Updated from 2:47 p.m. EST

Tough competition and sky-high fuel costs continue to challenge

Continental Airlines

(CAL) - Get Report

, which lost $43 million in the quarter ended Dec. 31 and expects to report a significant loss in the first quarter, as well.

For the fourth quarter, the Houston-based air carrier lost 53 cents a share. However, the most recent quarter includes a gain of $106 million related to the sale of shares in Panama's

Copa Airlines

and charges of $21 million. Excluding these items, Continental's loss would have been $128 million, or $1.58 a share.

The company lost $208 million in the same period a year ago. Revenue rose 17% to $2.85 billion. Analysts surveyed by Thomson First Call were looking for a loss of $1.63 a share on revenue of $2.82 billion.

Shares of Continental were sharply lower, dropping $2.36, or 12%, to $17.11 and posting the worse percentage loss in the sector. The Amex Airline Index was losing 6.3%, with all 10 members in the red for the day.

Regarding the competition in the skies, CEO Larry Kellner said on Tuesday's earnings call that bankruptcy has helped

United Airlines

(UALAQ)

secure a leaner cost structure, while

Delta

( DALRQ) and

Northwest

( NWACQ) are using Chapter 11 to reduce expenses.

Meanwhile, low-cost carrier

JetBlue

(JBLU) - Get Report

, which now serves Continental's Newark hub, is providing significant competition on the New York-Florida routes. Kellner said United and Delta are taking steps that Continental would avoid.

"Delta is using their bankruptcy advantage to aggressively expand internationally," Kellner said. "They're taking more risks than I would if I had their execution capabilities, but that's their decision." International flying accounts for about 45% of Continental's capacity.

United plans to emerge from bankruptcy protection next month with $3 billion in capital and reduced costs. While United has terminated its pension plan, Continental plans to make a $258 million pension plan payment in 2006.

Also, Continental has no plans to seek employee cost-cuts beyond the $500 million already announced. It obtained $418 million in employee cuts early last year (the year-to-year benefit will begin to show up in the second quarter) and anticipates $72 million more if flight attendants ratify a pending contract offer. Another $10 million reduction would come from international employees.

Kellner said that although United has transferred its pension responsibilities to the federal government and extracted concessions from its labor force, he wouldn't want to do the same thing.

"We're going to stop where we are at $500 million," he said. "We've got to look at other areas of the business to make sure we remain competitive. ... You've got be competitive on costs, but you've got to look at the service aspect, as well."

Continental executives also said they strongly support the airline industry's effort to shift some of the cost burden for air traffic control and other Federal Aviation Administration services to the corporate jet sector. Currently, airlines pay about 90% of the cost for the system, but use about 65% of its capacity.

"It's a bit like herding cats to get a common position (among the airlines)," said President Jeff Smisek. "But we're working on that as an industry, (and) Larry is personally involved in that."

Added Kellner: "If you want to take the optimistic point of view, fairness would be on our side in this debate. Airlines have ended up paying far more than what we use in the system."

The company said fourth-quarter operating costs rose 13% from a year ago, driven by a 58% surge in fuel costs and related taxes. Excluding special items and holding fuel costs constant, latest-quarter operating costs per available seat mile fell 6.7% from a year ago.

Fourth-quarter passenger revenue rose 17% from a year ago to $2.6 billion, on a 9.8% gain in consolidated revenue passenger miles and a yield increase of 6.8%. The growth in revenue was helped by continued international expansion and fare increases that partially offset the higher cost of fuel. International mainline capacity accounted for 45% of total mainline capacity in the fourth quarter.