Analyst Opinions

Aug 12, 2007
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Been off the board for a little bit since I was unable to log-on for some reason and the administrator apparently doesn't answers e-mail inquiries. So had to create a new account. etc. Anyway, collected from another board for your reading pleasure:

Gary Chase, Lehman Brothers Equity Research, July 27, 2007.

3Q RASM GUIDE STRONG
Investment Conclusion
We still see a compelling risk-reward in the entire airline space. Even in a group we find compelling, we believe LCC shares have significant relative upside.

On the cost side of the ledger, operations look to be stabilizing, but labor costs likely to rise beyond 2007.

Target Price
New: US$ 52.00
Old: US$ 52.00

Surprise to us is in better costs and lower non-operating expenses.

Raise 2H07 on better RASM and no tax rate planned for 4Q. 2008 stays flat with better revenue offset by anticipated labor escalation to bring pilots up to recent company offer.

Michael Linenberg, Lily Ng & Alexander Loanzon, Merrill Lynch, July 26, 2007.

Good cost control
US Airways Group reported total operating expenses of $2.864 billion (ex-special items), which was $30 million better than our forecast and only 1.2% higher than a year ago.
Mainline unit costs, ex-fuel and special items, increased 5.1% to 8 cents largely a function of increased expenses related to its operational improvement plan, which is being implemented during the summer.

Maintaining Neutral
Our Neutral rating stems from the fact that US Airways is predominantly a domestic carrier (only about 17% of its system is int’l), and therefore, the carrier does not benefit as much as some of its larger competitors (American, Continental and United) from the strong overseas markets. That said, it appears that US Airways could see stronger domestic revenue trends in upcoming months – something that we will continue to monitor given our investment stance on the shares.

Kevin Crissey. UBS Securities research, 27 July 2007

Labor issues remain a distraction
The integration of US Airways’ pilots from the East and West is progressing slowly as seniority issues between the groups persist. Mgmt has offered a deal but nothing can be agreed upon until the unions are on the same page. This is likely to drag on for some time but shouldn’t be material to earnings.

Our view on the stock
LCC is finally seeing things improve. Southwest’s capacity cut, LCC’s own cut, easier comps, and a bit better demand all promise better RASM growth near-term. Also, operations seem to have stabilized after a very rocky patch, which may stop the cost creep of the last few qtrs. All that said, the stock has bounced off of its bottom and doesn’t look overly compelling to us given high fuel prices.

Valuation: No change
Our 2007 EPS est. moves materially higher, to $5.64 from $5.01. However, this is largely because we lowered our Q4 effective tax rate est. to 2% from 38%. This change was made to reflect NOLs and GAAP only. It has no bearing on valuation for LCC. Our price target remains $37 based on a 5.6x fwd EV/EBITDAR.

Michael Linenberg, Lily Ng & Alexander Loanzon, Merrill Lynch, July 27, 2007.
(After earnings conference call)

Conference call highlights
CASM pressures stem from fixing ops and weather
US Airways experienced cost pressures this quarter mainly from: 1) initiatives implemented to improve its operations, 2) weather-related costs such as crew overtime, customer re-accommodation expense, etc. This amounted to about $10 million to $15 million, and 3) higher maintenance costs associated with the return of leased aircraft.

Continuous improvement in operations during the Q
US Airways experienced quite a bit of operational challenges in the March quarter, mainly due to the integration of its two reservations system. In response, the carrier took measures during the June quarter to improve the situation. Aside from making further enhancements to the combined reservation system, the carrier hired over 1,000 additional airport workers in preparation for the busy summer season. Finally, it also replaced 600 older airport kiosks on the East Coast. The results are evidenced by the improvement in the carrier’s on-time performance (Table 1). Currently, its July on-time metric is running slightly ahead of industry average. We also note that US Airways operates a disproportionate amount of flying in the congested Northeast region.

Talks with pilots to continue
US Airways made an offer to its pilot group to take the US Airways pilots up to the America West pay scale as well as an additional 3% increase in exchange for some extension in the terms of the contract. The pilots have not accepted the proposal and progress on contract talks remain slow. Should the pilots accept the offer, it would increase the company’s expenses by about $122 million.

Outlook and Rating
US Airways is currently seeing a much improved revenue environment in the September quarter. This is mainly due to significant strength in close-in business demand (this trend began in June), proactive reduction in capacity in late August and September to better match seasonally-weaker demand patterns as well as easier year-over-year comparisons. In addition, the competitive capacity situation is also improving. A year ago, during the June and September quarters, low cost carriers added 21 new overlapping routes in US Airways’ markets while this year, there were only 2 net new markets. Unit revenue for July looks to increase about 4%, and with strong advanced bookings and yield trends, US Airways expects consolidated unit revenue to increase 5% in the September quarter.
In preparation for the busy summer travel season, the carrier implemented several initiatives to ensure operational integrity. The carrier added four operational spares, lengthened the operating day by 30 minutes on the East Coast, and added an average of 20% more ground time in delay-prone airports (such as Chicago, Newark, Boston-Philadelphia corridor).


Daniel McKenzie, Credit Suisse , 26 July 2007.

Rating OUTPERFORM* [V]
Price (25 Jul 07) 34.84 (US$)
Target price (12M) (from 65.00) 58.00 (US$)

Looking ahead, improving ops are a good sign and separately, mgmt reports an encouraging rev environment & slowing cost increases. Raising our 3Q07E EPS to $1.40 (from $1.25) on lower costs & better revs. Our 4Q07 net profit is unchanged, but have eliminated the 38% tax rate; new EPS now $1.15. Adjusting FY07 accordingly. Adopting more cautious 08 cost outlook (no longer assuming lingering merger cost synergies); CASM ex-fuel +3.8% (vs prior 1%); fuel at $2.10/gal (unchanged); PRASM +3.4% on move to int’l flying; weaker 1H07 backdrop means easier comps in 08 given key assumption of improving economy; mgmt backfilling 737 flying w/ smaller-sized E190s; & believe LCC further downsizes weaker RASM flying (e.g. PIT); 08 EPS now $5.50 from $6.15.

LCC downsizing PIT by about 25% in July & Aug based on schedules data; mgmt attributes the reductions in part to regional jet (RJ) partners opting to fly less given: i) prorate contracts that leave them exposed to revenues/fuel (in general, it’s tougher for RJ operators to achieve the yield premium necessary to offset higher fuel costs); & ii) a shortage of RJ pilots.

In general, a less attractive schedule at a hub undermines a carrier’s ability to extract a yield premium from pax willing to pay more for the convenience of nonstop flights. Consequently, believe LCC continues to downsize PIT (ultimately a source of cost savings; CAL the biggest beneficiary given nearby competing CLE hub).

New $58 PT based on the carrier trading at 10.6x P/E multiple (unchanged) our lower 08E EPS of $5.50. Our PT factors in LCC’s balance sheet advantages to peers (we est. 08 FCF of $500M or a 15% FCF yield) and a consolidation premium (LCC CEO an outspoken advocate for industry consolidation).