Continental and Southwest, Back to Profitability

Continental Airlines (CAL) and Southwest Airlines (LUV) posted fourth-quarter profits Thursday, helped by lower fuel costs and improved demand, but the carriers both cautioned that the sector faces more turbulence in 2010.For the three months ended Dec. 31, Houston-based Continental reported net income of $85 million, or 60 cents a share, versus a year-ago loss of $269 million, or $2.35. Excluding items such as a tax benefit, Continental's earnings came to 3 cents a share. On that basis, analysts surveyed by Thomson Reuters forecast a loss of 7 cents a share.

Revenue for the most recent quarter fell more than 8% to $3.18 billion, slightly below analysts' view for $3.19 billion in revenue. However, operating costs dropped 9%, led by lower fuel expense, while mainline traffic, which excludes regional partners, rose 3.7%. Meanwhile, the pace of falling airfares abated, as yields, which reflect average ticket prices, dropped less than 14% year-over-year, better than the 22% decline Continental reported in the third quarter.

Despite the surprise profit, the carrier remains cautious on any increase in premium-paying business travelers this year. "While we are seeing some business traffic increasing, we likely have a long and slow road to recovery," said Chief Executive Jeff Smisek in a statement.

As for Southwest, the nation's largest discount carrier said fourth-quarter earnings came in at $116 million, or 16 cents a share, compared with a year-ago loss of $56 million, or 8 cents. Excluding fuel hedging and other items, profit was 10 cents a share, exceeding Wall Street's forecast by 3 cents.

Revenue at the Dallas-based airline fell fractionally to $2.71 billion, beating the Street's view for $2.69 billion. Fuel expense fell 3.1% a gallon, Southwest said, adding that it has hedged half of its estimated fuel needs for the current quarter. Traffic rose more than 5% as capacity declined nearly 8%. Yields dropped more than 6% but that was an improvement over the 12% decline seen in the third quarter.

Southwest's value proposition makes it less reliant on business travel but, like Continental, the budget carrier remained cautious, especially in light of rising jet fuel prices going forward.

"There is no doubt 2010 will be another challenging year," said Chief Executive Gary Kelly in a statement. "Thus far, the economic
recovery is tepid, and we expect record high hedged jet fuel prices for the company, given the current market and our hedge position."

On Wednesday, American Airlines parent AMR Corp. (AMR) posted a narrower fourth-quarter loss, helped by lower fuel costs and increases in revenue from passenger fees, but results still fell short of Wall cStreet's forecast.

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