Is a Price War Brewing in the Airlines Industry?

When Southwest Airlines Co. (NYSE: LUV) announced last week that it was adding more destinations in Mexico, Latin America and the Caribbean, we wondered if the discount carrier knew that it was launching a price war. Not only did the airline say it was adding more destinations, it also changed its order on Boeing Co. (NYSE: BA) for 31 jets with 32 more seats per plane than it had originally ordered. And that is after the airline added 6% to its capacity in the first quarter of this year.

Waiting long enough to make it seem like just another announcement, American Airlines Group Inc. (NASDAQ: AAL) CEO Doug Parker told Bloomberg News on Tuesday that his company would compete “aggressively” with discount carriers adding more seats and cutting fares to keep flights full.

On top of its first-quarter growth, Southwest sees full-year growth in capacity of up to 8%, primarily due to the lifting of limits on non-stop flights out of Love Field in Dallas. The company’s chief financial officer told an industry conference on Tuesday that Southwest believes there is significant pent-up demand for service out of Love Field.

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Delta Air Lines Co. (NYSE: DAL) and American already have said they plan on 2% capacity growth in 2015. Delta and American shared in record airline industry profits last year and would like to maintain pricing power by limiting the number of seats.

That is not the strategy that Southwest and low-cost carriers JetBlue Airways Corp. (NASDAQ: JBLU) and Spirit Airlines Inc. (NASDAQ: SAVE) intend to follow. Like Southwest, JetBlue projects 2015 growth in a range of 7% to 9%, while Spirit is looking at growing capacity by a whopping 31%.

There is virtually no way that the legacy carriers (American, Delta and United Continental) can compete with the low-cost carriers on price. Spirit claims the highest profit margin of any U.S. carrier at 11.7%. Of the legacy carriers, American’s margin is highest at 6.8%, with both Delta and United at 2.9%. Southwest and JetBlue margins are right around American’s.

The legacy carriers are also fighting with Persian Gulf airlines over flights to the United States that originate outside the Gulf countries and use the Gulf states as a connection for flights into the U.S. The U.S. carriers say the Gulf airlines like Emirates, Qatar Airways and Etihad receive billions in government subsidies and should not be treated the same as other airlines when it comes to flying to U.S. destinations.

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The threat of a price war is no good for any U.S. carrier. The low-cost airlines may suffer the least, but they are also not likely to suffer the longest. The legacy carriers will suffer the most, but they can probably survive longer.

Every U.S. carrier traded down shortly before noon on Wednesday, with American and United Continental Holdings Inc. (NYSE: UAL) both down more than 7%. JetBlue traded down the least at just under 2%.