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Transatlantic strength lifts Continental profit

/ Source: The Associated Press

Continental Airlines Inc. said Thursday that profits rose 15 percent in the second quarter as it carried more passengers and increased revenue on its trans-Atlantic flights.

While the strong summer traffic helped Continental beat higher fuel and labor costs, the airline warned that costs will rise in the third quarter.

Houston-based Continental signaled it will slow its ambitious growth plans, a move praised by analysts.

Continental expects capacity to grow 3 to 4 percent in 2008, down from an earlier target of 5 to 7 percent. The carrier said it will sell older airplanes that get poor fuel mileage.

Shares jumped more than 4 percent early in the day, but by midday they had fallen 57 cents to $36.26.

Continental said it earned $228 million, or $2.03 per share, compared with $198 million, or $1.84 per share a year earlier. This quarter’s earnings per share included a charge of 7 cents a share for a settlement related to pilots’ pensions.

Analysts surveyed by Thomson Financial had expected the company to earn $1.84 per share.

Revenue rose 5.8 percent, to $3.71 billion. That was an increase over $3.51 billion a year earlier, and nearly in line with analysts’ prediction of $3.72 billion.

Passenger revenue on trans-Atlantic flights jumped 20.9 percent, compared to a 3.5 percent increase in U.S. revenue. Continental increased capacity on trans-Atlantic routes by 11.8 percent to take advantage of the stronger international market.

Operating costs rose 5.6 percent, led by a 13.2 percent jump in labor costs and 3.8 percent increase in spending on fuel. Maintenance costs, while a much smaller part of the budget, increased 20.7 percent.

Continental has been criticized recently by rivals and analysts for increasing capacity, which can drive down prices and profits. But the company said Thursday it was scaling back its expansion plans by selling 10 older Boeing 737s to a Russian airline and was in talks to sell five other planes.

Jamie Baker, an analyst for J.P. Morgan, said the move was good news, especially coming from an airline “not particularly versed in the art of supply discipline.”

Robert Barry, an analyst with Goldman Sachs, also called Continental’s slower-growth plan “a notable positive.”

Barry said the cutback suggests that Continental is bracing for persistent weakness in U.S. traffic. But he said the move could lead to higher revenue per passenger and made sense with fuel at high prices.

Baker, however, said Continental’s comments about future costs led him to cut his estimates of how much the airline will earn in the second half of the year.

Still, Continental’s report added to the evidence that U.S. airlines are poised to record their second straight profitable year after a five-year slump.

On Wednesday, American Airlines parent, AMR Corp., reported higher profits than a year ago, Delta Air Lines Inc. swung from a loss to a gain, and Southwest Airlines Co. posted its 65th straight profitable quarter.