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.
jal ... I understand. I was just addressing what could, might happen in the various markets and in the different possible sequences that may impact eps estimates. Will it play to the longs, or the shorts over the next few months? Maybe some clarity from the webcasts this week.
AAL did say by September they would lap the Love field impact YOY. They did say something about a revenue software glitch that had a negative impact (wrong gauge equipment on some routes, I think). The dollar is a little weaker, and fuel surcharges are getting close to being lapped. Credit card agreement is still out there. Revenue projections in the back half of the year show a flattening out YOY ... Something is going to have to turn soon.
unc ... is the crack spread so wrong? I haven't got into the oil weed discussion for a number of years, but the crack spread use to be around $5 when oil was in this range and then increased to $15 or so when oil went to $100. It seems that oil dropped faster than the crack spread. And if that isn't the right way to look at it, I know that China in order to keep their refineries going are over producing oil products ... jet fuel included. (Those extra refinery runs also misstates true oil demand.)
All I was saying is if oil fluctuates $10/barrel from what is used in the estimates, it is easily (+/-) a billion bucks. Then you have the analysts' positive revenue estimates for 2017 to wonder about ... the airlines will decide if they want to maintain margins. Fuel impacts all the same, generally. And the other airlines are looking at labor contracts and order books as well, so it just isn't fuel staring them in the face. Will revenue adjustments happen before costs increase? Or the other way around? I believe in the long run adjustments will be made, but in the short run things could happen that raises questions, or dispels those questions.
// oil prediction recently made by Francesco Filia //
I'm not in the oil predicting business. All I was saying is that if oil moves higher (let's say temporarily) before airlines can show that they can adjust to it, eps estimates for all airlines will come down at least until they show they can adjust to it.
I know that the spring and early summer is usually the high time for oil, but if it stays at $47, or moves higher, the airlines are going to have to make those things "happen" that they can control (i.e. doing whatever is necessary to raise fares). Right now the analysts are showing a pretty hefty revenue increase for 2017. The airlines need to take some action to show that those revenues are possible. And I'm not disputing that the airlines aren't capable of doing that ... just that it needs to happen if oil stays in this area or tweaks higher, or eps estimates may drop until it does happen.
Then again, oil may average in the $37-40 range for 2016-17, and what I said won't matter.
unc .. ok ... you were talking about eps, not revenue. Thought you were talking about revenue.
You know, it all depends when things happen, but at some point it could look like $4 (+/-) eps for 2017, if oil goes up before other things happen ... but you know about predicting oil. Could even be less than $4 ... or, if things fall in place, current analysts' estimates could be hit. All this makes for an interesting situation ...
// otherwise is just a poormans IBM //
AAPL's revenues are going down faster than IBM's. The products and services in their industry are changing faster than the in the airlines ... opportunities, but, I'd say, risky too. And then again, top line problems exist throughout most industry these days.
LUV seems to be going to flat (maybe negative) capacity in 2017-18, and in their last CC they described their recent capacity increases as due to a "unique" situation (Wright, I assume), and they would manage capacity to maintain margins. And there have been feelers being put out for fare increases. I can understand betting that the airline industry won't act rationally, but it would be an early bet, and betting against the industry's rational actions of the last 6 years.
// AAL has to show it can grow more than 6% //
Unc ... 6% would be extremely good, but how did you come up with 6% growth as being necessary? The way you said it, I assume, that you meant 6% annual growth over the long term. Or was that for just a one year or so burst to cover a bump in costs.
AAPL is in a precarious position ... airlines just have some tweaking to do ... difficult tweaking, but it's not like they haven't had difficult tweaking to do before. And I feel there are signs the airlines want to do it.
The legacies have all indicated they would manage capacity.
I don't know how many listened to LUV's Q1 webcast, but they indicated only 5-6% increase this year (I think that was mostly out of Houston), and then to average only 2% growth over the 3 years ending in 2018 ... seems to me that means essentially no growth in 2017-2018.
(This pilot shortage needs some discussion ... seems more and more articles about it are popping up.)
I think Lykouretzos of Hoplite is hoping that it is "different this time" for his hedge fund. One to two years ago his hedge fund was about 35% larger ... looks like his hedges were clipped.
And I imagine if AAL had any inkling of his talk mentioning AAL today, buybacks have been minimal.
Recession calls are always detrimental to cyclical stocks. And rightfully so, but right now the economy isn't flying very high and hasn't been for years. Cyclical stocks would do much worse if the economy fell from a 4-5% GDP than if they had to deal with a drop from a 1-2% GDP economy. How much can things change ... ?
We have almost been in a recession every year recently (I think Q1 2015 GDP was even negative). Revenues don't grow, but this slowness can allow businesses to adjust to manage profits. Sure there will be bumps, but hitting a pothole slowly is better than hitting it at a high speed. Globally we hit a recession with a 2% global GDP (is that a new definition?) ... I think the chances of muddling along is greater than huge economic disaster.
But all that said, the "R" word scares investors. And scared investors produce opportunities at some point. Eventually they will realize "the sky is falling" means "it's a cloudy day again".
Rails, trucking, ... there is something incongruent. Transports are a leading indicator and after a year going down they finally look as if they are turning up ... and then on the other hand everyone is implying that a recession is coming ... one or the other is wrong. Then again, I suppose we could keep muddling along.
// LUV is same as everyone else with declining PRASM //
Guess I didn't hear their Q2 prasm forcast correctly. Thought they said it would be in the flat range.
Understand and agree with what you're saying, Unc. Changing the subject to LUV ... LUV going to flat prasm is somewhat of a good sign. YOY can be hard to compare sometimes as your example with DAL, but going to flat prasm is the right direction for domestic operations. AAL mentioned lapping the DAL (Love) situation in September. And internationally, the dollar and fuel surcharges and some international weakness will be lapped in the future. That could leave the carriers with lapped YOY situations, but still with low prasm that is also at a level that is still producing good earnings.
Besides UAL and DAL mentioning that they will manage capacity, I read an article this week that LUV said they are pulling back on their 2017 capacity. At least that is going in the right direction. Maybe AAL's Q1 prasm will be at least flat in 2017, YOY.
Is the future brighter? And when will the market be more forward looking? Always questions.
// ... at 2015 4q call he said 1q prasm would be the "trough", ... //
cav, I took the term "trough" as being nominal and not YOY. I didn't necessarily take Kirby's statement as saying much, since Q1 nominal prasm could very well be the lowest for the year, but still have other quarters show YOY declines. I didn't check out the numbers to see if that was right way to look at it.