Neidl: Airlines' High Load Factors 'Taxing the System'
DEBORAH MARCHINI, CNN ANCHOR: Among the very many airlines that will be reporting results today are Continental, Southwest and also America West. My guest this morning believes this could be a record quarter for the airline industry, though some challenges do remain. He is Ray Neidl from ING Barings Furman Selz. Great to have you back with us this morning.</s>RAYMOND NEIDL, ING BARINGS FURMAN SELZ: Good morning.</s>MARCHINI: This is an industry basically beset by change, the ones that have made the biggest headlines have been the mergers announced of late. How many of these deals are going to come to fruition?</s>NEIDL: My best guess is probably none at this time. It's going to be up to the Justice Department to determine if they want the industry to consolidate or not.</s>MARCHINI: OK, what about British Air and KLM?</s>NEIDL: That might stand a little bit better chance. Remember, over in Europe, it is easier for companies to merge within the European common market.</s>MARCHINI: OK, from reading your research, I know that you think that fuel prices perhaps may not be as big a problem for the airline industry as customer relations?</s>NEIDL: Well, fuel is a problem short term, and when we say this may be a record profit, that is ex-fuel. It's not going to be a record profit, fuel prices are just too high. But airlines have done a very good job in putting through price increases earlier this year to cover a large part of the higher fuel prices.</s>MARCHINI: Hasn't discouraged anybody from flying, though?</s>NEIDL: Demand is very strong, and that is what has allowed the airlines to jack the prices up.</s>MARCHINI: How about the service?</s>NEIDL: I think the service is commendable considering the massive amount of people flying. When you're flying at load factors of 80 percent you are really taxing the system.</s>MARCHINI: Do you think that taxing the system in that way is going to perhaps prove a problem for the airlines down the road, they're certainly getting bad publicity?</s>NEIDL: Yes, it's a bad problem right now, that combined with bad weather in the month of June has caused a lot of cancellations, delays, but I think the really big problem is the air traffic control system. It really does have to be upgraded if we're going to fly the masses around.</s>MARCHINI: We need better, what, air traffic control, or we need more and bigger airports, because nobody wants to live near an airport?</s>NEIDL: You need both, you need to improve the infrastructure on the ground, but it's very important that the air traffic control system be upgraded, the computers, more money being spent, and that way you could space airplanes closer together and transport more people, either that or airlines may end up raising prices more.</s>MARCHINI: Yes, exactly, and I don't think anybody would be too happy with that. You referred in your report to the perception out there among customers that aircraft have become human mailing tubes. I just wonder what the fallout from that has got to be?</s>NEIDL: Well, the thing is if you've flown lately you never see an empty airplane. It always seems like it is 100 percent full, but load factors are averaging close to 80 percent. And when you've got consistent traffic like that, you wear your assets out, and you wear your people out.</s>MARCHINI: No question about it. Speaking of wearing your people out, we saw United Airlines hurt a little bit by kind of a pilot slowdown earlier this year. What's your sense about labor and the airlines right now? how are they doing? and do they face potential labor hurdles down the road since they've posed such problems?</s>NEIDL: Well, United is being taught a lesson about their pilots. They just came out of their Aesop (ph), they're in contract negotiations, and the pilots are showing them who runs the airlines.</s>MARCHINI: Exactly. Let's ask about which of these companies you think are likely to perform the best and might make the best investment for shareholders right now?</s>NEIDL: Well, in the short term for this quarter, I really think that you might see airlines such as Northwest, United and American beat analysts' forecast. On the other and, you will probably see Alaska Air come in very weak. They were relatively on hedges as far as fuel goes.</s>MARCHINI: Looking at that screen, we see UAL down a lot, while the others are up quite a lot, their year-to-date performance. But that basically is because of the pending takeover of USAir, right?</s>NEIDL: Right, airlines or companies that are the acquirers tend to get penalized. American also, in my opinion, is being penalized right now.</s>MARCHINI: Do you favor Southwest?</s>NEIDL: Southwest is still my very strong buy, and it's the only really true growth story in this business.</s>MARCHINI: And Continental has really done incredibly well, a turning point?</s>NEIDL: The management at Continental have done a great job in turning that airline around, both employee relations and service.</s>MARCHINI: Ray Neidl, ING Barings Furman Selz, it is great to talk to you, thank you so much for coming in today, putting some perspective on what we can expect to hear from these companies.</s>NEIDL: Deb, thank you.