United Continental Holdings, Inc. (UAL) sent the airline sector into a tailspin on Wednesday after telling analysts that it would increase capacity by 4% to 6% per year in the next three years in an effort to compete more aggressively with low-cost airlines. The news stoked fears of a price war that would cut into steadily rising profits at major U.S. carriers, dumping the Amex Airline Index (XAL) nearly 3%. United Continental stock fell nearly 9%, dropping to a two-week low.
Carriers have raised fees substantially in the past few years, showing fiscal discipline that had been lacking throughout the past decade, which featured a string of high-profile bankruptcies. Less leg room, higher baggage fees and other penny-pinching schemes have angered customers but thrilled shareholders, who have lifted the group to all-time highs. That could change if United follows through on its growth objectives, forcing competitors to lower prices to maintain market share. (See also: Why Airlines Aren't Profitable.)
United Continental Holdings came into existence in May 2010, when United Airlines merged with Continental Airlines. The stock took flight after the marriage of equals, topping out at $29.75 in November. It built a basing pattern into 2013 and took off once again, stalling in the mid-$70s in January 2015. The subsequent decline continued into the first quarter of 2016, dropping into two-year support in the upper $30s.
The stock returned to the 2015 high in December 2016 and broke out, posting an all-time high at $83.04 in June 2017. It rolled over and failed the breakout in August, ahead of mixed action into this week's news shocker, which printed a high-volume gap into the 50-day exponential moving average (EMA) in the upper $60s. This support level should limit short-term technical damage, but aggressive short sellers are likely to reload positions on the next bounce into the low $70s.
United shares may face a more significant challenge at the 200-day EMA in the mid-$60s, with a breakdown favoring a decline all the way into the 2017 low at $56.51. On-balance volume (OBV) predicts a bearish outcome at this time, posting a new high in February 2017 and dropping into a major distribution wave, ahead of a bounce that failed to gain traction into 2018. This signals inadequate institutional sponsorship that could presage a long-term downtrend. (For more, see: United Continental Falls on Plans to Raise Capacity.)
American Airlines Group Inc. (AAL) was formed in December 2013 following the merger of US Air and American Airlines. The stock rallied strongly after the union, lifting into the mid-$50s in the first quarter of 2015. It sold off with other sector components into the first quarter of 2016, settling at a two-year low in the mid-$20s, ahead of a bounce that completed a round trip into the 2015 high in July 2017.
The stock carved a triangular consolidation at resistance into 2018 and broke out, hitting an all-time high at $59.08 on Jan. 16. It held that ground for a week and gapped down on Wednesday, dropping more than 8% after the news from United Continental. The decline reached breakout support and the 50-day EMA, generating a test of bullish strength. This establishes a bilateral scenario, with rally back to this month's high favoring trend continuation while a decline through $51.50 would signal a failed breakout.
The January breakout exceeded the 2015 high by less than three points, increasing vulnerability to a failed breakout. OBV is also waving a red flag, peaking in 2015 and failing to match 2018 price action with a bullish thrust to a new high. However, this stock is better positioned than its rival to escape technical damage and continue the long-term uptrend. Even so, the most logical strategy will be to stand aside right here and let the trading crowd decide the stock's fate. (See also: The Top 3 American Airlines Shareholders.)
The Bottom Line
United Continental Holdings shocked the airline industry with an aggressive growth plan that could ignite a worldwide price war. Customers will benefit greatly if that happens, while shareholders will suffer, with major industry players vulnerable to steep corrections.
<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>