Credit Suisse boosted its estimates after DAL posted strong Q2 results yesterday:
RASM [revenue per available seat mile] trends continued to show improvement across all geographic entities; all in, a nice surprise relative to expectations.
A slight improvement in 3Q revenue & cost outlook drives a $40M earnings improvement; raising 3Q08E EPS to 0.10 (from $0.00); narrowing full year loss to $0.84/share (from -$1.02) accordingly. No change to our 09E EPS.
In a broader sense, CS is relatively optimistic about the airline sector. The recent sharp decline in fuel prices, if sustained, could bring relief, and combined with continued capcity cuts, could result in a return to profit in 2009:
Sector Thoughts: The AMEX airline index was up 18% on the sharp drop in crude prices, but also airlines’ plans to cut incremental capacity. WTI at $125, we like the stocks given current capacity cuts that lead us to forecast 09 profitability. WTI at $150+, we’ve disliked the stocks despite upcoming capacity cuts because more needed. It looks like more cuts in fact are on the way, which means airlines should find deeper profitability if crude at $125 & potentially claw back to profitability even w/ crude at $150 (assuming no recession).
The “no recession” assumption is, of course, a crucial caveat. That said, Credit Suisse acknowledges that, going forward, there are big risks:
Looking ahead, worries that keep us cautious on the group include the rapid economic deterioration in the EU (w/ int’l demand a key revenue pillar at risk); looming decline in corp travel spend; & getting thru hurricane season w/out a WTI super spike. That said, Ch. 11 not a solution for carriers, cutting more capacity is, which is why we’re not predicting Ch. 11 filings at this point.
DAL remains rated Overweight and target stays at $9.00.
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