Jan. 17, 2008, 10:48PM
With merger talk rife, Continental listens closely
As carrier reports a pretax profit, its chief says independence first choice
ALL THIS TALK ABOUT DELTA>>> MY BET WILL BE CO-UAL AND LF GERMANY AIRLINE-JETBLUE
By BILL HENSEL JR.
Copyright 2008 Houston Chronicle
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After announcing a quarterly pretax profit Thursday, Continental Airlines said it wants to remain independent but will take action on the merger front if necessary.
"We believe our competitive position continues to improve," said Larry Kellner, Continental's chairman and chief executive.
Houston-based Continental also reported it isn't seeing a slowdown in travel in 2008.
Regarding mergers, the company acknowledged it is closely monitoring the industry landscape as Delta Air Lines is exploring a deal with Northwest Airlines or United Airlines. It emphasized that it will do what's in the best interest of its stakeholders.
In response to a question during a conference call about its size compared to competitors if there's a Delta merger, Kellner said he "would have some concern."
"If we see something or hear something, we won't hesitate to act aggressively," he said.
Size is important in a network business like airlines, Kellner added, and Continental has been focused on growing for the past decade.
UBS analyst Kevin Crissey said Thursday that he thinks it's likely Continental and United Airlines — which had merger talks in late 2006 — will wed.
"We believe this is the year the U.S. airlines finally announce the mergers that have so often been rumored and we see Continental as well-positioned," Crissey wrote in a note to investors.
In discussing continued independence, Kellner cited Continental's international growth, including routes to China, India and access to London's signature Heathrow Airport. Additionally, Continental has the most fuel-efficient fleet of any of the major carriers and the best position of new aircraft on order, he said.
But industry structural changes may be coming nevertheless, whether because of consolidation or persistent high fuel prices.
Kellner said a sluggish economy doesn't seem to be having a significant effect on Continental right now. Short-term bookings look solid, and top corporate customers are not pulling back on international travel, he said.
Crissey, however, said Continental's positive commentary about near-term demand runs contrary to bearish economic expectations. He said he expects Continental and other carriers to start seeing weakness in bookings soon.
Continental might be a little different, though. Kellner noted that his planes serve many local companies that benefit from the same high oil prices that undercut profits in fuel-intensive industries like airlines.
The carrier is expected to fare better than most U.S. airlines issuing earnings currently. It reported a fourth-quarter pretax profit of $71 million Thursday, compared with a net loss of $26 million for the same period last year. Excluding one-time gains and losses, Continental reported earning $24 million in the fourth quarter, compared with a $4 million loss in 2006's October-December period.
Kellner lauded Continental's largest fourth-quarter operating income in more than five years, especially pleasing considering the high cost of jet fuel.
"The outstanding performance of our team has once again set us apart from the competition," Kellner said.
Continental also announced Thursday it will distribute $158 million in profit sharing, which is $47 million more than last year.
Shares of Continental rose Thursday 31 cents, closing at $24.56, despite a generally dismal day for stocks.
Answering wide-ranging questions from analysts and journalists, Kellner also said Continental wants to expand in Latin America, has plans to upgrade seating in some international aircraft but would not reveal details, and will seek additional slots at London's Heathrow Airport.
Continental did not release net results because it has not determined how much its noncash charge will be for increasing its tax-valuation allowance. That charge, which will be announced in mid-February, is expected to fall between $70 million and $140 million.
The uncertainty stems from a new law raising pilots' retirement age to 65 from 60, which will result in airlines changing underlying assumptions built into their pension programs.
Continental said that for the year it had a pretax profit of $566 million, a 53 percent increase compared with the $369 million reported in 2006.
Continental President Jeff Smisek said revenue growth significantly outpaced capacity growth, or its number of seats.
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