By Jack Nicas
A slight increase in Southwest Airlines Co.'s growth plans
fueled a broad selloff in U.S. airline stocks, highlighting
investor jitters that cheap fuel could cause carriers to oversupply
the market, undoing recent competitive discipline that has helped
the industry reach record profits.
Southwest said a day ago that it plans to grow 7% to 8% in 2015,
up from its previous 7% estimate.
Analysts also reported on Wednesday that the industry's revenue
performance was worse than expected in April.
Shares of Southwest, United Continental Holdings Inc., and
American Airlines Group Inc. fell by more than 9% and Delta Air
Lines Inc. fell 5.6%.
U.S. airline stocks tend to be very volatile, and investors had
bid them up for most of the past year on hopes the companies would
continue reaping the benefits of cheap fuel without engaging in the
competition that has hurt their financial performance in the
past.
That the relatively minor Southwest news items sparked such a
broad decline in prices of airline stocks signals how skittish
investors still are about the carriers, despite depressed oil
prices and forecasts of record profits this year.
Analysts said that while investors are right to be concerned
about some airlines' growth plans, Wednesday's selloff was an
overreaction, and they remain generally bullish on the
industry.
"Investors are taking profits and being cautious, but we think
when summer rolls around and airplanes are packed and airlines are
back to making record profits, investors will come back," said Jim
Corridore, an airline equity analyst with S&P Capital IQ. "It's
my fundamental view that the most pervasive thing is energy
prices."
The price of jet fuel--until recently airlines' biggest
expense--has fallen by a third since August. Many airline
executives have said that instead of using fuel savings to fund new
growth, they would reduce debt and return cash to shareholders.
Indeed, many companies have done that, but growth forecasts have
also risen.
"Domestic capacity discipline has effectively vanished," said
Wolfe Research airline analyst Hunter Keay. "Marginal routes that
would have been eliminated to fund growth of new routes are now
being kept."
Cheap fuel is making growth irresistible to airlines, Mr. Keay
said. "If you're generating cash flow you never thought you'd
generate because oil prices are so low, it's very hard to walk away
from earning money," he said. "The true test is walking away when
oil prices are low. That's true discipline."
Southwest is the main force, analysts said, with potential 8%
growth this year and 7% growth next year, though much of its
expansion has come in Dallas, where new rules allow it to fly
farther from the secondary airport.
Smaller carriers like JetBlue Airways Corp., Spirit Airlines
Inc. and Frontier Airlines are also expanding aggressively, but
Southwest's expansion has the biggest impact on overall market
supply because it alone controls about a sixth of the U.S. domestic
market.
Mr. Keay said Southwest's and others' aggressiveness is pulling
bigger rivals like American and United away from their disciplined
strategy. In a situation he describes as a Mexican standoff,
airlines are afraid "that if they cut, someone else will come in
and take that market."
"Capacity is being added, not by us, but by some of our
competitors, and we will obviously respond to that," American
Airlines Chief Executive Doug Parker said on CNBC on Tuesday.
Mr. Parker added that while he believes oversupply would
continue to harm airlines' revenue performance in the near term, he
cautioned that the issue wasn't fatal to a financially revamped
U.S. airline industry.
"It's nothing like we've seen in the past when you'd see all
airlines fighting for share," he said. "These are individual
airlines making individual decisions. They're going to have to
figure out how to compete with that growth."
Meanwhile, U.S. airlines' unit revenue declined 3.9% in April
compared with a year prior, according to UBS AG airline analysts,
who had expected a 3% decline.
Write to Jack Nicas at jack.nicas@wsj.com
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