Low-Cost Airlines a Hit With Travelers, but Not With Wall Street

CHICAGO _ With rock-bottom prices, discount carriers have revolutionized the airline industry, forcing larger competitors to drop fares or lose customers.

But while low-cost airlines have attracted growing numbers of travelers, that success is not carrying over to the value of their stock.

This spring, larger, so-called legacy carriers like Continental Airlines and American Airlines have watched their stock rise, while shares of the largest discount carriers have fallen.

It is an ironic reversal of fortune in an industry in which many analysts have lauded the discount-airline model as the future of domestic air travel. But, for now, many see a greater financial upside for the large carriers with a global reach.

“The reason the legacy airlines have performed so well is that analysts and investors believe they’ve essentially turned the corner in their losses,” said Ann Heffron, analyst with Zacks Equity Research.

Nearly all carriers reported losses last quarter, blaming the red ink on record fuel prices. But, in most cases, other expenses were down.

“They’ve turned the corner because capacity is coming out of the system,” Heffron said. Fewer planes flying routes means other planes are more full. Carriers also are charging more for tickets.

“The optimism stems from increasing yields,” Heffron said. “Pricing power should be increasing over time.”

During the past year, the median stock price of large airlines is up about 140 percent, Heffron said. In the same period, the median price for their low-cost competitors is down about 9 percent, she said.

With few exceptions, airlines continue to lose money. During the first quarter, Southwest Airlines and US Airways were the only profitable major carriers.

Southwest continues to benefit from its strong fuel hedges, which have blunted the impact of record fuel costs. Its stock price has declined about 2 percent this year, although the carrier has said it intends to achieve 15 percent earnings growth this year.

In a recent analysis, Calyon Securities analyst Ray Neidl said he expected Southwest “will continue to grow and gain market share through both traffic stimulation and by taking traffic away from the legacy carriers.”

US Airways surprised analysts recently when it reported a profit of $5 million. They had expected the carrier to continue its string of quarterly losses that stretch back five years.

The carrier emerged from bankruptcy last year after merging with America West, a discount carrier. The new airline is a legacy-and-low-cost-airline hybrid whose management is forecasting a profitable year. Year to date, US Airways stock price is up nearly 30 percent.

The only legacy carriers not enjoying rising stock prices are the two operating in bankruptcy, Northwest Airlines and Delta Air Lines. Northwest lost $1.1 billion in the first quarter, while Delta reported a $2.1 billion loss.

United Airlines exited bankruptcy on Feb. 1 after 38 months operating under court protection. In the first quarter, United lost $306 million. The airline blamed its loss on high fuel prices and operating costs, immediately announcing a plan to cut spending by $700 million over the next two years.

United issued new stock in February, so year-to-year comparisons are not possible. The stock closed Friday at $33.50. It opened at $40 in its first day of trading on the Nasdaq stock market on Feb. 2 but has spent much of the past month trading in the mid-$30s.

Soaring fuel prices have forced airlines to make difficult choices that should pay off when energy prices come down, said Michael Linenberg, aviation analyst with Merrill Lynch. Although the industry is losing money, carriers have managed to control the bleeding despite rising energy costs.

“This industry suffers from `big-it is.’ They like to get bigger,” Linenberg said. “When the economy is strong, they like to add flights. But because fuel prices have been so high, the industry has to be much more disciplined on its capacity adds.”

In addition to not adding flights, airlines have also raised ticket prices.

“Fare increases began last summer, and they’ve accelerated the last six to nine months,” he said. “It’s the higher fuel prices acting as a disciplinarian in the industry.

“That’s why we’re seeing the stock prices move up.”

___

(c) 2006, Chicago Tribune.

Visit the Chicago Tribune on the Internet at http://www.chicagotribune.com/

Distributed by Knight Ridder/Tribune Information Services.

For information on republishing this content, contact us at (800) 661-2511 (U.S.), (213) 237-4914 (worldwide), fax (213) 237-6515, or e-mail reprints@krtinfo.com.