US Airways Shares Slip Despite Merger Chance, Strong Demand

CHARLOTTE, N.C. ( TheStreet) -- Despite continuing benefits from merger chatter and strong demand, shares in US Airways ( LCC) fell 8% on Monday after the carrier reported a disappointing unit revenue gain.

Shares fell back to $6.99, representing a gain of 34% for the year, after reaching a 2012 intra-day high of $9.91, up 90%, on Feb. 3. Generally, airline shares have been declining due to rising fuel costs. In mid-morning trading Tuesday, US Airways shares were flat.

In its February traffic report, issued Monday, US Airways said revenue per available seat mile rose 7% in February. That was the smallest gain in five months and less than what President Scott Kirby anticipated for the month during the carrier's fourth-quarter earnings conference call in January.

After an 11% RASM gain in the fourth quarter, partially as a result of several fare increases, "the year-over-year comps do start to get a little more difficult," Kirby said. "We expect both January and February RASM to be up about 10%. With the tougher comps and higher leisure focus, we'd expect March RASM to be up a little less but still in the high single digits."

US Airways spokesman John McDonald said a factor in the lower RASM number was the record completion factor of 99.7%, largely as a result of mild weather. "We flew more seats than would have been expected," McDonald said, meaning revenue per seat was lower than expected.

In a report issued Tuesday, Rodman & Renshaw analyst Dan McKenzie said "the results suggest a small softening in demand, but we're not drawing conclusions given overall industry demand trends that remain intact at this point."

A 24% share price decline over the past month means that shares are "oversold," McKenzie wrote, particularly given the possibility of a merger with bankrupt AMR.

Still, McKenzie cut his first-quarter earnings estimate to a loss of 45 cents a share, from a gain of 5 cents. Analysts surveyed by Thomson Reuters are estimating a loss of 18 cents. McKenzie also cut his full-year estimate to $2.20 a share, compared with consensus of $2.15, and he cut his price target to $11, based on eight times earnings after taxes. "Fundamentals still remain good given competitors that are widely capitulating where overlap exists with US Airways," McKenzie noted.

Regarding the possibility of a merger with bankrupt AMR, McKenzie wrote "we like the combination, assuming no overpayment," partially because mergers in bankruptcy are preferable to mergers outside bankruptcy. While American management remains opposed to a merger, McKenzie said a deal "could provide US Airways a path to resolving the seniority dispute" between pilot groups, which have failed to sign a joint contract nearly seven years after a 2005 merger. "If US Airways merges with another airline, we presume a new collective bargaining agreement would be negotiated among the three pilot groups," McKenzie wrote.

Lee Moak, president of the Air Line Pilots Association, voiced a similar view last month during a conference call with reporters. "I think what's going on with the American Airlines bankruptcy brings renewed focus onto the US Airways/America West matter," Moak said.

"You end up with an opportunity to finally address that situation," he said. "I'm encouraged right now, with current merger and acquisition activity, that it will put that matter to bed."

In recent interviews, the two candidates for president of USAPA, which represents US Airways pilots, said they would work to enable a merger if management approached them. Gary Hummel noted that USAPA has worked closely with American's Allied Pilots Association and, in fact, modeled its constitution on the APA model, while Eric Ferguson said the Nicolau seniority ruling, which has split the pilot group, would have to be part of any merger seniority agreement.

-- Written by Ted Reed in Charlotte, N.C.

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