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Continental, Southwest Earnings Hurt by Fuel Costs

Continental Airlines and Southwest Airlines, two of the healthiest major U.S. carriers, said Thursday that record-high fuel costs led to disappointing quarterly earnings and they cut growth plans.

Continental's loss and Southwest's decline in profit highlight the biggest challenges facing the airline industry today -- skyrocketing fuel prices and a sagging U.S. economy.

These were also contributors to the quarterly loss reported on Wednesday by AMR's American Airlines.

Tough market conditions may also pressure Continental to take part in a merger to better compete with rivals Delta Air Lines and Northwest Airlines , which on Monday said they planned to combine to form the world's largest airline by traffic volume.

Continental and UAL's United Airlines have reportedly been in merger talks for months.

"The proposed Delta-Northwest merger will change the competitive landscape for Continental and the entire airline industry," Continental's chief executive Larry Kellner told investors on a conference call.

"We are reviewing our strategic alternatives and we will do what we need to do to continue our success and remain a strong long-term competitor."

On Thursday, Continental said it will reduce domestic mainline capacity 5 percent beginning this fall and take another 14 single-aisle 737-300 aircraft out of service as leases expire beginning in September.

These are in addition to the 34 737-300s and 500s that were already planned to be removed from service in 2008 and 2009.

"In this fuel environment, we must reduce our domestic capacity to help reduce our losses in the domestic system," Jeff Smisek, president of Continental, said in a statement.

Continental, the fourth-largest U.S. carrier, reported a net loss of $80 million, or 81 cents a share, compared with a year-earlier profit of $22 million, or 21 cents a share.

Excluding special items, the loss was 86 cents a share. Analysts on average had expected a loss of 94 cents, according to Reuters Estimates.

Despite the tough conditions, Continental's revenue increased 12.3 percent to $3.6 billion, helped by international growth, fuel surcharges and modest fare increases.

Continental shares were trading about one percent higher at $21.06 Thursday afternoon.

Cost of Jet Fuel Threatens

Southwest on Thursday pulled back on growth plans and posted lower quarterly earnings as the weak U.S. economy and fuel costs took a toll on the leading U.S. discount carrier.

U.S. crude futures hit a record $115.54 Thursday. Oil prices have more than quintupled since 2002.

Although Southwest has a history of successfully hedging against higher fuel prices, it said on Thursday it was concerned about soaring energy costs.

"We cannot ignore the threat of volatile and unprecedented jet fuel prices," Chief Executive Gary Kelly said in a statement.

"We will continue to take steps to restore our profit margins, including an ongoing rigorous review of our flight schedule to eliminate nonproductive flying," Kelly said.

Southwest said it would increase its fleet in 2009 by no more than 14 737-700 aircraft -- half its previous plan.

Southwest's first-quarter net profit fell to $34 million, or 5 cents per share, from $93 million, or 12 cents per share, in the same period last year.

Excluding one-time items, profit was $43 million, or 6 cents a share, compared with $33 million, or 4 cents a share, in the year-ago period. Analysts on average had expected a penny a share, according to Reuters Estimates.

Revenue rose 15 percent to $2.53 billion.

On CNBC television, Kelly said his company needs to adjust to the changing environment and Southwest "can't just stand still.

"I don't think that means we have to look for a merger partner," he added, saying the best course of action for Southwest may be to do nothing amid the consolidation.

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