U.S. airlines ramp up competition, capacity in Dallas

(Reuters) - The shares of U.S. airlines plunged on Wednesday on concerns that several big carriers are gearing up for a fare war, with Dallas as ground zero.

Southwest Airlines Co shares plummeted more than 9 percent in a wider selloff of U.S. airline stocks after the carrier forecast its capacity would grow as much as 8 percent this year from 2014.

Typically, investors say capacity should rise 2 percent to 3 percent to match demand, measured by U.S. gross domestic product growth.

Southwest said the acquisition of two airport gates at its Dallas Love Field hub will contribute to the increase. The low-cost airline has expanded Love Field service aggressively since the Wright Amendment, a law that capped flying from that airport to several states, expired in October 2014.

U.S. airlines have posted billion-dollar profits in the past year as fuel costs fell and as industry consolidation staved off price wars. While they have commented on the ferocity of competition in Dallas for months, recent vows to stand their ground as capacity is added have caused Wall Street to worry that airlines will begin discounting fares, hurting revenue.

"Investors are questioning if this signals the end of the era of industry capacity discipline," Raymond James analyst Savanthi Syth wrote in a research note.

American Airlines Group Inc President Scott Kirby said during a transportation conference on Tuesday that hundreds of travelers now flying low-cost Spirit Airlines Inc from Dallas to Las Vegas used to be American's passengers.

"There is a big segment of our customer base - not all of it - but a big segment of our customer base that shops on price. And we need to compete for those customers as well," he said.

At the same conference, the chief financial officer of United Continental Holdings Inc , John Rainey, broadly echoed that sentiment.

"At United we are very focused on capacity discipline, but we're not going to do it at the expense of United and to the benefit of others," he said.

However, Southwest's Chief Financial Officer Tammy Romo said the carrier has seen "pent-up" demand at Love Field.

Sterne Agee CRT analyst Adam Hackel agreed, saying he did not expect a price war because Dallas demand is high.

That does not change the pressure airlines already feel in North Texas. Last month, Virgin America Inc said during an earnings call that Dallas was one of the markets that hurt its unit revenue the most in the first quarter.

(Reporting By Jeffrey Dastin in New York. Editing by Andre Grenon)

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