On Wall Street, airline stocks are as popular as a peck on the neck from a vampire. Well, get out the wolfbane, holy water, and garlands of garlic, because Merrill Lynch has just upgraded Northwest Airlines (NASDAQ:NWAC) to a "buy."
The reason for the buy, according to MarketWatch, is relative valuation. Since the end of 2004, rival AMR (NYSE:AMR), parent of American Airlines, has risen 17%. During the same period, Continental Airlines (NYSE:CAL) has fallen a modest 2.6% while Northwest has been in a steep 49% descent. The analyst doesn't see bankruptcy ahead, although the threat of one should help get wage concessions the airline says it needs.
The Associated Press reported last Friday that Northwest was going to save $2 million a year, starting June 9, by not providing "free" pretzels on its flights. When a discounter like Southwest Airlines (NYSE:LUV) says that it "simply refuses to follow the industry trend of charging for snacks," are you not ceding the marketing high ground -- and good word of mouth -- to low-cost carriers like Southwest and Motley Fool Stock Advisor pick JetBlue (NASDAQ:JBLU), which provide snacks with a smile?
Consider too, the value of threatening bankruptcy -- a carrot that Northwest has dangled here and there. UAL (OTC BB: UALAQ), patent of United Airlines, is in bankruptcy. While the company is announcing today that its mechanics union has agreed to a new five-year contract with significant wage concessions, the machinists have not settled and are threatening a strike. The prospect of bankruptcy might speed negotiations to a favorable conclusion, but labor relations are already strained in the industry. Bankruptcy threats may offer little assurance of speeding up negotiations.
You should also bear in mind that wage concessions are only one slice of an ever-widening pie. Airlines are faced with a host of structural concerns -- the opportunity costs of operating at unprofitable capacity levels and the inherently unstable price of oil (and its effect on earnings), to name a few.
Want a real scare? Read the first few paragraphs of Northwest's last earnings report:
- We lost money. Again.
- The results were disappointing. No kidding!
- We want to freeze current defined-benefits programs and introduce new ones. Ah, more employee unrest in the making.
- We need more wage concessions. Ditto that employee unrest.
This is the sort of short-term evil that purports a long-term necessity, but the prospect of a disgruntled (or striking) workforce does not bode well for Northwest's short-term valuation, either -- particularly given the highly competitive industry in which it operates.
We Fools buy an airline's stock if we see (or anticipate) its passenger seats being profitably filled. Analysts' mean estimates for Northwest this fiscal year and next foresee more losses. Without profitability on the horizon, this observer believes that there is no reason to buy this stock -- even if it's been in a downward spiral this year and the peak summer travel season is at hand. Northwest is cheap compared with its peers, but given the host of other structural concerns burdening the industry, it's not a gamble I'm willing to take.
These Foolish Takes on the airlines are ready for takeoff:
Fool contributor W.D.Crotty does not own shares in any of the companies mentioned -- and prefers peanuts to pretzels when traveling. Clickhereto see the Motley Fool's disclosure policy.
