United Continental has put U.S. airlines’ stability into a tailspin – potentially to its own detriment. Oscar Munoz, the company’s chief executive, plans to put more planes in the skies, sparking fears of a price war and wiping billions off United’s market value and the worth of rivals like American Airlines on Wednesday.
Munoz, who fought back from a public-relations gaffe last year after a passenger was dragged violently off a flight, reported what he called the company’s best earnings in history on Tuesday evening. He said the $20 billion United would add 4 percent to 6 percent capacity. The goal is growth, but spare seats historically go with cutthroat prices.
By the close of New York trade on Wednesday, United had lost 11 percent of its market capitalization, some $2 billion, while American’s stock was off 6 percent. Meanwhile American, with a market value of $26 billion, on Thursday morning reported fourth-quarter earnings slightly down from a year earlier.
U.S. airlines have been cruising. United merged with Continental and American with US Airways after the last wave of financial trouble, and four carriers control 80 percent of the domestic market. Consolidation has dramatically improved profitability. By the same token, though, if one of the big players now sparks more intense competition, others will quickly be affected.
Airlines face perennial headwinds that have made them a byword for corporate failure over decades. Among past bankruptcies are United, American, Delta Air Lines and US Airways. Fuel prices are one big factor. In recent years jet fuel has been relatively cheap, but rising costs showed up at both United and American last quarter.
Among the big competitors, United is on fairly weak ground to risk starting a price war. The company’s revenue per available seat mile is only slightly above the industry average, according to Eikon data, and the metric hardly grew last quarter. The airline’s costs, however, are nearly a third higher than the norm and growing faster than the top line.
American is on a better course – its revenue per available seat mile increased 5.6 percent in the last three months of 2017 from a year earlier. That said, its costs rose faster than revenue too. A return to rampant competition would be a journey back to the bad old days.
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