US Airlines Drop $8.5 Billion in Value After United Earnings Call
Tuesday night, United's management held an earnings call to discuss its earnings in the fourth quarter of 2017. The last time United's CEO Oscar Munoz took the mike during an earnings call, the stock price tumbled 12%, erasing $2.5 billion from the company's market value. Turns out Tuesday's call was followed by another drastic drop in stock price. But this time, the selloff spread across all airline stocks in the US. Across the six largest US-based airlines, stock values have dropped a combined $8.5 billion since the United earnings call began.
Two aspects of the call seem to have investors spooked. First, United admitted that it must compete with ultra-low-cost airlines on price; instead of differentiating on service, the airline is going to have to drop fares to match low-cost rivals.
And, it's not a limited issue. Chief Financial Officer Andrew Levy noted the airline has "a lot of airports that we're seeing a lot of price or cost pressure" and that the they "expect that will continue."
United President Scott Kirby agreed:
The best way to be able -- first the best way to compete with a low cost carrier is master prices. Half our revenue approximately comes from customers that are mostly shopping on price. And we cannot ignore half of our revenue and we can't let our low cost carriers have price advantages in our hubs and no one chooses to fly on an ultra low cost carrier, if they can get the same price on United Airlines.
For investors looking for revenue growth to drive earnings, this is a clear indication that the airline isn't going to be able to grow as fast as analysts want.
The next shoe to drop was United's plans for a massive capacity increase. United management indicated that it's going to expand domestic capacity by over 6% a year. And, as we know from the supply-demand curve in Economics 101, more supply with the same demand leads to lower prices.
And this may have been what caused the industry-wide stock selloff. As of 11am Eastern Wednesday, the largest six US carriers had all dropped significantly from close of business Tuesday — before the United earnings call:
- United Continental (UAL): down 10.63%, loss of $2.5 billion in value
- Delta Air Lines (DAL): down 5.39%, loss of $2.3 billion in value
- American Airlines (AAL): down 6.60%, loss of $1.8 billion in value
- Southwest Airlines (LUV): down 3.59%, loss of $1.4 billion in value
- Alaska Air (ALK): down 5.04%, loss of $431 million in value
- JetBlue Airways (JBLU): down 2.44%, loss of $177 million in value
That said, most of these losses simply pare back the large stock gains most of these airlines had seen so far in 2018:
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