Many consumer advocates are worried that consolidation in the U.S. airline industry is creating an oligopoly. After AMR and US Airways close their merger next week, there will be just three network airlines left: Delta Air Lines (DAL -0.41%) and United Continental (UAL 0.83%) are the others.

Delta Air Lines led the most recent wave of airline consolidation

These three carriers, along with Southwest Airlines (LUV 0.47%), will collectively dominate the industry, accounting for roughly 83% of U.S. domestic capacity. Indeed, one of the main reasons why the Department of Justice originally challenged the merger was the concern that another airline merger would undermine competition, leading to higher ticket prices.

However, any decrease in competition will be temporary. The ultimate reason is that the airline industry has relatively low barriers to entry and expansion. Airline profit margins are rising, and this has created a strong incentive for smaller carriers to grow. As smaller carriers continue to outgrow the larger ones, the competitive balance within the airline industry will improve.

Blessing in disguise
It would be natural to assume that the rise in oil prices over the last decade has hurt the major airlines. In the short run, it did, sending many into bankruptcy. However, the high fuel price environment looks like a blessing in disguise today. Not only did it force the legacy carriers to improve their cost structures, it also deterred start-ups from trying to enter the market and caused smaller carriers to grow more slowly.

For example, Virgin America is the only new airline to get off the ground in the last decade. Virgin America grew rapidly in the first five years after its founding in 2007, but it was consistently unprofitable due to the combination of high fuel prices and new route start-up costs.

Virgin America's growth has slowed in 2013, but higher profits could lead to faster expansion going forward (Photo: Virgin America)

A year ago, the company decided to address its profitability problems by canceling orders for 20 Airbus aircraft while deferring another 30 orders. This rapidly reduced its annual capacity growth rate from 28% to the mid-single digits. As a result of its slower growth, Virgin America has prospered along with the rest of the industry this year, posting big Q2 and Q3 profits.

Rebalancing
However, the burgeoning profitability of the airline industry will catalyze growth, particularly among the smaller airlines. Whereas the legacy carriers are devoted to capacity discipline -- through the first nine months of 2013, capacity grew 0.4% at Delta, 0.9% at American, and 3% at US Airways, and declined 2.6% at United -- smaller carriers see big growth opportunities.

Spirit Airlines (SAVE -4.83%) has been the most aggressive about expanding. Through the first nine months of 2013, capacity was up 21.4% year over year. Still, Spirit only represents around 1.4% of domestic industry capacity today. However, its current order book calls for doubling the size of its fleet between now and the end of 2017.

Spirit Airlines is set to continue growing rapidly over the next decade (Photo: Spirit Airlines)

By 2021, Spirit expects to hold at least 5% of the U.S. market. There is considerable upside to that number if industry conditions remain favorable. Spirit could extend the leases for aircraft currently in its fleet, and the company could also order more Airbus aircraft for delivery near the end of the decade.

While Virgin America is currently in a "growth pause", it will start receiving new aircraft in the second half of 2015. If its rapid profit improvement from this year can be sustained, Virgin America is likely to adopt a high single-digit or low double-digit growth pace thereafter.

JetBlue (JBLU -3.61%) is another carrier that is poised to gain market share over the next several years. By next year, it will be the fifth-largest U.S. carrier, and it already operates nearly 200 aircraft. Following a recent fleet restructuring, JetBlue is scheduled to take delivery of 129 new planes between 2014 and 2021.

JetBlue also plans to grow steadily over the next decade (Photo: JetBlue Airways)

Some of these new deliveries will replace older planes in JetBlue's fleet, but the majority of this order represents growth. This will add several percentage points to JetBlue's market share in the next decade.

Other smaller carriers, including Alaska Air, Allegiant Travel, and Frontier Airlines, also have growth-oriented fleet plans. As a result, the 17% of domestic capacity collectively held by these smaller carriers could easily rise to 25% or more by the end of the decade, with further gains beyond that.

Tricky situation
Investors have fallen back in love with the legacy carriers this year, believing that consolidation will lead to much higher profit margins in the future. This assumes that the "Big Four" will be able to tacitly coordinate by keeping capacity constrained and raising fares.

However, the growth of smaller carriers will make this at most a short-term phenomenon. The more successful the major carriers are at raising ticket prices, the bigger the opportunity for low cost carriers to grow and thereby steal market share from the top airlines. The airline industry has relatively low barriers to entry and expansion; if profit margins expand significantly from today's levels, it will provoke a new round of growth.

Thus, it's possible that the AMR-US Airways merger will lead to lower competition in the next few years, but it won't have much of an impact on the long-term structure of the industry. Growth-oriented airlines like Spirit and JetBlue should keep fares in check and profit margins at a level not too far beyond what airlines are earning today.