Sector Snap: Airline stocks pull back as oil resumes climb

The Amex Airline Index dropped 3.6 percent to 23.88 in late morning trading. The 14-stock index posted gains in each of the previous six sessions. The broader market advanced modestly, with the Dow Jones industrial average adding 0.3 percent to 13,040.86.

Oil prices surged back above $115 a barrel after Turkish warplanes bombed Kurdish rebel bases inside Iraq, stoking fears that Middle East supplies could be disrupted. Light, sweet crude for June delivery rose $3.25 to $115.77 a barrel on the New York Mercantile Exchange.

Airline shares often move opposite oil prices because fuel now accounts for many airlines' biggest cost.

Lehman Brothers analyst Garrett Chase said airlines began cutting back on capacity as planned in a number of markets, with large reductions from AMR Corp.'s American Airlines, AirTran Holdings Inc. and Southwest Airlines Co. Nearly all domestic airlines recently said they would scale back their flight offerings in an effort to cut costs given the high price of fuel.

"We continue to expect a domestic capacity decline of (about 1.8 percent) for 2008, with capacity reductions coming a bit sooner than expected," Chase said in a client note.

AMR shares fell 74 cents, or 7.5 percent, to $9.16. AirTran shares lost 14 cents to $3.51, while Southwest sank 24 cents to $13.28.

Other decliners included United Airlines parent UAL Corp., down 70 cents, or 4.4 percent, to $15.40, and Continental Airlines Inc., down $1.28, or 6.7 percent, to $17.97.

Mesa Air Group Inc. was a rare gainer after it and regional carrier and Hawaiian Airlines parent Hawaiian Holdings Inc. agreed to settle a long-running dispute over trade secrets earlier in the week. Hawaiian, meanwhile, struck its highest point in years before turning lower.

Mesa shares rose 17 cents, or 17.5 percent, to $1.13. Hawaiian shares dipped 3 cents to $8.42 after jumping to a new high of $8.90 earlier in the session.