JetBlue Airways Corporation (JBLU), Alaska Air Group, Inc. (ALK): Will a Scuttled Airline Merger Hurt Smaller Carriers?

Initially, it seems pretty clear that such an industry setup would allow large carriers to squeeze smaller ones out through predatory means. But if the largest carriers stick to their own routes, and fares rise as a result, then smaller carriers would have more room to raise fares on alternative routes.

If the merger fails, airline fares are unlikely to rise quite as quickly. This would in turn require smaller carriers to keep fares down, even on alternative routes, to remain competitive with travelers. But the threat of predatory tactics by majors would be reduced as well. So it’s unclear whether higher fares would be balanced out by predatory tactics for smaller airlines. And until a merger does happen, no one will know for sure.

Industry surprise
Despite causing an initial drop in shares of smaller carriers, the DOJ lawsuit filing against the US Airways-AMR merger has some silver linings for non-legacy players. However, the exact effects will be largely a product of the actions taken by major carriers. Investors in small airlines should keep an eye on industry airfare trends as continuing upward movement gives smaller carriers more room to raise their own fares.

In the event the merger is allowed to proceed, investors in smaller airlines need to watch out for predatory pricing tactics. While technically illegal, regulatory action is rarely quick enough to mitigate all damage to smaller competitors. So, unlike the market’s virtually universal negative reaction, the skies ahead for smaller carriers may have even more opportunities than before.

The article Will a Scuttled Airline Merger Hurt Smaller Carriers? originally appeared on Fool.com is written by Alexander MacLennan.

Alexander MacLennan is long $17 January 2015 US Airways calls, and long $22, $25, and $30 January 2015 Delta calls. This article is not an endorsement to buy or sell any security and does not constitute professional investment advice. Always do your own due diligence before buying or selling any security. The Motley Fool has no position in any of the stocks mentioned.

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