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Fare Hikes Don't Necessarily Mean Share Hikes

Despite a likely industrywide increase in airfare prices, analysts caution that stocks are unlikely to take off immediately.

An industrywide

increase in airfare prices is almost certain to go into effect, but analysts cautioned that airline stocks are, nevertheless, unlikely to take off immediately.

"This is not a panacea. It just lessens the chance for another round of estimates cuts," said Kevin Murphy, an analyst with

Morgan Stanley Dean Witter

. "It continues to be too little, too late."

By Friday afternoon, nine out of the 10 leading carriers had taken

Northwest Airlines'

(NWAC)

cue, raising fares by as much as $40 on roundtrip flights.

The price increases are aimed at helping offset the negative impact of higher fuel prices, which have nearly tripled during the past year. Higher fuel costs, one of the biggest expenses for airlines, have exerted pressure on the carriers' potential profitability, forcing several of them to cut their earnings estimates for 2000.

While analysts and fund managers applauded the airlines for finally taking a step to address the jump in oil prices, they noted that a host of other factors could erode any increase in revenues that airlines are likely to get because of the higher air fares.

A roughly 4% increase in the average price of a ticket could discourage some travelers from flying. In addition, analysts said, as interest rates rise, the airlines need to be concerned about a slowdown in the economy, which would also cut passenger traffic. The general consensus is that the

Federal Reserve

will raise its short-term

federal fund target rate

to 6.25% by the end of the year, from 5.75%.

"These are the kinds of head winds the industry is facing," said Tim Moloney, an analyst with

Banc of America Capital Management

, which manages about $250 billion in assets.

On a positive note, Moloney said he was still "relatively bullish" on the airline sector. He noted that a 30% to 35% drop in airline stock prices from the highs reached last year made them more attractive at current levels, adding that an industrywide trend to slow the growth in the number of available seats could also restrict supply. Oil prices are also expected to fall.

Leaders of several members of the

Organization for Petroleum Exporting Countries

have indicated that they would support an increase in production when OPEC meets in Vienna on March 27. An increase in supply would likely help to push down prices, which have risen on the heel of dwindling reserves.

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Banc of America economists now see oil prices slipping to an average of $25 a

barrel

for 2000 and $21 to $22 a barrel in 2001.

Crude oil

, which recently reached a historic high of more than $34 a barrel, was trading at $30.89 a barrel midday Friday.

Moloney said that of all the airlines, he liked

Delta Air Lines

(DAL) - Get Report

and

Southwest Airlines

(LUV) - Get Report

the best. No matter what, he said, those two were the airlines that stood to perform well even if there were no industrywide fare increase to cover higher fuel costs.

Delta is considered to have the most aggressive fuel-hedging program, meaning that it has contracts to buy fuel at preset prices that are lower than the market rate. And Southwest Airlines, a discount carrier, tends not to follow the pack when other airlines raise fares. This means that it could benefit from a rise in passengers seeking lower fares, while still having the leeway to raise prices.

"They have plenty of room to increase pricing and their fares would still be at low levels," Moloney said about Southwest.

Some analysts were also bullish on Northwest, the nation's fourth-largest carrier, which had been the spoiler during other industrywide attempts to raise air fares, usually forcing its competitors to roll back price increases. Airlines generally move in tandem on ticket-price increases because of stiff competition in the sector.

Tom Longman, an analyst at

Arnhold & S. Bleichroeder

, raised his rating on Northwest to a buy from a neutral following the fare increase, on expectations that the company will be able to attain higher

yields

based on

revenue per passenger mile

.

"We were originally looking at yields of 3%; now we're looking at 4%," said Longman, whose firm did not do any underwriting for Northwest. "Going forward, we may see some increase in estimates."

But, he forecast, any such increases would only come later in the second quarter, if at all.