On Wednesday, US Airways (UNKNOWN: LCC.DL ) reported an impressive 90% jump in Q3 pre-tax profit. This drove adjusted EPS to $1.16, just ahead of the average analyst estimate for EPS of $1.12. The carrier is profiting from decisions to increase the average size of its aircraft and add seats to some of its planes, both of which boost efficiency. US Airways also benefited from strong travel demand over the summer.
Q4 holiday bookings have been strong so far, but US Airways faces more difficult year-over-year comparisons this quarter. Moreover, this month's government shutdown had a significant impact on October revenue, which will keep revenue and profit growth more muted in the fourth quarter.
Solid unit revenue growth
US Airways' lack of geographical diversity compared to larger peers like United Continental (NYSE: UAL ) and Delta Air Lines (NYSE: DAL ) has been a blessing in disguise this year. US Airways has less international exposure than the other legacy carriers, and its international capacity is disproportionately devoted to the transatlantic market.
Fortunately, travel demand has been high for domestic routes and transatlantic routes this year. This can be seen in the US Airways results: unit revenue increased 5% for domestic routes and 8% for transatlantic routes, but was flat for Latin American routes. Overall, US Airways' unit revenue was up about 5% year over year in Q3.
By contrast, routes to Asia -- where US Airways has no presence -- have been hurt by industry capacity increases to China and the dramatic weakening of the yen. For example, United reported a 9.4% drop in unit revenue for its Pacific region in Q3, well below its system average of a 2.7% increase. Delta's Pacific region also dramatically underperformed, with unit revenue down 4.2%, compared to a 4% system-wide increase.
Give and take
While US Airways benefited from its lower geographical diversity last quarter, it will pay the price this quarter. US Airways appears to have been disproportionately hurt by the government shutdown, because Washington's Reagan Airport is one of its four hubs.
According to US Airways President Scott Kirby, last-minute bookings for flights to and from the D.C. area airports dropped 54% year over year during the shutdown. The sudden change in demand left US Airways no time to react. As a result, while October unit revenue was tracking toward a 4%-5% increase in mid-September, US Airways now expects a modest 1% increase in unit revenue this month.
Fortunately, demand appears to have snapped back to pre-crisis levels as soon as the shutdown stalemate was resolved. As a result, the shutdown impact should not linger beyond October. Nevertheless, US Airways faces tough year-over-year comparisons this fall, which will keep unit revenue growth around 2% for the full quarter.
Heading for a merger
As strong as the results were, US Airways CEO Doug Parker is still determined to merge with larger rival AMR. He noted that US Airways was just recently upgraded to a "B" credit rating, which leaves it five notches below investment-grade. In other words, Parker believes there is a lot of work to be done for US Airways to meet its full potential, and the merger is a necessary step in that process.
The significant impact of the government shutdown on US Airways in October highlights the rationale for a merger. US Airways' high profitability can be attributed in part to luck, insofar as its capacity was concentrated in the best performing parts of the globe. In Q4, its luck is running out, as its strong presence in Washington D.C. exposes it heavily to government-related travel. A merger with AMR will make for a more stable and geographically diversified airline.
Two enviable airlines...
Geographical concentration is just one of the pitfalls of airlines like US Airways. But two airlines are breaking all the rules by keeping costs low and avoiding direct competition -- leading to enviable profits. Click here to learn how these two airlines are leading a revolution in the industry, and discover whether they can keep delivering big gains for shareholders!