Airline stocks fly as AirTran makes play for Midwest Air, but heavy selling into rally seen

By Ronda Fears

Memphis, Dec. 13 - Airline stocks surged Wednesday as AirTran Holdings Inc. made a formal hostile takeover bid for Midwest Air Group Inc., but a huge amount of uncertainty was swirling around that deal and several others rumored to be on the table, such as a combo of two bigger carriers UAL Corp. and Continental Airlines Inc.

That didn't stall players from setting up for potential deals, however, and bankrupt Northwest Airlines Corp. and Delta Air Lines Inc. were among the biggest gainers in the session, as Delta has an $8 billion-plus bid in the wings from US Airways Group Inc. and Northwest has hired Evercore Group LLC to pursue a deal.

Northwest Airlines shares (Pink Sheets: NWACQ) climbed 47 cents, or 7.97%, to $6.37. Delta shares (Pink Sheets: DALRQ) added 6 cents on the day, or 3.59%, to $1.73.

With the AirTran bid for Midwest Air on the table, other regional carriers were at the party Wednesday but actually traded down from recent highs, traders said, including JetBlue Airways Corp. and Frontier Airlines Holdings, Inc.

However, increased wariness was creeping into investors' minds, traders said.

Midwest Air goes past bid

AirTran made a $290 million stock and cash bid for Midwest Air, valuing the smaller airline at $11.25 per share, a 24% premium to the close on Tuesday, but the stock hovered just below the offer for much of Wednesday, which traders attributed to a great deal of uncertainty about the deal getting done.

The stock managed to close near the bid level, however, with Midwest Air shares (Amex: MEH) settling with a gain of $2.02, or 22.25%, at $11.10. Meanwhile, AirTran shares (NYSE: AAI) also rose, adding 50 cents on the day, or 4.05%, to $12.85.

"It looks like the uncertainty of the deal going through is holding down the price of the stock a little bit today," one stock trader said, noting that AirTran has been in pursuit of Midwest Air since October.

"I am in total agreement that MEH should hold out for more money, but the market is not saying that it expects a better bid, from AirTran or another buyer. I expect the stock to rise in fits and starts over the next month."

Midwest has acknowledged the AirTran offer but continues to spurn their pursuit.

Continental sold short into rally

There was considerable selling into the rally of UAL and Continental shares, traders said, as market chatter put the two in talks of a possible merger deal.

Continental shares (NYSE: CAL) traded as high as $46.29 on Wednesday but came sharply off that due to outright selling and short selling into the rally, traders said. The stock closed the session with a gain of $1.88, or 4.38%, to $44.76.

UAL shares (Nasdaq: UAUA) added $2.01 on the day, or 4.65%, to $45.24.

As there has been a flood of speculation about consolidation in airlines, so far with nothing concrete outside of the Delta/US Airways and AirTran/Midwest Air situations, many players were taking profits on the gains in airline stocks seen over the past month. From here, one trader remarked, many of these stocks do not have a lot of upside, particularly as they face the traditional slump coming in January.

"A lot of guys are going short on Continental today. With the lousy guidance yesterday [Tuesday], plus the January correction for airline stocks coming, it seems like the most risk-free short we've seen in a while," the trader said.

"There's not a lot of upside for now."

On Tuesday, Continental shares pulled back sharply after cutting its fourth-quarter guidance for overall unit revenue growth to 1% to 3% from year-ago levels and lowering mainline passenger unit revenue growth to 2.5% to 4.5%. It also said advanced mainline bookings for the next six weeks are flat compared with the year-ago period.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.