PA

Why Airline Stocks Are So Often Bad Investments

The RASM Surge; Estimates Improved
Despite anticipated demand softness, industry RASM is expected to surge
starting in September, lifting estimates along the way. While airline shares tend
to seasonally find traction starting in November or December, we suggest
positions instead be established before the release of September demand data.
• All Eyes on RASM – With fuel prices at manageable levels, demand trends
are expected to retake center stage. Starting in September, we expect system
mainline RASM to exceed 10%, remaining there until well into 2009.
• We Are Boosting Our RASM Estimates – On an ATA basis, our Q3
system mainline 5% rises to 7%, Q4 10% to 11%, and 2009 8% to 9.5%.
• Our Forecasts Are Actually Conservative – Should August~December
sequential trends mirror those of 2007, Q4 RASM would exceed 15%. But
we’re modeling just 11%, reflective of anticipated demand softness. Put
differently, supply is exiting the industry at a far greater rate than
demand has ever softened, ex-9/11.
• Our 2009 Forecast Is Similarly Diffident, Yet Shares Look Cheap – On
an ATA basis, 2008 RASM is expected +7% on a 2% decline in capacity. For
2009, we anticipate 9.5% RASM on a 6% decline in capacity. Yet despite
this implied demand erosion, shares in many names are trading at or below
5x EV/EBITDAR.

Why Airline Stocks Are So Often Bad Investments

AIRLINES ARE NOW GREAT INVESTMENTS.....tight capacity, lower fuel cost, and additional charges will generate lots of free cash flow.