Airlines have had a fairly good year so far, helped by Delta Air Lines’ (DAL) strong fourth-quarter earnings and robust December traffic reports, and there’s plenty of optimism about the sector. And United Continental (UAL) just killed it.
Here’s what’s happening: United Continental did what many hoped it was when it reported a beat-and-raise quarter. United said that it earned $1.40 a share, on revenue that rose 4.3% year over year to $9.44 billion. Analysts were looking for earnings of $1.31 a share on $9.41 billion in revenue. For the full year, it expects to earn between $6.50 and $8.50 a share, above the $7 consensus estimate.
But shares of United have dropped to $70.14 at 10:26 a.m. today after the company said it would increase capacity by 4% and 6%. The damage isn’t limited to United. Delta has fallen 5.1% to $56.87, American Airlines (AAL) has slumped 5.5% to $55.12 and Southwest Airlines is off 3% at $63.33.
Evercore ISI’s Duane Pfennigwerth and Raymond Wong have had enough of United. They downgraded its shares from Outperform to In Line on the report, writing that United snatched “defeat from the jaws of victory.” And it’s not just the capacity news, but “numerous self-inflicted pricing execution missteps” last year that inspired the change, they write. They also note that while United claims to be working toward restoring its share of the domestic market and shoring up margins, there’s little sign that this tactic is actually working, and the capacity increases make it harder for investors to keep the faith.
But why do the other airlines have to suffer for United’s sins? Stephens’ Jack Atkins, who reiterated an Equal Weight rating on the stock today, notes that the capacity increases are particularly worrisome, especially if other airlines respond.
More competition would be great for fliers. For airline stocks, however, not so much.
