Crude oil surge slams airline shares

Rocky and wire reports

Originally published 11:00 a.m., March 26, 2008
Updated 02:33 p.m., March 26, 2008

A steep rise in oil prices and broader economic concerns shoved airline shares lower, with Denver-based Frontier Airlines falling as much as 30 percent in early trading before recovering later in the day.

The Amex Airline Index, which tracks 14 publicly traded carriers, dropped nearly 6 percent today to 26.41. That more than wiped out its gains for the week.

Shares of Denver-based Frontier sank as low as $2.05 but made up those losses to close the day up a penny.

United Airlines, the largest carrier in Denver, fell nearly 9 percent, while Southwest Airlines was down about 5 percent.

The government reported that February durable goods unexpectedly fell for the second month in a row, reigniting fears of a recession that could cause air travel to drop. A separate report that new-home sales fell for the fourth straight month added to investors’ concerns.

The Dow Jones industrial average closed down 109.74, or 0.9 percent, at 12,422.86.

Government data also drove the direction of crude prices, which spiked after the Energy Department said U.S. energy stockpiles were lower than expected. Light, sweet crude for May delivery rose $3.42 to $104.64 a barrel on the New York Mercantile Exchange.

Airline shares typically move inversely to crude prices because fuel represents one of the industry’s biggest costs.

Adding to investors’ concerns was a decision by American Airlines to cancel about 200 flights so crews could inspect wires aboard the carrier’s MD-80 planes. The nation’s largest carrier said an audit by the airline and the Federal Aviation Administration revealed the need for new inspections.

The move came a day after the FAA ordered inspections on hundreds of older model Boeing 737 aircraft operated by a number of carriers amid concerns over a potentially faulty bolt.

Shares of American Airlines parent AMR Corp. are now trading near their lowest point since 2004. But in a note to investors, FTN Midwest analyst Michael Derchin said such a low value is not warranted because the carrier is likely to generate significant cash flow even if it posts a loss, as analysts expect this year.