American and Southwest offered generally positive demand projections as airlines kicked off their third-quarter reporting this week, but it would be a stretch to say that the picture is clear.
"As we look ahead, demand is steady," said American Chief Financial Officer Bella Goren, in an interview. "There is less fare sale activity, which should have a positive effect on yield."
American reported Wednesday and Southwest reported Thursday. Wolfe Trahan analyst Hunter Keay calculated that American's earnings per share came in below his estimate, but "we do not believe it would be appropriate to assume it is a read-through for other upcoming airline earnings, as AMR missed our estimate on non-fuel costs, not revenue, and non-fuel costs are hard to model given AMR's bankruptcy," Keay wrote. Excluding bankruptcy costs and other items, Keay had estimated 54 cents a share; American earned 26 cents.
Southwest, meanwhile, beat estimates and CEO Gary Kelly said October revenue per available seat mile is up about 4% from the same month a year earlier. September unit revenue, by contrast, declined between 2% and 3%. "I don't think we can be sure if September was just a blip," Kelly said. "I don't think any of us can predict where the economy (will) go from here."
Deutsche Bank analyst Mike Linenberg wrote in a report that Southwest's fourth-quarter PRASM will be up 2.5% because "comparables get tougher moving through the quarter." Following the third-quarter report, Linenberg cut his full-year estimate to 50 cents a share. Analysts surveyed by Thomson Reuters are estimating 57 cents.
But J.P. Morgan analyst Jamie Baker applauded the 6.5 point PRASM improvement. Given thatDelta (DAL) has guided towards October PRASM improvement "in the low single digits," Baker wrote in a report that "the six-point sequential acceleration cited by Southwest exceeds even our own confidence that September would prove 2012's nadir.
"Coupled with Southwest's across-the-board fare increase last weekend, today's guidance may well prove a sector catalyst," Baker wrote.
Avondale Partners analyst Fred Lowrance is also optimistic. Lowrance wrote Wednesday that "RASM growth trends slowed more than anticipated during the third quarter, but evidence suggests that travel demand remains fairly robust. With earnings holding up well despite macro uncertainty and historically elevated jet fuel prices, and with more progress onindustry consolidation anticipated in coming months, we remain bullish on the airline industry."
Lowrance said Delta, which will report Oct. 24, and Spirit (SAVE) are his top picks. He saidUnited (UAL), which will report Oct. 25, "is now on the steep back-slope of the United-Continental integration." While he estimates third-quarter RASM at minus 1.7%, he rated the stockoutperform and has a price target of $25. United closed Thursday at $20.59.