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Author: Velocci, Jr., Anthony L.1

Merrill Lynch analyst Michael Linenberg last week raised his 12-month target prices for three U.S. airlines that recently traded through previous price objectives. They are America West, to $9 from $7; Expressjet, to $18 from $14; and Frontier, to $12 from $9. In addition, he upped his earnings or narrowed his loss forecasts for eight carriers for the quarter ended June 30.

The momentum behind airline stocks is clearly reflected in Aviation Week's Airline 25 index (see opposite page). It has gained nearly 17% since the beginning of 2003, versus 11.6% for the Standard & Poor's 500 index, and is poised to surpass its value of a year ago.

"Never have airline shares rallied so strongly in such a short period over the past decade," Linenberg said. "On the other hand, many airline stocks were at lows just three months ago." Even with the recent appreciation, share prices are still about 15% below where they were before the Sept. 11, 2001, terrorist attacks, he noted. For that reason, combined with the progress the industry is making in reducing operating costs and controlling capacity, Linenberg believes there is still plenty of upside for the next 12 months.

That's assuming, of course, that carriers don't become complacent about how they run their businesses. Potential spoilers, according to Linenberg, include a drop in demand for air travel during the second anniversary of the Sept. 11 attacks, lackluster business travel in the fall and the return of the security tax on Oct. 1.

One of the most notable developments last week was a memorandum of understanding between Mesa Air Group and United Airlines in which Mesa will fly 35 regional jets (15 50-seater and 20 70-seater aircraft) under the United Express marquee. That number could rise to 60. The 10-year agreement becomes effective in August and is being well received on Wall Street. Linenberg, for example, believes most of this regional flying represents new business for Mesa and may render current earnings estimates for 2004 too conservative. It was on this basis that he raised his target price for Mesa Air to $11 from $8. In trading last Wednesday, Mesa's stock rose 78 cents a share, or more than 9%, to close at 9.20.

J.P. Morgan analyst Jamie Baker believes Mesa's good fortune will come at the expense of Atlantic Coast Airlines. He's growing increasingly skeptical about incremental growth opportunities for that carrier. Last week wasn't a good one for Atlantic Coast. On Tuesday, its stock dropped 2.19 a share, or 16.4%, and lost another 13.6% on Wednesday, to close at 9.64.

Legend for chart:
A-Company Name
B-Current Week
C-Previous Week
D-Trailing P/E
E-Fwd. P/E
F-Pct/Chg. YTD
             WEEKLY MARKET PERFORMANCE
          Closing Prices As of July 1, 2003
                   AIRFRAME/PLATFORM
A                             B      C       D    E       F
BAE Systems                  2.27   2.34    9.2  ....   11.08
Boeing Co.                  34.65  34.41   22.4  17.1    5.0
Bombardier Inc.'B'           ...    4.57   ....  ....   ....
Embraer-Empresa Brasil AD   19.00  19.28   40.4   9.1   19.5
General Dynamics Corp.      73.78  73.81   16.4  13.8   -7.0
Lockheed Martin Corp.       48.45  48.12   41.4  19.9  -16.1
Orbital Sciences Corp.       7.42   7.26   21.8  10.3   75.8
Textron Inc.                38.84  38.29   14.5  14.1   -9.7
Averaae YTD chg                                        11.3%
                   DEFENSE ELECTRONICS
DRS Technologies            28.15  27.72   17.8  15.4  -10.2
EDO Corp                    17.50  17.52   21.3  14.5  -15.8
Integrated Defense Tech     15.60  15.41   24.8  13.4    7.6
L-3 Communications Holdings 44.70  43.40   18.4  14.2   -0.5
Northrop Grumman Corp.      88.20  87.54   21.6  18.2   -9.1
Raytheon Co                 33.25  33.22   22.5  19.9    8.1
Titan Corp                  10.26  10.07   -3.7  14.1   -1.3
Average YTD chG                                        -3.0%
                       PROPULSION
Alliant Techsystems         51.84  52.25   15.9  13.1  -16.9
General Electric Co.        28.63  29.26   19.3  16.5   17.6
Rolls-Royce plc              2.09   2.14    6.4  ....   17.0
United Technologies Corp.   71.29  70.60   15.8  14.1   15.1
Average YTD chg                                         5.3%
                       AVIONICS
CAE Inc.                     4.46   5.39    8.4  . . .  -13.7
Harris Corp.                30.67  31.27   23.8  19.5   16.6
Honeywell International     27.00  27.23  -65.9  14.5   12.5
Rockwell Collins            25.20  24.72   19.2  16.9    8.3
Smiths Group plc            11.56  11.88   14.7  ....    0.0
Average YTD chg                                          5.9%
                       SUBASSEMBLY
Barnes Group                21.95  21.54   15.3  11.7    7.9
BE Aerospace                 3.17   3.19   -1.5  63.4  -12.9
Ducommun Inc.               14.00  13.60   13.2   9.3  -11.7
GenCorp                      8.56   7.86   11.0  17.1    8.1
Goodrich                    20.53  20.30   12.9  14.1   12.1
Herley Industries           17.32  16.65   19.7  16.2   -0.5
Moog, CI'A'                 35.00  35.07   13.4  11.2   12.8
Parker-Hannifin             41.71  41.68   36.3  18.1   -9.6
PerkinElmer Inc.            13.69  13.45-1369.0  18.8   65.9
Triumph Group               28.07  29.42   12.2  10.2  -12.1
Average YTD chg                                         6.0%
                       FORGINGS/CASTINGS
Ladish Co Inc.               7.28   6.02   66.2  31.7  -9.7
Precision Castparts Corp.   31.15  30.44   13.3  11.6  28.5
Average YTD chg                                         9.4%
                        MRO/AFTERMARKET
AAR Corp.                    7.12   7.26  -47.5  26.4  38.3
Aviall Inc.                 11.55  11.25    8.6  10.2  43.5
HEICO Corp.                 12.65  10.12   20.1  16.4  19.2
Sequa Corp'A'               36.50  34.11    3.4  . . . -6.7
Average YTD chg                                        23.6%
                        AIRLINES
Alaska Air Group            21.64  20.47   -6.4  69.8   0.0
America West Holdings 'B'    6.74   5.70   -1.3  -6.0 274.4
British Airways             25.07  25.44  -13.2  10.0  12.1
Continental Airlines 'B'    15.20  14.45   -2.0 -80.0 109.7
Delta Air Lines             14.44  14.22   -1.3  -4.8  19.3
JetBlue Airways             42.99  40.27   50.0  28.3  59.2
KLM Royal Dutch Air          8.42   8.40   -0.8 -29.0 -13.2
Midwest Express Holdings     2.50   2.45   -1.4 -27.8 -53.3
Northwest Airlines          11.03  10.68   -0.9  -4.4  50.3
Ryanair Holdings ADS        44.90  41.50   26.4  17.9  14.7
Southwest Airlines          17.13  17.12   57.1  30.1  23.2
WestJet Airlines            ....   11.70   ....  ....  ....
Average YTD chg                                        45.1%
Standard & Poor's 500 year-to-date performance: 11.6%.
Source of financial data: Standard & Poor's. U.S. dollars and
cents. Trailing P/E ratio: stock price divided by its earnings
per share from the latest fiscal year. Forward P/E ratio uses
SAP's forecast of current fiscal year.

                  PERCENT CHANGE
Markets          Index Value   Week Ago   Year-to-Date   Year Ago
                 (As of 7/01)
AW Aerospace 25     635.2          0.3%        0.4%       -26.6%
AW Airline 25       790.1          2.3%       16.9%        -0.1%
S&P 500         982.3          0.7%       11.6%         3.6%

GRAPH: Aviation Week's Stock Market Indexes

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By Anthony L. Velocci, Jr.