U.S. grants tentative OK for 15 air carriers to suspend service to 75 airports By Reuters


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© Reuters. FILE PHOTO: Delta Air Lines passenger planes parked in Birmingham

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By David Shepardson

WASHINGTON (Reuters) – The U.S. Transportation Department said late on Friday it had granted tentative approval to 15 airlines to temporarily halt service to 75 U.S. airports because of the coronavirus pandemic.

Airlines must maintain minimum service levels in order to receive government assistance but many have petitioned to stop service to airports with low passenger demand.

Both United Airlines (O:) and Delta Air Lines (N:) won tentative approval to halt flights to 11 airports, while JetBlue Airways Corp (O:), Alaska Airlines (N:) and Frontier Airlines were approved to stop flights to five airports each. The department said all airports would continue to be served by at least one air carrier.

The Transportation Department said objections to the order can be filed until May 28.

U.S. air carriers are collectively burning through more than $10 billion in cash a month as travel demand remains a fraction of prior levels, even though it has rebounded slightly in recent weeks. They have parked more than half of their planes and cut thousands of flights.

The department has previously granted airlines waivers to cancel some additional flights and denied others. On May 12, the department said it would allow carriers to halt flights to up to 5% of required destinations.

Under the tentative order, Delta can halt service to Aspen, Colorado; Bangor, Maine; Flint, Michigan; Santa Barbara, California; and Lincoln, Nebraska, among other cities, while United can halt service to airports including Chattanooga, Tennessee; Hilton Head and Myrtle Beach, South Carolina; Key West, Florida; and Lansing and Kalamazoo, Michigan.

JetBlue can halt flights to Albuquerque, New Mexico;

Palm Springs and Sacramento, California; Sarasota, Florida; and Worcester, Massachusetts.

Alaska can suspend flights to Charleston, South Carolina;

Columbus, Ohio; El Paso and San Antonio, Texas; and New Orleans.

Only half of eligible carriers have applied to cut more flights.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.





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Union Pacific: Cost Reductions And Improved Service Offering Will Drive Upside (NYSE:UNP)


Union Pacific (UNP) recently reported 11% EPS growth in Q1 2020 despite a 3% decline in freight revenues. The company’s operating ratio improved 4.6 percentage points compared to Q1 2019. The company’s operating expenses decreased $338 million in the first quarter compared to 2019 driven by productivity initiatives, volume declines, lower fuel prices, and lower year-over-year weather-related costs. Out of this decrease, $220 million can be attributed to productivity savings achieved in 2019 and Q1 2020.

The company showed improvement in all of its key performance metrics in Q1 2020.

Source: Earnings Presentation

Like most of the other railroads, Union Pacific is also implementing Precision Scheduled Railroading [PSR] initiatives which helped it achieve ~$590 mn in productivity savings in 2019. The company is targeting another $400 to $500 mn in productivity in 2020 which should help it cushion some of the downside from declining volumes. In addition, the company is also improving its product and service offering which should help it gain market share from the other modes of transportation in the long term.

Outlook

Looking forward, the company’s second-quarter has had a slow start with volume declining 22% in the first three weeks driven by auto production shutdowns and retail closures as U.S. demand is constrained by the pandemic-related social distancing and quarantine. I believe April will bear the most brunt with May and June sequentially better as the economy starts to open up.

Going into the back half of the year, the company will also benefit from easing comparisons. If we look at last year’s revenue progression, the company’s revenues were down 7% and 9.5% in Q3 and Q4 respectively versus down 1.3% in Q2. So, there is 570bps and 820 bps help from easing comparisons in Q3 and Q4 respectively versus Q2.

On the pricing front, management has a long term goal of price increases exceeding rail cost inflation and believes they will be able to achieve this target in the current year as well. So, pricing should be positive.

I believe that the company will see a decline in operating margin in Q2 as it will be difficult to completely offset the kind of volume declines, Union Pacific is witnessing in this quarter. However, as the decline become less severe in the back half, the company can see some improvement. Management has also guided between $400 mn and $500 mn of productivity savings this year and their benefit should become apparent as the year progresses.

However, I believe the real benefit of the company’s cost-cutting effort will be seen in 2021 as the economy recovers and the company starts seeing growth in its revenues. Management has given a longer-term operating ratio target of 55%. The company was already at 59% in Q1 2020 with a 4.6 percentage point year-over-year improvement. I believe the company should be able to reach this goal over the next two to three years given the rate at which it is achieving its cost-cutting goals.

Market share gain opportunity

One thing which I like about UNP is that it is not only focusing on cost-cutting, but also improving its product/services offering. This should help it gain market share in the long run. The company has enhanced its offering and launched various new services for its customers in recent years.

In 2019 the company started offering its coast-to-coast refrigerated service to move fresh foods with the aim to gain market share from the trucking industry. The company purchased over 300 new generation refrigerated box cars which it began deploying in late 2019.

In 2018, the company introduced its Dallas to Dock service solution for the plastics market. With a lot of plant expansions continuing and coming online in the plastics business, the company made investments in storage and transit facilities and related export capabilities.

Source: Investor Presentation

Another example is the company’s new Butler Intermodal terminal in central Iowa. In the past, containers would have either shipped via rail to Chicago and then back-hauled to Iowa or some businesses would have used trucks for the entire long haul route with no rail participation. Now with Union Pacific’s new service, a container from Los Angles is shipped to Council Bluffs, Iowa on the existing Union Pacific intermodal train and then placed in Union Pacific Manifest service to interchange with Iowa Northern railway. For the customer, the product is delivered in roughly the same time but without the use of trucks for the long haul or backhaul from Chicago.

Source: Investor Presentation

In addition to improving its logistics service offering the company is also investing in technology investments to deliver better customer experience. Union Pacific is the first railroad to offer a suite of external application programming interfaces or APIs to its customers. This allows the free flow of data between the customer system and Union Pacific’s, giving the customer direct access to their supply chain data. Using APIs has not only enhanced shipment visibility but has also reduced manual work, streamlined business transaction, and have embedded Union Pacific deep in the customer supply chain.

I believe the company will benefit from these investments going forward and its pace of gaining market share from trucking companies may accelerate.

Valuation

Union Pacific has grown its EPS by 15.62% CAGR over the last decade. Before COVID-19 hit, analysts were expecting the company to post an EPS of $9.25 in the current year and the stock was trading in mid 180s with a P/E of ~20x. The current consensus EPS estimate for FY21 is $9.02. If we assume the company can achieve a P/E multiple similar to pre-COVID-19 levels, we get a target price of $180.4, or ~10.6% upside from the current levels. This coupled with ~2.4% dividend yield and multi-year earnings growth prospects from market share gains and cost reductions make it a good buy.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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American Airlines slashes flights but has no plans to halt U.S. service By Reuters


© Reuters. FILE PHOTO: American Airlines passenger planes crowd a runway where they are parked at Tulsa International Airport in Tulsa

By David Shepardson

WASHINGTON (Reuters) – American Airlines (NASDAQ:) Co said on Thursday it is cutting additional flights this summer as travel demand has drastically shrunk amid the coronavirus pandemic.

Vasu Raja, American Airlines’ senior vice president of Network Strategy, told Reuters that the airline is cutting between 70% and 75% of flights in April and about 80% of flights in May. For this month and May it is cutting nearly 90% of its international flights.

Raja said domestic demand will remain weak into May, citing of the lack of bookings.

Still, the largest U.S. airline has no plans to halt U.S. flights entirely, noting medical workers and others who must travel, sometimes for urgent medical reasons. “We are making no plans for the cessation of flying,” Raja said. “The important thing is to provide a minimum level of essential service to customers … but we do it in such a way where we don’t burn an excessive amount of cash.”

Across the industry, at some major airports overall U.S. flights are down 50% to 70%, officials say. The number of people who went through U.S. airport checkpoints hit another new low on Wednesday at just 136,023, down from 2.2 million a year ago.

American also disclosed on Thursday that it will cancel more than 60% of its total international flights this summer, including an 80% reduction in Pacific capacity, a 65% reduction in Atlantic and 48% reduction in Latin America. American is also delaying the launch of new international routes until 2021, delaying the launch of new winter seasonal service and suspending 25 summer seasonal flights.

The cuts in May are striking. American Airlines will go from the pre-crisis typical 250 weekday flights from Washington Reagan National Airport to about 28 in May. It will shrink from close to 100 flights a day at New York’s John F. Kennedy International Airport to just 11 flights a day. At its Dallas-Fort Worth hub, American will decline from nearly 1,000 planned flights a day this summer to around 350.

The cuts are prompted by the sharp demand reduction. “Literally we have flights that are 5% full,” Raja said. Washington flights are often 10-12% full and been hurt by a big decline in government travel, he added.

Still, American has no idea when things will turn around. “If we are the bottom it is only because gross bookings have fallen to zero and they can’t go any lower than that,” Raja said. “Pretty soon we’ll even run out of people to cancel on U.S. airlines.”

American will not fly its A330 fleet through the end of the summer to conserve costs.

American has said it is eligible for $12 billion out of $50 billion in U.S. government loans and grants for the airline industry.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.





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