United Continental Holdings (UAL) - Get Report fell sharply Wednesday after the parent of United Airlines said it would have to increase capacity in the near term as it battles low-cost carriers and higher oil prices in what is looking increasingly like a price war for the domestic airline sector.

United, the country's third-largest airline, posted stronger-than-expected fourth-quarter earnings of $1.99 per share and a modest 0.2% gain in pre-passenger revenue but told investors on a subsequent conference call that it would increase capacity by between 4% and 6% over the course of this year.

"The best way to compete with low-cost carriers is to match their prices," said UAL President Scott Kirby. "We can't let low-cost carriers have price advantages in our hubs."

UAL shares fell 10% early Wednesday. Shares in rival Delta Airlines Inc. (DAL) - Get Report  fell 4.9% while American Airlines (AAL) - Get Report  declined 5.4%.

Industry margins were also likely to be pressured by rising fuel costs, thanks in part to a 15% surge in global oil prices over the past month following a renewed agreement by OPEC members to limit production by 1.8 million barrels per day.

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