updated 8/11/2006 12:02:12 PM ET 2006-08-11T16:02:12

Investors pummeled airline stocks in midday trading Friday, as analysts continued to offer mixed opinions about the impact of this week’s foiled terrorist plot.

The Amex Airline Index sank 4.5 percent, falling even lower than it did Thursday morning after news first broke of thwarted terrorist plans to blow up trans-Atlantic flights with liquid explosives. Airline shares recovered by the end of trading Thursday, with several domestic-focused regional and low-cost carriers even marking gains.

But Friday’s decline was broad based, with sinking shares for international, low-cost and regional carriers.

Merrill Lynch economist David A. Rosenberg said he expects the industry to have to offer fare sales to lure back fliers frustrated with bans on all liquids in carryon baggage. That would cut into the revenue gains the industry has been making, as it fights to offset rising fuel prices.

“The new rules surrounding air travel are probably going to unleash some pretty serious price cutting in the airline industry because who is going to want to fly now, knowing you have to check in your toiletry bag, eye drops and all?” Rosenberg wrote in a research note.

Bear Stearns analyst David Strine, though, said he still expects the industry’s earnings and cash flows to improve in the second half of 2006 and in 2007, following the strong results posted so far this year. Bookings for September appear to be ahead of last year’s, which would help offset any slip due to terrorism fears.

But the terrorist fears, oil-price pressures and escalating violence in the Middle East all continue to pressure the industry, he wrote in a research note.

So long as the industry’s capacity doesn’t grow too quickly, “We believe the sector’s fundamentals are still recovering and don’t see valuation as stretched,” Strine said.

Somewhat higher oil prices after yesterday’s drop also hurt industry stocks as a barrel of oil picked up 10 cents to $74.10 on the New York Mercantile Exchange. Jet fuel is among carriers’ biggest costs.

Among the sharpest decliners were the three airlines identified as potential targets of the terrorist plot against Britain-to-U.S. flights.

American Airlines parent AMR Corp. fell $1.06, or 5.2 percent, to $19.23, and Continental Airlines Inc. dropped $1.36, or 5.7 percent, to $22.50, both on the New York Stock Exchange.

United Airlines’ parent UAL Corp. lost 96 cents, or 4 percent, to $22.56 on the Nasdaq, outside the Amex index.

Among other decliners, AirTran Holdings Inc. fell 70 cents, or 6 percent, to $11.05, and Alaska Air Group Inc. lost $1.41, or 3.9 percent, to $34.64, both on the NYSE.

Southwest Airlines Co. gave up 64 cents, or 3.7 percent, to $16.30, and US Airways Group Inc. shed $2.24, or 5.5 percent, to $38.28, both on the NYSE.

Frontier Airlines Holdings Inc. fell 33 cents, or 5.2 percent, to $6.05, and regional carrier SkyWest Inc. dropped $1.09, or 4.7 percent, to $22.16, both on the Nasdaq.

ExpressJet Holdings Inc. lost 30 cents, or 4.6 percent, to $6.23, and Mesa Air Group Inc. gave up 22 cents, or 2.7 percent, at $7.51, both on the Nasdaq.

JetBlue Airways Corp. fell 26 cents, or 2.6 percent, to $9.89 on the Nasdaq, despite announcing a deal earlier in the day that could add to its bottom line. The low-cost carrier will publish its fares and inventory on Sabre Holdings Corp.’s distribution system, giving it more reach to corporate travel managers.

Morgan Stanley analyst William Greene said in a research note the deal could mean up to 2 cents per share or 3 cents per share in additional earnings, if it succeeds in attracting more passengers at higher fares.

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