US Airways’ Intl. Growth And Cost Discipline Drive Earnings

US Airways (NYSE:LCC) was able to evade losses arising from spiraling fuel costs as it posted strong revenue growth of 10.3% this quarter. The revenues were well supported by robust growth in international capacity, improved load factor and fare hikes. Driven by a $77 million benefit from special items, the net GAAP income for the quarter was reported at $48 million.

Apart from earnings, American Airlines (NYSE:AMR) merger continued to be in focus where the management expects cost synergies of close to $1.2 billion. The market cheered the results and updates on American Airlines as the stock closed up by 3.1% on the earnings release date. On the other hand, competitor Delta Air Lines (NYSE:DAL) closed flat as it posted net loss of $39 million for the quarter excluding special items. Below, we analyze the potential impact of earnings and forward guidance on the company’s valuation.

See our complete analysis of US Airways

Robust Revenues Supported by Cost Discipline

Led by a capacity growth of 3%, strong passenger demand and record passenger yields, the company reported revenues of $3.3 billion this quarter. The fall in Cargo revenues by 6% to $40 million due to lower international volumes had marginal impact on the total revenues. The company is projecting fuel price in the range of $3.28-$3.33/gallon, higher than Q1 price of $3.26/gallon, for the entire year which takes our attention to the carrier’s ability to limit non-fuel expenditure.

US Airways managed effective control over the non-fuel costs as CASM (Cost per Available Seat Mile) excluding fuel fell by 0.6% y-o-y. The company has been able to achieve operational efficiencies at a crucial time when the fuel expense rose by $133 million this quarter. Considering that the carrier doesn’t hedge its fuel consumption, it has kept its operating expenses in check. These revenue and non fuel expense statistics are better than the projections used to come up with Trefis price estimate and hence would boost the company’s valuation.

Going forward, the company plans to return 15 older 737 leased aircraft and add 12 A321s which will increase the capacity by 1.5% this year due to increased seating capacity. Amidst strong passenger demand, this is a strategic fit for the company as capacity addition to popular routes adds to the revenues and adoption of fuel efficient aircraft result in lower costs.

American Airlines Merger Promises Substantial Cost Synergy Benefits

US Airways has been upbeat on a potential merger with American Airlines. To get things in perspective, most of the recent deals such as Delta-Northwest, United-Continental, US Airways-America West have successfully generated synergies of 3.9-6.5% of their combined revenues.

On the other hand, American Airlines’ parent company AMR seems to have a contrarian view. AMR prefers to rescue American from Chapter 11 as a standalone carrier. However, US Airways strongly believes that it can generate savings of $1.2 billion per year as opposed to the value created by AMR on a standalone basis. These synergies can be achieved through integration of IT systems, alleviation of facility space, management headcount and improved purchasing power.

The company has already received support from 55,000 member strong labor unions last week as it promises to cut fewer jobs compared to AMR. Now, the carrier is targeting support from unsecured creditors. A successful merger with American Airlines will make this joint entity one of the largest airlines in the world.

We have a Trefis price estimate of $8.54 for US Airways, which implies ~11% below stock’s current market price. Currently, we are in the process of updating the Trefis price estimate in accordance with the Q1 results.

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