24-Apr-2010 10:46 AM

Continental "disappointed", widens first quarter loss to USD146 million

Analysis

Continental Airlines widened its net loss to USD146 million or USD1.05 diluted loss per share, well below analyst targets of 86 cents.

The company cited the rolling winter storms which cost it net USD15 million - down from the USD25 million in lost revenue initially seen on the closure of its hub at Newark. It also cited the weak economy for its results as Continental's Chair, President and CEO Jeff Smisek expressed disappointment. "I'm disappointed with our first quarter results," he said. "However, the year-over-year increase in our revenue reflects the slowly improving global economy and benefits from our membership in Star Alliance."

United Operating margin v net margin: 1Q2007 to 4Q2009

No comment on consolidation/merger

No matter how the question was asked, Smisek and his team refused to be lured into any conversation about consolidation, tossing off the issue with a simple statement, much to the disappointment of analysts on yesterday's first quarter conference call.

"As you would expect of any responsible management team, we are examining all of Continental's options and will take whatever action we believe to be in the best interest of our coworkers, stockholders, customers and the communities we serve," he said foreclosing further questions.

Baggage revenue up, baggage carriage down

Smisek preferred to talk, instead, about the company's efforts to increase revenues. He pointed to the fact that its baggage fees, expected to reach USD350 million this year, had the additional benefit of easing operations as passengers changed behavior, thus reducing costs. He reported that fees for customers subject to bag fees have reduced baggage by 17% for domestic first bags, with a 66% drop in domestic second bags. The company experienced a 52% drop in second bags on its Latin American routes and a 38% drop in second bags on its Trans-Atlantic routes.

During the quarter, Continental began offering customers the option of purchasing premium seat assignments for economy-class seats with extra legroom. The new product is clearly valued by passengers, said Smisek, adding that the fees were generating USD100,000 per day. "And that is revenue we've never collected before," he said. Its recent decision to offer healthier and higher-quality food for purchase is expected to save USD35 million, assuming it breaks even on food sales.

RASM outperforming

Executive Vice President and CMO Jim Compton reported that the airline outperformed its peers, saying passenger RASM on a length of haul-adjusted basis was better. "While it is not unusual for us to run a RASM premium, for the last six month we have outperformed on average, of the ATA reporting carriers, by six to 10 basis points," he said. "For the first quarter we outperformed by 8.6 points. In each of the first quarter months we've seen sequential improvements in RASM percent changes resulting in the fact that mainline RASM was up 5.4% on strong load factors while mainline yields remained flat year on year."

Continental CASM vs RASM: 1Q2009 to 1Q2010

He added that regional RASM was also up - by 16.7% - on strong yields which were up 10% and load factor which was up 4.3 points. This was especially significant since it was in regional yield that the company first saw the beginnings of last year's crisis.

Compton cautioned that it was still early in the recovery but the company was encouraged by the improvement in leisure yields in the first quarter, adding it bodes well for the summer. Still, the improvement was modest with high-yield traffic up year on year but still below the levels reached in 1Q2008.

International markets were showing sequential improvements. In both the Trans-Atlantic and Trans-Pacific markets, year on year business first RASM was up through the quarter on top of load factor and yield improvements. However, he added that the comparables were very easy. For year on two, he said both Trans-Atlantic and Trans-Pacific business first load factor was up several points but yields were still negative in comparison to 1Q2008.

Star Alliance "exceeding expectations" and corporate improving

Compton also discussed the impact of the Star Alliance, noting that it was startling considering they were still in the beginning stages of spooling it up. "The revenue growth related to our membership in Star Alliance is exceeding our expectations," said Compton. "The revenue results year on year in the first quarter showed total passenger revenue up 7.1%, while total partner revenue was up 39%. The results versus the first quarter of 2008 are encouraging as well. On a year-on-two basis, first quarter total passenger revenue was down 13%, but total partner revenues were up slightly."

He attributed the results to the fact that Star is the largest, most comprehensive alliance, which offers more options to customers. "It is also the oldest and most sophisticated," he said. "The partnership is with carriers that have a fantastic focus on customer service."

Echoing the other carriers who have already reported, Compton said that for the second quarter corporate revenues were positive. "We are seeing a pick up inside of 14 days so we are managing to a more normal booking pattern," he said. "In the first quarter it was up 20% year on year but down 17% from first quarter 2008."

He reported that, because of the volcanic disruption, Continental was forced to cancel 400 flights accounting for 300 million ASMs for an estimated negative impact on passenger revenue of USD24 million. "There is still a week left in April, but based on the data, and including the impact from the volcano, we expect consolidation April RASM to be up 14% year on year and mainline to be up 12% year on year.

First Quarter Revenue and Capacity

Total revenue rose 7% to USD3.1 billion for the first quarter of 2010 versus the year-ago period. Passenger revenue for the first quarter rose 7.1% to USD2.3 billion compared to the same period in 2009, owing to increased traffic and higher average fares.

Consolidated yield for the quarter increased 1.3% year-over-year to 13.40 cents. Combined with the 4.3 point year-over-year increase in consolidated load factor to 79.5%, first quarter 2010 consolidated passenger RASM increased 7.1 percent to 10.65 cents. Consolidated RPMs for the first quarter of 2010 increased 5.7% to 21.9 billion while capacity remained flat year-over-year at 26 billion.

Mainline load factor of 80.1% was also a first quarter record, up 4.3 points year on year. Mainline RPMs in the first quarter of 2010 increased 5.9% to 18.7 billion on a mainline capacity increase of 0.2% to 23.3 billion year on year. Continental's mainline yield decreased 0.2% to 12.40 cents in the first quarter over the same period in 2009. As a result, first quarter 2010 mainline RASM was up 5.4 percent to 9.92 cents year on year.

Pacific experienced the biggest jump in revenues, up 11.6% to USD259 million on 15.5% increase in ASMs. RASM, however, was down 3.4%, while yield dropped 10.4%. Trans-Atlantic was next up 9.4% to 520 million revenues on a 5.3% drop in ASMs. RASM rose 15.6% while yield held steady with a modest 1.2% increase. Total mainline revenue was up USD2.3 billion on flat ASMs. RASM rose 5.4% while yield declined 0.2%.

Regional revenues were up 14.8% to USD481 million on a 1.6% decline in ASMs. RASM increased 16.7% and yield jumped 10%. Consolidated revenues rose 7.1% to 2.8 billion on flat ASMs, a RASM increase of 7.1% and a yield increase of 1.3%. The regional fleet declined in the quarter by seven CRJ-200s and four Embraer 145s. By the end of June another four aircraft will leave the regional fleet.

Continental's employees earned a total of USD2 million in cash incentives for on-time performance during the quarter.

Cost side up, mostly fuel

Executive Vice President and CFO Zane Rowe covered rising costs, echoing what other carriers said this week. Total operating expense rose 6.7% to USD3.2 billion. Net regional capacity purchase expenses dropped 5.6% to USD201 million, making it a consistently profitable program.

In part owing to significantly higher jet fuel cost, Continental's mainline CASM increased 7.4% in the first quarter to 11.34 cents compared to the same period last year.

Continental ended the first quarter with USD3.15 billion in unrestricted cash and short-term investments.

Guidance - capacity stable, only Pacific advance bookings looking stronger

The company expects, over the next six weeks, that advanced booked seat factor versus the year-ago will be down 1-2 points for mainline domestic while mainline Latin America is expected to be down 2-3 points. Transatlantic will be flat to up one point while Pacific will be up 4-5 points and regional down 1-2 points.

For the second quarter, the company expects both its consolidated and mainline load factors to be up about one point year on year.

At the end of the second quarter, Continental expects unrestricted cash, cash equivalents and short-term investments balance of between USD3.0 and USD3.1 billion.

Available seat miles for the second quarter will be down 0.4% for consolidated and up 2.9% for regional. For the full year 2010, Continental expects its consolidated capacity to be up 0.5% to 1.5% yoy. The company expects its mainline capacity to be up 0.5% to 1.5% yoy, with its mainline domestic capacity down 0.5% to 1.5% yoy and its mainline international capacity up 2% to 3% yoy. CASM in 2Q-2010 is expected to be between 12.06 and 12.11 cents while for the year it will be 12.20 to 12.25 cents