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US airlines' first quarter earnings preview: Will the revenue gains persist?


The first quarter is complete and US airline earnings statements are being prepared. Analysts are already weighing in. Barclay’s Capital sees an upside for revenues in the current capacity-controlled environment, according to a research note released this week. The company cited United, Delta and American as top picks for investors.

Meanwhile, Dahlman Rose has updated its Alaska Airlines guidance positively.

Opportunities for increased revenues

“Recovery to date has been impressive, but the industry's current revenue relative to GDP is very normal,” said the company. “More importantly, in a capacity controlled environment, we see upside potential along two dimensions, expansion in non-ticket revenue generation, and re-capturing 'wallet share' of travel spending. Against what we believe is still an improving industry backdrop, we continue to see compelling upside potential from current levels across the sector. Top picks remain UAL, DAL, and AMR.

It noted that small changes have a meaningful impact on revenue generation citing the fact that for every 1% share shift back to the airlines industry, there is a 6% gain in industry revenue, or USD20 per barrel in energy equivalent.

Barclays continues to describe the economy as tepid, noting that revenue projections have been causing concern as some fare increases have failed. Airlines are still trying to boost fares here and there and the company suggested that its revised expectations track with historical norms relative to GDP.

“We believe the industry will continue to benefit from non-ticket revenue in new ways that effectively allow the industry to better segment demand,” it said. “We also believe the industry has the potential to expand its share of the travel wallet looking forward and regain some of the share it lost following 9/11. In fact, the industry looks to be performing much better on that front since the beginning of the recession, possibly due to the non-ticket revenues.

“We do not believe non-ticket revenue generated to date is purely incremental,” it continued, “but we do think it is allowing the industry to better segment demand and creating net benefit. Looking forward, we see the potential for the industry to drive more net gain from these non-ticket revenue streams.”

Alaska 1Q strong

Citing Alaska’s reports of a strong March and first quarter despite double digit capacity growth, Dahlman Rose Analyst Helane Becker revised the airline's first quarter and 2011 EPS estimates. It is now forecasting EPS of 63 cents per share, nine cents higher than its previous estimate and well above the consensus at 58 cents per share. For the year, Dahlman Rose is forecasting an EPS of USD7.10, up from its previous estimate of USD7.03 but below consensus at USD7.36.

Traffic grew 17.1% on a 12.5% increase in capacity for March for Alaska Air Group. Ms Becker indicated that implies a 86.5% load factor. Mainline traffic grew 19.3% on a 15.3% capacity increase bringing in a load factor of 87.4%. As Horizon pulls back as it restructures, traffic declined by only 0.1% on 7.5% decrease in capacity. She reported that first quarter traffic grew by 15.9% on 12% more capacity for a load factor of 82.5%.

“Management expects unit costs excluding fuel to be down by 6% - 7%, unchanged from prior estimates,” she said in her research note. “Jet fuel is $2.90 per gallon on 11% increase in gallons consumed also unchanged from prior guidance. Unit revenue in the quarter is expected to grow by 3% - 4% and is the first time management has given 1Q2011 guidance.”

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