Tag Archives: airline analyst

Airline Analyst Dan McKenzie Resurfaces


This week I was happy to see an old name reappear at the top of a handful of airline research reports. That name? Dan McKenzie.

Most recently Dan was the airline analyst for Credit Suisse. Dan has now resurfaced as the airline analyst for Next Generation Equity Research.

This week Dan initiated coverage on JetBlue, Southwest and AirTran.

Dan initiated coverage of JetBlue with a “buy” rating and a $6 target price.

In his note, Dan commented,

Our 2009 profit forecast is largely in line with a consensus outlook, however, our modestly better 2010 outlook results from jetBlue’s new revenue management system, legacy carriers that continue to exit jetBlue’s largest markets, and revenues that begin to finally trickle in from a Lufthansa code share (which is not yet announced but a logical assumption in our view given the close relationship between the two carriers).

Despite its smaller size and five years of reported losses or weak profits, our outlook is on balance positive based on a number of unique findings in our proprietary capacity study.

We found the industry cutting head to head flying by 15% in jetBlue’s routes, leaving jetBlue with the industry’s best competitive dynamic. In particular, we found AMR cutting as much as of 50% of its flying in jetBlue’s top 50 markets (airport to airport), while other carriers are cutting 15-30%.

At Fort Lauderdale, a focus city, we found both AMR and US Airways shrinking 47% and 14% respectively (as jetBlue grows +16%).   

Dan also initiated coverage of Southwest Airlines.

Dan assigned Southwest a “neutral” rating and a $7 target price.

In his note, Dan wrote,

Southwest is the industry’s best fundamental story and as such, continues to be a longer-term play on the industry. However, given our anticipation of upcoming earnings disappointments, we’d wait for a better entry point.

Southwest is transitioning from a growth carrier to a cyclical carrier, but it’s not there yet. Substantial market share gains against weak legacy carriers underpin our view that the industry consolidates over the next two years, and Southwest is positioned to be a primary beneficiary.

Our slightly more aggressive valuation multiple vs the Street partially factors in earnings optionality from further industry consolidation over a 2 year time horizon.

Despite a cost structure that has inflated over the years, Southwest is still the lowest cost producer. And its cost advantage is set to widen as legacy carriers reset labor contracts higher.  

In the near term, Dan said the airline’s revenues and cost headwinds are pressuring margins. Because or this, and the fact the airline now has to renegotiate its pilot contract, Dan advises, “We’re not telling investors to race into thie stock, though for those that can look longer-term, Southwest continues to be a great play on the industry.”

And finally, Dan also initiated coverage on AirTran this week. AirTran also received a “neutral” ranking from McKenzie, along with a $7 price target.

In his note on AirTran, Dan wrote,

Following years of growth, AirTran, along with others, is responding to a demand shock by cutting growth and spending. The network changes position the carrier to report profits and begin the process of balance sheet repair (which is in contrast to AirTran’s 2008 loss that nearly erased five years of profits).

AirTran, like others, lacks adequate pricing power given industry overcapacity which means profits will remain levered to fuel prices. However, when removing fuel from the equation, upside to our modest profit this year and next appears unlikely based on our proprietary network study.

We found competitors cutting head to head flying on AirTran’s routes by 1.9% in 2Q09 and by 5.5% when factoring in indirect competition. While it’s always encouraging to see less capacity, AirTran’s competitive dynamic nonetheless ranks last on our industry measures.   

AirTran’s smaller size and lack of dominance in its markets leaves its revenues more exposed (vs peers) to larger and better capitalized competitors. As one of the lowest cost, lowest fare carriers in the industry, AirTran’s cost structure is thus a critical source of competitive advantage.      

AirTran’s current level of liquidity is not robust and limits the carrier strategically, but it’s adequate. And while AirTran’s liquidity strengthens on our outlook, an even stronger balance sheet would aid AirTran’s competitive position and revenue stability. As a result, we don’t rule out new equity issues (perhaps in the $7 to $10 stock price range).

Gary Chase Note On Airlines Today: It’s Been A Tiring Airline Earnings Season


The headline on Gary Chase’s research wrap-up piece today was entitled, “Thoughts After A Tiring Airline Earnings Season.”

That is exactly how I feel today, after the onslaught of reports this week. Particularly yesterday’s almost non-stop roll out of reports.

Chase, airline analyst with Barclays, commented today, “Mercifully, airline earnings season is over.”

Not quite. We still have a number of regional airlines to hear from. Then there are all the international carriers who report on a very different schedule. But as far as the big guns in the U.S. are concerned, yes, the noisy din that was created from a slew of very “noisy” earnings reports this quarter has now, finally, ended.

I’m still not sure which airlines we are going to take a closer look at in this week’s issue of PBB, because we had too many report in during the week. The issue would simply be too unwieldy in terms of size if we were to go into our usual detail on all eight. But after finishing up the last earnings transcript reading this morning, I’ll pick four for this week, and the rest will get their look-see next week.

But let’s get away from the specifics for a minute and look, as Gary did today, at the overall sense we got from listening to the calls over the last two weeks.

I’d sum it up by saying this: there is a lot of fear out there concerning demand. The immediate revenue landscape looks frightening and it’s not clear where the revenue versus demand level is going to settle. And god forbid if the price of oil starts to move up again.

As Gary said in his note this morning,

“We have entered the stage of the airline story where the thesis gets tested. We all know it takes a lot of revenue erosion to offset the benefits the industry will reap from extraordinary capacity reductions and breathtaking declines in fuel (now materially more than 9/11). However, now comes the hard part. The part where we actually have to observe the revenue declines rather than analyze sensitivities in our models. With revenue fading quickly, as it always does, faith is suddenly hard to come by.

The near-term isn’t going to be easy, in our view. The next potential catalysts will likely come on the revenue front and as CAL previewed yesterday, the RASM comps are going to be negative. In fact, our largely unchanged forecasts contemplate negative RASM comps in every single month of the year, with the exception of November. We currently believe 1Q will see the toughest comparisons.”

Translation? If you thought the fourth quarter numbers looked bad — just wait until mid-April when the first quarter numbers roll out.

However, as far as we can tell — most analysts continue to hold onto the belief that the benefits that come from the drop in the price of oil will more than compensate for whatever drop in demand the airlines continue to feel.

One PlaneBusiness Banter subscriber wrote me this week, “I think these guys on Wall Street are not connected to the real world. In your last issue in December you asked your readers to tell you how they felt about 2009. And you said yourself that you were surprised at the overall level of negativity readers expressed. I wasn’t. And I think your readers were, and are, closer to the mark than these guys who make their living transposing spreadsheets and getting lost in the numbers are.”

Thoughts? I think it’s time we open this up to PlaneBuzz readers for their take. Is 2009 still going to be the blockbuster earnings year for the airline industry that every Wall Street analyst on the planet said was going to be the case?

As always, you can comment here on Buzz — or you can send your notes to me directly.