NEW YORK (Reuters) - Shares of major U.S. airlines plummeted on Wednesday as investors reacted to growing concerns of an industry fare war, triggered by a decision from United Continental Holdings Inc UAL.N to increase capacity and compete head-to-head with budget carriers.
United shares closed down 11.44 percent at $69.05 on the carrier’s plan to add more seats on its routes and compete aggressively with low-cost rivals in the hopes of eventually boosting its slack profit margins.
The dramatic drop in the share price is the second such fall in as many quarters, as the Chicago-based airline has struggled to maintain control of its U.S. hub cities amid increased competition from budget airlines.
“The best way to compete with a low-cost carrier is match their prices,” United President Scott Kirby told analysts and investors on Tuesday. “We can’t let low-cost carriers have price advantages in our hubs.”
The bulk of investor concerns lie in United’s decision to beef up its capacity by between 4 percent and 6 percent in 2018, and at a similar clip in 2019 and 2020, on the grounds that it would give the carrier an edge in its fight against competitors.
United hopes to halt the steady creep of rivals, including Frontier, Spirit (SAVE.N) and Southwest Airlines (LUV.N), into its U.S. hubs like Denver and Chicago. At the same time, the No. 3 U.S. carrier by passenger traffic hopes to increase its market share in some rival strongholds to improve profit margins.
United, however, has to contend with significantly higher operating costs than its budget counterparts.
In the third quarter, for example, United’s cost per available seat mile was measured at 12.54 cents. Southwest’s unit cost for the same period was 11.36 cents. Smaller rival, budget carrier Spirit had a unit cost of just 7.59 cents.
In a research note on Wednesday, CFRA Research analyst Jim Corridore lowered the firm’s opinion of United shares to hold from buy.
United “unveils plan to right size hubs and raise connecting and premium traffic. We think this is the right course of action, but it will take time to work, will drive near-term unit revenues down and risk a competitive response,” Corridore wrote. “We will wait to see how this plays out before recommending shares.”
United’s financial results came on the heels of an uplifting fourth-quarter and full-year review from Delta earlier this month.
Reporting by Alana Wise in New York and Rachit Vats in Bengaluru; editing by Supriya Kurane, Susan Thomas and G Crosse