Barclays says airlines earnings set to improve

Chase forecast much smaller losses for 2008 and 2009 across the sector versus his previous expectation, and he predicted profits for Continental Airlines Inc. and Alaska Air Group this fiscal year, instead of losses.

Spooked by fuel prices which spiked over the summer, airlines have been cutting the number of flights, hoping to raise prices. They are still doing that, even though fuel prices have retreated.

"The new lease on life afforded the industry by a dramatic reduction in jet fuel prices should give investors the time to benefit from this phenomenon," Chase wrote. He said his top picks are United Airlines parent UAL Corp., as well as Delta Air Lines Inc. and Northwest Airlines Corp. (which are hoping to combine by the end of this year), "but we believe the whole sector looks very compelling right now."

He left his ratings on the stocks unchanged. But for Continental, he now predicts 2008 profit of 25 cents per share, versus a previous call for a loss of $2.04 per share, and 2009 profit of $1.50 per share instead of a loss of $3.70.

The analyst still expects AirTran Holdings Inc. to lose money this year, but he now expects a 2009 profit of 25 cents per share instead of a loss of 85 cents.

Chase wrote that the results are being driven by the reductions in flying capacity by the airlines. He wrote that he expects domestic capacity to fall almost 12 percent in the fourth quarter of 2008.

"We continue to believe the industry will remain disciplined on capacity and will execute on announced capacity reductions," he wrote.

In Thursday afternoon trading, shares of most airlines fell with the broader market. AMR Corp. lost 20 cents at $10.96. Continental fell 10 cents to $17.50. Southwest gave up 27 cents at $13.93. JetBlue dropped 23 cents, or 4.6 percent, to $4.82. Delta lost 56 cents, or 6.6 percent, at $7.99, and Northwest fell 84 cents, or 8 percent, to $9.66.

A couple of carriers posted slim gains. UAL added 11 cents at $9.63, and US Airways rose 10 cents to $7.10.