Posted on: Thursday, December 11, 2003

Continental issues warning on airfares

By Trebor Banstetter
Knight Ridder News Service

FORT WORTH, Texas — Continental Airlines warned Wall Street yesterday that despite stronger holiday bookings, average airfares will drop during the rest of the year — a sign that the improving economy hasn't yet produced a uch-hoped-for jump in business travel.

Executives with the Houston-based airline, which many analysts consider a bellwether for the industry, said in a letter to investors and analysts that they are "comfortable" with the level of advanced bookings for the next six weeks.

Domestic bookings on the airline, which is the fifth-largest in the world, are about 2 percentage points ahead of last year. Executives also said that they expect airplanes to be more full, on average, compared to last year.

But despite the strength in overall traffic, "we expect (average fares) to continue to be down (compared to last year) throughout the system," Sarah Zaozirny, Continental's director of investor relations, wrote.

Since the economic slowdown began in 2000, average airfares have dropped to the cheapest level in decades.

Much of the reduction is because of a steep reduction in the number of business travelers, who traditionally pay for more expensive last-minute fares.

Today, many business travelers make fewer trips, and are more likely to buy cheaper advanced-purchase tickets.

Although a boon for consumers, the drop in airfares has been devastating for the major airlines, like Continental and American Airlines, which rely heavily on business travel.

Continental's "cautious language on yields appears more emphatic than in the past," said Jamie Baker, an airline analyst for J.P. Morgan Securities in New York in a report to investors yesterday.

He noted that Continental's stock has dropped 20 percent since last week, when the carrier issued disappointing revenue results for November.

"The market has already spoken," he said.

Continental's stock closed at $14.95 per share, down 22 cents, in trading yesterday on the New York Stock Exchange.

Meanwhile, one airline analyst upgraded their rating for Southwest Airlines, which is the nation's largest low-fare carrier.

Susan Donofrio of Deutsche Bank Securities switched her recommendation from "hold" to "buy" after observing a "slow, yet steady rise in their overall fare levels," she wrote in a report yesterday.

She also cited upcoming growth and an easing of some of the airline's cost pressures in making her decision.

Southwest's stock was unchanged for the day, closing at $15.70 per share.