Wall Street on Thursday suffered its worst trading day this year since China jitters hit the market in February, with a 310-point plunge in the Dow Jones industrial average - a loss of 2.3%. But US airline stocks were rattled, with percentage losses around double the overall market, reflecting the sector’s sensitivity to changing economic circumstances.

Worst hit were Northwest Airlines, down almost 9% and Delta Air Lines by nearly 7%.

The fall could have been worse, with the Dow down nearly 450 points at one time during the day. Oil prices also surged to near all time highs before settling USD1.23 per barrel lower, just under USD75.

Global share markets could be in for a period of volatility until the direction of the US economy becomes clearer. Airlines have generally enjoyed a strong stock market performance this year on rising travel demand and improving yields.

But some clouds are gathering for the airline sector, including the spectre of overcapacity, slowing revenue growth and continued high fuel prices - enough to make any investor skittish.

Last week, IATA warned that we may also be moving into a period of cyclically slower growth in premium traffic, reducing the boost to airline revenues provided by premium traffic in recent years. Load factors remain high, although IATA stated the airlines will need to “carefully manage” the large amounts of new aircraft set to be delivered.

Growth of 2.2% in premium traffic for the year-to-May-07 is almost half the 4.3% growth seen in 2006, and the volume of premium travelers actually fell 0.7% in May-07 - the first year-on-year decline for nearly two-and-a-half years, led by weakness within Europe. Excluding these routes, premium traffic grew by 4.1% in May, slightly higher than growth of 3.9% in April.

But it may serve a warning for airlines that rely heavily on premium traffic, if the trend extends to this region. Here, the most exposed are Emirates (with almost 20% of total capacity offered in premium classes), followed by All Nippon, Malaysia Airlines and Thai Airways.

Emirates also offers the largest overall volume of premium seats, with half a million per week across its network, followed by Singapore Airlines, Cathay Pacific and Korean Air.

With several new product initiatives by airlines coming on stream aimed at the premium markets, competition for business travellers looks set to intensify.

Meanwhile, on Australian and New Zealand markets, Qantas and Air New Zealand were down around 2% in early trading, while Virgin Blue remained steady.
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