Continental, Southwest earnings hurt by fuel costs

Continental Airlines Inc. and Southwest Airlines Co., two of the healthiest major U.S. carriers, said Thursday that record-high fuel costs led to disappointing quarterly earnings. Both companies cut growth plans.

Continental’s loss and Southwest’s decline in profit highlight the biggest challenges facing the airline industry today -- skyrocketing fuel prices and a sagging U.S. economy.

These were also contributors to the quarterly loss reported Wednesday by AMR Corp.’s American Airlines.

Tough market conditions might also pressure Continental to take part in a merger to better compete with rivals Delta Air Lines Inc. and Northwest Airlines Corp., which Monday said that they planned to combine to form the world’s largest airline by traffic volume.

Continental and UAL Corp.’s United Airlines have reportedly been in merger talks for months.

“The proposed Delta-Northwest merger will change the competitive landscape for Continental and the entire airline industry,” Continental Chief Executive Larry Kellner told investors during a conference call.

Continental said it would reduce domestic mainline capacity 5% beginning this fall and take another 14 single-aisle 737-300 aircraft out of service as leases expire beginning in September.

These are in addition to the 34 737-300s and 500s that were already planned to be removed from service in 2008 and 2009.

“In this fuel environment, we must reduce our domestic capacity to help reduce our losses in the domestic system,” Jeff Smisek, president of Continental, said in a statement.

Continental, the fourth-largest U.S. carrier, reported a net loss of $80 million, or 81 cents a share, compared with a year-earlier profit of $22 million, or 21 cents.

Excluding special items, the loss was 86 cents a share. Analysts on average had expected a loss of 94 cents, according to Reuters Estimates.

Despite the tough conditions, Continental’s revenue increased 12.3% to $3.6 billion, helped by international growth, fuel surcharges and modest fare increases.

Meanwhile, leading U.S. discount carrier Southwest pulled back on growth plans and posted lower quarterly earnings as the weak U.S. economy and fuel costs took a toll.

Although Southwest has a history of successfully hedging against higher fuel prices, it said it was concerned about soaring energy costs.

“We cannot ignore the threat of volatile and unprecedented jet fuel prices,” Chief Executive Gary Kelly said.

Southwest said it would increase its fleet in 2009 by no more than 14 737-700 aircraft -- half its previous plan.

Southwest’s first-quarter net profit fell to $34 million, or 5 cents a share, from $93 million, or 12 cents, a year earlier.

Excluding one-time items, profit was $43 million, or 6 cents a share, compared with $33 million, or 4 cents, in the year-earlier period. Analysts on average had expected a penny a share, according to Reuters Estimates.

Revenue rose 15% to $2.53 billion.