Airlines Fly…Except United Continental

Delta’s’s August PRASM declined 6.5%. We assumed down 7% and the buy-side expectations we heard were in a range of down 6% to down 9%.
We fielded a decent level of call volume about this report today over the last couple weeks, and while there was some concern over a potential miss we also think there is an increased level of acceptance around lower PRASM as investors seem to have a continually improving understanding of the tight relationship of oil prices and ticket prices. This gives airlines some cover to miss on PRASM guides and should limit fallout from potential misses in the coming months, we think, as long as EPS isn’t revised down. That, and really only that, drives stock prices.
Credit Suisse analyst Julie Yates and team explain why they think shares of United Continental are “attractive”:
Despite headline risk from exposure to Asia and more energy-centric markets such as Houston, we continue to view UAL as attractive. Even embedding a more conservative unit revenue scenario for next year, the stock is at <8x our new fully taxed 2016E of $7.48. UAL is now also joining the S&P and has made significant progress de-risking the balance sheet. Plus, as of July it has a buyback program that rivals peers as a % of market cap and has shown progress on its ability to narrow the margin gap with peers in 2015. CapEx spend is under tight control, pension risk has been retired and the FCF yield is in the low double-digits. Imperial Capital’s Scott Buck keeps American Airlines at Outperform even as he cuts its price target: We are maintaining our Outperform rating, but reducing our one-year price target to $65 from $73. Despite reporting the best quarterly results in the industry’s history and guidance suggesting a record 2015, AAL shares, and those of other airlines, continue to trade closer to PRASM commentary near term. For investors with a longer investment horizon, management indicated it expects PRASM trends to turn more positive moving into the second half of 2016 as near-term revenue trends are likely to face similar headwinds as 2Q15, including increased competitive capacity and weaker macroeconomic trends in South America. However, recent operating results and management commentary continue to provide us with confidence in the company’s ability to generate the highest 2015 operating margins and earnings among the legacy carriers. We continue to view American as an earnings story and believe investors should turn their attention to record operating results rather than PRASM. In addition, American’s no fuel hedging policy is expected to result in approximately $4.8bn in annualized cost savings in 2015, the highest of any U.S. airline. We believe the company will continue to pass a substantial portion of these cost savings on to investors in the way of additional share repurchases and the retirement of high interest debt. Our price target represents about 66% potential upside from the recent share price. Shares of American Airlines gained 5.5% to $41.37 today, while Delta Air Lines rose 5% to $45.99. United Continental ticked up 0.2% to $57.25.

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