Southwest, American, United, Delta, Spirit, and JetBlue all took a hit in the stock market this week. Shares of the biggest airliners in the United States fell between 6 percent and 8 percent in just one day, and U.S. Global Jets fell 5 percent. For the past few years, airlines have been one of the best stocks on Wall Street, but it seems investors are shying away from the airlines for some reason. All of the big airlines, except Alaska Air and JetBlue, are down over 10 percent already on the year.
One issue that is concerning about the airline industry is that oil prices have gone up, with prices heading back to $60 a barrel. The airlines have already lost billions of dollars that the industry had anticipated saving in fuel this year. Investors are focused on the here and now in terms of what oil prices are doing to the airlines, even though the estimates are that barrels of oil will again drop to $45 by the fall time.
The airline industry executives are also spooking the investors by talking about how this year might be a peak for the airline industry in terms of growth. Tammy Romo, the chief financial offer of Southwest made comments at the industry conference this week, which seemed to spark a little concern for investors. Romo said that the growth of the airline industry should fall in line more with the economy in the long-term. American president Scott Kirby also said that profit margins in 2016 will likely be lower than this year, which would not be surprising given the sluggish economy.
There is also the issue that airlines having been really disciplined in terms of not adding too many flights and were lowering prices to help people because of the economy. There is concern that the airline industry is adding too much in terms of capacity, and if the economy gets any worse, this could be a major issue in the coming months. United CFO John Rainey made comments at the Wolfe Conference about how his airline was cutting capacity when the oil prices began to fall. However, Rainey thinks that the consumers will be willing to start paying for added leg room and on-flight extras.
This is where a lot of investors are getting spooked, because Rainey makes it sound like he is willing to hike up prices and essentially, start to get greedy in terms of the profit of the airline. Alaska Air CEO, Brad Tilden, was quick to point out that if you think consumers won’t pick a lower priced airline over legroom you are fooling yourself, so it seems that the big wigs of the airlines are at odds over the next move for the industry. While Rainey is looking at trying to get more money out of consumers, Kirby is smart to think that consumers are still thinking of saving money since the economy is still pretty horrible. The wars between which way to start moving is bad news for investors and also bad news for customers, because some airlines are likely to get greedy and also end up adding too much capacity, while other airlines will be focused on making the most money by getting the most business. For now, it seems that investors are scared over what comes next, and the slow economy is not helping the situation.