One on One with Ray Neidl, Airline Analyst , Calyon Securities
Thursday, January 18, 2007
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SUSIE GHARIB: More signs today of the turnaround in the airline sector. Quarterly results from Continental Airlines showed that the carrier is flying back toward the black and trimming its losses. Excluding charges for a payment with the pilots' pension plan, Continental lost just $0.04 a share in the fourth quarter. That was a much smaller loss than analysts were expecting. Sales at the airline rose 11 percent to $3.2 billion, right in line with analyst estimates. Looking ahead, Continental says the airline is positioned for sustained profitability, with costs rising just 3 percent in the current quarter. Joining us now with more analysis of the outlook for airlines, Ray Neidl, airline analyst with Calyon Securities. Hi, Ray.
RAY NEIDL, AIRLINE ANALYST, CALYON SECURITIES: Hi.
GHARIB: Well, you know, we've seen better than expected earnings from airlines, not only Continental today, but also American Airlines yesterday as well as Southwest Airlines. What is going on that the airlines are doing so well these days?
NEIDL: Well, the fourth quarter is the slow quarter for the airlines and results are marginal. In fact, for me a little disappointing because of winter storms in December. What we are looking at though is going into 2007 we are expecting strong results. The cost-cutting that the airlines have done, capacity constraints and price increases should lead to good profitability for the industry for this year.
GHARIB: And jet fuel prices are coming down and that's got to help. Do you see that continuing throughout 2007?
NEIDL: Well, in my projections, I'm assuming high fuel prices around $60 a barrel. So any discount we get in jet fuel prices will just be a bonus to the earnings that the airlines can achieve this year.
GHARIB: Ray, you have a couple of stocks that you have put on your "buy" list, including AMR, American Airlines, Continental, UAL, the parent of United, US Airways and Alaska Air. Tell us why you like these stocks.
NEIDL: Well, I think the legacy carriers have more upside potential in a good market. They've got more ability to raise prices. They've got more yield buckets (ph) to play with to get their yields up and they've been doing a good job in cutting their costs. Low-cost carriers are already low cost. They don't have as yield buckets (ph) to get their prices up.
GHARIB: Looking at these stocks today, Continental was down, AMR was up sharply, so was UAL. Why were the stocks down today and is this a good buying opportunity now?
NEIDL: It is. They had a good run earlier this week and last week. They were up for a while today. I think they went down with the whole market. Oil prices were down, but when the market went down late in the day, a lot of the airlines went down as well.
GHARIB: Ray, do you have any disclosures to make on these stock recommendations you are making?
NEIDL: No, I don't participate in the airline stocks because of the complications.
GHARIB: OK. Tell us a little bit about your outlook for Delta. You know that US Airways has a bid, a takeover offer for Delta. Do you think that deal is going to go through?
NEIDL: I am more conservative on this. I rate it no better than 50/50. I think the deal is a good deal for the creditors at Delta. I'm not sure if the regulars (ph) are ready to approve that. Also there is overlap in those two systems. It not a real end on end merger and the regulators may take a hard look at that.
GHARIB: How do you think Delta will do as a stand alone carrier in this competitive environment?
NEIDL: In an up market, they will do OK. But down the road we've got too many airlines with too many hubs and we're going to have consolidation even through mergers or in the next economic downturn, some airlines will disappear through liquidation.
GHARIB: You said in a recent report that out of the six legacy airlines, you expect only three to remain mostly because of consolidation. What are possible combinations that you think that Federal regulators will let go through?
NEIDL: Well, it could be any number of combinations. I think the Federal regulators would look a little more favorably on end-to-end, in other words, where there is not a lot of overlap and I'm not predicting these mergers. But American and Northwest would be a good fit. United and Continental would be a good fit. And Delta would be a good fit with either United or Northwest.
GHARIB: All right. Thank you very much. Really appreciate your coming on the program.
NEIDL: OK.
GHARIB: We've been speaking with Ray Neidl, airline analyst with Calyon Securities.
