Airlines Finding Ways to Prosper

That memo about the slowing economy still hasn't reached the airline industry.

In fact, two veteran airline analysts say the investment outlook for the industry is as good as they have ever seen.

Booking trends for the current quarter are positive, four of the six largest airlines reported last week. Three of the four posted third-quarter unit revenue growth in the 5% range, and expectations are high for United(UAUA Quote) and US Airways(LCC Quote), which report this week.

Sure, fuel prices are high. But as Continental(CAL Quote) CEO Larry Kellner said last week: "I never thought we'd be using the terms 'record oil' and 'record operating results' in the same quarter."

By and large, legacy airlines continue to limit capacity growth and to raise fares as oil prices warrant. A positive here, JP Morgan analyst Jamie Baker wrote in a research report, is that Southwest(LUV Quote) "continues to migrate from its traditional role as an industry spoiler to something far more disciplined."

Southwest has raised its fares five times this year, Baker says -- and that gives full-priced airlines more room to keep prices up.

JP Morgan has a financial relationship with Southwest that includes having recently provided investment banking services.

International growth remains strong, and last month, the Transportation Department handed each of the six legacy carriers a new route to China, with service to begin in 2008 for some and in 2009 for the others. (The 2009 awards were tentative.) Because the market is so underserved, each China route is worth about $200 million in new revenue, experts say.