Rundown Of Third-Quarter Airline Earnings: Southwest, American Airlines, Alaska Air

Includes: AAL, ALK, FAA, LUV
by: Valuentum

As followers of Valuentum know, we’re not too fond of airline stocks. We view them as merely speculative bets on changes in the macro-economy and jet-fuel prices — two factors largely out of airline executives’ control. Though we’ve made some money in our Best Ideas Newsletter entering into put contracts in American (AMR) and the Guggenheim Airline ETF (NYSEARCA:FAA) a number of weeks ago, we cover the group — to a large extent — to serve as a reminder to investors that airline stocks are merely speculative instruments and not long-term investments. Below, we summarize the third-quarter performance of Southwest (NYSE:LUV), American, and Alaska (NYSE:ALK) below:


Southwest posted a net loss in its third quarter Thursday, which compares to net income of over $200 million in the same period a year ago. The biggest contributor to the loss was an unrealized, noncash mark-down related to the company’s fuel-hedging portfolio. It’s worth noting that the airline industry is so unpredictable that in cases when fuel prices actually decline, airlines can find a way to lose money. What’s more, Southwest put up the loss on revenues that set an all-time quarterly record, $4.3 billion. As we look ahead, Southwest mentioned that booking trends remain strong and that business travel has remained stable, reinforcing our view that we are not headed for a recession in the U.S.


Valuentum followers are well aware of the bankruptcy risk inherent to American and reaped the benefits of the rapid decline in the firm’s share price in previous weeks. The troubled airline reported a net loss of $163 million in its third-quarter October 19 thanks to a 41% jump in fuel prices (this also compared to a net profit in the year-ago quarter). The airline noted that it is taking “aggressive action” to improve financial and operational performance, but we think the carrier’s probability of bankruptcy is significantly elevated over the next few years. As we’ve outlined previously here, the firm’s massive net debt load, pension obligations, and cost structure are the worst among domestic peers. Plus, Southwest’s aggressive fare prices — one-way tickets as low as $35 — will only exacerbate AMR’s dire position (the carrier’s recently announced capacity cuts aren’t enough). In a commodified industry such as that of air travel, the lowest cost provider will win — and AMR is far from that.


Alaska Air Group, arguably one of the better-positioned airlines, posted a profit Thursday for its third-quarter. The airline's performance was the best among the three reports summarized in this note. Revenues advanced 12% on record load factors and higher yields in each month of the quarter, which offset a 40%+ jump in economic fuel costs. We were encouraged by Alaska’s results — its highest adjusted quarterly profit ever — but we’re not compelled to jump into owning any airline at this time.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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