American Falls as Airline's Growth Plan Fuels Fears of Seat Glut

(Bloomberg) -- American Airlines Group Inc. fell the most in two months after the carrier said it would more than double the growth rate of seat supply next year, stoking concerns that a glut would drive down fares across the industry.

Capacity is expected to increase 2.5 percent next year, Chief Financial Officer Derek Kerr said Thursday on an earnings conference call. The closely watched figure, measuring each available seat flown a mile, is expected to 1 percent this year.

“That’s a high growth rate in the context of what other airlines have said, and it’s looking more likely that domestic capacity will grow about 5 percent in 2018, which is rough,” Wolfe Research analyst Hunter Keay said in a research note. “Investors obviously assume it bodes poorly for industry pricing.” 

The preliminary outlook from the world’s biggest carrier drove down other airline shares, fueling anxiety that the supply of seats would outstrip demand and undermine efforts to keep ticket prices from dropping. The biggest U.S. carriers also have struggled to contain a fare war with ultradiscounters that erupted earlier this year.

Kerr attempted to quell such worries, saying American will “take a measured approach to matching our planned capacity levels.” The Fort Worth, Texas-based carrier expects to provide its final plans for the year in January. The preliminary forecast has domestic and international capacity each increasing 2.5 percent next year.

American’s shares dropped 4.7 percent to close at $48.61 in New York, the biggest decline since Aug. 17. A Standard & Poor’s index of the five biggest U.S. carriers declined 3.1 percent.

American forecast that passenger revenue for each seat flown a mile would rise 2.5 percent to 4.5 percent this quarter from a year earlier, citing strength in business as well as leisure travel. The gauge of pricing power, also known as unit revenue, rose 1.1 percent in the third quarter, even after hurricanes forced the cancellation of 8,000 flights. 

“The outlook calls for an improving revenue environment,” Helane Becker, a Cowen & Co. analyst, said in a note.

American’s statement followed a similar forecast from Delta Air Lines Inc. United Continental Holdings Inc. caused concern this month when it said this year’s fare war had expanded to more markets and driven down some so-called walk-up prices around the industry.

Average fare per mile increased in every region last quarter for the first time since 2014, American said.

The carrier’s expansion of its basic-economy product throughout the continental U.S. last quarter allowed American to compete with ultra-discounters like Spirit Airlines Inc. Basic economy offers a lower fare with no upgrades, no advance seat assignment and one carry-on bag that fits under the seat. About 50 percent of travelers considering basic economy end up buying a higher-priced ticket, American says.

Profit Declines

Third-quarter adjusted earnings fell to $1.42 a share. Analysts had predicted $1.40, according to the average of estimates compiled by Bloomberg. Revenue rose 2.7 percent to $10.9 billion, matching analysts’ expectations. Unit revenue increased 1.1 percent from a year earlier.

Pretax profit margin, excluding some items, will be 4.5 percent to 6.5 percent this quarter. Costs for each seat flown a mile, excluding fuel and special items, will increase 4.5 percent this quarter and 5.5 percent for the full year.

The National Association for the Advancement of Colored People on Tuesday issued a travel advisory against American, saying a series of incidents involving African-American passengers “suggest a corporate culture of racial insensitivity and possible racial bias.” American Chief Executive Officer Doug Parker said the carrier doesn’t tolerate discrimination and will invite the civil-rights group to discuss the issue.

©2017 Bloomberg L.P.

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