Analyst assesses airlines in terms of 'survivability' 'Survivability' key in assessing airline industry By August Cole, CBS.MarketWatch.com Last Update: 1:13 PM ET Feb 20, 2003 NEW YORK (CBS.MW) -- You know times are tough for the airline industry when Wall Street's sell-side analysts start envisioning a "best-case" scenario that involves the shutdown of No. 2 carrier United Airlines. But that's what J.P. Morgan analyst Jamie Baker sees in store, boiling the investment case for airlines down to "survivability." GET QUOTES Enter one or more symbols Quotes delayed up to 20 Minutes RELATED QUOTES UAL 1.07 -0.03 BA 28.70 -1.48 AMR 2.87 -0.05 CAL 5.62 -0.02 NWAC 5.89 -0.22 Top MarketWatch Headlines Covad dumped after FCC ruling Nasdaq slips as chips take spotlight Boeing, Reliant Resources, SBC Communications, more A United spokesman defended the restructuring actions taken by the carrier, currently operating under Chapter 11 federal bankruptcy protection from creditors. In recent trading Thursday, the sector's stocks were mostly lower -- with the benchmark index drifting near the lowest levels of the year. See full story. "At current share levels, it is survivability that matters, not profits, in our view," Baker said in a Thursday note to clients. For the airline industry as whole, Baker sees the most favorable scenario as involving the shutdown of United, a subsidiary of UAL Corp. (UAL: news), because an "outside shock" that forced such a development could help address capacity issues. To be sure, there are tens of thousands of jobs on the line at United itself and in the communities in which it operates. In an already weak economy, it's unclear what the extent of the fallout might be. Moreover, industry observers say the process of picking up the pieces after a liquidation is by no means a smooth one. For the jet makers, there no doubt would be a sharp near-term impact. Baker's colleague, aerospace analyst Joe Nadol, said the aerospace sector's recovery could be pushed back by more than six months should United liquidate. "The aftermarket would experience a steep and rapid dropoff in revenue, while the OEM [original equipment manufacturer] market would suffer from an extension to the downcycle it currently finds itself in," wrote Nadol. By the same token, Boeing (BA: news) might gain market share, he said, if United were to liquidate because rival Airbus would lose an important customer. In recent dealings, the Dow Jones Industrials component's shares were off sharply, losing $1.82 to $28.36. Competitive fallout Even if there are few cash-poor buyers for United assets in the event of a shutdown, American Airlines would benefit greatly, Baker noted. AMR Corp. (AMR: news) owns American, the leading carrier ahead of United. According to Baker's models of the impact of a retroactive redistribution of United's business for 2002, Continental Airlines (CAL: news) would have earned $2 a share, Northwest Airlines (NWAC: news) would have broken even and American would have dramatically pared its losses to $2 a share, not $12.97. Mapping out the possible operational impact, Baker said American could pick up United's Pacific routes and a foothold at Chicago's O'Hare International. For its part, Delta Air Lines (DAL: news) could end up with United's Heathrow slots and also add Boeing-made 777 jets. Against this backdrop, Northwest would stand to gain the least, he said. The ramifications for management and labor relations are also potentially significant. An easing of cost-cut pressures should help rival carriers' financial performance. But that could postpone needed changes, Baker said. In his research note, the analyst made clear that he hasn't attempted to project when United might possibly go under. Any government assistance in that event would, he said, prolong the issues confronting the airline industry, not remedy the larger problems. "Everybody is entitled to their own opinion," said United spokesman Jeff Green. "We believe that the changes we're proposing in our plan for transformation are necessary and are the changes that will allow us to emerge from Chapter 11 a stronger and more competitive airline," he said. Baker couldn't immediately be reached for comment. UAL's shares traded lately at $1.07, down 3 cents, while AMR lost 3 cents to $2.89. First-quarter fears How the current quarter shapes up for the airlines is going to depend on March's performance, Baker noted. With war fears already mounting and a report Thursday in the Washington Times indicating that next month as a likely starting date for a campaign against Iraq, the outlook is not a good one. "The real question is March, which typically generates 38 percent of the quarter's revenue -- and which this year seems likely to be characterized by war," he wrote. That could produce almost half of the year's losses in the first quarter, up to $2.4 billion -- even wider than last year's quarter. In total, Baker expects industry losses this year to hit $5.3 billion. While that would be narrower than 2002's $6.9 billion in red ink, he said a potential military campaign against Iraq is going to make predicting financial performance even more difficult a task. August Cole is spot news editor at CBS.MarketWatch.com in Chicago