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In the investment community, the airline companies are usually frowned upon because they have a tendency to declare bankruptcy and make things difficult for their investors. When a company goes through bankruptcy, the stockholders are the last people to get their share of the pie while bond holders usually finish the pie off before the stockholders can even touch it. Yet, there are some great opportunities and valuations in the airline companies in the short and medium term.

First, let me define what I mean by short and medium term. Many times, investors and analysts tend to use "short term," "medium term" and "long term" in their analyses but everyone means something different when they use these terms. For example, I've seen people use "short term" to refer to as little as 3-4 days whereas I use short term as anything less than a year. In my book, 9-10 months would be considered short term. I've seen people use "medium term" to mean a few months, but it looks more like a few months. Many people invest for retirement and beyond, so "long term" should only mean 5 years or more. I don't know why people say "long term" when they mean the next year.

Now that I got that out of the way, I can go back to the topic. I don't think airline companies are good for long-term investment. I wouldn't buy an airline company and hold it for 7-8 years (now that I think about it, I've done that with very few companies anyways). On the other hand, I wouldn't stay away from airline companies altogether either. I wouldn't mind investing in an airline company for about a year, and this is exactly what I've done.

Last spring, I bought 1,000 shares of US Airways (LCC) at $11.00. Normally I am skeptical of buying a company after it had a strong rally but I felt like US Airways could move much higher (yes, I bought an airline company after a strong rally, and broke two of my personal rules at once). I sold some covered calls on my shares in order to bring my breakeven price lower. Eventually, I ended up bringing the breakeven price down to $9.00 but I couldn't resist buying more shares once they rallied up to $13.00. Eventually my breakeven price became $10.50. Today the company's share price is nearing $15.00 and many people wonder if the rally is over.

In the last one year, US Airways saw a price appreciation of 130%. Since November of 2011, the appreciation rate is nearing 300%. At this point, some might think US Airways is overbought, but even now the company's P/E ratio is below 5, because the company was able to grow its earnings even faster than its share price appreciated.

While US Airway's revenue didn't increase much since last year, the company's earnings skyrocketed. In 2011, US Airways generated $13.05 billion in revenues and in 2012, it generated $13.82 billion in revenues. When we look at the company's earnings, they moved from $71 million in 2011 to $636 million in 2012. US Airways was able to cut its costs efficiently and double its operating income within one year (up from $426 million to $856 million).

In 2012, US Airways generated $429 million in cash flow. The company currently holds cash reserves of $2.38 billion. This compares nicely with the market value of US Airways which also stands at $2.38 billion. Basically, the company could buy itself out with the amount of cash it has right now. Of course that won't happen because US Airways has to pay off debt and acquire American Airlines in the near future. Speaking of debt, US Airways has to pay $4.79 billion in the future, but long term debt makes up almost all of this number ($4.38 billion to be exact). As long as the company continues to generate the current earnings and cash flow, it will have absolutely no trouble with paying off its debt. I am sure once the debt is reduced significantly, US Airways will start implementing buybacks and dividends as well.

In the options community, the sentiment is very bullish for US Airways. The company's out of money calls with a strike price of $15 expiring in January 2014 yield a premium of $2.91. Selling one of these calls is like getting a dividend check with a yield of 19%. Even if the strike price goes as high as $20, the premium is still nice at $1.22 per contract. This would also equate a "dividend" yield of 8%. In fact, this is even better than dividends because the cash you get doesn't get deducted from the share price. Currently the strike price on the calls I sold is $15, which means if the US Airways goes above this price, I will miss out on profits unless I buy my calls back.

US Airways is known for consistently beating earnings estimates. In the last 4 quarters, the company has always beaten the earnings estimates. In average, US Airways was able to beat the estimates by a margin of 24.57% in 2012. Moving forward, the company is expected to earn $3.05 per share in 2013 and $3.58 per share in 2014, effectively giving it a forward P/E ratio below 5 for years to come. These estimates don't keep a possible merger with American Airlines into account. Also, these estimates are likely to be beaten again.

The company's CEO Doug Parker is doing an excellent job with the company and I trust his abilities as an investor of US Airways. During the last earnings conference, he didn't want to take any questions regarding a possible merger between US Airways and American Airlines. Before the question-answer session even began, he said:

"We're going to turn over to questions. Before we do, I need to give what is now becoming standard request before the questions, which is I know many of you would like to ask about the speculation regarding US Airways and American. However, we continue to operate under a nondisclosure agreement, which precludes us from commenting on that situation. So please remember that the purpose of today's call is to discuss US Airways' operations and results, and I thank you in advance for limiting your questions to those topics. So operator, we are ready for questions."

So I guess we will have to wait a little bit more before we hear more about the merger. As I always say, regardless of the merger situation, US Airways is a great buy. Many people argued that the company's rally in the last year is due to merger speculations, but I completely disagree. The company was able to cut its costs and grow its earnings tremendously in the last year. Apart from the company's debt level, I have nothing negative to say about US Airways.

Source: US Airways Continues To Fly Higher