US Equity Research - J.P. Morgan Securities Inc.
US Airways Group, Inc. (Overweight) - Estimates Reduced, Slightly
• 2Q Estimate Changes – This morning's quarterly guidance from LCC was largely unremarkable, though more detailed than usual. In order of importance: no change to ex-fuel cost guidance, slightly softer "other" revenue, slightly higher Q4 fuel expense, slightly better fuel consumption, slightly higher interest income, slightly less forecasted AMT expense, slightly higher share count. Net result is immaterial, in our view: 2Q $3.30 now $3.21 vs. consensus $3.13, 3Q $2.75 now $2.66 vs. consensus $2.30, 4Q $1.75 now $1.53 vs. consensus $1.15. We continue to envision softening consolidated RASM trends as the year progresses, 25% in 2Q (largely confirmed by monthly traffic releases), 20% in 3Q and 15% in 4Q.
• No change to fully-taxed 2007 $8.65, which continues to tower over a partially taxed (we believe) $5.90 consensus.
• Ex-fuel guidance implies potential upside – US Airways continues to endorse an unusually wide range of ex-fuel outcomes, given integration cost uncertainties. For 2Q, ex-fuel guidance of 7.50¢ to 7.75¢ implies $0.50 of untaxed earnings variance, with similar trends in 3Q & 4Q. Having embraced the mid-range of its guidance, 2Q results could well come in $0.25 better/worse than forecast, holding other inputs constant.
• Slightly Less Delta – Weekly schedule transmissions show a modest decline in planned Delta consolidated flying this fall, versus earlier schedules. Roughly 150 fewer daily departures in September & October, representing an approximate 5% decline in flight activity. Arguably a function of seasonally-diminished demand and the need to service aircraft after a busy summer, though welcome news nonetheless. Reductions slightly biased towards Connection operations, mostly in the east – implying a greater benefit for US Airways than for AirTran.
• The Margin Troika – We expect ALK, LCC & LUV margins to dwarf those of all others in 2Q, a trend we envision continuing into 2007. And yet LCC remains a valuation underdog, trading at a mere 4x forecasted 2007E EV/EBITDAR vs. 5x for AMR and 6x for CAL (and not to mention 14.5x for profit-challenged JBLU). This valuation disconnect suggests "A" we’re flat-out wrong about LCC, "B" we’ve materially underestimated competing Legacy profits, or "C" the market simply needs more time to digest US Airways’ much-improved relative position within the ranks. We obviously think the answer is C. While continued integration risk does argue in favor of some level of discount, we believe the market has unfairly penalized LCC for its need – sometime between now and the end of the decade – to move its pilots on a single contract. Or perhaps the market is simply reluctant to embrace a recent product of consolidation, twice baptized in the waters of bankruptcy – as was Continental’s situation a decade ago. In either case, there’s no change to our Overweight rating for LCC or our $100, mid-2007 price target.
Click here for the investment report.
Separately, according to the AP, US Airways said its second-quarter hedges are set at an equivalent price of $67.37 per barrel of oil. With the hedges, the airline expects to pay between $2.15 and $2.20 per gallon for jet fuel in the second quarter, including taxes.
Interestingly, a not-so-informed "naysayer" poster, who is not an employee of US Airways, indicated no airline could make money with oil prices at $70 per barrel.
US Airways' hedging program will provide the carrier with savings of more than $10 million per month in energy costs if crude oil prices traded at an average price of $70 per barrel from the hedged average price of $67.37 per barrel in 2Q. If the average price of oil and the corresponding jet fuel price increases over $70 per barrel of oil the savings will be even greater.
How could this not-so-informed poster be so wrong...again?
Best regards,
USA320Pilot
US Airways Group, Inc. (Overweight) - Estimates Reduced, Slightly
• 2Q Estimate Changes – This morning's quarterly guidance from LCC was largely unremarkable, though more detailed than usual. In order of importance: no change to ex-fuel cost guidance, slightly softer "other" revenue, slightly higher Q4 fuel expense, slightly better fuel consumption, slightly higher interest income, slightly less forecasted AMT expense, slightly higher share count. Net result is immaterial, in our view: 2Q $3.30 now $3.21 vs. consensus $3.13, 3Q $2.75 now $2.66 vs. consensus $2.30, 4Q $1.75 now $1.53 vs. consensus $1.15. We continue to envision softening consolidated RASM trends as the year progresses, 25% in 2Q (largely confirmed by monthly traffic releases), 20% in 3Q and 15% in 4Q.
• No change to fully-taxed 2007 $8.65, which continues to tower over a partially taxed (we believe) $5.90 consensus.
• Ex-fuel guidance implies potential upside – US Airways continues to endorse an unusually wide range of ex-fuel outcomes, given integration cost uncertainties. For 2Q, ex-fuel guidance of 7.50¢ to 7.75¢ implies $0.50 of untaxed earnings variance, with similar trends in 3Q & 4Q. Having embraced the mid-range of its guidance, 2Q results could well come in $0.25 better/worse than forecast, holding other inputs constant.
• Slightly Less Delta – Weekly schedule transmissions show a modest decline in planned Delta consolidated flying this fall, versus earlier schedules. Roughly 150 fewer daily departures in September & October, representing an approximate 5% decline in flight activity. Arguably a function of seasonally-diminished demand and the need to service aircraft after a busy summer, though welcome news nonetheless. Reductions slightly biased towards Connection operations, mostly in the east – implying a greater benefit for US Airways than for AirTran.
• The Margin Troika – We expect ALK, LCC & LUV margins to dwarf those of all others in 2Q, a trend we envision continuing into 2007. And yet LCC remains a valuation underdog, trading at a mere 4x forecasted 2007E EV/EBITDAR vs. 5x for AMR and 6x for CAL (and not to mention 14.5x for profit-challenged JBLU). This valuation disconnect suggests "A" we’re flat-out wrong about LCC, "B" we’ve materially underestimated competing Legacy profits, or "C" the market simply needs more time to digest US Airways’ much-improved relative position within the ranks. We obviously think the answer is C. While continued integration risk does argue in favor of some level of discount, we believe the market has unfairly penalized LCC for its need – sometime between now and the end of the decade – to move its pilots on a single contract. Or perhaps the market is simply reluctant to embrace a recent product of consolidation, twice baptized in the waters of bankruptcy – as was Continental’s situation a decade ago. In either case, there’s no change to our Overweight rating for LCC or our $100, mid-2007 price target.
Click here for the investment report.
Separately, according to the AP, US Airways said its second-quarter hedges are set at an equivalent price of $67.37 per barrel of oil. With the hedges, the airline expects to pay between $2.15 and $2.20 per gallon for jet fuel in the second quarter, including taxes.
Interestingly, a not-so-informed "naysayer" poster, who is not an employee of US Airways, indicated no airline could make money with oil prices at $70 per barrel.
US Airways' hedging program will provide the carrier with savings of more than $10 million per month in energy costs if crude oil prices traded at an average price of $70 per barrel from the hedged average price of $67.37 per barrel in 2Q. If the average price of oil and the corresponding jet fuel price increases over $70 per barrel of oil the savings will be even greater.
How could this not-so-informed poster be so wrong...again?
Best regards,
USA320Pilot
