Delta Air (NYSE: DAL) is recently up $0.53 to $20.53. On November 14, Pardus Capital Management, an activist hedge fund, sent a letter to DAL recommending DAL merger with UAL Corp (NASDAQ: UAUA). WTI Crude oil is down 0.51% $93.61 according to Bloomberg. DAL December option implied volatility of 74 is above its 24-week average of 50 according to Track Data, suggesting larger price risk.

AMR (NYSE: AMR) is recently up $1.04 to $24.36. AMR the world's largest airline, has been frequently mentioned as a merger partner over the last seven months. AMR December option implied volatility of 62 is above its 26-week average of 52 according to Track Data, suggesting larger risk.

Daily options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.

The airline sector is seeing nice gains today after positive earnings reports from JetBlue (NASDAQ: JBLU) and UAL Corp (NASDAQ: UAUA), and the declining oil futures are helping, too. US Airways (NYSE: LCC) is scheduled to report its third quarter earnings before the market opens on Thursday.

In light of major fuel price increases, US Airways has cut its capacity and is considering increasing fares in the next quarter. The airline had better-than-expected traffic over the past few months, and a Goldman Sachs analyst noted that LCC should benefit from fare hikes at low-cost carriers like Southwest (NYSE: LUV), as some customers are likely to defect to US Airways.

On average, analysts are expecting earnings of $1.75 per share, down from $2.74 last quarter, but up from from $1.09 in the year ago period. LCC has beat Wall Street expectations each of the last eight quarters. Though fuel prices have pressured the airlines as oil climbs well into the $80s, the solid earnings from others in the industry this quarter should bode well for the company. If you expect LCC to also report a positive quarter, then now could be a good time to take a look at a bullish hedged trade on the stock.

Barron's piece on AMR Corporation's (NYSE: AMR) American Airlines points to how investor sentiment might be changing toward the airline industry. The airlines are profitable, have huge cash positions and little debt outside of the leases for their planes.

One potential catalyst could be the spinning off of many of the industry's frequent flyer programs, similar to what Air Canada did with its Aviation Holdings frequent flyer program.

Also, as American Airlines and UAL Corporation (NASDAQ: UAUA) are getting pitched by investment bankers about spinning off assets, the supply-and-demand balance for oil and jet fuel are looking more favorable for a price decline. With demand slowing and new supplies coming to market from Saudi Arabia, the drop in fuel could be considerable.

With American having corrected from $40 and now selling for $22, and UAL Corp holding up better, but still selling for a cheap valuation, both stocks seem to have a number of catalysts in place to drive both airline stocks higher.

AMR Corp. (NYSE: AMR), parent of American Airlines, was urged by one of its top shareholders to consider "all options to enhance shareholder value" such as spinning-off American's frequent flier program, according the ' DealBook blog.

In a letter to the Fort Worth-based company, FL Group of Iceland said "a conservative analysis" of AMR
shows "there is significant hidden shareholder value to be unlocked." In particular, FL Group believes that unbundling AMR's AAdvantage ("AAD") Frequent Flier program could increase shareholder value "by more than $4 billion."

The idea isn't without precedent. As DealBook notes UAL Corp (NYSE: UAUA), the parent of United Airlines, are expected to consider spin-offs at its annual meeting this week and that Air Canada has already spun off its frequent flier plan. Shares of AMR, which have plunged 50% since January, are trading slightly higher today. But investors who have watched airlines destroy billions of dollars in shareholder value over the years shouldn't get their hopes up.

Ceylon Securities analyst Ray Neidl told Bloomberg News that AMR sees "greater value in keeping all of the parts together."

Maybe AMR will change its tune if other shareholders join forces with FL Group.

UAL Corporation (NASDAQ: UAUA), the parent of United Airlines, got beat up pretty good along with the rest of the airline group yesterday.

However, investors should not stampede away from this sector, or more specifically, from UAL. As discussed in a Bear Stearns report released yesterday, the airline, which recently emerged from bankruptcy, continues to explore ways to utilize its massive cash hoard of $5 billion to maximize shareholder value, $1 billion of which management believes is excess cash.

Also, UAL is seeking ways to unlock value for its Mileage Plus program, a business that generates $800 million per year in revenue and has a large deferred revenue stream which provides some visibility for future revenue. Aeroplan, the Canadian-based loyalty marketing service business that was spun off from Air Canada's holding company, sells for a 60% premium to its former parent and a 200% premium on an enterprise value/EBITDA basis to the pure airline, Air Canada.

The Bear report places a $65 price target on UAL, with the asset break-up value of the company going as high as $80. Operational turnaround, huge free cash flow generation and the potential to realize value for the mileage plus business are all cited as reasons that could lead to a considerably higher stock price.

MAJOR PAPERS:

• According to Barron's Online's (subscription required) "Inside Scoop" column, Blockbuster Inc (NYSE: BBI) CEO James Keyes purchased 679,250 class A shares on Monday at an average price of $4.42 per share.
• The Financial Times (subscription required) reported that Nortel Networks Corporation (NYSE: NT) is open to acquiring companies.

OTHER PAPERS:

• The New York Times reported that British mining company Anglo American plc (NASDAQ: AAUKD) is going to begin the process of selling Tarmac, with possible buyers including Orascom Construction Industries, Lafarge Coppee (NYSE: LR), and Cemex (NYSE: CX).
• From BusinessWeek's "Inside Wall Street" column:
• UAL Corporation's (NASDAQ: UAUA) stock has soared to around $44 from $21 in February 2007, and Daniel McKenzie of Credit Suisse believes UAL is a potential private equity play.
• USA Technologies Inc (NASDAQ: USAT) is the largest maker of the e-port devices that enable vending machines selling soft drinks, snacks, and laundry products to accept plastic, and the company has only begun to penetrate the market, according to CEO George Jensen.
• SemBiosys Genetics, which trades in Toronto under the symbol SBS, is developing a way to make insulin from safflower.

UAL Corporation (NASDAQ: UAUA), the holding company for United Airlines, reported some of the best results in the company's history, as it earned its highest net income in seven years.

• UAL generated operating cash flow of $1 billion for the quarter, versus a market cap $5.5 billion; year-to-date the company has generated $1.5 billion in free cash flow
• Revenue of $5.2 billion is the highest level in company history
• The highest profits in seven years comes despite higher energy prices
• Operating profit margins doubled and most impressive was the free cash flow yield of 20%, pretty amazing considering this industry has a history of never earning its return on invested capital. It appears this might be changing, at least for the short term.

The large net operating loss allows the company to keep most of the money it makes and not pay it to the government. We started blogging about this stock when it was selling for $25 as it emerged from bankruptcy. I'd stay with UAL, as there looks to be a lot more money to be made with this stock.

In what might prove to be great news for General Motors Corp. (NYSE: GM) and Ford Motor Co. (NYSE: F), the airline industry continues to foul its own nest by treating customers like egg-laying hens, penning them up until they've been squeezed dry, then plucking them clean.

Northworst, I mean, Northwest Airlines Corp. (NYSE: NWA) is the current worst-in-class, as its 'passengers' have been caught in the middle of a labor dispute between pilots and the airline, facing canceled flight after canceled flight. However, Northwest is just one of many culprits in this effort to convince the American public to take a car vacation.

US Airways (NYSE: LCC), aka 'Air Mañana,' was the perpetrator of six of the ten most delayed fights in April. We all remember the JetBlue (NASDAQ: JBLU) debacle this winter, and NPR's Scott Simon has documented his ongoing problems with United Airline's (NASDAQ: UAUA) unresponsive lost luggage department.

Even with airlines padding their flight times to increase on-time arrivals, almost one in every four is delayed. And while the industry continues to use weather as the whipping boy, according to FAA statistics it accounts for less than 1% of delays.

As we enter the vacation season, I would have expected the airline industry to put its best foot forward. Instead, it seems to be dropping its collective drawers to moon us. My advice? Drive. Yes, you'll be cooped up in a small chair, but you can get up to pee any time you wish.

Flight delay info can be found on the FAA website.

UAL Corporation (NASDAQ: UAUA) opened at $36.24. So far today the stock has hit a low of $36.19 and a high of $38.13. As of 11:05, UAUA is trading at $37.77, up $2.44 (6.9%).

UAUA shares are leading the airline sector in a charge today as UAL subsidiary United Airlines forecast a rise in second-quarter revenue and UBS upgraded U.S. Airways (NYSE: LCC) after an extended performance slump. Many analysts from various investment banks had positive words for the stock and the sector this morning, further boosting the airlines. Recent technical indicators for UAUA have been neutral and improving slightly, while S&P gives the stock a negative 2 STARS (out of 5) sell rating.

For a bullish hedged play on this stock, I would consider a September bull-put credit spread below the $30 range. UAUA hasn't been below $30 since October and has shown support around $33.90 recently. This trade could be risky if fuel costs make another big jump in the next 3 months, but even if that happens, the stock would have to fall by more than 21% before this position would be in trouble.

Brent Archer is an options analyst and writer at Investors Observer.
DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls a position in UAUA or LCC.

MOST NOTEWORTHY: Airtran Holdings Inc (NYSE: AAI), UAL Corporation (NASDAQ: UAUA) and the REIT sector were today's noteworthy downgrades:

• Calyon downgraded shares of Airtran Holdings to Neutral from Add, citing concerns with AAI's yield trends.
• The firm also downgraded shares of UAL Corp to Add from Buy based on higher fuel prices and slightly weaker-than-expected RASM increases.
• Stifel downgraded the REIT Sector citing rising interest rates and mutual fund outflows, among other reasons. Companies that include Cedar Shopping Centers Inc (NYSE: CDR), Kimco Realty Corporation (NYSE: KIM), Kite Realty Group Trust (NYSE: KRG), Ramco-Gershenson Properties Trust (NYSE: RPT), Simon Property Group Inc (NYSE: SPG) and Tanger Factory Outlet Centers Inc (NYSE: SKT) were downgraded to Hold from Buy.

OTHER DOWNGRADES:

• Morgan Joseph downgraded shares of Penn National Gaming Inc (NASDAQ: PENN) to Hold from Buy on valuation.
• CBOT Holdings Inc (NYSE: BOT) was downgraded to Neutral from Outperform at Credit Suisse.
• JP Morgan downgraded shares of Netflix Inc (NASDAQ: NFLX) to Underweight from Neutral, as the firm believes the company's growth will be impacted by Blockbuster Inc's (NYSE: BBI) Total Access offer.

Airlines stocks are entering the seasonally strongest period, after having a pretty good correction. It looks like a good trading opportunity.

One stock we have blogged about in the past with good success has been UAL Corporation (NASDAQ: UAUA). UAL has had a serious correction, dropping from a January 2007 high of $50 and is now around $35.50.

What is attractive about UAL is that it has a strong franchise name and a boat load of cash and little debt. Finishing up the first quarter with $4.2 billion and just $1.2 billion in balance-sheet debt.

Operating cash flow increased by 38% from the first quarter of 2006 to approximately $626 million.

While there are some capacity issues for the most recent quarter, buying a stock with $4.2 billion in cash, balance-sheet debt of $1.2 billion and generating $626 million in OCF, is just too cheap to pass up. Look for United to revisit its $50 higher.

MOST NOTEWORTHY: Select airline companies and Sanofi-Aventis (SNY) were the most notable upgrades this morning.

• Positive industry trends and relative valuations forced Calyon to upgrade AMR Corp (NYSE: AMR), Continental Airlines 'B' (NYSE: CAL), UAL Corp (NASDAQ: UAUA) and US Airways Group (NYSE: LCC) to Buy from Add.

• Merrill Lynch upgraded shares of Sanofi-Aventis ADS (NYSE: SNY) to Buy from Neutral this morning. The upgrade was based on expectations of positive news from the U.S. approval of Acomplia and a potential win in its Plavix patent litigation, among other reasons.

OTHER UPGRADES:

• Deutsche Bank upgraded shares of Ericsson (NASDAQ: ERIC) to Buy from Hold as they expect positive trends to emerge in 4Q and 1Q07, based on "benign" pricing in the industry and higher handset sales.

• Lehman upgraded shares of STMicroelectronics N.V. (NYSE: STM) to Overweight from Underweight; the firm expects a resolution to their NOR flash business shortly either by a spin-off or a sale.

Analyst summaries provided by TheFlyOnTheWall.com (subscription required).

MOST NOTEWORTHY: Home Depot (NYSE: HD) and Google (NASDAQ: GOOG) were the most notable upgrades for the first trading session of 2007.

• Home Depot (NYSE: HD) was upgraded to Strong Buy from Hold with a $50 target at Raymond James, expecting that the worst is over in the housing market with hopes 2007 will be a better year.

• Google (NASDAQ: GOOG) was added to Stifel Nicolaus' Select List while maintaining its Buy rating, citing Google's growth rate as compared to its peers. Note that Stifel removed eBay (NASDAQ: EBAY) from their Select List.

OTHER UPGRADES:

• Bear Stearns upgraded JB Hunt Transport (NASDAQ: JBHT) to Outperform from Peer Perform with a $27 target; the firm expects JB Hunt to Outperform its pure truckload competitors during the downturn and for a potential buyer to surface.

• Bear Stearns also upgraded Merck (NYSE: MRK) to Outperform from Peer Perform with a $53 target, based on improved sales growth for Vytorin/Zetia, growth from Junuvia and vaccines, along with pipeline catalysts.

• Piper Jaffray upgraded shares of Pacific Sunwear (NASDAQ: PSUN) to Outperform from Market Perform with a $25 target, believing that tight inventory management favors margin improvement and that business at core stores have stabilized.

• Calyon upgraded UAL Corp (NASDAQ: UAUA) to Add from Neutral and raised their target to $48 from $35 based on good prospects for 2007.

Analyst summaries provided by TheFlyOnTheWall.com (subscription required).

UAL Corp (NASDAQ: UAUA) and Continental Airlines (NYSE: CAL) are in merger talks.

Theflyonthewall pounded the table on UAL Corp when the stock was at $24 per share, and the stock is now at $42, up 68%. I would stay with this stock. It appears there will be little premium paid as the deal gets worked out and will be an exchange of stock, which would be a positive for the airline industry. There is no reason to take on additional debt in this business.

Investors have been skittish about investing in the airline sector, and justifiably so. But now almost every legacy airline has gone through bankruptcy during the past ten to fifteen years and has a much improved cost structure.

With the Fed expected to drop rates in 2007 and a prolonged economic recovery anticipated, the combination of UAL and Continental could generate huge profits and cash flow for investors. Investors in UAL Corp may want to dump the stock on this news, but they should probably consider staying with it. This airline bull market has a few more years to run.

Post contributed courtesy of TheFlyOnTheWall.com (subscription required).

On September 9, 2006, TheFLY blogged about UAL Corporation (NASDAQ:UAUA), the parent of United Airlines, and recommended that investors jump into the stock. The stock was at $25. UAUA is now trading at about $41. That's a nice 64% return in two months.

The blog was titled "One Very Cheap Stock" and we wrote how UAUA appeared poised to at least double over the next few years, mirroring similar moves by Continental Airlines, Inc. (NYSE: CAL) and American Airlines (AMR Corporation, NYSE: AMR).

Our current advice: Maintain your UAUA position. UAUA is now operating in a consolidating airline sector with many legacy liabilities removed. Also, its bankruptcy-filing enhanced balance sheet points to a company (and sector) that might actually earn its cost of capital. Further, the cash generation in this business could be enormous.