US Airways ( LCC) has an obligation to consider a merger with Delta Air Lines ( DALRQ) or Northwest Airlines ( NWACQ) because "tremendous value can be created through consolidation," the airline's chief executive said Thursday. Doug Parker, the CEO of the Phoenix-based carrier, made the comments on a conference call after US Airways reported a record second-quarter profit that reflected sharp improvements in the performance of its two predecessors. The airline, formed by the merger of the old US Airways and America West Airlines 10 months ago, posted second-quarter earnings of $305 million, or $3.25 a share. Excluding special items, the company would have earned $315 million, or $3.35 a share. Revenue was $3.2 billion. Analysts surveyed by Thomson Financial had expected earnings of $3.24 a share on revenue of $3.14 billion. Parker pointed out that the merger put together America West, which had a market capitalization of $200 million, the bankrupt former US Airways, which had no equity value, and $800 million in new equity. The resulting company now has market capitalization of $5 billion. "If people don't see the value of consolidation, it's because they don't want to," Parker said. "That value is created much more when two airlines are in bankruptcy. It would be negligent for us to ignore that there are two airlines still in bankruptcy that are going to have to emerge at some point. They will need to investigate it, and when they do, we would have to be there." Parker noted that he was commenting generally and declined to say specifically whether the airline is pursuing a merger. Delta spokeswoman Gina Laughlin said her company's strategy "is to emerge as a stand-alone airline. Everything else is speculation." Northwest spokesman Kurt Ebenhoch said, "We are totally focused on restructuring Northwest for long-term success."
As for its earnings, both of US Airways' former individual components had impressive turnarounds from a year ago. America West had a loss of $3 million, or 20 cents a share, in the second quarter of 2005. This year, on a stand-alone basis, America West reported a profit of $68 million. Meanwhile, the former US Airways had a second-quarter profit of $246 million, compared with a year-earlier loss of $44 million. Revenue per available seat mile at the former America West network increased 18.6%, driven primarily by a 16.4% improvement in mainline yields. For the old US Airways network, RASM grew 28.8% to 15.23 cents, because of a 16.9% increase in mainline yields and a 4.6% improvement in mainline load factor. Scott Kirby, the airline's executive vice president, said that besides the industry trends of improved pricing and reduced capacity, the RASM improvement reflected merger synergies. In future quarters, RASM gains will fall into the high teens, Kirby said, because comparisons with prior quarters will be more difficult. The airline projected a profitable third quarter and full year. Excluding fuel and special items, America West's mainline cost per available seat mile rose 7.4% to 6.92 cents on a 2.3% decrease in capacity. For the former US Airways' stand-alone network, CASM excluding fuel and special items rose 7.9% to 8.08 cents on a 12.8% capacity decrease. The CASM increases came largely from an accrual for the company's employee profit-sharing plan and a $31 million credit associated with US Airways' post-retirement benefits in 2005. Parker noted that the airline still expects another $100 million in cost savings from the merger, as part of a total $600 million in projected savings. Special items included $35 million in merger-related expenses, partially offset by a $7 million gain from interest income on a prior-year tax refund and an $18 million unrealized gain on fuel hedges. As of June 30, US Airways had $3.2 billion in cash and investments, of which $2.2 billion was unrestricted. Parker said the airline, unlike any of its major competitors, has no material debt amortizations until 2011 and has rejected solicitations for public offerings. However, he said debt reduction is a high priority.