US Airways posted a net income of USD28 million for the fourth quarter to beat consensus and mark a very strong year for the company, according to Barclays Capital. For the year, it posted a profit of USD502 million for the year, compared with a USD205 million net loss last year.
For the full year, ex special items, net was USD447 million, the second highest profit in company history and representing a USD946 million net profit swing from 2009. The fourth quarter results reflected the first fourth quarter profit for the airline since 2006, according to Chairman and CEO Doug Parker, who fairly crowed about the results.
The airline impressed analysts in many areas – including fuel prices which were the lowest in the industry. Impressive, since US Airways does not hedge. However, if fuel prices continue rising, it will not be until autumn that the airline will begin capacity reductions. For now it is working on its summer schedule and will re-evaluate the fuel picture when it gets to the autumn schedule.
“We think it remarkable that we had the lowest economic fuel price of any airlines in the fourth quarter especially since we didn’t hedge,” said President Scott Kirby. “We believe the cost of hedging remains exorbitantly expensive and if we did it through call options it would cost us about USD330 million assuming 100% of full year’s production and market prices higher than today’s. It is hard to rationalise when the cost of insurance is so incredibly expensive. It is hard for us to understand how to make a systematic hedge programme work.”
Another surprise for analysts was its January revenue per available seat mile (RASM) estimate increasing 7% year on year and 6-8% for the quarter beating Barclays’ estimate of 4-6% and 7% for the quarter.
“We have finally recovered RASM and yield to 2008 levels,” said Mr Kirby. “We expect all months in 2011 to set all time highs for revenue and yield.”
Mr Kirby believes there have been two-step function changes to revenues, the first kicking off 2010 when business demand strengthened 1200 basis points from 4Q2009. He believes January 2011 ushered another step function improvement which will be another 300-400 basis points higher than the 4Q2010 run rate.
The company also surprised analysts that the cost for the weather events in December was less than USD5 million, the least in the industry. It said that most of the customers were rebooked and revenue was captured another day. This, coupled with the savings on flying expense, resulted from the outstanding job of managing the event.
While US Airways would like to ultimately get to antitrust immunity with United, it noted United was busy integrating Continental. In the meantime, it was happy with trans-Atlantic results saying capacity would increase by making some routes year round and by adding Charlotte-Madrid and Charlotte-Dublin rather than by adding aircraft.
Distribution costs must come down
US Airways weighed in on the distribution battle saying it agreed in principal with what American was doing, adding that it is important to bring down distribution costs. Following similar comments from United earlier in the day, executives agreed that GDSs have failed to keep pace with airline innovations, contradicting Sabre’s contention that they have.
“We agree with American that costs need to come down to reflect today’s technology landscape and, over time, they need to come down dramatically,” said Mr Kirby. “The reality is the technological landscape has evolved over three decades and much of GDSs and distribution are still stuck in legacy systems that were built 30 years ago. It needs to evolve not only to get to lower costs but they need to move more quickly to sell new products. It just takes a long time. While we agree with American, we take a more pragmatic approach on how to get there. We are willing to see costs go down incrementally. They don’t have to go all the way to what a fair costing would be overnight. Instead we are working with our partners as they try to rework their business whether they are online, brick and mortar travel agencies or GDSs. And we’re willing to do so as along as we see them making progress on changing their systems.
“Our goal is to sell all of our ancillary products through all distribution channels,” he said. “We don’t want to prevent anyone from selling our product. We think the more channels the better. Take Choice Seats, the ability to sell that through USAirways.com will be USD30-USD40 million this year but will be USD200-300 million once we can sell through all the distribution channels. That is really important to us. But today, GDSs can’t do that and it is hard for them to change the technology to do that.”
While the carrier recently signed a new contract with Expedia in order to sell ancillaries, there is no time estimate when Expedia will gain that technology. “The problem is that right now they are not going through the GDSs and that is suboptimal for us because a big portion of our tickets are sold through the distribution system,” said Mr Kirby.
US Airways.com share is about 35% and is growing. He indicated distribution costs were about USD300 million annually, smaller than Delta’s estimated USD300 million-USD400 million and American’s USD1 billion. American’s includes commissions whereas it is unclear whether the others also include commissions. US Airways’ contracts are staggered so they come due at various times through the next few years.
Airline is cheering American on
While United refused to take sides in the Google-ITA acquisition now before the Department of Justice, Mr Kirby indicated that as long as the US Airways/ITA partnership, which he described as big, remains as it is there is no objection. “You see more objections from the OTAs, than from airlines,” he said.
The company is watching the narrowbody development, saying it is the biggest Airbus customer worldwide. Analysts suggested more fuel efficiency is more important to US Airways, given the fact it does not hedge, but Mr Parker said the operating cost savings would have to offset the capacity investment.
“I certainly applaud the effort and additional innovations both to lower operating costs and improve the mission of the airplane,” he said. “We, with others, have a 757 problem since no other aircraft can fly its missions and they will have to be retired at some point.”
Mr Parker also said that while news reports suggest the US Airways/Delta slot swap at LaGuardia and Washington National airports may not need to await court decisions since the government said the three-way negotiations may yield more faster, the issue is so uncertain as to not be included in the carrier’s guidance. The executives noted that the deal was initially worth USD75 million but that may have changed in the interim.
"2008 and 2009 were extraordinarily difficult years for our industry US Airways Group,” said Mr Parker, who noted the stock price was up 107% in the year. “US Airways took decisive actions to manage through those challenges - including reducing capacity, realigning our network to focus on key markets, introducing new revenue streams, controlling costs, and maintaining a commitment to exceptional operating reliability. These steps, combined with 2010's improving economic environment, have now put US Airways back on the path to sustained profitability. We fully understand, though, that remaining on that path requires commitment to the same steps that allowed us to navigate through the crisis. US Airways has such a commitment and because of it, we enter 2011 with confidence and excitement about the years to come."
A modestly improving economy and continued industry capacity discipline led to improved revenue performance. Total revenues in the fourth quarter were up 10.7% to USD2.9 billion versus the fourth quarter of 2009 on a 4.25% increase in total available seat miles (ASMs) to 21 billion. Total revenue per available seat mile was 13.83 cents, up 6.1% versus the same period last year driven by a 3.4% increase in passenger yields at 15.06 cents and an increase in passenger load factor from 78.6% to a fourth quarter record, 80.6%.
For the full year 2010, consolidated total revenues were USD11.9 billion, up 13.9% versus 2009. Total revenue per ASM increased 12.9% to 12.20 cents, driven by an 11.2% increase in passenger yield to 15.04 cents and a record load factor of 81.1%, up from 80.5%.
US Airways Express posted a 9.3% gain in revenues for the 4Q2010 to USD707 million and for the full year rose 12.7% to USD2.8 billion. Yield rose 1.4% in the quarter to 26.09 and 12.2% in the year to 26.57. PRASM increase 5% to 19.68 in the quarter and was up 13.8% to 19.83 cents. Load factor rose 2.6 and 1 point for the quarter and year to 75.5% and 74.6%, respectively.
Total consolidated operating expenses in the fourth quarter were up 7.3% to USD2.02 billion over the same period last year on a 22.4% increase in fuel expense. Mainline cost per available seat mile (CASM) was 12.05 cents, up 2%. Excluding fuel and special items, mainline CASM was 8.41 cents, down 1.7% versus the same period last year. Express CASM excluding fuel and special items was 13.81 cents, up 3.0% on a 4.1% increase in ASMs.
For the full-year 2010, total operating expenses were USD11.1 billion, up 7.6% versus 2009 due primarily to a 28.3% increase in fuel expense. Excluding fuel, special items and profit sharing, consolidated CASM declined 0.5% to 9.21 cents while mainline CASM declined 0.4% to 8.30 cents. Express CASM excluding fuel and special items increased 3.9% to 13.79. Express expenses reached USD703 million in the quarter, compared with USD636 in 4Q2010 maintaining its profitability. For the year, Express expenses rose to USD2.7 billion compared with USD2.5 billion in 2010.
As of 31-Dec-2010, US Airways had approximately USD2.3 billion in total cash and investments, of which USD364 million was restricted, up from USD2.0 billion, of which USD480 million was restricted on 31-Dec-2009.
Total system capacity is expected to be up 2% for 2011, with mainline up 2-3%. Domestic capacity will rise only 1% while international will jump 7%. US Airways is keeping Express flying flat. ASMs will be up 73.3 billion for the year and, broken into quarters it will be 17 billion in the first quarter, 19.1 billion in the second, 19.4 in the third and 17.8 in the fourth quarter 2011.
CASM for the full year for mainline will be flat compared with 2010, with both the first and second quarters being flat. The peak summer season will result in a 1-3% increase while the fourth quarter will also be flat. Express CASM will be up 5-7% primarily on the fact the maintenance honeymoon on its CRJ200s has expired which is worth about four points to Express CASM.