The airline sector took off Monday following an analyst's upgrade on shares of American Airlines parent AMR ( AMR) and a dip in crude oil below $60 a barrel.

Citing capacity reductions that are likely to boost fares next year, Lehman Brothers analyst Gary Chase upped his rating on AMR to overweight from equal-weight. The analyst, whose firm does and seeks to do business with companies covered in its research reports, also said the fundamental outlook had improved for the entire sector.

In reaction, AMR shares jumped 59 cents, or 4.6%, to $13.47 on higher-than-normal volume of 5.2 million shares. Most other airline stocks followed in a broad rally that lifted the Amex Airline Index by 3.4%.

Alaska Air ( ALK) rose $1.24, or 4.1%, to $31.24, and Continental Airlines ( CAL) gained 84 cents, or 7%, to $12.93.

JetBlue Airways ( JBLU) increased 58 cents, or 3.2%, to $18.63, and Southwest Airlines ( LUV) advanced 12 cents, or 0.8%, to $15.87. US Airways ( LCC) added 80 cents, or 3.6%, to $24.70.

Also encouraging for investors was crude's decline below the psychologically important $60 level. The decline was attributed to milder Midwest temperatures and the belief the hurricane season is drawing to a close.

The airline industry remains in a crisis environment marked by bankruptcies and painful jet fuel costs. Hurricane Katrina knocked out key refining facilities around the Gulf Coast, increasing the incremental cost of refining crude oil into jet fuel.

Still, carriers are reporting improving revenue and fare trends as the industry cuts back on capacity on domestic routes. An overabundance of capacity in 2004 and earlier this year helped pressure fares.

As an example of improvements in revenue, United Airlines' parent UAL ( UALAQ) on Monday said third-quarter unit revenue , measured in revenue per available seat mile rose 11% in its mainline operations. That came as the company's average fares rose and capacity decreased.

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