Airlines tumble as ‘risky’ growth bet stirs fare worries

Bloomberg

US airlines tumbled for a second day as more carriers announced plans to add seating capacity— compounding fears of a fare war that would crimp revenue as fuel costs climb.
Alaska Air Group Inc. said it expects to increase capacity 7.5 percent this year, while JetBlue Airways Corp. projected as much as 8.5 percent. Economists predict gross domestic product will rise at a 2.6 percent rate.
The capacity forecasts added to fears sparked earlier this week by United Continental Holdings Inc., which said it would boost the supply of flights and seats as much as 6 percent in each of the coming three years.
If capacity outstrips demand, airlines could be forced to cut ticket prices to fill planes—a boon for passengers, but a drag on carrier profits.
“The industry is yet again growing capacity above GDP levels, despite facing materially higher fuel prices versus last year,” said Andrew Davis, an analyst at T. Rowe Price Group Inc., a significant shareholder in the biggest US airlines. “This is a risky bet that better economic activity can absorb the growth, but it doesn’t likely lead to better margins and earnings,” he said.
American Airlines Group Inc. forecast that fuel costs would climb 24 percent this year.
Gary Kelly, the chief executive officer of Southwest Airlines Co., said investors need to “calm down.”
“I realise there’s angst amongst some about the growth rate of the industry, but I think a lot of people expect the GDP growth will accelerate,” he said on a conference call after the discounter reported earnings. “I think it will be very logical to assume from that, that you could see a boost in travel demand.”
Southwest sees capacity rising about 5 percent this year.
A Standard and Poor’s index of five leading airlines fell 3.8 percent at 2:41 pm recently in New York. Coming after a sharp drop Wednesday, that put the gauge on pace for its biggest two-day decline since June 2016.
American CEO Doug Parker said the slump was an overreaction. “When people hear growth they think, ‘Here we go again,’ believing that carriers will respond to expansion by adding capacity even if it means losing money,” he said.
“We’re not doing that at all. What we’re doing is taking existing aircraft, increasing utilisation, redeploying aircraft from markets not doing quite as well to places where we know we can do well.”