Some interesting thoughts from the biggest ex-mutual fund manager in the world on the airline industry (mainly on Delta Airlines but some comments on LUV, AMR, UAL, VJET also) in today's Barrons:
"The sector, broadly speaking, that has attracted me is the cyclical arena, which really
hasn't been too participative - oftentimes for good reason. I have them divided into two
groups - those that are earning good money now that the market says will not last (at
least in terms of their valuations), and those you'd be buying on the come, with poor
earnings in immediate prospect but better ones out there, a la Archie's Millennium
Chemicals. In the first group, the one with good earnings now, I have the airlines and, in
particular, Delta Air Lines. The stock is 70. Earned $8.47 in the most recent fiscal, June.
And in calendar '97 should earn $10 to $12. The stock has been around here for the
last six-eight years. The management has finally developed some consciousness of it. A
couple of years ago, they said, ``We have to get our costs down.'' They have done a
pretty good job. They've negotiated a pilots' contract in somewhat better fashion than
UAL, which gave away 55% of its stock for nothing but labor concessions. Delta gave
2% to pilots, via options. Did a good enough job of it that they've been able to start
Delta Express. Its costs won't quite be Southwest's equivalent. But close. And they are
implementing - having good success with it. Using existing pilots, but with a concession.
The threat, really, that dissuaded me previously was the ValuJet thing, where you took
25-year-old planes and flew them. Unfortunately, that doesn't always work. ValuJet and
its ilk are pretty well discredited now. People are reluctant to fly them.
Q: Is Delta's a comparatively old, young or indifferent fleet?
Neff: Nine years and improving. They have done a pretty good job of keeping up. The
L10-11s are going to the junk pile or Turkish Airlines.
Q: What's the difference?
Neff: Turkish Airlines sold jets to ValuJet, DC9s. Usually, they go the other way. Of
course, that was a couple of years ago. But even the ValuJet flight attendants said
management ought to be replaced. It's going to take a little more thoughtfulness to fly
that ilk than previously. Southwest is obviously in its own class. But all the others are in
and out of service.
Gabelli: John, how about a Continental-Delta match?
Neff: I would say - and I have no way of knowing - no.
Q: It sure looks like Continental wants to merge.
Neff: Yes, but somebody is going to have to step up. I'm not sure Delta will, with all the
things they have going.
Q: In any event, the competition from cut-rate startups will diminish?
Neff: Yes. They are replacing them a bit with Delta Express and United Express and
all. Their prices aren't quite as friendly. But they fly a lot newer planes with experienced
crews. I would think you would be more inclined to go from Boston to Florida on a
Delta Express than on, say, a ValuJet.
Schafer: John, is there much potential for overcapacity with Boeing's backlog?
Neff: A lot of that is replacement.
Ziegler: What's the multiple on the airlines here?
Neff: Delta is trading at six to seven times, if you buy my forecast. The others, the
AMRs and the UALs, would be a little higher. But AMR has never cut a deal with the
pilots. They don't have an express. And UAL gave the store away.
MacAllaster: Delta didn't really have a union, did they?
Neff: Just pilots and one other. And the pilots' was kind of a company union. But they
still had to negotiate with them. Delta has always done a pretty good job by employees.
That's what got them higher costs than they should have had to begin with.
Q: What about fuel costs?
Neff: I have crude going down maybe $5 from here.
Q: Down?
Neff: Yes. It got up to $25 a barrel. It is interesting. Do you know what the price of the
future is, for a year from now? $20.
Q: Go back a year and look at what the future was then, too. The commodities
market is a very poor guide to price.
Neff: It's at least an indication. In other words, if you wanted to sell crude short, which
I'd kind of like to do, you have to go out a ways. And if you do go out a ways, you
don't get $25.50.
Q: So, when will crude prices drop $5?
Neff: By the time we get together a year from now. If I am wrong, Delta will earn a
couple of bucks less. Or maybe they will get it with a fuel surcharge. Right now, the
excise tax has expired and they aren't passing the savings on to clients yet. This industry
will stay tough on pricing. But isn't it interesting, in a marketplace at 17 1/2 times, here is
a perfectly good company - in a semi-growth industry that's obviously very important to
our whole economy - selling for six or seven times.
Q: Yes, but airline earnings are ridiculously unpredictable.
Neff: Sure. I'm not saying it should sell at 17 times. Give me eight or 10 times, and I'd
be overjoyed. That would put the stock at 80 to 120." |
