Airline shares jump on Continental traffic data

* Continental May traffic revenue tops estimates

* Continental also benefits from drop in fuel costs

* Airline index up more than 3 percent

NEW YORK, June 2 (Reuters) - U.S. airline stocks shot up on Wednesday after Continental Airlines CAL.N posted strong May traffic revenue, underscoring the industry's newfound pricing power and the beginning of a rebound in business traffic.

No. 4 U.S. airline Continental, which announced a merger with United Airlines last month, said its mainline unit revenue rose between 22.5 percent and 23.5 percent in May.

The carrier said consolidated unit revenue, which includes the performance of its feeder airlines, rose as much as 24 percent, besting a 17 percent forecast from some analysts.

The beat was due to higher-than-expected fares, a rebound in higher-fare-paying business travelers, and fare surcharges put in place during peak travel days, CRT Capital Group LLC analyst Michael Derchin wrote in a research note.

Shares of Continental rose nearly 6 percent to $21.47 in early trading on the New York Stock Exchange. Shares of United parent UAL Corp UAUA.O jumped 6.3 percent to $20.57.

US Airways Group (LCC.N) shares added 7.7 percent to $9.30. The Arca Airline Index was up 3.4 percent.

Continental's report "is expected to kick off a multi-week, across-the-board strengthening of consensus, the magnitude of which is unlikely to go ignored by equities, in our view," JP Morgan analyst Jamie Baker wrote in a note Tuesday night.

May figures were based on easy comparisons, as a year ago the industry was hit by fears of the H1N1 virus and a deep recession.

Continental also saw a boost from a pull-back in oil prices during the month. The airline now estimates its second-quarter fuel cost will average $2.25 per gallon.

"The lower jet fuel price could potentially save CAL approximately $25 million during the second quarter if oil prices remain under pressure in June," Derchin said. (Reporting by Deepa Seetharaman; editing by John Wallace)