Continental, the No. 4 U.S. carrier, posted a narrower loss for the first quarter and leading discounter Southwest eked out only a modest increase in profit, while reiterating its full-year 15 percent earnings growth target.
The culprit in both cases was soaring fuel prices, which threaten to spoil what many investors had hoped would be a recovery year for a U.S. airline industry that has lost some $30 billion since the September 11, 2001 attacks."On fuel, well, 'Ouch' pretty well sums it up," Continental Chief Financial Officer Jeff Misner said on a conference call.
Continental said its fuel costs were $191 million higher than in the year-earlier period, dragging it to a $66 million loss. Its quarterly loss, equal to 76 cents per share, was still less than half the year-ago period's $186 million or $2.79 a share, thanks to higher revenues and lower costs. Excluding special items, Continental's loss was $46 million or 53 cents per share in the 2006 period.
The only hope for airlines such as Continental and American Airlines to reverse their losses this year and for Southwest to meet its earnings target, would be to raise fares further, said Ray Neidl, an analyst at Calyon Securities.
But Southwest Chief Executive Gary Kelly said his airline -- which has locked in fuel costs below market prices through extensive financial hedging contracts, allowing it to underprice rivals -- would keep to a strategy of only moderate fare hikes.
"I'm hopeful that we won't need dramatic fare increases," he said. I don't think they would work anyway."
In the latest sign that the rest of the industry is eager to raise prices, American earlier this week raised domestic round-trip ticket prices by $10. The move has been matched by most of its major rivals.
LIQUIDITY CRUNCH CONCERN
In the first quarter, both Southwest and Continental reported identical 5.4 percent increases in average ticket prices -- hikes that fell short of surging fuel prices.
"You've got fairly substantial fuel cost bills," said Helane Becker, an analyst with Benchmark Cos. "People are just very concerned."
Investors shrugged off double-digit revenue increases at both airlines. Southwest's revenues soared 21.4 percent to $2.02 billion, while Continental's revenue rose 17.6 percent to $2.95 billion.
Continental shares, the industry's top performers so far this year, were down $1.40, or 5.4 percent, at $24.59 in afternoon trading on the New York Stock Exchange. Southwest was 72 cents, or 4.2 percent lower, at $16.64.
JP Morgan analyst Jamie Baker said Continental was the most richly valued of the traditional U.S. carriers and warned that it could be hardest hit if jet fuel costs spiked to $2.50 a gallon from current levels of about $2.10.
Continental CEO Larry Kellner, responding to a question from Baker about a possible liquidity crunch, said the airline's cash position, at about $2 billion, is solid.
But the airline's executives acknowledged that they remain unsure whether it could turn a profit at current fuel levels.
Even Southwest saw its jet fuel costs soar 63 percent in the period to $1.46 a gallon. Still, it reaped a $133 million benefit from the hedges, more than twice the profit of $61 million or 7 cents per share it reported for the period. A year before, Southwest earned $59 million, also 7 cents per share.
The hedges are wearing off, but anybody else "would kill" to have them, Neidl said.
Still, some analysts were worried about signs that the low cost airline's expenses excluding fuel are creeping higher.
The concern is that "once these fuel hedges come, up they're going to be just like any other airline out there," said Marisa Thompson, an analyst at Morningstar.
A third airline, Alaska Air Group Inc. (ALK.N), parent of Alaska Airlines, substantially beat analysts' forecasts, reporting a small first-quarter net profit of $2,800,000 or 8 cents per share excluding charges mostly related to the retirement of its MD-80 aircraft. The profit on an operating basis was the airline's first in seven years in what is usually its weakest period.
Its shares were up $1.83, or 5.2 percent, at $37.23 -- more than a four-month high -- in afternoon trading on the New York Stock Exchange.
After the charges, Alaska Air's net loss was $79.1 million or $2.36 per share, compared with a year-earlier loss of $80.5 million or $2.39 per share. Revenue rose to $735.4 million from $642.5 million.
The Washington Post
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