Airlines' stock rally belies persistent ills, analysts caution

By James F. Peltz
Los Angeles Times

Airline stocks are surging only two months after it seemed most big U.S. carriers were flying straight toward bankruptcy.

But does the rally still have wings?

Don't bet on it, some analysts say. Sure, airlines are moving off the critical list as they make strides in cutting costs and the summer travel season arrives. Several analysts this week also cut their forecasts of the industry's losses, sparking more gains in the sector.

But the airlines remain in intensive care and are expected to lose another $1 billion in the quarter ending Monday after losing $3.5 billion in the first quarter. Fares also remain relatively low, which is good for travelers but precludes a meaningful rebound for the carriers, observers said.

"Losses are narrowing but they're still large, and the airlines remain highly vulnerable to any external shocks (such as another terrorist attack)," said Samuel Buttrick, an analyst at UBS Warburg.

The rally, in fact, partly reflects that the shares couldn't go much lower, analysts said.

Stocks including AMR Corp., the parent of industry leader American Airlines, Delta Air Lines Inc. and Northwest Airlines Corp. were trading in single digits this spring. AMR was on the brink of bankruptcy in April. United Airlines, a unit of UAL Corp. and the biggest carrier at Los Angeles International Airport, had filed for bankruptcy protection in December, and US Airways Inc. was just emerging from Chapter 11.

At the time, Buttrick recommended buying what he called "the survivors" of the airline industry — including AMR, Delta, Northwest and Continental Airlines Inc. — in large part because they were so inexpensive.

Since hitting bottom on March 11, the American Stock Exchange's index of 10 airline stocks has more than doubled over the last three months, to its highest level since last August.

AMR jumped another 42 cents, to $11.32 a share, in New York Stock Exchange trading Friday, even as several airline stocks fell as traders took profits. That gave AMR a 23 percent gain for the week and a seven-fold increase since late-March.

United said yesterday that its cost-cutting efforts are enabling the carrier to meet lenders' financing requirements and to build its cash position. UAL's stock, which was delisted from the NYSE after its Chapter 11 filing, now trades on the over-the-counter markets for less than $1 a share. The airline has said it's "highly likely" that the stock will become worthless as it moves through bankruptcy reorganization.

But analysts cautioned that the major airlines are not suddenly making money again — only that their losses shouldn't be as dire as earlier forecast.

And one analyst, Jim Corridore of Standard & Poor's Corp., merely raised his rating on AMR, Northwest and Continental to "hold" from "avoid."