EPS of ($0.29) was below our estimate of ($0.23), which was also in line with consensus. Guidance for 2Q was also below our estimate on TRASM and CASM ex-fuel, but lower fuel costs partly offset those declines. Demand in HA’s markets is decent, but competitive capacity headwinds appear likely through 2Q and continuing weakness in the JPY relative to the USD should continue to depress Japanese point of sale traffic. Even if the latter reverses tomorrow, HA’s long booking curve means the revenue benefit likely won’t accrue until 2H at the earliest.
The Obama Administration’s proposed FY14 budget contained harsh language on proposed new airline taxes and fees which include a $100/per flight fee for aviators operating in controlled airspace as well as an increase in the passenger security fee. Our calculations show that these proposals (if passed) would have a material impact on airline financials. But upon further examination of the detailed budget request, the language in the FY14 budget was essentially identical to proposals in the FY13 budget that ultimately failed to become law.
AMR is projecting annual capex of roughly twice what we expect from DAL & UAL. Some of this is needed to replace MD-80s but AMR continues to buy large widebody aircraft that appear to be for growth (i.e. the B777-300ER). For the 9th time by our count since Jan 2011 AMR quietly disclosed B777-300ER orders, this time a conversion of the B777-200ER to the much more expensive and larger B777-300ER. LCC management will have some flexibility with the post-merger order book, but we don’t expect much change to the narrowbody orders.
The WSJ just reported that the Commodity Futures Trading Commission (CFTC), is issuing far fewer rules due to “internal squabbling” and other reasons, potentially diluting the impact of the 2010 Dodd-Frank Act, which was passed in part to curb the role that speculators have in creating volatility in fuel prices. This follows a ruling last September from a federal judge that struck down a specific rule out of Dodd-Frank that limited speculative trading of oil contracts in futures markets. This is the type of stuff we watch closely, and it matters to us because we firmly believe the role of speculators in futures markets are the backbone of why most global airlines are disciplined on capacity: fear of the unknown.
Industry fundamentals are solid despite sudden panic in recent weeks about airline demand trends, which we simply don’t see beyond April. We thought most airline stocks were cheap before the harsh sell-off, so most valuations now appear even more compelling to us. Longer term EPS estimates have no defensible reason to change materially, in our opinion, and we think near term pricing should recover after a likely soft April (which we think most now expect anyway). Margins are up y/y in 1Q and likely in 2Q, too… so what if it’s fuel driven?
Rough week for airlines following poor PRASM from DAL and LCC, but we think it’s explainable. We think LCC stimulated March traffic with low fares following a poor February, and DAL optimistically held out for higher fares following a good February. LCC might have taken some of DAL’s lower yielding, bag-checking traffic (notice today LCC’s “other” revenue guidance popped a robust $30M from prior guidance). Both strategies were defensible, as DAL reiterated 1Q margin guidance and consensus EPS estimates for LCC still seem about right. The sell-off in stocks feels well overdone and more about the stock charts than about fundamentals. What’s really changed with the big picture bull thesis, after all?
HA filed an investor update and disclosed weaker revenues in 1Q that should be partly offset by lower non-fuel costs. This isn’t terribly surprising given continued weakness in the JPY relative to the USD, as almost all of HA’s traffic to and from Japan are Japanese tourists to Hawaii whose purchasing power continues to fall with a weak Yen. Still, the decline in passenger volumes was worse than we expected and we are lowering our 1Q and out-period EPS estimates for Peer Perform rated HA.
As sell side analysts we rate stocks in three general categories: like, neutral, dislike. Reality is more opaque. The single biggest reason we “dislike” shares of LUV is because of LUV’s distaste for fees: ROIC-positive but customer satisfaction-negative. But this week LUV rolled out a new ad campaign highlighting its large size, loyalty program, Wi-Fi, customer service, and more. Completely missing from the new campaign, however, was a reference to a bundled product. In the past LUV management has taken a ‘never say never’ approach to fees, which has periodically excited some, but that’s translated into financially immaterial changes to the fee strategy in recent years. But this feels a bit different to us, and in this note we’ve complied evolving statements from LUV management over the years. For now, LUV remains Underperform rated on valuation.
Valuing airline stocks is hard but as the industry transforms into an investable space valuation of equity prices and math are, at some point, going to have to overtake sentiment as a driver of new investor money. For now, sentiment and a secular change call might be enough to drive upside to stock prices… but that won’t last forever. Many investors use EV/EBITDAR as a primary valuation tool for airlines, which we appreciate and use ourselves, but there are currently too many flaws in that metric to solely rely on it as a reason to buy or sell an airline stock, in our view.
In this note, we update estimates following February traffic and declining fuel prices. Our 1Q estimates go up the most for ALK despite only a modest fuel benefit, as revenue growth continues to outpace our expectations. In Exhibit 1 we show all of our estimate changes as well as target price changes.