Flighty wrote:

You can cherry pick. How about the last 15 years? 20?

Also, where is new profitability going to come from? Nowhere much to go but down... IMO. It's a healthy industry just not an exciting investment. Granted, riding the upswing perfectly, yeah, you got me. Exciting. Time to get out though.

Tell that to Warren Buffet, who has been pouring money into airline stocks.

Good point and I don't get that. Why AAL is at 54 today versus 33 one year ago is a total mystery to me. Labor costs have increased strongly... did I miss anything? Or did the stock go up because Buffett bought it.

It hasn't been mentioned much recently, but Delta's refinery is expected to be profitable this year. From the earnings call, the CFO commented,

I think that we had said previously that the refinery was expected to be about $100 million for the year. That's probably down slightly based on the environmental compliance. I think we've got about $30 million to date. I would say it's probably going to be down slightly from that $100 million, but we're still expecting it to be profitable for the rest of the year.

Flighty wrote:

Good point and I don't get that. Why AAL is at 54 today versus 33 one year ago is a total mystery to me. Labor costs have increased strongly... did I miss anything? Or did the stock go up because Buffett bought it.

I think it's mostly an expectations game, specifically related to three things:

(1) AA management has demonstrated what most analysts apparently view as a credible path to a moderating rate of cost growth by the end of this year as the company laps union raises and begins to realize post-merger efficiency/scale economies
(2) AA was the first airline to see unit revenue trends turn back positive once it got past all the negative YOY comps related to DAL, Brazil, etc.
(3) AA management has now articulated the timing for a peak in debt levels as capex starts to slow in the next 18 months due to, among other things, deferred widebody deliveries

In Delta's case, analysts were already more bullish about its long-term prospects and had more clarity on management's financial objectives and "targets" - since Delta management loves to talk about them - so I think there has been relatively less of a "bump" as Delta has delivered on its promises. Put differently - I think Wall St was pricing in a discount on AA stock because of uncertainty and/or lack of clarity on several of the items listed above, and as those things have started to become more certain and clear, the stock has appreciated.

commavia wrote:

Flighty wrote:

Good point and I don't get that. Why AAL is at 54 today versus 33 one year ago is a total mystery to me. Labor costs have increased strongly... did I miss anything? Or did the stock go up because Buffett bought it.

I think it's mostly an expectations game, specifically related to three things:

(1) AA management has demonstrated what most analysts apparently view as a credible path to a moderating rate of cost growth by the end of this year as the company laps union raises and begins to realize post-merger efficiency/scale economies
(2) AA was the first airline to see unit revenue trends turn back positive once it got past all the negative YOY comps related to DAL, Brazil, etc.
(3) AA management has now articulated the timing for a peak in debt levels as capex starts to slow in the next 18 months due to, among other things, deferred widebody deliveries

In Delta's case, analysts were already more bullish about its long-term prospects and had more clarity on management's financial objectives and "targets" - since Delta management loves to talk about them - so I think there has been relatively less of a "bump" as Delta has delivered on its promises. Put differently - I think Wall St was pricing in a discount on AA stock because of uncertainty and/or lack of clarity on several of the items listed above, and as those things have started to become more certain and clear, the stock has appreciated.

Its also important to note, Flighty, that you really can't compare the airlines of today with 15 years ago as you seem to suggest by saying a 5 year period is just "picking and choosing". The reality is, 15 years ago, airlines were structurally unprofitable except for 1-2 Qs of the year in good years. That just isn't the case anymore. Debt is largely under control (yes, DL has mostly paid off pension debt, still a bit to go, but its debt is now investment grade, and AA does have significant recent debt). Airlines have figured out how to get more money out of customers (https://www.bloomberg.com/news/articles ... your-money). Etc. Yes, costs are increasing and somewhat outpacing revenue increases, but the airlines well incredibly well run. This is why the stocks are doing incredibly well, they are no longer seen as the dogs that they were.

Flighty wrote:

Good point and I don't get that. Why AAL is at 54 today versus 33 one year ago is a total mystery to me. Labor costs have increased strongly... did I miss anything? Or did the stock go up because Buffett bought it.

You may have missed, I don't know... sky high profitability and the realization that cheap fuel might in fact be with us for the next several years?

Flighty wrote:

You can cherry pick. How about the last 15 years? 20?

Also, where is new profitability going to come from? Nowhere much to go but down... IMO. It's a healthy industry just not an exciting investment. Granted, riding the upswing perfectly, yeah, you got me. Exciting. Time to get out though.

Some airlines still have upside potential. DL one year price target is 71 I believe and it's at arround 55 now. DL is trading only 8x it's earnings. Airlines still have the worst multiples of any industry and I don't know what it will take to get those multiples moving up to S&P averages. Plus for the time being airlines are buying billions of dollars worth of shares each year which helps keep moving the target upward. Like you I see profits declining but not enough where I believe they still can't keep buying a billion plus worth of shares every year for DL, AA, and UA.

Flighty wrote:

Good point and I don't get that. Why AAL is at 54 today versus 33 one year ago is a total mystery to me. Labor costs have increased strongly... did I miss anything? Or did the stock go up because Buffett bought it.

To quote the Wolf of Wall Street - "The first rule of Wall Street - nobody - I don't care if you're Warren Buffett or Jimmy Buffett - nobody knows if a stock is going to go up, down, sideways, or in f*ing circles, least of all stock brokers. It's all a fugazi"

Flighty wrote:

Good point and I don't get that. Why AAL is at 54 today versus 33 one year ago is a total mystery to me. Labor costs have increased strongly... did I miss anything? Or did the stock go up because Buffett bought it.

Part of the reason for the rise in share prices is that there has been a reduction, over the last two years, of more than 20% in the number of shares outstanding. They bought back a lot of stock.

I finally had time to review Delta's 10Q for 2Q 2017.

A couple interesting observatons.

Refinery generated $50mm profit for the first half of the year 2017 (up from 6MM during Q1 2017), compared to a loss of 38mm for first half of 2016. Comment that higher crack spreads helped this quarter.

Other interesting thing is that at June 30, 2017 Delta had 22 A321 in operation, plus 100 on order, for a total eventual A321-200 fleet of 122, BUT footnote 2 of the Fleet Information table on page 29 of the 10Q reveals:

(2)  Airbus has the option to confirm delivery commitments for five additional A321-200 aircraft.

potentially bringing the total A321-200 fleet to 127. And yes all of them 'ceo' versions.
I wonder if Airbus will in fact exercise this 5 aircraft option (similar to Boeing exercising their put option for the 10 additional 737-900ER during Q1 2017, which will bring that fleet to 130).

Based on the 2Q 2017 10Q reported aircraft commitments, I went over all my numbers on the spreadsheet I have been maintaining since 2010, and have no reason to alter my current estimated aircraft commitment costs (i.e. what Delta is actually paying for each aircraft) as follows:
Total Commitment at 6/30/2017 13700M (M=Millions of USD). (This is reported figure per 10Q)
comprised of by my calculations:
B737-900 51 a/c at unit price of 42-44M each
A321-200 100 a/c at unit price of 41-43mm each
A333-900 25 a/c at unit price of 83-93mm each
A350-900 25 a/c at unit price of 120-132mm each
CS100 75 a/c at unit price of 24-28mm each


Comments: Commitment using midpoints of my estimated per aircraft unit prices total 13492M. Delta has not for many years disclosed any financially significant deposits placed at time of order which leads me to conclude their early deposits are under 3% and more likely closer to 2% (unlike United and American which disclose deposit figures in the 3.5-5.5% range. External auditors would require Delta to reveal advance deposits if they were ''material''. IMHO Delta's credit rating allows it to order aircraft on the strength of its signature on a contract for the most part. More substantial pre- delivery deposits by my estimation only take place at actual start of production of their SN#'s, which in the case of the 737-900ER and the A321-200's is generally IIRC within 2 months of delivery, so I add about 200-320M in pre-delivery deposits on B737-900ER and A321-200 (i.e. about 5-8 aircraft are by my estimate in advanced production process at 6/30/2017 for deliveries during July and early Aug 2017). This 13492M + mid point 260M totals a number very close to the 13700M commitment figure disclosed in Delta's financial report as of 6/30/2017.

I was reviewing all the press releases on the Delta A321-200 orders, re-orders and supplemental orders including the 30 ordered on May 11 2017 and the additional 10 added on June 20 2017 bringing the total in operation and on order to 122. I am reading a statement that the last of the 122 (or is it 127? if Airbus exercises their option to have Delta take a further 5 units, as disclosed in Delta 2Q 2017 10Q) of these ceo a/c get delivered in 2021.

I did not realize that Airbus plans on keeping its ceo production lines running for another 4 years! I would have thought that by 2019. or 2020 at the latest, all production would have shifted to the neo versions. Or are they keeping sites like Mobile producing only ceo's until the full backlog is exhausted? while other sites will only be producing neos by that time. Any clarification would be appreciated.
Thanks
J

coronado - thanks for your interesting analysis.

(plus,love the Yooper logo).

Any insight into how favorable this pricing is whether one is really a better "deal" than the others?
At first glace the A330-900 & CS100 stand out as pretty substantial discounts.

When Delta ordered the incremental 10 A330-300 IGW back in Q3 2013, I calculated a commitment cost of about 87M each. When Delta during Q4 2014 placed the order for the 25 A350-900 and the 25 A333-900, my calculations indicated that a pair (1 x 359 + 1 x 339) was costing Delta right around 210-220M. This number is mathematically derived from the reported quarterly figures. But then how to allocate this figure between A359 and A333?. initially I allocated this in a ratio of approx 95M+-5M for the A339, which would leave about 120M+-5M for the A359. From some subsequent articles in the press there was a lot of speculation that in fact Delta was receiving launch pricing on the A339, and getting them for prices very similar to what they had paid for the A330-300 IGW's. Clearly the A339 is not as ''hot'' in the market place as the A359. For Airbus IMHO the A339 order from Delta is more significant in the scheme of things to establish that program's credibility. I subsequently adjusted my 210-220M cost budget for 1x359+1x339 to a number breakdown closer to 88M +-5M for the A339 and 126M+-5M for the A359.

Each subsequent quarter when I analyze the make up of the quarterly commitment number I tend to be able to detect if my component figures are drifting because of an incorrect assumption by throwing in some different assumed costs.. I have not had to adjust these much since I started the spreadsheet-some minor tweeks, but percentage wise not material. I will be looking with interest at Q3 and Q4 2017 reports due to the deliveries taking place and scheduled to take place for the first 4-5 A359. That will help validate my estimates for the cost allocation for the A359. If I am low in my 126M+-5M estimate for the A359, I should be able to detect this in the changes to the commitment balance. But the corollary is then this would necessarily mean that I am too high in my 88M+-5M estimate for the A339!

Say Yah to the U.P, Eh!