This article from NYTimes.com has been sent to you by psa188@xxxxxxxxx /-------------------- advertisement -----------------------\ Explore more of Starbucks at Starbucks.com. http://www.starbucks.com/default.asp?ci=1015 \----------------------------------------------------------/ Seeing Value in Spurned Shares of European Airlines April 20, 2003 By CONRAD DE AENLLE LONDON COMMERCIAL aviation has been a horrible investment on both sides of the Atlantic. If there is one consolation for shareholders of European flag carriers, which have fallen more than 30 percent over the last year, it is that American airline stocks have done even worse. AMR, the parent of American Airlines, is down 78 percent over the same period, while Delta Air Lines is off 60 percent. And United Airlines, part of UAL, is now in bankruptcy. Unlike their counterparts in the United States, the biggest European airlines, including British Airways, Air France and Lufthansa, have managed to show profits or minimize losses amid treacherous economic conditions, and some investors say their shares are bargains. A report by analysts at Citigroup shows just how out of favor the sector has been. Before a rally coinciding with the swift American progress in the war in Iraq, European airlines were trading, on average, at half their book value - the worth of their planes, landing slots and other assets. Five years ago, they traded at nearly three times book value. In one of the more extreme cases, KLM Royal Dutch Airlines sold at one-fifth book value, reflecting its precarious finances. KLM has exhausted credit lines, Citigroup says, and the ratio of its debt burden to the cash it earns is high compared with that of other airlines. Having only a small domestic market, KLM also depends more than its rivals on problematic markets like Asia and the Middle East. Many investors "are waiting for structural change in the industry, which never happens," said Riccardo Sicheri, a transportation analyst at J. P. Morgan Fleming Asset Management in London. "On top of that is the geopolitical uncertainty," he said. "And in Europe you have alternatives like the low-cost airlines that have pulled investors even further from the flag carriers." But he is drawn to them. Not only are airlines cheap, he said, but "if the economy improves, they are going to have a dramatic improvement in profitability." Mr. Sicheri makes a case for investing in European airlines in particular. The European market is less mature and the political environment for airlines more favorable than in the United States, he said. At American carriers, employees' big ownership stakes give their unions more influence, making it harder for the companies to reach cost-cutting deals. At European airlines, momentum from consolidation and deregulation, plus the success of low-cost carriers, is forcing unions to accept new work practices. The biggest of the budget airlines, Ryanair, based in Dublin, has been the darling of many fund managers for months. It has recorded stunning growth and huge profit margins as a low-fare, no-frills alternative to major carriers, and its shares are up more than 40 percent in the last year. A couple of months ago, it was worth about as much as all the publicly traded European flag carriers combined. Ryanair's stock has had a more muted war-related rally than those of bigger airlines. Dominic Wallington, a manager of European portfolios at Invesco in London, accepts that the flag carriers are reasonably priced and are beginning to restructure, but he does not want to own them. He is skeptical about their long-term ability to fend off low-cost airlines like Ryanair and EasyJet. "Valuation is important, but it's not always the most powerful driver of share prices," he said. Franz Weis, senior European fund manager at F.& C. Management in London, is more bearish. "We have no current positions in the airline sector and are not planning to get any exposure, either," he said. Comparing the industry's present circumstances with those just after Sept. 11, 2001, he said: "The situation looks different. Whereas in 2001 the industry suffered a one-off shock with very negative consequences for air traffic but hope for a relatively quick recovery, it faces several problems at the moment." Even setting aside worries about SARS, Iraq, oil prices and terrorist threats, he said, "the outlook for global economic growth is unattractive." Mr. Sicheri is lukewarm about Ryanair. He wonders how long it can continue growing by flying between pairs of European airports that are often far from urban hubs. He said that he prefers British Airways, which has "slashed investment, been hard on costs and started showing improved cash flow." British Airways and Air France recently decided to end the money-losing flights of the Concorde supersonic plane later this year. British Airways is also positioned to benefit most from a recovery in trans-Atlantic and Middle Eastern traffic, he said. Mr. Sicheri favors Air France over Lufthansa. Air France is benefiting from the weakness of second-tier flag carriers, especially Alitalia and KLM, in neighboring countries, he said. Lufthansa is being hurt by competition from small low-cost carriers in its home market of Germany. N the United States, British Airways and KLM are listed on the New York Stock Exchange. Ryanair trades on Nasdaq, and Lufthansa in the over-the-counter market. Americans can buy shares of other European airlines only through brokers that deal globally. Mr. Sicheri said that he was intrigued by KLM, but that it was a stock for gamblers who are bullish on the industry and the global economy. "KLM is so fragile," he said. "It's the bombed-out one that could perform quite dramatically if we have a recovery. If the market improves, it has to be the biggest beneficiary." http://www.nytimes.com/2003/04/20/business/yourmoney/20AIRL.html?ex=1051894465&ei=1&en=06ed0dabd2705f46 HOW TO ADVERTISE --------------------------------- For information on advertising in e-mail newsletters or other creative advertising opportunities with The New York Times on the Web, please contact onlinesales@xxxxxxxxxxx or visit our online media kit at http://www.nytimes.com/adinfo For general information about NYTimes.com, write to help@xxxxxxxxxxxx Copyright 2003 The New York Times Company