Airlines M&A Could Take Off
Credit Suisse
FOR INVESTORS THAT FEEL they've missed the run in airlines, it's not too late.
We are raising earnings estimates and price targets across the board on lower fuel prices.
Now we are assuming average 2007 West Texas Intermediate futures of $61 versus $67 previously (e.g., $56 in the first quarter; $62 in the second quarter; and $63 in the third and fourth quarters).
Higher earnings-per-share estimates (on average, about 11% higher than a consensus outlook) result in higher valuations for most carriers in our universe; at this point, we believe consensus and valuations have not fully factored in lower fuel prices and/or industry consolidation.
In addition, further upside exists to our estimates (and potentially to our valuation) if fuel remains in the current $54-$60 range based on our sensitivity analysis below.
While we believe LCC's offer for Delta Air Lines is sufficiently compelling and antitrust issues workable, we're assuming US Airways is ultimately unsuccessful in its bid to merge with Delta; in our view, management/labor hostility too big an obstacle to surmount.
However, consolidation is not dead, and in fact, likely will accelerate more quickly than we had been anticipating. In our revised consolidation outlook, we regard a Delta and Northwest Airlines deal as a much higher probability event, and a game changer for AMR. In particular, AMR may be forced to become a first mover on Northwest Airlines, an event we also rank as high probability.
In our view, AMR must respond or risk watching the industry consolidate around it. (CAL combination likely triggered by a Northwest/Delta deal would be especially disturbing from an AMR perspective).
Although US Airways doesn't succeed in acquiring Delta based on our revised outlook, that doesn't mean valuation should come under pressure. We've raised our 2007 estimated EPS and our target price from $72 to $76.
Other partners remain for US Airways, including Airtran, though we believe US Airways may be better off keeping its powder dry. It should benefit in general from consolidation, though under the scenario where AMR makes a bid for Northwest's assets, US Airways would also be a natural bidder (e.g., for Northwest's hubs at MSP International Airport of Minneapolis-St. Paul, and even Detroit Metropolitan Wayne County Airport). If successful, the presence could nicely complement US Airways' domestic hub structure.
US Airways has demonstrated that it can line up financing; consequently, investors selling into the news that US Airways may be unsuccessful in its bid for Delta would be premature, in our view. ...
-- Daniel McKenzie, CFA
Credit Suisse
FOR INVESTORS THAT FEEL they've missed the run in airlines, it's not too late.
We are raising earnings estimates and price targets across the board on lower fuel prices.
Now we are assuming average 2007 West Texas Intermediate futures of $61 versus $67 previously (e.g., $56 in the first quarter; $62 in the second quarter; and $63 in the third and fourth quarters).
Higher earnings-per-share estimates (on average, about 11% higher than a consensus outlook) result in higher valuations for most carriers in our universe; at this point, we believe consensus and valuations have not fully factored in lower fuel prices and/or industry consolidation.
In addition, further upside exists to our estimates (and potentially to our valuation) if fuel remains in the current $54-$60 range based on our sensitivity analysis below.
While we believe LCC's offer for Delta Air Lines is sufficiently compelling and antitrust issues workable, we're assuming US Airways is ultimately unsuccessful in its bid to merge with Delta; in our view, management/labor hostility too big an obstacle to surmount.
However, consolidation is not dead, and in fact, likely will accelerate more quickly than we had been anticipating. In our revised consolidation outlook, we regard a Delta and Northwest Airlines deal as a much higher probability event, and a game changer for AMR. In particular, AMR may be forced to become a first mover on Northwest Airlines, an event we also rank as high probability.
In our view, AMR must respond or risk watching the industry consolidate around it. (CAL combination likely triggered by a Northwest/Delta deal would be especially disturbing from an AMR perspective).
Although US Airways doesn't succeed in acquiring Delta based on our revised outlook, that doesn't mean valuation should come under pressure. We've raised our 2007 estimated EPS and our target price from $72 to $76.
Other partners remain for US Airways, including Airtran, though we believe US Airways may be better off keeping its powder dry. It should benefit in general from consolidation, though under the scenario where AMR makes a bid for Northwest's assets, US Airways would also be a natural bidder (e.g., for Northwest's hubs at MSP International Airport of Minneapolis-St. Paul, and even Detroit Metropolitan Wayne County Airport). If successful, the presence could nicely complement US Airways' domestic hub structure.
US Airways has demonstrated that it can line up financing; consequently, investors selling into the news that US Airways may be unsuccessful in its bid for Delta would be premature, in our view. ...
-- Daniel McKenzie, CFA
