The Tale of Two Business Partners…
US Airways Flying High
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J.P. Morgan Securities: US Airways Group 2Q Estimates Raised/2007 Tax Rate Introduced
• More RASM, More Profits - US Airways consolidated May RASM rose over 25%, nicely ahead of our 20%+ expectation. Additionally, US Airways updated its quarterly and annual non-revenue expectations last night, with no substantive changes. Accordingly, our estimates push higher still this morning, even when incorporating a full embrace of management's 2006 fuel guidance and a full 40% book tax rate in 2007.
• Strong May results, increased RASM bullishness – As reported, consolidated May RASM rose "25%+", with "+" suggesting perhaps as much as 300 basis points based on past precedent. Accordingly, we have pushed our consolidated 2Q RASM estimate from 23.5% to 24.9%, assuming "20%+" trends in June and pushing our 2Q outlook from $2.95 to $3.30, versus consensus $2.88. Similarly, we have boosted our 2H consolidated RASM forecast from 14.7% to 17.9%.
• Our fuel inputs are now consistent with management's - With jet kero prices showing no evidence of softening, we have chosen to embrace the low-end of LCC management's fuel guidance for the remainder of the year, pushing our 2H mainline forecast from $2.10/gallon to $2.28/gallon and all but offsetting improved 2H RASM expectations for the most part (hence only a slight $0.10 change to 2H06 estimates, a phenomenon not necessary unique only to LCC). Recall that management's ex-fuel cost guidance – reiterated last night – is generous by industry standards, assuming roughly $0.60 of earnings variance per quarter. For example, 2Q06 earnings could be as high as $3.60 should management achieve the low-end of ex-fuel CASM, or $3.00 at the high-end of costs.
• 2H06 estimates immaterially changed, 2007 lower on full-tax rate – We have re-introduced a full book tax rate for 2007, diminishing our partially-taxed $11.65 outlook to $8.65 though still meaningfully ahead of $6.39 consensus (itself a likely blend of taxed and un-taxed estimates, though we're not sure).
• LCC still the cheapest airline we can find, $100 still our target – US Airways remains a fundamentally mis-priced equity, in our view, trading at a significant discount to each of its peers. For illustrative purposes, were LCC trading at AMR's 2007 EV/EBITDAR, it would imply a $71 equity value. Continental’s valuation? $104. AirTran’s? $140. JetBlue’s? Don’t get us started (try $333). While integration risk does argue in favor of some level of discount, we believe the market has unfairly penalized US Airways given its need – sometime between now and the end of the decade – to move its pilots onto a single contract. Additionally, we’ve been surprised at the frosty reception we’ve received from certain investors in LCC hub markets, solely on their aversion to flying the airline. No worries, such was the case in New York about a decade ago, when a different airline – also born of consolidation and twice baptized in the waters of bankruptcy - emerged with a meaningful labor cost advantage to its peers. Continental.
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United Airlines Parent Company Posts $306 Million Loss Excluding Reorganization Items
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UAL cost-cutting needed: experts say
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Best regards,
USA320Pilot
US Airways Flying High
Click here
J.P. Morgan Securities: US Airways Group 2Q Estimates Raised/2007 Tax Rate Introduced
• More RASM, More Profits - US Airways consolidated May RASM rose over 25%, nicely ahead of our 20%+ expectation. Additionally, US Airways updated its quarterly and annual non-revenue expectations last night, with no substantive changes. Accordingly, our estimates push higher still this morning, even when incorporating a full embrace of management's 2006 fuel guidance and a full 40% book tax rate in 2007.
• Strong May results, increased RASM bullishness – As reported, consolidated May RASM rose "25%+", with "+" suggesting perhaps as much as 300 basis points based on past precedent. Accordingly, we have pushed our consolidated 2Q RASM estimate from 23.5% to 24.9%, assuming "20%+" trends in June and pushing our 2Q outlook from $2.95 to $3.30, versus consensus $2.88. Similarly, we have boosted our 2H consolidated RASM forecast from 14.7% to 17.9%.
• Our fuel inputs are now consistent with management's - With jet kero prices showing no evidence of softening, we have chosen to embrace the low-end of LCC management's fuel guidance for the remainder of the year, pushing our 2H mainline forecast from $2.10/gallon to $2.28/gallon and all but offsetting improved 2H RASM expectations for the most part (hence only a slight $0.10 change to 2H06 estimates, a phenomenon not necessary unique only to LCC). Recall that management's ex-fuel cost guidance – reiterated last night – is generous by industry standards, assuming roughly $0.60 of earnings variance per quarter. For example, 2Q06 earnings could be as high as $3.60 should management achieve the low-end of ex-fuel CASM, or $3.00 at the high-end of costs.
• 2H06 estimates immaterially changed, 2007 lower on full-tax rate – We have re-introduced a full book tax rate for 2007, diminishing our partially-taxed $11.65 outlook to $8.65 though still meaningfully ahead of $6.39 consensus (itself a likely blend of taxed and un-taxed estimates, though we're not sure).
• LCC still the cheapest airline we can find, $100 still our target – US Airways remains a fundamentally mis-priced equity, in our view, trading at a significant discount to each of its peers. For illustrative purposes, were LCC trading at AMR's 2007 EV/EBITDAR, it would imply a $71 equity value. Continental’s valuation? $104. AirTran’s? $140. JetBlue’s? Don’t get us started (try $333). While integration risk does argue in favor of some level of discount, we believe the market has unfairly penalized US Airways given its need – sometime between now and the end of the decade – to move its pilots onto a single contract. Additionally, we’ve been surprised at the frosty reception we’ve received from certain investors in LCC hub markets, solely on their aversion to flying the airline. No worries, such was the case in New York about a decade ago, when a different airline – also born of consolidation and twice baptized in the waters of bankruptcy - emerged with a meaningful labor cost advantage to its peers. Continental.
Click here
United Airlines Parent Company Posts $306 Million Loss Excluding Reorganization Items
Click here
UAL cost-cutting needed: experts say
Click here
Best regards,
USA320Pilot
