Scheduled system seat capacity for the May-Aug four-month period shows seats +3.5% y/y, up from +3.4% y/y last week due to rounding (up 2bp w/w). Domestic seat growth was flat w/w at +3.5% y/y, as additions from ALGT and Frontier were offset by cuts from ALK, SAVE, and DAL. Pacific capacity was flat w/w at -0.5% y/y, transatlantic was flat w/w at +5.6% y/y, and Latin ticked up 6bp w/w to +2.9% y/y on adds by SAVE and Frontier. Int’l capacity growth was up 4bp w/w to +3.3% y/y. Domestic competitive capacity was flat w/w at +3.0% y/y. There were no MAX-related changes this week.
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We read every proxy statement for the airlines we cover. We highlight noteworthy things, some subtle and some obvious. We aggregate the drivers of 2018 CEO pay in easy-to-read tables and show how pay metrics changed from last year. And again, for reference, we show how pay drivers at each airline have evolved since 2007.
Scheduled system seat capacity for the May-Aug four-month period shows seats +3.4% y/y, down 6bp w/w. Domestic seat growth was flat w/w at +3.5% y/y, though technically down 7bp on cuts from AAL and UAL. Pacific capacity was down 12bp w/w to -0.6% y/y, transatlantic was flat w/w at +5.6% y/y, and Latin was flat w/w at +2.8% y/y, as adds by AAL were entirely offset by cuts from ALK. Int’l capacity growth was flat w/w at +3.2% y/y. Domestic competitive capacity was 7bp lower w/w to +3.0% y/y. AAL and UAL added MAX flying this week while LUV made no MAX-related changes.
There are two airline conferences in the coming weeks, one of which is ours on May 20-22 in NYC. We’ve prepared 10 questions for each airline/union to help you prepare, and some high level industry thoughts.
Scheduled system seat capacity for the May-Aug four-month period shows seats +3.5% y/y, down 4bp w/w. Domestic seat growth was down 5bp w/w to +3.5% y/y on cuts from UAL and ALGT slightly offset by adds from Frontier. Pacific capacity was flat w/w at -0.4% y/y, transatlantic was flat w/w at +5.6% y/y, and Latin was flat w/w at +2.8% y/y. Int’l capacity growth was flat w/w at +3.2% y/y. Domestic competitive capacity was flat w/w at +3.1% y/y. Ex-MAX-related cuts (which were minimal this week), this summer’s domestic growth rate would have been down 4bp from last week.
We use a metric we call “the forgiveness ratio,” which measures the change in each airline’s stock price minus the change in forward EPS estimates – basically change in the multiple – to understand what the market seems to be saying about the prospects of the company and if certain issues are being overlooked as temporary. For example, if consensus EPS moves down 20% but the stock goes down by just 15% over that same period, that’s a +5pp “forgiveness” ratio. It works the other way, too, where a stock may go down more than consensus moves down, creating an unforgiven dynamic – or a “Clint Eastwood” situation. This analysis really only matters for outliers and it’s most useful immediately after earnings reports reset forward estimates.
It has been argued to us that some of DAL’s ~$3.4B Amex revenue (going to $7B in 2023) has a high margin due to minimal direct costs attached to it. We think that is myopic. Investors love breaking things down and assigning value to pieces. But sometimes that just can’t be done. Yes, DAL reported $1.5B of “loyalty program” revenue from Amex or the “brand” component of the ~$3.4B from Amex. That may feel like pure margin. It is not, per the stock market, which we estimate is saying it all carries a ~14% PT margin. We agree. We think DAL uses that revenue to subsidize things that would otherwise generate losses. Some say DAL is “competing away” the loyalty revenue. Maybe true in the short term, but we’d call that view myopic, too.
Three airlines hosted earnings calls today (4/25/19): SAVE, LUV, and ALK (all PP-rated). We recap all three here and update estimates on p2 and elaborate more on each company. With earnings mostly over, every airline report has contained one similar theme: airlines glowingly discussing robust demand across business and leisure, improving pricing trends, and noting late April strength carrying into the summer. Underscoring that tone were 2Q RASM guides that were all pretty good… but not as good as management sounded. What’s with that disconnect? It’s either: (1) they’re all suddenly sandbagging, or (2) there’s too much pricing volatility to underwrite a strong guide with much conviction, and improving trends are still fragile. The first is possible. But we lean towards the latter. Not one airline cut capacity due to higher fuel.
LUV reported earnings today (4/25/19) and updated guidance. Estimates on 2Q were all over the place – we’d assumed RASM >5% and CASMx up 8-9% y/y on 0-1% ASM growth. In fact, LUV guided to -2-3% y/y ASM shrinkage, RASM up 5.5% to 7.5% y/y, and CASMx up 10.5% to 12.5% y/y. LUV also noted strong booking and yield trends and strength in close-in pricing. Based on pre-market trading it looks like shorts will be squeezed on this and LUV will get a pass. 45+ years of results earn them that right, and even with all these headwinds it’s remarkable how durable LUV’s margins are, a testament to well it dominates its core markets. We have a few nits we need to share, however.
Scheduled system seat capacity for the May-Aug four-month period shows seats +3.8% y/y, down 17bp w/w. Once again, the entirety of the cuts came from one-time 737 MAX-related adjustments. Domestic seat growth was down 18bp w/w to +3.8% y/y on cuts by LUV and UAL slightly offset by Frontier adds. Pacific capacity was down 46bp w/w to -0.4% y/y, transatlantic was flat w/w at +5.7% y/y, and Latin was down 12bp w/w to +2.9% y/y. Int’l capacity growth was down 13bp w/w to +3.3% y/y. Domestic competitive capacity came down 22bp w/w to +3.4% y/y. Ex-MAX-related cuts, this summer’s domestic growth rate would have ticked up by 27bp w/w due to offsetting adds elsewhere. Domestic seat growth by non-MAX carriers grew by 2bp w/w.
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