Tuesday, October 25, 2016

2016 Second Quarter Airline Earnings

American Airlines 
American Airlines recorded a net profit of $950 million in the second quarter of 2016, down 44.3% from the same period in 2015. Second quarter revenue dropped 4.3% from the second quarter of 2015 to $10.4 billion while PRASM was down 6.3% from the second quarter of 2015. American Airlines increased mainline capacity by 1.2% in the second quarter while the airs to 82.9%.  
Outlook 
It was a weak quarter for American Airlines with the airline’s profit down 44.3% year-over-year. American was hindered by a competitive domestic market and foreign currency weakness which put a drag on revenue. As has been the story for the past few quarters, low fuel prices have boosted profits. However, fuel prices have risen since the 1st quarter, hence the lower profit. With oil prices continuing to rise, relentless capacity increases from domestic LCCs, and foreign market weakness due to Brexit, American’s worsening revenue situation could lead to another soft profit in the 3rd quarter.  

Delta Air Lines 
Delta Air Lines posted massive net profit of $1.5 billion profit in the second quarter of 2016up 4% from the same period in 2015. PRASM decreased 4.9% from the 2nd quarter of 2015 while total revenue dropped 2.4% to $10.4 billion. Delta increased capacity 3.2% in the 2nd quarter while the Atlanta-based carrier’s load factor decreased 0.1 percentage points to 85.5%. 
Outlook 
Delta had another strong quarter recording the largest 2nd quarter net profit out of the big four legacy airlines in the U.S. In what has been the narrative for most U.S. airlines, revenue pressures, which Delta attributed to foreign currency losses and a competitive U.S. market, have overshadowed the airline’s massive profits. With Delta focused on capacity discipline (Delta is planning to cut capacity by 1% in the 4th quarter of 2016), Delta will continue to have stronger revenue numbers than the other U.S. legacies. Look for another strong quarter in September. 

United Airlines 
United Airlines reported a net profit of $588 million in the 2nd quarter, down 50.7% from the same period in 2015. Total revenue was down 5.2% to $9.4 billion with PRASM decreasing 6.6% year-over-year. United Airlines only increased capacity by 0.1% while the carrier’s load factor decreased 0.4 percentage points to 83.5%.  
Outlook 
United’s 2nd quarter results were mediocre as the Chicago based airline was affected by foreign currency pressures, high capacity growth in the U.S. market from LCCS and continuing demand weakness due to the oil downturn (one of United’s biggest hubs is in Houston). While United’s financial performance in the 2nd quarter was middling, United made great strides operationally and in improving the airline’s passenger experience. Throughout the 2nd quarter, United consistently ranked as either the number one or number two airline out of the four U.S. legacies for on-time performance. United completed Wi-Fi installations on all of its mainline aircraft—the first U.S. airline to do so. United also unveiled a vastly improved international business class product called United Polaris. With Munoz at the helm, United finally seems to be improving in all aspects. Expect another moderate sized profit in the 3rd quarter. 

Southwest Airlines 
Southwest Airlines reported a company record 2nd quarter net profit of $820 million, up 34.9% year-over-year. Like the other big four legacy airlines in the United States, Southwest saw PRASM decrease 3.5% from the 2nd quarter of 2015. Southwest increased capacity in the 2nd quarter by 4.8% while the airline’s load factor increased 1 percentage point year-over-year to 85.6%. 
Outlook 
Southwest is on a roll. The Dallas based carrier posted yet another record quarterly profit in the second quarter. Unlike the other U.S. legacy carriers, Southwest is having major success in the current business environment with the airline’s total revenue actually increasing 5.3% in the 2nd quarter while increasing capacity by 4.8%. Southwest has successfully taken market share away from the other legacy carriers like American in Dallas while launching new routes in underserved markets. Due to Southwest’s limited international network, Southwest will face less revenue pressure from foreign currency losses compared to the other U.S. legacies. With healthy margins, high load factors, and moderate growth, expect Southwest to post another large profit in the 3rd quarter of 2016. 


Alaska Airlines 
Alaska Airlines posted a net profit of $263 million in the 2nd quarter of 2016, up 14% year-over-year. Total revenue increased 4% to $1.4 billion while PRASM decreased 7.7% compared to the 2nd quarter of last year. Alaska increased capacity by 11.2% while its load factor remained unchanged at 84.9%. 
Outlook 
While in the midst of a cutthroat battle with Delta in Seattle, Alaska has maintained healthy margins, strong profitability, and low costs. In the coming quarters, Alaska will be slowing its capacity growth to 8% in the 3rd quarter and 3% in the 4th quarter of 2016. Recently, Alaska expanded its trans-Continental services while announcing a merger with the trendiest airline in the U.S: Virgin America. The business fundamentals are there for Alaska; and with new opportunities for growth in the airline's merger with Virgin America, especially in the high yield trans-Continental market, Alaska's profitability can only go higher.  

JetBlue Airways 
JetBlue recorded a net profit of $180 million, up 18.5% from the 2nd quarter of last year. Total revenue for JetBlue was up 2% from the same period in 2015 to $1.6 billion while PRASM decreased 10.5% on an 11.1% year-over-year capacity increase. Load factor decreased 0.6 percentage points to 85%. 
Outlook 
JetBlue reported solid 2nd quarter earnings. The New York based airline was buoyed by lower costs from substantially lower fuel prices compared to the 2nd quarter of 2015. With fuel prices rising, JetBlue will hedge 24% of its projected 3rd quarter fuel consumption and 26% of its projected 4th quarter fuel consumption. While the dramatic decreases in PRASM are disconcerting for investors, JetBlue’s decision to expand its Mint branded premium class by purchasing an additional 30 A321 aircraft (15 A321ceos and 15 A321neos) will allow the carrier to further expand into the lucrative trans-continental market where the airline can command higher yields. With the option to convert all of its remaining A321neo deliveries to the A321-LR variant beginning in 2019, JetBlue could possibly enter the trans-Atlantic market as soon as 2020. While the future growth prospects for JetBlue are exciting, in the short term JetBlue must keep costs in check in the face of revenue headwinds.  

Spirit Airlines 
Spirit Airlines posted a $73.1 million net profit in the second quarter, down 4.7% from the second quarter of 2015. Spirit's total operating revenue rose 5.5% to $584.1 million while the airline's total revenue per PFS (passenger flight segment) decreased 15% year-over-year. Spirit's load factor increased .4 percentage points to 86.4% on a 23.1% increase in capacity.  
Outlook 
Spirit Airlines continued its recent trend of astronomical capacity growth and ever decreasing unit revenue. Spirit will be continuing its recent capacity growth with new service to Akron, Newark, and Orlando, among others, scheduled for this fall. While Spirit should continue to post strong profits in the next few quarters, there is considerable uncertainty as the legacy carriers roll out basic economy fares aimed at price conscious leisure travelers which comprise the customer base of Spirit and other LCCs. As Spirit pushes into bigger markets such as Newark and Orlando, expect more unit revenue pressures as the LCC enters into direct competition with the legacies.  


Virgin America 
Virgin America's second quarter net profit fell 41% year-over-year to $38 million. The San Francisco based carrier's total revenue in the second quarter increased 5.9% to $425 million. Virgin America increased capacity by 15.3% although the airline's PRASM decreased 9% year-over-year. Virgin America's load factor increased by 0.7 percentage points to 85.8%. 
Outlook 
Virgin America's second quarter earnings missed Wall Street estimates, although the airline saw increases in revenue and load factor. Virgin America's brutal 9% year-over-year decline in PRASM, primarily caused by an 11% increase in capacity, suppressed earnings. In merger news, regulatory approval for the merger of Virgin America and Alaska has been postponed until October 17th so that the DOJ has more time to review the merger.  

Allegiant  
Allegiant Air posted a $60.8 million net profit in the second quarter of 2016, up 12% from the second quarter of 2015. Allegiant's total operating revenue increased 7.1% year-over-year to $344.9 million. Allegiant increased capacity by 18.2% in the second quarter while the airline's load factor decreased by 1.8% to 83.9%. 
Outlook 
It has been a rocky couple of months for Allegiant with labor tensions with the airline's pilots and an FAA investigation into the airline's safety record. Even in the midst of all the tumult, Allegiant has remained consistently profitable. Like Spirit, Allegiant has embarked on a massive growth campaign centered on bigger markets such as Newark and Baltimore. Allegiant also has embarked on a fleet renewal program announcing an order for 12 new A320 aircraft. Things are also looking up for Allegiant on the labor front after the pilots ratified the new contract. With the safety concerns seemingly behind Allegiant, expect more consistent profits and growth in the coming quarters.  


Air Canada 
Air Canada recorded a $186 million Canadian dollar ($140.5 million USD) net profit in the second quarter of 2016, down 110% year-over-year. Air Canada's total revenue in the second quarter increased 44% to $3.45 billion Canadian dollars. The Canadian flag carrier increased capacity by 11% while the airline's load factor decreased by 1.2% percentage points to 82.4%. Air Canada's PRASM decreased by 8.2%.  
Outlook 
In tough economic conditions, Air Canada grinded out a solid profit in the second quarter. Air Canada has been in all out growth mode opening 10 new international routes  to counteract weak domestic demand. Internationally, Air Canada has seen revenue up, especially in growth markets such as the Asia-Pacific region. With the oil slump continuing, although showing some signs of a rebound, Air Canada must continue to rely on international traffic as weakness in the Canadian market continues persists. 


WestJet 
WestJet posted a $36.7 million net profit in the 2nd quarter, down 40.5% year-over-year. The Alberta based low cost carrier’s total revenue in the 2nd quarter inched up 0.8% to $949.3 million while the airline’s operating margin decreased 4.2 percentage points to the subterranean level of 6.5%. WestJet’s Load factor increased 2.7 percentage points to 80.8% while RASM decreased 8.9%. 
Outlook 
It was another rough quarter for WestJet as the Canadian low cost carrier barley scraped together its 45th straight quarter of profitability. In the 2nd quarter, WestJet’s net profit, revenue, and operating margin continued to slide dramatically. WestJet has been hampered by a strong U.S. dollar and weak demand in Canada, especially in the oil producing region of Alberta which is also the home base of WestJet. To make matters worse, oil prices have risen to close to $50—a nightmare price for WestJet as the airline is hit with higher fuel costs while the oil price is not high enough to support the profitability of the oil sands producers who make up the backbone of air travel demand for WestJet in Alberta. As long as oil prices remain relatively low, WestJet will continue to struggle to make a profit. Expect more of the same in the 3rd quarter.  

Aeromexico 
Aeromexico recorded a $28 million peso ($1.4 million U.S. dollars) net profit in the second quarter of 2016, down 72.5% from the second quarter of 2015. Total revenue increased 9.7% to $12.4 billion pesos as the airline's operating margin decreased .3 percentage points to 3.1% Aeromexico's net margin in the second quarter decreased by 0.7 percentage points year-over-year to .2%. Aeromexico's load factor dipped .3 percentage points in the second quarter to 79.4% on a 3.8% increase in capacity in the second quarter. 
Outlook 
Aeromexico's second quarter earnings were characterized by high costs and low margins. Aeromexico managed to increase its total costs in the second quarter by 10% year-over-year even as the airline's fuel expenses decreased 11.9%. While some of Aeromexico's costs can be attributed to the depreciation of the peso, Aeromexico's costs rose across the board from labor costs (up 7.3%), leasing costs (up 20.7%), and maintenance costs (up 49.6%). Aeromexico had very healthy revenue in the second quarter, buoyed by a growing Mexican economy and capacity growth. However, Aeromexico's margins, and profits, have been pitiful, mostly due to the depreciation of the Mexican Peso which has led to higher costs. With Mexico's economy showing strength not seen in the rest of Latin America, Aeromexico should see more strong revenue growth. It's just a matter of Aeromexico increasing its margin and profit. 

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