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Credit Suisse Previews Airliner's Q1 Earnings, Sees Q2 PRASM Outlook In Focus

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April 12, 2016 9:14 am
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There are continued investor concerns over the pricing environment for US Airlines remaining soft, and expectations are muted. Credit Suisse’s Julie Yates said that consensus expectations are likely to decline following the Q1 earnings reports.

The consensus expectations would be reduced to reflect higher fuel, incremental pricing weakness, and labor cost pressures, analyst Julie Yates believes. She added, however, that Passenger Revenue per Available Seat Mile [PRASM] may trough in Q1, and Q2 PRASM guides should reflect ~100-150 bps of improvement at the mid-point. Despite this, the pace of improvement through the remainder of 2016 may decelerate more than was expected at the beginning of the year.

Delta Air Lines

Yates maintained an Outperform rating for Delta Air Lines, Inc. (NYSE: DAL), while reducing the price target from $61 to $59. The analyst expects a Q2 PRASM guide of (2) percent – (4) percent, which implies 150bps of sequential improvement at the midpoint.

The Credit Suisse report stated, however, that the Q2 PRASM guide may be “met with skepticism.” Delta's unit revenue performance continues to be better than that of its peers and the company is likely to achieve positive PRASM earlier than its peers.

“DAL reiterated its positive PRASM by summer view, though we think that without a much better than expected Q2 PRASM result that this is likely not achievable. While we don’t think the buyside is embedding positive PRASM by summer (most seem to think either Q4 or 2017), there is headline risk around a negative change to this guidance,” Yates wrote.


United Continental

Credit Suisse maintained an Outperform rating for United Continental Holdings Inc (NYSE: UAL), while reducing the price target from $73 to $69. Yates expects a Q2 PRASM guide of (5) percent -(7) percent, in-line with muted expectations.

United Continental has the easiest comps and is planning on reducing capacity in Q2. The analyst added, however, “Continued unit revenue underperformance and pressure from rising labor costs puts the margin convergence story on hold in 2016 (as expected) and the acceleration of 747 replacement / regional upgauging pressures the FCF yield.”

Southwest Airlines

Yates maintained a Neutral rating for Southwest Airlines Co (NYSE: LUV), while reducing the price target from $23 to $21. The analyst expects a Q2 PRASM guide of +1 percent, which appears very achievable.

The Credit Suisse report noted, “The success of the Q1 RASM guide was key to restoring some faith in LUV's guidance practices, but another strong RASM guide may be met with the same skepticism as last quarter.” Southwest Airlines is expected to announce another dividend hike of at least 25 percent, along with a buyback authorization of at least $2B.

American Airlines

Credit Suisse maintained an Outperform rating for American Airlines Group Inc (NASDAQ: AAL), while reducing the price target from $53 to $49. The analyst expects a Q2 PRASM guide of (5) percent -(7) percent, aided by decelerating capacity growth and easy comps.

“We continue to believe AAL has the most control over its own pricing destiny through more granular pricing strategies which combined with leverage to Dallas improvement and easier comps, have the potential to position it as a unit revenue outperformer in the back half of the year or early 2017,” Yates mentioned.

The $1.6B share repurchase in Q1 is a sign of management’s confidence about the company’s performance in the back half of 2016. The analyst added that American Airlines has better visibility on costs than peers, since it large labor contracts have already been signed.

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