Hi Roader,
here's a snippet from TheStreet.com article that was posted yesterday that may be of interest:
Forget revenue per available seat mile. Forget cost
per available seat mile. And hey, who cares about
those annoying food costs anyway?
Delta Air Lines (DAL:NYSE) hit the big time
yesterday and earned a special place in the history
of airline finance when its involvement with
priceline.com (PCLN:Nasdaq) turned into a $1.2
billion investment overnight.
Because of its position as an inventory provider to
the Internet-based booking company, Delta was
granted warrants to buy 18 million shares at 93
cents each. These warrants are exercisable after
the usual 180-day waiting period and after certain
performance measures are met. priceline.com
closed Tuesday at 82 7/8.
But Joe Kolshak, Delta's vice president of investor
relations, says he thinks the airline will have no
problem meeting the performance requirements
attached to the warrants, based on sales levels
already achieved using the Internet ticket
distributor.
Of course, we're not going to discuss the
wackiness of the fact that priceline.com is now
capitalized at more than $11 billion, which is
greater than Delta Air Lines itself ($9.85 billion). All
of this is part of a totally different discussion -- one
that frankly scares the bejeebers out of us.
But as we cast aside those dark thoughts, what
other potential Internet-related nuggets do we see
hidden away in the airline industry?
The most obvious place to look is AMR
(AMR:NYSE), parent of American Airlines and
82% owner of Sabre Group (TSG:NYSE).
Sabre, in turn, owns 100% of one of the two most
successful Internet travel sites on the Web:
Travelocity. Now, regardless of the fact that the
site refused to work for us last Friday when we
went in to test it for our Traveling with Wings
column, the site is a major player in the Internet
travel industry.
Travelocity reported total sales of $40 million in
January, and in February it reported that it had two
weeks during which sales exceeded $11 million.
By comparison, priceline.com reported revenue of
$21 million for the first two months of this year.
And if priceline.com is now capitalized at $11
billion, what does that mean for Travelocity?
Well, we think this kind of comparison is off base.
(I know, we are desperately trying to find some
sense of normal value in these astronomical
comparisons.)
However, Sam Buttrick, airline analyst with
PaineWebber, said in a research note yesterday
that he would conservatively value Travelocity at $5
billion. Another analyst who preferred to go on
background this morning valued Travelocity at $10
billion. Sabre itself has a market cap of about $5.9
billion.
While chatter continues to mount as to when or
whether AMR will spin off the rest of Sabre and
how much the company would be worth as a totally
separate entity, we look for the tone of the chatter
to change.
While Sabre says it has no immediate plans to
spin off Travelocity, it would be nuts not to do so in
the current environment.
According to the analyst we talked to this morning,
Considering that shares of TSG
closed at 46 yesterday, it appears
therefore that the market is placing
little, if any, value on Travelocity. If
we keep things simple and say that
Travelocity is worth $10 billion, that
this value represents all the upside to
TSG stock, and TSG has 130 million
shares outstanding -- this would work
out to about 77 per share. This would
put the value of the stock a little over
120. This is too big to walk away
from. I fully expect [Sabre]
management to announce an IPO of
at least 10% to 20% of Travelocity
sometime this year.
And the effect on AMR stock if this happens?
Again, according to the analyst we talked to this
morning, if we assume that shares of TSG are
worth 120, this would work out to about another 74
per AMR share. So, if Travelocity is worth $10
billion, then TSG is worth about 120 a share, and
AMR is worth about 120 a share as well.
But is it just us, or is anyone else out there
uncomfortable about trying to assess the value of
an airline stock based on its Internet relationships
and investments?
Don't know about you, but while we understand the
math, we're just not so sure we want to put our
money into what the numbers are saying.
Yet.
Enjoy!
StockMarketMaven |
