Airline stocks have held steady despite news of an elevated terror alert, helped by optimism that the warning won't dent fourth-quarter earnings or the overall recovery.
Indeed, the first two months of the fourth quarter look solid, with the Air Transport Association announcing that industry traffic for November rose 4.9% on the year, following a 1.4% increase in October. And while the terror alert could suppress some travel demand in the near term, investors should use weakness to build positions, said Daniel Hemme, analyst at Prudential Equity Group.
"Given solid traffic results thus far in the fourth quarter of 2003, we believe risk-accepting investors should use equity weakness to build positions with the proposition of no near-term catastrophic events impacting forward demand levels," said Hemme.
Although Hemme said stocks could fall in the intermediate term, he said such fears are probably factored into stock prices, which have been relatively flat since peaking in early October.
On Monday, the Amex Airline Index closed at break-even, rallying into the closing bell after falling as much as 1.5% early in the session. Two carriers with exposure to international markets were the biggest losers:
, parent of American Airlines, dropped 8 cents, or 0.6%, to $12.72, and
dropped 16 cents, or 1.3%, to $12.32.
In Hemme's view, the terror alert level's rise to orange from yellow won't have much of an effect on fourth-quarter earnings, even though Tom Ridge, Homeland Security secretary, said "information indicates that extremists abroad are anticipating near-term attacks that they believe will rival -- or exceed -- the scope and impact of those we experienced in New York. Recent reporting reiterates that al Qaeda continues to consider using aircraft as a weapon."
According to Hemme, "The timing of the shift in warnings won't materially impact fourth-quarter results; however,
we view traffic fundamentals on an intermediate term to be at the greatest risk. We believe these risks continue to be reflected in airline equities, where values have remained largely flat."
With the alert coming so close to the holidays and with just a week left in the quarter, the chances that travelers will cancel their plans and push off travel plans are slim.
"The warnings came too late for people who may have wanted to change their plans. They're going to vacation spots or where their families are, and they will go ahead with those trips even though the terror alert level is high," said David Stempler, president of the Air Travelers Association, a trade group for frequent flyers.
Adjusting to Orange
Another reason why the increased terror alert level may not have a major impact on travel demand -- or share prices -- is that both business and leisure travelers are getting used to living and traveling in the post-Sept. 11, 2001, environment.
"Obviously it's going to be a negative, but we can't really quantify how bad it will be," said David Swierenga, economist at Aeroecon, an aviation consulting firm. "With the experience of Sept. 11, people are going to shy away from air travel, but on the other hand, with the security measures that the
Transportation Security Administration has put in place ... I think it's reassuring to the traveling public."
Studies from the Business Travel Coalition, which monitors the corporate travel environment, show that raising the terror alert level doesn't have the impact it once did. In a study from April 23, the BTC found that 75% of large corporate travel departments that had adjusted their travel policies due to the war in Iraq had returned to normal, while 92% had either lifted their bans on international travel, or were considering doing so.
"There was an immediate 30% decline in bookings during the first terror warning in September 2002. We're more jaundiced about the alerts now. We're hitting a slow period in January for travel, and if this holiday period comes and goes with no other activity, it will dissipate quickly," said Kevin Mitchell, president of the BTC.
"The offset, however, is this time around, Ridge is making a big statement about how obsessed terrorists are with using aircraft," Mitchell said. "That's going to be on people's minds. If an attack does happen or is frustrated, we may see that spike down of 30% reach 50% or 60%."
While the risk of a terror attack is very real, the impact is fading somewhat. According to Vaughn Cordle, analyst at Airline Forecasts, an airline investment research firm, hassles related to airport security and changing the alert level cost the airline industry $4 billion in revenue during 2002, a number that he estimates will fall to between $2 billion and $3 billion in 2003, despite the war in Iraq.
"The first had a major impact, the second had a major impact, but then it dampened out after that," said Cordle. "As we progress without events, people get comfortable. I think it will have some impact on business travel, but it will be a minor blip in the robust traffic recovery that's under way."
Elevations in the terror alert level tend to be short-lived. This marks the fifth time that the Department of Homeland Security has raised the alert level to orange from yellow since the alert levels were instituted in March 2002. The longest sustained period spent at orange was four weeks, while the U.S. was in the combat stage of the Iraq war.
Given the strength of Ridge's comments over the weekend, warning that the recent move to orange indicates the greatest threat to America's security since Sept. 11, 2001, the dangers are very real for the airline industry in the event of a worst-case scenario. But even as tensions run high, the near-term reaction from travelers has been a resolve to go about their business.
"One member was quite concerned, but as I walked them through the alternatives
to flying, none of them were really satisfactory. Even those who are expressing concerns are still flying," said Stempler. "This could all change, of course, if there's some kind of event. Things would turn on a dime."