January 29 - US Airlines’ Stocks Tanking; Why are investors freaking out?



US Airlines’ Stocks Tanking 

Why are investors freaking out?


Business Travel Coalition (BTC) published the following analysis.

United Airlines in its broadly promoted Q4 earnings call from New York City, after the market closed last Tuesday, revealed a three-year plan of low-fare carrier price matching amid 4% to 6% capacity growth year over year. United’s share price fell some 16%, along with its competitors last week.

Press headlines underscore HOW investors are freaking out:


Why United Continental -- and Every Other Airline Stock -- Just Exploded


Airline stocks plunge on price war fears


Airline shares are plunging after United forecast raises price-war concerns


Southwest CEO: Expect fierce response to United expansion


Airline stocks plunge after United's growth plan sparks fears of fare war

Here are the Wall Street analysts’ takes on the Tuesday earnings call from their reports to top clients:

“Black Wednesday” - Jamie Baker, JP Morgan

“Snatching Defeat from the Jaws of Victory” - Duane Pfennigwerth, Evercore

“Here We Go Again on Capacity” - Rajeev Lalwani, Morgan Stanley

Here is BTC’s take on WHY investors are freaking out.

· The major promise of US airline industry consolidation to investors was that airlines would stop competing away their profits, i.e. with historic fare wars and below-cost capacity dumping to eliminate low-fare competition.

· Now that investors have seen what they perceive as a profound change to the airline-industry-consolidation storyline from United Airlines vis-à-vis low-fare carriers - with the airline’s president Scott Kirby saying that the only way forward is to match low-fare carriers' prices - it's no doubt very unsettling especially in the context of tax reduction/reform-induced business travel demand now being potentially crushed by price wars as well as increasing labor and fuel costs.

· This kind of airline and investor reaction to domestic competition could have been predicted by looking at the over-the-top reaction by major US airlines American, Delta, and United (US3) to Gulf carrier competition and by the tens of millions of dollars spent on a political campaign over the past 3 years to keep the market and investors calm. The US3 badly miscalculated their market strategies with respect to Qatar Airways, Emirates Airline and Etihad Airways (Gulf Carriers), e.g., ignoring India; having a poor product to compete with, as well as a gaping deficit in the quality of service provided and value proposition offered; and losing the instinct and wherewithal to compete effectively - especially when they think they have a US Government protectionist, neo-mercantilist policy alternative. Why up one’s competitive game by innovating and better listening to what customers want and expect when one’s first, second and third instinct is instead to seek government protection!?

· Through their own behavior, the US3 themselves have created an undeniable perception that they believe capacity discipline/control is absolutely essential to their sustained profitability in the newly consolidated industry.

For example:

the class action lawsuit alleging illegal capacity signaling and discipline that Southwest has tacitly admitted to by settling and turning on the US3 by committing to provide evidence against them;

the battle against Norwegian Air International and Norwegian Air UK to try to manage transatlantic capacity, i.e. keep out a competitor who is not a member of the oligopoly’s inter-alliance antitrust immunized (ATI) empowered managed-capacity club; and

the now four-year-old political campaign against Open Skies and the competitive choice Gulf Carriers offer - again, trying to keep out competitors who don’t participate in the oligopoly’s inter-alliance ATI-empowered managed-capacity club. 

Given the US3’s desperation - at all costs - to maintain/impose domestic and international capacity discipline, why wouldn’t the market freak-out the way it did to United’s announced uncoordinated growth plans?

The consolidation-enabled, record-setting profits of the US3 provide them unprecedented economic power and incentive to engage in cut-throat pricing to try to frustrate remaining scant domestic competition – i.e., the United strategy. However, they have also fueled a scorched-earth campaign against the Gulf Carriers that are positioned to introduce badly needed services across the Atlantic in competition with the antitrust immunized, US3-led alliances and joint ventures.

The message they arrogantly intend to send to new entrant domestic and international competitors to stifle entry: these are “our markets” and “our passengers” - don’t even think about offering new competitive choice in them because, if you do, in coordination, we will unleash our full fury and unlimited lobbying budgets to destroy you.

The US Congress and regulators are watching. So should airline investors; it might not be a smooth ride!

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