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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: What happened to the US Airways (NYSE:U) story?

Mr. Neidl: Basically Steve Wolf now appears to be back in the saddle, which is a good sign. He’s an expert at turning around troubled carriers. This is probably going to be the challenge of his life, because, in my opinion, US Airways cannot survive under its current cost structure. It will continue to deteriorate if it has no partnerships and continues to be restricted in its limited use of RJs. Even if these changes are made, it will be difficult for US Airways to compete with its very high labor cost structure, as low-cost carriers continue to invade US Airways’ territory. Carriers such as Southwest, JetBlue and AirTran can make profits in these markets because of their lower cost structure and their flexible labor work rules. US Air can’t. They would gradually bleed themselves away. If Stephen Wolf’s strategy works, there’s a chance of survival. He does have to make changes in the cost structure of US Airways. He does have to use many, many more RJs, because in the USAir market area, smaller planes and lower costs are absolutely necessary. If he could hook up in a partnership with a larger airline system, he would get the through feed traffic that he needs, and his route system would be attractive to an airline such as United or American in terms of feeding traffic to each other, not as a merger, but as a partnership. So he has a big job ahead of him getting those things done, but the biggest thing is dealing with the labor unions and getting the use of a lot more RJs. But second, and I think this is very important also, he has to somehow get the labor cost structure down.

TWST: What was your view on the proposed acquisition by UAL of US Airways? Were you pleased or sorry that it fell apart?

Mr. Neidl: I think United should be very thankful it fell apart. If that had gone ahead, and with September 11 we might have had one huge airline bankruptcy now. To take two troubled carriers (and United has its own troubles with their unions and their uneconomic labor cost structure) and combine them wouldn’t have solved their problem. I think it would have made it worse. So I think the system and United are very lucky that that merger didn’t go through. The only losers on that were probably the US Air stockholders.

TWST: What is your overall message to investors who are contemplating going back into the airline industry? And isn’t this an industry where investors have been burned quite a number of times in the past?

Mr. Neidl: Investors who know how to invest in airlines have not been burned. This is not an industry to buy and hold. Investors can make a lot of money in airline stocks if they know when to buy and when to sell. They have to act on market information, economic information, and company-specific information. And barring the economy getting worse or another major act of terrorism or fuel prices shooting back up, at this point now most airline stocks look very cheap. If we are going into an economic recovery and return to a normalized earnings year in 2003, we’re going to look back on the prices right now and say, “Boy, I wish I had bought them there. They were cheap then.” Basically bottom line, right now, to get the industry moving and make sure that airline stocks are attractive, you have to get all those people who are still hiding under their beds after September 11 to come on out and start flying again.

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.