Sector snap: Airline stocks make modest rebound

Airline stocks staged a comeback Thursday, but the gains were modest compared with the losses racked up during the previous day's sell-off.

The Amex Airline Index gained 2.8 percent to 19.24 around midday. The broader market also began to claw back after sharp drops earlier in the week, with the Dow Jones industrial average up 0.3 percent to 12,640.76.

Oil prices eased after an earlier spike. Light, sweet crude for July delivery jumped to $135.09 a barrel in overnight electronic trading on the New York Mercantile Exchange before retreating to trade down $1.13 at $132.04 a barrel.

Airline shares are sensitive to movements in the price of oil because fuel represents most carriers' biggest expense.

Shares plummeted Wednesday after oil prices shot past $130 a barrel for the first time and American Airlines, the largest U.S. carrier, said it would slash capacity amid concerns about sharply rising fuel prices. Downbeat notes from two Wall Street analysts added pressure on the sector.

American parent AMR Corp. led the sector's rebound Thursday, jumping 56 cents, or 9 percent, to $6.78. Even so, the stock remained more than a dollar short of where it began Wednesday.

An analyst note Thursday suggested the worst is likely far from over for the sector. Calyon Securities analyst Ray Neidl said the current economic environment has created "the biggest challenge ever" for the industry, and warned that stocks could still fall further.

"The industry needs major capacity shrinkage that will enable large ticket price increases, or oil prices have to decline substantially, down towards $100 (per barrel), for the industry to return to even breakeven levels," he wrote in a note to investors.

Neidl cut his rating on Delta Air Lines Inc. and Northwest Airlines Corp. to "Neutral" from "Add" because he believes investors are unlikely to "give a premium value to the pending merger in the current uncertain environment."

Delta shares rose 29 cents, or 5 percent, to $6.06. Northwest shares added 37 cents, or 5.8 percent to $6.74.