Airlines Face Bleak Horizon

Delta's move comes about one week after rival JetBlue announced a fare sale of its own, offering fares as low as $29 one-way.

Network carriers are trying to cope with the still-difficult environment by boosting capacity on international routes and restraining it domestically. International routes, which lack the low-cost competition and overcapacity that continues to pressure domestic fares, tend to be more lucrative.

Continental claims to be growing internationally faster than any other carrier this year, and analysts are paying attention. It's also adding more first-class seats on some of its domestic routes.

"Continental is showing the other legacy carriers how to survive the continuing erosion of profitable point-to-point markets," writes Roger King, analyst at Credit Sights, an independent research firm based in New York that does no investment banking. "Continental is expanding where the low-cost carriers are not in the competition -- international and first-class."

King notes that Continental kept its domestic capacity flat in the second quarter from a year before, while boosting capacity by 15% on routes over the Atlantic and 16% over the Pacific. Although yields, which measure average fares, increased only 1% domestically, they gained 7% on Continental's international routes, he points out.

Concessions

Continental is not alone, however. AMR, Northwest and Delta are all boosting international flights with similar hopes of improving revenue.

Continental wouldn't have scored its second-quarter profit without new labor agreements it signed earlier this year. The concessions are designed to save the carrier $418 million a year.

Labor savings -- or the lack thereof -- remain perhaps the biggest issue for Northwest, which has only been able to achieve $300 million of its $1.1 billion annual target.