United Air expansion plans clobbers airline stocks
Airline stocks went into a nosedive Wednesday on investor fears that a plan by United Airlines to grow rapidly will undercut prices and profits.
Wednesday shares of United Continental Holdings Inc. (NYSE:UAL) American (NYSE:AAL), Delta (NYSE:DAL) and Southwest (NYSE:LUV) also fell. Billions in market value evaporated.
| Ticker | Security | Last | Change | Change % |
|---|---|---|---|---|
| UAL | UNITED AIRLINES HOLDINGS INC. | 96.83 | +0.48 | +0.50% |
| AAL | AMERICAN AIRLINES GROUP INC. | 14.52 | -0.12 | -0.82% |
| DAL | DELTA AIR LINES INC. | 63.82 | +0.20 | +0.31% |
| JBLU | JETBLUE AIRWAYS CORP. | 5.97 | +0.01 | +0.17% |
United was the nation's biggest airline a decade ago but has slipped behind American and Delta. United executives say they have to rebuild service on routes that the airline abandoned if it wants to regain high-paying connecting passengers.
Investors fear that United's plan — on top of growth by other airlines — will flood the market with too many flights and seats, triggering ruinous fare wars to keep planes full.
After the market closed on Tuesday, United reported solid financial results for the fourth quarter. Profit jumped 46 percent to $580 million, beating Wall Street's expectations. The airline indicated that average prices are heading higher, which cheered investors.
In after-hours trading, the company's stock went into a tailspin, however, midway through a meeting with Wall Street analysts that was webcast for investors everywhere to hear.
The breaking point was United's disclosure that it plans to add between 4 percent and 6 percent to its passenger-carrying capacity this year and maintain that pace through 2020.
Cowen and Co. analyst Helane Becker said many of her investor clients were worried that United would grow more than 4 percent, "and those fears are being realized."
United President Scott Kirby offered an impassioned defense of the growth strategy. He said that because of decisions by United's previous management team, the airline had been shrinking while Delta and American were growing. United is losing high-paying connecting passengers who fly between smaller cities and big hub airports and "support the whole network," he said.
"What we are doing is frankly catching up," Kirby told analysts.
Kirby said United can't afford to ignore discount carriers like Spirit Airlines because half of its customers choose an airline mostly on ticket price.
"The best way to compete with low-cost carrier is matching prices," he said. "No one chooses to fly on an ultra-low-cost carrier if they can get the same price on United Airlines, nobody."
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David Koenig can be reached at http://twitter.com/airlinewriter