By David Koenig / Associated Press
DALLAS — Planes are full and airlines are making huge profits, but airline stocks tumbled for a second straight day on Thursday because investors fear that the carriers are growing too rapidly.
They worry that airlines are adding so many flights and seats that they will spark fare wars that cut into profits.
In two days, the stock-market value of the six largest U.S. airlines dropped by more than $14 billion.
The stock slump overshadowed more evidence of strong demand for travel that is making the airlines so profitable.
American Airlines Group Inc. predicted Thursday that higher revenue will produce 2018 profit far exceeding what Wall Street was expecting.
The airlines also are getting a boost from the recently enacted tax bill. It is already showing up on the bottom line of Southwest Airlines Co., where fourth-quarter profit more than tripled largely because of the way the new law affects future tax liabilities.
Southwest earned a record $1.89 billion in the fourth quarter, up from $522 million a year earlier. It got a $1.15 billion benefit from a reduction in liability for deferred taxes. Chairman and CEO Gary Kelly said the new tax law, with its 21 percent rate on corporate taxes, down from 35 percent, will save Southwest hundreds of millions of dollars and “significantly boost our earnings in 2018.”
Dallas-based Southwest’s revenue rose 3.9 percent to $5.27 billion, topping Wall Street expectations. Its planes were on average 85 percent full — a record for any fourth quarter — helping overcome a 2.7 percent dip in the average fare.
American, the world’s largest airline, earned $258 million, down 11 percent from $289 million a year earlier, but revenue rose 8.3 percent to $10.60 billion, also beating analysts’ forecasts.
Higher fuel and labor costs cut into profit at American, and they are a challenge for other airlines, too. American’s fuel bill was $1 billion higher in 2017 than in 2016, which could soon translate into higher prices for passengers.
“Fares are too low for oil prices this high,” said Chairman and CEO Doug Parker.
Higher oil prices have led to a roughly 50 percent hike in spot prices for jet fuel since last June.
Even with costlier fuel, American predicted that it will earn between $5.50 and $6.50 per share this year because of strong travel demand. That is well above the $5.32 average in a FactSet survey of Wall Street analysts.
But shares of American and other airlines fell again Thursday, as investors continued to focus on fear of overly rapid growth and fare wars.
The rout started when United Airlines disclosed that it expects to increase flying by 4 percent to 6 percent each of the next three years, about twice as fast as its rivals.
Parker tried to defend his company’s plan to boost its passenger-carrying capacity by 2.5 percent to 3 percent. He said that much of American’s growth will involve adding destinations from its own major hubs such as Dallas and increasing flights on existing routes from those hubs.
“We think it is smart, efficient growth where we have competitive advantage” and “doesn’t result in fare wars,” he said on a call with analysts.
United President Scott Kirby had offered a similar explanation the day before.
Jim Corridore, an analyst with CFRA Research, said United’s capacity plans had upset investors, but “we think fundamentals remain strong.”
Alaska Air Group Inc., the fifth-largest U.S. airline company, reported fourth-quarter profit tripled to $367 million, helped by an income-tax benefit of $218 million and the acquisition of Virgin America.
The No. 6 carrier, JetBlue Airways Corp., said earnings quadrupled to $672 million on a tax benefit of $502 million and a 7 percent increase in revenue.
Shares of American fell $1.74, or 3.2 percent, to close at $53.05; Southwest lost $2.02, or 3.2 percent, to $60.19; Alaska dropped $2.62, or 4.1 percent, to $62.07; JetBlue slid $1.36, or 6.2 percent, to $20.69; Delta Air Lines Inc. lost $1.99, or 3.5 percent, to $54.81; and United Continental Holdings Inc. fell $2.97, or 4.3 percent, to $66.08.
The two-day sell-off wiped out gains that many of the stocks had made earlier this month.