US Airways Posts Strong Earnings On Higher Passenger Yield

LCC: US Airways Group New US Airways Group logo
US Airways Group New US Airways Group

US Airways (NYSE:LCC) posted second quarter operating revenues of $3.8 billion, up 7.2% y-o-y on higher passenger yield and demand for flights. [1] Net income for the quarter, excluding special charges, was $321 million, up 203% compared to the year-ago quarter. Net income benefited from a 4.4% y-o-y decline in aircraft fuel expenses and efficient non-fuel cost management by the airline during the quarter.

On the whole, the airline posted strong numbers, and we anticipate the trend to continue over the remainder of 2012 in the absence of a rise in fuel prices and continuing demand for flights.

We currently have a stock price estimate of $12 for the airline, approximately 5% above its current market price.

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Higher passenger yield drives top-line growth

Passenger yield, a measure of average fare paid per mile per passenger, increased 7.4% for the airline in the second quarter on a year-over-year basis. This, coupled with increasing demand for flights particularly on Latin, Caribbean and domestic U.S. routes, drove top-line growth. Passenger revenue increased 8% to $3.4 billion on capacity addition of 1% over the same period last year. Passenger Revenue per Available Seat Mile (PRASM) also increased 6.8% y-o-y on higher passenger yield.

Absence of fuel hedging leads to complete realization of benefit from fuel price decline

The airline also benefited from lower aircraft fuel prices. It incurred an average fuel price of $3.18 per gallon in Q2, down 3.5% from $3.29 per gallon incurred in the year-ago quarter. Since the airline had not entered into any transaction to hedge fuel prices for the quarter, it could fully realize the benefit of lower fuel prices.

Some of its competitors including Delta (NYSE:DAL) could not fully realize the benefits of lower fuel prices due to their fuel-hedging arrangements. However, on the flip side, US Airways remains vulnerable to a fuel price hike as it will have to fully incur the price rise in the absence of hedging arrangements.

On the whole, the airline managed to post strong numbers for the quarter on higher passenger yield and lower fuel costs. It could continue its good run if demand for flights keep rising and fuel costs remain low. However, in case fuel prices rise significantly, the airline’s margins will quickly erode due to the absence of hedging.

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  1. US Airways Reports Highest Quarterly Profit In Company History, July 25 2012, []