Prices of airline stocks have taken off in recent months.
Fundamental factors within the industry have pushed share prices up and should continue to provide good returns for investors, analysts say."The airline group has been one of the strongest in the stock market over the past two years," said Samuel Buttrick, airline analyst for Morgan Kee-gan & Co. in Memphis.
Airline stocks are up about 40 percent since the beginning of the year, compared with about 11.5 percent for the Dow Jones Industrial Average and Standard & Poor's 500 Index.
"What we're looking at is closing the gap between the asset value and the market value or the value the marketplace puts on the stock," Buttrick said. Northwest is seen as asset-rich, with relatively little debt and "perhaps not as well-managed as other airline companies."
But with someone showing a willingness to pay a price for the company based more on asset values than on profits and cash flow, investors have started to look at asset values of other airlines.
AMR, the parent of American Airlines, and UAL Inc., the parent of United Airlines, have valuable landing slots at jammed airports such as O'Hare International in Chicago. Pan American World Airways has tremendously valuable international route authority. Delta Air Lines has little debt relative to other airline companies.
In addition, the takeover moves on Northwest by Pan Am may have boosted the shares of Alaska Airlines, said Charles LaLoggia, publisher of the Special Situations Letter in Rochester, N.Y., and a follower of takeover stocks.
Alaska Airlines is the dominant regional carrier in the Pacific Northwest and an attractive pickup for any airline looking to expand service to Asia, LaLoggia said.
When Northwest, which flies Asian routes, began talking about restructuring or making acquisitions as a way of fending off its unwanted suitor, that led to speculation about Alaska Airlines.
Helaine Becker, analyst with Shearson Lehman Hutton in New York, is also recommending Alaska Airlines, she said, because of the revival of the Alaskan economy and rising airfares on the West Coast.
Although it has been on the block and Eastern Airlines seems destined to remain a part of Texas Air Corp., the downdrafts swirling around Eastern have affected other airlines for better and for worse.
"With one carrier grounded and it making up 6.5 percent of the industry, the other carriers are going to make a lot of money," said Becker.
Atlantic Southeast has benefited from the drop in competition in Atlanta since Eastern ceased most operations, said Frank Brown, analyst with Robinson-Humphrey Co. of Atlanta.
First-quarter earnings jumped from 9 cents per share a year ago to 38 cents in the first three months of this year, and the stock price rose from $9 per share to about $12.50. More passengers and higher fares contributed.
"The company has been a good, profitable commuter airline for many years," Brown said. "But it's getting additional benefit from the Eastern situation."
Metro Airlines stock will be hurt in the short run but may benefit in the long run from Eastern's problems, said LaLoggia.
The commuter airline fed Eastern flights in Atlanta and so has been hurt by the bankruptcy, he said. But Metro is also American's feeder in Dallas-Fort Worth, operating the American Eagle flights. American has acquired five of the six American Eagle carriers, leaving Metro the only independent and that's the way Metro management likes it, said LaLoggia.
"If Metro finds itself under pressure because of the Eastern bankruptcy, the management may have to rethink the idea of not wanting to be acquired by American," he said.
The key to airline stock gains in recent months is not takeovers, however, but yields, said But-trick. In airline parlance, that means the amount of revenue the airline gets for each mile each passenger flies.
There has been little increase in the number of passengers on airplanes, but yields have been rising because airfares are up about 15 percent. "That's pretty strong performance in what is perceived to be a mature industry," he said.
Still, airline stocks are trading at only eight times estimated 1989 earnings, 30 percent less than the average stock, Buttrick said. Those values are consistent with stock values for late in the business cycle - near a recession - when stocks such as airlines begin showing effects of the expected slowdown and a drop in passengers.
Also, rising oil prices and increasing pressures from workers for pay raises to match increases in inflation may put a damper on profit increases in the second half of the year.