UPDATE 1-Continental Air shares rally on revenue gain

Tue Jul 3, 2007 11:51am EDT

(Recasts, adds background. Updates share prices)

CHICAGO, July 3 (Reuters) - Shares of Continental Airlines CAL.N gained more than 9 percent on Tuesday, a day after the No. 4 U.S. carrier reported a monthly revenue increase that far surpassed expectations.

Continental on Monday said its revenue per available seat mile rose between 1.5 percent and 2.5 percent in June. The gain topped forecasts and may have quashed predictions for falling domestic revenue this year.

If the gains hold out until the market closes, it will have been the biggest one-day gain for Continental since November.

"We view this unexpected strength as sufficient not only to potentially boost Continental consensus estimates but legacy equities as well," said JP Morgan airline analyst Jamie Baker.

Stock in rival airlines also gained, with US Airways Group (LCC.N) up 5.77 percent at $32.47 on the New York Stock Exchange. AMR Corp. AMR.N, parent of American Airlines, rose 4.25 percent to $28.21 also on NYSE.

Airlines have been battered in recent years by low-fare competition and high fuel costs.

Some experts had predicted weaker domestic revenue for major airlines in 2007. But two successful fare hikes in two weeks have fueled optimism for the sector.

Airlines have cut capacity -- the number of seats for sale

-- in the last year and are flying fuller planes. The capacity -- in the last year and are flying fuller planes. The capacity cuts help maximize revenue on each flight. But passengers complain of uncomfortable flights and delays.

((Reporting by Kyle Peterson, editing by Dave Zimmerman; Reuters Messaging: kyle.peterson.reuters.com@reuters.net; e-mail: kyle.peterson@reuters.com; Tel: +1-312-408-8581)) Keywords: CONTINENTAL SHARES/

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