Air-fare discounts produce a bumpy ride for airline investors

Investors who boarded airline stocks at any point in the last four months have been treated to a pleasant gain in altitude. But last week the seat belt sign blinked on. The champion of steady fares, American Airlines, announced plans to slash coach fares as much as 70 percent.

The result: a severe downdraft on the Dow transportation index. Sell orders spilled out on the trading floors as other major airlines immediately matched the American cut.

Although American's price cuts are drastic, it is not uncommon for carriers to lower fares this time of the year. Fewer passengers fly during the winter months, and offering cheaper tickets is one tactic used to prevent losing market share.

But lately discounters such as People Express, Continental, and Braniff have been elbowing their way into major routes long held by full-service carriers. And although American denied any such intent, some analysts are concerned that an all-out fare war is being launched by this subsidiary of AMR Corporation. Such a battle occurred in 1982, with a disastrous effect on earnings.

Brokerage analysts are split on whether to go for the parachutes or stay in airline stocks for the ride.

For example, Salomon Brothers and First Boston Corporation are now telling clients to bail out. Kidder, Peabody & Co. sticks by a sell signal issued weeks ago. But Prudential-Bache Securities and Oppenheimer & Co. see the dip as a buying opportunity.

At Merrill Lynch, market analyst Hans Schueren says airline issues were overbought and due for a tumble. While the transportation index (which has climbed 4 percent already in 1985) tends to be more volatile than other indexes, Mr. Schueren says the airline sell-off ``was a little too panicky. I don't think these stocks are going to head down too much.''

Schueren's confidence in airline issues is tied to short-term bullishness for the stock market as a whole. In fact, the Dow Jones industrial average chalked up a second week of gains, finishing the week at 1,227.36, up 9.27 points. And the New York Stock Exchange was busy: in four out of five days, more than 100 million shares were traded.

But if you were just watching the Dow Jones industrial average you missed the real action. In January, the average has risen about 1.4 percent, and the Dow composite is up almost 2 percent. But the NASDAQ over-the-counter industrial average has risen nearly 7 percent, and the composite is up by 5.5 percent since the start of the year.

In fact, while the Dow recorded three slight drops this past week, the broader indexes continued to rise. Advances have led declines for ten consecutive trading days. The last time that occurred was just before the August 1982 rally.

Breadth has been the missing ingredient for some time now, and technical analysts like the signals they are getting. ``Secondary stocks are acting better than at any time in the last 18 months,'' says Ricky Harrington at Interstate Securities Corporation, Charlotte, N.C. ``That's a good sign for the future.''

Also, it seems the Dow has been running into what technicians call a psychological resistance point at about 1,240. ``For the last six months every rally that reaches this point gets turned back,'' Mr. Harrington notes.

At First Boston, chief market analyst Siresh Birud sees the return of secondary issues as a natural rebound after a long period of disfavor. Morever, the economic climate makes them more appealing to investors.

``We're in a very moderate GNP growth period in '85 and '86,'' Mr. Birud says. ``In this kind of an economy you have to ask, `What can grow better than the overall economy?' Obviously smaller-capitalized companies might experience better growth than the large caps.'' He adds, ``The big caps, the blue chips, are almost at their 1983 peaks. The small caps are at least 20 percent below June '83 peaks.''

Birud is recommending purchases of technology stocks (including the well-capitalized companies), financials, and transportation (trucking and shipping) issues -- airlines were just scratched from his buy list. Over the long run he likes electric utilities, but these stocks have a low beta, or volatility factor, and would not be expected to rise as sharply as the overall market if a rally should erupt.

Birud, along with Schueren at Merrill Lynch, say the Dow Jones will move to new highs within the next month or two.

To confirm the learned assessment of these professionals, one could draw upon some Wall Street folklore. According to the ``Super Bowl gauge,'' if San Francisco won Sunday's game, the market will rally. But maybe the wisest course is to do what most football coaches counsel, ``stick to the fundamentals.''