Air Powers' Big Business

The environment is particularly positive for legacy carriers, said Scott Nason, American's vice president for revenue management. Their move to equalize pricing brought back the flying public and enabled a series of changes in passenger behavior, he said in an interview.

For instance, the long-disdained requirement that passengers stay over Saturday night to get a low fare was eliminated in all but a few markets. Today, the requirement is little more than a symbol of the bad old days in corporate travel.

Additionally, passengers who had flown on one-stop flights to get lower fares can now fly instead nonstop. American cited examples from two markets with heavy business travel. Between Dallas and Newark, the percentage of passengers on nonstop flights increased to 90% from 78% between 2004 and 2006, and between Dallas and Washington's Dulles International, the share increased to 93% from 84% during the same period. In both cases, passengers reduced their reliance on one-stop flights as legacy carriers' fares declined.

As American's fares declined relative to its competitors, passengers increasingly have used major big city airports rather than the outlying facilities often used by low-fare carriers.

Analyst Scott Hamilton said American also must consider that lower-priced competitors like JetBlue (JBLU Quote) often offer more amenities. "I think you'd rather fly the legacies if the service were better," he said. "American offers a better frequent flier program, but that's it, and these days I'm not sure that's a big plus because you can't get the seats."

Morningstar analyst Chris Lozier said legacy carriers are benefiting from high demand and reduced capacity, and have done well recently compared with the low-cost carriers.

Over the longer term, he said, increased capacity is likely to reduce pricing power. "In the last year, we have seen capacity discipline and a reluctance to fly unprofitable routes," he said. "But historically, airlines have never been shy about putting more airplanes in the sky."