This Week in Airlines
by Holly Hegeman (MF Wings)

Dallas, TX (March 9, 1997) -- Foolish readers, the markets were kind to our Motley Flyers this week, as only five of the 35 stocks we track in Fool Air were down on the week. Yes! The week ended on a higher note as interest-rate sensitive shares, such as the airlines, got a boost from February jobs data that showed little upward pressure on wages.

The Dow Jones Industrial Average closed up 56.19 points on Friday to end the week at 7,000.89. For the week, the Dow rose 123.15 points. The nation's unemployment rate edged down to 5.3% from 5.4%, in line with forecasts, thus making everyone happy -- in other words, the information was not something that would be prone to make the Federal Reserve increase interest rates in March. Anytime the market breathes a sigh of relief over the possibility of increased interest rates, the airlines usually benefit. Why? Because the winged ones carry so much debt. Any minute raise in interest rates will cost the carriers dearly. Translation: Lower earnings. Final translation: The stocks usually begin to lose serious ground anytime there is the slightest hint of an interest rate.

The big winner on the week had to be UAL Corporation, parent of UNITED AIRLINES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UAL)") else Response.Write("(NYSE: UAL)") end if %>, which announced not only a tentative agreement with its pilots and machinists unions, but also announced higher load factors for February over a year ago, AND announced the company's first quarter earnings will top Wall Street estimates. All of this contributed to UAL sporting a new 52-week high this week, as the carrier closed the week up a staggering 18%--closing at 66 3/4.

USAIRWAYS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: U)") else Response.Write("(NYSE: U)") end if %>, which took flight officially the week before last, also had a stellar week, for reasons we are not exactly sure. The stock rose 13% to end the week at $22 3/8. (Must have something to do with that new Stephen Wolf-designed livery.)

In other news, UPS announced the beginning of its people-hauling business. Yes, now you, too, can be shipped UPS. Well, there are some restrictions. First you must be able to fit in a box, and two, you must be on your way to a cruise or other vacation venue. Huh? No, you don't really have to fit in the box. (Just a little MF Wings' humor there.) Actually, this is an effort by UPS to utilize aircraft on weekends, and passengers will be those who are part of tours, cruise packages, etc. So, no, you can't run out and book your next trip to Chicago via 2-day ground delivery. According to UPS, the company can convert their planes in around 4 hours from cargo haulers to people movers.

AMERICAN AIRLINES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMR)") else Response.Write("(NYSE: AMR)") end if %> gained 6% on the week, closing at $83 1/2, as both American and the APA (the union representing American pilots) wrapped up their presentations to the Presidential Emergency Board. In a move that is a little out of the prescribed norm for such PEB interventions, the board asked both sides if they would consider a period of mediation -- and both sides have accepted. American CEO Robert L. Crandall is no longer mute -- he finally ripped off the duct tape. He was out in the media full force this past week -- including a long profile piece in USAToday which questioned whether Crandall would survive this ordeal unscathed, or if the Board of Directors of AMR would ask him to step down -- if in fact there is no settlement reached and the pilots strike. We shall keep you posted.

And of course, the big news of the week was the reinstatement of the 10% ticket tax. Starting on Friday, all the airlines started playing a major game of chicken as to who was going to try to raise fares, and who was not. As of Friday morning, American, CONTINENTAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAI/B)") else Response.Write("(NYSE: CAI/B)") end if %>, DELTA AIR LINES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DAL)") else Response.Write("(NYSE: DAL)") end if %>, USAIRWAYS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: U)") else Response.Write("(NYSE: U)") end if %>, and United Airlines had raised them 10%. NORTHWEST AIRLINES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NWAC)") else Response.Write("(Nasdaq: NWAC)") end if %> and SOUTHWEST AIRLINES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LUV)") else Response.Write("(NYSE: LUV)") end if %> had not raised them. (Actually, Southwest had quietly raised a lot of its fares over the last two months.)

Then, Saturday, things had changed, with some carriers dropping down to a 4% increase, and Southwest reinstituting its "Friends Fly Free" campaign.

The juggling is still continuing as I write this on Sunday, March 9, and it remains to be seen what the final numbers are, as of Monday morning.

The rest of the action from last week: MESA <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MESA)") else Response.Write("(Nasdaq: MESA)") end if %> was up 14% to close at $7 1/4, WESTERN PACIFIC <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WPAC)") else Response.Write("(Nasdaq: WPAC)") end if %> (WHERE are those earnings?) was up 11% to close at $6 1/4, COMAIR <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COMR)") else Response.Write("(Nasdaq: COMR)") end if %> was up 9% to end at $22 1/2, AIRTRAN <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AAIR)") else Response.Write("(Nasdaq: AAIR)") end if %> was up 9% to close at $4 5/8, ATLANTIC COAST <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ACAI)") else Response.Write("(Nasdaq: ACAI)") end if %> was up 8% to close at $16 1/2, VALUJET <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VJET)") else Response.Write("(Nasdaq: VJET)") end if %> was up 8% to close at$ 7 7/8, NORTHWEST AIRLINES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NWAC)") else Response.Write("(Nasdaq: NWAC)") end if %> was up 7% to close at $37 7/8, MESABA <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MAIR)") else Response.Write("(Nasdaq: MAIR)") end if %> was up 7% to close at $13 5/8, FEDERAL EXPRESS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FDX)") else Response.Write("(NYSE: FDX)") end if %> was up 7% to close at$55, AMERICA WEST <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AWA)") else Response.Write("(NYSE: AWA)") end if %> (which announced less than stellar loads for February) was still up 6% to close at $14 3/4, WORLD AIRWAYS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WLDA)") else Response.Write("(Nasdaq: WLDA)") end if %> (thanks for the nice notes from you guys! ) was up 6% to close at$ 9, DELTA AIR LINES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DAL)") else Response.Write("(NYSE: DAL)") end if %> was up 5% to close at $84 1/8, ALASKA AIR <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ALK)") else Response.Write("(NYSE: ALK)") end if %> was up 4% to close at $24 3/4, CONTINENTAL AIRLINES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAI/B)") else Response.Write("(NYSE: CAI/B)") end if %> was up 3% to close at $29 5/8, AIRBORNE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ABF)") else Response.Write("(NYSE: ABF)") end if %> was up 3% to close at $28 1/4, MIDWEST EXPRESS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MEH)") else Response.Write("(NYSE: MEH)") end if %> was up 3% to close at $34 3/4, ATLAS AIR <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ATLS)") else Response.Write("(Nasdaq: ATLS)") end if %> was up 2% to close at $20 1/2, ATLANTIC SOUTHEAST <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASAI)") else Response.Write("(Nasdaq: ASAI)") end if %> was up 1% to close at $22 7/8, TWA (WHERE are those earnings?)<% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: TWA)") else Response.Write("(AMEX: TWA)") end if %> was up 1% to close at $5 15/16, RENO AIR <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RENO)") else Response.Write("(Nasdaq: RENO)") end if %> was up 1% to close at $6 13/16, PAN AM <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: PAA)") else Response.Write("(AMEX: PAA)") end if %> was up 1% to close at $8, SOUTHWEST AIRLINES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LUV)") else Response.Write("(NYSE: LUV)") end if %> was up 1% to close at $23 5/8, FRONTIER AIRLINES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FRNT)") else Response.Write("(Nasdaq: FRNT)") end if %> was flat, closing at $2 7/8, TOWER AIR <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TOWR)") else Response.Write("(Nasdaq: TOWR)") end if %> was down 2%, closing at $3 1/8, VANGUARD AIRLINES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VNGD)") else Response.Write("(Nasdaq: VNGD)") end if %> was down 9%, closing at $2, and HAWAIIAN AIR <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: HA)") else Response.Write("(AMEX: HA)") end if %> gave up almost all it gained the week before on the news of its naming a new CEO. The carrier dropped 12%, ending at $3 9/16, earning it the dubious distinction of Goat of the Week.

A Word from the "WISE"

Okay, Foolish readers, here you go. Friday night on the PBS Nightly Business Report, they interviewed the grand poohba of airline analysts, Julius Maldutis of Salomon Brothers. You understand that this man makes more money in one year than most of us will make in our entire lives, or 10 lives, and is looked upon as being the "be-all end-all" expert analyst of the industry.

Well, Foolish readers, I was not impressed. And you should not be either. Here is a perfect example of how the "Wise" are not always what they appear to be.

In the course of the discussion, Julius was asked about the picks he had made on the show last year. He rattled through a number of airlines, nothing major of note here -- and then he got to Western Pacific. The woman interviewing him asked him, "Now, here is one where you were WAY off." Julius admitted that yes, Western Pacific had turned into somewhat of a "clinker" and then, are you sitting down?

Julius blamed Western Pacific's woes on (and I quote) "the unexpected success of Frontier Airlines in Denver". He went on to say that Frontier had just done much better than had been expected. (Foolish readers, I assure you, Frontier CEO Sam Addoms would be thrilled to be doing as well as Julius intimated.) This success, Julius continued, and the fact that it became clear that people WERE NOT WILLING to travel to Colorado Springs, had been the reasons for Western Pacific's less than stellar performance.

Foolish readers, this is a bunch of hoohah.

First of all, to put Mr. Maldutis' comments in perspective, one only has to remember who the lead underwriter was on the Western Pacific IPO. (Three guesses and the first two don't count--and oh, yes, their name starts with S.) In addition, the Western Pacific IPO was priced at a VERY high price, in my estimation, when you compared other similar airlines and their capitalization levels at the time.

So, you think Julius is going to tell the truth? I.e., "We screwed up." Or, do you think he has to blame the "clink" of lost pennies on something ELSE?

But to say people were not willing to drive the 60 miles, when people are driving to Colorado Springs in DROVES, when the number of passengers enplaning there has gone through the roof, and when Frontier is hanging on for dear life while United tries to muscle its way around DIA--Julius! PLEEZE! You are offending our very basic and Foolish sensibilities.

My respect for Julius dropped a few notches last night.

Foolish readers, I would just say this. Remember that with ALL analysts, there may be other reasons for some of their comments than mere financial analysis. An analyst's position within a firm--and this is something I don't think a lot of people understand--is a VERY political position.

And that, Foolish readers, is, as Paul Harvey so effectively says, the REST of the story.

ASK MF WINGS MAILBAG

This week I thought I would do something a little different. I would like to take some time to answer some of the more frequently asked questions that have been sent to me of late. Because these updates are now circulated to a much larger audience, and one that does not, for the most part, have access to our area on America Online, I thought it would be helpful to do so.

The most frequently asked question to me is undoubtedly this one--or some version of it.

Question: "Who is MF Wings--and how did you get started doing this? What do you do? Who are you?"

I get the impression that some of you suspect I am really a janitor that works the night shift at an airline headquarters or something--either that or I am someone really noteworthy just writing under an assumed name.

Nah, nothing that intriguing or exciting.

My real name is Holly Hegeman, and until recently I was Senior Vice-President for a national brokerage firm headquartered in New York. However, I have also had my own management communications consulting firm for many years, in addition to my work in the financial sector. I also served as president of the New York chapter of the International Association of Business Communicators this year. And yes, as if you could not already guess, I also am a frequent speaker at many professional meetings and conferences. (Uh-oh--yes, I'm afraid it is true -- I talk pretty much like I write.)

My interest in the airline industry goes back many, many, years -- but I did not get really serious about it until I began working as a consultant to the ever-popular, always controversial, and never boring Robert L. Crandall, CEO of American Airlines. In addition to working with Mr. Crandall on various consulting projects, I also wrote most of the 1994 AMR Corporation Annual Report.

Since then, I have concentrated on monitoring the financial side of the industry, and well, the rest--as they say--is history. I have been involved with the Motley Fool as the head of the airline industry research area since August 1995. I feel quite strongly that the individual investor, and particularly the airline employee, in our case, should be privy to as much information about the financial and business side of the industry as possible. With more and more stock options being distributed as part of compensation packages, I think it is imperative that someone be vocal and visible in trying to sort out the public relations hype from the financial reality.

And yes, as you can tell from the update byline and my writing, I now live in Dallas, but I am not currently doing any consulting work for any airline clients.

I am, however, launching a new airline industry publication in about six weeks entitled PlaneBusiness.

Question: Aren't airline stocks primarily "trading" vehicles, instead of long-term investment opportunities? Aren't they very cyclical in many ways?

These are good questions, and ones that are asked a lot -- in various forms. Let's face it -- on the whole, the airline industry has not been a particularly good long-term investment choice since deregulation. However, yes, as a cyclical play, one that has definite yearly up and down institutional buying patterns, it does offer opportunities --if one knows how the patterns work.

Let me explain. So much of airline stock is owned institutionally, and NOT by individual investors, that the big institutional buyers and sellers really do set the tone on the buying patterns. Historically, as I have advised readers in our area in the Motley Fool, the best time to buy an airline stock is in the late fall, or early winter. The institutional buyers tend to buy after the end of the year -- looking forward. This increase in buying continues, and stocks usually continue to gain until around the end of May. Then, as the institutional buyers are looking forward, and summer peak earnings are already factored in, they start to sell off. We saw this pattern VERY clearly last year for example, when our own group of Foolish Faves were up around 64% in June. They ended the year up 24%. Still not bad, but as we advised our readers, we had proved the point. In this sector, if you try and work WITH the institutional patterns, yes, you will probably increase your chances of making money.

I think, therefore, that airline stocks are more of "trading" plays than many other sectors. Not only that, but there is another phenomenon that can be seen clearly in this sector -- and that is the "momentum" stock. Yes, dear readers, these don't just exist in the technology sectors! In this industry, there has been some big money made on these momentum stocks in the last few years. ValuJet, Atlas Air, Continental, USAir. All of these carriers had exceptionally explosive periods of stock appreciation. The one carrier that is poised to possibly fit into this mold right now? Pan Am.

But, let's not forget the healthy returns that many of the other carriers have continued to churn out, sometimes quite quietly, over the last few years. One of the stocks I liked in 1996 and recommended going into 1997 was UAL. UAL, parent of United Airlines, has had an exceptional two years--posting a 103.7% gain in 1995, and a 40% gain for 1996. UAL is currently up 7% this year, and had an 18% gain on the week, this past week, as the company stated it would exceed analysts' earnings estimates for the first quarter. In addition, the company announced it had come to a tentative agreement with both its pilots and machinists. While the flight attendants' contract is still in negotiations, the settlement of these other two contract disputes was another very positive factor in that 18% gain on the week.

AMR, for all the negative press the company has been getting of late in terms of its ongoing dispute with the APA, has also had a very good two years, as the stock was up 40.4% in 1995, and 19% in 1996. When the company does come to terms with the pilots, this stock should probably do well in 1997. It seems to me to be undervalued at this point in time, due to the concerns over the ongoing labor dispute.

Alaska Air has been another good choice for stockholders the last two years. One of our Foolish Faves, the stock gained 13% in 1995, 29% in 1996, and has gained 18% on the year this year.

There are many other airline stocks that have also had a good two-three return. The secret again -- do your homework.

Question: "What is wrong with Southwest Airlines' stock and why isn't it higher?"

I was just asked this question in person this past week by two SWA flight attendants, and it reminded me that yes, I get asked this question a LOT. (This might have something to do with the fact that my brother is a pilot for Southwest!) So, here goes one more time.

First, for those of you who are not aware, the financial track record of Southwest Airlines is enviable. The only airline to be profitable for 24 years straight, there is only one airline that has a higher percentage return to shareholders over the last ten years than Southwest. And that is UAL.

Southwest has returned an average 17.4% to shareholders over the last ten years. (The sector average is 7.6%).

The company, by many yardsticks, is one of the most, if not THE most well-managed company in the sector. It has the benefit of employees who would go to the ends of the earth for their CEO, Herb Kelleher -- the man I affectionately like to say is crazy like a fox and drinks like a fish. Personally, I think it is one of the few carriers that provides passengers with exactly what they promise: low fares, extremely caring and friendly service, and on-time performance. That's it. Pure and simple. And, they deliver -- over and over and over.

So, why is it, I am asked, that the stock price is not higher? Why is it that Wall Street hates Herb?

Well, dear readers, Wall Street does not hate Herb.

Here are a few reasons why Southwest stock has not been a particularly fast mover the last few years.

First, you have to remember what a stock price is. The price of a share of stock is determined not by how great a company a particular company is. It is determined by the market "expectations" for that company. If the market thinks that the competitive advantage of a company is fully reflected in its stock price, if the market feels that the opportunity for the company's growth in the future (i.e., the opportunity for earnings to increase) is not particularly great, then a given company's stock will tend to remain fairly stable.

This is not a reflection on the management of the company, nor does it mean that there is anything wrong with what the company is doing. It just means that the market feels the stock price accurately reflects the current earnings "expectations" for that company.

In other words, let's look at Southwest in particular. The company enjoyed a great increase in terms of stock appreciation in the past. This was due to a difference between the market perception of Southwest, which was somewhat limited, and the company's earnings, which continued to increase, and increase and increase. So, therefore, you then had a sudden and pretty hefty increase in the price of the stock, as the market suddenly "discovered" the company and expectations then were driven even higher.

However, over the last two years in particular, the markets have had several concerns. 1) Can Southwest continue to grow at the same rate as it has in the past? and 2) With the implementation of longer routes, is this good or bad? Will this new expansion increase earnings at a higher rate--or a lower rate?

Again, let me restate something. Wall Street buys on "expectations". If there is no expectation of greater than normal growth, then the stock will remain fairly stable.

Why did AMR and UAL experience such tremendous gains in the price of their stock the last two years? Because both companies earnings growth exceeded Wall Street expectations. Therefore, the stock price increased.

Remember, those of you who own Southwest stock -- your company earnings have been hard hit by several factors. One, the rise in jet fuel prices. This hit Southwest proportionately higher than some competitors, because of the high number of take-off and landings that Southwest incurs. The increase in jet fuel cost the company roughly $28 million in additional costs this past quarter alone. 2) The company has been, and still is, taking delivery of a LOT of planes. This costs money. 3) The company is expanding into new markets. This costs money. 4) Southwest had resisted raising fares --consequently income levels were not increasing to overcome the rise in costs. However, the company have recently raised fares, which is good.

So, the bottom line? Wall Street feels the stock is fine, where it is. No expectations of any great growth in the near future.

If Southwest can get its costs down (which should start to happen as the cost of jet fuel decreases, along with other cost saving efforts the company has undertaken of late) and the costs associated with the entry into new markets begin to be absorbed --all other things remaining equal-- then SWA's earnings should start to rise, and the stock should move upward as a result. However, will the stock experience any real tremendous growth spurt in the near future? Probably not.

Question: So, how does one "invest" in this sector?

The point I want to make is this. Don't put your money in an airline stock and let it sit there. You have to be an ACTIVE investor in this sector. This is a sector where just one penny's difference in the price of a gallon of jet fuel can mean a difference of millions of dollars in costs to a carrier for a quarter. It is a sector where even the mere hint of a rise in interest rates will also cause the institutional types to flee in droves, driving down the stock prices. It is a sector that is, to a great extent, bought and sold on the traditional patterns of institutional buyers. You need to understand and work with these patterns -- not against them. And lastly, it is a sector that also produces the "hot rocket" momentum players -- if you catch them at the bottom it can be great. But just ask those poor souls who bought ValuJet at $63 what it feels like when you catch the momentum when it runs out of gas.

But then again, if this sector was dull and boring, none of us would be interested in it, now would we?

E-MAIL DELIVERY PROBLEMS

Attention! We have received notices that stated more than a few of our addresses had problems last week. In other words, the Mailer-Daemon internet elves notified us that there was a problem in delivering your e-mail. I am going to list the first few letters of the e-mail addresses that were affected. If you are on this list, but got your update okay, then we will continue with the address we now have on file.

HOWEVER, if you are one of these people, AND YOU DID NOT GET YOUR update, please e-mail me, MF Wings at aol.com, (or some people have to use [email protected]), and include a phone number, so we can contact you and make sure we can get your addresses double-checked and these updates sent to you on time.

Here is the list of the partial addresses that reported back as having problems:

flyr@n
Imason
upmaj
IFLYSWA
Hondacar
heiresd
dkokott
johnalex
megatoy
griehle
scalhou
davebea
Dinesh.K
dfus@cw
dexter_lee
Pccurrier@u
rna@gsb-ec
Richard.Pla
Edward@emi
scook@rad

E-MAIL DELIVERY REQUESTS

Yes, dear readers, you too, can have a copy of the MF Wings' Weekly Airline Industry Update sent to your own personal e-mail box. Just send a request to MF [email protected] and tell me, "Yes, Wings, I NEED it!" I shall endeavor to make sure you get it--unless the Internet mailing elves have something else to say about it. Please make sure you indicate to what e-mail address you would like the updates sent.

Have a good week everyone!

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