New Investors Plow Cash In Airline Stock Offerings

Financially struggling airlines are taking advantage of renewed investor interest in their sector by selling new shares.

The parent of tiny Allegiant Air, based in Las Vegas, said last week it will go to the market with an IPO and expects to raise $100 million. The 9-year-old carrier flies 21 MD-80s, mostly on routes between Las Vegas and Orlando and 35 smaller cities. It also operates charter flights.

At the other end of the spectrum, No.1 American Airlines parent AMR sold $400million worth of new shares just before Allegiant signaled its IPO. Hawaiian Air, which emerged from Chapter 11 bankruptcy last summer, floated $30million in new shares late last month.

Airlines need the money. The domestic industry has lost more than $40billion in the past five years, and bankruptcy reorganization has become almost routine. Most are saddled with junk credit ratings that significantly inflate the cost of borrowing.

Yet stock investors have been willing to look past that and the airlines' recent high fuel bills to more promising aspects of the business: reduced operating costs, rising fares and strong demand for air travel.

Since Sept. 30, the Amex Airline index is up 14.3%, vs. a 2.4% increase in the Standard & Poor's 500-stock index. Both indexes have been trending down in recent weeks.

Analyst Ray Neidl at Calyon Securities says the recent stock issues probably aren't the last.

His picks as the most likely to follow: No.6 Continental, No.7 US Airways and No.2 United Airlines.

Neidl says the big airlines need the money from stock sales to begin repairing balance sheets damaged by heavy borrowing after the Sept. 11 terrorism.

AMR has more than $4billion in cash on hand but also more than $20billion in debt. It faces debt payments of more than $1billion in both 2006 and 2007. It also would be required to make large catch-up payments to its underfunded pension plans if Congress does not approve a relief measure.

Analyst Vaughn Cordle, an adviser to hedge funds and other big investors, says now is a good time for airlines to sell shares, but not necessarily for investors to buy them. He says several carriers' stocks aren't likely to rise much higher in the current cycle.

Going against the trend is the industry's perennial profit leader, Southwest Airlines. The maverick discounter said last week that it will buy back about $300million worth of stock. That's on top of $300million in shares bought earlier this year.

Cordle says Southwest, unlike most other carriers, doesn't need more cash. And the buyback, he adds, shows that management believes its shares are undervalued by the market.

Contributing: Roger Yu and Matt Krantz

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