Attached files
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
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WASHINGTON,
D.C. 20549
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FORM
10-K
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(Mark
One)
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[X]
ANNUAL 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 FISCAL YEAR ENDED DECEMBER 31, 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 of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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1600
Smith Street, Dept. HQSEO, Houston, Texas
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77002
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant's
telephone number, including area
code: 713-324-2950
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Securities
registered pursuant to Section 12(b) of the Act:
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Title of Each
Class
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Name
of Each Exchange
On Which
Registered
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Class
B Common Stock, par value $.01 per share
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New
York Stock Exchange
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Securities
registered pursuant to Section 12(g) of the
Act: None
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Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes X No
_____
Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Exchange Act. Yes No X
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 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-5 (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 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. [X]
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer or a smaller reporting company. See the definitions of " large
accelerated filer," “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act. Large accelerated filer X
Accelerated
filer ___ Non-accelerated filer ___ Smaller
reporting company ___
(Do not check if a
smaller
reporting company)
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes No X
As of June 30, 2009, the aggregate
market value of the registrant's common stock held by non-affiliates of the
registrant was $1.1 billion based on the closing sale price as reported on the
New York Stock Exchange.
Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practicable date.
Class
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Outstanding at
February 16, 2010
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Class
B Common Stock, $.01 par value per share
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139,057,281
shares
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__________________
DOCUMENTS
INCORPORATED BY REFERENCE
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Proxy
Statement for Annual Meeting of Stockholders to be held on June 9,
2010: PART III
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TABLE OF
CONTENTS
PAGE
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PART
I
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Item
1.
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5
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5
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6
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6
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6
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7
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8
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10
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11
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12
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13
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14
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Item
1A.
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17
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17
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22
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Item
1B.
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26
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Item
2.
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26
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26
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29
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Item
3.
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29
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29
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30
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31
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Item
4.
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31
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PART
II
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Item
5.
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32
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32
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32
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32
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Item
6.
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33
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Item
7.
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39
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39
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43
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55
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62
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62
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70
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70
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Item
7A.
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70
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Item
8.
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73
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73
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74
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76
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76
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77
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78
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80
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82
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Item
9.
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135
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Item
9A.
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135
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Item
9B.
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137
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PART
III
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Item
10.
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138
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Item
11.
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138
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Item
12.
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138
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Item
13.
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138
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Item
14.
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138
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PART
IV
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Item
15.
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139
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140
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142
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PART
I
Continental Airlines, Inc., a Delaware
corporation incorporated in 1980, is a major U.S. air carrier engaged in the
business of transporting passengers, cargo and mail. The terms
"Continental," "we," "us," "our" and similar terms refer to Continental
Airlines, Inc. and, unless the context indicates otherwise, its consolidated
subsidiaries.
We are the world's fifth largest
airline as measured by the number of scheduled miles flown by revenue passengers
in 2009. Including our wholly-owned subsidiary, Continental
Micronesia, Inc. ("CMI"), and regional flights operated on our behalf under
capacity purchase agreements with other carriers, we operate more than 2,000
daily departures. As of December 31, 2009, we flew to 118 domestic
and 124 international
destinations and offered additional connecting service through alliances with
domestic and foreign carriers. We directly served 28 Trans-Atlantic
destinations, 11 Canadian cities, seven South American cities and four
Trans-Pacific destinations from the U.S. mainland as of December 31,
2009. In addition, we provide service to more destinations in Mexico
and Central America than any other U.S. airline, serving 39
cities. Through our Guam hub, CMI provides extensive service in the
western Pacific, including service to more Japanese cities than any other U.S.
carrier.
General information about us, including
our Corporate Governance Guidelines and the charters for the committees of our
Board of Directors, can be found on our website, continental.com. Our
Board has adopted the "Ethics and Compliance Guidelines," which apply to all
directors, officers and employees of Continental and its subsidiaries and serve
as our "Code of Ethics" under Item 406 of Regulation S-K and as our "Code of
Business Conduct and Ethics" as required by Section 303A.10 of the New York
Stock Exchange ("NYSE") Listed Company Manual. The Ethics and
Compliance Guidelines also are available on our website, and future amendments
to or waivers from compliance with these guidelines will be disclosed on our
website in accordance with Item 5.05 of Form 8-K.
Copies of these charters and guidelines
are available in print to any stockholder who requests them. Written
requests for such copies may be directed to our Secretary at Continental
Airlines, Inc., P.O. Box 4607, Houston,
Texas 77210-4607. Electronic copies of our annual reports
on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, as
well as any amendments and exhibits to those reports, are available free of
charge through our website as soon as reasonably practicable after we file them
with, or furnish them to, the U.S. Securities and Exchange Commission
("SEC").
Information on our website is not
incorporated into this Form 10-K or our other securities filings and is not a
part of them.
This Form 10-K contains forward-looking
statements that are not limited to historical facts, but reflect our current
beliefs, expectations or intentions regarding future events. All
forward-looking statements involve risks and uncertainties that could cause
actual results to differ materially from those in the forward-looking
statements. For examples of those risks and uncertainties, see the
cautionary statements contained in Item 1A. "Risk
Factors." See Item 1A. "Risk Factors" and Item
7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Overview" for a discussion of trends and factors
affecting us and our industry. Also see Item 8. "Financial
Statements and Supplementary Data, Note 18 - Segment Reporting" for financial
information about each of our business segments. We undertake no
obligation to publicly update or revise any forward-looking statements to
reflect events or circumstances that may arise after the date of this report,
except as required by applicable law.
We operate our domestic route system
primarily through our hubs in the New York metropolitan area at Newark Liberty
International Airport ("New York Liberty"), in Houston, Texas at George Bush
Intercontinental Airport ("Houston Bush") and in Cleveland, Ohio at Hopkins
International Airport ("Cleveland Hopkins"). Each of our domestic
hubs is located in a large business and population center, contributing to a
large amount of "origin and destination" traffic. Our hub system
allows us 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 us to add service to a new
destination from a large number of cities using only one or a limited number of
aircraft. As of December 31, 2009, we operated 75% of the average
daily departures from New York Liberty, 84% of the average daily departures from
Houston Bush and 65% of the average daily departures from Cleveland Hopkins, in
each case based on scheduled passenger departures and including regional flights
flown for us under capacity purchase agreements.
We directly serve destinations
throughout Europe, Asia, Canada, Mexico, Central and South America and the
Caribbean. We also provide service to numerous other destinations
through codesharing arrangements with other carriers and have extensive
operations in the western Pacific conducted by CMI. As measured by
2009 available seat miles, approximately 51% of our mainline operations is
dedicated to international service.
New York Liberty is a significant
international gateway for our operations. From New York Liberty, we
served 28 Trans-Atlantic destinations, four Trans-Pacific destinations, eight
cities in Canada, four cities in Mexico, seven cities in Central America, four
cities in South America and 16 Caribbean destinations at December 31,
2009. We expect to begin daily service between New York Liberty and
Munich, Germany in March 2010.
Houston Bush is the focus of our
flights to destinations in Mexico and Central and South America. As
of December 31, 2009, we flew from Houston Bush to 29 cities in Mexico, ten
cities in Central America, seven cities in South America, six Caribbean
destinations, four cities in Canada, four cities in Europe and
Tokyo.
At December 31, 2009, we flew from
Cleveland Hopkins to two cities in Canada, San Juan, Puerto Rico and Cancun,
Mexico.
From its hub operations based on the
island of Guam, as of December 31, 2009, CMI provided service to nine cities in Japan, more
than any other U.S. carrier, as well as other Pacific rim destinations,
including Manila, Philippines and Cairns, Australia. 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 U.S.
mainland through Tokyo and Honolulu, each of which CMI serves non-stop from
Guam. CMI began service from Guam and Honolulu to Nadi, Fiji in
December 2009.
See Item 8. "Financial
Statements and Supplementary Data, Note 18 - Segment Reporting," for operating
revenue by geographical area.
We have extensive commercial
relationships with other airlines, which are often referred to generally as
“alliances” and may include (a) codesharing (one carrier placing its name and
flight number, or "code," on flights operated by the other carrier), (b)
reciprocal frequent flyer program participation, reciprocal airport lounge
access and other joint activities (such as seamless check-in at airports) and/or
(c) capacity purchase agreements. Alliances allow airlines to develop
their route structures by enabling them to offer their passengers greater
destination coverage, while providing member airlines with the potential for
both increased revenues and cost savings. We seek in particular to
develop international alliance relationships that complement our own route
system and permit expanded service through our hubs to major international
destinations. International alliances enable us to provide our
passengers better connecting service from our international flights to other
destinations beyond an alliance airline’s hub and expand the product line that
we may offer in a foreign destination.
On October 27, 2009, we joined Star
Alliance. Star Alliance was established in 1997 as the first global
airline alliance to offer customers worldwide reach and a smooth travel
experience. As a member of Star Alliance, we have bilateral
commercial agreements with all 25 other Star Alliance members, including
reciprocal earning and redemption of frequent flyer miles. The
members are Air Canada, Air China, Air New Zealand, All Nippon Airways (“ANA”),
Asiana Airlines, Austrian Airlines, British Midland Airways (“bmi”), Brussels
Airlines, EgyptAir, LOT Polish Airlines, Lufthansa, Scandinavian Airlines
(“SAS”), Shanghai Airlines, Singapore Airlines, South African Airways, Spanair,
Swiss International Air Lines, TAP Portugal, Thai Airways International, Turkish
Airlines, United Airlines (“United”) and US Airways. Regional member
carriers Adria Airways (Slovenia), Blue1 (Finland) and Croatia Airlines enhance
the global network. Aegean Airlines, Air India and TAM Airlines have
also been accepted as future members. Overall, Star Alliance network
offers more than 19,700 daily flights to 1,077 destinations in 175
countries.
As of December 31, 2009, we also had
codesharing agreements with Star Alliance members United, Lufthansa, Air Canada,
bmi and Asiana Airlines. Codesharing with additional airlines in Star
Alliance is being implemented, with codesharing with Air New Zealand, ANA and
SAS expected to begin in March 2010.
On July 10, 2009, the U.S. Department
of Transportation (“DOT”) approved our application to join United and a group of
eight other carriers within Star Alliance that already hold antitrust
immunity. This approval enables us, United and these other immunized
Star Alliance carriers to work closely together to deliver highly competitive
international flight schedules, fares and service and provides competitive
balance to antitrust-immunized carriers in SkyTeam. Additionally, we,
United, Lufthansa and Air Canada are permitted under antitrust immunity to
establish a trans-Atlantic joint venture to create a more efficient and
comprehensive trans-Atlantic network for our respective customers, offering
those customers more service, scheduling and pricing options and establishing a
framework for
similar
joint ventures in other regions of the world. The DOT’s approval of
antitrust immunity is subject to certain conditions and limitations that are not
expected to diminish materially the benefits of our participation in Star
Alliance or the trans-Atlantic joint venture. On December 23, 2009,
we, United and ANA filed an application with the DOT for antitrust immunity to
enable the three carriers to establish a trans-Pacific joint venture, offering
similar benefits to our trans-Pacific customers. We are seeking a
modification to our pilot collective bargaining agreement to permit us to engage
in revenue sharing with a domestic air carrier, which is a component of the
proposed joint ventures.
In
addition to our current participation in Star Alliance, we have a domestic
codesharing agreement with Hawaiian Airlines and international codesharing
agreements with Copa Airlines (an airline based in Panama), Emirates (the flag
carrier of the United Arab Emirates), EVA Airways Corporation (an airline based
in Taiwan), Virgin Atlantic Airways and French rail operator
SNCF. Additionally, we have codeshare agreements with Gulfstream
International Airlines, Hyannis Air Service, Inc. ("Cape Air"), Colgan Air, Inc.
("Colgan") and Hawaii Island Air, Inc. ("Island Air"), who provide us with
commuter feed traffic. We also have a train-to-plane alliance with
Amtrak.
We have regional capacity purchase
agreements with ExpressJet Airlines, Inc. ("ExpressJet"), a wholly-owned
subsidiary of ExpressJet Holdings, Inc. ("Holdings"), Chautauqua Airlines, Inc.,
("Chautauqua"), a wholly-owned subsidiary of Republic Airways Holdings, Inc.,
Colgan Air, Inc. (“Colgan”), a wholly-owned subsidiary of Pinnacle
Airlines Corp., and Champlain Enterprises, Inc. ("CommutAir"). See
Item 8. "Financial Statements and Supplementary Data, Note 16 - Regional
Capacity Purchase Agreements" for further discussion of our capacity purchase
agreements.
Except for the four regional capacity
purchase agreements listed above, all of our codeshare relationships are
currently free-sell codeshares, where the marketing carrier sells seats on the
operating carrier's flights from the operating carrier's inventory, but takes no
inventory risk. In contrast, under our capacity purchase agreements,
we (as the marketing carrier) purchase all seats on covered flights and are
responsible for all scheduling, pricing and seat inventories. Some of
our alliance relationships include other cooperative undertakings such as joint
purchasing, joint corporate sales contracts, airport handling, facilities
sharing or joint technology development.
Regional
Operations
Our regional operations are conducted
by other operators on our behalf, primarily under capacity purchase
agreements. We schedule and market the regional flights provided for
us by other operators under capacity purchase agreements. Our
regional operations using regional jet aircraft are conducted under the name
"Continental Express" by ExpressJet and Chautauqua, and those using turboprop
aircraft are conducted under the name "Continental Connection" by CommutAir and
Colgan. As of December 31, 2009, our regional operators served 102
destinations in the United States, 26 cities in Mexico and eight cities in
Canada. This regional service complements our operations by carrying
traffic that connects onto our mainline jets and allows more frequent flights to
smaller cities than could be provided economically with mainline jet
aircraft. Additional commuter feed traffic currently is provided to
us by other alliance airlines, as discussed above.
Under our capacity purchase agreement
with ExpressJet (the “ExpressJet CPA”), we purchase all of the capacity from the
ExpressJet flights covered by the agreement. In exchange for
ExpressJet's operation of the flights and performance of other obligations under
the ExpressJet CPA, we have agreed to pay ExpressJet a pre-determined rate,
subject to annual inflation adjustments (capped at 3.5%), for each block hour
flown (the hours from gate departure to gate arrival) and to reimburse
ExpressJet for various pass-through expenses (with no margin or mark-up) related
to the flights, including aviation insurance, property taxes, international
navigation fees, depreciation (primarily aircraft-related), landing fees and
certain maintenance expenses. Under the ExpressJet CPA, we are
responsible for the cost of providing fuel for all flights and for paying
aircraft rent for all of the aircraft operated on our behalf. The
ExpressJet CPA also contains incentive bonus and rebate provisions based upon
ExpressJet's operational performance.
The capacity purchase provisions of the
ExpressJet CPA currently cover a minimum of 190 regional jets and, as of
December 31, 2009, ExpressJet operated 212 Embraer 50-seat regional jets under
those provisions of the contract. The minimum number of covered
aircraft will be reduced as leases on covered aircraft expire. The
ExpressJet CPA will expire in June 2015, with provisions for an appropriate
wind-down period, and has no renewal or extension options. ExpressJet
also subleases 32 Embraer 50-seat regional jets from us that are not operated on
our behalf.
Chautauqua operates 50-seat regional
jets as a Continental Express carrier under a capacity purchase agreement (the
"Chautauqua CPA"). As of December 31, 2009, 22 aircraft were being
flown by Chautauqua for us. The Chautauqua CPA requires us to pay
Chautauqua a fixed fee, subject to annual inflation adjustments (capped at
3.5%), for each block hour flown for its operation of the
aircraft. Chautauqua supplies the aircraft that it operates under the
agreement. Aircraft are scheduled to be removed from service under
the Chautauqua CPA each year through 2012, provided that we have the unilateral
right to extend the Chautauqua CPA on the same terms on an aircraft-by-aircraft
basis for a period of up to five years in the aggregate for 20 aircraft and for
up to three years in the aggregate for seven aircraft, subject to the renewal
terms of the related aircraft lease. Chautauqua also subleases five
Embraer 37-seat aircraft from us that are not operated on our
behalf.
Colgan operates fourteen 74-seat
Bombardier Q400 twin-turboprop aircraft as a Continental Connection carrier on
short and medium-distance routes from New York Liberty on our
behalf. Colgan operates the flights under a capacity purchase
agreement with us. In January 2009, we amended the capacity purchase
agreement to increase by 15 the number of Q400 aircraft to be operated by Colgan
on our behalf. We expect that Colgan will begin operating these 15
additional aircraft as they are delivered, beginning in the third quarter of
2010 through the second quarter of 2011. Each aircraft is scheduled
to be covered by the agreement for ten years following the date such aircraft is
delivered into service thereunder. Colgan supplies all of the
aircraft that it operates under the agreement.
Our
capacity purchase agreement with CommutAir (the "CommutAir CPA") provides for
CommutAir to operate sixteen 37-seat Bombardier Q200 twin-turboprop aircraft as
a Continental Connection carrier on short distance routes from Cleveland Hopkins
and New York Liberty. CommutAir supplies all of the aircraft that it
operates under the agreement.
Marketing
As with other major domestic
hub-and-spoke carriers, a majority of our revenue comes from tickets sold by
travel agents. Although we generally do not pay base commissions, we
often negotiate compensation to travel agents based on their performance in
selling our tickets or based on competitive conditions in particular
markets. A significant portion of our revenue, including a
significant portion of our higher yield traffic, is derived from bookings made
through third party global distribution systems ("GDSs") used by many travel
agents and travel purchasers.
We use the internet to provide
travel-related services for our customers and to reduce our overall distribution
costs. We have marketing agreements with internet travel service
companies such as Expedia, Hotwire, Orbitz and Travelocity. Although
customers' use of the internet has helped to reduce our distribution costs, it
also has lowered our yields because it has enhanced the visibility of competing
fares offered by other carriers.
Our website, continental.com, is our
lowest cost distribution channel. We recorded approximately $3.2
billion in ticket sales on continental.com in 2009. The site offers
customers the ability to purchase, change and refund tickets on-line, to
check-in on-line and to have direct access to information such as schedules,
reservations, flight status, frequent flyer account information (including the
ability to redeem and change reward travel) and Continental travel
specials. Tickets purchased through our website accounted for 30% of
our passenger revenue during 2009.
Substantially all of our sales involve
our electronic ticketing, or e-ticket, product. Our e-ticket product
enables us to process customer and revenue information more
efficiently. E-ticketed passengers have the ability to check-in at
continental.com for all domestic and international travel. On-line
check-in allows customers to obtain a printed or electronic boarding pass from
their home, office or hotel up to 24 hours prior to departure and to proceed
directly to security at the airport, bypassing the ticket counter and saving
time. Passengers with baggage who check-in on-line may use special
kiosks at our hub airports to check their bags rapidly. E-ticketed
passengers also can use self-service kiosks to check-in. Our
customers have access to approximately 1,600 Continental self-service kiosks at
173 airports throughout our system, including all domestic airports we
serve. During 2009, 84% of all check-ins were done on-line or at
self-service kiosks.
Our first aircraft equipped with our
new flat-bed BusinessFirst seats began service in the fourth quarter of
2009. These seats, which will be offered on long-haul international
routes, allow customers to lie completely flat and provide 6½ feet of sleeping
space in the fully extended position (six feet four inches on Boeing 757-200
aircraft). The seats include laptop power and feature 15.4-inch video
monitors. We will install the flat-bed seats on our entire
fleet of Boeing 777, 757-200 and 767-200 aircraft and substantially all of our
767-400 aircraft, as well as on our Boeing 787 fleet as those aircraft are
delivered to us.
Our
Boeing 777 and 757-200 aircraft are currently equipped with Audio Video on
Demand entertainment systems in each BusinessFirst/first class and economy
seat. Customers can start, stop, pause, rewind or fast forward movies
and music at any time. The system features a large selection of
movies, television shows, music and interactive video games. The
system will also be provided on other aircraft equipped with flat-bed seats as
those seats are installed.
We are installing DIRECTV® satellite
programming on our entire fleet of narrowbody Next-Generation Boeing 737
aircraft (737-700, 737-800,737-900 and 737-900ER aircraft) and Boeing 757-300
aircraft. DIRECTV® offers customers the choice of more than 100
channels of live television and previously recorded programming. This
service is complimentary in first class and available at each seat in economy
class for a fee. We have completed installation of DIRECTV® on 48
aircraft as of December 31, 2009 and expect to complete installation of DIRECTV®
on our entire fleet of Boeing 737 Next-Generation aircraft by the end of 2010
and our Boeing 757-300 aircraft by mid-2011.
We introduced the cashless cabin in the
fourth quarter of 2009, and expect to have a cashless environment on-board our
entire fleet by early in the second quarter of 2010. In a cashless
cabin, flight crews accept credit and debit cards exclusively for on-board
purchases.
Our
Presidents Club lounges offer a wide range of amenities to make customers’
travel experience productive and enjoyable. Services offered include
complimentary beverages, light snacks and bar service, assistance with
arrangements for travel on us, high-speed wireless Internet access, local
telephone calls and fax machines. Arrival shower facilities are
available at select locations. The lounges are available to
Presidents Club members and to BusinessFirst customers, Star Alliance Gold Elite
members and Star Alliance international first and business class customers on
the day of travel.
During 2008, we began implementation of
our joint project with the Transportation Security Administration ("TSA") to be
the first U.S. carrier to launch a paperless boarding pass pilot program that
allows passengers to receive boarding passes electronically on their cell phones
or PDAs, and use those devices to pass through security and board the
aircraft. The new technology heightens the ability to detect
fraudulent boarding passes while improving customer service and reducing paper
use. This service is currently available at each of our hubs and
other select airports.
We offer a carbon offsetting program
developed in partnership with non-profit Sustainable Travel
International. This program allows customers to view the carbon
footprint of their booked itinerary and choose among a number of options to
reduce the impact of carbon dioxide emissions of their flights. For
customers who elect to participate in this program, their contributions are made
directly to Sustainable Travel International to fund the purchase of offsets,
which are generated from sustainable development projects including
reforestation, renewable energy and energy conservation. We receive
no revenue related to this program.
We maintain our "OnePass" frequent
flyer program to encourage repeat travel. OnePass allows passengers
to earn mileage credits by flying on us and certain other alliance
carriers. We also sell mileage credits to credit/debit card
companies, hotels, car rental agencies, utilities and various shopping and gift
merchants participating in OnePass. Mileage credits can be redeemed
for free, discounted or upgraded travel on Continental, Continental Express,
Continental Connection, CMI or alliance airlines. Most travel awards
are subject to capacity limitations.
During 2009, OnePass participants
claimed approximately 1.3 million round-trip awards. Frequent flyer
awards accounted for an estimated 6.0% of our consolidated revenue passenger
miles. We believe displacement of revenue passengers by passengers
who redeem rewards earned by flying on us is minimal given our ability to manage
frequent flyer inventory and the low ratio of OnePass award usage to revenue
passenger miles. At December 31, 2009, we had an outstanding
liability associated with approximately 2.6 million free round-trip travel
awards that were expected to be redeemed for free travel on Continental,
Continental Express, Continental Connection, CMI or alliance
airlines. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Critical Accounting Policies and
Estimates - Frequent Flier Accounting" for a detailed discussion concerning the
accounting treatment of our OnePass frequent flier program.
Our EliteAccess service is offered to
OnePass members who qualify for Elite status (based on the number of paid flight
miles and the fares purchased in a calendar year), first class and BusinessFirst
ticket holders and travelers with high-yield coach tickets who qualify as Elite
for the Day. EliteAccess passengers receive preferential treatment in
the check-in, boarding and baggage claim areas, are not charged fees for checked
bags and have special security lanes at certain airports. We also
provide a guarantee of no middle seat assignment for those passengers using a
full-fare, unrestricted ticket.
Competition
The U.S. airline industry is
characterized by substantial competition with respect to fares, fees, routes and
services, which is particularly pronounced in domestic
markets. Carriers use discount fares to stimulate traffic during
periods of slack demand, or when they begin service to new cities or have excess
capacity, to generate cash flow and to establish, increase or preserve market
share. Many of our competitors have greater financial resources
and/or lower cost structures than we do, in some cases as the result
of their bankruptcies and/or mergers. In recent years, the domestic
market share held by low-cost carriers has increased significantly and is
expected to continue to increase. The increased market presence of
low-cost carriers, which engage in substantial price discounting, has diminished
the ability of the network carriers to maintain sufficient fare levels in
domestic markets to achieve and sustain profitability. We cannot
predict whether or for how long these trends will continue.
In addition to price competition,
airlines also compete for market share by increasing the size of their route
system and the number of markets they serve. Several of our domestic
competitors are continuing to increase their international capacity, including
service to some destinations that we currently serve. Additionally,
the "open skies" agreement between the United States and the European Union,
which became effective on March 30, 2008, is resulting in increased competition
from European and U.S. airlines in these international markets, and may give
rise to additional consolidation or better integration opportunities among
European carriers. The “open skies” agreement between the United
States and Japan announced in December 2009 is also likely to increase
competition in affected markets if it becomes effective. The
increased competition in these international markets, particularly to the extent
our competitors engage in price discounting, may have a material adverse effect
on our results of operations, financial condition or liquidity.
We also compete with U.S. and foreign
carriers, including major network carriers, low-cost carriers and regional
carriers, throughout our global network on the basis of scheduling, availability
of non-stop and connecting flights, on-time performance, type of equipment,
cabin configuration, amenities provided to passengers, frequent flyer programs,
on-board products, markets served and other services.
We are also facing stronger competition
from carriers that have participated in industry consolidation or expanded
airline alliances and joint ventures. See Item 1A. "Risk Factors -
Risk Factors Relating to the Airline Industry - The airline is highly
competitive and susceptible to price discounting" below for a discussion of the
competitive advantages enjoyed by carriers participating in industry
consolidation and/or airline alliances and joint ventures.
As of December 31, 2009, we had
approximately 41,300 employees, which, due to the number of part-time employees,
represents 39,640 full-time equivalent employees consisting of approximately
16,225 customer service agents, reservations agents, ramp and other airport
personnel, 8,740 flight attendants, 6,195 management and clerical employees,
4,270 pilots, 4,090 mechanics and 120 dispatchers. Approximately 45%
of our full-time equivalent employees are represented by unions as of December
31, 2009. The following table reflects the principal collective
bargaining agreements, and their respective amendable dates, of Continental and
CMI:
Employee
Group
|
Approximate
Number
of
Full-time
Equivalent
Employees
|
Representing
Union
|
Contract
Amendable
Date
|
|
Continental
Flight
Attendants
|
8,460
|
International
Association of
Machinists
and Aerospace
Workers
("IAM")
|
December
2009
|
|
Continental
Pilots
|
4,270
|
Air
Line Pilots Association
International
("ALPA")
|
December
2008
|
|
Continental
Mechanics
|
3,965
|
International
Brotherhood of
Teamsters
("Teamsters")
|
December
2008
|
|
CMI
Fleet and Passenger
Service
Employees
|
420
|
Teamsters
|
November
2011
|
|
CMI
Flight Attendants
|
280
|
IAM
|
December
2010
|
|
Continental
Dispatchers
|
120
|
Transport
Workers Union
("TWU")
|
December
2008
|
|
CMI
Mechanics
|
125
|
Teamsters
|
December
2009
|
|
Continental
Flight
Simulator
Technicians
|
40
|
TWU
|
December
2012
|
On February 12, 2010, the National
Mediation Board informed us that our fleet service employees had voted in favor
of representation by the Teamsters. The election covers approximately
7,600 employees, or 6,340 full-time equivalent ramp, operations and cargo
agents.
Approximately 97% of our full-time
equivalent employees represented by unions as of December 31, 2009 are covered
by collective bargaining agreements that are currently amendable or become
amendable in 2010. The collective bargaining agreements with our
pilots, mechanics and certain other work groups became amendable in December
2008 and those with our flight attendants and CMI mechanics became amendable in
December 2009. On July 6, 2009, our flight simulator technicians
ratified a new four-year collective bargaining agreement with
us. With respect to our workgroups with amendable contracts, we have
been meeting with representatives of the applicable unions to negotiate amended
collective bargaining agreements with a goal of reaching agreements that are
fair to us and to our employees, but to date the parties have not reached new
agreements. Negotiations often take considerable time. For
example, we began negotiating with our pilots’ union in February 2007, and we
only received their first economic proposal in December 2009. We
cannot predict the outcome of our ongoing negotiations with our unionized
workgroups, although significant increases in the pay and benefits resulting
from new collective bargaining agreements could have a material adverse effect
on us. Furthermore, there can be no assurance that our generally good
labor relations and high labor productivity will continue.
Federal
Regulations. We provide air transportation under certificates
of public convenience and necessity issued by the DOT. These
certificates may be altered, amended, modified or suspended by the DOT if public
convenience and necessity so require, or may be revoked for intentional failure
by the holder of the certificate to comply with the terms and conditions of a
certificate. Continental and CMI each operate under a separate air
carrier certificate issued by the Federal Aviation Administration ("FAA"), which
may be amended, suspended or revoked by the FAA if the public interest and
safety in air commerce so require.
Airlines are regulated by the FAA,
primarily in the areas of flight operations, maintenance, ground facilities and
other technical matters. Pursuant to these regulations, we have
established, and the FAA has approved, a maintenance program for each type of
aircraft we operate that provides for the ongoing maintenance of our aircraft,
ranging from frequent routine inspections to major overhauls.
Airlines are subject to extensive
regulatory and legal compliance requirements that result in significant costs
and can adversely affect us. Additional laws, regulations, airport
rates and charges and growth constraints have been proposed from time to time
that could significantly increase the cost of airline operations or reduce
revenue. In addition, to address concerns about airport congestion,
the FAA has designated certain airports, including New York Liberty, New York’s
John F. Kennedy International Airport (“Kennedy”) and LaGuardia Airport
(“LaGuardia”) as “high density traffic airports,” and has imposed operating
restrictions at these three airports, which may include capacity
reductions. The FAA has also designated New York Liberty and Kennedy
as Level 3 Coordinated Airports under the International Air Transport
Association Worldwide Scheduling Guidelines, which requires us to participate in
seasonal FAA procedures for capacity allocation and schedule coordination for
New York Liberty and to have slots to operate at that
airport. Additional restrictions on airline routes and takeoff and
landing slots may be proposed that could affect rights of ownership and
transfer. Although we do not believe that these current operating
restrictions will have a material adverse effect on our operations at New York
Liberty, we cannot predict the impact of future capacity constraints or
allocations or other restrictions on our operations that might be imposed by the
FAA, Congress or other regulators, which could have a material adverse effect on
us.
Under the Aviation and Transportation
Security Act (the "Aviation Security Act") and related federal regulations,
substantially all security screeners at airports are federal employees and
significant other elements of airline and airport security are overseen and
performed by federal employees, including federal security managers, federal law
enforcement officers, federal air marshals and federal security
screeners. Among other matters, the law mandates improved flight deck
security, deployment of federal air marshals onboard flights, improved airport
perimeter access security, airline crew security training, enhanced security
screening of passengers, baggage, cargo, mail, employees and vendors, enhanced
training and qualifications of security screening personnel, additional
provision of passenger data to U.S. Customs and Border Protection and enhanced
background checks.
Airports from time to time seek to
increase the rates charged to airlines, and the ability of airlines to contest
such increases has been restricted by federal statutes, DOT and FAA regulations
and judicial decisions. Under the Aviation Security Act, funding for
passenger security is provided in part by a per enplanement ticket tax
(passenger security fee) of $2.50, subject to a $5 per one-way trip
cap. The Aviation Security Act also allows the TSA to assess an
aviation security infrastructure fee on each airline up to the total amount
spent by that airline on passenger and property screening in calendar year 2000
and, starting in fiscal year 2005, to impose a new methodology for calculating
assessments. TSA has continued to assess this fee on
airlines. Furthermore, because of significantly higher security and
other costs incurred by airports since September 11, 2001, many airports have
significantly increased their rates and charges to airlines, including us, and
may do so again in the future. Most airports where we operate
impose passenger facility charges of up to $4.50 per segment, subject to an $18
per roundtrip cap.
In time of war or during a national
emergency or defense-oriented situation, we and other air carriers could be
required to provide airlift services to the Air Mobility Command under the Civil
Reserve Air Fleet program ("CRAF"). If we were required in the future
to provide a substantial number of aircraft and crew to the Air Mobility Command
under CRAF, our operations could be materially adversely affected.
International
Regulations. The availability of international routes to U.S.
carriers is regulated by treaties and related agreements between the United
States and foreign governments. The United States typically follows
the practice of encouraging foreign governments to accept multiple carrier
designation on foreign routes, although certain countries have sought to limit
the number of carriers allowed to fly these routes. Certain foreign governments
impose limitations on the ability of air carriers to serve a particular city
and/or airport within their country from the United States. Bilateral
agreements between the United States and foreign governments often include
restrictions on the number of carriers (designations), operations (frequencies),
or airports (points) that can be served. When designations are
limited, only a certain number of airlines of each country may provide service
between the countries. When frequencies are limited, operations are
restricted to a certain number of weekly flights (as awarded by the United
States to the domestic carrier, based on the bilateral limits). When
points are limited, only certain airports within a country can be
served.
For a U.S. carrier to fly to any
international destination that is not subject to an "open skies" agreement
(meaning all carriers have access to any destination in a particular country),
it must first obtain approval from both the United States and the foreign
country where the destination is located, which is referred to as a "foreign
route authority." Route authorities to some international
destinations can be sold between carriers, and their value can vary because of
limits on accessibility. For those international routes where there
is a limit on the number of carriers or frequency of flights, studies have shown
that these routes have more value than those without restrictions. To
the extent foreign countries adopt open skies policies or otherwise liberalize
or eliminate restrictions on international
routes,
those actions would increase competition and potentially decrease the value of a
route. We cannot predict what laws, treaties and regulations relating
to international routes will be adopted or their resulting impact on us, but the
overall trend in recent years has been an increase in the number of “open skies”
agreements, as evidenced by “open skies” agreements between the United States
and the European Union and between the United States and Japan (if it becomes
effective). The impact of any future changes in governmental
regulation of international routes could be significant.
Environmental
Regulations. Many aspects of airlines' operations are also
subject to increasingly stringent federal, state, local and foreign laws
protecting the environment, including the imposition of additional taxes on
airlines or their passengers. Future regulatory developments in the
United States and abroad could adversely affect operations and increase
operating costs in the airline industry. The European Union has
issued a directive to member states to include aviation in its Greenhouse Gas
Emissions Trading Scheme (“ETS”), which requires us to begin monitoring our
emissions of carbon dioxide effective January 1, 2010 and have emissions
allowances equal to the amount of our carbon dioxide emissions to operate
flights to and from member states of the European Union in January 2012 and
thereafter, including flights between the United States and the European
Union. On December 16, 2009, we joined a lawsuit in the United
Kingdom with the Air Transport Association of America, American Airlines
(“American”) and United to challenge the extension of the European Union’s ETS
to include aviation and the imposition of its requirements on us. In
addition, non-EU governments are expected to challenge the application of the EU
ETS to their airlines; however, we may be forced to comply with the EU ETS
requirements during the pendency of a legal challenge. We may have to
purchase emissions allowances through the EU ETS to cover EU flights that exceed
our free allowances, which could result in substantial costs for
us.
Other regulatory actions that may be
taken in the future by the U.S. government, foreign governments (including the
European Union), or the International Civil Aviation Organization to address
climate change or limit the emission of greenhouse gases by the aviation sector
are unknown at this time. Climate change legislation has been
introduced in the U.S. Congress, including a proposal to require transportation
fuel producers and importers to acquire allowances sufficient to offset the
emissions resulting from combustion of their fuels. We cannot
predict, however, if any such legislation will pass the Congress or, if passed
and enacted into law, how it would specifically apply to the aviation
industry. In addition, effective January 14, 2010, the Administrator
of the U.S. Environmental Protection Agency (“EPA”) found that current and
projected concentrations of greenhouse gases in the atmosphere threaten the
public health and welfare. Although legal challenges and legislative
proposals are expected that may invalidate this endangerment finding and the
EPA’s assertion of authority under the Clean Air Act, the finding could result
in EPA regulation of commercial aircraft emissions if EPA finds, as expected,
that such emissions contribute to greenhouse gas pollution.
The impact to us and our industry from
any additional legislation or regulations addressing climate change is likely to
be adverse and could be significant, particularly if regulators were to conclude
that emissions from commercial aircraft cause significant harm to the upper
atmosphere or have a greater impact on climate change than other
industries. Potential actions may include the imposition of
requirements on airlines or transportation fuel producers and importers to
purchase emission offsets or credits, which could require participation in
emissions allowance trading (such as required in the European Union) and
increase the cost of carbon-based fuels (such as jet fuel), substantial taxes on
emissions and growth restrictions on airline operations, among other potential
regulatory actions.
The DOT allows local airport
authorities to implement procedures designed to abate special noise problems,
provided those procedures do not unreasonably interfere with interstate or
foreign commerce or the national transportation system. Some
airports, including certain major airports serving Boston, Chicago, Los Angeles,
San Diego, Orange County (California), Washington, D.C., Denver and San
Francisco, have established airport restrictions to limit noise, including
restrictions on aircraft types to be used and limits on the number and
scheduling of hourly or daily operations. In some instances, these
restrictions have caused curtailments in services or increased operating costs,
and could limit our ability to expand our operations at the affected
airports. Local authorities at other airports could consider adopting
similar noise regulations. Some foreign airports, including major
airports in countries such as the United Kingdom, France, Spain, Belgium,
Germany and Japan, have adopted similar restrictions to limit noise, and in some
instances our operations and costs have been adversely affected in the same
manner as described above.
Item
1A. Risk Factors.
There
are many factors that continue to threaten our operations, financial condition,
results of operations and liquidity. These factors are discussed
below.
Risk
Factors Relating to the Company
Fuel
prices or disruptions in fuel supplies could have a material adverse effect on
us. Expenditures for
fuel and related taxes represent the largest single cost of operating our
business. These costs include fuel costs on flights flown for us
under capacity purchase agreements. Our operations depend on the
availability of jet fuel supplies, and our results are significantly impacted by
changes in jet fuel prices, especially during periods of high volatility such as
2008. If fuel prices rise significantly in a short period of time, we
may be unable to increase fares or other fees sufficiently to offset fully our
increased fuel costs.
We routinely hedge a portion of our
future fuel requirements to protect against rising fuel
costs. However, there can be no assurance that our hedge contracts
will provide any particular level of protection against increased fuel costs or
that our counterparties will be able to perform under our hedge contracts, such
as in the case of a counterparty's bankruptcy. Because of the large
volume of jet fuel that we consume in our business, entering into hedge
contracts for any substantial portion of our future projected fuel requirements
is costly. Additionally, a deterioration in our financial condition
could negatively affect our ability to enter into new hedge contracts in the
future.
Significant declines in fuel prices
(such as those experienced in the last six months of 2008) may increase the
costs associated with our fuel hedging arrangements to the extent we have
entered into swaps or collars. Swaps and put options sold as part of
a collar obligate us to make payments to the counterparty upon settlement of the
contracts if the price of the commodity hedged falls below the agreed upon
amount. Historically, declining crude oil prices have resulted in our
being required to post significant amounts of collateral to cover potential
amounts owed with respect to swap and collar contracts that have not yet
settled. Additionally, lower fuel prices may result in increased
industry capacity and lower fares, especially to the extent that reduced fuel
costs justify increased utilization by airlines of less fuel efficient aircraft
that are unprofitable during periods of higher fuel prices.
Fuel prices could increase dramatically
and supplies could be disrupted as a result of international political and
economic circumstances, such as increasing international demand resulting from a
global economic recovery, conflicts or instability in the Middle East or other
oil producing regions and diplomatic tensions between the United States and oil
producing nations, as well as OPEC production decisions, disruptions of oil
imports, environmental concerns, weather, refinery outages or maintenance and
other unpredictable events.
Further volatility in jet fuel prices
or disruptions in fuel supplies, whether as a result of natural disasters or
otherwise, could have a material adverse effect on our results of operations,
financial condition and liquidity.
Disruptions
in the global capital markets coupled with our high leverage may affect our
ability to satisfy our significant financing needs or meet our
obligations. As is the case
with many of our principal competitors, we have a high proportion of debt
compared to our capital. We have a significant amount of fixed
obligations, including debt, aircraft leases and financings, leases of airport
property and other facilities and pension funding obligations. At
December 31, 2009, we had approximately $6.3 billion of debt and capital lease
obligations, including $2.1 billion that will come due by the end of 2011
(consisting of $1.0 billion during 2010 and $1.1 billion during
2011).
In addition, we have substantial
non-cancelable commitments for capital expenditures, including the acquisition
of new aircraft and related spare engines. To meet these obligations, we must
access the global capital markets and/or achieve and sustain
profitability. If there are future disruptions in the global capital
markets, as were experienced in late 2008 through mid-2009, we may be unable to
obtain financing or otherwise access the capital markets on favorable
terms. See “Management’s Discussion of Financial Condition and
Results of Operations – Liquidity and Capital Resources” included in Item 7 of
this report for a discussion of our obligations and the status of our efforts to
meet our financing needs.
Credit
rating downgrades could have a material adverse effect on our
liquidity. Reductions in our
credit ratings may increase the cost and reduce the availability of financing to
us in the future. We do not have any debt obligations that would be
accelerated as a result of a credit rating downgrade. However, we
would have to post additional collateral under our credit card processing
agreements with Chase Bank USA, N.A. ("Chase") and American Express and under
our workers' compensation program if our debt rating falls below specified
levels, as described below.
Failure
to meet our financial covenants would adversely affect our liquidity. Our credit card
processing agreement with Chase (the "Chase processing agreement") contains
financial covenants which require, among other things, that we post additional
cash collateral if we fail to maintain (1) a minimum level of unrestricted cash,
cash equivalents and short-term investments, (2) a minimum ratio of unrestricted
cash, cash equivalents and short-term investments to current liabilities of 0.25
to 1.0 or (3) a minimum senior unsecured debt rating of at least Caa3 and CCC-
from Moody's and Standard & Poor's, respectively. If a covenant
trigger under the Chase processing agreement results in our posting additional
collateral under that agreement, we would also be required to post additional
collateral under our credit card processing agreement with American
Express.
The amount of additional cash
collateral that we may be required to post if we fail to comply with the
financial covenants described above, which is based on our then-current air
traffic liability exposure (as defined in each agreement), could be
significant. See “Financial Statements and Supplementary Data, Note
19 – Commitments and Contingencies” included in Item 8 of this report for a
detailed discussion of our collateral posting obligations under these credit
card processing agreements.
Depending on our unrestricted cash,
cash equivalents and short-term investments balance at the time, the posting of
a significant amount of cash collateral could cause our unrestricted cash and
short-term investments balance to fall below the minimum balance of $1.0 billion
required under our $350 million secured term loan facility, resulting in a
default under that facility. The posting of such additional
collateral under these circumstances and/or the acceleration of amounts borrowed
under our secured term loan facility (or other remedies pursued by the lenders
thereunder) would likely have a material adverse effect on our financial
condition.
We are currently in compliance with all
of the covenants under these agreements.
Our
obligations for funding our defined benefit pension plans are affected by
factors beyond our control. We have defined
benefit pension plans covering substantially all of our U.S. employees other
than employees of our Chelsea Food Services division and CMI. The
timing and amount of our funding requirements under these plans depend upon a
number of factors, including labor negotiations and changes to pension plan
benefits as well as factors outside of our control, such as the number of
retiring employees, asset returns, interest rates and changes in pension
laws. Changes to these and other factors, such as liquidity
requirements, that can significantly increase our funding requirements could
have a material adverse effect on our financial condition.
Our
initiatives to increase revenues may not be adequate or successful. As we seek to
achieve and sustain profitability, we must continue to take steps to generate
additional revenues. These measures include charging separately for
services that previously had been included within the price of a ticket,
charging for other goods and services and increasing our existing
fees. We intend to introduce additional ancillary revenue initiatives
in the future. We can offer no assurance that these new measures or
any future initiatives will be successful in increasing our
revenues. Additionally, the implementation of some of these
initiatives could create technical and logistical challenges for
us. Any new and increased fees or charges might also reduce the
demand for travel on our airline or across the airline industry in general,
particularly in light of current weakened global economic
conditions.
Delays in
scheduled aircraft deliveries continue to adversely affect our ability to expand
our international capacity. Because all of
our widebody aircraft are already fully utilized, we will need to acquire
additional widebody aircraft to grow internationally when the level of demand
for international air travel supports such growth. We have
contractual commitments to purchase the long-range widebody aircraft that we
currently believe are necessary for our international growth, but significant
delays in their deliveries have occurred. We have been, and continue
to be, adversely impacted by those delays. If significant additional
delays in the deliveries of these new aircraft occur, we will only be able to
accomplish international growth by making alternate arrangements to acquire the
necessary long-range aircraft, if available and possibly on less financially
favorable terms, including higher ownership and operating costs.
Labor
disruptions could adversely affect our operations. Although we enjoy
generally good relations with our employees, we can provide no assurance that we
will be able to maintain these good relations in the future or avoid labor
disruptions, including a strike. The amendable dates for many of our
collective bargaining agreements have passed, including the agreements with the
unions representing our pilots, flight attendants and mechanics. We
are currently in talks with representatives of the applicable
unions. We cannot predict the outcome of these negotiations, and any
labor disruption, including a strike, that results in a prolonged significant
reduction in flights would have a material adverse effect on our results of
operations and financial condition.
Our labor
costs may not be competitive. Labor costs
constitute a significant percentage of our total operating costs. All
of the major hub-and-spoke carriers with whom we compete have achieved
significant labor cost reductions, whether in or out of
bankruptcy. Our wages, salaries and benefits cost per available seat
mile, measured on a stage length adjusted basis, is higher than that of many of
our competitors. These higher labor costs may adversely affect our
ability to achieve and sustain profitability while competing with other airlines
that have achieved lower relative labor costs. Additionally, we
cannot predict the outcome of our ongoing negotiations with our unionized
workgroups, although significant increases in the pay and benefits resulting
from new collective bargaining agreements could have a material adverse effect
on us.
If we
experience problems with certain of our third party regional operators, our
operations could be materially adversely affected. All of our
regional operations are conducted by third party operators on our behalf,
primarily under capacity purchase agreements. Due to our reliance on
third parties to provide these essential services, we are subject to the risks
of disruptions to their operations, which may result from many of the same risk
factors disclosed in this report. In addition, we may also experience
disruption to our regional operations if we terminate the capacity purchase
agreement with one or more of our current operators and transition the services
to another provider. As our regional segment provides revenue to us
directly and indirectly (by providing flow traffic to our hubs), a significant
disruption to our regional operations could have a material adverse effect on
our results of operations and financial condition.
Interruptions
or disruptions in service at one of our hub airports could have a material
adverse effect on our operations. We operate
principally through our hub operations at New York Liberty, Houston Bush,
Cleveland Hopkins and Guam. Substantially all of our flights either
originate from or fly into one of these locations, contributing to a large
amount of "origin and destination" traffic. A significant
interruption or disruption in service at one of our hubs resulting from air
traffic control delays, weather conditions, growth constraints, relations with
third party service providers, failure of computer systems, labor relations,
fuel supplies, terrorist activities, security breaches or otherwise could result
in the cancellation or delay of a significant portion of our flights and, as a
result, our business could be materially adversely affected.
We could
experience adverse publicity and declining revenues as a result of an accident
involving our aircraft or the aircraft of our regional carriers. Any accident
involving an aircraft that we operate or an aircraft that is operated under our
brand by one of our regional carriers could have a material adverse effect on us
if such accident created a public perception that our operations or those of our
regional carriers are less safe or reliable than other airlines, resulting in
passengers being reluctant to fly on us or our regional carriers. In
addition, any such accident could expose us to significant tort
liability. Although we currently maintain liability insurance in
amounts and of the type we believe to be consistent with industry practice to
cover damages arising from any such accidents, and our regional carriers carry
similar insurance and generally indemnify us for their operations on our behalf,
if our liability exceeds the applicable policy limits or the ability of a
carrier to indemnify us, we could incur substantial losses from an
accident.
A
significant failure or disruption of the computer systems on which we rely could
adversely affect our business. We depend heavily
on computer systems and technology to operate our business, such as flight
operations systems, communications systems, airport systems and reservations
systems (including continental.com and third party global distribution systems).
These systems could suffer substantial or repeated disruptions due to events
beyond our control, including natural disasters, power failures, terrorist
attacks, equipment or software failures, computer viruses or
hackers. Any such disruptions could materially impair our flight and
airport operations and our ability to market our services, and could result in
increased costs, lost revenue and the loss or compromise of important
data. Although we have taken measures in an effort to reduce the
adverse effects of certain potential failures or disruptions, if these steps are
not adequate to prevent or remedy the risks, our business may be materially
adversely affected.
Our net
operating loss carryforwards may be limited. At December 31,
2009, we had estimated net operating loss carryforwards ("NOLs") of $3.9 billion
for federal income tax purposes that expire beginning in 2020 and continuing
through 2029. Section 382 of the Internal Revenue Code ("Section
382") imposes limitations on a corporation's ability to utilize NOLs if it
experiences an "ownership change." In general terms, an ownership
change may result from transactions increasing the ownership of certain
stockholders in the stock of a corporation by more than 50 percentage points
over a three-year period.
In the event of an ownership change,
utilization of our NOLs would be subject to an annual limitation under Section
382 determined by multiplying the value of our stock at the time of the
ownership change by the applicable long-term tax-exempt rate (which is 4.16% for
December 2009). Any unused annual limitation may be carried over to
later years.
For purposes of Section 382, increases
in share holdings by, or that result in a person becoming, a holder of 5% or
more of the outstanding shares of our common stock are aggregated for purposes
of determining whether an "ownership change" has occurred. Because
our common stock has been trading at low market prices, the cost of acquiring a
sufficient number of shares of our common stock to become a holder of 5% or more
of the outstanding shares, and the cost of acquiring additional shares by
existing holders, has decreased significantly from historical levels, increasing
the possibility that we could experience an "ownership
change." Although we cannot currently predict whether or when such an
"ownership change" may occur, an ownership change as of December 31, 2009 would
have resulted in a $103 million limit to our annual NOL utilization, before
consideration of any built-in gains. The imposition of this
limitation on our ability to use our NOLs to offset future taxable income could
cause us to pay U.S. federal income taxes earlier than if such limitation were
not in effect and could cause such NOLs to expire unused, reducing or
eliminating the benefit of such NOLs. In addition, depending on the
market value of our common stock at the time of any such ownership change, a
limitation on our ability to use our NOLs could require us to recognize a
significant non-cash tax charge, the amount of which we cannot estimate at this
time.
The
global recession could continue to result in less demand for air
travel. The airline
industry is highly cyclical, and the level of demand for air travel is
correlated to the strength of the U.S. and global economies. The
severe economic recession in the U.S. and global economies had a substantial
negative impact on the demand for air carrier services beginning in the fourth
quarter of 2008. This decline in demand has disproportionately
reduced the volume of high-yield traffic in the premium cabins on domestic and
international flights, as many business travelers either curtailed their travel
or purchased lower yield economy tickets. The diminished volume of
high-yield traffic has significantly reduced airline revenues since the fourth
quarter of 2008.
We cannot predict how quickly or fully
demand for air travel will recover. Stagnant or worsening global
economic conditions that continue to contribute to the loss of business and
leisure traffic, particularly the loss of high-yield international traffic in
our first class and BusinessFirst cabins, could have a material adverse effect
on our results of operations and financial condition.
The
airline industry is highly competitive and susceptible to price
discounting. The U.S. airline industry is characterized by
substantial price competition, especially in domestic
markets. Carriers use discount fares to stimulate traffic during
periods of slack demand, or when they begin service to new cities or have excess
capacity, to generate cash flow and to establish, increase or preserve market
share. Some of our competitors have greater financial resources
(including a larger percentage or more favorable fuel hedges against price
increases) and/or lower cost structures than we do, in some cases as the result
of bankruptcies and/or mergers. In recent years, the domestic market
share held by low-cost carriers has increased significantly and is expected to
continue to increase. The increased market presence of low-cost
carriers, which engage in substantial price discounting, has diminished the
ability of the network carriers to maintain sufficient fare levels in domestic
markets to achieve sustained profitability. We cannot predict whether
or for how long these trends will continue.
In addition to price competition,
airlines also compete for market share by increasing the size of their route
system and the number of markets they serve. Several of our domestic
competitors have increased their international capacity, including service to
some destinations that we currently serve. Additionally, the "open
skies" agreement between the United States and the European Union, which became
effective on March 30, 2008 is resulting in increased competition from European
and U.S. airlines in these international markets, and may give rise to
additional consolidation or better integration opportunities among European
carriers. The “open skies” agreement between the United States and
Japan announced in December 2009 is also likely to increase competition in
affected markets if it becomes effective. The increased competition
in these international markets, particularly to the extent our competitors
engage in price discounting, may have a material adverse effect on our results
of operations, financial condition or liquidity.
Expanded
government regulation could further increase our operating costs and restrict
our ability to conduct our business. Airlines are
subject to extensive regulatory and legal compliance requirements that result in
significant costs and can adversely affect us. Additional laws,
regulations, airport rates and charges and growth constraints have been proposed
from time to time that could significantly increase the cost of airline
operations or reduce revenue. In addition, to address concerns about
airport congestion, the FAA has designated certain airports, including New York
Liberty, Kennedy and LaGuardia as “high density traffic airports,” and has
imposed operating restrictions at these three airports, which may include
capacity reductions. In addition, the FAA has designated New York
Liberty and Kennedy as Level 3 Coordinated Airports under the International Air
Transport Association Worldwide Scheduling Guidelines, which requires us to
participate in seasonal FAA procedures for capacity allocation and schedule
coordination for New York Liberty and to have slots to operate at that
airport. Additional restrictions on airline routes and takeoff and
landing slots may be proposed that could affect rights of ownership and
transfer. Although we do not believe that these current operating
restrictions will have a material adverse effect on our operations at New York
Liberty, we cannot predict the impact of future capacity constraints or
allocations or other restrictions on our operations that might be imposed by the
FAA, Congress or other regulators, which could have a material adverse effect on
us.
The FAA from time to time issues
directives and other regulations relating to the maintenance and operation of
aircraft that require significant expenditures or operational restrictions, and
which could include the temporary grounding of an entire aircraft type if the
FAA identifies design, manufacturing, maintenance or other issues requiring
immediate corrective action. FAA requirements cover, among other
things, retirement of older aircraft, security measures, collision avoidance
systems, airborne windshear avoidance systems, noise abatement and other
environmental concerns, aircraft operation and safety and increased inspections
and maintenance procedures to be conducted on older aircraft. These
FAA directives or requirements could have a material adverse effect on
us.
Many aspects of airlines' operations
also are subject to increasingly stringent federal, state, local and foreign
laws protecting the environment, including the imposition of additional taxes on
airlines or their passengers. Future regulatory developments in the
United States and abroad could adversely affect operations and increase
operating costs in the airline industry. The European Union has
issued a directive to member states to include aviation in its Greenhouse Gas
ETS, which requires us to begin monitoring our emissions of carbon dioxide
effective January 1, 2010 and have emissions allowances equal to the amount of
our carbon dioxide emissions to operate flights to and from member states of the
European Union in January 2012 and thereafter, including flights between the
United States and the European Union. On December 16, 2009, we joined
a lawsuit in the United Kingdom with the Air Transport Association of America,
American and United to challenge the extension of the European Union’s ETS to
include aviation and the imposition of its requirements on us. In
addition, non-EU governments are expected to challenge the application of the EU
ETS to their airlines; however, we may be forced to comply with the EU ETS
requirements during the pendency of a legal challenge. We may have to
purchase emissions allowances through the EU ETS to cover EU flights that exceed
our free allowances, which could result in substantial costs for
us.
Other regulatory actions that may be
taken in the future by the U.S. government, other foreign governments or the
International Civil Aviation Organization to address concerns about climate
change and air emissions from the aviation sector are unknown at this
time. Climate change legislation has been introduced in the U.S.
Congress, including a proposal to require transportation fuel producers and
importers to acquire allowances sufficient to offset the emissions resulting
from combustion of their fuels. We cannot predict, however, if any
such legislation will pass the Congress or, if passed and enacted into law, how
it would specifically apply to the aviation industry. In addition,
effective January 14, 2010, the Administrator of EPA found that current and
projected concentrations of greenhouse gases in the atmosphere threaten the
public health and welfare. Although legal challenges and legislative
proposals are expected that may invalidate this endangerment finding and the
EPA’s assertion of authority under the Clean Air Act, the finding could result
in EPA regulation of commercial aircraft emissions if EPA finds, as expected,
that such emissions contribute to greenhouse gas pollution.
The impact to
us and our industry from any additional legislation or regulations addressing
climate change is likely to be adverse and could be significant, particularly if
regulators were to conclude that emissions from commercial aircraft cause
significant harm to the upper atmosphere or have a greater impact on climate
change than other industries. Potential actions may include the
imposition of requirements on airlines or transportation fuel producers and
importers to purchase emission offsets or credits, which could require
participation in emissions allowance trading (such as required in the European
Union) and increase the cost of carbon-based fuels (such as jet fuel),
substantial taxes on emissions and growth restrictions on airline operations,
among other potential regulatory actions.
Further, the ability of U.S. carriers
to operate international routes is subject to change because the applicable
arrangements between the United States and foreign governments may be amended
from time to time, or because appropriate slots or facilities are not made
available. We cannot provide assurance that laws or regulations
enacted in the future will not have a significant adverse effect on
us.
Additional
terrorist attacks or international hostilities may further adversely affect our
financial condition, results of operations and liquidity. The
terrorist attacks of September 11, 2001 involving commercial aircraft severely
and adversely affected our financial condition, results of operations and
liquidity and the airline industry generally. Airlines continue to be
a target of terrorist attacks. Additional terrorist attacks, even if
not made directly on the airline industry, or the fear of such attacks
(including elevated national threat warnings or selective cancellation or
redirection of flights due to terror threats such as the August 2006 terrorist
plot targeting multiple airlines, including us), could negatively affect us and
the airline industry. The potential negative effects include
increased security, insurance and other costs for us and lost revenue from
increased ticket refunds and decreased ticket sales. Our financial
resources might not be sufficient to absorb the adverse effects of any further
terrorist attacks or other international hostilities involving the United
States.
Additional
security requirements may increase our costs and decrease our
traffic. Since September
11, 2001, the Department of Homeland Security ("DHS") and TSA have implemented
numerous security measures that affect airline operations and costs, and they
are likely to implement additional measures in the future. Most
recently, DHS has begun to implement the US-VISIT program (a program of
fingerprinting and photographing foreign visa holders), announced that it will
implement greater use of passenger data for evaluating security measures to be
taken with respect to individual passengers, expanded the use of federal air
marshals on our flights (who do not pay for their seats and thus displace
revenue passengers and cause increased customer complaints from displaced
passengers), begun investigating a requirement to install aircraft security
systems (such as devices on commercial aircraft as countermeasures against
portable surface to air missiles) and expanded cargo and baggage
screening. DHS also has required certain flights to be cancelled on
short notice for security reasons, and has required certain airports to remain
at higher security levels than other locations. In addition, foreign
governments also have begun to institute additional security measures at foreign
airports we serve, out of their own security concerns or in response to security
measures imposed by the United States.
Moreover, the TSA has imposed measures
affecting the contents of baggage that may be carried on an
aircraft. The TSA and other security regulators could impose other
measures as necessary to respond to security threats that may arise in the
future.
A large portion of the costs of these
security measures is borne by the airlines and their passengers, and we believe
that these and other security measures have the effect of decreasing the demand
for air travel and the overall attractiveness of air transportation as compared
to other modes of transportation. Additional security measures
required by the U.S. and foreign governments in the future, such as further
expanded cargo screening, might increase our costs or decrease the demand for
air travel, adversely affecting our financial results.
The
airline industry is heavily taxed. The airline
industry is subject to extensive government fees and taxation that negatively
impact our revenue. The U.S. airline industry is one of the most
heavily taxed of all industries. These fees and taxes have grown
significantly in the past decade for domestic flights, and various U.S. fees and
taxes also are assessed on international flights. In addition, the
governments of foreign countries in which we operate impose on U.S. airlines,
including us, various fees and taxes, and these assessments have been increasing
in number and amount in recent years. Certain of these fees and taxes
must be included in the fares we advertise or quote to our
customers. Due to the competitive revenue environment, many increases
in these fees and taxes have been absorbed by the airline industry rather than
being passed on to the passenger. Further increases in fees and taxes
may reduce demand for air travel and thus our revenues.
Airlines
may continue to participate in industry consolidation or alliances, which could
have a material adverse effect on us. We are facing
stronger competition from carriers that have participated in industry
consolidation and from expanded airline alliances and joint
ventures.
Since its deregulation in 1978, the
U.S. airline industry has undergone substantial consolidation and additional
consolidation may occur in light of the recently completed merger of Delta and
Northwest, which changed the competitive environment for us and the entire
airline industry. As a result of the announcement of the
Delta/Northwest merger agreement, we conducted a comprehensive review of our
strategic alternatives and announced in April 2008 that we had determined that
the best course for us was not to merge with another airline at such
time. Through consolidation, carriers have the opportunity to
significantly expand the reach of their networks, which is of primary importance
to business travelers, and to achieve cost reductions by eliminating redundancy
in their networks and their management structures.
Through participation in airline
alliances and/or joint ventures, carriers granted anti-trust immunity by the
appropriate regulatory authorities are able to coordinate their routes, pool
their revenues and costs and enjoy other mutual benefits, such as frequent flier
program reciprocity, achieving many of the benefits of
consolidation. For example, in 2009, Air France-KLM, Delta and
Northwest launched a new trans-Atlantic joint venture among those airlines that
involves coordination of routes, fares, schedules and other matters among those
airlines, Alitalia and CSA Czech Airlines. American, British Airways
and Iberia have received tentative DOT approval of their application for
anti-trust immunity for a similar trans-Atlantic joint venture, which would also
involve many of the same benefits. Delta recently attempted to induce
Japan Airlines to leave its current alliance and join Delta’s alliance, although
it was unsuccessful.
There may be additional consolidation
or changes in airline alliances and/or joint ventures in the future, any of
which could result in one or more airlines or alliances with more extensive
route networks and/or lower costs structures than currently exist, changing the
competitive landscape for the airline industry and having a material adverse
effect on us.
Insurance
costs could increase materially or key coverage could become
unavailable. The September 11,
2001 terrorist attacks led to a significant increase in insurance premiums and a
decrease in the insurance coverage available to commercial
airlines. Furthermore, our ability to continue to obtain certain
types of insurance remains uncertain. Since the terrorist attacks,
the U.S. government has provided war risk (terrorism) insurance to U.S.
commercial airlines to cover losses. War risk insurance in amounts
necessary for our operations, and at premiums that are not excessive, is not
currently available in the commercial insurance market. If the
government discontinues this coverage in whole or in part, we may be able to
obtain comparable coverage in the commercial insurance market only, if it is
available at all, for substantially higher premiums and on more restrictive
terms. If we are unable to obtain adequate war risk insurance, our
business could be materially and adversely affected.
Public
health threats affecting travel behavior could have a material adverse effect on
the industry. Public health threats, such as the H1N1 flu
virus, the bird flu, Severe Acute Respiratory Syndrome (SARs) and other highly
communicable diseases, outbreaks of which have occurred in various parts of the
world in which we operate, could adversely impact our operations and the
worldwide demand for air travel. Travel restrictions or operational
problems, such as quarantining of personnel or inability to access our
facilities or aircraft in any part of the world in which we operate, or any
reduction in the demand for air travel caused by public health threats in the
future, may materially adversely affect our operations and financial
results.
Our
results of operations fluctuate due to seasonality and other factors associated
with the airline industry. Due to greater
demand for air travel during the summer months, revenue in the airline industry
in the second and third quarters of the year is generally stronger than revenue
in the first and fourth quarters of the year for most U.S. air
carriers. Our results of operations generally reflect this
seasonality, but also have been impacted by numerous other factors that are not
necessarily seasonal, including excise and similar taxes, weather and air
traffic control delays, as well as the other factors discussed
above. As a result, our operating results for a quarterly period are
not necessarily indicative of operating results for an entire year, and
historical operating results are not necessarily indicative of future operating
results.
Item
1B. Unresolved Staff Comments.
None.
As of December 31, 2009, our operating
fleet consisted of 337 mainline jets and 264 regional aircraft. The
337 mainline jets are operated exclusively by us, while the 264 regional
aircraft are operated on our behalf by other operators under capacity purchase
agreements.
We own or lease 274 regional
jets. Of these, 212 are leased or subleased to ExpressJet and
operated on our behalf under a capacity purchase agreement with ExpressJet, 37
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
December 31, 2009:
Seats
in
|
Average
|
|||||||||||
Third-Party
|
Standard
|
Age
|
||||||||||
Aircraft
Type
|
Total
|
Owned
|
Leased
|
Aircraft
|
Configuration
|
(In
Years)
|
||||||
Mainline
(a):
|
||||||||||||
777-200ER
|
20
|
8
|
12
|
-
|
285
|
9.6
|
||||||
767-400ER
|
16
|
14
|
2
|
-
|
235
|
8.3
|
||||||
767-200ER
|
10
|
9
|
1
|
-
|
174
|
8.8
|
||||||
757-300
|
18
|
9
|
9
|
-
|
216
|
7.3
|
||||||
757-200
|
41
|
15
|
26
|
-
|
175
|
12.9
|
||||||
737-900ER
|
30
|
30
|
-
|
-
|
173
|
1.2
|
||||||
737-900
|
12
|
8
|
4
|
-
|
173
|
8.3
|
||||||
737-800
|
117
|
44
|
73
|
-
|
160
|
7.8
|
||||||
737-700
|
36
|
12
|
24
|
-
|
124
|
11.0
|
||||||
737-500
|
34
|
-
|
34
|
-
|
114
|
13.7
|
||||||
737-300
|
3
|
3
|
-
|
-
|
124
|
23.6
|
||||||
Total
mainline
|
337
|
152
|
185
|
-
|
9.0
|
|||||||
Regional
(b):
|
||||||||||||
ERJ-145XR
|
89
|
-
|
89
|
-
|
50
|
|||||||
ERJ-145
|
138
|
18
|
105
|
15
|
(c)
|
50
|
||||||
CRJ200LR
|
7
|
-
|
-
|
7
|
(c)
|
50
|
||||||
Q400
|
14
|
-
|
-
|
14
|
(d)
|
74
|
||||||
Q200
|
16
|
-
|
-
|
16
|
(e)
|
37
|
||||||
Total
regional
|
264
|
18
|
194
|
52
|
||||||||
Total
|
601
|
170
|
379
|
52
|
(a)
|
Excludes
seven grounded Boeing 737-500 aircraft (four owned and three leased) and
ten grounded Boeing 737-300 aircraft (seven owned and three leased) and
two leased 757-300 aircraft delivered but not yet placed into
service.
|
(b)
|
Excludes
25 ERJ-135 aircraft that are temporarily grounded and 15 ERJ145XR
aircraft, 17 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 under a capacity purchase agreement.
|
(d)
|
Operated
by Colgan under a capacity purchase agreement.
|
(e)
|
Operated
by CommutAir under a capacity purchase
agreement.
|
Most of the aircraft and engines we own
are subject to mortgages.
Mainline Fleet
Activity. During 2009, we placed into service 13 new Boeing
737-900ER aircraft, one new Boeing 737-800 aircraft and one leased Boeing
757-300 aircraft. We removed 20 Boeing 737-300 aircraft and eight
Boeing 737-500 aircraft from service during 2009. We removed three
additional Boeing 737-500 aircraft and one Boeing 737-300 aircraft from service
in January 2010. By March 2010, we expect to remove our two remaining
Boeing 737-300 aircraft from service.
At December 31, 2009, we had four owned
and three leased Boeing 737-500 aircraft that were grounded. We had
also grounded seven owned and three leased Boeing 737-300
aircraft. The three leased Boeing 737-300 aircraft were returned to
the lessor in January 2010 and the leases on the three Boeing 737-500 aircraft
will expire during the first half of 2012.
During 2009, we sold eight 737-500
aircraft to foreign buyers. We sold one grounded Boeing 737-500
aircraft to a foreign buyer in February 2010 and have agreements to sell the
three remaining grounded Boeing 737-500 aircraft to foreign
buyers. These sales are subject to customary closing conditions, some
of which are outside of our control, and we cannot give any assurances that the
buyers of these aircraft will be able to obtain financing for these
transactions, that there will not be delays in deliveries or that the closing of
these transactions will occur. We hold cash deposits that secure the
buyers’ obligations under the aircraft sale contracts and we are entitled to
damages under the aircraft sale contract if the buyers do not take delivery of
the aircraft when required.
We have also agreed to lease four
Boeing 757-300 aircraft from Boeing Capital Corporation. As of
December 31, 2009, three of these aircraft had been delivered, one of which had
been placed into service. We expect all of these aircraft to be
placed into service during 2010.
Regional Fleet
Activity. In January 2009, we amended our capacity purchase
agreement with Colgan to increase by 15 the number of Q400 aircraft to be
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
ten years following the date the aircraft is delivered into
service. Colgan supplies all of the aircraft that it operates under
the agreement.
In July 2009, we entered into
agreements to sublease five temporarily grounded ERJ-135 aircraft to
Chautauqua. 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. The leases on the 30 ERJ-135 aircraft expire in 2016
through 2018. We are evaluating our options regarding these 25
aircraft, including permanently grounding them.
In December 2009, we agreed with
ExpressJet to amend our capacity purchase agreement to permit ExpressJet to fly
eight ERJ-145 aircraft for another carrier under a capacity purchase
agreement. These eight aircraft are subleased from us and were
previously flown for us under our capacity purchase agreement. As of
December 31, 2009, two of these aircraft had been removed from service for
us. The remaining six aircraft will be removed from service for us
during the first half of 2010. The subleases have an average initial
term of two and one-half years.
Firm Order and Option
Aircraft. As of December 31, 2009 we had firm commitments to
purchase 84 new aircraft (55 Boeing 737 aircraft, four Boeing 777 aircraft and
25 Boeing 787 aircraft) scheduled for delivery from 2010 through 2016, with an
estimated aggregate cost of $5.1 billion including related spare
engines. In addition to our firm order aircraft, we had options to
purchase a total of 98 additional Boeing aircraft as of December 31,
2009.
We are currently scheduled to take
delivery of two Boeing 777 aircraft and 12 Boeing 737 aircraft in
2010. Due to issues arising out of the governmental certification
process used by the manufacturer of the coach seats on the Boeing 777 aircraft
and the coach and first class seats on the Boeing 737 aircraft scheduled for
delivery this year, we expect a delay in delivery of between one and six months
for most of the aircraft scheduled for delivery in 2010. This seat
manufacturer also provided the seats installed on most of the Boeing aircraft
currently in our fleet. We do not believe these issues will have a
material impact on our ability to continue to operate any of the aircraft in our
fleet.
Facilities
Our principal facilities are located at
New York Liberty, Houston Bush, Cleveland Hopkins and A.B. Won Pat International
Airport in Guam. Substantially all of these facilities are leased on
a net-rental basis, as we are responsible for maintenance, insurance and other
facility-related expenses and services. At each hub location, we
generally have multiple leases covering different types of facilities, and those
leases have expiration dates ranging from 2010 to 2030.
At each of our three domestic hub
cities and most other locations, our passenger and baggage handling space is
leased directly from the airport authority on varying terms dependent on
prevailing practice at each airport. We also maintain administrative
offices, terminal, catering, cargo and other airport facilities, training
facilities, maintenance facilities and other facilities, in each case as
necessary to support our operations in the cities we serve.
See Item 8. “Financial Statements and
Supplementary Data, Note 19 – Commitments and Contingencies” for a discussion of
certain of our guarantees relating to our principal facilities, as well as our
contingent liability for US Airways’ obligations under a lease agreement
covering the East End Terminal at LaGuardia Airport.
During
the period between 1997 and 2001, we reduced or capped the base commissions that
we paid to domestic travel agents, and in 2002 we eliminated those base
commissions. These actions were similar to those also taken by other air
carriers. We are a defendant, along with several other air carriers,
in two lawsuits brought by travel agencies that purportedly opted out of a prior
class action entitled Sarah Futch Hall d/b/a/
Travel Specialists v. United Air Lines, et al. (U.S.D.C., Eastern
District of North Carolina), filed on June 21, 2000, in which the defendant
airlines prevailed on summary judgment that was upheld on
appeal. These similar suits against Continental and other major
carriers allege violations of antitrust laws in reducing and ultimately
eliminating the base commissions formerly paid to travel agents and seek
unspecified money damages and certain injunctive relief under the Clayton Act
and the Sherman Anti-Trust Act. The pending cases, which currently
involve a total of 90 travel agency plaintiffs, are Tam Travel, Inc. v. Delta
Air Lines, Inc., et al. (U.S.D.C., Northern District of California),
filed on April 9, 2003 and Swope Travel Agency, et al.
v. Orbitz LLC et al. (U.S.D.C., Eastern District
of
Texas), filed on June 5, 2003. By order dated November 10, 2003,
these actions were transferred and consolidated for pretrial purposes by the
Judicial Panel on Multidistrict Litigation to the Northern District of
Ohio. On October 29, 2007, the judge for the consolidated lawsuit
dismissed the case for failure to meet the heightened pleading standards
established earlier in 2007 by the U.S. Supreme Court’s decision in Bell Atlantic Corp. v.
Twombly. On October 2, 2009, the U.S. Court of Appeals for the
Sixth Circuit affirmed the trial court’s dismissal of the case, and on December
18, 2009, the plaintiffs’ request for rehearing by the Sixth Circuit en banc was
denied. The plaintiffs now have the opportunity to appeal to the U.S.
Supreme Court. The plaintiffs in the Swope lawsuit, encompassing 43
travel agencies, have also alleged that certain claims raised in their lawsuit
were not, in fact, dismissed. The trial court has not yet ruled on
that issue. In the consolidated lawsuit, we believe the plaintiffs’
claims are without merit, and we intend to defend vigorously any
appeal. Nevertheless, a final adverse court decision awarding
substantial money damages could have a material adverse effect on our results of
operations, financial condition or liquidity.
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. We (including our predecessors) have been
identified as a potentially responsible party at one federal site and one state
site that are undergoing or have undergone investigation or
remediation. Although applicable case law is evolving and some cases
may be interpreted to the contrary, we believe that some or all of any liability
claims associated with these sites were discharged by confirmation of our 1993
Plan of Reorganization, principally because our 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, we believe that our potential liability for our allocable share of
the cost to remedy each site (if and to the extent we are found to be liable) is
not, in the aggregate, material; however, we have not been designated a “de
minimis” contributor at either site.
In 2001, the California Regional Water
Quality Control Board (“CRWQCB”) mandated a field study of the area surrounding
our aircraft maintenance hangar in Los Angeles. The study was
completed in September 2001 and identified jet fuel and solvent contamination on
and adjacent to this site. In April 2005, we began environmental
remediation of jet fuel contamination surrounding our aircraft maintenance
hangar pursuant to a workplan submitted to (and approved by) the CRWQCB and our
landlord, the Los Angeles World Airports. Additionally, we could be
responsible for environmental remediation costs primarily related to solvent
contamination on and near this site.
Although
we are not currently subject to any environmental cleanup orders imposed by
regulatory authorities, we are 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 and our current
reserves, we do not believe that any environmental liability associated with
such properties will have a material adverse effect on us.
At December 31, 2009, we had an accrual
for estimated costs of environmental remediation throughout our system of $30
million, based primarily on third-party environmental studies and estimates as
to the extent of the contamination and nature of the required remedial
actions. We have evaluated and recorded this accrual for environmental
remediation costs separately from any related insurance recovery. We did
not have any receivables related to environmental insurance recoveries at
December 31, 2009. Based on currently available information, we
believe that our accrual for potential environmental remediation costs is
adequate, although our accrual could be adjusted in the future due to new
information or changed circumstances. However, we do not expect these
items to materially affect our results of operations, financial condition or
liquidity.
We and/or certain of our subsidiaries
are defendants in various other pending lawsuits and proceedings and are subject
to various other claims arising in the normal course of our business, many of
which are covered in whole or in part by insurance. Although the
outcome of these lawsuits and proceedings (including the probable loss we might
experience as a result of an adverse outcome) cannot be predicted with certainty
at this time, we believe, after consulting with outside counsel, that the
ultimate disposition of such suits will not have a material adverse effect on
us.
Not
applicable.
PART
II
Item
5.
Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.
Our Class B common stock, which we
refer to as our common stock, trades on the NYSE under the symbol
“CAL.” The table below shows the high and low sales prices for our
common stock as reported in the consolidated transaction reporting system during
2009 and 2008.
Class
B
Common
Stock
|
||||||
High
|
Low
|
|||||
2009
|
Fourth
Quarter
|
$18.75
|
$10.94
|
|||
Third
Quarter
|
$17.55
|
$8.76
|
||||
Second
Quarter
|
$15.76
|
$7.86
|
||||
First
Quarter
|
$21.83
|
$6.37
|
||||
2008
|
Fourth
Quarter
|
$20.89
|
$9.49
|
|||
Third
Quarter
|
$21.40
|
$5.91
|
||||
Second
Quarter
|
$23.42
|
$9.70
|
||||
First
Quarter
|
$31.25
|
$17.19
|
As of February 16, 2010, there were
approximately 18,890 holders of record of our common stock. We paid
no cash dividends on our common stock during 2009 or 2008 and have no current
intention of doing so.
Our certificate of incorporation
provides that no shares of capital stock may be voted by or at the direction of
persons who are not U.S. citizens unless the shares are registered on a separate
stock record. Our bylaws further provide that no shares will be
registered on the separate stock record if the amount so registered would exceed
U.S. foreign ownership restrictions. United States law currently limits the
voting power in us (and other U.S. airlines) of persons who are not citizens of
the United States to 25%.
See Item 12. “Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder Matters” for
information regarding our equity compensation plans as of December 31,
2009.
None.
The following financial information for
the five years ended December 31, 2009 has been derived from our consolidated
financial statements. This information should be read in conjunction
with our consolidated financial statements and note thereto included in Item 8.
“Financial Statements and Supplementary Data” of this report.
Statement
of Operations Data (in millions except per
share data):
|
|||||
Year
Ended December 31,
|
|||||
2009
|
2008
|
2007
|
2006
|
2005
|
|
Operating
revenue
|
$12,586
|
$15,241
|
$14,232
|
$13,128
|
$11,208
|
Operating
expenses
|
12,732
|
15,555
|
13,545
|
12,660
|
11,247
|
Operating
income (loss)
|
(146)
|
(314)
|
687
|
468
|
(39)
|
Income
(loss) before cumulative effect of change
in
accounting principle
|
(282)
|
(586)
|
439
|
361
|
(75)
|
Cumulative
effect of change in accounting principle
|
-
|
-
|
-
|
(26)
|
-
|
Net
income (loss)
|
(282)
|
(586)
|
439
|
335
|
(75)
|
Net
income (loss) excluding special items (1)
|
(295)
|
(352)
|
529
|
296
|
(212)
|
Earnings
(loss) per share:
|
|||||
Basic:
|
|||||
Income
(loss) before cumulative effect of
change
in accounting principle
|
$(2.18)
|
$(5.54)
|
$ 4.53
|
$ 4.05
|
$(1.06)
|
Cumulative
effect of change in accounting principle
|
-
|
-
|
-
|
(0.29)
|
-
|
Net
income (loss)
|
$(2.18)
|
$(5.54)
|
$ 4.53
|
$ 3.76
|
$(1.06)
|
Diluted:
|
|||||
Income
(loss) before cumulative effect of
change
in accounting principle
|
$(2.18)
|
$(5.54)
|
$ 4.05
|
$ 3.51
|
$(1.08)
|
Cumulative
effect of change in accounting principle
|
-
|
-
|
-
|
(0.23)
|
-
|
Net
income (loss)
|
$(2.18)
|
$(5.54)
|
$ 4.05
|
$ 3.28
|
$(1.08)
|
(1)
|
See
“Reconciliation of GAAP to non-GAAP Financial Measures” in this
Item.
|
Balance
Sheet Data (in millions):
|
|||||
As
of December 31,
|
|||||
2009
|
2008
|
2007
|
2006
|
2005
|
|
Unrestricted
cash, cash equivalents and
short-term
investments
|
$2,856
|
$2,643
|
$2,803
|
$2,484
|
$ 1,957
|
Total
assets
|
12,781
|
12,686
|
12,105
|
11,308
|
10,529
|
Long-term
debt and capital lease obligations
|
5,291
|
5,353
|
4,337
|
4,820
|
5,010
|
Stockholders’
equity
|
590
|
123
|
1,569
|
386
|
273
|
Selected
Operating Data
We have two reportable
segments: mainline and regional. The mainline segment
consists of flights to cities using larger jets while the regional segment
currently consists of flights with a capacity of 79 or fewer
seats. As of December 31, 2009, the regional segment was operated by
ExpressJet, Chautauqua, CommutAir and Colgan under capacity purchase
agreements.
Year
Ended December 31,
|
|||||
2009
|
2008
|
2007
|
2006
|
2005
|
|
Mainline
Operations:
|
|||||
Passengers
(thousands) (1)
|
45,573
|
48,682
|
50,960
|
48,788
|
44,939
|
Revenue
passenger miles (millions) (2)
|
79,824
|
82,806
|
84,309
|
79,192
|
71,261
|
Available
seat miles (millions) (3)
|
97,407
|
102,527
|
103,139
|
97,667
|
89,647
|
Cargo
ton miles (millions)
|
948
|
1,005
|
1,037
|
1,075
|
1,018
|
Passenger
load factor (4):
|
|||||
Mainline
|
81.9%
|
80.8%
|
81.7%
|
81.1%
|
79.5%
|
Domestic
|
84.8%
|
83.3%
|
83.9%
|
83.6%
|
81.2%
|
International
|
79.2%
|
78.2%
|
79.4%
|
78.2%
|
77.5%
|
Passenger
revenue per available seat mile (cents)
|
9.49
|
11.10
|
10.47
|
9.96
|
9.32
|
Total
revenue per available seat mile (cents)
|
10.92
|
12.51
|
11.65
|
11.17
|
10.46
|
Average
yield per revenue passenger mile (cents) (5)
|
11.58
|
13.75
|
12.80
|
12.29
|
11.73
|
Average
fare per revenue passenger
|
$204.89
|
$236.26
|
$214.06
|
$201.81
|
$188.67
|
Cost
per available seat mile (cents)
|
10.75
|
12.44
|
10.83
|
10.56
|
10.22
|
Cost
per available seat mile excluding special
charges
and aircraft fuel and related taxes (cents) (6)
|
7.79
|
7.50
|
7.57
|
7.42
|
7.42
|
Average
price per gallon of fuel, including fuel taxes
|
$1.98
|
$3.27
|
$2.18
|
$2.06
|
$1.78
|
Fuel
gallons consumed (millions)
|
1,395
|
1,498
|
1,542
|
1,471
|
1,376
|
Aircraft
in fleet at end of period (7)
|
337
|
350
|
365
|
366
|
356
|
Average
length of aircraft flight (miles)
|
1,550
|
1,494
|
1,450
|
1,431
|
1,388
|
Average
daily utilization of each aircraft (hours) (8)
|
10:37
|
11:06
|
11:34
|
11:07
|
10:31
|
Regional
Operations:
|
|||||
Passengers
(thousands) (1)
|
17,236
|
18,010
|
17,970
|
18,331
|
16,076
|
Revenue
passenger miles (millions) (2)
|
9,312
|
9,880
|
9,856
|
10,325
|
8,938
|
Available
seat miles (millions) (3)
|
12,147
|
12,984
|
12,599
|
13,251
|
11,973
|
Passenger
load factor (4)
|
76.7%
|
76.1%
|
78.2%
|
77.9%
|
74.7%
|
Passenger
revenue per available seat mile (cents)
|
15.59
|
18.14
|
17.47
|
17.15
|
15.67
|
Average
yield per revenue passenger mile (cents) (5)
|
20.34
|
23.83
|
22.33
|
22.01
|
20.99
|
Aircraft
in fleet at end of period (7)
|
264
|
282
|
263
|
282
|
266
|
Year
Ended December 31,
|
|||||
2009
|
2008
|
2007
|
2006
|
2005
|
|
Consolidated
Operations:
|
|||||
Passengers
(thousands) (1)
|
62,809
|
66,692
|
68,930
|
67,119
|
61,015
|
Revenue
passenger miles (millions) (2)
|
89,136
|
92,686
|
94,165
|
89,517
|
80,199
|
Available
seat miles (millions) (3)
|
109,554
|
115,511
|
115,738
|
110,918
|
101,620
|
Passenger
load factor (4)
|
81.4%
|
80.2%
|
81.4%
|
80.7%
|
78.9%
|
Passenger
revenue per available seat mile (cents)
|
10.17
|
11.89
|
11.23
|
10.82
|
10.07
|
Average
yield per revenue passenger mile (cents) (5)
|
12.50
|
14.82
|
13.80
|
13.41
|
12.76
|
Cost
per available seat mile (cents)
|
11.62
|
13.47
|
11.70
|
11.41
|
11.07
|
Cost
per available seat mile excluding special
charges
and aircraft fuel and related taxes (cents) (6)
|
8.46
|
8.19
|
8.21
|
8.06
|
8.08
|
Average
price per gallon of fuel, including fuel taxes
|
$1.97
|
$3.27
|
$2.18
|
$2.06
|
$1.78
|
Fuel
gallons consumed (millions)
|
1,681
|
1,809
|
1,853
|
1,791
|
1,671
|
(1)
|
The
number of revenue passengers measured by each flight segment
flown.
|
(2)
|
The
number of scheduled miles flown by revenue passengers.
|
(3)
|
The
number of seats available for passengers multiplied by the number of
scheduled miles those seats are flown.
|
(4)
|
Revenue
passenger miles divided by available seat miles.
|
(5)
|
The
average passenger revenue received for each revenue passenger mile
flown.
|
(6)
|
See
“Reconciliation of GAAP to non-GAAP Financial Measures” in this
Item.
|
(7)
|
Excludes
aircraft that were removed from service. Regional aircraft
include aircraft operated by all carriers under capacity purchase
agreements, but exclude any aircraft that were subleased to other
operators but not operated on our behalf.
|
(8)
|
The
average number of hours per day that an aircraft flown in revenue service
is operated (from gate departure to gate
arrival).
|
Reconciliation
of GAAP to non-GAAP Financial Measures
Non-GAAP financial measures are
presented because they provide management and investors the ability to measure
and monitor our performance on a consistent basis. Special items
relate to activities that are not central to our ongoing operations or are
unusual in nature. A reconciliation of net income (loss) to the
non-GAAP financial measure of net income (loss) excluding special items for the
year ended December 31 is as follows (in millions):
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||
Net
income (loss) excluding special items:
|
||||||||||||
Net
income (loss) – GAAP
|
$(282)
|
$(586)
|
$439
|
$335
|
$(75)
|
|||||||
Special
charges:
|
||||||||||||
Operating
(expense) income:
|
||||||||||||
Aircraft-related
charges
|
(89)
|
(40)
|
22
|
18
|
16
|
|||||||
Pension
settlement/curtailment charges
|
(29)
|
(52)
|
(31)
|
(59)
|
(83)
|
|||||||
Severance
|
(5)
|
(34)
|
-
|
-
|
-
|
|||||||
Route
impairment
|
(12)
|
(18)
|
-
|
-
|
-
|
|||||||
Other
|
(10)
|
(37)
|
(4)
|
14
|
-
|
|||||||
Other
special (expense) income items:
|
||||||||||||
Gains
on sale of investments
|
-
|
78
|
37
|
92
|
204
|
|||||||
Loss
on fuel hedge contracts with Lehman
Brothers
|
-
|
(125)
|
-
|
-
|
-
|
|||||||
Other-than-temporary
impairment of auction
rate
securities
|
-
|
(60)
|
-
|
-
|
-
|
|||||||
Fair
value of auction rate securities put right
received
|
-
|
26
|
-
|
-
|
-
|
|||||||
Income
tax benefit (expense):
|
||||||||||||
Intraperiod
tax allocation
|
158
|
-
|
-
|
-
|
-
|
|||||||
NOL
utilization
|
-
|
28
|
(114)
|
-
|
-
|
|||||||
Cumulative
effect of change in accounting
principal
|
-
|
-
|
-
|
(26)
|
-
|
|||||||
Total
special items – income (expense)
|
13
|
(234)
|
(90)
|
39
|
137
|
|||||||
Net
income (loss) excluding special items –
non-GAAP
|
$(295)
|
$(352)
|
$529
|
$296
|
$(212)
|
Cost per available seat mile (CASM) is
a common metric used in the airline industry to measure an airline’s cost
structure and efficiency. CASM trends can be distorted by items that
are not central to our ongoing operations or are unusual in
nature. Additionally, both the cost and availability of fuel are
subject to many economic and political factors beyond our
control. CASM excluding special charges and aircraft fuel and related
taxes provides management and investors the ability to measure our cost
performance absent special items and fuel price volatility. A
reconciliation
of GAAP
operating expenses used to determine CASM to the non-GAAP operating expenses
used to determine CASM excluding special charges and aircraft fuel and related
taxes for the year ended December 31 is as follows (in millions, except CASM
amounts):
2009
|
2008
|
2007
|
2006
|
2005
|
|||
Mainline
cost per available seat mile excluding special
charges
and aircraft fuel and related taxes:
|
|||||||
Operating
expenses – GAAP
|
$10,471
|
$12,753
|
$11,171
|
$10,314
|
$ 9,162
|
||
Special
charges:
|
|||||||
Aircraft-related
charges
|
(70)
|
(40)
|
22
|
18
|
16
|
||
Pension
settlement/curtailment charges
|
(29)
|
(52)
|
(31)
|
(59)
|
(83)
|
||
Severance
|
(5)
|
(34)
|
-
|
-
|
-
|
||
Route
impairment
|
(12)
|
(18)
|
-
|
-
|
-
|
||
Other
|
(9)
|
(11)
|
(4)
|
14
|
-
|
||
Aircraft
fuel and related taxes
|
(2,755)
|
(4,905)
|
(3,354)
|
(3,034)
|
(2,443)
|
||
Operating
expenses excluding above items –
non-GAAP
|
$ 7,591
|
$ 7,693
|
$ 7,804
|
$ 7,253
|
$ 6,652
|
||
Available
seat miles – mainline
|
97,407
|
102,527
|
103,139
|
97,667
|
89,647
|
||
CASM
– GAAP (cents)
|
10.75
|
12.44
|
10.83
|
10.56
|
10.22
|
||
CASM
excluding special charges and aircraft
fuel
and related taxes – non-GAAP (cents)
|
7.79
|
7.50
|
7.57
|
7.42
|
7.42
|
||
Consolidated
cost per available seat mile excluding
special
charges and aircraft fuel and related taxes:
|
|||||||
Operating
expenses – GAAP
|
$12,732
|
$15,555
|
$13,545
|
$12,660
|
$11,247
|
||
Special
charges:
|
|||||||
Aircraft-related
charges
|
(89)
|
(40)
|
22
|
18
|
16
|
||
Pension
settlement/curtailment charges
|
(29)
|
(52)
|
(31)
|
(59)
|
(83)
|
||
Severance
|
(5)
|
(34)
|
-
|
-
|
-
|
||
Route
impairment
|
(12)
|
(18)
|
-
|
-
|
-
|
||
Other
|
(10)
|
(37)
|
(4)
|
14
|
-
|
||
Aircraft
fuel and related taxes
|
(3,317)
|
(5,919)
|
(4,034)
|
(3,697)
|
(2,974)
|
||
Operating
expenses excluding above items –
non-GAAP
|
$ 9,270
|
$ 9,455
|
$ 9,498
|
$ 8,936
|
$ 8,206
|
||
Available
seat miles – consolidated
|
109,554
|
115,511
|
115,738
|
110,918
|
101,620
|
||
CASM
– GAAP (cents)
|
11.62
|
13.47
|
11.70
|
11.41
|
11.07
|
||
CASM
excluding special charges and aircraft
fuel
and related taxes – non-GAAP (cents)
|
8.46
|
8.19
|
8.21
|
8.06
|
8.08
|
The following discussion contains
forward-looking statements that are not limited to historical facts, but reflect
our current beliefs, expectations or intentions regarding future
events. All forward-looking statements involve risks and
uncertainties that could cause actual results to differ materially from those in
the forward-looking statements. For examples of those risks and
uncertainties, see the cautionary statements contained in Item 1A. “ Risk
Factors – Risk Factors Relating to the Company” and “Risk Factors – Risk Factors
Relating to the Airline Industry.” We undertake no obligation to
publicly update or revise any forward-looking statements to reflect events or
circumstances that may arise after the date of this report, except as required
by applicable law.
Overview
We recorded a net loss of $282 million
for the year ended December 31, 2009, as compared to a net loss of $586 million
for the year ended December 31, 2008. Our net loss in 2009 was
primarily the result of the global recession. Excluding special
items, we recorded a net loss of $295 million for the year ended December 31,
2009, compared to a net loss of $352 million for the year ended December 31,
2008. Net loss excluding special items is significant because it
provides management and investors the ability to measure and monitor our
performance on a consistent basis. Special items relate to activities
that are not central to our ongoing operations or are unusual in
nature. A reconciliation of our net loss to the non-GAAP financial
measure of net loss excluding special items is provided in Item
6. “Selected Financial Data.”
2009
Financial Highlights
·
|
Passenger
revenue decreased 18.9% during 2009 as compared to 2008, primarily due to
lower fares and less high-yield business traffic attributable to the
global recession.
|
·
|
Operating
income (loss), a key measure of our performance, improved to a loss of
$146 million in 2009 compared to a $314 million loss in 2008, primarily
due to lower fuel prices offset by lower revenue.
|
·
|
We
raised approximately $1.7 billion through the issuance of common stock,
enhanced equipment trust certificates and convertible debt and through
other new secured borrowings.
|
·
|
Unrestricted
cash, cash equivalents and short-term investments totaled $2.9 billion at
December 31, 2009, as compared to $2.6 billion at December 31,
2008.
|
2009
Operational Highlights
·
|
We
joined Star Alliance on October 27, 2009.
|
·
|
Consolidated
traffic decreased 3.8% and capacity decreased 5.2% during 2009 as compared
to 2008, resulting in a consolidated load factor of 81.4%, 1.2 points
higher than the prior year consolidated load factor.
|
·
|
We
recorded a DOT on-time arrival rate of 78.8% for Continental mainline
flights and a mainline segment completion factor of 99.5% for 2009,
compared to a DOT on-time arrival rate of 74.0% and a mainline segment
completion factor of 98.9% for 2008. We also operated 101 days
without a single mainline flight
cancellation.
|
·
|
We
placed into service 13 new Boeing 737-900ER, one new Boeing 737-800 and
one leased Boeing 757-300 aircraft and removed 20 Boeing 737-300 and eight
Boeing 737-500 aircraft from our mainline fleet. The average
age of our mainline fleet was nine years at December 31,
2009.
|
Outlook
The severe global economic recession
significantly diminished the demand for air travel beginning in the fourth
quarter of 2008 and disrupted the global capital markets, resulting in a
difficult financial environment for U.S. network carriers. Although
we have seen some indications that the airline industry may be experiencing the
early stages of a recovery, we cannot predict how quickly or fully demand for
air travel will recover, and continued weakness in such demand would hinder our
ability to achieve and sustain profitability. Moreover, although
access to the capital markets has improved over the past several months, as
evidenced by our recent financing transactions, we cannot give any assurances
that we will be able to obtain additional financing or otherwise access the
capital markets in the future on acceptable terms (or at all). We
must achieve and sustain profitability and/or access the capital markets to meet
our significant long-term debt and capital lease obligations and future
commitments for capital expenditures, including the acquisition of aircraft and
related spare engines.
Economic
Conditions. The severe economic recession in the U.S. and
global economies has had a significant negative impact on the demand for air
carrier services beginning in the fourth quarter of 2008. Passenger
revenue in 2009 for U.S. airlines, as reported by the Air Transport Association
of America, declined 18% compared to 2008. The decline in demand for
air travel in 2008 and 2009 disproportionately reduced the volume of high-yield
traffic, as many business travelers either curtailed their travel or purchased
lower yield economy tickets. Although recent improvements in
corporate bookings and revenue trends suggest that the airline industry may be
experiencing the early stages of a recovery, we cannot predict how quickly or
fully demand for air travel will recover. If global economic
conditions fail to improve or worsen, resulting in continuing demand weakness
and reduced revenues, we may be unable to offset the reduced revenues fully
through further cost and capacity reductions or other measures.
In addition to its effect on demand for
our services, the global economic recession severely disrupted the global
capital markets, resulting in a diminished availability of financing and higher
cost for financing that was obtainable. Although access to the
capital markets has improved over the past several months, as evidenced by our
recent financing transactions, if economic conditions again worsen or these
markets experience further disruptions, we may be unable to obtain financing on
acceptable terms (or at all) to refinance certain maturing debt we would
normally expect to refinance and to satisfy future capital
commitments.
Fuel
Costs. We benefited from significantly lower fuel costs during
2009. Our average consolidated (mainline and regional) jet fuel price
per gallon including related taxes decreased to $1.97 in 2009 from
$3.27 in 2008. If fuel prices rise significantly from their current
levels, we may be unable to raise fares or other fees sufficiently to offset
fully our increased costs.
In an effort to address the risk of
rising fuel prices, we enter into fuel hedging arrangements from time to time,
including collars that minimize the up-front costs. However, a
precipitous decline in crude oil prices, as experienced during the second half
of 2008, may result in significant costs to us in cases where our hedging
arrangements obligate us to make payments to the counterparties to the extent
that the price of crude falls below the applicable agreed-upon
amounts. Our hedge contracts for 2009, which were largely entered
into before oil prices fell, resulted in $0.23 per gallon of additional fuel
expense during 2009.
Based on our expected fuel consumption
in 2010, a one dollar change in the price of a barrel of crude oil would change
our annual fuel expense by approximately $41 million, assuming no changes to the
refining margins and our fuel hedging program. We believe that our
modern, fuel-efficient fleet continues to provide us with a competitive
advantage relative to our peers and a long-term hedge against rising fuel
prices.
Revenue-Generating and Cost
Saving Measures. In response to the significant decline in
revenue, we implemented a number of measures to raise revenues and reduce costs
that are designed to achieve approximately $100 million in annual benefits when
fully implemented in 2010. These measures included the elimination of
certain operational, management and clerical positions across the company during
2009. We also increased or implemented fees for certain services we
provide, including checked baggage.
Going forward, we intend to offer
additional goods and services relating to air travel that will permit customers
to select product attributes that they wish to consume, and pay for, and not
select other product attributes that they do not wish to consume or pay
for. A portion of the goods and services will come from “unbundling”
our current product, while another portion will come from goods and services
that we do not currently offer. The revenue that we derive from these
goods and services, which is generally referred to as ancillary revenue,
typically has higher margins than that of our core product and is an important
element of our strategy to return to profitability and sustain that
profitability.
Additionally, we will continue to
invest in technology designed to assist customers with
self-service. We believe that many of our customers desire more
control over their travel experience, and wish to use tools that will permit
them to do so through all phases of travel, from pre-purchase to
post-flight. We will also invest in technology designed to help us
make better operational decisions and more efficiently assist customers at
airports, while lowering our operating costs.
Capacity. Because
of the adverse economic conditions in 2009, we reduced our consolidated capacity
by 5.2% in 2009 and rescheduled aircraft deliveries. We do not
anticipate returning to significant capacity growth unless the level of demand
for air travel, economic conditions and our financial performance improve
sufficiently to justify such growth. We expect only modest capacity
growth for 2010, with our consolidated capacity increasing between 1.0% and
2.0%. We expect our mainline capacity to increase between 1.5% and
2.5%, with mainline domestic capacity remaining about flat and mainline
international capacity increasing between 4.0% and 5.0%. The
international capacity increase is primarily due to the run-rate of
international routes added in 2009 and the restoration of our schedule to Mexico
following our capacity reductions in 2009 related to the H1N1 flu
virus.
Our future ability to grow our capacity
could be adversely impacted by manufacturer delays in aircraft
deliveries. We currently expect the first of our 25 Boeing 787
aircraft to be delivered in the second half of 2011, approximately two and a
half years late.
Star
Alliance. On October 27, 2009, we joined Star Alliance and
implemented code-sharing and reciprocity of frequent flier programs, elite
customer recognition and airport lounge use with United, Lufthansa, Air Canada
and other Star Alliance members.
On July 10, 2009, the DOT approved our
application to join United and a group of eight other carriers within Star
Alliance that already hold antitrust immunity. This approval enables
us, United and these other immunized Star Alliance carriers to work closely
together to deliver highly competitive international flight schedules, fares and
service and provides competitive balance to antitrust-immunized carriers in
SkyTeam. Additionally, we, United, Lufthansa and Air Canada have
received final DOT approval to establish a trans-Atlantic joint venture to
create a more efficient and comprehensive trans-Atlantic network for our
respective customers, offering those customers more service, scheduling and
pricing options and establishing a framework for similar joint ventures in other
regions of the world. The DOT’s approval of antitrust immunity is
subject to certain conditions and limitations that are not expected to diminish
materially the benefits of our participation in Star Alliance or the
trans-Atlantic joint venture. On December 23, 2009, we, United and
ANA filed an application with the DOT for antitrust immunity to enable the three
carriers to establish a trans-Pacific joint venture, offering similar benefits
to our trans-Pacific customers. We are seeking a modification to our
pilot collective bargaining agreement to permit us to engage in revenue sharing
with a domestic air carrier, which is a component of the proposed joint
ventures.
The full implementation of some of the
arrangements relating to Star Alliance requires the approval of domestic and
foreign regulatory agencies. These agencies may deny us necessary
approvals, delay certain approvals or, in connection with granting any such
approvals, impose requirements, limitations or costs on us or on other Star
Alliance members, or require us or them to divest slots, gates, routes or other
assets. In certain cases, such actions could prevent us from
consummating the transactions contemplated by our alliance
agreements.
Labor
Costs. Our ability to achieve and sustain profitability also
depends on continuing our efforts to implement and maintain a more competitive
cost structure. Approximately 97% of our full-time equivalent
employees represented by unions as of December 31, 2009 are covered by
collective bargaining agreements that are currently amendable or become
amendable in 2010. In addition, on February 12, 2010, the National
Mediation Board informed us that our fleet service employees had voted in favor
of representation by the Teamsters. The election covers approximately
7,600 employees, or 6,340 full-time equivalent ramp, operations and cargo
agents. The collective bargaining agreements with our pilots,
mechanics and certain other work groups became amendable in December 2008 and
those with our flight attendants and CMI mechanics became amendable in December
2009. On July 6, 2009, our flight simulator technicians ratified a
new four-year collective bargaining agreement with us. With respect
to our workgroups with amendable contracts, we have been meeting with
representatives of the applicable unions to negotiate amended collective
bargaining agreements with a goal of reaching agreements that are fair to us and
to our employees, but to date the parties have not reached new
agreements. Negotiations often take considerable time. For
example, we began negotiating with our pilots’ union in February 2007, and we
only received their first economic proposal in December 2009. We
cannot predict the outcome of our ongoing negotiations with our unionized
workgroups, although significant increases in the pay and benefits resulting
from new collective bargaining agreements could have a material adverse effect
on us. Furthermore, there can be no assurance that our generally good
labor relations and high labor productivity can continue.
Results
of Operations
Special
Items. The comparability of our financial results between
years is affected by a number of special items. Our results for each
of the last three years include the following special items (in
millions):
Income
(Expense)
|
|||
2009
|
2008
|
2007
|
|
Operating
(expense) income:
|
|||
Aircraft-related
charges (1)
|
$ (89)
|
$ (40)
|
$ 22
|
Pension
settlement charges (2)
|
(29)
|
(52)
|
(31)
|
Severance
(1)
|
(5)
|
(34)
|
-
|
Route
impairment (3)
|
(12)
|
(18)
|
-
|
Other
(1)
|
(10)
|
(37)
|
(4)
|
Total
special charges classified as operating items
|
(145)
|
(181)
|
(13)
|
Nonoperating
(expense) income:
|
|||
Gains
on sales of investments (4)
|
-
|
78
|
37
|
Loss
on fuel hedge contracts with Lehman Brothers (5)
|
-
|
(125)
|
-
|
Other-than-temporary
impairment of auction rate securities (6)
|
-
|
(60)
|
-
|
Fair
value of auction rate securities put right received (6)
|
-
|
26
|
-
|
Total
special non-operating items
|
-
|
(81)
|
37
|
Income
tax benefit (expense):
|
|||
Intraperiod
tax allocation (7)
|
158
|
-
|
-
|
NOL
utilization (7)
|
-
|
28
|
(114)
|
Total
special items – income (expense)
|
$ 13
|
$(234)
|
$ (90)
|
(1)
|
See
Note 13 to our consolidated financial statements contained in Item 8 of
this report.
|
|
(2)
|
See
Note 11 to our consolidated financial statements contained in Item 8 of
this report.
|
|
(3)
|
See
Notes 1 and 2 to our consolidated financial statements contained in Item 8
of this report.
|
|
(4)
|
See
Note 14 to our consolidated financial statements contained in Item 8 of
this report.
|
|
(5)
|
See
Note 7 to our consolidated financial statements contained in Item 8 of
this report.
|
|
(6)
|
See
Note 6 to our consolidated financial statements contained in Item 8 of
this report.
|
|
(7)
|
See
Note 12 to our consolidated financial statements contained in Item 8 of
this report.
|
Comparison
of Year Ended December 31, 2009 to December 31, 2008
Consolidated Results of
Operations
Significant components of our
consolidated operating results for the year ended December 31 were as follows
(in millions, except percentage changes):
Increase
|
%
Increase
|
|||||||
2009
|
2008
|
(Decrease)
|
(Decrease)
|
|||||
Operating
revenue
|
$12,586
|
$15,241
|
$ (2,655)
|
(17.4)%
|
||||
Operating
expenses
|
12,732
|
15,555
|
(2,823)
|
(18.1)%
|
||||
Operating
loss
|
(146)
|
(314)
|
(168)
|
(53.5)%
|
||||
Nonoperating
income (expense)
|
(293)
|
(381)
|
(88)
|
(23.1)%
|
||||
Income
tax benefit
|
157
|
109
|
48
|
44.0
%
|
||||
Net
loss
|
$ (282)
|
$ (586)
|
$ (304)
|
(51.9)%
|
Each of these items is discussed in the
following sections.
Operating
Revenue. The table below shows components of operating revenue
for the year ended December 31, 2009 and period to period comparisons for
operating revenue, passenger revenue per available seat mile (“RASM”) and
available seat miles (“ASMs”) by geographic region for our mainline and regional
operations:
Revenue
|
%
Increase
(Decrease)
in
2009 vs
2008
|
|||||
(in
millions)
|
Revenue
|
RASM
|
ASMs
|
|||
Passenger
revenue:
|
||||||
Domestic
|
$ 4,581
|
(18.7)%
|
(12.6)%
|
(6.9)%
|
||
Trans-Atlantic
|
2,249
|
(24.6)%
|
(17.2)%
|
(8.9)%
|
||
Latin
America
|
1,483
|
(15.3)%
|
(16.0)%
|
0.9 %
|
||
Pacific
|
931
|
(8.4)%
|
(15.4)%
|
8.5 %
|
||
Total
Mainline
|
9,244
|
(18.8)%
|
(14.5)%
|
(5.0)%
|
||
Regional
|
1,894
|
(19.6)%
|
(14.0)%
|
(6.4)%
|
||
Total
|
11,138
|
(18.9)%
|
(14.5)%
|
(5.2)%
|
||
Cargo
|
366
|
(26.4)%
|
||||
Other
|
1,082
|
7.4 %
|
||||
Operating
revenue
|
$12,586
|
(17.4)%
|
Passenger revenue decreased
significantly in 2009 as compared to 2008 due to reduced traffic, less capacity
and lower RASM. The reduced traffic and lower RASM reflects lower
fares and less high-yield business traffic attributable to the global
recession. The decline in demand has disproportionately reduced the
volume of high-yield traffic, as many business travelers are either curtailing
their travel or purchasing lower yield economy tickets.
Cargo revenue decreased due to lower
fuel surcharge rates and decreased freight volume. Other revenue
increased due to the implementation of new fees for checking bags in 2008 and a
change in how certain costs are handled under our capacity purchase agreement
with ExpressJet, offset in part by a reduction in sublease income received from
ExpressJet and decreased revenue associated with sales of mileage credits in our
OnePass frequent flyer program and ticket change fees.
Operating
Expenses. The table below shows period-to-period comparisons
by type of operating expense for our consolidated operations for the year ended
December 31 (in millions, except percentage changes):
2009
|
2008
|
Increase
(Decrease)
|
%
Increase
(Decrease)
|
|||
Aircraft fuel and related
taxes
|
$3,317
|
$ 5,919
|
$(2,602)
|
(44.0)%
|
||
Wages, salaries and related
costs
|
3,137
|
2,957
|
180
|
6.1 %
|
||
Aircraft rentals
|
934
|
976
|
(42)
|
(4.3)%
|
||
Regional capacity purchase,
net
|
848
|
1,059
|
(211)
|
(19.9)%
|
||
Landing fees and other
rentals
|
841
|
853
|
(12)
|
(1.4)%
|
||
Distribution costs
|
624
|
717
|
(93)
|
(13.0)%
|
||
Maintenance, materials and
repairs
|
617
|
612
|
5
|
0.8
%
|
||
Depreciation and
amortization
|
494
|
438
|
56
|
12.8 %
|
||
Passenger services
|
373
|
406
|
(33)
|
(8.1)%
|
||
Special charges
|
145
|
181
|
(36)
|
NM
|
||
Other
|
1,402
|
1,437
|
(35)
|
(2.4)%
|
||
$12,732
|
$15,555
|
$(2,823)
|
(18.1)%
|
|||
NM
– Not meaningful
|
Operating expenses decreased 18.1%
primarily due to the following:
·
|
Aircraft fuel and
related taxes decreased due to a 39.8% decrease in consolidated jet
fuel prices and decreased flying. Our average jet fuel price
per gallon including related taxes decreased to $1.97 in 2009 from $3.27
in 2008. Our average jet fuel price includes losses related to
our fuel hedging program of $0.23 per gallon in 2009 compared to losses of
$0.10 per gallon in 2008.
|
·
|
Wages, salaries and
related costs increased primarily due to $155 million of higher
pension expense resulting primarily from lower returns on plan assets in
2008. Higher wage rates and health insurance costs were offset
by a 5% reduction in the number of full-time equivalent
employees.
|
·
|
Aircraft
rentals decreased due to the retirement of leased Boeing 737
aircraft in 2008 and 2009. New aircraft delivered in 2008 and
2009 were purchased, with the related expense being reported in
depreciation and amortization and interest expense.
|
·
|
Regional capacity
purchase, net, includes expenses related to our capacity purchase
agreements. Our most significant capacity purchase agreement is
with ExpressJet. We also have agreements with Chautauqua,
Colgan and CommutAir. The net amounts consisted of the
following for the year ended December 31 (in millions, except percentage
changes):
|
Increase
|
%
Increase
|
||||||||
2009
|
2008
|
(Decrease)
|
(Decrease)
|
||||||
Capacity
purchase expenses
|
$848
|
$1,181
|
$(333)
|
(28.2)%
|
|||||
Aircraft
sublease income
|
-
|
(122)
|
(122)
|
(100.0)%
|
|||||
Regional
capacity purchase, net
|
$848
|
$1,059
|
$(211)
|
(19.9)%
|
Capacity
purchase expenses decreased due to rate reductions in conjunction with our
amended capacity purchase agreement with ExpressJet effective July 1, 2008
and capacity reductions. There was no aircraft sublease income
in 2009 because ExpressJet no longer pays sublease rent for aircraft
operated on our behalf. Sublease income on aircraft that were
subleased to other operators, but not operated on our behalf, of $23
million and $76 million for 2009
and 2008, respectively, is recorded as other revenue.
|
|
·
|
Distribution
costs decreased due to lower credit card discount fees, booking
fees and travel agency commissions, all of which resulted from decreased
passenger revenue.
|
·
|
Depreciation and
amortization expense increased in 2009 due to higher capitalizable
project costs, acceleration of depreciation on exiting aircraft and
increased depreciation from new aircraft.
|
·
|
Passenger
services expenses decreased due to fewer meals and beverages in
2009 compared to 2008, resulting from the decreased demand for air travel
in the weak economy, and lower mishandled baggage
expenses.
|
·
|
Special
charges. See Note 13 to our consolidated financial
statements contained in Item 8 of this report for a discussion of the
special charges.
|
·
|
Other operating
expenses decreased due to insurance settlements received in 2009
related to Hurricane Ike, reduced technology expenses resulting from new
contracts, lower expense due to station closings, the impact on certain
expenses of more favorable foreign currency exchange rates, lower OnePass
reward expenses and lower ground handling, security and outside services
costs as a result of capacity reductions, partially offset by increases in
expenses resulting from changes in who is contractually responsible for
certain costs under our capacity purchase agreement with
ExpressJet.
|
Nonoperating Income
(Expense). Nonoperating expense decreased $88 million in 2009
compared 2008 due to the following:
·
|
Net interest
expense increased $44 million primarily as a result of lower
interest income.
|
·
|
Gain on sale of
investments in 2008 consisted of $78 million related to the sale of
our remaining interests in Copa.
|
·
|
Other-than-temporary
impairment losses on investments included a loss of $60
million in 2008 to reflect the decline in the value of our student
loan-related auction rate securities.
|
·
|
Other nonoperating
income (expense) included fuel hedge ineffectiveness gains of $7
million and $26 million in 2009
and 2008, respectively. The ineffectiveness was caused by our
non-jet fuel derivatives experiencing a higher relative increase in value
than the jet fuel being hedged. Other nonoperating income
(expense) in 2009 also included foreign exchange gains of $8 million,
compared to losses of $37 million in 2008, and an increase in the fair
value of the cash surrender value of company-owned life insurance
policies. Additionally, other nonoperating income (expense) in
2008 included $125 million expense related to changes in the fair value of
fuel derivative contracts with Lehman Brothers that were deemed
ineffective after Lehman Brothers declared bankruptcy and a gain of $26
million related to our receipt of a put right covering certain of the
student loan-related auction rate
securities.
|
Income
Taxes. We are required to consider all items (including items
recorded in other comprehensive income) in determining the amount of tax benefit
that results from a loss from continuing operations and that should be allocated
to continuing operations. As a result, we recorded a $158 million
non-cash tax benefit on the loss from continuing operations for 2009, which is
exactly offset by income tax expense on other comprehensive
income. However, while the income tax benefit from continuing
operations is reported in our consolidated statement of operations, the income
tax expense on other comprehensive income is recorded directly to other
comprehensive income, which is a component of stockholders’
equity. Because the income tax expense on other comprehensive income
is equal to the income tax benefit from continuing operations, our net deferred
tax position at December 31, 2009 is not impacted by this tax
allocation.
Excluding this special item, 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.
Segment
Results of Operations
We have two reportable
segments: mainline and regional. The mainline segment
consists of flights to cities using larger jets while the regional segment
currently consists of flights with a capacity of 79 or fewer
seats. As of December 31, 2009, the regional segment was operated by
ExpressJet, Chautauqua, CommutAir and Colgan through capacity purchase
agreements. Under these agreements, we purchase all of the capacity
related to aircraft covered by the contracts and are responsible for setting
prices and selling all of the related seat inventory. In exchange for
the regional carriers’ operation of the flights, we pay the regional carriers
for each scheduled block hour based on agreed formulas. Under the
agreements, we recognize all passenger, cargo and other revenue associated with
each flight, and are responsible for most revenue-related expenses, including
commissions, reservations and catering.
We evaluate segment performance based
on several factors, of which the primary financial measure is operating income
(loss). However, we do not manage our business or allocate resources
based on segment operating profit or loss because (1) our flight schedules are
designed to maximize revenue from passengers flying, (2) many operations of the
two segments are substantially integrated (for example, airport operations,
sales and marketing, scheduling and ticketing), and (3) management decisions are
based on their anticipated impact on the overall network, not on one individual
segment.
Mainline Results of
Operations. Significant components of our mainline segment’s
operating results for the year ended December 31 were as follows (in millions,
except percentage changes):
2009
|
2008
|
Increase
(Decrease)
|
%
Increase
(Decrease)
|
|||||
Operating
revenue
|
$10,635
|
$12,827
|
$(2,192)
|
(17.1)%
|
||||
Operating
expenses:
|
||||||||
Aircraft
fuel and related taxes
|
2,755
|
4,905
|
(2,150)
|
(43.8)%
|
||||
Wages,
salaries and related costs
|
2,968
|
2,850
|
118
|
4.1
%
|
||||
Aircraft
rentals
|
621
|
662
|
(41)
|
(6.2)%
|
||||
Landing
fees and other rentals
|
741
|
782
|
(41)
|
(5.2)%
|
||||
Distribution
costs
|
534
|
611
|
(77)
|
(12.6)%
|
||||
Maintenance,
materials and repairs
|
617
|
612
|
5
|
0.8 %
|
||||
Depreciation
and amortization
|
481
|
427
|
54
|
12.6 %
|
||||
Passenger
services
|
349
|
384
|
(35)
|
(9.1)%
|
||||
Special
charges
|
125
|
155
|
(30)
|
NM
|
||||
Other
|
1,280
|
1,365
|
(85)
|
(6.2)%
|
||||
10,471
|
12,753
|
(2,282)
|
(17.9)%
|
|||||
Operating
income
|
$ 164
|
$ 74
|
$ 90
|
121.6 %
|
The variances in specific line items
for the mainline segment were due to the same factors discussed under
consolidated results of operations.
Regional Results of
Operations. Significant components of our regional segment’s
operating results for the year ended December 31 were as follows (in millions,
except percentage changes):
Increase
|
%
Increase
|
|||||||
2009
|
2008
|
(Decrease)
|
(Decrease)
|
|||||
Operating
revenue
|
$1,951
|
$2,414
|
$(463)
|
(19.2)%
|
||||
Operating
expenses:
|
||||||||
Aircraft
fuel and related taxes
|
562
|
1,014
|
(452)
|
(44.6)%
|
||||
Wages,
salaries and related costs
|
169
|
107
|
62
|
57.9 %
|
||||
Aircraft
rentals
|
313
|
314
|
(1)
|
(0.3)%
|
||||
Regional
capacity purchase, net
|
848
|
1,059
|
(211)
|
(19.9)%
|
||||
Landing
fees and other rentals
|
100
|
71
|
29
|
40.8 %
|
||||
Distribution
costs
|
90
|
106
|
(16)
|
(15.1)%
|
||||
Depreciation
and amortization
|
13
|
11
|
2
|
18.2 %
|
||||
Passenger
services
|
24
|
22
|
2
|
9.1 %
|
||||
Special
charges
|
20
|
26
|
(6)
|
NM
|
||||
Other
|
122
|
72
|
50
|
69.4 %
|
||||
2,261
|
2,802
|
(541)
|
(19.3)%
|
|||||
Operating
loss
|
$ (310)
|
$(388)
|
$ (78)
|
(20.1)%
|
The reported results of our regional
segment do not reflect the total contribution of the regional segment to our
system-wide operations. The regional segment generates revenue for
the mainline segment as it feeds passengers from smaller cities into our
hubs. The variances in specific line items for the regional segment
reflect generally the same factors discussed under consolidated results of
operations, with the exception of wages, salaries and related costs, landing
fees and other rentals, passenger services and other operating
expenses. These expenses increased for the regional segment due to
changes in who is contractually responsible for certain costs under our capacity
purchase agreement with ExpressJet and the transition of management of certain
airports to us from ExpressJet.
Comparison
of Year Ended December 31, 2008 to December 31, 2007
Consolidated Results of
Operations
Significant components of our
consolidated operating results for the year ended December 31 were as follows
(in millions, except percentage changes):
Increase
|
%
Increase
|
|||||||
2008
|
2007
|
(Decrease)
|
(Decrease)
|
|||||
Operating
revenue
|
$15,241
|
$14,232
|
$ 1,009
|
7.1%
|
||||
Operating
expenses
|
15,555
|
13,545
|
2,010
|
14.8%
|
||||
Operating
income (loss)
|
(314)
|
687
|
(1,001)
|
NM
|
||||
Nonoperating
income (expense)
|
(381)
|
(131)
|
250
|
NM
|
||||
Income
tax benefit (expense)
|
109
|
(117)
|
226
|
NM
|
||||
Net
income (loss)
|
$ (586)
|
$ 439
|
$(1,025)
|
NM
|
Each of these items is discussed in the
following sections.
Operating
Revenue. The table below shows components of operating revenue
for the year ended December 31, 2008 and period to period comparisons for
operating revenue, RASM and ASMs by geographic region for our mainline and
regional operations:
Revenue
|
%
Increase
(Decrease)
in
2008 vs
2007
|
|||||
(in
millions)
|
Revenue
|
RASM
|
ASMs
|
|||
Passenger
revenue:
|
||||||
Domestic
|
$ 5,633
|
1.2 %
|
6.4 %
|
(4.9)%
|
||
Trans-Atlantic
|
2,983
|
11.6 %
|
2.5 %
|
8.9 %
|
||
Latin
America
|
1,750
|
12.1 %
|
9.4 %
|
2.5 %
|
||
Pacific
|
1,016
|
2.3 %
|
8.5 %
|
(5.6)%
|
||
Total
Mainline
|
11,382
|
5.4 %
|
6.0 %
|
(0.6)%
|
||
Regional
|
2,355
|
7.0 %
|
3.8 %
|
3.1 %
|
||
Total
|
13,737
|
5.7 %
|
5.9 %
|
(0.2)%
|
||
Cargo
|
497
|
9.7 %
|
||||
Other
|
1,007
|
28.4 %
|
||||
Operating
revenue
|
$15,241
|
7.1 %
|
Passenger revenue increased due to
increased international traffic on increased capacity and increased
fares. The improved RASM reflects our actions taken to increase fares
and implement more restrictions on low fare tickets, as well as our domestic
capacity reductions commenced in September 2008.
Cargo revenue increased due to higher
fuel surcharge rates and increased mail volume. Other revenue
increased due to higher revenue associated with sales of mileage credits on our
OnePass frequent flyer program, higher ticket change fees, the implementation of
new fees for checking bags and changes in how certain costs are handled under
the ExpressJet CPA.
Operating
Expenses. The table below shows period-to-period comparisons
by type of operating expense for our consolidated operations for the year ended
December 31 (in millions, except percentage changes):
2008
|
2007
|
Increase
(Decrease)
|
%
Increase
(Decrease)
|
|||
Aircraft fuel and related
taxes
|
$ 5,919
|
$ 4,034
|
$1,885
|
46.7 %
|
||
Wages, salaries and related
costs
|
2,957
|
3,127
|
(170)
|
(5.4)%
|
||
Aircraft rentals
|
976
|
994
|
(18)
|
(1.8)%
|
||
Regional capacity purchase,
net
|
1,059
|
1,113
|
(54)
|
(4.9)%
|
||
Landing fees and other
rentals
|
853
|
790
|
63
|
8.0 %
|
||
Distribution costs
|
717
|
682
|
35
|
5.1 %
|
||
Maintenance, materials and
repairs
|
612
|
621
|
(9)
|
(1.4)%
|
||
Depreciation and
amortization
|
438
|
413
|
25
|
6.1 %
|
||
Passenger services
|
406
|
389
|
17
|
4.4 %
|
||
Special charges
|
181
|
13
|
168
|
NM
|
||
Other
|
1,437
|
1,369
|
68
|
5.0 %
|
||
$15,555
|
$13,545
|
$2,010
|
14.8 %
|
Operating expenses increased 14.8%
primarily due to the following:
·
|
Aircraft fuel and
related taxes increased due to a 50.0% increase in jet fuel
prices. Our average jet fuel price per gallon including related
taxes increased to $3.27 in 2008 from $2.18 in 2007. Our
average jet fuel price includes losses related to our fuel hedging program
of $0.10 per gallon in 2008, compared to gains of $0.02 per gallon in
2007.
|
·
|
Wages, salaries and
related costs decreased primarily due to a $172 million decrease in
profit sharing expenses. Although the average number of full
time equivalent employees decreased approximately 1% in 2008, the impact
on expenses was offset by wage increases.
|
·
|
Aircraft
rentals decreased due to the retirement of several Boeing 737
aircraft. New aircraft delivered in 2008 were all purchased,
with the related expense being reflected in depreciation and
amortization.
|
·
|
Regional capacity
purchase, net includes expenses related to our capacity purchase
agreements. Our most significant capacity purchase agreement is
with ExpressJet. Regional capacity purchase, net is net of our
rental income on aircraft leased to ExpressJet and flown for us in 2007
and the first six months of 2008. Under the ExpressJet CPA,
ExpressJet no longer pays sublease rent for aircraft operated on our
behalf. The net amounts consisted of the following for the year
ended December 31 (in millions, except percentage
changes):
|
Increase
|
%
Increase
|
||||||||
2008
|
2007
|
(Decrease)
|
(Decrease)
|
||||||
Capacity
purchase expenses
|
$1,181
|
$1,379
|
$(198)
|
(14.4)%
|
|||||
Aircraft
sublease income
|
(122)
|
(266)
|
(144)
|
(54.1)%
|
|||||
Regional
capacity purchase, net
|
$1,059
|
$1,113
|
$ (54)
|
(4.9)%
|
|||||
Regional
capacity purchase, net did not change significantly compared to
2007. Sublease income on aircraft that were subleased to other
operators, but not operated on our behalf, of $76 million and $79 million
for 2008 and 2007, respectively, is recorded as other
revenue.
|
|||||||||
·
|
Landing fees and other
rentals increased primarily due to a higher number of international
flights and rate increases.
|
||||||||
·
|
Distribution
costs, which consist primarily of reservation booking fees, credit
card fees and commissions, increased due to a 5.7% increase in passenger
revenue.
|
||||||||
·
|
Other operating
expenses increased primarily due to a greater number of
international flights, which resulted in increased air navigation fees and
ground handling, security and related expenses, changes in who is
contractually responsible for certain costs under the ExpressJet CPA and
higher OnePass reward expenses.
|
||||||||
·
|
Special
charges. See Note 13 to our consolidated financial
statements contained in Item 8 of this report for a discussion of the
special charges.
|
Nonoperating Income
(Expense). Nonoperating income (expense) includes net interest
expense (interest expense less interest income and capitalized interest), gains
from dispositions of investments and any ineffectiveness of our derivative
financial instruments. Total nonoperating expense increased $250
million in 2008 compared to 2007 due to the following:
·
|
Net interest
expense increased $72 million primarily due to lower interest
income resulting from lower interest rates on investments and lower cash,
cash equivalents and short-term investments balances.
|
·
|
Gain on sale of
investments of $78 million in 2008 related to the sale of our
remaining interests in Copa. Gain on
sale of investments in 2007 consisted of $30 million related to the sale
of our interest in ARINC, Inc. (“ARINC”) and $7 million related to the
sale of our remaining interest in Holdings.
|
·
|
Other-than-temporary
impairment losses on investments included a loss of $60
million in 2008 to reflect the decline in the value of our student
loan-related auction rate securities.
|
·
|
Other nonoperating
income (expense) included $125 million expense related to changes
in the fair value of fuel derivative contracts with Lehman Brothers that
were deemed ineffective after Lehman Brothers declared bankruptcy in
2008. This account also includes other fuel hedge
ineffectiveness gains of $26 million and $14 million in 2008 and 2007,
respectively, caused by our non-jet fuel derivatives experiencing a higher
relative change in value than the jet fuel being hedged. Other
nonoperating income expense in 2008 also includes a gain of $26 million
related to our receipt of a put right covering certain of the student
loan-related auction rate securities.
Other
variances in other nonoperating income (expense) include $37 million of
foreign currency exchange losses in 2008 compared to gains of $2 million
in 2007, a $16 million increase in the fair value of the cash surrender
value of company owned life insurance policies in 2008 compared to a $3
million increase in 2007 and $6 million less equity in earnings of other
companies in 2008 compared to 2007 resulting from our decreased ownership
of Copa and Holdings.
|
Income
Taxes. In the fourth quarter of 2007, we recorded income tax
expense of $114 million to increase the valuation allowance to be fully reserved
for certain NOLs, expiring in 2008 through 2011, which more likely than not
would not be realized prior to their expiration. In the second
quarter of 2008, we recorded an income tax benefit of $28 million resulting from
higher utilization of those NOLs than had been previously
anticipated.
Segment
Results of Operations
Mainline Results of
Operations. Significant components of our mainline segment’s
operating results for the year ended December 31 were as follows (in millions,
except percentage changes):
2008
|
2007
|
Increase
(Decrease)
|
%
Increase
(Decrease)
|
|||||
Operating
revenue
|
$12,827
|
$12,019
|
$ 808
|
6.7 %
|
||||
Operating
expenses:
|
||||||||
Aircraft
fuel and related taxes
|
4,905
|
3,354
|
1,551
|
46.2 %
|
||||
Wages,
salaries and related costs
|
2,850
|
3,073
|
(223)
|
(7.3)%
|
||||
Aircraft
rentals
|
662
|
680
|
(18)
|
(2.6)%
|
||||
Landing
fees and other rentals
|
782
|
738
|
44
|
6.0 %
|
||||
Distribution
costs
|
611
|
583
|
28
|
4.8 %
|
||||
Maintenance,
materials and repairs
|
612
|
621
|
(9)
|
(1.4)%
|
||||
Depreciation
and amortization
|
427
|
400
|
27
|
6.8 %
|
||||
Passenger
services
|
384
|
374
|
10
|
2.7 %
|
||||
Special
charges
|
155
|
13
|
142
|
NM
|
||||
Other
|
1,365
|
1,335
|
30
|
2.2 %
|
||||
12,753
|
11,171
|
1,582
|
14.2 %
|
|||||
Operating
income
|
$ 74
|
$ 848
|
$(774)
|
(91.3)%
|
The variances in specific line items
for the mainline segment were due to the same factors discussed under
consolidated results of operations.
Regional Results of
Operations. Significant components of our regional segment’s
operating results for the year ended December 31 were as follows (in millions,
except percentage changes):
Increase
|
%
Increase
|
|||||||
2008
|
2007
|
(Decrease)
|
(Decrease)
|
|||||
Operating
revenue
|
$2,414
|
$2,213
|
$ 201
|
9.1 %
|
||||
Operating
expenses:
|
||||||||
Aircraft
fuel and related taxes
|
1,014
|
680
|
334
|
49.1 %
|
||||
Wages,
salaries and related costs
|
107
|
54
|
53
|
98.1 %
|
||||
Aircraft
rentals
|
314
|
314
|
-
|
-
|
||||
Regional
capacity purchase, net
|
1,059
|
1,113
|
(54)
|
(4.9)%
|
||||
Landing
fees and other rentals
|
71
|
52
|
19
|
36.5
%
|
||||
Distribution
costs
|
106
|
99
|
7
|
7.1 %
|
||||
Depreciation
and amortization
|
11
|
13
|
(2)
|
(15.4)%
|
||||
Passenger
services
|
22
|
15
|
7
|
46.7 %
|
||||
Special
charges
|
26
|
-
|
26
|
NM
|
||||
Other
|
72
|
34
|
38
|
NM
|
||||
2,802
|
2,374
|
428
|
18.0 %
|
|||||
Operating
loss
|
$(388)
|
$(161)
|
$(227)
|
NM
|
The reported results of our regional
segment do not reflect the total contribution of the regional segment to our
system-wide operations. The regional segment generates revenue for
the mainline segment as it provides flow traffic to our hubs. The
variances in material line items for the regional segment reflect generally the
same factors discussed under consolidated results of operations and changes in
who is contractually responsible for certain costs under the ExpressJet
CPA.
Liquidity
and Capital Resources
As of December 31, 2009, we had $2.9
billion in unrestricted cash, cash equivalents and short-term investments, which
is $213 million higher than at December 31, 2008. At December 31,
2009, we also had $164 million of restricted cash, cash equivalents and
short-term investments, which is primarily collateral for estimated future
workers’ compensation claims, credit card processing contracts, letters of
credit and performance bonds. Restricted cash, cash equivalents and
short-term investments at December 31, 2008 totaled $190 million. The
decrease in restricted cash is primarily the result of the substitution of cash
collateral for student loan-related auction rate securities previously posted as
collateral under our workers’ compensation program. The use of cash
as collateral lowered the amount required to be posted.
As is the case with many of our
principal competitors, we have a high proportion of debt compared to our
capital. We have a significant amount of fixed obligations, including
debt, aircraft leases and financings, leases of airport property and other
facilities and pension funding obligations. At December 31, 2009, we
had approximately $6.3 billion of debt and capital lease obligations, including
$2.1 billion that will come due by the end of 2011 (consisting of $1.0 billion
during 2010 and $1.1 billion during 2011). In addition, we have
substantial non-cancelable commitments for capital expenditures, including the
acquisition of new aircraft and related spare engines.
We do not currently have any undrawn
lines of credit or revolving credit facilities and most of our otherwise readily
financeable assets are encumbered. The global economic recession
severely disrupted the global capital markets, resulting in a diminished
availability of financing and higher cost for financing that was
obtainable. Although access to the capital markets has improved over
the past several months, as evidenced by our recent financing transactions, we
cannot give any assurances that we will be able to obtain additional financing
or otherwise access the capital markets in the future on acceptable terms (or at
all). We must achieve and sustain profitability and/or access the
capital markets to meet our significant long-term debt and capital lease
obligations and future commitments for capital expenditures, including the
acquisition of aircraft and related spare engines.
Operating
Activities. Net cash flows provided by operations for the year
ended December 31, 2009 were $362 million, an improvement of $686 million from
the $324 million in net cash used by operating activities in
2008. The increase in cash flows provided by operations in 2009
compared to 2008 is primarily the result of an improvement in operating
results. Our operating loss was $168 million lower in 2009 than in
2008. Also, operating cash flows in 2008 were negatively impacted by
our posting $171 million of cash collateral related to our fuel hedges, which
were in a net liability position at December 31, 2008.
Investing
Activities. Cash flows used in investing activities for the
year ended December 31 were as follows (in millions):
Cash
|
||||||
Increase
|
||||||
2009
|
2008
|
(Decrease)
|
||||
Capital
expenditures
|
$(381)
|
$(373)
|
$ (8)
|
|||
Aircraft
purchase deposits refunded (paid), net
|
29
|
102
|
(73)
|
|||
(Purchase)
sale of short-term investments, net
|
180
|
115
|
65
|
|||
Proceeds
from sales of investments, net
|
30
|
171
|
(141)
|
|||
Expenditures
for airport operating rights
|
(22)
|
(131)
|
109
|
|||
Proceeds
from sales of property and equipment
|
64
|
113
|
(49)
|
|||
Decrease
(increase) in restricted cash, cash equivalents
and
short-term investments
|
26
|
(13)
|
39
|
|||
Other
cash flows from investing activities
|
(4)
|
-
|
(4)
|
|||
Net
cash used in investing activities
|
$ (78)
|
$ (16)
|
$ (62)
|
Capital expenditures for 2009 consisted
of $264 million of fleet expenditures and $117 million of non-fleet
expenditures. Fleet expenditures in 2009 included the portion of the
aircraft purchase price in excess of financings, the installation of winglets,
the installation of Audio Video on Demand entertainment systems and flat-bed
BusinessFirst seats for certain Boeing 777 and 757 aircraft and flight
simulators and training equipment. The 2009 non-fleet expenditures
were primarily for Star Alliance-related costs, ground service equipment and
technology and terminal enhancements.
We have substantial commitments for
capital expenditures, including for the acquisition of new
aircraft. As of December 31, 2009, we had firm commitments to
purchase 84 new Boeing aircraft scheduled for delivery from 2010 through 2016,
with an estimated aggregate cost of $5.1 billion including related spare
engines. In addition to our firm order aircraft, we had options to
purchase a total of 98 additional Boeing aircraft as of December 31,
2009. Projected net capital expenditures for 2010 are as follows (in
millions):
Fleet
related (excluding aircraft to be acquired through the issuance of
debt)
|
$265
|
Non-fleet
|
140
|
Net
capital expenditures
|
$405
|
Aircraft
purchase deposits
|
25
|
Projected
net capital expenditures
|
$430
|
Projected fleet expenditures include
the portion of the aircraft purchase price in excess of financings, flight
simulators and training equipment related to Boeing 787 aircraft, aircraft
reconfigurations and other product enhancements including winglet installations,
Audio Video on Demand systems, flat-bed BusinessFirst seats and in-seat power
installations. Projected non-fleet capital expenditures are primarily
for Star Alliance-related costs and technology and terminal
enhancements. While some of our projected capital expenditures are
related to projects we have committed to, a significant number of projects can
be deferred. Should economic conditions warrant, we will reduce our
capital expenditures, and expect to be able to do so without materially
impacting our operations.
Net purchase deposits refunded were
lower in 2009 as the result of fewer aircraft deliveries in 2009 than in
2008.
Proceeds from sales of short-term
investments were higher in 2009 than in 2008 due to the conversion of short-term
investments to cash and cash equivalents.
We sold eight Boeing 737-500 aircraft
to foreign buyers during 2009 and received cash proceeds of $53 million, in
addition to deposits received in 2008. We sold one grounded Boeing
737-500 aircraft to a foreign buyer in February 2010 and we have agreements to
sell the three remaining grounded Boeing 737-500 aircraft to foreign
buyers. These sales are subject to customary closing conditions, some
of which are outside of our control, and we cannot give any assurances that the
buyers of these aircraft will be able to obtain financing for these
transactions, that there will not be delays in deliveries or that the closing of
these transactions will occur. We hold cash deposits that secure the
buyers’ obligations under the aircraft sale contracts, and we are entitled to
damages under the aircraft sale contract if the buyers do not take delivery of
the aircraft when required.
Expenditures for airport operating
rights relate to our acquisition of slots at London’s Heathrow
Airport.
Financing
Activities. Cash flows provided by financing activities for
the year ended December 31 were as follows (in millions):
Cash
|
||||||
Increase
|
||||||
2009
|
2008
|
(Decrease)
|
||||
Payments
on long-term debt and capital lease obligations
|
$(610)
|
$(641)
|
$ 31
|
|||
Proceeds
from issuance of long-term debt, net
|
538
|
642
|
(104)
|
|||
Proceeds
from public offering of common stock, net
|
158
|
358
|
(200)
|
|||
Proceeds
from issuance of common stock pursuant to stock plans
|
11
|
18
|
(7)
|
|||
Net
cash provided by financing activities
|
$ 97
|
$ 377
|
$(280)
|
Debt Secured by
Aircraft. In April 2007, we obtained financing for 12 Boeing
737-800s and 18 Boeing 737-900ERs. We applied this financing to 30
Boeing aircraft delivered to us in 2008 and 2009 and recorded related debt of
$1.1 billion, including $121 million recorded in 2009 and $1.0 billion recorded
in 2008.
On July 1, 2009, we obtained financing
for 12 currently owned Boeing aircraft and five new Boeing 737-900ER
aircraft. An enhanced equipment trust raised $390 million through the
issuance of a single class of enhanced equipment trust certificates bearing
interest at 9%. During 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 five new
Boeing 737-900ER aircraft, resulting in proceeds of $141 million to finance the
purchase of the aircraft. Principal payments on the equipment notes
and the corresponding distribution of these payments to certificate holders are
scheduled from January 2010 through July 2016.
In November 2009, we obtained financing
for eight currently owned Boeing aircraft, nine new Boeing 737-800 aircraft and
two new Boeing 777 aircraft. These aircraft are expected to be
refinanced or delivered by August 31, 2010. In connection with this
financing, enhanced equipment trusts raised $644 million through the issuance of
two classes of enhanced equipment trust certificates. Class A
certificates, with an aggregate principal amount of $528 million, bear interest
at 7.25% and Class B certificates, with an aggregate principal amount of $117
million, bear interest at 9.25%. The proceeds from the sale of the
certificates are initially being held by a depositary in escrow for the benefit
of the certificate holders until we issue equipment notes to the trust, which
will purchase such notes with a portion of the escrowed funds. These
escrowed funds are not guaranteed by us and are not reported as debt on our
consolidated balance sheet because the proceeds held by the depositary are not
our assets. Any unused proceeds will be distributed directly to the
certificate holders. Principal payments on the equipment notes and
the corresponding distribution of these payments to certificate holders will
begin in November 2010 and will end in November 2019 for Class A certificates
and in May 2017 for Class B certificates.
During 2009, we entered into loan
agreements under which we borrowed $180 million. This indebtedness is
secured by five new Boeing 737-900ER aircraft and two Boeing 737-800 aircraft
that this debt refinanced. During 2008, we obtained $268 million
through three separate financings secured by two new Boeing 737-900ER aircraft,
seven Boeing 757-200 aircraft and five Boeing 737-700 aircraft.
We have backstop financing available
for the three other Boeing 737 aircraft
scheduled for delivery in 2010, subject to customary closing
conditions. However, we do not have backstop financing or any other
financing currently in place for the balance of the Boeing aircraft on
order. Further financing will be needed to satisfy our capital
commitments for our firm order aircraft and other related capital
expenditures. We can provide no assurance that the backstop financing
or any other financing not already in place for our aircraft deliveries will be
available to us when needed on acceptable terms or at all. Since the
commitments for firm order aircraft are non-cancelable, and assuming no breach
of the agreement by Boeing, if we are unable to obtain financing and cannot
otherwise satisfy our commitment to purchase these aircraft, the manufacturer
could exercise its rights and remedies under applicable law, such as seeking to
terminate the contract for a material breach, selling the aircraft to one or
more other parties and suing us for damages to recover any resulting losses
incurred by the manufacturer.
Other Financing
Activities. In December 2009, we issued $230 million in
principal amount of 4.5% convertible notes and received proceeds of $224
million. The notes mature on January 15, 2015 and are convertible
into our Class B common stock at an initial conversion price of approximately
$19.87 per share. We do not have the option to pay the conversion
price in cash; however, holders of the notes may 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. The conversion price
may also be adjusted within a specified range in certain circumstances if a
change in control of Continental occurs.
On December 30, 2009, we entered into
an amendment of our Debit Card Marketing Agreement with JPMorgan Chase Bank,
N.A. (“JP Morgan Chase”) under which JP Morgan Chase purchases frequent flyer
mileage credits to be earned by One Pass members for making purchases using a
Continental branded debit card issued by JP Morgan Chase. The
agreement provides for a payment to us of $40 million in early 2010 for the
advance purchase of frequent flyer mileage credits beginning January 1, 2016, or
earlier in certain circumstances. The purchase of mileage credits has
been treated as a loan from JP Morgan Chase with an implicit interest rate of
5.5% and is reported as long-term debt in our consolidated balance
sheet.
On June 10, 2008, we entered into an
amendment and restatement of our Bankcard Agreement with Chase, under which
Chase purchases frequent flyer mileage credits to be earned by OnePass members
for making purchases using a Continental branded credit card issued by
Chase. The Bankcard Agreement provides for a payment to us of $413
million, of which $235 million relates to the advance purchase of frequent flyer
mileage credits for the year 2016 and the balance of which is in consideration
for certain other commitments with respect to the co-branding relationship,
including the extension of the term of the Bankcard Agreement until December 31,
2016. In connection with the advance purchase of mileage credits, we
have provided a security interest to Chase in certain routes and slots,
including certain slots at London’s Heathrow Airport. The $235
million purchase of mileage credits has been treated as a loan from Chase with
an implicit interest rate of 6.18% and is reported as long-term debt in our
consolidated balance sheet. Our liability will be reduced ratably in
2016 as the mileage credits are issued to Chase.
In August 2009, we completed a public
offering of 14 million shares of our common stock at a price to the public of
$11.20 per share, raising net proceeds of $158 million for general corporate
purposes. We received net proceeds of $358 million in 2008 from
public offerings totaling 24 million shares of our common stock.
Liquidity and Credit Support
Providers. We have utilized proceeds from the issuance of
enhanced equipment trust certificates to finance the acquisition of 246 leased
and owned mainline jet aircraft, certain spare engines and certain spare
parts. Typically, these enhanced equipment trust certificates contain
liquidity facilities whereby a third party agrees to make payments sufficient to
pay at least 18 months of interest on the applicable certificates if a payment
default occurs. The liquidity providers for these certificates
include the following: Credit Agricole S.A., Landesbank
Hessen-Thuringen Girozentrale, Morgan Stanley Capital Services, Morgan Stanley
Bank, Westdeutsche Landesbank Girozentrale, AIG Matched Funding Corp., ABN AMRO
Bank N.V., Credit Suisse, Caisse des Depots et Consignations, Bayerische
Landesbank Girozentrale, ING Bank N.V., De Nationale Investeringsbank N.V.,
Natixis S.A. and RZB Finance LLC.
We are also the issuer of enhanced
equipment trust certificates secured by 135 leased regional jet aircraft
currently operated by ExpressJet. The liquidity providers for these
certificates include the following: ABN AMRO Bank N.V., Chicago Branch, Citibank
N.A., Citicorp North America, Inc., Landesbank Baden-Wurttemberg, RZB Finance
LLC and WestLB AG, New York Branch.
We currently utilize policy providers
to provide credit support on three separate financings with an outstanding
principal balance of $452 million at December 31, 2009. The policy
providers have unconditionally guaranteed the payment of interest on the notes
when due and the payment of principal on the notes no later than 24 months after
the final scheduled payment date. Policy providers on these notes are
Ambac Assurance Corporation (a subsidiary of Ambac Financial Group, Inc.) and
Financial Guaranty Insurance Company (a subsidiary of
FGIC). Financial information for the parent company of Ambac
Assurance Corporation is available over the internet at the SEC’s website at
www.sec.gov or at the SEC’s public reference room in Washington, D.C. and
financial information for FGIC is available over the internet at
www.fgic.com. A policy provider is also used as credit support for
the financing of certain facilities at Houston Bush, currently subject to a
sublease by us to the City of Houston, with an outstanding balance of $42
million at December 31, 2009.
Contractual
Obligations. The following table summarizes the effect that
minimum debt, lease and other material noncancelable commitments listed below
are expected to have on our future cash flows (in millions):
Contractual
Obligations
|
Payments
Due
|
Later
Years
|
|||||
Total
|
2010
|
2011
|
2012
|
2013
|
2014
|
||
Long-term
debt (1)
|
$
7,632
|
$1,254
|
$ 1,380
|
$ 767
|
$ 811
|
$ 474
|
$2,946
|
Capital
lease obligations (1)
|
466
|
17
|
16
|
16
|
16
|
16
|
385
|
Aircraft
operating leases (2)
|
8,145
|
994
|
977
|
948
|
933
|
904
|
3,389
|
Nonaircraft
operating leases (3)
|
5,830
|
462
|
426
|
513
|
376
|
359
|
3,694
|
Capacity
purchase agreements (4)
|
4,306
|
693
|
693
|
704
|
683
|
649
|
884
|
Aircraft
and other purchase
commitments
(5)
|
5,393
|
712
|
855
|
646
|
723
|
903
|
1,554
|
Projected
pension contributions (6)
|
1,393
|
119
|
132
|
179
|
161
|
160
|
642
|
Total
(7)
|
$33,165
|
$4,251
|
$4,479
|
$3,773
|
$3,703
|
$3,465
|
$13,494
|
(1)
|
Represents
contractual amounts due, including interest. Interest on
floating rate debt was estimated using rates in effect at December 31,
2009.
|
(2)
|
Represents
contractual amounts due and excludes $139 million of projected sublease
income to be received on aircraft that are subleased to other operators,
but not operated on our behalf.
|
(3)
|
Represents
minimum contractual amounts.
|
(4)
|
Represents
our estimates of future minimum noncancelable commitments under our
capacity purchase agreements and does not include the portion of the
underlying obligations for aircraft leased to ExpressJet or deemed to be
leased from Chautauqua, CommutAir or Colgan and facility rent that is
disclosed as part of aircraft and nonaircraft operating
leases. See Note 16 to our consolidated financial statements
contained in Item 8 of this report for the significant assumptions used to
estimate the payments.
|
(5)
|
Represents
contractual commitments for firm order aircraft and spare engines only,
net of previously paid purchase deposits, and noncancelable commitments to
purchase goods and services, primarily information technology
support. See Note 19 to our consolidated financial statements
contained in Item 8 of this report for a discussion of our purchase
commitments.
|
(6)
|
Represents
our estimate of the minimum funding requirements as determined by
government regulations. Amounts are subject to change based on
numerous assumptions, including the performance of the assets in the plan
and bond rates. See “Critical Accounting Policies and
Estimates” in this Item for a discussion of our assumptions regarding our
pension plans.
|
(7)
|
Total contractual obligations do not include long-term contracts where the
commitment is variable in nature, such as credit card processing
agreements and cost-per-hour
engine maintenance agreements, or where short-term cancellation
provisions exist.
|
We expect to fund our future capital
and purchase commitments through internally generated funds, general company
financings and aircraft financing transactions. However, especially
if there are any further disruptions in the global capital markets as
experienced in late 2008 and into 2009, there can be no assurance that
sufficient financing will be available for all aircraft and other capital
expenditures or that, if necessary, we will be able to defer or otherwise
renegotiate our capital commitments.
Other
Liquidity Matters
See the indicated notes to our
consolidated financial statements contained in Item 8. “Financial
Statements and Supplementary Data” of this report for the following other
matters affecting our liquidity and commitments.
Long-term
debt and related covenants
|
Note
4
|
Operating
Leases
|
Note
5
|
Investment
in student loan-related auction rate securities
|
Note
6
|
Fuel
hedges
|
Note
7
|
Pension
obligations
|
Note
11
|
Regional
capacity purchase agreements
|
Note
16
|
Guarantees
and Indemnifications, credit card processing agreements, credit
ratings
and
environmental liabilities
|
Note
19
|
An off-balance sheet arrangement is any
transaction, agreement or other contractual arrangement involving an
unconsolidated entity under which a company has (1) made guarantees, (2) a
retained or a contingent interest in transferred assets, (3) an obligation under
derivative instruments classified as equity or (4) any obligation arising out of
a material variable interest in an unconsolidated entity that provides
financing, liquidity, market risk or credit risk support to the company, or that
engages in leasing, hedging or research and development arrangements with the
company.
We have no arrangements of the types
described in the first three categories that we believe may have a material
current or future effect on our results of operations. Certain
guarantees that we do not expect to have a material current or future effect on
our results of operations, financial condition or liquidity are disclosed in
Note 19 to our consolidated financial statements contained in Item 8 of this
report.
We do have obligations arising out of
variable interests in unconsolidated entities. See Note 15 to our
consolidated financial statements contained in Item 8 of this report for a
discussion of our off-balance sheet aircraft leases, airport leases (which
include the US Airways contingent liability), subsidiary trust and our capacity
purchase agreement with ExpressJet.
Our consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of our consolidated financial
statements requires us to make estimates and judgments that affect the reported
amount of assets and liabilities, revenues and expenses and related disclosure
of contingent assets and liabilities at the date of our financial
statements. Actual results may differ from these estimates under
different assumptions or conditions.
Critical accounting policies are
defined as those that are reflective of significant judgments and uncertainties,
and potentially result in materially different results under different
assumptions and conditions. We believe that our critical accounting
policies are limited to those described below. For a detailed
discussion on the application of these and other accounting policies, see Note 1
to our consolidated financial statements contained in Item 8 of this
report.
Pension
Plans. We account for our defined benefit pension plans in
accordance with Accounting Standards Codification (“ASC”) Subtopic 715-30,
“Defined Benefit Plans – Pension.” Under this guidance, pension
expense is recognized on an accrual basis over employees’ approximate service
periods. We recognized expense for our defined benefit pension plans
totaling $279 million, $147 million and $191 million in 2009, 2008 and 2007,
respectively, including settlement charges. We currently expect our
expense related to our defined benefit pension plans to be approximately $215
million in 2010.
Our plans’ under-funded status was $1.3
billion at December 31, 2009 and $1.4 billion at December 31,
2008. Funding requirements for tax-qualified defined benefit pension
plans are determined by government regulations. During 2009, we
contributed $176 million to our tax-qualified defined benefit pension plans,
satisfying our minimum funding requirements during calendar year
2009. We contributed an additional $34 million to our tax-qualified
defined benefit pension plans in January 2010. We estimate that our
remaining minimum funding requirements during calendar year 2010 are
approximately $85 million.
The fair value of our plans’ assets
increased from $1.1 billion at December 31, 2008 to $1.4 billion at December 31,
2009. When calculating pension expense for 2009, we assumed that our
plans’ assets would generate a long-term rate of return of 8.25%. We
assumed a long-term rate of return for calculating pension expense in 2008 and
2007 of 8.5% and 8.26%, respectively. We develop our expected
long-term rate of return assumption based on historical experience and by
evaluating input from the trustee managing the plans’ assets. Our expected long-term
rate of return on plan assets is based on a target allocation of assets, which
is based on our goal of earning the highest rate of return while maintaining
risk at acceptable levels. Our projected long-term rate of return is
slightly higher than some market indices due to the active management of our
plans’ assets, and is supported by the historical returns on our plans’
assets. The plans strive to have assets sufficiently diversified so
that adverse or unexpected results from one security class will not have an
unduly detrimental impact on the entire portfolio. We regularly
review our actual asset allocation and the pension plans’ investments are
periodically rebalanced to our targeted allocation when considered
appropriate.
The defined benefit pension plans’
assets consist primarily of equity and fixed-income securities held through
common collective trusts. Equity securities include investments in
large-cap and small-cap companies. Fixed-income securities include
corporate bonds of companies in diversified industries and asset- and
mortgage-backed securities. Investments in equity securities and
fixed-income securities are commingled funds valued at the unit of participation
value of shares held by the plans’ trust. The private equity funds
invest primarily in common stock of companies in diversified industries and in
buyout, venture capital and special situation funds. Investments in
private equity funds are valued at the net asset value of shares held by the
plans’ trust at year end. Our allocation of assets was as follows at
December 31, 2009:
Percent of
Total
|
Expected
Long-Term
Rate
of Return
|
|||
Equity
securities:
|
||||
U.S.
companies
|
48%
|
8%
|
||
International
companies
|
21
|
9
|
||
Fixed-income
securities
|
21
|
5
|
||
Private
equity funds
|
10
|
11
|
Pension expense increases as the
expected rate of return on plan assets decreases. When calculating
pension expense for 2010, we will assume that our plans' assets will generate a
weighted-average long-term rate of return of 8.0%. The decrease of 25
basis points from the rate used to determine 2009 expense reflects lower
expected returns on investments due to the global recession. Lowering
the expected long-term rate of return on our plan assets by an additional 50
basis points (from 8.0% to 7.5%) would increase our estimated 2010 pension
expense by approximately $7 million.
We discounted our future pension
obligations using a weighted average rate of 6.01% at December 31, 2009,
compared to 6.13% at December 31, 2008. We determine the appropriate
discount rate for each of our plans based on current rates on high quality
corporate bonds that would generate the cash flow necessary to pay plan benefits
when due. This approach can result in different discount rates for
different plans, depending on each plan's projected benefit
payments. The pension liability and future pension expense both
increase as the discount rate is reduced. Lowering the discount rate
by 50 basis points (from 6.01% to 5.51%) would increase our pension liability at
December 31, 2009 by approximately $243 million and increase our
estimated 2010 pension expense by approximately $30 million.
At December 31, 2009, we have
unrecognized net actuarial losses of $1.2 billion related to our defined benefit
pension plans. Our estimated 2010 expense related to our defined
benefit pension plans of $215 million includes the recognition of approximately
$87 million of these losses.
Future changes in plan asset returns,
plan provisions, assumed discount rates, pension funding law and various other
factors related to the participants in our pension plans will impact our future
pension expense and liabilities. We cannot predict with certainty
what these factors will be in the future.
Revenue
Recognition. We recognize passenger revenue when
transportation is provided or when the ticket expires unused, rather than when a
ticket is sold. Revenue is recognized for unused non-refundable
tickets on the date of the intended flight if the passenger did not notify us of
his or her intention to change the itinerary.
The amount of passenger ticket sales
not yet recognized as revenue is included in our consolidated balance sheets as
air traffic and frequent flyer liability. We perform periodic
evaluations of the estimated liability for passenger ticket sales and any
adjustments, which can be significant, are included in results of operations for
the periods in which the evaluations are completed. These adjustments
relate primarily to differences between our statistical estimation of certain
revenue transactions and the related sales price, as well as refunds, exchanges,
interline transactions and other items for which final settlement occurs in
periods subsequent to the sale of the related tickets at amounts other than the
original sales price.
Ticket change fees relate to
non-refundable tickets, but are considered a separate transaction from the air
transportation because they represent a charge for our additional service to
modify a previous sale. Ticket change fees are recognized as other
revenue in our consolidated statement of operations at the time the fees are
assessed.
Frequent Flyer
Accounting. For those OnePass accounts that have sufficient
mileage credits to claim the lowest level of free travel, we record a liability
for either the estimated incremental cost of providing travel awards that are
expected to be redeemed with us or the contractual rate of expected redemption
on alliance carriers. Incremental cost includes the cost of fuel,
meals, insurance and miscellaneous supplies, less any fees charged to the
passenger for redeeming the rewards, but does not include any costs for aircraft
ownership, maintenance, labor or overhead allocation. We recorded an
adjustment of $27 million to increase passenger revenue and reduce our frequent
flyer liability during 2008 for the impact of redemption fees after we increased
them during 2008. A change to these cost estimates, the actual
redemption activity, the amount of redemptions on alliance carriers or the
minimum award level could have a significant impact on our liability in the
period of change as well as future years. The liability is adjusted
periodically based on awards earned, awards redeemed, changes in the incremental
costs and changes in the OnePass
program,
and is included in the accompanying consolidated balance sheets as air traffic
and frequent flyer liability. Changes in the liability are recognized
as passenger revenue in the period of change.
We also sell mileage credits in our
frequent flyer program to participating entities, such as credit/debit card
companies, alliance carriers, hotels, car rental agencies, utilities and various
shopping and gift merchants. Revenue from the sale of mileage credits
is deferred and recognized as passenger revenue over the period when
transportation is expected to be provided, based on estimates of its fair
value. Amounts received in excess of the expected transportation's
fair value are recognized in income currently and classified as other
revenue. A change to the time period over which the mileage credits
are used (currently six to 26 months), the actual redemption activity or our
estimate of the amount or fair value of expected transportation could have a
significant impact on our revenue in the year of change as well as future
years.
Prior to joining Star Alliance in
October 2009, we based our estimate of the fair value of transportation related
to frequent flyer miles sold on the rates we charged other
airlines. In connection with joining Star Alliance, we changed our
estimate of the related transportation’s fair value to be based on the rate that
is equivalent to the fare of a round trip ticket with restrictions similar to a
frequent flyer reward. We made this change due to the disparate
values of rates charged in reciprocal agreements with other Star Alliance
members. The resulting fair values are generally higher than under
our former estimates and will result in a larger portion of sales of OnePass
miles being deferred and then amortized into passenger revenue and a lower
portion being recognized as other revenue.
During the year ended December 31,
2009, OnePass participants claimed approximately 1.3 million round-trip
awards. Frequent flyer awards accounted for an estimated 6.0% of our
consolidated revenue passenger miles. We believe displacement of
revenue passengers is minimal given our ability to manage frequent flyer
inventory and the low ratio of OnePass award usage to revenue passenger
miles.
At December 31, 2009, we estimated that
approximately 2.6 million free round-trip travel awards outstanding were
expected to be redeemed for free travel on Continental, Continental Express,
Continental Connection, CMI or alliance airlines. Our total liability
for future OnePass award redemptions for free travel and unrecognized revenue
from sales of OnePass miles to other companies was approximately $348 million at
December 31, 2009. This liability is recognized as a component of air
traffic and frequent flyer liability in our consolidated balance
sheets.
Fair Value
Measurements. We have certain assets and liabilities that are
measured at fair value on a recurring basis. ASC Subtopic 820, “Fair
Value Measurements and Disclosures” (“ASC Topic 820”), clarifies that fair value
is an exit price, representing the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants based on the highest and best use of the asset or
liability. As such, fair value is a market-based measurement that
should be determined based on assumptions that market participants would use in
pricing an asset or liability. 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
|
We have three items that are classified
as Level 3: auction rate securities, a put right on certain
auction rate securities and fuel hedging derivatives. The
determination of the fair value of these items requires us to make critical
assumptions.
Student Loan-Related Auction
Rate Securities and Put Right. At December 31, 2009, we held
student loan-related auction rate securities with a fair value of $201 million
and a par value of $252 million. These securities were classified as
follows (in millions):
Fair
Value
|
Par
Value
|
Amortized
Cost
|
||||
Short-term
investments:
|
||||||
Available-for-sale
|
$136
|
$166
|
$136
|
|||
Trading
|
65
|
86
|
N/A
|
|||
Total
|
$201
|
$252
|
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 totaling $60 million during 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 for
available-for-sale securities 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 $201 million at December 31, 2009, taking into consideration
the limited sales and offers to purchase securities and using
internally-developed models of the expected future cash flows related to the
securities. Our models incorporated our probability-weighted
assumptions about the cash flows of the underlying student loans and discounts
to reflect a lack of liquidity in the market for these securities.
In addition, 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 2009, we sold, at par, auction
rate securities having a par value of $40 million. Most of these
securities were sold to the institution that had granted us the put
right. We recognized gains on the sales using the specific
identification method and recorded losses for the cancellation of the related
put rights. The net gains are included in other non-operating income
(expense) in our consolidated statement of operations and 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.
Property and
Equipment. As of December 31, 2009, the net carrying amount of
our property and equipment was $7.4 billion, which represents 58% of our total
assets. In addition to the original cost of these assets, the net
carrying amount of our property and equipment is impacted by a number of
accounting policy elections, including estimates, assumptions and judgments
relative to capitalized costs, the estimation of useful lives and residual
values and, when necessary, the recognition of asset impairment
charges. Our property and equipment accounting policies are designed
to depreciate our assets over their estimated useful lives and residual values
of our aircraft, reflecting both historical experience and expectations
regarding future operations, utilization and performance of our
assets.
In addition, our policies are designed
to appropriately and consistently capitalize costs incurred to enhance, improve
and extend the useful lives of our assets and expense those costs incurred to
repair and maintain the existing condition of our
aircraft. Capitalized costs increase the carrying values and
depreciation expense of the related assets, which also impact our results of
operations.
Useful lives of aircraft are difficult
to estimate due to a variety of factors, including technological advances that
impact the efficiency of aircraft, changes in market or economic conditions and
changes in laws or regulations affecting the airline industry. We
evaluate the remaining useful lives of our aircraft when certain events occur
that directly impact our assessment of the remaining useful lives of the
aircraft and include changes in operating condition, functional capability and
market and economic factors. Both depreciable lives and residual
values are regularly reviewed for our aircraft and spare parts to recognize
changes in our fleet plan and other relevant information. Jet
aircraft and rotable spare parts are assumed to have estimated residual values
of 15% and 10%, respectively, of original cost; other categories of property and
equipment are assumed to have no residual value. A one year increase
in the useful lives of our owned aircraft would reduce annual depreciation
expense by approximately $12 million while a one year decrease would increase
annual depreciation expense by approximately $12 million. A one
percent decrease in residual value of our owned aircraft would increase annual
depreciation expense by approximately $2 million.
Impairments of Long-Lived
Assets. We record impairment losses on long-lived assets,
consisting principally of property and equipment and domestic airport operating
rights, when events or changes in circumstances indicate, in management's
judgment, that the assets might be impaired and the undiscounted cash flows
estimated to be generated by those assets are less than the carrying amount of
those assets. Our cash flow estimates are based on historical results
adjusted to reflect our best estimate of future market and operating
conditions. The net carrying value of assets not recoverable is
reduced to fair value if lower than the carrying value. In
determining the fair market value of the assets, we consider market trends,
recent transactions involving sales of similar assets and, if necessary,
estimates of future discounted cash flows.
We recorded a $31 million impairment
charge on the Boeing 737-300 and 737-500 fleets in 2009 related to our decision
in June 2008 to retire all of our Boeing 737-300 aircraft and a significant
portion of our Boeing 737-500 fleet by early 2010. We recorded an
initial impairment charge in 2008 for each of these fleet types. The
additional write-down in 2009 reflects the further reduction in the fair value
of these fleet types in the then 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 $39 million of other
charges related to our mainline fleet, primarily related to the grounding and
sale of Boeing 737-300 and 737-500 aircraft and the write-off of certain
obsolete spare parts. The 737-300 and 737-500 aircraft fleets and
spare parts, a portion of which was being sold on consignment, experienced
further declines in fair values during the fourth quarter of 2009 primarily as
the result of additional 737 aircraft being grounded by other
airlines.
At December 31, 2009, we had four owned
and three leased Boeing 737-500 aircraft that were grounded. We had
also grounded seven owned and three leased Boeing 737-300
aircraft. The owned Boeing 737-500 and 737-300 aircraft are being
carried at aggregate fair values of $33 million and $22 million,
respectively. The three leased Boeing 737-300 aircraft were returned
to the lessor in January 2010 and the leases on the three Boeing 737-500
aircraft will expire during the first half of 2012. We have also
temporarily grounded 25 leased 37-seat ERJ-135 aircraft and have subleased five
others for terms of five years. The leases on these 30 ERJ-135
aircraft expire in 2016 through 2018.
We provide an allowance for spare parts
inventory obsolescence over the remaining useful life of the related aircraft,
plus allowances for spare parts currently identified as excess. These
allowances are based on our estimates and industry trends, which are subject to
change and, where available, reference to market rates and
transactions. The estimates are more likely to change when we near
the end of a fleet life or when we remove entire fleets from service sooner than
originally planned.
Impairments of Intangible
Assets. We also perform annual impairment tests on our routes
and international airport landing slots, which are indefinite life intangible
assets, as of October 1 of each year. 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.
Our international route assets were
recorded as part of our “fresh start” accounting when we emerged from bankruptcy
in1993 rather than as the result of purchase transactions. These
assets include both the value of the route and operating rights at the
destination airports. Therefore, we consider the fair values of both
the route authority and the airport operating rights when performing the annual
impairment test for these assets. 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. As a result, we
recorded a $12 million non-cash special charge in 2009 to write off our
international routes to certain locations in Mexico and Central
America.
The other intangible assets established
in 1993 were routes and airport operating rights for Paris, Madrid, Mexico City,
Tokyo and CMI’s network in the Pacific rim and Japan. In addition, we
have acquired intangible assets in recent years through the purchase of slots at
London’s Heathrow Airport. The carrying value of these
indefinite-lived intangible assets was $701 million at December 31,
2009. There have not been many market transactions involving these
assets upon which to base fair values. Therefore, we determined the
fair value of these assets using a discounted cash flow model based on our
internal cash flow projections adjusted, where necessary, for differences
between our underlying assumptions and those of other market
participants.
As a result of our analysis, we
concluded that there was no impairment of our routes and international landing
slots other than the $12 million we wrote off for routes having no fair
value. Our analysis required us to make a number of assumptions about
our future cash flows, our cost of capital and how other market participants
would value the assets. While we believe that our assumptions are
appropriate, changes in the assumptions could have a material effect on the
results of our analysis and our conclusions.
In 2008, we recorded an $18 million
non-cash charge to write off an intangible route asset as a result of our
decision to move all of our flights between New York Liberty and London from
London Gatwick Airport to London Heathrow Airport.
See Note 2 to our consolidated
financial statements contained in Item 8 of this report for a discussion of
recently issued accounting standards.
Related
Party Transactions
See Note 17 to our consolidated
financial statements contained in Item 8 of this report for a discussion of
related party transactions.
Market
Risk Sensitive Instruments and Positions
We are subject to certain market risks,
including commodity price risk (i.e., aircraft fuel prices), interest rate risk,
foreign currency risk and price changes related to certain investments in debt
and equity securities. The adverse effects of potential changes in
these market risks are discussed below. The sensitivity analyses
presented do not consider the effects that such adverse changes may have on
overall economic activity nor do they consider additional actions we may take to
mitigate our exposure to such changes. Actual results may
differ. See the notes to our consolidated financial statements
contained in Item 8 of this report for a description of our accounting policies
and other information related to these financial instruments. We do
not hold or issue derivative financial instruments for trading
purposes.
Aircraft
Fuel. Our results of operations are significantly impacted by
changes in the price of aircraft fuel. During 2009 and 2008, aircraft
fuel and related taxes accounted for 26.0% and 38.0%, respectively, of our
operating expenses. Based on our expected fuel consumption in 2010, a
one dollar increase in the price of crude oil will increase our annual fuel
expense by approximately $41 million, before assuming no changes to the refining
margins and our fuel hedging program.
We routinely hedge a portion of our
future fuel requirements, provided the hedges are expected to be cost
effective. We have historically entered into swap agreements or
purchased call options to protect us against sudden and significant increases in
jet fuel prices. We conduct our fuel hedging activities using a
combination of jet fuel, crude oil and heating oil contracts. We
strive to maintain fuel hedging levels and exposure generally comparable to that
of our major competitors, so that our fuel cost is not disproportionate to
theirs.
As of December 31, 2009, our projected
fuel requirements for 2010 were hedged as follows:
Maximum
Price
|
Minimum
Price
|
|||||||
%
of
Expected
Consumption
|
Weighted
Average
Price
(per
gallon)
|
%
of
Expected
Consumption
|
Weighted
Average
Price
(per
gallon)
|
|||||
Gulf
Coast jet fuel swaps
|
1%
|
$1.94
|
1%
|
$1.94
|
||||
WTI
crude oil swaps
|
2
|
1.84
|
2
|
1.84
|
||||
WTI
crude oil call options
|
4
|
2.20
|
N/A
|
N/A
|
||||
Total
|
7%
|
3%
|
At December 31, 2009, the fair value of
our fuel derivatives was $14 million and is included in prepayments and other
current assets in our consolidated balance sheet. We estimate that a
10% decrease in the price of crude oil and heating oil at December 31, 2009
would decrease the fair value of the fuel derivatives outstanding at that date
by approximately $20 million.
At
December 31, 2008, our fuel derivatives were in a net loss position of $415
million resulting from the substantial decline in crude oil
prices. This fair value is reported in accrued other current
liabilities in our consolidated balance sheet.
Because our fuel hedges were in a net
liability position at December 31, 2008, we were required to post cash
collateral with our counterparties totaling $171 million. These
amounts are reported in prepayments and other current assets in our consolidated
balance sheet.
Foreign
Currency. We are exposed to the effect of exchange rate
fluctuations on the U.S. dollar value of foreign currency denominated operating
revenue and expenses. 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.
At December 31, 2009, we had forward
contracts outstanding to hedge 30% of our projected Japanese yen-denominated
cash inflows, primarily from passenger ticket sales, through 2010. At
December 31, 2009, the fair value of those hedges was $5 million and is included
in prepayments and other current assets in our consolidated balance
sheet. We estimate that a uniform 10% strengthening in the value of
the U.S. dollar relative to the Japanese yen at December 31, 2009 would increase
the fair value for our yen hedges by $9 million and decrease our underlying
exposure by $31 million, resulting in a net loss of $22 million.
At December 31, 2008, we had forward
contracts outstanding to hedge the following cash inflows (primarily from
passenger ticket sales) in foreign currencies:
·
|
36%
of our projected Japanese yen-denominated cash inflows in
2009
|
·
|
6%
of our projected euro-denominated cash inflows in
2009
|
At December 31, 2008, the fair value of
our foreign currency hedges was $(8) million and is included in accrued other
liabilities in our consolidated balance sheet.
Interest
Rates. Our results of operations are affected by fluctuations
in interest rates (e.g., interest expense on variable-rate debt and interest
income earned on short-term investments). We had approximately $2.0
billion of variable-rate debt as of December 31, 2009 and December 31,
2008. If average interest rates increased by 100 basis points during
2010 as compared to 2009, our projected 2010 interest expense would increase by
approximately $19 million after taking into account scheduled
maturities.
As of December 31, 2009 and 2008, we
estimated the fair value of $4.1 billion and $3.7 billion (carrying value) of
our fixed-rate debt to be $4.0 billion and $3.0 billion, respectively, based
upon discounted future cash flows using our current incremental borrowing rates
for similar types of instruments or market prices. If market interest
rates increased 100 basis points at December 31, 2009, the fair value of our
fixed-rate debt would decrease by approximately $106 million.
A change in market interest rates would
also impact interest income earned on our cash, cash equivalents and short-term
investments. Assuming our cash, cash equivalents and short-term
investments remain at their average 2009 levels, a 100 basis point increase or
decrease in interest rates would result in a corresponding increase or decrease
in interest income of approximately $26 million during 2010.
Investment
Risk. Our short-term investments primarily include
certificates of deposit placed through an account registry service ("CDARS") and
auction rate securities. While the CDARS are insured by the Federal
Deposit Insurance Corporation and the auction rate securities are secured by
pools of student loans guaranteed by state-designated guaranty agencies and
reinsured by the U.S. government, we are subject to investment risk for the fair
value of the investments. Our short-term investments had a fair value
of $310 million at December 31, 2009, including amounts that were classified as
restricted cash, cash equivalents and short-term investments.
Our defined benefit plans had assets
with a fair value of $1.4 billion at December 31, 2009, compared to a fair value
of $1.1 billion at December 31, 2008. A significant portion of
the plans' assets consists of U.S. and international equities held through
common collective trusts. Lower asset values can result in higher
required contributions and pension expense in future years and a decrease in our
stockholders' equity.
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, 2009 and 2008, and the related consolidated statements of
operations, common stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 2009. 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 the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of the Company at December 31, 2009 and
2008, and the consolidated results of its operations and its cash flows for each
of the three years in the period ended December 31, 2009, in conformity
with U.S. generally accepted accounting principles.
We also have audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United
States), the Company's internal control over financial reporting as of December
31, 2009, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 17, 2010 expressed an unqualified
opinion thereon.
ERNST &
YOUNG LLP
Houston,
Texas
February
17, 2010
CONTINENTAL
AIRLINES, INC.
(In
millions, except per share data)
Year
Ended December 31,
|
|||
2009
|
2008
|
2007
|
|
Operating
Revenue:
|
|||
Passenger (excluding fees and
taxes of $1,476, $1,531 and $1,499,
respectively)
|
$11,138
|
$13,737
|
$12,995
|
Cargo
|
366
|
497
|
453
|
Other
|
1,082
|
1,007
|
784
|
Total Operating
Revenue
|
12,586
|
15,241
|
14,232
|
Operating
Expenses:
|
|||
Aircraft fuel and related
taxes
|
3,317
|
5,919
|
4,034
|
Wages, salaries and related
costs
|
3,137
|
2,957
|
3,127
|
Aircraft
rentals
|
934
|
976
|
994
|
Regional capacity purchase,
net
|
848
|
1,059
|
1,113
|
Landing fees and other
rentals
|
841
|
853
|
790
|
Distribution
costs
|
624
|
717
|
682
|
Maintenance, materials and
repairs
|
617
|
612
|
621
|
Depreciation and
amortization
|
494
|
438
|
413
|
Passenger
services
|
373
|
406
|
389
|
Special charges
|
145
|
181
|
13
|
Other
|
1,402
|
1,437
|
1,369
|
Total Operating
Expenses
|
12,732
|
15,555
|
13,545
|
Operating
Income (Loss)
|
(146)
|
(314)
|
687
|
Nonoperating
Income (Expense):
|
|||
Interest
expense
|
(367)
|
(376)
|
(393)
|
Interest
capitalized
|
33
|
33
|
27
|
Interest income
|
12
|
65
|
160
|
Gains on sale of
investments
|
-
|
78
|
37
|
Other-than-temporary impairment
losses on investments
|
-
|
(60)
|
-
|
Other, net
|
29
|
(121)
|
38
|
Total Nonoperating Income
(Expense)
|
(293)
|
(381)
|
(131)
|
Income
(Loss) before Income Taxes
|
(439)
|
(695)
|
556
|
Income
Tax Benefit (Expense)
|
157
|
109
|
(117)
|
Net
Income (Loss)
|
$ (282)
|
$ (586)
|
$ 439
|
(continued
on next page)
CONTINENTAL
AIRLINES, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
millions, except per share data)
Year
Ended December 31,
|
|||
2009
|
2008
|
2007
|
|
Earnings
(Loss) per Share:
|
|||
Basic
|
$(2.18)
|
$(5.54)
|
$4.53
|
Diluted
|
$(2.18)
|
$(5.54)
|
$4.05
|
Shares
Used for Computation:
|
|||
Basic
|
129
|
106
|
97
|
Diluted
|
129
|
106
|
114
|
The
accompanying Notes to Consolidated Financial Statements are an integral part of
these statements.
CONTINENTAL
AIRLINES, INC.
(In
millions, except for share data)
December
31,
|
||||
ASSETS
|
2009
|
2008
|
||
Current
Assets:
|
||||
Cash and cash
equivalents
|
$ 2,546
|
$ 2,165
|
||
Short-term
investments
|
310
|
478
|
||
Total unrestricted cash, cash
equivalents and short-term investments
|
2,856
|
2,643
|
||
Restricted cash, cash equivalents
and short-term investments
|
164
|
190
|
||
Accounts receivable, net of
allowance for doubtful receivables of $7 and $7
|
494
|
453
|
||
Spare parts and supplies, net of
allowance for obsolescence of $113 and $102
|
254
|
235
|
||
Deferred income
taxes
|
203
|
216
|
||
Prepayments and
other
|
402
|
610
|
||
Total current
assets
|
4,373
|
4,347
|
||
Property
and Equipment:
|
||||
Owned property and
equipment:
|
||||
Flight equipment
|
8,769
|
8,446
|
||
Other
|
1,787
|
1,694
|
||
Flight equipment and
other
|
10,556
|
10,140
|
||
Less: Accumulated
depreciation
|
3,509
|
3,229
|
||
Owned property and equipment,
net
|
7,047
|
6,911
|
||
Purchase deposits for flight
equipment
|
242
|
275
|
||
Capital leases
|
194
|
194
|
||
Less: Accumulated
amortization
|
63
|
53
|
||
Capital leases,
net
|
131
|
141
|
||
Total property and
equipment, net
|
7,420
|
7,327
|
||
Routes
and airport operating rights, net of accumulated amortization of
$389
and
$375
|
778
|
804
|
||
Other
assets, net
|
210
|
208
|
||
Total
Assets
|
$12,781
|
$12,686
|
(continued
on next page)
CONTINENTAL
AIRLINES, INC.
(In
millions, except for share data)
December
31,
|
||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
2009
|
2008
|
||
Current
Liabilities:
|
||||
Current maturities of long-term
debt and capital leases
|
$ 975
|
$ 519
|
||
Accounts payable
|
924
|
1,021
|
||
Air traffic and frequent flyer
liability
|
1,855
|
1,881
|
||
Accrued payroll
|
367
|
345
|
||
Accrued other
liabilities
|
268
|
708
|
||
Total current
liabilities
|
4,389
|
4,474
|
||
Long-Term
Debt and Capital Leases
|
5,291
|
5,353
|
||
Deferred
Income Taxes
|
203
|
216
|
||
Accrued
Pension Liability
|
1,248
|
1,417
|
||
Accrued
Retiree Medical Benefits
|
216
|
234
|
||
Other
Liabilities
|
844
|
869
|
||
Commitments
and Contingencies
|
||||
Stockholders'
Equity:
|
||||
Class B common stock - $.01 par,
400,000,000 shares authorized;
138,537,127 and 123,264,534
shares issued and outstanding
|
1
|
1
|
||
Additional paid-in
capital
|
2,216
|
2,038
|
||
Accumulated
deficit
|
(442)
|
(160)
|
||
Accumulated other comprehensive
loss
|
(1,185)
|
(1,756)
|
||
Total stockholders'
equity
|
590
|
123
|
||
Total
Liabilities and Stockholders' Equity
|
$12,781
|
$12,686
|
The
accompanying Notes to Consolidated Financial Statements are an integral part of
these statements.
CONTINENTAL
AIRLINES, INC.
(In
millions)
Year
Ended December 31,
|
|||
2009
|
2008
|
2007
|
|
Cash
Flows from Operating Activities:
|
|||
Net income
(loss)
|
$ (282)
|
$ (586)
|
$ 439
|
Adjustments to reconcile net
income (loss) to net cash provided by
operating
activities:
|
|||
Depreciation and
amortization
|
494
|
438
|
413
|
Special charges
|
145
|
181
|
13
|
Deferred income tax (benefit)
expense
|
(158)
|
(111)
|
111
|
Gains on sale of
investments
|
-
|
(78)
|
(37)
|
Loss on fuel hedge contracts
with Lehman Brothers
|
-
|
125
|
-
|
Other-than-temporary losses on
investments
|
-
|
60
|
-
|
Stock-based compensation
related to equity awards
|
9
|
16
|
27
|
Other adjustments,
net
|
55
|
(14)
|
50
|
Changes in operating assets and
liabilities:
|
|||
(Increase) decrease in accounts
receivable
|
12
|
147
|
(29)
|
(Increase) decrease in spare
parts and supplies
|
(34)
|
5
|
(66)
|
(Increase) decrease in
prepayments and other assets
|
206
|
(167)
|
16
|
Increase (decrease) in accounts
payable
|
(104)
|
(10)
|
71
|
Increase (decrease) in air
traffic and frequent flyer liability
|
(26)
|
(86)
|
255
|
Increase (decrease) in accrued
payroll, pension liability and other
|
45
|
(244)
|
(130)
|
Net cash (used in) provided by
operating activities
|
362
|
(324)
|
1,133
|
Cash
Flows from Investing Activities:
|
|||
Capital
expenditures
|
(381)
|
(373)
|
(329)
|
Aircraft purchase deposits
refunded (paid), net
|
29
|
102
|
(219)
|
(Purchase) sale of short-term
investments, net
|
180
|
115
|
(314)
|
Proceeds from sales of
investments, net
|
30
|
171
|
65
|
Expenditures for airport
operating rights
|
(22)
|
(131)
|
(116)
|
Proceeds from sales of property
and equipment
|
64
|
113
|
67
|
Decrease (increase) in
restricted cash, cash equivalents and short-term
investments
|
26
|
(13)
|
86
|
Other cash flows from investing
activities
|
(4)
|
-
|
-
|
Net cash used in investing
activities
|
(78)
|
(16)
|
(760)
|
Cash
Flows from Financing Activities:
|
|||
Payments on long-term debt and
capital lease obligations
|
(610)
|
(641)
|
(429)
|
Proceeds from issuance of
long-term debt, net
|
538
|
642
|
26
|
Proceeds from public offering
of common stock, net
|
158
|
358
|
-
|
Proceeds from issuance of
common stock pursuant to stock plans
|
11
|
18
|
35
|
Net cash provided by (used in)
financing activities
|
97
|
377
|
(368)
|
Net
Increase in Cash and Cash Equivalents
|
381
|
37
|
5
|
Cash
and Cash Equivalents - Beginning of Period
|
2,165
|
2,128
|
2,123
|
Cash
and Cash Equivalents - End of Period
|
$2,546
|
$2,165
|
$2,128
|
(continued
on next page)
CONTINENTAL
AIRLINES, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
millions)
Year
Ended December 31,
|
|||
2009
|
2008
|
2007
|
|
Supplemental
Cash Flows Information:
|
|||
Interest paid
|
$ 326
|
$ 365
|
$ 383
|
Income taxes
paid
|
$ 1
|
$ 5
|
$ 2
|
Investing and Financing
Activities Not Affecting Cash:
|
|||
Property and equipment acquired
through the issuance of debt
|
$ 402
|
$1,014
|
$ 190
|
Reduction of debt in exchange
for sale of frequent flyer miles
|
$ -
|
$ (38)
|
$ (37)
|
Transfer of auction rate
securities from available-for-sale to trading
|
$ -
|
$ 97
|
$ -
|
Common stock issued upon
conversion of 4.5% convertible notes
|
$ -
|
$ -
|
$ 170
|
The
accompanying Notes to Consolidated Financial Statements are an integral part of
these statements.
CONTINENTAL
AIRLINES, INC.
(In
millions)
Retained
|
Accumulated
|
|||||||||
Class
B
|
Additional
|
Earnings
|
Other
|
|||||||
Common
Stock
|
Paid-In
|
(Accumulated
|
Comprehensive
|
|||||||
Shares
|
Amount
|
Capital
|
Deficit)
|
Income
(Loss)
|
Total
|
|||||
Balance
at December 31, 2006
|
92
|
$ 1
|
$1,411
|
$ (13)
|
$(1,013)
|
$ 386
|
||||
Net
income
|
-
|
-
|
-
|
439
|
-
|
439
|
||||
Other
comprehensive income:
|
||||||||||
Net
change in unrealized gain
(loss)
on derivative instruments
|
-
|
-
|
-
|
-
|
45
|
45
|
||||
Net
change related to employee
benefit
plans
|
-
|
-
|
-
|
-
|
463
|
463
|
||||
Total
Comprehensive Income
|
947
|
|||||||||
Conversion
of 4.5%
convertible
notes
|
4
|
-
|
174
|
-
|
-
|
174
|
||||
Issuance
of common stock
pursuant
to stock plans
|
2
|
-
|
35
|
-
|
-
|
35
|
||||
Stock-based
compensation
|
-
|
-
|
27
|
-
|
-
|
27
|
||||
Balance
at December 31, 2007
|
98
|
1
|
1,647
|
426
|
(505)
|
1,569
|
||||
Net
loss
|
-
|
-
|
-
|
(586)
|
-
|
(586)
|
||||
Other
comprehensive loss:
|
||||||||||
Net
change in unrealized gain
(loss)
on derivative instruments
and
other
|
-
|
-
|
-
|
-
|
(441)
|
(441)
|
||||
Net
change related to employee
benefit
plans
|
-
|
-
|
-
|
-
|
(810)
|
(810)
|
||||
Total
Comprehensive Loss
|
(1,837)
|
|||||||||
Issuance
of common stock
pursuant
to stock plans
|
1
|
-
|
17
|
-
|
-
|
17
|
||||
Issuance
of common stock
pursuant
to stock offerings
|
24
|
-
|
358
|
-
|
-
|
358
|
||||
Stock-based
compensation
|
-
|
-
|
16
|
-
|
-
|
16
|
||||
Balance
at December 31, 2008
|
123
|
1
|
2,038
|
(160)
|
(1,756)
|
123
|
(continued
on next page)
CONTINENTAL
AIRLINES, INC.
CONSOLIDATED
STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
(In
millions)
Retained
|
Accumulated
|
|||||||||
Class
B
|
Additional
|
Earnings
|
Other
|
|||||||
Common
Stock
|
Paid-In
|
(Accumulated
|
Comprehensive
|
|||||||
Shares
|
Amount
|
Capital
|
Deficit)
|
Income
(Loss)
|
Total
|
|||||
Net
loss
|
-
|
-
|
-
|
(282)
|
-
|
(282)
|
||||
Other
comprehensive income:
|
||||||||||
Net
change in unrealized gain
(loss)
on derivative instruments
and
other
|
-
|
-
|
-
|
-
|
424
|
424
|
||||
Net
change related to employee
benefit
plans
|
-
|
-
|
-
|
-
|
305
|
305
|
||||
Tax
expense on other
comprehensive
income
|
-
|
-
|
-
|
-
|
(158)
|
(158)
|
||||
Total
Comprehensive Income
|
289
|
|||||||||
Issuance
of common stock
pursuant
to stock plans
|
2
|
-
|
11
|
-
|
-
|
11
|
||||
Issuance
of common stock
pursuant
to stock offerings
|
14
|
-
|
158
|
-
|
-
|
158
|
||||
Stock-based
compensation
|
-
|
-
|
9
|
-
|
-
|
9
|
||||
Balance
at December 31, 2009
|
139
|
$ 1
|
$2,216
|
$(442)
|
$(1,185)
|
$ 590
|
The
accompanying Notes to Consolidated Financial Statements are an integral part of
these statements.
CONTINENTAL
AIRLINES, INC.
Continental Airlines, Inc., a Delaware
corporation, is a major United States air carrier engaged in the business of
transporting passengers, cargo and mail. Including our wholly-owned
subsidiary, Continental Micronesia, Inc. ("CMI"), and regional flights operated
on our behalf under capacity purchase agreements with other carriers, we are the
world's fifth largest airline as measured by the number of scheduled miles flown
by revenue passengers in 2009. Our regional capacity purchase
agreements are with ExpressJet Airlines, Inc. ("ExpressJet"), a wholly-owned
subsidiary of ExpressJet Holdings, Inc. ("Holdings"), Chautauqua Airlines, Inc.
("Chautauqua"), a wholly-owned subsidiary of Republic Airways Holdings, Inc.,
Colgan Air, Inc. (“Colgan”), a wholly-owned subsidiary of Pinnacle Airlines
Corp., and Champlain Enterprises, Inc. ("CommutAir"). Our regional
operations using regional jet aircraft are conducted under the name "Continental
Express" and those using turboprop aircraft are conducted under the name
"Continental Connection."
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.
We have evaluated subsequent events
through February 17, 2010, which is the date these financial statements were
issued.
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a)
|
Principles of
Consolidation. Our consolidated financial statements
include the accounts of Continental and all wholly-owned
subsidiaries. All intercompany accounts and transactions have
been eliminated in consolidation.
|
(b)
|
Use of
Estimates. The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States 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. We classify short-term, highly liquid
investments which are readily convertible into cash and have a maturity of
three months or less when purchased as cash and cash
equivalents. Restricted cash, cash equivalents and short-term
investments is primarily collateral for estimated future workers'
compensation claims, credit card processing contracts, letters of credit
and performance bonds.
|
(d)
|
Short-term
Investments. Short-term investments primarily include
certificates of deposit placed through an account registry service
("CDARS") and auction rate securities. The CDARS we hold have
original maturities of 91 days and are insured by the Federal Deposit
Insurance Corporation. Short-term investments are classified as
available-for-sale or trading securities and are stated at fair
value. Trading securities consist of student loan-related
auction rate securities for which we have received an option to put the
securities back to the broker, discussed in Note 6. Realized
gains and losses on specific investments are reflected in non-operating
income (expense) in our consolidated statements of
operations. Unrealized gains and losses on available-for-sale
and trading securities are reflected as a component of accumulated other
comprehensive loss and non-operating income (expense) in our consolidated
statements of operations, respectively.
|
|
(e)
|
Spare Parts and
Supplies. Inventories, expendable parts and supplies
related to flight equipment are carried at average acquisition cost and
are expensed when consumed in operations. An allowance for
obsolescence is provided over the remaining lease term or the estimated
useful life of the related aircraft, as well as to reduce the carrying
cost of spare parts currently identified as excess to the lower of
amortized cost or net realizable value. We recorded additions
to this allowance for expense of $12 million, $26 million and $11 million
in the years ended December 31, 2009, 2008 and 2007,
respectively. Spare parts and supplies are assumed to have an
estimated residual value of 10% of original cost. These
allowances are based on management estimates, which are subject to
change.
|
|
(f)
|
Property and
Equipment. Property and equipment is recorded at cost
and is depreciated to estimated residual value over its estimated useful
life using the straight-line method. Jet aircraft and rotable
spare parts are assumed to have residual values of 15% and 10%,
respectively, of original cost; other categories of property and equipment
are assumed to have no residual value. The estimated useful
lives of our property and equipment are as follows:
|
|
Estimated Useful
Life
|
||
Jet
aircraft and simulators
|
25
to 30 years
|
|
Rotable
spare parts
|
Average
lease term or
useful
life for related aircraft
|
|
Buildings
and improvements
|
10
to 30 years
|
|
Vehicles
and equipment
|
5
to 10 years
|
|
Computer
software
|
3
to 5 years
|
|
Capital
leases
|
Shorter
of lease
term
or useful life
|
|
Leasehold
improvements
|
Shorter
of lease
term
or useful life
|
|
Amortization
of assets recorded under capital leases is included in depreciation
expense in our consolidated statement of operations.
|
||
The
carrying amount of computer software was $85 million and $80 million at
December 31, 2009 and 2008, respectively. Depreciation expense
related to computer software was $30 million, $27 million and $28 million
in the years ended December 31, 2009, 2008 and 2007,
respectively.
|
|
(g)
|
Routes and Airport
Operating Rights. Routes represent the right to fly
between cities in different countries. Airport operating rights
represent gate space and slots (the right to schedule an arrival or
departure within designated hours at a particular
airport). Routes and international airport operating rights are
indefinite-lived intangible assets and are not
amortized. Routes and international airport operating rights
totaled $701 million and $713 million at December 31, 2009 and 2008,
respectively. We perform a test for impairment of our routes
and international slots in the fourth quarter of each year. In
2009, we recorded a $12 million non-cash charge to write off intangible
route assets related to certain Mexican and Central American locations as
a result of our annual impairment analysis. We determined that
these routes had no fair value since they are subject to “open skies”
agreements and there are no other barriers to flying to these
locations. In 2008, we recorded an $18 million non-cash charge
to write off an intangible route asset as a result of our decision to move
all of our flights between Newark Liberty International Airport ("New York
Liberty") and London from London Gatwick Airport to London Heathrow
Airport. These write-offs are included in special charges in
our consolidated statement of operations.
|
Airport
operating rights at domestic airports totaled $77 million and $91 million
at December 31, 2009 and 2008, respectively. These assets are
amortized over the stated term of the related lease (for gates) or 20
years (for slots). Amortization expense related to domestic
airport operating rights was $14 million for each of the years ended
December 31, 2009, 2008 and 2007. We expect annual amortization
expense related to domestic airport operating rights to be approximately
$14 million in each of the next three years and $8 million and $6 million
in 2013 and 2014, respectively.
|
|
(h)
|
Measurement of
Impairment of Long-Lived Assets. We record impairment
losses on long-lived assets, consisting principally of property and
equipment and domestic airport operating rights, when events or changes in
circumstances indicate, in management's judgment, that the assets might be
impaired and the undiscounted cash flows estimated to be generated by
those assets are less than the carrying amount of those
assets. The net carrying value of assets not recoverable is
reduced to fair value if lower than the carrying value. In
determining the fair market value of the assets, we consider market
trends, recent transactions involving sales of similar assets and, if
necessary, estimates of future discounted cash flows. See Note
13 for a discussion of aircraft impairment charges.
|
(i)
|
Revenue/Air Traffic
Liability. Passenger revenue is recognized either when
transportation is provided or when the ticket expires unused, rather than
when a ticket is sold. Revenue is recognized for unused
non-refundable tickets on the date of the intended flight if the passenger
did not notify us of his or her intention to change the
itinerary.
|
We
are required to charge certain taxes and fees on our passenger
tickets. These taxes and fees include U.S. federal
transportation taxes, federal security charges, airport passenger facility
charges and foreign arrival and departure taxes. These taxes
and fees are legal assessments on the customer. As we have a
legal obligation to act as a collection agent with respect to these taxes
and fees, we do not include such amounts in passenger
revenue. We record a liability when the amounts are
collected and relieve the liability when payments are made to the
applicable government agency.
|
|
Under
our capacity purchase agreements with regional carriers, we purchase all
of the capacity related to aircraft covered by the contracts and are
responsible for selling all of the related seat inventory. We
record the related passenger revenue and related expenses, with payments
under the capacity purchase agreements reflected as a separate operating
expense in our consolidated statement of operations.
|
|
The
amount of passenger ticket sales not yet recognized as revenue is included
in our consolidated balance sheets as air traffic and frequent flyer
liability. We perform periodic evaluations of the estimated
liability for passenger ticket sales and any adjustments, which can be
significant, are included in results of operations for the periods in
which the evaluations are completed. These adjustments relate primarily to
differences between our statistical estimation of certain revenue
transactions and the related sales price, as well as refunds, exchanges,
interline transactions and other items for which final settlement occurs
in periods subsequent to the sale of the related tickets at amounts other
than the original sales price.
|
|
Revenue
from the shipment of cargo and mail is recognized when transportation is
provided. Other revenue includes revenue from the sale of
frequent flyer miles (see (j) below), ticket change fees, baggage fees,
charter services, sublease income on aircraft leased to Holdings but not
operated for us and other incidental services. Ticket change
fees relate to non-refundable tickets, but are considered a separate
transaction from the air transportation because they represent a charge
for our additional service to modify a previous sale. Ticket
change fees are recognized as other revenue in our consolidated statement
of operations at the time the fees are assessed.
|
|
(j)
|
Frequent Flyer
Program. For those OnePass accounts that have sufficient
mileage credits to claim the lowest level of free travel, we record a
liability for either the estimated incremental cost of providing travel
awards that are expected to be redeemed with us or the contractual rate of
expected redemption on alliance carriers. Incremental cost
includes the cost of fuel, meals, insurance and miscellaneous supplies,
less any fees charged to the passenger for redeeming the rewards, but does
not include any costs for aircraft ownership, maintenance, labor or
overhead allocation. We recorded an adjustment of $27 million
($0.24 per basic and diluted share) to increase passenger revenue and
reduce our frequent flyer liability during 2008 for the impact of
redemption fees after we increased them during 2008. A change
to these cost estimates, the actual redemption activity, the amount of
redemptions on alliance carriers or the minimum award level could have a
significant impact on our liability in the period of change as well as
future years. The liability is adjusted periodically based on
awards earned, awards redeemed, changes in the incremental costs and
changes in the OnePass program, and is included in the accompanying
consolidated balance sheets as air traffic and frequent flyer
liability. Changes in the liability are recognized as passenger
revenue in the period of change.
|
We
also sell mileage credits in our frequent flyer program to participating
entities, such as credit/debit card companies, alliance carriers, hotels,
car rental agencies, utilities and various shopping and gift
merchants. Revenue from the sale of mileage credits is deferred
and recognized as passenger revenue over the period when transportation is
expected to be provided, based on estimates of its fair
value. Amounts received in excess of the expected
transportation's fair value are recognized in income currently and
classified as other revenue. A change to the time period over
which the mileage credits are used (currently six to 26 months), the
actual redemption activity or our estimate of the amount or fair value of
expected transportation could have a significant impact on our revenue in
the year of change as well as future years.
|
|
Prior
to joining Star Alliance in October 2009, we based our estimate of the
fair value of transportation related to frequent flyer miles sold on the
rates we charged other airlines. In connection with joining
Star Alliance, we changed our estimate of the related transportation’s
fair value to be based on the rate that is equivalent to the fare of a
round trip ticket with restrictions similar to a frequent flyer
reward. We made this change due to the disparate values of
rates charged in reciprocal agreements with other Star Alliance
members. The resulting fair values are generally higher than
under our former estimates and will result in a larger portion of sales of
OnePass miles being deferred and then amortized into passenger revenue and
a lower portion being recognized as other revenue.
|
|
At
December 31, 2009, we estimated that approximately 2.6 million free
round-trip travel awards outstanding were expected to be redeemed for free
travel on Continental, Continental Express, Continental Connection, CMI or
alliance airlines. Our total liability for future OnePass award
redemptions for free travel and unrecognized revenue from sales of OnePass
miles to other companies was approximately $348 million at December 31,
2009. This liability is recognized as a component of air
traffic and frequent flyer liability in our consolidated balance
sheets.
|
|
(k)
|
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. Maintenance and
repair costs also include engine overhaul costs covered by cost-per-hour
agreements, a majority of which are expensed on the basis of hours
flown.
|
(l)
|
Advertising
Costs. We expense the costs of advertising as
incurred. Advertising expense was $102 million, $93 million and
$106 million for the years ended December 31, 2009, 2008 and 2007,
respectively.
|
(m)
|
Regional Capacity
Purchase, Net. Payments made to regional carriers under
capacity purchase agreements are reported in regional capacity purchase,
net, in our consolidated statement of operations. Regional
capacity purchase, net, is net of our rental income on aircraft leased to
ExpressJet and flown for us through June 30, 2008. Beginning
July 1, 2008, ExpressJet no longer pays us sublease rent for aircraft
operated on our behalf.
|
(n)
|
Foreign Currency Gains
(Losses). Foreign currency gains (losses) are recorded
as part of other, net non-operating income (expense) in our consolidated
statements of operations. Foreign currency gains (losses) were
$8 million, $(37) million and $2 million for the years ended December 31,
2009, 2008 and 2007, respectively.
|
(o)
|
Reclassifications. Certain
reclassifications have been made in the prior years’ consolidated
financial statements and related note disclosures to conform to the
current year’s presentation.
|
NOTE
2 – 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.
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 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 affected our annual impairment testing for our international routes and
airport operating rights, which we perform as of October 1 of each
year. 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. As a result, we recorded a $12 million non-cash special
charge in the fourth quarter of 2009 to write off certain of our international
routes. The routes written off are not pledged as collateral under
our debt agreements. Our compliance with our debt agreements was not
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 estimating fair value when the
volume and level of activity for an asset or liability has significantly
decreased in relation to normal market activity for the asset or
liability. 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.
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.
Revenue Arrangements with
Multiple Deliverables. In October 2009, the FASB issued
guidance that changes the accounting for revenue arrangements with multiple
deliverables. The guidance requires an entity to allocate
consideration at the inception of an arrangement to all of its deliverables
based on their relative selling prices and eliminates the use of the residual
method of allocation. The guidance establishes a hierarchy for
determining the selling price of a deliverable, based on vendor-specific
objective evidence, third-party evidence or estimated selling
price. In addition, this guidance expands required disclosures
related to a vendor’s multiple-deliverable revenue arrangements. This
accounting standard is effective for us on January 1, 2011 and may change our
accounting for the sale of frequent flyer mileage credits discussed in Note
1(j). We may elect to adopt this guidance through either prospective
application for revenue arrangements entered into, or materially modified, after
the effective date or retrospective application to all applicable revenue
arrangements for all periods presented. 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.
NOTE
3 - EARNINGS PER SHARE
The following table sets forth the
components of basic and diluted earnings (loss) per share (in
millions):
2009
|
2008
|
2007
|
||||
Numerator:
|
||||||
Numerator
for basic earnings (loss) per share - net income (loss)
|
$(282)
|
$(586)
|
$439
|
|||
Effect
of dilutive securities - interest expense on:
|
||||||
5%
convertible notes
|
-
|
-
|
12
|
|||
6%
convertible junior subordinated debentures
held
by subsidiary trust
|
-
|
-
|
12
|
|||
Numerator
for diluted earnings (loss) per share - net
income
(loss) after assumed conversions
|
$(282)
|
$(586)
|
$463
|
|||
Denominator:
|
||||||
Denominator
for basic earnings (loss) per share -
weighted
average shares
|
129
|
106
|
97
|
|||
Effect
of dilutive securities:
|
||||||
5%
convertible notes
|
-
|
-
|
9
|
|||
6%
convertible junior subordinated debentures
held
by subsidiary trust
|
-
|
-
|
4
|
|||
Employee
stock options
|
-
|
-
|
4
|
|||
Dilutive
potential shares
|
-
|
-
|
17
|
|||
Denominator
for diluted earnings (loss) per share -
weighted-average
shares after assumed conversions
|
129
|
106
|
114
|
The adjustments to net income to
determine the numerator for diluted earnings per share are net of the related
effect of profit sharing and income taxes, where applicable.
Approximately 14 million and 13 million
potential shares of common stock related to convertible debt securities were
excluded from the computation of diluted earnings (loss) per share in the year
ended December 31, 2009 and 2008, respectively, because they were
antidilutive. In addition, approximately eight million, eight million
and one million weighted average options to purchase shares of our common stock
were excluded from the computation of diluted earnings (loss) per share for the
years ended December 31, 2009, 2008 and 2007, respectively, because the effect
of including the options would have been antidilutive.
NOTE
4 - LONG-TERM DEBT
Long-term debt at December 31 consisted
of the following (in millions):
2009
|
2008
|
|||
Secured
|
||||
Notes
payable, interest rates of 5.375% to 9.0% (weighted average rate
of
7.1%
as of December 31, 2009), payable through 2022
|
$3,066
|
$2,862
|
||
Floating
rate notes, with indicated interest rates:
|
||||
LIBOR
(0.251% on December 31, 2009) plus 0.35% to 1.95%, payable
through
2020
|
1,153
|
1,345
|
||
LIBOR
plus 3.375%, payable in 2011
|
350
|
350
|
||
LIBOR
plus 3.125% to 3.25%, payable through 2014
|
188
|
192
|
||
LIBOR
plus 2.5% to 5.0%, payable through 2019
|
266
|
157
|
||
Advance
purchases of mileage credits, implicit interest rates of 5.5% to
6.18%
|
186
|
148
|
||
Other
|
5
|
15
|
||
Unsecured
|
||||
6.0%
convertible junior subordinated debentures, payable in
2030
|
248
|
248
|
||
4.5%
convertible notes, payable in 2015
|
230
|
-
|
||
Note
payable, interest rate of 8.75%, payable in 2011
|
200
|
200
|
||
5%
convertible notes, callable beginning in 2010
|
169
|
157
|
||
Other
|
9
|
-
|
||
6,070
|
5,674
|
|||
Less: current
maturities
|
972
|
516
|
||
Total
|
$5,098
|
$5,158
|
Maturities of long-term debt due over
the next five years are as follows (in millions):
Year
ending December 31,
|
||
2010
|
$ 972
|
|
2011
|
1,142
|
|
2012
|
584
|
|
2013
|
650
|
|
2014
|
332
|
Most of our property and equipment,
spare parts inventory, certain routes and the outstanding common stock and
substantially all of the other assets of our wholly-owned subsidiaries Air
Micronesia, Inc. ("AMI") and CMI are subject to agreements securing our
indebtedness.
At December 31, 2009, we also had
letters of credit and performance bonds relating to various real estate, customs
and aircraft financing obligations in the amount of $109 million with expiration
dates through September 2013.
2007 Enhanced Equipment
Trust Certificates. In April 2007, we obtained financing for
12 Boeing 737-800s and 18 Boeing 737-900ERs. We applied a portion of
this financing to 27 Boeing aircraft delivered to us in 2008 and recorded
related debt of $1.0 billion. We applied the final portion of this
financing to three Boeing 737 aircraft delivered to us in the first half of 2009
and recorded related debt of $121 million. In connection with this
financing, enhanced equipment trusts raised $1.1 billion through the issuance of
three classes of enhanced equipment trust certificates. Class A
certificates, with an aggregate principal amount of $757 million, bear interest
at 5.983%, Class B certificates, with an aggregate principal amount of $222
million, bear interest at 6.903% and Class C certificates, with an aggregate
principal amount of $168 million, bear interest at 7.339%. Principal
payments on the equipment notes and the corresponding distribution of these
payments to certificate holders will begin in April 2010 and will end in April
2022 for Class A and B certificates and April 2014 for Class C
certificates.
2009-1 Enhanced Equipment
Trust Certificates. On July 1, 2009, we obtained financing for
12 currently owned Boeing aircraft and five new Boeing 737-900ER
aircraft. A pass-through trust raised $390 million through the
issuance of a single class of enhanced equipment trust certificates bearing
interest at 9%. During 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 five new
Boeing 737-900ER aircraft, resulting in proceeds of $141 million to finance the
purchase of the aircraft. Principal payments on the equipment notes
and the corresponding distribution of these payments to certificate holders are
scheduled from January 2010 through July 2016.
2009-2 Enhanced Equipment
Trust Certificates. In November 2009, we obtained financing
for eight currently owned Boeing aircraft, nine new Boeing 737-800 aircraft and
two new Boeing 777 aircraft. These aircraft are expected to be
refinanced or delivered by August 31, 2010. In connection with this
financing, enhanced equipment trusts raised $644 million through the issuance of
two classes of enhanced equipment trust certificates. Class A
certificates, with an aggregate principal amount of $528 million, bear interest
at 7.25% and Class B certificates, with an aggregate principal amount of $117
million, bear interest at 9.25%. The proceeds from the sale of the
certificates are initially being held by a depositary in escrow for the benefit
of the certificate holders until we issue equipment notes to the trust, which
will purchase such notes with a portion of the escrowed funds. These
escrowed funds are not guaranteed by us and are not reported as debt on our
consolidated balance sheet because the proceeds held by the depositary are not
our assets. Any unused proceeds will be distributed directly to the
certificate holders. Principal payments on the equipment notes and
the corresponding distribution of these payments to certificate holders will
begin in November 2010 and will end in November 2019 for Class A certificates
and in May 2017 for Class B certificates.
Other Debt Secured by
Aircraft. During 2009, we entered into loan agreements under
which we borrowed $180 million. This indebtedness is secured by five
new Boeing 737-900ER aircraft and two Boeing 737-800 aircraft that this debt
refinanced. During 2008, we obtained $268 million through three
separate financings secured by two new Boeing 737-900ER aircraft, seven Boeing
757-200 aircraft and five Boeing 737-700 aircraft.
Advance Purchases of Mileage
Credits. On December 30, 2009, we entered into an amendment of
our Debit Card Marketing Agreement with JPMorgan Chase Bank, N.A. (“JP Morgan
Chase”) under which JP Morgan Chase purchases frequent flyer mileage credits to
be earned by One Pass members for making purchases using a Continental branded
debit card issued by JP Morgan Chase. The agreement provides for a
payment to us of $40 million in early 2010 for the advance purchase of frequent
flyer mileage credits beginning January 1, 2016, or earlier in certain
circumstances. The purchase of mileage credits has been treated as a
loan from JP Morgan Chase with an implicit interest rate of 5.5% and is reported
as long-term debt in our consolidated balance sheet.
On June 10, 2008, we entered into an
amendment and restatement of our Bankcard Joint Marketing Agreement (the
"Bankcard Agreement") with Chase Bank USA, N.A. ("Chase"), under which Chase
purchases frequent flyer mileage credits to be earned by OnePass members for
making purchases using a Continental branded credit card issued by
Chase. The Bankcard Agreement provides for a payment to us of $413
million, of which $235 million relates to the advance purchase of frequent flyer
mileage credits for the year 2016. In connection with the advance
purchase of mileage credits, we have provided a security interest to Chase in
certain routes and slots, including certain slots at London's Heathrow
Airport. The $235 million purchase of mileage credits has been
treated as a loan from Chase with an implicit interest rate of 6.18% and is
reported as long-term debt in our consolidated balance sheet. Our
liability will be reduced ratably in 2016 as the mileage credits are issued to
Chase.
The remaining $178 million received
from Chase is in consideration for certain other commitments with respect to the
co-branding relationship, including the extension of the term of the Bankcard
Agreement until December 31, 2016. This amount is reported in other
liabilities in our consolidated balance sheet and is being recognized as other
revenue on a straight-line basis over the term of the agreement.
Secured Term Loan
Facility. We and CMI have loans under a $350 million secured
term loan facility. The loans are secured by certain of our U.S.-Asia
routes and related assets, all of the outstanding common stock of our
wholly-owned subsidiaries AMI and CMI and substantially all of the other assets
of AMI and CMI, including route authorities and related assets. The
loans bear interest at a rate equal to the London Interbank Offered Rate
("LIBOR") plus 3.375% and are due in June 2011. The facility requires
us to maintain a minimum balance of unrestricted cash and short-term investments
of $1.0 billion at the end of each month. The loans may become due and
payable immediately if we fail to maintain the monthly minimum cash balance and
upon the occurrence of other customary events of default under the loan
documents. If we fail to maintain a minimum balance of unrestricted
cash and short-term investments of $1.125 billion, we and CMI will be
required to make a mandatory aggregate $50 million prepayment of the
loans.
In addition, the facility provides that
if the ratio of the outstanding loan balance to the value of the collateral
securing the loans, as determined by the most recently delivered periodic
appraisal, is greater than 52.5%, we and CMI will be required to post additional
collateral or prepay the loans to reestablish a loan-to-collateral value ratio
of not greater than 52.5%. We are currently in compliance with the
covenants in the facility.
Notes Secured by Spare Parts
Inventory. We have two series of notes secured by the majority
of our spare parts inventory. The senior equipment notes, which total
$190 million in principal amount, bear interest at the three-month LIBOR plus
0.35%. The junior equipment notes, which total $130 million in
principal amount, bear interest at the three-month LIBOR plus
3.125%. A portion of the spare parts inventory that serves as
collateral for the equipment notes is classified as property and equipment and
the remainder is classified as spare parts and supplies, net.
In connection with these equipment
notes, we entered into a collateral maintenance agreement requiring us, among
other things, to maintain a loan-to-collateral value ratio of not greater than
45% with respect to the senior series of equipment notes and a
loan-to-collateral value ratio of not greater than 75% with respect to both
series of notes combined. We must also maintain a certain level of
rotable components within the spare parts collateral pool. These
ratios are calculated semi-annually based on an independent appraisal of the
spare parts collateral pool. If any of the collateral ratio
requirements are not met, we must take action to meet all ratio requirements by
adding additional eligible spare parts to the collateral pool, redeeming a
portion of the outstanding notes, providing other collateral acceptable to the
bond insurance policy provider for the senior series of equipment notes or any
combination of the above actions. We are currently in compliance with
these covenants.
Convertible Debt
Securities. In December 2009, we issued $230 million in
principal amount of 4.5% convertible notes and received proceeds of $224
million. The notes mature on January 15, 2015 and are convertible
into our Class B common stock at an initial conversion price of approximately
$19.87 per share. We do not have the option to pay the conversion
price in cash; however, holders of the notes may 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. The conversion price
may also be adjusted within a specified range in certain circumstances if a
change in control of Continental occurs.
Our 5% convertible notes with a
principal amount of $175 million and carrying amount of $169 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. Therefore, we have
classified these notes in current maturities of long-term debt and capital
leases in our consolidated balance sheet at December 31, 2009. 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.
Because the 5% convertible notes may be
settled in either cash or common stock upon conversion, accounting rules require
us to separately account for the debt and equity components of the 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 at December 31 (in
millions):
2009
|
2008
|
||||
Principal
amount of convertible notes
|
$175
|
$175
|
|||
Unamortized
discount
|
6
|
18
|
|||
Net
carrying amount
|
169
|
157
|
|||
Additional
paid-in capital
|
64
|
64
|
At December 31, 2009, the unamortized
discount had a remaining recognition period of approximately 6
months.
The amount of interest expense
recognized and effective interest rate for the 5% convertible notes for the year
ended December 31 were as follows (in millions):
2009
|
2008
|
2007
|
||||
Contractual
coupon interest
|
$ 9
|
$ 9
|
$ 9
|
|||
Amortization
of discount on 5% convertible notes
|
12
|
11
|
10
|
|||
Interest
expense
|
$21
|
$20
|
$19
|
|||
Effective
interest rate
|
13%
|
13%
|
13%
|
In November 2000, Continental Airlines
Finance Trust II, a Delaware statutory business trust (the "Trust") of which we
own all the common trust securities, completed a private placement of five
million 6% convertible preferred securities, called Term Income Deferrable
Equity Securities or "TIDES." The TIDES have a liquidation value of
$50 per preferred security and are convertible at any time at the option of the
holder into shares of common stock at a conversion rate of $60 per share of
common stock (equivalent to approximately 0.8333 share of common stock for each
preferred security). Distributions on the preferred securities are
payable by the Trust at an annual rate of 6% of the liquidation value of $50 per
preferred security.
The sole assets of the Trust are 6%
convertible junior subordinated debentures ("convertible subordinated
debentures") with an aggregate principal amount of $248 million as of December
31, 2009 issued by us and which mature on November 15, 2030. The
convertible subordinated debentures are redeemable by us, in whole or in part,
on or after November 20, 2003 at designated redemption prices. If we
redeem the convertible subordinated debentures, the Trust must redeem the TIDES
on a pro rata basis having an aggregate liquidation value equal to the aggregate
principal amount of the convertible subordinated debentures
redeemed. Otherwise, the TIDES will be redeemed upon maturity of the
convertible subordinated debentures, unless previously converted.
Taking into consideration our
obligations under (i) the preferred securities guarantee relating to the TIDES,
(ii) the indenture relating to the convertible subordinated debentures to pay
all debt 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
TIDES and the convertible subordinated debentures, we have fully and
unconditionally guaranteed payment of (i) the distributions on the TIDES, (ii)
the amount payable upon redemption of the TIDES and (iii) the liquidation amount
of the TIDES.
In January 2007, $170 million in
principal amount of our 4.5% convertible notes due on February 1, 2007 was
converted by the holders into 4.3 million shares of our Class B common stock at
a conversion price of $40 per share. The remaining $30 million in
principal amount was paid on February 1, 2007.
NOTE
5 - LEASES
We lease certain aircraft and other
assets under long-term lease arrangements. Other leased assets
include real property, airport and terminal facilities, maintenance facilities,
training centers and general offices. Most aircraft leases include
both renewal options and purchase options. Because renewals of our
existing leases are not considered to be reasonably assured at the inception of
each lease, rental payments that would be due during the renewal periods are not
included in the determination of straight-line rent
expense. Leasehold improvements are amortized over the shorter of the
related lease term or their useful life. Any purchase options are
generally effective at the end of the lease term at the then-current fair market
value. Our leases do not include residual value
guarantees.
At December 31, 2009, the scheduled
future minimum lease payments under capital leases and the scheduled future
minimum lease rental payments required under operating leases were as follows
(in millions):
Capital
Leases
|
Operating
Leases
|
||||||
Aircraft
|
Non-aircraft
|
||||||
Year
ending December 31,
|
|||||||
2010
|
$ 17
|
$ 994
|
$ 462
|
||||
2011
|
16
|
977
|
426
|
||||
2012
|
16
|
948
|
513
|
||||
2013
|
16
|
933
|
376
|
||||
2014
|
16
|
904
|
359
|
||||
Later
years
|
385
|
3,389
|
3,694
|
||||
Total
minimum lease payments
|
466
|
$8,145
|
$5,830
|
||||
Less: amount
representing interest
|
270
|
||||||
Present
value of capital leases
|
196
|
||||||
Less: current
maturities of capital leases
|
3
|
||||||
Long-term
capital leases
|
$193
|
At December 31, 2009, we had 449
aircraft under operating leases, including 193 mainline aircraft and 256
regional jets. These operating leases have remaining lease terms
ranging up to 15 years. The operating lease amounts for aircraft
presented above include a portion of our minimum noncancelable payments under
capacity purchase agreements with our other regional carriers which represents
the deemed lease commitments on the related aircraft. See Note 16 for
a discussion of our regional capacity purchase agreements.
The table above does not include
projected sublease income of $139 million to be received through 2015 from other
operators related to aircraft that are not operated on our behalf. We
expect such sublease income to be $29 million, $29 million, $26 million, $22
million and $22 million in each of the next five years,
respectively.
Rent expense for non-aircraft operating
leases totaled $578 million, $580 million and $535 million for the years ended
December 31, 2009, 2008 and 2007, respectively.
NOTE
6 - 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
December 31,
2009
|
Level
1
|
Level
2
|
Level
3
|
Valuation
Technique
|
||
Cash
and cash equivalents
|
$2,546
|
$2,546
|
$-
|
$ -
|
(A)
|
|
Short-term
investments:
|
||||||
Auction
rate securities
|
201
|
-
|
-
|
201
|
(B)
|
|
Other
|
109
|
109
|
-
|
-
|
(A)
|
|
Restricted
cash, cash equivalents and
short-term
investments
|
164
|
164
|
-
|
-
|
(A)
|
|
Auction
rate securities put right
|
20
|
-
|
-
|
20
|
(B)
|
|
Fuel
derivatives
|
14
|
-
|
-
|
14
|
(A)
|
|
Foreign
currency derivatives
|
5
|
-
|
5
|
-
|
(A)
|
Assets measured at fair value on a
nonrecurring basis during 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)
|
We recorded additional losses in the
fourth quarter of 2009 associated with these fleet types as discussed in Note
13. Of the $36 million in fourth quarter aircraft related special
charges, $23 million was associated with Boeing 737-300 and 737-500 aircraft and
parts that had been sent out for sale on consignment.
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 CDARS. The fair
values of these investments are based on observable market data.
Student Loan-Related Auction
Rate Securities. At December 31, 2009, we held student
loan-related auction rate securities with a fair value of $201 million and a par
value of $252 million. These securities were classified as follows
(in millions):
Fair
Value
|
Par
Value
|
Amortized
Cost
|
||||
Short-term
investments:
|
||||||
Available-for-sale
|
$136
|
$166
|
$136
|
|||
Trading
|
65
|
86
|
N/A
|
|||
Total
|
$201
|
$252
|
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 totaling $60 million during 2008 to reflect
the other-than-temporary decline in the fair value of these
securities. Following this other-than-temporary impairment, a new
amortized cost basis was established for available-for-sale securities 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 $201 million at December 31, 2009, taking into consideration
the limited sales and offers to purchase securities and using
internally-developed models of the expected future cash flows related to the
securities. Our models incorporated our probability-weighted
assumptions about the cash flows of the underlying student loans and discounts
to reflect a lack of liquidity in the market for these securities.
In addition, 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. The initial fair value of
the put right was $26 million. 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 other nonoperating income
(expense) currently.
During 2009, we sold, at par, auction
rate securities having a par value of $40 million. Most of these
securities were sold to the institution that had granted us the put
right. We recognized gains on the sales using the specific
identification method and recorded losses of the cancellation of the related put
rights. The net gains are included in other non-operating income
(expense) in our consolidated statement of operations and 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 that is based on
inputs that are either readily available in public markets or can be derived
from information available in publicly quoted markets. We verify the
reasonableness of these inputs by comparing the resulting fair values to similar
quotes from our counterparties as of each date for which financial statements
are prepared. For derivatives not covered by collateral, we also make
an adjustment to incorporate credit risk into the valuation. Due to
the fact that certain of the inputs utilized to determine the fair value of the
fuel derivatives are unobservable (principally volatility of crude oil prices
and the credit risk adjustments), we have categorized these option contracts as
Level 3.
Foreign Currency
Derivatives. We determine the fair value of our foreign
currency derivatives by comparing our contract rate to a published forward price
of the underlying currency, which is based on market rates for comparable
transactions.
Property and Equipment -
Boeing 737-300 and 737-500 Aircraft Fleets. As discussed in
Note 13, 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 measured at fair
value on a recurring basis using unobservable inputs (Level 3) for the year
ended December 31, 2009 is as follows (in millions):
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)
|
(40)
|
-
|
393
|
|||
Gains
and losses:
|
||||||
Reported in
earnings:
|
||||||
Realized
|
8
|
(7)
|
-
|
|||
Unrealized
|
1
|
1
|
7
|
|||
Reported in other comprehensive
income (loss)
|
3
|
-
|
29
|
|||
Balance
at December 31, 2009
|
$201
|
$20
|
$ 14
|
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 $6.1 billion at December
31, 2009 and $5.7 billion at December 31, 2008 was approximately $5.8
billion and $4.6 billion, respectively. 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 previously held company owned life insurance policies
on certain of our employees. We terminated all of the policies
in 2009. As of December 31, 2008, the carrying value of the
cash surrender value of the life insurance policies was $26 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 maturity.
|
NOTE
7 - 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 have historically entered into swap agreements or
purchased call options to protect us against sudden and significant increases in
jet fuel prices. We conduct our fuel hedging activities using a
combination of jet fuel, crude oil and heating oil contracts. We
strive to maintain fuel hedging levels and exposure generally comparable to that
of our major competitors, so that our fuel cost is not disproportionate to
theirs.
As of December 31, 2009, our projected
fuel requirements for 2010 were hedged as follows:
Maximum
Price
|
Minimum
Price
|
|||||||
%
of
Expected
Consumption
|
Weighted
Average
Price
(per
gallon)
|
%
of
Expected
Consumption
|
Weighted
Average
Price
(per
gallon)
|
|||||
Gulf
Coast jet fuel swaps
|
1%
|
$1.94
|
1%
|
$1.94
|
||||
WTI
crude oil swaps
|
2
|
1.84
|
2
|
1.84
|
||||
WTI
crude oil call options
|
4
|
2.20
|
N/A
|
N/A
|
||||
Total
|
7%
|
3%
|
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
December 31, 2009. Because our fuel hedges were in a net liability
position at December 31, 2008, we were required to post cash collateral with our
counterparties totaling $171 million. These amounts are reported in
prepayments and other current assets in our consolidated balance
sheet.
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 December 31, 2009, we had forward contracts
outstanding to hedge 30% of our projected Japanese yen-denominated cash inflows,
primarily from passenger ticket sales, through 2010.
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 are 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 December 31, 2009, all of our derivative
instruments were designated as cash flow hedges and were reported in our
consolidated balance sheet as follows (in millions):
Asset
Derivatives
|
Liability
Derivatives
|
|||||
Balance
Sheet
Location
|
Fair
Value
|
Balance
Sheet
Location
|
Fair
Value
|
|||
Fuel
derivatives
|
Prepayments
and other current assets
|
$ 14
|
Accrued
other current liabilities
|
$ -
|
||
Foreign
currency derivatives
|
Prepayments
and other current assets
|
5
|
Accrued
other current liabilities
|
-
|
||
Total
derivatives
|
$ 19
|
$ -
|
The gains and losses related to our
derivative instruments reported in our consolidated balance sheet at December
31, 2009 and our consolidated statement of operations for the year
ended December 31, 2009 were as follows (in millions):
Cash Flow
Hedges
|
Gain
(Loss)
Recognized
in
OCI
(Effective
Portion)
|
Gain
(Loss) Reclassified from
Accumulated
OCI into Income
(Effective
Portion)
|
Gain
(Loss) Recognized in
Income (Ineffective
Portion)
|
|||||
Income
Statement
Location
|
Amount
|
Income
Statement
Location
|
Amount
|
|||||
Fuel
derivatives
|
$36
|
Aircraft
fuel and
related
taxes
|
$(380)
|
Other
nonoperating
income
(expense)
|
$7
|
|||
Foreign
currency derivatives
|
10
|
Passenger
revenue
|
(2)
|
Other
nonoperating
income
(expense)
|
-
|
|||
Total
|
$46
|
$(382)
|
$7
|
Lehman Brothers, one of the
counterparties to our fuel derivative contracts, declared bankruptcy on
September 15, 2008. As a result, we determined that our fuel
derivative contracts with Lehman Brothers were not highly effective
hedges. Therefore, we discontinued hedge accounting for these
contracts as of September 15, 2008 and all subsequent changes in the contracts’
fair values were reported in earnings. In 2008, we recognized losses
of $125 million in other non-operating income (expense) related to the changes
in the fair value of these contracts. In January 2009, we settled all
open contracts with Lehman Brothers.
NOTE
8 - PREFERRED AND COMMON STOCK
Preferred
Stock. On April 14, 2008, Northwest Airlines, Inc.
("Northwest") and Delta Air Lines, Inc. ("Delta") announced that they had
entered into a merger agreement. Northwest previously held the one
outstanding share of our Series B preferred stock, which prevented us from
engaging in certain business combinations or other activities without
Northwest's consent. We were entitled to redeem the share of Series B
preferred stock for a nominal sum upon the execution of a definitive merger
agreement by Northwest with respect to a transaction constituting a change of
control of Northwest, which occurred upon Northwest's entry into the merger
agreement with Delta. As a result, we redeemed and cancelled the
Series B preferred stock in the second quarter of 2008, eliminating Northwest's
right to prevent us from engaging in certain business combinations or other
activities.
Common
Stock. We currently have one class of common stock issued and
outstanding, Class B common stock. Each share of common stock is entitled to one
vote per share. In August 2009, we completed a public offering of
14.4 million shares of our common stock at a price to the public of $11.20 per
share, raising net proceeds of $158 million. In June 2008, we
completed a public offering of 11 million shares of our common stock at a price
to the public of $14.80 per share, raising net proceeds of $162
million. Additionally, in the fourth quarter of 2008, we completed a
public offering of 13 million shares of our common stock at an average price to
the public of $15.84 per share, raising net proceeds of $196
million. Proceeds from each of these offerings were used for general
corporate purposes. At December 31, 2009, approximately 40 million
shares were reserved for future issuance related to the conversion of
convertible debt securities and the issuance of stock under our stock incentive
plans.
As discussed in Note 4, $170 million in
principal amount of our 4.5% convertible notes was converted by the holders into
4.3 million shares of our common stock in January 2007 at a conversion price of
$40 per share.
Stockholder Rights
Plan. On November 20, 2008, our stockholder rights plan
expired. As a result, each outstanding share of our common stock is
no longer accompanied by a right. The holders of common stock were
not entitled to any payment as a result of the expiration of the rights plan and
the rights issued thereunder.
NOTE
9 - STOCK PLANS AND AWARDS
Stock
Options. Stock options are awarded with exercise prices equal
to the fair market value of our common stock on the date of
grant. Management level employee stock options typically vest over a
four year period and generally have five year terms. Expense related
to each portion of an option grant is recognized on a straight-line basis over
the specific vesting period for those options. Outside director stock
options vest in full on the date of grant and have ten year
terms. Under the terms of our management incentive plans, a change in
control would result in options outstanding under those plans becoming
exercisable in full.
The table below summarizes stock option
transactions pursuant to our plans (share data in thousands):
2009
|
2008
|
2007
|
|||||||
Options
|
Weighted-
Average
Exercise
Price
|
Options
|
Weighted-
Average
Exercise
Price
|
Options
|
Weighted-
Average
Exercise
Price
|
||||
Outstanding
at
beginning
of
year
|
7,972
|
$16.65
|
7,817
|
$17.36
|
8,991
|
$15.12
|
|||
Granted
|
713
|
$ 9.40
|
752
|
$10.84
|
728
|
$35.72
|
|||
Exercised
|
(383)
|
$11.72
|
(375)
|
$12.49
|
(1,699)
|
$13.39
|
|||
Cancelled
|
(188)
|
$23.86
|
(222)
|
$29.14
|
(203)
|
$17.29
|
|||
Outstanding
at
end
of year
|
8,114
|
$16.08
|
7,972
|
$16.65
|
7,817
|
$17.36
|
|||
Exercisable
at
end
of year
|
6,550
|
$15.98
|
6,212
|
$15.08
|
3,393
|
$15.45
|
As of December 31, 2009, stock options
outstanding at the end of the period had a weighted average contractual life of
2.4 years and an
aggregate intrinsic value of $38 million. Options exercisable at
December 31, 2009 had a weighted average contractual life of 2.1 years and an
aggregate intrinsic value of $28 million.
The fair value of options is determined
at the grant date using a Black-Scholes-Merton option-pricing model, which
requires us to make several assumptions. The risk-free interest rate
is based on the U.S. Treasury yield curve in effect for the expected term of the
option at the time of grant. The dividend yield on our common stock
is assumed to be zero since we historically have not paid dividends and have no
current plans to do so in the future. The market price volatility of
our common stock is based on the historical volatility of our common stock over
a time period equal to the expected term of the option and ending on the grant
date. The expected life of the options is based on our historical
experience for various work groups. We recognize expense only for
those option awards expected to vest, using an estimated forfeiture rate based
on our historical experience. The forfeiture rate may be revised in
future periods if actual forfeitures differ from our assumptions. The
weighted-average fair value of options granted during the year ended December 31
was determined based on the following weighted-average assumptions:
2009
|
2008
|
2007
|
||
Risk-free
interest rate
|
2.0%
|
3.1%
|
4.9%
|
|
Dividend
yield
|
0%
|
0%
|
0%
|
|
Expected
market price volatility of our common stock
|
86%
|
62%
|
57%
|
|
Expected
life of options (years)
|
3.9
|
3.9
|
3.9
|
|
Fair
value of options granted
|
$5.75
|
$5.32
|
$16.95
|
The total intrinsic value of options
exercised during the year ended December 31, 2009, 2008 and 2007 was $2 million,
$3 million and $45 million, respectively.
The following tables summarize the
range of exercise prices and the weighted average remaining contractual life of
the options outstanding and the range of exercise prices for the options
exercisable at December 31, 2009 (share data in thousands):
Options
Outstanding
|
|||||||
Range
of
Exercise
Prices
|
Number
|
Weighted
Average
Remaining
Contractual Life
(Years)
|
Weighted
Average
Exercise
Price
|
||||
$9.22-$11.72
|
1,286
|
4.3
|
$ 9.59
|
||||
$11.89
|
4,333
|
1.9
|
$11.89
|
||||
$11.96-$20.31
|
1,124
|
2.4
|
$19.21
|
||||
$20.97-$49.80
|
1,371
|
2.3
|
$32.83
|
||||
$9.22-$49.80
|
8,114
|
2.4
|
$16.08
|
Options
Exercisable
|
||||||||
Range
of
Exercise
Prices
|
Number
|
Weighted
Average
Exercise
Price
|
||||||
$9.22-$11.72
|
206
|
$ 9.84
|
||||||
$11.89
|
4,333
|
$11.89
|
||||||
$11.96-$20.31
|
1,081
|
$19.34
|
||||||
$20.97-$49.80
|
930
|
$32.52
|
||||||
$9.22-$49.80
|
6,550
|
$15.98
|
Employee Stock Purchase
Plan. All of our employees (including CMI employees) are
eligible to participate in the 2004 Employee Stock Purchase Plan (the "2004
ESPP"). At the end of each fiscal quarter, participants may purchase
shares of our common stock at a discount of 15% off the fair market value of the
stock on either the first day or the last day of the quarter (whichever is
lower), subject to a minimum purchase price of $10 per share. This
discount is reduced to zero as the fair market value approaches $10 per
share. If the fair market value is below the $10 per share minimum
price on the last day of a quarter, then the participants will not be permitted
to purchase the common stock for such quarterly purchase period and we will
refund to those participants the amount of their unused payroll
deductions. During 2009, 2008 and 2007, approximately 0.5 million,
1.1 million and 0.4 million shares, respectively, of common stock were issued to
participants at a weighted-average purchase price of $11.81, $12.76 and $27.84
per share, respectively. On June 10, 2009, our stockholders
approved an amendment to the 2004 ESPP, under which we had sold to participants
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 participants under the 2004 ESPP and extended the term of the
plan to December 31, 2019. In January 2010, 0.2 million shares were
purchased related to the fourth quarter of 2009 at a price of $12.82 per
share.
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. On December 1, 2009, our Board of
Directors approved our new Incentive Plan 2010, subject to stockholder
approval. We expect to submit the new incentive plan to our
stockholders for approval in 2010.
Profit Based RSU
Awards. We have issued profit based restricted stock unit
(“RSUs”) 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 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 during 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 account for the profit based RSU
awards as liability awards. Once it is probable that a profit
sharing-based performance target will be met, we measure the awards at fair
value based on the current stock price. The related expense is
recognized ratably over the required service period, which ends on each payment
date, after adjustment for changes in the then-current market price of our
common stock.
The 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, payments totaling $20 million and
$52 million were made in March 2009 and 2008, respectively, with respect to
these profit based RSU awards. The third and final payment related to
these 1.4 million awards will be made in March 2010.
The 0.5 million RSU awards with a
performance period commencing January 1, 2007 and ending December 31, 2009
expired without vesting on December 31, 2009 because the minimum cumulative
profit sharing target was not met. No payments will be made with
respect to these awards. We have two other grants of profit based RSU
awards outstanding at December 31, 2009. The following table sets
forth information about these grants:
2009
Grant
|
2008
Grant
|
|
Initial
grant date
|
February
2009
|
February
2008
|
Number
of RSU awards outstanding
|
1.3
million
|
0.8
million
|
Performance
period
|
January
1, 2009-
December
31, 2011
|
January
1, 2008-
December
31, 2010
|
Cumulative
profit sharing targets (range)
|
$0-$375
million
|
$0-$275
million
|
Cumulative
profit sharing achieved to date
for
applicable performance period
|
$0
|
$0
|
Payment
percentages (range)
|
0%-400%
|
0%-200%
|
Probable
payment percentage:
|
||
As
of December 31, 2009
|
0%
|
0%
|
As
of December 31, 2008
|
N/A
|
100%
|
Unrestricted
cash, cash equivalents and
short-term
investments hurdle
|
$2.2
billion
|
$2.2
billion
|
As of December 31, 2009, we had
recorded no liability associated with the profit based RSU awards for the
performance periods commencing January 1, 2008 or 2009 because we had not
achieved, and did not reasonably expect to achieve, any of the cumulative profit
sharing-based performance targets for those awards. On December 31,
2009, our enhanced profit sharing plan expired. Pursuant to the terms
of the 2008 and 2009 RSU grants, and in order to comply with the provisions of
Internal Revenue Code Section 162(m), achievement of a performance target for
such grants will continue to be determined under and based upon the definition
of annual award pool in the enhanced profit sharing plan that expired on
December 31, 2009.
Stock-Based Compensation
Expense. Total stock-based compensation expense included in
wages, salaries and related costs for the years ended December 31, 2009, 2008
and 2007 was $(3) million, $47 million and $75 million,
respectively. As of December 31, 2009, $5 million of compensation
cost attributable to future service related to unvested employee stock options
and profit based RSU awards with a performance period commencing April 1, 2006
and ending December 31, 2009 had not yet been recognized. This amount
will be recognized in expense over a weighted-average period of 1.2
years.
NOTE
10 - ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other
comprehensive loss (which are all net of applicable income taxes) were as
follows (in millions):
Defined
Benefit Pension and
Retiree Medical
Benefits Plans
|
Unrealized
Gain
(Loss)
on
Derivative
Instruments
and Other
|
||||||||
Unrecognized
Prior
Service
Cost
|
Unrecognized
Actuarial
Gains
(Losses)
|
Income
Tax
Benefit
(Expense)
|
Total
|
||||||
Balance
at December 31, 2006
|
$(262)
|
$(971)
|
$ (16)
|
$ 236
|
$(1,013)
|
||||
Derivative
financial instruments:
|
|||||||||
Reclassification
into earnings
|
-
|
-
|
(48)
|
-
|
(48)
|
||||
Change
in fair value
|
-
|
-
|
93
|
-
|
93
|
||||
Employee
benefit plans:
|
|||||||||
Reclassification
of unrecognized
net
actuarial loss into
earnings
|
-
|
97
|
-
|
-
|
97
|
||||
Reclassification
of prior service
cost
into earnings
|
30
|
-
|
-
|
-
|
30
|
||||
Current
year prior service cost
|
(18)
|
-
|
-
|
-
|
(18)
|
||||
Current
year actuarial gain
|
-
|
354
|
-
|
-
|
354
|
||||
Balance
at December 31, 2007
|
(250)
|
(520)
|
29
|
236
|
(505)
|
||||
Derivative
financial instruments:
|
|||||||||
Reclassification
into earnings
|
-
|
-
|
170
|
-
|
170
|
||||
Change
in fair value
|
-
|
-
|
(608)
|
-
|
(608)
|
||||
Unrealized
loss on student loan-
related
auction rate securities
|
-
|
-
|
(3)
|
-
|
(3)
|
||||
Employee
benefit plans:
|
|||||||||
Reclassification
of unrecognized
net
actuarial loss into
earnings
|
-
|
85
|
-
|
-
|
85
|
||||
Reclassification
of prior service
cost
into earnings
|
31
|
-
|
-
|
-
|
31
|
||||
Current
year actuarial loss
|
-
|
(926)
|
-
|
-
|
(926)
|
||||
Balance
at December 31, 2008
|
(219)
|
(1,361)
|
(412)
|
236
|
(1,756)
|
||||
Defined
Benefit Pension and
Retiree Medical
Benefits Plans
|
Unrealized
Gain
(Loss)
on
Derivative
Instruments
and Other |
||||||||
Unrecognized
Prior
Service
Cost
|
Unrecognized
Actuarial
Gains
(Losses)
|
Income
Tax
Benefit
(Expense)
|
Total
|
||||||
Derivative
financial instruments:
|
|||||||||
Reclassification
into earnings
|
-
|
-
|
375
|
-
|
375
|
||||
Change
in fair value
|
-
|
-
|
46
|
-
|
46
|
||||
Unrealized
gain on student loan-
related
auction rate securities
|
-
|
-
|
3
|
-
|
3
|
||||
Employee
benefit plans:
|
|||||||||
Reclassification
of unrecognized
net
actuarial loss into
earnings
|
-
|
138
|
-
|
-
|
138
|
||||
Reclassification
of prior service
cost
into earnings
|
31
|
-
|
-
|
-
|
31
|
||||
Current
year actuarial gain
|
-
|
136
|
-
|
-
|
136
|
||||
Income
tax expense
|
-
|
-
|
-
|
(158)
|
(158)
|
||||
Balance
at December 31, 2009
|
$(188)
|
$(1,087)
|
$ 12
|
$ 78
|
$(1,185)
|
NOTE
11 - EMPLOYEE BENEFIT PLANS
Our employee benefits plans include
defined benefit pension plans, defined contribution (including 401(k) savings)
plans and a welfare benefit plan, which includes retiree medical
benefits. Substantially all of our domestic employees are covered by
one or more of these plans.
Defined Benefit Pension
Plans. Benefits under our defined benefit pension plans are
based on a combination of years of benefit accrual service and an employee's
final average compensation. Under the collective bargaining agreement
with our pilots ratified on March 31, 2005, which we refer to as the "pilot
agreement," future defined benefit accruals for pilots ceased and retirement
benefits accruing in the future are provided through two pilot-only defined
contribution plans. As required by the pilot agreement, defined
benefit pension assets and obligations related to pilots in our primary defined
benefit pension plan (covering substantially all U.S. employees other than
Chelsea Food Services division ("Chelsea") and CMI employees) were spun out into
a separate pilot-only defined benefit pension plan, which we refer to as the
"pilot defined benefit pension plan." On May 31, 2005, future benefit
accruals for pilots ceased and the pilot defined benefit pension plan was
"frozen." As of that freeze date, all existing accrued benefits for
pilots (including the right to receive a lump sum payment upon retirement) were
preserved in the pilot defined benefit pension plan. Accruals for
non-pilot employees under our primary defined benefit pension plan
continue.
Retiree Medical Benefits
Plans. Our retiree medical programs are self-insured
arrangements that permit retirees who meet certain age and service requirements
to continue medical coverage between retirement and Medicare
eligibility. Eligible employees are required to pay a portion of the
costs of their retiree medical benefits, which in some cases may be offset by
accumulated unused sick time at the time of their retirement. Plan
benefits are subject to co-payments, deductibles and other limits as described
in the plans. We account for the retiree medical benefits plan under
ASC Topic 715, “Compensation – Retirement Benefits,” which requires recognition
of the expected cost of benefits over the employee's service
period.
Obligation and Funded
Status. Our pension and retiree medical benefits obligations
are measured as of December 31 of each year. The following table sets
forth the changes in projected benefit obligation of the defined benefit pension
and retiree medical benefits plans at December 31 (in millions):
Defined
Benefit
Pension
|
Retiree
Medical
Benefits
|
|||||||
2009
|
2008
|
2009
|
2008
|
|||||
Accumulated
benefit obligation
|
$2,401
|
$2,273
|
N/A
|
N/A
|
||||
Benefit
obligation at beginning of year
|
2,482
|
$2,353
|
$249
|
$252
|
||||
Service
cost
|
65
|
59
|
11
|
12
|
||||
Interest
cost
|
153
|
149
|
15
|
16
|
||||
Actuarial
(gains) losses
|
70
|
168
|
(26)
|
(17)
|
||||
Participant
contributions
|
-
|
-
|
2
|
2
|
||||
Benefits
paid
|
(49)
|
(118)
|
(18)
|
(16)
|
||||
Lump
sum settlements
|
(92)
|
(129)
|
-
|
-
|
||||
Benefit
obligation at end of year
|
$2,629
|
$2,482
|
$233
|
$249
|
The retiree medical benefits plan and
certain supplemental defined benefit pension plans are unfunded. The
following table sets forth the change in the fair value of the defined benefit
pension plans' assets at December 31 (in millions):
2009
|
2008
|
|||
Fair
value of plan assets at beginning of year
|
$1,057
|
$1,817
|
||
Actual
gains (losses) on plan assets
|
268
|
(618)
|
||
Employer
contributions, including benefits
paid
under unfunded plans
|
187
|
105
|
||
Benefits
paid
|
(49)
|
(118)
|
||
Lump
sum settlements
|
(92)
|
(129)
|
||
Fair
value of plan assets at end of year
|
$1,371
|
$1,057
|
The unfunded portion of the defined
benefit pension and retiree medical benefits liabilities were recognized in the
accompanying consolidated balance sheets at December 31 as follows (in
millions):
Defined
Benefit
Pension
|
Retiree
Medical
Benefits
|
|||||||
2009
|
2008
|
2009
|
2008
|
|||||
Accrued
payroll
|
$ 10
|
$ 8
|
$ 17
|
$ 15
|
||||
Accrued
pension liability
|
1,248
|
1,417
|
-
|
-
|
||||
Accrued
retiree medical benefits
|
-
|
-
|
216
|
234
|
||||
Funded
status of the plans - net underfunded
|
$1,258
|
$1,425
|
$ 233
|
$249
|
The amounts in accumulated other
comprehensive loss that have not yet been recognized as components of net
periodic benefit expense at December 31, 2009 were as follows (in
millions):
Defined
Benefit
Pension
|
Retiree
Medical
Benefits
|
|||
Unrecognized
prior service cost
|
$ 22
|
$166
|
||
Unrecognized
actuarial (gains) losses
|
$1,174
|
$(87)
|
Unrecognized prior service cost is
expensed using a straight-line amortization of the cost over the average future
service of employees expected to receive benefits under the
plans. The following table sets forth the amounts of unrecognized
prior service cost and net actuarial loss recorded in accumulated other
comprehensive loss expected to be recognized as components of net periodic
benefit expense during 2010 (in millions):
Defined
Benefit
Pension
|
Retiree
Medical
Benefits
|
|||
Prior
service cost
|
$ 10
|
$21
|
||
Actuarial
(gains) losses
|
$ 87
|
$(4)
|
The following actuarial assumptions
were used to determine our benefit obligations at December 31:
Defined
Benefit
Pension
|
Retiree
Medical
Benefits
|
||||||||
2009
|
2008
|
2009
|
2008
|
||||||
Weighted
average discount rate
|
6.01%
|
6.13%
|
5.57%
|
6.03%
|
|||||
Weighted
average rate of compensation increase
|
2.30%
|
2.30%
|
-
|
-
|
|||||
Health
care cost trend rate
|
-
|
-
|
7.50%
|
7.50%
|
The December 31, 2009 health care cost
trend rate is assumed to decline gradually to 5% by 2015.
Net periodic defined benefit pension
and retiree medical benefits expense for the year ended December 31 included the
following components (in millions):
Defined Benefit
Pension
|
Retiree Medical
Benefits
|
|||||
2009
|
2008
|
2007
|
2009
|
2008
|
2007
|
|
Service
cost
|
$ 65
|
$ 59
|
$ 61
|
$ 11
|
$12
|
$11
|
Interest
cost
|
153
|
149
|
158
|
15
|
15
|
14
|
Expected
return on plan assets
|
(89)
|
(157)
|
(137)
|
-
|
-
|
-
|
Amortization
of unrecognized
net
actuarial (gain) loss
|
111
|
34
|
68
|
(2)
|
(1)
|
(2)
|
Amortization
of prior service cost
|
10
|
10
|
10
|
21
|
21
|
20
|
Net
periodic benefit expense
|
250
|
95
|
160
|
45
|
47
|
43
|
Settlement
charges (included in
special
charges)
|
29
|
52
|
31
|
-
|
-
|
-
|
Net
benefit expense
|
$ 279
|
$ 147
|
$ 191
|
$ 45
|
$47
|
$43
|
During 2009, 2008 and 2007, we recorded
non-cash settlement charges totaling $29 million, $52 million and $31 million,
respectively, related to lump sum distributions from our pilot-only defined
benefit pension plan to pilots who retired. Settlement accounting is
required 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 a 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.
The following actuarial assumptions
were used to determine our net periodic benefit expense for the year ended
December 31:
Defined Benefit
Pension
|
Retiree Medical
Benefits
|
|||||
2009
|
2008
|
2007
|
2009
|
2008
|
2007
|
|
Weighted
average discount rate
|
6.13%
|
6.27%
|
5.95%
|
6.03%
|
6.02%
|
5.76%
|
Expected
long-term rate of return
on
plan assets
|
8.25%
|
8.50%
|
8.26%
|
-
|
-
|
-
|
Weighted
average rate of
compensation increase
|
2.30%
|
2.30%
|
2.30%
|
-
|
-
|
-
|
Health
care cost trend rate
|
-
|
-
|
-
|
7.50%
|
8.00%
|
8.00%
|
The 2009 health care cost trend rate is
assumed to decline gradually to 5% by 2014.
A one percentage point change in the
assumed health care cost trend rate would have the following effect (in
millions):
One
Percent
Increase
|
One
Percent
Decrease
|
|||
Impact
on 2009 retiree medical benefits expense
|
$ 3
|
$ (2)
|
||
Impact
on accrued retiree medical benefits as of
December
31, 2009
|
$22
|
$(20)
|
The defined benefit pension plans'
assets consist primarily of equity and fixed-income securities held through
common collective trusts. The fair values of our defined benefit
pension plans’ assets as of December 31, 2009 were as follows (in
millions):
Total
|
Level
1
|
Level
2
|
Level
3
|
||
Equity
securities:
|
|||||
U.S.
companies
|
$ 661
|
$ -
|
$ 661
|
$ -
|
|
International
companies
|
292
|
-
|
292
|
||
Fixed-income
securities
|
290
|
-
|
290
|
-
|
|
Private
equity funds
|
128
|
-
|
-
|
128
|
|
Total
|
$1,371
|
$ -
|
$1,243
|
$128
|
See Note 6 for a discussion of the
levels of inputs to determine fair value.
Equity securities include investments
in large-cap and small-cap companies. Fixed-income securities include
corporate bonds of companies in diversified industries and asset- and
mortgage-backed securities. Investments in equity securities and
fixed-income securities are commingled funds valued at the unit of participation
value of shares held by the plans’ trust.
The private equity funds invest
primarily in common stock of companies in diversified industries and in buyout,
venture capital and special situation funds. Investments in private
equity funds are valued at the net asset value of shares held by the plans’
trust at year end.
The reconciliation of our defined
benefit plans assets measured at fair value using unobservable inputs (Level 3)
for the year ended December 31, 2009 is as follows (in millions):
Private Equity
Funds
|
||
Balance
at December 31, 2008
|
$127
|
|
Actual
return on plan assets:
|
||
Unrealized
gains (losses) relating to assets still held at year end
|
(2)
|
|
Purchases,
sales, issuances and settlements (net)
|
3
|
|
Balance
at December 31, 2009
|
$128
|
We develop our expected long-term rate
of return assumption based on historical experience and by evaluating input from
the trustee managing the plans' assets. Our expected long-term
rate of return on plan assets is based on a target allocation of assets, which
is based on our goal of earning the highest rate of return while maintaining
risk at acceptable levels. The plans strive to have assets
sufficiently diversified so that adverse or unexpected results from one security
class will not have an unduly detrimental impact on the entire
portfolio. We regularly review our actual asset allocation and the
pension plans' investments are periodically rebalanced to our targeted
allocation when considered appropriate. Plan assets are allocated
within the following guidelines:
Percent of
Total
|
Expected
Long-Term
Rate of
Return
|
|||
Equity
securities:
|
||||
U.S.
companies
|
35-55%
|
8%
|
||
International
companies
|
15-25
|
9
|
||
Fixed-income
securities
|
15-25
|
5
|
||
Other
|
0-15
|
11
|
Funding requirements for tax-qualified
defined benefit pension plans are determined by government
regulations. During 2009, we contributed $176 million to our
tax-qualified defined benefit pension plans, satisfying our minimum funding
requirements during calendar year 2009. We contributed an additional
$34 million to our tax-qualified defined benefit pension plans in January
2010. We estimate that our remaining minimum funding requirements
during calendar year 2010 are approximately $85 million.
We project that our defined benefit
pension and retiree medical plans will make the following benefit payments,
which reflect expected future service and include expected lump sum
distributions, during the year ended December 31 (in millions):
Defined
Benefit
Pension
|
Retiree
Medical
Benefits
|
||||
2010
|
$ 155
|
$ 17
|
|||
2011
|
165
|
17
|
|||
2012
|
180
|
17
|
|||
2013
|
192
|
17
|
|||
2014
|
208
|
18
|
|||
2015
through 2019
|
946
|
105
|
Defined Contribution Plans
for Pilots. As required by the pilot agreement, two pilot-only
defined contribution plans were established in 2005. One of these
plans is a money purchase pension plan -- a type of defined contribution plan
subject to the minimum funding rules of the Internal Revenue
Code. Contributions under this plan are generally expressed as a
percentage of applicable pilot compensation, subject to limits under the
Internal Revenue Code. The other pilot-only defined contribution plan
is a 401(k) plan that was established by transferring the pilot accounts from
our pre-existing primary 401(k) plan (covering substantially all of our U.S.
employees other than CMI employees) to a separate pilot-only 401(k)
plan. Pilots may make elective pre-tax and/or post-tax contributions
to the pilot-only 401(k) plan. In addition, the pilot agreement
provides for variable employer contributions to the pilot-only 401(k) plan based
on pre-tax profits during a portion of the term of the pilot
agreement. To the extent the Internal Revenue Code limits preclude
employer contributions called for by the pilot agreement, the disallowed amount
will be paid directly to the pilots as current wages under a corresponding
nonqualified arrangement. Our expense related to the defined
contribution plans for pilots was $77 million, $82 million and $69 million in
the years ended December 31, 2009, 2008 and 2007, respectively.
Other 401(k)
Plans. We have two other defined contribution 401(k) employee
savings plans in addition to the pilot-only 401(k) plan, a 401(k) plan covering
substantially all domestic employees except for pilots and a 401(k) plan
covering substantially all of the employees of CMI. Participants in
the non-pilot 401(k) plans may make elective pre-tax and/or post-tax
contributions, and substantially all of those participants who are not and will
not become eligible for the Company's defined benefit pension plans are eligible
to receive employer non-elective contributions, expressed as a percentage of
applicable compensation, under the non-pilot 401(k) plans. The
non-pilot 401(k) plans were amended effective January 1, 2009 to provide for the
reinstatement of service-based employer matching 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. For the years ended December 31,
2009, 2008 and 2007, total expense for these defined contribution plans was $19
million, $6 million and $5 million, respectively.
Profit Sharing
Plan. Our enhanced profit sharing plan, which was in place
through December 31, 2009, created an award pool for employees of 30% of the
first $250 million of annual pre-tax income, 25% of the next $250 million and
20% of amounts over $500 million. Payment of profit sharing to
eligible employees would be made under the plan in the fiscal year following the
year in which profit sharing is earned and the related expense is
recorded. Substantially all of our employees participated in this
program except for officers and management directors. We recognized
$172 million of profit sharing expense and related payroll taxes in
2007. This amount is included in wages, salaries and related costs in
our consolidated statements of operations. As we incurred losses in
2009 and 2008, there was no profit sharing expense in those years.
On December 31, 2009, our enhanced
profit sharing plan expired. Effective January 1, 2010, we adopted a
new profit sharing plan with a five year term. Our new profit sharing
plan creates an award pool of 15% of annual pre-tax income excluding special,
unusual or non-recurring items. Generally, the profit sharing pool
will be distributed among eligible employees based on an employee’s annual base
pay relative to the annual base pay of all employees.
NOTE
12 - INCOME TAXES
Income tax benefit (expense) for the
year ended December 31 consisted of the following (in millions):
2009
|
2008
|
2007
|
||||
Federal:
|
||||||
Current
|
$ -
|
$ (2)
|
$ (3)
|
|||
Deferred
|
143
|
233
|
(194)
|
|||
State:
|
||||||
Current
|
(1)
|
-
|
(2)
|
|||
Deferred
|
15
|
20
|
(17)
|
|||
Foreign:
|
||||||
Current
|
-
|
-
|
(1)
|
|||
Tax
benefit resulting from intraperiod tax
allocation
|
158
|
-
|
-
|
|||
Valuation
allowance
|
(158)
|
(142)
|
100
|
|||
Total
income tax benefit (expense)
|
$ 157
|
$ 109
|
$(117)
|
We are required to consider all items
(including items recorded in other comprehensive income) in determining the
amount of tax benefit that results from a loss from continuing operations and
that should be allocated to continuing operations. As a result, we
recorded a $158 million non-cash tax benefit on the loss from continuing
operations for 2009, which is exactly offset by income tax expense on other
comprehensive income. However, while the income tax benefit from
continuing operations is reported in our consolidated statement of operations,
the income tax expense on other comprehensive income is recorded directly to
other comprehensive income, which is a component of stockholders’
equity. Because the income tax expense on other comprehensive income
is equal to the income tax benefit from continuing operations, our net deferred
tax position at December 31, 2009 is not impacted by this tax
allocation.
The reconciliation of income tax
computed at the United States federal statutory tax rate to income tax benefit
(expense) for the years ended December 31 is as follows (in
millions):
Amount
|
Percentage
|
|||||
2009
|
2008
|
2007
|
2009
|
2008
|
2007
|
|
Income
tax benefit (expense)
at
United States statutory rates
|
$154
|
$243
|
$(194)
|
35.0%
|
35.0%
|
35.0%
|
State
income tax benefit (expense),
net
of federal benefit (expense)
|
9
|
14
|
(12)
|
2.0
|
2.0
|
2.1
|
Meals
and entertainment disallowance
|
(4)
|
(5)
|
(6)
|
(1.0)
|
(0.7)
|
1.1
|
Tax
benefit resulting from intraperiod
tax
allocation
|
158
|
-
|
-
|
36.0
|
-
|
-
|
Valuation
allowance
|
(158)
|
(142)
|
100
|
(36.0)
|
(20.4)
|
(18.0)
|
Other
|
(2)
|
(1)
|
(5)
|
(0.3)
|
(0.1)
|
0.9
|
Income
tax benefit (expense)
|
$ 157
|
$ 109
|
$(117)
|
35.7 %
|
15.8 %
|
21.1%
|
For financial reporting purposes,
income tax benefit recorded on losses results in deferred tax
assets. We have concluded that we are required to provide a valuation
allowance for net deferred tax assets due to our continued losses and our
determination that it is more likely than not that such deferred tax assets
would ultimately not be realized. As a result, our losses are
generally not reduced by any tax benefit. Consequently, we also did
not record any provision for income taxes on our pre-tax income in 2007 because
we utilized a portion of the net operating loss carryforwards ("NOLs") for which
we had not previously recognized a benefit. In the fourth quarter of
2007, we recorded income tax expense of $114 million to increase the valuation
allowance to be fully reserved for certain NOLs, expiring in 2008 through 2011,
which more likely than not would not be realized prior to their
expiration. In the second quarter of 2008, we recorded an income tax
benefit of $28 million resulting from higher utilization of those NOLs than had
been previously anticipated. We have approximately $3.9 billion of
additional NOLs for federal income tax purposes, which expire between the years
2020 and 2029, available for use to offset future cash income
taxes.
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 our deferred tax
assets and (liabilities) as of December 31 were as follows (in
millions):
2009
|
2008
|
|||
Fixed
assets, intangibles and spare parts
|
$(1,775)
|
$(1,767)
|
||
Other,
net
|
(58)
|
-
|
||
Gross
deferred tax liabilities
|
(1,833)
|
(1,767)
|
||
Net
operating loss carryforwards
|
1,412
|
1,355
|
||
Pension
liability
|
412
|
481
|
||
Accrued
liabilities
|
516
|
558
|
||
Other,
net
|
56
|
161
|
||
Gross
deferred tax assets
|
2,396
|
2,555
|
||
Valuation
allowance
|
(563)
|
(788)
|
||
Net
deferred tax liability
|
-
|
-
|
||
Less: current
deferred tax asset
|
203
|
216
|
||
Non-current
deferred tax liability
|
$ (203)
|
$ (216)
|
Section 382 of the Internal Revenue
Code ("Section 382") imposes limitations on a corporation's ability to utilize
NOLs if it experiences an "ownership change." In general terms, an
ownership change may result from transactions increasing the ownership of
certain stockholders in the stock of a corporation by more than 50 percentage
points over a three-year period. In the event of an ownership change,
utilization of our NOLs would be subject to an annual limitation under Section
382 determined by multiplying the value of our stock at the time of the
ownership change by the applicable long-term tax-exempt rate (which is 4.16% for
December 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 December 31,
2009 under current conditions, our annual NOL utilization could be limited to
$103 million per year, before consideration of any built-in gains.
Activity in our deferred tax asset
valuation allowance for the year ended December 31 was as follows (in
millions):
2009
|
2008
|
2007
|
|
Balance
at beginning of year
|
$ 788
|
$ 192
|
$ 473
|
Valuation
allowance (utilized) provided for taxes related to:
|
|||
Income
(loss) before income taxes
|
158
|
142
|
(100)
|
Items
recorded directly to accumulated other
comprehensive
loss
|
(269)
|
462
|
(187)
|
Expiration
of NOLs
|
(115)
|
-
|
-
|
Other
|
1
|
(8)
|
6
|
Balance
at end of year
|
$ 563
|
$ 788
|
$ 192
|
Our federal and state income tax
returns for years after 2005 remain subject to examination by the taxing
authorities.
NOTE
13 - SPECIAL CHARGES
Special charges for the years ended
December 31 were as follows (in millions):
2009
|
2008
|
2007
|
|
Aircraft-related
charges
|
$ 89
|
$ 40
|
$(22)
|
Pension
settlement charges (see Note 11)
|
29
|
52
|
31
|
Severance
|
5
|
34
|
-
|
Route
impairment (see Notes 1 and 2)
|
12
|
18
|
-
|
Other
|
10
|
37
|
4
|
Total
special charges
|
$ 145
|
$ 181
|
$ 13
|
The special charges all relate to our
mainline segment unless otherwise noted.
Year Ended December 31,
2009. Aircraft-related charges of $89 million in 2009 include
$31 million of non-cash impairments of owned Boeing 737-300 and 737-500 aircraft
and related assets, $39 million of other aircraft-related charges and $19
million of losses related to subleasing regional jets.
We recorded a $31 million impairment
charge on the Boeing 737-300 and 737-500 fleets related 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 2010. We recorded an initial
impairment charge in 2008 for each of these fleet types. The
additional write-down in 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 $39 million of other
charges related to our mainline fleet, primarily related to the grounding and
sale of Boeing 737-300 and 737-500 aircraft and the write-off of certain
obsolete spare parts. The 737-300 and 737-500 aircraft fleets and
spare parts, a portion of which was being sold on consignment, experienced
further declines in fair values during the fourth quarter of 2009 primarily as
the result of additional 737 aircraft being grounded by other
airlines. During 2009, we sold eight 737-500 aircraft to foreign
buyers. Our gains on these sales were not material.
In December 2009, we agreed with
ExpressJet to amend our capacity purchase agreement to permit ExpressJet to fly
eight ERJ-145 aircraft for another carrier under a capacity purchase
agreement. These eight aircraft are subleased from us and were
previously flown for us under our capacity purchase agreement. We
recorded a $13 million charge in our regional segment based on the difference
between the sublease rental and the contracted rental payments on those aircraft
during the two and one-half year average initial term of the related sublease
agreement.
In July 2009, we entered into
agreements to sublease five temporarily grounded ERJ-135 aircraft to Chautauqua
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. We recorded a $6 million 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.
At December 31, 2009, we had four owned
and three leased Boeing 737-500 aircraft that were grounded. We had
also grounded seven owned and three leased Boeing 737-300
aircraft. The owned Boeing 737-500 and 737-300 aircraft are being
carried at aggregate fair values of $33 million and $22 million,
respectively. The three leased Boeing 737-300 aircraft were returned
to the lessor in January 2010 and the leases on the three Boeing 737-500
aircraft will expire during the first half of 2012. We have also
temporarily grounded 25 leased 37-seat ERJ-135 aircraft and have subleased five
others for terms of five years. The leases on these 30 ERJ-135
aircraft expire in 2016 through 2018.
If economic conditions deteriorate
further, we may incur additional special charges in future periods as we attempt
to dispose of our grounded Boeing 737-300 and 737-500
aircraft. Additionally, we may incur further accounting charges as a
result of future fleet actions, including costs associated with future lease
payments on the 30 ERJ-135 aircraft. We are not able to estimate the
amount and timing of these future charges.
During 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.
Other special charges in 2009 related
primarily to an adjustment to our reserve for unused facilities due to
reductions in expected sublease income for a maintenance hangar in
Denver.
Year Ended December 31,
2008. Aircraft-related charges of $40 million in 2008 include
non-cash impairments on owned Boeing 737-300 and 737-500 aircraft and related
assets. Aircraft-related charges in 2008 also includes charges for
future lease costs on permanently grounded 737-300 aircraft and gains on the
sale of ten Boeing 737-500 aircraft.
In conjunction with the 2008 capacity
reductions, we incurred $34 million for severance and continuing medical
coverage for employees accepting early retirement packages or company-offered
leaves of absence during 2008. Approximately 3,000 positions were
eliminated as a result of the capacity reductions, the majority of which were
implemented in September 2008.
Other special charges in 2008 related
primarily to contract settlements with regional carriers and adjustments to
reserves for unused facilities.
Year Ended December 31,
2007. Aircraft related credits of $22 million in 2007 related
primarily to the sale of three 737-500 aircraft. Other special
charges in 2007 of $4 million related to a change in the mandatory retirement
age for our pilots from age 60 to 65 signed into law on December 31,
2007. Because of the extension of the mandatory retirement age, we
recorded an additional $4 million liability for the long-term disability plan
for our pilots in 2007.
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
at December 31, 2006
|
$ -
|
$ -
|
$10
|
|||
Accrual
|
-
|
-
|
-
|
|||
Payments
|
-
|
-
|
(2)
|
|||
Balance
At December 31, 2007
|
-
|
-
|
8
|
|||
Accrual
|
34
|
14
|
14
|
|||
Payments
|
(6)
|
(4)
|
(2)
|
|||
Balance
at December 31, 2008
|
28
|
10
|
20
|
|||
Accrual
|
5
|
1
|
10
|
|||
Payments
|
(19)
|
(9)
|
(4)
|
|||
Balance
at December 31, 2009
|
$ 14
|
$ 2
|
$26
|
|||
Cumulative
accruals January 1, 2007
through
December 31, 2009
|
$ 39
|
$ 15
|
$24
|
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
14 – GAINS ON SALES OF INVESTMENTS
Copa. 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.
Holdings. In
2007, we sold all of our shares of the common stock of Holdings, the parent
company of ExpressJet, to third parties for cash proceeds of $35
million. We recognized a gain of $7 million as a result of these
sales.
ARINC. ARINC,
Inc. (“ARINC”) develops and operates communications and information processing
systems and provides systems engineering and other services to the aviation
industry and other industries. In 2007, we sold all of our ARINC
common stock and received cash proceeds of $30
million. Our investment in ARINC had no carrying value, resulting in
a gain of $30 million.
NOTE
15 - VARIABLE INTEREST ENTITIES
Certain types of entities in which a
company absorbs a majority of another entity's expected losses, receives a
majority of the other entity's expected residual returns, or both, as a result
of ownership, contractual or other financial interests in the other entity are
required to be consolidated. These entities are called "variable
interest entities." The principal characteristics of variable
interest entities are (1) an insufficient amount of equity to absorb the
entity's expected losses, (2) equity owners as a group are not able to make
decisions about the entity's activities, or (3) equity that does not absorb the
entity's losses or receive the entity's residual returns. "Variable
interests" are contractual, ownership or other monetary interests in an entity
that change with fluctuations in the entity's net asset value. As a
result, variable interest entities can arise from items such as lease
agreements, loan arrangements, guarantees or service contracts.
If an entity is determined to be a
"variable interest entity," the entity must be consolidated by the "primary
beneficiary." The primary beneficiary is the holder of the variable
interests that absorbs a majority of the variable interest entity's expected
losses or receives a majority of the entity's residual returns in the event no
holder has a majority of the expected losses. There is no primary
beneficiary in cases where no single holder absorbs the majority of the expected
losses or receives a majority of the residual returns. The
determination of the primary beneficiary is based on projected cash flows at the
inception of the variable interests.
We have variable interests in the
following types of variable interest entities:
Aircraft
Leases. We are the lessee in a series of operating leases
covering the majority of our leased aircraft. The lessors are trusts
established specifically to purchase, finance and lease aircraft to
us. These leasing entities meet the criteria for variable interest
entities. We are generally not the primary beneficiary of the leasing
entities if the lease terms are consistent with market terms at the inception of
the lease and do not include a residual value guarantee, fixed-price purchase
option or similar feature that obligates us to absorb decreases in value or
entitles us to participate in increases in the value of the
aircraft. This is the case for many of our operating leases; however,
leases of approximately 75 mainline jet aircraft contain a fixed-price purchase
option that allows us to purchase the aircraft at predetermined prices on
specified dates during the lease term. Additionally, leases of
substantially all of our 256 leased regional jet aircraft contain an option to
purchase the aircraft at the end of the lease term at prices that, depending on
market conditions, could be below fair value. We have not
consolidated the related trusts because, even taking into consideration these
purchase options, we are still not the primary beneficiary based on our cash
flow analyses. Our maximum exposure under these leases is the
remaining lease payments, which are reflected in future lease commitments in
Note 5.
Airport
Leases. We are the lessee of real property under long-term
operating leases at a number of airports where we are also the guarantor of
approximately $1.5 billion of underlying debt and interest
thereon. These leases are typically with municipalities or other
governmental entities, which are excluded from the consolidation requirements
concerning variable interest entities. To the extent our lease and
related guarantee are with a separate legal entity other than a governmental
entity, we are not the primary beneficiary because the lease terms are
consistent with market terms at the inception of the lease and the lease does
not include a residual value guarantee, fixed-price purchase option or similar
feature as discussed above.
Subsidiary
Trust. We have a subsidiary trust that has mandatorily
redeemable preferred securities outstanding with a liquidation value of $248
million. The trust is a variable interest entity because we have a
limited ability to make decisions about its activities. However, we
are not the primary beneficiary of the trust. Therefore, the trust
and the mandatorily redeemable preferred securities issued by the trust are not
reported on our balance sheets. Instead, we report our 6% convertible
junior subordinated debentures held by the trust as long-term debt and interest
on the notes is recorded as interest expense for all periods presented in the
accompanying financial statements.
NOTE
16 - REGIONAL CAPACITY PURCHASE AGREEMENTS
Capacity Purchase Agreement
with ExpressJet
General. In
June 2008, we entered into the Second Amended and Restated Capacity Purchase
Agreement with ExpressJet and certain of its affiliates (the " ExpressJet CPA"),
which amended and restated our capacity purchase agreement with ExpressJet
effective July 1, 2008. Under the ExpressJet CPA, we purchase all of
the capacity from the ExpressJet flights covered by the agreement at a
negotiated price.
Capacity and Fleet
Matters. At December 31, 2009, 212 Embraer 50-seat regional
jets were being operated as covered aircraft under the ExpressJet
CPA. The minimum number of covered aircraft under the ExpressJet CPA
is currently 190 regional jets, and will be reduced as leases on covered
aircraft expire. ExpressJet also subleases 32 Embraer 50-seat
regional jets from us outside of the capacity purchase provisions of the
ExpressJet CPA at reduced rental rates. During September 2008, we
temporarily grounded all 30 of the subleased 37-seat ERJ 135 aircraft being
flown by ExpressJet on our behalf and notified ExpressJet that these aircraft
would be withdrawn from the ExpressJet CPA. Five of these aircraft
are now subleased to Chautauqua.
Term of
Agreement. The ExpressJet CPA will expire in June 2015, with
provisions for an appropriate wind-down period, and has no renewal or extension
options. We may terminate the agreement at any time for "cause" (as
defined in the ExpressJet CPA) and either party may terminate for breach of the
agreement, subject to certain notice and cure periods. The ExpressJet
CPA also modified our rights under our former capacity purchase agreement by
reducing the scope of change-in-control limitations on ExpressJet, reducing
restrictions on ExpressJet flying into our hub airports, and removing the
most-favored-nation clause relating to agreements ExpressJet may enter into with
other airlines.
Compensation and Operational
Responsibilities. In exchange for ExpressJet's operation of
the flights and performance of other obligations under the ExpressJet CPA, we
have agreed to pay ExpressJet a pre-determined rate, subject to annual inflation
adjustments (capped at 3.5%), for each block hour flown (the hours from gate
departure to gate arrival) and to reimburse ExpressJet for various pass-through
expenses (with no margin or mark-up) related to the flights, including aviation
insurance, property taxes, international navigation fees, depreciation
(primarily aircraft-related), landing fees and certain maintenance
expenses. Under the ExpressJet CPA, we are responsible for the cost
of providing fuel for all flights and for paying aircraft rent for all of the
aircraft covered by the ExpressJet CPA. The ExpressJet CPA contains
incentive bonus and rebate provisions based upon ExpressJet's operational
performance.
Service
Agreements. We provide various services to ExpressJet,
including loading fuel into aircraft, certain customer services such as ground
handling, related airport terminal real estate, certain technology services
dedicated to flight opening and closeout processes and aviation insurance
procurement. Prior to the July 1, 2008 amendment to the ExpressJet
CPA, we charged ExpressJet for these services at rates in accordance with the
then-effective capacity purchase agreement. For providing these
services, we charged ExpressJet approximately $41 million and $88 million in
2008 and 2007, respectively. Effective July 1, 2008, we still provide
these services but do not charge ExpressJet.
Leases. As
of December 31, 2009, ExpressJet leased all 212 of the aircraft flown for us
under long-term operating leases from us. During the base term of the
ExpressJet CPA and an appropriate wind-down period, ExpressJet's lease
agreements with us have substantially the same terms as the lease agreements
between us and the lessor, except that ExpressJet does not pay us rent on the
aircraft operated under the capacity purchase provisions of the ExpressJet
CPA. Aircraft will be removed from the ExpressJet CPA as their
lease period ends. Upon expiration of the ExpressJet CPA, ExpressJet
has the option to retain up to 150 aircraft through the remaining lease terms
and replacing us as the primary obligor under the leases, releasing us from all
obligations related to the leases. ExpressJet also leases or
subleases, under various operating leases, ground equipment and substantially
all of its ground facilities, including facilities at public airports, from us
or the municipalities or agencies owning and controlling such
airports. If ExpressJet defaults on any of its payment obligations
with us, we are entitled to reduce any payments required to be made by us to
ExpressJet under the ExpressJet CPA by the amount of the defaulted
payment.
As of December 31, 2009, ExpressJet
subleased from us and operated 32 aircraft outside of the capacity purchase
provisions of ExpressJet CPA. The lease agreements for these aircraft
have substantially the same terms as the lease agreements between us and the
lessor, except that ExpressJet pays us reduced rent on these
aircraft. Our total rental income related to all leases with
ExpressJet was approximately $23 million, $205 million and $360 million in 2009,
2008 and 2007, respectively, including $22 million, $76 million and $79 million,
respectively, related to regional jets operated by ExpressJet outside of the
capacity purchase provisions of the ExpressJet CPA, which is reported as other
revenue. Our aircraft rental income on aircraft flown for us through
June 30, 2008 is reported as a reduction to regional capacity purchase,
net.
Capacity Purchase Agreement
with Chautauqua
Chautauqua operates 50-seat regional
jets as a Continental Express carrier under a capacity purchase agreement ("the
Chautauqua CPA"). As of December 31, 2009, 22 aircraft were being
flown by Chautauqua for us. The Chautauqua CPA requires us to pay
Chautauqua a fixed fee, subject to annual inflation adjustments (capped at
3.5%), for each block hour flown for its operation of the
aircraft. Chautauqua supplies the aircraft that it operates under the
agreement. Aircraft are scheduled to be removed from service under
the Chautauqua CPA each year through 2012, provided that we have the unilateral
right to extend the Chautauqua CPA on the same terms on an aircraft-by-aircraft
basis for a period of up to five years in the aggregate for 20 aircraft and for
up to three years in the aggregate for seven aircraft, subject to the renewal
terms of the related aircraft lease. Chautauqua also subleases five
Embraer 37-seat aircraft from us that are not operated on our
behalf.
Capacity Purchase Agreement
with Colgan
Colgan operates fourteen 74-seat
Bombardier Q400 twin-turboprop aircraft as a Continental Connection carrier on
short and medium-distance routes from New York Liberty on our
behalf. Colgan operates the flights under a capacity purchase
agreement with us. In January 2009, we amended the capacity purchase
agreement to increase by 15 the number of Q400 aircraft to be operated by Colgan
on our behalf. We expect that Colgan will begin operating these 15
additional aircraft as they are delivered, beginning in the third quarter of
2010 through the second quarter of 2011. Each aircraft is scheduled
to be covered by the agreement for ten years following the date such aircraft is
delivered into service thereunder. Colgan supplies all of the
aircraft that it operates under the agreement.
Capacity Purchase Agreement
with CommutAir
Our capacity purchase agreement with
CommutAir (the "CommutAir CPA"), provides for CommutAir to operate sixteen
37-seat Bombardier Q200 twin-turboprop aircraft as a Continental Connection
carrier on short distance routes from Cleveland Hopkins and New York
Liberty. CommutAir supplies all of the aircraft that it operates
under the agreement.
Indemnification Under
Capacity Purchase Agreements
Under each of these capacity purchase
agreements, our regional operator is generally required to indemnify us for any
claims arising in connection with its operation of the aircraft under the
agreement and to maintain separate insurance to cover its indemnification
obligation.
Commitments under Capacity
Purchase Agreements
Our future commitments under our
capacity purchase agreements are dependent on numerous variables, and are
therefore difficult to predict. The most important of these variables
is the number of scheduled block hours. Although we are not required
to purchase a minimum number of block hours under certain of our capacity
purchase agreements, we have set forth below estimates of our future payments
under the agreement based on our stated assumptions. These estimates
of our future payments under all of the capacity purchase agreements do not
include the portion of the underlying obligation for any aircraft leased to
ExpressJet or deemed to be leased from Chautauqua, CommutAir or Colgan and
facility rent that are disclosed as part of aircraft and nonaircraft operating
leases. For purposes of calculating these estimates, we have assumed
(1) the number of block hours flown is based on our anticipated level of flight
activity or at any contractual minimum utilization levels if applicable, (2)
that we will reduce the fleet as rapidly as contractually allowed under each
agreement, (3) that aircraft utilization, stage length and load factors will
remain constant, (4) that each carrier's operational performance will remain at
historic levels, and (5) that inflation is projected to be between 0.3% and 2.4%
per year. Based on these assumptions, our future payments through the
end of the terms of our capacity purchase agreements at December 31, 2009 were
estimated as follows (in millions):
Year
ending December 31,
|
|||
2010
|
$ 693
|
||
2011
|
693
|
||
2012
|
704
|
||
2013
|
683
|
||
2014
|
649
|
||
Later
years
|
884
|
||
Total
|
$4,306
|
It is important to note that the actual
amounts we pay to our regional operators under capacity purchase agreements
could differ materially from these estimates. For example, a 10%
increase or decrease in scheduled block hours for all of our regional operators
(whether as a result of changes in average daily utilization or otherwise) in
2010 would result in a corresponding increase or decrease in cash obligations
under the capacity purchase agreements of approximately 9.2%, or $64
million.
NOTE
17 - RELATED PARTY TRANSACTIONS
Prior to April 2008, Northwest
Airlines, Inc. held the sole share of our Series B preferred
stock. Until October 2009, we had a global alliance with Northwest
involving extensive codesharing, frequent flyer reciprocity and other
cooperative activities. The other cooperative activities are
considered normal to the daily operations of both airlines. As a
result of these other cooperative activities, we paid Northwest $9 million and
$28 million in 2008 and 2007, respectively, and Northwest paid us $9 million and
$13 million in 2008 and 2007, respectively. The payments to and from
Northwest were in the ordinary course of business were based on prevailing
market rates. These payments do not include interline billings, which
are common among airlines for transportation-related services.
NOTE
18 - 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 with a capacity of 79 or fewer seats. As of December 31,
2009, the regional segment was operated by ExpressJet, Chautauqua, CommutAir and
Colgan through capacity purchase agreements. See Note 16 for further
discussion of the capacity purchase agreements.
We evaluate segment performance based
on several factors, of which the primary financial measure is operating income
(loss). However, we do not manage our business or allocate resources
based on segment operating profit or loss because (1) our flight schedules are
designed to maximize revenue from passengers flying, (2) many operations of the
two segments are substantially integrated (for example, airport operations,
sales and marketing, scheduling and ticketing) and (3) management decisions are
based on their anticipated impact on the overall network, not on one individual
segment.
Financial information for the year
ended December 31 by business segment is set forth below (in
millions):
2009
|
2008
|
2007
|
|||||
Operating
Revenue:
|
|||||||
Mainline
|
$10,635
|
$12,827
|
$12,019
|
||||
Regional
|
1,951
|
2,414
|
2,213
|
||||
Total
Consolidated
|
$12,586
|
$15,241
|
$14,232
|
||||
Depreciation
and amortization expense:
|
|||||||
Mainline
|
$ 481
|
$ 427
|
$ 400
|
||||
Regional
|
13
|
11
|
13
|
||||
Total
Consolidated
|
$ 494
|
$ 438
|
$ 413
|
||||
Special
Charges (Note 13):
|
|||||||
Mainline
|
$ 125
|
$ 155
|
$ 13
|
||||
Regional
|
20
|
26
|
-
|
||||
Total
Consolidated
|
$ 145
|
$ 181
|
$ 13
|
||||
Operating
Income (Loss):
|
|||||||
Mainline
|
$ 164
|
$ 74
|
$ 848
|
||||
Regional
|
(310)
|
(388)
|
(161)
|
||||
Total
Consolidated
|
$ (146)
|
$ (314)
|
$ 687
|
||||
Interest
Expense:
|
|||||||
Mainline
|
$ 355
|
$ 363
|
$ 379
|
||||
Regional
|
12
|
13
|
14
|
||||
Total
Consolidated
|
$ 367
|
$ 376
|
$ 393
|
||||
Interest
Income:
|
|||||||
Mainline
|
$ 12
|
$ 65
|
$ 160
|
||||
Regional
|
-
|
-
|
-
|
||||
Total
Consolidated
|
$ 12
|
$ 65
|
$ 160
|
||||
Income
Tax Benefit (Expense):
|
|||||||
Mainline
|
$ 42
|
$ 51
|
$(150)
|
||||
Regional
|
115
|
58
|
33
|
||||
Total
Consolidated
|
$ 157
|
$ 109
|
$(117)
|
||||
Net
Income (Loss):
|
|||||||
Mainline
|
$ (76)
|
$ (243)
|
$ 581
|
||||
Regional
|
(206)
|
(343)
|
(142)
|
||||
Total
Consolidated
|
$(282)
|
$(586)
|
$ 439
|
The amounts presented above are
presented on the basis of how our management reviews segment
results. Under this basis, the regional segment's revenue includes a
pro-rated share of our ticket revenue for segments flown by regional carriers
and expenses include all activity related to the regional operations, regardless
of whether the costs were paid directly by us or to the regional
carriers.
Information concerning operating
revenue by principal geographic area for the year ended December 31 is as
follows (in millions):
2009
|
2008
|
2007
|
||||
Domestic
|
$ 6,941
|
$8,327
|
$8,053
|
|||
Trans-Atlantic
|
2,614
|
3,448
|
3,065
|
|||
Latin
America
|
1,947
|
2,283
|
1,981
|
|||
Pacific
|
1,084
|
1,183
|
1,133
|
|||
$12,586
|
$15,241
|
$14,232
|
We attribute revenue among the
geographical areas based upon the origin and destination of each flight
segment. Our tangible assets and capital expenditures consist
primarily of flight and related ground support equipment, which is mobile across
geographic markets and, therefore, has not been allocated.
NOTE
19 - COMMITMENTS AND CONTINGENCIES
Aircraft Purchase
Commitments. As of December 31, 2009 we had firm commitments
to purchase 84 new aircraft (55 Boeing 737 aircraft,
four Boeing 777 aircraft and 25 Boeing 787 aircraft)
scheduled for delivery from 2010 through 2016, with an estimated aggregate cost
of $5.1 billion including related spare engines. We are currently
scheduled to take delivery of 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 98 additional Boeing aircraft as of December 31,
2009.
As discussed in Note 4, we have
obtained financing for the two Boeing 777 aircraft and nine of the Boeing 737
aircraft to be delivered in 2010. We have backstop financing
available for the three other Boeing 737 aircraft
scheduled for delivery in 2010, subject to customary closing
conditions. However, we do not have backstop financing or any other
financing currently in place for the balance of the Boeing aircraft on
order. Further financing will be needed to satisfy our capital
commitments for our firm aircraft and other related capital
expenditures. We can provide no assurance that backstop financing or
any other financing not already in place for our aircraft deliveries will be
available to us when needed on acceptable terms or at all. Since the
commitments for firm order aircraft are non-cancelable, and assuming no breach
of the agreement by Boeing, if we are unable to obtain financing and cannot
otherwise satisfy our commitment to purchase these aircraft, the manufacturer
could exercise its rights and remedies under applicable law, such as seeking to
terminate the contract for a material breach, selling the aircraft to one or
more other parties and suing us for damages to recover any resulting losses
incurred by the manufacturer.
Financings and
Guarantees. We are the guarantor of approximately $1.7 billion
in aggregate principal amount of tax-exempt special facilities revenue bonds and
interest thereon, excluding the US Airways contingent liability described
below. These bonds, issued by various airport municipalities, are
payable solely from our rentals paid under long-term agreements with the
respective governing bodies. The leasing arrangements associated with
approximately $1.5 billion of these obligations are accounted for as operating
leases, and the leasing arrangements associated with approximately $190 million
of these obligations are accounted for as capital leases.
We are contingently liable for US
Airways' obligations under a lease agreement between US Airways and the Port
Authority of New York and New Jersey related to the East End Terminal at
LaGuardia airport. These obligations include the payment of ground
rentals to the Port Authority and the payment of other rentals in respect of the
full amounts owed on special facilities revenue bonds issued by the Port
Authority having an outstanding par amount of $109 million at December 31, 2009
and a final scheduled maturity in 2015. If US Airways defaults on
these obligations, we would be obligated to cure the default and we would have
the right to occupy the terminal after US Airways' interest in the lease had
been terminated.
We also had letters of credit and
performance bonds relating to various real estate, customs and aircraft
financing obligations at December 31, 2009 in the amount of $109
million. These letters of credit and performance bonds have
expiration dates through September 2013.
General Guarantees and
Indemnifications. We are the lessee under many real estate
leases. It is common in such commercial lease transactions for us as
the lessee to agree to indemnify the lessor and other related third parties for
tort liabilities that arise out of or relate to our use or occupancy of the
leased premises and the use or occupancy of the leased premises by regional
carriers operating flights on our behalf. In some cases, this
indemnity extends to related liabilities arising from the negligence of the
indemnified parties, but usually excludes any liabilities caused by their gross
negligence or willful misconduct. Additionally, we typically
indemnify such parties for any environmental liability that arises out of or
relates to our use of the leased premises.
In our aircraft financing agreements,
we typically indemnify the financing parties, trustees acting on their behalf
and other related parties against liabilities that arise from the manufacture,
design, ownership, financing, use, operation and maintenance of the aircraft and
for tort liability, whether or not these liabilities arise out of or relate to
the negligence of these indemnified parties, except for their gross negligence
or willful misconduct.
We expect that we would be covered by
insurance (subject to deductibles) for most tort liabilities and related
indemnities described above with respect to real estate we lease and aircraft we
operate.
In our financing transactions that
include loans, we typically agree to reimburse lenders for any reduced returns
with respect to the loans due to any change in capital requirements and, in the
case of loans in which the interest rate is based on the London Interbank
Offered Rate ("LIBOR"), for certain other increased costs that the lenders incur
in carrying these loans as a result of any change in law, subject in most cases
to certain mitigation obligations of the lenders. At December 31,
2009, we had $1.5 billion of floating rate debt and $229 million of fixed rate
debt, with remaining terms of up to ten years, that is subject to these
increased cost provisions. In several financing transactions
involving loans or leases from non-U.S. entities, with remaining terms of up to
ten years and an aggregate carrying value of $1.5 billion, we bear the
risk of any change in tax laws that would subject loan or lease payments
thereunder to non-U.S. entities to withholding taxes, subject to customary
exclusions.
We may be required to make future
payments under the foregoing indemnities and agreements due to unknown variables
related to potential government changes in capital adequacy requirements, laws
governing LIBOR based loans or tax laws, the amounts of which cannot be
estimated at this time.
Credit Card Processing
Agreements. The covenants contained in our domestic
bank-issued credit card processing agreement with Chase require that we post
additional cash collateral if we fail to maintain (1) a minimum level of
unrestricted cash, cash equivalents and short-term investments, (2) a minimum
ratio of unrestricted cash, cash equivalents and short-term investments to
current liabilities of 0.25 to 1.0 or (3) a minimum senior unsecured debt rating
of at least Caa3 and CCC- from Moody's and Standard & Poor's,
respectively.
Under the terms of our credit card
processing agreement with American Express, if a covenant trigger under the
Chase processing agreement requires us to post additional collateral under that
agreement, we would be required to post additional collateral under the American
Express processing agreement. The amount of additional collateral
required under the American Express processing agreement would be based on a
percentage of the value of unused tickets (for travel at a future date)
purchased by customers using the American Express card. The
percentage for purposes of this calculation is the same as the percentage
applied under the Chase processing agreement, after taking into account certain
other risk protection maintained by American Express.
Under these processing agreements and
based on our current air traffic liability exposure (as defined in each
agreement), we would be required to post collateral up to the following amounts
if we failed to comply with the covenants described above:
·
|
a
total of $65 million if our unrestricted cash, cash equivalents and
short-term investments balance falls below $2.0
billion;
|
·
|
a
total of $203 million if we fail to maintain the minimum unsecured debt
ratings specified above;
|
·
|
a
total of $387 million if our unrestricted cash, cash equivalents and
short-term investments balance (plus any collateral posted at Chase) falls
below $1.4 billion or if our ratio of unrestricted cash, cash equivalents
and short-term investments to current liabilities falls below 0.25 to 1.0;
and
|
·
|
a
total of $846 million if our unrestricted cash, cash equivalents and
short-term investments balance (plus any collateral posted at Chase) falls
below $1.0 billion or if our ratio of unrestricted cash, cash equivalents
and short-term investments to current liabilities falls below 0.22 to
1.0.
|
The amounts shown above are incremental
to the current collateral we have posted with these companies. We are
currently in compliance with all of the covenants under these processing
agreements.
Credit
Ratings. At December 31, 2009, our senior unsecured debt was
rated B3 by Moody's and CCC+ by Standard & Poor's. These ratings
are significantly below investment grade. Our current credit ratings
increase the costs we incur when issuing debt, adversely affect the terms of
such debt and limit our financing options. Additional reductions in
our credit ratings could further increase our borrowing costs and reduce the
availability of financing to us in the future. We do not have any
debt obligations that would be accelerated as a result of a credit rating
downgrade. However, as discussed above, we would have to post
additional collateral of approximately $203 million under our Chase and American
Express processing agreements if our senior unsecured debt rating were to fall
below Caa3 as rated by Moody's or CCC- as rated by Standard &
Poor's. The insurer under our workers’ compensation program has the
right to require us to post up to $32 million of additional collateral under a
number of conditions, including based on our current senior unsecured debt
rating, which is currently at the minimum of B3 as rated by Moody’s and below
the minimum of B- as rated by Standard & Poor’s. We could also be
required to post a higher amount of collateral with our fuel hedge
counterparties if our credit ratings were to fall, or if our unrestricted cash,
cash equivalents and short-term investments balance fell below certain specified
levels, and our fuel hedges were in a liability position. In such a
case, the total amount of the collateral that we might be required to post at
any time would be up to the amount of our liability under the related derivative
instruments to our respective counterparties. Our fuel hedging
agreement with one counterparty also requires us to post additional collateral
of up to 10% of the notional amount of our hedging contracts with that
counterparty if our senior unsecured debt rating by Moody’s or Standard &
Poor’s is below B3 or B-, respectively. Our fuel derivative contracts
do not contain any other credit risk-related contingent features, other than
those related to a change in control.
Employees. As
of December 31, 2009, we had approximately 41,300 employees, which, due to the
number of part-time employees, represents 39,640 full-time equivalent
employees. Approximately 45% of our full-time equivalent employees
are represented by unions.
Approximately 97% of our full-time
equivalent employees represented by unions as of December 31, 2009 are covered
by collective bargaining agreements that are currently amendable or become
amendable in 2010. In addition, on February 12, 2010, the National
Mediation Board informed us that our fleet service employees had voted in favor
of representation by the International Brotherhood of Teamsters. The
election covers approximately 7,600 employees, or 6,340 full-time equivalent
ramp, operations and cargo agents. The collective bargaining
agreements with our pilots, mechanics and certain other work groups became
amendable in December 2008 and those with our flight attendants and CMI
mechanics became amendable in December 2009. On July 6, 2009, our
flight simulator technicians ratified a new four-year collective bargaining
agreement with us. With respect to our workgroups with amendable
contracts, we have been meeting with representatives of the applicable unions to
negotiate amended collective bargaining agreements with a goal of reaching
agreements that are fair to us and to our employees, but to date the parties
have not reached new agreements. We cannot predict the outcome of our
ongoing negotiations with our unionized workgroups, although significant
increases in the pay and benefits resulting from new collective bargaining
agreements could have a material adverse effect on us. Furthermore,
there can be no assurance that our generally good labor relations and high labor
productivity will continue.
Environmental
Matters. In 2001, the California Regional Water Quality Control
Board ("CRWQCB") mandated a field study of the area surrounding our aircraft
maintenance hangar in Los Angeles. The study was completed in
September 2001 and identified jet fuel and solvent contamination on and adjacent
to this site. In April 2005, we began environmental remediation of
jet fuel contamination surrounding our aircraft maintenance hangar pursuant to a
workplan submitted to (and approved by) the CRWQCB and our landlord, the Los
Angeles World Airports. Additionally, we could be responsible for
environmental remediation costs primarily related to solvent contamination on
and near this site.
At December 31, 2009, we had an accrual
for estimated costs of environmental remediation throughout our system of $30
million, based primarily on third-party environmental studies and estimates as
to the extent of the contamination and nature of the required remedial
actions. We have evaluated and recorded this accrual for environmental
remediation costs separately from any related insurance recovery. We did
not have any receivables related to environmental insurance recoveries at
December 31, 2009. Based on currently available information, we
believe that our accrual for potential environmental remediation costs is
adequate, although our accrual could be adjusted in the future due to new
information or changed circumstances. However, we do not expect these
items to materially affect our results of operations, financial condition or
liquidity.
Legal
Proceedings. During the period between 1997 and 2001, we reduced or
capped the base commissions that we paid to domestic travel agents, and in 2002
we eliminated those base commissions. These actions were similar to those
also taken by other air carriers. We are a defendant, along with
several other air carriers, in two lawsuits brought by travel agencies that
purportedly opted out of a prior class action entitled Sarah Futch Hall d/b/a/
Travel Specialists v. United Air Lines, et al. (U.S.D.C., Eastern
District of North Carolina), filed on June 21, 2000, in which the defendant
airlines prevailed on summary judgment that was upheld on
appeal. These similar suits against Continental and other major
carriers allege violations of antitrust laws in reducing and ultimately
eliminating the base commissions formerly paid to travel agents and seek
unspecified money damages and certain injunctive relief under the Clayton Act
and the Sherman Anti-Trust Act. The pending cases, which currently
involve a total of 90 travel agency plaintiffs, are Tam Travel, Inc. v. Delta
Air Lines, Inc., et al. (U.S.D.C., Northern District of California),
filed on April 9, 2003 and Swope Travel Agency, et al.
v. Orbitz LLC et al. (U.S.D.C., Eastern District of Texas), filed on June
5, 2003. By order dated November 10, 2003, these actions were
transferred and consolidated for pretrial purposes by the Judicial Panel on
Multidistrict Litigation to the Northern District of Ohio. On October
29, 2007, the judge for the consolidated lawsuit dismissed the case for failure
to meet the heightened pleading standards established earlier in 2007 by the
U.S. Supreme Court's decision in Bell Atlantic Corp. v.
Twombly. On October 2, 2009, the U.S. Court of Appeals for the
Sixth Circuit affirmed the trial court’s dismissal of the case. On
December 18, 2009, the plaintiffs’ request for rehearing by the Sixth Circuit
en banc was
denied. The plaintiffs now have the opportunity to appeal to the U.S.
Supreme Court. The plaintiffs in the Swope lawsuit, encompassing 43
travel agencies, have also alleged that certain claims raised in their lawsuit
were not, in fact, dismissed. The trial court has not yet ruled on
that issue. In the consolidated lawsuit, we believe the plaintiffs'
claims are without merit, and we intend to defend vigorously any
appeal. Nevertheless, a final adverse court decision awarding
substantial money damages could have a material adverse effect on our results of
operations, financial condition or liquidity.
We and/or certain of our subsidiaries
are defendants in various other pending lawsuits and proceedings and are subject
to various other claims arising in the normal course of our business, many of
which are covered in whole or in part by insurance. Although the
outcome of these lawsuits and proceedings (including the probable loss we might
experience as a result of an adverse outcome) cannot be predicted with certainty
at this time, we believe, after consulting with outside counsel, that the
ultimate disposition of such suits will not have a material adverse effect on
us.
NOTE
20 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited summarized financial data by
quarter for 2009 and 2008 is as follows (in millions, except per share
data):
Three
Months Ended
|
||||||||
March
31
|
June
30
|
September
30
|
December
31
|
|||||
2009
|
||||||||
Operating
revenue
|
$2,962
|
$3,126
|
$3,317
|
$3,182
|
||||
Operating
income (loss)
|
(55)
|
(154)
|
61
|
1
|
||||
Nonoperating
income (expense), net
|
(81)
|
(59)
|
(79)
|
(73)
|
||||
Net
income (loss)
|
(136)
|
(213)
|
(18)
|
85
|
||||
Earnings
(loss) per share:
|
||||||||
Basic
|
$(1.10)
|
$(1.72)
|
$(0.14)
|
$ 0.61
|
||||
Diluted
|
$(1.10)
|
$(1.72)
|
$(0.14)
|
$ 0.60
|
||||
2008
|
||||||||
Operating
revenue
|
$3,570
|
$4,044
|
$4,156
|
$3,471
|
||||
Operating
loss
|
(66)
|
(71)
|
(152)
|
(25)
|
||||
Nonoperating
income (expense), net
|
(61)
|
22
|
(98)
|
(242)
|
||||
Net
loss
|
(82)
|
(5)
|
(230)
|
(269)
|
||||
Loss
per share:
|
||||||||
Basic
|
$(0.82)
|
$(0.05)
|
$(2.09)
|
$(2.35)
|
||||
Diluted
|
$(0.82)
|
$(0.05)
|
$(2.09)
|
$(2.35)
|
||||
The quarterly income (loss) amounts
were impacted by the following special income (expense) items:
Three
Months Ended
|
||||||||
March
31
|
June
30
|
September
30
|
December
31
|
|||||
2009
|
||||||||
Operating
earnings:
|
||||||||
Aircraft-related
charges
|
$ (4)
|
$(43)
|
$ (6)
|
$ (36)
|
||||
Pension
settlement charges
|
-
|
-
|
-
|
(29)
|
||||
Severance
|
-
|
-
|
(5)
|
-
|
||||
Route
impairment
|
-
|
-
|
-
|
(12)
|
||||
Other
|
-
|
(1)
|
(9)
|
-
|
||||
Total
special charges in operating earnings
|
$ (4)
|
$(44)
|
$(20)
|
$ (77)
|
||||
Additional
special items:
|
||||||||
Income
tax benefit related to intraperiod
tax
allocation
|
$ -
|
$ -
|
$ -
|
$ 158
|
||||
2008
|
||||||||
Operating
earnings:
|
||||||||
Aircraft-related
charges
|
$ 8
|
$(41)
|
$(12)
|
$ 5
|
||||
Pension
settlement charges
|
-
|
-
|
(8)
|
(44)
|
||||
Severance
|
-
|
-
|
(33)
|
(1)
|
||||
Route
impairment
|
-
|
-
|
(18)
|
-
|
||||
Other
|
-
|
(17)
|
(20)
|
-
|
||||
Total
special charges in operating earnings
|
$ 8
|
$(58)
|
$(91)
|
$ (40)
|
||||
Additional
special items:
|
||||||||
Gains
on sales of investments
|
$ -
|
$ 78
|
$ -
|
$ -
|
||||
Loss
on fuel hedge contracts with
Lehman
Brothers
|
-
|
-
|
-
|
(125)
|
||||
Other-than-temporary
impairment of
auction
rate securities
|
-
|
(29)
|
-
|
(31)
|
||||
Fair
value of auction rate securities put
right
received
|
-
|
-
|
-
|
26
|
||||
Income
tax benefit related to NOL
utilization
|
-
|
28
|
-
|
-
|
There were no changes in or
disagreements on any matters of accounting principles or financial statement
disclosure between us and our independent registered public accountants during
our two most recent fiscal years or any subsequent interim period.
Management's Conclusion on
the Effectiveness of Disclosure Controls and Procedures
As required by Rule 13a-15(b) of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), we have
evaluated, under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act)
as of the end of the period covered by this Form 10-K. Our disclosure
controls and procedures are designed to provide reasonable assurance that the
information required to be disclosed by us in reports that we file under the
Exchange Act is accumulated and communicated to our management, including our
principal executive officer and principal financial officer, as appropriate, to
allow timely decisions regarding required disclosure and is recorded, processed,
summarized and reported within the time periods specified in the rules and forms
of the SEC. Based upon the evaluation, our principal executive
officer and principal financial officer have concluded that our disclosure
controls and procedures were effective as of December 31, 2009 at the reasonable
assurance level.
Management's Report on
Internal Control over Financial Reporting
Management of the Company is
responsible for establishing and maintaining effective internal control over
financial reporting, as such term is defined in Rule 13a-15(f) under the
Securities Exchange Act of 1934. The Company's internal control over
financial reporting is a process designed to provide reasonable assurance to the
Company's management and Board of Directors regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in the
United States.
Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial
reporting and financial statement preparation and presentation.
Under the supervision and with the
participation of the Company's management, including our Chief Executive Officer
and Chief Financial Officer, an assessment of the effectiveness of the Company's
internal control over financial reporting as of December 31, 2009 was
conducted. In making this assessment, management used the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal
Control - Integrated Framework. Based on their assessment,
management concluded that, as of December 31, 2009, the Company's internal
control over financial reporting was effective based on those
criteria.
The effectiveness of our internal
control over financial reporting as of December 31, 2009, has been audited by
Ernst & Young LLP, the independent registered public accounting firm who
also has audited the Company's consolidated financial statements included in
this Annual Report on Form 10-K. Ernst & Young's report on the
Company's internal control over financial reporting appears below.
Changes in Internal
Controls
There was no change in our internal
control over financial reporting during the quarter ended December 31, 2009,
that materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
Report of Independent
Registered Public Accounting Firm
The Board
of Directors and Stockholders
Continental
Airlines, Inc.
We have audited the internal control
over financial reporting of Continental Airlines, Inc. (the "Company") as of
December 31, 2009, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the "COSO criteria"). The Company's management
is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over
financial reporting included in the accompanying Management's Report on Internal
Control over Financial Reporting. Our responsibility is to express an
opinion on the Company's internal control over financial reporting based on our
audit.
We conducted our audit in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our
audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company's internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles. A company's internal control over financial
reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the company's
assets that could have a material effect on the financial
statements.
Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as
of December 31, 2009, based on the COSO criteria.
We also have audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated balance sheets of the Company as of December 31, 2009
and 2008, and the related consolidated statements of operations, common
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2009 and our report dated February 17, 2010 expressed an
unqualified opinion thereon.
ERNST
& YOUNG
LLP
Houston,
Texas
February
17, 2010
Item
9B. Other Information.
Profit Sharing
Plan. On February 17, 2009, the Board of Directors of
Continental Airlines, Inc. (the “Company”) approved a new profit sharing plan
effective January 1, 2010, with a term of five years. The Company’s
prior enhanced profit sharing plan, adopted in connection with wage and benefit
reductions in 2005, expired on December 31, 2009. Under the new
profit sharing plan, the Company will create a profit sharing award pool equal
to 15 percent of its pre-tax income (adjusted for special, unusual or
non-recurring items). Generally, the profit sharing pool will be
distributed among eligible employees based on an employee’s annual base pay
relative to the annual base pay of all employees. The profit sharing
plan will pay out for any year that the Company earns pre-tax income (adjusted
for special, unusual or non-recurring items), except in years when the amount of
such pre-tax income results in a profit sharing award pool below 0.2% of the
annual base pay of all employees. In that case, the profit sharing
award pool for that year would be carried forward and included in a subsequent
year’s payout. All employees (other than officers and
management-level employees above a designated level) who are in a work group
that is not represented by a union are eligible to participate in the profit
sharing plan. Employees who are in a work group that is represented
by a union will be eligible to participate in the new profit sharing plan if
specifically provided pursuant to the terms of a ratified collective bargaining
agreement (a “CBA”). International employees are generally eligible
to participate in the profit sharing plan, subject to their applicable work
rules, CBAs and legal requirements. Eligibility is determined as of
the last day of the relevant year. The foregoing description of the
profit sharing plan is qualified in its entirety by reference to the full text
of the plan, which is filed as Exhibit 10.18 to this report.
PART
III
Incorporated herein by reference from
our definitive proxy statement for the annual meeting of stockholders to be held
on June 9, 2010.
Incorporated herein by reference from
our definitive proxy statement for the annual meeting of stockholders to be held
on June 9, 2010.
Stockholder Matters.
Incorporated herein by reference from
our definitive proxy statement for the annual meeting of stockholders to be held
on June 9, 2010 and
from Item 5. "Market for Registrant's Common Equity and Related
Stockholder Matters" of this Form 10-K.
Incorporated herein by reference from
our definitive proxy statement for the annual meeting of stockholders to be held
on June 9, 2010.
Incorporated herein by reference from
our definitive proxy statement for the annual meeting of stockholders to be held
on June 9, 2010.
PART
IV
(a)
|
The
following financial statements are included in Item
8. "Financial Statements and Supplementary
Data":
|
Report of
Independent Registered Public Accounting Firm
Consolidated
Statements of Operations for each of the Three Years in the Period
Ended
December 31, 2009
Consolidated
Balance Sheets as of December 31, 2009 and 2008
Consolidated
Statements of Cash Flows for each of the Three Years in the Period
Ended
December 31, 2009
Consolidated
Statements of Common Stockholders' Equity for each of the Three
Years
in the Period Ended December 31,
2009
Notes to
Consolidated Financial Statements
(b)
|
Financial
Statement Schedules:
|
All
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)
|
See
accompanying Index to Exhibits.
|
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/ ZANE C.
ROWE
|
|
Zane C. Rowe
|
|
Executive Vice President
and
|
|
Chief Financial
Officer
|
|
(On behalf of
Registrant)
|
Date:
February 17,
2010
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 17, 2010.
Signature
|
Capacity
|
/s/ JEFFERY A.
SMISEK
|
Chairman,
President, and Chief Executive Officer
|
Jeffery
A. Smisek
|
(Principal
Executive Officer)
|
/s/ ZANE C.
ROWE
|
Executive
Vice President and
|
Zane
C. Rowe
|
Chief
Financial Officer
|
(Principal
Financial Officer)
|
|
/s/ CHRIS
KENNY
|
Vice
President and Controller
|
Chris
Kenny
|
(Principal
Accounting Officer)
|
KIRBYJON H.
CALDWELL*
|
Director
|
Kirbyjon
H. Caldwell
|
|
CAROLYN
CORVI*
|
Director
|
Carolyn
Corvi
|
|
DOUGLAS H.
McCORKINDALE*
|
Director
|
Douglas
H. McCorkindale
|
|
HENRY L. MEYER
III*
|
Director
|
Henry
L. Meyer III
|
|
OSCAR
MUNOZ*
|
Director
|
Oscar
Munoz
|
|
LAURENCE E.
SIMMONS*
|
Director
|
Laurence
E. Simmons
|
|
KAREN HASTIE
WILLIAMS*
|
Director
|
Karen
Hastie Williams
|
|
RONALD B.
WOODARD*
|
Director
|
Ronald
B. Woodard
|
|
CHARLES A.
YAMARONE*
|
Director
|
Charles
A. Yamarone
|
*By
|
/s/ Jennifer L.
Vogel
|
Jennifer
L. Vogel
|
|
Attorney-in-fact
|
|
February
17, 2010
|
CONTINENTAL
AIRLINES, INC.
3.1
|
Amended
and Restated Certificate of Incorporation of Continental, as amended
through June 6, 2006 - incorporated by reference to Exhibit 3.1 to
Continental's Annual Report on Form 10-K for the year ended December 31,
2006 (File no. 1-10323) (the "2006 10-K").
|
3.1(a)
|
Certificate
of Designation of Series A Junior Participating Preferred Stock, included
as Exhibit A to Exhibit 3.1.
|
3.1(a)(i)
|
Certificate
of Amendment of Certificate of Designation of Series A Junior
Participating Preferred Stock - incorporated by reference to Exhibit
3.1(b) to Continental's Annual Report on Form 10-K for the year ended
December 31, 2001 (File no. 1-10323) (the "2001 10-K").
|
3.1(a)(ii)
|
Certificate
of Increase - Series A Junior Participating Preferred Stock - incorporated
by reference to Exhibit 3.1(a)(ii) to Continental's Quarterly Report on
Form 10-Q for the period ended June 30, 2008 (File no.
1-10323).
|
3.2
|
Amended
and Restated Bylaws of Continental, effective as of June 10, 2009 –
incorporated by reference to Exhibit 3.2 to Continental’s Current Report
on Form 8-K dated June 10, 2009 (File no. 1-10323).
|
4.1
|
Specimen
Class B Common Stock Certificate of Continental - incorporated by
reference to Exhibit 4.1 to Continental's Registration Statement on Form
8-A/A filed November 21, 2008.
|
4.2
|
Warrant
Agreement dated as of April 27, 1993, between Continental and Continental
as warrant agent - incorporated by reference to Exhibit 4.7 to
Continental's Current Report on Form 8-K, dated April 16, 1993 (File no.
1-10323). (No warrants remain outstanding under the agreement,
but some of its terms are incorporated into Continental's stock option
agreements.)
|
4.3
|
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
|
Agreement
of Lease dated as of January 11, 1985, between the Port Authority of New
York and New Jersey and People Express, 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, Inc. for
the year ended December 31, 1984.
|
10.1(a)
|
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
Continental's Annual Report on Form 10-K (File no. 1-8475) for the year
ended December 31, 1987 (the "1987 10-K").
|
10.1(b)
|
Supplemental
Agreement Nos. 1 through 6 to the Terminal C Lease - incorporated by
reference to Exhibit 10.3 to the 1987 10-K.
|
10.1(c)
|
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.
1-10323) for the year ended December 31, 1988 (the "1988
10-K").
|
10.1(d)
|
Supplemental
Agreements No. 8 through 11 to the Terminal C Lease - incorporated by
reference to Exhibit 10.10 to Continental's Form S-1 Registration
Statement (No. 33-68870).
|
10.1(e)
|
Supplemental
Agreements No. 12 through 15 to the Terminal C Lease - incorporated by
reference to Exhibit 10.2(d) to Continental's Annual Report on Form 10-K
(File no. 1-10323) for the year ended December 31,
1995.
|
10.1(f)
|
Supplemental
Agreement No. 16 to the Terminal C Lease - incorporated by reference to
Exhibit 10.1(e) to Continental's Annual Report on Form 10-K for the year
ended December 31, 1997 (File no. 1-10323) (the "1997
10-K").
|
10.1(g)
|
Supplemental
Agreement No. 17 to the Terminal C Lease - incorporated by reference to
Exhibit 10.1(f) to Continental's Annual Report on Form 10-K for the year
ended December 31, 1999 (File no. 1-10323) (the "1999
10-K").
|
10.1(h)
|
Supplemental
Agreement No. 18 to the Terminal C Lease - incorporated by reference to
Exhibit 10.5 to the 2003 Q-1 10-Q.
|
10.1(i)
|
Supplemental
Agreement No. 19 to the Terminal C Lease - incorporated by reference to
Exhibit 10.4 to Continental's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2003 (File no. 1-10323).
|
10.1(j)
|
Supplemental
Agreement No. 20 - to the Terminal C Lease - incorporated by reference to
Exhibit 10.1 to Continental's Quarterly Report on Form 10-Q for quarter
ended September 30, 2003 (File no. 1-10323) (the "2003 Q-3
10-Q").
|
10.1(k)
|
Supplemental
Agreement No. 21 dated as of June 1, 2003 to Agreement of Lease between
the Company and the Port Authority of New York and New Jersey regarding
Terminal C at Newark Liberty International Airport - incorporated by
reference to Exhibit 10.1 to Continental's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2005 (File no. 1-10323) (the "2005 Q-2
10-Q").
|
10.1(l)
|
Supplemental
Agreement No. 22 - to the Terminal C Lease - incorporated by reference to
Exhibit 10.1 to Continental's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2004 (File no. 1-10323) (the "2004 Q-1
10-Q").
|
10.1(m)
|
Supplemental
Agreement No. 23 - to the Terminal C Lease - incorporated by reference to
Exhibit 10.1(m) to Continental's Annual Report on Form 10-K for the year
ended December 31, 2005 (File no. 1-10323) (the "2005
10-K").
|
10.1(n)
|
Supplemental
Agreement No. 24 - to the Terminal C Lease - incorporated by reference to
Exhibit 10.1(n) to the 2005 10-K.
|
10.2
|
Airport
Use and Lease Agreement dated as of January 1, 1998 between Continental
and the City of Houston, Texas ("Houston") regarding George Bush
Intercontinental Airport - incorporated by reference to Exhibit 10.30 to
Continental's Annual Report on Form 10-K for the year ended December 31,
1998 (File no. 1-10323) (the "1998 10-K").
|
10.2(a)
|
Special
Facilities Lease Agreement dated as of March 1, 1997 between Continental
and Houston regarding an automated people mover project at Bush
Intercontinental - incorporated by reference to Exhibit 10.30(a) to the
1998 10-K.
|
10.2(b)
|
Amended
and Restated Special Facilities Lease Agreement dated as of December 1,
1998 by and between Continental and Houston regarding certain terminal
improvements projects at Bush Intercontinental - incorporated by reference
to Exhibit 10.30(b) to the 1998 10-K.
|
10.2(c)
|
Amended
and Restated Special Facilities Lease Agreement dated December 1, 1998 by
and between Continental and Houston regarding certain airport improvement
projects at Bush Intercontinental - incorporated by reference to Exhibit
10.30(c) to the 1998 10-K.
|
10.2(d)
|
Terminal
E Lease and Special Facilities Lease Agreement dated as of August 1, 2001
between Continental and Houston regarding Bush Intercontinental -
incorporated by reference to Exhibit 10.8 to Continental's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2001 (File no.
1-10323) (the "2001 Q-3 10-Q").
|
10.2(e)
|
Supplement
to Terminal E Lease and Special Facilities Lease Agreement dated as of
August 1, 2001 - incorporated by reference to Exhibit 10.2(e) to
Continental's Annual Report on Form 10-K for the year ended December 31,
2002 (File no. 1-10323) (the "2002 10-K").
|
10.3
|
Agreement
and Lease dated as of May 1987, as supplemented, between Continental and
the City of Cleveland, Ohio ("Cleveland") regarding Hopkins International
Airport - incorporated by reference to Exhibit 10.6 to Continental's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1993
(File no. 1-10323).
|
10.3(a)
|
Special
Facilities Lease Agreement dated as of October 24, 1997 by and between
Continental and Cleveland regarding certain concourse expansion projects
at Hopkins International (the "1997 SFLA") - incorporated by reference to
Exhibit 10.31(a) to the 1998 10-K.
|
10.3(b)
|
First
Supplemental Special Facilities Lease Agreement dated as of March 1, 1998,
and relating to the 1997 SFLA - incorporated by reference to Exhibit 10.1
to Continental's Quarterly Report on Form 10-Q for the quarter ended March
31, 1999 (File no. 1-10323) (the "1999 Q-1 10-Q").
|
10.3(c)
|
Special
Facilities Lease Agreement dated as of December 1, 1989 by and between
Continental and Cleveland regarding Hopkins International (the "1989
SFLA") - incorporated by reference to Exhibit 10.1 to Continental's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1999
(File no. 1-10323) (the "1999 Q-3 10-Q").
|
10.3(d)
|
First
Supplemental Special Facilities Lease Agreement dated as of March 1, 1998,
and relating to the 1989 SFLA - incorporated by reference to Exhibit
10.1(a) to the 1999 Q-3 10-Q.
|
10.3(e)
|
Second
Supplemental Special Facilities Lease Agreement dated as of March 1, 1998,
and relating to the 1989 SFLA - incorporated by reference to Exhibit
10.1(b) to the 1999 Q-3 10-Q.
|
10.3(f)
|
Amendment
No. 1, dated January 1, 2006, to Agreement and Lease dated as of May 1987,
as supplemented, between Continental and Cleveland regarding Hopkins
International Airport - incorporated by reference to Exhibit 10.3(f) to
the 2005 10-K.
|
10.3(g)
|
Amendment
No. 2, dated March 25, 2009, to Agreement and Lease dated as of May 1987,
as supplemented, between Continental and Cleveland regarding Hopkins
International Airport – incorporated by reference to Exhibit 10.1 to
Continental’s Quarterly Report on Form 10-Q for the quarter ended June 30,
2009 (the “2009 Q-2 10-Q”).
|
10.3(h)
|
Amendment
No. 3, dated April 3, 2009, to Agreement and Lease dated as of May 1987,
as supplemented, between Continental and Cleveland regarding Hopkins
International Airport – incorporated by reference to Exhibit 10.2 to the
2009 Q-2 10-Q.
|
10.4*
|
Employment
Agreement dated as of October 15, 2007 between Continental and Lawrence W.
Kellner - incorporated by reference to Exhibit 10.2 to Continental's Form
10-Q for the quarter ended September 30, 2007 (File no. 1-10323) (the
"2007 Q-3 10-Q").
|
10.4(a)*
|
Compensation
Reduction Agreement for Lawrence W. Kellner dated December 22, 2004 -
incorporated by reference to Exhibit 99.1 to Continental's Current Report
on Form 8-K dated December 22, 2004 (File no. 1-10323) (the "12/04
8-K").
|
10.4(b)*
|
Amendment
to Compensation Reduction Agreement for Lawrence W. Kellner dated February
15, 2005 - incorporated by reference to Exhibit 10.1 to Continental's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2005 (File
no. 1-10323) (the "2005 Q-1 10-Q").
|
10.4(c)*
|
Letter
Agreement dated as of May 30, 2008 between Continental and Larry Kellner -
incorporated by reference to Exhibit 99.2 to Continental's Current Report
on Form 8-K dated June 5, 2008 (the "06/08 8-K").
|
10.5*
|
Employment
Agreement dated as of October 15, 2007 between Continental and Jeffery A.
Smisek - incorporated by reference to Exhibit 10.3 to the 2007 Q-3
10-Q.
|
10.5(a)*
|
Compensation
Reduction Agreement for Jeffery A. Smisek dated December 22, 2004 -
incorporated by reference to Exhibit 99.2 to the 12/04
8-K.
|
10.5(b)*
|
Amendment
to Compensation Reduction Agreement for Jeffery A. Smisek dated February
15, 2005 - incorporated by reference to Exhibit 10.2 to the 2005 Q-1
10-Q.
|
10.5(c)*
|
Letter
Agreement dated as of May 30, 2008 between Continental and Jeffery Smisek
- incorporated by reference to Exhibit 99.3 to the 06/08
8-K.
|
10.5(d)*
|
Confidentiality
and Non-Competition Agreement dated April 23, 2009 between Continental and
Jeffery A. Smisek – incorporated by reference to Exhibit 10.1 to
Continental’s Quarterly Report on Form 10-Q for the quarter ended March
31, 2009 (the “2009 Q-1 10-Q”).
|
10.5(e)*
|
Letter
Agreement dated as of September 30, 2009 between Continental and Jeffery
Smisek (clarifying certain terms of his Employment Agreement in connection
with his promotion to Chairman, President and CEO on January 1, 2010) –
incorporated by reference to Exhibit 10.1 to Continental’s Quarterly
Report on Form 10-Q for the quarter ended September 30, 2009 (the “2009
Q-3 10-Q”).
|
10.5(f)*
|
Letter
Agreement dated as of January 4, 2010 between Continental and Jeffery
Smisek (pursuant to which he waives his salary and annual incentive
pursuant to the terms set forth therein) – incorporated by reference to
Exhibit 99.1 to Continental’s Current Report on Form 8-K dated January 4,
2010.
|
10.6*
|
Employment
Agreement dated as of August 31, 2008 between Continental and Zane Rowe -
incorporated by reference to Exhibit 10.2 to Continental's Form 10-Q for
the quarter ended September 30, 2008 (File no. 1-10323) (the "2008 Q-3
10-Q").
|
10.6(a)*
|
Confidentiality
and Non-Competition Agreement dated April 23, 2009 between Continental and
Zane C. Rowe – incorporated by reference to Exhibit 10.2 to the 2009 Q-1
10-Q.
|
10.7*
|
Employment
Agreement dated as of October 15, 2007 between Continental and Mark J.
Moran - incorporated by reference to Exhibit 10.6 to the 2007 Q-3
10-Q.
|
10.7(a)*
|
Compensation
Reduction Agreement for Mark J. Moran dated December 22, 2004 -
incorporated by reference to Exhibit 10.7(a) to the 2005
10-K.
|
10.7(b)*
|
Amendment
to Compensation Reduction Agreement for Mark J. Moran dated February 15,
2005 - incorporated by reference to Exhibit 10.7(b) to the 2005
10-K.
|
10.7(c)*
|
Confidentiality
and Non-Competition Agreement dated April 23, 2009 between Continental and
Mark J. Moran – incorporated by reference to Exhibit 10.4 to the 2009 Q-1
10-Q.
|
10.8*
|
Employment
Agreement dated as of October 15, 2007 between Continental and James E.
Compton - incorporated by reference to Exhibit 10.4 to the 2007 Q-3
10-Q.
|
10.8(a)*
|
Compensation
Reduction Agreement for James E. Compton dated December 22, 2004 - incorporated by
reference to Exhibit 10.8(a) to Continental's Annual Report on Form 10-K
for the year ended December 31, 2004 (File no. 1-10323) (the "2004
10-K").
|
10.8(b)*
|
Amendment
to Compensation Reduction Agreement for James E. Compton dated February
15, 2005 - incorporated by reference to Exhibit 10.4 to the 2005 Q-1
10-Q.
|
10.8(c)*
|
Confidentiality
and Non-Competition Agreement dated April 23, 2009 between Continental and
James E. Compton – incorporated by reference to Exhibit 10.3 to the 2009
Q-1 10-Q.
|
10.9*
|
Continental
Airlines, Inc. 1998 Stock Incentive Plan ("1998 Incentive Plan") -
incorporated by reference to Exhibit 4.3 to Continental's Form S-8
Registration Statement (No. 333-57297).
|
10.9(a)*
|
Amendment
No. 1 to 1998 Incentive Plan, 1997 Stock Incentive Plan and 1994 Incentive
Equity Plan, dated May 15, 2001 - incorporated by reference to Exhibit
10.2 to Continental's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2001 (File no. 1-10323) (the "2001 Q-2
10-Q").
|
10.9(b)*
|
Amendment
to 1998 Incentive Plan, 1997 Stock Incentive Plan and 1994 Incentive
Equity Plan, dated March 12, 2004 - incorporated by reference to Exhibit
10.5 to the 2004 Q-1 10-Q.
|
10.9(c)*
|
Form
of Outside Director Stock Option Grant pursuant to the 1998 Incentive Plan
– incorporated by reference to Exhibit 10.12(c) to the 2006
10-K.
|
10.10*
|
Continental
Airlines, Inc. Incentive Plan 2000, as amended and restated ("Incentive
Plan 2000") - incorporated by reference to Exhibit 10.1 to
Continental's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2002 (File no. 1-10323) (the "2002 Q-1
10-Q").
|
10.10(a)*
|
Amendment
to Incentive Plan 2000, dated March 12, 2004 - incorporated by reference
to Exhibit 10.6 to the 2004 Q-1 10-Q.
|
10.10(b)*
|
Second
Amendment to Incentive Plan 2000, dated June 6, 2006 - incorporated by
reference to Exhibit 10.1 to Continental's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2006 (File no. 1-10323) (the "2006
Q-2 10-Q").
|
10.10(c)*
|
Third
Amendment to Incentive Plan 2000, dated September 14, 2006 - incorporated
by reference to Exhibit 10.1 to Continental's Quarterly Report on Form
10-Q for the quarter ended September 30, 2006 (File no. 1-10323)
(the "2006 Q-3 10-Q").
|
10.10(d)*
|
Form
of Outside Director Stock Option Agreement pursuant to Incentive Plan 2000
– incorporated by reference to Exhibit 10.14(b) to the 2000
10-K.
|
10.10(e)*
|
Form
of Outside Director Stock Option Grant pursuant to Incentive Plan 2000
(updated form to facilitate electronic delivery) – incorporated by
reference to Exhibit 10.1 to Continental’s Quarterly Report on Form 10-Q
for the quarter ended March 31, 2008 (File no. l1-10323) (the “2008 Q-1
10-Q”).
|
10.11*
|
Continental
Airlines, Inc. Long-Term Incentive and RSU Program, as amended and
restated through February 18, 2009 (adopted pursuant to Incentive Plan
2000) – incorporated by reference to Exhibit 10.14 to Continental’s Annual
Report on Form 10-K for the year ended December 31, 2008 (the “2008
10-K”).
|
10.11(a)*
|
Form
of Award Notice pursuant to Continental Airlines, Inc. Long-Term Incentive
and RSU Program (Profit Based RSU Awards under Incentive Plan 2000) –
incorporated by reference to Exhibit 10.14(a) to the 2008
10-K.
|
10.11(b)*
|
Form
of Award Notice pursuant to Continental Airlines, Inc. Long-Term Incentive
and RSU Program (NLTIP Award under Incentive Plan 2000) - incorporated by
reference to Exhibit 10.16(b) to the 2005 10-K.
|
10.12*
|
Continental
Airlines, Inc. Incentive Plan 2010, as amended and restated February 17,
2010 (the “Incentive Plan 2010”). (3)
|
10.12(a)*
|
Form
of Non-Employee Director Option Grant Document pursuant to Incentive Plan
2010. (3)
|
10.13*
|
Continental
Airlines, Inc. Annual Executive Incentive Program (adopted pursuant to
Incentive Plan 2010) (the “AIP”). (3)
|
10.13(a)*
|
Form
of Award Notice pursuant to the AIP. (3)
|
10.14*
|
Continental
Airlines, Inc. Long-Term Incentive and RSU Program (adopted pursuant to
Incentive Plan 2010) (the “LTIP/RSU Program”).
(3)
|
10.14(a)*
|
Form
of Award Notice pursuant to the LTIP/RSU Program (Profit Based RSU Award
under Incentive Plan 2010). (3)
|
10.14(b)*
|
Form
of Award Notice pursuant to the LTIP/RSU Program (LTIP Award under
Incentive Plan 2010). (3)
|
10.15*
|
Continental
Airlines, Inc. 2005 Broad Based Employee Stock Option Plan - incorporated
by reference to Exhibit 10.8 to the 2005 Q-1 10-Q.
|
10.16*
|
Continental
Airlines, Inc. 2005 Pilot Supplemental Option Plan - incorporated by
reference to Exhibit 10.9 to the 2005 Q-1 10-Q.
|
10.17*
|
Continental
Airlines, Inc. Enhanced Profit Sharing Plan, as amended through February
23, 2007 - incorporated by reference to Exhibit 10.19 to the
2006 10-K.
|
10.18*
|
Continental
Airlines, Inc. Profit Sharing Plan, as adopted February 17, 2010.
(3)
|
10.19*
|
Summary
of Non-Employee Director compensation. (3)
|
10.20*
|
Form
of Letter Agreement relating to certain flight benefits between
Continental and each of its non-employee
directors. (3)
|
10.21
|
Amended
and Restated Credit and Guaranty Agreement, dated as of August 3, 2006,
among Continental and Continental Micronesia, Inc., as borrowers and
guarantors, Air Micronesia, Inc., as a guarantor, Merrill Lynch Mortgage
Capital, Inc., as administrative agent, and the lenders party thereto -
incorporated by reference to Exhibit 10.3 to the 2006 Q-3 10-Q.
(1)
|
10.22
|
Purchase
Agreement No. 1951, including exhibits and side letters thereto, between
the Company and Boeing, dated July 23, 1996, relating to the purchase of
Boeing 737 aircraft ("P.A. 1951") - incorporated by reference to Exhibit
10.8 to Continental's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996 (File no. 1-10323). (1)
|
10.22(a)
|
Supplemental
Agreement No. 1 to P.A. 1951, dated October 10, 1996 - incorporated by
reference to Exhibit 10.14(a) to Continental's Annual Report on Form 10-K
for the year ended December 31, 1996 (File no.
1-1-323). (1)
|
10.22(b)
|
Supplemental
Agreement No. 2 to P.A. 1951, dated March 5, 1997 - incorporated by
reference to Exhibit 10.3 to Continental's Quarterly Report on Form 10-Q
for the quarter ending March 31, 1997 (File no.
1-10323). (1)
|
10.22(c)
|
Supplemental
Agreement No. 3, including exhibit and side letter, to P.A. 1951, dated
July 17, 1997 - incorporated by reference to Exhibit 10.14(c) to the 1997
10-K. (1)
|
10.22(d)
|
Supplemental
Agreement No. 4, including exhibits and side letters, to P.A. 1951, dated
October 10, 1997 - incorporated by reference to Exhibit 10.14(d) to the
1997 10-K. (1)
|
10.22(e)
|
Supplemental
Agreement No. 5, including exhibits and side letters, to P.A. 1951, dated
October 10, 1997 - incorporated by reference to Exhibit 10.1 to
Continental's Quarterly Report on Form 10-Q for the quarter ended June 30,
1998 (File no.
1-10323). (1)
|
10.22(f)
|
Supplemental
Agreement No. 6, including exhibits and side letters, to P.A. 1951, dated
July 30, 1998 - incorporated by reference to Exhibit 10.1 to Continental's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1998
(File no. 1-10323). (1)
|
10.22(g)
|
Supplemental
Agreement No. 7, including side letters, to P.A. 1951, dated November 12,
1998 - incorporated by reference to Exhibit 10.24(g) to the 1998
10-K. (1)
|
10.22(h)
|
Supplemental
Agreement No. 8, including side letters, to P.A. 1951, dated December 7,
1998 - incorporated by reference to Exhibit 10.24(h) to the 1998
10-K. (1)
|
10.22(i)
|
Letter
Agreement No. 6-1162-GOC-131R1 to P.A. 1951, dated March 26, 1998 -
incorporated by reference to Exhibit 10.1 to Continental's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998 (File no.
1-10323). (1)
|
10.22(j)
|
Supplemental
Agreement No. 9, including side letters, to P.A. 1951, dated February 18,
1999 - incorporated by reference to Exhibit 10.4 to the 1999 Q-1
10-Q. (1)
|
10.22(k)
|
Supplemental
Agreement No. 10, including side letters, to P.A. 1951, dated March 19,
1999 - incorporated by reference to Exhibit 10.4(a) to the 1999 Q-1
10-Q. (1)
|
10.22(l)
|
Supplemental
Agreement No. 11, including side letters, to P.A. 1951, dated March 14,
1999 - incorporated by reference to Exhibit 10.4(a) to Continental's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 (File
no. 1-10323). (1)
|
10.22(m)
|
Supplemental
Agreement No. 12, including side letters, to P.A. 1951, dated July 2, 1999
- incorporated by reference to Exhibit 10.8 to the 1999 Q-3
10-Q. (1)
|
10.22(n)
|
Supplemental
Agreement No. 13 to P.A. 1951, dated October 13, 1999 - incorporated by
reference to Exhibit 10.25(n) to the 1999
10-K. (1)
|
10.22(o)
|
Supplemental
Agreement No. 14 to P.A. 1951, dated December 13, 1999 - incorporated by
reference to Exhibit 10.25(o) to the 1999
10-K. (1)
|
10.22(p)
|
Supplemental
Agreement No. 15, including side letters, to P.A. 1951, dated January 13,
2000 - incorporated by reference to Exhibit 10.1 to Continental's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 (File
no. 1-10323) (the "2000 Q-1 10-Q"). (1)
|
10.22(q)
|
Supplemental
Agreement No. 16, including side letters, to P.A. 1951, dated March 17,
2000 - incorporated by reference to the 2000 Q-1
10-Q. (1)
|
10.22(r)
|
Supplemental
Agreement No. 17, including side letters, to P.A. 1951, dated May 16, 2000
- incorporated by reference to Exhibit 10.2 to Continental's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2000 (File no.
1-10323). (1)
|
10.22(s)
|
Supplemental
Agreement No. 18, including side letters, to P.A. 1951, dated September
11, 2000 - incorporated by reference to Exhibit 10.6 to Continental's
Quarterly Report on Form 10-Q for the quarter ended September 30, 2000
(File no. 1-10323). (1)
|
10.22(t)
|
Supplemental
Agreement No. 19, including side letters, to P.A. 1951, dated October 31,
2000 - incorporated by reference to Exhibit 10.20(t) to the 2000
10-K. (1)
|
10.22(u)
|
Supplemental
Agreement No. 20, including side letters, to P.A. 1951, dated December 21,
2000 - incorporated by reference to Exhibit 10.20(u) to the 2000
10-K. (1)
|
10.22(v)
|
Supplemental
Agreement No. 21, including side letters, to P.A. 1951, dated March 30,
2001 - incorporated by reference to Exhibit 10.1 to Continental's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 (File
no. 1-10323). (1)
|
10.22(w)
|
Supplemental
Agreement No. 22, including side letters, to P.A. 1951, dated May 23,
2001 - incorporated by reference to Exhibit 10.3 to
the 2001 Q-2 10-Q. (1)
|
10.22(x)
|
Supplemental
Agreement No. 23, including side letters, to P.A. 1951, dated June 29,
2001 - incorporated by reference to Exhibit 10.4 to
the 2001 Q-2 10-Q. (1)
|
10.22(y)
|
Supplemental
Agreement No. 24, including side letters, to P.A. 1951, dated August 31,
2001 - incorporated by reference to Exhibit 10.11 to the 2001 Q-3
10-Q. (1)
|
10.22(z)
|
Supplemental
Agreement No. 25, including side letters, to P.A. 1951, dated December 31,
2001 - incorporated by reference to Exhibit 10.22(z) to the 2001
10-K. (1)
|
10.22(aa)
|
Supplemental
Agreement No. 26, including side letters, to P.A. 1951, dated March 29,
2002 - incorporated by reference to Exhibit 10.4 to the 2002 Q-1
10-Q. (1)
|
10.22(ab)
|
Supplemental
Agreement No. 27, including side letters, to P.A. 1951, dated November 6,
2002 - incorporated by reference to Exhibit 10.4 to the 2002 Q-1
10-Q. (1)
|
10.22(ac)
|
Supplemental
Agreement No. 28, including side letters, to P.A. 1951, dated April 1,
2003 - incorporated by reference to Exhibit 10.2 to the 2003 Q-1
10-Q. (1)
|
10.22(ad)
|
Supplemental
Agreement No. 29, including side letters, to P.A. 1951, dated August 19,
2003 - incorporated by reference to Exhibit 10.2 to the 2003 Q-3 10-Q.
(1)
|
10.22(ae)
|
Supplemental
Agreement No. 30 to P.A. 1951, dated as of November 4, 2003 - incorporated
by reference to Exhibit 10.23(ae) to Continental's Annual Report on Form
10-K for the year ended December 31, 2003 (File no. 1-10323) (the "2003
10-K"). (1)
|
10.22(af)
|
Supplemental
Agreement No. 31 to P.A. 1951, dated as of August 20, 2004 - incorporated
by reference to Exhibit 10.4 to Continental's Quarterly Report on Form
10-Q for the quarter ended September 30, 2004 (File no. 1-10323) (the
"2004 Q-3 10-Q"). (1)
|
10.22(ag)
|
Supplemental
Agreement No. 32 to P.A. 1951, including side letters, dated as of
December 29, 2004 - incorporated by reference to Exhibit 10.21(ag) to the
2004 10-K. (1)
|
10.22(ah)
|
Supplemental
Agreement No. 33 to P.A. 1951, including side letters, dated as of
December 29, 2004 - incorporated by reference to Exhibit 10.21(ah) to the
2004 10-K. (1)
|
10.22(ai)
|
Supplemental
Agreement No. 34 dated June 22, 2005 to P.A. 1951 - incorporated by
reference to Exhibit 10.3 to the 2005 Q-2 10-Q. (1)
|
10.22(aj)
|
Supplemental
Agreement No. 35 dated June 30, 2005 to P.A. 1951 - incorporated by
reference to Exhibit 10.4 to the 2005 Q-2 10-Q. (1)
|
10.22(ak)
|
Supplemental
Agreement No. 36 dated July 28, 2005 to P.A. 1951 - incorporated by
reference to Exhibit 10.1 to Continental's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2005 (File no. 1-10323) (the "2005 Q-3
10-Q"). (1)
|
10.22(al)
|
Supplemental
Agreement No. 37 dated March 30, 2006, to P.A. 1951 - incorporated by
reference to Exhibit 10.2 to Continental's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2006 (File no. 1-10323) (the "2006 Q-1
10-Q"). (1)
|
10.22(am)
|
Supplemental
Agreement No. 38, dated June 6, 2006, to P.A. 1951 - incorporated by
reference to Exhibit 10.3 to the 2006 Q-2
10-Q. (1)
|
10.22(an)
|
Supplemental
Agreement No. 39, dated August 3, 2006, to P.A. 1951 - incorporated by
reference to Exhibit 10.4 to the 2006 Q-3 10-Q. (1)
|
10.22(ao)
|
Supplemental
Agreement No. 40, dated December 5, 2006, to P.A. 1951 -
incorporated by reference to Exhibit 10.23(ao) to the 2006
10-K. (1)
|
10.22(ap)
|
Supplemental
Agreement No. 41, dated June 1, 2007, to P.A. 1951 - incorporated by
reference to Exhibit 10.1 to Continental's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2007 (File no. 1-10323) (the "2007 Q-2
10-Q"). (1)
|
10.22(aq)
|
Supplemental
Agreement No. 42, dated June 12, 2007, to P.A. 1951 - incorporated by
reference to Exhibit 10.2 to the 2007 Q-2 10-Q. (1)
|
10.22(ar)
|
Supplemental
Agreement No. 43, dated July 18, 2007 to P.A. 1951 - incorporated by
reference to Exhibit 10.1 to the 2007 Q-3
10-Q. (1)
|
10.22(as)
|
Supplemental
Agreement No. 44, dated December 7, 2007, to P.A. 1951 - incorporated by
reference to Exhibit 10.21(as) to Continental's Annual Report on Form 10-K
for the year ended December 31, 2007 (File no. 1-10323) (the "2007
10-K"). (1)
|
10.22(at)
|
Supplemental
Agreement No. 45, dated February 20, 2008, to P.A. 1951 - incorporated by
reference to Exhibit 10.2 to the 2008 Q-1
10-Q. (1)
|
10.22(au)
|
Supplemental
Agreement No. 46, dated June 25, 2008, to P.A. 1951 - incorporated by
reference to Exhibit 10.5 to the 2008 Q-2
10-Q. (1)
|
10.22(av)
|
Supplemental
Agreement No. 47, dated October 30, 2008, to P.A. 1951 – incorporated by
reference to Exhibit 10.21(av) to the 2008 10-K. (1)
|
10.22(aw)
|
Supplemental
Agreement No. 48, dated January 29, 2009, to P.A. 1951 – incorporated by
reference to Exhibit 10.3 to the 2009 Q-2 10-Q.(1)
|
10.22(ax)
|
Supplemental
Agreement No. 49, dated May 1, 2009, to P.A. 1951 – incorporated by
reference to Exhibit 10.4 to the 2009 Q-2 10-Q.(1)
|
10.22(ay)
|
Supplemental
Agreement No. 50, dated July 23, 2009, to P.A. 1951 – incorporated by
reference to Exhibit 10.2 to Continental’s Quarterly Report on Form 10-Q
for the quarter ended September 30, 2009 (the “2009 Q-3
10-Q”).(1)
|
10.22(az)
|
Supplemental
Agreement No. 51, dated August 5, 2009, to P.A. 1951 – incorporated by
reference to Exhibit 10.3 to the 2009 Q-3 10-Q. (1)
|
10.22(ba)
|
Supplemental
Agreement No. 52, dated August 31, 2009, to P.A. 1951 – incorporated by
reference to Exhibit 10.4 to the 2009 Q-3 10-Q. (1)
|
10.22(bb)
|
Supplemental
Agreement No. 53, dated December 23, 2009, to P.A. 1951.
(2)(3)
|
10.23
|
Aircraft
General Terms Agreement between the Company and Boeing, dated October 10,
1997 - incorporated by reference to Exhibit 10.15 to the 1997
10-K. (1)
|
10.23(a)
|
Letter
Agreement No. 6-1162-GOC-136 between the Company and Boeing, dated October
10, 1997, relating to certain long-term aircraft purchase commitments of
the Company - incorporated by reference to Exhibit 10.15(a) to the 1997
10-K. (1)
|
10.24
|
Purchase
Agreement No. 2061, including exhibits and side letters, between the
Company and Boeing, dated October 10, 1997, relating to the purchase of
Boeing 777 aircraft ("P.A. 2061") - incorporated by reference to Exhibit
10.17 to the 1997 10-K. (1)
|
10.24(a)
|
Supplemental
Agreement No. 1 to P.A. 2061 dated December 18, 1997 - incorporated by
reference to Exhibit 10.17(a) as to the 1997
10-K. (1)
|
10.24(b)
|
Supplemental
Agreement No. 2, including side letter, to P.A. 2061, dated July 30, 1998
- incorporated by reference to Exhibit 10.27(b) to the 1998
10-K. (1)
|
10.24(c)
|
Supplemental
Agreement No. 3, including side letter, to P.A. 2061, dated September 25,
1998 - incorporated by reference to Exhibit 10.27(c) to the 1998
10-K. (1)
|
10.24(d)
|
Supplemental
Agreement No. 4, including side letter, to P.A. 2061, dated February 3,
1999 - incorporated by reference to Exhibit 10.5 to the 1999 Q-1
10-Q. (1)
|
10.24(e)
|
Supplemental
Agreement No. 5, including side letter, to P.A. 2061, dated March 26, 1999
- incorporated by reference to Exhibit 10.5(a) to the 1999 Q-1
10-Q. (1)
|
10.24(f)
|
Supplemental
Agreement No. 6 to P.A. 2061, dated June 25, 2002 - incorporated by
reference to Exhibit 10.12 to Continental's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2002 (File no. 1-10323) (the "2002 Q-2
10-Q"). (1)
|
10.24(g)
|
Supplemental
Agreement No. 7, including side letter, to P.A. 2061, dated October 31,
2000 - incorporated by reference to Exhibit 10.23(g) to the 2000
10-K. (1)
|
10.24(h)
|
Supplemental
Agreement No. 8, including a side letter, to P.A. 2061, dated June 29,
2001 - incorporated by reference to Exhibit 10.5 to the 2001 Q-2
10-Q. (1)
|
10.24(i)
|
Supplemental
Agreement No. 9 to P.A. 2061, dated June 25, 2002 - incorporated by
reference to Exhibit 10.12 to the 2002 Q-2
10-Q. (1)
|
10.24(j)
|
Supplemental
Agreement No. 10 to P.A. 2061, dated November 4, 2003 - incorporated by
reference to Exhibit 10.26(j) to the 2003 10-K. (1)
|
10.24(k)
|
Supplemental
Agreement No. 11 to P.A. 2061, dated July 28, 2005 - incorporated by
reference to Exhibit 10.2 to the 2005 Q-3 10-Q. (1)
|
10.24(l)
|
Supplemental
Agreement No. 12 to P.A. 2061, dated March 17, 2006 - incorporated by
reference to Exhibit 10.3 to the 2006 Q-1
10-Q. (1)
|
10.24(m)
|
Supplemental
Agreement No. 13, dated December 3, 2007, to P.A. 2061 - incorporated by
reference to Exhibit 10.23(m) to the 2007
10-K. (1)
|
10.24(n)
|
Supplemental
Agreement No. 14 to P.A. 2061, dated February 20, 2008 - incorporated by
reference to Exhibit 10.3 to the 2008 Q-1
10-Q. (1)
|
10.24(o)
|
Supplemental
Agreement No. 15, dated October 15, 2008, to P.A. 2061 - incorporated by
reference to Exhibit 10.5 to the 2009 Q-2
10-Q. (1)
|
10.24(p)
|
Supplemental
Agreement No. 16, dated May 1, 2009, to P.A. 2061 - incorporated by
reference to Exhibit 10.6 to the 2009 Q-2
10-Q. (1)
|
10.24(q)
|
Supplemental
Agreement No. 17, dated August 31, 2009, to P.A. 2061 - incorporated by
reference to Exhibit 10.5 to the 2009 Q-3
10-Q. (1)
|
10.24(r)
|
Supplemental
Agreement no. 18, dated December 23, 2009, to P.A.
2061. (2)(3)
|
10.25
|
Letter
Agreement 6-1162-CHL-048 between the Company and Boeing, dated February 8,
2002, amending P.A. 1951, 2333, 2211, 2060 and 2061 - incorporated by
reference to Exhibit 10.44 to the 2001
10-K. (1)
|
10.26
|
Purchase
Agreement No. 2484, including exhibits and side letters, between the
Company and Boeing, dated December 29, 2004, relating to the purchase of
Boeing 7E7 aircraft (now known as 787 aircraft) ("P.A. 2484") - incorporated by
reference to Exhibit 10.27 to the 2004 10-K. (1)
|
10.26(a)
|
Supplemental
Agreement No. 1 to P.A. 2484, dated June 30, 2005 - incorporated by
reference to Exhibit 10.5 to the 2005 Q-2 10-Q. (1)
|
10.26(b)
|
Supplemental
Agreement No. 2, including exhibits and side letters, to P.A. 2484, dated
January 20, 2006 - incorporated by reference to Exhibit 10.27(b) to the
2005 10-K. (1)
|
10.26(c)
|
Supplemental
Agreement No. 3, dated May 3, 2006, to P.A. 2484 - incorporated by
reference to Exhibit 10.4 to the 2006 Q-2 10-Q. (1)
|
10.26(d)
|
Supplemental
Agreement No. 4, dated July 14, 2006, to P.A. 2484 - incorporated by
reference to Exhibit 10.5 to the 2006 Q-3
10-Q. (1)
|
10.26(e)
|
Supplemental
Agreement No. 5, dated March 12, 2007, to P.A. 2484 - incorporated by
reference to Exhibit 10.1 to Continental's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2007 (File no.
1-10323). (1)
|
10.26(f)
|
Supplemental
Agreement No. 6, dated October 22, 2008, to P.A. 2484 – incorporated by
reference to Exhibit 10.25(f) to the 2008 10-K. (1)
|
10.27
|
Amended
and Restated Letter Agreement No. 11 between Continental and General
Electric Company, dated August 8, 2005, relating to certain long-term
engine purchase commitments of Continental - incorporated by reference to
Exhibit 10.3 to the 2005 Q-3 10-Q. (1)
|
10.28
|
Standstill
Agreement dated as of November 15, 2000 among the Company, Northwest
Airlines Holdings Corporation, Northwest Airlines Corporation and
Northwest Airlines, Inc. - incorporated by reference to Exhibit 99.8 to
the 11/00 8-K.
|
10.29
|
Second
Amended and Restated Capacity Purchase Agreement ("XJT Capacity Purchase
Agreement") among Continental, ExpressJet Holdings, Inc., XJT Holdings,
Inc. and ExpressJet Airlines, Inc. dated June 5, 2008 - incorporated by
reference to Exhibit 10.4 to the 2008 Q-2 10-Q. (1)
|
10.29(a)
|
First
Amendment to the XJT Capacity Purchase Agreement, dated as of August 29,
2008 - incorporated by reference to Exhibit 10.1 to the 2008 Q-3
10-Q.
|
10.29(b)
|
Second
Amendment to the XJT Capacity Purchase Agreement, dated as of December 23,
2008
–
incorporated by reference to Exhibit 10.28(b) to the 2008 10-K.
(1)
|
10.29(c)
|
Third
Amendment to the XJT Capacity Purchase Agreement, dated as of December 22,
2009. (2) (3)
|
10.30
|
Agreement
between the Company and the United States of America, acting through the
Transportation Security Administration, dated May 7, 2003 - incorporated
by reference to Exhibit 10.1 to Continental's Quarterly Report on Form
10-Q for the quarter ended June 30, 2003 (File no.
1-10323).
|
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)
|
31.1
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Executive
Officer. (3)
|
31.2
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Financial
Officer. (3)
|
32.1
|
Section
1350 Certifications. (4)
|
______________
*These
exhibits relate to management contracts or compensatory plans or
arrangements.
(1)
|
The
Commission has granted confidential treatment for a portion of this
exhibit.
|
(2)
|
Continental
has applied to the Commission for confidential treatment of a portion of
this exhibit.
|
(3)
|
Filed
herewith.
|
(4)
|
Furnished
herewith.
|