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AMR, America West Worth Buying, Merrill Says

The analyst upgrades both stocks and narrows loss estimates for each carrier.

Two major airlines' improving revenue and successful cost-reduction strategies have a Merrill Lynch analyst thinking the companies' financial results will be on the mend in the coming years.

As such,

America West

(AWA)

and

AMR

(AMR)

, the parent company of

American Airlines

, were both upgraded to buy from neutral by analyst Michael Linenberg on Wednesday. Additionally, the analyst narrowed his loss estimates for both companies' upcoming quarters and fiscal years.

America West's shares spiked 15% to $5.60 in midday trading, while shares of AMR rose 6% to $9.45 on the news.

America West's revenue is outperforming the industry, said Linenberg, due in part to its simplified pricing, which began in its June 2002 quarter. In its last quarter, total sales were $523 million.

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The company has also been assertive with its cost-cutting, he said, with first-quarter unit costs, excluding fuel, decreasing 18%.

"The company currently has one of the lowest unit costs among the majors (save

Southwest

(LUV) - Get Southwest Airlines Co. Report

) and has recently implemented a cost-cutting plan to further reduce annual expenses by $100 million," Linenberg said. He sees the company's liquidity position at $350 million by the end of the June 2003 quarter.

For the second quarter, Linenberg now expects America West to post a loss of 40 cents, compared to his initial estimate of 90 cents. For 2003, he estimates a loss of $3.90 a share from a loss of $4.30 a share, and for 2004 the analyst expects a loss of 50 cents, better than his prior estimate of a loss of $2.

Analysts on average expect losses of 58 cents a share for the quarter, $4.39 a share for 2003 and $1.37 a share for 2004.

Meanwhile, AMR is cutting costs, too. The company has a turnaround plan that strives to reduce expenses by $4 billion annually.

Also, the airline is focused on raising capital, and Linenberg said AMR could "monetize its 26% stake in

Worldspan

this summer." That might be worth $200 million. The company's capital spending requirements are estimated to be modest in the next few years, which could bring in free cash flow by 2005, he believes.

AMR's May revenue was up 4%. The analyst narrowed his June quarter loss estimate to $2.75 a share from a loss of $4. Linenberg's full-year 2003 estimate goes to a loss of $12.50 from a loss of $15, and for 2004 he estimates a loss of $4.50, down from his original expectation of a loss of $7.25.

Analysts are looking for a loss of $3.54 in the current quarter, a loss of $14.13 in 2003 and a loss of $4.42 in 2004. Linenberg's 12-month price target is $13.