Daily Trouble |
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<DAILY TROUBLE>
Tuesday, August 24, 1999
Midway Airlines Corp.
<% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MDWY)") else Response.Write("(Nasdaq: MDWY)") end if %>
Phone: 919-595-6011
Website: www.midwayair.com
Price (8/23/99): $7 5/8
HOW DID IT FIND TROUBLE?
Grounded. The runway is not clear for takeoff. Like William Shatner in The Twilight Zone episode "Nightmare at 20,000 Feet," there is a mysterious gremlin on the wing wrecking the engine. This is the monster of the Midway. This is the furry creature that causes a character, and a stock, to break down.
Between perpetual fare wars and higher fuel prices, margins at Midway Airlines have been crunched like sharing a narrow row with a portly passenger. Making matters worse is heated competition by other carriers at the company's North Carolina airport hub.
A year ago, estimates called for Midway to earn $1.95 per share this year. The competitive climate has made those once-optimistic numbers obsolete. After earning $1.64 per share last year, analyst projections are aiming at $1.14 this year and $1.18 next year.
With pessimism in vogue, the shares have wavered off of their February highs. Despite reporting its 11th consecutive quarterly profit, Midway's prospects have endured a painful descent.
BUSINESS DESCRIPTION
Midway Airlines and its commuter partner operate 188 daily departures between Raleigh-Durham (RDU) and 25 destinations in 14 states and the District of Columbia. The operator prides itself on its "Carolina Class" of service and the fact that its fleet is one of the youngest in the industry, with the average jet being a mere three years old.
FINANCIAL FACTS
Income Statement
12-month sales: $215.7 million
12-month income: $13.8 million*
12-month EPS: $1.44*
Profit Margin: 6.4%
Market Cap: $73.2 million
(*Includes non-recurring items)
Balance Sheet
Cash: $56.6 million
Current Assets: $75.9 million
Current Liabilities: $55.8 million
Long-term Debt: $77.3 million
Ratios
Price-to-earnings: 5.3
Price-to-sales: 0.34
HOW COULD YOU HAVE SEEN IT COMING?
In March, Southwest Airlines <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LUV)") else Response.Write("(NYSE: LUV)") end if %> announced that it would be entering the Raleigh-Durham market. The no frills discounter and Wall Street darling has rarely brought good tidings to its competitors. As RDU's prime player, Midway had everything to lose when Southwest stormed its hub.
However, the stock shed just a few ticks on the news -- closing above $12 a share. Fuel prices were already beginning to rise, boosting the operating expenses for all airlines. At the same time, Midway was about to be shackled to its cut-rate peer's pricing tactics. To complicate matters, Midway was in the process of retiring older jets in its fleet with orders for new airplanes not slated to arrive until later in the year.
The skies couldn't get any darker for Midway -- the turbulent journey ahead never any clearer -- yet shareholders still had a chance to disembark while the stock lingered comfortably in double-digits over the next few telltale months.
WHERE TO FROM HERE?
Is the flight log's bark worse than its bite? The fare promotions have come fast and furious lately. Last month it was a Fourth of July sale. This month the stripped rates come with a "Back to School" flavor. Offering one-way rates as low as $47 will fill seats, and July showed a record load factor for the company, but it doesn't appear to be bringing back last year's bottom line.
Realistically, Midway is a decent vulture play. Sustainable earnings and a stock now trading just below book value will win over a few bottom-feeding hearts. However, this is a company mired in competitive pressure and in an out-of-favor sector. Even Southwest, often the sector's Teflon stock, is 25% off its highs. Larger carriers like United Airlines parent company UAL Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UAL)") else Response.Write("(NYSE: UAL)") end if %> and American Airlines parent AMR Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMR)") else Response.Write("(NYSE: AMR)") end if %> are also trading at single-digit P/E ratios.
With new arrivals on the way, Midway's discounting ways will probably only intensify in the coming months as a means to fill excess capacity. Buying Midway hoping for pricing pressures to ease industrywide, or for a larger operator to make a buyout bid, are feasible scenarios but too speculative to bank on. Right here, right now, these are trying times for Midway -- and Carolina Class finds Dixie flags flying at half-mast.
--Rick Aristotle Munarriz
([email protected])
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