RASM is outpacing peers, they are clearly taking share, and management sounds as optimistic as ever. Part of what UAL is doing is improving the utility of its hubs. Roughly two years in, we now have some decent data available to evaluate a few things: (1) which airlines are in the crosshairs of UAL’s growth, (2) if those airlines have responded to UAL’s growth, at least in those markets, (3) the impact to competitor airline load factors in those markets, and (4) UAL’s success rate.
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SAVE filed its 4Q18 IU tonight (01/16/19) and said 4Q18 RASM came in +11.4% y/y, in line with the prior guide of ~11% y/y but arguably better due to a high completion factor of 99.6% (due to those pesky good operations), which drove ASM growth of +16.2% y/y in the quarter relative to the guide of +15% y/y when the +11% RASM guide was provided on 11/26. We believe the RASM strength came on higher price from base fares and non-ticket revenue (which are mainly fees). SAVE’s good operations have liberated management to experiment with new price points for new or existing ancillary services, and it’s working. Due to its own actions in recent years, SAVE has regained control of its business and the narrative around the stock.
Solid call underpinned by a strong guide. UAL had an easy setup to make excuses for a poor 1Q RASM guide, had it happened: disproportionate network exposure to China and the U.S. gov’t. But UAL gave a strong guide despite that, which should speak to how well the strategic improvements are driving value. UAL’s EPS guidance of $11-13/share is good with jet fuel between $1.60/gal and $2.55/gal (it’s currently about $2.00/gal), proactively removing the excuse of uncontrollable factors changing, something airlines hide behind far too often. We have literally no criticism for the guide or for the earnings call, but UAL’s recent beats relative to the guides they provided may tempt some of the more bullish people out there to take earnings estimates to a potentially unhealthy place.
UAL reported very strong 4Q18 EPS of $2.41, far above consensus of $2.01 and our $2.26. UAL provided initial 2019 EPS guidance of $10-12/share, above our guess of an initially conservative guide of $9-11/share, using what appears to be about $2.15/gal in jet fuel as a placeholder at the midpoint. Consensus sits at $10.98 but there are outliers in there. UAL’s 1Q PRASM guide of 0-3% y/y was also above our guess of a -1% to +1% y/y range, perhaps 1pp wider than normal due to the gov’t shutdown. UAL reiterated 2019 CASMx of flat or better, which may be a more powerful story even than RASM outperformance if UAL can pull it off. If they do, UAL would be the first network airline in the post-BK era to put up back-to-back years of CASMx declines.
DAL reported 4Q18 EPS $0.02 above consensus and our estimate primarily on below-the-line help. DAL’s 1Q19 RASM guide of flat to +2% y/y was 50bp lighter than our guess but the 1Q19 PT margin guide of +6.5-8.5% was in line with our estimate. DAL was upbeat today (1/15/2019), referring to the twice-cut 4Q RASM guide as a blip, noting booking strength in corporate and leisure bookings to start 2019, offsetting ramping yield headwinds in what may be a challenging couple quarters in the transatlantic. This report doesn’t feel like enough to drive incremental conviction either way for on-the-fence investors, we think. Most will wait to triangulate to DAL’s guidance commentary after hearing from others, starting with UAL later today.
ALK filed its customary quarter-end 8-K today updating guidance, most notably raising 4Q18 RASM guidance to ~5.1%, or 10bp above the high end of the prior +4-5% y/y. This slight beat is above a RASM guide range that ALK improved twice during the quarter. Load factor for the quarter came in slightly lighter than we had modeled so we bump our yield assumption higher to bring our model back in line with guidance. We think, sticky, ALK specific network and revenue initiatives are beginning to spool and now seem to be translating to improved RASM. Also, ALK is primarily a leisure-oriented airline, and leisure airlines have done just fine in 4Q on RASM relative to airlines with more business travel mix.
Scheduled system capacity for Jan-Apr four-month period shows seats up 3.9% y/y, flat w/w. Domestic seat growth was flat w/w at +3.8% y/y as cuts by Frontier were offset by adds by JBLU, LUV, and HA. Pacific capacity was flat w/w at -1.4% y/y. Transatlantic was flat w/w at +3.1% y/y (technically up 3bp w/w). Latin was also basically flat (up 2bp w/w) but ticked up to +5.8% y/y due to rounding. International capacity growth was flat w/w at +4.3% y/y (technically up 2bp w/w). Domestic competitive capacity was up 18bp w/w to +3.3% y/y.
Since 2013, airlines have been adding a greater mix of incremental domestic capacity into smaller cities where airlines cut back after the 2009 recession, enabling strong yield growth there on connecting service by network airlines. From 2009-14 total domestic capacity fell by 3.2%, but capacity in the top 30 metro areas in the U.S. fell by -1.7% vs -7.1% for all other U.S. airports. And while those airports outside the top 30 (~740 of them) account for just 27% of domestic capacity, we think network airlines earn a disproportionate amount of profits there due to limited competition. But that is shifting back to pre-2014 as airlines are once again aggressively adding in these small cities.
Our quarterly review of competitive seat growth by airline shows, in aggregate, a downtick in competitive capacity (CC) growth to +2.5% y/y in 1Q19, down from +2.9% y/y in 4Q18. Though airline industry capacity growth remains elevated at +3.7% y/y in 1Q19 (on a seat basis), this +2.5% y/y CC growth rate in 1Q19 is the lowest CC growth rate we’ve seen from the industry since 3Q14, right when oil prices started to fall sharply. Also note: LUV has not yet loaded Hawaii service, so this growth rate should come up a bit when it does. We expect LUV to start Hawaii in very late 1Q19 or in early 2Q19.
System capacity for Jan-Apr four-month period shows seats up 3.9% y/y, flat w/w. Domestic seat growth was flat w/w at +3.8% y/y as inter-island cuts by HA were offset by adds by DAL and UAL. Pacific capacity was down 5bp w/w to -1.4% y/y. Transatlantic was flat w/w at +3.1% y/y (technically down 2bp w/w). Latin was flat w/w at +5.7% y/y. International capacity growth was flat w/w at +4.3% y/y (technically down 1bp w/w). Domestic competitive capacity was flat w/w at +3.1% y/y.
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