Sector Snap: Airline stocks tumble as oil rebounds

The Amex Airline Index dropped 7.3 percent to 18.03 in late morning trading. The declines came amid a steep pullback in the broader market, with the Dow Jones industrial average sinking 1.1 percent to 11,929.56.

Oil prices gained back many of the previous day's losses. Light, sweet crude for July delivery rose $3.90 to $135.83 a barrel on the New York Mercantile Exchange.

Airline shares often move opposite oil prices because fuel represents many carriers' biggest expense.

The sector rallied Thursday as oil prices dropped and Continental Airlines Inc. and UAL Corp.'s United Airlines announced plans to work together in an alliance. Those gains followed additional capacity cutback plans by a number of carriers earlier in the week.

Airline executives hope the drawdowns in capacity, most of which are slated for the end of summer, will reduce costs and increase the industry's pricing power as it struggles to cope with runaway fuel costs.

In midday trading, Continental shares fell $1.59, or 10.2 percent, to $14. UAL shares lost 87 cents, or 10.7 percent, to $7.24.

In a note to investors, FTN Midwest analyst Michael Derchin called the industry's sweeping cutbacks the "the most dramatic domestic downsizing since the jet age." However, he suggested that the sector's stock prices--some of which are trading as much as 60 to 75 percent below their levels a year ago--may have tumbled too far.

"The stocks are trading on bankruptcy fears which we feel is highly unlikely given the dramatic structural changes taking place and strong liquidity positions at most airlines," Derchin wrote.

The analyst listed Southwest Airlines Co. and American Airlines parent AMR Corp. as favorite holdings. He rates both "Buy," along with the majority of the major carriers.