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UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
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WASHINGTON,
D.C. 20549
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FORM
10-K
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(Mark
One)
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[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
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THE
SECURITIES EXCHANGE ACT OF 1934
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FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2008
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OR
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[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
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THE
SECURITIES EXCHANGE ACT OF 1934
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FOR
THE TRANSITION PERIOD FROM __________ TO __________
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Commission
File Number 1-10323
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CONTINENTAL
AIRLINES, INC.
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(Exact
name of registrant as specified in its charter)
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Delaware
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74-2099724
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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1600
Smith Street, Dept. HQSEO, Houston, Texas
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77002
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant's
telephone number, including area
code: 713-324-2950
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Securities
registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name
of Each Exchange
On Which Registered
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Class
B Common Stock, par value $.01 per share
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New
York Stock Exchange
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Securities
registered pursuant to Section 12(g) of the
Act: None
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Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes X No
_____
Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Exchange Act. Yes No X
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90
days. Yes X No
_____
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form
10-K. [X]
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer or a
non-accelerated filer. See definition of "accelerated filer and large
accelerated filer" in Rule 12b-2 of the Exchange Act. Large
accelerated filer X Accelerated
filer ___ Non-accelerated filer ___ Smaller
reporting company ___
(Do not check if a
smaller
reporting company)
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes No X
As of June 30, 2008, the aggregate
market value of the registrant's common stock held by non-affiliates of the
registrant was $1.1 billion based on the closing sale price as reported on the
New York Stock Exchange.
Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practicable date.
Class
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Outstanding at February 13,
2009
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Class
B Common Stock, $.01 par value per share
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123,531,252
shares
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__________________
DOCUMENTS
INCORPORATED BY REFERENCE
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Proxy
Statement for Annual Meeting of Stockholders to be held on June 10,
2009: PART III
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TABLE OF
CONTENTS
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PAGE
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PART
I
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Item
1.
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5
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13
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14
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Item
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Item
1B.
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Item
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Item
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Item
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PART
II
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Item
5.
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32
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Item
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Item
7.
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Item
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Item
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Item
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140
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Item
9A.
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Item
9B.
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144
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PART
III
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Item
10.
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145
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Item
11.
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145
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Item
12.
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145
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Item
13.
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Item
14.
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145
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PART
IV
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146
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Item
15.
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146
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147
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149
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PART
I
Continental Airlines, Inc., a Delaware
corporation incorporated in 1980, is a major U.S. air carrier engaged in the
business of transporting passengers, cargo and mail. The terms
"Continental," "we," "us," "our" and similar terms refer to Continental
Airlines, Inc. and, unless the context indicates otherwise, its consolidated
subsidiaries.
We are the world's fifth largest
airline as measured by the number of scheduled miles flown by revenue passengers
in 2008. Including our wholly-owned subsidiary, Continental
Micronesia, Inc. ("CMI"), and regional flights operated on our behalf under
capacity purchase agreements with other carriers, we operate more than 2,800
daily departures. As of December 31, 2008, we flew to 120 domestic
and 121 international
destinations and offered additional connecting service through alliances with
domestic and foreign carriers. We directly served ten Canadian cities, 25
European cities, seven South American cities and six Asian cities from the U.S.
mainland as of December 31, 2008. In addition, we provide service to
more destinations in Mexico and Central America than any other U.S. airline,
serving 39 cities. Through our Guam hub, CMI provides extensive
service in the western Pacific, including service to more Japanese cities than
any other U.S. carrier.
General information about us, including
our Corporate Governance Guidelines and the charters for the committees of our
Board of Directors, can be found on our website, continental.com. Our
Board has adopted the "Ethics and Compliance Guidelines," which apply to all
directors, officers and employees of Continental and its subsidiaries and serve
as our "Code of Ethics" under Item 406 of Regulation S-K and as our "Code of
Business Conduct and Ethics" as required by Section 303A.10 of the New York
Stock Exchange ("NYSE") Listed Company Manual. These Ethics and
Compliance Guidelines also are available on our website, and future amendments
to or waivers from compliance with these guidelines will be disclosed on our
website in accordance with Item 5.05 of Form 8-K.
Copies of these charters and guidelines
are available in print to any stockholder who requests them. Written
requests for such copies may be directed to our Secretary at Continental
Airlines, Inc., P.O. Box 4607, Houston,
Texas 77210-4607. Electronic copies of our annual reports
on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, as
well as any amendments and exhibits to those reports, are available free of
charge through our website as soon as reasonably practicable after we file them
with, or furnish them to, the U.S. Securities and Exchange Commission
("SEC").
Information on our website is not
incorporated into this Form 10-K or our other securities filings and is not a
part of them.
This Form 10-K contains forward-looking
statements that are not limited to historical facts, but reflect our current
beliefs, expectations or intentions regarding future events. All
forward-looking statements involve risks and uncertainties that could cause
actual results to differ materially from those in the forward-looking
statements. For examples of those risks and uncertainties, see the
cautionary statements contained in Item 1A. "Risk
Factors." See Item 1A. "Risk Factors" and Item
7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Overview" for a discussion of trends and factors
affecting us and our industry. Also see Item 8. "Financial
Statements and Supplementary Data, Note 18 - Segment Reporting" for financial
information about each of our business segments. We undertake no
obligation to publicly update or revise any forward-looking statements to
reflect events or circumstances that may arise after the date of this report,
except as required by applicable law.
We operate our domestic route system
primarily through our hubs in the New York metropolitan area at Newark Liberty
International Airport ("New York Liberty"), in Houston, Texas at George Bush
Intercontinental Airport ("Houston Bush") and in Cleveland, Ohio at Hopkins
International Airport ("Cleveland Hopkins"). Each of our domestic
hubs is located in a large business and population center, contributing to a
large amount of "origin and destination" traffic. Our hub system
allows us to transport passengers between a large number of destinations with
substantially more frequent service than if each route were served
directly. The hub system also allows us to add service to a new
destination from a large number of cities using only one or a limited number of
aircraft. As of December 31, 2008, we operated 74% of the average
daily departures from New York Liberty, 84% of the average daily departures from
Houston Bush and 65% of the average daily departures from Cleveland Hopkins, in
each case based on scheduled commercial passenger departures and including
regional flights flown for us under capacity purchase agreements.
We directly serve destinations
throughout Europe, Asia, Canada, Mexico, Central and South America and the
Caribbean. We also provide service to numerous other destinations
through codesharing arrangements with other carriers and have extensive
operations in the western Pacific conducted by CMI. As measured by
2008 available seat miles, approximately 50% of our mainline operations is
dedicated to international traffic.
The "open skies" agreement between the
United States and the European Union, which became effective on March 30, 2008,
is resulting in increased competition from European and U.S. airlines in these
international markets, and may give rise to additional integration opportunities
between or among European and U.S. carriers. In addition, the "open
skies" agreement has enhanced our ability to compete with European and U.S.
airlines that historically have provided service between London's Heathrow
Airport and destinations in the United States. We have acquired slots
at Heathrow, and during 2008 we moved all of our London flights from London
Gatwick to London Heathrow.
New York Liberty is a significant
international gateway for our operations. From New York Liberty, we
served 25 cities in Europe, six cities in Asia, eight cities in Canada, five
cities in Mexico, seven cities in Central America, three cities in South America
and 16 Caribbean destinations at December 31, 2008. We expect to
begin daily service between New York Liberty and Shanghai, China in March
2009.
Houston Bush is the focus of our
flights to destinations in Mexico and Central and South America. As
of December 31, 2008, we flew from Houston Bush to 29 cities in Mexico, all
seven countries in Central America, seven cities in South America, six Caribbean
destinations, three cities in Canada, three cities in Europe and
Tokyo. We expect to begin daily service between Houston Bush and
Frankfurt, Germany in late 2009.
At December 31, 2008, we flew from
Cleveland Hopkins to two cities in Canada, San Juan, Puerto Rico and Cancun,
Mexico. We also provide seasonal service between Cleveland Hopkins
and London.
From its hub operations based on the
island of Guam, as of December 31, 2008, CMI provided service to eight cities in
Japan, more than any other U.S. carrier, as well as other Pacific rim
destinations, including Manila in the Philippines and Cairns,
Australia. CMI is the principal air carrier in the Micronesian
Islands, where it pioneered scheduled air service in 1968. CMI's
route system is linked to the U.S. market through Tokyo and Honolulu, each of
which CMI serves non-stop from Guam.
See Item 8. "Financial
Statements and Supplementary Data, Note 18 - Segment Reporting," for operating
revenue by geographical area.
We have alliance agreements, which are
also referred to as codeshare agreements or cooperative marketing agreements,
with other carriers. Alliances allow airlines to develop their route
structures by enabling them to offer their passengers greater destination
coverage, while providing those airlines with the potential for both increased
revenue and cost savings. We seek in particular to develop
international alliance relationships that complement our own route system and
permit expanded service through our hubs to major international
destinations. International alliances enable us to provide our
passengers better connecting service from our international flights to other
destinations beyond an alliance airline's hub and expand the product line that
we may offer in a foreign destination.
These relationships may
include (a) codesharing (one carrier placing its name and flight
number, or "code," on flights operated by the other carrier), (b) reciprocal
frequent flyer program participation, reciprocal airport lounge access and other
joint activities (such as seamless check-in at airports) and/or (c) capacity
purchase agreements.
We are currently a member of SkyTeam, a
global alliance of airlines that includes Aeroflot, Aeromexico, Air France,
Alitalia, China Southern, CSA Czech, Delta Air Lines, Inc. ("Delta"), KLM,
Korean Air and Northwest Airlines, Inc. ("Northwest"), as well as associate
members Copa Airlines of Panama ("Copa Airlines"), Kenya Airways and
AirEuropa. As a member of SkyTeam, we have bilateral codeshare,
frequent flyer program participation and airport lounge access agreements with
each of the SkyTeam members.
Following the announcement by Delta and
Northwest of their definitive agreement to merge, we evaluated which of the
three major global airline alliances would be the best fit for our business over
the long term and decided that Star Alliance was the best alliance for
us. During 2008, we entered into framework agreements with United Air
Lines, Inc. ("United"), Deutsche Lufthansa AG ("Lufthansa") and Air Canada, each
a member of Star Alliance, pursuant to which we plan to develop an extensive
code-share relationship and reciprocity of frequent flier programs, elite
customer recognition and airport lounge use with these other
airlines. We plan to implement these relationships and join United,
Lufthansa and Air Canada (and other member airlines) in Star Alliance as
promptly as practicable following our exit from SkyTeam. We will exit
SkyTeam effective with our last flight on October 24, 2009.
Star Alliance was established in 1997
as the first truly global airline alliance to offer customers worldwide reach
and a smooth travel experience. Star Alliance received the Air
Transport World Market Leadership Award in 2008 and was voted Best Airline
Alliance by Business Traveller Magazine in 2003, 2006, 2007 and 2008 and by
Skytrax in 2003, 2005 and 2007. The members are Air Canada, Air
China, Air New Zealand, All Nippon Airways, Asiana Airlines, Austrian Airlines,
British Midland Airways, EgyptAir, LOT Polish Airlines, Lufthansa, Scandinavian
Airlines, Shanghai Airlines, Singapore Airlines, South African Airways, Spanair,
Swiss International Air Lines, TAP Portugal, Thai Airways International, Turkish
Airlines, United and US Airways. Regional member carriers Adria
Airways (Slovenia), Blue1 (Finland) and Croatia Airlines enhance the global
network. Air India, Brussels Airlines and TAM Airlines have also been
accepted as future members. Overall, the Star Alliance network offers
more than 16,500 daily flights to 912 destinations in 159
countries.
On July 23, 2008, we filed an
application with the U.S. Department of Transportation ("DOT") to join United
and a group of eight other carriers within Star Alliance that already hold
antitrust immunity. Approval by the DOT of this application would
enable us, United and these other immunized Star Alliance carriers to work
closely together to deliver highly competitive international flight schedules,
fares and service and would provide competitive balance to antitrust-immunized
carriers in SkyTeam.
Additionally, we, United, Lufthansa and
Air Canada have requested DOT approval to establish a trans-Atlantic joint
venture to create a more efficient and comprehensive trans-Atlantic network for
our respective customers, offering those customers more service, scheduling and
pricing options and establishing a framework for similar joint ventures in other
regions of the world. We are seeking a modification to our existing
pilot collective bargaining agreement, which presently prohibits us from
engaging in a revenue or profit sharing agreement with a domestic air carrier,
to permit us to enter into such joint ventures.
Prior to joining Star Alliance, we must
exit our existing bilateral alliance agreements with SkyTeam members and enter
into new alliance agreements with our new alliance partners. The
length of this transition period will depend upon a number of factors outside of
our control and the timing of our withdrawal from our existing bilateral
agreements with various SkyTeam members.
In the U.S. domestic market, where
antitrust immunity would not apply, we and United plan to begin broad
code-sharing, which facilitates the seamless creation of customer travel
itineraries using both carriers, as well as frequent flier programs, elite
customer recognition and airport lounge reciprocity. These
cooperative activities are subject to DOT code-sharing regulation and to our
exiting certain of our current alliance relationships.
Subject to these matters, we currently
anticipate that we will join Star Alliance and begin broad code-sharing and
other commercial cooperation with United, Lufthansa and Air Canada (and the
other members of Star Alliance) in the fourth quarter of 2009.
In
addition to our current participation in SkyTeam, we have domestic codesharing
agreements with Hawaiian Airlines, Alaska Airlines and Horizon Airlines and
international codesharing agreements with Emirates (the flag carrier of the
United Arab Emirates), EVA Airways Corporation (an airline based in Taiwan),
Virgin Atlantic Airways and French rail operator SNCF. Additionally,
we have codeshare agreements with Gulfstream International Airlines, Hyannis Air
Service, Inc. ("Cape Air"), Colgan Air, Inc. ("Colgan"), Hawaii Island Air, Inc.
("Island Air") and American Eagle Airlines, who provide us with commuter feed
traffic. We also have a train-to-plane alliance with Amtrak and a
codeshare agreement with US Helicopter Corporation, which provides eight-minute
shuttle service between Manhattan and our New York Liberty hub.
Except for the regional capacity
purchase agreements listed below, all of our codeshare relationships are
currently free-sell codeshares, where the marketing carrier sells seats on the
operating carrier's flights from the operating carrier's inventory, but takes no
inventory risk. In contrast, in capacity purchase agreements, the
marketing carrier purchases all seats on covered flights and is responsible for
all scheduling, pricing and seat inventories. Some of our alliance
relationships include other cooperative undertakings such as joint purchasing,
joint corporate sales contracts, airport handling, facilities sharing or joint
technology development.
Our regional capacity purchase
agreements are with ExpressJet Airlines, Inc. ("ExpressJet"), a wholly-owned
subsidiary of ExpressJet Holdings, Inc. ("Holdings"), Chautauqua Airlines, Inc.,
("Chautauqua"), a wholly-owned subsidiary of Republic Airways Holdings, Inc.,
Champlain Enterprises, Inc. ("CommutAir") and Pinnacle Airlines Corp.'s
subsidiary, Colgan. See Item 8. "Financial Statements and
Supplementary Data, Note 16 - Regional Capacity Purchase Agreements" for further
discussion of our capacity purchase agreements.
Regional
Operations
Our regional operations are conducted
by other operators on our behalf, primarily under capacity purchase
agreements. We schedule and market the regional flights provided for
us by other operators under capacity purchase agreements. Our
regional operations using regional jet aircraft are conducted under the name
"Continental Express" by ExpressJet and Chautauqua and those using turboprop
aircraft are conducted under the name "Continental Connection" by CommutAir and
Colgan. As of December 31, 2008, our regional operators served 103
destinations in the United States, 26 cities in Mexico, eight cities in Canada
and one Caribbean destination on our behalf. We believe this regional
service complements our operations by carrying traffic that connects onto our
mainline jets and by allowing more frequent flights to smaller cities than could
be provided economically with larger jet aircraft. Additional
commuter feed traffic currently is provided to us by other alliance airlines, as
discussed above.
In June 2008, we entered into the
Second Amended and Restated Capacity Purchase Agreement with ExpressJet and
certain of its affiliates (the "Amended ExpressJet CPA"), which amended and
restated the previous capacity purchase agreement effective July 1,
2008. Under the Amended ExpressJet CPA, we will continue to purchase
all of the capacity from the ExpressJet flights covered by the
agreement. In exchange for ExpressJet's operation of the flights and
performance of other obligations under the Amended ExpressJet CPA, we have
agreed to pay ExpressJet a pre-determined rate, subject to annual escalations
(capped at 3.5%), for each block hour flown (the hours from gate departure to
gate arrival) and to reimburse ExpressJet for various pass-through expenses
(with no margin or mark-up) related to the flights, including insurance,
property taxes, international navigation fees, depreciation (primarily
aircraft-related), landing fees and certain maintenance
expenses. Under the Amended ExpressJet CPA, we are responsible for
the cost of providing fuel for all flights and for paying aircraft rent for all
aircraft covered by the Amended ExpressJet CPA. The Amended
ExpressJet CPA contains incentive bonus and rebate provisions based upon
ExpressJet's operational performance, but no longer includes any payment
adjustments in respect of ExpressJet's operating margin. The
pre-determined rate under the Amended ExpressJet CPA is lower than the rate
under the previous capacity purchase agreement and more competitive with rates
offered by other regional service providers.
The Amended ExpressJet CPA covers a
minimum of 205 regional jets in the first year and ExpressJet currently operates
214 regional jets under that contract. After the first year, the
minimum number of covered aircraft adjusts to 190 regional jets, or fewer as
leases on covered aircraft expire. The Amended ExpressJet CPA will
expire after a term of seven years and has no renewal or extension
options. ExpressJet also leases 30 Embraer 50-seat regional jets from
us outside the Amended ExpressJet CPA.
During 2007, Chautauqua began providing
and operating forty-four 50-seat regional jets as a Continental Express carrier
under a capacity purchase agreement (the "Chautauqua CPA"). As of
December 31, 2008, 37 aircraft were being flown by Chautauqua for
us. The Chautauqua CPA requires us to pay Chautauqua a fixed fee,
subject to annual escalations (capped at 3.5%), for each block hour flown for
its operation of the aircraft. Chautauqua supplies the aircraft that
it operates under the agreement. Aircraft are scheduled to be removed
from service under the Chautauqua CPA each year through 2012, provided that we
have the unilateral right to extend the Chautauqua CPA on the same terms on an
aircraft-by-aircraft basis for a period of up to five years in the aggregate for
20 aircraft and for up to three years in the aggregate for seven aircraft,
subject to the renewal terms of the related aircraft lease.
Our capacity purchase agreement with
CommutAir (the "CommutAir CPA") provides for CommutAir to operate sixteen
37-seat Bombardier Q200 twin-turboprop aircraft as a Continental Connection
carrier on short distance routes from Cleveland Hopkins and New York
Liberty. The CommutAir CPA became effective in 2006 and has a term of
approximately six years. CommutAir supplies all of the aircraft that
it operates under the agreement.
In 2008, Colgan began operating fifteen
74-seat Bombardier Q400 twin-turboprop aircraft on short and medium-distance
routes from New York Liberty on our behalf. Colgan operates the
flights as a Continental Connection carrier under a capacity purchase agreement
with us. In January 2009, we amended the capacity purchase agreement
to increase by 15 the number of Q400 aircraft operated by Colgan on our
behalf. We expect that Colgan will begin operating these 15
additional aircraft as they are delivered, beginning in the third quarter of
2010 through the second quarter of 2011. Each aircraft is scheduled
to be covered by the agreement for approximately ten years following the date
such aircraft is delivered into service thereunder. Colgan supplies
all aircraft that it operates under the agreement. One of
Colgan's Q400 aircraft was involved in an accident on February 12, 2009,
reducing the number of aircraft currently being flown for us to 14.
As with other major domestic
hub-and-spoke carriers, a majority of our revenue comes from tickets sold by
travel agents. Although we generally do not pay base commissions, we
often negotiate compensation to travel agents based on their performance in
selling our tickets. A significant portion of our revenue, including
a significant portion of our higher yield traffic, is derived from bookings made
through third party global distribution systems ("GDSs") used by many travel
agents and travel purchasers.
We use the internet to provide
travel-related services for our customers and to reduce our overall distribution
costs. We have marketing agreements with internet travel service
companies such as Orbitz, Hotwire, Travelocity and Expedia. Although
customers' use of the internet has helped to reduce our distribution costs, it
also has lowered our yields because it has enhanced the visibility of competing
fares offered by low-cost carriers.
Our website, continental.com, is our
lowest cost distribution channel and recorded approximately $3.9 billion in
ticket sales in 2008, an 11% increase over 2007. The site offers
customers the ability to purchase and change tickets on-line, to check-in
on-line and to have direct access to information such as schedules,
reservations, flight status, frequent flyer account information (including the
ability to redeem and change reward travel) and Continental travel
specials. Tickets purchased through our website accounted for 26% of
our passenger revenue during 2008, compared with 25% in 2007 and 22% in
2006.
Substantially all of our sales involve
our electronic ticketing, or e-ticket, product. Our e-ticket product
enables us to process customer and revenue information more
efficiently. E-ticketed passengers have the ability to check-in at
continental.com for all domestic and international travel. On-line
check-in allows customers to obtain a boarding pass from their home, office or
hotel up to 24 hours prior to departure and to proceed directly to security at
the airport, bypassing the ticket counter and saving time. Passengers
with baggage who check-in on-line may use special kiosks at our hub airports to
check their bags rapidly. E-ticket passengers also can use
self-service kiosks to check-in. Our customers have access to
approximately 1,400 Continental self-service kiosks at 171 airports throughout
our system, including all domestic airports we serve. During 2008,
76% of all check-ins were done on-line or at self-service kiosks.
We were one of the first U.S. airlines
to implement interline e-ticketing, allowing customers to use electronic tickets
when their itineraries include travel on multiple carriers. At
December 31, 2008, we had interline e-ticketing arrangements with 119 air
carriers.
During 2008, we began implementation of
our joint project with the Transportation Security Administration ("TSA") to be
the first U.S. carrier to launch a paperless boarding pass pilot program that
allows passengers to receive boarding passes electronically on their cell phones
or PDAs, and use those devices to pass through security and board the
aircraft. The new technology heightens the ability to detect
fraudulent boarding passes while improving customer service and reducing paper
use. This service is currently available at each of our hubs and
other select airports.
We offer a carbon offsetting program
developed in partnership with non-profit Sustainable Travel
International. This program allows customers to view the carbon
footprint of their booked itinerary and choose among a number of options to
reduce the impact of carbon dioxide emissions of their flights. For
customers who elect to participate in this program, their contributions are made
directly to Sustainable Travel International to fund the purchase of offsets,
which are generated from sustainable development projects including
reforestation, renewable energy and energy conservation. We receive
no revenue related to this program.
The U.S. airline industry is
characterized by substantial competition with respect to fares, routes and
services, especially in domestic markets. Carriers use discount fares
to stimulate traffic during periods of slack demand, or when they begin service
to new cities or have excess capacity, to generate cash flow and to establish,
increase or preserve market share. Some of our competitors have
greater financial resources and/or lower cost structures than we do, some of
which is the result of bankruptcies and/or mergers. In recent years,
the domestic market share held by low-cost carriers has increased significantly
and is expected to continue to increase. The increased market
presence of low-cost carriers, which engage in substantial price discounting,
has diminished the ability of the network carriers to maintain sufficient fare
levels in domestic markets to achieve sustained profitability. We
cannot predict whether or for how long these trends will continue.
In addition to price competition,
airlines also compete for market share by increasing the size of their route
system and the number of markets they serve. Several of our domestic
competitors are continuing to increase their international capacity, including
service to some destinations that we currently serve. Additionally,
the "open skies" agreement between the United States and the European Union,
which became effective on March 30, 2008, is resulting in increased competition
from European and U.S. airlines in these international markets, and may give
rise to additional consolidation or better integration opportunities among
European carriers. The increased competition in these international
markets, particularly to the extent our competitors engage in price discounting,
may have a material adverse effect on our results of operations, financial
condition or liquidity.
We also compete with U.S. and foreign
carriers, including major network carriers, low-cost carriers and regional
carriers, throughout our global network on the basis of scheduling, availability
of non-stop flights, on-time performance, type of equipment, cabin
configuration, amenities provided to passengers, frequent flyer programs,
on-board products, markets served and other services.
We are also facing stronger competition
from carriers that have participated in industry consolidation or expanded
airline alliances and joint ventures. See Item 1A. "Risk Factors -
Risk Factors Relating to the Airline Industry - The airline is highly
competitive and susceptible to price discounting" below for a discussion of the
competitive advantages enjoyed by carriers participating in industry
consolidation and/or airline alliances and joint ventures.
We maintain our "OnePass" frequent
flyer program to encourage repeat travel. OnePass allows passengers
to earn mileage credits by flying us and certain other alliance
carriers. We also sell mileage credits to credit/debit card
companies, hotels, car rental agencies, utilities and various shopping and gift
merchants participating in OnePass. Mileage credits can be redeemed
for free, discounted or upgraded travel on Continental, Continental Express,
Continental Connection, CMI or alliance airlines. Most travel awards
are subject to capacity limitations.
During 2008, OnePass participants
claimed approximately 1.6 million awards. Frequent flyer awards
accounted for an estimated 8.5% of our consolidated revenue passenger
miles. We believe displacement of revenue passengers by passengers
who redeem rewards earned by flying on us is minimal given our ability to manage
frequent flyer inventory and the low ratio of OnePass award usage to revenue
passenger miles. At December 31, 2008, we had an outstanding
liability associated with approximately 2.4 million free travel awards that were
expected to be redeemed for free travel on Continental, Continental Express,
Continental Connection, CMI or alliance airlines. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Critical Accounting Policies and Estimates - Frequent Flier
Accounting" for a detailed discussion concerning the accounting treatment of our
OnePass frequent flier program.
Our "EliteAccess" service is offered to
OnePass members who qualify for "Elite" status (based on the number of paid
flight miles and the fares purchased), first class and BusinessFirst ticket
holders and travelers with high yield coach tickets who qualify as "Elite for
the Day." EliteAccess passengers receive preferential treatment in
the check-in, boarding and baggage claim areas and have special security lanes
at certain airports. We also provide a guarantee of no middle seat
assignment for those passengers using a full-fare, unrestricted
ticket.
As of December 31, 2008, we had
approximately 42,490 employees, which, due to the number of part-time employees,
represents 40,460 full-time equivalent employees consisting of approximately
16,940 customer service agents, reservations agents, ramp and other airport
personnel, 8,685 flight attendants, 6,235 management and clerical employees,
4,385 pilots, 4,095 mechanics and 120 dispatchers. Approximately 44%
of our full-time equivalent employees are represented by unions. The
following table reflects the principal collective bargaining agreements, and
their respective amendable dates, of Continental and CMI:
Employee Group
|
Approximate
Number
of
Full-time
Equivalent Employees
|
Representing Union
|
Contract
Amendable Date
|
|
|
|
|
Continental
Flight
Attendants
|
8,395
|
|
International
Association of
Machinists
and Aerospace
Workers
("IAM")
|
December
2009
|
|
|
|
|
|
Continental
Pilots
|
4,385
|
|
Air
Line Pilots Association
International
("ALPA")
|
December
2008
|
|
|
|
|
|
Continental
Mechanics
|
3,975
|
|
International
Brotherhood of
Teamsters
("Teamsters")
|
December
2008
|
|
|
|
|
|
CMI
Fleet and Passenger
Service
Employees
|
430
|
|
Teamsters
|
November
2011
|
|
|
|
|
|
CMI
Flight Attendants
|
290
|
|
IAM
|
December
2010
|
|
|
|
|
|
Continental
Dispatchers
|
120
|
|
Transport
Workers Union
("TWU")
|
December
2008
|
|
|
|
|
|
CMI
Mechanics
|
120
|
|
Teamsters
|
December
2009
|
|
|
|
|
|
Continental
Flight
Simulator
Technicians
|
40
|
|
TWU
|
December
2008
|
The collective bargaining agreements
with our pilots, mechanics and certain other work groups became amendable in
December 2008. During 2008, we met with representatives of the
applicable unions to engage in bargaining for amended collective bargaining
agreements. These talks will continue in 2009 with a goal of reaching
agreements that are fair to us and to our employees. Although there
can be no assurance that our generally good labor relations and high labor
productivity will continue, the preservation of good relations with our
employees is a significant component of our business
strategy. Additional information about our employee initiatives and
corporate social responsibility efforts can be found in our Global Citizenship
Report on our website, continental.com.
Industry
Regulation and Airport Access
Federal
Regulations. We provide air transportation under certificates
of public convenience and necessity issued by the U.S. Department of
Transportation ("DOT"). These certificates may be altered, amended,
modified or suspended by the DOT if public convenience and necessity so require,
or may be revoked for intentional failure by the holder of the certificate to
comply with the terms and conditions of a certificate. Continental
and CMI each operate under a separate air carrier certificate issued by the
Federal Aviation Administration ("FAA"), which may be amended, suspended or
revoked by the FAA if the public interest and safety in air commerce so
require.
Airlines are regulated by the FAA,
primarily in the areas of flight operations, maintenance, ground facilities and
other technical matters. Pursuant to these regulations, we have
established, and the FAA has approved, a maintenance program for each type of
aircraft we operate that provides for the ongoing maintenance of our aircraft,
ranging from frequent routine inspections to major overhauls.
Our future ability to maintain and/or
grow capacity could be adversely affected by additional laws, regulations and
growth constraints. The FAA has designated certain airports,
including New York Liberty and New York's John F. Kennedy International Airport
("Kennedy") and LaGuardia Airport ("LaGuardia") as "high density traffic
airports" and has limited the number of departure and arrival slots at those
airports. To address concerns about airport congestion, the FAA has
imposed operating restrictions at these airports including recent additional
capacity reductions at LaGuardia. The FAA has designated New York
Liberty and Kennedy as Level 3 Coordinated Airports under the International Air
Transport Association Worldwide Scheduling Guidelines, which requires us to
participate in seasonal FAA procedures for capacity allocation and schedule
coordination for New York Liberty and to have slots to operate at that
airport. Although we do not believe that these current operating
restrictions will have a material effect on our operations at New York Liberty,
we cannot predict the impact of future capacity constraints or allocations or
other restrictions on our operations that might be imposed by the FAA, Congress
or other regulators, which might have a material adverse effect on
us.
Although currently not effective
because of a court order, the FAA has issued rules that continue the FAA
requirement through 2019 that carriers conducting commercial flights at New York
Liberty, Kennedy and LaGuardia have a slot for arrival or departure at these
airports. Under these rules, the FAA will maintain current slot
holdings of airlines at New York Liberty, Kennedy and LaGuardia, except for the
annual withdrawal through 2013 and auction to the highest bidder of (i) 2% of
each airline's slots at New York Liberty and Kennedy that exceed 20 and (ii) 2%
of each airline's slots at LaGuardia. In addition, these rules
provide that the FAA will withdraw and retire 5% of each airline's slots at
LaGuardia. The withdrawal and auctioning to the highest bidder of our
slots could have a material adverse effect on us by causing us to incur
substantial costs to successfully bid for them or by reducing our slot
portfolio, requiring us to terminate flights associated with these slots and
increasing our costs to operate at these airports. Joined by our
airline trade association, the Air Transport Association, and the Port Authority
of New York and New Jersey, which operates New York Liberty, Kennedy and
LaGuardia, we have challenged the legality of the FAA withdrawal of slots from
airlines for non-operational reasons and the slot auction in the U.S. Court of
Appeals for the D.C. Circuit. The court has ordered the FAA not to
implement the rules while our challenge is pending, so the rules have not become
effective and no slot withdrawals or auctions have occurred under such
rules.
Under the Aviation and Transportation
Security Act (the "Aviation Security Act") and related federal regulations,
substantially all security screeners at airports are federal employees and
significant other elements of airline and airport security are overseen and
performed by federal employees, including federal security managers, federal law
enforcement officers, federal air marshals and federal security
screeners. Among other matters, the law mandates improved flight deck
security, deployment of federal air marshals onboard flights, improved airport
perimeter access security, airline crew security training, enhanced security
screening of passengers, baggage, cargo, mail, employees and vendors, enhanced
training and qualifications of security screening personnel, additional
provision of passenger data to U.S. Customs and Border Protection and enhanced
background checks.
Airports from time to time seek to
increase the rates charged to airlines, and the ability of airlines to contest
such increases has been restricted by federal statutes, DOT and FAA regulations
and judicial decisions. Under the Aviation Security Act, funding for
passenger security is provided in part by a per enplanement ticket tax
(passenger security fee) of $2.50, subject to a $5 per one-way trip
cap. The Aviation Security Act also allows the TSA to assess an
aviation security infrastructure fee on each airline up to the total amount
spent by that airline on passenger and property screening in calendar year 2000
and, starting in fiscal year 2005, to impose a new methodology for calculating
assessments. TSA has continued to assess this fee on
airlines. Furthermore, because of significantly higher security and
other costs incurred by airports since September 11, 2001, many airports have
significantly increased their rates and charges to airlines, including us, and
may do so again in the future. Most airports where we operate
impose passenger facility charges of up to $4.50 per segment, subject to an $18
per roundtrip cap.
In time of war or during a national
emergency or defense-oriented situation, we and other air carriers could be
required to provide airlift services to the Air Mobility Command under the Civil
Reserve Air Fleet program ("CRAF"). If we were required in the future
to provide a substantial number of aircraft and crew to the Air Mobility Command
under CRAF, our operations could be materially adversely affected.
International
Regulations. The availability of international routes to U.S.
carriers is regulated by treaties and related agreements between the United
States and foreign governments. The United States typically follows
the practice of encouraging foreign governments to accept multiple carrier
designation on foreign routes, although certain countries have sought to limit
the number of carriers allowed to fly these routes. Certain foreign governments
impose limitations on the ability of air carriers to serve a particular city
and/or airport within their country from the United States. Bilateral
agreements between the United States and foreign governments often include
restrictions on the number of carriers (designations), operations (frequencies),
or airports (points) that can be served. When designations are
limited, only a certain number of airlines of each country may provide service
between the countries. When frequencies are limited, operations are
restricted to a certain number of weekly flights (as awarded by the United
States to the domestic carrier, based on the bilateral limits). When
points are limited, only certain airports within a country can be
served.
For a U.S. carrier to fly to any
international destination that is not subject to an "open skies" agreement
(meaning all carriers have access to any destination in a particular country),
it must first obtain approval from both the United States and the foreign
country where the destination is located, which is referred to as a "foreign
route authority." Route authorities to some international
destinations can be sold between carriers, and their value can vary because of
limits on accessibility. For those international routes where there
is a limit on the number of carriers or frequency of flights, studies have shown
that these routes have more value than those without restrictions. To
the extent foreign countries adopt open skies policies or otherwise liberalize
or eliminate restrictions on international routes, those actions would increase
competition and potentially decrease the value of a route. We cannot
predict what laws, treaties and regulations relating to international routes
will be adopted or their resulting impact on us, but the overall trend in recent
years has been an increase in the number of open skies agreements and the impact
of any future changes in governmental regulation of international routes could
be significant.
Environmental
Regulations. Many aspects of airlines' operations are also
subject to increasingly stringent federal, state, local and foreign laws
protecting the environment, including the imposition of additional taxes on
airlines or their passengers. Future regulatory developments in the
United States and abroad could adversely affect operations and increase
operating costs in the airline industry. The European Union has
issued a directive to member states to include aviation in its Greenhouse Gas
Emissions Trading Scheme by February 2010, which will require us to have
emissions allowances to operate flights to and from member states of the
European Union in January 2012 and thereafter, including flights between the
United States and the European Union. The U.S. government and other
non-EU governments are expected to challenge the application of the EU emissions
trading scheme to their airlines; however, we may be forced to comply with the
EU emission trading scheme requirements during a legal challenge. We
may have to purchase emissions allowances through the EU emissions trading
scheme to cover EU flights that exceed our free allotment, which could result in
substantial costs for us.
Other regulatory actions that may be
taken in the future by the U.S. government, foreign governments (including the
European Union), or the International Civil Aviation Organization to address
climate change or limit the emission of greenhouse gases by the aviation sector
are unknown at this time. Climate change legislation is anticipated
in the United States, but it is currently unknown how the potential legislation
will be applied to the aviation industry. The impact to us and our
industry from such actions is likely to be adverse and could be significant,
particularly if regulators were to conclude that emissions from commercial
aircraft cause significant harm to the upper atmosphere or have a greater impact
on climate change than other industries. Potential actions may
include the imposition of requirements to purchase emission offsets or credits,
which could require participation in emission trading (such as required in the
European Union), substantial taxes on emissions and growth restrictions on
airline operations, among other potential regulatory actions.
The DOT allows local airport
authorities to implement procedures designed to abate special noise problems,
provided those procedures do not unreasonably interfere with interstate or
foreign commerce or the national transportation system. Some
airports, including the major airports at Boston, Chicago, Los Angeles, San
Diego, Orange County (California), Washington National, Denver and San
Francisco, have established airport restrictions to limit noise, including
restrictions on aircraft types to be used and limits on the number and
scheduling of hourly or daily operations. In some instances, these
restrictions have caused curtailments in services or increased operating costs,
and could limit our ability to expand our operations at the affected
airports. Local authorities at other airports could consider adopting
similar noise regulations. Some foreign airports, including major
airports in countries such as the United Kingdom, France, Spain, Belgium,
Germany and Japan, have adopted similar restrictions to limit noise, and in some
instances our operations and costs have been adversely affected in the same
manner as described above.
Item
1A. Risk Factors.
Risk
Factors Relating to the Company
Fuel
prices or disruptions in fuel supplies could have a material adverse effect on
us. Expenditures for
fuel and related taxes represent the largest single cost of operating our
business. These costs include fuel costs on flights flown for us
under capacity purchase agreements. Our operations depend on the
availability of jet fuel supplies, and our results are significantly impacted by
changes in jet fuel prices, which have been extremely volatile in recent
months. Jet fuel prices have recently decreased precipitously after
increasing significantly in 2007 and achieving record levels in
2008.
Although we experienced some success in
raising ticket prices and adding or increasing other fees during part of 2008,
we were unable to increase our revenue sufficiently to keep pace with the
escalating fuel prices and suffered a substantial loss in 2008. If
fuel prices return to these historically high levels in the future, we may again
be unable to increase fares or other fees sufficiently to offset fully our
increased fuel costs.
We routinely hedge a portion of our
future fuel requirements. However, there can be no assurance that, at
any given point in time, our hedge contracts will provide any particular level
of protection against increased fuel costs or that our counterparties will be
able to perform under our hedge contracts, such as in the case of a
counterparty's bankruptcy. Additionally, a deterioration in our
financial condition could negatively affect our ability to enter into new hedge
contracts in the future.
Significant declines in fuel prices
(such as those experienced over the past several months) may increase the costs
associated with our fuel hedging arrangements to the extent we have entered into
swaps or collars. Swaps and the put option sold as part of a collar
obligate us to make payments to the counterparty upon settlement of the
contracts if the price of the commodity hedged falls below the agreed upon
amount. Declining crude oil prices have resulted in us being required
to post significant amounts of collateral to cover potential amounts owed with
respect to contracts that have not yet settled. Additionally, lower
fuel prices may result in increased industry capacity and lower fares,
especially to the extent that reduced fuel costs justify increased utilization
by airlines of less fuel efficient aircraft that are unprofitable during periods
of higher fuel prices.
Fuel prices could increase dramatically
and supplies could be disrupted as a result of international political and
economic circumstances, such as decreasing international demand resulting from
the prevailing global recession, conflicts or instability in the Middle East or
other oil producing regions and diplomatic tensions between the United States
and oil producing nations, as well as OPEC production decisions, disruptions of
oil imports, environmental concerns, weather, refinery outages or maintenance
and other unpredictable events.
Further volatility in jet fuel prices
or disruptions in fuel supplies, whether as a result of natural disasters or
otherwise, could have a material adverse effect on our results of operations,
financial condition and liquidity.
We have
decided to change our global airline alliance, which could involve significant
transition and integration risks. During 2008, we
entered into framework agreements with United, Lufthansa and Air Canada, each a
member of Star Alliance, pursuant to which we are winding down and exiting our
participation in our current alliance, SkyTeam, and plan to join United,
Lufthansa and Air Canada (and other member airlines) in Star
Alliance. This change from SkyTeam to Star Alliance could involve
significant transition and integration risks, both because we are required to
end our participation in SkyTeam and wind down our existing SkyTeam
relationships prior to our being able to participate in Star Alliance and
because we may incur costs and/or a loss of revenue (or a delay in anticipated
increased revenue from the new alliance) in connection with these
changes. The significant transition and integration risks
include:
·
|
our
inability to terminate our existing agreements with individual SkyTeam
members and to commence participation in Star Alliance in the transition
period we have anticipated;
|
·
|
significant
revenue dilution as we wind down our participation in SkyTeam and/or
insufficient or delay in receipt of revenue from our participation in Star
Alliance, including an inability to maintain our key customer and business
relationships as we transition to Star Alliance;
|
·
|
our
incurrence, as a result of the wind down of our SkyTeam relationships, of
costs in excess of our expectations and/or costs of an unanticipated
nature, the amount and timing of which cannot be estimated at this time,
but which could be material individually or in the
aggregate;
|
·
|
an
inability to join or a delay in joining Star Alliance due to lack of
applicable approvals or difficulty in satisfying entrance requirements,
including the requirement that we enter into certain bilateral agreements
with each member of Star Alliance; and
|
·
|
difficulties
integrating our technology processes with Star Alliance
members.
|
In addition, the full implementation of
some of the arrangements contemplated by our framework agreements requires the
approval of domestic and foreign regulatory agencies. These agencies
may deny us necessary approvals, delay certain approvals or, in connection with
granting any such approvals, impose requirements, limitations or costs on us or
on Star Alliance members, or require us or them to divest slots, gates, routes
or other assets. Such actions may impair the value to us of entering
the alliance or make participation in the alliance by us or them unattractive
and, in certain cases, could prevent us from consummating the transactions
contemplated by the framework agreements.
If any of these risks or costs
materialize, they could have a material adverse effect on our business, results
of operations and financial condition.
The
troubled global capital markets coupled with our high leverage may affect our
ability to satisfy our significant financing needs or meet our
obligations. As is the case
with many of our principal competitors, we have a high proportion of debt
compared to our capital. We have a significant amount of fixed
obligations, including debt, aircraft leases and financings, leases of airport
property and other facilities and pension funding obligations. At
December 31, 2008, we had approximately $5.9 billion of long-term debt and
capital lease obligations, including $2.4 billion that will come due by the end
of 2011.
In addition, we have substantial
non-cancelable commitments for capital expenditures, including the acquisition
of new aircraft and related spare engines. We have financing in place
for three of the Boeing 737 aircraft scheduled for delivery in 2009 and have
reached an agreement in principle with a bank for it to provide financing for
three other Boeing 737 aircraft scheduled for delivery in
2009. Boeing has agreed to provide backstop financing for all of the
additional 11 Boeing 737 aircraft scheduled for delivery through February 2010
(or 14 such additional aircraft if we fail to reach a definitive agreement for
the financing described in the previous sentence), subject to customary
conditions. However, we do not have backstop financing or any other
financing currently in place for our other aircraft on order.
The current economic crisis has
severely disrupted the global capital markets, resulting in a diminished
availability of financing and higher cost for financing that is
obtainable. If the capital markets do not improve, whether through
measures implemented by the U.S. and foreign governments, such as the Emergency
Economic Stabilization Act of 2008, or otherwise, we may be unable to obtain
financing on acceptable terms (or at all) to refinance certain maturing debt we
would normally expect to refinance and to satisfy future capital
commitments. As a result, the continued lack of liquidity in the
capital markets could have a material adverse effect on our ability to honor our
contractual commitments and our results of operations and financial
condition.
Credit
rating downgrades could have a material adverse effect on our
liquidity. Reductions in our
credit ratings may increase the cost and reduce the availability of financing to
us in the future. We do not have any debt obligations that would be
accelerated as a result of a credit rating downgrade. However, we
would have to post additional collateral under our credit card processing
agreements with Chase Bank USA, N.A. ("Chase") and American Express and under
our workers' compensation program if our debt rating falls below specified
levels.
Failure
to meet our financial covenants would adversely affect our liquidity. Our credit card
processing agreement with Chase (the "Chase processing agreement") contains
financial covenants which require, among other things, that we post additional
cash collateral if we fail to maintain (1) a minimum level of unrestricted cash,
cash equivalents and short-term investments, (2) a minimum ratio of unrestricted
cash, cash equivalents and short-term investments to current liabilities of 0.25
to 1.0 or (3) a minimum senior unsecured debt rating of at least Caa3 and CCC-
from Moody's and Standard & Poor's, respectively. If a covenant
trigger under the Chase processing agreement results in our posting additional
collateral under that agreement, we would also be required to post additional
collateral under our credit card processing agreement with American
Express.
The amount of additional cash
collateral that we may be required to post in the event of our failure to comply
with the financial covenants described above, which is based on our then-current
air traffic liability exposure (as defined in each agreement), could be
significant. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources
- Other Liquidity Matters - Bank Card Processing Agreements" for a detailed
discussion of our collateral posting obligations under these credit card
processing agreements.
Depending on our unrestricted cash,
cash equivalents and short-term investments balance at the time, the posting of
a significant amount of cash collateral could cause our unrestricted cash and
short-term investments balance to fall below the minimum balance of $1.0 billion
required under our $350 million secured term loan facility, resulting in a
default under that facility. The posting of such additional
collateral under these circumstances and/or the acceleration of amounts borrowed
under our secured term loan facility (or other remedies pursued by the lenders
thereunder) would likely have a material adverse effect on our financial
condition.
We are currently in compliance with all
of the covenants under these agreements.
Our
obligations for funding our defined benefit pension plans are affected by
factors beyond our control. We have defined
benefit pension plans covering substantially all of our U.S. employees other
than employees of Chelsea Food Services and CMI. The timing and
amount of our funding requirements under these plans depend upon a number of
factors, including labor negotiations and changes to pension plan benefits as
well as factors outside of our control, such as the number of retiring
employees, asset returns, interest rates and changes in pension
laws. Changes to these and other factors, such as liquidity
requirements, that can significantly increase our funding requirements could
have a material adverse effect on our financial condition.
Delays in
scheduled aircraft deliveries may adversely affect our international
growth. Our future success depends, in part, on continuing our
profitable international growth. Because all of our long-range
aircraft are already fully utilized, we will need to acquire additional
long-range aircraft to continue our projected international
growth. Although we have contractual commitments to purchase the
long-range aircraft that we currently believe will be necessary for our
international growth, significant delays in their deliveries have occurred,
adversely affecting our planned international growth. If significant
delays in the deliveries of these new aircraft continue to occur, we would need
to either further curtail our international growth or try to make alternate
arrangements to acquire aircraft, possibly on less financially favorable terms,
including higher ownership and operating costs.
Labor
disruptions could adversely affect our operations. Although we enjoy
generally good relations with our employees, we can provide no assurance that we
will be able to maintain these good relations in the future or avoid labor
disruptions, including a strike. Many of our collective bargaining
agreements have amendable dates that began in December 2008, including those
with the unions representing our pilots and mechanics. We are
currently in talks with representatives of the applicable unions. We
cannot predict the outcome of these negotiations, and any labor disruption,
including a strike, that results in a prolonged significant reduction in flights
would have a material adverse effect on our results of operations and financial
condition.
Our labor
costs may not be competitive. Labor costs
constitute a significant percentage of our total operating costs. All
of the major hub-and-spoke carriers with whom we compete have achieved
significant labor cost reductions, whether in or out of
bankruptcy. We believe that our wages, salaries and benefits cost per
available seat mile, measured on a stage length adjusted basis, is higher than
that of many of our competitors. These higher labor costs may
adversely affect our ability to achieve and sustain profitability while
competing with other airlines that have achieved lower relative labor
costs. Additionally, we cannot predict the outcome of our ongoing
negotiations with our unionized workgroups, although significant increases in
the pay and benefits resulting from new collective bargaining agreements could
have a material adverse effect on us.
If we
experience problems with certain of our third party regional operators, our
operations could be materially adversely affected. All of our
regional operations are conducted by third party operators on our behalf,
primarily under capacity purchase agreements. Due to our reliance on
third parties to provide these essential services, we are subject to the risks
of disruptions to their operations, which may result from many of the same risk
factors disclosed in this report. In addition, we may also experience
disruption to our regional operations if we terminate the capacity purchase
agreement with one or more of our current operators and transition the services
to another provider. As our regional segment provides revenue to us
directly and indirectly (by providing flow traffic to our hubs), a significant
disruption to our regional operations could have a material adverse effect on
our results of operations and financial condition.
Interruptions
or disruptions in service at one of our hub airports could have a material
adverse effect on our operations. We operate
principally through our hub operations at New York Liberty, Houston Bush,
Cleveland Hopkins and Guam. Substantially all of our flights either
originate from or fly into one of these locations, contributing to a large
amount of "origin and destination" traffic. A significant
interruption or disruption in service at one of our hubs resulting from air
traffic control delays, weather conditions or events, growth constraints,
relations with third party service providers, failure of computer systems, labor
relations, fuel supplies, terrorist activities or otherwise could result in the
cancellation or delay of a significant portion of our flights and, as a result,
our business could be materially adversely affected.
We could
experience adverse publicity and declining revenues as a result of an accident
involving our aircraft or the aircraft of our regional carriers. Any accident
involving an aircraft that we operate or an aircraft that is operated under our
brand by one of our regional carriers could have a material adverse effect on us
if such accident created a public perception that our operations or those of our
regional carriers are less safe or reliable than other airlines, resulting in
passengers being reluctant to fly on us or our regional carriers. In
addition, any such accident could expose us to significant tort
liability. Although we currently maintain liability insurance in
amounts and of the type we believe to be consistent with industry practice to
cover damages arising from any such accidents, and our regional carriers carry
similar insurance and generally indemnify us for their operations on our behalf,
if our liability exceeds the applicable policy limits or the ability of a
carrier to indemnify us, we could incur substantial losses from an
accident.
A
significant failure or disruption of the computer systems on which we rely could
adversely affect our business. We depend heavily
on computer systems and technology to operate our business, such as flight
operations systems, communications systems, airport systems and reservations
systems (including continental.com and third party global distribution systems).
These systems could suffer substantial or repeated disruptions due to events
beyond our control, including natural disasters, power failures, terrorist
attacks, equipment or software failures, computer viruses or
hackers. Any such disruptions could materially impair our flight and
airport operations and our ability to market our services, and could result in
increased costs, lost revenue and the loss or compromise of important
data. Although we have taken measures in an effort to reduce the
adverse effects of certain potential failures or disruptions, if these steps are
not adequate to prevent or remedy the risks, our business may be materially
adversely affected.
Our net
operating loss carryforwards may be limited. At December 31,
2008, we had estimated net operating loss carryforwards ("NOLs") of $3.8 billion
for federal income tax purposes that expire beginning in 2009 and continuing
through 2028. Section 382 of the Internal Revenue Code ("Section
382") imposes limitations on a corporation's ability to utilize NOLs if it
experiences an "ownership change." In general terms, an ownership
change may result from transactions increasing the ownership of certain
stockholders in the stock of a corporation by more than 50 percentage points
over a three-year period.
In the event of an ownership change,
utilization of our NOLs would be subject to an annual limitation under Section
382 determined by multiplying the value of our stock at the time of the
ownership change by the applicable long-term tax-exempt rate (which is 5.40% for
December 2008). Any unused annual limitation may be carried over to
later years.
For purposes of Section 382, increases
in share holdings by, or that result in a person becoming, a holder of 5% or
more of the outstanding shares of our common stock are aggregated for purposes
of determining whether an "ownership change" has occurred. Because
our common stock has been trading at low market prices, the cost of acquiring a
sufficient number of shares of our common stock to become a holder of 5% or more
of the outstanding shares, and the cost of acquiring additional shares by
existing holders, has decreased significantly from historical levels, increasing
the possibility that we could experience an "ownership
change." Although we cannot currently predict whether or when such an
"ownership change" may occur, an ownership change as of December 31, 2008 would
have resulted in a $119 million limit to our annual NOL utilization, before
consideration of any built-in gains. The imposition of this
limitation on our ability to use our NOLs to offset future taxable income could
cause us to pay U.S. federal income taxes earlier than if such limitation were
not in effect and could cause such NOLs to expire unused, reducing or
eliminating the benefit of such NOLs. In addition, depending on the
market value of our common stock at the time of any such ownership change, we
may be required to recognize a significant non-cash tax charge, the amount of
which we cannot estimate at this time.
The
global recession could continue to result in less demand for air
travel. The U.S. and
global economies are currently in a recession. The airline industry
is highly cyclical, and the level of demand for air travel is correlated to the
strength of the U.S. and global economies. For 2008, a year in which
the U.S. gross domestic product experienced its largest contraction in 25 years,
traffic for the seven largest U.S. carriers, measured in miles flown by revenue
passengers, fell approximately 2% as compared to 2007, the first such annual
decline in five years. This decline in demand has disproportionately
reduced the volume of high yield traffic in the premium cabins on international
flights, as many business and leisure travelers are either curtailing their
international travel or purchasing lower yield economy tickets. A
prolonged recession in the U.S. or global economies that continues to contribute
to the loss of business and leisure traffic, particularly the loss of high yield
international traffic in our first class and BusinessFirst cabins, could have a
material adverse effect on our results of operations and financial
condition.
The
airline industry is highly competitive and susceptible to price
discounting. The U.S. airline industry is characterized by
substantial price competition, especially in domestic
markets. Carriers use discount fares to stimulate traffic during
periods of slack demand, or when they begin service to new cities or have excess
capacity, to generate cash flow and to establish, increase or preserve market
share. Some of our competitors have greater financial resources
(including a larger percentage or more favorable fuel hedges against price
increases) and/or lower cost structures than we do, some of which is the result
of bankruptcies and/or mergers. In recent years, the domestic market
share held by low-cost carriers has increased significantly and is expected to
continue to increase. The increased market presence of low-cost
carriers, which engage in substantial price discounting, has diminished the
ability of the network carriers to maintain sufficient fare levels in domestic
markets to achieve sustained profitability. We cannot predict whether
or for how long these trends will continue.
In addition to price competition,
airlines also compete for market share by increasing the size of their route
system and the number of markets they serve. Several of our domestic
competitors have increased their international capacity, including service to
some destinations that we currently serve. Additionally, the "open
skies" agreement between the United States and the European Union, which became
effective on March 30, 2008 is resulting in increased competition from European
and U.S. airlines in these international markets, and may give rise to
additional consolidation or better integration opportunities among European
carriers. The increased competition in these international markets,
particularly to the extent our competitors engage in price discounting, may have
a material adverse effect on our results of operations, financial condition or
liquidity.
Expanded
government regulation could further increase our operating costs and restrict
our ability to conduct our business. Airlines are
subject to extensive regulatory and legal compliance requirements that result in
significant costs and can adversely affect us. Additional laws,
regulations, airport rates and charges and growth constraints have been proposed
from time to time that could significantly increase the cost of airline
operations or reduce revenue. In addition, to address concerns about
airport congestion, the FAA has designated certain airports, including New York
Liberty, Kennedy and LaGuardia as "high density traffic airports," and has
imposed operating restrictions at these three airports, including recent
additional capacity reductions at LaGuardia. In addition, the FAA has
designated New York Liberty and Kennedy as Level 3 Coordinated Airports under
the International Air Transport Association Worldwide Scheduling Guidelines,
which requires us to participate in seasonal FAA procedures for capacity
allocation and schedule coordination for New York Liberty and to have slots to
operate at that airport. Although we do not believe that these
current operating restrictions will have a material adverse effect on our
operations at New York Liberty, we cannot predict the impact of future capacity
constraints or allocations or other restrictions on our operations that might be
imposed by the FAA, Congress or other regulators, which might have a material
adverse effect on us.
Additional restrictions on airline
routes and takeoff and landing slots have been or may be proposed that could
affect rights of ownership and transfer. For example, although
currently not effective because of a court order, the FAA has issued rules that
continue the FAA requirement to have a slot for arrival or departure at New York
Liberty, Kennedy and LaGuardia through 2019. These rules provide that
the FAA would withdraw and auction to the highest bidder annually through 2013 a
portion of each airline's slots at New York Liberty, Kennedy and
LaGuardia. Joined by our airline trade association, the Air Transport
Association, and the Port Authority of New York and New Jersey, which operates
New York Liberty, Kennedy and LaGuardia, we have challenged the legality of the
FAA withdrawal of slots from airlines for non-operational reasons and the slot
auction in the U.S. Court of Appeals for the D.C. Circuit. The court
has ordered the FAA not to implement the rules while our challenge is pending,
so the rules have not become effective and no slot withdrawals or auctions have
occurred under such rules. We cannot provide any assurances that we
will prevail in this challenge, and the withdrawal and auctioning to the highest
bidder of our slots could have a material adverse effect on us by causing us to
incur substantial costs to successfully bid for them or by reducing our slot
portfolio, requiring us to terminate flights associated with these slots and
increasing our costs to operate at these airports.
The FAA from time to time issues
directives and other regulations relating to the maintenance and operation of
aircraft that require significant expenditures or operational
restrictions. Some FAA requirements cover, among other things,
retirement of older aircraft, security measures, collision avoidance systems,
airborne windshear avoidance systems, noise abatement and other environmental
concerns, aircraft operation and safety and increased inspections and
maintenance procedures to be conducted on older aircraft.
Many aspects of airlines' operations
also are subject to increasingly stringent federal, state, local and foreign
laws protecting the environment, including the imposition of additional taxes on
airlines or their passengers. Future regulatory developments in the
United States and abroad could adversely affect operations and increase
operating costs in the airline industry. The European Union has
issued a directive to member states to include aviation in its Greenhouse Gas
Emissions Trading Scheme by February 2010, which will require us to have
emissions allowances to operate flights to and from member states of the
European Union in January 2012 and thereafter, including flights between the
United States and the European Union. The U.S. government and other
non-EU governments are expected to challenge the application of the EU emissions
trading scheme to their airlines; however, we may be forced to comply with the
EU emission trading scheme requirements during a legal challenge. We
may have to purchase emissions allowances through the EU emissions trading
scheme to cover EU flights that exceed our free allotment, which could result in
substantial costs for us.
Other regulatory actions that may be
taken in the future by the U.S. government, foreign governments (including the
European Union), or the International Civil Aviation Organization to address
concerns about climate change and air emissions from the aviation sector are
unknown at this time. Climate change legislation is anticipated in
the United States, but it is currently unknown how the potential legislation
will be applied to the aviation industry. The impact to us and our
industry from such actions is likely to be adverse and could be significant,
particularly if regulators were to conclude that emissions from commercial
aircraft cause significant harm to the upper atmosphere or have a greater impact
on climate change than other industries. Potential actions may
include the imposition of requirements to purchase emission offsets or credits,
which could require participation in emission trading (such as required in the
European Union), substantial taxes on emissions and growth restrictions on
airline operations, among other potential regulatory actions.
Further, the ability of U.S. carriers
to operate international routes is subject to change because the applicable
arrangements between the United States and foreign governments may be amended
from time to time, or because appropriate slots or facilities are not made
available. We cannot provide assurance that current laws and
regulations, or laws or regulations enacted in the future, will not adversely
affect us.
Additional
terrorist attacks or international hostilities may further adversely affect our
financial condition, results of operations and liquidity. The
terrorist attacks of September 11, 2001 involving commercial aircraft severely
and adversely affected our financial condition, results of operations and
liquidity and the airline industry generally. Additional terrorist
attacks, even if not made directly on the airline industry, or the fear of such
attacks (including elevated national threat warnings or selective cancellation
or redirection of flights due to terror threats such as the August 2006
terrorist plot targeting multiple airlines, including us), could negatively
affect us and the airline industry. The potential negative effects
include increased security, insurance and other costs for us and lost revenue
from increased ticket refunds and decreased ticket sales. Our
financial resources might not be sufficient to absorb the adverse effects of any
further terrorist attacks or other international hostilities involving the
United States.
Additional
security requirements may increase our costs and decrease our
traffic. Since September
11, 2001, the Department of Homeland Security ("DHS") and TSA have implemented
numerous security measures that affect airline operations and costs, and they
are likely to implement additional measures in the future. Most
recently, DHS has begun to implement the US-VISIT program (a program of
fingerprinting and photographing foreign visa holders), announced that it will
implement greater use of passenger data for evaluating security measures to be
taken with respect to individual passengers, expanded the use of federal air
marshals on our flights (who do not pay for their seats and thus displace
revenue passengers and cause increased customer complaints from displaced
passengers), begun investigating a requirement to install aircraft security
systems (such as devices on commercial aircraft as countermeasures against
portable surface to air missiles) and expanded cargo and baggage
screening. DHS also has required certain flights to be cancelled on
short notice for security reasons, and has required certain airports to remain
at higher security levels than other locations. In addition, foreign
governments also have begun to institute additional security measures at foreign
airports we serve, out of their own security concerns or in response to security
measures imposed by the United States.
Moreover, the TSA has imposed measures
affecting the contents of baggage that may be carried on an
aircraft. The TSA and other security regulators could impose other
measures as necessary to respond to security threats that may arise in the
future.
A large portion of the costs of these
security measures is borne by the airlines and their passengers, and we believe
that these and other security measures have the effect of decreasing the demand
for air travel and the overall attractiveness of air transportation as compared
to other modes of transportation. Additional security measures
required by the U.S. and foreign governments in the future, such as further
expanded cargo screening, might increase our costs or decrease the demand for
air travel, adversely affecting our financial results.
The
airline industry is heavily taxed. The airline
industry is subject to extensive government fees and taxation that negatively
impact our revenue. The U.S. airline industry is one of the most
heavily taxed of all industries. These fees and taxes have grown
significantly in the past decade for domestic flights, and various U.S. fees and
taxes also are assessed on international flights. In addition, the
governments of foreign countries in which we operate impose on U.S. airlines,
including us, various fees and taxes, and these assessments have been increasing
in number and amount in recent years. Certain of these fees and taxes
must be included in the fares we advertise or quote to our
customers. Due to the competitive revenue environment, many increases
in these fees and taxes have been absorbed by the airline industry rather than
being passed on to the passenger. Further increases in fees and taxes
may reduce demand for air travel and thus our revenues.
Airlines
may continue to participate in industry consolidation or alliances, which could
have a material adverse effect on us. We are facing
stronger competition from carriers that have participated in industry
consolidation and from expanded airline alliances and joint
ventures.
Since its deregulation in 1978, the
U.S. airline industry has undergone substantial consolidation and additional
consolidation may occur in light of the recently completed merger of Delta and
Northwest, which changed the competitive environment for us and the entire
airline industry. As a result of the announcement of the
Delta/Northwest merger agreement, we conducted a comprehensive review of our
strategic alternatives and announced in April 2008 that we had determined that
the best course for us was not to merge with another airline at such
time. Through consolidation, carriers have the opportunity to
significantly expand the reach of their networks, which is of primary importance
to business travelers, and to achieve cost reductions by eliminating redundancy
in their networks and their management structures.
Through participation in airline
alliances and/or joint ventures, carriers granted anti-trust immunity by the
appropriate regulatory authorities are able to coordinate their routes, pool
their revenues and costs and enjoy other mutual benefits, such as frequent flier
program reciprocity, achieving many of the benefits of
consolidation. For example, Air France-KLM, Delta and Northwest have
received anti-trust immunity to form a new trans-Atlantic joint venture among
those airlines and to coordinate routes, fares, schedules and other matters
among those airlines, Alitalia and CSA Czech Airlines. American
Airlines, British Airways and Iberia have requested anti-trust immunity for a
similar trans-Atlantic joint venture, which would also involve many of the same
benefits.
There may be additional consolidation
or changes in airline alliances and/or joint ventures in the future, any of
which could change the competitive landscape for the airline industry and have a
material adverse effect on us.
Insurance
costs could increase materially or key coverage could become
unavailable. The September 11,
2001 terrorist attacks led to a significant increase in insurance premiums and a
decrease in the insurance coverage available to commercial
airlines. Furthermore, our ability to continue to obtain certain
types of insurance remains uncertain. Since the terrorist attacks,
the U.S. government has provided war risk (terrorism) insurance to U.S.
commercial airlines to cover losses. War risk insurance in amounts
necessary for our operations, and at premiums that are not excessive, is not
currently available in the commercial insurance market. If the
government discontinues this coverage in whole or in part, we may be able to
obtain comparable coverage in the commercial insurance market only, if it is
available at all, for substantially higher premiums and on more restrictive
terms. If we are unable to obtain adequate war risk insurance, our
business could be materially and adversely affected.
Public
health threats affecting travel behavior could have a material adverse effect on
the industry. Public health threats, such as the bird flu,
Severe Acute Respiratory Syndrome (SARs) and other highly communicable diseases,
outbreaks of which have occurred in various parts of the world in which we
operate, could adversely impact our operations and the worldwide demand for air
travel. Any quarantine of personnel or inability to access our
facilities or aircraft could adversely affect our operations. Travel
restrictions or operational problems in any part of the world in which we
operate, or any reduction in the demand for air travel caused by public health
threats in the future, may materially adversely affect our operations and
financial results.
Our
results of operations fluctuate due to seasonality and other factors associated
with the airline industry. Due to greater
demand for air travel during the summer months, revenue in the airline industry
in the second and third quarters of the year is generally stronger than revenue
in the first and fourth quarters of the year for most U.S. air
carriers. Our results of operations generally reflect this
seasonality, but also have been impacted by numerous other factors that are not
necessarily seasonal, including excise and similar taxes, weather and air
traffic control delays, as well as the other factors discussed
above. As a result, our operating results for a quarterly period are
not necessarily indicative of operating results for an entire year, and
historical operating results are not necessarily indicative of future operating
results.
Item
1B. Unresolved Staff Comments.
None.
As of December 31, 2008, our operating
fleet consisted of 350 mainline jets and 282 regional aircraft. The
350 mainline jets are operated exclusively by us, while the 282 regional
aircraft are operated on our behalf by other operators under capacity purchase
agreements.
We own or lease 274 regional
jets. Of these, 214 are leased or subleased to ExpressJet and
operated on our behalf under a capacity purchase agreement with ExpressJet, 30
regional jet aircraft are subleased to ExpressJet but are not operated on our
behalf and 30 ERJ-135 regional jet aircraft are temporarily
grounded. Additionally, our regional operating fleet includes 68
regional jet and turboprop aircraft owned or leased by third parties that are
operated on our behalf by other operators under capacity purchase
agreements.
The following table summarizes our
operating fleet (aircraft operated by us and by others on our behalf) as of
December 31, 2008:
|
|
|
|
|
Seats
in
|
Average
|
|
|
|
|
Third-Party
|
Standard
|
Age
|
Aircraft Type
|
Total
|
Owned
|
Leased
|
Aircraft
|
Configuration
|
(In Years)
|
|
|
|
|
|
|
|
Mainline
(a):
|
|
|
|
|
|
|
777-200ER
|
20
|
|
8
|
|
12
|
|
-
|
|
285
|
|
8.6
|
|
767-400ER
|
16
|
|
14
|
|
2
|
|
-
|
|
235
|
|
7.3
|
|
767-200ER
|
10
|
|
9
|
|
1
|
|
-
|
|
174
|
|
7.8
|
|
757-300
|
17
|
|
9
|
|
8
|
|
-
|
|
216
|
|
6.3
|
|
757-200
|
41
|
|
15
|
|
26
|
|
-
|
|
175
|
|
11.9
|
|
737-900ER
|
17
|
|
17
|
|
-
|
|
-
|
|
173
|
|
0.6
|
|
737-900
|
12
|
|
8
|
|
4
|
|
-
|
|
169
|
|
7.3
|
|
737-800
|
116
|
|
43
|
|
73
|
|
-
|
|
157
|
|
6.8
|
|
737-700
|
36
|
|
12
|
|
24
|
|
-
|
|
124
|
|
10.0
|
|
737-500
|
42
|
|
-
|
|
42
|
|
-
|
|
114
|
|
13.1
|
|
737-300
|
23
|
|
14
|
|
9
|
|
-
|
|
124
|
|
22.6
|
|
Total
mainline
|
350
|
|
149
|
|
201
|
|
-
|
|
|
|
9.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regional
(b):
|
|
|
|
|
|
|
|
|
|
|
|
|
ERJ-145XR
|
89
|
|
-
|
|
89
|
|
-
|
|
50
|
|
|
|
ERJ-145
|
145
|
|
18
|
|
107
|
|
20
|
(c)
|
50
|
|
|
|
CRJ200LR
|
17
|
|
-
|
|
-
|
|
17
|
(c)
|
50
|
|
|
|
Q200
|
16
|
|
-
|
|
-
|
|
16
|
(d)
|
37
|
|
|
|
Q400
|
15
|
|
-
|
|
-
|
|
15
|
(e)
|
74
|
|
|
|
Total
regional
|
282
|
|
18
|
|
196
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
632
|
|
167
|
|
397
|
|
68
|
|
|
|
|
|
(a)
|
Excludes
seven grounded Boeing 737-500 aircraft, 12 grounded Boeing 737-300
aircraft and one Boeing 737-800 aircraft delivered but not yet placed into
service at December 31, 2008.
|
(b)
|
Excludes
30 temporarily grounded ERJ-135 aircraft and 30 ERJ-145 aircraft that are
subleased to ExpressJet.
|
(c)
|
Operated
by Chautauqua under a capacity purchase agreement.
|
(d)
|
Operated
by CommutAir under a capacity purchase agreement.
|
(e)
|
Operated
by Colgan under a capacity purchase
agreement.
|
Most of the aircraft and engines we own
are subject to mortgages.
Mainline Fleet
Activity. During 2008, we placed into service 17 new Boeing
737-900ER and 11 new Boeing 737-800 aircraft. We also announced that
we would accelerate the retirement of less fuel efficient Boeing 737-300 and
737-500 aircraft from our mainline fleet. We removed 18 Boeing
737-500 and 25 Boeing 737-300 aircraft
from service during 2008. The Boeing 737-500 aircraft removed from
service include ten aircraft that were sold and one aircraft that was declared a
loss following a runway accident. The Boeing 737-300 aircraft removed
from service include six aircraft that were returned to the lessors and seven
owned aircraft that were consigned for sale. The remaining Boeing
737-500 and 737-300 aircraft removed from service are grounded until future sale
or return to the lessors. By the end of 2009, we expect to remove 31
additional Boeing
737-500 and 737-300 aircraft from service. However, some of these
planned exits could be postponed due to delays in new aircraft deliveries and
the closing of pending aircraft sales.
At December 31, 2008, we had five owned
Boeing 737-500 aircraft and five owned Boeing 737-300 aircraft that were
grounded. At December 31, 2008, we also had two temporarily grounded
Boeing 737-500 leased aircraft and seven permanently grounded Boeing 737-300
leased aircraft. These leased aircraft have terms that range from one
month to 43 months. The two leased Boeing 737-500 aircraft that were
grounded at December 31, 2008 re-entered our active fleet in January
2009.
We have aircraft sale contracts with
two different foreign buyers to sell 15 Boeing 737-500 aircraft. The
buyers of these aircraft have requested, and in some cases we have agreed to, a
delay in the delivery dates for the aircraft. We hold cash deposits
that secure the buyers' obligations under the aircraft sale contracts, and we
are entitled to damages under the aircraft sale contracts if the buyers do not
take delivery of the aircraft when required. These pending
transactions are subject to customary closing conditions, some of which are
outside of our control, and we cannot give any assurances that the buyers of
these aircraft will be able to obtain financing for these transactions, that
there will not be further delays in deliveries or that the closing of these
transactions will occur.
Regional Fleet
Activity. During 2008, we temporarily grounded all thirty
37-seat ERJ 135 aircraft being flown by ExpressJet on our behalf and notified
ExpressJet that these aircraft would be withdrawn from the capacity purchase
agreement. We are evaluating our options regarding these 30 aircraft,
including sublease opportunities or permanently grounding them.
In the fourth quarter of 2008,
Chautauqua returned seven CRJ200LR aircraft operated for us to the lessors at
the lease expiration dates.
In 2008, Colgan began operating fifteen
74-seat Bombardier Q400 twin-turboprop aircraft on short and medium-distance
routes from New York Liberty on our behalf. Colgan operates the
flights as a Continental Connection carrier under a capacity purchase agreement
with us. In January 2009, we amended the capacity purchase agreement
to increase by 15 the number of Q400 aircraft operated by Colgan on our
behalf. We expect that Colgan will begin operating these 15
additional aircraft as they are delivered, beginning in the third quarter of
2010 through the second quarter of 2011. Each aircraft is scheduled
to be covered by the agreement for approximately ten years following the date
such aircraft is delivered into service thereunder. Colgan supplies
all aircraft that it operates under the agreement. One of Colgan's
Q400 aircraft was involved in an accident on February 12, 2009, reducing the
number of aircraft currently being flown for us to 14.
Firm Order and Option
Aircraft. As of December 31, 2008, we had firm commitments for
87 new aircraft (54 Boeing 737 aircraft, eight Boeing 777 aircraft and 25 Boeing
787 aircraft) scheduled for delivery from 2009 through 2016, with an estimated
aggregate cost of $5.6 billion including related spare engines. We
are currently scheduled to take delivery of 13 Boeing 737 aircraft in 2009 and
11 Boeing 737 aircraft and two Boeing 777 aircraft in 2010. In
addition to our firm order aircraft, we had options to purchase a total of 102
additional Boeing aircraft as of December 31, 2008.
We have also agreed to lease four
Boeing 757-300 aircraft from Boeing Capital Corporation. We expect
that these aircraft will be placed into service in the first half of
2010.
Our principal facilities are located at
New York Liberty, Houston Bush, Cleveland Hopkins and A.B. Won Pat International
Airport in Guam. Substantially all of these facilities are leased on
a net-rental basis, as we are responsible for maintenance, insurance and other
facility-related expenses and services. At each location, we
generally have multiple leases covering different types of facilities, and those
leases have expiration dates ranging from 2009 to 2030.
At each of our three domestic hub
cities and most other locations, our passenger and baggage handling space is
leased directly from the airport authority on varying terms dependent on
prevailing practice at each airport. We also maintain administrative
offices, terminal, catering, cargo and other airport facilities, training
facilities, maintenance facilities and other facilities, in each case as
necessary to support our operations in the cities we serve.
See Item 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" for a discussion of certain of our guarantees relating to our
principal facilities, as well as our contingent liability for US Airways'
obligations under a lease agreement covering the East End Terminal at LaGuardia
Airport.
During the period between 1997 and
2001, we reduced or capped the base commissions that we paid to domestic travel
agents, and in 2002 we eliminated those base commissions. These
actions were similar to those also taken by other air carriers. We
are a defendant, along with several other air carriers, in two lawsuits brought
by travel agencies that purportedly opted out of a prior class action entitled
Sarah Futch Hall
d/b/a/ Travel Specialists v. United Air Lines, et al. (U.S.D.C., Eastern
District of North Carolina), filed on June 21, 2000, in which the defendant
airlines prevailed on summary judgment that was upheld on
appeal. These similar suits against Continental and other major
carriers allege violations of antitrust laws in reducing and ultimately
eliminating the base commissions formerly paid to travel agents. The
pending cases are Tam
Travel, Inc. v. Delta Air Lines, Inc., et al. (U.S.D.C., Northern
District of California), filed on April 9, 2003 and Swope Travel Agency, et al.
v. Orbitz LLC et al. (U.S.D.C., Eastern District of Texas), filed on June
5, 2003. By order dated November 10, 2003, these actions were
transferred and consolidated for pretrial purposes by the Judicial Panel on
Multidistrict Litigation to the Northern District of Ohio. On
September 14, 2006, the judge for the consolidated lawsuit issued an order
dismissing 28 plaintiffs in the Swope case for their
failure to properly opt-out of the Hall
case. Consequently, a total of 90 travel agency plaintiffs remained
in the two cases. On October 29, 2007, the judge for the consolidated
lawsuit dismissed the case for failure to meet the heightened pleading standards
established earlier in 2007 by the U.S. Supreme Court's decision in Bell Atlantic Corp. v.
Twombly. The plaintiffs have appealed to the Sixth Circuit
Court of Appeals. In each of these cases, we believe the plaintiffs'
claims are without merit, and we intend to vigorously defend any
appeal. Nevertheless, a final adverse court decision awarding
substantial money damages could have a material adverse effect on our results of
operations, financial condition or liquidity.
Under the federal Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
(commonly known as "Superfund") and similar state environment cleanup laws,
generators of waste disposed of at designated sites may, under certain
circumstances, be subject to joint and several liability for investigation and
remediation costs. We (including our predecessors) have been
identified as a potentially responsible party at one federal site and one state
site that are undergoing or have undergone investigation or
remediation. Although applicable case law is evolving and some cases
may be interpreted to the contrary, we believe that some or all of any liability
claims associated with these sites were discharged by confirmation of our 1993
Plan of Reorganization, principally because our exposure is based on alleged
offsite disposal known as of the date of confirmation. Even if any
such claims were not discharged, on the basis of currently available
information, we believe that our potential liability for our allocable share of
the cost to remedy each site (if and to the extent we are found to be liable) is
not, in the aggregate, material; however, we have not been designated a "de
minimis" contributor at either site.
In 2001, the California Regional Water
Quality Control Board ("CRWQCB") mandated a field study of the area surrounding
our aircraft maintenance hangar in Los Angeles. The study was
completed in September 2001 and identified jet fuel and solvent contamination on
and adjacent to this site. In April 2005, we began environmental
remediation of jet fuel contamination surrounding our aircraft maintenance
hangar pursuant to a workplan submitted to (and approved by) the CRWQCB and our
landlord, the Los Angeles World Airports. Additionally, we could be
responsible for environmental remediation costs primarily related to solvent
contamination on and near this site.
In
1999, we purchased property located near our New York Liberty hub in Elizabeth,
New Jersey from Honeywell International, Inc. ("Honeywell") with certain
environmental indemnification obligations by us to Honeywell. We did
not operate the facility located on or make any improvements to the
property. In 2005, we sold the property to Catellus Commercial Group,
LLC ("Catellus") and, in connection with the sale, Catellus assumed certain
environmental indemnification obligations in favor of us. On October
9, 2006, Honeywell provided us with a notice seeking indemnification from us in
connection with a U.S. Environmental Protection Agency ("EPA") potentially
responsible party notice to Honeywell involving the Newark Bay Study Area of the
Diamond Alkali Superfund Site alleging hazardous substance releases from the
property and seeking study costs. In addition, on May 7, 2007,
Honeywell provided us with a notice seeking indemnification from us in
connection with a possible lawsuit by Tierra Solutions, Inc. ("Tierra
Solutions") against Honeywell relating to alleged discharges from the property
into Newark Bay and seeking cleanup of Newark Bay waters and sediments under the
Resource Conservation and Recovery Act. We have notified Honeywell
that, at this time, we have not agreed that we are required to indemnify
Honeywell with respect to the EPA and Tierra Solutions claims and Honeywell has
invoked arbitration procedures under its sale and purchase agreement with
us. Catellus has agreed to indemnify and defend us in connection with
the EPA and Tierra Solutions claims, including any arbitration with
Honeywell.
Although we are not currently subject
to any environmental cleanup orders imposed by regulatory authorities, we are
undertaking voluntary investigation or remediation at certain properties in
consultation with such authorities. The full nature and extent of any
contamination at these properties and the parties responsible for such
contamination have not been determined, but based on currently available
information and our current reserves, we do not believe that any environmental
liability associated with such properties will have a material adverse effect on
us.
At December 31, 2008, we had an accrual
for estimated costs of environmental remediation throughout our system of $33
million, based primarily on third-party environmental studies and estimates as
to the extent of the contamination and nature of the required remedial
actions. We have evaluated and recorded this accrual for environmental
remediation costs separately from any related insurance recovery. We did
not have any receivables related to environmental insurance recoveries at
December 31, 2008. Based on currently available information, we
believe that our accrual for potential environmental remediation costs is
adequate, although our accrual could be adjusted in the future due to new
information or changed circumstances. However, we do not expect these
items to materially affect our results of operations, financial condition or
liquidity.
We and/or certain of our subsidiaries
are defendants in various other pending lawsuits and proceedings and are subject
to various other claims arising in the normal course of our business, many of
which are covered in whole or in part by insurance. Although the
outcome of these lawsuits and proceedings (including the probable loss we might
experience as a result of an adverse outcome) cannot be predicted with certainty
at this time, we believe, after consulting with outside counsel, that the
ultimate disposition of such suits will not have a material adverse effect on
us.
Not
applicable.
PART
II
Our Class B common stock, which we
refer to as our common stock, trades on the NYSE under the symbol
"CAL." The table below shows the high and low sales prices for our
common stock as reported in the consolidated transaction reporting system during
2008 and 2007.
|
|
|
Class
B
Common Stock
|
|
|
|
High
|
Low
|
|
|
|
|
|
|
2008
|
Fourth
Quarter
|
$20.89
|
|
$9.49
|
|
|
|
Third
Quarter
|
$21.40
|
|
$5.91
|
|
|
|
Second
Quarter
|
$23.42
|
|
$9.70
|
|
|
|
First
Quarter
|
$31.25
|
|
$17.19
|
|
|
|
|
|
|
|
|
|
2007
|
Fourth
Quarter
|
$37.79
|
|
$21.59
|
|
|
|
Third
Quarter
|
$38.79
|
|
$26.21
|
|
|
|
Second
Quarter
|
$44.10
|
|
$32.00
|
|
|
|
First
Quarter
|
$52.40
|
|
$35.22
|
|
As of February 13, 2009, there were
approximately 19,273 holders of record of our common stock. We have
paid no cash dividends on our common stock and have no current intention of
doing so. Our agreement with the union representing our pilots
provides that we will not declare a cash dividend or repurchase our outstanding
common stock for cash until we have contributed at least $500 million to the
pilots' defined benefit pension plan, measured from March 31,
2005. Through February 18, 2009, we have made $470 million of
contributions to this plan.
Our certificate of incorporation
provides that no shares of capital stock may be voted by or at the direction of
persons who are not U.S. citizens unless the shares are registered on a separate
stock record. Our bylaws further provide that no shares will be
registered on the separate stock record if the amount so registered would exceed
U.S. foreign ownership restrictions. United States law currently limits the
voting power in us (and other U.S. airlines) of persons who are not citizens of
the United States to 25%.
See Item 12. "Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder Matters" for
information regarding our equity compensation plans as of December 31,
2008.
None.
The following table sets forth the
selected financial data of the Company derived from our consolidated financial
statements. The selected financial data should be read in conjunction
with Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's consolidated financial
statements and notes thereto contained in Item 8. "Financial
Statements and Supplementary Data."
Statement
of Operations Data (in millions except per
share data) (1):
|
|
|
|
|
|
|
Year
Ended December 31,
|
|
2008
|
2007
|
2006
|
2005
|
2004
|
|
|
|
|
|
|
Operating
revenue
|
$15,241
|
$14,232
|
$13,128
|
$11,208
|
$9,899
|
|
|
|
|
|
|
Operating
expenses
|
15,555
|
13,545
|
12,660
|
11,247
|
10,137
|
|
|
|
|
|
|
Operating
income
(loss)
|
(314)
|
687
|
468
|
(39)
|
(238)
|
|
|
|
|
|
|
Income
(loss) before cumulative effect of change
in
accounting
principle
|
(585)
|
459
|
369
|
(68)
|
(409)
|
|
|
|
|
|
|
Cumulative
effect of change in accounting principle
|
-
|
-
|
(26)
|
-
|
-
|
|
|
|
|
|
|
Net
income
(loss)
|
(585)
|
459
|
343
|
(68)
|
(409)
|
|
|
|
|
|
|
Earnings
(loss) per share:
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
Income
(loss) before cumulative effect of change
in
accounting
principle
|
$(5.54)
|
$ 4.73
|
$ 4.15
|
$(0.96)
|
$(6.19)
|
Cumulative
effect of change in accounting principle
|
-
|
-
|
(0.29)
|
-
|
-
|
Net
income
(loss)
|
$(5.54)
|
$ 4.73
|
$ 3.86
|
$(0.96)
|
$(6.19)
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
Income
(loss) before cumulative effect of change
in
accounting
principle
|
$(5.54)
|
$ 4.18
|
$ 3.53
|
$(0.97)
|
$(6.25)
|
Cumulative
effect of change in accounting principle
|
-
|
-
|
(0.23)
|
-
|
-
|
Net
income
(loss)
|
$(5.54)
|
$ 4.18
|
$ 3.30
|
$(0.97)
|
$(6.25)
|
|
|
|
|
|
|
(1)
|
Includes
the following special income (expense) items for year ended December 31
(in millions):
|
|
2008
|
2007
|
2006
|
2005
|
2004
|
|
|
|
|
|
|
|
Operating
(expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
Pension
settlement/curtailment charges
|
$(52)
|
|
$(31)
|
|
$(59)
|
|
$(83)
|
|
$ -
|
|
|
Aircraft-related
charges, net of gains on sales
of
aircraft
|
(40)
|
|
22
|
|
18
|
|
16
|
|
(87)
|
|
|
Severance
|
(34)
|
|
-
|
|
-
|
|
-
|
|
-
|
|
|
Route
impairment and other
|
(55)
|
|
(4)
|
|
14
|
|
-
|
|
(52)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonoperating
(expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
Gains
on sale of investments
|
78
|
|
37
|
|
92
|
|
204
|
|
-
|
|
|
Loss
on fuel hedge contracts with Lehman
Brothers
|
(125)
|
|
-
|
|
-
|
|
-
|
|
-
|
|
|
Write-down
of auction rate securities, net of
put
right received
|
(34)
|
|
-
|
|
-
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax credit (expense) related to NOL
utilization
|
28
|
|
(104)
|
|
-
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of change in accounting
principal
|
-
|
|
-
|
|
(26)
|
|
-
|
|
-
|
|
Balance
Sheet Data (in millions):
|
|
|
|
|
|
|
As
of December 31,
|
|
2008
|
2007
|
2006
|
2005
|
2004
|
|
|
|
|
|
|
Unrestricted
cash, cash equivalents and short-term
investments
|
$2,643
|
$2,803
|
$2,484
|
$ 1,957
|
$ 1,458
|
|
|
|
|
|
|
Total
assets
|
12,686
|
12,105
|
11,308
|
10,529
|
10,511
|
|
|
|
|
|
|
Long-term
debt and capital lease obligations
|
5,371
|
4,366
|
4,859
|
5,057
|
5,167
|
|
|
|
|
|
|
Stockholders'
equity
|
105
|
1,550
|
347
|
226
|
155
|
Selected
Operating Data
We have two reportable
segments: mainline and regional. The mainline segment
consists of flights to cities using larger jets while the regional segment
currently consists of flights with a capacity of 50 or fewer seats (for jets) or
78 or fewer seats (for turboprops). As of December 31, 2008, the
regional segment was operated by ExpressJet, Chautauqua, CommutAir and Colgan
under capacity purchase agreements.
|
Year
Ended December 31,
|
|
2008
|
2007
|
2006
|
2005
|
2004
|
|
|
|
|
|
|
Mainline
Operations:
|
|
|
|
|
|
Passengers
(thousands)
(1)
|
48,682
|
50,960
|
48,788
|
44,939
|
42,743
|
Revenue
passenger miles (millions)
(2)
|
82,806
|
84,309
|
79,192
|
71,261
|
65,734
|
Available
seat miles (millions) (3)
|
102,527
|
103,139
|
97,667
|
89,647
|
84,672
|
Cargo
ton miles
(millions)
|
1,005
|
1,037
|
1,075
|
1,018
|
1,026
|
|
|
|
|
|
|
Passenger
load factor (4):
|
|
|
|
|
|
Mainline
|
80.8%
|
81.7%
|
81.1%
|
79.5%
|
77.6%
|
Domestic
|
83.3%
|
83.9%
|
83.6%
|
81.2%
|
77.4%
|
International
|
78.2%
|
79.4%
|
78.2%
|
77.5%
|
77.9%
|
|
|
|
|
|
|
Passenger
revenue per available seat mile (cents)
|
11.10
|
10.47
|
9.96
|
9.32
|
8.82
|
Total
revenue per available seat mile (cents)
|
12.51
|
11.65
|
11.17
|
10.46
|
9.83
|
Average
yield per revenue passenger mile (cents) (5)
|
13.75
|
12.80
|
12.29
|
11.73
|
11.37
|
Average
fare
|
$232.26
|
$214.06
|
$201.81
|
$188.67
|
$177.90
|
|
|
|
|
|
|
Cost
per available seat mile, including special
charges
(cents)
|
12.44
|
10.83
|
10.56
|
10.22
|
9.84
|
Special
charges per available seat miles (cents)
|
0.15
|
0.01
|
0.03
|
0.07
|
0.16
|
|
|
|
|
|
|
Average
price per gallon of fuel, including fuel taxes
|
$3.27
|
$2.18
|
$2.06
|
$1.78
|
$1.19
|
Fuel
gallons consumed
(millions)
|
1,498
|
1,542
|
1,471
|
1,376
|
1,333
|
|
|
|
|
|
|
Aircraft
in fleet at end of period (6)
|
350
|
365
|
366
|
356
|
349
|
Average
length of aircraft flight (miles)
|
1,494
|
1,450
|
1,431
|
1,388
|
1,325
|
Average
daily utilization of each aircraft (hours) (7)
|
11:06
|
11:34
|
11:07
|
10:31
|
9:55
|
|
|
|
|
|
|
Regional
Operations:
|
|
|
|
|
|
Passengers
(thousands)
(1)
|
18,010
|
17,970
|
18,331
|
16,076
|
13,739
|
Revenue
passenger miles (millions) (2)
|
9,880
|
9,856
|
10,325
|
8,938
|
7,417
|
Available
seat miles (millions) (3)
|
12,984
|
12,599
|
13,251
|
11,973
|
10,410
|
Passenger
load factor
(4)
|
76.1%
|
78.2%
|
77.9%
|
74.7%
|
71.3%
|
Passenger
revenue per available seat mile (cents)
|
18.14
|
17.47
|
17.15
|
15.67
|
15.09
|
Average
yield per revenue passenger mile (cents) (5)
|
23.83
|
22.33
|
22.01
|
20.99
|
21.18
|
Aircraft
in fleet at end of period (6)
|
282
|
263
|
282
|
266
|
245
|
|
|
|
|
|
|
Consolidated
Operations:
|
|
|
|
|
|
Passengers
(thousands)
(1)
|
66,692
|
68,930
|
67,119
|
61,015
|
56,482
|
Revenue
passenger miles (millions) (2)
|
92,686
|
94,165
|
89,517
|
80,199
|
73,151
|
Available
seat miles (millions) (3)
|
115,511
|
115,738
|
110,918
|
101,620
|
95,082
|
Passenger
load factor
(4)
|
80.2%
|
81.4%
|
80.7%
|
78.9%
|
76.9%
|
Passenger
revenue per available seat mile (cents)
|
11.89
|
11.23
|
10.82
|
10.07
|
9.51
|
Average
yield per revenue passenger mile (cents) (5)
|
14.82
|
13.80
|
13.41
|
12.76
|
12.36
|
(1)
|
The
number of revenue passengers measured by each flight segment
flown.
|
(2)
|
The
number of scheduled miles flown by revenue passengers.
|
(3)
|
The
number of seats available for passengers multiplied by the number of
scheduled miles those seats are flown.
|
(4)
|
Revenue
passenger miles divided by available seat miles.
|
(5)
|
The
average passenger revenue received for each revenue passenger mile
flown.
|
(6)
|
Excludes
aircraft that were removed from service. Regional aircraft
include aircraft operated by all carriers under capacity purchase
agreements, but exclude any aircraft operated by ExpressJet outside the
scope of the ExpressJet CPA.
|
(7)
|
The
average number of hours per day that an aircraft flown in revenue service
is operated (from gate departure to gate
arrival).
|
The following information should be
read in conjunction with the information contained in Item 1A. "Risk
Factors" and the audited consolidated financial statements and the notes thereto
included under Item 8. "Financial Statements and Supplementary Data" of this
annual report.
Overview
We recorded a net loss of $585 million
for the year ended December 31, 2008, as compared to net income of $459 million
for the year ended December 31, 2007. Our net loss in 2008 was
primarily the result of significantly higher fuel prices. Our results
for both 2008 and 2007 were also affected by a number of special items, detailed
below under "Results of Operations."
2008
Financial Highlights and Challenges
·
|
Total
revenue grew 7.1% during 2008 as compared to 2007 due to increased fares,
international growth and new ancillary fees.
|
|
|
·
|
Operating
income (loss), a key measure of our performance, decreased $1.0 billion to
a $314 million loss during 2008 as compared to 2007, due primarily to
higher fuel prices.
|
|
|
·
|
We
raised approximately $1.2 billion in cash through new financings, the
issuance of common stock and the sale of our remaining equity interest in
Copa.
|
|
|
·
|
Unrestricted
cash, cash equivalents and short-term investments totaled $2.6 billion at
December 31, 2008.
|
2008
Operational Highlights
·
|
Consolidated
traffic decreased 1.6% and capacity decreased 0.2% during 2008 as compared
to 2007, resulting in a consolidated load factor of 80.2%, 1.2 points
below the prior year consolidated load factor.
|
|
|
·
|
We
inaugurated service between New York Liberty and Houston Bush to London's
Heathrow airport.
|
|
|
·
|
We
recorded a DOT on-time arrival rate of 74.0% for Continental mainline
flights and a mainline segment completion factor of 98.9% for 2008,
compared to a DOT on-time arrival rate of 74.3% and a mainline segment
completion factor of 99.2% for 2007.
|
|
|
·
|
We
took delivery of 17 Boeing 737-900ER and 12 Boeing 737-800 aircraft and
removed 18 Boeing 737-500 and 25 Boeing 737-300 aircraft from our mainline
fleet.
|
|
|
·
|
Sales
on continental.com, our lowest cost distribution channel, totaled $3.9
billion, an increase of 11% over
2007.
|
Outlook
The combination of weakening economic
conditions, turmoil in the global capital markets and highly volatile fuel
prices has resulted in a difficult financial environment for U.S. network
carriers and continues to hinder our ability to achieve and sustain
profitability. These significant challenges facing our industry
caused several smaller carriers to declare bankruptcy in 2008, most of which
ceased passenger operations. We and many of our domestic network
competitors reduced domestic capacity, increased fares and fees, reduced costs
and took other measures to address the challenges. We also raised
approximately $1.2 billion in cash during 2008 through a number of financings to
strengthen our unrestricted cash and short-term investments balance, which was
$2.6 billion at December 31, 2008. However, we have significant
long-term debt and capital lease obligations and future commitments for capital
expenditures, including the acquisition of aircraft and related spare
engines. To meet these obligations, we must access the global capital
markets and/or return to sustained profitability. Historically, we
have obtained financing for many of these debt obligations and capital
commitments, particularly the acquisition of aircraft and spare
engines. Due to the troubled global capital markets, however, we may
be unable to obtain financing or otherwise access the capital markets on
favorable terms.
Economic
Conditions. The U.S. and global economies are currently in a
recession. The airline industry is highly cyclical, and the level of
demand for air travel is correlated to the strength of the U.S. and global
economies. For 2008, a year in which the U.S. gross domestic product
experienced its largest contraction in 25 years, traffic for the seven largest
U.S. carriers, measured in miles flown by revenue passengers, fell approximately
2% as compared to 2007, the first such annual decline in five
years. This decline in demand has disproportionately reduced the
volume of high yield traffic in the premium cabins on international flights, as
many business and leisure travelers are either curtailing their international
travel or purchasing lower yield economy tickets.
The current economic crisis has
severely disrupted the global capital markets, resulting in a diminished
availability of financing and higher cost for financing that is
obtainable. If the capital markets do not improve, whether through
measures implemented by the U.S. and foreign governments, such as the Emergency
Economic Stabilization Act of 2008, or otherwise, we may be unable to obtain
financing on acceptable terms (or at all) to refinance certain maturing debt we
would normally expect to refinance and to satisfy future capital
commitments.
Fuel
Costs. The extreme volatility in jet fuel prices, which were
very high by historical standards during much of 2008, continues to impair our
ability to achieve and sustain profitability. During the twelve
months ended December 31, 2008, the spot price per gallon of Gulf Coast jet fuel
averaged $2.96 compared to $2.17 for the same period in 2007, with Gulf Coast
jet fuel closing prices peaking at $4.21 per gallon during the
year. In response to high fuel prices and to address the risk of
further escalations in fuel prices, most of the major network carriers
(including us) continued to enter into fuel hedging arrangements, including
collars which minimize the up-front costs. However, in the second
half of the year, the price of crude oil fell from a peak of $147.27 per barrel
on July 11, 2008 to a low of $32.40 per barrel on December 19, 2008, the first
time in almost five years that the price fell below $35 per
barrel. The precipitous decline in oil prices has resulted in
significant costs to us and to those other carriers with hedging arrangements
obligating them to make payments to the counterparties to the extent that the
price of crude falls below a specified level. Declining crude oil
prices have resulted in us being required to post significant amounts of
collateral to cover potential amounts owed with respect to contracts that have
not yet settled. At December 31, 2008, our fuel derivatives were in a
net liability position of $415 million and we had posted cash collateral with
our counterparties totaling $171 million.
Although we experienced some success
raising ticket prices and adding or increasing fees during part of 2008, we were
unable to increase our revenue sufficiently to keep pace with the escalating
fuel prices and suffered a substantial loss in 2008. If fuel prices
return to these historically high levels, we may again be unable to raise fares
or other fees sufficiently to offset our increased costs
fully. Consequently, further increases in jet fuel prices, as well as
disruptions in fuel supplies, could have a material adverse effect on our
results of operations, financial condition and liquidity.
Based on our expected fuel consumption
in 2009, a one dollar change in the price of a barrel of crude oil would change
our annual fuel expense by approximately $41 million, before considering
refining margins and the impact of our fuel hedging program. We
believe that our modern, fuel-efficient fleet continues to provide us with a
competitive advantage relative to our peers and a permanent hedge against rising
fuel prices.
As of December 31, 2008, we have hedged
approximately 23% of our projected consolidated fuel requirements for 2009 with
crude oil collars, options and swaps, excluding contracts with Lehman Brothers
which we terminated in January 2009. See "Item 7A. Quantitative and
Qualitative Disclosures about Market Risk" for details of our hedge position at
December 31, 2008.
Capacity. Our
long-term target remains to grow our mainline capacity between 5% and 7%
annually. However, because of adverse economic conditions, we have
reduced our capacity significantly and rescheduled aircraft deliveries, and we
do not anticipate returning to significant capacity growth until the level of
demand for air travel and economic conditions improve sufficiently to justify
such growth.
In September 2008, at the conclusion of
the peak summer season, we implemented significant reductions in flying and
staffing necessary for us to adjust further to the then high cost of fuel, a
weakening economy and a weak dollar. In conjunction with the
reductions in flying, we announced that we would accelerate the retirement of
all of our Boeing 737-300 aircraft and a significant number of our 737-500
aircraft to remove a majority of the least fuel-efficient aircraft from our
mainline fleet by the end of 2009. The retirement of as many as 15 of
the 737-500 aircraft may be delayed, however, if the parties that agreed to
purchase those aircraft continue to be unable to obtain financing in the
troubled global capital markets. As a result of the capacity
reductions, we eliminated approximately 3,000 employee positions.
Our future ability to grow our capacity
could be adversely impacted by delays in aircraft deliveries. Boeing
has announced several delays to its 787 aircraft program. We expect
the first of our 25 Boeing 787 aircraft to deliver in 2011 instead of the first
half of 2009 as originally scheduled. As a result, our anticipated
mainline capacity in 2010 and thereafter may be reduced, particularly if we are
unable to make alternative arrangements to acquire long-range aircraft on
commercially acceptable terms. However, in order to provide
flexibility for our widebody aircraft needs, we announced orders in February
2008 for eight new Boeing 777 aircraft, the first two of which are now scheduled
to deliver in 2010.
We are currently scheduled to take
delivery of 13 Boeing 737 aircraft in 2009 and 11 Boeing 737 aircraft and two
Boeing 777 aircraft in 2010. In addition, we have agreed to lease
four Boeing 757-300 aircraft from Boeing Capital Corporation. We
expect that these Boeing 757-300 aircraft will be placed into service in the
first half of 2010.
Competition. Competition
in most of our domestic markets from other carriers, as well as our response to
this competition, continues to result in increased capacity and lower yields in
many of those markets. In addition, several of our domestic
competitors have increased their international capacity, including service to
some destinations that we currently serve, resulting in lower yields and/or load
factors in affected markets. The "open skies" agreement between the
United States and the European Union, which became effective in March 2008, is
resulting in increased competition from European and U.S. airlines in these
international markets, and may give rise to additional integration opportunities
between or among U.S. and European carriers. For example, Air
France-KLM, Delta and Northwest have received anti-trust immunity to form a new
trans-Atlantic joint venture among those airlines and to coordinate routes,
fares, schedules and other matters among those airlines, Alitalia and CSA Czech
Airlines. American Airlines, British Airways and Iberia have
requested anti-trust immunity for a similar trans-Atlantic joint venture, which
would also involve many of the same benefits. However, we also expect
that our ability to compete in the trans-Atlantic markets will be enhanced by
our previously announced alliance-related activities.
Star
Alliance. In 2008, we entered into framework agreements with
United, Lufthansa and Air Canada, each a member of Star Alliance, pursuant to
which we plan to develop an extensive code-share relationship and reciprocity of
frequent flier programs, elite customer recognition and airport lounge use with
these other airlines. We plan to implement these relationships and
join United, Lufthansa and Air Canada (and other member airlines) in Star
Alliance as promptly as practicable following our exit from
SkyTeam. We will exit SkyTeam effective with our last flight on
October 24, 2009.
On July 23, 2008, we filed an
application with the DOT to join United and a group of eight other carriers
within Star Alliance that already hold antitrust immunity. Approval
by the DOT of this application would enable us, United and these other immunized
Star Alliance carriers to work closely together to deliver highly competitive
international flight schedules, fares and service and would provide competitive
balance to antitrust-immunized carriers in SkyTeam. Additionally, we,
United, Lufthansa and Air Canada have requested DOT approval to establish a
trans-Atlantic joint venture to create a more efficient and comprehensive
trans-Atlantic network for our respective customers, offering those customers
more service, scheduling and pricing options and establishing a framework for
similar joint ventures in other regions of the world. In addition, we
are seeking a modification to our existing pilot collective bargaining
agreement, which presently prohibits us from engaging in a revenue or profit
sharing agreement with a domestic air carrier, to permit us to enter into such
joint ventures.
Please see Part I, Item 1. "Business -
Alliances" and Part I, Item 1A. "Risk Factors - Risk Factors Relating to the
Company" for future discussion of our transition to Star Alliance.
Labor
Costs. Our ability to achieve and sustain profitability also
depends on continuing our efforts to implement and maintain a more competitive
cost structure. The collective bargaining agreements with our pilots,
mechanics and certain other work groups became amendable in December
2008. During 2008, we met with representatives of the applicable
unions to engage in bargaining for amended collective bargaining
agreements. These talks will continue in 2009 with a goal of reaching
agreements that are fair to us and to our employees. We cannot
predict the outcome of our ongoing negotiations with our unionized workgroups,
although significant increases in the pay and benefits resulting from new
collective bargaining agreements could have a material adverse effect on
us.
Results
of Operations
Special
Items. The comparability of our financial results between
years is affected by a number of special items. Our results for each
of the last three years included the following special items (in
millions):
|
Income (Expense)
|
|
2008
|
2007
|
2006
|
|
|
|
|
Pension
settlement charges
(1)
|
$ (52)
|
$(31)
|
$(59)
|
Aircraft-related
charges, net of gains on sales of aircraft (2)
|
(40)
|
22
|
18
|
Severance
(2)
|
(34)
|
-
|
-
|
Route
impairment and other
(2)
|
(55)
|
(4)
|
14
|
Total
special operating
items
|
(181)
|
(13)
|
(27)
|
|
|
|
|
Gains
on sales of investments
(3)
|
78
|
37
|
92
|
Loss
on fuel hedge contracts with Lehman Brothers (4)
|
(125)
|
-
|
-
|
Write-down
of auction rate securities, net of put right received (5)
|
(34)
|
-
|
-
|
Total
special non-operating
items
|
(81)
|
37
|
92
|
|
|
|
|
Income
tax credit (expense) related to NOL utilization (6)
|
28
|
(104)
|
-
|
Cumulative
effect of change in accounting principle (SFAS 123R) (7)
|
-
|
-
|
(26)
|
(1)
|
See
Note 11 to our consolidated financial statements included in Item
8.
|
(2)
|
See
Note 13 to our consolidated financial statements included in Item
8.
|
(3)
|
See
Note 14 to our consolidated financial statements included in Item
8.
|
(4)
|
See
Note 7 to our consolidated financial statements included in Item
8.
|
(5)
|
See
Note 6 to our consolidated financial statements included in Item
8.
|
(6)
|
See
Note 12 to our consolidated financial statements included in Item
8.
|
(7)
|
See
Note 9 to our consolidated financial statements included in Item
8.
|
Comparison
of Year Ended December 31, 2008 to December 31, 2007
Consolidated Results of
Operations
Significant components of our
consolidated operating results for the year ended December 31 were as follows
(in millions, except percentage changes):
|
|
Increase
|
%
Increase
|
|
2008
|
2007
|
(Decrease)
|
(Decrease)
|
|
|
|
|
|
Operating
revenue
|
$15,241
|
|
$14,232
|
|
$ 1,009
|
|
7.1%
|
|
Operating
expenses
|
15,555
|
|
13,545
|
|
2,010
|
|
14.8%
|
|
Operating
income
(loss)
|
(314)
|
|
687
|
|
(1,001)
|
|
NM
|
|
Nonoperating
income (expense)
|
(370)
|
|
(121)
|
|
249
|
|
NM
|
|
Income
tax benefit (expense)
|
99
|
|
(107)
|
|
206
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
Net
income
(loss)
|
$ (585)
|
|
$ 459
|
|
$(1,044)
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
NM
- Not meaningful
|
|
|
|
|
|
|
|
|
Each of these items is discussed in the
following sections.
Operating
Revenue. The table below shows components of operating revenue
for the year ended December 31, 2008 and period to period comparisons for
operating revenue, passenger revenue per available seat mile ("RASM") and
available seat miles ("ASMs") by geographic region for our mainline and regional
operations:
|
Revenue
|
%
Increase
(Decrease)
in 2008 vs
2007
|
|
(in
millions)
|
Revenue
|
RASM
|
ASMs
|
|
|
|
|
|
Passenger
revenue:
|
|
|
|
|
Domestic
|
$ 5,633
|
|
1.2 %
|
|
6.4 %
|
(4.9)%
|
Trans-Atlantic
|
2,983
|
|
11.6 %
|
|
2.5 %
|
8.9 %
|
Latin
America
|
1,750
|
|
12.1 %
|
|
9.4 %
|
2.5 %
|
Pacific
|
1,016
|
|
2.3 %
|
|
8.5 %
|
(5.6)%
|
Total
Mainline
|
11,382
|
|
5.4 %
|
|
6.0 %
|
(0.6)%
|
|
|
|
|
|
|
|
Regional
|
2,355
|
|
7.0 %
|
|
3.8 %
|
3.1 %
|
|
|
|
|
|
|
|
Total
|
13,737
|
|
5.7 %
|
|
5.9 %
|
(0.2)%
|
|
|
|
|
|
|
|
Cargo
|
497
|
|
9.7 %
|
|
|
|
Other
|
1,007
|
|
28.4 %
|
|
|
|
|
|
|
|
|
|
|
Operating
revenue
|
$15,241
|
|
7.1 %
|
|
|
|
Passenger revenue increased due to
increased international traffic on increased capacity and increased
fares. The improved RASM reflects our actions taken to increase fares
and implement more restrictions on low fare tickets, as well as our domestic
capacity reductions commenced in September 2008.
Cargo revenue increased due to higher
fuel surcharge rates and increased mail volume. Other revenue
increased due to higher revenue associated with sales of mileage credits on our
OnePass frequent flyer program, higher ticket change fees, the implementation of
new fees for checking bags and changes in how certain costs are handled under
the Amended ExpressJet CPA.
Operating
Expenses. The table below shows period-to-period comparisons
by type of operating expense for our consolidated operations for the year ended
December 31 (in millions, except percentage changes):
|
2008
|
2007
|
Increase
(Decrease)
|
%
Increase
(Decrease)
|
|
|
|
|
|
Aircraft fuel and related
taxes
|
$ 4,905
|
$ 3,354
|
$1,551
|
|
46.2 %
|
|
Wages, salaries and related
costs
|
2,957
|
3,127
|
(170)
|
|
(5.4)%
|
|
Regional capacity purchase,
net
|
2,073
|
1,793
|
280
|
|
15.6 %
|
|
Aircraft
rentals
|
976
|
994
|
(18)
|
|
(1.8)%
|
|
Landing fees and other
rentals
|
853
|
790
|
63
|
|
8.0 %
|
|
Distribution
costs
|
717
|
682
|
35
|
|
5.1 %
|
|
Maintenance, materials and
repairs
|
612
|
621
|
(9)
|
|
(1.4)%
|
|
Depreciation and
amortization
|
438
|
413
|
25
|
|
6.1 %
|
|
Passenger
services
|
406
|
389
|
17
|
|
4.4 %
|
|
Special
charges
|
181
|
13
|
168
|
|
NM
|
|
Other
|
1,437
|
1,369
|
68
|
|
5.0 %
|
|
|
$15,555
|
$13,545
|
$2,010
|
|
14.8 %
|
|
Operating expenses increased 14.8%
primarily due to the following:
·
|
Aircraft fuel and related taxes increased
due to a 50.5% increase in jet fuel prices. Our average jet
fuel price per gallon including related taxes increased to $3.27 in 2008
from $2.18 in 2007. Our average jet fuel price includes losses
related to our fuel hedging program of $0.10 per gallon in 2008, compared
to gains of $0.02 per gallon in 2007.
|
|
|
·
|
Wages, salaries and related costs decreased
primarily due to a $172 million decrease in profit sharing
expenses. Although the average number of full time equivalent
employees decreased approximately 1% in 2008, the impact on expenses was
offset by wage increases.
|
|
|
·
|
Regional capacity purchase, net includes
expenses related to our capacity purchase agreements. Our most
significant capacity purchase agreement is with
ExpressJet. Regional capacity purchase, net includes all fuel
expense on flights operated for us under capacity purchase agreements and
is net of our rental income on aircraft leased to ExpressJet and flown for
us in 2007 and the first six months of 2008. Under the Amended
ExpressJet CPA, ExpressJet no longer pays sublease rent for aircraft
operated on our behalf. The net amounts consisted of the
following for the year ended December 31 (in millions, except percentage
changes):
|
|
|
|
Increase
|
%
Increase
|
|
2008
|
2007
|
(Decrease)
|
(Decrease)
|
|
|
|
|
|
|
Capacity
purchase expenses
|
$1,181
|
|
$1,379
|
|
$(198)
|
|
(14.4)%
|
|
|
Fuel
and fuel taxes
|
1,014
|
|
680
|
|
334
|
|
49.1
%
|
|
|
Aircraft
sublease income
|
(122)
|
|
(266)
|
|
(144)
|
|
(54.1)%
|
|
|
|
|
|
|
|
|
|
|
|
Regional
capacity purchase, net
|
$2,073
|
|
$1,793
|
|
$ 280
|
|
15.6 %
|
|
|
The
net expense was higher in 2008 than in 2007 primarily due to higher fuel
expense. Fuel expense increased 49.1% over the 2007 expense as
a result of higher fuel prices. Fuel expense includes a
proportionate share of gains and losses related to our fuel hedging
program. Netting together capacity purchase expenses and
aircraft sublease income in 2008 for comparison to 2007, the net expense
did not change significantly. Sublease income of $76 million
and $79 million on aircraft operated by ExpressJet outside the scope of
our capacity purchase agreement for 2008 and 2007, respectively, is
recorded as other revenue.
|
|
|
·
|
Aircraft rentals decreased due to the
retirement of several Boeing 737 aircraft. New aircraft
delivered in 2008 were all purchased, with the related expense being
reflected in depreciation and amortization.
|
|
|
·
|
Landing fees and other rentals increased
primarily due to a higher number of international flights and rate
increases.
|
|
|
·
|
Distribution costs, which consist primarily
of reservation booking fees, credit card fees and commissions, increased
due to a 5.7% increase in passenger revenue.
|
|
|
·
|
Other operating expenses increased
primarily due to a greater number of international flights, which resulted
in increased air navigation fees and ground handling, security and related
expenses, changes in how certain costs are handled under the new Amended
ExpressJet CPA and higher OnePass reward expenses.
|
|
|
·
|
Special charges in 2008 included $52
million of non-cash settlement charges related to lump sum distributions
from our pilot-only defined benefit pension plan to pilots who retired,
$40 million of aircraft-related charges, net of gains on sales of
aircraft, $34 million in severance and $55 million of route impairment and
other charges.
Aircraft-related
charges, net of gains on sales of aircraft, of $40 million include
non-cash impairments on owned Boeing 737-300 and 737-500 aircraft and
related assets. Following the decision in June 2008 to retire
all of our Boeing 737-300 aircraft and a significant portion of our Boeing
737-500 fleet by the end of 2009, we evaluated the ongoing value of the
assets associated with these fleets. Fleet assets include owned
aircraft, improvements on leased aircraft, spare parts, spare engines and
simulators. Based on our evaluation, we determined that the
carrying amounts of these fleets were impaired and wrote them down to
their estimated fair value. We estimated the fair values based
on current market quotes and our expected proceeds from the sale of the
assets. Aircraft-related charges, net of gains on sales of
aircraft in 2008 also includes charges for future lease costs on
permanently grounded 737-300 aircraft and gains on the sale of ten Boeing
737-500 aircraft.
In
conjunction with the capacity reductions, we incurred $34 million for
severance and continuing medical coverage for employees accepting early
retirement packages or company-offered leaves of absence during
2008. Approximately 3,000 positions were eliminated as a result
of the capacity reductions, the majority of which were implemented in
September 2008.
Route
impairment and other special charges in 2008 of $55 million includes an
$18 million non-cash charge to write off an intangible route asset as a
result of our decision to move all of our flights between New York Liberty
and London from London Gatwick Airport to London Heathrow Airport and $37
million of charges related to contract settlements with regional carriers
and unused facilities.
Special
charges in 2007 consisted of a $31 million non-cash settlement charge
related to lump sum distributions from our pilot-only defined benefit
pension plan to pilots who retired and $22 million of gains on the sale of
three Boeing 737-500 aircraft. Additionally, we recorded a $4
million increase to the liability for the long-term disability plan for
our pilots related to a change in the mandatory retirement age for our
pilots from age 60 to 65. This change was signed into law on
December 13,
2007.
|
Nonoperating Income
(Expense). Nonoperating income (expense) includes net interest
expense (interest expense less interest income and capitalized interest), gains
from dispositions of investments and any ineffectiveness of our derivative
financial instruments. Total nonoperating expense increased $249
million in 2008 compared to 2007 due primarily to the following:
·
|
Net interest expense increased $71 million
primarily due to lower interest income resulting from lower interest rates
on investments and lower cash, cash equivalents and short-term investments
balances.
|
|
|
·
|
Gain on sale of investments of $78 million
in 2008 related to the sale of our remaining interests in Copa. Gain on
sale of investments in 2007 consisted of $30 million related to the sale
of our interest in ARINC, Inc. ("ARINC") and $7 million related to the
sale of our remaining interest in Holdings.
|
|
|
·
|
Other nonoperating income (expense)
included $125 million expense related to changes in the fair value of fuel
derivative contracts with Lehman Brothers that were deemed ineffective
after Lehman Brothers declared bankruptcy in
2008. Additionally, we recorded a loss of $34 million in 2008
to reflect the decline in the value of our student loan-related auction
rate securities, net of the value of a put right we received permitting us
to sell certain of the auction rate securities. This account
also includes other fuel hedge ineffectiveness gains of $26 million and
$14 million in 2008 and 2007, respectively, caused by our non-jet fuel
derivatives experiencing a higher relative change in value than the jet
fuel being hedged.
Other
variances in other nonoperating income (expense) include $37 million of
foreign currency exchange losses in 2008 compared to gains of $2 million
in 2007, a $16 million mark-to-market loss on investments supporting
company owned life insurance policies in 2008 compared to a $3 million
gain in 2007 and $6 million less equity in earnings of other companies in
2008 compared to 2007 resulting from our decreased ownership of Copa and
Holdings.
|
Income
Taxes. In the fourth quarter of 2007, we recorded income tax
expense of $104 million to increase the valuation allowance to be fully reserved
for certain NOLs, expiring in 2008 through 2011, which more likely than not
would not be realized prior to their expiration. In the second
quarter of 2008, we recorded an income tax credit of $28 million resulting from
higher utilization of those NOLs than had been previously
anticipated.
Segment
Results of Operations
We have two reportable
segments: mainline and regional. The mainline segment
consists of flights to cities using larger jets while the regional segment
currently consists of flights with a capacity of 50 or fewer seats (for jets) or
78 or fewer seats (for turboprops). As of December 31, 2008, the
regional segment was operated by ExpressJet, Chautauqua, CommutAir and Colgan
through capacity purchase agreements. Under these agreements, we
purchase all of the capacity related to aircraft covered by the contracts and
are responsible for setting prices and selling all of the related seat
inventory. In exchange for the regional carriers' operation of the
flights, we pay the regional carriers for each scheduled block hour based on
agreed formulas. Under the agreements, we recognize all passenger,
cargo and other revenue associated with each flight, and are responsible for all
revenue-related expenses, including commissions, reservations, catering and
terminal rent at hub airports.
We evaluate segment performance based
on several factors, of which the primary financial measure is operating income
(loss). However, we do not manage our business or allocate resources
based on segment operating profit or loss because (1) our flight schedules are
designed to maximize revenue from passengers flying, (2) many operations of the
two segments are substantially integrated (for example, airport operations,
sales and marketing, scheduling and ticketing), and (3) management decisions are
based on their anticipated impact on the overall network, not on one individual
segment.
Mainline Results of
Operations. Significant components of our mainline segment's
operating results for the year ended December 31 were as follows (in millions,
except percentage changes):
|
2008
|
2007
|
Increase
(Decrease)
|
%
Increase
(Decrease)
|
|
|
|
|
|
Operating
revenue
|
$12,827
|
|
$12,019
|
|
$ 808
|
|
6.7 %
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Aircraft
fuel and related
taxes
|
4,905
|
|
3,354
|
|
1,551
|
|
46.2 %
|
|
Wages,
salaries and related
costs
|
2,850
|
|
3,073
|
|
(223)
|
|
(7.3)%
|
|
Aircraft
rentals
|
662
|
|
680
|
|
(18)
|
|
(2.6)%
|
|
Landing
fees and other
rentals
|
782
|
|
738
|
|
44
|
|
6.0 %
|
|
Distribution
costs
|
611
|
|
583
|
|
28
|
|
4.8 %
|
|
Maintenance,
materials and repairs
|
612
|
|
621
|
|
(9)
|
|
(1.4)%
|
|
Depreciation
and
amortization
|
427
|
|
400
|
|
27
|
|
6.8 %
|
|
Passenger
services
|
384
|
|
374
|
|
10
|
|
2.7 %
|
|
Special
charges
|
155
|
|
13
|
|
142
|
|
NM
|
|
Other
|
1,365
|
|
1,335
|
|
30
|
|
2.2 %
|
|
|
12,753
|
|
11,171
|
|
1,582
|
|
14.2 %
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
$ 74
|
|
$ 848
|
|
$(774)
|
|
(91.3)%
|
|
The variances in specific line items
for the mainline segment were due to the same factors discussed under
consolidated results of operations.
Regional Results of
Operations. Significant components of our regional segment's
operating results for the year ended December 31 were as follows (in millions,
except percentage changes):
|
|
Increase
|
%
Increase
|
|
2008
|
2007
|
(Decrease)
|
(Decrease)
|
|
|
|
|
|
Operating
revenue
|
$2,414
|
|
$2,213
|
|
$ 201
|
|
9.1 %
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Wages,
salaries and related costs
|
107
|
|
54
|
|
53
|
|
98.1 %
|
|
Regional
capacity purchase, net
|
2,073
|
|
1,793
|
|
280
|
|
15.6 %
|
|
Aircraft
rentals
|
314
|
|
314
|
|
-
|
|
-
|
|
Landing
fees and other rentals
|
71
|
|
52
|
|
19
|
|
36.5
%
|
|
Distribution
costs
|
106
|
|
99
|
|
7
|
|
7.1 %
|
|
Depreciation
and amortization
|
11
|
|
13
|
|
(2)
|
|
(15.4)%
|
|
Passenger
services
|
22
|
|
15
|
|
7
|
|
46.7 %
|
|
Special
charges
|
26
|
|
-
|
|
26
|
|
NM
|
|
Other
|
72
|
|
34
|
|
38
|
|
NM
|
|
|
2,802
|
|
2,374
|
|
428
|
|
18.0 %
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
$(388)
|
|
$(161)
|
|
$(227)
|
|
NM
|
|
The reported results of our regional
segment do not reflect the total contribution of the regional segment to our
system-wide operations. The regional segment generates revenue for
the mainline segment as it provides flow traffic to our hubs. The
variances in material line items for the regional segment reflect generally the
same factors discussed under consolidated results of operations and a change in
2008 in how certain costs are handled under the new Amended ExpressJet
CPA.
Comparison
of Year Ended December 31, 2007 to December 31, 2006
Consolidated Results of
Operations
Significant components of our
consolidated operating results for the year ended December 31 were as follows
(in millions, except percentage changes):
|
|
Increase
|
%
Increase
|
|
2007
|
2006
|
(Decrease)
|
(Decrease)
|
|
|
|
|
|
Operating
revenue
|
$14,232
|
|
$13,128
|
|
$1,104
|
|
8.4%
|
|
Operating
expenses
|
13,545
|
|
12,660
|
|
885
|
|
7.0%
|
|
Operating
income
|
687
|
|
468
|
|
219
|
|
46.8%
|
|
Nonoperating
income (expense)
|
(121)
|
|
(99)
|
|
22
|
|
22.2%
|
|
Income
taxes
|
(107)
|
|
-
|
|
(107)
|
|
NM
|
|
Cumulative
effect of change in accounting principle
|
-
|
|
(26)
|
|
26
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
$ 459
|
|
$ 343
|
|
$ 116
|
|
33.8%
|
|
Each of these items is discussed in the
following sections.
Operating
Revenue. The table below shows components of operating revenue
for the year ended December 31, 2007 and period to period comparisons for
operating revenue, RASM and ASMs by geographic region for our mainline and
regional operations:
|
Revenue
|
%
Increase (Decrease)
in
2007 vs
2006
|
|
(in millions)
|
Revenue
|
RASM
|
ASMs
|
|
|
|
|
|
Passenger
revenue:
|
|
|
|
|
Domestic
|
$ 5,567
|
|
5.9 %
|
|
1.3 %
|
4.5 %
|
Trans-Atlantic
|
2,673
|
|
23.1 %
|
|
10.0 %
|
11.9 %
|
Latin
America
|
1,561
|
|
12.0 %
|
|
9.4 %
|
2.4 %
|
Pacific
|
992
|
|
9.4 %
|
|
8.2 %
|
1.1 %
|
Total
Mainline
|
10,793
|
|
10.9 %
|
|
5.0 %
|
5.6 %
|
|
|
|
|
|
|
|
Regional
|
2,202
|
|
(3.2)%
|
|
1.9 %
|
(4.9)%
|
|
|
|
|
|
|
|
Total
|
12,995
|
|
8.3%
|
|
3.8 %
|
4.3 %
|
|
|
|
|
|
|
|
Cargo
|
453
|
|
(0.9)%
|
|
|
|
Other
|
784
|
|
17.4
%
|
|
|
|
|
|
|
|
|
|
|
Operating
revenue
|
$14,232
|
|
8.4 %
|
|
|
|
Passenger revenue increased due to
increased traffic and fares. Along with other domestic airlines, we
raised fares in an effort to offset fuel price increases. The fare
increases were successful in part due to less capacity in domestic markets from
reduced flying by competitors. Consolidated RASM increased
year-over-year due to higher yields and load factors. The improved
RASM reflects our actions taken to improve the mix of local versus flow traffic
and reduce discounting. Consolidated RASM was adversely affected by
our reduction in regional flying, which historically has had significantly
higher RASM than our mainline flying due to the shorter stage length of regional
flights.
Cargo revenue decreased due to a
reduction in the volume of mail carried for the U.S. Postal
Service. Other revenue increased as a result of higher revenue
associated with sales of mileage credits in our OnePass frequent flyer program
and $79 million of rental income on aircraft leased to ExpressJet but not
operated for us during 2007.
Operating
Expenses. The table below shows period-to-period comparisons
by type of operating expense for our consolidated operations for the year ended
December 31 (in millions, except percentage changes):
|
2007
|
2006
|
Increase
(Decrease)
|
%
Increase
(Decrease)
|
|
|
|
|
|
Aircraft fuel and related
taxes
|
$3,354
|
$3,034
|
$ 320
|
|
10.5%
|
|
Wages, salaries and related
costs
|
3,127
|
2,875
|
252
|
|
8.8%
|
|
Regional capacity purchase,
net
|
1,793
|
1,791
|
2
|
|
0.1%
|
|
Aircraft
rentals
|
994
|
990
|
4
|
|
0.4%
|
|
Landing fees and other
rentals
|
790
|
764
|
26
|
|
3.4%
|
|
Distribution
costs
|
682
|
650
|
32
|
|
4.9%
|
|
Maintenance, materials and
repairs
|
621
|
547
|
74
|
|
13.5%
|
|
Depreciation and
amortization
|
413
|
391
|
22
|
|
5.6%
|
|
Passenger
services
|
389
|
356
|
33
|
|
9.3%
|
|
Special
charges
|
13
|
27
|
(14)
|
|
NM
|
|
Other
|
1,369
|
1,235
|
134
|
|
10.9%
|
|
|
$13,545
|
$12,660
|
$ 885
|
|
7.0%
|
|
Operating expenses increased 7.0%
primarily due to the following:
·
|
Aircraft and related taxes increased due to
higher fuel prices and a 5.6% increase in mainline
capacity. Our average jet fuel price per gallon including
related taxes increased to $2.18 in 2007 from $2.06 in
2006. Our average jet fuel price includes gains related to our
fuel hedging program of $0.02 per gallon in 2007, compared to losses
of $0.03 per gallon in 2006.
|
|
|
·
|
Wages, salaries and related costs increased
primarily due to a 3.7% increase in the average number of full time
equivalent employees necessary to support our growth and an increase of
$72 million for profit sharing and on-time performance incentive
expenses.
|
|
|
·
|
Regional capacity purchase, net includes
expenses related to our capacity purchase agreements. Our most
significant capacity purchase agreement is with
ExpressJet. Regional capacity purchase, net includes all fuel
expense on flights operated for us under capacity purchase agreements and
is net of our rental income on aircraft leased to ExpressJet and flown for
us. The net amounts consisted of the following for the year
ended December 31 (in millions, except percentage
changes):
|
|
|
|
Increase
|
%
Increase
|
|
2007
|
2006
|
(Decrease)
|
(Decrease)
|
|
|
|
|
|
|
Capacity
purchase expenses
|
$1,379
|
|
$1,461
|
|
$(82)
|
|
(5.6)%
|
|
|
Fuel
and fuel taxes
|
680
|
|
663
|
|
17
|
|
2.6 %
|
|
|
Aircraft
sublease income
|
(266)
|
|
(333)
|
|
(67)
|
|
(20.1)%
|
|
|
|
|
|
|
|
|
|
|
|
Regional
capacity purchase, net
|
$1,793
|
|
$1,791
|
|
$ 2
|
|
0.1 %
|
|
|
The
net expense was higher in 2007 than in 2006 due to higher fuel
expense. Fuel expense increased 2.6% over the 2006 expense as a
result of higher fuel prices. Sublease income was lower in 2007
as 67 aircraft were removed from our service. Sublease income
of $79 million on aircraft operated by ExpressJet outside the scope of the
ExpressJet CPA is recorded as other revenue. These factors were
offset by a decrease in regional capacity, which was attributable to
reduced flying by ExpressJet, partially offset by new capacity provided by
Chautauqua.
|
|
|
·
|
Maintenance, materials and repairs
increased primarily due to higher engine maintenance costs, driven by
increased flight activity and the timing of engine
overhauls. In addition, contractual engine repair rates
escalated in accordance with their contracts due to the aging of our
fleet. The costs of component repairs and expendable materials
increased primarily due to the aging of our fleet and the timing of
overhauls for more costly components, including landing
gears.
|
|
|
·
|
Other operating expenses increased
primarily due to a greater number of international flights, which resulted
in increased air navigation fees and ground handling, security and related
expenses.
|
|
|
·
|
Special charges in 2007 consisted of a $31
million non-cash settlement charge related to lump sum distributions from
our pilot-only defined benefit pension plan to pilots who retired and $22
million of gains on the sale of three Boeing 737-500
aircraft. Additionally, we recorded a $4 million increase to
the liability for the long-term disability plan for our pilots related to
a change in the mandatory retirement age for our pilots from age 60 to
65. This change was signed into law on December 13,
2007. Special charges in 2006 consisted of $59 million of
similar non-cash pension settlement charges, an $18 million credit
attributable to a reduction of our accruals for future lease payments and
return conditions related to permanently grounded MD-80
aircraft following negotiated settlements with aircraft lessors and a $14
million credit related to our officers' voluntary surrender of stock price
based restricted stock unit ("RSU")
awards.
|
Nonoperating Income
(Expense). Nonoperating income (expense) includes net interest
expense (interest expense less interest income and capitalized interest), gains
from dispositions of investments and any ineffectiveness of our derivative
financial instruments. Total nonoperating expense increased $22
million in 2007 compared to 2006 due primarily to the following:
·
|
Net interest expense decreased $18 million
primarily as a result of increased interest income on our higher cash
balances.
|
|
|
·
|
Other nonoperating income (expense)
includes hedge ineffectiveness gains related to our fuel hedges that
totaled $14 million during
2007. This ineffectiveness arose because our heating oil
collars experienced a higher increase in value than the jet fuel being
hedged. Hedge ineffectiveness was not material in
2006. Other nonoperating income (expense) also includes our
equity in the earnings of Copa and Holdings and income related to our tax
sharing agreement with Holdings in 2006. These amounts
were $23
million lower in 2007 as compared to 2006 as a result of our reduced
ownership interests in Holdings and Copa and a decrease in income
recognized from our tax sharing agreement with
Holdings.
|
|
|
·
|
Gain on sale of investments in 2007
consisted of $30 million related to the sale of our interest in ARINC,
Inc. and $7 million related to the sale of all of our remaining interest
in Holdings. In 2006, we recognized a gain of $92 million
related to the sale of 7.5 million shares of Copa's Class A common
stock.
|
Income
Taxes. In the fourth quarter of 2007, we recorded a non-cash
tax charge of $104 million to increase the deferred tax asset valuation
allowance to be fully reserved for certain NOLs expiring in 2008 through
2011. Additional income tax expense of $3 million during 2007 is
attributable to state and foreign income taxes.
Cumulative Effect of Change
in Accounting Principle. Stock price based RSU awards made pursuant to
our Long-Term Incentive and RSU Program can result in cash payments to award
holders if there are specified increases in our stock price over multi-year
performance periods. Prior to our adoption of Statement of Financial
Accounting Standards No. 123 (revised 2004), "Share Based Payment," ("SFAS
123R") on January 1, 2006, we had recognized no liability or expense related to
our stock price based RSU awards because the targets set forth in the program
had not been met. However, SFAS 123R requires these awards to be
measured at fair value at each reporting date with the related expense being
recognized over the required service periods, regardless of whether the
specified stock price targets have been met. On January 1, 2006, we
recognized a cumulative effect of change in accounting principle to record our
liability related to our outstanding stock price based RSU awards at that date,
which reduced 2006 earnings by $26 million. The final stock price
based RSU awards were paid out in January 2008. Following this
payout, there are no stock price based RSU awards outstanding.
Segment
Results of Operations
Mainline Results of
Operations. Significant components of our mainline segment's
operating results for the year ended December 31 were as follows (in millions,
except percentage changes):
|
2007
|
2006
|
Increase
(Decrease)
|
%
Increase
(Decrease)
|
|
|
|
|
|
Operating
revenue
|
$12,019
|
|
$10,907
|
|
$1,112
|
|
10.2 %
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Aircraft
fuel and related taxes
|
3,354
|
|
3,034
|
|
320
|
|
10.5 %
|
|
Wages,
salaries and related costs
|
3,073
|
|
2,830
|
|
243
|
|
8.6 %
|
|
Aircraft
rentals
|
680
|
|
678
|
|
2
|
|
0.3 %
|
|
Landing
fees and other rentals
|
738
|
|
720
|
|
18
|
|
2.5 %
|
|
Distribution
costs
|
583
|
|
541
|
|
42
|
|
7.8 %
|
|
Maintenance,
materials and repairs
|
621
|
|
547
|
|
74
|
|
13.5 %
|
|
Depreciation
and amortization
|
400
|
|
378
|
|
22
|
|
5.8 %
|
|
Passenger
services
|
374
|
|
341
|
|
33
|
|
9.7 %
|
|
Special
charges
|
13
|
|
27
|
|
(14)
|
|
NM
|
|
Other
|
1,335
|
|
1,218
|
|
117
|
|
9.6 %
|
|
|
11,171
|
|
10,314
|
|
857
|
|
8.3 %
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
$ 848
|
|
$ 593
|
|
$ 255
|
|
43.0 %
|
|
The variances in specific line items
for the mainline segment were due to the same factors discussed under
consolidated results of operations.
Regional Results of
Operations. Significant components of our regional segment's
operating results for the year ended December 31 were as follows (in millions,
except percentage changes):
|
|
Increase
|
%
Increase
|
|
2007
|
2006
|
(Decrease)
|
(Decrease)
|
|
|
|
|
|
Operating
revenue
|
$2,213
|
|
$2,221
|
|
$ (8)
|
|
(0.4)%
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Wages,
salaries and related costs
|
54
|
|
45
|
|
9
|
|
20.0 %
|
|
Regional
capacity purchase, net
|
1,793
|
|
1,791
|
|
2
|
|
0.1 %
|
|
Aircraft
rentals
|
314
|
|
312
|
|
2
|
|
0.6 %
|
|
Landing
fees and other rentals
|
52
|
|
44
|
|
8
|
|
18.2 %
|
|
Distribution
costs
|
99
|
|
109
|
|
(10)
|
|
(9.2)%
|
|
Depreciation
and amortization
|
13
|
|
13
|
|
-
|
|
-
|
|
Passenger
services
|
15
|
|
15
|
|
-
|
|
-
|
|
Other
|
34
|
|
17
|
|
17
|
|
100.0 %
|
|
|
2,374
|
|
2,346
|
|
28
|
|
1.2 %
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
$ (161)
|
|
$ (125)
|
|
$ 36
|
|
28.8 %
|
|
The reported results of our regional
segment do not reflect the total contribution of the regional segment to our
system-wide operations. The regional segment generates revenue for
the mainline segment as it provides flow traffic to our hubs. The
variances in specific line items for the regional segment reflect generally the
same factors discussed under consolidated results of operations.
Liquidity
and Capital Resources
As of December 31, 2008, we had $2.6
billion in unrestricted cash, cash equivalents and short-term investments, which
is $160 million lower than at December 31, 2007. At December 31,
2008, we also had $190 million of restricted cash, cash equivalents and
short-term investments, which was primarily collateral for estimated future
workers' compensation claims, credit card processing contracts, letters of
credit and performance bonds. Restricted cash, cash equivalents and
short-term investments at December 31, 2007 totaled $179 million.
We do not currently have any undrawn
lines of credit or revolving credit facilities and most of our otherwise readily
financeable assets are encumbered. The current economic crisis has
severely disrupted the global capital markets, resulting in a diminished
availability of financing and higher cost for financing that is
obtainable. If the capital markets do not improve, whether through
measures implemented by the U.S. and foreign governments, such as the Emergency
Economic Stabilization Act of 2008, or otherwise, we may be unable to obtain
financing on acceptable terms (or at all) to refinance certain maturing debt we
would normally expect to refinance and to satisfy future capital
commitments. As a result, the continued lack of liquidity in the
capital markets could have a material adverse effect on our results of
operations and financial condition.
We expect to fund our future capital
and purchase commitments through internally generated funds, general company
financings and aircraft financing transactions. However, particularly
in light of the troubled capital markets, there can be no assurance that
sufficient financing will be available for all aircraft and other capital
expenditures or that, if necessary, we will be able to defer or otherwise
renegotiate our capital commitments.
Operating
Activities. Net cash flows used by operations for the year
ended December 31, 2008 were $324 million, a decrease of $1.5 billion from the
$1.1 billion in net cash provided by operating activities in
2007. The decrease in cash flows provided by operations in 2008
compared to 2007 is primarily the result of our 2008 loss caused by higher fuel
expenses. In addition, operating cash flows in 2008 were negatively
impacted by our posting $171 million of cash collateral related to our fuel
hedges, which were in a net liability position at December 31,
2008.
Investing
Activities. Cash flows used in investing activities for the
year ended December 31 were as follows (in millions):
|
|
Cash
|
|
|
Increase
|
|
2008
|
2007
|
(Decrease)
|
|
|
|
|
Capital
expenditures
|
$(504)
|
|
$(445)
|
|
$ (59)
|
|
Purchase
deposits refunded (paid) in connection with
future
aircraft deliveries,
net
|
102
|
|
(219)
|
|
321
|
|
Proceeds
(purchase) of short-term and long-term
investments,
net
|
137
|
|
(314)
|
|
451
|
|
Proceeds
from sales of investments, net
|
149
|
|
65
|
|
84
|
|
Proceeds
from sales of property and equipment
|
113
|
|
67
|
|
46
|
|
Decrease
(increase) in restricted cash, net
|
(13)
|
|
86
|
|
(99)
|
|
|
$ (16)
|
|
$(760)
|
|
$744
|
|
Capital expenditures for 2008 consisted
of $177 million of fleet expenditures, $273 million of non-fleet expenditures
and $54 million for rotable parts and capitalized interest. Fleet
expenditures in 2008 included the installation of Audio/Video on Demand
entertainment systems for Boeing 777 and 757 aircraft and the installation of
winglets to improve fuel efficiency. The 2008 non-fleet expenditures
are primarily slots at London's Heathrow Airport, ground service equipment and
technology and terminal enhancements.
We have substantial commitments for
capital expenditures, including for the acquisition of new
aircraft. As of December 31, 2008, we had firm commitments for 87 new
Boeing aircraft scheduled for delivery from 2009 through 2016, with an estimated
aggregate cost of $5.6 billion including related spare engines. In
addition to our firm order aircraft, we had options to purchase a total of 102
additional Boeing aircraft as of December 31, 2008. Projected net
capital expenditures for 2009 are as follows (in millions):
Fleet
related (excluding aircraft to be acquired through
the
issuance of
debt)
|
$190
|
Non-fleet
|
210
|
Spare
parts and capitalized
interest
|
55
|
Total
|
$455
|
Aircraft
purchase
deposits
|
40
|
Projected
net capital
expenditures
|
$495
|
While some of our projected capital
expenditures are related to projects to which we have committed, a significant
number of projects can be deferred. Should economic conditions
warrant, we will reduce our capital expenditures, and will be able to do so
without materially affecting our operations in the near term.
We sold ten Boeing 737-500 aircraft in
2008 and received cash proceeds of $90 million. We have aircraft sale
contracts with two different foreign buyers to sell 15 Boeing 737-500
aircraft. The buyers of these aircraft have requested, and in some
cases we have agreed to, a delay in the delivery dates for the
aircraft. We hold cash deposits that secure the buyers' obligations
under the aircraft sale contracts, and we are entitled to damages under the
aircraft sale contracts if the buyers do not take delivery of the aircraft when
required. We expect to operate each aircraft scheduled for delivery
in 2009 until shortly before its delivery date. These pending
transactions are subject to customary closing conditions, some of which are
outside of our control, and we cannot give any assurances that the buyers of
these aircraft will be able to obtain financing for these transactions, that
there will not be further delays in deliveries or that the closing of these
transactions will occur.
Net purchase deposits paid were lower
in 2008 than in 2007 as the result of higher refunds in 2008 due to aircraft
deliveries.
In May 2008, we sold all of our
remaining shares of Copa Class A common stock for net proceeds of $149 million
and recognized a gain of $78 million.
In 2007, we sold all of our shares of
Holdings common stock to third parties for cash proceeds of $35
million. We also sold our interest in ARINC in the fourth quarter of
2007 for cash proceeds of $30 million.
Sales of property and equipment in 2007
included the sale of three 737-500 aircraft for $44 million in
cash.
Financing
Activities. Cash flows provided by (used in) financing
activities for the year ended December 31 were as follows (in
millions):
|
|
Cash
|
|
|
Increase
|
|
2008
|
2007
|
(Decrease)
|
|
|
|
|
Payments
on long-term debt and capital lease obligations
|
$(641)
|
|
$ (429)
|
|
$(212)
|
|
Proceeds
from issuance of long-term
debt
|
642
|
|
26
|
|
616
|
|
Proceeds
from public offering of common stock, net
|
358
|
|
-
|
|
358
|
|
Proceeds
from issuance of common stock pursuant to stock plans
|
18
|
|
35
|
|
(17)
|
|
|
$ 377
|
|
$(368)
|
|
$ 745
|
|
Cash flows provided by financing
activities increased in 2008 due to new borrowings and proceeds from public
offerings totaling 24 million shares of Class B common stock. In
addition to the amounts presented in the table above, we acquired $1.0 billion
of property and equipment through the issuance of debt in 2008, compared to $190
million in 2007.
On June 30, 2008, we entered into a
loan facility to finance a portion of the pre-delivery payment requirements
under the aircraft purchase agreements for 66 new Boeing aircraft originally
scheduled for delivery between July 1, 2008 and the end of 2011. We
borrowed $113 million under this facility on June 30, 2008. Our
obligations under the facility are secured by our rights under our purchase
agreements for 737 and 777 aircraft on order with Boeing.
On June 10, 2008, we entered into an
amendment and restatement of our Bankcard Agreement with Chase, under which
Chase purchases frequent flyer mileage credits to be earned by OnePass members
for making purchases using a Continental branded credit card issued by
Chase. The Bankcard Agreement provides for a payment to us of $413
million, of which $235 million relates to the advance purchase of frequent flyer
mileage credits for the year 2016 and the balance of which is in consideration
for certain other commitments with respect to the co-branding relationship,
including the extension of the term of the Bankcard Agreement until December 31,
2016. In connection with the advance purchase of mileage credits, we
have provided a security interest to Chase in certain routes and slots,
including certain slots at London's Heathrow Airport. The $235
million purchase of mileage credits has been treated as a loan from Chase with
an implicit interest rate of 6.18% and is reported as long-term debt in our
consolidated balance sheet. Our liability will be reduced ratably in
2016 as the mileage credits are issued to Chase.
In April 2007, we obtained financing
for 12 Boeing 737-800s and 18 Boeing 737-900ERs. We applied a portion
of this financing to 27 Boeing aircraft delivered to us in 2008 and recorded
related debt of $1.0 billion. We will apply the remainder of this
financing to three of the Boeing 737 aircraft scheduled for delivery in
2009. In connection with this financing, pass-through trusts raised
$1.1 billion through the issuance of three classes of pass-through
certificates. Class A certificates, with an aggregate principal
amount of $757 million, bear interest at 5.983%, Class B certificates, with an
aggregate principal amount of $222 million, bear interest at 6.903% and Class C
certificates, with an aggregate principal amount of $168 million, bear interest
at 7.339%. The proceeds from the sale of the certificates are
initially held by a depositary in escrow for the benefit of the certificate
holders until we use such funds to purchase the aircraft. The funds
in escrow are not guaranteed by us and are not reported as debt on our
consolidated balance sheet at December 31, 2008 because the proceeds held by the
depositary are not our assets and interest earned on the proceeds, as well as
any unused proceeds, will be distributed directly to the certificate
holders.
As we take delivery of each of the
three remaining aircraft that will be financed under this facility, we will
issue equipment notes to the trusts, which will purchase such notes with a
portion of the escrowed funds. We will use the proceeds to finance
the purchase of the aircraft and will record the principal amount of the
equipment notes that we issue as debt on our consolidated balance
sheet. Principal payments on the equipment notes and the
corresponding distribution of these payments to certificate holders will begin
in April 2010 and will end in April 2022 for Class A and B certificates and
April 2014 for Class C certificates. Additionally, the Class A and B
certificates have the benefit of a liquidity facility under which a third party
agrees to make up to three semiannual interest payments on the certificates if a
default in the payment of interest occurs.
We have reached an agreement in
principle with a bank for it to provide financing for three Boeing 737-900ER
aircraft scheduled for delivery in the first half of 2009. Boeing has
agreed to provide backstop financing for all of the additional 11 Boeing 737
aircraft scheduled for delivery through February 2010 (or 14 such additional
aircraft if we fail to reach a definitive agreement for the financing described
in the previous sentence), subject to customary closing
conditions. However, we do not have backstop financing or any other
financing currently in place for the balance of the Boeing aircraft on
order. Further financing will be needed to satisfy our capital
commitments for our firm order aircraft and other related capital
expenditures. We can provide no assurance that the backstop financing
or any other financing not already in place for our aircraft deliveries will be
available to us when needed on acceptable terms or at all. Since the
commitments for firm order aircraft are non-cancelable and assuming no breach of
the agreement by Boeing, if we are unable to obtain financing and cannot
otherwise satisfy our commitment to purchase these aircraft, the manufacturer
could exercise its rights and remedies under applicable law, such as seeking to
terminate the contract for a material breach, selling the aircraft to one or
more other parties and suing us for damages to recover for any resulting losses
incurred by the manufacturer.
During 2008, we obtained $268 million
through three separate financings secured by two new Boeing 737-900ER aircraft,
seven Boeing 757-200 aircraft and five Boeing 737-700 aircraft.
In June 2008, we completed a public
offering of 11 million shares of Class B common stock at a price to the public
of $14.80 per share, raising net proceeds of $162
million. Additionally, in the fourth quarter of 2008, we completed a
public offering of 13 million shares of Class B common stock at an average price
to the public of $15.84 per share, raising net proceeds of $196
million. Proceeds from both offerings were used for general corporate
purposes.
In January 2007, $170 million in
principal amount of our 4.5% Convertible Notes due on February 1, 2007 was
converted by the holders into 4.3 million shares of our Class B common stock at
a conversion price of $40 per share. The remaining $30 million in
principal amount was paid on February 1, 2007.
Proceeds from the issuance of long-term
debt in 2007 relate to the refinancing of debt secured by three Boeing 737-500
aircraft.
During 2007, we incurred $190 million
of floating rate indebtedness pursuant to existing finance agreements secured by
two Boeing 777-200ER aircraft that were delivered in March and April
2007. This indebtedness consists of $156 million of senior notes due
in 2019 and $34 million of junior notes due in 2014. The loans bear
interest at LIBOR plus a blended margin of approximately 1.9% per
year. The commitments under these finance agreements are fully
funded.
Other
Liquidity Matters
Student Loan-Related Auction
Rate Securities. At December 31, 2008, we held student
loan-related auction rate securities with a par value of $291 million and a fair
value of $229 million. This
total includes $258 million par value ($201 million fair value) classified as
short-term investments and $33 million par value ($28 million fair value) that
is collateral for estimated future workers' compensation claims and is
classified as restricted cash, cash equivalents and short-term
investments. These securities are variable-rate debt instruments with
contractual maturities generally greater than ten years and whose interest rates
are reset every 7, 28 or 35 days, depending on the terms of the particular
instrument. These securities are secured by pools of student loans
guaranteed by state-designated guaranty agencies and reinsured by the U.S.
government. All of the auction rate securities we hold are senior
obligations under the applicable indentures authorizing the issuance of the
securities. Auctions for these securities began failing in the first
quarter of 2008 and have continued to fail through mid-February 2009, resulting
in our continuing to hold such securities and the issuers of these securities
paying interest adjusted to the maximum contractual rates. At
December 31, 2008, the carrying value of our auction rate securities was
approximately 80% of par value in the aggregate. Based upon our cash
requirements and other existing liquid assets, the failure of these auctions and
our continuing to hold these securities did not have a material impact on our
liquidity during the year.
In addition, during the fourth quarter
of 2008, one institution granted us a put right permitting us to sell to the
institution auction rate securities with a par value of $125 million in 2010 at
their full par value. The institution has also committed to loan us
75% of the market value of these securities at any time until the put is
exercised.
Pension
Obligations. We have defined benefit pension plans covering
substantially all of our U.S. employees other than Chelsea Food Services and CMI
employees. As of December 31, 2008, our projected benefit obligation
of those plans was a combined liability of $2.5 billion and plan assets related
to those obligations totaled $1.1 billion, leaving an unfunded obligation of
$1.4 billion. We expect to contribute approximately $125 million to
our tax-qualified defined benefit pension plans during 2009.
Credit
Ratings. At December 31, 2008, our senior unsecured debt was
rated B3 by Moody's and B- by Standard & Poor's. These ratings
are significantly below-investment grade. Our current credit ratings
increase the costs we incur when issuing debt, adversely affect the terms of
such debt and limit our financing options. Additional reductions in
our credit ratings could further increase our borrowing costs and reduce the
availability of financing to us in the future. We do not have any
debt obligations that would be accelerated as a result of a credit rating
downgrade. However, we would have to post additional collateral of
approximately $229 million under our domestic bank-issued credit card and
American Express processing agreements if our senior unsecured debt rating were
to fall below Caa3 as rated by Moody's or CCC- as rated by Standard &
Poor's. If requested, we would also be required to post additional
collateral of up to $39 million under our worker's compensation program if our
senior unsecured debt rating were to fall below B3 as rated by Moody's or CCC+
as rated by Standard & Poor's.
Fuel
Hedges. Because our fuel derivatives were in a net liability
position of $415 million at December 31, 2008 resulting from the recent
significant decline in crude oil prices, we posted cash collateral with our
counterparties totaling $171 million. These amounts are reported in
prepayments and other current assets in our consolidated balance
sheet.
Bank Card Processing
Agreements. In connection with the amendment of the Bankcard
Agreement with Chase, we also amended our domestic bank-issued credit card
processing agreement to extend the term of the agreement until December 31, 2016
and modify certain provisions in the agreement. As a result of the
amendment of that processing agreement, the requirement that we maintain a
minimum EBITDAR (generally, earnings before interest, income taxes,
depreciation, amortization, aircraft rentals, certain nonoperating income
(expense) and special items) to fixed charges (interest and aircraft rentals)
ratio for the preceding 12 months was eliminated as a trigger requiring the
posting of additional collateral.
The covenants contained in the Chase
processing agreement require that we post additional cash collateral if we fail
to maintain (1) a minimum level of unrestricted cash, cash equivalents and
short-term investments, (2) a minimum ratio of unrestricted cash, cash
equivalents and short-term investments to current liabilities of 0.25 to 1.0 (or
(3) a minimum senior unsecured debt rating of at least Caa3 and CCC- from
Moody's and Standard & Poor's, respectively.
We also entered into a new credit card
processing agreement with American Express in 2008. Under the terms
of that agreement, if a covenant trigger under the Chase processing agreement
results in our posting additional collateral under that agreement, we would be
required to post additional collateral under the American Express processing
agreement. The amount of additional collateral required under the
American Express processing agreement would be based on a percentage of the
value of unused tickets (for travel at a future date) purchased by customers
using the American Express card. The percentage for purposes of this
calculation is the same as the percentage applied under the Chase processing
agreement, after taking into account certain other risk protection maintained by
American Express.
Under these processing agreements and
based on our current air traffic liability exposure (as defined in each
agreement), we would be required to post collateral up to the following amounts
if we failed to comply with the covenants described above:
·
|
a
total of $72 million if our
unrestricted cash, cash equivalents and short-term investments balance
falls below $2.0 billion;
|
·
|
a
total of $229 million if we fail to maintain the minimum unsecured debt
ratings specified above;
|
·
|
a
total of $437 million if our unrestricted cash, cash equivalents and
short-term investments balance (plus any collateral posted at Chase) falls
below $1.4 billion or if our ratio of unrestricted cash, cash equivalents
and short-term investments to current liabilities falls below 0.25 to 1.0;
and
|
·
|
a
total of $958 million if our unrestricted cash, cash equivalents and
short-term investments balance (plus any collateral posted at Chase) falls
below $1.0 billion or if our ratio of unrestricted cash, cash equivalents
and short-term investments to current liabilities falls below 0.22 to
1.0.
|
The amounts shown above are incremental
to the current collateral we have posted with these
companies.
Depending on our unrestricted cash,
cash equivalents and short-term investments balance at the time, posting of
significant amount of cash collateral could cause our unrestricted cash, cash
equivalents and short-term investments balance to fall below the minimum of $1.0
billion required under our $350 million secured term loan facility, resulting in
a default under the facility. The posting of such additional
collateral under these circumstances and/or the acceleration of amounts borrowed
under our secured term loan facility (or other remedies pursued by the lenders
thereunder) would likely have a material adverse effect on our financial
condition. We are currently in compliance with all of the covenants
under these agreements.
Debt
Covenants. We and CMI have loans under a $350 million secured
term loan facility. The loans are secured by certain of our U.S.-Asia
routes and related assets, all of the outstanding common stock of our
wholly-owned subsidiaries Air Micronesia, Inc. ("AMI") and CMI and substantially
all of the other assets of AMI and CMI, including route authorities and related
assets. The loans bear interest at a rate equal to the London
Interbank Offered Rate ("LIBOR") plus 3.375% and are due in June
2011. The facility requires us to maintain a minimum balance of
unrestricted cash and short-term investments of $1.0 billion at the end of
each month. The loans may become due and payable immediately if we fail to
maintain the monthly minimum cash balance and upon the occurrence of other
customary events of default under the loan documents. If we fail to
maintain a minimum balance of unrestricted cash, cash equivalents and short-term
investments of $1.125 billion, we and CMI will be required to make a
mandatory aggregate $50 million prepayment of the loans.
In addition, the facility provides that
if the ratio of the outstanding loan balance to the value of the collateral
securing the loans, as determined by the most recently delivered periodic
appraisal, is greater than 52.5%, we and CMI will be required to post additional
collateral or prepay the loans to reestablish a loan-to-collateral value ratio
of not greater than 52.5%. We are currently in compliance with the
covenants in the facility.
In connection with our $320 million in
notes secured by spare parts inventory, we entered into a collateral maintenance
agreement requiring us, among other things, to maintain a loan-to-collateral
value ratio of not greater than 45% with respect to the $190 million senior
series of equipment notes and a loan-to-collateral value ratio of not greater
than 75% with respect to both series of notes combined. We must also
maintain a certain level of rotable components within the spare parts collateral
pool. These ratios are calculated semi-annually based on an
independent appraisal of the spare parts collateral pool. If any of
the collateral ratio requirements are not met, we must take action to meet all
ratio requirements by adding additional eligible spare parts to the collateral
pool, redeeming a portion of the outstanding notes, providing other collateral
acceptable to the bond insurance policy provider for the senior series of
equipment notes or any combination of the above actions. We are
currently in compliance with these covenants.
Liquidity and Credit Support
Providers. We have utilized proceeds from the issuance of
pass-through certificates to finance the acquisition of 237 leased and owned
mainline jet aircraft, certain spare engines and certain spare
parts. Typically, these pass-through certificates contain liquidity
facilities whereby a third party agrees to make payments sufficient to pay at
least 18 months of interest on the applicable certificates if a payment default
occurs. The liquidity providers for these certificates include the
following: CALYON New York Branch, Landesbank Hessen-Thuringen
Girozentrale, Morgan Stanley Capital Services, Morgan Stanley Bank, Westdeutsche
Landesbank Girozentrale, AIG Matched Funding Corp., ABN AMRO Bank N.V., Credit
Suisse First Boston, Caisse des Depots et Consignations, Bayerische Landesbank
Girozentrale, ING Bank N.V., De Nationale Investeringsbank N.V. and RZB Finance
LLC.
We are also the issuer of pass-through
certificates secured by 135 leased regional jet aircraft currently operated by
ExpressJet. The liquidity providers for these certificates include
the following: ABN AMRO Bank N.V., Chicago Branch, Citibank N.A., Citicorp North
America, Inc., Landesbank Baden-Wurttemberg, RZB Finance LLC and WestLB AG, New
York Branch.
We currently utilize policy providers
to provide credit support on three separate financings with an outstanding
principal balance of $469 million at December 31, 2008. The policy
providers have unconditionally guaranteed the payment of interest on the notes
when due and the payment of principal on the notes no later than 24 months after
the final scheduled payment date. Policy providers on these notes are
Ambac Assurance Corporation (a subsidiary of Ambac Financial Group, Inc.) and
Financial Guaranty Insurance Company (a subsidiary of
FGIC). Financial information for the parent company of Ambac
Assurance Corporation is available over the internet at the SEC's website at
www.sec.gov or at the SEC's public reference room in Washington, D.C. and
financial information for FGIC is available over the internet at
www.fgic.com. A policy provider is also used as credit support for
the financing of certain facilities at Houston Bush, currently subject to a
sublease by us to the City of Houston, with an outstanding balance of $46
million at December 31, 2008.
Contractual
Obligations. The following table summarizes the effect that
minimum debt, lease and other material noncancelable commitments listed below
are expected to have on our future cash flows (in millions):
Contractual Obligations
|
Payments Due
|
Later
Years
|
Total
|
2009
|
2010
|
2011
|
2012
|
2013
|
|
|
|
|
|
|
|
|
Debt
and leases:
|
|
|
|
|
|
|
|
|
Long-term
debt (1)
|
$
7,372
|
$ 832
|
$ 1,045
|
$ 1,344
|
$ 690
|
$ 732
|
$2,729
|
|
Capital
lease obligations (1)
|
482
|
17
|
17
|
16
|
16
|
16
|
400
|
|
Aircraft
operating leases (2)
|
8,722
|
1,019
|
998
|
939
|
894
|
871
|
4,001
|
|
Nonaircraft
operating leases (3)
|
6,147
|
456
|
418
|
402
|
494
|
355
|
4,022
|
|
|
|
|
|
|
|
|
|
Other:
|
|
|
|
|
|
|
|
|
Capacity
purchase agreements (4)
|
4,703
|
767
|
674
|
660
|
675
|
671
|
1,256
|
|
Aircraft
and other purchase
commitments
(5)
|
5,902
|
551
|
809
|
955
|
696
|
1,092
|
1,799
|
|
Projected
pension contributions (6)
|
1,657
|
125
|
148
|
155
|
183
|
174
|
872
|
|
|
|
|
|
|
|
|
|
|
Total
(7)
|
$34,985
|
$3,767
|
$4,109
|
$4,471
|
$3,648
|
$3,911
|
$15,079
|
(1)
|
Represents
contractual amounts due, including interest. Interest on
floating rate debt was estimated using rates in effect at December 31,
2008.
|
(2)
|
Represents
contractual amounts due and excludes $248 million of projected sublease
income to be received from ExpressJet.
|
(3)
|
Represents
minimum contractual amounts.
|
(4)
|
Represents
our estimates of future minimum noncancelable commitments under our
capacity purchase agreements and does not include the portion of the
underlying obligations for aircraft leased to ExpressJet or deemed to be
leased from Chautauqua, CommutAir or Colgan and facility rent that is
disclosed as part of aircraft and nonaircraft operating
leases. See Note 16 to our consolidated financial statements
included in Item 8 of this report for the significant assumptions used to
estimate the payments.
|
(5)
|
Represents
contractual commitments for firm order aircraft only, net of previously
paid purchase deposits, and noncancelable commitments to purchase goods
and services, primarily information technology support. See
Note 19 to our consolidated financial statements included in Item 8 of
this report for a discussion of our purchase
commitments.
|
(6)
|
Represents
our estimate of the minimum funding requirements as determined by
government regulations. Amounts are subject to change based on
numerous assumptions, including the performance of the assets in the plan
and bond rates. See "Critical Accounting Policies and
Estimates" in this Item for a discussion of our assumptions regarding our
pension plans.
|
(7)
|
Total
contractual obligations do not include long-term contracts where the
commitment is variable in nature, such as credit card processing
agreements and cost-per-hour engine maintenance
agreements, or where short-term cancellation provisions
exist.
|
In addition to the above contractual
obligations, we also have fuel and foreign currency hedge contracts outstanding
at December 31, 2008 that will settle in 2009. These contracts were
in net liability positions of $415 million and $8 million, respectively, at
December 31, 2008. The actual settlement amounts could be
significantly different due to changes in prices of the underlying commodities
or in currency exchange rates. We had posted cash collateral with our
fuel hedge counterparties of $171 million at December 31, 2008.
We expect to fund our future capital
and purchase commitments through internally generated funds, general company
financings and aircraft financing transactions. However, particularly
in light of the troubled capital markets, there can be no assurance that
sufficient financing will be available for all aircraft and other capital
expenditures or that, if necessary, we will be able to defer or otherwise
renegotiate our capital commitments.
Operating
Leases. At December 31, 2008, we had 466 aircraft under
operating leases, including 210 mainline aircraft and 256 regional
jets. These leases have remaining lease terms ranging up to 16
years. In addition, we have non-aircraft operating leases,
principally related to airport and terminal facilities and related
equipment. The obligations for these operating leases are not
included in our consolidated balance sheets. Our total rental expense for
aircraft and non-aircraft operating leases was $976 million and $580 million,
respectively, in 2008.
Regional Capacity Purchase
Agreements. In June 2008, we entered into the Amended
ExpressJet CPA, which amends and restates our previous capacity purchase
agreement effective July 1, 2008. Under the Amended ExpressJet CPA,
we will continue to purchase all of the capacity from the ExpressJet flights
covered by the agreement at a negotiated price and be responsible for the cost
of providing fuel for all flights and paying aircraft rent for all aircraft
covered by the Amended ExpressJet CPA. See Note 16 to our
consolidated financial statements included in Item 8 of this report for details
of changes to our capacity purchase agreement with ExpressJet.
During 2007, Chautauqua began providing
and operating forty-four 50-seat regional jets as a Continental Express carrier
under the Chautauqua CPA. As of December 31, 2008, 37 aircraft are
being flown by Chautauqua for us. The Chautauqua CPA requires us to
pay Chautauqua a fixed fee, subject to annual escalations (capped at 3.5%), for
each block hour flown for its operation of the aircraft. Chautauqua
supplies the aircraft that it operates under the agreement. Aircraft
are scheduled to be removed from service under the Chautauqua CPA each year
through 2012, provided that we have the unilateral right to extend the
Chautauqua CPA on the same terms on an aircraft-by-aircraft basis for a period
of up to five years in the aggregate for 20 aircraft and for up to three years
in the aggregate for seven aircraft, subject to the renewal terms of the related
aircraft lease.
Our capacity purchase agreement with
CommutAir provides for CommutAir to operate sixteen 37-seat Bombardier Q200
twin-turboprop aircraft as a Continental Connection carrier on short distance
routes from Cleveland Hopkins and New York Liberty. The CommutAir CPA
became effective in 2006 and has a term of approximately six
years. CommutAir supplies all of the aircraft that it operates under
the agreement.
In 2008, Colgan began operating fifteen
74-seat Bombardier Q400 twin-turboprop aircraft on short and medium-distance
routes from New York Liberty on our behalf. Colgan operates the
flights as a Continental Connection carrier under a capacity purchase agreement
with us. In January 2009, we amended the capacity purchase agreement
to increase by 15 the number of Q400 aircraft operated by Colgan on our
behalf. We expect that Colgan will begin operating these 15
additional aircraft as they are delivered, beginning in the third quarter of
2010 through the second quarter of 2011. Each aircraft is scheduled
to be covered by the agreement for approximately ten years following the date
such aircraft is delivered into service thereunder. Colgan supplies
all aircraft that it operates under the agreement. One of Colgan's
Q400 aircraft was involved in an accident on February 12, 2009, reducing the
number of aircraft currently being flown for us to 14.
Under each of these capacity purchase
agreements, our regional operator is generally required to indemnify us for any
claims arising in connection with its operation of the aircraft under the
agreement and to maintain separate insurance to cover its indemnification
obligation.
Guarantees and
Indemnifications. We are the guarantor of approximately $1.7
billion in aggregate principal amount of tax-exempt special facilities revenue
bonds and interest thereon, excluding the US Airways contingent liability
discussed below. These bonds, issued by various municipalities and
other governmental entities, are payable solely from our rentals paid under
long-term agreements with the respective governing bodies. The
leasing arrangements associated with approximately $1.5 billion of these
obligations are accounted for as operating leases, and the leasing arrangements
associated with approximately $200 million of these obligations are accounted
for as capital leases.
We are contingently liable for US
Airways' obligations under a lease agreement between US Airways and the Port
Authority of New York and New Jersey related to the East End Terminal at
LaGuardia airport. These obligations include the payment of ground
rentals to the Port Authority and the payment of other rentals in respect of the
full amounts owed on special facilities revenue bonds issued by the Port
Authority having an outstanding par amount of $123 million at December 31, 2008
and having a final scheduled maturity in 2015. If US Airways defaults
on these obligations, we would be obligated to cure the default and we would
have the right to occupy the terminal after US Airways' interest in the lease
had been terminated.
We also had letters of credit and
performance bonds relating to various real estate and customs obligations at
December 31, 2008 in the amount of $69 million. These letters of
credit and performance bonds have expiration dates through October
2010.
We are the lessee under many real
estate leases. It is common in such commercial lease transactions for
us as the lessee to agree to indemnify the lessor and other related third
parties for tort liabilities that arise out of or relate to our use or occupancy
of the leased premises and the use or occupancy of the leased premises by
regional carriers operating flights on our behalf. In some cases,
this indemnity extends to related liabilities arising from the negligence of the
indemnified parties, but usually excludes any liabilities caused by their gross
negligence or willful misconduct. Additionally, we typically
indemnify such parties for any environmental liability that arises out of or
relates to our use of the leased premises.
In our aircraft financing agreements,
we typically indemnify the financing parties, trustees acting on their behalf
and other related parties against liabilities that arise from the manufacture,
design, ownership, financing, use, operation and maintenance of the aircraft and
for tort liability, whether or not these liabilities arise out of or relate to
the negligence of these indemnified parties, except for their gross negligence
or willful misconduct.
We expect that we would be covered by
insurance (subject to deductibles) for most tort liabilities and related
indemnities described above with respect to real estate we lease and aircraft we
operate.
In our financing transactions that
include loans, we typically agree to reimburse lenders for any reduced returns
with respect to the loans due to any change in capital requirements and, in the
case of loans in which the interest rate is based on LIBOR, for certain other
increased costs that the lenders incur in carrying these loans as a result of
any change in law, subject in most cases to certain mitigation obligations of
the lenders. At December 31, 2008, we had $1.5 billion of floating
rate debt and $260 million of fixed rate debt, with remaining terms of up to 12
years, that is subject to these increased cost provisions. In several
financing transactions involving loans or leases from non-U.S. entities, with
remaining terms of up to 12 years and an aggregate carrying value of $1.6 billion, we bear the
risk of any change in tax laws that would subject loan or lease payments
thereunder to non-U.S. entities to withholding taxes, subject to customary
exclusions.
We may be required to make future
payments under the foregoing indemnities and agreements due to unknown variables
related to potential government changes in capital adequacy requirements, laws
governing LIBOR based loans or tax laws, the amounts of which cannot be
estimated at this time.
Environmental
Matters. In 2001, the CRWQCB mandated a field study of the
area surrounding our aircraft maintenance hangar in Los Angeles. The
study was completed in September 2001 and identified jet fuel and solvent
contamination on and adjacent to this site. In April 2005, we began
environmental remediation of jet fuel contamination surrounding our aircraft
maintenance hangar pursuant to a workplan submitted to (and approved by) the
CRWQCB and our landlord, the Los Angeles World
Airports. Additionally, we could be responsible for environmental
remediation costs primarily related to solvent contamination on and near this
site.
In 1999, we purchased property located
near our New York Liberty hub in Elizabeth, New Jersey from Honeywell with
certain environmental indemnification obligations by us to
Honeywell. We did not operate the facility located on or make any
improvements to the property. In 2005, we sold the property to
Catellus and, in connection with the sale, Catellus assumed certain
environmental indemnification obligations in favor of us. On October
9, 2006, Honeywell provided us with a notice seeking indemnification from us in
connection with the EPA potentially responsible party notice to Honeywell
involving the Newark Bay Study Area of the Diamond Alkali Superfund Site
alleging hazardous substance releases from the property and seeking study
costs. In addition, on May 7, 2007, Honeywell provided us with a
notice seeking indemnification from us in connection with a possible lawsuit by
Tierra Solutions against Honeywell relating to alleged discharges from the
property into Newark Bay and seeking cleanup of Newark Bay waters and sediments
under the Resource Conservation and Recovery Act. We have notified
Honeywell that, at this time, we have not agreed that we are required to
indemnify Honeywell with respect to the EPA and Tierra Solutions claims and
Honeywell has invoked arbitration procedures under its sale and purchase
agreement with us. Catellus has agreed to indemnify and defend us in
connection with the EPA and Tierra Solutions claims, including any arbitration
with Honeywell.
At December 31, 2008, we had an accrual
for estimated costs of environmental remediation throughout our system of $33
million, based primarily on third-party environmental studies and estimates as
to the extent of the contamination and nature of the required remedial
actions. We have evaluated and recorded this accrual for environmental
remediation costs separately from any related insurance recovery. We did
not have any receivables related to environmental insurance recoveries at
December 31, 2008. Based on currently available information, we
believe that our accrual for potential environmental remediation costs is
adequate, although our accrual could be adjusted in the future due to new
information or changed circumstances. However, we do not expect these
items to materially affect our results of operations, financial condition or
liquidity.
Fuel
Hedges. Because our fuel derivatives were in a net liability
position of $415 million at December 31, 2008 resulting from the recent
significant decline in crude oil prices, we posted cash collateral with our
counterparties totaling $171 million. These amounts are reported in
prepayments and other current assets in our consolidated balance
sheet.
An off-balance sheet arrangement is any
transaction, agreement or other contractual arrangement involving an
unconsolidated entity under which a company has (1) made guarantees, (2) a
retained or a contingent interest in transferred assets, (3) an obligation under
derivative instruments classified as equity or (4) any obligation arising out of
a material variable interest in an unconsolidated entity that provides
financing, liquidity, market risk or credit risk support to the company, or that
engages in leasing, hedging or research and development arrangements with the
company.
We have no arrangements of the types
described in the first three categories that we believe may have a material
current or future effect on our results of operations. Certain
guarantees that we do not expect to have a material current or future effect on
our results of operations, financial condition or liquidity are disclosed in
Note 19 to our consolidated financial statements included in Item 8 of this
report.
We do have obligations arising out of
variable interests in unconsolidated entities. See Note 15 to our
consolidated financial statements included in Item 8 of this report for a
discussion of our off-balance sheet aircraft leases, airport leases (which
include the US Airways contingent liability), subsidiary trust and our capacity
purchase agreement with ExpressJet.
Our consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of our consolidated financial
statements requires us to make estimates and judgments that affect the reported
amount of assets and liabilities, revenues and expenses and related disclosure
of contingent assets and liabilities at the date of our financial
statements. Actual results may differ from these estimates under
different assumptions or conditions.
Critical accounting policies are
defined as those that are reflective of significant judgments and uncertainties,
and potentially result in materially different results under different
assumptions and conditions. We believe that our critical accounting
policies are limited to those described below. For a detailed
discussion on the application of these and other accounting policies, see Note 1
to our consolidated financial statements included in Item 8 of this
report.
Pension
Plans. We account for our defined benefit pension plans in
accordance with Statement of Financial Accounting Standards No. 87, "Employer's
Accounting for Pensions" ("SFAS 87") and SFAS No. 158, "Employers' Accounting
for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106 and 132(R)." Under SFAS 87, pension
expense is recognized on an accrual basis over employees' approximate service
periods. Pension expense calculated under SFAS 87 is generally
independent of funding decisions or requirements. We recognized expense for our
defined benefit pension plans totaling $147 million, $191 million and $219
million in 2008, 2007 and 2006, respectively, including settlement
charges. We currently expect our expense related to our defined
benefit pension plans to be approximately $250 million in 2009. This
amount is higher than our expense in each of the past three years due to an
increase in the plans' under-funded status and lower investment returns on lower
plan asset balances.
Our plans' under-funded status was $1.4
billion at December 31, 2008 and $536 million at December 31,
2007. This increase was primarily the result of lower investment
returns as a result of the current global financial crisis and decreases in the
discount rate and the lump sum conversion interest rate used to determine our
pension liability. Funding requirements for tax-qualified defined
benefit pension plans are determined by government
regulations. During 2008, we contributed $102 million to our
tax-qualified defined benefit pension plans, satisfying our minimum funding
requirements during calendar year 2008. We contributed an additional
$50 million to our tax-qualified defined benefit pension plans in January
2009. We expect to contribute approximately $125 million to our
tax-qualified defined benefit pension plans during 2009.
The fair value of our plans' assets
decreased from $1.8 billion at December 31, 2007 to $1.1 billion at December 31,
2008. When calculating pension expense for 2008, we assumed that our
plans' assets would generate a long-term rate of return of 8.5%. We
assumed a long-term rate of return for calculating pension expense in 2007 and
2006 of 8.26% and 8.5%, respectively. We develop our expected
long-term rate of return assumption based on historical experience and by
evaluating input from the trustee managing the plans' assets. Our expected long-term
rate of return on plan assets is based on a target allocation of assets, which
is based on our goal of earning the highest rate of return while maintaining
risk at acceptable levels. Our projected long-term rate of return is
slightly higher than some market indices due to the active management of our
plans' assets, and is supported by the historical returns on our plans'
assets. The plans strive to have assets sufficiently diversified so
that adverse or unexpected results from one security class will not have an
unduly detrimental impact on the entire portfolio. We regularly
review our actual asset allocation and the pension plans' investments are
periodically rebalanced to our targeted allocation when considered
appropriate. Our allocation of assets was as follows at December 31,
2008:
|
Percent of Total
|
Expected
Long-Term
Rate of
Return
|
|
|
|
|
U.S.
equities
|
47%
|
|
9%
|
|
|
International
equities
|
21
|
|
9
|
|
|
Fixed
income
|
20
|
|
5
|
|
|
Other
|
12
|
|
12
|
|
Pension expense increases as the
expected rate of return on plan assets decreases. When calculating
pension expense for 2009, we will assume that our plans' assets will generate a
weighted-average long-term rate of return of 8.25%. The decrease of
25 basis points over the rate used to determine 2008 expense reflects additional
expenses of the plan as a result of its current funded
status. Lowering the expected long-term rate of return on our plan
assets by an additional 50 basis points (from 8.25% to 7.75%) would increase our
estimated 2009 pension expense by approximately $5 million.
We discounted our future pension
obligations using a weighted average rate of 6.13% at December 31, 2008,
compared to 6.31% at December 31, 2007. We determine the appropriate
discount rate for each of our plans based on current rates on high quality
corporate bonds that would generate the cash flow necessary to pay plan benefits
when due. This approach can result in different discount rates for
different plans, depending on each plan's projected benefit
payments. The pension liability and future pension expense both
increase as the discount rate is reduced. Lowering the discount rate
by 50 basis points (from 6.13% to 5.63%) would increase our pension liability at
December 31, 2008 by approximately $232 million and increase our
estimated 2009 pension expense by approximately $29 million.
At December 31, 2008, we have
unrecognized net actuarial losses of $1.4 billion related to our defined benefit
pension plans. Our estimated 2009 expense related to our defined
benefit pension plans of $250 million includes the recognition of approximately
$111 million of these losses.
Future changes in plan asset returns,
plan provisions, assumed discount rates, pension funding law and various other
factors related to the participants in our pension plans will impact our future
pension expense and liabilities. We cannot predict with certainty
what these factors will be in the future.
Revenue
Recognition. We recognize passenger revenue when
transportation is provided or when the ticket expires unused, rather than when a
ticket is sold. Revenue is recognized for unused non-refundable
tickets on the date of the intended flight if the passenger did not notify us of
his or her intention to change the itinerary.
The amount of passenger ticket sales
not yet recognized as revenue is included in our consolidated balance sheets as
air traffic and frequent flyer liability. We perform periodic
evaluations of the estimated liability for passenger ticket sales and any
adjustments, which can be significant, are included in results of operations for
the periods in which the evaluations are completed. These adjustments
relate primarily to differences between our statistical estimation of certain
revenue transactions and the related sales price, as well as refunds, exchanges,
interline transactions and other items for which final settlement occurs in
periods subsequent to the sale of the related tickets at amounts other than the
original sales price.
Ticket change fees relate to
non-refundable tickets, but are considered a separate transaction from the air
transportation because they represent a charge for our additional service to
modify a previous order. Ticket change fees are recognized as other
revenue in our consolidated statement of operations at the time the fees are
assessed.
Frequent Flyer
Accounting. For those OnePass accounts that have sufficient
mileage credits to claim the lowest level of free travel, we record a liability
for either the estimated incremental cost of providing travel awards that are
expected to be redeemed with us or the contractual rate of expected redemption
on alliance carriers. Incremental cost includes the cost of fuel,
meals, insurance and miscellaneous supplies, but does not include any costs for
aircraft ownership, maintenance, labor or overhead
allocation. Beginning in 2008, we also include in our determination
of incremental cost the impact of fees charged to certain passengers redeeming
frequent flyer rewards for travel, which partially offsets the incremental cost
associated with providing flights for frequent flyer travel
rewards. We recorded an adjustment of $27 million to increase
passenger revenue and reduce our frequent flyer liability during 2008 for the
impact of these fees, which had not been significant in prior periods, after we
increased them during 2008. A change to these cost estimates, the
actual redemption activity, the amount of redemptions on alliance carriers or
the minimum award level could have a significant impact on our liability in the
period of change as well as future years. The liability is adjusted
periodically based on awards earned, awards redeemed, changes in the incremental
costs and changes in the OnePass program, and is included in the accompanying
consolidated balance sheets as air traffic and frequent flyer
liability. Changes in the liability are recognized as passenger
revenue in the period of change.
We also sell mileage credits in our
frequent flyer program to participating entities, such as credit/debit card
companies, alliance carriers, hotels, car rental agencies, utilities and various
shopping and gift merchants. Revenue from the sale of mileage credits
is deferred and recognized as passenger revenue over the period when
transportation is expected to be provided, based on estimates of its fair
value. Amounts received in excess of the expected transportation's
fair value are recognized in income currently and classified as other
revenue. A change to the time period over which the mileage credits
are used (currently six to 28 months), the actual redemption activity or our
estimate of the amount or fair value of expected transportation could have a
significant impact on our revenue in the year of change as well as future
years.
During the year ended December 31,
2008, OnePass participants claimed approximately 1.6 million
awards. Frequent flyer awards accounted for an estimated 8.5% of our
consolidated revenue passenger miles. We believe displacement of
revenue passengers is minimal given our ability to manage frequent flyer
inventory and the low ratio of OnePass award usage to revenue passenger
miles.
At December 31, 2008, we estimated that
approximately 2.4 million free travel awards outstanding were expected to be
redeemed for free travel on Continental, Continental Express, Continental
Connection, CMI or alliance airlines. Our total liability for future
OnePass award redemptions for free travel and unrecognized revenue from sales of
OnePass miles to other companies was approximately $324 million at December 31,
2008. This liability is recognized as a component of air traffic and
frequent flyer liability in our consolidated balance sheets.
Stock-Based
Compensation. We have stock option and RSU awards outstanding
that require management to make assumptions about the value of the awards in
order to recognize the expense and, in the case of the RSU awards, the
liabilities associated with those awards.
The fair value of options is determined
at the grant date using a Black-Scholes-Merton option-pricing model, which
requires us to make several assumptions. The risk-free interest rate
is based on the U.S. Treasury yield curve in effect for the expected term of the
option at the time of grant. The dividend yield on our common stock
is assumed to be zero since we historically have not paid dividends and have no
current plans to do so in the future. The market price volatility of
our common stock is based on the historical volatility of our common stock over
a time period equal to the expected term of the option and ending on the grant
date. The expected life of the options is based on our historical
experience for various work groups. We recognize expense only for
those option awards expected to vest, using an estimated forfeiture rate based
on our historical experience. The forfeiture rate may be revised in
future periods if actual forfeitures differ from our assumptions. A
one percent decrease in the estimated forfeiture rate at December 31, 2008 would
not have resulted in a material increase to wages, salaries and related
costs.
The weighted-average fair value of
options granted during 2008 was determined to be $5.32 per share, based on the
following weighted-average assumptions:
|
Risk-free
interest
rate
|
3.1%
|
|
Dividend
yield
|
0%
|
|
Expected
market price volatility of our common stock
|
62%
|
|
Expected
life of options (years)
|
3.9
|
At December 31, 2008, we had three
outstanding awards of RSUs granted under our Long-Term Incentive and RSU
Program: (1) profit based RSU awards with a performance period
commencing April 1, 2006 and ending December 31, 2009, (2) profit based RSU
awards with a performance period commencing January 1, 2007 and ending December
31, 2009 and (3) profit based RSU awards with a performance period commencing
January 1, 2008 and ending December 31, 2010.
Profit based RSU awards can result in
cash payments to our officers upon the achievement of specified profit
sharing-based performance targets. The performance targets require
that we reach target levels of cumulative employee profit sharing under our
enhanced employee profit sharing program during the performance period and that
we have net income calculated in accordance with U.S. generally accepted
accounting principles for the applicable fiscal year. To serve as a
retention feature, payments related to the achievement of a performance target
generally will be made in one-third annual increments to participants who remain
continuously employed by us through each payment date. Payments also
are conditioned on our having, at the end of the fiscal year preceding the date
any payment is made, a minimum unrestricted cash, cash equivalents and
short-term investments balance as set by the Human Resources Committee of our
Board of Directors. If we do not achieve the minimum cash balance
applicable to a payment date, the payment will be deferred until the next
payment date (March 1 of the next year), subject to a limit on the number of
years payments may be carried forward. Payment amounts are calculated
based on the average closing price of our common stock during the 20 trading
days preceding the payment date and the payment percentage set by the Human
Resources Committee of our Board of Directors for achieving the applicable
profit sharing-based performance target.
We account for the profit based RSU
awards as liability awards. Once it is probable that a profit
sharing-based performance target will be met, we measure the awards at fair
value based on the current stock price. The related expense is
recognized ratably over the required service period, which ends on each payment
date, after adjustment for changes in the then-current market price of our
common stock. Our determination of the probable cumulative profit
sharing pool is highly subjective and subject to change, due in large part to
the risks and uncertainties inherent in our business. Moreover,
because of the subjective nature of the assessment and those risks and
uncertainties, projected operating results are heavily discounted in our
probability analysis. As of December 31, 2007, we had achieved the
highest cumulative profit sharing-based performance target for the profit based
RSU awards with a performance period commencing April 1, 2006 and were,
therefore, accruing expense based on a payment percentage of
337.5%. We had not achieved any of the cumulative profit
sharing-based performance targets as of December 31, 2008 for the profit based
RSU awards with performance periods commencing January 1, 2007 and 2008,
respectively, but we have concluded that it is probable that we will achieve the
entry level target for those awards during the performance periods, resulting in
an estimated payment percentage under each award of 100%. If we had
concluded that it was probable at December 31, 2008 that we would not achieve
the entry level cumulative profit sharing-based performance targets for those
awards, wages, salaries and related costs would have decreased by $10 million in
2008. Conversely, if we had concluded that it was probable that we
would achieve the next higher cumulative profit sharing-based performance
targets, wages, salaries and related costs attributable to those awards would
have increased by $5 million in 2008. Holding the cumulative profit
sharing pool target levels constant, a one dollar increase or decrease in the
price of our common
stock at December
31, 2008 would have resulted in a $3 million increase or decrease, respectively,
in wages, salaries and related costs in 2008 attributable to all then
outstanding profit based RSU awards.
As of December 31, 2008, $32 million of
compensation cost attributable to future service related to unvested employee
stock options and profit based RSU awards that are probable of being achieved
had not yet been recognized. This amount will be recognized in
expense over a weighted-average period of 1.7 years.
Fair Value
Measurements. We have certain assets and liabilities that are
measured at fair value on a recurring basis. SFAS 157, "Fair Value
Measurements," clarifies that fair value is an exit price, representing the
price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants based on the highest and best
use of the asset or liability. As such, fair value is a market-based
measurement that should be determined based on assumptions that market
participants would use in pricing an asset or liability. SFAS 157
requires us to use valuation techniques to measure fair value that maximize the
use of observable inputs and minimize the use of unobservable
inputs. These inputs are prioritized as follows:
|
Level
1:
|
Observable
inputs such as quoted prices for identical assets or liabilities in active
markets
|
|
Level
2:
|
Other
inputs that are observable directly or indirectly, such as quoted prices
for similar assets or liabilities or market-corroborated
inputs
|
|
Level
3:
|
Unobservable
inputs for which there is little or no market data and which require us to
develop our own assumptions about how market participants would price the
assets or liabilities
|
We have three items that are classified
as Level 3 - auction rate securities, a put right on certain auction rate
securities and fuel hedging derivatives. The determination of the
fair value of these items requires us to make critical assumptions.
Historically, the carrying value of
auction rate securities approximated fair value due to the frequent resetting of
the interest rate and the existence of a liquid market. However, the
estimated market value of these auction rate securities no longer approximates
par value due to the lack of liquidity in the market for these securities at
their par value. We estimated the fair value of these securities to
be $229 million at December 31, 2008, taking into consideration the limited
sales and offers to purchase securities and using internally-developed models of
the expected future cash flows related to the securities. Our models
incorporated our probability-weighted assumptions about the cash flows of the
underlying student loans and discounts to reflect a lack of liquidity in the
market for these securities. The resulting fair value was
approximately 80% of the par value in the aggregate. Each one percent
decrease in the discounted cash flows indicated by our model would decrease the
fair value of our auction rate securities by approximately $3
million.
During 2008, we received a put right
permitting us to sell certain auction rate securities at par in
2010. We recorded the put right at fair value and recognized a gain
of $26 million upon receipt. We determined the fair value based on
the difference between the risk-adjusted discounted expected cash flows from the
underlying auction rate securities without the put right and with the put right
being exercised in 2010. Therefore, the fair value of the put right
is dependent on our calculation of the fair value of the underlying auction rate
securities. We have reclassified the underlying auction rate
securities to trading securities and elected the fair value option under SFAS
159, "The Fair Value Option for Financial Assets and Financial Liabilities," for
the put right, with changes in the fair value of the put right and the
underlying auction rate securities recognized in earnings
currently. The fair value adjustments to the auction rate securities
and the put right will largely offset and result in minimal net impact to
earnings in future periods.
We determine the fair value of our fuel
derivatives by obtaining inputs from a broker's pricing model based on inputs
that are either readily available in public markets or can be derived from
information available in publicly quoted markets. We verify the
reasonableness of these inputs by comparing the resulting fair values to similar
quotes from our counterparties as of each date for which financial statements
are prepared. For derivatives not covered by collateral, we also make
an adjustment to incorporate credit risk into the valuation. This
adjustment was determined by discounting the expected cash flows under the
contracts using a discount rate equal to the spread between our unsecured
borrowing rate and a risk-free rate for the applicable time
period. At December 31, 2008, this adjustment reduced our liability
position from $434 million (the calculated fair value before the adjustment) to
$415 million. Due to the fact that certain of the inputs utilized to
determine the fair value of the fuel derivatives are unobservable (principally
volatility of crude oil prices and the credit risk adjustments), we have
categorized these option contracts as Level 3.
Property and
Equipment. As of December 31, 2008, the net carrying amount of
our property and equipment was $7.3 billion, which represents 58% of our total
assets. In addition to the original cost of these assets, the net
carrying amount of our property and equipment is impacted by a number of
accounting policy elections, including estimates, assumptions and judgments
relative to capitalized costs, the estimation of useful lives and residual
values and, when necessary, the recognition of asset impairment
charges. Our property and equipment accounting policies are designed
to depreciate our assets over their estimated useful lives and residual values
of our aircraft, reflecting both historical experience and expectations
regarding future operations, utilization and performance of our
assets.
In addition, our policies are designed
to appropriately and consistently capitalize costs incurred to enhance, improve
and extend the useful lives of our assets and expense those costs incurred to
repair and maintain the existing condition of our
aircraft. Capitalized costs increase the carrying values and
depreciation expense of the related assets, which also impact our results of
operations.
Useful lives of aircraft are difficult
to estimate due to a variety of factors, including technological advances that
impact the efficiency of aircraft, changes in market or economic conditions and
changes in laws or regulations affecting the airline industry. We
evaluate the remaining useful lives of our aircraft when certain events occur
that directly impact our assessment of the remaining useful lives of the
aircraft and include changes in operating condition, functional capability and
market and economic factors. Both depreciable lives and residual
values are regularly reviewed for our aircraft and spare parts to recognize
changes in our fleet plan and other relevant information. Jet
aircraft and rotable spare parts are assumed to have estimated residual values
of 15% and 10%, respectively, of original cost; other categories of property and
equipment are assumed to have no residual value. A one year increase
in the useful lives of our owned aircraft would reduce annual depreciation
expense by approximately $18 million while a one year decrease would increase
annual depreciation expense by approximately $17 million. A one
percent decrease in residual value of our owned aircraft would increase annual
depreciation expense by approximately $2 million.
Impairments of Long-Lived
Assets. We record impairment losses on long-lived assets,
consisting principally of property and equipment and domestic airport operating
rights, when events or changes in circumstances indicate, in management's
judgment, that the assets might be impaired and the undiscounted cash flows
estimated to be generated by those assets are less than the carrying amount of
those assets. Our cash flow estimates are based on historical results
adjusted to reflect our best estimate of future market and operating
conditions. The net carrying value of assets not recoverable is
reduced to fair value if lower than the carrying value. In
determining the fair market value of the assets, we consider market trends,
recent transactions involving sales of similar assets and, if necessary,
estimates of future discounted cash flows.
Following the decision in June 2008 to
retire all of our Boeing 737-300 aircraft and a significant portion of our
Boeing 737-500 fleet by the end of 2009, we evaluated the ongoing value of the
assets associated with these fleets. Fleet assets include owned
aircraft, improvements on leased aircraft, rotable spare parts, spare engines
and simulators. Based on our evaluation, we determined that the
carrying amounts of these fleets were impaired and wrote them down to their
estimated fair value. We estimated the fair values based on current
market quotes and our expected proceeds from the sale of the
assets. We also evaluated the ongoing value of the assets associated
with our other fleets and determined that the carrying amounts of those fleets
were not impaired. Accordingly, we recorded $37 million of non-cash
impairments on owned Boeing 737-300 and 737-500 aircraft and related assets and
a non-cash charge of $14 million to write down spare parts and supplies for the
Boeing 737-300 and 737-500 fleets to the lower of cost or net realizable value
during 2008.
We provide an allowance for spare parts
inventory obsolescence over the remaining useful life of the related aircraft,
plus allowances for spare parts currently identified as excess. These
allowances are based on our estimates and industry trends, which are subject to
change and, where available, reference to market rates and
transactions. The estimates are more likely to change when we near
the end of a fleet life or when we remove entire fleets from service sooner than
originally planned.
We also perform annual impairment tests
on our routes and international airport landing slots, which are indefinite life
intangible assets. These tests are based on estimates of discounted
future cash flows, using assumptions consistent with those used for aircraft and
airport operating rights impairment tests. We determined that we did
not have any impairment of our routes at December 31, 2008. However,
we recorded an $18 million non-cash charge in 2008 to write off an intangible
route asset as a result of our decision to move all of our flights between New
York Liberty and London from London Gatwick Airport to London Heathrow
Airport.
Recently
Issued Accounting Pronouncements
See Note 2 to our consolidated
financial statements included in Item 8 of this report for a discussion of
recently issued accounting pronouncements.
Related
Party Transactions
See Note 17 to our consolidated
financial statements included in Item 8 of this report for a discussion of
related party transactions.
Market
Risk Sensitive Instruments and Positions
We are subject to certain market risks,
including commodity price risk (i.e., aircraft fuel prices), interest rate risk,
foreign currency risk and price changes related to certain investments in debt
and equity securities. The adverse effects of potential changes in
these market risks are discussed below. The sensitivity analyses
presented do not consider the effects that such adverse changes may have on
overall economic activity nor do they consider additional actions we may take to
mitigate our exposure to such changes. Actual results may
differ. See the notes to our consolidated financial statements
included in Item 8 of this report for a description of our accounting policies
and other information related to these financial instruments. We do
not hold or issue derivative financial instruments for trading
purposes.
Aircraft
Fuel. Our results of operations are significantly impacted by
changes in the price of aircraft fuel. During 2008 and 2007, mainline
aircraft fuel and related taxes accounted for 38.5% and 30.0%, respectively, of
our mainline operating expenses. Based on our expected fuel
consumption in 2009, a one dollar increase in the price of crude oil will
increase our annual fuel expense by approximately $41 million, before
considering the impact of refining margins and our fuel hedging
program.
We routinely hedge a portion of our
future fuel requirements, provided the hedges are expected to be cost
effective. One component of our hedging strategy is to construct a
hedge position that is designed to better hedge fuel price with respect to
tickets already sold, for which we can no longer adjust our
pricing. Implicit in this strategy is our belief that, as to tickets
not yet sold, the market will be efficient such that fare levels will adjust to
keep pace with fuel costs. We strive to maintain fuel hedging levels
and exposure generally comparable to that of our major competitors, so that our
fuel cost is not disproportionate to theirs.
Another component of our hedging
strategy is to purchase call options or enter into swap agreements to protect us
against sudden and significant increases in jet fuel prices. To
minimize the high cost to us of call options during 2008, we frequently entered
into collars. Collars are derivative instruments that involve
combining a purchased call option, which on a stand-alone basis would require us
to pay a premium, with a written put option, which on a stand-alone basis would
result in our receiving a premium. The collars we have entered into
consist of both instruments that result in no net premium to us (known as a
"costless" or zero-cost collar) and instruments that result in us paying a net
premium to the counterparty. The purchased call option portion of the
collar caps the price of the contract at the agreed upon price while the sold
option portion of the collar provides for a minimum price of the related
commodity. Our general practice is to enter into either crude oil or
heating oil contracts since there is a limited market for jet fuel
derivatives.
As of December 31, 2008, our projected
fuel requirements were hedged as follows, excluding contracts with Lehman
Brothers which we settled in January 2009:
|
Maximum Price
|
Minimum Price
|
|
%
of
Expected
Consumption
|
Weighted
Average
Price
(per gallon)
|
%
of
Expected
Consumption
|
Weighted
Average
Price
(per gallon)
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
WTI
crude oil
collars
|
14%
|
|
$3.40
|
|
14%
|
|
$2.53
|
|
WTI
crude oil call options
|
6
|
|
2.54
|
|
N/A
|
|
N/A
|
|
WTI
crude oil
swaps
|
3
|
|
1.33
|
|
3
|
|
1.33
|
|
Total
|
23%
|
|
|
|
17%
|
|
|
|
Lehman Brothers, one of the
counterparties to our fuel derivative contracts, declared bankruptcy on
September 15, 2008. As a result, we determined that our fuel
derivative contracts with Lehman Brothers were not highly effective
hedges. Therefore, we discontinued hedge accounting for these
contracts as of September 15, 2008 and all subsequent changes in the contracts'
fair values were reported in earnings. In 2008, we recognized losses
of $125 million in other non-operating income (expense) related to the changes
in the fair value of these contracts. In January 2009, we settled all
open contracts with Lehman Brothers.
At December 31, 2008, our fuel
derivatives, including contracts with Lehman Brothers, were in a net loss
position of $415 million resulting from the recent substantial decline in crude
oil prices. This fair value is reported in accrued other current
liabilities in our consolidated balance sheet. We estimate that a 10%
decrease in the price of crude oil and heating oil at December 31, 2008 would
increase our obligation related to the fuel derivatives outstanding at that date
by approximately $118 million.
Because our fuel hedges were in a net
liability position at December 31, 2008, we were required to post cash
collateral with our counterparties totaling $171 million. These
amounts are reported in prepayments and other current assets in our consolidated
balance sheet.
As of December 31, 2007, we had hedged
approximately 20% and 5% of our projected fuel requirements for the first and
second quarters of 2008, respectively, using heating oil option contracts
forming zero cost collars with a weighted average call price of $2.44 per gallon
and a weighted average put price of $2.28 per gallon. At December 31,
2007, the fair value of our fuel hedges was a $24 million net asset and is
included in prepayments and other current assets in our consolidated balance
sheet.
Foreign
Currency. We are exposed to the effect of exchange rate
fluctuations on the U.S. dollar value of foreign currency denominated operating
revenue and expenses. We attempt to mitigate the effect of certain
potential foreign currency losses by entering into forward and option contracts
that effectively enable us to sell Canadian dollars, British pounds, Japanese
yen and euros expected to be received from the respective denominated cash
inflows over the next 12 months at specified exchange rates.
At December 31, 2008, we had forward
contracts outstanding to hedge the following cash inflows (primarily from
passenger ticket sales) in foreign currencies:
·
|
36%
of our projected Japanese yen-denominated cash inflows in
2009
|
·
|
6%
of our projected euro-denominated cash inflows in
2009
|
At December 31, 2008, the fair value of
our foreign currency hedges was $(8) million and is included in accrued other
liabilities in our consolidated balance sheet. We estimate that a
uniform 10% strengthening in the value of the U.S. dollar relative to each
foreign currency would have the following impact on our existing forward
contacts at December 31, 2008 (in millions):
|
Increase
in
Fair Value
|
Increase
in
Underlying Exposure
|
Resulting
Net Loss
|
|
|
|
|
Japanese
yen
|
$14
|
|
$(40)
|
|
$(26)
|
|
Euro
|
3
|
|
(49)
|
|
(46)
|
|
At December 31, 2007, we had forward
contracts outstanding to hedge the following cash inflows from passenger ticket
sales in foreign currencies:
·
|
Approximately
25% of our projected British pound-denominated cash flows in
2008
|
·
|
Approximately
39% of our projected Canadian dollar-denominated cash flows in
2008
|
·
|
Approximately
43% of our projected Japanese yen-denominated cash flows in
2008
|
The fair
value of these hedges was not material at December 31, 2007.
Interest
Rates. Our results of operations are affected by fluctuations
in interest rates (e.g., interest expense on variable-rate debt and interest
income earned on short-term investments). We had approximately $2.0
billion of variable-rate debt as of December 31, 2008 and December 31,
2007. If average interest rates increased by 100 basis points during
2009 as compared to 2008, our projected 2009 interest expense would increase by
approximately $20 million after taking into account scheduled
maturities.
As of December 31, 2008 and 2007, we
estimated the fair value of $3.0 billion and $2.0 billion (carrying value) of
our fixed-rate debt to be $2.2 billion and $2.0 billion, respectively, based
upon discounted future cash flows using our current incremental borrowing rates
for similar types of instruments or market prices. If market interest
rates increased 100 basis points at December 31, 2008, the fair value of our
fixed-rate debt would increase by approximately $59
million. Estimating the fair value of the remaining fixed-rate debt
at December 31, 2008 and 2007, with a carrying value of $683 million and $929
million, respectively, was not practicable due to the large number of remaining
debt instruments with relatively small carrying amounts.
A change in market interest rates would
also impact interest income earned on our cash, cash equivalents and short-term
investments. Assuming our cash, cash equivalents and short-term
investments remain at their average 2008 levels, a 100 basis point increase or
decrease in interest rates would result in a corresponding increase or decrease
in interest income of approximately $26 million during 2009.
Investment
Risk. Our short-term investments primarily include
certificates of deposit placed through an account registry service ("CDARS"),
auction rate securities and automobile loan-related asset backed
securities. While the CDARS are insured by the Federal Deposit
Insurance Corporation and the auction rate securities are secured by pools of
student loans guaranteed by state-designated guaranty agencies and reinsured by
the U.S. government, we are subject to investment risk for the fair value of the
investments. Our short-term investments had a fair value of $506
million at December 31, 2008, including amounts that were classified as
restricted cash, cash equivalents and short-term investments.
Our defined benefit plans had assets
with a fair value of $1.0 billion at December 31, 2008, compared to a fair value
of $1.8 billion at December 31, 2007. This decrease was primarily the
result of lower investment returns as a result of the current global financial
crisis. A significant portion of the plans' assets consists of U.S.
and international equities. Lower asset values can result in higher
required contributions and pension expense in future years and a decrease in our
stockholders' equity.
Index to
Consolidated Financial Statements
|
PAGE
|
|
|
Report
of Independent Registered Public Accounting Firm
|
80
|
|
|
Consolidated
Statements of Operations for each of the Three Years in the
Period Ended December 31,
2008
|
81
|
|
|
Consolidated
Balance Sheets as of December 31, 2008 and 2007
|
83
|
|
|
Consolidated
Statements of Cash Flows for each of the Three Years in the
Period Ended December 31,
2008
|
85
|
|
|
Consolidated
Statements of Common Stockholders' Equity for each of the
Three Years in the Period Ended
December 31, 2008
|
87
|
|
|
Notes
to Consolidated Financial Statements
|
89
|
The Board
of Directors and Stockholders
Continental
Airlines, Inc.
We have audited the accompanying
consolidated balance sheets of Continental Airlines, Inc. (the "Company") as of
December 31, 2008 and 2007, and the related consolidated statements of
operations, common stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 2008. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of the Company at December 31, 2008 and
2007, and the consolidated results of its operations and its cash flows for each
of the three years in the period ended December 31, 2008, in conformity
with U.S. generally accepted accounting principles.
As discussed in Notes 9 and 11 to the
consolidated financial statements, the Company adopted, effective January 1,
2006, Statement of Financial Accounting Standards No. 123 (revised 2004), "Share
Based Payment", and, effective December 31, 2006, Statement of Financial
Accounting Standards No. 158, "Employers' Accounting for Defined Benefit Pension
and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106
and 132(R)", respectively.
We also have audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United
States), the Company's internal control over financial reporting as of December
31, 2008, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission, and our report dated February 18, 2009 expressed an unqualified
opinion thereon.
ERNST &
YOUNG LLP
Houston,
Texas
February
18, 2009
CONTINENTAL
AIRLINES, INC.
(In
millions, except per share data)
|
Year
Ended December 31,
|
|
2008
|
2007
|
2006
|
Operating
Revenue:
|
|
|
|
Passenger (excluding fees and
taxes of $1,531, $1,499 and $1,369,
respectively)
|
$13,737
|
$12,995
|
$12,003
|
Cargo
|
497
|
453
|
457
|
Other
|
1,007
|
784
|
668
|
|
15,241
|
14,232
|
13,128
|
Operating
Expenses:
|
|
|
|
Aircraft fuel and related
taxes
|
4,905
|
3,354
|
3,034
|
Wages, salaries and related
costs
|
2,957
|
3,127
|
2,875
|
Regional capacity purchase,
net
|
2,073
|
1,793
|
1,791
|
Aircraft
rentals
|
976
|
994
|
990
|
Landing fees and other
rentals
|
853
|
790
|
764
|
Distribution
costs
|
717
|
682
|
650
|
Maintenance, materials and
repairs
|
612
|
621
|
547
|
Depreciation and
amortization
|
438
|
413
|
391
|
Passenger
services
|
406
|
389
|
356
|
Special
charges
|
181
|
13
|
27
|
Other
|
1,437
|
1,369
|
1,235
|
|
15,555
|
13,545
|
12,660
|
|
|
|
|
Operating
Income
(Loss)
|
(314)
|
687
|
468
|
|
|
|
|
Nonoperating
Income (Expense):
|
|
|
|
Interest
expense
|
(365)
|
(383)
|
(401)
|
Interest
capitalized
|
33
|
27
|
18
|
Interest
income
|
65
|
160
|
131
|
Gains on sale of
investments
|
78
|
37
|
92
|
Other,
net
|
(181)
|
38
|
61
|
|
(370)
|
(121)
|
(99)
|
|
|
|
|
Income
(Loss) before Income Taxes and Cumulative Effect of Change in
Accounting
Principle
|
(684)
|
566
|
369
|
|
|
|
|
Income
Tax Benefit
(Expense)
|
99
|
(107)
|
-
|
|
|
|
|
Income
(Loss) before Cumulative Effect of Change in Accounting
Principle
|
(585)
|
459
|
369
|
|
|
|
|
Cumulative
Effect of Change in Accounting Principle
|
-
|
-
|
(26)
|
|
|
|
|
Net
Income
(Loss)
|
$ (585)
|
$ 459
|
$ 343
|
(continued
on next page)
CONTINENTAL
AIRLINES, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
millions, except per share data)
|
Year
Ended December 31,
|
|
2008
|
2007
|
2006
|
Earnings
(Loss) per Share:
|
|
|
|
Basic:
|
|
|
|
Income
(Loss) before Cumulative Effect of Change in Accounting
Principle
|
$(5.54)
|
$4.73
|
$ 4.15
|
Cumulative
Effect of Change in Accounting Principle
|
-
|
-
|
(0.29)
|
Net
Income
(Loss)
|
$(5.54)
|
$4.73
|
$ 3.86
|
|
|
|
|
Diluted:
|
|
|
|
Income
(Loss) before Cumulative Effect of Change in Accounting
Principle
|
$(5.54)
|
$4.18
|
$ 3.53
|
Cumulative
Effect of Change in Accounting Principle
|
-
|
-
|
(0.23)
|
Net
Income
(Loss)
|
$(5.54)
|
$4.18
|
$ 3.30
|
|
|
|
|
Shares
Used for Computation:
|
|
|
|
Basic
|
106
|
97
|
89
|
Diluted
|
106
|
114
|
111
|
The
accompanying Notes to Consolidated Financial Statements are an integral part of
these statements.
CONTINENTAL
AIRLINES, INC.
(In
millions, except for share data)
|
December
31,
|
ASSETS
|
2008
|
2007
|
|
|
|
Current
Assets:
|
|
|
Cash and cash
equivalents
|
$ 2,165
|
|
$ 2,128
|
|
Short-term
investments
|
478
|
|
675
|
|
Total unrestricted cash, cash
equivalents and short-term investments
|
2,643
|
|
2,803
|
|
|
|
|
|
|
Restricted cash, cash equivalents
and short-term investments
|
190
|
|
179
|
|
Accounts receivable, net of
allowance for doubtful receivables of $7 and $7
|
453
|
|
606
|
|
Spare parts and supplies, net of
allowance for obsolescence of $102 and $80
|
235
|
|
271
|
|
Deferred income
taxes
|
216
|
|
259
|
|
Prepayments and
other
|
610
|
|
443
|
|
Total current
assets
|
4,347
|
|
4,561
|
|
|
|
|
|
|
Property
and Equipment:
|
|
|
|
|
Owned property and
equipment:
|
|
|
|
|
Flight
equipment
|
8,446
|
|
7,182
|
|
Other
|
1,694
|
|
1,548
|
|
|
10,140
|
|
8,730
|
|
Less: Accumulated
depreciation
|
3,229
|
|
2,790
|
|
|
6,911
|
|
5,940
|
|
|
|
|
|
|
Purchase deposits for flight
equipment
|
275
|
|
414
|
|
|
|
|
|
|
Capital
leases
|
194
|
|
297
|
|
Less: Accumulated
amortization
|
53
|
|
93
|
|
|
141
|
|
204
|
|
Total property and
equipment,
net
|
7,327
|
|
6,558
|
|
|
|
|
|
|
Routes
and airport operating rights, net of accumulated amortization of
$375
and
$362
|
804
|
|
706
|
|
Investment
in other
companies
|
-
|
|
63
|
|
Other
assets,
net
|
208
|
|
217
|
|
|
|
|
|
|
Total
Assets
|
$12,686
|
|
$12,105
|
|
(continued
on next page)
CONTINENTAL
AIRLINES, INC.
(In
millions, except for share data)
|
December
31,
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
2008
|
2007
|
|
|
|
Current
Liabilities:
|
|
|
Current maturities of long-term
debt and capital leases
|
$ 519
|
|
$ 652
|
|
Accounts
payable
|
1,021
|
|
1,013
|
|
Air traffic and frequent flyer
liability
|
1,881
|
|
1,967
|
|
Accrued
payroll
|
345
|
|
545
|
|
Accrued other
liabilities
|
708
|
|
272
|
|
Total current
liabilities
|
4,474
|
|
4,449
|
|
|
|
|
|
|
Long-Term
Debt and Capital
Leases
|
5,371
|
|
4,366
|
|
|
|
|
|
|
Deferred
Income
Taxes
|
216
|
|
359
|
|
|
|
|
|
|
Accrued
Pension
Liability
|
1,417
|
|
534
|
|
|
|
|
|
|
Accrued
Retiree Medical
Benefits
|
234
|
|
235
|
|
|
|
|
|
|
Other
|
869
|
|
612
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity:
|
|
|
|
|
Preferred stock - $.01 par,
10,000,000 shares authorized; zero and
one share of Series B issued and
outstanding, stated at par value
|
-
|
|
-
|
|
Class B common stock - $.01 par,
400,000,000 shares authorized;
123,264,534 and 98,208,888 shares
issued and outstanding
|
1
|
|
1
|
|
Additional paid-in
capital
|
1,997
|
|
1,606
|
|
Retained earnings (accumulated
deficit)
|
(137)
|
|
448
|
|
Accumulated other comprehensive
loss
|
(1,756)
|
|
(505)
|
|
Total stockholders'
equity
|
105
|
|
1,550
|
|
Total
Liabilities and Stockholders' Equity
|
$12,686
|
|
$12,105
|
|
The
accompanying Notes to Consolidated Financial Statements are an integral part of
these statements.
CONTINENTAL
AIRLINES, INC.
(In
millions)
|
Year
Ended December 31,
|
|
2008
|
2007
|
2006
|
Cash
Flows from Operating Activities:
|
|
|
|
Net income
(loss)
|
$ (585)
|
$ 459
|
$ 343
|
Adjustments to reconcile net
income (loss) to net cash provided by
operating
activities:
|
|
|
|
Depreciation and
amortization
|
438
|
413
|
391
|
Special
charges
|
181
|
13
|
27
|
Deferred income tax (benefit)
expense
|
(101)
|
101
|
-
|
Gains on sale of
investments
|
(78)
|
(37)
|
(92)
|
Loss on fuel hedge contracts
with Lehman Brothers
|
125
|
-
|
-
|
Write-down in value of auction
rate securities, net of put right received
|
34
|
-
|
-
|
Undistributed equity in income
of other companies
|
(9)
|
(18)
|
(36)
|
Cumulative effect of change in
accounting principle
|
-
|
-
|
26
|
Stock-based compensation
related to equity awards
|
16
|
27
|
34
|
Other,
net
|
20
|
48
|
26
|
Changes in operating assets and
liabilities:
|
|
|
|
(Increase) decrease in accounts
receivable
|
147
|
(29)
|
(70)
|
(Increase) decrease in spare
parts and supplies
|
5
|
(66)
|
(26)
|
(Increase) decrease in
prepayments and other assets
|
(167)
|
16
|
(56)
|
Increase (decrease) in accounts
payable
|
(10)
|
71
|
104
|
Increase (decrease) in air
traffic and frequent flyer liability
|
(86)
|
255
|
237
|
Increase (decrease) in accrued
payroll, pension liability and other
|
(254)
|
(120)
|
150
|
Net cash (used in) provided by
operating
activities
|
(324)
|
1,133
|
1,058
|
Cash
Flows from Investing Activities:
|
|
|
|
Capital
expenditures
|
(504)
|
(445)
|
(300)
|
Aircraft purchase deposits
refunded (paid), net
|
102
|
(219)
|
(81)
|
(Purchase) sale of short-term
investments, net
|
137
|
(314)
|
(127)
|
Proceeds from sales of
investments, net
|
149
|
65
|
156
|
Proceeds from sales of property
and equipment
|
113
|
67
|
10
|
Decrease (increase) in
restricted cash, cash equivalents and short-term
investments
|
(13)
|
86
|
(24)
|
Net cash used in investing
activities
|
(16)
|
(760)
|
(366)
|
Cash
Flows from Financing Activities:
|
|
|
|
Payments on long-term debt and
capital lease obligations
|
(641)
|
(429)
|
(948)
|
Proceeds from issuance of
long-term
debt
|
642
|
26
|
574
|
Proceeds from public offering
of common stock, net
|
358
|
-
|
-
|
Proceeds from issuance of
common stock pursuant to stock plans
|
18
|
35
|
82
|
Net cash provided by (used in)
financing
activities
|
377
|
(368)
|
(292)
|
Net
Increase in Cash and Cash
Equivalents
|
37
|
5
|
400
|
Cash
and Cash Equivalents - Beginning of Period
|
2,128
|
2,123
|
1,723
|
Cash
and Cash Equivalents - End of Period
|
$2,165
|
$2,128
|
$2,123
|
(continued
on next page)
CONTINENTAL
AIRLINES, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
millions)
|
Year
Ended December 31,
|
|
2008
|
2007
|
2006
|
Supplemental
Cash Flows Information:
|
|
|
|
Interest
paid
|
$ 365
|
$ 383
|
$ 382
|
Income taxes paid
(refunded)
|
$ 5
|
$ 2
|
$ (1)
|
Investing and Financing
Activities Not Affecting Cash:
|
|
|
|
Property and equipment acquired
through the issuance of debt
|
$1,014
|
$ 190
|
$ 192
|
Capital lease obligations
incurred
|
$ 4
|
$ -
|
$ -
|
Reduction of debt in exchange
for sale of frequent flyer miles
|
$ (38)
|
$ (37)
|
$ -
|
Transfer of auction rate
securities from available-for-sale to trading
|
$ 97
|
$ -
|
$ -
|
Common stock issued upon
conversion of 4.5% Convertible Notes
|
$ -
|
$ 170
|
$ -
|
The
accompanying Notes to Consolidated Financial Statements are an integral part of
these statements.
CONTINENTAL
AIRLINES, INC.
(In
millions)
|
|
|
|
Retained
|
Accumulated
|
|
|
|
Class
B
|
Additional
|
Earnings
|
Other
|
Treasury
|
|
|
Common
Stock
|
Paid-In
|
(Accumulated
|
Comprehensive
|
Stock,
|
|
|
Shares
|
Amount
|
Capital
|
Deficit)
|
Loss
|
At Cost
|
Total
|
|
|
|
|
|
|
|
|
December
31, 2005
|
86
|
$ 1
|
|
$1,635
|
$ 406
|
|
$(675)
|
|
$(1,141)
|
$226
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
-
|
-
|
|
-
|
343
|
|
-
|
|
-
|
343
|
Other
Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
Decrease
in additional
minimum
pension liability
|
-
|
-
|
|
-
|
-
|
|
68
|
|
-
|
68
|
Net
change in unrealized gain
(loss)
on derivative instruments
|
-
|
-
|
|
-
|
-
|
|
(21)
|
|
-
|
(21)
|
Total
Comprehensive Income
|
|
|
|
|
|
|
|
|
|
390
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock
pursuant
to stock plans
|
6
|
-
|
|
82
|
-
|
|
-
|
|
-
|
82
|
Stock-based
compensation
|
-
|
-
|
|
34
|
-
|
|
-
|
|
-
|
34
|
Retirement
of treasury stock
|
-
|
-
|
|
(381)
|
(760)
|
|
-
|
|
1,141
|
-
|
Impact
of adoption of SFAS 158
|
-
|
-
|
|
-
|
-
|
|
(385)
|
|
-
|
(385)
|
December
31, 2006
|
92
|
1
|
|
1,370
|
(11)
|
|
(1,013)
|
|
-
|
347
|
|
|
|
|
|
|
|
|
Net
income
|
-
|
-
|
|
-
|
459
|
|
-
|
|
-
|
459
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
Net
change in unrealized gain
(loss)
on derivative instruments
|
-
|
-
|
|
-
|
-
|
|
45
|
|
-
|
45
|
Net
change related to employee
benefit
plans
|
-
|
-
|
|
-
|
-
|
|
463
|
|
-
|
463
|
Total
Comprehensive Income
|
|
|
|
|
|
|
|
|
|
967
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of 4.5%
convertible
notes
|
4
|
-
|
|
174
|
-
|
|
-
|
|
-
|
174
|
Issuance
of common stock
pursuant
to stock plans
|
2
|
-
|
|
35
|
-
|
|
-
|
|
-
|
35
|
Stock-based
compensation
|
-
|
-
|
|
27
|
-
|
|
-
|
|
-
|
27
|
December
31, 2007
|
98
|
1
|
|
1,606
|
448
|
|
(505)
|
|
-
|
1,550
|
(continued
on next page)
CONTINENTAL
AIRLINES, INC.
CONSOLIDATED
STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
(In
millions)
|
|
|
|
Retained
|
Accumulated
|
|
|
|
Class
B
|
Additional
|
Earnings
|
Other
|
Treasury
|
|
|
Common
Stock
|
Paid-In
|
(Accumulated
|
Comprehensive
|
Stock,
|
|
|
Shares
|
Amount
|
Capital
|
Deficit)
|
Loss
|
At Cost
|
Total
|
|
|
|
|
|
|
|
|
Net
loss
|
-
|
-
|
|
-
|
(585)
|
|
-
|
|
-
|
(585)
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
Net
change in unrealized gain
(loss)
on derivative instruments
and
other
|
-
|
-
|
|
-
|
-
|
|
(441)
|
|
-
|
(441)
|
Net
change related to employee
benefit
plans
|
-
|
-
|
|
-
|
-
|
|
(810)
|
|
-
|
(810)
|
Total
Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
(1,836)
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock
pursuant
to stock plans
|
1
|
-
|
|
19
|
-
|
|
-
|
|
-
|
19
|
Issuance
of common stock
pursuant
to stock offerings
|
24
|
-
|
|
358
|
-
|
|
-
|
|
-
|
358
|
Stock-based
compensation
|
-
|
-
|
|
14
|
-
|
|
-
|
|
-
|
14
|
December
31, 2008
|
123
|
$ 1
|
|
$1,997
|
$(137)
|
|
$(1,756)
|
|
$ -
|
$ 105
|
The
accompanying Notes to Consolidated Financial Statements are an integral part of
these statements.
CONTINENTAL
AIRLINES, INC.
Continental Airlines, Inc., a Delaware
corporation, is a major United States air carrier engaged in the business of
transporting passengers, cargo and mail. Including our wholly-owned
subsidiary, Continental Micronesia, Inc. ("CMI"), and regional flights operated
on our behalf under capacity purchase agreements with other carriers, we are the
world's fifth largest airline as measured by the number of scheduled miles flown
by revenue passengers in 2008. Our regional capacity purchase
agreements are with ExpressJet Airlines, Inc. ("ExpressJet"), a wholly-owned
subsidiary of ExpressJet Holdings, Inc. ("Holdings"), Chautauqua Airlines, Inc.
("Chautauqua"), a wholly-owned subsidiary of Republic Airways Holdings, Inc.,
Champlain Enterprises, Inc. ("CommutAir") and Pinnacle Airlines Corp.'s
subsidiary, Colgan Air, Inc. ("Colgan"). Our regional operations
using regional jet aircraft are conducted under the name "Continental Express"
and those using turboprop aircraft are conducted under the name "Continental
Connection."
As used in these Notes to Consolidated
Financial Statements, the terms "Continental," "we," "us," "our" and similar
terms refer to Continental Airlines, Inc. and, unless the context indicates
otherwise, its consolidated subsidiaries.
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a)
|
Principles of Consolidation. Our
consolidated financial statements include the accounts of Continental and
all wholly-owned subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation.
|
|
|
(b)
|
Use of Estimates. The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results
could differ from those estimates.
|
|
|
(c)
|
Cash and Cash Equivalents. We
classify short-term, highly liquid investments which are readily
convertible into cash and have a maturity of three months or less when
purchased as cash and cash equivalents. Restricted cash, cash
equivalents and short-term investments is primarily collateral for
estimated future workers' compensation claims, credit card processing
contracts, letters of credit and performance bonds.
|
|
|
(d)
|
Short-term
Investments. Short-term investments primarily include
certificates of deposit placed through an account registry service
("CDARS"), auction rate securities and automobile loan-related asset
backed securities. The CDARS we hold have original maturities
of 91 days and are insured by the Federal Deposit Insurance
Corporation. Short-term investments are classified as
available-for-sale or trading securities and are stated at fair
value. Trading securities consist of student loan-related
auction rate securities for which we have received an option to put the
securities back to the broker, discussed in Note 6. Realized
gains and losses on specific investments are reflected in non-operating
income (expense) in our consolidated statements of
operations. Unrealized gains and losses on available-for-sale
and trading securities are reflected as a component of accumulated other
comprehensive loss and non-operating income (expense) in our consolidated
statements of operations, respectively.
|
|
|
(e)
|
Spare Parts and
Supplies. Inventories, expendable parts and supplies
related to flight equipment are carried at average acquisition cost and
are expensed when consumed in operations. An allowance for
obsolescence is provided over the remaining lease term or the estimated
useful life of the related aircraft, as well as to reduce the carrying
cost of spare parts currently identified as excess to the lower of
amortized cost or net realizable value. We recorded additions
to this allowance for expense of $26 million, $11 million and $7 million
in the years ended December 31, 2008, 2007 and 2006,
respectively. The allowance was reduced by $1 million and $32
million in the years ended December 31, 2007 and 2006, respectively,
related primarily to the consignment of surplus spare parts and
supplies. Spare parts and supplies are assumed to have an
estimated residual value of 10% of original cost. These
allowances are based on management estimates, which are subject to
change.
|
|
|
(f)
|
Property and Equipment. Property
and equipment are recorded at cost and are depreciated to estimated
residual values over their estimated useful lives using the straight-line
method. Jet aircraft and rotable spare parts are assumed to
have residual values of 15% and 10%, respectively, of original cost; other
categories of property and equipment are assumed to have no residual
value. The estimated useful lives of our property and equipment
are as
follows:
|
|
|
Estimated Useful Life
|
|
|
|
|
Jet
aircraft and
simulators
|
25
to 30 years
|
|
Rotable
spare
parts
|
Average
lease term or
useful
life for related aircraft
|
|
Buildings
and
improvements
|
10
to 30 years
|
|
Vehicles
and
equipment
|
5
to 10 years
|
|
Computer
software
|
3
to 5 years
|
|
Capital
leases
|
Shorter
of lease
term
or useful life
|
|
Leasehold
improvements
|
Shorter
of lease
term
or useful life
|
|
Amortization
of assets recorded under capital leases is included in depreciation
expense in our consolidated statement of operations.
|
|
|
|
The
carrying amount of computer software was $80 million and $77 million at
December 31, 2008 and 2007, respectively. Depreciation expense
related to computer software was $27 million, $28 million and $28 million
in the years ended December 31, 2008, 2007 and 2006,
respectively.
|
|
|
(g)
|
Routes and Airport Operating
Rights. Routes represent the right to fly between cities
in different countries. Routes are indefinite-lived intangible
assets and are not amortized. Routes totaled $466 million and
$484 million at December 31, 2008 and 2007, respectively. We
perform a test for impairment of our routes in the fourth quarter of each
year. In 2008, we recorded an $18 million non-cash charge to
write off an intangible route asset as a result of our decision to move
all of our flights between Newark Liberty International Airport ("New York
Liberty") and London from London Gatwick Airport to London Heathrow
Airport.
|
|
|
|
Airport
operating rights represent gate space and slots (the right to schedule an
arrival or departure within designated hours at a particular
airport). Airport operating rights at domestic airports totaled
$91 million and $106 million at December 31, 2008 and 2007,
respectively. These assets are amortized over the stated term
of the related lease (for gates) or 20 years (for
slots). Amortization expense related to domestic airport
operating rights was $14 million for each of the years ended December 31,
2008, 2007 and 2006. We expect annual amortization expense
related to domestic airport operating rights to be approximately $14
million in each of the next four years and $9 million in
2013.
|
|
|
|
Our
international slots are indefinite-lived intangible assets and are not
amortized. International slots totaled $247 million and $116
million at December 31, 2008 and 2007, respectively.
|
|
|
(h)
|
Measurement of Impairment of Long-Lived
Assets. We record impairment losses on long-lived
assets, consisting principally of property and equipment and domestic
airport operating rights, when events or changes in circumstances
indicate, in management's judgment, that the assets might be impaired and
the undiscounted cash flows estimated to be generated by those assets are
less than the carrying amount of those assets. The net carrying
value of assets not recoverable is reduced to fair value if lower than the
carrying value. In determining the fair market value of the
assets, we consider market trends, recent transactions involving sales of
similar assets and, if necessary, estimates of future discounted cash
flows. See Note 13 for a discussion of aircraft impairment
charges during 2008.
|
|
|
(i)
|
Revenue/Air Traffic
Liability. Passenger revenue is recognized either when
transportation is provided or when the ticket expires unused, rather than
when a ticket is sold. Revenue is recognized for unused
non-refundable tickets on the date of the intended flight if the passenger
did not notify us of his or her intention to change the
itinerary.
|
|
|
|
We
are required to charge certain taxes and fees on our passenger
tickets. These taxes and fees include U.S. federal
transportation taxes, federal security charges, airport passenger facility
charges and foreign arrival and departure taxes. These taxes
and fees are legal assessments on the customer. As we have a
legal obligation to act as a collection agent with respect to these taxes
and fees, we do not include such amounts in passenger
revenue. We record a liability when the amounts are
collected and relieve the liability when payments are made to the
applicable government agency.
|
|
|
|
Under
our capacity purchase agreements with regional carriers, we purchase all
of the capacity related to aircraft covered by the contracts and are
responsible for selling all of the related seat inventory. We
record the related passenger revenue and related expenses, with payments
under the capacity purchase agreements reflected as a separate operating
expense in our consolidated statement of operations.
|
|
|
|
The
amount of passenger ticket sales not yet recognized as revenue is included
in our consolidated balance sheets as air traffic and frequent flyer
liability. We perform periodic evaluations of the estimated
liability for passenger ticket sales and any adjustments, which can be
significant, are included in results of operations for the periods in
which the evaluations are completed. These adjustments relate primarily to
differences between our statistical estimation of certain revenue
transactions and the related sales price, as well as refunds, exchanges,
interline transactions and other items for which final settlement occurs
in periods subsequent to the sale of the related tickets at amounts other
than the original sales price.
|
|
|
|
Revenue
from the shipment of cargo and mail is recognized when transportation is
provided. Other revenue includes revenue from the sale of
frequent flyer miles (see (k) below), ticket change fees, baggage fees,
charter services, sublease income on aircraft leased to Holdings but not
operated for us and other incidental services. Ticket change
fees relate to non-refundable tickets, but are considered a separate
transaction from the air transportation because they represent a charge
for our additional service to modify a previous order. Ticket
change fees are recognized as other revenue in our consolidated statement
of operations at the time the fees are assessed.
|
|
|
(j)
|
Frequent Flyer Program. For
those OnePass accounts that have sufficient mileage credits to claim the
lowest level of free travel, we record a liability for either the
estimated incremental cost of providing travel awards that are expected to
be redeemed with us or the contractual rate of expected redemption on
alliance carriers. Incremental cost includes the cost of fuel,
meals, insurance and miscellaneous supplies, but does not include any
costs for aircraft ownership, maintenance, labor or overhead
allocation. Beginning in 2008, we also include in our
determination of incremental cost the impact of fees charged to certain
passengers redeeming frequent flyer rewards for travel, which partially
offsets the incremental cost associated with providing flights for
frequent flyer travel rewards. We recorded an adjustment of $27
million ($0.24 per basic and diluted share) to increase passenger revenue
and reduce our frequent flyer liability during 2008 for the impact of
these fees, which had not been significant in prior periods, after we
increased them during 2008. A change to these cost estimates,
the actual redemption activity, the amount of redemptions on alliance
carriers or the minimum award level could have a significant impact on our
liability in the period of change as well as future years. The
liability is adjusted periodically based on awards earned, awards
redeemed, changes in the incremental costs and changes in the OnePass
program, and is included in the accompanying consolidated balance sheets
as air traffic and frequent flyer liability. Changes in the
liability are recognized as passenger revenue in the period of
change.
|
|
|
|
We
also sell mileage credits in our frequent flyer program to participating
entities, such as credit/debit card companies, alliance carriers, hotels,
car rental agencies, utilities and various shopping and gift
merchants. Revenue from the sale of mileage credits is deferred
and recognized as passenger revenue over the period when transportation is
expected to be provided, based on estimates of its fair
value. Amounts received in excess of the expected
transportation's fair value are recognized in income currently and
classified as other revenue. A change to the time period over
which the mileage credits are used (currently six to 28 months), the
actual redemption activity or our estimate of the amount or fair value of
expected transportation could have a significant impact on our revenue in
the year of change as well as future years.
|
|
|
|
At
December 31, 2008, we estimated that approximately 2.4 million free travel
awards outstanding were expected to be redeemed for free travel on
Continental, Continental Express, Continental Connection, CMI or alliance
airlines. Our total liability for future OnePass award
redemptions for free travel and unrecognized revenue from sales of OnePass
miles to other companies was approximately $324 million at December 31,
2008. This liability is recognized as a component of air
traffic and frequent flyer liability in our consolidated balance
sheets.
|
|
|
(k)
|
Maintenance and Repair
Costs. Maintenance and repair costs for owned and leased
flight equipment, including the overhaul of aircraft components, are
charged to operating expense as incurred. Maintenance and
repair costs also include engine overhaul costs covered by cost-per-hour
agreements, a majority of which are expensed on the basis of hours
flown.
|
|
|
(l)
|
Advertising Costs. We expense
the costs of advertising as incurred. Advertising expense was
$93 million, $106 million and $95 million for the years ended December 31,
2008, 2007 and 2006, respectively.
|
|
|
(m)
|
Regional Capacity Purchase,
Net. Payments made to regional carriers under capacity
purchase agreements are reported in regional capacity purchase, net, in
our consolidated statement of operations. Regional capacity
purchase, net, includes all fuel expense on flights operated for us under
capacity purchase agreements and is net of our rental income on aircraft
leased to ExpressJet and flown for us through June 30,
2008. Beginning July 1, 2008, ExpressJet no longer pays us
sublease rent for aircraft operated on our behalf.
|
|
|
(n)
|
Foreign Currency Gains
(Losses). Foreign currency gains (losses) are recorded
as part of other, net non-operating income (expense) in our consolidated
statements of operations. Foreign currency gains (losses) were
$(37) million, $2 million and $3 million for the years ended December 31,
2008, 2007 and 2006, respectively.
|
|
|
(o)
|
Reclassifications. Certain
reclassifications have been made in the prior years' consolidated
financial statements and related note disclosures to conform to the
current year's
presentation.
|
NOTE
2 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
SFAS
157. In September 2006, the Financial Accounting Standards
Board ("FASB") issued Statement No. 157, "Fair Value Measurements" ("SFAS 157"),
which defines fair value, establishes a framework for measuring fair value and
expands disclosures about fair value measurements. In February 2008,
the FASB issued FASB Staff Position No. FAS 157-2, "Effective Date of FASB
Statement No. 157," which deferred the effective date for us to January 1, 2009
for all nonfinancial assets and liabilities, except those that are recognized or
disclosed at fair value on a recurring basis (that is, at least
annually). As discussed in Note 6, we adopted the provisions of SFAS
157 relating to assets and liabilities recognized or disclosed in the financial
statements at fair value on a recurring basis on January 1, 2008. The
adoption of the deferred provisions of SFAS 157 on January 1, 2009 is not
expected to have a material effect on our consolidated financial
statements.
SFAS
159. In February 2007, the FASB issued Statement No. 159, "The
Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS
159"). SFAS 159 permits entities to elect to measure at fair value
eligible financial instruments that are not currently measured at fair
value. This election, which may be applied on an instrument by
instrument basis, is typically irrevocable once made. SFAS 159 was
effective for us as of January 1, 2008. The only financial instrument
we have elected to measure at fair value under this statement is the put right
we received in 2008 to sell certain student loan-related auction rate
securities, discussed in Note 6.
SFAS
141R. In December 2007, the FASB issued Statement No. 141(R),
"Business Combinations" ("SFAS 141R"). SFAS 141R improves consistency
and comparability of information about the nature and effect of a business
combination by establishing principles and requirements for how an acquirer (a)
recognizes and measures in its financial statements the identifiable assets
acquired, liabilities assumed and any noncontrolling interest in the acquiree;
(b) recognizes and measures the goodwill acquired in the business combination or
a gain from a bargain purchase; and (c) determines what information to disclose
to enable users of the financial statements to evaluate the nature and financial
effects of the business combination. SFAS 141R applies prospectively
to all business combination transactions for which the acquisition date is on or
after January 1, 2009. The impact of our adoption of SFAS 141R will
depend upon the nature and terms of business combinations, if any, that we
consummate on or after January 1, 2009.
SFAS
161. In March 2008, the FASB issued Statement No. 161,
"Disclosures about Derivative Instruments and Hedging Activities" ("SFAS
161"). SFAS 161 requires enhanced disclosures about an entity's
derivative and hedging activities and is effective for us as of January 1,
2009. We do not expect the adoption of SFAS 161 to have a material
effect on our consolidated financial statements.
FSP APB
14-1. In May 2008, the FASB affirmed Staff Position No. APB
14-1, "Accounting for Convertible Debt Instruments That May Be Settled in Cash
upon Conversion (Including Partial Cash Settlement)" ("FSP APB 14-1"), which
clarifies the accounting for convertible debt instruments that may be settled in
cash (including partial cash settlement) upon conversion. FSP APB
14-1 requires issuers to account separately for the liability and equity
components of certain convertible debt instruments in a manner that reflects the
issuer's nonconvertible debt (unsecured debt) borrowing rate when interest cost
is recognized. FSP APB 14-1 requires bifurcation of a component of
the debt, classification of that component in equity and the accretion of the
resulting discount on the debt to be recognized as part of interest expense in
our consolidated statement of operations. FSP APB 14-1 requires
retrospective application to the terms of instruments as they existed for all
periods presented. FSP APB 14-1 is effective for us as of January 1,
2009 and early adoption is not permitted. The adoption of FSP APB
14-1 will affect the accounting for our 5% Convertible Notes due 2023 and will
result in increased interest expense of approximately $12 million in 2009 and $6
million in 2010, assuming the 5% Convertible Notes will be settled in
2010. The retrospective application of this FSP to years 2003 through
2008 will result in increased annual interest expense of approximately $4
million in 2003, gradually increasing to approximately $11 million in
2008.
FSP FAS
132(R)-1. In December 2008, the FASB affirmed Staff Position
No. FAS 132(R)-1, "Employers’ Disclosures about Postretirement Benefit Plan
Assets" ("FSP FAS 132(R)-1"). FSP FAS 132(R)-1 requires additional
disclosures about assets held in an employer’s defined benefit pension or other
postretirement plan, primarily related to categories and fair value measurements
of plan assets. FSP FAS 132(R)-1 is effective for us as of
December 31, 2009 and we do not expect the adoption to have a material effect on
our consolidated financial statements.
NOTE
3 - EARNINGS PER SHARE
The following table sets forth the
components of basic and diluted earnings (loss) per share (in
millions):
|
2008
|
2007
|
2006
|
|
|
|
|
Numerator:
|
|
|
|
Numerator
for basic earnings (loss) per share - net income (loss)
|
$(585)
|
|
$459
|
|
$343
|
|
Effect
of dilutive securities - interest expense on:
|
|
|
|
|
|
|
5%
Convertible
Notes
|
-
|
|
7
|
|
7
|
|
6%
Convertible Junior Subordinated Debentures
held
by subsidiary
trust
|
-
|
|
12
|
|
11
|
|
4.5%
Convertible
Notes
|
-
|
|
-
|
|
7
|
|
Other
|
-
|
|
-
|
|
(1)
|
|
Numerator
for diluted earnings (loss) per share - net
income
(loss) after assumed conversions and effect
of
dilutive securities of equity
investee
|
$(585)
|
|
$478
|
|
$367
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
Denominator
for basic earnings (loss) per share -
weighted
average
shares
|
106
|
|
97
|
|
89
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
5%
Convertible
Notes
|
-
|
|
9
|
|
9
|
|
6%
Convertible Junior Subordinated Debentures
held
by subsidiary
trust
|
-
|
|
4
|
|
4
|
|
4.5%
Convertible
Notes
|
-
|
|
-
|
|
5
|
|
Employee
stock
options
|
-
|
|
4
|
|
4
|
|
Dilutive
potential common
shares
|
-
|
|
17
|
|
22
|
|
|
|
|
|
|
|
|
Denominator
for diluted earnings (loss) per share -
weighted-average
shares after assumed conversions
|
106
|
|
114
|
|
111
|
|
The adjustments to net income to
determine the numerator for diluted earnings per share for the years ended
December 31, 2007 and 2006 are net of the related effect of profit
sharing.
Approximately 13 million potential
shares of common stock related to convertible debt securities were excluded from
the computation of diluted earnings (loss) per share in the year ended December
31, 2008 because the impact would have been antidilutive. In
addition, approximately eight million, one million and one million weighted
average options to purchase shares of our common stock were excluded from the
computation of diluted earnings per share for the years ended December 31, 2008,
2007 and 2006, respectively, because the options' exercise prices were greater
than the average market price of the common shares during the relevant period or
the effect of including the options would have been antidilutive.
NOTE
4 - LONG-TERM DEBT
Long-term debt at December 31 consisted
of the following (in millions):
|
2008
|
2007
|
|
|
|
Secured
|
|
|
Notes
payable, interest rates of 5.4% to 8.4% (weighted average rate
of
6.9%
as of December 31, 2008), payable through
2022
|
$2,862
|
|
$2,226
|
|
Floating
rate notes, with indicated interest rates:
|
|
|
|
|
LIBOR
(1.425% on December 31, 2008) plus 0.35% to 1.95%, payable
through
2020
|
1,345
|
|
1,095
|
|
LIBOR
plus 3.375%, payable in
2011
|
350
|
|
350
|
|
LIBOR
plus 3.125% to 3.25%, payable through 2014
|
192
|
|
196
|
|
LIBOR
plus 2.5% to 4.5%, payable through 2016
|
157
|
|
174
|
|
Advance
purchase of mileage credits, implicit interest rate of
6.18%
|
148
|
|
-
|
|
Other
|
15
|
|
38
|
|
|
|
|
|
|
Unsecured
|
|
|
|
|
Convertible
junior subordinated debentures, interest rate of 6.0%,
payable
in
2030
|
248
|
|
248
|
|
Note
payable, interest rate of 8.75%, payable in 2011
|
200
|
|
200
|
|
Convertible
notes, interest rate of 5.0%, callable beginning in 2010
|
175
|
|
175
|
|
Note
payable, interest rate of 8.125%, payable in 2008
|
-
|
|
89
|
|
|
5,692
|
|
4,791
|
|
Less: current
maturities
|
516
|
|
620
|
|
Total
|
$5,176
|
|
$4,171
|
|
Maturities of long-term debt due over
the next five years are as follows (in millions):
Year
ending December 31,
|
|
|
2009
|
$ 516
|
|
2010
|
770
|
|
2011
|
1,128
|
|
2012
|
533
|
|
2013
|
600
|
Most of our property and equipment,
spare parts inventory, certain routes, and the outstanding common stock and
substantially all of the other assets of our wholly-owned subsidiaries Air
Micronesia, Inc. ("AMI") and CMI are subject to agreements securing our
indebtedness.
At December 31, 2008, we also had
letters of credit and performance bonds relating to various real estate and
customs obligations in the amount of $69 million with expiration dates through
October 2010.
Debt Secured by
Aircraft. In April 2007, we obtained financing for 12 Boeing
737-800s and 18 Boeing 737-900ERs. We applied a portion of this
financing to 27 Boeing aircraft delivered to us in 2008 and recorded related
debt of $1.0 billion. We will apply the remainder of this financing
to three of the Boeing 737 aircraft scheduled for delivery in
2009. In connection with this financing, pass-through trusts raised
$1.1 billion through the issuance of three classes of pass-through
certificates. Class A certificates, with an aggregate principal
amount of $757 million, bear interest at 5.983%, Class B certificates, with an
aggregate principal amount of $222 million, bear interest at 6.903% and Class C
certificates, with an aggregate principal amount of $168 million, bear interest
at 7.339%. The proceeds from the sale of the certificates are
initially held by a depositary in escrow for the benefit of the certificate
holders until we use such funds to purchase the aircraft. The funds
in escrow are not guaranteed by us and are not reported as debt on our
consolidated balance sheet at December 31, 2008 because the proceeds held by the
depositary are not our assets and interest earned on the proceeds, as well as
any unused proceeds, will be distributed directly to the certificate
holders.
As we take delivery of each of the
three remaining aircraft that will be financed under this facility, we will
issue equipment notes to the trusts, which will purchase such notes with a
portion of the escrowed funds. We will use the proceeds to finance
the purchase of the aircraft and will record the principal amount of the
equipment notes that we issue as debt on our consolidated balance
sheet. Principal payments on the equipment notes and the
corresponding distribution of these payments to certificate holders will begin
in April 2010 and will end in April 2022 for Class A and B certificates and
April 2014 for Class C certificates. Additionally, the Class A and B
certificates have the benefit of a liquidity facility under which a third party
agrees to make up to three semiannual interest payments on the certificates if a
default in the payment of interest occurs.
During 2008, we obtained $268 million
through three separate financings secured by two new Boeing 737-900ER aircraft,
seven Boeing 757-200 aircraft and five Boeing 737-700 aircraft.
Pre-delivery Payment
Facility. On June 30, 2008, we entered into a loan facility to
finance a portion of the pre-delivery payment requirements under the aircraft
purchase agreements for 66 new Boeing aircraft originally scheduled for delivery
between July 1, 2008 and the end of 2011. We borrowed $113 million
under this facility on June 30, 2008. Our obligations under the
facility are secured by our rights under our purchase agreements for 737 and 777
aircraft on order with Boeing.
Advance Purchase of Mileage
Credits. On June 10, 2008, we entered into an amendment and
restatement of our Bankcard Joint Marketing Agreement (the "Bankcard Agreement")
with Chase Bank USA, N.A. ("Chase"), under which Chase purchases frequent flyer
mileage credits to be earned by OnePass members for making purchases using a
Continental branded credit card issued by Chase. The Bankcard
Agreement provides for a payment to us of $413 million, of which $235 million
relates to the advance purchase of frequent flyer mileage credits for the year
2016. In connection with the advance purchase of mileage credits, we
have provided a security interest to Chase in certain routes and slots,
including certain slots at London's Heathrow Airport. The $235
million purchase of mileage credits has been treated as a loan from Chase with
an implicit interest rate of 6.18% and is reported as long-term debt in our
consolidated balance sheet. Our liability will be reduced ratably in
2016 as the mileage credits are issued to Chase.
The remaining $178 million received
from Chase is in consideration for certain other commitments with respect to the
co-branding relationship, including the extension of the term of the Bankcard
Agreement until December 31, 2016. This amount is reported in other
liabilities in our consolidated balance sheet and will be recognized as other
revenue on a straight-line basis over the term of the agreement.
Secured Term Loan
Facility. We and CMI have loans under a $350 million secured
term loan facility. The loans are secured by certain of our U.S.-Asia
routes and related assets, all of the outstanding common stock of our
wholly-owned subsidiaries AMI and CMI and substantially all of the other assets
of AMI and CMI, including route authorities and related assets. The
loans bear interest at a rate equal to the London Interbank Offered Rate
("LIBOR") plus 3.375% and are due in June 2011. The facility requires
us to maintain a minimum balance of unrestricted cash and short-term investments
of $1.0 billion at the end of each month. The loans may become due and
payable immediately if we fail to maintain the monthly minimum cash balance and
upon the occurrence of other customary events of default under the loan
documents. If we fail to maintain a minimum balance of unrestricted
cash and short-term investments of $1.125 billion, we and CMI will be
required to make a mandatory aggregate $50 million prepayment of the
loans.
In addition, the facility provides that
if the ratio of the outstanding loan balance to the value of the collateral
securing the loans, as determined by the most recently delivered periodic
appraisal, is greater than 52.5%, we and CMI will be required to post additional
collateral or prepay the loans to reestablish a loan-to-collateral value ratio
of not greater than 52.5%. We are currently in compliance with the
covenants in the facility.
Notes Secured by Spare Parts
Inventory. We have two series of notes secured by the majority
of our spare parts inventory. The senior equipment notes, which total
$190 million in principal amount, bear interest at the three-month LIBOR plus
0.35%. The junior equipment notes, which total $130 million in
principal amount, bear interest at the three-month LIBOR plus
3.125%. A portion of the spare parts inventory that serves as
collateral for the equipment notes is classified as property and equipment and
the remainder is classified as spare parts and supplies, net.
In connection with these equipment
notes, we entered into a collateral maintenance agreement requiring us, among
other things, to maintain a loan-to-collateral value ratio of not greater than
45% with respect to the senior series of equipment notes and a
loan-to-collateral value ratio of not greater than 75% with respect to both
series of notes combined. We must also maintain a certain level of
rotable components within the spare parts collateral pool. These
ratios are calculated semi-annually based on an independent appraisal of the
spare parts collateral pool. If any of the collateral ratio
requirements are not met, we must take action to meet all ratio requirements by
adding additional eligible spare parts to the collateral pool, redeeming a
portion of the outstanding notes, providing other collateral acceptable to the
bond insurance policy provider for the senior series of equipment notes or any
combination of the above actions. We are currently in compliance with
these covenants.
Convertible Debt
Securities. On July 1, 2006, our 5% Convertible Notes due 2023
with a principal amount of $175 million became convertible into shares of our
common stock at a conversion price of $20 per share. If a holder of
the notes exercises the conversion right, in lieu of delivering shares of our
common stock, we may elect to pay cash or a combination of cash and shares of
our common stock for the notes surrendered. All or a portion of the
notes are also redeemable for cash at our option on or after June 18, 2010 at
par plus accrued and unpaid interest, if any. Holders of the notes
may require us to repurchase all or a portion of their notes at par plus any
accrued and unpaid interest on June 15 of 2010, 2013 or 2018. We may
at our option choose to pay the repurchase price on those dates in cash, shares
of our common stock or any combination thereof. However, if we are
required to repurchase all or a portion of the notes, our policy is to settle
the notes in cash. Holders of the notes may
also require us to repurchase all or a portion of their notes for cash at par
plus any accrued and unpaid interest if certain changes in control of
Continental occur.
In November 2000, Continental Airlines
Finance Trust II, a Delaware statutory business trust (the "Trust") of which we
own all the common trust securities, completed a private placement of five
million 6% Convertible Preferred Securities, called Term Income Deferrable
Equity Securities or "TIDES." The TIDES have a liquidation value of
$50 per preferred security and are convertible at any time at the option of the
holder into shares of common stock at a conversion rate of $60 per share of
common stock (equivalent to approximately 0.8333 share of common stock for each
preferred security). Distributions on the preferred securities are
payable by the Trust at an annual rate of 6% of the liquidation value of $50 per
preferred security.
The sole assets of the Trust are 6%
Convertible Junior Subordinated Debentures ("Convertible Subordinated
Debentures") with an aggregate principal amount of $248 million as of December
31, 2008 issued by us and which mature on November 15, 2030. The
Convertible Subordinated Debentures are redeemable by us, in whole or in part,
on or after November 20, 2003 at designated redemption prices. If we
redeem the Convertible Subordinated Debentures, the Trust must redeem the TIDES
on a pro rata basis having an aggregate liquidation value equal to the aggregate
principal amount of the Convertible Subordinated Debentures
redeemed. Otherwise, the TIDES will be redeemed upon maturity of the
Convertible Subordinated Debentures, unless previously converted.
Taking into consideration our
obligations under (i) the Preferred Securities Guarantee relating to the TIDES,
(ii) the Indenture relating to the Convertible Subordinated Debentures to pay
all debt and obligations and all costs and expenses of the Trust (other than
U.S. withholding taxes) and (iii) the Indenture, the Declaration relating to the
TIDES and the Convertible Subordinated Debentures, we have fully and
unconditionally guaranteed payment of (i) the distributions on the TIDES, (ii)
the amount payable upon redemption of the TIDES and (iii) the liquidation amount
of the TIDES.
In January 2007, $170 million in
principal amount of our 4.5% convertible notes due on February 1, 2007 was
converted by the holders into 4.3 million shares of our Class B common stock at
a conversion price of $40 per share. The remaining $30 million in
principal amount was paid on February 1, 2007.
NOTE
5 - LEASES
We lease certain aircraft and other
assets under long-term lease arrangements. Other leased assets
include real property, airport and terminal facilities, maintenance facilities,
training centers and general offices. Most aircraft leases include
both renewal options and purchase options. Because renewals of our
existing leases were not considered to be reasonably assured at the inception of
the each lease, rental payments that would be due during the renewal periods
were not included in the determination of straight-line rent
expense. Leasehold improvements are amortized over the shorter of the
related lease term or their useful life. The purchase options are
generally effective at the end of the lease term at the then-current fair market
value. Our leases do not include residual value
guarantees.
At December 31, 2008, the scheduled
future minimum lease payments under capital leases and the scheduled future
minimum lease rental payments required under operating leases were as follows
(in millions):
|
|
Capital
Leases
|
Operating Leases
|
Aircraft
|
Non-aircraft
|
|
|
|
|
|
Year
ending December 31,
|
|
|
|
|
2009
|
$ 17
|
|
$ 1,019
|
|
$ 456
|
|
|
2010
|
17
|
|
998
|
|
418
|
|
|
2011
|
16
|
|
939
|
|
402
|
|
|
2012
|
16
|
|
894
|
|
494
|
|
|
2013
|
16
|
|
871
|
|
355
|
|
|
Later
years
|
400
|
|
4,001
|
|
4,022
|
|
|
|
|
|
|
|
|
|
Total
minimum lease payments
|
482
|
|
$8,722
|
|
$6,147
|
|
Less: amount
representing interest
|
284
|
|
|
|
|
|
Present
value of capital leases
|
198
|
|
|
|
|
|
Less: current
maturities of capital leases
|
3
|
|
|
|
|
|
Long-term
capital
leases
|
$195
|
|
|
|
|
|
At December 31, 2008, we had 466
aircraft under operating leases, including 210 mainline aircraft and 256
regional jets. These operating leases have remaining lease terms
ranging up to 16 years. Projected sublease income to be received from
ExpressJet through 2022, not included in the above table, is approximately $248
million. The operating lease amounts for aircraft presented above
include a portion of our minimum noncancelable payments under capacity purchase
agreements with our other regional carriers which represents the deemed lease
commitments on the related aircraft. See Note 16 for a discussion of
our regional capacity purchase agreements. Rent expense for
non-aircraft operating leases totaled $580 million, $535 million and $501
million for the years ended December 31, 2008, 2007 and 2006,
respectively.
NOTE
6 - FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
SFAS 157, "Fair Value Measurements,"
requires expanded disclosures about fair value measurements. SFAS 157
applies to other accounting pronouncements that require or permit fair value
measurements, but does not require any new fair value
measurements. SFAS 157 clarifies that fair value is an exit price,
representing the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants based
on the highest and best use of the asset or liability. As such, fair
value is a market-based measurement that should be determined based on
assumptions that market participants would use in pricing an asset or
liability. SFAS 157 requires us to use valuation techniques to
measure fair value that maximize the use of observable inputs and minimize the
use of unobservable inputs. These inputs are prioritized as
follows:
|
Level
1:
|
Observable
inputs such as quoted prices for identical assets or liabilities in active
markets
|
|
Level
2:
|
Other
inputs that are observable directly or indirectly, such as quoted prices
for similar assets or liabilities or market-corroborated
inputs
|
|
Level
3:
|
Unobservable
inputs for which there is little or no market data and which require us to
develop our own assumptions about how market participants would price the
assets or liabilities
|
|
The
valuation techniques that may be used to measure fair value are as
follows:
|
|
(A)
|
Market
approach - Uses prices and other relevant information generated by market
transactions involving identical or comparable assets or
liabilities
|
|
(B)
|
Income
approach - Uses valuation techniques to convert future amounts to a single
present amount based on current market expectations about those future
amounts, including present value techniques, option-pricing models and
excess earnings method
|
|
(C)
|
Cost
approach - Based on the amount that currently would be required to replace
the service capacity of an asset (replacement
cost)
|
Assets (liabilities) measured at fair
value on a recurring basis during the period include (in millions):
|
Carrying
Amount as of
December 31, 2008
|
Level 1
|
Level 2
|
Level 3
|
Valuation
Technique
|
|
|
|
|
|
|
Cash
and cash equivalents
|
$2,165
|
|
$2,165
|
|
|
(A)
|
Short-term
investments:
|
|
|
|
|
|
|
Auction
rate securities
|
201
|
|
|
|
$201
|
(B)
|
Other
|
277
|
|
277
|
|
|
(A)
|
Restricted
cash, cash equivalents and
short-term
investments:
|
|
|
|
|
|
|
Auction
rate securities
|
28
|
|
|
|
28
|
(B)
|
Other
|
162
|
|
162
|
|
|
(A)
|
Auction
rate securities put right
|
26
|
|
|
|
26
|
(B)
|
Fuel
derivatives
|
(415)
|
|
|
|
(415)
|
(A)
|
Foreign
currency
derivatives
|
(8)
|
|
|
$(8)
|
|
(A)
|
The determination of fair value of each
of these items is discussed below:
Cash, Cash Equivalents and
Restricted Cash. Cash, cash equivalents and restricted cash
consist primarily of U.S. Government and Agency money market funds and other
AAA-rated money market funds with original maturities of three months or
less. The original cost of these assets approximates fair value due
to their short-term maturity.
Short-Term Investments Other
than Auction Rate Securities. Short-term investments other
than auction rate securities primarily consist of CDARS and automobile
loan-related asset backed securities. The fair values of these
investments are based on observable market data.
Student Loan-Related Auction
Rate Securities. At December 31, 2008, we held student
loan-related auction rate securities with a fair value of $229 million and a par
value of $291 million. These securities were classified as follows
(in millions):
|
Fair Value
|
Par Value
|
|
|
|
Short-term
investments:
|
|
|
Available-for-sale
|
$105
|
|
$133
|
|
Trading
|
96
|
|
125
|
|
Total
|
201
|
|
258
|
|
|
|
|
|
|
Restricted
cash, cash equivalents and
short-term
investments
|
28
|
|
33
|
|
|
|
|
|
|
Total
|
$229
|
|
$291
|
|
The restricted portion is collateral
for estimated future workers' compensation claims.
These securities are variable-rate debt
instruments with contractual maturities generally greater than ten years and
whose interest rates are reset every 7, 28 or 35 days, depending on the terms of
the particular instrument. These securities are secured by pools of
student loans guaranteed by state-designated guaranty agencies and reinsured by
the U.S. government. All of the auction rate securities we hold are
senior obligations under the applicable indentures authorizing the issuance of
the securities. Auctions for these securities began failing in the
first quarter of 2008 and have continued to fail through mid-February 2009,
resulting in our continuing to hold such securities and the issuers of these
securities paying interest adjusted to the maximum contractual
rates. We recorded losses of $60 million during 2008 to reflect
other-than-temporary declines in the fair value of these
securities. These losses are included in nonoperating income
(expense) in our consolidated statement of operations.
Historically, the carrying value of
auction rate securities approximated fair value due to the frequent resetting of
the interest rate and the existence of a liquid market. Although we
will earn interest on these investments involved in failed auctions at the
maximum contractual rate, the estimated market value of these auction rate
securities no longer approximates par value due to the lack of liquidity in the
market for these securities at their par value. We estimated the fair
value of these securities to be $229 million at December 31, 2008, taking into
consideration the limited sales and offers to purchase securities and using
internally-developed models of the expected future cash flows related to the
securities. Our models incorporated our probability-weighted
assumptions about the cash flows of the underlying student loans and discounts
to reflect a lack of liquidity in the market for these securities. At
December 31, 2008, the carrying value of our auction rate securities was
approximately 80% of par value in the aggregate.
In addition, during the fourth quarter
of 2008, one institution granted us a put right permitting us to sell to the
institution auction rate securities with a par value of $125 million in 2010 at
their full par value. The institution has also committed to loan us
75% of the market value of these securities at any time until the put right is
exercised. We recorded the put right at fair value in other assets on
our consolidated balance sheet and recognized a gain of $26 million upon
receipt. This gain is included in nonoperating income (expense) in
our consolidated statement of operations. We determined the fair
value based on the difference between the risk-adjusted discounted expected cash
flows from the underlying auction rate securities without the put right and with
the put right being exercised in 2010. We have reclassified the
underlying auction rate securities to trading securities and elected the fair
value option under SFAS 159 for the put right, with changes in the fair value of
the put right and the underlying auction rate securities recognized in earnings
currently. The fair value adjustments to the auction rate securities
and the put right will largely offset and result in minimal net impact to
earnings in future periods. The underlying auction rate securities
had a fair value of $97 million at the date they were transferred into the
trading category. Since these securities had previously been written
down to fair value to reflect an other-than-temporary decline in fair value,
there were no unrealized gains or losses to be recognized in earnings at the
date of transfer into the trading category. The remainder of the
auction rate securities are classified as available-for-sale and changes in fair
value (other than other-than-temporary declines) are recognized in accumulated
other comprehensive income (loss).
We continue to monitor the market for
auction rate securities and consider its impact, if any, on the fair value of
our investments. If current market conditions deteriorate further, we
may be required to record additional losses on these securities.
Fuel
Derivatives. We determine the fair value of our fuel
derivatives by obtaining inputs from a broker's pricing model based on inputs
that are either readily available in public markets or can be derived from
information available in publicly quoted markets. We verify the
reasonableness of these inputs by comparing the resulting fair values to similar
quotes from our counterparties as of each date for which financial statements
are prepared. For derivatives not covered by collateral, we also make
an adjustment to incorporate credit risk into the valuation. Due to
the fact that certain of the inputs utilized to determine the fair value of the
fuel derivatives are unobservable (principally volatility of crude oil prices
and the credit risk adjustments), we have categorized these option contracts as
Level 3.
Foreign Currency
Derivatives. We determine the fair value of our foreign
currency derivatives by comparing our contract rate to a published forward price
of the underlying currency, which is based on market rates for comparable
transactions.
Unobservable
Inputs. The reconciliation of our assets measured at fair
value on a recurring basis using unobservable inputs (Level 3) for the year
ended December 31, 2008 is as follows (in millions):
|
Student
Loan-Related
Auction Rate Securities
|
Auction
Rate
Securities Put Right
|
Fuel
Derivatives
|
|
|
|
|
Balance
at beginning of period
|
$ -
|
|
$ -
|
|
$ 24
|
|
Transfers
to Level
3
|
314
|
|
-
|
|
-
|
|
Additions
|
-
|
|
-
|
|
74
|
|
Dispositions
|
(23)
|
|
-
|
|
-
|
|
Gains
and losses:
|
|
|
|
|
|
|
Settlement (gains) losses
reported in earnings
|
-
|
|
-
|
|
172
|
|
Unrealized gains (losses)
reported in earnings
|
(60)
|
|
26
|
|
(99)
|
|
Unrealized gains (losses)
reported in other
comprehensive
income
|
(2)
|
|
-
|
|
(586)
|
|
Balance
at end of
year
|
$229
|
|
$26
|
|
$(415)
|
|
Other Financial
Instruments. Other financial instruments that are not subject
to the disclosure requirements of SFAS 157 are as follows:
·
|
Debt. The fair value of our debt
with a carrying value of $5.0 billion at December 31, 2008 and $3.8
billion at December 31, 2007 was approximately $4.2 billion and $3.8
billion, respectively. These estimates were based on either the
discounted amount of future cash flows using our current incremental rate
of borrowing for similar liabilities or market
prices. Estimating the fair value of the remaining debt at
December 31, 2008 and 2007, with a carrying value of $683 million and $929
million, respectively, was not practicable due to the large number of
remaining debt instruments with relatively small carrying
amounts.
|
|
|
·
|
Investment in COLI Products. In
connection with certain of our supplemental retirement plans, we have
company owned life insurance policies on certain of our
employees. As of December 31, 2008 and 2007, the carrying value
of the underlying investments was $26 million and $45 million,
respectively, which approximated fair value.
|
|
|
·
|
Accounts Receivable and Accounts
Payable. The fair values of accounts receivable and
accounts payable approximated carrying value due to their short-term
maturity.
|
NOTE
7 - HEDGING ACTIVITIES
As part of our risk management program,
we use a variety of derivative financial instruments to help manage our risks
associated with changes in fuel prices and foreign currency exchange
rates. We do not hold or issue derivative financial instruments for
trading purposes.
We are exposed to credit losses in the
event of non-performance by issuers of derivative financial
instruments. To manage credit risks, we select issuers based on
credit ratings, limit our exposure to any one issuer under our defined
guidelines and monitor the market position with each counterparty.
Fuel Price Risk
Management. We routinely hedge a portion of our future fuel
requirements, provided the hedges are expected to be cost
effective. One component of our hedging strategy is to construct a
hedge position that is designed to better hedge fuel price with respect to
tickets already sold, for which we can no longer adjust our
pricing. Implicit in this strategy is our belief that, as to tickets
not yet sold, the market will be efficient such that fare levels will adjust to
keep pace with fuel costs. We strive to maintain fuel hedging levels
and exposure generally comparable to that of our major competitors, so that our
fuel cost is not disproportionate to theirs.
Another component of our hedging
strategy is to purchase call options or enter into swap agreements to protect us
against sudden and significant increases in jet fuel prices. To
minimize the high cost to us of call options during 2008, we frequently entered
into collars. Collars are derivative instruments that involve
combining a purchased call option, which on a stand-alone basis would require us
to pay a premium, with a written put option, which on a stand-alone basis would
result in our receiving a premium. The collars we have entered into
consist of both instruments that result in no net premium to us (known as a
"costless" or zero-cost collar) and instruments that result in us paying a net
premium to the counterparty. The purchased call option portion of the
collar caps the price of the contract at the agreed upon price while the sold
option portion of the collar provides for a minimum price of the related
commodity. Our generally practice is to enter into either crude oil
or heating oil contracts since there is a limited market for jet fuel
derivatives.
As of December 31, 2008, our projected
fuel requirements for 2009 were hedged as follows, excluding contracts with
Lehman Brothers which we settled in January 2009:
|
Maximum Price
|
Minimum Price
|
|
%
of
Expected
Consumption
|
Weighted
Average
Price
(per gallon)
|
%
of
Expected
Consumption
|
Weighted
Average
Price
(per gallon)
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
WTI
crude oil
collars
|
14%
|
|
$3.40
|
|
14%
|
|
$2.53
|
|
WTI
crude oil call options
|
6
|
|
2.54
|
|
N/A
|
|
N/A
|
|
WTI
crude oil
swaps
|
3
|
|
1.33
|
|
3
|
|
1.33
|
|
Total
|
23%
|
|
|
|
17%
|
|
|
|
Lehman Brothers, one of the
counterparties to our fuel derivative contracts, declared bankruptcy on
September 15, 2008. As a result, we determined that our fuel
derivative contracts with Lehman Brothers were not highly effective
hedges. Therefore, we discontinued hedge accounting for these
contracts as of September 15, 2008 and all subsequent changes in the contracts'
fair values were reported in earnings. In 2008, we recognized losses
of $125 million in other non-operating income (expense) related to the changes
in the fair value of these contracts. In January 2009, we settled all
open contracts with Lehman Brothers.
At December 31, 2008, our fuel
derivatives, including contracts with Lehman Brothers, were in a net liability
position of $415 million resulting from the recent substantial decline in crude
oil prices. This fair value is reported in accrued other current
liabilities in our consolidated balance sheet. At December 31, 2007,
the fair value of our fuel hedges was a $24 million net asset and is included in
prepayments and other current assets in our consolidated balance
sheet. We have not hedged any of our fuel requirements beyond
2009.
Because our fuel hedges were in a net
liability position at December 31, 2008, we posted cash collateral with our
counterparties totaling $171 million. These amounts are reported in
prepayments and other current assets in our consolidated balance
sheet.
Except as discussed above, we account
for our fuel derivatives as cash flow hedges and record them at fair value in
prepayments and other current assets (if we are in an asset position) or accrued
other current liabilities (if we are in a liability position) in our
consolidated balance sheet with the change in fair value, to the extent
effective, being recorded to accumulated other comprehensive income (loss), net
of applicable income taxes.
Fuel hedge gains (losses) are
recognized as a component of fuel expense or regional capacity purchase, net
when the underlying fuel being hedged is used. The ineffective
portion of our fuel hedges is determined based on the correlation between crude
oil or heating oil prices and jet fuel prices and is included in nonoperating
income (expense). This ineffectiveness was caused by our non-jet fuel
derivatives experiencing a higher relative change in value than the jet fuel
being hedged and the mark-to-market adjustment on the fuel derivative contracts
with Lehman Brothers. Realized and unrealized gains (losses) related
to fuel derivative instruments included in our consolidated statement of
operations for the year ended December 31 are as follows (in
millions):
|
2008
|
2007
|
2006
|
|
|
|
|
Aircraft
fuel and related
taxes
|
$(144)
|
|
$31
|
|
$(40)
|
|
Regional
capacity purchase,
net
|
(28)
|
|
6
|
|
(8)
|
|
Nonoperating
income
(expense)
|
(99)
|
|
14
|
|
-
|
|
Total
|
$(271)
|
|
$51
|
|
$(48)
|
|
Foreign Currency Exchange
Risk Management. We use foreign currency average rate options
and forward contracts to hedge against the currency risk associated with our
forecasted Japanese yen, British pound, Canadian dollar and euro-denominated
cash flows. The average rate options and forward contracts have only
nominal intrinsic value at the date contracted.
We account for these instruments as
cash flow hedges. They are recorded at fair value in prepayments and
other current assets or other accrued other liabilities in the accompanying
consolidated balance sheets with the offset to accumulated other comprehensive
income (loss), net of applicable income taxes and hedge ineffectiveness, and
recognized as passenger revenue when the underlying service is
provided. We measure hedge effectiveness of average rate options and
forward contracts based on the forward price of the underlying
currency. Hedge ineffectiveness, if any, is included in other
nonoperating income (expense) in the accompanying consolidated statement of
operations. We had no ineffectiveness related to foreign currency
hedges for the years ended December 31, 2008, 2007 and 2006. Our net
gain (loss) on our foreign currency average rate option and forward contracts
was $5 million, $(2) million and $2 million for the years ended December 31,
2008, 2007 and 2006, respectively. These gains (losses) are included
in passenger revenue in the accompanying consolidated statement of
operations.
NOTE
8 - PREFERRED AND COMMON STOCK
Preferred
Stock. On April 14, 2008, Northwest Airlines, Inc.
("Northwest") and Delta Air Lines, Inc. ("Delta") announced that they had
entered into a merger agreement. Northwest previously held the one
outstanding share of our Series B preferred stock, which prevented us from
engaging in certain business combinations or other activities without
Northwest's consent. We were entitled to redeem the share of Series B
preferred stock for a nominal sum upon the execution of a definitive merger
agreement by Northwest with respect to a transaction constituting a change of
control of Northwest, which occurred upon Northwest's entry into the merger
agreement with Delta. As a result, we redeemed and cancelled the
Series B preferred stock in the second quarter of 2008, eliminating Northwest's
right to prevent us from engaging in certain business combinations or other
activities.
Common
Stock. We currently have one class of common stock issued and
outstanding, Class B common stock. Each share of common stock is entitled to one
vote per share. In June 2008, we completed a public offering of 11
million shares of Class B common stock at a price to the public of $14.80 per
share, raising net proceeds of $162 million. Additionally, in the
fourth quarter of 2008, we completed a public offering of 13 million shares of
Class B common stock at an average price to the public of $15.84 per share,
raising net proceeds of $196 million. Proceeds from both offerings
were used for general corporate purposes. At December 31, 2008,
approximately 26 million shares were reserved for future issuance related to the
conversion of convertible debt securities and the issuance of stock under our
stock incentive plans.
As discussed in Note 4, $170 million in
principal amount of our 4.5% convertible notes was converted by the holders into
4.3 million shares of our Class B common stock in January 2007 at a conversion
price of $40 per share.
Stockholder Rights
Plan. On November 20, 2008, our stockholder rights plan
expired. As a result, each outstanding share of our Class B common
stock is no longer accompanied by a right. The holders of common
stock were not entitled to any payment as a result of the expiration of the
rights plan and the rights issued thereunder.
Restrictions on Dividends
and Share Repurchases. Our agreement with the union
representing our pilots provides that we will not declare a cash dividend or
repurchase our outstanding common stock for cash until we have contributed at
least $500 million to the pilot defined benefit pension plan, measured from
March 30, 2005. Through February 18, 2009, we have made $470 million
of contributions to this plan.
NOTE
9 - STOCK PLANS AND AWARDS
We have an equity incentive plan for
management level employees and non-employee directors that permits the issuance
of shares of our common stock. Approximately 1.0 million shares
remain available for award under this incentive plan as of December 31,
2008. No further awards may be granted under the plan after October
3, 2009.
Stock
Options. Stock options are awarded with exercise prices equal
to the fair market value of our common stock on the date of
grant. Management level employee stock options typically vest over a
four year period and generally have five year terms. Expense related
to each portion of an option grant is recognized on a straight-line basis over
the specific vesting period for those options. Outside director stock
options vest in full on the date of grant and have ten year
terms. Under the terms of our management incentive plans, a change in
control would result in options outstanding under those plans becoming
exercisable in full.
The table below summarizes stock option
transactions pursuant to our plans (share data in thousands):
|
2008
|
2007
|
2006
|
|
Options
|
Weighted-
Average
Exercise Price
|
Options
|
Weighted-
Average
Exercise Price
|
Options
|
Weighted-
Average
Exercise Price
|
|
|
|
|
|
|
|
Outstanding
at
beginning
of
year
|
7,817
|
$17.36
|
|
8,991
|
$15.12
|
|
12,710
|
$13.57
|
|
Granted
|
752
|
$10.84
|
|
728
|
$35.72
|
|
1,853
|
$24.11
|
|
Exercised
|
(375)
|
$12.49
|
|
(1,699)
|
$13.39
|
|
(5,118)
|
$14.33
|
|
Cancelled
|
(222)
|
$29.14
|
|
(203)
|
$17.29
|
|
(454)
|
$17.15
|
|
Outstanding
at
end
of year
|
7,972
|
$16.65
|
|
7,817
|
$17.36
|
|
8,991
|
$15.12
|
|
Exercisable
at
end
of year
|
6,212
|
$15.08
|
|
3,393
|
$15.45
|
|
1,764
|
$15.95
|
|
As of December 31, 2008, stock options
outstanding at the end of the period had a weighted average contractual life of
3.1 years and an
aggregate intrinsic value of $35 million. Options exercisable at
December 31, 2008 had a weighted average contractual life of 2.9 years and an
aggregate intrinsic value of $30 million.
The fair value of options is determined
at the grant date using a Black-Scholes-Merton option-pricing model, which
requires us to make several assumptions. The risk-free interest rate
is based on the U.S. Treasury yield curve in effect for the expected term of the
option at the time of grant. The dividend yield on our common stock
is assumed to be zero since we historically have not paid dividends and have no
current plans to do so in the future. The market price volatility of
our common stock is based on the historical volatility of our common stock over
a time period equal to the expected term of the option and ending on the grant
date. The expected life of the options is based on our historical
experience for various work groups. We recognize expense only for
those option awards expected to vest, using an estimated forfeiture rate based
on our historical experience. The forfeiture rate may be revised in
future periods if actual forfeitures differ from our assumptions. The
weighted-average fair value of options granted during the year ended December 31
was determined based on the following weighted-average assumptions:
|
|
2008
|
2007
|
2006
|
|
|
|
|
|
|
Risk-free
interest
rate
|
3.1%
|
4.9%
|
4.7%
|
|
Dividend
yield
|
0%
|
0%
|
0%
|
|
Expected
market price volatility of our common stock
|
62%
|
57%
|
63%
|
|
Expected
life of options
(years)
|
3.9
|
3.9
|
3.4
|
|
Fair
value of options
granted
|
$5.32
|
$16.95
|
$11.52
|
The total intrinsic value of options
exercised during the year ended December 31, 2008, 2007 and 2006 was $3 million,
$45 million and $81 million, respectively.
The following tables summarize the
range of exercise prices and the weighted average remaining contractual life of
the options outstanding and the range of exercise prices for the options
exercisable at December 31, 2008 (share data in thousands):
Options Outstanding
|
|
|
|
|
Range
of
Exercise Prices
|
Number
|
Weighted
Average
Remaining
Contractual Life (Years)
|
Weighted
Average
Exercise
Price
|
|
|
|
|
$8.85-$11.87
|
|
857
|
|
3.4
|
|
$10.45
|
|
$11.89
|
|
4,519
|
|
2.9
|
|
$11.89
|
|
$11.96-$20.31
|
|
1,132
|
|
3.4
|
|
$19.13
|
|
$20.97-$49.80
|
|
1,464
|
|
3.2
|
|
$33.05
|
|
|
|
|
|
|
|
|
|
$8.85-$49.80
|
|
7,972
|
|
3.1
|
|
$16.65
|
|
Options Exercisable
|
|
|
|
|
Range
of
Exercise Prices
|
Number
|
Weighted
Average
Exercise
Price
|
|
|
|
$8.85-$11.87
|
|
241
|
|
$11.70
|
|
$11.89
|
|
4,519
|
|
$11.89
|
|
$11.96-$20.31
|
|
763
|
|
$18.85
|
|
$20.97-$49.80
|
|
689
|
|
$33.00
|
|
|
|
|
|
|
|
$8.85-$49.80
|
|
6,212
|
|
$15.08
|
|
Employee Stock Purchase
Plan. All of our employees (including CMI employees) are
eligible to participate in the 2004 Employee Stock Purchase Plan (the "2004
ESPP"). At the end of each fiscal quarter, participants may purchase
shares of our common stock at a discount of 15% off the fair market value of the
stock on either the first day or the last day of the quarter (whichever is
lower), subject to a minimum purchase price of $10 per share. This
discount is reduced to zero as the fair market value approaches $10 per
share. If the fair market value is below the $10 per share minimum
price on the last day of a quarter, then the participants will not be permitted
to purchase the common stock for such quarterly purchase period and we will
refund to those participants the amount of their unused payroll
deductions. During 2008, 2007 and 2006, approximately 1.1 million,
0.4 million and 0.5 million shares, respectively, of common stock were issued to
participants at a weighted-average purchase price of $12.76, $27.84 and $17.77
per share, respectively. In January 2009, 0.2 million shares
were purchased at a price of $14.96 per share for the fourth quarter of
2008. In the aggregate, 3.0 million shares may be purchased under the
plan; however, no shares remained available for purchase following the purchase
made related to the quarter ended December 31, 2008.
Restricted Stock
Units. At December 31, 2008, we had three outstanding awards
of restricted stock units ("RSUs") granted under our Long-Term Incentive and RSU
Program: (1) profit based RSU awards with a performance period
commencing April 1, 2006 and ending December 31, 2009, (2) profit based RSU
awards with a performance period commencing January 1, 2007 and ending December
31, 2009 and (3) profit based RSU awards with a performance period commencing
January 1, 2008 and ending December 31, 2010.
Profit Based RSU
Awards. We have issued profit based RSU awards pursuant to our
Long-Term Incentive and RSU Program, which can result in cash payments to our
officers upon the achievement of specified profit-sharing based performance
targets. The performance targets require that we reach target levels
of cumulative employee profit sharing under our enhanced employee profit sharing
program during the performance period and that we have net income calculated in
accordance with U.S. generally accepted accounting principles for the applicable
fiscal year. To serve as a retention feature, payments related to the
achievement of a performance target generally will be made in annual increments
over a three-year period to participants who remain continuously employed by us
through each payment date. Payments also are conditioned on our
having, at the end of the fiscal year preceding the date any payment is made, a
minimum unrestricted cash, cash equivalents and short-term investments balance
as set by the Human Resources Committee of our Board of Directors. If
we do not achieve the minimum cash balance applicable to a payment date, the
payment will be deferred until the next payment date (March 1 of the next year),
subject to a limit on the number of years payments may be carried
forward. Payment amounts are calculated based on the average closing
price of our common stock during the 20 trading days preceding the payment date
and the payment percentage set by the Human Resources Committee of our Board of
Directors for achieving the applicable profit-sharing based performance
target.
The following table sets forth
information about the profit based RSU awards outstanding at December 31,
2008:
|
2008 Grant
|
2007 Grant
|
2006 Grant
|
|
|
|
|
Initial
grant
date
|
February
2008
|
February
2007
|
June
2006
|
|
|
|
|
Number
of awards outstanding
|
0.9
million
|
0.5
million
|
1.5
million
|
|
|
|
|
Performance
period
|
January
1, 2008-
December
31, 2010
|
January
1, 2007-
December
31, 2009
|
April
1, 2006-
December
31, 2009
|
|
|
|
|
Cumulative
profit sharing targets (range)
|
$0-$275
million
|
$0-$350
million
|
$0-$225
million
|
|
|
|
|
Cumulative
profit sharing achieved for
applicable
performance period
|
$0
|
$158
million
|
$262
million
|
|
|
|
|
Payment
percentages (range)
|
0%-200%
|
0%-200%
|
0%-337.5%
|
|
|
|
|
Probable
payment percentage:
|
|
|
|
As
of December 31,
2008
|
100%
|
100%
|
337.5%
|
As
of December 31,
2007
|
N/A
|
100%
|
337.5%
|
As
of December 31,
2006
|
N/A
|
N/A
|
150.0%
|
|
|
|
|
Unrestricted
cash, cash equivalents and
short-term
investments hurdle
|
$2.2
billion
|
$2.0
billion
|
$1.125
billion
|
We account for the profit based RSU
awards as liability awards. Once it is probable that a profit-sharing
based performance target will be met, we measure the awards at fair value based
on the current stock price. The related expense is recognized ratably
over the required service period, which ends on each payment date, after
adjustment for changes in the then-current market price of our common
stock. As of December 31, 2007, we had achieved the highest
cumulative profit sharing-based performance target for the profit based RSU
awards with a performance period commencing April 1, 2006 and were, therefore,
accruing expense based on a payment percentage of 337.5%. We had not
achieved any of the cumulative profit sharing-based performance targets as of
December 31, 2008 for the profit based RSU awards with performance periods
commencing January 1, 2007 and 2008, respectively, but we have concluded that it
is probable that we will achieve the entry level target for those awards during
the performance periods, resulting in an estimated payment percentage under each
award of 100%.
The awards that had a performance
period commencing April 1, 2006 and ending December 31, 2009 achieved the
highest level cumulative profit sharing performance target based on cumulative
profit sharing payments to our broad based employees of $262 million as of
December 31, 2007. As a result, in March 2008, payments totaling $52
million were made with respect to these profit based RSU awards following
achievement of the year end cash hurdle applicable to those awards.
Stock Price Based RSU
Awards. Stock price based RSU awards made pursuant to our
Long-Term Incentive and RSU Program can result in cash payments to award holders
if there are specified increases in our stock price over multi-year performance
periods. There are currently no stock price based RSU awards
outstanding. Prior to our adoption of FASB Statement No. 123R,
"Share-Based Payment" ("SFAS 123R"), on January 1, 2006, we had recognized no
liability or expense related to our stock price based RSU awards because the
targets set forth in the program had not been met. However, SFAS 123R
required these awards to be measured at fair value at each reporting date with
the related expense being recognized over the required service periods,
regardless of whether the specified stock price targets had been
met. The fair value was determined using a pricing model until the
specified stock price target had been met, and was determined based on the
current stock price thereafter. On January 1, 2006, we recognized a
cumulative effect of change in accounting principle to record our liability
related to the stock price based RSU awards at that date, which reduced 2006
earnings by $26 million ($0.29 per basic share and $0.23 per diluted
share).
In February 2006, in light of the
sacrifices made by their co-workers in connection with pay and benefit cost
reduction initiatives, our officers voluntarily surrendered their stock price
based RSU awards for the performance period ending March 31, 2006, which had
vested during the first quarter of 2006 and would have otherwise paid out $23
million at the end of March 2006. Of the $26 million total cumulative
effect of change in accounting principle recorded on January 1, 2006, $14
million related to the surrendered awards. Accordingly, upon the
surrender of these awards, we reported the reversal of the $14 million as a
reduction of special charges in our statement of operations. The
remaining $12 million of the cumulative effect of change in accounting principle
was related to the stock price based RSU awards with a performance period ending
December 31, 2007, discussed below, which were not surrendered.
During the first quarter of 2006, our
stock price achieved the performance target price per share for 1.2 million
stock price based RSU awards with a performance period ending December 31,
2007. At December 31, 2007, our outstanding stock price based RSUs
with a performance period commencing on April 1, 2004 and ending on December 31,
2007 had a vested liability of $29 million and were paid out in cash in January
2008 based on the average closing price of our common stock during the 20
trading days preceding December 31, 2007.
Stock-Based Compensation
Expense. Total stock-based compensation expense included in
wages, salaries and related costs for the years ended December 31, 2008, 2007
and 2006 was $47 million, $75 million and $83 million,
respectively. As of December 31, 2008, $32 million of compensation
cost attributable to future service related to unvested employee stock options
and profit based RSU awards that are probable of being achieved had not yet been
recognized. This amount will be recognized in expense over a
weighted-average period of 1.7 years. The expense related to RSUs
does not impact payments to our broad based employee group under our enhanced
profit sharing plan because profit sharing payments are based on pre-tax net
income calculated prior to any costs associated with incentive compensation for
executives.
NOTE
10 - ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other
comprehensive loss (which are all net of applicable income taxes) were as
follows (in millions):
|
Defined
Benefit Pension and
Retiree Medical Benefits
Plans
|
Unrealized
Gain
(Loss)
on
Derivative
Instruments
and
Other
|
|
|
Minimum
Pension
Liability
|
Unrecognized
Prior Service
Cost
|
Unrecognized
Actuarial
Gains
(Losses)
|
Total
|
Balance
at December 31, 2005
|
$(680)
|
$ -
|
$ -
|
|
$ 5
|
|
$ (675)
|
Net
change in accumulated other comprehensive
loss
|
68
|
-
|
-
|
|
(21)
|
|
47
|
Impact
of adoption of SFAS 158
|
612
|
(237)
|
(760)
|
|
-
|
|
(385)
|
Balance
at December 31, 2006
|
-
|
(237)
|
(760)
|
|
(16)
|
|
(1,013)
|
Derivative
financial instruments:
|
|
|
|
|
|
|
|
Reclassification
into earnings
|
-
|
-
|
-
|
|
18
|
|
18
|
Change
in fair
value
|
-
|
-
|
-
|
|
27
|
|
27
|
Employee
benefit plans:
|
|
|
|
|
|
|
|
Reclassification
of unrecognized
net
actuarial loss into
earnings
|
-
|
-
|
97
|
|
-
|
|
97
|
Reclassification
of prior service
cost
into earnings
|
-
|
30
|
-
|
|
-
|
|
30
|
Current
year prior service cost
|
-
|
(18)
|
-
|
|
-
|
|
(18)
|
Current
year actuarial gain
|
-
|
-
|
354
|
|
-
|
|
354
|
Balance
at December 31, 2007
|
-
|
(225)
|
(309)
|
|
29
|
|
(505)
|
Derivative
financial instruments:
|
|
|
|
|
|
|
|
Reclassification
into earnings
|
-
|
-
|
-
|
|
(26)
|
|
(26)
|
Change
in fair value
|
-
|
-
|
-
|
|
(415)
|
|
(415)
|
Employee
benefit plans:
|
|
|
|
|
|
|
|
Reclassification
of unrecognized
net
actuarial loss into
earnings
|
-
|
-
|
85
|
|
-
|
|
85
|
Reclassification
of prior service
cost
into earnings
|
-
|
31
|
-
|
|
-
|
|
31
|
Current
year actuarial loss
|
-
|
-
|
(926)
|
|
-
|
|
(926)
|
Balance
at December 31, 2008
|
$ -
|
$(194)
|
$(1,150)
|
|
$(412)
|
|
$(1,756)
|
We adopted SFAS No. 158, "Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans, an
amendment of FASB Statements No. 87, 88, 106 and 132(R)" ("SFAS 158"), on
December 31, 2006. Under SFAS 158, unrecognized prior service cost
and actuarial gains (losses) related to our defined benefit pension and retiree
medical benefits plans are recorded in accumulated other comprehensive
loss.
The prior service cost and unrecognized
actuarial losses recorded in accumulated other comprehensive loss before
applicable income taxes were $219 million and $1.4 billion, respectively, at
December 31, 2008, $250 million and $520 million, respectively, at December 31,
2007 and $262 million and $971 million, respectively, at December 31,
2006. The unrealized gain (loss) on derivative instruments recorded
in accumulated other comprehensive loss before applicable income taxes was the
same as the after-tax amount presented in the table above at each of December
31, 2008, 2007 and 2006.
NOTE
11 - EMPLOYEE BENEFIT PLANS
Our employee benefits plans include
defined benefit pension plans, defined contribution (including 401(k) savings)
plans and a consolidated welfare benefit plan, which includes retiree medical
benefits. Substantially all of our domestic employees are covered by
one or more of these plans.
Defined Benefit Pension
Plans. Benefits under our defined benefit pension plans are
based on a combination of years of benefit accrual service and an employee's
final average compensation. Under the collective bargaining agreement
with our pilots ratified on March 30, 2005, which we refer to as the "pilot
agreement," future defined benefit accruals for pilots ceased and retirement
benefits accruing in the future are provided through two pilot-only defined
contribution plans. As required by the pilot agreement, defined
benefit pension assets and obligations related to pilots in our primary defined
benefit pension plan (covering substantially all U.S. employees other than
Chelsea Food Services ("Chelsea") and CMI employees) were spun out into a
separate pilot-only defined benefit pension plan, which we refer to as the
"pilot defined benefit pension plan." On May 31, 2005, future benefit
accruals for pilots ceased and the pilot defined benefit pension plan was
"frozen." As of that freeze date, all existing accrued benefits for
pilots (including the right to receive a lump sum payment upon retirement) were
preserved in the pilot defined benefit pension plan. Accruals for
non-pilot employees under our primary defined benefit pension plan
continue.
Retiree Medical Benefits
Plans. Our retiree medical programs are self-insured
arrangements that permit retirees who meet certain age and service requirements
to continue medical coverage between retirement and Medicare
eligibility. Eligible employees are required to pay a portion of the
costs of their retiree medical benefits, which in some cases may be offset by
accumulated unused sick time at the time of their retirement. Plan
benefits are subject to co-payments, deductibles and other limits as described
in the plans. We account for the retiree medical benefits plan under
SFAS No. 106, "Employers' Accounting for Postretirement Benefits other than
Pensions," which requires recognition of the expected cost of benefits over the
employee's service period.
Obligation and Funded
Status. Our pension and retiree medical benefits obligations
are measured as of December 31 of each year. The following table sets
forth the changes in projected benefit obligation of the defined benefit pension
and retiree medical benefits plans at December 31 (in millions):
|
Defined
Benefit Pension
|
Retiree
Medical Benefits
|
|
2008
|
2007
|
2008
|
2007
|
|
|
|
|
|
Accumulated
benefit obligation
|
$2,273
|
|
$2,180
|
|
N/A
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Benefit
obligation at beginning of year
|
$2,353
|
|
$2,697
|
|
$252
|
|
$216
|
|
Service
cost
|
59
|
|
61
|
|
12
|
|
11
|
|
Interest
cost
|
149
|
|
158
|
|
16
|
|
14
|
|
Plan
amendments
|
-
|
|
-
|
|
-
|
|
18
|
|
Actuarial
(gains)
losses
|
168
|
|
(347)
|
|
(17)
|
|
8
|
|
Participant
contributions
|
-
|
|
-
|
|
2
|
|
1
|
|
Benefits
paid
|
(118)
|
|
(59)
|
|
(16)
|
|
(16)
|
|
Settlements
|
(129)
|
|
(157)
|
|
-
|
|
-
|
|
Benefit
obligation at end of year
|
$2,482
|
|
$2,353
|
|
$249
|
|
$252
|
|
Congress enacted, and the president
signed into law on December 13, 2007, a change in the mandatory retirement age
for our pilots from age 60 to 65. We have, for actuarial purposes,
made the assumption that the majority of our pilots will work beyond age 60 and
will not begin receiving their pension payments (or lump-sum distribution) at
the previously assumed age 60.
The retiree medical benefits plan and
certain supplemental defined benefit pension plans are unfunded, although we
have investments in COLI products that support our obligations under certain of
the supplemental plans (see note 6). The following table sets forth
the change in the fair value of the defined benefit pension plans' assets at
December 31 (in millions):
|
2008
|
2007
|
|
|
|
Fair
value of plan assets at beginning of year
|
$1,817
|
|
$1,545
|
|
Actual
gains (losses) on plan
assets
|
(618)
|
|
150
|
|
Employer
contributions, including benefits
paid
under unfunded
plans
|
105
|
|
338
|
|
Benefits
paid
|
(118)
|
|
(59)
|
|
Lump
sum
settlements
|
(129)
|
|
(157)
|
|
Fair
value of plan assets at end of
year
|
$1,057
|
|
$1,817
|
|
The unfunded portion of the defined
benefit pension and retiree medical benefits liabilities were recognized in the
accompanying consolidated balance sheets at December 31 as follows (in
millions):
|
Defined
Benefit Pension
|
Retiree
Medical Benefits
|
|
2008
|
2007
|
2008
|
2007
|
|
|
|
|
|
Accrued
payroll
|
$ 8
|
|
$ 2
|
|
$ 15
|
|
$ 17
|
|
Accrued
pension
liability
|
1,417
|
|
534
|
|
-
|
|
-
|
|
Accrued
retiree medical benefits
|
-
|
|
-
|
|
234
|
|
235
|
|
Funded
status of the plans - net underfunded
|
$1,425
|
|
$536
|
|
$249
|
|
$252
|
|
Our plans' under-funded status was $1.4
billion at December 31, 2008 and $536 million at December 31,
2007. The increase in our plans' underfunded status was primarily the
result of lower investment returns as a result of the current global financial
crisis and decreases in the discount rate and the lump sum conversion interest
rate used to determine our pension liability.
The amounts in accumulated other
comprehensive loss that have not yet been recognized as components of net
periodic benefit expense at December 31, 2008 were as follows (in
millions):
|
Defined
Benefit Pension
|
Retiree
Medical Benefits
|
|
|
|
Unrecognized
prior service
cost
|
$ 32
|
|
$187
|
|
Unrecognized
actuarial (gains) losses
|
$1,423
|
|
$(62)
|
|
Unrecognized prior service cost is
expensed using a straight-line amortization of the cost over the average future
service of employees expected to receive benefits under the
plans. The following table sets forth the amounts of unrecognized
prior service cost and net actuarial loss recorded in accumulated other
comprehensive loss expected to be recognized as components of net periodic
benefit expense during 2009 (in millions):
|
Defined
Benefit Pension
|
Retiree
Medical Benefits
|
|
|
|
Prior
service
cost
|
$ 10
|
|
$21
|
|
Actuarial
(gains)
losses
|
$111
|
|
$(3)
|
|
The following actuarial assumptions
were used to determine our benefit obligations at December 31:
|
Defined
Benefit Pension
|
Retiree
Medical Benefits
|
|
2008
|
2007
|
2008
|
2007
|
|
|
|
|
|
|
Weighted
average assumed
discount
rate
|
6.13%
|
|
6.31%
|
|
6.03%
|
|
6.02%
|
|
|
Weighted
average rate of
compensation
increase
|
2.30%
|
|
2.30%
|
|
-
|
|
-
|
|
|
Health
care cost trend
rate
|
-
|
|
-
|
|
7.50%
|
|
8.00%
|
|
|
The December 31, 2008 health care cost
trend rate is assumed to decline gradually to 5% by 2014.
Net periodic defined benefit pension
and retiree medical benefits expense for the year ended December 31 included the
following components (in millions):
|
Defined Benefit Pension
|
Retiree Medical Benefits
|
|
2008
|
2007
|
2006
|
2008
|
2007
|
2006
|
|
|
|
|
|
|
|
Service
cost
|
$ 59
|
$ 61
|
$ 59
|
$12
|
$11
|
$12
|
Interest
cost
|
149
|
158
|
146
|
15
|
14
|
14
|
Expected
return on plan assets
|
(157)
|
(137)
|
(122)
|
-
|
-
|
-
|
Amortization
of unrecognized
net
actuarial (gain) loss
|
34
|
68
|
68
|
(1)
|
(2)
|
-
|
Amortization
of prior service cost
|
10
|
10
|
9
|
21
|
20
|
20
|
Net
periodic benefit expense
|
95
|
160
|
160
|
47
|
43
|
46
|
Settlement
charges (included in
special
charges)
|
52
|
31
|
59
|
-
|
-
|
-
|
Net
benefit
expense
|
$ 147
|
$ 191
|
$ 219
|
$47
|
$43
|
$46
|
During 2008, 2007 and 2006, we recorded
non-cash settlement charges totaling $52 million, $31 million and $59 million,
respectively, related to lump sum distributions from our pilot-only defined
benefit pension plan to pilots who retired. SFAS No. 88 , "Employer's
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and
for Termination Benefits" ("SFAS 88"), requires the use of settlement accounting
if, for a given year, the cost of all settlements exceeds, or is expected to
exceed, the sum of the service cost and interest cost components of net periodic
pension expense for a plan. Under settlement accounting, unrecognized
plan gains or losses must be recognized immediately in proportion to the
percentage reduction of the plan's projected benefit obligation.
The following actuarial assumptions
were used to determine our net periodic benefit expense for the year ended
December 31:
|
Defined Benefit Pension
|
Retiree Medical Benefits
|
|
2008
|
2007
|
2006
|
2008
|
2007
|
2006
|
|
|
|
|
|
|
|
Weighted
average assumed
discount
rate
|
6.27%
|
5.95%
|
5.78%
|
6.02%
|
5.76%
|
5.57%
|
Expected
long-term rate of return
on
plan assets
|
8.50%
|
8.26%
|
8.50%
|
-
|
-
|
-
|
Weighted
average rate of
compensation increase
|
2.30%
|
2.30%
|
2.25%
|
-
|
-
|
-
|
Health
care cost trend rate
|
-
|
-
|
-
|
8.00%
|
8.00%
|
9.00%
|
The 2008 health care cost trend rate is
assumed to decline gradually to 5% by 2014.
A one percentage point change in the
assumed health care cost trend rate would have the following effect (in
millions):
|
One
Percent
Increase
|
One
Percent
Decrease
|
|
|
|
Impact
on 2008 retiree medical benefits expense
|
$ 3
|
|
$ (2)
|
|
Impact
on accrued retiree medical benefits as of
December
31,
2008
|
$24
|
|
$(21)
|
|
The defined benefit pension plans'
assets consist primarily of equity and fixed-income securities. As of
December 31, the asset allocations by category were as follows:
|
2008
|
2007
|
|
|
|
U.S.
equities
|
47%
|
|
49%
|
|
International
equities
|
21
|
|
22
|
|
Fixed
income
|
20
|
|
22
|
|
Other
|
12
|
|
7
|
|
Total
|
100%
|
|
100%
|
|
We develop our expected long-term rate
of return assumption based on historical experience and by evaluating input from
the trustee managing the plans' assets. Our expected long-term
rate of return on plan assets is based on a target allocation of assets, which
is based on our goal of earning the highest rate of return while maintaining
risk at acceptable levels. The plans strive to have assets
sufficiently diversified so that adverse or unexpected results from one security
class will not have an unduly detrimental impact on the entire
portfolio. We regularly review our actual asset allocation and the
pension plans' investments are periodically rebalanced to our targeted
allocation when considered appropriate. Plan assets are allocated
within the following guidelines:
|
Percent of Total
|
Expected
Long-Term
Rate of Return
|
|
|
|
U.S.
equities
|
35-55%
|
|
9%
|
|
International
equities
|
15-25
|
|
9
|
|
Fixed
income
|
15-25
|
|
5
|
|
Other
|
0-15
|
|
12
|
|
Funding requirements for tax-qualified
defined benefit pension plans are determined by government
regulations. During 2008, we contributed $102 million to our
tax-qualified defined benefit pension plans, satisfying our minimum funding
requirements during calendar year 2008. We contributed an additional
$50 million to our tax-qualified defined benefit pension plans in January
2009. We expect to contribute approximately $125 million to our
tax-qualified defined benefit pension plans during 2009.
We project that our defined benefit
pension and retiree medical plans will make the following benefit payments,
which reflect expected future service and include expected lump sum
distributions, during the year ended December 31 (in millions):
|
|
Defined
Benefit Pension
|
Retiree
Medical Benefits
|
|
|
|
|
|
2009
|
$ 108
|
|
$ 15
|
|
|
2010
|
130
|
|
16
|
|
|
2011
|
151
|
|
17
|
|
|
2012
|
165
|
|
18
|
|
|
2013
|
195
|
|
19
|
|
|
2014
through
2018
|
992
|
|
117
|
|
Defined Contribution Plans
for Pilots. As required by the pilot agreement, two pilot-only
defined contribution plans were established in 2005. One of these
plans is a money purchase pension plan -- a type of defined contribution plan
subject to the minimum funding rules of the Internal Revenue
Code. Contributions under this plan are generally expressed as a
percentage of applicable pilot compensation, subject to limits under the
Internal Revenue Code. The other pilot-only defined contribution plan
is a 401(k) plan that was established by transferring the pilot accounts from
our pre-existing primary 401(k) plan (covering substantially all of our U.S.
employees other than CMI employees) to a separate pilot-only 401(k)
plan. Pilots may make elective pre-tax and/or post-tax contributions
to the pilot-only 401(k) plan. In addition, the pilot agreement calls
for employer contributions to the pilot-only 401(k) plan based on pre-tax
profits during a portion of the term of the pilot agreement. To the
extent the Internal Revenue Code limits preclude employer contributions called
for by the pilot agreement, the disallowed amount will be paid directly to the
pilots as current wages under a corresponding nonqualified
arrangement. Our expense related to the defined contribution plans
for pilots was $82 million, $69 million and $49 million in the years ended
December 31, 2008, 2007 and 2006, respectively.
Other 401(k)
Plans. We have two other defined contribution 401(k) employee
savings plans in addition to the pilot-only 401(k) plan, a 401(k) plan covering
substantially all domestic employees except for pilots and a 401(k) plan
covering substantially all of the employees of CMI. Participants in
the non-pilot 401(k) plans may make elective pre-tax and/or post-tax
contributions, and substantially all of those participants who are not and will
not become eligible for the Company's defined benefit pension plans are eligible
to receive employer contributions, expressed as a percentage of applicable
compensation, under the non-pilot 401(k) plans. In addition, the
non-pilot 401(k) plans will be amended effective as of January 1, 2009 to
provide for the reinstatement of service-based employer match contributions for
certain workgroups at levels ranging up to 50% of employee contributions of up
to 6% of the employee's salary, based on seniority. Company matching
contributions are made in cash. For the years ended December 31,
2008, 2007 and 2006, total expense for these defined contribution plans was $6
million, $5 million and $4 million, respectively.
Profit Sharing
Program. Our enhanced profit sharing program, which will be in
place through December 31, 2009, creates an award pool for employees of 30% of
the first $250 million of annual pre-tax income, 25% of the next $250 million
and 20% of amounts over $500 million. For purposes of the program,
pre-tax net income excludes unusual or non-recurring items and is calculated
prior to any costs associated with incentive compensation for executives with
performance targets determined by the Human Resources Committee of our Board of
Directors. Payment of profit sharing to participating employees
occurs in the fiscal year following the year in which profit sharing is earned
and the related expense is recorded. Substantially all of our
employees participate in this program except for officers and management
directors. We recognized $172 million and $115 million of profit
sharing expense and related payroll taxes in 2007 and 2006,
respectively. This amount is included in wages, salaries and related
costs in our consolidated statements of operations. As we incurred a
loss in 2008, there was no profit sharing expense in 2008.
NOTE
12 - INCOME TAXES
Income tax benefit (expense) for the
year ended December 31 consisted of the following (in millions):
|
2008
|
2007
|
2006
|
|
|
|
|
Federal:
|
|
|
|
Current
|
$ (2)
|
|
$ (3)
|
|
$ (1)
|
|
Deferred
|
229
|
|
(198)
|
|
(132)
|
|
State:
|
|
|
|
|
|
|
Current
|
-
|
|
(2)
|
|
2
|
|
Deferred
|
20
|
|
(17)
|
|
(10)
|
|
Foreign:
|
|
|
|
|
|
|
Current
|
-
|
|
(1)
|
|
(1)
|
|
Valuation
allowance
|
(148)
|
|
114
|
|
142
|
|
Total
income tax benefit (expense)
|
$ 99
|
|
$(107)
|
|
$ -
|
|
The reconciliation of income tax
computed at the United States federal statutory tax rate to income tax benefit
(expense) for the years ended December 31 is as follows (in
millions):
|
Amount
|
Percentage
|
|
2008
|
2007
|
2006
|
2008
|
2007
|
2006
|
|
|
|
|
|
|
|
Income
tax benefit (expense)
at
United States statutory rates
|
$239
|
$(198)
|
$(129)
|
35.0%
|
35.0%
|
35.0%
|
State
income tax benefit (expense),
net
of federal benefit
|
14
|
(12)
|
(4)
|
2.0
|
2.1
|
1.1
|
Meals
and entertainment disallowance
|
(5)
|
(6)
|
(6)
|
(0.7)
|
1.1
|
1.6
|
Valuation
allowance
|
(148)
|
114
|
142
|
(21.7)
|
(20.1)
|
(38.4)
|
Other
|
(1)
|
(5)
|
(3)
|
(0.2)
|
0.7
|
0.7
|
Income
tax benefit (expense)
|
$ 99
|
$(107)
|
$ -
|
14.4%
|
18.8%
|
0.0%
|
For financial reporting purposes,
income tax benefit recorded on losses results in deferred tax
assets. Beginning in the first quarter of 2004, we concluded that we
were required to provide a valuation allowance for net deferred tax assets due
to our continued losses and our determination that it was more likely than not
that such deferred tax assets would ultimately not be realized. As a
result, our losses subsequent to that point were not reduced by any tax
benefit. Consequently, we also did not record any provision for
income taxes on our pre-tax income in 2006 or 2007 because we utilized a portion
of the net operating loss carryforwards ("NOLs") for which we had not previously
recognized a benefit. In the fourth quarter of 2007, we recorded
income tax expense of $104 million to increase the valuation allowance to be
fully reserved for certain NOLs, expiring in 2008 through 2011, which more
likely than not would not be realized prior to their expiration. In
the second quarter of 2008, we recorded an income tax credit of $28 million
resulting from higher utilization of those NOLs than had been previously
anticipated. We have approximately $3.4 billion of additional NOLs,
which expire between the years 2020 and 2028, available for use to offset future
cash income taxes.
Deferred income taxes reflect the net
tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the related amounts used for
income tax purposes. Significant components of our deferred tax
liabilities and assets as of December 31 were as follows (in
millions):
|
2008
|
2007
|
|
|
|
Fixed
assets, intangibles and spare parts
|
$1,767
|
|
$1,789
|
|
Other,
net
|
-
|
|
3
|
|
|
|
|
|
|
Gross
deferred tax
liabilities
|
1,767
|
|
1,792
|
|
|
|
|
|
|
Net
operating loss
carryforwards
|
(1,355)
|
|
(1,384)
|
|
Pension
liability
|
(481)
|
|
(151)
|
|
Accrued
liabilities
|
(558)
|
|
(349)
|
|
Other,
net
|
(167)
|
|
-
|
|
|
|
|
|
|
Gross
deferred tax
assets
|
(2,561)
|
|
(1,884)
|
|
|
|
|
|
|
Valuation
allowance
|
794
|
|
192
|
|
|
|
|
|
|
Net
deferred tax
liability
|
-
|
|
100
|
|
|
|
|
|
|
Less: current
deferred tax
asset
|
(216)
|
|
(259)
|
|
|
|
|
|
|
Non-current
deferred tax
liability
|
$ 216
|
|
$ 359
|
|
Section 382 of the Internal Revenue
Code ("Section 382") imposes limitations on a corporation's ability to utilize
NOLs if it experiences an "ownership change." In general terms, an
ownership change may result from transactions increasing the ownership of
certain stockholders in the stock of a corporation by more than 50 percentage
points over a three-year period. In the event of an ownership change,
utilization of our NOLs would be subject to an annual limitation under Section
382 determined by multiplying the value of our stock at the time of the
ownership change by the applicable long-term tax-exempt rate (which is 5.40% for
December 2008). Any unused annual limitation may be carried over to
later years. The amount of the limitation may, under certain
circumstances, be increased by the built-in gains in assets held by us at the
time of the change that are recognized in the five-year period after the
change. If we were to have an ownership change as of December 31,
2008 under current conditions, our annual NOL utilization could be limited to
$119 million per year, before consideration of any built-in gains.
Activity in our deferred tax asset
valuation allowance for the year ended December 31 was as follows (in
millions):
|
2008
|
2007
|
2006
|
|
|
|
|
Balance
at beginning of
year
|
$ 192
|
$ 487
|
$ 496
|
|
|
|
|
Valuation
allowance (utilized) provided for taxes related to:
|
|
|
|
Income
(loss) before cumulative effect of change in
accounting
principle
|
148
|
(114)
|
(142)
|
Cumulative
effect of change in accounting principle
|
-
|
-
|
10
|
Items
recorded directly to accumulated other
comprehensive
loss
|
462
|
(187)
|
(18)
|
Adoption
of SFAS
158
|
-
|
-
|
142
|
Other
|
(8)
|
6
|
(1)
|
Balance
at end of
year
|
$ 794
|
$ 192
|
$ 487
|
Our federal and state income tax
returns for years after 2004 remain subject to examination by the taxing
authorities.
NOTE
13 - SPECIAL CHARGES
Special charges for the years ended
December 31 were as follows (in millions):
|
2008
|
2007
|
2006
|
|
|
|
|
Pension
settlement charges (see Note 11)
|
$ 52
|
$ 31
|
$ 59
|
Aircraft-related
charges, net of gains on sales of aircraft
|
40
|
(22)
|
(18)
|
Severance
|
34
|
-
|
-
|
Route
impairment and
other
|
55
|
4
|
(14)
|
Total
special
charges
|
$ 181
|
$ 13
|
$ 27
|
Year Ended December 31,
2008. Aircraft-related charges, net of gains on sales of
aircraft, of $40 million include non-cash impairments on owned Boeing 737-300
and 737-500 aircraft and related assets. Following the decision in
June 2008 to retire all of our Boeing 737-300 aircraft and a significant portion
of our Boeing 737-500 fleet by the end of 2009, we evaluated the ongoing value
of the assets associated with these fleets. Fleet assets include
owned aircraft, improvements on leased aircraft, spare parts, spare engines and
simulators. Based on our evaluation, we determined that the carrying
amounts of these fleets were impaired and wrote them down to their estimated
fair value. We estimated the fair values based on current market
quotes and our expected proceeds from the sale of the
assets. Aircraft-related charges, net of gains on sales of aircraft
in 2008 also includes charges for future lease costs on permanently grounded
737-300 aircraft and gains on the sale of ten Boeing 737-500
aircraft.
At December 31, 2008, we had five owned
Boeing 737-500 aircraft and five owned Boeing 737-300 aircraft that were
grounded. These aircraft are being carried at an aggregate fair
market value of $84 million. At December 31, 2008, we also had two
temporarily grounded Boeing 737-500 leased aircraft and seven permanently
grounded Boeing 737-300 leased aircraft. These aircraft have lease
terms that range from one month to 43 months. We also have
temporarily grounded all thirty 37-seat ERJ 135 aircraft. The two
leased Boeing 737-500 aircraft that were grounded at December 31, 2008
re-entered our active fleet in January 2009.
We have aircraft sale contracts with
two different foreign buyers to sell 15 Boeing 737-500 aircraft. The
buyers of these aircraft have requested, and in some cases we have agreed to, a
delay in the delivery dates for the aircraft. We hold cash deposits
that secure the buyers' obligations under the aircraft sale contracts, and we
are entitled to damages under the aircraft sale contracts if the buyers do not
take delivery of the aircraft when required. These pending
transactions are subject to customary closing conditions, some of which are
outside of our control, and we cannot give any assurances that the buyers of
these aircraft will be able to obtain financing for these transactions, that
there will not be further delays in deliveries or that the closing of these
transactions will occur.
We expect to incur additional special
charges in future quarters associated with the planned permanent grounding of 23
additional Boeing 737-300 aircraft during 2009. Additionally, we may incur
further accounting charges as a result of future fleet actions, including costs
associated with future lease payments and return conditions on 30 ERJ-135
aircraft that are currently temporarily grounded. We are not able at this
time to estimate the amount and timing of these future charges.
In conjunction with the capacity
reductions, we incurred $34 million for severance and continuing medical
coverage for employees accepting early retirement packages or company-offered
leaves of absence during 2008. Approximately 3,000 positions were
eliminated as a result of the capacity reductions, the majority of which were
implemented in September 2008.
Route impairment and other special
charges in 2008 of $55 million includes an $18 million non-cash charge to write
off an intangible route asset as a result of our decision to move all of our
flights between New York Liberty and London from London Gatwick Airport to
London Heathrow Airport and $37 million of charges related to contract
settlements with regional carriers and unused facilities.
Year Ended December 31,
2007. Aircraft related credits of $22 million in 2007 related
primarily to the sale of three 737-500 aircraft. Other special
charges in 2007 of $4 million related to a change in the mandatory retirement
age for our pilots from age 60 to 65 signed into law on December 31,
2007. Because of the extension of the mandatory retirement age, we
recorded an additional $4 million liability for the long-term disability plan
for our pilots in 2007.
Year Ended December 31,
2006. Aircraft related special credits of $18 million in 2006
related primarily to a reduction of accruals for future lease payments and
return conditions related to permanently grounded MD-80 aircraft following
negotiated settlements with the aircraft lessors. Other special
credits in 2006 of $14 million related to the surrender of stock price based RSU
awards discussed in Note 9.
Accrual
Activity. Activity related to the accruals for severance and
medical costs and future lease payments on permanently grounded aircraft and
unused facilities is as follows (in millions):
|
Balance,
December 31, 2007
|
Accrual
|
Payments
|
Balance,
December 31, 2008
|
|
|
|
|
|
Severance/medical
costs
|
$ -
|
|
$ 34
|
|
$(6)
|
|
$28
|
|
Permanently
grounded aircraft
|
-
|
|
14
|
|
(4)
|
|
10
|
|
Unused
facilities
|
8
|
|
14
|
|
(2)
|
|
20
|
|
These accruals and payments relate
primarily to our mainline segment. Cash payments related to the
accruals for severance and medical costs will be made through the end of
2009. Remaining lease payments on permanently grounded aircraft and
unused facilities will be made through 2009 and 2018, respectively.
NOTE
14 - INVESTMENT IN OTHER COMPANIES
Copa. In
May 2008 and July 2006, we sold 4.4 million and 7.5 million shares,
respectively, of the Class A common stock of Copa for net proceeds of $149
million and $156 million, respectively. We recognized gains of $78
million and $92 million, respectively, on these transactions. We no
longer own any shares of Copa.
Prior to our disposition of Copa shares
in May 2008, we accounted for our interest in Copa using the equity method of
accounting because of our ability to significantly influence Copa's operations
through our alliance agreements with Copa and our representation on Copa's Board
of Directors.
Holdings. In
2007, we sold all of our shares of the common stock of Holdings, the parent
company of ExpressJet, to third parties for cash proceeds of $35
million. We recognized a gain of $7 million as a result of these
sales.
During 2006, we held an 8.6% interest
in Holdings. We accounted for our interest in Holdings using the
equity method of accounting because of our continued ability to significantly
influence Holdings' operations through our capacity purchase agreement with
ExpressJet.
ARINC. ARINC
develops and operates communications and information processing systems and
provides systems engineering and other services to the aviation industry and
other industries. In 2007, we sold all of our ARINC common stock
and received cash proceeds of $30 million. Our investment
in ARINC had no carrying value, resulting in a gain of $30 million.
Equity in Earnings of Other
Companies. We recorded equity in earnings of other companies
of $12 million, $18 million and $61 million in the years ended December 31,
2008, 2007 and 2006, respectively. The declining amounts reflect our
decreased ownership of Copa and Holdings. These amounts are included
in other nonoperating income (expense) in our consolidated statements of
operations.
NOTE
15 - VARIABLE INTEREST ENTITIES
Certain types of entities in which a
company absorbs a majority of another entity's expected losses, receives a
majority of the other entity's expected residual returns, or both, as a result
of ownership, contractual or other financial interests in the other entity are
required to be consolidated. These entities are called "variable
interest entities." The principal characteristics of variable
interest entities are (1) an insufficient amount of equity to absorb the
entity's expected losses, (2) equity owners as a group are not able to make
decisions about the entity's activities, or (3) equity that does not absorb the
entity's losses or receive the entity's residual returns. "Variable
interests" are contractual, ownership or other monetary interests in an entity
that change with fluctuations in the entity's net asset value. As a
result, variable interest entities can arise from items such as lease
agreements, loan arrangements, guarantees or service contracts.
If an entity is determined to be a
"variable interest entity," the entity must be consolidated by the "primary
beneficiary." The primary beneficiary is the holder of the variable
interests that absorbs a majority of the variable interest entity's expected
losses or receives a majority of the entity's residual returns in the event no
holder has a majority of the expected losses. There is no primary
beneficiary in cases where no single holder absorbs the majority of the expected
losses or receives a majority of the residual returns. The
determination of the primary beneficiary is based on projected cash flows at the
inception of the variable interests.
We have variable interests in the
following types of variable interest entities:
Aircraft
Leases. We are the lessee in a series of operating leases
covering the majority of our leased aircraft. The lessors are trusts
established specifically to purchase, finance and lease aircraft to
us. These leasing entities meet the criteria for variable interest
entities. We are generally not the primary beneficiary of the leasing
entities if the lease terms are consistent with market terms at the inception of
the lease and do not include a residual value guarantee, fixed-price purchase
option or similar feature that obligates us to absorb decreases in value or
entitles us to participate in increases in the value of the
aircraft. This is the case for many of our operating leases; however,
leases of approximately 75 mainline jet aircraft contain a fixed-price purchase
option that allows us to purchase the aircraft at predetermined prices on
specified dates during the lease term. Additionally, leases of
substantially all of our 256 leased regional jet aircraft contain an option to
purchase the aircraft at the end of the lease term at prices that, depending on
market conditions, could be below fair value. We have not
consolidated the related trusts because, even taking into consideration these
purchase options, we are still not the primary beneficiary based on our cash
flow analyses. Our maximum exposure under these leases is the
remaining lease payments, which are reflected in future lease commitments in
Note 5.
Airport
Leases. We are the lessee of real property under long-term
operating leases at a number of airports where we are also the guarantor of
approximately $1.5 billion of underlying debt and interest
thereon. These leases are typically with municipalities or other
governmental entities, which are excluded from the consolidation requirements
concerning variable interest entities. To the extent our lease and
related guarantee are with a separate legal entity other than a governmental
entity, we are not the primary beneficiary because the lease terms are
consistent with market terms at the inception of the lease and the lease does
not include a residual value guarantee, fixed-price purchase option or similar
feature as discussed above.
Subsidiary
Trust. We have a subsidiary trust that has Mandatorily
Redeemable Preferred Securities outstanding with a liquidation value of $248
million. The trust is a variable interest entity because we have a
limited ability to make decisions about its activities. However, we
are not the primary beneficiary of the trust. Therefore, the trust
and the Mandatorily Redeemable Preferred Securities issued by the trust are not
reported on our balance sheets. Instead, we report our 6% Convertible
Junior Subordinated Debentures held by the trust as long-term debt and interest
on the notes is recorded as interest expense for all periods presented in the
accompanying financial statements.
NOTE
16 - REGIONAL CAPACITY PURCHASE AGREEMENTS
Capacity Purchase Agreement
with ExpressJet
General. In
June 2008, we entered into the Second Amended and Restated Capacity Purchase
Agreement with ExpressJet and certain of its affiliates (the "Amended ExpressJet
CPA"), which amends and restates our capacity purchase agreement with
ExpressJet. Under the Amended ExpressJet CPA, we will continue to
purchase all of the capacity from the ExpressJet flights covered by the
agreement at a negotiated price. The Amended ExpressJet CPA was
effective as of July 1, 2008.
Capacity and Fleet
Matters. The Amended ExpressJet CPA covers a minimum of 205
regional jets in the first year. At December 31, 2008, 214 regional
jets were being operated under the Amended ExpressJet CPA. After the
first year, the minimum number of covered aircraft adjusts to 190 regional jets,
or fewer as leases on covered aircraft expire. Of the 69 aircraft
ExpressJet previously subleased from us for non-Continental flying, ExpressJet
continues to sublease 30 Embraer 50-seat regional jets from us outside the
Amended ExpressJet CPA at reduced rental rates. During the third
quarter of 2008, ExpressJet notified us of its intent to return to us 39 ERJ-145
aircraft that it subleased from us and operated on its own
behalf. ExpressJet had returned all 39 of these subleased aircraft to
us by early October 2008. We have elected to add these returned
aircraft to the Amended ExpressJet CPA. During September 2008, we
temporarily grounded all 30 of the subleased 37-seat ERJ 135 aircraft being
flown by ExpressJet on our behalf and notified ExpressJet that these aircraft
would be withdrawn from the Amended ExpressJet CPA. We are evaluating
our options regarding these 30 aircraft, including sublease opportunities or
permanently grounding them.
Term of
Agreement. The Amended ExpressJet CPA will expire after a term
of seven years and has no renewal or extension options. The Amended
ExpressJet CPA eliminated our right to terminate the agreement at any time upon
12 months' notice, although we may terminate the agreement at any time for
"cause" (as defined in the Amended ExpressJet CPA) and either party may
terminate for breach of the agreement, subject to certain notice and cure
periods. The Amended ExpressJet CPA also modified our rights under
our former capacity purchase agreement by reducing the scope of
change-in-control limitations on ExpressJet, reducing restrictions on ExpressJet
flying into our hub airports, and removing the most-favored-nation clause
relating to agreements ExpressJet may enter into with other
airlines.
In connection with entering into the
Amended ExpressJet CPA, certain existing agreements relating to aircraft
subleases, facilities, ground handling, fuel purchasing and administrative
services were amended. In addition, we entered into a settlement
agreement with ExpressJet related to block hour rates for the first six months
of 2008 and settled all outstanding disputed claims and other payment
disagreements under our former capacity purchase agreement, the impact of which
was not material to our consolidated results of operations.
Compensation and Operational
Responsibilities. In exchange for ExpressJet's operation of
the flights and performance of other obligations under the Amended ExpressJet
CPA, we have agreed to pay ExpressJet a pre-determined rate, subject to annual
escalations (capped at 3.5%), for each block hour flown (the hours from gate
departure to gate arrival) and to reimburse ExpressJet for various pass-through
expenses (with no margin or mark-up) related to the flights, including
insurance, property taxes, international navigation fees, depreciation
(primarily aircraft-related), landing fees and certain maintenance
expenses. Under the Amended ExpressJet CPA, we continue to be
responsible for the cost of providing fuel for all flights and for paying
aircraft rent for all aircraft covered by the Amended ExpressJet
CPA. The Amended ExpressJet CPA contains incentive bonus and rebate
provisions based upon ExpressJet's operational performance, but no longer
includes any payment adjustments in respect of ExpressJet's operating
margin.
Service
Agreements. We provide various services to ExpressJet and
charge them at rates in accordance with our capacity purchase
agreement. The services provided to ExpressJet by us include loading
fuel into aircraft, certain customer services such as ground handling and
infrastructure services, including insurance, technology, real estate and
environmental affairs. Prior to 2007, we also provided treasury,
human resources, internal corporate accounting, tax, payroll, accounts payable
and certain risk management services to ExpressJet. For providing
these services, we charged ExpressJet approximately $41 million, $88 million and
$105 million in 2008, 2007 and 2006, respectively.
Leases. As
of December 31, 2008, ExpressJet leased all 244 of its aircraft under long-term
operating leases from us. ExpressJet's lease agreements with us have
substantially the same terms as the lease agreements between us and the lessors
and expire between 2013 and 2022, except that ExpressJet's rent rates on 30
ERJ-145 aircraft not operated under the Amended ExpressJet CPA were reduced by
one-half effective July 1, 2008. ExpressJet leases or
subleases, under various operating leases, ground equipment and substantially
all of its ground facilities, including facilities at public airports, from us
or the municipalities or agencies owning and controlling such
airports. If ExpressJet defaults on any of its payment obligations
with us, we are entitled to reduce any payments required to be made by us to
ExpressJet under the Amended ExpressJet CPA by the amount of the defaulted
payment. Our total rental income related to all leases with
ExpressJet was approximately $205 million, $360 million and $349 million in
2008, 2007 and 2006, respectively. The 2008 and 2007 totals include
$76 million and $79 million, respectively, related to regional jets operated by
ExpressJet outside of our capacity purchase agreement, which is reported as
other revenue. Our aircraft rental income on aircraft flown for us
through June 30, 2008 is reported as a reduction to regional capacity purchase,
net.
Income Taxes. In
conjunction with Holdings' IPO, our tax basis in the stock of Holdings and the
tax basis of ExpressJet's tangible and intangible assets were increased to fair
value. The increased tax basis should result in additional tax
deductions available to ExpressJet over a period of 15 years. To the
extent ExpressJet generates taxable income sufficient to realize the additional
tax deductions, our tax sharing agreement with ExpressJet provides that it will
be required to pay us a percentage of the amount of tax savings actually
realized, excluding the effect of any loss carrybacks. ExpressJet is
required to pay us 100% of the first third of the anticipated tax benefit, 90%
of the second third and 80% of the last third. However, if the
anticipated benefits are not realized by the end of 2018, ExpressJet will be
obligated to pay us 100% of any benefits realized after that date. We
recognize the benefit of the tax savings associated with ExpressJet's asset
step-up for financial reporting purposes in the year paid to us by ExpressJet
due to the uncertainty of realization. We recognized no income from
the tax sharing agreement in 2008 or 2007. Income from the tax
sharing agreement totaled $26 million in 2006 and is included in other
nonoperating income (expense) in the accompanying statement of
operations.
Capacity Purchase Agreement
with Chautauqua
During 2007, Chautauqua Airlines, Inc.
("Chautauqua"), a wholly-owned subsidiary of Republic Airways Holdings Inc.,
began providing and operating forty-four 50-seat regional jets as a Continental
Express carrier under a capacity purchase agreement ("the Chautauqua
CPA"). As of December 31, 2008, 37 aircraft were being flown by
Chautauqua for us. The Chautauqua CPA requires us to pay Chautauqua a
fixed fee, subject to annual escalations (capped at 3.5%), for each block hour
flown for its operation of the aircraft. Chautauqua supplies the
aircraft that it operates under the agreement. Aircraft are scheduled
to be removed from service under the Chautauqua CPA each year through 2012,
provided that we have the unilateral right to extend the Chautauqua CPA on the
same terms on an aircraft-by-aircraft basis for a period of up to five years in
the aggregate for 20 aircraft and for up to three years in the aggregate for
seven aircraft, subject to the renewal terms of the related aircraft
lease.
Capacity Purchase Agreement
with CommutAir
Our capacity purchase agreement with
Champlain Enterprises, Inc., doing business as CommutAir (the "CommutAir CPA"),
provides for CommutAir to operate sixteen 37-seat Bombardier Q200 twin-turboprop
aircraft as a Continental Connection carrier on short distance routes from
Cleveland Hopkins and New York Liberty. The CommutAir CPA became
effective in 2006 and has a term of approximately six
years. CommutAir supplies all of the aircraft that it operates under
the agreement.
Capacity Purchase Agreement
with Colgan
In 2008, Pinnacle Airlines Corp.'s
subsidiary, Colgan Air, Inc. ("Colgan"), began operating fifteen 74-seat
Bombardier Q400 twin-turboprop aircraft on short and medium-distance routes from
New York Liberty on our behalf. Colgan operates the flights as a
Continental Connection carrier under a capacity purchase agreement with
us. In January 2009, we amended the capacity purchase agreement to
increase by 15 the number of Q400 aircraft operated by Colgan on our
behalf. We expect that Colgan will begin operating these 15
additional aircraft as they are delivered, beginning in the third quarter of
2010 through the second quarter of 2011. Each aircraft is scheduled
to be covered by the agreement for approximately ten years following the date
such aircraft is delivered into service thereunder. Colgan supplies
all aircraft that it operates under the agreement. One of Colgan's
Q400 aircraft was involved in an accident on February 12, 2009, reducing the
number of aircraft currently being flown for us to 14.
Indemnification Under
Capacity Purchase Agreements
Under each of these capacity purchase
agreements, our regional operator is generally required to indemnify us for any
claims arising in connection with its operation of the aircraft under the
agreement and to maintain separate insurance to cover its indemnification
obligation.
Commitments under Capacity
Purchase Agreements
Our future commitments under our
capacity purchase agreements are dependent on numerous variables, and are
therefore difficult to predict. The most important of these variables
is the number of scheduled block hours. Although we are not required
to purchase a minimum number of block hours under certain of our capacity
purchase agreements, we have set forth below estimates of our future payments
under the agreement based on our stated assumptions. These estimates
of our future payments under all of the capacity purchase agreements do not
include the portion of the underlying obligation for any aircraft leased to
ExpressJet or deemed to be leased from Chautauqua, CommutAir or Colgan and
facility rent that are disclosed as part of aircraft and nonaircraft operating
leases. For purposes of calculating these estimates, we have assumed
(1) the number of block hours flown is based on our anticipated level of flight
activity or at any contractual minimum utilization levels if applicable, (2)
that we will reduce the fleet as rapidly as contractually allowed under each
agreement, (3) that aircraft utilization, stage length and load factors will
remain constant, (4) that each carrier's operational performance will remain at
historic levels, and (5) that inflation is 1.6% to 3.5% per
year. Additionally, the impact of the 15 additional Q400 aircraft
expected to begin service beginning in 2010 has not been included since this
commitment was entered into subsequent to December 31, 2008. Based on
these assumptions, our future payments through the end of the terms of our
capacity purchase agreements at December 31, 2008 were estimated as follows (in
millions):
Year
ending December 31,
|
|
|
2009
|
$ 767
|
|
|
2010
|
674
|
|
|
2011
|
660
|
|
|
2012
|
675
|
|
|
2013
|
671
|
|
|
Later
years
|
1,256
|
|
|
Total
|
$4,703
|
|
It is important to note that the actual
amounts we pay to our regional operators under capacity purchase agreements
could differ materially from these estimates. For example, a 10%
increase or decrease in scheduled block hours for all of our regional operators
(whether as a result of changes in average daily utilization or otherwise) in
2009 would result in a corresponding increase or decrease in cash obligations
under the capacity purchase agreements of approximately 8.7%, or $67
million.
NOTE
17 - RELATED PARTY TRANSACTIONS
The following is a summary of
significant related party transactions that occurred during 2008, 2007 and 2006,
other than those discussed elsewhere in the Notes to Consolidated Financial
Statements. The payments to and from related parties in the ordinary
course of business were based on prevailing market rates and do not include
interline billings, which are common among airlines for transportation-related
services. In each case, the payments in 2008 relate only to the
period that the respective entity was considered a related party.
Northwest
Airlines. Prior to April 2008, Northwest Airlines, Inc. held
the sole share of our Series B Preferred Stock. We currently have a
global alliance with Northwest involving extensive codesharing, frequent flyer
reciprocity and other cooperative activities. The other cooperative
activities are considered normal to the daily operations of both
airlines. As a result of these other cooperative activities, we paid
Northwest $9 million, $28 million and $27 million in 2008, 2007 and 2006,
respectively, and Northwest paid us $9 million, $13 million and $20 million in
2008, 2007 and 2006, respectively.
Copa
Airlines. Prior to May 2008, we held a 10% interest in
Copa. We have a long-term alliance with Copa Airlines involving
extensive codesharing, frequent flyer reciprocity and other cooperative
activities. The other cooperative activities are considered normal to
the daily operations of both airlines. As a result of these other
cooperative activities, Copa paid us $7 million, $10 million and $8 million in
2008, 2007 and 2006, respectively.
NOTE
18 - SEGMENT REPORTING
We have two reportable
segments: mainline and regional. The mainline segment consists of
flights to cities using larger jets while the regional segment currently
consists of flights with a capacity of 50 or fewer seats (for jets) or 78 or
fewer seats (for turboprops). As of December 31, 2008, the regional
segment was operated by ExpressJet, Chautauqua, CommutAir and Colgan through
capacity purchase agreements. See Note 15 for further discussion of
the capacity purchase agreements.
We evaluate segment performance based
on several factors, of which the primary financial measure is operating income
(loss). However, we do not manage our business or allocate resources
based on segment operating profit or loss because (1) our flight schedules are
designed to maximize revenue from passengers flying, (2) many operations of the
two segments are substantially integrated (for example, airport operations,
sales and marketing, scheduling and ticketing) and (3) management decisions are
based on their anticipated impact on the overall network, not on one individual
segment.
Financial information for the year
ended December 31 by business segment is set forth below (in
millions):
|
2008
|
2007
|
2006
|
|
|
|
|
Operating
Revenue:
|
|
|
|
|
Mainline
|
$12,827
|
|
$12,019
|
|
$10,907
|
|
|
Regional
|
2,414
|
|
2,213
|
|
2,221
|
|
|
Total
Consolidated
|
$15,241
|
|
$14,232
|
|
$13,128
|
|
|
|
|
|
|
|
|
Depreciation
and amortization expense:
|
|
|
|
|
|
|
|
Mainline
|
$ 427
|
|
$ 400
|
|
$ 378
|
|
|
Regional
|
11
|
|
13
|
|
13
|
|
|
Total
Consolidated
|
$ 438
|
|
$ 413
|
|
$ 391
|
|
|
|
|
|
|
|
|
Special
Charges (Note 13):
|
|
|
|
|
|
|
|
Mainline
|
$ 155
|
|
$ 13
|
|
$ 27
|
|
|
Regional
|
26
|
|
-
|
|
-
|
|
|
Total
Consolidated
|
$ 181
|
|
$ 13
|
|
$ 27
|
|
|
|
|
|
|
|
|
Operating
Income (Loss):
|
|
|
|
|
|
|
|
Mainline
|
$ 74
|
|
$ 848
|
|
$ 593
|
|
|
Regional
|
(388)
|
|
(161)
|
|
(125)
|
|
|
Total
Consolidated
|
$ (314)
|
|
$ 687
|
|
$ 468
|
|
|
|
|
|
|
|
|
Interest
Expense:
|
|
|
|
|
|
|
|
Mainline
|
$ 352
|
|
$ 369
|
|
$ 385
|
|
|
Regional
|
13
|
|
14
|
|
16
|
|
|
Total
Consolidated
|
$ 365
|
|
$ 383
|
|
$ 401
|
|
|
|
|
|
|
|
|
Interest
Income:
|
|
|
|
|
|
|
|
Mainline
|
$ 65
|
|
$ 160
|
|
$ 131
|
|
|
Regional
|
-
|
|
-
|
|
-
|
|
|
Total
Consolidated
|
$ 65
|
|
$ 160
|
|
$ 131
|
|
|
|
|
|
|
|
|
Income
Tax Expense:
|
|
|
|
|
|
|
|
Mainline
|
$ 41
|
|
$(140)
|
|
$ -
|
|
|
Regional
|
58
|
|
33
|
|
-
|
|
|
Total
Consolidated
|
$ 99
|
|
$(107)
|
|
$ -
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss):
|
|
|
|
|
|
|
|
Mainline
|
$ (242)
|
|
$ 601
|
|
$ 476
|
|
|
Regional
|
(343)
|
|
(142)
|
|
(133)
|
|
|
Total
Consolidated
|
$(585)
|
|
$ 459
|
|
$ 343
|
|
The
amounts presented above are presented on the basis of how our management reviews
segment results. Under this basis, the regional segment's revenue
includes a pro-rated share of our ticket revenue for segments flown by regional
carriers and expenses include all activity related to the regional operations,
regardless of whether the costs were paid directly by us or to the regional
carriers. Net income (loss) for the mainline segment includes our
equity in Copa's earnings and gains on the sale of Copa shares and disposition
of Holdings shares. Net loss for the regional segment includes our
equity in Holdings' earnings.
Information concerning operating
revenue by principal geographic area for the year ended December 31 is as
follows (in millions):
|
2008
|
2007
|
2006
|
|
|
|
|
Domestic
|
$8,327
|
|
$8,053
|
|
$ 7,742
|
|
Trans-Atlantic
|
3,448
|
|
3,065
|
|
2,531
|
|
Latin
America
|
2,283
|
|
1,981
|
|
1,806
|
|
Pacific
|
1,183
|
|
1,133
|
|
1,049
|
|
|
|
|
|
|
|
|
|
$15,241
|
|
$14,232
|
|
$13,128
|
|
We attribute revenue among the
geographical areas based upon the origin and destination of each flight
segment. Our tangible assets and capital expenditures consist
primarily of flight and related ground support equipment, which is mobile across
geographic markets and, therefore, has not been allocated.
NOTE
19 - COMMITMENTS AND CONTINGENCIES
Aircraft Purchase
Commitments. As of December 31, 2008, we had firm commitments
for 87 new aircraft (54 Boeing 737 aircraft,
eight Boeing 777 aircraft and 25 Boeing 787 aircraft) scheduled for delivery
from 2009 through 2016, with an estimated aggregate cost of $5.6 billion
including related spare engines. In addition to our firm order
aircraft, we had options to purchase a total of 102 additional Boeing aircraft
as of December 31, 2008.
We have also agreed to lease four
Boeing 757-300 aircraft from Boeing Capital Corporation. We expect
that these aircraft will be placed into service in the first half of
2010.
As discussed in Note 4, we obtained
financing for 12 Boeing 737-800s and 18 Boeing 737-900ERs. We applied
a portion of this financing to 27 Boeing aircraft delivered to us in 2008 and
recorded related debt of $1.0 billion. We will apply the remainder of
this financing to three of the Boeing 737 aircraft scheduled for delivery in
2009. We have reached an agreement in principle with a bank for it to
provide financing for three Boeing 737-900ER aircraft scheduled for delivery in
the first half of 2009. Boeing has agreed to provide backstop
financing for all of the additional 11 Boeing 737 aircraft scheduled for
delivery through February 2010 (or 14 such additional aircraft if we fail to
reach a definitive agreement for the financing described in the previous
sentence), subject to customary closing conditions. However, we do
not have backstop financing or any other financing currently in place for the
balance of the Boeing aircraft on order. Since the commitments for
firm order aircraft are non-cancelable and assuming no breach of the agreement
by Boeing, if we are unable to obtain financing and cannot otherwise satisfy our
commitment to purchase these aircraft, the manufacturer could exercise its
rights and remedies under applicable law, such as seeking to terminate the
contract for a material breach, selling the aircraft to one or more other
parties and suing us for damages to recover for any resulting losses incurred by
the manufacturer. Further financing will be needed to satisfy our
capital commitments for our firm aircraft and other related capital
expenditures. We can provide no assurance that such further financing
will be available.
Financings and
Guarantees. We are the guarantor of approximately $1.7 billion
in aggregate principal amount of tax-exempt special facilities revenue bonds and
interest thereon, excluding the US Airways contingent liability described
below. These bonds, issued by various airport municipalities, are
payable solely from our rentals paid under long-term agreements with the
respective governing bodies. The leasing arrangements associated with
approximately $1.5 billion of these obligations are accounted for as operating
leases, and the leasing arrangements associated with approximately $200 million
of these obligations are accounted for as capital leases.
We are contingently liable for US
Airways' obligations under a lease agreement between US Airways and the Port
Authority of New York and New Jersey related to the East End Terminal at
LaGuardia airport. These obligations include the payment of ground
rentals to the Port Authority and the payment of other rentals in respect of the
full amounts owed on special facilities revenue bonds issued by the Port
Authority having an outstanding par amount of $123 million at December 31, 2008
and a final scheduled maturity in 2015. If US Airways defaults on
these obligations, we would be obligated to cure the default and we would have
the right to occupy the terminal after US Airways' interest in the lease had
been terminated.
We also had letters of credit and
performance bonds relating to various real estate and customs obligations at
December 31, 2008 in the amount of $69 million. These letters of
credit and performance bonds have expiration dates through October
2010.
General Guarantees and
Indemnifications. We are the lessee under many real estate
leases. It is common in such commercial lease transactions for us as
the lessee to agree to indemnify the lessor and other related third parties for
tort liabilities that arise out of or relate to our use or occupancy of the
leased premises and the use or occupancy of the leased premises by regional
carriers operating flights on our behalf. In some cases, this
indemnity extends to related liabilities arising from the negligence of the
indemnified parties, but usually excludes any liabilities caused by their gross
negligence or willful misconduct. Additionally, we typically
indemnify such parties for any environmental liability that arises out of or
relates to our use of the leased premises.
In our aircraft financing agreements,
we typically indemnify the financing parties, trustees acting on their behalf
and other related parties against liabilities that arise from the manufacture,
design, ownership, financing, use, operation and maintenance of the aircraft and
for tort liability, whether or not these liabilities arise out of or relate to
the negligence of these indemnified parties, except for their gross negligence
or willful misconduct.
We expect that we would be covered by
insurance (subject to deductibles) for most tort liabilities and related
indemnities described above with respect to real estate we lease and aircraft we
operate.
In our financing transactions that
include loans, we typically agree to reimburse lenders for any reduced returns
with respect to the loans due to any change in capital requirements and, in the
case of loans in which the interest rate is based on the London Interbank
Offered Rate ("LIBOR"), for certain other increased costs that the lenders incur
in carrying these loans as a result of any change in law, subject in most cases
to certain mitigation obligations of the lenders. At December 31,
2008, we had $1.5 billion of floating rate debt and $260 million of fixed rate
debt, with remaining terms of up to 12 years, that is subject to these increased
cost provisions. In several financing transactions involving loans or
leases from non-U.S. entities, with remaining terms of up to 12 years and an
aggregate carrying value of $1.6 billion, we bear the
risk of any change in tax laws that would subject loan or lease payments
thereunder to non-U.S. entities to withholding taxes, subject to customary
exclusions.
We may be required to make future
payments under the foregoing indemnities and agreements due to unknown variables
related to potential government changes in capital adequacy requirements, laws
governing LIBOR based loans or tax laws, the amounts of which cannot be
estimated at this time.
Credit Card Processing
Agreements. On June 10, 2008, we entered into an amendment and
restatement of our Bankcard Agreement with Chase. In connection
with the amendment of the Bankcard Agreement, we also amended our domestic
bank-issued credit card processing agreement to extend the term of the agreement
until December 31, 2016 and modify certain provisions in the
agreement. As a result of the amendment of that processing agreement,
the requirement that we maintain a minimum EBITDAR (generally, earnings before
interest, income taxes, depreciation, amortization, aircraft rentals, certain
nonoperating income (expense) and special items) to fixed charges (interest and
aircraft rentals) ratio for the preceding 12 months was eliminated as a trigger
requiring the posting of additional collateral.
The covenants contained in the Chase
processing agreement require that we post additional cash collateral if we fail
to maintain (1) a minimum level of unrestricted cash, cash equivalents and
short-term investments, (2) a minimum ratio of unrestricted cash, cash
equivalents and short-term investments to current liabilities of 0.25 to 1.0 or
(3) a minimum senior unsecured debt rating of at least Caa3 and CCC- from
Moody's and Standard & Poor's, respectively.
We have also recently entered into a
new credit card processing agreement with American Express. Under the
terms of that agreement, if a covenant trigger under the Chase processing
agreement results in our posting additional collateral under that agreement, we
would be required to post additional collateral under the American Express
processing agreement. The amount of additional collateral required
under the American Express processing agreement would be based on a percentage
of the value of unused tickets (for travel at a future date) purchased by
customers using the American Express card. The percentage for
purposes of this calculation is the same as the percentage applied under the
Chase processing agreement, after taking into account certain other risk
protection maintained by American Express.
Under these processing agreements and
based on our current air traffic liability exposure (as defined in each
agreement), we would be required to post collateral up to the following amounts
if we failed to comply with the covenants described above:
·
|
a
total of $72 million if our unrestricted cash, cash equivalents and
short-term investments balance falls below $2.0
billion;
|
·
|
a total
of $229 million if we fail to maintain the minimum unsecured debt ratings
specified above;
|
·
|
a
total of $437 million if our unrestricted cash, cash equivalents and
short-term investments balance (plus any collateral posted at Chase) falls
below $1.4 billion or if our ratio of unrestricted cash, cash equivalents
and short-term investments to current liabilities falls below 0.25 to 1.0;
and
|
·
|
a
total of $958 million if our unrestricted cash, cash equivalents and
short-term investments balance (plus any collateral posted at Chase) falls
below $1.0 billion or if our ratio of unrestricted cash, cash equivalents
and short-term investments to current liabilities falls below 0.22 to
1.0.
|
The amounts shown above are incremental
to the current collateral we have posted with these companies. We are
currently in compliance with all of the covenants under these processing
agreements.
Employees. As
of December 31, 2008, we had approximately 42,490 employees, which, due to the
number of part-time employees, represents 40,460 full-time equivalent
employees. In conjunction with the capacity reductions we announced
in June 2008, we have reduced our total workforce by approximately 3,000
positions, with the majority of the reductions being accomplished through
voluntary programs. These included an enhanced retirement window,
company offered leaves of absence and other voluntary reduction
programs.
Approximately 44% of our full-time
equivalent employees are represented by unions. The collective
bargaining agreements with our pilots, mechanics and certain other work groups
became amendable in December 2008. During 2008, we met with
representatives of the applicable unions to engage in bargaining for amended
collective bargaining agreements. These talks will continue in 2009
with a goal of reaching agreements that are fair to us and to our
employees. Although there can be no assurance that our generally good
labor relations and high labor productivity will continue, the preservation of
good relations with our employees is a significant component of our business
strategy.
Environmental
Matters. In 2001, the California Regional Water Quality Control
Board ("CRWQCB") mandated a field study of the area surrounding our aircraft
maintenance hangar in Los Angeles. The study was completed in
September 2001 and identified jet fuel and solvent contamination on and adjacent
to this site. In April 2005, we began environmental remediation of
jet fuel contamination surrounding our aircraft maintenance hangar pursuant to a
workplan submitted to (and approved by) the CRWQCB and our landlord, the Los
Angeles World Airports. Additionally, we could be responsible for
environmental remediation costs primarily related to solvent contamination on
and near this site.
In 1999, we purchased property located
near our New York Liberty hub in Elizabeth, New Jersey from Honeywell
International, Inc. ("Honeywell") with certain environmental indemnification
obligations by us to Honeywell. We did not operate the facility
located on or make any improvements to the property. In 2005, we sold
the property to Catellus Commercial Group, LLC ("Catellus") and, in connection
with the sale, Catellus assumed certain environmental indemnification
obligations in favor of us. On October 9, 2006, Honeywell provided us
with a notice seeking indemnification from us in connection with a U.S.
Environmental Protection Agency ("EPA") potentially responsible party notice to
Honeywell involving the Newark Bay Study Area of the Diamond Alkali Superfund
Site alleging hazardous substance releases from the property and seeking study
costs. In addition, on May 7, 2007, Honeywell provided us with a
notice seeking indemnification from us in connection with a possible lawsuit by
Tierra Solutions, Inc. ("Tierra Solutions") against Honeywell relating to
alleged discharges from the property into Newark Bay and seeking cleanup of
Newark Bay waters and sediments under the Resource Conservation and Recovery
Act. We have notified Honeywell that, at this time, we have not
agreed that we are required to indemnify Honeywell with respect to the EPA and
Tierra Solutions claims and Honeywell has invoked arbitration procedures under
its sale and purchase agreement with us. Catellus has agreed to
indemnify and defend us in connection with the EPA and Tierra Solutions claims,
including any arbitration with Honeywell.
At December 31, 2008, we had an accrual
for estimated costs of environmental remediation throughout our system of $33
million, based primarily on third-party environmental studies and estimates as
to the extent of the contamination and nature of the required remedial
actions. We have evaluated and recorded this accrual for environmental
remediation costs separately from any related insurance recovery. We did
not have any receivables related to environmental insurance recoveries at
December 31, 2008. Based on currently available information, we
believe that our accrual for potential environmental remediation costs is
adequate, although our accrual could be adjusted in the future due to new
information or changed circumstances. However, we do not expect these
items to materially affect our results of operations, financial condition or
liquidity.
Legal
Proceedings. During the period between 1997 and 2001, we reduced or
capped the base commissions that we paid to domestic travel agents, and in 2002
we eliminated those base commissions. These actions were similar to those
also taken by other air carriers. We are a defendant, along with
several other air carriers, in two lawsuits brought by travel agencies that
purportedly opted out of a prior class action entitled Sarah Futch Hall d/b/a/
Travel Specialists v. United Air Lines, et al. (U.S.D.C., Eastern
District of North Carolina), filed on June 21, 2000, in which the defendant
airlines prevailed on summary judgment that was upheld on
appeal. These similar suits against Continental and other major
carriers allege violations of antitrust laws in reducing and ultimately
eliminating the base commissions formerly paid to travel agents. The
pending cases are Tam
Travel, Inc. v. Delta Air Lines, Inc., et al. (U.S.D.C., Northern
District of California), filed on April 9, 2003 and Swope Travel Agency, et al.
v. Orbitz LLC et al. (U.S.D.C., Eastern District of Texas), filed on June
5, 2003. By order dated November 10, 2003, these actions were
transferred and consolidated for pretrial purposes by the Judicial Panel on
Multidistrict Litigation to the Northern District of Ohio. On
September 14, 2006, the judge for the consolidated lawsuit issued an order
dismissing 28 plaintiffs in the Swope case for their
failure to properly opt-out of the Hall
case. Consequently, a total of 90 travel agency plaintiffs remained
in the two cases. On October 29, 2007, the judge for the consolidated
lawsuit dismissed the case for failure to meet the heightened pleading standards
established earlier in 2007 by the U.S. Supreme Court's decision in Bell Atlantic Corp. v.
Twombly. The plaintiffs have appealed to the Sixth Circuit
Court of Appeals. In each of these cases, we believe the plaintiffs'
claims are without merit, and we intend to vigorously defend any
appeal. Nevertheless, a final adverse court decision awarding
substantial money damages could have a material adverse effect on our results of
operations, financial condition or liquidity.
We and/or certain of our subsidiaries
are defendants in various other pending lawsuits and proceedings and are subject
to various other claims arising in the normal course of our business, many of
which are covered in whole or in part by insurance. Although the
outcome of these lawsuits and proceedings (including the probable loss we might
experience as a result of an adverse outcome) cannot be predicted with certainty
at this time, we believe, after consulting with outside counsel, that the
ultimate disposition of such suits will not have a material adverse effect on
us.
NOTE
20 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited summarized financial data by
quarter for 2008 and 2007 is as follows (in millions, except per share
data):
|
Three
Months Ended
|
|
March 31
|
June 30
|
September 30
|
December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
Operating
revenue
|
$3,570
|
|
$4,044
|
|
$4,156
|
|
$3,471
|
|
Operating
loss
|
(66)
|
|
(71)
|
|
(152)
|
|
(25)
|
|
Nonoperating
income (expense), net
|
(58)
|
|
25
|
|
(96)
|
|
(239)
|
|
Net
loss
|
(80)
|
|
(3)
|
|
(236)
|
|
(266)
|
|
|
|
|
|
|
|
|
|
|
Loss
per share:
|
|
|
|
|
|
|
|
|
Basic
|
$(0.81)
|
|
$(0.03)
|
|
$(2.14)
|
|
$(2.33)
|
|
Diluted
|
$(0.81)
|
|
$(0.03)
|
|
$(2.14)
|
|
$(2.33)
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
Operating
revenue
|
$3,179
|
|
$3,710
|
|
$3,820
|
|
$3,523
|
|
Operating
income
|
64
|
|
263
|
|
280
|
|
80
|
|
Nonoperating
expense, net
|
(42)
|
|
(31)
|
|
(39)
|
|
(9)
|
|
Net
income
(loss)
|
22
|
|
228
|
|
241
|
|
(32)
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share:
|
|
|
|
|
|
|
|
|
Basic
|
$ 0.23
|
|
$2.35
|
|
$2.47
|
|
$(0.33)
|
|
Diluted
|
$ 0.21
|
|
$2.03
|
|
$2.15
|
|
$(0.33)
|
|
The quarterly income (loss) amounts
were impacted by the following special income (expense) items:
|
Three
Months Ended
|
|
March 31
|
June 30
|
September 30
|
December 31
|
|
|
|
|
|
2008
|
|
|
|
|
Operating
earnings:
|
|
|
|
|
Pension
settlement charges
|
$ -
|
|
$ -
|
|
$ (8)
|
|
$ (44)
|
|
Aircraft-related
charges, net of gains on sales
of
aircraft
|
8
|
|
(41)
|
|
(12)
|
|
5
|
|
Severance
|
-
|
|
-
|
|
(33)
|
|
(1)
|
|
Route
impairment and other
|
-
|
|
(17)
|
|
(38)
|
|
-
|
|
Total
special charges in operating earnings
|
$ 8
|
|
$(58)
|
|
$(91)
|
|
$ (40)
|
|
|
|
|
|
|
|
|
|
|
Additional
special items:
|
|
|
|
|
|
|
|
|
Gains
on sales of investments
|
$ -
|
|
$ 78
|
|
$ -
|
|
$ -
|
|
Loss
on fuel hedge contracts with
Lehman
Brothers
|
-
|
|
-
|
|
-
|
|
(125)
|
|
Write-down
of auction rate securities, net
of
put right
received
|
-
|
|
(29)
|
|
-
|
|
(5)
|
|
Income
tax credit related to NOL utilization
|
-
|
|
28
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
Operating
earnings:
|
|
|
|
|
Pension
settlement charges
|
$ (5)
|
|
$ (7)
|
|
$(12)
|
|
$ (7)
|
|
Aircraft-related
charges, net of gains on sales
of
aircraft
|
(6)
|
|
-
|
|
-
|
|
28
|
|
Pilot
long-term disability charge
|
-
|
|
-
|
|
-
|
|
(4)
|
|
Total
special charges in operating earnings
|
$(11)
|
|
$ (7)
|
|
$(12)
|
|
$ 17
|
|
|
|
|
|
|
|
|
|
|
Additional
special items:
|
|
|
|
|
|
|
|
|
Gains
on sales of investments
|
$ 7
|
|
$ -
|
|
$ -
|
|
$ 30
|
|
Income
tax expense related to NOL
utilization
|
-
|
|
-
|
|
-
|
|
(104)
|
|
There were no changes in or
disagreements on any matters of accounting principles or financial statement
disclosure between us and our independent registered public accountants during
our two most recent fiscal years or any subsequent interim period.
Management's Conclusion on
the Effectiveness of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief
Financial Officer performed an evaluation of our disclosure controls and
procedures, which have been designed to permit us to effectively identify and
timely disclose important information. They concluded that the
controls and procedures were effective as of December 31, 2008 to provide
reasonable assurance that the information required to be disclosed by the
Company in reports it files under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the SEC. While our disclosure controls and
procedures provide reasonable assurance that the appropriate information will be
available on a timely basis, this assurance is subject to limitations inherent
in any control system, no matter how well it may be designed or
administered.
Management's Report on
Internal Control over Financial Reporting
Management of the Company is
responsible for establishing and maintaining effective internal control over
financial reporting, as such term is defined in Rule 13a-15(f) under the
Securities Exchange Act of 1934. The Company's internal control over
financial reporting is a process designed to provide reasonable assurance to the
Company's management and Board of Directors regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in the
United States.
Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial
reporting and financial statement preparation and presentation.
Under the supervision and with the
participation of the Company's management, including our Chief Executive Officer
and Chief Financial Officer, an assessment of the effectiveness of the Company's
internal control over financial reporting as of December 31, 2008 was
conducted. In making this assessment, management used the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal
Control - Integrated Framework. Based on their assessment,
management concluded that, as of December 31, 2008, the Company's internal
control over financial reporting was effective based on those
criteria.
The effectiveness of our internal
control over financial reporting as of December 31, 2008, has been audited by
Ernst & Young LLP, the independent registered public accounting firm who
also has audited the Company's consolidated financial statements included in
this Annual Report on Form 10-K. Ernst & Young's report on the
Company's internal control over financial reporting appears below.
Changes in Internal
Controls
There was no change in our internal
control over financial reporting during the quarter ended December 31, 2008,
that materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
Report of Independent
Registered Public Accounting Firm
The Board
of Directors and Stockholders
Continental
Airlines, Inc.
We have audited the internal control
over financial reporting of Continental Airlines, Inc. (the "Company") as of
December 31, 2008, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the "COSO criteria"). The Company's management
is responsible for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over
financial reporting included in the accompanying Management's Report on Internal
Control over Financial Reporting. Our responsibility is to express an
opinion on the Company's internal control over financial reporting based on our
audit.
We conducted our audit in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our
audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company's internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles. A company's internal control over financial
reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as
of December 31, 2008, based on the COSO criteria.
We also have audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated balance sheets of the Company as of December 31, 2008
and 2007, and the related consolidated statements of operations, common
stockholders' equity, and cash flows of the Company for each of the three years
in the period ended December 31, 2008, and our report dated February 18, 2009
expressed an unqualified opinion thereon.
ERNST
& YOUNG
LLP
Houston,
Texas
February
18, 2009
Item
9B. Other Information.
None.
PART
III
Incorporated herein by reference from
our definitive proxy statement for the annual meeting of stockholders to be held
on June 10, 2009.
Incorporated herein by reference from
our definitive proxy statement for the annual meeting of stockholders to be held
on June 10, 2009.
Stockholder Matters.
Incorporated herein by reference from
our definitive proxy statement for the annual meeting of stockholders to be held
on June 10, 2009 and from Item 5. "Market for Registrant's Common
Equity and Related Stockholder Matters" of this Form 10-K.
Incorporated herein by reference from
our definitive proxy statement for the annual meeting of stockholders to be held
on June 10, 2009.
Incorporated herein by reference from
our definitive proxy statement for the annual meeting of stockholders to be held
on June 10, 2009.
PART
IV
(a)
|
The
following financial statements are included in Item
8. "Financial Statements and Supplementary
Data":
|
Report of
Independent Registered Public Accounting Firm
Consolidated
Statements of Operations for each of the Three Years in the Period
Ended
December 31, 2008
Consolidated
Balance Sheets as of December 31, 2008 and 2007
Consolidated
Statements of Cash Flows for each of the Three Years in the Period
Ended
December 31, 2008
Consolidated
Statements of Common Stockholders' Equity for each of the Three
Years
in the Period Ended December 31,
2008
Notes to
Consolidated Financial Statements
(b)
|
Financial
Statement Schedules:
|
All
schedules have been omitted because they are inapplicable, not required, or the
information is included elsewhere in the consolidated financial statements or
notes thereto.
(c)
|
See
accompanying Index to Exhibits.
|
Pursuant to the requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
CONTINENTAL
AIRLINES, INC.
|
|
|
|
By
/s/ ZANE C.
ROWE
|
|
Zane C. Rowe
|
|
Executive Vice President
and
|
|
Chief Financial
Officer
|
|
(On behalf of
Registrant)
|
Date:
February 18,
2009
Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed by the following
persons in the capacities indicated on February 18, 2009.
Signature
|
Capacity
|
|
|
/s/ LAWRENCE W.
KELLNER
|
Chairman
and Chief Executive Officer
|
Lawrence
W. Kellner
|
(Principal
Executive Officer)
|
|
|
/s/ ZANE C.
ROWE
|
Executive
Vice President and
|
Zane
C. Rowe
|
Chief
Financial Officer
|
|
(Principal
Financial Officer)
|
|
|
/s/ CHRIS
KENNY
|
Vice
President and Controller
|
Chris
Kenny
|
(Principal
Accounting Officer)
|
|
|
KIRBYJON H.
CALDWELL*
|
Director
|
Kirbyjon
H. Caldwell
|
|
|
|
DOUGLAS H.
McCORKINDALE*
|
Director
|
Douglas
H. McCorkindale
|
|
|
|
HENRY L. MEYER
III*
|
Director
|
Henry
L. Meyer III
|
|
|
|
OSCAR
MUNOZ*
|
Director
|
Oscar
Munoz
|
|
|
|
GEORGE G. C.
PARKER*
|
Director
|
George
G. C. Parker
|
|
|
|
/s/ JEFFERY A.
SMISEK
|
Director
|
Jeffery
A. Smisek
|
|
|
|
KAREN HASTIE
WILLIAMS*
|
Director
|
Karen
Hastie Williams
|
|
|
|
RONALD B.
WOODARD*
|
Director
|
Ronald
B. Woodard
|
|
|
|
CHARLES A.
YAMARONE*
|
Director
|
Charles
A. Yamarone
|
|
*By
|
/s/ Jennifer L.
Vogel
|
|
Jennifer
L. Vogel
|
|
Attorney-in-fact
|
|
February
18, 2009
|
CONTINENTAL
AIRLINES, INC.
3.1
|
Amended
and Restated Certificate of Incorporation of Continental, as amended
through June 6, 2006 - incorporated by reference to Exhibit 3.1 to
Continental's Annual Report on Form 10-K for the year ended December 31,
2006 (File no. 1-10323) (the "2006 10-K").
|
|
|
3.1(a)
|
Certificate
of Designation of Series A Junior Participating Preferred Stock, included
as Exhibit A to Exhibit 3.1.
|
|
|
3.1(a)(i)
|
Certificate
of Amendment of Certificate of Designation of Series A Junior
Participating Preferred Stock - incorporated by reference to Exhibit
3.1(b) to Continental's Annual Report on Form 10-K for the year ended
December 31, 2001 (File no. 1-10323) (the "2001 10-K").
|
|
|
3.2
|
Amended
and Restated Bylaws of Continental, effective as of November 20, 2008 -
incorporated by reference to Exhibit 3.2 to Continental's Current Report
on Form 8-K dated November 20, 2008 (File no. 1-10323).
|
|
|
4.1
|
Specimen
Class B Common Stock Certificate of Continental - incorporated by
reference to Exhibit 4.1 to Continental's Registration Statement on Form
8-A/A filed November 21, 2008.
|
|
|
4.2
|
Warrant
Agreement dated as of April 27, 1993, between Continental and Continental
as warrant agent - incorporated by reference to Exhibit 4.7 to
Continental's Current Report on Form 8-K, dated April 16, 1993 (File no.
1-10323). (No warrants remain outstanding under the agreement,
but some of its terms are incorporated into Continental's stock option
agreements.)
|
|
|
4.3
|
Continental
hereby agrees to furnish to the Commission, upon request, copies of
certain instruments defining the rights of holders of long-term debt of
the kind described in Item 601(b)(4)(iii)(A) of Regulation
S-K.
|
|
|
10.1
|
Agreement
of Lease dated as of January 11, 1985, between the Port Authority of New
York and New Jersey and People Express, Inc., regarding Terminal C (the
"Terminal C Lease") - incorporated by reference to Exhibit 10.61 to the
Annual Report on Form 10-K (File no. 0-9781) of People Express, Inc. for
the year ended December 31, 1984.
|
|
|
10.1(a)
|
Assignment
of Lease with Assumption and Consent dated as of August 15, 1987, among
the Port Authority of New York and New Jersey, People Express Airlines,
Inc. and Continental - incorporated by reference to Exhibit 10.2 to
Continental's Annual Report on Form 10-K (File no. 1-8475) for the year
ended December 31, 1987 (the "1987 10-K").
|
|
|
10.1(b)
|
Supplemental
Agreement Nos. 1 through 6 to the Terminal C Lease - incorporated by
reference to Exhibit 10.3 to the 1987 10-K.
|
|
|
10.1(c)
|
Supplemental
Agreement No. 7 to the Terminal C Lease - incorporated by reference to
Exhibit 10.4 to Continental's Annual Report on Form 10-K (File no.
1-10323) for the year ended December 31, 1988 (the "1988
10-K").
|
|
|
10.1(d)
|
Supplemental
Agreements No. 8 through 11 to the Terminal C Lease - incorporated by
reference to Exhibit 10.10 to Continental's Form S-1 Registration
Statement (No. 33-68870).
|
|
|
10.1(e)
|
Supplemental
Agreements No. 12 through 15 to the Terminal C Lease - incorporated by
reference to Exhibit 10.2(d) to Continental's Annual Report on Form 10-K
(File no. 1-10323) for the year ended December 31,
1995.
|
|
|
10.1(f)
|
Supplemental
Agreement No. 16 to the Terminal C Lease - incorporated by reference to
Exhibit 10.1(e) to Continental's Annual Report on Form 10-K for the year
ended December 31, 1997 (File no. 1-10323) (the "1997
10-K").
|
|
|
10.1(g)
|
Supplemental
Agreement No. 17 to the Terminal C Lease - incorporated by reference to
Exhibit 10.1(f) to Continental's Annual Report on Form 10-K for the year
ended December 31, 1999 (File no. 1-10323) (the "1999
10-K").
|
|
|
10.1(h)
|
Supplemental
Agreement No. 18 to the Terminal C Lease - as incorporated by reference to
Exhibit 10.5 to the 2003 Q-1 10-Q.
|
|
|
10.1(i)
|
Supplemental
Agreement No. 19 to the Terminal C Lease - incorporated by reference to
Exhibit 10.4 to Continental's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2003 (File no. 1-10323).
|
|
|
10.1(j)
|
Supplemental
Agreement No. 20 - to the Terminal C Lease - incorporated by reference to
Exhibit 10.1 to Continental's Quarterly Report on Form 10-Q for quarter
ended September 30, 2003 (File no. 1-10323) (the "2003 Q-3
10-Q").
|
|
|
10.1(k)
|
Supplemental
Agreement No. 21 dated as of June 1, 2003 to Agreement of Lease between
the Company and the Port Authority of New York and New Jersey regarding
Terminal C at Newark Liberty International Airport - incorporated by
reference to Exhibit 10.1 to Continental's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2005 (File no. 1-10323) (the "2005 Q-2
10-Q").
|
|
|
10.1(l)
|
Supplemental
Agreement No. 22 - to the Terminal C Lease - incorporated by reference to
Exhibit 10.1 to Continental's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2004 (File no. 1-10323) (the "2004 Q-1
10-Q").
|
|
|
10.1(m)
|
Supplemental
Agreement No. 23 - to the Terminal C Lease - incorporated by reference to
Exhibit 10.1(m) to Continental's Annual Report on Form 10-K for the year
ended December 31, 2005 (File no. 1-10323) (the "2005
10-K").
|
|
|
10.1(n)
|
Supplemental
Agreement No. 24 - to the Terminal C Lease - incorporated by reference to
Exhibit 10.1(n) to the 2005 10-K.
|
|
|
10.2
|
Airport
Use and Lease Agreement dated as of January 1, 1998 between Continental
and the City of Houston, Texas ("Houston") regarding George Bush
Intercontinental Airport - incorporated by reference to Exhibit 10.30 to
Continental's Annual Report on Form 10-K for the year ended December 31,
1998 (File no. 1-10323) (the "1998 10-K").
|
|
|
10.2(a)
|
Special
Facilities Lease Agreement dated as of March 1, 1997 between Continental
and Houston regarding an automated people mover project at Bush
Intercontinental - incorporated by reference to Exhibit 10.30(a) to the
1998 10-K.
|
|
|
10.2(b)
|
Amended
and Restated Special Facilities Lease Agreement dated as of December 1,
1998 by and between Continental and Houston regarding certain terminal
improvements projects at Bush Intercontinental - incorporated by reference
to Exhibit 10.30(b) to the 1998 10-K.
|
|
|
10.2(c)
|
Amended
and Restated Special Facilities Lease Agreement dated December 1, 1998 by
and between Continental and Houston regarding certain airport improvement
projects at Bush Intercontinental - incorporated by reference to Exhibit
10.30(c) to the 1998 10-K.
|
|
|
10.2(d)
|
Terminal
E Lease and Special Facilities Lease Agreement dated as of August 1, 2001
between Continental and Houston regarding Bush Intercontinental -
incorporated by reference to Exhibit 10.8 to Continental's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2001 (File no.
1-10323) (the "2001 Q-3 10-Q").
|
|
|
10.2(e)
|
Supplement
to Terminal E Lease and Special Facilities Lease Agreement dated as of
August 1, 2001 - incorporated by reference to Exhibit 10.2(e) to
Continental's Annual Report on Form 10-K for the year ended December 31,
2002 (File no. 1-10323) (the "2002 10-K").
|
|
|
10.3
|
Agreement
and Lease dated as of May 1987, as supplemented, between Continental and
the City of Cleveland, Ohio ("Cleveland") regarding Hopkins International
Airport - incorporated by reference to Exhibit 10.6 to Continental's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1993
(File no. 1-10323).
|
|
|
10.3(a)
|
Special
Facilities Lease Agreement dated as of October 24, 1997 by and between
Continental and Cleveland regarding certain concourse expansion projects
at Hopkins International (the "1997 SFLA") - incorporated by reference to
Exhibit 10.31(a) to the 1998 10-K.
|
|
|
10.3(b)
|
First
Supplemental Special Facilities Lease Agreement dated as of March 1, 1998,
and relating to the 1997 SFLA - incorporated by reference to Exhibit 10.1
to Continental's Quarterly Report on Form 10-Q for the quarter ended March
31, 1999 (File no. 1-10323) (the "1999 Q-1 10-Q").
|
|
|
10.3(c)
|
Special
Facilities Lease Agreement dated as of December 1, 1989 by and between
Continental and Cleveland regarding Hopkins International (the "1989
SFLA") - incorporated by reference to Exhibit 10.1 to Continental's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1999
(File no. 1-10323) (the "1999 Q-3 10-Q").
|
|
|
10.3(d)
|
First
Supplemental Special Facilities Lease Agreement dated as of March 1, 1998,
and relating to the 1989 SFLA - incorporated by reference to Exhibit
10.1(a) to the 1999 Q-3 10-Q.
|
|
|
10.3(e)
|
Second
Supplemental Special Facilities Lease Agreement dated as of March 1, 1998,
and relating to the 1989 SFLA - incorporated by reference to Exhibit
10.1(b) to the 1999 Q-3 10-Q.
|
|
|
10.3(f)
|
Amendment
No. 1, dated January 1, 2006, to Agreement and Lease dated as of May 1987,
as supplemented, between Continental and Cleveland regarding Hopkins
International Airport - incorporated by reference to Exhibit 10.3(f) to
the 2005 10-K.
|
|
|
10.4*
|
Employment
Agreement dated as of October 15, 2007 between Continental and Lawrence W.
Kellner - incorporated by reference to Exhibit 10.2 to Continental's Form
10-Q for the quarter ended September 30, 2007 (File no. 1-10323) (the
"2007 Q-3 10-Q").
|
|
|
10.4(a)*
|
Compensation
Reduction Agreement for Lawrence W. Kellner dated December 22, 2004 -
incorporated by reference to Exhibit 99.1 to Continental's Current Report
on Form 8-K dated December 22, 2004 (File no. 1-10323) (the "12/04
8-K").
|
|
|
10.4(b)*
|
Amendment
to Compensation Reduction Agreement for Lawrence W. Kellner dated February
15, 2005 - incorporated by reference to Exhibit 10.1 to Continental's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2005 (File
no. 1-10323) (the "2005 Q-1 10-Q").
|
|
|
10.4(c)*
|
Letter
Agreement dated as of May 30, 2008 between Continental and Larry Kellner -
incorporated by reference to Exhibit 99.2 to Continental's Current Report
on Form 8-K dated June 5, 2008 (the "06/08 8-K").
|
|
|
10.5*
|
Employment
Agreement dated as of October 15, 2007 between Continental and Jeffery A.
Smisek - incorporated by reference to Exhibit 10.3 to the 2007 Q-3
10-Q.
|
|
|
10.5(a)*
|
Compensation
Reduction Agreement for Jeffery A. Smisek dated December 22, 2004 -
incorporated by reference to Exhibit 99.2 to the 12/04
8-K.
|
|
|
10.5(b)*
|
Amendment
to Compensation Reduction Agreement for Jeffery A. Smisek dated February
15, 2005 - incorporated by reference to Exhibit 10.2 to the 2005 Q-1
10-Q.
|
|
|
10.5(c)*
|
Letter
Agreement dated as of May 30, 2008 between Continental and Jeffery Smisek
- incorporated by reference to Exhibit 99.3 to the 06/08
8-K.
|
|
|
10.6*
|
Employment
Agreement dated as of August 31, 2008 between Continental and Zane Rowe -
incorporated by reference to Exhibit 10.2 to Continental's Form 10-Q for
the quarter ended September 30, 2008 (File no. 1-10323) (the "2008 Q-3
10-Q").
|
|
|
10.7*
|
Employment
Agreement dated as of October 15, 2007 between Continental and Mark J.
Moran - incorporated by reference to Exhibit 10.6 to the 2007 Q-3
10-Q.
|
|
|
10.7(a)*
|
Compensation
Reduction Agreement for Mark J. Moran dated December 22, 2004 -
incorporated by reference to Exhibit 10.7(a) to the 2005
10-K.
|
|
|
10.7(b)*
|
Amendment
to Compensation Reduction Agreement for Mark J. Moran dated February 15,
2005 - incorporated by reference to Exhibit 10.7(b) to the 2005
10-K.
|
|
|
10.8*
|
Employment
Agreement dated as of October 15, 2007 between Continental and James E.
Compton - incorporated by reference to Exhibit 10.4 to the 2007 Q-3
10-Q.
|
|
|
10.8(a)*
|
Compensation
Reduction Agreement for James E. Compton dated December 22, 2004 - incorporated by
reference to Exhibit 10.8(a) to Continental's Annual Report on Form 10-K
for the year ended December 31, 2004 (File no. 1-10323) (the "2004
10-K").
|
|
|
10.8(b)*
|
Amendment
to Compensation Reduction Agreement for James E. Compton dated February
15, 2005 - incorporated by reference to Exhibit 10.4 to the 2005 Q-1
10-Q.
|
|
|
10.9*
|
Continental
Airlines, Inc. 1997 Stock Incentive Plan ("1997 Incentive Plan") -
incorporated by reference to Exhibit 4.3 to Continental's Form S-8
Registration Statement (No. 333-23165).
|
|
|
10.9(a)*
|
Form
of Outside Director Stock Option Grant pursuant to the 1997 Incentive Plan
- incorporated by reference to Exhibit 10.11(c) to the 1997
10-K.
|
|
|
10.10*
|
Amendment
and Restatement of the 1994 Incentive Plan and the 1997 Incentive Plan -
incorporated by reference to Exhibit 10.19 to the 1998
10-K.
|
|
|
10.11*
|
Continental
Airlines, Inc. 1998 Stock Incentive Plan ("1998 Incentive Plan") -
incorporated by reference to Exhibit 4.3 to Continental's Form S-8
Registration Statement (No. 333-57297).
|
|
|
10.11(a)*
|
Amendment
No. 1 to 1998 Incentive Plan, 1997 Incentive Plan and 1994 Incentive Plan
- incorporated by reference to Exhibit 10.2 to
Continental's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2001 (File no. 1-10323) (the "2001 Q-2
10-Q").
|
|
|
10.11(b)*
|
Form
of Outside Director Stock Option Grant pursuant to the 1998 Incentive Plan
- incorporated by reference to Exhibit 10.12(c) to the 2006
10-K.
|
|
|
10.11(c)*
|
Amendment
to 1998 Incentive Plan, 1997 Incentive Plan and 1994 Incentive Plan -
incorporated by reference to Exhibit 10.5 to the 2004 Q-1
10-Q.
|
|
|
10.12*
|
Continental
Airlines, Inc. Incentive Plan 2000, as amended and restated ("Incentive
Plan 2000") - incorporated by reference to Exhibit 10.1 to
Continental's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2002 (File no. 1-10323) (the "2002 Q-1
10-Q").
|
|
|
10.12(a)*
|
Form
of Employee Stock Option Agreement pursuant to the Incentive Plan 2000 -
incorporated by reference to Exhibit 10.3 to the 2001 Q-3
10-Q.
|
|
|
10.12(b)*
|
Form
of Outside Director Stock Option Agreement pursuant to the Incentive Plan
2000 - incorporated by reference to Exhibit 10.14(b) to the 2000
10-K.
|
|
|
10.12(c)*
|
Form
of Outside Director Stock Option Grant pursuant to the Incentive Plan 2000
(updated form to facilitate electronic delivery) - incorporated by
reference to Exhibit 10.1 to Continental's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2008 (File no. 1-10323) (the "2008 Q-1
10-Q").
|
|
|
10.12(d)*
|
Form
of Restricted Stock Agreement pursuant to the Incentive Plan 2000 -
incorporated by reference to Exhibit 10.4 to the 2001 Q-3
10-Q.
|
|
|
10.12(e)*
|
Amendment
to the Incentive Plan 2000, dated March 12, 2004 - incorporated by
reference to Exhibit 10.6 to the 2004 Q-1 10-Q.
|
|
|
10.12(f)*
|
Second
Amendment to Incentive Plan 2000, dated June 6, 2006 - incorporated by
reference to Exhibit 10.1 to Continental's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2006 (File no. 1-10323) (the "2006
Q-2 10-Q").
|
|
|
10.12(g)*
|
Third
Amendment to Incentive Plan 2000, dated September 14, 2006 - incorporated
by reference to Exhibit 10.1 to Continental's Quarterly Report on Form
10-Q for the quarter ended September 30, 2006 (File no. 1-10323)
(the "2006 Q-3 10-Q").
|
|
|
10.13*
|
Amended
and Restated Annual Executive Bonus Program - incorporated by reference to
Exhibit 10.15 to the 2005 10-K.
|
|
|
10.13(a)*
|
Form
of Award Notice pursuant to Continental Airlines, Inc. Amended and
Restated Annual Executive Bonus Program - incorporated by reference to
Exhibit 10.15(a) to the 2005 10-K.
|
|
|
10.13(b)*
|
First
Amendment, dated as of October 15, 2007, to the Amended and Restated
Annual Executive Bonus Program - incorporated by reference to Exhibit 10.7
to the 2007 Q-3 10-Q.
|
|
|
10.14*
|
Continental
Airlines, Inc. Long-Term Incentive and RSU Program (as amended and
restated through February 18, 2009). (3)
|
|
|
10.14(a)*
|
Form
of Award Notice pursuant to Continental Airlines, Inc. Long-Term Incentive
and RSU Program (Profit Based RSU
Awards). (3)
|
|
|
10.14(b)*
|
Form
of Award Notice pursuant to Continental Airlines, Inc. Long-Term Incentive
and RSU Program (NLTIP Award) - incorporated by reference to Exhibit
10.16(b) to the 2005 10-K.
|
|
|
10.15*
|
Continental
Airlines, Inc. 2005 Broad Based Employee Stock Option Plan - incorporated
by reference to Exhibit 10.8 to the 2005 Q-1 10-Q.
|
|
|
10.16*
|
Continental
Airlines, Inc. 2005 Pilot Supplemental Option Plan - incorporated by
reference to Exhibit 10.9 to the 2005 Q-1 10-Q.
|
|
|
10.17*
|
Continental
Airlines, Inc. Enhanced Profit Sharing Plan, (as amended through February
23, 2007) - incorporated by reference to Exhibit 10.19 to the
2006 10-K.
|
|
|
10.18*
|
Summary
of Non-Employee Director compensation. (3)
|
|
|
10.19*
|
Form
of Letter Agreement relating to certain flight benefits between
Continental and each of its non-employee directors.
|
|
|
10.20
|
Amended
and Restated Credit and Guaranty Agreement, dated as of August 3, 2006,
among Continental and Continental Micronesia, Inc., as borrowers and
guarantors, Air Micronesia, Inc., as a guarantor, Merrill Lynch Mortgage
Capital, Inc., as administrative agent, and the lenders party thereto -
incorporated by reference to Exhibit 10.3 to the 2006 Q-3 10-Q.
(1)
|
|
|
10.21
|
Purchase
Agreement No. 1951, including exhibits and side letters thereto, between
the Company and Boeing, dated July 23, 1996, relating to the purchase of
Boeing 737 aircraft ("P.A. 1951") - incorporated by reference to Exhibit
10.8 to Continental's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996 (File no. 1-10323). (1)
|
|
|
10.21(a)
|
Supplemental
Agreement No. 1 to P.A. 1951, dated October 10, 1996 - incorporated by
reference to Exhibit 10.14(a) to Continental's Annual Report on Form 10-K
for the year ended December 31, 1996 (File no.
1-1-323). (1)
|
|
|
10.21(b)
|
Supplemental
Agreement No. 2 to P.A. 1951, dated March 5, 1997 - incorporated by
reference to Exhibit 10.3 to Continental's Quarterly Report on Form 10-Q
for the quarter ending March 31, 1997 (File no.
1-10323). (1)
|
|
|
10.21(c)
|
Supplemental
Agreement No. 3, including exhibit and side letter, to P.A. 1951, dated
July 17, 1997 - incorporated by reference to Exhibit 10.14(c) to the 1997
10-K. (1)
|
|
|
10.21(d)
|
Supplemental
Agreement No. 4, including exhibits and side letters, to P.A. 1951, dated
October 10, 1997 - incorporated by reference to Exhibit 10.14(d) to the
1997 10-K. (1)
|
|
|
10.21(e)
|
Supplemental
Agreement No. 5, including exhibits and side letters, to P.A. 1951, dated
October 10, 1997 - incorporated by reference to Exhibit 10.1 to
Continental's Quarterly Report on Form 10-Q for the quarter ended June 30,
1998 (File no. 1-10323). (1)
|
|
|
10.21(f)
|
Supplemental
Agreement No. 6, including exhibits and side letters, to P.A. 1951, dated
July 30, 1998 - incorporated by reference to Exhibit 10.1 to Continental's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1998
(File no. 1-10323). (1)
|
|
|
10.21(g)
|
Supplemental
Agreement No. 7, including side letters, to P.A. 1951, dated November 12,
1998 - incorporated by reference to Exhibit 10.24(g) to the 1998
10-K. (1)
|
|
|
10.21(h)
|
Supplemental
Agreement No. 8, including side letters, to P.A. 1951, dated December 7,
1998 - incorporated by reference to Exhibit 10.24(h) to the 1998
10-K. (1)
|
|
|
10.21(i)
|
Letter
Agreement No. 6-1162-GOC-131R1 to P.A. 1951, dated March 26, 1998 -
incorporated by reference to Exhibit 10.1 to Continental's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998 (File no.
1-10323). (1)
|
|
|
10.21(j)
|
Supplemental
Agreement No. 9, including side letters, to P.A. 1951, dated February 18,
1999 - incorporated by reference to Exhibit 10.4 to the 1999 Q-1
10-Q. (1)
|
|
|
10.21(k)
|
Supplemental
Agreement No. 10, including side letters, to P.A. 1951, dated March 19,
1999 - incorporated by reference to Exhibit 10.4(a) to the 1999 Q-1
10-Q. (1)
|
|
|
10.21(l)
|
Supplemental
Agreement No. 11, including side letters, to P.A. 1951, dated March 14,
1999 - incorporated by reference to Exhibit 10.4(a) to Continental's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 (File
no. 1-10323). (1)
|
|
|
10.21(m)
|
Supplemental
Agreement No. 12, including side letters, to P.A. 1951, dated July 2, 1999
- incorporated by reference to Exhibit 10.8 to the 1999 Q-3
10-Q. (1)
|
|
|
10.21(n)
|
Supplemental
Agreement No. 13 to P.A. 1951, dated October 13, 1999 - incorporated by
reference to Exhibit 10.25(n) to the 1999
10-K. (1)
|
|
|
10.21(o)
|
Supplemental
Agreement No. 14 to P.A. 1951, dated December 13, 1999 - incorporated by
reference to Exhibit 10.25(o) to the 1999
10-K. (1)
|
|
|
10.21(p)
|
Supplemental
Agreement No. 15, including side letters, to P.A. 1951, dated January 13,
2000 - incorporated by reference to Exhibit 10.1 to Continental's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 (File
no. 1-10323) (the "2000 Q-1 10-Q"). (1)
|
|
|
10.21(q)
|
Supplemental
Agreement No. 16, including side letters, to P.A. 1951, dated March 17,
2000 - incorporated by reference to the 2000 Q-1
10-Q. (1)
|
|
|
10.21(r)
|
Supplemental
Agreement No. 17, including side letters, to P.A. 1951, dated May 16, 2000
- incorporated by reference to Exhibit 10.2 to Continental's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2000 (File no.
1-10323). (1)
|
|
|
10.21(s)
|
Supplemental
Agreement No. 18, including side letters, to P.A. 1951, dated September
11, 2000 - incorporated by reference to Exhibit 10.6 to Continental's
Quarterly Report on Form 10-Q for the quarter ended September 30, 2000
(File no. 1-10323). (1)
|
|
|
10.21(t)
|
Supplemental
Agreement No. 19, including side letters, to P.A. 1951, dated October 31,
2000 - incorporated by reference to Exhibit 10.20(t) to the 2000
10-K. (1)
|
|
|
10.21(u)
|
Supplemental
Agreement No. 20, including side letters, to P.A. 1951, dated December 21,
2000 - incorporated by reference to Exhibit 10.20(u) to the 2000
10-K. (1)
|
|
|
10.21(v)
|
Supplemental
Agreement No. 21, including side letters, to P.A. 1951, dated March 30,
2001 - incorporated by reference to Exhibit 10.1 to Continental's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 (File
no. 1-10323). (1)
|
|
|
10.21(w)
|
Supplemental
Agreement No. 22, including side letters, to P.A. 1951, dated May 23,
2001 - incorporated by reference to Exhibit 10.3 to
the 2001 Q-2 10-Q. (1)
|
|
|
10.21(x)
|
Supplemental
Agreement No. 23, including side letters, to P.A. 1951, dated June 29,
2001 - incorporated by reference to Exhibit 10.4 to
the 2001 Q-2 10-Q. (1)
|
|
|
10.21(y)
|
Supplemental
Agreement No. 24, including side letters, to P.A. 1951, dated August 31,
2001 - incorporated by reference to Exhibit 10.11 to the 2001 Q-3
10-Q. (1)
|
|
|
10.21(z)
|
Supplemental
Agreement No. 25, including side letters, to P.A. 1951, dated December 31,
2001 - incorporated by reference to Exhibit 10.22(z) to the 2001
10-K. (1)
|
|
|
10.21(aa)
|
Supplemental
Agreement No. 26, including side letters, to P.A. 1951, dated March 29,
2002 - incorporated by reference to Exhibit 10.4 to the 2002 Q-1
10-Q. (1)
|
|
|
10.21(ab)
|
Supplemental
Agreement No. 27, including side letters, to P.A. 1951, dated November 6,
2002 - incorporated by reference to Exhibit 10.4 to the 2002 Q-1
10-Q. (1)
|
|
|
10.21(ac)
|
Supplemental
Agreement No. 28, including side letters, to P.A. 1951, dated April 1,
2003 - incorporated by reference to Exhibit 10.2 to the 2003 Q-1
10-Q. (1)
|
|
|
10.21(ad)
|
Supplemental
Agreement No. 29, including side letters, to P.A. 1951, dated August 19,
2003 - incorporated by reference to Exhibit 10.2 to the 2003 Q-3 10-Q.
(1)
|
|
|
10.21(ae)
|
Supplemental
Agreement No. 30 to P.A. 1951, dated as of November 4, 2003 - incorporated
by reference to Exhibit 10.23(ae) to Continental's Annual Report on Form
10-K for the year ended December 31, 2003 (File no. 1-10323) (the "2003
10-K"). (1)
|
|
|
10.21(af)
|
Supplemental
Agreement No. 31 to P.A. 1951, dated as of August 20, 2004 - incorporated
by reference to Exhibit 10.4 to Continental's Quarterly Report on Form
10-Q for the quarter ended September 30, 2004 (File no. 1-10323) (the
"2004 Q-3 10-Q"). (1)
|
|
|
10.21(ag)
|
Supplemental
Agreement No. 32 to P.A. 1951, including side letters, dated as of
December 29, 2004 - incorporated by reference to Exhibit 10.21(ag) to the
2004 10-K. (1)
|
|
|
10.21(ah)
|
Supplemental
Agreement No. 33 to P.A. 1951, including side letters, dated as of
December 29, 2004 - incorporated by reference to Exhibit 10.21(ah) to the
2004 10-K. (1)
|
|
|
10.21(ai)
|
Supplemental
Agreement No. 34 dated June 22, 2005 to P.A. 1951 - incorporated by
reference to Exhibit 10.3 to the 2005 Q-2 10-Q. (1)
|
|
|
10.21(aj)
|
Supplemental
Agreement No. 35 dated June 30, 2005 to P.A. 1951 - incorporated by
reference to Exhibit 10.4 to the 2005 Q-2 10-Q. (1)
|
|
|
10.21(ak)
|
Supplemental
Agreement No. 36 dated July 28, 2005 to P.A. 1951 - incorporated by
reference to Exhibit 10.1 to Continental's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2005 (File no. 1-10323) (the "2005 Q-3
10-Q"). (1)
|
|
|
10.21(al)
|
Supplemental
Agreement No. 37 dated March 30, 2006, to P.A. 1951 - incorporated by
reference to Exhibit 10.2 to Continental's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2006 (File no. 1-10323) (the "2006 Q-1
10-Q"). (1)
|
|
|
10.21(am)
|
Supplemental
Agreement No. 38, dated June 6, 2006, to P.A. 1951 - incorporated by
reference to Exhibit 10.3 to the 2006 Q-2
10-Q. (1)
|
|
|
10.21(an)
|
Supplemental
Agreement No. 39, dated August 3, 2006, to P.A. 1951 - incorporated by
reference to Exhibit 10.4 to the 2006 Q-3 10-Q. (1)
|
|
|
10.21(ao)
|
Supplemental
Agreement No. 40, dated December 5, 2006, to P.A. 1951 -
incorporated by reference to Exhibit 10.23(ao) to the 2006
10-K. (1)
|
|
|
10.21(ap)
|
Supplemental
Agreement No. 41, dated June 1, 2007, to P.A. 1951 - incorporated by
reference to Exhibit 10.1 to Continental's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2007 (File no. 1-10323) (the "2007 Q-2
10-Q"). (1)
|
|
|
10.21(aq)
|
Supplemental
Agreement No. 42, dated June 12, 2007, to P.A. 1951 - incorporated by
reference to Exhibit 10.2 to the 2007 Q-2 10-Q. (1)
|
|
|
10.21(ar)
|
Supplemental
Agreement No. 43, dated July 18, 2007 to P.A. 1951 - incorporated by
reference to Exhibit 10.1 to the 2007 Q-3
10-Q. (1)
|
|
|
10.21(as)
|
Supplemental
Agreement No. 44, dated December 7, 2007, to P.A. 1951 - incorporated by
reference to Exhibit 10.21(as) to Continental's Annual Report on Form 10-K
for the year ended December 31, 2007 (File no. 1-10323) (the "2007
10-K"). (1)
|
|
|
10.21(at)
|
Supplemental
Agreement No. 45, dated February 20, 2008, to P.A. 1951 - incorporated by
reference to Exhibit 10.2 to the 2008 Q-1
10-Q. (1)
|
|
|
10.21(au)
|
Supplemental
Agreement No. 46, dated June 25, 2008, to P.A. 1951 - incorporated by
reference to Exhibit 10.5 to the 2008 Q-2
10-Q. (1)
|
|
|
10.21(av)
|
Supplemental
Agreement No. 47, dated October 30, 2008, to P.A.
1951. (2)(3)
|
|
|
10.22
|
Aircraft
General Terms Agreement between the Company and Boeing, dated October 10,
1997 - incorporated by reference to Exhibit 10.15 to the 1997
10-K. (1)
|
|
|
10.22(a)
|
Letter
Agreement No. 6-1162-GOC-136 between the Company and Boeing, dated October
10, 1997, relating to certain long-term aircraft purchase commitments of
the Company - incorporated by reference to Exhibit 10.15(a) to the 1997
10-K. (1)
|
|
|
10.23
|
Purchase
Agreement No. 2061, including exhibits and side letters, between the
Company and Boeing, dated October 10, 1997, relating to the purchase of
Boeing 777 aircraft ("P.A. 2061") - incorporated by reference to Exhibit
10.17 to the 1997 10-K. (1)
|
|
|
10.23(a)
|
Supplemental
Agreement No. 1 to P.A. 2061 dated December 18, 1997 - incorporated by
reference to Exhibit 10.17(a) as to the 1997
10-K. (1)
|
|
|
10.23(b)
|
Supplemental
Agreement No. 2, including side letter, to P.A. 2061, dated July 30, 1998
- incorporated by reference to Exhibit 10.27(b) to the 1998
10-K. (1)
|
|
|
10.23(c)
|
Supplemental
Agreement No. 3, including side letter, to P.A. 2061, dated September 25,
1998 - incorporated by reference to Exhibit 10.27(c) to the 1998
10-K. (1)
|
|
|
10.23(d)
|
Supplemental
Agreement No. 4, including side letter, to P.A. 2061, dated February 3,
1999 - incorporated by reference to Exhibit 10.5 to the 1999 Q-1
10-Q. (1)
|
|
|
10.23(e)
|
Supplemental
Agreement No. 5, including side letter, to P.A. 2061, dated March 26, 1999
- incorporated by reference to Exhibit 10.5(a) to the 1999 Q-1
10-Q. (1)
|
|
|
10.23(f)
|
Supplemental
Agreement No. 6 to P.A. 2061, dated June 25, 2002 - incorporated by
reference to Exhibit 10.12 to Continental's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2002 (File no. 1-10323) (the "2002 Q-2
10-Q"). (1)
|
|
|
10.23(g)
|
Supplemental
Agreement No. 7, including side letter, to P.A. 2061, dated October 31,
2000 - incorporated by reference to Exhibit 10.23(g) to the 2000
10-K. (1)
|
|
|
10.23(h)
|
Supplemental
Agreement No. 8, including a side letter, to P.A. 2061, dated June 29,
2001 - incorporated by reference to Exhibit 10.5 to the 2001 Q-2
10-Q. (1)
|
|
|
10.23(i)
|
Supplemental
Agreement No. 9 to P.A. 2061, dated June 25, 2002 - incorporated by
reference to Exhibit 10.12 to the 2002 Q-2
10-Q. (1)
|
|
|
10.23(j)
|
Supplemental
Agreement No. 10 to P.A. 2061, dated November 4, 2003 - incorporated by
reference to Exhibit 10.26(j) to the 2003 10-K. (1)
|
|
|
10.23(k)
|
Supplemental
Agreement No. 11 to P.A. 2061, dated July 28, 2005 - incorporated by
reference to Exhibit 10.2 to the 2005 Q-3 10-Q. (1)
|
|
|
10.23(l)
|
Supplemental
Agreement No. 12 to P.A. 2061, dated March 17, 2006 - incorporated by
reference to Exhibit 10.3 to the 2006 Q-1
10-Q. (1)
|
|
|
10.23(m)
|
Supplemental
Agreement No. 13, dated December 3, 2007, to P.A. 2061 - incorporated by
reference to Exhibit 10.23(m) to the 2007
10-K. (1)
|
|
|
10.23(n)
|
Supplemental
Agreement No. 14 to P.A. 2061, dated February 20, 2008 - incorporated by
reference to Exhibit 10.3 to the 2008 Q-1
10-Q. (1)
|
|
|
10.24
|
Letter
Agreement 6-1162-CHL-048 between the Company and Boeing, dated February 8,
2002, amending P.A. 1951, 2333, 2211, 2060 and 2061 - incorporated by
reference to Exhibit 10.44 to the 2001
10-K. (1)
|
|
|
10.25
|
Purchase
Agreement No. 2484, including exhibits and side letters, between the
Company and Boeing, dated December 29, 2004, relating to the purchase of
Boeing 7E7 aircraft (now known as 787 aircraft) ("P.A. 2484") - incorporated by
reference to Exhibit 10.27 to the 2004 10-K. (1)
|
|
|
10.25(a)
|
Supplemental
Agreement No. 1 to P.A. 2484, dated June 30, 2005 - incorporated by
reference to Exhibit 10.5 to the 2005 Q-2 10-Q. (1)
|
|
|
10.25(b)
|
Supplemental
Agreement No. 2, including exhibits and side letters, to P.A. 2484, dated
January 20, 2006 - incorporated by reference to Exhibit 10.27(b) to the
2005 10-K. (1)
|
|
|
10.25(c)
|
Supplemental
Agreement No. 3, dated May 3, 2006, to P.A. 2484 - incorporated by
reference to Exhibit 10.4 to the 2006 Q-2 10-Q. (1)
|
|
|
10.25(d)
|
Supplemental
Agreement No. 4, dated July 14, 2006, to P.A. 2484 - incorporated by
reference to Exhibit 10.5 to the 2006 Q-3
10-Q. (1)
|
|
|
10.25(e)
|
Supplemental
Agreement No. 5, dated March 12, 2007, to P.A. 2484 - incorporated by
reference to Exhibit 10.1 to Continental's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2007 (File no.
1-10323). (1)
|
|
|
10.25(f)
|
Supplemental
Agreement No. 6, dated October 22, 2008, to P.A.
2484. (2)(3)
|
|
|
10.26
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Amended
and Restated Letter Agreement No. 11 between Continental and General
Electric Company, dated August 8, 2005, relating to certain long-term
engine purchase commitments of Continental - incorporated by reference to
Exhibit 10.3 to the 2005 Q-3 10-Q. (1)
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10.27
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Standstill
Agreement dated as of November 15, 2000 among the Company, Northwest
Airlines Holdings Corporation, Northwest Airlines Corporation and
Northwest Airlines, Inc. - incorporated by reference to Exhibit 99.8 to
the 11/00 8-K.
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10.28
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Second
Amended and Restated Capacity Purchase Agreement ("XJT Capacity Purchase
Agreement") among Continental, ExpressJet Holdings, Inc., XJT Holdings,
Inc. and ExpressJet Airlines, Inc. dated June 5, 2008 - incorporated by
reference to Exhibit 10.4 to the 2008 Q-2 10-Q. (1)
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|
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10.28(a)
|
First
Amendment to the XJT Capacity Purchase Agreement, dated as of August 29,
2008 - incorporated by reference to Exhibit 10.1 to the 2008 Q-3
10-Q.
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10.28(b)
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Second
Amendment to the XJT Capacity Purchase Agreement, dated as of December 23,
2008. (2)(3)
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10.29
|
Agreement
between the Company and the United States of America, acting through the
Transportation Security Administration, dated May 7, 2003 - incorporated
by reference to Exhibit 10.1 to Continental's Quarterly Report on Form
10-Q for the quarter ended June 30, 2003 (File no.
1-10323).
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21.1
|
List
of Subsidiaries of Continental. (3)
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23.1
|
Consent
of Ernst & Young LLP. (3)
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|
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24.1
|
Powers
of attorney executed by certain directors and officers of
Continental. (3)
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31.1
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Executive
Officer. (3)
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31.2
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Financial
Officer. (3)
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32.1
|
Section
1350 Certifications. (4)
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______________
*These
exhibits relate to management contracts or compensatory plans or
arrangements.
(1)
|
The
Commission has granted confidential treatment for a portion of this
exhibit.
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(2)
|
Continental
has applied to the Commission for confidential treatment of a portion of
this exhibit.
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