USAir's stock is at a high point in its rough ride


The airline business has been one jarring ride after another for Arlington, Va.-based USAir Group during the past three years. But now the financial markets, at least, foresee fairer weather.

In a soaring market for stocks, and airline stocks in particular, few have flown higher than USAir. Since the beginning of the year, its share price has gone from $15.75 to $22.375, a 40 percent rise. That tops gains of 39 percent for Delta, 34 percent for United and 26 percent for American.

The surge appears against a woeful backdrop. Even optimistic forecasts by security analysts show the company losing money this year.

And USAir carries some heavy emotional baggage that has undermined its reputation among both investors and tourists.

Its planes were involved in fatal accidents in September of 1989 and last month. And efforts to integrate the mid-1980s purchase of two major regional carriers, Piedmont Aviation and PSA Airlines, proved disastrously insufficient.

At its peak in mid-1989, when airline acquisition fever was in the air, USAir's shares sold for $51.50, but by last December they had fallen as low as $13.875.

In January, USAir took remedial steps of the most painful kind. To excise unprofitable operations, it abandoned six former PSA West Coast destinations and reduced flights to Baltimore and Cleveland.

Furloughs and layoffs last August and in January cut 6,000 people from the company's 52,000-worker payroll. Scheduled plane deliveries have been deferred, older models in the fleet retired, and planned new routes postponed.

"They cut costs well and didn't dally around," said John Latanzio of Steinhardt Partners, a New York investment group that holds more than 5 percent of the company's shares. The group indicated in 1989 that it might seek control of USAir but contends it had no intention to do that.

Despite cost-cutting measures, USAir was far from optimistic about its own prospects for a turnaround.

In a late January announcement that included news of his impending retirement, Chairman Edwin Colodny said most of the bleak circumstances of 1990 -- including soft traffic, a weak economy, high fuel prices and widespread fare discounting -- "continue to be present. It is unrealistic to think the airline industry economic environment, which is adversely impacted by the gulf war, will change significantly in 1991."

Even with the war over, the recession continues to hurt travel and limit potential price increases. Asked about USAir's recent share performance, Geoffrey Dan of Smith Barney shrugged.

"You got me," he said. "We're in a bull market, and people are willing to look on the positive side. It may not be any deeper than that."

Still, if the prognosis on USAir isn't good, at least now it doesn't appear to be getting worse. During 1990, it lost $10.89 a share.

According to the I/B/E/S database of the brokerage Lynch Jones & Ryan, security analysts estimate the airline will lose $1.90 a share this year and next year actually will make a profit -- its first since 1988 -- of $1.60 a share.

Competitively, USAir's position has been enhanced by the demise of Eastern, its biggest East Coast competitor. Eastern overlapped on 1,400 routes and pushed aggressive price-cutting, which thrilled passengers but vexed carriers.

With the cessation of the gulf war, travel has begun to pick up on international routes and in a few domestic markets, USAir Executive Vice President Patricia Goldman said.

And the war's end has had a profound impact on fuel prices, the airline's largest expense after labor. USAir estimates each penny shift in fuel costs has a $13 million annual impact on costs.

The airline spent an average of 55 cents a gallon last July and $1.04 during the fourth quarter, Ms. Goldman said. Recently, prices have been moving down, but they are volatile, shifting by as much as a dime a day.

If USAir can begin to transport passengers at even a small profit, the turnaround in its bottom line, and its share price, could be substantial.

Daniel Hersh, an analyst at Kemper Securities, reckons that if USAir could produce margins of just 2.5 percent -- and in past years it'sdone as well as 6 percent -- earnings could reach $3.50 a share and the stock price $35.

"I'm not saying its going to happen and I'm not recommending it, but there's a lot of leverage because of their revenues," he said.

The airline's balance sheet is adequate and its fleet modern. From an investor's perspective (though not a passenger's) the airline's domination in Pittsburgh, Charlotte, N.C., and Baltimore are strong assets. And recently (at least before the February crash) its operating record had gone from awful to estimable. For instance, its on-time record, previously among the worst in the industry, has in the past six months been near the best. Its passenger complaint ranking has similarly improved.

Its real savior, though, may not be travelers but an overseas airline that would like to scoop up USAir's almost entirely domestic route structure. About 40 percent of all airline traffic occurs within the United States and USAir could be a non-overlapping extension, providing excellent feeder channels for international flights, Mr. Hersh said.

Lufthansa, British Air, and Air France all have been mentioned by various investors. But a foreign purchase would have to get by tight federal restrictions on overseas ownership of airlines. And at the moment, despite high stock prices, the industry worldwide is posting poor financial results or losses, making a bid unaffordable.

"The bottom line is [USAir] may have value in the future, but I don't see anything imminent," said Mr. Hersh. "No one has cash."

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