Despite Post-Rally Softness, Airline Stocks' Flight Plan Is Still Sound

The sector remains firmly on course, with Southwest (who else?) leading the way.
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OK, our move is now over.

Bell Atlantic

(BEL)

finally got all the phone lines installed correctly, so it's time to get back to work. And with one airline already out of the box with third-quarter earnings results, what better time to return to the fray?

First, a quick look at what's been going on in the industry. Last week, the airline sector had one of its best weeks this year -- if not

the

best -- as 14 of the 44 airline stocks we track posted double-digit gains on the week. Not just gains --

double-digit

gains. The action was so hot in shares of

Southwest Airlines

(LUV) - Get Report

that Sam Buttrick, the

PaineWebber

analyst who had just upgraded the stock to a buy the week before, promptly downgraded it to attractive because of the stock's recent 24% rise.

So, what was propelling this frenzy of buying activity? As

we said earlier this month, investors were locking in those anticipated spring profits early. At times like this, this sector really does act like a commodity -- not unlike buying wheat futures or pork bellies.

This week, however, those hot profits are being grabbed back, as Wall Street suffers from earnings angst, interest-rate jitters and, in the case of the airline sector, creeping crude-oil price fears. Translation? Most airline stocks have been on the negative side for most of the week.

Our take? Nothing to get excited about. Overall, things are staying on track, as far as we are concerned.

US Airways

(U) - Get Report

, our turnaround pick, has performed wonderfully well. Southwest is doing what Southwest usually does. Just buy it. Trust us, it will perform.

Shares of

Delta Air Lines

(DAL) - Get Report

still lag, but we continue to look for good things there. In the case of

UAL's

(UAL) - Get Report

United Airlines

, we do have a change to report. We may downgrade UAL from our top spot for one reason: Our analysis of the company's conversion of its employee stock-ownership program suggests that costs will be a bit higher than we had originally anticipated. As a result, we may bump it back a bit for the spring buying season.

American/Sabre/Travelocity

Last week,

Sabre

(TSG) - Get Report

announced that it will spin off

Travelocity.com

, its Internet-based travel agency, and merge it with

Preview Travel

(PTVL)

. The combined entity -- Travelocity.com -- will be among the 10 largest travel agencies online or off, and it will trade under a new symbol, TVLY, on the

Nasdaq

.

We're not sure this deal got the most bang for the buck for

AMR

(AMR)

shareholders. (AMR owns 80% of Sabre, the computerized airline reservation service that is ponying up $50 million and Travelocity's assets for the merger.) Preview shareholders are ecstatic -- and with good reason. Preview stock hopped up some 40% on the day the merger was announced, while AMR was up 10%. But with Preview shareholders getting a 1-for-1 exchange to Travelocity.com shares in the deal -- and with analysts saying shares in the new company could be worth as much as 35 -- we'd say Preview shareholders did very well in this deal.

But for AMR shareholders, who we think were expecting a nice bounce from a Travelocity IPO, the news is good long term, but about as exciting as a warm glass of milk today.

Sabre/AMR

Speaking of Sabre, let's also point out that just days before the announcement about the Travelocity/Preview deal, Sabre lost a chance at grabbing a big contract. Sabre officials had indicated publicly, as well as to analysts, that they were quite confident they were going to wrestle away from

Electronic Data Systems

(EDS)

a contract with

Continental Airlines

(CAL) - Get Report

. That didn't happen. Continental announced it was sticking with EDS.

Sources tell us that when it came right down to it, Sabre failed to get the contract for three reasons: US Airways' bad experience involving a cutover to a new Sabre system, Continental's concerns about just how well certain components of the Sabre package would work and concerns over Sabre's connection with American Airlines.

This feedback jives with comments we've heard from other airlines about Sabre. The incestuous relationship between Sabre and AMR needs to go away. From the perspective of AMR shareholders, as well as for the future success of Sabre as a standalone company, AMR should spin Sabre off completely. This would allow Sabre to manage and run itself as an information technology company, not as part of an airline. Such a move also would do away with those strange contract conditions that intrinsically link Sabre customers to AMR and its main subsidiary, American Airlines. In the recent contract with US Airways, for instance, the deal was sweetened by granting that airline warrants on Sabre stock. AMR also guaranteed cost overruns on the contract, as it does as a matter of course with most of Sabre Decision Technology contracts.

Boos and Hisses to AirTran

AirTran

(AAIR)

released third-quarter earnings, and while, operationally, we liked the airline's gains in revenue-per-available-seat-mile yield along with a drop in cost per available seat mile, we didn't like the fact that the airline's press release did not give the straight EPS figure for the quarter. The airline chose instead to give an EPS figure that included a one-time gain -- the cash settlement from the recent

ValuJet/SabreTech

litigation. Even in the financial reporting part of the release, the airline did

not

mention that the EPS for the quarter (

minus

the gain) was 8 cents. The only EPS figure mentioned in the release was 34 cents. Analysts had expected the airline to report 14 cents a share.

So, overall, results were far below expectations. Shares of AirTran dropped some 7% on the news yesterday, closing at 5.

Is Mesaba's Stock Haunted?

We're putting out an APB for any information about what's going on with shares of

Mesaba

(MAIR)

of late. A longtime reader sent us a note last week and wanted to know who the heck was shorting it. We have no idea what's going on or who's doing it. But something is afoot. Last week, the stock was very heavily traded and continued to drop like a rock. This week, it began the week moving up -- but again, on very heavy volume. And this heavy trading activity has been at a time when most all other airline stocks have been fairly lightly traded. This is the third week the stock has behaved erratically. Anyone know what's up?

Holly Hegeman, based in Barrington, R.I., pilots the Wing Tips column for TheStreet.com. At time of publication, Hegeman held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. You can usually find Hegeman, publisher of PlaneBusiness Banter, buzzing around her airline industry Web site at

www.planebusiness.com. While she cannot provide investment advice or recommendations, she welcomes your feedback at

hhegeman@planebusiness.com.