U.S. airlines are coming back into favor with analysts amid more competitive pricing and evidence the global economy is on a recovery path.

We have over the past month or two seen sequential improvement in trends on the pricing side of the airline business, indicating that demand is coming back to a small extent, Majestic Research analyst Matthew Jacob said.

The new trends offer a glimmer of hope for investors who have seen carriers' stocks crash this year with all of the liquidity fears and the talk of an airline bankruptcy. Now experts say these shares are poised for a short-term rebound as trends improve.

July industry results, combined with recent August revenue disclosures, point to some evidence that a recovery in airline revenue has begun, Barclays Capital analyst Gary Chase said in a note Wednesday.

The Arca Airline Index <.XAL> was up 7 percent on Thursday after J.P. Morgan analyst Jamie Baker, a noted industry bear, said the sector is on the verge of turning a financial corner and suggested investors boost their airline equity holdings.

Assuming stable demand and fuel, we now expect winter to pass with nary a bankruptcy in sight, he said in a note.

Baker upgraded stock of United Airlines parent UAL Corp and US Airways Group Inc .

J.P. Morgan's move spurred call interest in airlines among options traders.

Investors often use equity call options, which grant them the right to buy shares at a fixed price within a specified time period, to speculate on a potential rise in stock prices.

We are seeing heavy call volume across the airline sector with some investors buying call options in anticipation of further strength in the group in the short term, said Frederic Ruffy, an option strategist at Web information site WhatsTrading.com.

Most major U.S. airlines in the past week posted declining passenger traffic for August, but load factors -- which measure how full a plane is -- were mostly higher, aided by capacity cuts. In its latest monthly traffic report, US Airways said better booking trends seemed to be continuing into September.

But airlines are not yet out of the woods, analysts said. J.P. Morgan's Baker noted that fuel prices could easily prove to be a disruptive factor, while Barclays Capital's Chase said a resurgence of the H1N1 flu could be another issue.

Jacob, the Majestic Research analyst, said leisure travelers have responded to discounted air fares and lower hotel room rates, helping airlines as business travel slowed.

That peak traditional summer travel season has come to a close and the question for us is will this be a kind of a sustained recovery now that the airlines and the travel industry will probably have to rely a little bit more on business travel also coming back, Jacob said.

There may already be signs of an uptick in business traffic, said Helane Becker, a Jesup & Lamont Securities analyst.

As the airlines have reported traffic in the past week and a half, we've seen an improvement in our close-end bookings, Becker said. That's a good positive event because it implies that you're going to see some business traffic come back.

U.S. airlines' shares rose strongly on Thursday, with UAL and US Airways gaining 20 percent and 13 percent respectively, in wake of the J.P. Morgan rating upgrades.

Shares of Delta Air Lines were up 10 percent and AMR and Continental Airlines Inc were both some 8 percent higher. Southwest Airlines rose 3 percent.

(Additional reporting by Doris Frankel in Chicago; Editing by Maureen Bavdek)

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