By SHANNON BUGGS Copyright 2009 Houston Chronicle

The U.S. airline industry needs a stable economy and a reliable regulatory environment to make it more attractive to investors, Continental Airlines CEO and Chairman Larry Kellner said Wednesday.

Bolstering the national economy is a global effort, but Kellner outlined an approach for updating the laws that govern all aspects of aviation.

"The regulatory system we have today isn't working for employees, it's not working for shareholders, it's not working for customers," he said.

Kellner offered the industry prescriptions in response to questions during a conference call with journalists and Wall Street analysts to discuss the Houston-based carrier's quarterly performance.

In his final such conference — he's stepping down as Continental's top executive at the end of the year — Kellner discussed Continental's loss of $18 million, or 14 cents per share, in the June-September period.

That compares with a $230 million loss, or $2.09 a share, in third-quarter 2008, when record oil prices caused a surge in the airline's fuel costs.

Excluding special charges for severance payments and write-downs, the company earned $2 million, or 2 cents per share, during the peak of summer travel season.

Those exclusions put Continental's earnings in line with the consensus forecasts of analysts that the airline would break even in the third quarter, Jamie Baker, a JPMorgan analyst, said in a newsletter update on Wednesday.

Continental said that it will keep its U.S. flight schedule flat for the last three months of the year but will increase its international capacity up to 6 percent.

That increase stems primarily from the carrier's restoration of its full schedule to Mexico after a major cutback in flights there during the swine flu outbreak this year, the company said.

'Full-year profitability'

Continental President Jeffrey Smisek, who will succeed Kellner on Jan. 1 as chairman and CEO, said the airline recognizes "the importance of achieving and maintaining full-year profitability."

"We are committed to that goal and will do everything in our power to achieve it," Smisek said.

But adding caution to expectations for the fourth quarter, Smisek said that unlike the summer travel season, the holiday season is mainly specific high-demand days with the periods in between deeply discounted to attract business.

And Smisek said Continental can't predict when business travelers will return to their freer-spending ways.

"Your high-yield travelers are either not traveling or they are traveling in the back of the bus," Smisek said, meaning they are flying on economy tickets rather than business-class fares.

In response to an analyst's question, he acknowledged that business travel may now be in a "new normal."

Review of regulations

Kellner, in his broader comments on the industry, recommended a "holistic review" of aviation regulation, starting with modernizing and expanding the air traffic control system, eliminating oil speculation that may contribute to higher fuel prices, and streamlining labor and management relations as defined by the Railway Labor Act.

Labor concerns

Capt. Jay Pierce, chairman of the Continental Master Executive Council of the Air Line Pilots Association, which is negotiating a new pilot contract with Continental, said the union shares "widespread concerns about the way the Railway Labor Act has been administered in recent years."

"But there's no reason that airline managements can't do more right now to expedite negotiations for collective bargaining agreements with their employees," Pierce said in an e-mail.

Kellner declined to discuss the ongoing pilot nego- tiations or forecast how similar efforts with mech- anics and flight attendants may go later this year and next.

shannon.buggs@chron.com