ExpressJet IPO Can't Keep Airline Sector Aloft

Another successful IPO couldn't keep the airline sector from heading south Thursday.

ExpressJet Holdings XJT, a regional carrier spun off from Continental Airlines CAL, jumped as much as 8% in its New York Stock Exchange debut. But airline stocks followed the broader market lower after a small plane hit the Pirelli tower in Milan, starting a fire in the 30-story building and briefly raising fears of a terrorist attack. Big airline stocks dropped between 4% and 6%.

The vice president of the Italian Senate, Domenico Fisichella, said the crash was "probably an accident," the Milan newspaper Corriere Della Sera reported on its Web site. The Associated Press said the pilot radioed an SOS before hitting the building. Nonetheless, investors used the opportunity to lighten up on profit-starved airlines, which continue to struggle with weak pricing and overcapacity in the aftermath of Sept. 11's attacks.

Thursday's developments overshadowed first-quarter earnings reports at big carriers Southwest Airlines LUV, which posted a sharply reduced profit, and US Airways U, which said it would become the second airline to seek a government bailout. Both saw their shares fall.

The ExpressJet offering comes on the heels of last week's boffo debut of JetBlue Airlines JBLU, which jumped 67% on its first day of trading. Together with a series of weak earnings reports from the established carriers, the deals have raised investors' hopes for a new flock of low-cost, regional carriers heading toward the public markets. Northwest Airlines' NWAC Pinnacle Airlines and Republic Airways are expected to hit the market later in the year.

ExpressJet's 30-million-share offering, managed by Salomon Smith Barney, was expected to net $480 million -- the biggest airline public offering since China Southern Airlines ZNH bowed in 1997. The regional carrier's stock opened at $17.10, up 6.8%, from its Wednesday evening pricing at $16, and around midday was up 3% at $16.50.

Aside from ExpressJet's IPO, however, news in the airline sector wasn't pretty. Southwest became the first big carrier to post a profit after Sept. 11, posting first-quarter earnings of $21.4 million, or 3 cents a share -- in line with analyst estimates, according to Thomson Financial/First Call. Its stock fell 71 cents to $18.29 but has recovered somewhat in recent trading to $18.58.

Pricing and capacity continue to be key issues for airline carriers. With weak demand, especially for business travel, and too many seats, airlines are having a difficult time raising prices from reduced post-Sept. 11 levels. Continental's bid to raise prices last week failed when Northwest refused to go along.

While Southwest said it expected profits to steadily improve, it said the second quarter will be a challenge. "Earnings for second-quarter 2002 probably will fall well below last year's profit of $175.6 million, primarily due to the continued weakness in demand for air travel," said CEO James Parker, who did not provide specific guidance.

But Southwest's 82.3% stumble in profits looks positively bright when compared with Thursday morning's earnings release from US Airways. The struggling carrier announced a first-quarter loss of $269 million, or $3.97 a share. That was better than the analyst-consensus $6.08 loss, according to Thomson Financial. All the same, revenue came in at $1.7 billion -- a half a billion dollars lower than the year-ago quarter. The stock was down 30 cents to $5.90 around midday.

"The results we are announcing today are not only extremely disappointing, they are unacceptable," said President and CEO David Siegel. To lower costs, Siegel said the company would restructure and seek help from the federal government -- applying for a loan from the Air Transportation Stabilization Board. US Airways would be the second major carrier, after America West AWA, to apply for the federal loan.