Foiled Terror Plot Hurts Airline Shares

While airlines and travel companies were dealt a sharp blow Thursday by the discovery of a terrorist plot aimed at trans-Atlantic flights, shares of companies that make surveillance and detection technologies were boosted by prospects of increased spending on security.

Tourism would feel an immediate impact, experts said, but the longer-term economic effects were likely to be less harsh - particularly as officials had thwarted the planned attack.

"Sadly, I think the world has learned to live with the threat of sporadic terrorism," said Philip Shaw, chief economist at Investec Securities.

Airline shares had already recovered slightly by the close of trading in London.

Analysts said the main immediate impact for airlines would come from the cost of canceled flights, but in the long run all airlines would be hit with higher security costs. This sent shares of security technology stocks markedly higher.

Inspection-systems maker American Science and Engineering Inc. rose 26 percent to $45.80 on the Nasdaq Stock Market. Morgan Keegan analyst Brian W. Ruttenbur said investors may believe the company will win new business for its "backscatter" technology, a type of X-ray used to screen passengers at airports.

OSI Systems Inc. rose 11 percent to $19.43 on the Nasdaq. Ruttenbur said the company's thermal neutron analysis technology would be "ideal" for airport personnel screening because it can identify liquid explosives.

Other companies in the security and surveillance industries that saw their shares rise include: L-3 Communications Holdings Inc.; Israel's Magal Security Systems Ltd.; Isonics Corp.; Digital Recorders Inc.; and Global ePoint Inc.

The plot detected by British officials had targeted United Airlines, American Airlines and Continental Airlines, according to U.S. counterterrorism officials. Deputy Metropolitan Police Commissioner Paul Stephenson said it involved several planes and an intent "to commit mass murder on an unimaginable scale."

Heightened security measures targeting preflight checks and severely limiting onboard baggage led to chaotic scenes at airports, forcing airlines to cancel hundreds of flights.

The worst affected was London's Heathrow, Europe's biggest and busiest airport, catering to 190,000 passengers and 1,250 departures and arrivals on an average August day.

British Airways PLC was one of the hardest stocks hit because of its heavy exposure to the trans-Atlantic route and its reliance on Heathrow. Its shares fell 5.1 percent to 370.25 pence ($7.00) on the London Stock Exchange.

U.S. airline shares sold off early but later recovered, with American Airlines parent AMR Corp. falling less than 1 percent to $20.03 on the New York Stock Exchange. Shares of UAL Corp., the parent of United Airlines, fell 1 percent to $23.60 on Nasdaq while Continental Airlines fell 1 percent to $23.98 on the NYSE.

All short-haul inbound flights to Heathrow were canceled with several outbound flights also canceled or delayed. Long-haul flights continued to operate but with lengthy delays.

Flights to and from other airports around the country, including London's Stansted, Gatwick and Luton, were also heavily impacted.

Airports operator BAA PLC, which runs Heathrow, Gatwick and Stansted, said the cancelations would continue into Friday, and did not know how long the heightened security measures would be in place.

The ban on hand luggage posed a particular logistical problem for budget airline Ryanair Holdings PLC, which this year began charging customers for each bag they checked. The airline waived its new 2.50 euro ($3.20) fee for each carry-on bag that unexpectedly had to be checked in Thursday.

Ryanair shares fell 1.5 percent, while fellow low-cost carrier easyJet PLC fell 2.1 percent. Among other European airlines, Air France-KLM and Lufthansa were both down 3 percent.

The malaise spread to other travel companies, with British package tour operator MyTravel down 2 percent.

However, analysts said the longer-term outlook was not as pessimistic as was feared after last year's July 7 bombings on London's transport network that killed 52 commuters.

"You will always see a selloff based on the headlines today, but investors and analysts will now be waiting to see the depth of issues," said Henk Potts, equity strategist at Barclays Stockbrokers.

Holger Schmieding, an analyst with Bank of America in London, said vacationers and business travelers were unlikely to change their travel and spending habits by enough to hurt the economy for long.

"We do not expect the thwarted terror plot to affect economic and financial market trends in any significant way," he said.

Elliott Frisby, a spokesman for VisitBritain, the country's tourism authority, said it was too early to estimate the impact but noted that Britain still had a record year in number of visitors last year despite the London bombings.

Meanwhile, many travelers headed to the railroads in Europe. Eurostar Group Ltd. spokesman Gareth Headon said the company's train service across the English Channel had carried 10 percent more passengers than usual Thursday and was likely to grow.


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