U.S. airlines are being battered by investors concerned that the industry may revert to its old, costly habit of piling on too many seats, making it harder to charge more for tickets.
Even as planes fly full and carriers enjoy billions of dollars in savings on fuel, stocks are under pressure as a benchmark revenue gauge declines. That measure suggests that airlines are losing pricing power, stirring memories of recurring fare wars that once sapped earnings.
“This is an industry that Wall Street loves to hate,” said Eric Marshall, president of Hodges Capital Management Inc., whose holdings include American Airlines Group Inc. and United Continental Holdings Inc. “It is an area that didn’t earn its cost of capital for 20 to 30 years and has had a history of adding too much capacity at the wrong times of the cycle.”
Acquisitions, mergers and bankruptcies revived U.S. carriers after losses of $58 billion in the nine years ended in 2009. The Bloomberg U.S. Airlines Index soared about 80 percent in both 2013 and 2014, the biggest annual rallies ever. Yet this year, the 11-carrier gauge was down 16 percent through Friday.
The slump contrasts with analysts’ view of airline finances. Fresh off 2014’s record, American’s profit this year excluding some items is poised to surge more than 50 percent, according to estimates compiled Bloomberg. Delta Air Lines Inc.’s total may jump by almost a third.
“Investors’ question is, ‘How much better could this actually get?’” said George Ferguson, a senior analyst at Bloomberg Intelligence. “People are saying, ‘It might be the time to walk away and wait and see what happens rather than leave this money on the table.’”
Discounters such as Southwest Airlines Co. and Spirit Airlines Inc. are adding seating capacity faster than growth in U.S. gross domestic product, according to data compiled by Bloomberg, testing the resolve of bigger rivals to hold the line on fares. When American Chief Executive Officer Doug Parker told Bloomberg last month he would fight back on price, the airlines index tumbled the most since 2011.
Jockeying for U.S. market share is the last thing investors want to see, Ferguson said Thursday. The country has been a rare bright spot in a global industry convulsed by currency risks and economic weakness, he said.
Delta raised fares $3 each way across most of its domestic network Friday, building on more limited increases put in place earlier by JetBlue Airways Corp. and Southwest Airlines Co., according to Jamie Baker, a JPMorgan Chase & Co. analyst. Delta’s action was then matched across Southwest’s U.S. network, “all but ensuring the industry’s first widespread fare increase since last October,” Baker said.
The moves helped push the Bloomberg index up 1.2 percent at the close in New York.
Parker is among those who vow that the industry has changed for good and won’t return to days when airlines added seats to fend off a competitor even if a flight would lose money.
There’s concern that carriers will “get profitable, then do things to make ourselves unprofitable,” Parker said in an interview this week. “I do not believe that’s the case. The U.S. airline industry is doing exceptionally well.”
Yields, or average fare per mile, have fallen for the North American industry for four consecutive quarters, according to data compiled by Bloomberg. That trend is continuing, Ferguson said, as airlines give up some gain from lower fuel prices to engage in the market-share scuffle.
This week, Southwest tapped the brakes on its growth plans, saying it planned to cap seating-capacity expansion next year at about 6 percent, instead of an earlier 7 percent ceiling.
The trouble is, Southwest’s outlook “still feels well out of sync with economic growth expectations for many investors,” Duane Pfennigwerth of Evercore ISI said in a note.
Marshall of Dallas-based Hodges Capital said airlines still have to prove themselves after last decade’s losses.
“This industry is going to have more rational behavior,” Marshall said in an interview. “But I don’t think Wall Street is going to give them credit for it until they show this discipline throughout an entire cycle.”