America West Falls on Downgrade

Shares of America West Airlines AWA dropped after Bear Stearns downgraded the company to underperform from peer perform, warning investors that earnings estimates for the second half of 2004 will have to come down sharply.

With oil prices above $40 a barrel for the last two months, analyst David Strine cut his third- and fourth-quarter estimates on America West, establishing the lowest outlook on Wall Street. Strine now expects the carrier to lose 60 cents a share in the third quarter vs. the 2-cent profit expected by Wall Street, with a loss of 95 cents in the fourth quarter, below the 33-cent loss expected by analysts.

In reaction, shares of the carrier were down 16 cents to $6.67. The prediction for falling estimates is the latest sign that third quarter airline earnings may underwhelm, coming on the heels of last week's warning by AMR AMR, parent of American Airlines.

While America West faces near-term weakness, the analyst also cautioned that the company's competitive position is slowly eroding over the long haul, with cost cuts starting to plateau and the carrier unable to charge more in markets that it dominates.

"Unlike Delta DAL in Atlanta, American in Dallas, or United in Chicago, America West is not generating fare premiums in Phoenix or Las Vegas, the cities where it has the largest presence," said Strine, in his research note. "We believe this is due to the large low-cost carrier overlap in these markets."

In Phoenix, Bear Stearns estimates that 56% of the available seat miles, or capacity, flown by America West is subject to low-cost competition while in Las Vegas, 56% of America West's capacity overlaps with a single competitor: Southwest Airlines LUV.

Ultimately, the analyst believes, America West's costs aren't low enough to offset the low ticket prices, prompting Tuesday's downgrade.