Airline Analysts Brimming With Hope

Even with the most successful summer in years nearly over, Wall Street is optimistic.
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Airline analysts remain an optimistic group, shrugging off a failed fare hike and a broken-up terrorist plot, as the industry's most successful summer in six years draws to a close.

In particular, analysts say they were pleased by the 11.1% growth in July revenue per available seat mile, or RASM, reported Tuesday by the Air Transport Association. Not only that, they appear unbothered by the impending arrival of a seasonal, post-Labor Day slowdown and by the coming tougher year-over-year comparisons.

"RASM gains

are likely peaking, but so what?" JPMorgan analyst Jamie Baker wrote in a recent report. "Rather than implying weakening demand, these trends merely reflect capacity reality."

Domestic capacity, currently down 6% year over year, will be down just 2% by the end of the year, Baker believes. Year-over-year comparisons will also be more difficult because significant revenue improvements began showing up in the fall of 2005.

Baker expects 4% RASM improvement next year but says that even a little "goes a long way when added to the solid recovery foundation built in 2006." He predicts that, if oil prices remain relatively constant, "RASM improvement in 2007 is likely to propel many

legacy carriers toward peak margin levels."

Projections aside, what is certain is that this summer has been tremendous. According to a research report from Merrill Lynch analyst Mike Linenberg, the industry's domestic July load factor of 86.9% was the highest monthly load factor found the firm's database, which goes back to 1980.

An effort to raise most business fares by $5 for one-way trips and $7 for round trips was instituted by

United Air Lines

(UAUA)

on Aug. 18. The industry didn't follow, but analyst Ray Neidl of Calyon Securities said he isn't concerned.

"After a series of business fare increases and due to seasonality, it does not surprise us that other airlines are not matching at this time," Neidl wrote in a recent report. The process of raising fares "is only taking a breather until the market sees how demand holds up through the fall shoulder season and whether the economy and demand will hold up going into next year."

Meanwhile, airlines and passengers seem largely unaffected by the Aug. 10 revelation that British authorities foiled a terrorist plot to blow up aircraft on trans-Atlantic flights. Everything is back to normal, says the biggest trans-Atlantic carrier,

Delta Air Lines

(DALRQ)

.

"Operations from check-in to baggage claim continue to run smoothly," Delta says, noting that it has completed 98.7% of its flights since the existence of the plot was disclosed, prompting changes in security procedures.

The share prices of the airlines have eased since reaching short-term peaks in the first half of last month. The Amex Airline Index has declined about 15% since July 10.

However, Baker expects rebounds by

AMR

(AMR)

,

Continental Airlines

(CAL) - Get Report

and

US Airways

(LCC)

. JPMorgan has financial relationships with all three carriers.

Standard & Poor's lowered its outlook on airlines to neutral from positive on Aug. 10, as analyst Jim Corridore cited the terrorist plot, high oil prices and the start of a relatively slow travel period as added risk factors.

Even so, Corridore said it appears that U.S. airlines "are in the midst of a fundamental earnings recovery in a strong revenue environment with nonfuel cost cuts." He says he favors Southwest, US Airways and

AirTran

(AAI)

.