WSJ: WN's upgraded growth plan sends US airline stocks down

[WorldTraveler]

Most US airlines recorded some of their largest single day losses in months... and in AA's case since new AA emerged from BK.

"A slight increase in Southwest Airlines Co. s growth plans fueled a broad selloff in airline stocks on Wednesday, highlighting investor jitters that cheap fuel could cause U.S. carriers to oversupply the market.

"Recent competitive discipline has helped the industry reach record profits, but Southwest said this week it plans to increase capacity by 7% to 8% in 2015, up from its previous 7% estimate."

article available on the WSJ under "Southwests Upgraded Growth Plans Stir Airline Stocks and Prices Tumble"


the problem with what WN is saying compared to reality is that WN's growth at DAL accounts to just over 4% of WN's capacity while they are pushing their system growth to near twice that amount.

Analysts also don't like seeing airlines growing significantly above US GDP growth rates.

WN's growth rate, one of the fastest in the industry, is about 3x faster than GDP growth.

WN's growth is HALF driven by DAL and Wall Street is clearly saying that WN - which is adding more capacity than any other airline - is growing too quickly for WN and the industry's sake.

The fact that industry RASM was down in April and is expected to be weak for several months provides proof to Wall Street that too much capacity is entering the market.

AA's comments that they will reduce fares in order to maintain and protect share provides further concern.

 

[WNMECH]

May 29, 2015
Southwests CEO Went on Mad Money and Didnt Crater the Airline Sector

http://m.barrons.com/articles/BL-SWB-38460


It wasn't WN changing growth from 7% up to 8% that spooked the market.
It was Doug Parker saying they were going to have a price war.


http://www.cnbc.com/id/102711641?__source=yahoo%7cfinance%7cheadline%7cheadline%7cstory&par=yahoo&doc=102711641

 

[WorldTraveler]

here's what the big 4 stocks looked like for the month

http://finance.yahoo.com/echarts?s=DAL+Interactive#{"comparisons":"AAL,LUV,UAL","comparisonsColors":"#cc0000,#009999,#ff00ff","comparisonsWidths":"1,1,1","comparisonsGhosting":"0,0,0","range":"1mo","showPrePost":false}

 

[WNMECH]

The one year comparison is interesting also, even after this latest correction.
LUV is up 38.71%
UAL is up 16.9%
DAL is up 5.27%
AAL is up 2.79%

 

[WorldTraveler]

Since the topic and the comments were made within the last month, a one month graph of stock performance is more relevant to the topic.

WN stock has done well as its financial performance has returned to traditional levels after the merger.

 

[WNMECH]

Since the topic and the comments were made within the last month, a one month graph of stock performance is more relevant to the topic.

WN stock has done well as its financial performance has returned to traditional levels after the merger.

The one month graph is only more relevant if you want to pretend that DAL stock is preforming better than the other big three because it didn't take as big a slide this past month.
The one year comparison chart clearly debunks this and shows a better example of how the stocks have preformed.
It also shows, as I pointed out, the correction didn't effect LUV as much as others over the year and DAL didn't drop as much because they didn't rise as much as others over the past year.
Very relevant to the topic and comments.

 

[WorldTraveler]

the one year graph has nothing to do with the comments that you want to do.

the last month does.

The real story of airline stock valuations is that the legacy carriers are worth as much as they have.

If you recall, it wasn't much more than 10 years ago that the entire value of every other airline stock in the US put together was still less than WN.

Now, the legacy sector has recovered dramatically, DAL is the most valuable airline stock in the western world, and AAL is not far behind. WN is a very well run company but it is being challenged by other carriers that are generating financial performance that is on par with or with WN which is why other airline stocks are doing as well as they are.

AAL just like LUV has had a nice boost but most analysts are not saying that LUV is undervalued any more.

and specifically after concerns about excess capacity growth, WN's stock price will likely be pressured until they can prove that they can deliver financial performance that EXCEEDS the rest of the industry.

for now, WN is fairly valued relative to other US airlines and WN's market cap makes it the 3rd onlargest airline, ahead of UA but behind DL and AA

btw, here is a prospective on valuation of ALK, DAL, and LUV stock.

http://www.investopedia.com/stock-analysis/052915/best-airline-returns-delta-southwest-or-alaska-alk-dal-luv.aspx?partner=YahooSA

 

[WNMECH]

If you recall, it wasn't much more than 10 years ago that the entire value of every other airline stock in the US put together was still less than WN.

Now, the legacy sector has recovered dramatically,

If YOU recall, every one of the largest airlines went bankrupt (including Delta), and All THIER STOCKS became worthless. That was how they recovered.

All except WN.

Its stock has never lost its value.
No stockholders were ever left holding worthless stock.
No creditors or taxpayers were screwed by WN.
No employees were forced to take massive concessionary contracts with a (bankruptcy judge) gun to their heads.

The stocks that the other majors have today were not around about a dozen years ago.

You want to compare stock values?
You refuse to acknowledge the security that LUV stock has held (and still does) for over 40 years.

How about you show the prospectus of the majors when they all went bankrupt.

 

[WorldTraveler]

no, their RECOVERY was based on developing solid business plans.

BK doesn't rebuild a company. A solid business plan does.

The reason why DL stock has done as well as it has is for the very same reasons WN stock has done well for decades.... DL has been solidly profitable for years since BK, DL has been very careful not to undo the benefits it gained in BK, and DL has rebuilt the customer and employee elements of the DL culture that allowed DL to succeed.

and you also fail to note that the reason why WN did not need to file for BK is because WN's costs were so much lower than the legacy carriers for decades.

IN the year 2000, WN's average salary was $40,000 while UA's average salary was $54,000 and DL's was over $60,000.

further, in 2000, WN outsourced 65% of its maintenance compared to 17% for UA and 21% for DL.

America West in 2000 outsourced 73% of its maintenance and paid an average salary of $37,000.

WN average salaries passed DL's only in 2005, AFTER UA and US had already filed for BK, AA had already pushed down its own labor costs by 5% in its out of BK filing, and while DL was trying to keep out of BK itself.

SO, no, the reason why the legacy carriers had to file for BK was because the low cost carrier's costs were so much lower than the legacy carriers who had built their business models on providing long-term employment with defined benefit pension plans and doing most of their business functions in-house.

WN started from the very beginning with a completely different business model of not providing DB pensions or doing most of their maintenance in house; WN has NEVER done more than half of their maintenance in-house.

It has not been hard for LUV to be a winner in the marketplace when it was built around attacking the fundamental and costly employee driven fundamentals that the legacy carriers used as part of their business model.

and now that other carriers including AS (which is a legacy carrier as well) and DL are running their businesses with the same principles that made them strong long before WN ever came along and which WN itself copied from them because those legacies quit succeeding at their own strengths (DL for decades had the lowest DOT consumer complaint ratio before WN), WN is the one that Wall Street no longer views as the strongest financial performer when compared side by side with AS and DL which most analysts would agree are the 3 strongest airlines in the industry.

You can hang on to your 40 your track record if you would like where WN's costs were so much lower but today and the future is what counts. Even with higher costs, other carriers are outperforming WN in a number of financial metrics. TODAY.

 

[WNMECH]

Complete BS.

Their recovery was only based on shedding debt in bankruptcy.
The creditors had to take less and restructure debt or get nothing but scraps after liquidation.

You are still in denial over the Delta bankruptcy.

Go ahead and tell me why their great business model kept them from going bankrupt.

The rest of your post only shows how little you know about why WN is still successful and will continue to have strong balance sheets.

WN leaves a billion dollars in bag fees on the table because they can.
If your precious Delta or the other big three did the same, they would be right back in bankrupt court soon enough.
Fuel won't stay this low forever to prop up your bloated legacies.

WN has a true proven low cost method that has proven itself for decades.
They are not in it to have roller coaster profitable years and the go to bankruptcy court.
They are in it for the long haul and short sighted gains at the expense of long term success, don't make the cut.

If you, and certain spooked analysts, don't understand the long term goals outweigh short term spikes, you will never understand why WN just keeps on growing and growing TODAY.

 

[WorldTraveler]

I am in denial of nothing and it speaks volumes about your understanding of the industry (really lack thereof) for you not to realize that WN's costs were for decades far below the legacies and it is precisely for that reason that the legacies had to file for BK.

The nail in the coffin was that high legacy labor costs and a drop off in business traffic (which WN did not largely carry) post 9/11 forced the legacies to suspend their fuel hedges while WN had the financial strength to maintain them and used that fuel cost advantage to add on to the labor cost advantage it already had.

Each of the legacy bankruptcies involved cutting labor costs, debt costs, and increasing revenue. DL said in its BK, about 1/3 of the savings came from each of the 3 areas.

The reason why DL has done as well as it has done is because it has become THE premium fare US carrier in the US. Before BK, DL had domestic average fares per mile that were 15% BELOW the industry while today DL's average fares per mile are 15% ABOVE the industry.

It is ABSOLUTELY VERIFIABLE that WN's labor costs were far lower than the legacy carriers because it was a younger airline, had more outsourced maintenance, and had no DB pension plans.

the fall in the stock market after 9/11 made nearly ALL DB plans no longer viable because the cost of supporting them became more than the companies could bear. WN simply did not have that cost or the cost of running maintenance bases around the country that employed thousands of employees.

you can hold onto the bag fee argument if you want but the biggest reason why the legacy carriers have them is because the taxes on them are far less than they are on tickets. The federal government itself has created a structure where it is more favorable for a company to collect ancillary fees than it is for them to buy a ticket with everything bundled in. it is for that reason alone that Spirit and the ULCCs do as well as they do.

and yes I absolutely understand the long-term.

WN had a golden model which involved lower employee costs and that advantage is being wiped out. Legacy carriers are handing out far bigger pay raises, getting higher average fares even on competing domestic routes with WN, an the legacies are still reporting profit margins and other financial metrics as good as or better than WN.

If I am as wrong as you think I am, then you should have no problem getting new contracts with pay increases as large as the legacies and WN's stock value should be far higher than the legacies... but those things aren't happening.

The legacy carriers are winning at the game which WN created and built for 30 years and in which WN, not the legacies, are now playing catch up.

 

[WNMECH]

More BS and denial from you.

Our wages and benefits have been far and above the legacies for some time and hold little to no fuel hedges. We forgo a billion dollars a year in easy bag fees and the legacies outsource more and more maintenance.

If you are correct, but you are not, WN is being beaten at it own game and will be headed to bankruptcy court soon. Driven there by your so superior legacies management skills. We don't stand a chance.

Don't hold your breath.




By the way, our costs are STILL lower than the legacies, and we continue to grow, spread into legacies territory and take market share.
That is why your topic title is wrong and why the stock market is really spooked on airline stocks.
When we expand, legacies have to lower fares and lose profits.
It's not growth they are afraid of, it's competition.

 

[WorldTraveler]

Ten years is how long WN's average salaries have been above the legacy carriers.

It was AFTER the legacy carriers filed for BK that their average labor costs fell below WN's.

The reason why the legacy carriers filed for BK was because of labor costs which were at a disadvantage relative to low cost carriers including WN.

The legacy carriers did have debt which they discharged in BK but you clearly don't understand BK if you think that was simply wiped out.
Debt is exchanged for equity in C11. And most aircraft debt was not wiped out because aircraft values were pretty close to in line with market values.

Yes, your costs are lower than the legacies and so are your revenues. If the revenue was so much higher, then WN's profit margin would be too - but it isn't.

The reason why WN's costs are lower despite higher salary costs is because WN does not operate a hub and spoke route system; the legacies are less efficient because they carry more connecting passengers which require more employees to generate the same amount of revenue.

WN's cost advantage is because of efficiency due to a simpler business model.

AA and DL have been posting very similar gross profit margins to WN in recent years showing that they have been able to get their costs in line with their revenues.

I LUV your comment about competition.

WN is the one that has left one DL market after another while WN is the carrier that is fighting to keep competition OUT OF DAL. Your statement could not be more hypocritical if you tried.

 

[WNMECH]

Ten years ago WN was not in Atlanta but it is now our eight biggest city.
Ten years ago delta dehubbed DFW.

Delta ran from the completion not WN.

 

[WNMECH]

How about you list all these delta markets that WN left.
And I don't want to see you list AirTran routes that were served with a hub and spoke system that WN would never fly as feeder routes.