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Airlines Set for First Yearly Profit Since 9/11

The resurgent airline industry is poised for its first profitable year since before the 2001 terrorist attacks, and analysts are expecting even healthier earnings next year.

Higher fares, continued demand for seats and lower operating costs have helped to revive the once-moribund industry. Calyon Securities analyst Ray Neidl said in a recent research report he's looking for a $2.3 billion industry profit this year and $5.6 billion in 2007 earnings.

It's a stark turnaround for an industry that has burned many investors over the years. U.S. passenger and cargo airlines lost a total of $34.97 billion between 2001 and 2005, with losses peaking at $11.01 billion in 2002, according to the Air Transport Association of America.

In recent years, against the backdrop of high fuel prices and aggressive low-cost carrier growth, network airlines lined up to seek shelter in bankruptcy court. There, carriers took advantage of Chapter 11 protection by slashing employees' wages and returning planes to lessors.

That cut operating costs while also limiting the number of available seats in the skies, thereby giving carriers more pricing power.

Airline stocks have reaped the rewards of such moves: The Amex Airline Index, which includes 11 network, low-cost and regional carriers, is up about 8 percent so far this year. The network carriers have generally outperformed the low-cost carriers, aided by investor excitement over the prospects of industry consolidation.

Continental shares have nearly doubled over the course of the year, while shares of American Airlines' parent AMRare up about 45% year to date. Comparatively, Southwest Airlines has seen its stock decline 3%.

To be sure, analysts still caution that investing in airlines is risky. The industry is notorious for its volatility, as its fortunes are so closely tied to crude oil prices and its work force is strongly unionized. Another terrorist attack could likewise send the industry into a spiral.

UBS analyst Kevin Crissey even goes so far as to include the warning that 'trading airline stocks may be hazardous to your wealth' in his research notes. One of the biggest dangers Goldman Sachs analyst Robert Barry sees for the industry is weakening discipline over capacity.

'Growth is a drug for airlines,' Barry wrote in a recent research report.

While adding more seats to the market will lower a carrier's unit costs, it will also weaken the overall industry's pricing power.

The overall industry had 752.48 billion available seat miles domestically and 250.84 billion available seat miles internationally in 2005, according to the Air Transport Association. An available seat mile is an industry unit of capacity, representing one available airplane seat flown one mile.

For now, though, analysts say they're optimistic about the industry's fundamentals, particularly for network carriers. The larger airlines are enjoying the fruits of their large international route structures, as well as a bigger business-traveler base, which is generally more willing to pay higher fares.

If the industry does begin its long-predicted wave of consolidation, analysts say profits could grow even fatter. Mergers and acquisitions could help remove more available seats from the system.

Delta Air Lines, though, is fending off a hostile buyout bid from US Airways Group. Midwest Air Group likewise nixed a merger proposal from rival carrier AirTran Airways. Continental Airlines and United Airlines' parent UAL, meanwhile, are said to be in early-stage talks for a possible deal.

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