Chilly November for Continental

Airlines are releasing results for November, but although planes are more full than last year and traffic continues to rise, even optimistic analysts are growing concerned that pricing power and profit margins will lag in 2004.

Continental Airlines (CAL - Cramer's Take - Stockpickr) said late Monday that revenue passenger mile, or traffic, was up 8.7% annually during November, while the number of available seat miles, or capacity, increased by 0.7%. With traffic outpacing supply, the percentage of seats filled on every flight, known as load factor, rose to 75.3%, up from last year's 69.8%.

But while these fundamentals are moving in the right direction, there are signs that Continental -- and the rest of the industry -- is continuing to use discounts to drive demand and isn't showing much improvement in pricing. Indeed, Continental said that revenue per available seat mile, a key metric called RASM, increased between 4.5% and 5.5% during November, which disappointed many Wall Street analysts.

"Continental's November RASM [was] modestly below our 6.5% to 7.0% estimate and despite this year's return of Thanksgiving Sunday into November, which we believe should have had a more pronounced positive effect on RASM," said Jamie Baker, analyst for J.P. Morgan, in a note. "To the extent that 'consensus' for Continental's November RASM exists, we expect others to be mildly disappointed."

Indeed, Continental missed RASM targets at a number of brokerage houses, like Credit Suisse First Boston, which expected growth between 9% to 11%. In reaction, CSFB analyst James Higgins said he would have to reassess the near-term prospects for airline stocks, a notable position given the recent rise of optimism by many analysts.

"We are disappointed in the apparent inability to improve pricing in a month that saw a significant period of holiday demand," said Higgins, in his note. "These results give us less confidence in our favorable near-term stance on airline stocks. We believe a near-term pullback in the shares is likely, and will reassess our view once the dust settles."

Will November Spawn a Monster?

Analysts also warned the weak November could be a bad omen for 2004. Morgan Stanley analyst William Greene warned that Continental could miss his fourth-quarter loss estimate of 80 cents if December's RASM doesn't show growth between 5% and 6%. And as CSFB's Higgins notes, with both low-cost and network carriers planning add back flights next year, Continental's results may indicate that pricing power will remain weak.