Analyst assesses airlines in terms of 'survivability'

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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."

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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

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