Airline Shares Beat the Odds

The critical issue for carriers in the summer of 2003 will be yield management -- delicately balancing supply and demand levels, which are growing but still anemic.

"The post 9/11 rally proved short lived because airlines restored capacity too fast and revenue momentum quickly faltered," said Goldman's Engel. "Risks remain high that history could repeat, particularly if business confidence fails to improve."

So what does this mean for investors? Analysts are divided on whether investors should take profits now or wait to sell sometime before the end of the year, as traffic tends to slide in winter.

"The near-term optimism notwithstanding, we ... believe that the absolute level of recovery in the industry may ultimately disappoint, especially since capacity reductions appear likely to tail off as the year progresses," said Jim Higgins, airline analyst at Credit Suisse First Boston, in a research note. In other words, airlines won't be cutting traffic as much at the end of the year, which will make it harder to fill planes. "And we therefore fully expect to want to sell airline shares sometime before year end," he said.

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