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UNITED STATES
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, 1996
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.)
2929 Allen Parkway, Suite 2010, Houston, Texas 77019
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 713-834-2950
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, Inc.
par value $.01 per share
Class B Common Stock, New York Stock Exchange, Inc.
par value $.01 per share
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 stock held by non-
affiliates of the registrant was $1.6 billion as of February 14,
1997.
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Section 12, 13 or
15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes X No
_______________
As of February 14, 1997, 8,661,564 shares of Class A Common Stock
and 48,802,445 shares of Class B Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for Annual Meeting
of Stockholders to be held on May 16, 1997: 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 1996 revenue
passenger miles) and, together with its wholly owned subsidiary,
Continental Express, Inc. ("Express"), and its 91%-owned
subsidiary, Continental Micronesia, Inc. ("CMI"), each a Delaware
corporation, serves 188 airports worldwide. As of February 14,
1997, Continental flies to 58 international destinations and offers
additional connecting service through alliances with foreign
carriers. Continental recently announced expanded service from
Newark to Dusseldorf, Germany (scheduled to commence March 19,
1997), to Lisbon, Portugal (scheduled to commence May 1, 1997) and
to Birmingham, England (scheduled to commence July 1, 1997). In
addition, Continental recently entered into agreements with Air
France for a joint marketing arrangement that will involve service
from Newark and Houston to Paris (scheduled to commence in the
third quarter of 1997), subject to governmental approval, and
Aeroflot Russian International Airlines ("Aeroflot") for a joint
marketing arrangement that will involve service from Newark to
Moscow (scheduled to commence in the third quarter of 1997),
subject to governmental approval. Also, Continental recently
entered into an agreement with Alitalia Airlines ("Alitalia") to
expand the companies' existing code-share relationship to include
additional flights between the United States and Italy, which is
expected to commence in the second quarter of 1997. Continental is
one of the leading airlines providing service to Mexico and Central
America, serving more destinations there than any other United
States airline. In addition, Continental flies to four cities in
South America. 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 1994, Continental experienced operational problems in connection
with its rapid expansion of its network of short haul, no frills,
low fare flights resulting in significant losses. In early 1995,
Continental's new management team, led by Gordon Bethune (Chairman
of the Board and Chief Executive Officer) and Greg Brenneman
(President and Chief Operating Officer), put in place a
comprehensive strategic and operational plan designed to
fundamentally change the Company. The plan, labeled the "Go
Forward Plan", is a "back to basics" approach, which focuses on
improving profitability and financial condition, delivering a
consistent, reliable, quality product to customers and improving
employee morale and working conditions. Management believes that
the initiatives put in place under the Go Forward Plan and the
support of the Continental employees contributed significantly to
the Company's record $224 million of net income in 1995 and $319
million of net income in 1996. During the past two years, the
Company has achieved substantial improvements in revenue per
available seat mile, load factor and yields, growth of cash from
operations, consistent interior and exterior aircraft appearance,
and significant improvements in rankings for on-time performance,
mishandled bags, customer complaints and involuntary denied
boardings (as reported by the U.S. Department of Transportation
("DOT")), as well as improved employee relations.
In 1996, the Company continued to experience operational success as
evidenced by its continued improvement in each of the four key
performance categories tracked by the DOT. In the most recent 12-
month reporting period, Continental ranked first for fewest
involuntary denied boardings, second for on-time performance,
second for fewest mishandled bags, and third for fewest customer
complaints compared to its competitors. In addition, Continental
won the J.D. Power and Associates award for customer satisfaction
among the nine major U.S. carriers on long-haul (500+ miles)
flights, based on an independent survey of frequent flyers, and was
recently named "Airline of the Year" by the leading aviation trade
magazine, Air Transport World.
The Company's 1996-1997 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
new initiatives intended to build upon Continental's operational
and strategic strengths.
Fly to Win
The Company's 1996-1997 Fly to Win initiatives center around three
principal themes: Focus on Hub Operations, Improve Business/
Leisure Mix and Develop an Alliance Network.
Focus on Hub Operations. Continental will continue to add select
flights and refine its flight schedules to capitalize on the
strength of its hubs. In addition, Continental plans to focus on
expanding international traffic through service to new destinations
and additional code-sharing and other marketing alliances with
certain foreign carriers.
Management believes that by adding domestic and international
flights to the Company's hubs, attracting more international
passengers through alliances with foreign carriers and 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.
Improve Business/Leisure Mix. The Company's passenger load factors
have increased from 65.6% in 1995 to 68.1% in 1996, which
facilitates management of the business versus leisure traveler mix
on its aircraft. Since the average business traveler generally
pays a higher fare (on a revenue-per-seat-mile basis) for the
convenience of being able to make and change last minute travel
plans, increases in business traffic contribute disproportionately
to incremental profitability. Unrestricted business fares
accounted for approximately 42.8% of the Company's passenger
revenue in 1996 compared to 38.3% in 1995 (excluding CMI and
Express). Many of the Company's product and schedule improvements
have been made to appeal to business travelers. The Company has
invested in state-of-the-art revenue management and pricing systems
to enhance its ability to manage its fare mix.
Develop an Alliance Network. Management believes that developing
a network of international alliance partners will better leverage
the Company's hub assets and result in improved returns to the
Company. Focusing on multiple tactical alliances allows the
Company to benefit from the strengths of its alliance partners in
their local markets while reducing the Company's reliance on any
individual alliance partner.
The Company seeks alliance relationships that, together with the
Company's own flying, will permit expanded service through Newark
to major destinations in South America, Europe and Asia, and
expanded service through Houston to South America and Europe as
well as service to Japan. Certain route authorities that would be
required for the Company's own service to certain of these
destinations are not currently available to the Company. See
"Foreign Carrier Alliances" below for a discussion of new alliances
recently entered into with other carriers.
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 to target the Company's interest and
lease expense. Through refinancing and other initiatives,
Continental has achieved substantial reductions in interest and
lease expense attributable to financing arrangements that were
entered into when the Company was in a less favorable financial
position.
In 1996, the Company completed a number of transactions intended to
strengthen its long-term financial position and enhance earnings:
- In the first and second quarters of 1996, the Company
financed one owned aircraft and exercised its right under 22
existing leveraged aircraft leases to cause the owner/
lessor's debt underlying these leases to be refinanced. The
lower borrowing costs obtained in the refinancing allowed
Continental's operating lease expense for the affected
aircraft to be reduced by more than $17 million annually.
- In January and February 1996, Continental repurchased or
redeemed without prepayment penalty the remaining amount of
its Series A convertible secured debentures for $125 million
(including payment-in-kind interest of $7 million).
- In February 1996, Continental sold approximately 1.4 million
of the 1.8 million shares it owned in America West Airlines,
Inc. ("America West"), realizing net proceeds of $25 million
and recognizing a gain of $13 million. In May 1996, the
Company sold all of its 802,860 America West warrants,
realizing net proceeds of $7 million and recognizing a gain
of $5 million.
- In March 1996, Continental completed the offering of $230
million of 6-3/4% convertible subordinated notes.
- In March 1996, Continental repaid $257 million of secured
indebtedness to General Electric Capital Corporation, General
Electric Company and certain affiliates (any one or more of
such entities, "GE") (of which $47 million was required as a
result of the convertible debt financing and the America West
stock sale and $210 million was an optional prepayment),
resulting in the elimination of certain restrictive
covenants.
- In July 1996, CMI consummated a $320 million secured term
loan financing with a group of banks and other financial
institutions. Continental and CMI used the net proceeds,
together with available cash, to prepay approximately $324
million in principal amount of GE indebtedness. The bank
financing reduced interest expense by $3 million in 1996 and
is expected to result in a savings in interest expense of $6
million in 1997, based on current rates. The bank financing
does not contain any restrictive covenants at the Continental
parent level, and none of the assets of the parent company
(other than its stock in Air Micronesia, Inc. ("AMI"), CMI's
parent company) is pledged in connection with the financing.
Accordingly, this transaction freed up over $1 billion of
collateral at Continental which was previously pledged under
the terms of the GE debt agreements.
- In December 1996, the Company sold $250 million principal
amount of 9-1/2% senior notes due 2001. The net proceeds of
$244 million were added to the Company's available cash
resources.
Make Reliability a Reality
Customer service continues to be the focus in 1997. Management
believes Continental's on-time performance record is crucial to its
other operational objectives and, together with its other
initiatives (such as improved baggage handling, customer
satisfaction and involuntary denied boarding), is an important tool
to attract higher-margin business travelers.
Continental's goal for 1997 is to be ranked monthly by the DOT
among the top three major air carriers (excluding those airlines
who do not report electronically) in on-time performance, baggage
handling, customer satisfaction and involuntary denied boarding.
In 1996, bonuses of $65 were paid to employees (up to the manager
level) for each month that Continental ranked second or third in
on-time performance, and bonuses of $100 were paid for each month
that Continental ranked first; during 1996, Continental ranked
first five times and second or third three times. This successful
on-time performance bonus program continues in 1997.
In addition to programs intended to improve Continental's standings
in DOT performance data, the Company has acted in a number of
additional areas to enhance its attractiveness to business
travelers and the travel agent community. 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, better meals and greater benefits under its award-
winning frequent flyer program. In 1996, Continental continued to
make product improvements, such as refurbished Presidents Clubs
with specialty bars and on-board specialty coffees and microbrewery
beer, among others. In 1997, the Company anticipates switching to
a new inflight telephone service provider to install a reliable
air-to-ground telephone service on board its jet aircraft. The
Company has also continued to refine its award-winning
BusinessFirst service.
Working Together
Management believes that Continental's employees are its greatest
asset, as well as 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 Gordon Bethune,
monthly and quarterly Continental publications, videotapes mailed
to employees, and a Go Forward Plan bulletin board in over 600
locations system-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's goal for 1997 is to be ranked among the top three
major air carriers in employee measures such as turnover, lost
time, productivity and on the job injury claims.
Capital Structure
Stock Split. On June 26, 1996, the Board of Directors of the
Company declared a two-for-one stock split (the "Stock Split")
pursuant to which (a) one share of the Company's Class A common
stock, par value $.01 per share ("Class A common stock"), was
issued for each share of Class A common stock outstanding on July
2, 1996 (the "Record Date") and (b) one share of the Company's
Class B common stock, par value $.01 per share ("Class B common
stock"), was issued for each share of Class B common stock
outstanding on the Record Date. Shares issuable pursuant to the
Stock Split were distributed on or about July 16, 1996. All
references in this Form 10-K as to the number of shares of common
stock or warrants, options, per share amounts, exercise prices and
market prices relating to the Company's common stock, have been
retroactively restated to reflect the Stock Split.
Corporate Governance. On June 26, 1996, at the Company's annual
meeting of stockholders, the Company's stockholders approved
changes proposed by the Company to its Restated Certificate of
Incorporation ("Certificate of Incorporation"), which, together
with amendments to the Company's Bylaws ("Bylaws") previously
approved by the Company's Board of Directors (collectively, the
"Amendments"), generally eliminated special classes of directors
(except for the right of Air Partners, L.P., a Texas limited
partnership and major stockholder of the Company ("Air Partners")
to elect one-third of the directors in certain circumstances, as
described below) and supermajority voting provisions, and made a
variety of other modifications aimed at streamlining the Company's
corporate governance structure. The Amendments, as a whole,
reflect the reduction of the equity interest of Air Canada, a
Canadian corporation ("Air Canada"), in the Company, as described
below, and the decision of the former directors designated by Air
Canada not to stand for reelection, along with the expiration of
various provisions of the Certificate of Incorporation and Bylaws
specifically included at the time of the Company's reorganization
under Chapter 11 of the federal bankruptcy code in April 1993 (the
"Reorganization"). See Item 6. "Selected Financial Data. 1993
Reorganization" for a discussion of the Company's 1993
Reorganization and Item 3. "Legal Proceedings. Plan of
Reorganization".
As a result of the Amendments, shares of the Company's Class A
common stock may be freely converted into an equal number of shares
of the Company's Class B common stock. Under agreements put in
place at the time of the Reorganization, and designed in part to
ensure compliance with the foreign ownership limitations applicable
to United States air carriers, in light of the substantial stake in
the Company then held by Air Canada, holders of Class A common
stock were not permitted under the Certificate of Incorporation to
convert their shares to Class B common stock. In 1996, the market
price of Class A common stock was generally below the market price
of Class B common stock, which the Company believes was
attributable in part to the reduced liquidity present in the
trading market for Class A common stock. A number of Class A
common stockholders requested that the Company provide for free
convertibility of Class A common stock into Class B common stock,
and in light of the reduction of Air Canada's equity stake, the
Company determined that the restriction was no longer necessary.
Such conversions effectively increase the relative voting power of
those Class A common stockholders who do not convert. As of
February 14, 1997, stockholders had converted 618,436 shares of
Class A common stock for an equal number of shares of Class B
common stock.
On April 19, 1996, the Company's Board of Directors approved
certain agreements (the "Agreements") with its two major
stockholders, Air Canada and Air Partners. The Agreements contain
a variety of arrangements intended generally to reflect the
intention that Air Canada had expressed to the Company's management
that it intended to divest its investment in Continental in the
near future given that its investment in the Company had become
less central in light of other initiatives Air Canada had
undertaken - particularly expansion within Canada and exploitation
of the 1995 Open Skies agreement to expand Air Canada's own flights
into the U.S. Because of these initiatives, Air Canada determined
it appropriate to redeploy the funds invested in the Company into
other uses in Air Canada's business. Consequently, in May 1996,
Air Canada converted all of its 3,322,112 shares of Class A common
stock into Class B common stock (pursuant to certain rights granted
to it under the Company's Certificate of Incorporation) and sold,
on the open market, 4,400,000 shares of Class B common stock
pursuant to an underwritten public offering arranged by the Company
(the "Secondary Offering"). In January 1997, Air Canada divested
the remainder of its initial investment in Continental common stock
by selling on the open market 5,600,000 shares of Class B common
stock.
In connection with the Secondary Offering which was completed on
May 14, 1996, the Agreements provided for the following additional
steps to be taken:
- - in light of its reduced equity stake in the Company, Air Canada
was no longer entitled to designate nominees to the Board of
Directors of the Company, causing the four then-present or former
members of the Air Canada board who served as directors of
Continental to decline nomination for reelection as directors and
converted all of its Class A common stock to Class B common
stock;
- - Air Canada and Air Partners entered into a number of agreements
restricting, prior to December 16, 1996, further disposition of
the common stock of the Company held by either of them; and
- - each of the existing agreements among the parties was modified in
a number of respects to reflect, among other matters, the
changing composition of the respective equity interests of the
parties.
On November 21, 1996, Air Partners exercised its right to sell to
the Company, and the Company subsequently purchased, for $50
million, warrants to purchase 2,614,379 shares of Class B common
stock (representing a portion of the total warrants held by Air
Partners) pursuant to an agreement entered into earlier in 1996
with the Company .
As of February 14, 1997, Air Partners held approximately 9.5% of
the common equity interest and 40.5% of the general voting power of
the Company. If all of the remaining warrants held by Air Partners
had been exercised on February 14, 1997, approximately 19.6% of the
common equity interest and 52.6% of the general voting power of the
Company would have been held by Air Partners.
Domestic Operations
Continental operates its domestic route system primarily through
its hubs at Newark, Houston Intercontinental and 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 14, 1997, Continental operated 54% (237
departures) of the average daily jet departures and, together with
Express, accounted for 57% (351 departures) of all average daily
departures (jet and turboprop) from Newark. Considering the three
major airports serving New York City (Newark, LaGuardia and John F.
Kennedy), the Company and Express accounted for 24% of all daily
departures, while the next largest carrier, USAir, Inc. ("USAir"),
and its commuter affiliate accounted for 15% of all daily
departures.
Houston. As of February 14, 1997, Continental operated 80%
(318 departures) of the average daily jet departures and, together
with Express, accounted for 84% (436 departures) of all average
daily departures from Houston Intercontinental Airport. Southwest
Airlines Co. ("Southwest") also has a significant share of the
Houston market through Hobby Airport. Considering both
Intercontinental and Hobby Airports, Continental operated 57% and
Southwest operated 26% of the daily jet departures from Houston.
Cleveland. As of February 14, 1997, Continental operated 55% (106
departures) of the average daily jet departures and, together with
Express, accounted for 66% (250 departures) of all average daily
departures from Cleveland Hopkins International Airport. The next
largest carrier, USAir and its commuter affiliate, accounted for 8%
of all daily departures.
Continental Express. Continental's jet service at each of its
domestic hub cities is coordinated with Express, which operates
under the name "Continental Express". Express operates advanced,
new-generation turboprop aircraft that average approximately five
years of age and seat 64 passengers or less. In September 1996,
Express placed an order for 25 firm Embraer ("EMB")-145 regional
jets, with options for up to 175 additional aircraft. Express
anticipates deploying these 50-seat regional jets initially in
Cleveland beginning in April 1997. See Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of
Operations. Liquidity and Capital Commitments" for a discussion of
this aircraft order.
As of February 14, 1997, Express served 15 destinations from
Newark, 20 destinations from Houston Intercontinental and 30
destinations from Cleveland. In addition, commuter feed traffic is
currently provided by other code-sharing partners. See "Domestic
Carrier Alliances" below. In general, Express flights are less
than 200 miles in length and less than 90 minutes in duration.
Management believes Express's 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 such connecting traffic with commuter airlines owned by
or affiliated with other major airlines operating out of the same
or other cities. Management believes that Express's new EMB-145
regional jets will provide better customer acceptance and comfort
than its turboprop aircraft and will also allow Express to serve
certain routes which cannot be served by 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:
- - Continental has entered into a series of agreements with America
West, including agreements related to code sharing and ground
handling, which have created substantial benefits for both
airlines. These code-sharing agreements cover 73 city-pairs and
allow Continental to link additional destinations to its route
network. The sharing of facilities and employees by Continental
and America West in their respective key markets has resulted in
significant cost savings.
- - Currently, SkyWest Airlines, Inc., a commuter operator, provides
Continental access through Los Angeles to 14 additional markets
in California and Arizona through Los Angeles.
- - In January 1997, Continental announced a code-sharing agreement
with Gulfstream International Airlines, Inc. ("Gulfstream") which
is expected to commence in April 1997. Gulfstream will serve as
a connection for Continental passengers throughout Florida as
well as five markets in the Bahamas.
International Operations
International Operations. Continental has extensive operations in
the western Pacific conducted by CMI and serves destinations
throughout Europe, Mexico and Central and South America. As
measured by 1996 available seat miles, approximately 28.0% of
Continental's jet operations were dedicated to international
traffic. As of February 14, 1997, the Company offered 58 weekly
departures to five European cities and marketed service to eight
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 United
States airline.
The Company's Newark hub is a significant international gateway.
From Newark, the Company serves London, Manchester, Paris,
Frankfurt, Madrid, Rome, Milan, Amsterdam, Prague, Toronto and
Montreal, as well as certain other destinations in Canada, the
United Kingdom and Scotland through code-sharing arrangements with
other foreign carriers. Continental recently announced expanded
service from Newark to Dusseldorf, Germany (scheduled to commence
March 19, 1997), to Lisbon, Portugal (scheduled to commence May 1,
1997) and to Birmingham, England (scheduled to commence July 1,
1997). The Company also has code-sharing agreements and joint
marketing arrangements with other foreign carriers which management
believes are important to Continental's ability to compete as an
international airline. See "Foreign Carrier Alliances" discussed
below.
The Company also has non-stop service to two Mexican cities and six
Caribbean destinations from Newark. The Company launched service
between Newark and Lima, Peru in March 1996 and service between
Newark and Quito, Ecuador (via Bogota, Colombia) in June 1996.
The Company's Houston hub is the focus of its operations in Mexico
and Central America. Continental currently flies from Houston to
11 cities in Mexico, every country in Central America and four
cities in South America, including new service from Houston to
Lima, Peru which commenced in December 1996. In addition,
Continental flies nonstop from Houston to London and Paris.
Continental Micronesia. CMI is a United States-certificated
international air carrier engaged in the business of transporting
passengers, cargo and mail in the western Pacific, which is one of
the fastest growing areas for air travel in the world. From its
hub operations based on the island of Guam, CMI provides slot-
controlled service to six cities in Japan, more than any other
United States carrier, and to other Pacific rim destinations,
including Taiwan, the Philippines, Hong Kong, South Korea 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 begin
servicing 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 Honolulu, which CMI
serves non-stop from both Tokyo and 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 and Tokyo, to facilitate travel
from the United States into CMI's route system.
The 9.0% minority interest in CMI is owned by United Micronesia
Development Association, Inc. ("UMDA"), a private company. Under
agreements entered into in connection with the Reorganization, UMDA
would have the right to increase its ownership in CMI to just over
20% in the event any participating employer in the Company's
pension plans failed to make, or Continental failed to adequately
provide for, certain pension plan payments. CMI also has an
agreement to pay UMDA a fee of one percent of CMI's gross revenue,
as defined, through January 1, 2012.
In July 1996, CMI consummated a $320 million secured term loan
financing with a group of banks and other financial institutions.
The loan is secured by the stock of CMI and substantially all of
its unencumbered assets, consisting primarily of CMI's route
authorities, and is guaranteed by Continental and AMI. See Item 7.
"Management's Discussion and Analysis of Financial Condition and
Results of Operations. Liquidity and Capital Commitments".
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 sole major United States carrier to
operate a hub in the New York City area, by virtue of its Newark
operation. Consequently, management believes the Company is
uniquely situated to attract alliance partners from Europe, the Far
East and South America and intends to aggressively pursue such
alliances in order to benefit from the high-yield flow traffic that
may be generated thereby.
In addition, management believes that developing a network of
international alliances will better leverage the Company's hub
assets and result in improved returns to the Company. Continental
can enlarge its scope of service more rapidly and enter additional
markets with lower capital and start-up costs through formation of
alliances than it can entering markets independently of other
carriers.
Management has a goal of developing alliance relationships that,
together with the Company's own flying, will permit expanded
service through Newark to major destinations in South America,
Europe and Asia, and expanded service through Houston to South
America and Europe, as well as service to Japan. Certain route
authorities that would be required for the Company's own service to
certain of these destinations are not currently available to the
Company.
Continental currently has international code-sharing agreements
with Alitalia, Air Canada, Transavia Airlines ("Transavia"), CSA
Czech Airlines, Business Air, and, pending government approval,
China Airlines.
Currently, Alitalia and Continental code-share between points in
the United States and Italy, with Alitalia placing its code on
Continental flights to seven domestic cities and Continental
placing its code on Alitalia flights to Rome and Milan. In
November 1996, Alitalia and Continental entered into a block-space
agreement (pursuant to which the Company and another carrier agree
to share capacity and bear economic risk for blocks of seats on
certain routes) and expanded their existing code-share
relationship. The two carriers will code-share between points in
the United States and Italy, with Alitalia placing its code on
Continental flights between Newark and Rome and Milan and between
Newark and eight cities within the United States. Management
anticipates that this expanded code-share relationship will
commence in the second quarter of 1997.
Continental and Air Canada (and its subsidiaries) code-share on six
cross-border routes, where Continental places its code on 24 Air
Canada flights per day and Air Canada places its code on four
Continental flights per day. Continental and Air Canada provide
ground handling and other services for each other at certain
locations in the United States, Canada and elsewhere.
In addition, the Company has also entered into joint marketing
agreements with other airlines which will involve block-space
arrangements which management believes are important to
Continental's ability to compete as an international airline. In
October 1996, Continental announced a block-space agreement with
Air France, which contemplates a future code-share arrangement on
certain flights between Newark and Charles de Gaulle Airport
("CDG") and Houston and CDG (expected to commence in the third
quarter of 1997), subject to governmental approval. In January
1997, the Company announced a similar agreement with Aeroflot which
management anticipates will commence in the third quarter of 1997,
subject to governmental approval. Aeroflot will place its code on
one daily Continental flight to Moscow and will market the service
throughout the Commonwealth of Independent States. The two
airlines are evaluating further cooperation that could result in
additional code-sharing.
The Company anticipates entering into other code-sharing, joint
marketing and block-space agreements in 1997, which may include the
Company undertaking the financial commitment to purchase seats from
other carriers.
Employees
As of December 31, 1996, Continental had approximately 35,400 full-
time equivalent employees, including approximately 15,300 customer
service agents, reservations agents, ramp and other airport
personnel, 6,200 flight attendants, 5,500 management and clerical
employees, 5,100 pilots, 3,200 mechanics and 100 dispatchers.
Labor costs are a significant component of the Company's expenses
and can substantially impact airline results. In 1996, labor costs
constituted 26.5% of the Company's total operating expenses. While
there can be no assurance that Continental's generally good labor
relations and high labor productivity will continue, Continental's
management has established as a significant component of its
business strategy the preservation of good relations with the
Company's employees, approximately one-third of whom are
represented by unions.
The Company's collective bargaining agreement with its pilots
(excluding Express pilots), who are represented by the Independent
Association of Continental Pilots ("IACP"), becomes amendable in
July 1997. Negotiations with the IACP on a new collective
bargaining agreement are expected to begin in April 1997.
Express's collective bargaining agreement with its pilots, also
represented by the IACP, becomes amendable in October 1997.
In August 1996, the Company and the International Association of
Machinists and Aerospace Workers ("IAM") which represents
Continental Airlines' flight attendants, entered into a collective
bargaining agreement which becomes amendable in December 1999. The
agreement provides for base wage increases in each year of the
contract, a one-time adjustment to certain base wage scales as an
equitable adjustment, and an increase in per diem payments and
other matters, including productivity improvements. Continental
Express and the IAM are parties to a flight attendant collective
bargaining agreement that becomes amendable in November 1999.
Approximately 85% of CMI's flight attendants are also represented
by the IAM (excluding all foreign nationals), but are covered under
a separate four-year contract that became amendable in September
1996. Negotiations are in progress to amend this contract and are
expected to be finalized in the near future.
On July 8, 1996, the IAM filed a representation petition with the
National Mediation Board ("NMB"), seeking representation of
Continental's "fleet service" employees. The NMB initiated an
investigation into the petition, and the mediator's findings
regarding the scope of the appropriate class or craft have been
appealed by the IAM to the full board. The Company does not expect
any organizing effort by the IAM to have a material adverse impact
on the Company or its relations with its airport service employees.
CMI's mechanics and mechanic-related employees are represented by
the International Brotherhood of Teamsters ("IBT") under a
collective bargaining agreement, which becomes amendable in March
1997. The IBT also represents CMI's agent classification employees
located on Guam, whose collective bargaining agreement also becomes
amendable in March 1997. Negotiations are in progress to amend
these contracts and are expected to be finalized in the near
future. The IBT has also sought representation rights for CMI's
agent employees located on Saipan. The NMB's certification of the
IBT as the bargaining representative for these employees was
successfully challenged by CMI in a suit brought in Saipan federal
court in 1995. The NMB's request for reconsideration was denied,
and the NMB has now filed an appeal to the Ninth Circuit Court of
Appeals. Oral arguments have not been scheduled with respect to
the appeal. Regardless of the final outcome of this representation
dispute, the Company does not anticipate any significant adverse
effect on its employee relations resulting from these events.
Continental's dispatchers are represented by the Transport Workers
Union of America, AFL-CIO ("TWUA") under a collective bargaining
agreement signed in August 1996 which becomes amendable in April
1999. Express's dispatchers are also represented by the TWUA, but
are currently without a contract. CMI's dispatchers are not
represented by a union.
The Company believes that mutually-acceptable agreements can be
reached with its unionized employees, although the ultimate outcome
of the Company's future negotiations is unknown at this time.
The other employees of Continental, Express and CMI are not
represented by unions and are not covered by collective bargaining
agreements.
Effective July 1, 1996, Continental implemented pay increases for
substantially all of its non-unionized employees as part of a
three-year plan to increase base wages to be more comparable to
industry wages.
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. Overall industry profit margins have historically been
low. However, during 1995 and 1996, 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. In February 1995, Delta Airlines, Inc. placed a $25 cap
on travel agency commissions for one-way domestic tickets priced
over $250 and a $50 cap on travel agency commissions for round-trip
domestic tickets priced over $500. Other airlines, including
Continental, imposed similar commission caps. Continental, along
with other carriers, recently settled class action litigation
concerning such caps, which remain in place. See Item 3. "Legal
Proceedings. Antitrust Proceedings".
In September 1995, Continental announced the expansion of its
electronic ticket ("E-Ticket") product, which is now available
throughout the United States and through most travel agents. Using
an E-Ticket machine (now located in over 35 major U.S. airports),
E-Ticket customers arriving at the airport may check in, receive
boarding passes, select or change seat assignments, input frequent
flyer information, make simple flight changes and receive luggage
tags. Continental plans to continue to expand the E-Ticket program
to select international destinations and to increase travel agency
access in the future. The E-Ticket system has contributed to a
reduction in distribution costs and has improved the accuracy and
timeliness of certain of Continental's reporting systems.
Continental and its former System One Information Management, Inc.
("System One") subsidiary entered into a series of transactions on
April 27, 1995 whereby a substantial portion of System One's assets
and certain liabilities were transferred to a newly formed limited
liability company, System One Information Management, L.L.C.
("LLC"). LLC is owned equally by Continental CRS Interests, Inc.
("Continental CRS") (formerly System One, which remains a wholly
owned subsidiary of Continental), Electronic Data Systems
Corporation and AMADEUS, a European computerized reservation
system. LLC markets the AMADEUS computer reservation system which
distributes travel-related information products and services to the
worldwide travel industry.
Frequent Flyer Program
Each major airline has established a frequent flyer program
designed to encourage travel on their own carrier. Continental
sponsors a frequent flyer program ("OnePass"), which allows
passengers to earn mileage credits by flying Continental and
certain other carriers, such as Air Canada, Transavia, Alitalia and
America West (each a "OnePass Partner"). The Company also sells
mileage credits to hotels, car rental agencies and credit card
companies participating in the OnePass program.
Continental accrues the incremental cost associated with the earned
flight awards based on expected redemptions. The incremental cost
to transport a passenger on a free trip includes the cost of
incremental fuel, meals, insurance and miscellaneous supplies and
does not include any charge for potential displacement of revenue
passengers or costs for aircraft ownership, maintenance, labor or
overhead allocation. 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 less than 7% of
Continental's total revenue passenger miles in each of the years
1996 and 1995.
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 the 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.
Certain regulations require phase-out of certain aircraft and aging
aircraft modifications. Such types of regulations can
significantly increase costs and affect a carrier's ability to
compete. In December 1995, the FAA promulgated final rules
requiring commuter carriers to operate under the same safety rules
and standards, and train their crew and dispatchers in accordance
with the more stringent requirements, as are currently applicable
to carriers operating larger aircraft. The new rules have not had
a significant impact on the operations of Express.
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 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.
Several airports have recently sought to substantially 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, public airports
generally impose passenger facility charges of up to $3 per
departing or connecting passenger. With certain exceptions, these
charges are passed on to the customers.
The FAA has designated John F. Kennedy, LaGuardia, O'Hare and Wash-
ington National airports as "high density traffic airports" and has
limited the number of departure and arrival slots at those
airports. Currently, slots at the high density traffic airports
may be voluntarily sold or transferred between the carriers. The
DOT has in the past reallocated slots to other carriers and
reserves the right to withdraw slots. Various amendments to the
slot system, proposed from time to time by the FAA, members of
Congress and others, could, if adopted, significantly affect
operations at the high density traffic airports or expand slot
controls to other airports. Certain of such proposals could
restrict the number of flights, limit transfer of the ownership of
slots, increase the risk of slot withdrawals or require charges to
the Company's financial statements. Continental cannot predict
whether any of these proposals will be adopted.
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 has in the past
generally followed 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 may 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 affect
operations and increase operating costs in the airline industry,
including for the Company.
Risk Factors Relating to the Company
Leverage and Liquidity. Continental has successfully negotiated a
variety of agreements to increase its liquidity. Nevertheless,
Continental remains more leveraged and has significantly less
liquidity than certain of its competitors, several of whom have
available lines of credit and/or significant unencumbered assets.
Accordingly, Continental may be less able than certain of its
competitors to withstand a prolonged recession in the airline
industry.
As of December 31, 1996, Continental had approximately $1.9 billion
(including current maturities) of long-term debt and capital lease
obligations and had approximately $884 million of minority
interest, Continental-obligated mandatorily redeemable preferred
securities of subsidiary trust, redeemable preferred stock and
common stockholders' equity. Common stockholders' equity reflects
the adjustment of the Company's balance sheet and the recording of
assets and liabilities at fair market value as of April 27, 1993 in
accordance with the American Institute of Certified Public
Accountants' Statement of Position 90-7 - "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7").
See Item 6. "Selected Financial Data. 1993 Reorganization".
During the first and second quarters of 1995, in connection with
negotiations with various lenders and lessors, Continental ceased
or reduced contractually required payments under various
agreements, which produced a significant number of events of
default under debt, capital lease and operating lease agreements.
Through agreements reached with the various lenders and lessors,
Continental has cured all of these events of default. The last
such agreement was put in place during the fourth quarter of 1995.
As of December 31, 1996, Continental had approximately $1.1 billion
of cash and cash equivalents, including restricted cash and cash
equivalents of $76 million. Continental does not have general
lines of credit and has significant encumbered assets.
As of December 31, 1996, Continental has firm commitments with The
Boeing Company ("Boeing") to take delivery of a total of 127 jet
aircraft during the years 1997 through 2003 with options for an
additional 90 aircraft (exercisable subject to certain conditions).
These new aircraft will replace older, less efficient Stage 2
aircraft and allow for growth of operations. The estimated
aggregate cost of the Company's firm commitments for the Boeing
aircraft is approximately $4.3 billion. Continental has firm
commitments of approximately $1.4 billion of backstop financing for
its Boeing aircraft orders. Continental currently plans on
financing the new Boeing aircraft with enhanced equipment trust
certificates or similar financing, subject to availability and
market conditions. However, further financing will be needed to
satisfy Continental's capital commitment for other aircraft-related
expenditures such as spare parts, simulators (including Express's
new EMB-145 aircraft described below) 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. Continental has also entered into
agreements or letters of intent with several outside parties to
lease or purchase five DC-10-30 aircraft and one Boeing 747
aircraft which are expected to be delivered by mid 1997.
During 1996, Continental took delivery of a total of five new
Boeing aircraft which consisted of three 737-500 aircraft and two
757-200 aircraft. In addition, Continental also purchased three
DC-10-30 aircraft and two McDonnell Douglas ("MD")-82 aircraft and
leased four DC-10-30 aircraft.
In September 1996, Express placed an order for 25 firm EMB-145 50-
seat regional jets, with options for an additional 175 aircraft.
Neither Express nor Continental will have any obligation to take
aircraft that are not financed by a third party and leased to the
Company. However, if the Company fails to confirm the first
tranche of 25 options by August 1997, the rent associated with the
25 firm aircraft will increase by an aggregate of $33.6 million
over the 16-year life of the leases. Express took delivery of two
of the firm aircraft in late December 1996 and will take delivery
of the remaining 23 firm aircraft during the period from January 1,
1997 through the second quarter of 1998. The Company expects to
account for all of these aircraft as operating leases. During
1996, Express also took delivery of 12 Beech 1900-D aircraft and
eight Avions de Transport Regional ("ATR") 42-500 aircraft.
In 1996, Continental incurred cash expenditures under operating
leases relating to aircraft of approximately $568 million, compared
to $521 million for 1995. Cash expenditures relating to facilities
and other rentals amounted to $210 million in 1996, compared to
$229 million in 1995. In addition, Continental has capital
requirements relating to compliance with regulations that are
discussed below. See "Regulatory Matters".
In July 1996, CMI consummated a $320 million secured term loan
financing with a group of banks and other financial institutions.
The loan was made in two tranches -- a $180 million five-year
amortizing term loan with a current floating interest rate of
either Eurodollar plus 1.75% or Prime plus 0.75% and a $140 million
seven-year amortization extended loan with a floating interest rate
of either Eurodollar plus 2.00% or Prime plus 1.00%. The loan is
secured by the stock of CMI and substantially all its unencumbered
assets, consisting primarily of CMI's route authorities, and is
guaranteed by Continental and AMI.
The bank financing contains significant financial covenants
relating to CMI, including maintenance of a minimum fixed charge
coverage ratio, a minimum consolidated net worth and minimum
liquidity, and covenants restricting CMI's leverage, its incurrence
of certain indebtedness and its pledge of assets. The financial
covenants also limit the ability of CMI to pay dividends to
Continental. As of December 31, 1996, CMI had a minimum cash
balance requirement of $25 million, net assets of $185 million and
was restricted from paying dividends in excess of $6 million. As
a result of the recent weakness of the yen against the dollar and
increased fuel costs, CMI's operating earnings declined during the
third and fourth quarter of 1996 as compared to similar periods in
1995, and are not expected to improve materially absent a stronger
yen or reduced fuel costs. In January 1997, CMI elected to prepay
$25 million of principal amount of its bank financing rather than
use such cash for other purposes.
CMI used the net proceeds of the financing to prepay $160 million
in principal amount of indebtedness to GE and to pay transaction
costs, and Continental used the $136 million in proceeds received
by it as a dividend from CMI, together with approximately $28
million in cash on hand, to prepay approximately $164 million in
principal amount of indebtedness to GE. The bank financing does
not contain any restrictive covenants at the Continental parent
level, and none of the assets of Continental Airlines, Inc. (other
than its stock in AMI) is pledged in connection with the new
financing.
CMI entered into an interest rate swap agreement and an interest
rate cap agreement to reduce the impact of potential increases in
interest rates on its bank financing that was completed in July
1996. The notional value on the interest rate swap agreement is
$320 million and was effective from August 30, 1996 through January
30, 1997. The interest rate cap agreement has a notional value of
$153 million and is effective from January 31, 1997 through July
31, 2001.
In July 1996, the Company announced plans to expand its gates and
related facilities at Houston's Intercontinental Airport into
Terminal B, as well as planned improvements at Terminal C. The
expansion, which will include the construction of a new automated
people mover system linking Terminal B and Terminal C, is expected
to cost approximately $160 million (exclusive of capitalized
interest), which the Company expects will be funded principally by
the issuance of tax-exempt special facilities revenue bonds by the
City of Houston. In connection therewith, the Company expects to
enter 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
will have a term no longer than 30 years.
The Company is also exploring facility expansions at Cleveland and
Newark which would require, among other matters, agreements to be
reached with the applicable airport authority. The Company
anticipates that any such expansions would be financed by tax-
exempt bonds.
Continental's History of Operating Losses. Although Continental
recorded net income of $319 million in 1996 and $224 million in
1995, it had experienced significant operating losses in the
previous eight years. In the long term, Continental's viability
depends on its ability to sustain profitable results of operations.
Aircraft Fuel. Since fuel costs constitute a significant portion
of Continental's operating costs (approximately 13.3% for the year
ended December 31, 1996), significant changes in fuel costs would
materially affect the Company's operating results. Jet fuel prices
have increased significantly since December 31, 1995. Fuel prices
continue to be susceptible to international events, and the Company
cannot predict near or longer-term fuel prices. The Company has
entered into petroleum option contracts to provide some short-term
protection (generally, three to six months) against a sharp
increase in jet fuel prices. In the event of a fuel supply
shortage resulting from a disruption of oil imports or otherwise,
higher fuel prices or curtailment of scheduled service could
result.
Certain Tax Matters. The Company's United States federal income
tax return for the year ended December 31, 1996, is expected to
reflect net operating loss carryforwards ("NOLs") of $2.3 billion,
of which $1.1 billion are not subject to the limitations of Section
382 of the Internal Revenue Code ("Section 382"). As a result, the
Company will not pay United States federal income taxes (other than
alternative minimum tax) until it has recorded approximately an
additional $1.1 billion of taxable income following December 31,
1996. For financial reporting purposes, Continental began accruing
tax expense on its income statement during the second quarter of
1996.
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 5.48% for February 1997). Unused
annual limitations 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 NOL utilization would be limited to
approximately $100 million per year.
Realization of a substantial portion of the Company's NOLs will
require the completion by April 27, 1998, of transactions resulting
in recognition of built-in gains for federal income tax purposes.
The Company has consummated several such transactions and currently
intends to consummate one or more additional transactions. If the
Company were to determine in the future that such transactions will
not be completed and if future income is not sufficient to
recognize the benefit of previously completed transactions, an
adjustment to the net deferred tax liability of up to $85 million
would be charged to income in the period such determination was
made.
CMI. CMI's operating profit margins have generally been greater
than the Company's margins overall. In addition to its non-stop
service between Honolulu and Tokyo, CMI serves resort destinations
in the Micronesian Islands that cater primarily to Japanese leisure
travelers. 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. Appreciation of the yen against the dollar during 1994
and 1995 increased CMI's profitability, while a decline of the yen
against the dollar in 1996 reduced CMI's profitability. To reduce
the potential negative impact on CMI's dollar earnings, CMI, from
time to time, purchases average rate options as a hedge against a
portion of its expected net yen cash flow position. Any
significant and sustained decrease in traffic or yields to and from
Japan could materially adversely affect Continental's consolidated
profitability.
Principal Stockholder. On November 21, 1996, Air Partners
exercised its right to sell to the Company, and the Company
subsequently purchased, for $50 million, warrants to purchase
2,614,379 shares of Class B common stock (representing a portion of
the total warrants held by Air Partners) pursuant to an agreement
entered into earlier in 1996 with the Company. As of February 14,
1997, Air Partners held approximately 9.5% of the common equity
interest and 40.5% of the general voting power of the Company. If
all the remaining warrants held by Air Partners had been exercised
on February 14, 1997, approximately 19.6% of the common equity
interest and 52.6% of the general voting power of the Company would
have been held by Air Partners. As discussed in "Capital
Structure. Corporate Governance", in May 1996, Air Canada sold, on
the open market, 4,400,000 shares of Class B common stock pursuant
to the Secondary Offering and in January 1997, divested the
remainder of its initial investment in Continental common stock by
selling on the open market 5,600,000 shares of Class B common
stock. Shares of Class A common stock may be freely converted into
an equal number of shares of Class B common stock. Such
conversions effectively increase the relative voting power of those
Class A common stockholders who do not convert. As of February 14,
1997, stockholders had converted 618,436 shares of Class A common
stock for an equal number of shares of Class B common stock.
Various provisions in the Company's Certificate of Incorporation
and Bylaws currently provide Air Partners with the right to elect
one-third of the directors in certain circumstances; these
provisions could have the effect of delaying, deferring or
preventing a change in the control of the Company.
Risk Factors Relating to the Airline Industry
Industry Conditions and Competition. The airline industry is
highly competitive and susceptible to price discounting. The
Company has in the past both responded to discounting actions taken
by other carriers and initiated significant discounting actions
itself. Continental's competitors include carriers with
substantially greater financial resources (and in certain cases,
lower cost structures), as well as smaller carriers with low cost
structures. Airline profit levels are highly sensitive to, and
during recent years, have been severely impacted by changes in fuel
costs, fare levels (or "average yield") and passenger demand.
Passenger demand and yields have been affected by, among other
things, the general state of the economy, international events and
actions taken by carriers with respect to fares. From 1990 to
1993, these factors contributed to the domestic airline industry's
incurring unprecedented losses. Although fare levels have
increased recently, fuel costs have also increased significantly.
In addition, significant industry-wide discounts could be
reimplemented at any time, and the introduction of broadly
available, deeply discounted fares by a major United States airline
would likely result in lower yields for the entire industry and
could have a material adverse effect on the Company's operating
results.
The airline industry has consolidated in past years as a result of
mergers and liquidations and may further consolidate in the future.
Among other effects, such consolidation has allowed certain of
Continental's major competitors to expand (in particular) their
international operations and increase their market strength.
Furthermore, the emergence in recent years of several new carriers,
typically with low cost structures, has further increased the
competitive pressures on the major United States airlines. In many
cases, the new entrants have initiated or triggered price
discounting. Aircraft, skilled labor and gates at most airports
continue to be readily available to start-up carriers. Competition
with new carriers or other low cost competitors on Continental's
routes could negatively impact Continental's operating results.
Regulatory Matters. In the last several years, the FAA has issued
a number of maintenance directives and other regulations relating
to, 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. The Company expects to continue incurring expenses for
the purpose of complying with the FAA's noise and aging aircraft
regulations. In addition, several airports have recently sought to
increase substantially 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.
Management believes that the Company benefitted significantly from
the expiration of the aviation trust fund tax (the "ticket tax") on
December 31, 1995, although the amount of any such benefit directly
resulting from the expiration of the ticket tax cannot precisely be
determined. The ticket tax was reinstated on August 27, 1996, and
expired again on December 31, 1996. Management believes that the
reimposition of the ticket tax is imminent. Nevertheless, the
amount of the negative impact directly resulting from the
reimposition of the ticket tax cannot be precisely determined.
Additional laws and regulations have been proposed from time to
time that could significantly increase the cost of airline
operations by imposing additional requirements or restrictions on
operations. Laws and regulations have also been considered that
would prohibit or restrict the ownership and/or transfer of airline
routes or takeoff and landing slots. Also, the availability of
international routes to United States carriers is regulated by
treaties and related agreements between the United States and
foreign governments that are amendable. Continental cannot predict
what laws and regulations may be adopted or their impact, but there
can be no assurance that laws or regulations currently proposed or
enacted in the future will not adversely affect the Company.
Seasonal Nature of Airline Business. Due to the greater demand for
air travel during the summer months, revenue in the airline
industry in the third quarter of the year is generally
significantly greater than revenue in the first quarter of the year
and moderately greater than revenue in the second and fourth
quarters of the year for the majority of 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, changing levels of
operations, fuel prices, 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 consisted of 317 jets and was comprised of 11
different types and series of aircraft at December 31, 1996.
Seats
Total in Standard Average Age
Type Aircraft Owned Leased Configuration (In Years)
Four Engine
747-200* 2 - 2 426 24.5
Three Engine
DC-10-10 6 - 6 287 24.2
DC-10-30 17 1 16 242 19.8
727-200* 44 2 42 149 20.1
Two Engine
737-500 37 1 36 104 2.1
737-300 65 8 57 128 9.4
737-200* 17 15 2 100 27.5
737-100* 13 13 - 95 28.3
757-200 17 - 17 183 2.0
MD-80 69 11 58 141 12.0
DC-9-30* 30 3 27 103 24.9
317 54 263 14.3
*Stage 2 (noise level) aircraft.
The table above excludes four all-cargo 727 aircraft at CMI, three
A300 and one 747 Continental aircraft that were removed from
service in 1995 and four DC-10-30 Continental aircraft that were
delivered in 1996, but were not placed into service until 1997.
Substantially all of the aircraft and engines owned by Continental
are subject to mortgages.
The FAA has adopted rules pursuant to the Airport Noise and
Capacity Act of 1990 that require a scheduled phase out of Stage 2
aircraft during the 1990's. As a result of Continental's
acquisition of a number of new aircraft and the retirement of older
Stage 2 aircraft in recent years, 66.6% of Continental's current
jet fleet was composed of Stage 3 aircraft at December 31, 1996.
The Company plans to retire the remainder of its Stage 2 jet fleet
(excluding those aircraft operated by CMI) prior to the year 2000
in order to comply with such rules. Scheduled deliveries of the
Company's Boeing aircraft orders are expected to reduce the average
age of the Company's jet fleet from 14.3 years to 8.2 years by the
end of 1999.
During 1996, Continental took delivery of a total of five new
Boeing aircraft which consisted of three 737-500 aircraft and two
757-200 aircraft. In addition, Continental also purchased three
DC-10-30 aircraft and two MD-82 aircraft and leased four DC-10-30
aircraft.
As of December 31, 1996, Express operated a fleet of 99 aircraft,
as follows:
Seats
Total in Standard Average Age
Type Aircraft Owned Leased Configuration (In Years)
ATR-72 3 3 - 64 2.4
ATR-42-320 31 3 28 46 6.9
ATR-42-500 8 - 8 48 0.3
EMB 120 32 22 10 30 7.4
Beech 1900-D 25 25 - 19 0.9
99 53 46 4.9
Not included in the table above are two EMB-145 aircraft currently
being used as training aircraft and one ATR-42 aircraft owned by
the Company and currently leased to a third party.
During 1996, Express took delivery of 12 Beech 1900-D aircraft,
eight ATR 42-500 aircraft and two EMB-145 aircraft.
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, Houston
Intercontinental, Cleveland and 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 at Houston's Intercontinental Airport into
Terminal B, as well as planned improvements at Terminal C. The
expansion, which will include the construction of a new automated
people mover system linking Terminal B and Terminal C, is expected
to cost approximately $160 million (exclusive of capitalized
interest), which the Company expects will be funded principally by
the issuance of tax-exempt special facilities revenue bonds by the
City of Houston. In connection therewith, the Company expects to
enter 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
will have a term no longer than 30 years.
The Company is also exploring facility expansions at Cleveland and
Newark which would require, among other matters, agreements to be
reached with the applicable airport authority. The Company
anticipates that any such expansions would be financed by tax-
exempt bonds.
The Company has lease agreements with the City and County of Denver
covering 10 gates and several support facilities on a long-term
basis at Denver International Airport. The gates and 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. In the event such carrier fails to comply with
its obligations under the sublease, the Company would be required
to perform those obligations.
CMI operates a hub on the island of Guam. In September 1996, the
Guam International Airport Authority completed the first phase of
a $240 million airport terminal expansion and renovation project.
This provided new arrival facilities, inbound baggage carousels and
customs halls and increased the number of gates available to CMI
from six to 12. Upon completion of the second (and final) phase of
the project in July 1998, five new additional gates will be added,
including ticket counters and a new pier-sort outbound baggage
system. The completed project is expected to triple the size of
the terminal complex and increase the cost of CMI's operations in
Guam by approximately $15 million a year.
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 USAir related to the
East End Terminal at LaGuardia Airport in New York. In the event
USAir defaulted on these obligations, Continental could be required
to cure the default, at which time it would have the right to
reoccupy the terminal.
ITEM 3. LEGAL PROCEEDINGS.
Plan of Reorganization
The Company's Plan of Reorganization, which became effective on
April 27, 1993, upon emergence from bankruptcy (the "Plan of
Reorganization"), provides for the full payment of all allowed
administrative and priority claims. Pursuant to the Plan of
Reorganization, holders of allowed general unsecured claims are
entitled to participate in a distribution of 3,800,000 shares of
the Company's Class A common stock, 10,084,736 shares of the
Company's Class B common stock, and $6,523,952 of cash and have no
further claim against the Company. The Plan of Reorganization
provided for this distribution to be issued initially in trust to
a distribution agent and thereafter for distributions to be made
from the trust from time to time as disputed claims are resolved.
The distribution agent must reserve from each partial distribution
of stock or cash to allow a complete pro rata distribution to be
made to each holder of a disputed claim in the event such claim is
eventually allowed, unless the United States Bankruptcy Court for
the District of Delaware (the "Bankruptcy Court") establishes a
lower reserve or estimates the claim at a lesser amount for
purposes of distribution. As of December 31, 1996, there remained
584,397 shares of Class A common stock, 1,528,626 shares of Class B
common stock, and approximately $942,000 of cash available for
distribution. The stock and cash set aside for distribution to
prepetition unsecured creditors was fixed in the Plan of
Reorganization and will not change as claims are allowed. However,
a limited number of proceedings were brought by prepetition
creditors seeking to impose additional obligations on the Company.
On December 3, 1990, the Company owned 77 aircraft and 81 spare
engines (in four collateral pools) securing debt evidenced by
equipment trust certificates. The trustees for the four collateral
pools moved in the Bankruptcy Court for "adequate protection"
payments under Sections 361 and 363 of the federal bankruptcy code
for the Company's retention and use of the aircraft and engines
after December 3, 1990, including postpetition claims for the
alleged decline in market value of the aircraft and engines after
December 3, 1990 and claims for deterioration in the condition of
the aircraft and engines in the same period. The Bankruptcy Court
rejected the adequate protection claims that alleged market value
decline. Prior to April 16, 1993, the Company settled all of the
adequate protection claims of the trustees, except for a claim of
$117 million for alleged market value decline of 29 aircraft and
81 spare engines in the fourth collateral pool. On April 16, 1993,
the Bankruptcy Court rejected the market value decline claims of
the trustees for the fourth collateral pool in their entirety and
incorporated those findings into its order confirming the Plan of
Reorganization. The trustees for the fourth collateral pool
appealed from these orders, but failed to obtain a stay pending
appeal. The Company opposed these appeals on the merits and sought
dismissal of the appeals on the grounds they were made moot by the
substantial consummation of the Plan of Reorganization. The United
States District Court for the District of Delaware (the "District
Court") dismissed the appeals as moot, and the trustees appealed to
the Third Circuit Court of Appeals (the "Third Circuit") seeking
review of the District Court's mootness determination and the
Bankruptcy Court's finding on the merits. The Third Circuit
affirmed the District Court's dismissal in February 1996, but
subsequently granted a rehearing en banc. In July 1996, the Third
Circuit, acting en banc, also affirmed the District Court's
dismissal. The trustees petitioned for a writ of certiorari to the
U.S. Supreme Court which petition was denied by the U.S. Supreme
Court on January 6, 1997. On January 31, 1997, the trustees
petitioned the U.S. Supreme Court for a rehearing of the trustees'
previous petition. The Company does not believe that the foregoing
matter will have a material adverse effect on the Company.
Antitrust Proceedings
In September 1996, the Company signed a settlement agreement
providing for the settlement of all claims against it in
consolidated antitrust litigation in the U.S. District Court for
the District of Minnesota. Continental, along with various other
airlines, had been involved in that litigation since February 1995.
The plaintiffs claimed that Continental and the other airline
defendants conspired to fix and maintain the commissions paid to
U.S. travel agents for domestic travel. The plaintiffs also
claimed substantial damages. While denying all claims, Continental
determined to settle the litigation to avoid the risks and expenses
of further litigation. The settlement, which was approved by the
court in January 1997, included the payment by Continental of
approximately $5 million in 1996 and provided for the complete
release of all claims and dismissal of the case against the
Company.
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 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 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 A common stock and Class B common stock as reported
on the New York Stock Exchange during 1995 and 1996.
Class A Class B
Common Stock Common Stock
High Low High Low
1995 First Quarter . . . 6-1/16 3-1/2 6-1/8 3-1/4
Second Quarter. . . 12-7/8 5-3/16 12-7/8 5-5/16
Third Quarter . . . 19-7/8 11-9/16 20-1/16 11-11/16
Fourth Quarter. . . 23-7/16 17-3/16 23-3/4 17-3/8
1996 First Quarter . . . 27 19-1/8 28-3/16 19-7/16
Second Quarter. . . 31-1/16 25-7/8 31-7/16 26-9/16
Third Quarter . . . 31 21 31-1/8 21-1/8
Fourth Quarter. . . 30-5/8 22 30-3/4 22-5/8
As of February 14, 1997, there were approximately 3,446 and 12,334
holders of record of Continental's Class A common stock and Class B
common stock, respectively.
The Company has not paid any cash dividends on its common stock.
Because the Company continues to believe it is important to
strengthen the Company's balance sheet and liquidity, the Company
has no current intention of paying regular cash dividends on its
common stock, but may consider repurchase of its common stock under
certain market conditions.
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. Within the past year, Air Canada,
Continental's only significant foreign stockholder, sold all of its
Continental common stock that was included on the foreign stock
register. See Item 1. "Business. Capital Structure".
ITEM 6. SELECTED FINANCIAL DATA.
The table on the following page sets forth certain consolidated
financial data of (i) the Company at December 31, 1996, 1995, 1994
and 1993 and for the years ended December 31, 1996, 1995 and 1994
and the period April 28, 1993 through December 31, 1993 and
(ii) the Predecessor Company (see "1993 Reorganization" below), for
the period January 1, 1993 through April 27, 1993 and as of and for
the year ended December 31, 1992 (in millions, except per share
data).
1993 Reorganization
As used on the following page, the term "Reorganized Company"
refers to Continental Airlines, Inc. and its subsidiaries. The
Company reorganized under Chapter 11 of the federal bankruptcy code
in April 1993, after having filed for protection in December 1990.
Pursuant to the Reorganization, Continental Airlines Holdings, Inc.
(together with its subsidiaries, "Holdings" or the "Predecessor
Company"), which had been the Company's parent, merged with and
into the Reorganized Company.
As a result of the adoption of fresh start reporting in accordance
with SOP 90-7, upon consummation of the Company's Plan of
Reorganization (see Item 3. "Legal Proceedings. Plan of
Reorganization"), the consolidated financial statements of the
Predecessor Company and the Reorganized Company have not been
prepared on a consistent basis of accounting and are separated by
a vertical black line. The Reorganized Company includes
Continental CRS (formerly System One prior to April 27, 1995) (see
Item 1. - "Business. Competition and Marketing") and other
businesses that had been consolidated with Holdings prior to
April 28, 1993 (but not with pre-reorganized Continental).
ITEM 6. SELECTED FINANCIAL DATA (Continued)
Reorganized Company (1)(2)(3) Predecessor Company (2)(3)
April 28, January 1,
1993 through 1993 through Year Ended
Year Ended December 31, December 31, April 27, December 31,
1996 1995 1994 1993 1993 1992
Operating revenue. . . . $6,360 $5,825 $5,670 $3,910 $1,857 $5,459
Operating income (loss). 525 385 (11) 95 (114) (106)
Income (loss) before
extraordinary gain
(loss) . . . . . . . . 325 224 (613) (39) (979) (125)
Net income (loss). . . . 319 224 (613) (39) 2,640 (125)
Earnings (loss) per
common and common
equivalent share:
Income (loss)
before extra-
ordinary loss. . . 4.97 3.60 (11.88) (1.17) * (1.35)
Net income (loss). . 4.87 3.60 (11.88) (1.17) * (1.35)
Earnings (loss) per
common share
assuming full
dilution:
Income (loss)
before extra-
ordinary loss. . . 4.19 3.15 (11.88) (1.17) * (1.35)
Net income (loss). . 4.11 3.15 (11.88) (1.17) * (1.35)
*Not meaningful.
ITEM 6. SELECTED FINANCIAL DATA (Continued)
Predecessor
Reorganized Company (1)(2) Company (2)
December 31, December 31,
1996 1995 1994 1993 1992
Total assets . . . . . . . . . . . $5,206 $4,821 $4,601 $5,099 $3,253
Debt and capital lease obligations
in default (4) . . . . . . . . . - - 490 - -
Estimated liabilities subject to
Chapter 11 reorganization
proceedings. . . . . . . . . . . - - - - 3,907
Long-term debt and capital lease
obligations. . . . . . . . . . . 1,624 1,658 1,202 1,775 228
Minority interest. . . . . . . . . 15 27 26 22 -
Continental-Obligated Mandatorily
Redeemable Preferred Securities
of Subsidiary Trust holding
solely Convertible Subordinated
Debentures (5) . . . . . . . . . 242 242 - - -
Redeemable preferred stock . . . . 46 41 53 47 102
(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
1996, 1995 and 1994. 1996 results include a $128 million fleet disposition charge
associated with the Company's decision to accelerate the replacement of certain aircraft
between August 1997 and December 1999. The fleet disposition charge relates primarily
to (i) the writedown of Stage 2 aircraft inventory to its estimated fair value and (ii)
a provision for costs associated with the return of leased aircraft at the end of their
respective lease terms. 1995 results include a $108 million gain ($30 million after
taxes) from the System One transactions. 1994 results include a provision of
$447 million associated with the planned early retirement of certain aircraft and closed
or underutilized airport and maintenance facilities and other assets.
(2) Certain reclassifications have been made in prior years' financial statements to conform
to the 1996 presentation.
(3) No cash dividends were paid on common stock during the periods shown.
(4) The Company's failure to make certain required payments in 1994 to certain lenders and
aircraft lessors constituted events of default under the respective agreements with such
parties. These events of default were cured in 1995.
(5) The sole assets of the Continental-Obligated Mandatorily Redeemable Preferred Securities
of Subsidiary Trust ("Trust") are Convertible Subordinated Debentures, with an aggregate
principal amount of $250 million, which bear interest at the rate of 8-1/2% per annum
and mature on December 1, 2020. Upon repayment, the Trust will be mandatorily redeemed.
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.
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, 1996.
Comparison of 1996 to 1995. The Company recorded consolidated net
income of $319 million and $224 million for the years ended
December 31, 1996 and 1995, respectively, including a $128 million
fleet disposition charge ($77 million after taxes) and a $6 million
after-tax extraordinary loss relating to the early extinguishment
of debt in 1996. Continental's financial and operating performance
improved significantly in 1996 compared to 1995, reflecting, among
other things, continued implementation of the Company's strategic
program to enhance the fundamentals of its operations, rationalize
capacity, improve customer service and employee relations and
strengthen its balance sheet and liquidity. Management believes
that the Company benefitted significantly from the expiration of
the aviation trust fund tax (the "ticket tax") on December 31,
1995, although the amount of any such benefit directly resulting
from the expiration of the ticket tax cannot precisely be
determined. The ticket tax was reinstated on August 27, 1996, and
expired again on December 31, 1996. Management believes that the
reimposition of the ticket tax is imminent. Nevertheless, the
amount of the negative impact directly resulting from the
reimposition of the ticket tax cannot be precisely determined.
Implementation of the Company's route realignment and capacity
rationalization initiatives increased capacity by 0.8% in 1996 as
compared to 1995. This increase in capacity, combined with a 4.7%
increase in traffic, produced a 2.5 percentage point increase in
load factor to 68.1%. This higher load factor, combined with a
4.7% increase in the average yield per revenue passenger mile,
contributed to a 10.7% increase in passenger revenue to $5.9
billion in 1996.
Cargo, mail and other revenue decreased 6.5%, $34 million, from
1995 to 1996 primarily as a result of a series of transactions
entered into with a former subsidiary, System One Information
Management, Inc. ("System One") (which were effective April 27,
1995). Partially offsetting such decrease was an increase in other
revenue resulting from a wet lease agreement with Alitalia
Airlines, an agreement with DHL International to operate a sorting
and distribution hub in Manila and an increase in revenue related
to frequent flyer mileage credits sold to participating partners in
the Company's frequent flyer program.
Wages, salaries and related costs increased 8.2%, $117 million,
during 1996 as compared to 1995 due in part to an increase in the
average number of full-time equivalent employees from approximately
33,700 for the year ended December 31, 1995 to approximately 34,300
for the year ended December 31, 1996. The increase is also
attributable to pay increases effective July 1, 1996 for
Continental's jet pilots and substantially all of its non-unionized
employees and an increase in base wages and per diem payments for
flight attendants resulting from the Company's collective
bargaining agreement with the International Association of
Machinists and Aerospace Workers ("IAM") representing Continental's
flight attendants. In addition, increases in employee profit
sharing and other incentive programs, including the payment of
bonuses for on-time airline performance, increased wages and
salaries.
Aircraft fuel expense increased 13.7%, $93 million, from 1995 to
1996. The average price per gallon, net of fuel hedging gains of
$65 million, increased 10.7% from 55.0 cents in 1995 to 60.9 cents
in 1996. In addition, there was a 2.1% increase in the quantity of
jet fuel used from 1.203 billion gallons during 1995 to 1.228
billion gallons during 1996, principally reflecting increased
capacity.
Aircraft rentals increased 2.4%, $12 million, from 1995 to 1996,
primarily as a result of the delivery of new aircraft throughout
1996. Such increase was partially offset by retirements of certain
leased aircraft and refinancings of certain leased aircraft.
Commissions expense increased 4.3%, $21 million, in 1996 compared
to 1995, primarily due to a 10.7% increase in passenger revenue,
partially offset by a decrease in the percentage of commissionable
revenue.
Maintenance, materials and repairs increased 7.5%, $32 million,
during 1996 as compared to 1995, principally due to the volume and
timing of engine overhauls as part of the Company's ongoing
maintenance program.
During the third quarter of 1996, the Company made the decision to
accelerate the replacement of 30 DC-9-30 aircraft, six DC-10-10
aircraft, 31 727-200 aircraft, 13 737-100 aircraft and 17 737-200
aircraft between August 1997 and December 1999. As a result of its
decision to accelerate the replacement of these aircraft, the
Company recorded a fleet disposition charge of $128 million ($77
million after taxes). The fleet disposition charge relates
primarily to (i) the writedown of Stage 2 aircraft inventory, which
is not expected to be consumed through operations, to its estimated
fair value; and (ii) a provision for costs associated with the
return of leased aircraft at the end of their respective lease
terms.
Interest expense decreased 22.5%, $48 million, from 1995 to 1996,
primarily due to principal reductions of long-term debt and capital
lease obligations as a result of the Company's refinancing
initiatives.
Interest income increased 38.7%, $12 million, in 1996 compared to
1995, principally due to an increase in the average invested
balance of cash and cash equivalents.
The Company's other nonoperating income (expense) for the year
ended December 31, 1996 includes a $13 million gain related to the
sale of approximately 1.4 million shares of America West Airlines,
Inc. ("America West") common stock, a $5 million gain related to
the sale of the America West warrants and foreign currency gains
and losses (primarily related to the Japanese yen and the British
pound).
Nonoperating income (expense) for the year ended December 31, 1995
primarily consisted of a pre-tax gain of $108 million from the
System One transactions. Additionally in 1995, the bankruptcy
court approved a settlement resolving certain claims filed by the
Company for the return of certain aircraft purchase deposits. As
a result of the settlement, the Company recorded a $12 million gain
in 1995, included in other nonoperating income (expense). These
gains were partially offset by an additional provision of $14
million for underutilized airport facilities and other assets
(primarily associated with Denver International Airport, "DIA") and
a $5 million pretax charge which represented a waiver fee to a
major creditor of the Company.
The income tax provision for the year ended December 31, 1996 of
$86 million consists of federal, state and foreign income taxes.
During 1996, the Company utilized previously unbenefitted net
operating loss carryforwards ("NOLs"), created subsequent to the
Company's 1993 emergence from bankruptcy, and began accruing income
tax expense in the second quarter. A provision for federal income
taxes was recorded for the year ended December 31, 1995 related to
the System One transactions. No additional provision was recorded
in 1995 due to the previously incurred NOLs for which a tax benefit
had not previously been recorded.
Comparison of 1995 to 1994. Continental's financial and operating
performance improved dramatically in 1995, reflecting among other
things implementation of a new strategic program by the Company to
enhance the fundamentals of its operations, rationalize capacity
(including the elimination of "Continental Lite" operations - a
network of short-haul, no-frills, low-fare flights), improve
customer service and employee relations and strengthen
Continental's balance sheet and liquidity. The Company recorded
consolidated net income of $224 million for the year ended December
31, 1995, after recording $31 million in employee profit sharing,
as compared to a consolidated net loss of $613 million for the year
ended December 31, 1994. The Company's net income in 1995 included
a $30 million after-tax gain on the System One transactions.
During the fourth quarter of 1994, the Company recorded a provision
of $447 million, which included $278 million associated primarily
with the planned early retirement of certain aircraft and $169
million relating to closed or underutilized airport and maintenance
facilities and other assets.
During 1995, the Company implemented its route realignment and
capacity rationalization initiatives, which reduced capacity by
7.4% from 1994, while traffic declined only 3.8%, producing a 2.5
percentage point increase in load factor to 65.6%. This higher
load factor, combined with a 9.4% increase in the average yield per
revenue passenger mile, contributed to a 5.3% increase in passenger
revenue to $5.3 billion despite the decreased capacity.
Cargo, mail and other revenue decreased 17.5%, $111 million, from
1994 to 1995, principally as a result of the System One
transactions (which were effective April 27, 1995).
Wages, salaries and related costs decreased 6.5%, $100 million,
from 1994 to 1995, primarily due to a reduction in the average
number of full-time equivalent employees from approximately 40,400
for the year ended December 31, 1994 to approximately 33,700 for
the year ended December 31, 1995. Such decrease was partially
offset by a $20 million cash payment to pilots upon ratification of
a new collective bargaining agreement, employee profit sharing and
other incentive programs, including the payment of bonuses for
Continental's on-time performance. Wage rates were impacted by
longevity pay increases for substantially all employee groups,
effective July 1, 1995. In addition, wage restorations relating to
an average 10.0% wage reduction implemented by the Company in July
1992 also increased wage rates. Wage reductions were restored in
equal increments in December 1992, April 1993, April 1994 and July
1994.
Aircraft fuel expense decreased 8.1%, $60 million, from 1994 to
1995. The quantity of jet fuel used dropped 7.7% from 1.3 billion
gallons in 1994 to 1.2 billion gallons in 1995, principally
reflecting capacity reductions and increased stage lengths. Such
decrease was partially offset by a 2.8% increase in the average
price per gallon from 53.5 cents in 1994 to 55.0 cents in 1995.
Aircraft rentals increased 14.8%, $64 million, from 1994 to 1995,
primarily as a result of the delivery of new 737 and 757 aircraft
from Boeing during late 1994 and throughout 1995. Such increase
was partially offset by retirements and groundings of certain
leased aircraft.
Commission expense increased 11.4%, $50 million, from 1994 to 1995,
primarily due to increased passenger revenue and higher average
effective commission rates associated with the Company's targeted
travel initiatives and the elimination of noncommissionable
Continental Lite fares.
Maintenance, materials and repairs decreased 13.3%, $66 million,
from 1994 to 1995, principally due to the replacement of older
aircraft with new aircraft, a reduction in the fleet size and the
volume and timing of overhauls as part of the Company's ongoing
maintenance program. Such decreases were partially offset by the
shift of scheduled maintenance work to outside suppliers, which
resulted in the entire cost of maintenance work performed by
outside suppliers being included in maintenance, materials and
repairs, whereas when Continental performs its own maintenance
work, a portion of such cost is classified as wages, salaries and
related costs.
Other rentals and landing fees decreased by 9.2%, $36 million, from
1994 to 1995, principally due to reduced facility rentals and
landing fees resulting from downsizing operations.
Other operating expense decreased 6.3%, $88 million, from 1994 to
1995, primarily as a result of the System One transactions (which
were effective April 27, 1995), coupled with decreases in
advertising expense, aircraft servicing expense and catering
expense. Such decreases were partially offset by increases in
reservations and sales expense and other miscellaneous expense.
Interest expense decreased 11.6%, $28 million, from 1994 to 1995,
primarily due to the reduced accretion of deferred credits recorded
in connection with the Company's adjustment of operating leases to
fair market value as of April 27, 1993 upon emergence from
bankruptcy and principal reductions of long-term debt and capital
lease obligations. Such decrease was partially offset by accrued
interest on the convertible secured debentures.
Interest capitalized decreased 64.7%, $11 million, from 1994 to
1995, principally due to a decrease in the average balance of
purchase deposits for flight equipment.
Interest income increased 34.8%, $8 million, from 1994 to 1995,
primarily due to an increase in the average balance of cash and
cash equivalents.
The Company recorded a pretax gain of $108 million related to the
System One transactions in Nonoperating Income (Expense) in the
accompanying Consolidated Statement of Operations. The tax
provision related to these transactions totaled $78 million (which
differs from the federal statutory rate due to certain
nondeductible expenses), for a net gain of $30 million.
In 1995, the bankruptcy court approved a settlement resolving
certain claims filed by the Company for the return of certain
aircraft purchase deposits. As a result of the settlement, the
Company recorded a $12 million gain in 1995, which was classified
in Other, net in the accompanying Consolidated Statement of
Operations. This gain was offset by an additional provision of $14
million for underutilized airport facilities and other assets
(primarily associated with DIA) and a $5 million pretax charge
related to the purchase of warrants held by Air Canada, a Canadian
corporation. The Company's Other, net in 1994 included gains of
$10 million relating primarily to a gain on the sale of 10 Beech
aircraft and five spare engines, offset by foreign exchange losses
of $5 million (primarily related to Japanese yen-denominated
transactions). In addition, during the fourth quarter of 1994, the
Company recorded a provision of $447 million, which included $278
million associated primarily with the planned early retirement of
certain aircraft and $169 million relating to closed or
underutilized airport and maintenance facilities and other assets.
Certain Statistical Information
An analysis of statistical information for Continental's jet
operations for each of the three years in the period ended
December 31, 1996 is as follows:
Net Increase/ Net Increase/
(Decrease) (Decrease)
1996 1996-1995 1995 1995-1994 1994
Revenue pas-
senger miles
(millions) (1). . 41,914 4.7 % 40,023 (3.8)% 41,588
Available seat
miles (2) . . . . 61,515 0.8 % 61,006 (7.4)% 65,861
Block hours
(thousands) (3) . 1,131 3.3 % 1,095 (4.6)% 1,148
Passenger load
factor (4). . . . 68.1% 2.5 pts. 65.6% 2.5 pts. 63.1%
Breakeven pas-
senger load
factor (5). . . . 60.7% (0.1)pts. 60.8% (2.1)pts. 62.9%
Passenger revenue
per available
seat mile
(cents) (6) . . . 8.93 8.9 % 8.20 13.6 % 7.22
Total revenue per
available seat
miles (cents)
(7) . . . . . . . 9.80 8.6 % 9.02 13.5 % 7.95
Operating cost
per available
seat mile
(cents) (8),
(12). . . . . . . 8.77 4.9 % 8.36 6.4 % 7.86
Operating cost
per block
hour (12) . . . . $4,772 2.5 % $4,655 3.3 % $4,506
Average yield
per revenue
passenger
mile (cents) (9). 13.10 4.7 % 12.51 9.4 % 11.44
Average fare per
revenue
passenger . . . .$143.27 7.6 % $133.21 18.2 % $112.71
Revenue passengers
(thousands) . . . 38,332 2.0 % 37,575 (11.0)% 42,202
Average length of
aircraft flight
(miles) . . . . . 896 7.2 % 836 15.0 % 727
Average daily
utilization of
each aircraft
(hours) (10). . . 9:53 3.7 % 9:32 (4.2)% 9:57
Actual aircraft
in fleet at end
of period (11). . 317 2.6 % 309 (6.4)% 330
_______________
(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) The number of hours an aircraft is operated in revenue
service from gate to gate.
(4) Revenue passenger miles divided by available seat miles.
(5) 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.
(6) Passenger revenue divided by available seat miles.
(7) Total revenue divided by available seat miles.
(8) Operating expenses divided by available seat miles.
(9) The average revenue received for each mile a revenue
passenger is carried.
(10) The average block hours flown per day in revenue service per
aircraft.
(11) 1996 excludes four all-cargo 727 aircraft at CMI, three A300
and one 747 Continental aircraft that were removed from
service in 1995 and four DC-10-30 Continental aircraft that
were delivered in 1996, but were not placed into service
until 1997.
(12) 1996 excludes fleet disposition charge totaling $128 million.
Liquidity and Capital Commitments
During 1996, the Company completed a number of transactions
intended to strengthen its long-term financial position and enhance
earnings:
- - In the first and second quarters of 1996, the Company financed
one owned aircraft and exercised its right under 22 existing
leveraged aircraft leases to cause the owner/ lessor's debt
underlying these leases to be refinanced. The lower borrowing
costs obtained in the refinancing allowed Continental's operating
lease expense for the affected aircraft to be reduced by more
than $17 million annually.
- - In January and February 1996, Continental repurchased or redeemed
without prepayment penalty the remaining amount of its Series A
convertible secured debentures for $125 million (including
payment-in-kind interest of $7 million).
- - In February 1996, Continental sold approximately 1.4 million of
the 1.8 million shares it owned in America West, realizing net
proceeds of $25 million and recognizing a gain of $13 million.
In May 1996, the Company sold all of its 802,860 America West
warrants, realizing net proceeds of $7 million and recognizing a
gain of $5 million.
- - In March 1996, Continental completed the offering of $230 million
of 6-3/4% convertible subordinated notes.
- - In March 1996, Continental repaid $257 million of secured
indebtedness to General Electric Capital Corporation, General
Electric Company and certain affiliates (any one or more of such
entities, "GE") (of which $47 million was required as a result of
the convertible debt financing and the America West stock sale
and $210 million was an optional prepayment), resulting in the
elimination of certain restrictive covenants.
- - In July 1996, Continental's 91%-owned subsidiary, Continental
Micronesia, Inc. ("CMI") consummated a $320 million secured term
loan financing with a group of banks and other financial
institutions. Continental and CMI used the net proceeds,
together with available cash, to prepay approximately $324
million in principal amount of GE indebtedness. The bank
financing reduced interest expense by $3 million in 1996 and is
expected to result in a savings in interest expense of $6 million
in 1997, based on current rates. The bank financing does not
contain any restrictive covenants at the Continental parent
level, and none of the assets of the parent company (other than
its stock in Air Micronesia, Inc., CMI's parent company) is
pledged in connection with the financing. Accordingly, this
transaction freed up over $1 billion of collateral at Continental
which was previously pledged under the terms of the GE debt
agreements.
- - In December 1996, the Company sold $250 million principal amount
of 9-1/2% senior notes due 2001. The net proceeds of $244
million were added to the Company's available cash resources.
As of December 31, 1996, Continental had approximately $1.9 billion
(including current maturities) of long-term debt and capital lease
obligations, and had approximately $884 million of minority
interest, Continental-obligated mandatorily redeemable preferred
securities of subsidiary trust, redeemable preferred stock and
common stockholders' equity, a ratio of 2.1 to 1. As of
December 31, 1995, the ratio of long-term debt and capital lease
obligations (including current maturities) to minority interest,
Continental-obligated mandatorily redeemable preferred securities
of subsidiary trust, redeemable preferred stock and common
stockholders' equity was 3.1 to 1.
The Company had, as of December 31, 1996, deferred tax assets
aggregating $1.3 billion, including $804 million of NOLs. The
Company recorded a valuation allowance of $694 million against such
assets as of December 31, 1996. Realization of a substantial
portion of the Company's remaining NOLs will require the completion
by April 27, 1998 of transactions resulting in recognition of
built-in gains for federal income tax purposes. The Company has
consummated several such transactions and currently intends to
consummate one or more additional transactions. If the Company
were to determine in the future that such transactions will not be
completed and if future income is not sufficient to recognize the
benefit of previously completed transactions, an adjustment to the
net deferred tax liability of up to $85 million would be charged to
income in the period such determination was made.
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 $1.1 billion of taxable income
following December 31, 1996. 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 5.48% for February
1997). 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 NOL utilization would
be limited to approximately $100 million per year.
As of December 31, 1996, Continental has firm commitments with The
Boeing Company ("Boeing") to take delivery of a total of 127 jet
aircraft during the years 1997 through 2003 with options for an
additional 90 aircraft (exercisable subject to certain conditions).
These new aircraft will replace older, less efficient Stage 2
aircraft and allow for growth of operations. The estimated
aggregate cost of the Company's firm commitments for the Boeing
aircraft is approximately $4.3 billion. Continental has firm
commitments of approximately $1.4 billion of backstop financing for
its Boeing aircraft orders. Continental currently plans on
financing the new Boeing aircraft with enhanced equipment trust
certificates or similar financing, subject to availability and
market conditions. However, further financing will be needed to
satisfy Continental's capital commitment for other aircraft-related
expenditures such as spare parts, simulators (including Continental
Express's new Embraer ("EMB")-145 aircraft described below) 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. Continental has also
entered into agreements or letters of intent with several outside
parties to lease or purchase five DC-10-30 aircraft and one Boeing
747 aircraft which are expected to be delivered by mid 1997.
During 1996, Continental took delivery of a total of five new
Boeing aircraft which consisted of three 737-500 aircraft and two
757-200 aircraft. In addition, Continental also purchased three
DC-10-30 aircraft and two McDonnell Douglas-82 aircraft and leased
four DC-10-30 aircraft.
In September 1996, Continental's wholly-owned subsidiary,
Continental Express ("Express"), placed an order for 25 firm EMB-
145 50-seat regional jets, with options for an additional 175
aircraft. Neither Express nor Continental will have any obligation
to take aircraft that are not financed by a third party and leased
to the Company. However, if the Company fails to confirm the first
tranche of 25 options by August 1997, the rent associated with the
25 firm aircraft will increase by an aggregate of $33.6 million
over the 16-year life of the leases. Express took delivery of two
of the firm aircraft in late December 1996 and will take delivery
of the remaining 23 firm aircraft during the period from January 1,
1997 through the second quarter of 1998. The Company expects to
account for all of these aircraft as operating leases. During
1996, Express also took delivery of 12 Beech 1900-D aircraft and
eight Avions de Transport Regional ("ATR") 42-500 aircraft.
Continental expects its cash outlays for 1997 capital expenditures,
exclusive of fleet plan requirements, to aggregate $125 million,
primarily relating to mainframe, 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 1996
aggregated $84 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.
In July 1996, the Company announced plans to expand its gates and
related facilities Houston's Intercontinental Airport into Terminal
B, as well as planned improvements at Terminal C. The expansion,
which will include the construction of a new automated people mover
system linking Terminal B and Terminal C, is expected to cost
approximately $160 million (exclusive of capitalized interest),
which the Company expects will be funded principally by the
issuance of tax-exempt special facilities revenue bonds by the City
of Houston. In connection therewith, the Company expects to enter
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 will have
a term no longer than 30 years.
The Company is also exploring facility expansions at Cleveland and
Newark which would require, among other matters, agreements to be
reached with the applicable airport authority. The Company
anticipates that any such expansions would be financed by tax-
exempt bonds.
As of December 31, 1996 the Company had $1.0 billion in cash and
cash equivalents (excluding restricted cash), compared to $603
million as of December 31, 1995. Net cash provided by operating
activities increased $512 million during the year ended December
31, 1996 compared to the same period in the prior year principally
due to earnings improvement. Net cash used by investing activities
for the year ended December 31, 1996 compared to the same period in
the prior year increased $279 million, primarily as a result of
higher capital expenditures in 1996, lower purchase deposits
refunded in connection with aircraft delivered in 1996 and proceeds
received in 1995 in connection with the System One transactions.
This increase was offset in part by proceeds received from (i)
sale/leaseback transactions in 1996 and (ii) the sale in 1996 of
approximately 1.4 million shares of Continental's America West
stock and all of Continental's America West warrants. Net cash
used by financing activities increased $177 million primarily due
to (i) an increase in the repayment of long-term debt and capital
lease obligations, net of proceeds from issuance of debt and other
securities, (ii) dividends paid on preferred securities of trust
and (iii) a dividend paid to the minority shareholder of CMI in
connection with the $320 million secured term loan financing. This
increase was offset in part by proceeds received from the
consummation of a $320 million secured term loan financing and the
issuances of $250 million principal amount of 9-1/2% senior notes
and $230 million of 6-3/4% convertible subordinated notes.
Continental does not have general lines of credit and has
significant encumbered assets.
Approximately $76 million and $144 million of cash and cash
equivalents at December 31, 1996 and 1995, respectively, were held
in restricted arrangements relating primarily to workers'
compensation claims and in accordance with the terms of certain
other agreements. The $320 million financing consummated by CMI in
July 1996 contains significant financial covenants relating to CMI,
including maintenance of a minimum fixed charge coverage ratio, a
minimum consolidated net worth and minimum liquidity, and covenants
restricting CMI's leverage, its incurrence of certain indebtedness
and its pledge of assets. The financial covenants also limit the
ability of CMI to pay dividends to Continental. As of December 31,
1996, CMI had a minimum cash balance requirement of $25 million,
net assets of $185 million and was restricted from paying dividends
in excess of $6 million. As a result of the recent weakness of the
yen against the dollar and increased fuel costs, CMI's operating
earnings declined during the third and fourth quarter of 1996 as
compared to similar periods in 1995, and are not expected to
improve materially absent a stronger yen or reduced fuel costs. In
January 1997, CMI elected to prepay $25 million of principal amount
of its bank financing rather than use such cash for other purposes.
CMI entered into an interest rate swap agreement and an interest
rate cap agreement to reduce the impact of potential increases in
interest rates on its bank financing that was completed in July
1996. The Company has entered into petroleum option contracts to
provide some short-term protection against a sharp increase in jet
fuel prices, and CMI has entered into average rate option contracts
to hedge a portion of its Japanese yen-denominated ticket sales
against a significant depreciation in the value of the yen versus
the United States dollar.
In August 1996, the Company and the IAM which represents the
Company's Continental Airlines' flight attendants entered into a
collective bargaining agreement which becomes amendable in December
1999. The agreement provides for base wage increases in each year
of the contract, a one-time adjustment to certain base wage scales
as an equitable adjustment, an increase in per diem payments and
other matters, including productivity improvements. In addition,
effective July 1, 1996, Continental implemented pay increases for
substantially all of its non-unionized employees as part of a
three-year plan to increase base wages to be more comparable to
industry average wages. The Company anticipates that the pay
increases for Continental's flight attendants and its non-unionized
employees will result in a cumulative increase in wages, salaries
and related costs (assuming no change in the Company's operations)
of $60 million through 1997, $104 million through 1998 and $134
million through 1999. CMI's collective bargaining agreement with
its flight attendants became amendable in September 1996 and
negotiations are in progress to amend this contract. The Company's
collective bargaining agreements with its CMI agent-classification
employees, CMI mechanics and mechanic-related employees, its
Continental Airlines jet pilots and its Express pilots become
amendable in March 1997, March 1997, July 1997 and October 1997,
respectively. Negotiations are expected to begin in early 1997 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. The Company anticipates that it will be able to offset
a significant portion of wage and other cost increases with
increased labor productivity, reduced interest and lease expenses,
reduced distribution costs and other cost savings.
Continental's decision to order 60 new Boeing 737-500 and 737-600
aircraft (which will replace older, less efficient Stage 2
aircraft) is expected to increase ownership costs while generating
cost savings in the areas of maintenance, fuel and pilot training.
Management believes that the Company's costs are likely to be
affected in the future by (i) higher aircraft rental expense as new
aircraft are delivered, (ii) higher wages, salaries and related
costs as the Company continues to compensate 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 governmental regulations and taxes affecting air
transportation and the costs charged for airport access, including
new security requirements, (v) changes in the Company's fleet and
related capacity and (vi) 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 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, 1996 F-3
Consolidated Balance Sheets as of December 31, 1996
and 1995 F-5
Consolidated Statements of Cash Flows for each of the
Three Years in the Period Ended December 31, 1996 F-7
Consolidated Statements of Redeemable Preferred Stock
and Common Stockholders' Equity for each of the
Three Years in the Period Ended December 31, 1996 F-10
Notes to Consolidated Financial Statements F-14
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, 1996
and 1995, 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,
1996. 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 generally accepted
auditing standards. 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, 1996 and 1995,
the consolidated results of its operations and its cash flows for
each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
February 10, 1997
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions of dollars, except per share data)
Year Ended December 31,
1996 1995 1994
Operating Revenue:
Passenger. . . . . . . . . . . . . . . . $5,871 $5,302 $5,036
Cargo, mail and other. . . . . . . . . . 489 523 634
6,360 5,825 5,670
Operating Expenses:
Wages, salaries and related costs. . . . 1,549 1,432 1,532
Aircraft fuel. . . . . . . . . . . . . . 774 681 741
Aircraft rentals . . . . . . . . . . . . 509 497 433
Commissions. . . . . . . . . . . . . . . 510 489 439
Maintenance, materials and repairs . . . 461 429 495
Other rentals and landing fees . . . . . 350 356 392
Depreciation and amortization. . . . . . 254 253 258
Fleet disposition charge . . . . . . . . 128 - -
Other. . . . . . . . . . . . . . . . . . 1,300 1,303 1,391
5,835 5,440 5,681
Operating Income (Loss) 525 385 (11)
Nonoperating Income (Expense):
Interest expense . . . . . . . . . . . . (165) (213) (241)
Interest capitalized . . . . . . . . . . 5 6 17
Interest income. . . . . . . . . . . . . 43 31 23
Gain on System One transactions. . . . . - 108 -
Other, net . . . . . . . . . . . . . . . 20 (7) (439)
(97) (75) (640)
Income (Loss) before Income Taxes,
Minority Interest and Extraordinary
Loss . . . . . . . . . . . . . . . . . . 428 310 (651)
Income Tax (Provision) Benefit. . . . . . (86) (78) 42
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions of dollars, except per share data)
Year Ended December 31,
1996 1995 1994
Income (Loss) before Minority
Interest and Extraordinary Loss. . . . . $ 342 $ 232 $ (609)
Minority Interest . . . . . . . . . . . . (3) (6) (4)
Distributions on Preferred Securities
of Trust, net of applicable income taxes
of $8 in 1996. . . . . . . . . . . . . . (14) (2) -
Income (Loss) before Extraordinary
Loss . . . . . . . . . . . . . . . . . . 325 224 (613)
Extraordinary Loss, net of applicable
income taxes of $4 . . . . . . . . . . . (6) - -
Net Income (Loss) . . . . . . . . . . . . 319 224 (613)
Preferred Dividend Requirements and
Accretion to Liquidation Value . . . . . (5) (9) (6)
Income (Loss) Applicable to Common
Shares . . . . . . . . . . . . . . . . . $ 314 $ 215 $ (619)
Earnings (Loss) per Common and
Common Equivalent Share:
Income (loss) before Extraordinary
Loss . . . . . . . . . . . . . . . . . $ 4.97 $ 3.60 $(11.88)
Extraordinary Loss. . . . . . . . . . . (0.10) - -
Net Income. . . . . . . . . . . . . . . $ 4.87 $ 3.60 $(11.88)
Earnings (Loss) per Common Share
Assuming Full Dilution:
Income (loss) before Extraordinary
Loss . . . . . . . . . . . . . . . . . $ 4.19 $ 3.15 $(11.88)
Extraordinary Loss. . . . . . . . . . . (0.08) - -
Net Income. . . . . . . . . . . . . . . $ 4.11 $ 3.15 $(11.88)
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
CONTINENTAL AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(In millions of dollars, except for share data)
December 31, December 31,
ASSETS 1996 1995
Current Assets:
Cash and cash equivalents, including
restricted cash and cash equivalents
of $76 and $144, respectively . . . . . $1,061 $ 747
Accounts receivable, net of allowance
for doubtful receivables of $27 and
$44, respectively . . . . . . . . . . . 377 351
Spare parts and supplies, net of
allowance for obsolescence of $47 and
$36, respectively . . . . . . . . . . . 111 127
Prepayments and other assets . . . . . . 85 90
Total current assets . . . . . . . . . 1,634 1,315
Property and Equipment:
Owned property and equipment:
Flight equipment. . . . . . . . . . . . 1,199 1,107
Other . . . . . . . . . . . . . . . . . 338 288
1,537 1,395
Less: Accumulated depreciation . . . . 370 285
1,167 1,110
Purchase deposits for flight equipment . 154 48
Capital leases:
Flight equipment. . . . . . . . . . . . 396 394
Other . . . . . . . . . . . . . . . . . 31 28
427 422
Less: Accumulated amortization . . . . 152 119
275 303
Total property and equipment . . . . . 1,596 1,461
Other Assets:
Routes, gates and slots, net of
accumulated amortization
of $212 and $154, respectively. . . . . 1,473 1,531
Reorganization value in excess of
amounts allocable to identifiable
assets, net of accumulated amortization
of $60 and $46, respectively. . . . . . 237 251
Investments. . . . . . . . . . . . . . . 134 163
Other assets, net. . . . . . . . . . . . 132 100
Total other assets . . . . . . . . . . 1,976 2,045
Total Assets . . . . . . . . . . . . $5,206 $4,821
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(In millions of dollars, except for share data)
December 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
Current Liabilities:
Current maturities of long-term debt . . $ 201 $ 163
Current maturities of capital leases . . 60 58
Accounts payable . . . . . . . . . . . . 705 617
Air traffic liability. . . . . . . . . . 661 579
Accrued payroll and pensions . . . . . . 149 181
Accrued other liabilities. . . . . . . . 328 386
Total current liabilities . . . . . . . 2,104 1,984
Long-Term Debt. . . . . . . . . . . . . . 1,368 1,352
Capital Leases. . . . . . . . . . . . . . 256 306
Deferred Credits and Other Long-Term
Liabilities:
Deferred income taxes. . . . . . . . . . 75 46
Accruals for aircraft retirements and
excess facilities . . . . . . . . . . . 188 175
Other. . . . . . . . . . . . . . . . . . 331 343
Total deferred credits and other
long-term liabilities. . . . . . . . . 594 564
Commitments and Contingencies
Minority Interest . . . . . . . . . . . . 15 27
Continental-Obligated Mandatorily
Redeemable Preferred Securities
of Subsidiary Trust Holding Solely
Convertible Subordinated
Debentures (A) . . . . . . . . . . . . . 242 242
Redeemable Preferred Stock. . . . . . . . 46 41
Common Stockholders' Equity:
Class A common stock - $.01 par,
50,000,000 shares authorized;
9,280,000 and 12,602,112 shares issued
and outstanding, respectively . . . . . - -
Class B common stock - $.01 par,
200,000,000 shares authorized;
47,943,343 and 42,856,548 shares
issued and outstanding, respectively. . - -
Additional paid-in capital . . . . . . . 693 733
Accumulated deficit. . . . . . . . . . . (109) (428)
Unvested portion of restricted stock . . (5) (10)
Additional minimum pension liability . . (2) (8)
Unrealized gain on marketable equity
securities. . . . . . . . . . . . . . . 4 18
Total common stockholders' equity . . . 581 305
Total Liabilities and Stockholders'
Equity . . . . . . . . . . . . . . . $5,206 $4,821
(A) The sole assets of the Trust are convertible subordinated debentures
with an aggregate principal amount of $250 million, which bear
interest at the rate of 8-1/2% per annum and mature on December 1,
2020. Upon repayment, the Continental-Obligated Mandatorily
Redeemable Preferred Securities of Subsidiary Trust will be
mandatorily redeemed.
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions of dollars)
Year Ended December 31,
1996 1995 1994
Cash Flows From Operating
Activities:
Net income (loss). . . . . . . . . . . . $ 319 $224 $(613)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization. . . . . 254 253 258
Provision for aircraft and
facilities. . . . . . . . . . . . . . 128 14 447
Gain on sale of America West stock
and warrants. . . . . . . . . . . . . (18) - -
Gain on System One transactions. . . . - (108) -
Other, net . . . . . . . . . . . . . . 83 98 (52)
Changes in operating assets and
liabilities:
Increase in accounts receivable . . . (42) (21) (64)
Increase in spare parts and
supplies . . . . . . . . . . . . . . (43) (8) (10)
(Increase) decrease in prepayments
and other assets . . . . . . . . . . 88 (84) (29)
Increase in accounts payable. . . . . 103 48 89
Increase (decrease) in air traffic
liability. . . . . . . . . . . . . . 82 (5) (7)
Increase (decrease) in accrued
liabilities, deferred credits
and other. . . . . . . . . . . . . . (123) (92) 7
Net cash provided by operating
activities. . . . . . . . . . . . . . . 831 319 26
Cash Flows from Investing Activities:
Capital expenditures, net of returned
purchase deposits . . . . . . . . . . . (314) (82) (227)
Purchase deposits refunded in
connection with aircraft delivered. . . 20 97 96
Proceeds from disposition of
property, equipment and other
assets. . . . . . . . . . . . . . . . . 11 60 29
Proceeds from sale/leaseback
transactions. . . . . . . . . . . . . . 47 - -
Proceeds from sale of America West
stock and warrants. . . . . . . . . . . 32 - -
Investment in America West . . . . . . . - - (19)
Net cash provided (used) by
investing activities . . . . . . . . . (204) 75 (121)
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions of dollars)
Year Ended December 31,
1996 1995 1994
Cash Flows From Financing Activities:
Net proceeds from issuance of
long-term debt. . . . . . . . . . . . . $ 797 $ 9 $ 33
Payments on long-term debt and
capital lease obligations . . . . . . . (975) (318) (280)
Net proceeds from issuance of
common stock. . . . . . . . . . . . . . 18 13 -
Net proceeds from issuance of
preferred securities of trust . . . . . - 242 -
Dividends paid on preferred securities
of trust. . . . . . . . . . . . . . . . (22) - -
Dividend paid to minority interest
holder in connection with secured
term loan financing . . . . . . . . . . (13) - -
Purchase of warrants . . . . . . . . . . (50) (14) -
Net cash used by financing activities . (245) (68) (247)
Net Increase (Decrease) in Cash
and Cash Equivalents . . . . . . . . . . 382 326 (342)
Cash and Cash Equivalents
Beginning of Period (A). . . . . . . . . 603 277 619
Cash and Cash Equivalents
End of Period (A). . . . . . . . . . . . $ 985 $603 $ 277
Supplemental Cash Flows Information:
Interest paid. . . . . . . . . . . . . . $ 161 $179 $ 202
Income taxes paid, net . . . . . . . . . $ 4 $ 11 $ -
Financing and Investing Activities
Not Affecting Cash:
Reclassification of accrued rent,
capital leases and interest to
long-term debt . . . . . . . . . . . . $ 11 $ 65 $ 28
Capital lease obligations incurred. . . $ 32 $ 10 $ 14
Property and equipment acquired
through the issuance of debt . . . . . $ 119 $ 92 $ 10
Investment in AMADEUS acquired in con-
nection with System One transactions . $ - $120 $ -
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions of dollars)
Year Ended December 31,
1996 1995 1994
Reduction of debt in connection with
System One transactions. . . . . . . . $ - $ 42 $ -
Issuance of debt in connection with
purchase of Air Canada warrants. . . . $ - $ 42 $ -
Issuance of convertible secured
debentures in connection with the
aircraft settlements . . . . . . . . . $ - $158 $ -
Exchange of preferred stock for
long-term debt . . . . . . . . . . . . $ - $ 21 $ -
Financed purchase deposits for flight
equipment. . . . . . . . . . . . . . . $ 19 $ 5 $ -
Return of financed purchase deposits. . $ - $ 10 $ -
Reclassification of accrued management
fees to long-term debt . . . . . . . . $ - $ 21 $ -
Reduction of capital lease obligations
in connection with the exchange of
ATR aircraft . . . . . . . . . . . . . $ 19 $ - $ -
(A) Excludes restricted cash of $76 million, $144 million, $119 million
and $102 million at December 31, 1996, 1995, 1994 and 1993,
respectively.
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 of dollars)
Redeemable Additional
Preferred Paid-In Accumulated
Stock Capital Deficit Other
Balance, December 31, 1993 . . . . . . . . $ 47 $ 764 $ (39) $ (6)
Net Loss . . . . . . . . . . . . . . . . . - - (613) -
Restricted Stock Grant to Employees. . . . - 20 - (20)
Amortization of Restricted Stock Grants. . - - - 6
Accumulated Unpaid Dividends:
8% Cumulative Redeemable Preferred
Stock. . . . . . . . . . . . . . . . . . 2 (2) - -
12% Cumulative Redeemable Preferred
Stock. . . . . . . . . . . . . . . . . . 4 (4) - -
Additional Minimum Pension Liability . . . - - - (1)
Unrealized Loss on Marketable Equity
Securities. . . . . . . . . . . . . . . . - - - (2)
Balance, December 31, 1994 . . . . . . . . 53 778 (652) (23)
Net Income . . . . . . . . . . . . . . . . - - 224 -
Purchase of Warrants . . . . . . . . . . . - (51) - -
Accumulated Dividends:
8% Cumulative Redeemable Preferred
Stock. . . . . . . . . . . . . . . . . . 2 (2) - -
12% Cumulative Redeemable Preferred
Stock. . . . . . . . . . . . . . . . . . 2 (2) - -
Series A 12% Cumulative Preferred Stock . 2 (2) - -
Issuance of Note in Exchange for
Series A 8% Cumulative Preferred Stock. . (18) (3) - -
Additional Minimum Pension Liability . . . - - - (1)
Unrealized Gain on Marketable Equity
Securities. . . . . . . . . . . . . . . . - - - 20
Other. . . . . . . . . . . . . . . . . . . - 15 - 4
Balance, December 31, 1995 . . . . . . . . 41 733 (428) -
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED
STOCK AND COMMON STOCKHOLDERS' EQUITY
(In millions of dollars)
Redeemable Additional
Preferred Paid-In Accumulated
Stock Capital Deficit Other
Net Income . . . . . . . . . . . . . . . . $ - $ - $ 319 $ -
Purchase of Warrants . . . . . . . . . . . - (50) - -
Accumulated Dividends:
Series A 12% Cumulative Preferred Stock . 5 (5) - -
Additional Minimum Pension Liability . . . - - - 6
Unrealized Gain on Marketable Equity
Securities, net . . . . . . . . . . . . . - - - 4
Sale of America West Stock and Warrants. . - - - (18)
Other. . . . . . . . . . . . . . . . . . . - 15 - 5
Balance, December 31, 1996 . . . . . . . . $ 46 $ 693 $ (109) $ (3)
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, 1993 . . . . . . . 471,000 12,026,432 39,018,704 -
Conversion of Class B to Class A
Common Stock by Air Canada. . . . . . . - 575,680 (575,680) -
Restricted Stock Grant to Employees. . . - - 2,364,000 -
Forfeiture of Restricted Class B
Common Stock. . . . . . . . . . . . . . - - (60,000) 60,000
Balance, December 31, 1994 . . . . . . . 471,000 12,602,112 40,747,024 60,000
Cancellation of 8% and 12% Cumulative
Redeemable Preferred Stock. . . . . . . (471,000) - - -
Issuance of Series A 8% and 12%
Cumulative Preferred Stock. . . . . . . 589,142 - - -
Issuance of Note in Exchange for
Series A 8% Cumulative Preferred
Stock . . . . . . . . . . . . . . . . . (202,784) - - -
Forfeiture of Restricted Class B
Common Stock. . . . . . . . . . . . . . - - (55,000) 55,000
Reissuance of Treasury Stock . . . . . . - - 115,000 (115,000)
Issuance of Preferred Stock. . . . . . . 11,590 - - -
Issuance of Common Stock under
Company Stock Plans . . . . . . . . . . - - 863,978 -
Other. . . . . . . . . . . . . . . . . . - - 1,185,546 -
Balance, December 31, 1995 . . . . . . . 397,948 12,602,112 42,856,548 -
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
Conversion of Class A to Class B
Common Stock by Air Canada. . . . . . . - (3,322,112) 3,322,112 -
Forfeiture of Restricted Class B
Common Stock. . . . . . . . . . . . . . - - (60,000) 60,000
Purchase of Common Stock . . . . . . . . - - (133,826) 133,826
Reissuance of Treasury Stock . . . . . . - - 193,826 (193,826)
Issuance of Preferred Stock. . . . . . . 49,134 - - -
Issuance of Common Stock under
Company Stock Plans . . . . . . . . . . - - 1,764,683 -
Balance, December 31, 1996 . . . . . . . 447,082 9,280,000 47,943,343 -
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 1996 revenue
passenger miles) and, together with its wholly owned subsidiary,
Continental Express, Inc. ("Express"), and its 91%-owned
subsidiary, Continental Micronesia, Inc. ("CMI"), each a Delaware
corporation, serves 188 airports worldwide. Internationally,
Continental flies to 58 destinations and offers additional
connecting service through alliances with foreign carriers.
Continental is one of the leading airlines providing service to
Mexico and Central America, serving more destinations there than
any other United States airline. In addition, Continental flies to
four cities in South America. 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, CMI, and prior to April 27, 1995, System One
Information Management, Inc. ("System One"). See Note 11.
All significant intercompany transactions have been eliminated
in consolidation.
The minority interest holder of CMI has rights to acquire the
minimum number of additional shares of CMI necessary to cause
Continental's equity interest to decline below 80.0% if
certain events relating to the defined benefit plans of
Continental occur.
(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. Approximately $76 million and $144 million of cash
and cash equivalents at December 31, 1996 and 1995,
respectively, were held in restricted arrangements relating
primarily to payments for workers' compensation claims and in
accordance with the terms of certain other agreements.
(d) Spare Parts and Supplies -
Flight equipment expendable parts and supplies are valued at
average cost. An allowance for obsolescence for flight
equipment expendable parts and supplies is accrued to allocate
the costs of these assets, less an estimated residual value,
over the estimated useful lives of the related aircraft and
engines.
(e) Property and Equipment -
Property and equipment were recorded at fair market values as
of April 27, 1993; subsequent purchases were recorded at cost
and are depreciated to estimated residual values (10% of cost)
over their estimated useful lives using the straight-line
method. Estimated useful lives for such assets are 25 years
from the date of manufacture for all owned jet and commuter
aircraft; up to 25 years, depending on the lease period, for
aircraft acquired under long-term capital leases; and two to
25 years for other property and equipment, including airport
facility improvements.
(f) Intangible Assets -
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, 1996 at December 31, 1996
Routes. . . . $ 915 $ 92
Gates . . . . 423 89
Slots . . . . 135 31
$1,473 $212
Reorganization Value In Excess of Amounts Allocable to
Identifiable Assets
Reorganization value in excess of amounts allocable to
identifiable assets, arising from its emergence from
bankruptcy reorganization in 1993, is amortized on a straight-
line basis over 20 years. The carrying value of this
intangible asset is reviewed if the facts and circumstances
suggest it may be impaired. If this review indicates that
this intangible asset will not be recoverable, as determined
based on the undiscounted cash flows over the remaining
amortization periods, the carrying value is reduced by the
estimated shortfall of cash flows.
(g) 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.
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 to participating
partners in the OnePass program, such as hotels, car rental
agencies and credit card companies. The resulting revenue,
net of the estimated incremental cost of the credits sold, is
recorded as other operating revenue in the accompanying
Consolidated Statements of Operations during the period in
which the credits are sold.
(h) 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.
(i) 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.
(j) 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.
(k) Advertising Costs -
The Company expenses the costs of advertising as incurred.
Advertising expense was $76 million, $94 million and $133
million for the years ended December 31, 1996, 1995 and 1994,
respectively.
(l) Stock Split -
On June 26, 1996, the Board of Directors of the Company (the
"Board") declared a two-for-one stock split (the "Stock
Split") pursuant to which (a) one share of the Company's Class
A common stock, par value $.01 per share ("Class A common
stock"), was issued for each share of Class A common stock
outstanding on July 2, 1996 (the "Record Date") and (b) one
share of the Company's Class B common stock, par value $.01
per share ("Class B common stock"), was issued for each share
of Class B common stock outstanding on the Record Date.
Shares issuable pursuant to the Stock Split were distributed
on or about July 16, 1996. All references in these
consolidated financial statements and notes thereto as to the
number of shares of common stock or warrants, options, per
share amounts, exercise prices, and market prices relating to
the Company's common stock, have been retroactively restated
to reflect the Stock Split.
(m) Earnings (Loss) per Share -
The earnings (loss) per common share computations are based
upon earnings (loss) applicable to common shares and the
average number of shares of common stock, common stock
equivalents and potentially dilutive securities outstanding.
The number of shares used in the primary and fully diluted
earnings per share computations (before and after the
extraordinary loss) for the year ended December 31, 1996 was
64,599,550 and 81,943,112, respectively. The number of shares
used in the primary and fully diluted earnings per share
computations for the year ended December 31, 1995 was
64,086,854 and 71,138,298, respectively. The number of shares
used in both the primary and fully diluted loss per share
computations for the year ended December 31, 1994 was
52,113,794. Preferred stock dividend requirements, including
additional dividends on unpaid dividends, accretion to
redemption value and the accelerated accretion on the redeemed
Series A 8% Cumulative Preferred Stock ("Series A 8%
Preferred") caused by the exchange thereof for debt of the
Company on September 29, 1995 (see Note 6) decreased net
income for these computations by $5 million and $9 million for
the years ended December 31, 1996 and 1995, respectively, and
increased net loss for this computation by $6 million for the
year ended December 31, 1994.
(n) Reclassifications -
Certain reclassifications have been made in the prior years'
financial statements to conform to the current year
presentation.
NOTE 2 - LONG-TERM DEBT
Long-term debt as of December 31 is summarized as follows (in
millions):
1996 1995
Secured
Floating rate notes, interest rates of
Eurodollar plus 1.75% to 2.0% or Prime
plus 0.75% to 1.0% payable through 2003 . . $ 320 $ -
Notes payable, interest rates of 6.0% to
12.09% (imputed interest rates of 7.86%
to 9.9%), payable through 2008. . . . . . . 241 286
Floating rate notes, interest rates of
Prime plus 0.5% to 0.75% and LIBOR plus
0.75% to 4.0% and Eurodollar plus 0.75%,
payable through 2006. . . . . . . . . . . . 187 178
Notes payable, interest rates of 5.84% to
14.00%, payable through 2019. . . . . . . . 155 193
Notes payable, interest rates of 7.13% to
7.15% payable through 1999 and floating
rates thereafter of LIBOR plus 2%,
payable through 2011. . . . . . . . . . . . 97 51
Notes payable, interest rates of 8.0% to
9.86%, payable through 2003 . . . . . . . . - 546
Series A convertible debentures, interest
rate of 6.0%, payable through 2002. . . . . - 124
Other. . . . . . . . . . . . . . . . . . . . 4 7
Unsecured
Senior notes payable, interest rate of
9.5%, payable through 2001. . . . . . . . . 250 -
Convertible subordinated notes, interest
rate of 6.75%, payable through 2006 . . . . 230 -
Notes payable, interest rates of 8.38% to
12% (imputed interest rates 10.22% to
21.8%), payable through 2001. . . . . . . . 78 122
Other. . . . . . . . . . . . . . . . . . . . 7 8
1,569 1,515
Less: current maturities. . . . . . . . . . 201 163
Total. . . . . . . . . . . . . . . . . . . . $1,368 $1,352
As of December 31, 1996 and 1995, the Prime, LIBOR and Eurodollar
rates associated with Continental's indebtedness approximated 8.3%
and 8.5%, 5.6% and 5.6%, and 5.6% and 5.8%, respectively.
Substantially all of Continental's property and equipment is
subject to agreements securing indebtedness of Continental.
In July 1996, CMI consummated a $320 million secured term loan
financing with a group of banks and other financial institutions.
The loan was made in two tranches - a $180 million five-year
amortizing term loan with a current floating interest rate of
either Eurodollar plus 1.75% or Prime plus 0.75% and a $140 million
seven-year amortization extended loan with a floating interest rate
of either Eurodollar plus 2.00% or Prime plus 1.00%. See
discussion of the related interest rate cap agreement and interest
rate swap agreement in "Note 4 - Financial Instruments and Risk
Management". The loan is secured by the stock of CMI and
substantially all of its unencumbered assets, consisting primarily
of CMI's route authorities, and is guaranteed by Continental and
Air Micronesia, Inc., CMI's parent company. The bank financing
contains significant financial covenants relating to CMI, including
maintenance of a minimum fixed charge coverage ratio, a minimum
consolidated net worth and minimum liquidity, and covenants
restricting CMI's leverage, its incurrence of certain indebtedness
and its pledge of assets. The financial covenants also limit the
ability of CMI to pay dividends to Continental. As of December 31,
1996, CMI had a minimum cash balance requirement of $25 million,
net assets of $185 million and was restricted from paying cash
dividends in excess of $6 million.
CMI used the net proceeds of the financing to prepay $160 million
in principal amount of indebtedness to General Electric Capital
Corporation, General Electric Company and certain affiliates (any
one or more such entities, "GE") and to pay transaction costs, and
Continental used the $136 million in proceeds received by it as a
dividend from CMI, together with approximately $28 million in cash
on hand, to prepay approximately $164 million in principal amount
of indebtedness to GE. In connection with the prepayment,
Continental recorded a $6 million after-tax extraordinary loss
relating to early extinguishment of debt.
In March 1996, the Company issued $230 million of 6-3/4%
Convertible Subordinated Notes (the "Notes"). The Notes are
convertible into shares of Class B common stock prior to their
maturity date, April 15, 2006, at a conversion price of $30.20 per
share. The Notes are redeemable at the option of the Company on or
after April 15, 1999, at specified redemption prices.
Maturities of long-term debt due over the next five years are as
follows (in millions):
Year ended December 31,
1997. . . . . . . . . . . . . . . . . . $201
1998. . . . . . . . . . . . . . . . . . 143
1999. . . . . . . . . . . . . . . . . . 147
2000. . . . . . . . . . . . . . . . . . 134
2001. . . . . . . . . . . . . . . . . . 367
NOTE 3 - 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 renewal options and some aircraft leases
include purchase options.
At December 31, 1996, 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 ended December 31,
1997. . . . . . . . . . . . . . . . . . $ 89 $ 583
1998. . . . . . . . . . . . . . . . . . 80 529
1999. . . . . . . . . . . . . . . . . . 75 491
2000. . . . . . . . . . . . . . . . . . 63 479
2001. . . . . . . . . . . . . . . . . . 48 455
Later years . . . . . . . . . . . . . . 58 2,472
Total minimum lease payments . . . . . . . . 413 $5,009
Less: amount representing interest. . . . . 97
Present value of capital leases. . . . . . . 316
Less: current maturities of capital
leases. . . . . . . . . . . . . . . . . . . 60
Long-term capital leases . . . . . . . . . . $256
Not included in the above operating lease table is $210 million in
annual minimum lease payments relating to non-aircraft leases,
principally airport and terminal facilities and related equipment.
The Company's total rental expense for all operating leases, net of
sublease rentals, was $719 million, $720 million and $675 million
in 1996, 1995 and 1994, respectively.
NOTE 4 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
As part of the Company's risk management program, Continental uses
a variety of financial instruments, including petroleum call
options, foreign currency average rate options, and interest rate
swap and interest rate cap agreements. The Company does not hold
or issue derivative financial instruments for trading purposes.
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 and other terms of the instruments,
which relate to interest rates, exchange rates and 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 its
obligations. To manage credit risks, the Company selects
counterparties based on credit ratings, limits its exposure to a
single counterparty under defined guidelines, and monitors the
market position with each counterparty.
Fuel Price Risk Management
The Company has entered into petroleum call option contracts to
provide some short-term protection against a sharp increase in jet
fuel prices. The petroleum call option contracts generally cover
the Company's forecasted jet fuel needs for three to six months.
Gains, if any, on these option contracts are recognized as a
component of fuel expense when the underlying fuel being hedged is
used. At December 31, 1996, the Company had petroleum call option
contracts outstanding with an aggregate notional amount of $185
million. The fair value of the Company's call option contracts at
December 31, 1996, representing the amount the Company would
receive if the option contracts were closed, was immaterial.
During the year ended December 31, 1996, the Company recognized
gains of approximately $65 million under this risk reduction
strategy.
Foreign Currency Exchange Risk Management
CMI purchases foreign currency average rate option contracts that
effectively enable it to sell Japanese yen expected to be received
from yen-denominated ticket sales over the next six to nine months
at specified dollar amounts. The option contracts have only
nominal intrinsic value at the time of purchase. These contracts
are designated and effective as hedges of probable monthly yen-
denominated sales transactions, which otherwise would expose the
Company to foreign currency risk. Gains, if any, on these average
rate option contracts are deferred and recognized as a component of
passenger revenue when the related sale is recognized. At December
31, 1996, CMI had average rate option contracts outstanding with a
notional value of $118 million and the fair value, representing the
amount CMI would receive to terminate the agreements, was
immaterial.
Interest Rate Risk Management
The Company entered into an interest rate swap agreement and an
interest rate cap agreement to reduce the impact of potential
increases in interest rates on the CMI bank financing. The
interest rate swap agreement effectively converted the floating
rate on bank financing to a fixed rate of 5.875%. The notional
value on the interest rate swap agreement is $320 million and was
effective from August 30, 1996 through January 30, 1997. The
interest rate cap agreement has a notional value of $153 million
and is effective from January 31, 1997 through July 31, 2001. The
interest rate cap limits the amount of potential increase in the
Eurodollar or Prime rate component of the floating rate to a
maximum of 9% over the term of the contract. The fair values are
immaterial.
The differential to be paid or received as interest rates change is
accrued and recognized as an adjustment of interest expense related
to the obligation. The related amount payable to or receivable
from counterparties is included in current liabilities or assets.
Payments to be received as a result of the cap agreement are
accrued as a reduction in interest expense.
Fair Value of 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 the short maturity of three months or less.
(b) Investment in Equity Securities -
Continental's investment in America West Airlines, Inc.
("America West") is classified as available-for-sale and
carried at an aggregate market value of $8 million and
$37 million at December 31, 1996 and 1995, respectively.
Included in stockholders' equity at December 31, 1996 and 1995
is a net unrealized gain of $4 million and $18 million,
respectively.
Since a readily determinable market value does not exist for
the Company's investment in AMADEUS (see Note 11), the
investment is carried at cost in the accompanying consolidated
balance sheet.
(c) Debt -
The fair value of the Company's debt with a carrying value of
$1.36 billion and $1.35 billion as of December 31, 1996 and
1995, respectively, estimated based on the discounted amount
of future cash flows using the current incremental rate of
borrowing for a similar liability or quoted market prices,
approximates $1.37 billion and $1.38 billion, respectively.
The fair value of the remaining debt (with a carrying value of
$209 million and $171 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.
(d) Preferred Securities -
As of December 31, 1996, the fair value of Continental's 8-
1/2% Convertible Trust Originated Preferred Securities
("TOPrS") (with a carrying value of $242 million), estimated
based on quoted market prices, approximates $321 million. The
fair value approximated the carrying value as of December 31,
1995. See Note 5.
NOTE 5 - PREFERRED SECURITIES OF TRUST
In 1995, Continental Airlines Finance Trust, a Delaware statutory
business trust (the "Trust") with respect to which the Company owns
all of the common trust securities, completed a private placement
of 4,997,000 8-1/2% Convertible Trust Originated Preferred
Securities. The TOPrS have a liquidation value of $50 per
preferred security and are convertible at any time at the option of
the holder into shares of Class B common stock at a conversion rate
of 2.068 shares of Class B common stock for each preferred security
(equivalent to $24.18 per share of Class B common stock), subject
to adjustment in certain circumstances. Distributions on the
preferred securities are 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. The
proceeds of the private placement, which totaled $242 million (net
of $8 million of underwriting commissions and expense) 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 are 8-1/2% Convertible Subordinated
Deferrable Interest Debentures ("Convertible Subordinated
Debentures") with an aggregate principal amount of $250 million
issued by the Company and which mature on December 1, 2020. The
Convertible Subordinated Debentures are redeemable by Continental,
in whole or in part, on or after December 1, 1998 at designated
redemption prices. If Continental redeems the Convertible
Subordinated Debentures, the Trust must redeem the TOPrS on a pro
rata basis having an aggregate liquidation value equal to the
aggregate principal amount of the Convertible Subordinated
Debentures redeemed. Otherwise, the TOPrS will be redeemed upon
maturity of the Convertible Subordinated Debentures, unless
previously converted.
Taking into consideration the Company's obligations under (i) the
Preferred Securities Guarantee relating to the TOPrS, (ii) the
Indenture relating to the Convertible Subordinated Debentures to
pay all debts and obligations and all costs and expenses of the
Trust (other than U.S. withholding taxes) and (iii) the Indenture,
the Declaration relating to the TOPrS and the Convertible
Subordinated Debentures, Continental has fully and unconditionally
guaranteed payment of (i) the distributions on the TOPrS, (ii) the
amount payable upon redemption of the TOPrS, and (iii) the
liquidation amount of the TOPrS.
The Convertible Subordinated Debentures and related income
statement effects are eliminated in the Company's consolidated
financial statements.
NOTE 6 - REDEEMABLE PREFERRED AND COMMON STOCK
In June 1996, the Board and the stockholders of the Company
approved an amendment to Continental's Restated Certificate of
Incorporation ("Certificate of Incorporation") to increase the
total number of shares of capital stock authorized for issuance to
310 million, comprised of 10 million shares of preferred stock,
50 million shares each of Class A common stock and Class D common
stock, par value $.01 per share and 200 million shares of Class B
common stock and to eliminate the Class C common stock, par value
$.01 per share, of which no shares were outstanding.
Redeemable Preferred Stock
Redeemable preferred stock consists of 1,000,000 authorized shares
of Series A 12% Cumulative Preferred Stock ("Series A 12%
Preferred") with 447,082 and 397,948 shares issued and outstanding
at December 31, 1996 and 1995, respectively.
Effective June 30, 1995 and in exchange for the 300,000 shares of
12% Cumulative Redeemable Preferred Stock outstanding as of
June 30, 1995 and all of the accrued and unpaid dividends
accumulated thereon as of such date, the Company issued
386,358 shares of its new Series A 12% Preferred to an affiliate of
Air Canada, a Canadian corporation ("Air Canada"). Holders of
Series A 12% Preferred are entitled to receive, when and if
declared by the Board, cumulative dividends payable quarterly in
additional shares of such preferred stock for dividends
accumulating through December 31, 1996, and thereafter in cash at
an annual rate of $12 per share. To the extent net income, as
defined, for any calendar quarter is less than the amount of
dividends due on all outstanding shares of Series A 12% Preferred
for such quarter, the Board may declare dividends payable in
additional shares of Series A 12% Preferred in lieu of cash. At
any time, the Company may redeem, in whole or in part, on a pro
rata basis among the stockholders, any outstanding shares of Series
A 12% Preferred, and all outstanding shares are mandatorily
redeemable on April 27, 2003 out of legally available funds. The
redemption price is $100 per share plus accrued unpaid dividends.
The Series A 12% Preferred is not convertible into shares of common
stock and has no voting rights, except under limited circumstances.
The Board declared and issued 49,134 and 11,590 additional shares
of Series A 12% Preferred in lieu of cash dividends in 1996 and
1995, respectively.
Effective June 30, 1995 and in exchange for the 171,000 shares of
8% Cumulative Redeemable Preferred Stock outstanding as of June 30,
1995 and all of the accrued and unpaid dividends accumulated
thereon as of such date, the Company issued 202,784 shares of its
new Series A 8% Preferred. On September 29, 1995, Continental
issued a secured promissory note with a principal amount of
$21 million to GE in exchange for its 202,784 shares of Series A 8%
Preferred, together with accumulated dividends thereon
(representing all of the outstanding Series A 8% Preferred). As a
result of this transaction, the Company recorded a $3 million
charge against additional paid-in capital related to the
unamortized accretion of the difference between the Series A 8%
Preferred redemption value and its fair market value at the date of
issuance.
Common Stock
Continental has two classes of common stock issued and outstanding,
Class A common stock and Class B common stock. Holders of shares
of Class A common stock and Class B common stock are entitled to
receive dividends when and if declared by the Board. 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 January 1994, Air Canada converted 575,680 shares of Class B
common stock into an equal number shares of Class A common stock to
preserve its percentage of total voting power. In July 1994,
2,014,000 shares of restricted Class B common stock were granted
and issued to substantially all employees at or below the manager
or equivalent level. During 1996, 1995 and 1994, 20,000 shares,
306,000 shares and 364,000 shares, respectively, of restricted
Class B common stock were granted and issued to key officers. See
Note 7. In May 1996, Air Canada converted all of its 3,322,112
shares of Class A common stock into Class B common stock (pursuant
to certain rights granted to it under the Company's Certificate of
Incorporation) and sold, on the open market, 4,400,000 shares of
Class B common stock pursuant to an underwritten public offering
arranged by the Company. In January 1997, Air Canada divested the
remainder of its initial investment in Continental common stock by
selling on the open market 5,600,000 shares of Class B common
stock.
Pursuant to certain provisions provided for in the Company's
Certificate of Incorporation, shares of the Company's Class A
common stock may be freely converted into an equal number of shares
of Class B common stock at any time after January 1, 1997.
Warrants
As of December 31, 1996, the Company has outstanding 7,190,353
Class A Warrants and Class B Warrants (collectively, the
"Warrants"), all of which are held by Air Partners. Each Warrant
entitles the holder to purchase one share of Class A common stock
or Class B common stock as follows: (i) 2,298,134 Class A Warrants
and 2,500,821 Class B Warrants have an exercise price of $7.50 per
share, and (ii) 741,334 Class A Warrants and 1,650,064 Class B
Warrants have an exercise price of $15 per share. The Warrants
expire on April 27, 1998.
On November 21, 1996, Air Partners exercised its right to sell to
the Company, and the Company subsequently purchased, for $50
million, Warrants to purchase 2,614,379 shares of Class B common
stock (representing a portion of the total Warrants held by Air
Partners) pursuant to an agreement entered into earlier in 1996
with the Company.
On September 29, 1995, Continental purchased 2,735,760 Class A
Warrants and 9,699,510 Class B Warrants held by Air Canada for an
aggregate purchase price of $56 million (including a waiver fee of
$5 million paid to a major creditor of the Company).
NOTE 7 - 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 the Continental Airlines, Inc. 1994
Incentive Equity Plan, as amended (the "Incentive Plan"), and the
purchase rights under the Company's 1994 Employee Stock Purchase
Plan (the "Stock Purchase Plan") 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, no compensation expense is recognized.
Furthermore, under APB 25, since the Stock Purchase Plan is
considered a noncompensatory plan, no compensation expense is
recognized.
Stock Options
Under the Incentive Plan, key officers and employees of the Company
and its subsidiaries may receive stock options and/or restricted
stock. The Incentive Plan also provides for each outside director
to receive on the day following the annual stockholders' meeting
options to purchase 5,000 shares of Class B common stock. The
maximum number of shares of Class B common stock that may be issued
under the Incentive Plan will not in the aggregate exceed
9,000,000. The total remaining shares available for grant under
the Incentive Plan at December 31, 1996 was 511,750. In 1995, the
Incentive Plan was amended to provide for the exchange and
repricing of substantially all the outstanding stock options for
new options bearing a shorter exercise term and generally
exercisable at a price lower than that of the cancelled options,
subject to certain conditions. The exercise price for the repriced
options equaled the market value per share on the date of grant
($8.00). As a result of the repricing, stock options generally
vest over a period of three years with a term of five years.
The table on the following page summarizes stock option
transactions pursuant to the Company's Incentive Plan for the years
ended December 31, 1996, 1995 and 1994 (share data in thousands):
1996 1995 1994
Weighted- Weighted- Weighted-
Average Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
Outstanding at
Beginning of
Year. . . . . . 4,769 $ 8.41 3,443 $10.19 - -
Granted* . . . . 3,307 $25.07 4,322 $ 8.43 3,977 $10.26
Exercised . . . (1,747) $ 8.23 (361) $ 9.25 - -
Cancelled. . . . (513) $14.83 (2,635) $10.58 (534) $10.69
Outstanding at
End of Year . . 5,816 $17.37 4,769 $ 8.41 3,443 $10.19
Options
exercisable
at end of
year. . . . . . 659 - 1,079 - 247 -
*The option price for all stock options is equal to 100% of the fair market value at the date
of grant.
As shown in the above table, options granted during 1995 include the grant of repriced
options; options cancelled during 1995 include the cancellation of the higher priced options.
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, 1996 (share data in thousands):
Options Outstanding
Weighted
Average
Remaining
Range of Outstanding Contractual Weighted Average
Exercise Prices at 12/31/96 Life Exercise Price
$3.88- $7.06 464 6.95 $5.87
$8.00 1,827 3.33 $8.00
$8.19-$22.88 638 4.65 $16.34
$23.00-$31.00 2,887 4.34 $25.38
$3.88-$31.00 5,816 4.26 $17.37
Options Exercisable
Range of Exercisable Weighted Average
Exercise Prices at 12/31/96 Exercise Price
$3.88- $7.06 53 $5.80
$8.00 376 $8.00
$8.19-$22.88 189 $15.29
$23.00-$31.00 41 $29.11
$3.88-$31.00 659 $11.22
Restricted Stock
In addition, the Incentive Plan permits awards of restricted stock
to participants, subject to one or more restrictions, including a
restriction period, and a purchase price, if any, to be paid by the
participant. In connection with the plan, 600,000 shares have been
authorized for issuance as restricted stock. As of December 31,
1996, 35,000 shares were available to be issued at no cost to the
participant.
Additionally, on March 4, 1994, the Board approved a one-time grant
of 2,014,000 shares of restricted stock to substantially all
employees at or below the manager level. These shares were issued
at no cost to the employees and vest over a four-year period.
Unvested shares of restricted stock are subject to certain transfer
restrictions and forfeiture under certain circumstances. The
unvested portion of restricted stock, representing the fair market
value of the stock on the date of award, is being amortized to
wages, salaries and related costs over the vesting period.
Employee Stock Purchase Plan
Under the Stock Purchase Plan, which terminated on December 31,
1996, substantially all full and part-time employees of the Company
could purchase shares of Class B common stock at 85.0% of the lower
of the fair market value on the first or last business day of a
calendar quarter. Subject to adjustment, a maximum of
8,000,000 shares of Class B common stock were authorized for
purchase under the Stock Purchase Plan. During 1996 and 1995,
191,809 and 518,428 shares, respectively, of Class B common stock
were issued at prices ranging from $15.81 to $23.96 in 1996 and
$4.31 to $10.63 in 1995 in connection with the Stock Purchase Plan.
Pro Forma SFAS 123 Results
Pro forma information regarding net income and earnings per share
is required by SFAS 123, and 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 1996 and 1995, respectively: risk-free interest
rates of 5.8% and 6.2%; dividend yields of 0%; volatility factors
of the expected market price of the Company's common stock of 39%;
and a weighted-average expected life of the option of 2.6 years and
2.3 years. The weighted average fair value of the stock options
granted in 1996 and 1995 was $7.55 and $2.35, respectively. The
fair value of the purchase rights under the Stock Purchase Plan was
also estimated using the Black-Scholes model with the following
weighted-average assumptions for 1996 and 1995, respectively: risk
free interest rates of 5.2% and 5.8%; dividend yields of 0%;
expected volatility of 39%; and an expected life of 0.25 years.
The weighted-average fair value of those purchase rights granted in
1996 and 1995 was $5.75 and $1.89, 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.
Pro forma net income and earnings per share assuming that the
Company had accounted for its employee stock options using the fair
value method and amortized such to expense over the options'
vesting period would not be materially different from those
reported.
NOTE 8 - 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, 1996, 1995 and
1994, total pension expense for the defined benefit plans was $45
million, $40 million and $51 million, respectively. Total expense
for the defined contribution plans was $7 million, $6 million and
$1 million, for each of 1996, 1995 and 1994, respectively.
Net periodic pension cost of the Company's defined benefit plans
for 1996, 1995 and 1994 included the following components (in
millions):
1996 1995 1994
Service cost - benefits earned
during the year . . . . . . . . $38 $30 $39
Interest cost on projected
benefit obligations . . . . . . 45 40 39
Loss (return) on plan assets . . (63) (79) 14
Net amortization and deferral. . 25 49 (41)
Net periodic pension costs . . . $45 $40 $51
The following table sets forth the defined benefit plans' funded
status amounts as of December 31, 1996 and 1995 (in millions):
1996 1995
Accumulated Assets Accumulated Assets
Benefits Exceed Benefits Exceed
Exceed Accumulated Exceed Accumulated
Assets Benefits Assets Benefits
Actuarial present
value of benefit
obligations:
Vested . . . . . $308 $ 91 $359 $ 73
Non-vested . . . 96 3 20 1
Accumulated
benefit
obligations . . . 404 94 379 74
Effect of
projected future
salary increases. 107 - 149 -
Projected benefit
obligation. . . . 511 94 528 74
Plan assets at
fair value. . . . 393 115 303 89
Projected benefit
obligation in
excess of (less
than) plan
assets. . . . . . 118 (21) 225 (15)
Unrecognized prior
service costs . . (9) - - -
Unrecognized net
gain (loss).. . . 42 7 (41) (3)
Additional mini-
mum liability . . 2 - 8 -
Accrued (pre-
paid) pension
liability . . . . $153 $(14) $192 $(18)
In accordance with Statement of Financial Accounting Standards
No. 87 - "Employers' Accounting for Pensions", an additional
minimum pension liability for certain plans, representing the
excess of accumulated benefits over plan assets and accrued pension
costs, was recognized at December 31, 1996 and 1995. A
corresponding amount was recognized as a separate reduction to
stockholders' equity.
Plan assets consist primarily of equity securities (including
100,000 shares of Class B common stock), long-term debt securities
and short-term investments.
The weighted average discount rate used in determining the
actuarial present value of the projected benefit obligation was
7.75%, 7.25% and 8.75% for 1996, 1995 and 1994, respectively. The
expected long-term rate of return on assets (which is used to
calculate the Company's return on pension assets for the current
year) was 9.25% for each of 1996, 1995 and 1994. The weighted
average rate of salary increases was 5.5% for 1996 and 6.3% for
1995 and 1994. The unrecognized net gain (loss) is amortized on a
straight-line basis over the average remaining service period of
employees expected to receive a plan benefit.
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 15.0% of the Company's annual pre-tax earnings,
subject to certain adjustments, is distributed each year to
substantially all employees (other than those employees whose
collective bargaining agreement provides otherwise) 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, 1996 and 1995 was $68 million and
$31 million, respectively.
NOTE 9 - INCOME TAXES
The reconciliations of income tax computed at the United States
federal statutory tax rates to income tax provision (benefit) for
the years ended December 31, 1996, 1995 and 1994 are as follows (in
millions):
Amount Percent
1996 1995 1994 1996 1995 1994
Income tax pro-
vision (benefit)
at United States
statutory rates . . $150 $109 $(228) 35.0 % 35.0 % (35.0)%
State income tax
provision
(benefit) . . . . . 6 5 (2) 1.4 1.6 (0.3)
Reorganization value
in excess of
amounts allocable
to identifiable
assets. . . . . . . 5 20 6 1.2 6.5 0.9
Meals and
entertainment
disallowance. . . . 7 6 7 1.6 1.9 1.0
Net operating loss
not benefitted
(benefitted). . . . (88) (67) 170 (20.5) (21.6) 26.1
Other. . . . . . . . 6 5 5 1.4 1.6 0.8
Income tax provision
(benefit), net. . . $ 86 $ 78 $(42) 20.1 % 25.0 % (6.5)%
The significant component of the provision (benefit) for income
taxes for the year ended December 31, 1996, 1995 and 1994 was a
deferred tax provision (benefit) of $80 million, $71 million and
$(42) million, respectively. The provision for income taxes for
the period ended December 31, 1996, 1995 and 1994 also reflects a
current tax provision in the amount of $6 million, $7 million and
$0, respectively, as the Company is in an alternative minimum tax
position.
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, 1996 and
1995 are as follows (in millions):
1996 1995
Spare parts and supplies, fixed assets
and intangibles . . . . . . . . . . . . . $ 635 $ 674
Deferred gain. . . . . . . . . . . . . . . 62 62
Capital and safe harbor lease activity . . 34 -
Other, net . . . . . . . . . . . . . . . . 34 26
Gross deferred tax liabilities . . . . . . 765 762
Capital and safe harbor lease activity . . - (10)
Accrued liabilities. . . . . . . . . . . . (370) (472)
Revaluation of leases. . . . . . . . . . . (34) (35)
Net operating loss carryforwards . . . . . (804) (859)
Investment tax credit carryforwards. . . . (45) (45)
Minimum tax credit carryforward. . . . . . (10) (7)
Gross deferred tax assets. . . . . . . . . (1,263) (1,428)
Deferred tax assets valuation allowance. . 694 782
Net deferred tax liability . . . . . . . . 196 116
Less: current deferred tax liability. . . 121 70
Non-current deferred tax liability . . . . $ 75 $ 46
At December 31, 1996, the Company has estimated net operating loss
carryforwards ("NOLs") of $2.3 billion 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 could be limited.
For financial reporting purposes, a valuation allowance of
$694 million has been recognized to offset the deferred tax assets
related to a portion of the NOLs. The Company has considered
prudent and feasible tax planning strategies in assessing the need
for the valuation allowance. Realization of a substantial portion
of the Company's remaining NOLs will require the completion by
April 27, 1998 of transactions resulting in recognition of built-in
gains for federal income tax purposes. The Company has consummated
several such transactions and currently intends to consummate one
or more additional transactions. If the Company were to determine
in the future that such transactions will not be completed and if
future income is not sufficient to recognize the benefit of
previously completed transactions, an adjustment to the net
deferred tax liability of up to $85 million would be charged to
income in the period such determination was made. In the event the
Company recognizes additional tax benefits related to NOLs and
investment tax credit carryforwards attributable to the Company's
predecessor, Continental Airlines Holdings, Inc., together with its
operating subsidiaries, those benefits would be applied to reduce
reorganization value in excess of amounts allocable to identifiable
assets and other intangibles to zero, and thereafter as an addition
to paid-in capital.
The deferred tax valuation allowance decreased from $782 million at
December 31, 1995 to $694 million at December 31, 1996. This
decrease is related to the realization of deferred tax assets
associated with net operating losses that had not previously been
benefitted.
Approximately $532 million of the Company's net operating losses
can only be used to offset the separate parent company taxable
income of Continental Airlines, Inc. Approximately $13 million of
the Company's investment tax credits can only be used to offset the
separate parent company tax liability of Continental Airlines, Inc.
NOTE 10 - FLEET DISPOSITION CHARGE
During the third quarter of 1996, the Company made the decision to
accelerate the replacement of 30 DC-9-30 aircraft, six DC-10-10
aircraft, 31 727-200 aircraft, 13 737-100 aircraft and 17 737-200
aircraft between August 1997 and December 1999. As a result of its
decision to accelerate the replacement of these aircraft, the
Company recorded a fleet disposition charge of $128 million. The
fleet disposition charge relates primarily to (i) the writedown of
Stage 2 aircraft inventory, which is not expected to be consumed
through operations, to its estimated fair value; and (ii) a
provision for costs associated with the return of leased aircraft
at the end of their respective lease terms. The majority of the
aircraft are being accounted for as operating leases and therefore,
the Company will continue to recognize rent and amortization
expense on these aircraft through the respective dates they are
removed from service. The Company classified the $128 million
fleet disposition charge as a component of continuing operations in
the accompanying Consolidated Statements of Operations 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" (which the Company adopted
effective January 1, 1996). Prior to January 1, 1996, such charges
were classified as Nonoperating Expenses in accordance with
industry practice. See Note 11. Cash outlays of approximately $54
million will be incurred in connection with costs associated with
the return of the leased aircraft to the applicable lessors during
the period August 1997 to December 1999. At December 31, 1996, the
Company had total remaining accruals for these fleet disposition
charges of approximately $54 million, which was included in
Accruals for aircraft retirements and excess facilities in the
accompanying Consolidated Balance Sheets.
NOTE 11 - NONOPERATING INCOME (EXPENSE)
In February 1996, Continental sold approximately 1.4 million of the
1.8 million shares it owned in America West, realizing net proceeds
of $25 million and recognizing a gain of $13 million. In May 1996,
the Company sold all of its 802,860 America West warrants,
realizing net proceeds of $7 million and recognizing a gain of $5
million. The gains are included in Other, net in the accompanying
Consolidated Statements of Operations.
Continental and its former System One subsidiary entered into a
series of transactions on April 27, 1995 whereby a substantial
portion of System One's assets (including the travel agent
subscriber base and travel-related information management products
and services software), as well as certain liabilities of System
One, were transferred to a newly formed limited liability company,
System One Information Management, L.L.C. ("LLC"). LLC is owned
equally by Continental CRS Interests, Inc. ("Continental CRS")
(formerly System One, which remains a wholly owned subsidiary of
Continental), Electronic Data Systems Corporation ("EDS") and
AMADEUS, a European computerized reservation system ("CRS").
Substantially all of System One's remaining assets (including the
CRS software) and liabilities were transferred to AMADEUS. In
addition to the one-third interest in LLC, Continental CRS received
cash proceeds of $40 million and an equity interest in AMADEUS
valued at $120 million, and outstanding indebtedness of $42 million
of System One owed to EDS was extinguished. In connection with
these transactions, the Company recorded a pretax gain of $108
million, which amount was included in Nonoperating Income (Expense)
in the accompanying Consolidated Statements of Operations for the
year ended December 31, 1995. The related tax provision totaled
$78 million (which differs from the federal statutory rate due to
certain nondeductible expenses), for a net gain of $30 million.
System One's revenue, included in Cargo, mail and other revenue,
and related net earnings were not material to the consolidated
financial statements of Continental.
Also during the year ended December 31, 1995, the Company increased
the existing accrual for underutilized airport facilities
(discussed below) by $14 million, recorded a $5 million fee in
connection with the Air Canada warrant redemption and a gain of $12
million relating to a bankruptcy court approved settlement for the
return of certain aircraft purchase deposits. Such amounts were
included in Other, net in the accompanying Consolidated Statements
of Operations.
During the fourth quarter of 1994, the Company recorded a provision
of $447 million associated with (i) the planned early retirement of
certain aircraft ($278 million) and (ii) closed or underutilized
airport and maintenance facilities and other assets ($169 million).
This provision was included in Other, net in the accompanying
Consolidated Statements of Operations. Approximately $123 million
of the provision represented a non-cash charge associated with a
write-down of certain assets (principally inventory and flight
equipment) to expected net realizable value. The total provision
represented a net charge after taking into consideration $119
million of credits primarily related to the write-off of operating
lease deferred credits associated with the aircraft to be retired.
The following represents the activity within these accruals during
the two years ended December 31, 1996 (in millions):
1996 1995
Total accruals at beginning of year. . . . . $220 $443
Net cash payments:
Return conditions on grounded aircraft. . . (41) (35)
Other aircraft related. . . . . . . . . . . (11) (24)
Other . . . . . . . . . . . . . . . . . . . (17) (20)
Issuance of the Convertible Secured
Debentures. . . . . . . . . . . . . . . . . - (158)
Increase in accrual for underutilized
facilities. . . . . . . . . . . . . . . . . - 14
Total accruals at end of year. . . . . . . . 151 220
Portion included in accrued other
liabilities . . . . . . . . . . . . . . . . (17) (45)
Portion included in accrual for aircraft
retirement and excess facilities. . . . . . $134 $175
The remaining accruals relate primarily to anticipated cash outlays
associated with (i) underutilized airport facilities (primarily
associated with Denver International Airport), (ii) the remaining
liability associated with the grounded aircraft, and (iii) the
closure of the Los Angeles maintenance facilities. The Company has
assumed certain sublease rental income for these closed and under-
utilized facilities and grounded aircraft in determining the
accrual at December 31, 1996. 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 14 years). The Company expects to finance
the cash outlays primarily with internally generated funds.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
As of December 31, 1996, Continental has firm commitments with The
Boeing Company ("Boeing") to take delivery of a total of 127 jet
aircraft during the years 1997 through 2003 with options for an
additional 90 aircraft (exercisable subject to certain conditions).
These new aircraft will replace older, less efficient Stage 2
aircraft and allow for growth of operations. The estimated
aggregate cost of the Company's firm commitments for the Boeing
aircraft is approximately $4.3 billion. Continental has firm
commitments of approximately $1.4 billion of backstop financing for
its Boeing aircraft orders. Continental currently plans on
financing the new Boeing aircraft with enhanced equipment trust
certificates or similar financing, subject to availability and
market conditions. However, further financing will be needed to
satisfy Continental's capital commitment for other aircraft-related
expenditures such as spare parts, simulators (including Express's
new Embraer ("EMB") 145 aircraft described below) 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. Continental has also
entered into agreements or letters of intent with several outside
parties to lease or purchase five DC-10-30 aircraft and one Boeing
747 aircraft which are expected to be delivered by mid 1997.
In September 1996, Express placed an order for 25 firm EMB-145 50-
seat regional jets, with options for an additional 175 aircraft.
Neither Express nor Continental will have any obligation to take
aircraft that are not financed by a third party and leased to the
Company. However, if the Company fails to confirm the first
tranche of 25 options by August 1997, the rent associated with the
25 firm aircraft will increase by an aggregate of $33.6 million
over the 16-year life of the leases. Express took delivery of two
of the firm aircraft in late December 1996 and will take delivery
of the remaining 23 firm aircraft during the period from January 1,
1997 through the second quarter of 1998. The Company expects to
account for all of these aircraft as operating leases.
Continental expects its cash outlays for 1997 capital expenditures,
exclusive of fleet plan requirements, to aggregate $125 million
primarily relating to mainframe, 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 USAir, Inc.
("USAir") related to the East End Terminal at LaGuardia Airport in
New York. In the event USAir defaulted on these obligations,
Continental could be required to cure the default, at which time it
would have the right to reoccupy the terminal.
CMI's collective bargaining agreement with its flight attendants
became amendable in September 1996 and negotiations are in progress
to amend this contract. The Company's collective bargaining
agreements with its CMI agent-classification employees, CMI
mechanics and mechanic-related employees, its Continental airlines
jet pilots and its Express pilots become amendable in March 1997,
March 1997, July 1997 and October 1997, respectively. Negotiations
are expected to begin in early 1997 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
The Company and 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 13 - RELATED PARTY TRANSACTIONS
The following is a summary of significant related party
transactions which have occurred during 1996, 1995 and 1994 other
than those discussed elsewhere in the Notes to Consolidated
Financial Statements.
CMI and United Micronesia Development Association, Inc. ("UMDA"),
the 9% minority stockholder of CMI, have a services agreement
whereby UMDA is paid a fee of one percent of CMI's gross revenue,
as defined, through January 1, 2012. For the years ended
December 31, 1996, 1995 and 1994, these fees totaled $6 million,
$6 million and $5 million, respectively. As of December 31, 1996,
1995 and 1994, the Company had a payable of $7 million maturing in
2011 to UMDA. Annual payments aggregating $1 million per year are
applied to reduce the 1.0% fee.
In connection with the Company's $320 million secured term loan
financing (see Note 2), CMI paid UMDA a dividend of approximately
$13 million in 1996.
In connection with Air Canada's investment in the Company, Air
Canada, Air Partners and the Company agreed to identify and pursue
opportunities to achieve cost savings, revenue enhancement or other
synergies from areas of joint operation between the Company and Air
Canada. The Company and Air Canada have entered into a series of
synergies agreements, primarily in the areas of aircraft
maintenance and commercial and marketing alliances (including
agreements regarding coordination of connecting flights). The
Company believes that the synergies agreements allocate potential
benefits to the Company and Air Canada in a manner that is
equitable and commercially reasonable, and contain terms at least
as favorable to the Company as could be obtained from unrelated
parties. As a result of these agreements, Continental paid Air
Canada $16 million, $38 million and $29 million for the years ended
December 31, 1996, 1995 and 1994, respectively, and Air Canada paid
Continental $17 million, $16 million and $13 million in 1996, 1995
and 1994, respectively, primarily relating to aircraft maintenance.
The Company and America West, 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 of the Company and holds a significant interest in 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 $15 million, $11 million and $1
million in 1996, 1995 and 1994, respectively, and America West paid
Continental $22 million, $14 million and $2 million in 1996, 1995
and 1994, respectively.
On July 27, 1995 and August 10, 1995, Air Partners purchased from
the Company an aggregate of 308,226 and 657,320 shares of Class B
common stock, respectively, at purchase prices of $7.93 per share
(with respect to a total of 710,660 shares) and $6.70 per share
(with respect to a total of 254,886 shares). Of the total, 316,640
shares were purchased pursuant to the exercise of antidilution
rights granted to Air Partners under the Certificate of
Incorporation and the remaining 648,906 shares were purchased
pursuant to the exercise of antidilution rights granted to Air
Canada under the Certificate of Incorporation (which rights were
purchased by Air Partners immediately prior to their exercise on
August 10, 1995).
On November 21, 1996, Air Partners exercised its right to sell to
the Company, and the Company subsequently purchased, for $50
million, Warrants to purchase 2,614,379 shares of Class B common
stock (representing a portion of the total warrants held by Air
Partners) pursuant to an agreement entered into earlier in 1996
with the Company.
In May 1996, Air Canada converted all of its 3,322,112 shares of
Class A common stock into Class B common stock (pursuant to certain
rights granted to it under the Company's Certificate of
Incorporation) and sold, on the open market, 4,400,000 shares of
the Company's common stock pursuant to the Secondary Offering. In
January 1997, Air Canada divested the remainder of its initial
investment in Continental common stock by selling on the open
market 5,600,000 shares owned in the Company.
NOTE 14 - FOREIGN OPERATIONS
Continental conducts operations in various foreign countries.
Operating revenue from foreign operations are as follows (in
millions):
Year Ended December 31,
1996 1995 1994
Pacific $ 699 $ 742 $ 678
Atlantic 494 390 400
Latin America 372 311 310
$1,565 $1,443 $1,388
NOTE 15 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited summarized financial data by quarter for 1996 and 1995 is as follows (in millions,
except per share data):
Three Months Ended
March 31 June 30 September 30 December 31
1996
Operating revenue . . . . . . . . . . . . . $1,489 $1,639 $1,671 $1,561
Operating income. . . . . . . . . . . . . . 120 229 77 99
Nonoperating income (expense), net. . . . . (25) (23) (30) (19)
Net income. . . . . . . . . . . . . . . . . 88 167 17 47
Earnings per common and common equivalent
share:
Income before extraordinary loss (a). . . $ 1.35 $ 2.53 $ 0.35 $ 0.71
Extraordinary loss, net of tax. . . . . . - - (0.10) -
Net income (a). . . . . . . . . . . . . . $ 1.35 $ 2.53 $ 0.25 $ 0.71
Earnings per common share assuming full
dilution:
Income before extraordinary loss (a). . . $ 1.18 $ 2.04 $ 0.34 $ 0.61
Extraordinary loss, net of tax. . . . . . - - (0.09) -
Net income (a). . . . . . . . . . . . . . $ 1.18 $ 2.04 $ 0.25 $ 0.61
1995
Operating revenue . . . . . . . . . . . . . $1,409 $1,478 $1,515 $1,423
Operating income. . . . . . . . . . . . . . 29 109 153 94
Nonoperating income (expense), net. . . . . (57) 72 (40) (50)
Net income (loss) . . . . . . . . . . . . . (30) 102 111 41
Earnings (loss) per common and common
equivalent share (a) . . . . . . . . . . . $(0.60) $ 1.51 $ 1.54 $ 0.63
Earnings (loss) per common share assuming
full dilution (a). . . . . . . . . . . . . $(0.60) $ 1.49 $ 1.34 $ 0.55
(a) The sum of the four quarterly earnings (loss) per share amounts does not agree with the
earnings (loss) 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 1996, the Company recorded a pretax
gain of $12.5 million related to the sale of approximately 1.4
million shares of America West common stock.
During the second quarter of 1996, the Company recorded a $5
million gain related to the sale of the America West warrants.
During the third quarter of 1996, the Company recorded a fleet
disposition charge of $128 million ($77 million after-tax) related
to the Company's decision to accelerate the replacement of certain
aircraft. In addition, in connection with the prepayment of
certain indebtedness, Continental recorded a $6 million after tax
extraordinary loss relating to early extinguishment of debt.
During the second quarter of 1995, the Company recorded a pretax
gain of $108 million ($30 million after-tax) in connection with a
series of transactions with System One. See Note 11.
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 public accountants 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 16, 1997.
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 16, 1997.
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 16, 1997.
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 16, 1997.
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, 1996
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Cash Flows for each of the Three
Years in the Period Ended December 31, 1996
Consolidated Statements of Redeemable Preferred Stock and
Common Stockholders' Equity for each of the Three Years
in the Period Ended December 31, 1996
Notes to Consolidated Financial Statements
(b) Financial Statement Schedules:
Report of Independent Auditors
Schedule I - Condensed Financial Information of Registrant
(Parent Company Only)
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.
(i) Report dated October 10, 1996 reporting an Item 5.
"Other Event". No financial statements were filed with
the report, which announced an order for 60 firm 737-
500 and the new -600 model aircraft.
(ii) Report dated November 21, 1996 reporting an Item 5.
"Other Event". No financial statements were filed with
the report, which announced Continental's $50 million
purchase of warrants from Air Partners, L.P. to
purchase 2,614,379 shares of Class B common stock.
(iii) Report dated December 4, 1996 reporting an Item 5.
"Other Event". No financial statements were filed with
the report, which announced Continental's proposed
issuance of $250 million of 9-1/2% Senior Notes due
December 15, 2001 in a private placement.
(iv) Report dated December 10, 1996 reporting an Item 5.
"Other Event". No financial statements were filed with
the report, which announced the issuance of $250
million of 9-1/2% Senior Notes due December 15, 2001 in
a private placement.
(d) See accompanying Index to Exhibits.
REPORT OF INDEPENDENT AUDITORS
We have audited the consolidated financial statements of
Continental Airlines, Inc. as of December 31, 1996 and 1995, and
for each of the three years in the period ended December 31, 1996,
and have issued our report thereon dated February 10, 1997
(included elsewhere in this Form 10-K). Our audits also included
the financial statement schedules for these related periods listed
in Item 14(b) of this Form 10-K. These schedules are the
responsibility of the Company's management. Our responsibility is
to express an opinion based on our audits.
In our opinion, the financial statement schedules referred to
above, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material
respects the information set forth therein.
ERNST & YOUNG LLP
Houston, Texas
February 10, 1997
CONTINENTAL AIRLINES, INC.
(Parent Company Only)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENT OF OPERATIONS (a)
(In millions of dollars)
Year Ended December 31,
1996 1995 1994
Operating Revenue:
Passenger. . . . . . . . . . . . . . . . $4,885 $4,354 $4,211
Cargo, mail and other. . . . . . . . . . 458 419 411
5,343 4,773 4,622
Operating Expenses:
Wages, salaries and related costs. . . . 1,368 1,252 1,347
Aircraft fuel. . . . . . . . . . . . . . 645 567 642
Aircraft rentals . . . . . . . . . . . . 481 471 419
Commissions. . . . . . . . . . . . . . . 415 397 353
Maintenance, materials and repairs . . . 332 304 366
Other rentals and landing fees . . . . . 291 294 328
Depreciation and amortization. . . . . . 213 215 211
Fleet disposition charge . . . . . . . . 128 - -
Other. . . . . . . . . . . . . . . . . . 1,076 1,035 1,040
4,949 4,535 4,706
Operating Income (Loss) . . . . . . . . . 394 238 (84)
Nonoperating Income (Expense):
Interest expense . . . . . . . . . . . . (132) (185) (210)
Interest capitalized . . . . . . . . . . 5 6 17
Interest income. . . . . . . . . . . . . 39 27 20
Interest income from subsidiaries. . . . 9 11 12
Other, net . . . . . . . . . . . . . . . 20 (4) (426)
(59) (145) (587)
Income (Loss) before Equity in Net
Income (Loss) of Subsidiaries, Income
Taxes and Extraordinary Loss . . . . . . 335 93 (671)
Income Tax Benefit (Provision). . . . . . (54) 37 73
Equity in Net Income (Loss) of
Subsidiaries . . . . . . . . . . . . . . 53 96 (15)
Distributions on Preferred Securities
of Trust, net of applicable income
taxes of $8 in 1996. . . . . . . . . . . (14) (2) -
Income (Loss) before Extraordinary Loss . 320 224 (613)
Extraordinary Loss, net of applicable
income taxes of $1 (g) . . . . . . . . . (1) - -
Net Income (Loss) . . . . . . . . . . . . $ 319 $ 224 $ (613)
These Statements should be read in conjunction with the Consolidated
Financial Statements and Notes thereto and Notes to Schedule I.
CONTINENTAL AIRLINES, INC.
(Parent Company Only)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEET (a)
(In millions of dollars, except for share data)
December 31, December 31,
ASSETS 1996 1995
Current Assets:
Cash and cash equivalents, including
restricted cash and cash equivalents
of $76 and $144, respectively . . . . . $ 989 $ 675
Accounts receivable, net . . . . . . . . 298 282
Accounts receivable from subsidiaries,
net . . . . . . . . . . . . . . . . . . - 18
Notes receivable from subsidiaries . . . 78 79
Spare parts and supplies, net. . . . . . 85 107
Prepayments and other assets . . . . . . 82 85
Total current assets. . . . . . . . . . 1,532 1,246
Property and Equipment:
Owned property and equipment, net of
accumulated depreciation of $333 and
$263, respectively. . . . . . . . . . . 996 984
Purchase deposits for flight equipment . 137 47
Capital leases, net of accumulated
amortization of $128 and $102,
respectively. . . . . . . . . . . . . . 251 272
Total property and equipment . . . . . 1,384 1,303
Other Assets:
Routes, gates and slots, net of
accumulated amortization of $160 and
$116, respectively. . . . . . . . . . . 961 1,005
Reorganization value in excess of
amounts allocable to identifiable
assets, net of accumulated
amortization of $46 and $35,
respectively. . . . . . . . . . . . . . 185 196
Investment in subsidiaries . . . . . . . 194 276
Investments. . . . . . . . . . . . . . . 8 37
Other assets, net. . . . . . . . . . . . 113 90
Total other assets . . . . . . . . . . 1,461 1,604
Total Assets . . . . . . . . . . . . $4,377 $4,153
These Statements should be read in conjunction with the Consolidated
Financial Statements and Notes thereto and Notes to Schedule I.
CONTINENTAL AIRLINES, INC.
(Parent Company Only)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEET (a)
(In millions of dollars, except for share data)
December 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
Current Liabilities:
Current maturities of long-term
debt (b). . . . . . . . . . . . . . . . $ 155 $ 156
Current maturities of capital leases . . 52 50
Accounts payable . . . . . . . . . . . . 636 564
Accounts payable to subsidiaries, net. . 6 -
Air traffic liability. . . . . . . . . . 639 541
Accrued other liabilities. . . . . . . . 450 537
Total current liabilities . . . . . . . 1,938 1,848
Long-Term Debt (b). . . . . . . . . . . . 970 1,118
Capital Leases. . . . . . . . . . . . . . 227 269
Deferred Credits and Other Long-Term
Liabilities. . . . . . . . . . . . . . . 373 330
Commitments and Contingencies (c)
Continental-Obligated Mandatorily
Redeemable Preferred Securities
of Subsidiary Trust Holding Solely
Convertible Subordinated
Debentures (d) . . . . . . . . . . . . . 242 242
Redeemable Preferred Stock (e). . . . . . 46 41
Common Stockholders' Equity:
Class A common stock - $.01 par,
50,000,000 shares authorized; 9,280,000
and 12,602,112 shares issued and
outstanding at December 31, 1996
and 1995, respectively (e),(f). . . . . - -
Class B common stock - $.01 par,
200,000,000 shares authorized;
47,943,343 and 42,856,548 shares issued
and outstanding at December 31, 1996
and December 31, 1995,
respectively (e),(f). . . . . . . . . . - -
Additional paid-in capital . . . . . . . 693 733
Accumulated deficit. . . . . . . . . . . (109) (428)
Unvested portion of restricted stock . . (5) (10)
Additional minimum pension liability . . (2) (8)
Unrealized gain on marketable equity
securities. . . . . . . . . . . . . . . 4 18
Total common stockholders' equity . . . 581 305
Total Liabilities and Stockholders'
Equity. . . . . . . . . . . . . . . $4,377 $4,153
These Statements should be read in conjunction with the Consolidated
Financial Statements and Notes thereto and Notes to Schedule I.
CONTINENTAL AIRLINES, INC.
(Parent Company Only)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF CASH FLOWS (a)
(In millions of dollars)
Year Ended December 31,
1996 1995 1994
Net cash provided (used) by operating
activities . . . . . . . . . . . . . . . $788 $245 $(56)
Cash Flows from Investing Activities:
Capital expenditures, net of returned
purchase deposits. . . . . . . . . . . (283) (68) (196)
Proceeds from disposition of property,
equipment and other assets . . . . . . 11 20 28
Purchase deposits refunded in
connection with aircraft delivered . . 18 97 96
Proceeds from sale/leaseback
transactions . . . . . . . . . . . . . 47 - -
Proceeds from sale of America West
stock and warrants . . . . . . . . . . 32 - -
Dividends received from subsidiaries. . 136 81 -
Investment in America West. . . . . . . - - (19)
Net cash provided (used) by
investing activities. . . . . . . . . (39) 130 (91)
Cash Flows from Financing Activities:
Net proceeds from issuance of
long-term debt . . . . . . . . . . . . 484 7 31
Payments on long-term debt and
capital lease obligations. . . . . . . (797) (299) (256)
Net proceeds from issuance of
common stock . . . . . . . . . . . . . 18 13 -
Net proceeds from issuance of
preferred securities of trust. . . . . - 242 -
Dividends paid on preferred
securities of trust. . . . . . . . . . (22) - -
Purchase of warrants. . . . . . . . . . (50) (14) -
Net cash provided (used) by
financing activities. . . . . . . . . (367) (51) (225)
Net Increase (Decrease) in Cash and
Cash Equivalents . . . . . . . . . . . . 382 324 (372)
Cash and Cash Equivalents -
Beginning of Period (A). . . . . . . . . 531 207 579
Cash and Cash Equivalents -
End of Period (A). . . . . . . . . . . . $913 $531 $207
(continued on next page)
CONTINENTAL AIRLINES, INC.
(Parent Company Only)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF CASH FLOWS (a)
(In millions of dollars)
Year Ended December 31,
1996 1995 1994
Supplemental Cash Flows Information:
Interest paid. . . . . . . . . . . . . . $129 $156 $179
Income taxes paid. . . . . . . . . . . . 3 7 -
Financing and Investing Activities
Not Affecting Cash:
Reclassification of accrued rent,
capital leases and interest to
long-term debt . . . . . . . . . . . . $ 11 $ 65 $ 26
Capital Lease obligations incurred. . . $ 31 $ 10 $ 14
Property and equipment acquired
through the issuance of debt . . . . . $ 69 $ 15 $ 10
Issuance of debt in connection with
purchase of Air Canada warrants. . . . $ - $ 42 $ -
Issuance of convertible secured
debentures in connection with
the aircraft settlements . . . . . . . $ - $158 $ -
Exchange of preferred stock for
long-term debt . . . . . . . . . . . . $ - $ 21 $ -
Financed purchase deposits for
flight equipment . . . . . . . . . . . $ 19 $ 5 $ -
Return of financed purchase deposits. . $ - $ 10 $ -
Reduction of capital lease obligations
in connection with the exchange of ATR
aircraft . . . . . . . . . . . . . . . $ 19 $ - $ -
(A) Excludes restricted cash of $76 million, $144 million, $119 million
and $102 million at December 31, 1996, 1995, 1994 and 1993,
respectively.
These Statements should be read in conjunction with the Consolidated
Financial Statements and Notes thereto and Notes to Schedule I.
NOTES TO SCHEDULE I
(a) The Condensed Financial Information of Registrant includes the
accounts of Continental and its wholly owned subsidiaries,
Rubicon Indemnity, Ltd., which was formed for workers'
compensation purposes and Continental Airlines Finance Trust,
which was formed for the issuance of preferred securities.
These subsidiaries have been included in Schedule I to
properly reflect the parent company's workers' compensation
liability and redeemable preferred securities.
(b) Continental's long-term debt (parent company only) was
recorded at fair market value at April 27, 1993. Long-term
debt as of December 31, 1996 and 1995 is summarized as follows
(in millions):
1996 1995
Secured
Notes payable, interest rates of 6.0%
to 12.09% (imputed interest rates of
7.86% to 9.9%), payable through 2008 . . $ 218 $ 262
Floating rate notes, interest rates of
Prime plus 0.5% to 0.75%, LIBOR plus
0.75% to 4.0% and Eurodollar plus
0.75%, payable through 2006. . . . . . . 187 173
Notes payable, interest rates of 6.14%
to 14.00% (imputed interest rates
approximate stated interest rates),
payable through 2019 . . . . . . . . . . 152 187
Notes payable, interest rates of 8.0%
to 9.86%, payable through 2003 . . . . . - 392
Series A convertible debentures, interest
rate of 6.0%, payable through 2002 . . . - 124
Other . . . . . . . . . . . . . . . . . . 4 7
Unsecured
Senior notes payable, interest rate of 9.5%,
payable through 2001. . . . . . . . . . 250 -
Convertible subordinated notes,
interest rate of 6.75%, payable
through 2006. . . . . . . . . . . . . . 230 -
Notes payable, interest rates of 8.38%
to 12% (imputed interest rates of
10.22% to 21.8%), payable through
2001. . . . . . . . . . . . . . . . . . 78 122
Other. . . . . . . . . . . . . . . . . . 6 7
1,125 1,274
Less: current maturities. . . . . . . . 155 156
Total. . . . . . . . . . . . . . . . . . $ 970 $1,118
Long-term debt maturities due over the next five years are as
follows (in millions):
Year ending December 31,
1997 . . . . . . . . . . . . . . . . . . $155
1998 . . . . . . . . . . . . . . . . . . 102
1999 . . . . . . . . . . . . . . . . . . 101
2000 . . . . . . . . . . . . . . . . . . 84
2001 . . . . . . . . . . . . . . . . . . 307
(c) See Note 12 of Notes to Consolidated Financial Statements.
(d) See Note 5 of Notes to Consolidated Financial Statements.
(e) See Note 6 of Notes to Consolidated Financial Statements.
(f) The Company has not paid dividends on its common stock.
(g) During 1996, an extraordinary loss of $1 million was recorded,
net of $1 million income tax benefit, related to the early
extinguishment of debt. See Note 2 to Consolidated Financial
Statements.
CONTINENTAL AIRLINES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1996, 1995, and 1994
(In millions of dollars)
Allowance
for Doubtful Allowance for
Receivables Obsolescence
Balance, December 31, 1993 . . . $35 $ 5
Additions charged to expense . 25 32
Deductions from reserve. . . . (21) (1)
Other. . . . . . . . . . . . . (1) -
Balance, December 31, 1994 . . . 38 36
Additions charged to expense . 24 12
Deductions from reserve. . . . (15) (12)
Other. . . . . . . . . . . . . (3) -
Balance, December 31, 1995 . . . 44 36
Additions charged to expense . 16 18
Deductions from reserve. . . . (31) (8)
Other. . . . . . . . . . . . . (2) 1
Balance, December 31, 1996 . . . $27 $47
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 21, 1997
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 21, 1997.
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/ MICHAEL P. BONDS Vice President and Controller
Michael P. Bonds (Principal Accounting Officer)
THOMAS J. BARRACK, JR.* Director
Thomas J. Barrack, Jr.
LLOYD M. BENTSEN, JR.* Director
Lloyd M. Bentsen, Jr.
DAVID BONDERMAN* Director
David Bonderman
/s/GREGORY D. BRENNEMAN Director
Gregory D. Brenneman
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 21 , 1997
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. 0-09781)
(the "1992 10-K").
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 (the
"April 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 April 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 April 8-
K.
2.5 Confirmation Order, dated April 16, 1993 -- incorporated
by reference to Exhibit 2.5 to the April 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 3.1 to Continental's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996 (the "1996 Third Quarter 10-Q").
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 (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 Certificate of Designations of Series A 12% Cumulative
Preferred Stock -- incorporated by reference to Exhibit
1.2 to Continental's Form 8-A Registration Statement, as
amended to date.
4.4 Subscription and Stockholders' Agreement -- incorporated
by reference to Exhibit 4.5 to the April 8-K.
4.4(a) Amendment to Stockholders' Agreement dated April 19, 1996
among the Company, Air Partners and Air Canada --
incorporated by reference to Exhibit 10.1 to
Continental's Form S-3 Registration Statement (No. 333-
02701) (the "1996 S-3").
4.5 Amended and Restated Registration Rights Agreement dated
April 19, 1996 among the Company, Air Partners and Air
Canada -- incorporated by reference to Exhibit 10.2 to
the 1996 S-3.
4.6 Warrant Agreement dated as of April 27, 1993, between
Continental and Continental as warrant agent --
incorporated by reference to Exhibit 4.7 to the April 8-
K.
4.7 Continental hereby agrees to furnish to the Commission,
upon request, copies of certain instruments defining the
rights of holders of long-term debt of the kind described
in Item 601(b)(4)(iii)(A) of Regulation S-K.
10.1 Litigation Settlement Agreement, dated as of August 31,
1992, among the Pension Benefit Guaranty Corporation and,
jointly and severally, each of the debtors (as defined)
-- incorporated by reference to Exhibit 10.10 to the
1992 10-K.
10.2 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.
10.2(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").
10.2(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.
10.2(c) Supplemental Agreements No. 8 through 11 to the Terminal
C Lease -- incorporated by reference to Exhibit 10.10 to
the 1993 S-1.
10.2(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.
10.3 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.
10.4* Amended and restated employment agreement between the
Company and Gordon M. Bethune -- incorporated by
reference to Exhibit 10.1 to Continental's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996
(the "1996 Second Quarter 10-Q").
10.4(a)* Amendment to employment agreement, dated as of September
30, 1996, between the Company and Gordon M. Bethune --
incorporated by reference to Exhibit 10.1 to the 1996
Third Quarter 10-Q.
10.5* Amended and restated employment agreement between the
Company and Gregory D. Brenneman -- incorporated by ref-
erence to Exhibit 10.2 to the 1996 Second Quarter 10-Q.
10.5(a)* Amendment to employment agreement, dated as of September
30, 1996, between the Company and Gregory D. Brenneman --
incorporated by reference to Exhibit 10.2 to the 1996
Third Quarter 10-Q.
10.6* Amended and restated employment agreement between the
Company and Lawrence W. Kellner -- incorporated by ref-
erence to Exhibit 10.3 to the 1996 Second Quarter 10-Q.
10.7* Amended and restated employment agreement between the
Company and Barry P. Simon -- incorporated by reference
to Exhibit 10.7 to the 1995 10-K.
10.8* Amended and restated employment agreement between the
Company and C. D. McLean -- incorporated by reference to
Exhibit 10.8 to the 1995 10-K.
10.9* Form of amendment to employment agreement between the
Company and Lawrence W. Kellner, C.D. McLean and Barry P.
Simon -- incorporated by reference to Exhibit 10.4 to the
1996 Second Quarter 10-Q.
10.9(a)* Form of amendment to employment agreement, dated as of
September 30, 1996, for each of Lawrence W. Kellner, C.
D. McLean and Barry P. Simon -- incorporated by reference
to Exhibit 10.3 to the 1996 Third Quarter 10-Q.
10.10* Continental Airlines, Inc. 1994 Incentive Equity Plan --
incorporated by reference to Exhibit 4.3 to the Company's
Form S-8 Registration Statement (No. 33-81324).
10.10(a)* First Amendment to Continental Airlines, Inc. 1994
Incentive Equity Plan -- incorporated by reference to
Exhibit 10.1 to the 1995 Third Quarter 10-Q.
10.10(b)* Second Amendment to Continental Airlines, Inc. 1994
Incentive Equity Plan -- incorporated by reference to
Exhibit 4.3(c) to the 1996 S-8.
10.10(c)* Third Amendment to Continental Airlines, Inc. 1994
Incentive Equity Plan -- incorporated by reference to
Exhibit 10.4 to the 1996 Third Quarter 10-Q.
10.11 Purchase Agreement No. 1783, including exhibits and side
letters thereto, between the Company and Boeing,
effective April 27, 1993, relating to the purchase of
Boeing 757-224 aircraft -- incorporated by reference to
Exhibit 10.2 to Continental's Quarterly Report on Form
10-Q for the quarter ended June 30, 1993 (the "1993
Second Quarter 10-Q"). (1)
10.11(a) Supplemental Agreement No. 4 to Purchase Agreement No.
1783 between the Company and Boeing, dated March 31,
1995, relating to the purchase of Boeing 757-224 aircraft
-- 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. 0-09781) (the "1994 10-
K"). (1)
10.11(b) Supplemental Agreement No. 6 to Purchase Agreement No.
1783 between the Company and Boeing, dated June 13, 1996,
relating to the purchase of Boeing 757-224 aircraft --
incorporated by reference to Exhibit 10.6 to the 1996
Second Quarter 10-Q. (2)
10.11(c) Supplemental Agreement No. 7 to Purchase Agreement No.
1783 between the Company and Boeing, dated July 23, 1996,
relating to the purchase of Boeing 757-224 aircraft --
incorporated by reference to Exhibit 10.6(a) to the 1996
Second Quarter 10-Q. (2)
10.11(d) Supplemental Agreement No. 8 to Purchase Agreement No.
1783 between the Company and Boeing, dated October 27,
1996, relating to the purchase of Boeing 757-224
aircraft. (2)(3)
10.13 Purchase Agreement No. 1785, including exhibits and side
letters thereto, between the Company and Boeing,
effective April 27, 1993, relating to the purchase of
Boeing 777-224 aircraft -- incorporated by reference to
Exhibit 10.4 to the 1993 Second Quarter 10-Q. (1)
10.13(a) Supplemental Agreement No. 3 to Purchase Agreement No.
1785 between the Company and Boeing, dated March 31,
1995, relating to the purchase of Boeing 777-224 aircraft
-- incorporated by reference to Exhibit 10.14(a) to the
1994 10-K. (1)
10.13(b) Supplemental Agreement No. 4 to Purchase Agreement No.
1785 between the Company and Boeing, dated July 23, 1996,
relating to the purchase of Boeing 777-224 aircraft --
incorporated by reference to Exhibit 10.7 to the 1996
Second Quarter 10-Q. (2)
10.14 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 737-724
and 737-824 aircraft -- incorporated by reference to
Exhibit 10.8 to the 1996 Second Quarter 10-Q. (2)
10.14(a) Supplemental Agreement No. 1 to Purchase Agreement No.
1951 between the Company and Boeing, dated October 10,
1996, relating to the purchase of Boeing 737 aircraft.
(2)(3)
10.15 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.
10.15(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.
10.16 Stock Subscription Warrant of Continental Micronesia
granted to United Micronesia Development Association,
Inc. -- incorporated by reference to Exhibit 10.18 to the
1993 S-1.
10.17 Lease Agreement, as amended and supplemented, between the
Company and the City of Houston, Texas regarding Terminal
C of Houston Intercontinental Airport -- incorporated by
reference to Exhibit 10.5 to Continental's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1993 (the "1993 Third Quarter 10-Q").
10.18 Agreement and Lease dated as of May 1987, as
supplemented, between the City of Cleveland, Ohio and
Continental regarding Cleveland Hopkins International
Airport -- incorporated by reference to Exhibit 10.6 to
the 1993 Third Quarter 10-Q.
10.19 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.
10.20* 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
of the 1995 10-K.
11.1 Statement Regarding Computation of Per Share Earnings.
(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 agreement.
(2) The Company has applied to the Commission for confidential
treatment of a portion of this exhibit.
(3) Filed herewith.