But Analysts Say Upward Trend May Have Crested

As we near the end of domestic airlines' second profitable year in a row -- after five years losing $35 billion -- analysts believe that may be as good as it gets.

The general opinion is for profits to fall in 2008 from 2007 among several of the major carriers. Fuel costs are high, despite a $1.95 a barrel drop on Friday. At $88.28 a barrel, jet fuel is the number one cost to airlines, along with labor, according to Thomson Financial.

But, the US economy may run into a slump... and travel tends to be stronger creating better profits when the economy is strong, says JPMorgan analyst Jamie Baker.

"Tepid demand has long been forecast, though it still hurts to see," he said. "We're hard pressed to find anyone that could logically argue for anything but softer air travel trends in 2008 versus 2007."

To combat a downturn, airlines are cutting capacity, and even dropping routes -- hoping fewer seats will allow them to boost prices.

Travelers have shown some resilience. Analyst Ray Neidl doesn't see airline shares rising unless the industry can push through fare increases, crude oil prices ease or airlines start merging. None of these is assured, according to the Calyon Securities analyst.

Goldman Sachs analyst Robert Barry cut his view on the sector to "cautious" from "neutral."

Carriers with international routes are favored by analysts for more profitability.

United Airlines' parent UAL Corp. (UAUA), which Barry rates "buy," says such routes face less competition from low-cost carriers.

All airline shares got a boost last week, after UAL approved a $250 million special distribution to shareholders.

FMI: www.united.com