Airline shares suffer on higher oil prices

LONDON Tue Feb 22, 2011 6:03am EST

LONDON (Reuters) - Higher oil prices, driven by mounting tensions in the Middle East and North Africa, sent shares in European airlines lower on Tuesday.

Air France-KLM shed 3.5 percent, Lufthansa lost 2.1 percent and International Consolidated Airlines Group -- formed from the merger of British Airways and Iberia -- dropped 3.3 percent.

Scandinavian airline SAS fell 2.6 percent, while the STOXX Europe 600 travel and leisure index eased 1.2 percent.

"The fear is that airlines didn't see it coming, and might not have the fuel hedging programs in place to cushion the shock of oil reaching these prices," Harry Sebag, head of sales trading at Saxo Banque in Paris.

"This could seriously hit their results."

Shares in Asian airlines also suffered on concerns over rising fuel costs.

Brent crude futures rose more than $1 to above $107 a barrel on concern that violence in Libya could cut more of the OPEC-member's output and that a similar story could play out in other top oil producers in North Africa and the Middle East.

On Tuesday, Libyan leader Muammar Gaddafi vowed defiance in the face of mounting revolt against his 41-year rule, making a fleeting television appearance to disdain protesters and deny he had fled the country.

Credit Suisse lowered its earnings estimates for the three major European carriers, though it remained positive on the sector.

The broker cut its earnings estimates for Air France-KLM, which issued a profit warning two weeks ago, by 81 percent to 94.6 million euros. It also trimmed its forecasts on IAG by 22 percent to 329 million euros and Lufthansa by 3.2 percent to 877.7 million.

"While there may prove a lag between higher fuel prices and higher fare levels, we remain positive on pricing prospects for the rest of the year, and continue to rate each flag carrier outperform, with IAG our top pick," Credit Suisse said in a note.

(Reporting by Dominic Lau; Additional reporting by Blaise Robinson in Paris; Editing by Jon Loades-Carter)

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