United Airlines Slammed By Oil

by Sacha Lichtenstein

10:34:00 AM September 29, 2000 GMT

United Airlines [UAL: NYSE] said before the bell Friday it would post a 3Q loss instead of an expected profit thanks in part to higher oil prices. Needless to say, the shares are going to descend a few thousand feet.

Prior to the announcement, analysts expected the airline to post a 3Q profit of $0.97 per share and a 4Q profit $0.63 per share. The airline said current woes could force it to suffer losses in the 3Q and 4Q as well. This dour prediction comes after United warned it would miss analysts expectations for the remainder of the year back in July.

This shouldnt come as shocking surprise, as United, which is in the midst of buying US Airways [U: NYSE] for $4.3bn, has been beset by tensions with its pilots. The pilots didnt want to work overtime, forcing the airline to cancel 25,000 flights over the last five months.

The company was able to resolve issues with its pilots last month, but that involved raising their pay by 10%, making them the best-paid pilots among all airlines. Now the airline is going into negotiations with its flight attendant union, which is angling for wages 5% higher than the highest in the industry.

United was also crippled by higher oil prices, which recently reached 10-year highs. The companys attempts to hedge against rising fuel costs didnt work as well as hoped. Jet fuel costs rocketed up 58% this quarter from year-ago costs, no doubt marring earnings potential.

Its a rough ride for the entire industry, with fuel and labor costs expected to rise 48% and 14% this quarter from the year-ago quarter according to analysts, while industry revenue is only expected to increase 10% this quarter.

The airline industry is also at risk if US economic growth slows. The industrys overall health is closely correlated to that of the overall economy. If there is less money to be had, people will simply not fly as much.

Market Timing

United Airlines [UAL: NYSE] shares are touching a four-year low on Friday. This stock has traded in a wide range over the past two years and so could conceivably bounce back in 2001 if the economic outlook improves. Over the next few months, however, United shares will continue to fly at a low altitude. IDEAglobal sees United falling to $40 and then $36 in the next four to eight weeks. Thats 13% off current prices

http://www.ideaadvisor.com/article/article.asp?aid=5449

-- Martin Thompson (mthom1927@aol.com), September 29, 2000

Answers

This news is a shock? Not! Wait until all of the many energy-intensive corporations announce 3rd quarter earnings warnings next month (many companies do not announce these until a few days to a week before release of the actual report). Industries such as paper, chemicals, trucking, railroads, mining, utilities, etc., etc., etc., where fuel costs are a major factor in their ability to operate, will have a lot of bad news to spread around--and, for Wall Street to consider.

I wouldn't be at all surprised to see a good-sized sell-off in the stock market next month--and I mean in 500-1,000 points per day increments.

-- JackW (jpayne@webtv.net), September 29, 2000.

I read on humanitarian.com some time ago that the US government was buying selected stocks through brokers in NY in order to prop the market up. This was orchestrated by Rubin Rubin the wizard of Treasury after he resigned. This article has been removed much to my chigrin because I wanted a copy for myself. I don't think you will see a drop in the Dow, however, when I peruse the stock prices I see a 50 to 60 percent loss in equity of major corporations such as Waste Management, UPS, Caterpillar, Pennoil, and Crown Cork from a year and half ago. I think the market has already seen a correction and the Dow is used as a propaganda tool for the general public. Also, short interest is at an all time high. Someone is betting the market is going to take a serious drop but the Dow will probably stay in a range of values.

-- David Williams (DAVIDWILL@prodigy.net), September 30, 2000.