US Airways Investors Live in A Fantasy World

You don't have to be qwazy to buy other airline stocks, but you have to be courageous, and perhaps contrarian. Southwest Airlines (LUV on the NYSE) is the only carrier whose stock is rated "buy" by a majority of the analysts who follow it. Even the two most successful new airlines, AirTran (AAI on the NYSE) and JetBlue (JBLU on Nasdaq), draw equal numbers of "buy" and "hold" ratings because analysts think their stocks have gotten too pricey.

"As long as oil is over $50 a barrel, I think it is a very iffy proposition investing in airlines," said Neidl, of Calyon Securities (USA) Inc. , a U.S. arm of France's Credit Agricole Group.

"The industry is not structured to make money with oil over $50," said Neidl, who recently downgraded American Airlines, Delta Air Lines and Northwest Airlines to "neutral." Neidl offers an unusual rationale for bestowing "neutral" ratings on those carriers: "Their stocks are currently too cheap to sell."

Neidl does not grant the "too cheap to sell" concession to United, US Airways or Flyi Inc., parent of Independence Air, the aggressive low-fare carrier based at Washington Dulles International Airport.

As for Flyi, Neidl said, "I just don't think the model works." In its previous incarnation as Atlantic Coast Airlines, Flyi flew feeder flights under contract for United and other airlines. Facing the loss of the United business after that airline went to bankruptcy court, Atlantic Coast renamed and reinvented itself as a low-cost carrier, flying mostly regional jets from Dulles.

Neidl argued that Flyi's small jets can't carry enough passengers to make money and certainly not at the fares that the airline is charging, as low as $29 one way.

Still upbeat, Flyi spokesman Rick DeLisi said Friday: "May is going to end up being our best month for passenger traffic. June is shaping up to be a very robust month, and we think it will be an excellent summer."

He said the airline "could be approaching break-even in the July time frame" and "on the path" to become profitable by next year -- if crude oil is under $47 a barrel.

Flyi's stock chart looks like the glide path of a jetliner coming into Dulles: a slow steady descent from $12 a share in the fall of 2003 to 77 cents a share at the close of Friday's trading.

With its stock under $1 a share, Flyi could be delisted by the Nasdaq Stock Market, which generally doesn't trade penny stocks.

To head that off, the airline is asking shareholders at next month's annual meeting to approve a reverse stock split of up to 10-to-1 -- every 10 shares would be swapped for one new share. Theoretically, with one-tenth as many shares, the stock ought to sell for 10 times as much. Delisting is not an immediate threat, DeLisi said, and the vote would simply give the company the option to do a reverse split.

Unfortunately for investors, reverse splits are a lot like bankruptcy reorganization -- sometimes they work out but often they don't.

Washington area travelers would be the losers if Flyi stops flying. Everyone I know who has flown Independence Air loves the planes, praises the eager young crews and is delighted by the bargain fares. The low prices are doing exactly what economic theory predicts. They are boosting demand, encouraging people to take trips they wouldn't otherwise take and forcing competitors to bring down their fares.

Flyi may be the best thing that's ever happened to air travelers in the Washington region, long plagued by lack of competition and high prices.

But Flyi's failure would be one of the best things that could happen for other airlines. They are "definitely having a negative effect on East Coast competitors," Neidl said. "The longer they stay in operation, the tougher it's going to be for everybody else to make money."