US Airways joins the 2Q2010 profit club

Citing the improved economy, cost cuts, rebounding demand and rising ancillary revenues, US Airways posted a second quarter profit of USD279 million on revenues of USD3.1 billion compared to a loss of USD58 million in 2Q2009. "We are extremely pleased to report our second highest quarterly profit since our 2005 merger,” said Chair and CEO Doug Parker. “Over the past three years, US Airways has taken the steps required to return to profitability, including reducing capacity, maintaining cost discipline, increasing ancillary revenues, and establishing industry-leading operational reliability. Those steps, combined with an improving economic environment, have led to these results.”

President Scott Kirby described the recovery as very weak, meaning there was plenty of headroom for increased revenues. “If you compare the results to what we did in 2008 or 2007, the business/leisure trends are almost identical,” he said. “It was dramatically different a year ago because business fell so far off. Revenue is still a couple of percentage points off the 2008 peak. This is all indicative of a weak recovery but if it strengthens or even becomes a moderate recovery there is a lot of upside.”

Parker was adamant that capacity discipline is still key to success and responded to a question as to whether overflowing cash reserves at airlines will mean the usual spending spree on capacity, he completely rejected the notion. “We share your concern,” he said. “For reasons that defy logic every now and then when you make money people think it makes sense to add more airplanes although the result is that we all lose money. Airlines also like to do strategic flying by flying loss-making flying and some of that is starting to go on right now. Hopefully, rationality will prevail. We are encouraged by the fact that you don’t see as many people doing that and we are also encouraged by the fact that the four other major airlines are run by CFOs and lawyers who care about returns not about buying more metal and being the world’s largest airline. That doesn’t mean that it is not going to happen again but I can tell you right now it’s not going to be us.”

Kirby indicated that US Airways was not seeing the boost Continental was seeing after it joined Star, adding that the Phoenix-based airline is not part of the joint venture and, thus, has not done such integration with Continental. “We hope becoming part of the JV is on the horizon.”

Mergers: "We never had to and we still don’t have to"

As for mergers, Parker said that the results prove that US Airways does not have to merge. “We have a stand-alone airline producing better margins than any of our peers so we don’t have to do something,” said Parker. “Our interest in consolidation was if it happens in the industry that’s great and if it includes us that it is even better because we chose to participate. But we never had to and we still don’t have to.”

US Airways posted an operating margin of 8.4% and an EBITDAR margin of 18.7%. “We believe that is the right way to look at operating margin in our business,” said CFO Derek Kerr. He also indicated the carrier, as most others did, received a refund on aviation security fees. However, US Airways chose to list it as a special item compared to others putting it into operations. It could, he suggested, be inflating other airlines' results.

With rising cash, US Airways was able to reduce its credit card holdback from 25% to 15%, which is equal to USD50 million. If its balance sheet progress continues, it will ultimately be able to go to 0% holdback or what is known a Tier One.

“This feels like a tepid recovery and we think it is not getting better, but not getting worse,” said President Scott Kirby, noting that despite the economic uncertainty, airlines are making near record profits. “On the other hand, a tepid recovery moderates fuel prices.” He also noted the revenue recovery has flat lined since April.

Kirby reported that LaGuardia has recovered and is now profitable, but the airline is still interested in doing the Delta slot swap. LaGuardia is its lowest margin earner while DCA, where it was to get slots traded for its slots at LaGuardia.

Revenue and cost comparisons

Higher passenger yields from an improving economy and higher business demand drove total revenues in the second quarter up 19.3% to USD 3.1 billion versus the second quarter 2009. Total revenue per available seat mile was 14.37 cents, up 18.9% versus the same period last year. US Airways revenue passenger miles were flat in the quarter at 15.3 billion while ASMs grew slightly at 0.7% to 18.5 billion. Load factor dropped 0.6% to 84.2%. Yield rose 18.1% to 13.11. Passenger revenue per ASM rose 17.3% to 11.04 cents.

Express RPMs dropped 1.1% to 2.7 billion, while ASMs dropped 1.3% to 3.6 billion. Passenger load factor for Express carriers rose one point to 76.5%. Yield jumped 20.7% to 27.60 while PRASM rose 20.9% to 21.12 cents. Operating cost per available seat mile increased 10.8% to 18.83 cents.

Other revenue – mostly ancillary revenues – was up 22% to USD331 million. Mainline passenger revenue rose 18.1% to USD2 billion while Express passenger revenue jumped 19.3% to USD767 million. Kirby reported the carrier was in negotiations with Mesa on their capacity purchase agreement and hoped to have an announcement soon.

Total operating expenses in the second quarter were up 10.4% to 2.8 billion over the same period, but as one analyst put it, it was better than expected. The airline cited a 38.7% increase in mainline and Express fuel expense. Mainline cost per available seat mile (CASM) in the second quarter was 11.48 cents, up 10% versus the same period last year. Excluding fuel and special items, mainline CASM was 8.18 cents, up 0.5% from the same period last year. Express CASM excluding fuel and special items was 13.49 cents, up 3.3% on a 1.3% decline in ASMs.

Parker and his management team – Kirby and Kerr – noted that the company still has several productivity initiatives in the works. “There is still an opportunity for more,” said Kirby. “As revenue goes up, costs have gone up, much of which are revenue driven. We don’t see anything big that will drive our costs up. We still see an opportunity to be even more efficient.”  

COO Robert Isom reported that the productivity gains were coming not only from the operational turnaround which puts US Airways at the top of the industry’s DOT metrics, but also from the technology investment made by the carrier and more efficient operations at airports. “We have not exhausted that list,” he said. “They probably won’t be huge dollars, but they are certainly the kinds of things that will keep our costs in check.”

Parker also addressed the fact the company no longer hedges fuel. “We’ve seen articles where it says we’ve done a really smart thing by not hedging because our earnings are better,” he said. “We didn’t not hedge because we thought fuel prices were going to fall. We’ve also seen the view that those who hedge are paying more but are also getting more certainty on earnings. We take exception to both those views. Our view is the largest potential disaster – what we have to be most concerned about – is, indeed, a double dip that results in revenue going down and results in oil prices going down just as in 2008. In that scenario, what you will see is those who hedge will pay higher prices, they’ll have to pay them in advance and their revenues will go down. That’s the most likely disaster in our view. We now believe there is a natural hedge in place which has been the case for year and a half and that is the economy. If it gets stronger oil may go up but that’s okay because we are hedging our revenues. And if gets a lot weaker those who have locked in fuel prices are going to be in a scenario that will be difficult to manage and we don’t want to be in that position again.”

Unrestricted cash and investments balance at the end of the second quarter increased by USD451 million to USD2.1 billion versus the first quarter. In the highest quarter-ending total and unrestricted cash balance since the second quarter 2008, the company had approximately USD2.5 billion in total cash and investments, of which USD442 million was restricted.

Parker expressed encouragement on the economic recovery adding based on current business conditions the company will finish with profits in for both the third quarter and full year. It also expects the full quarter revenues to be up 15%.

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