A Wall Street Transcript Interview with Ray Neidl, Senior Equity Analyst at Calyon Securities: Significant Margin Growth Available to Niche Airlines

67 WALL STREET, New York - November 15, 2012 - The Wall Street Transcript has just published its Industrial Equipment, Aerospace and Defense Report offering a timely review of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Commercial Aviation and Energy Expenditures - Industrial Restructuring - Emerging Markets Penetration - Heightened M&A Activity - Future Growth and Market Share Gains - Increased Commercial Aircraft Production Rate - Defense Budget Uncertainty - Growth Opportunities in Data Security -

Companies include: Boeing Co. (BA), EMBRAER - Empresa Brasileira d (ERJ), SkyWest Inc. (SKYW), Republic Airways Holdings Inc. (RJET), Alaska Air Group Inc. (ALK), Hawaiian Holdings Inc. (HA), JetBlue Airways Corporation (JBLU), Allegiant Travel Company (ALGT), Southwest Airlines Co. (LUV), Copa Holdings SA (CPA), LAN Airlines S.A. (LFL), GOL Linhas A?reas Inteligentes (GOL), US Airways Group, Inc. (LCC)

In the following excerpt from the Industrial Equipment, Aerospace and Defense Report, an expert analyst discusses the outlook for the sector for investors:

TWST: So even with a tough economic environment, airlines are able to forge ahead and change their fleets?

Mr. Neidl: Yes, in the U.S., we are really divided into a couple of different sectors. You have the regional sector, which is a big question mark right now. But among the major carriers, you have the old legacy carriers - the hub-and-spoke carriers - that still are heavily leveraged, have been through bankruptcy, but have a lot more efficiencies now in their operations and they have management that is bottom-line financially oriented rather than going just for market share.

And most importantly, you have a reduced number of airlines through consolidation, and previously to that, liquidation. We are really down to four of them, and shortly we may be down to three, if US Airways (LCC) is successful in their acquisition of AMR. Furthermore, you can't overemphasize the importance of these developments because they've been able to eliminate secondary or smaller hubs like Cincinnati and Memphis, and these type of hubs were expensive to operate. They were small, and then in an economic downturn, they initiate ticket discounting just to keep traffic flowing through them. By eliminating these expensive hubs and just concentrating on the super hubs, because there are less major airlines, the airlines can operate that much more efficiently. Unfortunately, for the regional sector, this played a big part in these smaller hubs and with these hubs downsized or gone, the need for regional services has been reduced, which is why the regional sector is restructuring.

As far as the major legacy carriers go, they are in the process of, I think, being able to make money in good times or bad, but they have to prove themselves over the next couple of years to perk investor interest. Further, I believe they have to continue to deleverage to get a higher multiple on their stock price.

On the other hand, we've had a very profitable growth sector develop - what I call niche airlines - but they are anything but niche airlines. They are quite large carriers, and they include airlines like Alaska Air Group (ALK), Hawaiian (HA), JetBlue (JBLU), Allegiant (ALGT) and Spirit Airlines (SAVE). All are growing fairly rapidly in their particular niches.

For instance, Hawaiian has a niche of flying people to the Hawaiian islands, though they face competition and limited growth from the mainland U.S., but nevertheless there is still some growth there for the airline going into new markets. They also run interisland, where there is no growth, but they more or less have close to a monopoly. But the big area for growth for them is to Asian points - Japan, where they just recently started services; in particular, Korea; and eventually, China - and that represents big growth and profitable opportunity for them.

You have Alaska Airlines, which is really growing and dominating the western coastal area of the North American continent. You've got Allegiant, which has a very unique model, which in combination of a charter schedule service going into very small communities that have lost your scheduled service because of the fallback of the regional airlines. You have got JetBlue, which is restructuring themselves. It's not only growing JFK in New York but growing Boston as a business market and growing the Caribbean, where American has been pulling back as a leisure market. And you've got Spirit Airlines, which is growing at around 20% a year with a very unique product, where they charge you for just about everything beyond the ticket, to keep ticket prices low, which appeals to be a very certain segment of the economic market toward the bottom end of the small business - the infrequent traveler seems to like that product.

So you've got different airlines that have different niches that they are attacking, and so far, it has been very successful. So far, the growth has been good. The margins are margins that you don't usually see in an airline, and probably, there is more significant growth available to these carriers.

Finally, you've got Southwest (LUV) out there as not the only low-cost, low-fare carrier any longer. They are quite large, but wisely they have curtailed growth as they restructure themselves and try and absorb their recent acquisition of AirTran. So Southwest has to define their model in a new industry environment and to achieve a targeted ROIC before they begin growth again.

We have a much more efficient legacy industry. They are competing against on the one hand, but on the other hand, they are facing larger and very efficient, low-cost niche carriers that are going into some other markets.

TWST: And where are we in this whole restructuring? Are we still in the early days or is it well along at this point?

For more of this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.