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United Continental Holdings, Inc. (UAL), a holding company, owns United Air Lines, Inc. (United) and Continental Airlines, Inc. (Continental). The Company transports people and cargo through its mainline operations. US Airways Group, Inc. (LCC) operates a network air carrier through its wholly owned subsidiaries, US Airways, Piedmont Airlines, Inc., PSA Airlines, Inc., Material Services Company, Inc. and Airways Assurance Limited. UAL and LCC are gaining positive momentums and this article will review the recent developments for both.

On February 6, 2013, UAL closed at $25.32 with 4.37% gain and LCC closed at $14.56 with 3.34% increase. With Wednesday's surge, both companies have outperformed S&P 500 index YTD, as seen from the chart below. UAL had gained $8.30%, and LCC had increased 7.84% while S&P 500 increased 6.03%. Both stocks have unusual call activities on Wednesday where UAL had a daily call volume ratio of 5.19 and LCC had the ratio of 2.74. Unusual option activities can be an indicator or precursor of a major movement for the underlying stock.

(click to enlarge)

Source: Google Finance

United Continental Holdings, Inc.

Improving operation efficiency: On February 5, 2013, United Airlines reported, "Despite challenging weather conditions across the system, the airline ended the month with an 82.8 percent domestic on-time arrival rate, and an 80.5 percent international on-time rate, resulting in the best combined domestic and international performance for the month in 10 years." It is a sign that the company is improving its operational efficiency and reliability while United Airlines is aiming to deliver consistent performance for the entire 2013.

Delta Air Lines (DAL) topped the list with 87.18 percent domestic on-time arrival rate, while Southwest Airlines (LUV) came second with 84.85 percent. US Airways ranked third with 83.28 percent, as reported by FlightStats Inc., Portland, Ore.

Suspending Boeing 787: United Airlines is taking the troubled Boeing (BA) 787 out of its flying plan for the rest of February. Boeing 787s were grounded by the government last month, and the National Transportation Board is still weeks away from knowing what caused 787 battery to catch fire on January 17, 2013.

Concerns

On January 25, 2013, Buckingham Research downgraded UAL from Buy to Neutral with a price target of $24.00 (from $28.00). On the same day, BofA/Merrill Lynch also downgraded UAL from Neutral to Underperform. Lastly, JPMorgan downgraded UAL from Overweight to Neutral with a price target of $30.00.

Technically, for UAL, the MACD (12, 26, 9) indicator still showing a bearish trend but the MACD difference is converging. RSI (14) is showing a bullish lean. UAL is currently trading above its 50-day MA of $23.52 and 200-day MA of $21.76, as seen from the chart below.

(click to enlarge)

Source: StockCharts.com

US Airways Group, Inc.

Record January load factor: On February 6, 2013, LCC reported a record January load factor, the percentage of seats filled, of 81.1 percent, which is 2.3 points higher than January, 2012. LCC also reported it flew $4.85B revenue passenger miles in January, a 4.8 percent increase compared with January, 2012. As reported by Fox Business, the company had previously expressed a rosy outlook for travel demand throughout the airline industry. UAL has increased its total number of available seats in recent months, reversing course from last year's move to reduce capacity.

Positive Q4 earnings: On January 23, 2013, LCC reported that Q4 profit was more than doubled as higher revenue offset cost increases. LCC reported adjusted profit of 26 cents per share compared to the estimated 19 cents. Improved on-time arrivals and baggage handling helped drive traffic and revenue. Full-year profit, excluding special items, came to $537 million, which is the highest annual profit in company history.

AMR-US Airways Merger: American Airlines parent AMR Corp. (AAMRQ.PK) and US Airways are progressing to merge, which will create the world's largest airline. The deal may be finalized within the next week or two. As reported by the Wall Street Journal, "If the deal is reached, the new company could have a market capitalization of more than $10 billion and would vault ahead of United Continental Holdings Inc. as the biggest U.S. airline by traffic. The all-stock deal would be executed as a reorganization plan that takes American out of Chapter 11 bankruptcy protection." However, the deal is not 100 percent sure yet as the airlines and AMR creditors are in advanced talks over a merger. The final sticking points are how much of the combined company would belong to AMR creditors and how much to US Airways shareholders, and which management team would lead it.

In recent years, U.S. carriers have merged, stopping flying unprofitable routes and raising ticket prices, in an effort to recover. Airline companies are creating new revenue streams with baggage and food fees to combat volatile fuel prices.

Concerns

On January 15, 2013, JPMorgan downgraded LCC from Overweight to Neutral with a price target of $18.00.

Technically, for LCC, the MACD (12, 26, 9) is showing a bearish trend but the MACD difference diverged. RSI (14) is indicting a slightly bullish lean. LCC is currently trading above its 50-day MA of $13.75 and 200-day MA of $12.13, as seen from the chart below.

(click to enlarge)

Source: StockCharts.com

Key Stats and Valuation Comparison

 

United Continental

US Airways Group

Industry

Enterprise Value

$13.63B

$4.71B

N/A

Total Cash

$6.68B

$2.38B

N/A

Total Debt

$12.24B

$4.79B

N/A

Revenue Growth (3 Year Average)

22.5

2.5

14.6

Operating Margin, ttm (%)

1.5

6.1

6.3

Net Margin, ttm (%)

-0.6

4.5

2.4

ROE, ttm

-11.6

134.6

15.9

P/E

-33.7

4.4

16.4

Forward P/E

5.2

3.3

S&P average of 14.0

Source: Yahoo! Finance and Morningstar

In short, the AMR-US Airways merger could put LCC ahead of UAL as the biggest U.S. airline by traffic. The merger will reduce the number of major U.S. airlines to only four, UAL, LCC, DAL, and LUV, and thus giving airlines more pricing power, which would be good news for investors.

Note: All prices are quoted from the closing of February 6, 2013. Investors and traders are recommended to do their own due diligence and research before making any trading/investing decisions.

Source: United Continental And US Airways Are Gaining Momentum