The real threat to the airline industry

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News that police had foiled an apparent plot to blow up reportedly five aeroplanes flying from the UK to the US sent travel shares tumbling yesterday. Logically enough, the airline sector was the worst hit, with sector heavyweight British Airways ending down 5% at 370.25p.

But shareholders who had watched excitedly as BA climbed close to five-year highs shouldn't feel too disheartened. Terrorism and other geopolitical threats such as disease and war are always bad news in the short term for travel stocks - but they tend to recover fast.

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The real threat to airline stocks is much more mundane - and it's growing by the day

Despite the damage in the travel sector, the FTSE 100 was hardly battered by yesterday's terror threats. The blue-chip index lost just 37 points over the session.

Many press commentators commented on the City's resilience. As Robert Cole in The Times put it: "Another day, another terror threat?the muted reaction to news of the plot suggests that terror risk may already be priced into asset valuations."

But if you look back at similar incidents, it's not that surprising. On the day of the July 7th bombings in London - which actually succeeded, you'll remember - the FTSE 100 took a short-lived 200 point plunge, but was back to where it was before the attacks within the week.

If anything, the lack of reaction just points to the fact that investors still have very little sensitivity to risk. The events of September 11th 2001, distasteful as it may seem, appear to have taught even inexperienced investors that disaster represents a buying opportunity.

And the truth is, they may be right. Unlike the US, the UK had become accustomed to living with terrorism way before Al Qaeda ever came on the scene, so we shouldn't be too surprised that the City tends to take these incidents in its stride.

Travel stocks may take longer to recover than others, but in reality, the UK's airline sector (not to mention the broader market) has more to fear from the Bank of England than from terrorist plots. Why? Well, one thing people often forget is that a plane ticket is a consumer good, just like any other.

The cost of flying has been going up, which has boosted airline profits nicely, despite hefty rises in fuel charges. But as interest rates rise, people will see their spending power squeezed. Holidays are often among the last things that consumers are prepared to sacrifice, but if it's a choice between two weeks in the sun and paying the mortgage, most people are smart enough to put the money on the house.

High street giant Next suffered a share price fall yesterday, as analyst Shore Capital downgraded it to a "Sell", saying the company's summer sale had lasted for longer than usual this year. It's just one of the signs that retailers are still struggling - particularly if they weren't selling plasma-screen TVs in the run-up to the World Cup. And with the Bank looking set to raise rates by another quarter point this year, that's a trend that will continue.

Meanwhile in China, another airline's troubles have been taken as a sign that the stock market boom may be coming to an end. The Shanghai stock market has risen by 40% since the start of the year, one of the best global performers. As John Christy on Breakingviews.com points out: "bankers in Hong Kong and Shanghai have had little trouble selling just about anything that the Chinese government wants to unload on the public."

But the lacklustre initial public offering of airline Air China "is a sign that things are changing." According to The Times, "there are too many shares chasing too few buyers and the domestic bourses in Shanghai and Shenzhen are likely to struggle for the rest of the year." The company has cut the number of shares on offer by 40%. It now hopes to raise $576m, compared to a hoped-for $1bn.

Regulators are apparently considering calling a halt to all new listings, which could prevent the "proposed $21bn IPO of the Industrial and Commercial Bank of China," says Christy.

Given the careless appetite for Chinese banks - despite massive bad debts, Bank of China is priced at more than three times book value, nearly double the price of Deutsche Bank - "regulators may in this case be doing investors a favour".

You can read more about the future of China's economy in this week's issue of MoneyWeek, out today. Subscribers can download their copy by clicking here: Latest issue (/file/11557/latest-issue.html)

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Turning to the wider markets

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News of the terrorist plot to bomb transatlantic flights leaving the UK saw London's top stocks plunge early morning, but the FTSE recovered to end the day just 37 points lower at 5,782. The leisure and travel sectors took a hit as flights were delayed or cancelled due to the enforcement of strict rules on hand luggage. British Airways was the biggest faller, down 5%. Easyjet, MyTravel and and Avis Europe also suffered losses. International Power was the biggest riser of the day, having announced a strong first-half performance. For a full market report, see: London market close (/file/16673/london-close-bomb-plot-takes-footsie-lower.html)

News of the plot also hit investor confidence on the continent. The Paris CAC-40 fell 48 points to close at 4,935 with Airbus maker EADS the biggest faller. In Frankfurt, the Dax-30 slipped 71 points to 5,630 on disappointing results from Deutsche Telekom.

Across the Atlantic however, investors were cheered by news that the attacks had been thwarted. Falling oil prices. also buoyed sentiment. The Dow Jones was up 48 points to 11,124, the S&P 500 rose 5 points to 1,271 and the Nasdaq was up 11 points to 2,071.

In Asia, the Nikkei was down 25 points to close at 15,630 as traders took profits ahead of US trade figures to be released later today, which are expected to show growth slowing.

The oil price fell back slightly yesterday. Crude was trading at $74.51 in New York this morning, and Brent Spot was at $75.88 in London.

Spot gold rose 1% to $641.50 this morning, whilst silver was trading at $12.04 in New York late last night.

And in London this morning, troubled online gaming company BetonSports announced that it was closing down its American business. The company said that operations there were no longer viable given the arrest of its former chief executive, David Carruthers, and a restraining order placed on the company by US authorities.

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