Strong Yields And Stable Demand Mitigate Fuel Burden at US Airways

US Airways (NYSE:LCC) registered a marked drop in its September quarter earnings as increasing fuel costs weighed heavily on its operating profitability. The company reported a net income of $95 million in the third quarter of 2011 versus $243 million earned in 2010. Echoing the sentiment of its peers including Delta Air Lines (NYSE:DAL) and United Continental(NYSE:UAL), US Airways maintained that demand environment remained strong in the last quarter and continued to betray the weak global cues. The airline expects to recover the increase in fuel prices through fare hikes, capacity cuts and cost discipline as it heads into the winter. Below, we take stock of drivers of third quarter earnings at US Airways in the past quarter.

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Strong pricing environment and capacity cuts boosts top-line in Q3

Riding on strong leisure and business demand, US Airways saw an 8% growth in top-line, the past quarter. Successful fare hikes supported yield increases across the board with consolidated yield rising as much as 8% y-o-y. Stable passenger demand amid apprehensions about a slowing economy led to an improved pricing environment. US Airways eliminated some fare sales and increased fares by a consistent dollar amount while maintaining a lower percentage increase in peak periods than non-peak periods. Load factors also improved 2% over the last year on the back of 1% lower capacity in Q3. The company is implementing more capacity cuts in Q4 with mainline capacity expected to be down by 0.2% and express capacity by 7%, y-o-y.

Rising fuel burden to eat a billion more in operating profits in 2011

Operating profits dropped over 40% as the growth in revenues was offset by rising operating costs. Fuel bill increased the highest as fuel price per gallon shot up 44% over the last year. For the full year 2011, US Airways expects its fuel costs to increase by about $1.3 billion versus 2010. Since the third quarter of 2008, the airline has refrained from entering into any new transactions to hedge fuel consumption.

US Airways expects to control its total operating costs by curbing non-fuel costs. In the past quarter, US Airways restricted the increase in ex-fuel unit costs (also excludes profit sharing and special items) to about 3%,y-o-y. While mainline operations experienced higher costs due to revenue-related expenses and increased benefit costs, regional flying was faced with increased maintenance costs. Similar items are expected to drive up non-fuel costs in the fourth quarter.

We are currently revising our model to incorporate the updated capex and cost guidance provided by the company.

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