Continental Airlines ( CAL) shares plunged 3.4% after Bear Stearns downgraded the company, citing high fuel costs and the carrier's $124 million first-quarter loss.

In the eyes of David Strine, airline analyst at Bear Stearns, Continental shares are no longer worth buying; he dropped his rating to peer perform from outperform. While Strine credited Continental's moves with controlling costs and boosting revenue without losing market share, he said the stock was likely to perform inline with peers -- a departure from 2003, when Continental was an industry darling, one of the only airlines expected to post a profit.

"Forces out of their control are hurting performance. While the carrier remains highly leveraged to an improvement in business mix and/or a decline in oil prices ... given the trajectory of yields this year, we must ratchet down our expectations," said Strine.

Bear Stearns wasn't the only brokerage to lower second-quarter and full-year estimates because of weak yields, which are a measure of pricing power and the total revenue airlines can derive from a single paying customer. Citigroup Smith Barney lowered estimates, while Morgan Stanley and Lehman Brothers established estimates below Wall Street consensus.

In response to the lowered outlooks and downgrade, Continental shares fell 42 cents to $11.83, triggering a wider sell-off in the airline sector. The Amex Airline Index was off 1.3%, led lower by Northwest Airlines ( NWAC), off 35 cents, or 3.1%, to $10.93, and Delta Air Lines ( DAL), which continues to reel in the wake of an executive exodus, falling 46 cents, or 6.6%, to $6.52, hitting a new 52-week-low.

The biggest area of concern for Wall Street and investors is revenue. With low-cost carriers adding so many flights, the industry is in the midst of a fare war that has carriers flying more passengers and making less money off them. (Click here for more coverage on this trend and a possible silver lining for the summer months.) As fuel costs remain high and revenues stay flat, airline earnings expectations are growing more pessimistic.

"Continued revenue pressure and high fuel prices are likely to lead to further downward revisions to estimates in the coming weeks," said William Greene, airline analyst at Morgan Stanley. "That said, over the next three or four months, we see seasonal improvements in revenue trends."

Indeed, analysts are torn on the airline industry's prospects for the second half of the year. While second-quarter earnings estimates are likely to come down, legacy carriers like Continental are seeing international traffic increase and are talking about strong bookings going forward. Of course, with ticket prices weak, an airline that flies more travelers won't necessarily profit from them.

With former bull Bear Stearns moving to a more bearish camp, some existing fans of Continental's stock appear conflicted about the near-term investment case, too. Prudential Equity Group analyst Dan Hemme, who rates the stock overweight, said packed planes will allow Continental to post a second-quarter profit, but said shares may be stuck in place for the time being.

"Upon reflection of reported results, management's guidance and our research efforts, we concede that we find it increasingly difficult to remain overly bullish on the prospect of significant share appreciation," he said.

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