Some see airline stocks as just the ticket

``In three years there will be three airlines, and it'll cost you $10,000 to fly to California,'' a New York analyst deadpanned recently. Hyperbole, of course. But a long-term investment in a few choice airlines does look rather tempting to some analysts now.

Assuming pending mergers get approved, five carriers (Texas Air, United, American, Delta, Northwest) will control 70 percent of the airline market.

At present, the earnings forecast for these carriers is remarkably free of inclement weather.

``The earnings outlook for the next six to nine months is better than I've seen in a long time,'' says Louis Marckesano, airlines-watcher at Janney Montgomery Scott in Philadelphia. ``And I've been following the industry for 25 years.''

On the revenue side, passengers are filling planes, and ticket prices are edging higher.

With a foundering People Express nearly tucked under Texas Air's wing, ``the impetus for lower fares disappears,'' Mr. Marckesano says. ``Over the last four or five years, People Express has put pricing pressure on everyone.''

He figures Texas Air will be too busy with its debt-laden balance sheet over the next year or so to start an all-out fare war.

On the expense side, fuel prices are down 35 percent from a year earlier. Two-tier contracts are bringing labor costs steadily lower. Consolidation continues to reduce the overall work force.

Marc Klee also predicts ``spectacular'' earnings gains. But the portfolio manager of the National Aviation & Technology mutual fund concedes that a dismal first half of 1986 will make the earnings comparisons unusually strong.

Still, he bluntly states: ``I don't think any airline, and I mean any, will underperform the market over the next two, possibly four, quarters.'' The nothin'-but-blue-skies forecast hasn't been lost on investors. Standard & Poor's airline index has soared some 25 percent since mid-July. Meanwhile, the S&P 500 has barely lifted out of ground effect, with a 4.5 percent gain.

Last week, the broad market averages ran into selling pressure as the Commerce Department reported lower retail sales in October and an uptick in wholesale prices. The Dow Jones industrial average lost 12.94 points last week, closing at 1,873.59. And takeover talk continues to dominate trading action.

E.F. Hutton, for instance, failing to get its $55 a share buyout price from Shearson Lehman Brothers, says it is not for sale. But rumors of suitors persist. Revlon bid $65 a share to take over Gillette. Merger speculation also pushed up shares of Bally, Lockheed, Stop & Shop, and Borg-Warner.

While more mergers remain a distinct probability, it's the improving fundamental outlook that is putting airspace under airline stocks - and Marckesano predicts continued gains.

``Shares of most bigger carriers will rise 20 percent over the next 12 to 14 months. Delta and US Air could see a 40 percent price jump.''

But the optimism of Mr. Klee and Marekesano isn't universally shared. Paul Schlesinger, an analyst with Drexel Burnham Lambert, eschews all the airline stocks at these prices.

``The group had a nice run because traffic was better than expected,'' he says. ``But we think that improvement is adequately reflected in stock prices.''

Furthermore, as American opens its new Raleigh-Durham, N.C., hub, Delta expands its Cincinnati hub, and United bolsters its Washington, D.C., hub, ticket ``pricing competition will intensify.''

Fare cuts by Contintental on its Denver-Chicago route, coupled with expected December and January cuts by Eastern, Pan Am, and TWA to fill seats on Florida flights, prompted Oppenheimer & Co.'s Bob McAdoo to issue a special report last week: ``We do not believe the fare wares are over.... It may be a good time to pare back positions across the group.'' Mr. McAdoo also thinks Texas Air will cut People Express fares to beef up its cash flow.

But Klee, with 40 percent of his fund in airline stocks, isn't ruffled. ``We'll always see temporary fare skirmishes. Nothing gives you free publicity like a fare cut. But the discounting will be limited. In general, fares will rise.''

One of Klee's favorites is UAL Inc. (United). Because of a rough year, earnings are expected to reach only about $1.25 a share.

But ``United could easily earn $6 to $7 per share next year,'' he says, and, ``assuming the economy hangs in there, $10 a share in '88. On that basis, UAL's selling at eight times '87 earnings and six times '88 earnings, while the market's now at about 13 times 1987 earnings.''

Klee also has a sizable position in NWA Inc. (Northwest). The Oct. 1 merger with Republic is not going smoothly and passengers are complaining.

But Klee argues this is the time to buy. ``By mid-'87, the economic justification will be very evident. Northwest is extremely well managed.''

For the long haul, Marckesano at Janney Montgomery likes Delta, which recently acquired Western Airlines.

The purchase vaults Delta, which had primarily been a Southeast and Eastern Seaboard carrier, into the national airline ranks by giving it two new hubs west of the Mississippi.

``Delta's undervalued,'' he says. ``It'll earn $5 to $6 per share over the next couple of years, which puts it with AMR [American] and UAL. But it's selling for about $10 per share less.''

But Oppenheimer's McAdoo believes competition will undercut Delta earnings. He believes Eastern will grow stronger under Continental's former president. And the expansion plans of American and United will increase direct competition with Delta.

Finally, Texas Air makes nearly every analyst's list as a wild card.

``Two years from now it will either be a $100 stock or bankrupt,'' says Marckesano.

If all the mergers go through, Texas Air will be the largest, lowest cost-structured airline in the United States. The Houston-based airline giant will control 20 percent of the market.

But it carries a bulging cargo hold of debt: $4.5 billion to $5 billion - not to mention the daunting challenge of folding the assets of Frontier and the struggling Eastern and People Express carriers into their Continental operations.

But Klee points out that means ``there's tremendous duplication of facilities, equipment, and personnel, [with] lots of assets to be sold to pay down their debt. Plus they've got $1 billion in cash and a great management team.''

So Texas Air is a tough call. Bear in mind, however, that the airlines are classic cyclical stocks. They soar in a fair business climate. But if the economy itself hits turbulence, airline earnings have a tendency to obey the law of gravity.

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