News of the foiled terrorist attack targeting U.S.-bound airplanes from London's Heathrow Airport hurt the U.K. stock market today as well as shares of British Airways PLC, Continental Airlines Inc., United Airlines Inc. and American Airlines Inc. — the four airlines whose planes were reported to be targets of the attack.
The FTSE 100 slid 37.1 points, or 0.63%, to close at 5,823.40. British Airways fell 19.75 pence (33 cents), or 5.06%, to close at 370.25 pence. In late afternoon trading on Nasdaq, United was down 54 cents, or 2.27%, at $23.29; on the NYSE, American parent AMR Corp. was down 15 cents, or 0.74%, at $20.14; and Continental was down 63 cents, or 2.6%, at $23.58.
Jim Corridore, airline equity analyst with Standard & Poor's, said this morning's events were "the straw that broke the camel's back" in terms of recommending airline stock to investors. The rating agency today downgraded its fundamental outlook on the airline industry to neutral from positive as a result of the alleged plot.
High oil prices and a seasonally weaker travel period put airlines in a precarious stock position even before today's news, he said. "Now we think it's too risky to advise investors to aggressively purchase airline stock," he said. "We see more negatives than positives."
Mr. Corridore said he anticipates an earnings recovery for U.S. airlines later this year and into 2007, but right now there is little incentive to invest in the industry.
S&P also downgraded American Airlines two notches to "hold" from "strong buy" and downgraded Continental Airlines one notch to "hold" from "buy." Although the U.S. Department of Homeland Security did not identify the airlines that were intended targets, three U.S. carriers — American, Continental and United — are the primary servers for the route between London and the United States. The firm is not yet rating United, which recently emerged from bankruptcy.
"Airline stocks have been knocked severely," said Nick van den Brul, London-based aviation analyst at BNP Paribas. "They will recover, but it's hard to say when, depending on the details to come on what the police actually say. It may take those airlines directly affected a little longer than the rest."
Keith Bowman, London-based equity analyst at Hargreaves Lansdown Stockbrokers, added that it will take at least a day or two for investors to assess the underlying economic factors. "We've had these impacts before, and normally, the market recovers fairly quickly," Mr. Bowman said. "In the greater scheme of things, concerns about interest rates, the shadow of inflation and the slower pace of the economy are the big factors going forward; one shouldn't get too carried away with the short-term impact."
"Today's terrorist scare … highlighted the fact that markets have been complacent about geopolitical risk by not factoring in a high enough risk premium," Ted Scott, manager of F&C Asset Management's Growth & Income fund, said in a news release.
"There is often a knee-jerk reaction to stocks that are directly affected by unpredictable events such as the terrorist alert this morning," he said. "Airlines, travel companies and related businesses will be affected, but they are likely to bounce back soon." If the planned attacks had proceeded, "we might have seen markets drop a further 10% as they did following the Sept. 11 attacks," he said.
Airline and airport debt-related credit ratings will likely remain unchanged, said Gregory Clifton, senior analyst for corporate finance at Moody's Investors Service. But the alleged plot did expose some of the industry's financial vulnerabilities, he said.
"As many U.S. carriers have only recently begun to restore financial stability, these developments could interrupt the progress of this recovery," he said. "At a minimum, airlines will experience higher costs related to the disruption of their networks caused by cancellations, delays and rerouting stemming from today's events." Despite the risks, however, "most airlines have the financial capacity" to deal with today's events, he said.
Timothy Riddle, Chartwell Investments managing partner and CEO, said he did not foresee an immediate negative effect on the U.S. equity market; in fact, he thinks the airline and other travel sectors may see increased investment activity.
"Unless it escalates, we don't think there's any major impact," he said. If transport and travel-related stocks take a dip, Chartwell "may have an opportunity to jump into" those investments. "Right now there's not a tremendous amount of information available, but we're monitoring the situation very closely," he said. Mr. Riddle declined to comment further until after the firm has had an opportunity to talk with all of its clients.