Airline Stocks Start Takeoff
Look at what's suddenly taking off! The United States airline industry, considered a problem-child on the stock market just a few months back, is again in favor among a growing number of investors. Indeed, gains in airline stocks spurred the Dow Jones Transportation Average (DJTA) last week. The transportation average is often considered a guide to future economic activity, since manufacturers tend to ship products when underlying economic prospects are considered favorable.
A number of individual airline stocks have been posting gains recently, including AMR Inc. (American), UAL Inc. (United), Delta, Pan Am, USAir, and Federal Express, a delivery company that has a sizable airplane fleet. UAL and Federal Express have been repeated takeover candidates.
But beyond interest in particular stocks, the airline industry itself is once again considered potentially lucrative, as are other transportation companies. Merrill Lynch strategist Charles Clough recently put a higher weighting on transportation stocks within his model portfolio, in part reflecting less concern about the slowing economy.
Morgan Stanley, in a recent advisory letter, puts it this way: ``Airlines: start adding to positions.''
Kevin Murphy, an airline analyst with that investment banking firm, says the worst may not yet be over for the US airline industry in terms of declining passenger revenue growth. But the risk of airline stocks is ``outweighed by the potential rewards.''
Murphy, like many airline specialists, says the industry will continue to remain turbulent, reflecting such challenges as the softening economy, the threat of recession, somewhat uncertain fuel prices, and continued tough competition among carriers.
But Murphy also believes that a degree of equilibrium has returned to the industry; eight major carriers now have roughly 90 percent of total market share, which means less competition.
Among positive steps under way in the industry:
More-efficient aircraft now in use by carriers are lowering crucial fuel and labor costs.
Pricing decisions are more ``rational,'' based in part on service provided, rather than promotional gimmicks.
Indeed, many airline officials recognize that the continuous round of promotional fares and other ``bargains'' introduced during the late 1980s probably led to more customer confusion and dissatisfaction than plaudits.
Murphy notes that some 30 percent of the industry's market share is now in the hands of carriers that are relatively weak financially: the Continental and Eastern units of Texas Air, TWA, and Pan Am. Assuming these airlines further retrench, the more successful carriers such as American, United, and Delta will be able to pick up new routes.
Morgan Stanley is current recommending AMR (American) and Delta, among domestic carriers; Singapore Airlines and Malaysia Airline Systems, among overseas carriers; and The Harper Group and Federal Express, among air freight carriers.
Ironically, weakness in the airline business is not necessarily a negative, at least in terms of investment potential. Thus, some analysts, such as Robert McAdoo, of Oppenheimer & Company, maintain this is a good moment to buy Texas Air. In a recent report for Oppenheimer, Mr. McAdoo argues that the press has largely overlooked the main story on Texas Air: that the company will be keeping most of Eastern, though not its shuttle between Boston, New York, and Washington, which was sold to Donald Trump.
So much for writing off Frank Lorenzo and his Texas Air!
McAdoo also likes American, Delta, Atlantic Southeast, and Southwest Air.
Could a recession unravel the rising prospects of the US air carrier industry? McAdoo doubts that. Even back in the recession year of 1982 most carriers reported earnings gains, the analyst says.