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U.S. airline shares fall for 2nd day, hit by rising oil prices

June 12 (Reuters) - Shares of major U.S. airlines dropped for a second straight day on Thursday as oil prices climbed to a three-month high in the wake of the worst fighting in Iraq since the U.S. troop withdrawal in 2011.

American Airlines Group Inc, the world's largest carrier, tumbled 5.4 percent, while United Continental Holdings Inc 5.7 percent and Delta Air Lines Inc dropped 5 percent. The sector also fell on Wednesday, when German carrier Deutsche Lufthansa AG pared its profit targets for the next two years, citing greater competition .

Southwest Airlines Co and JetBlue Airways Corp were both down more than 4 percent.

Brent crude oil climbed topped $112 a barrel on worries that escalating violence in Iraq could disrupt oil supplies from the major OPEC exporter. Fuel and labor are the biggest costs for airlines.

Kevin Crissey, an airline analyst with Skyline Research, said newer investors were likely not accustomed to the volatile effect of fuel prices on the sector. He also said profit-taking was likely playing a role in the sector skid.

"This shouldn't be an indictment to everything good that's been going on in the industry," Crissey said. "The consolidation, the capacity discipline, that's all still true, but fuel still matters."

Shares of airlines have rallied over the past year as carriers moved to enhance shareholder returns. Last month Delta said it would raise its quarterly dividend by 50 percent and launch a new $2 billion share buyback.

Even with the declines over the past two days, Delta shares have risen about 39 percent so far this year, and American is up about 57 percent. Alaska Air Group Inc, which announced a 2-for-1 stock split on Thursday, has risen about 27 percent this year. It was off 3.6 percent on Thursday.

Crissey said he expected airlines to be profitable despite the latest rise in oil. "It shouldn't change the overall thesis that the airlines are doing quite well, demand is decent, their capacity discipline is in place and there's fewer of them," Crissey added. "It's still a very attractive time for the airline space."

Iraqi Kurdish forces took control of the northern oil city of Kirkuk on Thursday, after government troops abandoned their posts in the face of a triumphant Sunni Islamist rebel march toward Baghdad that threatens Iraq's future as a unified state.

(Reporting by Karen Jacobs in Atlanta; Editing by Jeffrey Benkoe)