Gawd, I love 'experts'
Sorry to interrupt the love fest here, but this article was in the local fish wrap a few days ago. Excuse me if it has been posted already. Notice how analysts manage to straddle both sides of the fence.
Saturday, December 18, 2004
Analyst views sale of Comair negatively
Its many woes would pull market value down
By James Pilcher
Enquirer staff writer
Just what is Comair worth, anyway?
Would it be enough for Delta Air Lines to pull a trigger on a deal or public offering spinoff that would turn its Erlanger-based subsidiary back into an independently-owned company?
Industry analysts say it's difficult to put a precise figure on Comair's worth.
But they say that on the open market, it would be much less than the $2.3 billion Delta spent for the airline in early 2000.
"They are not very attractive right now, and given the climate surrounding airlines in general and the regional industry,
they'd be giving away the product," said Ray Neidl, airline analyst with Calyon Securities.
Earlier this week, Delta executives openly said that the airline did not have to own Comair to get the benefits of a regional carrier, and that they were continually weighing those benefits against Comair's value as an asset.
Analysts have been speculating for several years about the possibility of Delta spinning off Comair to raise cash.
That speculation that came to a crescendo earlier this fall as cash-starved Delta teetered on the verge of bankruptcy.
On Friday, Delta officials declined comment and would not speculate on any potential deals or spinoffs involving any of its subsidiaries, which also include Atlanta-based regional Atlantic Southeast Airlines.
"Delta Connection is a key part of our network and business strategy," Delta spokesman John Kennedy said Friday. "But it's prudent that we continually evaluate how Delta Connection and other subsidiaries fit into the overall business strategy."
Regional airlines simply are not worth as much as they used to be, according to Neidl and other industry experts.
Neidl points to the fact that when Continental Airlines spun off its regional subsidiary unit ExpressJet in April 2002, it created a company worth about $1 billion, and raised $480 million. Now that company is worth just above $600 million.
Northwest was another major carrier to spin off a regional subsidiary when it held an IPO for Pinnacle in November 2003. That garnered Northwest just $271 million, with the stock selling below the expected range.
Father-son combination
And that's not mentioning some of the issues surrounding Comair that could frighten off potential investors, either public or private.
The airline, started by a father-and-son duo at the Cincinnati/Northern Kentucky International Airport in 1977, now has some of the highest labor costs in the industry. That's mainly because of its pilot contract. Comair pilots are among the highest-paid in the regional sector.
Most important, according to Neidl, Comair has no growth plan. Parent Delta told Comair earlier this year that it would not get any new planes in 2005 because its costs were too high, the first time in Comair's history that it will not add to its fleet. So it must make do with older planes while being unable to add new routes and more revenue. "That's a huge deterrent from anyone wanting to buy," Neidl said.
Comair also would still probably be tied to just Delta, unlike other carriers such as SkyWest that carry passengers for other airlines too.
"They are only out of one hub (Dallas) as well, and I'm not predicting that Delta will pull out of Cincinnati, but it increases the risk for a potential Comair investor," Neidl said.
The airline has a fleet that is starting to get older, which airline officials have previously said equates into higher maintenance costs.
Eighty-five of its jets were delivered before 2000, and several remain from as far back as 1993, when Comair became the first domestic carrier to use regional jets.
Still, Comair is one of the best-regarded airlines in the industry, and now has exceeded $1 billion annually in operating revenue, according to the Bureau of Transportation Statistics. It also is profitable, according to federal statistics, turning in an operating profit of $25.7 million, or 8.1 percent during the third quarter. Still, its operating profit margin has shrunk from more than 16 percent in the fourth quarter of 2003.
Remaking the model Even though Delta would not get back what it paid for Comair, it might be looking to shed itself of all but core operations as it remakes its business model, said another industry watcher, University of Portland (Ore.) business professor Richard Gritta
"They will still rely on (partnerships) to carry the regional and short-haul traffic," said Gritta. "But as they gear toward the long-haul routes where they can compete,
this might be the time.
"Now is the time to start making some moves if you are a major carrier if you want to survive."
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