Transportation Index Just Shy of Record : Airline Issues Out-Distance Other Stocks
While many stocks have prospered in the market rally of the past three months, few groups have gone farther and faster than airline issues.
Stocks like Delta, UAL, AMR, NWA, Alaska Air and Southwest have all traded lately at their highest levels in at least a year.
As it happens, those six are all components of the Dow Jones average of 20 transportation stocks.
The transportation average, unlike many other market indicators, has recently come close to recouping all ground lost in the market decline of August through December, 1987.
Last Tuesday, the index closed at 1,087.97, shy of its all-time closing high of 1,101.16 reached at the peak of the bull market in 1987, notes William LeFevre, an analyst at Advest Inc. Three consecutive losses left it at 1,059.99 by the end of the week.
In Wall Street’s view at least, the recent gains would seem to suggest that the industry has begun to emerge from a long, turbulent period of adjustment to deregulation and may be headed for smoother sailing.
During 1988, “everything that could possibly go right did,” said Helane Becker, an analyst who follows the airline industry for Shearson Lehman Hutton. “The airlines had one of their best ever years.”
Pretax industry earnings grew 18%, she estimated in a recent report, on a 12% gain in revenues.
“The likelihood of the profitability continuing into 1989 is, in our opinion, quite high,” she added, “although the percent changes will probably not be as dramatic.”
In its appraisal of 91 industry groups for their likely stock price performance over the next 12 months, the Value Line Investment Survey ranks the air transport group a lofty ninth.
All this has caught some investors off guard, since they have grown used to thinking of airline stocks as a kind of commodity, like gold or soybeans, best suited for short-term trading strategies rather than long-term holdings.
Two prime forces affecting most airline stocks have been developments in the industry’s sporadic passenger fare wars and fluctuations in the price of oil.
Traders looked for falling oil prices (translated to read “lower jet fuel costs”) or indications of a letup in fare competition as a cue to take airline stocks for a quick ride.
Promotional air fares aren’t likely to disappear, Becker acknowledged. “However,” she said, “we think that, overall, air fares will remain relatively stable.
“This should lead to better predictability of earnings. Consequently, we think airline company equities will become more than trading vehicles: They are likely to become investments.”
Despite the industry’s bright picture, Value Line analysts caution that some new clouds may be forming on the horizon. They say U.S. airlines may be confronted with increased competition from abroad in the years ahead.
Once members of the European Community fulfill plans to form a single, unified marketplace by 1992, Value Line says, European airlines may well seek and gain the right to fly routes within the United States, as some American carriers now do between destinations in Europe.
That competition could be especially formidable, the advisory service observes, because of the reputation for good service that many European carriers enjoy.
