Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Shares of U.S. airlines United Continental Holdings Inc. (UAL -0.08%) and American Airlines Group Inc. (AAL 0.64%) and plunged 10% today.
So what: Since a phase of bankruptcies and consolidations concluded just in the past few years, airlines have been able to maintain capacity and slowly raise prices by adding fees for everything from carry-on baggage to in-flight snacks. But the scarcity of airline seats that have helped push prices, and profits, higher might be forming cracks as carriers begin to compete for customers.
American Airlines CEO Doug Parker told CNBC yesterday that airlines are expanding capacity too quickly, and Southwest Airlines (LUV 1.10%) added to those worries by saying revenue per available seat mile will fall 3% in the second quarter. If capacity indeed grows more quickly than passengers are willing to take up, then we could see falling prices for airline tickets, and all carriers' margins would struggle.
Now what: Historically, airlines have been a terrible investment for just this reason. As soon as margins and profits grow to a comfortable level, either companies add capacity or new competitors enter the market. It was only a matter of time before the cycle happened again with airlines, and today's reaction is due to worries that we may be at a peak profit level for airlines.
I'm not one to panic over any single move, but I'll say that this is one reason I avoid airline stocks. They can be wildly successful when times are good, but the good times rarely last, and more often than I would like, the fall leads to bankruptcy, even for the biggest airline companies in the United States.
