What's Next for Delta Airlines?

Tickers in this article: AAMRQ DAL LCC UAL

ATLANTA ( TheStreet) -- Delta is the biggest competitor to US Airways , which makes it seem all the more illogical that a merger between the two was proposed in 2006.

But does Delta benefit from the potential failure of a merger between US Airways and American that would significantly strengthen the two partners?

Investors don't seem to think so. Since the Justice Department announced on Aug. 13 that it would oppose an all-but-done merger of US Airways and American, Delta stock has fallen 9%. On Tuesday, shares rose 6 cents to close at $19.19.

Some analysts are recommending Delta, based on the widespread belief that it is the best-managed U.S. airline and that it will, in fact, benefit if the merger is not approved. But that hope is balanced against the possibility that Delta could be harmed by a weakened airline industry in which American rapidly adds capacity while also having to slash fares to attract passengers.

JP Morgan analyst Jamie Baker takes the negative view. Following the DOJ's announcement, Baker downgraded Delta from overweight to neutral and reduced his price target to $22 from $25.

"We can't sit idly by without adjusting targets and ratings," Baker wrote. "While near-term earnings are unaffected, in our view, longer-term risk is higher." He said "the broader industry thesis has been compromised (not ruined but comprised)" and the risk of investor flight now exists.

In contrast, Avondale Partners analyst Fred Lowrance said the DOJ lawsuit created "an opportunity for those investors who have been patiently waiting for a pull-back" in airline shares. "We do not expect airline management teams to suddenly throw years of hard work on an obviously successful business transition out the window," he said.

Lowrance said Delta is his top pick, not only because US Airways is a primary competitor but also because he does not assume that standalone American and US Airways will suddenly begin to increase capacity.

"We had always assumed that this merger would make the new American more competitive in places like New York and Charlotte, challenging DAL in Atlanta," Lowrance wrote in a recent report. "Secondly, we believe the knee-jerk assumption that a standalone American or US Airways would suddenly throw capacity discipline out the window and begin growing for market share's sake is completely unfounded."

In fact, in a report issued Monday, Buckingham Research analyst Dan McKenzie noted that over the weekend American trimmed 446,000 seats from its November through January schedule, meaning fourth-quarter capacity will rise just 1.4%. McKenzie said the reductions primarily involve flights from Chicago to LaGuardia, Dallas and Miami. "We're not drawing conclusions from a week's worth of data, but if AMR is ultimately forced to exit Ch. 11 standalone (we assign a 50/50 probability), creditors likely require AMR to rethink growth and capex as a standalone carrier," McKenzie said.