ATA Airlines

(ATAH)

has avoided a bankruptcy filing, prompting Deutsche Bank to upgrade shares to hold from sell, but as even the brokerage raises its opinion, it warns that ATA isn't out of the woods yet.

"We have become more comfortable with its liquidity situation going forward," wrote Susan Donofrio, airline analyst at Deutsche Bank, in her upgrade on Friday morning. "More specifically, the airline recently completed a significant debt and aircraft lease restructuring, which has removed its near-term liquidity shortfall. As a result, ATA has an adequate cash cushion to stave off a near-term liquidity crisis, resulting from weak revenues."

Indeed, when it released earnings on Feb. 2, ATA warned investors that revenue would be soft in the beginning part of the year. Earlier, it had warned that it would have to file for bankruptcy protection unless it reached new terms with creditors and bondholders, having to make $300 million in payments by the end of 2004. The carrier ended 2003 with just $160.6 million in cash, down nearly 20% from the year before.

But ATA has made strides to rectify this situation, announcing a bond restructuring at the end of January that reduced its cash payments by $142 million in 2004, while deferring payments on some aircraft leases, reducing this year's cash payments by another $99 million. With just $59 million in cash outlays in 2004, ATA management said it "believes its revised financial structure will provide the require liquidity for 2005 and beyond."

And so does Donofrio. As one of two analysts covering ATA, Donofrio's word carries a bit of weight, and that may help explain why ATA shares rose 12 cents, or 1.2%, to $9.79. (Deutsche Bank does and seeks to do business with the companies it covers in research reports.)

But while Wall Street coverage is limited, the carrier's recovery has attracted more attention as of late, especially after racking up $1.5 billion in revenue during fiscal 2003. By passing the $1 billion revenue threshold, ATA became the 10th U.S. airline to reach "major" status, according to the Department of Transportation.

With a balance sheet disaster averted for now, ATA has moved to boost revenue in order to leverage its low cost structure. In 2003, the carrier had a cost per available seat mile of 6.82 cents -- a nearly 17% year-over-year drop. Earlier in the week, the carrier announced that it would begin making business class seating available on flights by November, hoping to capitalize on the recovering economy. The new offering will include more legroom, leather seats, free meals and a guarantee that no flight will cost more than $400 one way.

It's a tactic that

America West Airlines

(AWA)

and

AirTran

(AAI)

have employed with great success, skimming frequent-flyer business from network carriers by discounting business-class seats. Over the last year, these moves have depressed business fares from coast to coast, with fares falling 8% year over year through the week of Feb. 14, according to Harrell Associates, an airfare research firm.

But just because ATA has patched up its near-term issues and is making moves to court lucrative business travelers doesn't mean the carrier is out of the woods yet. Even as she upgraded the carrier, Donofrio cautioned that the risk-reward profile for other low-cost carriers was better.

"We are, however, going to stay on the sidelines with ATA Holdings, as we think there are other growth airline stocks that provide substantial upside for investors without as much risk, namely

Southwest

(LUV) - Get Report

and AirTran, all rated buy," said Donofrio. "Despite being successful, on the cost side, ATA continues to struggle with profitability."

Donofrio's mixed bag upgrade mirrors ATA's recent performance, which is both promising and disappointing.

A few weeks ago, ATA announced a profit of $15.8 million for fiscal 2003, its first profitable year since 1999, but ATA's return to the black was fueled by $37 million in government help. Without the aid, the carrier would have posted a big loss, as it did in the fourth quarter, when it lost $20.2 million, or $1.72 a share, way shy of Donofrio's 50-cent loss estimate.

And while ATA flirted with a profit in 2003, Donofrio doesn't expect the carrier to show a profit again until 2005. Furthermore, with shares nearing $10, ATA is already more expensive than Donofrio's new price target of $9, up from $6.

"Looking ahead, we are lowering our estimate for 2004 to a loss of $1.60 from a profit of $1 due to a stagnant revenue environment for the low-cost carriers," said Donofrio. "For 2005, we are also lowering our estimate to 85 cents from $1.50."