Sky's the Limit for US Air - TheStreet

Sky's the Limit for US Air

Revenue is climbing, costs are falling, and one analyst says the stock could even reach $100 a share.
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The new

US Airways Group

(LCC)

is on a roll -- costs are declining, revenue is rising, shares are soaring and one analyst predicts the stock will double again by next year.

Now, the airline's pilots want to share in its success. The 2,700 pilots from the old US Airways gave up $2 billion in salary and pension contributions and "want a bite of the apple," says Jack Stephan, chairman of the US Airways chapter of the Air Line Pilots Association.

J.R. Baker, chairman of the 1,900-member America West branch of ALPA, says his colleagues want to be acknowledged, as well. "The America West pilots have made our share of sacrifices too, but our pilots never had an apple to bite," he says. "For a long time, the last 20 years, we've been at the bottom of the industry."

Pilots say their time is now, because the America West contract is up for renewal on June 30. Although the US Airways pilot contract doesn't open until 2009, a joint committee with two representatives from each pilot group is working to negotiate a merged contract. Face-to-face meetings have been taking place once or twice a month.

So far, it's been one long party since the September merger of the old US Airways, an ailing legacy carrier that was in its second bankruptcy, and Phoenix-based America West Airlines, a struggling low-cost carrier that averted its own 2002 bankruptcy filing only by getting a $380 million federal loan guarantee.

Private investors and vendors were dazzled by America West CEO Doug Parker, who now heads the combined airline. They poured $1.5 billion in new capital into the joint enterprise, and they've been well-rewarded for their bet. Shares in US Airways closed Wednesday at $47.80, up more than 5% for the day and more than double the $20.40 price at which the new company began trading last year.

The airline will report earnings on Tuesday. According to Thomson Financial, analysts expect a loss of 22 cents a share on revenue of $2.7 billion in the first quarter, but profits for the rest of the year.

In a recent research report, JP Morgan analyst Jamie Baker said that by mid-2007 the shares should double again, reaching a target price of $100. He forecast earnings of $5.15 a share in 2006, higher than the consensus estimate of $3.49, and a profit of $8.65 a share next year. The stock should trade between 10 and 14 times earnings, he says.

"No guarantees, but if US Airways can improve its earnings by roughly $12 per share in 2006, the idea of another $3.50 of improvement in 2007

over his preliminary 2006 EPS estimate hardly seems like a Herculean stretch," Baker wrote in his research report.

During the past 12 months, US Airways has been a JPMorgan client, and a JP Morgan affiliate has also received compensation from the airline.

Analyst Ray Neidl of Calyon Securities has a more conservative 2007 target price of $49, based on his earnings expectation of $4.71 a share next year. He expects EPS of $3.58 this year. However, Neidl wrote in a research report, "the management of America West, which is now running the combined America West/US Airways, has tended to beat expectations in being able to obtain revenue-premium increases."

Neither Neidl nor Calyon has a financial relationship with US Airways.

US Airways says the merger is producing around $600 million in annual cost savings, even without any benefit from a merged pilot group. The company says it wants a single contract, but doesn't need one to operate the carrier under the single Federal Aviation Administration operating certificate it's seeking by 2007.

"We can continue to operate with two separate pilot groups, even with a single certificate," said Executive Vice President Jeff McClelland on the airline's January conference call. He said that the two systems are complementary, and that "while we may have to operate under a couple of different

contracts if we aren't fully finished, we do that today."

Baker says America West pilots reserve the right to negotiate a separate contract, but are currently looking for a joint pact, which would save the airline millions of dollars annually.

"It gets back to one of the basic issues with management: What are the intangibles worth?" he says. "What price do you put on the fact that people are working together in harmony going forward?"

Stephan says his group understands US Airways wants to be a low-cost carrier, "but that doesn't mean we have to be a low-paid carrier. This entity would not exist had not the pilots dug deep in their pockets, and now we expect that our sacrifices will be respected."