The top U.S. airlines saw some impressive fourth-quarter earnings. But that was not enough to give Wall Street assurances of no turbulence ahead.
Stocks plunged simultaneously as the heads of the airlines recited their earnings, which barely registered once everybody started talking about a potential price war. The hysteria was set off on Wednesday after one of the airlines (United Continental Holdings) announced plans to add seats and passengers over the next few years.
On Friday, moments before market close, stocks for all four of the major carriers were back in the green. American Airlines Group Inc. (AAL, Financial) had been down for most of the day. But the stock inched up .04% to over $53 a share by market close.
The three other carriers also were up. United Continental Holdings (UAL, Financial) was up 0.64%. Southwest Airlines Co. (LUV, Financial) was up 0.92%, and Delta Airlines Inc. (DAL, Financial) was up 0.65%. The improvements, however, did not make up for the losses the stocks experienced over just a few days.
Less than 24 hours ago, we saw some stock prices lose value in the double-digits. American Airlines was trading at $53.05 a share; just two days prior, it had been over $58 a share. Delta Airlines saw a drop to $54.81 after drawing close to $60 a share for its stock earlier this week. Shares of Southwest Airlines went to $60; the stock was at $65 a share on Tuesday.
United Airlines went to almost $78 a share on Tuesday. By Thursday, the stock price had fallen to $66.08 a share.
Flying high
On Tuesday, the major carriers were flying high as earnings left expectations in the dust. Chicago-based United announced earnings of $1.40 per share for the fourth quarter. Wall Street had expected $1.34 per share.
Dallas-based Southwest said its earnings had reached a record $3.18 per share, capping more than four decades of sustained profitability.
Atlanta-based Delta told investors this month it had generated $6.8 billion of adjusted operating cash flow and $2 billion of free cash flow for the full year. For an industry that’s capital intensive, that was great news for investors.
Fort Worth-based American was announcing a big dividend for shareholders on the day its shares fell by more than 3%.
More seats
On Wednesday, United announced plans to add more seats to the market. In detail, it said it would add 4% to 6% to its passenger-carrying capacity this year, continuing that growth through 2020.
It freaked out investors, including Warren Buffett (Trades, Portfolio), who acted quickly to dump approximately $1 billion in holdings of airline stocks.
Years ago, Bufffet was known for not being very fond of airline stocks. Back then, he said he was open to changing his opinion about airlines as they got better at managing business. It’s highly likely the guru will say something about this issue in the near future.
United Airlines
United Continental CEO Oscar Munoz did not look too spooked on TV this week when he talked about his airline’s plan to expand seats and customers.
Indeed, he called it “a very exciting path forward for United to reach its full potential.”
But Munoz said he was not surprised by the reaction his announcement set off among investors. Sometimes, “the transparency you provide to this world creates a little bit of noise,” he said on CNBC.
He acknowledged the widespread criticism that fare wars, sparked when airlines expand capacity, create few winners. At the same time, he emphasized that, by adding capacity, his airline was trying to tap opportunities and "strengthen areas of weakness."
“It’s great for customers because customers from many different places are going to get a chance to fly with us.”
