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Industry Outlook -- Services: TRANSPORTATION

TRANSPORTATION

Look for a repeat of last year's smooth ride for airlines and railroads. And in trucking, two years of bad road will soon be a memory

For airlines and railroads, 1997 is a year of deja vu. Merger talks and speculation are again roiling both industries, while healthy demand and cost-cutting bode well for profits. Truckers look to leave two lackluster years in the dust.

Strong tailwinds are pushing the airline industry forward. David A. Swierenga, chief economist at the Air Transport Assn., figures traffic on U.S. carriers will grow about 3.5% this year, thanks to a healthy economy. That's down from last year's 7% growth, which was boosted by the eight-month disappearance of the federal ticket tax. But the slowdown in growth is causing little concern, thanks to the airlines' cautious expansion plans. Swierenga forecasts capacity expansion of about 3.5%. Analyst Susan M. Donofrio at NatWest Securities Corp. predicts the 10 major U.S. airlines will see net profits of $4.5 billion, up from a record $3.5 billion in 1996.

WILD CARD. That rosy profit forecast assumes the airlines won't reignite merger talks. In recent months, Continental Airlines and Delta Air Lines Inc. explored a possible marriage, although the talks went nowhere. Some analysts believe the industry is ripe for consolidation. But mergers can cost money in the short run and heap more debt on weak balance sheets. In the meantime, U.S. carriers are looking abroad for alliances. American Airlines Inc.'s proposed link with British Airways PLC awaits the outcome of U.S.-British talks to liberalize a restrictive aviation treaty.

One industry wild card is the fate of the 10% ticket tax, which was scheduled to expire again at the end of 1996. The biggest airlines are pushing a new tax formula that would boost the costs of low-fare carriers such as Southwest Airlines Co.

In the railroad business, too, mergers are a hot topic. In the East, Norfolk Southern Corp. and CSX Corp. are battling for Conrail Inc. In the West, managers at Union Pacific Corp. still struggle to digest Southern Pacific Rail Corp. Net income for the eight largest carriers will grow about 17% this year, to $6.4 billion, on a sales gain of 3.5%, to nearly $33 billion, predicts NatWest Securities analyst Anthony B. Hatch. "We are in a rail renaissance," Hatch says.

Even the trucking industry seems to be steering into better times after last year's higher fuel prices and harsh winter weather. Cost-cutting and stronger demand should help, figures Louis J. Esposito, vice-president of sales at Roadway Express Inc. Roadway even plans to boost rates 5.7% in January. Still, a driver shortage will hurt some companies. To stem driver turnover, J.B. Hunt Transport Services Inc. plans to boost pay an average 32% starting in February. In trucking, it looks like the drivers will fare best of all.By Wendy Zellner in Dallas, with Joseph Weber in PhiladelphiaReturn to top

TABLE

Prognosis 1997

POSITIVES

-- Healthy demand and slow capacity growth should mean strong profits for airlines

-- Relentless cost-cutting will help railroad margins

-- With less capacity, truckers should get modest price hikes to stick

NEGATIVES

-- High fuel costs may persist, pinching all transportation sectors

-- Proposed changes in the airline-ticket tax could be costly for low-fare carriers

-- A driver shortage and higher wages will hurt some trucking companiesReturn to top

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