Continental Airlines Should Continue to be a High Flyer (CAL)

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Includes: DAL, UAL
by: Jack Miller

June 20 is the deadline to guess this quarter's Continental Airlines (NYSE:CAL) earnings. The person who makes one guess and is closest to the actual results, wins $100. The person who makes two guesses and hits a winner will win $50 and the second place guesser will win $50.

I read an interesting institutional research report today. It stated that CAL should trade at over $70 per share by year end but that earnings for the quarter may be a little low at around $1.29 because of high fuel costs. (Last year, CAL made about $1.26 in the second quarter). My good friend, Lamar Jones, sent a note that Jim Cramer, the guy that will never ever recommend an airline stock, recommended CAL tonight. He said the recent moves by the Bush administration to support foreign ownership rights could make CAL a take over target.

I fear it is the other way around. Congress just blocked, at least for now, the Bush proposals. This means CAL could try to join the ranks of the big four by buying Northwest Airlines (NWACQ). CAL and NWA are the two largest buyers of dreamliner 787 jets. These jets are much lighter and more fuel efficient than the jets they will replace. Remember the law of substitution? Boeing has substituted lighter composite plastic materials for much of the aluminum in the old planes: the planes save about 15% on fuel. These planes are ideal for the CAL strategy of direct flights to major international cities. NWA has a similar strategy primarily covering pacific destinations.

The Airbus super jumbo is at least 6 months behind schedule. Besides, who wants to fly halfway around the world and still have to catch a second regional flight? This is great news for CAL and airlines in general. The longer it takes to add new capacity, the longer the carriers will be able to charge premium prices.

CAL and NWA have complimentary route structures and bankruptcy has done the work to make NWA a profitable merger candidate. If CAL can purchase by assuming debt, it may not hurt the price of CAL shares too badly in the short run and could help a lot in the long run.

Make a quick guess and you may win $100. Make the right investment decisions and make a fortune for you, your family and your fellow man.

CAL 1-yr chart:

CAL 1-yr chart