Airline rivals caught in United's turbulence
Airline stocks went into a nosedive Wednesday on investor fears that a plan by United Airlines to grow rapidly will undercut prices and profits.
In afternoon trading, shares of United Continental Holdings Inc plunged 11.5 per cent to US$69.03. American, Delta, and Southwest also fell.
The six largest US airlines lost about US$10 billion in stock market value.
United was the nation's biggest airline a decade ago, but has slipped behind American and Delta. United executives say that they have to rebuild service on routes that the airline abandoned 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 per cent to US$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.
It marks the fourth consecutive stock slump for United following an earnings report. In October, a disastrous conference call contributed to a 12 per cent one-day drop.
The breaking point this time was United's disclosure that it plans to add between 4 per cent and 6 per cent 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 per cent, "and those fears are being realised".
CFRA Research analyst Jim Corridore stripped United of his 'buy' rating, saying it's the "right course of action, but it will take time to work".
United President Scott Kirby offered an impassioned defence 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 cannot afford to ignore discount carriers like Spirit Airlines because half of United's customers choose an airline mostly on ticket price.
"The best way to compete with low-cost carriers 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."
Entering Wednesday, United shares had gained 7 per cent in the past year - 36 per cent just since November 14, on the notion that United, trailing rivals like Delta in key financial measures, had more room to run.
In the sell-off Wednesday, United's woes spread to other carriers. Airlines Group Inc fell 7.4 per cent to US$53.98; Delta Air Lines Inc fell 6.5 per cent to US$56.05; and Southwest Airlines Company slid 4.4 per cent to US$62.38.
American, Southwest and JetBlue Airways Corp report fourth-quarter results today, Thursday.