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Soaring Fuel Costs Ground Airline Stocks

Spiking fuel costs are grounding airline stocks, offering new evidence that something always spoils the party in the airline industry.

The eleven major carriers enjoyed a fabulously successful third quarter, in which they reported earnings of $1.7 billion. The results put the group on pace to its second consecutive profitable year for the first time since 2000.

And yet, the Amex Airline Index closed Wednesday down 3.4% to 41.40, which is approaching its 52-week low of 40.15. For the year, the index is down almost 29%. American Airlines parent AMR Corp. (AMR) closed Wednesday at $21.52, nearly half its 52-week high of $41. Continental Airlines (CAL) shares, which closed Tuesday at $29.60, also has lost more than 40% of their value since early in the year.

The root cause is record fuel costs. The Air Transport Association estimates that, on an annualized basis, a $1 per barrel increase in the price of crude oil costs the industry $470 million. With crude hovering just below $97 a barrel, the industry must spend nearly $22 billion more annually than it would have spent when oil traded at its 2007 low per-barrel price of $50.51, in January.

It is no wonder that many investors shun airlines, which cumulatively have failed to make a profit since the Wright Brothers first flew. It's always something with this industry. Fuel prices. Labor issues. Terrorist threats. Irrational competition. Or even the possibility that Congress will step in to help.

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