Scheduled system seat capacity for the Sep-Dec four-month period shows seats +5.2% y/y, down 27bp w/w mainly on LUV MAX cuts but also on some non-MAX UAL trims. Domestic growth was down 31bp w/w to +5.5% y/y, as LUV and UAL cuts were slightly offset by adds from DAL and Frontier. Pacific capacity was flat w/w at +2.2% y/y, transatlantic was down 32bp w/w to +5.5% y/y, and Latin was up 14bp w/w to +1.0% y/y. Int’l capacity growth was flat w/w at +2.3% y/y. Domestic competitive capacity was flat w/w at +6.1% y/y.
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In the six years following the UA-CO merger, UAL lost 2.7pp of domestic seat share. In the four years after the AA-US merger AAL has lost 2.6pp of domestic seat share. Three years ago, UAL was losing share, running a poor operation, and suffering from high unit cost growth and low employee morale. AAL is now in a similar situation. So, in that sense, the AAL fix is easy: do what UAL did.
After close today (7/18/19), BA announced a $5.6B pretax charge (or $8.74/share) associated with estimated costs from potential customer concessions and other considerations for disruptions related to the 737 MAX grounding and subsequent delivery delays. In addition, BA noted 737 program margins would absorb an incremental $1.7B of expenses driven mainly by higher costs related to a longer-than-expected cut in build rates (recall pre-crash, BA was gearing up to hit 57/mo in 2019). BA expects higher program costs will weigh on 737 program margins starting in 2Q19 and extending into the quarters (and, we believe, years) ahead. In total, BA called out $7.3B of MAX-related charges, in line with our $7-8B estimate, but we expect BA will book additional period expenses as it gets more clarity.
UAL hosted its earnings call today (07/17/19). It was good. Some people we spoke to after the print last night were asking why UAL didn’t raise 2019 EPS guidance to $11.00-$12.00 instead of the $10.50-$12.00 range they announced (prior range was $10-12), wondering if UAL was implying some nervousness about 4Q. UAL disabused that idea fairly emphatically, saying an outright beat of the high end is likely barring uncontrollable headwinds. Of course, uncontrollable challenges happen all too often in airlines, but well-run airlines overcome them, and investors show more patience as they happen. Look at LUV right now. Higher margins fortify that defense, and UAL continues to aspire towards that status. It is a long journey.
UAL reported GAAP 2Q19 EPS of $4.02 but adjusted EPS of $4.21, above consensus of $4.12. Most forward guidance was in line or slightly above our estimates including 3Q PRASM (+0.5% to +2.5% y/y, 50bp better than our 0-2% y/y), 3Q PT margin (+10-12%, in line with our estimate), and FY19 EPS guidance (raised from $10-12/share to $10.50-$12, though we were expecting a new range of $11-12). The PR has been out for ~60 mins and only one person called us, so that probably means it’s fine.
Scheduled system seat capacity for the Sep-Dec four-month period shows seats +5.4% y/y, down 27bp w/w largely on AAL’s recent MAX cuts. Domestic seat growth was down 28bp w/w to +5.8% y/y, as AAL and UAL cuts were slightly offset by adds from JBLU and ALGT. Pacific capacity was down 25bp w/w to +2.2% y/y, transatlantic was flat w/w at +5.8% y/y, and Latin was down 37bp w/w to +0.9% y/y. Int’l capacity growth was down 27bp w/w to +2.3% y/y. Domestic competitive capacity was down 38bp w/w to +6.1% y/y.
BCA delivered 90 planes in 2Q19 matching our expectation and comes as no surprise given the MAX grounding and subsequent delivery suspension. Mix was slightly favorable driven by three more 787-9s and -10s, two fewer very low-margin 787-8s, and one more 777. At BDS, there were 36 total deliveries (18 new builds and 18 remanufactured), somewhat less than what we were expecting. Recall, the Air Force slowed tanker acceptances to 1/month from 3/month after discovering more foreign object debris (FOD) in newly assembled tankers even after the Air Force halted deliveries twice this year over the same FOD issue. Tanker deliveries declined by two aircraft sequentially: BCA transferred six 767-2Cs to BDS in 2Q (vs. eight in 1Q) and BDS delivered five tankers to the Air Force in 2Q (vs. seven in 1Q). Overall, our 2Q19 sales estimate moves 2% higher to $20.3B and our EPS inches up $0.03 to $1.68.
This is Between Two Phones, an occasional piece we do where we interview someone in or around the airline industry who carries influence but may also be under the radar of airline investors. This time it’s Mike Leskinen, VP of Corporate Development and Investor Relations at UAL.
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