United Airlines’ (UAL) headache dominated the headlines for a second day on Tuesday.
And while early in the day it looked like the debacle surrounding the forcible removal of a passenger from a flight on Sunday night would have a major impact on the stock — shares were down as much as 4% at one point, taking more than $900 million off United’s market cap — impacts turned out to be more muted by the end of the trading day.
United shares lost 1.1% on Tuesday, more than the broader market, but far from the amount that likely makes executives think markets will dwell on what has been a considerable PR disaster.
Near the end of the trading day, United CEO Oscar Munoz finally issued a statement that, in contrast to the company’s earlier communications on the incident, showed some real contrition.
“The truly horrific event that occurred on this flight has elicited many responses from all of us: outrage, anger, disappointment,” Munoz wrote.
“I share all of those sentiments, and one above all: my deepest apologies for what happened. Like you, I continue to be disturbed by what happened on this flight and I deeply apologize to the customer forcibly removed and to all the customers aboard. No one should ever be mistreated this way.”
On Wednesday, Delta Airlines (DAL), one of United’s chief rivals, will report earnings before the market open. Delta’s report will be the headline amid an economic and corporate calendar that is sparse, as investors wait for bank stocks — including Citi (C), Wells Fargo (WFC), and JPMorgan (JPM) — to unofficially kick of first quarter earnings season with reports out before the market open on Thursday.
Airlines, the industry
As we wrote on Monday, flying stinks.
Flying is also highly unequal.
In many ways, commercial flight in the U.S. brings to bear all the things we’d perhaps rather forget about our current culture : it is unequal, very loud, very crowded, and seems needlessly terrible.
And this is good for the airline industry.
As Business Insider’s Bob Bryan noted on Tuesday, the business issue that made itself known with United’s overbooking problem on Sunday is capacity. Specifically, the airline industry doesn’t have much excess capacity left. If you’re an airline, this is good. If you’re a flyer, it is less good.
“The cost of air travel plunged for almost 30 years as the industry was de-regulated and competition reduced prices,” write analysts at Bespoke Investment Group. “Since the post-9/11 airline industry restructuring, however, air travel’s prices have risen faster than inflation as flights have operated at higher capacity.”
Now, Bespoke notes that a lack of capital investment has put airline capacity right up against its limits. And a lack of capital investment is not only an issue that clearly plagues airlines and has before, but is one that is holding back the economy at large.
But, again, for shareholders, this is good, because airlines operating closer to their capacity limits means fuller flights and higher airfares. Indeed, the number of people taken off overbooked flights last year was 46,000.
In his annual letter to Berkshire Hathaway (BRK-A, BRK-B) shareholders, Warren Buffett, noting that airlines jack up the price of flight into Omaha, Nebraska ahead of the Berkshire annual meeting, said that, “though I must admit I have developed some tolerance, bordering on enthusiasm, for [raising airfares aggressively] now that Berkshire has made large investments in America’s four major carriers.”
And at the time Buffett’s airline investments were disclosed, Yahoo Finance’s Rick Newman noted that this investment in an industry Buffett once called a “death trap” indicated competition had, basically, gotten down to a level where shareholders, rather than passengers, were likely to enjoy the spoils of a better-run industry.
Now, as the stock reaction to United’s continued PR headache on Tuesday indicated, investors are, overall, less bothered by the bad press the airline is getting than the general public might be. Of course, as we’ve seen with the investing and general public’s reaction to the Trump presidency, this shouldn’t come as a surprise.
But this also means that United is unlikely to deal with this dust-up by making a fresh round of investment. As Bespoke writes, “if airlines are disciplined, they’ll only add capacity to match new demand.
“In other words: crowded flights and occasional conflict over seats is likely here to stay. Bad for travelers, but good for the airlines.”
Bad PR is bad. There is not getting around that. But as a public company, United has a duty not only to its employees, its customers, and its corporate partners, but also its shareholders. And what’s good for shareholders isn’t necessarily what’s good for consumers.
Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland
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