2015 eps estimates have the synergies built in, but the potential drop in fuel is not built in, yet.
A 10% drop in fuel prices YOY in 2015 over 2014 would add $1.50-$2.00 to 2015 eps.
Plus, there will be a tailwind for the economy with lower gas prices ... more demand for the airlines ... even more to earnings.
At risk of making an understatement ... This is all good.
mark ... as you say, you can get some strange combinations of demand, prasm, fares, etc. Then there is yield, stage length impact ... etcetera, etcetera.
Parker was the one in the early-middle part of 2009 that started the move away from the market share mentality to capacity control. I think DAL and CAL were still bumping ASMs going into Q3 2009. Then all of a sudden they said "oops' and drastically cut capacity in the beginning of 2010. LUV joined a year later. Parker really seems like the industry leader.
mark ... that's a good point about "being newly merged". I guess I was speaking too generally when I should have been looking at angles relating to AAL specifically.
That said, the fact that they are going to make in the $5.50 range is a "testimoney" to the YOY improvement of AMR and things working out. Last year when Parker said that in 2014 AMR would be accretive to LCC's 2013 eps, I was impressed. LCC made in the $5+ range. They really got the AMR side going YOY.
And another slant, I believe it was in one of the recent webcasts (or CC), Parker confirmed synergies of $1.5 billion with $.5 billion coming from costs. And the bulk was still to come. A good chunk of that is sitting in the 2015 eps estimates.
airline ... and I don't want to imply that fare increases from the prior year are the only thing that can have an effect without softer business being the cause. For example, the business leisure mix could have improved in Q3 2013. Having that same benefit this year and other things being equal would produce flat PRASM, but still strong business.
Easter can impact Q2 YOY PRASM ... has business changed? No, Easter did.
And to your point about the momentum in the stock being less. Well, last summer we were looking at a 2-3 PE ... now it is 7, but should still be higher ... what can I say? And going into 2015 there are synergies to increase earnings and now fuel is looking like a plus ... that 7 PE is going to shrink if the stock price doesn't get going.
airline ... lower PRASM gains from one quarter to another doesn't necessarily mean business is softening. It's a YOY number. And the airlines said comps would become difficult, but business was still strong. Absent the 1% decrease in PRASM and margin guidance due to Venezuela (which was explained), fare increases, that went into effect in Q3 of 2013, weren't there in Q2 of 2013 ... YOY comps are tougher, but not necessarily because business has changed. Be careful getting wrapped up in a YOY number.
Share price is soft.
Stuartt ... I agree with you that, that is the general view of things. I fully understand the supply and demand stories. And what's good is that airlines will make money regardless of oil by adjusting capacity. Lower fuel cost will "grease" the path to those profitable margins though.
That said, I've been following for years what's been said about the impact of the Commodities Modernization Act of 2000 on commodities ... heck, that Act in 2000 was basically the cause of the financial panic of 2008. It impacted many areas of the financial realm, and commodities started to go crazy the same time other areas of the financial system started to screw up with the use of deregulated derivatives ... the use of commodity derivative swaps exploded in the early 2000s.
The CFTC has been trying to put position limits on 28 energy, agriculture and metal commodities for the last 5 years. Each time they got close to doing it commodities dropped in price, and then commodities went up as the position limit rule was delayed. They are getting close to doing it again.
Do I know for sure of the impact of the position limits rule? ... no, I don't. But I do see a coincidence in pricing behavior, and the position limit proposal has received the greatest push back by "speculation" industry. Europe will be doing their own (but coordinated) version of position limits by the end of the year. The CFTC estimates that there is a 20-25% speculative premium in commodities. Heck, I'll take just a 5-10% decrease in commodity prices ... why be greedy.
airline ... well, then I take it you disagree with what Anderson said less than a week ago about the outlook. And he specifically said business looked good to Europe. I can agree that Europe could have an impact, but the airlines (as an industry) have been adjusting capacity to cover fuel and/or to meet margins for the last 2-3 years (and have built margins each year). So, what you say is robust demand, has really been the airlines adjusting capacity to meet demand. Robust demand is when the economies have been humming ... we haven't had that for years. So, I disagree with your view point to the extent that whatever is coming down the pike, the airlines will make adjustments to maintain profitability. That's been the thesis for the bull move in airline stocks, not that we've had a robust economy. (Heck, LCC made $5+/share in 2013 with paltry GDPs all over the world.)
I will agree that Q3 eps was aggressively moved up in June/July, and midpoint cost/margin guidance gives an eps in the $1.75 area. Though there is room for beat.
cav ... one more side ... I'd be willing to bet that oil inventories are relatively the same now as they were over the last 5-6 years.
Some of these commodities don't have supply and demand stories. Take rice for example. Dropped almost 20% in the last month or so ... cotton ... another. There is something going on.
cav ... I agree, the airline could respond to the fuel cost savings by lowering fares, but I would think that would only happen after the achieved the margins they want (over the business cycle). So, it would certainly grease the path to their margins. That said, other airlines will have hedging losses, so pressure on fares may be out a ways.
And the other benefit to that, is lower fuel is good for the economy, so travel demand will be good and growth in earnings is possible from there, even if fares come off a bit. So, all is good in any scenario involving lower fuel.
I assume the analysts used the forward curve for oil when figuring their 2015 estimates for AAL. The major jump from 2014 to 2015 estimates of $6.79 is due to the synergies. If fuel runs 5% below that forward curve and actually stays down at least 5% in 2015, that is another buck a share in earnings. That would move 2015 estimates to $7.79. Hunter Keay is using an 8.5 multiple ... figure it out for $7.79. (fuel may be down more than 5%)
With AAL being unhedged, the fuel saving will go right to the bottom line. Other airlines will have a number of quarters (longer?) of hedging losses.
There are about 28 energy, agriculture, and metal commodities that are/have been dropping. Some have supply and demand stories, some don't.
Unfortunately, I don't think barley and hops are part of those 28 commodities. I plan to go out this evening to do some channel checks with some barley and hops end users. This is the confusing part of it ... will it be considered increasing demand, or decreasing supply?
cav ... just a 5% drop in fuel for next year will make their eps $7.50. Actually, even with a 10-15% geopolitical premium not being reduced, people are talking about fuel targets dropping more than 5%.
As a side note, CALPERS is "eliminating" (that's eliminating, not reducing) their long held positions in energy, gold and metal index funds ... it was in a Reuters article yesterday. Got to wonder why ... though I have some hunches.
Regardless, $6.50 eps is pretty good for a $38 stock.
ALK also regained its 50 day in a strong reversal around the same time DAL started its move. HA continues to move. And the rest seem to be following. We'll have to see how the day goes.
... a big increase in capacity? ... well, not that big, but they increased asm's and increased the money they got for each asm.
Cramer did flip on the airlines, and added that you should wait for the analysts to downgrade. Could be that some of the impact of whatever the analysts do will be mitigated by his heads up. The midpoint of Q3 guidance is down in the mid $1.70s, so analysts still have to reduce estimates back to where they were before they aggressively moved them up at the end of June and into July. The numbers are still good though.
The important part of the July numbers is that they still expect 1-3% prasm growth, which is unchanged from the conference call guidance.
The monthly reports are a set of good metrics, but they don't include all the moving parts ... they are "comp" numbers (yoy), doesn't give you yield, and other considerations. They could of used smaller gauge aircraft on some routes ... that would have raised prasm and LF, but topline revenue would have been the same. So, monthly numbers are better than nothing, but far from the complete picture.
One of the worries was "Iraq", and even though the initial plan is for limited air strikes, the precedent is set. I'll say ISIS will have trouble against the Kurds and Iraqi army with US air support. It may be the turning point of this Iraqi situation.
The markets may end up looking at this differently than their initial reaction. But who knows? We'll find out soon enough.
Actually, I think it is good that he is doing it. Give some air support to those fighting ISIL, excuse me IS. That could make that situation manageable. Heck, Iraq has been begging us for months to do it.