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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
0-9781
(Commission File Number)
CONTINENTAL AIRLINES, INC.
(Exact name of registrant as specified in its charter)
Delaware 74-2099724
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1600 Smith Street, Dept. HQSEO, Houston, Texas 77002
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 713-324-2950
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
Class A Common Stock, New York Stock Exchange
par value $.01 per share
Class B Common Stock, New York Stock Exchange
par value $.01 per share
Series A Junior Participating New York Stock Exchange
Preferred Stock Purchase Rights
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting and non-voting common
equity stock held by non-affiliates (including shares held in a
voting trust) of the registrant was $2.2 billion as of January 21,
2000.
_______________
As of January 21, 2000, 11,265,349 shares of Class A Common
Stock and 52,996,832 shares of Class B Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for Annual Meeting
of Stockholders to be held on May 23, 2000: PART III
PART I
ITEM 1. BUSINESS.
Continental Airlines, Inc. (the "Company" or "Continental") is a
major United States air carrier engaged in the business of
transporting passengers, cargo and mail. Continental is the fifth
largest United States airline (as measured by 1999 revenue
passenger miles) and, together with its wholly owned subsidiaries,
Continental Express, Inc. ("Express") and Continental Micronesia,
Inc. ("CMI"), each a Delaware corporation, serves 219 airports
worldwide at February 1, 2000. As of February 1, 2000, Continental
flies to 132 domestic and 87 international destinations and offers
additional connecting service through alliances with domestic and
foreign carriers. Continental directly serves 16 European cities,
eight South American cities, Tel Aviv and Tokyo and is one of the
leading airlines providing service to Mexico and Central America,
serving more destinations there than any other United States
airline. Through its Guam hub, CMI provides extensive service in
the western Pacific, including service to more Japanese cities than
any other United States carrier.
As used in this Form 10-K, the terms "Continental" and "Company"
refer to Continental Airlines, Inc. and its subsidiaries, unless
the context indicates otherwise. This Form 10-K may contain
forward-looking statements. In connection therewith, please see
the cautionary statements contained in Item 1. "Business - Risk
Factors Relating to the Company" and "Business - Risk Factors
Relating to the Airline Industry" which identify important factors
that could cause actual results to differ materially from those in
the forward-looking statements.
Business Strategy
In 1995, Continental implemented the "Go Forward Plan", a "back to
basics" strategic plan focused on improving profitability and
financial condition, delivering a consistent, reliable, quality
product to customers and improving employee morale and working
conditions. The Company's 2000 strategic plan, as discussed below,
retains the four basic components of the Go Forward Plan: Fly to
Win, Fund the Future, Make Reliability a Reality and Working
Together, with initiatives intended to build upon Continental's
operational and strategic strengths.
Fly to Win
The Company's 2000 Fly to Win initiatives center around two
principal themes: Grow Electronic Commerce and Focus on Hub
Operations.
Grow Electronic Commerce
During 1999, Continental reached several E-commerce milestones.
See "Competition and Marketing" below. The Company's goals in 2000
include developing key internet sites and implementing interline e-
ticketing with its alliance partners as well as some of the other
top ten U.S. carriers. In addition, the Company will focus on
reducing distribution expenses through electronic commerce.
Focus on Hub Operations. In 2000, Continental will continue to add
select flights and refine its flight schedules to maximize the
potential of its hubs. Management believes that by further
refining the efficiency of the Company's hub operations,
Continental will continue to capture additional flow traffic
through its hubs and attract a larger share of higher-yielding
business travelers.
Recently, industry capacity and growth in the transatlantic markets
have resulted in lower yields and revenue per available seat mile
in those markets, which trend is expected to continue in 2000. As
a result, Continental will continue to critically review its growth
plans and will adjust or redeploy resources as necessary.
Fund the Future
Having achieved its 1995 goals of building the Company's overall
liquidity and improving its financial condition, management shifted
its financial focus in 1996 and 1997 to the Company's interest and
lease expenses. In 1998 and 1999, the Company concentrated on
securing favorable financing for new aircraft and other assets as
well as buying back common stock.
In 1999, the Company completed a number of transactions intended to
strengthen its long-term financial position and enhance earnings.
In February 1999, the Company completed an offering of $806 million
of pass-through certificates used to finance (either through
leveraged leases or secured debt financings) the debt portion of
the acquisition cost of 22 aircraft delivered in 1999.
In March 1999, the Company completed a $160 million credit
facility, with a maturity date of March 2001, to finance pre-
delivery deposits for certain new Boeing aircraft to be delivered
between March 1999 and March 2002.
In April 1999, the Company exercised its right and called for
redemption in May 1999, all $230 million of its 6-3/4% Convertible
Subordinated Notes due 2006. The notes were converted into 7.6
million shares of Class B common stock during May 1999.
Also, in June 1999, the Company completed an offering of $742
million of pass-through certificates used to finance (either
through leveraged leases or secured debt financings) the debt
portion of the acquisition cost of 21 new Boeing aircraft delivered
in 1999.
In October 1999, Continental sold its interest in AMADEUS Global
Travel Distribution, S.A. ("AMADEUS") for $409 million, including
a special dividend.
During 1999, the Company's Board of Directors increased the size of
its common stock repurchase program by $900 million, bringing the
total size of the program to $1.2 billion. As of January 21, 2000,
the Company has repurchased 18,853,600 Class B common shares for
$804 million since the inception of the repurchase program in March
1998.
The focus in 2000 is to maintain cash balances of at least $1
billion while continuing to secure financing for aircraft
deliveries in 2000 and beyond and, under appropriate circumstances,
buy back common stock. The Company expects to continue to
eliminate excess interest and lease expenses through refinancings
and other initiatives.
Continental desires to simplify its equity capital structure and is
committed to continuing to repurchase outstanding equity. In
connection with its stock repurchase program, the Company has held
preliminary discussions with Northwest Airlines, Inc. ("Northwest")
concerning the acquisition by Continental of all the Class A common
stock of Continental held by Northwest in a voting trust (8.7
million shares). The alliance between Continental and Northwest is
beneficial to both carriers, and any transaction would be designed
to preserve and strengthen the benefits of the alliance. There can
be no assurance as to whether a transaction between Continental and
Northwest will be agreed to or consummated, nor can Continental
predict the structure, form or amount of consideration or other
elements of any such transaction.
Make Reliability a Reality
Customer service continues to be a principal focus in 2000.
Management believes Continental's on-time performance record is
crucial to its other operational objectives and, together with its
initiatives to improve baggage handling and customer satisfaction
and appropriately manage involuntary denied boardings, is an
important tool to attract higher-margin business travelers.
Continental's goal for 2000 is to be ranked monthly by the
Department of Transportation ("DOT") among the top half of major
air carriers in on-time performance, baggage handling, customer
satisfaction and avoidance of involuntary denied boarding. For
1999, Continental ranked fifth in on-time performance, third in
baggage handling, fourth in fewest customer complaints and second
in fewest involuntary denied boardings. In 1999, bonuses of $65
were paid to substantially all employees for each month that
Continental ranked second or third or achieved 80% or above (for
arrivals within 14 minutes) in domestic on-time performance, and
bonuses of $100 were paid for each month that Continental ranked
first among the top 10 U.S. air carriers (excluding those airlines
that do not report electronically) in domestic on-time performance.
For 1999, a total of $26 million of on-time bonuses was paid. This
successful on-time performance bonus program continues in 2000.
In addition to programs intended to improve Continental's standings
in DOT performance data, the Company has taken action in other
areas to enhance its attractiveness to business travelers.
Specifically, Continental implemented various initiatives designed
to offer travelers cleaner and more attractive aircraft interiors,
consistent interior and exterior decor, first class seating on all
jet aircraft (other than regional jets), better meals and greater
benefits under its award-winning frequent flyer program.
Continental continues to make product improvements, such as new and
refurbished Presidents Clubs with specialty bars, and on-board
specialty coffees and microbrewery beer, among others. Continental
Airlines' jets now have reliable air-to-ground telephone service
for customers, and its new long-range jets have state-of-the-art
video equipment.
Continental's TransContinental service provides passengers
traveling coast-to-coast from Newark International Airport
("Newark") enhancements on their flights, including check-in
options at nine Continental ticket offices in New York, upgraded
meal service and audio/video entertainment. Continental currently
flies one of the youngest jet fleets in the industry and plans to
integrate the Boeing 767 aircraft into its fleet in 2000. The
Company has also continued to refine its award-winning
BusinessFirst service.
Working Together
Management believes that Continental's employees are its greatest
asset and the cornerstones of improved reliability and customer
service. Management has introduced a variety of programs to
increase employee participation and foster a sense of shared
community. These initiatives include significant efforts to
communicate openly and honestly with all employees through daily
news bulletins, weekly voicemail updates from the Company's Chief
Executive Officer, monthly and quarterly Continental publications,
videotapes mailed to employees reporting on the Company's growth
and progress, Go Forward Plan bulletin boards in over 600 locations
system-wide, and daily news electronic display signs in many
Continental employee locations world-wide. In addition, regularly
scheduled visits to airports throughout the route system are made
by the senior executives of the Company (each of whom is assigned
an airport for this purpose). Monthly meetings open to all
employees, as well as other periodic on-site visits by management,
are designed to encourage employee participation, knowledge and
cooperation. Continental was recently named among the best
companies to work for in America, finishing 23rd in Fortune
Magazine's 1999 "100 Best Companies to Work for in America" list,
up from 40th where it debuted in 1998. Continental has also
reached long-term agreements with a majority of its employee
workgroups regarding wages, benefits and other workplace matters.
Continental's goals for 2000 include (i) being ranked among the top
three major air carriers in employee measures such as turnover,
lost time, productivity and on-the-job injury claims, (ii)
continuing to work with all employee groups in a way that is fair
to the employees and fair to the Company, (iii) continuing to
improve work environment safety, and (iv) maintaining Continental
as one of the 100 best companies to work for in America.
In September 1997, Continental announced that it intended to bring
all employees to industry standard wages over a three-year period.
This goal will be achieved in 2000. The Company is in the process
of formulating a plan to bring all employees to industry standard
benefits over a multi-year period. See "Employees" below.
Domestic Operations
Continental operates its domestic route system primarily through
its hubs at Newark, George Bush Intercontinental Airport ("Bush
Intercontinental") in Houston and Hopkins International Airport
("Hopkins International") in Cleveland. The Company's hub system
allows it to transport passengers between a large number of
destinations with substantially more frequent service than if each
route were served directly. The hub system also allows Continental
to add service to a new destination from a large number of cities
using only one or a limited number of aircraft. Each of
Continental's domestic hubs is located in a large business and
population center, contributing to a high volume of "origin and
destination" traffic.
Newark. As of February 1, 2000, Continental operated 54% (233
departures) of the average daily jet departures (excluding regional
jets) and, together with Express, 58% (323 departures) of all
average daily departures (jet, regional jet and turboprop) from
Newark. Considering the three major airports serving New York City
(Newark, LaGuardia and John F. Kennedy), Continental and Express
accounted for 22% of all daily departures, while the next largest
carrier, American Airlines, Inc. ("American"), and its commuter
affiliate accounted for 17% of all daily departures.
Houston. As of February 1, 2000, Continental operated 77%
(325 departures) of the average daily jet departures (excluding
regional jets) and, together with Express, 82% (483 departures) of
all average daily departures from Bush Intercontinental. Southwest
Airlines Co. ("Southwest") also has a significant share of the
Houston market through Hobby Airport. Considering both Bush
Intercontinental and Hobby Airport, Continental operated 56% and
Southwest operated 25% of the daily jet departures (excluding
regional jets) from Houston.
Cleveland. As of February 1, 2000, Continental operated 52% (85
departures) of the average daily jet departures (excluding regional
jets) and, together with Express, 65% (254 departures) of all
average daily departures from Hopkins International. The next
largest carrier, US Airways, Inc. ("US Airways"), accounted for 6%
of all daily jet departures.
Continental Express. Continental Airlines' jet service at each of
its domestic hub cities is coordinated with Express, which operates
new-generation regional jets and turboprop aircraft under the name
"Continental Express". The regional jets average one year of age
and seat either 37 or 50 passengers while the turboprop aircraft
average approximately eight years of age and seat 64 or fewer
passengers.
As of February 1, 2000, Express served 32 destinations from Newark
(23 by regional jet), 47 destinations from Bush Intercontinental
(29 by regional jet) and 55 destinations from Hopkins International
(29 by regional jet). In addition, commuter feed traffic is
currently provided to Continental by other code-sharing partners.
See "Domestic Carrier Alliances" below.
Management believes Express's regional jet and turboprop operations
complement Continental's jet operations by allowing more frequent
service to small cities than could be provided economically with
conventional jet aircraft and by carrying traffic that connects
onto Continental's jets. In many cases, Express (and Continental)
compete for connecting traffic with commuter airlines owned by or
affiliated with other major airlines operating out of the same or
other cities. Continental believes that Express's new regional
jets provide greater comfort and enjoy better customer acceptance
than turboprop aircraft. Express is in the process of developing
a plan to convert to an all regional jet fleet over a multi-year
period. The regional jets also allow Express to serve certain
routes that cannot be served by its turboprop aircraft.
Domestic Carrier Alliances. Pursuant to the Company's Fly to Win
initiative under the Go Forward Plan, Continental has entered into
and continues to develop alliances with domestic carriers:
- - In 1998, the Company entered into a long-term global alliance
with Northwest (the "Northwest Alliance"). The Northwest
Alliance includes the placing by each carrier of its code on a
large number of the flights of the other and reciprocal frequent
flyer programs and executive lounge access. Significant other
joint marketing activities are being undertaken, while preserving
the separate identities of the carriers. Continental has also
entered into agreements to code-share with certain Northwest
regional affiliates. See "Risk Factors Relating to the Company -
Risks Regarding Continental/Northwest Alliance".
- - Continental has a series of agreements with America West
Airlines, Inc. ("America West"), including agreements related to
code-sharing and ground handling, which have created substantial
benefits for both airlines. These code-sharing agreements cover
141 city-pairs at February 1, 2000, and allow Continental to link
additional destinations to its route network and derive
additional traffic from America West's distribution strength in
cities where Continental has less sales presence. The sharing of
facilities and employees by Continental and America West in their
respective key markets has resulted in significant cost savings.
- - Continental began a code-sharing agreement with Gulfstream
International Airlines, Inc. ("Gulfstream") in April 1997.
Gulfstream serves as a connection for Continental passengers
throughout Florida as well as eight destinations in the
Caribbean. Continental recently purchased 28% of the equity of
Gulfstream.
- - Continental implemented a code-sharing agreement with Mesaba
Aviation, Inc. ("Mesaba"), operating as a Northwest affiliate,
commencing in January 1999. Mesaba serves as a connection for
Continental passengers through Detroit and Minneapolis/St. Paul.
- - Continental and CMI entered into a cooperative marketing
agreement with Hawaiian Airlines, Inc. ("Hawaiian") that began in
October 1997 on flights connecting in Honolulu. The relationship
expanded in 1999 to include code-sharing. Hawaiian connects
Continental passengers through Honolulu to six additional
Hawaiian cities.
- - In February 1999, Continental announced its code-sharing
agreement with Alaska Airlines, Inc. ("Alaska Air") and its
affiliate, Horizon Airlines, Inc. ("Horizon"). Alaska Air and
Horizon serve as connections for Continental passengers to 35
destinations throughout the Pacific Northwest.
International Operations
International Operations. Continental directly serves destinations
throughout Europe, Canada, Mexico, Central and South America, and
the Caribbean, as well as Tokyo and Tel Aviv, and has extensive
operations in the western Pacific conducted by CMI. As measured by
1999 available seat miles, approximately 36.2% of Continental's jet
operations, including CMI, were dedicated to international traffic,
compared with 33.8% in 1998. Continental anticipates that a
majority of its capacity growth in 2000 will be in Europe due to
the full year impact of new markets and increased capacity added in
1999. Continental does not intend to add any new European
destinations during 2000. As of February 1, 2000, the Company
offered 146 weekly departures to 16 European cities and marketed
service to 32 other cities through code-sharing agreements.
Continental is one of the leading airlines providing service to
Mexico and Central America, serving more destinations there than
any other U.S. airline.
The Company's Newark hub is a significant international gateway.
From Newark at February 1, 2000, the Company served 16 European
cities, five Canadian cities, three Mexican cities, four Central
American cities, six South American cities, seven Caribbean
destinations, Tel Aviv and Tokyo and markets numerous other
destinations through code-sharing arrangements with foreign
carriers. The Company recently announced the addition of two South
American destinations, one of which will also connect to Houston,
and one Caribbean destination for 2000, subject to government
approval.
The Company's Houston hub is the focus of its operations in Mexico
and Central America. As of February 1, 2000, Continental flew from
Houston to 13 cities in Mexico, every country in Central America,
six cities in South America, two Caribbean destinations, three
cities in Canada, two cities in Europe and Tokyo. Express also
serviced three additional cities in Mexico by regional jets and
plans to add four more cities in 2000, subject to government
approval.
Continental also flies to London, Montreal, Toronto, San Juan and
Cancun from its hub in Cleveland.
Continental Micronesia. CMI is a United States-certificated air
carrier transporting passengers, cargo and mail in the western
Pacific. From its hub operations based on the island of Guam, CMI
provides service to eight cities in Japan, more than any other
United States carrier, as well as other Pacific rim destinations,
including Taiwan, the Philippines, Hong Kong, Australia and
Indonesia. Service to these Japanese cities and certain other
Pacific Rim destinations is subject to a variety of regulatory
restrictions limiting the ability of other carriers to service
these markets.
CMI is the principal air carrier in the Micronesian Islands, where
it pioneered scheduled air service in 1968. CMI's route system is
linked to the United States market through Tokyo and Honolulu, each
of which CMI serves non-stop from Guam. CMI and Continental also
maintain a code-sharing agreement and coordinate schedules on
certain flights from the west coast of the United States to
Honolulu, and from Honolulu to Guam, to facilitate travel from the
United States into CMI's route system.
Foreign Carrier Alliances. Over the last decade, major United
States airlines have developed and expanded alliances with foreign
air carriers, generally involving adjacent terminal operations,
coordinated flights, code-sharing and other joint marketing
activities. Continental is the only major United States air
carrier operating a hub in the New York City area. Consequently,
Continental believes it is uniquely situated to attract alliance
partners from Europe, the Far East and South America and has
aggressively pursued such alliances. The Company believes that the
Northwest Alliance enhances its ability to attract foreign alliance
partners. See "Risk Factors Relating to the Company - Risks
Regarding Continental/Northwest Alliance".
Continental believes that continuing to develop a network of
international alliance partners will better leverage its hub assets
by attracting high-yield flow traffic and strengthening its
position in large, local (non-connecting) markets and will result
in improved returns to the Company. Additionally, Continental can
enlarge its scope of service more rapidly and enter additional
markets with lower capital and start-up costs through formation of
alliances with partners as compared with entering markets
independently of other carriers.
Continental seeks to develop alliance relationships that complement
the Company's own flying and permit expanded service through Newark
and Houston to major international destinations. Route authorities
necessary for the Company's own service to certain of these
destinations are not currently available to the Company.
Continental has implemented international code-sharing agreements
with Alitalia Linee Aeree Italiane, S.P.A. ("Alitalia"), CSA Czech
Airlines, British Midland, EVA Airways Corporation, an airline
based in Taiwan, Virgin Atlantic Airways ("Virgin"), Viacao Aerea
Sao Paulo ("VASP"), Societe Air France ("Air France") and Compania
Panamena de Aviacion, S.A. ("COPA"), 49% of the common equity of
which is owned by Continental. Upon receipt of government
approval, Continental will commence code-sharing arrangements with
Aeroservicios Carabobo S.A., a Venezuelan carrier, Avant Airlines,
a Chilean carrier, Air Aruba and Air China. In addition,
Continental and KLM Royal Dutch Airlines ("KLM") have signed a
memorandum of understanding and anticipate finalizing and
implementing a comprehensive cooperative marketing agreement by the
second quarter of 2000. The joint marketing initiative is to
include through check-in of passengers and baggage, reciprocal
frequent flyer program participation, reciprocal airport lounge
access, and, subject to government approval, codesharing on
selected routes. Continental has entered into joint marketing
agreements with Aerolineas Centrales de Colombia ("ACES"), for
which government approval has not yet been sought.
Certain of Continental's code-sharing agreements involve block-
space arrangements (pursuant to which carriers agree to share
capacity and bear economic risk for blocks of seats on certain
routes). Alitalia has agreed to purchase blocks of seats on
Continental flights between Newark and Rome and Milan. Continental
and Air France purchase blocks of seats on each other's flights
between Houston and Newark and Paris. Continental and Virgin
exchange blocks of seats on each other's flights between Newark and
London, and Continental purchases blocks of seats on eight other
routes flown by Virgin between the United Kingdom and the United
States.
The Company is negotiating an early termination of its alliance
with Air France as a result of Air France's announcement of an
alliance with Delta Air Lines, Inc. ("Delta").
The Company might enter into other code-sharing, joint marketing
and block-space agreements in 2000, which could include the
Company's financial commitment to purchase seats from other
carriers.
Employees
As of December 31, 1999, the Company had approximately 51,275
employees (46,550 full-time equivalent employees, including
approximately 20,150 customer service agents, reservations agents,
ramp and other airport personnel, 8,650 flight attendants, 7,450
management and clerical employees, 6,350 pilots, 3,800 mechanics
and 150 dispatchers). Labor costs are a significant component of
the Company's expenses and can substantially impact airline
results. In 1999, labor costs (including employee incentives)
constituted 31.5% of the Company's total operating expenses
(excluding fleet disposition/impairment loss). While there can be
no assurance that the Company's generally good labor relations and
high labor productivity will continue, management has established
as a significant component of its business strategy the
preservation of good relations with the Company's employees,
approximately 42% of whom are represented by unions. In September
1997, the Company announced a plan to bring all employees to
industry standard wages no later than the end of the year 2000.
Wage increases began in 1997, and will continue to be phased in
through 2000. The Company is in the process of formulating a plan
to bring all employees to industry standard benefits over a multi-
year period.
The following is a table of the Company's, Express's and CMI's
principal collective bargaining agreements, and their respective
amendable dates:
Approximate
Number of
Full-time Contract
Employee Equivalent Representing Amendable
Group Employees Union Date
Continental Pilots 5,000 Independent October 2002
Association
of Continental
Pilots ("IACP")
Express Pilots 1,350 IACP October 2002
Dispatchers 150 Transport Workers October 2003
Union of America
Continental 3,300 International January 2002
Mechanics Brotherhood of
Teamsters
("Teamsters")
Express Mechanics 350 Teamsters January 2003
CMI Mechanics 150 Teamsters March 2001
Continental 7,800 International (Negotiations
Flight Attendants Association of for amended
Machinists and contract
Aerospace Workers ongoing)
("IAM")
Express 500 IAM (Negotiations
Flight Attendants for amended
contract
ongoing)
CMI 350 IAM June 2000
Flight Attendants
CMI Fleet and 475 Teamsters March 2001
Passenger Service
Employees
In February 2000, the Company announced a 54-month tentative
collective bargaining agreement with its Continental Airlines
flight attendants. The agreement is subject to ratification by the
Continental Airlines flight attendants. In September 1999, Express
and the IAM began collective bargaining negotiations to amend the
Express flight attendants' contract (which became amendable in
November 1999). The Company believes that mutually acceptable
agreements can be reached with such employees, although the
ultimate outcome of the negotiations is unknown at this time.
The other employees of Continental, Express and CMI are not covered
by collective bargaining agreements.
Competition and Marketing
The airline industry is highly competitive and susceptible to price
discounting. The Company competes with other air carriers that
have substantially greater resources (and in certain cases, lower
cost structures) as well as smaller air carriers with low-cost
structures. Historically, industry profit margins have been low.
However, during 1995 through 1999, industry profit margins improved
substantially. See Item 1. "Business. Risk Factors Relating to
the Airline Industry" and Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
As with other carriers, most tickets for travel on Continental are
sold by travel agents. Travel agents generally receive commissions
measured by the price of tickets sold. Accordingly, airlines
compete not only with respect to the price of tickets sold but also
with respect to the amount of commissions paid. Airlines often pay
additional commissions in connection with special revenue programs.
E-Ticket. In 1999, Continental expanded its electronic ticketing
("E-Ticket") product to 95% of all of its own destinations. E-
Tickets result in lower distribution costs to the Company while
providing enhanced customer and revenue information. Continental
recorded over $3.9 billion in E-Ticket sales in 1999, representing
41% of total sales. During 1999, Continental announced interline
E-Ticketing with America West and replaced E-Ticket machines with
e-Service Centers. In 2000, the Company plans to implement
interline E-Ticketing with its alliance partners as well as some of
the other top ten U.S. carriers. The Company expects these
features to contribute to an increase in E-Ticket usage and a
further reduction in distribution costs.
Internet. Continental's award winning website, www.continental.com
("continental.com") recorded over $165 million in ticket sales in
1999. The site features computer graphics and navigational aids
that make it simpler and faster for travelers to purchase tickets
and retrieve travel-related information online. The Company
implemented its "featured fare" program for customers to make
travel plans around special fare offers. Continental online
("COOL") travel specials are available only to online users
offering reduced fares for immediate travel on specified dates.
During 1999, the Company announced an online promotion to provide
frequent flyer bonus miles for customers who use the
continental.com website for the first time to book a Continental
flight. Combined with online travel agents, the Company recorded
over $305 million in ticket sales through the internet during 1999.
Other. In 1999, Continental entered into an agreement with
priceline.com, Inc. ("Priceline") which allows customers to
purchase airline tickets at an offer price determined by the
customer. Continental decides on which routes it will allow seats
to be sold by Priceline and the related fare it is willing to
accept. Additionally, the Company announced an agreement among the
Company, Northwest, Delta and United Air Lines, Inc. to create a
new on-line travel web site. To date, 27 U.S. and foreign
carriers, including American and US Airways, have signed up to join
the web-based travel service. The new site, the first multi-
airline travel portal, is expected to provide customers with
convenient online access to airline, hotel, car rental and other
travel services in addition to internet offers. The site will
feature published fares from virtually all carriers worldwide and
will welcome the posting of internet fares from other carriers as
well.
Frequent Flyer Program
Each major airline has established a frequent flyer program
designed to encourage repeat travel on its system. Continental's
OnePass program currently allows passengers to earn mileage credits
by flying Continental and certain other carriers including
Northwest, America West, Alaska Air, Alitalia, Air France, COPA and
Gulfstream. The Company also sells mileage credits to credit card
companies, phone companies, hotels, car rental agencies and others
participating in the OnePass program.
Due to the structure of the program and the low level of
redemptions as a percentage of total travel, Continental believes
that displacement of revenue passengers by passengers using flight
awards has historically been minimal. The number of awards used on
Continental represented slightly less than 7% of Continental's
total revenue passenger miles in each of the years 1999 and 1998.
Industry Regulation and Airport Access
Continental and its subsidiaries operate under certificates of
public convenience and necessity issued by the DOT. Such
certificates may be altered, amended, modified or suspended by the
DOT if public convenience and necessity so require, or may be
revoked for intentional failure to comply with the terms and
conditions of a certificate.
The airlines are also regulated by the Federal Aviation
Administration ("FAA"), primarily in the areas of flight
operations, maintenance, ground facilities and other technical
matters. Pursuant to these regulations, Continental has
established, and the FAA has approved, a maintenance program for
each type of aircraft operated by the Company that provides for the
ongoing maintenance of such aircraft, ranging from frequent routine
inspections to major overhauls. Continental has retired all of its
Stage 2 aircraft in order to meet the FAA's noise compliance
requirements with the exception of five Boeing 727 aircraft
operated by CMI which are exempt since they are operated outside
the United States. The Company intends to retire these five
aircraft in 2000.
The DOT allows local airport authorities to implement procedures
designed to abate special noise problems, provided such procedures
do not unreasonably interfere with interstate or foreign commerce
or the national transportation system. Certain airports, including
the major airports at Boston, Washington, D.C., Chicago, Los
Angeles, San Diego, Orange County (California) and San Francisco,
have established airport restrictions to limit noise, including
restrictions on aircraft types to be used and limits on the number
of hourly or daily operations or the time of such operations. In
some instances, these restrictions have caused curtailments in
services or increases in operating costs, and such restrictions
could limit the ability of Continental to expand its operations at
the affected airports. Local authorities at other airports are
considering adopting similar noise regulations.
Airports from time to time seek to increase the rates charged to
airlines, and the ability of airlines to contest such increases has
been restricted by federal legislation, DOT regulations and
judicial decisions. In addition, some public airports generally
impose passenger facility charges ("PFC's") of up to $3 per segment
for a maximum of $12 per roundtrip. Legislation which would
increase the PFC to $6 per segment for a maximum of $24 per
roundtrip is being considered in a conference committee between the
House of Representatives and the Senate. With certain exceptions,
these charges are passed on to the customers.
The FAA has designated John F. Kennedy International Airport
("Kennedy") and LaGuardia Airport ("LaGuardia") in New York, O'Hare
International Airport in Chicago ("O'Hare") and Ronald Reagan
Washington National Airport in Washington, D.C. ("Reagan National")
as "high density traffic airports" and has limited the number of
departure and arrival slots at those airports. Currently, such
slots may be voluntarily sold or transferred between carriers.
Various amendments to the slot system proposed from time to time
could, if adopted, significantly affect operations at high density
traffic airports, significantly change the value of the slots,
grant slots to other carriers or for route or aircraft specific
usage, expand slots to other airports or eliminate slots entirely.
The DOT has in the past reallocated slots to other carriers and
reserves the right to withdraw slots. In addition, the DOT has
proposed the elimination of slot restrictions at high density
airports other than Reagan National. Legislation containing a
similar proposal, which could eliminate slots as early as 2002 at
O'Hare and 2007 at LaGuardia and Kennedy, has passed the full House
of Representatives and the full Senate and is currently being
considered by a conference committee. The Company cannot predict
whether any of these proposals will be adopted. However, if
legislation or regulation eliminating slots were adopted, the value
of such slots could be deemed to be permanently impaired, resulting
in a loss being charged to earnings for the relevant period.
Moreover, the elimination of slots could have an adverse effect
upon future results of operations of the Company. At December 31,
1999, the net book value of the Company's slots at O'Hare,
LaGuardia and Kennedy was $52 million, $12 million and $0,
respectively.
The availability of international routes to United States carriers
is regulated by treaties and related agreements between the United
States and foreign governments. The United States typically
follows the practice of encouraging foreign governments to accept
multiple carrier designation on foreign routes, although certain
countries have sought to limit the number of carriers. Foreign
route authorities may become less valuable to the extent that the
United States and other countries adopt "open skies" policies
liberalizing entry on international routes. Continental cannot
predict what laws and regulations will be adopted or their impact,
but the impact could be significant.
Many aspects of Continental's operations are subject to
increasingly stringent federal, state and local laws protecting the
environment. Future regulatory developments could adversely affect
operations and increase operating costs in the airline industry.
Risk Factors Relating to the Company
High Leverage and Significant Financing Needs. Continental has a
higher proportion of debt compared to its equity capital than some
of its principal competitors. In addition, a majority of
Continental's property and equipment is subject to liens securing
indebtedness. Accordingly, Continental may be less able than some
of its competitors to withstand a prolonged recession in the
airline industry or respond as flexibly to changing economic and
competitive conditions.
As of December 31, 1999, Continental had approximately $3.4 billion
(including current maturities) of long-term debt and capital lease
obligations and had approximately $1.6 billion of common
stockholders' equity. Also at December 31, 1999, Continental had
$1.6 billion in cash and cash equivalents and short-term
investments. Continental has lines of credit totaling $225
million.
Continental has substantial commitments for capital expenditures,
including for the acquisition of new aircraft. As of January 14,
2000, Continental had agreed to acquire a total of 74 Boeing jet
aircraft through 2005. The Company anticipates taking delivery of
28 Boeing jet aircraft in 2000. Continental also has options for
an additional 118 aircraft (exercisable subject to certain
conditions). The estimated aggregate cost of the Company's firm
commitments for Boeing aircraft is approximately $4 billion.
Continental currently plans to finance its new Boeing aircraft with
a combination of enhanced pass through trust certificates, lease
equity and other third-party financing, subject to availability and
market conditions. Continental has commitments or letters of
intent for backstop financing for approximately 18% of the
anticipated remaining acquisition cost of future Boeing deliveries.
In addition, at January 14, 2000, Continental has firm commitments
to purchase 34 spare engines related to the new Boeing aircraft for
approximately $219 million, which will be deliverable through March
2005.
As of January 14, 2000, Express had firm commitments for 43 Embraer
ERJ-145 ("ERJ-145") 50-seat regional jets and 19 Embraer ERJ-135
("ERJ-135") 37-seat regional jets, with options for an additional
100 ERJ-145 and 50 ERJ-135 aircraft exercisable through 2008.
Express anticipates taking delivery of 15 ERJ-145 and 12 ERJ-135
regional jets in 2000. Neither Express nor Continental will have
any obligation to take any of the firm ERJ-145 or ERJ-135 aircraft
that are not financed by a third party and leased to Continental.
For 1999, cash expenditures under operating leases relating to
aircraft approximated $758 million, compared to $702 million for
1998, and approximated $328 million relating to facilities and
other rentals compared to $263 million in 1998. Continental
expects that its operating lease expenses for 2000 will increase
over 1999 amounts.
Additional financing will be needed to satisfy the Company's
capital commitments. Continental cannot predict whether sufficient
financing will be available for capital expenditures not covered by
firm financing commitments.
Continental's Historical Operating Results. Continental has
recorded positive net income in each of the last five years.
However, Continental experienced significant operating losses in
the previous eight years. Historically, the financial results of
the U.S. airline industry have been cyclical. Continental cannot
predict whether current industry conditions will continue.
Significant Cost of Aircraft Fuel. Fuel costs constitute a
significant portion of Continental's operating expense. Fuel costs
were approximately 9.7% of operating expenses for the year ended
December 31, 1999 (excluding fleet disposition/impairment losses)
and 10.2% for the year ended December 31, 1998 (excluding fleet
disposition/ impairment losses). Recently, spot jet fuel prices
have increased dramatically, rising to 87.3 cents per gallon at
January 21, 2000 compared to 58.3 cents per gallon as recently as
October 31, 1999. Continental recently announced that if high fuel
costs continue without an improvement in the revenue environment,
the Company may not post a profit in the first quarter of 2000.
Fuel prices and supplies are influenced significantly by
international political and economic circumstances. Continental
enters into petroleum swap contracts, petroleum call option
contracts and/or jet fuel purchase commitments to provide some
short-term protection (generally three to six months) against a
sharp increase in jet fuel prices. The Company's fuel hedging
strategy could result in the Company not fully benefiting from
certain fuel price declines. If a fuel supply shortage were to
arise from OPEC production curtailments, a disruption of oil
imports or otherwise, higher fuel prices or reduction of scheduled
airline service could result. Significant changes in fuel costs or
continuation of high current jet fuel prices would materially
affect Continental's operating results.
Labor Costs. Labor costs constitute a significant percentage of
the Company's total operating costs, and the Company experiences
competitive pressure to increase wages and benefits. In September
1997, the Company announced a plan to bring all employees to
industry standard wages no later than the end of the year 2000.
Wage increases began in 1997, and will continue to be phased in
through 2000. The Company is currently formulating a plan to bring
employees to industry standard benefits over a multi-year period.
Certain Tax Matters. At December 31, 1999, Continental had
estimated net operating loss carryforwards ("NOLs") of $700 million
for federal income tax purposes that will expire through 2009 and
federal investment tax credit carryforwards of $45 million that
will expire through 2001. As a result of the change in ownership
of Continental on April 27, 1993, the ultimate utilization of
Continental's NOLs and investment tax credits may be limited.
Reflecting this limitation, Continental has a valuation allowance
of $263 million at December 31, 1999.
Continental had, as of December 31, 1999, deferred tax assets
aggregating $611 million, including $266 million of NOLs. The
Company has consummated several transactions which resulted in the
recognition of NOLs of the Company's predecessor. To the extent
the Company were to determine in the future that additional NOLs of
the Company's predecessor could be recognized in the accompanying
consolidated financial statements, such benefit would reduce the
value ascribed to routes, gates and slots.
As a result of NOLs, Continental will not pay United States federal
income taxes (other than alternative minimum tax) until it has
earned approximately an additional $700 million of taxable income
following December 31, 1999. Section 382 of the Internal Revenue
Code ("Section 382") imposes limitations on a corporation's ability
to utilize NOLs if it experiences an "ownership change." In
general terms, an ownership change may result from transactions
increasing the ownership of certain stockholders in the stock of a
corporation by more than 50 percentage points over a three-year
period. In the event that an ownership change should occur,
utilization of Continental's NOLs would be subject to an annual
limitation under Section 382 determined by multiplying the value of
Continental's stock at the time of the ownership change by the
applicable long-term tax-exempt rate (which was 5.72% for December
1999). Any unused annual limitation may be carried over to later
years, and the amount of the limitation may under certain
circumstances be increased by the built-in gains in assets held by
Continental at the time of the change that are recognized in the
five-year period after the change. Under current conditions, if an
ownership change were to occur, Continental's annual NOL
utilization would be limited to approximately $172 million per year
other than through the recognition of future built-in gain
transactions.
In November 1998, an affiliate of Northwest completed its
acquisition of certain equity of the Company previously held by Air
Partners, L.P. and its affiliates, together with certain Class A
common stock of the Company held by other investors, totaling
8,661,224 shares of the Class A common stock (the "Air Partners
Transaction"). The Company does not believe that the Air Partners
Transaction resulted in an ownership change for purposes of Section
382.
Continental Micronesia's Dependence on Japanese Economy and
Currency Risk. Because the majority of CMI's traffic originates in
Japan, its results of operations are substantially affected by the
Japanese economy and changes in the value of the yen as compared to
the dollar. To reduce the potential negative impact on CMI's
earnings, the Company has entered into forward contracts as a hedge
against a portion of its expected net yen cash flow position. As
of December 31, 1999, the Company had hedged approximately 95% of
2000 projected yen-denominated net cash flows at a rate of 102 yen
to $1 US.
Principal Stockholder. As of December 31, 1999, Northwest held
approximately 13.2% of the common equity interest and 49.1% of the
fully diluted voting power of the Company. In addition, Northwest
holds a limited proxy to vote certain additional shares of the
Company's common stock that would raise its voting power to
approximately 50.9% of the Company's fully diluted voting power.
In connection with the Air Partners Transaction, the Company
entered into a corporate governance agreement with certain
affiliates of Northwest (the "Northwest Parties") designed to
assure the independence of the Company's Board and management
during the six-year term of the governance agreement. Under the
governance agreement, as amended, the Northwest Parties agreed not
to beneficially own voting securities of the Company in excess of
50.1% of the fully diluted voting power of the Company's voting
securities, subject to certain exceptions, including third-party
acquisitions or tender offers for 15% or more of the voting power
of the Company's voting securities. The Northwest Parties deposited
all voting securities of the Company beneficially owned by them
(other than the shares for which they hold only a limited proxy) in
a voting trust with an independent voting trustee requiring that
such securities be voted (i) on all matters other than the election
of directors, in the same proportion as the votes cast by other
holders of voting securities, and (ii) in the election of
directors, for the election of independent directors (who must
constitute a majority of the Board) nominated by the Board of
Directors. However, in the event of a merger or similar business
combination or a recapitalization, liquidation or similar
transaction, a sale of all or substantially all of the Company's
assets, or an issuance of voting securities that would represent
more than 20% of the voting power of the Company prior to issuance,
or any amendment of the Company's charter or bylaws that would
materially and adversely affect Northwest (each, an "Extraordinary
Transaction"), the shares may be voted as directed by the Northwest
Party owning such shares, and if a third party is soliciting
proxies in an election of directors, the shares may be voted at the
option of such Northwest Party either as recommended by the
Company's Board of Directors or in the same proportion as the votes
cast by the other holders of voting securities.
The Northwest Parties also agreed to certain restrictions on the
transfer of voting securities owned by them, agreed not to seek to
affect or influence the Company's Board of Directors or the control
of the management of the Company or the business, operations,
affairs, financial matters or policies of the Company or to take
certain other actions, and agreed to take all actions necessary to
cause independent directors to at all times constitute at least a
majority of the Company's Board of Directors. The Company granted
preemptive rights to a Northwest Party with respect to issuances of
Class A common stock and certain issuances of Class B common stock.
The Northwest Parties agreed that certain specified actions,
together with any material transactions between the Company and
Northwest or its affiliates, including any modifications or waivers
of the governance agreement or the alliance agreement, may not be
taken without the prior approval of a majority of the Board of
Directors, including the affirmative vote of a majority of the
independent directors. The governance agreement also required the
Company to adopt a shareholder rights plan with reasonably
customary terms and conditions, with an acquiring person threshold
of 15% (20% in the case of an Institutional Investor) and with
appropriate exceptions for the Northwest Parties for actions
permitted by and taken in compliance with the governance agreement.
A rights plan meeting these requirements was adopted effective
November 20, 1998, and amended effective February 8, 2000.
The governance agreement will expire on November 20, 2004, or if
earlier, upon the date that the Northwest Parties cease to
beneficially own voting securities representing at least 10% of the
fully diluted voting power of the Company's voting securities.
However, in response to concerns raised by the Department of
Justice ("DOJ") in its antitrust review of the Northwest Alliance,
the Air Partners Transaction and the related governance agreement
between the Company and the Northwest Parties (collectively, the
"Northwest Transaction"), a supplemental agreement was adopted in
November 1998, which extended the effect of a number of the
provisions of the governance agreement for an additional four
years. For instance, the Northwest Parties must act to ensure that
a majority of the Company's Board is comprised of independent
directors, and certain specified actions, together with material
transactions between the Company and Northwest or its affiliates,
including any modifications or waivers of the supplemental
agreement or the alliance agreement, may not be taken without the
prior approval of a majority of the Board of Directors, including
the affirmative vote of a majority of the independent directors.
The Northwest Parties will continue to have the right to vote in
their discretion on any Extraordinary Transaction during the
supplemental period, but also will be permitted to vote in their
discretion on other matters up to 20% of the outstanding voting
power (their remaining votes to be cast neutrally, except in a
proxy contest, as contemplated in the governance agreement),
subject to their obligation set forth in the previous sentence.
If, during the term of the supplemental agreement, the Company's
rights plan were amended to allow certain parties to acquire more
shares than is currently permitted, or if the rights issued
thereunder were redeemed, the Northwest Parties could vote all of
their shares in their discretion. Certain transfer limitations are
imposed on the Northwest Parties during the supplemental period.
The Company has granted preemptive rights to a Northwest Party with
respect to issuances of Class A common stock and certain issuances
of Class B common stock that occur during such period. The Company
has agreed to certain limitations upon its ability to amend its
charter, bylaws, executive committee charter and rights plan during
the term of the supplemental agreement. Following the
supplemental period, the supplemental agreement requires the
Northwest Parties to take all actions necessary to cause
Continental's Board to have at least five independent directors, a
majority of whom will be required to approve material transactions
between Continental and Northwest or its affiliates, including the
amendment, modification or waiver of any provisions of the
supplemental agreement or the alliance agreement.
In certain circumstances, particularly in cases where a change in
control of the Company could otherwise be caused by another party,
Northwest could exercise its voting power so as to delay, defer or
prevent a change in control of the Company.
Continental desires to simplify its equity capital structure and is
committed to continuing to repurchase outstanding equity. In
connection with its stock repurchase program, the Company has held
preliminary discussions with Northwest concerning the acquisition
by Continental of all the Class A common stock of Continental held
by Northwest in a voting trust (8.7 million shares). The Northwest
alliance is beneficial to both carriers, and any transaction would
be designed to preserve and strengthen the benefits of the
alliance. There can be no assurance as to whether a transaction
between Continental and Northwest will be agreed to or consummated,
nor can Continental predict the structure, form or amount of
consideration or other elements of any such transaction.
Risks Regarding Continental/Northwest Alliance. In November 1998,
the Company and Northwest began implementing a long-term global
alliance involving extensive code-sharing, frequent flyer
reciprocity, and other cooperative activities. Implementation of
the Northwest Alliance continued throughout 1999 and is continuing
in 2000.
Continental's ability to finalize implementation of the Northwest
Alliance and to achieve the anticipated benefits is subject to
certain risks and uncertainties, including (a) disapproval or delay
by regulatory authorities or adverse regulatory developments; (b)
competitive pressures, including developments with respect to
alliances among other air carriers; (c) customer reaction to the
alliance, including reaction to differences in products and
benefits provided by Continental and Northwest; (d) economic
conditions in the principal markets served by Continental and
Northwest; (e) increased costs or other implementation
difficulties, including those caused by employees; and (f)
Continental's ability to modify certain contracts that restrict
certain aspects of the alliance.
The alliance agreement provides that if after four years the
Company has not entered into a code share with KLM or is not
legally able (but for aeropolitical restrictions) to enter into a
new trans-Atlantic joint venture with KLM and Northwest and place
its airline code on certain Northwest flights, Northwest can elect
to (i) cause good faith negotiations among the Company, KLM and
Northwest as to the impact, if any, on the contribution to the
joint venture resulting from the absence of the code share, and the
Company will reimburse the joint venture for the amount of any loss
until it enters into a code share with KLM, or (ii) terminate
(subject to cure rights of the Company) after one year's notice any
or all of such alliance agreement and any or all of the agreements
contemplated thereunder.
On October 23, 1998, the DOJ filed a lawsuit against Northwest and
Continental challenging Northwest's acquisition of an interest in
Continental. The DOJ did not seek to preliminarily enjoin the
transaction before it closed on November 20, 1998, nor is the DOJ
challenging the Northwest Alliance at this time, although the DOJ
has informed the parties that it continues to investigate certain
specific aspects of the alliance. Continental continues to
implement its alliance with Northwest. While it is not possible to
predict the ultimate outcome of this litigation, management does
not believe that it will have a material adverse effect on
Continental.
The DOT has continuing jurisdiction to review changes in
Continental's ownership and joint venture agreements between major
U.S. airlines such as Continental and Northwest. In connection
with such reviews, the DOT exempted Continental and Northwest
through December 10, 1999, from regulatory approval requirements
which the DOT has interpreted to require approval for what it
considers de facto route transfers when one U.S. airline holding
international route authority acquires control of another U.S.
airline holding such authority. The exemption remains in effect
pursuant to the Administrative Procedure Act and a renewal
application has been submitted to the DOT by Continental and
Northwest pending possible further DOT review of the agreements
between them to consider whether, in the DOT's view, there has been
a de facto route transfer.
If the DOT were to conclude that a de facto route transfer of
Continental routes to Northwest were occurring, it would institute
a proceeding to determine whether such a transfer was in the public
interest. In the past, the DOT has approved numerous transfers,
but it has also concluded on occasion that certain overlapping
routes in limited-entry markets should not be transferred. In
those instances, the DOT has decided those routes should instead
become available to other airlines to enhance competition on
overlapping routes or between two countries. Continental and
Northwest operate overlapping flights on certain limited entry
routes and offer service between their primary U.S. hubs and
various other countries. If the DOT were to institute a route
transfer proceeding, it could consider whether certain of
Continental's international routes overlapping with Northwest's on
a point-to-point or country-to-country basis should be transferred
to Northwest or to another airline. Continental believes that
Northwest has not acquired control of Continental, and that there
is a significant question as to the DOT's authority to apply a de
facto route transfer theory to the current relationship between
Northwest and Continental. Continental would vigorously oppose any
attempt by the DOT to institute a route transfer proceeding which
would consider any reductions in Continental's route authorities.
Risks Factors Relating to the Airline Industry
Competition and Industry Conditions. The airline industry is
highly competitive and susceptible to price discounting. Carriers
have used discount fares to stimulate traffic during periods of
slack demand, to generate cash flow and to increase market share.
Some of Continental's competitors have substantially greater
financial resources or lower cost structures than Continental.
Airline profit levels are highly sensitive to changes in fuel
costs, fare levels and passenger demand. Passenger demand and fare
levels have in the past been influenced by, among other things, the
general state of the economy (both internationally and
domestically), international events, airline capacity and pricing
actions taken by carriers. Domestically, from 1990 to 1993, the
weak U.S. economy, turbulent international events and extensive
price discounting by carriers contributed to unprecedented losses
for U.S. airlines. In the last several years, the U.S. economy has
improved and excessive price discounting has abated. Recently,
industry capacity and growth in the transatlantic markets have
resulted in lower yields and revenue per available seat mile in
those markets. Continental cannot predict the extent to which
these industry conditions will continue.
In recent years, the major U.S. airlines have sought to form
marketing alliances with other U.S. and foreign air carriers. Such
alliances generally provide for "code-sharing", frequent flyer
reciprocity, coordinated scheduling of flights of each alliance
member to permit convenient connections and other joint marketing
activities. Such arrangements permit an airline to market flights
operated by other alliance members as its own. This increases the
destinations, connections and frequencies offered by the airline,
which provide an opportunity to increase traffic on its segment of
flights connecting with its alliance partners. The Northwest
Alliance is an example of such an arrangement, and Continental has
existing alliances with numerous other air carriers. Other major
U.S. airlines have alliances or planned alliances more extensive
than Continental's. Continental cannot predict the extent to which
it will benefit from its alliances or be disadvantaged by competing
alliances.
Regulatory Matters. Airlines are subject to extensive regulatory
and legal compliance requirements that engender significant costs.
In the last several years, the FAA has issued a number of
directives and other regulations relating to the maintenance and
operation of aircraft that have required significant expenditures.
Some FAA requirements cover, among other things, retirement of
older aircraft, security measures, collision avoidance systems,
airborne windshear avoidance systems, noise abatement, commuter
aircraft safety and increased inspections and maintenance
procedures to be conducted on older aircraft. Continental expects
to continue incurring expenses in complying with the FAA's
regulations.
Additional laws, regulations, taxes and airport rates and charges
have been proposed from time to time that could significantly
increase the cost of airline operations or reduce revenues. For
instance, "passenger bill of rights" legislation has been
introduced in Congress that would, among other things, require the
payment of compensation to passengers as a result of certain
delays, and limit the ability of carriers to prohibit or restrict
usage of certain tickets in manners currently prohibited or
restricted. The DOT has proposed rules that would significantly
limit major carriers' ability to compete with new entrant carriers.
If adopted, these measures could have the effect of raising ticket
prices, reducing revenue and increasing costs. Restrictions on the
ownership and transfer of airline routes and takeoff and landing
slots have also been proposed. See "Industry Regulation and
Airport Access" above. 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. Continental cannot provide
assurance that laws or regulations enacted in the future will not
adversely affect it.
Seasonal Nature of Airline Business; Other. Due to greater demand
for air travel during the summer months, revenue in the airline
industry in the second and third quarters of the year is generally
stronger than revenue in the first and fourth quarters of the year
for most U.S. air carriers. Continental's results of operations
generally reflect this seasonality, but have also been impacted by
numerous other factors that are not necessarily seasonal, including
the extent and nature of competition from other airlines, fare
wars, excise and similar taxes, changing levels of operations, fuel
prices, weather, air traffic control delays, foreign currency
exchange rates and general economic conditions.
ITEM 2. PROPERTIES.
Flight Equipment
As shown in the following table, Continental's (including CMI's)
jet aircraft fleet (excluding regional jets) consisted of 363 jets
at December 31, 1999.
Seats
Total in Standard Average Age
Type Aircraft Owned Leased Configuration (In Years)
Three Engine
DC-10-30 28 6 22 242 24.0
727-200 5 2 3 149 21.7
Two Engine
777-200 14 4 10 283 0.9
757-200 38 10 28 183 3.2
737-800 42 12 30 155 0.7
737-700 36 12 24 124 1.0
737-500 66 15 51 104 3.7
737-300 65 14 51 128 12.4
MD-80 69 17 52 141 15.0
363 92 271 8.4
The table above excludes four all-cargo 727 CMI aircraft and one
A300, three 747, three DC-9-30, three DC-10-30 and two 727
Continental aircraft that have been removed from service.
A majority of the aircraft and engines owned by Continental are
subject to mortgages.
The FAA adopted rules pursuant to the Airport Noise and Capacity
Act of 1990 that required a scheduled phase-out of Stage 2 aircraft
during the 1990s. Aircraft operating outside the U.S. are exempt
from the phase-out. With the exception of five 727 aircraft
operated by CMI, Continental's jet fleet was composed of all Stage
3 aircraft at December 31, 1999.
During 1999, Continental put into service a total of 61 new Boeing
aircraft which consisted of 20 737-700 aircraft, 27 737-800
aircraft, six 757-200 aircraft and eight 777-200 aircraft. The
Company anticipates taking delivery of 28 new Boeing aircraft and
retiring 11 DC-10-30, five 727-200 and three MD-80 aircraft in
2000.
As of December 31, 1999, Express operated a fleet of 147 aircraft,
as follows:
Seats
Total in Standard Average Age
Type Aircraft Owned Leased Configuration (In Years)
Regional jets
ERJ-145 56 - 56 50 1.4
ERJ-135 6 - 6 37 0.3
Turboprop
ATR-72 2 2 - 64 6.1
ATR-42-500 6 - 6 48 3.3
ATR-42-320 31 4 27 46 9.8
EMB-120 21 11 10 30 10.0
Beech 1900-D 25 - 25 19 3.9
147 17 130 5.0
The table above excludes one EMB-120 owned by the Company but
removed from service.
During 1999, Express took delivery of 21 ERJ-145 aircraft and six
ERJ-135 aircraft. Also, Express put into service one ATR 42-320
previously subleased. Express anticipates taking delivery of
another 15 ERJ-145 aircraft and 12 new ERJ-135 aircraft in 2000.
During December 1999, under a sale and leaseback agreement with
Gulfstream, Express sold 25 Beech 1900-D aircraft to Gulfstream in
exchange for Gulfstream's assumption of $81 million in debt.
Express is leasing these aircraft from Gulfstream for periods
ranging from eight to 23 months.
See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital
Commitments" for a discussion of the Company's order for new firm
commitment aircraft and related financing arrangements.
Facilities
The Company's principal facilities are located at Newark, Bush
Intercontinental in Houston, Hopkins International in Cleveland and
A.B. Won Pat International Airport in Guam. All these facilities,
as well as substantially all of Continental's other facilities, are
leased on a long-term, net-rental basis, and Continental is
responsible for maintenance, taxes, insurance and other facility-
related expenses and services. In certain locations, Continental
owns hangars and other facilities on land leased on a long-term
basis, which facilities will become the property of the lessor on
termination of the lease. At each of its three domestic hub cities
and most other locations, Continental's passenger and baggage
handling space is leased directly from the airport authority on
varying terms dependent on prevailing practice at each airport.
In July 1996, the Company announced plans to expand its gates and
related facilities into Terminal B at Bush Intercontinental, as
well as planned improvements at Terminal C and the construction of
a new automated people mover system linking Terminal B and Terminal
C. The majority of the Company's expansion project has been
completed. In April 1997 and January 1999, the City of Houston
completed the offering of $190 million and $46 million,
respectively, aggregate principal amount of tax-exempt special
facilities revenue bonds (the "IAH Bonds") to finance such
expansion and improvements. The IAH Bonds are unconditionally
guaranteed by Continental. In connection therewith, the Company
has entered into long-term leases (or amendments to existing
leases) with the City of Houston providing for the Company to make
rental payments sufficient to service the related tax-exempt bonds,
which have a term no longer than 30 years.
Continental substantially completed the expansion of its facilities
at Hopkins International in the third quarter of 1999. The
expansion, which included a new jet concourse for the regional jet
service offered by Express, as well as other facility improvements,
cost approximately $156 million and was funded principally by a
combination of tax-exempt special facilities revenue bonds (issued
in March 1998) and general airport revenue bonds (issued in
December 1997) by the City of Cleveland, Ohio (the "City of
Cleveland"). Continental has unconditionally guaranteed the
special facilities revenue bonds and has entered into a long-term
lease with the City of Cleveland under which rental payments will
be sufficient to service the related bonds.
In September 1999, the City of Cleveland completed the issuance of
$71 million aggregate principal amount of tax-exempt bonds. The
bond proceeds were used to refinance $75 million aggregate
principal amount in bonds originally issued by the City of
Cleveland in 1990 for the purpose of constructing certain terminal
and other improvements at Hopkins International. Continental has
unconditionally guaranteed the bonds and has a long-term lease with
the City of Cleveland under which rental payments will be
sufficient to service the related bonds, which have a term of 20
years. Continental estimates that it will save approximately $44
million in debt service payments over the 20-year term as a result
of the refinancing.
Also in September 1999, the New Jersey Economic Development
Authority completed the offering of $730 million aggregate
principal amount of tax-exempt special facility revenue bonds to
finance a portion of Continental's Global Gateway Program at Newark
International Airport. Major construction began in the third
quarter of 1999 and is scheduled to be completed in 2002. The
program includes construction of a new concourse in Terminal C and
other facility improvements. Continental has unconditionally
guaranteed the bonds and has entered into a long-term lease with
the New Jersey Economic Development Authority under which rental
payments will be sufficient to service the related bonds, which
have a term of 30 years.
The Company has lease agreements with the City and County of Denver
covering several support facilities at Denver International
Airport. The facilities exceed Continental's needs at the airport
and the Company has subleased a portion of the space.
The Company has cargo facilities at Los Angeles International
Airport. In July 1996, the Company subleased such facilities to
another carrier. If such carrier fails to comply with its
obligations under the sublease, the Company would be required to
perform those obligations.
Continental also maintains administrative offices, airport and
terminal facilities, training facilities and other facilities
related to the airline business in the cities it serves.
Continental remains contingently liable until December 1, 2015, on
$202 million of long-term lease obligations of US Airways related
to the East End Terminal at LaGuardia. If US Airways defaulted on
these obligations, Continental could be required to cure the
default, at which time it would have the right to occupy the
terminal.
ITEM 3. LEGAL PROCEEDINGS.
Antitrust Litigation
United States of America v. Northwest Airlines Corp. & Continental
Airlines, Inc., in the United States District Court for the
Eastern District of Michigan, Southern Division. In this
litigation, the Antitrust Division of the DOJ is challenging under
Section 7 of the Clayton Act and Section 1 of the Sherman Act the
acquisition by Northwest of shares of Continental's Class A common
stock bearing, together with certain shares for which Northwest has
a limited proxy, more than 50% of the fully diluted voting power of
all Continental stock. The government's position is that,
notwithstanding various agreements that restrict Northwest's
ability to exercise voting control over Continental and are
designed to assure Continental's competitive independence,
Northwest's control of the Class A common stock will reduce actual
and potential competition in various ways and in a variety of
markets. The government seeks an order requiring Northwest to
divest all voting stock in Continental on terms and conditions as
may be agreed to by the government and the Court. No specific
relief is sought against Continental. Trial is currently set for
October 2000.
Environmental Proceedings
Under the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended (commonly known
as "Superfund") and similar state environment cleanup laws,
generators of waste disposed of at designated sites may, under
certain circumstances, be subject to joint and several liability
for investigation and remediation costs. The Company (including
its predecessors) has been identified as a potentially responsible
party at four federal and two state sites that are undergoing or
have undergone investigation or remediation. The Company has
entered into a settlement agreement with the Environmental
Protection Agency ("EPA") with respect to the four federal sites.
The settlement agreement provides for EPA to receive an allowed
unsecured claim of approximately $1.3 million under the Company's
Plan of Reorganization (subject to approval of the Bankruptcy
Court) and approximately $230,000 in cash, in full satisfaction of
any and all of the Company's liabilities relating to such sites.
With respect to the state sites, the Company believes that,
although applicable case law is evolving and some cases may be
interpreted to the contrary, some or all of any liability claims
associated with these sites were discharged by confirmation of the
Company's Plan of Reorganization, principally because the Company's
exposure is based on alleged offsite disposal known as of the date
of confirmation. Even if any such claims were not discharged, on
the basis of currently available information, the Company believes
that its potential liability for its allocable share of the cost to
remedy each site (to the extent the Company is found to have
liability) is not, in the aggregate, material; however, the Company
has not been designated a "de minimis" contributor at any of such
sites.
The Company is also and may from time to time become involved in
other environmental matters, including the investigation and/or
remediation of environmental conditions at properties used or
previously used by the Company. Although the Company is not
currently subject to any environmental cleanup orders imposed by
regulatory authorities, it is undertaking voluntary investigation
or remediation at certain properties in consultation with such
authorities. The full nature and extent of any contamination at
these properties and the parties responsible for such contamination
have not been determined, but based on currently available
information, the Company does not believe that any environmental
liability associated with such properties will have a material
adverse effect on the Company.
General
Various other claims and lawsuits against the Company are pending
that are of the type generally consistent with the Company's
business. The Company cannot at this time reasonably estimate the
possible loss or range of loss that could be experienced if any of
the claims were successful. Typically, such claims and lawsuits
are covered in whole or in part by insurance. The Company does not
believe that the foregoing matters will have a material adverse
effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
Continental's common stock trades on the New York Stock Exchange.
The table below shows the high and low sales prices for the
Company's Class B common stock and Class A common stock as reported
on the New York Stock Exchange during 1998 and 1999.
Class B Class A
Common Stock Common Stock
High Low High Low
1998 First Quarter . . . $62-1/16 $44 $64-1/4 $47-3/4
Second Quarter. . . $64 $54-1/16 $64-1/2 $55-3/4
Third Quarter . . . $65-1/8 $35-3/4 $64-3/4 $36-1/2
Fourth Quarter. . . $42-13/16 $28-7/8 $43-5/16 $30-7/8
1999 First Quarter . . . $41-11/16 $30 $44-15/16 $34-1/8
Second Quarter. . . $48 $36-7/16 $48 $36-13/16
Third Quarter . . . $44-9/16 $31-5/8 $44-3/8 $31-13/16
Fourth Quarter. . . $44-3/8 $32-3/8 $44-11/16 $32-3/16
As of January 21, 2000, there were approximately 14,774 and 2,893
holders of record of Continental's Class B common stock and Class A
common stock, respectively.
The Company has paid no cash dividends on its common stock and has
no current intention of paying cash dividends on its common stock.
During 1999, the Company's Board of Directors increased the size
of its common stock repurchase program by $900 million, bringing
the total size of the program to $1.2 billion. In addition, the
Company's Board of Directors has also authorized the Company to use
up to one-half of its 2000 and later adjusted net income, and all
of the net proceeds of future sales of non-strategic assets, for
additional stock repurchases. As of January 21, 2000, the Company
has repurchased 18,853,600 Class B common shares for $804 million
since the inception of the repurchase program in March 1998.
Certain of the Company's credit agreements and indentures restrict
the ability of the Company and certain of its subsidiaries to pay
cash dividends or repurchase capital stock by imposing minimum
unrestricted cash requirements on the Company, limiting the amount
of such dividends and repurchases when aggregated with certain
other payments or distributions and requiring that the Company
comply with other covenants specified in such instruments.
The Company's Certificate of Incorporation provides that no shares
of capital stock may be voted by or at the direction of persons who
are not United States citizens unless such shares are registered on
a separate stock record. The Company's Bylaws further provide that
no shares will be registered on such separate stock record if the
amount so registered would exceed United States foreign ownership
restrictions. United States law currently requires that no more
than 25% of the voting stock of the Company (or any other domestic
airline) may be owned directly or indirectly by persons who are not
citizens of the United States.
ITEM 6. SELECTED FINANCIAL DATA.
The table on the following page sets forth certain consolidated
financial data of the Company at December 31, 1999, 1998, 1997,
1996 and 1995 and for each of the five years in the period ended
December 31, 1999.
ITEM 6. SELECTED FINANCIAL DATA (Continued)
(in millions, except per share data)
Year Ended December 31, (1)(2)
1999 1998 1997 1996 1995
Operating revenue (3). . . . $8,639 $7,927 $7,194 $6,347 $5,816
Operating income . . . . . . 600 701 716 525 385
Income before cumulative
effect of accounting
changes and extra-
ordinary charge. . . . . . 488 387 389 325 224
Net income . . . . . . . . . 455 383 385 319 224
Earnings per common share:
Income before cumulative
effect of accounting
changes and extra-
ordinary charge. . . . 7.02 6.40 6.72 5.87 4.07
Net income . . . . . . . 6.54 6.34 6.65 5.75 4.07
Earnings per common share
assuming dilution:
Income before cumulative
effect of accounting
changes and extra-
ordinary charge. . . . 6.64 5.06 5.03 4.25 3.37
Net income . . . . . . . 6.20 5.02 4.99 4.17 3.37
ITEM 6. SELECTED FINANCIAL DATA (Continued)
(in millions, except per share data)
Year Ended December 31, (1)(2)
1999 1998 1997 1996 1995
Proforma Effect Assuming
Accounting Change-Sale
of Frequent Flyer Miles -
is Applied Retroactively:
Income before
Extraordinary Charge. . . $ 488 $ 382 $ 385 $ 319 $ 219
Earnings per Common Share. $ 7.02 $ 6.32 $ 6.65 $ 5.74 $ 3.97
Earnings per Common Share
Assuming Dilution . . . . $ 6.64 $ 5.00 $ 4.98 $ 4.16 $ 3.29
Net Income . . . . . . . . $ 482 $ 378 $ 381 $ 313 $ 219
Earnings per Common Share. $ 6.93 $ 6.26 $ 6.58 $ 5.63 $ 3.97
Earnings per Common Share
Assuming Dilution . . . . $ 6.57 $ 4.95 $ 4.93 $ 4.09 $ 3.29
ITEM 6. SELECTED FINANCIAL DATA (Continued)
Year Ended December 31,
1999 1998 1997 1996 1995
Total assets . . . . . . . . . . . $8,223 $7,086 $5,830 $5,206 $4,821
Long-term debt and capital lease
obligations. . . . . . . . . . . 3,055 2,480 1,568 1,624 1,658
Minority interest (4). . . . . . . - - - 15 27
Continental-Obligated Mandatorily
Redeemable Preferred Securities
of Subsidiary Trust holding
solely Convertible Subordinated
Debentures (5) . . . . . . . . . - 111 242 242 242
Redeemable preferred stock (6) . . - - - 46 41
(1) See Item 7. "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Results of Operations" for a discussion of significant transactions in
1999, 1998 and 1997. 1999 results include a $50 million fleet disposition/impairment
loss ($81 million pre-tax) resulting from the Company's decision to accelerate the
retirement of certain jet and turboprop aircraft. In addition, 1999 results include a
$182 million gain ($297 million pre-tax) related to the sale of the Company's interest
in AMADEUS and an $18 million net gain ($29 million pre-tax) related to other asset
sales, including a portion of the Company's interest in Equant N.V. 1999 results also
include the cumulative effect of accounting changes ($33 million, net of taxes) related
to the write-off of pilot training costs and a change in the method of accounting for
the sale of mileage credits under the Company's frequent flyer program. 1998 results
include a $122 million fleet disposition/impairment loss resulting from the Company's
decision to accelerate the retirement of certain jet and turboprop aircraft. 1996
results include a $128 million fleet disposition loss associated with the Company's
decision to accelerate the replacement of its DC-9-30, DC-10-10, 727-200, 737-100 and
737-200 aircraft. 1995 results include a $30 million gain ($108 million pre-tax) from
the System One transactions.
(2) No cash dividends were paid on common stock during the periods shown.
(3) Certain reclassifications have been made in the prior years' financial data to conform
to the current year presentation.
(4) Continental purchased the United Micronesia Development Association, Inc.'s 9% interest
in Air Micronesia, Inc. in 1997.
(5) The sole assets of the Continental-Obligated Mandatorily Redeemable Preferred Securities
of Subsidiary Trust ("Trust") were Convertible Subordinated Debentures. In 1998,
approximately $134 million principal amount of such Preferred Securities converted into
shares of Class B common stock, and in January 1999, the remainder of such Preferred
Securities converted into shares of Class B common stock.
(6) Continental redeemed for cash all of the outstanding shares of its Series A 12%
Cumulative Preferred Stock in 1997.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The following discussion may contain forward-looking statements.
In connection therewith, please see the cautionary statements
contained in Item 1. "Business - Risk Factors Relating to the
Company" and "Business - Risk Factors Relating to the Airline
Industry" which identify important factors that could cause actual
results to differ materially from those in the forward-looking
statements. Hereinafter, the terms "Continental" and the "Company"
refer to Continental Airlines, Inc. and its subsidiaries, unless
the context indicates otherwise.
Continental's results of operations are impacted by seasonality
(the second and third quarters are generally stronger than the
first and fourth quarters) as well as numerous other factors that
are not necessarily seasonal, including the extent and nature of
competition from other airlines, employee job actions (including at
other airlines), fare sale activities, excise and similar taxes,
changing levels of operations and capacity, fuel prices, weather,
air traffic control delays, foreign currency exchange rates,
changes in regulations and aviation treaties and general economic
conditions. Recently, jet fuel prices have increased dramatically.
If high fuel costs continue without an improvement in the revenue
environment, the Company may not post a profit in the first quarter
of 2000. In addition, industry capacity and growth in the
transatlantic markets (including block space arrangements where
Continental is obligated to purchase capacity at a fixed price)
have resulted in lower yields and revenue per available seat mile
in those markets, which trend is expected to continue in 2000.
Although the results in Asia of Continental Micronesia, Inc.
("CMI"), a wholly owned subsidiary of the Company, have declined in
recent years, the Company successfully redeployed CMI capacity into
stronger domestic markets and CMI's recent results continue to
improve. Continental will continue to critically review its growth
plans in light of industry conditions and will adjust or redeploy
resources, including aircraft capacity, as necessary, similar to
its recent decision to accelerate the retirement of certain DC-10-
30 aircraft and replace them with narrowbody aircraft on certain
transatlantic routes. In addition, management believes the Company
is well positioned to respond to market conditions in the event of
a sustained economic downturn for the following reasons:
underdeveloped hubs with strong local traffic; a flexible fleet
plan; a strong cash balance, a $225 million unused revolving credit
facility and a well developed alliance network.
Results of Operations
The following discussion provides an analysis of the Company's
results of operations and reasons for material changes therein for
the three years ended December 31, 1999.
Comparison of 1999 to 1998. The Company recorded consolidated net
income of $455 million and $383 million for the years ended
December 31, 1999 and 1998, respectively. Net income in 1999 was
significantly impacted by several non-recurring items, including a
$182 million gain on the sale of the Company's interest in AMADEUS
Global Travel Distribution S.A. ("AMADEUS") ($297 million pre-tax),
a $50 million fleet disposition/impairment loss ($81 million pre-
tax) related to the early retirement of several DC-10-30's and
other items, the cumulative effect of accounting changes ($33
million, net of taxes) related to the write-off of pilot training
costs and a change in the method of accounting for the sale of
mileage credits to participating partners in the Company's frequent
flyer program, a $20 million gain ($33 million pre-tax) on the sale
of a portion of the Company's interest in Equant N.V. ("Equant")
and a $3 million loss ($4 million pre-tax) on the sale of the
Company's warrants to purchase common stock of priceline.com, Inc.
("Priceline"). Net income in 1998 was significantly impacted by a
$77 million ($122 million pre-tax) fleet disposition/ impairment
loss resulting from the Company's decision to accelerate the
retirement of certain jet and turboprop aircraft.
Passenger revenue increased 8.9%, $660 million, during 1999 as
compared to 1998. The increase was due to an 11.3% increase in
revenue passenger miles, partially offset by a 3.3% decrease in
yield. Both yield pressures in the transatlantic markets and a
6.7% increase in average stage length negatively impacted yield.
Cargo and mail revenue increased 10.2%, $28 million, in 1999 as
compared to 1998 due to increased domestic and international
volumes and new markets added in 1999.
Other operating revenue increased 12.2%, $24 million, in 1999
compared to the prior year primarily due to an increase in fees
charged to customers to change advance purchase tickets and also
due to an increase in Presidents Club revenue as a result of a
larger number of these airport private clubs.
Wages, salaries and related costs increased 13.2%, $292 million,
during 1999 as compared to 1998, primarily due to an 8.3% increase
in average full-time equivalent employees to support increased
flying and higher wage rates resulting from the Company's decision
to increase employee wages to industry standard by the year 2000.
Aircraft fuel expense increased 6.1%, $44 million, in 1999 as
compared to the prior year. The average price per gallon increased
1.0% from 46.83 cents in 1998 to 47.31 cents in 1999. This
increase is net of gains of approximately $105 million recognized
during 1999 related to the Company's fuel hedging program. See
"Fuel Hedging" below. In addition, the quantity of jet fuel used
increased 3.7% principally reflecting increased capacity offset in
part by the increased fuel efficiency of the Company's younger
fleet.
Aircraft rentals increased 17.0%, $112 million, during 1999 as
compared to 1998, due to the delivery of new aircraft.
Commissions expense decreased 1.2%, $7 million, during 1999 as
compared to 1998 due to lower rates resulting from international
commission caps and a lower volume of commissionable sales,
partially offset by increased passenger revenue.
Other rentals and landing fees increased 20.0%, $83 million,
primarily due to higher facilities rent due to increased rates and
volume and higher landing fees resulting from increased operations.
Depreciation and amortization expense increased 22.4%, $66 million,
in 1999 compared to 1998 primarily due to the addition of new
aircraft and related spare parts. These increases were partially
offset by approximately a $5 million reduction in the amortization
of routes, gates and slots resulting from the recognition of
previously unbenefitted net operating losses ("NOLs") during 1998.
During the fourth quarter of 1999, the Company made the decision to
accelerate the retirement of six DC-10-30 aircraft and other items
in 1999 and the first half of 2000 and to dispose of related excess
inventory. The DC-10-30's will be replaced by Boeing 757 and
Boeing 737-800 aircraft on certain routes, and by Boeing 777
aircraft on other routes. In addition, the market value of certain
Boeing 747 aircraft no longer operated by the Company has declined.
As a result of these items and certain other fleet-related items,
the Company recorded a fleet disposition/impairment loss of $81
million in the fourth quarter of 1999.
Approximately $52 million of the $81 million charge relates to the
impairment of owned or capital leased aircraft and related
inventory held for disposal with a carrying amount of $77 million.
The remaining $29 million of the charge relates primarily to costs
expected to be incurred related to the return of leased aircraft.
As of December 31, 1999, the remaining accrual for the 1999 fleet
disposition/impairment loss totaled $12 million. The Company
expects to finance the cash outlays primarily with internally
generated funds.
Other operating expense increased 14.9%, $243 million, in 1999 as
compared to the prior year, primarily as a result of increases in
passenger services expense, aircraft servicing expense,
reservations and sales expense and other miscellaneous expense,
principally due to a 9.7% increase in available seat miles.
Interest expense increased 30.9%, $55 million, due to an increase
in long-term debt resulting from the purchase of new aircraft and
$200 million of 8% unsecured senior notes issued in December 1998,
partially offset by interest savings of $9 million due to the
conversion of the Company's 6-3/4% Convertible Subordinated Notes
into Class B common stock.
Interest income increased 20.3%, $12 million, due to higher average
balances of cash, cash equivalents and short-term investments and
due to higher rates.
The Company's other nonoperating income (expense) in 1999 includes
a $33 million gain on the sale of a portion of the Company's
interest in Equant, partially offset by foreign currency losses of
$13 million, losses on equity investments of $7 million and a $4
million loss on the sale of the Company's warrants to purchase
common stock of Priceline. Other nonoperating income (expense) in
1998 included a $6 million gain on the sale of certain stock of
America West Holdings Corporation ("America West Holdings").
Comparison of 1998 to 1997. The Company recorded consolidated net
income of $383 million and $385 million for the years ended
December 31, 1998 and 1997 (including special charges),
respectively. Net income in 1998 was significantly impacted by a
$77 million ($122 million pre-tax) fleet disposition/impairment
loss resulting from the Company's decision to accelerate the
retirement of certain jet and turboprop aircraft. Management
believes that the Company benefitted in the first quarter of 1997
from the expiration of the aviation trust fund tax (the "ticket
tax"). The ticket tax was reinstated on March 7, 1997. Management
believes that the ticket tax has a negative impact on the Company,
although neither the amount of such negative impact directly
resulting from the reimposition of the ticket tax, nor the benefit
realized by its previous expiration, can be precisely determined.
Passenger revenue increased 10.7%, $723 million, during 1998 as
compared to 1997. The increase was due to a 12.5% increase in
revenue passenger miles, partially offset by a 2.4% decrease in
yield. The decrease in yield was due to lower industry-wide fare
levels and an 8% increase in average stage length.
Cargo and mail increased 6.6%, $17 million, due to an increase in
freight revenue resulting from strong international volumes and
strong growth in Continental's express delivery service.
Wages, salaries and related costs increased 22.3%, $404 million,
during 1998 as compared to 1997, primarily due to an 11.2% increase
in average full-time equivalent employees to support increased
flying and higher wage rates resulting from the Company's decision
to increase employee wages to industry standards by the year 2000.
Aircraft fuel expense decreased 17.9%, $158 million, in 1998 as
compared to the prior year. The average price per gallon decreased
25.6% from 62.91 cents in 1997 to 46.83 cents in 1998. This
reduction was partially offset by a 9.6% increase in the quantity
of jet fuel used principally reflecting increased capacity.
Aircraft rentals increased 19.6%, $108 million, during 1998 as
compared to 1997, due primarily to the delivery of new leased
aircraft.
Maintenance, materials and repairs increased 8.4%, $45 million,
during 1998 as compared to 1997. Aircraft maintenance expense in
the second quarter of 1997 was reduced by $16 million due to the
reversal of reserves that were no longer required as a result of
the acquisition of 10 aircraft previously leased by the Company.
In addition, maintenance expense increased due to the overall
increase in flight operations offset by newer aircraft and the
volume and timing of engine overhauls as part of the Company's
ongoing maintenance program.
Depreciation and amortization expense increased 15.7%, $40 million,
in 1998 compared to 1997 primarily due to the addition of new
aircraft and related spare parts. These increases were partially
offset by an approximate $18 million reduction in the amortization
of reorganization value in excess of amounts allocable to
identifiable assets and routes, gates and slots resulting from the
recognition of previously unbenefitted NOLs.
In August 1998, Continental announced that CMI would accelerate the
retirement of its four Boeing 747 aircraft by April 1999 and its
remaining thirteen Boeing 727 aircraft by December 2000. The
Boeing 747s were replaced by DC-10-30 aircraft and the Boeing 727
aircraft were replaced with a reduced number of Boeing 737
aircraft. In addition, Continental Express, Inc. ("Express"), a
wholly owned subsidiary of the Company, announced that it would
accelerate the retirement of certain turboprop aircraft by December
2000, including its fleet of 32 Embraer 120 turboprop aircraft, as
regional jets are acquired to replace turboprops. As a result of
its decision to accelerate the retirement of these aircraft,
Continental recorded a fleet disposition/impairment loss of $77
million ($122 million pre-tax) in the third quarter of 1998.
Other operating expense increased 10.3%, $152 million, in 1998 as
compared to the prior year, primarily as a result of increases in
passenger and aircraft servicing expense, reservations and sales
expense and other miscellaneous expense, primarily due to the 10.6%
increase in available seat miles.
Interest expense increased 7.2%, $12 million, due to an increase in
long-term debt resulting from the purchase of new aircraft.
Interest capitalized increased 57.1%, $20 million, due to increased
capital spending and a higher average balance of purchase deposits
for flight equipment.
The Company's other nonoperating income (expense) in 1998 included
a $6 million gain on the sale of America West Holdings stock.
Certain Statistical Information
An analysis of statistical information for Continental's jet
operations, excluding regional jets operated by Express, for each
of the three years in the period ended December 31, 1999 is as
follows:
Net Increase/ Net Increase/
(Decrease) (Decrease)
1999 1999-1998 1998 1998-1997 1997
Revenue pas-
senger miles
(millions) (1) . 60,022 11.3 % 53,910 12.5 % 47,906
Available seat
miles
(millions) (2) . 81,946 9.7 % 74,727 10.6 % 67,576
Passenger load
factor (3) . . . 73.2% 1.1 pts. 72.1% 1.2 pts. 70.9%
Breakeven pas-
senger load
factor (4), (5). 65.6% 4.0 pts. 61.6% 1.5 pts. 60.1%
Passenger revenue
per available
seat mile
(cents). . . . . 9.06 (1.8)% 9.23 (0.6)% 9.29
Total revenue per
available seat
mile (cents) . . 9.81 (1.4)% 9.95 (1.1)% 10.06
Operating cost
per available
seat mile
(cents) (5). . . 9.03 1.6 % 8.89 (1.7)% 9.04
Average yield
per revenue
passenger mile
(cents) (6). . . 12.37 (3.3)% 12.79 (2.4)% 13.11
Average fare per
revenue
passenger. . . .$163.07 3.2 % $158.02 3.7 % $152.40
Revenue passengers
(thousands). . . 45,540 4.4 % 43,625 5.9 % 41,210
Average length of
aircraft flight
(miles). . . . . 1,114 6.7 % 1,044 8.0 % 967
Average daily
utilization of
each aircraft
(hours) (7). . . 10:29 2.6 % 10:13 0.0 % 10:13
Actual aircraft
in fleet at end
of period (8). . 363 - 363 7.7 % 337
_______________
Continental has entered into block space arrangements with certain
other carriers whereby one or both of the carriers is obligated to
purchase capacity on the other. The table above excludes 2.6
billion, 1.9 billion and 738 million available seat miles, together
with related revenue passenger miles and enplanements, operated by
Continental but purchased and marketed by the other carriers in
1999, 1998 and 1997, respectively, and includes 1.0 billion and 358
million available seat miles, together with related revenue
passenger miles and enplanements, operated by other carriers but
purchased and marketed by Continental in 1999 and 1998,
respectively.
(1) The number of scheduled miles flown by revenue passengers.
(2) The number of seats available for passengers multiplied by
the number of scheduled miles those seats are flown.
(3) Revenue passenger miles divided by available seat miles.
(4) The percentage of seats that must be occupied by revenue
passengers in order for the airline to break even on an
income before income taxes basis, excluding nonrecurring
charges, nonoperating items and other special items.
(5) 1999 and 1998 exclude fleet disposition/impairment losses
totaling $81 million and $122 million, respectively.
(6) The average revenue received for each mile a revenue
passenger is carried.
(7) The average number of hours per day that an aircraft flown in
revenue service is operated (from gate departure to gate
arrival).
(8) Excludes all-cargo 727 aircraft (four in 1999 and six in 1998
and 1997) at CMI.
Liquidity and Capital Resources
During 1999, the Company completed a number of transactions
intended to strengthen its long-term financial position and enhance
earnings:
In February 1999, the Company completed an offering of $806 million
of pass-through certificates used to finance (either through
leveraged leases or secured debt financings) the debt portion of
the acquisition cost of 22 aircraft delivered in 1999.
In March 1999, the Company completed a $160 million Credit
Facility, with a maturity date of March 2001, to finance pre-
delivery deposits for certain new Boeing aircraft to be delivered
between March 1999 and March 2002.
In April 1999, the Company exercised its right and called for
redemption in May 1999, all $230 million of its 6-3/4% Convertible
Subordinated Notes due 2006. The notes were converted into 7.6
million shares of Class B common stock during May 1999.
Also, in June 1999, the Company completed an offering of $742
million of pass-through certificates used to finance (either
through leveraged leases or secured debt financings) the debt
portion of the acquisition cost of 21 new Boeing aircraft delivered
in 1999.
In October 1999, Continental sold its interest in AMADEUS for $409
million, including a special dividend.
During 1999, the Company's Board of Directors increased the size of
its common stock repurchase program by $900 million, bringing the
total size of the program to $1.2 billion. As of January 21, 2000,
the Company has repurchased 18,853,600 Class B common shares for
$804 million since the inception of the program in March of 1998.
As of December 31, 1999, Continental had approximately $3.4 billion
(including current maturities) of long-term debt and capital lease
obligations, and had approximately $1.6 billion of common
stockholders' equity, a ratio of 2.1 to 1, at both December 31,
1999 and 1998.
As of December 31, 1999, the Company had $1.6 billion in cash and
cash equivalents and short-term investments, compared to $1.4
billion as of December 31, 1998. Net cash provided by operating
activities decreased $100 million during the year ended December
31, 1999 compared to the same period in the prior year primarily
due to a decrease in operating income. Net cash used by investing
activities for the year ended December 31, 1999 compared to the
same period in the prior year decreased $39 million, primarily due
to proceeds received from the sale of AMADEUS and increased
proceeds received from the sale of equipment offset by the purchase
of short-term investments in 1999. Net cash used by financing
activities increased $514 million primarily due to an increase in
the purchase of the Company's Class B common stock and a decrease
in proceeds received from the issuance of long-term debt.
Continental has unused lines of credit totaling $225 million. A
significant amount of Continental's assets are encumbered.
Deferred Tax Assets. As of December 31, 1999, the Company had
deferred tax assets aggregating $611 million, including $266
million of NOLs, and a valuation allowance of $263 million.
As a result of NOLs, the Company will not pay United States federal
income taxes (other than alternative minimum tax) until it has
recorded approximately an additional $700 million of taxable income
following December 31, 1999. Section 382 of the Internal Revenue
Code ("Section 382") imposes limitations on a corporation's ability
to utilize NOLs if it experiences an "ownership change". In
general terms, an ownership change may result from transactions
increasing the ownership of certain stockholders in the stock of a
corporation by more than 50 percentage points over a three-year
period. In the event that an ownership change should occur,
utilization of Continental's NOLs would be subject to an annual
limitation under Section 382 determined by multiplying the value of
the Company's stock at the time of the ownership change by the
applicable long-term tax exempt rate (which was 5.72% for December
1999). Any unused annual limitation may be carried over to later
years, and the amount of the limitation may under certain
circumstances be increased by the built-in gains in assets held by
the Company at the time of the change that are recognized in the
five-year period after the change. Under current conditions, if an
ownership change were to occur, Continental's annual NOL
utilization would be limited to approximately $172 million per year
other than through the recognition of future built-in gain
transactions.
On November 20, 1998, an affiliate of Northwest Airlines, Inc.
completed its acquisition of certain equity of the Company
previously held by Air Partners, L.P. and its affiliates, together
with certain Class A common stock of the Company held by certain
other investors, totaling 8,661,224 shares of the Class A common
stock (the "Air Partners Transaction"). The Company does not
believe that the Air Partners Transaction resulted in an ownership
change for purposes of Section 382.
Purchase Commitments. Continental has substantial commitments for
capital expenditures, including for the acquisition of new
aircraft. As of January 14, 2000, Continental had agreed to
acquire a total of 74 Boeing jet aircraft through 2005. The
Company anticipates taking delivery of 28 Boeing jet aircraft in
2000. Continental also has options for an additional 118 aircraft
(exercisable subject to certain conditions). The estimated
aggregate cost of the Company's firm commitments for Boeing
aircraft is approximately $4 billion. Continental currently plans
to finance its new Boeing aircraft with a combination of enhanced
pass through trust certificates, lease equity and other third-party
financing, subject to availability and market conditions.
Continental has commitments or letters of intent for backstop
financing for approximately 18% of the anticipated remaining
acquisition cost of future Boeing deliveries. In addition, at
January 14, 2000, Continental has firm commitments to purchase 34
spare engines related to the new Boeing aircraft for approximately
$219 million which will be deliverable through March 2005.
However, further financing will be needed to satisfy the Company's
capital commitments for other aircraft and aircraft-related
expenditures such as engines, spare parts, simulators and related
items. There can be no assurance that sufficient financing will be
available for all aircraft and other capital expenditures not
covered by firm financing commitments. Deliveries of new Boeing
aircraft are expected to increase aircraft rental, depreciation and
interest costs while generating cost savings in the areas of
maintenance, fuel and pilot training.
As of January 14, 2000, Express had firm commitments for 43 Embraer
ERJ-145 ("ERJ-145") regional jets and 19 Embraer ERJ-135 ("ERJ-
135") regional jets, with options for an additional 100 ERJ-145 and
50 ERJ-135 aircraft exercisable through 2008. Express anticipates
taking delivery of 15 ERJ-145 and 12 ERJ-135 regional jets in 2000.
Neither Express nor Continental will have any obligation to take
any of the firm ERJ-145 or ERJ-135 aircraft that are not financed
by a third party and leased to Continental.
Continental expects its cash outlays for 2000 capital expenditures,
exclusive of fleet plan requirements, to aggregate $207 million,
primarily relating to software application and automation
infrastructure projects, aircraft modifications and mandatory
maintenance projects, passenger terminal facility improvements and
office, maintenance, telecommunications and ground equipment.
Continental's capital expenditures during 1999 aggregated $213
million, exclusive of fleet plan requirements.
The Company expects to fund its future capital commitments through
internally generated funds together with general Company financings
and aircraft financing transactions. However, there can be no
assurance that sufficient financing will be available for all
aircraft and other capital expenditures not covered by firm
financing commitments.
Continental has certain block-space arrangements whereby it is
committed to purchase capacity on other carriers at an aggregate
cost of approximately $159 million per year. These arrangements
are currently scheduled to expire over the next eight years.
Pursuant to other block-space arrangements, other carriers are
committed to purchase capacity at a cost of approximately $95
million per year on Continental.
Year 2000. The Year 2000 issue arose as a result of computer
programs having been written using two digits (rather than four) to
define the applicable year, among other problems. Any information
technology ("IT") systems with time-sensitive software might
recognize a date using "00" as the year 1900 rather than the year
2000, which could result in miscalculations and system failures.
The problem could also extend to many "non-IT" systems; that is,
operating and control systems that rely on embedded chip systems.
In addition, the Company was at risk from Year 2000 failures on the
part of third party-suppliers and governmental agencies with which
the Company interacts.
The Company uses a significant number of computer software programs
and embedded operating systems that are essential to its
operations. For this reason, the Company implemented a Year 2000
project in late 1995 so that the Company's computer systems would
function properly in the year 2000 and thereafter. The Company's
Year 2000 project involved the review of a number of internal and
third-party systems. Each system was subjected to the project's
five phases which consisted of systems inventory, evaluation and
analysis, modification implementation, user testing and integration
compliance. The Company completed its system review and made
certain modifications to its existing software and systems and/or
conversions to new software. As a result, the Year 2000 issue did
not pose any operational problems.
The Company completed its extensive communications and on-site
visits with its significant suppliers, vendors and governmental
agencies with which its systems interface and exchange data or upon
which its business depends. The Company coordinated efforts with
these parties to minimize the extent to which its business would be
vulnerable to their failure to remediate their own Year 2000
problems. The Company's business is dependent upon certain
domestic and foreign governmental organizations or entities such as
the Federal Aviation Administration that provide essential aviation
industry infrastructure. The systems of such third parties on
which Continental relies did not pose significant operational
problems for the Company. Management updated its day-to-day
operational contingency plans for possible Year 2000-specific
operational requirements. Although passenger travel was lower in
the latter part of December and early January due in part, the
Company believes, to Year 2000 concerns, the Company does not
believe that it has continued exposure to the Year 2000 issue.
The total cost of the Company's Year 2000 project (excluding
internal payroll) was $20 million and was funded through cash from
operations. In addition, the Company estimates that the negative
revenue impact in the latter part of December and early January
attributable to the Year 2000 concerns approximated $20 million and
$10 million, respectively. The cost of the Year 2000 project was
limited by the substantial outsourcing of the Company's systems and
the significant implementation of new systems since 1993.
Bond Financings. In July 1996, the Company announced plans to
expand its gates and related facilities into Terminal B at Bush
Intercontinental Airport, as well as planned improvements at
Terminal C and the construction of a new automated people mover
system linking Terminal B and Terminal C. The majority of the
Company's expansion project has been completed. In April 1997 and
January 1999, the City of Houston completed the offering of $190
million and $46 million, respectively, aggregate principal amount
of tax-exempt special facilities revenue bonds (the "IAH Bonds") to
finance such expansion and improvements. The IAH Bonds are
unconditionally guaranteed by Continental. In connection
therewith, the Company has entered into long-term leases (or
amendments to existing leases) with the City of Houston providing
for the Company to make rental payments sufficient to service the
related tax-exempt bonds, which have a term no longer than 30
years.
Continental substantially completed the expansion of its facilities
at its Hopkins International Airport hub in Cleveland in the third
quarter of 1999. The expansion, which included a new jet concourse
for the regional jet service offered by Express, as well as other
facility improvements, cost approximately $156 million and was
funded principally by a combination of tax-exempt special
facilities revenue bonds (issued in March 1998) and general airport
revenue bonds (issued in December 1997) by the City of Cleveland,
Ohio (the "City of Cleveland"). Continental has unconditionally
guaranteed the special facilities revenue bonds and has entered
into a long-term lease with the City of Cleveland under which
rental payments will be sufficient to service the related bonds.
In September 1999, the City of Cleveland completed the issuance of
$71 million aggregate principal amount of tax-exempt bonds. The
bond proceeds were used to refinance $75 million aggregate
principal amount in bonds originally issued by the City of
Cleveland in 1990 for the purpose of constructing certain terminal
and other improvements at Cleveland Hopkins International Airport.
Continental has unconditionally guaranteed the bonds and has a
long-term lease with the City of Cleveland under which rental
payments will be sufficient to service the related bonds, which
have a term of 20 years. Continental estimates that it will save
approximately $44 million in debt service payments over the 20-year
term as a result of the refinancing.
Also, in September 1999, the New Jersey Economic Development
Authority completed the offering of $730 million aggregate
principal amount of tax-exempt special facility revenue bonds to
finance a portion of Continental's Global Gateway Program at Newark
International Airport. Major construction began in the third
quarter of 1999 and is scheduled to be completed in 2002. The
program includes construction of a new concourse in Terminal C and
other facility improvements. Continental has unconditionally
guaranteed the bonds and has entered into a long-term lease with
the New Jersey Economic Development Authority under which rental
payments will be sufficient to service the related bonds, which
have a term of 30 years.
Employees. In September 1997, the Company announced a plan to
bring all employees to industry standard wages no later than the
end of the year 2000. Wage increases began in 1997, and will
continue to be phased in through 2000. The Company is in the
process of formulating a plan to bring employees to industry
standard benefits over a multi-year period.
The following is a table of the Company's, Express's and CMI's
principal collective bargaining agreements, and their respective
amendable dates:
Approximate
Number of
Full-time Contract
Employee Equivalent Representing Amendable
Group Employees Union Date
Continental Pilots 5,000 Independent October 2002
Association
of Continental
Pilots ("IACP")
Express Pilots 1,350 IACP October 2002
Dispatchers 150 Transport Workers October 2003
Union of America
Continental 3,300 International January 2002
Mechanics Brotherhood of
Teamsters
("Teamsters")
Express 350 Teamsters January 2003
Mechanics
CMI Mechanics 150 Teamsters March 2001
Continental 7,800 International (Negotiations
Flight Attendants Association of for amended
Machinists and contract
Aerospace Workers ongoing)
("IAM")
Express 500 IAM (Negotiations
Flight Attendants for amended
contract
ongoing)
CMI 350 IAM June 2000
Flight Attendants
CMI Fleet and 475 Teamsters March 2001
Passenger Service
Employees
In February 2000, the Company announced a 54-month tentative
collective bargaining agreement with its Continental Airlines
flight attendants. The agreement is subject to ratification by the
Continental Airlines flight attendants. In September 1999, Express
and the IAM began collective bargaining negotiations to amend the
Express flight attendants' contract (which became amendable in
November 1999). The Company believes that mutually acceptable
agreements can be reached with such employees, although the
ultimate outcome of the negotiations is unknown at this time.
The other employees of Continental, Express and CMI are not covered
by collective bargaining agreements.
Other. The Department of Transportation has proposed the
elimination of slot restrictions at high density airports other
than Ronald Reagan Washington National Airport in Washington, D.C.
Legislation containing a similar proposal, which could eliminate
slots as early as 2002 at O'Hare International Airport in Chicago
and 2007 at LaGuardia Airport and John F. Kennedy International
Airport in New York has passed the full House of Representatives
and the full Senate and is currently being considered by a
conference committee. The Company cannot predict whether any of
these proposals will be adopted. However, if legislation or
regulation eliminating slots were adopted, the value of such slots
could be deemed to be permanently impaired, resulting in a loss
being charged to earnings for the relevant period. Moreover, the
elimination of slots could have an adverse effect upon future
results of operations of the Company. At December 31, 1999, the
net book value of slots at these three airports was $64 million.
Management believes that the Company's costs are likely to be
affected in the future by (i) higher aircraft ownership costs as
new aircraft are delivered, (ii) higher wages, salaries, benefits
and related costs as the Company compensates its employees
comparable to industry average, (iii) changes in the costs of
materials and services (in particular, the cost of fuel, which can
fluctuate significantly in response to global market conditions),
(iv) changes in distribution costs and structure, (v) changes in
governmental regulations and taxes affecting air transportation and
the costs charged for airport access, including new security
requirements, (vi) changes in the Company's fleet and related
capacity and (vii) the Company's continuing efforts to reduce costs
throughout its operations, including reduced maintenance costs for
new aircraft, reduced distribution expense from using Continental's
electronic ticket product, E-Ticket and the internet for bookings,
and reduced interest expense.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Market Risk Sensitive Instruments and Positions
The Company is subject to certain market risks, including commodity
price risk (i.e., aircraft fuel prices), interest rate risk,
foreign currency risk and price changes related to investments in
equity securities. The adverse effects of potential changes in
these market risks are discussed below. The sensitivity analyses
presented do not consider the effects that such adverse changes may
have on overall economic activity nor do they consider additional
actions management may take to mitigate the Company's exposure to
such changes. Actual results may differ. See the notes to the
consolidated financial statements for a description of the
Company's accounting policies and other information related to
these financial instruments.
Aircraft Fuel. The Company's results of operations are
significantly impacted by changes in the price of aircraft fuel.
During 1999 and 1998, aircraft fuel accounted for 9.7% and 10.2%,
respectively, of the Company's operating expenses (excluding fleet
disposition/impairment losses). In order to provide short-term
protection (generally three to six months) against a sharp increase
in jet fuel prices, the Company from time to time enters into
petroleum call options, petroleum swap contracts and jet fuel
purchase commitments. The Company's fuel hedging strategy could
result in the Company not fully benefiting from certain fuel price
declines. As of December 31, 1999, the Company had hedged
approximately 24% of its projected 2000 fuel requirements,
including 93% related to the first quarter and 8% related to the
second quarter using petroleum call options, compared to
approximately 25% of its projected 1999 fuel requirements hedged at
December 31, 1998 using petroleum swap contracts and purchase
commitments. The Company estimates that at December 31, 1999, a
ten percent increase in the price per gallon of aircraft fuel would
not have a material impact on the fair value of the existing
petroleum call options, as compared to an $8 million increase in
the fair value of the petroleum swap contracts existing at December
31, 1998.
Foreign Currency. The Company is exposed to the effect of exchange
rate fluctuations on the U.S. dollar value of foreign currency
denominated operating revenue and expenses. The Company's largest
exposure comes from the Japanese yen. However, the Company is
attempting to mitigate the effect of certain potential foreign
currency losses by entering into forward contracts that effectively
enable it to sell Japanese yen expected to be received from yen-
denominated net cash flows over the next twelve months at specified
exchange rates. As of December 31, 1999, the Company had entered
into forward contracts to hedge approximately 95% of its 2000
projected yen-denominated net cash flows, as compared to having in
place average rate options and forward contracts to hedge 69% of
its 1999 projected yen-denominated net cash flows at December 31,
1998. The Company estimates that at December 31, 1999, a 10%
strengthening in the value of the U.S. dollar relative to the yen
would have increased the fair value of the existing forward
contracts by $18 million as compared to a $7 million increase in
the fair value of existing average rate options and forward
contracts at December 31, 1998.
Interest Rates. The Company's results of operations are affected
by fluctuations in interest rates (e.g., interest expense on debt
and interest income earned on short-term investments).
The Company had approximately $690 million and $599 million of
variable-rate debt as of December 31, 1999 and 1998, respectively.
The Company has mitigated its exposure on certain variable-rate
debt by entering into an interest rate cap (notional amount of $106
million and $125 million as of December 31, 1999 and 1998,
respectively) which expires in July 2001. The interest rate cap
limits the amount of potential increase in the LIBOR rate component
of the floating rate to a maximum of 9% over the term of the
contract. If average interest rates increased by 100 basis points
during 2000 as compared to 1999, the Company's projected 2000
interest expense would increase by approximately $6 million. At
December 31, 1998, an interest rate increase of 100 basis points
during 1999 and compared to 1998 was projected to increase 1999
interest expense by approximately $5 million. The interest rate
cap does not mitigate this increase in interest expense materially
given the current level of such floating rates.
As of December 31, 1999 and 1998, the fair value of $2.2 billion
and $1.5 billion (carrying value) of the Company's fixed-rate debt
was estimated to be $2.2 billion and $1.5 billion, respectively,
based upon discounted future cash flows using current incremental
borrowing rates for similar types of instruments or market prices.
Market risk, estimated as the potential increase in fair value
resulting from a hypothetical 100 basis points decrease in interest
rates, was approximately $91 million and $70 million as of December
31, 1999 and 1998, respectively. The fair value of the remaining
fixed-rate debt at December 31, 1999 and 1998, (with a carrying
value of $248 million and $287 million, respectively, and primarily
relates to aircraft modification notes and various loans with
immaterial balances) was not practicable to estimate due to the
large number and small dollar amounts of these notes.
If 2000 average short-term interest rates decreased by 100 basis
points over 1999 average rates, the Company's projected interest
income from cash, cash equivalents and short-term investments would
decrease by approximately $11 million during 2000, compared to an
estimated $13 million decrease during 1999 measured at December 31,
1998.
Investments in Equity Securities. The Company has a 49% equity
investment in Compania Panamena de Aviacion, S.A. ("COPA") and a
28% equity investment in Gulfstream International Airlines, Inc.
("Gulfstream") which are also subject to price risk. However,
since a readily determinable market value does not exist for either
COPA or Gulfstream (each is privately held), the Company is unable
to quantify the amount of price risk sensitivity inherent in these
investments. At December 31, 1999 and 1998, the carrying value of
COPA was $49 million and $53 million, respectively.
At December 31, 1999, the Company owned approximately 357,000
depository certificates convertible, subject to certain
restrictions, into the common stock of Equant, which completed an
initial public offering in July 1998. As of December 31, 1999, the
estimated fair value of these depository certificates was
approximately $40 million, based upon the publicly traded market
value of Equant common stock. Since the fair value of the
Company's investment in the depository certificates is not readily
determinable (i.e., the depository certificates are not traded on
a securities exchange), the investment is carried at cost, which
was not material as of December 31, 1999 or 1998.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Consolidated Financial Statements
Page No.
Report of Independent Auditors F-2
Consolidated Statements of Operations for each of the
Three Years in the Period Ended December 31, 1999 F-3
Consolidated Balance Sheets as of December 31, 1999
and 1998 F-5
Consolidated Statements of Cash Flows for each of the
Three Years in the Period Ended December 31, 1999 F-7
Consolidated Statements of Redeemable Preferred Stock
and Common Stockholders' Equity for each of the
Three Years in the Period Ended December 31, 1999 F-9
Notes to Consolidated Financial Statements F-15
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Continental Airlines, Inc.
We have audited the accompanying consolidated balance sheets of
Continental Airlines, Inc. (the "Company") as of December 31, 1999
and 1998, and the related consolidated statements of operations,
redeemable preferred stock and common stockholders' equity and cash
flows for each of the three years in the period ended December 31,
1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require
that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of the Company at December 31, 1999 and 1998,
and the consolidated results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999,
in conformity with accounting principles generally accepted in the
United States.
As discussed in Note 1 to the consolidated financial statements,
effective January 1, 1999, the Company changed its method of
accounting for the sale of mileage credits to participating
partners in its frequent flyer program.
ERNST & YOUNG LLP
Houston, Texas
January 17, 2000
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
Year Ended December 31,
1999 1998 1997
Operating Revenue:
Passenger. . . . . . . . . . . . . . . . $8,116 $7,456 $6,733
Cargo and mail . . . . . . . . . . . . . 303 275 258
Other. . . . . . . . . . . . . . . . . . 220 196 203
8,639 7,927 7,194
Operating Expenses:
Wages, salaries and related costs. . . . 2,510 2,218 1,814
Aircraft fuel. . . . . . . . . . . . . . 771 727 885
Aircraft rentals . . . . . . . . . . . . 771 659 551
Maintenance, materials and repairs . . . 603 582 537
Commissions. . . . . . . . . . . . . . . 576 583 567
Other rentals and landing fees . . . . . 497 414 395
Depreciation and amortization. . . . . . 360 294 254
Fleet disposition/impairment losses. . . 81 122 -
Other. . . . . . . . . . . . . . . . . . 1,870 1,627 1,475
8,039 7,226 6,478
Operating Income 600 701 716
Nonoperating Income (Expense):
Interest expense . . . . . . . . . . . . (233) (178) (166)
Interest income. . . . . . . . . . . . . 71 59 56
Interest capitalized . . . . . . . . . . 55 55 35
Gain on sale of AMADEUS. . . . . . . . . 297 - -
Other, net . . . . . . . . . . . . . . . 8 11 (1)
198 (53) (76)
Income before Income Taxes, Cumulative
Effect of Accounting Changes and
Extraordinary Charge . . . . . . . . . . 798 648 640
Income Tax Provision. . . . . . . . . . . (310) (248) (237)
Distributions on Preferred Securities
of Trust, net of applicable income taxes
of $7 and $8 in 1998 and 1997,
respectively . . . . . . . . . . . . . . - (13) (14)
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
Year Ended December 31,
1999 1998 1997
Income before Cumulative Effect of
Accounting Changes and
Extraordinary Charge . . . . . . . . . . $ 488 $ 387 $ 389
Cumulative Effect of Accounting
Changes, Net of Applicable Income
Taxes of $19 (1) . . . . . . . . . . . . (33) - -
Extraordinary Charge, net of applicable
income taxes of $2 in 1998 and 1997. . . - (4) (4)
Net Income. . . . . . . . . . . . . . . . 455 383 385
Preferred Dividend Requirements and
Accretion to Liquidation Value . . . . . - - (2)
Income Applicable to Common Shares. . . . $ 455 $ 383 $ 383
Earnings per Common Share:
Income before Cumulative Effect of
Accounting Changes and
Extraordinary Charge. . . . . . . . . $ 7.02 $ 6.40 $ 6.72
Cumulative Effect of Accounting
Changes . . . . . . . . . . . . . . . (0.48) - -
Extraordinary Charge. . . . . . . . . . - (0.06) (0.07)
Net Income. . . . . . . . . . . . . . . $ 6.54 $ 6.34 $ 6.65
Earnings per Common Share Assuming
Dilution:
Income before Cumulative Effect of
Accounting Changes and
Extraordinary Charge. . . . . . . . . $ 6.64 $ 5.06 $ 5.03
Cumulative Effect of Accounting
Changes . . . . . . . . . . . . . . . (0.44) - -
Extraordinary Charge. . . . . . . . . . - (0.04) (0.04)
Net Income. . . . . . . . . . . . . . . $ 6.20 $ 5.02 $ 4.99
(1) See Note 1(i) for the proforma effect of retroactive application
of the accounting change.
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
CONTINENTAL AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except for share data)
December 31, December 31,
ASSETS 1999 1998
Current Assets:
Cash and cash equivalents. . . . . . . . $1,198 $1,399
Short-term investments . . . . . . . . . 392 -
Accounts receivable, net of allowance
for doubtful receivables of $20 and
$22, respectively . . . . . . . . . . . 506 449
Spare parts and supplies, net of
allowance for obsolescence of $59 and
$46, respectively . . . . . . . . . . . 236 166
Deferred income taxes. . . . . . . . . . 145 234
Prepayments and other assets . . . . . . 129 106
Total current assets . . . . . . . . . 2,606 2,354
Property and Equipment:
Owned property and equipment:
Flight equipment. . . . . . . . . . . . 3,593 2,459
Other . . . . . . . . . . . . . . . . . 814 582
4,407 3,041
Less: Accumulated depreciation . . . . 808 625
3,599 2,416
Purchase deposits for flight equipment . 366 410
Capital leases:
Flight equipment. . . . . . . . . . . . 300 361
Other . . . . . . . . . . . . . . . . . 88 56
388 417
Less: Accumulated amortization . . . . 180 178
208 239
Total property and equipment . . . . . 4,173 3,065
Other Assets:
Routes, gates and slots, net of
accumulated amortization
of $345 and $295, respectively. . . . . 1,131 1,181
Investments. . . . . . . . . . . . . . . 71 151
Other assets, net. . . . . . . . . . . . 242 335
Total other assets . . . . . . . . . . 1,444 1,667
Total Assets . . . . . . . . . . . . $8,223 $7,086
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except for share data)
December 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
Current Liabilities:
Current maturities of long-term debt . . $ 278 $ 184
Current maturities of capital leases . . 43 47
Accounts payable . . . . . . . . . . . . 856 843
Air traffic liability. . . . . . . . . . 962 854
Accrued payroll and pensions . . . . . . 299 265
Accrued other liabilities. . . . . . . . 337 249
Total current liabilities . . . . . . . 2,775 2,442
Long-Term Debt. . . . . . . . . . . . . . 2,855 2,267
Capital Leases. . . . . . . . . . . . . . 200 213
Other Long-Term Liabilities:
Deferred income taxes. . . . . . . . . . 590 372
Accruals for aircraft retirements and
excess facilities . . . . . . . . . . . 69 95
Other. . . . . . . . . . . . . . . . . . 141 393
Total other long-term liabilities . . . 800 860
Commitments and Contingencies
Continental-Obligated Mandatorily
Redeemable Preferred Securities
of Subsidiary Trust Holding Solely
Convertible Subordinated
Debentures . . . . . . . . . . . . . . . - 111
Common Stockholders' Equity:
Class A common stock - $.01 par,
50,000,000 shares authorized;
11,320,849 shares issued and out-
standing in 1999 and 11,406,732
shares issued and outstanding
in 1998 . . . . . . . . . . . . . . . . - -
Class B common stock - $.01 par,
200,000,000 shares authorized;
63,923,431 shares issued in 1999
and 53,370,741 shares issued
in 1998 . . . . . . . . . . . . . . . . 1 1
Additional paid-in capital . . . . . . . 871 634
Retained earnings. . . . . . . . . . . . 1,114 659
Accumulated other comprehensive income . (1) (88)
Treasury Stock - 9,763,684 and 399,524
Class B shares, respectively, at cost . (392) (13)
Total common stockholders' equity . . . 1,593 1,193
Total Liabilities and Stockholders'
Equity . . . . . . . . . . . . . . . $8,223 $7,086
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Year Ended December 31,
1999 1998 1997
Cash Flows From Operating
Activities:
Net income . . . . . . . . . . . . . . . $ 455 $ 383 $ 385
Adjustments to reconcile net income
to net cash provided by operating
activities:
Deferred income taxes. . . . . . . . . 293 224 212
Depreciation . . . . . . . . . . . . . 284 211 162
Amortization . . . . . . . . . . . . . 76 83 92
Fleet disposition/impairment losses. . 81 122 -
Gain on sale of AMADEUS. . . . . . . . (297) - -
Gain on sale of other investments. . . (29) (6) -
Cumulative effect of change in
accounting principles . . . . . . . . 33 - -
Other, net . . . . . . . . . . . . . . (83) (4) 34
Changes in operating assets and
liabilities:
Increase in accounts receivable. . . (53) (102) (1)
Increase in spare parts and
supplies. . . . . . . . . . . . . . (99) (71) (38)
Increase in accounts payable . . . . 8 59 71
Increase in air traffic liability. . 110 108 85
Other. . . . . . . . . . . . . . . . (3) (131) (103)
Net cash provided by operating
activities. . . . . . . . . . . . . . . 776 876 899
Cash Flows from Investing Activities:
Purchase deposits paid in connection
with future aircraft deliveries . . . . (1,174) (818) (409)
Purchase deposits refunded in
connection with aircraft delivered. . . 1,139 758 141
Capital expenditures . . . . . . . . . . (706) (610) (417)
Purchase of short-term investments . . . (392) - -
Proceeds from sale of AMADEUS, net . . . 391 - -
Proceeds from disposition of property
and equipment . . . . . . . . . . . . . 77 46 29
Proceeds from sale of other investments. 35 9 -
Investment in and advances to
partner airlines. . . . . . . . . . . . (23) (53) -
Other. . . . . . . . . . . . . . . . . . (6) (30) (1)
Net cash used by investing activities . (659) (698) (657)
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Year Ended December 31,
1999 1998 1997
Cash Flows From Financing Activities:
Proceeds from issuance of
long-term debt, net . . . . . . . . . . $ 453 $ 737 $ 517
Purchase of Class B common stock . . . . (528) (223) -
Payments on long-term debt and
capital lease obligations . . . . . . . (295) (423) (676)
Proceeds from issuance of common stock . 38 56 24
Proceeds from sale-leaseback
transactions. . . . . . . . . . . . . . 14 71 39
Dividends paid on preferred securities
of trust. . . . . . . . . . . . . . . . - (22) (22)
Purchase of warrants to purchase
Class B common stock. . . . . . . . . . - - (94)
Redemption of redeemable preferred
stock . . . . . . . . . . . . . . . . . - - (48)
Other. . . . . . . . . . . . . . . . . . - - (18)
Net cash (used) provided by financing
activities . . . . . . . . . . . . . . (318) 196 (278)
Net (Decrease) Increase in Cash and
Cash Equivalents . . . . . . . . . . . . (201) 374 (36)
Cash and Cash Equivalents
Beginning of Period. . . . . . . . . . . 1,399 1,025 1,061
Cash and Cash Equivalents
End of Period. . . . . . . . . . . . . . $1,198 $1,399 $1,025
Supplemental Cash Flows Information:
Interest paid. . . . . . . . . . . . . . $ 221 $ 157 $ 156
Income taxes paid. . . . . . . . . . . . $ 18 $ 25 $ 12
Investing and Financing Activities
Not Affecting Cash:
Property and equipment acquired
through the issuance of debt . . . . . $ 774 $ 425 $ 207
Conversion of 6-3/4% Convertible
Subordinated Notes . . . . . . . . . . $ 230 $ - $ -
Conversion of trust originated
preferred securities . . . . . . . . . $ 111 $ 134 $ -
Capital lease obligations incurred. . . $ 50 $ 124 $ 22
Sale-leaseback of Beech 1900-D aircraft $ 81 $ - $ -
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED
STOCK AND COMMON STOCKHOLDERS' EQUITY
(In millions)
Retained Accumulated
Redeemable Additional Earnings Other Treasury
Preferred Paid-In (Accumulated Comprehensive Comprehensive Stock,
Stock Capital Deficit) Income Income at Cost
Balance, December 31, 1996 . . $ 46 $ 688 $ (109) $ 2 $329 $ -
Net Income . . . . . . . . . . - - 385 - 385 -
Purchase of Warrants . . . . . - (94) - - - -
Accumulated Dividends on
Series A 12% Cumulative
Preferred Stock . . . . . . . 2 (2) - - - -
Redemption of Series A
12% Cumulative Preferred
Stock . . . . . . . . . . . . (48) - - - - -
Additional Minimum Pension
Liability, net of applicable
income taxes of $2. . . . . . - - - (4) (4) -
Other. . . . . . . . . . . . . - 49 - - - -
Balance, December 31, 1997 . . - 641 276 (2) 381 -
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED
STOCK AND COMMON STOCKHOLDERS' EQUITY
(In millions)
Retained Accumulated
Redeemable Additional Earnings Other Treasury
Preferred Paid-In (Accumulated Comprehensive Comprehensive Stock,
Stock Capital Deficit) Income Income at Cost
Net Income . . . . . . . . . . $ - $ - $ 383 $ - $383 $ -
Cumulative Effect of
Adopting SFAS 133 (see Note 5)
as of October 1, 1998, net of
applicable income taxes
of $1 . . . . . . . . . . . . - - - 1 1 -
Net loss on derivative
instruments designated and
qualifying as cash flow
hedging instruments, net of
applicable income taxes
of $4 . . . . . . . . . . . . - - - (7) (7) -
Additional Minimum Pension
Liability, net of applicable
income taxes of $41 . . . . . - - - (76) (76) -
Unrealized loss on Marketable
Equity Securities, net of
applicable income taxes
of $1 . . . . . . . . . . . . - - - (4) (4) -
Purchase of Common Stock . . . - - - - - (223)
Reissuance of Treasury Stock
pursuant to Stock Plans . . . - - - - - 50
Issuance of Common Stock
pursuant to Stock Plans . . . - 19 - - - -
Conversion of Trust Originated
Preferred Securities into
Common Stock. . . . . . . . . - (32) - - - 160
Other. . . . . . . . . . . . . - 6 - - - -
Balance, December 31, 1998 . . - 634 659 (88) 297 (13)
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED
STOCK AND COMMON STOCKHOLDERS' EQUITY
(In millions)
Retained Accumulated
Redeemable Additional Earnings Other Treasury
Preferred Paid-In (Accumulated Comprehensive Comprehensive Stock,
Stock Capital Deficit) Income Income at Cost
Net Income . . . . . . . . . . $ - $ - $ 455 $ - $455 $ -
Net gain on derivative
instruments designated and
qualifying as cash flow
hedging instruments, net of
reclassification adjustments
and applicable income taxes
of $2 . . . . . . . . . . . . - - - 4 4 -
Unrealized gain on marketable
equity securities, net of
applicable income taxes . . . - - - 1 1 -
Reduction in additional
minimum pension liability,
net of applicable income
taxes of $43. . . . . . . . . - - - 82 82 -
Purchase of Common Stock . . . - - - - - (528)
Reissuance of Treasury Stock
pursuant to Stock Plans . . . - (18) - - - 69
Conversion of 6-3/4%
Convertible Subordinated
Notes into Common Stock . . . - 161 - - - 66
Conversion of Trust Originated
Preferred Securities into
Common Stock. . . . . . . . . - 100 - - - 11
Conversion of Class A Common
Stock to Class B Common
Stock . . . . . . . . . . . . - (3) - - - 3
Other. . . . . . . . . . . . . - (3) - - - -
Balance, December 31, 1999 . . $ - $ 871 $ 1,114 $ (1) $542 $(392)
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED
STOCK AND COMMON STOCKHOLDERS' EQUITY
NUMBER OF SHARES
Redeemable Class A Class B
Preferred Common Common Treasury
Stock Stock Stock Stock
Balance, December 31, 1996 . . . . . . . 447,082 9,280,000 47,943,343 -
Conversion of Class A to Class B
Common Stock. . . . . . . . . . . . . . - (900,536) 900,536 -
Purchase of Common Stock . . . . . . . . - - (154,882) 154,882
Reissuance of Treasury Stock pursuant
to Stock Plans. . . . . . . . . . . . . - - 154,882 (154,882)
Issuance of Preferred Stock Dividends
on Series A 12% Cumulative Preferred
Stock . . . . . . . . . . . . . . . . . 13,165 - - -
Redemption of Series A 12% Cumulative
Preferred Stock . . . . . . . . . . . . (460,247) - - -
Issuance of Common Stock pursuant to
Stock Plans . . . . . . . . . . . . . . - - 1,646,419 -
Conversion of Trust Originated
Preferred Securities into
Common Stock. . . . . . . . . . . . . . - - 21,712 -
Balance, December 31, 1997 . . . . . . . - 8,379,464 50,512,010 -
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED
STOCK AND COMMON STOCKHOLDERS' EQUITY
NUMBER OF SHARES
Redeemable Class A Class B
Preferred Common Common Treasury
Stock Stock Stock Stock
Purchase of Common Stock . . . . . . . . - - (4,452,700) 4,452,700
Reissuance of Treasury Stock pursuant
to Stock Plans. . . . . . . . . . . . . - - 859,080 (859,080)
Reissuance of Treasury Stock pursuant
to Conversion of Trust Originated
Preferred Securities. . . . . . . . . . - - 3,181,896 (3,181,896)
Conversion of Class A to Class B
Common Stock. . . . . . . . . . . . . . - (12,200) 12,200 (12,200)
Issuance of Common Stock pursuant to
Stock Plans . . . . . . . . . . . . . . - - 235,290 -
Conversion of Trust Originated
Preferred Securities into
Common Stock. . . . . . . . . . . . . . - - 2,376,753 -
Exercise of warrants . . . . . . . . . . - 3,039,468 246,688 -
Balance, December 31, 1998 . . . . . . . - 11,406,732 52,971,217 399,524
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED
STOCK AND COMMON STOCKHOLDERS' EQUITY
NUMBER OF SHARES
Redeemable Class A Class B
Preferred Common Common Treasury
Stock Stock Stock Stock
Purchase of Common Stock . . . . . . . . - - (13,133,700) 13,133,700
Reissuance of Treasury Stock pursuant
to Stock Plans. . . . . . . . . . . . . - - 1,853,478 (1,853,478)
Reissuance of Treasury Stock pursuant
to Conversion of Class A to Class B
Common Stock. . . . . . . . . . . . . . - (85,883) 85,883 (85,883)
Issuance of Common Stock pursuant to
Stock Plans . . . . . . . . . . . . . . - - 13,227 -
Conversion of 6-3/4% Convertible
Subordinated Notes into Common Stock. . - - 6,132,055 -
Reissuance of Treasury Stock pursuant
to Conversion of 6-3/4% Convertible
Subordinated Notes. . . . . . . . . . . - - 1,485,065 (1,485,065)
Conversion of Trust Originated
Preferred Securities into
Common Stock. . . . . . . . . . . . . . - - 4,407,408 -
Reissuance of Treasury Stock pursuant
to Conversion of Trust Originated
Preferred Securities. . . . . . . . . . - - 345,114 (345,114)
Balance, December 31, 1999 . . . . . . . - 11,320,849 54,159,747 9,763,684
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
CONTINENTAL AIRLINES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continental Airlines, Inc. (the "Company" or "Continental") is a
major United States air carrier engaged in the business of
transporting passengers, cargo and mail. Continental is the fifth
largest United States airline (as measured by 1999 revenue
passenger miles) and, together with its wholly owned subsidiaries,
Continental Express, Inc. ("Express"), and Continental Micronesia,
Inc. ("CMI"), each a Delaware corporation, serves 219 airports
worldwide at January 17, 2000. As of December 31, 1999,
Continental flies to 132 domestic and 87 international destinations
and offers additional connecting service through alliances with
domestic and foreign carriers. Continental directly serves 16
European cities, eight South American cities, Tel Aviv and Tokyo
and is one of the leading airlines providing service to Mexico and
Central America, serving more destinations there than any other
United States airline. Through its Guam hub, CMI provides
extensive service in the western Pacific, including service to more
Japanese cities than any other United States carrier.
As used in these Notes to Consolidated Financial Statements, the
terms "Continental" and "Company" refer to Continental Airlines,
Inc. and, unless the context indicates otherwise, its subsidiaries.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation -
The consolidated financial statements of the Company include
the accounts of Continental and its operating subsidiaries,
Express and CMI. All significant intercompany transactions
have been eliminated in consolidation.
(b) Use of Estimates -
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
(c) Cash and Cash Equivalents -
Cash and cash equivalents consist of cash and short-term,
highly liquid investments which are readily convertible into
cash and have a maturity of three months or less when
purchased.
(d) Short-Term Investments -
The Company invests in commercial paper with original
maturities in excess of 90 days but less than 270 days. These
investments are classified as short-term investments in the
accompanying consolidated balance sheet. Short-term
investments are stated at cost, which approximates market
value.
(e) Spare Parts and Supplies -
Inventories, expendable parts and supplies relating to flight
equipment are carried at average acquisition cost and are
expensed when incurred in operations. An allowance for
obsolescence is provided over the remaining estimated useful
life of the related aircraft, for spare parts expected to be
on hand the date the aircraft are retired from service, plus
allowances for spare parts currently identified as excess.
These allowances are based on management estimates, which are
subject to change.
(f) Property and Equipment -
Property and equipment are recorded at cost and are
depreciated to estimated residual values over their estimated
useful lives using the straight-line method. The estimated
useful lives and residual values for the Company's property
and equipment are as follows:
Estimated Estimated
Useful Life Residual Value
Jet aircraft. . . . . . . . 25 to 30 years 10-15%
Turboprop aircraft. . . . . 18 years 10%
Ground property and
equipment. . . . . . . . . 2 to 30 years 0%
Capital lease - flight
and ground . . . . . . . . Lease Term 0%
(g) Routes, Gates and Slots -
Routes are amortized on a straight-line basis over 40 years,
gates over the stated term of the related lease and slots over
20 years. Routes, gates and slots are comprised of the
following (in millions):
Balance at Accumulated Amortization
December 31, 1999 at December 31, 1999
Routes. . . . $ 732 $157
Gates . . . . 306 141
Slots . . . . 93 47
$1,131 $345
(h) Air Traffic Liability -
Passenger revenue is recognized when transportation is
provided rather than when a ticket is sold. The amount of
passenger ticket sales not yet recognized as revenue is
reflected in the accompanying Consolidated Balance Sheets as
air traffic liability. The Company performs periodic
evaluations of this estimated liability, and any adjustments
resulting therefrom, which can be significant, are included in
results of operations for the periods in which the evaluations
are completed.
(i) Frequent Flyer Program -
Continental sponsors a frequent flyer program ("OnePass") and
records an estimated liability for the incremental cost
associated with providing the related free transportation at
the time a free travel award is earned. The liability is
adjusted periodically based on awards earned, awards redeemed
and changes in the OnePass program.
The Company also sells mileage credits in the OnePass program
to participating partners, such as hotels, car rental agencies
and credit card companies. During 1999, as a result of the
recently issued Staff Accounting Bulletin No. 101 - "Revenue
Recognition in Financial Statements," the Company changed the
method it uses to account for the sale of these mileage
credits. This change, which totaled $27 million, net of tax,
was applied retroactively to January 1, 1999. Under the new
accounting method, revenue from the sale of mileage credits is
deferred and recognized when transportation is provided.
Previously, the resulting revenue, net of the incremental cost
of providing future air travel, was recorded in the period in
which the credits were sold. This change reduced net income
for the year ended December 31, 1999 by $21 million ($32
million pre-tax). The Company believes the new method is
preferable as it results in a better matching of revenues with
the period in which services are provided.
The pro forma results, assuming the accounting change is
applied retroactively, is shown below (in millions except per
share data):
1999 1998 1997
Income before Cumulative Effect
of Accounting Change and
Extraordinary Charge . . . . . . $ 488 $ 382 $ 385
Earnings per Common Share . . . . $ 7.02 $ 6.32 $ 6.65
Earnings per Common Share
Assuming Dilution. . . . . . . . $ 6.64 $ 5.00 $ 4.98
Net Income. . . . . . . . . . . . $ 482 $ 378 $ 381
Earnings per Common Share . . . . $ 6.93 $ 6.26 $ 6.58
Earnings per Common Share
Assuming Dilution. . . . . . . . $ 6.57 $ 4.95 $ 4.93
Actual per share amounts are shown below for comparative
purposes.
Income before Cumulative Effect
of Accounting Change and
Extraordinary Charge . . . . . . $ 488 $ 387 $ 389
Earnings per Common Share . . . . $ 7.02 $ 6.40 $ 6.72
Earnings per Common Share
Assuming Dilution. . . . . . . . $ 6.64 $ 5.06 $ 5.03
Net Income. . . . . . . . . . . . $ 455 $ 383 $ 385
Earnings per Common Share . . . . $ 6.54 $ 6.34 $ 6.65
Earnings per Common Share
Assuming Dilution. . . . . . . . $ 6.20 $ 5.02 $ 4.99
(j) Passenger Traffic Commissions -
Passenger traffic commissions are recognized as expense when
the transportation is provided and the related revenue is
recognized. The amount of passenger traffic commissions not
yet recognized as expense is included in Prepayments and other
assets in the accompanying Consolidated Balance Sheets.
(k) Deferred Income Taxes -
Deferred income taxes are provided under the liability method
and reflect the net tax effects of temporary differences
between the tax basis of assets and liabilities and their
reported amounts in the financial statements.
(l) Maintenance and Repair Costs -
Maintenance and repair costs for owned and leased flight
equipment, including the overhaul of aircraft components, are
charged to operating expense as incurred, except engine
overhaul costs covered by power by the hour agreements, which
are accrued on the basis of hours flown.
(m) Advertising Costs -
The Company expenses the costs of advertising as incurred.
Advertising expense was $82 million, $78 million and $78
million for the years ended December 31, 1999, 1998 and 1997,
respectively.
(n) Stock Plans and Awards -
Continental has elected to follow Accounting Principles Board
Opinion No. 25 - "Accounting for Stock Issued to Employees"
("APB 25") in accounting for its employee stock options and
its stock purchase plans because the alternative fair value
accounting provided for under Statement of Financial
Accounting Standards No. 123 - "Accounting for Stock-Based
Compensation" ("SFAS 123") requires use of option valuation
models that were not developed for use in valuing employee
stock options or purchase rights. Under APB 25, since the
exercise price of the Company's employee stock options equals
the market price of the underlying stock on the date of grant,
generally no compensation expense is recognized. Furthermore,
under APB 25, since the stock purchase plans are considered
noncompensatory plans, no compensation expense is recognized.
(o) Measurement of Impairment -
In accordance with Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" ("SFAS 121"), the
Company records impairment losses on long-lived assets used in
operations when events and circumstances indicate that the
assets might be impaired and the undiscounted cash flows
estimated to be generated by those assets are less than the
carrying amount of those assets.
(p) Start-Up Costs -
Statement of Position 98-5, "Reporting on the Costs of Start-
Up Activities" ("SOP 98-5"), requires start-up costs to be
expensed as incurred. Continental adopted SOP 98-5 in the
first quarter of 1999. This statement requires all
unamortized start up costs (e.g., pilot training costs related
to induction of new aircraft) to be expensed upon adoption,
resulting in a $6 million cumulative effect of a change in
accounting principle, net of tax, in the first quarter of
1999.
(q) Reclassifications -
Certain reclassifications have been made in the prior years'
financial statements to conform to the current year
presentation.
NOTE 2 - EARNINGS PER SHARE
Basic earnings per common share ("EPS") excludes dilution and is
computed by dividing net income available to common stockholders by
the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could
occur if securities or other obligations to issue common stock were
exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the
Company. The following table sets forth the computation of basic
and diluted earnings per share (in millions):
1999 1998 1997
Numerator:
Income before cumulative effect
of accounting changes and
extraordinary charge . . . . . . . $488 $387 $389
Cumulative effect of accounting
changes. . . . . . . . . . . . . . (33) - -
Extraordinary charge, net of
applicable income taxes. . . . . . - (4) (4)
Net income. . . . . . . . . . . . . 455 383 385
Preferred stock dividends . . . . . - - (2)
Numerator for basic earnings per
share - income available to
common stockholders. . . . . . . . 455 383 383
Effect of dilutive securities:
Preferred Securities of Trust. . . - 11 14
6-3/4% convertible subordinated
notes . . . . . . . . . . . . . . 4 9 11
4 20 25
Other . . . . . . . . . . . . . . . - - (4)
Numerator for diluted earnings
per share - income available to
common stockholders after
assumed conversions . . . . . . . $459 $403 $404
1999 1998 1997
Denominator:
Denominator for basic earnings per
share - weighted-average shares. . 69.5 60.3 57.6
Effect of dilutive securities:
Employee stock options . . . . . . 1.4 1.7 1.6
Warrants . . . . . . . . . . . . . - 0.9 3.5
Preferred Securities of Trust. . . 0.1 9.8 10.3
6-3/4% convertible subordinated
notes . . . . . . . . . . . . . . 2.9 7.6 7.6
Restricted Class B common stock. . - - 0.4
Dilutive potential common shares. . 4.4 20.0 23.4
Denominator for diluted earnings
per share - adjusted weighted-
average and assumed conversions . 73.9 80.3 81.0
Approximately 1.1 million in 1999 and 1.4 million in 1998 of
weighted average options to purchase shares of the Company's Class
B common stock, par value $.01 per share ("Class B common stock"),
were not included in the computation of diluted earnings per share
because the options' exercise price was greater than the average
market price of the common shares and, therefore, the effect would
have been antidilutive.
NOTE 3 - LONG-TERM DEBT
Long-term debt as of December 31 is summarized as follows (in
millions):
1999 1998
Secured
Notes payable, interest rates of 5.00% to
7.73%, payable through 2019 . . . . . . . . $1,817 $ 886
Floating rate notes, interest rates of
LIBOR plus 0.75% to 1.25%, Eurodollar
plus 1.0%, or Commercial Paper,
payable through 2009. . . . . . . . . . . . 241 223
Revolving credit facility totaling $160
million, floating interest rates of
LIBOR or Eurodollar plus 1.125% to 1.375%,
payable through 2001. . . . . . . . . . . . 160 57
Notes payable, interest rates of 8.49% to
9.46%, payable through 2008 . . . . . . . . 51 66
Notes payable, interest rates of 7.13% to
7.15%, payable through 1999 . . . . . . . . - 86
Unsecured
Senior notes payable, 9.5%, payable
through 2001. . . . . . . . . . . . . . . . 242 250
Credit facility, floating interest rate
of LIBOR or Eurodollar plus 1.0%,
payable through 2002. . . . . . . . . . . . 215 245
Senior notes payable, interest rate of
8.0%, payable through 2005. . . . . . . . . 200 200
Notes payable, interest rate of 8.125%,
payable through 2008. . . . . . . . . . . . 110 110
Floating rate note, interest rate of LIBOR
or Eurodollar plus 1.25%, payable
through 2004. . . . . . . . . . . . . . . . 74 74
Convertible subordinated notes, interest
rate of 6.75% . . . . . . . . . . . . . . . - 230
Other. . . . . . . . . . . . . . . . . . . . 23 24
3,133 2,451
Less: current maturities. . . . . . . . . . 278 184
Total. . . . . . . . . . . . . . . . . . . . $2,855 $2,267
At December 31, 1999 and 1998, the LIBOR and Eurodollar rates
associated with Continental's indebtedness approximated 6.0% and
5.1% and 6.0% and 5.1%, respectively. The Commercial Paper rate
was 6.1% and 5.5% as of December 31, 1999 and 1998, respectively.
A majority of Continental's property and equipment is subject to
agreements securing indebtedness of Continental.
In July 1997, Continental entered into a $575 million credit
facility (the "Credit Facility"), including a $275 million term
loan, the proceeds of which were loaned to CMI to repay its
existing $320 million secured term loan. In connection with this
prepayment, Continental recorded a $4 million after tax
extraordinary charge relating to early extinguishment of debt. The
Credit Facility also includes a $225 million revolving credit
facility with a commitment fee of 0.225% per annum on the unused
portion, and a $75 million term loan commitment with a current
floating interest rate of Libor or Eurodollar plus 1.25%. At
December 31, 1999 and 1998, no borrowings were outstanding under
the $225 million revolving credit facility. During 1998, the
Credit Facility became unsecured due to an upgrade of Continental's
credit rating by Standard and Poor's Corporation.
The Credit Facility does not contain any financial covenants
relating to CMI other than covenants restricting CMI's incurrence
of certain indebtedness and pledge or sale of assets. In addition,
the Credit Facility contains certain financial covenants applicable
to Continental and prohibits Continental from granting a security
interest on certain of its international route authorities and its
stock in Air Micronesia, Inc., CMI's parent company.
In April 1998, the Company completed an offering of $187 million of
pass-through certificates to be used to refinance the debt related
to 14 aircraft currently owned by Continental. In connection with
this refinancing, Continental recorded a $4 million after tax
extraordinary charge to consolidated earnings in the second quarter
of 1998 related to the early extinguishment of such debt.
At December 31, 1999, under the most restrictive provisions of the
Company's debt and credit facility agreements, the Company had a
minimum cash balance requirement of $600 million, a minimum net
worth requirement of $972 million and was restricted from paying
cash dividends in excess of $576 million.
On April 15, 1999, the Company exercised its right and called for
redemption on May 25, 1999, all $230 million of its 6-3/4%
Convertible Subordinated Notes due 2006. The notes were converted
into 7.6 million shares of Class B common stock during May 1999.
Maturities of long-term debt due over the next five years are as
follows (in millions):
Year ending December 31,
2000. . . . . . . . . . . . . . . . . . $278
2001. . . . . . . . . . . . . . . . . . 592
2002. . . . . . . . . . . . . . . . . . 266
2003. . . . . . . . . . . . . . . . . . 170
2004. . . . . . . . . . . . . . . . . . 239
NOTE 4 - LEASES
Continental leases certain aircraft and other assets under long-
term lease arrangements. Other leased assets include real
property, airport and terminal facilities, sales offices,
maintenance facilities, training centers and general offices. Most
leases also include both renewal options and purchase options.
At December 31, 1999, the scheduled future minimum lease payments
under capital leases and the scheduled future minimum lease rental
payments required under aircraft and engine operating leases, that
have initial or remaining noncancellable lease terms in excess of
one year, are as follows (in millions):
Capital Operating
Leases Leases
Year ending December 31,
2000. . . . . . . . . . . . . . . . . . $ 59 $ 851
2001. . . . . . . . . . . . . . . . . . 50 823
2002. . . . . . . . . . . . . . . . . . 46 753
2003. . . . . . . . . . . . . . . . . . 28 700
2004. . . . . . . . . . . . . . . . . . 26 652
Later years . . . . . . . . . . . . . . 96 6,080
Total minimum lease payments . . . . . . . . 305 $9,859
Less: amount representing interest. . . . . 62
Present value of capital leases. . . . . . . 243
Less: current maturities of capital
leases. . . . . . . . . . . . . . . . . . . 43
Long-term capital leases . . . . . . . . . . $200
Not included in the above operating lease table is approximately
$493 million of annual average minimum lease payments for each of
the next five years relating to non-aircraft leases, principally
airport and terminal facilities and related equipment.
Continental is the guarantor of $1.2 billion aggregate principal
amount of tax-exempt special facilities revenue bonds. These
bonds, issued by various airport municipalities, are payable solely
from rentals paid by Continental under long-term agreements with
the respective governing bodies.
At December 31, 1999, the Company, including Express, had 382 and
19 aircraft under operating and capital leases, respectively.
These leases have remaining lease terms ranging from one month to
22 years.
The Company's total rental expense for all operating leases, net of
sublease rentals, was $1.1 billion, $922 million and $787 million
in 1999, 1998 and 1997, respectively.
NOTE 5 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
As part of the Company's risk management program, Continental uses
or used a variety of financial instruments, including petroleum
call options, petroleum swaps, jet fuel purchase commitments,
foreign currency average rate options, foreign currency forward
contracts and interest rate cap agreements. The Company does not
hold or issue derivative financial instruments for trading
purposes.
Effective October 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 133 - "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133
requires the Company to recognize all derivatives on the balance
sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through income. If the derivative is a
hedge, depending on the nature of the hedge, changes in the fair
value of derivatives are either offset against the change in fair
value of assets, liabilities, or firm commitments through earnings
or recognized in other comprehensive income until the hedged item
is recognized in earnings. The ineffective portion of a
derivative's change in fair value is immediately recognized in
earnings. The adoption of SFAS 133 on October 1, 1998 did not have
a material impact on results of operations but resulted in the
cumulative effect of an accounting change of $2 million pre-tax
being recognized as income in other comprehensive income.
Notional Amounts and Credit Exposure of Derivatives
The notional amounts of derivative financial instruments summarized
below do not represent amounts exchanged between parties and,
therefore, are not a measure of the Company's exposure resulting
from its use of derivatives. The amounts exchanged are calculated
based upon the notional amounts as well as other terms of the
instruments, which relate to interest rates, exchange rates or
other indices.
The Company is exposed to credit losses in the event of non-
performance by counterparties to these financial instruments, but
it does not expect any of the counterparties to fail to meet their
obligations. To manage credit risks, the Company selects
counterparties based on credit ratings, limits its exposure to a
single counterparty under defined Company guidelines, and monitors
the market position with each counterparty.
Fuel Price Risk Management
The Company uses a combination of petroleum call options, petroleum
swap contracts, and jet fuel purchase commitments to provide some
short-term protection against a sharp increase in jet fuel prices.
These instruments generally cover the Company's forecasted jet fuel
needs for three to six months.
The Company accounts for the call options and swap contracts as
cash flow hedges. In accordance with SFAS 133, such financial
instruments are marked-to-market using forward prices and fair
market value quotes with the offset to other comprehensive income,
net of applicable income taxes and hedge ineffectiveness and then
subsequently recognized as a component of fuel expense when the
underlying fuel being hedged is used. The ineffective portion of
these call options and swap agreements is determined based on the
correlation between West Texas Intermediate Crude Oil prices and
jet fuel prices, which was not material for the years ended
December 31, 1999 and 1998. For the year ended December 31, 1999,
the Company recognized approximately a $105 million net gain on its
fuel hedging program. The gain is included in fuel expense in the
accompanying consolidated statement of operations.
At December 31, 1999, the Company had petroleum call options
outstanding with an aggregate notional amount of approximately $310
million and an immaterial fair value. The notional value of the
Company's petroleum swap contracts outstanding at December 31, 1998
was $82 million with a fair value of $6 million loss, which was
recorded in other current liabilities with the offset to other
comprehensive income, net of applicable income taxes and hedge
ineffectiveness. The loss was recognized in earnings during 1999.
Foreign Currency Exchange Risk Management
The Company uses a combination of foreign currency average rate
options and forward contracts to hedge against the currency risk
associated with Japanese yen-denominated net cash flows for the
next nine to twelve months. The average rate options and forward
contracts have only nominal intrinsic value at the time of
purchase.
The Company accounts for these instruments as cash flow hedges. In
accordance with SFAS 133, such financial instruments are marked-to-
market using forward prices and fair market value quotes with the
offset to other comprehensive income, net of applicable income
taxes and hedge ineffectiveness and then subsequently recognized as
a component of other revenue when the underlying net cash flows are
realized. The Company measures hedge effectiveness of average rate
options and forward contracts based on the forward price of the
underlying commodity. Hedge ineffectiveness was not material
during 1999 or 1998.
At December 31, 1999, the Company had yen forward contracts
outstanding with an aggregate notional amount of $197 million and
a fair value loss of $5 million. The notional amount of the
Company's yen average rate options and forward contracts
outstanding at December 31, 1998 was $78 million and $76 million,
respectively, with a total fair value loss of $3 million.
Unrealized losses are recorded in other current liabilities with
the offset to other comprehensive income, net of applicable income
taxes and hedge ineffectiveness. The unrealized loss at December
31, 1999 will be recognized in earnings within the next twelve
months.
Interest Rate Risk Management
The Company entered into an interest rate cap agreement to reduce
the impact of potential increases on floating rate debt. The
interest rate cap had a notional amount of $106 million and $125
million as of December 31, 1999 and 1998, respectively, and is
effective through July 31, 2001. The Company accounts for the
interest rate cap as a cash flow hedge whereby the fair value of
the interest rate cap is reflected as an asset in the accompanying
consolidated balance sheet with the offset, net of any hedge
ineffectiveness (which is not material) recorded as interest
expense and net of applicable income taxes, to other comprehensive
income. The fair value of the interest rate cap was not material
as of December 31, 1999 or 1998. As interest expense on the
underlying hedged debt is recognized, corresponding amounts are
removed from other comprehensive income and charged to interest
expense. Such amounts were not material during 1999 or 1998.
Accumulated Derivative Gains or Losses
The following table summarizes activity in other comprehensive
income related to derivatives classified as cash flow hedges held
by the Company during the period October 1 (the date of the
Company's adoption of SFAS 133) through December 31, 1998 and for
the year ended December 31, 1999 (in millions):
1999 1998
Accumulated derivative loss included in
other comprehensive income at beginning
of period. . . . . . . . . . . . . . . . $ (6) $ -
Cumulative effect of adopting SFAS 133 as
of October 1, 1998, net. . . . . . . . . - 1
(Gains)/losses reclassified into earnings
from other comprehensive income, net . . (63) -
Change in fair value of derivatives, net . 67 (7)
Accumulated loss included in other
comprehensive income, net. . . . . . . . $ (2) $ (6)
Other Financial Instruments
(a) Cash equivalents -
Cash equivalents consist primarily of commercial paper with
original maturities of three months or less and approximate
fair value due to their short maturity.
(b) Short-term Investments -
Short-term investments consist primarily of commercial paper
with original maturities in excess of 90 days but less than
270 days and approximate fair value due to their short
maturity.
(c) Investment in Equity Securities -
Continental's investment in America West Holdings Corporation
is classified as available-for-sale and carried at an
aggregate market value of approximately $3 million at both
December 31, 1999 and 1998. Included in stockholders' equity
at both December 31, 1999 and 1998 are net unrealized gains of
$1 million.
In May 1998, the Company acquired a 49% interest in Compania
Panamena de Aviacion, S.A. ("COPA") for $53 million. The
investment is accounted for under the equity method of
accounting. As of December 31, 1999 and 1998, the excess of
the amount at which the investment is carried and the amount
of underlying equity in the net assets was $40 million and $43
million, respectively. This difference is being amortized
over 40 years.
On October 20, 1999, Continental sold its interest in AMADEUS
Global Travel Distribution, S.A. ("AMADEUS") for $409 million,
including a special dividend. The sale, which occurred as
part of AMADEUS's initial public offering resulted in a gain
of approximately $297 million. As of December 31, 1998,
Continental's investment in AMADEUS was carried at cost ($95
million), since a readily determinable market value did not
exist.
At December 31, 1999, the Company owned approximately 357,000
depository certificates convertible, subject to certain
restrictions, into the common stock of Equant N.V. ("Equant"),
which completed an initial public offering in July 1998. As
of December 31, 1999, the estimated fair value of these
depository certificates was approximately $40 million, based
upon the publicly traded market value of Equant common stock.
Since the fair value of the Company's investment in the
depository certificates is not readily determinable (i.e., the
depository certificates are not traded on a securities
exchange), the investment is carried at cost, which was not
material as of December 31, 1999 or 1998.
In December 1999, the Company acquired a 28% interest in
Gulfstream International Airlines, Inc. ("Gulfstream"). The
investment is accounted for under the equity method of
accounting.
In 1999, Continental received 1,500,000 warrants to purchase
common stock of priceline.com, Inc. ("Priceline") at an
exercise price of $59.93 per share (the "Warrants"). In the
fourth quarter of 1999, the Company sold the Warrants for $18
million, resulting in a loss of approximately $4 million.
(d) Debt -
The fair value of the Company's debt with a carrying value of
$2.75 billion and $1.98 billion at December 31, 1999 and 1998,
respectively, estimated based on the discounted amount of
future cash flows using the current incremental rate of
borrowing for a similar liability or market prices,
approximate $2.53 billion and $1.88 billion, respectively.
The fair value of the remaining debt (with a carrying value of
$383 million and $473 million, respectively, and primarily
relating to aircraft modification notes and various loans with
immaterial balances) was not practicable to estimate due to
the large number and small dollar amounts of these notes.
NOTE 6 - PREFERRED SECURITIES OF TRUST
Continental Airlines Finance Trust, a Delaware statutory business
trust (the "Trust") with respect to which the Company owned all of
the common trust securities, had 2,298,327 8-1/2% Convertible Trust
Originated Preferred Securities ("TOPrS") outstanding at December
31, 1998. In November 1998, the Company exercised its right and
called for redemption approximately half of its outstanding TOPrS.
The TOPrS were convertible into shares of Class B common stock at
a conversion price of $24.18 per share of Class B common stock. As
a result of the call for redemption, 2,688,173 TOPrS were converted
into 5,558,649 shares of Class B common stock. In December 1998,
the Company called for redemption the remaining outstanding TOPrS.
As a result of the second call, the remaining 2,298,327 TOPrS were
converted into 4,752,522 shares of Class B common stock during
January 1999.
Distributions on the preferred securities were payable by the Trust
at the annual rate of 8-1/2% of the liquidation value of $50 per
preferred security and are included in Distributions on Preferred
Securities of Trust in the accompanying Consolidated Statements of
Operations. At December 31, 1998, outstanding TOPrS totaling $111
million are included in Continental-Obligated Mandatorily
Redeemable Preferred Securities of Subsidiary Trust Holding Solely
Convertible Subordinated Debentures in the accompanying
Consolidated Balance Sheets.
The sole assets of the trust were 8-1/2% Convertible Subordinated
Deferrable Interest Debentures ("Convertible Subordinated
Debentures") with an aggregate principal amount of $115 million at
December 31, 1998.
The Convertible Subordinated Debentures and related income
statement effects are eliminated in the Company's consolidated
financial statements.
NOTE 7 - PREFERRED, COMMON AND TREASURY STOCK
Preferred Stock
Continental has 10 million shares of authorized preferred stock,
none of which was outstanding as of December 31, 1999 or 1998.
Common Stock
Continental has two classes of common stock issued and outstanding,
Class A common stock, par value $.01 per share ("Class A common
stock") and Class B common stock. Each share of Class A common
stock is entitled to 10 votes per share and each share of Class B
common stock is entitled to one vote per share. In addition,
Continental has authorized 50 million shares of Class D common
stock, par value $.01 per share, none of which is outstanding.
The Company's Certificate of Incorporation permits shares of the
Company's Class A common stock to be converted into an equal number
of shares of Class B common stock. During 1999 and 1998, 85,883
and 12,200 shares of the Company's Class A common stock,
respectively, were so converted.
Treasury Stock
The Company's Board of Directors has authorized the expenditure of
up to $1.2 billion to repurchase shares of the Company's Class A
common stock and Class B common stock or securities convertible
into Class B common stock. The Company's Board of Directors also
authorized the Company to use up to one-half of its 2000 and later
adjusted net income, and all of the net proceeds of future sales of
non-strategic assets, for additional stock repurchases. Subject to
applicable securities law, such purchases occur at times and in
amounts that the Company deems appropriate. No time limit was
placed on the duration of the repurchase program. As of December
31, 1999, the Company had repurchased 17,586,400 shares of Class B
common stock for $751 million since the inception of the repurchase
program in March 1998.
Stockholder Rights Plan
Effective November 20, 1998, the Company adopted a stockholder
rights plan (the "Rights Plan") in connection with the disposition
by Air Partners, L.P. ("Air Partners") of its interest in the
Company to an affiliate of Northwest Airlines, Inc. (together with
such affiliate, "Northwest").
The rights become exercisable upon the earlier of (i) the tenth day
following a public announcement or public disclosure of facts
indicating that a person or group of affiliated or associated
persons has acquired beneficial ownership of 15% or more of the
total number of votes entitled to be cast generally by the holders
of the common stock of the Company then outstanding, voting
together as a single class (such person or group being an
"Acquiring Person"), or (ii) the tenth business day (or such later
date as may be determined by action of the Board of Directors prior
to such time as any person becomes an Acquiring Person) following
the commencement of, or announcement of an intention to make, a
tender offer or exchange offer the consummation of which would
result in any person becoming an Acquiring Person. Certain persons
and entities related to the Company, Air Partners or Northwest at
the time the Rights Plan was adopted are exempt from the definition
of "Acquiring Person."
The rights will expire on November 20, 2008 unless extended or
unless the rights are earlier redeemed or exchanged by the Company.
Subject to certain adjustments, if any person becomes an Acquiring
Person, each holder of a right, other than rights beneficially
owned by the Acquiring Person and its affiliates and associates
(which rights will thereafter be void), will thereafter have the
right to receive, upon exercise thereof, that number of Class B
Common Shares having a market value of two times the exercise price
($200, subject to adjustment) of the right.
If at any time after a person becomes an Acquiring Person, (i) the
Company merges into any other person, (ii) any person merges into
the Company and all of the outstanding common stock does not remain
outstanding after such merger, or (iii) the Company sells 50% or
more of its consolidated assets or earning power, each holder of a
right (other than the Acquiring Person and its affiliates and
associates) will have the right to receive, upon the exercise
thereof, that number of shares of common stock of the acquiring
corporation (including the Company as successor thereto or as the
surviving corporation) which at the time of such transaction will
have a market value of two times the exercise price of the right.
At any time after any person becomes an Acquiring Person, and prior
to the acquisition by any person or group of a majority of the
Company's voting power, the Board of Directors may exchange the
rights (other than rights owned by such Acquiring Person which have
become void), in whole or in part, at an exchange ratio of one
share of Class B common stock per right (subject to adjustment).
At any time prior to any person becoming an Acquiring Person, the
Board of Directors may redeem the rights at a price of $.001 per
right. The Rights Plan may be amended by the Board of Directors
without the consent of the holders of the rights, except that from
and after such time as any person becomes an Acquiring Person no
such amendment may adversely affect the interests of the holders of
the rights (other than the Acquiring Person and its affiliates and
associates). Until a right is exercised, the holder thereof, as
such, will have no rights as a stockholder of the Company,
including, without limitation, the right to vote or to receive
dividends.
NOTE 8 - STOCK PLANS AND AWARDS
Stock Options
On October 4, 1999, the Board of Directors adopted the Continental
Airlines, Inc. Incentive Plan 2000 (the "2000 Incentive Plan"),
subject to approval by the stockholders of the Company at the
annual stockholders meeting in May 2000. The 2000 Incentive Plan
provides that the Company may grant awards (options, restricted
stock awards, performance awards or incentive awards) to non-
employee directors of the Company or employees of the Company or
its subsidiaries. Subject to adjustment as provided in the
Incentive Plan, the aggregate number of shares of Class B common
stock that may be issued under the Incentive Plan may not exceed
3,000,000 shares, which may be originally issued or treasury shares
or a combination thereof.
The stockholders of the Company have approved the Company's 1998
Stock Incentive Plan, 1997 Stock Incentive Plan and 1994 Incentive
Equity Plan (collectively, the "Plans") under which the Company may
issue shares of restricted Class B common stock or grant options to
purchase shares of Class B common stock to non-employee directors
and employees of the Company or its subsidiaries. Subject to
adjustment as provided in the Plans, the aggregate number of shares
of Class B common stock that may be issued may not exceed
16,500,000 shares, which may be originally issued or treasury
shares or a combination thereof. Options granted under the Plans
are awarded with an exercise price equal to the fair market value
of the stock on the date of grant. The total shares remaining
available for grant under the Plans at December 31, 1999 was
969,327. No options may be awarded under the 1994 Incentive Equity
Plan after December 31, 1999. Stock options granted under the
Plans generally vest over a period of three to four years and have
a term of five years.
Under the terms of the Plans, a change of control would result in
all outstanding options under these plans becoming exercisable in
full and restrictions on restricted shares being terminated.
The table on the following page summarizes stock option
transactions pursuant to the Company's Plans (share data in
thousands):
1999 1998 1997
Weighted- Weighted- Weighted-
Average Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
Outstanding at
Beginning of
Year. . . . . . 9,683 $30.31 5,998 $22.62 5,809 $17.37
Granted. . . . . 1,055 $33.38 6,504 $43.75 1,968 $29.34
Exercised . . . (1,464) $16.54 (807) $19.53 (1,582) $11.72
Cancelled. . . . (269) $37.41 (2,012) $55.18 (197) $22.49
Outstanding at
End of Year . . 9,005 $32.69 9,683 $30.31 5,998 $22.62
Options
exercisable
at end of
year (1). . . . 4,845 $29.13 5,174 $23.56 1,229 $20.61
(1) On November 20, 1998, Air Partners disposed of its interest in the Company to Northwest,
resulting in a change of control under the terms of the Plans. As a result, all options
and restricted stock then outstanding under these plans became exercisable and fully
vested, respectively.
The following tables summarize the range of exercise prices and the
weighted average remaining contractual life of the options
outstanding and the range of exercise prices for the options
exercisable at December 31, 1999 (share data in thousands):
Options Outstanding
Weighted
Average
Remaining
Range of Contractual Weighted Average
Exercise Prices Outstanding Life Exercise Price
$4.56-$8.00 208 0.68 $7.80
$8.19-$22.13 183 2.03 $16.64
$22.38-$28.63 2,468 1.76 $26.12
$28.75-$32.13 2,616 3.45 $30.31
$32.25-$56.81 3,530 3.92 $41.35
$4.56-$56.81 9,005 3.08 $32.69
Options Exercisable
Range of Weighted Average
Exercise Prices Exercisable Exercise Price
$4.56-$8.00 208 $ 7.80
$8.19-$22.13 183 $16.64
$22.38-$28.63 2,468 $26.12
$28.75-$32.13 917 $29.71
$32.25-$56.81 1,069 $41.90
$4.56-$56.81 4,845 $29.13
Employee Stock Purchase Plans
All employees of the Company are eligible to participate in the
Company's stock purchase program under which they may purchase
shares of Class B common stock of the Company at 85% of the lower
of the fair market value on the first day of the option period or
the last day of the option period. During 1999 and 1998, 526,729
and 305,978 shares, respectively, of Class B common stock were
issued at prices ranging from $27.84 to $49.41 in 1999 and $29.33
to $49.41 in 1998. During 1997, 218,892 shares of Class B common
stock were issued at prices ranging from $19.55 to $29.33.
Pro Forma SFAS 123 Results
Pro forma information regarding net income and earnings per share
has been determined as if the Company had accounted for its
employee stock options and purchase rights under the fair value
method of SFAS 123. The fair value for these options was estimated
at the date of grant using a Black-Scholes option pricing model
with the following weighted-average assumptions for 1999, 1998 and
1997, respectively: risk-free interest rates of 4.9%, 4.9% and
6.1%; dividend yields of 0%; volatility factors of the expected
market price of the Company's common stock of 43% for 1999, 40% for
1998 and 34% for 1997; and a weighted-average expected life of the
option of 3.1 years, 3.0 years and 2.5 years. The weighted average
grant date fair value of the stock options granted in 1999, 1998
and 1997 was $11.13, $13.84 and $7.87 per option, respectively.
The fair value of the purchase rights under the stock purchase
plans was also estimated using the Black-Scholes model with the
following weighted-average assumptions for 1999, 1998 and 1997,
respectively: risk free interest rates of 4.7%, 4.7% and 5.2%;
dividend yields of 0%; expected volatility of 43% for 1999, 40% for
1998 and 34% for 1997; and an expected life of .25 years for 1999,
.25 years for 1998 and .33 years for 1997. The weighted-average
fair value of the purchase rights granted in 1999, 1998 and 1997
was $7.72, $9.10 and $7.38, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferrable. In addition, option
valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because the
Company's employee stock options and purchase rights have
characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options and
purchase rights.
Assuming that the Company had accounted for its employee stock
options and purchase rights using the fair value method and
amortized the resulting amount to expense over the options' vesting
period, net income would have been reduced by $24 million, $18
million and $11 million for the years ended December 31, 1999, 1998
and 1997, respectively. Basic EPS would have been reduced by
35 cents, 30 cents and 18 cents for the years ended December 31,
1999, 1998 and 1997, respectively, and diluted EPS would have been
reduced by 33 cents, 23 cents and 14 cents for the same periods,
respectively. The pro forma effect on net income is not
representative of the pro forma effects on net income in future
years because it did not take into consideration pro forma
compensation expense related to grants made prior to 1995.
NOTE 9 - ACCUMULATED OTHER COMPREHENSIVE INCOME
The components of accumulated other comprehensive income are as
follows (in millions):
Unrealized
Gain/
Minimum Unrealized (Loss) on
Pension Gain/(Loss) Derivative
Liability on Investments Instruments Total
Balance at
December 31, 1996 . $ (2) $ 4 $ - $ 2
Current year net
change in other
comprehensive
income. . . . . . . (4) - - (4)
Balance at
December 31, 1997 . (6) 4 - (2)
Current year net
change in other
comprehensive
income. . . . . . . (76) (4) (6) (86)
Balance at
December 31, 1998 . (82) - (6) (88)
Current year net
change in other
comprehensive
income. . . . . . . 82 1 4 87
Balance at
December 31, 1999 . $ - $ 1 $ (2) $ (1)
NOTE 10 - EMPLOYEE BENEFIT PLANS
The Company has noncontributory defined benefit pension and defined
contribution (including 401(k) savings) plans. Substantially all
domestic employees of the Company are covered by one or more of
these plans. The benefits under the active defined benefit pension
plan are based on years of service and an employee's final average
compensation. For the years ended December 31, 1999, 1998 and
1997, total expense for the defined contribution plan was $14
million, $8 million and $6 million, respectively.
The following table sets forth the defined benefit pension plans'
change in projected benefit obligation for 1999 and 1998:
1999 1998
(in millions)
Projected benefit obligation at
beginning of year . . . . . . . . $1,230 $ 846
Service cost . . . . . . . . . . . 66 55
Interest cost. . . . . . . . . . . 90 69
Plan amendments. . . . . . . . . . 54 110
Actuarial (gains) losses . . . . . (47) 178
Benefits paid. . . . . . . . . . . (93) (28)
Projected benefit obligation at
end of year . . . . . . . . . . . $1,300 $1,230
The following table sets forth the defined benefit pension plans'
change in the fair value of plan assets for 1999 and 1998:
1999 1998
(in millions)
Fair value of plan assets at
beginning of year . . . . . . . . $ 781 $ 633
Actual return on plan assets . . . 138 75
Employer contributions . . . . . . 187 101
Benefits paid. . . . . . . . . . . (93) (28)
Fair value of plan assets at
end of year . . . . . . . . . . . $1,013 $ 781
Pension cost recognized in the accompanying consolidated balance
sheets is computed as follows:
1999 1998
(in millions)
Funded status of the plans -
net underfunded . . . . . . . . . $ (287) $ (449)
Unrecognized net actuarial loss. . 152 256
Unrecognized prior service cost. . 143 113
Net amount recognized. . . . . . . 8 (80)
Prepaid benefit cost . . . . . . . 12 2
Accrued benefit liability. . . . . (78) (320)
Intangible asset . . . . . . . . . 74 113
Accumulated other comprehensive
income. . . . . . . . . . . . . . - 125
Net amount recognized. . . . . . . $ 8 $ (80)
The $125 million charge to other comprehensive income in 1998 was
reversed in 1999 due to favorable asset performance and an increase
in the weighted average assumed discount rate.
Net periodic defined benefit pension cost for 1999, 1998 and 1997
included the following components:
1999 1998 1997
(in millions)
Service cost . . . . . . . . . . . $ 66 $ 55 $ 38
Interest cost. . . . . . . . . . . 90 69 51
Expected return on plan assets . . (84) (64) (49)
Amortization of prior service
cost . . . . . . . . . . . . . . 13 6 1
Amortization of unrecognized
net actuarial loss . . . . . . . 13 4 -
Net periodic benefit cost. . . . . $ 98 $ 70 $ 41
The following actuarial assumptions were used to determine the
actuarial present value of the Company's projected benefit
obligation:
1999 1998 1997
Weighted average assumed
discount rate. . . . . . . . . . 8.25% 7.0% 7.25%
Expected long-term rate of
return on plan assets. . . . . . 9.50% 9.50% 9.25%
Weighted average rate of
compensation increase. . . . . .4.98%-5.27% 5.30% 4.90%
The projected benefit obligation, accumulated benefit obligation
and the fair value of plan assets for the pension plans with
projected benefit obligations and accumulated benefit obligations
in excess of plan assets were $1.3 billion, $1.1 billion and $1.0
billion, respectively, as of December 31, 1999, and $1.2 billion,
$1.1 billion and $771 million, respectively, as of December 31,
1998.
During 1999 and 1998, the Company amended its benefit plan as a
result of changes in benefits pursuant to new collective bargaining
agreements.
Plan assets consist primarily of equity securities, long-term debt
securities and short-term investments.
Continental's policy is to fund the noncontributory defined benefit
pension plans in accordance with Internal Revenue Service ("IRS")
requirements as modified, to the extent applicable, by agreements
with the IRS.
The Company also has a profit sharing program under which an award
pool consisting of 15% of the Company's annual pre-tax earnings,
subject to certain adjustments, is distributed each year to
substantially all employees (other than employees whose collective
bargaining agreement provides otherwise or who otherwise receive
profit sharing payments as required by local law) on a pro rata
basis according to base salary. The profit sharing expense
included in the accompanying Consolidated Statements of Operations
for the years ended December 31, 1999, 1998 and 1997 was $62
million, $86 million and $105 million, respectively.
NOTE 11 - INCOME TAXES
The reconciliations of income tax computed at the United States
federal statutory tax rates to income tax provision for the years
ended December 31, 1999, 1998 and 1997 are as follows (in
millions):
Amount Percent
1999 1998 1997 1999 1998 1997
Income tax pro-
vision at
United States
statutory rates . . $279 $227 $224 35.0% 35.0% 35.0 %
State income tax
provision . . . . . 12 10 9 1.5 1.5 1.4
Meals and
entertainment
disallowance. . . . 11 10 9 1.3 1.5 1.4
Net operating loss
not previously
benefitted. . . . . - - (15) - - (2.3)
Other. . . . . . . . 8 1 10 1.1 0.3 1.6
Income tax
provision, net. . . $310 $248 $237 38.9% 38.3% 37.1 %
The significant component of the provision for income taxes for the
year ended December 31, 1999, 1998 and 1997 was a deferred tax
provision of $293 million, $231 million and $220 million,
respectively. The provision for income taxes for each of the years
ended December 31, 1999, 1998 and 1997 also reflects a current tax
provision in the amount of $17 million, as the Company is in an
alternative minimum tax position for federal income tax purposes
and pays current state and foreign income tax.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the related amounts used for
income tax purposes. Significant components of the Company's
deferred tax liabilities and assets as of December 31, 1999 and
1998 are as follows (in millions):
1999 1998
Spare parts and supplies, fixed assets
and intangibles . . . . . . . . . . . . . $ 590 $ 536
Deferred gain. . . . . . . . . . . . . . . 61 57
Capital and safe harbor lease activity . . 73 46
Other, net . . . . . . . . . . . . . . . . 69 39
Gross deferred tax liabilities . . . . . . 793 678
Accrued liabilities. . . . . . . . . . . . (254) (347)
Net operating loss carryforwards . . . . . (266) (372)
Investment tax credit carryforwards. . . . (45) (45)
Minimum tax credit carryforward. . . . . . (46) (37)
Other. . . . . . . . . . . . . . . . . . . - (2)
Gross deferred tax assets. . . . . . . . . (611) (803)
Deferred tax assets valuation allowance. . 263 263
Net deferred tax liability . . . . . . . . 445 138
Less: current deferred tax asset. . . . . (145) (234)
Non-current deferred tax liability . . . . $ 590 $ 372
At December 31, 1999, the Company had estimated tax net operating
losses ("NOLs") of $700 million for federal income tax purposes
that will expire through 2009 and federal investment tax credit
carryforwards of $45 million that will expire through 2001. As a
result of the change in ownership of the Company on April 27, 1993,
the ultimate utilization of the Company's net operating losses and
investment tax credits may be limited. Reflecting this limitation,
the Company had a valuation allowance of $263 million at December
31, 1999 and 1998.
The Company has consummated several transactions which resulted in
the recognition of NOLs of the Company's predecessor. To the
extent the Company were to determine in the future that additional
NOLs of the Company's predecessor could be recognized in the
accompanying consolidated financial statements, such benefit would
reduce the value ascribed to routes, gates and slots.
NOTE 12 - ACCRUALS FOR AIRCRAFT RETIREMENTS AND EXCESS FACILITIES
During the fourth quarter of 1999, the Company made the decision to
accelerate the retirement of six DC-10-30 aircraft and other items
in 1999 and the first half of 2000 and to dispose of related excess
inventory. The DC-10-30's will be replaced by Boeing 757 and
Boeing 737-800 aircraft on certain routes, and by Boeing 777
aircraft on other routes. In addition, the market value of certain
Boeing 747 aircraft no longer operated by the Company has declined.
As a result of these items and certain other fleet-related items,
the Company recorded a fleet disposition/impairment loss of $81
million in the fourth quarter of 1999.
Approximately $52 million of the $81 million charge relates to the
impairment of owned or capital leased aircraft and related
inventory held for disposal with a carrying amount of $77 million.
The remaining $29 million of the charge relates primarily to costs
expected to be incurred related to the return of leased aircraft.
As of December 31, 1999, the remaining accrual for the 1999 fleet
disposition/impairment loss totaled $12 million.
In August 1998, the Company announced that CMI planned to
accelerate the retirement of its four Boeing 747 aircraft by April
1999 and its remaining thirteen Boeing 727 aircraft by December
2000. The Boeing 747s have been replaced by DC-10-30 aircraft and
the Boeing 727 aircraft will be replaced with a reduced number of
Boeing 737 aircraft. In addition, Express accelerated the
retirement of certain turboprop aircraft to the year 2000,
including its fleet of 32 EMB-120 turboprop aircraft, as regional
jets are acquired to replace turboprops. In connection with its
decision to accelerate the replacement of these aircraft, the
Company performed evaluations to determine, in accordance with SFAS
121, whether future cash flows (undiscounted and without interest
charges) expected to result from the use and eventual disposition
of these aircraft would be less than the aggregate carrying amount
of these aircraft and the related assets. As a result of the
evaluation, management determined that the estimated future cash
flows expected to be generated by these aircraft would be less than
their carrying amount, and therefore these aircraft are impaired as
defined by SFAS 121. Consequently, the original cost basis of
these aircraft and related items was reduced to reflect the fair
market value at the date the decision was made, resulting in a $59
million fleet disposition/impairment loss. In determining the fair
market value of these assets, the Company considered recent
transactions involving sales of similar aircraft and market trends
in aircraft dispositions. The remaining $63 million of the fleet
disposition/impairment loss includes cash and non-cash costs
related primarily to future commitments on leased aircraft past the
dates they will be removed from service and the write-down of
related inventory to its estimated fair market value. The combined
charge of $122 million was recorded in the third quarter of 1998.
As of December 31, 1999, the remaining accrual for the 1998 fleet
disposition/impairment loss totaled $40 million.
The remaining balance of accruals for aircraft retirements and
excess facilities at December 31, 1999 relates to the 1996 fleet
disposition/impairment loss accrual of $21 million and the 1994
accrual for fleet disposition/impairment loss and underutilized
facilities of $47 million.
The following represents the activity within these accruals during
the three years ended December 31, 1999 (in millions):
1999 1998 1997
Total accruals at beginning of year. . $155 $151 $205
Net cash payments:
Aircraft related. . . . . . . . . . . (32) (34) (27)
Underutilized facilities and other. . (20) (30) (13)
Increase/(decrease) in accrual for
grounded aircraft . . . . . . . . . . - - (16)
Fleet disposition/impairment loss for
costs of return of leased aircraft. . 20 - -
Fleet disposition/impairment loss
for the retirement of aircraft. . . . - 63 -
Other. . . . . . . . . . . . . . . . . (3) 5 2
Total accruals at end of year. . . . . 120 155 151
Portion included in accrued other
liabilities . . . . . . . . . . . . . (51) (60) (28)
Accrual for aircraft retirements and
excess facilities . . . . . . . . . . $ 69 $ 95 $123
The remaining accruals relate primarily to anticipated cash outlays
associated with (i) underutilized airport facilities (primarily
associated with Denver International Airport), (ii) the return of
leased aircraft and (iii) the remaining liability associated with
the grounded aircraft. The Company has assumed certain sublease
rental income for these closed and underutilized facilities and
grounded aircraft in determining the accrual at each balance sheet
date. However, should actual sublease rental income be different
from the Company's estimates, the actual charge could be different
from the amount estimated. The remaining accrual represents cash
outlays to be incurred over the remaining lease terms (from one to
19 years). The Company expects to finance the cash outlays
primarily with internally generated funds.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
Continental has substantial commitments for capital expenditures,
including for the acquisition of new aircraft. As of January 14,
2000, Continental had agreed to acquire a total of 74 Boeing jet
aircraft through 2005. The Company anticipates taking delivery of
28 Boeing jet aircraft in 2000. Continental also has options for
an additional 118 aircraft (exercisable subject to certain
conditions). The estimated aggregate cost of the Company's firm
commitments for Boeing aircraft is approximately $4 billion.
Continental currently plans to finance its new Boeing aircraft with
a combination of enhanced pass through trust certificates, lease
equity and other third-party financing, subject to availability and
market conditions. Continental has commitments or letters of
intent for backstop financing for approximately 18% of the
anticipated remaining acquisition cost of future Boeing deliveries.
In addition, at January 14, 2000, Continental has firm commitments
to purchase 34 spare engines related to the new Boeing aircraft for
approximately $219 million, which will be deliverable through March
2005. However, further financing will be needed to satisfy the
Company's capital commitments for other aircraft and aircraft-
related expenditures such as engines, spare parts, simulators and
related items. There can be no assurance that sufficient financing
will be available for all aircraft and other capital expenditures
not covered by firm financing commitments. Deliveries of new
Boeing aircraft are expected to increase aircraft rental,
depreciation and interest costs while generating cost savings in
the areas of maintenance, fuel and pilot training.
As of January 14, 2000, Express had firm commitments for 43 Embraer
ERJ-145 ("ERJ-145") 50-seat regional jets and 19 Embraer ERJ-135
("ERJ-135") 37-seat regional jets, with options for an additional
100 ERJ-145 and 50 ERJ-135 aircraft exercisable through 2008.
Express anticipates taking delivery of 15 ERJ-145 and 12 ERJ-135
regional jets in 2000. Neither Express nor Continental will have
any obligation to take any of the firm ERJ-145 or ERJ-135 aircraft
that are not financed by a third party and leased to Continental.
Continental expects its cash outlays for 2000 capital expenditures,
exclusive of fleet plan requirements, to aggregate $207 million
primarily relating to software application and automation
infrastructure projects, aircraft modifications and mandatory
maintenance projects, passenger terminal facility improvements and
office, maintenance, telecommunications and ground equipment.
Continental remains contingently liable until December 1, 2015, on
$202 million of long-term lease obligations of US Airways, Inc.
("US Airways") related to the East End Terminal at LaGuardia
Airport in New York. If US Airways defaulted on these obligations,
Continental could be required to cure the default, at which time it
would have the right to occupy the terminal.
Continental has certain block space arrangements whereby it is
committed to purchase capacity on other carriers at an aggregate
cost of approximately $159 million per year. These arrangements
are currently scheduled to expire over the next eight years.
Pursuant to other block-space arrangements, other carriers are
committed to purchase capacity at a cost of approximately $95
million per year on Continental.
Approximately 42% of the Company's employees are covered by
collective bargaining agreements. The Company's collective
bargaining agreements with its Express flight attendants and
Continental Airlines flight attendants (representing approximately
18% of the Company's employees) became amendable in November and
December 1999, respectively. Negotiations began in September 1999
to amend these contracts. The Company believes that mutually
acceptable agreements can be reached with such employees, although
the ultimate outcome of the Company's negotiations is unknown at
this time.
Legal Proceedings
United States of America v. Northwest Airlines Corp. & Continental
Airlines, Inc.: The Antitrust Division of the Department of
Justice is challenging under Section 7 of the Clayton Act and
Section 1 of the Sherman Act the acquisition by Northwest of Shares
of Continental's Class A common stock bearing, together with
certain shares for which Northwest has a limited proxy, more than
50% of the fully diluted voting power of all Continental stock.
The government's position is that, notwithstanding various
agreements that restrict Northwest's ability to exercise voting
control over Continental and are designed to assure Continental's
competitive independence, Northwest's control of the Class A common
stock will reduce actual and potential competition in various ways
and in a variety of markets. The government seeks an order
requiring Northwest to divest all voting stock in Continental on
terms and conditions as may be agreed to by the government and the
Court. No specific relief is sought against Continental. Trial is
currently set for October 2000.
The Company and/or certain of its subsidiaries are defendants in
various lawsuits, including suits relating to certain environmental
claims, the Company's consolidated Plan of Reorganization under
Chapter 11 of the federal bankruptcy code which became effective on
April 27, 1993, and proceedings arising in the normal course of
business. While the outcome of these lawsuits and proceedings
cannot be predicted with certainty and could have a material
adverse effect on the Company's financial position, results of
operations and cash flows, it is the opinion of management, after
consulting with counsel, that the ultimate disposition of such
suits will not have a material adverse effect on the Company's
financial position, results of operations or cash flows.
NOTE 14 - RELATED PARTY TRANSACTIONS
The following is a summary of significant related party
transactions that occurred during 1999, 1998 and 1997, other than
those discussed elsewhere in the Notes to Consolidated Financial
Statements.
The Company and America West Airlines, Inc. ("America West"), a
subsidiary of America West Holdings Corporation, in which David
Bonderman holds a significant interest, entered into a series of
agreements during 1994 related to code-sharing and ground handling
that have created substantial benefits for both airlines. Mr.
Bonderman is a director and stockholder of the Company. The
services provided are considered normal to the daily operations of
both airlines. As a result of these agreements, Continental paid
America West $25 million, $20 million and $16 million in 1999, 1998
and 1997, respectively, and America West paid Continental $31
million, $27 million and $23 million in 1999, 1998 and 1997,
respectively.
In November 1998, the Company and Northwest, a significant
stockholder of the Company, began implementing a long-term global
alliance involving extensive code-sharing, frequent flyer
reciprocity and other cooperative activities. The services
provided are considered normal to the daily operations of both
airlines. As a result of these activities, Continental paid
Northwest $7 million in 1999, and Northwest paid Continental $9
million in 1999.
During December 1999, Continental entered into an equipment sales
agreement with COPA for $8 million. The resulting note receivable
is payable in quarterly installments through October 2002. During
1999, COPA paid Continental $4 million for services considered
normal to the daily operations of both airlines.
In connection with Continental's investment in Gulfstream,
Continental purchased from Gulfstream, a ten-year $10 million
convertible note, payable in quarterly installments of principal
and interest totaling $0.4 million. Continental also purchased a
six month $3 million secured note, with interest paid quarterly and
principal due at the end of the six months. During 1999,
Continental paid Gulfstream $1 million and Gulfstream paid
Continental $13 million for services considered normal to the daily
operations of both airlines.
Also during December 1999, under a sale and leaseback agreement
with Gulfstream, Express sold 25 Beech 1900-D aircraft to
Gulfstream in exchange for Gulfstream's assumption of $81 million
in debt. Express is leasing these aircraft from Gulfstream for
periods ranging from eight to 23 months.
NOTE 15 - SEGMENT REPORTING
Information concerning principal geographic areas is as follows (in
millions):
1999 1998 1997
Operating Operating Operating
Revenue Revenue Revenue
Domestic (U.S.) $6,066 $5,596 $5,196
Atlantic 1,102 995 778
Latin America 860 769 572
Pacific 611 567 648
$8,639 $7,927 $7,194
The Company attributes revenue among the geographical areas based
upon the origin and destination of each flight segment. The
Company's tangible assets consist primarily of flight equipment
which is mobile across geographic markets and, therefore, has not
been allocated. Continental has one reportable operating segment
(air transportation).
NOTE 16 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited summarized financial data by quarter for 1999 and 1998 is as follows (in millions,
except per share data):
Three Months Ended
March 31 June 30 September 30 December 31
1999 (a)
Operating revenue . . . . . . . . . . . . . $2,042 $2,181 $2,264 $2,152
Operating income (loss) . . . . . . . . . . 153 247 202 (2)
Income before cumulative effect of
accounting changes . . . . . . . . . . . . 85 132 104 167
Cumulative effect of accounting changes:
Start-up costs . . . . . . . . . . . . . . (6) - - -
Sale of frequent flyer miles . . . . . . . (27) - - -
Net income. . . . . . . . . . . . . . . . . 52 132 104 167
Earnings per common share:
Income before cumulative effect of
accounting changes (b) . . . . . . . . . $ 1.25 $ 1.85 $ 1.47 $ 2.46
Cumulative effect of accounting
changes, net of tax. . . . . . . . . . . (0.48) - - -
Net income (b). . . . . . . . . . . . . . $ 0.77 $ 1.85 $ 1.47 $ 2.46
Earnings per common share assuming
dilution:
Income before cumulative effect of
accounting changes (b) . . . . . . . . . $ 1.13 $ 1.73 $ 1.44 $ 2.42
Cumulative effect of accounting
changes, net of tax. . . . . . . . . . . (0.42) - - -
Net income (b). . . . . . . . . . . . . . $ 0.71 $ 1.73 $ 1.44 $ 2.42
(continued on next page)
Three Months Ended
March 31 June 30 September 30 December 31
1998
Operating revenue . . . . . . . . . . . . . $1,848 $2,030 $2,110 $1,939
Operating income. . . . . . . . . . . . . . 150 280 143 128
Nonoperating income (expense), net. . . . . (13) (5) (18) (17)
Net income. . . . . . . . . . . . . . . . . 81 163 73 66
Earnings per common share:
Income before extraordinary charge. . . . $ 1.38 $ 2.74 $ 1.21 $ 1.08
Extraordinary charge, net of tax. . . . . - (0.06) - -
Net income (b). . . . . . . . . . . . . . $ 1.38 $ 2.68 $ 1.21 $ 1.08
Earnings per common share assuming
dilution:
Income before extraordinary charge. . . . $ 1.06 $ 2.11 $ 0.97 $ 0.91
Extraordinary charge, net of tax. . . . . - (0.05) - -
Net income (b). . . . . . . . . . . . . . $ 1.06 $ 2.06 $ 0.97 $ 0.91
Proforma Effect Assuming Accounting Change-
Sale of Frequent Flyer Miles - is Applied
Retroactively:
Income before Extraordinary Charge. . . . $ 79 $ 166 $ 71 $ 66
Earnings per Common Share (b) . . . . . . $ 1.34 $ 2.72 $ 1.18 $ 1.07
Earnings per Common Share Assuming
Dilution (b) . . . . . . . . . . . . . . $ 1.04 $ 2.09 $ 0.96 $ 0.90
Net Income. . . . . . . . . . . . . . . . $ 79 $ 162 $ 71 $ 66
Earnings per Common Share (b) . . . . . . $ 1.34 $ 2.66 $ 1.18 $ 1.07
Earnings per Common Share Assuming
Dilution (b) . . . . . . . . . . . . . . $ 1.04 $ 2.05 $ 0.96 $ 0.90
(a) During the fourth quarter of 1999, the Company changed its method of accounting for the
sale of mileage credits under its frequent flyer program. Therefore, effective January
1, 1999, the Company recorded a $27 million cumulative effect of a change in accounting
principle, net of tax, and has restated the quarterly information for 1999 presented
herein.
(b) The sum of the four quarterly earnings per share amounts does not agree with the
earnings per share as calculated for the full year due to the fact that the full year
calculation uses a weighted average number of shares based on the sum of the four
quarterly weighted average shares divided by four quarters.
During the first quarter of 1999, Continental recorded a $6 million
cumulative effect of a change in accounting principle, net of tax,
related to the write-off of pilot training costs.
In addition, during the first quarter of 1999, Continental recorded
a $12 million gain ($20 million pre-tax) on the sale of a portion
of the Company's interest in Equant.
During the fourth quarter of 1999, the Company changed its method
of accounting for the sale of mileage credits under its frequent
flyer program. Therefore, effective January 1, 1999, the Company
recorded a $27 million cumulative effect of this change in
accounting principle, net of tax.
During the fourth quarter of 1999, Continental recorded a $182
million gain ($297 million pre-tax) on the sale of its interest in
AMADEUS and a $6 million net gain ($9 million pre-tax) on other
asset sales, including a portion of its interest in Equant.
Also during the fourth quarter of 1999, Continental recorded a
fleet disposition/impairment loss of $50 million ($81 million pre-
tax).
During the second quarter of 1998, Continental recorded a $4
million after tax extraordinary charge relating to prepayment of
debt.
During the third quarter of 1998, Continental recorded a fleet
disposition/impairment loss of $77 million ($122 million pre-tax)
relating to its decision to accelerate the retirement of certain
jet and turboprop aircraft.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
There were no changes in or disagreements on any matters of
accounting principles or financial statement disclosure between the
Company and its independent auditors during the registrant's two
most recent fiscal years or any subsequent interim period.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Incorporated herein by reference from the Company's definitive
proxy statement for the annual meeting of stockholders to be held
on May 23, 2000.
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated herein by reference from the Company's definitive
proxy statement for the annual meeting of stockholders to be held
on May 23, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
Incorporated herein by reference from the Company's definitive
proxy statement for the annual meeting of stockholders to be held
on May 23, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated herein by reference from the Company's definitive
proxy statement for the annual meeting of stockholders to be held
on May 23, 2000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
(a) The following financial statements are included in Item 8.
"Financial Statements and Supplementary Data":
Report of Independent Auditors
Consolidated Statements of Operations for each of the Three
Years in the Period Ended December 31, 1999
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Cash Flows for each of the Three
Years in the Period Ended December 31, 1999
Consolidated Statements of Redeemable Preferred Stock and
Common Stockholders' Equity for each of the Three Years
in the Period Ended December 31, 1999
Notes to Consolidated Financial Statements
(b) Financial Statement Schedules:
Report of Independent Auditors
Schedule II - Valuation and Qualifying Accounts
All other schedules have been omitted because they are
inapplicable, not required, or the information is included
elsewhere in the consolidated financial statements or notes
thereto.
(c) Reports on Form 8-K:
None.
(d) See accompanying Index to Exhibits.
REPORT OF INDEPENDENT AUDITORS
We have audited the consolidated financial statements of
Continental Airlines, Inc. (the "Company") as of December 31, 1999
and 1998, and for each of the three years in the period ended
December 31, 1999, and have issued our report thereon dated January
17, 2000 (included elsewhere in this Form 10-K). Our audits also
included the financial statement schedule for these related periods
listed in Item 14(b) of this Form 10-K. This schedule is the
responsibility of the Company's management. Our responsibility is
to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
Houston, Texas
January 17, 2000
CONTINENTAL AIRLINES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1999, 1998, and 1997
(In millions)
Allowance
for Doubtful Allowance for
Receivables Obsolescence
Balance, December 31, 1996 . . . $ 27 $ 47
Additions charged to expense . 12 12
Deductions from reserve. . . . (21) (4)
Other. . . . . . . . . . . . . 5 (4)
Balance, December 31, 1997 . . . 23 51
Additions charged to expense . 18 17
Deductions from reserve. . . . (18) (16)
Other. . . . . . . . . . . . . (1) (6)
Balance, December 31, 1998 . . . 22 46
Additions charged to expense . 12 19
Deductions from reserve. . . . (12) (5)
Other. . . . . . . . . . . . . (2) (1)
Balance, December 31, 1999 . . . $ 20 $ 59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CONTINENTAL AIRLINES, INC.
By /s/ LAWRENCE W. KELLNER
Lawrence W. Kellner
Executive Vice President and
Chief Financial Officer
(On behalf of Registrant)
Date: February 11, 2000
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons in the
capacities indicated on February 11, 2000.
Signature Capacity
/s/ GORDON M. BETHUNE Chairman and Chief Executive Officer
Gordon M. Bethune (Principal Executive Officer)
/s/ LAWRENCE W. KELLNER Executive Vice President and
Lawrence W. Kellner Chief Financial Officer
(Principal Financial Officer)
/s/ CHRIS KENNY Staff Vice President and Controller
Chris Kenny (Principal Accounting Officer)
THOMAS J. BARRACK, JR.* Director
Thomas J. Barrack, Jr.
DAVID BONDERMAN* Director
David Bonderman
/s/GREGORY D. BRENNEMAN Director
Gregory D. Brenneman
KIRBYJON CALDWELL* Director
Kirbyjon Caldwell
PATRICK FOLEY* Director
Patrick Foley
DOUGLAS McCORKINDALE* Director
Douglas McCorkindale
GEORGE G. C. PARKER* Director
George G. C. Parker
RICHARD W. POGUE* Director
Richard W. Pogue
WILLIAM S. PRICE III* Director
William Price III
DONALD L. STURM* Director
Donald L. Sturm
KAREN HASTIE WILLIAMS* Director
Karen Hastie Williams
CHARLES A. YAMARONE* Director
Charles A. Yamarone
*By /s/ LAWRENCE W. KELLNER
Lawrence W. Kellner
Attorney in-fact
February 11, 2000
INDEX TO EXHIBITS
OF
CONTINENTAL AIRLINES, INC.
2.1 Revised Third Amended Disclosure Statement Pursuant to
Section 1125 of the Bankruptcy Code with Respect to
Debtors' Revised Second Amended Joint Plan of
Reorganization Under Chapter 11 of the United States
Bankruptcy Code, as filed with the Bankruptcy Court on
January 13, 1993 -- incorporated by reference from
Exhibit 2.1 to Continental's Annual Report on Form 10-K
for the year ended December 31, 1992 (File no. 0-9781).
2.2 Modification of Debtors' Revised Second Amended Joint
Plan of Reorganization dated March 12, 1993 --
incorporated by reference to Exhibit 2.2 to Continental's
Current Report on Form 8-K, dated April 16, 1993 (File
no. 0-9781) (the "4/93 8-K").
2.3 Second Modification of Debtors' Revised Second Amended
Joint Plan of Reorganization, dated April 8, 1993 --
incorporated by reference to Exhibit 2.3 to the 4/93 8-K.
2.4 Third Modification of Debtors' Revised Second Amended
Joint Plan of Reorganization, dated April 15, 1993 --
incorporated by reference to Exhibit 2.4 to the 4/93 8-K.
2.5 Confirmation Order, dated April 16, 1993 -- incorporated
by reference to Exhibit 2.5 to the 4/93 8-K.
3.1 Amended and Restated Certificate of Incorporation of
Continental -- incorporated by reference to
Exhibit 4.1(a) to Continental's Form S-8 registration
statement (No. 333-06993) (the "1996 S-8").
3.2 By-laws of Continental, as amended to date --
incorporated by reference to Exhibit 99.3 to
Continental's Current Report on Form 8-K dated November
20, 1998 (the "11/98 8-K").
4.1 Specimen Class A Common Stock Certificate of the Company
-- incorporated by reference to Exhibit 4.1 to
Continental's Annual Report on Form 10-K for the year
ended December 31, 1995 (File no. 0-9781) (the "1995 10-
K").
4.2 Specimen Class B Common Stock Certificate of the Company
-- incorporated by reference to Exhibit 4.1 to
Continental's Form S-1 Registration Statement (No. 33-
68870) (the "1993 S-1").
4.3 Rights Agreement, dated as of November 20, 1998, between
Continental and Harris Trust and Savings Bank --
incorporated by reference to Exhibit 4.1 to the 11/98 8-
K.
4.3(a) First Amendment to Rights Agreement, dated as of February
8, 2000 -- incorporated by reference to Exhibit 4.1 to
Continental's Current Report on Form 8-K dated February
8, 2000 (File No. 0-9781) (the "2/00 8-K").
4.4 Certificate of Designation of Series A Junior
Participating Preferred Stock, included as Exhibit A to
Exhibit 4.3 -- incorporated by reference to Exhibit 4.2
to the 11/98 8-K.
4.5 Form of Right Certificate, included as Exhibit B to
Exhibit 4.3 -- incorporated by reference to Exhibit 4.3
to the 11/98 8-K.
4.6 Summary of Rights to Purchase Preferred Shares, included
as Exhibit C to Exhibit 4.3 -- incorporated by reference
to Exhibit 4.4 to the 11/98 8-K.
4.7 Amended and Restated Governance Agreement, dated February
8, 2000, among the Company, Northwest Airlines
Corporation ("Northwest") and Northwest Airlines Holdings
Corporation ("Northwest Holdings") -- incorporated by
reference to Exhibit 99.2 to the 2/00 8-K.
4.8 Supplemental Agreement dated November 20, 1998 among the
Company, Newbridge Parent Corporation and Northwest --
incorporated by reference to Exhibit 99.7 to the 11/98 8-
K.
4.8(a) First Amendment to Supplemental Agreement, dated as of
February 8, 2000, among the Company, Northwest and
Northwest Holdings -- incorporated by reference to
Exhibit 99.3 to the 2/00 8-K.
4.9 Amended and Restated Registration Rights Agreement dated
April 19, 1996 among the Company, Air Partners, L.P. and
Air Canada -- incorporated by reference to Exhibit 10.2
to Continental's Form S-3 Registration Statement (No.
333-02701).
4.9(a) Amendment dated November 20, 1998 to the Amended and
Restated Registration Rights Agreement among the Company,
Air Partners and Northwest -- incorporated by reference
to Exhibit 99.5 to the 11/98 8-K.
4.10 Warrant Agreement dated as of April 27, 1993, between
Continental and Continental as warrant agent --
incorporated by reference to Exhibit 4.7 to the 4/93 8-K.
4.11 Continental hereby agrees to furnish to the Commission,
upon request, copies of certain instruments defining the
rights of holders of long-term debt of the kind described
in Item 601(b)(4)(iii)(A) of Regulation S-K.
9.1 Northwest Airlines/Air Partners Voting Trust Agreement
dated as of November 20, 1998 among the Company,
Northwest, Northwest Holdings, Air Partners and
Wilmington Trust Company, as Trustee -- incorporated by
reference to Exhibit 99.4 to the 11/98 8-K.
9.1(a) First amendment to Northwest Airlines/Air Partners Voting
Trust Agreement, dated as of February 8, 2000 between the
Company and Northwest -- incorporated by reference to
Exhibit 99.1 to the 2/00 8-K.
10.1 Agreement of Lease dated as of January 11, 1985, between
the Port Authority of New York and New Jersey and People
Express Airlines, Inc., regarding Terminal C (the
"Terminal C Lease") -- incorporated by reference to
Exhibit 10.61 to the Annual Report on Form 10-K (File No.
0-9781) of People Express Airlines, Inc. for the year
ended December 31, 1984.
10.1(a) Supplemental Agreements Nos. 1 through 6 to the Terminal
C Lease -- incorporated by reference to Exhibit 10.3 to
Continental's Annual Report on Form 10-K (File No. 1-
8475) for the year ended December 31, 1987 (the "1987 10-
K").
10.1(b) Supplemental Agreement No. 7 to the Terminal C Lease --
incorporated by reference to Exhibit 10.4 to
Continental's Annual Report on Form 10-K (File No. 1-
8475) for the year ended December 31, 1988.
10.1(c) Supplemental Agreements No. 8 through 11 to the Terminal
C Lease -- incorporated by reference to Exhibit 10.10 to
the 1993 S-1.
10.1(d) Supplemental Agreements No. 12 through 15 to the Terminal
C Lease -- incorporated by reference to Exhibit 10.2(d)
to the 1995 10-K.
10.1(e) Supplemental Agreement No. 16 to the Terminal C Lease --
incorporated by reference to Exhibit 10.1(e) to
Continental's Annual Report on Form 10-K for the year
ended December 31, 1997 (File no. 0-9781) (the "1997 10-
K").
10.1(f) Supplemental Agreement No. 17 to the Terminal C Lease.
(2)(3)
10.2 Assignment of Lease with Assumption and Consent dated as
of August 15, 1987, among the Port Authority of New York
and New Jersey, People Express Airlines, Inc. and
Continental -- incorporated by reference to Exhibit
10.2 to the 1987 10-K.
10.3* Amended and restated employment agreement between the
Company and Gordon Bethune, dated as of November 20, 1998
-- incorporated by reference to Exhibit 10.3 to the 1998
10-K.
10.3(a)* Amendment dated as of May 19, 1999 to Mr. Bethune's
Employment Agreement -- incorporated by reference to
Exhibit 10.2 to Continental's Quarterly Report on Form
10-Q for the quarter ended June 30, 1999 (File No. 0-
9781) (the "1999 Q-2 10-Q").
10.3(b)* Amendment dated as of September 16, 1999 to Mr. Bethune's
Employment Agreement -- incorporated by reference to
Exhibit 10.2 to Continental's Quarterly Report on Form
10-Q for the quarter ended September 30,1999 (File No. 0-
9781) (the "1999 Q-3 10-Q").
10.4* Amended and restated employment agreement between the
Company and Gregory Brenneman, dated as of November 20,
1998 -- incorporated by reference to Exhibit 10.4 to the
1998 10-K.
10.4(a)* Amendment dated as of May 19, 1999 to Mr. Brenneman's
Employment Agreement -- incorporated by reference to
Exhibit 10.3 to the 1999 Q-2 10-Q.
10.4(b)* Amendment dated as of September 16, 1999 to Mr.
Brenneman's Employment Agreement -- incorporated by
reference to Exhibit 10.3 to the 1999 Q-3 10-Q.
10.5* Amended and restated employment agreement dated as of
September 16, 1999 between the Company and Lawrence
Kellner -- incorporated by reference to Exhibit 10.4 to
the 1999 Q-3 10-Q.
10.6* Amended and restated employment agreement dated as of
September 16, 1999 between the Company and C.D. McLean --
incorporated by reference to Exhibit 10.5 to the 1999 Q-3
10-Q.
10.7* Amended and restated employment agreement dated September
16, 1999 between the Company and Jeffery A. Smisek --
incorporated by reference to Exhibit 10.6 to the 1999 Q-3
10-Q.
10.8* Stay Bonus Agreement between the Company and Gordon
Bethune -- incorporated by reference to Exhibit 10.3 to
Continental's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998 (File no. 0-9781) (the "1998
Q-2 10-Q").
10.9* Stay Bonus Agreement between the Company and Gregory
Brenneman -- incorporated by reference to Exhibit 10.4 to
the 1998 Q-2 10-Q.
10.10* Stay Bonus Agreement between the Company and Lawrence
Kellner -- incorporated by reference to Exhibit 10.5 to
the 1998 Q-2 10-Q.
10.11* Stay Bonus Agreement between the Company and C.D. McLean
-- incorporated by reference to Exhibit 10.6 to the 1998
Q-2 10-Q.
10.12* Stay Bonus Agreement between the Company and Jeffery
Smisek -- incorporated by reference to Exhibit 10.7 to
the 1998 Q-2 10-Q.
10.13* Forms of Stay Bonus Agreements for other executive
officers -- incorporated by reference to Exhibit 10.8 to
the 1998 Q-2 10-Q.
10.14* Executive Bonus Program -- incorporated by reference to
Appendix B to the Company's proxy statement relating its
annual meeting of stockholders held on June 26, 1996.
10.14(a)* Amendment of Executive Bonus Program effective January 1,
1999 -- incorporated by reference to Exhibit 10.2 to
Continental's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999 (File no. 0-9781) (the "1999
Q-1 10-Q").
10.14(b)* Amendment of Executive Bonus Program dated February 8,
2000. (3)
10.15* Continental Airlines, Inc. 1994 Incentive Equity Plan
("1994 Equity Plan") -- incorporated by reference to
Exhibit 4.3 to the Company's Form S-8 Registration
Statement (No. 33-81324).
10.15(a)* First Amendment to 1994 Equity Plan -- incorporated by
reference to Exhibit 10.1 to Continental's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1995 (File no. 0-9781).
10.15(b)* Second Amendment to 1994 Equity Plan -- incorporated by
reference to Exhibit 4.3(c) to the 1996 S-8.
10.15(c)* Third Amendment to 1994 Equity Plan -- incorporated by
reference to Exhibit 10.4 to Continental's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1996 (File no. 0-9781).
10.15(d)* Fourth Amendment to 1994 Equity Plan -- incorporated by
reference to Exhibit 10.10(d) to the 1997 10-K.
10.15(e)* Form of Employee Stock Option Grant pursuant to the 1994
Equity Plan -- incorporated by reference to Exhibit
10.10(e) to the 1997 10-K.
10.15(f)* Form of Outside Director Stock Option Grant pursuant to
the 1994 Equity Plan -- incorporated by reference to
Exhibit 10.10(f) to the 1997 10-K.
10.15(g)* Form of Restricted Stock Grant pursuant to the 1994
Equity Plan -- incorporated by reference to Exhibit
10.10(g) to the 1997 10-K.
10.16* Continental Airlines, Inc. 1997 Stock Incentive Plan
("1997 Incentive Plan") -- incorporated by reference to
Exhibit 4.3 to Continental's Form S-8 Registration
Statement (No. 333-23165).
10.16(a)* First Amendment to 1997 Incentive Plan -- incorporated by
reference to Exhibit 10.11(a) to the 1997 10-K.
10.16(b)* Form of Employee Stock Option Grant pursuant to the 1997
Incentive Plan -- incorporated by reference to Exhibit
10.11(b) to the 1997 10-K.
10.16(c)* Form of Outside Director Stock Option Grant pursuant to
the 1997 Incentive Plan -- incorporated by reference to
Exhibit 10.11(c) to the 1997 10-K.
10.17* Amendment and Restatement of the 1994 Equity Plan and the
1997 Incentive Plan -- incorporated by reference to
Exhibit 10.19 to the 1998 10-K.
10.18* Continental Airlines, Inc. 1998 Stock Incentive Plan
("1998 Incentive Plan") -- incorporated by reference to
Exhibit 4.3 to Continental's Form S-8 Registration
Statement (No. 333-57297) (the "1998 S-8").
10.18(a)* Form of Employee Stock Option Grant pursuant to the 1998
Incentive Plan -- incorporated by reference to Exhibit
4.4 to the 1998 S-8.
10.19* Amended and Restated Continental Airlines, Inc. Deferred
Compensation Plan. (3)
10.20* Continental Airlines, Inc. Incentive Plan 2000. (3)
10.21* Continental Airlines, Inc. Executive Bonus Performance
Award Program, as amended. (3)
10.22* Continental Airlines, Inc. Long Term Incentive
Performance Award Program. (3)
10.23* Form of Letter Agreement relating to certain flight
benefits between the Company and each of its nonemployee
directors -- incorporated by reference to Exhibit 10.19
to the 1995 10-K.
10.24 Purchase Agreement No. 1783, including exhibits and side
letters, between the Company and Boeing, effective
April 27, 1993, relating to the purchase of Boeing 757
aircraft ("P.A. 1783") -- incorporated by reference to
Exhibit 10.2 to Continental's Quarterly Report on Form
10-Q for the quarter ended June 30, 1993 (File no. 0-
9781). (1)
10.24(a) Supplemental Agreement No. 4 to P.A. 1783, dated March
31, 1995 -- incorporated by reference to Exhibit
10.12(a) to Continental's Annual Report on Form 10-K for
the year ended December 31, 1994 (File no. 0-9781) (the
"1994 10-K"). (1)
10.24(b) Supplemental Agreement No. 6 to P.A. 1783, dated June 13,
1996 -- incorporated by reference to Exhibit 10.6 to
Continental's Quarterly Report on Form 10-Q for the
quarter ending June 30, 1996 (File no. 0-9781) (the "1996
Q-2 10-Q"). (1)
10.24(c) Supplemental Agreement No. 7 to P.A. 1783, dated July 23,
1996 -- incorporated by reference to Exhibit 10.6(a) to
the 1996 Q-2 10-Q. (1)
10.24(d) Supplemental Agreement No. 8 to P.A. 1783, dated October
27, 1996 -- incorporated by reference to Exhibit 10.11(d)
to Continental's Annual Report on Form 10-K for the year
ended December 31, 1996 (File no. 0-9781) (the "1996 10-
K"). (1)
10.24(e) Letter Agreement No. 6-1162-GOC-044 to P.A. 1783, dated
March 21, 1997 -- incorporated by reference to Exhibit
10.4 to Continental's Quarterly Report on Form 10-Q for
the quarter ending March 31, 1997 (File no. 0-9781) (the
"1997 Q-1 10-Q"). (1)
10.24(f) Supplemental Agreement No. 9 to P.A. 1783, dated August
13, 1997 -- incorporated by reference to Exhibit 10.1 to
Continental's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997 (File no. 0-9781). (1)
10.24(g) Supplemental Agreement No. 10, including side letters, to
P.A. 1783, dated October 10, 1997 -- incorporated by
reference to Exhibit 10.13(g) to the 1997 10-K. (1)
10.24(h) Supplemental Agreement No. 11, including exhibits and
side letters, to P.A. 1783, dated July 30, 1998 --
incorporated by reference to Exhibit 10.2 to
Continental's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998 (File no. 0-9781) (the
"1998 Q-3 10-Q"). (1)
10.24(i) Supplemental Agreement No. 12, including side letter, to
P.A. 1783, dated September 29, 1998 -- incorporated by
reference to Exhibit 10.23(i) to the 1998 10-K. (1)
10.24(j) Supplemental Agreement No. 13 to P.A. 1783, dated
November 16, 1998 -- incorporated by reference to Exhibit
10.23(j) to the 1998 10-K. (1)
10.24(k) Supplemental Agreement No. 14, including side letter, to
P.A. 1783, dated December 17, 1998 -- incorporated by
reference to Exhibit 10.23(k) to the 1998 10-K. (1)
10.24(l) Supplemental Agreement No. 15, including side letter, to
P.A. 1783, dated February 18, 1999 -- incorporated by
reference to Exhibit 10.3 to the 1999 Q-1 10-Q. (1)
10.24(m) Supplemental Agreement No. 16, including side letters, to
P.A. 1783, dated July 2, 1999 -- incorporated by
reference to Exhibit 10.7 to the 1999 Q-3 10-Q. (2)
10.25 Purchase Agreement No. 1951, including exhibits and side
letters thereto, between the Company and Boeing, dated
July 23, 1996, relating to the purchase of Boeing 737
aircraft ("P.A. 1951") -- incorporated by reference to
Exhibit 10.8 to the 1996 Q-2 10-Q. (1)
10.25(a) Supplemental Agreement No. 1 to P.A. 1951, dated October
10, 1996 -- incorporated by reference to Exhibit 10.14(a)
to the 1996 10-K. (1)
10.25(b) Supplemental Agreement No. 2 to P.A. 1951, dated March 5,
1997 -- incorporated by reference to Exhibit 10.3 to the
1997 Q1 10-Q. (1)
10.25(c) Supplemental Agreement No. 3, including exhibit and side
letter, to P.A. 1951, dated July 17, 1997 -- incorporated
by reference to Exhibit 10.14(c) to the 1997 10-K. (1)
10.25(d) Supplemental Agreement No. 4, including exhibits and side
letters, to P.A. 1951, dated October 10, 1997 --
incorporated by reference to Exhibit 10.14(d) to the 1997
10-K. (1)
10.25(e) Supplemental Agreement No. 5, including exhibits and side
letters, to P.A. 1951 dated October 10, 1997 --
incorporated by reference to Exhibit 10.1 to the 1998 Q-2
10-Q. (1)
10.25(f) Supplemental Agreement No. 6, including exhibits and side
letters, to P.A. 1951, dated July 30, 1998 -- incor-
porated by reference to Exhibit 10.1 to the 1998 Q-3 10-
Q. (1)
10.25(g) Supplemental Agreement No. 7, including side letters, to
P.A. 1951, dated November 12, 1998 -- incorporated by
reference to Exhibit 10.24(g) to the 1998 10-K. (1)
10.25(h) Supplemental Agreement No. 8, including side letters, to
P.A. 1951, dated December 7, 1998 -- incorporated by
reference to Exhibit 10.24(h) to the 1998 10-K. (1)
10.25(i) Letter Agreement No. 6-1162-GOC-131R1 to P.A. 1951, dated
March 26, 1998 -- incorporated by reference to Exhibit
10.1 to Continental's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998 (File no. 0-9781). (1)
10.25(j) Supplemental Agreement No. 9, including side letters, to
P.A. 1951, dated February 18, 1999 -- incorporated by
reference to Exhibit 10.4 to the 1999 Q-1 10-Q. (1)
10.25(k) Supplemental Agreement No. 10, including side letters, to
P.A. 1951, dated March 19, 1999 -- incorporated by
reference to Exhibit 10.4(a) to the 1999 Q-1 10-Q. (1)
10.25(l) Supplemental Agreement No. 11, including side letters, to
P.A. 1951, dated May 14, 1999 -- incorporated by
reference to Exhibit 10.7 to the 1999 Q-2 10-Q. (1)
10.25(m) Supplemental Agreement No. 12 to P.A. 1951, dated July 2,
1999 -- incorporated by reference to Exhibit 10.8 to the
1999 Q-3 10-Q. (2)
10.25(n) Supplemental Agreement No. 13 to P.A. 1951, dated October
13, 1999. (2)(3)
10.25(o) Supplemental Agreement No. 14 to P.A. 1951, dated
December 13, 1999. (2)(3)
10.26 Aircraft General Terms Agreement between the Company and
Boeing, dated October 10, 1997 -- incorporated by
reference to Exhibit 10.15 to the 1997 10-K. (1)
10.26(a) Letter Agreement No. 6-1162-GOC-136 between the Company
and Boeing, dated October 10, 1997, relating to certain
long-term aircraft purchase commitments of the Company --
incorporated by reference to Exhibit 10.15(a) to the 1997
10-K. (1)
10.27 Purchase Agreement No. 2060, including exhibits and side
letters, between the Company and Boeing, dated October
10, 1997, relating to the purchase of Boeing 767 aircraft
("P.A. 2060") -- incorporated by reference to Exhibit
10.16 to the 1997 10-K. (1)
10.27(a) Supplemental Agreement No. 1 to P.A. 2060 dated December
18, 1997 -- incorporated by reference to Exhibit 10.16(a)
to the 1997 10-K. (1)
10.27(b) Supplemental Agreement No. 2 to P.A. 2060 dated June 8,
1999 -- incorporated by reference to Exhibit 10.8 to the
1999 Q-2 10-Q. (1)
10.28 Purchase Agreement No. 2061, including exhibits and side
letters, between the Company and Boeing, dated October
10, 1997, relating to the purchase of Boeing 777 aircraft
("P.A. 2061") -- incorporated by reference to Exhibit
10.17 to the 1997 10-K. (1)
10.28(a) Supplemental Agreement No. 1 to P.A. 2061 dated December
18, 1997 -- incorporated by reference to Exhibit 10.17(a)
as to the 1997 10-K. (1)
10.28(b) Supplemental Agreement No. 2, including side letter, to
P.A. 2061, dated July 30, 1998 -- incorporated by
reference to Exhibit 10.27(b) to the 1998 10-K. (1)
10.28(c) Supplemental Agreement No. 3, including side letter, to
P.A. 2061, dated September 25, 1998 -- incorporated by
reference to Exhibit 10.27(c) to the 1998 10-K. (1)
10.28(d) Supplemental Agreement No. 4, including side letter, to
P.A. 2061, dated February 3, 1999 -- incorporated by
reference to Exhibit 10.5 to the 1999 Q-1 10-Q. (1)
10.28(e) Supplemental Agreement No. 5, including side letter, to
P.A. 2061, dated March 26, 1999 -- incorporated by
reference to Exhibit 10.5(a) to the 1999 Q-1 10-Q. (1)
10.28(f) Supplemental Agreement No. 6, including side letter, to
P.A. 2061, dated May 14, 1999 -- incorporated by
reference to Exhibit 10.9 to the 1999 Q-2 10-Q. (1)
10.29 Purchase Agreement No. 2211, including exhibits and side
letters thereto, between the Company and Boeing, dated
November 16, 1998, relating to the purchase of Boeing 767
aircraft ("P.A. 2211") -- incorporated by reference to
Exhibit 10.28 to the 1998 10-K. (1)
10.29(a) Supplemental Agreement No. 1, including side letters, to
P.A. 2211, dated July 2, 1999 -- incorporated by
reference to Exhibit 10.9 to the 1999 Q-2 10-Q. (1)
10.30 Lease Agreement dated as of May 1992 between the City and
County of Denver, Colorado and Continental regarding
Denver International Airport -- incorporated by reference
to Exhibit 10.17 to the 1993 S-1.
10.30(a) Supplemental Lease Agreement, including an exhibit
thereto, dated as of April 3, 1995 between the City and
County of Denver, Colorado and Continental and United Air
Lines, Inc. regarding Denver International Airport --
incorporated by reference to Exhibit 10.15(a) to the 1994
10-K.
10.31 Airport Use and Lease Agreement dated as of January 1,
1998 between the Company and the City of Houston, Texas
regarding Bush Intercontinental -- incorporated by
reference to Exhibit 10.30 to the 1998 10-K.
10.31(a) Special Facilities Lease Agreement dated as of March 1,
1997 by and between the Company and the City of Houston,
Texas regarding an automated people mover project at Bush
Intercontinental -- incorporated by reference to Exhibit
10.30(a) to the 1998 10-K.
10.31(b) Amended and Restated Special Facilities Lease Agreement
dated as of December 1, 1998 by and between the Company
and the City of Houston, Texas regarding certain terminal
improvement projects at Bush Intercontinental --
incorporated by reference to Exhibit 10.30(b) to the 1998
10-K.
10.31(c) Amended and Restated Special Facilities Lease Agreement
dated December 1, 1998 by and between the Company and the
City of Houston, Texas regarding certain airport
improvement projects at Bush Intercontinental --
incorporated by reference to Exhibit 10.30(c) to the 1998
10-K.
10.32 Agreement and Lease dated as of May 1987, as
supplemented, between the City of Cleveland, Ohio and
Continental regarding Hopkins International --
incorporated by reference to Exhibit 10.6 to
Continental's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1993 (File no. 0-9781).
10.32(a) Special Facilities Lease Agreement dated as of October
24, 1997 by and between the Company and the City of
Cleveland, Ohio regarding certain concourse expansion
projects at Hopkins International (the "1997 SFLA") --
incorporated by reference to Exhibit 10.31(a) to the 1998
10-K.
10.32(b) First Supplemental Special Facilities Lease Agreement
dated as of March 1, 1998, and relating to the 1997 SFLA
-- incorporated by reference to Exhibit 10.1 to the 1999
Q-1 10-Q.
10.33 Special Facilities Lease Agreement dated as of December
1, 1989 by and between the Company and the City of
Cleveland, Ohio regarding Cleveland Hopkins International
Airport (the "1989 SFLA") -- incorporated by reference to
Exhibit 10.1 to the 1999 Q-3 10-Q.
10.33(a) First Supplemental Special Facilities Lease Agreement
dated as of March 1, 1998, and relating to the 1989 SFLA
-- incorporated by reference to Exhibit 10.1(a) to the
1999 Q-3 10-Q.
10.33(b) Second Supplemental Special Facilities Lease Agreement
dated as of March 1, 1998, and relating to the 1989 SFLA
-- incorporated by reference to Exhibit 10.1(b) to the
1999 Q-3 10-Q.
10.34 Third Revised Investment Agreement, dated April 21, 1994,
between America West Airlines, Inc. and AmWest Partners,
L.P. -- incorporated by reference to Exhibit 1 to
Continental's Schedule 13D relating to America West
Airlines, Inc. filed on August 25, 1994.
10.35 Letter Agreement No. 11 between the Company and General
Electric Company, dated December 22, 1997, relating to
certain long-term engine purchase commitments of the
Company -- incorporated by reference to Exhibit 10.23 to
the 1997 10-K. (1)
18.1 Letter from Ernst & Young LLP re change in accounting
principle. (3)
21.1 List of Subsidiaries of Continental. (3)
23.1 Consent of Ernst & Young LLP. (3)
24.1 Powers of attorney executed by certain directors and
officers of Continental. (3)
27.1 Financial Data Schedule. (3)
__________
* These exhibits relate to management contracts or compensatory
plans or arrangements.
(1) The Commission has granted confidential treatment for a
portion of this exhibit.
(2) The Company has applied to the Commission for confidential
treatment of a portion of this exhibit.
(3) Filed herewith.