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Airline Stocks Climb, but Will Pattern Hold?

Though major carriers are making strides in cutting costs, analysts note that they remain vulnerable to turbulence

June 28, 2003|James F. Peltz | Times Staff Writer

Airline stocks are surging only two months after it seemed most big U.S. carriers were flying straight toward bankruptcy.

But does the rally have wings?

Don't bet on it, some analysts say. Sure, airlines are moving off the critical list as they make strides in cutting costs and the summer travel season arrives. Several analysts this week also cut their forecasts of the industry's losses, sparking gains in the sector.

But the airlines remain in intensive care. They are expected to lose an additional $1 billion in the quarter ending Monday after losing $3.5 billion in the first quarter. Fares also remain relatively low, which is good for travelers but precludes a meaningful rebound for carriers, observers noted Friday.

"Losses are narrowing but they're still large, and the airlines remain highly vulnerable to any external shocks" such as another terrorist event, said Samuel Buttrick, an analyst at UBS Warburg.

The rally, in fact, partly reflects that the shares couldn't go much lower.

Stocks such as AMR Corp., the parent of industry leader American Airlines, Delta Air Lines Inc. and Northwest Airlines Corp. were trading in single digits this spring. AMR was on the brink of bankruptcy. United Airlines, a unit of UAL Corp. and the biggest carrier at Los Angeles International Airport, was already operating under Bankruptcy Court protection, and US Airways Inc. was just emerging from Chapter 11.

At the time, Buttrick recommended buying "the survivors" of the airline industry -- including AMR, Delta, Northwest and Continental Airlines Inc. -- in large part because shares were so cheap.

For the stocks, "there was no where to go but up or out," meaning bankruptcy, said Thomas Nulty, a partner with the Corporate Solutions Group, a travel consulting firm in Monarch Beach, Calif.

Since hitting bottom on March 11, the American Stock Exchange's index of 10 airline stocks has more than doubled in the last three months, to its highest level since August.

AMR jumped 42 cents to $11.32 a share in New York Stock Exchange trading Friday, even as several other airline stocks fell as traders took profits. That gave AMR a 23% gain for the week and a sevenfold increase since late March.

The rally began that month, when risk-tolerant investors began buying airline shares even as the industry was facing a barrage of problems.

Travel was weakened by the sluggish economy, the war in Iraq and the outbreak of severe acute respiratory syndrome.

The carriers also were grappling with high operating costs, including labor expenses, and enormous debt burdens. As always, the big airlines faced ferocious competition from prosperous, low-fare carriers such as Southwest Airlines Co., JetBlue Airways Corp. and AirTran Airways, a unit of AirTran Holdings Inc.

But American secured nearly $4 billion in cost savings from its employees, lenders and suppliers, and it said Wednesday that the savings were starting to help its liquidity.

United on Friday said its own cost-cutting efforts were enabling the carrier to meet lenders' financing requirements and build its cash position. UAL's stock, which was delisted from the NYSE after its Chapter 11 filing, rose 3.5 cents to 76 cents on the over-the-counter Bulletin Board market. The airline has said it is "highly likely" that the stock will eventually become worthless as it moves through bankruptcy reorganization.

Analysts cautioned that the major airlines aren't suddenly making money again -- only that their losses should be less dire than earlier forecast.

And one analyst, Jim Corridore of Standard & Poor's Corp., merely raised his ratings on AMR, Northwest and Continental to "hold" from "avoid."

Still, Corridore and James Higgins of Credit Suisse First Boston said AMR had taken a big step back from seeking court protection from its creditors. The company's cost cutting "suggests a substantial reduction in the odds of AMR going bankrupt," Higgins said in a note to clients.

With the stocks having gained so much altitude in such a short time, Buttrick of UBS Warburg suggests that investors consider buying them only after they have dropped back down.

"Given the run in the stocks against the continuing risks," he said, "we are increasingly focusing on adding to positions only on 25%-plus pullbacks, which history shows us will invariably occur."

Travelers, meantime, continue to enjoy relatively low prices as the major carriers keep discounting fares to fill planes.

"It's still a buyer's market out there for travelers," consultant Nulty said.

The real test will come in September, when vacation travel abates and the airlines find out whether business travel rebounds, Nulty said.

"That's when we'll know if this is a false recovery or not."

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