Hi guys. Just a quick note to let you know that we are out of pocket today. Will be returning to the Worldwide Headquarters late tomorrow.
In case you didn’t look at your favorite airline stock today — you are in for a pleasant surprise.
It seems that because the majority of airlines are not reporting second quarter earnings results that are as dire as analysts had expected, and because oil prices continue to move downward, investor sentiment in the sector has gone off the charts. Again.
I thought we had a week last week that could not be improved upon, in terms of airline stock gains, but when all the shouting is done, I may very well be proven wrong when Friday rolls around.
But forget the end of the week. Today gains were off the charts all by themselves, as shares of US Airways soared 59% to 4.27. Shares of United Airlines, which also reported earnings today, were up 69% to 8.41, and shares of, which also reported today, were up 16%, closing at 4.50.
Whew.
So what has changed? As analyst Kevin Crissey from UBS wrote in a research note late this afternoon — sentiment.
“Today was another good day for the airline stocks. Good day of course being a big understatement. Combined with the upward moves last week, the legacy airline stocks are up 90% in the last five trading days and the low fare stocks are up 30%.
* Sentiment has improved
But what really changed today? United sold miles forward (expected), United’s credit card holdback was lowered (positive surprise although we hadn’t expected it to be increased), United, US Airways and jetBlue cut more capacity (not really a surprise although timing/magnitude is arguably better), and fuel prices fell. Ultimately though we think what changed is sentiment. Sentiment regarding the chances that fuel prices will continue to fall, and sentiment regarding the probability and timing of a liquidity crisis.* Our view on the stocks
We believe the airlines can offset weak demand or high fuel prices but not both. So upside to the shares comes from either fuel prices falling or demand being better than expected. We are skeptical that analysts are underestimating revenue growth and therefore view fuel as the primary driver. Fuel prices may or may not continue to fall but based on the forward curve our analysis indicates that the stocks are roughly fairly valued.* Updating EPS estimates
We are reducing our EPS loss estimates for UAUA, LCC and JBLU.