UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
Commission File Number 0-9781
CONTINENTAL AIRLINES, INC.
(Exact name of registrant as specified in its charter)
Delaware 74-2099724
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2929 Allen Parkway
Houston, Texas 77019
(Address of principal executive office)
(Zip Code)
713-834-5000
(Registrant's telephone number including area code)
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _____
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subject to the distribution of securities under a plan
confirmed by a court. Yes X No _____
_______________
As of November 4, 1994, 6,301,056 shares of Class A common stock and
20,353,512 shares of Class B common stock were outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONTINENTAL AIRLINES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
September 30, December 31,
ASSETS 1994 1993
(Unaudited)
Current Assets:
Cash and cash equivalents, including
restricted cash and cash equivalents of
$110,008 and $102,439, respectively. . . . . $ 501,155 $ 721,038
Accounts receivable, net. . . . . . . . . . . 439,820 342,864
Spare parts and supplies, net . . . . . . . . 158,388 161,856
Prepayments and other . . . . . . . . . . . . 87,655 79,404
Total current assets . . . . . . . . . . . . 1,187,018 1,305,162
Property and Equipment:
Owned property and equipment:
Flight equipment . . . . . . . . . . . . . . 1,022,205 951,881
Other. . . . . . . . . . . . . . . . . . . . 327,724 284,362
1,349,929 1,236,243
Less: Accumulated depreciation. . . . . . . 153,690 69,022
1,196,239 1,167,221
Purchase deposits for flight equipment. . . . 181,001 166,984
Capital leases:
Flight equipment . . . . . . . . . . . . . . 398,777 394,236
Other. . . . . . . . . . . . . . . . . . . . 12,239 2,142
411,016 396,378
Less: Accumulated amortization. . . . . . . 57,031 23,838
353,985 372,540
Total property and equipment. . . . . . . . 1,731,225 1,706,745
Other Assets:
Routes, gates and slots, net. . . . . . . . . 1,628,745 1,672,759
Reorganization value in excess of amounts
allocable to identifiable assets, net. . . . 322,545 335,565
Other assets, net . . . . . . . . . . . . . . 118,421 86,301
Total other assets. . . . . . . . . . . . . 2,069,711 2,094,625
Total Assets. . . . . . . . . . . . . . . $4,987,954 $5,106,532
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
CONTINENTAL AIRLINES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except for share data)
September 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1994 1993
(Unaudited)
Current Liabilities:
Current maturities of long-term debt. . . . . . $ 215,958 $ 176,350
Current maturities of capital leases. . . . . . 45,456 40,556
Accounts payable. . . . . . . . . . . . . . . . 655,130 597,669
Air traffic liability . . . . . . . . . . . . . 673,279 590,994
Accrued payroll and pensions. . . . . . . . . . 187,905 167,859
Accrued other liabilities . . . . . . . . . . . 328,631 370,226
Total current liabilities. . . . . . . . . . . 2,106,359 1,943,654
Long-Term Debt . . . . . . . . . . . . . . . . . 1,294,380 1,377,052
Capital Leases . . . . . . . . . . . . . . . . . 378,423 405,387
Deferred Credits and Other Long-Term
Liabilities:
Deferred income taxes. . . . . . . . . . . . . 40,000 50,767
Deferred credit - operating leases . . . . . . 239,332 288,556
Other. . . . . . . . . . . . . . . . . . . . . 224,212 251,719
Total deferred credits and other
long-term liabilities. . . . . . . . . . . . 503,544 591,042
Commitments and Contingencies
Minority Interest. . . . . . . . . . . . . . . . 25,047 21,935
Redeemable Preferred Stock (aggregate
redemption value - $54,543 and $50,497,
respectively) . . . . . . . . . . . . . . . . . 51,125 46,916
Common Stockholders' Equity:
Class A common stock - $.01 par, 50,000,000
shares authorized; 6,301,056 and 6,013,216
shares issued and outstanding . . . . . . . . 63 60
Class B common stock - $.01 par, 100,000,000
shares authorized; 20,353,512 and 19,509,352
shares issued and outstanding . . . . . . . . 204 195
Additional paid-in capital . . . . . . . . . . 779,000 764,274
Accumulated deficit. . . . . . . . . . . . . . (128,464) (38,549)
Unearned portion of restricted stock issued
for future service. . . . . . . . . . . . . . (16,293) -
Additional minimum pension liability . . . . . (5,434) (5,434)
Total common stockholders' equity . . . . . . 629,076 720,546
Total Liabilities and Stockholders' Equity . $4,987,954 $5,106,532
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
CONTINENTAL AIRLINES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of dollars, except per share data)
Three Months Three Months
Ended Ended
September 30, September 30,
1994 1993
(Unaudited) (Unaudited)
Operating Revenues:
Passenger . . . . . . . . . . . . . . . $1,350,145 $1,399,965
Cargo, mail and other . . . . . . . . . 163,539 164,218
1,513,684 1,564,183
Operating Expenses:
Wages, salaries and related costs . . . 393,942 390,650
Aircraft fuel . . . . . . . . . . . . . 196,202 205,156
Rentals and landing fees. . . . . . . . 209,787 199,250
Commissions . . . . . . . . . . . . . . 107,442 156,016
Depreciation and amortization . . . . . 65,239 61,394
Other . . . . . . . . . . . . . . . . . 458,284 460,707
1,430,896 1,473,173
Operating Income . . . . . . . . . . . . 82,788 91,010
Nonoperating Income (Expense):
Interest expense. . . . . . . . . . . . (59,218) (63,085)
Interest capitalized. . . . . . . . . . 3,555 2,894
Interest income . . . . . . . . . . . . 5,851 5,516
Gain (Loss) on disposition of property,
equipment and other assets, net. . . . (110) 4,181
Other, net. . . . . . . . . . . . . . . (112) (16,565)
(50,034) (67,059)
Income before Income Taxes and
Minority Interest . . . . . . . . . . . 32,754 23,951
Income Tax Provision . . . . . . . . . . - (11,341)
Income before Minority Interest. . . . . 32,754 12,610
Minority Interest. . . . . . . . . . . . (2,123) (171)
Net Income . . . . . . . . . . . . . . . 30,631 12,439
Preferred Dividend Requirements and
Accretion to Liquidation Value. . . . . (1,443) (1,303)
Income Applicable to Common Shares . . . $ 29,188 $ 11,136
Primary and Fully Diluted Earnings
per Common Share. . . . . . . . . . . . $ 1.03 $ 0.53
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
CONTINENTAL AIRLINES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of dollars, except per share data)
Reorganized Reorganized Predecessor
Company Company Company
Period from
Reorganization
Nine Months (April 28, 1993 Period from
Ended through January 1, 1993
September 30, September 30, through
1994 1993) April 27, 1993
(Unaudited) (Unaudited)
Operating Revenues:
Passenger . . . . . . . . $3,796,490 $2,275,439 $1,622,406
Cargo, mail and other . . 464,220 266,317 234,752
4,260,710 2,541,756 1,857,158
Operating Expenses:
Wages, salaries and
related costs. . . . . . 1,143,749 653,641 501,901
Aircraft fuel . . . . . . 544,200 347,162 271,935
Rentals and landing fees. 608,961 328,063 273,977
Commissions . . . . . . . 338,151 247,919 175,283
Depreciation and
amortization . . . . . . 190,371 98,953 76,795
Other . . . . . . . . . . 1,409,233 779,064 670,405
4,234,665 2,454,802 1,970,296
Operating Income (Loss). . 26,045 86,954 (113,138)
Nonoperating Income
(Expense):
Interest expense. . . . . (183,022) (101,120) (52,023)
Interest capitalized. . . 10,244 4,558 1,759
Interest income . . . . . 16,733 9,050 -
Gain on disposition of
property, equipment and
other assets, net. . . . 1,845 4,230 31,250
Reorganization items:
Professional fees
and other . . . . . . . - - (823,086)
Interest income. . . . . - - 4,535
Other, net. . . . . . . . (5,798) (15,789) (25,742)
(159,998) (99,071) (863,307)
Loss before Income Taxes,
Minority Interest and
Extraordinary Item. . . . (133,953) (12,117) (976,445)
Income Tax Benefit
(Provision) . . . . . . . 47,150 398 (2,140)
Loss before Minority
Interest and Extra-
ordinary Item . . . . . . (86,803) (11,719) (978,585)
Minority Interest. . . . . (3,112) (283) -
Loss before Extraordinary
Item. . . . . . . . . . . (89,915) (12,002) (978,585)
Extraordinary Item . . . . - - 3,618,723
Net Income (Loss). . . . . (89,915) (12,002) 2,640,138
Preferred Dividend
Requirements and
Accretion to Liquidation
Value . . . . . . . . . . (4,209) (2,163) -
Income (Loss) Applicable
to Common Shares. . . . . $ (94,124) $ (14,165) $2,640,138
Primary and Fully Diluted
Loss per Common Share . . $ (3.69) $ (0.81) $ N.M.*
*N.M. - Not meaningful - Historical per share data for the Predecessor Company
is not meaningful since the Company has been recapitalized and has
adopted fresh start reporting as of April 27, 1993.
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
CONTINENTAL AIRLINES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
Reorganized Reorganized Predecessor
Company Company Company
Period from
Reorganization
Nine Months (April 28, 1993 Period from
Ended through January 1, 1993
September 30, September 30, through
1994 1993) April 27, 1993
(Unaudited) (Unaudited)
Net Cash Provided by
Operating Activities. . . $ 69,266 $ 94,322 $ 73,629
Cash Flows from Investing
Activities:
Investment in America
West . . . . . . . . . . (18,771) - -
Proceeds from disposition
of property, equipment
and other assets . . . . 2,480 153 36,123
Capital expenditures. . . (123,081) (179,168) (67,425)
Net cash used by
investing activities. . (139,372) (179,015) (31,302)
Cash Flows from Financing
Activities:
Proceeds from issuance
of stock . . . . . . . . - - 122,004
Proceeds from issuance
of long-term debt, net . 30,395 45,937 308,536
Payments on long-term
debt and capital lease
obligations. . . . . . . (180,172) (69,965) (106,296)
Net cash provided
(used) by financing
activities. . . . . . . (149,777) (24,028) 324,244
Net Increase (Decrease)
in Cash and Cash
Equivalents . . . . . . . (219,883) (108,721) 366,571
Cash and Cash Equivalents-
Beginning of Period . . . 721,038 766,140 399,569
Cash and Cash Equivalents-
End of Period . . . . . . $501,155 $657,419 $766,140
(continued on next page)
CONTINENTAL AIRLINES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
Reorganized Reorganized Predecessor
Company Company Company
Period from
Reorganization
Nine Months (April 28, 1993 Period from
Ended through January 1, 1993
September 30, September 30, through
1994 1993) April 27, 1993
(Unaudited) (Unaudited)
Supplemental Cash Flow
Information:
Interest paid . . . . . . $146,175 $ 59,241 $ 30,926
Financing Activities Not
Affecting Cash:
Reclassification of
accrued rent to long-
term debt due to
renegotiated leases. . . $ 6,679 $ 42,488 $111,692
Capital lease
obligations incurred . . $ 9,546 $ 8,635 $ -
Interest expense
financed on renegoti-
ated aircraft debt . . . $ 17,942 $ 18,652 $ 1,804
Property and equipment
acquired through the
issuance of debt . . . . $ 9,526 $ - $ -
Financed flight
equipment purchase
deposits . . . . . . . . $ 18,422 $ - $ -
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
CONTINENTAL AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Continental Airlines, Inc. (the "Company", the "Reorganized Company" or
"Continental") is the successor to Continental Airlines Holdings, Inc. (together
with its subsidiaries, "Holdings" or the "Predecessor Company") and Continental
Airlines, Inc. On December 3, 1990, Continental and Holdings and all their
wholly-owned domestic subsidiaries filed voluntary petitions to reorganize under
Chapter 11 of the federal bankruptcy code. The Companies' consolidated Plan of
Reorganization was confirmed on April 16, 1993 and became effective on April 27,
1993 (the "Reorganization"). On such date, Holdings merged with and into
Continental. System One Information Management, Inc. ("System One"), which had
been a subsidiary of Holdings, was reorganized as a subsidiary of Continental.
Because consolidated Continental (as reorganized) includes System One and other
businesses that had been consolidated with Holdings prior to April 27, 1993 (but
not with pre-reorganization Continental), the discussion herein includes
references to Holdings' consolidated financial statements for periods prior to
April 27, 1993. On April 27, 1993, Continental adopted fresh start reporting
in accordance with the American Institute of Certified Public Accountants'
Statement of Position 90-7 - "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code" ("SOP 90-7"), which resulted in adjustments to the
Company's common stockholders' equity and the carrying values of assets and
liabilities. Accordingly, the Company's post-reorganization balance sheets and
statements of operations have not been prepared on a basis of accounting
consistent with the pre-reorganization balance sheet and statements of
operations. For accounting purposes, the inception date for the Reorganized
Company is deemed to be April 28, 1993. A vertical black line is shown in the
consolidated financial statements to separate Continental from the Predecessor
Company since the financial statements have not been prepared on a consistent
basis of accounting.
The Company has prepared the consolidated financial statements included herein
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments, consisting of normal
recurring accruals, necessary to present fairly the financial position of the
Company as of September 30, 1994 and the results of its operations and its cash
flows for the periods ended September 30, 1994 and April 27 and September 30,
1993. Certain reclassifications have been made to the prior year's financial
statements to conform to the 1994 presentation. The accompanying consolidated
financial statements should be read in conjunction with the consolidated
financial statements and the notes thereto contained in the Company's Annual
Report on Form 10-K for the year ended December 31, 1993.
NOTE 1 - EARNINGS (LOSS) PER SHARE
The earnings (loss) per common share computation is based upon the income (loss)
applicable to common shares and the average number of shares of common stock and
dilutive common stock equivalents (warrants, options and restricted stock)
outstanding. The number of shares used in the computations for the three and
nine months ended September 30, 1994 was 28,988,888 and 25,522,568,
respectively. Preferred stock dividend requirements (including additional
dividends on unpaid dividends) and accretion to redemption value on preferred
stock decreased net income for this computation by approximately $1.4 million
for the three months ended September 30, 1994 and increased the net loss for
this computation by $4.2 million for the nine months ended September 30, 1994.
NOTE 2 - PREFERRED AND COMMON STOCK
The Company had approximately $7.4 million and $3.4 million of dividends on its
preferred stock in arrears as of September 30, 1994 and December 31, 1993,
respectively.
In January 1994, Air Canada converted 287,840 shares of Class B Common Stock
into an equal number of shares of Class A common stock to preserve its
percentage of total voting power.
See Note 7 - "Other - Compensation Plans" for a discussion of certain plans
pursuant to which additional shares of common stock may be issued.
NOTE 3 - PASSENGER REVENUES
In the third quarter of 1994, the Company recorded a $23.4 million favorable
adjustment as a result of a change in the Company's estimate of awards expected
to be redeemed for travel on Continental under its frequent flyer program. In
the third quarter of 1993, the Company recorded a $75.0 million favorable
adjustment resulting from the completion of the Company's periodic evaluation
of its air traffic liability account.
NOTE 4 - NONOPERATING INCOME (EXPENSE)
In the third quarter of 1993, the Company recorded charges totaling
approximately $13.1 million related to Continental's termination of service to
Australia and New Zealand.
NOTE 5 - INCOME TAXES
The income tax benefit for the nine months ended September 30, 1994 differs from
the federal statutory rate principally due to state taxes and certain
nondeductible expenses. A provision was not recorded for the three months ended
September 30, 1994 due to net operating losses that have not previously been
benefitted. The income tax benefit for the period April 28, 1993 through
September 30, 1993 is based on the estimated annual effective tax rate which
differs from the federal statutory rate of 35% principally due to state income
taxes and certain nondeductible expenses. The provision for income taxes for
the period January 1, 1993 through April 27, 1993 represents only state income
taxes.
NOTE 6 - CONTINGENCIES
The Company has undertaken a number of actions, and is continuing to analyze and
implement additional actions, intended to improve profitability. Certain of
these actions may be expected to result in charges and write-offs, which may be
material.
As announced on July 28, 1994, the Company reduced operations in Denver to 23
daily departures effective October 31, 1994. As a result of this reduction of
operations in Denver, and the expected increase in costs associated with the
pending opening of a new Denver airport, the Company is pursuing several
alternatives which could reduce its exposure in Denver and is continuing to
evaluate the financial impact of the reduction of its Denver operations.
On November 7, 1994, the Company announced its decision to close its Western
U.S. scheduled maintenance facilities in Los Angeles and Denver, eliminating
approximately 1,640 maintenance positions. Much of the Company's scheduled
maintenance needs will be performed by outside suppliers who can support the
Company's flight operations at locations more convenient to its primary routes
in the Eastern, Central and Southern regions of the United States.
The Company is considering eliminating or removing from service certain jet and
turboprop aircraft that management believes are not well suited to the Company's
current route structure and, in connection herewith, the Company has announced
that it plans to remove eight A300 aircraft from service effective January 10,
1995.
Until the Company completes its evaluation of alternatives with respect to each
such action (and, in the case of Denver, until the cost of the new airport has
been determined), the amounts of charges and write-offs that may be incurred
cannot be determined.
NOTE 7 - OTHER
Compensation Plans. On March 4, 1994, the Board of Directors adopted the
Continental Airlines 1994 Employee Stock Purchase Plan (the "Stock Purchase
Plan") (to be effective July 1, 1994) and the Continental Airlines 1994
Incentive Equity Plan (the "Incentive Plan"), which plans were approved by the
stockholders of the Company at the annual stockholders' meeting on June 30,
1994.
Under the Stock Purchase Plan, all full and part-time employees of the Company
who are on the United States payroll may purchase shares of Class B Common Stock
("Class B") at 85% of the lower of fair market value on the first or last
business day of a calendar quarter. A maximum of 4,000,000 shares of Class B
are authorized for purchase.
Under the Incentive Plan, key officers and employees of the Company and its
subsidiaries may be selected by the Human Resources Committee of the Board of
Directors (the "Committee") to receive any or all of the following: stock
options, restricted stock, long-term incentive awards and annual incentive
awards. Subject to adjustment, as provided for in the Incentive Plan, the
number of shares of common stock that may be issued under the Incentive Plan
will not in the aggregate exceed 2,300,000 shares of Class B, which may be
originally issued or treasury shares or a combination thereof. On March 4,
1994, the Board of Directors approved the grant of options to employees to
purchase approximately 1,900,000 shares of Class B with an exercise price of
$21.375 per share. On July 1, 1994, each outside director of Continental
received an option to purchase 1,500 shares of Class B with an exercise price
of $13.25 per share.
In addition, the Incentive Plan permits awards of restricted stock to
participants, subject to one or more restrictions, including a restriction
period and a purchase price, if any, to be paid by the participant, as
determined by the Committee. The number of shares of common stock that may be
granted or sold as restricted stock under the Incentive Plan may not in the
aggregate exceed 300,000 shares of Class B. As of September 30, 1994,
132,000 shares of restricted stock had been granted with no cost to the
participants.
In addition, the Board of Directors approved (a) a broad-based employee
compensation program including: (i) a profit sharing program under which 15%
of the Company's pre-tax earnings (before unusual or nonrecurring items) will
be distributed each year to all employees on a pro rata basis according to base
salary, and (ii) a one-time grant of approximately one million shares of
restricted stock for substantially all employees at or below the Continental
Manager or equivalent position (the restricted stock vests over a four-year
period, has no exercise price and will result in the recognition of
approximately $16.1 million of compensation expense which is being amortized
over the vesting period) and (b) an executive cash bonus plan based upon Company
share price performance within a specified range over a period of years.
America West Airlines, Inc. ("America West"). As a limited partner in AmWest
Partners, L.P. ("AmWest"), Continental participated in the acquisition by AmWest
of 31.4% of the equity of reorganized America West in connection with America
West's emergence from bankruptcy effective August 25, 1994. Continental
contributed approximately $18.8 million of a total of approximately $113 million
used by AmWest. As a result of the transaction, Continental owns approximately
5.7% of the equity of reorganized America West. Continental also entered into
a series of agreements with America West, such as agreements related to code
sharing and ground handling, which are expected to create substantial benefits
for both airlines.
Each investor participating in the acquisition did so on individual terms;
Continental and certain affiliates of Fidelity Management Trust Company invested
at the same per share price, but at a higher price (approximately $9.25 per
share as compared to approximately $6.75 per share) than the price being paid
by Air Partners, II, L.P. ("AP II") and TPG Partners, L.P., partnerships
controlled by Mr. David Bonderman, Chairman of the Board of Continental.
However, as between Continental and AP II, Continental is entitled to receive
a 10% per year return on its investment before AP II receives any return and to
receive its invested capital back before AP II does.
Foreign Carrier Alliance. In May 1994, Continental entered into a strategic
alliance with Alitalia Airlines to expand travel between the United States and
Italy, including a code sharing agreement. The agreement has been approved by
both the Italian and United States governments.
Litigation. On July 19, 1994, the United States Bankruptcy Court for the
District of Delaware (the "Bankruptcy Court") approved a comprehensive
settlement resolving claims filed by the Air Line Pilots Association ("ALPA")
and former Eastern Air Lines, Inc. ("Eastern") pilots which asserted that, among
other things, a de facto operational merger between Continental and Eastern
occurred and therefore the pilot seniority lists of Continental and Eastern
should be integrated. Under the settlement, each pilot may elect to participate
by receiving (i) an allowed general unsecured claim with a face value of
approximately $100,000 against the debtor estates of Continental and Holdings
(the payment of which will be primarily in the form of Continental Class B
Common Stock which was issued for the benefit of creditors pursuant to the
provisions of Continental's Revised Second Amended Joint Plan of Reorganization)
and limited pass travel privileges or (ii) a future hiring preference at
Continental, half of the allowed general unsecured claim and limited pass travel
privileges. The second option is available only to the 225 most senior pilots
so electing. Individual pilots who have filed claims and elect not to
participate may continue to pursue their claims. However, the agreement settles
all remaining claims between Continental and ALPA.
On August 18, 1994, a dissident group of Eastern pilots, known as the "LPP
Claimants," sought leave from the Bankruptcy Court to file an untimely appeal
from the Order approving the Settlement. That request was denied on
September 9, 1994, and the dissidents have appealed that denial to the United
States District Court. Briefing on that appeal was concluded on November 10,
1994. The Company believes that the likelihood that the LPP Claimants will be
successful is extremely remote.
Continental Express, Inc. In May 1994, the Company's turboprop commuter airline
subsidiary, Continental Express, Inc. ("Express"), terminated substantially all
of its unprofitable Denver operations, which were taken over by GP Express
Airlines, Inc. ("GP Express"), an unaffiliated commuter airline operator.
Express has implemented cost reduction programs, including substantial workforce
reductions. Continental is considering a possible private placement by Express
of less than 20% of the common stock of Express. The Express shares offered in
the private placement would not be registered under the Securities Act and would
not be offered or sold in the United States absent registration or an applicable
exemption from registration requirements. The Company is also considering a
possible future distribution by Continental to its stockholders of all or part
of the stock of Express held by Continental.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
An analysis of statistical information for Continental's jet operations is as
follows:
Three Months Ended Net
September 30, Increase/
1994 1993 (Decrease)
Revenue passengers (thousands) . . . 11,629 10,294 12.97 %
Revenue passenger miles
(millions) (a). . . . . . . . . . . 11,616 11,679 (0.54)%
Available seat miles (millions) (b). 17,259 17,572 (1.78)%
Passenger load factor (c). . . . . . 67.3% 66.5% 0.80 pts.
Breakeven passenger load factor (d). 64.7% 63.6% 1.10 pts.
Passenger revenue per available
seat mile (cents) (e). . . . . . . 7.38 7.49 (1.47)%
Operating cost per available seat
mile (cents) (f) . . . . . . . . . 7.56 7.64 (1.05)%
Average yield per revenue
passenger mile (cents) (g) . . . . 10.97 11.27 (2.66)%
Average fare per revenue passenger . $109.57 $127.84 (14.29)%
Average length of aircraft
flight (miles) . . . . . . . . . . 707 877 (19.38)%
Average daily utilization of
each aircraft (h). . . . . . . . . 10:10 9:54 2.69 %
Nine Months Ended Net
September 30, Increase/
1994 1993 (Decrease)
Revenue passengers (thousands) . . . 31,493 28,942 8.81 %
Revenue passenger miles
(millions) (a). . . . . . . . . . . 31,154 32,481 (4.09)%
Available seat miles (millions) (b). 48,632 51,248 (5.10)%
Passenger load factor (c). . . . . . 64.1% 63.4% 0.70 pts.
Breakeven passenger load factor (d). 65.1% 66.1% (1.00)pts.
Passenger revenue per available
seat mile (cents) (e). . . . . . . 7.36 7.14 3.08 %
Operating cost per available seat
mile (cents) (f) . . . . . . . . . 7.92 7.94 (0.25)%
Average yield per revenue
passenger mile (cents) (g) . . . . 11.49 11.27 1.95 %
Average fare per revenue passenger . $113.64 $126.50 (10.17)%
Average length of aircraft
flight (miles) . . . . . . . . . . 728 876 (16.89)%
Average daily utilization of
each aircraft (h). . . . . . . . . 9:56 9:50 1.02 %
(a) "Revenue passenger miles" means the number of scheduled miles flown by
revenue passengers.
(b) "Available seat miles" means the number of seats available for passengers
multiplied by the number of scheduled miles those seats are flown.
(c) "Passenger load factor" means revenue passenger miles divided by available
seat miles.
(d) "Breakeven passenger load factor" means the percentage of seats which must
be occupied by revenue passengers in order for the airline to breakeven on
an income before income taxes basis, excluding nonrecurring, nonoperating
gains/losses and other special items.
(e) "Passenger revenue per available seat mile" means passenger revenue
divided by available seat miles.
(f) "Cost per available seat mile" means the total of operating expenses
divided by available seat miles.
(g) "Average yield per revenue passenger mile" means the average revenue
received for each mile a revenue passenger is carried.
(h) "Average daily utilization of each aircraft" means the average block hours
flown per day in revenue service per aircraft.
The Company has undertaken a number of actions, and is continuing to analyze and
implement additional actions, intended to improve profitability. Certain of
these actions may be expected to result in charges and write-offs, which may be
material. See Note 6 of Notes to Consolidated Financial Statements.
Management has implemented strategies to improve the performance of Express,
which has experienced substantial losses in recent years. In May 1994, Express
terminated substantially all of its unprofitable Denver operations, which were
taken over by GP Express. The Company reached an agreement with GP Express for
GP Express to lease and/or sublease from the Company 15 Beechcraft 1900 aircraft
currently serving seven markets from Denver. The agreement contemplates that
GP Express will continue service in the Denver market under the name Continental
Express pursuant to a code sharing agreement with the Company. Express has
implemented cost reduction programs, including substantial work force
reductions.
During the third quarter of 1994, the Company significantly improved the
operating reliability of its low fare, short haul "Continental Lite" operations
over results for the second quarter. However, Continental Lite as a whole was
not profitable in the third quarter, and management is continuing to implement
changes intended to achieve sustained profitability. There can be no assurance
as to when or whether such profitability will be achieved.
RESULTS OF OPERATIONS
The following discussion provides an analysis of the Company's results of
operations and reasons for material changes therein for the three and nine month
periods ended September 30, 1994 as compared to the three and nine month periods
ended September 30, 1993. A discussion with respect to the three months ended
September 30, 1994 and 1993 has been provided only for material changes that are
not consistent with the discussion of the nine month periods. The Company's
results of operations for the three and nine month periods ended September 30,
1994 have not been prepared on a basis of accounting consistent with its results
of operations for periods prior to April 28, 1993, due to the implementation of
fresh start reporting upon the Company's emergence from bankruptcy.
The Company recorded consolidated net losses of $89.9 million for the nine
months ended September 30, 1994 as compared to consolidated net income of
$2.6 billion for the nine months ended September 30, 1993. The Company's net
income in 1993 included $3.0 billion in fresh start adjustments primarily
related to the discharge of prepetition debt obligations.
The Company recorded consolidated net income of $30.6 million and $12.4 million
for the three months ended September 30, 1994 and 1993, respectively.
Consolidated operating income totaled $82.8 million for the three months ended
September 30, 1994 as compared to consolidated operating income of $91.0 million
for the three months ended September 30, 1993. The operations of Continental's
subsidiary, Continental Micronesia, Inc. ("CMI"), contributed significantly to
Continental's consolidated operating results for the third quarter of 1994.
CMI's operating results have been favorably impacted by improved economic
conditions in Japan and recovery from an August 1993 earthquake in Guam.
Passenger revenues for the three and nine months ended September 30, 1994,
include a $23.4 million favorable adjustment as a result of the Company's
estimate of awards expected to be redeemed for travel on Continental under its
frequent flyer program. Passenger revenues for the three and nine months ended
September 30, 1993, include a $75.0 million favorable adjustment resulting from
the completion of the Company's periodic evaluation of its air traffic liability
account.
Passenger revenues decreased 2.6% for the first nine months of 1994 as compared
to the same period in 1993 due primarily to a 5.1% decrease in available seat
miles and a 4.1% decrease in Continental's jet revenue passenger miles. Such
decrease was partially offset by a 2.0% increase in jet yields. Revenues in the
first nine months of 1994 were negatively impacted by the unusually poor weather
in the eastern United States in the first quarter of 1994 and a decrease in
available seat miles due to Continental's acceleration of its fleet
refurbishment program.
Cargo, mail and other revenues in the first nine months of 1994 decreased 7.4%
as compared to the first nine months of 1993 primarily as a result of
Continental's termination of service to Australia and New Zealand in October
1993, poor weather in the eastern United States during the first quarter of 1994
and a decrease in other revenue. Cargo, mail and other revenues remained
relatively constant in the third quarter of 1994 as compared to the same period
in 1993.
Wages, salaries and related costs in the first nine months of 1994 decreased
1.0% as compared to the same period in 1993 due to a decrease in the number of
full-time equivalent employees partially offset by higher wage rates. In July
1992, the Company implemented an average 10% wage reduction, which reduction was
restored in equal increments in December 1992, April 1993 and April 1994, with
the final restoration occurring in July 1994. The number of full-time
equivalent employees decreased from approximately 40,650 as of September 30,
1993 to approximately 38,800 as of September 30, 1994. As a percentage of total
operating costs, the Company's labor costs were 27.0% for the first nine months
of 1994 as compared to approximately 26.1% for the first nine months of 1993.
Fuel expense decreased 12.1% in the first nine months of 1994 as compared to the
same period in 1993. The quantity of jet fuel used decreased from
1,012.6 million gallons in the first nine months of 1993 to 1,003.8 million
gallons in the first nine months of 1994, and the average price per gallon
decreased from 59.94 cents to 52.74 cents. Fuel costs were 12.9% and 14.0% of
total operating expenses in the first nine months of 1994 and 1993,
respectively.
Rentals and landing fees increased 1.1% in the first nine months of 1994 as
compared to the same period in 1993 and increased 5.3% in the third quarter of
1994 as compared to the same period in 1993. Rent expense increased primarily
as a result of settlements reached in April 1993 with certain aircraft debt
holders (which resulted in the transfer to the debt holders and subsequent
leaseback of certain aircraft) and the delivery of new Boeing 737 and 757
aircraft during 1994. Such increase was partially offset by retirements of
leased aircraft and the amortization of deferred credits recorded in connection
with the Company's adjustment of operating leases to fair market value as of
April 27, 1993.
Commissions expense decreased 20.1% in the first nine months of 1994 and 31.1%
in the three months ended September 30, 1994 as compared to the same periods in
1993 primarily due to a decrease in commissionable sales.
Depreciation and amortization expense increased 8.3% between the periods due
primarily to the amortization of intangibles (including Reorganization Value in
Excess of Amounts Allocable to Identifiable Assets) beginning April 28, 1993.
Such increase was partially offset by a decrease in depreciation expense due to
a reduction in the number of owned aircraft as a result of settlements reached
in early 1993 with certain aircraft debt holders (which resulted in the transfer
to the debt holders and subsequent leaseback of certain aircraft). In addition,
depreciation and amortization expense increased 6.3% in the third quarter of
1994 as compared to the same period in 1993 due primarily to an increase in
aircraft operated under capital leases (aircraft previously leased under
operating leases) and the amortization of incremental capitalized costs
associated with aircraft.
Other operating expenses decreased 2.8% in the first nine months of 1994 as
compared to the same period in 1993 primarily as a result of a decrease in
passenger services and maintenance, material and repair expenses partially
offset by an increase in other miscellaneous expenses. Charges totaling
approximately $5.5 million were recorded in the first quarter of 1994 relating
to the redeployment of assets.
The Company's interest expense increased 19.5% for the first nine months of 1994
as compared to the same period in 1993 (from $153.1 million to $183.0 million)
due primarily to a net increase in debt on which the Company was required to
accrue interest. As a result of its Chapter 11 filings, through April 1993, the
Company was not obligated to pay, and accordingly ceased accruing contractual
interest on its unsecured and undersecured obligations. Interest expense
decreased 6.1% in the third quarter of 1994 as compared to the same period in
1993 due to the early repayment of debt.
Capitalized interest increased $3.9 million in the first nine months of 1994 as
compared to the same period in 1993 due primarily to an increase in the average
balance of purchase deposits for flight equipment during the first nine months
of 1994 as compared to the same period in 1993.
Interest income increased 23.2% in the first nine months of 1994 as compared to
the same period in 1993 primarily due to an increase in the average balance of
cash and cash equivalents. Interest income increased 6.1% in the third quarter
of 1994 compared to the same period in 1993 due to an increase in the average
interest rate. Interest income earned on the Company's investments during the
period prior to April 28, 1993 was classified as a reorganization item in
accordance with SOP 90-7.
For the nine months ended September 30, 1994 and 1993, the Company recorded
gains relating primarily to Continental's disposition of property, equipment and
other assets of $1.8 million and $35.5 million, respectively. In 1993, the
Company recorded a gain of $34.9 million related to System One's sale to
Electronic Data Systems Corporation of substantially all of the assets of its
Airline Services Division.
Reorganization items-professional fees and other in the first nine months of
1993 included professional fees of $58.6 million and accruals for rejected
aircraft agreements and other miscellaneous adjustments of $187.2 million. In
addition, in the second quarter of 1993, fresh start adjustments totaling
$719.1 million were recorded relating to the adjustment of assets and
liabilities to fair market value as well as other miscellaneous fresh start
adjustments of approximately $76.8 million. These fresh start adjustments were
partially offset by the write-off of deferred gains on sale/leaseback
transactions of $218.6 million.
The Company's other nonoperating income (expense) in the first nine months of
1994 primarily included foreign exchange and other losses of $9.0 million
(primarily related to Japanese yen-denominated transactions) and charges
totaling approximately $2.3 million relating to the closing of certain
stations. Other nonoperating income (expense) in the first nine months of
1993 included foreign exchange losses (primarily related to Japanese yen,
German mark and British pound-denominated transactions) of $11.4 million,
charges totaling approximately $13.1 million related to the Company's
termination of services to Australia and New Zealand and other expenses
(primarily related to the abandonment of and relocation to airport facilities).
In 1993, the Company recorded an extraordinary gain of approximately
$3.6 billion resulting from the extinguishment of prepetition obligations,
including the write-off of a deferred credit related to Eastern of approximately
$1.1 billion.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1994, the Company had approximately $501.2 million in cash
and cash equivalents as compared to $721.0 million as of December 31, 1993.
This decrease was a result of approximately $149.8 million of net cash used by
financing activities and $139.4 million of net cash used by investing activities
offset by $69.3 million of net cash provided by operating activities.
Approximately $110.0 million and $102.4 million of cash and cash equivalents at
September 30, 1994 and December 31, 1993, respectively, were held in restricted
arrangements relating primarily to payments for workers' compensation claims and
in accordance with the terms of certain security agreements.
Continental currently does not have general lines of credit or significant
unencumbered assets, and its access to additional sources of liquidity, in
particular debt financing, remains limited. In addition, Continental's
principal note agreements require mandatory prepayments in the event of most
asset sales. Continental's ability to improve its liquidity will depend, in
part, upon its ability to achieve improved financial results.
As of September 30, 1994, Continental has substantial capital commitments,
including firm commitments for substantial numbers of new aircraft (to be used
to replace existing aircraft) with a cost of approximately $3.2 billion; in
connection with such firm order aircraft, the Company has financing commitments,
subject to conditions, of over $1.5 billion. The Company also has options to
acquire additional aircraft. As of September 30, 1994, the Company had
acquired, under operating leases, 18 of the 737 aircraft and six of the
757 aircraft on firm order. In January 1994, Continental exercised its options
with respect to two additional 737 aircraft. In March 1994, the Company entered
into a separate agreement to acquire under long-term leases ten new
737 aircraft. The first of these aircraft is scheduled to be delivered in the
last quarter of 1994 and the remainder in 1995.
The Company intends to seek additional financing for the aircraft deliveries
(which may include public debt financing and/or private financing) in the future
when and as appropriate. The Company has filed a shelf registration relating
to the potential offering of secured and unsecured debt securities, including
convertible debt securities.
In addition to traditional sources of liquidity, the Company is evaluating the
desirability of disposing of one or more non-core assets or operations.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
See Note 7 - "Other - Litigation" of Notes to Consolidated Financial
Statements.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
10.1 Third Revised Investment Agreement dated April 21, 1994
between America West Airlines, Inc. and AmWest Partners,
L.P. - incorporated by reference to Exhibit 1 to the
August 25, 1994 Schedule 13D.
10.2 Management Compensation Agreement between the Company and
Daniel Garton - filed herewith.
10.3 Management Compensation Agreement between the Company and
John Luth - filed herewith.
10.4 First Amendment to 1994 Employee Stock Purchase Plan -
filed herewith.
10.5 Prospectus relating to 1994 Restricted Stock Grant, in
replacement of Exhibit 4.3 to the Company's Registration
Statement No. 33-81326 - filed herewith.
11.1 Statement Regarding Computation of Per Share Earnings -
filed herewith.
27.1 Financial Data Schedule - filed herewith.
(b) Reports on Form 8-K:
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONTINENTAL AIRLINES, INC.
(Registrant)
Date: November 14, 1994 by: /s/ Daniel P. Garton
Daniel P. Garton
Senior Vice President and
Chief Financial Officer
(On behalf of Registrant)
Date: November 14, 1994 by: /s/ Janice E. Bryant
Janice E. Bryant
Vice President and Controller
(On behalf of Registrant)
CONTINENTAL AIRLINES, INC.
INDEX TO EXHIBITS
10.1 Third Revised Investment Agreement dated April 21, 1994 between
America West Airlines, Inc. and AmWest Partners, L.P. - incorporated
by reference to Exhibit 1 to the August 25, 1994 Schedule 13D.
10.2 Management Compensation Agreement between the Company and Daniel
Garton - filed herewith.
10.3 Management Compensation Agreement between the Company and John Luth
- filed herewith.
10.4 First Amendment to 1994 Employee Stock Purchase Plan - filed
herewith.
10.5 Prospectus relating to 1994 Restricted Stock Grant, in replacement
of Exhibit 4.3 to the Company's Registration Statement No. 33-81326
- filed herewith.
11.1 Statement Regarding Computation of Per Share Earnings - filed
herewith.
27.1 Financial Data Schedule - filed herewith.