Continental Airlines

(CAL) - Get Report

updated its outlook Friday, prompting at least one analyst to predict the airline will return to the red in the third quarter.

In the update filed with regulators, Continental also reiterated its forecast for a significant full-year loss, blaming record high fuel costs. But the Houston-based airline maintained its cash guidance, suggesting higher fuel prices won't erode its liquidity.

Shares of Continental fell 36 cents, or 2.9%, to $12.24. Most airline stocks were in negative territory following a jump in crude oil futures, and the Amex Airline Index was down 1.4%.

On average, Wall Street analysts are expecting Continental to turn a third-quarter profit of 36 cents a share, according to Thomson First Call. The airline has benefited from lower labor costs, strong passenger traffic and improving revenue trends, factors that lifted it to an adjusted profit of 69 cents a share in the second quarter.

However, crude oil's continued rise -- it surged above $70 a barrel in the wake of Hurricane Katrina and traded above $65 a barrel Friday morning -- and widening margins for highly refined jet fuel have led Continental to raise its cost forecast for both the third quarter and the full year.

The update prompted Helane Becker, airline analyst at The Benchmark Co., a New York-based brokerage firm, to switch her third-quarter forecast to a loss of 25 cents a share from a profit of 40 cents a share.

"July and August were mostly profitable months," writes Becker in a research note. "September is being negatively affected by higher fuel prices. The consensus estimate of 36 cents a share is likely to come down to our level." Benchmark does no investment banking.

Continental now expects to pay an average of $1.89 a gallon for jet fuel in the third quarter, vs. the $1.82 it forecast in July when it reported second-quarter results. For the full year, it expects jet fuel to average $1.76 a gallon, up from the previous forecast for $1.71.

Although increases of a few pennies in the price of a gallon of fuel may not sound like much, they are significant for a large airline like Continental, which expects to consume 1.38 billion gallons of fuel this year.

Rival

Delta Air Lines

(DAL) - Get Report

has estimated that every penny increase in the average price of a gallon of fuel increases its liquidity needs by $25 million a year.

Fuel increases will drive up Continental's unit costs, which airlines measure by the cost of flying one seat for one mile. Continental now expects third-quarter unit costs across its operations of 10.75 cents to 10.8 cents in the third quarter, up from its July forecast of 10.69 cents to 10.74 cents. For the full year, the airline expects unit costs of 11.01 cents to 11.06 cents, up from its July forecast of 10.94 cents to 10.99 cents.

Continental also said it expects to end the third quarter with an unrestricted cash balance and short-term investments of between $1.9 billion and $2.0 billion. That's unchanged from its previous forecast.

The airline predicts it will end 2005 with $1.5 billion in its coffers. Airline liquidity typically falls during the autumn and winter when customer traffic declines from the warmer spring and summer.