As Southwest Airlines and American Airlines Grow in L.A., Will United Shrink?

By Markets Fool.com

In recent years, consumer advocates have complained that a series of airline mergers have eroded competition, driving up airfares. That may be true in some places, but it certainly isn't the case in Los Angeles.

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In fact, Los Angeles is unique in the U.S. in that all of the major airlines consider it an important market and are fighting for position there. Toward that end, American Airlines and Southwest Airlines are both expanding in the L.A. area. So far, no airline has been able to build up much of a lead, though.

American Airlines just expanded by more than 10% in L.A. Image source: American Airlines.

On the other hand, one prominent airline analyst recently suggested that United Continental should consider shrinking in L.A. With the competition getting even tougher there, that's a course of action the struggling legacy carrier should definitely consider.

American unveils a big expansion

Los Angeles International Airport (LAX) has been bursting at the seams for years. Gate space is scarce, making it hard for airlines to grow there.

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However, American Airlines announced in January that it was building two new gates to increase its capacity there. Earlier this month, it completed the project and added more than 20 daily flights at LAX. This included more than half a dozen new routes, serving important destinations like Seattle, Portland, Minneapolis, and New Orleans.

American Airlines will then add new international routes from LAX to Auckland, New Zealand, and Hong Kong in the next three months. It also hopes to begin flying nonstop to Beijing in December, although it is fighting with Delta Air Lines for the rights to that route.

With these new flights, American will offer more than 220 daily departures at LAX, where it is already the largest carrier with 19% market share.

Southwest looks to grow, too

Southwest Airlines is also looking to grow its presence in the L.A. region. While it hasn't been able to add new gates at LAX this year, Southwest is renovating its existing gates there. This will enable them to more readily accommodate the larger 737-800 aircraft that is becoming an increasingly important part of Southwest's fleet.

Southwest Airlines is also looking for ways to grow L.A. Image source: The Motley Fool.

This will allow Southwest to add capacity on high-demand routes even though gate constraints prevent it from adding more departures right now. Meanwhile, on high-frequency routes, Southwest may be able to cut a few flights as it adds more 737-800s. That would free up space for Southwest to launch flights to new destinations from L.A.

Indeed, Southwest has already announced that it will start flying from LAX to Pittsburgh in August. The carrier also applied earlier this month to fly to three popular Mexican beach markets -- Cancun, Puerto Vallarta, and San Jose del Cabo -- beginning in November.

Additionally, unlike its larger rivals, Southwest offers ample service to the other L.A.-area airports. It is the largest carrier at three of the region's four secondary airports. And last week, Southwest started operations at Long Beach Airport, giving it a presence at all five commercial airports in the L.A. metro area for the first time.

Tough choices for United Continental

While it never had a dominant position in L.A., United Continental was the largest airline at LAX not too long ago. However, two years ago it leased four excess gates there to American Airlines, allowing the latter to take the lead in market share.

Since then, United has gradually trimmed its flight schedule at LAX. Most recently, it decided to end its nonstop flight to New Orleans -- one of the markets that American just entered. The L.A. hub has been a perennial underperformer in United's route network due to the stiff competition it faces there, and the company doesn't seem to have a clear plan to fix it.

United has encountered growing competition at LAX recently. Image source: The Motley Fool.

That's a big reason why Wolfe Research analyst Hunter Keay thinks that United should more aggressively cut capacity in L.A.. Unlike all of its rivals in L.A., United Continental has a strong hub just 300 miles away in San Francisco. United already has twice as much capacity in San Francisco as it does at LAX and holds nearly 45% market share there.

American, Delta, Southwest, and even Alaska Air and JetBlue Airways are all likely to keep growing in L.A. in the coming years as they fight for position there. That's good for travelers, as it will keep fares relatively low.

It's not good for airline shareholders, though. Taking a back seat in the country's second largest city might seem like a humiliating defeat for United Continental. But United might make more money by focusing its operations on markets like San Francisco where it holds a true competitive advantage.

The article As Southwest Airlines and American Airlines Grow in L.A., Will United Shrink? originally appeared on Fool.com.

Adam Levine-Weinberg owns shares of JetBlue Airways and United Continental Holdings, Inc., andis long January 2017 $40 calls on Delta Air Lines, Inc., long January 2017 $17 calls on JetBlue Airways, and long January 2017 $30 calls on American Airlines Group. The Motley Fool is long January 2017 $35 calls on American Airlines Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.