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Next year, LUV will begin selling fares through GDS providers Travelport and Amadeus. LUV said this will boost 2H20 PT income by $10-20M. We estimate that will grow to >$200M in 2-3 years. Travelport and Amadeus together only have 25-30% share of the domestic GDS market, which Sabre dominates at 70-75%. We believe LUV’s entry into the GDS corporate travel market will drive corporate share gain for LUV, with a CASMx penalty, but drive RASM and margins higher. But there is a big picture game theory worth discussing and Sabre is in the center of it. And we think LUV has leverage.
AUSA kicked of its annual three-day event on Monday, 10/14. All defense primes and many defense contractors were present, along with several high-profile officials including Army Secretary McCarthy. We attended, too. Much of the products on display were aligned to the Army’s six modernization priorities, and the overall tenor at the conference was positive/optimistic.
The stock outperformed as UAL guided to 2020 adjusted CASMx of ~flat in 2020, and though UAL didn’t formally update capacity guidance we assume that ~flat guide is on ASM growth of ~6.0% to 6.5% y/y ASM growth. This implies a similar degree of gross non-fuel cost inflation to DAL (+~6-7%). We expect similar from AAL next week. UAL also disclosed higher 2020 capex (“closer to $7B”) than many were expecting. We had assumed ~$7B of capex but on lower 2019 capex due to MAX timing. UAL is doing great on the P&L, but ~$12B of 2019-20 capex financed by ~$9B of new, gross debt (our estimate) raises the stakes of UAL continuing to nail RASM/CASMx entering what may be a volatile 2020.
UAL reported 3Q19 earnings and guided to 4Q19 PRASM growth of 0-2% y/y, 1pp better than our ranged estimate, and a 4Q19 PT margin of +7-9%, 50bp better than our estimate. UAL also affirmed its longstanding adjusted 2020 EPS guidance of $11-$13, beat the midpoint of 3Q19 PRASM by ~20bp (we expected a 10bp miss) and slightly missed on CASMx (20bp). We expect a cautiously upbeat call tomorrow, with cautiousness from uncertainty around the MAX and China. But all things considered this print should be good enough and consensus estimates don’t appear likely to change materially, barring new info on the call.
Scheduled system seat capacity for the Sep-Dec four-month period shows seats +3.8% y/y, 14bp lower w/w. Domestic growth was down 16bp w/w to +4.0% y/y on MAX cuts by AAL and UAL as both punted the MAX out of 2019. Pacific, transatlantic, and Latin capacity were all flat w/w at +1.3% y/y, +5.4% y/y, and +1.2% y/y. Int’l capacity growth was flat w/w at +2.3% y/y. Domestic competitive capacity was down 21bp w/w to +3.9% y/y.
SAVE is trading at its lowest forward P/E multiple since 2011: ~7x. Some blame cost creep. Some blame Basic Economy. Some blame fears of near-term estimate cuts. But those overlook a bigger issue: network airlines are adding low-priced connecting capacity in SAVE markets by flexing the muscles of hubs. And they’re doing some of it with zero incremental ASMs, and thus no cost, which we refer to as “ghost capacity.”
DAL reported 3Q19 earnings and guided to 4Q metrics that were slightly below our estimate, all in, due to costs. DAL’s guidance implies ~6% non-fuel cost inflation in 2020, which is basically what we modeled, just with a different mix of capacity (+4%) and CASMx (+2%). Most folks tend to assume DAL will outgrow its capacity guidance, which we continue to expect (DAL guided 2020 +3-4% y/y) as competitors grow and seek to regain lost share. DAL won’t sit around and lose share next year, and cost creep in most facets of the business are inevitable for all airlines, not just DAL. The rally in the shares after a selloff in the AM is encouraging (though of course the stock has been beaten up of late into the print), as the stock hovers around its customary, valuation-less driven, ~$50/share bottom.
AAL filed its customary quarter-end investor update this morning. The print was largely in-line with our expectations as AAL tightened its 3Q TRASM guide to +1.5 to +2.5% y/y (compared to +1.0% to +3.0% y/y previously). We feared AAL would miss the midpoint on RASM due to off-peak yield softness JBLU and SAVE noted earlier in the quarter, but it seems AAL has been able to offset that with higher loads, which was the point, as AAL flexes its hub muscles. AAL reiterated its 3Q CASMx guide of +4.0 to +6.0% y/y, which is still too high. AAL’s operations have improved lately following legal wins over mechanics, and negotiations have restarted, and we believe are progressing civilly. Overall this report was clearly enough.
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