cav ... definitely agree that it is safe to say that AAL may trail DAL going to flat prasm, but improvement may be the same. On a side note, I find it amusing that analysts/articles say they like DAL better since they are further along with merger integration ... What? DAL has been merged for over 5 years (When did DAL do their res system, 2010?)? When do they become one airline?
Eventually, margins may take on more meaning, especially if the industry can show some indications of prasm stability.
// Yes, I've been flying domestically all month ... //
I was driving last week ... my "truck" indicator went off the charts. Granted it was near the intersection of two interstates, but I had to stop counting because I couldn't keep up and drive at the same time. 49 trucks in two miles ... and I was surrounded by trucks. There is definitely commerce going on. Sure it is probably not 24 hours a day and there are thin spots, but the thin spots are less, and busier during other times of the day than a year ago that is definitely for sure.
On the back of an envelope I think the incremental growth in the EU and US will counter the drop off in China's growth ... and elsewhere. In 2016 maybe the weak ones will get on track.
// The economy can be weaker, ulcc/lcc pressure can continue, etc...that will prevent significant fare increases. //
Cav ... The industry can handle rising fuel, but I agree with you it may not be lockstep ... probably lag one to two quarters, and even during the lag there will be some catch up being accomplished. They know how to do it, and they did in 2010/11. The ulcc/lcc would have a greater percentage of costs impacted with fuel rising, and so all airlines need to do what it takes to raise fares.
If the economy is weak as you pose, that will take the edge off commodities (oil). It's the natural hedge Parker has talked about since 2009 when he stopped hedging.
Also all airlines have negotiated labor contracts that will allow labor savings if capacity is cut (something that didn't exist in prior airline industry history). Almost all have said they have aircraft they can park.
Oil will be capped at the frack marginal price, and that is near what you figured the your 2016 earnings in a previous post. Have to say I agree with your numbers. The economy is good, and margins are good ... I bet prasm goes flat (very near flat) going into the new year.
// it can also initiate another QE if the next crisis hits as soon as Next year.//
Yes, and also have heard talk of fiscal plans if need be also. But don't know if that is true, or just something that is being tossed about right now.
// 25 basis points is nothing //
Scott ... True, and if a crisis hits lowering the Fed funds rate back to 0 won't help much too. You said a target should be 2-6% for the Fed fund rate. Well, long term rates are usually economic growth plus inflation. Right now they are hanging at 3%. The Fed wants to keep the yield curve steep to be accommodative. So, as long as the economy isn't over heating and inflation doesn't exceed the Fed's target, why would the Fed flatten or invert the yield curve and drive the economy into a recession?
Now if economic growth picks up (and/or, hopefully not, inflation), long term rates should reflect that ... they are market determined (generally). Having said that the Fed does have a balance sheet to reduce, and when they feel the economy and certain sectors can take it, they will start reducing their balance sheet (that too will be data dependent), and that will impact long term rates.
Anyway, we need an accommodative monetary policy ... can't see the Fed flattening the yield curve too much ... I'd call 2% a restrictive monetary policy, if long term rates stay where they are. Right now there is no need have restrictive monetary policy, and the Fed has said as much.
Right now fiscal policy is somewhat restrictive ... deficit is decreasing due to higher taxes over the last few years. Fed is fighting that too. So to those that say current monetary policy isn't working, they should look at other headwinds. Though one thing about low growth ... how far can you fall?
// It's a big conspiracy theory. //
It's a plan, it's coordination, it's different, etc., but not a conspiracy theory. And because it is "different" there is plenty of room for various corners to say the "sky is going to fall" in an attempt to instill fear.
And judging the way long term rates are going people are buying treasuries ... no problem there. Sometime in 2016, I believe, the plan is for the Fed to relax their balance sheet, if conditions permit. But that is a different issue than raising short term rates, but to some degree may require the same economic conditions.
// Like it or not we can't stay at zero forever otherwise we will simply head into a deflationary tailspin. //
Scott ... low interest rates don't cause deflation. In general I understand what you are saying. I guess my point is more against everyone saying we have to "normalize". What is "normal" depends on other variables, and we still have conditions to make the current state "normal". Everyone acts like "normal" should be historical, or some average, or the level of interest rates in other cycles.
I think when conditions call for a hike we'll see it in long term rates, which is market controlled (though through QE and the Fed balance sheet they did stick their finger in the long term rate game). Anyway, that will give the Fed room raise short term rates and not flatten the yield curve. The Fed did say they expected that any increase in interest rates by them would be done in the context of being accommodative. I know that 25 basis points would not flatten the curve, but it wouldn't satisfy those that want the old normal either, and it would impact emerging market loans.
// ... while Yellen is mainly concerned about the U.S. //
That's true, but there is an argument to be made that what is good for the world is also good for us. And there has been increased coordination among central bankers over the years. I'm surprised the market was so surprised about no rate hike. It was in July that the IMF and the EU made their plea to the Fed ... and it's not that economic metrics here are heating up quickly, so why not wait, especially after a request like that? Until more metrics change, lower rates are actually normal for conditions. (Financials would have liked a hike.)
If growth stays at 2-3% that is better than the last number of years and the economically sensitive airlines did very well for the last number of years.
cav ... there probably should be more discussion about downside risks. This year has been full of many new "twists". Probably some concern about where the balls would land (prasm, capacity, oil, integration, weak parts of the world, etc.) I can see iahphx point from his post too ... there will always be something ... and, even with "the somethings", look at the margins. One of the concerns, the integration hurdles, will soon be dissipating ... then they can get everybody to redirect their focus on tuning things up.
cav ... never really addressed your January, 2015 prasm warning. You called it, and it certainly put my antenna up. There might have been some inklings about some prasm weakness, but your posts got me to pay attention. Thanks for that.
// it's the Commitment of National Traders (CONT). //
There are numerous reports, COT being one ... still, commodity swaps aren't included even in the CONT.
// commitments of Traders //
Unc, That's not all there is ... the Commitment of Traders (COT) that is. Commodity swaps (energy being one area), and some other derivatives aren't reported yet, nor are there positions limits on them ... the dark world. And that market may "swamp" the size of the futures market. It's coming though ... and indications that it was coming started late last spring and early summer. Like the Fed concerning themselves with the requests from the IMF and EU about interest rates, the CFTC is going to do it in coordination with the EU, etc. ... well Basel III ... or at least closer Basel III's implementation of similar rules.
All commodities (energy, metals and most ags.), not just oil, started dropping late last spring and summer. All the other commodities came off 25-35%+, not sure if all had supply stories like oil.
// What happens when rates rise 3 or 4 percent then what happens????? //
I get the feeling from "talking shirts" that those rates (3-4% short term) are "normal" historically and therefore that is where the Fed has to take rates ... ridiculous. What makes "historical" normal? Only if other economic factors return to historical levels will it justify "historical" interest rate levels.
// 1,077m of revenue, the 16% margin is $172.32m, 18% is $193.86m, the difference is only $21.54m //
Slide the decimal point ... but still understood, as did you
Actually, I thought it was only down that low for about 6-7 minutes. If you went to get coffee, you missed it. Had to have orders already in ... say at the gap.
I didn't like the repeal of Glass-Steagall either, but at the time European banks weren't hamstrung by a law like that and to be non political about it, we decided to be more like Europe instead of Europe becoming more like us. But probably more devastating was the Commodities Modernization Act of 2000 which deregulated derivatives ... (and for the same reasons of the repeal of Glass-Steagall ... to be more like Europe). Sure a republican congress, but this was pushed hard by Rubins and Summers within the WH.
I'm not against trying something new ... this just wasn't caught in time. Greenspan for years said derivatives seem to lessen risk in his testimonies. And for that matter in 2006 the WH did start investigating what was going on with commodities through the GAO, but results were inconclusive. Bush walked into office with terrorism increasing, deregulated derivatives, dotcom bust, and a recession ... his plate was full and not his doing. Sometimes changes are made and things go bad ... well, they did. TARP stabilized the financial system, but the damage was done.
Unc ... AAL does give enough guidance. Their comment about not going to positive prasm until Q3 2016 was a safe call (maybe taken overly negative). I remember Keay saying that if AAL just laid it on the line in January the market probably wouldn't have dropped it so much ... so shortly after Keay says that AAL comes out with their Q3 of 2016 comment. Which is not in congruent with DAL's comment about going to flat prasm in Q1 2016 ... AAL could also be flat in Q1 and Q2 2016 (+/-) and still not be wrong with their projection for Q3. The slant to their comment is good for buybacks.
// Oil at $38 or lower for long term is going to keep dollar too strong //
A strong dollar means cheaper oil ... it's not the other way around. If we raise rates, the dollar will strengthen and oil will be cheaper than it otherwise would have been.
I'll take oil at whatever price where supply is enough. As far as today goes, oil had to bounce sometime. We still have supply on our side, a relatively strong dollar, and we are set to put position limits on commodity derivatives (unless the politicians get cold feet). And airlines do well with a good economy ... go 3.7% GDP.