Jan. 18 (Bloomberg) -- Continental Airlines Inc., the fastest-growing major U.S. carrier, narrowed its fourth-quarter loss by 40 percent as it flew more passengers and boosted fares.

The loss of $26 million, or 29 cents a share, compared with a year-earlier loss of $43 million, or 53 cents, the Houston- based airline said today in a statement. Sales rose 11 percent to $3.16 billion.

Continental joined other carriers in raising ticket prices 10 times last year as travel demand filled planes to record levels. The airline forecast the loss on Dec. 11, citing higher non-fuel costs and a revenue decline at its regional unit.

Fare increases in 2007 may be smaller because ``the easy fruit has all been picked,'' Ray Neidl, a New York-based Calyon Securities Inc. analyst, said in an interview. ``Demand will stay up and capacity will remain tight, so they'll be able to increase revenue this year.''

Continental recorded a $22 million expense for lump-sum payments to retiring pilots. Without that cost, the loss was $4 million, or 4 cents a share, in the quarter.

Analysts expected a fourth-quarter loss of 8.9 cents a share, the average of 10 estimates compiled by Bloomberg.

`Solid'

The company posted a full-year profit of $343 million, or $3.30 a share, compared with a year-earlier loss of $68 million, or 97 cents. Sales rose 17 percent to $13.1 billion.

The full-year profit was Continental's first since 2003 and the biggest since earnings of $342 million in 2000.

``We were able to deliver solid results for the year,'' Chief Executive Officer Larry Kellner said in the statement. ``We look forward to distributing $111 million in profit sharing on Valentine's Day'' to employees.

Shares of Continental fell $1.77 to $48.23 at 4 p.m. in New York Stock Exchange composite trading. The stock has almost tripled in the past 12 months to lead the Bloomberg U.S. Airlines Index.

Kellner, responding to analysts' questions during a conference call, said Continental executives had studied all possible outcomes for airline-industry mergers.

``It looks pretty cloudy as to where we're going to end up,'' he said. ``As soon as it becomes clear what's going to happen, we'll be able to speak about it.''

Continental and UAL Corp.'s United Airlines have held preliminary merger talks, people close to the discussions said Dec. 15. The carriers want to be prepared in case US Airways Group Inc.'s $10.2 billion bid for bankrupt Delta Air Lines Inc. succeeds.

Capacity Growth

Continental expanded its capacity by 11 percent in 2006, the most among large U.S. airlines, and passed bankrupt Northwest Airlines Corp. as the fourth-biggest carrier by passenger traffic. Southwest Airlines Co. grew 10 percent, while some rivals including AMR Corp.'s American Airlines cut flying.

Continental will increase flying this year by about 4 percent. It will take delivery of 65 new aircraft over the next three years to continue its expansion, Kellner said.

Continental's load factor, a measure of paying travelers on board, reached monthly records throughout 2006, including 79.9 percent on its mainline jets in December. That was 1.9 percentage points more than a year earlier.

Passenger Bookings

Passenger bookings over the next six weeks will be at or slightly higher than a year earlier, President Jeff Smisek said today on the conference call.

Revenue at the airline's regional unit, ExpressJet Holdings Inc., fell short of expectations, Continental said last month. Yields, or fares paid per mile flown, fell 2.4 percent from a year earlier as JetBlue Airways Corp. service at JFK International Airport in New York pressured Continental's regional-jet flying at New Jersey's Newark Liberty Airport.

Continental is studying how to trim regional-carrier costs that are above the industry average, Chief Financial Officer Jeff Misner told analysts.

Jet-fuel spending last quarter was $725 million, a 1.5 percent increase from a year earlier. A gallon of jet fuel for immediate delivery in New York Harbor averaged $1.79, down 5.3 percent.

The airline locked in 44 percent of its fourth-quarter fuel needs in advance, pegged to a barrel of crude oil at $71.40 to $74.11. Crude oil averaged $60.11 during the quarter in trading on the New York Mercantile Exchange.

Continental lost $48 million in the quarter on its fuel hedges, Misner said on the conference call. The carrier said it purchased 55 percent of its fuel needs for this quarter in advance, without giving a price range for those contracts.

Operating Profit

Operating profit, or what the airline earned before taxes, depreciation, interest expense and other charges, was $20 million. That was a $114 million improvement over a loss a year earlier.

Continental was the third major U.S. airline to report fourth-quarter earnings.

AMR posted a $17 million profit yesterday, beating analysts' expectations of a quarterly loss. Southwest, the largest low-fare carrier, had net income of $57 million as higher fuel expense damped profit.

To contact the reporter on this story: Eric Torbenson in Dallas at etorbenson@bloomberg.net;

Last Updated: January 18, 2007 16:19 EST