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.
Search Coverage List, Models & Reports
Search Results1-10 out of 251
we roll forward our weekly capacity tracker to focus on post Labor Day schedules covering the four-month period from September to December. As of today, scheduled post Labor Day capacity from U.S. airlines shows system seat growth of +5.1% y/y, which is ahead of the 4.0% growth rate on schedule for the summer period (May-Aug). While unnerving, we expect airlines to trim that back by 1-2pp over the next few months. Note, PLD cuts typically happen at a quicker pace and scale in mid-July through August. Domestic seats are currently scheduled to grow +5.4% y/y, down from 5.9% reported last week, though this week now includes seats for SAVE and LUV, who both filed complete fall schedules. Int’l seats are set to grow +3.2% y/y.
Airlines haven’t done themselves favors with investors from capacity growth, and the negativity around the space will likely persist until they trim it back. Why does this have to be so hard? Sigh. Anyway, LUV filed its 2H18 capacity yesterday (5/31) but we won’t be able to see it until this weekend at the earliest. We expect LUV will file 2H18 ASM growth of ~5-6% y/y driven by three factors: (1) reinstatement of nonstop service temporarily culled during the 737CL fleet transition, (2) use of Hawaii-oriented planes in the L48 as Hawaii service is pushed into 2019 (our expectation), and (3) normal, planned growth. Option #3 is probably the best chance to be dialed back, which we guess is about 1-2pp of that ~5-6% growth (just a guess, hard to do that math). Worse, the actual growth for your model will be probably ~2pp above what shows up in Diio due to low completion factors last year. And, worse, LUV has been the least likely to scale back planned 2H growth among all U.S. airlines over the last two years. In fact, they’ve added. Oh, and they have significant hedge protection above Brent $80/bbl.
Scheduled capacity from U.S. airlines in the May-Aug four-month period shows system seat growth down 30bp w/w to 4.0% y/y, due to cuts by LUV who loaded its schedule up to October over the weekend. Domestic seat growth came down 20bp w/w to +4.6% y/y as cuts by LUV, DAL, and SAVE were slightly offset by increases from AAL. International seat capacity came down 60bp to +0.2% on trims in LatAm by LUV and ALK.
Since peaking on 01/29, the S&P 500 is down 8% and U.S. airlines are down 5%. Of course, airlines are down 12% since the 1/23 UAL analyst day, so some of the selling/capitulating happened before the broader market correction, but the industry has been generally hanging in there (notwithstanding today’s weakness). Since the S&P peaked airlines have had zero “hell days” as we define it, and actually one “heaven” day, implying much of the bad news is largely been priced in. Airlines could have quite easily been down much more in this recent market correction. Needless to say, some period of time is going to have to pass before investors start to get comfortable with the idea that UAL’s capacity growth will be absorbed, but it does feel like the industry is nearing a bottom on sentiment.
As fuel prices rise and pressure margins we expect airlines will respond with cuts to 2018 capacity guidance in an effort to drive pricing. It’s relatively easy for airlines to do this given most capacity growth in recent years is from increased asset utilization. But, of course, there are no free lunches, and while less capacity helps pricing it also creates a CASMx headwind.
Shares of UAL are trading basically in line (on a P/E basis) with DAL on consensus 2018 EPS, which we think is crazy. But a look at how the market has valued shares of UAL relative to DAL over the past 5-6 years provides insight as to how shares of UAL may trade over the next year or so. In a nutshell: the market currently probably thinks UAL’s margin gap is unfixable.
LUV is retiring its 737CL fleet as it transitions to the 737MAX. All Classics were out at the start of 4Q, and though LUV said it’s going to ramp utilization of its NG fleet as a bridge, it’s still artificially and temporarily depressing LUV’s capacity growth in 4Q. 737CLs accounted for 8% of LUV seats flown in 3Q17 and will account for 0% in 4Q. We believe DAL and AAL are the most obvious beneficiaries from this temporary transition, which perhaps partially explains the better than expected RASM guides for 4Q by those two.
We believe it’s time to reward DAL with a P/E multiple above UAL and AAL, which we’ve been reluctant to embrace. But as DAL continues to put up stable margins while competitors struggle we think the market will evolve. We examine angles around a DAL re-rate through four key arguments along with a counterargument against it. It’s time, people.
System capacity for the Jan-Apr four-month period is up +4.8% y/y, up 10bp w/w. Domestic seat capacity moved up 10bp w/w to +5.4% y/y. International seat capacity was unchanged at +0.5% y/y. The slight revision higher in overall seat growth was mainly due to AAL and DAL adding in the domestic market but none of the capacity looks ‘confrontational,’ we’d say.
- 1 of 26
- next →