Earnings Preview: Profit Expected for Southwest, Loss for Continental

Southwest Airlines (LUV) and Continental Airlines (CAL) report quarterly earnings Thursday and investors will be keen to hear if the outfits will follow American Airlines parent AMR Corp.'s (AMR) lead in adding back some capacity in 2010, an indication that the worst of the industry's downturn may be behind it.Of the nation's six major airlines, only Southwest is forecast to report a quarterly profit amid a global slowdown that's hurt demand and caused ticket prices to plunge. On Wednesday, AMR posted a narrower fourth-quarter loss, helped by lower fuel costs and higher fees, but results still missed Wall Street estimates.

Southwest Less Vulnerable

As the nation's biggest discount airline, Southwest is less vulnerable to the steep drop-off in premium-paying business travelers. It's also seen improving traffic trends for several months, helped by low fares and the fact that it doesn't levy charges on the first two bags checked by passengers.

Still, profits are forecast to drop versus the year-ago period. Analysts surveyed by Thomson Reuters expect the Dallas-based airline to report earnings of 7 cents a share versus the 8 cents a share recorded in last year's fourth quarter. Revenue is expected to slide nearly 2% to $2.69 billion from $2.73 billion.

However, as with AMR, investors will be eager for hints that traffic is poised to improve after the worst year on record. The Air Transport Association, an industry trade group, on Wednesday said U.S. airlines' combined passenger revenue declined 18% last year, breaking the old mark of a 14% drop set in 2001 following the events of Sept. 11.

Business Travel To Lag

December air traffic statistics support the view that demand for air travel is improving, something that should benefit Southwest, says Standard & Poor's analyst Jim Corridore. "We expect leisure and domestic travel trends to improve ahead of business travel," wrote Corridore in a note to clients. "With a highly domestic- and leisure-centric customer base, we think Southwest is well positioned for improved results in 2010."

On the other side of the ledger, legacy carrier Continental is forecast to report a narrower quarterly loss on significantly weaker revenue, as the airline has had to slash prices to fill empty seats. Analysts, on average, forecast a loss of 7 cents a share versus a year-ago loss of 89 cents. Revenue is seen dropping more than 8% to $3.19 billion from the $3.47 billion recorded in last year's fourth quarter.

Like fellow legacy carrier American Airlines, Continental is expected to show some sequential improvement in its business. "Continental estimated that December unit revenues dropped between 3.5% to 4.5%, a substantial improvement from November when unit revenues fell 8.5%," Corridore wrote. "We think these trends demonstrate improving passenger travel demand."

And as a legacy carrier more dependent on business and international travel, any indication that Houston-based Continental will add capacity in 2010 could give the stock a lift. Shares in AMR rallied Wednesday after American Airlines said international capacity would increase this year.
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