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Cost Cuts Help Continental Narrow Loss

Fuel expenses continue to rise, however. Revenue climbs nearly 18%.
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Updated from 7:09 a.m. EDT

Continental Airlines

(CAL) - Get Caleres Inc. Report

said lower labor costs and higher ticket prices helped it narrow its first-quarter year-over-year loss.

The carrier also said bookings are strong and that, to date, rising ticket prices have not dampened demand.

CEO Larry Kellner said he's surprised demand hasn't dropped, but he told analysts and reporters on a conference call Thursday that people appear eager to take to the skies. "What we see across the system is that the economy is pretty strong," he said. "We don't see any sign of that letting up, at least through yesterday's bookings."

The Houston-based carrier lost $66 million, or 76 cents a share, in the first quarter, compared with the year-ago loss of $186 million, or $2.79 a share.

Excluding certain costs, the latest-quarter's loss was 53 cents a share, 9 cents better than the Thomson Financial analyst estimate. Revenue rose to $2.94 billion, beating the $2.88 billion target.

Significant revenue improvements and savings from wage and benefit reductions contributed to a first-quarter operating profit of $11 million, which came despite a 31% increase in fuel prices vs. the same period a year ago. The last time Continental had an operating profit for a first quarter was 2001. The company had an operating loss of $173 million in the first quarter of 2005.

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Consolidated revenue passenger miles for mainline and regional operations rose 12.3% on a capacity increase of 10.7%. Despite the increase, load factor for the quarter was 77.9%, or 1.1 points higher than a year earlier.

Operating revenue was $2.95 billion, up 17.6%. "The pricing and revenue management environment has been helped as bankrupt and financially challenged competitors are pulling down capacity," said President Jeff Smisek. "Yields are improving and load factors remain high. As a result, it's a great time to grow our network."

Consolidated revenue per available seat mile was 10.27 cents, up 6.9%, while yield was 13.19 cents, up 5.4 %, The gains occurred even though Easter travel took place in April this year after coming in March a year earlier.

Meanwhile, expenses were $2.94 billion, up 9.6%. Wages and benefits declined 6% to $672 million, but fuel costs rose 40.6% to $661 million. The mainline cost per available seat mile was 10.35 cents, down 2.1 %, due primarily to wage and benefit reductions.

During the quarter, Continental's flight attendants ratified a new collective bargaining agreement which, combined with previously announced pay and benefit reductions by other work groups, will allow the airline to achieve substantially all of the $500 million in targeted cost savings.

"While we will continue to work every cost-line item, with the recent ratification of the flight attendant agreement, our $1.6 billion cost reduction effort is largely in place," said Jeff Misner, executive vice president and chief financial officer. "The best part is that we have accomplished it without destroying our product or culture."

Continental recorded a $26 million charge for the cumulative effect of an accounting change, a $14 million credit associated with all officers surrendering restricted stock units that otherwise would have been paid out in the quarter, a $15 million charge for lump-sum pension payments to retiring pilots and a $7 million expense reversal related primarily to negotiated settlements on three leased MD-80's that have been grounded.

The company ended the first quarter with more than $2 billion in unrestricted cash and short-term investments, after prepaying $96 million of high interest-rate debt and prefunding $103 million of aircraft deposits.

Shares of Continental closed down $1.18, or 4.5%, at $24.81.