Airline Shares' Descent Could Mean Bargains

With low-cost names like JetBlue, AirTran and Southwest (LUV Quote) planning massive expansions over the next four years, the competition will only intensify in 2004 as network carriers add back flights to keep that expansion in check.

Early skirmishes have favored the network names. Already, Delta and low-cost rival AirTran (AAI Quote) can claim victory in their shared hub city of Atlanta, causing JetBlue to pull service from the city, citing the stiff competition.

"The recent pre-announcements at low-cost carriers may suggest further downward earnings revisions are on the horizon for a number of airlines," said William Greene, analyst at Morgan Stanley, in a note. "We have heard from numerous major airline executives that they are finished shrinking their networks."

Because of these fears -- along with news that OPEC would push for higher oil prices in 2004, raising fuel prices, which are the second-largest expense for airlines -- investors have become spooked.

Since early October, airlines have been giving back the gains they put on over the summer, and Friday's action was no different. The Amex airlines were down 2.4%, led lower by JetBlue's fall of $5.19 to $26.19. Other low-cost names were down, too, with AirTran off 91 cents, or 6.8%, to $12.46 and America West (AWA Quote) down $1.57, or 11.4%, to $12.22.

But investors with a tolerance for risk and an interest in JetBlue and other names may want to keep a close eye on the slide. Given JetBlue's long-term growth prospects and the fact the company will remain a cost leader in the industry, Lehman Brothers analyst Gary Chase, who cut the company's price target to $34.50 from $41.50, told investors that a big pullback could represent a buying opportunity.

"We continue to believe in the JetBlue story and feel that investors may get a chance to buy a terrific franchise at reduced prices," said Chase, who is only one of two Wall Street analysts who rate the carrier a buy. "If the shares suffer significant declines, we would be inclined to buy opportunistically."