(FORTUNE Magazine) – Airlines are tough to love--especially lately. The stocks--which have rebounded since Sept. 11--are still off 44% on average over the past year. That's why when Merrill Lynch airline analyst Michael Linenberg upgraded three--Delta ($26, DAL), Continental ($23, CAL), and Northwest ($17, NWAC)--to strong buys, we couldn't help but wonder: Has this guy been stuck in lost luggage for the past year? Linenberg stands by his buys.

The industry just lost $2 billion in the first quarter. You say that's good?

It was about $150 million better than we forecasted. I'm not sure that's a reason to start popping champagne corks, but in the previous quarter it lost about $3 billion. So we had a billion-dollar improvement. And I think we're going to continue to see more improvement.

How much of the cost savings is from getting stingy with the peanuts?

There are two big parts. One is that the revenue is improving. But also the industry has laid off people and a lot of aircraft have been parked. So plenty of costs have been taken out.

Okay, the planes that are in the air are fuller--but airlines still can't raise prices. What gives?

I think we will get a price increase. I don't think it'll be systemwide or in all fare classes. But down the road you'll have to pay a little more for your ticket.

Maybe the airlines would have more leverage if they didn't treat passengers like cattle?

That's an issue. But I've been on the road extensively since Sept. 11 and seen a lot of improvement. I've been able to get through some of the lines quickly.

Is that because you cover airlines?

No. I fly in the back of the bus like everybody else. I've been in numerous spot checks and when they rifle through my bags and start finding Aviation Week, I get pulled aside. Try explaining that you're an equity analyst to a security guy in Spokane.

Companies are still cutting back on business travel. Does that worry you?

If you think the U.S. economy is dead, then so is air transportation. But those numbers will come back. These stocks are not for the faint of heart. If the trends continue to improve, however, it's a leveraged play on the economic recovery.

Why do you like these three stocks?

They have the best outlook over the next year on fundamentals. I think you could see them move up 30%, maybe 40%.

Are all bets off if there's a war in the Middle East?

If you have a war in the Middle East, that's not good. But we've had a lot of noise about war, oil prices have moved up, there's talk about recession, lack of business travel, the hassle factor, and this group is down year-to-date by less than 4%. The S&P is down 6%.

What if the Saudis cut off our oil?

Shoot, that's bad for airlines but I don't even want to imagine what that would do to the stock market.

Maybe the airlines could try those gas-electric hybrid engines. Or methane.

Tell the truth: Did you upgrade just for the frequent-flier miles?

No. Analyst integrity is critical right now.

--Brian O'Keefe