Airline stocks rally as execs vouch that recovery continues
June 15, 2010, 5:25 p.m. EDT

By Christopher Hinton , MarketWatch
NEW YORK (MarketWatch) -- The sector benchmark for airline stocks hit its highest point in almost three years Tuesday, rallying after executives from major U.S. carriers said revenue growth has nearly returned to prerecession levels.

All 13 of the airline index's component stocks traded in the black -- and shares of Continental Airlines /quotes/comstock/13*!cal/quotes/nls/cal (CAL 24.81, +0.10, +0.40%) , UAL Corp. /quotes/comstock/15*!uaua/quotes/nls/uaua (UAUA 23.74, +0.83, +3.62%) and US Airways Group /quotes/comstock/13*!lcc/quotes/nls/lcc (LCC 10.37, -0.09, -0.86%) all reached 52-week highs.

During a series of analyst meetings in New York, executives from Continental, US Airways and Delta Air Lines /quotes/comstock/13*!dal/quotes/nls/dal (DAL 14.01, +0.02, +0.14%) noted premium-paying business travel continued to recover, albeit slowly. Along with greatly reduced seating capacity, the return of such premium-class customers has helped lift average fare and unit revenue for the airlines.

"Our unit revenue numbers for each quarter of 2010 should be better than they were in 2007, and we will approach the 2008 numbers. ... We should be at the 2008 levels by the end of this year," said Ed Bastian, president of Atlanta-based Delta.

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Along with unit revenue, cash balances are running high, with Delta forecasting $7 billion in free cash flow between now and 2012. Read more about Delta's outlook .

For its part, Continental said it expects to end the current quarter with about $3.5 billion, its highest end-of-quarter balance on record.

The so-called legacy carriers, which also include American parent AMR

Corp. /quotes/comstock/13*!amr/quotes/nls/amr (AMR 8.83, +0.04, +0.46%) , typically outperform the market as they benefit disproportionately from an improving economy, according to Deutsche Bank analyst Michael Linenberg.

On Monday, Linenberg initiated buy ratings for all the legacy carriers, as well as the Seattle-based network carrier Alaska Air /quotes/comstock/13*!alk/quotes/nls/alk (ALK 52.06, +0.30, +0.58%) .

"Major airline stocks are highly exposed to the three revenue segments that were most impacted during the global recession: long-haul international, business-premium travel, and cargo," Linenberg said in a note to investors.

But beyond the peak-travel season this summer, there are some dark clouds to navigate. Unemployment remains high, global production remains sluggish and consumer spending remains restrained.

On Wednesday, FedEx Corp. /quotes/comstock/13*!fdx/quotes/nls/fdx (FDX 83.12, +0.11, +0.13%) is scheduled to report fourth-quarter financial results as management updates the shipping giant's outlook.

As an economic bellwether, the Memphis-based company's projected freight and cargo shipments will be watched closely by analysts for business trends -- as well as any signs of decelerating global trade and prospects for a double-dip recession. Read more about the FedEx outlook .

Christopher Hinton is a reporter for MarketWatch based in New York.