This Week in Airlines
by Holly Hegeman (MF Wings)

Dallas, TX (Feb 17, 1997) -- Foolish readers, I know it is hard to believe, but there WAS more news this week than the situation at American Airlines. Yes, I kid you not. The rest of the world went on about its business, the stock market acted as though it had overdosed on far too many euphoria-inducing drugs, and most importantly-- for those of us who have our money invested in members of the Motley Flock-- investors finally seemed to understand the positive relationship between dropping oil prices and the potential for increased airline earnings.

Oh, and yes, we did have a strike against American Airlines by its pilots.

But more on all that in a minute.

As I said, the stock market had one wild week this past week, as it hit new uncharted territory. The Dow Jones Industrial Average ended the week at 6988.96, down 33.48 points on the day, but that was after it hit record territory on Thursday as it closed at 7022.44. There seemed to be a bit of profit taking on Friday, as money managers seemed to be moving money around in anticipation of the long weekend. But, needless to say, the cash keeps flowing into the markets and the stock prices continue to rise. Just a Bursting-Baby-Boomer-fueled market if you ask me.

Speaking of fuel - this week we saw continued downward movement in the price of oil futures. This downward movement is nothing but good news for those of us who invest in this sector. Between this news and the sense that inflation is under control and the FED is not in danger of raising interest rates--well this proved to be a one-two punch for our Motley Flock members this week, as we had only 12 of the 35 stocks we follow show a negative number in terms of stock performance for the week.

Atlantic Coast, Atlantic Southeast, Comair, and Mesaba

First, let's revisit our four airline stocks that we dubbed the Foolish Feeder Four about a month ago. If you will recall, we talked about the strengths of these four carriers: Comair <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COMR)") else Response.Write("(Nasdaq: COMR)") end if %> , Atlantic Southeast <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASAI)") else Response.Write("(Nasdaq: ASAI)") end if %>, Atlantic Coast <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ACAI)") else Response.Write("(Nasdaq: ACAI)") end if %>, and Mesaba <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MAIR)") else Response.Write("(Nasdaq: MAIR)") end if %> . Well, Foolish investors, generally speaking, these four have not disappointed us. This past week Comair was the high flyer on the week, as it gained 14% to close at 22 3/8. Comair, which had taken a dip in January in conjunction with the crash of one of its aircraft, is now down 7% on the year, but showing strength. It's traffic numbers for January were mixed, as load factor was down to 48.3% from 50.4% the year previous, however, year-to-date figures show the airline running ahead of its previous year, with a YTD load factor of 56.1, as opposed to 53.5 for 1996. (Yes, Comair does not utilize a calendar fiscal year.) And revenue passenger miles are showing a substantial increase.

Atlantic Coast, which is up 28% on the year, gained 4% this past week, as it closed at 15 5/8, Atlantic Southeast, which is up 2% on the year, gained 1% this past week to close at 22 5/16, and Mesaba, which is down 9% on the year, was up 1% this past week as well, closing at 13 1/2.

So, yes, our Foolish Feeder Four are doing fine. We are content with their activity.

ValuJet

ValuJet <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VJET)") else Response.Write("(Nasdaq: VJET)") end if %> had a good week this past week, as the stock was up 14%, closing at 7 7/16 on the week. However, we have to wonder, was there some short covering going on out there? This past week Gruntal & Co. analyst Steve Lewins reiterated his neutral rating on ValuJet and warned that the company may again face default of its financial covenants. He also said he expects ValuJet to post a fourth quarter loss of $0.30 a share.

Lewins also said if ValuJet is in default of its bank covenants, its lead lenders, Bank of Montreal and NationsBank could very well take a tougher stance with the carrier. But Lewins added that he expects the banks will allow ValuJet to remain aloft. But, no doubt there may be some added pressure put to bear on the still-struggling carrier as it continues to lose millions, slowly eroding its horde of cash.

America West

America West <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AWA)") else Response.Write("(NYSE: AWA)") end if %> also had a good week, as the carrier saw a nice 12% gain on the week, closing at 15 1/2. Well, what can we say? We'll attribute this to a continuing positive reaction from the week before when Bill Franke was formally deposed as CEO of AWA, and Richard Goodmanson was finally named both president of America West Holdings and president and chief executive officer of America West Airlines.

Bill Franke will remain as chairman of the airline and as chairman and chief executive officer of its parent company, America West Holdings Corp.

As many of you know, AWA was waiting for Goodmanson to achieve his American citizenship -- which he did last month. So, how many of you knew that being an American citizen is a federal prerequisite to becoming chief executive officer of a U.S. flag carrier? (I should have made that a trivia question or something.) Although Goodmanson has been a resident of the U.S. for more than 13 years, he is originally from Australia.

TWA

TWA <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: TWA)") else Response.Write("(AMEX: TWA)") end if %> also had a formal changing of the guard this past week, as Gerald L. Gitner was officially named chairman and chief executive Wednesday. The stock gained 9% on the week to close at 6 9/16.

Gitner has been serving as acting CEO since December. Gitner is chairman of Avalon Group Ltd., a New York-based investment bank, and has held senior management positions at several airlines, including the vice chairman's post at Pan American World Airways. (In answer to your question..am I impressed? No.)

Now, I hate to pick on TWA. I mean, the carrier is not in the best of shape, but I just can't resist. The press releases and quotes associated with this announcement were truly like something from David Letterman. I mean, this guy Tom Meagher needs to get himself a new writer -- or maybe he just needs to be quiet. And I quote:

``Frankly, we could have saved a lot of time and effort if Gerry had said yes the first time we asked him to become CEO, which was very early in the search process,'' said Thomas Meagher, chairman of the TWA board's executive committee. (quote continues) "TWA interviewed numerous candidates, thus strengthening their belief that Gitner was the best person for the job," Meagher said.

Translation? Gitner was not about to do it. But as we all know, they could not find anyone else who was WILLING to do it. TWA's abortive search for a new CEO has been a very embarrassing ongoing ordeal for the carrier. So, they probably made him an offer he could not refuse, and he threw in the towel and said yes. (Actually the other members of the Board probably drew straws and he ended up with the short one.)

Quote number 2: Gitner said: ``With proper management, TWA can again be a successful airline.''

WHEW! Stop the presses! Buy that man a BUD! What insight! What acute perception!

Quote number 3: ``The board has been very impressed with our interim management team's focus on improving the basics of on-time performance and customer service, and we expect to see great progress in these areas under Gerry's leadership,'' Meagher said.

We'll see. I really don't think THESE are the main problems facing TWA.

His appointment is surely not sitting well with the airline's Machinists union. Earlier this month, the International Association of Machinists issued a no confidence vote against Gitner. It also threatened to sue TWA's board of directors because of recent layoffs and other cuts.

The IAM represents about 15,000 of TWA's 25,000 employees, so they represent no small threat.

Seems to me it would have been much better if they could have found someone who did not have the "baggage" that Gitner has. They really need a people person, and someone who can inspire confidence in a very dispirited group of employees--in addition to everything else.

Somehow I just don't think Mr. Gitner is that person.

Southwest Airlines

Yes, you heard it here last week before it was public, thanks to our ever-eagle-eyed Fool Air reader Stokaholic. Southwest <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LUV)") else Response.Write("(NYSE: LUV)") end if %> raised their fares. YES! Great news for LUV stockholders. In addition, or more accurately, as a result, Southwest was the beneficiary of two nice analyst notes this week. AND, on top of that, Southwest was up a nice 9% on the week, ending at 23 7/8.

Gruntal & Co. reiterated an outperform rating on Southwest, saying the company remains financially strong.

Gruntal analyst Steve Lewins pointed to several factors in his notes: 1) he cited Southwest's fare increase, which started over the weekend. 2) He also cited Southwest's plan to fly longer haul routes, from Nashville to Oakland, Calif. and Los Angeles by the middle of the year. (We told you about these a few weeks ago--Southwest now will have a total of 8 one-stop transcontinental flights when these new changes are in place.) Lewins made a special mention that these flights represent the beginning of one-stop transcontinental service for the traditionally short-haul carrier.

Lewins also said if traffic and utilization remain strong, while fuel prices and startup costs related to the new Providence service decline, the airline could see improvements in the first quarter, instead of the second quarter, as expected.

Lewins thinks that the airline's unit costs will be up about three to four percent in the fourth quarter due to fuel and startups costs.

In addition, Lehman Brothers upgraded Southwest Airlines to outperform from neutral. Lehman also cited the positive revenue impact from the fare increase initiated over the weekend and calculated that the fare increase represented a 6.6 percent systemwide price increase which should boost unit revenues by 3.8 percent over pricing policies in effect prior to the weekend.

Lehman maintains its 1997 earnings estimates of $1.55 a share. They also pointed out that they felt the fare increase will likely offset the early return of the excise tax, which may be reinstated by March 1 instead of July 1, as previously expected.

Lehman expects Southwest's cost performance to improve in 1996, and has set a 12-month price target of $25 a share. (FYI--Salomon has set a $28-$31 12 month price target.)

Frontier Airlines

As a follow-up to the discussion we had last week here in regard to Frontier Airlines <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FRNT)") else Response.Write("(Nasdaq: FRNT)") end if %>, Frontier formally filed a complaint Tuesday with the Justice Department alleging that United Airlines has engaged in practices designed to put the discount carrier out of business.

The Denver-based airline cited eight counts of alleged antitrust violations that included targeting routes Frontier flies and paying a bounty to travel agents that steer business away from Frontier to United.

Frontier competes against United in 13 of the 15 cities it serves. Frontier has about 3.5 percent of Denver International Airport's $5 billion market and is the airport's third biggest carrier in passenger traffic. It offers 26 flights.

With the debut of United's new Shuttle service Tuesday from DIA to Las Vegas and Phoenix, United boosted its number of flights at DIA to 303. It has about 77 percent of the DIA market.

In its complaint, Frontier alleged that United targets its competitors by flooding competing markets with more flights--a technique that is called "capacity dumping.''

It also accused United of charging below-cost ticket prices and signing exclusive agreements with businesses. It alleged United pays travel agents bonuses to steer passengers away from Frontier and toward United.

Now, come on Gerald and the Gang. I mean, with 77% of the market at DIA, do you really HAVE to go after the measly 3.5% that Frontier controls?

Frontier also announced their earnings this past week, and the last quarter, as we had expected, was brutal. But, they were pretty much what we had expected. In fact, the stock was up 6% this week--closing at 3 3/8--so that affirms our belief that the markets were not overly distressed by what they saw.

Frontier reported a net loss of $8,895,482, or $1.12 per share, on revenues of $83,435,232, vs. a year-ago nine-month loss of $6,397,348, or $1.51 per share, on revenues of $44,343,080.

While Frontier CEO Sam Addoms did cite the situation with United as being one of the major factors in Frontier's lackluster performance, he also added, "On a positive note, we appear to be regaining some of our earlier momentum through a number of recently introduced sales initiatives, including programs aimed at business travelers, marketing alliances with other airlines and new programs with travel wholesalers."

On the cost side, Addoms also added that the company has started to enjoy the efficiencies of a ticketless reservations system introduced last month. Also, Frontier expects to gain "sizable economies of scale" from four additions to its present fleet of 10 Boeing 737 jets over the next 11 months.

American Airlines

American <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMR)") else Response.Write("(NYSE: AMR)") end if %> closed up 3% on the week, ending at 81 7/8.

Score: AMR 1, APA 0.

Round Two now scheduled--thanks to President Bill Clinton--who felt it was necessary to jump in immediately after the pilots declared a strike against the airline and invoke the powers of the Railway Labor Act. The strike lasted all of 24 minutes. Actually it only lasted about 2 minutes--it just took that long to get the news of the President's actions to all the interested parties.

The two sides then had no choice but to agree to a 60 day "cooling off" period, during which time a Presidential Emergency Board will work to come to a type of non-binding agreement-which will then be presented to both sides. If the two parties cannot agree at that time, then guess what? Yep, we could be going through this all over again. The pilots would have the right to strike at the end of the 60 day period. Then again, Congress could also come in and dictate terms of a new agreement.

Just one very important point I would like to make--and one that AMR and the Wise analysts seem to be glossing over. There was an article in the Wall Street Journal this past week about how analysts were generally unconcerned about the possibility of a strike and how the stock price had begun to move up again, after suffering an approximate 10% decline since the pilots turned down the tentative agreement in January. I disagree. I think that AMR earnings have to be affected, and to no small degree.

In an article in today's Dallas Morning News, airline industry consultant and Fool Air reader Robert Mann, who is working as a consultant to the APA, estimated that AMR (the parent company of American Airlines) would lose hundreds of millions of dollars more as a result of the standoff. "If it goes back into another "cooling off", (which it has) it looks like it could cost another $400 plus million, " according to Mann.

American has already conceded that it has lost as much as $100 million as a result of the contract dispute. Mann estimates the loss closer to $177 million.

Well, whoever you want to believe, MF Wings has this to say. This has been a costly situation for AMR, and will continue to be so. And just not in terms of money.

So, I cannot understand why the Wise feel that this is no big deal.

But then again, we are just Fools.

Quick Summary

Some other gains on the week: Northwest Airlines <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NWAC)") else Response.Write("(Nasdaq: NWAC)") end if %> , up 8% to close at 35 3/4; Alaska Airlines <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ALK)") else Response.Write("(NYSE: ALK)") end if %>, up 6% to close at 23 5/8; Continental <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAI/B)") else Response.Write("(NYSE: CAI/B)") end if %> , which was up 4% to close at 29 7/8; Delta <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DAL)") else Response.Write("(NYSE: DAL)") end if %> , which was up 4% to close at 84 7/8; UAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UAL)") else Response.Write("(NYSE: UAL)") end if %> , parent of United Airlines, was up 3% to close at 60 3/8; USAir <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: U)") else Response.Write("(NYSE: U)") end if %> was up 2% to close at 21; Pan Am <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: PAA)") else Response.Write("(AMEX: PAA)") end if %> was up 2% to close at 8 1/16; and Atlas <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ATLS)") else Response.Write("(Nasdaq: ATLS)") end if %> was flat--closing at 34 1/4.

That is it for this week's edition of the MF Wings' Weekly Update. Remember, if you would like to have this delivered to your e-mail box, just write me a note and it is yours. No charge. Just send me a note at MF Wings @aol.com and tell me "YES! I NEED IT!"

Or, whatever you want to say. I'll get the message.

Have a good week everyone,

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