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Mixed April for Continental Air

A key measure of the airline's revenue growth shows a smaller gain in April than in March.

For nearly three years, investors have been lingering in and out of airline stocks, betting on a recovery, but after

Continental Airlines


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release of disappointing April results, they could be waiting for even longer.

Continental announced that revenue per available seat mile, a key industry metric called RASM, rose between 2.5% and 3.5% annually during the month of April, a drop from March, when RASM increased nearly 5%.

This is a far cry from the strength analysts expected to see entering the summer months, when travel demand begins to rise. Credit Suisse First Boston predicted Continental's RASM would grow between 7% and 8%, while J.P. Morgan expected a RASM increase between 5% and 6%. Even on the low end, Merrill Lynch expected the carrier to see RASM climb between 3% and 5%.

If Continental's results late Monday are emblematic of the entire industry -- and oil continues to stay above $35 a barrel -- kiss those expectations of industry profitability in 2005 goodbye.

"If we apply current revenue trends and $35 oil to our network earnings models, 2005 profits can not likely be achieved," said Jamie Baker, airline analyst at J.P. Morgan, in reaction to Continental's miss. "Something needs to get better."

Continental's RASM miss may be an anomaly -- the carrier's RASM has lagged the industry because of increased competition on its routes. Nonetheless, the RASM miss is notable, especially as low-cost carriers continue to expand service in markets high-cost carriers like Continental service. This month,

Southwest Airlines

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will begin flying from Philadelphia, a hub served by US Airways, while


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and others continue adding cross-country flights and debuting service with discounted fares.

Ultimately, the competition has depressed fare levels and yields, which is the amount of money that a carrier brings in per passenger. According to Credit Suisse First Boston, Continental's RASM decline implies that April yields fell between 2.9% and 3.9% -- the six straight month of decline. Despite the weakness, CSFB analyst Jim Higgins took a wait and see approach, telling investors Continental's results "do not necessarily change our earnings outlook for the second quarter."

The oversupply of flights and fare wars are jeopardizing the airline recovery and potential upside for airline stocks. First quarter losses were quite deep, profits are at least a year away -- and analysts were already losing patience before Continental's weak results.

What's bad for the airline industry has been good for passengers, who continue to snap up cheap fares and pack planes. In the month of April, Continental said it filled a record 77% of seats, up from 72.4% last year.

In April 2003, the airline industry had shelved a lot of capacity due to the war in Iraq and the SARS outbreak. A year later, the industry is scrambling to increase service levels, even if it means discounting seats to do it. In April, Continental boosted capacity, measured in available seat miles, by 13.4%, while traffic, measured in revenue seat miles, rose 20.7%.

Southwest also boosted capacity, but at a much lower level than Continental while filling a large percentage of seats. In April, Southwest said it filled 76.2% of its seats. Traffic rose 19.2%, while capacity rose just 4.1% -- a sign that travelers are flocking to the low-cost model.