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LUV filed an investor update for 3Q19, as expected, this morning before the market opened and affirmed 3Q RASM growth of +3-5% y/y and improved 3Q CASMx growth by 1pp to a new range of +8-10% y/y from the prior range of +9-11%. LUV also said 3Q ASMs will shrink by 3% y/y, the low end of the prior range of -2-3% y/y, on weather challenges. LUV said weather didn’t help or hurt RASM or CASMx materially. LUV also maintained 3Q19 fuel guidance of $2.05-$2.15/gal with minimal impact from hedges.
Scheduled system seat capacity for the Sep-Dec four-month period shows seats +4.0% y/y, down 16bp w/w largely on LUV MAX cuts. Domestic growth was down 19bp w/w to +4.2% y/y mostly driven by cuts from LUV (MAX) slightly offset by adds from Frontier and SAVE. Pacific capacity was down 12bp w/w to +1.2% y/y, transatlantic was flat w/w at +5.5% y/y, and Latin was up 9bp w/w to +1.3% y/y. Int’l capacity growth was flat w/w at +2.3% y/y. Domestic competitive capacity was down 14bp w/w to +4.2% y/y.
As you surely know, drones bombed Saudi Arabian oil production facilities on Saturday (9/14/19). While this is likely a positive for our A&D coverage, the markets will probably view it as a negative for our airline coverage. It seems oil prices may rise meaningfully on Monday (9/16/19). Over the last 10 years there have been only three instances where crude oil prices (in Brent) went up more than $5/bbl in a single day. All three occurred in 2011-12. The day oil prices spiked, airline stocks declined by 1.5% on an absolute basis and lagged the S&P 500 by 2.3%, on average. In the five days following the oil price spike and airline sell-off, airline stocks on average rose +0.2% absolute and +0.8% relative to the S&P 500, recapturing only some of the 2.3% underperformance.
We believe good labor relations don’t directly contribute to an airline’s financial success, but poor labor relations impede it. One of the many benefits of high oil prices is it adds to our “common enemy” theory, where airlines and unions are at their most collaborative when outside negative forces create a challenging business environment for airlines, like OPEC did from 2007-14. The growth in U.S. shale five years ago had as much to do with the deterioration in airline-labor relations as anything else did, as we see it. A pop in short term profits right around the time labor contracts became amendable resulted in the labor “giveback” feared by many anti-airline investors. That said, good labor relations are a net positive for airlines in the long run. And good labor relations aren’t cheap.
Scheduled system seat capacity for the Sep-Dec four-month period shows seats +4.1% y/y, down 14bp w/w largely on LUV MAX cuts. Domestic growth was down 16bp w/w to +4.4% y/y mostly driven by cuts from LUV (MAX), UAL, and JBLU slightly offset by adds from DAL. Pacific capacity was flat w/w at +1.3% y/y, transatlantic was flat w/w at +5.5% y/y, and Latin was flat w/w at +1.2% y/y. Int’l capacity growth was flat w/w at +2.3% y/y. Domestic competitive capacity was down 15bp w/w to +4.3% y/y.
After the close Friday (9/6/19), SAVE filed an investor update lowering guidance on worse RASM and CASMx than previously expected. We lowered our SAVE estimates on Friday in anticipation of a guidance cut, but we didn’t expect them to do this today and we didn’t expect it would be this bad. SAVE is in a very tough spot now. They’ll be fine in the long run, but the near and medium term outlook is unpleasant.
Many airlines presented at the Cowen conference this week and filed investor updates and/or commented on the near term outlook. We are updating our models to reflect what we learned. We lower estimates for most airlines we cover mainly on lower RASM and/or CASMx
Scheduled system seat capacity for the Sep-Dec four-month period shows seats +4.3% y/y, down 60bp w/w largely on AAL MAX cuts. Domestic growth was down 64bp w/w to +4.6% y/y mostly driven by cuts from AAL (MAX), ALK, and SAVE slightly offset by adds from Frontier and ALGT. Pacific capacity was flat w/w at +1.3% y/y, transatlantic was up 2bp w/w to +5.5% y/y, and Latin was down 44bp w/w to +1.2% y/y. Int’l capacity growth was down 26bp w/w to +2.3% y/y. Domestic competitive capacity was down 64bp w/w to +4.5% y/y.
We use a simple quantitative framework to determine when a stock hits “battleground” status. Currently, DAL is in that territory. We define a battleground stock as one that outperforms the airline group while short interest builds over the same 60-day period. We believe airlines remain out of favor, generally, though the recent snapback this week implies the group was a touch oversold.
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