Continental Airlines and Southwest Airlines results topped Wall Street estimates as more people booked flights and ticket prices rose, but the airlines said the path to recovery would be rough.

The airlines' shares rose in morning trading on the New York Stock Exchange on Thursday, lifting the Arca Airline Index <.XAL> nearly 0.5 percent.

The results come a day after American Airlines parent AMR Corp posted a quarterly loss, but said demand was improving.

Southwest, the leading U.S. discount carrier, expects unit revenue to rise in the first quarter of 2010. Continental said the decline in revenue that it books per passenger eased in the fourth quarter, compared with the third quarter.

I think there's cautious optimism that business travel is returning, said airline consultant Doug Abbey. International markets look stronger than most expected. So I think the hope is that we've bottomed out in the yield declines.

A drop in costs and higher-than-expected quarterly revenues helped the airlines beat analyst expectations. Continental's fuel costs fell by about a third in the fourth quarter, while Southwest fuel costs fell more than 13 percent.

U.S. airlines have cut jobs and trimmed capacity in the past two years in an effort to hem costs in the face of a severe recession in 2009 and a surge in fuel prices in 2008.

Southwest said it would not increase capacity in 2010, while Continental expects mainline domestic capacity to remain flat. Continental expects international capacity to jump between 4 percent and 5 percent this year.

Shares of Continental jumped to as much as $21.58, its highest level in a year. More recently, it was trading at $21.07. Southwest shares rose nearly 1 percent to $11.42.


Continental's fourth quarter mainline passenger revenue per available seat mile (PRASM) fell 10.4 percent. This was an improvement over the third quarter, when mainline passenger revenue slumped more than 20 percent.

We expect Continental to be the only profitable network carrier in the fourth quarter, which we believe, in itself, is a remarkable feat, particularly given typical fourth quarter seasonal weakness, Stifel Nicolaus analyst Hunter Keay wrote in a research note.

The world's fifth-largest airline reported net income of $85 million, or 60 cents per share, in the fourth quarter. A year earlier, it reported a net loss of $269 million or $2.35 per share.

Excluding items, Continental posted a profit of 3 cents per share. Analysts on average expected the carrier to post a loss of 7 cents per share, according to Thomson Reuters I/B/E/S.


Dallas-based Southwest it would keep capacity flat this year, but focus on flying to more profitable cities such as New York, Boston and Milwaukee.

The company's yield, or revenue per available seat mile, rose 7.4 percent in the fourth quarter.

We attribute (the rise in yield) to its domestic-centric network, its 'bags fly free' promotion and to recent revenue enhancement initiatives, S&P analyst Jim Corridore said in a research note.

Southwest reported net profit of $116 million, or 16 cents a share, compared with a net loss of $56 million, or 8 cents per share, a year earlier.

Excluding items, it posted a profit of 10 cents per share. Analysts on average expected the carrier to post a profit of 7 cents per share, according to Thomson Reuters I/B/E/S.

Southwest recently unveiled an early boarding charge of $10, but does not charge for checked bags, an important revenue source for other major airlines. Southwest says its strategy has helped it seize market share.

Southwest has derivative contracts for about half of its estimated 2010 fuel consumption at about $100 per barrel.

(Additional reporting by Kyle Peterson; Editing by Derek Caney and Robert MacMillan)