DJIA 8915.40 -149.22 (-1.65%) S&P 500 1086.55 -21.35 (-1.93%) Nasdaq 1820.31 -48.65 (-2.60%) Value Line ndx 958.33 -20.99 (-2.14%) 30-Year Bond 100 29/32 -1 19/32 6.06% Yield
Yurie Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YURI)") else Response.Write("(Nasdaq: YURI)") end if %> rose $3 1/4 to $34 3/4 after telecommunications equipment maker Lucent Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LU)") else Response.Write("(NYSE: LU)") end if %> agreed to acquire the company at a price of $35 per share in cash. The offer, valued at about $1 billion, represents an 11% premium to the $31.50 per share closing price of Yurie's stock on Friday. Based in Landover, Maryland, Yurie makes asynchronous transfer mode (ATM) access equipment for data, voice, and video networks. The deal seems like a good fit for Lucent, which already markets Yurie's high-end ATM products under its own brand name. Lucent said it will take an unspecified charge to fiscal Q3 earnings to write off in-process R&D, adding that the deal will be "slightly dilutive" to earnings during the first year of the merger. Analysts expect Yurie's earnings to grow at a 50% compound annual rate over the coming five years.
PLC Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: PLC)") else Response.Write("(AMEX: PLC)") end if %> raced $5 5/8 higher to $18 after an FDA advisory panel on Friday unanimously recommended marketing approval of the firm's heart laser system for transmyocardial revascularization. The laser basically drills tiny holes in the heart, creating channels that facilitate blood flow to parts of the heart that are not receiving enough oxygen. Last July, the same panel rejected the product due to a lack of data. The laser process is an alternative to traditional coronary artery bypass grafting, but it involves only a single incision and can be performed while the heart is still beating. Since the patient is not placed on life support during the operation, the procedure could be just what the doctor ordered to treat elderly patients suffering from angina. First, though, the laser's application must clear another hurdle and receive the FDA's final stamp of approval.
QUICK TAKES: Cardiac catheter and defibrillator maker Guidant Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GDT)") else Response.Write("(NYSE: GDT)") end if %> advanced $2 3/8 to $64 after UBS Securities upgraded the company to "strong buy" from "buy." Also, Adams, Harkness & Hill started coverage of the firm with a "market performer" rating... TV program producer and restaurant operator Dick Clark Productions <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DCPI)") else Response.Write("(Nasdaq: DCPI)") end if %> rocked $1 3/8 higher to $15 1/2 after declaring a 5% stock dividend. The company's COO said he expects "strong financial performance" in fiscal Q3... Cancer diagnostic and treatment products developer Neoprobe Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NEOP)") else Response.Write("(Nasdaq: NEOP)") end if %> jumped $2 3/16 to $6 1/8 after signing an agreement with a unit of healthcare products giant Johnson & Johnson <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JNJ)") else Response.Write("(NYSE: JNJ)") end if %> to market Neoprobe's portable radioisotope detector and its reusable probes for lymphatic mapping.
Managed care provider Oxford Health Plans <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: OXHP)") else Response.Write("(Nasdaq: OXHP)") end if %> was lifted $1/2 to $16 15/16 after reporting a Q1 loss of $0.57 per share (including a $16.3 million restructuring charge), which was not quite as bad as the First Call mean estimate of a $0.62 per share loss... Jefferson Smurfit <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: JJSC)") else Response.Write("(Nasdaq: JJSC)") end if %> rose $1 1/4 to $20 3/4 on rumors the Irish paper and packaging firm may merge with a U.S. firm, according to Reuters... Cardiovascular and respiratory pharmaceuticals developer KOS Pharmaceuticals <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KOSP)") else Response.Write("(Nasdaq: KOSP)") end if %> added $3/4 to $12 3/4 after the firm submitted an abbreviated new drug application (NDA) with the the FDA on Friday for a tablet to treat angina stemming from coronary artery disease... Fingerprint identification systems maker SAC Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SACM)") else Response.Write("(Nasdaq: SACM)") end if %> gained $1/2 to $10 1/4 after its biometrics ID products became the first devices certified by the International Computer Security Association.
Specialized lighting systems supplier Astronics Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ATRO)") else Response.Write("(Nasdaq: ATRO)") end if %> climbed $1/2 to $12 3/8 after the company said on Friday that it expects to receive a $50 million contract from the U.S. Air Force to develop night vision modification kits for use on the F-16 fighter jet... Brick and boot maker Justin Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: JSTN)") else Response.Write("(Nasdaq: JSTN)") end if %> added $1 3/4 to $16 1/8 after receiving a favorable write-up in the latest edition of Barron's, in which the company's CEO said he had "no quarrel" with the First Call earnings estimate (by one analyst) of $1.08 per share for fiscal 1998 and $1.21 per share for fiscal 1999... Phone service provider and forgotten Bell, Cincinnati Bell <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CSN)") else Response.Write("(NYSE: CSN)") end if %> rang up a $2 7/8 gain to $36 13/16 after reporting fiscal Q1 EPS of $0.36 (excluding a $42.6 million acquisition charge) and announcing the spin-off of its MATRIXX Marketing teleservices and CBIS billing and customer service outsourcing subsidiaries.
Vitalink Pharmacy Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VTK)") else Response.Write("(NYSE: VTK)") end if %> surged $1 11/16 to $21 1/2 after the provider of infusion and other ancillary services agreed to merge with eldercare services provider Genesis Health Ventures <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GHV)") else Response.Write("(NYSE: GHV)") end if %> in a deal valued at about $690 million... Music seller K-tel International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KTEL)") else Response.Write("(Nasdaq: KTEL)") end if %> tacked on $8 to $34 3/4 after direct response TV service provider and infomercial broadcaster TV Media Holdings PTE Ltd. agreed to market the company's K-tel Express online service worldwide... Electronic testing tools manufacturer Fluke Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FLK)") else Response.Write("(NYSE: FLK)") end if %> gained $7 9/32 to $30 15/32 after agreeing to merge with environmental controls equipment and tools maker Danaher Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DHR)") else Response.Write("(NYSE: DHR)") end if %> in a stock swap valued at about $625 million.
Voice messaging and other business telephony services provider Applied Voice Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AVTC)") else Response.Write("(Nasdaq: AVTC)") end if %> rose $3 to $46 after reporting fiscal Q1 EPS of $0.32 (before charges) on Friday, beating the Street estimate by $0.04... Telecommunications network construction and integration firm Able Telecom Holding Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ABTE)") else Response.Write("(Nasdaq: ABTE)") end if %> gained $1 1/8 to $9 1/16 after agreeing to buy WorldCom's <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WCOM)") else Response.Write("(Nasdaq: WCOM)") end if %> MFS Network Technologies unit... Medical diagnostic systems developer Cytyc Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CYTC)") else Response.Write("(Nasdaq: CYTC)") end if %> added $1 3/8 to $13 3/4 after reporting a fiscal Q1 loss of $0.37 per share, which was in line with the company's downwardly revised estimate announced earlier this month. The company said it is "already seeing progress" in its efforts to reimburse clients for sales of its ThinPrep test for cervical cancer.
NextLink Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NXLK)") else Response.Write("(Nasdaq: NXLK)") end if %> tacked on $2 1/16 to $28 3/16 after Jefferies & Co. upgraded the provider of switched telecommunications services to businesses to "buy" from "hold"... EVEREN Securities raised its short-term rating on CFC International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CFCI)") else Response.Write("(Nasdaq: CFCI)") end if %> to "outperform" from "market perform," sending the shares of the maker of magnetic strips and high-end holographic products up $3/4 to $11 1/4.
[Correction: In last Thursday's "Heroes" section, we reported that RightCHOICE Managed Care <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RIT)") else Response.Write("(NYSE: RIT)") end if %> reached a deal with the state of Missouri to settle all of the outstanding litigation and regulatory issues between the state and the company. However, the deal is actually a "tentative conceptual framework" to settle complaints over the company's reorganization plan lodged by Missouri's Attorney General and Department of Insurance, not a suit relating to Missouri's state-sponsored healthcare plan. Under the framework for the reorganization, RightCHOICE's parent will contribute 15 million RightCHOICE shares to a foundation run by a state-approved board of directors, which will then divest the shares in "an orderly manner."]
Chrysler <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: C)") else Response.Write("(NYSE: C)") end if %> skidded for $1 11/16 to $40 after becoming the last of the Big Three U.S. automakers to join the industry coupon war. In an effort to cement customer loyalty -- and keep its competitors from wooing away buyers -- the No. 3 automaker announced Friday that it will give coupons worth $500 to $1,000 to owners of Dodge, Chrysler, Plymouth, Jeep, and Eagle vehicles good toward the purchase of a new 1997, 1998, or 1999 model vehicle. The company is also extending the offer to owners of General Motors <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GM)") else Response.Write("(NYSE: GM)") end if %> and Ford <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: F)") else Response.Write("(NYSE: F)") end if %> vehicles who qualify for owner loyalty programs at those two automakers. Last week Ford mailed coupons worth $500 to $1,000 to Ford owners and told car dealerships to honor similar vouchers issued by GM earlier this month. With Chrysler joining the fray, sticker prices likely will fall or at least remain stable, while incentives such as coupons and low interest rates are likely to increase. Industry analysts now expect average incentives to increase by $200 a vehicle to about $1,500 -- approaching the levels attained in the recession of the early 1990s.
PC makers lost ground today after reports from two market research firms cast some doubt about the strength of the PC market. Dataquest reported that worldwide PC shipments increased 14.1% to 21 million units in the first quarter, in line with the firm's forecast that the PC market will grow 15.6% this year. But International Data Corp. issued a report stating that the worldwide PC market grew more than 10% to 7.9 million units, which does not include shipments to other distributors that add their own labels and parts. More importantly, however, both Dataquest and IDC expect growth to slow in the second quarter as the world's largest PC maker Compaq <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPQ)") else Response.Write("(NYSE: CPQ)") end if %> continues to struggle with an backlog in inventory (Compaq controls 12.5% of the world market for PCs and 17% of the U.S. market). According to Dataquest, Compaq, Dell <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %>, and Hewlett-Packard <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HWP)") else Response.Write("(NYSE: HWP)") end if %> had the strongest year-on-year growth, with shipments rising 39.2%, 66.1%, and 72% respectively. Today Compaq closed down $1 1/8 to $27 15/16, Dell sank $2 to $74 5/16, and H-P shed $1 3/8 to $73 1/4. Gateway <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GTW)") else Response.Write("(Nasdaq: GTW)") end if %> slipped $7/8 to $57 5/8, and IBM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %> dipped $2 1/16 to $115 5/16. SGS-Thomson Microelectronics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: STM)") else Response.Write("(NYSE: STM)") end if %>, Europe's second largest chipmaker, fell $4 1/2 to $81 5/16.
QUICK CUTS: Internet companies careened off the information highway this today after running up for much of the last three weeks. America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> fell $1 5/8 to $72 7/8, Netscape Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSCP)") else Response.Write("(Nasdaq: NSCP)") end if %> sank $15/16 to $24 3/4, Infoseek Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SEEK)") else Response.Write("(Nasdaq: SEEK)") end if %> lost $5/8 to $30 3/8, Excite Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: XCIT)") else Response.Write("(Nasdaq: XCIT)") end if %> dropped $2 15/16 to $57 13/16, Yahoo! Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %> slid $2 5/8 to $112 1/8, and Lycos Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LCOS)") else Response.Write("(Nasdaq: LCOS)") end if %> slipped $4 5/16 to $49 3/16... WorldCom <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WCOM)") else Response.Write("(Nasdaq: WCOM)") end if %> and No. 2 long-distance carrier MCI Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MCIC)") else Response.Write("(Nasdaq: MCIC)") end if %> fell on news that they will soon receive the European Commission's objections to their proposed $41.8 billion merger. WorldCom lost $7/16 to $43 3/8. MCI told Bloomberg it is "confident" that the deal will ultimately be approved despite complaints from rival companies, but it still fell $1 1/8 to $50.
After a run-up on optimism over its new male impotence drug Viagra, Pfizer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PFE)") else Response.Write("(NYSE: PFE)") end if %> dropped $4 7/8 to $113 3/8 today. The company has gained 17% over the last two weeks, primarily on the strength of an opening surge in demand for Viagra... Wall Street brokerages retreated on speculation that profits will be hurt as bond yields increase. Bond prices fell on concern that the Federal Reserve may raise interest rates. J.P. Morgan lost $3 5/8 to $132, Merrill Lynch <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MER)") else Response.Write("(NYSE: MER)") end if %> dropped $2 to $84 5/8, Lehman Brothers Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LEH)") else Response.Write("(NYSE: LEH)") end if %> fell $4 3/16 to $69 7/16, Morgan Stanley Dean Witter <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MWD)") else Response.Write("(NYSE: MWD)") end if %> slid $3 to $75 3/16, Donaldson, Lufkin & Jenrette <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DLJ)") else Response.Write("(NYSE: DLJ)") end if %> tumbled $3 7/8 to $91 1/2, and Paine Webber Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PWJ)") else Response.Write("(NYSE: PWJ)") end if %> shed $2 3/8 to $43 3/8.
Pittsburgh-based Mellon Bank <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MEL)") else Response.Write("(NYSE: MEL)") end if %> sank $3 11/16 to $71 5/16 after its Board of Directors yesterday unanimously rejected the unsolicited merger offer from Bank of New York <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BK)") else Response.Write("(NYSE: BK)") end if %>. Other banks were hit today as well. NationsBank <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NB)") else Response.Write("(NYSE: NB)") end if %> lost $3 13/16 to $72 11/16, while merger partner BankAmerica <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAC)") else Response.Write("(NYSE: BAC)") end if %> shed $4 to $80 5/8. Citicorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CCI)") else Response.Write("(NYSE: CCI)") end if %> was cut $5 3/16 to $150, and merger partner Travelers Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TRV)") else Response.Write("(NYSE: TRV)") end if %> dipped $1 1/2 to $61 3/8. First Chicago NBD <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FCN)") else Response.Write("(NYSE: FCN)") end if %> slid $2 3/4 to $89 as merger partner BANC ONE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ONE)") else Response.Write("(NYSE: ONE)") end if %> declined $1 9/16 to $56 11/16. Government-sponsored enterprises also were brought down a few notches, with Freddie Mac <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FRE)") else Response.Write("(NYSE: FRE)") end if %> falling $1 3/4 to $42 3/8 and Fannie Mae <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FNM)") else Response.Write("(NYSE: FNM)") end if %> getting tossed on its fanny for a $1 11/16 loss to $56 1/2.
Diversified financial services company UICI <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: UICI)") else Response.Write("(Nasdaq: UICI)") end if %> plunged $4 1/2 to $27 1/2 after announcing Friday that it expects its Q1 earnings will not meet analysts' expectations and will be less than the operating earnings of $0.44 per share reported for Q1 1997... Industrial, medical, and specialty gases distributor Airgas Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ARG)") else Response.Write("(NYSE: ARG)") end if %> tanked $2 1/2 to $15 1/4 after announcing that Q4 earnings will likely be 10% to 15% below the year-earlier period and below analysts' estimates. Earnings are being impacted by about $6 million in costs for relocating employees, exiting certain businesses, and computer conversions... Meetings and training programs organizer Caribiner International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CWC)") else Response.Write("(NYSE: CWC)") end if %> plummeted $8 1/2 to $19, hitting a 52-week low, after announcing that it expects Q2 EPS (before charges) to be between $0.25 and $0.28, below analysts' expectations of around $0.34. The company also anticipates EPS for the fiscal year ending September 30 to be 10% to 15% below the current mean estimate.
Homebuilders fell today on concern that higher interest rates would make it more expensive to finance construction and more difficult for homebuyers. Ryland Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RYL)") else Response.Write("(NYSE: RYL)") end if %> fell $3 3/8 to $20 3/8; U.S. Home Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UH)") else Response.Write("(NYSE: UH)") end if %> sank $5 9/16 to $39 3/4; Lennar Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LEN)") else Response.Write("(NYSE: LEN)") end if %> dropped $3 1/4 to $29; and Toll Brothers <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TOL)") else Response.Write("(NYSE: TOL)") end if %> slipped $3 1/2 to $26 11/16. Kaufman & Broad Home <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KBH)") else Response.Write("(NYSE: KBH)") end if %> slid $2 1/4 to $28 11/16; Centex Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CTX)") else Response.Write("(NYSE: CTX)") end if %> tumbled $2 11/16 to $35 11/1; and Pulte Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PHM)") else Response.Write("(NYSE: PHM)") end if %> lost $2 15/16 to $50 3/8... Merix Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MERX)") else Response.Write("(Nasdaq: MERX)") end if %> slumped $1 1/8 to $14 after the maker of advanced electronics connectors announced that its Q4 bookings have slowed and revenues are expected to be about 10% less than current projections... Concerns about PC sales going forward hurt shares of some semiconductor companies today, including Intel <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %>, which lost $2 1/16 to $80, and Advanced Micro Devices <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMD)") else Response.Write("(NYSE: AMD)") end if %>, which was cut $1 to $28 1/8.
[Correction: In Friday's "Quick Cuts," the gross margin given for DAOU Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DAOU)") else Response.Write("(Nasdaq: DAOU)") end if %> was incorrect. The company's Q1 gross margin increased to 40.4% from 34.5% in last year's Q1.]
FOOL
ON THE HILL
An Investment Opinion
by
Jim Surowiecki
Airline Alliances
It's like a merger, but not really. At a time when the entire landscape of American business is being continually reshaped by the booming mergers and acquisitions (M&A) market, the airline industry has begun to extend one of its keenest strategies for international markets into the domestic realm. "Code-sharing domestic alliances" are the latest vogue for airlines, and the big question at the moment is whether they're just another step toward oligopoly with a more pleasant name attached.
Code sharing is back in the news because last week the news broke that Delta Air Lines <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DAL)") else Response.Write("(NYSE: DAL)") end if %> and UAL Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UAL)") else Response.Write("(NYSE: UAL)") end if %>, parent of United Airlines, had come to terms on a massive marketing alliance that would involve code sharing and cross-promotion. That deal was almost immediately sidetracked, though, when the Delta pilots' union insisted on a seat on Delta's board before any final deal was signed. That demand reflected Delta pilots' concerns that because United pilots own 25% of UAL -- which is majority-owned by its employees -- and because the pilots are the major players in United's corporate governance structure, the details of the code-sharing arrangement would undoubtedly favor the preservation of United jobs. The Delta pilots did meet with the company's CEO on Friday, and the possibility of a deal is now still very much alive, but it's unclear whether Delta will be able to push it through without rearranging its board structure.
As it happens, the concerns of pilots from both companies reflect the peculiar nature of these alliances, which the airlines insist are not anti-competitive and yet seem to have as a possible result the elimination of jobs, which only happens if flights are eliminated as well. Code sharing began as a way for domestic airlines to join forces with international carriers, making international travel smoother and more continuous for consumers and enabling the airlines to reap the benefits of an expanded market presence without any major investment. The curious spectacle of the same flight being listed as AMR 1, Canadian Airlines 4, and Air Japan 6 is the result of this hodgepodge of deals that has now left very few players completely independent. But the extension of code sharing to the domestic market represents an important change in the airlines' strategy, and is arguably a first step toward the industry consolidation that many see as inevitable.
Code sharing derives much of its economic force from the fact that particular airlines tend to control a huge percentage of the traffic at particular airports. AMR Corp.'s <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMR)") else Response.Write("(NYSE: AMR)") end if %> American Airlines and United together control 87% of the flights into Chicago's O'Hare Airport, while Northwest <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NWAC)") else Response.Write("(Nasdaq: NWAC)") end if %> and Continental <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAI.A and CAI.B)") else Response.Write("(NYSE: CAI.A and CAI.B)") end if %>, which have agreed to an alliance that includes an unusual stock-swap arrangement, will together own 80% of the air traffic at Detroit and 83% at Minneapolis. Delta, meanwhile, has a dominant position in Atlanta, and American has a near monopoly on Dallas-Fort Worth.
American and U.S. Air have just announced a deal to merge their frequent-flier programs and to examine the possibility of a national code-sharing alliance. If they were to enter into such an alliance, U.S. Air would profit from its passengers flying into (or out of) Dallas without actually having to fly them there, and vice versa. As a result, the airlines are able to hold onto the pricing power that oligopolistic control of takeoff and landing slots grants while simultaneously extending their reach to new airports.
Insofar as concerns about the anti-competitive nature of the alliances have been raised, they have focused on those rare occasions when each of the airlines pulls out of a market in which the other has a major presence, in a straight quid pro quo. But of course the alliances will have an anti-competitive effect even if all they do is prevent airlines from heading into new markets. The great irony is that these alliances are bursting into full bloom just as legislators are contemplating ways in which smaller carriers can be protected from predatory behavior by the giants and as they're being lobbied heavily by the major airlines to keep the status quo in place.
Ordinarily one could rely on straight competition to keep prices low. If the majors are reaping unreasonable rents, whether through code-sharing alliances or other tactics, then competitors should spring up to undercut them. The problem is that airports can only handle a limited number of takeoffs and landings every day, and the majors have a tight grip on those. In the early part of this decade, when even the majors were engaging in cutthroat pricing to gain market share, competition kept prices low. But in recent years, the airlines have reached a more sensible accommodation among themselves, a sort of kinder, gentler version of the old cartels. There's not too much fare slashing anymore.
What the code-sharing alliances ultimately do, then, is formalize the existing congenial state of affairs. It's a win-win situation, at least for the airlines. Considering that prices on business fares rose an incredible 36% in the first quarter of this year, it's perhaps not such a bright scenario for consumers. Ironically, outgoing AMR CEO Bob Crandall was a devoted opponent of code sharing, but he soon came around, to the point that AMR has been trying for two years now to enter into a global alliance with British Airways <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAB)") else Response.Write("(NYSE: BAB)") end if %>.
The reality that underlies these alliances is that even though this is as flush a time as the industry has enjoyed in many years, with ticket prices up, gasoline prices down, and successful yield management keeping margins high, the majors are still running as fast as they can, and their stock prices are still trading at tremendous discounts to the market as a whole. As with the auto companies, the industry has not -- and presumably will not -- be able to shake the cyclical label. At the same time, the increasing global reach of the airlines has also made them more susceptible to turmoil abroad, as evidenced by UAL's meager 1.4% rise in earnings in the latest quarter as a result of the Asian crisis. In that context, one can see how code-sharing alliances would seem like only a necessary step in the rationalization of the business. It is the best of times, but it apparently doesn't feel that way to those on the inside.
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Contributing Writers Yi-Hsin Chang (TMF Puck), a Fool Brian Graney (TMF Panic), Fool Two Alex Schay (TMF Nexus6), Fool, too Dale Wettlaufer (TMF Ralegh), Final Fool
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