Editor's Note: On the second anniversary of Sept. 11, the airline industry, devasted by the attacks, is on the path to recovery. Here's a story from Sept. 9 on the outlook for the airlines.

August is traditionally the sweet spot of the summer for the airline industry, and 2003 was no exception, with passengers packing planes and ticket prices firming -- which bodes well for the third quarter.

Because demand is higher in the summer, airlines were able to post strong increases in traffic. But carriers also showed uncharacteristic discipline when it came to capacity, refusing to add back flights, forcing passengers to fill up planes. The move not only led to record load factors, or higher percentages of seats filled on planes, but could help airlines boost prices down the road. (

Click here for a story on how lawsuits against the airline industry in the wake of Sept. 11 should have a limited impact on carriers.)

"I thought the August numbers were strong, stronger than we were expecting, a sign that during a seasonally strong period we're seeing good demand," said Jim Corridore, analyst at Standard & Poor's. "The load factors argue for an ability to improve pricing in the future. I could see some of that returning to the industry in the third quarter, but it remains to be seen what kind of demand we'll see in seasonally weak periods."

While most airlines don't comment on yield and pricing, at least two airlines said pricing power has returned, which would mean third-quarter results could be stronger.

Last week,

Continental Airlines

(CAL) - Get Report

said the amount of revenue it can bring in per passenger, a metric known as revenue per available seat mile, or RASM, was up between 4% and 5% in August, prompting analysts to predict third-quarter profits for the carrier. Elsewhere,

America West Airlines

(AWA)

, a low-cost carrier with a hub in Las Vegas, said August yields showed the highest one-month gain since March 1998 -- more than five years.

Pricing Power in the Fall

And while

US Airways

said it didn't see any appreciable improvement to yield, citing overcapacity and decreased business travel demand, analysts say the yield improvement trend could carry over into the fall.

Deutsche Bank analyst Susan Donofrio said in her weekly look at airline fares Monday that a "slow, yet steady recovery in air travel/pricing is under way," in part because leisure fares are getting more expensive, while business fares have been discounted.

In August, her data show business fares were down 5% over year-ago levels, while leisure fares were up 2%. The move is considered a sign of strength, because as Donofrio notes, both kinds of tickets were subject to deep discounts in April, when leisure fares were down 15% on the year and business seats were 1% cheaper.

This trend toward a more normalized fare structure, where the wide disparity between leisure and business fares is reduced, could prove lucrative as business travelers find discounted -- but profitable -- business fares more attractive than restrictive -- and less profitable -- leisure fares. "The result has been a net positive for overall RASM trends," concluded Donofrio. "We think that this revenue momentum is likely to continue due to increased corporate spending and the continuation of tight capacity growth."

The improving RASM trends may well force airline analysts to boost their third-quarter earnings estimates for the industry, which begins releasing results in five weeks. In July, even optimistic airline executives weren't ready to predict that September would be a good month -- a view that's slowly changing now.

"Yield looks higher and unit revenues look pretty good. Bookings for September are not as good as July and August, but they're better than what airlines thought they'd be when they talked in July on their conference calls," said Helane Becker, airline analyst at The Benchmark Company, a brokerage firm, noting a definite improvement from last year. "Advertised fare sales for fall happened later than they did last year and they're not as deep in the past."

Network Improvement, Low-Cost Explosion

Across the board in August, low-cost and regional carriers boosted traffic, capacity and load factors, as evidenced in

JetBlue's

(JBLU) - Get Report

91.6% load factor and traffic increase of nearly 70%. But for network carriers, August was about recovery, discipline and slow improvement, with companies cutting capacity and boosting load factors, but doing little to improve traffic.

As JetBlue's results indicate, it's the low-cost and regional names that are still growing by leaps and bounds. Low-cost names are expanding route structures and stealing market share from larger rivals, while regional names fly routes larger carriers no longer want to operate.

Mesa Airlines

(MESA) - Get Report

, which flies for

UAL

(UALAQ)

unit United Airlines and US Airways, is a good example of regional growth in August. The company boosted its load factor to 67.2%, while growing traffic 56.1% against a 37.4% capacity increase.

Compare that with a network carrier like

AMR

(AMR)

unit American Airlines, which increased load factor to 79.5%, while traffic fell 1.7% against a 6.7% capacity decrease. Despite the traffic slump, August results reveal underlying strength because capacity was down far more than traffic, meaning demand was strong. While not as exciting as the huge growth seen at low-cost rivals, August has helped network carriers lay the groundwork for future profitability.

"I'm not expecting industrywide profits in the third quarter, but we will see a profit here and there. We're poised for some surprises with companies coming in above loss estimates," said Corridore. "That would be a major positive. And we might see some cash-flow profitability and that's what they need to do a lot more of, to increase cash balances."

Ultimately, August revealed the rise of an important new trend -- the possible return of pricing power -- and the continuation of an old trend -- explosive low-cost carrier growth at the expense of larger rivals. All in all, the traditionally strong third quarter could be brighter than people currently expect.

"The real negative for the legacy carriers is that, on balance, they're shrinking, but the low-cost guys are growing. I'm not sure that changes in the short term," said Becker. "But the basic bottom line is that I think the third quarter will be better than people think."