US Airways Triples Its Earnings, Investors Still Unhappy

| About: American Airlines (AAL)
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On July 25th, 2012 US Airways (LCC) announced another quarter of beating analyst estimates as it increased its earnings by more than 300% since the same period last year. Fare increases and lower oil prices played a major role in the company's major success as it was able to earn $1.54 per share, compared with 49 cents per share last year in the same quarter. In the last 4 quarters, the company earned a total of $2.3 per share. This performance decreases the company's trailing P/E ratio to 5 and the company's forward P/E ratio is expected to be around 3.

The distribution of seats sold also played a role in the great earnings. The company was able to sell more of the expensive seats and less of the cheaper seats, helping the margins nicely. On average, each customer paid 7.4% more per mile-traveled compared to last year. This is the most profitable quarter of the company's history as it beat estimates for 4 quarters in a row now.

After these results, analysts will definitely raise their price targets for the company. Lately, the investors of US Airways are too busy worrying about whether the company's merger with American Airlines (AAMRQ.PK) will work or not that they forgot to pay attention to the major success of the company. At this point, even if the merger fails completely, the company is still grossly undervalued as the company's current earnings can easily support an upside of 50-60%.

In the morning trading, the share price of US Airways was up by as much as 5%, but in the afternoon, they fell sharply due to a comment by the CEO of American Airlines Tom Horton. He practically said that merging the two airlines was originally his idea and it would be his decision whether to carry it out or not. He pointed out that US Airways was acting out of "desperation" and that reiterated his earlier opinion that US Airways needed this merger more than American Airlines did. Once this interview was published, investors of US Airways weren't too happy and they immediately ignored the impressive quarterly results by the company. Mr. Horton said that it's been 7 years since the last labor contract at US Airways and the company wants to increase its revenue by merging with American Airlines to strengthen its hand before renewing the employee contracts.

The story of a possible US Airways-American Airlines merger looks more and more like a chess game every day. Each day, one side or another comes up with an announcement, waiting for the other side's move. The next day, the other side makes a move and it goes back to the first side. Back and forth, communications are issued with very little actual progress. Each side is waiting for the other side to make a bad move so that they can take advantage of the bad move. At first, the rumors surrounding the merger helped the share price of US Airways significantly, however at the moment, it is hurting the company's share price despite its strong results.

On a side note, Delta Airlines (DAL) also posted impressive results today. The company's good results can be explained by most of the reasons that explain the good results of US Airways, with the exception of oil prices. US Airways and Delta Airlines use different practices in dealing with oil prices and by design, US Airways is more likely to benefit from short term drops in the oil prices than Delta Airlines.

I am bullish on US Airways regardless of whether its merger attempt with American Airlines actually materializes or not. The company has been doing great things and it is undervalued by a large margin regardless of whether you base it on current earnings or future earnings. The average analyst price target for US Airways is $17, and I expect it to reach or exceed $20 if the merger with American Airlines happens. Despite the increased ticket prices and the slowing global economy, there is strong demand for plane tickets and airliners are having one of their golden eras at the moment.

Disclosure: I am long LCC. I've written covered calls on my positions.