Airlines’ $10 billion monthly swoon keeps wall street on edge

Bloomberg

US airline investors, already absorbing the worst monthly stock performance in a year, are bracing for more disappointment.
A Standard & Poor’s index of the five biggest US airlines plunged 7.5 percent in August, wiping out about $10 billion in market value. Shares fell as a price war that started between United Continental Holdings Inc. and heavy discounters spread to more carriers and markets.
Analysts see more pain ahead. UBS Group AG predicts the latest skirmish will force some carriers to lower their third-quarter forecasts for revenue for each seat flown a mile, a closely watched gauge of pricing power. The trend is worrisome because the major airlines have been boasting that industry consolidation would lead to steadier profits and smoother shareholder returns — not repeated fare battles with low-cost rivals.
“We’ve taken it on the chin the last 30, 45 days, because there’s no question United started cutting fares to ward off Spirit, Frontier, whoever, and I guess it’s spread among all the airlines cutting fares,” said Gary Bradshaw, a portfolio manager at Hodges Capital Management in Dallas, which owns stakes in the major airlines. “It happened overnight almost.”
Hurricane Harvey, which shuttered Houston’s airports for several days last week, will be another drag on earnings because of flight cancellations and a spike in jet-fuel prices.
United and Southwest Airlines Co. will probably have to cut their forecasts the most, said Darryl Genovesi, a UBS analyst. American Airlines Group Inc. and Delta Air Lines Inc., which have been less aggressive in adding flights and seats, “may just shade to the low end of current ranges,” Genovesi said in a note to clients.
The fare battle that started this summer between United and heavy discounters like Spirit Airlines Inc. and Frontier Airlines Inc. has since spread to others, including American and Southwest. The S&P airlines index has dropped more than 14 percent since June 30.
Industry pricing declined in July from the previous month, and August “appears to have deteriorated further,” Cowen & Co. analyst Helane Becker said in a note, citing meetings with airlines last week. While carriers expect improvement in the last three months of the year compared with this quarter, “the pricing trends are currently not favorable.”

Hurricane Harvey
Hurricane Harvey is only expected to exacerbate the industry’s woes. Jet-fuel prices jumped 26 percent from Harvey’s August 25 landfall in Texas through September 1, after the shutdown of two pipelines carrying fuel and refined products from the US Gulf Coast. Jet fuel is the second-largest operating expense for airlines, behind employee compensation.
Airlines “can truck in fuel, potentially look to other pipelines as a source, but that’s another headache for the industry to try to deal with,” Southwest Chief Executive Officer Gary Kelly said. While there’s no immediate danger of a shortage, Kelly said he was “absolutely” concerned by the pipeline closures.
Some carriers are expected to use a Cowen transportation conference that starts on September 6 in Boston to update outlooks for third-quarter revenue for each seat flown a mile.