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 The Brancatelli File

joe EATEN BY THE BEAR

BY JOE BRANCATELLI

September 30, 1999 -- Airline executives often explain and sometimes excuse their faltering service and skyrocketing fares by claiming business necessity. Hardly a week goes by without some airline bigwig lecturing me on the need to maximize profit in order to serve the needs of the carrier's shareholders.

Like any other business traveler, I am in business, so the "profit excuse" doesn't ring hollow. Like any other business traveler, I expect the airlines to make money. In fact, like any business traveler, I have problems with any business, including an airline, that can't make money.

Ignoring for the moment that the businesses we business travelers admire most are the ones that make money and offer their customers value for money, let's give the airline devils their due: They have made lots of money lately.

With a few notable exceptions, the airlines earned potfuls during the last half of the decade. Quarter after quarter, most carriers have boasted record results. It is even fair to say that the major U.S. carriers have collectively earned more in the last five years than all the commercial carriers ever generated going back to the moment the Wright Brothers first flew at Kitty Hawk and the pricing chief back at the bicycle shop decided that fares were already too low.

As business travelers, we may despise how they've slashed service and raised fares, but these guys and gals have generated handsome profits. That should make them the toast of Wall Street, where turning a pretty penny is the coin of the realm.

So how come Wall Street hates the airlines, too?

Check out the chart below: All that profit, rung from business travelers at such a painful psychic cost, has been for naught. At the close of business yesterday, airlines are anywhere from 33 to 76 percent below their two-year highs.

Do not think this shabby airline showing has any relation to the recent market malaise. Even though the Dow Jones Industrial Average fell yesterday for the sixth time in seven sessions, stocks remain close to August's record high of 11,428.94. The Dow closed yesterday at 10,213.48, just 10.6 percent off the all-time high. The stock market has had a shaky week, but airline stocks have been eaten by the bear for more than two years.

I humbly suggest this: If the stock market hates you and your best customers hate you, perhaps there's something wrong with how you're running your business. Memo to the airlines: I think there's something wrong with how you're running your business.

There are "logical" explanations for the woes of some specific airline stocks. A year of labor strife and seemingly intractable operational snafus has US Airways within $2 of its two-year low. Despite its notable service improvements, TWA hasn't earned an annual profit in years and some analysts have given up hope. Air Canada and Northwest haven't recovered from last year's strikes. Analysts fret about the continued weakness of Asia's economies, all key markets for United. The soap opera that is its relationship with labor unions has depressed American's stock price.

Yet plowing through the thicket of individual excuses is like missing the forest for the trees. The overarching truth is what matters: Just like us underserved and overcharged business travelers, Wall Street thinks the airlines are doing a bad job.

That would normally be the bottom line, but there is more. Wall Street expects things are going to get worse. The carriers are looking at dramatic near-term profit declines due to ill-timed capacity growth, rising fuel prices, growing resistance of corporate travelers to higher fares and the cost of finally sharing some of its late 1990s bonanza with employees.

We know that the executives who control the nation's airlines don't listen to their best customers when we complain about high fares and poor service. It will be interesting to see how they react now that the market has turned against them, too.

Disclosure notice: Joe Brancatelli does not now and has never owned the stock of any airline or aviation-related company.

 EATEN BY THE BEAR: HOW AIRLINE STOCKS HAVE TUMBLED

AIRLINE

SYMBOL

105-WK LOW

105-WK HIGH

CLOSE (9-29)

DECLINE*

AIR CANADA

ACNAF

$ 2.87

$ 10.18

$ 6.56

35.55%

ALASKA

ALK

$26.00

$ 62.56

$39.93

36.17%

AMERICA WEST (B)

AWA

$ 9.56

$ 31.31

$17.68

43.53%

AMERICAN (A)

AMR

$45.62

$ 89.93

$55.25

38.56%

BRITISH AIRWAYS

BAB

$52.12

$114.75

$56.00

51.19%

CONTINENTAL(B)

CAI.B

$28.87

$ 65.12

$32.50

50.09%

DELTA (C)

DAL

$40.87

$ 72.00

$47.43

34.12%

KLM

KLM

$23.00

$ 49.68

$25.62

48.42%

NORTHWEST

NWAC

$18.62

$ 65.31

$24.87

61.92%

SOUTHWEST (A)

LUV

$10.18

$ 23.62

$15.62

33.86%

TWA

TWA

$ 3.50

$ 15.12

$ 3.62

76.05%

UNITED

UAL

$55.25

$101.75

$65.43

35.69%

USAIRWAYS

U

$24.12

$ 83.75

$25.56

69.48%

*Compared to 105-week high. (A) = Reflects 1998 stock distribution. (B) = Class B. (C) = Reflects 1999 stock repurchase

This column originally appeared at biztravel.com.

Copyright 1993-2004 by Joe Brancatelli. All rights reserved.