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Continental Airlines

(CAL) - Get Caleres, Inc. Report

filled a record number of seats in January, but rising fuel costs and a lack of pricing power continue to sap the power of a revenue recovery.

Continental late Monday reported that it filled 71.4% of its seats in January, setting a new record for the month as demand for air travel continues to outpace the rising supply of flights. The carrier said that traffic, as measured in revenue passenger miles, rose 8.5% over January 2003, while capacity, as measured in available seat miles, rose 3.2%.

Elsewhere, American Airlines, unit of



, announced that it filled 68.9% of the seats on its planes in January, a gain of two percentage points over last year. As with Continental, American's revenue environment was strong, with traffic up 3.8%, led by an 11.6% jump in international traffic. Capacity was under control as well, up just 0.8% over year-ago levels.

Despite that, airline stocks stumbled early Tuesday. The Amex Airline Index dropped 2.1%, with Continental down 39 cents, or 2.6%, to $14.71, and American off 28 cents, or 1.7%, to $15.87.

But while Continental and American control capacity and fill more seats on their planes, the carriers -- and the rest of the industry -- have been using deeply discounted tickets and fare sales to spur demand, pushing down the amount of revenue they generate per seat mile, a metric called RASM. Continental, which is the only carrier to announce RASM results on a monthly basis, said that it increased between 0.5% and 1.5% in January from last year, a marginal increase at best.

While this is the ninth consecutive month of RASM gains for Continental, its growth has been shrinking towards zero over the last two months. From July through November, Continental's monthly RASM was up more than 4% year-over-year, but dropped to a gain of 1.7% in December.

January could be the nadir for the RASM growth slide. During the first half of 2004, RASM will likely show more improvement over 2003, when results were adversely affected by the war in Iraq and the SARS outbreak.

But with RASM coming in with such a slight gain, analysts say that yield, a measure of the average price of a fare sold by the carrier, will be down again. According to Jim Higgins, airline analyst at Credit Suisse First Boston, yield for January will fall between 3.7% and 4.7% over 2003 levels. The January slide in yield extends and outpaces December's drop of 2.3%, November's 3% fall and October's 2.1% drop.

"Another month lacking yield progress," said Jamie Baker, analyst at J.P. Morgan, in a research note. "This is the fifth consecutive month of weakening year-over-year yields, suggesting that evidence of pricing power remains non-existent."

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At a time when costs remain high for the airline industry, especially with regards to fuel, the lack of pricing power puts operators in a difficult position. After three years of massive losses, the balance sheets of many network carriers are so weak they're unable to hedge for fuel costs, leaving many exposed to the vagaries of how oil trades on the open market.

Indeed, in the month of January, Continental said the average price of a gallon of jet fuel, excluding tax, was 96 cents, up 6.7% from January 2003. As a result, even though Continental filled a record number of its seats in January -- it still wasn't enough to break even. The carrier said that it would have had to fly with its planes 81% full to break even in January.

Labor costs are also a top priority for some carriers. As fourth-quarter earnings results drove home, labor costs will determine which of the network carriers can truly take advantage of the rising revenue environment.

Delta Air Lines

(DAL) - Get Delta Air Lines, Inc. Report


US Airways



Northwest Airlines


, all of which are negotiating pay cuts with unions, are expected to lose money in 2004.

But American, which received $1.8 billion in wage concessions in 2003, is expected to earn $1.09 a share, a massive reversal from the loss of $9.68 a share it had in 2003.

In a bright spot for the airlines, analysts say that the revenue recovery is outpacing the rising cost of fuel, at least, and overcoming the lack of pricing power. Given the nasty weather in many of Continental's key markets, analysts say that its results will not necessarily be representative of the rest of the industry.

"We are expecting that overall industry revenues will exhibit greater strength than Continental's results and we retain our favorable near-term stance based on our belief that revenues will continue to be strong into mid-2004," said Higgins. "Fuel prices remain a concern, but for now at least, revenues are at least offsetting that drag."