Judging from recent airline-industry reports and analyst reactions to them, the long-awaited revenue recovery is either coming along very slowly or has stalled.

On Monday night, traffic, revenue and capacity reports from the American Airlines unit of AMR ( AMR), Continental Airlines ( CAL) and Southwest Airlines ( LUV) revealed how business fared during May. Generally speaking, business remains at a crossroads: Airlines have cut capacity, allowing them to fill more seats, but they're not seeing much of an increase in demand or revenue from last year.

Wall Street reaction was mixed, with equity analysts offering different takes on the outlook entering the potentially lucrative summer travel season. But on a longer horizon, while airline shares could find reasons to rally, analysts said the revenue recovery picture was less certain.

"The near-term optimism notwithstanding, we also believe that the absolute level of recovery in the industry may ultimately disappoint, especially since capacity reductions appear likely to tail off as the year progresses," said Jim Higgins, airline analyst at Credit Suisse First Boston, in an otherwise bullish note, "and we therefore fully expect to want to sell airline shares sometime before year end."

Of all the reports, Continental's held the most sway, with Higgins saying that this has historically been the best proxy by which to judge the rest of the industry. And judging from what it had to say about business in May, the outlook is mixed.

On a positive note, Continental announced that revenue per available seat mile, a metric called RASM used to handicap revenue trends, was up between 1% and 3% from year-ago levels. And load factor, or the percentage of seats filled on every flight, hit 77.3%, up 2 full percentage points from year-ago levels. Also, unit ExpressJet showed double-digit growth, an impressive sign that the older network carriers may be able to master the low-cost trick.

But the good news, especially when it comes to load factor, was driven by drops in capacity, showing that airlines are still struggling with reduced travel demand. The number of revenue passenger miles, a reflection of one paying customer flying one mile that's also called traffic, fell 6.3% from last year's levels, to 4.8 billion miles. Available seat miles, the number of miles available for passengers to fly, also called capacity, was off 5.7% from year-ago levels, at 3.9 million miles.

The net takeaway from Continental's report is that things are improving slowly. The airline is flying fewer flights, putting more people in seats and slightly boosting revenue from 2002's severely depressed levels, when the industry posted record losses.

In reaction, Morgan Stanley analyst William Greene boosted his second-quarter and fiscal 2003 earnings estimates for Continental, noting that the company's revenue increase in May was ahead of his forecasts. He now thinks the company will lose $1.40 a share, which is still worse than the current consensus and a sign of how cautious his sector view still is.

"This view reflects our concerns that a rebound in revenue for airlines has stalled, as overcapacity continues and pricing remains under downward pressure," said Greene, who also noted that long-term revenue trends show no signs of improvement. "As such, balance sheets at many carriers are deteriorating."

On the low-cost front, Southwest Airlines said May traffic was up 3.9% from year-ago levels, coming in at 6 billion, while the number of revenue passengers dropped slightly from last May. The end result is that Southwest's load factor dipped a half-percentage point from last year, coming in at 69.2%.

The cost-cutting efforts at AMR boosted American Airlines' load factor, but business appeared weak, especially in the Pacific Rim, where SARS has seriously impacted demand. American said traffic came in at 9.9 billion miles, down 4.8% from the last May, which is positive when you consider that American cut capacity by 10.1% from last May. All told, the moves have increased American's efficiency, boosting its load factor to 73.7%, up from the year-ago 69.5%.

While airline shares rally, indicating that investors believe that a summer revenue recovery is probable, the May traffic reports add another note to the rising chorus of caution. On Monday, Delta Air Lines ( DAL) CEO Leo Mullin told reporters at an industry conference that while the very worst may be behind the industry, a recovery isn't exactly at hand.

"We're in for another extremely tough year here in the United States," he said. "It's a mid-2004 to late-2004 before we really begin to see some uptick in traffic. I would not suggest anybody should presume that anything like a true uplift is on the way. There is still some time left."

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