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Guy Kosov
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student at Fresno Pacific University (junior) B.A. in business administration finance emphasis. Swim team Captain at Fresno Pacific University
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  • US Airways High Expectation For 2013

    Guy Kosov

    LCC- US Airways

    The airline industry today is drastically different from what it used to be years ago. Today prices are more affordable and air traveling is clearly the preferred mode of transportation. Consumer demand for air travel has increased in the last few years. We can see that people prefer to save time by flying instead of taking long drives or any other means of public transportation. Another aspect that helped to attract customers to air travel is the development of technology like: personal in-flight entertainment systems, and worldwide Wi-Fi. These amenities provide the traveler the opportunity to keep working while they are traveling to their destinations. We can notice that there is a recovery of the whole air traveling industry after years of struggle, and one of the reasons is the fact that companies developed better business models and customer service relationships. Companies learned how to reduce ticket costs by cutting different expenses or adding fees like baggage for example. We also can see mergers between companies like United Airlines group, Delta and others. The strategies behind mergers like these help to reduce competition and provide more profitable operation.

    Why U.S. Airways is a good investment?

    Financials:

    U.S. Airways just like other companies in the industry have suffered from hard times in the past, and almost went bankrupt few years ago. U.S. Airways are now experiencing good stable growth in the company and it slowly became profitable again. Last year was the best fiscal year the company has had in relation to operational profits.

     

     

    Average Growth Rates for Past Five Years:

              

    YEAR

    2008

    2009

    %

    2010

    %

    2011

    %

    2012

    %

    Avg 5 growth

    Revenue

    12118

    10458

    -13.70%

    11908

    13.86%

    13055

    9.63%

    13831

    5.94%

    3.94%

    Net Income

    -2210

    -205

    90.72%

    502

    344.88%

    71

    -85.86%

    637

    797.18%

    286.73%

    Earnings per Share

    -1.54

    2.61

    269.48%

    0.44

    -83.14%

    3.28

    645.45%

    3.28

    0.00%

    207.95%

    Cash Flow

    -2048

    -624

    69.53%

    603

    196.63%

    -121

    -120.07%

    242

    300.00%

    111.52%

    Gross Margin

    7562

    5376

    -28.91%

    7848

    45.98%

    5849

    -25.47%

    6508

    11.27%

    0.72%

    Even under a bad economy when most companies were struggling, we can see a revenue growth and net income growth over the last few years. We can see an increase in the company's cash flow, which is part of their new strategy. The gross margin is pretty stable, 5-year average of gross margin is 0.72%, and we don't see an increase because of the fact the company had difficulty adjusting to the increasing fuel prices (US Airways is the only airline company that does not running a fuel hedge). The positive increase in Revenue, NI, EPS and CF growth rates is an indicator that the company is running an efficient operation under a good business model. Another strong indicator that the company has improved its operation is the growth in Revenue Passenger Miles. In 2011 the company had 44,551 million in RPM, in 2012 the number increased to 46,071 million. The company also increased the ASM revenues from 52,476 million in 2011 to 53,783 million in 2012. The positive sign about those numbers are that even though the company decreased the number of departures from 403,000 in 2011 to 401,000 in 2012, there is still an increase in the RPM, ASM, NI and Revenues. This shows us that the company is operating under a solid business model that provides growth and operational efficiency. We can also see that the company is slowly reducing its debt, which is a positive sign for the future.

    Cash Flows From Financing Activities

    2008

    2009

    2010

    2011

    2012

    Debt issued

    1586

    919

    467

    764

    634

    Debt repayment

    -784

    -407

    -774

    -675

    -495

    *Morningstar

    U.S. Airways is taking their time in paying back their debt, said CEO Parker. Parker addressed his views on the cash issue by saying that his primary focus is to generate more cash at this point, and that he regularly evaluates whether or not to begin paying down debt. Parker said that, in his view, the issue of cash is directly related to the issue of investors' confidence. "Every airline industry observer knows how bad things have been in the past, and no airline wants to be left without a cash cushion in the middle of an economic crisis," stated Parker. Parker also added that simply holding cash is inefficient in the long term. We can take this as a positive sign because now the company is more aware of the environment and it definitely provides investors more confidence when the company is holding cash on the side, as well as thinking about long term investments. (Like the merger with AMR)

    year

    2009

    2010

    2011

    2012

    Total Debt to Assets:

    1.05

    0.99

    0.98

    0.92

    *Morningstar

    We can see that the total debt to assets ratio is slowly going down which is a positive sign for the company, as we said the company is trying to regulate its debt payments and slowly grow its assets.

    year

    2009

    2010

    2011

    2012

    Long-Term Debt to Equity:

    -10.24

    47.90

    26.69

    5.23

    *Morningstar

    We can see a reduction in 2012 for long-term debt to equity ratio. This means that the company is reducing its borrowing, and the increase in earnings is coming from better operation and performance, not from increasing debt. We can see that the company is increasing its profitability by observing the cash flow per share ratio that was 4.99 in the end of 2012 compare to 2.88 in 2011.

    year

    2009

    2010

    2011

    2012

    Sales per Share:

    78.63

    59.24

    79.60

    67.80

    Cash flow Per Share:

    0.44

    4.00

    2.88

    4.99

    *Morningstar

    An increase in the company's operating income occurs due to the company cutting expenses, but still maintaining a stable (almost the same level) growth of gross margin. The five years average of gross margin growth was 0.72%, but the fact that they are cutting expenses provides the company more money under the operating income, which is also an indicator of good management and awareness to expenses.

    Fiscal year ends in December. USD in millions except per share data.

    2008-12

    2009-12

    2010-12

    2011-12

    2012-12

    Gross profit

    7562

    5376

    7848

    5849

    6508

    Operating expenses

         

    Sales, General and administrative

    4475

    3802

    4411

    3927

    4153

    Depreciation and amortization

    215

    242

    248

    237

    245

    Other operating expenses

    4672

    1214

    2408

    1259

    1254

    Total operating expenses

    9362

    5258

    7067

    5423

    5652

    Operating income

    -1800

    118

    781

    426

    856

    *Morningstar

    Projected operating income for the 2013 under good, bad, and average economy:

    Under good economy $1368

    Under average economy $1041

    Under bad economy $904

    The positive affect of US Airways and American Airlines merger:

    On February 14th U.S. Airways merged with American Airlines (AMR). Together they created the largest airline group in the United States. For U.S. Airways it was one big step in getting bigger and being able to compete with other big airline companies like United Group and Delta Group. For American Airlines this was a step in the right direction after they filed a bankruptcy stage 11 in 2011, because they now can build up their competitive strategy again. Due to the merger and consequentially becoming the biggest airline group in the United States the company will be able to compete more successfully on a global platform. The new airline, which will be called American, set promises on making 6,700 flights a day on 600 planes to 336 cities in 56 countries. The company will be under the leading hand of the CEO Parker, who already has proven that he can facilitate a good business model and create operational efficiency. He also has experience with the company before the airline merger and showed that he understands the logistics of the process. This can indicate a bright future for the U.S. Airways/American Airlines group, and less competition in the industry. This should lead to an increase in revenue that can be expected from good regulation of expenses and labor. The group will still have to create and maintain a good customer relation culture and not repeat past mistakes when the industry failed to build such a relationship. Parker's job is to transfer the good business culture he created in U.S. Airways to the combined company.

    Future evaluation based on past results:

    In analyzing the last 24-quarters of US airways, the company had 9 bad quarters, 7 average quarters and 8 good quarters. Using the weighted average method, I predicted that under good economy the company will grow 7.87%, under an average economy the company will experience 2.84% growth, and under weak economy the company will have a 0.08% growth.

     

     

    revenue growth Q

    Q1

     

    Q2

     

    Q3

     

    Q4

      

    2013

             

    2012

    3266

    10.30%

    3754

    7.17%

    3533

    2.82%

    3278

    3.90%

     

    2011

    2961

    11.74%

    3503

    10.47%

    3436

    8.08%

    3155

    8.49%

     

    2010

    2650

    9.14%

    3171

    18.10%

    3179

    16.92%

    2908

    10.74%

     

    2009

    2428

    -14.51%

    2685

    -17.56%

    2719

    -16.62%

    2626

    -4.86%

     

    2008

    2840

    3.95%

    3257

    3.23%

    3261

    7.41%

    2760

    -0.61%

     

    2007

    2732

    3.80%

    3155

    -0.50%

    3036

    2.29%

    2777

    -0.32%

     

    2006

    2632

     

    3171

     

    2968

     

    2786

      
       
       

    sample size

    24Q

      

    Bad economy

    9

    0.74%

    0.08%

    Average economy

    7

    19.86%

    2.84%

    Good economy

    8

    62.97%

    7.87%

    Sum

    24

      
     

    current

    projected growth under good economy

    projected growth under bad economy

    Projected growth under average economy

    Gross margin

    47.05%

    47.05%

    47.05%

    47.05%

    Operating margin

    6.19%

    9.17%

    6.53%

    7.31%

    ROA

    6.78%

    10.68%

    6.69%

    7.89%

    ROE

    135.00%

    145.41%

    142.47%

    146.86%

    Book Value per Share

    3.87

    9.88

    7.91

    8.63

    EPS

    3.12

    5.68

    3.36

    4.05

    Cash flow per Share

    4.99

    7.58

    5.02

    5.92

    Price-book Ratio

    4.167797

    0.546

    0.2857

    0.534

    Price -earnings Ratio

    5.168854

    0.466

    0.192

    0.767

    Price-cash flow Ratio

    3.237522

    0.626

    0.2941

    0.801

    price per share current

    16.14

       
              

    Conclusion:

    I think that right now U.S. Airways is in a great position and all the factors are playing into the company's favor. I think that the leadership management of the company showed us that they have learned from past mistakes and they developed an efficient business model that has helped them to recover and gain value. Another important issue is the fact that the company is accumulating cash for future potential threats. This helps us investors to gain confidence in the operation, showing efficacy in the top-end management. The merger with American Airlines will make the group the biggest air carrier in the United States, and I see that as opportunity for the company to increase revenues and compete better in the global market. I have a lot of confidence in their CEO Parker, who has already experienced a big merger in the past and knows how to create an efficient process that will benefit the company. He has already provided a good business model that works for U.S. Airways, and I have confidence that he will be able to implement the same business efficiency and cooperative culture in a combined company. In my opinion the stock price is undervalued. Using the weighted average method I predict that the company stock at the end of 2013 will be in the range between $20.86 under a bad economy, $22.53 under an average economy, and $30.71 under a good economy.

    2013 forecasting of operating income:

    Under good a economy $1368

    Under an average economy $1041

    Under a bad economy $904

    The expected market return for 2013 in LCC based on the CAPM is 6.41%

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Apr 19 4:17 AM | Link | Comment!
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