AMR, Continental Post Steep Losses - TheStreet

Updated from 7:14 a.m. EST

Now that a dreadful fourth quarter is behind them, airline investors are hoping the industry can bounce back in 2002. Analysts are becoming more and more optimistic about the carriers, but they still believe the sector, while in the process of turning around, will probably need additional time to regain its health.

Two major U.S. carriers offered gruesome looks Wednesday at just how bad the last few months have been.

AMR

(AMR)

, the parent of

American Airlines

and

TWA

, and

Continental Airlines

(CAL) - Get Report

posted massive losses in their recently completed quarters, but traders liked what they saw and sent the shares higher.

AMR closed up 23 cents, or 0.9%, to $26.02, while Continental gained $1.71, or 5.8%, to $31.10. The shares were able to rise largely for two reasons -- the quarterly losses the carriers reported were narrower than expected and the view is spreading that the worst may be over for the industry as a whole.

"The December quarter marked a new low point for airline industry financials, with an expected loss of $3.2 billion, the largest ever," Sam Buttrick, an analyst at UBS Warburg, wrote in a research report Tuesday.

Buttrick expects to see narrower losses in 2002, but he remains a realist. "All key drivers are moving in the right direction," he said. "But let's face it, compared to September, there was only one way to go."

Following the terrorist attacks on Sept. 11, airline passenger traffic plummeted. In September, traffic fell a record 34.2%. Before the attacks, carriers were adding customers. October, November and December also saw fewer people taking to the skies, as industry traffic dropped in those three months as well. Those attacks made even worse a year that was already horrid for the airlines, as high fuel costs and labor troubles pressured the major carriers and led to big losses for most in the first half of 2001.

And if the suicide hijackings weren't enough to make the public skittish about flying commercially, the industry had to contend with two more potentially devastating events before the end of the year. In November, an American Airlines jet crashed after takeoff near Kennedy Airport in Queens, New York. A month later, a terrorist tried to ignite explosives stored in his shoes aboard a trans-Atlantic flight.

In the fourth quarter, AMR posted a loss of $734 million, or $4.75 a share, before items, reversing a profit of $56 million, or 34 cents a share, in the same period the previous year. Including all costs, the company lost $5.17. Analysts expected the company to lose $5.08 a share.

In a statement, Don Carty, AMR's chairman and chief executive officer, said traffic, particularly business travel, was down significantly in the quarter. Average fares were also lower. While traffic is improving, Carty said AMR still has a long way to go before it's profitable again.

In contrast, Gordon Bethune, Continental's chief executive, was much more optimistic on a conference call with analysts, saying he expected the airline to record a profit in the second and third quarters.

Continental had a fourth-quarter loss of $220 million, or $3.81 a share, before items, down from a gain of $38 million, or 61 cents a share, a year ago. The company lost $2.58 a share including items. Wall Street expected a loss of $4.49.

Bethune said it's unlikely that Continental will need to apply for the loan guarantee portion of the government bailout package. On the call, he touted the company's ability to cut costs per seat. But at the same time, he expects a daily cash burn rate of $3 million to $4 million in the first quarter.

One thing helping the airlines in the fourth quarter was a steep decline in fuel costs. Still, a recovery hinges on the carriers' ability to build back capacity. For example, Continental still has about 75 planes parked in a desert in the western U.S. In the first quarter, the airline expects capacity to fall 13%, which is better than its previous estimate of a 20% drop.

Looking ahead, analysts are hopeful. "Even in the face of sizable fourth-quarter losses, we remain quite bullish on the prospect of owning airline stocks," Susan Donofrio, an analyst at Deutsche Banc, wrote in a research note Tuesday.

Still, Buttrick believes the industry has a long way to go before profits are restored. "We continue to forecast a 2002 net loss of $2.5 billion," he wrote in his report. "But with modest profits in 2003, it follows that 2004, a year about which we know absolutely nothing, should be a good year."

Since cratering in September, the American Stock Exchange Airline Index is up 45%, but still 24% below its level before the attack.

Investors will have more sector news to contend with Thursday, when

Southwest Airlines

(LUV) - Get Report

and

US Airways

(U) - Get Report

are scheduled to report.