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The Associated Press May 24, 2011, 4:12PM ET

Airline stocks drop on rising oil, fare concerns

Airline stocks fell Tuesday as oil prices headed back up, a volcanic ash cloud disrupted travel in Europe, and an analyst said summer airfares were heading lower.

Airline stocks have benefited from the recent 15 percent drop in oil prices. Fuel and labor are an airline's two biggest expenses, and cheaper oil would help reduce one of those.

On Tuesday, however, oil prices rose almost 2 percent, helped by reports from Goldman Sachs, J.P. Morgan and Morgan Stanley that said prices are likely to climb again later this year. Benchmark West Texas intermediate rose to $99.59 a barrel on the New York Mercantile Exchange, and Brent crude moved up to $112.53 in London.

In Europe, airlines canceled hundreds of flights as wind carried ash from a volcano in Iceland over Scotland. Airlines worry that ash particles can harm jet engines and sandblast airplane windows. Government officials expect the disruption to travel won't be as severe as last year, when another volcano in Iceland erupted.

In the U.S., airlines are preparing for the busy summer season. Demand for travel has been rising, and some airlines have reported strong bookings for May and June.

UBS analyst Kevin Crissey said airline revenue was likely to be strong in May and "decent" in June and July. He raised profit forecasts because of the recent drop in fuel prices.

But, Crissey said, average fares for leisure travelers in mid- and late summer were "showing some softening" after a "great" first quarter during which airlines raised prices several times.

The Arca Airlines Index, which includes U.S. and international airlines, dipped nearly 1 percent.

Among U.S. carriers, shares of Delta Air Lines Inc. fell 14 cents to $11.09; United Continental Holdings Inc. slipped 54 cents, or 2.1 percent, to $25.71; American Airlines parent AMR Corp. dipped 7 cents to $6.48; US Airways Group Inc. was down 26 cents, or 2.6 percent, to $9.74; and Southwest Airlines Co. fell 17 cents to $11.97.

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