f063009form10q.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 JUNE 30, 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
_____
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 July 20, 2009, 123,657,537 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
|
|
|
|
|
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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31
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Item
3.
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52
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Item
4.
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53
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PART
II
|
OTHER
INFORMATION
|
|
|
|
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Item
1.
|
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54
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Item
1A.
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54
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Item
2.
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57
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Item
3.
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57
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Item
4.
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57
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Item
5.
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58
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Item
6.
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58
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60
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61
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PART
I - FINANCIAL INFORMATION
CONTINENTAL
AIRLINES, INC.
(In
millions, except per share data) (Unaudited)
(2008
As Adjusted (Note 1))
|
Three
Months
Ended June
30,
|
Six
Months
Ended June
30,
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Revenue:
|
|
|
|
|
Passenger
(excluding fees and taxes of $379,
$408,
$725, and $784, respectively)
|
$2,767
|
|
$3,650
|
|
$5,384
|
|
$6,873
|
|
|
|
Cargo
|
82
|
|
132
|
|
167
|
|
254
|
|
|
|
Other
|
277
|
|
262
|
|
536
|
|
487
|
|
|
|
|
3,126
|
|
4,044
|
|
6,087
|
|
7,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
Aircraft
fuel and related taxes
|
891
|
|
1,653
|
|
1,626
|
|
2,915
|
|
|
|
Wages,
salaries and related costs
|
799
|
|
704
|
|
1,564
|
|
1,432
|
|
|
|
Aircraft
rentals
|
235
|
|
246
|
|
472
|
|
493
|
|
|
|
Regional
capacity purchase, net
|
217
|
|
299
|
|
431
|
|
591
|
|
|
|
Landing
fees and other rentals
|
216
|
|
210
|
|
425
|
|
418
|
|
|
|
Maintenance,
materials and repairs
|
161
|
|
167
|
|
314
|
|
326
|
|
|
|
Distribution
costs
|
150
|
|
194
|
|
307
|
|
375
|
|
|
|
Depreciation
and amortization
|
118
|
|
108
|
|
229
|
|
215
|
|
|
|
Passenger
services
|
96
|
|
107
|
|
183
|
|
203
|
|
|
|
Special
charges
|
44
|
|
58
|
|
48
|
|
50
|
|
|
|
Other
|
353
|
|
369
|
|
696
|
|
733
|
|
|
|
|
3,280
|
|
4,115
|
|
6,295
|
|
7,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Loss
|
(154)
|
|
(71)
|
|
(208)
|
|
(137)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonoperating
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
(90)
|
|
(91)
|
|
(183)
|
|
(185)
|
|
|
|
Interest
capitalized
|
8
|
|
8
|
|
17
|
|
17
|
|
|
|
Interest
income
|
4
|
|
16
|
|
8
|
|
40
|
|
|
|
Gain
on sale of investments
|
-
|
|
78
|
|
-
|
|
78
|
|
|
|
Other-than-temporary
impairment losses on
investments
|
-
|
|
(29)
|
|
-
|
|
(29)
|
|
|
|
Other,
net
|
19
|
|
40
|
|
17
|
|
39
|
|
|
|
|
(59)
|
|
22
|
|
(141)
|
|
(40)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before Income Taxes
|
(213)
|
|
(49)
|
|
(349)
|
|
(177)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Tax Benefit
|
-
|
|
44
|
|
-
|
|
90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
$(213)
|
|
$ (5)
|
|
$ (349)
|
|
$ (87)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted Loss per Share
|
$(1.72)
|
|
$(0.05)
|
|
$(2.82)
|
|
$(0.87)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Used for Basic and Diluted Computation
|
124
|
|
99
|
|
124
|
|
99
|
|
|
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))
|
June
30,
|
December
31,
|
June
30,
|
|
2009
|
2008
|
2008
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
Current
Assets:
|
|
|
|
Cash
and cash equivalents
|
$ 2,521
|
|
$ 2,165
|
|
$ 3,049
|
|
Short-term
investments
|
247
|
|
478
|
|
358
|
|
Total
unrestricted cash, cash equivalents and
short-term
investments
|
2,768
|
|
2,643
|
|
3,407
|
|
|
|
|
|
|
|
|
Restricted
cash, cash equivalents and
short-term
investments
|
167
|
|
190
|
|
122
|
|
Accounts
receivable, net
|
488
|
|
453
|
|
739
|
|
Spare
parts and supplies, net
|
242
|
|
235
|
|
339
|
|
Deferred
income taxes
|
172
|
|
216
|
|
249
|
|
Prepayments
and other
|
494
|
|
610
|
|
602
|
|
Total
current assets
|
4,331
|
|
4,347
|
|
5,458
|
|
|
|
|
|
|
|
|
Property
and Equipment:
|
|
|
|
|
|
|
Owned
property and equipment:
|
|
|
|
|
|
|
Flight
equipment
|
8,614
|
|
8,446
|
|
7,960
|
|
Other
|
1,740
|
|
1,694
|
|
1,641
|
|
|
10,354
|
|
10,140
|
|
9,601
|
|
Less: Accumulated
depreciation
|
3,388
|
|
3,229
|
|
2,968
|
|
|
6,966
|
|
6,911
|
|
6,633
|
|
|
|
|
|
|
|
|
Purchase
deposits for flight equipment
|
257
|
|
275
|
|
328
|
|
|
|
|
|
|
|
|
Capital
leases
|
194
|
|
194
|
|
190
|
|
Less: Accumulated
amortization
|
58
|
|
53
|
|
49
|
|
|
136
|
|
141
|
|
141
|
|
Total
property and equipment, net
|
7,359
|
|
7,327
|
|
7,102
|
|
|
|
|
|
|
|
|
Routes
and airport operating rights, net
|
797
|
|
804
|
|
791
|
|
Investment
in student loan-related auction rate
securities,
long-term
|
-
|
|
-
|
|
264
|
|
Other
assets, net
|
175
|
|
208
|
|
203
|
|
|
|
|
|
|
|
|
Total
Assets
|
$12,662
|
|
$12,686
|
|
$13,818
|
|
(continued
on next page)
CONTINENTAL
AIRLINES, INC.
CONSOLIDATED
BALANCE SHEETS
(In
millions, except for share data)
(2008
As Adjusted (Note 1))
STOCKHOLDERS'
EQUITY
|
June
30,
|
December
31,
|
June
30,
|
2009
|
2008
|
2008
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
Current
Liabilities:
|
|
|
|
Current
maturities of long-term debt and
capital
leases
|
$ 980
|
|
$ 519
|
|
$ 466
|
|
Accounts
payable
|
1,062
|
|
1,021
|
|
1,043
|
|
Air
traffic and frequent flyer liability
|
2,128
|
|
1,881
|
|
2,790
|
|
Accrued
payroll
|
379
|
|
345
|
|
334
|
|
Accrued
other liabilities
|
307
|
|
708
|
|
294
|
|
Total
current liabilities
|
4,856
|
|
4,474
|
|
4,927
|
|
|
|
|
|
|
|
|
Long-Term
Debt and Capital Leases
|
4,963
|
|
5,353
|
|
5,300
|
|
|
|
|
|
|
|
|
Deferred
Income Taxes
|
172
|
|
216
|
|
307
|
|
|
|
|
|
|
|
|
Accrued
Pension Liability
|
1,375
|
|
1,417
|
|
472
|
|
|
|
|
|
|
|
|
Accrued
Retiree Medical Benefits
|
239
|
|
234
|
|
242
|
|
|
|
|
|
|
|
|
Other
|
821
|
|
869
|
|
843
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity:
|
|
|
|
|
|
|
Class
B common stock - $.01 par, 400,000,000
shares
authorized; 123,657,537, 123,264,534
and
109,796,597 issued
|
1
|
|
1
|
|
1
|
|
Additional
paid-in capital
|
2,047
|
|
2,038
|
|
1,826
|
|
Retained
earnings (accumulated deficit)
|
(509)
|
|
(160)
|
|
339
|
|
Accumulated
other comprehensive loss
|
(1,303)
|
|
(1,756)
|
|
(439)
|
|
Total
stockholders' equity
|
236
|
|
123
|
|
1,727
|
|
Total
Liabilities and Stockholders' Equity
|
$ 12,662
|
|
$ 12,686
|
|
$ 13,818
|
|
The
accompanying Notes to Consolidated Financial Statements are an integral part of
these statements.
CONTINENTAL
AIRLINES, INC.
(In
millions)
(2008
As Adjusted (Note 1))
|
Six Months Ended June
30,
|
|
2009
|
2008
|
|
|
(Unaudited)
|
|
Cash
Flows from Operating Activities:
|
$
|
|
|
|
Net
loss
|
|
$ (349)
|
$ (87)
|
|
Adjustments to reconcile net loss
to net cash provided by operating
activities:
|
|
|
|
|
Depreciation and
amortization
|
|
229
|
215
|
|
Special
charges
|
|
48
|
50
|
|
Gain on sale of
investments
|
|
-
|
(78)
|
|
Stock-based compensation
related to equity awards
|
|
3
|
8
|
|
Deferred income tax
benefit
|
|
-
|
(90)
|
|
Other,
net
|
|
27
|
26
|
|
Changes in operating assets
and liabilities
|
|
401
|
423
|
|
Net cash
provided by operating activities
|
|
359
|
467
|
|
|
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
Capital
expenditures
|
|
(147)
|
(293)
|
|
Aircraft purchase deposits
refunded, net
|
|
17
|
56
|
|
Proceeds from sales of short-term
investments, net
|
|
233
|
82
|
|
Proceeds from sales of property
and equipment
|
|
7
|
74
|
|
Decrease (increase) in restricted
cash, cash equivalents and
short-term
investments
|
|
23
|
(21)
|
|
Proceeds from sale of Copa
Holdings, S.A. stock
|
|
-
|
149
|
|
Proceeds from sales of
investments
|
|
1
|
21
|
|
Other
|
|
(3)
|
-
|
|
Net cash provided by investing
activities
|
|
131
|
68
|
|
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
Payments on long-term debt and
capital lease obligations
|
|
(169)
|
(267)
|
|
Proceeds from issuance of
long-term debt
|
|
30
|
483
|
|
Proceeds from public offering of
common stock
|
|
-
|
162
|
|
Proceeds from issuance of common
stock pursuant to stock plans
|
|
5
|
8
|
|
Net cash provided by (used in)
financing activities
|
|
(134)
|
386
|
|
|
|
|
|
|
Net
Increase in Cash and Cash Equivalents
|
|
356
|
921
|
|
|
|
|
|
|
Cash
and Cash Equivalents - Beginning of Period
|
|
2,165
|
2,128
|
|
|
|
|
|
|
Cash
and Cash Equivalents - End of Period
|
|
$2,521
|
$3,049
|
|
|
|
|
|
|
Investing
and Financing Activities Not Affecting Cash:
|
|
|
|
|
Property and equipment acquired
through the issuance of debt
|
|
$ 197
|
$ 690
|
|
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 for the year ended December 31, 2008 contained
in our Current Report on Form 8-K dated April 24, 2009. 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 periods’ consolidated statements of operations 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.
We have evaluated subsequent events
through July 21, 2009, which is the date these financial statements were
issued.
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.
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
June 30, 2008
|
Six Months ended June
30, 2008
|
|
Originally
Reported
|
As
Adjusted
|
Originally
Reported
|
As
Adjusted
|
|
|
|
|
|
Interest
expense
|
$(88)
|
|
$(91)
|
|
$(179)
|
|
$(185)
|
|
Income
tax benefit
|
43
|
|
44
|
|
88
|
|
90
|
|
Net
loss
|
(3)
|
|
(5)
|
|
(83)
|
|
(87)
|
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted Loss per Share
|
$(0.03)
|
|
$(0.05)
|
|
$(0.84)
|
|
$(0.87)
|
|
Consolidated
Balance Sheet:
|
December 31,
2008
|
June 30,
2008
|
|
Originally
Reported
|
As
Adjusted
|
Originally
Reported
|
As
Adjusted
|
|
|
|
|
|
Long-term
debt and capital leases
|
$5,371
|
|
$5,353
|
|
$5,323
|
|
$5,300
|
|
Deferred
income tax liability
|
216
|
|
216
|
|
299
|
|
307
|
|
Additional
paid-in capital
|
1,997
|
|
2,038
|
|
1,785
|
|
1,826
|
|
Retained
earnings (accumulated deficit)
|
(137)
|
|
(160)
|
|
365
|
|
339
|
|
Total
stockholders’ equity
|
105
|
|
123
|
|
1,712
|
|
1,727
|
|
SFAS
165. In May 2009, the FASB issued Statement No. 165,
“Subsequent Events” (“SFAS 165”), which establishes general standards of
accounting for, and requires disclosure of, events that occur after the balance
sheet date but before financial statements are issued or are available to be
issued. We adopted the provisions of SFAS 165 for the quarter ended
June 30, 2009. The adoption of these provisions did not have a
material effect on our consolidated financial statements.
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 for 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
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. We adopted the
provisions of FSP FAS 157-4 for the quarter ended June 30, 2009. The
adoption did not have a material effect 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. We adopted
the provisions of FSP FAS 115-2 for the quarter ended June 30,
2009. The adoption did not have a material effect 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. We adopted the provisions of FSP FAS 107-1 for
the quarter ended June 30, 2009. Because FSP FAS 107-1 applies only
to financial statement disclosures, the adoption 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 is not expected to have a material effect on
our consolidated financial statements.
NOTE
2 - LOSS PER SHARE
Because we incurred a net loss in the
three and six months ended June 30, 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 for the three and six months ended
June 30, 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
each of the three and six months ended June 30, 2009 and 2008 because the effect
of including the options would have been antidilutive.
NOTE
3 - FLEET INFORMATION
As of June 30, 2009, our operating
fleet consisted of 351 mainline jets and 266 regional aircraft. The
351 mainline jets are operated exclusively by us, while the 266 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 52
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 June
30, 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
|
22
|
|
22
|
|
-
|
|
-
|
|
737-900
|
12
|
|
8
|
|
4
|
|
-
|
|
737-800
|
117
|
|
44
|
|
73
|
|
-
|
|
737-700
|
36
|
|
12
|
|
24
|
|
-
|
|
737-500
|
40
|
|
-
|
|
40
|
|
-
|
|
737-300
|
20
|
|
12
|
|
8
|
|
-
|
|
Total
mainline
|
351
|
|
153
|
|
198
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Regional
(b):
|
|
|
|
|
|
|
|
|
ERJ-145XR
|
89
|
|
-
|
|
89
|
|
-
|
|
ERJ-145
|
140
|
|
18
|
|
107
|
|
15
|
(c)
|
CRJ200LR
|
7
|
|
-
|
|
-
|
|
7
|
(c)
|
Q200
|
16
|
|
-
|
|
-
|
|
16
|
(d)
|
Q400
|
14
|
|
-
|
|
-
|
|
14
|
(e)
|
Total
regional
|
266
|
|
18
|
|
196
|
|
52
|
|
|
|
|
|
|
|
|
|
|
Total
|
617
|
|
171
|
|
394
|
|
52
|
|
______________________
(a)
|
Excludes
nine grounded Boeing 737-500 aircraft, nine grounded Boeing 737-300
aircraft and one Boeing 737-900ER aircraft delivered but not yet placed
into service at June 30, 2009.
|
(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 six months of 2009, we placed into
service five 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 and four
Boeing 737-500 aircraft from service during the first six months of
2009. By early January 2010, we expect to remove all of our remaining
Boeing 737-300 aircraft and nine additional Boeing 737-500 aircraft
from service. However, some of these planned exits could be postponed
due to delays in the closing of pending aircraft sales.
We have agreements to sell a total of
12 Boeing 737-500 aircraft to two foreign buyers. 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. 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.
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 to Colgan, 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.
In July 2009, we entered into
agreements to sublease to a regional carrier five temporarily grounded ERJ-135
aircraft beginning in the third quarter of 2009. The subleases have
terms of five years, but are cancellable by the lessee earlier under certain
conditions. The remaining 25 ERJ-135 aircraft continue to be
temporarily grounded. We are evaluating our options regarding these
25 aircraft, including permanently grounding them.
Firm Order and Option
Aircraft. As of June 30, 2009, we had firm commitments to
purchase 83 new aircraft (51 Boeing 737 aircraft, seven Boeing 777 aircraft and
25 Boeing 787 aircraft) scheduled for delivery from 2009 through 2016, with an
estimated aggregate cost of $5.3 billion including related spare
engines. We are currently scheduled to take delivery of seven Boeing
737 aircraft in the remaining six months of 2009. In addition to our
firm order aircraft, we had options to purchase a total of 102 additional Boeing
aircraft as of June 30, 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
2007 Enhanced Equipment
Trust Certificates (“EETC”). In April 2007, we obtained
financing for 12 Boeing 737-800s and 18 Boeing 737-900ERs. We applied
the final portion of this financing to three Boeing aircraft delivered to us in
the first half of 2009 and recorded related debt of $121 million.
Other Debt Secured by
Aircraft. During the first six months of 2009, we entered into
a loan agreement under which we borrowed $106 million. This floating
rate indebtedness is secured by three new Boeing 737-900ER aircraft and one
refinanced Boeing 737-800 aircraft. The loan agreement also provides
for additional borrowings related to the refinancing of one Boeing 737-800
aircraft in August 2009.
In July 2009, we obtained additional
financing totaling $58 million for two additional new Boeing 737-900ER aircraft,
one of which was delivered to us and financed under this arrangement in July
2009.
2009 EETC
Financing. On July 1, 2009, we obtained financing for 12
currently owned Boeing aircraft and five new Boeing 737-900ERs, which we expect
to be delivered to us by the end of 2009. A pass-through trust raised
$390 million through the issuance of a single class of pass-through certificates
bearing interest at 9%. The proceeds from the sale of the
certificates are initially being held by a depositary in escrow for the benefit
of the certificate holders until we issue equipment notes to the trust, which
will purchase such notes with a portion of the escrowed funds. The
equipment notes issued with respect to the 12 currently owned aircraft will
generate $249 million in cash for our general corporate purposes and the other
equipment notes issued will generate $141 million to finance the purchase of the
five new aircraft. These escrowed funds are not guaranteed by
us. We 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 January 2010 and will end in July
2016. Additionally, the 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.
Maturities. Maturities
of long-term debt due before December 31, 2009 and for the next four years are
as follows (in millions):
July
1, 2009 through December 31, 2009
|
$411
|
Year
ending December 31,
|
|
|
2010
|
943
|
|
2011
|
1,114
|
|
2012
|
552
|
|
2013
|
619
|
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 are 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):
|
June
30,
|
December
31,
|
June
30,
|
|
2009
|
2008
|
2008
|
|
|
|
|
Principal
amount of Convertible Notes
|
$175
|
|
$175
|
|
$175
|
|
Unamortized
discount
|
12
|
|
18
|
|
23
|
|
Net
carrying
amount
|
163
|
|
157
|
|
152
|
|
Additional
paid-in
capital
|
64
|
|
64
|
|
64
|
|
At June 30, 2009, the unamortized
discount had a remaining recognition period of approximately 12
months.
The amount of interest expense
recognized and effective interest rate for the three and six months ended June
30 were as follows (in millions):
|
Three
Months
Ended June
30,
|
Six
Months
Ended June
30,
|
|
2009
|
2008
|
2009
|
2008
|
|
|
|
|
|
Contractual
coupon interest
|
$ 2
|
|
$ 2
|
|
$ 4
|
|
$ 4
|
|
Amortization
of discount on 5% Convertible Notes
|
3
|
|
3
|
|
6
|
|
6
|
|
Interest
expense
|
$ 5
|
|
$ 5
|
|
$ 10
|
|
$10
|
|
|
|
|
|
|
|
|
|
|
Effective
interest rate
|
13%
|
|
13%
|
|
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
June 30,
2009
|
Level
1
|
Level
2
|
Level
3
|
Valuation
Technique
|
|
|
|
|
|
|
Cash
and cash equivalents
|
$2,521
|
|
$2,521
|
-
|
-
|
(A)
|
Short-term
investments:
|
|
|
-
|
|
|
|
Auction
rate securities
|
230
|
|
|
-
|
$230
|
(B)
|
Other
|
17
|
|
17
|
-
|
-
|
(A)
|
Restricted
cash, cash equivalents and
short-term
investments
|
167
|
|
167
|
-
|
-
|
(A)
|
Auction
rate securities put right
|
27
|
|
-
|
-
|
27
|
(B)
|
Fuel
derivatives
|
(17)
|
|
-
|
-
|
(17)
|
(A)
|
Foreign
currency
derivatives
|
1
|
|
-
|
$1
|
-
|
(A)
|
Assets measured at fair value on a
nonrecurring basis during the three and six months ended June 30, 2009 include
(in millions):
|
Carrying
Amount as of
June 30,
2009
|
Level
1
|
Level
2
|
Level
3
|
Total
Losses
|
|
|
|
|
|
|
Property
and Equipment:
|
|
|
|
|
|
Boeing
737-300 fleet
|
$90
|
|
-
|
|
-
|
|
$90
|
|
$(19)
|
|
Boeing
737-500 fleet
|
82
|
|
-
|
|
-
|
|
82
|
|
(12)
|
|
|
|
|
|
|
|
|
|
|
$(31)
|
|
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 June 30, 2009, we held
student loan-related auction rate securities with a fair value of $230 million
and a par value of $291 million. These securities were classified as
follows (in millions):
|
Fair
Value
|
Par
Value
|
Amortized
Cost
|
|
|
|
|
Short-term
investments:
|
|
|
|
Available-for-sale
|
$135
|
|
$166
|
|
$135
|
|
Trading
|
95
|
|
125
|
|
N/A
|
|
Total
|
$230
|
|
$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, resulting in our holding 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 recorded losses of
$29 million during the second quarter of 2008 to reflect the
other-than-temporary decline in the fair value of these
securities. These losses are included in nonoperating income
(expense) in our consolidated statement of operations. Following this
other-than-temporary impairment, a new amortized cost basis was established
equal to the then fair value. The difference between this amortized
cost and the cash flows expected to be collected is being accreted as interest
income.
We estimated the fair value of these
securities to be $230 million at June 30, 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, in 2008, one institution
granted us a put right permitting us in 2010 to sell to the institution at their
full par value auction rate securities with a par value of $125
million. 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. The put right is recorded at fair value in prepayments and
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.
Property and Equipment -
Boeing 737-300 and 737-500 Aircraft Fleets. As discussed in
Note 11, we wrote down our Boeing 737-300 and 737-500 fleets to their respective
fair values in the second quarter of 2009. Fleet assets include owned
aircraft, improvements on leased aircraft, rotable spare parts, spare engines
and simulators. We estimated the fair values based on current market
conditions, the condition of our aircraft and our expected proceeds from the
sale of the assets.
Unobservable
Inputs. The reconciliation of our assets (liabilities)
measured at fair value on a recurring basis using unobservable inputs (Level 3)
is as follows (in millions):
|
Three Months Ended
June 30, 2009
|
|
Student
Loan-Related
Auction Rate
Securities
|
Auction
Rate
Securities Put
Right
|
Fuel
Derivatives
|
|
|
|
|
Balance
at beginning of period
|
$229
|
|
$26
|
|
$(252)
|
|
Sales
|
(1)
|
|
-
|
|
-
|
|
Gains
and losses:
|
|
|
|
|
|
|
Realized losses reported in
earnings
|
-
|
|
-
|
|
204
|
|
Unrealized
gains reported in earnings
|
-
|
|
1
|
|
8
|
|
Unrealized gains reported in
other
comprehensive
income (loss)
|
2
|
|
-
|
|
23
|
|
Balance
as of June 30, 2009
|
$230
|
|
$27
|
|
$ (17)
|
|
|
Six Months Ended June
30, 2009
|
|
Student
Loan-Related
Auction Rate
Securities
|
Auction
Rate
Securities Put
Right
|
Fuel
Derivatives
|
|
|
|
|
Balance
at beginning of period
|
$229
|
|
$26
|
|
$(415)
|
|
Sales
|
(1)
|
|
-
|
|
-
|
|
Settlements
|
-
|
|
-
|
|
77
|
|
Gains
and losses:
|
|
|
|
|
|
|
Realized losses reported in
earnings
|
-
|
|
-
|
|
345
|
|
Unrealized
gains reported in earnings
|
-
|
|
1
|
|
6
|
|
Unrealized gains (losses)
reported in
other
comprehensive income (loss)
|
2
|
|
-
|
|
(30)
|
|
Balance
as of June 30, 2009
|
$230
|
|
$27
|
|
$ (17)
|
|
Other Financial
Instruments. Other financial instruments that are not subject
to the disclosure requirements of SFAS 157 are as follows:
·
|
Debt. The
fair value of our debt with a carrying value of $5.7 billion at June 30,
2009 was approximately $4.8 billion. These estimates were based
on either market prices or the discounted amount of future cash flows
using our current incremental rate of borrowing for similar
liabilities.
|
|
|
·
|
Investment in COLI
Products. In connection with certain of our supplemental
retirement plans, we have company owned life insurance policies covering
certain of our employees. As of June 30, 2009, the carrying
value and fair value of the underlying investments was $27 million, which
approximates the cash surrender value of the life insurance
policies.
|
|
|
·
|
Accounts Receivable
and Accounts Payable. The fair values of accounts
receivable and accounts payable approximated carrying value due to their
short-term maturities.
|
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 conduct our fuel hedging activities using a combination
of jet fuel, crude oil and heating oil contracts.
We have historically entered into swap
agreements or purchased call options to protect us against sudden and
significant increases in jet fuel prices. To minimize the high cost
to us of call options, we may also 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.
As of June 30, 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
|
6%
|
|
$3.21
|
|
6%
|
|
$2.40
|
|
WTI
crude oil swaps
|
5%
|
|
1.33
|
|
5%
|
|
1.33
|
|
Total
|
11%
|
|
|
|
11%
|
|
|
|
As of June 30, 2009, we had 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 June 30, 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 $32 million and granted liens in favor of a
counterparty on one Boeing 777-200 aircraft and one Boeing 757-200 aircraft in
lieu of posting up to an additional $25 million in cash. In July
2009, we posted cash collateral with that counterparty, resulting in the release
of the liens on the aircraft. As of July 21, 2009, our total
collateral posted with fuel hedge counterparties consisted of $18 million in
cash. The cash posted as collateral is reported in prepayments and
other current assets in our consolidated balance sheets.
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 June 30, 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:
·
|
45%
of our projected Japanese yen-denominated cash inflows
|
|
|
·
|
8%
of our projected euro-denominated cash
inflows
|
As of June 30, 2009, we had 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 June 30, 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
|
$ 16
|
|
Accrued
other current liabilities
|
$33
|
|
|
|
|
|
|
|
|
Foreign
currency derivatives
|
Prepayments
and other current assets
|
1
|
|
Accrued
other current liabilities
|
-
|
|
Total derivatives
|
|
$ 17
|
|
|
$33
|
|
The gains and losses related to our
derivative instruments reported in our consolidated balance sheet at June 30,
2009 and our consolidated statement of operations were as follows (in
millions):
|
Three
Months Ended June 30,
2009
|
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
|
$58
|
|
Aircraft
fuel and
related
taxes
|
$(210)
|
|
Other
nonoperating
income
(expense)
|
$8
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency
derivatives
|
(3)
|
|
Passenger
revenue
|
1
|
|
Other
nonoperating
income
(expense)
|
-
|
|
Total
|
$ 55
|
|
|
$(209)
|
|
|
$8
|
|
|
Six
Months Ended June 30,
2009
|
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
|
$(351)
|
|
Other
nonoperating
income
(expense)
|
$6
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency
derivatives
|
9
|
|
Passenger
revenue
|
-
|
|
Other
nonoperating
income
(expense)
|
-
|
|
Total
|
$38
|
|
|
$(351)
|
|
|
$6
|
|
NOTE
7 – COMMON STOCK
In June 2008, we completed a public
offering of 11 million shares of Class B common stock at a price to the public
of $14.80 per share, raising net proceeds of $162 million for general corporate
purposes.
NOTE
8 - 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 profit based RSU awards that had a
performance period commencing April 1, 2006 and ending December 31, 2009
achieved the highest level cumulative profit sharing performance target based on
cumulative profit sharing payments to our broad based employees of $262 million
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.
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.
As of June 30, 2009, we had recorded no
liability associated with the profit based RSU awards for the periods commencing
January 1, 2007, 2008 or 2009.
SFAS 123R
Expense. Total stock-based compensation expense (credit)
related to SFAS 123R included in wages, salaries and related costs was $0, $(16)
million, $(24) million and $5 million for the three months ended June 30, 2009
and 2008 and the six months ended June 30, 2009 and 2008,
respectively. As of June 30, 2009, $6 million of compensation cost
attributable to future service related to unvested employee stock options and
profit based RSU awards with a performance period commencing April 1, 2006 had
not yet been recognized. This amount will be recognized in expense
over a weighted-average period of 0.9 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 income calculated prior to any costs associated with incentive
compensation for executives.
Employee Stock Purchase
Plan. On June 10, 2009, our stockholders approved an amendment
to our 2004 Employee Stock Purchase Plan (the “2004 ESPP”), under which no
shares were available for purchase by employees beginning in the first quarter
of 2009. The amendment makes 3.5 million shares of common stock
available for purchase by employees under the 2004 ESPP and extends the term of
the plan to December 31, 2019. The 2004 ESPP is open to all of our
employees, including CMI employees.
NOTE
9 - COMPREHENSIVE INCOME (LOSS)
Total comprehensive income (loss)
included the following (in millions):
|
Three
Months
Ended June
30,
|
Six
Months
Ended June
30,
|
|
2009
|
2008
|
2009
|
2008
|
|
|
|
|
|
Net
loss
|
$(213)
|
$ (5)
|
$(349)
|
$(87)
|
|
|
|
|
|
Other
comprehensive income (loss):
|
|
|
|
|
Derivative
financial instruments:
|
|
|
|
|
Reclassification
into earnings (net of deferred
taxes
of $(40) and $(51) in 2008)
|
201
|
(69)
|
343
|
(88)
|
Changes
in fair value (net of deferred taxes of $73
and $79 in
2008)
|
55
|
125
|
38
|
135
|
Unrealized
gain on student loan-related auction rate
securities (net
of deferred taxes of $5 and $0 in
2008)
|
2
|
9
|
2
|
-
|
Items
related to employee benefit plans:
|
|
|
|
|
Amortization
of net actuarial losses (net of
deferred
taxes of $3 and $5 in 2008)
|
27
|
4
|
54
|
9
|
Amortization
of prior service cost (net of
deferred
taxes of $3 and $6 in 2008)
|
7
|
5
|
16
|
10
|
Comprehensive
income (loss) adjustments
|
292
|
74
|
453
|
66
|
|
|
|
|
|
Total
comprehensive income (loss)
|
$ 79
|
$ 69
|
$104
|
$(21)
|
NOTE
10 - EMPLOYEE BENEFIT PLANS
Defined Benefit Pension and
Retiree Medical Plans. Net periodic defined benefit pension
and retiree medical benefits expense included the following components (in
millions):
|
Defined
Benefit
Pension
|
Retiree
Medical
Benefits
|
|
Three
Months
Ended June
30,
|
Six
Months
Ended June
30,
|
Three
Months
Ended June
30,
|
Six
Months
Ended June
30,
|
|
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
|
|
|
|
|
|
|
|
|
Service
cost
|
$ 16
|
$ 15
|
$ 32
|
$ 29
|
$ 3
|
$ 3
|
$5
|
$ 6
|
Interest
cost
|
38
|
37
|
77
|
74
|
4
|
4
|
8
|
8
|
Expected
return on plan assets
|
(22)
|
(41)
|
(44)
|
(81)
|
-
|
-
|
-
|
-
|
Amortization
of unrecognized net
actuarial
loss
|
28
|
8
|
55
|
15
|
(1)
|
(1)
|
(1)
|
(1)
|
Amortization
of prior service cost
|
2
|
2
|
5
|
5
|
5
|
6
|
11
|
11
|
Net
periodic benefit expense
|
$ 62
|
$ 21
|
$125
|
$ 42
|
$11
|
$12
|
$23
|
$24
|
During the first half of 2009, we
contributed $100 million to our tax-qualified defined benefit pension plans and
on July 9, 2009, we contributed an additional $20 million to the
plans. Our remaining minimum funding requirements during calendar
year 2009 are approximately $30 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 $26 million, $21
million, $50 million and $45 million for the three months ended June 30, 2009
and 2008 and the six months ended June 30, 2009 and 2008,
respectively.
NOTE
11 - SPECIAL CHARGES
Special charges were as follows (in
millions):
|
Three
Months
Ended June
30,
|
Six
Months
Ended June
30,
|
|
2009
|
2008
|
2009
|
2008
|
|
|
|
|
|
Aircraft-related
charges, net of gains on sales of aircraft
|
$ 43
|
$ 41
|
$ 47
|
$33
|
Other
|
1
|
17
|
1
|
17
|
Total
special
charges
|
$ 44
|
$58
|
$ 48
|
$50
|
The special charges all relate to our
mainline segment unless otherwise noted.
Aircraft-related charges in the second
quarter of 2009 include $31 million of non-cash impairments on owned Boeing
737-300 and 737-500 aircraft and related assets, an $8 million non-cash charge
related to the disposition of three 737-300 aircraft and a $4 million non-cash
charge to write off certain obsolete spare parts. In the first
quarter of 2009, we recorded a $4 million charge for future lease and other
related costs on a permanently grounded Boeing 737-300 aircraft.
Aircraft-related charges in the second
quarter of 2008 include $37 million of non-cash impairments on owned Boeing
737-300 and 737-500 aircraft and related assets and a non-cash charge of $14
million to write down spare parts and supplies for the Boeing 737-300 and
737-500 fleets to the lower of cost or net realizable value, partially offset by
$10 million of gains on the sale of two owned Boeing 737-500
aircraft. We received proceeds of $26 million on the sale of these
aircraft. Other special charges in the second quarter of 2008 include
$17 million of charges related to contract settlements with regional carriers
and unused facilities ($15 million of which related to our regional
segment). During the first quarter of 2008, we sold three owned
Boeing 737-500 aircraft and received net proceeds of $42 million, resulting in
net gains of $8 million.
The impairment charges on the Boeing
737-300 and 737-500 fleets in the second quarters of both 2009 and 2008 relate
to our decision in June 2008 to retire all of our Boeing 737-300 aircraft and a
significant portion of our Boeing 737-500 aircraft by early January
2010. We recorded an initial impairment charge in the second quarter
of 2008 for each of these fleet types. The additional write-down in
the second quarter of 2009 reflects the further reduction in the fair value of
these fleet types in the current economic environment. In both
periods, we determined that indicators of impairment were present for these
fleets. Fleet assets include owned aircraft, improvements on leased
aircraft, rotable spare parts, spare engines and simulators. Based on
our evaluations, we determined that the carrying amounts of these fleets were
impaired and wrote them down to their estimated fair value. We
estimated the fair values based on current market quotes and our expected
proceeds from the sale of the assets.
In July 2009, we entered into
agreements to sublease to a regional carrier five temporarily grounded ERJ-135
aircraft beginning in the third quarter of 2009. The subleases have
terms of five years, but are cancellable by the lessee earlier under certain
conditions. The remaining 25 ERJ-135 aircraft continue to be
temporarily grounded. We are evaluating our options regarding these
aircraft, including permanently grounding them. If we do permanently
ground them, we may incur significant special charges for future rent
expense.
If economic conditions deteriorate
further, we may incur additional special charges in future quarters as we
attempt to dispose of our grounded Boeing 737-300 and 737-500
aircraft. We are currently unable to estimate the amount or timing of
these future charges. At June 30, 2009, the net carrying values of
our Boeing 737-300 and 737-500 fleets were $90 million and $82 million,
respectively.
On July 21, 2009, we announced plans to
eliminate approximately 1,700 positions across the company. In
connection with these plans, we anticipate that we will record charges for
severance and other termination costs in the third quarter of
2009. We are not able to estimate the amount of these charges at this
time.
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):
|
Severance/
Medical
Costs
|
Permanently
Grounded
Aircraft
|
Unused
Facilities
|
|
|
|
|
Balance,
December 31, 2008
|
$28
|
|
$10
|
|
$20
|
|
Accrual
|
-
|
|
2
|
|
-
|
|
Payments
|
(8)
|
|
(7)
|
|
(1)
|
|
Balance,
June 30, 2009
|
$20
|
|
$ 5
|
|
$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
12 - 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 ultimately will not be realized. As a result, our
pre-tax losses for the first half 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
net operating losses (“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 4.61% for June
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 June 30, 2009
under current conditions, our annual NOL utilization could be limited to $49
million per year, before consideration of any built-in gains.
NOTE
13 – GAIN ON SALE OF INVESTMENTS
In May 2008, we sold all of our
remaining shares of Copa Holdings, S.A. (“Copa”) Class A common stock for net
proceeds of $149 million and recognized a gain of $78 million.
NOTE
14 - SEGMENT REPORTING
We have two reportable
segments: mainline and regional. The mainline segment
consists of flights using larger jets while the regional segment currently
consists of flights utilizing aircraft with a capacity of 78 or fewer
seats. As of June 30, 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 passenger revenue, (2) much of the 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 by business
segment is set forth below (in millions):
|
Three
Months
Ended June
30,
|
Six
Months
Ended June
30,
|
|
2009
|
2008
|
2009
|
2008
|
|
|
|
|
|
Operating
Revenue:
|
|
|
|
|
|
Mainline
|
$2,644
|
$3,365
|
$5,173
|
$6,380
|
|
Regional
|
482
|
679
|
914
|
1,234
|
|
Total Consolidated
|
$3,126
|
$4,044
|
$6,087
|
$7,614
|
|
|
|
|
|
Operating
Income (Loss):
|
|
|
|
|
|
Mainline
|
$ (64)
|
$ 12
|
$ -
|
$ 48
|
|
Regional
|
(90)
|
(83)
|
(208)
|
(185)
|
|
Total Consolidated
|
$ (154)
|
$ (71)
|
$ (208)
|
$ (137)
|
|
|
|
|
|
|
Net
Income (Loss):
|
|
|
|
|
|
Mainline
|
$ (120)
|
$ 46
|
$ (135)
|
$ 32
|
|
Regional
|
(93)
|
(51)
|
(214)
|
(119)
|
|
Total Consolidated
|
$ (213)
|
$ (5)
|
$ (349)
|
$ (87)
|
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
15 - COMMITMENTS AND CONTINGENCIES
Aircraft Purchase
Commitments. As of June 30, 2009, we had firm commitments to
purchase 83 new aircraft (51 Boeing 737 aircraft,
seven Boeing 777 aircraft and 25 Boeing 787 aircraft) scheduled for delivery
from 2009 through 2016, with an estimated aggregate cost of $5.3 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 June 30, 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 five new Boeing 737-900ERs, which are scheduled for delivery in
the third quarter of 2009. In July 2009, we obtained additional
financing for two additional new Boeing 737-900ER aircraft, one of which was
delivered to us and financed under this arrangement in July
2009. With these agreements, we have financing commitments in place
for all aircraft scheduled for delivery to us in 2009. We also have
backstop financing available for the two Boeing 777-200ER aircraft and 12 Boeing
737 aircraft scheduled for delivery in 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 June 30, 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
June 30, 2009 in the amount of $64 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, among other things,
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 June 30, 2009,
we had $1.5 billion of floating rate debt and $245 million of fixed rate debt,
with remaining terms of up to 11 years, which 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 $87 million if our unrestricted cash, cash equivalents and
short-term investments balance falls below $2.0
billion;
|
·
|
a
total of $252 million if we fail to maintain the minimum unsecured debt
ratings specified above;
|
·
|
a
total of $472 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 $1.0 billion 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.
Credit
Ratings. At June 30, 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, as discussed above, we would have to post
additional collateral of approximately $252 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. We
could also be required to post additional collateral with our fuel hedge
counterparties if our credit ratings were to fall. However, the
amount of collateral required would be limited to the fair value of the related
derivative instruments. Our fuel derivative contracts do not contain
any other credit risk-related contingent features, other than those related to a
change in control.
Employees. As
of June 30, 2009, we had approximately 43,365 employees, which, due to the
number of part-time employees, represents 40,455 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. On July 6, 2009, our flight simulator technicians ratified a
new four-year collective bargaining agreement with us. We are meeting
with representatives of the applicable unions representing our other unionized
workgroups 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 did not agree that we were required to indemnify Honeywell
with respect to the EPA and Tierra Solutions claims and Honeywell invoked
arbitration procedures under its sale and purchase agreement with
us. Catellus agreed to indemnify and defend us in connection with the
EPA and Tierra Solutions claims, including indemnification and defense in
connection with the arbitration with Honeywell. On June 15, 2009, we
received the arbitrator’s decision in our favor, which found that Honeywell is
not entitled to indemnification and defense from us with respect to the EPA and
Tierra Solutions claims.
At June 30, 2009, we had an accrual for
estimated costs of environmental remediation throughout our system of $31
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 June
30, 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 Annual
Report on Form 10-K for the year ended December 31, 2008 (the “2008 Form 10-K”)
and in our reports and registration statements filed from time to time with the
Securities and Exchange Commission (“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 June 30, 2009, we served 119 domestic and 120
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 SEC.
Second
Quarter Financial Highlights
·
|
We
recorded a net loss of $213 million in the second quarter of
2009.
|
|
|
·
|
Passenger
revenue decreased 24.2% during the second quarter of 2009 as compared to
the second quarter of 2008 primarily due to lower fares and less high
yield business traffic attributable to the global recession. We
estimate that the outbreak of the H1N1 flu virus reduced passenger revenue
by approximately $50 million during the quarter.
|
|
|
·
|
We
recorded an operating loss of $154 million during the second quarter of
2009 as compared to an operating loss of $71 million in the second quarter
of 2008, due primarily to significantly reduced passenger revenue offset
in part by lower fuel expenses.
|
|
|
·
|
Unrestricted
cash, cash equivalents and short-term investments totaled $2.8 billion at
June 30, 2009.
|
Second
Quarter Operational Highlights
·
|
Consolidated
traffic decreased 6.4% and capacity decreased 7.8% during the second
quarter of 2009 as compared to the second quarter of 2008, resulting in a
consolidated load factor of 82.7% for the second quarter of
2009.
|
|
|
·
|
We
recorded a U.S. Department of Transportation (“DOT”) on-time arrival rate
of 78.7% and a mainline segment completion factor of 99.6% for the second
quarter of 2009, compared to a DOT on-time arrival rate of 73.1% and a
mainline segment completion factor of 99.5% for the second quarter of
2008.
|
|
|
·
|
We
placed one new Boeing 737-900ER aircraft into service and removed four
Boeing 737-500 aircraft from
service.
|
Outlook
The severe global economic recession
has significantly diminished the demand for air travel and disrupted the global
capital markets, resulting in a difficult financial environment for U.S. network
carriers. 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 markets for capital and/or achieve and
sustain profitability. Although access to the troubled capital
markets has improved over the past several months, as evidenced by our recent
financing transactions, we cannot give any assurances due to the economic
environment that we will be able to obtain additional financing or otherwise
access the markets for capital in the future on acceptable terms (or at
all). Moreover, continuing declines in our passenger and cargo
revenues are hindering our ability to achieve and sustain profitability and,
given the losses we incurred during the first six months of 2009, under current
market conditions we expect to incur a significant loss for the full year
2009.
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 9.5%
decrease in traffic, as measured by miles flown by revenue passengers during the
first half of 2009 as compared to the first half of 2008. The decline
in demand has disproportionately reduced the volume of high yield traffic, as
many business travelers are either curtailing their travel or purchasing lower
yield economy tickets.
The global economic recession has
severely disrupted the global capital markets, resulting in a diminished
availability of financing and higher cost for financing that is
obtainable. If economic conditions again worsen or these markets
experience further disruptions, 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 half of 2009. Our average consolidated (mainline and
regional) jet fuel price per gallon including related taxes decreased to $1.95 in the first
half of 2009 from $3.14 in the first half of 2008. However, the
continued volatility in jet fuel prices, which ranged from $1.12 per gallon to
$1.90 per gallon in the first six months of 2009, 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. Our hedge contracts for the first six months of 2009, which
were largely entered into before oil prices fell, resulted in $0.42 per gallon
of additional fuel expense during the first half of 2009. 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.
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.
New Revenue-Generating and
Cost Saving Measures. In response to the significant decline
in revenue, we are implementing a number of measures to raise revenues and
reduce costs that are designed to achieve approximately $100 million in annual
benefits when fully implemented in 2010. These measures include
eliminating approximately 1,700 positions across the company, including
management and clerical positions. This is in addition to the
previously announced elimination of 500 reservation agent positions and special
company offered leaves of absence extended for 700 flight
attendants. We are offering employees voluntary programs to minimize
the number of involuntary furloughs and reductions in force. We are
also increasing domestic checked baggage fees by $5 for customers who do not
prepay those fees online, effective immediately for travel August 19, 2009 and
beyond, and increasing the telephone reservation booking service fee by $5
effective immediately.
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. By early January 2010, we expect
to remove all of our remaining Boeing 737-300 aircraft and nine additional
Boeing 737-500 aircraft from service.
Our future ability to grow our capacity
could be adversely impacted by manufacturer delays in aircraft
deliveries. In June 2009, Boeing announced an additional delay to its
787 aircraft program. Boeing has not yet provided an updated 787
delivery schedule. Prior to this delay, we expected the first of our
25 Boeing 787 aircraft to be delivered in 2011 instead of the first half of 2009
as originally scheduled.
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
approved on July 10, 2009. Final approval by the DOT of this
application enables us, United and these other immunized Star Alliance carriers
to work closely together to deliver highly competitive international flight
schedules, fares and service and provides competitive balance to
antitrust-immunized carriers in SkyTeam. Additionally, we, United,
Lufthansa and Air Canada have received final DOT approval to establish a
trans-Atlantic joint venture to create a more efficient and comprehensive
trans-Atlantic network for our respective customers, offering those customers
more service, scheduling and pricing options and establishing a framework for
similar joint ventures in other regions of the world. The DOT’s
approval of antitrust immunity is subject to certain conditions and limitations
that are not expected to diminish materially the benefits of our participation
in Star Alliance or the trans-Atlantic joint venture. In addition, we
are seeking a modification to our existing pilot collective bargaining
agreement, which would permit us to engage in a joint venture with a domestic
air carrier.
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. On July 6, 2009, our flight simulator technicians ratified a
new four-year collective bargaining agreement with us. We are meeting
with representatives of the applicable unions representing our other unionized
workgroups 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.
Management
Changes. On July 16, 2009, we announced that Larry Kellner,
our chairman and chief executive officer, will leave effective December 31, 2009
to head a new private equity firm. Jeff Smisek, our president and
chief operating officer and a member of our board of directors, will become
chairman and chief executive officer effective January 1, 2010.
RESULTS
OF OPERATIONS
The following discussion provides an
analysis of our results of operations and reasons for material changes therein
for the three and six months ended June 30, 2009 as compared to the
corresponding periods in 2008. As further discussed in the notes to
our consolidated financial statements, our consolidated financial statements for
the three and six months ended June 30, 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.
Comparison
of Three Months Ended June 30, 2009 to Three Months Ended June 30,
2008
Consolidated
Results of Operations
Statistical
Information. Certain statistical information for our
consolidated operations for the three months ended June 30 is as
follows:
|
2009
|
2008
|
Increase
(Decrease)
|
|
|
|
|
Passengers
(thousands)
(1)
|
16,348
|
17,962
|
(9.0)%
|
Revenue
passenger miles (millions) (2)
|
23,166
|
24,746
|
(6.4)%
|
Available
seat miles (millions)
(3)
|
28,007
|
30,383
|
(7.8)%
|
Passenger
load factor
(4)
|
82.7%
|
81.4%
|
1.3 pts.
|
Passenger
revenue per available seat mile (cents)
|
9.88
|
12.01
|
(17.7)%
|
Average
yield per revenue passenger mile (cents) (5)
|
11.94
|
14.75
|
(19.1)%
|
Average
price per gallon of fuel, including fuel taxes
|
$2.07
|
$3.46
|
(40.2)%
|
Fuel
gallons consumed
(millions)
|
430
|
478
|
(10.0)%
|
(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 $213 million in the
second quarter of 2009 as compared to $5 million for the second quarter of
2008. We consider a key measure of our performance to be operating
loss, which was $154 million for the second quarter of 2009, as compared to $71
million for the second quarter of 2008. Significant components of our
consolidated operating results for the three months ended June 30 are as follows
(in millions, except percentage changes):
|
|
Increase
|
%
Increase
|
|
2009
|
2008
|
(Decrease)
|
(Decrease)
|
|
|
|
|
|
Operating
Revenue
|
$3,126
|
$4,044
|
$(918)
|
|
(22.7)%
|
|
Operating
Expenses
|
3,280
|
4,115
|
(835)
|
|
(20.3)%
|
|
Operating
Loss
|
(154)
|
(71)
|
83
|
|
NM
|
|
Nonoperating
Income (Expense)
|
(59)
|
22
|
(81)
|
|
NM
|
|
Income
Tax
Benefit
|
-
|
44
|
(44)
|
|
(100.0)%
|
|
|
|
|
|
|
|
|
Net
Loss
|
$ (213)
|
$ (5)
|
$ 208
|
|
NM
|
|
NM – Not
Meaningful
Each of these items is discussed in the
following sections.
Operating
Revenue. The table below shows components of operating revenue
for the quarter ended June 30, 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
Second Quarter 2009 vs
Second Quarter 2008
|
|
(in
millions)
|
Revenue
|
RASM
|
ASMs
|
|
|
|
|
|
Passenger
revenue:
|
|
|
|
|
Domestic
|
$1,167
|
|
(22.4)%
|
|
(14.3)%
|
(9.5)%
|
Trans-Atlantic
|
577
|
|
(28.3)%
|
|
(19.8)%
|
(10.6)%
|
Latin
America
|
345
|
|
(20.8)%
|
|
(16.5)%
|
(5.2)%
|
Pacific
|
211
|
|
(12.3)%
|
|
(22.3)%
|
12.8 %
|
Total
Mainline
|
2,300
|
|
(22.9)%
|
|
(16.9)%
|
(7.3)%
|
|
|
|
|
|
|
|
Regional
|
467
|
|
(29.9)%
|
|
(20.5)%
|
(11.8)%
|
|
|
|
|
|
|
|
Total
|
2,767
|
|
(24.2)%
|
|
(17.7)%
|
(7.8)%
|
|
|
|
|
|
|
|
Cargo
|
82
|
|
(37.9)%
|
|
|
|
Other
|
277
|
|
5.7 %
|
|
|
|
|
|
|
|
|
|
|
Operating
Revenue
|
$3,126
|
|
(22.7)%
|
|
|
|
Passenger revenue decreased
significantly in the second quarter of 2009 as compared to the second quarter of
2008 due to reduced traffic, less capacity and lower RASM. The
reduced traffic and lower RASM reflects lower fares and less high yield business
traffic attributable to the global recession. The decline in demand
has disproportionately reduced the volume of high yield traffic, as many
business travelers are either curtailing their travel or purchasing lower yield
economy tickets. We estimate that the outbreak of the H1N1 flu virus
reduced passenger revenue by approximately $50 million during the
quarter.
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 in 2008 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 and decreased revenue associated with sales of mileage credits in our
OnePass frequent flyer program.
Operating
Expenses. The table below shows period-to-period comparisons
by type of operating expense for our consolidated operations for the three
months ended June 30 (in millions, except percentage changes):
|
2009
|
2008
|
Increase
(Decrease)
|
%
Increase
(Decrease)
|
|
|
|
|
|
Aircraft fuel and related
taxes
|
$ 891
|
$1,653
|
$(762)
|
|
(46.1)%
|
|
Wages, salaries and related
costs
|
799
|
704
|
95
|
|
13.5 %
|
|
Aircraft
rentals
|
235
|
246
|
(11)
|
|
(4.5)%
|
|
Regional capacity purchase,
net
|
217
|
299
|
(82)
|
|
(27.4)%
|
|
Landing fees and other
rentals
|
216
|
210
|
6
|
|
2.9 %
|
|
Maintenance, materials and
repairs
|
161
|
167
|
(6)
|
|
(3.6)%
|
|
Distribution
costs
|
150
|
194
|
(44)
|
|
(22.7)%
|
|
Depreciation and
amortization
|
118
|
108
|
10
|
|
9.3
%
|
|
Passenger
services
|
96
|
107
|
(11)
|
|
(10.3)%
|
|
Special
charges
|
44
|
58
|
(14)
|
|
NM
|
|
Other
|
353
|
369
|
(16)
|
|
(4.3)%
|
|
|
$3,280
|
$4,115
|
$(835)
|
|
(20.3)%
|
|
Operating expenses decreased 20.3%
primarily due to the following:
·
|
Aircraft fuel and
related taxes decreased due to a 40.2% decrease in consolidated jet
fuel prices and decreased flying. Our average jet fuel price
per gallon including related taxes decreased to $2.07 in the second
quarter of 2009 from $3.46 in the second quarter of 2008. Our
average jet fuel price includes losses related to our fuel hedging program
of $0.49 per gallon in the second quarter of 2009, compared to gains of
$0.17 per gallon in the second quarter of 2008.
|
|
|
·
|
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 in September 2008. Expenses
in the second quarter of 2009 also include $41 million of higher pension
expense resulting from lower returns on plan assets.
|
|
|
·
|
Aircraft
rentals decreased due to the retirement of leased Boeing 737
aircraft in the second half of 2008 and the first half of
2009. New aircraft delivered in 2008 and the first half 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 June 30 (in millions, except
percentage changes):
|
|
|
|
Increase
|
%
Increase
|
|
2009
|
2008
|
(Decrease)
|
(Decrease)
|
|
|
|
|
|
Capacity
purchase expenses
|
$217
|
|
$360
|
|
$(143)
|
|
(39.7)%
|
|
Aircraft
sublease income
|
-
|
|
(61)
|
|
(61)
|
|
(100.0)%
|
|
Regional
capacity purchase, net
|
$217
|
|
$299
|
|
$ (82)
|
|
(27.4)%
|
|
|
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 June 30, 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 our capacity purchase agreement with ExpressJet for
the three months ended June 30, 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, all of which resulted from decreased
passenger revenue.
|
|
|
·
|
Passenger
services expenses decreased due to fewer meals and beverages in the
second quarter of 2009 compared to the second quarter of 2008, resulting
from the decreased demand for air travel in the weak
economy.
|
|
|
·
|
Special charges
in the second quarter of 2009 include $31 million of non-cash impairments
on owned Boeing 737-300 and 737-500 aircraft and related assets, an $8
million non-cash charge related to the disposition of three 737-300
aircraft and a $4 million non-cash charge to write off certain obsolete
spare parts.
|
|
|
|
Special
charges in the second quarter of 2008 include $37 million of non-cash
impairments on owned Boeing 737-300 and 737-500 aircraft and related
assets and a non-cash charge of $14 million to write down spare parts and
supplies for the Boeing 737-300 and 737-500 fleets to the lower of cost or
net realizable value, partially offset by $10 million of gains on the sale
of two owned Boeing 737-500 aircraft. We received proceeds of
$26 million on the sale of these aircraft. Other special
charges in the second quarter of 2008 include $17 million of charges
related to contract settlements with regional carriers and unused
facilities.
|
|
|
·
|
Other operating
expenses decreased due to insurance settlements received in 2009
related to Hurricane Ike, reduced technology expenses resulting from new
contracts, lower expense due to station closings, the impact on certain
expenses of more favorable foreign currency exchange rates, lower OnePass
reward expenses 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.
|
Nonoperating Income
(Expense). Total nonoperating income decreased $81 million to
a net expense in the second quarter of 2009 compared to the second quarter of
2008 due to the following:
·
|
Net interest
expense increased $11 million primarily as a result of lower
interest income.
|
|
|
·
|
Gain on sale of
investments in 2008 consisted of $78 million related to the sale of
our remaining interest in Copa.
|
|
|
·
|
Other-than-temporary
impairment losses on investments were $29 million in the second
quarter of 2008, reflecting the decline in value of student loan-related
auction rate securities.
|
|
|
·
|
Other nonoperating
income (expense) included fuel hedge ineffectiveness gains of $8
million and $33 million in the second quarter of 2009 and 2008,
respectively. This ineffectiveness was caused by our non-jet
fuel derivatives experiencing a higher relative increase in value than the
jet fuel being hedged.
|
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 ultimately will not be realized. As a result, our
pre-tax losses for the second 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 using larger jets while the regional segment currently
consists of flights utilizing aircraft with a capacity of 78 or fewer
seats. As of June 30, 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 passenger revenue, (2) much of the 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 June 30 is as follows:
|
|
Increase
|
|
2009
|
2008
|
(Decrease)
|
|
|
|
|
Mainline
Operations:
|
|
|
|
Passengers
(thousands)
|
11,876
|
13,000
|
(8.6)%
|
Revenue
passenger miles (millions)
|
20,772
|
22,017
|
(5.7)%
|
Available
seat miles
(millions)
|
24,963
|
26,933
|
(7.3)%
|
Cargo
ton miles
(millions)
|
219
|
263
|
(16.7)%
|
Passenger
load factor:
|
|
|
|
Mainline
|
83.2%
|
81.7%
|
1.5 pts.
|
Domestic
|
86.4%
|
84.7%
|
1.7 pts.
|
International
|
80.2%
|
78.8%
|
1.4 pts.
|
|
|
|
|
Passenger
revenue per available seat mile (cents)
|
9.21
|
11.08
|
(16.9)%
|
Total
revenue per available seat mile (cents)
|
10.59
|
12.49
|
(15.2)%
|
Average
yield per revenue passenger mile (cents)
|
11.07
|
13.55
|
(18.3)%
|
Average
fare per revenue
passenger
|
$195.82
|
$231.94
|
(15.6)%
|
|
|
|
|
Cost
per available seat mile, including special
charges (cents)
|
10.85
|
12.45
|
(12.9)%
|
Special
charges per available seat miles (cents)
|
0.18
|
0.16
|
NM
|
|
|
|
|
Average
price per gallon of fuel, including fuel taxes
|
$2.08
|
$3.45
|
(39.7)%
|
Fuel
gallons consumed (millions)
|
358
|
395
|
(9.4)%
|
|
|
|
|
Aircraft
in fleet at end of period (1)
|
351
|
375
|
(6.4)%
|
Average
length of aircraft flight (miles)
|
1,551
|
1,497
|
3.6 %
|
Average
daily utilization of each aircraft (hours)
|
10:46
|
11:34
|
(7.0)%
|
|
|
|
|
Regional
Operations:
|
|
|
|
Passengers
(thousands)
|
4,472
|
4,962
|
(9.9)%
|
Revenue
passenger miles (millions)
|
2,394
|
2,729
|
(12.3)%
|
Available
seat miles (millions)
|
3,044
|
3,450
|
(11.8)%
|
Passenger
load
factor
|
78.7%
|
79.1%
|
(0.4) pts.
|
Passenger
revenue per available seat mile (cents)
|
15.35
|
19.31
|
(20.5) %
|
Average
yield per revenue passenger mile (cents)
|
19.51
|
24.41
|
(20.1)%
|
Aircraft
in fleet at end of period (1)
|
266
|
278
|
(4.3)%
|
________________________
(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 June 30 are as follows (in
millions, except percentage changes):
|
2009
|
2008
|
Increase
(Decrease)
|
%
Increase
(Decrease)
|
|
|
|
|
|
Operating
Revenue
|
$2,644
|
$3,365
|
$(721)
|
|
(21.4)%
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
Aircraft
fuel and related taxes
|
743
|
1,363
|
(620)
|
|
(45.5)%
|
|
Wages,
salaries and related costs
|
757
|
689
|
68
|
|
9.9 %
|
|
Aircraft
rentals
|
157
|
167
|
(10)
|
|
(6.0)%
|
|
Landing
fees and other rentals
|
189
|
194
|
(5)
|
|
(2.6)%
|
|
Maintenance,
materials and repairs
|
161
|
167
|
(6)
|
|
(3.6)%
|
|
Distribution
costs
|
128
|
164
|
(36)
|
|
(22.0)%
|
|
Depreciation
and amortization
|
115
|
105
|
10
|
|
9.5 %
|
|
Passenger
services
|
89
|
102
|
(13)
|
|
(12.7)%
|
|
Special
charges
|
44
|
43
|
1
|
|
NM
|
|
Other
|
325
|
359
|
(34)
|
|
(9.5)%
|
|
|
2,708
|
3,353
|
(645)
|
|
(19.2)%
|
|
|
|
|
|
|
|
|
Operating
Income (Loss)
|
$ (64)
|
$ 12
|
$ (76)
|
|
NM
|
|
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 June 30 are as follows (in
millions, except percentage changes):
|
|
Increase
|
%
Increase
|
|
2009
|
2008
|
(Decrease)
|
(Decrease)
|
|
|
|
|
|
Operating
Revenue
|
$482
|
$679
|
$(197)
|
|
(29.0)%
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
Aircraft
fuel and related taxes
|
148
|
290
|
(142)
|
|
(49.0)%
|
|
Wages,
salaries and related costs
|
42
|
15
|
27
|
|
180.0 %
|
|
Aircraft
rentals
|
78
|
79
|
(1)
|
|
(1.3)%
|
|
Regional
capacity purchase, net
|
217
|
299
|
(82)
|
|
(27.4)%
|
|
Landing
fees and other rentals
|
27
|
16
|
11
|
|
68.8
%
|
|
Distribution
costs
|
22
|
30
|
(8)
|
|
(26.7)%
|
|
Depreciation
and amortization
|
3
|
3
|
-
|
|
-
|
|
Passenger
services
|
7
|
5
|
2
|
|
40.0 %
|
|
Special
charges
|
-
|
15
|
(15)
|
|
NM
|
|
Other
|
28
|
10
|
18
|
|
180.0 %
|
|
|
572
|
762
|
(190)
|
|
(24.9)%
|
|
|
|
|
|
|
|
|
Operating
Loss
|
$(90)
|
$ (83)
|
$ 7
|
|
8.4
%
|
|
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, passenger services 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.
Comparison
of Six Months Ended June 30, 2009 to Six Months Ended June 30, 2008
Consolidated
Results of Operations
Statistical
Information. Certain statistical information for our
consolidated operations for the six months ended June 30 is as
follows:
|
2009
|
2008
|
%
Increase
(Decrease)
|
|
|
|
|
Passengers
(thousands)
|
30,756
|
34,401
|
(10.6)%
|
Revenue
passenger miles (millions)
|
42,956
|
47,025
|
(8.7)%
|
Available
seat miles
(millions)
|
54,331
|
58,759
|
(7.5)%
|
Passenger
load
factor
|
79.1%
|
80.0%
|
(0.9)
pts.
|
Passenger
revenue per available seat mile (cents)
|
9.91
|
11.70
|
(15.3)%
|
Average
yield per revenue passenger mile (cents)
|
12.53
|
14.62
|
(14.3)%
|
Average
price per gallon of fuel, including fuel taxes
|
$1.95
|
$3.14
|
(37.9)%
|
Fuel
gallons consumed (millions)
|
833
|
929
|
(10.3)%
|
Results of
Operations. We recorded a net loss of $349 million in the
first six months of 2009 as compared to an $87 million net loss in the first six
months of 2008. We consider a key measure of our performance to be
operating loss, which was $208 million for the first six months of 2009, as
compared to a $137 million net loss in the first six months of
2008. Significant components of our consolidated operating results
for the six months ended June 30 are as follows (in millions, except percentage
changes):
|
|
Increase
|
%
Increase
|
|
2009
|
2008
|
(Decrease)
|
(Decrease)
|
|
|
|
|
|
Operating
Revenue
|
$6,087
|
$7,614
|
$(1,527)
|
|
(20.1)%
|
|
Operating
Expenses
|
6,295
|
7,751
|
(1,456)
|
|
(18.8)%
|
|
Operating
Loss
|
(208)
|
(137)
|
71
|
|
51.8
%
|
|
Nonoperating
Income (Expense)
|
(141)
|
(40)
|
(101)
|
|
NM
|
|
Income
Tax
Benefit
|
-
|
90
|
(90)
|
|
(100.0)%
|
|
|
|
|
|
|
|
|
Net
Loss
|
$ (349)
|
$ (87)
|
$ 262
|
|
NM
|
|
Each of these items is discussed in the
following sections.
Operating
Revenue. The table below shows components of operating revenue
for the six months ended June 30, 2009 and period to period comparisons for
operating revenue, RASM and ASMs by geographic region for our mainline and
regional operations:
|
Revenue
|
Percentage
Increase (Decrease) in
June 30, 2009 YTD vs
June 30, 2008 YTD
|
|
(in
millions)
|
Revenue
|
RASM
|
ASMs
|
|
|
|
|
|
Passenger
revenue:
|
|
|
|
|
Domestic
|
$2,238
|
|
(21.7)%
|
|
(12.3)%
|
(10.8)%
|
Trans-Atlantic
|
1,052
|
|
(25.5)%
|
|
(19.7)%
|
(7.2)%
|
Latin
America
|
765
|
|
(14.7)%
|
|
(13.2)%
|
(1.8)%
|
Pacific
|
443
|
|
(10.9)%
|
|
(11.7)%
|
0.9
%
|
Total
Mainline
|
4,498
|
|
(20.6)%
|
|
(14.2)%
|
(7.5)%
|
|
|
|
|
|
|
|
Regional
|
886
|
|
(26.7)%
|
|
(20.2)%
|
(8.1)%
|
|
|
|
|
|
|
|
Total
|
5,384
|
|
(21.7)%
|
|
(15.3)%
|
(7.5)%
|
|
|
|
|
|
|
|
Cargo
|
167
|
|
(34.3)%
|
|
|
|
Other
|
536
|
|
10.1 %
|
|
|
|
|
|
|
|
|
|
|
Operating
Revenue
|
$6,087
|
|
(20.1)%
|
|
|
|
Passenger revenue decreased
significantly in the first half of 2009 as compared to the first half of 2008
due to reduced traffic, less capacity and lower RASM. The reduced
traffic and lower RASM reflects lower fares and less high yield business traffic
attributable to the global recession. The decline in demand has
disproportionately reduced the volume of high yield traffic, as many business
travelers are either curtailing their travel or purchasing lower yield economy
tickets.
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 in 2008 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 and decreased revenue associated with sales of mileage credits in our
OnePass frequent flyer program.
Operating
Expenses. The table below shows period-to-period comparisons
by type of operating expense for our consolidated operations for the six months
ended June 30 (in millions, except percentage changes):
|
2009
|
2008
|
Increase
(Decrease)
|
%
Increase
(Decrease)
|
|
|
|
|
|
Aircraft fuel and related
taxes
|
$1,626
|
$2,915
|
$(1,289)
|
(44.2)%
|
|
Wages, salaries and related
costs
|
1,564
|
1,432
|
132
|
9.2
%
|
|
Aircraft
rentals
|
472
|
493
|
(21)
|
(4.3)%
|
|
Regional capacity purchase,
net
|
431
|
591
|
(160)
|
(27.1)%
|
|
Landing fees and other
rentals
|
425
|
418
|
7
|
1.7
%
|
|
Maintenance, materials and
repairs
|
314
|
326
|
(12)
|
(3.7)%
|
|
Distribution
costs
|
307
|
375
|
(68)
|
(18.1)%
|
|
Depreciation and
amortization
|
229
|
215
|
14
|
6.5
%
|
|
Passenger
services
|
183
|
203
|
(20)
|
(9.9)%
|
|
Special
charges
|
48
|
50
|
(2)
|
NM
|
|
Other
|
696
|
733
|
(37)
|
(5.0)%
|
|
|
$6,295
|
$7,751
|
$(1,456)
|
(18.8)%
|
|
Operating
expenses decreased 18.8% primarily due to the following:
·
|
Aircraft fuel and
related taxes decreased due to a 37.9% decrease in consolidated jet
fuel prices and decreased flying. Our average jet fuel price
per gallon including related taxes decreased to $1.95 in the first half of
2009 from $3.14 in the first half of 2008. Our average jet fuel
price includes losses related to our fuel hedging program of $0.42 per
gallon in the first half of 2009, compared to gains of $0.12 per gallon in
the first half of 2008.
|
|
|
·
|
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 in September 2008. Expenses
in the first half of 2009 also include $83 million of higher pension
expense resulting from lower returns on plan assets.
|
|
|
·
|
Aircraft
rentals decreased due to the retirement of leased Boeing 737
aircraft in the second half of 2008 and the first half of
2009. New aircraft delivered in 2008 and the first half 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 six months ended June 30 (in millions, except percentage
changes):
|
|
|
|
Increase
|
%
Increase
|
|
2009
|
2008
|
(Decrease)
|
(Decrease)
|
|
|
|
|
|
Capacity
purchase expenses
|
$431
|
|
$ 713
|
|
$(282)
|
|
(39.6)%
|
|
Aircraft
sublease income
|
-
|
|
(122)
|
|
(122)
|
|
(100.0)%
|
|
Regional
capacity purchase, net
|
$431
|
|
$ 591
|
|
$(160)
|
|
(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 six months ended June 30, 2009 because ExpressJet no longer pays
sublease rent for aircraft operated on our behalf. Sublease
income of $11 million and $52 million on aircraft operated by ExpressJet
outside the scope of our capacity purchase agreement with ExpressJet for
the six months ended June 30, 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, all of which resulted from decreased
passenger revenue.
|
|
|
·
|
Passenger
services expenses decreased due to fewer meals and beverages in the
first half of 2009 compared to the first half of 2008, resulting from the
decreased demand for air travel in the weak economy.
|
|
|
·
|
Special charges
(credits) in the first six months of 2009 include $31 million of
non-cash impairments on owned Boeing 737-300 and 737-500 aircraft and
related assets, an $8 million non-cash charge related to the disposition
of three 737-300 aircraft, a $4 million charge for future lease and other
related costs on a permanently grounded Boeing 737-300 aircraft and a $4
million non-cash charge to write off certain obsolete spare
parts.
|
|
|
|
Special
charges in the first six months of 2008 include $37 million of non-cash
impairments on owned Boeing 737-300 and 737-500 aircraft and related
assets and a non-cash charge of $14 million to write down spare parts and
supplies for the Boeing 737-300 and 737-500 fleets to the lower of cost or
net realizable value, partially offset by $18 million of gains on the sale
of five owned Boeing 737-500 aircraft. We received proceeds of
$68 million on the sale of these aircraft. Other special
charges in the first six months of 2008 include $17 million of charges
related to contract settlements with regional carriers and unused
facilities.
|
|
|
·
|
Other operating
expenses decreased due to insurance settlements received in 2009
related to Hurricane Ike, reduced technology expenses resulting from new
contracts, lower expense due to station closings, the impact on certain
expenses of more favorable foreign currency exchange rates, lower OnePass
reward expenses 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.
|
Nonoperating Income
(Expense). Total nonoperating expense increased $101 million
in the first half of 2009 compared to the first half of 2008 due to the
following:
·
|
Net interest
expense increased $30 million primarily as a result of lower
interest income.
|
|
|
·
|
Gain on sale of
investments in 2008 consisted of $78 million related to the sale of
our remaining interests in Copa.
|
|
|
·
|
Other-than-temporary
impairment losses on investments were $29 million in the first half
of 2008, reflecting the decline in value of student loan-related auction
rate securities.
|
|
|
·
|
Other nonoperating
income (expense) included fuel hedge ineffectiveness gains of $6
million and $33 million in the first half of 2009 and 2008,
respectively. This ineffectiveness was caused by our non-jet
fuel derivatives experiencing a higher relative increase in value than the
jet fuel being hedged.
|
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 ultimately will not be realized. As a result, our
pre-tax losses for the first half of 2009 were not reduced by any tax
benefit.
Segment
Results of Operations
Statistical
Information. Certain statistical information for our segments'
operations for the six months ended June 30 is as follows:
|
|
Increase
|
|
2009
|
2008
|
(Decrease)
|
|
|
|
|
Mainline
Operations:
|
|
|
|
Passengers
(thousands)
|
22,438
|
25,196
|
(10.9)%
|
Revenue
passenger miles (millions)
|
38,462
|
41,940
|
(8.3)%
|
Available
seat miles
(millions)
|
48,316
|
52,211
|
(7.5)%
|
Cargo
ton miles
(millions)
|
420
|
524
|
(19.8)%
|
Passenger
load factor:
|
|
|
|
Mainline
|
79.6%
|
80.3%
|
(0.7)
pts.
|
Domestic
|
83.2%
|
83.4%
|
(0.2) pts.
|
International
|
76.2%
|
77.3%
|
(1.1) pts.
|
|
|
|
|
Passenger
revenue per available seat mile (cents)
|
9.31
|
10.85
|
(14.2)%
|
Total
revenue per available seat mile (cents)
|
10.71
|
12.22
|
(12.4)%
|
Average
yield per revenue passenger mile (cents)
|
11.69
|
13.50
|
(13.4)%
|
Average
fare per revenue passenger
|
$202.48
|
$227.07
|
(10.8)%
|
|
|
|
|
Cost
per available seat mile, including special charges (cents)
(1)
|
10.71
|
12.13
|
(11.7)%
|
Special
charges per available seat miles (cents)
|
0.10
|
0.06
|
NM
|
|
|
|
|
Average
price per gallon of fuel, including fuel taxes
|
$1.96
|
$3.13
|
(37.4)%
|
Fuel
gallons consumed (millions)
|
692
|
769
|
(10.0)%
|
|
|
|
|
Aircraft
in fleet at end of period (1)
|
351
|
375
|
(6.4)%
|
Average
length of aircraft flight (miles)
|
1,527
|
1,477
|
3.4 %
|
Average
daily utilization of each aircraft (hours)
|
10:34
|
11:23
|
(7.1)%
|
|
|
|
|
Regional
Operations:
|
|
|
|
Passengers
(thousands)
|
8,318
|
9,205
|
(9.6)%
|
Revenue
passenger miles (millions)
|
4,494
|
5,085
|
(11.6)%
|
Available
seat miles (millions)
|
6,015
|
6,548
|
(8.1)%
|
Passenger
load
factor
|
74.7%
|
77.7%
|
(3.0) pts.
|
Passenger
revenue per available seat mile (cents)
|
14.74
|
18.47
|
(20.2)%
|
Average
yield per revenue passenger mile (cents)
|
19.72
|
23.78
|
(17.1)%
|
Aircraft
in fleet at end of period (1)
|
266
|
278
|
(4.3)%
|
________________________
(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 six months ended June 30 are as follows (in millions,
except percentage changes):
|
2009
|
2008
|
Increase
(Decrease)
|
%
Increase
(Decrease)
|
|
|
|
|
|
Operating
Revenue
|
$5,173
|
$6,380
|
$(1,207)
|
(18.9)%
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
Aircraft
fuel and related taxes
|
1,353
|
2,411
|
(1,058)
|
(43.9)%
|
|
Wages,
salaries and related costs
|
1,480
|
1,402
|
78
|
5.6
%
|
|
Aircraft
rentals
|
315
|
336
|
(21)
|
(6.3)%
|
|
Landing
fees and other rentals
|
373
|
387
|
(14)
|
(3.6)%
|
|
Maintenance,
materials and repairs
|
314
|
326
|
(12)
|
(3.7)%
|
|
Distribution
costs
|
263
|
320
|
(57)
|
(17.8)%
|
|
Depreciation
and amortization
|
223
|
209
|
14
|
6.7
%
|
|
Passenger
services
|
171
|
194
|
(23)
|
(11.9)%
|
|
Special
charges
|
48
|
35
|
13
|
NM
|
|
Other
|
633
|
712
|
(79)
|
(11.1)%
|
|
|
5,173
|
6,332
|
(1,159)
|
(18.3)%
|
|
|
|
|
|
|
|
Operating
Income
|
$ -
|
$ 48
|
$ (48)
|
(100.0)%
|
|
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 six months ended June 30 are as follows (in millions,
except percentage changes):
|
|
Increase
|
%
Increase
|
|
2009
|
2008
|
(Decrease)
|
(Decrease)
|
|
|
|
|
|
Operating
Revenue
|
$ 914
|
$1,234
|
$(320)
|
|
(25.9)%
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
Aircraft
fuel and related taxes
|
273
|
504
|
(231)
|
|
(45.8)%
|
|
Wages,
salaries and related costs
|
84
|
30
|
54
|
|
180.0 %
|
|
Aircraft
rentals
|
157
|
157
|
-
|
|
-
|
|
Regional
capacity purchase, net
|
431
|
591
|
(160)
|
|
(27.1)%
|
|
Landing
fees and other rentals
|
52
|
31
|
21
|
|
67.7
%
|
|
Distribution
costs
|
44
|
55
|
(11)
|
|
(20.0)%
|
|
Depreciation
and amortization
|
6
|
6
|
-
|
|
-
|
|
Passenger
services
|
12
|
9
|
3
|
|
33.3
%
|
|
Special
charges
|
-
|
15
|
(15)
|
|
NM
|
|
Other
|
63
|
21
|
42
|
|
200.0
%
|
|
|
1,122
|
1,419
|
(297)
|
|
(20.9)%
|
|
|
|
|
|
|
|
|
Operating
Loss
|
$ (208)
|
$ (185)
|
$ 23
|
|
12.4
%
|
|
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, passenger services 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 June 30, 2009, we had $2.8
billion in unrestricted cash, cash equivalents and short-term investments, which
is $125 million higher than at December 31, 2008. At June 30, 2009,
we also had $167 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.
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 June 30, 2009, we had
approximately $5.9 billion of debt and capital lease obligations, including $2.5
billion that will come due by the end of 2011 (consisting of $0.4 billion during
the six months ending December 31, 2009, $1.0 billion during 2010 and $1.1
billion during 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 markets for capital 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.
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 global economic recession has
severely disrupted the global capital markets, resulting in a diminished
availability of financing and higher cost for financing that is
obtainable. Although access to the capital markets has improved over
the past several months, if economic conditions worsen or these markets
experience further disruptions, 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, further worsening or disruption of the
global capital markets could have a material adverse effect on our results of
operations and financial condition.
Sources
and Uses of Cash
Operating
Activities. Cash flows provided by operations for the six
months ended June 30, 2009 were $359 million compared to $467 million in the
same period in 2008. The decrease in cash flows is the result of the
significant drop in revenue in 2009, partially offset by lower fuel
costs. Our operating loss was $71 million higher in the first six
months of 2009 than in the comparable period of 2008.
Investing
Activities. Cash flows provided by (used in) investing
activities for the six months ended June 30 were as follows (in
millions):
|
2009
|
2008
|
Change
|
|
|
|
|
Capital
expenditures
|
$(147)
|
$(293)
|
$ 146
|
|
Aircraft
purchase deposits refunded, net
|
17
|
56
|
(39)
|
|
Proceeds
from sales of short-term investments, net
|
233
|
82
|
151
|
|
Proceeds
from sales of property and equipment
|
7
|
74
|
(67)
|
|
Decrease
(increase) in restricted cash, cash
equivalents
and short-term investments, net
|
23
|
(21)
|
44
|
|
Proceeds
from sale of Copa stock
|
-
|
149
|
(149)
|
|
Proceeds
from sales of investments
|
1
|
21
|
(20)
|
|
Other
|
(3)
|
-
|
(3)
|
|
|
$ 131
|
$ 68
|
$ 63
|
|
Capital expenditures decreased during
the six months ended June 30, 2009 from the corresponding prior year period
primarily due to our efforts to reduce expenditures and conserve cash in light
of current economic conditions and payments of $93 million to acquire slots at
London’s Heathrow Airport in the first six months of 2008.
We have substantial commitments for
capital expenditures, including for the acquisition of new
aircraft. As of June 30, 2009, we had firm commitments to purchase 83
new Boeing aircraft scheduled for delivery from 2009 through 2016, with an
estimated aggregate cost of $5.3 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 June 30,
2009.
Projected net capital expenditures for
2009 are as follows (in millions):
Fleet
related (excluding aircraft to be acquired through
the
issuance of debt)
|
$ 190
|
Non-fleet
|
120
|
Spare
parts and capitalized interest
|
56
|
Total
|
$ 366
|
Aircraft
purchase deposits refunded
|
(30)
|
Projected
net capital expenditures
|
$ 336
|
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.
Net purchase deposits refunded were
lower in the first half of 2009 as the result of fewer aircraft deliveries in
the first half of 2009 than in the first half of 2008.
Proceeds from sales of short-term
investments were higher in the first six months of 2009 than in the first six
months of 2008 due to the conversion of short-term investments to cash and cash
equivalents.
We sold five Boeing 737-500 aircraft
during the first half of 2008 and received cash proceeds of $68
million. We have agreements to sell a total of 12 Boeing 737-500
aircraft to two foreign buyers. 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. 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.
Financing
Activities. Cash flows provided by (used in) financing
activities for the six months ended June 30 were as follows (in
millions):
|
2009
|
2008
|
Change
|
|
|
|
|
Payments
on long-term debt and capital lease obligations
|
$(169)
|
$ (267)
|
$ 98
|
|
Proceeds
from issuance of long-term debt
|
30
|
483
|
(453)
|
|
Proceeds
from public offering of common stock
|
-
|
162
|
(162)
|
|
Proceeds
from issuance of common stock pursuant to stock plans
|
5
|
8
|
(3)
|
|
|
$(134)
|
$ 386
|
$(520)
|
|
Cash flows used in financing activities
were reduced by lower proceeds from issuances of debt, partially offset by lower
repayments of debt. Debt issuances in the first six months of 2008
included a $235 million advance purchase of frequent flyer mileage credits for
the year 2016 and $113 million borrowed under a loan facility to finance a
portion of aircraft pre-delivery payment requirements.
In April 2007, we obtained financing
for 12 Boeing 737-800s and 18 Boeing 737-900ERs. We applied this
financing to 30 Boeing aircraft delivered to us in 2008 and 2009 and recorded
related debt of $1.1 billion, including $121 million recorded in the first half
of 2009 and $689 million recorded in the first half of 2008.
During the first half of 2009, we
entered into a loan agreement under which we borrowed $106
million. This floating rate indebtedness is secured by three new
Boeing 737-900ER aircraft and one refinanced Boeing 737-800
aircraft. The loan agreement also provides for additional borrowings
related to the refinancing of one Boeing 737-800 aircraft in August
2009.
In July 2009, we obtained additional
financing totaling $58 million for two additional new Boeing 737-900ER aircraft,
one of which was delivered to us and financed under this arrangement in July
2009.
On July 1, 2009, we obtained financing
for 12 currently owned Boeing aircraft and five new Boeing 737-900ERs, which we
expect to be delivered to us by the end of 2009. A pass-through trust
raised $390 million through the issuance of a single class of pass-through
certificates bearing interest at 9%. The proceeds from the sale of
the certificates are initially being held by a depositary in escrow for the
benefit of the certificate holders until we issue equipment notes to the trust,
which will purchase such notes with a portion of the escrowed
funds. The equipment notes issued with respect to the 12 currently
owned aircraft will generate $249 million in cash for our general corporate
purposes and the other equipment notes issued will generate $141 million to
finance the purchase of the five new aircraft. These escrowed funds
are not guaranteed by us. We 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 January 2010 and will end in July 2016. Additionally, the
certificates have the benefit of a liquidity facility under which a third party
agrees to make up to three semiannual interest payments on the certificates if a
default in the payment of interest occurs.
We also have backstop financing
available for the two Boeing 777-200ER aircraft and 12 Boeing 737 aircraft
scheduled for delivery in 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.
In June 2008, we completed a public
offering of 11 million shares of Class B common stock at a price to the public
of $14.80 per share, raising net proceeds of $162 million for general corporate
purposes.
Other
Liquidity Matters
See the indicated notes to our
consolidated financial statements contained in Item 1 of this report for the
following other matters affecting our liquidity.
Investment
in student loan-related auction rate securities
|
Note
5
|
Fuel
hedges
|
Note
6
|
Pension
obligations
|
Note
10
|
Credit
card processing agreements
|
Note
15
|
Credit
ratings
|
Note
15
|
Aircraft
Fuel. As of June 30, 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
|
6%
|
|
$3.21
|
|
6%
|
|
$2.40
|
|
WTI
crude oil swaps
|
5
|
|
1.33
|
|
5
|
|
1.33
|
|
Total
|
11%
|
|
|
|
11%
|
|
|
|
As of June 30, 2009, we had not hedged
any of our fuel requirements beyond 2009.
At June 30, 2009, our fuel derivatives
were in a net liability position of $17 million (before consideration of
collateral posted with counterparties) resulting from the recent substantial
decline in crude oil prices. Our fuel derivatives are reported at
fair value in either prepayments and other current assets or accrued other
current liabilities, depending on whether the individual contracts are in an
asset or liability position. We estimate that a 10% decrease in the
price of crude oil at June 30, 2009 would increase our net obligation related to
the fuel derivatives outstanding at that date by approximately $11
million.
Because our fuel hedges were in a net
liability position at June 30, 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 $32 million and granted liens in favor of a
counterparty on one Boeing 777-200 aircraft and one Boeing 757-200 aircraft in
lieu of posting up to an additional $25 million in cash. In July
2009, we posted cash collateral with that counterparty, resulting in the release
of the liens on the aircraft. As of July 21, 2009, our total
collateral posted with fuel hedge counterparties consisted of $18 million in
cash. The cash posted as collateral is reported in prepayments and
other current assets in our consolidated balance sheets.
Foreign
Currency. At June 30, 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:
·
|
45%
of our projected Japanese yen-denominated cash inflows
|
·
|
8%
of our euro-denominated cash
inflows
|
As of June 30, 2009, we had not hedged
any of our foreign currency cash flows beyond 2009.
At June 30, 2009, the fair value of our
foreign currency hedges was $1 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 June 30, 2009 (in millions):
|
Increase
in
Fair
Value
|
Increase
in
Underlying
Exposure
|
Resulting
Net
Loss
|
|
|
|
|
Japanese
yen
|
$7
|
|
$(16)
|
|
$(9)
|
|
Euro
|
1
|
|
(16)
|
|
(15)
|
|
Item 4. Controls and
Procedures.
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 June 30, 2009 to provide reasonable
assurance that the information required to be disclosed by Continental 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 June 30, 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 and subsequent quarterly and current reports filed with the
SEC. The risks described in this report and in our 2008 Form 10-K are
not the only risks facing Continental. 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
We have
decided to change our global airline alliance, which involves significant
transition and integration risks. During 2008, we
entered into framework agreements with United, Lufthansa and Air Canada, each a
member of Star Alliance, pursuant to which we are winding down and exiting our
participation in our current alliance, SkyTeam, and plan to join United,
Lufthansa and Air Canada (and other member airlines) in Star
Alliance. This change from SkyTeam to Star Alliance involves
significant transition and integration risks, both because we are required to
end our participation in SkyTeam and wind down our existing SkyTeam
relationships prior to our being able to participate in Star Alliance and
because we may incur costs and/or a loss of revenue (or a delay in anticipated
increased revenue from the new alliance) in connection with these
changes. The significant transition and integration risks
include:
·
|
an
inability to join or a delay in joining Star Alliance due to lack of
applicable approvals or difficulty in satisfying entrance requirements,
including the requirement that we enter into certain bilateral agreements
with each member of Star Alliance;
|
|
|
·
|
significant
revenue dilution as we wind down our participation in SkyTeam and/or
insufficient, or delay in receipt of, revenue from our participation in
Star Alliance, including an inability to maintain our key customer and
business relationships as we transition to Star Alliance;
and
|
|
|
·
|
difficulties
integrating our technology processes with Star Alliance
members.
|
In addition, the full implementation of
some of the arrangements contemplated by our framework agreements requires the
approval of domestic and foreign regulatory agencies. These agencies
may deny us necessary approvals, delay certain approvals or, in connection with
granting any such approvals, impose requirements, limitations or costs on us or
on Star Alliance members, or require us or them to divest slots, gates, routes
or other assets. Such actions may impair the value to us of entering
the alliance or make participation in the alliance by us or them unattractive
and, in certain cases, could prevent us from consummating the transactions
contemplated by the framework agreements.
If any of these risks or costs
materialize, they could have a material adverse effect on our business, results
of operations and financial condition.
Risks
Factors Relating to the Airline Industry
Expanded
government regulation could further increase our operating costs and restrict
our ability to conduct our business. Airlines are
subject to extensive regulatory and legal compliance requirements that result in
significant costs and can adversely affect us. Additional laws,
regulations, airport rates and charges and growth constraints have been proposed
from time to time that could significantly increase the cost of airline
operations or reduce revenue. In addition, to address concerns about
airport congestion, the FAA has designated certain airports, including New York
Liberty, Kennedy and LaGuardia as “high density traffic airports,” and has
imposed operating restrictions at these three airports, including recent
additional capacity reductions at LaGuardia. In addition, the FAA has
designated New York Liberty and Kennedy as Level 3 Coordinated Airports under
the International Air Transport Association Worldwide Scheduling Guidelines,
which requires us to participate in seasonal FAA procedures for capacity
allocation and schedule coordination for New York Liberty and to have slots to
operate at that airport. Although we do not believe that these
current operating restrictions will have a material adverse effect on our
operations at New York Liberty, we cannot predict the impact of future capacity
constraints or allocations or other restrictions on our operations that might be
imposed by the FAA, Congress or other regulators, which could have a material
adverse effect on us.
Additional restrictions on airline
routes and takeoff and landing slots have been or may be proposed that could
affect rights of ownership and transfer. For example, although
currently not effective because of a court order and subject to the FAA’s
proposed withdrawal, the FAA has issued rules that continue the FAA requirement
to have a slot for arrival or departure at New York Liberty, Kennedy and
LaGuardia through 2019. These rules provide that the FAA would
withdraw and auction to the highest bidder annually through 2013 a portion of
each airline's slots at New York Liberty, Kennedy and
LaGuardia. Joined by our airline trade association, the Air Transport
Association, and the Port Authority of New York and New Jersey, which operates
New York Liberty, Kennedy and LaGuardia, we have challenged the legality of the
FAA withdrawal of slots from airlines for non-operational reasons and the slot
auction in the U.S. Court of Appeals for the D.C. Circuit. The court
has ordered the FAA not to implement the rules while our challenge is pending,
so the rules have not become effective and no slot withdrawals or auctions have
occurred under such rules. Moreover, the FAA has proposed to withdraw
these rules and has invited public comment on its proposal. We cannot
provide any assurances that we will prevail in this challenge, but we expect
that the FAA will adopt its proposal to withdraw these rules, which will obviate
the need to challenge them further. Withdrawal and auctioning to the
highest bidder of our slots could have a material adverse effect on us by
causing us to incur substantial costs to successfully bid for them or by
reducing our slot portfolio, requiring us to terminate flights associated with
these slots and increasing our costs to operate at these airports.
The FAA from time to time issues
directives and other regulations relating to the maintenance and operation of
aircraft that require significant expenditures or operational
restrictions. Some FAA requirements cover, among other things,
retirement of older aircraft, security measures, collision avoidance systems,
airborne windshear avoidance systems, noise abatement and other environmental
concerns, aircraft operation and safety and increased inspections and
maintenance procedures to be conducted on older aircraft.
Many aspects of airlines' operations
also are subject to increasingly stringent federal, state, local and foreign
laws protecting the environment, including the imposition of additional taxes on
airlines or their passengers. Future regulatory developments in the
United States and abroad could adversely affect operations and increase
operating costs in the airline industry. The European Union has
issued a directive to member states to include aviation in its Greenhouse Gas
Emissions Trading Scheme by February 2010, which will require us to have
emissions allowances to operate flights to and from member states of the
European Union in January 2012 and thereafter, including flights between the
United States and the European Union. The U.S. government and other
non-EU governments are expected to challenge the application of the EU emissions
trading scheme to their airlines; however, we may be forced to comply with the
EU emission trading scheme requirements during a legal challenge. We
may have to purchase emissions allowances through the EU emissions trading
scheme to cover EU flights that exceed our free allotment, which could result in
substantial costs for us.
Other regulatory actions that may be
taken in the future by the U.S. government, foreign governments (including the
European Union), or the International Civil Aviation Organization to address
concerns about climate change and air emissions from the aviation sector are
unknown at this time. Climate change legislation is anticipated in
the United States, but it is currently unknown how the potential legislation
will be applied to the aviation industry. The impact to us and our
industry from such actions is likely to be adverse and could be significant,
particularly if regulators were to conclude that emissions from commercial
aircraft cause significant harm to the upper atmosphere or have a greater impact
on climate change than other industries. Potential actions may
include the imposition of requirements to purchase emission offsets or credits,
which could require participation in emission trading (such as required in the
European Union), substantial taxes on emissions and growth restrictions on
airline operations, among other potential regulatory actions.
Further, the ability of U.S. carriers
to operate international routes is subject to change because the applicable
arrangements between the United States and foreign governments may be amended
from time to time, or because appropriate slots or facilities are not made
available. We cannot provide assurance that laws or regulations
enacted in the future will not have a significant adverse affect on
us.
Public
health threats affecting travel behavior could have a material adverse effect on
the industry. Public health
threats, such as the H1N1 flu virus, the bird flu, Severe Acute Respiratory
Syndrome (SARs) and other highly communicable diseases, outbreaks of which have
occurred in various parts of the world in which we operate, could have a
significant adverse impact on our operations and the worldwide demand for air
travel. Travel restrictions or operational problems, such as
quarantining of personnel or inability to access our facilities or aircraft, in
any part of the world in which we operate or any reduction in the demand for air
travel caused by public health threats in the future, could materially adversely
affect our operations and financial results.
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds.
None.
Item
3. Defaults
Upon Senior Securities.
None.
Continental's Annual Meeting of
Stockholders was held on June 10, 2009. The following individuals
were elected to Continental's Board of Directors to hold office until the next
annual meeting of stockholders.
NOMINEE
|
VOTES
FOR
|
VOTES
WITHHELD
|
|
|
|
Kirbyjon
H. Caldwell
|
86,459,465
|
14,790,583
|
|
Lawrence
W. Kellner
|
88,924,629
|
12,325,419
|
|
Douglas
H. McCorkindale
|
88,726,267
|
12,523,781
|
|
Henry
L. Meyer III
|
86,576,289
|
14,673,759
|
|
Oscar
Munoz
|
87,902,923
|
13,347,125
|
|
Jeffery
A. Smisek
|
88,944,439
|
12,305,609
|
|
Karen
Hastie Williams
|
54,142,431
|
47,107,617
|
|
Ronald
B. Woodard
|
87,676,178
|
13,573,870
|
|
Charles
A. Yamarone
|
86,434,972
|
14,815,076
|
|
A
proposal to amend our 2004 Employee Stock Purchase Plan to (i) authorize the
sale of an additional 3.5 million shares of our common stock under the plan and
(ii) extend the term of the plan to December 31, 2019, was approved by
stockholders as follows:
VOTES
FOR
|
VOTES
AGAINST
|
VOTES
ABSTAINING
|
BROKER
NON-VOTES
|
|
|
|
|
72,918,619
|
466,161
|
1,579,032
|
|
26,286,236
|
|
A
proposal to ratify the appointment of Ernst & Young LLP as our independent
registered public accountants for the fiscal year ending December 31, 2009 was
approved by the stockholders as follows:
VOTES
FOR
|
VOTES
AGAINST
|
VOTES
ABSTAINING
|
|
|
|
|
|
100,411,268
|
541,514
|
297,266
|
|
|
|
A
stockholder proposal related to discontinuing stock option grants to senior
executives was rejected by the stockholders as follows:
VOTES
FOR
|
VOTES
AGAINST
|
VOTES
ABSTAINING
|
BROKER
NON-VOTES
|
|
|
|
|
2,586,345
|
70,508,527
|
1,868,939
|
|
26,286,237
|
|
A
stockholder proposal related to reincorporating in North Dakota was rejected by
the stockholders as follows:
VOTES
FOR
|
VOTES
AGAINST
|
VOTES
ABSTAINING
|
BROKER
NON-VOTES
|
|
|
|
|
11,218,126
|
63,293,102
|
452,584
|
|
26,286,236
|
|
On July 21, 2009, we announced plans to
eliminate approximately 1,700 positions across the company. In
connection with these plans, we anticipate that we will record charges for
severance and other termination costs in the third quarter of
2009. We are not able to estimate the amount of these charges at this
time.
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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).
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|
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3.1(a)
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Certification
of Designation of Series A Junior Participating Preferred Stock, included
as Exhibit A to Exhibit 3.1.
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|
|
|
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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).
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|
|
|
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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).
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|
|
|
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3.2
|
Amended
and Restated Bylaws of Continental, effective as of June 10, 2009 –
incorporated by reference to Exhibit 3.2 to Continental’s Current Report
on Form 8-K dated June 10, 2009 (File no. 1-10323).
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|
|
|
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10.1
|
Amendment
No. 2, dated March 25, 2009, to Agreement and Lease dated as of May 1987,
as supplemented, between Continental and Cleveland regarding Hopkins
International Airport.
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|
|
|
|
10.2
|
Amendment
No. 3, dated April 3, 2009, to Agreement and Lease dated as of May 1987,
as supplemented, between Continental and Cleveland regarding Hopkins
International Airport.
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|
|
|
|
10.3
|
Supplemental
Agreement No. 48, dated as of January 29, 2009, to Purchase Agreement No.
1951 (“P.A. 1951”), dated July 23, 1996, between Continental and The
Boeing Company (“Boeing”) relating to the purchase of Boeing 737
aircraft. (1)
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|
|
|
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10.4
|
Supplemental
Agreement No. 49, dated as of May 1, 2009, to P.A.
1951. (1)
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|
|
|
|
10.5
|
Supplemental
Agreement No. 15, dated as of October 15, 2008, to Purchase Agreement No.
2061 (“P.A. 2061”), dated October 10, 1997, between Continental and Boeing
relating to the purchase of Boeing 777
aircraft. (1)
|
|
|
|
|
10.6
|
Supplemental
Agreement No. 16, dated as of May 1, 2009, to P.A.
2061. (1)
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|
|
|
|
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.
|
(1)
|
Continental
has applied to the SEC for confidential treatment of a portion of this
exhibit.
|
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.
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|
|
Registrant
|
|
|
|
|
|
|
Date: July 21,
2009
|
by:
|
/s/ Chris
Kenny
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|
|
Chris
Kenny
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|
|
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 June 10, 2009 –
incorporated by reference to Exhibit 3.2 to Continental’s Current Report
on Form 8-K dated June 10, 2009 (File no. 1-10323).
|
|
|
10.1
|
Amendment
No. 2, dated March 25, 2009, to Agreement and Lease dated as of May 1987,
as supplemented, between Continental and Cleveland regarding Hopkins
International Airport.
|
|
|
10.2
|
Amendment
No. 3, dated April 3, 2009, to Agreement and Lease dated as of May 1987,
as supplemented, between Continental and Cleveland regarding Hopkins
International Airport.
|
|
|
10.3
|
Supplemental
Agreement No. 48, dated as of January 29, 2009, to Purchase Agreement No.
1951 (“P.A. 1951”), dated July 23, 1996, between Continental and The
Boeing Company (“Boeing”) relating to the purchase of Boeing 737
aircraft. (1)
|
|
|
10.4
|
Supplemental
Agreement No. 49, dated as of May 1, 2009, to P.A.
1951. (1)
|
|
|
10.5
|
Supplemental
Agreement No. 15, dated as of October 15, 2008, to Purchase Agreement No.
2061 (“P.A. 2061”), dated October 10, 1997, between Continental and Boeing
relating to the purchase of Boeing 777
aircraft. (1)
|
|
|
10.6
|
Supplemental
Agreement No. 16, dated as of May 1, 2009, to P.A.
2061. (1)
|
|
|
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.
|
(1)
|
Continental
has applied to the SEC for confidential treatment of a portion of this
exhibit.
|