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 JUNE 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
Commission File Number 0-9781
CONTINENTAL AIRLINES, INC.
(Exact name of registrant as specified in its charter)
Delaware 74-2099724
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2929 Allen Parkway
Houston, Texas 77019
(Address of principal executive offices)
(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 subsequent to the distribution of
securities under a plan confirmed by a court. Yes X No _____
_______________
As of August 4, 1995, 6,301,056 shares of Class A common stock and
20,893,678 shares of Class B common stock were outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions of dollars, except per share data)
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Operating Revenues:
Passenger. . . . . . . $1,355 $1,241 $2,595 $2,446
Cargo, mail and
other . . . . . . . . 123 150 292 301
1,478 1,391 2,887 2,747
Operating Expenses:
Wages, salaries and
related costs . . . . 357 377 723 750
Rentals and landing
fees. . . . . . . . . 217 195 432 399
Aircraft fuel. . . . . 168 173 337 348
Commissions. . . . . . 131 110 250 231
Maintenance, materials
and repairs . . . . . 101 130 198 265
Depreciation and
amortization. . . . . 65 63 129 125
Other. . . . . . . . . 330 344 680 686
1,369 1,392 2,749 2,804
Operating Income
(Loss) . . . . . . . . 109 (1) 138 (57)
Nonoperating Income
(Expense):
Interest expense . . . (56) (61) (110) (124)
Interest capitalized . 3 4 4 7
Interest income. . . . 8 5 13 11
Gain (loss) on
disposition of
property, equipment and
other assets, net . . - (1) 1 2
Other, net . . . . . . 117 1 107 (6)
72 (52) 15 (110)
Income (Loss) before Income
Taxes and Minority
Interest . . . . . . . 181 (53) 153 (167)
Income Tax Benefit
(Provision). . . . . . (78) 4 (78) 47
Income (Loss) Before
Minority Interest. . . 103 (49) 75 (120)
Minority Interest . . . (1) - (3) (1)
Net Income (Loss) . . . 102 (49) 72 (121)
Preferred Dividend
Requirements and
Accretion to
Liquidation Value. . . (2) (1) (3) (3)
Income (Loss) Applica-
ble to Common Shares . $ 100 $ (50) $ 69 $ (124)
Earnings (Loss) per
Common and Common
Equivalent Share . . . $ 3.02 $(1.97) $ 2.31 $(4.83)
Earnings (Loss) per
Common Share Assuming.
Full Dilution. . . . . $ 2.99 $(1.97) $ 2.21 $(4.83)
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
CONTINENTAL AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(In millions of dollars)
June 30, December 31,
ASSETS 1995 1994
(Unaudited)
Current Assets:
Cash and cash equivalents, including
restricted cash and cash equivalents of
$150 and $119, respectively . . . . . . . . $ 502 $ 396
Accounts receivable, net . . . . . . . . . . 435 376
Spare parts and supplies, net. . . . . . . . 139 142
Prepayments and other. . . . . . . . . . . . 78 76
Total current assets. . . . . . . . . . . . 1,154 990
Property and Equipment:
Owned property and equipment:
Flight equipment. . . . . . . . . . . . . . 1,039 1,004
Other . . . . . . . . . . . . . . . . . . . 274 282
1,313 1,286
Less: Accumulated depreciation . . . . . . 249 207
1,064 1,079
Purchase deposits for flight equipment . . . 97 166
Capital leases:
Flight equipment. . . . . . . . . . . . . . 400 400
Other . . . . . . . . . . . . . . . . . . . 27 17
427 417
Less: Accumulated amortization . . . . . . 95 69
332 348
Total property and equipment . . . . . . . 1,493 1,593
Other Assets:
Routes, gates and slots, net . . . . . . . . 1,560 1,591
Reorganization value in excess of amounts
allocable to identifiable assets, net . . . 259 318
Investments. . . . . . . . . . . . . . . . . 151 17
Other assets, net. . . . . . . . . . . . . . 60 92
Total other assets . . . . . . . . . . . . 2,030 2,018
Total Assets . . . . . . . . . . . . . . $4,677 $4,601
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(In millions of dollars, except share data)
June 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994
(Unaudited)
Current Liabilities:
Debt and capital lease obligations in default. $ 583 $ 490
Current maturities of long-term debt . . . . . 75 126
Current maturities of capital leases . . . . . 26 26
Accounts payable . . . . . . . . . . . . . . . 615 630
Air traffic liability. . . . . . . . . . . . . 703 584
Accrued payroll and pensions . . . . . . . . . 175 179
Accrued other liabilities. . . . . . . . . . . 338 373
Total current liabilities . . . . . . . . . . 2,515 2,408
Long-Term Debt. . . . . . . . . . . . . . . . . 922 1,038
Capital Leases. . . . . . . . . . . . . . . . . 158 164
Deferred Credits and Other Long-Term
Liabilities:
Deferred income taxes . . . . . . . . . . . . 102 28
Deferred credit - operating leases. . . . . . 118 138
Accruals for aircraft retirements and
excess facilities. . . . . . . . . . . . . . 354 392
Other . . . . . . . . . . . . . . . . . . . . 238 251
Total deferred credits and other
long-term liabilities . . . . . . . . . . . 812 809
Commitments and Contingencies
Minority Interest . . . . . . . . . . . . . . . 29 26
Redeemable Preferred Stock (aggregate
redemption value - $59 and $56,
respectively). . . . . . . . . . . . . . . . . 56 53
Common Stockholders' Equity:
Class A common stock - $.01 par, 50,000,000
shares authorized; 6,301,056 shares
issued and outstanding. . . . . . . . . . . . - -
Class B common stock - $.01 par, 100,000,000
shares authorized; 20,686,065 and 20,403,512
shares issued . . . . . . . . . . . . . . . . - -
Additional paid-in capital . . . . . . . . . . 778 778
Accumulated deficit. . . . . . . . . . . . . . (580) (652)
Unvested portion of restricted stock . . . . . (13) (14)
Additional minimum pension liability . . . . . (7) (7)
Unrealized gain (loss) on marketable equity
securities. . . . . . . . . . . . . . . . . . 7 (2)
Treasury stock - 30,000 shares
at December 31, 1994. . . . . . . . . . . . . - -
Total common stockholders' equity. . . . . . 185 103
Total Liabilities and Stockholders' Equity. $4,677 $4,601
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
CONTINENTAL AIRLINES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions of dollars)
Six Months Ended June 30,
1995 1994
(Unaudited) (Unaudited)
Net Cash Provided by Operating Activities . . . $166 $ 33
Cash Flows from Investing Activities:
Proceeds from disposition of property,
equipment and other assets. . . . . . . . . . 4 2
Capital expenditures, net of returned
purchase deposits . . . . . . . . . . . . . . (41) (145)
Purchase deposits refunded in connection
with aircraft delivered . . . . . . . . . . . 46 38
Proceeds from System One transactions. . . . . 40 -
Net cash provided (used) by investing
activities . . . . . . . . . . . . . . . . . 49 (105)
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt, net. 8 11
Payments on long-term debt and capital lease
obligations . . . . . . . . . . . . . . . . . (119) (121)
Proceeds from issuance of common stock . . . . 2 -
Net cash used by financing activities . . . . (109) (110)
Net Increase (Decrease) in Cash and
Cash Equivalents . . . . . . . . . . . . . . . 106 (182)
Cash and Cash Equivalents-Beginning of Period . 396 721
Cash and Cash Equivalents-End of Period . . . . $502 $539
Supplemental Cash Flow Information:
Interest paid. . . . . . . . . . . . . . . . . $ 97 $ 91
Investing and Financing Activities Not
Affecting Cash:
Reclassification of accrued rent, capital
leases and interest to long-term debt . . . . $ 30 $ 22
Capital lease obligations incurred . . . . . . $ 9 $ 3
Property and equipment acquired through the
issuance of debt. . . . . . . . . . . . . . . $ 9 $ 10
Financed purchase deposits for flight
equipment . . . . . . . . . . . . . . . . . . $ 5 $ 13
Return of financed purchase deposits . . . . . $ 10 $ -
Reclassification of accrued management fees
to long-term debt . . . . . . . . . . . . . . $ 21 $ -
Investment in Amadeus. . . . . . . . . . . . . $120 $ -
Reduction of debt in connection with
System One transactions . . . . . . . . . . . $ 42 $ -
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
CONTINENTAL AIRLINES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In the opinion of management, the unaudited consolidated financial
statements included herein contain all adjustments necessary to present
fairly the financial position, results of operations and cash flows for the
periods indicated. Such adjustments are of a normal recurring nature. The
accompanying consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes
thereto contained in the Annual Report of Continental Airlines, Inc. (the
"Company" or "Continental") on Form 10-K for the year ended December 31,
1994.
NOTE 1 - LIQUIDITY
In connection with the Go Forward Plan, the Company has retired from
service 23 less efficient widebody aircraft during 1995. In February 1995,
the Company began paying market rentals, which are significantly less than
contractual rentals on these aircraft, and began ceasing all rental and
debt service payments as the aircraft were removed from service. In
addition, in February 1995, Continental reduced its rental payments on an
additional 11 widebody aircraft leased at significantly above-market rates.
Also, the Company has reached an agreement in principle with a lessor
relating to one 747 aircraft, subject to settlement of certain litigation.
See Note 5. The Company began negotiations in February 1995 with the
lessors of (or lenders with respect to) the 35 widebody aircraft to amend
the payment schedules and provide, effective February 1, 1995, alternative
compensation, including, in certain cases, debt securities convertible into
Continental's Class B Common Stock, in lieu of current cash payments.
As of August 11, 1995, the Company had issued convertible secured
debentures in an aggregate principal amount of $139 million, entered into
certain agreements, including restructured leases, and made certain
payments to lessors with respect to 27 of these aircraft. Continental is
continuing negotiations with substantially all the remaining creditors and
lessors regarding the modification of contractual obligations. Certain
long-term debt and capital lease obligations were in default or cross
default as of August 11, 1995. In accordance with generally accepted
accounting principles, such defaulted obligations have been classified as
current liabilities as of June 30, 1995. However, the Company does not
believe it probable that it will be required to fund such defaulted
obligations in the next 12 months. In addition, certain operating leases
with remaining aggregate rentals of $2.1 billion as of June 30, 1995 were
in default or cross default as of August 11, 1995. The Company received a
notice of lease termination dated April 18, 1995 from one lessor relating
to one A300 aircraft, and such lessor sued the Company and certain other
persons on May 2, 1995. See Note 5. The notice of lease termination
resulted in additional cross defaults as of June 30, 1995. See Item 2.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Commitments".
In July 1995, the Company was also sued for breach of lease and related
documents by a lender with respect to one Boeing 747 aircraft leased by the
Company. Continental believes that any breach of the lease and related
documents has been cured and as a result, an event of default has not been
reflected in the consolidated financial statements. See Note 5.
NOTE 2 - EARNINGS (LOSS) PER SHARE
The earnings (loss) per common share computations are based upon earnings
(loss) applicable to common shares and the average number of shares of
common stock and common stock equivalents (stock options, warrants and
restricted stock) outstanding. The number of shares used in the primary
and fully diluted computations for the three and six months ended June 30,
1995 was 35,014,697 and 34,982,388, respectively. The number of shares
used in the primary and fully diluted computations for both the three and
six months ended June 30, 1994 was 25,522,568. 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 $2 million and $3 million for the three
and six months ended June 30, 1995, respectively.
NOTE 3 - PREFERRED AND COMMON STOCK
In connection with the Company's debt restructuring program, the Company
entered into an agreement with General Electric Capital Corporation and its
affiliates (collectively, "GE Capital"), pursuant to which Continental
issued two new series of preferred stock in exchange for its previously
existing preferred stock. The new series of preferred stock are
substantially identical to the respective previous series, except that the
new series provide that all dividends accumulating on the new preferred
stock through December 31, 1996 shall be paid only in additional respective
shares of such preferred stock. In exchange for the 171,000 shares of 8%
Cumulative Preferred Stock outstanding as of June 30, 1995 and all of the
accrued and unpaid dividends accumulated thereon as of such date, the
Company issued 202,784 shares of its new Series A 8% Cumulative Preferred
Stock ("Series A 8% Preferred"). In exchange for the 300,000 shares of 12%
Cumulative Preferred Stock outstanding as of June 30, 1995 and all of the
accrued and unpaid dividends accumulated thereon as of such date, the
Company issued 386,358 shares of its new Series A 12% Cumulative Preferred
Stock ("Series A 12% Preferred"). Each such exchange was effective
June 30, 1995.
Holders of Series A 8% Preferred and Series A 12% Preferred are entitled to
receive, when and if declared by the Board of Directors (the "Board"),
cumulative dividends payable quarterly in additional shares of such
preferred stock for dividends accumulating through December 31, 1996, and
thereafter in cash at an annual rate of $8 and $12 per share, respectively.
To the extent net income, as defined, for any calendar quarter is less than
the amount of dividends due on all outstanding shares of Series A 12%
Preferred for such quarter, the Board may declare dividends payable in
additional shares of Series A 12% Preferred in lieu of cash. At any time,
the Company may redeem, in whole or in part, on a pro rata basis among the
stockholders, any outstanding shares of Series A 8% Preferred or Series A
12% Preferred. All outstanding shares of both series of preferred stock
are mandatorily redeemable on April 27, 2003 out of legally available
funds. In each case, the redemption price is $100 per share plus accrued
unpaid dividends. Neither series of preferred stock is convertible into
shares of common stock and neither series has voting rights, except under
limited circumstances. The Series A 8% Preferred ranks pari passu with the
Series A 12% Preferred as to payment of dividends and liquidation.
On June 5, 1995, the stockholders of the Company approved an amendment to
the Company's 1994 Incentive Equity Plan (the "Plan Amendment"). In
connection with the Plan Amendment, the Human Resources Committee of the
Board of Directors of the Company authorized the exchange and repricing of
substantially all the outstanding stock options for new options bearing a
shorter exercise term and generally exercisable at a price lower than that
of the canceled options, subject to certain conditions. The exercise price
for the new options equals the market value per share on the date of grant
($16.00).
NOTE 4 - INCOME TAXES
A provision was recorded for the three and six months ended June 30, 1995
related to the System One Information Management, Inc. ("System One")
transaction. See Note 6. No additional provision was recorded since the
Company had incurred net operating losses for which a tax benefit had not
previously been recorded. The income tax benefit for the three and six
months ended June 30, 1994 differs from the federal statutory rate
principally due to an increase in the deferred tax valuation allowance
related to a portion of the Company's net operating losses that may not be
realizable, state taxes and certain nondeductible expenses.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
The Company, the City and County of Denver (the "City") and certain other
parties have entered into an agreement (the "Settlement"), which was
approved by the Denver City Council on April 10, 1995 and relates to gates
and operational space at the new Denver International Airport ("DIA"). The
Settlement provides for the release of certain claims and the settlement of
certain litigation filed by the City against the Company and reduces
(i) the full term of the lease to five years, subject to certain rights of
renewal granted to Continental, (ii) the number of gates leased from 20 to
10 and (iii) the amount of leased operational and other space by
approximately 70%. The reduced gates and operational space exceed
Continental's current needs at the airport, and the Company subleased to
America West Airlines, Inc. and Frontier Airlines, Inc. five of its
remaining gates and certain operational space. The Company will attempt to
sublease additional facilities and operational space as well.
Another air carrier filed a complaint with the Department of Transportation
("DOT") alleging that the Settlement had increased its costs at DIA and it
had not approved the changes to the airline rates. The DOT dismissed the
air carrier's complaint. The Settlement may still be challenged by certain
other parties, including other air carriers, and the Company cannot predict
what the outcome of any such challenge will be. If the Settlement is
successfully challenged, the Company believes it has defenses against the
City, as well as claims against the City that justify rescission of the
lease or, if rescission were not awarded by the court, a substantial
reduction in the Company's obligations thereunder. See Item 2.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Commitments".
In connection with the restructuring, two lawsuits have been filed by a
lessor and a lender. On May 1, 1995, GATX Third Aircraft Corporation
("GATX") filed an action in the Superior Court of California for the County
of San Francisco against Continental and several unnamed "Doe" defendants
with respect to one A300 aircraft ("the GATX litigation"). GATX alleges
that Continental has breached the terms of an aircraft lease between GATX
and Continental. GATX seeks the return of the aircraft and engines,
damages of $436,000 for unpaid rent, damages of $20 million (less the fair
market value of the aircraft) in liquidation of its claims for future rent,
costs and interest. Continental filed its response in the GATX litigation
on June 16, 1995. Discovery is currently ongoing and no trial date has
been set.
On July 7, 1995, The Nippon Credit Bank, Ltd. ("Nippon") filed a suit
against Continental in the U.S. District Court in Los Angeles, California
with respect to a Boeing 747 aircraft leased by Continental. Nippon
alleges that events of default exist under the lease based on a delay by
Continental in making rent payments from March through June of 1995 and
Continental's decision to cease flying the aircraft. Nippon claims that it
is entitled to terminate the lease and seeks $35 million in damages.
Because Continental has made all rent payments due under the lease
(including interest required under the lease to be paid in respect of late
payments) and believes it is otherwise in compliance with the requirements
of the lease, Continental denies that an event of default exists under the
lease, denies that Nippon is entitled to terminate the lease and disagrees
with Nippon's claim for damages even if an event of default were deemed to
exist.
NOTE 6 - OTHER
Continental CRS Interests, Inc. ("Continental CRS"). Continental and its
subsidiary, System One, entered into a series of transactions on April 27,
1995 whereby a substantial portion of System One's assets (including the
travel agent subscriber base and travel-related information management
products and services software), as well as certain liabilities of System
One were transferred to a newly formed limited liability company, System
One Information Management, L.L.C. ("LLC"). LLC is owned equally by
Continental CRS (which was formerly named System One and remains a wholly
owned subsidiary of Continental), Electronic Data Systems Corporation
("EDS") and AMADEUS, a European computerized reservation system ("CRS").
Substantially all of System One's remaining assets (including the CRS
software) and liabilities were transferred to AMADEUS. In addition to the
one-third interest in LLC, Continental CRS received cash proceeds of
$40 million and an equity interest in AMADEUS valued at $120 million, and
the outstanding indebtedness of System One owed to each of EDS and
Continental was repaid. System One's revenues, included in cargo, mail and
other revenue, and related net earnings are not material to the
consolidated financial statements. In connection with these transactions,
the Company recorded a pre-tax gain of $108 million, which amount is
included in Other Nonoperating Income (Expense) in the accompanying
consolidated statement of operations. The related tax provision totaled
$78 million (which differs from the federal statutory rate due to certain
nondeductible expenses), for a net gain of $30 million.
Pilot Contract. The Company and the Independent Association of Continental
Pilots ("IACP") have negotiated a 24-month collective bargaining agreement.
The new agreement has been approved by the Board of Directors of the IACP
and remains subject to IACP member ratification. The new agreement
provides for an immediate $20 million cash payment by the Company upon
ratification of the agreement (which amount has been accrued in the second
quarter of 1995), a $10 million cash payment on April 1, 1996, a 13.5% wage
increase on July 1, 1996 and a 5.0% wage increase on June 30, 1997. The
agreement will be submitted to the pilots for ratification. It is
anticipated that the votes will be counted on August 30, 1995.
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
June 30, Increase/
1995 1994 (Decrease)
Revenue passengers (thousands). . . . 9,761 10,516 (7.2) %
Revenue passenger miles
(millions) (a) . . . . . . . . . . . 10,259 10,235 0.2 %
Available seat miles (millions) (b) . 15,180 16,089 (5.6) %
Passenger load factor (c) . . . . . . 67.6% 63.6% 4.0 pts.
Breakeven passenger load factor (d) . 62.5% 63.1% (0.6) pts.
Passenger revenue per available
seat mile (cents) (e) . . . . . . . 8.40 7.28 15.4 %
Operating cost per available seat
mile (cents) (f). . . . . . . . . . 8.48 7.85 8.0 %
Average yield per revenue
passenger mile (cents) (g). . . . . 12.43 11.44 8.7 %
Average fare per revenue passenger. . $130.66 $111.32 17.4 %
Average length of aircraft
flight (miles). . . . . . . . . . . 834 717 16.3 %
Average daily utilization of
each aircraft (h) . . . . . . . . . 9:19 10:03 (7.3) %
Actual aircraft in fleet at end
of period. . . . . . . . . . . . . . 317 313 1.3 %
Six Months Ended Net
June 30, Increase/
1995 1994 (Decrease)
Revenue passengers (thousands). . . . 18,902 19,864 (4.8) %
Revenue passenger miles
(millions) (a) . . . . . . . . . . . 19,820 19,538 1.4 %
Available seat miles (millions) (b) . 31,183 31,373 (0.6) %
Passenger load factor (c) . . . . . . 63.6% 62.3% 1.3 pts.
Breakeven passenger load factor (d) . 60.3% 63.1% (2.8) pts.
Passenger revenue per available
seat mile (cents) (e) . . . . . . . 7.87 7.35 7.1 %
Operating cost per available seat
mile (cents) (f). . . . . . . . . . 8.18 8.11 0.9 %
Average yield per revenue
passenger mile (cents) (g). . . . . 12.39 11.80 5.0 %
Average fare per revenue passenger. . $129.90 $116.03 12.0 %
Average length of aircraft
flight (miles). . . . . . . . . . . 818 739 10.7 %
Average daily utilization of
each aircraft (h) . . . . . . . . . 9:27 9:49 (3.7) %
Actual aircraft in fleet at end
of period. . . . . . . . . . . . . . 317 313 1.3 %
(a) The number of scheduled miles flown by revenue passengers.
(b) The number of seats available for passengers, multiplied by the number
of scheduled miles those seats are flown.
(c) Revenue passenger miles divided by available seat miles.
(d) The percentage of seats that must be occupied by revenue passengers in
order for the airline to break even on an income before income taxes
basis, excluding nonrecurring charges, nonoperating items and other
special items.
(e) Passenger revenues divided by available seat miles.
(f) Operating expenses divided by available seat miles.
(g) The average revenue received for each mile a revenue passenger is
carried.
(h) The average block hours flown per day in revenue service per aircraft.
Due to the greater demand for air travel during the summer months, revenues
in the airline industry in the third quarter of the year are generally
significantly greater than revenues in the first quarter of the year and
moderately greater than revenues in the second and fourth quarters of the
year for the majority of air carriers. Continental's results of operations
usually have reflected this seasonality, but have also been impacted by
numerous other factors that are not necessarily seasonal, including the
general state of the United States and Japanese economies and fare actions
taken by Continental and its competitors.
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 six
months ended June 30, 1995 as compared to the three and six months ended
June 30, 1994. The Company's net income in 1995 included a $30 million net
gain on the System One transactions. See Note 6.
Three Months Ended June 30, 1995 and 1994
The Company recorded consolidated net income of $102 million for the three
months ended June 30, 1995 as compared to a consolidated net loss of
$49 million for the three months ended June 30, 1994.
Passenger revenues of $1.4 billion for the quarter ended June 30, 1995
increased 9.2%, $114 million, as compared to the same period in 1994, due
primarily to an 8.7% increase in Continental's jet yield and a 0.2%
increase in jet revenue passenger miles.
Cargo, mail and other revenues decreased 18.0%, $27 million, in the three
months ended June 30, 1995 as compared to the same period in the prior
year, principally as a result of the System One transactions which were
effective April 27, 1995.
Wages, salaries and related costs decreased 5.3%, $20 million, during the
quarter ended June 30, 1995 as compared to the same period in 1994,
primarily due to a reduction in the number of full-time equivalent
employees from approximately 39,800 as of June 30, 1994 to approximately
33,600 as of June 30, 1995. Such decrease was partially offset by accruals
for a $20 million cash payment anticipated to be due to the pilots upon
ratification of a new collective bargaining agreement (see Note 6), and
employee profit sharing and other incentive programs, including the payment
of bonuses for on-time airline performance. In addition, wage rates were
impacted by wage restorations resulting from an average 10.0% wage
reduction implemented by the Company in July 1992, which reduction was
restored in equal increments in December 1992, April 1993, April 1994 and
July 1994.
Rentals and landing fees increased 11.3%, $22 million, for the three months
ended June 30, 1995 compared to the same period in 1994. Rent expense
increased primarily as a result of the delivery of new Boeing 737 and 757
aircraft during 1994 and early 1995. Such increase was partially offset by
retirements and groundings of certain leased aircraft and reduced facility
rentals and landing fees resulting from downsizing operations.
Aircraft fuel expense decreased 2.9%, $5 million, in the three months ended
June 30, 1995 compared to the same period in 1994, principally due to a
10.1% reduction in the quantity of jet fuel used from 333.9 million gallons
in the second quarter of 1994 to 300.1 million gallons in the second
quarter of 1995. Such decrease was partially offset by a 7.7% increase in
the average price per gallon from 50.6 cents in 1994 to 54.5 cents in 1995.
Commissions expense increased 19.1%, $21 million, in the quarter ended
June 30, 1995 as compared to the same period in the prior year primarily
due to increased passenger revenues and higher average effective commission
rates.
Maintenance, materials and repairs costs decreased 22.3%, $29 million,
during the quarter ended June 30, 1995 as compared to the same period in
1994 principally due to (i) the replacement of older aircraft with new
aircraft, (ii) the closure of maintenance facilities in Los Angeles and
Denver and (iii) the shift of scheduled maintenance work to outside
suppliers who can support the Company's flight operations at a lower cost
and at locations more convenient to its primary routes.
Other operating expense decreased 4.1%, $14 million, in the three months
ended June 30, 1995 as compared to the same period in the prior year
primarily as a result of decreases in advertising expense, catering expense
and other miscellaneous expense, partially offset by increases in
reservations and sales expense and aircraft servicing expense.
Interest expense decreased 8.2%, $5 million, during the three months ended
June 30, 1995 as compared to the same period in 1994, primarily due to
(i) the reduced accretion of deferred credits recorded in connection with
the Company's adjustment of operating leases to fair market value as of
April 27, 1993 and (ii) principal reductions of long-term debt and capital
lease obligations.
Interest capitalized decreased 25.0%, $1 million, in the quarter ended
June 30, 1995 as compared to the same period in 1994 principally due to a
decrease in the average balance of purchase deposits for flight equipment.
The Company's other nonoperating income (expense) in the quarter ended
June 30, 1995 included a pre-tax gain of $108 million from the System One
transactions.
Six Months Ended June 30, 1995 and 1994
The Company recorded consolidated net income of $72 million for the six
months ended June 30, 1995 as compared to a consolidated net loss of
$121 million for the six months ended June 30, 1994.
Passenger revenues of $2.6 billion for the first six months of 1995
increased 6.1%, $149 million, as compared to the same period in 1994, due
primarily to a 5.0% increase in Continental's jet yield and a 1.4% increase
in jet revenue passenger miles.
Wages, salaries and related costs decreased 3.6%, $27 million, during the
first six months of 1995 compared to the same period in 1994 primarily due
to a reduction in the number of full-time equivalent employees from
approximately 39,800 as of June 30, 1994 to approximately 33,600 as of
June 30, 1995. Such decrease was partially offset by accruals for a
$20 million cash payment anticipated to be due to the pilots upon
ratification of a new collective bargaining agreement (see Note 6),
employee profit sharing and other incentive programs, including the payment
of bonuses for on-time airline performance. In addition, wage rates were
impacted by wage restorations resulting from an average 10.0% wage
reduction implemented by the Company in July 1992, which reduction was
restored in equal increments in December 1992, April 1993, April 1994 and
July 1994.
Rentals and landing fees increased 8.3%, $33 million, for the first six
months of 1995 compared to the same period in 1994. Rent expense increased
primarily as a result of the delivery of new Boeing 737 and 757 aircraft
during 1994 and early 1995. Such increase was partially offset by
retirements and groundings of certain leased aircraft and reduced facility
rentals and landing fees resulting from downsizing operations.
Aircraft fuel expense decreased 3.2%, $11 million, in the first six months
of 1995 compared to the same period in 1994, principally due to a 5.8%
reduction in the quantity of jet fuel used from 650.5 million gallons in
1994 to 612.5 million gallons in 1995. Such decrease was partially offset
by a 2.7% increase in the average price per gallon from 52.1 cents in 1994
to 53.5 cents in 1995.
Commissions expense increased 8.2%, $19 million, in the first six months of
1995 as compared to the first six months of 1994 primarily due to increased
passenger revenues and higher average effective commission rates.
Maintenance, materials and repairs costs decreased 25.3%, $67 million,
during the first six months of 1995 compared to the same period in 1994
principally due to (i) the replacement of older aircraft with new aircraft,
(ii) the closure of maintenance facilities in Los Angeles and Denver and
(iii) the shift of scheduled maintenance work to outside suppliers who can
support the Company's flight operations at a lower cost and at locations
more convenient to its primary routes.
Interest expense decreased 11.3%, $14 million, during the first six months
of 1995 compared to the same period in 1994, primarily due to (i) the
reduced accretion of deferred credits recorded in connection with the
Company's adjustment of operating leases to fair market value as of
April 27, 1993 and (ii) principal reductions of long-term debt and capital
lease obligations.
Interest capitalized decreased 42.9%, $3 million, in the first six months
of 1995 compared to the same period in 1994 primarily due to a decrease in
the average balance of purchase deposits for flight equipment.
Interest income increased 18.2%, $2 million, in the first six months of
1995 compared to the same period in 1994 principally due to an increase in
the average interest rate earned on investments, partially offset by a
decrease in the average balance of cash and cash equivalents.
The Company's other nonoperating income (expense) in the first six months
of 1995 included a pre-tax gain of $108 million from the System One
transactions. Other nonoperating income (expense) in the first six months
of 1994 included foreign exchange and other losses of $9 million (related
to the Japanese yen) and charges totaling approximately $2 million relating
to the closing of certain airport stations.
LIQUIDITY AND CAPITAL COMMITMENTS
As part of the Company's Go Forward Plan, Continental has successfully
negotiated agreements to increase its liquidity during 1995 and 1996. As
discussed below, under binding agreements reached through August 11, 1995,
the Company has improved its liquidity by an estimated $267 million in 1995
and $259 million in 1996. This achieves roughly 87% of the Go Forward Plan
liquidity goal.
On March 31, 1995 the Company signed agreements with The Boeing Company
("Boeing") and certain engine manufacturers to defer substantially all
aircraft deliveries that had been scheduled for 1996 and 1997. On
March 30, 1995, Continental amended its principal secured loan agreements
with GE Capital and General Electric Company (collectively with GE Capital,
the "Lenders") to defer 1995 and 1996 principal payments, and amended
certain of its operating lease agreements with one of the Lenders to defer
1995 rental obligations. These agreements with Boeing, the engine
manufacturers and the Lenders will improve the Company's liquidity by
approximately $170 million in each of 1995 and 1996.
In connection with the Go Forward Plan, the Company has retired from
service 23 less efficient widebody aircraft during 1995. In February 1995,
the Company began paying market rentals, which are significantly less than
contractual rentals on these aircraft, and began ceasing all rental and
debt service payments as the aircraft were removed from service. In
addition, in February 1995, Continental reduced its rental payments on an
additional 11 widebody aircraft leased at significantly above-market rates.
Also, the Company has reached an agreement in principle with a lessor
relating to one 747 aircraft, subject to settlement of certain litigation.
See Note 5. The Company began negotiations in February 1995 with the
lessors of (or lenders with respect to) the 35 widebody aircraft to amend
the payment schedules and provide, effective February 1, 1995, alternative
compensation, including, in certain cases, debt securities convertible into
Continental's Class B Common Stock, in lieu of current cash payments. As
of August 11, 1995, the Company had issued convertible secured debentures
in an aggregate principal amount of $139 million, entered into certain
agreements, including restructured leases, and made certain payments to
lessors with respect to 27 of these aircraft. The agreements with these
lessors are expected to improve the Company's liquidity by an estimated
$77 million and $69 million in 1995 and 1996, respectively.
On April 10, 1995, the Denver City Council approved an agreement among the
City, the Company and certain signatory airlines amending the Company's
lease of facilities at DIA by reducing the Company's lease term to five
years, reducing to 10 the number of gates (and reducing associated space)
leased by the Company and making certain changes in the rates and charges
under the lease. The agreement also provides for the release of certain
claims and the settlement of certain litigation filed by the City against
the Company. The agreement is expected to result in annual reduction in
costs to the Company of approximately $20 million over the life of the
lease.
As part of its plan to dispose of non-core assets, Continental and System
One entered into a series of transactions on April 27, 1995. See Note 6.
Continental's failure to make required payments to the Lenders, the City
and certain aircraft lessors and lenders as described above constituted
events of default under the respective agreements with such parties. The
agreements reached through August 11, 1995 with the Lenders, the City, six
aircraft lessors and two lenders have cured defaults under their respective
agreements. As of August 11, 1995, defaults under the remaining six
widebody aircraft leases were continuing due to the nonpayment of rent,
which could entitle the lessors to pursue contractual remedies, including
seeking to take possession of the affected aircraft. Additionally, the
Company received a notice of lease termination dated April 18, 1995 from
one lessor relating to one A300 aircraft, and such lessor sued the Company
and certain other persons on May 2, 1995. See Note 5. The notice of lease
termination resulted in additional cross defaults as of June 30, 1995 and
accordingly, such defaulted debt and capital lease obligations have been
classified as current liabilities as of June 30, 1995 in accordance with
generally accepted accounting principles. As of August 11, 1995, the
Company is in negotiations with substantially all the remaining lessors.
The Company believes it will be able to successfully conclude the remaining
negotiations and thus avoid any material adverse effect on the Company.
In July 1995, the Company was also sued for breach of lease and related
documents by a lender with respect to one Boeing 747 aircraft leased by the
Company. Continental believes that any breach of the lease and related
documents has been cured and as a result, an event of default has not been
reflected in the consolidated financial statements. See Note 5.
In addition, under "cross default" provisions, the payment defaults and the
notice of lease termination from a lessor of one A300 aircraft create (and
the Company's actions in connection with the Boeing 747 lease may have
created) defaults under a significant number of Continental's other lease
and debt agreements, and the Company's obligations under the agreements
subject to such cross defaults are also eligible to be declared in default.
However, management believes that it is unlikely that lessors or creditors
will exercise remedies under cross default provisions because (i) the
Company is making all required contractual payments under the applicable
agreements, (ii) the contractual payments on a substantial majority of
aircraft leases are at current market rates, (iii) taking possession of the
aircraft would cause the lessors or lenders to incur remarketing costs, and
(iv) exercise of remedies could expose lessors and lenders to "lender
liability" litigation. Additionally, the Company has made substantial
progress in negotiations with lenders and lessors to cure the defaults.
Management does not believe that events of default or cross defaults
remaining after June 30, 1995 will have a material adverse effect on the
Company.
As a result of a Federal Aviation Administration Airworthiness Directive,
which forced the partial grounding of the Company's ATR commuter fleet in
late 1994 and early 1995, the Company withheld January and February lease
payments totaling $7 million on those ATR aircraft leased by the
manufacturer. The Company's non-payment of rentals may have resulted in an
event of default under the related lease agreements with Avions de
Transport Regional ("ATR"). In July 1995, the Company reached a settlement
with ATR which will cure any such payment default and provides for the
settlement of certain claims between the Company and ATR.
The Company is in default under the debt agreement relating to the
financing of the Company's Los Angeles International Airport ("LAX")
maintenance facility. At June 30, 1995, the principal balance of the
applicable obligation was approximately $63 million. As of August 11,
1995, the Company was in negotiations with the holders of the debt to
restructure such debt and thereby cure the default. In light of the
current status of such negotiations, the Company does not anticipate that
such default will have a material adverse effect on the Company.
The Company has no current plans to take other actions in the future that
would constitute additional events of default.
As a result of the defaults and cross-defaults described above that were
continuing at August 11, 1995, approximately $583 million of the Company's
long-term debt and capital lease obligations were classified as debt and
capital lease obligations in default within current liabilities as of
June 30, 1995. While the Company does not believe it is probable that it
will be required to fund such defaulted obligations in the next 12 months,
generally accepted accounting principles require that such defaulted
obligations be classified as current liabilities at June 30, 1995. In
addition, certain operating leases with remaining aggregate rentals of
$2.1 billion as of June 30, 1995 were in default or cross default at
August 11, 1995.
Continental has firm commitments to take delivery of 22 new 737 and five
new 757 aircraft in 1995, one new 757 aircraft in 1996 and 43 new jet
aircraft during the years 1998 through 2002. The estimated aggregate cost
of these aircraft is approximately $3.4 billion. As of August 11, 1995, 17
new 737 and three new 757 aircraft had been delivered. In December 1994,
Continental Express, Inc. ("Express"), a wholly owned subsidiary,
contracted with Beech Acceptance Corporation ("Beech") for the purchase and
financing of 25 Beech 1900-D turboprop aircraft at an estimated aggregate
cost of $104 million, excluding price escalations. Deliveries of the Beech
aircraft are scheduled in 1995 and 1996. As of August 11, 1995, two Beech
1900-D aircraft had been delivered. In connection with the rescheduling of
jet aircraft deliveries, $72 million was refunded in the first six months
of 1995. The Company currently anticipates that available firm financing
commitments with respect to its acquisition of new Boeing and Beech
aircraft will be sufficient to fund all deliveries scheduled during the
years 1995 and 1996.
Continental expects its 1995 capital expenditures, exclusive of aircraft,
to aggregate approximately $83 million, primarily relating to aircraft
modifications, passenger terminal facility improvements and maintenance,
telecommunications and ground equipment.
As of June 30, 1995, the Company had approximately $502 million in cash and
cash equivalents, compared to $396 million as of December 31, 1994. Net
cash provided by operating activities increased by approximately
$133 million during the six months ended June 30, 1995 compared to the same
period in the prior year principally due to earnings improvement. In
addition, net cash provided by investing activities increased to
approximately $49 million primarily as a result of cash proceeds received
from the System One transactions in 1995 and an increase in purchase
deposits refunded in 1995 due to cancelled aircraft options, delivery
deferrals or delivery of aircraft, as well as higher capital expenditures
during 1994 relating to purchase deposits on jet and turboprop aircraft and
expenditures relating to the Company's discontinued Continental Lite
operations. Net cash used by financing activities for the six months ended
June 30, 1995 compared to the same period in the prior year remained
relatively constant.
Continental does not have general lines of credit, and substantially all of
its assets, including the stock of its subsidiaries, are encumbered.
Approximately $150 million and $119 million of cash and cash equivalents at
June 30, 1995 and December 31, 1994, respectively, were held in restricted
arrangements relating primarily to workers' compensation claims and in
accordance with the terms of certain other agreements. In addition,
Continental Micronesia, Inc. ("CMI"), a 91%-owned subsidiary, is required
by its loan agreement with GE Capital to maintain certain minimum cash
balances and net worth levels, which effectively restrict the amount of
cash available to Continental from CMI. As of June 30, 1995, CMI had a
minimum cash balance requirement of $26 million.
Continental currently believes that its cash on hand, together with cash
expected to be generated from operations, cash anticipated to be generated
from the disposition of non-strategic assets and available aircraft
financing will be sufficient to fund its operations, fleet commitments and
expected capital expenditures for the remainder of 1995.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
See Note 5 of Notes to Consolidated Financial Statements.
ITEM 2. CHANGES IN SECURITIES.
See Note 3 for a discussion of the exchange of the 8% Preferred and
12% Preferred for Series A 8% Preferred and Series A 12% Preferred.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
As more fully discussed in Item 2. "Management's Discussion and
Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Commitments", Continental is in default and
cross default on certain long-term debt and capital and operating
lease obligations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's Annual Meeting of Stockholders was held on June 5,
1995. The following members were elected to the Company's Board of
Directors to hold office for the ensuing year:
Nominee Votes For Votes Withheld
Thomas J. Barrack, Jr. 72,559,418 5,923,231
Gordon M. Bethune 72,559,421 5,923,228
David Bonderman 72,559,710 5,922,939
Gregory D. Brenneman 72,554,631 5,928,018
Joel H. Cowan 72,561,113 5,921,536
Patrick Foley 72,561,515 5,921,134
Rowland C. Frazee, C.C. 72,560,043 5,922,606
Hollis L. Harris 72,561,605 5,921,044
Dean C. Kehler 72,559,039 5,923,610
Robert L. Lumpkins 72,560,456 5,922,193
Douglas H. McCorkindale 72,561,558 5,921,091
David E. Mitchell, O.C. 72,560,666 5,921,983
Richard W. Pogue 72,561,480 5,921,169
William S. Price 72,560,781 5,921,868
Donald L. Sturm 72,561,375 5,921,274
Claude I. Taylor, O.C. 72,560,467 5,922,182
Karen Hastie Williams 72,560,228 5,922,421
Charles A. Yamarone 72,559,729 5,922,920
An amendment to the Company's 1994 Incentive Equity Plan (the
"Plan") was proposed to (i) increase the number of shares of Class
B common stock covered by the Plan from 2,300,000 to 3,000,000 and
increase to 400,000 the number of shares subject to options that
may be granted to any participant during any calendar year, (ii)
permit the Chief Executive Officer to administer and make awards
under the Plan with respect to certain individuals, (iii) provide
that the Plan administrator may require certain restrictions and
(iv) make certain technical changes.
The votes of the stockholders on this proposal were as follows:
Votes Votes Broker
Votes For Against Abstaining Non-Votes
67,204,413 11,198,585 79,651 -0-
A proposal to ratify the appointment of Ernst & Young LLP as the
Company's independent auditors for the fiscal year ending December
31, 1995 was approved as follows:
Votes Votes Broker
Votes For Against Abstaining Non-Votes
78,362,679 61,328 58,642 -0-
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
4.1 Certificate of Elimination with respect to Certificates
of Designations of 8% Cumulative Preferred Stock and 12%
Cumulative Preferred Stock.
4.2 Certificate of Designations of Series A 8% Cumulative
Preferred Stock.
4.3 Certificate of Designations of Series A 12% Cumulative
Preferred Stock.
4.4 Continental hereby agrees to furnish to the Commission,
upon request, copies of certain instruments defining the
rights of holders of long-term debt of the kind
described in Item 601(b)(4)(iii)(A) of Regulation S-K.
10.1 Employment Agreement between the Company and Gordon M.
Bethune.
10.2 Employment agreement between the Company and Gregory D.
Brenneman.
11.1 Statement Regarding Computation of Per Share Earnings.
27.1 Financial Data Schedule.
(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: August 11, 1995 by: /s/ Lawrence W. Kellner
Lawrence W. Kellner
Senior Vice President and
Chief Financial Officer
(On behalf of Registrant)
Date: August 11, 1995 /s/ Michael P. Bonds
Michael P. Bonds
Staff Vice President and Controller
(Principal Accounting Officer)