This Week in Airlines
by Holly Hegeman (MF Wings)

The Admiral's Club/Dulles Airport (April 14, 1997) -- Foolish readers, I am going to forewarn you. This will be a rather abbreviated version of the MF Wings' Weekly Update that you have grown to know and love. (Well, at least that is our unabashedly Foolish hope.)

Because of a weekend-long series of editorial meetings at Fool Headquarters in Alexandria, Virginia, I am writing this weekly update on the fly....literally....as I sit in the Admiral's Club at Dulles Airport waiting for my flight to Dallas/Ft. Worth.

So, just *bear* with me here as I try to work without the luxury of printed weekly performance figures and industry notes at my right hand. Yes, this week, we are just going to have to *wing* it.

Speaking of *bearing* with things--I have a confession to make. I am, indeed, wearing the MF Wings' Ratty Old Bear Suit. I brought it this weekend. I felt I had no choice.

As we had discussed last week, I started to take the Ratty Old Bear Suit out of the trunk where it is normally hidden away the Friday before, but given the nice bump-up our Motley Flyers enjoyed on that Friday, I decided I could wait just a bit longer before I did the dastardly deed.

If you remember, the Street went nuts over the fact that oil futures were the lowest in eight months on that day. Translation? Lower oil prices are always seen as a strong positive indicator for the industry.

However, after the excitement that Friday, April 4, became but a distant memory--and trust me, there is nothing as short as the memory of a Wall Street trader--last week was not a particularly good one for the Motley Flyers. The Dow Jones Industrial Average ended the week down 134.38 points, closing at 6391.69. The vast majority of our airline stocks also had a down week, as only six of our domestic birds showed gains, two stayed flat as roadkill, and the rest lost their feathers on the sides of the financial runway to one degree or another.

Now, remember--this lackluster performance occured just as the industry is poised to report great first quarter earnings--overall. Loads continue to look good, fuel prices continue to drop or at the very least are more stabilized from this point last year, and the carriers also have the benefit of the first two months of the year when they were not required to collect the 10% tax on tickets. All indications are pointing towards very good first quarter results--particulary for such carriers as UNITED AIRLINES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UAL)") else Response.Write("(NYSE: UAL)") end if %> and CONTINENTAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAI/B)") else Response.Write("(NYSE: CAI/B)") end if %>.

So, why am I now sporting the Ratty Old Bear suit? (And why are these folks in the Admiral's Club looking at me in this funny way?)

Because, Foolish readers, the market itself is in a bearish frame of mind. The market seems to be poised for a correction of sorts.

Friday the market was spooked by the fact that wholesale prices in March were up 0.04%. A Foolish note: this was the level of increase in the so-called "core rate". (This rate excludes some items as energy and food because of their inherent volatility.)

As a result of this higher than expected figure, the fear on the Street is of higher interest rates and possible inflation.

Translation: airline stocks, no matter how great their earnings look like they are going to be for the first quarter, got smacked.

And, they will continue to get smacked, if the market continues to believe that inflation and potentially higher interest rates are a likely scenario.

In addition, the yield on the 30-year Treasury bond rose to 7.18% on Friday. This is also a significant indicator to watch in terms of this industry. Why? Because as this yield gets closer and closer to the 7.25% point, bonds begin to give stocks a serious run for their money. Since this industry is very heavily institutionally owned--this will have an effect. In other words, institutional investors may start pulling money from stocks and put it into bonds instead--if the yields on bonds continue to rise.

Now, got all that?

Simple and to the point--here is what you need to remember.

Yes, the airlines are going to have, overall, a great first quarter. (TWA will be the one very notable exception.)

Will this mean that we are going to see dramatically higher stock prices in the near term? Probably not--as this sector has to be looked at in terms of the market overall, and we have to look at those two important factors that impact this sector--interest rates and fuel prices.

Situation now? The market is a bit spooked and there is sentiment that interest rates are on the way up.

Therefore, I don't see the airline stocks doing anything very positive in the near term --great earnings, or no great earnings.

I know to some of you this makes no sense. If a company reports great earnings should that not mean the stock should go up? Nope. Remember, Wall Street buys on expectations. Not on what is happening today--or in this case, this week and next.

Western Pacific Reports Disturbing Load Factors

Again, because of me writing this on the run, my apologies for not posting all of the traffic and loads from this past week--I will double up and make sure they are included in next week's update.

However, there is one airline that reported load factors that I think we need to make special note of.

In a long rambling type of release, WESTERN PACIFIC <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WPAC)") else Response.Write("(Nasdaq: WPAC)") end if %> did manage to include this little bit of information:

"Passenger load factors for the first quarter of 1997 decreased by 10 points to 48.7 percent when compared to the the first quarter of 1996. Passenger load factors for March 1997 decreased by 6.1 points to 61.2% when compared to March 1996."

YOWSA, Foolish readers.

I do not believe that Western Pacific can make money with a 49% load factor. I do believe that Mr. Peiser has his hands full as the carrier prepares to take delivery of additional planes and expand up the road to Senor Pena's Palace of Planes in Denver. The stock was almost the Goat of the Week--as it lost 8% on the week to close at $6. PAN AM <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: PAA)") else Response.Write("(AMEX: PAA)") end if %> was the Official Goat. The carrier lost 9%, closing at $8 1/2.

After four years--and much anticipation--excuse me while I yawn.

DELTA AIR LINES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DAL)") else Response.Write("(NYSE: DAL)") end if %> unveiled its much-anticipated new livery this past week. Anyone else out there seen it? Well, my take is that it looks as though the company didn't let the designer finish the assignment. It reminds me of corporate clients I have known who tell you they want something new, they know they NEED something new, but when push comes to shove, they revert back to what is familiar, what is perceived as "safe." Or worse, they take some innovative concept and chicken out. They revert back in mid-stream so they end up with something halfway. It is not a great innovative design, and it is not the old one either. It is something forever caught in the middle.

The new livery seems very bland and uninteresting to me. The design COULD have been better if Delta had let go of what had been before and truly come up with something strikingly new. Instead it just seems kind of a half-way attempt--it is not really very attractive--and certainly does not graphically portray what I thought the airline was trying to accomplish--which was a "new attitude and a new direction" for the airline.

Just one person's Foolish opinion.

I know, this has absolutely NOTHING to do with airline finance. But hey--as you know--we cannot, and certainly *do not* live by financial wizardry alone here in the MF Wings' Weekly Update.

BTW--Delta was down 3% on the week, to close at $86 7/8. And no, I don't think it had a thing to do with the unveiling of the rather lackluster new livery.

I promise.

Of course...one never knows. (No, really, I am kidding!)

Analyst Upgrades

Robinson-Humphrey analyst James Parker upgraded SOUTHWEST AIRLINES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LUV)") else Response.Write("(NYSE: LUV)") end if %> and RENO AIR INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RENO)") else Response.Write("(Nasdaq: RENO)") end if %> to "buy" from "hold" on a short-term basis this last week.

Parker maintained his long-term rating of "buy" on Southwest and his "hold" rating on Reno. He also maintained his 1997 earnings estimate of $1.65 a share for Southwest and $0.45 for Reno.

Parker said he upgraded Southwest, which recently raised fares, because he expects earnings to grow rapidly during the second half of the year. As a result, according to Parker, Reno should also benefit. (Reno and Southwest compete directly in a large number of markets.)

Parker set a six-month price target of $27 to $28 on Southwest, and $9 on Reno.

[MF Wings' Note: I concur with the anticipated rise in earnings for Southwest during the second half of the year-- the company has raised fares more than once since the beginning of the year, the costs associated with their expansion efforts are beginning to be absorbed, they have been on a "search and destroy" mission in an attempt to lower costs internally at the airline, and any drop in fuel prices, which we have had since the beginning of the year, gives Southwest a nice added bonus to its bottom-line.]

The Week's Stock Activity

AIRTRAN <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AAIR)") else Response.Write("(Nasdaq: AAIR)") end if %> closed the week up 9%, closing at$ 6 1/8, VANGUARD <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VNGD)") else Response.Write("(Nasdaq: VNGD)") end if %> ended the week up 6% to close at $2 1/8, ATLANTIC COAST <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ACAI)") else Response.Write("(Nasdaq: ACAI)") end if %> was up 5% to close at $15, COMAIR <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COMR)") else Response.Write("(Nasdaq: COMR)") end if %> was up 3% to close at$20 3/4, TOWER AIR <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TOWR)") else Response.Write("(Nasdaq: TOWR)") end if %> was up 2% to close at $2 11/16, MESABA <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MAIR)") else Response.Write("(Nasdaq: MAIR)") end if %> was up 1% to close at $12 1/8, and UNITED AIRLINES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UAL)") else Response.Write("(NYSE: UAL)") end if %> was up 1% to close at $69 3/8.

Those that were flat on the week were: AIRBORNE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ABF)") else Response.Write("(Nasdaq: ABF)") end if %>, closing at $31 7/8, and ATLANTIC SOUTHEAST <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASAI)") else Response.Write("(Nasdaq: ASAI)") end if %> which closed at $21.

Those who were down on the week were: MIDWEST EXPRESS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MEH)") else Response.Write("(NYSE: MEH)") end if %>, which closed at $37 1/4, SOUTHWEST AIRLINES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LUV)") else Response.Write("(NYSE: LUV)") end if %>, which closed down 1% to end the week at $22 5/8, VALUJET <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VJET)") else Response.Write("(Nasdaq: VJET)") end if %>, which ended down 2% to close at $7 3/8, RENO AIR <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RENO)") else Response.Write("(Nasdaq: RENO)") end if %>, which was down 2% to close at $6 7/8, USAIR <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: U)") else Response.Write("(NYSE: U)") end if %>, which was down 3% to close at $25 1/4, TWA <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: TWA)") else Response.Write("(AMEX: TWA)") end if %>, which was down 3% to close at $6 1/4, DELTA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DAL)") else Response.Write("(NYSE: DAL)") end if %> which, as we said, closed down 3% to close at $86 7/8, MESA <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MESA)") else Response.Write("(Nasdaq: MESA)") end if %>, which closed down 3% to end the week at $5 9/16, CONTINENTAL AIRLINES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAI/B)") else Response.Write("(NYSE: CAI/B)") end if %>, which closed down 5% to close at $31, FRONTIER <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FRNT)") else Response.Write("(Nasdaq: FRNT)") end if %>, which also closed down 5% to end the week at $3 5/8, AMERICA WEST <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AWA)") else Response.Write("(NYSE: AWA)") end if %>, which closed down 5% at $15 3/8, FEDERAL EXPRESS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FDX)") else Response.Write("(NYSE: FDX)") end if %>, down 5% to end at $50 3/8, AMERICAN AIRLINES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMR)") else Response.Write("(NYSE: AMR)") end if %>, which was down 5% to close at $81 5/8, ATLAS AIR <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ATLS)") else Response.Write("(Nasdaq: ATLS)") end if %>, which dropped 6% to close at $23 1/2, WORLD AIRLINES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WLDA)") else Response.Write("(Nasdaq: WLDA)") end if %>, which closed down 7% to end the week at $6 3/4, ALASKA AIRLINES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ALK)") else Response.Write("(NYSE: ALK)") end if %>, which lost 7% to close at $23 1/2, NORTHWEST AIRLINES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NWAC)") else Response.Write("(Nasdaq: NWAC)") end if %>, which ended the week down 7% to close at $37 3/4, and as we mentioned previously--WESTERN PACIFIC <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WPAC)") else Response.Write("(Nasdaq: WPAC)") end if %>, which closed down 8% to end the week at $6, and PAN AM <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: PAA)") else Response.Write("(AMEX: PAA)") end if %>, which ended the week at $8 1/2, down 9%.

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Weekly Wrap-Up

Thanks everyone. Next week we start reporting earnings. See you then. In the meantime--as always--have a great week!

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