With the proposed merger of American Airlines and US Airways suddenly up in the air, many are questioning whether the industry can maintain its long-standing capacity discipline.
Fort Worth-based American would likely return to its pre-merger plan to increase capacity 20% by 2017 while Tempe, Arizona-based US Airways would probably maintain its flat fleet count while gradually upgauging its fleet through at least 2014, based on various Wall Street analyst comments.
"Industry discipline is at risk," says Jamie Baker, an analyst at JP Morgan in New York, in a research note on 13 August. "The industry's longer-term earnings prospects are jeopardised by a standalone AMR business plan that must grow its way (rather than merge its way) to competitive network parity with post-merger Delta and United."
He notes on an investor call today that the bank's guidance for US carriers remain unchanged for 2014.
Airline capacity in the USA is down 9.3% from 2007 to 2012, according to Flightglobal/Innovata data. Industry capacity bottomed at 1.12 trillion available seat kilometres (ASKs) in 2010 having since risen to 1.4% to 1.14 trillion ASKs in 2012, the data shows.
This discipline has produced profits for the industry. The 10 largest airlines in the USA reported a combined $152 million profit in 2012, according to industry body Airlines for America (A4A). This was down from $418 million in 2011 but still a positive sign after years of industry losses.
Fitch Ratings cites consolidation, and the resulting capacity discipline and higher yields, as a significant driver behind the improvements in many airline credit profiles during the past five years, in a research note on 13 August.
The rating agency adds that the Department of Justice's (DOJ) challenge could "effectively halt near-term airline consolidation and represents a modest credit negative for US carriers".
Stock markets reflected the pessimistic view of the industry. American shares fell 45.4% to close at $3.17, Delta fell 7.5% to $19.55, United fell 7.9% to $30.73 and US Airways fell 13.2% to $16.36 in trading on 13 August.
One of the main thrusts of the agency's challenge to the American-US Airways merger is the fact that the deal would result in more than 80% of US airline capacity being in the hands of four carriers. Bill Baer, assistant attorney general in charge of the DOJ's antitrust division, says that such a concentration would improve carriers' ability to raise fares and fees through what he deems "tacit coordination", during a media call on 13 August.
"Industry consolidation has left fewer, more-similar airlines, making it easier for the remaining airlines to raise prices, impose new or higher baggage and other ancillary fees, and reduce capacity and service," the DOJ says in its lawsuit. "This merger positions US Airways' management to continue the trend."
The agency and district attorney's from Arizona, Florida, Pennsylvania, Tennessee, Texas, Virginia and Washington DC filed a 56-page lawsuit challenging the merger with the US District Court for the District of Columbia on 13 August.
The case is expected to go to court in the next two to three months with a ruling issued before a 13 December deadline, when the merger agreement between American and US Airways expires.
Without the merger both American and US Airways remain at a disadvantage to Delta Air Lines and United Airlines. Delta and United are significantly larger carriers that benefitted from quick DOJ antitrust approvals of their respective mergers with Northwest Airlines in 2008 and Continental Airlines in 2010.
Delta is flying 21.2% of US domestic capacity, United 19.2%, American 14.1% and US Airways 9.8% in August, Flightglobal/Innovata data shows.
Michael Boyd, chairman of aviation consulting firm Boyd Group International, says that the DOJ created an "off-balance" industry with two mega carriers and two "competitively disadvantaged sub-mega" carriers.
Delta and United could benefit if there is no merger, even with growth at American. Both carriers have deep networks that connect every major - and many small - metropolitan areas in the USA with the rest of the country in all directions. A market position that was a centrepiece to American and US Airways argument for their merger - to fill the gaps in their respective networks.
One of American and US Airways widely cited examples was Buffalo. American only flies from the city to Chicago O'Hare, a routing that does not provide for easy connections to either the northeast or southeast, while US Airways flies from the city to Boston, Charlotte, Philadelphia and Washington National, making it less attractive to travellers heading to the midwest or west.
"There are certain implications for Delta and United that they benefit from this deal not going through in the short term," says Mark Streeter, an airline credit analyst at JP Morgan, during an investor call today. "Long-term they'll be in a position to benefit as well."
He adds that Delta has taken some passengers from American since its bankruptcy filing while United has likely lost some passengers to the carrier as it has gone through its own merger integration issues over the past 18 months.