United Airlines (NASDAQ: UAUA), US Airways (NYSE: LCC) and American Airlines (NYSE: AMR), according to an influential analyst, have run out of options. Jamie Baker of JPMorgan said in a July 20, 2009 report that these companies couldn't do anything to prevent a cash crisis. They only savior available to them would have to be an outside investor. To call the position grim would be optimistic. Unfortunately, it couldn't have come at a worse time.

As Baker was walking the bear into the airline industry, United was starting to celebrate its change in direction. The carrier has improved its on-time rate, according to a USA Today report, and its operations are coming around. Despite the fact that the airline industry has been brutalized by the global recession, the airline has made some progress. Through August, the company's share price doubled, and its ascent has continued in September. So, the company is locked in an ongoing struggle to manage its identity, cope with its past and shape how the world sees it today.

The operational "makeover" has resulted in a reduction of its fleet from 601 jets in 2000 to 386 as of the summer of 2009. In terms of passenger traffic, it's in the #4 spot in the United States – trailing Delta (NYSE: DAL), Southwest (NYSE: LUV) and American. With Q2 revenues off 25.2% year-over-year, however, drastic measures are still necessary.

Continental Airlines (NYSE: CAL) just got the relief it needs to compete. Despite resistance from the Department of Justice (which can only recommend), the Department of Transportation has granted the airline immunity from antitrust laws. This clears the way for Continental to work with United Airlines (NASDAQ: UAUA) -- and other carriers -- on international routes. Now, the airline can join Star Alliance, which already has antitrust immunity.

At the same time, DOT approved a joint venture among Continental, United, Lufthansa (OTC: DLAKY) and Air Canada. This new relationship would involve trans-Atlantic routes.

Fuel prices seem to be the number one concern on just about everyone's mind lately, and it seems like things are not going to be getting better any time soon. As prices have risen to record levels, many of us have decided to cut back on our driving, especially on long trips in order to save a little on our fuel prices. Well, the airlines are no different, and there's an interesting report today in The Wall Street Journal showing how airlines are cutting back on long flights in order to save a little on fuel consumption.

It is a pretty nasty cycle we are seeing with the airlines. The higher fuel costs have led to higher tickets prices and extra fees. These higher prices have led to less air traffic, and that has led to an even greater need to find more ways to cover rising costs. Definitely a tough situation.

The new way they are starting to combat the high costs of flying is by cutting back, or postponing long international flights, in particular flights that are in excess of 12 hours.

In reaction to surging fuel costs, several major airlines announced today that they were raising their fares in order to recoup some of their rapidly increasing flying costs.

The increase this time around is $20 and effects passengers traveling on UAL Corporation (NASDAQ: UAUA), Delta Air Lines, Inc. (NYSE: DAL), and AMR Corporation (NYSE: AMR)'s American Airlines. The $20 jump in prices will be added to the airline's fuel surcharges, and consequently, these charges are now running at $130 round trip on most flights that you will book through the airlines.

The current rate hike was first initiated by Delta, and marks the second time in just over a week that the airline has been forced to raise fares in order to combat record high fuel costs. Times are definitely tough for airlines, and they are doing everything they can to combat fuel prices, but regardless of the rate increases most analysts are still expecting to see huge losses this year from most, if not all, airline carriers.

Delta (NYSE: DAL) is not wasting any time. It would like to have a merger deal in place before the end of the month. According to The Wall Street Journal, the airline is already in talks with both United (NASDAQ: UAUA) and Northwest (NYSE: NWA).

What's the hurry? In an industry where losses are more common than profits and Chapter 11 is not an unusual state of operation, consolidations may be a way to stay in business. Both oil costs and a weak economy could undermine financial results at big carriers.

That leaves open the question of whether mergers really help airlines make money. There are savings in personnel but they often involve difficult negotiations with unions. A combined operation does not help bring down oil prices.

Perhaps most important, merged airlines often have problems combining reservation systems and customer service. That means quality of service drops and consumers sometimes take their business elsewhere.

The math is not all that compelling.

Douglas A. McIntyre is an editor at 247wallst.com.

After airline stocks took a nearly unprecedented beating during the last few weeks on concerns about higher fuel costs and a falling economy, they rallied this week. Some of it may be that the selling was a bit overdone. But the biggest cause was news that Delta (NYSE: DAL) is considering a merger with Northwest (NYSE: NWA) or United (NASDAQ: UAUA).

According to Reuters, "most of the largest U.S. airlines are likely to post fourth-quarter losses, possibly signaling the end of an industry recovery that began in 2006 and further building a case for mergers."

Mergers in the airline industry are often used to keep one or the other carrier out of Chapter 11. The courts have been the refuge of the flying business for decades. If a carrier can't pay its bills, it goes into bankruptcy. When things get better, it comes out again. Creditors and unions usually get the short end.

The assumption that putting two big airlines together will save money is undoubtedly true. But compared to overall costs, those savings are probably very, very modest. Running Northwest costs about $12 billion a year. So much of that goes into fleet costs, fuel, and labor that there is not much to cut. Employees can be pushed out over time, but the unions are sensitive about it.

Since it came out of bankruptcy two months ago, Northwest Airlines (NYSE: NWA) has canceled a significant amount of flights because of a pilot shortage. Over 147 Northwest flights were canceled over the past weekend and more than 60 were canceled on Monday. By mid-day today, 30 more were grounded.

While these recent cancellations don't compare to the 1,000 flights that were cut in June, Northwest failed to meet the industry's target of 98.0% completed flights. The numbers are also worse than Northwest's rivals' performances. USA Today reported that Northwest's 76 cancellations Sunday totaled 5.6% of the day's flights. In comparison, American Airlines (NYSE: AMR) cut six flights, United Airlines (NASDAQ: UAUA) canceled 33 and Delta (NYSE: DAL) cut four. All provide more daily flights than Northwest.

MOST NOTEWORTHY: Netflix (NFLX), NiSource (NI), TiVo (TIVO), Williams-Sonoma (WSM) and KLA-Tencor (KLAC) were today's more noteworthy downgrades:

• Netflix (NASDAQ: NFLX) was cut to Hold from Buy at Needham to reflect the lowered subscriber guidance and their belief that things can get worse before getting better. Shares were also downgraded at Cowen, to Neutral from Outperform, and Lehman, to Equal Weight from Overweight.

• NiSource (NYSE: NI) was cut to Underweight from Equal Weight at Lehman based on the expected increases in interest expense and taxes.

• TiVo (NASDAQ: TIVO) was downgraded to Short from Sell at SMH Capital and believes the current valuation now reflects 20% penetration of the Comcast Corp (CMCSK)-owned digital sub base for the joint venture product bundle, which the firm considers aggressive. In addition, the firm believes TiVo's new pricing structure doesn't add much value.

• Matrix cut Williams-Sonoma (NYSE: WSM) to Sell from Hold on valuation and deteriorating operating results.

• Citigroup downgraded shares of KLA-Tencor (NASDAQ: KLAC) to Hold from Buy on valuation as they see risk to 2H07 estimates due to slower near-term cost savings and higher integration costs...

OTHER DOWNGRADES:

• Friedman Billings downgraded American Express (NYSE: AXP) to Market Perform from Outperform.

• Piper Jaffray cut Atheros Communications (NASDAQ: ATHR) to Market Perform from Outperform.

• Jefferies downgraded United Rentals (NYSE: URI) and GlobalSantaFe (NYSE: GSF) to Hold from Buy.

• Merrill downgraded Wyeth (NYSE: WYE) to Neutral from Buy.

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

As of today, there's a new airline in the skies: Virgin America. That's right folks: British Billionaire Richard Branson has expanded his Virgin Atlantic fleet across the pond. The new San Francisco-based start-up will use a fleet of Airbus A320's to fly two routes: San Francisco to J.F.K in New York and San Francisco to Los Angeles International.

While Virgin America will only open with those two routes, they plan on ramping its schedule fast. In the next three months, Virgin will add Las Vegas and Washington Dulles to the schedule and move up to a total 10 U.S. destinations a year from now. The fleet plans to service 30 destinations within the next five years.

This week, the online travel tracker – Yapta – announced it raised about $2.3 million in venture capital from First Round Capital.

The company's service is definitely intriguing. Basically, it alerts you if an airfare has decreased – and allows you to get a refund. This is the case so long as you purchase tickets directly from airlines, such as United (Nasdaq: UAUA).

I had a chance to interview Rafi Mohammed, an expert on pricing. He runs a consulting firm, Culture of Profit, and is the author of the book The Art of Pricing.

According to him:

"I really love this concept and tell all my friends about it. Yapta watched a trip to LA for me – started at $530 and I bought at $390. I'm going to buy my holiday tickets and have Yapta watch for lower fares.

"I believe Yapta offers a great service that travelers will embrace. With the airline industry changing millions of prices every hour, consumers are often caught in the Catch 22 conundrum of buying now or hoping for lower fares later. Yapta reduces the uncertainty of these often wide airline ticket price swings and helps its users benefit from the lowest prices. Yapta offers a service that every airline customer can financially benefit from."

Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.

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.

Airline stocks received little favorable attention from the newsletter world as oil prices were setting new highs. However, with the recent decline in fuel costs, the airline sector is now gaining favor, and two particularly astute industry observers have both added UAL Corp. (NASDAQ: UAUA ), parent of United Airlines, to their buy lists.

According to Elliott Gue, editor of The Energy Strategist, UAL has been "somewhat of a laggard and is due to play catch-up." And while some investors might be uncomfortable buying a stock that was in bankruptcy until last February, Elliott sees this is a significant plus.

He explains, "Almost all the big players have been bankrupt on multiple occasions. Basically, without being too sarcastic, here's how the airline bankruptcy game works: an airline racks up huge debts, and when the industry turns down they can't services their debt, so they declare bankruptcy, wipe out the shareholders, and hand control to the debt (bond) holders."

Setting aside the obvious unfairness of this business model to those who suffer from the bankruptcy, from a stock trader's standpoint Gue notes, "Under bankruptcy carriers are able to cut their costs, eliminate much of their debt and even secure new financing and cash to begin anew. As a result, carriers that are just emerging from a major bankruptcy restructuring can also be highly competitive players."

Such has been the case with UAL; during its bankruptcy, he notes, UAL renegotiated labor contracts, dumped its underfunded pension plays and reduced its debt by almost half.

Now, he says, "The only thing holding UAL back has been high oil prices. With oil now at more moderate levels now, the sector and this stock have room to run." He emphasizes, however, that this is a trade – not a long term investment.

UAL has also shown up among the stocks being bought by the "best" stock pickers on Marketocracy, a site developed by Ken Kam who monitors the buying and selling of some 70,000 investors who operate virtual model portfolios. For his top stock picks he looks for stocks that are being bought by those with the best trading records while concurrently being sold by those with the poorest records.

Ken first saw buying by the top performing stock pickers when UAL emerged from bankruptcy last February, and has watched them increase and decrease their positions along with moves in oil.

According Ken, the 'best' just added 12% to their UAL positions, while the 'rest' –underperformers – have been selling, recently reducing their positions by 13%. This divergence between the "best and the rest" has led Ken to select UAL as his latest featured stock idea.

Steven Halpern is the editor of TheStocksAdvisors.com, a daily digest covering the favorite investment ideas from the financial newsletter community.

One thing about airline stocks: it's usually very good or very bad. Now, according to a cover story from Barron's, the sector may be very good.

Ironically, a big part of the puzzle is the wrenching problems over the years – such as union strife, security threats, rising energy costs, and intense competition from low-cost carriers. It's by going through restructurings – and bankruptcies – that airline companies end up in fairly good shape.

According to Barron's, the best values for shareholders may actually be the legacy carriers: US Airways Group, Inc. (NYSE:LCC), United (UAL Corporation, NASDAQ:UAUA) and American (AMR Corporation, NYSE:AMR). In fact, it looks like 2007 could see the highest profits in the industry's history -- as energy prices fall, travel continues to grow and capacity is stagnant.

There is also the potential for M&A activity. One scenario is a merger between Delta Air Lines, Inc. (OTC:DALRQ) and Northwest Airlines Corporation (OTC:NWACQ). And, as I wrote about in BloggingStocks, there may be a deal with United.

True, if the economy slips into recession, things are likely to turn negative for the airlines. But, so long as this does not happen – and energy prices remain stable – investors may get a pleasant surprise.

Tom Taulli is the author of various books, including the Complete M&A Handbook and operates InvestorOffering.com.