U.S. Airline Industry Coverage Initiation Network Carriers Flying on Course for Continued Outperformance September 8, 2014 RESEARCH TEAM
Julie Yates Research Analyst 212-325-3706
[email protected]
Krishna Vege Research Analyst 212-325-6949
[email protected]
We initiate coverage of the U.S. Airline sector at Overweight. Based on structural changes to the industry, a strong demand & pricing environment, and ongoing margin enhancing initiatives, we have a favorable bias toward the three U.S. network carriers. Our outof-consensus top pick is UAL, as we expect self-help initiatives to propel momentum over the next 6-18 months, and see a string of catalysts and tailwinds in 2015 that should drive upside to both earnings & valuation. We rate JBLU Underperform based on the view that incremental strategy/management change in 2015 will disappoint relative to elevated expectations. Cyclical juice remains on structural industry shifts. We are in the fifth year of industry profitability and while operating margins have approached historical peak levels of ~9%, we expect a healthier, more rational airline industry will reach midteens EBIT margins by 2016. Unit revenue (PRASM) growth and margin expansion is moderating mid-cycle, but we see further upside potential from continued pricing gains, evolution of revenue and cost initiatives, and as merger synergies are fully realized. However, yields bear watching after four years of growth. While upward pricing trends appear intact domestically, pockets of competitive tension are building in certain markets and the battle for high-yielding corporate travel is intensifying following industry consolidation. In this report, we take a close look at capacity and pricing trends in certain regional markets. Comps are getting tougher and international trends are mixed, but network carriers have been quick to adjust capacity and restructure where needed to protect yields. Going forward, we see the most opportunity for UAL to catch-up. Stock calls. We initiate coverage with Outperform ratings on UAL, DAL, and AAL, a Neutral rating on LUV, and an Underperform rating on JBLU.
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Table of Contents (Click on Titles to Navigate Through Note)
Appendix
Executive Summary
Regional Detail Domestic Transatlantic Asia Latin America
Valuation & Risks
Industry Themes
Stock Picks & Company Tearsheets
1
Executive Summary
We are Recommending United, Delta and American Coverage Universe Ratings, Target Price, and Tag Lines
Company
United (UAL)
Delta (DAL)
Rating
Target Price
Target Upside / Price Target Price (Downside) Multiple Multiple on vs. Current on 2015 2015 EPS Share Price EBITDAR (Fully Taxed)
CS Tag Lines
Best self-help story. Margin recovery efforts shld drive ~400-500 bps of margin improvement by 2016.
TOP PICK O/P
$68.00
34%
6.0x
14.0x
O/P
$56.00
43%
6.6x
14.4x
UAL has yet to fully realize benefits from structural industry changes and its merger with CAL, but the carrier is on track for a turnaround and we expect it to transition unit revenue outperformance in 2015. We see a string of catalysts and tailwinds in 2015 that should drive earnings and valuation upside. We see no structural impediments to UAL achieving a low double-digit EBIT margin, which is not priced into the stock.
Best-in-class. A key holding for airline investors given index presence, lower debt levels, a fully integrated merger, an established shareholder return program, top-level management, the best FCF generation in the group, and a leading position in the corporate market share that yields a 13% domestic unit revenue premium to the industry. The December 11th investor day gives management another opportunity to remind investors why they should own DAL in 2015.
American (AAL)
O/P
$52.00
37%
7.2x
10.6x
Merger integration upside outweighs risk. Relative underperformance since Q2 report offers longer-term
Southwest (LUV)
N
$32.00
(3%)
6.1x
15.7x
Fewer levers for margin expansion. Despite a strong brand and leading domestic footprint, rising unit cost
U/P
$11.00
(12%)
6.1x
12.9x
Unlikely to see major strategy shift investors are waiting for. Share outperformance (+66%) and
JetBlue (JBLU)
Ratings
Outperform
Source: Thomson Reuters, Credit Suisse estimates, Bloomberg
investors an attractive entry point with shares off 17% from the 52-week high. A conservative $1.4B synergy target, structural improvements to legacy American post-integration, and upside to capital deployment drive our above consensus 2015 estimates. Long-term, we think AAL can exceed DAL margin levels. Expect re-rating as integration progresses in 2015. pressures and labor tensions, decelerating yield growth, premium valuation and leading YTD performance temper our enthusiasm on shares. Limited ancillary opportunity given customer friendly policies and low-fare brand bound yield potential, in our view. multiple analyst upgrades since late April have centered primarily on optimism for a CEO / strategy change and earnings upside from fare unbundling, but we see little change to JBLU’s hybrid growth strategy. We are less bullish on the level of incremental earnings from fare family/ancillary revenue. We think disappointment on the latter two, combined with lagging returns and more limited margin upside will make JBLU a relative underperformer. Neutral
Underperform
3
Flying High on Structural Shifts Executive Summary & Conclusion
Where are We Different?
Structural industry changes make industry investable
Favorable bias to network carriers, less positive on leisure carriers
Key Investable Theme. U.S. airlines represent a key investable theme within industrials as structural industry changes are driving unprecedented profitability & S/H returns in what historically has been a capital-destructive industry. Earning Cost of Capital, Returning Cash to S/H & Avoiding Prior Cycle Sins. Management teams are avoiding prior cycle sins, with an intense focus on improving financial metrics, not just land grabbing for market share. Balance sheets are cleaner, debt loads are reduced, and U.S. airlines are finally generating returns above capital cost. Managements are leveling new aircraft spend, taking a more balanced approach to capital deployment. Five of the six largest U.S. airlines are returning cash to shareholders as of July. Oligopolistic Structure has Lead to Pricing Power: Five major mergers since 2005 have consolidated the domestic airline industry to 4 carriers that control more than 80% of capacity. This oligopolistic structure and consistent capacity discipline is driving sustainable pricing power. Domestic capacity remains 6% below 2007 levels. International trends remain mixed, but we think recent Transatlantic excess capacity fears are overdone and note that 84% of trunk routes between the U.S. and Europe are a duopoly, greatly reducing the risk of irrational capacity or pricing decisions. Margin Expansion Moderating, but Still Room to Go. The pace of margin expansion is moderating mid-cycle, but we see further upside at network carriers as revenue & cost initiatives bear fruit, and merger synergies are fully realized. Airline profitability is extremely dynamic, driven by (1) pricing, (2) load factors, and (3) unit costs. Since 2010, yields have risen 20% representing real pricing gains above inflation for the first time since the late 1990s. System load factors of 80%+ are at all time highs. Carriers are steadily refleeting & eliminating structural costs to keep unit cost growth sub-inflation. Re-rating Upside: Network carriers trade at a significant discount to leisure carriers, industrial transports, and the S&P 500. We expect an upward rerating as structural industry shifts, sustained pricing and cost control drive midteens operating margins & capital is returned to S/H, similar to the “Rail Renaissance”.
Out of Consensus Top Pick is UAL; Underperform on JBLU. Our Neutral rating on top YTD performer Southwest (LUV) is also lessconsensus. We initiate at Outperform on Delta (DAL) and American (AAL) given our favorable bias to network carriers on structural industry changes post consolidation, as well as stock specific reasons. DAL and AAL are more consensus longs, but we think valuation remains attractive for both.
UAL Turning it Around. Self-help initiatives should propel momentum over the next 6-18 months, and we see a string of catalysts and tailwinds in 2015 that should drive upside to both earnings and valuation. Sentiment on UAL has improved since the Q2 report, but Delta’s performance since early 2013 has doubled that of that of United. We expect near-term outperformance as sidelined investors gain confidence in an inflection. JBLU Change Optimism Overdone: We rate JBLU Underperform based on a view that incremental upside from management / strategy change and ancillary revenue in 2015 will disappoint relative to elevated expectations, following multiple analyst upgrades and rising 2015 consensus (+10% in last 3 months). DAL Remains Key Holding: We see DAL as a key holding for airline investors given its S&P presence, lower debt levels, fully integrated merger, established shareholder return program, and leading margin and return profile. DAL is successfully executing a lower risk, differentiated strategy with its approach to fleet, fuel, and maintenance. AAL May Take Longer to Play Out: Our Outperform call on AAL has a longerterm horizon and we think strong YTD stock performance, Venezuela PRASM headwinds in H2 and merger risk has sidelined some. Despite these challenges, we see significant upside potential in margins as management executes on the merger, and optimizes legacy AMR over the next 18-36 months. LUV Fully Valued on Our Estimates: LUV has a strong brand and leading domestic footprint, but we see fewer levers for margin expansion & relative share outperformance given it is the best YTD performer (+73%) and is now the only airline in our converge that trades at a premium to the S&P 500 on FY2 P/E. 4
More Runway to Go, but Selectivity Key Following significant outperformance since early 2013, we think the market will be more discriminating in H2 of 2014 and 2015 Innovative revenue management, heightened cost control, greater focus on ROIC, and shareholder friendly capital deployment are key themes that have primarily been shaped by industry consolidation
We still see upside in airline stocks given the following factors: 1.
Capacity Discipline - supply/demand dynamics remain strong on capacity discipline
2.
Durable pricing gains with room to go - Yields should continue to grow ahead of inflation on better revenue management & strong domestic demand
3. Increasingly attractive shareholder returns, improving ROIC and inexpensive valuations - The paradigm shift to shareholder-friendly capital allocation and improving ROIC should drive a sector re-rating Following a decade wrought with the worst industry downturn since deregulation, fuel volatility, bankruptcies, and five major mergers, the U.S. airline industry has emerged stronger than ever as reflected by sector's appreciation since early 2013 We subscribe to the bullish view that the industry is now investable, and think the next leg of the story will be driven by further margin expansion, improving ROIC and consistency in capital allocation. U.S. airlines are in the 5th year of current upcycle, but cyclical juice remains on structural industry shifts We are in the 5th year of industry profitability and while operating margins are approaching (and some have exceeded) historical peak levels of ~9%, we expect a healthier, more rational airline industry can exceed prior peaks and reach midteens. If current macro trends hold (or improve) and fuel is stable (or declines), we think this cycle's peak may not be until 2016 / 2017, suggesting two to three more years of improving profits, cash and shareholder returns. The industry remains beholden to fuel, but Brent crude prices are stable despite pockets of geopolitical instability, and we think the price trend is gradually down given supply growth in the U.S. and steady demand. Multiple re-rating on improved industry performance Post-consolidation, the U.S. network carriers are now a functioning, disciplined oligopoly earning returns above capital costs. We believe the airlines can re-rate similar to the rails, on the back of a pricing renaissance that drove improved returns and shareholder-friendly capital allocation. While the evolution of the shareholder base is well underway, we think the group is still under owned with network carriers trading at 9.5x fully taxed P/E versus the S&P at 15.7x and transports at 17x. Sector 2015 EV/EBITDAR of 5.7x is below where we think airlines should trade mid-cycle (between 6-7x EV/EBITDAR).
Sector valuations reasonable versus prior peak (late 90s) and relative to other industrials. Source: Company data, CS estimates, Bloomberg
5
Key Charts Record Domestic Load Factors & Strong Yields 86.0% (%/¢)
Trailing 12-month ROIC vs. WACC & Company Targets 15-18% 15%
No target
7%
7.5%
7.0%
DAL (pre-tax)
AAL (pre-tax)
UAL (pre-tax)
ROIC (Q2 2014)
WACC
LUV (pre-tax)
7.0%
14.57¢
82.0%
82.9%
12.2%
210 bp 10.1%
150 bp
50 bp
141 bp 7.4%
0 bp
H1 2014
Domestic Yield
Jet Fuel
0.87 correlation & 0.75 R squared between Jet Fuel & Airline Pricing from 2010-2013...
2015E
12%
$3.00
$17.00
10%
$2.50
8%
2016E
Average Op Margin (Network Carriers)
Y/Y margin expansion
Pace of expansion slowing, but more upside on pricing, revenue initiatives and unit cost control Source: Company data, CS estimates
Domestic Yield $18.00
14%
2% 2014E
2013
$3.50
4% 2013
2012
$16.00
... Since then, that relationship has broken down with R squared and correlation falling to 0.05 and -0.23, respectively
$2.00
6%
4.8% 2012
12.50 2011
Sustainable pricing on tight supply / demand balance
13.6%
97 bp
13.50
Jet Fuel Pricing vs. Domestic Yield
300 bp
100 bp
14.50
Domestic Load Factor
EBIT Margin
200 bp
83.6%
2010
Target (in bold)
Y/Y Margin Expansion 270 bp
15.50 84.0%
83.9%
81.0%
JBLU (post-tax)
Network Carrier Operating Margins & Expansion (bp/%)
254 bp
16.50
85.1%
15.85¢
83.0%
ROIC > WACC at 3 of 5 top U.S. airlines ROIC a key driver of share prices
250 bp
16.41¢
84.0%
9.0%
8.0%
16.80¢
85.0%
10%
17.50 17.09¢
$1.50
$1.00 Jan-10
$15.00 $14.00 $13.00
$12.00 Jan-11 Jet Fuel 6 Mth MA
Jan-12
Jan-13
Jan-14
A4A Avg. Domestic Yield 6 mth MA
Correlation between yield & fuel decoupling as fundamentals strengthen… 6
Capacity and Market Share Analysis Oligopolistic structure ensures more rational behavior Market Share of Domestic Seats (% Share)
44%
44%
36%
Transatlantic Trunk Route Market Share by Immunized JVs (% Share) 36%
26%
27%
27%
16% 17%
17%
17%
11%
11%
18%
18%
22%
21%
22%
21%
21%
21%
11%
11%
17%
18%
14%
13%
14%
13%
13%
13%
13%
13%
13%
2007
2008
2009
2010
2011
2012
2013
American Airlines
Delta
22%
21%
22%
Southwest
United
Other
Number of Competitors on Top 25 Domestic Routes
25% 2014
36%
35%
2007
2% 35%
45%
26%
28%
26%
28%
37%
19%
25%
26%
27%
26%
26%
26%
2008
2009
2010
2011
2012
2013
2014
STAR JV
SkyTeam JV
oneworld JBA
Other
84% of transatlantic trunk routes are duopolies; 50% are monopolies
Percentage of Top 25 U.S. Routes where Carrier is Dominant (>45% share) Delta 12%
Duopoly 24%
4 competitors 24%
11%
48% 75%
81%
12%
100%
21%
Today, 4 carriers control 83% of domestic seats vs. 8 in 2007
5 competitors 16%
16%
American 35%
United 53%
3 competitors 36%
3 or fewer players control 60% of the top 25 U.S. city pairs Source: Company data, CS estimates
United has dominant share on ½ of the top 25 U.S. city pairs 7
Our Valuation Approach We equally weight EV/EBITDAR with P/E We Equally Blend EV/EBITDAR and P/E
Delta implied price United implied price American implied price Southwest implied price JetBlue implied price
EV/EBITDAR on 2015 Consensus
Target Price
Target EV/EBITDAR multiple
Target P/E multiple
$56
7.0x $59.94 6.5x $76.16 6.0x $53.75 7.0x $36.82 6.0x $11.68
13.5x $52.55 12.5x $60.78 11.0x $49.71 13.5x $27.52 13.0x $11.09
$68 $52 $32 $11
Explanation of multiples
5.6x 5.0x
Premium for higher quality, lower debt
4.2x
4.3x
AAL
UAL
4.6x
Discount for execution risk Discount for merger integration, higher leverage Premium for Investment Grade B/S, Consistency Discount to LUV for lagging returns and B/S
DAL
LUV
JBLU
EBITDAR = EBITDA + Aircraft Rents Normalizing aircraft financing across carriers We look at CFROI Using Credit Suisse HOLT® to Cross Check
Price-to-Earnings on 2015 Consensus (fully-taxed earnings)
CFROI 10-Yr Median 15.9x
CFROI Forecast
Market-Implied CFROI
10%
15.8x 13.8x
8%
10.5x
10.0x
CFROI LFY
CFROI
8.1x
6% 4%
2% DAL
AAL
UAL
LUV
JBLU
S&P 500
Source: Bloomberg, company data, CS estimates
0% AAL
DAL
LUV
JBLU
UAL
8
Credit Suisse Global Airline Coverage U.S. coverage rounds out existing Latin American, European & Asian airline coverage Company Reuters Share price Rating Name Ticker curncy U.S. Airlines - Analyst: Julie Yates American Airlines AAL.OQ USD OP Delta Air Lines DAL.N USD OP United Continental UAL.N USD OP Southwest Airlines LUV.N USD N JetBlue JBLU.OQ USD UP Latin American Airlines - Analyst: Bruno Savaris, CFA Copa Holdings CPA.N USD OP Gol Linhas Aerea GOLL4.SA USD N LATAM Airlines LFL.N USD OP European Airlines - Analyst: Neil Glynn, CFA Air France AIRF.PA EUR N Deutsche Lufthansa LHAG.DE EUR N IAG ICAG.L GBP OP EasyJet EZJ.L GBP OP Ryanair RYA.I EUR OP Asian Airlines - Analyst: Timothy Ross Singapore Airlines SIAL.SI SGD UP Cathay Pacific 0293.HK HKD OP Korean Air 003490.KS KRW N Asiana Air 020560.KS KRW UP China Airlines 2610.TW TWD UP EVA Airways 2618.TW TWD OP All Nippon Airways 9202 JPY OP Japan Airlines 9201 JPY OP Thai Airways THAI.BK THB UP Malaysia Airlines MASM.KL MYR UP Tiger Airways TAHL.SI SGD UP AirAsia AIRA.KL MYR OP Cebu Pacific CEB.PS PHP UP Asia Aviation AAV.BK THB UP Garuda GIAA.JK IDR UP AirAsia X AIRX.KL MYR UP
Target Price
Last Close Upside Price /Downside (%)
Mkt Cap (US$ mn)
$52 $56 $68 $32 $11
37.85 39.22 50.73 32.83 12.54
37% 43% 34% -3% -12%
27,259 33,063 18,951 22,493 3,722
$181 $5 $24
124.75 15.10 13.03
45% -65% 84%
5,439 1,891 7,109
€9 € 14 £6 £18 €8
8.61 13.81 3.69 13.77 7.48
2% -2% 59% 33% 13%
3,343 8,237 12,233 8,839 13,401
9 17 34500 4300 9 18 275 6525 13 0 0 3 45 3 430 1
10.12 14.36 37900 4780 10.05 15.20 258.00 5870 15.20 0.26 0.42 2.46 66.55 4.74 437.00 0.77
-7% 18% -9% -10% -6% 18% 7% 11% -14% -22% -24% 18% -32% -30% -2% -9%
9,685 7,289 2,171 911 1,748 1,656 8,568 10,126 1,037 1,343 331 2,157 926 718 964 575
EV / EBITDAR 7.1x 7.6x 6.1x 6.9x 7.8x 7.2x 9.7x 9.4x 11.4x 8.4x 5.4x 4.7x 3.5x 3.5x 7.2x 8.0x 8.3x 5.0x 6.9x 7.8x 9.2x 8.4x 6.2x 6.0x 2.6x 8.5x 12.0x 10.5x 6.7x 8.4x 8.9x 9.8x 16.2x
ROIC 15% 14% 20% 13% 17% 10% 13% 19% n/a 7% 12% 5% 7% 12% 20% 15% 14% 11% 10% 10% 16% 9% 13% 14% 26% 8% 15% 17% 17% 16% 14% 12% 13%
U.S. Carriers trade at a discount to Asian and Latin Am erican Airlines on EV/ EBITDAR Source: Bloomberg, company data, CS estimates
9
Industry Themes
Structural Industry Shifts Alter Competitive Dynamics… Consolidation has led to a paradigm shift where airlines are focused on profits and returns instead of market share Capacity discipline and revenue management 3 network carriers have demonstrated commitment to sub-GDP capacity growth; 4 largest carriers control more than 80% of domestic capacity
Yield improvement prioritized over capacity growth drives real pricing gains. Growth decelerating following four years of strength Robust corporate & leisure demand driving record load factors and enhancing pricing power Fare unbundling & innovative ancillary merchandising initiatives driving high-margin revenue Continuous network optimization and improving yield management practices Cost control Structural cost reductions keeping ex-fuel unit cost growth below inflation Operational improvements include productivity, sourcing & distribution initiatives Full realization of merger synergies should drive margin upside Improved fuel efficiency driven by refleeting, up gauging, interior reconfiguration Capital discipline and improving profits are driving returns above cost of capital Carriers are smoothing capital expenditures through slower fleet replacement and used aircraft strategies to avoid prior cycle peaks and valleys Healthier balance sheets post bankruptcies and significant debt reduction lowers interest burden and improves credit profile Management teams are stepping up commitment to shareholder returns –
As of July, 5 of 6 largest U.S. airlines now returning cash to shareholders through share repurchase; 4 have dividends
We subscribe to the bullish view that the industry is now investable, and think the next leg of the story will be driven by further m argin expansion, im proving ROIC and consistency in capital allocation. Source: Company data, CS estimates
11
… But Potential Disruptors Sideline Some Investors Still a highly cyclical industry sensitive to macro and fuel Are pricing and loads peaking, limiting further margin expansion? PRASM/Yield growth deceleration following 4 years of strength; pockets of international weakness (Asia (China), LatAm (Brazil, Venezuela), Transatlantic) We believe any deterioration in the domestic pricing story is the biggest risk to the bull thesis Domestic load factors of 85% peaking, International load factors at 80% under pressure due to competitive capacity additions from non-U.S. airlines Renewed concern over fuel price volatility given geopolitical unrest Fuel is the single largest cost for the industry averaging over 30% of operating expenses; level of hedging varies among airlines Macro environment Sustainability of GDP growth Rising interest rates will drive up aircraft financing and leasing costs
Currency risk includes further devaluation of Yen, repatriation of Venezuelan Bolivar Consolidation Merger integration risk – Still significant for American; lingers at United and Southwest to a lesser extent Labor negotiations unresolved Wages represent 25% of operating expenses on average and as industry profits improve, employee wage expectations elevate
Benefits from restructuring post-bankruptcy diminishing with open negotiations, expiring contracts, and pending unionization posing risk for some carriers Disruptors remain key question for skeptics Skeptics remain focused on the PRASM / yield deceleration, signs of international overcapacity, the durability of profits and cash during a recession, or fuel spike and international capacity discipline and the yield environment. The industry has significantly de-levered and structurally reduced costs and capacity, putting it in a much stronger position to weather a recession, or fuel spike.
While the industry rem ains deeply cyclical, it is less so than pre-consolidation. Source: Company data, CS estimates
12
We Prefer Network Carriers Given Structural Improvements and Ongoing Margin Enhancing Initiatives Four carriers now control over 80% of capacity, down from 8 in 2005 Carrier Reduction
CONSOLIDATION
Favorable industry environment
Pre-2005: 8 CARRIERS
2014: 3 NETWORK CARRIERS + Southwest Total System Load Factor (% of Seats Filled) 90%
Load factors are at record highs
85%
80%
75% Network
LCC
70%
Other
65%
The four major U.S. carriers should continue to benefit from a favorable industry environment, where the landscape has been significantly improved by consolidation. Capacity and capital discipline are now paramount Strong demand is producing record load factors. Revenue optimization initiatives combined with structural cost reductions should drive industry operating margins to the mid-teens, above the prior peak of around 9% despite much higher fuel costs Three immunized JVs control 98% of key routes on the Transatlantic, promoting rational decision making; 50% of trunk routes are monopoly markets while 84% of trunk routes U.S.-Europe are duopolies 60% of top 25 domestic city pairs are controlled by 3 airlines Global Alliances
60%
Source: US DOT Form 41 via BTS, schedule T2, CS estimates
United
Star Alliance
Delta
Sky Team
American
One World
13
Airline Profitability is Extremely Dynamic with 3 Key Variables Margin expansion slowing mid-cycle, but we still see >300 bps of upside Unit Costs (CASM - Cost per Available Seat Mile)
Variable Primary Lever
Pricing (Yield – revenue per passenger carried)
Reduce non-fuel operating costs Network optimization, distribution, sourcing
Better yield management IT, variable scheduling, re-banking
Accurate demand forecasting Booking curve, inventory control
Reduce fuel expense Re-fleeting with more efficient aircraft, hedging
Avoidance of marginal cost pricing
Revenue management Balance load factor versus yield
Increase labor productivity Better IT, part-time flexibility
Driving higher value mix Corporate market share, upselling Ancillary revenues Fare unbundling, merchandising, monetization of extras
Increase aircraft density Add more seats to existing aircraft
Code sharing / JV coordination
Network Carrier Operating Margins and Expansion
Avg. Network Carrier Unit Cost Growth vs. Load Factor
Y/Y Margin Expansion
EBIT Margin
13.6%
300 bp 254 bp
250 bp
270 bp
12.2%
210 bp
200 bp 150 bp
141 bp 97 bp
50 bp
4.8%
7.4%
85%
12%
8%
84%
6%
83%
4%
82%
2%
81%
8%
4% 2%
2012
2013
2014E
2015E
2016E
Load Factor
10%
6%
0 bp
Growth, Yield & Inflation
14%
10%
10.1%
100 bp
Capacity Utilization (Load Factor)
0%
80% 2011
2012
2013
2014E
2015E
Average Op Margin (Network Carriers)
Average Unit Cost Growth (Network Carriers)
Y/Y margin expansion
A4A Yield
2016E
Inflation Average Load Factor (Network Carriers)
Source: Company data, CS research and estimates, A4A
14
Network Carrier Margins are Reaching New Highs EBIT margins should reach midteens by 2016 Network carrier average EBIT margin peaked at 9.3% in 1997 when fuel was only 11% of operating expenses 2014E network EBIT margin average is ~10.2%, with consensus forecasting another 100 bps of expansion in 2015 and 2016 Fuel is closer to 30% of operating expenses today
Middle of extended upcycle
US Network Carrier Operating Margin
UPCYCLE
Profit Margin (%)
DOWNCYCLE
1997 Prior peak 9% margins
15%
CONSOLIDATION
9/11/2001 Terrorist attacks
UPCYCLE
2008 Fuel price spike
Fuel as a % of OpEx
35%
10%
30%
5%
25%
0%
20%
(5%)
15%
Fuel costs average 11% of (10%) operating expenses (15%)
Fuel costs average 30% of operating expenses
1995
1996
1997
1998
1999
2000
2001
2002
7 CARRIERS
Source: Company data, CS estimates, MIT
2003
2004
2005
2006
8 CARRIERS
2007
2008
2009
2010
2011
2012
2013 2014E 2015E 2016E
2016-2017 Peak, midteens margins
10%
5%
3 NETWORK CARRIERS + LUV
15
Limited Margin Expansion Potential for Leisure Carriers Given our expectations for more muted yield growth and rising unit costs We think margins at Southwest and JetBlue have less potential for the following reasons: Cost advantage eroding with age, and as network airlines become more efficient and ultra-low cost carrier models evolve Yield upside limited as customer base is more price elastic and competition from both network and ultra-low cost carriers increases; comps more challenging in H2 2014 and 2015 Ancillary revenue potential capped as customer-friendly policies key to brand loyalty for LUV and JBLU – Southwest’s “Bags Fly Free” marketing campaign and operational underperformance in our view make a bag fee unlikely; lack of upsell product limiting as well – JetBlue is introducing “Fare Families” in 2015 including a bag fee for its no frills offering, but we think the incremental contribution will be lower than consensus is forecasting as management implements the initiative a “JetBlue way” to minimize customer reproach Operating Margin, Adj. (%)
Operating Margin, Adj. (%) 15.0% 14.0% 13.8%
14.1%
12.4%
11.9%
11.4%
11.3% 9.3%
10.7%
8.7%
8.1%
7.5%
7.1%
11.8% 10.1%
10.8%
8.9%
8.2% 7.9%
6.4% 4.9%
4.6% 3.7% 3.7%
2012
2013
2014E DAL
AAL
2015E
2016E
UAL
DAL already best-in-class, but most upside at UAL and AAL
Source: Company data, CS estimates
2012
2013
2014E LUV
2015E
2016E
JBLU
Margin expansion at LUV and JBLU more moderate
16
Capacity Discipline Remains Crucial U.S. carriers continues to demonstrate commitment to sub-GDP capacity growth Domestic capacity discipline keeping supply and demand balanced; Capacity growth has been below GDP since 2010
Schedule data shows total seat growth growing less than 3% in 4Q, even with several carriers up gauging; even LCC growth only 3%
Domestic Supply, Demand, and GDP
Total Seats (from US to RoW, incl. Domestic)
Domestic capacity is still 6% below 2007 levels
3.0%
3.5% 3.0%
2.5%
2.5%
2.0%
2.0%
1.5%
1.5%
1.0%
1.0% 0.5%
0.5%
0.0% 0.0% 2010
2011
Domestic ASMs YY
2012 Domestic RPMs YY
2013
H1 2014
Domestic GDP
-0.5% -1.0% 1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14E
4Q14E
Management Strategy
AAL
“The domestic market, in particular, is mature. And so you certainly shouldn’t have growth that exceeds GDP in the domestic market.”
DAL
“The goal over the next 5 years is for capacity growth of roughly 2% per year, which is well within our expectations of what the general economic forecasts for the future are.”
UAL
“Over the next 4 years, we expect our consolidated capacity to grow less than GDP, or 1-2%.”
Source: A4A, Diio Mi,Company data, CS estimates
17
Upward Pricing Trends Appear Intact, but Bear Watching Closely Pockets of competitive tension are building, comps are getting tougher Matching capacity with demand is helping to circumvent unsustainable price competition, but, is yield growth sustainable? We think so, as long as capacity growth is sub-GDP. That said, while upward pricing trends appear intact, pockets of competitive tension are building in certain markets and the battle for high-yielding corporate travel is intensifying as the differentiation between network carriers wanes. Yields are up 20% over the last four years, well ahead of inflation, on real pricing gains and record load factors.
PRASM growth deceleration is inevitable…we think UAL will transition to PRASM outperformance on easier comps and self-help Comps are getting tougher and international trends are mixed with over capacity risk in the Pacific, Atlantic and Latin America. PRASM growth has averaged 5% since 2010 and going forward, we think PRASM outperformance will be driven by revenue management at the company level which is where UAL is poised to catch-up. AAL should eventually outperform from integration upside, but near-term Venezuela issues and tough comps may cloud merger benefits for 6-9 months. DAL is now challenged with protecting its 13% domestic revenue premium following successful corporate market share gains, while UAL is playing catch-up. Ancillary revenues should continue to rise as airlines become more advanced at monetizing extras and enhancing distribution We see further pricing upside & expect non-ticket revenues to drive continued yield improvement. New products, variable/dynamic pricing, distribution enhancements, and different pricing methods are all contributing to higher ancillary revenues. Non-ticket revenue as a percentage of total operating revenue for major U.S.-based airlines rose to nearly 10% in 2013 and are a significant driver of profit. Ultra-low cost carriers have led the way with ancillary revenue as a percentage of total revenue averaging 30% of total revenues. Quarterly Yield Growth Y/Y
Quarterly PRASM Growth Y/Y
Comps most challenging for AAL among network carriers Expectations are highest for DAL
Comps toughen over next 12 months for DAL and AAL
6.5%
Airline
5.3% 3.8%
3.1%
Year
1Q
2Q
3Q
4Q
AAL
2013 2014
6.0% 2.9%
0.9% 5.9%
3.4% 1-3%
5.0%
DAL
2012 2013 2014
13.6% 3.9% 3.2%
8.2% -0.1% 5.7%
2.8% 4.0% 2-4%
4.1% 3.0%
UAL
2012 2013 2014
5.2% 5.9% -2.0%
2.9% 1.0% 3.7%
-1.3% 2.7% 2-4%
0.6% 3.2%
3.9%
3.2%
3.0% AAL
1.3%
DAL UAL
-2.0% Q4'13
Q1'14
Q2'14
Source: Company data, CS research and estimates
18
Improving Unit Cost Control Carriers are getting smarter at keeping non-fuel unit costs sub-inflation All Three Network Carriers Targeting Sub-Inflationary Unit Cost Growth 2014+ United has the most work to do but is showing progress on a $2B structural cost reduction program announced in late 2013 Non-Fuel Unit Cost Growth Ex-Items
Stage Length Adjusted CASM ex Fuel (LTM 2Q 14)
7.0%
12.00¢
6.0% xxx 5.0%
10.00¢
4.0%
8.00¢
3.0%
AAL
2.0%
11.06¢
11.19¢
9.82¢ 7.49¢
7.21¢
LUV
JBLU
6.00¢
DAL
1.0%
UAL
4.00¢
0.0% 2.00¢
-1.0% -2.0%
0.00¢ AAL
DAL
UAL
Management Stated Goals
AAL
DAL
2015 non-fuel unit cost growth -1% - +1%, below inflation.
Goal to keep non-fuel unit cost growth 2x peers) limits flexibility
Sub-inflation Y/Y CASM past 2015 not sustainable. DAL and UAL saw significant cost growth around year 3-4 post close
CS View
Outperform, $52 Target Price We expect margin expansion to outpace consensus in 2015, and think margins can exceed Delta’s in 2015 (we forecast 15% vs. DAL’s 14%) Recent underperformance offers attractive entry point, esp. for L-T investors looking past merger Merger integration unlocks opportunity for structural improvements at legacy AMR Synergy targets conservative
Accelerating capital returns; upside in 2015
Source: Company data, CS estimates
28
DAL INITIATION REPORT RATING: OUTPERFORM PRICE (Sept 05 2014): $39.22 TARGET PRICE: $56
DAL — Outperform ($56 TP) Setting the industry standard (link to full report) Key Investment Highlights
Credit Suisse versus Consensus
The industry leader. Despite the significant run in shares, we still see valuation upside as Delta demonstrates its long-term goals are achievable, and leads the network carriers in operating margin and FCF generation. In our view, DAL is the highest-quality holding among network carriers for the following reasons: (i) merger integration risk is retired; (ii) management is a respected, proven team successfully executing a differentiated strategy (fuel, and ROIC focused approach to fleet), and (iii) leading FCF and generous shareholder friendly cash returns. Key holding for airline investors. We see DAL as a key holding for airline investors given inclusion in the S&P, lower relative debt levels, a fully integrated merger, an established shareholder return program, leading margins and a 13% domestic revenue premium to the industry. Differentiated approach. DAL’s differentiated approach to cost control through its refinery investment and older fleet/maintenance strategy gives it the most flexibility in a rising fuel environment or in the face of declining demand given greater capacity flexibility with fully depreciated assets. DAL’s fuel price/gal is ~5% below peers. Leading profitability. While many viewed the combined DAL-NWA network / hub structure as inferior to peers, Delta has proven otherwise with its industry leading profitability. We think this is primarily attributable to (i) dominant market share at top hubs, (ii) the more efficient airports (ATL & MSP are top 3 in N. America), and (iii) advantages from lower costs per enplaned passengers in top 3 hubs. Committed to Shareholders We expect the Dec investor day gives management another opportunity to remind investors why they should own DAL in 2015. Management has proven its commitment to shareholders, and we see no reason this will change. If the demand and pricing environment remain strong, we expect DAL may nudge up its long-term operating margin / ROIC target again next year. 11th
Our 2015E are essentially in-line with consensus.
2014 EPS
EBITDAR
CS Consensus $3.22 $3.21 12.2x 12.2x
∆ 0.3%
CS Consensus $7,115 $7,211 5.5x 5.5x
∆ -1.3%
2015 EPS
EBITDAR
CS Consensus $3.89 $3.83 10.1x 10.3x
∆ 1.6%
CS Consensus $7,911 $7,854 5.0x 5.0x
∆ 0.7%
Relative Valuation Still Attractive; at a Significant Discount on P/E We blend a 13.5x mid-cycle P/E multiple and a 7x EV/EBITDAR multiple on our 2015 estimates to yield our $56 target price. 20.0x 17.2x
18.0x
15.8x
16.0x
16.7x
15.8x
14.0x 12.0x
10.0x
10.1x
8.0x 6.0x 4.0x
Catalysts
2.0x
(i) September traffic / PRASM & investor update 10/2, (ii) Q3 earnings 10/22, (iii) fall conferences, (iv) NYC investor day 12/11 Source: Company data, CS estimates, Bloomberg
0.0x DAL
LUV
Air Freight
Rails
S&P500
29
DAL — Outperform ($56 TP) Financial and operational snapshot Income Statement
Key Performance Metrics 2013A
2014E
2015E
2016E
Revenue Y/Y% Change EBITDAR Margin EBIT Margin Pre-Tax Profit Margin EPS
$37,773 3.0% $5,393 14.3% $3,526 9.3% $2,696 7.1% $3.14
$40,317 6.7% $7,115 17.6% $5,028 12.5% $4,144 10.3% $3.22
$41,944 4.0% $7,911 18.9% $5,844 13.9% $5,214 12.4% $3.89
$44,142 5.2% $8,481 19.2% $6,306 14.3% $5,774 13.1% $4.49
Y/Y% Change
72%
2.3%
21.0%
15.4%
Regional Capacity (by ASMs)
Traffic Growth Capacity Growth Load Factor Unit Revenue Growth Pax Yield Growth Unit Cost Growth Ex-Fuel Unit Cost Growth Net Lease Adj. Debt Net Lease Adj. Debt/EBITDAR Net Lease Adj. Debt/Equity
2013A
2014E
2015E
2016E
1.0% 1.0% 83.8% 2.7% 2.5% -1.3% 2.4% $9,002 1.67x
4.2% 2.7% 85.0% 3.6% 2.1% -0.1% 0.9% $7,144 1.00x
2.2% 1.9% 85.2% 2.1% 1.8% 0.4% 1.2% $5,375 0.68x
2.7% 2.1% 85.7% 2.7% 2.2% 2.6% 0.6% $3,627 0.43x
n/a
0.54x
0.35x
0.20x
2013A
2014E
2015E
2016E
Capital Deployment
Domestic Transatlantic
59%
20%
Transpacific
Operating Cash Flow
4,504
5,341
5,430
5,801
Gross CapEx Debt Reduction
(2,568) (1,461)
(2,300) (1,806)
(2,500) (1,247)
(2,750) (1,615)
Incremental Pension Funding
(250)
(250)
(250)
(250)
Return Cash to Shareholders
(352)
(1,027)
(1,086)
(1,194)
(102)
(252)
(336)
(394)
(250) (127)
(775) (43)
(750) 347
(800) (8)
17.0%
33.2%
37.1%
39.1%
Dividends
13%
Repurchase Cash Remaining (Used) from OCF generated Latin America
8%
% of FCF returned to shareholders
May 6, 2014 - DAL announced new $2 billion share repurchase program, to be completed no later than Dec. 31, 2016. In addition, beginning in the September 2014 quarter, the company's quarterly dividend will increase to $0.09 per share from the current $0.06 per share. Together, these two programs are expected to return an additional $2.75 billion to
Source: Company data, CS estimates
shareholders through 2016.
30
DAL — Outperform ($56 TP) Bull versus Bear
Backstory
DAL has led the industry in operating & financial performance, and shareholder friendly capital deployment. Management has significantly reduced debt and improved ROIC (18% TTM at Q2) since the Northwest merger. Last fall Delta was re-added to the S&P 500.
Bull Case
Bear Case
Best-in-class margins, FCF generation & ROIC
Best performer over 20-mth period, highest expectations
Rising yields & below inflation unit cost growth supports margin expansion
PRASM growth deceleration on tough comps and international weakness
S&P inclusion, lower debt and investment grade metrics
Transatlantic capacity / yield concerns
High exposure to strong domestic trends; 13% unit revenue premium domestically
Losing discipline in battle for Seattle, adding too much capacity
Merger risk retired
Most likely airline to close valuation gap with transports
Trainer refinery adds risk
CS View
Outperform, $56 Target Price We see as key holding for airline investors given lower relative risk profile PRASM growth sustainable, albeit at a slower pace Expect positive December 11th investor day JVs are reducing Transatlantic capacity in Q4; rational market structure
Best positioned in pullback given lower debt and older fleet strategy
Source: Company data, CS estimates
31
LUV INITIATION REPORT RATING: Neutral PRICE (Sept 05 2014): $32.83 TARGET PRICE: $32
LUV — Neutral ($32 TP) Quality domestic exposure, but fully valued (link to full report) Key Investment Highlights Strong domestic footprint, but fewer margin levers versus network peers. LUV has a bright future given a strong brand and leading domestic footprint, but we see fewer levers for margin expansion and relative share price outperformance given (i) rising unit cost pressures & labor tensions, (ii) decelerating yield growth due to capacity additions into competitive markets and more limited mix/ancillary opportunity, and (iii) a premium valuation (15.8x P/E on 2015E vs. network average of 9.5x). 2015 capacity growth a key question. LUV remains on track to meet or exceed its 15% ROIC target this year and has pointed to a return to capacity additions next year following two years of very modest growth. Management has cited its opportunity set as 50 destinations beyond the 48 states. Consensus is forecasting 3.6% ASM growth in 2015, and we expect guidance much above that would not be well received. Historic cost advantage is eroding as network evolves post the AirTran acquisition and expands to more competitive routes and congested and costlier airports. Meanwhile, network carriers are becoming more efficient following bankruptcy restructurings, merger-driven structural cost reduction initiatives, and new union contracts. On the other side of the spectrum, ultra-low cost carriers have made steady progress in competing with Southwest given much lower labor and maintenance costs and unbundled fare structures. While LUV has a strong domestic footprint, we see limited room for further yield growth following pricing increases on par with the industry for the past 2.5 years as (i) 38% of LUV’s capacity growth is directed into highly competitive markets where pricing will likely have to be sacrificed and (ii) limited ancillary revenue opportunities due to “Bags Fly Free”, customer friendly fee policies, and no upsell product. Catalysts (i) Sept. traffic & Q3 PRASM 10/8, (ii) Q3 Earnings 10/23, (iii) Dallas Investor day Nov 10th, (iv) 2015 capacity growth plans, (v) changes to bag fee or fee structure or addition of upsell product, and (vi) progress on labor negotiations. Source: Company data, CS estimates, Bloomberg
Credit Suisse versus Consensus Our estimates are lower than consensus, reflecting a more tempered increase in yields and greater cost inflation as the carrier continues to grow its scale and loses some of its cost advantage
2014 EPS CS Consensus $1.71 $1.78 19.2x 18.5x
EBITDAR
∆ -3.9%
CS Consensus $3,194 $3,406 6.6x 6.2x
∆ -6.2%
2015 EPS CS Consensus $2.04 $2.07 16.1x 15.8x
EBITDAR
∆ -1.7%
CS Consensus $3,620 $3,776 5.9x 5.6x
∆ -4.1%
LUV trades at a significant premium to peers We blend a 13.5x mid-cycle P/E multiple and a 7x EV/EBITDAR multiple on our 2015 estimates to yield our $32 target price. 18.0x
15.8x
16.0x
13.6x
14.0x 12.0x
15.8x
10.4x
10.2x
10.0x 7.8x
8.0x 6.0x 4.0x
2.0x 0.0x
DAL
AAL
UAL
LUV
JBLU
S&P 500
2015 P/E on fully taxed consensus
32
LUV — Neutral ($32 TP) Financial and operational snapshot Income Statement
Key Performance Metrics 2013A
2014E
2015E
2016E
Revenue Y/Y% Change EBITDAR Margin EBIT Margin Pre-Tax Profit Margin EPS
$17,699 3.6% $2,675 15.1% $1,447 8.2% $1,291 7.3% $1.12
$18,466 4.3% $3,194 17.3% $1,970 10.7% $1,920 10.4% $1.71
$19,420 5.2% $3,620 18.6% $2,316 11.9% $2,247 11.6% $2.04
$20,155 3.8% $3,757 18.6% $2,386 11.8% $2,338 11.6% $2.17
Y/Y% Change
103%
52.3%
19.5%
6.6%
Dom estic Hubs (with % of ASMs)
Traffic Growth Capacity Growth Load Factor Unit Revenue Growth Pax Yield Growth Unit Cost Growth Ex-Fuel Unit Cost Growth Net Lease Adj. Debt Net Lease Adj. Debt/EBITDAR Net Lease Adj. Debt/Equity
2013A
2014E
2015E
2016E
1.4% 1.7% 80.1% 2.1% 2.4% -1.7% 1.3% $2,195 0.82x
2.1% 0.4% 81.4% 4.4% 2.6% 0.6% 2.9% $1,012 0.32x
3.7% 3.2% 81.8% 2.0% 1.6% 0.5% 1.2% $184 0.05x
2.3% 3.2% 81.1% 0.6% 1.5% 0.7% 1.4% ($660) -0.18x
n/a
0.13x
0.02x
-0.07x
2014E
2015E
Capital Deployment 2013A Operating Cash Flow CapEx
Las Vegas 5.8%
Phoenix 4.4%
Chicago (MDW) 6.3%
Denver 4.4%
Dallas (DAL) 3.5%
Debt Reduction Baltimore 5.2%
2,477
3,411
3,349
3,211
(1,447)
(1,800)
(1,550)
(1,400)
(313)
(559)
(400)
(500)
Incremental Pension Funding
0
0
0
0
Return Cash to Shareholders
(611)
(889)
(786)
(819)
Dividends
(71)
(139)
(186)
(219)
Repurchase
(540)
(750)
(600)
(600)
106
162
613
492
59.3%
55.2%
43.7%
45.2%
Cash Remaining (Used) from OCF generated % of FCF returned to shareholders Houston (HOU) 4.1%
2016E
May 2014: LUV boosted its quarterly dividend by 50% in May to $0.06/share (from $0.04/share). The board also authorized another $1B share repurchase (~6% of market cap when announced) program and while no timeframe was given, the company did implement a $200M /6M ASR (accelerated share repurchase) program.
Source: Company data, CS estimates, Bloomberg
33
LUV — Neutral ($32 TP) Bull versus Bear
Backstory
LUV is a pure-play on U.S. domestic air travel where fundamentals have never been better. The strongest balance sheet among large carriers, an investment grade rating, combined with its presence in the S&P500 are attractive to investors. Shares appreciated 86% in 2013 and have risen another 75% in 2014, making LUV best performing airline in 2014
Bull Case
Best positioned to enjoy strength of domestic market AirTran integration complete at end 2014 Management returning to growth but maintaining return-driven approach S&P 500 inclusion & healthy balance sheet with investment grade credit rating ROIC improvement 2015+ Consistent, shareholder friendly capital deployment Insulated from international weakness and beneficiary of structural changes in the industry
Bear Case
Unit cost inflation as scale grows, erosion of LCC cost advantages IT transition risk LUV adding capacity again in 2015 now that 15% ROIC target reached; additions in competitive, costlier locations; could pressure margins >20% of routes in development, typically lower margin Ceiling on yields given lowfare, leisure brand and ULCC pressure points Deteriorating labor relations Limited ancillary revenue opportunity as “Bags Fly Free” and no change/cancellation fees or upsell product
CS View
Neutral, $32 Target Price
Fewer levers for margin expansion More modest earnings growth vs. peers Premium valuation captures highquality characteristics and strong domestic backdrop Below consensus estimates on more tempered yields and greater cost inflation Deteriorating labor relations pose risk to culture and brand and industry leading employee productivity, higher wages likely We favor network carriers as we see greater upside to margins and multiples
Source: Company data, CS estimates
34
JBLU INITIATION REPORT RATING: Underperform PRICE (Sept 05 2014): $12.54 TARGET PRICE: $11
JBLU — Underperform ($11 TP) Valuation reflects optimism for change (link to full report) Key Investment Highlights Outperformance since late April prices in upside. Shares are up 66% since late April primarily on optimism for a CEO transition and fare unbundling in early 2015. Our Underperform rating is based on our: (i) view that incremental strategy/management change will disappoint relative to elevated expectations following multiple analyst upgrades; (ii) below consensus 2015 forecast, and (iii) concern that PRASM deceleration in H2 and competitive capacity in key growth markets will pressure yields. Unlikely to see major strategy shift. We expect JBLU will keep growing capacity in the mid-single digits to capitalize on investments and place new, larger aircraft into service, regardless of any management change. We fear the market has been overly simplistic in extrapolating incremental earnings potential in 2015 from Fare Families, which has pushed consensus too high. JBLU is still in early stages of conceptualizing the idea, and its rollout may be slower and less impactful than the market is expecting to carefully avoid customer reproach. Growth at the expense of returns? Management asserts the carrier should continue to expand on the belief that recent investments would be wasted if growth was halted for the sake of improving ROIC in the short-term. The carrier is scheduled to receive ~48 aircraft over the next 3.5 years, growing its fleet by 25% from today's fleet of 197 aircraft. This is similar to its pace of aircraft deliveries over the last three years (when capacity growth has averaged 7% Y/Y), but new aircraft are larger A321s. We are concerned about the level of competitive capacity coming into JBLU's growth markets and the potential impact on yields and returns.
Credit Suisse versus Consensus Our 2015 estimates are below consensus on conservatism around incremental earnings from ancillary revenues derived from “Fare Families”.
2014 EPS
EBITDAR
CS Consensus $0.67 $0.71 18.7x 17.6x
∆ -6.0%
CS Consensus $959 $957 5.5x 5.5x
∆ 0.2%
2015 EPS
EBITDAR
CS Consensus $0.85 $0.92 14.7x 13.6x
∆ -7.4%
CS Consensus $1,106 $1,137 4.7x 4.6x
∆ -2.8%
JBLU Valuation We blend a 13x mid-cycle P/E multiple and a 6x EV/EBITDAR multiple on our 2015 estimates to yield our $11 target price. 18.0x
15.8x
16.0x
13.6x
14.0x
Valuation not compelling. With shares are trading at 13.6x 2015 (just 2 turns or 12% below investment-grade LUV) and a 10% boost to 2015 consensus in the last three months, we see shares as fairly valued.
12.0x
Catalysts (i) September PRASM 10/11, (ii) Q3 Earnings 10/23, (iii) NYC investor day Nov 19th, (iv) greater clarity on CEO role in 2015, (v) fare family details
6.0x
15.8x
10.4x
10.2x
10.0x 7.8x
8.0x
4.0x
2.0x 0.0x
DAL
Source: Company data, CS estimates
AAL
UAL
LUV
JBLU
S&P 500
2015 P/E on fully taxed consensus
35
JBLU — Underperform ($11 TP) Financial and operational snapshot Income Statement
Key Performance Metrics
2013A
2014E
2015E
2016E
Revenue Y/Y% Change EBITDAR Margin EBIT Margin Pre-Tax Profit Margin EPS
$5,441 9.2% $846 15.5% $428 7.9% $279 5.1% $0.52
$5,887 8.2% $959 16.3% $522 8.9% $629 10.7% $0.67
$6,430 9.2% $1,106 17.2% $650 10.1% $480 7.5% $0.85
$6,925 7.7% $1,218 17.6% $745 10.8% $564 8.1% $0.99
Traffic Growth
Y/Y% Change
25.7%
30.0%
27.1%
16.1%
Net Lease Adj. Debt/Equity
Dom estic Hubs (with % of ASMs)
2013A
2014E
2015E
2016E
6.8%
4.3%
6.1%
4.6%
Capacity Growth
6.9%
5.0%
5.8%
4.5%
Load Factor
83.7%
83.2%
83.4%
83.5%
Unit Revenue Growth
2.2%
3.3%
3.3%
2.9%
Pax Yield Growth
2.3%
3.9%
3.0%
2.8%
Unit Cost Growth
1.8%
2.0%
1.8%
2.3%
Ex-Fuel Unit Cost Growth Net Lease Adj. Debt Net Lease Adj. Debt/EBITDAR
3.8%
4.3%
2.9%
3.5%
$2,854
$2,888
$2,914
$3,009
3.37x
3.01x
2.64x
2.47x
n/a
1.16x
1.05x
0.97x
2013A
2014E
2015E
2016E
Capital Deployment Operating Cash Flow New York Boston (JFK + LGA) 13.0% 21.3%
L.A. Area 4.8%
758
731
959
1,074
Gross CapEx
(637)
(500)
(430)
(493)
Debt Reduction
(612)
(822)
(370)
(555)
Incremental Pension Funding
0
0
0
0
Return Cash to Shareholders
0
0
0
0
Dividends
0
0
0
0
Repurchase
0
0
0
0
0
(591)
159
26
0.0%
0.0%
0.0%
0.0%
Cash Remaining (Used) from OCF generated % of FCF returned to shareholders Orlando 7.3%
JBLU currently does not have a dividend or share repurchase program Fort Lauderdale San 7.5% Juan 4.9%
Source: Company data, CS estimates, Bloomberg
36
JBLU — Underperform ($11 TP) Bull versus Bear
Backstory
Bull Case
JBLU operates a primarily leisurefocused airline in high value geographies on the East Coast. Lower returns and lagging profitability due to upward pressure on costs have weighed on the stock’s relative performance up until this Spring. Since then, optimism about a CEO transition / strategy change in 2015 has driven relative outperformance. Also, the announcement that the carrier would implement Fare Families including a first bag fee has pushed 2015 consensus higher.
Potential CEO transition in 2015 drives optimism for shift to returns-driven strategy over customer-driven strategy Maturing network & more modest capacity growth boosts profitability prospects Introduction of Fare Families / first bag fee in 2015 drives earnings upside Potential return to all-Airbus fleet = CASM benefit Mint is a success & closes RASM gap on Transcontinental
Bear Case
Impact of CEO transition overstated; static strategy
CS View
Underperform, $11 TP
Competitive capacity in key markets pressures yields
Valuation of 13.6x 2015E rich vs. peers given lagging return and cash profile
Low corporate share limits yield upside; greater demand elasticity from leisure focus
We are below consensus 2015E as we expect Fare Family & Mint impact to be nominal
Wage inflation; pilot unionization
We think incremental change in 2015 will disappoint relative to elevated expectations that have driven recent outperformance
Cost structure not low enough to compete with budding ultra-low cost carriers Mint offering won’t close RASM gap; business case flawed July PRASM of 1% missed guidance for 2-3% growth
PRASM deceleration in H2 on tough comps & competitive capacity in key growth markets may limit investor enthusiasm
Very tough September comp, could see negative growth
Source: Company data, CS estimates
37
Coverage Universe and Comp Table Summary of Credit Suisse Estimates versus Consensus Target
Upside /
Ticker
Rating
Mkt Cap
Price
(downside)
2014E
2015E
2014E
2015E
2014E
2015E
2014E
2015E
DAL
O/P
$33.1B
$56
43%
17.4x
14.4x
17.5x
14.6x
7.7x
6.6x
5.5x
5.0x
AAL
O/P
$27.3B
$52
37%
9.3x
10.6x
9.4x
7.6x
8.6x
7.2x
4.7x
4.1x
UAL O/P $19.0B Network Carrier average
$68
34%
14.5x 13.8x
14.0x 13.0x
14.9x 13.9x
11.7x 11.3x
8.1x 8.1x
6.0x 6.6x
5.1x 5.1x
4.4x 4.5x
$22.5B
$32
-3%
18.8x
15.7x
18.0x
15.4x
7.3x
6.1x
6.2x
5.6x
JBLU U/P $3.7B Leisure Carrier average
$11
-12%
16.4x 17.6x
12.9x 14.3x
15.4x 16.7x
11.9x 13.7x
7.1x 7.2x
6.1x 6.1x
5.5x 5.8x
4.6x 5.1x
15.3x
13.5x
15.0x
12.3x
7.7x
6.4x
5.4x
4.8x
LUV
N
Industry average
CS P/E
Consensus P/E
CS EV/EBITDAR
Consensus EV/EBITDAR
Source: Bloomberg, company data, CS estimates
38
Valuation & Risks
Stocks Have Outperformed for 20 Months We expect this to continue as long as yields are improving Relative YTD share price performance 90
LUV AAL JBLU DAL UAL S&P500
80 70
60
LUV AAL
50
JBLU
40
DAL
30
UAL
20 10
S&P 500
0 -10
-20
Year
2007 2008 2009 2010 2011 2012 2013 2014 YTD
Airline Stocks
AAL -54% -24% -28% 1% -96% 127% 50%
DAL -23% -1% 11% -36% 47% 133% 44%
UAL -19% -67% 17% 85% -21% 24% 62% 34%
LCC -73% -47% -37% 107% -49% 166%
Source: Bloomberg, company data, CS estimates
CAL -46% -19% -1%
S&P 500
JBLU -58% 20% -23% 21% -21% 10% 49% 47%
SAVE
14% 156% 61%
LUV -20% -29% 33% 14% -34% 20% 86% 75%
Average -45% -27% -6% 40% -43% 58% 97% 52%
SPX 6% -37% 15% 15% 2% 16% 32% 10%
Airline Indices
XAL -41% -29% 40% 41% -31% 38% 58% 27%
BUSAIRL -35% -25% 22% 22% -30% 31% 79% 40%
DJUSAR -36% -28% 21% 21% -32% 30% 92% 42%
40
EV / EBITDAR and EV / Invested Capital Useful Metrics Returns must continue to improve to drive re-rating Current EV/IC and ROIC (EV/IC)
EV / EBITDAR is the best valuation metric through the cycle
2.0x
Removes distortions from taxes, capital structures and accounting polices
1.2x
EV / Invested Capital is also a robust metric correlated with ROIC Highest returns and cash flow generation warrant a premium
1.5x
10%
1.0x
0.8x
20%
1.8x
14%
1.6x
We apply a mid-cycle EV/EBITDAR multiple which we think is 6-7x
(ROIC) 18%
18%
16% 9%
1.0x
0.9x
0.4x
8% 4%
0.0x
0%
DAL
AAL
UAL EV/IC
EV/EBITDAR (TTM)
12%
LUV
JBLU
ROIC
EV/EBITDAR (2015)
8.0x
LUV
7.0x
DAL
6.0x
5.6x
5.0x 4.1x
JBLU
5.0x
4.6x
4.4x
UAL
4.0x 3.0x
2.0x 1.0x
LUV DAL JBLU
UAL
0.0x
DAL
Source: Bloomberg, company data, CS estimates
AAL
UAL
LUV
JBLU
41
Airline Sector Still at a Significant Discount to the Market and Industrial Transports We expect an upward re-rating Multiples should re-rate as the structural industry shifts and cost control drive network carriers toward mid-teens operating margins We expect a sector rerating similar to the “Rail Renaissance” as sector margins expand, ROIC improves, and capital is returned to shareholders Airline valuation is challenging – P / E doesn’t capture Balance Sheet which can be misleading given higher leverage and pension deficits Earnings volatility and leverage make it difficult to compare airline P/E to market or across industrials, so we incorporate EV/EBITDAR and cross check with balance sheet value metrics including EV/Invested Capital and CFROI through the Credit Suisse HOLT® methodology.
Bloomberg US Airline Index vs. Discount to S&P Discount to S&P 70%
Index FY2 P/E 12.0x
60%
11.0x
50%
10.0x
40%
9.0x
30%
8.0x
20%
7.0x
10%
6.0x
0%
5.0x
-10% -20%
4.0x
-30%
3.0x
-40%
2.0x
-50%
1.0x
-60%
0.0x
-70%
Discount to S&P
Bloomberg US Airline Index FY2 P/E
Source: Bloomberg, company data, CS estimates
42
U.S. Airline Financials and Valuation Overview Price
Short Interest
Beta
Volatility
% of Float Cover Days
6-Month
6-Month
2013
YTD
YTD Rel.*
Past Week
S&P
Fitch
1.8 1.7
1.5 1.6
33.4 34.6
132.6% n/a
44.6% 51.2%
32.5% 39.0%
(0.3%) (2.0%)
BBB
BBB+
2.1%
2.2
1.6
44.1
61.8%
35.4%
24.8%
7.6%
B
B
3.0 2.2 6.9 7.6
1.3
23.6 32.1 29.1
75.9% 51.8% 46.7% 30.2%
61.1% 39.3% 35.2% 19.0%
2.9% 2.0% 2.5% 2.2%
BBB
1.5 1.2
85.6% 93.3% 49.3% 71.3%
BBB-
7,686,412 1,368,390
3.1% 2.1% 6.1% 7.7%
B BB+
B
$4,793
582,406
3.6%
3.1
1.5
31.4
156.1%
62.3%
49.5%
4.7%
$2,319
105,367
5.9%
5.5
1.2
30.0
46.7%
19.3%
10.0%
2.4%
SMID cap average
5.8%
5.8
80.9%
39.6%
28.4%
2.9%
Industry Average
4.0%
4.0
87.1%
45.7%
33.9%
2.5%
Company
Upside/
52 Week Range
Market Cap
EV
Avg. 30D Vol
Ticker
Rating
5-Sep
Target Price
(Downside)
Low
High
(US$M)
(US$M)
# shares
Delta Air Lines American Airlines
DAL AAL
O/P O/P
$39.48 $38.09
$56 $52
42% 37%
$20.76 $23.45
$42.66 $44.88
$33,282 $27,429
$39,523 $35,113
10,169,117 9,530,739
1.7% 1.6%
United Continental
UAL
O/P
$51.21
$68
33%
$29.11
$51.70
$19,131
$25,655
5,217,513
Southwest Airlines
LUV
N
$32.94
$32
-3%
$12.98
$33.14
$22,565
$21,329
5,167,687
JetBlue Alaska Air Group
JBLU ALK
U/P N/R
$12.53 $47.35
$11 N/A
-12% N/A
$6.11 $28.74
$12.83 $50.49
$3,658 $6,387
$5,247 $5,736
Spirit Airlines
SAVE
N/R
$73.68
N/A
N/A
$31.39
$73.98
$5,360
Allegiant Travel
ALGT
N/R
$125.80
N/A
N/A
$81.19
$128.39
$2,247
Large Cap Average
Stock Performance (Total Return)
Credit Rating
BB-
Financials Revenues (US$M) Company Delta Air Lines American Airlines United Continental Southwest Airlines
CAGR
EBITDAR Margin
EBIT Margin
Pre-Tax Margin
Adjusted EPS
CAGR
Ticker DAL
2013A 37,773
2014E 40,317
2015E 41,944
13-15 5.4%
2013A 14.3%
2014E 17.6%
2015E 18.9%
2013A 9.3%
2014E 12.5%
2015E 13.9%
2013A 7.1%
2014E 10.3%
2015E 12.4%
2013A $3.14
CS 14E $3.22
Street 14E** $3.20
CS 15E $3.89
Street 15E** $3.84
(2yr Fwd) 11.3%
AAL UAL
40,419 38,279
43,030 38,866
45,326 40,436
5.9% 2.8%
14.2% 11.5%
17.2% 13.0%
19.4% 15.2%
8.1% 4.6%
11.3% 6.4%
13.8% 8.7%
3.3% 2.8%
9.3% 4.1%
12.0% 7.1%
$2.62 $3.01
$5.59 $4.68
$5.52 $4.56
$7.49 $7.55
$6.85 $5.79
69.2% 58.4%
4.7% 4.7% 8.7%
15.1% 13.8% 15.5%
17.3% 16.3% 16.3%
18.6% 18.0% 17.2%
8.2% 7.6% 7.9%
10.7% 10.2% 8.9%
11.9% 12.1% 10.1%
7.3% 5.1% 5.1%
10.4% 8.5% 10.7%
11.6% 10.8% 7.5%
$1.12
$1.71
$1.78
$2.04
$2.09
$0.52
$0.67
$0.72
$0.85
$0.93
34.9% 43.4% 28.5%
LUV
17,699
18,466
19,420
JBLU
5,441
5,887
6,430
ALK
5,156
$5,387
$5,730
5.4%
23.8%
23.6%
23.8%
16.3%
15.5%
15.6%
15.8%
15.8%
15.6%
$5.40
$3.82
$4.16
-12.2%
SAVE ALGT
1,654 996
$1,967 $1,134
$2,502 $1,290
23.0% 13.8%
29.3% 23.4%
31.0% 25.7%
30.5% 25.7%
17.1% 15.5%
18.3% 17.1%
18.3% 16.9%
17.1% 14.7%
18.5% 15.4%
18.7% 15.9%
$2.43 $4.82
$3.10 $6.08
$3.98 $7.33
27.9% 23.3%
SMID cap average
12.7%
23.0%
24.2%
24.3%
14.2%
14.9%
15.2%
13.2%
15.1%
14.4%
16.9%
Industry Average
8.7%
18.4%
20.2%
21.2%
10.9%
12.6%
13.7%
9.2%
11.8%
12.6%
30.2%
Large Cap Average JetBlue Alaska Air Group Spirit Airlines Allegiant Travel
**Bloomberg estimates
Valuation
Yield
Returns
Liquidity Cash & STI Net lease adj. Net Lease Adj.
Company
P/E Ratio 2015E
2016E
EV/IC 2014E
Price/FCF 2015E
PEG 2015E
FCF Yield 2014E
Div Yield NTM
2012
2014
15.0%
19.9%
1.4x
7,144
0.2x
1.0x
10.1%
n/a
13.9%
0.0x
25,094
0.9x
3.4x
22.9%
8.0%
10.0%
13.4%
0.2x
14,565
0.8x
2.9x
13.4%
0.7%
7.2%
13.1%
17.2%
1.0x
1,012
0.0x
0.3x
17.8%
6.7% -6.0%
0.9%
8.8% 4.8%
12.7% 5.4%
16.1% 10.2%
0.7x 1.3x
2,888
0.5x 0.8x
1.9x 3.0x
16.0% 11.5%
8.1% 2.0%
1.1%
13.0% 26.5%
13.6% 31.8%
3.4x 2.6x
154 764
0.0x 0.1x
0.1x 1.3x
25.8% 32.1%
2014E
Delta Air Lines
DAL
12.3x
10.1x
12.5x
7.7x
6.6x
5.8x
2.1x
11.2x
0.9x
9.1%
0.9%
11.0%
American Airlines
AAL
14.6x
5.1x
5.8x
8.6x
7.2x
6.5x
1.6x
6.7x
0.2x
10.4%
1.1%
n/a
United Continental
UAL
17.0x
6.8x
9.1x
8.1x
6.0x
4.4x
1.9x
13.0x
0.4x
0.3%
Southwest Airlines
LUV
29.4x
16.2x
14.7x
7.3x
6.1x
5.5x
1.9x
12.5x
0.9x
7.0%
JetBlue
JBLU
18.3x 24.3x
9.5x 14.7x
10.5x 11.1x
7.9x 7.1x
6.5x 6.1x
5.6x 5.7x
1.9x 1.2x
10.8x 44.4x
0.6x 0.9x
Alaska Air Group Spirit Airlines
SAVE
12.4x 23.8x
11.4x 18.5x
10.6x 15.5x
4.5x 7.8x
4.2x 6.3x
4.3x 4.9x
1.7x 5.9x
12.3x 50.9x
0.7x 0.8x
Allegiant Travel
ALGT
ALK
ROIC 2013
debt 2014E
Debt/ Mkt. Cap debt/ EBITDAR 2014E 2014E
as a % of
ROIC/ WACC
Ticker
Large Cap Average
2016E
EV/EBITDAR 2014E 2015E
Net lease adj.
Revenues 2013
20.7x
17.2x
14.5x
8.0x
7.0x
6.3x
3.5x
-20.1x
1.2x
-5.0%
15.6%
16.4%
1.7x
312
0.1x
1.1x
35.2%
SMID cap average
20.3x
15.4x
12.9x
6.9x
5.9x
5.3x
3.1x
21.9x
0.9x
-0.2%
15.0%
16.8%
2.2x
1,030
0.3x
1.4x
26.2%
Industry Average
19.3x
12.5x
11.7x
7.4x
6.2x
5.4x
2.5x
16.3x
0.7x
3.2%
12.3%
15.0%
1.4x
6,492
0.4x
1.6x
21.1%
14.9%
Source: Credit Suisse Estimates, Bloomberg, Company Data
43
Operating Statistics, Fleet Details, and other Operating Statistics
Industry Average
ASM Y/Y% Change 2014E 2015E 2016E 2.7% 1.9% 2.1% 2.3% 2.4% 1.9% 0.5% 1.8% 1.1% 0.4% 3.2% 3.2% 1.5% 2.3% 2.1% 5.0% 5.8% 4.5% 7.1% 5.7% 17.8% 26.4% 9.6% 13.0% 9.9% 12.7% 5.7% 7.5% 2.6%
Company Delta Air Lines American Airlines United Continental Southwest Airlines
Ticker DAL AAL UAL LUV
Total Fleet 916 1539 1267 680
JBLU ALK SAVE ALGT
196 185 57 81
Company Delta Air Lines American Airlines United Continental Southwest Airlines
Ticker DAL AAL UAL LUV
Large Cap Average JetBlue Alaska Air Group Spirit Airlines Allegiant Travel
JBLU ALK SAVE ALGT
SMID cap average
Large Cap Average JetBlue Alaska Air Group Spirit Airlines Allegiant Travel
SMID cap average Industry Average
% Own* 77% 49% 60% 79% 66% 67% 74% 100% 98% 85% 75%
% Lease* 23% 51% 40% 21% 34% 33% 26% 0% 2% 15% 25%
RPMs Y/Y% Change 2014E 2015E 2016E 4.2% 2.2% 2.7% 2.2% 2.4% 2.1% 0.8% 2.7% 1.2% 2.1% 3.7% 2.3% 2.3% 2.7% 2.1% 4.3% 6.1% 4.6% 6.8% 5.9% 18.8% 26.0% 8.4% 11.5% 9.6% 12.4% 6.0% 7.6% 2.6%
Avg Age* 16.9 yrs 13.0 yrs 13.5 yrs 11.6yrs 14 yrs 7.5 yrs 09 yrs 5.1 yrs 22 yrs 11 yrs 12 yrs
2014E 85.0% 82.8% 83.9% 81.4% 83.3% 83.2% 85.6% 87.1% 88.8% 86.1% 84.7%
Load Factors 2015E 85.2% 82.8% 84.6% 81.8% 83.6% 83.4% 85.7% 86.7% 88.4% 86.1% 84.8%
Fleet Details (as of Q2) Orders as Mainline On Order % of Fleet %Wide % Narrow 217 24% 21% 79% 544 35% 15% 85% 258 20% 23% 77% 285 42% n/a 100% 326 30% 133 68% n/a 100% 65 35% n/a 100% 114 200% n/a 100% 8 10% n/a 100% 80 78% 203 54.3%
2016E 85.7% 83.0% 84.7% 81.1% 83.6% 83.5% 85.5% 85.4% 84.8% 84.1%
Ex. Fuel Unit Costs (Y/Y % Change) 2014E 2015E 2016E 0.9% 1.2% 0.6% 3.6% -0.8% 2.0% 2.0% -0.2% 0.6% 2.9% 1.2% 1.4% 2.4% 0.4% 1.1% 4.3% 2.9% 3.5% -0.1% 1.3% 1.8% 1.6% 6.7% 1.9% 2.8% 1.6% 2.8% 1.1% 1.6%
Regional Fleet Size %50 Seat 162 46% 557 63% 561 65% n/a n/a n/a 51 n/a n/a
n/a n/a n/a n/a
Avg FTE* /Aircraft 102 96 120 66 96 64 44 60 31 50 73
Unit Revenues (Y/Y % Change) 2014E 2015E 2016E 3.6% 2.1% 2.7% 3.3% 2.8% 3.0% 1.6% 3.4% 2.6% 4.4% 2.0% 0.6% 3.2% 2.6% 2.2% 3.3% 3.3% 2.9% 1.0% 0.4% 0.4% -0.2% 1.6% 2.5%
1.2% 2.0%
Efficiency and Fuel (2013) ASMs* % hedged Fuel cost /Gallon /Gallon Current FY 60.8 $3.07 20.0% 60.5 $3.08 0.0% 62.2 $3.13 24.0% 71.7 $3.12 30.0% 63.8 $3.10 18.5% 70.9 $3.14 21.0% 75.3 $3.30 44.0% 80.6 $3.21 67.6 $3.20 73.6 $3.21 32.5% 68.7 $3.16 23.2%
2.9% 2.3%
2014E 2.1% 3.4% 1.3% 2.6% 2.4% 3.9% 12.5% 5.9% 7.4% 4.5%
Costs as % of Opex Fuel Wages 2013 2013 27.4% 24.0% 29.9% 21.2% 33.8% 23.6% 35.5% 31.0% 31.7% 25.0% 37.9% 22.6% 34.0% 27.6% 40.2% 19.1% 45.8% 18.9% 39.5% 22.0% 35.6% 23.5%
Pax Yield Y/Y% Change 2015E 2016E 1.8% 2.2% 2.8% 2.8% 2.5% 2.4% 1.6% 1.5% 2.2% 2.2% 3.0% 2.8% 0.2% 1.9% 1.7% 2.0%
Gross CapEx 2014 $2,568 $5,500 $2,400 $1,447 $637 $566 $90 $178
2.8% 2.3%
CapEx xD&A 2013 1.5x 3.1x 1.3x 1.7x 1.9x 2.1x 2.1x 0.6x 2.6x 1.8x 1.9x
% unionized 18.0% 73.0% 80.0% 83.0% 63.5% 21.8% 75.0% 59.0% 50.0% 51.5% 57.5%
% of Sales 2013 6.8% 11.6% 5.7% 8.2% 8.1% 11.7% 11.0% 1.2% 17.8% 10.4% 9.2%
*Mainline used for three major network carriers **As of year end 2013 Source: Credit Suisse Estimates, Bloomberg, Company Data
44
Key Industry Risks Highly cyclical industry sensitive to fuel prices and the health of the economy Because consumer demand for travel is fairly elastic, any economic uncertainty or downturn in the macro environment could jeopardize leisure traffic. Corporate spending on business travelers would also decline in a recession, which would further compress margins as business travelers pay higher fares. The carrier is running at record load factors relative to history and any economic weakness would likely negatively impact loads and pricing. Any terrorist attack or threat, epidemic, or natural disaster (real or perceived) would significantly reduce demand for air travel Any terrorist attack or threat, epidemic, or natural disaster, real or perceived would significantly reduce demand for air travel and would significantly impact airline operations. Similarly, an accident or crash, on any flight, irrespective of its operator, would create the perception that aircraft travel is dangerous and would also negatively impact passenger traffic. The majority of many carriers’ labor forces are highly unionized and if an airline is unable to reach an agreement with its unionized labor force regarding collective bargaining agreements or if additional employees were to become unionized, the company may face flight cancellations and interruptions, which would adversely affect its operations and may increase labor costs. Airlines are capital intensive, high fixed cost businesses with fuel and labor comprising 60% of operating expenses Aircraft fuel prices fluctuate on a number of factors including supply/demand balance, inventory levels, geopolitical events, economic outlooks and fiscal/monetary policies. Given the competitive nature of the industry, airlines may not be able to pass future fuel price costs to customers. Furthermore, passengers frequently book flights in advance, thus fuel price increases occurring after the ticket purchase date must be incurred by the airline. Airlines are highly competitive and if other major carriers lose capacity discipline, yields may come under pressure With consolidation in the U.S. among network carriers, the differentiation between routes/networks has lessened. Network carriers are aggressively pursuing corporate travel share and control of certain markets which could lead to price competition. Also, as ultra-low cost and low cost carriers pursue aggressive growth plans, established carriers are at risk of market share erosion to low cost carriers, particularly in leisure markets. Furthermore, wellfunded, Middle Eastern airlines are competing with network carriers internationally and are also beginning to enter the U.S. market. Government regulation and fees The airline industry is heavily regulated and new or unexpected regulations may increase the company's operating costs. Future legislation mandating fuel and noise efficient planes would also cause United to incur additional operating expenses. Additionally, taxes and fees are high and elevate the total ticket price customers pay. Most recently, the Transportation Security Administration hiked fees, which could negatively impact leisure travel demand.
45
Regional Detail
Domestic
Transatlantic
Pacific
Latin America
Domestic
Domestic
Yield improvement prioritized over capacity growth Domestic capacity is still 6% below 2007 levels and 15% below 2001 levels. Since 2010, capacity has risen just 2% on 4% greater demand. Domestic yields are up 17% over the same period (on a rolling 12 month basis) Record domestic load factors and strong yields (%/¢) 86.0%
Southwest is the purest-play domestics; American has the most domestic exposure among the network carriers (% of Domestic — Revenues) 98.8%
17.50 17.09¢
16.80¢
85.0%
16.41¢
85.1%
15.85¢
84.0% 83.0%
14.57¢
82.0%
82.9%
83.6%
16.50
57.7%
15.50 83.9%
46.2%
84.0% 14.50 13.50
81.0%
12.50 2010
71.4%
64.1%
2011
2012
2013
Domestic Load Factor
DAL
H1 2014
UAL
LUV
Domestic Market Structure
2.50% 2.3% 1.1%
JBLU
Domestic Yield
Capacity data shows seat growth is greater in Q4, but still below GDP (Domestic US Seat Growth YoY)
0.7% 0.5%
AAL
2.30%
JetBlue 5%
2.20%
0.5%
-0.2% -1.0% 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14E4Q14E Domestic US seat growth Y/Y
American 25%
1.60% 0.95%
0.9%
Other 13%
2010
2011
2012
2013
Southwest 18% United 19%
H1 2014 Delta 20%
Domestic ASMs YY
Domestic RPMs YY
Domestic GDP
Source: Diio Mi, A4A, company data, CS estimates
47
Transatlantic
Transatlantic
Structural positives but capacity decisions bear watching The Transatlantic is concentrated to three JVs, but AF and LHA profit warnings and signs of overcapacity worrisome. Based on our trunk route analysis, we note that 50% of trunk routes are monopolies, while 85% of trunk routes are controlled by two JVs as duopolies. Transatlantic capacity creeping but yields holding in (%/¢) 86.0%
15.50 14.65¢
84.0%
82.0%
Three JVs control 98% of US-LHR capacity (% Market Share by Seats US-LHR)
13.73¢
14.89¢
14.03¢
80.0%
73%
7%
9.50 8.50
79.9%
78.0% 76.0%
2011
2012
2013
Atlantic Load Factor
10.50
H1 2014
58% 56%
55%
10%
10%
10%
16%
17%
16%
17%
14%
2010
2011
2012
2013
2014
STAR JV
Atlantic Yield
Carriers are ratcheting back Q4 capacity to protect pricing (US to Europe Transatlantic Seat Growth YoY)
Transatlantic market structure Other 16%
7.8%
4.1%
2%
18%
11.50
80.5%
2010
77%
12.50
81.9%
82.5%
14.50 13.50
83.2%
12.83¢
18%
5.1%
6.1%
5.5%
1.7% 2.0%
1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 US to Europe seat growth Y/Y
oneworld JBA
Non-alliance
Three JVs control 98% of US-LHR capacity (% Market Share on Transatlantic Trunk Routes)
STAR JV 31%
81% oneworld JBA 23%
12%
11%
36%
35%
45%
26%
28%
26%
28%
75%
2007
2% 35%
48% 100%
SkyTeam JV 30%
-3.7%
SkyTeam JV
26%
37%
19%
25%
26%
27%
26%
26%
26%
2008
2009
2010
2011
2012
2013
2014
STAR JV
SkyTeam JV
oneworld JBA
Other
Source: Diio Mi, A4A, company data, CS estimates
48
Asia
Pacific
U.S. carriers restructuring Pacific networks to address weak yields and currency Accelerating industry capacity growth in China will pressure yields after the seasonal peak Asian network restructurings addressing weak yields (%/¢) 86.0% 14.94¢ 84.0%
84.5%
82.0%
12.97¢
14.31¢
14.29¢ 82.8%
82.5%
81.1%
80.0%
14.11¢
81.8%
United leads in the Pacific (% of Asia — ASMs) 15.50
18%
14.50
16%
13.50
14%
76.0% 2010
2011
2012
2013
Pacific Load Factor
13%
12%
12.50
10%
11.50
8%
10.50 78.0%
16%
6%
9.50
4%
8.50
2%
H1 2014
4%
0%
Pacific Yield
AAL
DAL
Capacity additions to Asia are continuing, particularly to China (US to Asia Seat Growth YoY)
Asia Market Structure
9.2%
8.3% 6.9%
28.6% 29.9%
6.2% 4.9%
3.5% 3.9%
18.4%
3.7% 5.6%
1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 US to Asia seat growth Y/Y Source: Diio Mi, A4A, company data, CS estimates
UAL
Cathay Pacific Airways 6%
American Airlines 6% United Airlines 17%
Japan Airlines 6%
8.7% 9.4%
-0.3% -4.8% 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14
Korean Air Lines 10%
Delta Air Lines 16%
US to China seat growth Y/Y
49
Latin America
Lat Am
Competitive capacity additions and Venezuela headwinds Ex-Venezuela, pricing is flat to down as competitive capacity additions continue World Cup-driven weakness pressured H1, Venezuela to weigh on H2 (%/¢) 86.0%
American has the most extensive Latin America network (% of LatAm — ASMs)
16.50
84.0%
15.70¢
15.80¢
18%
15.93¢
15.81¢
16%
15.50
14%
82.0% 80.0% 78.0%
14.04¢
81.2%
12%
14.50
81.8%
80.2%
80.0%
79.6%
76.0%
10% 8%
13.50
2011
2012
2013
Latin Load Factor
AAL
Latin America Market Share Southwest Aeromexico Airlines 4% 4%
11.4%
6.0% 4.1%
2.7% 2.5%
10.6%
12.6%
US Airways 7%
9.1%
JetBlue Airways 11%
1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 US to Caribbean, Central & South America seat growth Y/Y
American Airlines 21%
5.8% 5.6% 0.5%
Source: Diio Mi, A4A, company data, CS estimates
UAL
0%
8.8%
1.6%
DAL
2%
H1 2014
Capacity coming down as Venezuela flying pulled, but still seeing high-single digit capacity additions to the Caribbean and Central America (US to Latin America Seat Growth YoY)
3.2%
8%
4%
Latin Yield
4.1%
8%
6%
12.50 2010
15%
-2.0% 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14
Delta Air Lines 12%
United Airlines 14%
US to South America seat growth Y/Y
50
Appendix
Bull versus Bear for U.S. Airline Industry We subscribe to the bull case
Bull Case
Bear Case
Consolidation has created a rational, capacity disciplined industry focused on returns and profits instead of market share
Capacity discipline is short-lived; managements will lose discipline as financial targets achieved and the industry reaches new margin peaks
Expect managements to maintain capacity and capital discipline as they strive to become viewed as an investable industry
Five of six largest U.S. airlines now returning cash to shareholders
Buybacks and dividends not sustainable; cannot endure a downturn
Cash returns to shareholders, more disciplined CapEx, and improving ROIC should attract a more stable investor base
Domestic demand and yield environment remain strong enough to off set pockets of international weakness; carriers are managing mix better and driving highmargin ancillary revenue
International overcapacity and weakening yields signal pricing can’t rise forever; unprecedented yield growth over last four years not sustainable. Load factors are at peak and no longer a driver of yield
Domestic yield strength likely to continue as US carriers tightly manage supply. International trends bear watching. With record loads, further yield gains need to be pricing driven. High-yielding corporate traffic more important than ever
Earnings more sustainable and industry less cyclical following substantial de-leveraging and structural cost reductions from bankruptcies and mergers
Still a highly cyclical industry beholden to macro, fuel and exogenous events; recession resistance unproven
Interest burdens substantially reduced and liquidity very strong. Airline industry still cyclical, but structural changes reduce downside risk to some extent. Expect airlines to be more nimble with capacity reductions in face of any weakness
Geopolitical risk already high, oil prices stabilize on supply
Fuel price volatility increases from geopolitical instability
Brent oil prices range bound ~$100, plus or minus $5, and long-term trend is gradually down given supply growth in the U.S.
Source: Company data, CS estimates
CS View
52
We are Mid-Cycle in What Could be the Longest Upcycle in History Profitability lasted six years in the mid- to late 1990s; 2014 marks year five of this cycle Global Airlines Net Profit/(Loss) as a % of Total Revenue 4.0% 2.0% 0.0%
Middle of extended upcycle
(2.0%) (4.0%) (6.0%)
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E
Period:
Status Factors
1979-1983 Deep crisis
Dramatic Higher loads, lower increase in fuel costs, fuel declined, (oil shock 1978), economy improved followed by Volker recession (lower demand)
Economic July ’81-Nov ’82 Cycles Recession US recession
Result
1984-1986 Profits improved
1987-1989 Highly profitable
1990-1993 Cyclical downturn
1995-1998 Strong profitability
2000-2005 Worst crisis in history
Improvement in global OECD economies began Cost cutting measures Overcapacity due to market share demand and decline weakening while fuel prices and improving demand war; strengthening $, rising in fuel costs increased, eventually as a result of strong labor costs after renegotiating skyrocketing when Iraq economic growth contracts after years of profitability, invaded Kuwait and increasing fuel prices pressured profits. Economic growth decline caused cyclical downturn in 2000, exaggerated for airlines by 9/11 & SARS epidemic
1983-1989
1983-1989
July ’90-Mar ’91
Mar ’91-Mar ’01
March ’01-Nov ’01
Expansion
Expansion
Recession
Expansion
Recession
US recession due to oil price shock, excess leverage of 1980s
US expansion fueled by technological growth and fiscal policy
US recession caused by dot-com bubble bursting and 9/11
IATA member airlines collectively lose $29.5b. Bankruptcies: United, US Airways, Delta, Northwest. US airlines suffered the worst
Stable inflation and oil Stable inflation and oil prices as well as prices as well as increased private increased private investment investment
Bankruptcies: 1986 – Chernobyl Highly levered industry Bankruptcies: Eastern Record profitability in Braniff (US), nuclear disaster, as debt was taken on airlines, Air Europe, Pan 1997-1998, however Laker (UK), bombing of Libya to cover losses from Am entered bankruptcy. grab for market share government & terrorism in Europe previous cycles as well Scramble for share amidst in strong times as well financial support and ME impacted as to finance new fleets economic weakness as entry of LCCs N. American to take advantage led to falling yields and over led to eventual travel of traffic growth capacity. Many airlines over capacity received capital injections and declining yields
Source: Credit Suisse Estimates, US DOT Form 41 via BTS, schedule T2.
LCC-AWA merger
2007 Brief improvement Favorable fuel prices, cost cutting measures and strong traffic growth
Nov ’01- Dec ’07
2008-2009 Economic downturn
2010-Current Extended upcycle
Fuel prices doubled Slow recovery from in H1 of 2008, long-lasting economic causing airlines to damage caused by hedge, costing $ in H2 recession when prices fell; banking industry collapse and broader recession hurt traffic and yields Dec ’07-June ’09
June’10-
‘The Great Recession’
Expansion
Home price bubble drove construction and financial services
Subprime mortgage crisis
Sluggish recovery Federal fiscal support S&P more than doubled over course of recovery
10 largest US airlines returned to profitability after successive losses
Top 10 US airlines saw net income decline from $4.3b in 2007 to $19.4b in 2008.
Consolidation structurally improves US airline industry
DAL-NWA begins consolidation trend
UAL-CAL merger LUV-AAI merger AMR-LCC merger
53
Looking at United’s Margin Progress Post-Merger versus Delta’s… The UAL-DAL pretax profit margin gap is only 30 bps four years from merger close # Years Since Close
# Months Since Close Calendar
1
12 mths
18 mths
4
5
6
48 mths
60 mths
72 mths
2011
2012
2013
2014E
Non fuel unit costs grew 3% YY
High water mark for non-fuel unit costs grew 4.5% YY
$500M buyback (3% mkt cap) Dividend
$2B buyback (6% mkt cap) Dividend +50%
Op margin:
6.4%
7.1% Op margin
9.3%
12.6%
PT margin:
3.4%
4.2% PT margin
7.1%
10.3%
Net income:
$770M
$1B
$2.5B
$4.2B
ROIC:
10.7%
11.5%
11.9%
18%
36 mths
48 mths
60 mths
72 mths
2013
2014E
2015E
2016E
High water mark for non-fuel unit cost growth +6.2% YY
Non-fuel unit costs growth of 1-2% Y/Y
Sub inflation non-fuel unit cost growth
Op margin:
4.6%
6.1% Op margin
7.1%
PT margin:
2.8%
4.5% PT margin
6.0%
8.1%
Net income:
$1.1B
$1.6B
$2.2B
$3.0B
8%
10%
11-12%
24 mths
36 mths
48 mths
60 mths
72 mths
2015E
2016E
SOC received Dec-2009 IT Integrated Feb-2010
Four years after merger close, Delta’s PTP margin and ROIC were not that much higher than United’s in 2014
# Months Since Close
12 mths
18 mths
24 mths
Close: Oct-2010
UnitedContinental
SOC received Nov-2011
IT integrated Mar-2012
ROIC:
# Months Since Close Calendar
3
36 mths
Close: Oct-2008
Delta – Northwest
Calendar
2
24 mths
12 mths
Close: Dec-2013
AmericanUS Airways
18 mths
2014
$1B buyback (6% mkt cap)
Consensus only forecasting 240 bps of margin expansion, we forecast 500 bps 8.6%
$1B buyback (3% mkt cap) Dividend
Op margin: 11.3%
SOC targeted mid'15
12.0%
14.3%
PT margin:
IT integration Q3'15
11.1%
12.5%
9.3%
Note: Unreported years are Bloomberg consensus
Source: Credit Suisse Estimates, Bloomberg
54
We Believe UAL Can Reach 10% Pretax Margins by 2016 Consensus is only projecting 8% pretax margin in 2016 Year 4 after Merger Close
Year 6 after Merger Close
11.5%
We forecast margins at UAL will expand by 500 bps over the next two years. 11.0%
12.5% 11.4%
10.9%
We are 160 bps ahead of consensus.
9.7% 8.6%
8.1%
7.1% 6.4%
4.2%
Op Margin
4.7%
Pre-tax margin Delta - 2012
ROIC
United - 2014E CS est
Op Margin Delta - 2014 consensus
Pre-tax margin United - 2016 CS est
United - 2016 consensus
United’s revenue and cost initiatives should drive significant margin expansion over the next 2 years United unlikely to “catch” Delta and American, but we think they can close the gap We expect UAL management to provide longer-term guidance in the next 12-months – this should reassure investors
Source: Credit Suisse Estimates, Bloomberg
55
Top Domestic Markets and Market Share UAL’s hub market share is lower than DAL and AAL, but it has the most relevant network for global corporate travel
Low-Cost / Regional
Network
Top Domestic Markets & Market Share Delta Atlanta (ATL) Minneapolis (MSP) Detroit (DTW) New York (LGA & JFK) Salt Lake City (SLC) Average
Mkt Share 69% 49% 46% 22% 46% 46%
United Houston Chicago (ORD) San Francisco (SFO) Denver Newark Average
Mkt Share 41% 20% 39% 24% 49% 34%
American Dallas/Ft Worth (DFW) Charlotte Phoenix Miami Chicago Average
Mkt Share 70% 59% 38% 71% 17% 51%
Southwest Chicago (MWY) Las Vegas Baltimore Denver Phoenix Average
Mkt Share 24% 44% 61% 26% 31% 37%
JetBlue New York Boston Orlando Fort Lauderdale San Juan, PR Average
Mkt Share 21% 39% 14% 19% 36% 26%
Alaska Seattle Portland Anchorage Los Angeles San Diego Average
Mkt Share 40% 19% 62% 4% 8% 27%
Frontier Denver Las Vegas Salt Lake City Seattle Orlando Average
Mkt Share 19% 1% 2% 1% 1% 5%
SkyWest Salt Lake City Los Angeles Denver San Francisco Chicago Average
Mkt Share 29% 10% 9% 10% 3% 12%
Spirit Mkt Share Fort Lauderdale 17% Dallas/Ft Worth 4% Las Vegas 6% Chicago 3% Detroit 6% Average 7% Source: BTS website, data LTM January 2014
Top International Corporate Travel Markets
Top Domestic Corporate Travel Markets Rank
Market (incl secondary airports)
American
United
1 New York 22% 24% 2 Las Vegas 12% 10% 3 Chicago 29% 27% 4 San Francisco 12% 28% 5 Houston 11% 43% 6 Orlando 15% 10% 7 Atlanta 9% 3% 8 San Diego 15% 13% 9 Charlotte 67% 9% 10 Dallas 55% 5% **Share calculated from % of passengers from O&D reports for YE 2013
Delta
Southwest
26% 12% 8% 10% 7% 17% 63% 12% 18% 8%
Source: BTS website, Concur, Diio Mi, CS Estimates
6% 39% 28% 27% 34% 35% 21% 41% 3% 20%
Rank
Market
oneworld
Star Alliance
Sky Team
1 London 53% 20% 6% 2 Shanghai, China 10% 27% 40% 3 Singapore 11% 53% 7% 4 Beijing, China 5% 52% 24% 5 Tokyo, Japan 29% 43% 16% 6 Toronto, Canada 7% 58% 6% 7 Hong Kong 59% 18% 7% 8 Paris, France 10% 12% 63% 9 Mexico City, Mexico 14% 14% 46% 10 Montreal, Canada 9% 48% 13% **Share calculated from schedule data for TTM July 2014, ASMs into market
56
Revenue Management Critical Yield management can help maximize passenger revenue per flight Fare increases are not the only way to drive unit revenue improvement Implementing scheduling improvements such as rebanking of hubs and variable scheduling to efficiently capture demand Expanding ancillary offerings and merchandising capabilities to drive incremental, high margin revenue and increase first-class paid load factors.
Restructuring network to optimize fleet allocation and eliminate unprofitable routes/hubs Improving mix (split between high-fare and low-fare passengers) incredibly important to driving unit revenue – Business travel is price inelastic and accounts for the bulk of revenues – Leisure travel is price elastic and makes up the majority of traffic volume A4A Industry Average Passenger Yield
Y/Y% Change in Passenger Yield Network and LCC Average
17.00¢
15.0%
15.0%
16.00¢
10.0%
10.0%
15.00¢
5.0%
14.00¢ 0.0% 13.00¢
5.0% 0.0% (5.0%)
-5.0%
12.00¢
(10.0%)
11.00¢
-10.0%
10.00¢
-15.0%
A4A Pax Yield
Y/Y % change
Source: Company data, A4A, MIT Airline Data Project CS estimates
(15.0%) (20.0%)
Network Carriers
LCCs
57
Fuel Is Single Largest Cost at 30% of Operating Expenses Renewed concern over fuel price volatility given geopolitical unrest CS HOUSE VIEW 2014: $111/bbl 2015: $102.5/bbl 2016: $95/bbl We expect Brent crude to be range bound and for refining margins to continue to compress Long-term, expect Brent crude to gradually trend down given increasing supply in U.S. and stable demand Level of hedging varies by airline
Rising fuel driving global re-fleeting 1400
$3.50
1200
$3.00
1000 800
$2.50
600 400
$2.00
200
$1.50
0
$1.00
-200 -400
AAL
DAL
UAL
LUV
JBLU
Sold remaining fuel hedges at the end of the Q2, inline with US Airways policy of minimal hedging
Owns and operates a refinery and a hedge book that should reduce fuel expense by $350M for the year
21% hedged for the rest of 2014, 19% hedged for 2015 as of 2Q
41% hedged for rest of 2014 as of 2Q; previously had the one of the best hedging strategies in industry (saved $4B through hedging from 2000-2008)
23% and 27% hedged for 3Q and 4Q, respectively. ~10% hedged for H1 2015 and 5% hedged for H2 2015
$0.50
-600 -800
$0.00
New Aircraft Deliveries
Retirements
Jet Fuel p/gallon (NY)
Correlation between yield & fuel decoupling as fundamentals strengthen…
Delta’s fuel price/gallon is the lowest among U.S. carriers $3.25
Jet Fuel
$3.20
$3.50
$18.00
$3.00
$17.00
$3.15
Fuel Price per Gallon
0.87 correlation & 0.75 R squared between Jet Fuel & Airline Pricing from 2010-2013...
$3.10
Domestic Yield
DAL
$3.05
AAL
$3.00
$16.00
$2.50
... Since then, that relationship has broken down with R squared and correlation falling to 0.05 and -0.23, respectively
UAL
$2.95
LUV
$2.90
JBLU
$2.85 $2.80 $2.75
2013
1Q'14
2Q'14
3Q'14E
$2.00 $1.50
$1.00 Jan-10
$14.00 $13.00
$12.00 Jan-11 Jet Fuel 6 Mth MA
Source: Company data, CS estimates, Bloomberg
$15.00
Jan-12
Jan-13
Jan-14
A4A Avg. Domestic Yield 6 mth MA
58
Labor is Second Largest Expense at 25% of Operating Expenses Labor negotiations unresolved Wages represent 25% of operating expenses on average, and as industry profits improve, employee wage expectations elevate Rate benefits from restructuring post-bankruptcy diminishing with open negotiations, expiring contracts, and pending unionization posing risk – Historically strong Southwest labor relations have deteriorated – Pilot contract at Delta negotiable in 2016
Contract Amendable Dates for Pilots July 2014 Alaska America
– American requires single contracts to realize full merger synergies
– United flight attendants and mechanics still not under single contract – JetBlue pilot unionization decision
Delta Hawaiian jetBlue ALPA certified as collective bargaining representative in April 2014 Southwest United
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19
Wages as a percentage of operating expenses
Average employees per aircraft
31.0% 24.0%
DAL
21.2%
AAL
23.6%
UAL
120
22.6%
LUV
JBLU
102
DAL
96
AAL
UAL
66
64
LUV
JBLU
Source: Company data, CS estimates
59
Aircraft Financing Costs At record low levels Three primary financing options for aircraft—bank debt, capital markets (EETC), and operating leases. Ample availability from all sources Historically low aircraft financing costs
Historical Aircraft Financing Costs
Aircraft Financing Environment Capital Providers 2007
Record low levels
15%
2008
2009
2010
2011
2012
2013
2014F
Leasing Companies Commercial Banks Capital Markets
Range of All-in Cost for Aircraft Financing
10%
Export Credit Agencies Private Equity & Hedge Funds
Tax Equity
5%
LIBOR
New Sources of Funding Airframe & Engine Manufacturers
0% 1985
1989
1993
1997
2001
2005
2009
2013
Satisfactory — Cautionary — Major Concern
Source: Boeing, company data, CS estimates
Source: Boeing
60
Interest Rates Rising interest rates will drive up aircraft financing and leasing costs FY 13 Net Int. Exp as a % of Adj. Net Income ($M) $1,250
96%
100%
$1,184 $1,000
80% 70% 61%
$750
60%
$762
$698 $500
$250
40% 26%
20%
16%
$0 DAL
AAL FY 13 Net Int. Exp ($M)
UAL
$125
$162
LUV
JBLU
0%
FY 13 Net Int. Exp as a % of Adj. Net Income
THE CS HOUSE VIEW The Fed could become more hawkish on rates once the following conditions are met: 1. US core inflation rising towards 2% 2. US employment on track to