Every Friday, we check the Sunseeker FAQ website to track all changes. We believe no change is too small. This week ALGT changed an FAQ about the pool from, “the resort swimming pool… will be over 1,000 feet long, covering nearly two acres” to a new answer of “Sunseeker Resorts Charlotte Harbor will feature a rooftop swimming pool and jacuzzis as well as an accompanying rooftop bar.” This felt like a significant change. Turns out it is.
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Entering quarter end, we’re seeing lines being drawn (and positions being built) on how airlines will report/guide/sound with investor updates and earnings. Some are clearly out of favor with high short interest and relative underperformance (HA) and some are being shunned (ALK) with low short interest and stock underperformance. But only one has high short interest and has relative outperformance to the group – DAL – which may mean it’s set up for a ‘coiled spring’ result, one way or the other, with March traffic likely on 4/2. This mix of outperformance on high short interest isn’t terribly unique in airlines, but when it happens it creates winners and losers.
Gulfstream president Mark Burns presented at an Aero Club of Washington luncheon a couple weeks ago. We attended. There were some tidbits we felt are worth passing along.
TDG completed its acquisition of ESL last Thursday (3/14) for $4.0B consisting of an estimated $3.7B in cash (at $122.50/share) and $273M of assumed net debt (now retired). Timing of the close was in line with expectations. TDG paid an implied EV/EBITDA multiple of 12x and EV/S multiple of 2x based on FY19 consensus EBITDA of $330M and sales of $2B, putting this deal at the high end of TDG’s target 9-12x range. That said, TDG is optimistic it can rationalize this “misunderstood” company and make operations leaner, more efficient, and more profitable. TDG recognizes ESL’s EBITDA margins won’t reach its corporate average of ~50%, but management expects significant improvement from the 14.1% ESL realized in FY18. We believe TDG is embolden by its success with the Kirkhill lab experiment (TDG bought Kirkhill from ESL last year).
Scheduled system seat capacity for the May-Aug four-month period shows seats +4.6% y/y, flat w/w (technically up 3bp w/w). Domestic seat growth was flat w/w at +4.6% y/y (technically up 4bp w/w) as cuts by UAL and HA were offset by additions from SAVE and DAL. Pacific capacity was flat w/w at +0.2% y/y, transatlantic was flat w/w at +5.7% y/y, and Latin was flat w/w at +4.6% y/y (technically down 4bp w/w). Int’l capacity growth as a whole was flat w/w at +4.4% y/y. Domestic competitive capacity came up 9bp w/w to +4.4% y/y.
On 4/10/19 we expect JBLU to announce its intention to serve Europe, an initiative management has teased in internal employee memos obtained by the media. We have no clue what they’ll say that day, but we make our best guess here and try to quantify the impact ahead of time.
ALK filed its monthly investor update today (03/14/19). Two things changed: 1Q19 fuel came up to $2.14/gal from last update of $2.05/gal and CASMx improved by 1pp to +4.0% to +4.5% y/y range. We believe some of this was timing and some relates to better productivity, meaning some should carry through beyond 1Q. ALK also reiterated its FY19 CASMx guide of +2.0% y/y to +2.5% y/y but we take that squarely to the low end after today’s update. ALK also bought another $3m of stock in February, as it seems cash priorities lie more firmly with reducing debt – probably a smart move.
Some have suggested the grounding of the 737 MAX fleet in the U.S. will be accretive to earnings due to lower capacity. Does that feel right? Higher fuel prices make airlines scale back growth in their least profitable markets in a gradual and orderly fashion while pushing fares higher. A sudden grounding of a 737 MAX merely causes disruption to the schedule, annoyances to passengers, bad press, higher costs to the airline, and brand damage. Airlines won’t be raising fares on this. If anything, this feels like a winter storm, and investors don’t capitalize temporary bumps to RASM caused by uncontrollable events. If you as an investor want to be bullish on airlines, go ahead – just don’t do it because of this.
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