Continental Air Up on Union Pacts

The airline secures tentative wage and benefit cuts.
By Ross Snel ,

Continental Airlines'

(CAL) - Get Report

shares jumped Tuesday on news the airline hammered out new contracts with key unions.

The nation's fifth-largest airline late Monday announced that it had struck tentative agreements with unions representing its pilots, flight attendants, mechanics and dispatchers. In doing so, Continental met its goal of securing wage and benefit cuts with all of its major employee groups by the end of February. The airline expects the latest agreements, along with previously announced concessions, to save it a total of $500 million a year.

They should also shore up the airlines balance sheet; Continental had warned it would face a liquidity crisis if it didn't meet its $500 million target on time.

Shares jumped 49 cents, or 4.6%, to $11.20 Tuesday morning.

Continental was the last of the U.S. network airlines to seek company-wide pay cuts in the wake of the Sept. 11, 2001 terror attacks. Industry revenue has been under pressure from overcapacity and fierce price competition at a time when jet fuel prices remain painfully high.

Continental stock could outperform other airline shares in coming days, according to J.P. Morgan airline Jamie Baker. "We did not expect management to achieve its Feb. 28 deadline," Baker wrote in a research note. "However, with Continental shares having risen 22.7% since Feb. 24 -- vs. 5.4% for the Amex Airline Index and 3.4% for the

S&P 500

-- it could be argued that only we were skeptical. Nonetheless, we expect Continental shares to continue their relative sector outperformance as (tentative agreements) ratify over coming weeks, consensus estimates potentially improve and liquidity concerns continue to abate."

With the labor concessions in hand, Continental's financial position is looking rosier, according to Baker. "Subject to ratification and additional details, Continental is expected to end 2005 comfortably," he wrote. "Labor deals likely increase the potential for debt re-financing, which could push liquidity higher. ... Continental faces an approximate $690 million in debt and (capital) lease obligations, significantly skewed toward the fourth quarter."

In connection with its labor cuts, Continental said late Monday it would issue options for about 10 million shares of its common stock to its employees. The grants apply to all employees except for officers and board members and would represent roughly 15% of the company's currently outstanding stock.

Continental said that plane maker

Boeing

(BA) - Get Report

has extended for one month the time Continental's board has to approve an aircraft acquisition deal the two companies already announced. That will allow time for various unions to ratify their new contracts, a process Continental expects will conclude by the end of March.

The airline did not disclose details of the new contracts, saying it wanted to give the unions time to explain them to members.

Before the latest agreements, Continental already wrangled concessions totaling $169 million from airport ticket and gate agents, management and clerical workers and reservation agents. The airline's board also has agreed to cut its fees by 30% and will forgo its stock-option grant this year.

Continental said it has now concluded its negotiation process with all employees, except some international workers.

Loading ...