American Airlines parent AMR Corp on Wednesday posted a smaller-than-expected quarterly loss as capacity cuts and new revenue streams helped offset weak travel demand.

The No. 2 U.S. carrier was the first major U.S. airline to report its second quarter earnings, and its results easily beat expectations, sending its shares higher.

Airlines are struggling to gain financial altitude in a lingering recession that has drained demand for business travel, especially on lucrative international routes.

This deep recession has significantly affected demand for air travel and cargo services. And the H1N1 virus certainly had a negative impact on our results, particularly on our Mexico flying, Tom Horton, AMR's Chief Financial Officer, said on a conference call with analysts and reporters.

In short, there is great uncertainty on many fronts, he said.

AMR shares were up 2.4 percent at $4.28 on Nasdaq. The Amex airline index .XAL was up 5.14 percent.

The airline industry responded to weaker recessionary demand last year by downsizing. AMR said in June that it increased its planned 2009 capacity reductions to 7.5 percent versus 2008.

Morningstar analyst Basili Alukos said he had been encouraged by AMR's capacity cuts and by the increase in ancillary revenue the carrier has drawn from new fees for in-flight perks. But he said the decline in international travel is troubling.

International passengers and (revenue) will be down more significantly than domestic. I think that'll probably be the big thing, Alukos said .

LOSS NARROWS

AMR said its net loss was $390 million, or $1.39 per share, compared with a loss of $1.5 billion, or $5.83 per share, a year ago when the company took a $1.1 billion charge.

 The latest results include $70 million in one-time charges related to the sale of aircraft and the grounding of leased aircraft prior to lease expiration.

Excluding those charges, AMR lost $319 million, or $1.14 per share, which compares with a consensus forecast by analysts for a loss of $1.29 per share, according to Reuters Estimates.

With ongoing global economic weakness and the resulting effect on travel demand, revenues are down sharply from a year ago, AMR Chief Executive Gerard Arpey said in a statement.

AMR said operating revenue fell 20.9 percent to $4.89 billion. The company said it earned $565 million in other revenues, which includes new fees. Those revenues grew 7.4 percent from a year ago.

AMR paid $1.33 billion for fuel in the quarter, down 44.9 percent from a year ago when oil prices were at an record high.

AMR ended the quarter with $3.3 billion in cash and short-term investments, including a restricted balance of $460 million.

Their cash position was a little better than I would have expected considering how significantly demand was down, Alukos said.

AMR said it added $66 million in liquidity through an aircraft sale-leaseback transaction. The company completed a $520 million public offering that also added liquidity. AMR said it now has committed financing expected to cover all firm orders for its Boeing Co 737 aircraft through 2011. (Reporting by Kyle Peterson; editing by John Wallace, Tim Dobbyn and Bernard Orr)