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þ Filed by a Party other than the Registranto Check the appropriate box: o Preliminary Proxy Statement oConfidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) þ Definitive Proxy Statement o Definitive Additional Materials o Soliciting Material Pursuant to §240.14a-12 | |
Continental Airlines, Inc.
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SEC 1913 | Persons who are to respond to the collection of information contained in this form are not required to respond unless the form displays a currently valid OMB control number. |
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PROPOSAL 2: AMENDMENT OF THE AMENDED AND RESTATED CERTIFICATE OF INCORPORATION | 34 | ||||
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PROPOSAL 3: AMENDMENT OF THE INCENTIVE PLAN 2000 | 36 | ||||
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PROPOSAL 4: RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS | 44 | ||||
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OTHER MATTERS | 47 | ||||
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Appendix A: Consolidated Financial Statements | A-1 | ||||
Appendix B: Audit Committee Charter (as amended and restated through February 11, 2005) | B-1 | ||||
Appendix C: Amendment to Amended and Restated Certificate of Incorporation | C-1 | ||||
Appendix D: Amendment to Amended and Restated Incentive Plan 2000 | D-1 | ||||
E-1 |
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• | an individual who is a citizen of the United States; | |
• | a partnership, each of whose partners is an individual who is a citizen of the United States; or | |
• | a corporation or association organized under the laws of the United States or a state, the District of Columbia, or a territory or possession of the United States, of which the president and at least two-thirds of the board of directors and other managing officers are citizens of the United States, which is under the actual control of citizens of the United States, and in which at least 75% of the voting interest is owned or controlled by persons who are citizens of the United States. |
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• | by submitting written notice to our Secretary before the meeting that you have revoked your proxy; |
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• | by timely submitting another proxy via the internet, by telephone or by mail that is later dated and, if by mail, that is properly signed; or | |
• | by voting in person at the meeting, provided you have a valid proxy to do so if you are not the record holder of the shares. |
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Beneficial | |||||||||
Ownership | |||||||||
of Class B | Percent | ||||||||
Name and Address of Beneficial Holder | Common Stock | of Class | |||||||
Amaranth LLC | 4,880,300 | (1) | 7.2 | % | |||||
c/o Amaranth Advisors L.L.C. One American Lane Greenwich, CT 06831 | |||||||||
Barclays Global Investors, NA | 3,424,653 | (2) | 5.1 | % | |||||
45 Fremont Street San Francisco, CA 94105 | |||||||||
Dimensional Fund Advisors Inc. | 4,787,942 | (3) | 7.2 | % | |||||
1299 Ocean Avenue, 11th Floor Santa Monica, CA 90401 | |||||||||
Harbert Convertible Arbitrage Master Fund, Ltd. | 3,653,574 | (4) | 5.5 | % | |||||
c/o HMC Convertible Arbitrage Offshore Manager, L.L.C. 555 Madison Avenue, 16th Floor New York, NY 10022 | |||||||||
Mellon Financial Corporation | 5,113,191 | (5) | 7.6 | % | |||||
One Mellon Center Pittsburgh, PA 15258 | |||||||||
Vanguard Windsor Funds-Vanguard Windsor Fund | 5,242,500 | (6) | 7.8 | % | |||||
100 Vanguard Blvd. Malvern, PA 19355 | |||||||||
Wellington Management Company, LLP | 9,223,200 | (7) | 13.8 | % | |||||
75 State Street Boston, MA 02109 |
Beneficial | ||||||||
Ownership | ||||||||
of Class B | Percent | |||||||
Name and Address of Beneficial Holder | Common Stock | of Class | ||||||
OppenheimerFunds, Inc. | 9,839,350 | (1) | 11.5% | |||||
Two World Financial Center 225 Liberty Street, 11th Floor New York, NY 10018 | ||||||||
Wellington Management Company, LLP | 9,298,080 | (2) | 10.9% | |||||
75 State Street Boston, MA 02109 | ||||||||
Vanguard Windsor Funds-Vanguard Windsor Fund | 7,731,500 | (3) | 9.1% | |||||
100 Vanguard Blvd. Malvern, PA 19355 | ||||||||
Mellon Financial Corporation | 4,533,178 | (4) | 5.3% | |||||
One Mellon Center Pittsburgh, PA 15258 |
(1) | According to an amendment to Schedule 13G filed with the | |
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According to an amendment to Schedule 13G filed with the SEC | ||
(3) | According to an amendment to Schedule 13G filed with the SEC on February 13, 2006, VWF, an investment company, may be deemed to beneficially own all of the shares reflected in the table. It reported that it has sole power to vote all of those shares and that no shares are subject to shared voting power or sole or shared dispositive power. The shares reported in the table as held by Wellington Management Company, LLP include the shares reported in the table as held by VWF. | |
(4) | According to an amendment to Schedule 13G filed with the SEC on February 15, 2006, Mellon Financial Corporation (“Mellon”) may be deemed to beneficially own, through its direct and indirect subsidiaries, up to 4,533,178 shares of our common stock. Of such shares, Mellon reported sole voting power with respect to 2,996,679 shares, sole dispositive power with respect to 2,999,813 shares, and shared voting and dispositive power with respect to 1,410,000 shares. |
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Amount and | ||||||||
Nature of | ||||||||
Beneficial | Percent | |||||||
Name of Beneficial Owners | Ownership(1) | of Class | ||||||
Thomas J. Barrack, Jr. | 45,000 | (2) | * | |||||
Gordon M. Bethune** | 907,422 | (3) | 1.3 | % | ||||
Kirbyjon H. Caldwell | 30,288 | (4) | * | |||||
Michael H. Campbell** | 182,500 | (5) | * | |||||
James Compton | 40,465 | (6) | * | |||||
Mark A. Erwin | 147,839 | (7) | * | |||||
Lawrence W. Kellner | 400,270 | (8) | * | |||||
Douglas H. McCorkindale | 60,000 | (9) | * | |||||
Henry L. Meyer III | 15,000 | (10) | * | |||||
Jeffrey J. Misner | 62,262 | (11) | * | |||||
Oscar Munoz | 5,000 | (2) | * | |||||
George G. C. Parker | 46,400 | (9) | * | |||||
Jeffery A. Smisek | 328,095 | (12) | * | |||||
Karen Hastie Williams | 46,000 | (9) | * | |||||
Ronald B. Woodard | 10,000 | (2) | * | |||||
Charles A. Yamarone | 56,000 | (13) | * | |||||
All executive officers and directors as a group (26 persons) | 2,992,422 | (14) | 4.3 | % |
Amount and | ||||||||
Nature of | ||||||||
Beneficial | Percent | |||||||
Name of Beneficial Owners | Ownership(1) | of Class | ||||||
Thomas J. Barrack, Jr. | 45,000 | (2) | * | |||||
Kirbyjon H. Caldwell | 30,288 | (3) | * | |||||
James Compton | 40,465 | (4) | * | |||||
Lawrence W. Kellner | 399,712 | (5) | * | |||||
Douglas H. McCorkindale | 60,000 | (6) | * | |||||
Henry L. Meyer III | 15,000 | (7) | * | |||||
Jeffrey J. Misner | 62,262 | (8) | * | |||||
Mark J. Moran | 46,525 | (9) | * | |||||
Oscar Munoz | 5,000 | (2) | * | |||||
George G. C. Parker | 46,400 | (6) | * | |||||
Jeffery A. Smisek | 328,265 | (10) | * | |||||
Karen Hastie Williams | 46,000 | (6) | * | |||||
Ronald B. Woodard | 10,000 | (2) | * | |||||
Charles A. Yamarone | 53,000 | (6) | * | |||||
All executive officers and directors as a group (15 persons) | 1,248,949 | (11) | 1.4 | % |
* | Less than 1% |
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The persons listed have the sole power to vote and dispose of the shares beneficially owned by them except as otherwise indicated. | ||
(2) | Represents shares subject to stock options that are exercisable within sixty days of | |
(3) | ||
Includes 30,000 Exercisable Options. | ||
(4) | ||
Includes 921 restricted shares which vest on April 9, 2006 and 36,258 Exercisable Options. | ||
(5) | ||
Includes 9,375 restricted shares which vest on April 9, 2006 and 329,687 Exercisable Options. Also includes 200 shares owned by a relative of Mr. Kellner, as to which shares Mr. Kellner shares dispositive power but disclaims beneficial ownership. | ||
(6) | Includes 45,000 Exercisable Options. |
Includes 10,000 Exercisable Options. |
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Includes 2,000 restricted shares which vest on April 9, 2006 and 53,062 Exercisable Options. | ||
Includes 700 restricted shares which vest on April 9, 2006 and 43,375 Exercisable Options. | ||
(10) | Includes 8,000 restricted shares which vest on April 9, 2006 and 266,500 Exercisable Options. | |
Includes | ||
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Human | Corporate | |||||||||||||||||||
Name | Audit | Resources | Governance | Finance | Executive | |||||||||||||||
Mr. Barrack | X | C | C | |||||||||||||||||
Mr. Caldwell | X | X | ||||||||||||||||||
Mr. Kellner | X | X | ||||||||||||||||||
Mr. McCorkindale | X | |||||||||||||||||||
Mr. Meyer | X | X | ||||||||||||||||||
Mr. Munoz | X | |||||||||||||||||||
Mr. Parker | C | X | ||||||||||||||||||
Mr. Smisek | X | |||||||||||||||||||
Ms. Williams | C | |||||||||||||||||||
Mr. Woodard | X | X | X | |||||||||||||||||
Mr. Yamarone | C | X | ||||||||||||||||||
2004 Meetings | 9 | 9 | 4 | 1 | 0 | |||||||||||||||
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Human | Corporate | |||||||||||||||||||
Name | Audit | Resources | Governance | Finance | Executive | |||||||||||||||
Mr. Barrack | X | C | C | |||||||||||||||||
Mr. Caldwell | X | X | ||||||||||||||||||
Mr. Kellner | X | X | ||||||||||||||||||
Mr. McCorkindale | X | |||||||||||||||||||
Mr. Meyer | X | X | ||||||||||||||||||
Mr. Munoz | X | |||||||||||||||||||
Mr. Parker | C | X | ||||||||||||||||||
Mr. Smisek | X | |||||||||||||||||||
Ms. Williams | C | |||||||||||||||||||
Mr. Woodard | X | X | X | |||||||||||||||||
Mr. Yamarone | C | X | ||||||||||||||||||
2005 Meetings | 11 | 7 | 3 | 1 | 0 | |||||||||||||||
C = Chair | ||
X = Member |
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• | The person’s reputation, integrity and, | |
• | The person’s skills and business, government or other professional experience and acumen, bearing in mind the composition of the board and the current state of the company and the airline industry generally at the time of determination; | |
• | The number of other public companies for which the person serves as a director (subject to the specific limitations described under “Corporate Governance” above) and the availability of the person’s time and commitment to the company; | |
• | Diversity; | |
• | The person’s knowledge of a major geographical area in which the company operates (such as a hub) or another area of the company’s operational environment; | |
• | The person’s | |
• | Whether the person has a material, non-ordinary course (direct or indirect) investment in a direct competitor of the company. |
• | The Corporate Governance Committee, the Chairman of the Board and Chief Executive Officer, or other board member identifies a need to add a new board member who meets specific criteria or to fill a vacancy on the board. | |
• | The Corporate Governance Committee initiates a search by working with staff support, seeking input from board members and senior management and hiring a search firm, if necessary. | |
• | The Corporate Governance Committee also considers recommendations for nominees for directorships submitted by stockholders. | |
• | The initial slate of candidates that will satisfy specific criteria, and otherwise qualify for membership on the | |
• | The Chairman of the Board and Chief Executive Officer and at least one member of the Corporate Governance Committee interviews prospective candidate(s). | |
• | The full board is kept informed of progress. | |
• | The Corporate Governance Committee offers other board members the opportunity to interview the candidate(s) and then meets to consider and approve the final candidate(s). | |
• | The Corporate Governance Committee seeks full board endorsement of the final candidate(s). | |
• | The final candidate(s) are nominated by the board or elected to fill a vacancy. |
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• | $24,500 per year, plus an additional $25,000 for members of the Audit Committee ($40,000 for the chairperson of the Audit Committee); | |
• | $1,400 ($2,100 for the chairperson) for each board and committee meeting physically attended (other than an Audit Committee meeting); | |
• | $2,000 ($3,000 for the chairperson) for each Audit Committee meeting physically attended; | |
• | $700 for each board meeting attended by telephone; | |
• | $350 for each committee meeting attended by telephone ($500 for each Audit Committee meeting attended by telephone); | |
• | stock options to purchase 5,000 shares of common stock at the grant date fair market value, which are fully vested upon grant and have a10-year term. Such options are granted following each annual stockholders meeting and upon election to the board if they are first elected to the board other than at an annual stockholders meeting; and | |
• | lifetime flight benefits, comprised of space-available personal and family flight passes, a travel card permitting positive space travel by the director, the director’s family and certain other individuals (which is taxable to the director, subject to the reimbursement of certain of such taxes by the company), frequent flyer cards and airport lounge cards (“Flight Benefits”). |
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• | reviewed and discussed the audited financial statements included asAppendix A to this proxy statement with management and the company’s independent auditors; | |
• | reviewed the overall scope and plans for the audit and the results of the independent auditors’ examinations; | |
• | met with management periodically during the year to consider the adequacy of the company’s internal controls and the quality of its financial reporting and discussed these matters with the company’s independent auditors and with appropriate company financial personnel and internal auditors; | |
• | discussed with the company’s senior management, independent auditors and internal auditors the process used for the company’s chief executive officer and chief financial officer to make the certifications required by the SEC and the Sarbanes-Oxley Act of 2002 in connection with the10-K and other periodic filings with the SEC; | |
• | reviewed and discussed with the independent auditors (1) their judgments as to the quality (and not just the acceptability) of the company’s accounting policies, (2) the written communication required by Independence Standards Board Standard No. 1, “Independence Discussions with Audit |
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Committees” and the independence of the independent auditors, and (3) the matters required to be discussed with the committee under auditing standards generally accepted in the United States, including Statement on Auditing Standards No. 61, “Communication with Audit Committees”; | ||
• | based on these reviews and discussions, as well as private discussions with the independent auditors and the company’s internal auditors, recommended to the board of directors the inclusion of the audited financial statements of the company and its subsidiaries in the10-K; and |
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• | determined that the non-audit services provided to the company by the independent auditors (discussed below under Proposal |
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Name, Age | Term of Office | |
LAWRENCE W. KELLNER, age Chairman of the Board and Chief Executive Officer | Chairman of the Board and Chief Executive Officer since December 2004. President and Chief Operating Officer (March | |
JEFFERY A. SMISEK, age President | President since December 2004. Executive Vice President (March | |
JAMES COMPTON, age Executive Vice President — Marketing | Executive Vice President — Marketing since August 2004. Senior Vice President — Marketing (March | |
JEFFREY J. MISNER, age Executive Vice President and Chief Financial Officer | Executive Vice President and Chief Financial Officer since August 2004. Senior Vice President and Chief Financial Officer (November | |
MARK J. MORAN, age Executive Vice President — Operations | Executive Vice President — Operations since August 2004. Senior Vice President — Technical Operations and Purchasing (September | |
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Mr. Moran joined the company in 1994. | ||
JENNIFER L. VOGEL, age Senior Vice President, General Counsel, Secretary and Corporate Compliance Officer | Senior Vice President, General Counsel, Secretary and Corporate Compliance Officer since September 2003. Vice President, General Counsel, Secretary and Corporate Compliance Officer (March | |
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• | appropriately link compensation levels with the creation of stockholder value; | |
• | provide total compensation capable of attracting, motivating and retaining executives of outstanding talent; | |
• | achieve competitiveness of total compensation; and | |
• | emphasize “at risk” pay tied to |
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• | The NLTIP compares Continental’s EBITDAR margin for a three-year performance period against the average EBITDAR margin represented by the expanded peer group. For the first performance period under the NLTIP plan (April 1, 2004 through December 31, 2006), and for performance periods commencing January 1, 2005 and January 1, 2006, performance targets were set by the committee so that executives will earn (i) nothing for EBITDAR margin performance below peer group average performance, (ii) below market incentives for EBITDAR margin performance equal to peer group average performance, (iii) graduated payments up to market average incentives for above average EBITDAR margin performance and (iv) graduated payments up to above market average incentives for superior EBITDAR margin performance. The 2004 and 2005 NLTIP | |
• | The RSU program |
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“2005 RSUs”), to March 31, 2006 (the “2006 RSUs”), and to December 31, 2007 (the “2007 RSUs”), respectively. These RSUs vest during the performance period only if Continental’s stock achieves the target price (based on a20-day average price), and |
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• | Stock Options. No stock options have been awarded to the | |
• | Restricted Stock. From time to time, grants of restricted shares of our common stock are made pursuant to the |
• | Officer Retention and Incentive Award Program (“PARs Award Program”). The committee terminated the program in November 2005 except with respect to one outstanding award, related to a small investment made by the company in 2003 in a travel distribution company, which the company is prohibited from terminating under the terms of the program. In 2005 there were no new PARs awards; however there were payouts as the awards related to the company’s 2003 and 2004 sales of its investments in Orbitz and Hotwire vested. |
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• | Alignment with Restructuring of the Industry — | |
• | ||
• | Longer Vesting Schedules and Performance Vesting —The four-year performance period for RSUs awarded in 2004 is longer than is common. | |
• | Introduction of Return on Capital Performance Measure —In prior years, EBITDAR margin was the main performance measure used in both the annual and long-term incentive compensation programs at Continental. For 2004 and going forward, | |
• | Improved Performance Goal Setting —Beginning in 2004 and beyond, the committee sets entry, target, and stretch performance goals that require not only that | |
• | Share Price Appreciation — The 2007 RSUs, and the surrendered 2005 RSUs and 2006 RSUs, required significant share price appreciation before the executives could earn anything under the program. The 2007 RSUs, as well as any future awards made under the amended RSU program, place the executives’ compensation reward “at risk” for any share price decline that occurs before the end of the relevant performance period or the relevant payment dates because the value of the RSU is determined based on a20-day average share price at the end of the performance period or payment date (even though stockholders can benefit from the share price appreciation before the executives are permitted to do so). | |
• | Significant “at risk” Pay —The CEO’s “at risk” compensation, and that of our other top officers, |
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Name | Former Annual Salary | Current Annual Salary | ||||||
Larry Kellner | $ | 950,000 | $ | 712,500 | ||||
Jeff Smisek | $ | 720,000 | $ | 576,000 | ||||
Jim Compton | $ | 450,000 | $ | 360,000 | ||||
Jeff Misner | $ | 450,000 | $ | 360,000 | ||||
Mark Erwin | $ | 400,000 | $ | 330,000 |
Name | Former Annual Salary | Current Annual Salary | ||||||
Larry Kellner | $ | 950,000 | $ | 712,500 | ||||
Jeff Smisek | $ | 720,000 | $ | 576,000 | ||||
Jim Compton | $ | 450,000 | $ | 360,000 | ||||
Jeff Misner | $ | 450,000 | $ | 360,000 | ||||
Mark Moran | $ | 450,000 | $ | 360,000 |
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Reductions in | |||||||||||||||||
Reductions in | Reductions in | Long Term | Total Waived | ||||||||||||||
Name | Base Salary | Annual Bonus | Incentive Payout | Cash Compensation | |||||||||||||
Larry Kellner | $ | 273,852 | $ | 1,696,305 | $ | 2,217,375 | $ | 4,187,532 | |||||||||
Jeff Smisek | — | 594,042 | — | 594,042 | |||||||||||||
Gordon Bethune | 366,720 | 1,303,125 | 3,518,438 | 5,188,283 | |||||||||||||
Total | $ | 640,572 | $ | 3,593,472 | $ | 5,735,813 | $ | 9,969,857 | |||||||||
Reductions in | ||||||||||||||||
Reductions in | Reductions in | Long Term | Total Waived | |||||||||||||
Name | Base Salary | Annual Bonus | Incentive Payout | Cash Compensation | ||||||||||||
Larry Kellner | $ | 531,144 | $ | 1,696,305 | $ | 6,321,760 | $ | 8,549,209 | ||||||||
Jeff Smisek | 156,000 | 594,042 | 2,670,452 | 3,420,494 | ||||||||||||
Jim Compton | 97,500 | — | 1,057,859 | 1,155,359 | ||||||||||||
Jeff Misner | 97,500 | — | 1,061,789 | 1,159,289 | ||||||||||||
Mark Moran | 97,500 | — | 794,433 | 891,933 | ||||||||||||
Total | $ | 979,644 | $ | 2,290,347 | $ | 11,906,293 | $ | 15,176,284 | ||||||||
As of | As of | |||||||||||
April 15, | April 15, | |||||||||||
2001 | 2005 | % Change | ||||||||||
Average Annual Base Salary — 5 Most Highly Compensated Officers | $ | 755,200 | $ | 473,700 | (37 | )% | ||||||
Number of Officers | 59 | 45 | (24 | )% |
As of | As of | |||||||||||
April 15, | March 31, | |||||||||||
2001 | 2006 | % Change | ||||||||||
Average Annual Base Salary — Five Most Highly Compensated Officers | $ | 755,200 | $ | 473,700 | (37 | )% | ||||||
Number of Officers | 59 | 47 | (20 | )% |
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Long-Term Compensation | |||||||||||||||||||||||||||||||||
Annual Compensation | Awards | Payouts | |||||||||||||||||||||||||||||||
Other | Restricted | Securities | |||||||||||||||||||||||||||||||
Name and | Annual | Stock | Underlying | LTIP | All Other | ||||||||||||||||||||||||||||
Principal Position | Year | Salary | Bonus | Compensation(3) | Awards(4) | Options | Payouts(5) | Compensation(7) | |||||||||||||||||||||||||
Lawrence W. Kellner | 2004 | $ | 865,508 | (1) | $ | 783,806 | (2) | $ | 68,262 | $ | 0 | 0 | $ | 1,937,139 | (6) | $ | 2,856,539 | (8) | |||||||||||||||
Chairman of the Board | 2004 | $ | 0 Paid | (2) | |||||||||||||||||||||||||||||
and Chief Executive | 2003 | 662,704 | (1) | 0 | (1) | 20,948 | 0 | 0 | 0 | (6) | 6,489 | ||||||||||||||||||||||
Officer | 2002 | 730,000 | 456,250 | 67,831 | 1,405,000 | 335,000 | 2,217,375 | 6,489 | |||||||||||||||||||||||||
Jeffery A. Smisek | 2004 | $ | 645,923 | $ | 594,042 | (2) | $ | 21,750 | $ | 0 | 0 | $ | 941,584 | $ | 7,958 | ||||||||||||||||||
President | 2004 | $ | 0 Paid | (2) | |||||||||||||||||||||||||||||
2003 | 600,000 | 750,000 | 74,430 | 0 | 0 | 2,134,443 | 7,908 | ||||||||||||||||||||||||||
2002 | 600,000 | 375,000 | 18,625 | 1,124,000 | 270,000 | 1,350,000 | 6,236 | ||||||||||||||||||||||||||
James Compton | 2004 | $ | 419,135 | $ | 371,276 | $ | 20,896 | $ | 0 | 0 | $ | 325,983 | $ | 2,050 | |||||||||||||||||||
Executive Vice | 2003 | 350,686 | 438,358 | 14,479 | 0 | 0 | 832,218 | 2,000 | |||||||||||||||||||||||||
President — Marketing | 2002 | 315,016 | 196,886 | 9,808 | 175,625 | 68,750 | 519,750 | 2,000 | |||||||||||||||||||||||||
Jeffrey J. Misner | 2004 | $ | 419,135 | $ | 371,276 | $ | 11,962 | $ | 0 | 0 | $ | 292,830 | $ | 2,050 | |||||||||||||||||||
Executive Vice | 2003 | 350,686 | 438,358 | 13,211 | 0 | 0 | 832,218 | 2,000 | |||||||||||||||||||||||||
President & Chief | 2002 | 315,016 | 196,886 | 9,144 | 281,000 | 54,687 | 519,750 | 2,000 | |||||||||||||||||||||||||
Financial Officer | |||||||||||||||||||||||||||||||||
Mark A. Erwin | 2004 | $ | 400,000 | $ | 330,023 | $ | 76,610 | $ | 0 | 0 | $ | 402,149 | $ | 5,400 | |||||||||||||||||||
Senior Vice President — | 2003 | 386,667 | 456,250 | 44,291 | 0 | 0 | 1,002,131 | 750 | |||||||||||||||||||||||||
Asia/ Pacific and | 2002 | 359,103 | 215,846 | 61,218 | 175,625 | 140,000 | 598,500 | 5,326 | |||||||||||||||||||||||||
Corporate Development | |||||||||||||||||||||||||||||||||
Retired Officers | |||||||||||||||||||||||||||||||||
Gordon M. Bethune | 2004 | $ | 1,014,742 | (1) | $ | 860,123 | $ | 202,160 | $ | 0 | 0 | $ | 5,106,128 | (6) | $ | 27,070,627 | (9) | ||||||||||||||||
Former Chairman of | 2003 | 966,480 | (1) | 0 | (1) | 113,244 | 0 | 0 | 0 | (6) | 43,835 | ||||||||||||||||||||||
the Board and Chief | 2002 | 1,042,500 | 651,563 | 120,394 | 2,318,250 | 800,000 | 3,518,438 | 43,835 | |||||||||||||||||||||||||
Executive Officer | |||||||||||||||||||||||||||||||||
Michael H. Campbell | 2004 | $ | 465,000 | $ | 383,652 | $ | 22,956 | $ | 0 | 0 | $ | 402,149 | $ | 3,073,319 | (10) | ||||||||||||||||||
Former Senior Vice | 2003 | 465,000 | 581,250 | 22,251 | 0 | 0 | 1,104,506 | 2,000 | |||||||||||||||||||||||||
President — Human | 2002 | 465,000 | 290,625 | 16,596 | 281,000 | 180,000 | 732,375 | 2,000 | |||||||||||||||||||||||||
Resources and Labor | |||||||||||||||||||||||||||||||||
Relations |
Long-Term Compensation | ||||||||||||||||||||||||||||||||
Annual Compensation | Awards | Payouts | ||||||||||||||||||||||||||||||
Other | Restricted | Securities | ||||||||||||||||||||||||||||||
Name and | Annual | Stock | Underlying | LTIP | All Other | |||||||||||||||||||||||||||
Principal Position | Year | Salary | Bonus | Compensation(4) | Awards(5) | Options | Payouts(6) | Compensation(8) | ||||||||||||||||||||||||
Lawrence W. Kellner | 2005 | $ | 752,083 | (1) | $ | 0 | $ | 73,526 | $ | 0 | 0 | $ | 191,894 | $ | 8,354 | |||||||||||||||||
Chairman of the Board | 2004 | 865,508 | (2) | 0 | (3) | 68,262 | 0 | 0 | 1,937,139 | (7) | 2,856,539 | (9) | ||||||||||||||||||||
and Chief Executive | 2003 | 662,704 | (2) | 0 | (2) | 20,948 | 0 | 0 | 0 | (7) | 6,489 | |||||||||||||||||||||
Officer | ||||||||||||||||||||||||||||||||
Jeffery A. Smisek | 2005 | $ | 600,000 | (1) | $ | 0 | $ | 13,814 | $ | 0 | 0 | $ | 130,568 | $ | 9,034 | |||||||||||||||||
President | 2004 | 645,923 | 0 | (3) | 21,750 | 0 | 0 | 941,584 | 7,958 | |||||||||||||||||||||||
2003 | 600,000 | 750,000 | 74,430 | 0 | 0 | 2,134,443 | 7,908 | |||||||||||||||||||||||||
James Compton | 2005 | $ | 375,000 | (1) | $ | 0 | $ | 58,182 | $ | 0 | 0 | $ | 51,792 | $ | 7,704 | |||||||||||||||||
Executive Vice | 2004 | 419,135 | 371,276 | 20,896 | 0 | 0 | 325,983 | 2,050 | ||||||||||||||||||||||||
President — Marketing | 2003 | 350,686 | 438,358 | 14,479 | 0 | 0 | 832,218 | 2,000 | ||||||||||||||||||||||||
Jeffrey J. Misner | 2005 | $ | 375,000 | (1) | $ | 0 | $ | 48,309 | $ | 0 | 0 | $ | 47,457 | $ | 4,601 | |||||||||||||||||
Executive Vice | 2004 | 419,135 | 371,276 | 11,962 | 0 | 0 | 292,830 | 2,050 | ||||||||||||||||||||||||
President & Chief | 2003 | 350,686 | 438,358 | 13,211 | 0 | 0 | 832,218 | 2,000 | ||||||||||||||||||||||||
Financial Officer | ||||||||||||||||||||||||||||||||
Mark J. Moran | 2005 | $ | 375,000 | (1) | $ | 0 | $ | 77,252 | $ | 0 | 0 | $ | 28,326 | $ | 7,216 | |||||||||||||||||
Executive Vice | 2004 | 357,404 | 371,276 | 17,381 | 0 | 0 | 218,609 | 4,100 | ||||||||||||||||||||||||
President — Operations | 2003 | 259,175 | 323,969 | 18,839 | 0 | 0 | 666,814 | 2,000 |
(1) | The compensation reduction agreements discussed above became effective February 28, 2005 and, therefore, the 2005 salary amount for each named executive officer is higher than his current annual salary rate. | |
(2) | As discussed above, in order to permit us to comply with our agreement with the TSA, | |
(3) |
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Smisek and are not included in the table. | ||
Includes cash amounts received pursuant to a credit under |
24
and a car benefit in the amount of $22,768, and his 2004 compensation includes Flight Benefits (including tax reimbursements) in the amount of | ||
(5) | ||
(6) | Amounts include payouts under our prior Long Term Incentive Performance Award Program (LTIP) and our | |
(7) | Pursuant to |
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(8) | Amounts shown for | |
(9) | Includes a cash payment of $2,850,000 in consideration of his covenant not to compete with the company for a period of two years following the termination of his employment for any reason other than a termination by the company without cause or a termination by Mr. Kellner for good cause. This covenant not to compete, and corresponding payment, was made in connection with a new employment agreement executed April 14, 2004 between the company and Mr. Kellner in connection with his election as chairman and CEO | |
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Number of Securities | Value of Unexercised | |||||||||||||||||||||||
Underlying Unexercised | In-the-Money | |||||||||||||||||||||||
Shares | Options at Fiscal Year-End | Options at Fiscal Year-End | ||||||||||||||||||||||
Acquired on | Value | |||||||||||||||||||||||
Name | Exercise | Realized | Exercisable | Unexercisable | Exercisable | Unexercisable | ||||||||||||||||||
Lawrence W. Kellner | 0 | $ | 0 | 313,750 | 21,250 | $ | 0 | $ | 0 | |||||||||||||||
Jeffery A. Smisek | 0 | 0 | 252,500 | 17,500 | 0 | 0 | ||||||||||||||||||
James Compton | 0 | 0 | 30,336 | 7,402 | 0 | 0 | ||||||||||||||||||
Jeffrey J. Misner | 0 | 0 | 46,562 | 8,125 | 0 | 0 | ||||||||||||||||||
Mark A. Erwin | 0 | 0 | 130,000 | 10,000 | 0 | 0 | ||||||||||||||||||
Retired Officers | ||||||||||||||||||||||||
Gordon M. Bethune | 0 | 0 | 800,000 | 0 | 0 | 0 | ||||||||||||||||||
Michael H. Campbell | 0 | 0 | 180,000 | 0 | 0 | 0 |
Number of Securities | Value of Unexercised | |||||||||||||||||||||||
Shares | Underlying Unexercised | In-the-Money | ||||||||||||||||||||||
Acquired on | Value | Options at Fiscal Year-End | Options at Fiscal Year-End | |||||||||||||||||||||
Name | Exercise | Realized | Exercisable | Unexercisable | Exercisable | Unexercisable | ||||||||||||||||||
Lawrence W. Kellner | 0 | $ | 0 | 329,687 | 0 | $ | 1,819,872 | $ | 0 | |||||||||||||||
Jeffery A. Smisek | 0 | 0 | 266,500 | 0 | 1,471,080 | 0 | ||||||||||||||||||
James Compton | 0 | 0 | 36,258 | 0 | 200,144 | 0 | ||||||||||||||||||
Jeffrey J. Misner | 0 | 0 | 53,062 | 0 | 292,902 | 0 | ||||||||||||||||||
Mark J. Moran | 0 | 0 | 53,375 | 3,000 | 294,630 | 10,260 |
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Performance or | Estimated Future Payouts | |||||||||||||||||||
Number of Shares, | Other Period | Under Non-Stock Price-Based Plans | ||||||||||||||||||
Units or | Until Maturation | |||||||||||||||||||
Name | Other Rights | or Payout | Threshold | Target | Maximum | |||||||||||||||
Lawrence W. Kellner | NLTIP Awards | (1) | 3 years | $ | 1,202,344 | $ | 1,603,125 | $ | 2,404,688 | |||||||||||
150,000 RSUs | (2) | (3) | ||||||||||||||||||
150,000 RSUs | (2) | (4) | ||||||||||||||||||
200,000 RSUs | (2) | (5) | ||||||||||||||||||
Jeffery A. Smisek | NLTIP Awards | (1) | 3 years | $ | 907,200 | $ | 1,166,400 | $ | 1,749,600 | |||||||||||
100,000 RSUs | (2) | (3) | ||||||||||||||||||
100,000 RSUs | (2) | (4) | ||||||||||||||||||
125,000 RSUs | (2) | (5) | ||||||||||||||||||
James Compton | NLTIP Awards | (1) | 3 years | $ | 405,000 | $ | 607,500 | $ | 810,000 | |||||||||||
40,000 RSUs | (2) | (3) | ||||||||||||||||||
40,000 RSUs | (2) | (4) | ||||||||||||||||||
50,000 RSUs | (2) | (5) | ||||||||||||||||||
Jeffrey J. Misner | NLTIP Awards | (1) | 3 years | $ | 405,000 | $ | 607,500 | $ | 810,000 | |||||||||||
40,000 RSUs | (2) | (3) | ||||||||||||||||||
40,000 RSUs | (2) | (4) | ||||||||||||||||||
50,000 RSUs | (2) | (5) | ||||||||||||||||||
Mark A. Erwin | NLTIP Awards | (1) | 3 years | $ | 222,750 | $ | 371,250 | $ | 519,750 | |||||||||||
40,000 RSUs | (2) | (3) | ||||||||||||||||||
40,000 RSUs | (2) | (4) | ||||||||||||||||||
50,000 RSUs | (2) | (5) | ||||||||||||||||||
Retired Officers | ||||||||||||||||||||
Gordon M. Bethune(6) | NLTIP Awards | (1) | 3 years | $ | 478,353 | $ | 637,804 | $ | 956,707 | |||||||||||
125,000 RSUs | (2) | (3) | ||||||||||||||||||
75,000 RSUs | (2) | (4) | ||||||||||||||||||
50,000 RSUs | (2) | (5) | ||||||||||||||||||
Michael H. Campbell(7) | NLTIP Awards | (1) | 3 years | $ | 0 | $ | 0 | $ | 0 | |||||||||||
45,000 RSUs | (2) | (3) | ||||||||||||||||||
45,000 RSUs | (2) | (4) | ||||||||||||||||||
60,000 RSUs | (2) | (5) |
Performance or | ||||||||||||||||||||
Number of Shares, | Other Period | Estimated Future Payouts | ||||||||||||||||||
Units or | Until Maturation | Under Non-Stock Price-Based Plans | ||||||||||||||||||
Name | Other Rights(1) | or Payout | Threshold | Target | Maximum | |||||||||||||||
Lawrence W. Kellner | NLTIP Award | 3 years | $ | 1,202,344 | $ | 1,603,125 | $ | 2,404,688 | ||||||||||||
Jeffery A. Smisek | NLTIP Award | 3 years | $ | 907,200 | $ | 1,166,400 | $ | 1,749,600 | ||||||||||||
James Compton | NLTIP Award | 3 years | $ | 405,000 | $ | 607,500 | $ | 810,000 | ||||||||||||
Jeffrey J. Misner | NLTIP Award | 3 years | $ | 405,000 | $ | 607,500 | $ | 810,000 | ||||||||||||
Mark J. Moran | NLTIP Award | 3 years | $ | 405,000 | $ | 607,500 | $ | 810,000 |
(1) | Amounts set forth in the table represent potential payout of awards under the NLTIP based on awards made in | |
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Years of Service(1) | ||||||||||||||||||||||||
Final Average Compensation | 5 | 10 | 15 | 20 | 25 | 30 | ||||||||||||||||||
$500,000 | $ | 62,500 | $ | 125,000 | $ | 187,500 | $ | 250,000 | $ | 312,500 | $ | 375,000 | ||||||||||||
$600,000 | 75,000 | 150,000 | 225,000 | 300,000 | 375,000 | 450,000 | ||||||||||||||||||
$800,000 | 100,000 | 200,000 | 300,000 | 400,000 | 500,000 | 600,000 | ||||||||||||||||||
$1,000,000 | 125,000 | 250,000 | 375,000 | 500,000 | 625,000 | 750,000 | ||||||||||||||||||
$1,500,000 | 187,500 | 375,000 | 562,500 | 750,000 | 937,500 | 1,125,000 | ||||||||||||||||||
$2,000,000 | 250,000 | 500,000 | 750,000 | 1,000,000 | 1,250,000 | 1,500,000 |
Final Average | Years of Service(1) | |||||||||||||||||||||||
Compensation | 5 | 10 | 15 | 20 | 25 | 30 | ||||||||||||||||||
$500,000 | $ | 62,500 | $ | 125,000 | $ | 187,500 | $ | 250,000 | $ | 312,500 | $ | 375,000 | ||||||||||||
$600,000 | 75,000 | 150,000 | 225,000 | 300,000 | 375,000 | 450,000 | ||||||||||||||||||
$800,000 | 100,000 | 200,000 | 300,000 | 400,000 | 500,000 | 600,000 | ||||||||||||||||||
$1,000,000 | 125,000 | 250,000 | 375,000 | 500,000 | 625,000 | 750,000 | ||||||||||||||||||
$1,500,000 | 187,500 | 375,000 | 562,500 | 750,000 | 937,500 | 1,125,000 | ||||||||||||||||||
$2,000,000 | 250,000 | 500,000 | 750,000 | 1,000,000 | 1,250,000 | 1,500,000 |
(1) | As calculated under the SERP. |
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12/31/99 | 12/31/00 | 12/31/01 | 12/31/02 | 12/31/03 | 12/31/04 | ||||||||||||||||||||||||||
Continental Airlines | $ | 100.00 | $ | 116.34 | $ | 59.06 | $ | 16.34 | $ | 36.66 | $ | 30.51 | |||||||||||||||||||
Amex Airline Index | $ | 100.00 | $ | 110.28 | $ | 57.93 | $ | 25.65 | $ | 40.65 | $ | 39.82 | |||||||||||||||||||
S&P 500 Index | $ | 100.00 | $ | 90.97 | $ | 80.19 | $ | 62.57 | $ | 80.32 | $ | 88.94 | |||||||||||||||||||
12/31/00 | 12/31/01 | 12/31/02 | 12/31/03 | 12/31/04 | 12/31/05 | |||||||||||||||||||||||||
Continental Airlines | $ | 100.00 | $ | 50.77 | $ | 14.04 | $ | 31.52 | $ | 26.23 | $ | 41.26 | ||||||||||||||||||
Amex Airline Index | $ | 100.00 | $ | 52.53 | $ | 23.26 | $ | 36.86 | $ | 36.11 | $ | 32.73 | ||||||||||||||||||
S&P 500 Index | $ | 100.00 | $ | 88.15 | $ | 68.79 | $ | 88.29 | $ | 97.77 | $ | 102.50 | ||||||||||||||||||
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Number of Securities | ||||||||||||
Number of Securities | Remaining Available | |||||||||||
to be Issued | Weighted-Average | for Future Issuance | ||||||||||
Upon Exercise | Exercise Price | Under Compensation Plans | ||||||||||
of Outstanding Options, | of Outstanding Options, | (Excluding Securities | ||||||||||
Plan Category | Warrants and Rights | Warrants and Rights | Reflected in First Column) | |||||||||
Equity compensation plans approved by security holders | 6,175,232 | $ | 17.10 | 3,722,757 | (1) | |||||||
Equity compensation plans not approved by security holders(2) | N/A | N/A | N/A | |||||||||
Total | 6,175,232 | $ | 17.10 | 3,722,757 | (1) | |||||||
Number of Securities | ||||||||||||
Number of Securities | Remaining Available | |||||||||||
to be Issued | Weighted-Average | for Future Issuance | ||||||||||
Upon Exercise | Exercise Price | Under Compensation Plans | ||||||||||
of Outstanding Options, | of Outstanding Options, | (Excluding Securities | ||||||||||
Plan Category | Warrants and Rights | Warrants and Rights | Reflected in First Column) | |||||||||
Equity compensation plans approved by security holders | 4,550,788 | $ | 16.56 | 3,441,853 | (1) | |||||||
Equity compensation plans not approved by security holders(2) | 8,159,269 | 11.90 | 1,840,731 | |||||||||
Total | 12,710,057 | $ | 13.57 | 5,250,299 | (1) | |||||||
(1) | The number of securities remaining available for future issuance under equity compensation plans includes | |
(2) | During the first quarter of 2005, we adopted the 2005 Broad Based Employee Stock Option Plan and the 2005 Pilot Supplemental Option Plan, as a commitment to our employees that their wage and benefits cost reduction contributions represent an investment in their future. We did not seek stockholder approval to adopt these plans because the audit committee of our board of directors determined that the delay necessary in obtaining such approval would seriously jeopardize our financial viability. On March 4, 2005, the NYSE accepted our reliance on this exception to its shareholder approval policy. A total of 10 million shares of common stock may be issued under these plans. As of |
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• | Mr. McCorkindale. Mr. McCorkindale is the Chairman of Gannett Co., Inc., a nationwide diversified communications company and the parent company of USA Today. We purchase newspapers from USA Today for our flights and Presidents Clubs and retain USA Today’s services as our agent for procuring newspapers from other publishers. We have also advertised in various newspapers owned by Gannett from time to time. Our aggregate payments to Gannett and its subsidiaries in connection with these arrangements, during each of the past three years, represented less than 1/100th of 1% of our total operating expenses and less than 1/10th of 1% of Gannett’s disclosed consolidated gross revenues. | |
• | Mr. Meyer. Mr. Meyer is the Chairman, President and CEO of KeyCorp, a financial services company and the parent company of KeyBank, the 11th largest bank in the United States. We are the preferred air carrier of KeyCorp, and receive payments from KeyCorp in exchange for providing routine air transportation services to its employees. We also receive payments from KeyBank in connection with its debit card program, launched in 2003, which is co-branded with us. Further, we lease certain ground equipment from KeyBank’s leasing division. During each of the past three years, our aggregate payments to KeyCorp and KeyBank, as well as their aggregate payments to us, in each case represented less than 1/4th of 1% of the consolidated gross revenues of the payee, and less than 1/4th of 1% of the total expenses of the payor. | |
• | Mr. Woodard. Mr. Woodard serves on the board of directors of AAR Corp., a leading supplier of products and services to the global aviation/aerospace industry. AAR Corp. is a supplier of parts and repair services to us and is the owner participant on certain aircraft and spare engines leased by us. During each of the past three years, our lease payments relating to such aircraft and equipment, together with amounts paid in consideration of parts and repairs, amounted to less than 1/10th of 1% of our total operating expenses and less than 1/2 of 1% of AAR Corp.’s consolidated gross revenues. |
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Name, Age, Position | ||
and Committee Memberships | Term of Office and Business Experience | |
THOMAS J. BARRACK, JR., age (Human Resources Committee, Corporate Governance Committee, Executive Committee) | Director since 1994. Chairman and Chief Executive Officer of Colony Capital, LLC and Colony Advisors, LLC (real estate investments) for more than five years. Director | |
KIRBYJON H. CALDWELL, age (Human Resources Committee, Corporate Governance Committee) | Director since 1999. Senior Pastor of The Windsor Village-United Methodist Church, Houston, Texas for more than twenty years. Director |
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LAWRENCE W. KELLNER, age Chairman of the Board and Chief Executive Officer (Finance Committee, Executive Committee) | Director since 2001. Chairman of the Board and Chief Executive Officer since December 2004. President and Chief Operating Officer (March2003-December 2004); President (May 2001-March 2003); Executive Vice President and Chief Financial Officer (November 1996-May 2001). Mr. Kellner joined the company in 1995. Director | |
DOUGLAS H. McCORKINDALE, age (Executive Committee) | Director since 1993. Chairman | |
HENRY L. MEYER III, age (Audit Committee, Executive Committee) | Director since 2003. Chairman of the Board, President and Chief Executive Officer of KeyCorp (banking) since May 2001. President and Chief Executive Officer of KeyCorp (January 2001-May 2001) | |
OSCAR MUNOZ, age (Audit Committee) | Director since 2004. Executive Vice President and CFO of CSX Corporation (freight transportation) since May 2003. Vice President — Consumer Services and CFO of AT&T Consumer Services, a division of AT&T Corporation (January 2001-March 2003). Senior Vice President — Finance and Administration of Qwest |
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Name, Age, Position | ||
and Committee Memberships | Term of Office and Business Experience | |
GEORGE G. C. PARKER, age (Audit Committee, Finance Committee) | Director since 1996. Dean Witter Distinguished Professor of Finance and Management and previously Senior Associate Dean for Academic Affairs and Director of the MBA Program, Graduate School of Business, Stanford University for more than five years. Director | |
JEFFERY A. SMISEK, age President (Finance Committee) | Director since December 2004. President since December 2004. Executive Vice President (March2003-December 2004); Executive Vice President — Corporate and Secretary (May 2001-March 2003); Executive Vice President, General Counsel and Secretary (November 1996-May 2001). Mr. Smisek joined the company in 1995. Director | |
KAREN HASTIE WILLIAMS, age (Finance Committee) | Director since 1993. |
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RONALD B. WOODARD, age (Audit Committee, Finance Committee, Human Resources Committee) | Director since 2003. Chairman of the Board of MagnaDrive Corporation (a supplier of new engine power transfer technology applications for industrial equipment) since 2002; President and Chief Executive Officer(1999-2002). Various positions with The Boeing Company for more than 32 years, including President of Boeing Commercial Airplane Group, Senior Vice President of Boeing, Executive Vice President of Boeing Commercial Airplane Group, and Vice President and General Manager of the Renton Division, Boeing Commercial Airplane Group. Director | |
CHARLES A. YAMARONE, age (Human Resources Committee, Corporate Governance Committee) | Director since 1995. Executive Vice President of Libra Securities, LLC (institutional broker-dealer) since January 2002. Executive Vice President of U.S. Bancorp Libra, a division of U.S. Bancorp Investments, Inc.(1999-2001) |
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• | stock splits; | |
• | equity and equity-based financings; | |
• | stock dividends; | |
• | future acquisitions; and | |
• | other general corporate purposes. |
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2004 | 2003 | ||||||||
Audit Fees(1) | $ | 2.7 | $ | 2.5 | |||||
Audit Related Fees(2) | $ | 0.1 | $ | 0.3 | |||||
Tax Fees(3) | $ | 1.2 | $ | 1.6 | |||||
All Other Fees(4) | $ | 0.2 | $ | 0.4 | |||||
Total Fees | $ | 4.2 | $ | 4.8 |
2005 | 2004 | 2003 | ||||||||||
Audit Fees(1) | $ | 2.47 | $ | 2.62 | $ | 2.48 | ||||||
Audit Related Fees(2) | $ | 0.08 | $ | 0.09 | $ | 0.30 | ||||||
Tax Fees(3) | $ | 0.52 | $ | 1.17 | $ | 1.63 | ||||||
All Other Fees(4) | $ | 0.01 | $ | 0.17 | $ | 0.39 | ||||||
Total Fees | $ | 3.07 | $ | 4.05 | $ | 4.81 |
(1) | Audit fees consist primarily of the audit and quarterly reviews of the consolidated financial statements (including an audit of management’s assessment and the effectiveness of the company’s internal control over financial reporting), statutory audits of subsidiaries required by governmental or regulatory bodies, attestation services required by statute or regulation, comfort letters, consents, assistance with and review of documents filed with the SEC, work performed by tax professionals in connection with the audit and quarterly reviews, and accounting and financial reporting consultations and research work necessary to comply with generally accepted auditing standards. |
(2) | Audit-related fees consist primarily of the audits of subsidiaries that are not required to be audited by governmental or regulatory bodies. | |
(3) | Tax fees include professional services provided for preparation of federal and state tax returns, review of tax returns prepared by the company, assistance in assembling data to respond to governmental reviews of past tax filings, and tax advice, exclusive of tax services rendered in connection with the audit. | |
(4) | Other fees consist primarily of attestation services associated with third-party contract compliance. |
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Item | Page No. | ||||
A-2 | |||||
A-5 | |||||
A-79 | |||||
A-80 |
A-1
A-1
12/31/99 | 12/31/00 | 12/31/01 | 12/31/02 | 12/31/03 | 12/31/04 | |||||||||||||||||||
Continental Airlines | $ | 100.00 | $ | 116.34 | $ | 59.06 | $ | 16.34 | $ | 36.66 | $ | 30.51 | ||||||||||||
Amex Airline Index | $ | 100.00 | $ | 110.28 | $ | 57.93 | $ | 25.65 | $ | 40.65 | $ | 39.82 | ||||||||||||
S&P 500 Index | $ | 100.00 | $ | 90.97 | $ | 80.19 | $ | 62.57 | $ | 80.32 | $ | 88.94 |
A-2
SELECTED FINANCIAL DATA
Year Ended December 31, | ||||||||||||||||||||
2004 | 2003 | 2002 | 2001 | 2000 | ||||||||||||||||
Statement of Operations Data (in millions except per share data) (1)(2): | ||||||||||||||||||||
Operating revenue | $ | 9,744 | $ | 8,870 | $ | 8,402 | $ | 8,969 | $ | 9,899 | ||||||||||
Operating expenses | 9,973 | 8,667 | 8,714 | 8,825 | 9,170 | |||||||||||||||
Operating income (loss) | (229 | ) | 203 | (312 | ) | 144 | 729 | |||||||||||||
Net income (loss) | (363 | ) | 38 | (451 | ) | (95 | ) | 342 | ||||||||||||
Basic earnings (loss) per share | (5.49 | ) | 0.58 | (7.02 | ) | (1.72 | ) | 5.62 | ||||||||||||
Diluted earnings (loss) per share | (5.55 | ) | 0.57 | (7.02 | ) | (1.72 | ) | 5.45 |
As of December 31, | ||||||||||||||||||||
2004 | 2003 | 2002 | 2001 | 2000 | ||||||||||||||||
Balance Sheet Data (in millions) (1): | ||||||||||||||||||||
Total assets | $ | 10,545 | $ | 10,649 | $ | 10,641 | $ | 9,798 | $ | 9,208 | ||||||||||
Long-term debt and capital lease obligations | 5,167 | 5,558 | 5,471 | 4,448 | 3,624 | |||||||||||||||
Redeemable common stock | — | — | — | — | 450 | |||||||||||||||
Redeemable preferred stock of subsidiary | — | — | 5 | — | — | |||||||||||||||
Stockholders’ equity | 266 | 792 | 767 | 1,161 | 1,160 |
Year Ended December 31, | ||||||||||||||||||||
2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||||||
Statement of Operations Data (in millions except per share data)(1)(2): | ||||||||||||||||||||
Operating revenue | $ | 11,208 | $ | 9,899 | $ | 9,001 | $ | 8,511 | $ | 9,049 | ||||||||||
Operating expenses | 11,247 | 10,137 | 8,813 | 8,841 | 8,921 | |||||||||||||||
Operating income (loss) | (39 | ) | (238 | ) | 188 | (330 | ) | 128 | ||||||||||||
Net income (loss) | (68 | ) | (409 | ) | 28 | (462 | ) | (105 | ) | |||||||||||
Basic earnings (loss) per share | (0.96 | ) | (6.19 | ) | 0.43 | (7.19 | ) | (1.89 | ) | |||||||||||
Diluted earnings (loss) per share | (0.97 | ) | (6.25 | ) | 0.41 | (7.19 | ) | (1.89 | ) |
As of December 31, | ||||||||||||||||||||
2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||||||
Balance Sheet Data (in millions)(1): | ||||||||||||||||||||
Cash, cash equivalents and short-term investments | $ | 2,198 | $ | 1,669 | $ | 1,600 | $ | 1,342 | $ | 1,132 | ||||||||||
Total assets | 10,529 | 10,511 | 10,620 | 10,615 | 9,778 | |||||||||||||||
Long-term debt and capital lease obligations | 5,057 | 5,167 | 5,558 | 5,471 | 4,448 | |||||||||||||||
Stockholders’ equity | 226 | 155 | 727 | 712 | 1,117 |
A-2
Year Ended December 31, | ||||||||||||||||||||
2004 | 2003 | 2002 | 2001 | 2000 | ||||||||||||||||
Mainline Statistics: | ||||||||||||||||||||
Onboard passengers (thousands) (3) | 42,743 | 40,613 | 41,777 | 45,064 | 47,778 | |||||||||||||||
Revenue passenger miles (millions) (4) | 65,734 | 59,165 | 59,349 | 61,140 | 64,161 | |||||||||||||||
Available seat miles (millions) (5) | 84,672 | 78,385 | 80,122 | 84,485 | 86,100 | |||||||||||||||
Cargo ton miles (millions) | 1,026 | 917 | 908 | 917 | 1,096 | |||||||||||||||
Passenger load factor (6) | 77.6 | % | 75.5 | % | 74.1 | % | 72.4 | % | 74.5 | % | ||||||||||
Passenger revenue per available seat mile (cents) | 8.75 | 8.73 | 8.61 | 8.98 | 9.84 | |||||||||||||||
Total revenue per available seat mile (cents) | 9.65 | 9.64 | 9.27 | 9.58 | 10.52 | |||||||||||||||
Average yield per revenue passenger mile (cents) (7) | 11.28 | 11.57 | 11.63 | 12.42 | 13.20 | |||||||||||||||
Operating cost per available seat mile, including special charges (cents) (8) | 9.65 | 9.36 | 9.53 | 9.22 | 9.68 | |||||||||||||||
Average price per gallon of fuel, including fuel taxes (cents) | 119.01 | 91.40 | 74.01 | 82.48 | 88.54 | |||||||||||||||
Fuel gallons consumed (millions) | 1,333 | 1,257 | 1,296 | 1,426 | 1,533 | |||||||||||||||
Average fare per revenue passenger | $ | 176.51 | $ | 171.72 | $ | 168.25 | $ | 171.59 | $ | 180.66 | ||||||||||
Actual aircraft in fleet at end of period (9) | 349 | 355 | 366 | 352 | 371 | |||||||||||||||
Average length of aircraft flight (miles) | 1,325 | 1,270 | 1,225 | 1,185 | 1,159 | |||||||||||||||
Average daily utilization of each aircraft (hours) (10) | 9:55 | 9:19 | 9:31 | 10:19 | 10:36 | |||||||||||||||
Regional Statistics: | ||||||||||||||||||||
Onboard passengers (thousands) (3) | 13,739 | 11,445 | 9,264 | 8,354 | 7,804 | |||||||||||||||
Revenue passenger miles (millions) (4) | 7,417 | 5,769 | 3,952 | 3,388 | 2,947 | |||||||||||||||
Available seat miles (millions) (5) | 10,410 | 8,425 | 6,219 | 5,437 | 4,735 | |||||||||||||||
Passenger load factor (6) | 71.3 | % | 68.5 | % | 63.5 | % | 62.3 | % | 62.2 | % | ||||||||||
Passenger revenue per available seat mile (cents) | 15.09 | 15.31 | 15.45 | 15.93 | 17.63 | |||||||||||||||
Actual aircraft in fleet at end of period (9) | 245 | 224 | 188 | 170 | 166 | |||||||||||||||
Consolidated Statistics (Mainline and Regional): | ||||||||||||||||||||
Onboard passengers (thousands) (3) | 56,482 | 52,058 | 51,041 | 53,418 | 55,582 | |||||||||||||||
Passenger load factor (6) | 76.9 | % | 74.8 | % | 73.3 | % | 71.8 | % | 73.9 | % | ||||||||||
Breakeven passenger load factor (11) | 81.6 | % | 73.7 | % | 82.5 | % | 73.5 | % | 67.9 | % | ||||||||||
Passenger revenue per available seat mile (cents) | 9.45 | 9.37 | 9.11 | 9.40 | 10.25 |
A-3
Year Ended December 31, 2005 2004 2003 2002 2001 Passengers (thousands)(3) 44,939 42,743 40,613 41,777 45,064 Revenue passenger miles (millions)(4) 71,261 65,734 59,165 59,349 61,140 Available seat miles (millions)(5) 89,647 84,672 78,385 80,122 84,485 Cargo ton miles (millions) 1,018 1,026 917 908 917 Passenger load factor(6) 79.5 % 77.6 % 75.5 % 74.1 % 72.4 % Passenger revenue per available seat mile (cents) 9.32 8.82 8.79 8.67 9.03 Total revenue per available seat mile (cents) 10.46 9.83 9.81 9.41 9.68 Average yield per revenue passenger mile (cents)(7) 11.73 11.37 11.64 11.71 12.48 Average segment fare per revenue passenger $ 188.67 $ 177.90 $ 172.83 $ 169.37 $ 172.50 Operating cost per available seat mile, including special charges (cents)(8) 10.22 9.84 9.53 9.63 9.34 Average price per gallon of fuel, including fuel taxes (cents) 177.55 119.01 91.40 74.01 82.48 Fuel gallons consumed (millions) 1,376 1,333 1,257 1,296 1,426 Actual aircraft in fleet at end of period(9) 356 349 355 366 352 Average length of aircraft flight (miles) 1,388 1,325 1,270 1,225 1,185 Average daily utilization of each aircraft (hours)(10) 10:31 9:55 9:19 9:29 10:19 Passengers (thousands)(3) 16,076 13,739 11,445 9,264 8,354 Revenue passenger miles (millions)(4) 8,938 7,417 5,769 3,952 3,388 Available seat miles (millions)(5) 11,973 10,410 8,425 6,219 5,437 Passenger load factor(6) 74.7 % 71.3 % 68.5 % 63.5 % 62.3 % Passenger revenue per available seat mile (cents) 15.67 15.09 15.31 15.45 15.93 Actual aircraft in fleet at end of period(9) 266 245 224 188 170 Passengers (thousands)(3) 61,015 56,482 52,058 51,041 53,418 Revenue passenger miles (millions)(4) 80,199 73,151 64,934 63,301 64,528 Available seat miles (millions)(5) 101,620 95,082 86,810 86,341 89,922 Passenger load factor(6) 78.9 % 76.9 % 74.8 % 73.3 % 71.8 % Passenger revenue per available seat mile (cents) 10.07 9.51 9.42 9.16 9.45 Average yield per revenue passenger mile (cents)(7) 12.76 12.36 12.60 12.49 13.17
(1) | Amounts include ExpressJet through November 12, 2003. |
A-3
(2) | Includes the following special |
2004 | 2003 | 2002 | 2001 | 2000 | ||||||||||||||||
Operating revenue (income): | ||||||||||||||||||||
Change in expected redemption of frequent flyer mileage credits sold | $ | — | $ | (24 | ) | $ | — | $ | — | $ | — | |||||||||
Operating expense (income): | ||||||||||||||||||||
Fleet retirement and impairment charges | 87 | 100 | 242 | 61 | — | |||||||||||||||
Air Transportation Safety and System Stabilization Act grant | — | — | 12 | (417 | ) | — | ||||||||||||||
Security fee reimbursement | — | (176 | ) | — | — | — | ||||||||||||||
Severance and other special charges | — | — | — | 63 | — | |||||||||||||||
Termination of 1993 service agreement with United Micronesian Development Association | 34 | — | — | — | — | |||||||||||||||
Frequent flyer reward redemption cost adjustment | 18 | — | — | — | — | |||||||||||||||
Nonoperating expense (income): | ||||||||||||||||||||
Gain on investments | — | (305 | ) | — | — | (9 | ) | |||||||||||||
Impairment of investments | — | — | — | 22 | — |
2005 2004 2003 2002 2001 Operating revenue: Change in expected redemption of frequent flyer mileage credits sold $ — $ — $ 24 $ — $ — Operating (expense) income: Fleet retirement and impairment charges 16 (87 ) (86 ) (242 ) (61 ) Pension curtailment/settlement charges (83 ) — — — — Termination of 1993 service agreement with United Micronesia Development Association — (34 ) — — — Frequent flyer reward redemption cost adjustment — (18 ) — — — Security fee reimbursement — — 176 — — Air Transportation Safety and System Stabilization Act grant — — — (12 ) 417 Severance and other special charges — — (14 ) — (63 ) Nonoperating (expense) income: Gains on investments 204 — 305 — — Impairment of investments — — — — (22 )
(3) | Revenue passengers measured by each flight segment flown. | |||
(4) | The number of scheduled miles flown by revenue passengers. | |||
(5) | The number of seats available for passengers multiplied by the number of scheduled miles those seats are flown. | |||
(6) | Revenue passenger miles divided by available seat miles. | |||
(7) | The average passenger revenue received for each revenue passenger mile flown. | |||
(8) | Includes operating expense special items noted in (2) | |||
(9) | Excludes aircraft that were removed from service. | |||
(10) | The average number of hours per day that an aircraft flown in revenue service is operated (from gate departure to gate arrival). | |||
A-4
The2005 and 2003 without the special items.
The $1.1 billion of annual cost-cutting and revenue-generating measures thatsince 2002, and we have implemented in recent years have proven insufficient to return us to profitability in the current environment. As a result, on November 18, 2004, we announced that we neededalso made significant progress toward our goal of achieving an annualadditional $500 million reduction in wage and benefit costs. In late 2004 and early 2005, we finalized (but have not yet implemented) changes to wages, work rulesannual pay and benefits for U.S.-based management and clerical, reservations, food services, airport and cargo agents and customer service employees that result in savings of $169 million annually.costs. On February 28, 2005, we announced that we had reached tentative agreements on new contracts coveringJanuary 29, 2006, our pilots, flight attendants mechanics and dispatchers following negotiations with ALPA, the IAM, the Teamsters, and the TWU. We also reachedratified a tentative agreement with our simulator technicians, represented by TWU. Each of the agreements is subject to ratification by the members of each covered work group, and the effectiveness of each agreement is conditioned on ratification of each other agreement. Results of the ratification process for each of the agreements are expected by the end of March 2005. If the agreements are ratified, the wage and benefit reductions will become effective as of the date of ratification and we will begin to implement the agreements. Some of the savings from the agreements will take time to achieve, while others, such as the wage reductions and certain benefit changes, will result in immediate savings. Our officers and Board of Directors implemented their reductions on February 28, 2005.
The tentative agreements,new contract which, along with previously announced pay and benefit reductions for other work groups, concludeconcludes the negotiation process with allto change wages, work rules and benefits for our employees, except some CMIdomestic employees. We began implementing these pay and international employees. Thebenefit reductions and work rule changes in early April 2005, which, when fully implemented, are expected to result in approximately $490 million of annual pay and benefits of international employees must be adjusted in accordance with laws and regulations of the various countries.cost savings on a run-rate basis. We expect to complete the process with these remaining employees inof obtaining the near future.final $10 million of our
A-5
Each of the agreements is for a 45-month term, so that the agreements would become amendable again on December 31, 2008. A significant portion of the cost savings from our work groups, both unionized and non-unionized, will be derived from changes to benefits and work rules. We expect to achieve approximately
A-5
relating to items contained in the tentative agreements. Further,work rule changes, principally with our ability to achieve certain of the cost reductions will depend on timely and effective implementation of new work rules, actual productivity improvements, implementation of changes in technology pertaining to employee work rules and benefits and other items.
Each of the tentative agreements require that, even if ratified, they will not go into effect (and thus will not be implemented) unless all of the other tentative agreements are ratified. As a result, there is the risk that if one or more of the tentative agreements is not ratified, then one or more of the other tentative agreements would not become effective and thus would not be implemented. If the tentative agreements were not implemented, we would not achieve the necessary $500 million reduction in wage and benefit costs and would ultimately have inadequate liquidity to meet our obligations under current market conditions. We would be forced to pursue alternate survival strategies, including taking significant steps to reduce both our future financial commitments and current cash outflows. This would mean that we would be forced to obtain annual pay and benefit reductions totaling $800 million from our work groups later in 2005.
In addition to having to obtain significantly larger pay and benefit reductions from our work groups, actions we would be forced to take if the tentative agreements are not ratified and do not take effect include canceling plans to lease eight 757-300 aircraft from Boeing Capital Corporation and canceling the accelerated delivery of six 737-800 aircraft which were to be delivered in 2006. Those aircraft would instead be delivered in 2008, the original delivery year. However, we anticipate that we would enter into discussions with Boeing to defer all aircraft deliveries beyond 2005, representing a total of 40 aircraft. We would also be forced to cancel our recent order for ten Boeing 787 aircraft, which were planned for delivery beginning in 2009.
Additionally, we would pursue shrinking our fleet. As part of our contingency planning, we have engaged Focus Aviation, Inc., an aircraft broker, with regard to our Boeing 737-500 fleet. These aircraft have relatively few seats compared to our other mainline aircraft and have become less attractive to operate in a low-fare environment. If the tentative agreements are not ratified and do not take effect, we will market for sale or lease twenty-four 737-500 aircraft. This fleet reduction would result in frequency and aircraft size reductions in certain markets. Moreover, if the aircraft are withdrawn from the fleet, we would need to furlough a significant number of pilots, flight attendants, mechanics and other positions associated with those aircraft.
If the tentative agreements are not ratified and do not take effect, absent significant declines in fuel pricesunionized workgroups at CMI, in the near future, we expect that we would fail to meet certain financial covenants infuture.
We could experience aninternational routes in recent months, but these increases have not fully offset the substantial increase in early retirements caused by concern among our employees about our financial stability. The potential of an increase in early retirements could be exacerbated by the fact that our employees are entitled to lump-sum distributions from our defined benefit pension plan upon their retirement, including early retirement within the provisions of the plan. Some of our competitors have terminated, or have sought to terminate, their defined benefit pension plans in bankruptcy, which can cause employees to receive less than the full amount of their pension benefits under applicable federal pension benefit insurance, and can also limit or eliminate the ability of employees to receive their pension benefits in a lump-sum. If liquidity concerns increase, we could experience a significant increase in early retirements which could negatively impact our operations and materially increase our near-term funding obligations to our defined benefit pension plan, which could itself result in a material adverse effect on our liquidity.
If the current adverse environment does not improve, wefuel prices.
In developing our plan for 2005, we considered our current projections for 2005 revenue, including the impact of fare reductions initiated in early January 2005 by Delta Air Lines, current and forward fuel price levels as of March 14, 2005, our expectations with regard to union ratification of the tentative agreements described above
A-6
and our ability to execute additional financing transactions. While we believe our 2005 plan is achievable, a combination of some or all of several events, most of which are outside of our direct control, may result in us being unable to generate sufficient cash from operations or complete financing transactions that we would need to maintain adequate liquidity through December 31, 2005. These events include the failure of our unions to ratify the tentative agreements so that they do not go into effect, further significant declines in yields and fuel prices higher than current levels for an extended period of time. Additionally,
end of 2007.
• | ||
• | Low Fare Environment. | |
• | Fuel Costs. |
A-6
• | Labor Costs. | |
• | Excessive Taxation. |
A-7
itinerary; (c) up to $18 per round trip in local airport charges; and (d) up to $10 per round trip in airport security fees. The Bush administration has proposed increasing the passenger security fee from $2.50 to $5.50 per enplanement, which, if implemented, would result in an additional annual tax of $1.5 billion on the airline industry, as estimated by the administration. We estimate that the annual impact on us would be approximately $160 million, based on our 2004 security fee collections. Various U.S. fees and taxes are also assessed on international flights that can result in additional fees and taxes of up to $45 itinerary; (c) local airport charges of up to $18 per round trip; and (d) airport security fees of up to $10 per round trip. Various U.S. fees and taxes are also assessed on international flights that can result in additional fees and taxes of up to $46 per international round trip, not counting fees and taxes imposed by foreign governments. Certain of these assessments but not all, must be included in the fares we advertise or quote to our customers. Due to competition, many increases in these fees and taxes that are not required to be included in fares have been absorbed by the airline industry rather than being passed on to the passenger. These fees and taxes, which are not included in our reported passenger revenue, increased to $1.0 billion for the year ended December 31, 2004, compared to $904 million for the year ended December 31, 2003.
• | Pension Liability. |
A-8
A-7
Consolidated
Income (Expense)} | ||||||||
Pre Tax | After Tax | |||||||
Year Ended December 31, 2004 MD-80 aircraft retirement charges and other (1) | $ | (87 | ) | $ | (68 | ) | ||
Termination of United Micronesian Development Association Service Agreement (1) | (34 | ) | (22 | ) | ||||
Frequent flyer reward redemption cost adjustment (2) | (18 | ) | (18 | ) | ||||
$ | (139 | ) | $ | (108 | ) | |||
Year Ended December 31, 2003 Security fee reimbursement (3) | $ | 176 | $ | 111 | ||||
Gain on dispositions of ExpressJet stock (4) | 173 | 100 | ||||||
Gain on Hotwire and Orbitz investments (after related compensation expense and including an adjustment to fair value of remaining investment in Orbitz) (5) | 132 | 83 | ||||||
MD-80 aircraft retirement and impairment charges (1) | (86 | ) | (54 | ) | ||||
Revenue adjustment for change in expected redemption of frequent flyer mileage credits sold (6) | 24 | 15 | ||||||
Boeing 737 aircraft delivery deferral (1) | (14 | ) | (8 | ) | ||||
$ | 405 | $ | 247 | |||||
Year Ended December 31, 2002 DC 10-30, MD-80 and turboprop aircraft retirement and impairment charges (1) | $ | (242 | ) | $ | (153 | ) | ||
Write-down of Stabilization Act receivable (1) | (12 | ) | (8 | ) | ||||
$ | (254 | ) | $ | (161 | ) | |||
Pre Tax | ||||
Income (Expense) | ||||
Year Ended December 31, 2005 | ||||
Gain on sale of Copa Holdings, S.A. shares(1) | $ | 106 | ||
Gain on dispositions of ExpressJet stock(2) | 98 | |||
Pension curtailment/settlement charges(3) | (83 | ) | ||
Reserve reduction on grounded aircraft(4) | 16 | |||
$ | 137 | |||
Year Ended December 31, 2004 | ||||
MD-80 aircraft retirement charges and other(4) | $ | (87 | ) | |
Termination of United Micronesia Development Association Service Agreement(4) | (34 | ) | ||
Frequent flyer reward redemption cost adjustment(5) | (18 | ) | ||
$ | (139 | ) | ||
Year Ended December 31, 2003 | ||||
Security fee reimbursement(6) | $ | 176 | ||
Gain on dispositions of ExpressJet stock(2) | 173 | |||
Gain on Hotwire and Orbitz investments (after related compensation expense and including an adjustment to fair value of remaining investment in Orbitz)(7) | 132 | |||
MD-80 aircraft retirement and impairment charges(4) | (86 | ) | ||
Revenue adjustment for change in expected redemption of frequent flyer mileage credits sold(5) | 24 | |||
Boeing 737 aircraft delivery deferral(4) | (14 | ) | ||
$ | 405 | |||
(1) | See Note 14 to our consolidated financial statements. | |||
(2) | See Note 16 to our consolidated financial statements. | |||
(3) | See Note 10 to our consolidated financial statements. | |||
(4) | See Note 12 to our consolidated financial statements. | |||
See Note 1(k) to our consolidated financial statements. | ||||
See Note 13 to our consolidated financial statements. | ||||
See Note | ||||
A-8
Year Ended | ||||||||||||||||
December 31, | Increase | % Increase | ||||||||||||||
2005 | 2004 | (Decrease) | (Decrease) | |||||||||||||
Operating Revenue: | ||||||||||||||||
Passenger | $ | 10,235 | $ | 9,042 | $ | 1,193 | 13.2 | % | ||||||||
Cargo, mail and other | 973 | 857 | 116 | 13.5 | % | |||||||||||
11,208 | 9,899 | 1,309 | 13.2 | % | ||||||||||||
Operating Expenses: | ||||||||||||||||
Wages, salaries and related costs | 2,649 | 2,819 | (170 | ) | (6.0 | )% | ||||||||||
Aircraft fuel and related taxes | 2,443 | 1,587 | 856 | 53.9 | % | |||||||||||
ExpressJet capacity purchase, net | 1,572 | 1,351 | 221 | 16.4 | % | |||||||||||
Aircraft rentals | 928 | 891 | 37 | 4.2 | % | |||||||||||
Landing fees and other rentals | 708 | 654 | 54 | 8.3 | % | |||||||||||
Distribution costs | 588 | 552 | 36 | 6.5 | % | |||||||||||
Maintenance, materials and repairs | 455 | 414 | 41 | 9.9 | % | |||||||||||
Depreciation and amortization | 389 | 415 | (26 | ) | (6.3 | )% | ||||||||||
Passenger servicing | 332 | 306 | 26 | 8.5 | % | |||||||||||
Special charges | 67 | 121 | (54 | ) | NM | |||||||||||
Other | 1,116 | 1,027 | 89 | 8.7 | % | |||||||||||
11,247 | 10,137 | 1,110 | 10.9 | % | ||||||||||||
Operating Loss | (39 | ) | (238 | ) | (199 | ) | (83.6 | )% | ||||||||
Nonoperating Income (Expense) | (29 | ) | (211 | ) | (182 | ) | (86.3 | )% | ||||||||
Loss before Income Taxes and | ||||||||||||||||
Minority Interest | (68 | ) | (449 | ) | (381 | ) | (84.9 | )% | ||||||||
Income Tax Benefit | — | 40 | (40 | ) | (100.0 | )% | ||||||||||
Net Loss | $ | (68 | ) | $ | (409 | ) | $ | (341 | ) | (83.4 | )% | |||||
A-9
Percentage Increase | ||||||||||||||||
2005 | 2005 vs. 2004 | |||||||||||||||
Passenger | Passenger | |||||||||||||||
Revenue | Revenue | RASM | ASMs | |||||||||||||
(In millions) | ||||||||||||||||
Domestic | $ | 4,772 | 5.8 | % | 5.3 | % | 0.5 | % | ||||||||
Transatlantic | 1,733 | 26.9 | % | 8.8 | % | 16.6 | % | |||||||||
Latin America | 1,085 | 11.1 | % | 7.2 | % | 3.7 | % | |||||||||
Pacific | 768 | 24.3 | % | 3.1 | % | 20.6 | % | |||||||||
Total Mainline | 8,358 | 11.9 | % | 5.7 | % | 5.9 | % | |||||||||
Regional | 1,877 | 19.4 | % | 3.8 | % | 15.0 | % | |||||||||
Total System | $ | 10,235 | 13.2 | % | 5.9 | % | 6.9 | % | ||||||||
A-10
A-11
Year Ended December 31, | Increase | % Increase | ||||||||||||||
2005 | 2004 | (Decrease) | (Decrease) | |||||||||||||
Operating Revenue | $ | 9,377 | $ | 8,327 | $ | 1,050 | 12.6 | % | ||||||||
Operating Expenses: | ||||||||||||||||
Wages, salaries and related costs | 2,605 | 2,773 | (168 | ) | (6.1 | )% | ||||||||||
Aircraft fuel and related taxes | 2,443 | 1,587 | 856 | 53.9 | % | |||||||||||
Aircraft rentals | 640 | 632 | 8 | 1.3 | % | |||||||||||
Landing fees and other rentals | 667 | 622 | 45 | 7.2 | % | |||||||||||
Distribution costs | 494 | 472 | 22 | 4.7 | % | |||||||||||
Maintenance, materials and repairs | 455 | 414 | 41 | 9.9 | % | |||||||||||
Depreciation and amortization | 378 | 404 | (26 | ) | (6.4 | )% | ||||||||||
Passenger servicing | 318 | 295 | 23 | 7.8 | % | |||||||||||
Special charges | 67 | 121 | (54 | ) | NM | |||||||||||
Other | 1,095 | 1,014 | 81 | 8.0 | % | |||||||||||
9,162 | 8,334 | 828 | 9.9 | % | ||||||||||||
Operating Income (Loss) | $ | 215 | $ | (7 | ) | $ | 222 | NM | ||||||||
Year Ended | ||||||||||||||||
December 31, | Increase | % Increase | ||||||||||||||
2005 | 2004 | (Decrease) | (Decrease) | |||||||||||||
Operating Revenue | $ | 1,831 | $ | 1,572 | $ | 259 | 16.5 | % | ||||||||
Operating Expenses: | ||||||||||||||||
Wages, salaries and related costs | 44 | 46 | (2 | ) | (4.3 | )% | ||||||||||
ExpressJet capacity purchase, net | 1,572 | 1,351 | 221 | 16.4 | % | |||||||||||
Aircraft rentals | 288 | 259 | 29 | 11.2 | % | |||||||||||
Landing fees and other rentals | 41 | 32 | 9 | 28.1 | % | |||||||||||
Distribution costs | 94 | 80 | 14 | 17.5 | % | |||||||||||
Depreciation and amortization | 11 | 11 | — | — | ||||||||||||
Passenger servicing | 14 | 11 | 3 | 27.3 | % | |||||||||||
Other | 21 | 13 | 8 | 61.5 | % | |||||||||||
2,085 | 1,803 | 282 | 15.6 | % | ||||||||||||
Operating Loss | $ | (254 | ) | $ | (231 | ) | $ | 23 | 10.0 | % | ||||||
A-12
Year Ended December 31, | ||||||||||||||||
2005 | 2004 | Increase | % Increase | |||||||||||||
Capacity purchase expenses | $ | 1,560 | $ | 1,507 | $ | 53 | 3.5 | % | ||||||||
Fuel and fuel taxes in excess of 71.2 cents per gallon cap | 322 | 126 | 196 | 155.6 | % | |||||||||||
Aircraft sublease income | (310 | ) | (282 | ) | 28 | 9.9 | % | |||||||||
ExpressJet capacity purchase, net | $ | 1,572 | $ | 1,351 | $ | 221 | 16.4 | % | ||||||||
A-13
A-9
Accordingly, the expense variance explanations discussed below exclude the effect of ExpressJet in 2003 unless indicated otherwise. Significant components of our operating results attributable to the deconsolidation of ExpressJet and attributable to our business generally are as followsset forth in the table below (in millions, except percentage changes):
Comparison of Year Ended December 31, 2004 to December 31, 2003
Components of Increase (Decrease) | ||||||||||||||||||||
Increase | % Increase | |||||||||||||||||||
(Decrease) | (Decrease) | |||||||||||||||||||
Year Ended | related to | All Other | Excluding | |||||||||||||||||
December 31, | ExpressJet | Increase | ExpressJet | |||||||||||||||||
2004 | 2003 | Deconsolidation (A) | (Decrease) | Deconsolidation | ||||||||||||||||
Operating Revenue: | ||||||||||||||||||||
Passenger | $ | 8,984 | $ | 8,135 | $ | — | $ | 849 | 10.4 | % | ||||||||||
Cargo, mail and other | 760 | 735 | (4 | ) | 29 | 4.0 | % | |||||||||||||
9,744 | 8,870 | (4 | ) | 878 | 9.9 | % | ||||||||||||||
Operating Expenses: | ||||||||||||||||||||
Wages, salaries and related costs | 2,819 | 3,056 | (304 | ) | 67 | 2.4 | % | |||||||||||||
Aircraft fuel and related taxes | 1,587 | 1,319 | (170 | ) | 438 | 38.1 | % | |||||||||||||
ExpressJet capacity purchase, net | 1,351 | 153 | 953 | 245 | 22.2 | % | ||||||||||||||
Aircraft rentals | 891 | 896 | — | (5 | ) | (0.6 | )% | |||||||||||||
Landing fees and other rentals | 646 | 620 | (87 | ) | 113 | 21.2 | % | |||||||||||||
Commissions, booking fees, credit card fees and other distribution costs | 552 | 525 | — | 27 | 5.1 | % | ||||||||||||||
Maintenance, materials and repairs | 414 | 509 | (111 | ) | 16 | 4.0 | % | |||||||||||||
Depreciation and amortization | 414 | 444 | (17 | ) | (13 | ) | (3.0 | )% | ||||||||||||
Passenger servicing | 306 | 297 | (11 | ) | 20 | 7.0 | % | |||||||||||||
Security fee reimbursement | — | (176 | ) | 3 | 173 | NM | ||||||||||||||
Special charges | 121 | 100 | — | 21 | NM | |||||||||||||||
Other | 872 | 924 | (103 | ) | 51 | 6.2 | % | |||||||||||||
9,973 | 8,667 | 153 | 1,153 | 13.1 | % | |||||||||||||||
Operating Income (Loss) | (229 | ) | 203 | (157 | ) | (275 | ) | NM | ||||||||||||
Nonoperating Income (Expense) | (211 | ) | (2 | ) | 50 | (259 | ) | NM | ||||||||||||
Income (Loss) before Income Taxes and Minority Interest | (440 | ) | 201 | (107 | ) | (534 | ) | NM | ||||||||||||
Income Tax Benefit (Expense) | 77 | (114 | ) | 58 | 133 | NM | ||||||||||||||
Minority Interest | — | (49 | ) | 49 | — | NM | ||||||||||||||
Net Income (Loss) | $ | (363 | ) | $ | 38 | $ | — | $ | (401 | ) | NM | |||||||||
Components of Increase (Decrease) | ||||||||||||||||||||
Increase | % Increase | |||||||||||||||||||
(Decrease) | (Decrease) | |||||||||||||||||||
Year Ended | Related to | All Other | Excluding | |||||||||||||||||
December 31, | ExpressJet | Increase | ExpressJet | |||||||||||||||||
2004 | 2003 | Deconsolidation(A) | (Decrease) | Deconsolidation | ||||||||||||||||
Operating Revenue: | ||||||||||||||||||||
Passenger | $ | 9,042 | $ | 8,179 | $ | — | $ | 863 | 10.6 | % | ||||||||||
Cargo, mail and other | 857 | 822 | (4 | ) | 39 | 4.8 | % | |||||||||||||
9,899 | 9,001 | (4 | ) | 902 | 10.0 | % | ||||||||||||||
Operating Expenses: | ||||||||||||||||||||
Wages, salaries and related costs | 2,819 | 3,056 | (304 | ) | 67 | 2.4 | % | |||||||||||||
Aircraft fuel and related taxes | 1,587 | 1,319 | (170 | ) | 438 | 38.1 | % | |||||||||||||
ExpressJet capacity purchase, net | 1,351 | 153 | 953 | 245 | 22.2 | % | ||||||||||||||
Aircraft rentals | 891 | 896 | — | (5 | ) | (0.6 | )% | |||||||||||||
Landing fees and other rentals | 654 | 632 | (87 | ) | 109 | 20.0 | % | |||||||||||||
Distribution costs | 552 | 525 | — | 27 | 5.1 | % | ||||||||||||||
Maintenance, materials and repairs | 414 | 509 | (111 | ) | 16 | 4.0 | % | |||||||||||||
Depreciation and amortization | 415 | 447 | (17 | ) | (15 | ) | (3.5 | )% | ||||||||||||
Passenger servicing | 306 | 297 | (11 | ) | 20 | 7.0 | % | |||||||||||||
Security fee reimbursement | — | (176 | ) | 3 | 173 | NM | ||||||||||||||
Special charges | 121 | 100 | — | 21 | NM | |||||||||||||||
Other | 1,027 | 1,055 | (103 | ) | 75 | 7.9 | % | |||||||||||||
10,137 | 8,813 | 153 | 1,171 | 13.1 | % | |||||||||||||||
Operating Income (Loss) | (238 | ) | 188 | (157 | ) | (269 | ) | NM | ||||||||||||
Nonoperating Income (Expense) | (211 | ) | (2 | ) | 50 | (259 | ) | NM | ||||||||||||
Income (Loss) before Income Taxes and Minority Interest | (449 | ) | 186 | (107 | ) | (528 | ) | NM | ||||||||||||
Income Tax Benefit (Expense) | 40 | (109 | ) | 58 | 91 | NM | ||||||||||||||
Minority Interest | — | (49 | ) | 49 | — | NM | ||||||||||||||
Net Income (Loss) | $ | (409 | ) | $ | 28 | $ | — | $ | (437 | ) | NM | |||||||||
(A) | Represents increase (decrease) in amounts had ExpressJet been deconsolidated for all of 2003 and reported using the equity method of accounting at 53.1% ownership interest. |
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2004 | ||||||||||||||||
Passenger Revenue | Percentage Increase (Decrease) 2004 vs. 2003 | |||||||||||||||
(in millions) | Passenger Revenue | RASM | ASMs | |||||||||||||
Domestic | $ | 4,452 | 2.0 | % | (1.1 | )% | 3.1 | % | ||||||||
Trans-Atlantic | 1,366 | 26.1 | % | 4.0 | % | 21.2 | % | |||||||||
Latin America | 977 | 8.3 | % | (2.9 | )% | 11.5 | % | |||||||||
Pacific | 618 | 25.0 | % | 13.2 | % | 10.5 | % | |||||||||
Total Mainline | 7,413 | 8.3 | % | 0.2 | % | 8.0 | % | |||||||||
Regional | 1,571 | 21.8 | % | (1.4 | )% | 23.6 | % | |||||||||
Total System | $ | 8,984 | 10.4 | % | 0.9 | % | 9.5 | % | ||||||||
2004 Percentage Increase (Decrease) Passenger 2004 vs. 2003 Revenue Passenger Revenue RASM ASMs (In millions) Domestic $ 4,510 2.3 % (0.8 )% 3.1 % Transatlantic 1,366 26.1 % 4.0 % 21.2 % Latin America 977 8.3 % (2.9 )% 11.5 % Pacific 618 25.0 % 13.2 % 10.5 % Total Mainline 7,471 8.4 % 0.2 % 8.0 % Regional 1,571 21.8 % (1.4 )% 23.6 % Total System $ 9,042 10.6 % 0.9 % 9.5 %
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quarter for expenses associated with the deferral of Boeing 737 aircraft deliveries.
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2004.
We have two reportable segments: mainline and regional. The mainline segment consists of flights to cities with jets with a capacity of greater than 100 seats while the regional segment consists of flights with jets with a capacity of 50 or fewer seats. The regional segment is operated by ExpressJet through a capacity purchase agreement. Under that agreement, we handle all of the scheduling and are responsible for setting prices and selling all of the seat inventory. In exchange for ExpressJet’s operation of the flights, we pay ExpressJet for each scheduled block hour based on an agreed formula. Under the agreement, we recognize all passenger, cargo and other revenue associated with each flight, and are responsible for all revenue-related expenses, including commissions, reservations, catering and terminal rent at hub airports.
We evaluate segment performance based on several factors, of which the primary financial measure is operating income (loss)
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Mainline. Significant components of our mainline segment’s operating results are as follows (in millions, except percentage changes):
Year Ended December 31, | Increase | % Increase | Year Ended December 31, | Increase | % Increase | |||||||||||||||||||||||||||
2004 | 2003 | (Decrease) | (Decrease) | 2004 | 2003 | (Decrease) | (Decrease) | |||||||||||||||||||||||||
Operating Revenue: | ||||||||||||||||||||||||||||||||
Passenger | $ | 7,413 | $ | 6,845 | $ | 568 | 8.3 | % | ||||||||||||||||||||||||
Cargo, mail and other | 759 | 714 | 45 | 6.3 | % | |||||||||||||||||||||||||||
8,172 | 7,559 | 613 | 8.1 | % | ||||||||||||||||||||||||||||
Operating Revenue | $ | 8,327 | $ | 7,690 | $ | 637 | 8.3 | % | ||||||||||||||||||||||||
Operating Expenses: | ||||||||||||||||||||||||||||||||
Wages, salaries and related costs | 2,773 | 2,713 | 60 | 2.2 | % | 2,773 | 2,713 | 60 | 2.2 | % | ||||||||||||||||||||||
Aircraft fuel and related taxes | 1,587 | 1,149 | 438 | 38.1 | % | 1,587 | 1,149 | 438 | 38.1 | % | ||||||||||||||||||||||
Aircraft rentals | 632 | 670 | (38 | ) | (5.7 | )% | 632 | 670 | (38 | ) | (5.7 | )% | ||||||||||||||||||||
Landing fees and other rentals | 614 | 528 | 86 | 16.3 | % | 622 | 540 | 82 | 15.2 | % | ||||||||||||||||||||||
Commissions, booking fees, credit card fees and other distribution costs | 472 | 456 | 16 | 3.5 | % | |||||||||||||||||||||||||||
Distribution costs | 472 | 456 | 16 | 3.5 | % | |||||||||||||||||||||||||||
Maintenance, materials and repairs | 414 | 398 | 16 | 4.0 | % | 414 | 398 | 16 | 4.0 | % | ||||||||||||||||||||||
Depreciation and amortization | 403 | 416 | (13 | ) | (3.1 | )% | 404 | 419 | (15 | ) | (3.6 | )% | ||||||||||||||||||||
Passenger servicing | 295 | 278 | 17 | 6.1 | % | 295 | 278 | 17 | 6.1 | % | ||||||||||||||||||||||
Security fee reimbursement | — | (173 | ) | 173 | NM | — | (173 | ) | 173 | NM | ||||||||||||||||||||||
Special charges | 121 | 91 | 30 | NM | 121 | 91 | 30 | NM | ||||||||||||||||||||||||
Other | 859 | 799 | 60 | 7.5 | % | 1,014 | 930 | 84 | 9.0 | % | ||||||||||||||||||||||
8,170 | 7,325 | 845 | 11.5 | % | 8,334 | 7,471 | 863 | 11.6 | % | |||||||||||||||||||||||
Operating Income (Loss) | $ | (7 | ) | $ | 219 | $ | (226 | ) | NM | |||||||||||||||||||||||
Operating Income | $ | 2 | $ | 234 | $ | (232 | ) | (99.1 | )% | |||||||||||||||||||||||
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Components of Increase (Decrease) | ||||||||||||||||||||
Increase | % Increase | |||||||||||||||||||
(Decrease) | (Decrease) | |||||||||||||||||||
Year Ended | Related to | All Other | Excluding | |||||||||||||||||
December 31, | ExpressJet | Increase | ExpressJet | |||||||||||||||||
2004 | 2003 | Deconsolidation (A) | (Decrease) | Deconsolidation | ||||||||||||||||
Operating Revenue: | ||||||||||||||||||||
Passenger | $ | 1,571 | $ | 1,290 | $ | — | $ | 281 | 21.8 | % | ||||||||||
Cargo, mail and other | 1 | 21 | (4 | ) | (16 | ) | (94.1 | )% | ||||||||||||
1,572 | 1,311 | (4 | ) | 265 | 20.3 | % | ||||||||||||||
Operating Expenses: | ||||||||||||||||||||
Wages, salaries and related costs | 46 | 343 | (304 | ) | 7 | 17.9 | % | |||||||||||||
Aircraft fuel and related taxes | — | 170 | (170 | ) | — | NM | ||||||||||||||
ExpressJet capacity purchase, net | 1,351 | 153 | 953 | 245 | 22.2 | % | ||||||||||||||
Aircraft rentals | 259 | 226 | — | 33 | 14.6 | % | ||||||||||||||
Landing fees and other rentals | 32 | 92 | (87 | ) | 27 | NM | ||||||||||||||
Commissions, booking fees, credit card fees and other distribution costs | 80 | 69 | — | 11 | 15.9 | % | ||||||||||||||
Maintenance, materials and repairs | — | 111 | (111 | ) | — | NM | ||||||||||||||
Depreciation and amortization | 11 | 28 | (17 | ) | — | — | ||||||||||||||
Passenger servicing | 11 | 19 | (11 | ) | 3 | 37.5 | % | |||||||||||||
Security fee reimbursement | — | (3 | ) | 3 | — | NM | ||||||||||||||
Special charges | — | 9 | — | (9 | ) | NM | ||||||||||||||
Other | 13 | 125 | (103 | ) | (9 | ) | (40.9 | )% | ||||||||||||
1,803 | 1,342 | 153 | 308 | 20.6 | % | |||||||||||||||
Operating Loss | $ | (231 | ) | $ | (31 | ) | $ | (157 | ) | $ | (43 | ) | 22.9 | % | ||||||
Components of Increase (Decrease) | ||||||||||||||||||||
Increase | % Increase | |||||||||||||||||||
(Decrease) | (Decrease) | |||||||||||||||||||
Year Ended | Related to | All Other | Excluding | |||||||||||||||||
December 31, | ExpressJet | Increase | ExpressJet | |||||||||||||||||
2004 | 2003 | Deconsolidation(A) | (Decrease) | Deconsolidation | ||||||||||||||||
Operating Revenue | $ | 1,572 | $ | 1,311 | $ | (4 | ) | 265 | 20.3 | % | ||||||||||
Operating Expenses: | ||||||||||||||||||||
Wages, salaries and related costs | 46 | 343 | (304 | ) | 7 | 17.9 | % | |||||||||||||
Aircraft fuel and related taxes | — | 170 | (170 | ) | — | — | ||||||||||||||
ExpressJet capacity purchase, net | 1,351 | 153 | 953 | 245 | 22.2 | % | ||||||||||||||
Aircraft rentals | 259 | 226 | — | 33 | 14.6 | % | ||||||||||||||
Landing fees and other rentals | 32 | 92 | (87 | ) | 27 | 540.0 | % | |||||||||||||
Distribution costs | 80 | 69 | — | 11 | 15.9 | % | ||||||||||||||
Maintenance, materials and repairs | — | 111 | (111 | ) | — | — | ||||||||||||||
Depreciation and amortization | 11 | 28 | (17 | ) | — | — | ||||||||||||||
Passenger servicing | 11 | 19 | (11 | ) | 3 | 37.5 | % | |||||||||||||
Security fee reimbursement | — | (3 | ) | 3 | — | — | ||||||||||||||
Special charges | — | 9 | — | (9 | ) | NM | ||||||||||||||
Other | 13 | 125 | (103 | ) | (9 | ) | (40.9 | )% | ||||||||||||
1,803 | 1,342 | 153 | 308 | 20.6 | % | |||||||||||||||
Operating Loss | $ | (231 | ) | $ | (31 | ) | $ | (157 | ) | $ | (43 | ) | 22.9 | % | ||||||
(A) | Represents increase (decrease) in amounts had ExpressJet been deconsolidated for all of 2003 and reported using the equity method of accounting at 53.1% ownership interest. |
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A-17
Year Ended December 31, | ||||||||||||||||
2004 | 2003 (A) | Increase | % Increase | |||||||||||||
Capacity purchase expenses | $ | 1,507 | $ | 1,311 | $ | 196 | 15.0 | % | ||||||||
Fuel and fuel taxes in excess of 71.2 cents per gallon cap | 126 | 45 | 81 | 180.0 | % | |||||||||||
Aircraft sublease income | (282 | ) | (250 | ) | 32 | 12.8 | % | |||||||||
ExpressJet capacity purchase, net | $ | 1,351 | $ | 1,106 | $ | 245 | 22.2 | % | ||||||||
Year Ended December 31, | ||||||||||||||||
2004 | 2003(A) | Increase | % Increase | |||||||||||||
Capacity purchase expenses | $ | 1,507 | $ | 1,311 | $ | 196 | 15.0 | % | ||||||||
Fuel and fuel taxes in excess of 71.2 cents per gallon cap | 126 | 45 | 81 | 180.0 | % | |||||||||||
Aircraft sublease income | (282 | ) | (250 | ) | 32 | 12.8 | % | |||||||||
ExpressJet capacity purchase, net | $ | 1,351 | $ | 1,106 | $ | 245 | 22.2 | % | ||||||||
(A) | Represents amounts had ExpressJet been deconsolidated for all of 2003 and reported using the equity method of accounting at 53.1% ownership interest. |
Year Ended December 31, | Increase | % Increase | ||||||||||||||
2003 | 2002 | (Decrease) | (Decrease) | |||||||||||||
(in millions, except percentage changes) | ||||||||||||||||
Operating Revenue: | ||||||||||||||||
Passenger | $ | 8,135 | $ | 7,862 | $ | 273 | 3.5 | % | ||||||||
Cargo, mail and other | 735 | 540 | 195 | 36.1 | % | |||||||||||
8,870 | 8,402 | 468 | 5.6 | % | ||||||||||||
Operating Expenses: | ||||||||||||||||
Wages, salaries and related costs | 3,056 | 2,959 | 97 | 3.3 | % | |||||||||||
Aircraft fuel and related taxes | 1,319 | 1,084 | 235 | 21.7 | % | |||||||||||
ExpressJet capacity purchase, net | 153 | — | 153 | NM | ||||||||||||
Aircraft rentals | 896 | 902 | (6 | ) | (0.7 | )% | ||||||||||
Landing fees and other rentals | 620 | 633 | (13 | ) | (2.1 | )% | ||||||||||
Commissions, booking fees, credit card fees and other distribution costs | 525 | 592 | (67 | ) | (11.3 | )% | ||||||||||
Maintenance, materials and repairs | 509 | 476 | 33 | 6.9 | % | |||||||||||
Depreciation and amortization | 444 | 444 | — | — | ||||||||||||
Passenger servicing | 297 | 296 | 1 | 0.3 | % | |||||||||||
Security fee reimbursement | (176 | ) | — | (176 | ) | NM | ||||||||||
Special charges | 100 | 254 | (154 | ) | NM | |||||||||||
Other | 924 | 1,074 | (150 | ) | (14.0 | )% | ||||||||||
8,667 | 8,714 | (47 | ) | (0.5 | )% | |||||||||||
Operating Income (Loss) | 203 | (312 | ) | 515 | NM | |||||||||||
Nonoperating Income (Expense) | (2 | ) | (319 | ) | 317 | (99.4 | )% | |||||||||
Income (Loss) before Income Taxes and Minority Interest | 201 | (631 | ) | 832 | NM | |||||||||||
Income Tax Benefit (Expense) | (114 | ) | 208 | (322 | ) | NM | ||||||||||
Minority Interest | (49 | ) | (28 | ) | (21 | ) | 75.0 | % | ||||||||
Net Income (Loss) | $ | 38 | $ | (451 | ) | $ | 489 | NM | ||||||||
Operating Revenue. Passenger revenue increased principally due to increased regional traffic in conjunction with ExpressJet’s capacity increases, offset in part by reduced mainline traffic. The mainline traffic and capacity declines were largely due to a reduction in certain international flights in response to decreased demand during the war in Iraq and related to SARS. Mainline yields were essentially unchanged year over year.
A-15
The table below shows passenger revenue for the year ended December 31, 2003 and period to period comparisons for passenger revenue, RASM and ASMs by geographic region for our mainline and regional operations:
2003 | ||||||||||||||||
Passenger Revenue | Percentage Increase (Decrease) 2003 vs. 2002 | |||||||||||||||
(in millions) | Passenger Revenue | RASM | ASMs | |||||||||||||
Domestic | $ | 4,365 | (0.6 | )% | 2.4 | % | (3.0 | )% | ||||||||
Trans-Atlantic | 1,084 | 2.2 | % | 0.6 | % | 1.5 | % | |||||||||
Latin America | 902 | (0.1 | )% | 1.3 | % | (1.3 | )% | |||||||||
Pacific | 494 | (9.3 | )% | (4.5 | )% | (5.0 | )% | |||||||||
Total Mainline | 6,845 | (0.8 | )% | 1.4 | % | (2.2 | )% | |||||||||
Regional | 1,290 | 34.4 | % | (0.9 | )% | 35.5 | % | |||||||||
Total System | $ | 8,135 | 3.5 | % | 2.9 | % | 0.5 | % | ||||||||
Cargo, mail and other revenue increased primarily due to military charter flights associated with the war in Iraq, higher freight and mail volumes, and revenue-generating initiatives. Our results in 2003 also included $24 million of additional revenue resulting from a change in the expected redemption of frequent flyer mileage credits sold.
Operating Expenses. Wages, salaries and related costs increased as a result of increased pension costs and higher wage rates principally caused by increases in seniority, partially offset by a 3.8% reduction in the average number of employees. Wages, salaries and related costs would have been $50 million higher in 2003 had we not deconsolidated Holdings effective November 12, 2003.
Aircraft fuel and related taxes increased primarily due to the average mainline fuel price per gallon increase of 23.5% from 74.01 cents in 2002 to 91.40 cents in 2003. Mainline fuel consumption was down 3.0% as a result of reduced flights and more fuel-efficient aircraft. Regional jet fuel expense increased $46 million, even with the deconsolidation of Holdings, due to increased flights and higher jet fuel prices.
Payments made to ExpressJet under our capacity purchase agreement, previously eliminated in consolidation, are reported as ExpressJet capacity purchase, net, beginning November 12, 2003, the date we deconsolidated Holdings. In addition to the payments for the purchased capacity, ExpressJet capacity purchase, net, also includes ExpressJet’s fuel expense in excess of the cap provided in the capacity purchase agreement and a related fuel purchase agreement (71.2 cents per gallon, including fuel taxes) and is net of our rental income on aircraft we lease to ExpressJet.
Aircraft rentals decreased slightly year over year due to aircraft retirements, partially offset by increases from aircraft deliveries in 2003 and 2002. The decrease in landing fees and other rentals was due to lower variable rent at selected airports, partially offset by higher facilities rent, primarily attributable to the completion of substantial portions of the Global Gateway project at Liberty International Airport. Landing fees and other rentals would have been $9 million higher in 2003 had we not deconsolidated Holdings effective November 12, 2003.
Commissions, booking fees, credit card fees and other distribution costs decreased primarily due to the elimination of domestic base commissions during 2002 and certain international commission reductions. Maintenance, materials and repairs expense increased resulting from increases in our contractual engine maintenance cost per hour rates, higher wide-body maintenance activity and the higher number of regional jets in service. Maintenance, materials and repairs expense would have been $19 million higher in 2003 had we not deconsolidated Holdings effective November 12, 2003.
In May 2003, we received and recognized in earnings a security fee reimbursement of $176 million in cash from the United States government pursuant to a supplemental appropriations bill enacted in April 2003. This amount was reimbursement for our proportional share of passenger security and air carrier security fees paid or collected by U.S. air carriers as of the date of enactment of the legislation.
Special charges in 2003 consisted of $86 million retirement and impairment charges for our MD-80 fleet and spare parts associated with the grounded aircraft and a $14 million charge in the second quarter for expenses associated with the deferral of Boeing 737 aircraft deliveries. In 2002, we recorded $242 million of retirement and impairment charges for DC 10-30, MD-80 and turboprop aircraft and a charge of $12 million to write down our receivable from the
A-16
U.S. government based on our final grant application related to the Air Transportation and System Stabilization Act.
Other operating expense decreased as a result of lower insurance costs and cost-saving measures. These expenses would have been $21 million higher in 2003 had we not deconsolidated Holdings effective November 12, 2003.
Nonoperating Income (Expense).Interest expense increased 5.6%, $21 million, in 2003 compared to 2002 due to an increase in long-term debt resulting from the purchase of new aircraft. Equity in the income (loss) of affiliates included our equity in the earnings (loss) of Copa Airlines, Orbitz (until its initial public offering in December 2003) and, effective November 12, 2003, Holdings and $17 million of income related to our tax sharing agreement with Holdings in 2003. 2003 included $132 million of gains related to the sale of investments in Hotwire and Orbitz and an adjustment to fair value of our remaining investment in Orbitz, after associated compensation expense and a $173 million gain on the sale and contribution of Holdings common stock to our pension plan.
Income Tax Benefit (Expense).Our effective tax rates differ from the federal statutory rate of 35% primarily due to expenses that are not deductible for federal income tax purposes, state income taxes and the accrual of income tax expense on our share of Holdings’ net income. We are required to accrue income tax expense on our share of Holdings’ net income after its initial public offering in all periods where we consolidate Holdings’ operations. The accrual of this income tax expense increased our tax expense by approximately $16 million during 2003 and reduced our tax benefit by $12 million in 2002. During 2003, we contributed 7.4 million shares of Holdings common stock valued at approximately $100 million to our defined benefit pension plan. For tax purposes, our deduction was limited to the market value of the shares contributed. Since our tax basis in the shares was higher than the market value at the time of the contribution, the nondeductible portion increased our tax expense by $9 million.
Minority Interest. Minority interest of $49 million in 2003 represents the portion of Holdings’ net income attributable to the equity of Holdings that we did not own prior to November 12, 2003, the date we deconsolidated Holdings. Transactions between us and Holdings or ExpressJet prior to deconsolidation were otherwise eliminated in the consolidated financial statements.
A-17
Segment Results of Operations
Mainline. Significant components of our mainline segment’s operating results are as follows (in millions, except percentage changes):
Year Ended December 31, | Increase | % Increase | ||||||||||||||
2003 | 2002 | (Decrease) | (Decrease) | |||||||||||||
Operating Revenue: | ||||||||||||||||
Passenger | $ | 6,845 | $ | 6,902 | $ | (57 | ) | (0.8 | )% | |||||||
Cargo, mail and other | 714 | 530 | 184 | 34.7 | % | |||||||||||
7,559 | 7,432 | 127 | 1.7 | % | ||||||||||||
Operating Expenses: | ||||||||||||||||
Wages, salaries and related costs | 2,713 | 2,632 | 81 | 3.1 | % | |||||||||||
Aircraft fuel and related taxes | 1,149 | 960 | 189 | 19.7 | % | |||||||||||
Aircraft rentals | 670 | 722 | (52 | ) | (7.2 | )% | ||||||||||
Landing fees and other rentals | 528 | 542 | (14 | ) | (2.6 | )% | ||||||||||
Commissions, booking fees, credit card fees and other distribution costs | 456 | 528 | (72 | ) | (13.6 | )% | ||||||||||
Maintenance, materials and repairs | 398 | 379 | 19 | 5.0 | % | |||||||||||
Depreciation and amortization | 416 | 403 | 13 | 3.2 | % | |||||||||||
Passenger servicing | 278 | 279 | (1 | ) | (0.4 | )% | ||||||||||
Security fee reimbursement | (173 | ) | — | (173 | ) | NM | ||||||||||
Special charges | 91 | 197 | (106 | ) | NM | |||||||||||
Other | 799 | 944 | (145 | ) | (15.4 | )% | ||||||||||
7,325 | 7,586 | (261 | ) | (3.4 | )% | |||||||||||
Operating Income (Loss) | $ | 234 | $ | (154 | ) | $ | 388 | NM | ||||||||
The variances in specific line items for the mainline segment are due to the same factors discussed under consolidated results of operations, with the exception of aircraft rentals and depreciation and amortization. Mainline aircraft rental expense decreased primarily due to lease expirations and lower rates on renewal leases. Depreciation and amortization expense increased due to higher ground equipment and software balances resulting from increased non-fleet capital expenditures.
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Regional. Significant components of our regional segment’s operating results are as follows (in millions, except percentage changes):
Year Ended December 31, | Increase | % Increase | ||||||||||||||
2003 | 2002 | (Decrease) | (Decrease) | |||||||||||||
Operating Revenue: | ||||||||||||||||
Passenger | $ | 1,290 | $ | 960 | $ | 330 | 34.4 | % | ||||||||
Cargo, mail and other | 21 | 10 | 11 | 110.0 | % | |||||||||||
1,311 | 970 | 341 | 35.2 | % | ||||||||||||
Operating Expenses: | ||||||||||||||||
Wages, salaries and related costs | 343 | 327 | 16 | 4.9 | % | |||||||||||
Aircraft fuel and related taxes | 170 | 124 | 46 | 37.1 | % | |||||||||||
ExpressJet capacity purchase, net | 153 | — | 153 | NM | ||||||||||||
Aircraft rentals | 226 | 180 | 46 | 25.6 | % | |||||||||||
Landing fees and other rentals | 92 | 91 | 1 | 1.1 | % | |||||||||||
Commissions, booking fees, credit card fees and other distribution costs | 69 | 64 | 5 | 7.8 | % | |||||||||||
Maintenance, materials and repairs | 111 | 97 | 14 | 14.4 | % | |||||||||||
Depreciation and amortization | 28 | 41 | (13 | ) | (31.7 | )% | ||||||||||
Passenger servicing | 19 | 17 | 2 | 11.8 | % | |||||||||||
Security fee reimbursement | (3 | ) | — | (3 | ) | NM | ||||||||||
Special charges | 9 | 57 | (48 | ) | NM | |||||||||||
Other | 125 | 130 | (5 | ) | (3.8 | )% | ||||||||||
1,342 | 1,128 | 214 | 19.0 | % | ||||||||||||
Operating Income (Loss) | $ | (31 | ) | $ | (158 | ) | $ | 127 | (80.4 | )% | ||||||
The reported results of our regional segment do not reflect the total contribution of the regional segment to our system-wide operations. The regional segment generates additional revenue for the mainline segment as it feeds traffic between smaller cities and our mainline hubs.
The variances in specific line items for the regional segment are due to the same factors discussed under consolidated results of operations, with the exception of aircraft rentals and depreciation and amortization. Regional aircraft rental expense increased due to new regional jet deliveries in 2003 and 2002, offset by aircraft retirements. Depreciation and amortization expense decreased due to the sale of ExpressJet inventory in 2002. Payments made to ExpressJet under our capacity purchase agreement were eliminated in consolidation prior to November 12, 2003.
Liquidity and Capital Resources
If the current adverse environment does not improve, we expect to incur a significant loss in 2005. However, absent adverse factors outside our control such as additional terrorist attacks, hostilities involving the United States or further significant increases in fuel prices, we currently believe that our existing liquidity and projected 2005 cash flows will be sufficient to fund our current operations and other financial obligations through 2005 if we achieve the timely ratification and implementation of the tentative agreements with our unions concerning wage and benefit reductions or, if the tentative agreements are not ratified and do not take effect, by taking the steps described in “Overview” above to reduce our future financial commitments and current cash outflows. These steps include canceling our tentative agreements with Boeing, marketing for sale or lease twenty-
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four 737-500 aircraft and furloughing a significant number of employees.
In developing our plan for 2005, we considered our current projections for 2005 revenue, including the impact of fare reductions initiated in early January 2005 by Delta Air Lines, current and forward fuel price levels as of March 14, 2005, our expectations with regard to union ratification of the tentative agreements described above and our ability to execute additional financing transactions. While we believe our 2005 plan is achievable, a combination of some or all of several events, most of which are outside of our direct control, may result in us being unable to generate sufficient cash from operations or complete financing transactions that we would need to maintain adequate liquidity through December 31, 2005. These events include the failure of our unions to ratify the tentative agreements so that they do not go into effect, further significant declines in yields and fuel prices higher than current levels for an extended period of time. Additionally, we have significant financial obligations due in 2006 and thereafter, and we will have inadequate liquidity to meet those obligations if the current financial environment for network carriers continues and we are unable to increase our revenues or decrease our costs considerably.
initiatives, partially offset by higher fuel costs. Cash flows provided by operations in 2004 benefited from our election with respect to 2004 to defer contributions to our primary defined benefit pension plan. Cash contributions to our defined benefit pension plans totaled $224 million in 2005.
Our capital expenditures during 2004 totaled $162 million or $51 million when reduced byand net purchase deposits refunded. In 2003, our capital expendituresrefunded totaled $205 million, or $153 million when reduced by net purchase deposits refunded.$111 million. Capital expenditures for 20052006 are expected to be approximately $220$300 million, or $170$325 million when reduced byafter considering purchase deposits to be paid, net of purchase deposits to be refunded. Projected capital expenditures for 20052006 consist of $50$155 million of fleet expenditures, $135$100 million of non-fleet expenditures and $35$45 million for rotable parts and capitalized interest.
The eightfrom 2007 through 2011. In addition, we are scheduled to take delivery of two used 757-300 aircraft discussed above will be leased from Boeing Capital Corporation, which has also agreed to providein 2006 under operating leases.
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expenditures, or for our capital expenditures in general.
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provided by these new aircraft as they deliverare delivered to ExpressJet.
2005.
December 2005.
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In May 2003, we issued $100 million of Floating Rate Secured Subordinated Notes due December 2007 (the “Junior Notes”). The Junior Notes are secured by a portion of our spare parts inventory and bear interest at the three-month LIBOR plus 7.5%. In connection with the Junior Notes and $200 million of Floating Rate Secured Notes due December 2007 secured by the same pool of spare parts (the “Senior Notes”), we have entered into a collateral maintenance agreement requiring us, among other things, to maintain a loan-to-collateral value ratio of not greater than 45% with respect to the Senior Notes and a loan-to-collateral value ratio of not greater than 67.5% with respect to both the Senior Notes and the Junior Notes combined. We must also maintain a certain level of rotable components within the spare parts collateral pool. The ratios are calculated on a semi-annual basis based on an independent appraisal of the spare parts collateral pool. If any of the collateral ratio covenants are not met, we must take action to meet all covenants by adding additional eligible spare parts to the collateral pool, purchasing or redeeming some of the outstanding notes, providing other collateral acceptable to the bond insurance policy provider for the Senior Notes, or any combination of the above.
During 2003, we incurred $130 million of floating rate indebtedness under a term loan agreement that matures in May 2011. This indebtedness is secured by a portion of our spare engines and initially bears interest at the three-month LIBOR plus 3.5%.
In June 2003, we issued $175 million of 5% Convertible Notes due 2023. The notes are convertible into our Class B common stock at an initial conversion price of $20 per share, subject to certain conditions on conversion. The notes are redeemable for cash at our option on or after June 18, 2010 at par plus accrued and unpaid interest, if any. Holders may require us to repurchase the notes on June 15 of 2010, 2013 or 2018, or in the event of certain changes in control, at par plus accrued and unpaid interest, if any. The indenture provides that we may at our option choose to pay this repurchase price in cash, in shares of common stock or any combination thereof, except in certain circumstances involving a change in control, in which case we will be required to pay cash.
During the fourth quarter of 2003, we incurred $120 million of floating rate indebtedness due at various intervals through 2015. This indebtedness is secured by the four 737-800 aircraft that were delivered in the fourth quarter of 2003.
On several occasions subsequent to September 11, 2001, Moody’s Investors Service and Standard and Poor’s both downgraded the credit ratings of a number of major airlines, including us. Additional downgrades to our credit ratings were made in March and April 2003 and further downgrades are possible. As of
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and Poor’s.
We would also be required to post additional collateral of up to $27 million under our worker’s compensation program if our debt rating falls below Caa2 as rated by Moody’s or CCC+ as rated by Standard & Poor’s.
convertible into, shares of common stock, such as stock purchase contracts, warrants or subscription rights, among others. Proceeds from any sale of securities under this registration statement other than pass-through certificates would likely be used for general corporate purposes, including the repayment of debt, the funding of pension obligations and working capital requirements, whereas proceeds from the issuance of pass-through certificates would be used to finance or refinance aircraft and related equipment. On October 24, 2005, we completed a public offering of 18 million shares of common stock under this registration statement, raising $203 million in cash.
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A policy provider is also used as credit support for the financing of certain facilities at Bush Intercontinental, currently subject to a sublease by us to the City of Houston, with an outstanding balance of $57 million at December 31, 2005.
Contractual Obligations | Payments Due | Later | ||||||||||||||||||||||||||
Total | 2005 | 2006 | 2007 | 2008 | 2009 | Years | ||||||||||||||||||||||
Debt and leases: | ||||||||||||||||||||||||||||
Long-term debt (1) | $ | 7,642 | $ | 979 | $ | 836 | $ | 1,172 | $ | 817 | $ | 650 | $ | 3,188 | ||||||||||||||
Capital lease obligations (1) | 645 | 46 | 39 | 40 | 45 | 16 | 459 | |||||||||||||||||||||
Aircraft operating leases (2) | 11,249 | 982 | 933 | 903 | 884 | 840 | 6,707 | |||||||||||||||||||||
Nonaircraft operating leases (3) | 7,741 | 406 | 397 | 390 | 369 | 370 | 5,809 | |||||||||||||||||||||
Future operating leases (4) | 671 | 15 | 37 | 39 | 39 | 39 | 502 | |||||||||||||||||||||
Other: | ||||||||||||||||||||||||||||
Capacity Purchase Agreement (5) | 2,857 | 1,233 | 1,092 | 525 | 7 | — | — | |||||||||||||||||||||
Aircraft and other purchase commitments (6) | 2,074 | 333 | 62 | 55 | 941 | 683 | — | |||||||||||||||||||||
Projected pension contributions (7) | 1,557 | 307 | 360 | 450 | 290 | 150 | — | |||||||||||||||||||||
Total (8) | $ | 34,436 | $ | 4,301 | $ | 3,756 | $ | 3,574 | $ | 3,392 | $ | 2,748 | $ | 16,665 | ||||||||||||||
Payments Due | Later | |||||||||||||||||||||||||||
Contractual Obligations | Total | 2006 | 2007 | 2008 | 2009 | 2010 | Years | |||||||||||||||||||||
Debt and leases: | ||||||||||||||||||||||||||||
Long-term debt(1) | $ | 7,846 | $ | 916 | $ | 1,240 | $ | 866 | $ | 698 | $ | 802 | $ | 3,324 | ||||||||||||||
Capital lease obligations(1) | 614 | 39 | 40 | 46 | 16 | 16 | 457 | |||||||||||||||||||||
Aircraft operating leases(2) | 11,068 | 1,003 | 966 | 955 | 910 | 924 | 6,310 | |||||||||||||||||||||
Nonaircraft operating leases(3) | 6,931 | 429 | 400 | 377 | 374 | 364 | 4,987 | |||||||||||||||||||||
Future operating leases(4) | 194 | 9 | 11 | 11 | 11 | 11 | 141 | |||||||||||||||||||||
Other: | ||||||||||||||||||||||||||||
Capacity Purchase Agreement(5) | 2,368 | 1,339 | 922 | 107 | — | — | — | |||||||||||||||||||||
Aircraft and other purchase commitments(6) | 2,709 | 252 | 274 | 630 | 855 | 378 | 320 | |||||||||||||||||||||
Projected pension contributions(7) | 1,554 | 258 | 318 | 376 | 262 | 98 | 242 | |||||||||||||||||||||
Total(8) | $ | 33,284 | $ | 4,245 | $ | 4,171 | $ | 3,368 | $ | 3,126 | $ | 2,593 | $ | 15,781 | ||||||||||||||
(1) | Amounts represent contractual amounts due, including interest. Interest on floating rate debt was estimated using |
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(2) | Amounts represent contractual amounts due and exclude | |
(3) | Amounts represent minimum contractual amounts. | |
(4) | Amounts represent payments for firm regional jets to be financed by third parties and leased by us. We will sublease the regional jets to ExpressJet. Neither we nor ExpressJet has an obligation to take any firm aircraft that are not financed by a third party. Amounts are net of previously paid purchase deposits and exclude sublease income we will receive from ExpressJet. See Note | |
(5) | Amounts represent our estimates of future minimum noncancelable commitments under our agreement with ExpressJet and do not include the portion of the underlying obligations for aircraft and facility rent that are disclosed as part of aircraft and nonaircraft operating leases. See Note |
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(6) | Amounts represent contractual commitments for firm-order aircraft only, net of previously paid purchase deposits, and noncancelable commitments to purchase goods and services, primarily information technology support. | |
(7) | Amounts represent our estimate of the minimum funding requirements as determined by government regulations. Amounts are subject to change based on numerous assumptions, including the performance of the assets in the plan and bond rates. See “Critical Accounting Policies and Estimates” for a discussion of our assumptions regarding our pension | |
(8) | Total contractual obligations do not include long-term contracts where the commitment is variable in nature, such as credit card processing agreements, or where short-term cancellation provisions exist, such aspower-by-the-hour engine maintenance agreements. |
2005.
Capacity Purchase Agreement.. 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. Under the agreement, ExpressJet has the right through December 31, 2006 to be our sole provider of regional jet service from our hubs. In December 2005, we gave notice to ExpressJet that we would withdraw 69 of the 274 regional jet aircraft (including 2006 deliveries) from the capacity purchase agreement because we believe the rates charged by ExpressJet for regional capacity are above the current market. While our discussions with ExpressJet continue, we have requested proposals from numerous regional jet operators to provide regional jet service to replace the withdrawn capacity. Any transition of service of the withdrawn capacity from ExpressJet to a new operator would begin in January 2007 and be completed during the summer of 2007. See Note 15 in our consolidated financial statements16 for details of our capacity
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purchase agreement with ExpressJet.
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 and a new international ticketing hall facility 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. We have also entered into a binding corporate guaranty with the bond trustee for the repayment of all of the principal and interest on the bonds. The guarantee became effective for the repayment of principal and interest with respect to $271 million of the bonds upon completion of the terminal during the first quarter of 2004. The remainder of the guarantee, relating to $53 million of the bonds, became effective upon completion of the international ticketing facility in January 2005.
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obligationswithholding taxes, subject to customary exclusions. These capital leases for these two 757 aircraft totaled $59expire in 2008 and have a carrying value of $49 million at December 31, 2004.
2005.
agreements due to unknown variables related to potential government changes in capital adequacy requirements or tax laws.
$495 million, which completely offset our net deferred tax assets.
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The
liquidity.
We expect our total losses from environmental matters to be approximately $50 million, for which we were fully accrued at December 31, 2004. 2005.
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“pilot agreement,” future defined benefit accruals for pilots ceased and retirement benefits accruing in the future are provided through two new pilot-only defined contribution plans. See Note 10 to our consolidated financial statements for a discussion of these new defined contribution plans. As required by the pilot agreement, defined benefit pension assets and obligations related to pilots in our primary defined benefit pension plan (covering substantially all U.S. employees other than Chelsea Food Services (“Chelsea”) and CMI employees) were spun out into a separate pilot-only defined benefit pension plan, which we refer to as the “pilot defined benefit pension plan.” Subsequently, on May 31, 2005, future benefit accruals for pilots ceased and the pilot defined benefit pension plan was “frozen.” As of that freeze date, all existing accrued benefits for pilots (including the right to receive a lump sum payment upon retirement) were preserved in the pilot defined benefit pension plan. Accruals for non-pilot employees under our primary defined benefit pension plan continue.
We could experience an increase The U.S. Senate approved a pension reform bill in November 2005 that would give airlines the option of amortizing pension liabilities over a twenty-year period. The pension reform bill passed by the U.S. House of Representatives in December 2005 does not include a similar provision. The bills are expected to go to conference committee in early retirements caused by concern among our employees about our financial stability. The potential of an increase in early retirements could be exacerbated by2006 and it is not possible to predict the fact that our employees are entitled to lump-sum distributions from our defined benefit pension plan upon their retirement, including early retirement within the provisions of the plan. Some of our competitors have terminated, or have sought to terminate, their defined benefit pension plans in bankruptcy, which can cause employees to receive less than the full amount of their pension benefits under applicable federal pension benefit insurance, and can also limit or eliminate the ability of employees to receive their pension benefits in a lump-sum. If liquidity concerns increase, we could experience a significant increase in early retirements which could negatively impact our operations and materially increase our near-term funding obligations to our defined benefit pension plan, which could itself result in a material adverse effect on our liquidity.
outcome.
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detrimental impact on the entire portfolio. Our allocation of assets was as follows at December 31, 2004:
Expected Long-Term | ||||||||
Percent of Total | Rate of Return | |||||||
U.S. equities | 49 | % | 10.0 | % | ||||
International equities | 17 | 10.0 | ||||||
Fixed income | 28 | 6.5 | ||||||
Other | 6 | 13.0 | ||||||
Total | 100 | % | ||||||
We believe that our long-term asset allocation on average will approximate the targeted allocation. We regularly review our actual asset allocation and periodically rebalance the pension plan’splans’ investments to our targeted allocation when considered appropriate.
Our allocation of assets was as follows at December 31, 2005:
Expected Long-Term | ||||||||
Percent of Total | Rate of Return | |||||||
U.S. equities | 49 | % | 9.4 | % | ||||
International equities | 21 | 9.4 | ||||||
Fixed income | 22 | 6.8 | ||||||
Other | 8 | 12.4 | ||||||
Total | 100 | % | ||||||
The tentative agreements with our pilots and flight attendants each provide that benefits accruals with respect to those groups under our defined benefit pension plan will be frozen and we will begin to make contributions to alternate retirement programs. All of the pilots’ and flight attendants’ existing benefits under our plan at the date of the freeze will be preserved, including the right to receive a lump-sum payment upon their retirement.
The tentative agreement with our pilots provides for a new defined contribution plan to be established after the existing pension benefits are frozen on May 31, 2005. That plan will be a money purchase pension plan that is also subject to minimum contribution rules under the Internal Revenue Code. If the pilots’ tentative agreement is ratified and takes effect, contributions under the new defined contribution plan will generally be specified percentages of applicable pilot compensation, subject to applicable legal limits. Further, the tentative agreement provides for additional contributions to the pilots’ 401(k) plan, depending on our pre-tax profits during a portion of the term of the pilots’ agreement. To the extent contributions to either plan are limited by applicable law, the difference between the contractual amounts and the amounts permitted by law to be contributed to the defined contribution plans will be paid directly to pilots under a corresponding nonqualified arrangement.
The tentative agreement with our flight attendants provides that the flight attendants will join the IAM’s National Pension Fund in connection with the freezing of their benefits under our existing defined benefit plan. The National Pension Plan is a multiemployer pension plan managed by representatives of participating employers and representatives of the IAM. Our obligation will be to make a fixed contribution to the National Pension Plan per hour of flight attendant service, as specified in the tentative agreement.
Funding requirements under our pre-existing defined benefit plan (including a separate plan to be established that will contain the assets and obligations related to pilots formerly contained in our defined benefit
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plan) will continue to be determined under applicable law. However, if the pilots’ tentative agreement takes effect, we have agreed that we will not declare a cash dividend or repurchase our outstanding common stock for cash until we have contributed at least $500 million to the pilots’ defined benefit plan, measured from the date of ratification of the pilots’ tentative agreement. Further, we have agreed that we will not make an election under any optional funding legislation that would eliminate the lump-sum benefit option without the consent of ALPA.
We would expect to record an approximately $56 million non-cash curtailment charge in accordance with SFAS No. 88, “Employer’s Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits”, (“SFAS No. 88”) in connection with freezing a portion of our defined benefit pension plan. SFAS No. 88 requires curtailment accounting if an event eliminates, for a significant number of employees, the accrual of defined benefits for some or all of their future services. In the event of a curtailment, the unrecognized prior service costs associated with years of service no longer expected to be rendered as the result of a curtailment is a loss. As a result of freezing a portion of the defined benefit pension plan, and net of required contributions to alternate retirement programs, we expect net cash outflows relating to our pension funding obligations to decrease by approximately $50 million in 2005 and our 2005 pension expense to decrease by approximately $90 million.
Also, in conjunction with the tentative agreements with the unions representing our work groups, we plan to make available on a long-term basis certain medical benefits to eligible retirees. Generally, these benefits allow eligible retired employees to receive medical benefits that “bridge” their medical coverage from their date of retirement until attainment of Medicare eligibility, subject to applicable limits and conditions. Retirees are required to pay a portion of the costs of their retiree medical benefits to the extent they do not have sufficient accumulated sick time accruals. Plan benefits are subject to co-payments, deductibles and other limits as described in the plans. The retiree medical benefits plan would be accounted for under SFAS No. 106, “Employers’ Accounting for Postretirement Benefits other than Pensions”, which requires recognition of the expected cost of benefits over the employee’s service period. We expect to record an incremental $25 million non-cash expense in 2005 associated with this post retirement plan.
operating carrier.
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In 2003, weWe recorded an impairment charge of $65 million to reflect decreases in the fair value of our owned MD-80s and spare parts inventory for permanently grounded fleets. In 2002, we recognized an impairment charge of $93 million related to owned MD-80 and ATR-42 aircraft. We estimated the fair value of these aircraft and related inventory based on industry trends and, where available, reference to market rates and transactions. All other long-lived assets, principally our other fleet types and airport operating rights, were determined to be recoverable based on our estimates of future cash flows.
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2005.
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sheets.
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vesting period is not complete, we will use the modified prospective transition method permitted by SFAS 123R. Under this method, we will account for such awards on a prospective basis, with expense will bebeing recognized based onin our statement of operations beginning in the first quarter of 2006 using the grant-date fair value and vesting schedule of those awardsvalues previously calculated for theour SFAS 123 pro forma disclosures under SFAS 123. Seepresented in Note 1(o) for. We will recognize the impact ofrelated compensation cost not previously recognized in the fair value recognition provisions of SFAS 123 onpro forma disclosures over the remaining vesting period.
Long-Term Incentive and Restricted Stock Unit (“RSU”) program. As discussed in Note 8 to our consolidated financial statements, awards made pursuant to this program can result in cash payments to our officers if there are specified increases in our stock price over multi-year performance periods. Under our current accounting, we expect to issue to employees stock options to acquire approximately ten million shareshave recognized no liability or expense as of our Class B common stock,December 31, 2005 because the targets set forth in the program had not been met as of that date. Under SFAS 123R, these awards will be measured at fair value at each reporting date and the related expense will be recognized over the remaining required service periods. The fair value will be determined using a price per share equalpricing model.
Upon adoption of SFAS 123R effectiveon January 1, 2006, reducing earnings approximately $26 million. On February 1, 2006, our officers surrendered their RSU awards with a performance period ending March 31, 2006. Approximately $15 million of the thirdcumulative effect of change in accounting principle at January 1, 2006 relates to these surrendered awards. Accordingly, we will record this amount as a reduction of operating expense in the first quarter of 2005, and assuming ratification and effectiveness of each of the tentative agreements with the unions representing our work groups, we would expect2006.
incremental expense related to the existing RSU awards is difficult to predict because it will vary with changes in our stock price.
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place prior to December 31, 2004. In February 2006, we entered into petroleum swap contracts to hedge a minimal portion of our projected 2006 fuel usage.
• | Forward and option contracts to hedge approximately 61% of our projected Japanese yen-denominated | |
• | Forward and option contracts to hedge approximately 45% |
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• | Forward contracts to hedge approximately 42% of our projected Canadian dollar-denominated | |
• | Forward and option contracts to hedge approximately 39% |
We estimate that at
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At December 31, 2003, a uniform 10% strengthening in the value of the U.S. dollar relative to the Japanese yen, British pound and euro would have increased the fair value of the existing option and/or forward contracts by $6 million, $12 million and $2 million, respectively, offset by a corresponding loss on the underlying 2004 exposure of $13 million, $9 million and $3 million, respectively, resulting in a net $(7) million, $3 million and $(1) million gain (loss).
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ON
INTERNAL FINANCIAL REPORTING
March 14, 2005
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As discussed in Notes 12 and 14 to the consolidated financial statements, the Company adopted, effective January 1, 2003, Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Disposal or Exit Activities” and, effective July 1, 2003, Financial Accounting Standards Board Interpretation No. 46, “Consolidation of Variable Interest Entities.”
March 14, 2005
A-34A-33
Year Ended December 31, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
(In millions, except per | ||||||||||||
share data) | ||||||||||||
Operating Revenue: | ||||||||||||
Passenger (excluding fees and taxes of $1,176, $1,046 and $904) | $ | 10,235 | $ | 9,042 | $ | 8,179 | ||||||
Cargo, mail and other | 973 | 857 | 822 | |||||||||
11,208 | 9,899 | 9,001 | ||||||||||
Operating Expenses: | ||||||||||||
Wages, salaries and related costs | 2,649 | 2,819 | 3,056 | |||||||||
Aircraft fuel and related taxes | 2,443 | 1,587 | 1,319 | |||||||||
ExpressJet capacity purchase, net | 1,572 | 1,351 | 153 | |||||||||
Aircraft rentals | 928 | 891 | 896 | |||||||||
Landing fees and other rentals | 708 | 654 | 632 | |||||||||
Distribution costs | 588 | 552 | 525 | |||||||||
Maintenance, materials and repairs | 455 | 414 | 509 | |||||||||
Depreciation and amortization | 389 | 415 | 447 | |||||||||
Passenger servicing | 332 | 306 | 297 | |||||||||
Security fee reimbursement | — | — | (176 | ) | ||||||||
Special charges | 67 | 121 | 100 | |||||||||
Other | 1,116 | 1,027 | 1,055 | |||||||||
11,247 | 10,137 | 8,813 | ||||||||||
Operating Income (Loss) | (39 | ) | (238 | ) | 188 | |||||||
Nonoperating Income (Expense): | ||||||||||||
Interest expense | (410 | ) | (389 | ) | (393 | ) | ||||||
Interest capitalized | 12 | 14 | 24 | |||||||||
Interest income | 72 | 29 | 19 | |||||||||
Income from affiliates | 90 | 118 | 40 | |||||||||
Gain on sale of Copa Holdings, S.A. shares | 106 | — | — | |||||||||
Gain on dispositions of ExpressJet Holdings shares | 98 | — | 173 | |||||||||
Other, net | 3 | 17 | 135 | |||||||||
(29 | ) | (211 | ) | (2 | ) | |||||||
Income (Loss) before Income Taxes and Minority Interest | (68 | ) | (449 | ) | 186 | |||||||
Income Tax Benefit (Expense) | — | 40 | (109 | ) | ||||||||
Minority Interest | — | — | (49 | ) | ||||||||
Net Income (Loss) | $ | (68 | ) | $ | (409 | ) | $ | 28 | ||||
Earnings (Loss) per Share: | ||||||||||||
Basic | $ | (0.96 | ) | $ | (6.19 | ) | $ | 0.43 | ||||
Diluted | $ | (0.97 | ) | $ | (6.25 | ) | $ | 0.41 | ||||
Shares Used for Computation: | ||||||||||||
Basic | 70.3 | 66.1 | 65.4 | |||||||||
Diluted | 70.3 | 66.1 | 65.6 | |||||||||
Year Ended December 31, | ||||||||||||
2004 | 2003 (A) | 2002 (A) | ||||||||||
Operating Revenue: | ||||||||||||
Passenger (excluding fees and taxes of $1,046, $904 and $878) (B) | $ | 8,984 | $ | 8,135 | $ | 7,862 | ||||||
Cargo, mail and other | 760 | 735 | 540 | |||||||||
9,744 | 8,870 | 8,402 | ||||||||||
Operating Expenses: | ||||||||||||
Wages, salaries and related costs | 2,819 | 3,056 | 2,959 | |||||||||
Aircraft fuel and related taxes | 1,587 | 1,319 | 1,084 | |||||||||
ExpressJet capacity purchase, net | 1,351 | 153 | — | |||||||||
Aircraft rentals | 891 | 896 | 902 | |||||||||
Landing fees and other rentals | 646 | 620 | 633 | |||||||||
Commissions, booking fees, credit card fees and other distribution costs | 552 | 525 | 592 | |||||||||
Maintenance, materials and repairs | 414 | 509 | 476 | |||||||||
Depreciation and amortization | 414 | 444 | 444 | |||||||||
Passenger servicing | 306 | 297 | 296 | |||||||||
Security fee reimbursement | — | (176 | ) | — | ||||||||
Special charges | 121 | 100 | 254 | |||||||||
Other | 872 | 924 | 1,074 | |||||||||
9,973 | 8,667 | 8,714 | ||||||||||
Operating Income (Loss) | (229 | ) | 203 | (312 | ) | |||||||
Nonoperating Income (Expense): | ||||||||||||
Interest expense | (389 | ) | (393 | ) | (372 | ) | ||||||
Interest capitalized | 14 | 24 | 36 | |||||||||
Interest income | 29 | 19 | 24 | |||||||||
Income from affiliates | 118 | 40 | 8 | |||||||||
Gain on dispositions of ExpressJet Holdings shares | — | 173 | — | |||||||||
Other, net | 17 | 135 | (15 | ) | ||||||||
(211 | ) | (2 | ) | (319 | ) | |||||||
Income (Loss) before Income Taxes and Minority Interest | (440 | ) | 201 | (631 | ) | |||||||
Income Tax Benefit (Expense) | 77 | (114 | ) | 208 | ||||||||
Minority Interest | — | (49 | ) | (28 | ) | |||||||
Net Income (Loss) | $ | (363 | ) | $ | 38 | $ | (451 | ) | ||||
Earnings (Loss) per Share: | ||||||||||||
Basic | $ | (5.49 | ) | $ | 0.58 | $ | (7.02 | ) | ||||
Diluted | $ | (5.55 | ) | $ | 0.57 | $ | (7.02 | ) | ||||
Shares Used for Computation: | ||||||||||||
Basic | 66.1 | 65.4 | 64.2 | |||||||||
Diluted | 66.1 | 65.6 | 64.2 | |||||||||
A-34
December 31, | ||||||||
2005 | 2004 | |||||||
(In millions, except for share data) | ||||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 1,723 | $ | 1,178 | ||||
Restricted cash | 241 | 211 | ||||||
Short-term investments | 234 | 280 | ||||||
Total cash, cash equivalents and short-term investments | 2,198 | 1,669 | ||||||
Accounts receivable, net of allowance for doubtful receivables of $15 and $22 | 515 | 472 | ||||||
Spare parts and supplies, net of allowance for obsolescence of $95 and $93 | 201 | 214 | ||||||
Deferred income taxes | 154 | 166 | ||||||
Note receivable from ExpressJet Holdings, Inc. | 18 | 81 | ||||||
Prepayments and other | 341 | 222 | ||||||
Total current assets | 3,427 | 2,824 | ||||||
Property and Equipment: | ||||||||
Owned property and equipment: | ||||||||
Flight equipment | 6,706 | 6,744 | ||||||
Other | 1,372 | 1,262 | ||||||
8,078 | 8,006 | |||||||
Less: Accumulated depreciation | 2,328 | 2,053 | ||||||
5,750 | 5,953 | |||||||
Purchase deposits for flight equipment | 101 | 105 | ||||||
Capital leases | 344 | 396 | ||||||
Less: Accumulated amortization | 109 | 140 | ||||||
235 | 256 | |||||||
Total property and equipment | 6,086 | 6,314 | ||||||
Routes | 484 | 615 | ||||||
Airport operating rights, net of accumulated amortization of $335 and $316 | 133 | 236 | ||||||
Intangible pension asset | 60 | 108 | ||||||
Investment in affiliates | 112 | 156 | ||||||
Note receivable from ExpressJet Holdings, Inc. | — | 18 | ||||||
Other assets, net | 227 | 240 | ||||||
Total Assets | $ | 10,529 | $ | 10,511 | ||||
A-35
December 31, | ||||||||
2005 | 2004 | |||||||
(In millions, except for share data) | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current Liabilities: | ||||||||
Current maturities of long-term debt and capital leases | $ | 546 | $ | 670 | ||||
Accounts payable | 846 | 766 | ||||||
Air traffic and frequent flyer liability | 1,475 | 1,157 | ||||||
Accrued payroll | 234 | 281 | ||||||
Accrued other liabilities | 298 | 251 | ||||||
Total current liabilities | 3,399 | 3,125 | ||||||
Long-Term Debt and Capital Leases | 5,057 | 5,167 | ||||||
Deferred Income Taxes | 154 | 378 | ||||||
Accrued Pension Liability | 1,078 | 1,132 | ||||||
Other | 615 | 554 | ||||||
Commitments and Contingencies | ||||||||
Stockholders’ Equity: | ||||||||
Preferred stock — $.01 par, 10,000,000 shares authorized; one share of Series B issued and outstanding, stated at par value | — | — | ||||||
Class B common stock — $.01 par, 200,000,000 shares authorized; 111,690,943 and 91,938,816 shares issued | 1 | 1 | ||||||
Additional paid-in capital | 1,635 | 1,408 | ||||||
Retained earnings | 406 | 474 | ||||||
Accumulated other comprehensive loss | (675 | ) | (587 | ) | ||||
Treasury stock — 25,489,291 and 25,476,881 shares, at cost | (1,141 | ) | (1,141 | ) | ||||
Total stockholders’ equity | 226 | 155 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 10,529 | $ | 10,511 | ||||
December 31, | ||||||||
2004 | 2003 | |||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 1,055 | $ | 999 | ||||
Restricted cash and cash equivalents | 211 | 170 | ||||||
Short-term investments | 403 | 431 | ||||||
Total cash, cash equivalents and short-term investments | 1,669 | 1,600 | ||||||
Accounts receivable, net of allowance for doubtful receivables of $22 and $19 | 472 | 403 | ||||||
Spare parts and supplies, net of allowance for obsolescence of $93 and $98 | 214 | 191 | ||||||
Deferred income taxes | 170 | 157 | ||||||
Note receivable from ExpressJet Holdings, Inc. | 81 | 67 | ||||||
Prepayments and other | 222 | 168 | ||||||
Total current assets | 2,828 | 2,586 | ||||||
Property and Equipment: | ||||||||
Owned property and equipment: | ||||||||
Flight equipment | 6,744 | 6,574 | ||||||
Other | 1,262 | 1,195 | ||||||
8,006 | 7,769 | |||||||
Less: Accumulated depreciation | 2,023 | 1,784 | ||||||
5,983 | 5,985 | |||||||
Purchase deposits for flight equipment | 105 | 225 | ||||||
Capital leases | 396 | 404 | ||||||
Less: Accumulated amortization | 140 | 126 | ||||||
256 | 278 | |||||||
Total property and equipment | 6,344 | 6,488 | ||||||
Routes | 615 | 615 | ||||||
Airport operating rights, net of accumulated amortization of $316 and $293 | 236 | 259 | ||||||
Intangible pension asset | 108 | 124 | ||||||
Investment in affiliates | 156 | 173 | ||||||
Note receivable from ExpressJet Holdings, Inc. | 18 | 126 | ||||||
Other assets, net | 240 | 278 | ||||||
Total Assets | $ | 10,545 | $ | 10,649 | ||||
(continued on next page)
A-36
CONTINENTAL AIRLINES, INC.CONSOLIDATED BALANCE SHEETS(In millions, except for share data)
December 31, | ||||||||
2004 | 2003 | |||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current Liabilities: | ||||||||
Current maturities of long-term debt and capital leases | $ | 670 | $ | 422 | ||||
Accounts payable | 766 | 840 | ||||||
Air traffic liability | 1,157 | 957 | ||||||
Accrued payroll | 281 | 280 | ||||||
Accrued other liabilities | 385 | 366 | ||||||
Total current liabilities | 3,259 | 2,865 | ||||||
Long-Term Debt and Capital Leases | 5,167 | 5,558 | ||||||
Deferred Income Taxes | 382 | 446 | ||||||
Accrued Pension Liability | 1,132 | 680 | ||||||
Other | 339 | 308 | ||||||
Commitments and Contingencies | ||||||||
Stockholders’ Equity: | ||||||||
Series B Junior Participating Preferred stock - $.01 par, 10,000,000 shares authorized; one share of Series B issued and outstanding, stated at par value | — | — | ||||||
Class B common stock - $.01 par, 200,000,000 shares authorized; 91,938,816 and 91,507,192 shares issued | 1 | 1 | ||||||
Additional paid-in capital | 1,408 | 1,401 | ||||||
Retained earnings | 585 | 948 | ||||||
Accumulated other comprehensive loss | (587 | ) | (417 | ) | ||||
Treasury stock - 25,476,881 and 25,471,881 shares, at cost | (1,141 | ) | (1,141 | ) | ||||
Total stockholders’ equity | 266 | 792 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 10,545 | $ | 10,649 | ||||
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
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A-36
Year Ended December 31, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
(In millions) | ||||||||||||
Cash Flows from Operating Activities: | ||||||||||||
Net income (loss) | $ | (68 | ) | $ | (409 | ) | $ | 28 | ||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||
Deferred income taxes | — | (40 | ) | 96 | ||||||||
Depreciation and amortization | 389 | 415 | 447 | |||||||||
Special charges | 67 | 121 | 100 | |||||||||
Gains on dispositions of investments | (204 | ) | — | (305 | ) | |||||||
Undistributed equity in the income of affiliates | (62 | ) | (66 | ) | (23 | ) | ||||||
Other, net | (18 | ) | (73 | ) | (36 | ) | ||||||
Changes in operating assets and liabilities: | ||||||||||||
Increase in accounts receivable | (56 | ) | (76 | ) | (25 | ) | ||||||
(Increase) decrease in spare parts and supplies | (7 | ) | (37 | ) | 4 | |||||||
(Increase) decrease in prepayments and other assets | (59 | ) | (135 | ) | (27 | ) | ||||||
Increase (decrease) in accounts payable | 80 | (74 | ) | (19 | ) | |||||||
Increase in air traffic and frequent flyer liability | 318 | 200 | 75 | |||||||||
Increase in accrued pension liability and other | 77 | 547 | 27 | |||||||||
Net cash provided by operating activities | 457 | 373 | 342 | |||||||||
Cash Flows from Investing Activities: | ||||||||||||
Capital expenditures | (185 | ) | (162 | ) | (205 | ) | ||||||
Purchase deposits (paid) refunded in connection with aircraft deliveries, net | (3 | ) | 111 | 52 | ||||||||
Sale of short-term investments, net | �� | 46 | 34 | 35 | ||||||||
Proceeds from sale of Copa Holdings, S.A, net | 172 | — | — | |||||||||
Proceeds from sales of ExpressJet Holdings, net | — | — | 134 | |||||||||
Proceeds from sales of Internet-related investments | — | 98 | 76 | |||||||||
Proceeds from sales of property and equipment | 53 | 16 | 16 | |||||||||
Increase in restricted cash, net | (30 | ) | (41 | ) | (108 | ) | ||||||
Other | (2 | ) | (3 | ) | 53 | |||||||
Net cash provided by investing activities | 51 | 53 | 53 | |||||||||
Cash Flows from Financing Activities: | ||||||||||||
Proceeds from issuance of long-term debt, net | 436 | 67 | 559 | |||||||||
Payments on long-term debt and capital lease obligations | (662 | ) | (447 | ) | (549 | ) | ||||||
Proceeds from issuance of common stock, net | 227 | 5 | 5 | |||||||||
Other | 36 | 11 | — | |||||||||
Net cash (used in) provided by financing activities | 37 | (364 | ) | 15 | ||||||||
Impact on cash of ExpressJet deconsolidation | — | — | (225 | ) | ||||||||
Net Increase in Cash and Cash Equivalents | 545 | 62 | 185 | |||||||||
Cash and Cash Equivalents — Beginning of Period | 1,178 | 1,116 | 931 | |||||||||
Cash and Cash Equivalents — End of Period | $ | 1,723 | $ | 1,178 | $ | 1,116 | ||||||
Supplemental Cash Flows Information: | ||||||||||||
Interest paid | $ | 385 | $ | 372 | $ | 374 | ||||||
Income taxes paid (refunded) | $ | 2 | $ | (4 | ) | $ | 13 | |||||
Investing and Financing Activities Not Affecting Cash: | ||||||||||||
Property and equipment acquired through the issuance of debt | $ | — | $ | 226 | $ | 120 | ||||||
Capital lease obligations incurred | $ | 1 | $ | 1 | $ | 22 | ||||||
Contribution of ExpressJet Holdings stock to pension plan | $ | 130 | $ | — | $ | 100 |
Year Ended December 31, | ||||||||||||
2004 | 2003 (A) | 2002 (A) | ||||||||||
Cash Flows from Operating Activities: | ||||||||||||
Net income (loss) | $ | (363 | ) | $ | 38 | $ | (451 | ) | ||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||
Deferred income taxes | (77 | ) | 101 | (179 | ) | |||||||
Depreciation and amortization | 414 | 444 | 444 | |||||||||
Special charges | 121 | 100 | 254 | |||||||||
Gains on investments | — | (305 | ) | — | ||||||||
Equity in the income of affiliates | (66 | ) | (23 | ) | (8 | ) | ||||||
Other, net | (73 | ) | (36 | ) | — | |||||||
Changes in operating assets and liabilities: | ||||||||||||
Increase in accounts receivable | (76 | ) | (25 | ) | (23 | ) | ||||||
(Increase) decrease in spare parts and supplies | (37 | ) | 4 | 4 | ||||||||
Decrease in accounts payable | (74 | ) | (19 | ) | (79 | ) | ||||||
Increase (decrease) in air traffic liability | 200 | 75 | (132 | ) | ||||||||
Increase (decrease) in accrued pension liability and other | 404 | (12 | ) | 124 | ||||||||
Net cash provided by (used in) operating activities | 373 | 342 | (46 | ) | ||||||||
Cash Flows from Investing Activities: | ||||||||||||
Capital expenditures | (162 | ) | (205 | ) | (539 | ) | ||||||
Purchase deposits paid in connection with future aircraft deliveries | (33 | ) | (29 | ) | (73 | ) | ||||||
Purchase deposits refunded in connection with aircraft delivered | 144 | 81 | 219 | |||||||||
Sale (purchase) of short-term investments, net | 28 | (134 | ) | (56 | ) | |||||||
Proceeds from sales of ExpressJet Holdings, net | — | 134 | 447 | |||||||||
Proceeds from sales of Internet-related investments | 98 | 76 | — | |||||||||
Proceeds from disposition of property and equipment | 16 | 16 | 9 | |||||||||
Other | (3 | ) | 53 | (43 | ) | |||||||
Net cash provided by (used in) investing activities | 88 | (8 | ) | (36 | ) | |||||||
Cash Flows from Financing Activities: | ||||||||||||
Proceeds from issuance of long-term debt, net | 67 | 559 | 596 | |||||||||
Payments on long-term debt and capital lease obligations | (447 | ) | (549 | ) | (383 | ) | ||||||
Proceeds from issuance of common stock | 5 | 5 | 23 | |||||||||
Increase in restricted cash | (41 | ) | (108 | ) | (32 | ) | ||||||
Other | 11 | — | — | |||||||||
Net cash (used in) provided by financing activities | (405 | ) | (93 | ) | 204 | |||||||
Impact on cash of ExpressJet deconsolidation | — | (225 | ) | — | ||||||||
Net Increase in Cash and Cash Equivalents | 56 | 16 | 122 | |||||||||
Cash and Cash Equivalents - Beginning of Period | 999 | 983 | 861 | |||||||||
Cash and Cash Equivalents - End of Period | $ | 1,055 | $ | 999 | $ | 983 | ||||||
Supplemental Cash Flows Information: | ||||||||||||
Interest paid | $ | 372 | $ | 374 | $ | 345 | ||||||
Income taxes paid (refunded) | $ | (4 | ) | $ | 13 | $ | (31 | ) | ||||
Investing and Financing Activities Not Affecting Cash: | ||||||||||||
Property and equipment acquired through the issuance of debt | $ | 226 | $ | 120 | $ | 908 | ||||||
Capital lease obligations incurred | $ | 1 | $ | 22 | $ | 36 | ||||||
Contribution of ExpressJet stock to pension plan | $ | — | $ | 100 | $ | — |
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A-37
Accumulated | ||||||||||||||||||||||||||||
Class B | Additional | Other | Treasury | |||||||||||||||||||||||||
Common Stock | Paid-In | Retained | Comprehensive | Stock, | ||||||||||||||||||||||||
Shares | Amount | Capital | Earnings | Income (Loss) | At Cost | Total | ||||||||||||||||||||||
December 31, 2001 | 63.2 | $ | 1 | $ | 1,069 | $ | 1,361 | $ | (130 | ) | $ | (1,140 | ) | $ | 1,161 | |||||||||||||
Net Loss | — | — | — | (451 | ) | — | — | (451 | ) | |||||||||||||||||||
Other Comprehensive Income: | ||||||||||||||||||||||||||||
Increase in Additional Minimum Pension Liability, net of income taxes of $146 | — | — | — | — | (250 | ) | — | (250 | ) | |||||||||||||||||||
Other | — | — | — | — | (15 | ) | — | (15 | ) | |||||||||||||||||||
Total Comprehensive Loss | (716 | ) | ||||||||||||||||||||||||||
Issuance of Common Stock pursuant to Stock Plans | 2.6 | — | 36 | — | — | — | 36 | |||||||||||||||||||||
Sales of ExpressJet Holdings Stock, net of applicable income taxes of $175 | — | — | 291 | — | — | — | 291 | |||||||||||||||||||||
Other | — | — | (5 | ) | — | — | — | (5 | ) | |||||||||||||||||||
December 31, 2002 | 65.8 | 1 | 1,391 | 910 | (395 | ) | (1,140 | ) | 767 | |||||||||||||||||||
Net Income | — | — | — | 38 | — | — | 38 | |||||||||||||||||||||
Other Comprehensive Income: | ||||||||||||||||||||||||||||
Increase in Additional Minimum Pension Liability, net of income taxes of $11 | — | — | — | — | (20 | ) | — | (20 | ) | |||||||||||||||||||
Other | — | — | — | — | (2 | ) | — | (2 | ) | |||||||||||||||||||
Total Comprehensive Income | 16 | |||||||||||||||||||||||||||
Issuance of Common Stock pursuant to Stock Plans | 0.3 | — | 5 | — | — | — | 5 | |||||||||||||||||||||
Other | — | — | 5 | — | — | (1 | ) | 4 | ||||||||||||||||||||
December 31, 2003 | 66.1 | 1 | 1,401 | 948 | (417 | ) | (1,141 | ) | 792 | |||||||||||||||||||
Net Loss | — | — | — | (363 | ) | — | — | (363 | ) | |||||||||||||||||||
Other Comprehensive Income: | ||||||||||||||||||||||||||||
Increase in Additional Minimum Pension Liability | — | — | — | — | (176 | ) | — | (176 | ) | |||||||||||||||||||
Other | — | — | — | — | 6 | — | 6 | |||||||||||||||||||||
Total Comprehensive Loss | (533 | ) | ||||||||||||||||||||||||||
Issuance of Common Stock pursuant to Stock Plans | 0.4 | — | 5 | — | — | — | 5 | |||||||||||||||||||||
Other | — | — | 2 | — | — | — | 2 | |||||||||||||||||||||
December 31, 2004 | 66.5 | $ | 1 | $ | 1,408 | $ | 585 | $ | (587 | ) | $ | (1,141 | ) | $ | 266 | |||||||||||||
Accumulated Class B Additional Other Treasury Common Stock Paid-In Retained Comprehensive Stock, Shares Amount Capital Earnings Income (Loss) at Cost Total (In millions) December 31, 2002 65.8 $ 1 $ 1,391 $ 855 $ (395 ) $ (1,140 ) $ 712 Net Income — — — 28 — — 28 Other Comprehensive Income: Increase in additional minimum pension liability, net of income taxes of $11 — — — — (20 ) — (20 ) Other — — — — (2 ) — (2 ) Total Comprehensive Income 6 Issuance of common stock pursuant to stock plans 0.3 — 5 — — — 5 Other — — 5 — — (1 ) 4 December 31, 2003 66.1 1 1,401 883 (417 ) (1,141 ) 727 Net Loss — — — (409 ) — — (409 ) Other Comprehensive Income: Increase in additional minimum pension liability — — — — (176 ) — (176 ) Other — — — — 6 — 6 Total Comprehensive Loss (579 ) Issuance of common stock pursuant to stock plans 0.4 — 5 — — — 5 Other — — 2 — — — 2 December 31, 2004 66.5 1 1,408 474 (587 ) (1,141 ) 155 Net Loss — — — (68 ) — — (68 ) Other Comprehensive Income: Increase in additional minimum pension liability — — — — (96 ) — (96 ) Other — — — — 8 — 8 Total Comprehensive Loss (156 ) Issuance of common stock pursuant to stock offering 18.0 — 203 — — — 203 Issuance of common stock pursuant to stock plans 1.7 — 24 — — — 24 December 31, 2005 86.2 $ 1 $ 1,635 $ 406 $ (675 ) $ (1,141 ) $ 226
A-39
A-38
The current U.S. domestic network carrier financial environment continues to be the worst in history and could deteriorate further. We have had substantial losses since September 11, 2001. Losses of the magnitude incurred by us since September 11, 2001 are not sustainable if they continue. With the current weak domestic yield environment caused in large part by the growth of low cost competitors and fuel prices at twenty-year highs, our cost structure is not competitive. Additionally, it has been increasingly difficult for us to obtain financing in the face of our significant and continuing losses and our current revenue and cost outlook. Many of our network competitors, such as American Airlines, Delta Air Lines, United Airlines and US Airways, have used bankruptcy or the threat of bankruptcy to reduce their costs significantly, and may continue to restructure their costs downward.
The $1.1 billion of cost-cutting and revenue-generating measures that we have implemented in recent years have proven insufficient to return us to profitability in the current environment. As a result, on November 18, 2004, we announced that we needed an annual $500 million reduction in wage and benefit costs. In late 2004 and early 2005, we finalized (but have not yet implemented) changes to wages, work rules and benefits for U.S.-based management and clerical, reservations, food services, airport and cargo agents and customer service employees that result in savings of $169 million annually. On February 28, 2005, we announced that we had reached tentative agreements on new contracts covering our pilots, flight attendants, mechanics and dispatchers following negotiations with ALPA, the IAM, the Teamsters, and the TWU. We also reached a tentative agreement with our simulator technicians, represented by the TWU. Each of the agreements is subject to ratification by the members of each covered work group, and the effectiveness of each agreement is conditioned on ratification of each other agreement. Results of the ratification process for each of the agreements are expected by the end of March 2005. If the agreements are ratified, the wage and benefit reductions will become effective as of the date of ratification and we will begin to implement the agreements. Some of the savings from the agreements will take time to achieve, while others, such as the wage reductions and certain benefit changes, will result in immediate savings. Our officers and Board of Directors implemented their reductions on February 28, 2005.
The tentative agreements, along with previously announced pay and benefit reductions for other work groups, conclude the negotiation process with all our employees, except some CMI and international employees. The pay and benefits of international employees must be adjusted in accordance with laws and regulations of the various countries. We expect to complete the process with these remaining employees in the near future.
Each of the agreements is for a 45-month term, so that the agreements would become amendable again on December 31, 2008. A significant portion of the cost savings from our work groups, both unionized and non-unionized, will be derived from changes to benefits and work rules. We expect to achieve approximately $500 million of annual cost savings on a run-rate basis if the agreements with our various work groups are fully implemented. This excludes the non-cash cost of approximately ten million stock options that we expect to issue to our employees in connection with the pay and benefit reductions and accruals for certain non-cash costs or charges relating to items contained in the tentative agreements. Further, our ability to achieve certain of the cost reductions will depend on timely and effective implementation of new work rules, actual productivity improvements, implementation of changes in technology pertaining to employee work rules and benefits and other items.
Each of the tentative agreements require that, even if ratified, they will not go into effect (and thus will not be implemented) unless all of the other tentative agreements are ratified. As a result, there is the risk that if one or
A-40
more of the tentative agreements is not ratified, then one or more of the other tentative agreements would not become effective and thus would not be implemented. If the tentative agreements were not implemented, we would not achieve the necessary $500 million reduction in wage and benefit costs and would ultimately have inadequate liquidity to meet our obligations under current market conditions. We would be forced to pursue alternate survival strategies, including taking significant steps to reduce both our future financial commitments and current cash outflows. This would mean that we would be forced to obtain annual pay and benefit reductions totaling $800 million from our work groups later in 2005.
In addition to having to obtain significantly larger pay and benefit reductions from our work groups, actions we would be forced to take if the tentative agreements are not ratified and do not take effect include canceling plans to lease eight 757-300 aircraft from Boeing Capital Corporation and canceling the accelerated delivery of six 737-800 aircraft which were to be delivered in 2006. Those aircraft would instead be delivered in 2008, the original delivery year. However, we anticipate that we would enter into discussions with Boeing to defer all aircraft deliveries beyond 2005, representing a total of 40 aircraft. We would also be forced to cancel our recent order for ten Boeing 787 aircraft, which were planned for delivery beginning in 2009.
Additionally, we would pursue shrinking our fleet. As part of our contingency planning, we have engaged Focus Aviation, Inc., an aircraft broker, with regard to our Boeing 737-500 fleet. These aircraft have relatively few seats compared to our other mainline aircraft and have become less attractive to operate in a low-fare environment. If the tentative agreements are not ratified and do not take effect, we will market for sale or lease twenty-four 737-500 aircraft. This fleet reduction would result in frequency and aircraft size reductions in certain markets. Moreover, if the aircraft are withdrawn from the fleet, we would need to furlough a significant number of pilots, flight attendants, mechanics and other positions associated with those aircraft.
If the tentative agreements are not ratified and do not take effect, absent significant declines in fuel prices in the near future, we expect that we would fail to meet certain financial covenants in our bank-issued credit card processing agreement. In that event, we would be required to post up to an additional $335 million cash collateral, which would adversely affect our liquidity needed for our operations and debt service.
We could experience an increase in early retirements caused by concern among our employees about our financial stability. The potential of an increase in early retirements could be exacerbated by the fact that our employees are entitled to lump-sum distributions from our defined benefit pension plan upon their retirement, including early retirement within the provisions of the plan. Some of our competitors have terminated, or have sought to terminate, their defined benefit pension plans in bankruptcy, which can cause employees to receive less than the full amount of their pension benefits under applicable federal pension benefit insurance, and can also limit or eliminate the ability of employees to receive their pension benefits in a lump-sum. If liquidity concerns increase, we could experience a significant increase in early retirements which could negatively impact our operations and materially increase our near-term funding obligations to our defined benefit pension plan, which could itself result in a material adverse effect on our liquidity.
If the current adverse environment does not improve, we expect to incur a significant loss in 2005. However, absent adverse factors outside our control such as additional terrorist attacks, hostilities involving the United States or further significant increases in fuel prices, we currently believe that our existing liquidity and projected 2005 cash flows will be sufficient to fund our current operations and other financial obligations through 2005 if we achieve the timely ratification and implementation of the tentative agreements with our unions concerning wage and benefit reductions or, if the tentative agreements are not ratified and do not take effect, by taking the steps described above to reduce our future financial commitments and current cash outflows. These steps include canceling our tentative agreements with Boeing, marketing for sale or lease twenty-four 737-500 aircraft and furloughing a significant number of employees.
In developing our plan for 2005, we considered our current projections for 2005 revenue, including the impact of fare reductions initiated in early January 2005 by Delta Air Lines, current and forward fuel price levels as of March 14, 2005, our expectations with regard to union ratification of the tentative agreements described above and our ability to execute additional financing transactions. While we believe our 2005 plan is achievable, a combination of some or all of several events, most of which are outside of our direct control, may result in us being unable to generate sufficient cash from operations or complete financing transactions that we would need to maintain adequate liquidity through December 31, 2005. These events include the failure of our unions to ratify the tentative agreements so that they do not go into effect, further significant declines in yields and fuel prices higher
A-41
than current levels for an extended period of time. Additionally, we have significant financial obligations due in 2006 and thereafter, and we will have inadequate liquidity to meet those obligations if the current financial environment for network carriers continues and we are unable to increase our revenues or decrease our costs considerably.
As used in these Notes to Consolidated Financial Statements, the terms “Continental”, “we”, “us”,“Continental,” “we,” “us,” “our” and similar terms refer to Continental Airlines, Inc. and, unless the context indicates otherwise, its consolidated subsidiaries.
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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Estimated Useful Life | ||||
Jet aircraft and simulators | 25 to 30 years | |||
Rotable spare parts | 25 to 30 years | |||
Buildings and improvements | 10 to 30 years | |||
Food service equipment | 6 to 10 years | |||
Maintenance and engineering equipment | 8 years | |||
Surface transportation and ground equipment | 6 years | |||
Communication and meteorological equipment | 5 years | |||
Computer software | 3 to 10 years | |||
Capital lease | Shorter of Lease Term or Useful Life | |||
Leasehold improvements | Shorter of Lease Term or Useful Life |
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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
2004 | 2003 | 2002 | ||||||||||
Net income (loss), as reported | $ | (363 | ) | $ | 38 | $ | (451 | ) | ||||
Deduct: total stock-based employee compensation expense determined under SFAS 123, net of tax | (6 | ) | (6 | ) | (20 | ) | ||||||
Net income (loss), pro forma | $ | (369 | ) | $ | 32 | $ | (471 | ) | ||||
Basic earnings (loss) per share: | ||||||||||||
As reported | $ | (5.49 | ) | $ | 0.58 | $ | (7.02 | ) | ||||
Pro forma | $ | (5.58 | ) | $ | 0.49 | $ | (7.33 | ) | ||||
Diluted earnings (loss) per share: | ||||||||||||
As reported | $ | (5.55 | ) | $ | 0.57 | $ | (7.02 | ) | ||||
Pro forma | $ | (5.64 | ) | $ | 0.47 | $ | (7.33 | ) |
2005 | 2004 | 2003 | ||||||||||
Net income (loss), as reported | $ | (68 | ) | $ | (409 | ) | $ | 28 | ||||
Deduct: total stock-based employee compensation expense determined under SFAS 123, net of tax | (29 | ) | (6 | ) | (6 | ) | ||||||
Net income (loss), pro forma | $ | (97 | ) | $ | (415 | ) | $ | 22 | ||||
Basic earnings (loss) per share: | ||||||||||||
As reported | $ | (0.96 | ) | $ | (6.19 | ) | $ | 0.43 | ||||
Pro forma | $ | (1.38 | ) | $ | (6.28 | ) | $ | 0.33 | ||||
Diluted earnings (loss) per share: | ||||||||||||
As reported | $ | (0.97 | ) | $ | (6.25 | ) | $ | 0.41 | ||||
Pro forma | $ | (1.39 | ) | $ | (6.33 | ) | $ | 0.32 |
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NOTE 2 - PENDING ACCOUNTING PRONOUNCEMENT (continued)
those change in accounting principle related to the adoption of SFAS 123R on January 1, 2006, reducing earnings approximately $26 million. On February 1, 2006, our officers surrendered their RSU awards calculatedwith a performance period ending March 31, 2006. Approximately $15 million of the cumulative effect of change in accounting principle at January 1, 2006 relates to these surrendered awards. Accordingly, we will record this amount as a reduction of operating expense in the first quarter of 2006.
stock price.
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On September 30, 2004, The following table sets forth the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 04-8, “The Effectcomponents of Contingently Convertible Debt on Diluted Earnings per Share,” which changes the treatment of contingently convertible debt instruments in the calculation ofbasic and diluted earnings per share. Contingently convertible debt instruments are financial instruments that include a contingent feature, such as a feature by which the debt becomes convertible into common shares of the issuer if the issuer’s common stock price has exceeded a predetermined threshold for a specified time period. Prior to the consensus, most issuers, including us, excluded the potential dilutive effect of the conversion feature from diluted earnings per share until the contingency threshold was met. EITF Issue No. 04-8 provides that these debt instruments should be included in the earnings per share computation (if dilutive) regardless of whether the contingent feature has been met. This change does not have any effect on net income (loss), but it can affect the related per share amounts.
We adopted EITF Issue No. 04-8 as of December 31, 2004 and restated the computations of earnings (loss) per share for prior periods. The assumed conversion(in millions):
2005 | 2004 | 2003 | ||||||||||
Numerator: | ||||||||||||
Numerator for basic earnings per share — net income (loss) | $ | (68 | ) | $ | (409 | ) | $ | 28 | ||||
Effect of dilutive securities issued by equity investee | (1 | ) | (4 | ) | (1 | ) | ||||||
Numerator for diluted earnings per share — net income (loss) after effect of dilutive securities of equity investee | $ | (69 | ) | $ | (413 | ) | $ | 27 | ||||
Denominator: | ||||||||||||
Denominator for basic earnings (loss) per share — weighted-average shares | 70.3 | 66.1 | 65.4 | |||||||||
Effect of dilutive securities — employee stock options | — | — | 0.2 | |||||||||
Denominator for diluted earnings (loss) per share — adjusted weighted-average and assumed conversions | 70.3 | 66.1 | 65.6 | |||||||||
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NOTE 3 - EARNINGS PER SHARE (continued)
In each of years 2002 through 2004, our6% Convertible Junior Subordinated Debentures Held by Subsidiary Trust, 5.0% Convertible Notes and 4.5% Convertible NotesNotes. Approximately 17.9 million, 17.9 million and 14.0 million potential common shares related to convertible debt securities were also antidilutive and therefore were not included inexcluded from the calculationcomputation of diluted earnings per share.
2004 | 2003 | 2002 | ||||||||||
Numerator: | ||||||||||||
Numerator for basic earnings per share - net income (loss) | $ | (363 | ) | $ | 38 | $ | (451 | ) | ||||
Effect of dilutive securities issued by equity investee | (4 | ) | (1 | ) | — | |||||||
Numerator for diluted earnings per share - net income (loss) after effect of dilutive securities of equity investee | $ | (367 | ) | $ | 37 | $ | (451 | ) | ||||
Denominator: | ||||||||||||
Denominator for basic earnings (loss) per share - weighted- average shares | 66.1 | 65.4 | 64.2 | |||||||||
Effect of dilutive securities - employee stock options | — | 0.2 | — | |||||||||
Denominator for diluted earnings (loss) per share - adjusted weighted - average and assumed conversions | 66.1 | 65.6 | 64.2 | |||||||||
Approximatelyshare in 2005, 2004 and 2003, respectively, because they were antidilutive. In addition, approximately 12.1 million in 2005, 6.2 million in 2004 and 5.3 million in 2003 and 4.0 million in 2002 of weighted average options to purchase shares of our 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 or the effect of including the options would have been antidilutive. In addition, 17.9 million, 14.0 million and 8.7 million potential common shares related to convertible debt securities were excluded from the computation of diluted earnings per share in 2004, 2003 and 2002, respectively, because they were antidilutive.
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2004 | 2003 | |||||||
Secured | ||||||||
Notes payable, interest rates of 5.0% to 8.5%, (weighted average rate of 6.99% as of December 31, 2004) payable through 2019 | $ | 3,147 | $ | 3,268 | ||||
Floating rate notes, interest rates of LIBOR (2.56% on December 31, 2004) plus 0.45% to 1.3%; Eurodollar (2.54% on December 31, 2004) plus 1.375%, payable through 2014 | 872 | 923 | ||||||
Floating rate notes, interest rate of LIBOR plus 2.5% to 4.5%, payable through 2016 | 343 | 275 | ||||||
Floating rate notes, interest rate of LIBOR plus 4.53%, payable through 2007 | 123 | 139 | ||||||
Floating rate notes, interest rate of LIBOR plus 7.5%, payable through 2007 | 97 | 97 | ||||||
Other | 17 | 17 | ||||||
Unsecured | ||||||||
Convertible junior subordinated debentures, interest rate of 6.0%, payable in 2030 | 248 | 248 | ||||||
Convertible notes, interest rate of 4.5%, payable in 2007 | 200 | 200 | ||||||
Senior notes payable, interest rate of 8.0%, payable in 2005 | 195 | 195 | ||||||
Convertible notes, interest rate of 5.0%, callable beginning in 2010 | 175 | 175 | ||||||
Note payable, interest rate of 8.1%, payable in 2008 | 112 | 112 | ||||||
Other | 8 | 8 | ||||||
5,537 | 5,657 | |||||||
Less: current maturities | 642 | 397 | ||||||
Total | $ | 4,895 | $ | 5,260 | ||||
2005 2004 Secured Notes payable, interest rates of 5.0% to 8.5%, (weighted average rate of 6.90% as of December 31, 2005) payable through 2019 $ 2,832 $ 3,147 Floating rate notes, interest rates of LIBOR (4.54% on December 31, 2005) plus 0.45% to 1.6%; Eurodollar (4.52% on December 31, 2005) plus 1.375%, payable through 2014 925 872 Floating rate notes, interest rate of LIBOR plus 5.375%, payable in 2011 350 — Floating rate notes, interest rate of LIBOR plus 2.5% to 4.5%, payable through 2016 208 343 Floating rate notes, interest rate of LIBOR plus 4.53%, payable through 2007 104 123 Floating rate notes, interest rate of LIBOR plus 7.5%, payable through 2007 97 97 Other 79 17 Unsecured Convertible junior subordinated debentures, interest rate of 6.0%, payable in 2030 248 248 Convertible notes, interest rate of 4.5%, payable in 2007 200 200 Senior notes payable, interest rate of 8.0%, payable in 2005 — 195 Convertible notes, interest rate of 5.0%, callable beginning in 2010 175 175 Note payable, interest rate of 8.1%, payable in 2008 112 112 Other — 8 5,330 5,537 Less: current maturities 524 642 Total $ 4,806 $ 4,895
Year ending December 31, | ||||
2005 | $ | 642 | ||
2006 | 533 | |||
2007 | 908 | |||
2008 | 603 | |||
2009 | 468 |
Year ending December 31, 2006 $ 524 2007 937 2008 632 2009 460 2010 602
In October 2004, we issued two floating rate classes of Series 2004-1 Pass Through Trust Certificates in the aggregate amount of $77 million that amortize through November 2011. The certificates are secured by a lien on 21 spare engines.
During the first half of 2004, we incurred $86 million of floating rate indebtedness and $128 million of fixed rate indebtedness. These loans are secured by the five 757-300 aircraft that were delivered in the first half of 2004.
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NOTE 4 - LONG-TERM DEBT (continued)
The $175 million of 5%
The $200 million of 4.5% convertible notes due February 1, 2007 are convertible into our common stock at an initial conversion price of $40 per share. The notes are redeemable at our option on or after February 5, 2005, at specified redemption prices.
Debt Securities. In November 2000, Continental Airlines Finance Trust II, a Delaware statutory business trust (the “Trust”) of which we own all the common trust securities, completed a private placement of five million 6% Convertible Preferred Securities, Term Income Deferrable Equity Securities or “TIDES”.“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
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Capital Leases | Operating Leases | |||||||||||
Aircraft | Non-aircraft | |||||||||||
Year ending December 31, | ||||||||||||
2005 | $ | 46 | $ | 982 | $ | 406 | ||||||
2006 | 39 | 933 | 397 | |||||||||
2007 | 40 | 903 | 390 | |||||||||
2008 | 45 | 884 | 369 | |||||||||
2009 | 16 | 840 | 370 | |||||||||
Later years | 459 | 6,707 | 5,809 | |||||||||
Total minimum lease payments | 645 | $ | 11,249 | $ | 7,741 | |||||||
Less: amount representing interest | 345 | |||||||||||
Present value of capital leases | 300 | |||||||||||
Less: current maturities of capital leases | 28 | |||||||||||
Long-term capital leases | $ | 272 | ||||||||||
Capital Operating Leases Leases Aircraft Non-aircraft Year ending December 31, 2006 $ 39 $ 1,003 $ 429 2007 40 966 400 2008 46 955 377 2009 16 910 374 2010 16 924 364 Later years 457 6,310 4,987 Total minimum lease payments 614 $ 11,068 $ 6,931 Less: amount representing interest 341 Present value of capital leases 273 Less: current maturities of capital leases 22 Long-term capital leases $ 251
Rent expense for non-aircraft operating leases totaled $466 million, $426 million and $407 million for the years ended December 31, 2005, 2004 and 2003, respectively.
The notional amounts of derivative financial instruments summarized below do not represent amounts exchanged between parties and, therefore, are not a measure of our exposure resulting from our 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.
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NOTE 6 -
We usehad no fuel hedges outstanding at December 31, 2005, December 31, 2004 or at any time during 2005, although we did have fuel hedges in place prior to December 31, 2004. In February 2006, we entered into petroleum swap contracts to hedge a minimal portion of our projected 2006 fuel usage. In the past, we have used a combination of petroleum call options, petroleum swap contractsand/or jet fuel purchase commitments to provide us with short-term hedge protection (generally three to six months) against sudden and significant increases in jet fuel prices, while simultaneously ensuring that we are not competitively disadvantaged in the event of a substantial decrease in the price of jet fuel.
We had no fuel hedges outstanding at December 31, 2004 or December 31, 2003, although we did have fuel hedges in place during these years.
Foreign Currency Exchange Risk Management
We use a combination of foreign currency average rate options and forward contracts to hedge against the currency risk associated with our forecasted Japanese yen, British pound, Canadian dollar and euro-denominated net cash flows. The average rate options and forward contracts have only nominal intrinsic value at the date contracted.
We account for these instruments as cash flow hedges. They 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 passenger revenue when the underlying service is provided. We measure hedge effectiveness of average rate options and forward contracts based on the forward price of the underlying currency. Hedge ineffectiveness is included in other nonoperating income (expense) in the accompanying consolidated statement of operations and was not material for the years ended December 31, 2004, 2003 and 2002. Our net gain (loss) on our foreign currency forward and option contracts was $(10) million for the year ended December 31, 2004 and was not material in the years ended December 31, 2003 and 2002. These gains are included in passenger revenue in the accompanying consolidated statement of operations.
We had the following foreign currency hedges outstanding at December 31, 2004 (for 2005 projected cash flows) and December 31, 2003 (for 2004 projected cash flows):
These hedges had a liability fair value of $7 million at both December 31, 2004 and December 31, 2003.
Interest Rate Risk Management
We have entered into an interest rate swap agreement to reduce the impact of potential interest rate increases on floating rate debt. The notional amount of the outstanding interest rate swap at December 31, 2004 and 2003 was $143 million and $153 million, respectively. The swap expires in November 2005. We account for the interest rate swap as a cash flow hedge whereby the fair value of the interest rate 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
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NOTE 6 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)
rate swap liability was $4 million at December 31, 2004 and $11 million at December 31,in 2003. Amounts recorded in accumulated other comprehensive income (loss) are amortized as an adjustment to interest expense over the term of the related hedge. Such amounts were not material during 2004, 2003 or 2002.
Judgment is necessarily required in interpreting market data and the use of different market assumptions or estimation methodologies may affect the estimated fair value amounts.
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NOTE 6 -
We are exposed to credit losses in the event of non-performance by issuers of financial instruments. To manage credit risks, we select issuers based on credit ratings, limit our exposure to a single issuer under our defined guidelines and monitor the market position with each counterparty.
We have ten million shares of authorized preferred stock. We currently have one share of Series B preferred stock outstanding, which is held by Northwest Airlines, Inc. The material provisions of the Series B Junior Participating 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 winding up of the company.
Dividends. No dividends are payable on the Series B preferred stock.
Voting Rights.
• | Certain business combinations and similar changes of control transactions involving us and a third party major air carrier; | |
• | Certain amendments to our rights plan (or redemption of those rights); | |
• | Any dividend or distribution of all or substantially all of our assets; and | |
• | Certain reorganizations and restructuring transactions involving us. |
Redemption.
• | Northwest Airlines, Inc. or certain of its affiliates transfers or encumbers the Series B preferred stock; | |
• | ||
• | Our alliance with Northwest Airlines Corporation terminates or expires (other than as a result of a breach by us); or |
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NOTE 7 - PREFERRED AND COMMON STOCK (continued)
• | Northwest Airlines Corporation or certain of its affiliates materially breaches its standstill obligations to us or triggers our rights agreement. |
We currently have one class of common stock issued and outstanding, Class B common stock. Each share of Class B common stock is entitled to one vote per share. On October 24, 2005, we completed a public offering of 18 million shares of common stock, raising $203 million in cash. At December 31, 2004,2005, approximately 2937 million shares were reserved for future issuance related to the conversion of convertible debt securities and the issuance of stock under our stock incentive plans.
We have a Rights Plan which was adopted effective November 20, 1998 and expires on November 20, 2008, unless extended or unless the rights are earlier redeemed or exchanged by us.
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NOTE 7 - PREFERRED AND COMMON STOCK (continued)
Under our tentative Our agreement with the union representing our pilots if that agreement becomes effective, we have agreedprovides that we will not declare a cash dividend or repurchase our outstanding common stock for cash until we have contributed at least $500 million to the pilots’pilot defined benefit pension plan, measured from March 30, 2005. Through December 31, 2005, we have made $112 million of such contributions to the date of ratification of the pilots’ tentative agreement.plan.
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Our stockholders We have approved the followinga number of equity incentive plans which subject to adjustment as provided in the respective plans, permit the issuance of the number of shares of Class Bour common stock set forth below:
The Incentive Plan 2000stock. One of these plans 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 permitsIn general, our plans permit 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 plans may be originally issued shares, treasury shares or a combination thereof. Approximately 972,0003.3 million shares remained for award under the plans as of December 31, 2004.
2005.
Under the terms of the Plans,plans, a change in control would result in all outstanding options under these plans becoming exercisable in full and restrictions on restricted shares being terminated.
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NOTE 8 - STOCK PLANS AND AWARDS
2005 | 2004 | 2003 | ||||||||||||||||||||||||||||||||||||||||||||||
2004 | 2003 | 2002 | Weighted- | Weighted- | Weighted- | |||||||||||||||||||||||||||||||||||||||||||
Weighted- | Weighted- | Weighted- | Average | Average | Average | |||||||||||||||||||||||||||||||||||||||||||
Average | Average | Average | Options | Exercise Price | Options | Exercise Price | Options | Exercise Price | ||||||||||||||||||||||||||||||||||||||||
Options | Exercise Price | Options | Exercise Price | Options | Exercise Price | |||||||||||||||||||||||||||||||||||||||||||
Outstanding at beginning of year | 6,469 | $ | 17.86 | 6,871 | $ | 18.28 | 980 | $ | 36.34 | 6,175 | $ | 17.10 | 6,469 | $ | 17.86 | 6,871 | $ | 18.28 | ||||||||||||||||||||||||||||||
Granted | 729 | $ | 11.99 | 296 | $ | 15.00 | 6,079 | $ | 15.82 | 8,648 | $ | 11.91 | 729 | $ | 11.99 | 296 | $ | 15.00 | ||||||||||||||||||||||||||||||
Exercised | (181 | ) | $ | 14.62 | (306 | ) | $ | 15.62 | (65 | ) | $ | 28.04 | (1,178 | ) | $ | 15.52 | (181 | ) | $ | 14.62 | (306 | ) | $ | 15.62 | ||||||||||||||||||||||||
Cancelled | (842 | ) | $ | 19.10 | (392 | ) | $ | 24.82 | (123 | ) | $ | 35.45 | (935 | ) | $ | 19.12 | (842 | ) | $ | 19.10 | (392 | ) | $ | 24.82 | ||||||||||||||||||||||||
Outstanding at end of year | 6,175 | $ | 17.10 | 6,469 | $ | 17.86 | 6,871 | $ | 18.28 | 12,710 | $ | 13.57 | 6,175 | $ | 17.10 | 6,469 | $ | 17.86 | ||||||||||||||||||||||||||||||
Options exer- cisable at end of year | 4,837 | $ | 17.91 | 5,018 | $ | 18.27 | 3,856 | $ | 19.61 | |||||||||||||||||||||||||||||||||||||||
Options exercisable at end of year | 3,896 | $ | 17.17 | 4,837 | $ | 17.91 | 5,018 | $ | 18.27 | |||||||||||||||||||||||||||||||||||||||
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Weighted | ||||||||||||
Range of | Average Remaining | Weighted Average | ||||||||||
Exercise Prices | Outstanding | Contractual Life | Exercise Price | |||||||||
$3.65-$15.77 | 904 | 4.57 | $ | 11.70 | ||||||||
$15.78 | 4,719 | 2.41 | $ | 15.78 | ||||||||
$16.84-$56.81 | 552 | 3.71 | $ | 37.14 | ||||||||
$3.65-$56.81 | 6,175 | 2.84 | $ | 17.10 | ||||||||
Weighted Range of Average Remaining Weighted Average Outstanding Contractual Life Exercise Price $ 3.65 - $11.87 631 3.39 $ 11.19 $11.89 8,123 5.98 $ 11.89 $11.96 - $15.78 3,580 1.69 $ 15.66 $15.79 - $56.81 376 3.00 $ 33.86 $ 3.65 - $56.81 12,710 4.55 $ 13.57
Range of | Weighted Average | |||||||
Exercise Prices | Exercisable | Exercise Price | ||||||
$3.65-$15.77 | 173 | $ | 11.26 | |||||
$15.78 | 4,212 | $ | 15.78 | |||||
$16.84-$56.81 | 452 | $ | 40.34 | |||||
$3.65-$56.81 | 4,837 | $ | 17.91 | |||||
Anticipated Grant of Options to Employees
On February 28, 2005, we announced that we plan to issue to our employees stock options for approximately ten million shares of our Class B common stock upon ratification and effectiveness of the tentative agreements for wage and benefit cost reductions with the unions representing our work groups. The stock options will be issued pursuant to two plans, a broad-based plan for all of our employees and a supplemental plan for eligible pilots.
We anticipate that substantially all of the options will be issued by the end of March 2005, subject to the ratification and effectiveness of the tentative agreements with our major unions. Under the stock option program, each stock option grant will represent the right to acquire shares of our common stock on the New York Stock
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Range of | Weighted Average | |||||||
Exercise Prices | Exercisable | Exercise Price | ||||||
$ 3.65 - $11.87 | 196 | $ | 10.68 | |||||
$11.96 - $15.78 | 3,396 | $ | 15.73 | |||||
$15.79 - $56.81 | 304 | $ | 37.40 | |||||
$ 3.65 - $56.81 | 3,896 | $ | 17.17 | |||||
NOTE 8 - STOCK PLANS AND AWARDS (continued)
Exchange at the closing price of the common stock on the date of grant. The options will generally become exercisable in three equal installments on the first, second and third anniversaries of the date of grant, and will have a term ranging from six to eight years. No further options may be granted under either plan after ten years from the date the plan is adopted by our Board of Directors.
The stock option program applies to all U.S.-based employees, except officers and members of Continental’s Board of Directors, and international employees where practical based on foreign laws and regulations.
Also in connection with the wage and benefit cost reductions, our five most senior executives agreed to surrender options for 14,293 shares of our common stock effective February 28, 2005.
In April 2002, we awarded 444,750 shares of restricted stock. The restricted stock was awarded pursuant to our equity incentive plans and had a fair value on the grant date of $12.5$12 million ($28.10 per share). The restricted stock is scheduled to vestvests in 25% increments on the first four anniversaries of the grant.
Our five most senior executives agreed to surrender 12,225 sharesdate of restricted stock effective February 28, 2005 in connection with the wage and benefit cost reductions.
grant.
On March 12, 2004, our stockholders voted to adopt the 2004 Employee Stock Purchase Plan. All of our employees (including CMI employees) are eligible to participate in this program, which began in the second2004 Employee Stock Purchase Plan. At the end of each fiscal quarter, of 2004. Participantsparticipants may purchase shares of our Class B common stock at 85% (or higher in certain circumstances)a discount of 15% off the fair market value of the stock on either the first day or the last day of the option periodquarter (whichever is lower), limitedsubject to a minimum purchase price of $10 per share. This discount is reduced to zero as the fair market value approaches $10 per share. If the fair market value is below the $10 per share minimum price on the last day of a quarter, then the participants will not be permitted to purchase common stock for such quarterly purchase period and we will refund to those participants the amount of their unused payroll deductions. In the aggregate, 3,000,000 shares may be purchased.purchased under the plan. These shares may be newlyoriginally issued shares, treasury shares or reacquired shares.a combination thereof. During 2005 and 2004, 573,848 shares and 249,160 shares, respectively, of Class B common stock were issued to participants at a weighted-average purchase price of $10$10.06 and $10.00 per share. An additional 237,984 shares were issued in January 2005 at a purchase price of $10 per share.
Under a former plan, all of our employees (including ExpressJet and CMI employees) were eligible to participate in our employee stock purchase program under which they could purchase shares of Class B common stock 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 2002, 2,076,745 shares of Class B common stock were issued at prices ranging from $4.58 to $34.60. No shares have been issued under this plan subsequent to 2002.
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NOTE 8 - STOCK PLANS AND AWARDS (continued)
We account for our stock-based compensation plans under the recognition and measurement principles of APB 25. Pro forma information regarding net income and earnings per share disclosed in Note 1(o) has been determined as if we had accounted for our employee stock options and purchase rights under the fair value method of SFAS 123. For purposes of the pro forma SFAS 123 calculation,
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2004 | 2003 | 2002 | ||||||||||
Risk-free interest rate | 3.3 | % | 2.5 | % | 2.9 | % | ||||||
Dividend yield | 0 | % | 0 | % | 0 | % | ||||||
Expected market price volatility of our Class B common stock | 78 | % | 77 | % | 64 | % | ||||||
Weighted-average expected life of options (years) | 3.5 | 3.2 | 2.0 | |||||||||
Weighted-average fair value of options granted | $ | 6.59 | $ | 7.77 | $ | 5.73 |
2005 2004 2003 Risk-free interest rate 3.4 % 3.3 % 2.5 % Dividend yield 0 % 0 % 0 % Expected market price volatility of our common stock 74 % 78 % 77 % Weighted-average expected life of options (years) 3.7 3.5 3.2 Weighted-average fair value of options granted $ 6.47 $ 6.59 $ 7.77
2004 | 2003 | 2002 | ||||||||||
Risk-free interest rate | 1.4 | % | N/A | 1.7 | % | |||||||
Dividend yield | 0 | % | N/A | 0 | % | |||||||
Expected market price volatility of our Class B common stock | 48 | % | N/A | 63 | % | |||||||
Weighted-average expected life of the purchase rights (years) | 0.25 | N/A | 0.25 | |||||||||
Weighted-average fair value of purchase rights granted | $ | 3.40 | N/A | $ | 2.86 |
2005 2004 Risk-free interest rate 3.0 % 1.4 % Dividend yield 0 % 0 % Expected market price volatility of our common stock 55 % 48 % Weighted-average expected life of the purchase rights (years) 0.25 0.25 Weighted-average fair value of purchase rights granted $ 6.77 $ 3.40
During 2004, we implemented the Restricted Stock Unit (RSU)RSU program. This program is designed to reward our officers for significantspecified increases in our stock price over multi-year measurementperformance periods. If our stock price reaches a target price and averages at least that levelthe target price for 20 consecutive trading days during the relevant performance period, the officers are paid cash for each unit equal to the average stock price atfor the 20 trading days preceding the date specified below. As of March 14,December 31, 2005, there were awards outstanding with respect to two performance periods that began on April 1, 2004 and end as follows:
Units | Target Price per Share | |||||||
(In thousands) | ||||||||
March 31, 2006 | 1,100 | $ | 20.48 | |||||
December 31, 2007 | 1,383 | 22.48 | ||||||
2,483 | ||||||||
On February 15, 2005, our officers voluntarily surrendered all of their awards for the performance period ending June 30, 2005 (not shown above) as part of the wage and benefit cost reductions. Units Target Price per Share (In thousands) March 31, 2006 955 $ 20.48 December 31, 2007 1,195 22.48 2,150
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NOTE 8 - STOCK PLANS AND AWARDS (continued)
2005, our stock price had not achieved anyeither of the target prices and, accordingly, we had recorded no expense or liability related to the RSU program. In January 2006, our stock price achieved the target for the awards for the performance period ending March 31, 2006. However, on February 1, 2006, our officers surrendered their RSU awards for this performance period in light of the pay and benefit reductions taken by our employees. As discussed in Note 2, we will account for the RSUs on a fair value basis effective with the adoption of SFAS 123R on January 1, 2006.
NOTE 9 - ACCUMULATED OTHER COMPREHENSIVE LOSS
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NOTE 9 — | ACCUMULATED OTHER COMPREHENSIVE LOSS |
Unrealized | ||||||||||||
Minimum | Gain/(Loss) on | |||||||||||
Pension | Derivative | |||||||||||
Liability | Instruments | Total | ||||||||||
Balance at December 31, 2001 | $ | (138 | ) | $ | 8 | $ | (130 | ) | ||||
Current year net change in accumulated other comprehensive loss | (250 | ) | (15 | ) | (265 | ) | ||||||
Balance at December 31, 2002 | (388 | ) | (7 | ) | (395 | ) | ||||||
Current year net change in accumulated other comprehensive loss | (20 | ) | (2 | ) | (22 | ) | ||||||
Balance at December 31, 2003 | (408 | ) | (9 | ) | (417 | ) | ||||||
Current year net change in accumulated other comprehensive loss | (176 | ) | 6 | (170 | ) | |||||||
Balance at December 31, 2004 | $ | (584 | ) | $ | (3 | ) | $ | (587 | ) | |||
Unrealized Minimum Gain/(Loss) on Pension Derivative Liability Instruments Total Balance at December 31, 2002 $ (388 ) $ (7 ) $ (395 ) Current year net change in accumulated other comprehensive loss (20 ) (2 ) (22 ) Balance at December 31, 2003 (408 ) (9 ) (417 ) Current year net change in accumulated other comprehensive loss (176 ) 6 (170 ) Balance at December 31, 2004 (584 ) (3 ) (587 ) Current year net change in accumulated other comprehensive loss (96 ) 8 (88 ) Balance at December 31, 2005 $ (680 ) $ 5 $ (675 )
NOTE 10 - EMPLOYEE BENEFIT PLANS
NOTE 10 — | EMPLOYEE BENEFIT PLANS |
Pension Plan.
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2004 | 2003 | |||||||
Accumulated benefit obligation | $ | 2,412 | $ | 1,958 | ||||
Projected benefit obligation at beginning of year | $ | 2,362 | $ | 2,061 | ||||
Service cost | 151 | 156 | ||||||
Interest cost | 152 | 134 | ||||||
Plan amendments | (6 | ) | — | |||||
Actuarial losses | 310 | 192 | ||||||
Benefits paid | (113 | ) | (187 | ) | ||||
Other | 7 | 6 | ||||||
Projected benefit obligation at end of year | $ | 2,863 | $ | 2,362 | ||||
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2005 | 2004 | |||||||
Accumulated benefit obligation | $ | 2,494 | $ | 2,412 | ||||
Projected benefit obligation at beginning of year | $ | 2,863 | $ | 2,362 | ||||
Service cost | 86 | 151 | ||||||
Interest cost | 151 | 152 | ||||||
Plan amendments | 7 | (6 | ) | |||||
Actuarial losses | 105 | 310 | ||||||
Benefits paid | (310 | ) | (113 | ) | ||||
Plan curtailment | (272 | ) | — | |||||
Other | — | 7 | ||||||
Projected benefit obligation at end of year | $ | 2,630 | $ | 2,863 | ||||
NOTE 10 - EMPLOYEE BENEFIT PLANS (continued)
2004 | 2003 | |||||||
Fair value of plan assets at beginning of year | $ | 1,280 | $ | 866 | ||||
Actual gain on plan assets | 113 | 218 | ||||||
Employer contributions | 1 | 383 | ||||||
Benefits paid | (113 | ) | (187 | ) | ||||
Fair value of plan assets at end of year | $ | 1,281 | $ | 1,280 | ||||
Pension 2005 2004 Fair value of plan assets at beginning of year $ 1,281 $ 1,280 Actual gain on plan assets 69 113 Employer contributions 381 1 Benefits paid (310 ) (113 ) Fair value of plan assets at end of year $ 1,421 $ 1,281
2004 | 2003 | |||||||
Funded status of the plan - net underfunded | $ | (1,582 | ) | $ | (1,081 | ) | ||
Unrecognized net actuarial loss | 1,275 | 1,041 | ||||||
Unrecognized prior service cost | 101 | 126 | ||||||
Net amount recognized | $ | (206 | ) | $ | 86 | |||
Accrued benefit liability | $ | (1,132 | ) | $ | (680 | ) | ||
Intangible asset | 108 | 124 | ||||||
Accumulated other comprehensive loss | 818 | 642 | ||||||
Net amount recognized | $ | (206 | ) | $ | 86 | |||
2005 2004 Funded status of the plans — net underfunded $ (1,209 ) $ (1,582 ) Unrecognized net actuarial loss 1,051 1,275 Unrecognized prior service cost 54 101 Net amount recognized $ (104 ) $ (206 ) Accrued benefit liability $ (1,078 ) $ (1,132 ) Intangible asset 60 108 Accumulated other comprehensive loss 914 818 Net amount recognized $ (104 ) $ (206 )
2005 | 2004 | |||||||||||||||
2004 | 2003 | |||||||||||||||
Weighted average assumed discount rate | 5.75 | % | 6.25 | % | 5.68 | % | 5.75 | % | ||||||||
Weighted average rate of compensation increase | 3.00 | % | 2.87 | % | 2.25 | % | 3.0 | % |
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2004 | 2003 | 2002 | ||||||||||
Service cost | $ | 151 | $ | 156 | $ | 114 | ||||||
Interest cost | 152 | 134 | 114 | |||||||||
Expected return on plan assets | (116 | ) | (72 | ) | (95 | ) | ||||||
Amortization of prior service cost | 19 | 20 | 19 | |||||||||
Amortization of unrecognized net actuarial loss | 87 | 90 | 33 | |||||||||
Net periodic benefit expense | $ | 293 | $ | 328 | $ | 185 | ||||||
2005 2004 2003 Service cost $ 86 $ 151 $ 156 Interest cost 151 152 134 Expected return on plan assets (124 ) (116 ) (72 ) Amortization of prior service cost 11 19 20 Amortization of unrecognized net actuarial loss 73 87 90 Net periodic benefit expense 197 293 328 Curtailment loss (included in special charges) 43 — — Settlement charge (included in special charges) 40 — — Net benefit expense $ 280 $ 293 $ 328
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NOTE 10 - EMPLOYEE BENEFIT PLANS (continued)
2005 | 2004 | 2003 | ||||||||||||||||||||||
2004 | 2003 | 2002 | ||||||||||||||||||||||
Weighted average assumed discount rate | 6.25 | % | 6.75 | % | 7.50 | % | 5.71 | % | 6.25 | % | 6.75 | % | ||||||||||||
Expected long-term rate of return on plan assets | 9.00 | % | 9.00 | % | 9.50 | % | 9.00 | % | 9.00 | % | 9.00 | % | ||||||||||||
Weighted average rate of compensation increase | 2.87 | % | 3.34 | % | 3.34 | % | 2.48 | % | 2.87 | % | 3.34 | % |
Plan
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2004 | 2003 | |||||||
U.S. equities | 49 | % | 52 | % | ||||
International equities | 17 | 17 | ||||||
Fixed income | 28 | 27 | ||||||
Other | 6 | 4 | ||||||
Total | 100 | % | 100 | % | ||||
2005 2004 U.S. equities 49 % 49 % International equities 21 17 Fixed income 22 28 Other 8 6 Total 100 % 100 %
Expected Long-Term | ||||||||||
Percent of Total | Rate of Return | |||||||||
U.S. equities | % | % | ||||||||
International equities | ||||||||||
Fixed income | ||||||||||
Other |
We believe that
defined benefit plans. Due to record high fuel prices, the weak revenue environment and our desire to maintain adequate liquidity, we elected in 2004 and 2005 to use deficit contribution relief under the Pension Funding Equity Act of 2004. As a result, we were not required to make any contributions to our primary defined benefit pension plan in 2004 and did not do so. The elections also allowed us to make smaller contributions to our defined benefit pension plans in 2005, and will allow smaller contributions in 2006, than would have been otherwise required. Based on current legislationassumptions and current assumptions,applicable law, we will be required to contribute in excess of $1.5 billion$258 million to our defined benefit pension plan over the next five years, including $307 millionplans in 2005,2006 to meet our minimum funding obligations before considering the potential changes discussed below. On January 6, 2005, we contributed six million shares of Holdings common stock valued at $65 million to our pension plan, which represents an 11.0% interest in Holdings.
obligations.
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NOTE 10 - EMPLOYEE BENEFIT PLANS (continued)
we could experience a significant increase in early retirements which could negatively impact our operations and materially increase our near-term funding obligations to our defined benefit pension plan, which could itself result in a material adverse effect on our liquidity.
We project that our pension plan will make the following benefit payments, which reflect expected future service, for the years ended December 31 (in millions):
2005 | $ | 147 | ||
2006 | 179 | |||
2007 | 289 | |||
2008 | 288 | |||
2009 | 232 | |||
2010 through 2014 | 1,414 |
The tentative agreements with our pilots and flight attendants each provide that benefits accruals with respect to those groups under our defined benefit pension plan will be frozen and we will begin to make contributions to alternate retirement programs. All of 2006 $ 185 2007 273 2008 251 2009 193 2010 214 2011 through 2015 1,023
The tentativenew pilot agreement, with our pilots provides for atwo new pilot-only defined contribution plan to beplans were established after the existing pension benefits are frozen on May 31,effective September 1, 2005. That plan will beOne of these plans is a money purchase pension plan that is also— a type of defined contribution plan subject to the minimum contributionfunding rules underof the
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The tentative agreement with our flight attendants provides that the flight attendants will join the IAM National Pension Fund (“National Pension Plan”) in connection with the freezing of their benefits under our existing defined benefit plan. The National Pension Plan is a multiemployer pension plan managed by representatives of participating employers and representatives of the IAM. Our obligation will be to make a fixed contribution to the National Pension Plan per hour of flight attendant service, as specifiedwas $20 million in the tentative agreement.
Funding requirements under our pre-existing defined benefit plan (including a separate plan to be established that will contain the assets and obligations related to pilots formerly contained in our defined benefit plan) will continue to be determined under applicable law. However, if the pilots’ tentative agreement takes effect, we have agreed that we will not declare a cash dividend or repurchase our outstanding common stock for cash until we have contributed at least $500 million to the pilots’ defined benefit plan, measured from the date of ratification of the pilots’ tentative agreement. Further, we have agreed that we will not make an election under any optional funding legislation that would eliminate the lump-sum benefit option without the consent of ALPA.
year ended December 31, 2005.
Profit Sharing Plan. During 2004, we terminated our profit sharing program under which an award pool consisting of 15% of our annual pre-tax net income,employees other than flight attendants, mechanics and CMI employees subject to collective bargaining agreements. Company matching contributions for flight attendants were terminated in the first quarter of 2006.
Projected benefit obligation at inception of plan | $ | 246 | ||
Service cost | 8 | |||
Interest cost | 11 | |||
Actuarial gain | (7 | ) | ||
Participant contributions | 1 | |||
Benefits paid | (9 | ) | ||
Projected benefit obligation at end of year | $ | 250 | ||
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NOTE 10 - EMPLOYEE BENEFIT PLANS (continued)
substantially all Continental
2005 | ||||
Funded status of the plan — net underfunded | $ | (250 | ) | |
Unrecognized net gain | (7 | ) | ||
Unrecognized prior service cost | 231 | |||
Net amount recognized | $ | (26 | ) | |
Accrued benefit liability | $ | (26 | ) | |
2005 | ||
Weighted average assumed discount rate | 5.57% | |
Health care cost trend | 9%, decreasing to 5% by 2010 |
Service cost | $ | 8 | ||
Interest cost | 11 | |||
Amortization of prior service cost | 15 | |||
Net periodic benefit expense | $ | 34 | ||
2006 | $ | 11 | ||
2007 | 13 | |||
2008 | 16 | |||
2009 | 17 | |||
2010 | 19 | |||
2011 through 2015 | 113 |
the assumed health care cost trend rate would decrease the accumulated postretirement benefit obligation as of December 31, 2005 by approximately $21 million and our run-rate annual expense by approximately $3 million.
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NOTE 11 - INCOME TAXES
We paid no profit sharing to Continental employees in 2005, 2004 or 2003.
NOTE 11 — | INCOME TAXES |
2004 | 2003 | 2002 | ||||||||||
Federal: | ||||||||||||
Current | $ | — | $ | (7 | ) | $ | 40 | |||||
Deferred | 143 | (94 | ) | 158 | ||||||||
State: | ||||||||||||
Current | — | (5 | ) | (10 | ) | |||||||
Deferred | 13 | (7 | ) | 21 | ||||||||
Foreign: | ||||||||||||
Current | — | (1 | ) | (1 | ) | |||||||
Valuation allowance | (79 | ) | — | — | ||||||||
Total income tax benefit (expense) | $ | 77 | $ | (114 | ) | $ | 208 | |||||
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2005 | �� | 2004 | 2003 | |||||||||
Federal: | ||||||||||||
Current | $ | — | $ | — | $ | (7 | ) | |||||
Deferred | (5 | ) | 147 | (89 | ) | |||||||
State: | ||||||||||||
Current | — | — | (5 | ) | ||||||||
Deferred | (3 | ) | 13 | (7 | ) | |||||||
Foreign: | ||||||||||||
Current | — | — | (1 | ) | ||||||||
Deferred | (1 | ) | — | — | ||||||||
Valuation allowance | 9 | (120 | ) | — | ||||||||
Total income tax benefit (expense) | $ | — | $ | 40 | $ | (109 | ) | |||||
NOTE 11 - INCOME TAXES (continued)
Amount | Percentage | |||||||||||||||||||||||
2004 | 2003 | 2002 | 2004 | 2003 | 2002 | |||||||||||||||||||
Income tax (expense) benefit at United States statutory rates | $ | 154 | $ | (70 | ) | $ | 222 | 35.0 | % | 35.0 | % | 35.0 | % | |||||||||||
State income tax benefit (expense), net of federal benefit | 8 | (8 | ) | 8 | 1.9 | 3.8 | 1.3 | |||||||||||||||||
Tax on equity in the income of subsidiary | — | (16 | ) | (12 | ) | — | 8.1 | (1.9 | ) | |||||||||||||||
Non-deductible loss on contribution of Holdings stock to defined benefit pension plan | — | (9 | ) | — | — | 4.4 | — | |||||||||||||||||
Meals and entertainment disallowance | (6 | ) | (8 | ) | (9 | ) | (1.4 | ) | 3.9 | (1.4 | ) | |||||||||||||
Valuation allowance | (79 | ) | — | — | (18.0 | ) | — | — | ||||||||||||||||
Other | — | (3 | ) | (1 | ) | — | 1.6 | (0.1 | ) | |||||||||||||||
Income tax benefit (expense) | $ | 77 | $ | (114 | ) | $ | 208 | 17.5 | % | 56.8 | % | 32.9 | % | |||||||||||
Amount Percentage 2005 2004 2003 2005 2004 2003 Income tax benefit (expense) at United States statutory rates $ 24 $ 157 $ (65 ) 35.0 % 35.0 % 35.0 % State income tax benefit (expense), net of federal benefit 2 8 (8 ) 3.4 1.8 4.3 Tax on equity in the income of subsidiary — — (16 ) — — 8.6 Non-deductible loss on contribution of Holdings stock to defined benefit pension plan (27 ) — (9 ) (39.6 ) — 4.8 Meals and entertainment disallowance (7 ) (6 ) (8 ) (11.0 ) (1.3 ) 4.3 Valuation allowance 9 (120 ) — 13.8 (26.6 ) — Other (1 ) 1 (3 ) (1.6 ) — 1.6 Income tax benefit (expense) $ — $ 40 $ (109 ) 0.0 % 8.9 % 58.6 %
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During
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NOTE 11 - INCOME TAXES (continued)
2004 | 2003 | |||||||
Fixed assets, intangibles and spare parts | $ | 1,596 | $ | 1,459 | ||||
Other, net | 110 | 69 | ||||||
Gross deferred tax liabilities | 1,706 | 1,528 | ||||||
Net operating loss carryforwards | (1,209 | ) | (1,038 | ) | ||||
Pension liability | (311 | ) | (69 | ) | ||||
Accrued liabilities | (232 | ) | (246 | ) | ||||
Basis in subsidiary stock | (105 | ) | (105 | ) | ||||
Gross deferred tax assets | (1,857 | ) | (1,458 | ) | ||||
Valuation allowance | 363 | 219 | ||||||
Net deferred tax liability | 212 | 289 | ||||||
Less: current deferred tax asset | (170 | ) | (157 | ) | ||||
Non-current deferred tax liability | $ | 382 | $ | 446 | ||||
2005 2004 Fixed assets, intangibles and spare parts $ 1,571 $ 1,574 Other, net 198 165 Gross deferred tax liabilities 1,769 1,739 Net operating loss carryforwards (1,544 ) (1,209 ) Pension liability (343 ) (343 ) Accrued liabilities (318 ) (295 ) Basis in subsidiary stock (59 ) (84 ) Gross deferred tax assets (2,264 ) (1,931 ) Valuation allowance 495 404 Net deferred tax liability — 212 Less: current deferred tax asset (154 ) (166 ) Non-current deferred tax liability $ 154 $ 378
2025.
The
NOTE 12 - SPECIAL CHARGES
Effective January 1, 2003, we adopted SFAS No. 146, “Accounting for Costs Associated with Disposal or Exit Activities” (“SFAS 146”), which requires liabilities for costs associated with exit or disposal activities to be recognized when the liabilities are incurred, rather than when an entity commits to an exit plan. In July 2003, we announced plans to remove all our remaining MD-80 aircraft from service. Prior to the adoption of SFAS 146, we would have recognized a charge associated with future obligations for rent and return conditions, net of estimated sublease income, on the entire fleettax uncertainties existing at the timepoint we were committed to permanently removing the aircraftemerged from service. However, subsequent to the adoption of SFAS 146, we recorded these charges as each of the aircraft were permanently grounded.
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NOTE 12 - SPECIAL CHARGES (continued)
NOTE 12 — | SPECIAL CHARGES |
During 2002, we recorded special charges totaling $254 million ($161 million after taxes) primarily related to the impairment of owned aircraft and the accrual of future obligations for leased aircraft which have been permanently grounded or were to be permanently grounded within 12 months following the charge. The charge included $242 million ($153 million after income taxes) of retirement and impairment charges for DC 10-30, MD-80 and turboprop aircraft. In addition, we recorded a charge of $12 million in 2002 to write down our receivable from the U.S. government based on our final application under the Air Transportation Safety and System Stabilization Act.
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NOTE 12 - SPECIAL CHARGES (continued)
Beginning | Ending | |||||||||||||||||||
Balance | Accrual | Payments | Other | Balance | ||||||||||||||||
2004 | ||||||||||||||||||||
Allowance for future lease payments and return conditions | $ | 83 | $ | 87 | $ | (57 | ) | 3 | $ | 116 | ||||||||||
Closure/under-utilization of facilities | 17 | — | (3 | ) | — | 14 | ||||||||||||||
2003 | ||||||||||||||||||||
Allowance for future lease payments and return conditions | $ | 107 | $ | 21 | $ | (45 | ) | $ | — | $ | 83 | |||||||||
Closure/under-utilization of facilities | 22 | — | (5 | ) | — | 17 | ||||||||||||||
2002 | ||||||||||||||||||||
Allowance for future lease payments and return conditions | $ | 20 | $ | 142 | $ | (45 | ) | $ | (10 | ) | $ | 107 | ||||||||
Closure/under-utilization of facilities | 26 | — | (4 | ) | — | 22 | ||||||||||||||
Severance/leave of absence costs | 11 | — | (11 | ) | — | — |
Beginning Ending Balance Accrual Payments Other Balance 2005 Allowance for future lease payments and return conditions $ 116 $ — $ (61 ) $ (16 )(A) $ 39 Closure/under-utilization of facilities 14 — (2 ) — 12 2004 Allowance for future lease payments and return conditions $ 83 $ 87 $ (57 ) $ 3 $ 116 Closure/under-utilization of facilities 17 — (3 ) — 14 2003 Allowance for future lease payments and return conditions $ 107 $ 21 $ (45 ) $ — $ 83 Closure/under-utilization of facilities 22 — (5 ) — 17
(A) | Primarily reserve reductions on permanently grounded aircraft, recorded as a credit to special charges in our consolidated statement of operations. |
Asduring 2006.
Additionally, we have 12 Embraer 120 turboprop aircraft and 11 ATR 42 turboprop aircraft out of service. We lease 15 and own eight of these aircraft. The eight owned aircraft are being carried at fair value, and the remaining rentals and obligations for return conditions on those aircraft accounted for as operating leases have been accrued. We currently sublease seven of the leased out-of-service turboprop aircraft to third parties.
We are currently exploring lease or sale opportunities for the remaining out-of-service owned aircraft and sublease opportunities for the out-of-service leased aircraft that do not have near-term lease expirations. The timing of the disposition of these aircraft will depend upon our ability to find purchasers, lessees or sublessees for the aircraft, which is limited in part because of a large surplus of similar aircraft available in the market and a weak economic environment in the airline industry. aircraft. We cannot predict when or if the economic environment for airlines will improve or if purchasers, lessees or sublessees can be found, and it is possible that our assets (includingownedMD-80 aircraft currently in service) could suffer additional impairment.
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NOTE 13 - SECURITY FEE REIMBURSEMENT
NOTE 13 — | SECURITY FEE REIMBURSEMENT |
NOTE 14 — | INVESTMENT IN AFFILIATES |
NOTE 14 - VARIABLE INTEREST ENTITIES
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Effective July 1,
Nine Months Ended | Year Ended December 31, | |||||||||||
September 30, 2005 | 2004 | 2003 | ||||||||||
Revenue | $ | 429 | $ | 400 | $ | 342 | ||||||
Operating income | 82 | 82 | 58 | |||||||||
Net income | 65 | 69 | 48 |
Current assets | $ | 156 | ||
Total assets | 702 | |||
Current liabilities | 143 | |||
Stockholders’ equity | 174 |
Year Ended December 31, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
Revenue | $ | 1,563 | $ | 1,508 | $ | 1,311 | ||||||
Operating income | 157 | 205 | 182 | |||||||||
Net income | 98 | 123 | 108 |
2005 | 2004 | |||||||
Current assets | $ | 280 | $ | 254 | ||||
Total assets | 560 | 543 | ||||||
Current liabilities | 150 | 207 | ||||||
Stockholders’ equity | 209 | 114 |
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NOTE 15 — | VARIABLE INTEREST ENTITIES |
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NOTE 14 - VARIABLE INTEREST ENTITIES (continued)
NOTE 15 - INVESTMENT IN EXPRESSJET AND REGIONAL CAPACITY PURCHASE AGREEMENT
NOTE 16 — | INVESTMENT IN EXPRESSJET AND REGIONAL CAPACITY PURCHASE AGREEMENT |
In April 2002, Holdings, our then wholly-owned subsidiary and
During 2003, we sold approximately 9.8 million shares of our Holdings common stock to Holdings, andreducing our ownership interest in Holdings from 53.1% to 44.6%. In a subsequent transaction in the third quarter of 2003, we contributed approximately 7.4 million shares of Holdings common stock to thatour defined benefit pension plan, further reducing our ownership of Holdings to 30.9%below 31%. We recognized gains totaling $173 million in 2003 as a result of these transactions.
Prior We continued to these transactions, we consolidatedconsolidate Holdings because, we owned over 50% of the voting interest in Holdings. Following these transactions, we would have deconsolidated Holdings and accounted for our interest using the equity method of accounting set forth in APB Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock”, which was the applicable accounting literature prior to the adoption of FIN 46. However, we adoptedunder FIN 46, on July 1,we were the primary beneficiary until November 12, 2003, and elected to restate prior period financial statements for retroactive application.
Aswhen, as a result of sales of Holdings shares to unrelated parties by our defined benefit pension plan, on November 12, 2003 the combined amount of Holdings common stock owned by us and our defined benefit pension plan fell below 41%, the point at which we no longer were the primary beneficiary under FIN 46. Therefore, in accordance with FIN 46, we deconsolidated Holdings as of November 12, 2003.
Effective November 12, 2003 weand began to account for our interest in Holdings using the equity method of accounting set forth in APB Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock”. We believe that use of the equity method is appropriate given our percentage ownership and our continued ability to significantly influence Holdings’ operations through our capacity purchase agreement and our continued representation on Holdings’ Board of Directors. Since the inception of our capacity purchase agreement with Holdings and ExpressJet, we have purchased all of ExpressJet’s capacity and are responsible for selling all of the
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NOTE 15 - INVESTMENT IN EXPRESSJET AND REGIONAL CAPACITY PURCHASE AGREEMENT (continued)
purchased seat inventory.accounting. As a result, after deconsolidation, we continue to record the related passenger revenue and related expenses, with payments under the capacity purchase agreement reflected as a separate operating expense. Prior to November 12, 2003, expenses under the capacity purchase agreement were eliminated in consolidation and the portion of Holdings’ net income attributable to the equity of Holdings that we did not own was reported as minority interest in our consolidated statement of operations. After
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As of December 31, 2004, we owned 16.7 million shares of Holdings common stock with a market value of $215 million, which represented a 30.8% interest in Holdings, and our defined benefit pension plan owned no shares of Holdings common stock.
We do not currently intend to remain a stockholder of Holdings over the long term. Subject to market conditions, we intend to sell or otherwise dispose of some or all of ourdefined benefit pension plans owned 4.2 million shares of Holdings common stock at December 31, 2005, which represented a 7.9% interest in Holdings. The independent fiduciary for our defined benefit pension plans, which exercises sole and exclusive control over the future.
voting and disposition of all securities owned by our defined benefit pension plans, sold 7.9 million shares to third parties during 2005. Our ownership of Holdings common stock, together with the shares held by our defined benefit pension plans (which shares are subject to the exclusive control of the independent fiduciary), totaled 8.9 million shares, or 16.5% of Holdings’ outstanding shares, at December 31, 2005.
Our obligations Pursuant to the terms of the agreement, the block hour rate portion of the compensation we pay to ExpressJet is re-negotiated annually.
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NOTE 15 - INVESTMENT IN EXPRESSJET AND REGIONAL CAPACITY PURCHASE AGREEMENT (continued)
Set forth below are estimates of our future minimum noncancelable commitments under the capacity purchase agreement. These estimates of our future minimum noncancelable commitments under the capacity purchase agreement do not include the portion of the underlying obligations for aircraft and facility rent that are disclosed as part of our consolidated operating lease commitments. For purposes of calculating these estimates, we have assumed (i)(1) that ExpressJet’s aircraft deliveries continue as scheduled through MarchJune 2006, (ii) 2005 contractual rates with an inflationary assumption of 2% for subsequent years, (iii)(2) that applicable expenses include a 10% margin, (3) a constant fuel rate of 71.2 cents per gallon, including fuel taxes, (iv)(4) that aircraft are removed from the capacity purchase agreement beginning December 28, 2006 based on a withdrawal schedule provided to ExpressJet, (5) we exercise our rightsright to initiate termination of the capacity purchase agreement aton March 1, 2006 with a wind-down beginning in June 2007 after the earliest possible date permitted under the contract (January 1, 2007), (v) that prior to termination we exercise our rights to remove as many aircraft as quickly as contractually permitted (beginning March 2006) from the capacity purchase agreement, (vi)withdrawal (noted in (4) above) is completed, (6) an average daily utilization rate of 9.1 hours9.7 for 20052006 through 2008, and (vii)(7) cancellations are at historical levels resulting in no incentive compensation payable to ExpressJet.ExpressJet and (8) that inflation is 2% per year. Based on these assumptions, our future minimum noncancelable commitments under the capacity purchase agreement at December 31, 20042005 are estimated as follows (in millions):
2005 | $ | 1,233 | ||
2006 | 1,092 | |||
2007 | 525 | |||
2008 and thereafter | 7 | |||
Total | $ | 2,857 | ||
2006 $ 1,339 2007 922 2008 107 Total $ 2,368
Under the agreementmillion and a related fuel purchase agreement, ExpressJet’s fuel costs were capped at 71.2 cents per gallon, including fuel taxes,$16 million in 2005, 2004, and will remain capped at this level for the duration of the agreement. Accordingly, we absorbed $126 million of ExpressJet’s fuel costs and fuel taxes in 2004 and will likely continue to do so in the future.
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NOTE 15 - INVESTMENT IN EXPRESSJET AND REGIONAL CAPACITY PURCHASE AGREEMENT (continued)
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Should ExpressJet retain the withdrawn aircraft, we anticipate that the new operator will supply any aircraft needed for its operations for us.
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NOTE 15 - INVESTMENT IN EXPRESSJET AND REGIONAL CAPACITY PURCHASE AGREEMENT (continued)
us and the lessors and expire between 2013 and 2020. ExpressJet leases or subleases, under various operating leases, ground equipment and substantially all of its ground facilities, including facilities at public airports, from us or the municipalities or agencies owning and controlling such airports. If
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Summarized Financial Information for Holdings. Holdings’ stand-alone financial statements and the calculation of our equity in Holdings’ earnings (post deconsolidation) and minority interest (pre-deconsolidation) in our consolidated financial statements are based on Holdings’ results of operations under the capacity purchase agreement. On this basis, selected Holdings’ results of operations were as follows for the year ended December 31 (in millions):
2004 | 2003 | 2002 | ||||||||||
Revenue | $ | 1,508 | $ | 1,311 | $ | 1,089 | ||||||
Operating income before taxes and dividends | 198 | 175 | 139 | |||||||||
Net income | 123 | 108 | 84 |
Holdings’ balance sheet information at December 31 was as follows (in millions):
NOTE 17 — | RELATED PARTY TRANSACTIONS |
2004 | 2003 | |||||||
Current assets | $ | 253 | $ | 234 | ||||
Total assets | 543 | 510 | ||||||
Current liabilities | 206 | 219 | ||||||
Stockholders’ equity (deficit) | 114 | (10 | ) |
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NOTE 16 - RELATED PARTY TRANSACTIONS
The following is a summary of significant related party transactions that occurred during 2005, 2004 2003 and 2002,2003, other than those discussed elsewhere in the Notes to Consolidated Financial Statements. The payments to and from the related parties in the ordinary course of business were based on prevailing market rates and do not include interline billings, which are common among airlines for transportation-related services.
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America West. Two of our former directors, Messrs. Bonderman and Price, may be deemed to have indirectly controlled approximately 54% of the voting power of America West Holdings Corporation. In 1994, we entered into a series of agreements with America West Airlines, Inc., a subsidiary of America West Holdings Corporation, related to codesharing and ground handling activities such as passenger check-in and ticketing and baggage handling and delivery. The services provided are considered normal to the daily operations of both airlines. As a result of these agreements, we paid America West Airlines $5 million and $18 million in 2003 and 2002, respectively, and they paid us $16 million and $24 million in 2003 and 2002, respectively. The majority of these agreements were terminated in 2002, although agreements for services at certain airports are continuing.
NOTE 17 - SEGMENT REPORTING
NOTE 18 — | SEGMENT REPORTING |
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NOTE 17 - SEGMENT REPORTING (continued)
deconsolidation of Holdings effective November 12, 2003.
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NOTE 17 - SEGMENT REPORTING (continued)
2005 | 2004 | 2003 | ||||||||||||||||||||||
2004 | 2003 | 2002 | ||||||||||||||||||||||
Operating Revenue: | ||||||||||||||||||||||||
Mainline | $ | 8,172 | $ | 7,559 | $ | 7,432 | $ | 9,377 | $ | 8,327 | $ | 7,690 | ||||||||||||
Regional | 1,572 | 1,311 | 970 | 1,831 | 1,572 | 1,311 | ||||||||||||||||||
Total Consolidated | $ | 9,744 | $ | 8,870 | $ | 8,402 | $ | 11,208 | $ | 9,899 | $ | 9,001 | ||||||||||||
Depreciation and amortization expense: | ||||||||||||||||||||||||
Mainline | $ | (403 | ) | $ | (416 | ) | $ | (403 | ) | $ | (378 | ) | $ | (404 | ) | $ | (419 | ) | ||||||
Regional | (11 | ) | (28 | ) | (41 | ) | (11 | ) | (11 | ) | (28 | ) | ||||||||||||
Total Consolidated | $ | (414 | ) | $ | (444 | ) | $ | (444 | ) | $ | (389 | ) | $ | (415 | ) | $ | (447 | ) | ||||||
Special Charges (Note 12): | ||||||||||||||||||||||||
Mainline | $ | (121 | ) | $ | (91 | ) | $ | (197 | ) | $ | (67 | ) | $ | (121 | ) | $ | (91 | ) | ||||||
Regional | — | (9 | ) | (57 | ) | — | — | (9 | ) | |||||||||||||||
Total Consolidated | $ | (121 | ) | $ | (100 | ) | $ | (254 | ) | $ | (67 | ) | $ | (121 | ) | $ | (100 | ) | ||||||
Operating Income (Loss): | ||||||||||||||||||||||||
Mainline | $ | 2 | $ | 234 | $ | (154 | ) | |||||||||||||||||
Regional | (231 | ) | (31 | ) | (158 | ) | ||||||||||||||||||
Total Consolidated | $ | (229 | ) | $ | 203 | $ | (312 | ) | ||||||||||||||||
Interest Expense: | ||||||||||||||||||||||||
Mainline | $ | (371 | ) | $ | (372 | ) | $ | (350 | ) | |||||||||||||||
Regional | (18 | ) | (27 | ) | (37 | ) | ||||||||||||||||||
Intercompany Eliminations | — | 6 | 15 | |||||||||||||||||||||
Total Consolidated | $ | (389 | ) | $ | (393 | ) | $ | (372 | ) | |||||||||||||||
Interest Income: | ||||||||||||||||||||||||
Mainline | $ | 25 | $ | 16 | $ | 22 | ||||||||||||||||||
Regional | 4 | 9 | 17 | |||||||||||||||||||||
Intercompany Eliminations | — | (6 | ) | (15 | ) | |||||||||||||||||||
Total Consolidated | $ | 29 | $ | 19 | $ | 24 | ||||||||||||||||||
Income Tax Benefit (Expense): | ||||||||||||||||||||||||
Mainline | $ | 45 | $ | (110 | ) | $ | 160 | |||||||||||||||||
Regional | 32 | (4 | ) | 48 | ||||||||||||||||||||
Total Consolidated | $ | 77 | $ | (114 | ) | $ | 208 | |||||||||||||||||
Net Income (Loss): | ||||||||||||||||||||||||
Mainline | $ | (169 | ) | $ | 131 | $ | (300 | ) | ||||||||||||||||
Regional | (194 | ) | (93 | ) | (151 | ) | ||||||||||||||||||
Total Consolidated | $ | (363 | ) | $ | 38 | $ | (451 | ) | ||||||||||||||||
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2005 2004 2003 Operating Income (Loss): Mainline $ 215 $ (7 ) $ 219 Regional (254 ) (231 ) (31 ) Total Consolidated $ (39 ) $ (238 ) $ 188 Interest Expense: Mainline $ (393 ) $ (371 ) $ (372 ) Regional (17 ) (18 ) (27 ) Intercompany Eliminations — — 6 Total Consolidated $ (410 ) $ (389 ) $ (393 ) Interest Income: Mainline $ 69 $ 25 $ 16 Regional 3 4 9 Intercompany Eliminations — — (6 ) Total Consolidated $ 72 $ 29 $ 19 Income Tax Benefit (Expense): Mainline $ — $ 8 $ (105 ) Regional — 32 (4 ) Total Consolidated $ — $ 40 $ (109 ) Net Income (Loss): Mainline $ 189 $ (215 ) $ 121 Regional (257 ) (194 ) (93 ) Total Consolidated $ (68 ) $ (409 ) $ 28
Net income (loss) for the mainline segment includes income from Copa and gains on the sale of Copa shares and dispositions of Holdings shares.
2005 | 2004 | 2003 | ||||||||||
Domestic (U.S.) | $ | 6,914 | $ | 6,570 | $ | 6,181 | ||||||
Atlantic | 1,993 | 1,489 | 1,203 | |||||||||
Latin America | 1,427 | 1,139 | 1,050 | |||||||||
Pacific | 874 | 701 | 567 | |||||||||
$ | 11,208 | $ | 9,899 | $ | 9,001 | |||||||
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NOTE 17 - SEGMENT REPORTING (continued)
2004 | 2003 | 2002 | ||||||||||
Domestic (U.S.) | $ | 6,415 | $ | 6,050 | $ | 5,570 | ||||||
Atlantic | 1,489 | 1,203 | 1,205 | |||||||||
Latin America | 1,139 | 1,050 | 1,016 | |||||||||
Pacific | 701 | 567 | 611 | |||||||||
$ | 9,744 | $ | 8,870 | $ | 8,402 | |||||||
NOTE 18 - COMMITMENTS AND CONTINGENCIES
NOTE 19 — | COMMITMENTS AND CONTINGENCIES |
The eightfrom 2007 through 2011. In addition, we are scheduled to take delivery of two used 757-300 aircraft discussed above will be leased from Boeing Capital Corporation, which has also agreed to providein 2006 under operating leases.
expenditures, or for our capital expenditures in general.
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 and a new international ticketing hall facility 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
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rental payments sufficient to service the related tax-exempt bonds through their maturity in 2029. We have also entered into a binding corporate guaranty with the bond trustee for the repayment of all of the principal and interest on the bonds. The guarantee became effective for the repayment of principal and interest with respect to $271 million of the bonds upon completion of the terminal during the first quarter of 2004. The remainder of the guarantee, relating to $53 million of the bonds, became effective upon completion of the international ticketing facility in January 2005.
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2005.
agreements due to unknown variables related to potential government changes in capital adequacy requirements or tax laws.
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being required to post up to an additional $335$330 million of cash collateral, which would adversely affect our liquidity needed forliquidity. Depending on our operationsunrestricted cash and debt service, but would not resultshort-term investments balance at the time, the posting of a significant amount of cash collateral could cause our unrestricted cash and short-term investments balance to fall below the $1.0 billion minimum balance requirement under our $350 million secured loan facility, resulting in a default under any of our debt or lease agreements. Additionally, we would have to post additional collateral of approximately $60 million under our bank-issued credit card processing agreement if our debt rating falls below Caa3 as rated by Moody’s or CCC- as rated by Standard and Poor’s.
such facility.
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On November 18, 2004, we announced that we needed an annual $500 million reduction in wage and benefit costs. In late 2004 and early 2005, we finalized (but have not yet implemented) changes to wages, work rules and benefits for U.S.-based management and clerical, reservations, food services, airport and cargo agents and customer service employees that result in savings of $169 million annually. On February 28, 2005, we announced that we had reached tentative agreements on new contracts covering our pilots, flight attendants, mechanics and dispatchers following negotiations with ALPA, the IAM, the Teamsters, and the TWU. We also reached a tentative agreement with our simulator technicians, represented by the TWU. Each of the agreements is subject to ratification by the members of each covered work group, and the effectiveness of each agreement is conditioned on ratification of each other agreement. Results of the ratification process for each of the agreements are expected by the end of March 2005. If the agreements are ratified, the wage and benefit reductions will become effective as of the date of ratification and we will begin to implement the agreements. Some of the savings from the agreements will take time to achieve, while others, such as the wage reductions and certain benefit changes, will result in immediate savings. Our officers and Board of Directors implemented their reductions on February 28, 2005.
The tentative agreements, along with previously announced pay and benefit reductions for other work groups, conclude the negotiation process with all our employees, except some CMI and international employees. The pay and benefits of international employees must be adjusted in accordance with laws and regulations of the various countries. We expect to complete the process with these remaining employees in the near future.
Each of the agreements is for a 45-month term, so that the agreements would become amendable again on December 31, 2008. A significant portion of the cost savings from our work groups, both unionized and non-unionized, will be derived from changes to benefits and work rules. Our ability to achieve certain of the cost reductions will depend on timely and effective implementation of new work rules, actual productivity improvements, implementation of changes in technology pertaining to employee work rules and benefits and other items.
We expect our total losses from environmental matters to be approximately $50 million, for which we were fully accrued at December 31, 2004. 2005.
IRS Examinations. The IRS is in the process of examining our income tax returns for years through 2001 and has indicated that it may disallow certain deductions we claimed. We believe the ultimate resolution of these audits will not have a material adverse effect on our financial condition, liquidity or results of operations.
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that purportedly opted out of a prior class action entitledSarah Futch Hall d/b/a/ Travel Specialists v. United Air Lines, et al.al. (U.S.D.C., Eastern District of North Carolina). This class action was, filed in federal court on June 21, 2000, by a travel agent,in which the defendant airlines prevailed on behalf of herself and other similarly situated U.S. travel agents, challenging the reduction and subsequent elimination of travel agent base commissions. The amended complaint alleged an unlawful agreement among the airline defendants to reduce, cap or eliminate commissions in violation of federal antitrust laws during the years 1997 to 2002. The plaintiffs sought compensatory and treble damages, injunctive relief and their attorneys’ fees. The class was certified on September 18, 2002. On October 30, 2003, a summary judgment and orderthat was granted in favor of all of the defendants. Plaintiffs filed their appeal to this judgment and orderupheld on November 5, 2003. On December 9, 2004 the Fourth Circuit Court of Appeals affirmed the award of summary judgment. On January 4, 2005, the plaintiffs’ Petition for Rehearing with the Fourth Circuit Court of Appeals was denied. We have been advised that plaintiffs will not pursue further appeals.
Several travel agents who purportedly opted out of the Hall class action filedappeal. These similar suits against Continental and other major carriers allegingallege violations of antitrust laws in reducing and ultimately eliminating the base commission:commission formerly paid to travel agents. The pending cases areTam Travel, Inc. v. Delta Air Lines, Inc., et al.al. (U.S.D.C., Northern District of California), filed on April 9, 2003;Paula Fausky, et al. v. American Airlines, et al. (U.S.D.C., Northern District of Ohio), filed on May 8, 2003;2003 andSwope Travel Agency, et al. v. Orbitz LLC et al.al. (U.S.D.C., Eastern District of Texas), filed on June 5, 2003. Another such similar lawsuit, styledPaula Fausky, et al. v. American Airlines, et al. (U.S.D.C., Northern District of Ohio) and filed on May 8, 2003, was dismissed without prejudice in July 2005. By order dated November 12,10, 2003, thesethe remaining actions were transferred and consolidated for pretrial purposes by the Judicial Panel on Multidistrict Litigation to the Northern District of Ohio. Discovery has recently been served on Continental.
Always Travel, et. al. v. Air Canada, et al. On December 6, 2002, the named plaintiffs in this case, pending in the Federal Court of Canada, Trial Division, filed an amended statement of claim alleging that between 1995 and the present, Continental, the other defendant airlines, and the International Air Transport Association conspired to reduce commissions paid to Canada-based travel agents in violation of the Competition Act of Canada. By Order dated December 10, 2004, the Court approved the plaintiffs’ motion to discontinue their action and abandon their motion for class certification with prejudice.
In addition to the lawsuits brought by travel agencies discussed above, Continental was a defendant in an alleged securities fraud class action filed in federal court in Phoenix, Arizona relating to the sale of certain America West stock in 1998 brought against America West Airlines, America West Holdings Corporation and various other defendants, entitledEmployer-Teamsters Joint Council No. 84 Pension Trust Fund v. America West Holdings Corp., et al. This action was first filed in March 1999, but was dismissed. Plaintiffs then filed a Second Amended Consolidated Complaint in January 2001, which was dismissed with prejudice in June 2001. Plaintiffs appealed that dismissal and in 2003 the Ninth Circuit Court of Appeals reversed and remanded the lower court’s dismissal. In January 2004 the class was certified and was set for trial in November 2004. By Order dated September 27, 2004, the Court granted full summary judgment in favor of Continental and it is not anticipated that there will be any further appeal.
commenced.
or liquidity.
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NOTE 19 - QUARTERLY
NOTE 20 — | QUARTERLY FINANCIAL DATA (UNAUDITED) |
Three Months Ended | ||||||||||||||||
March 31 | June 30 | September 30 | December 31 | |||||||||||||
2004 | ||||||||||||||||
Operating revenue | $ | 2,269 | $ | 2,514 | $ | 2,564 | $ | 2,397 | ||||||||
Operating income (loss) | (135 | ) | 43 | 24 | (161 | ) | ||||||||||
Nonoperating expense, net | (58 | ) | (68 | ) | (40 | ) | (45 | ) | ||||||||
Net loss | (124 | ) | (17 | ) | (16 | ) | (206 | ) | ||||||||
Loss per share (a): | ||||||||||||||||
Basic | $ | (1.88 | ) | $ | (0.26 | ) | $ | (0.24 | ) | $ | (3.10 | ) | ||||
Diluted | $ | (1.90 | ) | $ | (0.27 | ) | $ | (0.26 | ) | $ | (3.12 | ) | ||||
2003 | ||||||||||||||||
Operating revenue | $ | 2,042 | $ | 2,216 | $ | 2,365 | $ | 2,248 | ||||||||
Operating income (loss) | (224 | ) | 238 | 174 | 16 | |||||||||||
Nonoperating income (expense), net | (90 | ) | (79 | ) | 87 | 80 | ||||||||||
Net income (loss) | (221 | ) | 79 | 133 | 47 | |||||||||||
Earnings (loss) per share (a): | ||||||||||||||||
Basic | $ | (3.38 | ) | $ | 1.20 | $ | 2.04 | $ | 0.72 | |||||||
Diluted | $ | (3.38 | ) | $ | 1.08 | $ | 1.65 | $ | 0.61 | |||||||
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Three Months Ended | ||||||||||||||||
March 31 | June 30 | September 30 | December 31 | |||||||||||||
2005 | ||||||||||||||||
Operating revenue | $ | 2,505 | $ | 2,857 | $ | 3,001 | $ | 2,845 | ||||||||
Operating income (loss) | (173 | ) | 119 | 109 | (94 | ) | ||||||||||
Nonoperating income (expense), net | (13 | ) | (19 | ) | (48 | ) | 51 | |||||||||
Net income (loss) | (186 | ) | 100 | 61 | (43 | ) | ||||||||||
Earnings (Loss) per share: | ||||||||||||||||
Basic | $ | (2.79 | ) | $ | 1.49 | $ | 0.91 | $ | (0.53 | ) | ||||||
Diluted | $ | (2.79 | ) | $ | 1.26 | $ | 0.80 | $ | (0.53 | ) | ||||||
2004 | ||||||||||||||||
Operating revenue | $ | 2,307 | $ | 2,553 | $ | 2,602 | $ | 2,437 | ||||||||
Operating income (loss) | (137 | ) | 40 | 22 | (163 | ) | ||||||||||
Nonoperating expense, net | (58 | ) | (68 | ) | (40 | ) | (45 | ) | ||||||||
Net loss | (155 | ) | (28 | ) | (18 | ) | (208 | ) | ||||||||
Loss per share: | ||||||||||||||||
Basic | $ | (2.36 | ) | $ | (0.41 | ) | $ | (0.28 | ) | $ | (3.14 | ) | ||||
Diluted | $ | (2.37 | ) | $ | (0.43 | ) | $ | (0.29 | ) | $ | (3.16 | ) | ||||
NOTE 19 - QUARTERLY FINANCIAL DATA (UNAUDITED) (continued)
2004 | ||||
First quarter\ | $ | 0.02 | ||
Second quarter | 0.01 | |||
Third quarter | 0.02 | |||
Fourth quarter | N/A | |||
2003 | ||||
First quarter | — | |||
Second quarter | 0.02 | |||
Third quarter | 0.18 | |||
Fourth quarter | 0.06 |
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Three months ended: | ||||
March 31, 2004 | $ | 21 | ||
June 30, 2004 | 30 | |||
September 30, 2004 | 22 | |||
December 31, 2004 | 14 | |||
Total | $ | 87 | ||
During the first quarter of 2003, we recorded $65 million of special charges related to additional impairment of our fleet of owned MD-80s and the write-down to market value of spare parts inventory for permanently grounded fleet.
In the second quarter of 2003, we recorded $176 million income related to the security fee reimbursement received from the U.S. government and a special charge for $14 million related to the deferral of aircraft deliveries.
In the third quarter of 2003, we recognized gains of $173 million related to dispositions of Holdings stock.
In the fourth quarter of 2003, we recorded gains of $132 million related to our Hotwire and Orbitz investments, after related compensation expense and including an adjustment to fair value of the remaining investment in Orbitz, and a special charge of $21 million related to five permanently grounded MD-80 aircraft. Also in the fourth quarter of 2003, we adjusted our estimates of the frequent flyer mileage credits we expect to be redeemed for travel, resulting in a one-time increase in other revenue of $24 million.
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Class B | ||||||||
Common Stock | ||||||||
High | Low | |||||||
2005 | ||||||||
Fourth Quarter | $ | 21.97 | $ | 9.62 | ||||
Third Quarter | $ | 16.60 | $ | 9.03 | ||||
Second Quarter | $ | 15.60 | $ | 11.08 | ||||
First Quarter | $ | 14.19 | $ | 8.50 | ||||
2004 | ||||||||
Fourth Quarter | $ | 14.01 | $ | 7.63 | ||||
Third Quarter | $ | 11.68 | $ | 7.80 | ||||
Second Quarter | $ | 13.93 | $ | 9.05 | ||||
First Quarter | $ | 18.70 | $ | 10.85 |
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Name | Title & Principal Employer | |
Thomas J. Barrack, Jr. | Chairman and Chief Executive Officer Colony Capital, LLCandColony Advisors, LLC(real estate investments) | |
Kirbyjon H. Caldwell | Senior Pastor The Windsor Village-United Methodist Church | |
Lawrence W. Kellner | Chairman of the Board and Chief Executive OfficerContinental Airlines, Inc. | |
Douglas H. McCorkindale | Chairman Gannett Co., Inc. (a nationwide diversified communications company) | |
Henry L. Meyer III | Chairman of the Board, President and Chief Executive Officer KeyCorp(banking) | |
Oscar Munoz | Executive Vice President and Chief Financial OfficerCSX Corporation(freight transportation) | |
George G. C. Parker | Dean Witter Distinguished Professor of Finance and Management, Graduate School of Business Stanford University | |
Jeffery A. Smisek | President Continental Airlines, Inc. | |
Karen Hastie Williams | Senior Counsel Crowell & Moring LLP(law firm) | |
Ronald B. Woodard | Chairman of the Board MagnaDrive Corporation(supplier of new engine power transfer technology applications for industrial equipment) | |
Charles A. Yamarone | Executive Vice President Libra Securities, LLC(institutional broker-dealer) |
Name | Title | |
James Compton | Executive Vice President — Marketing | |
Jeffrey J. Misner | Executive Vice President and Chief Financial Officer | |
Mark J. Moran | Executive Vice President — Operations | |
Jennifer L. Vogel | Senior Vice President, General Counsel, Secretary and Corporate Compliance Officer |
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B-1
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CONTINENTAL AIRLINES, INC.: | ||||
By: | ||||
Name: | ||||
Title: | ||||
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By: |
D-1
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12(b).
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(u) “Plan”means the Continental Airlines, Inc. Incentive Plan 2000, as amended from time to time.
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E - 4
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prescribe rules and regulations relating to the Plan, and to determine the terms, restrictions and provisions of the Grant Documents, including such terms, restrictions and provisions as shall be requisite in the judgment of the Administrator to cause designated Options to qualify as Incentive Stock Options, and to make all other determinations necessary or advisable for administering the Plan. The Administrator may correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any Grant Document relating to an Award in the manner and to the extent it shall deem expedient to carry it into effect. The determination of the Administrator on the matters referred to in this Section 4 shall be conclusive; provided, however, that in the event of any conflict in any such determination as between the Committee and the Chief Executive Officer of the Company, each acting in capacity as Administrator of the Plan, the determination of the Committee shall be conclusive.
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include an Incentive Stock Option, a Non-Qualified Option, a Restricted Stock Award, a Performance Award, an Incentive Award, a Retention Award or any combination thereof.
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thereof in exchange for cash, whole shares of Common Stock, or a combination thereof, as determined by the Committee, with a value equal to the excess of the Market Value per Share, as of the date of such request, of one share of Common Stock over the Option price for such share multiplied by the number of shares covered by the Option or portion thereof to be surrendered. In the case of any SAR which is granted in connection with an Incentive Stock Option, such SAR shall be exercisable only when the Market Value per Share of the Common Stock exceeds the price specified therefor in the Option or portion thereof to be surrendered. In the event of the exercise of any SAR granted hereunder, the number of shares reserved for issuance under the Plan shall be reduced only to the extent that shares of Common Stock are actually issued in connection with the exercise of such SAR. Additional terms
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(b) Performance Measures.A Performance Award shall be awarded to a Holder contingent upon future performance of the Company or any subsidiary, division, or department thereof. The Administrator shall establish the performance measures applicable to such performance within the applicable time period permitted by section 162(m) of the Code, with such adjustments thereto as may be determined by the Administrator. The performance measures may be absolute, relative to one or more other companies, relative to one or more indexes, or measured by reference to the Company alone or the Company together with its consolidated subsidiaries. The performance measures established by the Administrator may be based upon (i) the price of a share of Common Stock, (ii) operating income or operating income margin, (iii) earnings before interest, income taxes, depreciation, amortization and aircraft rent (“EBITDAR”) or EBITDAR margin, (iv) net income or net income margin, (v) cash flow, (vi) total shareholder return, or (vii) a combination of any of the foregoing, including any average, weighted average, minimum, hurdle, rate of increase or other measure of any or any combination thereof. The Administrator, in its sole discretion, may provide for an adjustable Performance Award value based upon the level of achievement of performance measures.
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(e) Termination of Employment. An Incentive Award shall terminate if the Holder does not remain continuously in the employ (or in service as a Director) of the Company or a subsidiary at all times during the applicable vesting period, except as otherwise set forth in the applicable Grant Document.
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B-8
(c) Change in Control.As used in the Plan (except as otherwise provided in an applicable Grant Document), the term “Change in Control” shall mean:
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(aa) any person (within the meaning of Section 13(d) or 14(d) under the Exchange Act, including any group (within the meaning of Section 13(d)(3) under the Exchange Act), a “Person”) is or becomes the “beneficial owner” (as such term is defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of the Company (such Person being referred to as an “Acquiring Person”) representing 25% or more of the combined voting power of the Company’s outstanding securities; other than beneficial ownership by (i) the Company or any subsidiary of the Company, (ii) any employee benefit plan of the Company or any Person organized, appointed or established pursuant to the terms of any such employee benefit plan (unless such plan or Person is a party to or is utilized in connection with a transaction led by Outside Persons), (iii) a Person who has a Schedule 13G on file with the Securities and Exchange Commission pursuant to the requirements of Rule 13d-1 under the Exchange Act, with respect to its holdings of the Company’s voting securities (“Schedule 13G”), so long as (1) such Person is principally engaged in the business of managing investment funds for unaffiliated securities investors and, as part of such Person’s duties as agent for fully managed accounts, holds or exercises voting or dispositive power over voting securities of the Company, (2) such Person acquires beneficial ownership of voting securities of the Company pursuant to trading activities undertaken in the ordinary course of such Person’s business and not with the purpose nor the effect, either alone or in concert with any Person, of exercising the power to direct or cause the direction of the management and policies of the Company or of otherwise changing or influencing the control of the Company, nor in connection with or as a participant in any transaction having such purpose or effect, including any transaction subject to Rule 13d-3(b) of the Exchange Act and (3) if such Person is a Person included in Rule 13d-1(b)(1)(ii) of the Exchange Act, such Person is not obligated to, and does not, file a Schedule 13D with respect to the securities of the Company, or (iv) (I) 1992 Air, Inc., (II) any Person who controlled 1992 Air, Inc. as of February 26, 1998, including David Bonderman and James Coulter, or (III) any Person controlled by any such Person (Persons referred to in clauses (i) through (iv) hereof are hereinafter referred to as “Excluded Persons”); or
(bb) individuals who constituted the Board as of May 15, 2001 (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board, provided that any individual becoming a director subsequent to May 15, 2001 whose appointment to fill a vacancy or to fill a new Board position or whose nomination for election by the Company’s shareholders was approved by a vote of at least a majority of the directors then comprising the Incumbent Board or who was nominated for election by Excluded Persons shall be considered as though such individual were a member of the Incumbent Board; or
(cc) the Company merges with or consolidates into or engages in a reorganization or similar transaction with another entity pursuant to a transaction in which the Company is not the “Controlling Corporation”; or
(dd) the Company sells or otherwise disposes of all or substantially all of its assets, other than to Excluded Persons.
For purposes of clause (aa) above, if at any time there exist securities of different classes entitled to vote separately in the election of directors, the calculation of the proportion of the voting power held by a beneficial owner of the Company’s securities shall be determined as follows: first, the proportion of the voting power represented by securities held by such beneficial owner of each separate class or group of classes voting separately in the election of directors shall be determined, provided that securities representing more than 50% of the voting power of securities of any such class or group of classes shall be deemed to represent 100% of such voting power; second, such proportion shall then be multiplied by a fraction, the numerator of which is the number of directors which such class or classes is entitled to elect and the denominator of which is the total number of directors elected to membership on the Board at the time; and third, the product obtained for each such separate class or group of classes shall be added together, which sum shall be the proportion of the combined voting power of the Company’s outstanding securities held by such beneficial owner.
For purposes of clause (aa) above, the term “Outside Persons” means any Persons other than (I) Persons
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described in clauses (aa)(i) or (iii) or (iv) above (as to Persons described in clause (aa)(iii) or (iv) above, while they are Excluded Persons) and (II) members of senior management of the Company in office immediately prior to the time the Acquiring Person acquires the beneficial ownership described in clause (aa).
For purposes of clause (cc) above, the Company shall be considered to be the Controlling Corporation in any merger, consolidation, reorganization or similar transaction unless either (1) the shareholders of the Company immediately prior to the consummation of the transaction (the “Old Shareholders”) would not, immediately after such consummation, beneficially own, directly or indirectly, securities of the resulting entity entitled to elect a majority of the members of the Board of Directors or other governing body of the resulting entity or (2) those persons who were directors of the Company immediately prior to the consummation of the proposed transaction would not, immediately after such consummation, constitute a majority of the directors of the resulting entity, provided that (I) there shall be excluded from the determination of the voting power of the Old Shareholders securities in the resulting entity beneficially owned, directly or indirectly, by the other party to the transaction and any such securities beneficially owned, directly or indirectly, by any Person acting in concert with the other party to the transaction, (II) there shall be excluded from the determination of the voting power of the Old Shareholders securities in the resulting entity acquired in any such transaction other than as a result of the beneficial ownership of Company securities prior to the transaction and (III) persons who are directors of the resulting entity shall be deemed not to have been directors of the Company immediately prior to the consummation of the transaction if they were elected as directors of the Company within 90 days prior to the consummation of the transaction.
The exclusion described in clause (aa)(iii) above shall cease to have any force or effect (and the Person described therein shall cease to be an Excluded Person) if that Person becomes an “Acquiring Person” within the meaning of the Amended and Restated Rights Agreement dated as of November 15, 2000 between the Company and Mellon Investor Services LLC, as amended from time to time. The exclusion described in clause (aa)(iv) above shall cease to have any force or effect (and the Persons described therein shall cease to be Excluded Persons) if (A) the Person acquiring beneficial ownership is not controlled by David Bonderman or James Coulter, or (B) the Person acquiring beneficial ownership (together with any Person controlling, controlled by or under common control with such Person) ceases to be after such acquisition, for a period of thirty consecutive calendar days, the beneficial owner, directly or indirectly, of securities of the Company representing at least 25% of the combined voting power of the Company’s outstanding securities.
Upon the occurrence of a Change in Control, with respect to each recipient of an Award hereunder, (AA) all Options granted to such recipient and outstanding at such time shall immediately vest and become exercisable in full (but subject, however, in the case of Incentive Stock Options, to the aggregate fair market value, determined as of the date the Incentive Stock Options are granted, of the stock with respect to which Incentive Stock Options are exercisable for the first time by such recipient during any calendar year not exceeding $100,000) and, except as required by law, all restrictions on the transfer of shares acquired pursuant to such Options shall terminate, (BB) all restrictions applicable to such recipient’s Restricted Stock and Incentive Awards that are outstanding at such time shall be deemed to have been satisfied and such Restricted Stock and Incentive Awards shall immediately vest in full, and (CC) all Retention Awards granted to such recipient and outstanding at such time shall immediately vest in full.
In addition, except as otherwise provided in the applicable Grant Document, if a recipient of an Award hereunder becomes entitled to one or more payments (with a “payment” including, without limitation, the vesting of an Award) pursuant to the terms of the Plan (the “Total Payments”), which are or become subject to the tax imposed by section 4999 of the Code (or any similar tax that may hereafter be imposed) (the “Excise Tax”), the Company or subsidiary for whom the recipient is then performing services shall pay to the recipient an additional amount (the “Gross-Up Payment”) such that the net amount retained by the recipient, after reduction for any Excise Tax on the Total Payments and any federal, state and local income or employment tax and Excise Tax on the Gross-Up Payment, shall equal the Total Payments. For purposes of determining the amount of the Gross-Up Payment, the recipient shall be deemed (aa) to pay federal income taxes at the highest stated rate of federal income taxation (including surtaxes, if any) for the calendar year in which the Gross-Up Payment is to be made; and (bb) to pay any applicable state and local income taxes at the highest stated rate of taxation (including surtaxes, if any) for the calendar year in which the Gross-Up
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Payment is to be made. Any Gross-Up Payment required hereunder shall be made to the recipient at the same time any Total Payment subject to the Excise Tax is paid or deemed received by the recipient.
13. AMENDMENT AND TERMINATION OF THE PLAN
Subject to the last sentence of Section 3 hereof, the Board in its discretion may terminate the Plan at any time. The Board shall have the right to amend the Plan or any part thereof from time to time, and the Administrator may amend any Award (and its related Grant Document) at any time, except as otherwise specifically provided in such Grant Document; provided that no change in any Award theretofore granted may be made which would impair the rights of the Holder thereof without the consent of such Holder, and provided further that the Board may not, without approval of the stockholders of the Company, amend the Plan to (a) increase the maximum aggregate number of shares that may be issued under the Plan or (b) change the class of individuals eligible to receive Awards under the Plan.
14. MISCELLANEOUS
(a) No Right to an Award.Neither the adoption of the Plan nor any action of the Board or the Administrator shall be deemed to give an employee or Director any right to be granted an Award except as may be evidenced by a Grant Document from the Company reflecting a grant by the Company of an Award to such person and setting forth the terms and conditions thereof. The Plan shall be unfunded. The Company shall not be required to establish any special or separate fund or to make any other segregation of funds or assets to assure the performance of its obligations under any Award.
(b) No Employment or Membership Rights Conferred.Nothing contained in the Plan shall (i) confer upon any employee any right with respect to continuation of employment with the Company or any subsidiary or (ii) interfere in any way with the right of the Company or any subsidiary to terminate his or her employment at any time. Nothing contained in the Plan shall confer upon any Director any right with respect to continuation of membership on the Board.
(c) Other Laws; Withholding.The Company shall not be obligated to issue any Common Stock pursuant to any Award granted under the Plan until there has been compliance with applicable laws and regulations with respect thereto. No fractional shares of Common Stock shall be delivered, nor shall any cash in lieu of fractional shares be paid. The Company shall have the right to (i) make deductions from any settlement or exercise of an Award made under the Plan, including the delivery of shares, or require shares or cash or both be withheld from any Award, in each case in an amount sufficient to satisfy withholding of any taxes required by law, or (ii) take such other action as may be necessary or appropriate to satisfy any such tax withholding obligations. The Administrator may determine the manner in which such tax withholding may be satisfied, and may permit shares of Common Stock (together with cash, as appropriate) to be used to satisfy required tax withholding based on the Market Value per Share of any such shares of Common Stock.
(d) No Restriction on Corporate Action.Subject to the restrictions contained in Section 13, nothing contained in the Plan shall be construed to prevent the Company or any subsidiary from taking any corporate action, whether or not such action would have an adverse effect on the Plan or any Award granted hereunder. No employee, Director, beneficiary or other person shall have any claim against the Company or any subsidiary as a result of any such action.
(e) Restrictions on Transfer.An Award (other than an Incentive Stock Option, which shall be subject to the transfer restrictions set forth in Section 7(c)) shall not be transferable otherwise than (i) by will or the laws of descent and distribution, (ii) pursuant to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder, or (iii) with respect to Awards of Non-Qualified Options, with the consent of the Administrator. In the discretion of the Administrator, a percentage (determined by the Administrator and set forth in the applicable Grant Document) of the aggregate shares of Common Stock obtained from exercises of an Option (which percentage may be satisfied out of particular exercises as determined by the Administrator and set forth in the applicable Grant Document) shall not be transferable prior to the earliest to occur of (x)
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the termination of the relevant Option term (or such shorter period as may be determined by the Administrator and set forth in the Grant Document), (y) the Holder’s retirement, death or Disability, or (z) termination of the Holder’s employment with the Company and its subsidiaries.
(f) Governing Law.The Plan shall be construed in accordance with the laws of the State of Texas.
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Amendment to Continental Airlines, Inc. Incentive Plan 2000(as amended and restated through February 20, 2002)
This Amendment (this “Amendment”) to the Continental Airlines, Inc. Incentive Plan 2000 (as amended and restated through February 20, 2002) (the “Plan”) is dated as of March 12, 2004 and has been adopted by the Board of Directors of Continental Airlines, Inc., a Delaware corporation, on March 12, 2004.
Pursuant to Section 13 of the Plan, the Plan is hereby amended as follows:
Section 12(c) of the Plan is hereby amended in its entirety to read as follows:
“(c)Change in Control.As used in the Plan (except as otherwise provided in an applicable Grant Document), the term “Change in Control” shall mean:
(aa) any person (within the meaning of Section 13(d) or 14(d) under the Exchange Act, including any group (within the meaning of Section 13(d)(3) under the Exchange Act), a “Person”) is or becomes the “beneficial owner” (as such term is defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of the Company (such Person being referred to as an “Acquiring Person”) representing 25% or more of the combined voting power of the Company’s outstanding securities; other than beneficial ownership by (i) the Company or any subsidiary of the Company, (ii) any employee benefit plan of the Company or any Person organized, appointed or established pursuant to the terms of any such employee benefit plan (unless such plan or Person is a party to or is utilized in connection with a transaction led by Outside Persons), or (iii) a Person who has a Schedule 13G on file with the Securities and Exchange Commission pursuant to the requirements of Rule 13d-1 under the Exchange Act, with respect to its holdings of the Company’s voting securities (“Schedule 13G”), so long as (1) such Person is principally engaged in the business of managing investment funds for unaffiliated securities investors and, as part of such Person’s duties as agent for fully managed accounts, holds or exercises voting or dispositive power over voting securities of the Company, (2) such Person acquires beneficial ownership of voting securities of the Company pursuant to trading activities undertaken in the ordinary course of such Person’s business and not with the purpose nor the effect, either alone or in concert with any Person, of exercising the power to direct or cause the direction of the management and policies of the Company or of otherwise changing or influencing the control of the Company, nor in connection with or as a participant in any transaction having such purpose or effect, including any transaction subject to Rule 13d-3(b) of the Exchange Act and (3) if such Person is a Person included in Rule 13d-1(b)(1)(ii) of the Exchange Act, such Person is not obligated to, and does not, file a Schedule 13D with respect to the securities of the Company (Persons referred to in clauses (i) through (iii) hereof are hereinafter referred to as “Excluded Persons”); or
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securities held by such beneficial owner of each separate class or group of classes voting separately in the election of directors shall be determined, provided that securities representing more than 50% of the voting power of securities of any such class or group of classes shall be deemed to represent 100% of such voting power; second, such proportion shall then be multiplied by a fraction, the numerator of which is the number of directors which such class or classes is entitled to elect and the denominator of which is the total number of directors elected to membership on the Board at the time; and third, the product obtained for each such separate class or group of classes shall be added together, which sum shall be the proportion of the combined voting power of the Company’s outstanding securities held by such beneficial owner.
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deemed (aa) to pay federal income taxes at the highest stated rate of federal income taxation (including surtaxes, if any) for the calendar year in which the Gross-Up Payment is to be made; and (bb) to pay any applicable state and local income taxes at the highest stated rate of taxation (including surtaxes, if any) for the calendar year in which the Gross-Up Payment is to be made. Any Gross-Up Payment required hereunder shall be made to the recipient at the same time any Total Payment subject to the Excise Tax is paid or deemed received by the recipient.”
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2.
3. Capitalized terms used in this Amendment without definition are defined in the Plan and are used in this Amendment with the same meanings as in the Plan.
IN WITNESS WHEREOF, the undersigned has executed this Amendment on behalfshares of the Company as of March 12, 2004.
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June 16, 2005
Address Changes/Comments: | ||
Address Change/Comments (Mark the corresponding box on the reverse side)
You can now access your Continental Airlines account online.
Access your Continental Airlines shareholder account online via Investor ServiceDirect®(ISD).
Mellon Investor Services LLC, Transfer Agent for Continental Airlines, now makes it easy and convenient to get current information on your shareholder account.
Visit us on the web at http://www.melloninvestor.com
Call 1-877-978-7778 between 9am-7pmMonday-Friday Eastern Time
1600 SMITH ST. 41 FL HQSLG HOUSTON, TX 77002 | VOTE BY INTERNET -www.proxyvote.com Use the Internet to transmit your voting instructions and for electronic delivery of information up until 11:59 P.M. Eastern Time the day before the cut-off date or meeting date. Have your proxy card in hand when you access the web site and follow the instructions to obtain your records and to create an electronic voting instruction form. ELECTRONIC DELIVERY OF FUTURE SHAREHOLDER COMMUNICATIONS If you would like to reduce the costs incurred by Continental Airlines, Inc. in mailing proxy materials, you can consent to receiving all future proxy statements, proxy cards and annual reports electronically via e-mail or the Internet. To sign up for electronic delivery, please follow the instructions above to vote using the Internet and, when prompted, indicate that you agree to receive or access shareholder communications electronically in future years.VOTE BY PHONE - 1-800-690-6903 Use any touch-tone telephone to transmit your voting instructions up until 11:59 P.M. Eastern Time the day before the cut-off date or meeting date. Have your proxy card in hand when you call and then follow the instructions. VOTE BY MAIL Mark, sign and date your proxy card and return it in the postage-paid envelope we have provided or return it to Continental Airlines, Inc., c/o ADP, 51 Mercedes Way, Edgewood, NY 11717. If you vote by Internet or telephone, you do NOT need to mail back your proxy card. |
TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS: | ||||
CONTI 1 | KEEP THIS PORTION FOR YOUR RECORDS | |||
DETACH AND RETURN THIS PORTION ONLY |
CONTINENTAL AIRLINES, INC. | ||||||||||||||
IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED |
PROPOSAL 2, “FOR” PROPOSAL 3, “FOR” PROPOSAL | ||||||||||||||
4 AND “AGAINST” PROPOSAL 5. | ||||||||||||||
1. Election of Directors: | For All | Withhold All | For All Except | To withhold authority to vote for one or more individual nominees, mark “For All Except” and write the name(s) of the nominee(s) on the line below. | ||||||||||
01 Thomas J. Barrack, Jr | 07 George G.C. Parker | o | o | o | ||||||||||
02 Kirbyjon H. Caldwell | 08 Jeffery A. Smisek | |||||||||||||
03 Lawrence W. Kellner | 09 Karen Hastie Williams | |||||||||||||
04 Douglas H. McCorkindale | 10 Ronald B. Woodard | |||||||||||||
05 Henry L. Meyer III | 11 Charles A. Yamarone | |||||||||||||
06 Oscar Munoz |
Vote on Proposals | For | Against | Abstain | For | Against | Abstain | ||||||||||||||
2. | Proposal to amend the Amended and Restated Certificate of Incorporation to increase the authorized Class B common stock | o | o | o | 4. | Ratification of Appointment of Independent Auditors | o | o | o | |||||||||||
3. | Proposal to amend the Incentive Plan 2000 to increase the number of shares of common stock issuable under the plan | o | o | o | 5. | Proposal of Stockholder regarding political activities | o | o | o | |||||||||||
For address changes and/or comments, please check this box and write them on the back where indicated. | o | Note: Please sign exactly as name appears hereon. Joint owners should each sign. When signing as attorney, executor, administrator, trustee or guardian, please give full title as such. | ||||||||||||||||||
Yes | No | |||||||||||||||||||
Please indicate if you plan to attend this meeting. | o | o | ||||||||||||||||||
HOUSEHOLDING ELECTION — Please indicate if you plan consent to receive certain future investor communications in a single package per household. | o | o | Please mark this box ONLY if stock owned of record or beneficially by you is owned or controlled by persons who are not U.S. citizens (as defined in the proxy statement). | o |
Signature [PLEASE SIGN WITHIN BOX] | Date | |||||||||||
Signature | (Joint Owners) | Date | ||||||||||||||||||||
Vote by Internet or Telephone or Mail
Internet and telephone voting is available through 11:59 PM Eastern Time the day prior to annualmeeting day.
Your Internet or telephone vote authorizes the named proxies to vote your shares in the same manneras if you marked, signed and returned your proxy card.
If you vote your proxy by Internet or by telephone,you do NOT need to mail back your proxy card.