US Airways And Alaska’s Results Glide Higher On Gains From Capacity Expansion

US Airways (NYSE:LCC) posted strong growth in its third quarter operating profits on gains from capacity expansion and a stable demand environment for flights. The carrier raised its flying capacity by 4.1% annually in the quarter, with maximum expansion on Latin international routes followed by domestic and Atlantic international routes. This expansion in flying capacity drove up its third quarter passenger traffic by 4.7% annually. Additionally, the carrier’s third quarter passenger yield – amount collected from each passenger for a mile of flight – also rose by over 4% annually, driven by higher fares and supported by a stable demand environment. In all, higher passenger traffic and higher yield lifted US Airways’ top line by over 9% annually to $3.9 billion in the third quarter. ^[1]

Driven by this sharp rise in top line, the carrier’s third quarter pre-tax profit excluding special items also nearly doubled to $367 million. However, on a GAAP basis, which includes one-time non-operating items, US Airways’ profits fell by 12% annually to $216 million. ^[1] These one-time items mostly comprised of merger related expenses. US Airways incurred significant expenses in legal and professional fees in the quarter as it is seeking to merge with American Airlines. However, before the carrier can go through with this merger, it will have to prevail in the lawsuit brought by the Department of Justice (DoJ).

See our complete analysis of US Airways here. We are in the process of incorporating the carrier’s third quarter earnings and shall update our analysis shortly.

The DoJ Lawsuit Seeks To Block The US Airways-American Merger

The Justice Department blocked the merger of US Airways and American Airlines in early August citing customer interests. The department contends that this merger will reduce competition in the airline industry and raise airfares for customers. US Airways and American Airlines on the other hand contend that their merger will provide customers with more options on many routes by providing an alternative to Delta and United, which increased in size following their mergers with Northwest and Continental in 2008 and 2010, respectively. The trial which is set to begin on November 25 will decide if US Airways will jump ahead of its competitors and become part of the largest airline in the world or continue in its current form for the foreseeable future. For a more detailed analysis of the impact of US Airways- American merger on various stakeholders read here.

Looking ahead, irrespective of the trial outcome, US Airways plans to continue to raise its flying capacity in the fourth quarter. We figure this growth oriented capacity stance of the carrier will help raise its passenger traffic and top line in the next quarter as well.

Alaska’s Third Quarter Earnings

Separately, Alaska Air Group‘s (NYSE:ALK) top line and profits also rose significantly in the third quarter driven by gains from its capacity expansion. The carrier raised its flying capacity by over 7% annually in the quarter by expanding to new transcontinental and mid-continental markets, and increasing its frequency on certain existing routes. This expansion drove up its third quarter passenger traffic by 6.8% annually. However, gains from higher passenger traffic were slightly offset by lower unit revenue which provides a measure of passenger fares. Alaska’s third quarter unit revenue fell by nearly 1% annually due to expansion of low cost carriers such as JetBlue (NASDAQ:JBLU) in its core markets of the Pacific Northwest and Alaska. We figure the increase in Alaska’s competitive capacity impacted its ability to price its fares on some of its most important routes, which lowered its third quarter unit revenue. In all, Alaska’s top line rose by 22% annually to $1.6 billion in the third quarter driven by higher passenger traffic, and partially offset by the impact from an increase in its competitive capacity. ^[2]

Driven by this sharp top line gain, Alaska’s third quarter profits also rose to $289 million, from $163 million in the prior year period. ^[2] Looking ahead, the carrier like US Airways also plans to continue to raise its flying capacity to drive growth in its passenger traffic and top line.

See our complete analysis of Alaska Air Group here. We are also in the process of incorporating its third quarter earnings and shall update our analysis shortly.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. US Airways’ 2013 Q3 earnings form 8-K, October 28 2013, www.usairways.com [↩] [↩]
2. Alaska’s 2013 Q3 earnings form 8-K, October 24 2013, www.alaskaworld.com [↩] [↩]