UAL, US Airways shares hurt by Frontier deal

NEW YORK (Reuters) - Shares of US Airways (LCC.N) and United Airlines parent UAL Corp (UAUA.O) dropped more than 10 percent on Tuesday as investors worried about increased competition for both carriers owing to an airline merger.

U.S. regional carrier Frontier Airlines Holdings Inc FRNTQ.PK said Monday it had reached a deal to sell itself to Republic Airways Holdings Inc (RJET.O). The deal could help Frontier emerge from bankruptcy this fall as a subsidiary of Republic.

S&P airlines analyst Jim Corridore said Frontier could pose a strong challenge to carriers with West Coast operations such as United and US Airways.

"(Frontier is) going to be able to emerge as a stronger competitor because they now have a backer for financing to come out of bankruptcy," said Corridore. "They're joining forces with a relatively profitable competitor that has the financial resources to help them."

Shares of UAL fell 11.2 percent, or 40 cents, to $3.17. US Airways shed 10.9 percent, or 27 cents, to $2.20.

Corridore said other airlines were also being hurt by the tepid outlook for the U.S. economy. The Amex airlines index .XAL was off 2.4 percent, compared with a 0.3 percent drop in the S&P 500 index.

(Reporting by Deepa Seetharaman; editing by John Wallace)