Continental Promotional Deal Sparks Concern : Airline Stock Prices Tumble on Fears New Fare War Is Starting
Nervousness on the part of investors in airline stocks over the possibility of a fare war sent those issues tumbling Tuesday after Continental Airlines announced some short-term promotional fares in the Chicago market.
The Dow Jones transportation index dropped 8.00, or 0.95% of its total value, to 836.63. The index, which is composed of 20 airline, trucking and railroad stocks, dropped even though blue chips rose slightly Tuesday and the market in general was virtually unchanged.
American Airlines dropped $1.875 a share to $57.625, UAL Inc. dipped $2 to $57.625, Delta $1.375 to $48.875 and Trans World Airlines 25 cents to $23.25.
The edginess comes less than a month after giant United Airlines moved to eliminate some of the bargain-basement prices that have plagued the airlines for a number of years.
UAL, which flies to all 50 states, raised fares effective Oct. 26. United’s major competitors quickly followed suit.
If there is to be any kind of fare war, it would reduce airline profits at a time when the industry, after a money-losing first half of 1986, is just beginning to do well. In the third quarter of this year, the major U.S. carriers reported net profits of $515.7 million, up 48.4% over the same period last year.
The Continental cuts will be in conjunction with the start of new service out of Chicago’s Midway Airport on Nov. 20. For example, Continental will operate four daily non-stop flights between Midway and Denver for as little as $59. Passengers can then change planes and go on to other cities, including San Francisco, Los Angeles, Phoenix and Las Vegas, for an additional $20.
By comparison, a one-way ticket on Continental between Chicago’s O’Hare Airport and Denver, purchased 30 days in advance, now costs $69.
Continental also announced a major expansion of routes, including new service between Washington’s National Airport and several cities in Texas and two daily flights between Houston and Orange County. Fares will be $79 each way.
Continental’s introductory fares will take effect Nov. 20 and will end Dec. 15. Bruce Hicks, a Continental spokesman, said the cuts are not meant to begin another fare competition and are typical of those used to introduce new services.
“They are just promotional fares for a limited period of time,” he said. “With the exception of the Thanksgiving Day weekend, they are being implemented between Thanksgiving and Christmas, the slowest time in the airline industry.”
United immediately followed Continental’s lead, saying it would match the low fares but only beginning Dec. 2 and ending Dec. 15, since its seats are sold out over Thanksgiving. A United spokesman said he could not understand Tuesday’s Wall Street reaction to the fare cuts, adding that both Continental and United had been selling the new fares since Oct. 27. American said it will also match the fares, but, instead of flying through Denver, passengers will be routed through American’s Dallas hub.
Long-Term Danger
Scott J. Drysdale, an airline analyst with the Seattle office of Birr, Wilson & Co., a San Francisco-based brokerage, said there is reason for concern about the Continental cuts. “Historically,” he said, “every time this has happened in a market a fare war has broken out--at least in the markets where the first were cut.”
Drysdale said any long-term fare cuts of meaningful size could quickly put the airlines in the red again. “The industry is profitable now. But if you look at the fare structure of the industry, you don’t have to cut much from where fares are now before the carriers move from the black into the red. They are just a few points from the break-even point right now.”
David Sylvester, airline analyst with San Francisco-based Montgomery Securities, said that “there may be more than meets the eye” to United’s reaction to the Continental promotional fares. “I wonder if this seemingly irrational response,” he said, “is an excuse by United to readjust recent fare increases because they might have negatively cut demand.
“Or it’s a message being sent to non-union Continental that there is no more Mr. Nice Guy. Or it is a futile attempt by United to slow the growth at Midway Airport.”
