What happened

Shares of American Airlines Group (AAL -0.36%) are up more than 5% on Thursday following a report that the airline had successfully led a round of domestic fare increases in recent days, strengthening the case for investing in the sector despite lingering questions about demand.

So what

While airlines are forbidden from colluding on pricing, they do monitor each other's fare structure closely and try to match rates. For this reason, an attempt by one airline to raise fares often either succeeds or fails based on whether competitors choose to match the price.

An American Airlines 737.

Image source: American Airlines Group.

J.P. Morgan analyst Jamie Baker in a note said American Airlines had increased domestic fares by $5 one-way on Wednesday morning, and that increase seemingly was matched by a systemwide hike by Hawaiian Airlines (HA -0.71%) and a "substantive" boost by Southwest (LUV 1.07%). This would mark the second fare hike since the beginning of May, and Baker admitted he was surprised to see it stick so soon after the previous one.

Shares of American have been grounded in 2019, down more than 5% year to date prior to Thursday's move, on concerns about the health of the domestic economy and fears that trade wars could eat into international business travel demand. But Baker wrote that domestic fare resilience is not priced into the stocks, saying that stronger fares and potential stronger-than-expected performance in the ongoing second quarter could reverse investors' "recent apathy" toward airline stocks.

Now what

Shares of American Airlines even after the Thursday's bump are down 24% over the past year, underperforming rivals including United Continental Holdings (UAL -1.47%), Delta Air Lines (DAL -0.46%), and Southwest. But the shares are hardly cheap, trading at a multiple to earnings slightly above that of United and Delta.

AAL Chart

Airline data by YCharts

American is in the process of a makeover, including new routes from its Dallas-Fort Worth megahub and a cost-cutting program expected to generate $1 billion in savings. It's also less exposed to international markets than United or Delta, and has already cut back its service to China.

Airlines tend to trade up and down based on the health of the economy, so there is ample macro-reason to be cautious about American Airlines' shares today. But if the fare increase does hold, so too can the stock's push-off from its lows.