Though there is the possibility that between credit card, FF, new revenue management, Cuba and segmented fares ... That margins increase from 2015. So eps has a shot at increases regardless due to the huge buybacks. But what if margins go up too??
The sharp drop in fuel prices was te "good times" and at constant oil, margins would probably get squeezed more. But at some point I think margins would it an equilibrium point. Bears think the airlines are going to shoot themselves in the foot, plenty of historical precdent for that.
The airlines have shown they can produce large profits during good times. But they haven't shown they can get decent profits during bad times. So they trade at low P/Es until they can prove they are resilient to shocks.
I'm one of the only oil bulls here, but, IF they can show capacity discipline and the ability to raise fares as oil goes up, they may show a decrease in earnings but an increase in P/E.
I think analysts were saying the credit card deal would add 2-3% to PRASM and should hit sometime in 2017.
I disagree that AAL is worst for higher fuel. New planes and no one is hedged. Their competitors are unhedging, not hedging.
Higher fuel without an accompanying rise in ticket prices will lead to older planes being retired and that will lead back to PRASM but on a delay.
Yates is right that things are getting worse for the airlines. She has a plausible outcome: higher costs (fuel/employee) coupled with continued revenue pressures. The airlines have been consistently too bullish about PRASM turn around, so, I think she's OK to be conservative here.
But "worse" is relative to $10 of earnings in 2014 and $5+ in earnings this year. Yates predicts $4 in earnings in 2017, which assumes that both costs and revenues trend the wrong way. But is that $4 of earnings really worth below $30 (at $30 that's a P/E of 7.5). That low of a valuation would only be appropriate IF that trend of higher expenses/lower revenue continues (she says PRASM will go up in Q4 2017).
Will be interesting to see if Delta dials back its promise to get to neutral PRASM y/y at the end of this year. I don't see how Delta's PRASM can go from -5% to 0%, without AAL's PRASM experiencing a similar sized improvement (even if it doesn't get all the way to positive).
I'm probably the lone oil bull here. But let me explain why I think higher oil is good for the stock:
1) The stock trades on PRASM and not earnings, and higher oil leads to higher PRASM.
2) Higher oil relatively benefits both bigger and more fuel efficient planes; which is to AAL's relative advantage.
3) Older planes will be retired faster, which will lead to lower capacity/higher prices (the reverse has been happening over the past 1.5 years).
4) The cost advantage of the ULCC's diminishes with higher oil - the greater oil prices factor into ticket prices, the less their low-cost employees benefits them.
5) Higher oil likely benefits their Texas and LatAm operations.
Someone was asking about PRASM on a different thread. My thoughts:
Reasons for PRASM declining for AAL:
1) Dallas Love Field expansion
2) Low oil
3) LatAm Weakness
4) Strong dollar
To see when PRASM starts improving, you just have to look at when each of these hits the year mark.
1) Dallas Love Field, that stopped expanding in August 2015, so Sept 2016 you will see relief from PRASM pressures there.
2) Oil difficult to predict, but my estimate is near the end of this year y/y oil prices will be ~flat. So end of 2016 for this one.
3) LatAm I think is still getting worse, but the bulk of the big declines already happened. i.e. venezuela is a total disaster, but most of that should lap the year mark in the summer.
4) Similar to 3.
SO based on these things, I'd say PRASM is going to improve sequentially from Q2 to Q3 to Q4 to Q1. This is just the math of when you pass the year mark of the "shock" to PRASM.
We will see in a few weeks, but, last quarter AAL bought back nearly $1.6Bn of shares. At current prices in the low $30's, the $1.6Bn from last quarter is nearly 10% of the share count. I've never really seen a company capable of buying back 10% of their share count each quarter before. There's also the possibility that AAL is not buying back shares and that's why it's persistently dropped.
IMO the share buyback, at these prices, is a more important driver of earnings than PRASM, oil prices, etc. Nothing really beats having the denominator drop by 20, 30, 40%/year.
FWIW I'm bullish on oil, I think higher oil = recovery in PRASM and that will be the catalyst for a recovery in the shares. I don't really agree that the shares should trade on PRASM, but they do, and so I don't even think that higher oil is a bad thing for the airliens any more.