Continental Cruising

The airline's comeback has it at the top of its class.
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As the resurgent airline industry heads for its first profitable year since 2000, Continental Airlines (CAL) - Get Report has emerged as the very obvious leader of the pack.

Since the start of the year, Continental's stock has risen nearly 70%. The airline topped analysts' estimates in the second quarter, its best in five years, and again in the third quarter. It has 138 international destinations, the most of any U.S. carrier.

And analysts are effusive in their praise of Continental, termed "the Tiffany of the legacies" in a recent report by Calyon Securities analyst Ray Neidl.

Vivian Lee, an analyst with Alliance Capital, is also enthusiastic, writing in a research note that even though "the rate of growth at Continental has been quite a bit more robust than all of its competitors ... the differentiation will not only become more apparent, but also more accentuated in the next year or two. Put another way, the seeds had to be planted a decade ago to start to come to fruition now."

Alliance Capital held about 9.1 million shares of Continental, or roughly 10% of the total, as of August.

Lee believes that Continental's advantages include a 50-50 split between domestic and international capacity, equal distributions of international capacity between the Atlantic, Pacific and Latin regions, consistent management, a relatively young all-Boeing fleet and a revenue premium over its competitors.

During the past five years, Continental's mainline revenue per available seat mile has been about 110% of the industry average.

"Continental has a clear plan," adds consultant Mike Boyd. "They understand that the front cabin is where they want to go

for a revenue premium. They understand international, including secondary markets in Europe, and they have a fleet strategy."

So what's not to like? Helane Becker, airline analyst for Benchmark Co., says that Continental "has done a really good job of delivering in the past few years and quarters, and now they're making a lot of money."

However, she notes that Benchmark has a $37 price target on the airline's stock, and "they're just about there." Continental shares closed Wednesday at $36.06, down 8 cents.

"I don't know how much more we can see," says Becker, adding that both

UAL

(UAUA)

, the parent of United Airlines, and

US Airways

(LCC)

are strong performers that have not yet reached her price targets.

The gain in Continental's shares has been particularly striking by comparison to its peers' performances. Since the start of the year, the Amex Airline Index has risen by about 1%.

Shares in

Southwest Airlines

(LUV) - Get Report

have fallen by nearly 7%.

AMR

(AMR)

, the owner of American Airlines, is up 27%, while US Airways has risen 33%.

Jim Compton, a Continental executive vice president, said in an interview that in meetings between the airline's management and analysts, "the one thing

that resonates with them is that we've always been very consistent."

Compton said a run of executive stability began when Gordon Bethune took over as CEO in 1995.

Bethune benefited from lower costs imposed during bankruptcies in 1983 and 1990. Under his leadership, the carrier moved to an all-Boeing fleet and grew its underutilized Newark hub. Additionally, Continental began to build international service from the Newark and Houston hubs.

When he retired in 2004, Bethune was replaced by CFO Larry Kellner. "With Larry, we've kept right on going," Compton says.

Bethune reached out to employees, offering perks like cash awards for on-time performance and entry in a raffle to win a sport-utility vehicle for those with perfect attendance. Under Kellner, employees agreed to $500 million in annual contract concessions after the company found $1.1 billion in annual nonlabor cost reductions.

The cuts enabled Continental to avoid a third bankruptcy filing, despite heavy losses during the four years after the Sept. 11, 2001, terrorist attacks.

"We've been able to grow because we said if we all step up as a company, we can make airplane purchases," Compton says. "That

meant our plan of international growth could continue."