Continental Jets to Profit

The company's earnings are well above Wall Street's estimates.
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Updated from 9:09 a.m. EDT

Continental Airlines

(CAL) - Get Report

left Wall Street expectations in its slipstream, recording solid second-quarter profits on improved revenue trends and labor savings.

Investors liked the news and bid up shares of the Houston-based airline by as much as 5.7%. But the stock, which had surged on Tuesday in anticipation of the earnings report, quickly fell from its peak as some investors appeared to take profits. Late in the session, shares were up just 7 cents, or 0.4%, at $15.77.

Executives also cautioned in a conference call that Continental still remains headed for a significant full-year loss, as fuel costs remain at painfully high levels. Recent fare increases have certainly helped, but they don't fully offset the rising cost of fuel, the executives said.

Continental reported net income of $100 million, or $1.26 a share, more than reversing a year-earlier loss of $28 million, or 43 cents a share.

The latest quarter's results included a $47 million gain related to the contribution of shares of regional partner

ExpressJet

(XJT)

to Continental's pension plan. Without that gain, Continental earned $53 million, or 69 cents a share, still well ahead of the 20 cent-a-share average profit estimate from analysts surveyed by Thomson First Call.

Revenue jumped nearly 12% to $2.86 billion from $2.55 billion a year earlier and topped the $2.77 billion analyst consensus.

Continental was not immune to the high fuel costs that have bedeviled the airline industry since last year. With jet fuel trading at record prices during the latest quarter, and peaking at $70.56 a barrel, Continental's mainline fuel expense was 48.6% higher than in the same period a year ago. Mainline operations exclude smaller, regional flights.

The airline credited wage and benefit reductions agreed to by most of its worker groups for helping it turn a profit. The concessions are designed to save about $418 million a year and went into effect in April.

"I want to thank my co-workers for the sacrifices they have made toward stabilizing our company with their pay and benefit reductions," said Larry Kellner, Continental's chairman and chief executive officer. "Achieving a modest profit in one of the two strongest quarters of the year was a direct result of the contract ratifications that occurred on March 30. High costs and depressed fares have doomed more than one airline, but we're going to stay focused on the key issues to make sure we're a long-term survivor."

The airline said strong passenger traffic and higher yields, or average fares, also boosted results. Overall passenger traffic increased 8.3%, while the airline increased capacity by only 5.5%. That helped Continental put more passengers on its planes. Load factor, which measures the average percentage of seats filled, was 79.6%, up 2 points from a year ago. Yields improved by 3.2%.

Overall passenger revenue per available seat mile, a key industry measure of unit revenue also known as RASM, jumped 6% during the quarter.

Results on Continental's mainline flights showed similar improvements, with passenger traffic rising 7.2% on a 4.2% capacity increase. The mainline load factor was up 2.3 points to 80.4%, while yields improved 3.2% and RASM gained 6.3%.

So far, third-quarter trends bode well on the fare front, Continental executives said. Yields are improving year over year, driven primarily by higher fares on international flights. But domestic yields are also perking up, the executives said.

Advance bookings appear soft compared with last year, but executives said that's most likely just a symptom of travelers making reservations closer to when they travel.

The company ended the quarter with $2.05 billion in unrestricted cash and short-term investments, up from $1.38 billion at the end of the first quarter. The increase included proceeds from a $350 million secured loan that Continental closed during the second quarter.

The airline also said Wednesday that it had restated its annual results going back to 1993 to put its lease-accounting practices in line with recent guidelines from the

Securities and Exchange Commission

. The airline said the adjustments increased its rental expenses between $3 million and $12 million a year. Depreciation expenses rose between $2 million and $6 million a year, and the adjustments required Continental to also recalculate income tax benefits.

Rival

AMR

(AMR)

, the parent of

American Airlines

,

also reported a stronger-than-expected second quarter Wednesday.

On Thursday, airline investors will get a look at quarterly results from

Alaska Air

(ALK) - Get Report

,

America West

(AWA)

,

Delta Air Lines

(DAL) - Get Report

and

JetBlue Airways

(JBLU) - Get Report

.