HoustonChronicle.com -- http://www.HoustonChronicle.com | Section: Business
Oct. 19, 2005, 9:33PM
Continental shares slip despite profit
Announcement of stock sale may have contributed
By BILL HENSEL JR.
Copyright 2005 Houston Chronicle
Continental Airlines shares fell Wednesday, even after the carrier reported a third-quarter profit at a time when high fuel prices are hammering the industry.
The market's reaction may been caused by Continental's announcement late Tuesday of a public sale of 18 million shares of Class B common stock. The carrier also reported its earnings after the stock market closed Tuesday.
With more Continental shares in the marketplace, current investors may fear that the value of their shares could be diluted. Lehman Bros. said in a report that it was "a bit surprised" by the plan, which is expected to raise $200 million.
"While additional liquidity offers fundamental benefits, we believe it also dilutes value to current equity holders," Lehman Bros. analyst Gary Chase said.
The money that's raised will be used for general purposes at the airline, a Continental spokesman said.
Shares of Continental closed down 22 cents at $11.67 Wednesday. The stock had traded lower earlier in the day.
Standard & Poor's, however, had a positive take on the developments at the airline.
Analyst Philip Baggaley said the combination of a better-than-expected operating performance coupled with added cash from the stock offering should ease concerns about Continental's upcoming debt obligations.
Continental has $349 million in debt maturities in this year's fourth quarter and an additional $525 million in 2006, the rating agency said.
"Still, management acknowledges that the company will face a challenge to meet financial obligations in 2007 and beyond if fuel prices do not decline or revenues improve further," Baggaley said.
Continental has $937 million in debt maturities in 2007, he said.
Baggaley noted that Continental's $61 million net profit for the third quarter was achieved despite higher fuel expenses.
Loss still to come
The airline said although revenue trends have been improving, it's still expecting "a significant loss" in the fourth quarter and for all of 2005. The airline lost money in the first quarter but posted a profit for the second quarter.
American Airlines' parent company Wednesday reported a net loss of $153 million for the third quarter, or 93 cents per share. American would have recorded a net loss of $95 million, or 58 cents per share, without several special charges.
"The result is mildly disappointing in the context of the company's second-quarter profit and a profit reported today by competitor Continental Airlines," Standard & Poor's said in a separate report on American.
Two other big airlines, Northwest and Delta, filed for bankruptcy protection during the third quarter.
Expense of fuel
The industry has been hurt this year by high fuel prices, with Continental reiterating Wednesday that fuel has become its single largest expense.
Continental said it spent $684 million on fuel for the third quarter, up more than 65 percent compared to the same period last year.
Officials at Continental said during an earnings conference call Wednesday they believe the company has enough cash and access to cash to fund its budget and other financial obligations through 2006. They said they will continue to look for ways to cut costs and increase revenue.
Continental Chairman and Chief Executive Officer Larry Kellner said wage and benefit cuts by employees were a big factor in Continental making a profit.
The carrier remains in talks with its flight attendants, however, since they rejected proposed cuts in April. Continental still needs those cuts, Kellner said.
"I had hoped it wouldn't take this long," Kellner said. He added that he wants to reach an agreement that's fair to everyone involved.