United Airlines and US Airways Group reported smaller quarterly losses that topped Wall Street estimates on Tuesday, signaling a recovery for an industry that endured sagging demand in the recent recession.

Airlines are able to drive average fares higher, CRT Capital analyst Michael Derchin said. They're getting more business travelers flying who tend to pay higher fares and ancillary revenues continue to increase.

Derchin noted that fuel prices remain volatile and threaten to erode progress airlines have made in controlling costs.

US Airways said that amid the improving revenue environment, it expects to be profitable in the current second quarter, which would mark its first profit including items since the third quarter of 2007.

US Airways shares rose 1 cent to $6.51, while the S&P 500 <.SPX> slumped 1.4 percent. United shares dipped 77 cents to $21.59. The Arca Airline index <.XAL> fell 2.9 percent.

CONSOLIDATION TALK

US Airways and United, a unit of UAL Corp , recently ended merger discussions. UAL remains in talks with Continental Airlines on a deal that could form the world's largest airline.

During a call with analysts, US Airways said its discussions with United may have spurred Continental to re-open merger talks with United. US Airways said it would prefer to participate in consolidation, but does not need it to survive.

US Airways also said there is potential for more cooperation with United and Continental, but the airline does not expect this to happen imminently. All three airlines belong to the global airline network, Star Alliance.

US Airways has the most to prove now that it is no longer in merger discussions with United, and it appears US Airways has done that by significantly beating analysts' estimates, said Morningstar analyst Basili Alukos.

Neither United nor Continental have confirmed talks. A source familiar with the talks said Sunday that the two are haggling over the exact ratio of shares that United plans to pay for Continental.

United shares have fallen for two straight days since that report.

NARROWER LOSSES

UAL, the No. 3 U.S. airline, said its first-quarter net loss was $82 million, or 49 cents per share, compared with $382 million, or $2.64 per share, a year earlier.

Excluding one-time items, UAL posted a loss of 55 cents per share, compared with a consensus Wall Street forecast for a 72 cents per-share loss, according to Reuters I/B/E/S.

The company recorded $15 million in cash losses on fuel hedges that settled in the first quarter. UAL also reported noncash, net mark-to-market gains on its fuel hedges of $31 million.

UAL said its first-quarter revenue gained 15 percent to $4.24 billion. The company ended the quarter with cash amounting to $3.8 billion, unrestricted cash of more than $3.5 billion, and restricted cash of nearly $300 million.

At US Airways, the first-quarter loss narrowed to $45 million, or 28 cents per share, from a loss of $103 million, or 90 cents per share, a year before.

During the call, US Airways said it is getting close to 2008 revenue levels.

Excluding one-time items, US Airways posted a loss of 55 cents per share, compared with a Wall Street consensus forecast for a loss of 71 cents per share, according to Reuters
I/B/E/S.

The carrier reported $44 million in special items. US Airways said it lost $30 million in revenue during February as a result of the severe winter storms on the East Coast.

The carrier said its revenue gained 8 percent to $2.65 billion, slightly above the $2.63 billion analysts had expected. US Airways ended the quarter with an unrestricted cash and investments balance of $1.6 billion, up $100 million from the end of 2009.

(Reporting by Kyle Peterson in Chicago, Karen Jacobs in Atlanta and Deepa Seetharaman in New York; editing by Maureen Bavdek and Derek Caney)

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