March 25 (Bloomberg) -- Demand for air travel has fallen to “alarming levels,” threatening the rebound in U.S. airline stocks from record lows, according to Hunter Keay, a Stifel Nicolaus & Co. analyst.

As the CHART OF THE DAY shows, fares have dropped even as carriers have reduced service on domestic routes. The consumer price index’s airfare component has tumbled 14 percent from a peak in August.

Keay had a similar chart in a report yesterday containing rating cuts for Continental Airlines Inc., Delta Air Lines Inc. and the parent companies of American and United airlines. All four were trimmed to “hold” from “buy.”

“We see the potential for another sell-off of airline stocks” in response to air-traffic figures for March and April and first-quarter earnings, he wrote. Revenue from each seat may decline 15 percent to 20 percent this month on a per-mile basis from a year ago, according to his estimate.

The Amex Airline Index plummeted 52 percent in the two months ended March 9 and hit bottom at the lowest level since calculations began in 1992. Since then, the industry gauge has risen as much as 23 percent.

AMR Corp., the owner of American, and UAL Corp., United’s owner, are included along with Continental, Delta and Southwest Airlines Co., which also has a “hold” rating from Keay.

(To save a copy of the chart, click here.)

To contact the reporter on this story: David Wilson in New York at dwilson@bloomberg.net

Last Updated: March 25, 2009 11:58 EDT