| Airlines Are Issuing Upbeat Forecasts. Investors Aren't Impressed. -- Barrons.com |
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| Dow Jones Newswires April 22, 2021 11:56:00 AM ET
First-quarter results from Southwest Airlines, Spirit Airlines, Alaska Air Group, and American Airlines Group have now landed. The market doesn't seem impressed.
Of the four carriers that reported earnings, Southwest (LUV) and Spirit (SAVE) were the only stocks in positive territory on Thursday, while Alaska (ALK) was flat and American (AAL) were up about 0.5%.
Quarterly results from the carriers were a mixed bag. The airlines all struck an upbeat tone on second-quarter guidance, expecting ongoing recoveries in flight capacity and revenues. All turned cash positive on an operating basis in March. And all expect the summer travel season to be healthy for domestic routes.
But the sector has been such a winner--up 61% in the last six months, including a 23% gain this year--that it may take much stronger forecasts to lift the stocks. Most of the stocks now trade less than 10% below Wall Street's average targets. Revenue and profit estimates may have to rise or the market will need to assign higher multiples for the stocks to move significantly higher.
While planes and airports are now filling up, operating costs could be heading higher as jet fuel prices climb and companies add back flight capacity. That, in turn, could keep earnings per share depressed, even as revenues increase.
As expected, airlines focused on domestic leisure travel are performing better than the full-service international carriers--largely because of border closures and a lack of business travel.
Southwest, for instance, slightly missed revenue estimates, but beat on the bottom line. The airline reported revenue of $2.05 billion, missing forecasts by $17 million. But Southwest eked out a GAAP profit of $116 million, or 19 cents a share, helped by $1.2 billion in federal bailout funds.
Southwest CEO Gary Kelly said in an earnings release that the airline was seeing "significant pent-up demand for leisure travel" and was optimistic about summer travel. Southwest is now adding more flights for June, expecting available seat miles to be only slightly below levels in June, 2019.
Also encouraging was Southwest's guidance on cash flow. The airline turned cash positive in March, including cash from future bookings, generating $4 million a day in positive cash flow. It is now targeting June as the month for breaking even on core cash flow.
Southwest is getting a lift from the Boeing (BA) 737 MAX returning to service. The airline reiterated that it had placed "100 firm orders" for additional MAX aircraft. The plane is more fuel-efficient than older aircraft and should help Southwest offset higher jet fuel prices, which have risen sharply over the last six months.
Bernstein analyst David Vernon, for one, like the results. "Our first look at LUV results is constructive," he wrote in a note, "as the leisure-led recovery should result in revenue that is 10% ahead of the Street in the second quarter and cost controls result in a more moderate loss." He maintained an Outperform rating on the stock and a $69 price target.
Southwest's budget-travel cousin, Spirit, also delivered a relatively strong quarter. Revenue of $461 million came in $2 million ahead of forecasts, and the airline reported an adjusted net loss of $243 million, or $2.48 a share, beating estimates for a loss of $2.66.
Spirit's guidance looked quite healthy. The airline said its second-quarter capacity would be down just 5.5% from the second quarter of 2019. The company said it expected operating margins to range from a loss of 5% to break-even in the quarter, based on adjusted adjusted earnings before interest, taxes, depreciation, and amortization (Ebitda).
Spirit sees revenues picking up from booking-related fees, some of which it suspended early on in the pandemic. While average fare revenue took a 24% hit in the quarter, non-ticket revenue improved to an average $55 per passenger flight segment in March.
As for Alaska Air (ALK), it also beat revenue and earnings forecasts: The company reported revenue of $797 million and an adjusted loss of $436 million, or $3.51 a share, coming in slightly ahead of consensus forecasts.
Alaska is benefiting from the return of the Boeing MAX to service, and said it planned to order 68 more planes through 2024. It should also start to see revenue gains from its entry into the Oneworld alliance (with 13 other carriers), expanding its flight network to global destinations.
Alaska issued a stronger forecast for the second quarter, expecting revenue to be down 32% to 37% from the second quarter of 2019, beating consensus estimates for a decline of 41%.
Raymond James analyst Savanthi Syth liked those results, noting that Alaska's revenue forecast beat her estimates, though its outlook for operating expenses was slightly worse. She maintained a Strong Buy on the stock with an $85 target.
American, for its part, continued to rack up some of the steepest losses in the industry. Excluding bailout funding and tax credits worth about $2 billion, the airline posted a pretax loss of $3.5 billion, or $4.32 a share, on revenue of $4 billion, which was flat from the fourth quarter of 2020. The results missed consensus forecasts, coming in $381 million worse on the pretax loss.
The carrier did strike an upbeat tone, however. "With the momentum under way from the first quarter, we see signs of continued recovery in demand, " CEO Doug Parker said in the earnings release. On a call with analysts, he noted that the airline produced the highest unit revenue of any carrier, with the most available seats for sale, operating 340,000 flights in the quarter.
American is also on its way to getting back to pre-pandemic flight capacity. The company expects to fly 80% of its 2019 seat capacity in the second quarter, rising to 90% this summer. Almost all of that will be domestic travel, with Latin America routes at just 12% of total capacity, and Atlantic and Pacific routes at just 40% of pre-pandemic levels.
American's financial health is improving: Cash and available liquidity is expected to jump to $19.5 billion in the second quarter from $17.3 billion in the first quarter, the company said. American has taken out $1.3 billion in costs from its operating structure. In March, it turned cash positive, excluding debt and severance payments.
All that said, American's debt load is enormous and its balance sheet remains stressed. The carrier issued $6.5 billion in bonds in the quarter, taking its total long-term debt and leasing liabilities to $37 billion. American has also heavily diluted its shares outstanding by issuing equity and warrants to the government. Its outstanding equity totaled 634,609 shares in the quarter, up from 425,713, a year earlier.
The stock is still tough for analysts to recommend, given the share count dilution and huge debt burden. Citigroup analyst Stephen Trent maintained his Sell rating, for instance, while Syth kept the stock at Underperform.
Cowen's Helane Becker reiterated a Market Perform on American. Atlantic and Pacific traffic isn't likely to improve until borders reopen, she noted.
The airline's balance sheet repair may now be the key to the stock moving higher.
Write to daren.fonda@barrons.com |
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