Sometimes investors see a silver lining.
Start with recession. Toss in war, escalating fuel prices and fear of terrorism. Next, mix in record corporate losses, layoffs and bankrupt competitors.
Despite all those dark clouds, the airline stock group has soared more than 25 percent in value this year, a clear indication that investors have shrugged off all the bad news as purely temporary.
Which has left many airline industry analysts perplexed, since no one really knows for sure how everything is going to turn out.
”Stocks have been ignoring what`s happening, instead looking beyond recession, low traffic, still-high fuel prices and the likelihood of rising labor costs,” noted Thomas Longman, airline analyst with Bear, Stearns & Co. ”The belief is that the collapse of Eastern Airlines will help the pricing of carriers such as Delta Air Lines and USAir Group, and that the second half of the year will show general industrywide improvement.”
Chief beneficiaries of the problems of many carriers should be UAL Corp., parent of United Airlines, and AMR Corp., parent of American Airlines, Longman believes. He considers their stock inexpensive when compared to their prospects and recommends them for purchase.
”Some problems probably are temporary, for the fuel price problem seems to be rectifying itself, and, if the war is short, the downturn in
international travel may not last long, either,” said Paul Nisbet, airline analyst with Prudential-Bache Securities.
”However, Pan Am Corp. and TWA seem to be in the latter stages of a death spiral similar to the one experienced by Eastern Airlines, and, looking out a bit, they probably won`t be around in their current form.”
Nisbet considers the best prospects to be those of Delta, which could wind up with 90 percent of the Atlanta market if it is permitted to take over Eastern slots there. He considers its stock price low and headed skyward. Another favorite, Alaska Air Group, is a stock with good potential for appreciation.
”Airline losses will continue to be heavy in the first quarter, just as they were in the last quarter of 1991,” predicted Mark Daugherty, airline analyst with Dean Witter Reynolds Inc.
”Since we`ve already seen America West and its rivals offer deep discounts and Northwest Airlines give up its attempt to enact a $15 surcharge, we can probably expect weaker carriers to keep the price competition going.” Daugherty isn`t recommending any airline stocks, because he sees industry volatility ahead. With carriers such as Midway Airlines, TWA, Pan Am, Continental and America West so highly leveraged, there`s no reason for enthusiasm, he believes.
There are always differences of opinion about the airline industry, since the competition is always stiff and unpredictable.
Nisbet has American, United and Southwest Air listed as ”holds.” The new agreement between American and its pilots will mean somewhat higher labor costs. United will feel a negative impact from the decline in international travel and faces union negotiations 8 to 10 months from now. Southwest has the best prospects of the three, he believes.
Meanwhile, he has placed his ”sell” rating on Midway Airlines, America West and USAir. Midway will continue selling off assets to get operating capital, Nisbet believes. It must hope for a short recession and wait for a white knight, who is unlikely to arrive. America West, while miraculously managed by aggressive bosses, has a lot of debt and the potential for something going wrong. USAir, which recently said it will furlough 3,500 employees, is the best off of the three, but it has its limitations, he contends.
The airline industry is cyclical, and investors generally consider its stocks to be trading vehicles, with solid potential for gains if you`re on the right side of a movement. Some analysts believe that if the industry decreases to just a few strong carriers, as many expect, it may become a more stable industry, with fewer lows in its cycle.
Recently, Transportation Secretary Sam Skinner announced the government is more open to foreign investment in U.S. carriers. Permitting a 49 percent ownership share, compared with the past 25 percent share, is designed to make this easier, yet few analysts believe it has been done soon enough to help troubled carriers.
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Andrew Leckey`s column appears Sunday, Monday and Thursday.
