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We publish the “Friday Flyer” each week with highlights from the U.S. airline industry, and our opinion on how the events should impact airline stocks. Included are (1) a summary from the week with our sentiment gauge; (2) updates on noteworthy news events that might be interesting but maybe unworthy of a standalone note (3) key changes to airline schedules per OAG data; (4) recent stock performance and an update on the correlation of WTI and Heating Oil with airline stocks; (5) updated guidance/data points (6) our stat of the week (7) updated comp tables, and more.
JBLU results were good with EPS of $0.09 above consensus by $0.01 but below our estimate by $0.01 (the miss from lighter “other” revenue). April PRASM guidance of +8% to +9% y/y was strong given the difficult comparison, and though May is likely to decelerate (on an even harder comparison), our PRASM estimates come up, and management reiterated confidence in demand trends, too. Though we still take issue with JBLU’s decision to forego lucrative first-bag fee revenue, $21/pax in ancillary revenue is likely higher than network airline competitors and probably well above LUV (we estimate that closer to about $5/pax). It could be a lot better, but it could also be much worse.
EPS beat consensus and us, but April PRASM guidance of ~5% was again soft, and further deceleration is likely into May. UAL faces very difficult y/y comparisons and struggles with yield traction following the early March cutover to a single reservation system called SHARES (the former CAL platform), and we expect the company’s PRASM deficit to peers to drag through the summer and begin to converge to the industry after labor day. Fortunately, we think DAL’s current success of harvesting merger synergies from its own Northwest Airlines acquisition serves as a beacon of hope for those long UAL, likely limiting downside in shares for the time being. We show a table comparing timelines of DAL’s merger to UAL’s merger (page 2).
As a result of its $0.71 loss in 1Q:12 and continued struggles with labor costs into a likely still healthy but more competitive LTL market in 2012 and 2013 relative to 2011, we reduced our 2012 and 2013 estimates as well as our Target price. However, we expect earnings to inflect positive in 2Q (so book value will begin climbing again) and ABFS has a strong balance sheet and has seen positive trends into April. We see material upside for ABFS into 1) an improving economy which should support continued solid, albeit less strong LTL pricing and relatively solid industry tonnage, 2) potential company-specific labor catalysts from its pending lawsuit against YRCW and the Teamsters and/or its upcoming Teamster negotiations in April 2013, 4) YRCW’s potential bankruptcy which seems increasingly likely over the next 12-18 months, and 5) improving valuation which historically bounces off book value into upside catalysts, which we expect to become more apparent in 2Q:12.
This weekly report presents the most recent views we are hearing from industry insiders and summarizes the research of Wolfe Trahan. Included are (1) key takeaways, selected shipper comments; (2) notices of upcoming industry events; (3) key takeaways from some of our notes from the past week; (4) recent stock performance for our transport universe; (5) updated comparison tables for the airfreight & logistics group, railroads, and trucking; and (6) fuel trends for West Texas Crude Oil, On-highway diesel, Rail diesel, and Jet fuel.
LSTR reported in-line 1Q EPS (normalizing for a lower tax rate) and in-line 2Q guidance. Our thesis remains largely unchanged on LSTR: we expect it will continue to show solid top-line growth in an improving economy given its relatively high-end exposure to flatbed at around one-third of revenue. However, LSTR’s mostly fixed-margin business model (65%-70% of its revenue receives a fixed margin percent) should limit operating leverage for LSTR going forward and we continue to prefer asset-based truckers in an improving freight and pricing environment.
Total Week 16 rail vols increased 2.4% y/y vs. -1.1% and -2.4% the prior 2 weeks. Excluding weak coal vols, rail vols grew 7.2% y/y, better than +3.5% and +1.6% the past two weeks. The rails faced an easy comp as Good Friday occurred in Week 16 last year. The rails will face another easy holiday comp next weak (Easter Sunday) before comps normalize in 2 weeks.
Despite UPS’ $0.04 beat of our low-end 1Q:12 $0.96 EPS forecast, we have reduced our full year C12 EPS forecast from $4.85 to $4.82 (versus prior Consensus $4.89) given continued weaker than expected International Package profitability, lower domestic yield trends (mix shifts towards lower price point, lower weight B2C products) and lower than expected implied 2Q guidance. Strong domestic package growth in 1Q seems positive for FDX in its F4Q ending May quarter. While weak yields and mix likely is a negative for FDX, our sense is at least some, if not most, of the mix issue is company specific to UPS.
PACR’s 1Q earnings report was disappointing. However, it also marked its first full quarter without any benefit from its legacy UNP contract so it seems encouraging that Intermodal EBIT was flattish y/y. We continue to see PACR likely as an annuity with EPS around $0.30-$0.40, modest free cash generation and a stock in a $5-$7 range. However we see potential catalysts for PACR into a strong secular domestic Intermodal market, an eventual turnaround at Logistics, or the emergence of a strategic or financial buyer.
ODFL reported another strong quarter, but our expectations, along with Cons. seemingly got ahead of themselves in 1Q. For the first time in a while, we don’t expect Consensus EPS forecasts to rise out of ODFL’s report. We have modestly raised our lower-end prior C12 and C13 EPS estimates of $2.81 and $3.05 by 1% (including the $0.06 1Q miss relative to our higher-end expectation) and 3% to $2.80 and $3.15 (vs. prior Cons. $2.84 and $3.20). We believe ODFL benefitted by about $0.06 y/y in 1Q from fuel and weather combined, which should prove a modest headwind going forward. While we still see upside potential in our estimates, we no longer view upside as a given for ODFL going forward into much more difficult comparisons and expectations and an arguably more competitive industry backdrop.
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