f1st10q.htm
|
UNITED
STATES
|
SECURITIES
AND EXCHANGE COMMISSION
|
WASHINGTON,
D.C. 20549
|
FORM
10-Q
|
(Mark
One)
|
[X] QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
|
THE
SECURITIES EXCHANGE ACT OF 1934
|
FOR
THE QUARTERLY PERIOD ENDED MARCH 31, 2009
|
OR
|
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
|
THE
SECURITIES EXCHANGE ACT OF 1934
|
FOR
THE TRANSITION PERIOD FROM __________ TO __________
|
Commission
File Number: 1-10323
|
CONTINENTAL
AIRLINES, INC.
|
(Exact
name of registrant as specified in its charter)
|
Delaware
|
74-2099724
|
|
(State
or other jurisdiction
|
(I.R.S.
Employer
|
|
of
incorporation or organization)
|
Identification
No.)
|
|
1600
Smith Street, Dept. HQSEO
|
Houston,
Texas 77002
|
(Address
of principal executive offices)
|
(Zip
Code)
|
713-324-2950
|
(Registrant's
telephone number, including area code)
|
Indicate by check mark whether
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 whether
the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such
files). Yes No
_____*
(*Registrant
is not subject to the requirements of Rule 405 of Regulation S-T at this
time.)
Indicate by
check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of "large accelerated filer,”
“accelerated filer" and “smaller reporting company” 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 April 22, 2009, 123,656,520
shares of Class B common stock of the registrant were
outstanding.
TABLE OF
CONTENTS
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PAGE
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PART
I
|
FINANCIAL
INFORMATION
|
|
|
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Item
1.
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4
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5
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6
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7
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8
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Item
2.
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26
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Item
3.
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41
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Item
4.
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42
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PART
II
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OTHER
INFORMATION
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Item
1.
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43
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Item
1A.
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43
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Item
2.
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44
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Item
3.
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44
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Item
4.
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44
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Item
5.
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45
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Item
6.
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46
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47
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48
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PART
I - FINANCIAL INFORMATION
CONTINENTAL
AIRLINES, INC.
(In
millions, except per share data)
(2008
As Adjusted (Note 1))
|
Three Months Ended
March 31,
|
|
2009
|
|
2008
|
|
|
(Unaudited)
|
Operating
Revenue:
|
|
|
Passenger
(excluding fees and taxes of $346 and $376)
|
$2,617
|
|
$3,223
|
|
Cargo
|
85
|
|
122
|
|
Other
|
260
|
|
225
|
|
|
2,962
|
|
3,570
|
|
Operating
Expenses:
|
|
|
|
|
Wages,
salaries and related costs
|
765
|
|
729
|
|
Aircraft
fuel and related taxes
|
735
|
|
1,262
|
|
Aircraft
rentals
|
237
|
|
247
|
|
Regional
capacity purchase, net
|
213
|
|
292
|
|
Landing
fees and other rentals
|
209
|
|
207
|
|
Distribution
costs
|
156
|
|
182
|
|
Maintenance,
materials and repairs
|
153
|
|
159
|
|
Depreciation
and amortization
|
111
|
|
106
|
|
Passenger
services
|
88
|
|
96
|
|
Special
charges (credits)
|
4
|
|
(8)
|
|
Other
|
346
|
|
364
|
|
|
3,017
|
|
3,636
|
|
|
|
|
|
|
Operating
Loss
|
(55)
|
|
(66)
|
|
|
|
|
|
|
Nonoperating
Income (Expense):
|
|
|
|
|
Interest
expense
|
(93)
|
|
(93)
|
|
Interest
capitalized
|
8
|
|
9
|
|
Interest
income
|
4
|
|
24
|
|
Other,
net
|
-
|
|
(1)
|
|
|
(81)
|
|
(61)
|
|
|
|
|
|
|
Loss
before Income Taxes
|
(136)
|
|
(127)
|
|
|
|
|
|
|
Income
Tax Benefit
|
-
|
|
45
|
|
|
|
|
|
|
Net
Loss
|
$(136)
|
|
$ (82)
|
|
|
|
|
|
|
Basic
and Diluted Loss per Share
|
$(1.10)
|
|
$(0.82)
|
|
|
|
|
|
|
Shares
Used for Basic and Diluted
Computation
|
123
|
|
98
|
|
The
accompanying Notes to Consolidated Financial Statements are an integral part of
these statements.
CONSOLIDATED
BALANCE SHEETS
(In
millions, except for share data)
(2008
As Adjusted (Note 1))
|
March
31,
|
December
31,
|
March
31,
|
|
2009
|
2008
|
2008
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
Current
Assets:
|
|
|
|
Cash
and cash equivalents
|
$ 2,210
|
|
$ 2,165
|
|
$ 2,230
|
|
Short-term
investments
|
438
|
|
478
|
|
289
|
|
Total
unrestricted cash, cash equivalents and short-term
investments
|
2,648
|
|
2,643
|
|
2,519
|
|
|
|
|
|
|
|
|
Restricted
cash, cash equivalents and short-term investments
|
173
|
|
190
|
|
109
|
|
Accounts
receivable, net
|
546
|
|
453
|
|
719
|
|
Spare
parts and supplies, net
|
229
|
|
235
|
|
315
|
|
Deferred
income taxes
|
170
|
|
216
|
|
273
|
|
Prepayments
and other
|
617
|
|
610
|
|
489
|
|
Total
current assets
|
4,383
|
|
4,347
|
|
4,424
|
|
|
|
|
|
|
|
|
Property
and Equipment:
|
|
|
|
|
|
|
Owned
property and equipment:
|
|
|
|
|
|
|
Flight
equipment
|
8,583
|
|
8,446
|
|
7,590
|
|
Other
|
1,727
|
|
1,694
|
|
1,600
|
|
|
10,310
|
|
10,140
|
|
9,190
|
|
Less: Accumulated
depreciation
|
3,308
|
|
3,229
|
|
2,889
|
|
|
7,002
|
|
6,911
|
|
6,301
|
|
|
|
|
|
|
|
|
Purchase
deposits for flight equipment
|
246
|
|
275
|
|
368
|
|
|
|
|
|
|
|
|
Capital
leases
|
194
|
|
194
|
|
238
|
|
Less: Accumulated
amortization
|
56
|
|
53
|
|
68
|
|
|
138
|
|
141
|
|
170
|
|
Total
property and equipment, net
|
7,386
|
|
7,327
|
|
6,839
|
|
|
|
|
|
|
|
|
Routes
and airport operating rights, net
|
801
|
|
804
|
|
703
|
|
Investment
in student loan-related auction rate securities
|
-
|
|
-
|
|
300
|
|
Investment
in other companies
|
-
|
|
-
|
|
67
|
|
Other
assets, net
|
202
|
|
208
|
|
209
|
|
|
|
|
|
|
|
|
Total
Assets
|
$12,772
|
|
$12,686
|
|
$12,542
|
|
(continued
on next page)
CONTINENTAL
AIRLINES, INC.
CONSOLIDATED
BALANCE SHEETS
(In
millions, except for share data)
(2008
As Adjusted (Note 1))
STOCKHOLDERS'
EQUITY
|
March
31,
|
December
31,
|
March
31,
|
2009
|
2008
|
2008
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
Current
Liabilities:
|
|
|
|
Current
maturities of long-term debt and capital
leases
|
$ 578
|
|
$ 519
|
|
$ 539
|
|
Accounts
payable
|
948
|
|
1,021
|
|
1,049
|
|
Air
traffic and frequent flyer liability
|
2,192
|
|
1,881
|
|
2,498
|
|
Accrued
payroll
|
365
|
|
345
|
|
342
|
|
Accrued
other liabilities
|
565
|
|
708
|
|
311
|
|
Total
current liabilities
|
4,648
|
|
4,474
|
|
4,739
|
|
|
|
|
|
|
|
|
Long-Term
Debt and Capital Leases
|
5,360
|
|
5,353
|
|
4,687
|
|
|
|
|
|
|
|
|
Deferred
Income Taxes
|
170
|
|
216
|
|
332
|
|
|
|
|
|
|
|
|
Accrued
Pension Liability
|
1,395
|
|
1,417
|
|
485
|
|
|
|
|
|
|
|
|
Accrued
Retiree Medical Benefits
|
236
|
|
234
|
|
239
|
|
|
|
|
|
|
|
|
Other
|
810
|
|
869
|
|
572
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity:
|
|
|
|
|
|
|
Preferred
Stock - $.01 par, 10,000,000 shares authorized;
zero, 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;
123,531,752,
123,264,534 and 98,438,675
issued
|
1
|
|
1
|
|
1
|
|
Additional
paid-in capital
|
2,043
|
|
2,038
|
|
1,656
|
|
Retained
earnings (accumulated deficit)
|
(296)
|
|
(160)
|
|
344
|
|
Accumulated
other comprehensive income (loss)
|
(1,595)
|
|
(1,756)
|
|
(513)
|
|
Total
stockholders' equity
|
153
|
|
123
|
|
1,488
|
|
Total
Liabilities and Stockholders' Equity
|
$ 12,772
|
|
$ 12,686
|
|
$12,542
|
|
The
accompanying Notes to Consolidated Financial Statements are an integral part of
these statements.
CONTINENTAL
AIRLINES, INC.
(In
millions)
(2008
As Adjusted (Note 1))
|
Three Months Ended
March 31,
|
|
2009
|
2008
|
|
|
(Unaudited)
|
Cash
Flows from Operating Activities:
|
$
|
|
|
|
Net loss
|
|
$ (136)
|
$ (82)
|
|
Adjustments to reconcile net loss
to net cash provided by operating activities:
|
|
|
|
|
Depreciation and
amortization
|
|
111
|
106
|
|
Special charges
(credits)
|
|
4
|
(8)
|
|
Stock-based compensation
related to equity awards
|
|
1
|
5
|
|
Deferred income tax benefit
(expense)
|
|
-
|
(45)
|
|
Other,
net
|
|
17
|
9
|
|
Changes in operating assets
and liabilities
|
|
113
|
84
|
|
Net cash
provided by operating activities
|
|
110
|
69
|
|
|
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
Capital
expenditures
|
|
(86)
|
(101)
|
|
Aircraft purchase deposits
refunded, net
|
|
27
|
32
|
|
Proceeds from sales of short-term
investments, net
|
|
41
|
151
|
|
Proceeds from sales of property
and equipment
|
|
5
|
42
|
|
Increase in restricted cash, cash
equivalents and short-term investments
|
|
17
|
(8)
|
|
Other
|
|
(1)
|
-
|
|
Net cash provided by investing
activities
|
|
3
|
116
|
|
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
Payments on long-term debt and
capital lease obligations
|
|
(98)
|
(130)
|
|
Proceeds from issuance of
long-term debt
|
|
26
|
43
|
|
Proceeds from issuance of common
stock pursuant to stock plans
|
|
4
|
4
|
|
Net cash used in financing
activities
|
|
(68)
|
(83)
|
|
|
|
|
|
|
Net
Increase in Cash and Cash Equivalents
|
|
45
|
102
|
|
|
|
|
|
|
Cash
and Cash Equivalents - Beginning of Period
|
|
2,165
|
2,128
|
|
|
|
|
|
|
Cash
and Cash Equivalents - End of Period
|
|
$2,210
|
$2,230
|
|
|
|
|
|
|
Investing
and Financing Activities Not Affecting Cash:
|
|
|
|
|
Property and equipment acquired
through the issuance of debt
|
|
$ 130
|
$ 344
|
|
The
accompanying Notes to Consolidated Financial Statements are an integral part of
these statements.
CONTINENTAL
AIRLINES, INC.
(UNAUDITED)
In our opinion, the unaudited
consolidated financial statements included herein contain all adjustments
necessary to present fairly our financial position, results of operations and
cash flows for the periods indicated. Such adjustments, other than
nonrecurring adjustments that have been separately disclosed, are of a normal,
recurring nature.
The accompanying consolidated financial
statements should be read in conjunction with the consolidated financial
statements and the notes thereto contained in our Annual Report on Form 10-K for
the year ended December 31, 2008 (the "2008 Form 10-K"). Due to
seasonal fluctuations common to the airline industry, our results of operations
for the periods presented are not necessarily indicative of the results of
operations to be expected for the entire year. 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.
Reclassifications have been made in the
prior period's consolidated financial statements to conform to our new
presentation for expense related to fuel and related taxes on flights operated
for us by other operators under capacity purchase agreements. This
expense, which is now included in aircraft fuel and related taxes, was
previously reported in regional capacity purchase, net. These
reclassifications do not affect operating income (loss) or net income (loss) for
any period.
NOTE
1 – ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
FSP APB
14-1. On January 1, 2009, we adopted the Financial Accounting
Standards Board’s (“FASB”) 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 statements of operations.
Once adopted, FSP APB 14-1 requires
retrospective application to the terms of instruments as they existed for all
periods presented. The adoption of FSP APB 14-1 affects the
accounting for our 5% Convertible Notes issued in 2003 and due 2023 (the “5%
Convertible Notes”). The retrospective application of this
pronouncement affects years 2003 through 2008. Income taxes have been
recorded on the foregoing adjustments to the extent tax benefits were
available.
The following table sets forth the
effect of the retrospective application of FSP APB 14-1 on certain previously
reported line items (in millions, except per share data):
Consolidated
Statements of Operations:
|
Three Months ended
March 31, 2008
|
|
Originally
Reported
|
As
Adjusted
|
|
|
|
Interest
expense
|
$(90)
|
|
$(93)
|
|
Income
tax benefit
|
44
|
|
45
|
|
Net
loss
|
(80)
|
|
(82)
|
|
|
|
|
|
|
Basic
and Diluted Loss per Share
|
$(0.81)
|
|
$(0.82)
|
|
Consolidated
Balance Sheets:
|
December 31,
2008
|
March 31,
2008
|
|
Originally
Reported
|
As
Adjusted
|
Originally
Reported
|
As
Adjusted
|
|
|
|
|
|
Long-term
debt and capital
leases
|
$5,371
|
|
$5,353
|
|
$4,713
|
|
$4,687
|
|
Deferred
income tax
liability
|
216
|
|
216
|
|
323
|
|
332
|
|
Additional
paid-in
capital
|
1,997
|
|
2,038
|
|
1,615
|
|
1,656
|
|
Retained
earnings (accumulated deficit)
|
(137)
|
|
(160)
|
|
368
|
|
344
|
|
Total
stockholders’
equity
|
105
|
|
123
|
|
1,471
|
|
1,488
|
|
SFAS
157. In September 2006, the 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). We adopted the deferred
provisions of SFAS 157 on January 1, 2009. The adoption of these
provisions did not have a material effect on our consolidated financial
statements.
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. Because FSP FAS 132(R)-1 applies only to financial
statement disclosures, the adoption will not have a material effect on our
consolidated financial statements.
FSP FAS
157-4. In April 2009, the FASB issued Staff Position No.
157-4, “Determining Fair value When the Volume and Level of Activity for the
Asset or Liability Have Significantly Decreased and Identifying Transactions
That Are Not Orderly” (“FSP FAS 157-4”), which provides additional guidance for
estimating fair value in accordance with SFAS 157. FSP FAS 157-4 is
effective for our quarter ending June 30, 2009 and could affect our accounting
for our investment in student loan-related auction rate
securities. We are currently evaluating the requirements of this
pronouncement and have not determined the impact, if any, that adoption will
have on our consolidated financial statements.
FSP FAS
115-2. In April 2009, the FASB issued Staff Position No. FAS
115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary
Impairments” (“FSP FAS 115-2”), which provides new guidance on the recognition
of other-than-temporary impairments of investments in debt securities and
provides new presentation and disclosure requirements for other-than-temporary
impairments of investments in debt and equity securities. FSP FAS
115-2 is effective for our quarter ending June 30, 2009. We are
currently evaluating the requirements of this pronouncement and have not
determined the impact, if any, that adoption will have on our consolidated
financial statements.
FSP FAS 107-1 and ABP
28-1. In April 2009, the FASB issued Staff Position No. FAS
107-1 and APB 28-1,”Interim Disclosures about Fair Value of Financial
Instruments” (“FSP FAS 107-1”). FSP FAS 107-1 amends SFAS No. 107,
“Disclosures about Fair Value of Financial Instruments” (“SFAS 107”) to require
disclosures about fair value of financial instruments in interim reporting
periods. Such disclosures were previously required only in annual
financial statements. FSP FAS 107-1 is effective for our quarter
ending June 30, 2009. Because FSP FAS 107-1 applies only to financial
statement disclosures, the adoption will not have a material effect on our
consolidated financial statements.
NOTE
2 - LOSS PER SHARE
Because we incurred a net loss in the
three months ended March 31, 2009 and 2008, basic and diluted loss per share for
each period were calculated as our net loss divided by the weighted average
shares outstanding. Approximately 13 million potential shares of our
common stock related to convertible debt securities were excluded from the
computation of diluted loss per share in the three months ended March 31, 2009
and 2008 because they were antidilutive. In addition, approximately 8
million weighted average options to purchase shares of our common stock were
excluded from the computation of diluted loss per share for the three months
ended March 31, 2009 and 2008 because the effect of including the options would
have been antidilutive.
NOTE
3 - FLEET INFORMATION
As of March 31, 2009, our operating
fleet consisted of 354 mainline jets and 280 regional aircraft. The
354 mainline jets are operated exclusively by us, while the 280 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 Airlines,
Inc. (“ExpressJet”) and operated on our behalf under a capacity purchase
agreement with ExpressJet, 30 are subleased to ExpressJet and are not operated
on our behalf and 30 ERJ-135 regional jet aircraft are temporarily
grounded. Additionally, our regional operating fleet includes 66
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
March 31, 2009:
|
|
|
|
Third-Party
|
Aircraft
Type
|
Total
|
Owned
|
Leased
|
Aircraft
|
|
|
|
|
|
Mainline
(a):
|
|
|
|
|
777-200ER
|
20
|
|
8
|
|
12
|
|
-
|
|
767-400ER
|
16
|
|
14
|
|
2
|
|
-
|
|
767-200ER
|
10
|
|
9
|
|
1
|
|
-
|
|
757-300
|
17
|
|
9
|
|
8
|
|
-
|
|
757-200
|
41
|
|
15
|
|
26
|
|
-
|
|
737-900ER
|
21
|
|
21
|
|
-
|
|
-
|
|
737-900
|
12
|
|
8
|
|
4
|
|
-
|
|
737-800
|
117
|
|
44
|
|
73
|
|
-
|
|
737-700
|
36
|
|
12
|
|
24
|
|
-
|
|
737-500
|
44
|
|
-
|
|
44
|
|
-
|
|
737-300
|
20
|
|
12
|
|
8
|
|
-
|
|
Total
mainline
|
354
|
|
152
|
|
202
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Regional
(b):
|
|
|
|
|
|
|
|
|
ERJ-145XR
|
89
|
|
-
|
|
89
|
|
-
|
|
ERJ-145
|
145
|
|
18
|
|
107
|
|
20
|
(c)
|
CRJ200LR
|
16
|
|
-
|
|
-
|
|
16
|
(c)
|
Q200
|
16
|
|
-
|
|
-
|
|
16
|
(d)
|
Q400
|
14
|
|
-
|
|
-
|
|
14
|
(e)
|
Total
regional
|
280
|
|
18
|
|
196
|
|
66
|
|
|
|
|
|
|
|
|
|
|
Total
|
634
|
|
170
|
|
398
|
|
66
|
|
______________________
(a)
|
Excludes
five grounded Boeing 737-500 aircraft and 11 grounded Boeing 737-300
aircraft.
|
(b)
|
Excludes
30 temporarily grounded ERJ-135 aircraft and 30 ERJ-145 aircraft that are
subleased to ExpressJet but are not operated on our
behalf.
|
(c)
|
Operated
by Chautauqua Airlines, Inc. (“Chautauqua”) under a capacity purchase
agreement.
|
(d)
|
Operated
by Champlain Enterprises, Inc. (“CommutAir”) under a capacity purchase
agreement.
|
(e)
|
Operated
by Colgan Air, Inc. (“Colgan”) under a capacity purchase
agreement.
|
Mainline Fleet
Activity. During the first quarter of 2009, we placed into
service four new Boeing 737-900ER aircraft and one new Boeing 737-800 aircraft
and returned to service two Boeing 737-500 aircraft that were grounded at
December 31, 2008. We removed three Boeing 737-300 aircraft from
service during the first quarter of 2009. By the end of 2009, we
expect to remove 27 additional Boeing 737-500 and
737-300 aircraft from service. However, some of these planned exits
could be postponed due to delays in the closing of pending aircraft
sales.
As of April 23, 2009, we have
agreements to sell a total of 12 Boeing 737-500 aircraft to two foreign
buyers. 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. The buyers of these aircraft have requested, and in some
cases we have agreed to, a delay in the delivery dates for the
aircraft. 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. In January 2009, we amended our capacity purchase
agreement with Colgan 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 March 31, 2009, we had firm commitments to
purchase 83 new aircraft (50 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 $5.5 billion including related spare
engines. We are currently scheduled to take delivery of nine Boeing
737 aircraft in the remaining nine months of 2009. In addition to our
firm order aircraft, we had options to purchase a total of 102 additional Boeing
aircraft as of March 31, 2009.
We have also agreed to lease four
Boeing 757-300 aircraft from Boeing Capital Corporation. We expect
these aircraft to be placed into service in the first half of 2010.
NOTE
4 - LONG-TERM DEBT
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 two Boeing aircraft delivered to us in the first quarter of 2009
and recorded related debt of $80 million. We expect to apply the
remainder of this financing to one of the Boeing 737-900ER aircraft scheduled
for delivery in the second quarter of 2009.
During the first quarter of 2009, we
also entered into a loan agreement under which we borrowed $76
million. This floating rate indebtedness is secured by two new Boeing
737-900ER aircraft and one refinanced Boeing 737-800 aircraft. The
loan agreement also provides for additional borrowings totaling $46 million
related to one new Boeing 737-900ER aircraft scheduled for delivery in May 2009
and the refinancing of one Boeing 737-800 aircraft in August 2009.
Maturities. Maturities
of long-term debt due before December 31, 2009 and for the next four years are
as follows (in millions):
April
1, 2009 through December 31, 2009
|
$ 451
|
Year
ending December 31,
|
|
|
2010
|
958
|
|
2011
|
1,115
|
|
2012
|
546
|
|
2013
|
614
|
Convertible Debt
Securities. Our 5% Convertible Notes due 2023 with a principal
amount of $175 million are convertible into 50 shares of our common stock per
$1,000 principal amount 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.
As a result of the adoption of FSP APB
14-1, we were required to separately account for the debt and equity components
of our 5% Convertible Notes in a manner that reflects our nonconvertible debt
(unsecured debt) borrowing rate when interest expense is
recognized. The debt and equity components recognized for our 5%
Convertible Notes were as follows (in millions):
|
March
31,
|
December
31,
|
March
31,
|
|
2009
|
2008
|
2008
|
|
|
|
|
Principal
amount of Convertible Notes
|
$175
|
|
$175
|
|
$175
|
|
Unamortized
discount
|
15
|
|
18
|
|
26
|
|
Net
carrying
amount
|
160
|
|
157
|
|
149
|
|
Additional
paid-in
capital
|
64
|
|
64
|
|
64
|
|
At March 31, 2009, the unamortized
discount had a remaining recognition period of approximately 15
months.
The amount of interest expense
recognized and effective interest rate for the three months ended March 31 were
as follows (in millions):
|
2009
|
2008
|
|
|
|
Contractual
coupon
interest
|
$ 2
|
|
$ 2
|
|
Amortization
of discount on 5% Convertible Notes
|
3
|
|
3
|
|
Interest
expense
|
$ 5
|
|
$ 5
|
|
|
|
|
|
|
Effective
interest
rate
|
13%
|
|
13%
|
|
NOTE
5 - FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
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
|
|
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
March 31,
2009
|
Level
1
|
Level
2
|
Level
3
|
Valuation
Technique
|
|
|
|
|
|
|
Cash
and cash
equivalents
|
$2,210
|
|
$2,210
|
-
|
-
|
(A)
|
Short-term
investments:
|
|
|
-
|
|
|
|
Auction
rate
securities
|
229
|
|
|
-
|
$229
|
(B)
|
Other
|
209
|
|
209
|
-
|
-
|
(A)
|
Restricted
cash, cash equivalents and
short-term investments
|
173
|
|
173
|
-
|
-
|
(A)
|
Auction
rate securities put right
|
26
|
|
-
|
-
|
26
|
(B)
|
Fuel
derivatives
|
(252)
|
|
-
|
-
|
(252)
|
(A)
|
Foreign
currency derivatives
|
5
|
|
-
|
$5
|
-
|
(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 certificates of deposit placed
through an account registry service (“CDARS”). The fair values of
these investments are based on observable market data.
Student Loan-Related Auction
Rate Securities and Put Right. At March 31, 2009, 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
|
$133
|
|
$166
|
|
Trading
|
96
|
|
125
|
|
Total
|
$229
|
|
$291
|
|
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-April 2009,
resulting in our continuing to hold such securities and the issuers of these
securities paying interest adjusted to the maximum contractual
rates.
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 March 31, 2009, 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.
In addition, during the fourth quarter
of 2008, one institution granted us a put right permitting us to sell to the
institution at their full par value auction rate securities with a par value of
$125 million in 2010. 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. 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 classified the underlying auction
rate securities as trading securities and elected the fair value option under
FASB Statement No. 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.
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 (liabilities)
measured at fair value on a recurring basis using unobservable inputs (Level 3)
for the three months ended March 31, 2009 is as follows (in
millions):
|
Student
Loan-Related
Auction Rate
Securities
|
Auction
Rate
Securities Put
Right
|
Fuel
Derivatives
|
|
|
|
|
Balance
at beginning of period
|
$229
|
|
$26
|
|
$(415)
|
|
Settlements
|
-
|
|
-
|
|
77
|
|
Gains
and losses:
|
|
|
|
|
|
|
Realized losses reported in
earnings
|
-
|
|
-
|
|
141
|
|
Unrealized losses reported in
other comprehensive
income
(loss)
|
-
|
|
-
|
|
(55)
|
|
Balance
as of March 31,
2009
|
$229
|
|
$26
|
|
$(252)
|
|
NOTE
6 - 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. 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, we frequently enter 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 and instruments that result
in our payment of 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 because there is a limited market for
jet fuel derivatives.
As of March 31, 2009, our projected
consolidated fuel requirements for the remainder of 2009 were hedged as
follows:
|
Maximum
Price
|
Minimum
Price
|
|
%
of
Expected
Consumption
|
Weighted
Average
Price
(per
gallon)
|
%
of
Expected
Consumption
|
Weighted
Average
Price
(per
gallon)
|
|
|
|
|
|
WTI
crude oil
collars
|
15%
|
|
$3.41
|
|
15%
|
|
$2.56
|
|
WTI
crude oil
swaps
|
3%
|
|
1.33
|
|
3%
|
|
1.33
|
|
Total
|
18%
|
|
|
|
18%
|
|
|
|
We have not hedged any of our fuel
requirements beyond 2009.
We account for our fuel derivatives as
cash flow hedges and record them at fair value in our consolidated balance sheet
with the change in fair value, to the extent effective, being recorded to
accumulated other comprehensive income (loss) (“accumulated OCI”), net of
applicable income taxes. Fuel hedge gains (losses) are recognized as
a component of fuel expense when the underlying fuel hedged is
used. The ineffective portion of our fuel hedges is determined based
on the correlation between jet fuel and crude oil or heating oil prices and is
included in nonoperating income (expense) in our consolidated statement of
operations.
Because our fuel hedges were in a net
liability position at March 31, 2009 resulting from the significant decline in
crude oil prices during the last six months of 2008, we posted cash collateral
with our counterparties totaling $168 million and granted a lien in favor of a
counterparty on one Boeing 777-200 aircraft and one Boeing 757-200 aircraft in
lieu of posting an additional $63 million in cash. The cash posted as
collateral is reported in prepayments and other current assets in our
consolidated balance sheet rather than being netted against the related
derivative liabilities.
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. At March 31, 2009, we
had forward contracts outstanding to hedge the following cash inflows for the
remainder of 2009 (primarily from passenger ticket sales) in foreign
currencies:
·
|
37%
of our projected Japanese yen-denominated cash inflows
|
|
|
·
|
7%
of our projected euro-denominated cash
inflows
|
We have not hedged any of our foreign
currency cash flows beyond 2009.
We account for these instruments as
cash flow hedges. They are recorded at fair value in our consolidated
balance sheet with the offset to accumulated OCI, net of applicable income taxes
and hedge ineffectiveness, and recognized as passenger revenue in the month of
sale. 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 our consolidated statement of
operations.
Quantitative
Disclosures. At March 31, 2009, all of our derivative
instruments were designated as cash flow hedges and were reported in our
consolidated balance sheet as follows (in millions):
|
Asset
Derivatives
|
Liability
Derivatives
|
|
Balance
Sheet
Location
|
Fair
Value
|
Balance
Sheet
Location
|
Fair
Value
|
|
|
|
|
|
Fuel
derivatives
|
Prepayments
and other current assets
|
$ -
|
|
Accrued
other current liabilities
|
$252
|
|
|
|
|
|
|
|
|
Foreign
currency derivatives
|
Prepayments
and other current assets
|
5
|
|
Accrued
other current liabilities
|
-
|
|
Total
derivatives
|
|
$ 5
|
|
|
$252
|
|
The gains and losses related to our
derivative instruments reported in our consolidated balance sheet at March 31,
2009 and our consolidated statement of operations for the three months ended
March 31, 2009 were as follows (in millions):
Cash
Flow
Hedges
|
Gain
(Loss)
Recognized
in
OCI
(Effective
Portion)
|
Gain
(Loss) Reclassified from
Accumulated
OCI into Income
(Effective
Portion)
|
Gain
(loss) Recognized in
Income (Ineffective
Portion)
|
Income
Statement
Location
|
Amount
|
Income
Statement
Location
|
Amount
|
|
|
|
|
|
|
Fuel
derivatives
|
$(29)
|
|
Aircraft
fuel and
related
taxes
|
$(141)
|
|
Other
nonoperating
income
(expense)
|
$(2)
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency
derivatives
|
12
|
|
Passenger
revenue
|
(1)
|
|
Other
nonoperating
income
(expense)
|
-
|
|
Total
|
$ (17)
|
|
|
$(142)
|
|
|
$(2)
|
|
NOTE
7 - STOCK PLANS AND AWARDS
Profit Based RSU
Awards. We have issued profit based restricted stock unit
("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 payments under
our enhanced employee profit sharing plan 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 in which the cumulative
profit sharing target is met. 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 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
number of RSUs subject to the award, the average closing price of our common
stock for 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 have four outstanding awards of
profit based 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, (3) profit based RSU awards with a performance period commencing
January 1, 2008 and ending December 31, 2010 and (4) profit based RSU awards
with a performance period commencing January 1, 2009 and ending December 31,
2011.
The awards with a performance period
commencing January 1, 2009, which were granted in February
2009, cover 1.3 million RSUs with cumulative profit sharing
performance targets ranging from $100 million to $375 million and payment
percentages ranging from 100% to 400%. The cash hurdle associated
with these awards is $2.2 billion.
The profit based RSU awards granted in
April 2006, which 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 during the performance period. As a
result, in March 2009, payments totaling $20 million were made with respect to
these profit based RSU awards following achievement of the year end cash hurdle
of $1.125 billion for those awards. The third and final payment
related to these awards will be made in March 2010, provided the year end cash
hurdle is met at December 31, 2009.
At March 31, 2009, we had no accrual
for the profit based RSU awards with performance periods commencing January 1,
2008 or 2009. We are currently accrued at the entry level for the
profit based RSU awards with a performance period commencing January 1,
2007.
SFAS 123R
Expense. Total stock-based compensation expense (credit)
related to SFAS 123R included in wages, salaries and related costs was $(24)
million and $21 million for the three months ended March 31, 2009 and 2008,
respectively. As of March 31, 2009, $10 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 1.3 years. The SFAS 123R 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
8 - COMPREHENSIVE INCOME (LOSS)
Total comprehensive income (loss) for
the three months ended March 31 included the following (in
millions):
|
2009
|
2008
|
|
|
|
Net
loss
|
$(136)
|
$ (82)
|
|
|
|
Other
comprehensive income (loss):
|
|
|
Derivative
financial instruments:
|
|
|
Reclassification
into earnings (net of deferred taxes of $(10) in 2008)
|
144
|
(19)
|
Changes
in fair value (net of deferred taxes of $6 in 2008)
|
(17)
|
10
|
Unrealized
loss on student loan-related auction rate securities (net
of deferred taxes of $5 in 2008)
|
-
|
(9)
|
Items
related to employee benefit plans:
|
|
|
Amortization
of net actuarial losses (net of deferred taxes of
$3 in 2008)
|
27
|
5
|
Amortization
of prior service cost (net of deferred taxes of
$2 in 2008)
|
7
|
5
|
Comprehensive
income (loss)
adjustments
|
161
|
(8)
|
|
|
|
Total
comprehensive income (loss)
|
$ 25
|
$(90)
|
NOTE
9 - EMPLOYEE BENEFIT PLANS
Defined Benefit Pension and
Retiree Medical Plans. Net periodic defined benefit pension
and retiree medical benefits expense for the three months ended March 31
included the following components (in millions):
|
Defined
Benefit
Pension
|
Retiree
Medical
Benefits
|
|
2009
|
2008
|
2009
|
2008
|
|
|
|
|
|
Service
cost
|
$ 16
|
$ 15
|
$ 3
|
$ 3
|
Interest
cost
|
38
|
37
|
4
|
4
|
Expected
return on plan assets
|
(22)
|
(41)
|
-
|
-
|
Amortization
of unrecognized net actuarial (gain)
loss
|
28
|
8
|
(1)
|
-
|
Amortization
of prior service
cost
|
2
|
2
|
5
|
5
|
Net
periodic benefit
expense
|
$ 62
|
$ 21
|
$ 11
|
$ 12
|
During the first quarter of 2009, we
contributed $50 million to our tax-qualified defined benefit pension plans and
on April 9, 2009 we contributed an additional $50 million to the
plans. Our remaining minimum funding requirements during calendar
year 2009 are approximately $50 million.
Defined Contribution
Plans. The 401(k) plan covering substantially all domestic
employees except for pilots and the 401(k) plan covering substantially all of
the employees of CMI were amended effective 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. Total expense for all defined
contribution plans, including two pilot-only plans, was $25 million and $24
million for the three months ended March 31, 2009 and 2008,
respectively.
NOTE
10 - SPECIAL CHARGES (CREDITS)
In the first quarter of 2009, we
recorded a $4 million charge for future lease costs and return conditions on a
permanently grounded Boeing 737-300 aircraft. In 2008, we sold three
owned Boeing 737-500 aircraft in the first quarter and received cash proceeds of
$42 million, resulting in gains of $8 million.
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,
2008
|
Accrual
|
Payments
|
Balance,
March 31,
2009
|
|
|
|
|
|
Severance/medical
costs
|
$28
|
|
$ -
|
|
$(4)
|
|
$24
|
|
Permanently
grounded aircraft
|
10
|
|
4
|
|
(5)
|
|
9
|
|
Unused
facilities
|
20
|
|
-
|
|
(1)
|
|
19
|
|
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
2010. Remaining lease payments on permanently grounded aircraft and
unused facilities will be made through 2009 and 2018, respectively.
NOTE
11 - INCOME TAXES
Our effective tax rates differ from the
federal statutory rate of 35% primarily due to the following: changes
in the valuation allowance, expenses that are not deductible for federal income
tax purposes and state income taxes. We are required to provide a
valuation allowance for our deferred tax assets in excess of deferred tax
liabilities because we have concluded that it is more likely than not that such
deferred tax assets will ultimately not be realized. As a result, our
pre-tax losses for the first quarter of 2009 were not reduced by any tax
benefit.
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 5.49% for
March 2009). 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 March 31, 2009
under current conditions, our annual NOL utilization could be limited to $59
million per year, before consideration of any built-in gains.
NOTE
12 - 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 78 or fewer
seats. As of March 31, 2009, the regional segment was operated by
ExpressJet, Chautauqua, CommutAir and Colgan through 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 three
months ended March 31 by business segment is set forth below (in
millions):
|
2009
|
2008
|
|
|
|
Operating
Revenue:
|
|
|
|
Mainline
|
$2,529
|
$3,016
|
|
Regional
|
433
|
554
|
|
|
|
|
|
Total
Consolidated
|
$2,962
|
$3,570
|
|
|
|
Operating
Income (Loss):
|
|
|
|
Mainline
|
$ 63
|
$ 36
|
|
Regional
|
(118)
|
(102)
|
|
|
|
|
|
Total
Consolidated
|
$ (55)
|
$ (66)
|
|
|
|
|
Net
Loss:
|
|
|
|
Mainline
|
$ (15)
|
$ (14)
|
|
Regional
|
(121)
|
(68)
|
|
|
|
|
|
Total
Consolidated
|
$(136)
|
$ (82)
|
The amounts in the table 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.
NOTE
13 - COMMITMENTS AND CONTINGENCIES
Aircraft Purchase
Commitments. As of March 31, 2009, we had firm commitments to
purchase 83 new aircraft (50 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 $5.5 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 March 31, 2009.
We have also agreed to lease four
Boeing 757-300 aircraft from Boeing Capital Corporation. We expect
these aircraft to 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 29 Boeing aircraft delivered to us in 2008 and
2009 and recorded related debt of $1.1 billion, including $80 million recorded
in the first quarter of 2009. We expect to apply the remainder of
this financing to one of the Boeing 737-900ER aircraft scheduled for delivery in
the second quarter of 2009. We have also arranged for financing for
one additional Boeing 737-900ER aircraft scheduled for delivery in the second
quarter of 2009. Boeing has agreed to provide backstop financing for
all of the additional 11 Boeing 737 aircraft scheduled for delivery through
February 2010, 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 aircraft and other
related capital expenditures. We can provide no assurance that
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.
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 March 31, 2009 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
March 31, 2009 in the amount of $67 million. These letters of credit
and performance bonds have expiration dates through December 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 March 31, 2009,
we had $1.6 billion of floating rate debt and $247 million of fixed rate debt,
with remaining terms of up to 11 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 11 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
Agreement. The covenants contained in our domestic bank-issued
credit card processing agreement with Chase Bank USA, N.A. (“Chase”) 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.
Under the terms of our credit card
processing agreement with American Express, if a covenant trigger under the
Chase processing agreement requires us to post 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 $223 million if we fail to maintain the minimum unsecured debt
ratings specified above;
|
·
|
a
total of $423 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 $924 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 March 31, 2009, we had approximately 43,150 employees, which, due to the
number of part-time employees, represents 40,290 full-time equivalent
employees. 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. We are meeting with representatives of the applicable unions to
engage in bargaining for amended collective bargaining agreements 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 hub at Newark Liberty International Airport (“New York Liberty”) 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, and we are currently engaged in
arbitration proceedings with Honeywell. Catellus has agreed to
indemnify and defend us in connection with the EPA and Tierra Solutions claims,
including any arbitration with Honeywell.
At March 31, 2009, 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 March
31, 2009. 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 and seek
unspecified money damages and certain injunctive relief under the Clayton Act
and the Sherman Anti-Trust Act. The pending cases, which currently
involve a total of 90 travel agency plaintiffs, 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 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 the consolidated lawsuit, 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.
Item
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
This quarterly report on Form 10-Q
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 such risks and
uncertainties, please see the risk factors set forth in Part II, Item
1A. “Risk Factors” and elsewhere in this Form 10-Q, in our 2008 Form
10-K and in our reports and registration statements filed from time to time with
the SEC, which identify important matters such as the significant volatility in
the cost of aircraft fuel, our transition to a new global alliance, the
consequences of our high leverage and other significant capital commitments, our
high labor and pension costs, delays in scheduled aircraft deliveries, service
interruptions at one of our hub airports, disruptions to the operations of our
regional operators, disruptions in our computer systems, and industry
conditions, including the recession in the U.S. and global economies, the
airline pricing environment, terrorist attacks, regulatory matters, excessive
taxation, industry consolidation, the availability and cost of insurance, public
health threats and the seasonal nature of the airline business. 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.
OVERVIEW
We are a major United States air
carrier engaged in the business of transporting passengers, cargo and
mail. 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 2,300 daily
departures. As of March 31, 2009, we served 121 domestic and 121
international destinations and offered additional connecting service through
alliances with domestic and foreign carriers.
General information about us can be
found on our website, continental.com. 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 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 Securities and Exchange Commission
("SEC").
First
Quarter Financial Highlights
·
|
We
recorded a net loss of $136 million in the first quarter of 2009, compared
to a net loss of $82 million in the first quarter of
2008.
|
|
|
·
|
Passenger
revenue and cargo revenue decreased 18.8% and 30.3%, respectively, during
the first quarter of 2009 as compared to the first quarter of 2008
primarily due to the weak economy.
|
|
|
·
|
We
recorded an operating loss of $55 million during the first quarter of 2009
as compared to an operating loss of $66 million in the first quarter of
2008, due primarily to reduced passenger revenue offset in part by lower
fuel expenses.
|
|
|
·
|
Unrestricted
cash, cash equivalents and short-term investments totaled $2.6 billion at
March 31, 2009.
|
First
Quarter Operational Highlights
·
|
Consolidated
traffic decreased 11.2% and capacity decreased 7.2% during the first
quarter of 2009 as compared to the first quarter of
2008.
|
|
|
·
|
We
recorded a U.S. Department of Transportation (“DOT”) on-time arrival rate
of 76% and a mainline segment completion factor of 99.2% for the first
quarter of 2009, compared to a DOT on-time arrival rate of 71% and a
mainline segment completion factor of 98.9% for the first quarter of
2008.
|
|
|
·
|
We
placed into service four new Boeing 737-900ER aircraft and one new Boeing
737-800 aircraft.
|
|
|
·
|
We
inaugurated service to Shanghai,
China.
|
Outlook
The combination of weakening economic
conditions and turmoil in the global capital markets has resulted in a difficult
financial environment for U.S. network carriers and threatens our profitability
in 2009 and thereafter. In addition, 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 achieve and sustain 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, and continuing declines in our passenger and cargo revenues
would hinder our ability to achieve and sustain profitability.
Economic
Conditions. 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. The current recession in the U.S. and global
economies has had a significant negative impact on the demand for air carrier
services. Seven major U.S. carriers have reported a combined 11.3%
decrease in traffic, as measured by miles flown by revenue passengers, and an
8.6% decrease in capacity, as measured by available seat miles, during the first
quarter of 2009 as compared to the first quarter of
2008. Furthermore, the Air Transport Association has reported that
passenger revenue for these seven carriers fell 23% in March 2009 compared to
March 2008, representing the fifth consecutive month in which passenger revenue
has fallen from the prior year. The decline in demand has
disproportionately reduced the volume of high yield traffic in the premium
cabins, as many business and leisure travelers are either curtailing their
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 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. We benefited from significantly lower fuel costs during
the first quarter of 2009. Our average consolidated (mainline and
regional) jet fuel price per gallon including related taxes decreased to $1.82 in the first
quarter of 2009 from $2.80 in the first quarter of 2008. However, the
continued 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. If fuel prices rise significantly from their
current levels, we may be unable to raise fares or other fees sufficiently in
the current financial environment to offset fully our increased
costs.
In response to high fuel prices during
the first half of 2008 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, the precipitous decline in oil prices during the
second half of 2008 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. As of April 15, 2009, we expect that our hedge contracts,
which were largely entered into before oil prices fell, will result in $0.55 per
gallon of additional fuel expense during the second quarter of 2009, based on
current prices. We have significantly fewer hedge contracts
outstanding related to the third and fourth quarters of 2009, and have hedged
none of our fuel requirements beyond 2009.
As a result of declining crude oil
prices, we have been required to post significant amounts of collateral to cover
potential amounts owed with respect to fuel hedging contracts that have not yet
settled. At March 31, 2009, our fuel derivatives were in a net
liability position of $252 million and we had posted cash collateral with our
counterparties totaling $168 million and granted a lien in favor of a
counterparty on two aircraft in lieu of posting an additional $63 million in
cash.
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 $40 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.
Capacity. Our
long-term target remains to grow our mainline capacity between 5% and 7%
annually. However, because of the current 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.
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 be delivered in 2011 instead of the
first half of 2009 as originally scheduled. However, in order to
provide flexibility for our widebody aircraft needs, we announced orders in
February 2008 for eight new Boeing 777 aircraft.
We are currently scheduled to take
delivery of nine Boeing 737 aircraft in the remaining nine months of
2009. In addition, we have agreed to lease four Boeing 757-300
aircraft from Boeing Capital Corporation. We expect these Boeing
757-300 aircraft to be placed into service in the first half of
2010.
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, which the DOT
tentatively approved on April 7, 2009. Final 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 (which the DOT has
tentatively granted) 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.
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. We are meeting with representatives of the applicable unions to
engage in bargaining for amended collective bargaining agreements 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
The following discussion provides an
analysis of our results of operations and reasons for material changes therein
for the three months ended March 31, 2009 as compared to the corresponding
period in 2008. As further discussed in the notes to our consolidated
financial statements, our consolidated financial statements for the three months
ended March 31, 2008 have been adjusted for the retrospective application of FSP
APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in
Cash upon Conversion (Including Partial Cash Settlement),” and
for certain reclassifications related to fuel and related taxes on
flights operated for us by other operators under capital purchase
agreements.
Consolidated
Results of Operations
Statistical
Information. Certain statistical information for our
consolidated operations for the three months ended March 31 is as
follows:
|
2009
|
2008
|
%
Increase
(Decrease)
|
|
|
|
|
Passengers
(thousands)
(1)
|
14,408
|
16,440
|
(12.4)%
|
Revenue
passenger miles (millions)
(2)
|
19,790
|
22,280
|
(11.2)%
|
Available
seat miles (millions)
(3)
|
26,323
|
28,376
|
(7.2)%
|
Passenger
load factor
(4)
|
75.2%
|
78.5%
|
(3.3)
pts.
|
Passenger
revenue per available seat mile (cents)
|
9.94
|
11.36
|
(12.5)%
|
Average
yield per revenue passenger mile (cents) (5)
|
13.23
|
14.47
|
(8.6)%
|
Average
price per gallon of fuel, including fuel taxes
|
$1.82
|
$2.80
|
(35.0)%
|
Fuel
gallons consumed (millions)
|
403
|
451
|
(10.6)%
|
(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.
|
Results of
Operations. We recorded a net loss of $136 million in the
first quarter of 2009 as compared to a net loss of $82 million in the first
quarter of 2008. We consider a key measure of our performance to be
operating income (loss), which was a loss of $55 million for the first quarter
of 2009, as compared to a loss of $66 million for the first quarter of
2008. Significant components of our consolidated operating results
for the three months ended March 31 are as follows (in millions, except
percentage changes):
|
|
Increase
|
%
Increase
|
|
2009
|
2008
|
(Decrease)
|
(Decrease)
|
|
|
|
|
|
Operating
Revenue
|
$2,962
|
$3,570
|
$(608)
|
|
(17.0)%
|
Operating
Expenses
|
3,017
|
3,636
|
(619)
|
|
(17.0)%
|
Operating
Loss
|
(55)
|
(66)
|
(11)
|
|
(16.7)%
|
Nonoperating
Income (Expense)
|
(81)
|
(61)
|
20
|
|
32.8 %
|
Income
Tax
Benefit
|
-
|
45
|
(45)
|
|
(100.0)%
|
|
|
|
|
|
|
Net
Loss
|
$ (136)
|
$ (82)
|
$ 54
|
|
65.9 %
|
Each of these items is discussed in the
following sections.
Operating
Revenue. The table below shows components of operating revenue
for the quarter ended March 31, 2009 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
|
Percentage
Increase (Decrease) in
First Quarter 2009 vs
First Quarter 2008
|
|
(in
millions)
|
Revenue
|
RASM
|
ASMs
|
|
|
|
|
|
Passenger
revenue:
|
|
|
|
|
Domestic
|
$1,070
|
|
(21.0)%
|
|
(10.0)%
|
(12.2)%
|
Trans-Atlantic
|
475
|
|
(21.7)%
|
|
(19.3)%
|
(3.0)%
|
Latin
America
|
421
|
|
(9.0)%
|
|
(10.3)%
|
1.5 %
|
Pacific
|
232
|
|
(9.6)%
|
|
0.6
%
|
(10.2)%
|
Total
Mainline
|
2,198
|
|
(18.0)%
|
|
(11.2)%
|
(7.6)%
|
|
|
|
|
|
|
|
Regional
|
419
|
|
(22.8)%
|
|
(19.6)%
|
(4.1)%
|
|
|
|
|
|
|
|
Total
|
2,617
|
|
(18.8)%
|
|
(12.5)%
|
(7.2)%
|
|
|
|
|
|
|
|
Cargo
|
85
|
|
(30.3)%
|
|
|
|
Other
|
260
|
|
15.6 %
|
|
|
|
|
|
|
|
|
|
|
Operating
Revenue
|
$2,962
|
|
(17.0)%
|
|
|
|
Passenger revenue decreased in the
first quarter of 2009 as compared to the first quarter of 2008 due to reduced
traffic and lower RASM. The lower revenue is a result of the current
recession in the U.S. and global economies.
Cargo revenue decreased due to lower
fuel surcharge rates and a decreased freight volume. Other revenue
increased due to the implementation of new fees for checking bags and a change
in how certain costs are handled under our capacity purchase agreement with
ExpressJet, offset by a reduction in sublease income received from
ExpressJet.
Operating
Expenses. The table below shows period-to-period comparisons
by type of operating expense for our consolidated operations for the three
months ended March 31 (in millions, except percentage changes):
|
2009
|
2008
|
Increase
(Decrease)
|
%
Increase
(Decrease)
|
|
|
|
|
|
Wages, salaries and related
costs
|
$ 765
|
$ 729
|
$ 36
|
|
4.9 %
|
|
Aircraft fuel and related
taxes
|
735
|
1,262
|
(527)
|
|
(41.8)%
|
|
Aircraft rentals
|
237
|
247
|
(10)
|
|
(4.0)%
|
|
Regional capacity purchase,
net
|
213
|
292
|
(79)
|
|
(27.1)%
|
|
Landing fees and other
rentals
|
209
|
207
|
2
|
|
1.0
%
|
|
Distribution costs
|
156
|
182
|
(26)
|
|
(14.3)%
|
|
Maintenance, materials and
repairs
|
153
|
159
|
(6)
|
|
(3.8)%
|
|
Depreciation and
amortization
|
111
|
106
|
5
|
|
4.7 %
|
|
Passenger services
|
88
|
96
|
(8)
|
|
(8.3)%
|
|
Special charges
(credits)
|
4
|
(8)
|
12
|
|
NM
|
|
Other
|
346
|
364
|
(18)
|
|
(4.9)%
|
|
|
$3,017
|
$3,636
|
$(619)
|
|
(17.0)%
|
|
NM = Not
Meaningful
Operating expenses decreased 17.0%
primarily due to the following:
·
|
Wages, salaries and
related costs increased primarily due to higher wage rates for
certain workgroups offset by a 6% reduction in the number of employees in
connection with capacity reductions. Expenses in the first
quarter of 2009 also include $41 million of higher pension expense
resulting from lower returns on plan assets, offset in part by a reduction
in variable compensation expense.
|
|
|
·
|
Aircraft fuel and
related taxes decreased due to a 35.0% decrease in consolidated jet
fuel prices. Our average jet fuel price per gallon including
related taxes decreased to $1.82 in the first quarter of 2009 from $2.80
in the first quarter of 2008. Our average jet fuel price
includes losses related to our fuel hedging program of $0.35 per gallon in
the first quarter of 2009, compared to gains of $0.06 per gallon in the
first quarter of 2008.
|
|
|
·
|
Aircraft
rentals decreased due to the retirement of leased Boeing 737
aircraft in the second half of 2008 and the first quarter of
2009. New aircraft delivered in 2008 and the first quarter of
2009 were purchased, with the related expense being reported in
depreciation and amortization.
|
|
|
·
|
Regional capacity
purchase, net, includes expenses related to our capacity purchase
agreements. Our most significant capacity purchase agreement is
with ExpressJet. We also have agreements with Chautauqua,
Colgan and CommutAir. The net amounts consisted of the
following for the three months ended March 31 (in millions, except
percentage changes):
|
|
|
|
Increase
|
%
Increase
|
|
2009
|
2008
|
(Decrease)
|
(Decrease)
|
|
|
|
|
|
Capacity
purchase expenses
|
$213
|
|
$353
|
|
$(140)
|
|
(39.7)%
|
|
Aircraft
sublease income
|
-
|
|
(61)
|
|
(61)
|
|
(100.0)%
|
|
Regional
capacity purchase, net
|
$213
|
|
$292
|
|
$ (79)
|
|
(27.1)%
|
|
|
Capacity
purchase expenses decreased due to rate reductions in conjunction with our
amended capacity purchase agreement with ExpressJet effective July 1, 2008
and capacity reductions. There was no aircraft sublease income
in the quarter ended March 31, 2009 because ExpressJet no longer pays
sublease rent for aircraft operated on our behalf. Sublease
income of $5 million and $26 million on aircraft operated by ExpressJet
outside the scope of the ExpressJet CPA for the three months ended March
31, 2009 and 2008, respectively, is recorded as other
revenue.
|
|
|
·
|
Distribution
costs decreased due to lower credit card discount fees, booking
fees and travel agency commissions, both of which resulted from decreased
passenger revenue.
|
|
|
·
|
Other operating
expenses decreased due to insurance settlements related to
Hurricane Ike, reduced technology expenses resulting from new contracts
and lower ground handling, security and outside services costs as a result
of capacity reductions, partially offset by increases in expenses
resulting from changes in how certain costs are handled under our capacity
purchase agreement with ExpressJet and foreign currency exchange
losses.
|
|
|
·
|
Special charges
(credits) in the first quarter of 2009 consisted of a $4 million
charge for future lease costs and return conditions on a permanently
grounded Boeing 737-300 aircraft. Special charges (credits) in
the first quarter of 2008 consisted of an $8 million gain on the sale of
three Boeing 737-500 aircraft.
|
Nonoperating Income
(Expense). Nonoperating expense increased $20 million in the
first quarter of 2009 compared to the first quarter of 2008 primarily as a
result of lower interest income.
Income
Taxes. Our effective tax rates differ from the federal
statutory rate of 35% primarily due to the following: changes in the
valuation allowance, expenses that are not deductible for federal income tax
purposes and state income taxes. We are required to provide a
valuation allowance for our deferred tax assets in excess of deferred tax
liabilities because we have concluded that it is more likely than not that such
deferred tax assets will ultimately not be realized. As a result, our
pre-tax losses for the first quarter of 2009 were not reduced by any tax
benefit.
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 78 or fewer
seats. As of March 31, 2009, 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.
Statistical
Information. Certain statistical information for our segments'
operations for the three months ended March 31 is as follows:
|
|
Increase
|
|
2009
|
2008
|
(Decrease)
|
|
|
|
|
Mainline
Operations:
|
|
|
|
Passengers
(thousands)
|
10,562
|
12,197
|
(13.4)%
|
Revenue
passenger miles
(millions)
|
17,690
|
19,923
|
(11.2)%
|
Available
seat miles
(millions)
|
23,352
|
25,278
|
(7.6)%
|
Cargo
ton miles
(millions)
|
200
|
261
|
(23.4)%
|
Passenger
load factor:
|
|
|
|
Mainline
|
75.8%
|
78.8%
|
(3.0) pts.
|
Domestic
|
79.7%
|
81.9%
|
(2.2) pts.
|
International
|
72.1%
|
75.6%
|
(3.5) pts.
|
|
|
|
|
Passenger
revenue per available seat mile (cents)
|
9.41
|
10.60
|
(11.2)%
|
Total
revenue per available seat mile (cents)
|
10.83
|
11.93
|
(9.2)%
|
Average
yield per revenue passenger mile (cents)
|
12.43
|
13.45
|
(7.6)%
|
Average
fare per revenue passenger
|
$209.94
|
$221.87
|
(5.4)%
|
|
|
|
|
Cost
per available seat mile, including special charges (credits)
(cents)
|
10.56
|
11.79
|
(10.4)%
|
Special
charges (credits) per available seat miles (cents)
|
0.02
|
(0.03)
|
NM
|
|
|
|
|
Average
price per gallon of fuel, including fuel taxes
|
$1.83
|
$2.80
|
(34.6)%
|
Fuel
gallons consumed (millions)
|
333
|
375
|
(11.2)%
|
|
|
|
|
Aircraft
in fleet at end of period (1)
|
354
|
372
|
(4.8)%
|
Average
length of aircraft flight (miles)
|
1,502
|
1,457
|
3.1 %
|
Average
daily utilization of each aircraft (hours)
|
10:22
|
11:11
|
(7.4)%
|
|
|
|
|
Regional
Operations:
|
|
|
|
Passengers
(thousands)
|
3,846
|
4,243
|
(9.4)%
|
Revenue
passenger miles
(millions)
|
2,100
|
2,357
|
(10.9)%
|
Available
seat miles
(millions)
|
2,971
|
3,098
|
(4.1)%
|
Passenger
load
factor
|
70.7%
|
76.1%
|
(5.4) pts.
|
Passenger
revenue per available seat mile (cents)
|
14.11
|
17.54
|
(19.6)%
|
Average
yield per revenue passenger mile (cents)
|
19.96
|
23.05
|
(13.4)%
|
Aircraft
in fleet at end of period (1)
|
280
|
269
|
4.1 %
|
________________________
(1)
|
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 our capacity purchase agreement with
ExpressJet.
|
Mainline Results of
Operations. Significant components of our mainline segment's
operating results for the three months ended March 31 are as follows (in
millions, except percentage changes):
|
2009
|
2008
|
Increase
(Decrease)
|
%
Increase
(Decrease)
|
|
|
|
|
|
Operating
Revenue
|
$2,529
|
$3,016
|
$(487)
|
|
(16.1)%
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
Wages,
salaries and related costs
|
723
|
714
|
9
|
|
1.3 %
|
|
Aircraft
fuel and related taxes
|
610
|
1,048
|
(438)
|
|
(41.8)%
|
|
Landing
fees and other rentals
|
184
|
193
|
(9)
|
|
(4.7)%
|
|
Aircraft
rentals
|
158
|
168
|
(10)
|
|
(6.0)%
|
|
Distribution
costs
|
135
|
156
|
(21)
|
|
(13.5)%
|
|
Maintenance,
materials and repairs
|
153
|
159
|
(6)
|
|
(3.8)%
|
|
Depreciation
and amortization
|
108
|
104
|
4
|
|
3.8 %
|
|
Passenger
services
|
81
|
91
|
(10)
|
|
(11.0)%
|
|
Special
charges
(credits)
|
4
|
(8)
|
12
|
|
NM
|
|
Other
|
310
|
355
|
(45)
|
|
(12.7)%
|
|
|
2,466
|
2,980
|
(514)
|
|
(17.2)%
|
|
|
|
|
|
|
|
|
Operating
Income
|
$ 63
|
$ 36
|
$ 27
|
|
75.0 %
|
|
The variances in specific line items
for the mainline segment are 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 three months ended March 31 are as follows (in
millions, except percentage changes):
|
|
Increase
|
%
Increase
|
|
2009
|
2008
|
(Decrease)
|
(Decrease)
|
|
|
|
|
|
Operating
Revenue
|
$ 433
|
$554
|
$(121)
|
|
(21.8)%
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
Wages,
salaries and related costs
|
42
|
15
|
27
|
|
180.0 %
|
|
Aircraft
fuel and related taxes
|
125
|
214
|
(89)
|
|
(41.6)%
|
|
Aircraft
rentals
|
79
|
79
|
-
|
|
-
|
|
Regional
capacity purchase, net
|
213
|
292
|
(79)
|
|
(27.1)%
|
|
Landing
fees and other rentals
|
25
|
14
|
11
|
|
78.6 %
|
|
Distribution
costs
|
21
|
26
|
(5)
|
|
(19.2)%
|
|
Depreciation
and amortization
|
3
|
2
|
1
|
|
50.0 %
|
|
Passenger
services
|
7
|
5
|
2
|
|
40.0 %
|
|
Other
|
36
|
9
|
27
|
|
300.0 %
|
|
|
551
|
656
|
(105)
|
|
(16.0)%
|
|
|
|
|
|
|
|
|
Operating
Loss
|
$(118)
|
$(102)
|
$ 16
|
|
15.7 %
|
|
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 feeds passengers from
smaller cities into our hubs. The variances in specific line items
for the regional segment reflect generally the same factors discussed under
consolidated results of operations, with the exception of wages, salaries and
related costs, landing fees and other rentals and other operating
expenses. These expenses increased for the regional segment due to
changes in how certain costs are handled under our capacity purchase agreement
with ExpressJet effective July 1, 2008.
LIQUIDITY
AND CAPITAL RESOURCES
Current
Liquidity
As of March 31, 2009, we had $2.6
billion in unrestricted cash, cash equivalents and short-term
investments. At March 31, 2009, we also had $173 million of
restricted cash, cash equivalents and short-term investments, which is 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, 2008 totaled $190 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 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.
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 March 31, 2009, we had
approximately $5.9 billion of long-term debt and capital lease obligations,
including $2.6 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. To meet these obligations, we must access the global capital
markets and/or achieve and sustain 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.
Sources
and Uses of Cash
Operating
Activities. Cash flows provided by operations for the three
months ended March 31, 2009 were $110 million compared to $69 million in the
same period in 2008. The increase in cash flows provided by
operations in 2009 compared to 2008 is primarily the result of lower fuel
expenses and $158 million in profit sharing related to 2007 paid to our
employees in the first quarter of 2008. Operating cash flows in the
first quarter of 2009 were negatively impacted by our posting $168 million of
cash collateral related to our fuel hedges, which were in a net liability
position at March 31, 2009.
Investing
Activities. Cash flows provided by (used in) investing
activities for the three months ended March 31 were as follows (in
millions):
|
|
Cash
|
|
|
Increase
|
|
2009
|
2008
|
(Decrease)
|
|
|
|
|
Capital
expenditures
|
$(86)
|
$(101)
|
$ 15
|
|
Purchase
deposits refunded in connection with future
aircraft deliveries, net
|
27
|
32
|
(5)
|
|
Proceeds
from sales of short-term investments, net
|
41
|
151
|
(110)
|
|
Proceeds
from sales of property and equipment
|
5
|
42
|
(37)
|
|
Decrease
(increase) in restricted cash, net
|
17
|
(8)
|
25
|
|
Other
|
(1)
|
-
|
(1)
|
|
|
$ 3
|
$ 116
|
$(113)
|
|
Capital expenditures decreased during
the three months ended March 31, 2009 from the corresponding prior year period
primarily due to our efforts to reduce expenditures and conserve cash in light
of current economic conditions.
We have substantial commitments for
capital expenditures, including for the acquisition of new
aircraft. As of March 31, 2009, we had firm commitments to purchase
83 new Boeing aircraft scheduled for delivery from 2009 through 2016, with an
estimated aggregate cost of $5.5 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 March 31,
2009.
Projected net capital expenditures for
2009 are as follows (in millions):
Fleet
related (excluding aircraft to be acquired through the
issuance of debt)
|
$210
|
Non-fleet
|
180
|
Spare
parts and capitalized
interest
|
57
|
Total
|
$447
|
Aircraft
purchase
deposits
|
7
|
Projected
net capital
expenditures
|
$454
|
Projected non-fleet capital
expenditures are primarily for Star Alliance costs, ground service equipment and
technology and terminal enhancements. While some of our projected
capital expenditures are related to projects we have committed to, 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 impacting our operations.
We sold three Boeing 737-500 aircraft
during the first quarter of 2008 and received cash proceeds of $42
million. As of April 23, 2009, we have agreements to sell a total of
12 Boeing 737-500 aircraft to two foreign buyers. 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. The buyers of
these aircraft have requested, and in some cases we have agreed to, a delay in
the delivery dates for the aircraft. 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 refunded were
lower in the first quarter of 2009 as the result of fewer aircraft deliveries in
the first quarter of 2009 than in the first quarter of 2008.
Financing
Activities. Cash flows used in financing activities for the
three months ended March 31 were as follows (in millions):
|
|
Cash
|
|
|
Increase
|
|
2009
|
2008
|
(Decrease)
|
|
|
|
|
Payments
on long-term debt and capital lease obligations
|
$ (98)
|
$ (130)
|
$32
|
|
Proceeds
from issuance of long-term
debt
|
26
|
43
|
(17)
|
|
Proceeds
from issuance of common stock pursuant to stock plans
|
4
|
4
|
-
|
|
|
$ (68)
|
$ (83)
|
$15
|
|
Cash flows used in financing activities
decreased due to lower debt repayments in the first quarter of
2009.
In April 2007, we obtained financing
for 12 Boeing 737-800s and 18 Boeing 737-900ERs. We applied a portion
of this financing to 29 Boeing aircraft delivered to us in 2008 and 2009 and
recorded related debt of $1.1 billion, including $80 million recorded in the
first quarter of 2009. We expect to apply the remainder of this
financing to one of the Boeing 737-900ER aircraft scheduled for delivery in the
second quarter of 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 March 31, 2009 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 the final
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 the first quarter of 2009, we
also entered into a loan agreement under which we borrowed $76
million. This floating rate indebtedness is secured by two new Boeing
737-900ER aircraft and one refinanced Boeing 737-800 aircraft. The
loan agreement also provides for additional borrowings totaling $46 million
related to one new Boeing 737-900ER aircraft scheduled for delivery in May 2009
and the refinancing of one Boeing 737-800 aircraft in August 2009.
Boeing has agreed to provide backstop
financing for all of the additional 11 Boeing 737 aircraft scheduled for
delivery through February 2010, 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.
Other
Liquidity Matters
Student Loan-Related Auction
Rate Securities. At March 31, 2009, we held student
loan-related auction rate securities with a par value of $291 million and a fair
value of $229 million. 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, and are classified as short-term
investments. 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-April 2009, resulting in
our continuing to hold such securities and the issuers of these securities
paying interest adjusted to the maximum contractual rates. 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 an impact on
our liquidity during the quarter.
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. During the first quarter of 2009, we contributed $50
million to our tax-qualified defined benefit pension plans and on April 9, 2009
we contributed an additional $50 million to the plans. Our remaining
minimum funding requirements during calendar year 2009 are approximately $50
million.
Credit
Ratings. At March 31, 2009, 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 $223 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 hedges were in a net liability
position at March 31, 2009 resulting from the significant decline in crude oil
prices during the last six months of 2008, we posted cash collateral with our
counterparties totaling $168 million and granted a lien in favor of a
counterparty on one Boeing 777-200 aircraft and one Boeing 757-200 aircraft in
lieu of posting an additional $63 million in cash. The cash posted as
collateral is reported in prepayments and other current assets in our
consolidated balance sheet.
Credit Card Processing
Agreements. See Note 13 to our financial statements contained
in Item 1 of this report for a discussion of the covenants contained in our bank
card processing agreements.
There have been no material changes in
market risk from the information provided in Item 7A. "Quantitative and
Qualitative Disclosures About Market Risk" in our 2008 Form 10-K except as
follows:
Aircraft
Fuel. As of March 31, 2009, our projected consolidated fuel
requirements for the remainder of 2009 were hedged as follows:
|
Maximum
Price
|
Minimum
Price
|
|
%
of
Expected
Consumption
|
Weighted
Average
Price
(per
gallon)
|
%
of
Expected
Consumption
|
Weighted
Average
Price
(per
gallon)
|
|
|
|
|
|
WTI
crude oil
collars
|
15%
|
|
$3.41
|
|
15%
|
|
$2.56
|
|
WTI
crude oil
swaps
|
3
|
|
1.33
|
|
3
|
|
1.33
|
|
Total
|
18%
|
|
|
|
18%
|
|
|
|
We have not hedged any of our fuel
requirements beyond 2009.
At March 31, 2009, our fuel derivatives
were in a net loss position of $252 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 at
March 31, 2009 would increase our obligation related to the fuel derivatives
outstanding at that date by approximately $59 million.
Because our fuel hedges were in a net
liability position at March 31, 2009 resulting from the significant decline in
crude oil prices during the last six months of 2008, we posted cash collateral
with our counterparties totaling $168 million and granted a lien in favor of a
counterparty on one Boeing 777-200 aircraft and one Boeing 757-200 aircraft in
lieu of posting an additional $63 million in cash. The cash posted as
collateral is reported in prepayments and other current assets in our
consolidated balance sheet.
Foreign
Currency. At March 31, 2009, we had forward contracts
outstanding to hedge the following cash inflows for the remainder of 2009
(primarily from passenger ticket sales) in foreign currencies:
·
|
37%
of our projected Japanese yen-denominated cash inflows
|
·
|
7%
of our euro-denominated cash
inflows
|
We have not hedged any of our foreign
currency cash flows beyond 2009.
At March 31, 2009, the fair value of
our foreign currency hedges was $5 million and is included in prepayments and
other current assets 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 March 31, 2009 (in millions):
|
Increase
in
Fair
Value
|
Increase
in
Underlying
Exposure
|
Resulting
Net
Loss
|
|
|
|
|
Japanese
yen
|
$10
|
|
$(26)
|
|
$(16)
|
|
Euro
|
2
|
|
(26)
|
|
(24)
|
|
Evaluation 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 March 31, 2009 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.
Changes in Internal
Controls. There was no change in our internal control over
financial reporting during the quarter ended March 31, 2009 that materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
PART
II - OTHER INFORMATION
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 and seek
unspecified money damages and certain injunctive relief under the Clayton Act
and the Sherman Anti-Trust Act. The pending cases, which currently
involve a total of 90 travel agency plaintiffs, 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 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 the consolidated lawsuit, 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.
Part 1, Item 1A, “Risk Factors,” of our
2008 Form 10-K includes a detailed discussion of our risk
factors. The information presented below updates, and should be read
in conjunction with, the risk factors and information disclosed in our 2008 Form
10-K. The risks described in this Form 10-Q and in our 2008 Form 10-K
are not the only risks facing our company. Additional risks and
uncertainties not currently known to us, or that we currently deem to be
immaterial, also may materially adversely affect our business, financial
condition and future results.
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 one of the largest costs 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 the last 18
months. Jet fuel prices decreased precipitously in the last six
months of 2008 after increasing significantly in 2007 and achieving record
levels in mid-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 rise significantly from their current levels, we may be unable to
increase fares or other fees sufficiently in the current financial environment
to offset fully our increased fuel costs.
We routinely hedge a portion of our
future fuel requirements to protect against rising fuel
costs. 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 in the last six months of 2008) 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 fuel hedging 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 increasing international demand resulting from a
global economic recovery, 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.
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
March 31, 2009, we had approximately $5.9 billion of long-term debt and capital
lease obligations, including $2.6 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. To meet these obligations,
we must access the global capital markets and/or achieve and sustain
profitability. Due to the troubled global capital markets, however,
we may be unable to obtain financing or otherwise access the capital markets on
favorable terms. See “Management’s Discussion of Financial Condition
and Results of Operations – Liquidity and Capital Resources” included in Part I,
Item 2 of this report for a discussion of our obligations and the status of our
efforts to meet our financing needs.
None.
Item
3. Defaults
Upon Senior Securities.
None.
None.
On
April 23, 2009, the Human Resources Committee of Continental’s Board of
Directors approved, and Continental subsequently entered into, Confidentiality
and Non-Competition Agreements with each of the following “named executive
officers” of Continental: Jeffery Smisek, President and Chief
Operating Officer; Zane Rowe, Executive Vice President and Chief Financial
Officer; James Compton, Executive Vice President – Marketing; and Mark Moran,
Executive Vice President – Operations. Each of these agreements
includes an 18-month non-compete provision with Continental following
termination of the executive’s employment, except if such termination is by
Continental other than for “Cause” or by the executive for “Good Reason” (in
each case as defined in the executive’s employment agreement). The
non-competition obligations prohibit the executives from serving in an
executive, advisory or consulting capacity for any passenger air carrier in the
United States or in any foreign country in which the company has an office,
station or branch as of the date of the executive’s termination of
employment. To induce the officers to enter into the Confidentiality
and Non-Competition Agreements, Continental has agreed to pay $1,125,000 to Mr.
Smisek and $750,000 to each of Messrs. Rowe, Compton and Moran. These
non-compete provisions are similar in scope to those binding on our Chairman and
Chief Executive Officer, Larry Kellner. The foregoing description of
these Confidentiality and Non-Competition Agreements is qualified in its
entirety by reference to the full text of such agreements, which are filed as
Exhibits 10.1, 10.2, 10.3 and 10.4 to this report.
|
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).
|
|
|
|
|
3.1(a)
|
Certification
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).
|
|
|
|
|
3.1(a)(ii)
|
Certificate
of Increase – Series A Junior Participating Preferred Stock – incorporated
by reference to Exhibit 3.1(a)(ii) to Continental’s Quarterly Report on
Form 10-Q for the period ended June 30, 2008 (File no.
1-10323).
|
|
|
|
|
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).
|
|
|
|
|
10.1*
|
Confidentiality
and Non-Competition Agreement dated April 23, 2009 between Continental and
Jeffery A. Smisek.
|
|
|
|
|
10.2*
|
Confidentiality
and Non-Competition Agreement dated April 23, 2009 between Continental and
Zane C. Rowe.
|
|
|
|
|
10.3*
|
Confidentiality
and Non-Competition Agreement dated April 23, 2009 between Continental and
James E. Compton.
|
|
|
|
|
10.4*
|
Confidentiality
and Non-Competition Agreement dated April 23, 2009 between Continental and
Mark J. Moran.
|
|
|
|
|
31.1
|
Rule
13a-14 (a)/15d-14 (a) Certification of Chief Executive
Officer.
|
|
|
|
|
31.2
|
Rule
13a-14 (a)/15d-14 (a) Certification of Chief Financial
Officer.
|
|
|
|
|
32.1
|
Section
1350 Certifications.
|
*This
exhibit relates to management contracts or compensatory plans or
arrangements.
SIGNATURES
Pursuant to the requirements 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.
|
|
|
Registrant
|
|
|
|
|
|
|
Date: April 24,
2009
|
by:
|
/s/ Chris
Kenny
|
|
|
Chris
Kenny
|
|
|
Vice
President and Controller
|
|
|
(Principal
Accounting Officer)
|
OF
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).
|
|
|
3.1(a)
|
Certification
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).
|
|
|
3.1(a)(ii)
|
Certificate
of Increase – Series A Junior Participating Preferred Stock – incorporated
by reference to Exhibit 3.1(a)(ii) to Continental’s Quarterly Report on
Form 10-Q for the period ended June 30, 2008 (File no.
1-10323).
|
|
|
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).
|
|
|
10.1*
|
Confidentiality
and Non-Competition Agreement dated April 23, 2009 between Continental and
Jeffery A. Smisek.
|
|
|
10.2*
|
Confidentiality
and Non-Competition Agreement dated April 23, 2009 between Continental and
Zane C. Rowe.
|
|
|
10.3*
|
Confidentiality
and Non-Competition Agreement dated April 23, 2009 between Continental and
James E. Compton.
|
|
|
10.4*
|
Confidentiality
and Non-Competition Agreement dated April 23, 2009 between Continental and
Mark J. Moran.
|
|
|
31.1
|
Rule
13a-14 (a)/15d-14 (a) Certification of Chief Executive
Officer.
|
|
|
31.2
|
Rule
13a-14 (a)/15d-14 (a) Certification of Chief Financial
Officer.
|
|
|
32.1
|
Section
1350 Certifications.
|
*This
exhibit relates to management contracts or compensatory plans or
arrangements.