Airlines Finding Ways to Prosper

Both Baker and Bob McAdoo of Avondale Partners like the outlook. Baker wrote recently that "legacy sector risk/reward ranks among the most favorable we've ever seen."

McAdoo, meanwhile, notes that earnings for the six traditional carriers improved by more than $1 billion in the first six months of this year.

"Conditions going forward are likely the most favorable we have seen in the last 20 years," he wrote. "The airline industry is poised for improving results through 2008."

McAdoo says Continental and US Airways are his favorites. He notes that risks in the sector, which has recorded a loss since the Wright Brothers first flew, are high, including fuel prices, fluctuations in the economy and the possibility of a terrorist attack.

So far, investors seem to have focused on the risks. The Amex Airline Index hit a three-year high of 66.92 in January. It was trading Monday at 45.48, and is down about 22% for the year.