Category Archives: Uncategorized

What Did This Quarter’s Earnings Tell Us?

It’s Friday. Do you know how well YOUR favorite airline did for the first quarter of 2009?

As of today, all the major airlines have reported earnings.

So what have we learned? A couple of things.

One, Allegiant Air continues to blow away everybody else on the block. The travel company, which happens to include an airline that happens to fly only MD-80s that also happens to make money hand over fist had a spectacular first quarter. As I mentioned earlier this week, a 31.3% operating margin was posted by the airline.

You just don’t see margins like that in this industry.

I told you guys not to believe that anti-Allegiant rant that CNBC’s Jim Cramer spewed out not too long ago. Cramer, by lumping ALGT with Las Vegas “casino stocks,” proved that his research is lacking.

We also learned this week that AirTran had a great first quarter. No, the results were not as stratospheric as those of Allegiant, but they were pretty damn good. Nice fat profit, and nice big declines in costs. Excellent job.

We also learned that while we may have hit a point where declines in demand have more or less leveled out — nobody, and I mean, NOBODY, (well, except for Allegiant) is ready to call what is going to happen in May and June.

Preliminary bookings are down — but will they recover, as more and more passengers continue to book tickets closer in? Then again, at the heart of the demand decline here in the U.S. is the declining number of premium passengers. That is only going to improve when the economy improves.

What I might have concerns about if I were an airline other than Allegiant is just how much of that previous business travel my airline had before does return. Even if the economy picks up.

You don’t have to look very far to see what is happening in companies both big and small these days. Companies are cutting back on travel and are using video conferencing more and more. Heck, today anyone with a laptop can connect via video to a small one-on-one meeting or to a meeting with many more participants. There is no question that the quality and ease, not to mention the low to no-cost of such efforts — has changed dramatically just in the last couple of years.

So yes, I am concerned that going forward — if a company gets used to using video conferencing as a result of the current belt-tightening — is that same company going to be anxious to start spending money on sending their employees to far-flung regions of the country? Much less the rest of the world? Just because they now have a little extra money to spend?

I’m not so sure.

And, if this is the case — which airlines stand the best chance of inheriting the earth? Or at least the bulk of the shorter-term profit kitty? Those airlines that cater to the leisure traveler and have the low fares and low cost structure to make money doing so.

Which is one of the reasons why Morgan Stanley analyst Bill Greene recently advised airline stock investors to move out of U.S. legacy carriers and into low cost, low fare airlines such as Allegiant, AirTran and JetBlue. US Airways kind of sneaks in there as well, as it has the lower fares and the lower cost structure and a bigger domestic market than that of American, United, Delta, or Continental.

Earnings Overload

Hello everybody. It’s earnings overload week in the airline sector this week, and my head is buried under the avalanche.

I’ll be back later with some observations from the airlines that have reported in so far this week.

For now, it’s time to listen to another call.

Talk to you later.

Southwest Airlines: Not Overly Impressed With First Quarter Stats; Neither is S&P

southwest_airlines_logo.jpg.jpeg

Thursday Southwest Airlines announced its first quarter earnings. Clearly the big headline grabber here was the fact the airline posted its first loss (no ifs, ands, or buts, much less special charge excuses) in 17 years.

The airline lost $91 million in the first quarter, or $0.12 a share. That amount included a loss of $71 million due to the falling value of its fuel hedges.

Without the fuel hedge losses, the airline posted a loss of $20 million or 3 cents a share.

Analyst consensus had the airline posting a loss of a penny, so the loss was more than analysts had expected.

Worse, CEO Gary Kelly said in the airline’s earnings call that RASM, which declined 2.9 points in the first quarter, could take an even bigger hit in the second quarter.

The airline also announced that it was offering a buyout to virtually all employees, had instituted a hiring freeze and was freezing pay for its top execs.

A couple of observations. One, I know more than one Southwest Airlines Captain who, for the most part, sat around eating bon-bons for much of the first quarter. And yet, the pilots at the airline were just given a tentative agreement that, if anything, sweetened the pot. It doesn’t take a mathematician to figure out that the costs involved in having more pilots than the airline needs right now is costing the airline a pretty penny.

Two, while the airline can offer buyouts to employees — the timing is not exactly the best for this kind of move, as the airline’s employees have seen the value of their Southwest Airlines‘ shares in their 401(k) accounts fall precipitously over the last year.

So while I applaud the airline for attempting to right the downsizing ship by natural attrition and voluntary departures, I’m afraid I have to wonder if these measures are going to be enough.

Three, I still think the airline’s growth plan is too aggressive, it’s capital spending plans too ambitious for 2009.

Third, I’m not the only one.

This morning Standard and Poor’s put the airline’s debt ratings on Credit Watch with negative implications. As we all know, this move is usually a precursors to a ratings cut.

S&P put Southwest’s “BBB+” rated long-term corporate credit rating on negative Credit Watch because of 1) the airline’s first quarter performance, 2) it’s forecast for its second quarter revenue and 3) the fact that the airline has added more than $700 million in debt since just late last year, increasing its interest expense.

This increase in debt is a direct result of the airline having engaged in aircraft sale-leasebacks in an attempt to increase its liquidity.

I would add that this amount is only going to increase in the second quarter. As I reported in a recent PBB, there is yet another traunche of sale-leaseback financing in the works with BOC Aviation that is set to close in the second quarter. BOC has handled the bulk of the airline’s recent sale-leaseback transactions.

Note that anything below “BBB” is no longer considered “investment” grade. It then falls into the “junk category.”

My gut feeling is that we will see Southwest lose its lofty “investment grade” debt rating status before this downturn is finished.

Allegiant Air Pre-Announces Earnings

elvis.jpg.jpeg

Late Tuesday Las Vegas-based Allegiant Air pre-announced that it will report earnings for the first quarter of between $1.34 to $1.38 per share.

This estimate is far above the then-forecast estimate by analysts for the airline — which had estimated the airline would post a profit of $1.20 a share.

The airline will report earnings this coming Monday.

So why the uptick from previous company guidance?

Analyst Dave Fintzen with Barclays, who recently initiated coverage of the airline’s stock (we talked about his recent research note on the airline in the latest edition of PlaneBusiness Banter) said today that because the airline gave no details other than the higher EPS estimate, it’s a bit hard to know where the better performance for the airline was. Although he assumes it was all on the revenue side, with revenue probably outperforming even the previous management guidance.

So what is Dave going to be looking for when the airline reports on Monday? Any feedback on the airline’s booking trends in its new markets, especially Los Angeles, in addition to any updated information on where the airline is going to grow now — as we move into the second quarter and third quarters.

Earnings Calendar: Southwest Airlines Reports Thursday

AMR, Parent of American Airlines, Posts $375 Million Loss

Today AMR, parent of American Airlines reported their first quarter results.

What is it they say — it’s all about managing expectations.

And in the case of American’s first quarter numbers that were released today, that is exactly what management did — as the airline had just recently warned Wall Street that its first quarter numbers might not be as strong as first expected.

As a result of that guidance, analyst forecasts were then lowered.

Previous to the airline’s announcement today, the analysts’ consensus forecast a loss of $1.62 a share.

So today, when the airline reported a loss of $375 million or $1.35 a share — the shares of the airline took a nice bounce, gaining 19% on the day, closing at $5.01.

The reason for the better-than-expected numbers? Operating costs were down a bit more than forecast and RASM declines were not as sharp as previously indicated.

American’s stock was not the only airline stock that picked up some ground today — comments the airline made in its earnings call helped push up other airline stocks as well, as CEO Gerard Arpey indicated that the airline is not seeing any “further deterioration” as those in the revenue world like to put it. But, just as Alaska Airlines indicated in an SEC filing last week, Arpey said that American is also looking at May and June bookings that are off noticeably from this same time last year. He said that May and June bookings are off by about 2 percentage points.

This percentage drop is more or less in line with what Alaska reported last week.

AMR ended the quarter with $3.3 billion in cash and short- term investments, including $462 million that is restricted.

Thanks!

Sorry folks. Have been tied up almost all day. Just got back online and thanks for all the emails and comments on the ASA photos! See, just goes to show you what happens when you believe what a pilot tells you.

Ahem.

All I can say is this. Even though it wasn’t apparently a lightning strike, it still would have certainly gotten my attention. Whew.

Atlantic Southeast Airlines Lightning Strike: This Would Get Anyone’s Attention

Thanks to one of our American Airlines‘ pilot friends who sent us these photos this morning of an Atlantic Southeast Airlines/Delta Connection aircraft, after it suffered a lightning strike.

If these photos don’t scare the you-know-what out of you, I’m not sure what would.

As he said to me in his note, “Wonder what the Captain’s seat cushion looked like after this…”

Air Canada Implodes

AirCanada2.jpg.jpeg

Well, we called this one.

Actually, I called it the day the airline came out of bankruptcy several years ago.

If you want to see what happens to an airline when the financial types pull off a slick version of bankruptcy (one in which inherent problems with an airline are not really changed — but bankers, hedge funds, and airline executives make off with a lot of cash in the process) you need look no further than the sickening situation that began at Air Canada when the airline came out of bankruptcy in 2004 and which will end when the airline ends up back in bankruptcy again. An event which is probably not that far down the road.

This week Montie Brewer, CEO of Air Canada was forced out of the airline as CEO. Technically, he “resigned.” Yes, well, that was only after he was told he was fired.

I don’t blame Montie for the position Air Canada finds itself in today. I blame Robert Milton, the former CEO of Air Canada, and all the rest of that airline’s top executives who made off with a s%^* load of money when the airline came out of bankruptcy in 2004. It was this group, along with the various banks and hedge funds that fueled the airline’s exit, all wrapped around a nice new holding company, ACE Holdings, that is to blame for the situation Air Canada is in today.

Milton was made Chairman, President and CEO of ACE.

Very convenient. And yes, the position has also been very lucrative.

To the bankers, to the hedge funds, and to Milton. And his friends.

And guess what? Two of the members of that Milton brain trust are now back at the top of Air Canada — Calin Rovinescu and Duncan Dee.

In an article in the Globe and Mail, Milton was quoted as saying, “Look at this as Calin’s and Duncan’s chance to make good things happen with a terrible backdrop.”

How so very convenient. I mean, what are friends for anyway?

Air Canada has been on the PlaneBusiness Titanic Watch for more than a year.

Babbitt Formally Announced as Administration Pick for FAA Head

This afternoon the White House announced that it will, in fact, nominate Randy Babbitt, former ALPA President and aviation consultant, to be head of the Federal Aviation Administration.

Randy, who is here in Phoenix at the Phoenix International Airline Symposium (actually he’s up on stage right now moderating the executive panel) denied reports that he will bring his Hawaiian shirt dress code to the Washington FAA offices in Washington.