Continental Airlines (CAL) announced that it managed to make more revenue on each mile it flew in March, relieving market fears that the industry has begun to struggle for growth in that key metric. Investors bought airline shares on Apr. 3 after the news.
Continental is one of the few airlines to announce information about its monthly performance that regulators do not require. As a result, its results are widely seen as a bellwether for news still to come from others. The company said Apr. 2 that its consolidated passenger revenue per available seat mile (RASM) rose between 4.5% and 5.5% in March compared to the same month of 2006. As a measurement of the sales generated for every mile flown, RASM suggests how many empty seats an airline had and how efficiently it performed.
"The results were encouraging," said Phil Baggaley, an analyst at Standard & Poor's Ratings Services (S&P, like BusinessWeek.com, is owned by the McGraw-Hill Cos.). Continental's data provide hope that a recent slowing in RASM isn't as much as previously feared, he says.
Like many in the industry, the Houston airline has been flying fuller planes during recent years, as bankruptcies by major carriers like Delta Air Lines (DALRQ.PK) cut down on the industry's overall supply capacity. Meanwhile soaring fuel prices made airlines more reluctant to get into price wars, also contributing to stronger RASM. Continental's RASM had improved by 14.8% during March, 2005.
Against such comparisons, RASMs in the industry began to look less impressive in mid-2006 as the U.S. economy showed signs of weakness, sparking concerns among investors. Continental had estimated that its February RASM increased between 1.5% and 2.5% compared to February, 2006. In contrast, RASM for this March looks better.
"Airline stocks should stage a relief rally on CAL revenue results," Credit Suisse analyst Daniel McKenzie said in a research note Apr. 3. "We're naturally mindful about the weaker economic backdrop and poor geopolitical backdrop, however, a slowdown for the airlines is not yet in sight." McKenzie reiterated an outperform rating on the stock. (McKenzie certified that his compensation is not directly related to views expressed in the report. But Credit Suisse's investment banking activities generate revenue that contributes to his pay and Continental has been a client within the past year.)
Investors did indeed buy airline shares on Apr. 3 after the news. In example, Continental's shares surged 9.2% to $39.35 per share in early afternoon trading on the New York Stock Exchange. Its rival United Airlines (UAUA) gained 4.9% to $40.24 per share on the Nasdaq, while US Airways Group (LCC) surged 6.5% to $47.98 per share on the NYSE.