Airlines See Steady October

"October's load factor at American was slightly better than our estimate for the [fourth-quarter] total," said William Greene, airline analyst at Morgan Stanley. "As we expect traffic trends to pick up in November and December, we see no reason to change our above-consensus estimate."

Low-cost carriers and regional carriers continue to outperform their network rivals, posting much larger traffic increases, even as they rapidly expand capacity.

On the low-cost front, Southwest Airlines (LUV) said traffic increased 5% from last October, while capacity rose by 3.9%, driving load factor up 1.1 percentage points from last year to 63.6%. AirTran (AAI) said traffic increased 33.6% and capacity grew by 21%, driving load factor up to 69.1% from the year-ago 62.6%.

Regional carriers continued to show explosive year-over-year growth, with ExpressJet (XJT) announcing traffic increased 58.5% against a capacity increase of 43%, putting load factor at 70.3%, up 7 percentage points from last year. Mesa Airlines (MESA) said October traffic rose 58.5%, with capacity up 39.9% and load factor coming in at 66.7%.

With these results largely expected by analysts, investors haven't been quick to snap up airline shares, some of which have quadrupled from their prewar March lows. Indeed, the rally in airline stocks appears to have stalled in recent weeks, as investors realize that the fourth quarter of 2003 and the first quarter of 2004 won't be nearly as profitable as the third quarter was.

Stalled Recovery: A Buying Opportunity? Since March, airline stocks have been on a tear but investors are starting to take profits
Carrier	Mar. 11 to Oct. 9	Oct. 9 to Nov. 4
JetBlue	189%	-20.6%
AirTran	257	-16.1
Mesa	295	-12.7
Delta	118	-5.1
Continental	402	-3.7
Amex Airlines	171	-0.3
Southwest	56.2	0.5
American	834	1.2
ExpressJet	125	3.7
Northwest	90.6	28.7
America West	504	36
Source: Baseline

On Tuesday, investors continued to sit on the sidelines and wait for better news, with most airline stocks posting small losses. The network airlines bucked the trend, with Continental gaining 12 cents, or 0.9%, to $13.63, while American rose 24 cents, or 1.3%, to $19.04. In the low-cost space, Southwest fell 13 cents, or 0.7%, to $18.72, while AirTran dropped 8 cents, or 0.5%, to $16.50. Among regionals, Mesa fell 7 cents, or 0.7%, to $10.43, while ExpressJet dropped 37 cents, or 2.4%, to $15.17.

As David Brine, airline analyst for Bear Stearns, noted, "for the airlines, in-line hasn't seemed to be enough for the market to get truly positive," arguing that when yields finally recover, airlines will have a great deal of leverage. And the economy set to improve, some analysts have been advocating buying shares into weakness to take advantage of the pending recovery.

"We believe that the recent round of profit taking is an opportunity to invest in a recovering industry," said Jeffrey Kauffman, airline analyst for Fulcrum Global Partners. "Many investors who have year-to-date gains in this space have been reassessing their holdings, in light of the performance year, which we believe has put pressure on shares."

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