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Wall Street worries about fare wars and higher costs as airlines grow

 

Investors’ fears about low airfares may not materialize as airlines digest and start passing along higher oil prices.

Fares are too low for oil prices this high,” American CEO Doug Parker told analysts on an earnings call. “Over time, you’ll see that adjust but it takes time.”

Also, demand for leisure and business travel is strong, a boon to carriers that are flying fuller, and sometimes larger planes.

American Airlines, the world’s biggest airline, said Thursday it expects the revenue per seat for every mile it flies, a key industry metric, to rise 2 to 4 percent in the first three months of the year. That’s after this figure grew 5.6 percent in the fourth quarter from the last three months of 2016. Growing beyond demand can be risky and lead to spiraling fare wars.

United, like American, plans to expand to other cities that connect to some of its largest hubs.

Parker told CNBC the industry’s growth plans are strategic and more disciplined than aggressive expansions in the past, a move that has backfired on airlines in the past as they resort to rock-bottom fares to get more travelers on board.

“When you saw growth in excess of demand growth … that led to more bad times,” Parker said, adding that shares in the sector, once beleaguered by high oil prices and bankruptcies, are cheap compared with other industries.

U.S. airline stocks have each been trading at about 6 to 13 times earnings, compared with 24 times earnings for the S&P 500, according to FactSet.

“I think … people believe that we’ll once again find a way to screw this up,” Parker said. “I don’t think that’s the case.”

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