Good Times for Aircraft Industry?

TRAVELERS may worry about the safety of the aging airline fleet in the United States. But not even the accident on United Airlines' Flight 811 out of Hawaii last week has discouraged investment analysts from recommending some stocks of major carriers and airplane manufacturers. It may even boost the airplanemakers' sales prospects, they say.

``It's estimated that there are some 7,800 jet aircraft now flying in the Western world,'' notes Peter Aseritis, an aerospace/defense analyst with Smith Barney, Harris Upham & Co. ``It's also estimated that half of those aircraft need to be replaced. That adds up to a lot of possible business for Boeing, McDonnell Douglas, and the European Airbus.''

Mr. Aseritis is bullish on Boeing Company, which does both commercial and defense manufacturing. But Aseritis maintains a ``neutral stance'' on three other major defense firms: McDonnell Douglas, General Dynamics, and Lockheed.

McDonnell Douglas is considered Boeing's major competitor within the US in commercial aircraft. The key factor for Aseritis is the respective mix of the two companies.

``Boeing is around two-thirds commercial business, one-third defense. Within the commercial sector, it holds a 55 percent to 60 percent share of all aircraft in the Western world. McDonnell Douglas, by contrast, is around one-third commercial and two-thirds defense. It is very good in the defense area and is America's largest defense contractor. But it is hard to see how the company can continue to show strong growth when defense budgets are shrinking.''

Despite that point, many analysts remain largely upbeat about the aerospace/aircraft manufacturers stocks in general.

``These stocks are cheap in terms of price-earnings ratios,'' says Jonathan Strauss, an investment strategist with Oppenheimer & Co. ``In addition to that, orders for new aircraft are picking up. The aircraft fleet is aging, so it seems that there are going to have to be many new planes built during the next five to 10 years.''

Currently Oppenheimer portfolios are overweighted in aerospace/defense stocks. Mr. Strauss contends that the ``consensus'' worries too much about the impact of Pentagon budget cuts, or a spending slowdown, on the aircraft/defense group.

The airlines, for their part, benefit from the availability of large numbers of new aircraft. This is partly because current tax laws have encouraged investors to buy planes to lease to the airlines.

From the airline standpoint, leasing, as opposed to buying, can be advantageous, says Robert McAdoo, an airline analyst with Oppenheimer in Seattle.

Airlines can work out long-term lease arrangements that enable the carriers to operate new aircraft at costs far cheaper than would have been the case had the planes been purchased.

At the same time, the cash flow from airline operations, plus ``strong depreciation levels,'' provides large cash reserves for the carriers, which make them attractive as potential buyout or restructuring candidates. That can benefit investors in their stock.

In terms of carriers, Oppenheimer is recommending American, Delta, United, Northwest, Southwest, and Atlantic Southeast (which is traded over the counter). Mr. McAdoo does not see the recent Flight 811 incident as in any way hurting the stock of United Airlines.

Not only do analysts see both airline manufacturer and carrier stocks as attractive. There is also a perception that some airline-related stocks are desirable.

One example: Rohr Industries provides certain types of technologies necessary for most engines and aircraft (items called nacelles and thrust reversers).

But analysts are cautious about two airline-related sectors. Nikko Securities Company International Inc. warns that the aircraft engine market is ``fiercely competitive.'' Prudential-Bache Securities says the airfreight sector may be weak because of a slowing of US export-growth abroad.