This Week in Airlines
by Holly Hegeman (MF Wings)

Dallas, TX (Feb 23, 1997) -- Foolish readers--a pretty lackluster performance for our Motley Flock this week. The stock market seemed to cool off a bit towards the end of this week, after two weeks of wild rides. Although the technology sector continued to be the place to be for real thrills and chills as those stocks met with some pretty stiff sell-offs. Networking and semiconductor stocks took a particulary brutal beating. In addition, Friday was the infamous "double-witching" day when stock and stock-index options expired, which helped to make the session on Friday a bit more volatile. Just a little bit of everything going on the past seven days. The Dow Jones Industrials ended the week at 6931.62, down 57.34 points on the week.

In addition, and good news for those of us who own airline stocks, the price for a barrel of benchmark crude oil dropped to its lowest point in six months on Friday, as it dropped below the $20 a barrel price. April Brent crude futures closed 26 cents weaker at $19.82 a barrel after dropping to $19.76. This is the lowest price the crude has traded at since August 8, when it closed at $19.70.

Reasons? An extremely mild winter in the Northeastern United States, (which is the largest home heating oil market in the world), and more oil coming into the markets from Iraq.

Translation: This is good news for the airline industry going forward, as it should translate into lower jet fuel prices. And, as we all Foolishly know, all other things being equal, lower jet fuel prices should mean higher earnings, which should motivate stock prices to move accordingly. That said, let's now take a closer look at some of the activity this past week with our Motley Flyers.

Atlas Air <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq:ATLS)") else Response.Write("(Nasdaq:ATLS)") end if %>

Atlas Air definitely made the biggest news this past week. Or rather, I should say the movement of the airline's stock made the biggest news as the stock dropped 29.2% on Tuesday, and eventually ended down 26% on the week, as it closed at 25 3/8. On Tuesday, Atlas posted fourth-quarter earnings of $.60 a share on operating revenues of $104.7 million, compared with earnings of $0.43 on operating revenues of $56.1 million last year. First Call analyst consensus for the quarter had been $0.63 cents per share.

However, the market did not punish Atlas just because they missed earnings expectations by $.03 per share. Yes, that was part of it, but in a conference call to analysts the company also indicated that first quarter earnings were going to be pretty flat. As we had mentioned a few weeks ago in the airline folder, certain maintenance costs remain higher than expected, (mainly those associated with the Federal Express planes that Atlas acquired), and the company will not begin to see the added revenue impact of its 5 new aircraft until the latter part of 1997.

As a result of the company's statements, Michael Shonstrom of Neidiger Tucker Bruner said he planned to reduce his first-quarter earnings estimate to about $.30 a share from an earlier forecast of $0.40. The consensus estimate on Wall Street prior to the company's earnings announcement was $0.49 a share, according to First Call.

MF Wings' translation? As we all know, Wall Street goes bonkers when a company steps up and says, "Guys, the next quarter is not going to be as good as you thought." Add that to the fact this quarter missed expectations, and what do you get? An almost 30% slide in the stock price.

We still think Atlas is a good niche player, and we think the markets overreacted to the news this past week. At 25 3/8, the company looks like a good potential buy to us.

But then, that is the Foolish philosophy. Unless something major had changed in the fundamentals of the company in those 24 hours between Tuesday and Wednesday, (and there was none) we see no reason to be alarmed by the drop--we only see temptation to possibly run out and buy some shares.

Moody's Investors Service also said on Wednesday it has placed the Ba3-rated pass-through certificates of Atlas Air under review for possible upgrade.

In making the announcement, Moody's said: "The review will focus on Atlas's rapid growth of its 747-200 air cargo business, acheived by offering a low-cost cargo alternative to the international air carriers that contract with Atlas Air for lift to supplement their own fleet. Since the debt offering in November 1995, Atlas has added new multi-year contracts and renewed existing contracts under which Atlas provides the aircraft, crew, maintenance and insurance, thereby diversifying its revenue stream and reducing contract renewal risk."

Atlas is just going through growing pains. Yes, the tremendous rate of growth they experienced last year has slowed, but that was expected. Their operating margins are still healthy, and if it wasn't for those darn FEDEX Dogs, (WOOF!) they'd be doing just fine.

Needless to say, with its 26% drop on the week, Atlas was the Goat of the Week. The stock also presently holds the questionable distinction of Goat of the Year, as the stock has lost 47% since the start of the year.

While we are hanging around in the Fool Air cellar, let's take a look at some of the other Motley Flyers who ended up down there this past week.

Western Pacific <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq:WPAC)") else Response.Write("(Nasdaq:WPAC)") end if %>

Western Pacific continued its downward descent this past week, as the Colorado Springs-based carrier lost another 14%, ending the week at 5 1/2. Now, opposed to the situation with Atlas Air, this is one we are concerned with, and have been for some time.

Western Pacific is the creation of Ed Beauvais, former CEO of America West airlines. As many of you may know, MF Wings is not a big fan of Mr. Beauvais. Well, let me re-phrase that. I think the man is a consummate marketer. One of the best on the planet. I just don't think he is a particulary effective airline CEO. (We could talk about those America West 747's to Hawaii, but nah....we'd get started and never stop.)

Robert Peiser, former CFO of TWA was brought in the end of last year to take over as CEO of the airline, while Mr. Ed, as we like to affectionately call him, remained as Chairman. Of course, Mr. Ed also cashed in some nice stock options right before this change took place. He also managed to go through quite a bit of the cash the airline's IPO had initially raised throughout the course of last year.

Peiser is a good man, and if anyone can take that mismanaged airline and give it some structure and focus, he is a great candidate to do so.

But, he faces some very strong challenges in the mid-term. I think the markets are reacting to this, and really, I see no reason to think that earnings are going to turn around at the carrier to any great extent anytime soon. So, as a result, we have seen the continuing erosion of the stock price--even as Peiser has come in and attempted to get a grasp on the situation.

Result? The stock ended down 14% this past week, and is down 21% on the year.

No, in this case we do not think WPAC represents a buying opportunity at this point in time. A horse is a horse of course, of course...except when it is a horse of a different color.

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

What can I say about TWA? We spent a fair amount of time talking about them this past week. However one thing of note--something one of our readers pointed out in a post to me this week: TWA is playing hide and seek with their earnings annoucement again. Last year TWA did the same thing with their end of year and fourth quarter figures. They would not commit to a definite date, and when they finally did, they still did not announce on time. We actually had an official "TWA Earnings Watch" contest. Well, if you check with First Call, the last reported date for the release of earnings was scheduled for February 12th. Well, guess what? I don't see them. Do you see them? Maybe the dog ate them.

The stock was down 9% this past week (maybe someone knows something we don't?) to close at 6. The stock is now down 9% on the year as well.

Reno Air <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: Reno)") else Response.Write("(Nasdaq: Reno)") end if %>

Reno Air announced earnings this past week, and they were less than stellar. Reno was a Foolish Fave in 1996, but like most of the low-fare smaller carriers, began to lose altitude after the ValuJet crash last May. These earnings are also of particular interest to me in that Reno just lost their CFO of many years, Paul Tate, who abruptly left Reno to go to Atlantic Coast in January. MF Wings' On-Board Radar always goes off when these types of moves occur--we won't even talk about when Vanguard's CFO left last June. But, there did not seem to be anything of note going on. I have second thoughts after looking at the results that the airline just issued.

I will quote from a review of the earnings provided by one of our Foolish Associates, Mikesinbox (Mike Zyskowski). Mike has followed Reno pretty closely over the last year or so.

"Reno's 4th qtr was pretty dismal... with a loss of $0.58 a share compared to a $0.02 profit the previous 4th quarter. For the year the company ended up making a little bit more money than last year and earned $0.19 EPS.

According to Reno's CEO Robert Reding, the disappointing 4th quarter performance was due to three primary causes... the $29 West Coast airfare sale, $2.4 million attributed to higher fuel expenses, and substantial losses from the storms over Christmas that froze or closed down most of the West. (A point here to remember for the current quarter, the storms did flow a day or two into January). Without the extra cost for fuel, Reno would have dropped its cost per available seat mile (ASM) to 7.5 cents, which is pretty respectable.

In their numbers they had a $2 million positive adjustment (this comes from tickets that aren't used and expire and such). This was markedly down from the previous year where the figure allocated was 5 million. This was a bit of a surprise to me. With their additional capacity, I expected some growth in this figure... but something to remember for next years' 4th quarter, don't expect anything more than 2 million."

MF Wings' note: I have always wondered about the way Reno accounts for these tickets. AND, given the increase in capacity--it would make sense this figure would go up. So, does that mean the earlier figure was a bit out of line?

Mike continues, "As you look over the numbers, if the positive adjustment had been 5 million, Reno would have earned about 50 cents for the year and if you add in the 2.4 million fuel hit... we're up to 75 cents... and if the weather had been a bit more mild... you're closer to a $1.00. On the negative side... their maintenance costs did double in the fourth quarter, from 3 to 6 million (not sure if this is because of their maintenance facility or extra cost involved with the storms). Another cost on their balance sheet that doubled was their "other" category... again from 3.5 million to 6.6 million. These need further investigation to understand the future downside for Reno.

Another point that Reding made (again), was that Reno is commited to profit margin improvement in the coming year as they will moderate their growth to boost the company's bottom line. (Let me add my own Foolish 2 cents here--they want to do this so they can get stock price up and have a secondary offering) But, I don't get this, what else have they not already done to boost profits that they can do now (it's not like they have learned something new this year???)"

Reno's stock was off 5% on the week, and is down 9% on the year.

Oh, yes, and Mr. Reding got more bad news this past week. The flight attendants for Reno have filed for representation by the Teamsters Union.

In another more positive note, Reno also announced they had struck a guaranteed revenue arrangement with Gulfport Mississippi, to provide air service to the Gulfport airport. They will provide scheduled service to Atlanta, Tampa/St. Petersburg and Orlando beginning in April. As many of you know, many of the smaller carriers have struck similiar "guaranteed revenue" or subsidization agreements as these. ValuJet has just consummated one with Mobile, Alabama for example--where they had been in a nasty on-again, off-again battle with Delta Airlines. ValuJet left Mobile--claiming Delta had made it impossible for the carrier to compete as Delta matched ValuJet's fares--Delta promptly raised fares, and then the city of Mobile agreed to subsidize ValuJet if they would come back.

And people WONDER trying to figure out this industry is such a challenge....

Amtran <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq:AMTR)") else Response.Write("(Nasdaq:AMTR)") end if %>

Another small fry that we find hiding behind the MF Wings' wine bottles in the cellar this week is the small carrier American Trans Air, or ATA. The company reported a net loss of $14.1 million, or $1.22 per share, for the last quarter of 1996. This compared with a net loss of $3.8 million or $0.32 cents per share in 1995. Amtran had an operating loss of $19.5 million for the fourth quarter of 1996. Operating revenues were $148.6 million and operating expenses were $168.1 million.

This has been an interesting stock to watch since the beginning of the year. There has been some serious buying going on as the stock has increased its value some 32% this year. Not shabby. However, we could never find any real reason for the stock run-up. For the life of me, I still really can't. Although it does appear the carrier is making inroads in bringing its revenues back into line.

The company was hit hard earlier in the year with tremendous growth in capacity that coincided with the drop-off in passengers that affected many carriers after the ValuJet crash. Now, on the good side, their scheduled service has begun to climb, and higher bookings and higher load factors began to surface towards the end of 1996. Looking forward, the advanced bookings also look strong, and their core base of charter customers looks as though they are coming back into the mix as well.

The stock was off 6% on the week, closing at 9 1/4. The question with this one for investors is... is the appreciation the stock has enjoyed this year over for now? Is the stock fairly priced, or is there more room to move? I think the stock will probably quiet down for time being. We need to see if they can continue to increase load factors and it is also important to keep a look at the level of charter service and how that improves or does not improve.

Upgrades, Downgrades, Whatever

Susan Donfrio at NatWest Securities announced a number of analyst changes this week. On Tuesday, she announced she was cutting UAL Corp., parent of United Airlines <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UAL)") else Response.Write("(NYSE: UAL)") end if %> to hold from accumulate. She also announced that she was maintaining an accumulate rating on Southwest Airlines <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LUV)") else Response.Write("(NYSE: LUV)") end if %>, and maintained a hold raing on USAir <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: U)") else Response.Write("(NYSE: U)") end if %>. Donfrio lowered her rating on Delta Airlines <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DAL)") else Response.Write("(NYSE: DAL)") end if %> stock to hold from buy, and she put AMR, parent of American Airlines <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMR)") else Response.Write("(NYSE: AMR)") end if %> on a "hold" status from accumulate.

Donfrio stated that she felt American Airlines' aggressive stance in its pricing actions merited the change. She also reminded us that with the reimplementation of the 10% domestic passenger excise tax, it will be difficult for all airline earnings growth to sustain year-over-year increases over the next couple of quarters.

Analyst Bill Whitlow announced Pacific Crest Securities had upgraded Alaska Air <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ALK)") else Response.Write("(NYSE: ALK)") end if %> to buy from outperform based on their just reported better than expected yields and traffic.

Whitlow reported that management was comfortable with his estimate the company would break even in the current first quarter, compared with a loss of $0.52 a share last year. On average, analysts expect Alaska to lose $0.40 cents a share in the current quarter, according to IBES. Whittow estimated 1997 ernings of "at least" $2.75, compared wtih $2.05 in 1996, and he set a price target above 30.

Weekly Summary

Here, at a glance, is a summary of market activity for the last week: World Airways <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WLDA)") else Response.Write("(Nasdaq: WLDA)") end if %>, up 11% to close at 10 3/8, Atlantic Southeast <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASAI)") else Response.Write("(Nasdaq: ASAI)") end if %>, up 4%, closing at 23 1/4, Pan Am <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: PAA)") else Response.Write("(AMEX: PAA)") end if %>, up 4% to close at 8 3/8, Alaska Air <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ALK)") else Response.Write("(NYSE: ALK)") end if %>, up 3% to close at 24 1/4, Frontier <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FRNT)") else Response.Write("(Nasdaq: FRNT)") end if %> up 2% to close at 3 7/16, Tower Air <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TOWR)") else Response.Write("(Nasdaq: TOWR)") end if %> up 2% to close at 3 7/16, Hawaiian Air <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: HA)") else Response.Write("(AMEX: HA)") end if %> up 2% to close at 3 9/16, American Airlines <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMR)") else Response.Write("(NYSE: AMR)") end if %> up 1% to close at 82 7/8, Mesaba <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MAIR)") else Response.Write("(Nasdaq: MAIR)") end if %> up 1% to close at 13 5/8, United Airlines <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:UAL)") else Response.Write("(NYSE:UAL)") end if %> flat on the week, closing at 60 1/8, Southwest Airlines <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LUV)") else Response.Write("(NYSE: LUV)") end if %> was down 1%, closing at 23 3/4, Northwest Airlines <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NWAC)") else Response.Write("(Nasdaq: NWAC)") end if %> was down 1% to close at 35 3/8, Continental Airlines <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAI/B)") else Response.Write("(NYSE: CAI/B)") end if %> was down 1% to close at 29 1/2, Midwest Express <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MEH)") else Response.Write("(NYSE: MEH)") end if %> was down 2% to close at 34 1/4, Delta Air LInes <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DAL)") else Response.Write("(NYSE: DAL)") end if %> was down 4% to close at 81 7/8, USAir <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: U)") else Response.Write("(NYSE: U)") end if %> was down 4% to close at 20 1/8, Valujet<% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VJET)") else Response.Write("(Nasdaq: VJET)") end if %> was down 5% to close at 7 1/16, Atlantic Coast <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ACAI)") else Response.Write("(Nasdaq: ACAI)") end if %> was down 6% to close at 14 3/4, America West <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AWA)") else Response.Write("(NYSE: AWA)") end if %> was down 6% to close at 14 5/8, Mesa <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq:MESA)") else Response.Write("(Nasdaq:MESA)") end if %> was down 6% to close at 6 1/16, and Comair <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COMR)") else Response.Write("(Nasdaq: COMR)") end if %> was down 10% to close at 20 1/8.

Administrative Notes

For those of you who access us on America Online, first, we do apologize for the problems that we have had the last week with the message boards. If you think YOU were frustrated, well, you can imagine what we were. However, as of today (2/23), they seem to be working.

In addition, we also have a new home for the aluminum-clad beauty we call Fool Air. If you have not been in lately, come see. The direct links to the stock message boards are now DIRECT--just one click. AND, the main industry board is now "favorite placeable". In addition, look for each stock to have its own area, complete with one-click access to current quotes and other financial information in the next week or so.

YAHOO!

A warm welcome to the incredibly large number of you who wrote this past week and asked to be added to the mailing list, due to the fact our weekly update is now prominently featured on the YAHOO/Motley Fool Money Page. We did have two addresses sent to us that would not send correctly, so if you sent a request to be added, and you did not receive a copy this week, just drop me another line and we'll try and get you on as soon as possible.

E-Mail Delivery

Yes, that is right, Foolish readers. If you would like to receive a copy of the MF Wings' Weekly Airline Industry Update in your own personal e-mail box, just drop me a note at MF [email protected] and tell me "Wings, PLEASE...I need it." I'll make sure you don't have to go without.

One Last Note (well...sort of.)

As you can tell, I cannot possibly cover every bit of news in the industry in this one update. What we do try and do is highlight different airlines each week, when possible. So, just because we don't talk about your particular airline, don't think that there was not any news to report, or that we are ignoring them. We'll talk about them... not to worry. It just may not be every week!

In Closing--American Airlines and the War of Perception

You will note that I have not mentioned the ongoing dispute with American Airlines and its pilot union, the APA, this week--although the carrier was briefly mentioned in an analyst note, and in terms of its stock movement.

No, instead, I am going to let you read a letter from a long-time Fool Air reader, who is married to an American pilot. And I quote,

"Dear Holly,

I read with much interest your weekend comments on American's situation. I agree wholeheartedly that AMR won that round, and may have won the war already. I give AMR three points for the weekend. One point because they got Clinton to step in at all. Another point because they got Clinton to step in after only TWO MINUTES of striking. (Isn't that some kind of record???). And, I give AMR their third point for getting Clinton to move the stike from a very busy week end (where many poeple would scream bloody murder) to the middle of April, which is a very low travel time. The next busy travel time isn't until July... MANY months later.

I wonder if AMR hasn't already won this battle. A lot of this battle is being fought in the media. I think that Crandall has the media and most of the public in his court. I think that if the pilots want to win the next important step, they need to hire the best PR firm this country has to offer. They need to convince the Presidential Board and the public that AMR is as much to blame for this fiasco as them. But I don't think they will do that for two reasons.

First, pilots tend to be frugal (translation... cheap). They won't want to pay out the bucks required to pull it off. Second, and I think more importantly, pilots tend to think they are right, and they can do everything needed by themselves. It's a kind of narcissistic self-sufficiency that comes with the profession. It's a great characteristic during an emergency in the air. It's a killer during a protracted battle being fought in public eye.

My prediction... the Presidential Board will make recommendations leaning to AMR, with a few bones thrown in for the pilots. The recommendations will include the RJ's going to Eagle. The next 30 days will be more public wrangling, with another 11th hour that goes nowhere. Then Congress will vote to impose the recommendtions onto the pilots and the company. Crandall will try to get out of the few bones thrown to the pilots (in court). He won't, and life will become more contentious at AA.

I read somewhere (the WSJ perhaps?) that Crandall intends to retire within 4 years. [MF Wings' note--he HAS to retire when he reaches the age of 65, which is approximately 4 years away--December 6, 2000 to be exact.] I hope that the Board of Directors is considering the trust issue already. Who could they find that has the business brilliance of Crandall with the personality of Herb? [MF Wings' note--I sure as heck don't know, but if someone finds this person, please let me know--call me collect anytime of the day or night.]

Let's all stay tuned for the next chapters in the story.

Julie... married to a pilot for a lot of years. "

Julie, thanks for taking the time to write. As one who looks at the war of perception with a highly-critical eye, I think you've basically hit the high points. The pilots are outgunned in the matter of the political and public war. AMR launched a lobbying effort that was monumental to make sure they got just what they did--a Presidential intervention--as well as public support.

They have also been very successful in removing Robert Crandall as an element in the argument. For a few exceptions, the man has been fairly mute, and invisible. This is not accidental. If you remove the object of the opponent's intense ire, then you negate the other sides' arguments against him.

As for the APA--guys--you have to realize that the war at the negotiating table is just one of the ones you need to address. I am afraid AMR has ambushed you on the flanks.

I agree--some strategic re-thinking and positioning is crucial if the APA's argument is to be heard, much less understood.

Okay--that's it! Pull that soapbox now! You just never know what you will read here, now do you?

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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