Continental Airlines cuts jobs, retires planes

NEW YORK (Reuters) - Continental Airlines Inc said on Thursday it would cut 3,000 jobs, or about 6.5 percent of its work force, and retire 67 older planes as it scales down in the face of soaring fuel prices.

The No. 4 carrier is the latest of the major U.S. airlines to announce large cutbacks as they grapple with unprecedented oil prices, which have doubled in the past year.

On Tuesday, UAL Corp's United Airlines announced plans to slash jobs and flights, following a similar move by AMR Corp's American Airlines last month.

"The airline industry is in a crisis," Larry Kellner, Continental's chief executive, and Jeff Smisek, its president, wrote in a letter to Continental employees released on Thursday.

"Its business model doesn't work with the current price of fuel and the existing level of capacity in the marketplace. We need to make changes in response," the executives said.

Continental's shares, which have fallen some 35 percent so far this year, rose about 6 percent to $15.40 on the New York Stock Exchange.

To counter its higher fuel bill, Continental said it would cut 3,000 of its 45,000 staff, and retire 67 older single-aisle Boeing 737 planes by the end of 2009, on top of the six planes it has already pulled out of service this year.

The airline said it would replace some of those jets with deliveries of new, more fuel-efficient 737s. Its mainline fleet of about 375 planes would shrink to about 344 by the end of next year, an overall cut of about 8 percent.

Crude oil futures crested at $135 a barrel last month -- more than twice the price of a year ago -- sending the cost of jet fuel up sharply.

Continental said the price of Gulf Coast jet fuel closed on Wednesday at $151.26 -- about 75 percent higher than what it was a year ago.

SECTOR'S BANKRUPTCY RISK

Continental said it would cut flights after the summer season, reducing domestic capacity -- or the number of seats for sale on U.S. flights -- about 11 percent in the fourth quarter.

Continental plans to reduce domestic flights about 16 percent in the fourth quarter, over the year before, but said it will not announce which destinations will be hit until late next week.

It said it would provide more details on the job cuts next week after discussing them with employees. The airline hopes most of the cuts will be voluntary.

The job cuts will take effect after the peak summer season, although some management and clerical jobs will be cut sooner.

Continental said that in recognition of the crisis and its effect on co-workers, Kellner and Smisek have declined their salaries for the rest of this year and declined any payment under the company's annual incentive program for 2008.

As a result, Kellner will receive a salary of $296,875 and Smisek $240,000 for 2008, Continental said in a regulatory filing.

Also on Thursday, Lehman Brothers upgraded the U.S. airline sector to "positive" from "neutral," saying industry restructuring was coming at an accelerated pace.

Shares of major airlines rose: Delta Air Lines was up more than 9 percent, American Airlines parent AMR Corp climbed almost 5 percent and United Airlines parent UAL Corp rose more than 10 percent.

Lehman analyst Gary Chase said in a note to clients: "What's clear to us is that if nothing changes, bankruptcy risk is significant for the entire industry. It is for that very reason, however, that we believe significant changes must, and ultimately will, happen."

(Reporting by Bill Rigby and Mark McSherry, editing by Maureen Bavdek)