By Martin Tillier
Temper your sympathy a little. I am not stranded now. But I was, for 24 hours two weekends ago. It is a long story, but most of the delay was due to a US Airways (NYSE: Ticker: LCC) gate agent allowing a visibly drunk passenger aboard, despite the warnings of passengers. This was regrettable, but most of all it was avoidable. The gate agent, who was wearing a US Airways uniform, made a mistake and the passengers paid for it. I mention this, not to generate an outpouring of much deserved sympathy, but because I think it helps to explain the wariness with which investors approach US based airlines.
US Airways Group, Inc. (LCC) has been flying high this year, and will release 2Q earnings tomorrow (July 25th). Analysts are expecting further improvement in both revenues, to $3.75 billion, and EPS, to $1.55. The company has shown a remarkable recovery to profitability, not all of which can be attributed to lower oil prices. The stock has reacted accordingly, being up around 135% year to date.
The above chart from VectorVest tracks EPS on the bottom line as well as the stock price on the top of the chart. You can see that much of the appreciation is due to better performance, but that isn’t the whole story. Rumors of a buy-out of now bankrupt American Airlines have helped to boost the stock price and US Airways’ purchase of $1 million of American Airlines debt gave those rumors a boost.
With rising revenues, increasing profitability and strong rumors of a beneficial merger, everything would seem to be going LCC’s way. So why the 20% drop over the last few days? Oil prices have turned, but a 12% rise in jet fuel over the same period doesn’t explain a 20% fall in the stock. Profit taking could be a part of it, and it could be seen as a correction, but it has been a sudden, sharp decline. I believe there is an additional problem that affects LCC and the other large US based carriers. For you to better understand it I must reluctantly return to my never ending journey.
What struck me throughout the entire delay was the attitude of the US Airways staff. They were never rude or disrespectful, but there was an eerie similarity to an attitude I had encountered before. I had the good fortune to work in both Russia and Poland in their early post-communist days and experienced a sense of déjà-vu dealing with the ground staff last week. Like the Russians and Poles at that time, it seemed that the number one priority of the workers was to avoid responsibility, both personal and corporate, at all costs. This made the delay harder for the passengers, as we had to fight for even hotel accommodation after missing connections. The surprising thing, though, was the lack of surprise. None of us were shocked. It was what we had come to expect. When an industry regularly uses bankruptcy to escape from contracts and obligations, I guess a culture of dodging responsibility amongst the staff should come as no surprise.
The problem that LCC and other large US based airlines face is an almost total lack of investor confidence. Long term investing in US airlines is a thing of the past. Whether it is true or not, most investors believe that, at the first sign of trouble, they are likely to get burned again. Even when the company performs well versus its peer group, as US Airways has done, and the fundamentals all look good, investors are still nervous. Tomorrow’s Q2 results from LCC will be interesting. There will be plenty of excuses if they fail to beat (Europe and the Dollar are this season’s favorites) and maybe a temporary return to the upward trend if they exceed expectations, but I am not a fan at these levels. To me, whether good or bad, the earnings represent an opportunity to sell. The company has a low P/E and improving results, but even in today’s world of high frequency trading and short term views, investor confidence counts. The airline industry has none.
Disclaimer: The author has no position in LCC.
Martin Tillier has been dragged, kicking and screaming into the 21st century, and can now be followed on Twitter @MartinTillier and Facebook Martin Tillier.