Airlines Follow Continental's Drift

The airline's strong March performance helps lift the entire sector.
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A strong March performance by

Continental

(CAL) - Get Report

has raised hopes for airline industry shares.

Those shares have slumped this year, even though the 2007 outlook "is the most promising in several years," according to the Air Transport Association, which projects profits of about $4 billion. So far, the Amex Airline Index is down 6.78% this year, despite a 3.39% increase on Tuesday.

The increase was triggered by declining oil prices and by Continental's report showing a March increase of between 4.5% and 5.5% in revenue per available seat mile, a closely watched revenue metric. Mainline RASM rose 6.5% to 7.5%, the airline said.

The numbers were surprising, given that difficult winter weather has led several carriers to make cautionary statements about first-quarter results. In early March, for example, industry leader

Southwest

(LUV) - Get Report

reported that its load factor fell by 1.7 points in February and said March bookings were soft.

Continental said Tuesday that major Northeast storms impacted its operations, resulting in an adverse impact of about $10 million. But the carrier said it recovered quickly, and it also noted that flight cancellations drove capacity lower. The lower capacity, as measured by available seat miles, led to a one-point RASM increase, as revenue was spread over fewer-than-expected ASMs.

The results prompted Cathay Financial airline analyst Susan Donofrio to boost her first-quarter earnings-per-share estimate for Continental by 20 cents, to a new estimate of 10 cents. "RASM appears to be trending ahead of forecast," she wrote in a report. Donofrio also boosted her price target to $64 from $62 and said Continental's earnings momentum suggests that the share price could rise even higher.

Meanwhile, J.P. Morgan analyst Jamie Baker said Continental's performance augurs well for the industry, "hopefully serving as a reassuring reminder that demand trends remain intact.

"In conjunction with potential diplomatic progress on the U.K./Iran front, we are optimistic that Continental's results can potentially halt, if not hopefully reverse, recent sector underperformance," Baker wrote in a report. "Based on several sessions of underperformance, airline equities were longing for some reassuring news."

Baker said that while he considers Continental to be overvalued, "there's no ignoring what a token first-quarter profit can do for sentiment." J.P. Morgan has a financial relationship with Continental that includes providing noninvestment banking services and, potentially, investment banking services as well.

Last week,

Delta

(DALRQ)

said it expects first-quarter RASM growth of 4%, largely as a result of improvements it has made during its bankruptcy restructuring. In an investor day Web cast, CFO Ed Bastian said the carrier expects a first-quarter loss of $25 million to $50 million, compared with a $350 million loss in the same quarter last year. Delta expects to issue new stock to the public early next month, after it emerges from bankruptcy court protection.