Nothing like coming home to four major airline earnings reports.
Makes one just want to go get back on the airplane.
Nah, not really. Just means we may have a Saturday morning PlaneBusiness Banter publishing date this week.
As of today, American Airlines, Southwest Airlines, Continental Airlines, and Delta Air Lines have all now reported in for the quarter.
Winners? Losers?
Well, here is a very over-simplified “first look” take. With oil prices surging, all airlines are now looking at current fourth quarter fuel estimates that look off-base. We haven’t heard one that sounds overly enthusiastic about fourth quarter forecasts as a result. But, if we were to pick one of the four that sounded more upbeat, overall, than the others — it would be Delta Air Lines.
This diminished forward outlook dovetails with our recent comments in PBB about airline stocks. Our thought was that earnings reports were not going to be overly positive about forward forecasts — and it sounds like this has been the case with the four airlines that have reported so far. My take was that the sector probably had further to fall before it started to make its more normal cyclical upturn.
For Southwest, as Bear Stearns analyst Frank Boroch noted in his research note, the airline is now looking at a headwind of about $200 million in 2008 — a result of the continued unwinding of the airline’s infamous fuel hedges.
As Boroch estimates, this is the equivalent to a $4 one-way across the board fare hike (or 4% increase in fares).
For Continental, JP Morgan analysts Jamie Baker and Mark Streeter said this week that “Q4 guidance does not support current consensus. As one might expect, fuel guidance is roughly $70 million higher than in our model (~$60 million higher than earlier guidance), while ex-fuel costs have worsened by around $15 million and ‘other’ revenue is lighter than expected.”
While the airline posted a good strong quarterly profit of $2.25 a share, the airline’s forward guidance was, as Baker put it, “uninspiring.”
On the American Airlines front, the JP Morgan boys made the comment in their note on the results, “Shares in AMR were greeted enthusiastically on Wednesday, a puzzling phenomenon in our view given a downbeat conference call focusing on deteriorating fundamentals and sluggish prospects for asset divestitures. We are diminishing our 2008 outlook, pushing valuation between that of CAL & UAUA, & sending AMR further back among our Overweight rated names.”
Baker and Streeter added, “AMR management cited stubborn fuel, weak London trends to deteriorate further, Virgin in the Transcon, worsening pilot relations, and growing cost pressures. In fairness, booked load factor is ahead of last year, though that’s not the type of robust demand commentary we were hoping for. Finally, AMR admitted it was still deep in “study mode” as it has been for some time, exploring the possibility of divesting its Regional subsidiary, MRO, money management business, and/or frequent flyer program. Apparently that last point resonated with investors, who perhaps felt that AMR’s divestiture studies had for some reason ceased. Unlike others, we saw little cause to celebrate.”
On the Delta Air Lines front, the bigger news this week was not the airline’s earnings. The bigger news was confirmation of the long-rumored joint venture deal with Air France.
But even putting aside the confirmation of that deal, (which we like) the airline appears to have posted the most upbeat forecast of the four.
Bill Greene, analyst with Morgan Stanley wrote this week, “New CEO Richard Anderson, is considering a number of interesting strategic options. Based upon his comments, we believe Delta is most likely to pursue a monetization of Comair assets first (within the next 90-120 days). Potential industry consolidation also ranks high on the list of options. Divesting non-core assets such as frequent flyer program, maintenance operations or AirElite (the company’s business jet division) appears unlikely in 2008. However, the company could offer greater transparency into the financials of the hidden assets next year.”
The airline said during the call that near-term revenue trends remain solid and that advanced bookings are up through November. While domestic capacity is set to grow minimally in the fourth quarter, international growth remains strong.
And, following up on what we said after Anderson was named CEO of the airline, we note that he told those on the airline’s call this week that merging with another airline could be the best way for the airline to establish itself as “the undisputed leader in the airline industry.”
The betting window is now open. Place your bets early. Place your bets often.
