Calm down unc ... I was just wondering about something, not getting a headache. By the way, you must have gotten so concern about the headache you assumed, you missed my question to you about rigs.
// we get even more oil than the world really needs (like fracking) //
I don't know how this is all going to play out for the producers, but at good fracking prices, but it seems for most OPEC producers it is below their budgets so they are going to have to pump ... so then the marginal frackers are at risk if prices drop due to production to meet budgets. Interesting dynamics.
Right now it is interesting with so many low cost producers offline (or reduced production) such as Nigeria, VZ, Libya and even Canada (not completely low cost), coupled with the seasonal bump, that oil isn't even higher.
Maybe unc can answer this because he mentions rig count a lot. It is my understanding that the rig count only counts operating rigs. Are there rigs sitting on site waiting to start up again ... I imagine rigs can be stored anywhere ... even on site for a negotiated price.
// all they care is still the PRASM //
That's what they say. I think they really mean margins. If costs are pinching margins, airlines have a number of ways of dealing with it. Fare increases are ostensibly easy to read. However, just a capacity cut (of the right kind) can change the mix of passengers fares. Airlines know how to do that, and it appears they are setting up to do that. Kirby did throw that bone out there to the fish ... ( I don't know ... do fish like bones?)
// declining RASMs are only a problem if you're counting on 20% margins. //
The worry is maybe less than 10% margins ... or even ...
That said, many airlines seem to be prepping capacity growth in Q4 and 2017 for fare hikes. Even LUV mentioned going to flat (maybe slightly negative) capacity growth in 2017. Plus many have substantial labor contracts coming which they are going to have cover with additional revenue.
// any thoughts on Lending Club //
Fintech is certainly out there. I think the main idea is that they are going to have to combine with the banks. I'm sure there will be opportunities if and when that happens. To your question, I haven't looked at Lending Club. Probably should devote more time the area.
// 1st sight of PRASM increase //
The industry doesn't need to go into 2017 without fare increases and especially if oil starts towards $60. EPSs for 2017 will certainly be coming down if that is so.
That said, the question is, "What margins the industry will manage to?" AAL thought it would be between 2014's and 2015's. Even though the lower end produces a lower eps than what is currently projected, it is reasonably good. The shorts are looking at something lower, assuming the industry won't put across fare increases with rising costs. And they can push their story since there will be a lag in the industry response. So, even if wrong, they will be right for awhile.
I'm sure with all the number crunching on the board, everyone has figured various eps outcomes under different scenarios for 2017, as well as 2016. Interesting ...
On another note ... Back in Q1 when AAL said prasm would trough, it was at 12.43 cents. If that was true, Q2 would be down a max of 8.4%, Q3 would be down a max of 5% and Q4 would be down a max of 2%. Q2 prasm guidance was down 6-8%, or a midpoint beat of 1.4% from trough levels. So, if AAL was correct, Q3 should be down 5-3.6%, Q4 should be down 2-1.6%. (nothing special about the 1.4% ... just the improvement off of trough for Q2).
The market is betting against fare hikes (and fuel increasing from here). With other airlines facing labor cost increases, maybe the incentive will be there for fare hikes ... Otherwise make sure you look at different scenarios for eps outcomes in 2017 ... but hopefully everyone has done that.
I'm not an oil market watcher, but it may have something to do with Brent dropping to WTI. (Brent was always lower than WTI in the "old" days ... ) Anyway, we started importing diesel and jet fuel from Europe, and the product was higher cost than if cracked off of WTI. The WTI refineries here just matched the imported prices and took the extra profit. The crack spreads were huge for product from WTI for about 8-10 years ... now the crack spreads are coming in for those products.
I also heard that China is just pumping out product to keep employment stable at their refineries ... that product may be floating around the world somewhere.
Probably other reasons too ... I'm sure ... not an oil expert here. (watched the CFTC/EU over the years and how they've been handling the previously deregulated commodity derivatives ... many changes in the last few years ... nobody talks about it ... I think it impacted quite a few commodities including oil.)
In a way, the prasm/revenue problem should have been seen. Fuel continued to drop and the dollar was stronger in Q1. The shorts will have their way for awhile, but capacity is coming off, and we'll see if prasm reverses. At least for another year or so, gpd will be there for a support.
AAL's new revenue software is something that is lurking in my mind. In Q1 they mentioned a glitch that cause some wrong gauge on certain routes. New software can be great, but glitches along the way are always possible. I'm surprised no one at Wolfe directly addressed that problem mentioned in the Q1 CC. Instead it seemed like Keay just asked questions about how it was going to be implemented, and then Kirby had to say we started already.
Still, you have to ask yourself, how many $30 stocks are there making over 5 bucks ... making 4 bucks ... or 3 bucks?
// when they guided 14-16% margin when they last year made 17.20%, ... //
The continuing prasm situation was more of a surprise in the Q1 CC, though the resolution was just pushed out a few quarters. They said awhile ago that 2016 margins would be less than 2015, and then bumping up ... we knew that was coming.
The markets are in a "wait and see" mood at this point (until they're not). One thing, and as Kirby said, AAL did put the guidance out there and although it was not as bright as others, it was more "on". Let's see if their forecast for improvement will be "on".
There are things out there that can create doubts ... which can weigh on the stock. That said, it looks like the economy is tweaking up, and that is good. I thought the market responded well to Yellen's comments.
I understand about the fuel costs, though their Q2 costs run from mid-March or so, to mid June ... It'll be higher than their guidance, but will it be $1.53? It was $1.50 in Q4 with what looked like higher spot prices than now. That said estimates need to be tweaked down for reasons you say ... wouldn't mind them in the $1.50 area (or $1.40s?) going into earnings. (A hiccup ... right ... Kirby says they'll adjust to fuel ... right?). Brent settled a penny under WTI ... old times again ... maybe.
DAL's 21-23% was operating not pre-tax ... wasn't it?
// the margin they most recently mentioned as sustainable //
I assume you are referring to the margin mentioned at the Wolfe webcast? Wasn't that just a general margin range AAL thought the "industry" would maintain going forward, and AAL thought they could operate at least that or better.
Gaps usually get filled, especially low volume gaps, so a "call" ... just playing the odds (but thanks)
I was listening to Greenspan the other day. He made the comment that the money supply was rising at a higher rate. I wonder if we'll start to hear comments about the Fed reducing their balance sheet by selling some of their long assets to soak up the extra bucks (or not replacing those that mature)? If things are normalizing one would expect the velocity of money to pick up back to the levels of the pre-crisis ... then again I don't know how that would have to be coordinated with the rest of the world. Anyway, if the long end tweaks up, that does leave room for rate hikes without flattening the curve.
// BTW, I find it interesting how little discussion of cash taxes there is. //
iah ... I think everyone understands that situation, even before they reversed the NOL's and had to report the non-cash taxes.
It's a "show me" situation ... I don't know what it will take. If oil averages what it did last year, EPS will be lower than current estimates ($4.xx) ... don't know what share count the market will use in their thinking (GAAP share count or what?). That's still pretty good for a $30 stock. Anyway, for that to happen, oil needs to get up into the high 50s very soon and stay there for the rest of the year. Near the $60/bbl level ... that's pumping territory.
Just read cav's comment about Kirby and margins ... if those margins are achieved, nothing to worry about.
I feel a hike could happen also ... and would prefer it in July for your reasons. Today RF left a low volume gap ... should definitely get back to $9.68 if not lower. RF did bounce off the 200 dma nicely, so with any pullback it could hit that as well. Could get a golden cross soon with the 50 dma crossing the 200. (With all the algo's ... they can make charts look like anything though.)
Usually, the Fed stays in the background during election time. I think they may skip raising in June due to Brexit, and do an intra-meeting hike in July prior to conventions, and the later election period (If data indicates.). And if things keep improving ... December may be in the picture.
(Though I feel they have to be careful not to flatten the yield curve too much ... we need to see long rates tweak upward .... hopefully due to real growth and not inflation. I would think the Fed wants to normalize, but not at the expense of cooling off the economy ... it's cool enough. And we already know they pay attention to our rate's relative position to the rest of the world.)
Delta runs a good show, unc, I agree. But I believe the industry does have more level headed leadership than ever before ... AAL included.
I think AAL did what they had to do given the circumstances. Anyway, we have LUV potentially going to negative capacity next summer, and SAVE looking for a fare hike along with DAL, and JBLU with a drastic drop in RASM as iahphx mentioned ... a fare hike will happen when the right size fits all is proposed.
It looks like the industry's planned capacity is falling below nominal GDP growth ... at least it is headed in that direction for fall and 2017.
Of course you can get 8-14 companies thinking clearly about how to behave, but the odds of getting 4-7 companies doing that are better. The airlines in general are all the same animal and to stay as on-going concerns they have to make good margins. For one, among others, they have to avoid the pitfalls of their depreciation schedules ... they have to think in terms of replacement cost accounting over the long run.
// curbs on oil speculation //
Oil (commodities in general) speculation in the previously deregulated derivative swap market is different than pre-2014, but all aspects are not in place yet. The CFTC has implemented rules for at least keeping track of the trades, margin requirements, established clearing houses, etc., so they can watch what is going on. These were mostly implemented in 2014. Also, the proposed rule for position limits and aggregation of positions has been sitting there since 2014 waiting to be made final. The CFTC is probably waiting for Basel III catch up which is going to implement similar rules. But at least with the transparency rules they can see if anyone tries to put on a "Hunt brothers" sized position, unlike pre-2014.