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Airline rally unwinding as American Air spurs price war selloff

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US carriers sank the most in seven months amid signs that a year of lower fuel costs has left them poised to ramp up competition for customers with cut-rate fares and more routes.

[NEW YORK] Turns out cheap oil isn't always good for airlines.

US carriers sank the most in seven months amid signs that a year of lower fuel costs has left them poised to ramp up competition for customers with cut-rate fares and more routes.

Southwest Airlines Co dropped 7.5 per cent to US$37.84 at 1:20 pm in its biggest drop in three years, while American Airlines Group Inc tumbled 6.4 per cent to US$44.80 in its worst day since emerging from bankruptcy in 2013. Airline stocks have risen at twice the rate of the Standard & Poor's 500 Index in the past year.

Carriers are able to finance expansion projects and offer cheaper flights as oil prices hover near US$60 a barrel, more than 40 per cent below a June peak. Jet fuel is airlines' largest expense. Southwest rallied 50 per cent since crude's peak through Tuesday amid a surge in revenue and profit, while United Continental Holdings Inc. jumped 40 per cent in that time.

American intends to "compete aggressively" against discount carriers that are piling on added seats and then cutting fares to keep planes full, Chief Executive Officer Doug Parker said in an interview at Bloomberg's New York headquarters Tuesday.

"We're not going to lose customers on price," Mr Parker said. "We're not going to give anyone else an advantage and allow them to expand at a rate that takes away customers and is not good for our shareholders."

Dallas-based Southwest led declines Wednesday after Chief Financial Officer Tammy Romo said yesterday the airline increased its 2015 expansion plan to as much as 8 per cent, from 7 per cent previously. While she said the move is not related to fuel savings estimated to total as much as US$1.3 billion in 2015, she forecast it would be at least two years before new markets generate returns.

The company's shares were downgraded by Daniel McKenzie, an analyst at the Buckingham Research Group.

"We're seeing the competitive backdrop worsen and lean competitors are vowing to compete aggressively looking ahead, which suggests a more cautious revenue outlook is warranted," New York-based McKenzie wrote in a note.

The Bloomberg US Airlines Index dropped 5.9 per cent, as United Continental and JetBlue Airways Corp. fell more than 5.7 per cent. The S&P 500 was little changed.

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