General Lee
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Bulls, Bears Debate Continental
Can Big U.S. Carrier Navigate
Soaring Fuel Costs, Bankruptcy
By WORTH CIVILS
THE WALL STREET JOURNAL ONLINE
September 28, 2005
Continental Airlines is one of the last two old-guard U.S. carriers not
operating under bankruptcy-court protection, along with AMR's American
Airlines. To avoid that fate, Continental, which steered through two
bankruptcies in the 1990s, will have to grapple with choking fuel costs,
the popularity of low-cost rivals like JetBlue and the possibility that
airlines emerging from Chapter 11 will be stronger competitors.
Continental avoided a big hit at its Houston hub from Hurricane Rita,
helping its depressed rally early Monday. By Tuesday, it finished at
$9.44, more than 40% off its 52-week high of $16.60 in July. Is the
carrier in the clear? (Analysts' ratings and disclosures follow.)
The Bull Case
[Bull Case]
Clipped Wings: Continental could benefit if the two most recent Chapter
11 filers -- Delta Air Lines and Northwest Airlines -- cut back on seat
capacity, Merrill Lynch analyst Michael Linenberg wrote in a recent
note. Delta recently said it will reduce seat capacity by 15% to 20%;
Northwest hasn't made an official announcement. Bear Stearns estimates
bankrupt carriers on average cut capacity by 5% to 10% following Chapter
11. Continental could pick up fares from the increased demand created as
the troubled carriers are forced to cut back on flights and routes. "In
that regard, we remain favorably disposed to the two major carriers that
are relatively better off financially," Mr. Linenberg said, referring to
Continental and American. Continental reported that traffic in August
rose more than 10% over last year, with revenue passenger miles
increasing from seven billion to 7.7 billion.
[Art]
Inter-Continental: Low-cost carriers such as Southwest and JetBlue are
increasingly treading on their rivals' turf in the U.S. -- but
Continental doesn't face that challenge overseas. "Continental is
continuing on a path that emphasizes growth in international capacity,
an area where meaningful low-cost carrier competition does not exist,"
wrote Prudential's Bob McAdoo. Continental's international capacity --
the percentage of its seats that are on overseas flights -- is 42%, the
most among the major U.S. carriers. Continental recently introduced nine
new overseas routes to Europe, including Berlin and Stockholm, from
Newark, N.J. It also began service to Beijing -- the first passenger
airline to initiate direct flights from the U.S. to mainland China in 20
years -- and is planning service to Delhi, India, beginning Nov. 1.
Sealed Deals: Continental excelled earlier this year in labor
negotiations, obtaining most of the concessions needed from pilots,
mechanics and other unions, wrote Mr. Neidl. Labor strife was a
considerable reason why other airlines landed in bankruptcy court.
Including previously disclosed wage and benefit cuts affecting nonunion
employees, Continental achieved $418 million of $500 million in cost
cuts it sought. That helped the carrier, which is still negotiating with
flight attendants, report net income of $100 million, or $1.26 a share,
in the second quarter. Stripping out a $47 million gain from the
contribution of shares of regional jet provider ExpressJet to
Continental's pension plan, Continental earned 69 cents a share, above
Wall Street forecasts for 20 cents a share. "Continental's results
exceeded consensus estimates primarily due to stronger revenues and the
impact of labor concessions achieved earlier in the year," wrote Mr. McAdoo.
The Bear Case
[Bear Case]
Bankruptcy Shield: While under the shield of Chapter 11, Delta and
Northwest will try to trim costs and maybe even refashion their
burdensome pension plans, analysts say. That would give the carriers a
fiscal shot in the arm, helping them to better absorb fuel costs and
compete with discount carriers. Bankrupt airlines "will see enormous
benefits from their bankruptcies, putting AMR and Continental at a
disadvantage," Mr. Linenberg at Merrill wrote. Continental acknowledged
the situation in a prepared statement: "When competitors enter Chapter
11 and default on their financial obligations, including their
employees' hard-earned pensions, it puts us at a cost disadvantage."
Helane Becker, an airline analyst at independent research firm Benchmark
Co. in New York, says airlines sometimes join forces while in Chapter
11, presenting another potential challenge. "A merger is not
farfetched," she said of Northwest and Delta.
Burning Fuel: Continental's fuel cost increased by $188 million, or
48.6%, to $575 million in the second quarter -- an "enormous obstacle,"
wrote Bear Stearns analyst David Strine. The Wall Street firm estimates
that for every $1 move in the price of a barrel of crude, Continental's
profit shifts by $27 million, or 30 cents a share. That's much higher
than Mr. Strine's industry average of 22 cents a share. "The sensitivity
to oil is enormous," he wrote, since Continental doesn't hedge against
rising fuel costs like some other airlines. Southwest has by far been
the most successful at that, hedging 65% of its fuel costs -- a $1 gain
in crude shaves just a penny from its profit, according to Mr. Strine.
Turbulence Ahead: Analysts are concerned about Continental's dwindling
cash position. J.P. Morgan analyst Jamie Baker, who recently downgraded
the stock to "underweight," wrote that "we increasingly view Continental
as the industry's next liquidity crisis should fundamentals fail to
improve." Mark Streeter, credit analyst at J.P. Morgan, agrees that
"unless industry fundamentals take an unexpected turn for the better,
Continental potentially faces a 2006 year-end cash crunch." J.P. Morgan
estimates Continental will need to raise or refinance an additional $400
million in order to maintain adequate liquidity. A hefty debt load and
high maintenance costs helped give the airline the second-highest
non-fuel costs in the second quarter after United; J.P. Morgan expects
Continental to have the highest in the industry next year.
Bye Bye--General Lee
Can Big U.S. Carrier Navigate
Soaring Fuel Costs, Bankruptcy
By WORTH CIVILS
THE WALL STREET JOURNAL ONLINE
September 28, 2005
Continental Airlines is one of the last two old-guard U.S. carriers not
operating under bankruptcy-court protection, along with AMR's American
Airlines. To avoid that fate, Continental, which steered through two
bankruptcies in the 1990s, will have to grapple with choking fuel costs,
the popularity of low-cost rivals like JetBlue and the possibility that
airlines emerging from Chapter 11 will be stronger competitors.
Continental avoided a big hit at its Houston hub from Hurricane Rita,
helping its depressed rally early Monday. By Tuesday, it finished at
$9.44, more than 40% off its 52-week high of $16.60 in July. Is the
carrier in the clear? (Analysts' ratings and disclosures follow.)
The Bull Case
[Bull Case]
Clipped Wings: Continental could benefit if the two most recent Chapter
11 filers -- Delta Air Lines and Northwest Airlines -- cut back on seat
capacity, Merrill Lynch analyst Michael Linenberg wrote in a recent
note. Delta recently said it will reduce seat capacity by 15% to 20%;
Northwest hasn't made an official announcement. Bear Stearns estimates
bankrupt carriers on average cut capacity by 5% to 10% following Chapter
11. Continental could pick up fares from the increased demand created as
the troubled carriers are forced to cut back on flights and routes. "In
that regard, we remain favorably disposed to the two major carriers that
are relatively better off financially," Mr. Linenberg said, referring to
Continental and American. Continental reported that traffic in August
rose more than 10% over last year, with revenue passenger miles
increasing from seven billion to 7.7 billion.
[Art]
Inter-Continental: Low-cost carriers such as Southwest and JetBlue are
increasingly treading on their rivals' turf in the U.S. -- but
Continental doesn't face that challenge overseas. "Continental is
continuing on a path that emphasizes growth in international capacity,
an area where meaningful low-cost carrier competition does not exist,"
wrote Prudential's Bob McAdoo. Continental's international capacity --
the percentage of its seats that are on overseas flights -- is 42%, the
most among the major U.S. carriers. Continental recently introduced nine
new overseas routes to Europe, including Berlin and Stockholm, from
Newark, N.J. It also began service to Beijing -- the first passenger
airline to initiate direct flights from the U.S. to mainland China in 20
years -- and is planning service to Delhi, India, beginning Nov. 1.
Sealed Deals: Continental excelled earlier this year in labor
negotiations, obtaining most of the concessions needed from pilots,
mechanics and other unions, wrote Mr. Neidl. Labor strife was a
considerable reason why other airlines landed in bankruptcy court.
Including previously disclosed wage and benefit cuts affecting nonunion
employees, Continental achieved $418 million of $500 million in cost
cuts it sought. That helped the carrier, which is still negotiating with
flight attendants, report net income of $100 million, or $1.26 a share,
in the second quarter. Stripping out a $47 million gain from the
contribution of shares of regional jet provider ExpressJet to
Continental's pension plan, Continental earned 69 cents a share, above
Wall Street forecasts for 20 cents a share. "Continental's results
exceeded consensus estimates primarily due to stronger revenues and the
impact of labor concessions achieved earlier in the year," wrote Mr. McAdoo.
The Bear Case
[Bear Case]
Bankruptcy Shield: While under the shield of Chapter 11, Delta and
Northwest will try to trim costs and maybe even refashion their
burdensome pension plans, analysts say. That would give the carriers a
fiscal shot in the arm, helping them to better absorb fuel costs and
compete with discount carriers. Bankrupt airlines "will see enormous
benefits from their bankruptcies, putting AMR and Continental at a
disadvantage," Mr. Linenberg at Merrill wrote. Continental acknowledged
the situation in a prepared statement: "When competitors enter Chapter
11 and default on their financial obligations, including their
employees' hard-earned pensions, it puts us at a cost disadvantage."
Helane Becker, an airline analyst at independent research firm Benchmark
Co. in New York, says airlines sometimes join forces while in Chapter
11, presenting another potential challenge. "A merger is not
farfetched," she said of Northwest and Delta.
Burning Fuel: Continental's fuel cost increased by $188 million, or
48.6%, to $575 million in the second quarter -- an "enormous obstacle,"
wrote Bear Stearns analyst David Strine. The Wall Street firm estimates
that for every $1 move in the price of a barrel of crude, Continental's
profit shifts by $27 million, or 30 cents a share. That's much higher
than Mr. Strine's industry average of 22 cents a share. "The sensitivity
to oil is enormous," he wrote, since Continental doesn't hedge against
rising fuel costs like some other airlines. Southwest has by far been
the most successful at that, hedging 65% of its fuel costs -- a $1 gain
in crude shaves just a penny from its profit, according to Mr. Strine.
Turbulence Ahead: Analysts are concerned about Continental's dwindling
cash position. J.P. Morgan analyst Jamie Baker, who recently downgraded
the stock to "underweight," wrote that "we increasingly view Continental
as the industry's next liquidity crisis should fundamentals fail to
improve." Mark Streeter, credit analyst at J.P. Morgan, agrees that
"unless industry fundamentals take an unexpected turn for the better,
Continental potentially faces a 2006 year-end cash crunch." J.P. Morgan
estimates Continental will need to raise or refinance an additional $400
million in order to maintain adequate liquidity. A hefty debt load and
high maintenance costs helped give the airline the second-highest
non-fuel costs in the second quarter after United; J.P. Morgan expects
Continental to have the highest in the industry next year.
Bye Bye--General Lee
