 Weekly Airline Archive
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This Week in Airlines
by Holly Hegeman (TMF
Wings)
Dallas, TX (June 29, 1997) -- I admit it, TMF Wings is doing her lizard imitation this afternoon, oh Foolish readers. And what is that? Well, it is a very complex and complicated process that basically involves...well...sitting in the sun and getting baked. Takes much skill and expertise. Ahem. NOT! But, as the Fourth of July Holiday week kicks off, may you also find time to practice your lizard imitation -- not to mention eating lots of hot dogs, hamburgers, and potato chips. It is just kind of the American way, right?
Speaking of the American way, making money in the stock market has also, apparently, become one of the great American pastimes. So, what happened in the markets this past week?
TMF Wings' Market Watch
The Commerce Department announced on Friday that the economy expanded at a 5.9% seasonally adjusted rate in the first three months of the year, the best rate since 1987. However, economists anticipate that growth will be well below that rate for the quarter that ends on Monday, as consumers seem to be easing off the spending frenzy of the first of the year. With the Fed meeting next week, it seems a given that the Fed will not raise interest rates. As a result, investors decided this week it is STILL relatively safe to go into the water! The Dow Jones Industrial Average, after dropping some 200 points at the start of the week, then bounced around 100 or so points on and off all week, ending the week at 7687.72--down 108.79 for the week.
Ticket Tax--What's the Latest?
Okay, now the House has passed its version of the tax bill, and the Senate has passed its version. Now what? Where does this leave our Motley Flock in terms of a new ticket tax?
Well, things are still, as they usually are with this sector, up in the air.
President Clinton stepped into the fray on Friday when he let both the House and Senate know that he was not overly thrilled with either proposal. What this means airline fans, is that this debate is far from over.
Gentlemen, start your negotiating engines.
Lehman Brothers announced on Friday that they estimated the airline ticket tax proposal from the House would cut the U.S. airline industry's 1998 pre-tax income by 1.4%, while the Senate proposal would lower pre-tax earnings by 4.5%.
Interestingly, Lehman noted that airline stocks have underperformed the market by 11% over the past three weeks. They took this as an indication that the ticket tax issue may have been overplayed. "We'd be looking for opportunities to accumulate airline stocks in anticipation of easier financial comparisons for the second half of 1997." [Not sure TMF Wings' agrees with this assessment. I would say the drop-off in the stocks is more because of things looming on the earnings horizon...but hey...what do we know? We are just Fools.]
According to the airline whizzes at Lehman, AMERICAN AIRLINES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMR)") else Response.Write("(NYSE: AMR)") end if %> would be affected the most by both versions of the bill. US AIRWAYS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: U)") else Response.Write("(NYSE: U)") end if %> would be "virtually unaffected," and might see a slight benefit from the House version.
SOUTHWEST AIRLINES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LUV)") else Response.Write("(NYSE: LUV)") end if %> would see an impact in line with other carriers under the House bill, but would be "virtually unscathed" by the Senate bill.
TMF Wings' assessment? It is too early to tell. I don't think this is anywhere near to being over.
Strange Days...Must be the Heat.
If you take a look at the stock performance figures from last week, you will see two somewhat strange bedfellows that actually posted double digit gains on the week. The first? VANGUARD AIRLINES (OTC: VNGD). Vanguard gained 34% on the week to close at $1 3/4. (Again, just a reminder. Ordinarily we do not report on carriers that have a stock price of under $5, but Vanguard used to trade above $5 so we continue to cover it. But just remember, it does not take MUCH to get a stock to jump that much when the price is this low.)
The second carrier to post a double-digit gain? RENO AIR <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RENO)") else Response.Write("(Nasdaq: RENO)") end if %>, which posted a nice healthy 16% gain, to close at $8 1/2 on no news to speak of. But, hey, Foolish readers, this is just the beginning.
Now, Vanguard has had an interesting couple of weeks. Actually their fate is strongly tied to that of AMTRAN <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMTR)") else Response.Write("(Nasdaq: AMTR)") end if %>. Now, guess what? Amtran was the Goat of the Week, losing 8% to close at$8.
What is the connection? The former Chairman and CEO of Vanguard, John Tague, who just happens to be the former CEO of Amtran, is guess what? The NEW President and CEO of Amtran. Now, you know, there is something about all this that gets TMF Wings' curiosity into gear. (Yes, you know what that means -- you have not heard the end of this.)
For those of you who are not that familiar, with the story, Stan Pace, the former CEO of Amtran, suddenly resigned not too long ago. Now, here was a former Bain and Co. consultant who had done a bang-up job of turning Amtran's American Trans Air's unit into a profitable entity -- a far cry from its overextended-with-no-plan-in-sight former self. (Does this remind us of the the Ed Beauvais syndrome?)
The last quarter showed Amtran had done a phenomenal job of turning the tide of red ink.
But wait! Who was the person who was at the helm when American Trans Air got into the messy situation? The one, the only, and the same John Tague.
So -- okay, you got your story plotline straight here?
John Tague takes American Trans Air and puts it on the verge of extinction, leaves and goes over to Vanguard (which TMF Wings had put on the "Titantic Watch" last summer) and Air South (yes, the man was CEO of BOTH at the same time). So, Stan Pace is brought in at Amtran, does a great job at restructuring the mess that Tague had created. Then Pace quits unexpectedly.
Now Tague is back at Amtran.
Does this make sense to anyone else out there?
Why is it that I think the Chairman and Founder of Amtran, George Mikelsons, might actually think so?
Now, in the meantime, Vanguard has a new Chairman, President and CEO, Robert J. "Rocky" Spane (a former member of the board of directors). Now, I don't know much about this person but, given Vanguard's very serious financial situation, I am afraid that I kind of harbor second thoughts about someone called "Rocky" in the company press releases, whose most notable previous claim to fame was being on the Vanguard Board of Directors. [I think the company needs a CEO who is NOT a former member of the Board.]
Stay tuned.
As to news on Reno Air, there was none. The stock was downgraded two weeks ago by Alex Brown and Company to "buy" from "strong buy". But other than that -- nada.
Short Takes
American and Canadian get Approval for Taiwan Codeshare
When American Airlines poured some $230 million into Canadian Airlines, one of the AAdvantages it was supposed to get was increased code-sharing opportunities to the Far East. Well, lookey here! Paydirt! This week, the company announced they have received approval from Taiwan allowing American Airlines to place its carrier code on Canadian Airlines' flights to Taipei from Vancouver.
U.S. passengers can begin booking Taipei flights for service begining Sept. 8.
I still say this was the most expensive code-sharing agreement in history. Ahem.
American ended the week down 1% to close at $94 1/4.
DIA is Now Officially Home for Western Pacific
The moving vans have done their job. The planes have flown north for the duration. WESTERN PACIFIC AIRLINES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WPAC)") else Response.Write("(Nasdaq: WPAC)") end if %> is now based at Denver International Airport, not Colorado Springs. With the cuttting of a ribbon today, Western Pacific started their new service out of Senor Pena's Palace of Planes. And what of the proposed merger with Frontier? Stay tuned. We still think it will come about.
Western Pacific closed down 2% at $5 3/8, and FRONTIER <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FRNT)") else Response.Write("(Nasdaq: FRNT)") end if %> was down 3% to close at $4 this past week.
Analyst Upgrades, Downgrades
Dillon Reed issued a slew of downgrades on the airline sector this past week. Hey guys, is this something personal? (Nah--they obviously had just gotten around to reading their past issues of the TMF Wings' Weekly Update.) <g>
Dillon Read said it believes the industry's earnings momentum is now negative and that the 1998 consensus estimates are too high.
The company continued, saying it sees load factors and fares at very high levels and added "we do not see that they can be pushed much further." [TMF Wings would agree.]
The company also said the industry's tax level may be pushed higher under tax proposals being mulled in Congress. (Now see, as a faithful reader, you already knew ALL of this!)
Dillon Reed also said they felt industry unit costs "are now entering an upward spiral." [TMF Wings' agrees.]
The firm pointed out that labor and other non-fuel cash costs are rising after cost-cutting seen in the middle 1990s, and concluded by saying that the "only brght spot on the expense side is an expected moderate jet fuel price for the foreseeable future."
Dillon Reed cut AMR CORP.<% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMR)") else Response.Write("(NYSE: AMR)") end if %>, parent of American Airlines; AMERICAN WEST HOLDINGS CORP.<% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AWA)") else Response.Write("(NYSE: AWA)") end if %>, parent of America West Airlines; and ALASKA AIR GROUP INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ALK)") else Response.Write("(NYSE: ALK)") end if %>, parent of Alaska Airlines to "neutral" from "outperform". They cut CONTINENTAL AIRLINES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAI/B)") else Response.Write("(NYSE: CAI/B)") end if %> to "neutral" from "buy", and DELTA AIR LINES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DAL)") else Response.Write("(NYSE: DAL)") end if %>, MIDWEST EXPRESS HOLDINGS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MEH)") else Response.Write("(NYSE: MEH)") end if %> and RENO AIR <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RENO)") else Response.Write("(Nasdaq: RENO)") end if %> to "outperform" from "buy".
Dillon Reed also cut Southwest Airlines to "neutral" from "outperform".
In addition, the company cut UAL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UAL)") else Response.Write("(NYSE: UAL)") end if %>, parent of United Airlines, to "neutral" from "buy" and cut US AIRWAYS GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: U)") else Response.Write("(NYSE: U)") end if %> to "outperform" from "buy".
Smith Barney Adds Their 2 Cents
Smith Barney said this past week it believes the U.S. airline industry is "experiencing peak earnings".
The company believes the second half of this year is expected to be "somewhat difficult," and said earnings estimates for the current quarter have been adjusted downward recently.
Smith Barney joined the TMF Wings bandwagon by saying that while the industry is expected to show relatively strong traffic for June, this will be offset by an increase in discounts and, as a result, they believe there is more negative news in the short-term than positive news. They also suspect shares will remain under some pressure, and they cited the case of several major airlines, which have unsuccessfully tried to raise fares over the past two weeks.
Another point the company brought up was the recent slew of new aircraft orders.
"Once again, the industry seems to be ordering aircraft at the peak of the cycle," according to Smith Barney.
Here is a new one. Smith Barney's top pick for this year going forward? NORTHWEST AIRLINES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NWAC)") else Response.Write("(Nasdaq: NWAC)") end if %>.
By the way, congratulations to Smith Barney airline analyst Helane Becker, who was recently named the top airline industry analyst by the Wall Street Journal. We like Helane. Not only has she always been accessible to us, and shared her research with us (which most will NOT) but she has done a great job at picking winners.
Besides, we both made lots of money on ATLAS AIR <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ATLS)") else Response.Write("(Nasdaq: ATLS)") end if %> last year!
Weekly Performance, Rank by Percent Change over Previous Week
Closing Price Closing Price Percent Symbol 06/20/97 06/27/97 Change VNGD 1 9/29 1 3/4 34% RENO 7 5/16 8 1/2 16% MESA 4 3/4 5 3/16 9% AIRT 4 3/8 4 3/4 9% MAIR 14 1/8 15 1/4 8% WLDA 7 7/8 8 1/2 8% NWAC 35 37 6% ASAI 26 3/4 28 5% ABF 39 1/8 40 3/4 4% SKYW 15 7/8 16 1/2 4% TOWR 3 1/4 3 3/8 4% MEH 26 7/8 27 7/8 4% ACAI 15 1/4 15 3/4 3% CEA 25 3/8 26 2% AAIR 5 1/8 5 1/4 2% KLM 30 7/8 31 1/2 2% ALK 25 1/8 25 9/16 2% U 35 1/2 35 3/4 1% BAB 114 7/8 115 5/8 1% HA 4 3/4 4 3/4 0% JAPNY 8 7/8 8 7/8 0% LUV 26 1/2 26 3/8 0% AMR 94 7/8 94 1/4 -1% PAA 8 1/16 7 15/16 -2% ATLS 33 1/8 32 1/2 -2% AWA 14 7/8 14 9/16 -2% TWA 8 1/4 8 1/16 -2% WPAC 5 1/2 5 3/8 -2% VJET 7 7/32 7 1/32 -3% UAL 74 1/8 72 -3% COMR 26 25 1/4 -3% FRNT 4 1/8 4 -3% CAIB 34 3/4 33 5/8 -3% FDX 59 1/2 57 9/16 -3% DAL 88 1/4 85 5/16 -3% AMTR 8 1/2 8 -6%
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Have a great week everyone.
Holly Hegeman
TMF [email protected]
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