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Leading analyst examines the airlines sector in this special Outlook for Airlines report from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info491.htm

TWST: When we spoke last year the big concern, besides the price of fuel, was the drop-off in business travel. Can you quantify how much demand has dropped for business travel and also for leisure travel since September 11?

Mr. Neidl: You can quantify the total amount of traffic that dropped off just by looking at the statistics, which were significant, anywhere from 20%-25%. Business travel is coming back slowly. You have to rely on the airlines and how they define business traffic versus leisure. It seems that business travel has come back as much as it can under the current economic circumstances. To get further increases in business travel, we’re going to need an improving economy. Leisure travel, in my opinion, is coming back more slowly. This segment is more conscious of security, terrorism and safety. Airlines are using price inducements to try to get those people to come back, because they figure that once people get on an airplane and see that there’s not a terrorist under every seat, they will feel a little better about traveling. I think that this is happening slowly but surely, and it’s going to take time. So you have those two things working for you. I think when the economy starts to improve, a lot of the business travel will start to come back. Airlines just have to keep working on the leisure traveler, and once they get back the mass of that, they can concentrate on pricing for profitability. Right now the airlines are not pricing for profitability, they’re pricing to lure people back on to the airplanes. As people come back, they’ll build up their schedule. When they get back to the maximum schedule, whatever that is, they’ll start raising prices to try to get profitability. For most of the big network carriers, I don’t see that happening before the end of this year, at the earliest the end of the third quarter. But you have to use incentives to get leisure travelers to come back. You can use the example of the Mohawk Indians, who used to work on skyscrapers and bridges because they had good balance at high altitudes. When one of their workers fell off, before they even took him to the hospital, they made him go back up if he was able to, because if he didn’t do it right away he’d never do it again. I think that’s analogous to the situation of airline passengers. You have to get them traveling as quickly as possible, and once they do that they’ll lose their fear of flying.

TWST: Which airlines are best positioned to benefit when the turn comes?

Mr. Neidl: Basically I think the whole industry will rally when the turn comes. I don’t think the nine major airlines, despite what people said early on, will have any significant bankruptcy filings in the short term. After September 11, if the government hadn’t injected the $5 billion into the industry right away, the whole industry probably would have been in bankruptcy, maybe with the exception of Southwest (NYSE:LUV). The last one is Alaska Air (NYSE:ALK). One could say they don’t have a broad system. But they do have a good balance sheet, good liquidity, and a management that everybody likes. And even though they don’t have a worldwide route system, they have a very powerful niche on the West Coast, particularly in the Pacific Northwest to the state of Alaska. And they have good marketing agreements with a number of other carriers, such as Continental, American and Northwest, which feed them traffic, and I think they’re in a good position. That’s why I put them on the list, and also their stock price has come back faster than those of most other airlines.

This special report includes:

1) Outlook for Airlines - In an in-depth (3,600 words) Analyst Interview, Raymond E. Neidl, Director and Equity Research Analyst at ABN AMRO Securities LLC, examines the outlook for the sector including and shares specific stock recommendations.