Royal Aeronautics Society. Vaughn Cordle, CFA

Transcription

1 Royal Aeronautics Society Vaughn Cordle, CFA Thursday, 13 May 2010

2 Fear AND Loathing In the Airline Sector- The lost decade 2

3 Incompetent management? Powerful unions that take more than their fair share? Government policies exclusive focus on consumer prices? Excess seat capacity production by the airlines? Internet transparency in pricing? Too many airlines destructive price competition? Best answer at the end of the presentation 3

4 $70 billion in inflation-adj. losses over the last decade, $63 billion in the domestic market Weak and overleveraged balance sheets Large increases in costs are on the way Optimal time to maximize share price Labor issues can be worked out Weakest airlines must merge to survive CO had to merge with UA to prevent the a UA merger with US. 4

5 Available Seat Miles (ASMs) (scheduled for the week of May 10, 2010) Relative (millions) to UA/CO 1 United/Continental 5, % 2 Delta 4,445 87% 3 American 3,243 63% 4 Lufthansa* 3,215 63% 5 United pre-merger 3,018 59% 6 Air France/KLM 2,864 56% 7 British Airways/Iberia 2,688 53% 8 Continental pre-merger 2,097 41% 9 Emirates 2,067 40% 10 Southwest 1,991 39% 11 US Airways 1,713 33% 12 Air China* 1,958 38% 13 Qantas* 1,635 32% 14 China Southern 1,316 26% 15 Cathay Pacific 1,313 26% 16 Singapore Airlines 1,284 25% 17 Ryanair 1,275 25% 18 China Eastern* 1,237 24% 19 Air Canada 1,161 23% 20 Japan Airlines* 1,130 22% 2 American/US Airways 4,956 97% Source: AirlineForecasts & OAG 5

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8 Since the early 90s HHI fell significantly to a nadir low 3 quarters (1Q07) before the credit bubble popped and one of the worst recessions on record. Easy to see why the losses were so massive for the industry during the down turn. Real average fares in the domestic-only market were 38% lower than in the early 90s, when market concentration was at a peak Anything below.2 is considered perfect competition, above.6 is considered monopoly concentration 8

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10 Regression Statistics Multiple R 0.77 R Square 0.59 Adjusted R 0.58 Standard Er Observation 75 Domesitc Q09 FARE PAX FARE 1 PAX

11 pasng rev price Predicted Actual per enpland elasticity Enplaned Enplaned Stage passenger demand Passengers Passengers Length (millions (millions Pax shr Domestic $ % 1,062 Atlantic $ % 4,335 Pacific $ % 4,942 Latin $ % 1,291 System $ % 1,132 11

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13 Passenger Yields (pax rev / RPMs) In cents and constant 3Q09 dollars Average Average Relative Year-over year % chg. 91-' * 04-'09 Change 03-'09 07-'08 08-'09 07-'09 1 Atlantic % -3% 6% -18% -17% 2 Pacific % 7% 10% -16% -12% 3 Latin % -18% 3% -16% -13% System % -15% 1% -14% -13% 4 Domestic % -17% -1% -13% -12% *2009: Three quarter avg. through 3Q09 Source: DOT Form 41 & AIrlineForecasts 13

14 U.S Passenger Airline Revenue in $millons % chng Total Revenue 145, , % Passenger Revenue 111,002 91, % Misc fees/charges/other 27,069 23, % Baggage Fees 1,146 2, % Freight 3,601 2, % Cancellation Fees 1,654 2, % Charter Pasn'gr + Prop % Mail % Percentage of total revenue Passenger Revenue 76.2% 74.1% Misc fees/charges/other 18.6% 19.0% Baggage Fees 0.8% 2.2% Freight 2.5% 2.0% Cancellation Fees 1.1% 1.9% Charter Pasn'gr + Prop 0.5% 0.5% Mail 0.3% 0.3% AirlineForecasts & DOT Form 41 14

15 Capacity Growth (ASMs) Average Yr-over-yr change Average Relative 91-' * 04-'09 Change 1 Pacific -1.5% -7.6% 12.1% 11.6% 1.0% 0.5% -0.7% -7.0% 3.4% Atlantic 3.4% -5.9% 10.8% 6.4% 7.7% 9.8% 9.9% -3.6% 7.3% Latin 6.5% 0.9% 14.3% 11.0% 6.7% 4.1% 0.7% -1.1% 6.3% -0.2 System 2.0% 0.5% 9.4% 3.2% 0.3% 3.1% -1.5% -6.8% 1.6% Domestic 2.1% 2.3% 8.6% 1.4% -1.4% 2.2% -3.8% -8.0% 0.2% -1.9 *2009: Three quarter avg. through 3Q09 Source: DOT Form 41 & AIrlineForecasts 15

16 Net Income Margins per Passenger Average Average Relative 91-' * 04-'09 Change 1 Atlantic -2.8% -0.3% 0% -21% 27% 11% -19% -6% -1.2% Latin 1.6% 4.3% 2% -12% 15% 10% -5% 2% 1.8% Pacific -3.4% -16.5% -5% -66% 53% 10% -24% -5% -6.1% -2.7 System -1.3% -2.4% -9% -24% 14% 4% -17% -3% -6.0% Domestic -1.3% -2.3% -12% -22% 9% 2% -18% -3% -7.4% -6.1 *Three quarters to 3Q09 AIrlineForecasts 16

17 Capital Sturcture Deficit Tangible Market Book Intangible Tangible Total Book equity Equity Equity assets Equity Assets to Assets 1 Allegiant 1, % 2 Southwest 9,574 5,220 5,537 14,530 38% 3 Jeblue 1,667 1,510 1,534 6,513 24% 4 AirTran ,286 21% 5 Alaska 1, ,016 18% 6 Continental 2, (277) 13,318-2% 7 US Airways 1,100 (447) 616 (1,063) 7,808-14% 8 American 2,311 (3,892) 981 (4,873) 25,525-19% 9 Delta 9, ,794 (9,722) 44,339-22% 10 United 3,265 (2,887) 2,863 (5,750) 19,952-29% Top 10 33,816 1,625 15,028 (12,950) 139,786-9% AMR/US 12,070 (3,820) 10,775 (14,595) 33,333-44% UAL/CAL 6,101 (2,390) 3,637 (6,027) 33,270-18% AirlineForecasts 17

18 Book Equity Deficit Tangible Equity Equity % of total % of total ($ millions) Deficit Deficit Assets Revenue 1 Allegiant (167) (167) -33% -25% 2 Southwest (1,588) (1,588) -11% -13% 3 Jeblue % 3% 4 AirTran % 3% 5 Alaska % 13% 6 Continental 2,833 3,607 27% 25% 7 US Airways 2,399 3,015 39% 25% 8 American 10,273 11,254 44% 50% 9 United 7,875 10,738 54% 55% 10 Delta 11,013 20,807 47% 66% Top 10 Airlines 33,321 48,349 35% 40% United + Continental 10,708 14,345 43% 43% American + US Airways 12,672 14,269 43% 42% AirlineForecasts 18

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20 2010 Revenue & Earnings Estimates Revenue Net Profit Margins ($millions) ($millions) 1 Allegiant $ 681 $ % 2 Alaska 3, % 3 Southwest 11, % 4 Delta 31,571 1, % 5 Hawaii 1, % 6 United 19, % 7 Continental 14, % 8 Airtran 2, % 9 JetBlue 3, % 10 US Airways 11, % 11 American 22, % Major Airlines $ 123,427 $ 3, % 1 Skywest 2, % 2 Pinnacle % 3 Republic 2, % United/Continental 33,584 1, % American/US Airways 34, % AirlineForecasts 20

21 2011 Revenue & Earnings Estimates Revenue Net Profit Margins ($millions) ($millions) 1 Allegiant $ 817 $ % 2 Alaska 3, % 3 Southwest 12, % 4 Delta 33,427 1, % 5 United 20, % 6 Hawaii 1, % 7 JetBlue 4, % 8 Airtran 2, % 9 Continental 15, % 10 US Airways 12, % 11 American $ 23,723 $ % Major Airlines $ 131,030 $ 4, % United/Continental 35,533 1, % American/US Airways 36, % AirlineForecasts 21

22 Enterprise Value and CashFlow CA/UAUA AMR/LCC $ millions DAL CAL + UAUA Combined AMR + LCC Combined JBLU LUV ALK Market Cap 9,900 2,870 3,320 6,190 2,340 1,120 3,460 1,690 9,570 1,590 Total Debt 16,916 6,191 9,304 15,495 10,916 4,606 15,522 3,119 3,475 1,476 MRQ Rent Annualized MRQ Rent Capitalized at 7.0x 3,136 6,412 2,268 8,680 3,612 4,788 8, , Cash (including restricted cash) 5,369 3,153 3,599 6,752 5,006 1,532 6,538 1,072 2,773 1,171 Enterprise Value 24,583 12,320 11,293 23,613 11,862 8,982 20,844 4,605 11,588 2,620 Rent capitalization multiple: 7.0x EBITDA Estimates as of 5/12/10: EV / EBITDAR ,180 1,210 2,422 3,632 1, , , ,886 1,464 2,602 4,065 1,978 1,103 3, , x 5.7x 4.1x 4.8x 5.7x 5.3x 5.5x 6.2x 6.4x 3.7x x 5.0x 3.8x 4.3x 4.7x 4.8x 4.7x 5.5x 5.8x 3.6x AirlineForecasts 22

23 Oberstar will hold hearings and has tasked the GAO to study the merger 14 high concentration city pairs DOJ makes decisions based on concentration of specific markets, not system-wide. DOT provides analysis and input DOT decides international issues and grants ATI for JVs Market Share at Top Hubs (based on Scheduled Seats) Market Continental United Combined Cleveland 64.70% 5.00% 69.80% Houston* 66.10% 1.60% 67.70% Guam 50.30% 0.00% 50.30% Denver 1.70% 42.30% 44.00% San Francisco 3.30% 40.70% 44.00% Chicago* 1.30% 36.10% 37.50% Washington D.C.* 2.60% 25.80% 28.40% New York* 23.10% 3.20% 26.30% Los Angeles 3.60% 17.20% 20.80% Tokyo (Narita) 1.80% 5.10% 6.90% *Includes multiple airports Source: OAG Schedules 23

24 Not all of the cost and revenue synergies will fall to the bottom line. Stated differently, shareholders will only capture perhaps 1/2 of the $ billion we are estimating as the base-case cost/revenue synergies UAL/CAL merger. Even at 1/2, the leverage to the bottom line is significant, which is why market values will increase significantly Timing is very good for a merger in the airline industry. Why? The window to create the most value is open, but it will start closing as labor pressures for higher wages ($3.3 6 billion) and higher airport PFC fees ($2 billion higher) and security costs ($2.7 billion by 2014) kick in. Also, higher fuel costs have become a catalyst, encouraging CEOs/CFOs to move towards protecting and enhancing shareholder value. Fuel costs in 2010 will be around $6.4 billion higher than 2009's $80 base case this year and $84 in

25 A merger will be good for the airlines, labor and shareholders. Moreover, it can benefit the consumer as the industry moves towards a more viable structure that can afford to properly invest and provide the required level of service. In the decade ending in 2009, the U.S. airline industry lost over $70 billion in 2009 dollars. Hence the need for greater concentration i.e., fewer airlines and pricing power, which does not exist in the domestic market. Herfindahl (HHI) concentration analysis : In the domestic-only segment, the value is around.14 and would increase to.18 after UAL merges CAL. Anything under.2 is considered close to "perfect competition" and results in destructive price competition where consumers capture the bulk of the value produced by the industry. However, with the joint ventures and more concentrated alliances, and the merger, pricing power will result, at least for a period of time. 25

26 DOT Airline Advisor Commission objectives: Safety: gotta say this and more money is typically the only way to improve safety. World-class aviation workforce: skill set or in terms of wages/benefits? Balancing competitiveness and viability: without mergers, the networks are not viable and will continue a slow liquidation. Securing funding: charge the airlines or taxpayers, with airlines likely paying for technology that helps the airlines. Addressing environmental challenges and solutions - carbon taxes are coming and airline passengers will have to pay their fair share. 26

27 The simple equation: World class workforce + balance between competitiveness and viability + carbon taxes + funding for ATC and aircraft technology = higher government taxes/fees, security costs, airport charges, ADS-B technology costs, and labor costs for the airlines. These higher costs must be viewed within the context of a $1.4 to $2 trillion budget deficit and Obama's need to reduce government spending in later years. Solution: Allow consolidations and mergers which will allow the industry to pass the increased costs on to consumers of the air transportation system. 27

28 Incompetent management? Powerful unions that take more than their fair share? Government policies exclusive focus on consumer prices? Excess seat capacity production by the airlines Internet transparency in pricing? Too many airlines destructive price competition Best answers in red 28