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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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.
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.
DAL filed an investor update today lowering 4Q18 RASM guidance by 50bp to +3% y/y, the second 4Q RASM reduction in a month. DAL also affirmed the high-end of its 4Q18 EPS guidance, though that was due to lower fuel prices and a one-time gain from the ‘sale’ of a business. Obviously investors are keying in on “good” earnings eroding, as a lower quality mix of earnings is diluting the equity multiple for DAL (and others) while overall estimates probably shouldn’t move much. Though airlines are surely frustrated by the idea, the fact is: it matters how airlines make money, not how much money airlines make.
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.
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