US Airways: Seeing Beyond The Merger Hype

| About: American Airlines (AAL)

US Airways (LCC) announced its third quarter report for fiscal year 2013 on October 23, recording an increase in its passenger revenue. This increment is attributed to its aircrafts' increased flying capacity, which increased 4.1% year over year in the third quarter of fiscal year 2013. US Airways replaced its Boeing (BA) 737 airplanes with the new Airbus A321, which has a higher passenger capacity.

According to the International Air Transport Association, or IATA, international air passenger capacity rose 5.6% year over year in August 2013. To gain from this growth in passenger capacity, US Airways planned to expand its international operations. The company will launch a new service between its busiest and largest hub at Charlotte next year. Also, it plans to add international flights to four European cities: Barcelona, Lisbon, Brussels, and Manchester, from Charlotte Douglas international airport.

Over the last five years, the number of international passengers from Charlotte Douglas airport increased at a compounded annual growth rate of 10.02% to 92,820 in September 2013. Considering this growth rate to be constant for next year, I estimate around 102,120 international passengers to use Charlotte Douglas airport. With this international expansion plan, US Airways is well positioned to gain on the increasing number of international passengers. In addition, US Airways is also planning to introduce new routes between Charlotte Douglas airport and China. Earlier this year, US Airways installed Wi-Fi inflight services on its various aircrafts and allowing electronic devices is the company's latest step to gain customer traction. Consolidating all the above discussed growth prospects, I expect the company's passenger revenue will grow.

Although US Airways replaced its Boeing commercial airplanes, Boeing is betting on the growth of its commercial airplanes segment and considers this segment as a strong revenue generating opportunity. To further boost the 737, it is continuously making progress regarding improving the aircraft's fuel efficiency. As per this announcement, the 737 MAX airplanes will have 14% better fuel efficiency, as compared to most fuel efficient single aisle airplanes, like those of Airbus.

Considering 737 as a prime growth opportunity, Boeing is expected to increase the production rate of these airplanes. Currently, the company produces around 38 such airplanes per month and expects to increase this production rate to 42 airplanes per month in the first half of next year. The average cost of a 737 is $93.55 million, as per the table below.

737 airplanes

Average cost in $ million (2013)







737 MAX 7


737 MAX 8


737 MAX 9


Source: Company's report

Considering that the production rate of the 737 is around 456 per annum, and with the above mentioned average cost, these airplanes currently generate around $42.65 billion annually. With the increase to 42 airplanes per month, I estimate this revenue contribution will increase 10.53% annually to $47.14 billion in 2014. With growth aspects of the commercial airplanes segment, I am bullish on Boeing's outlook.

Peer comparison

The nearest rival of US Airways in the airline industry is Southwest Airlines (LUV). The stock valuation of US Airways conforms to its growth fundamentals and supports the growth momentum of US Airways' stock. The trailing twelve months price to earnings, or PE, ratio of US Airways is 8.18, significantly lower than Southwest Airlines' trailing twelve months PE ratio of 20.87. The forward PE ratio of US Airways is 7.03, lower than its trailing twelve months PE, implying that the earnings of US Airways is expected to increase going forward. However US Airways', price earnings to growth, or PEG, ratio is 0.87, higher than Southwest Airlines' PEG ratio of 0.54. US Airways' price to sales, or PS, ratio is 0.32, lower than Southwest Airlines' PS ratio of 0.73.

These valuation parameters indicate that US Airways' stock is currently undervalued. Although Southwest Airlines may not be a better pick compared to US Airways based on valuation, Southwest Airlines reported a strong third quarter of fiscal year 2013 on October 24, 2013. During this quarter, Southwest Airlines returned approximately $178 million to shareholders by paying around $28 million in the form of dividend and repurchasing its shares for approximately $150 million. On September 6, 2013, Southwest Airlines extended its $150 million share repurchase program, which is expected to complete by the fourth quarter of fiscal year 2013. This accelerated share repurchase program will certainly fetch investors' attention.


US Airways expects to bolster its passenger revenue with its international expansion plan of Charlotte Douglas international airport. The growth fundamentals of the company are well supported by its valuation parameters. After considering all the growth factors of US Airways, I suggest investors can safely rely on this stock for favorable returns.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.