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US Airways Flying High

The carrier's stock rises 9% after it forecasts a profit for the year.
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US Airways Group

(LCC)

reported a first-quarter profit, a result of double-digit improvements in revenue per seat mile at both of the airlines it operates, and predicted it would have earnings for the full year.

Excluding special items, the company -- created by the 2005 merger of US Airways and America West Airlines -- said Tuesday it earned $5 million, or 5 cents a share, compared with a loss of $16 million, or $1.09 a share, in the first quarter of 2005.

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Once the items were factored in, earnings were $64 million, or 75 cents a share, compared with $28 million and $1.29 a share, before an accounting change, during the same period a year earlier at America West Holdings, which was considered the acquiring company in the merger. Revenue for the combined companies totaled $2.65 billion.

Analysts polled by Thomson Financial had expected a loss of 16 cents a share on revenue of $2.61 billion.

In the first quarter, revenue per available seat mile at the former US Airways stand-alone network was 13.34 cents, up 27.7%, while mainline yield was 13.97 cents, up 19%. At the former America West network, RASM was 10.27 cents, a 16.2% increase, and mainline yield was 11.52 cents, 13.2% above the prior year.

Much of the RASM increase could be attributed to capacity reductions. The combined airline took planes out of service following the merger, said CEO Doug Parker during a conference call.

"Some people don't seem to recognize the value you can create if you can get out of airplanes and get out of some of your worst-performing markets," he said. "We were able to do that through the US Airways bankruptcy. Some of the other

airlines are adding capacity, and they're not seeing anything like

this."

The RASM improvement also reflected better pricing, strong leisure demand and revenue gains from the merger, said Executive Vice President Scott Kirby. "Fares have gone up about 20%," he said. "We're selling a lot fewer of the absurdly priced low-end fares. Whereas a year ago, it was common to have $158

transcontinental fares in the market, today those fares are more like $300."

RASM comparisons with the former US Airways are strong, Kirby said. "They were in bankruptcy, customers were defecting, there was lots of bad press -- and US Airways got into the mode of deeply discounting because they felt like they had to," he said. "We don't feel like we have to do that anymore."

Parker said the airline now expects to be profitable for the full year, even after accounting for integration expenses, a projection the company had not made before. US Airways shares closed trading at $51.63, up $4.33, or 9.2%.

He also said the company is willing to make changes in the pilot contract currently being negotiated, but is unwilling to see its costs increase. "US Airways is still here and now is doing well because the employees of US Airways did what was required to compete," he said. "It was hard and painful, as we know. We're asking people to not reverse the great progress that's been made."

JPMorgan analyst Jamie Baker said "mainline and express RASM

were both significantly stronger than expected." On Tuesday, Baker said US Airways' margins improved more than any other carrier's, and he reaffirmed his price target of $100 a share by mid-2007. During the past 12 months, US Airways has been a JPMorgan client, and a JPMorgan affiliate has also received compensation from the airline.

Analyst Ray Neidl of Calyon Securities set a target share price of $60 after revising his 2007 EPS estimate to $7.60 based on "much stronger RASM increases than we were expecting, and expectations that this trend will continue this year."

"RASM and yield are increasing throughout the industry as domestic capacity is cut back," Neidl wrote in a research note. "However, the old America West management that is now running the combined companies is doing a commendable job in controlling costs but, even more importantly, raising yields in the old US Airways system."

Neither Neidl nor Calyon has a financial relationship with the company.

The airline said increased fuel prices added $183 million to its operating expenses compared with a year earlier. On a stand-alone basis, America West's mainline operating costs per available seat mile (CASM) were 8.76 cents, up 11.2%, largely due to higher fuel costs. Excluding fuel and special items, America West's mainline CASM was 6.72 cents, up 4.2%, partially because of a 1.4% decrease in available seat miles.

US Airways stand-alone mainline CASM was 11.44 cents, up 8.8%. Excluding fuel and special items, US Airways' stand-alone mainline CASM was 8.42 cents, up 4.3%, with a 16.3% decrease in available seat miles. As of March 31, US Airways had $2.6 billion in total cash and investments, of which $1.6 billion was unrestricted. The company has no plans to draw down any cash in the second quarter.