Airline shares surge as oil slips

CHICAGO (Reuters) - U.S. airline shares were sharply higher on Wednesday, led by a 16 percent gain by American Airlines parent AMR Corp (AMR.N), as a slide in oil prices bolstered sentiment toward the hard-hit sector.

"Oil has backed out significantly over the last two days," said Jim Corridore, an equities analyst with Standard & Poor's.

Crude oil prices, which affect the price of jet fuel and surged to a record of over $100 a barrel earlier this month, fell 2.3 percent to less than $88 a barrel on Wednesday.

The airline industry has been battered in recent months by soaring fuel prices and concerns that economic weakness will erode travel demand.

Carriers that have reported fourth-quarter earnings have been mostly unprofitable. AMR, UAL, and Delta Air Lines (DAL.N) all reported quarterly losses on soaring fuel costs.

But the earnings figures have generally been better than expected, Corridore said. He also said the sector got support from comments from executives that mergers are still a possibility.

United Airlines parent UAL Corp (UAUA.O), which was 15 percent higher to $36.65 in afternoon trade, also got a boost after Goldman Sachs reiterated its buy rating on the company.

"We've favored UAL shares owing to strong international, best-in-class FCF (free cash flow), and strategic option value around asset spins and consolidation," Goldman analyst Robert Barry said in a research note.

UAL is at the center of merger speculation and reportedly is in talks with Delta, along with Northwest Airlines NWA.N. None of the carriers have commented.

The Amex airline index .XAL was up 9.6 percent in late afternoon trading. AMR soared $1.98 to $14.28. Delta was up 8.8 percent to $16.16.

(Reporting by Kyle Peterson and Chris Reiter; Editing by Tim Dobbyn)