Airline stocks bear close look

Andrew Leckey

April 28, 1992|By Andrew Leckey | Andrew Leckey,Tribune Media Services

The nation's airlines, reeling from a disastrous 1991, have put on a happy face and christened this the year of the new pricing structure. What remains to be seen is whether it benefits travelers, stockholders and the industry alike, and, most importantly, whether it will actually hold up.

The plan initiated by American Airlines wipes out the prior complicated system. It replaces it with four-tiered pricing that drops top business fares by as much as 40 percent.

Most carriers have fallen in line, though there has been some adjustment of the plan. The hope is that money lost now will pay off big as more Americans fly.

Yet investors in airline stocks should make no mistake: Airlines' bottom lines will be hammered hard by the new pricing. Only American, United and Southwest are expected to turn a profit in the second quarter.

"Near-term, there will be a crimp in revenue growth for the airlines because they're cutting fares and yield per passenger," predicted Thomas Longman, analyst with Bear, Stearns. "Until there's more traffic, they won't be reaping rewards."

Simplified won't necessarily mean frozen prices.

"The pricing structure will hold in terms of four basic fare levels, but the question is whether they'll fool around with the cost of those fares," said Stephen Sanborn, with the Value Line Investment Survey. "American, in coming up with the pricing, simply lowered fares to levels most people were paying anyway."

Many do believe it will eventually help the bottom line.

"Following a weak second quarter, the new pricing strategy should be a plus for the industry by stimulating travel," said John Flanagan, analyst with Stein Roe & Farnham.

For the investor willing to accept volatility, here are the airline stock picks:

American Airlines (AMR Corp.) is recommended by Mr. Longman and Mr. Flanagan. As the largest domestic carrier, it should benefit most from the U.S. economic recovery. Chairman Robert Crandall, in Mr. Flanagan's opinion, is the industry's top executive. With route expansion completed, costs will come down. It is well-positioned in North and South America and becoming important in the North Atlantic.

United Airlines (UAL Corp.) is a favorite of Mr. Longman's and Mr. Flanagan's. Like American, it should benefit from U.S. economic recovery and is well-established internationally. It has had trouble getting Latin American operations acquired from defunct Pan Am up-to-speed, but that should be resolved. United trimmed four-year capital spending plans by $2 billion.

Southwest Airlines is suggested by Mr. Flanagan. Point-to-point flying with no amenities fills a niche. Its costs are a mere 6 cents a mile. Taking advantage at Chicago's Midway Airport of the opening caused by the failure of Midway Airlines, Southwest has 100 flights scheduled by year-end. Arizona and California routes are highly successful.

Atlantic Southeast Airlines is a Sanborn pick. Based in Atlanta, it benefited from Eastern Airlines going out of business and boasted record earnings in 1990 and 1991.

Mesa Airlines is recommended by Mr. Longman. Its low-cost structure is on target in the current industry environment.

Meanwhile, Delta Airlines isn't as attractive right now because the expense of going international by acquiring Pan Am in Europe has been substantial. It's had trouble controlling the cost of adding 60 destinations and new employees. Analysts suggest waiting a while to see whether Delta gets its financial act together.

Another competitor, USAir Group, is struggling against a competitive market without the capacity to compete with the three biggest carriers on all fronts. It's trying to emphasize key eastern routes rather than make alliances internationally. With the issue of union concessions before it, USAir holds little near-term investment allure.

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