Airline stocks may be cleared for takeoff as industry regroups

July 26, 1995|By Andrew Leckey

On a wing and a prayer.

The performance of airline stocks for more than five years provided a turbulent flight for investors, because of fare wars, bankruptcies, recession, labor disputes and over-expansion.

But skies have suddenly turned tranquil. After a $510 million loss for the industry last year, $1.5 billion in net earnings are projected for 1995. Next year could bring a record-breaking $2 billion.

There are many reasons why. The economy may finally get its soft landing; carriers are flying more people on fewer airplanes; and fuel prices are lower. Cost-cutting measures are paying off; losing routes have been dropped; and each carrier is profitably emphasizing its own hub airport. There have also been some fare increases.

Examples of intelligently cutting losses include American Airlines pulling out of Raleigh/Durham, N.C., and Continental Airlines ending its unsuccessful low-fare Continental Light service.

Despite some dramatic stock price increases this year, it's believed on Wall Street that airline equities are poised for even greater gains as good news unfolds. These aren't stocks that you hold forever, but they can provide a good ride if you get on board at the right time.

"The airline stocks are still really cheap if the industry has two to three more years of pretty decent earnings, as we expect, so you haven't missed your chance to invest," said Jason Weiner, analyst and portfolio manager of Fidelity Select Air Transportation Fund, up a dramatic 48 percent in the first half of 1995.

Because airline stocks tend to move as a group, good news tends to boost most of them.

"Some airline stocks are up 50 percent this year and there aren't too many sectors that can show that kind of improvement," noted Jeffrey Long, analyst with J.P. Morgan Securities. "However, the fortunes of the industry can change very quickly for better or worse, so I advise investors to be greedy, but not too greedy."

There's always reason for caution with these cyclical high-fliers. For example, carriers must spend $75 million to refit planes to meet federal noise-reduction specifications by the year 2000. A proposed 4.3 cents-a-gallon fuel tax slated to take effect this fall could cost the industry $500 million a year. Fears of economic problems, terrorism, fuel price increases or uncontrolled fare wars are always on everyone's mind.

"There will always be periods of low airline fares because there will always be times when it's necessary to stimulate business," explained Helane Becker, analyst with Smith Barney Inc.

"However, you aren't likely to see 50 percent-off airfares until another carrier is close to bankruptcy and needs to pay its pilots, or until the next recession, which we don't think will occur until 1997."

So enjoy the good times while you can.

"The typical airline cycle is three to five years and the industry will go back into the red again at some point, but I think we're in for a couple of years with good numbers," predicted Candace Browning, analyst with Merrill Lynch & Co.

Buy the best airline stocks when prospects look good, but head for the emergency exit at times of trouble:

* Delta Air Lines is recommended by all four analysts interviewed. It has a well-thought-out strategic plan to reduce its cost per mile from 9.07 cents to 7.5 cents by the end of its 1997 fiscal year.

* Comair Holdings, a standout regional carrier with principal hub in Cincinnati and good growth potential, is a favorite of Becker, Long and Weiner.

* AMR Corp., holding company of American Airlines, is a pick of Becker and Browning. This well-run giant has an opportunity to lower costs through negotiations with its organized labor units this year.

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