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Fears about competition spook investors

By Benjamin Snyder
May 21, 2015

Lower fuel prices are leading to growing competition among airlines—and investors are panicking.

Southwest Airlines reported ambitious growth plans this week, and the promise of more competition led to a selloff of airline stocks Wednesday. Southwest said it hopes to increase capacity±the number of seats on its planes—by 8% this year, up from its earlier goal of 7%, the Wall Street Journal reports. It credited higher profitability, which is partly due to cheap fuel lowering costs. But that led investors to predict a market oversupply as energy prices continue to keep overall costs low.

Shares of companies in the industry, including Southwest, United Continental and American Airlines fell more than 9%, while Delta saw its stock tumble by over 5%. Analysts called the selloff an overreaction, the Journal reports, but it still wiped out more than $10 billion in market value Wednesday.

“Investors are taking profits and being cautious, but we think when summer rolls around and airplanes are packed and airlines are back to making record profits, investors will come back,” Jim Corridore, an airline equity analyst with S&P Capital IQ, told the Journal. “It’s my fundamental view that the most pervasive thing is energy prices.”

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