UPDATE 2-Oil spike hits U.S. airlines, but fare hikes help

* Airline index down 5.23 percent

* U.S. crude CLc2 up $5.53 to $95.24 per barrel

* Jet fuel a major expense for airlines (Adds comment from US Airways president, analyst, updates prices)

By Kyle Peterson

CHICAGO, Feb 22 (Reuters) - U.S. airline stocks tumbled on Tuesday, smacked by a spike in oil prices amid unrest in the Middle East, but recent fare hikes, capacity restraint and new fees imposed by carriers could cushion the blow.

The main drag on airline stocks was an oil rally, which boosts the price of jet fuel, a major expense for airlines. U.S. crude oil CLc2 was up $5.53 to $95.24 per barrel on concerns that the revolt in Libya could spread to other oil producers.

The run-up in oil to a 30-month high slammed world stocks and sent the Arca airline index .XAL down 5.23 percent. But unlike with previous surges in oil prices, airlines are better positioned to take the hit.

A spike in the price of oil to a record high in 2008 threatened to tip some top carriers into bankruptcy.

"The reality is airlines have exposure to fuel prices, and we can't eliminate that," said Scott Kirby, president of US Airways Group (LCC.N). "It's just part of our business. The good news for airlines is that fares are rapidly increasing. Unlike 2008, this time the industry really does appear to be able to pass those (fuel) costs on."

Several regions in the Middle East are seeing political upheaval, but protests in Libya -- the third largest oil producer -- against leader Muammar Gaddafi triggered a sharp rise in oil prices.

The revolt in Libya has disrupted oil supplies from the OPEC nation.

The airline industry is recovering from a downturn spurred in part by oil price volatility and an economic recession that drained travel demand.

But industry health has improved in recent years because of airline mergers and huge capacity cuts that enabled carriers to fly fewer planes and fill more seats.

(For a graphic on oil's impact on airline shares, click on r.reuters.com/xeq28r.)

According to the Air Transport Association, an airline trade group, every penny-per-gallon-per-year increase in the price of jet fuel means $170 million to $180 million in additional fuel expenses for the industry.

"The airlines are having a tough day of it. And it's to be expected, given everything happening out there," said Helane Becker, an airline analyst with Dahlman Rose & Co.

United Continental Holdings (UAL.N) closed down $2.48, or 9.2 percent, to $24.44. Delta Air Lines (DAL.N) finished down 76 cents, or 6.6 percent, to $10.74. AMR Corp AMR.N lost 42 cents, or 5.65 percent, to $7.02.

FARES HIKES AND HEDGING

The first buffer against fuel costs is fare hikes. Top carriers have made several efforts to boost fares this year.

One fare tracker -- Farecompare.com -- said a $10 round-trip domestic fare hike initiated by Southwest Airlines (LUV.N) last week was quickly matched over the weekend by all domestic airlines.

It was the fourth broad-based domestic fare hike this year, Farecompare Chief Executive Rick Seaney said in an email, noting that the pace of domestic fare hikes is "almost exactly mirroring the same time period in late 2007 and early 2008 when oil prices leapt into the mid $90's per barrel.

Carriers also are relying more heavily on new fees for travel perks and services to beef up revenue. Charges like bag check fees have helped airlines shore up their balance sheets.

Against this backdrop, some top airlines are more aggressively hedging their fuel exposure to cut the risk of price volatility.

United Continental, parent of United Airlines, said it had hedged about 40 percent of its expected 2011 fuel consumption as of late January.

As of Jan. 7, 2011, AMR had hedged 50 percent of its expected first-quarter 2011 fuel consumption, the airline said.

US Airways stopped hedging in 2009 and has said it has saved money on hedge premiums and paid less than rivals for fuel on price dips. The carrier has said it has no plans to restart fuel hedging.

But despite their best efforts, a sharp spike in fuel prices is a major risk to airlines, said Darryl Jenkins, chairman of the American Aviation Institute.

"Any time you have a major run up in your biggest cost, it's going to hurt," Jenkins said. "And I think that's the only way you can look at it." (Reporting by Kyle Peterson; editing by John Wallace and Carol Bishopric)