US Airways (NYSE:LCC) has scheduled to announce its second quarter earnings on Wednesday, July 25. The company’s stock is up nearly 140% year-to-date, driven by strong growth in passenger traffic, capacity expansion and higher load factors. Anticipations of an American Airlines’ acquisition and the resulting cost savings for the airline has also contributed to the rally. However, in the second quarter we anticipate comparatively lower growth on a year-over-year basis in major operational parameters, including Revenue Passenger Miles (RPM), Available Seat Miles (ASM) and load factor, due to continuing slowdown in Europe and lower growth of domestic passenger traffic in US. Also, we anticipate fuel expenses for the airline to rise marginally from the year-ago period.
On the whole, we anticipate moderate growth in second quarter earnings on a year-over-year basis.
We currently have a stock price estimate of $12 for the company, in-line with its current market price.
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Moderate growth in operational performance
As evident from the monthly traffic reports released by the airline; Revenue Passenger Miles (RPM), an indicator of passenger traffic increased 2.1% and 1.7% in April and June 2012, but declined 0.9% in May 2012; Available Seat Miles (ASM), an indicator of capacity increased marginally in all the three months compared to the year-ago periods; and Load factor increased 0.3 points in April, but declined 1.1 points and 0.6 points in May and June, on a year-over-year basis.    Further, passenger traffic and load factors have declined for each of the three months on the Atlantic route, from the year-ago period, indicative of the continuing economic slowdown in Europe.
Marginal rise in fuel expense
Also, the airline incurred an average fuel price of $3.29 per gallon in the second quarter of 2011,  and it anticipates to incur an average fuel price in the range of $3.28 – $3.33 per gallon in 2012. Thus, we anticipate the average fuel price for the second quarter of 2012 to be in-line with the price in the year-ago period. However, we also anticipate the airline to incur marginally higher fuel expenses due to rise in capacity.
It is interesting to note that the airline does not hedge against fuel price volatility unlike a few of its competitors including Southwest (NYSE:LUV) and Delta (NYSE:DAL), among others. As a result, its margins are highly vulnerable to high crude oil prices and therefore it needs to manage its non-fuel expenses effectively. It was able to achieve the same in the previous quarter where its non-fuel expenses declined 0.6% year-over-year. However, it needs to maintain the same to prevent margins from eroding.Notes:
- US Airways Reports April Traffic Results, May 3 2012, www.usairways.com [↩]
- US Airways Reports May Traffic Results, June 5 2012, www.usairways.com [↩]
- US Airways Reports June Traffic Results, July 5 2012, www.usairways.com [↩]
- US Airways Reports Second Quarter Profit, July 21 2011, www.usairways.com [↩]