Continental Slides Despite Signs of Progress

The airline industry's halting progress continued Tuesday.

Continental Airlines(CAL Quote) said it would post "significant" losses in the first quarter and expressed concerns about its second quarter, while noting that it turned cash-flow positive last month. The company's comments came as investors sold stocks in general and airline issues in particular on another day devoted to watching Middle East tensions increase.

"Based on current fuel price and revenue trends, the company's ability to reach profitability in the second quarter will be challenging," Contintental said in a statement.

The political climate and weak profit outlook are more hurdles for the airline industry to overcome as it struggles to recover from a steep post-Sept. 11 drop in business. Air traffic, especially in the lucrative business travel segment, is still down sharply. Overcapacity is exacerbating the problem, cutting into profit margins. And rising oil prices could wipe out whatever profits companies can scrape up.

At midday, Continental was off 89 cents, to $26.76, while Delta Air Lines(DAL Quote) fell $1.14, to $30.81. AMR(AMR Quote), parent of American Airlines, slid 82 cents, to $24.74, while UAL(UAL Quote), parent of United, slid 89 cents, to $14.92. The American Stock Exchange Airline Index was off 3.7% to 98.73.

The news wasn't all bad. Continental said it would report that it was cash-flow positive during the month of March, the first time the airline has reached profitability since Sept. 11. Though the company expects to end the first quarter with $1.2 billion in cash, fundamentals are still well below year-ago levels. Traffic in March was off 5.4% from a year earlier, and revenue per available seat mile fell between 6% and 8%. In February, unit revenue was off 11% year over year.

The company blamed capacity increases by rivals as a reason behind the unit revenue weakness.

But to reach its goal of profitability in the second quarter, Continental must overcome the excess capacity and show continued revenue improvement. On a year-over-year basis, the company predicts unit revenue will slide 8% in April, but that it will gain 2% in May and 4% in June. But these estimates assume that fuel prices will remain constant, and this is one reason why Continental says meeting second-quarter goals will be a challenge.

To offset a $2 jump in the barrel of oil, revenues must increase by at least 1%, says Glenn Engel, airline analyst with Goldman Sachs, who rates Continental a trading buy. (Goldman has a banking relationship with Continental and will be co-managing its upcoming initial public offering of ExpressJet Holdings.) In the current environment, such a jump is anything but a certainty -- as investors have learned over the last six months.