UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 20002001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
Commission File Number 0-9781
CONTINENTAL AIRLINES, INC.
(Exact name of registrant as specified in its charter)
Delaware | 74-2099724 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1600 Smith Street, Dept. HQSEO, Houston, Texas | 77002 |
(Address of principal executive offices) | (Zip Code) |
Registrant's telephone number, including area code: 713-324-2950
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange On Which Registered |
Class B Common Stock, par value $.01 per share | New York Stock Exchange |
Series A Junior Participating Preferred Stock Purchase Rights | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
[ ]
The aggregate market value of the voting and non-voting common equity stock held by non-affiliates of the registrant was $2.5$1.8 billion as of January 22, 2001.February 8, 2002.
__________________
As of January 22, 2001, 53,401,756February 8, 2002, 63,605,761 shares of Class B common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for Annual Meeting of Stockholders to be held on May 15, 2001:April 17, 2002: PART III
PART I
ITEM 1. BUSINESS.
Continental Airlines, Inc. (the "Company" or "Continental") is a major United States air carrier engaged in the business of transporting passengers, cargo and mail. Continental isWe are the fifth largest United States airline (as measured by 20002001 revenue passenger miles) and, together with itsour wholly owned subsidiaries, ExpressJet Airlines, Inc. (formerly Continental Express, Inc. ("Express"and referred to in this Form 10-K as "ExpressJet") and Continental Micronesia, Inc. ("CMI"), each a Delaware corporation, served 230216 airports worldwide at January 19, 2001.31, 2002. As of January 19, 2001, Continental31, 2002, we flew to 136123 domestic and 9493 international destinations and offered additional connecting service through alliances with domestic and foreign carriers. ContinentalWe directly served 1615 European cities, seven South American cities, Tel Aviv, Hong Kong and Tokyo as of January 31, 2002, and isare one of the leading airlines providing service to Mexico and Central America, serving more destinations there than any other United States airline. Through itsour Guam hub, CMI provides extensive serviceser vice in the western Pacific, including service to more Japanese cities than any other United States carrier.
As used in this Form 10-K, the terms "Continental", "we", "us", "our" and "Company"similar terms refer to Continental Airlines, Inc. and its subsidiaries, unless the context indicates otherwise. This Form 10-K may contain forward-looking statements. In connection therewith, please see the cautionary statements contained in Item 1. "Business - Risk Factors - Terrorist Attacks", "Business - Risk Factors Relating to the Company" and "Business - Risk Factors Relating to the Airline Industry" which identify important factors that could cause actual results to differ materially from those in the forward-looking statements.
Recent Developments
The terrorist attacks of September 11, 2001 involving commercial aircraft adversely affected our financial condition, results of operations and prospects, and the airline industry generally. Among the effects we experienced from the September 11, 2001 terrorist attacks were significant flight disruption costs caused by the Federal Aviation Administration, or FAA, imposed grounding of the U.S. airline industry's fleet, significantly increased security, insurance and other costs, significantly higher ticket refunds, significantly reduced load factors, and significantly reduced yields. As a result, we reduced our flight schedule and furloughed approximately 8,000 employees in connection with the schedule reduction. For the fourth quarter of 2001, we reduced our systemwide available seat miles by approximately 14.9% as compared with capacity for the same period in the prior year. Due in part to the lack of predictability of future traffic, business mix and yields, we are currently unable to estimate t he long-term impact on us of the events of September 11, 2001 and the sufficiency of our financial resources to absorb that impact. However, given the magnitude of these unprecedented events and their potential subsequent effects, the adverse impact to our financial condition, results of operations and prospects may continue to be material. See "Employees" and "Risk Factors - Terrorist Attacks" below.
Domestic Operations
Continental operates itsWe operate our domestic route system primarily through itsour hubs in New York at Newark International Airport ("Newark"), in Houston, Texas at George Bush Intercontinental Airport ("Bush Intercontinental") and in Houston andCleveland, Ohio at Hopkins International Airport ("Hopkins International") in Cleveland. The Company's. Our hub system allows itus 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 Continentalus to add service to a new destination from a large number of cities using only one or a limited number of aircraft. As of January 19, 2001, Continental31, 2002, we operated 55%61% of the average daily jet departures from Newark, 78%83% of the average daily jet departures from Bush Intercontinental, and 50%66% of the average daily jet departures from Hopkins International (in each case excludingincluding regional jets). Each of Continental'sour domestic hubs is located in a large business and population center, contributing to a high volume of "origin and destination" traffic.
traff ic.
Continental ExpressExpressJet. Continental Airlines'Our mainline jet service at each of itsour domestic hub cities is coordinated with Express,ExpressJet, which operates new-generation regional jets and turboprop aircraft under the name "Continental Express".
Express." Effective January 1, 2001, we entered into a capacity purchase agreement with ExpressJet pursuant to which we purchase in advance all of ExpressJet's available seat miles for a negotiated price. Under the agreement, ExpressJet operates regional flights on our behalf, while we are responsible for all scheduling, pricing and seat inventories, and are entitled to all revenue associated with those flights. We pay ExpressJet based on scheduled block hours in accordance with a formula designed to provide them with an operating margin of approximately 10% before taking into account variations in some costs and expenses that are generally controllable by ExpressJet. Accordingly, we assume the risk of revenue volatility associated with fares and passenger traffic, price volatility for specifie d expense items such as fuel and the cost of all distribution and revenue-related costs. The capacity purchase agreement replaced our prior revenue-sharing arrangement.
As of January 19, 2001, Express31, 2002, ExpressJet served 7076 cities in the U.S., ten11 cities in Mexico and five cities in Canada by regional jets. In addition,At that date, ExpressJet also served 29 cities by turboprop aircraft. Additional commuter feed traffic is currently provided to Continentalus by other code-sharing partners. See "Alliances" below.
Management believes Express'sWe believe ExpressJet's regional jet and turboprop operations complement Continental's jetservice complements our operations by carrying traffic that connects onto our mainline jets and allowing more frequent serviceflights to smallsmaller cities than could be provided economically with conventional jet aircraft and by carrying trafficaircraft. We believe that connects onto Continental's jets. Continental believes that Express's newExpressJet's regional jets provide greater comfort and enjoy better customer acceptance than turboprop aircraft. The regional jets also allow ExpressExpressJet to serve certain routes that cannot be served by its turboprop aircraft. Continental anticipatesWe anticipate that Express'sExpressJet's fleet will be entirely comprised of regional jets by 2004.2003.
We originally filed with the Securities and Exchange Commission, or SEC, for a public offering of common stock of ExpressJet's parent last summer, but decided to postpone the offering after September 11, 2001 to allow the financial markets to stabilize and to permit the airline industry to begin its recovery from the events of September 11, 2001. Our current intention is to continue pursuing our strategy of separating the ownership of Continental and ExpressJet by selling a portion of our interest in ExpressJet to the public for cash.
International Operations
ContinentalWe directly servesserve destinations throughout Europe, Canada, Mexico, Central and South America and the Caribbean, as well as Tel Aviv, Hong Kong and Tokyo, and Tel Aviv, and hashave extensive operations in the western Pacific conducted by CMI. As measured by 20002001 available seat miles, approximately 38.0% of Continental'sour mainline jet operations, including CMI, were dedicated to international traffic, compared with 36.2% in 1999.traffic. As of January 19, 2001, the Company31, 2002, we offered 152119 weekly departures to 1615 European cities and marketed service to 3134 other cities through code-sharing agreements.
The Company'sOur Newark hub is a significant international gateway. From Newark at January 19, 2001, the Company31, 2002, we served 1615 European cities, five Canadian cities, sixfour Mexican cities, fourfive Central American cities, fivefour South American cities, ten11 Caribbean destinations, Tel Aviv, Hong Kong and Tokyo and marketed numerous other destinations through code-sharing arrangements with foreign carriers. Continental announced that it will inaugurate daily non-stop service between Newark and Hong Kong, effective March 1, 2001, and between Newark and London/Stansted, effective May 1, 2001. In addition, the Company announced that it would begin daily non-stop service between Newark and Buenos Aires, Argentina effective December 1, 2001, subject to government approval.
The Company'sOur Houston hub is the focus of itsour operations in Mexico and Central America. As of January 19, 2001, Continental31, 2002, we flew from Houston to 20 cities in Mexico, every country in Central America, six cities in South America, two Caribbean destinations, three cities in Canada, two cities in Europe and Tokyo. Express also serviced seven additional cities in Mexico by regional jets.
ContinentalWe also fliesfly to London, Montreal, Toronto San Juan and Cancuntwo Caribbean destinations from itsour hub in Cleveland.
Continental Micronesia. CMI is a United States-certificated air carrier transporting passengers, cargo and mail in the western Pacific. From its hub operations based on the island of Guam as of January 31, 2002, CMI providesprovided service to eight cities in Japan, more than any other United States carrier, as well as other Pacific rim destinations, including Taiwan, the Philippines, Hong Kong, South Korea, Australia and Indonesia. Service to these Japanese cities and certain other Pacific Rim destinations is subject to a variety of regulatory restrictions limiting the ability of other carriers to serve these markets.
CMI is the principal air carrier in the Micronesian Islands, where it pioneered scheduled air service in 1968. CMI's route system is linked to the United States market through Hong Kong, Tokyo and Honolulu, each of which CMI serves non-stop from Guam. CMI and Continental also maintain a code-sharing agreement and coordinate schedules on certain flights from the west coast of the United States to Honolulu, and from Honolulu to Guam, to facilitate travel from the United States into CMI's route system.
Alliances
Continental hasWe have entered into and continuescontinue to develop alliances with domestic carriers. In 1998, the Company entered intoWe have a long-term global alliance with Northwest Airlines, Inc. ("Northwest Airlines") (the "Northwest Alliance"). Contemporaneously with the commencement of the Northwest Alliance, Northwest Airlines Corporation ("Northwest") purchased from a stockholder of the Company approximately 8.7 million shares of Class A common stock, par value $.01 per share ("Class A common stock") of the Company. On January 22, 2001, the Company repurchased approximately 6.7 million of such shares for $450 million, and reclassified all issued shares of Class A common stock into Class B common stock, par value $.01 per share ("Class B common stock") (see the "Northwest Transaction"). At the same time, Continental and Northwest Airlines extended the term of the Northwest Alliance through 2025, subject to earlier termination by either carrierof us in the event of certain changes in control of either Northwest Airlines or Continental. The Northwest Alliance provides thatfor each carrier will placeplacing its code on a large number of the flights of the other, and includes reciprocity of frequent flyer programs and executive lounge access. Significantaccess, and other joint marketing activities are being undertaken, while preserving the separate identities of the carriers.activities. Northwest Airlines and Continental have also begun to enter intohave joint contracts with major corporations and travel agents with the objective of creatingdesigned to create access to a broader product line encompassing the route systems of both carriers. Continental has
The alliance agreement also entered into agreementsprovides that subject to code share with certain conditions, including the receipt by Northwest Airlines, regional affiliates.KLM Royal Dutch Airlines and us of an adequate grant of antitrust immunity, we will join, as an economic participant, a new transatlantic joint venture with Northwest Airlines and KLM on terms to be negotiated by the parties in good faith. If the parties cannot resolve the terms of our entrance into such a joint venture, the terms of our entrance would be determined by arbitration in accordance with the alliance agreement's dispute resolution procedures. We have not yet applied for such antitrust immunity and neither we nor Northwest has sought to invoke the arbitration provisions relating to our joint venture participation.
We had originally projected that the Northwest Alliance would generate approximately $225 million of incremental annual operating income for us when fully implemented, which we anticipated would be by the end of 2001. Due to implementation delays, we subsequently revised that projection to $160 million for 2001 and projected that the full run-rate benefit would be achieved during the next few years. Due primarily to the effects on our industry of the September 11, 2001 terrorist attacks, the actual incremental contribution for 2001 was $140 million, and it is now unclear whether the full projected benefit will be achieved in the future.
ContinentalWe also hashave domestic code-sharing agreements with America West Airlines, Inc. ("America West"), Gulfstream International Airlines, Inc. ("Gulfstream"), Mesaba Aviation, Inc., Hawaiian Airlines, Inc., Alaska Airlines, Inc. ("Alaska Air"), Horizon Airlines, Inc., Champlain Enterprises, Inc., dba CommutAir (CommutAir) and American Eagle Airlines, Inc. Continental also ownsWe own 28% of the common equity of Gulfstream.
In addition to our domestic alliances, Continental seekswe seek to develop international alliance relationships that complement the Company'sour own flying and permit expanded service through itsour hubs to major international destinations. International alliances assist the Company in the development of itsour route structure by enabling the Companyus to offer more frequencies in a market, by providing passengers connecting service from Continental'sour international flights to other destinations beyond an alliance partner's hub, orand by expanding the product line that Continentalwe may offer in a foreign destination.
In October 2001, we announced that we had signed a cooperative marketing agreement with KLM that includes extensive codesharing and reciprocal frequent flyer program participation and airport lounge access. On December 1, 2001, we placed our code on selected flights to more than 30 European destinations operated by KLM and KLM Cityhopper beyond its Amsterdam hub, and KLM placed its code on our flights between New York and Amsterdam, as well as on selected flights to U.S. destinations operated by us beyond our New York and Houston hubs. In addition, members of each carrier's frequent flyer program are able to earn mileage anywhere on the other's global route network, as well as the global network of Northwest Airlines. This code-share agreement terminates on March 30, 2002, unless extended by the parties.
Continental hasWe have also implemented international code-sharing agreements with Alitalia Linee Aeree Italiane, S.P.A. ("Alitalia"),Air Europa, Air China, Emirates (the flag carrier of the United Arab Emirates),EVA Airways Corporation, an airline based in Taiwan, Virgin Atlantic Airways, ("Virgin"), Societe Air France ("Air France"), and Compania Panamena de Aviacion, S.A. ("Copa"). Continental also ownsWe own 49% of the common equity of Copa.
CertainSome of Continental'sour code-sharing agreements involve block-space arrangements (pursuant to(under which carriers agree to share capacity and bear economic risk for blocks of seats on certain routes). Continental and Air France purchase blocks of seats on each other's flights between Houston and Newark and Paris. Continental and Virgin Atlantic Airways exchange seat blocks of seats on each other's flights between Newark and London, and Continental purchaseswe purchase seat blocks of seats on eight other routes flown by Virgin Atlantic Airways between the United KingdomStates and the United States. Continental's block-space arrangementKingdom. Our codeshare agreement with Alitalia will be terminated effective March 25, 2001. The Company and Air France are continuing to discuss terminating certain portions of their alliance.
Most of the Company's larger U.S. competitors are members of global airline groups involving multi-carrier marketing activities. Continental does not currently have an agreement to join such a group, and it is likely that any group formed by Continental in the future would be smaller than some of these groups.
will terminate on March 31, 2002.
Marketing
As with other carriers, most tickets for travel on Continentalus are sold by travel agents. Travel agents generally receive commissions measured by a certain percentage of the price of tickets sold. AirlinesWe often pay additional commissions to travel agents in connection with special revenue programs.
E-Ticket. In 2000, Continental expanded its2001, we continued to expand our electronic ticketing, ("E-Ticket") product to approximately 95% of its destinations.or E-Ticket, product. E-Tickets result in lower distribution costs to the Companyus while providing enhanced customer and revenue information. ContinentalWe recorded over $5.8$5.6 billion in E-Ticket sales in 2000,2001, representing 54%60% of total sales. During 2000, ContinentalWe have currently replaced itsour airport E-Ticket machines with new state-of-the-art eService Centers, self-service kiosks for customer check-in, in over 5090 U.S. airports. Continental and America West were the first U.S. airlines to implement interline E-Ticketing allowing customers to use electronic tickets when their itineraries include travel on both carriers. In 2000, the Company implementedWe now have interline E-Ticketing arrangements with America West, Northwest Airlines, United Air Lines, Inc. and plansGulfstream, and plan to implement interline E-Ticketing with itsour other alliance partners and some of the other large U.S. carriers. The Company expectsWe expect these features to contribute to an increase in E-Ticket usage and a further reduction in distributiondistr ibution costs.
Internet. Continental'sOur award winning website, www.continental.comcontinental.com, recorded over$487 million in ticket sales in 2001, compared with $320 million in ticket sales in 2000, compared with over $165 million in ticket sales in 1999.2000. The site offers customers direct access to information such as schedules, reservations, flight status, cargo tracking and Continental Online travel specials, a free weekly emaile-mail containing special offers for weekend travel. New customer service features in 2000 include flight status notification via text messaging tools and a downloadable timetable. Combined with online travel agents, the Companywe recorded over $665 million$1 billion in ticket sales through the internet during 2000,2001, compared with over $305$665 million in 1999.
2000.
Other. Continental isWe are using e-commerce to improve distributionour services for the customer as well as reducingand to reduce distribution costs. Continental, along with United Air Lines, Inc. ("United"), American Airlines, Inc. ("American"), Delta Air Lines, Inc. ("Delta") and Northwest Airlines, own a majority interest in a comprehensive travel planning website, ORBITZ, which will offeroffers customers unlimited access to a wide variety of unbiased travel options. To date, 2945 U.S. and foreign carriers have signed up to joinjoined the web-based travel service. ORBITZ will provideprovides customers with convenient online access to airline, hotel, car rental and other travel services in addition to internet offers. The site will featurefeatures published fares from virtually all carriers worldwide and will welcome the posting of internet fares from other carriers as well.worldwide. In addition, Continental haswe have entered into marketing agreements with other web-based travel service companies such as Biz Travel, Hotwire, Travelocity and Site59.com.Expedia.
Frequent Flyer Program
Continental has established aWe maintain our "OnePass" frequent flyer program "OnePass", designed to encourage repeat travel on itsour system. Continental's OnePass program currently allows passengers to earn mileage credits by flying Continentalus and certain other carriers, including Northwest Airlines, America West Airlines, Alaska Air,Airlines, Alitalia, Air France, Qantas Airways, Copa and Gulfstream. The CompanyWe also sellssell mileage credits to credit card companies, phone companies, hotels, car rental agencies and others participating in the OnePass program.
OnePass.
Due to the structure of the program and the low level of redemptions as a percentage of total travel, Continental believeswe believe that displacement of revenue passengers by passengers using flight awards has historically been minimal. The number of awards used on Continentalus represented 7.6% and 7%7.3% of Continental'sour total revenue passenger miles in 2000 and 1999, respectively.
In 2000, Continental entered into a marketing agreement with MilePoint.com, a new website that allows frequent flyer customers to trade accumulated miles for discounts on online merchandise. To date, the Company, Delta, Northwest Airlines, US Airways, Inc. ("US Airways"), and America West are participants and equity owners.
2001.
Employees
As of December 31, 2000, the Company2001, we had approximately 54,300 employees (48,40042,900 full-time equivalent employees, including approximately 21,15017,850 customer service agents, reservations agents, ramp and other airport personnel, 9,0007,660 flight attendants, 7,6006,790 management and clerical employees, 6,5006,150 pilots, 4,0004,300 mechanics and 150 dispatchers).dispatchers. Labor costs are a significant component of the Company'sour expenses and can substantially impact airline results. In 2000,2001, labor costs (including employee incentives) constituted 30.9%33.1% of the Company'sour total operating expenses.expenses, excluding special charges and a grant under the Air Transportation Safety and System Stabilization Act (the "Stabilization Act"). While there can be no assurance that the Company'sour generally good labor relations and high labor productivity will continue, management haswe have established as a significant component of itsour business strategy the preservation of good relations with the Company'sour employees, approximately 41%44% of whom are represented by unions.
As a result of the September 11, 2001 terrorist attacks, we expected to furlough approximately 12,000 employees. We were able to reduce our original estimate to 8,000, of which approximately 55% accepted company-offered leaves of absence or retirements. We have recalled several hundred employees primarily to assist in enhanced security requirements at airports.
See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" for a table of the Company's, Express'sContinental's, ExpressJet's and CMI's principal collective bargaining agreements, and their respective amendable dates.
Industry Regulation and Airport Access
ContinentalWe and itsour subsidiaries operate under certificates of public convenience and necessity issued by the Department of Transportation, ("DOT").or DOT. Such certificates may be altered, amended, modified or suspended by the DOT if public convenience and necessity so require, or may be revoked for intentional failure to comply with the terms and conditions of a certificate.
The airlines are also regulated by the Federal Aviation Administration ("FAA"),FAA, primarily in the areas of flight operations, maintenance, ground facilities and other technical matters. Pursuant to these regulations, Continental haswe have established, and the FAA has approved, a maintenance program for each type of aircraft operated by the Companywe operate that provides for the ongoing maintenance of such aircraft, ranging from frequent routine inspections to major overhauls.
The DOT allows local airport authorities to implement procedures designed to abate special noise problems, provided such procedures do not unreasonably interfere with interstate or foreign commerce or the national transportation system. Certain airports, including the major airports at Boston, Washington, D.C., Chicago, Los Angeles, San Diego, Orange County (California) and San Francisco, have established airport restrictions to limit noise, including restrictions on aircraft types to be used and limits on the number of hourly or daily operations or the time of such operations. In some instances, these restrictions have caused curtailments in services or increases in operating costs, and such restrictions could limit theour ability of Continental to expand itsour operations at the affected airports. Local authorities at other airports are considering adopting similar noise regulations.
Airports from time to time seek to increase the rates charged to airlines, and the ability of airlines to contest such increases has been restricted by federal legislation, DOT regulations and judicial decisions. In addition, someMost recently, under the Aviation and Transportation Security Act (the "Aviation Security Act"), funding for airline and airport security is provided in part by a new $2.50 per enplanement ticket tax. The Aviation Security Act also allows the Department of Transportation to assess each airline fees that could total the amount spent by that airline on screening services in 2000. Additionally, because of significantly higher security and other costs incurred by airports since September 11, 2001, and because reduced landing weights since September 11, 2001 have reduced the fees airlines pay to airports, many airports are significantly increasing their rates and charges to air carriers. Some public airports impose passenger facility charges of up to $4.50 per segment for a maximum of $18 per roundtrip.r oundtrip. With certain exceptions, these charges are passed on to customers.
The FAA has designated John F. Kennedy International Airport ("Kennedy") and LaGuardia Airport ("LaGuardia") in New York, O'Hare International Airport in Chicago ("O'Hare") and Ronald Reagan Washington National Airport in Washington, D.C. ("Reagan National") as "high density traffic airports" and has limited the number of departure and arrival slots at those airports. In April 2000, legislation was signed eliminatingphasing out slot restrictions beginning in 2001 at O'Hare, and 2007 at LaGuardia and Kennedy. Elimination of slot restrictionsAll slots at O'Hare LaGuardiaare scheduled to be eliminated by July 2002 and Kennedy already began through exemptions for new entrants and small aircraft serving small and non-hub airports. Express has been awarded slot exemptions to provide service at LaGuardia using regional jets. The Borough of Queens, the City of New York and the Mayor of New York have asked the U.S. Court of Appeals for the Second Circuit to review and reverse the DOT's decisions awarding slot exemptionsslots at LaGuardia and Kennedy are scheduled to Expressbe eliminated by 2007. The elimination of slots has had no material impact on us.
On April 14, 2000, the DOT implemented legislation which exempted from slot requirements service between high-density airports (except at Reagan National) and other carriers. Subsequent tosmall cities using small aircraft. After the awardcommencement of slot exemptions at LaGuardia,such operations, however, the FAA reducedrequired airlines to reduce the number of slot exemptions available there effective January 31, 2001,flights operated at LaGuardia pursuant to amelioratethe new legislation to reduce congestion and delays, and Expressit seems likely such restrictions will now have only a limited numbercontinue.
Reagan National was closed to air service from September 11, 2001 through October 4, 2001, and the government is permitting service to be recommenced in phases. As of slot exemptions available at LaGuardia.
December 31, 2001, we were servicing Reagan National out of our New York and Houston hubs. Service out of Cleveland resumed in January 2002.
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. Foreign route authorities may become less valuable to the extent that the United States and other countries adopt "open skies" policies liberalizing entry on international routes. ContinentalWe cannot predict what laws and regulations will be adopted or their impact, but the impact could be significant.
Many aspects of Continental's operations are subject to increasingly stringent federal, state and local laws protecting the environment. Future regulatory developments could adversely affect operations and increase operating costs in the airline industry.
Risk Factors - Terrorist Attacks
Northwest TransactionThe terrorist attacks of September 11, 2001 involving commercial aircraft adversely affected our financial condition, results of operations and prospects, and the airline industry generally. Those effects continue, although they have been mitigated somewhat by increased traffic, the Stabilization Act and our cost-cutting measures. Moreover, additional terrorist attacks, even if not made directly on the airline industry, or the fear of such attacks, could further negatively impact us and the airline industry.
Among the effects we experienced from the September 11, 2001 terrorist attacks were significant flight disruption costs caused by the FAA-imposed grounding of the U.S. airline industry's fleet, significantly increased security, insurance and other costs, significantly higher ticket refunds, significantly reduced load factors, and significantly reduced yields. Further terrorist attacks using commercial aircraft could result in another grounding of our fleet, and would likely result in significant reductions in load factor and yields, along with increased ticket refunds and security, insurance and other costs. In addition, terrorist attacks not involving commercial aircraft, or other world events, could result in decreased load factors and yields for airlines, including us, and could also result in increased costs. For instance, fuel costs, which have declined since September 11, 2001, could escalate if oil-producing countries were impacted by hostilities or reduce output, which could also impact fue l availability. In February 2002, we purchased out of the money call options to hedge a significant increase in fuel costs for approximately 35% of our projected 2002 fuel requirements for the period March through December. Premiums for aviation insurance have increased substantially, and could escalate further, or certain aviation insurance could become unavailable or available only for reduced amounts of coverage that are insufficient to comply with the levels of insurance coverage required by aircraft lenders and lessors or required by applicable government regulations. Additionally, war-risk coverage or other insurance might cease to be available to our vendors, or might be available only at significantly increased premiums or for reduced amounts of coverage, which could adversely impact our operations or costs.
On November 15, 2000, Continental entered into a number of agreements with Northwest and some of its affiliates under which it would, among other things, repurchase approximately 6.7 million shares of Class A common stock owned by Northwest, reclassify all issued shares of Class A common stock into Class B common stock, make other adjustments to its corporate and alliance relationship with Northwest Airlines and issue to Northwest Airlines one share of preferred stock, designated as Series B preferred stock ("Series B preferred stock") with blocking rights relating to certain change of control transactions involving Continental and certain matters relating to Continental's rights plan. The transactions closed on January 22, 2001. Under the agreements relatingDue in part to the recapitalization, Continentallack of predictability of future traffic, business mix and Northwest agreedyields, we are currently unable to seek dismissalestimate the long-term impact on us of the antitrust litigation brought by the U.S. Departmentevents of Justice ("DOJ") against Northwest and Continental, which dismissal was granted on January 22, 2001. See Item 3. "Legal Proceedings - Antitrust Litigation".
Repurchase of Shares of Class A Common Stock. On January 22,September 11, 2001 Continental repurchased from Northwest and an affiliate 6,685,279 shares of Continental Class A common stock for an aggregate purchase price of $450 million in cash (or approximately $67 per share).
The shares repurchased represented approximately 77% of the total number of shares of Class A common stock owned by Northwest, excluding shares subject to a limited proxy held by Northwest. This limited proxy terminated upon the closing of the recapitalization. After giving effect to the repurchase and the reclassificationsufficiency of our financial resources to absorb that impact. However, given the issued sharesmagnitude of Class A common stock into Class B common stock, Northwest's general voting power with respectthese unprecedented events and their potential subsequent effects, the adverse impact to Continental, including Northwest's rightour financial condition, results of operations and prospects may continue to vote certain shares under a limited proxy, was reducedbe material.
We may have to recognize further special charges related to grounded aircraft. As of January 31, 2002, we had 56 jet aircraft and 19 turboprop aircraft out of service from approximately 59.6%our fleet. The majority of these aircraft have been temporarily removed from service and we will continue to approximately 7.2%. This percentage does not include the share of Series B preferred stock issuedevaluate whether to Northwest Airlinesreturn these temporarily grounded aircraft to service, which will primarily depend on demand and yield in the recapitalization, which does not have general voting rights but instead hascoming months. It is possible that all or a special class vote on certain changesignificant portion of control transactions as described below.
Reclassification of Shares of Class A Common Stock. At the effective time of the recapitalization, the remaining 1,975,945 shares of Class A common stock owned by Northwest that Continental did not purchase, as well as all other issued shares of Class A common stock, were reclassified into Class B common stock at an exchange rate of 1.32 shares of Class B common stock per share of Class A common stock. Unlike the shares of Class A common stock, which were entitled to ten votes per share, the shares of Class B common stock are entitled to one vote per share.
Amendment of Master Alliance Agreement. In connection with the recapitalization, the master alliance agreement between Continental and Northwest Airlines, pursuant to which certain joint marketing activities (such as code sharing, reciprocal frequent flyer programs and executive lounge access) are undertaken, was extended through 2025, with automatic five-year renewals thereafter unless either party gives three years' advance notice of nonrenewal. The master alliance agreement was also amended so that itthese temporarily grounded aircraft will be terminable by either Northwest Airlines or, under certain limited circumstances, Continental with six months' prior written notice in the event ofpermanently removed from service at a change of control of Continental, and by either Continental or Northwest Airlines with six months prior written notice in the event of a change of control of Northwest Airlines.
Issuance of Series B Preferred Stock. In connection with the transactions described above, including the amendment of the master alliance agreement described above, Continental issued to Northwest Airlines one share of Series B preferred stock for consideration of $100 in cash. The Series B preferred stock gives Northwest Airlines the right to vote, as a separate class, during the term of the master alliance agreement or, if earlier, until the Series B preferred stock becomes redeemable, on:
Except for the right to vote on any amendment to Continental's certificate of incorporation that would adversely affect the Series B preferred stock, and on any other matter as may be required by law, the Series B preferred stock does not have any other voting rights. The voting rights of the Series B preferred stock will be eliminated and the Series B preferred stock will, at Continental's option, be redeemable if:
Purchase of Right of First Offer. In connection with the recapitalization, Continental paid 1992 Air, Inc. $10 million in cash for its sale to Continental of its right of first offer to purchase the shares of Class A common stock that the Company purchased from Northwest (which right terminated immediately after the recapitalization). 1992 Air, Inc. is an affiliate of David Bonderman, one of Continental's directors.
Standstill Agreement. In connection with the recapitalization, Northwest and certain of its affiliates have entered into a standstill agreement with the Company that contains standstill and conduct restrictions that are substantially similar to those previously contained in the corporate governance agreement that had been in place between the parties. However, the percentage of Continental stock that Northwest and its affiliates may own has been adjusted downward to reflect their holdings following the recapitalization and will be adjusted downward to reflect any subsequent dispositions by them of Continental common stock, and upward if their percentage ownership increases as a result of decreases in the number of outstanding shares of Continental common stock. The agreement restricts Northwest and its affiliates from increasing their percentage ownership of shares of Continental stock or otherwise attempting to control or influence the Company. Under the agreement, Northwest agreed to vote neutrally all of Continental's common stock owned by it after the recapitalization, except that Northwest will be free to vote its shares in its discretion with respect to a change of control of the Company, as defined in the Series B preferred stock certificate of designations, and will vote neutrally or as recommended by Continental's board of directors with respect to the election of directors. The standstill agreement provides that Northwest will be released from its obligations if Continental publicly announces that it is seeking, or has entered into an agreement with, a third party to acquire a majority of Continental's voting securities or all or substantially all of Continental's airline assets.
Amendment of the Rights Agreement. Continental has also amended its rights agreement to take into account, among other things, the effects of the recapitalization and to eliminate Northwest's status as an exempt person that would not trigger the provisions of the rights agreement.
Adoption of Amended and Restated Certificate of Incorporation. The Company's certificate of incorporation was amended to:
other long-lived assets could, be material.
Continental/Northwest AllianceThe Aviation Security Act will impose additional costs and may cause service disruptions. In November 1998,2001, the CompanyPresident signed into law the Aviation Security Act. This law federalizes substantially all aspects of civil aviation security, creating a new Transportation Security Administration under the Department of Transportation. Under the Aviation Security Act, all security screeners at airports will be federal employees, and Northwest Airlinessignificant other elements of airline and airport security will be 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 sc reening personnel, additional provision of passenger data to U.S. Customs, and enhanced background checks. Funding for airline and airport security under the law is provided by a new $2.50 per enplanement ticket tax (subject to a $5 per one-way trip cap), and a new annual tax on air carriers in an amount not to exceed the amounts paid in calendar year 2000 by carriers for screening passengers and property. Air carriers began implementing a long-term global alliance involving extensive code-sharing, frequent flyer reciprocity,collecting the new ticket tax from passengers, and other cooperative activities.became subject to the new tax on air carriers, on February 1, 2002. The law requires that the Undersecretary of Transportation for Security will assume all the civil aviation security functions and responsibilities related to passenger screening called for under the law beginning February 17, 2002, and provides that the Undersecretary may assume existing contracts for the provision of passenger screening services at U.S. airports for up to 270 days from that date, after which all security screeners must be federal employees. The law also requires that all checked baggage be screened by explosive detection systems by December 31, 2002, which will require significant equipment acquisitions by the government and may require facility and baggage process changes to implement. Implementation of the Northwest Alliance continued throughout 2000.
The alliance agreement provides that if by January 25, 2002 the Company has not entered into a code share with KLM Royal Dutch Airlines ("KLM") or is not legally able (but for aeropolitical restrictions) to enter into a new transatlantic joint venture with KLM and Northwest Airlines and place its airline code on certain Northwest Airlines flights, Northwest Airlines can elect to (i) cause good faith negotiations among the Company, KLM and Northwest Airlines as to the impact, if any, on the contribution to the joint venture described below resulting from the absencerequirements of the code share,Aviation Security Act will result in increased costs for us and the Company will reimburse the joint venture for the amount of any loss until it enters into a code-share arrangement with KLM, or (ii) terminate (subjectour passengers and may result in delays and disruptions to cure rights of the Company) after one year's notice any or all of such alliance agreement and any or all of the agreements contemplated thereunder. As of January 22, 2001, the Company had not entered into a code share with KLM.air travel.
The alliance agreement also provides that subject to the receipt by Northwest Airlines, KLM and the Company of an adequate grant of antitrust immunity and within one year after all contractual and technical impediments have been removed, the Company shall join, as an economic participant, a new transatlantic joint venture with Northwest Airlines and KLM. The Company has not yet applied for such antitrust immunity, and not all such impediments have been removed. The alliance agreement provides that Northwest Airlines and KLM will negotiate in good faith with each other and with the Company the share of the new transatlantic joint venture to which the Company will be entitled. If the three carriers are unable to agree on the profit shares of the new transatlantic joint venture, they will submit the matter to arbitration in accordance with the alliance agreement's dispute resolution procedures. In such a case, the arbitrator(s) will only be permitted to choose one award from those submitted by each of the carriers.
Risk Factors Relating to the Company
We continue to experience significant operating losses. Since September 11, 2001, we have not generated positive cash flow from our operations. Although improved traffic since September has significantly decreased the average daily negative cash flow from operations, our cash flow from operations as of February 20, 2002, remains negative at approximately $2 million per day, and we currently anticipate that we will incur a significant loss in the first quarter of 2002. We also expect to incur a loss for the fourth quarter of 2002 and for the full year 2002. Although load factors continue to improve, they have done so against significantly reduced capacity. The reduced capacity, coupled with the fact that many of our costs are fixed in the intermediate to long term, will continue to cause higher unit costs. Cost per available seat mile for 2002 is expected to increase 5%, holding fuel rate constant, as compared to 2001. This increase is partly attributable to anticipated additional insuranc e costs in 2002 of approximately $85 million. Business traffic in most markets continues to be weak, and carriers continue to offer reduced fares to attract passengers, which lowers our passenger revenue and yields and raises our break-even load factor. We cannot predict when business traffic or yields will increase.
In addition, our capacity purchase agreement with ExpressJet provides that we purchase in advance all of its available seat miles for a negotiated price, and we are at risk for reselling the available seat miles at market prices. We previously announced our intention to sell or otherwise dispose of some or all of our interests in ExpressJet. If we do so, then we would have greater fixed costs, which could result in lower or more volatile earnings or both. For example, for the year ended December 31, 2001, our pre-tax net loss of approximately $114 million included pre-tax net income for ExpressJet of approximately $80 million.
High Leverage and Significant Financing NeedsOur high leverage may affect our ability to satisfy our significant financing needs or meet our obligations. Continental hasWe have a higher proportion of debt compared to itsour equity capital than some of itsour principal competitors. We also have significant operating leases and facility rental costs. In addition, Continental has lesswe have fewer cash resources than some of itsour principal competitors. A majorityMost of Continental'sour property and equipment is subject to liens securing indebtedness. Accordingly, Continentalwe may be less able than some of itsour competitors to withstand a prolonged recession in the airline industry or respond as flexibly to changing economic and competitive conditions.
As of December 31, 2000, Continental2001, we had approximately $3.7$4.6 billion (including current maturities) of long-term debt and capital lease obligations, and approximately $1.9 billion$250 million liquidation amount of Continental-obligated mandatorily redeemable preferred securities of trust redeemable common stock($243 million net of unamortized discount), and common$1.2 billion of stockholders' equity. Also at December 31, 2000, Continental had $1.4 billion in cash, cash equivalents and short-term investments.
Continental hasWe have substantial commitments for capital expenditures, including for the acquisition of new aircraft. As of December 31, 2000, Continental2001, we had agreed to acquire or lease a total of 86 additional Boeing jet aircraft through 2005. The Company anticipates taking delivery of 35 Boeing jet aircraft in 2001. Continental also has options for an additional 105 aircraft (exercisable subject to certain conditions). The estimated aggregate cost of the Company's firm commitments for 87 aircraft from Boeing, with an estimated cost of approximately $3.7 billion, after giving effect to the rescheduling discussed below. We expect that 20 of these aircraft is approximately $4 billion. Continental currently planswill be delivered between January 2002 and May 2002. Thirteen of these 20 aircraft have been pre-financed, and we expect to finance its newthe remaining seven aircraft. We have agreed with Boeing to reschedule deliveries of the remaining 67 aircraft with a combination of enhanced pass through trust certificates, lease equityso that they will be delivered between late 2003 and other third-party financing, subject to availability and market conditions. As of December 31, 2000, Continental had approximately $890 million in financing arranged for such Boeing deliveries. Continental also has commitments or letters of intent formid 2008. We do not have backstop financing from Boeing or any other financing currently in place for approximately 23% of the anticipated remaining acquisition cost of future Boeing deliveries. In addition, at December 31, 2000, Continental had firm commitments to purchase 26 spare engines related to the new Boeing aircraft for approximately $158 million, which will be deliverable through March 2005.
67 aircraft.
As of December 31, 2000, Express2001, ExpressJet had firm commitments for 178 Embraer137 regional jets from Empresa Brasileira de Aeronautica S.A. ("Embraer"), with options for an additional 100 Embraer regional jets exercisable through 2007. Express anticipates taking delivery of 41 regional jets in 2001. The estimated cost of the Company's firm commitments for Embraer regional jets is approximately $3$2.6 billion. Neither Express nor Continental willWe do not have any obligation to take any suchof these firm Embraer aircraft that are not financed by a third party and leased to Continental.us.
In addition, we have significant operating lease and facility rental obligations. For the year ended December 31, 2001 and 2000, cash expenditures under operating leases relating to aircraft approximated $864 million, compared to $758 million for 1999,$1.3 billion and approximated $353 million relating to facilities and other rentals compared to $328 million in 1999. Continental expects that its operating lease expenses for 2001 will increase over 2000 amounts.
$1.2 billion, respectively.
Additional financing will be needed to satisfy the Company'sour capital commitments. ContinentalWe cannot predict whether sufficient financing will be available for capital expenditures not covered by firm financing commitments.
Continental's Historical Operating Results. Continental has recorded positive net income in On several occasions subsequent to September 11, 2001, each of Moody's Investors Service, Standard and Poor's and Fitch Ibca, Duff & Phelps downgraded the last six years. However, Continental experienced significant operating lossescredit ratings of a number of major airlines, including our credit ratings. Reductions in our credit ratings may increase the previous eight years. Historically,cost and reduce the financial resultsavailability of the U.S. airline industry have been cyclical. Continental cannot predict whether current industry conditions will continue.
financing to us.
Significant Costchanges or extended periods of Aircraft Fuelhigh fuel costs would materially affect our operating results. Fuel costs constitute a significant portion of Continental'sour operating expense. Fuel costs wererepresented approximately 15.6%13.5% of our operating expenses for the year ended December 31, 20002001 (excluding severance and 9.7%other special charges and Stabilization Act grant) and 15.2% of our operating expenses for the year ended December 31, 1999 (excluding fleet disposition/impairment losses).2000. Fuel prices and supplies are influenced significantly by international political and economic circumstances. Continental entersFrom time to time we enter into petroleum swap contracts, petroleum call option contracts and/or jet fuel purchase commitments to provide some short-term protection (generally three to six months) against a sharp increase in jet fuel prices. The Company'sOur fuel hedging strategy could resultmay limit our ability to benefit from declines in fuel prices. In February 2002, we purchased out of the Company not fully benefiting from certainmoney call options to hedge a significant increase in fuel price declines.costs for approximately 35% of o ur projected 2002 fuel requirements for the period March through December. If a fuel supply shortage were to arise from OPEC production curtailments, a disruption of oil imports or otherwise, higher fuel prices or reduction of scheduled airline service could result. Significant changes in fuel costs or continuationextended periods of high current jet fuel prices would materially affect Continental'sour operating results.
Labor Costscosts impact our results of operations. Labor costs constitute a significant percentage of the Company'sour total operating costs, and the Company experiences competitive pressure to increase wages and benefits.costs. In July 2000, the Companywe completed a three-year program bringing all employees to industry standard wages and also announced and began to implementimplementing a phased plan to bring employee benefits to industry standard levels by 2003. The plan provides for increases in vacation, paid holidays, increased 401(k) Company matching cash contributions and additional past service retirement credit for most senior employees.
Collective bargaining agreements between us and our mechanics (who are represented by the International Brotherhood of Teamsters) and between both us and ExpressJet and our respective pilots (who are represented by the Air Line Pilots Association) are amendable in January 2002 and October 2002, respectively. Negotiations were deferred due to the economic uncertainty following the September 11, 2001 terrorist attacks. Negotiations with these employee groups have recommenced with the International Brotherhood of Teamsters in the first quarter of 2002 and are scheduled to commence with the Air Line Pilots Association in the summer of 2002. We will incur increased labor costs in connection with the negotiation of our collective bargaining agreements. In addition, certain other U.S. air carriers have experienced work slowdowns, strikes or other labor disruptions in connection with contract negotiations. Although we enjoy generally good relations with our employees, there can be no assurance that we wi ll not experience labor disruptions in the future.
Certain Tax MattersOur ability to utilize certain net operating loss carryforwards or investment tax credits may be limited by certain events. At December 31, 2000, Continental2001, we had estimated net operating loss carryforwards ("NOLs") of $1$1.5 billion for federal income tax purposes that will expire through 20212022 and federal investment tax credit carryforwards of $45$27 million that will expire through 2001.2002. Due to ana change in our ownership change of Continental on April 27, 1993, the ultimate utilization of Continental'sour NOLs and investment tax credits may be limited, as described below. Reflecting this limitation, Continental had a valuation allowance of $263 million at December 31, 2000.
Continental had, as of December 31, 2000, deferred tax assets aggregating $677 million, including $366 million related to NOLs. The Company has consummated several transactions that resulted in the recognition of NOLs of the Company's predecessor. To the extent the Company were to determine in the future that additional NOLs of the Company's predecessor could be recognized in the accompanying consolidated financial statements, such benefit would reduce the value ascribed to routes, gates and slots.
Section 382 of the Internal Revenue Code ("Section 382") imposes limitations on a corporation's ability to utilize NOLs if it experiences an "ownership change." In general terms, an ownership change may result from transactions increasing the ownership of certain stockholders in the stock of a corporation by more than 50 percentage points over a three-year period. In the event that an ownership change occurred, utilization of Continental'sour NOLs would be subject to an annual limitation under Section 382 determined by multiplying the value of Continental'sour stock at the time of the ownership change by the applicable long-term tax-exempt rate (which was 5.39%is 4.82% for December 2000)January 2002). Any unused annual limitation may be carried over to later years, and the amount of the limitation may under certain circumstances be increased by the built-in gains in assets held by Continentalus at the time of the change that are recognized in the five-year period after the change. Under current conditions, if an ownership change were to occur, Continental'sour annual NOLN OL utilization would be limited to approximately $174$93 million per year other than through the recognition of future built-in gain transactions.
In November 1998, Northwest Airlines Corporation completed its acquisition of certain equity of the Companyinterests in us previously held by Air Partners, L.P. and its affiliates, together with certainshares of our Class A common stock of the Company held by other investors, totaling 8,661,224 shares of the Class A common stock. On January 22, 2001, Continentalwe repurchased 6,685,279 shares of Continentalour Class A common stock from Northwest Airlines Corporation and an affiliate. In addition, each issued share of Continentalour Class A common stock was reclassified into 1.32 shares of Class B common stock in a nontaxable transaction. The Company doesWe do not believe that these transactions resulted in an ownership change for purposes of Section 382.
Continental Micronesia's Dependencedependence on the Japanese Economy; Currency Riskeconomy may result in currency risk. Because the majority of CMI's traffic originates in Japan, its results of operations are substantially affected by the Japanese economy and changes in the value of the yen as compared to the U.S. dollar. To reduce the potential negative impact on CMI's earnings the Company hasassociated with fluctuations in currency, we have entered into forward contracts as a hedge against a portion of itsour expected net yen cash flow position. As of December 31, 2000, the Company2001, we had hedged approximately 75%80% of 20012002 projected yen-denominated net cash flows at a weighted average rate of 99116 yen to $1 US.
Risks Factors Relating to the Airline Industry
Competition and Industry ConditionsThe industry in which we compete is highly competitive. The airline industry is highly competitive and susceptible to price discounting. Carriers have useduse discount fares to stimulate traffic during periods of slack demand, to generate cash flow and to increase market share. Some of Continental'sour competitors have substantially greater financial resources or lower cost structures than Continental.
we do.
Airline profit levels are highly sensitive to changes in fuel costs, fare levels and passenger demand. Passenger demand and fare levels have in the past beenare influenced by, among other things, the general state of the global economy, (both internationallydomestic and domestically), international events, airline capacity and pricing actions taken by carriers. Domestically, from 1990 to 1993, theThe weak U.S. economy, turbulent international events and extensive price discounting by carriers contributed to unprecedented losses for U.S. airlines. Inairlines from 1990 to 1993. Since September 11, 2001, these same factors, together with the last several years,effects of the U.S. economy has improvedterrorist attacks and excessive price discounting has abated. Continentalthe industry's reduction in capacity, have resulted in dramatic losses for us and the airline industry generally. We cannot predict the extent to which these industrywhen conditions will continue.
improve.
In recent years, the major U.S. airlines have sought to form marketing alliances with other U.S. and foreign air carriers. Such alliances generally provide for "code-sharing",code-sharing, frequent flyer reciprocity, coordinated scheduling of flights of each alliance member to permit convenient connections and other joint marketing activities. Such arrangements permit an airline to market flights operated by other alliance members as its own. This increases the destinations, connections and frequencies offered by the airline, which provide an opportunity to increase traffic on its segment of flights connecting with its alliance partners. TheOur alliance with Northwest AllianceAirlines is an example of such an arrangement, and Continental haswe have existing alliances with numerous other air carriers. Other major U.S. airlines have alliances or planned alliances more extensive than Continental's. Continentalours. We cannot predict the extent to which itwe will benefit from its alliances or be disadvantaged by competing alliances.
In recent years, and particularly sinceSince its deregulation in 1978, the U.S. airline industry has also undergone substantial consolidation, and it may in the future undergoexperience additional consolidation. For example, in May 2000, United, the nation's largest commercial airline, announced its agreement to acquire US Airways, the nation's sixth largest commercial airline, subject to regulatory approvals and other conditions. In addition, in January 2001, American announced agreements to acquire the majority of Trans World Airlines, Inc.'s assets and some of US Airways' assets, subject to regulatory approvals and other conditions. ContinentalWe routinely monitorsmonitor changes in the competitive landscape and engagesengage in analysis and discussions regarding itsour strategic position, including alliances and business combination transactions. Continental hasWe have had, and anticipates it willexpect to continue to have, discussions with third parties regarding strategic alternatives. The impact on Continental of these pending transactions and any additional consolidation within the U.S. airline industry cannot be predicted at this time.
Regulatory MattersOur business is subject to extensive government regulation. AirlinesAs evidenced by the enactment of the Aviation Security Act, airlines are subject to extensive regulatory and legal compliance requirements that engenderresult in significant costs. In the last several years, theThe FAA has issued a number offrom time to time issues directives and other regulations relating to the maintenance and operation of aircraft that have requiredrequire significant expenditures. Some FAA requirements cover, among other things, retirement of older aircraft, security measures, collision avoidance systems, airborne windshear avoidance systems, noise abatement and other environmental concerns, commuter aircraft safety and increased inspections and maintenance procedures to be conducted on older aircraft. Continental expectsWe expect to continue incurring expenses in complyingto comply with the FAA's regulations.
Additional laws, regulations, taxes and airport rates and charges have been proposed from time to time that could significantly increase the cost of airline operations or reduce revenues. For instance, "passenger billAdditionally, because of rights" legislation has been introduced in Congress that would, amongsignificantly higher security and other things, requirecosts incurred by airports since September 11, 2001, and because reduced landing weights since September 11, 2001 have reduced the payment of compensationfees airlines pay to passengers as a result of certain delays,airports, many airports are significantly increasing their rates and limit the ability ofcharges to air carriers, including to prohibit or restrict usage of certain tickets in manners currently prohibited or restricted. The DOT has proposed rules that would significantly limit major carriers' ability to compete with new entrant carriers. If adopted, these measures could have the effect of raising ticket prices, reducing revenue and increasing costs.us. Restrictions on the ownership and transfer of airline routes and takeoff and landing slots have also been proposed. See "Industry Regulation and Airport Access" above. The ability of U.S. carriers to operate international routes is subject to change because the applicable arrangements between the United States and foreign governments may be amended from time to time, or because appropriate slots or facilities are not made available. ContinentalWe cannot provide assurance that laws or regulations enactedenacte d in the future will not adversely affect it.
us.
Seasonal Nature of Airline Business; OtherOur operations are affected by the seasonality 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. Continental'sOur results of operations generally reflect this seasonality, but have also been impacted by numerous other factors that are not necessarily seasonal, including the extent and nature of competition from other airlines, fare wars,actions, excise and similar taxes, changing levels of operations, fuel prices, weather, air traffic control delays, foreign currency exchange rates and general economic conditions.
ITEM 2. PROPERTIES.
Flight Equipment
As shown in the following table, Continental'sour operating aircraft fleet consisted of 371352 jets, 96137 regional jets and 7033 turboprop aircraft at December 31, 2000. Continental's2001. Our purchase commitments (orders) and aircraft options as of December 31, 20002001 are also shown below.
Aircraft Type | Total Aircraft |
Owned |
Leased |
Orders |
Options | Seats in Standard Configuration | Average Age (In Years) | Total Aircraft (a) |
Owned |
Leased |
Orders |
Options | Seats in Standard Configuration | Average Age (In Years) |
777-200 | 16 | 4 | 12 | 2 | 6 | 283 | 1.7 | |||||||
777-200ER | 16 | 4 | 12 | 2 | 4 | 283 | 2.7 | |||||||
767-400ER | 4 | 3 | 1 | 20 | - | 235 | 0.2 | 6 | 4 | 2 | 10 | - | 235 | 1.1 |
767-200ER | 3 | 3 | - | 7 | 10 | 174 | 0.1 | 10 | 9 | 1 | - | 6 | 174 | 0.8 |
757-300 | - | - | - | 15 | 5 | 210 | - | 2 | 2 | - | 13 | 5 | 210 | 0.1 |
757-200 | 41 | 13 | 28 | - | - | 172 | 3.9 | 41 | 13 | 28 | - | - | 183 | 4.9 |
737-900 | - | - | - | 15 | 15 | 167 | - | 10 | 6 | 4 | 5 | 12 | 167 | 0.4 |
737-800 | 58 | 17 | 41 | 27 | 38 | 155 | 1.3 | 73 | 20 | 53 | 42 | 32 | 155 | 1.9 |
737-700 | 36 | 12 | 24 | - | 31 | 124 | 2.0 | 36 | 12 | 24 | 15 | 24 | 124 | 3.0 |
737-500 | 66 | 15 | 51 | - | - | 104 | 4.7 | 66 | 15 | 51 | - | - | 104 | 5.7 |
737-300 | 65 | 14 | 51 | - | - | 124 | 13.4 | 59 | 11 | 48 | - | - | 124 | 14.5 |
DC10-30 | 17 | 4 | 13 | - | - | 242 | 25.5 | |||||||
MD-80 | 65 | 17 | 48 | - | - | 141 | 15.9 | 33 | 5 | 28 | - | - | 141 | 16.6 |
371 | 102 | 269 | 86 | 105 |
| |||||||||
Mainline jets | 352 | 101 | 251 | 87 | 83 |
| 6.5 | |||||||
ERJ-145XR | - | - | - | 75 | 100 | 50 | - | - | - | - | 104 | 100 | 50 | - |
ERJ-145 | 78 | 18 | 60 | 71 | - | 50 | 1.9 | 107 | 18 | 89 | 33 | - | 50 | 2.2 |
ERJ-135 | 18 | - | 18 | 32 | - | 37 | 0.7 | 30 | - | 30 | - | - | 37 | 1.3 |
96 | 18 | 78 | 178 | 100 |
| |||||||||
Regional jets | 137 | 18 | 119 | 137 | 100 |
| ||||||||
Total jets | 467 | 120 | 347 |
| 6.7 | 489 | 119 | 370 |
| 5.2 | ||||
ATR-42-320 | 31 | 9 | 22 | 46 | 10.8 | 25 | 8 | 17 | 46 | 11.7 | ||||
EMB-120 | 20 | 10 | 10 | 30 | 11.0 | 8 | 2 | 6 | 30 | 11.9 | ||||
Beech 1900-D | 19 | - | 19 | 19 | 4.8 | |||||||||
70 | 19 | 51 |
| 33 | 10 | 23 |
| |||||||
Total | 537 | 139 | 398 | 7.1 | 522 | 129 | 393 | 5.7 |
A majorityMost of the aircraft and engines owned by Continentalwe own are subject to mortgages.
During 2000, Continental2001, we put into service a total of 2836 new Boeing aircraft which consisted of fourtwo 767-400ER aircraft, threeseven 767-200ER aircraft, 16 737-800two 757-300 aircraft, three 757-200ten 737-900 aircraft and two 777-20015 737-800 aircraft. ExpressDuring late 2001, we converted eight firm commitments for Boeing 767 aircraft into 22 firm commitments for Boeing 737 aircraft. ExpressJet took delivery of 2229 ERJ-145 aircraft and 12 ERJ-135 aircraft. The Company retired 11 DC10-30's, five 727-200'saircraft in 2001. We removed from service 17 DC-10-30 aircraft, 32 MD-80 aircraft and four MD-80'ssix 737-300 aircraft in 2000.2001. ExpressJet removed from service six ATR-42 aircraft, 12 EMB-120 aircraft and 19 Beech 1900 aircraft in 2001.
We anticipate taking delivery of 20 Boeing jet aircraft in 2002 and the remainder of our firm orders through 2008. Also in 2002, we plan to retire from service 18 jet aircraft, the leases for which expire in 2002.
The CompanyExpressJet anticipates taking delivery of 35 Boeing jet aircraft in 2001 and the remainder of its firm orders through November 2005. The Company plans to retire 16 jet aircraft in 2001.
Express anticipates taking delivery of 4151 Embraer regional jet aircraft in 20012002 and the remainder of its firm orders through the first quarter of 2005. The Company plansWe plan to retire 2027 turboprop aircraft in 2001.
2002 and the remaining turboprop aircraft in 2003.
See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Commitments" for a discussion of the Company'sour order for new firm commitment aircraft and related financing arrangements.
Facilities
The Company'sOur principal facilities are located at Newark, Bush Intercontinental, Hopkins International and A.B. Won Pat International Airport in Guam. Substantially all of these facilities and Continental'sour other facilities are leased on a long-term, net-rental basis, and Continental iswe are responsible for maintenance, taxes, insurance and other facility-related expenses and services. At each of itsour three domestic hub cities and most other locations, Continental'sour passenger and baggage handling space is leased directly from the airport authority on varying terms dependent on prevailing practice at each airport. ContinentalWe also maintainsmaintain administrative offices, airport and terminal facilities, training facilities and other facilities related to the airline business in the cities it serves.we serve.
Continental hasWe have entered into agreements with the Citycities of Houston, Texas the City ofand Cleveland, Ohio, the New Jersey Economic Development Authority, the Port Authority of New York and New Jersey, the Hawaii Department of Transportation, of the State of Hawaii, the Regional Airports Improvement Corporation (in Los Angeles, California), and the Harris County (Houston) Industrial Development Corporation to provide funds for constructing, improving and modifying facilities and acquiring equipment whichthat have been or will be leased to Continental.us and for acquiring related equipment. In connection therewith, Continental haswe have unconditionally guaranteed the principal and interest on certaintax-exempt bonds totalingissued by these entities with a par value in an original principal amount of approximately $1.6 billion (excluding the City of Houston bonds referenced below) and has entered into long-term leases with the respective authorities under which rental payments will be sufficient to service the related bonds. The leases generally have terms ranging from 20 to 30 years.
During 2000,2001, construction continued under Continental's Global Gateway Program at Newark International Airport. The program includes construction of a new concourse in Terminal C, and otherwhich opened in December 2001, a new federal inspection services facility improvements. The project is currently ahead of schedule andfor processing arriving international passengers, which is expected to be completed in the second quarter of 2002, and other facility improvements. The remaining portions of the Global Gateway Program are expected to be completed during 2002. During 2000, Continental also began plans for
In August 2001, the City of Houston completed the offering of $324 million aggregate principal amount of tax-exempt special facilities revenue bonds to finance the construction of the International Services Expansion Program ("ISEP")Terminal E at Bush Intercontinental Airport. In connection therewith, we entered into a long-term lease with the City of Houston at Bush Intercontinental. Continental's portionrequiring that upon completion of construction, with limited exceptions, we will make rental payments sufficient to service the related tax-exempt bonds through their maturity in 2029. Approximately $27 million of the ISEP includes a new international terminal, a new international ticketing facility, a new cargo facility and various other support facilities and improvementsbond proceeds have been expended as of December 31, 2001. During the construction period, we maintain certain risks related to the Company's existing leased property at Bush Intercontinental. The Company plans to finance its portionour own actions or inactions while managing portions of the ISEPconstruction. Potential obligations associated with these risks are generally limited based upon certain percentages of construction costs incurred to date. We have also entered into a binding corporate guaranty with the bond financing made available throughtrustee for the Cityrepayment of Houston.the principal and interest on the bonds that b ecomes effective upon the occurrence of the completion of construction, our failure to comply with the lease agreement (which is within our control), or our termination of the lease agreement. Further, we have not assumed any condemnation risk, any casualty event risk (unless caused by us), or risk related to certain cost overruns (and in the case of cost overruns, our liability for the project would be limited to 89.9% of the capitalized costs) during the construction period. Accordingly, we are not considered the owner of the project and, therefore, have not capitalized the construction costs or recorded the debt obligation in our consolidated financial statements.
The Company hasWe have cargo facilities at Los Angeles International Airport, which it has subleasedwe sublease to another carrier. If suchthe carrier failed to comply with its obligations under the sublease, the Companywe would be required to perform those obligations. We have guaranteed the repayment of principal and interest on $24 million par value bonds related to this facility, which amount is included in our total $1.6 billion guaranteed obligations described above.
Continental remainsWe remain contingently liable until December 1, 2015, on $196 millionfor US Airways, Inc.'s obligations under a lease agreement between US Airways and the Port Authority of long-term lease obligations of US AirwaysNew York and New Jersey related to the East End Terminal at LaGuardia.LaGuardia airport. These obligations include the payment of ground rentals to the Port Authority and the payment of principal and interest on $189 million par value special facilities revenue bonds issued by the Port Authority, which amount is included in our total $1.6 billion guaranteed obligations described above. If US Airways defaulted on these obligations, Continentalwe could be required to cure the default, at which time itwe would have the right to occupy the terminal.
ITEM 3. LEGAL PROCEEDINGS.
Antitrust Litigation
United States of America v. Northwest Airlines Corp. & Continental Airlines, Inc., in the United States District Court for the Eastern District of Michigan, Southern Division. In this litigation, the Antitrust Division of the DOJ challenged under Section 7 of the Clayton Act and Section 1 of the Sherman Act the acquisition by Northwest of shares of Continental's Class A common stock bearing, together with certain shares for which Northwest had a limited proxy, more than 50% of the fully diluted voting power of all Continental stock. The government's position was that, notwithstanding various agreements that restricted Northwest's ability to exercise voting control over Continental and were designed to assure Continental's competitive independence, Northwest's control of the Class A common stock would reduce actual and potential competition in various ways and in a variety of markets. The government sought an order requiring Northwest to divest all voting stock in Continental on terms and conditions agreeable to the government and the Court. Under the Northwest Agreements, Continental and Northwest supported an adjournment of the DOJ lawsuit pending closing of the transaction (which adjournment was granted by the U.S. District Court on November 6, 2000) and agreed to seek dismissal of the DOJ litigation upon or promptly after the closing. The U.S. District Court entered an order dismissing this litigation on January 22, 2001.
Legal Proceedings
On July 25, 2000, a Concorde aircraft operated by Air France crashed shortly after takeoff from France's Charles de Gaulle airport, killing 114 people, most of whom were tourists on board the chartered aircraft, which was also destroyed. The interim investigation conducted byfinal investigative report of the French authorities, issued January 15, 2002, suggests that one of the aircraft's tires burst after running over a small piece of metal believed by investigators to have come from one of our DC-10 aircraft that had taken off on the same runway a short time before the Concorde and that portions of the resulting debris struck the underside of a wing of the aircraft which caused the rupture of a fuel tank, leading to a fire and the crash. In early September 2000, Continental learned that a small piece of metal found on the runway after the Concorde took off is believed by the French authorities to have caused or contributed to the tire failure and is suspected by investigators to have come from a Continental DC10 aircraft that had taken off on the same runway a short time before the Concorde.
The following lawsuits involving the Company have been filed to dateus are pending in connection with the accident, which remains under investigation:accident:Air France and its Insurers v. Continental Airlines, Inc., USAU, Inc, and USAIG filed on September 15, 2000 before the Commercial Court of Pontoise, France, in which the plaintiffs seek damages for indemnification paid to the passengers' families and other parties, for destruction of the aircraft, and for any other expenses and costs incurred by Air France; and Cause No. 2001-37394,Phillippe Fournel, et al.Plaintiffs v. Continental Airlines, Inc. and Goodyear Tire and Rubber Company,Defendants v. Air France S.A., BAE Systems PLC, British Aerospace Corporation, European Aeronautic Defense & Space Company, N.V. and Aerospatiale Matra S.A., Third Party Defendants, filed on July 25, 2001 in the 281st Judicial District Court of Harris County, Texas, in which plaintiffs seek compensatory and punitive damages in connection with the deaths of five crew members on board the Concorde.
The foregoing cases are in preliminary stages. Although the outcome of such suits or any future litigation cannot be known at this time, our costs to defend these matters and, we believe, any potential liability exposure is covered by insurance. Consequently, we do not expect the foregoing litigation or any additional suits that may arise from the accident to have a material adverse effect on our financial position or results of operations.
Two cases previously disclosed in our reports have been dismissed. Case No.
00-07707,In re: Petition of Ina Frentzen, Rita Frentzen-Bien, and Ralf Frentzen Requesting Depositions Before Suit filed on September 29, 2000 in the District Court for Dallas County, Texas, D-95th Judicial District (Parties in interest include Continental Airlines, Inc. and The Goodyear Tire & Rubber Company), in which the plaintiffs seeksought to depose certain parties, including our officers and employees, of the Company, prior to determining whether to file suit against the Companyus and certain other parties;parties, was dismissed by the District Court on June 20, 2001 in connection with a settlement agreement among the parties and certain insurers. Case No. 01CIV.0149,Dr. Hans-Joachim Schnitter, Dietmar Schnitter, Kerstin Hoffman, Carola Wagner and Annette Friedland v. Air France, S.A., Continental Airlines, Inc., BAE Systems plc, European Aeronautic Defense and Space Company N.V., The Goodyear Tire and Rubber Company, General Electric Company, MRA Systems, Inc., filed on January 9, 2001 in the United States District Court for the Southern District of New York, in which the plaintiffs seeksought compensatory and punitive damages in connection with the deaths of three passengers on board the Concorde, atwas dismissed by the time ofDistrict Court on June 21, 2001 in connection with a settlement agreement among the loss. The Company anticipates that additional suits will be filed against the Company in the future connected with this accident.
The foregoing litigation is in preliminary stages. The Company is cooperating with Frenchparties and U.S. authorities in the investigation of the accident. Although the outcome of such suits or any future litigation cannot be known at this time, the Company's costs to defend these matters and, the Company believes, any potential liability exposure are covered by insurance. Consequently, management does not expect the foregoing litigation or any additional suits that may arise from the accident to have a material adverse effect on the financial position or results of operations of the Company.
certain insurers.
Environmental Proceedings
Under the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (commonly known as "Superfund") and similar state environment cleanup laws, generators of waste disposed of at designated sites may, under certain circumstances, be subject to joint and several liability for investigation and remediation costs. The CompanyWe (including itsour predecessors) hashave been identified as a potentially responsible party at six federal and two state sites that are undergoing or have undergone investigation or remediation. The Company hasWe have entered into a settlement agreement with the Environmental Protection Agency ("EPA") with respect to five of the federal sites. The settlement agreement provides for the EPA to receive an allowed unsecured claim of approximately $1.3 million under the Company'sour 1993 Plan of Reorganization and approximately $230,000 in cash, in full satisfaction of any and all of the Company'sour liabilities relating to such sites. In addition, the Company haswe have settled one of the state sites for a de minimisminimi s amount. With respect to the remaining sites, the Company believeswe believe that, although applicable case law is evolving and some cases may be interpreted to the contrary, some or all of any liability claims associated with these sites were discharged by confirmation of the Company'sour 1993 Plan of Reorganization, principally because the Company'sour exposure is based on alleged offsite disposal known as of the date of confirmation. Even if any such claims were not discharged, on the basis of currently available information, the Company believeswe believe that itsour potential liability for itsour allocable share of the cost to remedy each site (to the extent the Company iswe are found to have liability) is not, in the aggregate, material; however, the Company haswe have not been designated a "de minimis" contributor at any of such sites.
The Company isWe are also and may from time to time become involved in other environmental matters, including the investigation and/or remediation of environmental conditions at properties usedwe use or previously used by the Company.used. In 2001, we recorded a charge of $17 million, net of anticipated insurance recoveries, to provide additional reserves for potential environmental remediation costs. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. "Liquidity and Capital Resources - Environmental Matters". Although the Company iswe are not currently subject to any environmental cleanup orders imposed by regulatory authorities, it iswe 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 the Company doesand our current reserves, we do not believe that any environmental liability associated with such properties will have a material adverse effect on the Company.
us.
General
Various other claims and lawsuits against the Companyus are pending that are of the type generally consistent with the Company'sour business. The CompanyWe cannot at this time reasonably estimate the possible loss or range of loss that could be experienced if any of the claims were successful. Many of such claims and lawsuits are covered in whole or in part by insurance. The Company doesWe do not believe that the foregoing matters will have a material adverse effect on the Company.us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Continental's ClassOur common stock (Class B common stockstock) trades on the New York Stock Exchange; its Class A common stock ceased trading on January 22, 2001 upon the closing of the Northwest Transaction.Exchange. The table below shows the high and low sales prices for the Company's Class B common stock and Class Aour common stock as reported on the New York Stock Exchange during 19992000 and 2000.2001.
Class B Common Stock | Class A Common Stock | ||||
High | Low | High | Low | ||
1999 | First Quarter | $41-11/16 | $30 | $44-15/16 | $34-1/8 |
Second Quarter | $48 | $36-7/16 | $48 | $36-13/16 | |
Third Quarter | $44-9/16 | $31-5/8 | $44-3/8 | $31-13/16 | |
Fourth Quarter | $44-3/8 | $32-3/8 | $44-11/16 | $32-3/16 | |
2000 | First Quarter | $46-5/8 | $29 | $46-1/2 | $29-1/16 |
Second Quarter | $50 | $37-5/8 | $49-1/8 | $38-3/16 | |
Third Quarter | $54-13/16 | $43-1/8 | $54-3/4 | $43-3/8 | |
Fourth Quarter | $54-9/16 | $40-1/2 | $68-1/2 | $40-13/16 |
On January 22, 2001, each issued share of Class A common stock was reclassified into 1.32 shares of Class B common stock. See Item 1. "Business - Northwest Transaction".
Class B Common Stock | ||||
High | Low | |||
2001 | First Quarter | $57.88 | $39.10 | |
Second Quarter | $51.95 | $38.70 | ||
Third Quarter | $52.32 | $12.35 | ||
Fourth Quarter | $27.50 | $14.85 | ||
2000 | First Quarter | $46.63 | $29.00 | |
Second Quarter | $50.00 | $37.63 | ||
Third Quarter | $54.81 | $43.13 | ||
Fourth Quarter | $54.56 | $40.50 |
As of January 22, 2001,February 8, 2002, there were approximately 16,50913,499 holders of record of Continental's Class Bour common stock.
The Company hasWe have paid no cash dividends on itsour common stock and hashave no current intention of paying cash dividends on its common stock. Continentaldoing so. We began a stock repurchase program in 1998 under which itwe repurchased a total of 28.128.2 million shares of Class B common stock for a total of approximately $1.2 billion through December 31, 2000. Of the approximately $2872001. Approximately $216 million remained available in the program as of December 31, 2000, $200 million was used as part of the purchase price for 6,685,279 shares of Class A common stock held by Northwest. The Company plans to use the remaining balance in2001, although the program along withhas been suspended. In addition to the current balance, the program permits (i) one-half of future net income (excluding special gains and charges), (ii) all the proceeds from the sale of non-strategic assets and (iii) the amount of cash proceeds received by the Companywe receive for the purchase of common stock by employees and other participants under itsour employee stock purchase and stock option plans to continuebe added to repurchase its common stock in the future.program. Certain of the Company'sour credit agreements and indentures restrict theour ability of the Company and certain of itsour subsidiaries to pay cash dividends or repurchase capital stock by imposing minimum unrestricted cash requirements on the Company,us, limiting thet he amount of such dividends and repurchases when aggregated with certain other payments or distributions and requiring that the Company comply with other covenants specified in such instruments.distributions.
The Company'sOur Certificate of Incorporation provides that no shares of capital stock may be voted by or at the direction of persons who are not United States citizens unless such shares are registered on a separate stock record. The Company'sOur Bylaws further provide that no shares will be registered on such separate stock record if the amount so registered would exceed United States foreign ownership restrictions. United States law currently limits to 25% the voting power in the Companyus (or any other U.S. airline) of persons who are not citizens of the United States to 25%.States.
ITEM 6. SELECTED FINANCIAL DATA.
The tables below set forth certain consolidated financial data of the Company at December 31, 2000, 1999, 1998, 1997 and 1996 and for each of the five years in the period ended December 31, 2000 (in millions, except per share data).
Year Ended December 31, (1)(2) | |||||
2000 | 1999 | 1998 | 1997 | 1996 | |
Operating revenue | $9,899 | $ 8,639 | $7,927 | $7,194 | $6,347 |
Operating income | 684 | 600 | 701 | 716 | 525 |
Income before cumulative effect of accounting changes and extra- ordinary charge |
348 |
488 |
387 |
389 |
325 |
Net income | 342 | 455 | 383 | 385 | 319 |
Earnings per common share: | |||||
Income before cumulative effect of accounting changes and extraordinary charge |
5.71 |
7.02 |
6.40 |
6.72 |
5.87 |
Net income | 5.62 | 6.54 | 6.34 | 6.65 | 5.75 |
Earnings per common share assuming dilution: | |||||
Income before cumulative effect of accounting changes and extraordinary charge |
5.54 |
6.64 |
5.06 |
5.03 |
4.25 |
Net income | 5.45 | 6.20 | 5.02 | 4.99 | 4.17 |
Year Ended December 31, (1)(2) | |||||
2001 | 2000 | 1999 | 1998 | 1997 | |
Statement of Operations Data (in millions except per share data): | |||||
Operating revenue | $8,969 | $9,899 | $ 8,639 | $7,927 | $7,194 |
Operating expenses | 8,825 | 9,170 | 8,024 | 7,226 | 6,478 |
Operating income | 144 | 729 | 615 | 701 | 716 |
Income (loss) before cumulative effect of accounting changes and extraordinary charge | (95) | 348 | 488 | 387 | 389 |
Net income (loss) | (95) | 342 | 455 | 383 | 385 |
Basic earnings (loss) per share: | |||||
Income (loss) before cumulative effect of accounting changes and extraordinary charge | (1.72) | 5.71 | 7.02 | 6.40 | 6.72 |
Net income (loss) | (1.72) | 5.62 | 6.54 | 6.34 | 6.65 |
Diluted earnings (loss) per share: | |||||
Income (loss) before cumulative effect of accounting changes and extraordinary charge | (1.72) | 5.54 | 6.64 | 5.06 | 5.03 |
Net income (loss) | (1.72) | 5.45 | 6.20 | 5.02 | 4.99 |
As of December 31, | |||||
2001 | 2000 | 1999 | 1998 | 1997 | |
Balance Sheet Data (in millions): | |||||
Cash, cash equivalents and short-term investments | 1,132 | 1,395 | 1,590 | 1,399 | 1,025 |
Total assets | 9,791 | 9,201 | 8,223 | 7,086 | 5,830 |
Long-term debt and capital lease obligations | 4,198 | 3,374 | 3,055 | 2,480 | 1,568 |
Continental-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust holding solely Convertible Subordinated Debentures (3) |
243 |
242 |
- |
111 |
242 |
Redeemable common stock (4) | - | 450 | - | - | - |
Stockholders' equity | 1,161 | 1,160 | 1,593 | 1,193 | 916 |
ITEM 6. SELECTED FINANCIAL DATA. (Continued)
| December 31, | ||||
2000 | 1999 | 1998 | 1997 | 1996 | |
Total assets | $9,201 | $8,223 | $7,086 | $5,830 | $5,206 |
Long-term debt and capital lease obligations | 3,374 | 3,055 | 2,480 | 1,568 | 1,624 |
Minority interest (3) | - | - | - | - | 15 |
Continental-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust holding solely Convertible Subordinated Debentures (4) |
242 |
- |
111 |
242 |
242 |
Redeemable preferred stock (5) | - | - | - | - | 46 |
Redeemable common stock (6) | 450 | - | - | - | - |
Year Ended December 31, | |||||
| 2001 | 2000 | 1999 | 1998 | 1997 |
Operating Statistics (5): | |||||
Revenue passengers (thousands) | 44,238 | 46,896 | 45,540 | 43,625 | 41,210 |
Revenue passenger miles (millions) (6) | 61,140 | 64,161 | 60,022 | 53,910 | 47,906 |
Available seat miles (millions) (7) | 84,485 | 86,100 | 81,946 | 74,727 | 67,576 |
Passenger load factor (8) | 72.4% | 74.5% | 73.2% | 72.1% | 70.9% |
Breakeven passenger load factor (9)(10) | 74.9% | 67.6% | 66.4% | 61.6% | 61.0% |
Passenger revenue per available seat mile (cents) | 8.98 | 9.84 | 9.12 | 9.23 | 9.29 |
Total revenue per available seat mile (cents) | 9.78 | 10.67 | 9.86 | 9.95 | 10.06 |
Operating cost per available seat mile (cents) (11) | 9.58 | 9.68 | 8.98 | 8.89 | 9.04 |
Average yield per revenue passenger mile (cents) (12) | 12.42 | 13.20 | 12.45 | 12.79 | 13.11 |
Average price per gallon of fuel, excluding fuel taxes (cents) | 78.32 | 84.21 | 46.56 | 46.83 | 62.91 |
Average price per gallon of fuel, including fuel taxes (cents) | 82.57 | 88.54 | 50.78 | 51.20 | 67.36 |
Fuel gallons consumed (millions) | 1,424 | 1,533 | 1,536 | 1,487 | 1,357 |
Average fare per revenue passenger | $171.59 | $180.66 | $164.11 | $158.02 | $152.40 |
Average length of aircraft flight (miles) | 1,185 | 1,159 | 1,114 | 1,044 | 967 |
Average daily utilization of each aircraft (hours) (13) | 10:19 | 10:36 | 10:29 | 10:13 | 10:13 |
Actual aircraft in fleet at end of period (14) | 352 | 371 | 363 | 363 | 337 |
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The following discussion may contain forward-looking statements. In connection therewith, please see the cautionary statements contained in Item 1. "Business - Risk Factors - Terrorist Attacks", "Business - Risk Factors Relating to the Company" and "Business - Risk Factors Relating to the Airline Industry" which identify important factors that could cause actual results to differ materially from those in the forward-looking statements. Hereinafter, the terms "Continental", "we", "us", "our" and the "Company"similar terms refer to Continental Airlines, Inc. and its subsidiaries, unless the context indicates otherwise.
We incurred a consolidated net loss of $95 million for the year ended December 31, 2001 as compared to consolidated net income of $342 million for the year ended December 31, 2000. Results for 2001 included a $146 million charge for fleet impairment losses, costs associated with furloughs and company-offered leaves, a charge for environmental remediation, costs associated with the closure and nonutilization of certain facilities and for some of our uncollectible receivables and charges related to the impairment of investments in some of our affiliates and the uncollectibility of related notes receivable. In addition, 2001 results included a $417 million grant under the Air Transportation Safety and System Stabilization Act (the "Stabilization Act"). Under the Stabilization Act, the federal government is entitled to audit our books and records to ensure that we had adequate losses to justify the size of the government grant and may reduce the amount of grant if the government determines that such lo sses do not justify the size of the grant.
Continental'sAlthough traffic on many of our flights has continued to increase on significantly reduced capacity since September 11, 2001, yields remain low, resulting in revenue per available seat mile, or RASM, being significantly below levels in the comparable periods in 2000 and significantly below the levels we forecasted prior to September 11, 2001. Our systemwide (mainline jet) RASM for the period between September 11 and December 31, 2001 was approximately 21% lower than our systemwide RASM for the comparable period in 2000, and our estimated systemwide RASM for January 2002 was 14 percent lower than our systemwide RASM for January 2001. Moreover, certain routes, such as the transpacific and transatlantic routes, have been more adversely affected by the September 11, 2001 terrorist attacks than our U.S. domestic or other routes. The reduced systemwide RASM results from lower load factors following the terrorist attacks, a worsening of the general economic slowdown that already impacted our business prio r to the attacks, corporate travel restrictions imposed by a number of companies in the wake of the September 11, 2001 attacks, and various fare sales designed to encourage passengers to travel after the attacks. Although we have taken aggressive action to reduce costs, including significant reductions in workforce, many of our costs are fixed over the intermediate to longer term, so we cannot reduce costs as quickly as we reduce capacity.
The long-term impact on us of the terrorist attacks and their aftermath and the sufficiency of our financial resources to absorb that impact will depend on a number of factors, including: (1) the adverse impact of the terrorist attacks on the economy in general; (2) the level of air travel demand, business mix and yields; (3) our ability to reduce operating costs and conserve our financial resources, taking into account the increased costs we will incur as a consequence of the attacks, including those referred to herein, (4) the higher costs associated with new Federal Aviation Administration, or FAA, security directives, the Aviation and Transportation Security Act (the "Aviation Security Act") and any other increased regulation of air carriers; (5) the higher costs of aviation insurance coverage, and the extent to which such insurance (and war risk coverage for vendors) will continue to be commercially available to us and our vendors; (6) our ability to reduce costs to a level that takes into accou nt our significantly reduced operations, and the timing of those cost reductions; (7) our ability to raise financing in light of the various factors referred to herein; (8) the price and availability of jet fuel, and the availability to us of fuel hedges in light of current industry conditions; (9) the extent of any uncompensated losses we experience as a result of the terrorist attacks and their aftermath, including any shutdown by the government of the U.S. air traffic system; (10) any further declines in the values of the aircraft in our fleet; (11) the extent of the benefits we received under the Stabilization Act, taking into account any possible challenges to and interpretations or possible amendments of the Stabilization Act or regulations issued pursuant thereto; and (12) our ability to retain management and other employees in light of current industry conditions and their impact on compensation and morale.
As described in Item 1. Business. "Recent Developments," the terrorist attacks of September 11, 2001 involving commercial aircraft have had adverse effects on us and the airline industry generally. Among the effects we have experienced from the September 11, 2001 terrorist attacks are significant flight disruption costs caused by the FAA-imposed grounding of the U.S. airline industry's fleet, significantly increased security, insurance and other costs, significantly higher ticket refunds, significantly reduced load factors, and significantly reduced yields. Further terrorist attacks using commercial aircraft could result in another grounding of our fleet, and would likely result in significant reductions in load factor and yields, along with increased ticket refunds and security, insurance and other costs. In addition, terrorist attacks not involving commercial aircraft, or other events could result in decreased load factors and yields for airlines, including us, and could also result in increase d costs. For instance, fuel costs, which have declined since September 11, 2001, could escalate if oil-producing countries are impacted by hostilities or reduce output, which could also impact fuel availability. In February 2002, we purchased out of the money call options to hedge a significant increase in fuel costs for approximately 35% of our projected 2002 fuel requirements for the period March through December. Premiums for aviation insurance have increased substantially, and could escalate further, or certain aviation insurance could become unavailable or available only for reduced amounts of coverage that are insufficient to comply with the levels of insurance coverage required by aircraft lenders and lessors or required by regulations. Additionally, war risk coverage or other insurance might cease to be available to our vendors, or might be available only at significantly increased premiums or for reduced amounts of coverage, which could adversely impact our operations or costs. Among other matte rs, the Aviation Security Act 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 enhanced background checks. Implementation of the requirements of the Aviation Security Act will result in increased costs for us and our passengers and may result in delays and disruptions to air travel. Additionally, because of significantly higher security and other costs incurred by airports after September 11, 2001, and because reduced landing weights since September 11, 2001 have reduced the fees airlines pay to airports, many airports are significantly increasing their rates and charges to air carriers, including to us.
Although the adverse effects described above continue, mitigated somewhat by recently increased traffic, the Stabilization Act and our cost-cutting measures, additional terrorist attacks, even if not made directly on the airline industry, or the fear of such attacks, could further negatively impact us and the airline industry.
Due in part to the lack of predictability of future traffic, business mix and yields, we are currently unable to estimate the long-term impact on us of the events of September 11, 2001 and the sufficiency of our financial resources to absorb that impact. However, given the magnitude of these unprecedented events and their potential subsequent effects, the adverse impact to our financial condition, results of operations are impacted by seasonality (the second and third quarters are generally stronger than the first and fourth quarters) as well as numerous other factors that are not necessarily seasonal, including the extent and nature of competition from other airlines, employee job actions (including at other airlines), fare sale activities, excise and similar taxes, changing levels of operations and capacity, fuel prices, weather, air traffic control delays, foreign currency exchange rates, changes in regulations and aviation treaties and general economic conditions. Rising jet fuel prices significantly impacted results of operations in 2000. However, management believes the Company is well positioned to respond to market conditions in the event of a sustained economic downturn due to its flexible fleet plan, a strong cash balance and a well developed alliance network.
prospects may be material.
Results of Operations
The following discussion provides an analysis of the Company'sour results of operations and reasons for material changes therein for the three years ended December 31, 2000.2001.
Comparison of 2001 to 2000. Passenger revenue decreased 9.1%, $851 million, during 2001 as compared to 2000, which was principally due to a decrease in both traffic and yields subsequent to the September 11, 2001 attacks, as well as lower yields that had been affecting our business prior to the attacks.
Cargo, mail and other revenue decreased 13.4%, $79 million, in 2001 compared to 2000 primarily due to lower contract revenue from outside ground handling, lower freight and mail due to lower international volumes and security restrictions on our ability to carry freight and mail after the terrorist attacks.
Wages, salaries and related costs increased 5.1%, $146 million, during 2001 as compared to 2000, primarily due to higher wage rates. On September 15, 2001, we announced that we would be forced to furlough approximately 12,000 employees in connection with the reduction of our flight schedule in the wake of the September 11, 2001 terrorist attacks, although we were able to reduce our original estimate to 8,000. Approximately 55% of furloughed employees accepted company-offered leaves of absence and retirements and we have recalled several hundred employees primarily to assist in enhanced security requirements at airports. Severance costs and related company-offered benefits are included in fleet impairment losses, severance and other special charges in the accompanying consolidated statements of operations.
Aircraft fuel expense decreased 11.8%, $164 million, in 2001 as compared to 2000. The average price per gallon decreased 7.0% from 84.21 cents in 2000 to 78.32 cents in 2001. Jet fuel consumption decreased 7.1% principally reflecting decreased flight operations after September 11, 2001 and the fuel efficiency of our younger fleet. During 2000, we recognized gains of approximately $88 million related to our fuel hedging program, which is reflected in fuel expense. Losses during 2001 were not material.
Aircraft rentals increased 7.0%, $59 million, in 2001 compared to 2000, due to the delivery of new aircraft.
Landing fees and other rentals increased 9.2%, $49 million, in 2001 as compared to 2000 primarily due to higher facilities rent and landing fees resulting from increased operations prior to September 11, 2001.
Maintenance, materials and repairs expense decreased 12.1%, $78 million, during 2001 as compared to 2000 due to the volume and timing of aircraft overhauls as part of our ongoing maintenance program, the mix of aircraft and the grounding of aircraft subsequent to September 11, 2001.
Depreciation and amortization expense increased 16.2%, $65 million, in 2001 compared to 2000 due principally to the addition of new owned aircraft and related spare parts.
Reservations and sales expense decreased 2.2%, $10 million, in 2001 as compared to 2000 principally due to lower credit card fees as a result of lower revenue.
Commissions expense decreased 30.8%, $162 million, in 2001 compared to 2000 due principally to lower revenue and lower rates due to commission caps.
Passenger servicing expense decreased 4.1%, $15 million, in 2001 as compared to 2000 primarily due to improved baggage performance and a decrease in food costs caused by a decrease in passengers.
Fleet impairment, severance and other special charges in 2001 include costs associated with impairment of various owned aircraft and spare engines ($61 million), furloughs and company-offered leaves ($29 million), a charge for environmental remediation ($17 million) and costs associated with the closure and nonutilization of certain facilities and for certain uncollectible receivables ($17 million).
We recorded a $417 million Stabilization Act grant in 2001 for direct losses incurred beginning on September 11, 2001 through December 31, 2001 as a result of the September 11, 2001 terrorist attacks.
Interest expense increased 17.5%, $44 million, in 2001 compared to 2000 due to an increase in long-term debt primarily resulting from the purchase of new aircraft, partially offset by lower rates on variable debt.
Interest income decreased 48.3%, $42 million, in 2001 compared to 2000 due to lower average balances of cash and lower interest rates.
Other nonoperating income (expense) in 2001 and 2000, included net losses of $6 million and $44 million, respectively, related to the portion of fuel hedges excluded from the assessment of hedge effectiveness (primarily option time value). Other nonoperating income (expense) in 2001 included approximately $22 million of special charges related to the impairment of investments in certain affiliates and the uncollectibility of the related notes receivable as a consequence of the events of September 11, 2001. Other nonoperating income (expense) in 2000 included a $9 million gain related to the sale of a right of first refusal and our remaining investment in America West Holdings Corporation, partially offset by foreign currency losses of $8 million.
In 2000, we recorded an extraordinary charge of $6 million (net of income tax benefit) related to the early repayment of debt.
Comparison of 2000 to 1999. The CompanyWe recorded consolidated net income of $342 million and $455 million for the years ended December 31, 2000 and 1999, respectively. Net income in 2000 included a $6 million after-tax gain on the sale of a right of first refusal and the Company'sour remaining investment in America West Holdings Corporation ("America West Holdings") and a $6 million extraordinary charge from the early repayment of debt. Net income in 1999 was significantly impacted by several non-recurring items, including $200 million of after-tax gains on the sale of the Company'sour interest in AMADEUSAmadeus Global Travel Distribution S.A. ("AMADEUS") and other investments, a $50 million after-tax fleet disposition/impairment loss related to the early retirement of several DC-10-30's and other items and the cumulative effect of accounting changes ($33 million, net of taxes) related to the write-off of pilot training costs and a change in the method of accounting for the sale of mileage credits to participating partners in the Company'sour frequent flyer program.
Passenger revenue increased 14.7%, $1.2 billion, during 2000 as compared to 1999. The increase was principally due to new transatlantic and Latin American destinations served as well as an improvement in yield and load factor.
Cargo, mail and mailother revenue increased 18.8%13.0%, $57$68 million, in 2000 as compared to 1999 primarily due to increased international volumes resulting from new markets.
Wages, salaries and related costs increased 13.3%14.5%, $335$365 million, during 2000 as compared to 1999, primarily due to a 5.8% increase in average full-time equivalent employees to support increased flying, increased employee incentives and higher wage rates resulting from the Company'sour decision to increase employee wages to industry standard by the year 2000.
Aircraft fuel expense increased 86.5%84.3%, $667$637 million, in 2000 as compared to the prior year. The average price per gallon increased 83.2%80.9% from 47.3146.56 cents in 1999 to 86.6984.21 cents in 2000. In addition, jet fuel consumption decreased 0.3%0.2% even with increased flight operations principally reflecting the fuel efficiency of the Company'sour younger fleet. During 2000 and 1999, the Companywe recognized gains of approximately $44$88 million and $90$120 million, respectively, related to itsour fuel hedging program.
Aircraft rentals increased 9.5%, $73 million, during 2000 as compared to 1999, due to the addition of newer aircraft.
Landing fees and other rentals increased 7.0%, $35 million, in 2000 as compared to 1999 primarily due to higher facilities rent and landing fees resulting from increased operations.
Maintenance, materials and repairs increased 7.1%, $43 million, in 2000 as compared to 1999 due to an increase in line maintenance and the volume and timing of engine overhauls as part of the Company'sour ongoing maintenance program.
Depreciation and amortization expense increased 11.7%, $42 million, in 2000 compared to 1999 primarily due to the addition of new aircraft and related spare parts.
Landing feesReservations and other rentalssales expense increased 7.0%9.9%, $35$41 million, in 2000 as compared to 1999 primarily due to higher facilities rent and landingcredit card fees resulting from increased operations.
sales.
Commissions expense decreased 8.7%, $50 million, during 2000 as compared to 1999 due to a lower volume of commissionable sales and lower rates resulting from international commission caps.
Reservations and sales expense increased 9.9%, $41 million, in 2000 as compared to 1999 primarily due to higher credit card fees resulting from increased sales.
Depreciation and amortization expense increased 11.7%, $42 million, in 2000 compared to 1999 primarily due to the addition of new aircraft and related spare parts.
Passenger servicing expense increased 4.0%2.8%, $14$10 million, in 2000 compared to 1999 primarily due to an increase in food costs caused by an increase in passengers.
Other operating expense increased 2.8%, $31 million, in 2000 as compared to the prior year, primarily as a result of increases in outsourced services, travel and other incidental costs, and other miscellaneous expense.
During 1999, the Companywe made the decision to accelerate the retirement of six DC-10-30 aircraft and other items in 1999 and the first half of 2000 and to dispose of related excess inventory. In addition, the market value of certain Boeing 747 aircraft that we no longer operated by the Company had declined. As a result of these items and certain other fleet-related items, the Companywe recorded a fleet disposition/impairment loss of $81 million in 1999.
Other operating expense increased 5.2%, $57 million, in 2000 as compared to the prior year, primarily as a result of increases in outsourced services, travel and other incidental costs, and other miscellaneous expense.
Interest expense increased 7.7%, $18 million, in 2000 as compared to 1999 due to an increase in long-term debt resulting from the purchase of new aircraft, partially offset by interest savings due to the conversion of the Company'sour 6-3/4% Convertible Subordinated Notes into our Class B common stock, par value $.01 per share ("Class B common stock"), in the second quarter of 1999 and the repurchase of the Company'sour remaining 9-1/2% senior unsecured notes in 2000.
Interest income increased 22.5%, $16 million, in 2000 as compared to 1999 due to higher average balances of cash, cash equivalents and short-term investments and due to higher interest rates.
The Company'sOther nonoperating income (expense) in 2000 and 1999, both included net losses of $44 million and $15 million, respectively, related to the portion of fuel hedges excluded from the assessment of hedge effectiveness (primarily option time value). Our other nonoperating income (expense) in 2000 included a $9 million gain related to the sale of a right of first refusal and the Company'sour remaining investment in America West Holdings Corporation, partially offset by foreign currency losses of $8 million. Other nonoperating income (expense) in 1999 included a $33 million gain on the sale of a portion of the Company'sour interest in Equant N.V. ("Equant"), partially offset by foreign currency losses of $13 million, losses on equity investments of $7 million and a $4 million loss on the sale of the Company'sour warrants to purchase common stock of priceline.com, Inc.
In 2000, an extraordinary charge of $6 million (net of income tax benefit) was recorded related to the early extinguishmentrepayment of debt.
Comparison of 1999 to 1998. The Company recorded consolidated net income of $455 million and $383 million for the years ended December 31, 1999 and 1998, respectively. Net income in 1999 was significantly impacted by several non-recurring items, including $200 million of after-tax gains on the sale of the Company's interest in AMADEUS and other investments, a $50 million after-tax fleet disposition/impairment loss related to the early retirement of several DC-10-30s and other items and the cumulative effect of accounting changes ($33 million, net of taxes) related to the write-off of pilot training costs and a change in the method of accounting for the sale of mileage credits to participating partners in the Company's frequent flyer program. Net income in 1998 was significantly impacted by a $77 million after-tax fleet disposition/impairment loss resulting from the Company's decision to accelerate the retirement of certain jet and turboprop aircraft.
Passenger revenue increased 8.9%, $660 million, during 1999 as compared to 1998. The increase was due to an 11.3% increase in revenue passenger miles, partially offset by a 2.7% decrease in yield. Both yield pressures in the transatlantic markets and a 6.7% increase in average stage length caused the decrease in yield.
Cargo and mail revenue increased 10.2%, $28 million, in 1999 as compared to 1998 due to increased domestic and international volumes and new markets added in 1999.
Other operating revenue increased 12.2%, $24 million, in 1999 compared to the prior year primarily due to an increase in fees charged to customers to change advance purchase tickets and also due to an increase in Presidents Club revenue as a result of a larger number of these airport private clubs.
Wages, salaries and related costs increased 13.2%, $292 million, during 1999 as compared to 1998, primarily due to an 8.3% increase in average full-time equivalent employees to support increased flying and higher wage rates resulting from the Company's decision to increase employee wages to industry standard by the year 2000.
Aircraft fuel expense increased 6.1%, $44 million, in 1999 as compared to the prior year. The average price per gallon increased 1.0% from 46.83 cents in 1998 to 47.31 cents in 1999. This increase is net of gains of approximately $90 million recognized during 1999 related to the Company's fuel hedging program. In addition, the quantity of jet fuel used increased 3.7% principally reflecting increased capacity offset in part by the increased fuel efficiency of the Company's younger fleet.
Aircraft rentals increased 17.0%, $112 million, during 1999 as compared to 1998, due to the delivery of new aircraft.
Landing fees and other rentals increased 20.0%, $83 million, during 1999 as compared to 1998 primarily due to higher facilities rent due to increased rates and volume and higher landing fees resulting from increased operations.
Commissions expense decreased 1.2%, $7 million, during 1999 as compared to 1998 due to lower rates resulting from international commission caps and a lower volume of commissionable sales.
Reservations and sales expense increased 12.8%, $47 million, in 1999 compared to 1998 primarily due to an increase in credit card discount fees and computer reservation system fees as a result of higher sales.
Depreciation and amortization expense increased 22.4%, $66 million, in 1999 compared to 1998 primarily due to the addition of new aircraft and related spare parts.
Passenger servicing expense increased 13.9%, $43 million, in 1999 compared to 1998 primarily due to an increase in food costs caused by an increase in passengers.
Other operating expense increased 16.1%, $153 million, in 1999 as compared to the prior year, primarily as a result of increases in aircraft servicing expense and outsourced services.
Interest expense increased 30.9%, $55 million, in 1999 as compared to 1998 due to an increase in long-term debt resulting from the purchase of new aircraft and $200 million of 8% unsecured senior notes issued in December 1998, partially offset by interest savings of $9 million due to the conversion of the Company's 6-3/4% Convertible Subordinated Notes into Class B common stock.
Interest income increased 20.3%, $12 million, in 1999 as compared to 1998 due to higher average balances of cash, cash equivalents and short-term investments and due to higher interest rates.
Certain Statistical Information
An analysis of statistical information for Continental's jet operations, excluding regional jets operated by Continental Express, Inc. ("Express"), a wholly owned subsidiary of the Company, for each of the three years in the period ended December 31, 2000 is as follows:
2000 | Net Increase/ (Decrease) 2000-1999 |
1999 | Net Increase/ (Decrease) 1999-1998 |
1998 | |
Revenue passengers (thousands) | 46,896 | 3.0 % | 45,540 | 4.4 % | 43,625 |
Revenue passenger miles (millions) (1) | 64,161 | 6.9 % | 60,022 | 11.3 % | 53,910 |
Available seat miles (millions) (2) | 86,100 | 5.1 % | 81,946 | 9.7 % | 74,727 |
Passenger load factor (3) | 74.5% | 1.3 pts. | 73.2% | 1.1 pts. | 72.1% |
Breakeven passenger load factor (4)(5) | 66.3% | 1.6 pts. | 64.7% | 3.1 pts. | 61.6% |
Passenger revenue per available seat mile (cents) |
9.84 |
7.9 % |
9.12 |
(1.2)% |
9.23 |
Total revenue per available seat mile (cents) | 10.67 | 8.2 % | 9.86 | (0.9)% | 9.95 |
Operating cost per available seat mile (cents) (5) | 9.76 | 8.6 % | 8.99 | 1.1 % | 8.89 |
Average yield per revenue passenger mile (cents) (6) | 13.20 | 6.0 % | 12.45 | (2.7)% | 12.79 |
Average price per gallon of fuel, excluding fuel taxes (cents) |
86.69 |
83.2 % |
47.31 |
1.0 % |
46.83 |
Average price per gallon of fuel, including fuel taxes (cents) |
91.00 |
76.7 % |
51.51 |
0.6 % |
51.20 |
Fuel gallons consumed (millions) | 1,537 | (0.3)% | 1,542 | 3.7 % | 1,487 |
Average fare per revenue passenger | $180.66 | 10.1 % | $164.11 | 3.9 % | $158.02 |
Average length of aircraft flight (miles) | 1,159 | 4.0 % | 1,114 | 6.7 % | 1,044 |
Average daily utilization of each aircraft (hours) (7) | 10:36 | 1.1 % | 10:29 | 2.6 % | 10:13 |
Actual aircraft in fleet at end of period (8) | 371 | 2.2 % | 363 | - | 363 |
_____________________
Continental has entered into block space arrangements with certain other carriers whereby one or both of the carriers is obligated to purchase capacity on the other. The table above does not include the statistics for the capacity that was purchased by another carrier.
Liquidity and Capital Resources
As of December 31, 2000, the Company2001, we had $1.4$1.13 billion in cash and cash equivalents and short-term investments, compared to $1.6 billion asequivalents. Included in that amount is $168 million of December 31, 1999. Net cash provided by operating activities increased $128 million duringfor transportation taxes, the year ended December 31, 2000 comparedpayment of which was deferred until January pursuant to the same period in the prior year primarily due to an increase in operating income. Net cash used by investing activitiesStabilization Act. Cash flows from operations for the year ended December 31, 2000 compared2001 were $567 million, which included $354 million of cash under the Stabilization Act. Cash flows used in investing activities, primarily capital expenditures and purchase deposits for aircraft, were $654 million for the year ended December 31, 2001. Cash flows used in financing activities, primarily for the repurchase of stock and the payment of debt, offset by issuance of long-term debt, were $152 million for the year ended December 31, 2001.
Since September 11, 2001, we have not generated positive cash flow from our operations. Although recently improved traffic has significantly decreased the average daily negative cash flow from operations, our cash flow from operations as of February 20, 2002, remains negative at approximately $2 million per day. We currently anticipate that we will incur a significant loss for the first quarter of 2002. However, based on current information and trends, we currently anticipate being profitable in March of 2002 and in the second and third quarters of 2002 due in part to the same periodseasonality of our business. In addition, we currently expect to incur a loss for the fourth quarter of 2002 and for the full year 2002.
We are currently targeting a March 31, 2002 cash balance of approximately $1 billion and a year-end cash balance of approximately $1.5 billion. As part of our strategy to increase our cash balances to $1.5 billion by year-end, we intend to complete an initial public offering of our ExpressJet Airlines subsidiary. We originally filed with the Securities and Exchange Commission, or SEC, for a public offering of common stock of ExpressJet's parent last summer, but decided to postpone the offering after September 11, 2001 to allow the financial markets to stabilize and to permit the airline industry to begin its recovery from the events of September 11, 2001. Our current intention is to continue pursuing our strategy of separating the ownership of Continental and ExpressJet by selling a portion of our interest in ExpressJet to the public for cash.
Together with our subsidiaries, we anticipate receiving the remaining grant under the Stabilization Act (totaling approximately $63 million in cash) in the prior year decreased $591first quarter of 2002. Subsequent to September 11, 2001, we sold shares of common stock and issued 4.5% convertible notes for proceeds totaling $367 million. See "General Financing" below. In addition, we will explore the availability of other financing for our liquidity needs.
We do not currently have any lines of credit, but have unencumbered assets, consisting primarily of spare parts, with a net book value in excess of $1.0 billion at December 31, 2001 which could be pledged in connection with future financings. Furthermore, the Stabilization Act provides for $10 billion in federal credit instruments (loan guarantees) to U.S. air carriers to guarantee loans from lenders to those air carriers, subject to certain conditions and fees, including limits on compensation of certain of our employees and the potential requirement that the U.S. Government be issued warrants or other equity instruments in connection with such loan guarantees. If our liquidity needs require us to do so, we may apply for a loan guarantee under this program.
On several occasions subsequent to September 11, 2001, each of Moody's, Standard and Poor's and Fitch, Ibca, Duff & Phelps downgraded the credit ratings of a number of major airlines, including our credit ratings. Reductions in our credit ratings have increased the interest rates we pay on approximately $410 million primarilyin loans and may increase the cost and reduce the availability of other financing available to us in the future.
We do not have any debt obligations that would be accelerated as a result of the proceeds from the sale of short-term investments in 2000, partially offset by proceeds received from the sale of AMADEUS in 1999. Net cash used by financing activities increased $345 million primarily due to an increase in payments on long-terma credit rating downgrade, but under certain debt and capital leasecontract obligations, one or more further credit rating downgrades would entitle contract counterparties to require us to provide them with up to $41 million in collateral to secure these obligations.
At December 31, 2001, under the most restrictive provisions of our debt and credit facility agreements, we are required to maintain a minimum unrestricted cash balance of $500 million and beginning in the second quarter of 2003, a minimum specified ratio of EBITDAR (earnings before interest, income taxes, depreciation and aircraft rentals) to fixed charges, which consist of interest expense, aircraft rental expense, cash income taxes and cash dividends. These credit facilities had an outstanding balance of $326 million at December 31, 2001.
As of December 31, 2000, Continental2001, we had approximately $3.7$4.6 billion (including current maturities) of long-term debt and capital lease obligations, and had approximately $1.9 billion$250 million of liquidation amount of Continental-obligated mandatorily redeemable preferred securities of trust redeemable common stock($243 million, net of unamortized discount) and common$1.2 billion of stockholders' equity, a ratio of 3.2 to 1, at December 31, 2001 and 2.0 to 1 at December 31, 2000 and 2.1 to 1 at2000.
At December 31, 1999.2001, Continental, including ExpressJet, had 427 aircraft under operating leases (40 of which have been removed from service). These leases have remaining lease terms ranging from one month to 22-1/2 years. In addition, Continental has non-aircraft operating leases, principally related to airport and terminal facilities and related equipment. The obligations for these operating leases are not included in our consolidated balance sheet. Our total rental expense for aircraft and non-aircraft operating leases, net of sublease rentals, was $903 million and $380 million, respectively, in 2001.
Most of our assets are encumbered.
General Financing. In March 2000, the CompanyJuly 2001, we completed an offering of $743$200 million of pass-through certificates to beon owned aircraft at an interest rate of 7.57%. The proceeds are being used to finance (through either leveraged leases or secured debt financings)for general corporate purposes. This obligation has been recorded in the debt portion of the acquisition cost of 21 Boeing aircraft. All of these aircraft were placed in service in 2000.
accompanying consolidated balance sheets.
In November 2000, the Company completed an offering2001, we sold 7,751,000 shares of $176 million of floating enhanced aircraft trust securities to be used to finance the debt portion of the acquisition cost of four Boeing aircraft. All of these aircraft were placed in service by January 2001.
In November 2000, the Company completed an offering of $841 million of pass-through certificates to be used to finance (through either leveraged leases or secured debt financings) the debt portion of the acquisition cost of 23 new Boeing aircraft scheduledcommon stock for delivery from February 2001 to December 2001.
Also in November 2000, the Company completed the placement of 5,000,000 6% Convertible Preferred Securities, known as Term Income Deferrable Equity Securities. The net proceeds of the private placement totaled $242$172 million. The proceeds are being used for general corporate purposes.
On January 16, 2002 and February 15, 2002, we issued $175 million and were used as part$25 million, respectively, of the purchase price4.5% convertible notes due February 1, 2007 for approximately 6.7 million sharesnet proceeds of Class A$195 million. The notes are convertible into our common stock par value $.01at an initial conversion price of $40 per share ("Class A common stock") held by Northwest Airlines Corporation ("Northwest")share. The notes are redeemable at our option on or after February 5, 2005, at specified redemption prices. The proceeds are being used for general corporate purposes.
Aircraft and an affiliate.
Also in November 2000, the Company completed an offering of $177 million special facilities revenue bonds issued by the New Jersey Economic Development Authority. The bonds will finance the construction of a maintenance facility, cargo facility, ground service equipment maintenance facility, terminal improvements, and other various projects related to the Company's Global Gateway expansion at Newark.
Facilities Financing. In January 2001, the Company obtained a 3-yearwe borrowed $200 million under a pre-delivery paymentcredit facility to be used to finance manufacturer progress payments on 156 new Boeing aircraft.
During 2000, the Company's Boardsecond quarter of Directors increased2001, two offerings of pass-through certificates were completed totaling $901 million at an effective average interest rate of 6.87%. The proceeds are being used to finance the sizeacquisition cost of its common stock repurchase program by the amount21 new aircraft. These aircraft are scheduled to be delivered from October 2001 to April 2002. Eight of cash proceeds received by the Company for the purchase of common stock by employees and other participants under the Company's employee stock purchase and stock option plans after January 1, 2000. The program also permits the expenditure of one half of future net income (excluding special gains and charges), plus all the proceeds from the sale of non-strategic assets, to repurchase common stock. Of the approximately $287 million availablethese aircraft had been placed in the programservice as of December 31, 2000, $200 million was2001. At our option, the proceeds can be used asto fund the debt portion of a partleveraged lease between a third-party lessor and us or to finance the purchase of an owned aircraft by us. Prior to the delivery of the aircraft, the proceeds are being held in a restricted depositary account that is bankruptcy-protected from our creditors, as well as from us in the event the bank holding the depositary account were to file for bankruptcy. Additionally, if we choose not to draw on the depositary account, the proceeds will be distributed back to the certificate holders without any penalty to us. Subsequent to the delivery of the aircraft, the proceeds will be used by third-party lessors to fund the debt portion of leveraged leases or to finance the purchase priceof owned aircraft by us, at which time either operating lease commitments for approximately 6.7 million shares of Class A common stock held by Northwest.
A significant amount of Continental's assets are encumbered.
Deferred Tax Assets.leased aircraft will be disclosed in the notes to our consolidated financial statements or owned aircraft and the related debt obligations will be reflected in our consolidated balance sheets. As of December 31, 2000,2001, approximately $655 million of the Company had deferred taxproceeds remained on deposit. The restricted cash and related debt are not reflected in our consolidated financial statements as they are neither our assets aggregating $677nor liabilities. If any funds remain as deposits at the end of the specified delivery periods, those funds will be distributed back to the certificate holders without payment or penalty to us.
In August 2001,we borrowed $181 million including $366from a group of banks to finance four new Boeing aircraft that were delivered between July 2001 and December 2001.
We have entered into agreements with the cities of Houston, Texas and Cleveland, Ohio, the New Jersey Economic Development Authority, the Port Authority of New York and New Jersey, the Hawaii Department of Transportation, the Regional Airports Improvement Corporation (in Los Angeles, California), and the Harris County (Houston) Industrial Development Corporation to provide funds for constructing, improving and modifying facilities that have been or will be leased to us and for acquiring related equipment. In connection therewith, we have unconditionally guaranteed the principal and interest on tax-exempt bonds issued by these entities with a par value in an original principal amount of approximately $1.6 billion (excluding the City of Houston bonds referenced below) and entered into long-term leases with the respective authorities under which rental payments will be sufficient to service the related bonds. The leases generally have terms ranging from 20 to 30 years. These leasing arrangements are a ccounted for as operating leases in the accompanying consolidated financial statements.
In August 2001, the City of Houston completed the offering of $324 million aggregate principal amount of tax-exempt special facilities revenue bonds to finance the construction of Terminal E at Bush Intercontinental Airport. In connection therewith, we entered into a long-term lease with the City of Houston requiring that upon completion of construction, with limited exceptions, we will make rental payments sufficient to service the related tax-exempt bonds through their maturity in 2029. Approximately $27 million of the bond proceeds have been expended as of December 31, 2001. During the construction period, we maintain certain risks related to net operating losses ("NOLs"), and a valuation allowance of $263 million.
Section 382our own actions or inactions while managing portions of the Internal Revenue Code ("Section 382") imposes limitationsconstruction. Potential obligations associated with these risks are generally limited based upon certain percentages of construction costs incurred to date. We have also entered into a binding corporate guaranty with the bond trustee for the repayment of the principal and interest on a corporation's abilitythe bonds that becomes effective upon the occurrence of the completion of construction, our failure to utilize NOLs if it experiences an "ownership change". In general terms, an ownership change may result from transactions increasingcomply with the ownershiplease agreement (which is within our control), or our termination of the lease agreement. Further, we have not assumed any condemnation risk, any casualty event risk (unless caused by us), or risk related to certain stockholdersoverruns (and in the stockcase of a corporation by more than 50 percentage points over a three-year period. Incost overruns, our liability for the event that an ownership change occurred, utilization of Continental's NOLs would be subject to an annual limitation under Section 382 determined by multiplying the value of the Company's stock at the time of the ownership change by the applicable long-term tax exempt rate (which was 5.39% for December 2000). Any unused annual limitation may be carried over to later years, and the amount of the limitation may under certain circumstances be increased by the built-in gains in assets held by the Company at the time of the change that are recognized in the five-year period after the change. Under current conditions, if an ownership change were to occur, Continental's annual NOL utilizationproject would be limited to approximately $174 million per year other than through the recognition of future built-in gain transactions.
In November 1998, Northwest completed its acquisition of certain equity89.9% of the Company previously held by Air Partners, L.P. and its affiliates, together with certain Class A common stockcapitalized costs) during the construction period. Accordingly, we are not considered the owner of the Company held by other investors, totaling 8,661,224 shares ofproject and, therefore, have not capitalized the Class A common stock. On January 22, 2001, Continental repurchased 6,685,279 shares of Continental Class A common stock from Northwest and an affiliate. In addition, each issued share of Continental Class A common stock was reclassified into 1.32 shares of Class B common stockconstruction costs or recorded the debt obligation in a nontaxable transaction. The Company does not believe that these transactions resulted in an ownership change for purposes of Section 382.
our consolidated financial statements.
Purchase Commitments. Continental hasWe have substantial commitments for capital expenditures, including for the acquisition of new aircraft. As of December 31, 2000, the estimated aggregate cost of the Company's2001, we had firm commitments for 87 aircraft from Boeing, with an estimated cost of approximately $3.7 billion, after giving effect to the rescheduling discussed below. We expect that 20 of these aircraft is approximately $4 billion. Continental currently planswill be delivered between January 2002 and May 2002. Thirteen of these 20 aircraft have been pre-financed, and we expect to finance its newthe remaining seven aircraft. We have agreed with Boeing to reschedule deliveries of the remaining 67 aircraft with a combination of enhanced pass through trust certificates, lease equityso that they will be delivered between late 2003 and other third-party financing, subject to availability and market conditions. As of December 31, 2000, Continental had approximately $890 million in financing arranged for such Boeing deliveries. Continental also has commitments or letters of intent formid 2008. We do not have backstop financing from Boeing or any other financing currently in place for approximately 23% of the anticipated remaining acquisition cost of such Boeing deliveries.67 aircraft. In addition, at December 31, 2000, Continental2001, we had firm commitments to purchase 2622 spare engines related to the new Boeing aircraft for approximately $158$128 million, which will be deliverable through March 2005. Further financing will be needed to satisfy the Company'sour capital commitments for otherour aircraft and aircraft-related expenditures such as engines, spare parts, simulators and related items. There can be no assurance that sufficient financing will be available for all aircraft and other capital expenditures not covered by firm financing commitments. Deliveries of new Boeing aircraft are expected to increase aircraft rental, depreciation and interest costs while generating cost savings in the areas of maintenance, fuel and pilot training.
As of December 31, 2000,2001, the estimated aggregate cost of Express'sExpressJet's firm commitments for Embraer regional jets is approximately $3$2.6 billion. Neither Express nor Continental willWe do not have any obligation to take delivery of any suchof these firm Embraer aircraft that are not financed by a third party and leased to Continental.us.
Continental expects itsWe expect our net cash outlays for 20012002 capital expenditures, exclusive of fleet plan requirements, to aggregatewill total approximately $326$200 million, primarily relating to software application and automation infrastructure projects, aircraft modifications, and mandatory maintenance projects, passenger terminal facility improvements and office, maintenance, telecommunications and ground equipment. Continental'sOur net capital expenditures during 20002001 aggregated $203$156 million, exclusive of fleet plan requirements.
The Company expectsWe expect to fund itsour future capital commitments through internally generated funds together with general Companycompany financings and aircraft financing transactions. However, there can be no assurance that sufficient financing will be available for all aircraft and other capital expenditures not covered by firm financing commitments.
The following table of our material debt, lease, TIDES and aircraft purchase commitments at December 31, 2001, summarizes the effect these obligations are expected to have on our cash flow in the future periods set forth below (in millions):
Contractual Obligations | Related Cash Outflows Total 20022003200420052006 | Later Years | |||||
Long-term debt | $ 4,256 | $ 328 | $ 410 | $ 329 | $ 563 | $ 417 | $2,209 |
Capital lease obligations | 446 | 45 | 40 | 38 | 39 | 41 | 243 |
TIDES | 250 | - | - | - | - | - | 250 |
Aircraft operating leases | 11,271 | 923 | 880 | 843 | 821 | 715 | 7,089 |
Nonaircraft operating leases | 5,132 | 389 | 556 | 616 | 656 | 656 | 2,259 |
Aircraft purchase commitments (1) | 3,438 | 1,129 | 158 | 641 | 597 | 397 | 516 |
Total | $24,793 | $2,814 | $2,044 | $2,467 | $2,676 | $2,226 | $12,566 |
Bond FinancingsDeferred Tax Assets. Continental has entered into agreements withWe have not paid income taxes, other than alternative minimum taxes, in the Citylast two years. As of Houston, Texas, the CityDecember 31, 2001, we had a net deferred tax liability of Cleveland, Ohio, the New Jersey Economic Development Authority, the Department$518 million including gross deferred tax assets aggregating $976 million, $532 million related to net operating losses ("NOLs"), and a valuation allowance of Transportation$245 million.
Section 382 of the StateInternal 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 Hawaii,certain stockholders in the Regional Airports Improvementstock of a corporation by more than 50 percentage points over a three-year period. In the event that an ownership change occurred, 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 was 4.82% for January 2002). Any unused annual limitation may be carried over to later years, and the amount of the limitation may under certain circumstances be increased by the built-in gains in assets that we held at the time of the change that are recognized in the five-year period after the change. Under current conditions, if an ownership change were to occur, Continent al's annual NOL utilization would be limited to approximately $93 million per year other than through the recognition of future built-in gain transactions.
In November 1998, Northwest Airlines Corporation completed its acquisition of certain equity interests in us previously held by Air Partners, L.P. and its affiliates, together with some of our Class A common stock held by other investors, totaling 8,661,224 shares of the Class A common stock. On January 22, 2001, we repurchased 6,685,279 shares of our Class A common stock from Northwest Airlines Corporation and the Harris County (Houston) Industrial Development Corporation to provide fundsan affiliate. In addition, each issued share of our Class A common stock was reclassified into 1.32 shares of Class B common stock in a nontaxable transaction. We do not believe that these transactions resulted in an ownership change for constructing, improving and modifying facilities and acquiring equipment which have been or will be leased to Continental. In connection therewith, Continental has unconditionally guaranteed the principal and interest on certain bonds totaling approximately $1.6 billion and has entered into long-term leases with the respective authorities under which rental payments will be sufficient to service the related bonds. The leases generally have terms ranging from 20 to 30 years.
purposes of Section 382.
Employees. In July 2000, the Company completed a three-year program bringing all employees to industry standard wages and also announced andwe began to implementimplementing a phased plan to bring employee benefits to industry standard levels by 2003. The plan provides for increases in vacation, paid holidays, increased 401(k) Companycompany matching cash contributions and additional past service retirement credit for most senior employees.
The following is a table of the Company's, Express'sreflects Continental's, ExpressJet's and CMI's principal collective bargaining agreements, and their respective amendable dates:
Employee Group | Approximate Number of Full-time Equivalent Employees | Representing Union | Contract Amendable Date |
Continental Pilots |
|
International (" | October 2002 |
|
|
| October 2002 |
Continental Dispatchers |
| Transport Workers Union
| October 2003 |
ExpressJet Dispatchers | 50 | TWU | July 2004 |
Continental Mechanics |
| International Brotherhood of Teamsters ("Teamsters") | January 2002 |
|
| Teamsters |
|
CMI Mechanics | 100 | Teamsters | March 2001 |
Continental Flight
|
| International Association of Machinists and Aerospace Workers ("IAM") |
|
|
| IAM | December 2004 |
CMI Flight Attendants |
| IAM |
|
CMI Fleet and Passenger
Employees |
| Teamsters | March 2001 |
Continental Flight Simulator Technicians | 50 Tra | TWU | Negotiations for initial contract ongoing |
Collective bargaining agreements between us and our mechanics (who are represented by the Teamsters) and between both us and ExpressJet and our respective pilots (who are represented by ALPA) are amendable in January 2002 and October 2002, respectively. In March 2000,addition, collective bargaining agreements between CMI and its mechanics and fleet and passenger service employees (represented by the IAM began collective bargaining negotiations to amend the CMI flight attendants' contract (which becameTeamsters) were amendable in June 2000). The parties reached a tentative agreement, which was not ratified byMarch 2001. Negotiations were deferred due to the flight attendants.economic uncertainty following the September 11, 2001 terrorist attacks. Negotiations will resume in early 2001. The Company continues to believe that mutually acceptable agreements can be reachedhave recommenced with such employees, although the ultimate outcome of the negotiations is unknown at this time.
The pilots areTeamsters in the processfirst quarter of considering whether they wish2002 and are scheduled to merge their independent union, IACP, intocommence with ALPA in the Air Line Pilots Association, which would be subject to ratification by the Continental pilots.summer of 2002.
TheOur other employees and those of Continental, ExpressExpressJet and CMI are not covered by collective bargaining agreements.
Impairment Losses. In the fourth quarter of 2001, we incurred a special charge of $61 million ($39 million after taxes) associated primarily with the impairment of various owned aircraft and spare engines, including all of the DC-10-30, ATR-42, EMB-120 and Boeing 747 and 727 aircraft we owned.
Management believesIn accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of") ("SFAS 121"), we record impairment losses on owned assets when circumstances indicate that the Company'sassets might be impaired. We performed evaluations to determine whether future cash flows expected to result from the use and eventual disposition of these aircraft would be less than the aggregate carrying amount of the aircraft and the related assets. As a result of the evaluations, we determined that the expected cash flows expected are not sufficient to recover the carrying value of the assets, and therefore these aircraft were impaired as defined by SFAS 121. Consequently, the original cost basis of these aircraft and related items was reduced to reflect their fair market value. In determining the fair market value of these assets, we considered recent transactions involving sales of similar aircraft and market trends in aircraft di spositions. Our estimate of cash flows and fair market value might change due to changes in the economic environment in the airline industry.
As of January 31, 2002, we had 56 jet aircraft and 19 turboprop aircraft out of service from our fleet. The majority of these aircraft have been temporarily removed from service and we will continue to evaluate whether to return these temporarily grounded aircraft to service, which will primarily depend on demand and yield in the coming months. It is possible that all or a significant portion of these temporarily grounded aircraft will be permanently removed from service at a later date, which would result in special charges for impairment and lease exit costs. We could suffer additional impairment of operating aircraft and other long-lived assets in the future if the economic environment in which we operate does not continue to improve or further deteriorates due to unforeseen circumstances. The special charges for all or a significant portion of the temporarily grounded aircraft would, and any additional special charges for impairment of operating aircraft and other long-lived assets could, be ma terial.
Environmental Matters. In the third quarter of 2001, we recorded a $17 million charge, net of anticipated insurance recoveries, to provide additional reserves for potential environmental remediation costs. Reserves for estimated losses from environmental remediation are based primarily on third-party environmental studies and estimates as to the extent of the contamination and the nature of required remedial actions. Anticipated insurance proceeds are recorded as a receivable. Although we believe, based on currently available information, that our reserves for potential environmental remediation costs in excess of anticipated insurance proceeds are adequate, reserves could be adjusted as further information develops or circumstances change. In addition, certain of our insurers have denied coverage for environmental matters. We have sued them for coverage, and they have counterclaimed against us. We cannot currently calculate the increase that might be required in our environmental reserv es or predict the outcome of our insurance dispute. However, we do not expect these items to materially impact our liquidity or our results of operations.
Critical Accounting Policies. The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these 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 in the notes to the consolidated financial statements.
As a result of the impact on our operations of the September 11, 2001 terrorist attacks, we determined that the carrying amounts of our owned DC-10-30, ATR-42, EMB-120 and Boeing 747 and 727 aircraft and related inventories are no longer recoverable based on estimates of future operating cash flows to be generated by these fleets. As a result, we recognized an impairment charge of approximately $61 million in the fourth quarter of 2001. We estimated the fair value of these aircraft based on industry trends, and, where available, reference to market rates and transactions. All other long-lived assets, principally our other fleet types and intangible assets, were determined to be recoverable based on our estimates of future cash flows. Our estimates of future cash flows reflect a return to more historical levels of industry profitability on a longer-term basis.
We provide an allowance for inventory obsolescence over the remaining useful life of the related aircraft for spare parts expected to be on hand on the date the aircraft are retired from service, plus allowances for spare parts currently identified as excess. These allowances are based on our estimates and industry trends, which are subject to change. The estimates are more sensitive when we near the end of a fleet life or when we remove entire fleets from service sooner than originally planned.
We regularly review the estimated useful lives and salvage values for our aircraft and spare parts.
We record a liability for the estimated incremental cost of providing travel awards which includes the cost of incremental fuel, meals, insurance and miscellaneous supplies and does not include any costs for aircraft ownership, maintenance, labor or overhead allocation. A change to these cost estimates or the minimum award level could have a significant impact on our liability in the year of change as well as future years.
We defer the portion of amounts received from marketing partners for sale of OnePass miles representing our estimate of the fair value of tickets that are likely to be purchased with mileage credits sold to the marketing partners. This portion is recognized over the period the mileage credits are expected to be used. A change to either the time period over which the credits are used or our estimate of the number or fair value of tickets could have a significant impact on our revenue in the year of change as well as future years.
The Emerging Issues Task Force of the Financial Accounting Standards Board is currently reviewing the accounting for both multiple-deliverable revenue arrangements and volume-based sales incentive offers, but has not yet reached a consensus that would apply to programs such as ours. The issuance of new accounting standards could have a significant impact on our liability in the year of change as well as future years.
Recently Issued Accounting Standards. In July 2001, the Financial Accounting Standards Board issued Financial Accounting Standard No. 142 - "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 includes requirements to test goodwill and indefinite lived intangible assets for impairment rather than amortize them. We will adopt SFAS 142 beginning in the first quarter of 2002 and currently estimate discontinuing the amortization of our goodwill recorded on equity investments and routes, which are indefinite-life intangible assets, which will result in reduced expense of approximately $23 million on an annualized basis. We will be required to test routes for impairment annually in accordance with SFAS 142, beginning in the first quarter of 2002. We expect to perform the first of the required impairment tests for goodwill and routes as of January 1, 2002 in the first quarter of 2002. We do not expect to have a material impairment of our goodwill or routes upon adoption based upon our pr eliminary assessment of fair values.
In August 2001, the Financial Accounting Standards Board issued Financial Accounting Standard No. 144 - "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 supersedes SFAS 121 and the portion of the Accounting Principle Board Opinion No. 30 that deals with disposal of a business segment. We do not expect SFAS 144, which is effective in 2002, to have a material effect on our results of operations.
Pensions. Although 2001 costs associated with our pension plan remained flat, 2002 costs are expected to increase significantly. This expected increase results primarily from a significant decline in the fair market value of the securities comprising the plan's assets and the participation in the plan by employees who were previously excluded from it. We are required to meet minimum funding standards for the plan and anticipate that our costs will continue to increase as the number of participants grows. These increases will be exacerbated, and could be significant, if the value of plan assets remains depressed or drops further and if the overall seniority of participating employees is higher in a given year. We believe that this may occur as our attrition rates continue to drop.
Other. Our capacity purchase agreement with ExpressJet provides that we purchase in advance all of its available seat miles for a negotiated price, and we are at risk for reselling the available seat miles at market prices. We previously announced our intention to sell or otherwise dispose of some or all of our interests in ExpressJet. If we do so, then we would have greater fixed costs, which could result in lower or more volatile earnings or both. For example, for the year ended December 31, 2001, our pre-tax net loss of approximately $114 million included pre-tax net income for ExpressJet of approximately $80 million.
See Note 15 in the notes to consolidated financial statements for a discussion of related party transactions.
We anticipate that additional employee stock options will be granted in 2002 to properly incentivize our employees. The number of options and terms are not yet known. See Note 8 in the notes to consolidated financial statements.
Outlook. As discussed above, in light of the events of September 11, 2001 and their aftermath, we currently anticipate that we will incur a significant loss for the first quarter of 2002. However, based on current information and trends, we currently anticipate being profitable in March of 2002 and in the second and third quarters of 2002 due in part to the seasonality of our business. In addition, we currently expect to incur a loss for the fourth quarter of 2002 and for the full year 2002. Although load factors continue to improve, they have done so against significantly reduced capacity. The reduced capacity, coupled with the fact that many of our costs are fixed in the intermediate to long term, will continue to drive higher unit costs. Cost per available seat mile for 2002 is expected to increase 5%, holding fuel rate constant, as compared to 2001. This increase is partly attributable to anticipated additional insurance costs in 2002 of approximately $85 million. Business traffic in most markets continues to be weak, and carriers continue to offer reduced fares to attract passengers, which lowers our passenger revenue and yields and raises our break-even load factor. We cannot predict when business traffic or yields will increase.
We believe that our costs are likely to be affected in the future by (i) higher aircraft ownership costs as new aircraft are delivered, (ii) higher wages, salaries, benefits and related costs as the Company compensates its employees comparable to industry average,we reach new union agreements, partially offset by savings realized through employee furloughs, company-offered leaves of absence, retirements and cancellation of open positions, (iii) changes in the costs of materials and services (in particular, the cost of fuel, which can fluctuate significantly in response to global market conditions)conditions, and insurance and security costs, which have already increased significantly since the September 11, 2001 terrorist attacks), (iv) changes in distribution costs and structure, (v) changes in governmental regulations and taxes affecting air transportation and the costs charged for airport access, including newlanding fees andnew security requirements, (vi) changes in the Company'sour fleet and related capacity and (vii) the Company'sour continuing efforts to reduce costs throughout itst hroughout our operations, including reduced maintenance costs for new aircraft, reduced distribution expense from using Continental's electronic ticket product, E-Ticketticketing and the internet for bookings, reduced capital spending, lowering capacity to meet demand, and reduced interest expense.continuing to remove non-value added costs from the system. However, the precise impact of these items is not known at this time.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Market Risk Sensitive Instruments and Positions
The Company isWe 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 investments in equity and debt 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 managementwe may take to mitigate the Company'sour exposure to such changes. Actual results may differ. See the notes to the consolidated financial statements for a description of the Company'sour accounting policies and other information related to these financial instruments.
Aircraft Fuel. The Company'sOur results of operations are significantly impacted by changes in the price of aircraft fuel. During 20002001 and 1999,2000, aircraft fuel accounted for 15.6%13.5% and 9.7%15.2%, respectively, of the Company'sour operating expenses (excluding fleet disposition/impairment losses)severance and other special charges and Stabilization Act grant). In orderFrom time to time we enter into petroleum swap contracts, petroleum call option contracts and/or jet fuel purchase commitments to provide some short-term protection (generally three to six months) against a sharp increase in jet fuel prices, the Company from time to time enters into petroleum call options, petroleum swap contracts and jet fuel purchase commitments. The Company'sprices. Our fuel hedging strategy could resultmay limit our ability to benefit from declines in fuel price. In February 2002, we purchased out of the Company not fully benefiting from certainmoney call options to hedge a significant increase in fuel price declines.costs for approximately 35% of our projected 2002 fuel requirements for the period March through December. As of December 31, 2000, the Company2001, we had hedgedno fuel hedges in place to protect against price increases as compared to approximately 23% of itsour projected 2001 fuel requirements using petroleum call options, which represents 95% of projected first quarter fuel requirements, compared to approximately 24% of its projected 2000 fuel requirements hedged at December 31, 1999. Subsequent to December 31, 2000, the Company entered into jet fuel and heating oil call options, jet fuel swap contracts and jet fuel purchase commitments. The Company estimates2000. We estimate that a 10% increase in the price per gallon of aircraft fuel would not have a material impact on the fair value of the petroleum call options existing at December 31, 2000 or 1999.
2000.
Foreign Currency. The Company isWe are exposed to the effect of exchange rate fluctuations on the U.S. dollar value of foreign currency denominated operating revenue and expenses. The Company'sOur largest exposure comes from the Japanese yen. However, the Company attemptswe attempt to mitigate the effect of certain potential foreign currency losses by entering into forward contracts that effectively enable itus to sell Japanese yen expected to be received from yen-denominated net cash flows over the next 12 months at specified exchange rates. As of December 31, 2000, the Company2001, we had entered into forward contracts to hedge approximately 75%80% of its 2001our 2002 projected yen-denominated net cash flows, as compared to having in place forward contracts to hedge approximately 95%75% of its 2000our 2001 projected yen-denominated net cash flows at December 31, 1999. The Company estimates2000. We estimate that at December 31, 2000,2001, a 10% strengthening in the value of the U.S. dollar relative to the yen would have increased the fair value of the existing forward contracts by $15$10 million offset by a c orresponding loss on the underlying exposure of $12 million resulting in a net $2 million loss as compared to an $18a $15 million increase in the fair value of existing forward contracts offset by a corresponding loss on the underlying exposure of $20 million resulting in a net $5 million loss at December 31, 1999.
2000.
Interest Rates. The Company'sOur results of operations are affected by fluctuations in interest rates (e.g., interest expense on debt and interest income earned on short-term investments).
The CompanyWe had approximately $754 million$1 billion and $690$754 million of variable-rate debt as of December 31, 2001 and 2000, and 1999, respectively. The Company hasWe have mitigated itsour exposure on certain variable-rate debt by entering into interest rate cap and swap agreements. TheOur interest rate cap, had notional amounts of $84 million and $106 million as of December 31, 2000 and 1999, respectively. Caps outstanding at December 31, 2000 are effective through July 31, 2001. The interest rate cap limitswhich limited the amount of potential increase in the LIBOR rate component of the floating rate to a maximum of 9% over the term of the contract.contract, expired July 31, 2001. The interest rate swap outstanding at both December 31, 2001 and 2000 had a notional amount of $176 million. The interest rate swap effectively locks the Companyus into paying a fixed rate of interest on a portion of itsour floating rate debt securities through 2005. If average interest rates increased by 100 basis points during 20012002 as compared to 2000, the Company's2001, our projected 20012002 interest expense would increase by approximately $7 million.$8 million, net of interest rate cap and swap. At December 31, 1999,2000, an interest rate increase of 100 basis points during 20002001 as compared to 19992000 was projected to increase 20002001 interest expense by approximately $6 million.$5 million, net of interest rate cap and swap. The interest rate cap does not mitigate this increase in interest expense materially given the current level of such floating rates.
As of December 31, 2001 and 2000, and 1999,we estimated the fair value of $2.2$2.7 billion and $2.2 billion (carrying value) of the Company'sour fixed-rate debt was estimated to be $2.2$2.5 billion and $2.2 billion, respectively, based upon discounted future cash flows using our current incremental borrowing rates for similar types of instruments or market prices. Market risk, estimated as the potential increase in fair value resulting from a hypothetical 100 basis points decrease in interest rates, was approximately $136$115 million and $91$109 million as of December 31, 20002001 and 1999,2000, respectively. The fair value of the remaining fixed-rate debt at December 31, 20002001 and 1999,2000, (with a carrying value of $453$526 million and $248$453 million, respectively), was not practicable to estimate.
If 20012002 average short-term interest rates decreased by 100 basis points over 20002001 average rates, the Company'sour projected interest income from cash, cash equivalents and short-term investments would decrease by approximately $12$11 million during 2001,2002, compared to an estimated $11$12 million decrease during 20002001 measured at December 31, 1999.
2000.
Investments in Equity Securities. The Company hasWe have a 49% equity investment in Compania Panamena de Aviacion, S.A. ("Copa") and, a 28% equity investment in Gulfstream International Airlines, Inc. ("Gulfstream")and an 11% equity interest in Orbitz which are also subject to price risk. However, since a readily determinable market value does not exist for eitherany of Copa, Gulfstream or GulfstreamOrbitz (each is privately held), the Company iswe are unable to quantify the amount of price risk sensitivity inherent in these investments. At December 31, 20002001 and 1999,2000, the carrying value of the investment in Copa was $48$53 million and $49$48 million, respectively. At December 31, 20002001 and 1999,2000, the carrying value of the investment in Gulfstream was $0 and $8 million, and $10 million, respectively.
At December 31, 2000,2001, the Company owned approximately 357,000 depository
certificates convertible, subject to certain restrictions, into an equivalent number of shares of the common stock of Equant, which completed an initial public offering in July 1998. As of December 31, 2000 and 1999, the estimated faircarrying value of these depository certificates was approximately $9 million and $40 million, respectively, based upon the publicly traded market value of Equant common stock. Since the fair value of the Company'sour investment in the depository certificates is not readily determinable (i.e., the depository certificates are not traded on a securities exchange), the investment is carried at cost, whichOrbitz was not material as of December 31, 2000 or 1999.$12 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Consolidated Financial Statements
Page No. | |
Report of Independent Auditors | F-2 |
Consolidated Statements of Operations for each of the Three Years in the Period Ended December 31, | F-3 |
Consolidated Balance Sheets as of December 31, |
|
Consolidated Statements of Cash Flows for each of the Three Years in the Period Ended December 31, |
|
Consolidated Statements of Common Stockholders' Equity for each of the Three Years in the Period Ended December 31, |
|
Notes to Consolidated Financial Statements |
|
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Continental Airlines, Inc.
We have audited the accompanying consolidated balance sheets of Continental Airlines, Inc. (the "Company") as of December 31, 20002001 and 1999,2000, 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, 2000.2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 20002001 and 1999,2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2000,2001, in conformity with accounting principles generally accepted in the United States.
As discussed in Note 1 to the consolidated financial statements, effective January 1, 1999, the Company changed its method of accounting for the sale of mileage credits to participating partners in its frequent flyer program.
ERNST & YOUNG LLP
Houston, Texas
January 16, 2001
except for Note 16, as to which
the date is January 22, 20012002
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
Year Ended December 31, | |||
2000 | 1999 | 1998 | |
Operating Revenue: | |||
Passenger | $9,308 | $8,116 | $7,456 |
Cargo and mail | 360 | 303 | 275 |
Other | 231 | 220 | 196 |
9,899 | 8,639 | 7,927 | |
Operating Expenses: | |||
Wages, salaries and related costs | 2,845 | 2,510 | 2,218 |
Aircraft fuel | 1,438 | 771 | 727 |
Aircraft rentals | 844 | 771 | 659 |
Maintenance, materials and repairs | 646 | 603 | 582 |
Landing fees and other rentals | 532 | 497 | 414 |
Commissions | 526 | 576 | 583 |
Reservations and sales | 455 | 414 | 367 |
Depreciation and amortization | 402 | 360 | 294 |
Passenger servicing | 366 | 352 | 309 |
Fleet disposition/impairment losses | - | 81 | 122 |
Other | 1,161 | 1,104 | 951 |
9,215 | 8,039 | 7,226 | |
Operating Income | 684 | 600 | 701 |
Nonoperating Income (Expense): | |||
Interest expense | (251) | (233) | (178) |
Interest income | 87 | 71 | 59 |
Interest capitalized | 57 | 55 | 55 |
Gain on sale of AMADEUS | - | 297 | - |
Other, net | (6) | 8 | 11 |
(113) | 198 | (53) | |
Income before Income Taxes, Cumulative Effect of Accounting Changes and Extraordinary Charge | 571 | 798 | 648 |
Income Tax Provision | (222) | (310) | (248) |
Distributions on Preferred Securities of Trust, net of applicable income taxes of $1 and $7 in 2000 and 1998, respectively |
(1) |
- |
(13) |
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
Year Ended December 31, | |||
2000 | 1999 | 1998 | |
Income before Cumulative Effect of Accounting Changes and Extraordinary Charge | $ 348 | $ 488 | $ 387 |
Cumulative Effect of Accounting Changes, Net of Applicable Income Taxes of $19 (1) |
- | (33) | - |
Extraordinary Charge, net of applicable income Taxes of $3 and $2 in 2000 and 1998 | (6) | - | (4) |
Net Income | $ 342 | $ 455 | $ 383 |
Earnings per Common Share: | |||
Income before Cumulative Effect of Accounting Changes and Extraordinary Charge |
$ 5.71 | $ 7.02 | $ 6.40 |
Cumulative Effect of Accounting Changes | - | (0.48) | - |
Extraordinary Charge | (0.09) | - | (0.06) |
Net Income | $ 5.62 | $ 6.54 | $ 6.34 |
Earnings per Common Share Assuming Dilution: | |||
Income before Cumulative Effect of Accounting Changes and Extraordinary Charge |
$ 5.54 | $ 6.64 | $ 5.06 |
Cumulative Effect of Accounting Changes | - | (0.44) | - |
Extraordinary Charge | (0.09) | - | (0.04) |
Net Income | $ 5.45 | $ 6.20 | $ 5.02 |
Year Ended December 31, | |||
2001 | 2000 | 1999 | |
Operating Revenue: | |||
Passenger | $8,457 | $9,308 | $8,116 |
Cargo, mail and other | 512 | 591 | 523 |
8,969 | 9,899 | 8,639 | |
Operating Expenses: | |||
Wages, salaries and related costs | 3,021 | 2,875 | 2,510 |
Aircraft fuel | 1,229 | 1,393 | 756 |
Aircraft rentals | 903 | 844 | 771 |
Landing fees and other rentals | 581 | 532 | 497 |
Maintenance, materials and repairs | 568 | 646 | 603 |
Depreciation and amortization | 467 | 402 | 360 |
Reservations and sales | 445 | 455 | 414 |
Commissions | 364 | 526 | 576 |
Passenger servicing | 347 | 362 | 352 |
Fleet impairment losses, severance and other special charges | 124 | - | 81 |
Other | 1,193 | 1,135 | 1,104 |
Stabilization Act grant | (417) | - | - |
8,825 | 9,170 | 8,024 | |
Operating Income | 144 | 729 | 615 |
Nonoperating Income (Expense): | |||
Interest expense | (295) | (251) | (233) |
Interest capitalized | 57 | 57 | 55 |
Interest income | 45 | 87 | 71 |
Gain on sale of Amadeus | - | - | 297 |
Other, net | (65) | (51) | (7) |
(258) | (158) | 183 | |
Income (Loss) before Income Taxes, Cumulative Effect of Accounting Changes and Extraordinary Charge | (114) | 571 | 798 |
Income Tax (Expense) Benefit | 29 | (222) | (310) |
Distributions on Preferred Securities of Trust, net of applicable income taxes of $6 and $1 in 2001 and 2000, respectively | (10) | (1) | - |
Income (Loss) before Cumulative Effect of Accounting Changes and Extraordinary Charge | (95) | 348 | 488 |
Cumulative Effect of Accounting Changes, Net of Applicable Income Taxes of $19 |
- |
- | (33) |
Extraordinary Charge, net of applicable income taxes of $3 | - | (6) | - |
Net Income (Loss) | $ (95) | $ 342 | $ 455 |
Basic Earnings (Loss) per Share: | |||
Income (Loss) before Cumulative Effect of Accounting Changes and Extraordinary Charge |
$ (1.72) |
$ 5.71 | $ 7.02 |
Cumulative Effect of Accounting Changes | - | - | (0.48) |
Extraordinary Charge | - | (0.09) | - |
Net Income (Loss) | $ (1.72) | $ 5.62 | $ 6.54 |
Diluted Earnings (Loss) per Share: | |||
Income (Loss) before Cumulative Effect of Accounting Changes and Extraordinary Charge |
$ (1.72) |
$ 5.54 | $ 6.64 |
Cumulative Effect of Accounting Changes | - | - | (0.44) |
Extraordinary Charge | - | (0.09) | - |
Net Income (Loss) | $ (1.72) | $ 5.45 | $ 6.20 |
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
CONTINENTAL AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except for share data)
December 31, | December 31, | December 31, | ||
ASSETS | 2000 | 1999 | 2001 | 2000 |
Current Assets: | ||||
Cash and cash equivalents | $ 1,371 | $ 1,198 | $ 1,132 | $ 1,371 |
Short-term investments | 24 | 392 | - | 24 |
Accounts receivable, net of allowance for doubtful receivables of $20 and $20, respectively | 495 | 506 | ||
Spare parts and supplies, net of allowance for obsolescence of $67 and $59, respectively | 280 | 236 | ||
Accounts receivable, net of allowance for doubtful receivables of $27 and $20, respectively | 404 | 495 | ||
Spare parts and supplies, net of allowance for obsolescence of $80 and $67, respectively | 272 | 280 | ||
Deferred income taxes | 137 | 145 | 192 | 137 |
Prepayments and other | 152 | 129 | 144 | 152 |
Total current assets | 2,459 | 2,606 | 2,144 | 2,459 |
Property and Equipment: | ||||
Owned property and equipment: | ||||
Flight equipment | 4,597 | 3,593 | 5,592 | 4,597 |
Other | 990 | 814 | 1,092 | 990 |
5,587 | 4,407 | 6,684 | 5,587 | |
Less: Accumulated depreciation | 1,025 | 808 | 1,249 | 1,025 |
4,562 | 3,599 | 5,435 | 4,562 | |
Purchase deposits for flight equipment | 404 | 366 | 454 | 404 |
Capital leases: | ||||
Flight equipment | 226 | 300 | 223 | 226 |
Other | 138 | 88 | 234 | 138 |
364 | 388 | 457 | 364 | |
Less: Accumulated amortization | 167 | 180 | 193 | 167 |
197 | 208 | 264 | 197 | |
Total property and equipment | 5,163 | 4,173 | 6,153 | 5,163 |
Other Assets: | ||||
Routes, gates and slots, net of accumulated amortization of $395 and $345, respectively | 1,081 | 1,131 | ||
Routes and airport operating rights, net of accumulated amortization of $445 and $395, respectively | 1,033 | 1,081 | ||
Other assets, net | 498 | 313 | 461 | 498 |
Total other assets | 1,579 | 1,444 | 1,494 | 1,579 |
Total Assets | $ 9,201 | $ 8,223 | $ 9,791 | $ 9,201 |
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CONTINENTAL AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except for share data)
December 31, | December 31, | |
LIABILITIES AND STOCKHOLDERS' EQUITY | 2000 | 1999 |
Current Liabilities: | ||
Current maturities of long-term debt and capital leases | $ 304 | $ 321 |
Accounts payable | 1,016 | 856 |
Air traffic liability | 1,125 | 1,042 |
Accrued payroll and pensions | 297 | 299 |
Accrued other liabilities | 238 | 257 |
Total current liabilities | 2,980 | 2,775 |
Long-Term Debt and Capital Leases | 3,374 | 3,055 |
Deferred Credits and Other Long-Term Liabilities: | ||
Deferred income taxes | 787 | 590 |
Other | 208 | 210 |
Total deferred credits and other long-term liabilities | 995 | 800 |
Commitments and Contingencies | ||
Continental-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Convertible Subordinated Debentures (1) |
242 |
- |
Redeemable Common Stock | 450 | - |
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except for share data)
December 31, | December 31, | December 31, | ||
LIABILITIES AND STOCKHOLDERS' EQUITY | 2000 | 1999 | 2001 | 2000 |
Common Stockholders' Equity: | ||||
Class A common stock - $.01 par, 50,000,000 shares authorized; 10,963,538 and 11,320,849 shares issued and outstanding in 2000 and 1999, respectively |
$ - |
$ - | ||
Class B common stock - $.01 par, 200,000,000 shares authorized; 64,073,431 and 63,923,431 shares issued in 2000 and 1999, respectively |
1 |
1 | ||
Current Liabilities: | ||||
Current maturities of long-term debt and capital leases | $ 355 | $ 304 | ||
Accounts payable | 1,008 | 1,016 | ||
Air traffic liability | 1,014 | 1,125 | ||
Accrued payroll and pensions | 523 | 297 | ||
Accrued other liabilities | 291 | 238 | ||
Total current liabilities | 3,191 | 2,980 | ||
Long-Term Debt and Capital Leases | 4,198 | 3,374 | ||
Deferred Credits and Other Long-Term Liabilities: | ||||
Deferred income taxes | 710 | 787 | ||
Other | 288 | 208 | ||
Total deferred credits and other long-term liabilities | 998 | 995 | ||
Commitments and Contingencies | ||||
Continental-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Convertible Subordinated Debentures |
243 |
242 | ||
Redeemable Common Stock | - | 450 | ||
Stockholders' Equity: | ||||
Preferred stock - $.01 par, 10,000,000 shares authorized; one share of Series B issued and outstanding as of December 31, 2001, stated at par value |
- | |||
Class A common stock - $.01 par, 50,000,000 shares authorized through January 22, 2001; 10,963,538 shares issued and outstanding as of December 31, 2000 |
- | |||
Class B common stock - $.01 par, 200,000,000 shares authorized; 88,617,001 and 64,073,431 shares issued in 2001 and 2000, respectively |
1 | |||
Additional paid-in capital | 379 | 871 | 1,071 | 379 |
Retained earnings | 1,456 | 1,114 | 1,361 | 1,456 |
Accumulated other comprehensive income (loss) | 13 | (1) | (132) | 13 |
Treasury stock - 16,586,603 and 9,763,684 Class B shares in 2000 and 1999, respectively, at cost | (689) | (392) | ||
Total common stockholders' equity | 1,160 | 1,593 | ||
Treasury stock - 25,442,529 and 16,586,603 Class B shares in 2001 and 2000, respectively, at cost | (1,140) | (689) | ||
Total stockholders' equity | 1,161 | 1,160 | ||
Total Liabilities and Stockholders' Equity | $ 9,201 | $ 8,223 | $ 9,791 | $ 9,201 |
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Year Ended December 31, | |||
2000 | 1999 | 1998 | |
Cash Flows from Operating Activities: | |||
Net income | $ 342 | $ 455 | $ 383 |
Adjustments to reconcile net income to net cash provided by operating activities: | |||
Deferred income taxes | 224 | 293 | 224 |
Depreciation and amortization | 402 | 360 | 294 |
Fleet disposition/impairment losses | - | 81 | 122 |
Gain on sale of AMADEUS | - | (297) | - |
Gain on sale of other investments | (9) | (29) | (6) |
Cumulative effect of accounting changes | - | 33 | - |
Other, net | (49) | (83) | (4) |
Changes in operating assets and liabilities: | |||
(Increase) decrease in accounts receivable | 6 | (53) | (102) |
Increase in spare parts and supplies | (72) | (99) | (71) |
Increase in accounts payable | 159 | 8 | 59 |
Increase in air traffic liability | 163 | 110 | 108 |
Increase (decrease) in accrued payroll and pensions | (132) | 34 | 107 |
Other | (130) | (37) | (238) |
Net cash provided by operating activities | 904 | 776 | 876 |
Cash Flows from Investing Activities: | |||
Purchase deposits paid in connection with future aircraft deliveries | (640) | (1,174) | (818) |
Purchase deposits refunded in connection with aircraft delivered | 577 | 1,139 | 758 |
Capital expenditures | (511) | (706) | (610) |
Sale (purchase) of short-term investments | 368 | (392) | - |
Proceeds from sale of AMADEUS, net | - | 391 | - |
Proceeds from disposition of property and equipment | 135 | 77 | 46 |
Proceeds from sale of other investments | 11 | 35 | 9 |
Investment in and advances to partner airlines | - | (23) | (53) |
Other | (8) | (6) | (30) |
Net cash used in investing activities | (68) | (659) | (698) |
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Year Ended December 31, | |||
2000 | 1999 | 1998 | |
Cash Flows from Financing Activities: | |||
Proceeds from issuance of long-term debt, net | $ 157 | $ 453 | $ 737 |
Proceeds from issuance of preferred securities of trust, net | 242 | - | - |
Purchase of Class B common stock | (450) | (528) | (223) |
Payments on long-term debt and capital lease obligations | (707) | (295) | (423) |
Proceeds from issuance of common stock | 92 | 38 | 56 |
Proceeds from sale-leaseback transactions | 3 | 14 | 71 |
Dividends paid on preferred securities of trust | - | - | (22) |
Net cash (used in) provided by financing activities | (663) | (318) | 196 |
Net (Decrease) Increase in Cash and Cash Equivalents | 173 | (201) | 374 |
Cash and Cash Equivalents - Beginning of Period | 1,198 | 1,399 | 1,025 |
Cash and Cash Equivalents - End of Period | $1,371 | $1,198 | $1,399 |
Supplement Cash Flows Information: | |||
Interest paid | $ 276 | $ 221 | $ 157 |
Income taxes paid | $ 7 | $ 18 | $ 25 |
Investing and Financing Activities Not Affecting Cash: | |||
Property and equipment acquired through the issuance of debt | $ 808 | $ 774 | $ 425 |
Conversion of 6-3/4% Convertible Subordinated Notes into Class B common stock |
$ - |
$ 230 |
$ - |
Conversion of Trust Originated Preferred Securities into Class B common stock | $ - | $ 111 | $ 134 |
Capital lease obligations incurred | $ 53 | $ 50 | $ 124 |
Sale-leaseback of Beech 1900-D aircraft | $ - | $ 81 | $ - |
Year Ended December 31, | |||
2001 | 2000 | 1999 | |
Cash Flows from Operating Activities: | |||
Net income (loss) | $ (95) | $ 342 | $ 455 |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||
Deferred income taxes | (35) | 224 | 293 |
Depreciation and amortization | 467 | 402 | 360 |
Fleet disposition/impairment losses | 61 | - | 81 |
Gain on sale of Amadeus | - | - | (297) |
Gain on sale of other investments | (5) | (9) | (29) |
Cumulative effect of accounting changes | - | - | 33 |
Other, net | 56 | (49) | (83) |
Changes in operating assets and liabilities: | |||
(Increase) decrease in accounts receivable | 73 | 6 | (53) |
Increase in spare parts and supplies | (20) | (72) | (99) |
Increase (decrease) in accounts payable | (8) | 159 | 8 |
Increase (decrease) in air traffic liability | (111) | 163 | 110 |
Increase (decrease) in accrued payroll and pensions | 90 | (132) | 34 |
Other | 94 | (130) | (37) |
Net cash provided by operating activities | 567 | 904 | 776 |
Cash Flows from Investing Activities: | |||
Purchase deposits paid in connection with future aircraft deliveries | (432) | (640) | (1,174) |
Purchase deposits refunded in connection with aircraft delivered | 337 | 577 | 1,139 |
Capital expenditures | (568) | (511) | (706) |
Sale (purchase) of short-term investments | 24 | 368 | (392) |
Proceeds from sale of Amadeus, net | - | - | 391 |
Proceeds from disposition of property and equipment | 11 | 135 | 77 |
Other | (26) | 3 | 6 |
Net cash used in investing activities | (654) | (68) | (659) |
Cash Flows from Financing Activities: | |||
Proceeds from issuance of long-term debt, net | 436 | 157 | 453 |
Proceeds from issuance of preferred securities of trust, net | - | 242 | - |
Purchase of common stock | (451) | (450) | (528) |
Payments on long-term debt and capital lease obligations | (367) | (707) | (295) |
Proceeds from issuance of common stock | 241 | 92 | 38 |
Other | (11) | 3 | 14 |
Net cash used in financing activities | (152) | (663) | (318) |
Net Increase (Decrease) in Cash and Cash Equivalents | (239) | 173 | (201) |
Cash and Cash Equivalents - Beginning of Period | 1,371 | 1,198 | 1,399 |
Cash and Cash Equivalents - End of Period | $1,132 | $1,371 | $1,198 |
Supplemental Cash Flows Information: | |||
Interest paid | $ 314 | $ 276 | $ 221 |
Income taxes paid (refunded) | $ (4) | $ 7 | $ 18 |
Investing and Financing Activities Not Affecting Cash: | |||
Property and equipment acquired through the issuance of debt | $ 707 | $ 808 | $ 774 |
Conversion of 6-3/4% Convertible Subordinated Notes into Class B common stock | $ - | $ - | $ 230 |
Conversion of Trust Originated Preferred Securities into Class B common stock | $ - | $ - | $ 111 |
Capital lease obligations incurred | $ 95 | $ 53 | $ 50 |
Sale-leaseback of aircraft | $ - | $ - | $ 81 |
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
(In millions)
Additional Paid-In Capital |
Retained Earnings | Accumulated Other Comprehensive Income/(Loss) |
Comprehensive Income | Treasury Stock, At Cost |
Additional Paid-In Capital |
Retained Earnings | Accumulated Other Comprehensive Income/(Loss) |
Comprehensive Income/(Loss) | Treasury Stock, At Cost | |
Balance, December 31, 1997 | $ 641 | $ 276 | $ (2) | $ 381 | $ - | |||||
Net Income | - | 383 | - | 383 | - | |||||
Additional Minimum Pension Liability, net of applicable income taxes of $41 |
- |
- |
(76) |
- | ||||||
Purchase of Common Stock | - | - | - | (223) | ||||||
Reissuance of Treasury Stock pursuant to Stock Plans | - | - | - | 50 | ||||||
Issuance of Common Stock pursuant to Stock Plans | 19 | - | - | - | ||||||
Conversion of Trust Originated Preferred Securities into Common Stock |
(32) |
- |
- |
160 | ||||||
Other | 6 | - | (10) | - | ||||||
Balance, December 31, 1998 | 634 | 659 | (88) | 297 | (13) | $ 634 | $ 659 | $(88) | $ 297 | $ (13) |
Net Income | - | 455 | - | 455 | - | - | 455 | - | 455 | - |
Reduction in Additional Minimum Pension Liability, net of applicable income taxes of $43 |
- |
- |
82 |
- |
- |
- |
82 |
- | ||
Purchase of Common Stock | - | - | - | (528) | - | - | - | (528) | ||
Reissuance of Treasury Stock pursuant to Stock Plans | (18) | - | - | 69 | (18) | - | - | 69 | ||
Conversion of 6-3/4% Convertible Subordinated Notes into Common Stock |
161 |
- |
- |
66 |
161 |
- |
- |
66 | ||
Conversion of Trust Originated Preferred Securities into Common Stock |
100 |
- |
- |
11 |
100 |
- |
- |
11 | ||
Other | (6) | - | 5 | 5 | 3 | (6) | - | 5 | 5 | 3 |
Balance, December 31, 1999 | 871 | 1,114 | (1) | 542 | (392) | 871 | 1,114 | (1) | 542 | (392) |
Net Income | - | 342 | - | 342 | - | - | 342 | - | 342 | - |
Purchase of Common Stock | (1) | - | - | (449) | (1) | - | - | (449) | ||
Reissuance of Treasury Stock pursuant to Stock Plans | (45) | - | - | 137 | (45) | - | - | 137 | ||
Reclass for Redeemable Common Stock | (450) | - | - | - | (450) | - | - | - | ||
Other | 4 | - | 14 | 14 | 15 | 4 | - | 14 | 14 | 15 |
Balance, December 31, 2000 | $ 379 | $1,456 | $ 13 | $ 356 | $ (689) | 379 | 1,456 | 13 | 356 | (689) |
Net Loss | - | (95) | - | (95) | - | |||||
Increase in Additional Minimum Pension Liability, net of applicable income taxes of $77 |
- |
- |
(138) |
- | ||||||
Purchase of Common Stock | - | - | - | (451) | ||||||
Issuance of Common Stock pursuant to Stock Plans | 79 | - | - | - | ||||||
Issuance of Common Stock pursuant to Stock Offering | 173 | - | - | - | ||||||
Reclass for Redeemable Common Stock | 450 | - | - | - | ||||||
Other | (10) | - | (7) | - | ||||||
Balance, December 31, 2001 | $1,071 | $1,361 | $ (132) | $ (240) | $(1,140) | |||||
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
NUMBER OF SHARES (in thousands)
Class A Common Stock | Class B Common Stock | Treasury Stock |
Preferred Stock | Class A Common Stock | Class B Common Stock | Treasury Stock | |
Balance, December 31, 1997 | 8,379 | 50,512 | - | ||||
Purchase of Common Stock | - | (4,453) | 4,453 | ||||
Reissuance of Treasury Stock pursuant to Stock Plans | - | 859 | (859) | ||||
Reissuance of Treasury Stock pursuant to Conversion of Trust Originated Preferred Securities | - | 3,182 | (3,182) | ||||
Conversion of Class A to Class B Common Stock | (12) | 12 | (12) | ||||
Issuance of Common Stock pursuant to Stock Plans | - | 235 | - | ||||
Conversion of Trust Originated Preferred Securities into Common Stock | - | 2,377 | - | ||||
Exercise of warrants | 3,040 | 247 | - | ||||
Balance, December 31, 1998 | 11,407 | 52,971 | 400 | - | 11,407 | 52,971 | 400 |
Purchase of Common Stock | - | (13,134) | 13,134 | - | - | (13,134) | 13,134 |
Reissuance of Treasury Stock pursuant to Stock Plans | - | 1,854 | (1,854) | - | - | 1,854 | (1,854) |
Reissuance of Treasury Stock pursuant to Conversion of Class A to Class B Common Stock | (86) | 86 | (86) | - | (86) | 86 | (86) |
Issuance of Common Stock pursuant to Stock Plans | - | 13 | - | - | - | 13 | - |
Conversion of 6-3/4% Convertible Subordinated Notes into Common Stock | - | 6,132 | - | - | - | 6,132 | - |
Reissuance of Treasury Stock pursuant to Conversion of 6-3/4% Convertible Subordinated Notes | - | 1,485 | (1,485) | - | - | 1,485 | (1,485) |
Conversion of Trust Originated Preferred Securities into Common Stock | - | 4,408 | - | - | - | 4,408 | - |
Reissuance of Treasury Stock pursuant to Conversion of Trust Originated Preferred Securities | - | 345 | (345) | ||||
Reissuance of Treasury Stock pursuant to a reclassification of Trust Originated Preferred Securities | - | - | 345 | (345) | |||
Balance, December 31, 1999 | 11,321 | 54,160 | 9,764 | - | 11,321 | 54,160 | 9,764 |
Purchase of Common Stock | - | (10,545) | 10,545 | - | - | (10,545) | 10,545 |
Reissuance of Treasury Stock pursuant to Stock Plans | - | 3,365 | (3,365) | - | - | 3,365 | (3,365) |
Reissuance of Treasury Stock pursuant to Conversion of Class A to Class B Common Stock | (357) | 357 | (357) | ||||
Reissuance of Treasury Stock pursuant to a reclassification of Class A to Class B Common Stock | - | (357) | 357 | (357) | |||
Issuance of Common Stock pursuant to Stock Plans | - | 150 | - | - | - | 150 | - |
Balance, December 31, 2000 | 10,964 | 47,487 | 16,587 | - | 10,964 | 47,487 | 16,587 |
Repurchase of Northwest Stock | - | (6,686) | - | 8,824 | |||
Issuance of Common Stock pursuant to Stock Plans | - | - | 2,313 | - | |||
Issuance of Common Stock pursuant to Conversion of Class A to Class B Common Stock | - | (4,278) | 5,646 | - | |||
Issuance of Common Stock pursuant to Stock Offering | - | - | 7,751 | - | |||
Purchase of Common Stock | - | - | (23) | 23 | |||
Issuance of Preferred Stock | - | - | - | ||||
Other | - | - | - | 9 | |||
Balance, December 31, 2001 | - | - | 63,174 | 25,443 | |||
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
CONTINENTAL AIRLINES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continental Airlines, Inc. (the "Company" or "Continental") is a major United States air carrier engaged in the business of transporting passengers, cargo and mail. Continental isWe are the fifth largest United States airline (as measured by 20002001 revenue passenger miles) and, together with itsour wholly owned subsidiaries, Continental Express,ExpressJet Airlines, Inc. ("Express"ExpressJet"), and Continental Micronesia, Inc. ("CMI"), each a Delaware corporation, served 230215 airports worldwide at January 16, 2001.15, 2002. As of December 31, 2000, Continental fliesJanuary 15, 2002, we flew to 136123 domestic and 9492 international destinations and offersoffered additional connecting service through alliances with domestic and foreign carriers. ContinentalWe directly served 1615 European cities, seven South American cities, Tel Aviv, Hong Kong and Tokyo and isare one of the leading airlines providing service to Mexico and Central America, serving more destinations there than any other United States airline. Through itsour Guam hub, CMI provides extensive service in the western Pacific, including service to more Japanese cities than any other UnitedUnite d States carrier.
As used in these Notes to Consolidated Financial Statements, the terms "Continental", "we", "us", "our" and "Company"similar terms refer to Continental Airlines, Inc. and, unless the context indicates otherwise, its subsidiaries.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
TheOur consolidated financial statements of the Company include the accounts of Continental and its operating subsidiaries, ExpressExpressJet and CMI. All significant intercompany transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Cash and cash equivalents consist of cash and short-term, highly liquid investments, which are readily convertible into cash and have a maturity of three months or less when purchased.
The Company investsWe invest in commercial paper with original maturities in excess of 90 days but less than 270 days. These investments are classified as short-term investments in the accompanying consolidated balance sheet. Short-term investments are stated at cost, which approximates market value, and are classified as held-to-maturity securities.
Inventories, expendable parts and supplies relating to flight equipment are carried at average acquisition cost and are expensed when incurred in operations. An allowance for obsolescence is provided over the remaining estimated useful life of the related aircraft, for spare parts expected to be on hand the date the aircraft are retired from service, plus allowances for spare parts currently identified as excess.excess to reduce the carrying costs to the lower of amortized cost or net realizable value. These allowances are based on management estimates, which are subject to change.
Property and equipment are recorded at cost and are depreciated to estimated residual values over their estimated useful lives using the straight-line method. The estimated useful lives and residual values for the Company'sour property and equipment are as follows:
Estimated Useful Life | Estimated Residual Value | ||
Jet aircraft | 25 to 30 years | 10-15% | |
Turboprop aircraft | 18 years | 10% | |
Ground property and equipment | 2 to 30 years | 0% | |
Capital lease - flight and ground | Lease Term | 0% |
Routes are amortized on a straight-line basis over 40 years gatesand airport operating rights over the stated term of the related lease and slots overor 20 years. Routes gates and slotsairport operating rights are comprised of the following in millions:
Balance at December 31, 2000 | Accumulated Amortization at December 31, 2000 | ||
Routes | $711 | $179 | |
Gates | 285 | 162 | |
Slots | 85 | 54 | |
$1,081 | $395 |
Balance 20012000 | Accumulated Amortization 20012000 | ||||
Routes | $ 685 | $ 711 | $201 | $179 | |
Airport operating rights | 348 | 370 | 244 | 216 | |
$1,033 | $1,081 | $445 | $395 |
See Note 1 (q) for a discussion of recently issued accounting standards.
Passenger revenue is recognized when transportation is provided rather than when a ticket is sold. The amount of passenger ticket sales not yet recognized as revenue is reflected in the accompanying Consolidated Balance Sheets as air traffic liability. The Company performsWe perform periodic evaluations of this estimated liability, and any adjustments resulting therefrom, which can be significant, are included in results of operations for the periods in which the evaluations are completed. 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.
Continental sponsorsWe sponsor a frequent flyer program, "OnePass", and recordsrecord an estimated liability for the incremental cost associated with providing the related free transportation at the time a free travel award is earned. The liability is adjusted periodically based on awards earned, awards redeemed and changes in the OnePass program.
The CompanyWe also sellssell mileage credits in the OnePass program to participating partners, such as hotels, car rental agencies and credit card companies. During 1999, as a result of the issuance of Staff Accounting Bulletin No. 101 - - "Revenue Recognition in Financial Statements," the Companywe changed the method it useswe use to account for the sale of these mileage credits. This change, which totaled $27 million, net of tax, was applied retroactively to January 1, 1999.1999 and was accounted for as a cumulative effect of a change in accounting principle. Under the new accounting method, revenue from the sale of mileage credits, based on estimates of the fair value of tickets to be redeemed with the mileage sold, is deferred and recognized when transportation is provided. Previously, the resulting revenue, net of the incremental cost of providing future air travel, was recorded in the period in which the credits were sold.
The pro forma and actual results for 1999, assuming the accounting change is applied retroactively, is shown below (in millions except per share data):
|
| ||
Income before Cumulative Effect of Accounting Change and Extraordinary Charge | $ 488 | $ | |
| $ 7.02 | $ | |
| $ 6.64 | $ | |
Net Income | $ 482 | $ | |
| $ 6.93 | $ | |
| $ 6.57 | $ |
Actual per share amounts are shown below for comparative purposes:
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Passenger traffic commissions are recognized as expense when the transportation is provided and the related revenue is recognized. The amount of passenger traffic commissions not yet recognized as expense is included in Prepayments and other assets in the accompanying Consolidated Balance Sheets.
Deferred income taxes are provided under the liability method and reflect the net tax effects of temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements.
Maintenance and repair costs for owned and leased flight equipment, including the overhaul of aircraft components, are charged to operating expense as incurred, except engine overhaul costs covered by power by the hour agreements, which are accrued on the basis of hours flown.
The Company expensesWe expense the costs of advertising as incurred. Advertising expense was $18 million, $60 million $82 million and $78$82 million for the years ended December 31, 2001, 2000 and 1999, and 1998, respectively.
Continental has elected to followUnder Accounting Principles Board Opinion No. 25 - "Accounting for Stock Issued to Employees" ("APB 25"), if the exercise price of our employee stock options equals the market price of the underlying stock on the date of grant, generally no compensation expense is recognized. Since our stock options have all been granted at fair value, no compensation expense has been recognized under APB 25. We elected to follow APB 25 in accounting for itsour employee stock options and itsour stock purchase plans because theplans. We believe APB 25 is preferable to alternative fair value accounting provided for under Statement of Financial Accounting Standards No. 123 - "Accounting for Stock-Based Compensation" ("SFAS 123"), which requires use of option valuation models that were not developed for use in valuing employee stock options or purchase rights. Under APB 25, since the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, generally no compensation expense is recognized. Furthermore, under APB 25, since the stock purchase plans are considered noncompensatory plans, no compensation expense is recognized.
In accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"), the Company recordswe record impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets. The net carrying value of assets not recoverable is reduced to fair value if lower than carrying value.
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"), requires start-up costs to be expensed as incurred. ContinentalWe adopted SOP 98-5 in the first quarter of 1999. This statement requires all unamortized start up costs (e.g., pilot training costs related to induction of new aircraft) to be expensed upon adoption, resulting in a $6 million cumulative effect of a change in accounting principle, net of tax, in the first quarter of 1999.
In July 2001, the Financial Accounting Standards Board issued Financial Accounting Standard No. 142 - "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 includes requirements to test goodwill and indefinite lived intangible assets for impairment rather than amortize them. We will adopt SFAS 142 beginning in the first quarter of 2002 and currently estimate discontinuing the amortization of our goodwill recorded on equity investments and routes, which are indefinite-life intangible assets, which will result in reduced expense of approximately $23 million on an annualized basis. We will be required to test routes for impairment annually in accordance with SFAS 142, beginning in the first quarter of 2002. We expect to perform the first of the required impairment tests for goodwill and routes as of January 1, 2002 in the first quarter of 2002. We do not expect to have a material impairment of our goodwill or routes upon adoption based upon our preliminary assessment of fair values.
In August 2001, the Financial Accounting Standards Board issued Financial Accounting Standard No. 144 - "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 supersedes SFAS 121 and the portion of the Accounting Principle Board Opinion No. 30 that deals with disposal of a business segment. We do not expect SFAS 144, which is effective in 2002, to have a material effect on our results of operations.
Certain reclassifications have been made in the prior years' financial statements to conform to the current year presentation.
NOTE 2 - EARNINGS PER SHARE
Basic earnings (loss) per common share ("EPS") excludes dilution and is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other obligations to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings (loss) of the Company. The following table sets forth the computation of basic and diluted earnings (loss) per share (in millions):
2000 | 1999 | 1998 | 2001 | 2000 | 1999 | |
Numerator: | ||||||
Income before cumulative effect of accounting changes and extraordinary charge | $348 | $488 | $387 | |||
Income (loss) before cumulative effect of accounting changes and extraordinary charge | $(95) | $348 | $488 | |||
Cumulative effect of accounting changes, net of tax | - | (33) | - | - | (33) | |
Extraordinary charge, net of tax | (6) | - | (4) | - | (6) | - |
Numerator for basic earnings per share - net income | 342 | 455 | 383 | |||
Numerator for basic earnings (loss) per share - net income (loss) | (95) | 342 | 455 | |||
Effect of dilutive securities: | ||||||
Preferred Securities of Trust | 1 | - | 11 | - | 1 | - |
6-3/4% Convertible Subordinated Notes | - | 4 | 9 | - | 4 | |
1 | 4 | 20 | - | 1 | 4 | |
Numerator for diluted earnings per share - net income after assumed conversions | $343 | $459 | $403 | |||
Numerator for diluted earnings (loss) per share - net income (loss) after assumed conversions | $(95) | $343 | $459 | |||
Denominator: | ||||||
Denominator for basic earnings per share - weighted- average shares | 60.7 | 69.5 | 60.3 | |||
Denominator for basic earnings (loss) per share - weighted- average shares | 55.5 | 60.7 | 69.5 | |||
Effect of dilutive securities: | ||||||
Employee stock options | 1.1 | 1.4 | 1.7 | - | 1.1 | 1.4 |
Preferred Securities of Trust | 0.6 | 0.1 | 9.8 | - | 0.6 | 0.1 |
Potentially Dilutive Shares (Northwest Repurchase) | 0.4 | - | - | - | 0.4 | - |
6-3/4% Convertible Subordinated Notes | - | 2.9 | 7.6 | - | 2.9 | |
Warrants | - | - | 0.9 | |||
Dilutive potential common shares | 2.1 | 4.4 | 20.0 | - | 2.1 | 4.4 |
Denominator for diluted earnings per share - adjusted weighted - average and assumed conversions | 62.8 | 73.9 | 80.3 | |||
Denominator for diluted earnings (loss) per share - adjusted weighted - average and assumed conversions | 55.5 | 62.8 | 73.9 |
Approximately 6.0 million in 2001, 1.1 million in 2000 and 1.1 million in 1999 and 1.4 million in 1998 of weighted average options to purchase shares of the Company'sour Class B common stock par value $.01 per share ("Class B common stock"), were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the common shares and, therefore, the effect would have been antidilutive.
NOTE 3 - LONG-TERM DEBT
Long-term debt as of December 31 is summarized as follows (in millions):
2000 | 1999 | 2001 | 2000 | |
Secured | ||||
Notes payable, interest rates of 5.00% to 8.50%, payable through 2019 | $2,325 | $1,817 | $2,852 | $2,325 |
Floating rate notes, interest rates of LIBOR plus 0.49% to 1.0%, Eurodollar plus 0.87% or Commercial Paper plus 0.40% to 0.60%, payable through 2012 |
532 |
241 | ||
Credit facility, floating interest rate of LIBOR plus 1.0%, payable through 2002 | 150 | 215 | ||
Floating rate note, interest rate of LIBOR plus 1.25%, payable through 2004 | 72 | 74 | ||
Notes payable, interest rates of 8.49% to 9.46%, payable through 2008 | 39 | 51 | ||
Revolving credit facility totaling $160 million, floating interest rate of LIBOR plus 1.375%, payable through 2001 | - | 160 | ||
Floating rate notes, interest rates of LIBOR plus 0.49% to 1.0%, (2.50% to 4.72% as of December 31, 2001), Eurodollar plus 1.375% (3.31% as of December 31, 2001), Commercial Paper plus 0.40% (1.95% as of December 31, 2001), payable through 2014 |
718 |
532 | ||
Revolving credit facility, floating interest rate of LIBOR plus 3.0% (4.93% as of December 31, 2001), payable through 2004 |
190 |
- | ||
Credit facility, floating interest rate of LIBOR plus 3.5% and 1.0%, respectively (5.43% as of December 31, 2001), payable through 2002 | 75 | 150 | ||
Floating rate note, interest rate of LIBOR plus 4.0% and 1.25%, respectively, (5.93% as of December 31, 2001), payable through 2004 | 61 | 72 | ||
Notes payable, interest rates of 8.49% to 9.07%, payable through 2008 | 36 | 39 | ||
Unsecured | ||||
Senior notes payable, interest rate of 8.0%, payable through 2005 | 200 | 200 | 200 | |
Notes payable, interest rate of 8.125%, payable through 2008 | 110 | 110 | 110 | |
Senior notes payable, interest rate of 9.5%, payable through 2001 | - | 242 | ||
Other | 14 | 23 | 14 | |
3,442 | 3,133 | 4,256 | 3,442 | |
Less: current maturities | 272 | 278 | 328 | 272 |
Total | $3,170 | $2,855 | $3,928 | $3,170 |
At December 31, 2000 and 1999, both the LIBOR and Eurodollar rates associated with Continental's indebtedness approximated 6.4% and 6.0%, respectively. The Commercial Paper rate was 6.5% and 6.1% asSubstantially all of December 31, 2000 and 1999, respectively.
A majority of Continental'sour property and equipment is subject to agreements securing indebtednessour indebtedness. We have unencumbered assets, consisting primarily of Continental.spare parts, with a net book value in excess of $1.0 billion.
The Company hasWe have certain debt and credit facility agreements, which contain financial covenants restricting CMI's incurrence of certain indebtedness and pledge or sale of assets. In addition, the credit facility contains certain financial covenants applicable to Continental and prohibits Continental from granting a security interest on certain of its international route authorities and its stock in Air Micronesia, Inc., CMI's parent company.
At December 31, 2000,2001, under the most restrictive provisions of the Company'sour debt and credit facility agreements, the Company hadwe are required to maintain a minimum unrestricted cash balance requirement of $600$500 million and beginning in the second quarter of 2003, a minimum net worth requirementspecified ratio of $898EBITDAR (earnings before interest, income taxes, depreciation and aircraft rentals) to fixed charges, which consist of interest expense, aircraft rental expense, cash income taxes and cash dividends. These credit facilities had an outstanding balance of $326 million and was restricted from paying cash dividends in excess of $904 million.
On April 15, 1999, the Company exercised its right and called for redemption on May 25, 1999, all $230 million of its 6-3/4% Convertible Subordinated Notes due 2006. The notes were converted into approximately 7.6 million shares of Class B common stock during May 1999.
at December 31, 2001.
Maturities of long-term debt due over the next five years are as follows (in millions):
Year ending December 31, | ||
2001 | $272 | |
2002 | 305 | |
2003 | 211 | |
2004 | 277 | |
2005 | 537 |
Year ending December 31, | ||
2002 | $328 | |
2003 | 410 | |
2004 | 329 | |
2005 | 563 | |
2006 | 417 |
NOTE 4 - LEASES
Continental leasesWe lease certain aircraft and other assets under long-term lease arrangements. Other leased assets include real property, airport and terminal facilities, sales offices, maintenance facilities, training centers and general offices. Most aircraft leases also include both renewal options and purchase options.
At December 31, 2000,2001, the scheduled future minimum lease payments under capital leases and the scheduled future minimum lease rental payments required under aircraft and engine operating leases, that have initial or remaining noncancellable lease terms in excess of one year, are as follows (in millions):
Capital Leases | Operating Leases | ||
Year ending December 31, | |||
2001 | $ 47 | $ 859 | |
2002 | 47 | 814 | |
2003 | 31 | 766 | |
2004 | 28 | 709 | |
2005 | 29 | 688 | |
Later years | 180 | 6,387 | |
Total minimum lease payments | 362 | $10,223 | |
Less: amount representing interest | 126 | ||
Present value of capital leases | 236 | ||
Less: current maturities of capital leases | 32 | ||
Long-term capital leases | $204 |
Not included in the above operating lease table is approximately $567 million of annual average minimum lease payments for each of the next five years relating to non-aircraft leases, principally airport and terminal facilities and related equipment.
Continental is the guarantor of approximately $1.6 billion aggregate principal amount of tax-exempt special facilities revenue bonds and interest thereon. These bonds, issued by various airport municipalities, are payable solely from rentals paid by Continental under long-term agreements with the respective governing bodies.
Capital Leases | Operating Leases AircraftNon-aircraft | |||
Year ending December 31, | ||||
2002 | $ 45 | $ 923 | $ 389 | |
2003 | 40 | 880 | 556 | |
2004 | 38 | 843 | 616 | |
2005 | 39 | 821 | 656 | |
2006 | 41 | 715 | 656 | |
Later years | 243 | 7,089 | 2,259 | |
Total minimum lease payments | 446 | $11,271 | $5,132 | |
Less: amount representing interest | 149 | |||
Present value of capital leases | 297 | |||
Less: current maturities of capital leases | 27 | |||
Long-term capital leases | $270 |
At December 31, 2000, the Company,2001, Continental, including Express,ExpressJet, had 386427 and 1211 aircraft (of which 40 operating leased aircraft and five capital leased aircraft have been removed from service) under operating and capital leases, respectively. These leases have remaining lease terms ranging from one month to 2322-1/2 years.
The Company'sOur total rental expense for allaircraft operating leases, net of sublease rentals, was $1.2 billion, $1.1 billion$903 million, $844 million and $922$771 million in 2001, 2000 and 1999, respectively. Total rental expense for non-aircraft operating leases, net of sublease rentals, was $380 million, $353 million and 1998,$328 million in 2001, 2000 and 1999, respectively.
NOTE 5 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
As part of the Company'sour risk management program, Continental useswe use or hashave used a variety of financial instruments, including petroleum call options, petroleum swap contracts, jet fuel purchase commitments, foreign currency average rate options, foreign currency forward contracts and interest rate cap and swap agreements. The Company doesWe do not hold or issue derivative financial instruments for trading purposes.
Effective October 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 133 - "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") and accordingly recognizes all derivatives on the balance sheet at fair value.
Notional Amounts and Credit Exposure of Derivatives
The notional amounts of derivative financial instruments summarized below do not represent amounts exchanged between parties and, therefore, are not a measure of the Company'sour exposure resulting from itsour use of derivatives. The amounts exchanged are calculated based upon the notional amounts as well as other terms of the instruments, which relate to interest rates, exchange rates or other indices.
Fuel Price Risk Management
The Company uses a combinationAs of petroleum call options,December 31, 2001, we had no fuel hedges in place to protect against fuel price increases, we have from time to time entered into petroleum swap contracts, andpetroleum call option contracts and/or jet fuel purchase commitments to provide some short-term protection (generally three to six months) against a sharp increase in jet fuel prices. These instruments generally cover upShould we enter into any such arrangements in the future, our fuel hedging strategy may limit our ability to 100% of the Company's forecasted jetbenefit from declines in fuel needs for three to six months.price.
The Company accountsWe account for the call options and swap contracts as cash flow hedges. In accordance with Statement of Financial Accounting Standards No. 133 - "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133,133"), such financial instruments are recorded at fair value with the offset to accumulated other comprehensive income (loss), net of applicable income taxes and hedge ineffectiveness, and recognized as a component of fuel expense when the underlying fuel being hedged is used. The ineffective portion of these call options and swap agreements is determined based on the correlation between West Texas Intermediate Crude Oil prices and jet fuel prices as well as the change in the time value of the options.prices. Hedge ineffectiveness is included in fuel expenseother nonoperating income (expense) in the accompanying consolidated statement of operations and was not material for the years ended December 31, 2001, 2000 1999 and 1998.1999. For the years ended December 31, 2001, 2000 and 1999, the Companywe recognized approximately $6 million, $44 million and $15 million, respectively, of net losses related to the portion of the hedging instrument excluded from the assessment of hedge effectiveness (primarily time value). These losses are also included in fuel expensenonoperating income (expense) in the accompanying consolidated statement of operations.
The CompanyWe had petroleum call options outstanding with an aggregate notional amount of approximately $329 million and $310 million at December 31, 2000 and 1999, respectively.2000. The fair value of these hedges was not material.
There were no outstanding fuel hedges at December 31, 2001.
Foreign Currency Exchange Risk Management
The Company usesWe use a combination of foreign currency average rate options and forward contracts to hedge against the currency risk associated with itsour forecasted Japanese yen-denominated net cash flows for the following nine to twelve months. The average rate options and forward contracts have only nominal intrinsic value at the time of purchase.date contracted.
The Company accountsWe account for these instruments as cash flow hedges. In accordance with SFAS 133, such financial instruments are recorded at fair value with the offset to accumulated other comprehensive income (loss), net of applicable income taxes and hedge ineffectiveness, and recognized as a component of other revenue when the underlying net cash flows are realized. The Company measuresWe measure hedge effectiveness of average rate options and forward contracts based on the forward price of the underlying currency. Hedge ineffectiveness was not material during 2001, 2000 1999 or 1998.
1999.
At December 31, 2000, the Company2001, we had yen forward contracts outstanding with an aggregate notional amount of $188$131 million and an unrealized gain of $22$14 million. The notional amount of the Company'sour yen forward contracts outstanding at December 31, 19992000 was $197$188 million with an unrealized lossgain of $5$22 million. Unrealized gains (losses) are recorded in other current assets (liabilities) with the offset to other accumulated comprehensive income (loss), net of applicable income taxes and hedge ineffectiveness. The unrealized lossgain at December 31, 20002001 will be recognized in earnings within the next twelve months.
Interest Rate Risk Management
The CompanyWe entered into interest rate cap and interest rate swap agreements to reduce the impact of potential interest rate increases on floating rate debt. The interest rate cap had a notional amount of $84 million and $106 million as of December 31, 2000, and 1999, respectively, and iswas effective through July 31, 2001. The interest rate swap which was entered into during 2000, had a notional amount of $176 million at both December 31, 2001 and 2000. The Company accountsWe account for the interest rate cap and swap as cash flow hedges whereby the fair value of the interest rate cap and swap is reflected in other assets in the accompanying consolidated balance sheet with the offset, net of income taxes and any hedge ineffectiveness (which is not material), recorded as accumulated other comprehensive income (loss). The fair value of the interest rate swap was a negative $9 million at December 31, 2001 and the fair value of the interest rate cap and swap waswere not material as of December 31, 2000 or 1999.2000. Amounts recorded in accumulated other comprehensive income (loss) are amortized as an adjustment to interestinteres t expense over the term of the related hedge. Such amounts were not material during 2001, 2000 1999 or 1998.
1999.
Other Financial Instruments
Cash equivalents are carried at cost and consist primarily of commercial paper with original maturities of three months or less and approximate fair value due to their short maturity.
Short-term investments consist primarily of commercial paper with original maturities in excess of 90 days but less than 270 days and approximate fair value due to their short maturity. The Company classifiesWe classify these investments as held-to-maturity securities.
Continental's investment in America West Holdings Corporation ("America West Holdings") was classified as an available-for-sale security and was carried at an aggregate market value of approximately $3 million at December 31, 1999. In December 2000, the Company sold its investment in America West Holdings and a right of first refusal, resulting in a gain of $9 million.
In May 1998, the Company acquiredWe have a 49% interest in Compania Panamena de Aviacion, S.A. ("Copa") for $53 million. The investment is accounted for under the equity method of accounting. As of December 31, 20002001 and 1999,2000, the excess of the amount at which the investment is carried and the amount of underlying equity in the net assets was $41$40 million and $40$41 million, respectively. This difference is treated as goodwill and is being amortized over 40 years.
Effective January 1, 2002, the amortization of this goodwill will be discontinued in accordance with SFAS 142.
On October 20, 1999, Continentalwe sold itsour interest in AMADEUSAmadeus Global Travel Distribution, S.A. ("AMADEUS") for $409 million, including a special dividend. The sale, which occurred as part of AMADEUS'sAmadeus's initial public offering, resulted in a gain of approximately $297 million.
At both December 31, 2000 and 1999, the Company owned approximately 357,000 depository certificates convertible, subject to certain restrictions, into the common stock of Equant N.V. ("Equant"), which completed an initial public offering in July 1998. As of December 31, 2000 and 1999, the estimated fair value of these depository certificates was approximately $9 million and $40 million, respectively, based upon the publicly traded market value of Equant common stock. Since the fair value of the Company's investment in the depository certificates is not readily determinable (i.e., the depository certificates are not traded on a securities exchange), the investment is carried at cost, which was not material as of December 31, 2000 or 1999.
In December 1999, the Companywe acquired a 28% interest in Gulfstream International Airlines, Inc. ("Gulfstream"). The investment is accounted for under the equity method of accounting. At December 31, 20002001 and 1999,2000, the carrying value of the investment in Gulfstream was $0 and $8 million, and $10 million, respectively. The Company hasWe have also guaranteed approximately $25$17 million of debt for Gulfstream as of December 31, 2000.2001.
In 1999, Continental received 1,500,000 warrants to purchase common stockAs of priceline.com, Inc. atDecember 31, 2001, we had an exercise price11% equity interest in Orbitz, a comprehensive travel planning website. We account for our investment in Orbitz under the equity method of $59.93 per share (the "Warrants"). Inaccounting. At December 31, 2001, the fourth quartercarrying value of 1999, the Company sold the Warrants for $18 million, resultingour investment in a loss of approximately $4Orbitz was $12 million.
The fair value of the Company'sour debt with a carrying value of $2.9$3.6 billion and $2.8$2.9 billion at December 31, 20002001 and 1999,2000, respectively, estimated based on the discounted amount of future cash flows using theour current incremental rate of borrowing for a similar liability or market prices, approximated $3.4 billion and $2.7 billion, and $2.5 billion, respectively.
The fair value of the remaining debt (with a carrying value of $567$626 million and $383$567 million at December 31, 20002001 and 1999,2000, respectively), was not practicable to estimate.
As of December 31, 2001 and 2000, the fair value of the Company'sour 5,000,000 6% Convertible Preferred Securities, Term Income Deferrable Equity Securities ("TIDES"), with a carrying value of $242$243 million, estimated based on market quotes, approximated $142 million and $259 million.million, respectively.
The Company isWe are the holder of warrants in a number of start-up eCommercee-commerce companies focused on various segments of the travel distribution network. The warrants are recorded at fair value with the offset recorded to non-operating income. The fair value of these warrants was not material at December 31, 20002001 or 1999.2000.
The Company hasWe have a compensation plan for certain employeesall officers that provides a cash benefit that is indexed to the appreciation in fair value of a number of underlying equity securities of eCommerce businesses.
e-commerce businesses related to the travel industry (including both Hotwire and Orbitz). The benefit formula meets the definition of a derivative, and is accordingly accounted for at fair value, with the offset recorded to non-operating expense. The fair value of the underlying equity securities derivative was not material at December 31, 2001 or 2000.
Credit Exposure of Financial Instruments
The Company isWe are exposed to credit losses in the event of non-performance by issuers of financial instruments. To manage credit risks, the Company selectswe select issuers based on credit ratings, limits itslimit our exposure to a single issuer under defined Company guidelines, and monitorsmonitor the market position with each counterparty.
NOTE 6 - PREFERRED SECURITIES OF TRUST
In November 2000, Continental Airlines Finance Trust II, a Delaware statutory business trust (the "Trust") with respect toof which the Company ownswe own all of the common trust securities, completed a private placement of 5,000,000 6% Convertible Preferred Securities, Term Income Deferrable Equity Securities.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 Class B common stock at a conversion rate of $60 per share of Class B common stock (equivalent to approximately 0.8333 share of Class B 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 and are included in Distributions on Preferred Securities of Trust in the accompanying Consolidated Statement of Operations. The proceeds of the private placement, which totaled $242 million (net of $8 million of underwriting commissions and expense) are includedinclud ed in Continental-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Convertible Subordinated Debentures in the accompanying Consolidated Balance Sheets.
The sole assets of the trust are 6% Convertible Junior Subordinated Debentures ("Convertible Subordinated Debentures") with an aggregate principal amount of $250 million issued by the Companyus and which mature on November 15, 2030. The Convertible Subordinated Debentures are redeemable by Continental,us, in whole or in part, on or after November 20, 2003 at designated redemption prices. If Continental redeemswe 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 the Company'sour 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, Continental haswe 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.
The Convertible Subordinated Debentures and related income statement effects are eliminated in the Company'sour consolidated financial statements.
Continental Airlines Finance Trust, a Delaware statutory business trust with respect to which the Company owned all of the common trust securities, had 2,298,327 8-1/2% Convertible Trust Originated Preferred Securities ("TOPrS") outstanding at December 31, 1998. In November 1998, the Company exercised its right and called for redemption approximately half of its outstanding TOPrS. The TOPrS were convertible into shares of Class B common stock at a conversion price of $24.18 per share of Class B common stock. As a result of the call for redemption, 2,688,173 TOPrS were converted into 5,558,649 shares of Class B common stock. In December 1998, the Company called for redemption the remaining outstanding TOPrS. As a result of the second call, the remaining 2,298,327 TOPrS were converted into 4,752,522 shares of Class B common stock during January 1999.
Distributions on the preferred securities were payable by Continental Airlines Finance Trust at the annual rate of 8-1/2% of the liquidation value of $50 per preferred security and are included in Distributions on Preferred Securities of Trust in the accompanying Consolidated Statements of Operations.
NOTE 7 - REDEEMABLE COMMON, PREFERRED, COMMON AND TREASURY STOCK
Redeemable Common Stock
On November 15, 2000, the Companywe entered into a number of agreements with Northwest Airlines Corporation ("Northwest") and some of its affiliates under which the Companywe would, among other things, repurchase approximately 6.7 million shares of our Class A common stock, par value $.01 per share ("owned by Northwest Airlines Corporation, reclassify all issued shares of Class A common stock")stock into Class B common stock, make other adjustments to our corporate and alliance relationship with Northwest Airlines, Inc., and issue to Northwest Airlines, Inc. one share of Continental owned by Northwest for $450 million.preferred stock, designated as Series B preferred stock with blocking rights relating to certain change of control transactions involving us and certain matters relating to our rights plan. The transactions closed on January 22, 2001. As a result of the Company'sour commitment to repurchase these Class A shares for $450 million, such amounts arewere included in Redeemable Common Stock in the accompanying Consolidated Balance Sheets at December 31, 2000. See Note 16.
Preferred Stock
Continental hasWe have 10 million shares of authorized preferred stock.
As of December 31, 2001, one share of Series B preferred stock nonewas outstanding, which is owned by Northwest Airlines, Inc. No shares of which waspreferred stock were outstanding as of December 31, 20002000.
Some of the material provisions of the Series B preferred stock are listed below.
Ranking. The Series B preferred stock ranks junior to all classes of capital stock other than our common stock upon liquidation, dissolution or 1999.winding up of the company.
Dividends. No dividends are payable on the Series B preferred stock.
Voting Rights. The holder of the Series B preferred stock has the right to block certain actions we may seek to taking including:
Redemption. The Series B preferred stock is redeemable by us at a nominal price under the following circumstances:
Common Stock
Continental has two classesWe currently have one class of common stock issued and outstanding, Class A common stock and Class B common stock. Each share of Class A common stock is entitled to 10 votes per share and each share of Class B common stock is entitled to one vote per share. In addition, Continental has authorized 50 million shares of Class D common stock, par value $.01 per share, none of which is outstanding. See Note 16.
The Company's Certificate of Incorporation permits shares of the Company's Class A common stock to be converted into an equal number of shares of Class B common stock. During 2000 and 1999, 357,311 and 85,883 shares of the Company's Class A common stock, respectively, were so converted. See Note 16.
Treasury Stock
ContinentalWe began a stock repurchase program in 1998 under which itwe repurchased a total of 28.128.2 million shares of Class B common stock for a total of approximately $1.2 billion through December 31, 2000. Of the approximately $2872001. Approximately $216 million remained available in the program as of December 31, 2000, $200 million will be used as part of2001. In addition to the purchase price of 6,685,279 shares of Class A common stock held by Northwest. See Note 16. The Company plans to use the remainingcurrent balance, in the program along withpermits (i) one-half of future net income (excluding special gains and charges), (ii) all the proceeds from the sale of non-strategic assets and (iii) the amount of cash proceeds received by the Companywe receive for the purchase of common stock by employees and other participants under itsour employee stock purchase and stock option plans to continuebe added to repurchase its common stock in the future.program. This program was suspended during 2001.
Stockholder Rights Plan
Effective November 20, 1998, the Companywe adopted a stockholder rights plan (the "Rights Plan") in connection with the disposition by Air Partners, L.P. ("Air Partners") of its interest in Continental to Northwest Airlines Corporation. Effective January 22, 2001, we amended the CompanyRights Plan to Northwest.
take into account, among other things, the effects of the recapitalization and to eliminate the status of the Northwest parties as exempt persons that would not trigger the provisions of the Rights Plan.
The rights become exercisable upon the earlier of (i) the tenth day following a public announcement or public disclosure of facts indicating that a person or group of affiliated or associated persons has acquired beneficial ownership of 15% (20%(25%, or more in some cases, in the case of an Institutional Investor) or more of the total number of votes entitled to be cast generally by the holders of theour common stock of the Company then outstanding, voting together as a single class (such person or group being an "Acquiring Person"), or (ii) the tenth business day (or such later date as may be determined by action of the Boardour board of Directorsdirectors prior to such time as any person becomes an Acquiring Person) following the commencement of, or announcement of an intention to make, a tender offer or exchange offer the consummation of which would result in any person becoming an Acquiring Person. Certain persons and entities related to the Company,us or Air Partners or Northwest at the time the Rights Plan was adopted are exempt from the definition of "Acquiring Person."
The rights will expire on November 20, 2008 unless extended or unless the rights are earlier redeemed or exchanged by the Company.
us.
Subject to certain adjustments, if any person becomes an Acquiring Person, each holder of a right, other than rights beneficially owned by the Acquiring Person and its affiliates and associates (which rights will thereafter be void), will thereafter have the right to receive, upon exercise thereof, that number of shares of Class B common stock having a market value of two times the exercise price ($200, subject to adjustment) of the right.
If at any time after a person becomes an Acquiring Person, (i) the Company mergeswe merge into any other person, (ii) any person merges into the Companyus and all of theour outstanding common stock does not remain outstanding after such merger, or (iii) the Company sellswe sell 50% or more of itsour consolidated assets or earning power, each holder of a right (other than the Acquiring Person and its affiliates and associates) will have the right to receive, upon the exercise thereof, that number of shares of common stock of the acquiring corporation (including the Companyus as successor thereto or as the surviving corporation) which at the time of such transaction will have a market value of two times the exercise price of the right.
At any time after any person becomes an Acquiring Person, and prior to the acquisition by any person or group of a majority of the Company'sour voting power, the Boardour board of Directorsdirectors may exchange the rights (other than rights owned by such Acquiring Person, which will have become void), in whole or in part, at an exchange ratio of one share of Class B common stock per right (subject to adjustment).
At any time prior to any person becoming an Acquiring Person, the Boardour board of Directorsdirectors may redeem the rights at a price of $.001 per right. The Rights Plan may be amended by the Boardour board of Directorsdirectors without the consent of the holders of the rights, except that from and after suchthe time asthat any person becomes an Acquiring Person no such amendment may adversely affect the interests of the holders of the rights (other than the Acquiring Person and its affiliates and associates). Until a right is exercised, theits holder, thereof, as such, will have no rights as a stockholderone of the Company,our stockholders, including without limitation, the right to vote or to receive dividends. See Note 16.
NOTE 8 - STOCK PLANS AND AWARDS
Stock Options
On May 23, 2000, theOur stockholders of the Companyhave approved the Continental Airlines, Inc. Incentive Plan 2000 (the "2000 Incentive Plan"). The 2000 Incentive Plan provides that the Company may grant awards (options, restricted stock awards, performance awards orfollowing incentive awards) to non-employee directors of the Company or employees of the Company or its subsidiaries. Subjectplans, which, subject to adjustment as provided in the 2000 Incentive Plan,respective plans, permit the aggregateissuance of the number of shares of Class B common stock that mayset forth below:
Incentive Plan 2000 | 3,000,000 shares | |
1998 Stock Incentive Plan | 5,500,000 shares | |
1997 Stock Incentive Plan | 2,000,000 shares | |
1994 Stock Incentive Equity Plan | 9,000,000 shares |
The Incentive Plan 2000 provides for awards in the form of stock options, restricted stock, performance awards and incentive awards. Each of the other plans permits awards of either stock options or restricted stock. Each plan permits awards to be made to the non-employee directors of the company or the employees of the company or its subsidiaries. Stock issued under the 2000 Incentive Plan may not exceed 3,000,000 shares, whichplans may be originally issued orshares, treasury shares or a combination thereof.
The stockholderstotal shares remaining for award under the plans as of December 31, 2001 was 7.2 million, although no new awards can be made under the Company have approved the Company's 1998 Stock Incentive Plan, 1997 Stock Incentive Plan and 1994 Incentive Equity Plan (collectively, the "Plans") under which the Company may issue shares of restricted Class B common stock or grantPlan.
Stock options to purchase shares of Class B common stock to non-employee directors and employees of the Company or its subsidiaries. Subject to adjustment as provided in the Plans, the aggregate number of shares of Class B common stock that may be issued may not exceed 16,500,000 shares, which may be originally issued or treasury shares or a combination thereof. Options grantedare awarded under the Plans are awardedplans with an exercise priceprices equal to the fair market value of the stock on the date of grant. The total shares remaining available for grant, under the 2000 Incentive Plan and the Plans at December 31, 2000 was 2.5 million. No options may be awarded under the 1994 Incentive Equity Plan after December 31, 1999. Stock options granted under the Plans generallytypically vest over a period of three to four years andfour-year period. Employee stock options generally have a five-year term, of five years.
while outside director stock options have ten-year terms.
Under the terms of the Plans, a change ofin control would result in all outstanding options under these plans becoming exercisable in full and restrictions on restricted shares being terminated.
The table below summarizes stock option transactions pursuant to the Company'sour 2000 Incentive Plan and the Plans (share data in thousands):. The vast majority of outstanding options were voluntarily surrendered to us in October 2001.
2000 | 1999 | 1998 | 2001 | 2000 | 1999 | |||||||
Options | Weighted- Average Exercise Price |
Options | Weighted- Average Exercise Price |
Options | Weighted- Average Exercise Price |
Options | Weighted- Average Exercise Price |
Options | Weighted- Average Exercise Price |
Options | Weighted- Average Exercise Price | |
Outstanding at Beginning of Year |
9,005 |
$32.69 |
9,683 |
$30.31 |
5,998 |
$22.62 |
7,468 |
$37.30 |
9,005 |
$32.69 |
9,683 |
$30.31 |
Granted | 1,514 | $42.20 | 1,055 | $33.38 | 6,504 | $43.75 | 1,651 | $49.47 | 1,514 | $42.20 | 1,055 | $33.38 |
Exercised | (2,885) | $25.65 | (1,464) | $16.54 | (807) | $19.53 | (1,612) | $31.48 | (2,885) | $25.65 | (1,464) | $16.54 |
Cancelled | (166) | $34.35 | (269) | $37.41 | (2,012) | $55.18 | (6,527) | $41.96 | (166) | $34.35 | (269) | $37.41 |
Outstanding at End of Year | 7,468 | $37.30 | 9,005 | $32.69 | 9,683 | $30.31 | 980 | $36.34 | 7,468 | $37.30 | 9,005 | $32.69 |
Options exer- cisable at end of year |
3,318 |
$35.47 |
4,845 |
$29.13 |
5,174 |
$23.56 |
711 |
$35.66 |
3,318 |
$35.47 |
4,845 |
$29.13 |
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, 20002001 (share data in thousands):
Options Outstanding
Range of Exercise Prices |
Outstanding | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price |
$4.56-$29.19 | 1,722 | 2.18 | $27.55 |
$29.25-$32.13 | 853 | 2.81 | $31.77 |
$32.25-$35.00 | 2,272 | 2.96 | $34.96 |
$35.13-$43.31 | 1,501 | 4.47 | $41.72 |
$43.50-$56.81 | 1,120 | 3.05 | $55.36 |
$4.56-$56.81 | 7,468 | 3.08 | $37.30 |
Range of Exercise Prices |
Outstanding | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price |
$4.56-$28.63 | 130 | 1.82 | $20.74 |
$29.19-$29.19 | 206 | 1.90 | $29.19 |
$30.88-$34.75 | 217 | 2.99 | $32.54 |
$35.00-$45.56 | 223 | 5.17 | $41.93 |
$46.19-$56.81 | 204 | 5.83 | $51.46 |
$4.56-$56.81 | 980 | 3.69 | $36.34 |
Options Exercisable
Range of Exercise Prices | Exercisable | Weighted Average Exercise Price |
$4.56-$29.19 | 1,197 | $26.83 |
$29.25-$32.13 | 290 | $31.11 |
$32.25-$35.00 | 1,140 | $34.97 |
$35.13-$43.31 | 103 | $40.64 |
$43.50-$56.81 | 588 | $55.28 |
$4.56-$56.81 | 3,318 | $35.47 |
Range of Exercise Prices | Exercisable | Weighted Average Exercise Price |
$4.56-$28.63 | 123 | $20.94 |
$29.19-$29.19 | 154 | $29.19 |
$30.88-$34.75 | 142 | $32.75 |
$35.00-$45.56 | 166 | $42.25 |
$46.19-$56.81 | 126 | $52.53 |
$4.56-$56.81 | 711 | $35.66 |
Employee Stock Purchase Plan
All employees of the Companyour employees are eligible to participate in the Company'sour employee stock purchase program under which they may purchase shares of Class B common stock of the Company at 85% of the lower of the fair market value on the first day of the option period or the last day of the option period. During 2001 and 2000, 710,394 and 1999, 481,950 and 526,729 shares, respectively, of Class B common stock were issued at prices ranging from $13.40 to $38.30 in 2001 and $27.73 to $38.30 in 2000 and $27.84 to $49.41 in 1999.2000. During 1998, 305,9781999, 526,729 shares of Class B common stock were issued at prices ranging from $29.33$27.84 to $49.41.
Pro Forma SFAS 123 Results
Pro forma information regarding net income and earnings per share has been determined as if the Companywe had accounted for itsour employee stock options and purchase rights under the fair value method of SFAS 123. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 2001, 2000 1999 and 1998,1999, respectively: risk-free interest rates of 6.5%4.8%, 4.9%6.5% and 4.9%, dividend yields of 0%; volatility factors of the expected market price of the Company'sour Class B common stock of 46% for 2001, 47% for 2000 and 43% for 1999, and 40% for 1998, and a weighted-average expected life of the option of 4.9 years, 3.6 years 3.1 years and 3.03.1 years. The weighted average grant date fair value of the stock options granted in 2001, 2000 and 1999 was $22.63, $17.37 and 1998 was $17.37, $11.13 and $13.84 per option, respectively.
The fair value of the purchase rights under the stock purchase plans was also estimated using the Black-Scholes model with the following weighted-average assumptions for 2001, 2000 1999 and 1998,1999, respectively: risk free interest rates of 5.9%3.3%, 4.7%5.9% and 4.7%; dividend yields of 0%, expected volatility of 46% for 2001, 47% for 2000 and 43% for 1999 and 40% for 1998;1999; and an expected life of .25 years for each of 2001, 2000 1999 and 1998.1999. The weighted-average fair value of the purchase rights granted in 2001, 2000 and 1999 was $5.12, $10.18 and 1998 was $10.18, $7.72, and $9.10, respectively.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company'sour employee stock options and purchase rights have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management'sour opinion, the existing models do not necessarily provide a reliable single measure of the fair value of itsour employee stock options and purchase rights.
Assuming that the Companywe had accounted for itsour employee stock options and purchase rights using the fair value method and amortized the resulting amount to expense over the options' vesting periods, net loss would have been increased by $6 million for the year ended December 31, 2001 and net income would have been reduceddecreased by $20 million $24 million and $18$24 million for the years ended December 31, 2000 1999 and 1998,1999, respectively. Basic net loss per share would have increased by 11 cents for the year ended December 31, 2001 and basic EPS would have been reduceddecreased by 33 cents 35 cents and 3035 cents for the years ended December 31, 2000 and 1999, and 1998, respectively,respectively. Diluted net loss per share would have increased by 11 cents for the year ended December 31, 2001 and diluted EPS would have been reduceddecreased by 32 cents 33 cents and 2333 cents for the same periods,years ended December 31, 2000 and 1999, respectively. The pro forma effect on net income is not representative of the pro forma effects on net income in future years because it did not take into consideration pro forma compensation expense related to grants made prior to 1995.
NOTE 9 - ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS)
The components of accumulated other comprehensive income (loss) are as follows (in millions):
Minimum Pension Liability | Unrealized Gain/(Loss) on Investments | Unrealized Gain/(Loss) on Derivative Instruments |
Total |
Minimum Pension Liability | Unrealized Gain/(Loss) on Investments | Unrealized Gain/(Loss) on Derivative Instruments |
Total | |
Balance at December 31, 1997 | $ (6) | $ 4 | $ - | $ (2) | ||||
Current year net change in accumulated other compre- hensive income (loss) |
(76) |
(4) |
(6) |
(86) | ||||
Balance at December 31, 1998 | (82) | - | (6) | (88) | $(82) | $ - | $ (6) | $(88) |
Current year net change in accumulated other compre- hensive income (loss) |
82 |
1 |
4 |
87 |
82 |
1 |
4 |
87 |
Balance at December 31, 1999 | - | 1 | (2) | (1) | - | 1 | (2) | (1) |
Current year net change in accumulated other compre- hensive income (loss) |
- |
(1) |
15 |
14 |
- |
(1) |
15 |
14 |
Balance at December 31, 2000 | $ - | $ - | $ 13 | $ 13 | - | - | 13 | 13 |
Current year net change in accumulated other compre- hensive income (loss) |
(138) |
- |
(7) |
(145) | ||||
Balance at December 31, 2001 | $(138) | $ - | $ 6 | $(132) |
NOTE 10 - EMPLOYEE BENEFIT PLANS
The Company hasWe have noncontributory defined benefit pension and defined contribution (including 401(k) savings) plans. Substantially all of our domestic employees of the Company are covered by one or more of these plans. The benefits under the active defined benefit pension plan are based on years of service and an employee's final average compensation. For the years ended December 31, 2001, 2000 1999 and 1998,1999, total expense for the defined contribution plan was $34 million, $17 million and $14 million, and $8 million, respectively.
The following table sets forth the defined benefit pension plans' change in projected benefit obligation for 20002001 and 1999:2000:
2000 | 1999 | 2001 | 2000 | |
(in millions) | (in millions) | |||
Projected benefit obligation at beginning of year | $1,300 | $1,230 | $1,488 | $1,300 |
Service cost | 93 | 66 | 94 | 93 |
Interest cost | 113 | 90 | 117 | 113 |
Plan amendments | 54 | 2 | 54 | |
Actuarial (gains) losses | (16) | (47) | 37 | (16) |
Benefits paid | (56) | (93) | (195) | (56) |
Projected benefit obligation at end of year | $1,488 | $1,300 | $1,543 | $1,488 |
The following table sets forth the defined benefit pension plans' change in the fair value of plan assets for 20002001 and 1999:2000:
2000 | 1999 | 2001 | 2000 | |
(in millions) | (in millions) | |||
Fair value of plan assets at beginning of year | $1,013 | $ 781 | $1,206 | $1,013 |
Actual return on plan assets | (33) | 138 | (81) | (33) |
Employer contributions | 282 | 187 | 26 | 282 |
Benefits paid | (56) | (93) | (195) | (56) |
Fair value of plan assets at end of year | $1,206 | $1,013 | $ 956 | $1,206 |
Pension cost recognized in the accompanying consolidated balance sheets is computed as follows:
2000 | 1999 | 2001 | 2000 | |
(in millions) | (in millions) | |||
Funded status of the plans - net underfunded | $(282) | $(287) | $(587) | $(282) |
Unrecognized net actuarial loss | 270 | 152 | 503 | 270 |
Unrecognized prior service cost | 178 | 143 | 151 | 178 |
Net amount recognized | $ 166 | $ 8 | $ 67 | $ 166 |
Prepaid benefit cost | $ 184 | $ 12 | $ - | $ 184 |
Accrued benefit liability | (27) | (78) | (296) | (27) |
Intangible asset | 9 | 74 | 148 | 9 |
Accumulated other comprehensive income | 215 | - | ||
Net amount recognized | $ 166 | $ 8 | $ 67 | $ 166 |
Net periodic defined benefit pension cost for 2001, 2000 1999 and 19981999 included the following components:
2000 | 1999 | 1998 | 2001 | 2000 | 1999 | |
(in millions) | (in millions) | |||||
Service cost | $ 93 | $ 66 | $ 55 | $ 94 | $ 93 | $ 66 |
Interest cost | 113 | 90 | 69 | 117 | 113 | 90 |
Expected return on plan assets | (103) | (84) | (64) | (118) | (103) | (84) |
Amortization of prior service cost | 18 | 13 | 6 | 22 | 18 | 13 |
Amortization of unrecognized net actuarial loss | 3 | 13 | 4 | 12 | 3 | 13 |
Net periodic benefit cost | $124 | $ 98 | $ 70 | $127 | $124 | $ 98 |
The following actuarial assumptions were used to determine the actuarial present value of the Company'sour projected benefit obligation:
2000 | 1999 | 1998 | ||||
(in millions) | 2001 | 2000 | 1999 | |||
Weighted average assumed discount rate | 8.00% | 8.25% | 7.00% | 7.50% | 8.00% | 8.25% |
Expected long-term rate of return on plan assets | 9.50% | 9.50% | 9.50% | |||
Weighted average rate of compensation increase | 4.98%-5.27% | 5.30% | 4.98%-5.27% |
The projected benefit obligation, accumulated benefit obligation and the fair value of plan assets for the pension plans with projected benefit obligations and accumulated benefit obligations in excess of plan assets were $1.5 billion, $1.2 billion and $956 million, respectively, as of December 31, 2001, and $39 million, $26 million and $0, respectively, as of December 31, 2000, and $1.3 billion, $1.1 billion and $1.0 billion, respectively, as of December 31, 1999.
2000.
During 1999, and 1998, the Companywe amended itsour benefit plan as a result of changes in benefits pursuant to new collective bargaining agreements.
Plan assets consist primarily of equity securities, long-term debt securities and short-term investments.
Continental'sOur policy is to fund the noncontributory defined benefit pension plans in accordance with Internal Revenue Service ("IRS") requirements as modified, to the extent applicable, by agreements with the IRS.
Our defined contribution 401(k) employee savings plan covers substantially all domestic employees. Effective January 1, 2001, we amended the plan to increase the employer-matching contribution rate, which is made in cash.
The CompanyWe also hashave a profit sharing program under which an award pool consisting of 15% of the Company'sour annual pre-tax earnings, subject to certain adjustments, is distributed each year to substantially all employees (other than employees whose collective bargaining agreement provides otherwise or who otherwise receive profit sharing payments as required by local law) on a pro rata basis according to base salary. The profit sharing expense included in the accompanying Consolidated Statements of Operations for the years ended December 31, 2000 1999 and 19981999 was $66 million and $62 million, and $86 million, respectively.
NOTE 11 - INCOME TAXES
Income tax expense/(benefit) for the years ended December 2001, 2000 and 1999 consists of the following (in millions):
2001 | 2000 | 1999 | |
Federal: | |||
Current | $ - | $ (1) | $ 10 |
Deferred | (28) | 206 | 279 |
State: | |||
Current | 5 | (2) | 3 |
Deferred | (7) | 18 | 14 |
Foreign: | |||
Current | 1 | 1 | 4 |
Total Income Tax Expense/(Benefit) | $(29) | $222 | $310 |
The reconciliations of income tax computed at the United States federal statutory tax rates to income tax provisionexpense/(benefit) for the years ended December 31, 2001, 2000 1999 and 19981999 are as follows (in millions):
Amount | Percentage | |||||
2000 | 1999 | 1998 | 2000 | 1999 | 1998 | |
Income tax provision at United States statutory rates | $199 | $279 | $227 | 35.0% | 35.0% | 35.0% |
State income tax provision (net of federal benefit) | 10 | 12 | 10 | 1.8 | 1.5 | 1.5 |
Meals and entertainment disallowance | 10 | 11 | 10 | 1.8 | 1.3 | 1.5 |
Other | 3 | 8 | 1 | 0.3 | 1.1 | 0.3 |
Income tax provision, net | $222 | $310 | $248 | 38.9% | 38.9% | 38.3% |
Amount | Percentage | |||||
2001 | 2000 | 1999 | 2001 | 2000 | 1999 | |
Income tax expense/(benefit) at United States statutory rates | $(40) | $199 | $279 | 35.0% | 35.0% | 35.0% |
State income tax expense/ (benefit) (net of federal benefit) |
(2) |
10 | 12 | 1.8 | 1.8 |
1.5 |
Meals and entertainment disallowance | 11 | 10 | 11 | (9.7) | 1.8 | 1.3 |
Other | 2 | 3 | 8 | (1.9) | 0.3 | 1.1 |
Income tax expense/(benefit), net | $ (29) | $222 | $310 | 25.2% | 38.9% | 38.9% |
The significant component of the provision for income taxes for the year ended December 31, 2000, 1999 and 1998 was a deferred tax provision of $224 million, $293 million and $231 million, respectively. The provision for income taxes for each of the years ended December 31, 2000, 1999 and 1998 also reflects a current tax provision (benefit) in the amount of $(2) million, $17 million and $17 million, respectively, as the Company is in an alternative minimum tax position for federal income tax purposes and pays current state and foreign income tax.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the related amounts used for income tax purposes. Significant components of the Company'sour deferred tax liabilities and assets as of December 31, 20002001 and 19992000 are as follows (in millions):
2000 | 1999 | 2001 | 2000 | |
Spare parts and supplies, fixed assets and intangibles | $ 812 | $ 590 | $ 967 | $ 812 |
Deferred gain | 67 | 61 | 68 | 67 |
Capital and safe harbor lease activity | 90 | 73 | 99 | 90 |
Other, net | 95 | 69 | 115 | 95 |
Gross deferred tax liabilities | 1,064 | 793 | 1,249 | 1,064 |
Accrued liabilities | (223) | (254) | (374) | (223) |
Net operating loss carryforwards | (366) | (266) | (532) | (366) |
Investment tax credit carryforwards | (45) | (27) | (45) | |
Minimum tax credit carryforward | (43) | (46) | (43) | |
Gross deferred tax assets | (677) | (611) | (976) | (677) |
Valuation allowance | 263 | 263 | 245 | 263 |
Net deferred tax liability | 650 | 445 | 518 | 650 |
Less: current deferred tax asset | (137) | (145) | (192) | (137) |
Non-current deferred tax liability | $ 787 | $ 590 | $ 710 | $ 787 |
At December 31, 2000, the Company2001, we had estimated tax net operating losses ("NOLs") of $1$1.5 billion for federal income tax purposes that will expire through 20212022 and federal investment tax credit carryforwards of $45$27 million that will expire through 2001.in 2002. Due to anour ownership change of the Company on April 27, 1993, the ultimate utilization of the Company'sour NOLs and investment tax credits may be limited. Reflecting this limitation, the Companywe had a valuation allowance of $245 million and $263 million at December 31, 2001 and 2000, respectively. The change in valuation allowance during 2001 relates to previously reserved credits that expired in 2001 resulting in the removal of both the deferred tax asset and 1999.the related valuation allowance.
The Company hasWe have consummated several transactions whichthat resulted in the recognition of NOLs of the Company'sour predecessor. To the extent the Companywe were to determine in the future that additional NOLs of the Company'sour predecessor could be recognized in the accompanying consolidated financial statements, such benefit would reduce the value ascribed to routes gates and slots.
airport operating rights.
NOTE 12 - ACCRUALS FOR AIRCRAFT RETIREMENTSFLEET IMPAIRMENT LOSSES, SEVERANCE AND EXCESS FACILITIESOTHER SPECIAL CHARGES
In 2001, we recorded a $146 million charge for fleet impairment losses, severance and other special charges including a fleet impairment loss of approximately $61 million associated primarily with the impairment of various owned aircraft and spare engines. The aircraft in the impairment include all of our owned DC-10-30, ATR-42, EMB-120 and Boeing 747 and 727 aircraft.
DuringAs a result of the fourth quarterevaluations that were performed, we determined that the expected cash flows are not sufficient to recover the carrying value of the assets, and therefore these aircraft are impaired as defined by SFAS 121. Consequently, the original cost basis of these aircraft and related items was reduced to reflect their estimated fair market value. In determining the fair market value of these assets, we considered recent transactions involving sales of similar aircraft and market trends in aircraft dispositions.
We also recorded a special charge in 2001 totaling $63 million for the following:
These charges are recorded in Fleet impairment losses, severance and other special charges in the accompanying consolidated statements of operations.
Also, in September 2001, and as a consequence of the September 11, 2001 terrorist attacks, we recorded a special non-operating charge of $22 million related to the impairment of investments in some of our affiliates and the uncollectibility of related notes receivable. This charge is included in Non-operating Income (Expense) - Other, in the accompanying consolidated statements of operations.
In 1999, the Companywe made the decision to accelerate the retirement of six DC-10-30 aircraft and other items in 1999 and the first half of 2000 and to dispose of related excess inventory. In addition, the market value of certain Boeing 747 aircraft that we no longer operated by the Company had declined. As a result of these items and certain other fleet-related items, the Companywe recorded a fleet disposition/impairment loss of $81 million in the fourth quarter of 1999. Approximately $52 million of the $81 million charge related to the impairment of owned or capital leased aircraft and related inventory held for disposal with a carrying amount of $77 million. The remaining $29 million of the charge related primarily to costs expected to be incurred related to the return of leased aircraft. As of December 31, 2000, the remaining accrual for the 1999 fleet disposition/impairment loss totaled $8 million.
In August 1998, the Company announced that CMI planned to accelerate the retirement of its four Boeing 747 aircraft by April 1999 and its remaining thirteen Boeing 727 aircraft by December 2000. In addition, Express accelerated the retirement of certain turboprop aircraft to the year 2000, including its fleet of 32 EMB-120 turboprop aircraft, as regional jets are acquired to replace turboprops. In connection with its decision to accelerate the replacement of these aircraft, the Company performed evaluations to determine, in accordance with SFAS 121, whether future cash flows (undiscounted and without interest charges) expected to result from the use and eventual disposition of these aircraft would be less than the aggregate carrying amount of these aircraft and the related assets. As a result of the evaluation, management determined that the estimated future cash flows expected to be generated by these aircraft would be less than their carrying amount, and therefore these aircraft are impaired as defined by SFAS 121. Consequently, the original cost basis of these aircraft and related items was reduced to reflect the fair market value at the date the decision was made, resulting in a $59 million fleet dispos ition/impairment loss. In determining the fair market value of these assets, the Company considered recent transactions involving sales of similar aircraft and market trends in aircraft dispositions. The remaining $63 million of the fleet disposition/impairment loss includes cash and non-cash costs related primarily to future commitments on leased aircraft past the dates they will be removed from service and the write-down of related inventory to its estimated fair market value. The combined charge of $122 million was recorded in the third quarter of 1998. As of December 31, 2000, the remaining accrual for the 1998 fleet disposition/impairment loss totaled $17 million.
The remaining balance of accruals for aircraft retirements and excess facilities at December 31, 2000 relates to the 1994 accrual for fleet disposition/impairment loss and underutilized facilities of $29 million.
Significant activity related to these accruals during the years ended December 31, 2001, 2000 1999 and 19981999 were limited to cash payments incurred.
NOTE 13 - STABILIZATION ACT GRANT
On September 21, 2001, Congress passed, and the President subsequently signed into law, the Air Transportation Safety and System Stabilization Act (the "Stabilization Act"), which provides, among other matters, for $5 billion in payments to compensate U.S. air carriers for losses incurred by the air carriers as a result of the September 11, 2001 terrorist attacks. We recognized a $417 million grant under the Stabilization Act for the year ended December 31, 2001, approximately $354 million of which we received in cash. We expect to receive the remaining cash in the first quarter of 2002. The grant is for the direct losses incurred beginning on September 11, 2001, resulting from the FAA grounding, and for incremental losses incurred through December 31, 2001 as a direct result of the attacks. The grant is included in Stabilization Act grant in the accompanying consolidated statements of operations.
NOTE 1314 - COMMITMENTS AND CONTINGENCIES
Continental hasPurchase Commitments. We have substantial commitments for capital expenditures, including for the acquisition of new aircraft. As of December 31, 2000, Continental2001, we had agreed to acquire or lease a total of 86 Boeing jet aircraft through 2005. The Company anticipates taking delivery of 35 Boeing jet aircraft in 2001. Continental also has options for an additional 105 aircraft (exercisable subject to certain conditions). The estimated aggregate cost of the Company's firm commitments for 87 aircraft from Boeing, with an estimated cost of approximately $3.7 billion, after giving effect to the rescheduling discussed below. We expect that 20 of these aircraft is approximately $4 billion.
Continental currently planswill be delivered between January 2002 and May 2002. Thirteen of these 20 aircraft have been pre-financed, and we expect to finance its newthe remaining seven aircraft. We have agreed with Boeing to reschedule deliveries of the remaining 67 aircraft with a combination of enhanced pass through trust certificates, lease equityso that they will be delivered between late 2003 and other third-party financing, subject to availability and market conditions. As of December 31, 2000, Continental had approximately $890 million in financing arranged for such Boeing deliveries. Continental also has commitments or letters of intent formid 2008. We do not have backstop financing from Boeing or any other financing currently in place for approximately 23% of the anticipated remaining acquisition cost of future Boeing deliveries.67 aircraft. In addition, at December 31, 2000, Continental has2001, we had firm commitments to purchase 2622 spare engines related to the new Boeing aircraft for approximately $158$128 million, which will be deliverable through March 2005. However, furtherFurther financing will be needed to satisfy the Company'sour capital commitments for otherour aircraft and aircraft-related expenditures such as engines, spare parts, simulators and related items. There can be no assurance that sufficient financing will be available for all aircraft and other capital expenditures not covered by firm financing commitments. Deliveries of new Boeing aircraft are expected to increase aircraft rental, depreciation and interest costs while generating cost savings in the areas of maintenance, fuel and pilot training.
As of December 31, 2000, Express2001, our ExpressJet Airlines subsidiary had firm commitments for 178137 Embraer regional jets with options for an additional 100 Embraer regional jets exercisable through 2007. ExpressExpressJet anticipates taking delivery of 4151 regional jets in 2001.2002. The estimated cost of the Company'sour firm commitments for Embraer regional jets is approximately $3$2.6 billion. Neither Express nor ContinentalWe will not have any obligation to take any suchof these firm Embraer aircraft that are not financed by a third party and leased to Continental.us.
Financings and Guarantees. In August 2001, the City of Houston completed the offering of $324 million aggregate principal amount of tax-exempt special facilities revenue bonds to finance the construction of Terminal E at Bush Intercontinental Airport. In connection therewith, we entered into a long-term lease with the City of Houston requiring that upon completion of construction, with limited exceptions, we will make rental payments sufficient to service the related tax-exempt bonds through their maturity in 2029. Approximately $27 million of the bond proceeds have been expended as of December 31, 2001. During the construction period, we maintain certain risks related to our own actions or inactions while managing portions of the construction. Potential obligations associated with these risks are generally limited based upon certain percentages of construction costs incurred to date. We have also entered into a binding corporate guaranty with the bond trustee for the repayment of the principa l and interest on the bonds that becomes effective upon the occurrence of the completion of construction, our failure to comply with the lease agreement (which is within our control), or our termination of the lease agreement. Further, we have not assumed any condemnation risk, any casualty event risk (unless caused by us), or risk related to certain overruns (and in the case of cost overruns, our liability for the project would be limited to 89.9% of the capitalized costs) during the construction period. Accordingly, we are not considered the owner of the project and, therefore, have not capitalized the construction costs or recorded the debt obligation in our consolidated financial statements.
Proceeds from pass-through certificates can be used to fund the debt portion of a leveraged lease between a third-party lessor and us or to finance the purchase of an owned aircraft by us. Prior to the delivery of the aircraft, the proceeds are being held in a restricted depositary account that is bankruptcy-protected from our creditors, as well as from us in the event the bank holding the depositary account were to file for bankruptcy. Additionally, if we choose not to draw on the depositary account, the proceeds will be distributed back to the certificate holders without any penalty to us. Subsequent to the delivery of the aircraft, the proceeds will be used by third-party lessors to fund the debt portion of leveraged leases or to finance the purchase of owned aircraft by us, at which time either operating lease commitments for leased aircraft will be disclosed in the notes to our consolidated financial statements or owned aircraft and the related debt obligations will be reflected in our consolid ated balance sheets. As of December 31, 2001, approximately $655 million of the proceeds remained on deposit. The restricted cash and related debt are not reflected in our consolidated financial statements as they are neither our assets nor liabilities. If any funds remain as deposits at the end of the specified delivery periods, those funds will be distributed back to the certificate holders without payment or penalty to us.
Continental expects its cash outlays for 2001 capital expenditures, exclusiveWe are the guarantor of fleet plan requirements, toapproximately $1.6 billion aggregate approximately $326 million, primarily relating to software applicationprincipal amount of tax-exempt special facilities revenue bonds and automation infrastructure projects, aircraft modifications and mandatory maintenance projects, passenger terminal facility improvements and office, maintenance, telecommunications and ground equipment.interest thereon. These bonds, issued by various airport municipalities, are payable solely from our rentals paid under long-term agreements with the respective governing bodies.
Continental remainsWe remain contingently liable until December 1, 2015, on $196 million of long-term lease obligations offor US Airways, Inc. ("'s obligations under a lease agreement between US Airways")Airways and the Port Authority of New York and New Jersey related to the East End Terminal at LaGuardia Airportairport. These obligations include the payment of ground rentals to the Port Authority and the payment of principal and interest on $189 million par value special facilities revenue bonds issued by the Port Authority, which amount is included in New York.our total $1.6 billion guaranteed obligations described above. If US Airways defaulted on these obligations, Continentalwe could be required to cure the default, at which time itwe would have the right to occupy the terminal.
We have cargo facilities at Los Angeles International Airport, which we sublease to another carrier. If the carrier failed to comply with its obligations under the sublease, we would be required to perform those obligations. We have guaranteed the repayment of principal and interest on $24 million par value bonds related to this facility, which amount is included in our total $1.6 billion guaranteed obligations described above.
Employees. Approximately 41%44% of the Company'sour employees are covered by collective bargaining agreements. The Company'sCollective bargaining agreements between us and our mechanics and between both us and ExpressJet and our respective pilots are amendable in January 2002 and October 2002, respectively. In addition, collective bargaining agreements withbetween CMI and its CMI flight attendants (representing approximately 1% of the Company's employees) becamemechanics and fleet and passenger service employees were amendable in June 2000. The parties reached a tentative agreement, which was not ratified byMarch 2001. Negotiations were deferred due to the flight attendants.economic uncertainty following the September 11, 2001 terrorist attacks. Negotiations will resumehave recommenced with the International Brotherhood of Teamsters in early 2001. The Company continuesthe first quarter of 2002 and are scheduled to commence with the Air Line Pilots Association in the summer of 2002. We continue to believe that mutually acceptable agreements can be reached with such employees, although the ultimate outcome of the Company's negotiations is unknown at this time.
Other. We expect that our net cash outlays for 2002 capital expenditures, exclusive of fleet plan requirements, will total approximately $200 million, primarily relating to software application and automation infrastructure projects, aircraft modifications, passenger terminal facility improvements and office, maintenance, telecommunications and ground equipment.
As of December 31, 2001, we had 59 jet aircraft and 18 turboprop aircraft out of service from our fleet. The majority of these aircraft have been temporarily removed from service and we will continue to evaluate whether to return these temporarily grounded aircraft to service, which will primarily depend on demand and yield in the coming months. It is possible that all or a significant portion of these temporarily grounded aircraft will be permanently removed from service at a later date, which would result in special charges for impairment and lease exit costs. We could suffer additional impairment of operating aircraft and other long-lived assets in the future if the economic environment in which we operate does not continue to improve or further deteriorates due to unforeseen circumstances. The special charges for all or a significant portion of the temporarily grounded aircraft would, and any additional special charges for impairment of operating aircraft and other long-lived assets could, be m aterial.
Environmental Matters. In the third quarter of 2001, we recorded a $17 million charge, net of anticipated insurance recoveries, to provide additional reserves for potential environmental remediation costs. Reserves for estimated losses from environmental remediation are based primarily on third-party environmental studies and estimates as to the extent of the contamination and the nature of required remedial actions. Anticipated insurance proceeds are recorded as a receivable. Although we believe, based on currently available information, that our reserves for potential environmental remediation costs in excess of anticipated insurance proceeds are adequate, reserves could be adjusted as further information develops or circumstances change. In addition, certain of our insurers have denied coverage for environmental matters. We have sued them for coverage, and they have counterclaimed against us. We cannot currently calculate the increase that might be required in our environmental re serves or predict the outcome of our insurance dispute. However, we do not expect these items to materially impact our liquidity or our results of operations.
Legal Proceedings
. On July 25, 2000, a Concorde aircraft operated by Societe Air France ("Air France") crashed shortly after takeoff from France's Charles de Gaulle Airport,airport, killing 114 people, and destroyingmost of whom were tourists on board the aircraft.chartered aircraft, which was also destroyed. The interim investigation conducted byfinal investigative report of the French authorities issued January 15, 2002, suggests that one of the aircraft's tires burst after running over a small piece of metal believed by investigators to have come from one of our DC-10 aircraft that had taken off on the same runway a short time before the Concorde and that portions of the resulting debris struck the underside of a wing of the aircraft which caused the rupture of a fuel tank, leading to a fire and the crash. In early September 2000, Continental learned that a small piece of metal found on the runway after the Concorde took off is believed by the French authorities to have caused or contributed to the tire failure and is suspected by investigators to have come from a Continental DC-10 aircraft that had taken off on the same runway a short time before the Concorde.
Several lawsuits involving Continental have been filed to dateus are pending in connection with the accident, and Continental anticipates that additional suits will be filed against the Company in the future. This pending litigation isaccident. These cases are in preliminary stages. Continental is cooperating with French and U.S. authorities in the investigation of the accident. Although the outcome of these suits or any future litigation cannot be known at this time, Continental'sour costs to defend these matters and, the Company believes,we believe, any potential liability exposure are covered by insurance. Consequently, the Company doeswe do not expect this litigation or any additional suits that may arise from the accident to have a material adverse effect on the Company'sour financial position or results of operations.
The CompanyWe and/or certain of itsour subsidiaries are defendants in various lawsuits, including suits relating to certain environmental claims, the Company's consolidated Plan of Reorganization under Chapter 11 of the federal bankruptcy code which became effective on April 27, 1993, and proceedings arising in the normal course of business. While the outcome of these lawsuits and proceedings cannot be predicted with certainty and could have a material adverse effect on the Company'sour financial position, results of operations and cash flows, it is theour opinion, of management, after consulting with counsel, that the ultimate disposition of such suits will not have a material adverse effect on the Company'sour financial position, results of operations or cash flows.
NOTE 1415 - RELATED PARTY TRANSACTIONS
The following is a summary of significant related party transactions that occurred during 2001, 2000 1999 and 1998,1999, other than those discussed elsewhere in the Notes to Consolidated Financial Statements.
In December 2000, the Companywe sold itsour remaining investment in America West Holdings Corporation, a company in which David Bonderman, a director and stockholderone of the Company,our directors, holds a significant interest. The CompanyWe and America West Airlines, Inc. ("America West"), a subsidiary of America West Holdings Corporation entered into a series of agreements during 1994 related to code-sharing and ground handling that have created substantial benefits for both airlines. The services provided are considered normal to the daily operations of both airlines. As a result of these agreements, Continentalwe paid America West $25 million, $28 million and $25 million in 2001, 2000 and $20 million in 2000, 1999, and 1998, respectively, and America West paid Continental $30 million, $33 million and $31 million in 2001, 2000 and $27 million in 2000, 1999, and 1998, respectively.
In November 2000, Continentalwe entered into a number of agreements with Northwest Airlines Corporation and some of its affiliates under which itwe would repurchase most of itsour Class A common stock owned by Northwest. See Note 16. In November 1998, the Company and Northwest Airlines, Inc. ("Northwest Airlines"),we began implementing a long-term global alliance with Northwest Airlines, Inc. involving extensive code-sharing, frequent flyer reciprocity and other cooperative activities. The services provided are considered normal to the daily operations of both airlines. As a result of these activities, Continentalwe paid Northwest $486 million (including $450 million related to the repurchase of our Class A shares), $10 million in 2000 and $7 million in 2001, 2000 and 1999, respectively, and Northwest paid Continentalus $19 million, $14 million in 2000 and $9 million in 2001, 2000 and 1999, respectively.
Also in November 2000, Continentalwe entered into an agreement to pay 1992 Air, Inc. $10 million in cash for its sale to Continentalus of its right of first offer to purchase the shares of Class A common stock that the Companywe purchased from Northwest. This amount was paid in January 2001 in connection with our purchase of those shares. 1992 Air, Inc. is an affiliate of David Bonderman, one of Continental'sour directors. See Note 16.
During December 1999, Continentalwe entered into an equipment sales agreement with Copa for $8 million. The resulting note receivable is payable in quarterly installments through October 2002. The services provided are considered normal to the daily operations of both airlines. Copa paid Continentalus $0, $8 million in 2000 and $4 million in 2001, 2000 and 1999, and Continentalwe paid Copa approximately $1 million in each of 2001, 2000 and 1999.
In connection with Continental'sour investment in Gulfstream, Continentalwe purchased from Gulfstream, a ten-year $10 million convertible note, payable in quarterly installments of principal and interest totaling $0.4 million. ContinentalWe also purchased a short-term $3 million secured note, with interest paid quarterly. During 2001, 2000 and 1999, Continentalwe paid Gulfstream $3 million, $1 million and $1 million, respectively, and Gulfstream paid Continentalus $2 million, $16 million and $13 million, respectively, for services considered normal to the daily operations of both airlines.
Also during December 1999, under a sale and leaseback agreement with Gulfstream, ExpressExpressJet sold 25 Beech 1900-D aircraft to Gulfstream in exchange for Gulfstream's assumption of $81 million in debt. Express is leasing these aircraft fromIn addition, we have guaranteed approximately $17 million of debt for Gulfstream as of December 31, 2001.
In 2000, we entered into a marketing agreement with CIMO, Inc. (d/b/a Hotwire), a web-based travel services company. Two of our directors, David Bonderman and William Price, indirectly control significant equity interests in Hotwire. As of December 31, 2001, we owned approximately 9% of the equity interest in Hotwire. We sold Hotwire approximately $19 million and $1 million of air travel tickets during 2001 and 2000, respectively. Other airlines also own equity interests in Hotwire, and also sell air travel tickets to Hotwire. The distribution services provided by Hotwire are considered normal to the daily operations of both Hotwire and us.
In 2001, Orbitz, a comprehensive travel planning website, in which we have an 11% equity interest, became available to customers. We paid Orbitz approximately $2 million for periods ranging from eightservices during 2001 and consumers booked approximately $55 million of air travel on us via Orbitz. Other airlines also own equity interests in Orbitz and distribute air travel tickets through Orbitz. The distribution services provided by Orbitz are considered normal to 23 months.the daily operations of both Orbitz and us.
NOTE 1516 - SEGMENT REPORTING
Information concerning operating revenues by principal geographic areas is as follows (in millions):
2000 | 1999 | 1998 | 2001 | 2000 | 1999 | |
Domestic (U.S.) | $6,835 | $6,066 | $5,596 | $6,108 | $6,835 | $6,066 |
Atlantic | 1,370 | 1,102 | 995 | 1,179 | 1,370 | 1,102 |
Latin America | 1,022 | 860 | 769 | 1,024 | 1,022 | 860 |
Pacific | 672 | 611 | 567 | 658 | 672 | 611 |
$9,899 | $8,639 | $7,927 | $8,969 | $9,899 | $8,639 |
The Company attributesWe attribute revenue among the geographical areas based upon the origin and destination of each flight segment. The Company'sOur tangible assets consist primarily of flight equipment, which is mobile across geographic markets and, therefore, has not been allocated. Continental hasWe have one reportable operating segment (air transportation).
NOTE 16 - SUBSEQUENT EVENTS
On November 15, 2000, Continental entered into a number of agreements with Northwest and some of its affiliates under which it would, among other things, repurchase approximately 6.7 million shares of Class A common stock owned by Northwest, reclassify all issued shares of Class A common stock into Class B common stock, make other adjustments to its corporate and alliance relationship with Northwest Airlines, and issue to Northwest Airlines one share of preferred stock, designated as Series B preferred stock ("Series B preferred stock") with blocking rights relating to certain change of control transactions involving Continental and certain matters relating to Continental's rights plan. The transactions closed on January 22, 2001. The consideration paid to repurchase the Class A common stock owned by Northwest and to reclassify the issued Class A common stock to Class B common stock will be accounted for as an equity transaction. Under the agreements relating to the recapitalization, Continental and Northwest agreed to seek dismissal of the antitrust litigation brought by the U.S. Department of Justice against Northwest and Continental, which dismissal was granted on January 22, 2001.
Repurchase of Shares of Class A Common Stock. On January 22, 2001, Continental repurchased from Northwest and an affiliate 6,685,279 shares of Continental Class A common stock for an aggregate purchase price of $450 million in cash (or approximately $67 per share).
The shares repurchased represented approximately 77% of the total number of shares of Class A common stock owned by Northwest, excluding shares subject to a limited proxy held by Northwest. This limited proxy terminated upon the closing of the recapitalization. After giving effect to the repurchase and the reclassification of the issued shares of Class A common stock into Class B common stock, Northwest's general voting power with respect to Continental, including Northwest's right to vote certain shares under a limited proxy, was reduced from approximately 59.6% to approximately 7.2%. This percentage does not include the share of Series B preferred stock issued to Northwest Airlines in the recapitalization, which does not have general voting rights but instead has a special class vote on certain change of control transactions as described below.
Reclassification of Shares of Class A Common Stock. At the effective time of the recapitalization, the remaining 1,975,945 shares of Class A common stock owned by Northwest that Continental did not purchase, as well as all other issued shares of Class A common stock, were reclassified into Class B common stock at an exchange rate of 1.32 shares of Class B common stock per share of Class A common stock.
Issuance of Series B Preferred Stock. In connection with the transactions described above, including the amendment of the master alliance agreement, Continental issued to Northwest Airlines one share of Series B preferred stock for consideration of $100 in cash. The Series B preferred stock gives Northwest Airlines the right to vote, as a separate class, during the term of the master alliance agreement or, if earlier, until the Series B preferred stock becomes redeemable, on:
Except for the right to vote on any amendment to Continental's certificate of incorporation that would adversely affect the Series B preferred stock, and on any other matter as may be required by law, the Series B preferred stock does not have any other voting rights.
Purchase of Right of First Offer. In connection with the recapitalization, Continental paid 1992 Air, Inc. $10 million in cash for its sale to Continental of its right of first offer to purchase the shares of Class A common stock that the Company purchased from Northwest (which right terminated immediately after the recapitalization). 1992 Air, Inc. is an affiliate of David Bonderman, one of Continental's directors.
Standstill Agreement. In connection with the recapitalization, Northwest and certain of its affiliates have entered into a standstill agreement with the Company that contains standstill and conduct restrictions that are substantially similar to those previously contained in the corporate governance agreement that had been in place between the parties. Under the agreement, Northwest agreed to vote neutrally all of Continental's common stock owned by it after the recapitalization, except that Northwest will be free to vote its shares in its discretion with respect to a change of control of the Company, as defined in the Series B preferred stock certificate of designations, and will vote neutrally or as recommended by Continental's board of directors with respect to the election of directors. The standstill agreement provides that Northwest will be released from its obligations if Continental publicly announces that it is seeking, or has entered into an agreement with, a third party to acquire a majority of Continental's voting securities or all or substantially all of Continental's airline assets.
Amendment of the Rights Agreement. Continental has also amended its rights agreement to take into account, among other things, the effects of the recapitalization and to eliminate Northwest's status as an exempt person that would not trigger the provisions of the rights agreement.
NOTE 17 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited summarized financial data by quarter for 20002001 and 19992000 is as follows (in millions, except per share data):
Three Months Ended | ||||
March 31 | June 30 | September 30 | December 31 | |
2000 | ||||
Operating revenue | $2,277 | $2,571 | $2,622 | $2,429 |
Operating income | 54 | 279 | 254 | 97 |
Nonoperating income (expense), net | (31) | (29) | (30) | (23) |
Net income | 14 | 149 | 135 | 44 |
Earnings per common share: | ||||
Income before extraordinary charge | $0.21 | $2.52 | $2.29 | $0.74 |
Extraordinary charge, net of tax | - | (0.08) | (0.03) | - |
Net income (a) | $0.21 | $2.44 | $2.26 | $0.74 $2.26 |
Earnings per common share: | ||||
Income before extraordinary charge | $0.21 | $2.46 | $2.24 | $0.70 |
Extraordinary charge, net of tax | - | (0.07) | (0.03) | - |
Net income (a) | $0.21 | $2.39 | $2.21 | $0.70 $2.26 |
| Three Months Ended | |||
March 31 | June 30 | September 30 | December 31 | |
1999 | ||||
Operating revenue | $2,042 | $2,181 | $2,264 | $2,152 |
Operating income (loss) | 153 153 | 247 | 202 | (2) |
Income before cumulative effect of accounting changes | 85 | 132 | 104 | 167 |
Cumulative effect of accounting changes: | ||||
Start-up costs | (6) | - | - | - |
Sale of frequent flyer miles | (27) | - | - | - |
Net income | 52 | 132 | 104 | 167 |
Earnings per common share: | ||||
Income before cumulative effect of accounting changes (a) | $ 1.25 | $ 1.85 | $ 1.47 | $ 2.46 |
Cumulative effect of accounting changes, net of tax | (0.48) | - | - | - |
Net income (a) | $ 0.77 | $ 1.85 | $ 1.47 | $ 2.46 |
Earnings per common share: | ||||
Income before cumulative effect of accounting changes (a) | $ 1.13 | $ 1.73 | $ 1.44 | $ 2.42 |
Cumulative effect of accounting changes, net of tax | (0.42) | - | - | - |
Net income (a) | $ 0.71 | $ 1.73 | $ 1.44 | $ 2.42 |
Three Months Ended | ||||
March 31 | June 30 | September 30 | December 31 | |
2001 | ||||
Operating revenue | $2,451 | $2,556 | $2,223 | $1,739 |
Operating income (loss) | 76 | 137 | 87 | (156) |
Nonoperating income (expense), net | (57) | (57) | (75) | (69) |
Net income (loss) | 9 | 42 | 3 | (149) |
Basic earnings (loss) per share (a) | $0.17 | $0.77 | $0.06 | $(2.58) |
Diluted earnings (loss) per share (a) | $0.16 | $0.74 | $0.05 | $(2.58) |
2000 | ||||
Operating revenue | $2,277 | $2,571 | $2,622 | $2,429 |
Operating income | 63 | 286 | 263 | 117 |
Nonoperating income (expense), net | (40) | (36) | (39) | (43) |
Net income | 14 | 149 | 135 | 44 |
Basic earnings per share: | ||||
Income before extraordinary charge | $0.21 | $2.52 | $2.29 | $0.74 |
Extraordinary charge, net of tax | - | (0.08) | (0.03) | - |
Net income (a) | $0.21 | $2.44 | $2.26 | $0.74 $2.26 |
Diluted earnings per share : | ||||
Income before extraordinary charge | $0.21 | $2.46 | $2.24 | $0.70 |
Extraordinary charge, net of tax | - | (0.07) | (0.03) | - |
Net income (a) | $0.21 | $2.39 | $2.21 | $0.70 $2.26 |
During the fourth quarter of 2001, we recorded a special charge totaling $61 million related to fleet impairment and other charges. In addition, we recognized a $174 million grant under the Stabilization Act.
During the third quarter of 2001, we recorded a special charge totaling $63 million which included costs associated with furloughs and company-offered leaves, a charge for environmental remediation and costs associated with the closure and nonutilization of certain facilities and for some of our uncollectible receivables. In addition, we recorded a special non-operating charge of $22 million related to the impairment of investments in some of our affiliates and the uncollectibility of related notes receivable. Also in the third quarter of 2001, we recognized a $243 million grant under the Stabilization Act.
During the fourth quarter of 2000, Continentalwe recorded a $6 million gain ($9 million pre-tax) on the sale of aour right of first refusal to purchase certain shares of, and the Company'sour remaining investment in, America West Holdings.
Holdings Corporation.
During the third quarter of 2000, Continentalwe repurchased the remainder of itsour 9-1/2% senior unsecured notes, in addition to the early extinguishment of other debt, resulting in a $2 million extraordinary charge (net of income tax benefit) for early debt repayment.
During the second quarter of 2000, Continentalwe repurchased $188 million of itsour 9-1/2% senior unsecured notes, in addition to the early extinguishment of other debt, resulting in a $4 million extraordinary charge (net of income tax benefit) for early debt repayment.
During the first quarter of 1999, Continental recorded a $6 million cumulative effect of a change in accounting principle, net of tax, related to the write-off of pilot training costs.
In addition, during the first quarter of 1999, Continental recorded a $12 million gain ($20 million pre-tax) on the sale of a portion of the Company's interest in Equant.
During the fourth quarter of 1999, the Company changed its method of accounting for the sale of mileage credits under its frequent flyer program. Therefore, effective January 1, 1999, the Company recorded a $27 million cumulative effect of this change in accounting principle, net of tax.
During the fourth quarter of 1999, Continental recorded a $182 million gain ($297 million pre-tax) on the sale of its interest in AMADEUS and a $6 million net gain ($9 million pre-tax on other asset sales, including a portion of its interest in Equant.
Also, during the fourth quarter of 1999, Continental recorded a fleet disposition/impairment loss of $50 million ($81 million pre-tax).
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There were no changes in or disagreements on any matters of accounting principles or financial statement disclosure between the Companyus and itsour independent auditors during the registrant'sour two most recent fiscal years or any subsequent interim period.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Incorporated herein by reference from the Company'sour definitive proxy statement for the annual meeting of stockholders to be held on May 15, 2001.April 17, 2002.
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated herein by reference from the Company'sour definitive proxy statement for the annual meeting of stockholders to be held on May 15, 2001.April 17, 2002.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
Incorporated herein by reference from the Company'sour definitive proxy statement for the annual meeting of stockholders to be held on May 15, 2001.April 17, 2002.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated herein by reference from the Company'sour definitive proxy statement for the annual meeting of stockholders to be held on May 15, 2001.April 17, 2002.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
Report of Independent Auditors
Consolidated Statements of Operations for each of the Three Years in the Period Ended
December 31, 20002001
Consolidated Balance Sheets as of December 31, 20002001 and 19992000
Consolidated Statements of Cash Flows for each of the Three Years in the Period Ended
December 31, 20002001
Consolidated Statements of Common Stockholders' Equity for each of the Three Years
in the Period Ended December 31, 20002001
Notes to Consolidated Financial Statements
Report of Independent Auditors
Schedule II - Valuation and Qualifying Accounts
All other schedules have been omitted because they are inapplicable, not required, or the information is included elsewhere in the consolidated financial statements or notes thereto.
REPORT OF INDEPENDENT AUDITORS
We have audited the consolidated financial statements of Continental Airlines, Inc. (the "Company") as of December 31, 20002001 and 1999,2000, and for each of the three years in the period ended December 31, 2000,2001, and have issued our report thereon dated January 16, 20012002 (included elsewhere in this Form 10-K). Our audits also included the financial statement schedule for these related periods listed in Item 14(b) of this Form 10-K. This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Houston, Texas
January 16, 20012002
CONTINENTAL AIRLINES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2001, 2000, 1999, and 19981999
(In millions)
Allowance for Doubtful Receivables | Allowance for Obsolescence | Allowance for Doubtful Receivables | Allowance for Obsolescence | |
Balance, December 31, 1997 | $ 23 | $ 51 | ||
Additions charged to expense | 18 | 17 | ||
Deductions from reserve | (18) | (16) | ||
Other | (1) | (6) | ||
Balance, December 31, 1998 | 22 | 46 | $ 22 | $ 46 |
Additions charged to expense | 12 | 19 | 12 | 19 |
Deductions from reserve | (12) | (5) | (12) | (5) |
Other | (2) | (1) | (2) | (1) |
Balance, December 31, 1999 | 20 | 59 | 20 | 59 |
Additions charged to expense | 10 | 22 | 10 | 22 |
Deductions from reserve | (12) | (13) | (12) | (13) |
Other | 2 | (1) | 2 | (1) |
Balance, December 31, 2000 | $ 20 | $ 67 | 20 | 67 |
Additions charged to expense | 9 | 25 | ||
Deductions from reserve | (8) | |||
Other | 6 | (4) | ||
Balance, December 31, 2001 | $ 27 | $ 80 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CONTINENTAL AIRLINES, INC.
By/s/ LAWRENCE W. KELLNERJEFFREY J. MISNER
Lawrence W. KellnerJeffrey J. Misner
ExecutiveSenior Vice President and
Chief Financial Officer
(On behalf of Registrant)
Date:February 6, 200120, 2002
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 6, 2001.20, 2002.
Signature Capacity
/s/ GORDON M. BETHUNE Chairman and Chief Executive Officer
Gordon M. Bethune (Principal Executive Officer)
/s/ LAWRENCE W. KELLNER ExecutiveJEFFREY J. MISNER Senior Vice President and
Lawrence W. KellnerJeffrey J. Misner Chief Financial Officer
(Principal Financial Officer)
/s/ CHRIS KENNY Staff Vice President and Controller
Chris Kenny (Principal Accounting Officer)
THOMAS J. BARRACK, JR.* Director
Thomas J. Barrack, Jr.
DAVID BONDERMAN* Director
David Bonderman
/s/ GREGORY D. BRENNEMAN Director
Gregory D. Brenneman
KIRBYJON CALDWELL* Director
Kirbyjon Caldwell
PATRICK FOLEY* Director
Patrick Foley
/s/ LAWRENCE W. KELLNER Director
Lawrence W. Kellner
DOUGLAS McCORKINDALE* Director
Douglas McCorkindale
GEORGE G. C. PARKER* Director
George G. C. Parker
RICHARD W. POGUE* Director
Richard W. Pogue
WILLIAM S. PRICE III* Director
William S. Price III
DONALD L. STURM* Director
Donald L. Sturm
KAREN HASTIE WILLIAMS* Director
Karen Hastie Williams
CHARLES A. YAMARONE* Director
Charles A. Yamarone
*By/s/ LAWRENCE W. KELLNERSCOTT R. PETERSON
Lawrence W. KellnerScott R. Peterson
Attorney in-factin fact
February 6, 200120, 2002
INDEX TO EXHIBITS OF
CONTINENTAL AIRLINES, INC.
2.2 Modification of Debtors' Revised Second Amended Joint Plan of Reorganization dated March 12, 1993 -- incorporated by reference to Exhibit 2.2 to Continental's Current Report on Form 8-K, dated April 16, 1993 (File no. 0-9781) (the "4/93 8-K").
2.3 Second Modification of Debtors' Revised Second Amended Joint Plan of Reorganization, dated April 8, 1993 -- incorporated by reference to Exhibit 2.3 to the 4/93 8-K.
3.1(a) Certificate of Designation of Series A Junior Participating Preferred Stock, included as Exhibit A to Exhibit 3.1.
3.1(b) Certificate of Amendment of Certificate of Designation of Series A Junior Participating Preferred Stock. (3)
3.1(b)3.1(c) Certificate of Designation of Series B Preferred Stock. (3)Stock -- incorporated by reference to Exhibit 3.1(b) to the 2000 10-K.
3.1(c)3.1(d) Form of Series B Preferred Stock Certificate. (3)Certificate -- incorporated by reference to Exhibit 3.1(c) to the 2000 10-K.
3.2
4.4(a) Amendment dated November 20, 1998 to the Amended and Restated Registration Rights Agreement, among the Company, Air Partners and Northwest -- incorporated by reference to Exhibit 99.5 to Continental's Current Report on Form 8-K dated November 20, 1998.
4.4(b) Amendment dated November 15, 2000 to the Amended and Restated Registration Rights Agreement, among the Company, Air Partners and Northwest -- incorporated by reference to Exhibit 99.9 to the 11/00 8-K.
4.54.4 Warrant Agreement dated as of April 27, 1993, between Continental and Continental as warrant agent -- incorporated by reference to Exhibit 4.7 to the 4/93 8-K.Continental's Current Report on Form 8-K, dated April 16, 1993 (File no. 0-9781).
4.64.5 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, Airlines, Inc., regarding Terminal C (the "Terminal C Lease") -- incorporated by reference to Exhibit 10.61 to theContinental's Annual Report on Form 10-K (File No. 0-9781) of People Express, Airlines, Inc. for the year ended December 31, 1984.
10.1(a) Supplemental Agreement Nos. 1 through 6 to the Terminal C Lease -- incorporated by reference to Exhibit 10.3 to Continental's Annual Report on Form 10-K (File No. 1-8475) for the year ended December 31, 1987 (the "1987 10-K").
10.1(b) Supplemental Agreement No. 7 to the Terminal C Lease -- incorporated by reference to Exhibit 10.4 to Continental's Annual Report on Form 10-K (File No. 1-8475) for the year ended December 31, 1998.
10.1(c) Supplemental Agreements No. 8 through 11 to the Terminal C Lease -- incorporated by reference to Exhibit 10.10 to the 1993 S-1.
10.1(d) Supplemental Agreements No. 12 through 15 to the Terminal C Lease -- incorporated by reference to Exhibit 10.2(d) to Continental's Annual Report on Form 10-K (File no. 0-9781) for the 1995 10-K.
year ended December 31, 1995.
10.1(e) Supplemental Agreement No. 16 to the Terminal C Lease -- incorporated by reference to Exhibit 10.1(e) to Continental's Annual Report on Form 10-K for the year ended December 31, 1997 (File no. 0-9781) (the "1997 10-K").
10.1(f) Supplemental Agreement No. 17 to the Terminal C Lease -- 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. 0-9781) (the "1999 10-K").
10.3* Employment Agreement between the Company and Gordon M. Bethune, dated as of July 25, 2000 -- incorporated by reference to Exhibit 10.1 to Continental's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 (File no. 0-9781) (the "2000 Q-3 10-Q").
10.4* Employment Agreement between the Company and Gregory D. Brenneman, dated as of July 25, 2000 -- incorporated by reference to Exhibit 10.2 to the 2000 Q-3 10-Q.
10.5* Employment Agreement dated as of July 25, 2000 between the Company and Lawrence W. Kellner -- incorporated by reference to Exhibit 10.3 to the 2000 Q-3 10-Q.
10.6*10.5* Employment Agreement dated as of July 25, 2000 between the Company and C.D. McLean -- incorporated by reference to Exhibit 10.4 to the 2000 Q-3 10-Q.
10.7*10.6* Employment Agreement dated as of July 25, 2000 between the Company and Jeffery A. Smisek -- incorporated by reference to Exhibit 10.5 to the 2000 Q-3 10-Q.
10.7* Employment Agreement dated as of July 25, 2000 between the Company and Michael H. Campbell. (3)
10.8* Executive Bonus Program -- incorporated by reference to Appendix B toEmployment Agreement between the Company's proxy statement relating its annual meetingCompany and Gregory D. Brenneman, dated as of stockholders held on June 26, 1996.
10.8(a)* Amendment of Executive Bonus Program effective January 1, 1999July 25, 2000 -- incorporated by reference to Exhibit 10.2 to Continental's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 (File no. 0-9781) (the "1999 Q-1 10-Q").
10.8(b)* Amendment of Executive Bonus Program dated February 8, 2000 -- incorporated by reference to Exhibit 10.14(b) to the 1999 10-K.
Q-3 10-Q.
10.9* Continental Airlines, Inc. 1994 Incentive Equity Plan ("1994 Equity Plan") -- incorporated by reference to Exhibit 4.3 to the Company's Form S-8 Registration Statement (No. 33-81324).
10.9(a)* Form of Employee Stock Option Grant pursuant to the 1994 Equity Plan -- incorporated by reference to Exhibit 10.10(e) to the 1997 10-K.
10.9(b)* Form of Outside Director Stock Option Grant pursuant to the 1994 Equity Plan -- incorporated by reference to Exhibit 10.10(f) to the 1997 10-K.
10.10* Continental Airlines, Inc. 1997 Stock Incentive Plan ("1997 Incentive Plan") -- incorporated by reference to Exhibit 4.3 to Continental's Form S-8 Registration Statement (No. 333-23165).
10.10(a)* Form of Employee Stock Option Grant pursuant to the 1997 Incentive Plan -- incorporated by reference to Exhibit 10.11(b)10.1 to Continental's Quarterly Report on Form 10-Q for the 1997 10-K.
quarter ended September 30, 2001 (File no. 0-9781) (the "2001 Q-3 10-Q").
10.10(b)* Form of Outside Director Stock Option Grant pursuant to the 1997 Incentive Plan -- incorporated by reference to Exhibit 10.11(c) to the 1997 10-K.
10.11* Amendment and Restatement of the 1994 Equity Plan and the 1997 Incentive Plan -- incorporated by reference to Exhibit 10.19 to Continental's Annual Report on Form 10-K (File no. 0-9781) for the year ended December 31, 1998 10-K.
("1998 10-K").
10.12* Continental Airlines, Inc. 1998 Stock Incentive Plan ("1998 Incentive Plan") -- incorporated by reference to Exhibit 4.3 to Continental's Form S-8 Registration Statement (No. 333-57297) (the "1998 S-8").
10.12(a)* Amendment No. 1 to 1998 Incentive Plan, 1997 Incentive Plan and 1994 Incentive Plan -- 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. 0-9781) (the "2001 Q-2 10-Q").
10.12(a)10.12(b)* Form of Employee Stock Option Grant pursuant to the 1998the1998 Incentive Plan, as amended -- incorporated by reference to Exhibit 4.410.2 to the 1998 S-8.
2001 Q-3 10-Q.
10.13* Amended and Restated Continental Airlines, Inc. Deferred Compensation Plan -- incorporated by reference to Exhibit 10.19 to the 1999 10-K.
10.13(a)* Amendment dated November 27, 2001 to Deferred Compensation Plan. (3)
10.14* Continental Airlines, Inc. Incentive Plan 2000, as amended and restated ("Incentive Plan 2000") -- incorporated by reference to Exhibit 10.2099.1 to Continental's Current Report on Form 8-K dated March 27, 2000 (File no. 0-9781).
10.14(a)* Amendment No. 1 to Incentive Plan 2000 as amended and restated -- incorporated by reference to Exhibit 10.1 to the 1999 10-K.2001 Q-2 10-Q.
10.14(a)10.14(b)* Form of employee stockEmployee Stock Option Agreement and Award Notice pursuant to the Incentive Plan 2000. (3)2000 -- incorporated by reference to Exhibit 10.3 to the 2001 Q-3 10-Q.
10.14(b)10.14(c)* Form of Outside Director Stock Option Agreement pursuant to the Incentive Plan 2000. (3)2000 -- incorporated by reference to Exhibit 10.14(b) to the 2000 10-K.
10.14(c)10.14(d)* Form of Restricted Stock Agreement and Award Notice pursuant to the Incentive Plan 2000. (3)
2000 -- incorporated by reference to Exhibit 10.4 to the 2001 Q-3 10-Q.
10.15* Continental Airlines, Inc. Executive Bonus Performance Award Program, as amended -- incorporated by reference to Exhibit 10.2110.5 to the 1999 10-K.
2001 Q-3 10-Q.
10.15(a)* Form of Executive Bonus Performance Award Notice. (3)
Notice -- incorporated by reference to Exhibit 10.15(a) to the 2000 10-K.
10.16* Continental Airlines, Inc. Long Term Incentive Performance Award Program, as amended -- incorporated by reference to Exhibit 10.2210.6 to the 1999 10-K.
2001 Q-3 10-Q.
10.16(a)* Form of Long Term Incentive Performance Award Notice. (3)
Notice -- incorporated by reference to Exhibit 10.16(a) to the 2000 10-K.
10.17* Continental Airlines, Inc. Officer Retention and Incentive Award Program. (3)
Program, as amended -- incorporated by reference to Exhibit 10.7(a) to the 2001 Q-3 10-Q.
10.17(a)* Form of Officer Retention and Incentive Award Notice. (3)
Notice -- incorporated by reference to Exhibit 10.7 to the 2001 Q-3 10-Q.
10.18* Form of Letter Agreement relating to certain flight benefits between the Company and each of its nonemployee directors. (3)directors -- incorporated by reference to Exhibit 10.18 to the 2000 10-K.
10.19* Letter agreement dated September 26, 2001 between the Company and Gordon M. Bethune -- incorporated by reference to Exhibit 10.9 to the 2001 Q-3 10-Q.
10.1910.20* Letter agreement dated September 26, 2001 between the Company and Lawrence W. Kellner -- incorporated by reference to Exhibit 10.10 to the 2001 Q-3 10-Q.
10.21 Purchase Agreement No. 1783, including exhibits and side letters, between the Company and The Boeing Company ("Boeing"), effective April 27, 1993, relating to the purchase of Boeing 757 aircraft ("P.A. 1783") -- incorporated by reference to Exhibit 10.2 to Continental's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993 (File no. 0-9781). (1)
10.19(a)10.21(a) Supplemental Agreement No. 4 to P.A. 1783, dated March 31, 1995 -- incorporated by reference to Exhibit 10.12(a) to Continental's Annual Report on Form 10-K for the year ended December 31, 1994 (File no. 0-9781) (the "1994 10-K"). (1)
10.19(b)10.21(b) Supplemental Agreement No. 6 to P.A. 1783, dated June 13, 1996 -- incorporated by reference to Exhibit 10.6 to Continental's Quarterly 10-Q for the quarter ending June 30, 1996 (File no. 0-9781) (the "1996 Q-2 10-Q"). (1)
10.19(c)10.21(c) Supplemental Agreement No. 7 to P.A. 1783, dated July 23, 1996 -- incorporated by reference to Exhibit 10.6(a) to the 1996 Q-2 10-Q. (1)
10.19(d)10.21(d) Supplemental Agreement No. 8 to P.A. 1783, dated October 27, 1996 -- incorporated by reference to Exhibit 10.11(d) to Continental's Annual Report on Form 10-K for the year ended December 31, 1996 (File no. 0-9781) (the "1996 10-K"). (1)
10.19(e)10.21(e) Letter Agreement No. 6-1162-GOC-044 to P.A. 1783, dated March 21, 1997 -- incorporated by reference to Exhibit 10.4 to Continental's Quarterly Report on Form 10-Q for the quarter ending March 31, 1997 (File no. 0-9781) (the "1997 Q-1 10-Q"). (1)
10.19(f)10.21(f) Supplemental Agreement No. 9 to P.A. 1783, dated August 13, 1997 -- incorporated by reference to Exhibit 10.1 to Continental's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 (File no. 0-9781). (1)
10.19(g)10.21(g) Supplemental Agreement No. 10, including side letters, to P.A. 1783, dated October 10, 1997 -- incorporated by reference to Exhibit 10.13(g) to the 1997 10-K. (1)
10.19(h)10.21(h) Supplemental Agreement No. 11, including exhibits and side letters, to P.A. 1783, dated July 30, 1998 -- incorporated by reference to Exhibit 10.2 to Continental's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (File no. 0-9781) (the "1998 Q-3 10-Q"). (1)
10.19(i)10.21(i) Supplemental Agreement No. 12, including side letter, to P.A. 1783, dated September 29, 1998 -- incorporated by reference to Exhibit 10.23(i) to the 1998 10-K. (1)
10.19(j)10.21(j) Supplemental Agreement No. 13 to P.A. 1783, dated November 16, 1998 -- incorporated by reference to Exhibit 10.23(j) to the 1998 10-K. (1)
10.19(k)10.21(k) Supplemental Agreement No. 14, including side letter, to P.A. 1783, dated December 17, 1998 -- incorporated by reference to Exhibit 10.23(k) to the 1998 10-K. (1)
10.19(l)10.21(l) Supplemental Agreement No. 15, including side letter, to P.A. 1783, dated February 18, 1999 -- incorporated by reference to Exhibit 10.3 to Continental's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 (File no. 0-9781) (the "1999 Q-1 10-Q.10-Q"). (1)
10.19(m)10.21(m) Supplemental Agreement No. 16, including side letter, to P.A. 1783, dated July 2, 1999 -- incorporated by reference to Exhibit 10.7 to Continental's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 (File no. 0-9781) (the "1999 Q-3 10-Q.10-Q"). (1)
10.2010.22 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 the 1996 Q-2 10-Q. (1)
10.20(a)10.22(a) Supplemental Agreement No. 1 to P.A. 1951, dated October 10, 1996 -- incorporated by reference to Exhibit 10.14(a) to the 1996 10-K. (1)
10.20(b)10.22(b) Supplemental Agreement No. 2 to P.A. 1951, dated March 5, 1997 -- incorporated by reference to Exhibit 10.3 to the 1997 Q1 10-Q. (1)
10.20(c)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)
10.20(d)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)
10.20(e)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 Q-2 10-Q.(File no. 0-9781). (1)
10.20(f)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 the 1998 Q-3 10-Q. (1)
10.20(g)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)
10.20(h)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)
10.20(i)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. 0-9781). (1 )(1)
10.20(j)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)
10.20(k)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)
10.20(l)10.22(l) Supplemental Agreement No. 11, including side letters, to P.A. 1951, dated May 14, 1999 -- incorporated by reference to Exhibit 10.7 to the 1999 Q-2 10-Q. (1)
10.20(m)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)
10.20(n)10.22(n) Supplemental Agreement No. 13 to P.A. 1951, dated October 13, 1999. (1)
10.20(o)10.22(o) Supplemental Agreement No. 14 to P.A. 1951, dated December 13, 1999. (1)
10.20(p)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. 0-9781) (the "2000 Q-1 10-Q"). (1)
10.20(q)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)
10.20(r)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. 0-9781). (1)
10.20(s)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. 0-9781). (1)
10.20(t) Supplement10.22(t) Supplemental Agreement No. 19, including side letters, to P.A. 1951, dated October 31, 2000. (2)(3)2000 -- incorporated by reference to Exhibit 10.20(t) to the 2000 10-K. (1)
10.20(u) Supplement10.22(u) Supplemental Agreement No. 20, including side letters, to P.A. 1951, dated December 21, 2000.2000 -- 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. 0-9781) (the "2001 Q-1 10-Q"). (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. (2)(3)
10.2110.23 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)
10.21(a)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)
10.2210.24 Purchase Agreement No. 2060, including exhibits and side letters, between the Company and Boeing, dated October 10, 1997, relating to the purchase of Boeing 767 aircraft ("P.A. 2060") -- incorporated by reference to Exhibit 10.16 to the 1997 10-K. (1)
10.22(a)10.24(a) Supplemental Agreement No. 1 to P.A. 2060 dated December 18, 1997 -- incorporated by reference to Exhibit 10.16(a) to the 1997 10-K. (1)
10.22(b)10.24(b) Supplemental Agreement No. 2 to P.A. 2060 dated June 8, 1999 -- incorporated by reference to Exhibit 10.8 to the 1999 Q-2 10-Q. (1)
10.22(c)10.24(c) Supplemental Agreement No. 3 to P.A. 2060 dated October 31, 2000. (2)(3)2000 -- incorporated by reference to Exhibit 10.22(c) to the 2000 10-K. (1)
10.22(d)10.24(d) Supplemental Agreement No. 4 to P.A. 2060 dated December 1, 2000.2000 -- incorporated by reference to Exhibit 10.22(d) to the 2000 10-K. (1)
10.24(e) Supplemental Agreement No. 5 to P.A. 2060, dated February 14, 2001 -- incorporated by reference to Exhibit 10.2 to the 2001 Q-1 10-Q. (1)
10.24(f) Supplemental Agreement No. 6 to P.A. 2060, dated July 11, 2001 -- incorporated by reference to Exhibit 10.12 to the 2001 Q-3 10-Q. (1)
10.24(g) Supplemental Agreement No. 7 to P.A. 2060, dated August 31, 2001 -- incorporated by reference to Exhibit 10.13 to the 2001 Q-3 10-Q. (1)
10.24(h) Supplemental Agreement No. 8 to P.A. 2060, dated December 31, 2001. (2)(3)
10.2310.25 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)
10.23(a)10.25(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)
10.23(b)10.25(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)
10.23(c)10.25(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)
10.23(d)10.25(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)
10.23(e)10.25(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)
10.23(f)10.25(f) Supplemental Agreement No. 6, including side letter, to P.A. 2061, dated May 14, 1999 -- incorporated by reference to Exhibit 10.9 to the 1999 Q-2 10-Q. (1)
10.23(g)10.25(g) Supplemental Agreement No. 7, including side letter, to P.A. 2061, dated October 31, 2000. (2)(3)2000 -- incorporated by reference to Exhibit 10.23(g) to the 2000 10-K. (1)
10.25(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)
10.2410.26 Purchase Agreement No. 2211, including exhibits and side letters thereto, between the Company and Boeing, dated November 16, 1998, relating to the purchase of Boeing 767 aircraft ("P.A. 2211") -- incorporated by reference to Exhibit 10.28 to the 1998 10-K. (1)
10.24(a)10.26(a) Supplemental Agreement No. 1, including side letters to P.A. 2211, dated July 2, 1999 -- incorporated by reference to Exhibit 10.9 to the 1999 Q-2 10-Q. (1)
10.24(b)10.26(b) Supplemental Agreement No. 2, including side letters to P.A. 2211, dated October 31, 2000. (2)(3)2000 -- incorporated by reference to Exhibit 10.24(b) to the 2000 10-K. (1)
10.26(c) Supplemental Agreement No. 3, including side letters, to P.A. 2211, dated February 14, 2001 -- incorporated by reference to Exhibit 10.3 to the 2001 Q-1 10-Q. (1)
10.26(e) Supplemental Agreement No. 5, including side letters, to P.A. 2211, dated August 31, 2001 -- incorporated by reference to Exhibit 10.14 to the 2001 Q-3 10-Q. (1)
10.27 Purchase Agreement No. 2333, including exhibits and side letters thereto, between the Company and Boeing, dated December 29, 2000, relating to the purchase of Boeing 757 aircraft ("P.A. 2333"). (3)
10.26(a)10.28(a) Special Facilities Lease Agreement dated as of March 1, 1997 by and between the Company and the City of Houston, Texas regarding an automated people mover project at Bush Intercontinental -- incorporated by reference to Exhibit 10.30(a) to the 1998 10-K.
10.26(b)10.28(b) Amended and Restated Special Facilities Lease Agreement dated as of December 1, 1998 by and between the Company and the City of Houston, Texas regarding certain terminal improvements projects at Bush Intercontinental -- incorporated by reference to Exhibit 10.30(b) to the 1998 10-K.
10.26(c)10.28(c) Amended and Restated Special Facilities Lease Agreement dated December 1, 1998 by and between the Company and the City of Houston, Texas regarding certain airport improvement projects at Bush Intercontinental -- incorporated by reference to Exhibit 10.30(c) to the 1998 10-K.
10.28(d) Terminal E Lease and Special Facilities Lease Agreement dated as of August 1, 2001 between the Company and the City of Houston, Texas regarding George Bush Intercontinental Airport -- incorporated by reference to Exhibit 10.8 to the 2001 Q-3 10-Q.
10.29 Agreement and Lease dated as of May 1987, as supplemented, between the City of Cleveland, Ohio and Continental regarding Hopkins International -- incorporated by reference to Exhibit 10.6 to Continental's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993 (File no. 0-9781).
10.27(a)10.29(a) Special Facilities Lease Agreement dated as of October 24, 1997 by and between the Company and the City of Cleveland, Ohio regarding certain concourse expansion projects at Hopkins International (the "1997 SFLA") -- incorporated by reference to Exhibit 10.31(a) to the 1998 10-K.
10.27(b)10.29(b) First Supplemental Special Facilities Lease Agreement dated as of March 1, 1998, and relating to the 1997 SFLA -- incorporated by reference to Exhibit 10.1 to the 1999 Q-1 10-Q.
10.28(a)10.30(a) First Supplemental Special Facilities Lease Agreement dated as of March 1, 1998, and relating to the 1989 SFLA -- incorporated by reference to Exhibit 10.1(a) to the 1999 Q-3 10-Q.
10.28(b)10.30(b) Second Supplemental Special Facilities Lease Agreement dated as of March 1, 1998, and relating to the 1989 SFLA -- incorporated by reference to Exhibit 10.1(b) to the 1999 Q-3 10-Q.
F-1"). (1)
10.33(a)10.35(a) Amendment No. 1 to P.A. 3/96 dated September 26, 1996 -- incorporated by reference to Exhibit 10.3 to the Embraer F-1. (1)
10.33(b)10.35(b) Amendment No. 2 to P.A. 3/96 dated May 22, 1997 -- incorporated by reference to Exhibit 10.3 to the Embraer F-1. (1)
10.33(c)10.35(c) Amendment No. 3 to P.A. 3/96 dated August 20, 1997 -- incorporated by reference to Exhibit 10.3 to the Embraer F-1. (1)
10.33(d)10.35(d) Amendment No. 4 to P.A. 3/96 dated October 1, 1997 -- incorporated by reference to Exhibit 10.3 to the Embraer F-1. (1)
10.33(e)10.35(e) Amendment No. 5 to P.A. 3/96 dated November 12, 1997 -- incorporated by reference to Exhibit 10.3 to the Embraer F-1. (1)
10.33(f)10.35(f) Amendment No. 6 to P.A. 3/96 dated August 19, 1998 -- incorporated by reference to Exhibit 10.3 to the Embraer F-1. (1)
10.33(g)10.35(g) Amendment No. 7 to P.A. 3/96 dated February 19, 1999 -- incorporated by reference to Exhibit 10.3 to the Embraer F-1. (1)
10.33(h)10.35(h) Amendment No. 8 to P.A. 3/96 dated March 31, 1999 -- incorporated by reference to Exhibit 10.3 to the Embraer F-1. (1)
10.33(i)10.35(i) Amendment No. 9 to P.A. 3/96 dated October 29, 1999 -- incorporated by reference to Exhibit 10.3 to the Embraer F-1. (1)
10.33(j)10.35(j) Amendment No. 10 to P.A. 3/96 dated October 20, 1999 -- incorporated by reference to Exhibit 10.3 to the Embraer F-1. (1)
10.33(k)10.35(k) Amendment No. 11 to P.A. 3/96 dated December 15, 1999 -- incorporated by reference to Exhibit 10.3 to the Embraer F-1. (1)
10.33(l)10.35(l) Amendment No. 12 to P.A. 3/96 dated February 18, 2000 -- incorporated by reference to Exhibit 10.3 to the Embraer F-1. (1)
10.33(m)10.35(m) Amendment No. 13 to P.A. 3/96 dated April 28, 2000 -- incorporated by reference to Exhibit 10.3 to the Embraer F-1. (1)
10.33(n)10.35(n) Amendment No. 14 to P.A. 3/96 dated April 28, 2000 -- incorporated by reference to Exhibit 10.3 to the Embraer F-1. (1)
10.33(o)10.35(o) Amendment No. 15 to P.A. 3/96 dated July 25, 2000. (2)(3)2000 -- incorporated by reference to Exhibit 10.33(o) to the 2000 10-K. (1)
10.33(p)10.35(p) Amendment No. 16 to P.A. 3/96 dated July 24, 2000. (2)(3)2000 -- incorporated by reference to Exhibit 10.33(p) to the 2000 10-K. (1)
10.33(q)10.35(q) Amendment No. 17 to P.A. 3/96 dated November 7, 2000. (2)(3)2000 -- incorporated by reference to Exhibit 10.33(q) to the 2000 10-K. (1)
10.33(r)10.35(r) Amendment No. 18 to P.A. 3/96 dated November 17, 2000.2000 -- incorporated by reference to Exhibit 10.33(r) to the 2000 10-K. (1)
10.35(s) Amendment No. 19 to P.A. 3/96 dated July 31, 2001. (2)(3)
10.35(t) Amendment No. 20 to P.A. 3/96 dated July 31, 2001. (2)(3)
10.3410.35(u) Amendment No. 21 to P.A. 3/96 dated October 10, 2001. (2)(3)
10.35(v) Amendment No. 22 to P.A. 3/96 dated January 24, 2002. (2)(3)
10.36 Letter of Agreement No. GPJ-004/96 dated August 5, 1996 between Embraer and ExpressExpressJet ("L.A. 4/96") -- incorporated by reference to Exhibit 10.3 to the Embraer F-1. (1)
10.34(a)10.36(a) Amendment No. 1 to L.A. 4/96 dated August 31, 1996. (3)1996 -- incorporated by reference to Exhibit 10.34(a) to the 2000 10-K.
10.34(b)10.36(b) Amendment No. 2 to L.A. 4/96 and Amendment No. 1 to L.A. 4A/96 (defined below) dated August 31, 1996 between Embraer and Express.ExpressJet -- incorporated by reference to Exhibit 10.34(b) to the 2000 10-K. (1)
10.36(c) Amendment No. 3 to L.A. 4/96 and Amendment No. 1 to L.A. 4A/96 (defined below) dated January 24, 2002 between Embraer and ExpressJet. (2)(3)
10.3510.37 Letter of Agreement No. PCJ-004A/96 dated August 31, 1996 among the Company, ExpressContinental, ExpressJet and Embraer ("L.A. 4A/96") -- incorporated by reference to Exhibit 10.3 to the Embraer F-1.
10.37(a)10.39(a) Amendment No. 1 to P.A. 54/98 dated July 30, 1999 -- incorporated by reference to Exhibit 10.3 to the Embraer F-1. (1)
10.37(b)10.39(b) Amendment No. 2 to P.A. 54/98 dated July 30, 1999 -- incorporated by reference to Exhibit 10.3 to the Embraer F-1. (1)
10.37(c)10.39(c) Amendment No. 3 to P.A. 54/98 dated October 21, 1999 -- incorporated by reference to Exhibit 10.3 to the Embraer F-1. (1)
10.37(d)10.39(d) Amendment No. 4 to P.A. 54/98 dated January 31, 2000 -- incorporated by reference to Exhibit 10.3 to the Embraer F-1. (1)
10.37(e)10.39(e) Amendment No. 5 to P.A. 54/98 dated February 15, 2000 -- incorporated by reference to Exhibit 10.3 to the Embraer F-1. (1)
10.37(f)10.39(f) Amendment No. 6 to P.A. 54/98 dated April 17, 2000 -- incorporated by reference to Exhibit 10.3 to the Embraer F-1. (1)
10.37(g)10.39(g) Amendment No. 7 to P.A. 54/98 dated July 24, 2000. (2)(3)2000 -- incorporated by reference to Exhibit 10.37(g) to the 2000 10-K. (1)
10.37(h)10.39(h) Amendment No. 8 to P.A. 54/98 dated November 7, 2000. (2)(3)2000 -- incorporated by reference to Exhibit 10.37(h) to the 2000 10-K. (1)
10.37(i)10.39(i) Amendment No. 9 to P.A. 54/98 dated September 20, 2000. (2)(3)2000 -- incorporated by reference to Exhibit 10.37(i) to the 2000 10-K. (1)
10.37(j)10.39(j) Amendment No. 10 to P.A. 54/98 dated November 17, 2000.2000 -- incorporated by reference to Exhibit 10.37(j) to the 2000 10-K. (1)
10.39(k) Amendment No. 11 to P.A. 54/98 dated July 31, 2001. (2)(3)
10.39(l) Amendment No. 12 to P.A. 54/98 dated July 31, 2001. (2)(3)
10.3810.39(m) Amendment No. 13 to P.A. 54/98 dated October 10, 2001. (2)(3)
10.39(n) Amendment No. 14 to P.A. 54/98 dated January 24, 2002. (3)
10.40 Letter of Agreement DCT-055/98 dated December 23, 1998 between ExpressExpressJet and Embraer ("L.A. 55/98"). (2)(3) -- incorporated by reference to Exhibit 10.38 to the 2000 10-K. (1)
10.38(a)10.40(a) Amendment No. 1 to L.A. 55/98 dated July 24, 2000. (2)(3)2000 -- incorporated by reference to Exhibit 10.38(a) to the 2000 10-K. (1)
10.3910.41 EMB-135 Financing Letter of Agreement dated March 23, 2000 among the Company, ExpressExpressJet and Embraer ("L.A. 135"). (2)(3) -- incorporated by reference to Exhibit 10.39 to the 2000 10-K. (1)
10.39(a)10.41(a) Amendment No. 1 to L.A. 135. (2)(3)135 -- incorporated by reference to Exhibit 10.39(a) to the 2000 10-K. (1)
10.39(b)10.41(b) Amendment No. 2 to L.A. 135. (2)(3)135 -- incorporated by reference to Exhibit 10.39(b) to the 2000 10-K. (1)
10.39(c)10.41(c) Amendment No. 3 to L.A. 135 dated October 27, 2000. (2)(3)2000 -- incorporated by reference to Exhibit 10.39(c) to the 2000 10-K. (1)
10.40
10.43* Continental Airlines, Inc. 1997 Employee Stock Purchase Plan, as amended and restated through November 27, 2001. (3)
10.44* Letter Agreement 6-1162-CHL-048 between the Company and Boeing, dated February 8, 2002, amending P.A. 1951, 2333, 2211, 2060 and 2061. (2) (3)
_______________
*These exhibits relate to management contracts or compensatory plans or arrangements.