The Tesco of the Sky

*** WH Smith's surprise...

*** The mid-caps continue their ascent

*** Budget airline warfare...the Tesco of thesky...tough times ahead...and more..&nbsp ------------------- WH Smith surprised the market on Wednesday...byrevealing profits had 'improved substantially'.

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According to the struggling newsagent, like-forlike sales fell 1% for the six weeks to 15 January far better than 2003's devastating Christmas season.Smith's High Street stores had less luck, with likefor-like sales falling 2% over the same period.

So how did WH Smith invoke a festive seasonupgrade? Well, margins at the group were not so muchboosted by an increase in customers. Rather, WH Smithadmitted to cutting back on expensive promotions.

'This is a long term recovery programme and muchremains to be done,' CEO Kate Swann said yesterday.'However, we are on track and confident in theoutcome for the year.' As were investors, who pushedWH Smith's share price up nearly 6%, to 359p.

In fact, WH Smith's surge, helped along by a 7%rise in glassmaker Pilkington, pushed the FTSE250closer to its all-time record. The mid-cap index isnow 60 points off its September 2000 high. It closed0.5% up at 7,088. The FTSE100 fell 5 points, to closeat 4,818, pulling the All Share index down 0.02%.

Glass manufacturer Pilkington played down bidprospects on Wednesday...with little success. Thegroup surged 8p to 125p, on rumour that either NipponSheet Glass or French company St. Gobain is huntingthe UK glassmaker. 'We're aware of the speculation,'a Pilkington spokesman said yesterday, 'but we don'tknow where it comes from. It could just be hedge fundmanagers getting excited...'

Boots on Wednesday said its third quarter like-forlike sales hiked by 2.6%. The news may have been atthe lower end of analyst predictions, but convincedinvestors that the chemist is due for a turnaround infortune. Boots traded 0.4% up yesterday, at 622p.

Media group Pearson shed just under 3% as one ofthe blue chip's biggest fallers. Pearson yesterdaysaid that trading at its book publisher Penguinremained difficult, adding that profits would be tothe lower end of analyst predictions. The FT ownerswill now sell their 22% stake in their onlinefinancial news operation Marketwatch to Dow Jones for$100m.

Bad news for Pearson, but rival media group Emapenjoyed the reports. Emap closed as the biggest bluechip gainer on Wednesday, as investors switchedstocks from Pearson. Emap added 3%, to close at 835p&nbsp ------------------ Budget airline Ryanair reckons it will ease intoannual profit of around £140m. The Irish airlineryesterday said that despite higher fuel costs, itanticipates breaking even by the end of its financialyear. Passenger numbers are expected to hike byaround 20% in its current fiscal year.

'With only two months to go in the year, it islooking pretty much in line with generalexpectations,' Ryanair's feisty CEO Michael O'Learysaid yesterday. Ryanair's share price traded over 1%up on the news, at €5.82.

Yet why should we believe the CEO's predictions?Well, because in May last year, O'Leary predicted a'bloodbath' as the competition between budgetairlines heated up. And he wasn't wrong...

Virgin Blue, Australia's budget airline, saw itsshare price plummet 20% yesterday, as the groupwarned investors to prepare for a poor year.According to Virgin, full year profits could fall byas much as 15% on the previous year. The airliner 25% owned by Richard Branson has been losing out toAustralia's rival budget airline, Jetstar.

'Sluggish demand reported previously for Novemberand now December 2004 continues,' the group's CEOBrett Godfrey said yesterday.&nbsp Even in America, higher fuel costs and acompetitive market knocked Northwest Airlines into afourth-quarter loss yesterday. America's fourthbiggest airliner revealed a net loss that amassed$420m. One year ago, the group had reported a $360mprofit.

'This was a difficult quarter for NorthwestAirlines,' CEO Doug Steenland said yesterday. 'Labourcost savings realised by some of our majorcompetitors make it imperative that Northwest achievelabour restructuring.'

In fact, Steenland is referring to Delta Air Lines which recently narrowly avoided a bankruptcy filingby striking a deal with its pilots. And both UnitedAirlines and US Airways are in the process ofreducing their labour costs under bankruptcyprotection rules. Northwest saw its share price shedover 4% by London's close&nbsp In the face of such downbeat airline news,investors may be forgiven for believing the UKtransport sector would feel the heat. Not so...

In fact, the transporters climbed 0.5% yesterday,after hitting a three and a half year high on MondayHeavyweight British Airways traded 0.1% up at 251p.EasyJet fell 0.2%, to close at 206p. But nothing'schanged in the industry: prepare for tough times,O'Leary reckons.

'The bloodbath will continue as competitors willlose money and go out of business,' the Ryanair CEOsaid yesterday. 'The problem for all of ourcompetitors is that the lowest priced operator keepsexpanding. It's a bit like Tesco. Ryanair is theTesco of the airline industry.'

High praise indeed... for Ryanair, that is..Until tomorrow,

Heather D'AltoMoney Mornin