By Jerry Knight
Monday, May 30, 2005
Attention investors: The captain has turned on the seat-belt light. Please prepare for landing.
Please be sure that your seat belts are fastened, your wallets are closed and your investment portfolios are in the full uptight position. And please refrain from buying any airline stocks until we are parked at the gate and the analysts have turned off the warning lights.
Now that the merger of US Airways Group Inc. of Arlington and America West Holdings Corp. of Tempe, Ariz., is preparing for landing, some investors are showing the same impatience that many passengers exhibit at the end of a flight.
America West's stock price has jumped 30 percent since word of the pending deal leaked out, but the two carriers have yet to convince Wall Street analysts that combining airlines would create a winner in the ruthlessly competitive industry.
Seven of the eight analysts who follow America West stock (AWA on the New York Stock Exchange) rate the shares "neutral." The eighth calls it a "sell."
Whether Wall Street believes the merger will work isn't what's important, America West's chairman and chief executive, W. Douglas Parker, told analysts recently. "The people that have invested believe it, or they wouldn't be investing."
Obviously, the analysts' reservations haven't kept a lot of investors from buying America West stock. Maybe the buyers think they're smarter than the professionals who study the airline industry. Maybe they're willing to take risks that analysts would avoid. Maybe they're right. Or maybe they just don't know what they are doing.
That is almost certainly true of investors who have been buying US Airways stock, which will become worthless the day the merger with America West is consummated.
Let me repeat that: US Airways stock is going to be worthless.
The company has said it again and again. "The transaction anticipates that the existing shares of U.S. Airways will be canceled," the airline said in announcing the merger plan.
The analysts all say it.
Everybody who understands the way bankruptcy works knows it.
It is what happened the first time US Airways was reorganized under Chapter 11. The old stock became worth no more than the paper it was printed on, valuable only to collectors of stock certificates.
But still, somebody keeps buying it.
On May 19, US Airways' shares jumped 61 percent -- from 77 cents a share to $1.24 -- based on the faulty premise that somehow stockholders would benefit from the restructuring worked out by the Arlington-based airline, its creditors and new investors.
The shares have since sunk back, closing at 84 cents Friday, but even that reflects false hopes.
The merger plan is very specific about who will own the new airline. America West shareholders will get 45 percent. A group of new investors will get 41 percent. U.S. Airways creditors will get 14 percent.
US Airways shareholders aren't on the list because their investments will be wiped out.
I've had to explain all too often to anguished shareholders in companies going through bankruptcy: You made the mistake of investing in a business that went broke. Because the company couldn't pay its debts, the creditors essentially repossessed it. They own it now; you're out of luck.
As airline analyst Raymond E. Neidl wrote of US Airways and United Airlines, which is also reorganizing in bankruptcy: "We believe that the stocks have no value in bankruptcy regardless of the chances of success or failure of the restructuring."
Once in a blue moon, shareholders come out of Chapter 11 bankruptcy with a few crumbs even though they're always at the back of the line, behind all the creditors. The final outcome of a bankruptcy reorganization is never known until the day the judge signs the order.
That is one reason why stock market regulators allow shares of companies that have filed for reorganization to continue to trade. Theoretically they might be worth something.
The regulators warn investors that a company is going through bankruptcy reorganization by labeling their stocks with a big letter Q.
US Airways stock used to trade on the Nasdaq Stock Market under the symbol UAIR. Now it's UAIRQ. That's Q, as Elmer Fudd would say, because you must be qwazy to buy this stock.
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."