Airline stocks rallied Wednesday for the second time this week after another Wall Street analyst issued a bullish call on the sector's prospects.

Capacity adjustments, including reductions on U.S. domestic routes, should boost unit revenue next year, according to Bear Stearns' David Strine, who adds that a major beneficiary will be American Airlines' parent AMR ( AMR). Strine raised AMR to outperform from peer perform and increased his bottom-line estimates for other carriers.

Shares of AMR, the world's largest airline company, gained 73 cents, or 5.5%, to $14.05. Most other airline stocks followed, driving the Amex Airline Index 3.3% higher.

AirTran ( AAI) rose 1.8%, Alaska Air ( ALK) increased 5.3%, Continental ( CAL) gained 3.3%, JetBlue ( JBLU) advanced 2.2%, Southwest ( LUV) added 2.3%, and US Airways ( LCC) rose 11%.

Strine joins other investment-bank analysts offering optimistic forecasts for airlines as they head into 2006. Last week, J.P. Morgan's Jamie Baker upped his ratings on AMR and Continental, saying he felt better "about the industry's near-term prospects and equity potential upside than at any time this decade."

Then on Monday, Lehman Brothers' Gary Chase sent airline stocks on a tear with an upgrade on AMR and positive comments on the sector. All three analysts' firms do and seek to do business with companies covered in their research reports.

Strine has surveyed Asian, European and U.S. airlines to get a global read on capacity plans, his research note indicates. With U.S. legacy carriers cutting domestic capacity 6%, industry unit revenue should grow 6% in 2006, its best rate in five years, the analyst says. Capacity decreases often allow airlines to either raise fares, fill more seats, or both, lifting unit revenue.

Although U.S. legacy carriers plan to boost international capacity 7% next year, growth plans from European and Asian airlines are more moderate, and capacity-to-gross domestic product ratios are below historical averages everywhere but Latin America, according to Strine.

The analyst says AMR derives more of its revenue -- 70% -- from the domestic market than other legacy airlines, giving it significant leverage to improving domestic revenue trends.

Both AMR and Continental should be in the black in 2006, assuming crude oil averages $60 and the crack spread, or cost of refining that oil, averages $20, Strine writes. "Of course, a few-dollar move in oil could spoil that," he acknowledges.

Elsewhere, Calyon Securities analyst Ray Neidl cautions that although airline stocks appear to be in a mini-rally on improving expectations, shares will likely see a pullback before the slow winter season.

Also, Continental late Tuesday said unit revenue rose between 3.5% and 4.5% in October from a year ago in its mainline operations, which exclude smaller regional flights. Mainline passenger traffic increased 6.1% as Continental raised capacity 8.1%. That combination meant the airline filled an average of 77.4% of its mainline seats, down 1.5 points from a year ago.

The numbers suggest Continental's yield, which measures average fares, rose 6% year over year, according to J.P. Morgan's Baker.

Continental is notable among major airlines because it regularly releases monthly unit revenue performance. Although market watchers often use that performance as a proxy for the industry, Baker says Continental's monthly unit-revenue growth will probably lag the industry's in coming months, because the airline continues to expand capacity while rivals hold it flat or reduce it.

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