Confused by Continental

Maybe airlines aren't all bad. Yesterday, Continental Airlines (NYSE: CAL  ) did the unthinkable: It flew past every expectation for its second-quarter earnings. (Get all the numbers here.)

Houston's top carrier was a record-setting globetrotter in Q2, booking a 20.9% gain in passenger revenue for transatlantic flights. Domestically, Continental improved its top line by 3.5%. Systemwide, passenger revenue improved by 5.2% to $3.4 billion.

Continental also managed to keep a lid on expenses. Cost per available seat mile (CASM), a key measure in determining sustainable profitability, grew by less than 1%, while revenue per available seat mile (RASM) improved by 2.1%. Higher margins naturally followed.

So were investors impressed? Hardly. Shares of Continental closed down roughly 3% on Thursday, and they're off another 2% today. It's as if shareholders had been fed bad peanuts and reruns of Roseanne during all five hours of a cross-country flight.

Part of the problem is the outlook. Executives told analysts that high fuel prices and low fares would continue to hurt Continental's bottom line. Well, duh. Anyone who's actually surprised by that probably also doesn't know that smoking can kill you. Or that a pure diet of cheeseburgers and Coke will make you fat.

Look, I get it: Airlines stink. UAL's (Nasdaq: UAUA  ) United has a rotten service record. And JetBlue (Nasdaq: JBLU  ) faces millions in potential costs from its customer's bill of rights. But are we really ready to say there's no money to be made in airlines? I think that's crazy. (For the record, I'm a shareholder of Southwest Airlines (NYSE: LUV  ) .)

Continental's investing thesis rests entirely on international expansion. With the carrier's available seat miles for trans-Atlantic fights climbing by double digits, managers obviously understand that. Shouldn't we be celebrating, then, rather than selling?

Taxi toward related Foolishness:

  • Last year brought thoughts of heavenly bliss for Continental and United.
  • Now, we're wondering whether airlines might finally take off.

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Fool contributor Tim Beyers usually flies coach, but will take first class any time he can get it. Tim owned shares of Southwest at the time of publication. Find Tim's portfolio here and his latest blog commentary here. The Motley Fool's disclosure policy would like to ask that you take your seat and fasten your seat belts.

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