I agree that if supply of seats goes down, fares go up. However, my point is that supply will only remain down for a short period. The barriers to entry are incredibly low in the domestic US airline industry. If UA or DL disappeared tomorrow, hundreds of airplanes will be idled, many of them from leasing companies. Lessors would try to cut deals with upstarts, and guess what, capacity would be slowly re-introduced into the market again. And, when big airports like ORD and ATL suddenly see 40-70% shrinkage in capacity, you can bet they will try to cut deals to get carriers to add service there to make up for the loss of UA or DL.

Look at all the money that is going in to prop up US, UA, DL, etc.; there will continue to be investors out there who will invest in new LCCs because they think they see an incredible business opportunity to go for the 100 million+ passengers that DL used to carry....

Another point is that low revenue is not necessarily the result of UA or DL discounting but of the LCCs. I'm sure UA, US, NW, DL would all like to raise their fares right this minute; that won't happen because B6, WN, F9 are not going away. B6, WN, F9, etc., will not raise fares to the level that AA or CO need to sustain themselves profitably under their legacy models. For the most part, they will resist raising fares, unless absolutely necessary (i.e., when fuel costs balloon) because they know they can continue to beat the majors at their own game as long as the majors maintain their bloated (or at least higher-than-LCC) cost structures. If UA or US or DL disappeared tomorrow, AA and CO might try to raise fares but then will have to back down again in markets where they face LCC competition (which is going to be increasing). B6, WN, F9 are not keeping fares low because of the presence of UA, US, DL, NW, etc.; they are the price leaders and they know they can continue to dictate prices according to their needs, their schedule, and their overall strategy.