Attached files
file | filename |
---|---|
EX-10.4 - EXHIBIT 10.4 - UNITED AIRLINES, INC. | fexhibit104.htm |
EX-31.1 - EXHIBIT 31.1 - UNITED AIRLINES, INC. | fexhibit311.htm |
EX-10.1 - EXHIBIT 10.1 - UNITED AIRLINES, INC. | fexhibit101.htm |
EX-31.2 - EXHIBIT 31.2 - UNITED AIRLINES, INC. | fexhibit312.htm |
EX-10.3 - EXHIBIT 10.3 - UNITED AIRLINES, INC. | fexhibit103.htm |
EX-10.5 - EXHIBIT 10.5 - UNITED AIRLINES, INC. | fexhibit105.htm |
EX-32.1 - EXHIBIT 32.1 - UNITED AIRLINES, INC. | fexhibit321.htm |
EX-12.1 - EXHIBIT 12.1 - UNITED AIRLINES, INC. | fexhibit121.htm |
EX-10.2 - EXHIBIT 10.2 - UNITED AIRLINES, INC. | fexhibit102.htm |
UNITED
STATES
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SECURITIES
AND EXCHANGE COMMISSION
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WASHINGTON,
D.C. 20549
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FORM
10-Q
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(Mark
One)
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[X] QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
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THE
SECURITIES EXCHANGE ACT OF 1934
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FOR
THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2009
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OR
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[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
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THE
SECURITIES EXCHANGE ACT OF 1934
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FOR
THE TRANSITION PERIOD FROM __________ TO __________
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Commission
File Number 1-10323
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CONTINENTAL
AIRLINES, INC.
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(Exact
name of registrant as specified in its charter)
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Delaware
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74-2099724
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(State
or other jurisdiction
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(I.R.S.
Employer
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of
incorporation or organization)
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Identification
No.)
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1600
Smith Street, Dept. HQSEO
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Houston,
Texas 77002
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(Address
of principal executive offices)
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(Zip
Code)
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713-324-2950
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(Registrant's
telephone number, including area code)
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Indicate by check mark whether
registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
_____
Indicate by check mark whether
the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such
files). Yes No
_____
Indicate by check mark whether
the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. Large
accelerated filer X Accelerated
filer
___ Non-accelerated filer ___ Smaller
reporting company ___
(Do not check if a
smaller
reporting
company)
Indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes No
X
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As of October 20, 2009, 138,452,052
shares of Class B common stock of the registrant were
outstanding.
TABLE OF
CONTENTS
PAGE
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PART
I
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FINANCIAL
INFORMATION
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Item
1.
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4
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5
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6
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7
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8
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Item
2.
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33
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Item
3.
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53
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Item
4.
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55
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PART
II
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OTHER
INFORMATION
|
|
Item
1.
|
55
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|
Item
1A.
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56
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Item
2.
|
58
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|
Item
3.
|
58
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|
Item
4.
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58
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Item
5.
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58
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Item
6.
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59
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60
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61
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PART
I - FINANCIAL INFORMATION
CONTINENTAL
AIRLINES, INC.
(In
millions, except per share data) (Unaudited)
(2008
As Adjusted (Note 1))
Three
Months
Ended September
30,
|
Nine
Months
Ended September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Operating
Revenue:
|
||||||||||||||||
Passenger
(excluding fees and taxes of $397, $402, $1,121, and $1,186,
respectively)
|
$ | 2,947 | $ | 3,760 | $ | 8,331 | $ | 10,633 | ||||||||
Cargo
|
92 | 129 | 259 | 383 | ||||||||||||
Other
|
278 | 267 | 814 | 755 | ||||||||||||
Total
Operating Revenue
|
3,317 | 4,156 | 9,404 | 11,771 | ||||||||||||
Operating
Expenses:
|
||||||||||||||||
Aircraft
fuel and related taxes
|
881 | 1,807 | 2,507 | 4,722 | ||||||||||||
Wages,
salaries and related costs
|
794 | 765 | 2,358 | 2,197 | ||||||||||||
Aircraft
rentals
|
233 | 244 | 705 | 736 | ||||||||||||
Landing
fees and other rentals
|
222 | 225 | 647 | 643 | ||||||||||||
Regional
capacity purchase, net
|
211 | 247 | 641 | 838 | ||||||||||||
Distribution
costs
|
160 | 182 | 467 | 558 | ||||||||||||
Maintenance,
materials and repairs
|
159 | 152 | 473 | 478 | ||||||||||||
Depreciation
and amortization
|
124 | 112 | 353 | 327 | ||||||||||||
Passenger
services
|
99 | 113 | 282 | 315 | ||||||||||||
Special
charges
|
20 | 91 | 68 | 141 | ||||||||||||
Other
|
353 | 370 | 1,050 | 1,105 | ||||||||||||
Total
Operating Expenses
|
3,256 | 4,308 | 9,551 | 12,060 | ||||||||||||
Operating
Income (Loss)
|
61 | (152 | ) | (147 | ) | (289 | ) | |||||||||
Nonoperating
Income (Expense):
|
||||||||||||||||
Interest
expense
|
(91 | ) | (95 | ) | (274 | ) | (279 | ) | ||||||||
Interest
capitalized
|
8 | 8 | 25 | 25 | ||||||||||||
Interest
income
|
2 | 16 | 10 | 56 | ||||||||||||
Gain
on sale of investments
|
- | - | - | 78 | ||||||||||||
Other-than-temporary
impairment losses on investments
|
- | - | - | (29 | ) | |||||||||||
Other,
net
|
2 | (27 | ) | 19 | 11 | |||||||||||
Total
Nonoperating Income (Expense)
|
(79 | ) | (98 | ) | (220 | ) | (138 | ) | ||||||||
Loss
before Income Taxes
|
(18 | ) | (250 | ) | (367 | ) | (427 | ) | ||||||||
Income
Tax Benefit
|
- | 20 | - | 110 | ||||||||||||
Net
Loss
|
$ | (18 | ) | $ | (230 | ) | $ | (367 | ) | $ | (317 | ) | ||||
Basic
and Diluted Loss per Share
|
$ | (0.14 | ) | $ | (2.09 | ) | $ | (2.91 | ) | $ | (3.08 | ) | ||||
Shares
Used for Basic and Diluted Computation
|
132 | 110 | 126 | 103 |
The
accompanying Notes to Consolidated Financial Statements are an integral part of
these statements.
CONSOLIDATED
BALANCE SHEETS
(In
millions, except for share data)
(2008
As Adjusted (Note 1))
September
30,
|
December
31,
|
September
30,
|
||||||||||
2009
|
2008
|
2008
|
||||||||||
(Unaudited)
|
(Unaudited)
|
|||||||||||
Current
Assets:
|
||||||||||||
Cash
and cash equivalents
|
$ | 2,313 | $ | 2,165 | $ | 2,411 | ||||||
Short-term
investments
|
229 | 478 | 475 | |||||||||
Total
unrestricted cash, cash equivalents and short-term
investments
|
2,542 | 2,643 | 2,886 | |||||||||
Restricted
cash, cash equivalents and short-term investments
|
164 | 190 | 164 | |||||||||
Accounts
receivable, net
|
549 | 453 | 652 | |||||||||
Spare
parts and supplies, net
|
245 | 235 | 311 | |||||||||
Deferred
income taxes
|
180 | 216 | 217 | |||||||||
Prepayments
and other
|
435 | 610 | 483 | |||||||||
Total
current assets
|
4,115 | 4,347 | 4,713 | |||||||||
Property
and Equipment:
|
||||||||||||
Owned
property and equipment:
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||||||||||||
Flight
equipment
|
8,807 | 8,446 | 8,170 | |||||||||
Other
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1,755 | 1,694 | 1,673 | |||||||||
Flight
equipment and other
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10,562 | 10,140 | 9,843 | |||||||||
Less: Accumulated
depreciation
|
3,444 | 3,229 | 3,061 | |||||||||
Owned
property and equipment, net
|
7,118 | 6,911 | 6,782 | |||||||||
Purchase
deposits for flight equipment
|
226 | 275 | 319 | |||||||||
Capital
leases
|
195 | 194 | 190 | |||||||||
Less: Accumulated
amortization
|
60 | 53 | 51 | |||||||||
Capital
leases, net
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135 | 141 | 139 | |||||||||
Total
property and equipment, net
|
7,479 | 7,327 | 7,240 | |||||||||
Routes
and airport operating rights, net
|
794 | 804 | 785 | |||||||||
Investment
in student loan-related auction rate securities, long-term
|
- | - | 130 | |||||||||
Other
assets, net
|
208 | 208 | 194 | |||||||||
Total
Assets
|
$ | 12,596 | $ | 12,686 | $ | 13,062 |
(continued
on next page)
CONTINENTAL
AIRLINES, INC.
CONSOLIDATED
BALANCE SHEETS
(In
millions, except for share data)
(2008
As Adjusted (Note 1))
September
30,
|
December
31,
|
September
30,
|
||||||||||
STOCKHOLDERS'
EQUITY
|
2009
|
2008
|
2008
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|||||||||
(Unaudited)
|
(Unaudited)
|
|||||||||||
Current
Liabilities:
|
||||||||||||
Current
maturities of long-term debt and capital leases
|
$ | 734 | $ | 519 | $ | 717 | ||||||
Accounts
payable
|
911 | 1,021 | 945 | |||||||||
Air
traffic and frequent flyer liability
|
1,936 | 1,881 | 2,374 | |||||||||
Accrued
payroll
|
405 | 345 | 380 | |||||||||
Accrued
other liabilities
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279 | 708 | 499 | |||||||||
Total
current liabilities
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4,265 | 4,474 | 4,915 | |||||||||
Long-Term
Debt and Capital Leases
|
5,290 | 5,353 | 5,160 | |||||||||
Deferred
Income Taxes
|
180 | 216 | 217 | |||||||||
Accrued
Pension Liability
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1,368 | 1,417 | 564 | |||||||||
Accrued
Retiree Medical Benefits
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241 | 234 | 246 | |||||||||
Other
Liabilities
|
806 | 869 | 849 | |||||||||
Commitments
and Contingencies
|
||||||||||||
Stockholders'
Equity:
|
||||||||||||
Class
B common stock - $.01 par, 400,000,000 shares authorized;138,117,042,
123,264,534 and 110,243,176 issued
|
1 | 1 | 1 | |||||||||
Additional
paid-in capital
|
2,210 | 2,038 | 1,836 | |||||||||
Retained
earnings (accumulated deficit)
|
(527 | ) | (160 | ) | 109 | |||||||
Accumulated
other comprehensive loss
|
(1,238 | ) | (1,756 | ) | (835 | ) | ||||||
Total
stockholders' equity
|
446 | 123 | 1,111 | |||||||||
Total
Liabilities and Stockholders' Equity
|
$ | 12,596 | $ | 12,686 | $ | 13,062 |
The
accompanying Notes to Consolidated Financial Statements are an integral part of
these statements.
CONTINENTAL
AIRLINES, INC.
(In
millions)
(2008
As Adjusted (Note 1))
Nine Months Ended
September 30,
|
||||||||
2009
|
2008
|
|||||||
(Unaudited)
|
||||||||
Cash
Flows from Operating Activities:
|
||||||||
Net
loss
|
$ | (367 | ) | $ | (317 | ) | ||
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
||||||||
Depreciation
and amortization
|
353 | 327 | ||||||
Special
charges
|
68 | 141 | ||||||
Gain
on sale of investments
|
- | (78 | ) | |||||
Other-than-temporary
impairment losses on investments
|
- | 29 | ||||||
Stock-based
compensation related to equity awards
|
7 | 13 | ||||||
Deferred
income tax benefit
|
- | (110 | ) | |||||
Other
adjustments, net
|
35 | 20 | ||||||
Changes
in operating assets and liabilities
|
91 | (22 | ) | |||||
Net
cash provided by operating activities
|
187 | 3 | ||||||
Cash
Flows from Investing Activities:
|
||||||||
Capital
expenditures
|
(301 | ) | (281 | ) | ||||
Aircraft
purchase deposits refunded, net
|
42 | 61 | ||||||
Proceeds
from sales of short-term investments, net
|
256 | 93 | ||||||
Proceeds
from sales of property and equipment
|
46 | 76 | ||||||
Decrease
(increase) in restricted cash, cash equivalents and short-term
investments
|
26 | (62 | ) | |||||
Proceeds
from sale of Copa Holdings, S.A. stock
|
- | 149 | ||||||
Proceeds
from sales of other long-term investments
|
- | 22 | ||||||
Expenditures
for airport operating rights
|
(22 | ) | (109 | ) | ||||
Other
cash flows from investing activities
|
(3 | ) | - | |||||
Net
cash provided by (used in) investing activities
|
44 | (51 | ) | |||||
Cash
Flows from Financing Activities:
|
||||||||
Payments
on long-term debt and capital lease obligations
|
(542 | ) | (341 | ) | ||||
Proceeds
from issuance of long-term debt
|
295 | 497 | ||||||
Proceeds
from public offering of common stock
|
158 | 162 | ||||||
Proceeds
from issuance of common stock pursuant to stock plans
|
6 | 13 | ||||||
Net
cash (used in) provided by financing activities
|
(83 | ) | 331 | |||||
Net
Increase in Cash and Cash Equivalents
|
148 | 283 | ||||||
Cash
and Cash Equivalents - Beginning of Period
|
2,165 | 2,128 | ||||||
Cash
and Cash Equivalents - End of Period
|
$ | 2,313 | $ | 2,411 | ||||
Investing
and Financing Activities Not Affecting Cash:
|
||||||||
Property
and equipment acquired through the issuance of debt
|
$ | 370 | $ | 865 |
The
accompanying Notes to Consolidated Financial Statements are an integral part of
these statements.
CONTINENTAL
AIRLINES, INC.
(Unaudited)
In our opinion, the unaudited
consolidated financial statements included herein contain all adjustments
necessary to present fairly our financial position, results of operations and
cash flows for the periods indicated. Such adjustments, other than
nonrecurring adjustments that have been separately disclosed, are of a normal,
recurring nature.
The accompanying consolidated financial
statements should be read in conjunction with the consolidated financial
statements and the notes thereto for the year ended December 31, 2008 contained
in our Current Report on Form 8-K dated April 24, 2009. Due to
seasonal fluctuations common to the airline industry, our results of operations
for the periods presented are not necessarily indicative of the results of
operations to be expected for the entire year. As used in these Notes
to Consolidated Financial Statements, the terms “Continental,” “we,” “us,” “our”
and similar terms refer to Continental Airlines, Inc. and, unless the context
indicates otherwise, its consolidated subsidiaries.
Reclassifications have been made in the
prior periods’ consolidated statements of operations to conform to our new
presentation for expense related to fuel and related taxes on flights operated
for us by other operators under capacity purchase agreements. This
expense, which is now included in aircraft fuel and related taxes, was
previously reported in regional capacity purchase, net. These
reclassifications do not affect operating income (loss) or net income (loss) for
any period.
We have evaluated subsequent events
through October 21, 2009, which is the date these financial statements were
issued.
NOTE
1 – ADOPTED AND RECENTLY ISSUED ACCOUNTING STANDARDS
Codification. Effective
July 1, 2009, the Financial Accounting Standards Board’s (“FASB”) Accounting
Standards Codification (“ASC”) became the single official source of
authoritative, nongovernmental generally accepted accounting principles (“GAAP”)
in the United States. The historical GAAP hierarchy was eliminated
and the ASC became the only level of authoritative GAAP, other than guidance
issued by the Securities and Exchange Commission. Our accounting
policies were not affected by the conversion to ASC. However,
references to specific accounting standards in the footnotes to our consolidated
financial statements have been changed to refer to the appropriate section of
ASC.
Convertible
Debt. On January 1, 2009, we adopted the Cash Conversion
Subsections of ASC Subtopic 470-20, “Debt with Conversion and Other Options –
Cash Conversion” (“Cash Conversion Subsections”), which clarify the accounting
for convertible debt instruments that may be settled in cash (including partial
cash settlement) upon conversion. The Cash Conversion Subsections
require issuers to account separately for the liability and equity components of
certain convertible debt instruments in a manner that reflects the issuer’s
nonconvertible debt (unsecured debt) borrowing rate when interest cost is
recognized. The Cash Conversion Subsections require bifurcation of a
component of the debt, classification of that component in equity and the
accretion of the resulting discount on the debt to be recognized as part of
interest expense in our consolidated statements of operations.
The Cash Conversion Subsections require
retrospective application to the terms of instruments as they existed for all
periods presented. The adoption of the Cash Conversion Subsections
affects the accounting for our 5% Convertible Notes issued in 2003 and due 2023
(the “5% Convertible Notes”). The retrospective application of this
guidance affects years 2003 through 2008. Income taxes have been
recorded on the foregoing adjustments to the extent tax benefits were
available.
The following table sets forth the
effect of the retrospective application of the Cash Conversion Subsections on
certain previously reported line items (in millions, except per share
data):
Consolidated
Statements of Operations:
Three
Months ended
September 30,
2008
|
Nine
Months ended
September 30,
2008
|
|||||||||||||||
Originally
Reported
|
As
Adjusted
|
Originally
Reported
|
As
Adjusted
|
|||||||||||||
Interest
expense
|
$ | (93 | ) | $ | (95 | ) | $ | (271 | ) | $ | (279 | ) | ||||
Income
tax benefit
|
12 | 20 | 100 | 110 | ||||||||||||
Net
loss
|
(236 | ) | (230 | ) | (319 | ) | (317 | ) | ||||||||
Basic
and Diluted Loss per Share
|
$ | (2.14 | ) | $ | (2.09 | ) | $ | (3.11 | ) | $ | (3.08 | ) |
Consolidated
Balance Sheet:
December 31,
2008
|
September 30,
2008
|
|||||||||||||||
Originally
Reported
|
As
Adjusted
|
Originally
Reported
|
As
Adjusted
|
|||||||||||||
Long-term
debt and capital leases
|
$ | 5,371 | $ | 5,353 | $ | 5,181 | $ | 5,160 | ||||||||
Additional
paid-in capital
|
1,997 | 2,038 | 1,795 | 1,836 | ||||||||||||
Retained
earnings (accumulated deficit)
|
(137 | ) | (160 | ) | 129 | 109 | ||||||||||
Total
stockholders’ equity
|
105 | 123 | 1,090 | 1,111 |
Fair
Value. In September 2006, the FASB issued guidance which
defines fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. This guidance is contained
in ASC Topic 820, “Fair Value Measurements and Disclosures” (“ASC Topic
820”). In February 2008, the FASB deferred the effective date for us
to January 1, 2009 for all nonfinancial assets and liabilities, except for those
that are recognized or disclosed at fair value on a recurring basis (that is, at
least annually). We adopted the deferred provisions of ASC Topic 820
on January 1, 2009. Application of the new
rules will affect our annual impairment testing for our international routes and
airport operating rights, which we perform as of October 1 of each
year. Routes, which are indefinite-lived intangible assets, represent
the right to fly between cities in the United States and foreign
countries. In prior years, we determined the fair value of each route
by modeling the expected future discounted cash flows. If the
calculated fair value was lower than the carrying value of a route, an
impairment loss would have been recognized for the difference between the two
amounts. With the adoption of new accounting rules, fair value is now
determined as an exit price, representing the price that would be received in an
orderly transaction between market participants based on the highest and best
use of the asset, rather than as the result of an internally-generated cash flow
analysis. Certain of our international routes are to countries that
are subject to “open skies” agreements, meaning that all carriers have access to
any destination in that country. In these cases, if there are no
significant barriers to new entrants to serve the international destination,
such as airport slot restrictions or gate availability, there is no market for
the route asset and, therefore, it has no fair value under the new definition of
fair value. We are currently evaluating the requirements of the
pronouncement and anticipate that we will record a non-cash special charge in
the fourth quarter of 2009 to write off certain of our international
routes. However, we do not expect the charge to have a material
effect on our consolidated financial statements. The routes expected
to be written off are not pledged as collateral under our debt
agreements. Therefore, our compliance with our debt agreements will
not be affected by this new guidance.
In April 2009, the FASB issued
additional guidance for estimating fair value in accordance with ASC Topic
820. The additional guidance addresses determining fair value when
the volume and level of activity for an asset or liability have significantly
decreased and identifying transactions that are not orderly. We
adopted the provisions of this guidance for the quarter ended June 30,
2009. The adoption did not have a material effect on our consolidated
financial statements.
Other-Than-Temporary
Impairments. In April 2009, the FASB issued new guidance on
the recognition of other-than-temporary impairments of investments in debt
securities, as well as financial statement presentation and disclosure
requirements for other-than-temporary impairments of investments in debt and
equity securities. We adopted the provisions of this guidance for the
quarter ended June 30, 2009. The adoption did not have a material
effect on our consolidated financial statements.
Transfers of Financial
Assets. In June 2009, the FASB issued guidance that changes
the information a reporting entity provides in its financial statements about
the transfer of financial assets and continuing interests held in transferred
financial assets. The standard amends previous accounting guidance by
removing the concept of qualified special purpose entities. This
accounting standard is effective for us for transfers occurring on or after
January 1, 2010. We are currently evaluating the requirements of this
pronouncement and have not determined the impact, if any, that adoption of this
standard will have on our consolidated financial statements.
Variable Interest
Entities. In June 2009, the FASB issued guidance to change
financial reporting by enterprises involved with variable interest entities
(“VIEs”). The standard replaces the quantitative-based risks and
rewards calculation for determining which enterprise has a controlling financial
interest in a VIE with an approach focused on identifying which enterprise has
the power to direct the activities of a VIE and the obligation to absorb losses
of the entity or the right to receive the entity’s residual
returns. This accounting standard is effective for us on January 1,
2010. We are currently evaluating the requirements of this
pronouncement and have not determined the impact, if any, that adoption of this
standard will have on our consolidated financial statements.
Employee Benefit
Plans. In December 2008, the FASB issued guidance that
requires additional disclosures about assets held in an employer's defined
benefit pension or other postretirement plan, primarily related to categories
and fair value measurements of plan assets. This guidance is
effective for us as of December 31, 2009. Because this guidance
applies only to financial statement disclosures, the adoption is not expected to
have a material effect on our consolidated financial statements.
NOTE
2 - LOSS PER SHARE
Because we incurred a net loss in the
three and nine months ended September 30, 2009 and 2008, basic and diluted loss
per share for each period were calculated as our net loss divided by the
weighted average shares outstanding. Approximately 13 million
potential shares of our common stock related to convertible debt securities were
excluded from the computation of diluted loss per share for each of the periods
presented because they were antidilutive. In addition, approximately
8 million weighted average options to purchase shares of our common stock were
excluded from the computation of diluted loss per share for each of the periods
presented because the effect of including the options would have been
antidilutive.
NOTE
3 - FLEET INFORMATION
As of September 30, 2009, our operating
fleet consisted of 338 mainline jets and 266 regional aircraft. The
338 mainline jets are operated exclusively by us, while the 266 regional
aircraft are operated on our behalf by other operators under capacity purchase
agreements.
We own or lease 274 regional
jets. Of these, 214 are leased or subleased to ExpressJet Airlines,
Inc. (“ExpressJet”) and operated on our behalf under a capacity purchase
agreement with ExpressJet, 35 are subleased to other operators but are not
operated on our behalf and 25 are temporarily grounded. Additionally,
our regional operating fleet includes 52 regional jet and turboprop aircraft
owned or leased by third parties that are operated on our behalf by other
operators under capacity purchase agreements.
The following table summarizes our
operating fleet (aircraft operated by us and by others on our behalf) as of
September 30, 2009:
Third-Party
|
||||||||
Aircraft
Type
|
Total
|
Owned
|
Leased
|
Aircraft
|
||||
Mainline
(a):
|
||||||||
777-200ER
|
20
|
8
|
12
|
-
|
||||
767-400ER
|
16
|
14
|
2
|
-
|
||||
767-200ER
|
10
|
9
|
1
|
-
|
||||
757-300
|
17
|
9
|
8
|
-
|
||||
757-200
|
41
|
15
|
26
|
-
|
||||
737-900ER
|
28
|
28
|
-
|
-
|
||||
737-900
|
12
|
8
|
4
|
-
|
||||
737-800
|
117
|
44
|
73
|
-
|
||||
737-700
|
36
|
12
|
24
|
-
|
||||
737-500
|
34
|
-
|
34
|
-
|
||||
737-300
|
7
|
7
|
-
|
-
|
||||
Total
mainline
|
338
|
154
|
184
|
-
|
||||
Regional
(b):
|
||||||||
ERJ-145XR
|
89
|
-
|
89
|
-
|
||||
ERJ-145
|
140
|
18
|
107
|
15
|
(c)
|
|||
CRJ200LR
|
7
|
-
|
-
|
7
|
(c)
|
|||
Q200
|
16
|
-
|
-
|
16
|
(d)
|
|||
Q400
|
14
|
-
|
-
|
14
|
(e)
|
|||
Total
regional
|
266
|
18
|
196
|
52
|
||||
Total
|
604
|
172
|
380
|
52
|
______________________
(a)
|
Excludes
nine grounded Boeing 737-500 aircraft (five owned and four leased), 12
grounded Boeing 737-300 aircraft (four owned and eight leased) and one
owned Boeing 737-900ER aircraft delivered but not yet placed into
service.
|
(b)
|
Excludes
25 ERJ-135 aircraft that are temporarily grounded and 30 ERJ-145 aircraft
and five ERJ-135 aircraft that are subleased to other operators but are
not operated on our behalf.
|
(c)
|
Operated
by Chautauqua Airlines, Inc. (“Chautauqua”) under a capacity purchase
agreement.
|
(d)
|
Operated
by Champlain Enterprises, Inc. (“CommutAir”) under a capacity purchase
agreement.
|
(e)
|
Operated
by Colgan Air, Inc. (“Colgan”) under a capacity purchase
agreement.
|
Mainline Fleet
Activity. During the first nine months of 2009, we placed into
service 11 new Boeing 737-900ER aircraft and one new Boeing 737-800
aircraft. We removed 16 Boeing 737-300 aircraft and eight Boeing
737-500 aircraft from service during the first nine months of
2009. By early January 2010, we expect to remove from service all of
our remaining Boeing 737-300 aircraft and three additional Boeing 737-500
aircraft.
During the third quarter of 2009, we
sold six 737-500 aircraft to a foreign buyer. We also have an
agreement to sell up to five additional Boeing 737-500 aircraft to a different
foreign buyer. This sale is subject to customary closing conditions,
some of which are outside of our control, and we cannot give any assurances that
the buyer of these aircraft will be able to obtain financing for this
transaction, that there will not be delays in deliveries or that the closing of
this transaction will occur. We hold cash deposits that secure the
buyer’s obligations under the aircraft sale contract and we are entitled to
damages under the aircraft sale contract if the buyer does not take delivery of
the aircraft when required.
Regional Fleet
Activity. In January 2009, we amended our capacity purchase
agreement with Colgan to increase by 15 the number of Q400 aircraft operated by
Colgan on our behalf. We expect that Colgan will begin operating
these 15 additional aircraft as they are delivered to Colgan, beginning in the
third quarter of 2010 through the second quarter of 2011. Each
aircraft is scheduled to be covered by the agreement for approximately ten years
following the date the aircraft is delivered into service. Colgan
supplies all aircraft that it operates under the agreement. One of
Colgan’s Q400 aircraft was involved in an accident on February 12, 2009,
reducing the number of aircraft currently being flown under the agreement to
14.
In July 2009, we entered into
agreements to sublease five temporarily grounded ERJ-135 aircraft beginning in
the third quarter of 2009. These aircraft will not be operated for
us. The subleases have terms of five years, but may be cancelled by
the lessee under certain conditions after an initial term of two
years. The remaining 25 ERJ-135 aircraft continue to be temporarily
grounded. We are evaluating our options regarding these 25 aircraft,
including permanently grounding them.
Firm Order and Option
Aircraft. As of September 30, 2009 we had firm commitments to
purchase 82 new aircraft (52 Boeing 737 aircraft, five Boeing 777 aircraft and
25 Boeing 787 aircraft) scheduled for delivery from 2009 through 2016, with an
estimated aggregate cost of $5.1 billion including related spare
engines. We are currently scheduled to take delivery of one Boeing
737 aircraft in the fourth quarter of 2009 and two Boeing 777 aircraft and 12
Boeing 737 aircraft in 2010. In addition to our firm order aircraft,
we had options to purchase a total of 102 additional Boeing aircraft as of
September 30, 2009.
We have also agreed to lease four
Boeing 757-300 aircraft from Boeing Capital Corporation. We expect
these aircraft to be placed into service by the end of the first quarter of
2010.
NOTE
4 - LONG-TERM DEBT
2007 Enhanced Equipment
Trust Certificates. In April 2007, we obtained financing for
12 Boeing 737-800s and 18 Boeing 737-900ERs. We applied the final
portion of this financing to three Boeing aircraft delivered to us in the first
half of 2009 and recorded related debt of $121 million.
Other Debt Secured by
Aircraft. During the first nine months of 2009, we entered
into loan agreements under which we borrowed $180 million. This
floating rate indebtedness is secured by five new Boeing 737-900ER aircraft and
two Boeing 737-800 aircraft that this debt refinanced.
2009 Enhanced Equipment
Trust Certificates. On July 1, 2009, we obtained financing for
12 currently owned Boeing aircraft and five new Boeing 737-900ERs. A
pass-through trust raised $390 million through the issuance of a single class of
pass-through certificates bearing interest at 9%. The proceeds from
the sale of the certificates were initially held by a depositary in escrow for
the benefit of the certificate holders until we issued equipment notes to the
trust, which purchased such notes with a portion of the escrowed
funds. During the third quarter of 2009, we issued equipment notes
with respect to the 12 currently owned aircraft, resulting in proceeds of $249
million cash for our general corporate purposes, and equipment notes with
respect to four new Boeing 737-900ER aircraft, resulting in proceeds of $113
million to finance the purchase of the aircraft. One remaining new
Boeing 737-900ER aircraft will be financed through the issuance of $28 million
of equipment notes in the fourth quarter of 2009. We have recorded
the principal amount of the equipment notes that we issued as debt on our
consolidated balance sheet. Principal payments on the equipment notes
and the corresponding distribution of these payments to certificate holders are
scheduled from January 2010 through July 2016. Additionally, the
certificates have the benefit of a liquidity facility under which a third party
agrees to make up to three semiannual interest payments on the certificates if a
default in the payment of interest occurs.
Maturities. Maturities
of long-term debt due before December 31, 2009 and for the next four years are
as follows (in millions):
October
1, 2009 through December 31, 2009
|
$ | 62 | ||
Year
ending December 31,
|
||||
2010
|
968 | |||
2011
|
1,143 | |||
2012
|
581 | |||
2013
|
647 |
Convertible Debt
Securities. Our 5% Convertible Notes with a principal amount
of $175 million are convertible into 50 shares of our common stock per $1,000
principal amount at a conversion price of $20 per share. If a holder
of the notes exercises the conversion right, in lieu of delivering shares of our
common stock, we may elect to pay cash or a combination of cash and shares of
our common stock for the notes surrendered. All or a portion of the
notes are also redeemable for cash at our option on or after June 18, 2010 at
par plus accrued and unpaid interest, if any. Holders of the notes
may require us to repurchase all or a portion of their notes at par plus any
accrued and unpaid interest on June 15 of 2010, 2013 or 2018. We may
at our option choose to pay the repurchase price on those dates in cash, shares
of our common stock or any combination thereof. However, if we are
required to repurchase all or a portion of the notes, our policy is to settle
the notes in cash. Holders of the notes may also require us to
repurchase all or a portion of their notes for cash at par plus any accrued and
unpaid interest if certain changes in control of Continental occur.
As a result of the adoption of the Cash
Conversion Subsections of ASC Subtopic 470-20, we are required to account
separately for the debt and equity components of our 5% Convertible Notes in a
manner that reflects our nonconvertible debt (unsecured debt) borrowing rate
when interest expense is recognized. The debt and equity components
recognized for our 5% Convertible Notes were as follows (in
millions):
September
30,
|
December
31,
|
September
30,
|
||||||||||
2009
|
2008
|
2008
|
||||||||||
Principal
amount of Convertible Notes
|
$ | 175 | $ | 175 | $ | 175 | ||||||
Unamortized
discount
|
9 | 18 | 21 | |||||||||
Net
carrying amount
|
166 | 157 | 154 | |||||||||
Additional
paid-in capital
|
64 | 64 | 64 |
At September 30, 2009, the unamortized
discount had a remaining recognition period of nine months.
The amount of interest expense
recognized and effective interest rate for the three and nine months ended
September 30 were as follows (in millions):
Three
Months
Ended September
30,
|
Nine
Months
Ended September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Contractual
coupon interest
|
$ | 2 | $ | 2 | $ | 6 | $ | 6 | ||||||||
Amortization
of discount on 5% Convertible Notes
|
3 | 3 | 9 | 9 | ||||||||||||
Interest
expense
|
$ | 5 | $ | 5 | $ | 15 | $ | 15 | ||||||||
Effective
interest rate
|
13 | % | 13 | % | 13 | % | 13 | % |
NOTE
5 – FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
Accounting rules for fair value clarify
that fair value is an exit price, representing the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction
between market participants based on the highest and best use of the asset or
liability. As such, fair value is a market-based measurement that
should be determined based on assumptions that market participants would use in
pricing an asset or liability. ASC Topic 820 requires us to use
valuation techniques to measure fair value that maximize the use of observable
inputs and minimize the use of unobservable inputs. These inputs are
prioritized as follows:
Level
1:
|
Observable
inputs such as quoted prices for identical assets or liabilities in active
markets
|
|
Level
2:
|
Other
inputs that are observable directly or indirectly, such as quoted prices
for similar assets or liabilities or market-corroborated
inputs
|
|
Level
3:
|
Unobservable
inputs for which there is little or no market data and which require us to
develop our own assumptions about how market participants would price the
assets or liabilities
|
|
The
valuation techniques that may be used to measure fair value are as
follows:
|
(A)
|
Market
approach – Uses prices and other relevant information generated by market
transactions involving identical or comparable assets or
liabilities
|
|
(B)
|
Income
approach – Uses valuation techniques to convert future amounts to a single
present amount based on current market expectations about those future
amounts, including present value techniques, option-pricing models and
excess earnings method
|
|
(C)
|
Cost
approach – Based on the amount that currently would be required to replace
the service capacity of an asset (replacement
cost)
|
Assets (liabilities) measured at fair
value on a recurring basis during the period include (in millions):
Carrying
Amount as of
September 30,
2009
|
Level
1
|
Level
2
|
Level
3
|
Valuation
Technique
|
|||||||||||||
Cash
and cash equivalents
|
$ | 2,313 | $ | 2,313 | - | - |
(A)
|
||||||||||
Short-term
investments:
|
- | ||||||||||||||||
Auction
rate securities
|
205 | - | $ | 205 |
(B)
|
||||||||||||
Other
|
24 | 24 | - | - |
(A)
|
||||||||||||
Restricted
cash, cash equivalents and short-term investments
|
164 | 164 | - | - |
(A)
|
||||||||||||
Auction
rate securities put right
|
23 | - | - | 23 |
(B)
|
||||||||||||
Fuel
derivatives
|
9 | - | - | 9 |
(A)
|
||||||||||||
Foreign
currency derivatives
|
(3 | ) | - | $ | (3 | ) | - |
(A)
|
Assets measured at fair value on a
nonrecurring basis during the nine months ended September 30, 2009 include our
Boeing 737-300 and 737-500 fleets and related assets. We recorded
impairment losses on these assets in the quarter ended June 30,
2009. As a result of the impairments, we measured these assets at
fair value at June 30, 2009, as follows (in millions):
Carrying
Amount as of
June 30,
2009
|
Level
1
|
Level
2
|
Level
3
|
Total
Losses
|
||||||||||||||||
Property
and Equipment:
|
||||||||||||||||||||
Boeing
737-300 fleet
|
$ | 90 | - | - | $ | 90 | $ | (19 | ) | |||||||||||
Boeing
737-500 fleet
|
82 | - | - | 82 | (12 | ) | ||||||||||||||
$ | (31 | ) |
The determination of fair value of each
of these items is discussed below:
Cash, Cash Equivalents and
Restricted Cash. Cash, cash equivalents and restricted cash
consist primarily of U.S. Government and Agency money market funds and other
AAA-rated money market funds with original maturities of three months or
less. The original cost of these assets approximates fair value due
to their short-term maturity.
Short-Term Investments Other
than Auction Rate Securities. Short-term investments other
than auction rate securities primarily consist of certificates of deposit placed
through an account registry service (“CDARS”). The fair values of
these investments are based on observable market data.
Student Loan-Related Auction
Rate Securities and Put Right. At September 30, 2009, we held
student loan-related auction rate securities with a fair value of $205 million
and a par value of $261 million. These securities were classified as
follows (in millions):
Fair
Value
|
Par
Value
|
Amortized
Cost
|
||||||||||
Short-term
investments:
|
||||||||||||
Available-for-sale
|
$ | 135 | $ | 166 | $ | 135 | ||||||
Trading
|
70 | 95 | N/A | |||||||||
Total
|
$ | 205 | $ | 261 |
These securities are variable-rate debt
instruments with contractual maturities generally greater than ten years and
whose interest rates are reset every 7, 28 or 35 days, depending on the terms of
the particular instrument. These securities are secured by pools of
student loans guaranteed by state-designated guaranty agencies and reinsured by
the U.S. government. All of the auction rate securities we hold are
senior obligations under the applicable indentures authorizing the issuance of
the securities. Auctions for these securities began failing in the
first quarter of 2008 and have continued to fail, resulting in our holding such
securities and the issuers of these securities paying interest adjusted to the
maximum contractual rates.
Prior to the first quarter of 2008, the
carrying value of auction rate securities approximated fair value due to the
frequent resetting of the interest rate and the existence of a liquid
market. Although we will earn interest on these investments involved
in failed auctions at the maximum contractual rate, the estimated market value
of these auction rate securities no longer approximates par value due to the
lack of liquidity in the market for these securities at their par
value. We recorded losses of $29 million during the second quarter of
2008 to reflect the other-than-temporary decline in the fair value of these
securities. These losses are included in nonoperating income
(expense) in our consolidated statement of operations. Following this
other-than-temporary impairment, a new amortized cost basis was established
equal to the then fair value. The difference between this amortized
cost and the cash flows expected to be collected is being accreted as interest
income.
We estimated the fair value of these
securities to be $205 million at September 30, 2009, taking into consideration
the limited sales and offers to purchase securities and using
internally-developed models of the expected future cash flows related to the
securities. Our models incorporated our probability-weighted
assumptions about the cash flows of the underlying student loans and discounts
to reflect a lack of liquidity in the market for these securities.
In addition, in 2008, one institution
granted us a put right permitting us in 2010 to sell to the institution at their
full par value auction rate securities with a par value of $125
million. The institution has also committed to loan us 75% of the
market value of these securities at any time until the put right is
exercised. The put right is recorded at fair value in prepayments and
other assets on our consolidated balance sheet. We determined the
fair value based on the difference between the risk-adjusted discounted expected
cash flows from the underlying auction rate securities without the put right and
with the put right being exercised in 2010. We have classified the
underlying auction rate securities as trading securities and elected the fair
value option under the Fair Value Subsections of ASC Topic 825-10, “Financial
Instruments,” for the put right, with changes in the fair value of the put right
and the underlying auction rate securities recognized in earnings
currently.
During the third quarter of 2009, we
sold, at par, auction rate securities having a par value of $30 million to the
institution that had granted us the put right. Our gains on the sales
were recognized using the specific identification method and are included in
other non-operating income (expense) in our consolidated statements of
operations. Such gains were not material.
We continue to monitor the market for
auction rate securities and consider its impact, if any, on the fair value of
our investments. If current market conditions deteriorate further, we
may be required to record additional losses on these securities.
Fuel
Derivatives. We determine the fair value of our fuel
derivatives by obtaining inputs from a broker's pricing model based on inputs
that are either readily available in public markets or can be derived from
information available in publicly quoted markets. We verify the
reasonableness of these inputs by comparing the resulting fair values to similar
quotes from our counterparties as of each date for which financial statements
are prepared. For derivatives not covered by collateral, we also make
an adjustment to incorporate credit risk into the valuation. Due to
the fact that certain of the inputs utilized to determine the fair value of the
fuel derivatives are unobservable (principally volatility of crude oil prices
and the credit risk adjustments), we have categorized these contracts as Level
3.
Foreign Currency
Derivatives. We determine the fair value of our foreign
currency derivatives by comparing our contract rate to a published forward price
of the underlying currency, which is based on market rates for comparable
transactions.
Property and Equipment -
Boeing 737-300 and 737-500 Aircraft Fleets. As discussed in
Note 11, we wrote down our Boeing 737-300 and 737-500 fleets to their respective
fair values in the second quarter of 2009. Fleet assets include owned
aircraft, improvements on leased aircraft, rotable spare parts, spare engines
and simulators. We estimated the fair values based on current market
conditions, the condition of our aircraft and our expected proceeds from the
sale of the assets.
Unobservable
Inputs. The reconciliation of our assets (liabilities)
measured at fair value on a recurring basis using unobservable inputs (Level 3)
is as follows (in millions):
Three Months Ended
September 30, 2009
|
||||||||||||
Student
Loan-Related
Auction Rate
Securities
|
Auction
Rate
Securities Put
Right
|
Fuel
Derivatives
|
||||||||||
Balance
at June 30, 2009
|
$ | 230 | $ | 27 | $ | (17 | ) | |||||
Purchases,
sales, issuances and settlements (net)
|
(30 | ) | - | 36 | ||||||||
Gains
and losses:
|
||||||||||||
Reported
in earnings:
|
||||||||||||
Realized
|
5 | (4 | ) | - | ||||||||
Unrealized
|
- | - | 1 | |||||||||
Reported
in other comprehensive income (loss)
|
- | - | (11 | ) | ||||||||
Balance
at September 30, 2009
|
$ | 205 | $ | 23 | $ | 9 |
Nine Months Ended
September 30, 2009
|
||||||||||||
Student
Loan-Related
Auction Rate
Securities
|
Auction
Rate
Securities Put
Right
|
Fuel
Derivatives
|
||||||||||
Balance
at December 31, 2008
|
$ | 229 | $ | 26 | $ | (415 | ) | |||||
Purchases,
sales, issuances and settlements (net)
|
(31 | ) | - | 458 | ||||||||
Gains
and losses:
|
||||||||||||
Reported
in earnings:
|
||||||||||||
Realized
|
5 | (4 | ) | - | ||||||||
Unrealized
|
- | 1 | 7 | |||||||||
Reported
in other comprehensive income (loss)
|
2 | - | (41 | ) | ||||||||
Balance
at September 30, 2009
|
$ | 205 | $ | 23 | $ | 9 |
Other Financial
Instruments. Other financial instruments that are not subject
to the disclosure requirements of ASC Topic 820 are as follows:
·
|
Debt. The
fair value of our debt with a carrying value of $5.8 billion at September
30, 2009 was approximately $5.1 billion. These estimates were
based on either market prices or the discounted amount of future cash
flows using our current incremental rate of borrowing for similar
liabilities.
|
·
|
Investment in COLI
Products. In connection with certain of our supplemental
retirement plans, we have company owned life insurance policies covering
certain of our employees. As of September 30, 2009, the
carrying value of the cash surrender value of the life insurance policies
was $30 million, which was based on the fair value of the underlying
investments.
|
·
|
Accounts Receivable
and Accounts Payable. The fair values of accounts
receivable and accounts payable approximated carrying value due to their
short-term maturities.
|
NOTE
6 - HEDGING ACTIVITIES
As part of our risk management program,
we use a variety of derivative financial instruments to help manage our risks
associated with changes in fuel prices and foreign currency exchange
rates. We do not hold or issue derivative financial instruments for
trading purposes.
We are exposed to credit losses in the
event of non-performance by issuers of derivative financial
instruments. To manage credit risks, we select issuers based on
credit ratings, limit our exposure to any one issuer under our defined
guidelines and monitor the market position with each counterparty.
Fuel Price Risk
Management. We routinely hedge a portion of our future fuel
requirements, provided the hedges are expected to be cost
effective. We conduct our fuel hedging activities using a combination
of jet fuel, crude oil and heating oil contracts.
We have historically entered into swap
agreements or purchased call options to protect us against sudden and
significant increases in jet fuel prices. To minimize the high cost
to us of call options, we may also enter into collars. Collars are
derivative instruments that involve combining a purchased call option, which on
a stand-alone basis would require us to pay a premium, with a written put
option, which on a stand-alone basis would result in our receiving a
premium. The collars we have entered into consist of both instruments
that result in no net premium to us and instruments that result in our payment
of a net premium to the counterparty. The purchased call option
portion of the collar caps the price of the contract at the agreed upon price,
while the sold option portion of the collar provides for a minimum price of the
related commodity. We had no collars outstanding at September 30,
2009.
As of September 30, 2009, our projected
consolidated fuel requirements were hedged as follows:
Maximum
Price
|
Minimum
Price
|
|||||||||||||||||||
%
of
Expected
Consumption
|
Weighted
Average
Price
(per
gallon)
|
%
of
Expected
Consumption
|
Weighted
Average
Price
(per
gallon)
|
|||||||||||||||||
Fourth Quarter
2009
|
||||||||||||||||||||
Gulf
Coast jet fuel swaps
|
15 | % | $ | 1.83 | 15 | % | $ | 1.83 | ||||||||||||
WTI
crude oil swaps
|
5 | % | 1.36 | 5 | % | 1.36 | ||||||||||||||
Total
|
20 | % | 20 | % | ||||||||||||||||
First Quarter
2010
|
||||||||||||||||||||
Gulf
Coast jet fuel swaps
|
5 | % | $ | 1.94 | 5 | % | $ | 1.94 | ||||||||||||
WTI
crude oil swaps
|
1 | % | 1.62 | 1 | % | 1.62 | ||||||||||||||
WTI
crude oil call options
|
1 | % | 1.88 | N/A | N/A | |||||||||||||||
Total
|
7 | % | 6 | % |
We account for our fuel derivatives as
cash flow hedges and record them at fair value in our consolidated balance sheet
with the change in fair value, to the extent effective, being recorded to
accumulated other comprehensive income (loss) (“accumulated OCI”), net of
applicable income taxes. Fuel hedge gains (losses) are recognized as
a component of fuel expense when the underlying fuel being hedged is
used. The ineffective portion of our fuel hedges is determined based
on the correlation between jet fuel and crude oil or heating oil prices and is
included in nonoperating income (expense) in our consolidated statement of
operations.
When our fuel hedges are in a liability
position, we may be required to post cash collateral with our
counterparties. We were not required to post any such collateral at
September 30, 2009.
Foreign Currency Exchange
Risk Management. We have historically used foreign currency
average rate options and forward contracts to hedge against the currency risk
associated with our forecasted Japanese yen, British pound, Canadian dollar and
euro-denominated cash flows. The average rate options and forward
contracts have only nominal intrinsic value at the date
contracted. At September 30, 2009, we had forward contracts
outstanding to hedge the following cash inflows (primarily from passenger ticket
sales) in foreign currencies:
·
|
24%
of our projected Japanese yen-denominated cash inflows through
2010
|
·
|
9%
of our projected euro-denominated cash inflows through
2009
|
We account for these instruments as
cash flow hedges. They are recorded at fair value in our consolidated
balance sheet with the offset to accumulated OCI, net of applicable income taxes
and hedge ineffectiveness, and recognized as passenger revenue in the month of
sale. We measure hedge effectiveness of average rate options and
forward contracts based on the forward price of the underlying
currency. Hedge ineffectiveness, if any, is included in other
nonoperating income (expense) in our consolidated statement of
operations.
Quantitative
Disclosures. At September 30, 2009, all of our derivative
instruments were designated as cash flow hedges and were reported in our
consolidated balance sheet as follows (in millions):
Asset
Derivatives
|
Liability
Derivatives
|
|||||||||
Balance
Sheet
Location
|
Fair
Value
|
Balance
Sheet
Location
|
Fair
Value
|
|||||||
Fuel
derivatives
|
Prepayments
and other current assets
|
$ | 9 |
Accrued
other current liabilities
|
$ | - | ||||
Foreign
currency derivatives
|
Prepayments
and other current assets
|
- |
Accrued
other current liabilities
|
3 | ||||||
Total
derivatives
|
$ | 9 | $ | 3 |
The gains and losses related to our
derivative instruments reported in our consolidated balance sheet at September
30, 2009 and our consolidated statement of operations were as follows (in
millions):
Three Months Ended
September 30, 2009
|
||||||||||||||
Cash
Flow
Hedges
|
Gain
(Loss)
Recognized
in
OCI
(Effective
Portion)
|
Gain
(Loss) Reclassified from
Accumulated
OCI into Income
(Effective
Portion)
|
Gain
(Loss) Recognized in
Income (Ineffective
Portion)
|
|||||||||||
Income
Statement
Location
|
Amount
|
Income
Statement
Location
|
Amount
|
|||||||||||
Fuel
derivatives
|
$ | (6 | ) |
Aircraft
fuel and
related
taxes
|
$ | (41 | ) |
Other
nonoperating
income
(expense)
|
$ | 1 | ||||
Foreign
currency derivatives
|
(3 | ) |
Passenger
revenue
|
- |
Other
nonoperating
income
(expense)
|
- | ||||||||
Total
|
$ | (9 | ) | $ | (41 | ) | $ | 1 |
Nine Months Ended
September 30, 2009
|
||||||||||||||
Cash
Flow
Hedges
|
Gain
(Loss)
Recognized
in
OCI
(Effective
Portion)
|
Gain
(Loss) Reclassified from
Accumulated
OCI into Income
(Effective
Portion)
|
Gain
(Loss) Recognized in
Income (Ineffective
Portion)
|
|||||||||||
Income
Statement
Location
|
Amount
|
Income
Statement
Location
|
Amount
|
|||||||||||
Fuel
derivatives
|
$ | 23 |
Aircraft
fuel and
related
taxes
|
$ | (392 | ) |
Other
nonoperating
income
(expense)
|
$ | 7 | |||||
Foreign
currency derivatives
|
6 |
Passenger
revenue
|
- |
Other
nonoperating
income
(expense)
|
- | |||||||||
Total
|
$ | 29 | $ | (392 | ) | $ | 7 |
NOTE
7 – COMMON STOCK
Common
Stock. In August 2009, we completed a public offering of 14.4
million shares of Class B common stock at a price to the public of $11.20 per
share, raising net proceeds of $158 million for general corporate
purposes.
In June 2008, we completed a public
offering of 11 million shares of Class B common stock at a price to the public
of $14.80 per share, raising net proceeds of $162 million for general corporate
purposes.
NOTE
8 - STOCK PLANS AND AWARDS
Profit Based RSU
Awards. We have issued profit based restricted stock unit
(“RSU”) awards pursuant to our Long Term Incentive and RSU Program, which can
result in cash payments to our officers upon the achievement of specified profit
sharing-based performance targets. The performance targets require
that we reach target levels of cumulative employee profit sharing under our
enhanced employee profit sharing program during the performance period and that
we have net income calculated in accordance with U.S. generally accepted
accounting principles for the applicable fiscal year in which the cumulative
profit sharing target is met. To serve as a retention feature,
payments related to the achievement of a performance target generally will be
made in annual increments over a three-year period to participants who remain
continuously employed by us through each payment date. Payments also
are conditioned on our having, at the end of the fiscal year preceding the date
any payment is made, a minimum unrestricted cash, cash equivalents and
short-term investments balance as set by the Human Resources Committee of our
Board of Directors. If we do not achieve the minimum cash balance
applicable to a payment date, the payment will be deferred until the next
payment date (March 1 of the next year), subject to a limit on the number of
years payments may be carried forward. Payment amounts are calculated
based on the number of RSUs subject to the award, the average closing price of
our common stock for the 20 trading days preceding the payment date and the
payment percentage set by the Human Resources Committee of our Board of
Directors for achieving the applicable profit sharing-based performance
target.
We have four outstanding awards of
profit based RSUs granted under our Long-Term Incentive and RSU
Program: (1) profit based RSU awards with a performance period
commencing April 1, 2006 and ending December 31, 2009, (2) profit based RSU
awards with a performance period commencing January 1, 2007 and ending December
31, 2009, (3) profit based RSU awards with a performance period commencing
January 1, 2008 and ending December 31, 2010 and (4) profit based RSU awards
with a performance period commencing January 1, 2009 and ending December 31,
2011.
The profit based RSU awards that had a
performance period commencing April 1, 2006 and ending December 31, 2009
achieved the highest level cumulative profit sharing performance target based on
cumulative profit sharing payments to our broad based employees of $262 million
during the performance period. As a result, in March 2009, payments
totaling $20 million were made with respect to these profit based RSU awards
following achievement of the year end cash hurdle of $1.125 billion for those
awards. The third and final payment related to these awards
will be made in March 2010, provided the year end cash hurdle is met at December
31, 2009.
The awards with a performance period
commencing January 1, 2009, most of which were granted in February 2009, cover
1.4 million RSUs with cumulative profit sharing performance targets ranging from
$100 million to $375 million and payment percentages ranging from 100% to
400%. The cash hurdle associated with these awards is $2.2
billion.
As of September 30, 2009, we had
recorded no liability associated with the profit based RSU awards for the
periods commencing January 1, 2007, 2008 or 2009.
Employee Stock Purchase
Plan. On June 10, 2009, our stockholders approved an amendment
to our 2004 Employee Stock Purchase Plan (the “2004 ESPP”), under which we had
sold to our employees all of the remaining previously authorized shares in the
first quarter of 2009. The amendment made 3.5 million shares of
common stock available for purchase by employees under the 2004 ESPP and
extended the term of the plan to December 31, 2019. The 2004 ESPP is
open to all of our employees, including CMI employees.
Stock
Options. During the nine months ended September 30, 2009, we
granted approximately 0.7 million options to purchase shares of our common stock
at a weighted average exercise price of $9.36 per share. The majority
of these options vests in equal installments over four years and has a term of
five years.
Incentive
Plan. Our incentive plan for granting equity and performance
awards to management level employees and equity awards to non-employee directors
expired on October 3, 2009. The plan remains effective solely for
purposes of governing the terms of outstanding awards and no further awards may
be granted under the plan.
Stock-based
Compensation. Total stock-based compensation expense (credit)
included in wages, salaries and related costs was $16 million, $25 million, $(7)
million and $30 million for the three months ended September 30, 2009 and 2008
and the nine months ended September 30, 2009 and 2008,
respectively. As of September 30, 2009, $6 million of compensation
cost attributable to future service related to unvested stock options and profit
based RSU awards with a performance period commencing April 1, 2006 had not yet
been recognized. This amount will be recognized in expense over a
weighted-average period of 1.3 years.
NOTE
9 - COMPREHENSIVE INCOME (LOSS)
Total comprehensive income (loss)
included the following (in millions):
Three
Months
Ended September
30,
|
Nine
Months
Ended September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Net
loss
|
$ | (18 | ) | $ | (230 | ) | $ | (367 | ) | $ | (317 | ) | ||||
Other
comprehensive income (loss):
|
||||||||||||||||
Derivative
financial instruments:
|
||||||||||||||||
Reclassification
into income (net of deferred taxes of $51 and $0 in 2008)
|
40 | 6 | 383 | (201 | ) | |||||||||||
Changes
in fair value (net of deferred taxes of $(77) and $0 in
2008)
|
(9 | ) | (336 | ) | 29 | (82 | ) | |||||||||
Unrealized
gain on student loan-related auction rate securities
|
- | (3 | ) | 2 | (3 | ) | ||||||||||
Items
related to employee benefit plans:
|
||||||||||||||||
(Increase)
decrease in net actuarial losses
|
- | (89 | ) | - | (89 | ) | ||||||||||
Amortization
of net actuarial losses (net of deferred taxes of $(5) and $0 in
2008)
|
27 | 13 | 81 | 22 | ||||||||||||
Amortization
of prior service cost (net of deferred taxes of $(6) and $0 in
2008)
|
7 | 13 | 23 | 23 | ||||||||||||
Comprehensive
income (loss) adjustments
|
65 | (396 | ) | 518 | (330 | ) | ||||||||||
Total
comprehensive income (loss)
|
$ | 47 | $ | (626 | ) | $ | 151 | $ | (647 | ) |
NOTE
10 - EMPLOYEE BENEFIT PLANS
Defined Benefit Pension and
Retiree Medical Plans. Net periodic defined benefit pension
and retiree medical benefits expense included the following components (in
millions):
Defined Benefit
Pension
|
Retiree Medical
Benefits
|
|||||||||||||||||||||||||||||||
Three
Months
Ended September
30,
|
Nine
Months
Ended September
30,
|
Three
Months
Ended September
30,
|
Nine
Months
Ended September
30,
|
|||||||||||||||||||||||||||||
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||||||||||||||
Service
cost
|
$ | 16 | $ | 15 | $ | 48 | $ | 44 | $ | 3 | $ | 3 | $ | 8 | $ | 9 | ||||||||||||||||
Interest
cost
|
38 | 37 | 115 | 112 | 4 | 4 | 12 | 12 | ||||||||||||||||||||||||
Expected
return on plan assets
|
(22 | ) | (39 | ) | (66 | ) | (120 | ) | - | - | - | - | ||||||||||||||||||||
Amortization
of unrecognized net actuarial loss
|
28 | 8 | 83 | 23 | (1 | ) | - | (2 | ) | (1 | ) | |||||||||||||||||||||
Amortization
of prior service cost
|
2 | 2 | 7 | 7 | 5 | 5 | 16 | 16 | ||||||||||||||||||||||||
Net
periodic benefit expense
|
62 | 23 | 187 | 66 | 11 | 12 | 34 | 36 | ||||||||||||||||||||||||
Settlement
charge (included in special charges)
|
- | 8 | - | 8 | - | - | - | - | ||||||||||||||||||||||||
Net
benefit expense
|
$ | 62 | $ | 31 | $ | 187 | $ | 74 | $ | 11 | $ | 12 | $ | 34 | $ | 36 |
During the first nine months of 2009,
we contributed $140 million to our tax-qualified defined benefit pension
plans. On October 9, 2009, we contributed an additional $36 million
to the plans, satisfying our minimum funding requirements during calendar year
2009.
We recorded non-cash settlement charges
totaling $8 million in the three and nine months ended September 30, 2008
related to lump sum distributions from our pilot-only defined benefit pension
plan to retired pilots. Accounting rules for defined benefit pension
plans require the use of settlement accounting if, for a given year, the cost of
all settlements exceeds, or is expected to exceed, the sum of the service cost
and interest cost components of net periodic pension expense for the
plan. Under settlement accounting, unrecognized plan gains or losses
must be recognized immediately in proportion to the percentage reduction of the
plan's projected benefit obligation. We did not record any settlement
charges in the nine months ended September 30, 2009 because it is not probable
that we will meet the threshold for the year 2009. However, we may
record settlement charges in the fourth quarter of 2009 if settlements in the
fourth quarter are higher than currently expected.
Defined Contribution
Plans. The 401(k) plan covering substantially all domestic
employees except for pilots and the 401(k) plan covering substantially all of
the employees of CMI were amended effective January 1, 2009 to provide for the
reinstatement of service-based employer match contributions for certain
workgroups at levels ranging up to 50% of employee contributions of up to 6% of
the employee’s salary, based on seniority. Company matching
contributions are made in cash. Total expense for all defined
contribution plans, including two pilot-only plans, was $22 million, $22
million, $72 million and $67 million for the three months ended September 30,
2009 and 2008 and the nine months ended September 30, 2009 and 2008,
respectively.
NOTE
11 - SPECIAL CHARGES
Special charges were as follows (in
millions):
Three
Months
Ended September
30,
|
Nine
Months
Ended September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Aircraft-related
charges, net of gains on sales of aircraft
|
$ | 6 | $ | 12 | $ | 53 | $ | 45 | ||||||||
Severance
|
5 | 33 | 5 | 33 | ||||||||||||
Route
impairment and other
|
9 | 38 | 10 | 55 | ||||||||||||
Pension
settlement charges (see Note 10)
|
- | 8 | - | 8 | ||||||||||||
Total
special charges
|
$ | 20 | $ | 91 | $ | 68 | $ | 141 |
The special charges all relate to our
mainline segment unless otherwise noted.
In the third quarter of 2009, we
entered into agreements to sublease five temporarily grounded ERJ-135
aircraft. The subleases have terms of five years, but may be
cancelled by the lessee under certain conditions after an initial term of two
years. We recorded a $6 million non-cash charge in our regional
segment for the difference between the sublease rental income and the contracted
rental payments on those aircraft during the initial term of the
agreement. The remaining 25 ERJ-135 aircraft continue to be
temporarily grounded. We are evaluating our options regarding these
aircraft, including permanently grounding them. If we do permanently
ground them, we may incur significant special charges for future rent
expense.
During the first nine months of 2009,
we announced plans to eliminate certain operational, management and clerical
positions across the company. We recorded a charge of $5 million for
severance and other costs during the third quarter of 2009 in connection with
the reductions in force, furloughs and leaves of absence. In the
third quarter of 2009, we also recorded a $9 million adjustment to our reserve
for unused facilities due to reductions in expected sublease income primarily
for a maintenance hangar in Denver.
Aircraft-related charges in 2009 prior
to the third quarter include $31 million of non-cash impairments on owned Boeing
737-300 and 737-500 aircraft and related assets and $16 million of other charges
($12 million of which was non-cash) related to the grounding and disposition of
Boeing 737-300 aircraft and the write-off of certain obsolete spare
parts. The impairment charges on the Boeing 737-300 and 737-500
fleets prior to the third quarters of both 2009 and 2008 relate to our decision
in June 2008 to retire all of our Boeing 737-300 aircraft and a significant
portion of our Boeing 737-500 aircraft by early January 2010. We
recorded an initial impairment charge in the second quarter of 2008 for each of
these fleet types. The additional write-down in the second quarter of
2009 reflects the further reduction in the fair value of these fleet types in
the current economic environment. In both periods, we determined that
indicators of impairment were present for these fleets. Fleet assets
include owned aircraft, improvements on leased aircraft, rotable spare parts,
spare engines and simulators. Based on our evaluations, we determined
that the carrying amounts of these fleets were impaired and wrote them down to
their estimated fair value. We estimated the fair values based on
current market quotes and our expected proceeds from the sale of the
assets.
We recorded $91 million of special
charges in the third quarter of 2008, a portion of which is related to our
capacity reductions implemented beginning in September 2008. The
special charges include $33 million for severance and continuing medical
coverage for employees accepting early retirement packages or company-offered
leaves of absence, $12 million of charges for future lease costs on permanently
grounded Boeing 737-300 aircraft and an $11 million charge related to future
rents for leased space at locations that are no longer expected to be used or
subleased.
The special charges in the third
quarter of 2008 also include an $18 million non-cash charge to write off an
intangible route asset as a result of our decision to move all of our year-round
London flights from London Gatwick Airport to London Heathrow Airport, a $9
million charge pertaining to our reimbursement of certain costs incurred by
ExpressJet for temporarily grounded aircraft and airport slots being returned to
us and a non-cash settlement charge of $8 million related to lump sum
distributions from our pilot-only defined benefit pension plan to retired
pilots.
Aircraft-related charges in 2008 prior
to the third quarter include $37 million of non-cash impairments on owned Boeing
737-300 and 737-500 aircraft and related assets and a non-cash charge of $14
million to write down spare parts and supplies for the Boeing 737-300 and
737-500 fleets to the lower of cost or net realizable value, partially offset by
$18 million of gains on the sale of five owned Boeing 737-500
aircraft. We received proceeds of $68 million on the sale of these
aircraft. Other special charges in the second quarter of 2008 include
$17 million of charges related to contract settlements with regional carriers
and unused facilities ($15 million of which related to our regional
segment).
If economic conditions deteriorate
further, we may incur additional special charges in future quarters as we
attempt to dispose of our grounded Boeing 737-300 and 737-500
aircraft. We are currently unable to estimate the amount or timing of
these future charges, if any. At September 30, 2009, the net carrying
values of our Boeing 737-300 and 737-500 fleets were $76 million and $75
million, respectively.
Accrual
Activity. Activity related to the accruals for severance and
medical costs and future lease payments on permanently grounded aircraft and
unused facilities is as follows (in millions):
Severance/
Medical
Costs
|
Permanently
Grounded
Aircraft
|
Unused
Facilities
|
||||||||||
Balance,
December 31, 2008
|
$ | 28 | $ | 10 | $ | 20 | ||||||
Accrual
|
5 | 1 | 10 | |||||||||
Payments
|
(13 | ) | (8 | ) | (3 | ) | ||||||
Balance,
September 30, 2009
|
$ | 20 | $ | 3 | $ | 27 |
These accruals and payments relate
primarily to our mainline segment. Cash payments related to the
accruals for severance and medical costs will be made through the third quarter
of 2011. Remaining lease payments on permanently grounded aircraft
and unused facilities will be made through 2010 and 2018,
respectively.
NOTE
12 - INCOME TAXES
Our effective tax rates differ from the
federal statutory rate of 35% primarily due to the following: changes
in the valuation allowance, expenses that are not deductible for federal income
tax purposes and state income taxes. We are required to provide a
valuation allowance for our deferred tax assets in excess of deferred tax
liabilities because we have concluded that it is more likely than not that such
deferred tax assets ultimately will not be realized. As a result, our
pre-tax losses for the first nine months of 2009 were not reduced by any tax
benefit.
Section 382 of the Internal Revenue
Code (“Section 382”) imposes limitations on a corporation's ability to utilize
net operating losses (“NOLs”) if it experiences an “ownership
change.” In general terms, an ownership change may result from
transactions increasing the ownership of certain stockholders in the stock of a
corporation by more than 50 percentage points over a three-year
period. In the event of an ownership change, utilization of our NOLs
would be subject to an annual limitation under Section 382 determined by
multiplying the value of our stock at the time of the ownership change by the
applicable long-term tax-exempt rate (which is 4.48% for September
2009). Any unused annual limitation may be carried over to later
years. The amount of the limitation may, under certain circumstances,
be increased by the built-in gains in assets held by us at the time of the
change that are recognized in the five-year period after the
change. If we were to have an ownership change as of September 30,
2009 under current conditions, our annual NOL utilization could be limited to
$101 million per year, before consideration of any built-in gains.
NOTE
13 – GAIN ON SALE OF INVESTMENTS
In May 2008, we sold all of our
remaining shares of Copa Holdings, S.A. (“Copa”) Class A common stock for net
proceeds of $149 million and recognized a gain of $78 million.
NOTE
14 - SEGMENT REPORTING
We have two reportable
segments: mainline and regional. The mainline segment
consists of flights using larger jets while the regional segment currently
consists of flights utilizing aircraft with a capacity of 78 or fewer
seats. As of September 30, 2009, the regional segment was operated by
ExpressJet, Chautauqua, CommutAir and Colgan through capacity purchase
agreements.
We evaluate segment performance based
on several factors, of which the primary financial measure is operating income
(loss). However, we do not manage our business or allocate resources
based on segment operating profit or loss because (1) our flight schedules are
designed to maximize passenger revenue, (2) much of the operations of the two
segments are substantially integrated (for example, airport operations, sales
and marketing, scheduling and ticketing) and (3) management decisions are based
on their anticipated impact on the overall network, not on one individual
segment.
Financial information by business
segment is set forth below (in millions):
Three
Months
Ended September
30,
|
Nine
Months
Ended September
30,
|
||||||||||||||||
2009
|
2008
|
2009
|
2008
|
||||||||||||||
Operating
Revenue:
|
|||||||||||||||||
Mainline
|
$ | 2,797 | $ | 3,519 | $ | 7,970 | $ | 9,899 | |||||||||
Regional
|
520 | 637 | 1,434 | 1,872 | |||||||||||||
Total
Consolidated
|
$ | 3,317 | $ | 4,156 | $ | 9,404 | $ | 11,771 | |||||||||
Operating
Income (Loss):
|
|||||||||||||||||
Mainline
|
$ | 111 | $ | (30 | ) | $ | 111 | $ | 17 | ||||||||
Regional
|