That’s where our perspectives diverge. If you want to go from the South to the North of France, you are most likely looking at railway tickets; if you’re going from London to Prague you’re looking at low-costs; for unpopular long-distances, you have some national carriers that are occasionally flying Embraers. The US is a different market. We’re comparing pears with apples. Key to our discussion is which model will be adopted by the growing economies. The European experience suggests flourishing companies are operating 200+ capacities, while the Embraers operators are on the verge of going out of business.
I admit the Embraers are a better choice compared to 737/A320; hence my overall bullish sentiment.
The record profitability was one timer; now everything is back to normal with capacities/guidance going down (rode $SAVE from $40 to $55 myself). Talking about American Airlines – what was the capital structure over there once again? I am bearish on oil too. Didn’t jump back on US airlines mostly due to the poor signals coming out of the latest earnings. Might be missing something. You will tell me.
The Monte Carlo was about semiconductors (dont like what the market is implying). Airlines are a different story.
Thank you for answering my questions. I will most likely add some shares on a trend reversal.
What are you even talking about the high profitability was one time? Blue chip airlines have seen three straight years of surging EBITDA 3-4x above normal levels with 2017 consensus expected to hold level for all North American airlines. Clinging to the fact that AA is BB rated (and the lone major US carrier not IG) like it’s some kind of vindication demonstrates how flimsy your argument is.
You’re still not getting it, the seats has nothing to do with distance. It has to do with route volume, airport size and network. They just flew a CS100 across the Atlantic a week ago to begin planning to open a 40 passenger route direct from London City to New York. Bombardier specifically had that route in mind when they designed the plane. Saying the E2 is better than a 737 literally makes no sense. They’re completely different aircraft for different markets. Both of which are necessary and popular. Because a route is not “as profitable” as another route doesn’t mean it isn’t profitable, regional airlines have been operating those for decades. You can’t operate Southwest with E2’s or 787’s and narrowbodies continue to outpace widebody sales over the past few years with the 737/A320 being the most popular models in the world (Europe included). By implying the failing airlines are all using regional and narrowbody jets as a differentiating factor, you’re just saying non-sensical things at this point. The strongest airlines all operate the largest narrowbody aircraft fleets.
British Airways just announced a push further into long range narrowbody service last month and long range narrowbody jets orders have been rising while widebody have almost completely ceased with production cuts beginning to take place at BA and Airbus.
Then of course there’s the fact that 40% of their current backlog is evenly split between Europe and Asia.
This is Boeing literally three months ago on the future demand need in parts of Asia:
"As for the Oceania market, Boeing expects that it will need 1,020 new aircraft valued at $160 billion over the next 20 years. They will be comprised of 800 single-aisle jets, 130 small widebodies and 90 medium-sized widebodies. It also sees no demand for large widebodies in the region. “Clearly we think that the single-aisle airplane is going to be the major airplane in the market there, said Keskar."
Then there’s this article from a quick google at home:
The point here being that literally no analyst or aerospace firm in the universe of analysts is saying there is no future need for regional jets in Asia.
The savings from the jet fuel are given back to the consumer and airliners are currently in a price war. Aren’t the fares at record lows right now? Fingers crossed AA will make it to IG as all pension funds are around the corner
I am comparing E2 to 737/A320 as they are of similar capacity. Yet, the Embraers are cheaper. Indeed, there’re a lot of Embraers flying across Europe even at the moment.
If your logic is correct and North America renews its fleet while the Chinese/Japanese continue making their planes, isnt a safer bet to go for avionics rather than ERJ? Or is this a value thesis, exploiting the Brazilian factor?
I checked ERJ’s latest presentations before starting this conversation.
Fares are actually not at record lows after hiking through 2015 and most of 2016 and load factors are high showing good capacity restraint. So that’s just generally false. Asia’s seen some pressure but North America in particular is actually seeing a good period of strength. Not sure where you got that impression. The pension fund point is a non point, particularly with rising rates.
E2 capacity ranges from 80 to 130, 737 is from 160 to 250 in most configurations. They’re completely different classes, one’s a regional jet and one’s a large narrowbody. Embraer’s are cheaper because they’re a different, smaller plane.
ERJ is a better value hands down. You’re making money off of Brazilian optics and the cycle of their development. Avionics names have a lot of widebody demand risk that isn’t priced in.
If you checked the presentations, I’m not sure how you made so many obvious misstatements about the geography of their order book, model lineup and aircraft market.
2015? As far as I remember the first hikes were announced in late 2016, around the time I jumped in. Load factors vary between airlines; admittedly quite impressive recently but there you’re bounded from above and only way now is down (so two blades edge).
737 ranges from 85 to 215; the one in the 160+ space might be more common due to strong competition from ERJ and Bombardier / lack of efficiency of flying such aircrafts, but 737 is definitely a competitor.
I was not referring to the current book, but rather new orders opportunities. Plus, as far as I remember the cancelations are a big risk to this particular industry. Anyway, I bought a chunk, might add if it goes lower / bulls take over
The current book do represent the most recent orders. It tells you what the people who actually have a clue and not L3 candidates are actually buying and from where. It also tells you where the experts see the industry headed since these things have a 40 year asset life.
While the 737 CAN be laid out as low as 85, literally not one airline in the world operates them that way because it’s completely uneconomical. Which is why I clearly stated 737 is operated >160 in most configurations. So talking about 85 seat configurations because of a google search you made just shows how clueless you are. It’s not a competitor because there are literally no airlines buying 737’s in lieu of regional jets. The last blue chip airline to do that was Delta. They literally fired those executives and the first thing the new team did was cancel the order, citing the inefficiency of the 737 for regional service and begin the renegotiating process with Embraer and Bombardier. There are also things like union regulations that stipulate a number of aircraft for each size that can be operated by each airline that you’re not even accounting for.
First hikes were in 2015: “In 2015, various airlines initiated five fare hikes but only two were matched by the country’s largest carriers, according to Farecompare.com.”
From now onwards we can only hope that everything you said is correct and everything I’ve pointed is nonsense. Lets see these 1160 deliveries in Europe alone by 2035.
what did you take away on semis? I jumped out of them last Oct/Nov was holding NVDA from 25 in 2015 and jumped out at 85 in October i think as it seemed the market had priced in a ton of growth and execution would have had to be perfect. Was a little early but looks like things are cooling off
Well hell, I’m waiting to see what they add on the earnings call. My guess is they pulled a deliveries into 4Q to hit their YE #'s and had a steeper than typical fall off (1Q always seasonally low) especially in the business jet segment. Mix was weak too with a lot of small jets. If it helps, I got hit hard on a large position but at this point I’m in set and forget mode for the long haul unless something changes fundamentally.
yea i added a bit today to avg down. Still relatively small portion of my portfolio so not overly concerned and willing to add based on what they come out with and how they perform
The action was quite strange. It went up premarket just after the figures came out. Feeling comfortable I moved on. On the second check, it was down more than 2 standard deviations while a brokerage house releasing a price target at $27(BS, was that you? Later MS set at $23). At that point it was hard to make a decision. A few takeaways:
BS said it is a long-term investment and we should treat it as one. The macro is improving with the FED about to start unwinding its balance sheet. It will flatten the yield curve and corporate borrowing will continue (although longer duration will be riskier). Demand for oil is weak; OPEC got their act together but for how long?
Results show how vulnerable/irrelevant the mighty backlog is. Indeed, at this point Embraer looks like a safe/value bet, but jumping solely on bookings is hardly a wise move. The deliveries, although weak, follow the downward trend seen recently. No drama here as long as our sell-side friend is correct with regards to the upcoming fleet replacement in the US.
Usually I don’t look for triangles and rectangles on the charts, but bear momentum seems strong at the moment. Put the political uncertainty in Brazil back to the equation and current levels doesn’t look like a hard bottom. Hence I wouldn’t recommend purchasing at this point. Buying on catalysts rather than weakness is better in my eyes.
Playing the automotive with German’s Infineon as a top pick; holding $MU and a really small position in $NVDA (Love the company; bullish in AI/AR, but current risk/reward is terrible. Might buy on weakness). Hedged with shorts on the equipment makers ($UCTT, $ICHR). Market is indeed pricing a ton of growth across the whole industry, but it seems justified.
yea I think GPUs are/have certainly been getting a lot more love lately. I do like them over the next 2-3 years but after catching ~250% on them I felt the market was heavy and dont like to get greedy. Was certainly hurting when I saw NVDA at 115ish but still comfortable with my decision. Was following MU for a while a year or so ago but never found a time I was comfortable pulling the trigger, obviously would have been a good call couldnt miss with semis last year.
The difference with backlog is that they each come with scheduled delivery dates and many of them are second generation aircraft that obviously can’t be delivered until they’re ready for manufacturing. So it won’t be surprising to see deliveries fluctuating based on those two factors, particularly until 2018 (new gen) deliveries really start to kick in. Also 1Q is typically the weakest with about 1/2 to 2/3 as many deliveries as 4Q.
Also if you map CRB index over Brazil GDP YoY growth you wind up with a very high correlation and a bottom that appears to have occured in 4Q15 with 1Q17 growth likely to post just a hair below break even. This with government spending reductions (so not stimulus driven). Plus first job adds in brazil in two years just occurred and QE taking place in BRL.
That being said, I don’t want to push this one too much harder right now given that I’m already in the hot seat. I have a pretty large position locked in for the long haul, (although only down a few percent), so for better or worse I’m along for the ride.
love it when he gets a little fire going