United Airlines' capacity growth spooks markets: investors react and stock price dives

An upward revision to United's 2017 capacity guidance has created a minor market panic, fearing that US airline capacity discipline has been abandoned just as pricing in the domestic market was beginning to stabilise. The timing of United's revised capacity guidance was unfortunate - occurring just days after its rivals American, Delta and Southwest revised 1Q2017 unit revenue guidance downward. United, which initially offered a more conservative forecast, has kept its guidance intact.

The ensuing plunge in United's stock price is hardly surprising given underlying market fears that domestic capacity could creep up in 2017. In some aspects United, which has been a strict adherent to keeping capacity growth in line with GDP, took markets off guard, stoking fears that the capacity discipline integral to the industry's turnaround is evaporating.

United's argument is that the company is engaged in a comprehensive network review, and the changes triggering the capacity growth are ultimately margin accretive. The company and its new management are refreshingly unapologetic for the capacity increase, arguing that it is necessary to regain lost ground in the US domestic market. The logic for that argument is sound, but United finds itself balancing the short term focus of investors with its efforts to close margin gaps with its peers. The big question - will others respond?