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    Quick Take
  • In the first quarter, US Airways continued to raise its flying capacity to grow its passenger traffic. The carrier also improved its unit revenues on higher fares and higher demand from certain markets like U.S.-Latin America travel market.
  • US Airways also announced its merger with American Airlines in the first quarter. We believe that this merger is in the long term interest of the US Airways.

US Airways (NYSE:LCC) will announce its first quarter earnings Tuesday, April 23. The carrier posted strong growth in its revenues and profits in 2012, on higher passenger traffic driven by its capacity expansion. In the first quarter, the carrier continued to raise its flying capacity on domestic U.S. and Latin international routes to drive growth in its passenger traffic. Supported by a stable demand environment, it also improved its unit revenues, which are a measure of the flying capacity and the extent to which airplanes are filled. Thus, growth in the carrier’s top line is likely.

Further, the first-quarter profits of the carrier are not likely to be impacted from fuel costs as crude oil prices did not see significant spikes during the quarter. Fuel costs constitute nearly 35% of US Airways’ total operating expenses; thus, any major spikes in crude oil prices, raise the operating expenses of the carrier significantly [
US Airways’ 2012 10-K, February 20 2013, www.usairways.com]

We currently have a stock price estimate of $18 for US Airways, approximately 5% above its current market price.

Capacity Expansion In Line With The Demand Environment

In the first quarter, US Airways increased its flying capacity on U.S.-Latin American international routes to address the rising demand for flights on these routes, which is being driven by the fast-growing economies of Latin America. The carrier also raised its flying capacity in certain domestic U.S. markets in line with the demand environment. However, on trans-Atlantic routes to Europe, US Airways slashed its flying capacity significantly due to the declining demand on these routes driven by the economic slowdown in Europe. All in all, US Airways increased its flying capacity by 1.4% in the first quarter compared to the year ago period [US Airways’ traffic report for March, April 3 2013, www.usairways.com].

This increased flying capacity supported by an overall improvement in the demand environment grew the passenger traffic for the carrier by 4.3% on a year-over-year basis in the first quarter. This higher passenger traffic will drive growth in US Airways’ top line.

Merger With American Airlines Brings Several Advantages

US Airways also announced its merger with American Airlines during the quarter. When complete, the merged entity will surpass United Airlines (NYSE:UAL) to become the largest airline in the world. Currently, both US Airways and American Airlines are completing the merger regulatory process, which among other things, requires approval from US Airways’ shareholders.

We believe that this merger is in the long-term interest of US Airways due to the following major reasons. First, the merger will reduce the impact of price competition from low-cost carriers like Southwest and JetBlue on US Airways through the addition of American’s vast international operations. (See US Airways’ Merger With American Helps Mitigate The Impact Of Low Cost Carrier). Second, the merger will bring enhanced growth opportunities on U.S.-Latin American and U.S.-Asia-Pacific routes through American’s greater presence in these markets. And third, American will provide US Airways a much larger share of the lucrative U.S.-London travel market through its significant presence at the Heathrow Airport in London.

Disclosure: No positions

Source: US Airways Earnings Preview: Higher Passenger Traffic Will Lift Results