Airline industry appears ready for takeoff to profitable times

Andrew Leckey

August 04, 1993|By Andrew Leckey | Andrew Leckey,Tribune Media Services

The airline industry may be taking off again, thanks to some long-awaited profits and encouragement from the federal government.

Those 1993 surprises are fashioning a revival for an embattled industry that suffered a mind-boggling $10 billion in losses in the last three years.

The potential for turnaround appears so strong that many Wall Street analysts are talking up the prospects of airline stocks, whose prices nose-dived to inexpensive levels during the preceding debacle.

"There have been ticket price increases, oil is at a three-year low and domestic seat capacity is declining just as the economy begins to expand," noted Samuel Buttrick, analyst with Kidder, Peabody. "Add to that the positive recommendations from the national commission on the airline industry, and you see why I recommend broad exposure to the group."

Profits in the past quarter, such as the $47 million turned in by AMR Inc., parent of American Airlines, are far from awesome. But they're better than the losses of the recent past and may signal better times ahead.

"In 1994 and '95, the airline industry will be profitable," predicted Candace Browning, analyst with Merrill Lynch.

"The cyclical recovery, a drop in seat capacity from pulling aircraft from service and the likelihood that big carriers will emulate the efficient short-haul strategies of carriers such as Southwest Air all bode well."

Also, the government commission whose goal is the reviving of the airline industry recently said it would recommend tax cuts and regulatory relief to help improve what it called the industry's "abysmal financial condition."

Among its proposals are exemption from any new tax on transportation fuels, rolling back taxes on passenger tickets and changing the income tax code so money-losing carriers wouldn't be subject to the alternative minimum tax.

"Before the commission meetings, most industry management expected little, or feared that its proposals could hurt carriers," said Vivian Lee, analyst with Smith Barney, Harris Upham, who credits Southwest Air Chairman Herb Kelleher's involvement in the commission with representing the industry well.

"Now we have proposals that seem palatable to everyone, so we'll have to see whether all these proposals will in reality mean anything."

In Lee's opinion, bankrupt carriers have drained the health of the industry, and it's time the thousands of lost jobs at strong carriers be considered just as important as jobs at troubled carriers that have been proven incapable of being profitable.

The number of recommended airline stocks is growing, though investors should keep in mind the inherent volatility of this industry. The best strategy has been to buy when shares are low on negative industry trends and sell as soon as positive results boost their value.

Stock in UAL Corp., parent of United Airlines, is recommended by Browning and Buttrick because of its reasonable price and its impressive worldwide route system.

A United Airlines uncertainty is the recently announced employee plan to gain control of the airline in exchange for wage concessions. While Buttrick worries that it would be difficult to give employees majority ownership without detracting from the earnings potential, Browning expects employees will wind up with a sizable stake in the carrier, but not majority ownership.

AMR Inc. is another pick of Browning and Buttrick. Its earnings in the second quarter, although relatively meager, seem to indicate the business cycle is starting to move in its favor. Its campaign to cut costs is working, and its balance sheet should start to show steady improvement.

Delta Air Lines is suggested by Buttrick and, somewhat less enthusiastically, by Browning. Its modest $7.1 million in profits in the last quarter offers hope, though it must continue to press for serious change in its cost structure.

Southwest Air is recommended by Lee, who considers it the success story of deregulation. Route expansion continues at a brisk pace. While other analysts deem its stock a bit pricey at this time, they agree it has established itself as the pre-eminent carrier in short-haul markets.

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