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Airlines Stick to the Blueprint

CHARLOTTE, N.C. -- Wall Street has evidently concluded that airline executives aren't very good at their jobs.

Generally, the thinking among the more vocal activist investors is that the current group of leaders can't successfully captain their companies through a period of nearly $100-a-barrel oil prices.

Consider the Amex Airline Index, which closed last week at 39.28, and is near a four-and-a-half-year low after a 33% decline in 2007. The deterioration in industry share prices has generated a new round of merger chatter, initiated most recently by a hedge fund with big airline holdings.

Yet within the industry, the view is not quite so glum. Managers, after all, believe they can manage. And several carriers say that they can respond to high fuel prices by adjusting capacity, enabling them to maintain a reasonable supply-demand equilibrium.

In a recent report, JP Morgan analyst Jamie Baker said he retains a favorable view of legacy carriers, "given the low probability that managements sit idly by and do nothing.

"Far more likely, in our view, are significant capacity cuts, furloughs, fare increases and a sincere run at consolidation," Baker wrote. He particularly recommended Continental (CAL - Get Report), noting that its shares had shed 30% over the previous 30 trading days.

"Of the 18 times CAL has fallen this fast and furiously since 1993, shares have rallied back in every instance," Baker wrote, setting an eight-month target price of $35. Continental closed out last week at $27.60.
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