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Gary Shilling

Airlines Find Some Bad Habits Are Hard to Break

Look for carriers to continue a pattern of adding too much capacity, leading to fare wars and bankruptcies.
Airlines are headed for some turblence.

Airlines are headed for some turblence.

Photographer: Paul Ellis/Getty Images

United Continental announced plans in late January to add routes to domestic hubs, enhancing the airline’s capacity by 6 percent by 2020. United’s shares fell 11 percent the next day, and other airline stocks dropped as investors feared they would follow with capacity additions, leading to excess seats and price wars.

I’m not surprised by United’s actions or the likelihood that other airlines are following. When jet fuel costs, the airlines’ single biggest outlay, collapsed along with crude oil prices in late 2014, airline CEOs vowed they’d use the windfall to reward investors, not increase capacity. Those plans have been effective in recent years, as full planes show. But now, airlines are back to their old ways. The industry is planning to add 5 percent to capacity this year despite the recent leap in jet fuel prices, double the February 2016 level. The Labor Department’s consumer price index report Wednesday showed that airline fares fell for a third straight month in January, dropping 0.59 percent.