Airlines plunge as Italian coronavirus outbreak threatens longer crisis

* Virus spread threatens summer travel

* Consumer fears seen weighing on airlines

* Spare capacity could also hit profit

By Laurence Frost and Alistair Smout

PARIS/LONDON, Feb 24 (Reuters) - European budget airlines
bore the brunt of Monday's plunge in global stock markets as the
arrival of the coronavirus in Italy pointed to a longer, deeper
crisis than many have banked on.

EasyJet dropped 16.4% and Ryanair 13.5% as
airlines were forced to reassess the fallout from the rapid
spread of the COVID-19 virus across Asia and beyond, with South
Korea, Italy and Iran now struggling to contain outbreaks.

Although airlines have yet to suspend any Italian flights,
the new outbreaks raised the spectre of serious upheaval
extending into the lucrative summer tourism season on a day when
European stocks suffered their biggest slump since mid-2016.

"Concerns are growing that COVID-19 continues to spread and
will impact demand to and from other European countries," Credit
Suisse analysts said.

Ireland, meanwhile, advised citizens to avoid some
destinations in Italy, a major leisure market.

While budget airlines are most exposed to Italy, Credit
Suisse added that lower-margin legacy carriers are at risk from
a broader traffic slump if the contagion unnerves consumers.

In an email to frequent flyers on Monday, Singapore Airlines
highlighted the air filtration systems on its jets as well as
"enhanced cleaning" procedures between flights, including
"disinfectant fogging" and removal of headrest covers.

Among full-service European carriers, shares in Air
France-KLM, Lufthansa and British Airways
owner IAG all fell about 9%.

'FEAR AND UNCERTAINTY'

"The market reaction is a reflection of the fear and
uncertainty of the virus being in Europe and particularly in
Italy," said Stephen Furlong, transport analyst at Dublin-based
brokerage Davy.

Air France-KLM last week said the virus would wipe 150
million to 200 million euros ($163 million to $217 million) off
its earnings, assuming that flights suspended in January resume
in April - a scenario that now looks increasingly optimistic.

On the same day, the International Air Transport Association
(IATA) predicted that the impact would echo that of the 2003
SARS virus oubreak, with an estimated $28 billion hit this time.

"It could well be significantly more than that, given the
news over the weekend of cases in Iran and Italy," Phil Seymour,
chief executive of aviation consultancy IBA, said on Monday.

Some carriers that have suspended China services are likely
to add capacity on other routes in the hope that they will
benefit from displaced Asia leisure traffic, Seymour said.

Carriers including Delta Air Lines have already
begun to reassign larger planes to transatlantic flights and Air
France-KLM said it was considering redeployment options.

But there are inherent dangers, Seymour warned.

"If you increase capacity too much because you've
overestimated that demand shift, you just create a price war,"
he said.

The crisis could ultimately force more bankruptcies among
weaker carriers, which would benefit a fragmented European
sector in need of consolidation, Davy's Furlong said.

In the nearer term, however, it has darkened the industry's
profit outlook just when market fundamentals had appeared to be
improving.

"It looked like supply was going to be behind demand heading
into this summer," Furlong said. "This could rebalance that."
($1 = 0.9223 euros)

(Reporting by Laurence Frost
Editing by David Goodman)