Tuesday, January 03, 2006

Continental Airlines an Outstanding Year

After the market closed today,Continental Airlines (CAL) reported outstanding traffic for December and for the full year. December Revenue Passenger Miles were super strong. The domestic increase of 9.2% was eclipsed by international and transatlantic growth of 15.6% and 17.5%!

For the full year, consolidated revenue passenger miles increased by 9.6%! Available seat miles grew at a less robust 6.9% which shows that the company flew more seats with a higher percentage of them passengers in them. Indeed, the consolidated load factor for the year increase from 2004's 76.9% to 2005's 78.9%.

Today, CNBC focused on the story of head to head competition between Southwest and Frontier Airlines. I find it comforting to know that these low cost carriers are fighting so hard over passengers who pay maybe $100 for a ticket when CAL is taking out many of the cheap international seats and adding business class seats that fetch $3,000 or more.

A Forbes article recently detailed the continuing woes of DAL. The pilots seem to be willing to close the airline down rather than take permanent pay cuts. It appears that NWAC maintenance workers have tried and, so far, failed to force NWAC into liquidation. Independence is currently facing liquidation. UAL, having slashed salaries, pensions, interest and other costs while under bankruptcy protection, has obtained the financing it needs to come out from under the courts protection.

It is my judgment that ,Continental Airlines (CAL) and AMR are the best run of the international carriers. These carriers face the least amount of cut-throat competition and they each have cut costs dramatically. Further capacity reductions by DAL and NWAC are expected to give these carriers an extra boost.

There are many red herrings around. It is easy to get lost in the questions of fuel prices or potential terrorist attacks; bad things may or may not happen. The important thing to understand is that international business travel is in a major uptrend, this trend is expected to continue for several years and it will be several years before new planes on order will serve to increase available seats. Between now and then, one should expect strong revenue gains with a high percentage of the gains sinking to the bottom line.

Because these carriers have massive tax loss carry forwards, the after tax profits are going to be about the same as the before tax profits. Profits per share should rise dramatically for the next three years. During "the good times" it is not unusual to see airline PE's at 20% or more. I'm guessing that (CAL) and AMR will each see profits per share of $7 or more per share by 2008. To avoid sounding like a raving Looney, I continue to suggest these stocks may well pass their old highs in the high 50's or low 60's within a couple of years. I am actually hopeful that they will make $7 each and sell at 20 times 7 by 2008.


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