Profits Flying High on US Airways Turnaround

By Robert Herbst

Coming next month AirlineFinancials.com estimates US Airways (LCC) will report an all time record 3^rd quarter profit of $225 million from $3.2 billion in projected operating revenue.

This record high profit and near record 3^rd quarter revenue, follows US Airways 2^nd quarter 2010 profit margin of 8.36%. When comparing the nine largest US airlines, Alaska’s (ALK) 8.6% was the only profit margin higher than US Airways for the recent 2^nd quarter.

Less than two years ago, US Airways reported a 3^rd quarter loss of $242 million (including special items, the loss was $865 million). Toward the end of 2008, United (UAUA) and US Airways were at the top of many analysts’ list of carriers that were most likely to join the growing graveyard of failed airlines.

Just over 10 months ago in a conference call, US Airways CEO Doug Parker stated:

I think those of us [airlines] who are around have made it through a very difficult time. – It is not over – is probably the best way to say it. …This is still… what has to happen; we have to get this industry back to profitability.

The standard can’t just be survival. We passed that standard but there is a higher standard out there which is getting actual returns for investors on their investment.

Not only have Mr. Parker and the US Airways employees turned their airline around but they are now leading the industry in several categories.

Operationally, US Airways on-time performance generally leads the legacy airlines. Additionally, US Airways receives fewer consumer complaints than most other legacy carriers.

In the last year, US Airways stock is up well over 200%. Excluding United, which had a higher stock return due to their merger with Continental (CAL), US Airways stock increase was over twice the return achieved by the other seven major airlines over the same time period (see following chart – time period is prior 52 weeks as of September 1^st, 2010).

AirlineFinancials.com believes there are two primary reasons why US Airways is outperforming most of the industry on the cost side.

• Approximately two years ago, US Airways management made the decision to not hedge fuel. Excluding US Airways, all of the major airlines currently have some type of fuel hedging program. – In short, fuel hedging is a type of insurance airlines purchase to offset the price volatility of jet fuel. This “insurance” is very expensive and drives a negative return when actual fuel prices remain more or less stable. – The bottom line for the past several months is after reconciling the cost of fuel hedges compared to industry competitors, US Airways has a fuel cost advantage of approximately 3-7% for their net fuel cost.

• Excluding much smaller low cost carriers JetBlue (JBLU) and Air Tran (AAI), US Airways has the lowest labor costs in the industry.

Recognizing that fuel and labor represent the two highest cost items for airlines, US Airways has a significant cost advantage over competitors.

For year 2009, US Airways labor costs were 26.7% of operating revenues compared to Continental at 27.9%, United at 28.4%, Delta (DAL) at 30.0%, Alaska at 31.4%, Southwest (LUV) at 33.5%, and American (AMR) tops the list at 34.8% (see following chart – all ratios are for mainline operations).

To put this in some perspective (see note), compared to the largest competitors US Airways has a labor cost advantage of $97 million over Continental, $140 million over United, $268 million over Delta, $551 million over Southwest (LUV), and $653 million over American. Note: There are numerous variables that would likely increase or decrease the actual dollar values noted in the labor cost advantage (see following chart – cost advantage assumes US Airways would have the same labor cost ratio of operating revenue as the airlines noted above – values are for mainline operations only).

On the revenue side for the recent 2^nd quarter 2010, US Airways had:

• 18% year-over-year increase in passenger yield. United was the only major airline with a higher yield increase (yield is passenger revenue/passenger miles).

• 18.4% year-over-year increase in unit revenue. United and Southwest were the only two major carriers with higher RASM increases (RASM is operating revenue/ASM capacity).

• 19.3% year-over-year increase in total operating revenue. United and Southwest were the only two major airlines with a higher revenue increase.

• 26.2% year-over-year increase in ATL (advance ticket sales). JetBlue was the only major airline with a higher increase in ATL.

• For the recent 2^nd quarter, US Airways had at or near the industries best operating income margin, net income margin, and EBITDAR margin.

Conclusion- Based on US Airways more recent strong performance both operationally and financially, there should be no doubt US Airways is ready to compete.

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Disclosure- The above opinions and comments should not be used to determine the worth of any stock or investment. At the time of writing, the author and his family did not hold stock and/or derivative positions in any of the airlines covered in this article.

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Robert Herbst is an independent airline industry consultant. He is the founder of AirlineFinancials.com which provides airline industry analysis and commentary for major US carriers. In addition to his consulting work, Mr. Herbst was a commercial pilot from 1969 until January 2010. His aviation experience and financial background provide a unique analytical perspective into the airline industry.