The turnaround in the economy and fuel prices are critical to the estimates. “The improved outlook for 2010 is being driven by a combination of factors. On the revenue side increasing demand and disciplined capacity management are leading to sharply stronger yields pushing revenues higher. At the same time, costs remain relatively stable.”

Giovanni Bisignani, IATA’s Director General and CEO said that the improvement is not much of a salve for years of hard times. “The $8.9 billion profit that we are projecting will start to recoup the nearly $50 billion lost over the previous decade.”

The “cost” of the gains is substantial, and not sustainable. Airline lay-offs have increased due to mergers of large carriers line United (NASDAQ: UAUA) and Continental (NYSE: CAL) and Northwest and Delta (NYSE: DAL). These mergers may create the world’s largest airlines, but they do so in a way that damages the economy. Consolidation also almost always hurts customer service.

The airlines do not have much to add in the way of new fees for passengers or to cuts in service. Most airlines do not serve meals on short flights, but they do charge for luggage. Electronic check-in may allow the carriers to cut desk staff, but those cuts are one-time. New generations of air craft may drop fuel consumption, but that is one of the few ongoing benefits that airlines have found.

The single thing that is nearly certain about airlines is that they will eventually engage in irrational pricing to gain passengers. Price wars cut profits, but the trend has gone on for decades.

Profits may have returned to the industry, but in a way that is not sustainable.

Douglas A. McIntyre

USA Today looked at data from 2004 to the present which included studies by JDPower, Zagat, and from several universities.  The review by the newspaper found that “There’s no correlation between what passengers pay for flights and their satisfaction with an airline. Newer planes and a concentration on service often dictate customer satisfaction.”

The meta-data study indicates that old fleets and legacy employees hurt consumer perception of carriers such as American (NYSE: AMR), Delta (NYSE: DAL), and Continental. This perception could be worsened by that Delta merger with Northwest and the upcoming combination of Continental (NYSE: CAL) and United (NASDAQ: UAUA). Marriages between airlines often cause labor unrest, a cutback in numbers of flights, and mergers of reservation systems which can cause delays in bookings and incompatible fares.

What the survey does not show is that the traveler who wants to go from place to place by air is trapped. Discount carriers including Southwest (NYSE LUV) and JetBlue only fly to very limited parts of the nation. Fliers who want access to most of the airports around the country have no other choice than to use the large airlines.

And, that may be the secret to good service–it is easier to provide on route systems which are small and need only a modest number of aircraft. Carriers that are medium-sized and cover modest amounts of geography may be better able to treat customers because they have more control over the number of people they serve and the number of airports that they fly to.

Coming next month AirlineFinancials.com estimates US Airways (LCC) will report an all time record 3^rd quarter profit of $225 million from $3.2 billion in projected operating revenue.

This record high profit and near record 3^rd quarter revenue, follows US Airways 2^nd quarter 2010 profit margin of 8.36%. When comparing the nine largest US airlines, Alaska’s (ALK) 8.6% was the only profit margin higher than US Airways for the recent 2^nd quarter.

Less than two years ago, US Airways reported a 3^rd quarter loss of $242 million (including special items, the loss was $865 million). Toward the end of 2008, United (UAUA) and US Airways were at the top of many analysts’ list of carriers that were most likely to join the growing graveyard of failed airlines.

Just over 10 months ago in a conference call, US Airways CEO Doug Parker stated:

I think those of us [airlines] who are around have made it through a very difficult time. – It is not over – is probably the best way to say it. …This is still… what has to happen; we have to get this industry back to profitability.

The standard can’t just be survival. We passed that standard but there is a higher standard out there which is getting actual returns for investors on their investment.

Not only have Mr. Parker and the US Airways employees turned their airline around but they are now leading the industry in several categories.

Operationally, US Airways on-time performance generally leads the legacy airlines. Additionally, US Airways receives fewer consumer complaints than most other legacy carriers.

In the last year, US Airways stock is up well over 200%. Excluding United, which had a higher stock return due to their merger with Continental (CAL), US Airways stock increase was over twice the return achieved by the other seven major airlines over the same time period (see following chart – time period is prior 52 weeks as of September 1^st, 2010).

AirlineFinancials.com believes there are two primary reasons why US Airways is outperforming most of the industry on the cost side.

• Approximately two years ago, US Airways management made the decision to not hedge fuel. Excluding US Airways, all of the major airlines currently have some type of fuel hedging program. - In short, fuel hedging is a type of insurance airlines purchase to offset the price volatility of jet fuel. This “insurance” is very expensive and drives a negative return when actual fuel prices remain more or less stable. – The bottom line for the past several months is after reconciling the cost of fuel hedges compared to industry competitors, US Airways has a fuel cost advantage of approximately 3-7% for their net fuel cost.

• Excluding much smaller low cost carriers JetBlue (JBLU) and Air Tran (AAI), US Airways has the lowest labor costs in the industry.

Recognizing that fuel and labor represent the two highest cost items for airlines, US Airways has a significant cost advantage over competitors.

For year 2009, US Airways labor costs were 26.7% of operating revenues compared to Continental at 27.9%, United at 28.4%, Delta (DAL) at 30.0%, Alaska at 31.4%, Southwest (LUV) at 33.5%, and American (AMR) tops the list at 34.8% (see following chart – all ratios are for mainline operations).

To put this in some perspective (see note), compared to the largest competitors US Airways has a labor cost advantage of $97 million over Continental, $140 million over United, $268 million over Delta, $551 million over Southwest (LUV), and $653 million over American. Note: There are numerous variables that would likely increase or decrease the actual dollar values noted in the labor cost advantage (see following chart – cost advantage assumes US Airways would have the same labor cost ratio of operating revenue as the airlines noted above - values are for mainline operations only).

On the revenue side for the recent 2^nd quarter 2010, US Airways had:

• 18% year-over-year increase in passenger yield. United was the only major airline with a higher yield increase (yield is passenger revenue/passenger miles).

• 18.4% year-over-year increase in unit revenue. United and Southwest were the only two major carriers with higher RASM increases (RASM is operating revenue/ASM capacity).

• 19.3% year-over-year increase in total operating revenue. United and Southwest were the only two major airlines with a higher revenue increase.

• 26.2% year-over-year increase in ATL (advance ticket sales). JetBlue was the only major airline with a higher increase in ATL.

• For the recent 2^nd quarter, US Airways had at or near the industries best operating income margin, net income margin, and EBITDAR margin.

Conclusion- Based on US Airways more recent strong performance both operationally and financially, there should be no doubt US Airways is ready to compete.

# # #

Disclosure- The above opinions and comments should not be used to determine the worth of any stock or investment. At the time of writing, the author and his family did not hold stock and/or derivative positions in any of the airlines covered in this article.

_____________________________________________________________

Robert Herbst is an independent airline industry consultant. He is the founder of AirlineFinancials.com which provides airline industry analysis and commentary for major US carriers. In addition to his consulting work, Mr. Herbst was a commercial pilot from 1969 until January 2010. His aviation experience and financial background provide a unique analytical perspective into the airline industry.

Anheuser-Busch InBev (NYSE: BUD) is going to be one to watch after Barron’s touted it this weekend.  “Big Gains Brewing at Anheuser-Busch InBev by CHRISTOPHER C. WILLIAMS Wall Street’s doubts about the beer behemoth are fast disappearing as the Belgian-based brewer cuts costs and crafts plans to boost growth in the U.S. and globally.

Apple Inc. (NASDAQ: AAPL) has a corporate event om September 1 with new iPod updates and potentially updates on the AppleTV initiative expected.

Aruba Networks, Inc. (NASDAQ: ARUN) was listed as the #1 chart in the IBD 100 over the weekend.  At $18.39, the 52-week trading range is $7.44 to $18.69.

Continental Airlines and UAL Corp. (NASDAQ: UAUA) managed to secure DOJ approval despite the dominance that this merger will give the company over its competitors and over its customers.  Shares are likely to trade up marginally for Continental and UAL, although despite this merger being bad for America it was always expected to receive approval.

Genzyme Corporation (NASDAQ: GENZ) is indicated higher after Sanofi-Aventis confirmed a $69.00 bid to the company.  The problem is that Genzyme is not necessarily playing along.  Management seems stuck on the old $80+ high at a time that the company is still recovering from its virus and manufacturing issues.  If history is an example, we’d expect Genzyme to remain aloof.

SanDisk Corporation (NASDAQ: SNDK) is trading as though a worse warnings is coming from the company than what Intel forecast on Friday.  SanDisk shares fell 4.4% to $34.19 with more than double volume as it traded over 29 million shares.  This one we pegged for InvestorPlace.com over a week ago for a 200%+ option gain that we recommended then rolling down to a lower strike with a portion of the profits.  That may still happen.

3PAR, Inc. (NYSE: PAR) closed at $32.46 on Friday, $2.46 above the current H-P bid of $30.00 per share.  The premium is here as there is a bidding war and as investors feel that Dell will raise its offer as it has been doing so far.  3PAR was deemed an expensive buyout at $18 and then at $24, and now it is a praised deal.

United States Natural Gas (NYSE: UNG) saw an unbelievable amount of put activity in the Sept-2010 and OCT-2010 $6.00 PUTS…. more than its open interest of 44,000+ and 53,000+ contracts respectively.  Total volume in the $6.00 PUTS was over 61,000 contracts and over 75,000 respectively.  The ETF closed at $6.24, down over 3% on weak natural gas demand while oil rose steadily on Friday.  It looks like the bet is on that nat-gas is heading lower.

You can join our free daily email distribution list to hear more about dividend trends, analyst upgrades and downgrades, top day trader and active trader alerts, news on Buffett and other investment gurus, IPOs, secondary offerings, private equity, and more.

JON C. OGG

Reuters:   BP plc (NYSE: BP) began the “static kill” of its well in the Gulf.

Reuters:   Japan is worried because the yen is at a 15-year high.

Reuters:   European banks are profiting as bad loans drop.

Reuters:   Barnes & Noble (NYSE: BKS) is up for sale.

Reuters:   Oil fell as US stocks of crude rose.

Reuters:   Research In Motion (NASDAQ: RIMM) released a new phone to compete with the Apple Inc. (NASDAQ: AAPL) iPhone.

Reuters:   Motorola Inc. (NYSE: MOT) and Verizon Communications (NYSE: VZ) will build a tablet PC to rival the Apple iPad. The unit will use Google Inc.’s (NASDAQ: GOOG) Android OSReuters:   Sharp will launch a 3D handset.

Reuters:   Continental Air (NYSE: CAL) and UAL (NASDAQ: UAUA) will release more information on their merger talks.

WSJ:   The sales of electronics are hurting purchases of clothes and consumer appliances says the Commerce Department

WSJ:   The Federal Reserve is foreclosing on certain properties from its Bear Stearns asset portfolio.

WSJ:   Saudi Arabia will shut done some RIM BlackBerry services in a few days.

WSJ:   US car sales were up 5% last month but Toyota sales fell.

WSJ:   Three studies say than banks will not have to cut lending because of new financial regulations.

WSJ:   The FTC will announce a settlement with Intel Corporation (NASDAQ: INTC) over charges it worked to hurt competition.

WSJ:   Baidu Inc (NASDAQ: BIDU) is working to improve its growth.

WSJ:   Republican Senators released a list of 100 items that have failed as part of the stimulus package.

WSJ:   BP plc sold some Colombian assets.

WSJ:   Procter & Gamble (NYSE: PG) earnings were hurt by product promotions.

WSJ:   Dollar Thrifty as Avis Inc (NYSE: CAR) to improve its bid.

WSJ:   Microsoft Corporation (NASDAQ: MSFT) is using data from its China labs to improve a Chinese-English translation tool.

WSJ:   China’s CIC may buy part of Harvard’s real estate investments.

NYT:   About three-quarters of the Gulf oil spill is already dissipating.

NYT:   A National League of Cities survey shows more cities are cutting pay instead of laying of f workers.

NYT;   Germany is experiencing a broad recovery.

FT:   More China banks will trade gold.

Bloomberg:   Facebook says its largest advertisers are increasing their investments by 1000%

Douglas A. McIntyre

Monday morning will be Delta Air Lines Inc. (NYSE: DAL) in the air.  Thomson Reuters has estimates at $0.63 EPS and $8.27 billion in revenues for the last quarter, and if the airline gives guidance the estimates for the existing quarterly reports due in October are $ 0.95 EPS and $8.8 billion in revenues.  Shares are at $11.92 and the 52-week trading range is $5.58 to $14.94.

Tuesday morning will bring earnings from UAL Corporation (NASDAQ: UAUA).  Thomson Reuters has estimates at $1.74 EPS and $5.11 billion in revenues for the last quarter, and if the airline gives guidance the estimates for the existing quarterly reports due in October are $2.57 EPS and $5.37 billion in revenues.  Shares are at $21.50 and the 52-week trading range is $3.18 to $24.59.

Wednesday morning brings earnings from AirTran Holdings Inc. (NYSE: AAI).  Thomson Reuters has estimates at $0.25 EPS and $708.2 million in revenues for the last quarter, and if the airline gives guidance the estimates for the existing quarterly reports due in October are $0.17 EPS and $694.08 million in revenues.  Shares are currently at $4.85 and the 52-week trading range is $4.05 to $7.47.

AMR Corporation (NYSE: AMR) is out Wednesday with earnings. Thomson Reuters has estimates at -0.03 EPS and $5.71 billion in revenues for the last quarter, and if the airline gives guidance the estimates for the existing quarterly reports due in October are $0.63 EPS and $6.0 billion in revenues.  Shares are currently at $6.95 and the 52-week trading range is $4.06 to $10.50.

Also Wednesday morning will bring US Airways Group, Inc. (NYSE: LCC) on the tarmac.  Thomson Reuters has estimates at $1.18 EPS and $3.16 billion in revenues for the last quarter, and if the airline gives guidance the estimates for the existing quarterly reports due in October are $0.99 EPS and $3.15 billion in revenues.  Shares are currently at $8.95 and the 52-week trading range is $2.02 to $10.87.

Thursday morning will bring Alaska Air Group, Inc. (NYSE: ALK).  Thomson Reuters has estimates at $2.14 EPS and $966.37 million in revenues for the last quarter, and if the airline gives guidance the estimates for the existing quarterly reports due in October are $3.27 EPS and $1.07 billion in revenues.  Shares are currently at $48.12 and the 52-week trading range is $20.12 to $54.13.

Continental Airlines, Inc. (NYSE: CAL) is also reporting on Thursday morning with a move to a huge EPS figure from a large loss last year.  Thomson Reuters has estimates at $1.52 EPS and $3.7 billion in revenues for the last quarter, and if the airline gives guidance the estimates for the existing quarterly reports due in October are $2.21 EPS and $3.92 billion in revenues.  Shares are currently at $23.01 and the 52-week trading range is $8.87 to $25.58.

JetBlue Airways Corporation (NASDAQ: JBLU) is also due Thursday morning.  Thomson Reuters has estimates at $0.08 EPS and $939.64 million in revenues for the last quarter, and if the airline gives guidance the estimates for the existing quarterly reports due in October are $0.18 EPS and $1.02 billion in revenues.  Shares are currently at $5.96 and the 52-week trading range is $4.45 to $6.95.

Southwest Airlines Co. (NYSE: LUV) is not out with earnings until the morning of July 29.  Thomson Reuters has estimates at $0.27 EPS and $3.15 billion in revenues.  With shares at $11.88 today, the 52-week trading range is $6.61 to $13.97.

The Claymore/NYSE Arca Airline (NYSE: FAA) is thin volume and has a very low market cap with thin assets under management and has some international carrier exposure.  The weightings of 3 are very dominant: UAL Corp is 15.8%, Southwest is 13.48%, and Delta is 11.8%… so over 40% is tied up in 3 of the more than 20 components.

As far as our results of our poll over whether the airline merger between Continental and UAL should be allowed and how it affects your money, here are the results:

• Bad For Consumers: 508 votes, 35% of all responses
• Good For Consumers: 279 votes, 19% of all responses
• Good For Investors: 471 votes, 32% of all responses
• Bad For Investors: 204 votes, 14% of all responses

In short, for consumers, the response on the Continental-UAL merger was that 64.5% feel this bad for consumers.  On your investing money, 69.7% of responses feel this merger will be good for investors.

As you have seen in the 52-week trading ranges, the airline has some stocks in here that have rallied significantly from lows.  If you have flown lately to normal airline traffic destinations during any normal hours, the load factor on airplanes just feels significantly higher as there are almost no empty seats.  Pricing has been solid as airlines have not had to be as price sensitive, and if you fly most of these carriers you know that they have been able to pass on fee on top of fee to the consumer.

After such great tailwinds for the financial figures and after such great moves from lows, those airlines which somehow manage to disappoint on earnings will probably see some of the huge gains disappear.

JON C. OGG

Reuters:   The Volcker rule would prevent mergers among large banks.

Reuters:   Facebook’s 2009 revenue was close to $800 million.

Reuters:   Oil traded at $76 and gold near all-time highs.Reuters:   China told the G20 not to pressure it on the yuan.

Reuters:   A jobs bill was blocked in the Senate.

Reuters:   Regulators moved toward a set of broadband rules.

Reuters:   Motorola (NYSE: MOT) and Sprint-Nextel (NYSE: S) will sell a Microsoft (NASDAQ: MSFT) Windows powered phone

Reuters:   UAL (NASDAQ: UAUA) and Continental Airlines Inc (CAL) said lower cost airlines and foreign competition was a reason for their merger plan.

WSJ:   Russian President Medvedev is worried about BP plc (NYSE: BP) and the euro.

WSJ:   The Fed’s powers will stay in place under the financial reform plan.

WSJ:   Calpers will retain executives to be nominated by the firm for boards which it thinks have poor governance.

WSJ:   A fall in consumer prices will hurt profits at many companies.

WSJ:   Campbell is recalling 15 million pounds of SpaghettiOs

WSJ:   Lockheed Martin is preparing for military budget cuts.

WSJ:   Europe agreed to release bank stress tests.

WSJ:   There will be a battle over ratings liabilities.

WSJ:   Sony Corporation’s (NYSE: SNE) CEO received compensation of $4.5 million.

WSJ:   Qualcmm (NASDAQ: QCOM) faces a new EU probe.

WSJ:   Motorola will put most of its cash into its handset business when it spins it out and will also reduce its pension liabilities.

NYT:   As many as 50,000 Gulf workers could lose jobs with the deepwater drilling moratorium.

NYT:   China’s energy plans put the environment way down the list of priorities.

FT:   US companies are using cash for share buybacks.

Bloomberg:   BP may lose control over its US assets–a third of its revenue.

Bloomberg:   Greenspan said the US may soon reach its limit for adding sovereign debt.

Bloomberg:   A Toyota Motor (NYSE: TM) plant in China was partly shut by a strike.

Bloomberg:   The World Bank said China should use interest rates to manage its growing economy.

Douglas A. McIntyre