) -- Airline shares are closing out a bumpy week as the vision of a finally rational industry was challenged by disappointing unit revenue numbers from two major carriers.
reported that March revenue per available seat mile gained 2%,
of 4%. On Wednesday,
reported flat March PRASM,
of 2% to 4%.
The two airlines both put some of the blame for lower PRASM on the sequester, suggesting that it reduced travel. Delta also listed a variety of other factors, including the impact of a weakening yen as well as "lower than expected demand as a result of our attempt to drive higher yields, and temporary inefficiencies during implementation of new revenue management technology."
The disappointments triggered share price declines throughout the sector. Delta closed Thursday at $14.75, down 10% for the first four days of the week. US Airways closed Thursday at $15.69, down 7% in four days.
closed at $29.30, down 6%, while
was down 4% at $13.47. Among the major airlines, only
was up, closing Thursday at $25.51, a gain of 1% in four days.
Late Thursday, JP Morgan analyst Jamie Baker wrote in a report that the industry is facing "continued, uninspiring demand, exacerbated by the impact of sequestration," but noted that fuel prices have fallen 25 cents per gallon since February's peak. As a result, he said, his estimates have changed little.
Still, Baker believes the impact of sequestration is real. "Government demand for air travel contributes 3% to 4% of industry revenue, and is estimated to have declined by as much as 30% in the past month," he said. Plus, there's the downstream impact to consumers that rely on government funding. And yes, that likely means negative monthly RASM for some, such as US Airways in April."
In general. airline analysts including Baker are sticking with the carriers, making the case that the industry has in fact been transformed by three key recent changes: consolidation, rational capacity management and the introduction of the ancillary fee model. CRT Capital Markets analyst Mike Derchin argued in a recent report that the group's multiple, currently around 4.7, ought to be between 5 and 6.5.
Derchin slightly reduced first-quarter estimates for Delta and US Airways, to 2 cents and 26 cents, respectively, but he has buys on both. He also has the same $19 price target for both. He said sequestration would have impacted Delta's Atlanta hub because of the high concentration of military bases in the Southeast; Charlotte likely felt a similar impact. But it is worth noting, he said, that both carriers will report a first-quarter profit, a rarity for airlines.
Sterne Agee analyst Jeff Kaufman said Delta's failure to meet guidance was unexpected. "The airline that most investors viewed as the one without 'concerns' surprised analysts with a concern,'" Kaufman wrote in a report. But he said sequestration and "a new revenue management strategy that misfired" were both one-time events. Although he reduced his first-quarter estimate to 5 cents from 16 cents, he retained a buy on the shares and a $21 price target.
Wolfe Trahan analyst Hunter Keay said the PRASM disappointment reflects differing strategies, nothing more. "We think US Airways stimulated March traffic with low fares following a poor February, and Delta optimistically held out for higher fares following a good February," he wrote. "The sell-off in stocks this week feels well overdone and more about the stock charts than about fundamentals. What's really changed with the big picture bull thesis, after all?
Investors will have more PRASM information next week from United, which will report traffic after the close on Monday, and American.
-- Written by Ted Reed in Charlotte, N.C.
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