The past week has been a rough one for airlines, with Delta Air Lines (DAL -1.71%) and American Airlines Group (AAL 0.66%) among the hardest hit. Renewed capacity concerns alongside fears of slowing demand have contributed to the double-digit sell-off in Delta and American Airlines shares.
But American Airlines Group CEO Doug Parker has a different take on the industry, and it's one worth listening to after the big sell-off.
For the past couple of years, airline stocks have flown higher as capacity concerns were tamed and a recovering economy continued to boost demand. But some investors were startled when Delta Air Lines released its June report, which mentioned, among other things, an increase in capacity in the international market.
Aside from the capacity comments, the report was not particularly good or bad. Unit revenues were in line with Delta's April guidance, and the completion factor and on-time arrival rates were 99.9% and 80.8%, respectively. However, capacity increases got the bulk of investor attention, and shares sold off.
As investors continued to mull this information over, Air France-KLM (AFRAF 4.27%) announced that its 2014 profits could be 12% lower than previously forecasted. In its explanation for this profit drop, the Franco-Dutch carrier laid blame on overcapacity and lower prices in both its passenger and cargo divisions. This news had shares of Delta and American down around another 5% in morning trading on July 8.
...or clear skies?
However, not everyone is buying into the idea that airlines are running into overcapacity and weak demand. In a July 7 article in Barron's, several analysts framed the current sell-off as a buying opportunity, arguing that the long-term outlook for airlines is still positive.
On July 8, American Airlines CEO Doug Parker weighed in on the recent fear surrounding the airline industry. Rather than being concerned about perceived slowing demand, the Associated Press notes that Parker said, "We're happy with the demand we are seeing for the product throughout the world." His take on capacity is also more bullish: "There happens to be some growth internationally from a number of carriers, including American Airlines, in response to increased demand."
As Parker added that "the airline is doing very well", shares of both Delta and American reversed much of their previous losses from the Air France-KLM news. At the end of the day, Delta was down 1.25% while American moved into positive territory with a small gain of 0.4%.
Although airline stocks have taken a heavy beating over the past week, Q2 earnings for Delta and American look to be less than a month away, based on past reporting dates. So far, neither airline has revised guidance down, and Doug Parker seems very positive on the outlook for American Airlines.
While we must acknowledge that the CEO of a company is at least somewhat biased toward a positive future for the company, corporate officials have to be careful in choosing their words, especially this close to earnings, as it could cause an embarrassment or shareholder backlash if the CEO talks up the company and then reports disappointing earnings.
With the recent events creating such a divide among airline investors, Q2 earnings results could play a major role in whether airlines resume their upward flight path or continue to encounter stock market turbulence.