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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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.
We survey investors quarterly to quantify sentiment and views on key topics. This quarter we received 86 responses. Thank you for replying, if you did. For context, most of the survey answers were submitted on Tuesday and Wednesday before DAL’s investor update on Thursday morning.
System capacity for Jan-Apr four-month period shows seats up 3.9% y/y, flat w/w (technically down 2bp). Domestic seat growth was down to +3.8% y/y from +3.9% y/y last week due to rounding (technically down 2bp w/w) as cuts by DAL and HA were slightly offset by additions by UAL. Pacific was flat w/w at -1.3% y/y (technically down 2bp). Transatlantic was flat w/w at +3.1% y/y. Latin was flat w/w at +5.7% y/y (technically up 1bp w/w). International capacity growth was flat w/w at +4.3% y/y. Domestic competitive capacity was flat w/w at +3.1% y/y.
System capacity for Jan-Apr four-month period shows seats up 3.9% y/y, flat w/w (technically up 2bp w/w) as adds by LUV in domestic, Frontier, and AAL were partially offset by DAL, and LUV Latin cuts. Domestic seat growth was up to +3.9% y/y from +3.8% y/y, due to rounding (technically up 4bp w/w). Pacific was up 13bp w/w to -1.3% y/y. Transatlantic was down 24bp w/w to +3.1% y/y. Latin declined 15bp w/w to +5.7% y/y. International capacity growth was down 13bp w/w to +4.3% y/y. Domestic competitive capacity was up 27bp w/w to +3.1% y/y.
Assuming a Brent oil price of $55/bbl in 2019 and real GDP +2.5%, history suggests U.S. airlines will report -1.0% y/y baseline RASM in 2019, all else equal. But all else is rarely equal. If domestic ASMs grow ~1.5pp above real GDP, as we assume here, a ~1.3pp negative modifier is added to the domestic portion of system RASM due to diminishing marginal returns. All in, our analysis suggests U.S. airlines will show a 2019 system RASM decline of 2-3% y/y with the current economic, oil, and capacity outlook. This would be worse than what’s currently in our models, to be clear, due to the fall in oil prices over the last few weeks. The recent macro-driven pullback is not why we downgraded airlines – that is “luck” – but we continue to expect key airline fundamentals to worsen in early 2019.
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