IATA Conference Airs Analysts' Airline Lamentations

<B>IATA Conference Airs Analysts' Airline Lamentations</B>

By Jay Campbell

Airlines need to elevate their focus on shareholders in relation to labor and customers so they can regain some Wall Street favor lost to dot-coms, financial experts last month told participants in the International Air Transport Association financial summit.

"Investors feel they spend a lot of time at the bottom of the food chain due to price competition and the demands of labor," said Salomon Smith Barney buy-side airline analyst Jeff Long. "Many of the gains the industry has achieved have flowed to travelers, although they don't always believe that."

Pierre Jeanniot, IATA's director general, said airlines should resist the temptation to give away e-commerce savings to consumers through lower fares and should limit the availability of extremely low-yield inventory. "I don't think we should ask business travelers to pay more at this time," he said, noting that high-paying passengers have suffered from weaker service as the airlines chased low-yielding customers.

But airline analysts speaking at the conference doubted that the airlines would follow Jeanniot's path. "Average ticket prices in the next three to five years will fall by almost 25 percent," said CIBC World Markets analyst Julius Maldutis. "Unfortunately, that means extraordinarily high load factors."

According to PaineWebber analyst Sam Buttrick, "One would expect that over time, distribution cost savings will be apportioned out to the natural constituencies." But like many other conference participants, he feels that among the three constituencies--customers, employees and shareholders--the last has been neglected, at least in terms of dividends.

Rather than repurchasing stock, which the industry has done to the tune of more than $8 billion over the past three years, airlines would regain some interest from investors by paying dividends, said Buttrick. He also called for better earnings consistency with the help of fuel purchase hedging to reduce cost volatility, as well as possibly paying a "meaningful premium" to labor in order to set long-term contracts.

These are seen as remedies to UAL Corp. CFO Doug Hacker's complaint that "there are very few investors who care about the airlines. They're chasing dot-coms." Whether or not they should be chasing dot-coms indeed is debatable--and the recent tech bloodbath on Wall Street shows many are questioning the same--but airlines aren't exactly the prettiest of so-called "Old Economy" stocks either.

According to Salomon Smith's Long, investors don't like airlines because it's an "underperforming sector with relatively poor industry fundamentals and powerful conflicting constituencies."

Buttrick agreed, saying airline shares have underperformed the broader market 90 percent of the time over the past 30 years. For the most part, the industry attracts only value investors, or those who focus on buying cheap stocks, not stocks whose companies offer sustained earnings momentum.

Even these value investors, however, don't like the airlines' lack of earnings consistency, high capital requirements, labor leverage, lack of dividends, barriers to exit (thanks to bankruptcy protection) and barriers to consolidation.

UAL's Hacker added that the industry is challenged by inadequate air traffic control, "new entrepreneurs ready to outfox us, in e-commerce and the vestiges of many subscale or poorly positioned airlines. But," he said, "there's an underlying cause for optimism."

"The industry is undergoing a transformation," said Maldutis, a veteran analyst who turned bullish on the airlines in 1996. "This doesn't mean it won't be cyclical, affected by fuel, held hostage by labor and affected by infrastructure issues. Clearly, there will be turbulence, but I think the skies ahead are very promising."

Maldutis cited four main reasons to be optimistic: managements that are more focused on earnings than market share; alliances, which are "surrogates for mergers;" the Internet's capability to reduce costs and fill empty seats; and a shortage of planes over the next 10 years as environmental restrictions get tighter.