American Airlines' (AAL) hint that it may increase domestic capacity sent stocks in the industry tumbling Friday, just as signs began appearing that airlines have finally ended a two-year glut in flights and seats that have weighed on earnings.
In a research note, Stifel analyst Joseph DeNardi attributed the stock sell-off to "commentary from management that it 'wouldn't be shocked if we slightly toned down international and add a little bit to domestic (capacity).'"
He added: "Following similar creep from Southwest yesterday, the messaging to investors is pretty poor (i.e. domestic RASM has finally turned positive - now let's start adding capacity). While we appreciate that perspective and understand it's based on reality given how 2015 played out, we'd be surprised if airlines make the same mistake again."
Early Friday, shares of American briefly rose to 50 on the stock market today, exactly matching a buy point from a handle in a short cup base. But the stock then quickly reversed lower, closing down 5.3% to 46.95 and finishing below its 50-day line for the first time in four months.
Delta Air Lines (DAL) lost 2.4%, closing at its 50-day. United Airlines (UAL) fell 1.3%, and Southwest (LUV) lost 2.3% after soaring 9% Thursday to a record high. JetBlue (JBLU) sank 6.9% and Spirit Airlines (SAVE) tumbled 4.8%, diving below its 50-day.
American's capacity comment overshadowed a generally positive Q4 report, which showed unit revenue turned positive for the first time in two years, beating its rivals to that much-anticipated milestone. The carrier also approved a $2 billion buyback.
Earnings per share dropped 54% to 92 cents, in line with analysts' view, while revenue increased 2% to $9.79 billion, above forecasts for $9.74 billion.
Traffic slipped 1.3%, capacity edged up 0.4%, and unit revenue rose 1.3%. Earlier this month, the carrier said it expected total unit revenue to be flat to up 2%.
"Our product investments are showing up in our unit revenue performance," said Chairman and CEO Doug Parker in a statement, referring to Delta's Basic Economy and Premium Economy classes. "We had the largest improvement in unit revenue among our competitors and as we look forward, we continue to see strong demand for air service, and improving yields."
Unit cost climbed 5.7%. Operating expenses grew 5.4% as salaries and benefits expense jumped 17.4% on new labor agreements.
American also sees Q1 unit revenue up 2.5%-4.5%. Unit costs, excluding fuel and special items, are expected to jump about 9% in Q1, which will be the peak as maintenance and fleet crew pay hikes won't be lapped until the middle of Q3. Capacity is seen growing roughly 1% for 2017.
The results come as most airlines improve unit revenue — which measures revenue as it relates to seat-and-flight capacity and is seen as a gauge of an airline's efficiency — aided by rising postelection travel demand and capacity cuts.
IBD'S TAKE: Higher fuel prices can help airlines operate more conservatively and pass costs onto consumers, annoying passengers but helping financials. But rising fuel costs, along with pay-raises or other deals struck with staff, are also likely to keep margins thinner this year. Margins could become more of a focus as the year progresses.
Delta this month said higher fuel and labor costs would pull at margins for the first half of this year, peaking in the current quarter. United also forecast higher costs.
Southwest offered a strong unit-revenue forecast for the first quarter. But JetBlue forecast a January unit-revenue decline of 8%-9% due in part to Winter Storm Jonas. But JetBlue said the months to come look better.
RELATED:
Why Airline Investors Could See 'Ample Upside'; Delta Lifts Views
Only Delta, Southwest Spared From Cowen's Airline Downgrades
