Airlines Garner More Acclaim

Airline stocks rallied Wednesday for the second time this week after another Wall Street analyst issued a bullish call on the sector's prospects.

Capacity adjustments, including reductions on U.S. domestic routes, should boost unit revenue next year, according to Bear Stearns' David Strine, who adds that a major beneficiary will be American Airlines' parent AMR (AMR Quote). Strine raised AMR to outperform from peer perform and increased his bottom-line estimates for other carriers.

Shares of AMR, the world's largest airline company, gained 73 cents, or 5.5%, to $14.05. Most other airline stocks followed, driving the Amex Airline Index 3.3% higher.

AirTran (AAI Quote) rose 1.8%, Alaska Air (ALK Quote) increased 5.3%, Continental (CAL Quote) gained 3.3%, JetBlue (JBLU Quote) advanced 2.2%, Southwest (LUV Quote) added 2.3%, and US Airways (LCC Quote) rose 11%.

Strine joins other investment-bank analysts offering optimistic forecasts for airlines as they head into 2006. Last week, J.P. Morgan's Jamie Baker upped his ratings on AMR and Continental, saying he felt better "about the industry's near-term prospects and equity potential upside than at any time this decade."

Then on Monday, Lehman Brothers' Gary Chase sent airline stocks on a tear with an upgrade on AMR and positive comments on the sector. All three analysts' firms do and seek to do business with companies covered in their research reports.

Strine has surveyed Asian, European and U.S. airlines to get a global read on capacity plans, his research note indicates. With U.S. legacy carriers cutting domestic capacity 6%, industry unit revenue should grow 6% in 2006, its best rate in five years, the analyst says. Capacity decreases often allow airlines to either raise fares, fill more seats, or both, lifting unit revenue.

Although U.S. legacy carriers plan to boost international capacity 7% next year, growth plans from European and Asian airlines are more moderate, and capacity-to-gross domestic product ratios are below historical averages everywhere but Latin America, according to Strine.