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US Airways Group, Inc. (LCC) reported earnings yesterday, topping EPS estimates. The company's sales figure came in line with market expectations. This came as a surprise, as many had expected the company's results to match that of its competitor, Delta Air Lines, Inc. (NYSE:DAL). DAL missed revenues by $50 million and EPS by one cent. However, there was some optimism regarding passenger traffic, as DAL reported a 4% rise in revenue from domestic flights.

LCC's revenues rose by 2.8% YoY. Available Seat Miles (ASMs) increased by 2.7 percent YoY, while Passenger Revenue per Available Seat Mile (PRASM) rose by 0.1 % YoY to 15.22 cents. This was achieved through a 0.6 percent improvement in passenger yields. However, operating costs were up 0.3 percent to $3.3 billion. The good news for investors is that CASM declined YoY, which is normally not the case when PRASM rises.

Mainline CASM of 12.7 cents was down 1.8 percent. Express CASM also fell 4.5 percent to 13.97 cents. Average fuel price per gallon also fell 2.4 percent YoY to $3.07 per gallon. The average turned out to be better than DAL's $3.14. Even netting off the $0.03 per gallon of hedging loss from DAL's figure, it was still more than LCC's average.

The following graph shows the main metrics of the airline:

Metrics

PRASM (cents)

13.63

Load Factor (%)

84.9

CASM (cents)

14.07

ASM (million)

23,204

Yield (cents)

16.04

Average Fuel Price ($ per gallon)

3.07

The table above does not show the YoY changes. The following table shows how LCC has grown over the year:

Mainline

Express

Overall

Revenues

2.30%

6%

2.80%

RPM

2.40%

4.10%

2.60%

ASM

2.80%

2.40%

2.70%

Load factor (BPS)

-0.3

1.3

-0.1

Yield

-0.10%

1.80%

0.60%

PRASM

-0.50%

3.60%

0.50%

Passenger enplanements

0.60%

2.70%

2%

Average fuel price

-2.00%

-3.50%

-2.40%

CASM

-1.90%

-3.90%

-2.40%

The improvement in PRASM was brought about by increased Express business. The Express division performed better than mainline. The overall load factor, however, decreased from 85% to 84.9%.

LCC reported a 108% rise in operating income (excluding one-time items); including the special items, gives a jump of 222%. This is the best ever profit that LCC has posted in a quarter since its inception. Fuel prices have been low, and LCC has benefited the most from the situation, given that it is the only airline that does not hedge against oil price volatility. This was helped by a recent hike in prices, which has been a delight for airline investors and a disappointment for airline consumers.

According to CEO Doug Parker, the revenue environment for the airline remains strong. Travel demand is on the rise and limited supply of airplanes has allowed airlines to take prices in the direction of their choosing. Fares have been increased more than a dozen times since 2011.

Such a solid result was important for LCC to convince the creditors of American Airlines, subsidiary of AMR Corp (AAMRQ.PK), on the fact that a combined company would be much more successful than a single American Airlines. According to the Allied Pilots Association (APA), LCC will pursue a merger with American Airlines even without the consent of American Airline's management. The union says that an alternate plan is being mapped out by LCC.

It is obvious that American Airlines' management is not willing to go for the merger. LCC, on the other hand, wants the merger to take place to establish an airline able to compete with DAL and United Airlines (NYSE:UAL). Not only this, the merger will give LCC access to American Airlines' prime routes in South America.

Conclusion

The stock is trading at a forward P/E of 4x. Earnings are expected to grow by 71% per annum for the next five years. The stock is already up by 2% after its earnings release. The stock, with cheap valuations and a chance to become one of the largest airlines (after the merger) in the U.S., is recommended as a buy.

Source: Buy US Airways: A Cheap Airline With No Fuel Hedging