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Little Airlines, Big Opportunities?


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LITTLE AIRLINES, BIG OPPORTUNITIES?

Mention airlines these days, and most investors blanch. Every time the stocks of these beleaguered carriers begin edging up, some piece of disappointing economic news sends them tumbling. But while the big carriers suffer, a group of smaller, regional carriers and niche players is flying high. Over the past 18 months, the stocks of these airlines have soared 150%, vs. a 9% gain for the Standard & Poor's 500-stock index. And one company, a niche jet carrier, Reno Air Inc., saw its shares appreciate nearly tenfold in a 10-month period.

Regionals will be one of the hot stock groups of the 1990s, say analysts. And for a good reason: These airlines know how to make money. While major carriers have collectively lost $10 billion since 1990, many of the smaller, regional airlines are racking up earnings gains of 20% and more a year.

Why are they so profitable while the majors keep getting pummeled? For one thing, regional airlines have lower cost structures--primarily because their workers often earn one-third what their counterparts do at the majors. Second, these airlines, which restrict flying to short-haul routes and then feed passengers into larger carriers, handle a much greater percentage of higher-paying business travelers than do larger airlines. The regionals also have limited competition on many routes, allowing them to keep fares up.

NIMBLE BUNCH. Moreover, prospects continue to brighten as struggling major carriers increasingly turn over unprofitable routes to these nimbler partners. "There's a real, long-term case to be made for regional airline stocks," says Kidder, Peabody & Co. analyst Samuel Buttrick.

Buttrick cautions that the wild inflation of price-to-earnings ratios over the past year won't persist. While investors could buy regional airline stocks at 10 times earnings four years ago, p-e ratios have shot up to 20 and higher in the last year. But even if those ratios come down a bit, stock prices can keep rising on the strength of accelerating earnings. Atlantic Southeast Airlines Inc., which feeds Delta Air Lines Inc. at Washington's Dulles International Airport, is expected to see earnings jump 36%, to around $1.48 a share, in 1993. Cincinnati-based Comair Holdings Inc., 23% owned by Delta Air Lines Inc., should see double-digit profit gains, to $1.17 a share, say analysts. And Mesa Airlines Inc., the nation's largest regional airline company and a holding company for six regional carriers in the Southwest and on the West Coast, should double profits, to 97 a share, this year.Investor appetite for the upstart regional carriers will be tested within weeks. Atlantic Coast Airlines, a United Airlines Inc. affiliate, is gearing up to go public. The carrier, started in 1989, has 56 planes and feeds traffic into United at Dulles. In April, it added limited service in Florida. Analyst William Wrightsen at Alex. Brown & Sons Inc., which will underwrite the offering, won't comment on Atlantic Coast specifically but says: "We're very bullish on the industry. Yields [money collected per seat] for regionals are strong, and their future looks good."

Small carriers that fall outside the bounds of traditional regional airlines because they sometimes fly long-haul also show strong prospects. Just look at 11-month old Reno Air. That carrier began flying a single jet out of Reno, Nev., last July. But a powerful reception by travelers helped the airline grow to a dozen planes and seven destinations in under a year. The stock climbed from 2 to a high of 20.

STARTUP SEARCHERS. True, in recent weeks, Reno's stock has dropped back to 14, reflecting concerns about overexpansion, which has been the downfall of many carriers. In May, the airline signed a deal to operate some of American Airlines Inc.'s routes out of the big carrier's hub in San Jose, Calif.--which puts Reno in direct competition with Southwest Airlines Co. "I like the stock at 14," says Mark Leibovit, publisher of the Volume Reversal Survey, in Sedona, Ariz.

Investment bankers are now scurrying to find new Renos. Robert W. Iverson, president of startup Kiwi International Air Lines in Newark, N.J., says bankers call him regularly to try to interest him in tapping the public markets for capital. A year ago, Wall Street wouldn't go near his airline, and Iverson had to raise money from Kiwi's pilots to get off the ground. Now, Iverson, whose airline flies to Chicago, Orlando, Tampa--and soon San Juan--says it is contemplating a public offering.

Of course, investing in regional airlines or startups still presents risks. As the major carriers search desperately for ways to shore up revenues, some could push their smaller partners into less attractive revenue-sharing arrangements than they had in the past. And competition could heat up among regional carriers themselves. Still, the risk-reward ratio points to regionals as an enticing investment.Andrea Rothman in New York, with Seth Payne in Washington


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