"Continental CEO: Growth Coming From European Routes"

Thursday, October 28, 2004

Continental CEO: Growth Coming From European Routes


NEW YORK (Dow Jones)--The current level of taxes and fees paid by airlines
isn't sustainable, Continental Airlines Inc. (CAL) Chief Executive Gordon
Bethune said Thursday.

Speaking at the Society of Airline Analysts meeting, Bethune explained the
industry will pay $14 billion in taxes and fees "in addition to income
taxes" to the federal government this year. Continental will pay about $1
billion, he said.

That includes fees paid by passengers, many of which aren't disclosed to
these passengers by law, he said. These fees paid by passengers are also
eating into airline profits because airlines have to factor them in when
pricing a ticket.

In addition to the fees and taxes, airlines face higher costs due to rising
fuel prices, lost domestic market share to low-cost competition and falling
domestic yields because of overcapacity, he said. Yields are a measure of
the average fare paid.

Chief Financial Officer Jeff Misner explained that low-cost competition will
continue to eat into domestic yields in 2005. As a result, Continental is
focusing on expanding its international routes, particularly to mid-sized
cities in Europe which can't be reached by low-cost competitors' fleets,
Bethune said.

The airline has been "enticed by some cities," he said, referring to
financial incentives used to draw Continental to Europe.

In addition to having a hub in New York that makes flights to Europe
feasible, Continental is also able to offer low fares to economy-class
passengers because of the premiums paid by first- and business-class
passengers, he said.

Low-cost carriers can't replicate first- and business-class conditions that
justify those fares without increasing their costs, Bethune added.

One way Continental plans to deal with rising costs is through wage and
benefit concessions from its employees. The airline, however, is waiting for
its competitors to reach similar agreements first, Bethune said. In
particular, UAL Corp.'s (UALAQ) United Airlines will set the bar for
Continental's negotiations because "we cannot pay our pilots less than the
biggest employer out there," he said.

Bethune said he doesn't know how long Continental will have to wait for
United to reach an agreement, but CFO Misner said the airline has a number
of options to maintain its cash level. Those include selling its stake in
ExpressJet Holdings Inc. (XJT) and Copa Airlines.

Continental is particularly wary about having to approach its pilot union
more than once. "If you're going to cut a dog's tail off, you better only do
it once, " Bethune said.

Misner also said Delta Air Lines Inc.'s (DAL) recent agreement for about $1
billion in wage and benefit savings is "probably not quite enough."


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