This Week in Airlines
by Holly Hegeman (MF Wings)

New York, NY (March 2, 1997) -- Foolish readers, the thud you heard this past week was the hard landing that many of our Motley Flock members experienced, as while the markets were up the beginning of the week, Fed Chairman Alan Greenspan put a halt to that foolishness (that's foolishness with a small "f") with his comments on Wednesday that alluded to the fact he thought stocks may be overpriced. Of course, the Wall Street translation of this was, "Uh-oh. This means he's thinking about coming in and raising interest rates."

As a result, the Dow skidded down 130.46 points to close at 6877.74. More importantly, the majority of our Motley Flyers were grounded, ending up in the negative category. Between the effect of the Greenspan comments, and the fact that it became clear the 10% ticket tax was going to be reinstituted, (which it was -- President Clinton signed the bill Friday night, making the tax effective March 7th), the majority of the Motley Flock was simply left sitting at the gate this week, as only 11 of the 35 stocks we track showed a positive gain on the week.

And speaking of sitting at the gate. MF Wings was sitting at the gate herself this past Friday night, as I flew from DFW to my old environs of New York on American Airlines <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMR)") else Response.Write("(NYSE: AMR)") end if %>. And, since all of us here are acutely aware of the situation with American, I have to relate this story with you. Here we are, sitting at the gate at DFW -- about 10 minutes late from our scheduled departure time. The Captain comes on and explains that there were two problems. One, we had to wait for some late-arriving passengers, who had just arrived, and two, there was a maintenance problem, and maintenance had been called, but had not shown up yet.

About ten rows behind me, in a voice loud enough you could have heard it in the MD-80 parked next to us, a woman screams out (as though the Captain could hear her from back there, and well, now that I think about it I guess he probably could) "Oh, I'm not believing this sh--. Let me tell you something, Mr. High-Paid pilot, you are NOT on strike. This is bull----. This has happened to me three times this week on American. Do you think we passengers are ...stupid??"

Well, as I said last week, we all know where the pilots fit in the scheme of public opinion now don't we?

Speaking of union problems, American is certainly not the only carrier that has them. Are you aware that every major carrier for the exception of Southwest <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LUV)") else Response.Write("(NYSE: LUV)") end if %> and Delta <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DAL)") else Response.Write("(NYSE: DAL)") end if %> have labor contracts that are now open, or contracts up for renegotiation this year?

Analysts are taking note, and you should too if you are an investor in this industry. If anything will put a damper on airline stock prices throughout the year, this will be it. It is apparent that labor is digging in its heels and making sure the airlines know that they expect them to cough up some of their newly-found profits. But as I mentioned two weeks ago, whether a company actually suffers an out and out strike, a slow-down, or just rancorous negotiations, there is a price to pay which is far more than whatever wage and benefits are eventually agreed to.

And, in the case of American, the issue of who will fly the regional jets is one that has far-reaching consequences for many airlines, not just American and American Eagle. What does MF Wings' see happening there? The PEB will come back with a recommendation that will essentially have American Eagle flying the RJ's. The APA will then have to decide if they are willing to strike against American over the RJ issue. Meanwhile American has got the pressure on Congress turned up to a fierce level, and if the pilots do strike, and Congress is then pressured to come up with a solution--they will, I think, go with whatever the PEB recommended.

I know a lot of readers will not be happy with this scenario, but unless something monumental breaks in the next week or so, this is how I see it playing out.

As we like to say, stay tuned.

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

Since we have started on this management/labor path, let's start with United, where there are more than just unhappy pilots. United flight attendants, irritated at the slow pace of their contract negotiations, announced this week the kick-off of a campaign they call CHAOS. The Association of Flight Attendants, AFL-CIO, which represents the United flight attendants, marked the start of the campaign with informational picketing at airports in Los Angeles, Sacramento, Des Moines and New York (LaGuardia) this past Saturday. As of Saturday, it has been one year since the flight attendants have been negotiating under an open contract.

Kevin Lum, Pres. of AFA's Master Execkutive Council at United stated, "This initial phase of CHAOS is designed to use creative tactics to inform the public about our contract dispute. . . . If we exhaust the negotiations and mediation process and United still has not agreed to a new contract, then CHAOS will escalate into a series of unpredictable work actions."

AFA first used its CHAOS strategy at Alaska Airlines <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ALK)") else Response.Write("(NYSE: ALK)") end if %> in 1993. Alaska Airlines flight attendants won an industry-leading contract after CHAOS culminated in a string of intermittent strikes. Rather than strike the whole airline, flight attendants targeted individual flights and individual cities for their work stoppages. The unannounced strikes lasted from 20 minutes to one hour each, making it nearly impossible for management to mount an effective defense.

United's flight attendants have identified raises, retirement and respect as key issues in the negotiations, not very different than the issues that were key in the 1993 American flight attendent negotiations.

Interestingly, United flight attendents did not agree to participate when United went through the ESOP transition.

As most of you also know, the pilots at United, who ARE employee-owners, and who have seats on the UAL Board of Directors, are also not happy campers. Last month, members of the Air Line Pilots Association (ALPA) began withdrawing from non-essential task forces at United Airlines as part of a protest of what they called poor relations with management.

The pilots, along with some groups within the International Association of Machinists and Aerospace Workers, recently turned down a mid-term pay raise offer from United. That issue now goes to arbitration.

United announced this week that William Hobgood had been named Senior Vice President/People, effective immediately. He will act as a liaison between the company and worker groups. He replaces Paul George, a human resources executive who retired recently.

This is similiar to the move made by Continental last month, when they too brought in an attorney well-versed in aviation labor issues to head up their internal labor negotiation efforts. Hobgood had been a private practice attorney specializing in mediation and arbitration. He spent 14 years with the Federal Mediation and Conciliation Service, where he was commissioner and later director, mediation services. He also served as Assistant Secretary of Labor for Labor-Management Relations during the Carter administration. Most recently he was vice president of the Mediation, Research and Education Project at Northwestern University.

As a friend of mine, who is involved in the labor/management side of another airline said to me one day, "Yep, we are just waiting to see the press release when the pilots go on strike against United. Do you think it will come from the Board of Directors?

United also came out swinging this past week in response to the suit filed against them by Frontier Airlines. United filed a report with the U.S. government in response to the charges made by Frontier officials, citing Frontier Airlines' recent complaints as unwarranted and potentially harmful to airline competition in Denver and across the country.

Roger Gibson, a United Airlines vice president, released a statement in which he said, "In recent weeks, Frontier Airlines has tried to wage a disinformation campaign based on dubious, misleading and inaccurate accusations," "Our response to the government outlines facts that clearly refute the carrier's claims. It also reveals that what Frontier is really seeking is preferential treatment and a desire to turn back the clock by re-regulating the airline

industry.They aim to curtail aggressive competition in the airline industry which now competes just like other U.S. businesses using quality, service and price for the benefit of the consumer. If Frontier were to achieve its objectives, it would be at the expense of the consumer."

As we say, we'll keep you posted.

UAL was down 6% this past week, as the stock closed at 56 3/4.

Continental <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAI/B)") else Response.Write("(NYSE: CAI/B)") end if %>

Speaking of Continental, here is my strange story of the week. Well, actually the TWO strangest related stories. This week the Continental Airlines pilots' union announced a study it had commissioned by Salomon Brothers showed the airline could eventually merge with another carrier, perhaps within the next 18 to 24 months.

Salomon Brothers forecast a rapid consolidation in the airline industry if the proposed alliance between British Airways and American Airlines was approved, said Len Nikolai, president of the Independent Association of Continental Pilots.

The Salomon Brothers study suggested Continental would emerge as an attractive acquisition candidate because of its strong domestic and international route structure, solid financial situation, and relatively good relations between its management and employees.

Now, first of all, my question to you is this. You mean you guys actually paid Salomon cold hard cash to come up with this startling information? Hey guys--I got news for you. This is nothing that we don't already know. In fact it is nothing that your own CEO hasn't already articulated.

So, how much did Julius and his assistants over at Salomon charge you for this earth-shaking bit of news anyway??

But wait! If this is not interesting enough, almost right on the heels of this announcement, Salomon Brothers announced they were downgrading Continental's stock from buy to hold.

Reasons stated:

(1) airline workers throughout industry are clamoring for higher wages, [MF Wings' note: And yes, we know who they are and they are paying us handsomely to tell them what is pretty much common knowledge] and the wage situation at Continental has the potential to "substantially reduce" earnings since wages at Houston-based Continental are about 20 percent below the industry average.

(2) continued strength in demand for air travel and Continental's cost controls will lead to slightly improved operating results in 1997.

Well, as I said in the airline industry folder, doesn't anyone else find this just a little bit interesting?

Continental closed the week down 3%, ending at 28 5/8.

USAirways <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: U)") else Response.Write("(NYSE: U)") end if %>

Yes Foolish readers, Thursday marked the introduction of the "new" USAir --USAirways. As a matter of fact, I received an e-mail this past week from a reader who asked, "Wings, why is USAir changing its name?" Now, yes, I did eventually give the reader the reasons that the company had articulated. However, I think the best answer is simply... "Because Stephen Wolf wanted to do it." (Stephen Wolf is CEO of USAirways, and formerly CEO of United Airlines). I think that is far more succinct and accurate than going on about some need for a corporate change of image, a new global attitude, and morale boosting. Oh, yes, those are true too. (Well, actually the PR blurb read something like "this is an effort to reflect USAir's "evolving position among domestic and international airlines.")

Whatever.

But we all know Stephen can't resist painting airplanes some shade of grey. There must be something lacking in the man's diet that forces him to do this. I still have to say that personally I think the UAL livery is horrible. If you all are not aware, the colors for UAL were personally chosen by da Wolfman, and I am sure the same was true here. So, yes, be on the lookout, the new paint scheme is already on a small number of USAirways jets flying into an airport near you.

And yes, USAirways has already asked its pilot union to take a substantial cut in pay, and has proposed a new "airline within an airline" concept, not unlike Delta Express, but MUCH more extensive than Delta Express.

USAirways was down 2% on the week, as the stock closed at 19 3/4.

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

Okay, enough of labor/management themed comments. Let's shift gears. Now, if I asked you what was the 12th largest airline in this country, what would you say? I bet very few of you would guess Hawaiian Air--but, yes Foolish readers they are. Hawaiian was a high-flying exception to this generally down week as the company announced the appointment of a new CEO on Thursday, and SHAZAM, the stock shot up 12% on Friday --ending up 14% on the week-- to close at 4 1/16. On Thursday, it was announced that Hawaiian's president and CEO Bruce Nobles had resigned, and that Paul Casey had been named to succeed Nobles. Most recently, Casey had been living a not-so-rough life as president and chief executive of the Hawaii Visitors and Convention Bureau. However, the man has worked in the airline industry previously. From 1985 to 1994, Casey served in several executive positions at Continental, including vice president-International Division; vice president-Pacific/Asia; and chairman, president and CEO of Continental Air Micronesia. Prior to joining Continental, he served from 1977 to 1984 in management positions throughout the Pacific for Pan Am.

Nobles had been with Hawaiian as president and CEO since 1993. He was the one who led the company through a year-long Chapter 11 reorganization in 1993 and 1994, and he had been slowly working to restore the airline's profitability by restructuring the airline's fleet, route structure and labor agreements. More recently, he directed a series of equity investments and offerings that generated nearly $60 million in new capital for the company.

The company has entered into a number of code-share and marketing arrangements with other carriers including: American Airlines, Northwest Airlines, Reno Air, American Eagle/Wings West and Hawaii commuter carrier Mahalo Air. The beginning of February it was also announced that Hawaiian would begin using one of the Sabre Group's revenue management systems. (Yes, there are strong ties with AMR and Hawaiian.)

Hawaiian's latest traffic figures were flat, with January loads being the same as January 1996.

But obviously the news of the change at the top made the Wall Street types happy -- as like we said, the stock ended the week up 14%.

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

ValuJet reported a bigger-than-expected loss for the fourth quarter, as expenses related to a three-month suspension of operations and a sharp decline in the percentage of seats filled took their toll on ValuJet's results.

ValuJet had a loss of $20.6 million, or 38 cents a share, in the latest quarter. That was eight cents a share worse than the mean estimate of four analysts surveyed by First Call. Excluding $13.3 million of expenses related to the three-month grounding that followed the crash, which killed 110 people, ValuJet said its loss would have totaled $12.3 million, or 22 cents a share.

For the year-ago quarter, ValuJet posted net income of $19.2 million, or 32 cents a share.

Revenue plunged 75% to $28.1 million from $110.8 million and fourth-quarter load factor was 57.3%, compared with 64.5% in the 1995 quarter.

ValuJet posted a loss of $41.5 million for the year, or 76 cents a share, including $68 million in charges from the grounding. Without those expenses, the company would have had 1996 income of $1 million, or two cents a share. For all of 1995, ValuJet earned $67.8, or $1.13 a share. Revenue tumbled 40% in 1996 to $219.6 million, compared with $367.8 million in 1995, and load factor for 1996 was 57.1%, off sharply from 68.8% in 1995.

ValueJet reported it's once-substantial cash hoarde is now down to a little more than $150 million in cash.

As bad as the news was, the stock was not roughed up this week, as ValuJet ended up 4% on the week, closing at 7 5/16.

Earnings? The Dog is Innocent. We know. We asked.

We continue to wait for both TWA and Western Pacific to report earnings. Both are dragging their feet. Is this perhaps a new malady... one that is related to Robert Peiser? Maybe we will just start calling this the Peiser effect. Last week we wondered if the dog had eaten them. We have since checked that theory out and no, the dog is innocent.

Slick Tricks and Cool Moves/ Vanguard <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VNGD)") else Response.Write("(Nasdaq: VNGD)") end if %>

In response to a request from a reader, MF Wings went nosing around to find out about a special shareholders meeting of Vanguard Airlines scheduled for tomorrow (March 3). It seems that the Board of Directors of this financially troubled airline decided at a meeting in January that they wanted to change the corporate resolution of the corporation and authorize the issuance of a few more shares of common stock. Our reader was wondering what the effect of this meeting would be on the shares of an individual investor.

Well, Foolish readers, what do you think?

The Board of Vanguard wants to increase the number of authorized shares from 16 million to 51 million. Yes, you read that correctly. Now, granted, corporations increase the number of shares of stock that are available for many reasons. First, this can prevent one person or entity from gaining control. Well, that is not the case here, as Hambrecht and Quist controls 61% of the shares. I don't think there is any danger that anyone is out to unseat them.

Secondly, the company may want to raise additional capital. Well, yes, that could certainly be the case here. In that case, the individual stockholder would probably see the value of their shares drop.

But more importantly, there are some 9 million or so warrants outstanding that are convertible to common stock.

Ah-ha.

Yes, Foolish readers, this too would greatly diminish the value of the existing shares if for some reason, folks started cashing in those warrants.

The bottomline? Well, two more directors resigned from the Vanguard Board of Directors not long after the Board voted to schedule this special shareholders meeting.

I really have no more to say. I think the chances are that the value of the stock that is now outstanding will probably be diminished.

Upgrades, Downgrades

Robinson-Humphrey Co. upgraded its short-term rating on Midwest Express Holdings Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MEH)") else Response.Write("(NYSE: MEH)") end if %> to buy from market performer.

Robinson-Humphrey Co. maintained its long-term buy recommendation on the stock.

Gruntal announced this week it lowered its earnings per share projections on Northwest Airlines <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NWAC)") else Response.Write("(Nasdaq: NWAC)") end if %> to $0.40 from $0.80 for Q1 and to $5.50 from $6.50 for the full year. Gruntal said the action reflects the shift in the value of the yen and competitive impact of the AMR "non-strike."

Gruntal also maintains its outperform (speculative) rating for Northwest Airlines.

Market Wrap-Up

Here is a wrap-up of other activity from last week. AirTran <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AAIR)") else Response.Write("(Nasdaq: AAIR)") end if %> ended the week up 10% to close at 4 1/4, Mesa <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MESA)") else Response.Write("(Nasdaq: MESA)") end if %> ended the week up 5% to close at 6 3/8, Atlantic Coast <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ACAI)") else Response.Write("(Nasdaq: ACAI)") end if %> ended the week up 3% to close at 15 1/4, Comair <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COMR)") else Response.Write("(Nasdaq: COMR)") end if %> ended the week up 2% to close at 20 5/8, Western Pacific <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WPAC)") else Response.Write("(Nasdaq: WPAC)") end if %> ended the week up 2% to close at 5 5/8, Reno <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RENO)") else Response.Write("(Nasdaq: RENO)") end if %> was up 2% to close at 6 3/4, Amtran <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMTR)") else Response.Write("(Nasdaq: AMTR)") end if %> was flat on the week, closing at 9 1/4, Northwest Airlines <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NWAC)") else Response.Write("(Nasdaq: NWAC)") end if %> was flat on the week, closing at 35 3/8, Southwest Airlines <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LUV)") else Response.Write("(NYSE: LUV)") end if %> was down 1% on the week to close at 23 1/2, Midwest Express <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MEH)") else Response.Write("(NYSE: MEH)") end if %> was down 1% to close at 33 7/8, Delta <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DAL)") else Response.Write("(NYSE: DAL)") end if %> was down 2% to close at 80 1/2, Alaska <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ALK)") else Response.Write("(NYSE: ALK)") end if %> was down 2% to close at 23 3/4, TWA <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: TWA)") else Response.Write("(AMEX: TWA)") end if %> was down 2% to close at 5 7/8, Atlantic Southeast <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASAI)") else Response.Write("(Nasdaq: ASAI)") end if %> was down 3% to close at 22 5/8, AMR<% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMR)") else Response.Write("(NYSE: AMR)") end if %> was down 5% to close at 78 3/4, America West <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AWA)") else Response.Write("(NYSE: AWA)") end if %> was down 5% to close at 13 7/8, Pan Am <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: PAA)") else Response.Write("(AMEX: PAA)") end if %> was down 5% to close at 7 15/16, Vanguard <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VNGD)") else Response.Write("(Nasdaq: VNGD)") end if %> was down 5% to close at 2 3/16, Mesaba <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MAIR)") else Response.Write("(Nasdaq: MAIR)") end if %> was down 6% to close at 12 3/4, Tower <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TOWR)") else Response.Write("(Nasdaq: TOWR)") end if %> was down 7% to close at 3 3 /16, Frontier <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FRNT)") else Response.Write("(Nasdaq: FRNT)") end if %> was down 16% to close at 2 7/8, World <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WLDA)") else Response.Write("(Nasdaq: WLDA)") end if %> was down 18% to close at 8 1/2, and Atlas <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ATLS)") else Response.Write("(Nasdaq: ATLS)") end if %> was down another 21% to close at 20 1/8.

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Have a good week everyone!

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