US Airways' International Passenger Yield: US Airways' International Passenger Yield decreased from $0.162 in 2008 to $0.128 in 2009 before rebounding to $0.181 in 2012 as a result of airlines passing high fuel prices to passengers. We expect this figure to increase to $0.207 by the end of the Trefis forecast period. However, if this figure increases to $0.223 due to stronger economic activity and constant pressure from fuel prices then there could be a potential upside of around 5% to the Trefis price estimate.
If however due to competitive pressures, passenger revenue remains stable at current levels then there could be a potential downside of around 4% to the Trefis price estimate of US Airways' stock.
US Airways Group, a Delaware corporation, is a holding company whose primary business activity is the operation of a major network air carrier through its wholly owned subsidiaries US Airways, Piedmont Airlines, Inc. ("Piedmont"), PSA Airlines, Inc. ("PSA"), Material Services Company, Inc. ("MSC") and Airways Assurance Limited ("AAL"). MSC and AAL operate in support of its airline subsidiaries in areas such as the procurement of aviation fuel and insurance. Effective upon US Airways Group's emergence from bankruptcy on September 27, 2005, US Airways Group merged with America West Holdings Corporation ("America West Holdings"), with US Airways Group existing as the surviving corporation.
US Airways is the fifth largest airline in the United States as measured by domestic revenue passenger miles ("RPMs") and available seat miles ("ASMs"). It has hubs in Charlotte, Philadelphia and Phoenix and a focus city in Washington, D.C. at Ronald Reagan Washington National Airport ("Washington National").
It offers scheduled passenger service on more than 3,200 flights daily to more than 200 communities in the United States, Canada, Mexico, Europe, the Middle East, the Caribbean, Central and South America. It also has an established East Coast route network, including the US Airways Shuttle service.
US Airways' mainline operation provides regularly scheduled service or seasonal service at approximately 135 airports, while the US Airways Express network serves around 160 airports in the United States, Canada and Mexico, including nearly 80 airports also served by the mainline operation. As of December 31, 2011, US Airways operated 340 mainline jets and is supported by US Airways Group's regional airline subsidiaries and affiliates operating as US Airways Express under capacity purchase agreements, which operated 233 regional jets and 50 turboprops. US Airways' prorate carriers operated seven turboprops and seven regional jets at December 31, 2011.
The Fees and Cargo segment is the most valuable to the company because of following reasons.
Higher operating margin than core passenger travel business
US Airways earned around 49% EBITDA margins on its Fee and Cargo business in 2011 and only 10-13% margins on its core passenger operations. Marketing initiatives that contribute to an increase in ancillary business revenue like baggage handling, sale of mileage credits, Continental FareLock etc. have zero or minimal direct costs associated with them. These programs offer additional revenue for the firm without any significant costs associated with them.
Significant revenue growth potential as a result of product investments
During 2011, US Airways invested in enhancing its product offerings as it replaced 12 Boeing 737 aircraft's with 12 more modern and fuel-efficient new Airbus A321 aircraft's, which feature Gogo inflight internet and more first class seats. The carrier currently provides inflight wi-fi service on all A321 aircraft's and expects to deploy it on its entire domestic fleet beginning this year.
US Airways has also completed the installation of a dedicated first class cabin on 110 US Airways Express regional jets, enabling the carrier to offer more seamless same-class service, and also began the installation of the Envoy Suite, the airline's fully lie-flat business-class seats with an on-demand in-flight entertainment system. The carrier's Envoy Suite product is currently available on all seven A330-200 aircraft's and is coming to all nine A330-300 aircraft's in the near future.
Oil prices significantly impact US Airways' bottom line
Fuel expenses represent one of the largest single costs faced by airliners and account for over 30% of the costs for airlines.
US Airways 2012 forecast mainline and express fuel consumption is presently approximately 1.45 billion gallons. Based on this forecast, a one cent per gallon increase in aviation fuel price results in a $15 million increase in annual expense.
Focus on keeping prices competitive in the airline industry prevents US Airways from immediately passing on price increases to its customers, so US Airways' expenses are heavily impacted by fuel prices and their volatility.
Weak macroeconomic conditions
The main challenge the global airline industry faces during 2012 and beyond is the state of the global economy. Europe’s sovereign debt crisis has created enormous uncertainty and is expected to impact the overall profitability of the sector. Tony Tyler, IATA’s director general believes that a failure on the part of governments to resolve Europe’s issues could lead to a loss of $8 billion in 2012 for the airline industry. As a result IATA has already downgraded its 2012 outlook for profitability to $3.5 billion from $4.9 billion that was expected a few months ago.
According to IATA’s latest forecasts; North America carriers are expected to earn about $1.7 billion; Asia Pacific carriers around $2.1 billion; African airlines are expected to lose $100 million and European airlines are projected to take a loss of $600 million due to economic uncertainty and higher passenger taxes.
Cautious capacity stance
Due to rising fuel expenses and weak economic conditions, several airlines have been forced to cut back on routes. Capacity cuts that had occurred in developed markets in 2011 are expected to persist in 2012. On the other hand growth in capacity has been robust in international markets.
Domestic mainline is expected to be up only 0.5% y-o-y in 2012.
Growth in ancillary revenues
With profitability declining for the overall airline sector, many of the carriers are figuring out ways to improve income by increasing ancillary forms of revenues. Baggage fees have been one of the main drivers of profitability for many airlines. Airlines are adding various new features to help boost revenues such as WiFi, in-flight entertainment and improvements in lounge facilities.
According to a recent Amadeus/IdeaWorks study, North American airlines collectively produce the largest stream of ancillary revenues compared to other regions, with an estimated $15 billion in revenue in 2011. The study also revealed that around 50% of ancillary revenues for the U.S. airlines is generated by the sale of frequent flier miles, notably those linked to co-branded credit card activity.
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Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
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See more on: DCF Methodology
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
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