US airlines lose pricing power
Race for market share and fare wars result in erosion of fuel cost savings
dallas — US 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 airlines enjoy billions 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. “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 US airlines after losses of $58 billion in the nine years ended in 2009. The Bloomberg US Airlines Index soared about 80 per cent in both 2013 and 2014, the biggest annual rallies ever. Yet this year, the 11-carrier gauge was down 16 per cent 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 per cent, according to Bloomberg. Delta Air Lines’ total may jump by almost a third.
“Investors’ question is, ‘How much better could this 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 and Spirit Airlines are adding seating capacity faster than growth in US gross domestic product, testing the resolve of bigger rivals to hold the line on fares.
Jockeying for US market share is the last thing investors want to see, Ferguson said. 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 on Friday, building on more limited increases put in place earlier by JetBlue Airways and Southwest Airlines, according to Jamie Baker, a JPMorgan Chase & Co. analyst.
Delta’s action was then matched across Southwest’s US network, “all but ensuring the industry’s first widespread fare increase since last October,” Baker said. 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.