UAL

Valuentum Economic Castleâ„¢ Rating Update

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Read: Keeping the Horse Before the Cart: Valuentum’s Economic Castle™ Rating The Economic Castle Focuses on the Magnitude of Economic Value Creation The Valuentum Economic Castle™ rating is an enhancement of the competitive advantage framework (commonly known as economic moat analysis) that has become widespread and ubiquitous within the investing world. Whereas an economic moat framework evaluates a firm on the basis of the sustainability and durability of its competitive advantages, Valuentum’s Economic Castle™ rating evaluates a firm on the basis of the firm’s future economic profit spread (return on invested capital less its weighted average cost of capital). The companies with the strongest Valuentum Economic Castle™ ratings are poised to generate the most economic value for shareholders in the … Read more

The Dichotomy of Airlines and Aerospace

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On Monday, top insurance idea AIG (AIG) announced that it would sell International Lease Finance Corporation (ILFC) to aircraft leasing firm AerCap Holdings (AER) for $5.4 billion, consisting of $3 billion in cash and the balance in newly-issued AerCap common shares. Though we think ILFC was one of the crown jewels of AIG’s business particularly considering the prospects for global air travel demand in coming years, the price is fair and opportunistic, especially since AerCap is risking its investment-grade status to facilitate the deal. We don’t think better terms could have been had by either party, given financial constraints, and shares of both entities are moving higher on the news. The combined AerCap-ILFC will be #2 on the world stage … Read more

Why Airline Stocks Are Not Long-Term Investments

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The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down. — Warren Buffett, annual letter to Berkshire Hathaway shareholders, 2008. The airline industry has undergone meaningful changes since the beginning of the last decade. The painful restructuring of labor agreements and balance sheets by most of the legacy carriers via Chapter 11, the significant mega-mergers of Delta (DAL)/Northwest, UAL (UAL)/Continental, US Airways (LCC)/America West, … Read more

Market Overreacts to Heat Damage on Boeing’s 787 at Heathrow

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Boeing’s (click ticker for report: ) shares tumbled a few percentage points Friday after reports of a fire in the upper part of the rear fuselage of one of Ethiopian Airlines’ 787 Dreamliners that was parked on the tarmac at London Heathrow Airport. Preliminary results of the investigation reveal that the fire (heat damage) was not caused by the plane’s lithium-ion battery (location of batteries shown here), which had been the trigger of previous fire-related incidents on the aircraft. Interestingly, the plane had been parked for as many as eight hours and was unoccupied, leaving the cause of the blaze unidentified (unwitnessed) and somewhat peculiar. We expect the aft fuselage on this 787 to be a total loss, given our assessment … Read more

Delta Buys 49% of Virgin Atlantic Airways

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As we touched on last week, Delta Airlines (click ticker for report: ) acquired a 49% stake in Virgin Atlantic Airways from Singapore Airlines for approximately $360 million. The deal seems to make sense for both parties, as it gives Virgin better access on US routes and Delta access to London’s Heathrow airport. The valuation, a haircut from what Singapore paid, doesn’t seem unreasonable, in our view. Given Delta’s semi-decent balance sheet, we doubt the deal will materially impact financial standing. One would think the market really likes the deal, given that shares of Delta are up more than 6%. However, we believe the airline market is rallying on reports that the rumored merger between AMR Corp (American Airlines) and US … Read more

Spirit Airlines Retains Cost Advantage, AMR and United Continental Trail Peers

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In the commodified airline industry, the lowest-cost provider often dictates the price for any given route, and real pricing growth continues to elude this troubled industry. As a result, efficient and low-cost operations are paramount to success, and in many cases, essential for long-term survival. The primary metric used to gauge the cost structure of an airline is cost per available seat mile (CASM) — or the cost to fly one seat one mile, whether it’s occupied or not. Unfortunately, comparing one airline’s consolidated CASM with that of another offers little insight into which airline is truly more cost efficient, as some carriers sport regional operations and others vastly different route structures and fleets. To really compare the cost structures … Read more

United Continental and US Airways Troubled by Fuel Costs

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United Continental (UAL) reported a second-quarter net profit of roughly $1.49 per share Thursday (net income fell 12%), excluding special items, with passenger revenue advancing over 10% compared to the same period a year ago – unit passenger revenue improved 9% from the prior year period. The airline continues to face the burden of rising fuel costs, as second-quarter fuel expense increased a whopping 45% on a year-over-year basis. Unit costs, excluding special items advanced over 11%, driving lower profits from the prior-year period. We view United Continental’s liquidity position as adequate, with $8.6 billion in unrestricted cash, cash equivalents and short-term investments on hand as of the end of the second quarter. We’re also quite pleased with the carrier’s continued … Read more

Yield Outlook Deteriorates for Airline Stocks

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This article appeared on Seeking Alpha. Please view disclosures: https://seekingalpha.com/article/280098-yield-outlook-deteriorates-for-airline-stocks As we had outlined in our industry primer for airlines, the yield (pricing) environment for the group is treacherous and remains under perpetual pressure. The International Air Transport Association [IATA] released its July 2011 Airline Business Confidence Survey. Importantly, the IATA commented on the outlook for yields, which we reproduce below: While both passenger and cargo transport businesses saw improving yield performance during the second quarter of 2011, the trend is flattening. With demand-supply conditions weakening and concerns that markets may not bear further fare/rate rises, prospects for yields over the year ahead look flat. With over 80% of respondents reporting increased input costs during Q2, clearly high fuel costs have … Read more

What Does $150 Oil Mean for Airline Stocks? New 52-week Lows.

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This article appeared on Seeking Alpha. Please view disclosures: https://seekingalpha.com/article/277933-what-does-150-oil-mean-for-airline-stocks-and-the-airline-etf-expect-new-52-week-lows In “Get Ready for $150 Oil,” Barron’s predicts an oil shock will occur in spring 2012, with the black commodity reaching a record average monthly price of $150 per barrel, with spikes to $165 and $170 along the way. If this prognostication proves correct, airlines are in for a world of hurt. Before we get started on just how painful this shock could be, we invite airline stock speculators to take a read of our industry primer on the airline industry.  Jet fuel prices generally represent the largest component of an airline’s cost structure, and we estimate that for every $1 increase in the price of crude oil, it costs the global airline industry about $1.5 to $1.7 billion more. … Read more