Analysts Differ Over Air Fare War : Not All Think Profits, Investor Confidence Would Suffer
Airline stocks, which increased sharply in value earlier this year, face a threat from looming fare wars that some market analysts say could severely hurt industry profits and investor confidence.
But other analysts say airline stocks remain attractive because declining fuel prices and wage costs will help profits, and sophisticated marketing techniques should keep fare discounts controlled, unlike what happened two years ago.
Market watchers are focusing on Denver, a major hub where Continental and People Express are locked in heavy competition. The fear is that United Airlines, the biggest U.S. carrier, will undercut those two adversaries.
“Sitting in Denver I would certainly be concerned about the outlook for 1986, but not everybody serves Denver,” said Timothy P. Pettee, an analyst for the New York investment firm of L. F. Rothschild, Unterberg, Towbin. “The question is whether the fare competition will spread throughout the country.”
United’s chairman, Richard Ferris, appeared to put competitors on notice at a Nov. 21 luncheon with New York securities analysts, when he said the airline will withstand all price challenges and expects a “blood bath” in early 1986. Evidence of a spreading fare war emerged in November, when several major airlines began offering $99 one-way fares on transcontinental routes and a Thanksgiving holiday sale cut many domestic fares by 85%.
More signs appeared last week on New York-Florida routes, when People Express, Eastern Airlines and Delta Air Lines cut one-way prices to $49 on midweek flights between Dec. 3 and 17. New York Air answered with a $39 fare on two of those routes between Dec. 5 and 18.
In addition, People Express, Delta, Eastern and Piedmont have offered post-Chrismas discounts.
“It seems that in more than a few markets, airlines are taking a bite out of each other,” said Andrew Geller, an analyst with the brokerage firm Advest Inc. in Hartford, Conn. “But they are in very restricted markets,” he said. “It’s really not like the 1983 fare war, the out-and-out, kick’em-down fare war. It’s really a much more segregated market and specific time periods in that market.”
Economic growth and strong consumer spending helped push airline stocks up more than 30% between January and August, compared with about 13% for the market as a whole.
Since then airline stocks have retreated about 20%, which many analysts attribute to profit taking, mixed signals about the economy and rapid expansion without a matching increase in passengers. As a result, many carriers have been compelled to reduce fares in attempts to sell more seats.
“We believe that airline industry fundamentals are deteriorating rapidly,” Julius Maldutis, airline analayst for the New York investmet firm of Salomon Bros. Inc., wrote in a recent commentary. “Traffic growth rates are declining, and airline fare wars are spreading.”
Maldutis noted that in the third quarter only five major airlines reported improved operating income: American, Continental, Pan Am, Republic and Western. He wrote that he expected poor earnings results for the fourth quarter and does not anticipate improvement perhaps until mid-1986, warning investors to “carefully evaluate their holdings of airline equities.”
Pettee said investors nervous about their airline holdings overlook what he called the industry’s maturity, arguing that indiscriminate fare-cutting is unlikely because carriers have learned to offer limited discounts.
“I think the airline industry can absorb a continuation of lower fares,” he said. “As long as the economy remains intact, people are going to fly.”
Once it becomes apparent that fare cuts are not hurting the airlines, Pettee said, “I think you’ll see some rethinking by investors as to where these companies can go.”
