The U.S. airline industry slipped into a bear market as investors worry that carriers are losing power to raise fares even as oil prices rise.
The Bloomberg U.S. Airlines Index tumbled for a fifth straight day Tuesday, dropping 21 percent from its 2015 high on Jan. 26, a common definition of a bear market. The decline has occurred despite forecasts for a record industry profit this year and as planes fly with more than 80 percent of seats filled.
Investors are concerned expansion by some airlines is putting too many seats into the market, upsetting the balance between supply and demand at the same time that oil prices have climbed 33 percent since a 2015 low on March 17. Oil is refined into jet fuel, airline’s largest expense in recent years.
“Unfortunately given the amount of capacity creep and likely resulting lack of pricing power, we don’t feel like we have the confidence level to take our revenue estimates up concurrently with higher fuel,” Hunter Keay, a Wolfe Research analyst, wrote in a note Tuesday. “This probably explains why airline stocks are getting hammered.”
Keay lowered his 2015, 2016 and 2017 earnings estimates for seven U.S. carriers Tuesday, including American Airlines Group Inc., Delta Air Lines Inc., United Continental Holdings Inc. and Southwest Airlines Co. He also trimmed his target price for United, Southwest and American.
U.S. airlines lost almost $12 billion in market value on May 20, after Southwest increased its expansion plans this year for a second time, and American Chief Executive Officer Doug Parker said his carrier would “aggressively” match fares of low-cost airlines and not lose passengers on price competition.
The Bloomberg U.S. Airlines Index of 11 members fell 3.1 percent Tuesday, even as oil prices also slumped.
No Free Lunch
U.S. airlines have depended on mergers, capacity discipline and, more recently, lower oil prices to sustain profits after $58 billion in losses in the nine years ended in 2009. The Bloomberg U.S. Airline Index soared 81 percent last year as the industry reported record profits.
“People had thought things were looking great with lower oil prices, especially in the $40s,” said David James, senior vice president for James Investment Research in Xenia, Ohio. “As they started to jump back up to the $60s, that created a lot more concern as far as the cost, that it wouldn’t be quite the free lunch many had expected.”
James Investment, with holdings that include Delta, Southwest and Alaska Air Group Inc., sees a 50 percent chance oil prices will fall and believes the current share decline represents an opportunity to buy airlines.
–With assistance from Michael Sasso in Atlanta and Jennifer Kaplan in New York.
This article was written by Mary Schlangenstein from Bloomberg and was legally licensed through the NewsCred publisher network.