Sunny Summer Awaits Airlines

Lower capacity and strong demand appear to be trends that will continue.
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For the airline industry, a reduced supply of seats combined with high demand produced strong May revenue trends that seem likely to continue into the summer.

Continental Airlines

(CAL) - Get Report

reported Wednesday that mainline revenue per available seat mile (RASM) rose about 7.5% in May.

Separately,

Spirit Airlines

CEO Ben Baldanza said in an interview that his company expects double-digit RASM growth for the month. "We're bullish about the summer," Baldanza says. "Bookings are strong."

Continental's monthly RASM reports are closely watched by analysts as an early indicator for business in the airline industry. Spirit is privately held. Continental said its May consolidated RASM, including express service, rose about 9%. Additionally, its consolidated load factor was 81%, up 1.9 points over the same month a year earlier. Domestic mainline load factor was 83.9%, up 2.7 points. Both were records for May.

Continental's RASM growth tends to trail the industry average because the airline has been expanding while many carriers have been reducing capacity by shedding unprofitable routes. During the first quarter, domestic capacity fell 4.1%, the Air Transport Association, an industry group, has reported. Overall, capacity fell 1.9%, after international increases.

Meanwhile,

AMR's

(AMR)

unit American Airlines reported that its load factor increased to 80.7% from 78.1% last month. American doesn't issue monthly RASM reports. American also said that its revenue passenger miles rose 3.7% in May, on a capacity increase of 0.3%.

JPMorgan analyst Jamie Baker wrote in a research report that Continental's RASM growth exceeded his expectations and will likely lead to a 20.2% revenue increase. He's also looking for a 5.9% improvement in yield, or revenue per revenue seat mile.

"There remains no evidence whatsoever of diminished demand or passenger resistance to higher fares," Baker says. "Given continued expected industry supply discipline, this phenomenon is expected to continue well beyond 2006." JPMorgan has had a financial relationship with Continental during the past 12 months.

Merrill Lynch analyst Mike Linenberg wrote in a report on Friday that Continental's RASM growth was driven by increased yield, "which was not surprising given the numerous fare increases that have gone through since the start of the year."

He maintains a buy rating on the stock. In the past 12 months, Merrill Lynch has had a financial relationship with Continental that includes providing investment banking services.

Baldanza says the airline industry has been unable to raise ticket prices sufficiently to fully cover the increase in fuel prices, unlike

FedEx

(FDX) - Get Report

and

UPS

(UPS) - Get Report

.

The overnight cargo carriers "have been able to pass on the full effect, but this industry isn't good at doing that because there are still a lot of seats being flown," Baldanza says. "We are worse off than they are, although we are not as badly off as if we hadn't reacted at least partially."