Delta Air Lines, Inc. (DAL), Southwest Airlines Co. (LUV), JetBlue Airways Corporation (JBLU): Is Big the New Small in the Airline Industry?

The transition of 717s from Southwest Airlines Co. (NYSE:LUV) to Delta Air Lines, Inc. (NYSE:DAL) is thus allowing both carriers to increase their average aircraft size.

Other carriers are getting into the game, too. JetBlue Airways Corporation (NASDAQ:JBLU) has historically operated a fleet of 150-seat Airbus A320s and 100-seat Embraer SA (ADR) (NYSE:ERJ) E190s. However, this fall the carrier will begin taking delivery of 190-seat Airbus A321s (the largest narrowbody aircraft currently in production). Management is very excited about the potential for these larger aircraft to lower unit costs over the next few years. JetBlue Airways Corporation (NASDAQ:JBLU) plans to add 30 A321s to its fleet, and has scaled back the growth of its E190 fleet to accommodate the A321.

Competition will intensify
The upshot of all the activity currently taking place is that the average domestic aircraft will be noticeably bigger in a few years. This will allow the airlines to reduce unit costs, but given that the market is not growing significantly, they may have trouble filling these extra seats at rational prices. While the airline industry has been very successful at raising prices in the past few years, most carriers began seeing patches of demand weakness last month.

Airline executives still talk about capacity discipline, but the shift toward larger planes is adding a significant number of additional seats to certain markets, even if system capacity growth is small. In an environment where pricing is already starting to break down, this excess capacity could cause unit revenues to drop just as quickly as unit costs. Airline investors should keep a close eye on this process as it plays out, as it represents a significant risk to most U.S. airlines.

The article Is Big the New Small in the Airline Industry? originally appeared on Fool.com is written by Adam Levine-Weinberg.

Motley Fool contributor Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool recommends Southwest Airlines.

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