This Week in Airlines
by Holly Hegeman (MF Wings)

Dallas, TX (Feb 3, 1997) -- Foolish fans of the airline industry, I have a confession to make. I was in the throes of driving myself and my Foolish belongings across the country last week, as MF Wings made her way ....WEST. So, to tell you the truth, do you know there were days when I did not even know what the stock market did at all? Much less the airline stocks?

It was actually quite nice NOT to know for a change. It also is a nice reminder that yes, Virginia, there are other things to life besides the stock market and/or the airline industry. But then again, I have to admit--it was hard not to be able to REALLY know what was going on with TWA and the Russians. Then again, now that I am re-wired and back online, in addition to being equipped with the more normal communications tools such as the television and telephone, I STILL don't know what was really going on with TWA and the Russians. So in a way, I guess I really didn't miss much. If you are completely lost, don't know what I am talking about, and are now wondering if the Russians possibly shot down TWA Flight 800 -- no. Stay tuned, details in a few paragraphs!

But first, let's take a look at what happened overall with the Motley Flock this past week.

The Dow Jones Industrial Average and the Dow Jones Transportation Index were apparently doing the two-step this week, as both ended down 0.2% for the week, with the DJIA ending at 6813.09, and the DJTI ending at 2324.10. Overall, the week was fairly quiet as weeks go for the Motley Flock, as only 10 of the 35 stocks we track showed a gain on the week. Most of those gains were fairly small ones at that. There was one loud resounding thud as Vanguard <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq:VNGD)") else Response.Write("(Nasdaq:VNGD)") end if %> fell down the basement steps, ending down 23% on the week. But, then again, as we have discussed previously, this stock continues to be highly volatile from day to day. It ended the week at 1 15/16.

United Airlines <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:UAL)") else Response.Write("(NYSE:UAL)") end if %>

Earnings, earnings, earnings! Yes, there were more announced this week. UAL Corporation, parent of United Airlines, reported fourth quarter operating earnings on a fully distributed basis of $1.06 a share, a record, compared with $0.63 a year ago.

For the year, fully distributed operating earnings were $7.68 a share, a record, up from $5.19 a year ago. A particulary nice bit of news for UAL shareholders was the fact that UAL's long-term debt and capital lease obligations totaled $3.3 billion as of December 31, 1996, down from $4.1 billion a year ago.

UAL said cash flows from operations totaled $488 million in 1996, part of which were used to retire $106 million in principal amount long-term debt. Yowsa--MF Wings loves it when airlines retire debt with cash flow.

The company estimates this debt retirement, combined with other initiatives, will save more than $100 million annually in gross interest expense and dividends.

UAL Chairman Gerald Greenwald was quoted as being particulary pleased with the fact that the strong overall performance was driven by United's U.S. domestic passenger unit revenue growth, which once again exceeded the industry average. Hey Gerald, I agree with you. That is a great indicator.

For the year, United Airlines' revenue passenger miles gained 4.4 percent to 116.70 billion from 111.81 billion. Available seat miles in 1996 rose 2.7 percent to 162.84 billion vs 158.57 billion. Passenger load factor was 71.7 percent in 1996 vs 70.5 percent.

Gruntal & Co., Inc. said Wednesday it reiterated an outperform rating on UAL Corp, after the company reported Q4 fully distributed earnings per share in line with expectations.

"We remain buyers of United Airlines in risk-tolerant accounts, especially on weakness or if either fuel prices or long-term interest rates slacken," Gruntal said in a report.

It's FY97 estimate is for $8.50 compared with $7.68 a fully distributed share in 1996.

MF Wings remains bullish on UAL, even though the market has recently been less than positive about the stock, as fears relating to the discussions now going on with labor groups within the airline have Wall Streeters fearing what will happen in the mid-term. The stock was down 3% this past week, closing at 56 1/2, and is down 10% on the year. Fundamentally, the company is doing the right things, and unit revenue growth continues to look strong. However, as long as the labor issues are there, I think Wall Street will be cautious. But, long-term, I think the stock is a good one to look at.

Pan Am <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: PAA)") else Response.Write("(AMEX: PAA)") end if %>

Pan Am had a good week this past week, as the stock ended up 12%, closing at 9 5/16. The carrier has announced some expansion of late, and in answer to a question that was posed in the airline industry folder, according to CEO Martin Shugrue's January 30th message to employees, the carrier had a load factor of around 68% in January. Not bad for a usually slow month. However, the carrier is also flying a lot of snowbird-related routes, so this should be a good time for them.

Midwest Express <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:MEH)") else Response.Write("(NYSE:MEH)") end if %>

Midwest Express also announced earnings this past week. Highlights? The carrier reported record fourth quarter revenue, net income and earnings per share. Operating revenue increased 23% in quarter and 18% in 1996. Revenue yield increased 5% for the quarter and 8% in 1996. Earnings per share were up $0.16 to $0.62 in quarter and $0.63 to $3.40 in1996.

For the fourth quarter ending December 31, 1996, total operating revenue increased 23.3% to $78.2 million from $63.4 million in the same quarter last year. Consolidated net income totaled $4.0 million, up 35.9% from $2.9 million in the year-ago quarter. Earnings per share for the quarter were $0.62, compared with $0.46 in the fourth quarter of 1995.

On Wednesday, Goldman Sachs cut its rating on Midwest Express to market outperform from trading buy.

On Friday, Robinson-Humphrey Co. analyst Jim Parker initiated coverage of Midwest, with a short-term hold and a long-term buy rating. (Robinson-Humphrey defines short-term as a six-month period, while long-term is up to two years.)

The stock is up 6% on the year, and ended up 6% last week, closing at 38 1/8. I would have to concur here--I see a hold on this stock for the time being. No real great growth possibilities in the near-term and fuel costs will continue to constrain profits in the short-term.

Atlantic Coast <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ACAI)") else Response.Write("(Nasdaq: ACAI)") end if %>

Atlantic Coast Airlines, one of the Foolish Feeder Four, had a spectacular week in terms of news and in terms of stock movement. The carrier announced, as expected, an initial order for 12 Canadair Regional Jets, with an option for additional aircraft, the ACAI pilots voted to accept the proposed contract with the carrier, and Paul Tate, the former CFO of Reno Air, abruptly resigned from Reno and took up residence with ACAI. Not bad for one week, not bad at all. Top that off with the fact that the stock gained 9% on the week, and well, the only question to potential investors is this--after a gain of 31% since the beginning of the year, has the stock now peaked, or is there more upside potential? Stay tuned.

TWA <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: TWA)") else Response.Write("(AMEX: TWA)") end if %>

Now, to TWA and the Russians.

It was reported this past week that officials from Transaero, Russia's second-larget airline, and a New Jersey-based investment group, Strategic Capital Group, were supposedly making an offer for a "strategic partnership" with TWA.

Now, here is where it gets interesting. According to USA Today, this was described as an offer to take control of the company. Transaero Vice Chairman Grigory Gurtovoi told USA Today that he wanted to use TWA to create a global airline. But then, he said there would be no merger--just a "strategic partnership."

CNN also reported that Strategic Capital Group, of which the Russian airline Transaero is a main partner, had proposed a plan to acquire 51% of stock in TWA. This would require about $3 billion in capital.

However, as of today, it is still not too clear as to what or whom is really doing what or proposing what to whom. TWA has since denied that any "offer" was made to the Board. They said they did not meet with Brian Freeman, nor anyone representing Mr. Freeman.

Hmmmmmm. Well, whatever is going on, it certainly affected TWA stock this past week. The stock was up 6% on the week, closing at 6 7/16, and was the most active stock on the American Stock Exchange on Thursday.

MF Wings' take on all this? I think the two carriers had probably discussed possible code-sharing, that is a no-brainer. But all this other stuff--I don't know. Someone is not telling the truth. Either Freeman met with the Board, or he didn't. So--here we sit, distracted by such antics, while TWA continues to find itself hopelessly mired in the muck of mismanagement.

The latest? Today (Feb 3), the machinists union issued a press release that stated that the "15,000 IAM owner employees of TWA have put the TWA Board of Directors formally on notice today that their recent proposed actions will run afoul of their fiduciary duties to the carrier and may subject them to a shareholder derivative suit."

Translation? The IAM is warning that "unless the Board agrees to take no further action to shrink the airline through asset sales, station closings, layoffs and the like, pending consideration of a number of current proposals for purchase, merger or strategic alliance, the IAM employee owners will be left with no alternative but to file a court action." The IAM contends that the Board has engaged in conduct which jeopardizes a number of potential transactions which will grow the airline and ensure its continued viability.

In a letter to Mr. Gitner, the acting CEO of sorts, William O'Driscoll, President andDirecting General Chairman of IAM District Lodge 142 stated: " ... it is obvious that you intend to shrink the airline to a single hub, thereby causing the layoff of thousands of employees.... As others before you have tried and failed, you believe you can prop up TWA by decimating the workforce. You have chosen this alternative instead of addressing the fundamental operational issues which are responsible for the airline's current condition."

Always a good sign--when employee groups start issuing press releases bashing management. While I understand the tactic, I also find it doesn't usually help the situation on any level.

Alaska Airlines <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ALK)") else Response.Write("(NYSE: ALK)") end if %>

Two other earnings mentions before we sign off for this week. First, Alaska Air shocked analysts and investors alike when it reported that its fourth-quarter net loss widened sevenfold and missed analysts' expectations by a large margin.

Alaska blamed severe winter storms in the final six days of the year, in addition to the expected impact of higher fuel prices.

The company's net loss widened to $5.6 million, or 38 cents a share, from $800,000, or six cents a share, in the year-ago period. The consensus estimate of analysts surveyed by First Call was for a loss of 18 cents a share.

Revenue rose 5.3% to $359.2 million from $341.1 millin a year ago, and their load factor rose 3.2 percent to 66% from the year ago period.

The stock fared well, all things considered. The stock, which is up 3% on the year, posted a flat week, closing at 21 5/8.

America West <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AWA)") else Response.Write("(NYSE: AWA)") end if %>

And, finally, America West reported earnings this past week. We have been through a lot with America West. We have been watching them closely for over a year, as they made mistakes in scheduling, revenue management, maintenance outsourcing, and route planning. Slowly, they seem to be getting areas of their operation up to speed. But, note, I say, SLOWLY.

However, earnings were a nice surprise for the Phoenix-based carrier. Net income more than doubled over the year earlier quarter and per share net surpassed analysts' expectations.

Despite a 23.1% increase in the cost of fuel, it was interesting to note that AWA's operating cost per available mile, excluding special charges, fell 2.6% to 7.19 cents per mile from 7.38 cents in the fourth quarter of 1995.

Revenue passenger miles were up 21.5% for the fourth quarter, and the fourth quarter load factor was up to 69.1% from 66.6%. Revenue passenger miles for the year rose 15.1% to 15.32 billion from 13.31 billion a year earlier. Load factor was 70.9%, compared with 68.5% a year earlier.

Net income totaled $12 million, or 26 cents a share, as compared to $6 million, or 12 cents a share a year earlier. That year before figure did include a pretax restructuring amount of $10.5 million, however. The mean estimate of eight analysts surveyed by First Call was 21 cents a share for the latest quarter.

America West ended the week down 4% to close at 14 7/8.

American Airlines <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMR)") else Response.Write("(NYSE: AMR)") end if %>

Folks, if you want the latest on what is going on with the APA/AA situation, I would suggest you check with us in the airline industry folder. Things are really too complex to get into here this week, but there are continuing posts in the folder, and I am sure we will be talking more about this next week.

AMR continues its slide that started about the beginning of the year, with the pilot's turn-down of the proposed contract. The stock is now down 9% on the year, and was down 5% this past week, closing at 80 1/2.

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Have a good week everyone!

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