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Continental, Southwest forced to slow growth

High fuel costs that helped drive some marginal airlines into bankruptcy this spring are also taking a toll on two of the nation's healthiest carriers.
Earns Continental
Continental Airlines’ CEO said the carrier would prefer to stay independent, but is studying its options.David J. Phillip / AP
/ Source: The Associated Press

High fuel costs that helped drive some marginal airlines into bankruptcy this spring are also taking a toll on two of the nation's healthiest carriers.

Continental Airlines Inc. slid to a first-quarter loss as fuel spending soared 53 percent, and Southwest Airlines Co. — which hasn't lost money since 1991 — saw its profit fall by two-thirds.

Both airlines say they will respond by slowing their once-ambitious growth plans, and they are raising fares.

"We've put in two fare increases in the past week, and we'll have to be looking for opportunities to do more," said Gary Kelly, chief executive of Southwest, which built its business on offering lower fares than competitors but now faces the same cost squeeze.

Stubbornly high fuel prices are likely to mean billions in losses this year at the nation's airlines. Already this year, five smaller carriers have shut down or announced plans to do so, and analysts are tossing around the B-word — bankruptcy — even in talking about the major airlines.

Southwest reported Thursday that its earnings tumbled to $34 million, or 5 cents per share, in the January-March period, from $93 million, or 12 cents per share, a year earlier.

Excluding some one-time items, the profit would have been 6 cents per share, which beat the penny-per-share profit forecast by analysts, according to Thomson Financial.

Revenue rose 15 percent, to $2.53 billion, and Southwest planes were more full than a year ago.

"They did a masterful job given the amount of adversity in the airline industry," said Dan Ortwerth, an analyst with Edward Jones. "It's a good house in a very bad neighborhood."

Southwest is better insulated from high fuel costs than other carriers because several years ago it agreed to pay for the right to buy fuel in future years at set prices, which turned out to be a bargain.

Still, Southwest spent $753 million on fuel, an increase of $189 million or 33.5 percent in just a year. And the Dallas-based airline warned that even with its price-hedging deals it will pay $2.35 per gallon in the April-June period, up from $1.98 per gallon in the first quarter.

JPMorgan analyst Jamie Baker said Southwest turned in "a respectable quarter" but higher spending on fuel and other items made it hard to see how the company will hit Wall Street's profit targets for the rest of the year.

Baker said at current fuel prices, U.S. airlines would lose $6 billion this year after profitable years in 2006 and 2007.

At Continental, fuel costs rose by $364 million from last year, pushing the Houston-based carrier to a loss of $80 million, or 81 cents per share. A year ago, the company earned $22 million, or 21 cents per share.

Excluding a gain on airplane sales, Continental said it would have lost 86 cents per share in the first three months of this year. Thomson said analysts expected a loss of 93 cents per share.

Continental also posted a healthy increase in revenue — up 12.3 percent to $3.57 billion. But costs rose even faster, by 16.7 percent.

Both Southwest and Continental plan to limit growth to cope with high fuel costs and a slowing economy.

Southwest said it would go ahead with plans to add 29 new Boeing jets to its fleet this year but only 14 — half its original plan — in 2009.

Southwest's Kelly said his airline had cut its growth rate from 8 percent a year ago to about 2 percent in 2009. "We may not grow at all in 2009," he added.

Continental will take 14 older jets out of service beginning in September and reduce domestic capacity 5 percent after the peak summer travel season.

Slower growth, or even contraction, could help the airlines control costs and boost fares. The same result might be achieved through consolidation, such as Monday's announcement that Delta Air Lines Inc. has agreed to take over Northwest Airlines Corp.

Since Monday, speculation has increased about a combination of Continental and UAL Corp.'s United Airlines. Continental took a small but public step in that direction Thursday by buying out Northwest's right to veto a deal involving Continental.

Continental Chairman and Chief Executive Lawrence Kellner said he would still prefer for the airline to remain independent, but the Delta announcement changed things.

"We are reviewing our strategic alternatives and will do what we need to do to continue our success and to remain a strong, long-term competitor," he said.

All the airlines have been raising fares and fuel surcharges. Continental and other so-called network carriers such as United, Delta and AMR Corp.'s American have enacted about a dozen increases this year, including a hike this week of $10 to $20 per round trip. The latest Southwest increase was $6 to $20 per round trip.

Vacationers and business fliers should brace for more of the same between now and summer, said Tom Parsons, chief executive of travel Web site

"Get bigger pockets, because you're going to have to dig deeper," he said.

Shares of Southwest rose 11 cents to $12.61 Thursday, while shares of Continental gained 27 cents to $21.11.