We survey investors quarterly to quantify sentiment and views on key topics. This quarter we had 86 replies. Thanks for replying, if you did! We think this survey had some particularly interesting and actionable results.
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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.
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.
Scheduled system seat capacity for the Sep-Dec four-month period shows seats +4.9% y/y, down 24bp w/w. Domestic growth was down 24bp w/w to +5.2% y/y mostly driven by cuts from LUV (MAX), UAL, and Frontier slightly offset by adds from JBLU. Pacific capacity was down 1.2pp w/w to +1.3% y/y, transatlantic was up 15bp w/w to +5.4% y/y, and Latin was down 10bp w/w to +1.6% y/y. Int’l capacity growth was down 18bp w/w to +2.5% y/y. Domestic competitive capacity was down 31bp w/w to +5.1% y/y.
SAVE is probably about to buy planes, and the size of the order will matter for SAVE itself and for the industry. We expect an order will be announced within the next 2-6 weeks based on public comments from management. Our guess: SAVE buys 200 A320neo family planes for delivery between 2022-27, consisting of 150 firm orders and 50 options. We expect this order will consist of A319s, A320s, and A321s. We built up to our assumption with a model we built that projects growth, pro forma leverage (2.8x) and more. That model is available for download so you can plug in key assumptions to forecast annual changes in pro forma leverage and earnings.
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