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Continental Profit Tops Forecasts on Strong Transatlantic Business

Continental Airlines planes at Houston Intercontinental Airport.
David J. Phillip
Continental Airlines planes at Houston Intercontinental Airport.

Continental Airlines on Thursday posted a better-than-expected 15 percent increase in quarterly earnings, on strong demand for transatlantic and other international flights.

Despite the upbeat earnings and advanced bookings that the company said were ahead of last year, Continental slowed its expansion plans for 2008 as domestic travel demand shows signs of softening.

Shares of the fourth-largest U.S. carrier by passenger traffic rose more than 3 percent on both the financial results and the slowed expansion.

Second-quarter net profit rose to $228 million, or $2.03 per share, from $198 million, or $1.84 per share, a year earlier.

Excluding a charge from the settlement of a pilot pension plan, earnings were $2.10 per share, beating Wall Street expectations of $1.84, according to Reuters Estimates.

Operating revenue was up 5.8 percent at $3.71 billion as yield -- a measure of average ticket prices -- rose 1.5 percent and capacity increased 4.7 percent.

INTERNATIONAL STRENGTH

The strength was chiefly in international markets, especially on transatlantic routes, where Continental increased capacity 11.8 percent, and revenue per available seat mile, or unit revenue, rose 8.1 percent.

The carrier increased domestic capacity by 6.1 percent, but unit revenue fell 2.5 percent, with fares under pressure.

Regional operations were especially weak, with unit revenue down 2.7 percent.

The already-intense competition in the domestic airline market is set to heat up. Virgin America, a low-cost carrier that aims to make its first flight on Aug. 8, said it had more than a million seats to sell through Feb. 12.

New budget carrier Skybus Airlines began flying May 22, luring travelers with $10 one-way fares.

Despite the competitive pressures, Continental forecast a stronger load factor -- the percentage of seats filled with paying passengers -- in the third quarter.

The company predicted a load factor of 84 percent to 85 percent, compared with 82.2 percent in the year-ago quarter.

SLOWED GROWTH

Amid the softening domestic market, Continental will sell 10 Boeing 737 planes to Russia's Transaero Airlines, and is in discussions to sell another five 737s to another company.

As a result of the aircraft sales as well as shifts in the delivery of other planes, Continental said it expected its capacity to rise 3 percent to 4 percent in 2008, down from its earlier target of 5 percent to 7 percent.

"In this industry where there's too much capacity, I enjoy seeing a moderation of it, and I think we need a little bit more," said Calyon Securities analyst Ray Neidl.

Facing a slowing domestic economy, scaling back expansion has become a popular theme for U.S. airlines. Southwest Airlines plans to cut capacity growth in the fourth quarter and 2008 to 6 percent from 8 percent.

American Airlines, a unit of AMR, plans to reduce capacity by 2.1 percent this year. But with traditional carriers shifting more and more planes to international routes and new rivals like MAXjet Airways entering the market, robust international growth may also be coming to an end.

"We're probably reaching the max point for international in this cycle, because a lot of capacity has gone into international," said Calyon's Neidl.

Continental shares -- which have fallen about 30 percent since hitting a 5-year high of $52.40 on Jan. 17 -- rose $0.07, or 0.19% percent, to $36.90 in late-morning New York Stock Exchange trade.