This Week in Airlines
by Holly Hegeman (TMF Wings)

Dallas, TX (May 18, 1997) --Well, you will be happy to know that instead of trekking over the hill and down the street to watch Tiger Woods at the Byron Nelson Golf Tournament, TMF Wings has chosen instead to sit down and write myself a letter. (Wasn't that the name of a song?) Well, maybe not actually a letter -- more like the latest version of the Weekly Airline Update. Now does that not tell you just how much you rate on the Foolish Scale of Importance? Actually it just means that I blew it and did not go yesterday -- and decided that I did not want to go roam around alone out there on the packed 90 degree greens, all in an attempt to catch a glimpse of the elusive Tiger Tiger burning bright. Besides, we knew he was going to win anyway!

So, now that we are all here--what happened of note this past week in the markets in general and more specifically involving our esteemed group of Motley Flyers?

TMF Wings' Market Watch

Well, it was just another schizoid week on Wall Street, folks. After a week that saw the market seesaw up and down, the Dow Jones Industrial Average dropped nearly 140 points as conflicting news on the economy and technology sector forced investors to consider a less rosy outlook than they had considered earlier in the week.

The Dow, which on Thursday closed above 7,300 for the first time in history, slid 138.88, or 1.9%, on Friday to close at 7,194.67, trimming the week's gain to 25.14.

The mood quickly worsened Friday when two new economic reports dealt a blow to the recent belief that inflationary pressures were under control. Translation? Wall Street is in one of its "Fed Watching" moods again. The Fed meets Tuesday and industry watchers are split about 50/50 in terms of whether the Fed will elect to impose another interest rate hike. This week should be an interesting one in the markets -- no matter what the Fed does.

If you will recall, the last Fed rate hike in late March sent the markets sliding to the tune of almost a 10% drop.

The Airline Sector--Market Reminders

A couple of reminders to those of us who invest in this sector. First, as we have discussed in the past, many institutional buyers tend to buy stocks in this sector on a December-June cycle. This means that historically, the prices of airline stocks rise in the spring. And just like lemmings in search of all things familiar, institutions tend to sell at the end of spring, when the rise in earnings due to projected summer revenues has already been factored in the price of a stock. Then in the fall, there is usually another small flurry of activity.

So, just an FYI. Look at the calendar.

Secondly, remember that the airlines had blockbuster first and second quarter earnings last year--partially due to the lapse in the collection of Federal Excise Taxes. Now, this year, first quarter could be compared year to year, as the tax was not collected the first quarter of this year either. Alas, Congress got its act together and now the tax is back in effect. Bottomline? It will be difficult for carriers to surpass their earnings of second quarter 1996, and if a carrier does surpass earnings year over year, you can be assured that it is making a ton of money.

Just an FYI, some carriers are already hinting that their second quarter earnings will be lower than those of last year. This does not mean they are not doing "better" than they did last year necessarily. But it does mean that 10% off the top of passenger revenue now goes to Washington and not to the corporate bank accounts of United Air Lines, Atlantic Southeast, Delta and whomever. Yes, there have been fare increases to help offset this reinstitution of the ticket tax, but what I am saying is that the net effect will be seen at different levels with different carriers. But it will be seen.

This Week with our Motley Flyers

What happened in terms of industry news this past week?

A lot actually.

Delta's CEO Booted Out

The biggest bombshell by far this past week? Ron Allen, CEO, President and Chairman of DELTA AIR LINES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DAL)") else Response.Write("(NYSE: DAL)") end if %> is gone effective July 31, and the departure was definitely not his idea. Can we say "Thanks Ron, but it is time for you to go?" Ron, who, by most measures, had succeeded in building a pretty controlled board at Delta, apparently had a rude surprise when they told him, "No, thank you" to an apparent ultimatum of sorts that he delivered to them concerning a new contract. Don't cry for Allen, however, as he is entitled to a handsome consulting/ pension/ stock option package that will surely keep him in those conservative blue suits and red ties for a long time to come.

(Actually we all know what the real reason for his departure was don't we? Yep -- that new livery.) Just kidding folks --re ally. It's a joke..... I think.

Hey, and speaking of Ron's attire, thanks to my Delta friends who faxed me the copy of Re-Touched Ron attired in a natty Wal-Mart vest -- it was just pretty darn funny.

Conjecture on his successor? High-Flyer Gordon Bethune, CEO of Continental Airlines, is a very likely prospect, as is Don Carty at AMERICAN AIRLINES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMR)") else Response.Write("(NYSE: AMR)") end if %> , Hollis Harris, former President of Delta, Maurice Worth, the current EVP of Customer Service and interim COO for Delta, Jack Pope, former President and CFO of UNITED AIRLINES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UAL)") else Response.Write("(NYSE: UAL)") end if %> and a few others. However, personally I think Carty will use the possibility of jumping ship from the USS Bob Crandall for leverage. Or, if he is smart he will. As for Harris, he is in the midst of starting a new carrier, CalJet, and his track record at Air Canada was not the best in the world. So, don't know on that one.

Gordon? Seems like a natural choice to me. Bigger territory and a potential merger in the palm of his hand. Boeing, his former employer is already locked in with Delta on a large exclusive aircraft deal, and well, the match just looks awfully tasty to me folks.

I think the departure of Allen is a great opportunity for Delta to make a big leap. I hope they do go out of the inner circle of management that is there now and bring on someone who has the leadership ability, the people skills, and the strategic ability to reconstruct the carrier in a more positive and enlightened way.

The market reacted fairly benignly to all this hoopla about Delta. The stock closed the week down 2% to end at $93.

Star Alliance Makes It's Stellar Debut

The new "Star Alliance" that partners up United Air Lines, Lufthansa, Thai Airways, Scandanavian Airlines, and Air Canada in a much more involved marketing and operations alliance, also made its big splashy arrival this past week. Consequently, the heat is now turned up on the proposed American Airlines/ BRITISH AIRLINES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAB)") else Response.Write("(NYSE: BAB)") end if %> alliance. BA stock took off like it had been electrified this past week--in fact it's NYSE-traded ADR's showed the highest percentage gain of any stock we track this week as they gained 10% on the week. Both American and British Air issued statements reminding everyone that if the Star Alliance is okay with everyone, why not the AA/BA alliance?

Well, folks--granted, the Star Alliance spans three continents and goes way beyond any existing alliance, however--it does not lock up the majority of flights between London and the United States.

Stay tuned. While British Air's stock had a great week, AMR's stock gain was a bit more modest--the stock climbed 3%, ending the week at $95 1/8.

Continental Airlines--Gordon says,"No Problem." Pilots say, "Ah.....Houston, we have a problem."

Well, we had somewhat conflicting news and forecasts concerning the ongoing negotiations between CONTINENTAL AIRLINES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAI/B)") else Response.Write("(NYSE: CAI/B)") end if %> and its pilot union this last week. After the Annual Meeting on Friday, CEO Gordon Bethune almost waxed poetic when he told reporters that contract talks with the carrier's pilots were going well and that he expected to have a new pact by July 1.

Bethune, speaking to reporters after the company's annual shareholders' meeting, said Continental and the pilots had asked to bring in a federal mediator "to keep things moving" as negotiators reached the most critical issue -- salaries.

"We're down to the money now...everything else is mostly resolved," he said. Bethune said bringing in a mediator did not signal problems in the talks, which began April 2. Rather, Continental management generally favors using a mediator to keep negotiations from bogging down, he said.

"Oh absolutely, I don't see why not," Bethune said when asked if he thought that date could be met.

Meanwhile the pilots' union, the IACP, which represents 4900 pilots at Continental Airlines', and 1000 pilots at Continental Express, seems to believe that the two parties are just a tad farther apart and says it doesn't expect a new contract agreement before the target date of June 30. Gordon, I think they are waiting for you to "show them the money."

Continental, had a rather, well, let us say eventful week. A Continental flight landed at the wrong airport, the company won the J.D. Power and Associates/ Frequent Flyer Magazine award -- given to the top carrier in customer satisfaction for domestic flights over 500 miles -- for the second year in a row (we figure all those folks who participated in this survey did indeed land at the right airport), and news reports disclosed that oxygen canisters like the type that are suspected to have brought down ValuJet Flight 592 had been carried on a Continental flight a few weeks ago.

By the way, AMERICA WEST <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AWA)") else Response.Write("(NYSE: AWA)") end if %> won the companion award to Continental's--winning the "domestic flights under 500 miles" category.

The effect of all this hoopla on the stock? CAI/B ended the week up 2% to close at $34 3/4. As you might remember, CAI/B was one of our picks going into 1997, and Gordon and the troops have not disappointed us, as the carrier has returned a nice 23% YTD.

RAA Conference

Our thanks to Benet Wilson, Editor at Commuter/Regional Airline News, who sent us information on the recent Regional Airline Association Conference.

Skeen Named Regional Airline Executive of the Year

ATLANTIC COAST AIRLINES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ACAI)") else Response.Write("(Nasdaq: ACAI)") end if %> President and CEO Kerry Skeen was selected as the 1996 Commuter/Regional Airline News-Allison Engine Co. Regional Airline Executive of the Year at the Conference. Atlantic Coast flies as United Express out of Washington Dulles International Airport.

Skeen was selected for his exceptional managerial, leadership and financial skills. He took the company from a record $25 million loss in 1994 to $20 million in profit in 1996. "Atlantic Coast, faced with the pulldown of partner United Airlines out of the Washington Dulles International Airport hub, shed two aircraft types from its fleet, eliminated its Florida operations and redefined its route network," said Editor Benet Wilson.

Wall Street must have been duly impressed, as Atlantic Coast had a pretty good week last week as the stock closed up 3% to end at $15 1/4.

Transition to Part 121 only partly complete; further costs lie ahead

Kathy Hakala, the acting manager of the FAA's air transportation division, cautioned participants at the conference that, "You have a delayed compliance schedule ahead of you."

On March 20, 33 regional carriers operating more that 900 airplanes began operating under the rules laid down under Part 121 of the Federal Aviation Regulations, dropping forever the more forgiving Part 135 rules governing the operations of commuter/regional airlines.

Only six small carriers operating a total of 13 airplanes did not meet the deadline.

Of interest to shareholders in our smaller airlines, Hakala warned there is further work that is needed to finish the transition, and that this work will create additional costs to the members of the regional airline industry.

Upcoming Ryanair IPO--Should you give this one a good look?

Ireland's 'low-budget' airline Ryanair is seeking to offer stock in the airline both on the Irish stock exchange and the Nasdaq stock exchange, the first Irish company to seek a simultaneous listing on both sides of the Atlantic. Now, why in the world should you be interested in this?

Does the name David Bonderman ring a bell? You know...Continental...America West--THAT David Bonderman.

Speculation that the company would go public increased dramatically after Bonderman became Ryanair Chairman in December 1996 after taking a 20% stake in the airline.

Bonderman took over from former GPA chief Tony Ryan whose family founded Ryanair. After the offering the Ryan family will own 35.3% of the company down from 61.7% prior to the offer. While Irish Air and chief executive Michael O'Leary will own 15.7 and 14.1% respectively.

Ryanair, which has been operating for 12 years and has a fleet of 17 Boeing 737-200 aircraft, said the funds from the share offer will be used to cut debt, and provide capital for additional aircraft purchases.

The offering will be underwritten by Morgan Stanley, Investment Bank of Ireland, CS First Boston and the Robinson Humphrey Company, Inc.

Pan Am reports quarterly earnings, new flights and is the goat of the week

PAN AM <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: PAA)") else Response.Write("(AMEX: PAA)") end if %> this week reported a net loss of $14.6 million in the first quarter of 1997, which represents a net loss of $1.33 per share.

Total operating revenues were $21.7 million and total operating expenses were $36.6 million, resulting in an operating loss of $14.9 million. Pan Am recorded a non-operating income of $238,000 in the first quarter. Comparable figures for 1996 are not meaningful as the corporation was in a pre-start period.

Pan Am Corp.'s principal subsidiary, Pan American World Airways, began scheduled service on Sept. 26, 1996, and has reported a steady rise in load factors since its initial start-up. For the fourth quarter of 1996, the airline reported a load factor of 46.8%, which grew to 67.1% for the first quarter of 1997.

On March 21, Pan Am announced that it had reached a definitive agreement to acquire Carnival Air Lines for 9.5 million shares of Pan Am stock. Carnival operates 60 daily flights with a fleet of 27 jet aircraft, including nine A300's. Carnival serves 20 airports across the United States and the Caribbean and has nearly 1,600 employees.

Pan Am expects to close this transaction in June.

Pan Am also plans to triple its daily service between Los Angeles and New York's Kennedy Airport to three trips in each direction.

Apparently Wall Street was not impressed. The stock dropped 10% this week, making it the Goat of the Week, ending the week at $7 3/16.

Has the DOT been listening to Frontier or what??

A key Department of Transportation official told Congress Tuesday the government will clear the way for more low-fare airlines to get landing rights at big airports, but only on a "case-by-case" basis.

Members of the Senate Commerce Aviation Subcommittee have asked the Administration to help promote competition by opening up take-off and landing slots at major airports.

Assistant Transportation Secretary for Aviation Charles Hunnicutt told the committee the department will "be more receptive to considering competition as a factor in granting slot exemptions to new entrants." But he added that would be on a "case-by-case" basis and not as a general rule.

Members of the committee pushed Hunnicutt to go even further.

"The federal government continues to maintain unnecessary restrictions ... that have impeded competition," said Committee Chairman John McCain, an Arizona Republican. "I am talking about slot restrictions at the high density airports -- O'Hare in Chicago, National in Washington, LaGuardia and JFK in New York."

These announcements followed a day of testimony by representatives of both the smaller carriers and the larger ones--such as United--who view these developments as paramount to re-regulation. As you might remember, FRONTIER AIRLINES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FRNT)") else Response.Write("(Nasdaq: FRNT)") end if %> requested permission to secure slots at LaGuardia a couple of months ago--apparently the DOT was in a listening mood.

Analyst Upgrades, Downgrades

UAL, Delta and Southwest Lowered at NatWest

NatWest Securities downgraded UAL Corp. to "hold" from a "buy" rating, said a source at the firm Wednesday.

The firm also cut Delta Air Lines and AMR Corp. to "hold" from "buy."

In addition, NatWest downgraded SOUTHWEST AIRLINES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LUV)") else Response.Write("(NYSE: LUV)") end if %> to "accumulate from "buy".

Northwest Lowered at Gruntal

Gruntal and Co said it downgraded NORTHWEST AIRLINES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NWAC)") else Response.Write("(NYSE: NWAC)") end if %> to "neutral" from "outperform" after the stock approached the firm's $45 price target.

Steve Lewins, Gruntal analyst, said earnings on the company remained unchanged.

This Week's Weekly Performance Results

Weekly Performance, Rank by Percent Change over Previous Week

         Closing Price   Closing Price    Percent
Symbol     05/09/97        05/16/97       Change

BAB        113  5/8        124  1/2        10%
ASAI        22  7/16        24  1/2         9%
JAPNY        8  1/4          8  7/8         8%
U           33              35              6%
COMR        20  1/2         21  5/8         5%
HA           3 11/16         3  7/8         5%
SKYW        12  3/4         13  3/8         5%
TOWR         3  7/16         3  9/16        4%
VNGD         1 20/29         1  3/4         4%
ACAI        14  3/4         15  1/4         3%
AMR         92  5/8         95  1/8         3%
LUV         26  5/8         27  1/4         2%
CAIB        34              34  3/4         2%
MAIR        13  1/4         13  1/2         2%
UAL         73  3/4         75  1/8         2%
AMTR         9  1/8          9  1/4         1%
NWAC        40  1/2         41              1%
MEH         43  3/4         44  1/4         1%
AWA         14  7/8         15              1%
ABF         34  7/8         34  3/4         0%
TWA          7  3/16         7  1/8        -1%
KLM         31  1/4         30  7/8        -1%
DAL         94  5/8         93             -2%
ALK         24  5/8         24  1/8        -2%
AIRT         4  5/8          4  1/2        -3%
FDX         54  1/4         52  5/8        -3%
VJET         7  5/16         6 15/16       -5%
MESA         5 11/16         5  3/8        -5%
ATLS        29  5/8         27  7/8        -6%
CEA         31              29  1/8        -6%
RENO         7  3/8          6 29/32       -6%
AAIR         5  1/2          5  1/8        -7%
WLDA         8  7/8          8  1/4        -7%
FRNT         3  3/8          3  1/8        -7%
WPAC         6  1/2          6             -8%
PAA          8               7  3/16      -10%

E-Mail Delivery

Foolish readers, if you would like to have a copy of the TMF Wings' Weekly Airline Update sent to your e-mail box, every week at no charge, just drop me a note at [email protected], and we will make sure that you are put on the list. That's right--simpler than an e-ticket and faster than the Concorde. (Well, unless the AOL servers decide to give us a hard time!)

Mail--I get letters! I get letters!

Again, an apology to those who may have written in the last few weeks. The switchover from screenames and the tremendous influx of mail has once again overtaken me. You'd think I was offering $25 fares to everywhere or something! I hope to catch up on all my mail to you this week. So, thanks again to all who have written.

That's about it for this edition, and as always, have a good week everyone!

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