With major U.S. regionals and Pan American airlines in attendance at the latest Calyon Securities airline conference, Calyon Analyst Ray Niedl said while airlines such as TAM and COPA shine, U.S. regionals are in the process of redefining themselves. Related Story
“The regional airlines continue to move in diverse directions as the old system of cost plus contracts continue to fade,” said Niedl in his after-conference report, noting ExpressJet (XJT) faces the biggest challenge with 20 percent of capacity going into independent flying. Niedl also pointed to Pinnacle (PNCL) diversifying away from Northwest (NWA), Mesa (MESA), in Hawaii and China and Republic (RJET), in the larger regional jet area.
Niedl reported that none of the regionals expected immediate consolidation or acquisitions amongst regionals, but indicated they were concentrating more on internal expansion. “We believe that there may be constraints for growth opportunities until we reach the next round of ‘scope clause’ liberalization where a greater number of larger RJ's are allowed in pilot contracts,” he concluded. “Although there is some potential for the time being, we remain generally neutral in this area.”
Pinnacle, Republic, Mesa, ExpressJet, American Eagle and Midwest Airlines (MEH) were all in attendance along with Air Canada, Jazz, WestJet, TAM and COPA as well as AerCap.
“The Latin/Brazilian airlines are continuing on their aggressive growth trends which it appears will translate into comparable growth in EPS,” said Niedl. “It is an exciting sector and we believe investors were attracted to the potential for the companies that attended from this group which included TAM and COPA. We believe this sector will remain hot.”
Niedl noted the Canadian market has been reduced to two airlines – Air Canada, with its Air Canada Jazz partner, and WestJet. “WestJet continuing its aggressive domestic growth plans into the eastern provinces and Air Canada is concentrating on their variable pricing model,” he said. “We believe that there is room in this market where both carriers can prosper as long as they keep unit costs in check. Despite disappointing stock performance by Air Canada, we believe the two Canadian carriers remain interesting for investors.”
Finally, he reported that while Midwest is determined to remain independent with a new plan to increase yields, (see related story) it is resigned to the possibility it will have three new directors on its board who support AirTran’s hostile takeover.