Flight International online news 09:00GMT: Continental Airlines expects to post “significant” fourth quarter and full year losses despite recording a relatively healthy $61 million third quarter net profit.
The Houston-based carrier today also warned that its liquidity will only cover its financial obligations until the end of 2006, and that its cost reduction programs will not change this predicament.
Pressure from rising fuel costs is also mounting, and this quarter became the carrier’s largest expense. Until this latest fuel price increase, labor was historically a US legacy carrier’s main cost.
“We have had substantial losses since September 11 2001, the magnitude of which is not sustainable,” says Continental chairman and CEO Larry Kellner. “We have attempted to return to profitability by implementing the majority of $1.1 billion of annual cost-cutting and revenue-generating measures since 2002, and we have also made significant progress toward our goal of achieving an additional annual $500 million reduction in pay and benefits costs.”
He adds: “We finalized changes to wages, work rules and benefits for all employees except our flight attendants and certain employees of our wholly-owned subsidiary [Continental Micronesia] who are subject to collective bargaining agreements. We began implementing these changes in early April 2005, which, when fully implemented, are expected to result in approximately $418 million of annual pay and benefits cost savings on a run-rate basis.”
These changes, however, will have little effect if the carrier’s revenue does not rebound at a rate higher than fuel, says Kellner. This, however, is unlikely, he adds.
“Although revenue trends have been improving, we still expect to incur a significant loss in the fourth quarter and full year 2005 due in large part to record high fuel prices,” says the chairman and CEO. “As a result of escalating prices, fuel expense is our single largest operating expense item for the first time in our history. We have been able to implement some fare increases on certain domestic and international routes in recent months, but these increases have not fully offset the substantial increase in fuel prices.”
Continental paid a little under $1.68/gal in the third quarter. At that price Continental spent a total of $684 million on fuel, $50 million more than it paid in labor expenses. This is the first time fuel surpassed labor as the carrier’s chief expense.
The airline does not hold any fuel hedges, and expects the prices of oil to increase in the fourth quarter.
But excessive fuel costs are overshadowing some good news for Continental. Its $3 billion third quarter revenue is unprecedented, and unit revenue grew 5.5% year-on-year to 9.37cents - outpacing the fuel influenced 4.1% rise in unit costs to 10.13 cents. The carrier’s load factor also rose 2.4 percentage points year-on-year in the third quarter to 79.9% on an 8.3% rise in traffic to 53.58 billion revenue passenger miles.
The carrier also held $2.2 billion in cash, equivalents and short-term investments, of which $247 million was restricted. This is more than double the $1 billion covenant stipulated in a $350 million loan signed in June.
Long-term debt stood at $6 billion. “We do not currently have any undrawn lines of credit or revolving credit facilities and substantially all of our otherwise readily financeable assets are encumbered. However, our interests in [ExpressJet] Holdings and Copa Airlines remain unencumbered,” says the airline in a US Securities and Exchange Commission filing.
“We are currently in compliance with all debt covenants,” it adds.
Continental CFO Jeff Misner expects the carrier to continue to post yield growth in the fourth quarter as it moves to strengthen the profitability of its route network. Unit cost, however, will rise above third quarter levels to 10.19 cents, while operating expenses are forecast to total just under $2.38 billion, an almost 12% increase on the $2.13 billion operating cost posted in the final quarter of 2004.
“We have to be very thoughtful about the future,” says Kellner, who notes that some supplier contracts, including ExpressJet’s feeder deal, are scheduled for renegotiation in the next 12 months. “We have to remain competitive,” he adds.
Source: Flight International
