Sky-high jet fuel costs have been a major headache for all the airlines, but US Airways (LCC.N) may well see its earnings take off as that headwind vanishes.

Among the groups celebrating the recent decline in crude oil prices, some of the greatest jubilation is being demonstrated by airlines, for whom jet fuel costs are one of the single largest variable expenses with which they must contend in any given year. (By some estimates, more than a third of the industry’s revenues last year went to paying its jet fuel bills.) Better yet is the fact that consumers finally are having to fork over more in exchange for their tickets. The chart on the left, below, displays the CPI Airline Fare index; after its 2008 nosedive took this measure of airline ticket prices to 249, it recently has recovered and gone on to hit a record high of 318. Unsurprisingly, this good news has been reflected in the share prices of the airlines, which have been flying high of late. The Thomson Reuters US Airline index (see the chart below, on the right), also has bounced back from its lows of late March, 2009, to its current level of 69. That’s still well below its recent highs, recorded in 2006 and 2007, but bullish investors still seem to be willing to believe that the drop in crude prices will be significant and long-lasting enough to give airlines’ bottom lines a boost, without being so severe as to indicate that another recession is brewing that could cause travelers to simply stop traveling altogether.

Among the beneficiaries of this trend is US Airways Group (LCC.N), which cut its capacity last year to rein in costs during the period in which jet fuel costs peaked. The company today announced that its passenger revenue per available seat mile – a key indicator of financial health – rose about 6% in June, a month during which its consolidated traffic jumped 1.7%. That’s the latest piece of good news from the airline, which posted a profit in the first quarter after the impact of the sale of some airport landing and takeoff rights, and whose stock price has soared about 70% in the last three months. Analysts have responded to this good news by boosting their estimates for the company’s second quarter profits; in the last 30 days alone, they have boosted estimates eight times, and no analyst has cut his or her forecast for the company’s earnings.

Today, that consensus forecast stands at $1.40 a share. But the SmartEstimate, a proprietary StarMine measure that puts a larger weight on the most recent estimates by top-rated analysts with a track record for accuracy, still remains higher, predicting that US Airways may do better still, earning $1.43 a share. The gap between the consensus and the SmartEstimate gives the company a Predicted Surprise of 2%, a level that tells us that there’s a reasonably high probability either that analysts will continue raising their forecast for US Airways further, or that the airline will report a positive surprise when it announces its second quarter results on July 26. 2012.

Analysts also are becoming more bullish about the outlook for US Airways’ annual earnings, raising the consensus forecast for its 2012 results to $2.95 a share. Again, however, the top-ranked analysts have been busy raising their estimates for the airline’s full year, and the SmartEstimate now stands at $3.16 a share. That gives the company an even larger Predicted Surprise of 7.2% for the full year. (The company will report full year earnings on Jan 25, 2013)

US Airways succeeded in posting net income of $48 million (which translated into earnings from continuing operations, on a diluted basis, of 24 cents a share) in the first quarter of 2012, compared to a loss of $114 million from continuing operations, or 70 cents a share in the year-earlier period, in spite of an increase of 13% in the per-gallon price of jet fuel. “Had fuel prices remained at the … first quarter of 2011 levels, our fuel expense would have been $133 million lower … in the first quarter of 2012,” Doug Parker, the airline’s chairman and CEO, told an earnings conference call during which management discussed the first-quarter results. True, the company reported first-quarter loss of 13 cents per share, before taking into account the bottom-line impact of a one-time transfer of landing and takeoff slots to Delta Airlines. But that loss still was smaller than expected and smaller than the loss of 68 cents a share recorded in the year-earlier period. It seems clear that US Airways had adjusted well to operating more profitably in an environment dominated by sky-high jet fuel costs; the odds are that a decline in fuel prices may remove a significant headwind to profitability.

If US Airways succeeds in posting stronger-than-expected earnings for its just-concluded second quarter and for the remainder of the year, this will put it in a stronger position to push forward with its efforts to acquire AMR Corp’s American Airlines while the latter is still operating under bankruptcy court protection. As reported in this article from Reuters News, AMR’s CEO, Tom Horton, has made it clear that he wants his airline to emerge from bankruptcy as an independent company. While Parker has been drumming up support for a bid among AMR’s unionized employees, winning support for a merger from more than 50,000 workers worried about the fate of their jobs at American as it tries to battle its way to profitability, Horton has pooh-poohed talk of a takeover by a smaller carrier like US Airways as just another doomed attempt by the latter to find a merger partner.

Certainly, US Airways’ increasing financial strength has helped win the support of unions; the more robust its bottom line, the more plausible its promises to AMR employees that as part of a merged company, they would face fewer demands for wage cuts and job losses. So there’s a lot at stake as the clock ticks down towards July 26, the date US Airways is scheduled to tell the world just how high its second-quarter profits soared as a result of the slump in jet fuel costs.

 
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