Lehman cuts price targets on 8 airline cos

(Reuters) - Lehman Brothers cut its price targets on eight U.S. airline companies, saying high fuel costs and a recession would result in the companies resorting to continued capacity cuts, and highlighted that extra cash would also be a requirement to get through the next two years.

"Given current valuations and energy prices, stocks are generally not compelling. We expect the stocks to have a downward bias in the intermediate term," analyst Gary Chase said in a note to clients.

The Amex airline index was down 7.58 percent in midday trade.

Chase believes a 7 percent capacity reduction should prevent run-rate cash burn by the end of 2009, given current fuel prices. He also said he was now modeling $2 billion in equity raises in 2008, adding that "equity can only follow a credible and sufficient capacity solution."

The airline industry has been battered by soaring fuel costs and a weakening economy. Oil prices climbed to a record above $132 a barrel on Wednesday, driven by a combination of long-term production worries and a near-term focus on tight fuel stocks.

Gerard Arpey, chief executive of AMR Corp, said in a statement earlier in the day, "The airline industry as it is constituted today was not built to withstand oil prices at $125 a barrel, and certainly not when record fuel expenses are coupled with a weak U.S. economy."

American Airlines, owned by AMR, said on Wednesday it plans to cut domestic capacity by 11 percent to 12 percent in the fourth quarter, its biggest service cutback since the attacks of September 11, 2001.

Analyst Chase named Delta Airlines, which is in the process of merging with Northwest Airlines, as its top pick.

(Reporting by Eric Yep in Bangalore; Editing by Himani Sarkar)