Wall Street is afraid your flight could get cheaper

Key Points
  • Airlines are trying to grow to meet strong demand.
  • Some analysts fear this could spark fare wars.
  • Airline expansion plans come as oil prices hit more than three-year highs.
Steve Parsons | PA Images | Getty Images

Airline investors want the exact opposite of what consumers want: higher fares.

Several U.S. airlines this week reported better-than-expected profits, but their growth plans have worried some analysts that the skies could be flooded with too many seats, and that airlines will have to offer bargain fares to compete. Their expansion plans are coming just as costs from fuel to labor are rising.

The worries began on Tuesday when United Airlines said it aimed to grow capacity by as much as 6 percent a year for each of the next three years. Shares tumbled more than 11 percent the next day, taking down other airline stocks. A day later, investors still appeared worried about how the sector will grow and how it will withstand higher costs, especially with rising fuel bills.

United shares dropped another 4.3 percent Thursday, while American fell 3.2 percent, Delta Air Lines shed 3.5 percent and Southwest dropped 3.3 percent. JetBlue sank 6.2 percent after an earnings miss.

"I think investors have every right to be worried about that," Raymond James airline analyst Savanthi Syth said of United's pace of growth.

American Airlines CEO: Growth in our hubs creates connectivity for our customers

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."