US Airways ( UAIR) announced a surprising second-quarter profit, but continued to warn employees that the airline's long-term prospects were in doubt unless they cut their pay again. US Airways managed a second-quarter net profit of $34 million, or 59 cents a share, a big improvement from the year-ago quarter's profit of $26 million, or 25 cents a share. Results are an even bigger improvement over 2003 when a $214 million government reimbursement for security fees is taken out. The two Wall Street analysts covering the company expected it to lose $1.34 per share, on average, in the second quarter. In reaction to the upside surprise, shares of the carrier rose 17 cents, or 7.1%, to $2.55. Revenue came in at $1.96 billion, up 10.1% from the $1.78 billion it had a year ago, with demand for flights outpacing supply. The company said traffic, a demand metric measured in revenue passenger miles, rose 11.8%, while it increased capacity, a supply metric measured in available passenger miles, rose 6.2%. As a result, US Airways filled 78.9% of its seats in the second quarter, a quarterly record and a 3.5 percentage-point gain from last year. But while the formerly bankrupt airline, which is looking for another round of concessions from employees to compete against low-cost carriers, posted a small profit, an increase in sales and filled a record number of seats, management warned that its business is still broken. "While we reported a small profit, we should have done significantly better in the second quarter, which is traditionally our best. Absent an immediate and dramatic reduction in costs, this nominal profit is insufficient, and we will likely be faced with additional second-half losses," said Bruce Lakefield, US Airways president and CEO. "These results reaffirm what we have told our labor leaders -- that we must change course now."
Total expenses came in at $1.87 billion, up from $1.71 billion a year ago, led by a big increase in the price of fuel, which was offset by a 14.5% drop in labor costs. Unlike many other carriers, US Airways hedged some of its fuel costs, but said that the price of fuel rose 25.9% year over year. Cost per available seat mile, a key metric also called CASM, came in at 9.40 cents, down 12.6% but a far cry from the 6 cents seen by low-cost rivals like JetBlue Airways ( JBLU). Revenue may be growing and costs falling, but with Southwest Airlines ( LUV) targeting US Airways' key hub in Philadelphia, the airline had to slash prices to fill planes and saw its profit margins shrink. The carrier said that yield, a measure of pricing power, came in at 12.87 cents, down 1.8% year over year. The company noted that its cheaper, simplified pricing structure, called GoFares, had kept seats full, but it is not a sustainable business model given its current cost structure. "While GoFares are bringing in additional passengers, lower fares translate to lower revenue, and yields remain under intense pressure," said B. Ben Baldanza, US Airways senior vice president of marketing and planning. "Our existing cost structure will not allow for sustained profitability, given the competitive environment now dominated by low fares."