Thu, Oct 11, 2001 page19

• ABN Amro says airline industry rally a sucker bet

  Even well-managed airlines with plenty of cash on their balance sheets and popular routes, such as Southwest and SkyWest, make sense only for investors who can wait at least two years for their returns

  • BLOOMBERG
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  Raymond Neidl says investors should think twice before buying airline stocks, even as other analysts call the shares a bargain.

  In fact, the ABN Amro analyst recommends that investors avoid airlines altogether unless they are prepared to wait at least two years.

  "We do not believe that any stock price rally is sustainable in the near term, and it is still too unclear as to when and how quickly traffic will return," Neidl wrote in a note to clients.

  The Amex Airline Index surged 14 percent through Monday from the six-year low it reached Sept. 20 as the government readied a bailout and some analysts recommended stocks such as AMR Corp and Delta Air Lines Inc.

  The index had plunged 46 percent in the first four days of trading after terrorists slammed commercial jets into the World Trade Center and Pentagon Sept. 11.

  Neidl's comments come after Goldman, Sachs & Co's Glenn Engel and Deutsche Banc Alex Brown's Susan Donofrio urged clients to buy some airline stocks. Share prices already reflect declines in revenue and losses the industry will sustain in the next six months, according to Engel and Donofrio.

  "Airline stocks are cheap, but justifiably so," Neidl said in an interview. "This industry still could be in danger, even with government aid, of going into Chapter 11, which would wipe out equity investors. I don't think that will happen, but it could." Some investors concur with Neidl.

  "It's a tough environment," said Robert Streed, manager of the US$377 million Northern Select Equity Fund. "Everything you read in the paper will give you pause." That's why investors are selling stocks that have rallied, he said.

  Streed bought Southwest Airlines Co shares after the attacks, when the stock fell to about US$13 from US$17. He sold the shares for more than US$15. Southwest Tuesday rose US$0.11 to US$15.12.

  Even well-managed airlines with plenty of cash on their balance sheets and popular routes, such as Southwest and SkyWest Inc, make sense only for investors who can wait at least two years for their returns, Neidl said.

  The earliest the industry will return to profitability is the second half of next year, according to Neidl. "It might be 2003 before we see any significant airline profitability," he said.

  Neidl says a US$10 billion government loan guarantee program unveiled last week will help many carriers to weather the drop in airline travel that followed the attacks. Still, that doesn't mean all the companies will benefit.

  "The program is meant to preserve the viability of the industry and not the viability of individual airlines," he wrote.

  The White House has said airlines with sound business plans and private lender backing, and whose employees make compensation concessions will have preference in getting some of the loan guarantees.

  Even those that qualify for the loans may find they "further weigh down what may already be weakened balance sheets from large- scale losses," Neidl wrote.

  Of 17 stocks Neidl covers, he rates only Southwest, SkyWest and Atlantic Coast Airlines Holdings Inc "buy," according to Bloomberg data. He rates AMR and No. 3 Delta "add." He rates UAL Corp, owner of No. 2 United Airlines "hold."

  Deutsche Banc Alex Brown's Donofrio said AMR, parent of No. 1 carrier American Airlines, is one of her top picks. On Sept. 25 she raised her rating to "buy" from "market perform." Goldman Sachs has Delta on its "recommended list," and Engel has said investors should pick up the shares at "fire sale prices." Airline executives have said the attacks cost more than US$5 billion in revenue at a time when the industry already was expected to lose as much as US$2.5 billion this year amid slumping corporate travel.

  And last week, major carriers including Delta, United and American slashed fares as much as 50 percent to lure back passengers as traffic dropped more than 30 percent in September.

  Phil Condit, chief executive of No. 1 aircraft maker Boeing Co, said half of all US airlines may be bankrupt by December.

  AMR slipped US$1.04 to US$20.16, 32 percent below its Sept. 10 closing price. Delta lost 63 cents to US$26.88, and UAL dropped 62 cents to US$17.72, off 28 percent and 43 percent, respectively, since the attacks.

  The Amex Airline Index dropped 2.1 percent Tuesday, with eight of 10 members falling.
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