Wednesday, January 24, 2018

United Continental May Drag Industry Into Price War: Airline’s plans to increase capacity has investors worrying that carriers are losing their discipline



The Wall Street Journal
By Justin Lahart
Jan. 24, 2018 1:42 p.m. ET

When the going gets good, it can be tough to avoid overconfidence. Investors fear United Continental Holdings could be making exactly that mistake.

Late Tuesday United reported fourth-quarter earnings that topped analyst estimates, but by Wednesday morning nobody was paying attention to that.

Instead, the focus was on the airline’s plan to increase available seat miles, a measure of capacity, by 4% to 6% a year over the next three years, compared with 3.5% last year and 1.4% in 2016.

That raised concerns United risks making the oft-repeated mistake of expanding too quickly and then having to cut ticket prices sharply to fill seats.

United’s stock nose-dived over 10% by Wednesday afternoon. Shares of other airlines also fell sharply on worries that United’s growth plan would prompt them to respond in kind in an effort to protect their market share.

The environment airlines are operating in is unusually strong. The U.S. economy is doing well, as are most other economies around the world. Airlines have shown unusual discipline on costs since the financial crisis, and that has translated into strong profit growth and, Wednesday’s drop notwithstanding, soaring stock prices. Domestic carriers also count as some of the biggest beneficiaries of recently enacted tax cuts.

The challenge for the industry right now is figuring how long the good times are going to last.

It is easy to tell a story in which more people take to the skies as global standards of living rise and corporate travel budgets expand. Companies can tell themselves those kinds of stories when times are good. After so many years of feast, though, airlines risk forgetting all about famine.

Original article can be found here ➤ https://www.wsj.com

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