Airline shares rallied Friday morning after a brokerage said the industry's restructuring efforts are going better than most people think and that the risk of bankruptcy has moderated for most carriers. Merrill Lynch upgraded five carriers to buy from neutral: Alaska Air ( ALK), which was recently up $1.79, or 10%, to $19.50; Continental ( CAL), which was recently up $2.02, or 20%, to $11.88; Delta ( DAL), which rose $1.82, or 14%, to $14.82; Northwest ( NWAC), which was up $1.78, or 21%, to $10.33; and Frontier ( FRNT), which rose $1.03, or 16%, to $7.29. AMR's ( AMR) ratings weren't changed but the shares nevertheless rose 78 cents, or 16%, to $5.59. The Amex Airline index was gaining 11.2%. "The current health of the industry can be summed up by our net loss forecasts for the next two years: $8.2 billion in 2003 and $2.5 billion in 2004," Merrill wrote in a Friday morning note. "Although the industry has a ways to go before it is healthy again, it appears that the worse may be over for the airlines." Merrill noted that the average debt-to-capitalization ratio among airlines is a historically high 95%, and that industry capacity is unlikely to improve much in the next three years. But it noted that an industrywide restructuring is going well, with labor, aircraft retirement and network changes taking hold, and said the initiatives might have more impact on earnings than is currently believed. "As such, we now feel that the risk to our 2003 earnings forecasts could be to the upside (i.e., lower losses)," Merrill wrote. "This would certainly qualify as an industry phenomenon given that we have been in a period of constant earnings reductions for the past several years." Merrill kept buy ratings on several defensive plays: Atlantic Coast ( ACAI), recently up 99 cents, or 11%, to $9.84; ExpressJet ( XJT), recently up 63 cents, or 6%, to $11.01; Mesa ( MESA), up 13 cents, or 2%, to $6.06; SkyWest ( SKYW), up 59 cents, or 4%, to $13.99; and WestJet.