US Airways Stock Worth $12 On Intl Growth And Better Cost Structure

Led by strong operational performance and potential merger opportunity with American Airlines (NYSE :AMR), US Airways (NYSE:LCC) has been in limelight in the airline sector this year. The carrier reported a robust revenue growth of 10.3% this quarter and efficiently managed its non-fuel expenses to evade losses in a difficult period. The stock has more than doubled this year itself on its operational performance, improving travel demand, and possible synergy benefits through American Airlines merger. We still believe that there is some upside left in the stock as the airlines are currently riding the wave of higher fares, record load factors, improved fuel efficiency and the recent oil price correction.

We have a Trefis price estimate of $11.92 for US Airways. Below, we analyze some of the prime factors that drive a higher valuation for this stock.

See our complete analysis of US Airways

Growing Travel Demand

Despite the first quarter being very silent for the travel industry, the airlines have witnessed growing demand for travel so far this year. As the airlines are holding back on capacity growth, the carrier has been posting record load factors this season led by the Latin American markets.

Even the repeated fare hikes have not had much impact on the travel demand. The FAA (Federal Aviation Administration) forecast little passenger demand growth in 2012 with only 0.5% rise in RPMs (Revenue Passenger Miles). However, US Airways has beaten these estimates by a healthy margin posting 4.5% growth in RPMs YTD. The rising travel demand buoyed by rising passenger fares is expected to post robust top-line growth in the near future.

Growth Opportunities in International Markets

As the domestic markets become more competitive, the carrier is eyeing high potential international markets. The FAA has forecast that capacity expansions are going to be driven by international markets in the coming years. In fact, it has projected slight fall in domestic capacity for 2012.

US Airways has been able to achieve 3.4% y-o-y ASM growth this year, driven by 5.1% growth in the Atlantic markets. Going forward, the carrier has given cautious projections of 1% capacity addition in the international markets in 2012.  The medium term growth trend for US airways is going to be similar with Atlantic markets in prime focus. As the travel demand increases further, we expect the airline to beat the projected capacity growth estimates.

Efficient Cost Optimization Structures

Since US airways doesn’t invest in fuel hedging programs to cap fuel expenses, it has inclined its focus towards non fuel expenses. In its presentation during the Bank of American Merrill Lynch Global Transport Conference, the carrier announced itself as one of the most operationally efficient airline in Q1 this year with 0.6% fall in CASM (Cost per Available Seat Mile) ex-fuel and special charges.

While the capacity forecast shared by the carrier may appear to be on the lower side, it is strategically replacing older aircraft with new A321s that provision better fuel efficiency and added capacity. This strategy distributes the operational costs among a wider base and also cuts down on fuel expenses, thereby improving the profitability of the airline. Every cent/gallon change in jet fuel prices affects the fuel costs for the carrier by $15 million. If the recent fuel price correction to $90/barrel sustains for sometime at current levels, they are also going to bring substantial cost advantages to the carrier.