Financing aircraft and taking advantage of the low interest rates today makes sense by itself. 4% is certainly lower than its cost of capital. And as you say a PE of 5 implies a 20% return. Certainly more than its pre-tax margins, so buying its stock is a better deal than investing in the company, yet low interest rates are allowing both. At some point the PE will not be better than what the company makes, making buybacks not the thing to do. If the next incremental investment in the company will only be 12%, or 8%, over the business cycle, then you have different metrics. These guys make these business decisions all the time, and have the data and smarts to do what is right.
// That's quite a Fish Talk, ... //
I feel he didn't complete he thought. He said, as you quote, "If oil prices go up expect capacity cuts ... ". If oil goes up, it may mean the economy is picking up and airline demand will increase, and grow into existing capacity (and prasm will go up). So, possibly no capacity cuts. In addition he said, as you quote, " If oil stays cheap PRASM will stay soft ..." ... maybe not. Airlines will manage for investable returns (what is that 14-16% pre-tax margins over the business cycle? Pick a number.) AAL has said a goal was to exceed their cost of capital over the business cycle. And that goal should be the goal of any business. So if oil continues down, prasm may not drop if all airlines want to meet their profit goals. And since they all have balance sheet repair to do, (except a few), and profits repair balance sheets, they will manage for profit goals and manage capacity at some point even with oil down. Also, as a side note, airlines don't always get capacity right and right now planned capacity for 2015 wasn't right for 2015 demand.
Being non-hedge has its benefits. I thought I heard that LUV is carrying $1.3 billion in future hedge losses, and it's been awhile since I went over hedge accounting, but I don't think that counts the cost of getting in the hedges. Certainly in the future if oil goes up LUV's loss decreases, but that has to come to pass just to get even with being non-hedged.
There are numerous ways to take Kirby's comment about 2H 2016 (and DAL's comment of being flat prasm going into Q1 which theoretically fits Kirby's comment, but AAL may be a quarter behind DAL in that respect). And I can't remember anything about prasm getting worse as you indicated, bperfett. Anyway, I would think AAL is closer to DAL's comment than prasm getting worse.
Maybe AAL is projecting parity in the dollar in Q2 2016 and that is the only reason it won't be going positive in Q2 ... or Q1, or were there other factors? Needed follow-up questions. Can't remember off hand what UAL said in their CC about prasm going into 2016.
DAL thought they would be flat prasm in Q1. And DAL didn't say when positive prasm would occur. They could be flat for Q1 and Q2 and not turn positive until the second half. Anyway, AAL may be a tad behind DAL, and then again maybe not.
A couple of talking shirts mention forced selling because of margin calls in the commodity holdings. At least the market held at the 2079-80 area ... for today.
cav ... well, I'm in your camp as far as oil goes. Actually, all commodities are falling back (and lower for longer) ... maybe we're going back to a normally priced commodity world (after a decade+ of financialization) Even if one doesn't accept that thesis, any tweak up in interest rates will strengthen the dollar at least over the next year or two, which will add to any weakness in oil.
It's kind of funny. If oil was usually this low and airlines slowly tweaked prasm up to its current level to produce 15-18% pre-tax margins, the market would be looking at this completely differently.
cav ... the problem with oil is that (I believe) most are looking at low oil as temporary. Recently the "lower for longer" crowd is becoming more vocal. If "lower for longer" takes hold, then it might become more material to airlines, which haven't gotten the full credit for oil's drop.
OPEC is going to pump like crazy to meet there budgets. What I don't have a handle on is the 50 mbd coming from non-OPEC and non-US ... are they doing any new drilling? Pickens says they are just going to deplete, but I can only imagine that some of them have budgets too along with other incentives to produce oil.
PRASM decreasing yoy can be misconstrued. AAL did say that it is not getting worse, and they are already matching fares in all markets. PRASM can seasonally stay the same (in cents) and revenues increase through GDP growth as they fill more of the seats they added to their planes, or seats available through realigning gauge on route after the res system is done (more passengers at same prasm is more revenue). And as UNC says the ancillary revenues are always there. Anyway, AAL did say the they felt PRASM was stable at current levels ... yoy comps won't tell you that.
cav ... thought VZ was slight to about .5% in Q1 and Q2 (mostly Q2) 2014 but then went to 1.5-2.0% in Q3 and Q4 ... guess we'll find out. Yes, there is that domestic glitch ... hope it is resolved going into the fall.
Wasn't the date for the start of switching some LCC flights to the AAL res the 17th of July? If so, anyone hear of any glitches with any of the switched flights? I imagine by the earnings CC, AAL might be able to say something on how it is going ... if it started on the 17th.
Other than the VZ yoy comp difference, I'm not expecting too much out of Q3 prasm. Though I vaguely recall that AAL's prasm in Q3 of 2014 was somewhat weaker than the others. If so, the yoy comparison may look better than just the VZ portion ... not counting on my recollection ... have to look back. That said the summer capacity is in stone ... have to look for better comps beyond. I agree with you, cav, that we need to start being flat at least as we go into next year.
unc ... we were just talking about targets (in general), not what the market is doing now, but thanks for reminding us to "Right (y)our minds".
cav ... It's not what I think, it is what analysts are using to model their target stock prices. If you take an analyst's eps estimate and divide it into their target you'll get their "modeled" PE. And I think most are around 8 (under pre-tax reporting). Keay mentioned he was using 8.5 to get his target. As eps has been taken down recently, target prices have moved down, but the PE has generally stayed the same for target stock price reasons.
Sure, after a number of years of good earnings and balance sheets improve (nothing like profits to improve balance sheets), and the airlines show they can do well over the business cycle, the market may expand multiples. Having said that, once in an after tax situation, target prices shouldn't change ... just PE's expanding to an after-tax PE. Otherwise why don't analysts say the target price is "this or that" using pre-tax and a different target using after tax earnings.
cav ... right now target prices are using about 8-9 times whatever the analyst has for eps. Are you saying that as they report after tax eps, the analysts are going to drop target prices about 35%?
I agree with you, bearsrunfrombuls. Depending on what you want to estimate for fuel and synergies, they do between $7-10, and most likely $8.
// It doesn't work that way, even when they switch they'll add back in "special items", so take $6.84 as it is.
DAL switch in 1Q14. //
unc ... you just talked about an apple, orange and a peach
DAL and AAL have about the same tangible net assets on their BS. Actually DAL was right to pay down their debt, though with other liabilities added, it has the same total liabilities as AAL. DAL was essentially financing their "goodwill" prior to paying down debt (they have more goodwill than AAL).