became the latest airline to warn that it may have to ask employees to cut their pay, saying that losses will continue unless it can boost fares. In reaction, Standard & Poor's cut the company's credit rating and shares sank on Wednesday, sitting out a sector rally.
Continental warned that it will post a loss in the second quarter, against Wall Street expectations of a 4-cent profit, because of the skyrocketing price of jet fuel, which is currently at $1.14 a gallon, 67% higher than Continental's expectations entering the year. To help offset the costs, Continental made another attempt to raise fares $10 each way.
Unlike previous attempts to raise fares, however, Continental's fare hike is a worldwide rate increase, not just one that affects select U.S. markets. And unlike earlier attempts, which were largely unsuccessful, Continental's rhetoric is growing stronger, with the carrier warning that it may have to furlough employees and reduce pension funding.
The dire language used in the carrier's late-Tuesday announcement prompted Standard & Poor's to drop the company's long-term rating outlook to negative from stable, just a week after the rating agency made a similar downgrade on
Delta Air Lines'
long-term outlook. Continental shares fell 12 cents, or 1.3%, to $9.12, while others in the sector, namely Delta, posted large gains.
"Continental is attempting to raise fares, but if other airlines do not follow suit, then Continental may need to seek concessions from its employees, a step that it has thus far tried to avoid," said Philip Baggaley, debt analyst for S&P, in a statement.
At the moment, Continental's liquidity is not a problem, but Baggaley warns that continued losses will begin eating into the company's cash position. At the end of the second quarter, Continental will have between $1.5 billion and $1.6 billion in unrestricted cash, but may have to make a $300 million pension payment in 2004, along with $131 million to service its debt.
In Continental's view, one way to cure its ills is to raise ticket prices, but the company admits that this will only offset 15% to 20% of the impact that high fuel costs have had on its business. In the eyes of some on Wall Street, namely Lehman Brothers analyst Gary Chase, the problems at Continental are indicative of a larger problem facing the entire industry.
"It is our firmly held view that the only way to drive average prices higher is to reduce capacity," said Chase. "For that reason, even if the published fare increases stick, we are skeptical that this move will have a significant impact on Continental's revenue or that of the rest of the industry."