I was just hoping for a 10% reduction in fuel costs which would be around 30 cents/gal. Now I'm hearing talk of 15% ... that's 45 cents times 4,300 million gals/yr, or a potential $1.9 billion savings. Divide that by the shares outstanding to get the possible bump in eps.
But even a 10% savings is a potential $1.3 billion to margins.
AAL uses 4.3 billion gallons of jet fuel. The last time gasoline was this low, heating oil was at $2.70. Many are calling for another 10% coming off oil. Below $2.70 there is a lot of air ... who knows where it will go. 2015 could very well have jet fuel off 20 cents ... if not more than what 2015 eps estimates are using. That is an extra $860 million in cost savings to the bottom-line. AAL already is guiding for flat non-fuel CASM in 2015. Things look good.
I don't know when the market will move the stock, but this is hugely material.
Using the prospectus from the merger, AAL indicated they expected to earn $4.3 billion in 2015 ... that was with fuel high and some synergies.
If fuel stays at this level for all of 2015, it will be about $1.30/gal lower (times) 4.4 billion gallons per year is $5.7 billion to the bottom line. Add that to $4.3 billion and you get $10 billion in pre-tax earnings. Divided by 735 million shares and you get $13.60 eps for 2015 (times) 8.5 pre-tax PE, and you get a price target of ... $115/share. What do you think ... an easy double? Anyway, makes current price targets look easy.
If we do the earnings of $6.80, which includes some of the synergies, plus the extra $1.70 in fuel savings, we're at just over a 4 PE ... could double from here. That was a little tongue in cheek ... say up 90%.
The stock has been in the doldrums before the report, selling at a multiple that must have anticipated even worse numbers. The numbers weren't great, but certainly not bad enough to justify the extent of the recent doldrums. Buy the fact ... though I don't have the faintest idea how the stock will end the day. I do know AAL's multiple is low given earnings with these numbers.
Plus, the price doesn't reflect next year's synergies, or the possibility of lower fuel going into next year, both of which are material ... potentially, very material.
EPS for the quarter should come down a bit, (but we knew that after they reported Q2 and they gave guidance for Q3) ... still the multiple is low.
The prospectus for the merger gave $3.7 billion in pre-tax earnings for 2014, which they are easily going to make. The prospectus also indicated a pre-tax earnings for 2015 of $4.3 billion. If AAL saves 60 cent/gal for the 4.4 billion gallons they use, that makes for 2015 pre-tax earnings of about $9.30/share. Use the analysts' pre-tax multiple of 8.5 and AAL's target is $79 .... fair value for 2015.
Well, you were the one in the original post that indicated people ought to be talking about the nonrecurring expenses implying that there was some negative hidden in the expenses, but this board doesn't seem inclined to discuss it. To me that indicate you had something in mind to mention. So, I asked if you'd start by stating something specific that you were concerned about in the nonrecurring expenses, so there was something to discuss. Wasn't that they way the posts went?
I stand by my PE comment relative to NOLs. That situation is completely understood by the market.
airline ... you said it again without saying anything. You imply there are things hidden in the nonrecurring expenses. My question is what was out of line in their nonrecurring expenses? And since you first implied that, why don't you start a specific discussion about the expense you question.
Your NOL PE comment doesn't hold merit. Companies that don't pay taxes because of NOLs get a PE about 35% less than other tax paying companies in the industry. Look at DAL, it has to report after tax eps, but still has NOLs. When they started to report after tax eps a short while ago, their stock price didn't change, the market just accepted a higher after tax PE.
The fuel savings are in the $6.80? Oh no they aren't. The difference between this year's EPS and next is the synergies. The $6.80 EPS was out there long before oil even thought about dropping.
By the way, boils, the thread you are talking about ... I had that conversation with the airlineprof, not you. Maybe you and the airlineprof are the same person as others claim.
What if ISIS takes down Iraqi oil? OPEC gets their production cuts. Guess that means oil goes back up ... but by how much?
Ebola is contained, but obviously a fear, and if it gets out of control, traffic suffers.
Higher oil and lower traffic.
Looking for the first good sign about ebola. Maybe if everyone in quarantine comes out of it healthy. Got until the 19th except for the one that the nurse had contact with. Maybe some kind of restrictions on travel ... Who knows? I say I'm looking for it but what is it I'm looking for?
If we get rid of the ebola fear, I'll live with higher fuel if it comes about.
It could happen at any moment ... people might go, "hmmm, AAL uses 4.4 billion gallons per year, times the savings/gal in the drop in fuel divide by 740 million shares added to this years eps is .... hmmm ... OMG. And they have synergies yet to added as well ... OMG, OMG.
And it is undervalued now using the old fuel price and no synergies.
Parker at LCC decided not to hedge fuel about 3-4 years ago. LCC was the only airline that didn't hedge and were given grief for it from the analysts. However, during that time LCC usually had a lower fuel cost than hedging airlines.
Parker's argument was that the airlines had a "natural" hedge, in that if fuel went up, all airlines would raise fares to be profitable at a non-hedged fuel price. Hedges do run out and the industry had to show that they were set to make a profit at the raw fuel cost. And that is what happened. Sure, for the quarter or so that fuel spiked, LCC would be hit with rising fuel, but that cost would be swamped by the cost of continually maintaining a hedged position. He was right.
AMR had some hedges left over after the merger which were exited in June when oil was $112. I believe for a number of quarters AAL will be booking a profit on those exited hedges. Hedge accounting has a lot of moving parts, but nothing like selling the hedges when oil was high.
// They could rise more than 40% next year, to $75, and still look reasonably priced. //
I'll take any and all positive articles. In the above quote, at least they said "still look reasonably priced". Using an 8.5 PE, that $75 implies only a 17% drop in fuel for the year. I guess they are thinking oil will average in the $85 range for 2015. Wall Street may still be in denial about the potential ... if they are, Main Street has a ways to go.
If oil averages $70, it is easy to get a $98 price target using an 8.5 PE. (other things being equal)
If oil averages where it is today, you can argue a $113 price target. (other things being equal)
cav ... yes, fuel savings does lag even though not hedged. And I imagine it is not 100% of the drop in fuel that shows up in fuel savings. They have into plane costs that are fixed, so do they save 90%, 95% or %? of the drop in fuel? All carriers have that situation though. Still the savings is going to be huge ... don't want to dismiss that. This fuel savings is going to pay for a lot of the new airplanes ... great for earnings, great for the balance sheet, great for careers, great for shareholders.
Actually, the sec filing on Oct 23rd gave a midpoint of $2.59 jet fuel for Q4. They project on the forward curve, and I expect them to do the same in 2015. I agree, the lag is looking more like a month.
I can only guess about LF, but I think they went to a higher gauge, same flights and the demand just has to develop. Excluding the impact of the extra 4% raise, higher gauge is going to keep CASM ex-fuel close to flat in 2015. December didn't have T-day this year as well, and Q4 was going to be more difficult than Q3 regarding Venezuela ... those comps will improve in 2015. I believe the thinking is that the consumer benefit to lower gasoline will take a number of months to show up in the economy.