August 3, 2009
Airlines
2Q09 Review: De-Risking
Could Drive Near-Term Rally
Updating Estimates: We have adjusted our estimates
on the back of 2Q09 earnings. Though we remain below
consensus in 2009 across many of the airlines we cover,
we see few catalysts for major downward revisions in
the near-term; thus, we continue to believe that buy-side
expectations are troughing – supportive of a near-term
rally (see Expanding Survivor Bias: Overweight CAL and
DAL 7/2/09). However, we maintain our In-Line Industry
View due to our belief that a muted demand rebound in
2010 could pressure already weakened liquidity
balances at higher risk carriers.
Preview vs. Review: 2Q09 results were largely
characterized by inline/better-than-expected results
(Page 5) and conservative forward commentary. While
we generally underestimated carriers’ abilities to control
costs in 2Q, company guidance was broadly consistent
with our view of a near-term bottom in demand followed
by a weak rebound. Though we expect sell-side
consensus to fall as a result of updated guidance, we
believe buy-side consensus is already far closer to our
below-consensus estimates. As a result, we believe a
number of factors are actually supportive of airline
shares in the near-term including: (1) Liquidity trends
were slightly better than expected in 2Q; (2) Mgmt
commentary confirmed that demand has likely
bottomed; (3) The overhang of possible bad news
around 2Q earnings is now behind us.
What’s next? Monthly traffic reports are likely to
confirm that revenue trends likely bottom this summer –
which we expect to support shares of all airlines with
outsized benefit for the most distressed names.
Longer-term, we remain concerned that the following
issues are likely to weigh on the airline equities and thus
we maintain an In-Line Industry View: (1) a tempered
rebound in 2H09 is likely to see oil rise sooner and faster
than airline revenues adding risk to already seasonally
weak fall/winter cash flows and/or (2) an anemic 2010
rebound in demand could trigger a liquidity squeeze at
the highest-risk airlines.