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, 1996
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, Suite 2010
Houston, Texas 77019
(Address of principal executive offices)
(Zip Code)
713-834-2950
(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 October 11, 1996, 9,280,000 shares of Class A common stock
and 46,771,324 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 Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
(Unaudited) (Unaudited)
Operating Revenue:
Passenger . . . . . . . $1,546 $1,402 $4,440 $3,997
Cargo, mail and other . 125 113 359 405
1,671 1,515 4,799 4,402
Operating Expenses:
Wages, salaries and
related costs. . . . . 397 356 1,139 1,079
Aircraft fuel . . . . . 201 171 558 508
Commissions . . . . . . 135 126 398 376
Aircraft rentals. . . . 128 122 379 370
Maintenance, materials
and repairs. . . . . . 118 119 349 317
Other rentals and
landing fees . . . . . 89 87 258 271
Depreciation and
amortization . . . . . 63 63 195 192
Nonrecurring charge . . 128 - 128 -
Other . . . . . . . . . 335 318 969 998
1,594 1,362 4,373 4,111
Operating Income . . . . 77 153 426 291
Nonoperating Income
(Expense):
Interest expense. . . . (40) (52) (129) (162)
Interest capitalized. . 1 1 2 5
Interest income . . . . 11 9 30 22
Other, net. . . . . . . (2) 2 19 110
(30) (40) (78) (25)
Income before Income
Taxes, Minority
Interest and
Extraordinary Loss. . . 47 113 348 266
Income Tax Provision . . (18) - (57) (78)
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions of dollars, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
(Unaudited) (Unaudited)
Income before Minority
Interest and
Extraordinary Loss. . . $ 29 $ 113 $ 291 $ 188
Minority Interest. . . . (1) (2) (3) (5)
Distributions on
Preferred Securities
of Trust, net of
applicable income
taxes of $2 and $7,
respectively. . . . . . (4) - (10) -
Income before
Extraordinary Loss. . . 24 111 278 183
Extraordinary Loss,
net of applicable
income taxes of $4. . . (6) - (6) -
Net Income . . . . . . . 18 111 272 183
Preferred Dividend
Requirements and
Accretion to
Liquidation Value . . . (1) (5) (3) (8)
Income Applicable to
Common Shares . . . . . $ 17 $ 106 $ 269 $ 175
Earnings per Common and
Common Equivalent Share:
Income Before
Extraordinary Loss. . $0.35 $1.54 $4.26 $2.93
Extraordinary Loss,
net of tax. . . . . . (0.10) - (0.10) -
Net Income . . . . . . $0.25 $1.54 $4.16 $2.93
Earnings per Common
Share Assuming
Full Dilution:
Income Before
Extraordinary Loss. . $0.34 $1.34 $3.58 $2.68
Extraordinary Loss,
net of tax. . . . . . (0.09) - (0.08) -
Net Income . . . . . . $0.25 $1.34 $3.50 $2.68
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
CONTINENTAL AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(In millions of dollars, except for share data)
September 30, December 31,
ASSETS 1996 1995
(Unaudited)
Current Assets:
Cash and cash equivalents, including
restricted cash and cash equivalents
of $70 and $144, respectively. . . . . . $ 865 $ 747
Accounts receivable, net. . . . . . . . . 443 351
Spare parts and supplies, net . . . . . . 114 127
Prepayments and other . . . . . . . . . . 81 90
Total current assets . . . . . . . . . . 1,503 1,315
Property and Equipment:
Owned property and equipment:
Flight equipment . . . . . . . . . . . . 1,140 1,107
Other. . . . . . . . . . . . . . . . . . 317 288
1,457 1,395
Less: Accumulated depreciation. . . . . 353 285
1,104 1,110
Purchase deposits for flight equipment. . 121 48
Capital leases:
Flight equipment . . . . . . . . . . . . 406 394
Other. . . . . . . . . . . . . . . . . . 29 28
435 422
Less: Accumulated amortization . . . . . 150 119
285 303
Total property and equipment . . . . . . 1,510 1,461
Other Assets:
Routes, gates and slots, net. . . . . . . 1,488 1,531
Reorganization value in excess of
amounts allocable to identifiable
assets, net. . . . . . . . . . . . . . . 240 251
Investments . . . . . . . . . . . . . . . 131 163
Other assets, net . . . . . . . . . . . . 111 100
Total other assets . . . . . . . . . . . 1,970 2,045
Total Assets. . . . . . . . . . . . . . $4,983 $4,821
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(In millions of dollars, except for share data)
September 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
(Unaudited)
Current Liabilities:
Current maturities of long-term debt. . . $ 205 $ 163
Current maturities of capital leases. . . 62 58
Accounts payable. . . . . . . . . . . . . 627 617
Air traffic liability . . . . . . . . . . 765 579
Accrued payroll and pensions. . . . . . . 159 181
Accrued other liabilities . . . . . . . . 311 386
Total current liabilities. . . . . . . . 2,129 1,984
Long-Term Debt . . . . . . . . . . . . . . 1,116 1,352
Capital Leases . . . . . . . . . . . . . . 275 306
Deferred Credits and Other Long-Term
Liabilities:
Deferred income taxes . . . . . . . . . . 84 46
Deferred credit - aircraft operating
leases . . . . . . . . . . . . . . . . . 78 97
Accruals for aircraft retirements and
excess facilities. . . . . . . . . . . . 187 175
Other . . . . . . . . . . . . . . . . . . 244 246
Total deferred credits and other
long-term liabilities . . . . . . . . . 593 564
Commitments and Contingencies
Minority Interest. . . . . . . . . . . . . 16 27
Continental-Obligated Mandatorily
Redeemable Preferred Securities of
Subsidiary Trust Holding Solely
Convertible Subordinated Debentures (A) . 242 242
Redeemable Warrants. . . . . . . . . . . . 50 -
Redeemable Preferred Stock (aggregate
redemption value - $45 and $41,
respectively) . . . . . . . . . . . . . . 45 41
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(In millions of dollars, except for share data)
September 30, December 31,
1996 1995
(Unaudited)
Common Stockholders' Equity:
Class A common stock - $.01 par,
50,000,000 shares authorized;
9,280,000 and 12,602,112 shares
issued and outstanding,
respectively . . . . . . . . . . . . . . $ - $ -
Class B common stock - $.01 par,
200,000,000 shares authorized;
46,771,324 and 42,856,548 shares
issued and outstanding, respectively . . - -
Additional paid-in capital . . . . . . . 686 733
Accumulated deficit . . . . . . . . . . . (156) (428)
Unvested portion of restricted stock. . . (6) (10)
Additional minimum pension liability. . . (8) (8)
Unrealized gain on marketable
equity securities. . . . . . . . . . . . 1 18
Total common stockholders' equity. . . . 517 305
Total Liabilities and Stockholders'
Equity . . . . . . . . . . . . . . . . $4,983 $4,821
(A) The sole assets of the Trust are convertible subordinated
debentures with an aggregate principal amount of $250 million,
which bear interest at the rate of 8-1/2% per annum and mature
on December 1, 2020. Upon repayment, the Continental-
Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trust will be mandatorily redeemed.
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)
Nine Months
Ended September 30,
1996 1995
(Unaudited)
Net Cash Provided by Operating
Activities. . . . . . . . . . . . . . . $611 $281
Cash Flows from Investing Activities:
Proceeds from sale of America West
stock and warrants . . . . . . . . . . 32 -
Proceeds from disposition of property,
equipment and other assets . . . . . . 6 13
Proceeds from sale/leaseback
transaction. . . . . . . . . . . . . . 12 -
Capital expenditures, net of returned
purchase deposits. . . . . . . . . . . (195) (63)
Purchase deposits refunded in
connection with aircraft delivered . . 12 97
Proceeds from System One transactions . - 40
Net cash provided (used) by
investing activities. . . . . . . . . (133) 87
Cash Flows from Financing Activities:
Proceeds from issuance of long-term
debt, net. . . . . . . . . . . . . . . 553 8
Payments on long-term debt and
capital lease obligations. . . . . . . (890) (166)
Proceeds from issuance of common
stock. . . . . . . . . . . . . . . . . 7 11
Dividends paid on preferred securities
of trust . . . . . . . . . . . . . . . (17) -
Dividend paid to minority interest
holder in connection with secured
term loan financing. . . . . . . . . . (13) -
Purchase of warrants. . . . . . . . . . - (14)
Net cash used by financing activities. (360) (161)
Net Increase in Cash and
Cash Equivalents. . . . . . . . . . . . 118 207
Cash and Cash Equivalents - Beginning
of Period . . . . . . . . . . . . . . . 747 396
Cash and Cash Equivalents - End of
Period. . . . . . . . . . . . . . . . . $865 $603
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions of dollars)
Nine Months
Ended September 30,
1996 1995
(Unaudited)
Supplemental Cash Flow Information:
Interest paid . . . . . . . . . . . . . $120 $136
Income taxes paid . . . . . . . . . . . $ 1 $ 9
Investing and Financing Activities
Not Affecting Cash:
Property and equipment acquired
through the issuance of debt . . . . . $ 54 $ 21
Reclassification of accrued rent,
capital leases and interest to
long-term debt . . . . . . . . . . . . $ 11 $ 42
Capital lease obligations incurred. . . $ 27 $ 9
Financed purchase deposits for
flight equipment . . . . . . . . . . . $ 17 $ 5
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
Issuance of debt in connection with
purchase of Air Canada warrants. . . . $ - $ 42
Issuance of convertible secured
debentures in connection with the
aircraft settlements . . . . . . . . . $ - $158
Conversion of preferred stock into
long-term debt . . . . . . . . . . . . $ - $ 21
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, as amended, for the year ended
December 31, 1995.
NOTE 1 - STOCK SPLIT
On June 26, 1996, the Board of Directors of the Company declared a
two-for-one stock split (the "Stock Split") pursuant to which (a)
one share of the Company's Class A common stock, par value $.01 per
share ("Class A common stock"), was issued for each share of Class
A common stock outstanding on July 2, 1996 (the "Record Date") and
(b) one share of the Company's Class B common stock, par value $.01
per share ("Class B common stock"), was issued for each share of
Class B common stock outstanding on the Record Date. Shares
issuable pursuant to the Stock Split were distributed on or about
July 16, 1996. All share and earnings per share information for
prior periods has been adjusted for the Stock Split.
NOTE 2 - EARNINGS PER SHARE
The earnings per common share computations are based upon income
applicable to common shares and the average number of shares of
common stock, common stock equivalents (e.g., stock options,
warrants and restricted stock) and potentially dilutive securities
(e.g., convertible securities) outstanding, as adjusted for the
Stock Split. The number of shares used in the primary earnings per
share computations (before and after the extraordinary loss) for
the three and nine months ended September 30, 1996 was 64,532,717
and 64,741,285, respectively. The number of shares used in the
fully diluted earnings per share computations before the
extraordinary loss for the three and nine months ended September
30, 1996 was 82,482,792 and 81,694,080, respectively. The number
of shares used in the fully diluted earnings per share computations
after the extraordinary loss for the three and nine months ended
September 30, 1996 was 64,532,717 and 81,694,080, respectively.
The number of shares used in the primary earnings per share
computations for the three and nine months ended September 30, 1995
was 70,732,930 and 64,514,176, respectively. The number of shares
used in the fully diluted earnings per share computations for the
three and nine months ended September 30, 1995 was 81,939,622 and
68,249,740, respectively. Preferred stock dividend requirements
decreased net income for these computations by $1 million and $3
million for the three and nine months ended September 30, 1996,
respectively. In 1995, preferred stock dividend requirements,
including accretion to redemption value and the accelerated
accretion on the redeemed Series A 8% Cumulative Preferred Stock
caused by the exchange of such preferred stock for debt on
September 29, 1995 decreased net income for these computations by
$5 million and $8 million for the three and nine months ended
September 30, 1995, respectively.
NOTE 3 - OPTION CONTRACTS
The Company has entered into petroleum option contracts to provide
some short-term protection against a sharp increase in jet fuel
prices, and the Company's 91%-owned subsidiary, Continental
Micronesia, Inc. ("CMI"), has entered into average rate option
contracts to hedge a portion of its Japanese yen-denominated ticket
sales against a significant depreciation in the value of the yen
versus the United States dollar. The petroleum option contracts
generally cover the Company's forecasted jet fuel needs for
approximately six months, and the average rate option contracts
cover a portion of CMI's yen-denominated ticket sales for the next
six to nine months. At September 30, 1996, the Company had
petroleum option contracts outstanding with an aggregate notional
value of $226 million and CMI had average rate option contracts
outstanding with a contract value of $114 million. At September
30, 1996, the carrying value of the option contracts was
immaterial. For the three and nine months ended September 30,
1996, the Company recognized fuel hedging gains totaling $16
million and $37 million, respectively.
The Company and CMI are exposed to credit loss in the event of
nonperformance by the counterparties on the option contracts;
however, management does not anticipate nonperformance by these
counterparties. The amount of such exposure is generally the
unrealized gains, if any, on such option contracts.
NOTE 4 - NONRECURRING CHARGES
During the third quarter of 1996, the Company made the decision to
accelerate the replacement of 30 DC-9-30 aircraft, six DC-10-10
aircraft, 31 727-200 aircraft, 13 737-100 aircraft and 17 737-200
aircraft between August 1997 and December 1999. In connection with
this decision, the Company placed two new aircraft orders with The
Boeing Company ("Boeing"). As a result of its decision to
accelerate the replacement of these aircraft, the Company recorded
a nonrecurring charge of $128 million. The nonrecurring charge
relates primarily to (i) the writedown of Stage 2 aircraft
inventory, which is not expected to be consumed through operations,
to its estimated fair value; and (ii) a provision for costs
associated with the return of leased aircraft at the end of their
respective lease terms. The majority of the aircraft are being
accounted for as operating leases and therefore, the Company will
continue to recognize rent expense on these aircraft through the
respective dates they are removed from service. Cash outlays of
approximately $54 million will be incurred in connection with costs
associated with the return of the leased aircraft to the applicable
lessors.
NOTE 5 - INCOME TAXES
Income taxes for the three and nine months ended September 30, 1996
are provided at the estimated effective tax rate. For the nine
months ended September 30, 1996, the estimated effective tax rate
differs from the federal statutory rate of 35%, primarily due to
net operating losses ("NOLs") for which a tax benefit had not
previously been recorded, and differs for the three months ended
September 30, 1996 due to state and foreign income taxes and the
effect of certain expenses that are not deductible for income tax
purposes. Continental recognized the remainder of its previously
unbenefitted post reorganization NOLs during the second quarter of
1996. A provision for income taxes was recorded in the second
quarter of 1995 related to the System One Information Management,
Inc. ("System One") transactions (see Note 6). No provision for
income taxes was recorded for the three months ended September 30,
1995 and no additional provision was recorded for the nine months
ended September 30, 1995 since the Company had incurred net
operating losses for which a tax benefit had not previously been
recorded.
At December 31, 1995, the Company had NOL carryforwards of $2.6
billion for federal income tax purposes (of which $1.3 billion are
not subject to the limitations of Section 382 of the Internal
Revenue Code ("Section 382")) that will expire from 1996 through
2009, and investment tax credit carryforwards of $45 million that
will expire through 2001. As a result of the change in ownership
of the Company on April 27, 1993, the ultimate utilization of the
Company's NOLs and investment tax credits could be limited.
For financial reporting purposes, a valuation allowance has been
recognized to offset the deferred tax assets related to a portion
of the NOLs. The Company has considered prudent and feasible tax
planning strategies in assessing the need for the valuation
allowance. The Company initially assumed $194 million of benefit
attributable to such tax planning strategies. The Company
consummated the System One transactions, which had the effect of
realizing approximately $78 million of the built-in gains required
to be realized, and currently intends to consummate one or more
additional transactions. In the event the Company were to
determine in the future that any such tax planning strategies would
not be implemented, an adjustment to the net deferred tax liability
of up to $116 million would be charged to income in the period such
determination was made. In the event the Company recognizes
additional tax benefits related to NOLs and investment tax credit
carryforwards attributable to the Company's predecessor, which
include the accounts of Continental Airlines Holdings, Inc. and the
pre-reorganized Company, those benefits would be applied to reduce
reorganization value in excess of amounts allocable to identifiable
assets and other intangibles to zero, and thereafter as an addition
to paid-in capital.
NOTE 6 - OTHER
Financing Transactions
In the first and second quarters of 1996, the Company financed one
owned aircraft and exercised its right under 22 existing leveraged
aircraft leases to cause the owner/lessor's debt underlying these
leases to be refinanced. In connection with these financings, the
Company leased the aircraft through pass-through trusts ("Trusts")
rather than directly from the equipment provider to reduce
Continental's overall financing costs. The lower borrowing costs
obtained in the refinancing allowed Continental's operating lease
expense for the affected aircraft to be reduced by more than $17
million annually. In connection with the refinancing, Trusts were
created to hold new non-recourse equipment notes (with the
exception that equipment notes with respect to one owned aircraft
were issued by Continental). The Trusts issued pass-through
certificates representing interests in the equipment notes.
Inasmuch as (i) the owner/lessor has a substantial investment in
the aircraft, (ii) the pass-through certificates are secured by the
aircraft and an assignment of the corresponding leases and lease
rentals payable by Continental, and (iii) the pass-through
certificates are not direct obligations of, or guaranteed by,
Continental, the Trusts (and the corresponding debt and interest
expense) are not included in the accompanying consolidated
financial statements. Continental has both renewal options and
fair market value purchase options under the related aircraft
leases.
During January and February 1996, the Company repurchased or
redeemed without prepayment penalty the remaining amount of its
Series A convertible secured debentures for $125 million (including
payment-in-kind interest of $7 million).
In March 1996, Continental issued $230 million of 6-3/4%
convertible subordinated notes due April 15, 2006. The notes are
convertible into Class B common stock at an initial conversion
price of $30.195 per share (adjusted for the Stock Split). The
notes are redeemable at the option of the Company on or after April
15, 1999, at specified redemption prices.
In March 1996, Continental repaid $257 million of secured
indebtedness to General Electric Company and affiliates
(collectively, "GE") (of which $47 million was required as a result
of the convertible notes financing described above and the America
West Airlines, Inc. ("America West") stock sale (discussed below)
and $210 million was an optional prepayment), which eliminated
certain restrictive covenants.
In March 1996, the Company's wholly owned subsidiary, Continental
Express, Inc. ("Express"), entered into an agreement to acquire
eight new ATR aircraft. As of September 1996, five of these
aircraft had been delivered. These aircraft are being accounted
for as operating leases. In conjunction with the acquisition, the
Company is returning eight older ATR aircraft accounted for as
capital leases. As of September 1996, four of these aircraft had
been returned.
In July 1996, CMI consummated a $320 million secured term loan
financing with a group of banks and other financial institutions.
The loan was made in two tranches - a $180 million five-year
amortizing term loan with a floating interest rate of LIBOR plus
175 basis points and a $140 million seven-year amortization
extended loan with a floating interest rate of LIBOR plus 200 basis
points. The loan is secured by the stock of CMI and substantially
all of its unencumbered assets, consisting primarily of CMI's route
authorities, and is guaranteed by Continental and Air Micronesia,
Inc. ("AMI"), CMI's parent company.
CMI used the net proceeds of the financing to prepay $160 million
in principal amount of indebtedness to GE and to pay transaction
costs, and Continental used the $136 million in proceeds received
by it as an indirect dividend from CMI, together with approximately
$28 million in cash on hand, to prepay $164 million in principal
amount of indebtedness to GE. In connection with the prepayment,
Continental recorded a $6 million after tax extraordinary loss
relating to early extinguishment of debt.
The bank financing is expected to reduce interest expense by $6
million in the first year, based on current rates. The bank
financing does not contain any restrictive covenants at the
Continental parent level, and none of the assets of the parent
company (other than its stock in AMI) is pledged in connection with
the financing. Accordingly, this transaction freed up over $1
billion of collateral at Continental Airlines which was previously
pledged under the terms of the GE debt agreements.
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 outstanding
indebtedness of $42 million of System One owed to EDS was
extinguished. System One's revenues, included in cargo, mail and
other revenue, and related net earnings are not material to the
consolidated financial statements of Continental. In connection
with these transactions, the Company recorded a pre-tax gain of
$108 million, which amount was included in other nonoperating
income (expense) in the accompanying consolidated statement of
operations for the nine months ended September 30, 1995. 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.
Commitments
In July 1996, the Company announced its plan to expand its gates
and related facilities in Terminal B, as well as planned improve-
ments at Terminal C, at Continental's Houston Intercontinental
Airport hub. The expansion is expected to cost approximately $115
million, which the Company expects will be funded principally by
the issuance of tax-exempt debt by the applicable municipal
authority. In connection therewith, the Company expects to enter
into long-term leases (or amendments to existing leases) with the
applicable municipal authority containing rental payments
sufficient to service the related tax-exempt debt.
In October 1996, Continental placed an order for 60 firm 737-500
and 737-600 aircraft. See Item 2. "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Other
In February 1996, the Company sold approximately 1.4 million shares
of its 1.8 million shares of America West common stock in an
underwritten public offering, realizing net proceeds of
approximately $25 million and recognizing a gain of $12.5 million.
In addition, in May 1996, the Company sold all of its 802,860
America West warrants held, realizing net proceeds of $7 million
and recognizing a gain of $5 million. The gains are included in
other nonoperating income. The Company currently owns
approximately 1.0% of the equity interest and 7.9% of the voting
power of America West.
On June 26, 1996, the stockholders of the Company approved an
amendment to the Company's 1994 Incentive Equity Plan (as amended,
the "Incentive Plan") which increased the maximum number of shares
of Class B common stock that may be issued under the Incentive Plan
from 6,000,000 to 9,000,000 shares, in the aggregate, on a post-
Stock Split basis.
NOTE 7 - RELATED PARTY TRANSACTIONS
In May 1996, the Company entered into an agreement with Air
Partners, L.P. ("Air Partners") for the sale by Air Partners to the
Company from time to time, at Air Partners' election, for the one-
year period beginning August 15, 1996, of up to an aggregate of $50
million in intrinsic value (the then-current Class B common stock
price minus exercise price) of Air Partners' Class B warrants. The
purchase price would be payable in cash. The Board of Directors
has authorized the Company to publicly issue up to $50 million of
Class B common stock in connection with any such purchase, and the
Company has an effective registration statement covering such
potential issuance. In connection with this agreement, the Company
has reclassified $50 million from common equity to redeemable
warrants.
On May 14, 1996, Air Canada exchanged 1,661,056 shares of Class A
common stock for 1,661,056 shares of Class B common stock (on a
pre-Stock Split basis) pursuant to certain rights granted to it
under the Company's Certificate of Incorporation.
In connection with the Company's $320 million secured term loan
financing (see Note 6), CMI paid its 9% minority interest holder,
United Micronesia Development Association, Inc. ("UMDA"), a
dividend of approximately $13 million.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 months ended September 30, 1996 as compared to
the three and nine months ended September 30, 1995.
The following information contains forward looking statements.
Numerous important factors, including those factors identified as
Risk Factors filed as Exhibit 99.1 hereto and incorporated herein
by reference, and the fact that the assumptions filed as Exhibit
99.2 hereto and incorporated herein by reference relating to
certain of such forward looking statements could prove incorrect,
could cause actual results to differ materially from those
contained in such forward looking statements.
Comparison of Three Months Ended September 30, 1996 to Three Months
Ended September 30, 1995
The Company recorded consolidated net income of $18 million and
$111 million for the three months ended September 30, 1996 and
1995, respectively, including a $128 million nonrecurring charge
($77 million after taxes) and a $6 million after tax extraordinary
loss in 1996. Excluding the nonrecurring charge, the Company
recorded income before income taxes, minority interest and
extraordinary loss of $175 million, an increase of 54.9%, $62
million, from the same period in the prior year. Continental's
financial and operating performance improved significantly in the
third quarter of 1996 compared to the third quarter of 1995,
reflecting, among other things, continued implementation of the
Company's strategic program to enhance the fundamentals of its
operations, rationalize capacity, improve customer service and
employee relations and strengthen Continental's balance sheet and
liquidity. Management believes that the Company benefitted
significantly from the expiration of the aviation trust fund tax
(the "ticket tax") on December 31, 1995, although the amount of any
such benefit directly resulting from the expiration of the ticket
tax cannot be precisely determined. The ticket tax was reimposed
on August 27, 1996, and is again scheduled to expire on December
31, 1996. Management believes that the reimposition of the ticket
tax has a negative impact on the Company, although the amount of
such negative impact directly resulting from the reimposition of
the ticket tax cannot be precisely determined.
Passenger revenue increased 10.3%, $144 million, during the quarter
ended September 30, 1996 as compared to the same period in 1995,
primarily due to a 5.1% increase in revenue passenger miles and a
4.2% increase in the average yield per revenue passenger mile. The
Company's capacity increased 5.3% during the third quarter of 1996
as compared to the comparable period in 1995, primarily due to
increased utilization of existing aircraft.
Cargo, mail and other revenue increased 10.6%, $12 million, in the
three months ended September 30, 1996 as compared to the same
period in the prior year, principally as a result of an agreement
with DHL International to operate a sorting and distribution hub in
Manila and an increase in charter revenue.
Wages, salaries and related costs increased 11.5%, $41 million,
during the quarter ended September 30, 1996 as compared to the same
period in 1995, primarily due to pay increases effective July 1,
1996 for Continental's jet pilots and all non-unionized employees,
an increase in base wages and per diem payments for flight
attendants resulting from the Company's recently ratified
collective bargaining agreement with the International Association
of Machinists and Aerospace Workers ("IAM") representing
Continental's flight attendants and additional costs associated
with the Company's 5.3% increase in capacity over such period.
Aircraft fuel expense increased 17.5%, $30 million, in the three
months ended September 30, 1996 as compared to the same period in
the prior year. The average price per gallon, net of fuel hedging
gains of $16 million, increased 9.5% from 54.88 cents in the third
quarter of 1995 to 60.10 cents in the third quarter of 1996. In
addition, there was a 6.3% increase in the quantity of jet fuel
used from 303 million gallons in the third quarter of 1995 to 322
million gallons in the third quarter of 1996, principally
reflecting increased capacity and stage lengths.
Commissions expense increased 7.1%, $9 million, in the quarter
ended September 30, 1996 as compared to the same period in the
prior year, primarily due to a 10.3% increase in passenger revenue,
offset by a decrease in the percentage of commissionable revenue.
Aircraft rentals increased 4.9%, $6 million, for the three months
ended September 30, 1996 compared to the same period in 1995,
primarily as a result of the delivery of new aircraft throughout
1996. Such increase was partially offset by retirements of certain
leased aircraft.
During the third quarter of 1996, the Company made the decision to
accelerate the replacement of 30 DC-9-30 aircraft, six DC-10-10
aircraft, 31 727-200 aircraft, 13 737-100 aircraft and 17 737-200
aircraft between August 1997 and December 1999. In connection with
this decision, the Company placed two new aircraft orders with
Boeing. As a result of its decision to accelerate the replacement
of these aircraft, the Company recorded a nonrecurring charge of
$128 million. The nonrecurring charge relates primarily to (i) the
writedown of Stage 2 aircraft inventory, which is not expected to
be consumed through operations, to its estimated fair value; and
(ii) a provision for costs associated with the return of leased
aircraft at the end of their respective lease terms.
Other operating expense increased 5.3%, $17 million, in the three
months ended September 30, 1996 as compared to the same period in
the prior year, due primarily to increases in aircraft servicing,
passenger services and fuel tax. Increased passenger services are
a result of a 6.5% increase in block hours, and a 2.9% increase in
revenue passengers.
Interest expense decreased 23.1%, $12 million, during the three
months ended September 30, 1996 as compared to the same period in
1995, primarily due to principal reductions of long-term debt and
capital lease obligations and 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.
The Company's other nonoperating income (expense) in the quarter
ended September 30, 1996 includes a $5 million payment to settle
certain litigation arising out of the Company's decision in 1995 to
cap domestic travel agency commissions. In addition, foreign
currency losses (primarily related to the Japanese yen) were
included in other nonoperating income (expense). Other
nonoperating income (expense) in the third quarter of 1995 included
a $5 million charge which represented a waiver fee to a major
creditor of the Company.
The income tax provision of $18 million for the three months ended
September 30, 1996 consists of federal, state and foreign income
taxes. During the second quarter of 1996, the Company fully
utilized previously unbenefitted post reorganization NOLs and began
accruing income tax expense. No provision for federal income taxes
was recorded for the three months ended September 30, 1995 as a
result of the utilization of previously incurred NOLs for which a
tax benefit had not previously been recorded.
In July 1996, an extraordinary loss of $6 million was recorded, net
of $4 million income tax benefit, related to the early
extinguishment of debt.
Comparison of Nine Months Ended September 30, 1996 to Nine Months
Ended September 30, 1995
The Company recorded consolidated net income of $272 million and
$183 million for the nine months ended September 30, 1996 and 1995,
respectively, including a $128 million nonrecurring charge ($77
million after taxes) and a $6 million after tax extraordinary loss
in 1996. Continental's financial and operating performance
improved significantly in the first nine months of 1996 compared to
the first nine months of 1995, reflecting, among other things,
continued implementation of the Company's strategic program to
enhance the fundamentals of its operations, rationalize capacity,
improve customer service and employee relations and strengthen its
balance sheet and liquidity. Management believes that the Company
benefitted significantly from the expiration of the ticket tax on
December 31, 1995, although the amount of any such benefit directly
resulting from the expiration of the ticket tax cannot be precisely
determined. The ticket tax was reimposed on August 27, 1996, and
is again scheduled to expire on December 31, 1996. Management
believes that the reimposition of the ticket tax has a negative
impact on the Company, although the amount of such negative impact
directly resulting from the reimposition of the ticket tax cannot
be precisely determined.
Implementation of the Company's route realignment and capacity
rationalization initiatives reduced capacity by 1.5% in the first
nine months of 1996 as compared to the same period in 1995. This
decrease in capacity, combined with a 3.3% increase in traffic,
produced a 3.1 percentage point increase in load factor to 68.9%.
This higher load factor, combined with a 6.6% increase in the
average yield per revenue passenger mile, contributed to an 11.1%
increase in passenger revenue to $4.4 billion despite the decreased
capacity.
Cargo, mail and other revenue decreased 11.4%, $46 million, in the
nine months ended September 30, 1996 as compared to the same period
in the prior year, primarily as a result of the System One
transactions (which were effective April 27, 1995). Partially
offsetting such decrease was an increase in other revenue resulting
from a wet lease agreement with Alitalia Airlines, an agreement
with DHL International to operate a sorting and distribution hub in
Manila and an increase in revenue related to military charters.
Wages, salaries and related costs increased 5.6%, $60 million,
during the nine months ended September 30, 1996 as compared to the
same period in 1995. The increase is attributable to pay increases
effective July 1, 1996 for Continental's jet pilots and all non-
unionized employees and an increase in base wages and per diem
payments for flight attendants resulting from the Company's
collective bargaining agreement with the IAM representing
Continental's flight attendants. In addition, there were increases
in employee profit sharing accruals and the payment of bonuses for
on-time airline performance.
Aircraft fuel expense increased 9.8%, $50 million, in the nine
months ended September 30, 1996 as compared to the same period in
the prior year. The average price per gallon, net of fuel hedging
gains of $37 million, increased 9.5% from 53.98 cents in the first
nine months of 1995 to 59.09 cents in the first nine months of
1996.
Commissions expense increased 5.9%, $22 million, in the nine months
ended September 30, 1996 as compared to the same period in the
prior year, primarily due to an 11.1% increase in passenger
revenue, partially offset by a decrease in the percentage of
commissionable revenue.
Maintenance, materials and repairs increased 10.1%, $32 million,
during the nine months ended September 30, 1996 as compared to the
same period in 1995, principally due to the volume and timing of
engine overhauls as part of the Company's ongoing maintenance
program.
Other rentals and landing fees decreased 4.8%, $13 million, for the
nine months ended September 30, 1996 compared to the same period in
1995, principally due to reduced facility rentals and landing fees
resulting from capacity reductions.
During the third quarter of 1996, the Company made the decision to
accelerate the replacement of 30 DC-9-30 aircraft, six DC-10-10
aircraft, 31 727-200 aircraft, 13 737-100 aircraft and 17 737-200
aircraft between August 1997 and December 1999. In connection with
this decision, the Company placed two new aircraft orders with
Boeing. As a result of its decision to accelerate the replacement
of these aircraft, the Company recorded a nonrecurring charge of
$128 million. The nonrecurring charge relates primarily to (i) the
writedown of Stage 2 aircraft inventory, which is not expected to
be consumed through operations, to its estimated fair value; and
(ii) a provision for costs associated with the return of leased
aircraft at the end of their respective lease terms.
Other operating expense decreased 2.9%, $29 million, in the nine
months ended September 30, 1996 as compared to the same period in
the prior year, primarily as a result of the System One
transactions (which were effective April 27, 1995) and a decrease
in advertising expense partially offset by increases in passenger
services and fuel tax.
Interest expense decreased 20.4%, $33 million, during the nine
months ended September 30, 1996 as compared to the same period in
1995, primarily due to principal reductions of long-term debt and
capital lease obligations and 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.
Interest income increased 36.4%, $8 million, in the first nine
months of 1996 compared to the same period in the prior year,
principally due to an increase in the average interest rate earned
on investments coupled with an increase in the average invested
balance of cash and cash equivalents.
The Company's other nonoperating income (expense) in the nine
months ended September 30, 1996 includes a $12.5 million gain
related to the sale of approximately 1.4 million shares of America
West common stock and a $5 million gain related to the sale of the
America West warrants. Other nonoperating income (expense) in the
first nine months of 1995 consisted of a pre-tax gain of $108
million from the System One transactions and a $5 million pre-tax
charge which represented a waiver fee to a major creditor of the
Company.
The income tax provision for the nine months ended September 30,
1996 of $57 million consists of federal, state and foreign income
taxes. During the second quarter of 1996, the Company fully
utilized previously unbenefitted post reorganization NOLs, and
began accruing income tax expense. A provision for federal income
taxes was recorded for the nine months ended September 30, 1995
related to the System One transactions. No additional provision
was recorded due to the previously incurred NOLs for which a tax
benefit had not previously been recorded.
In July 1996, an extraordinary loss of $6 million was recorded, net
of $4 million income tax benefit, related to the early extinguish-
ment of debt.
An analysis of statistical information for Continental's jet
operations for the periods indicated is as follows:
Three Months Ended Net
September 30, Increase/
1996 1995 (Decrease)
Revenue passenger miles
(millions) (a). . . . . . . . . .11,302 10,757 5.1 %
Available seat miles
(millions) (b). . . . . . . . . .16,117 15,312 5.3 %
Block hours (thousands) (c). . . . 293 275 6.5 %
Passenger load factor (d). . . . . 70.1% 70.3% (0.2) pts.
Breakeven passenger load
factor (e). . . . . . . . . . . . 61.0% 62.7% (1.7) pts.
Passenger revenue per available
seat mile (cents) (f) . . . . . . 8.95 8.61 3.9 %
Total revenue per available
seat mile (cents) (g) . . . . . . 9.81 9.43 4.0 %
Operating cost per available
seat mile (cents) (h),(l) . . . . 8.60 8.44 1.9 %
Operating cost per block
hour (l) . . . . . . . . . . . .$4,731 $4,690 0.9 %
Average yield per revenue
passenger mile (cents) (i). . . . 12.77 12.26 4.2 %
Average fare per revenue
passenger . . . . . . . . . . . .$144.70 $136.04 6.4 %
Revenue passengers (thousands) . . 9,972 9,695 2.9 %
Average length of aircraft
flight (miles). . . . . . . . . . 914 858 6.5 %
Average daily utilization of
each aircraft (hours) (j) . . . . 10:10 9:45 4.3 %
Actual aircraft in fleet at
end of period (k) . . . . . . . . 314 311 1.0 %
Nine Months Ended Net
September 30, Increase/
1996 1995 (Decrease)
Revenue passenger miles
(millions) (a). . . . . . . . . .31,581 30,577 3.3 %
Available seat miles
(millions) (b). . . . . . . . . .45,820 46,496 (1.5)%
Block hours (thousands) (c). . . . 842 826 1.9 %
Passenger load factor (d). . . . . 68.9% 65.8% 3.1 pts.
Breakeven passenger load
factor (e). . . . . . . . . . . . 60.5% 61.1% (0.6)pts.
Passenger revenue per available
seat mile (cents) (f) . . . . . . 9.07 8.12 11.7 %
Total revenue per available
seat mile (cents) (g) . . . . . . 9.94 8.91 11.6 %
Operating cost per available
seat mile (cents) (h),(l) . . . . 8.77 8.27 6.0 %
Operating cost per block
hour (l). . . . . . . . . . . . .$4,772 $4,653 2.6 %
Average yield per revenue
passenger mile (cents) (i). . . . 13.16 12.34 6.6 %
Average fare per revenue
passenger . . . . . . . . . . . .$143.97 $131.98 9.1 %
Revenue passengers (thousands) . .28,858 28,597 0.9 %
Average length of aircraft
flight (miles). . . . . . . . . . 893 831 7.5 %
Average daily utilization of
each aircraft (hours) (j) . . . . 9:52 9:35 3.0 %
Actual aircraft in fleet at
end of period (k) . . . . . . . . 314 311 1.0 %
(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) The number of hours an aircraft is operated in revenue service
from gate-to-gate.
(d) Revenue passenger miles divided by available seat miles.
(e) 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.
(f) Passenger revenue divided by available seat miles.
(g) Total revenue divided by available seat miles.
(h) Operating expenses divided by available seat miles.
(i) The average revenue received for each mile a revenue passenger
is carried.
(j) The average block hours flown per day in revenue service per
aircraft.
(k) 1996 excludes four all cargo 727 aircraft at CMI.
(l) 1996 excludes nonrecurring charges totaling $128 million.
LIQUIDITY AND CAPITAL COMMITMENTS
During the first nine months of 1996, the Company completed a
number of transactions intended to strengthen its long-term
financial position and enhance earnings. During January and
February, Continental repurchased or redeemed without prepayment
penalty the remaining amount of its Series A convertible secured
debentures for $125 million (including payment-in-kind interest of
$7 million). In February, Continental sold approximately 1.4
million of the 1.8 million shares it owned in America West,
realizing net proceeds of approximately $25 million and recognizing
a gain of approximately $12.5 million. In addition, in May,
Continental sold all of its 802,860 America West warrants held,
realizing net proceeds of approximately $7 million and recognizing
a gain of $5 million. On March 26, Continental issued $230 million
of 6-3/4% convertible subordinated notes. The net proceeds from
this offering and from the America West stock sale, as well as cash
on hand, were used for the repayment of certain outstanding GE
indebtedness totaling $257 million (of which $47 million was
required as a result of the convertible notes financing and the
America West stock sale and $210 million was an optional
prepayment). In the first and second quarters, the Company
financed one owned aircraft and exercised its right under 22
existing leveraged aircraft leases to cause the owner/lessor's debt
underlying these leases to be refinanced. The lower borrowing
costs obtained in the refinancing allowed Continental's operating
lease expense for the affected aircraft to be reduced by more than
$17 million annually. In July, CMI consummated a $320 million
secured term loan financing with a group of banks and other
financial institutions. Continental and CMI used the net proceeds,
together with available cash, to prepay approximately $324 million
in principal amount of GE indebtedness. The bank financing is
expected to reduce interest expense by $6 million in the first
year, based on current rates. The bank financing does not contain
any restrictive covenants at the Continental parent level, and none
of the assets of the parent company (other than its stock in AMI)
is pledged in connection with the financing. Accordingly, this
transaction freed up over $1 billion of collateral at Continental
Airlines which was previously pledged under the terms of the GE
debt agreements. See Note 6.
As a result of NOLs, the Company will not pay United States federal
income taxes (other than alternative minimum tax) until it has
recorded approximately an additional $1.3 billion of taxable income
following December 31, 1995. Section 382 imposes limitations on a
corporation's ability to utilize NOLs if it experiences an
"ownership change". In general terms, an ownership change may
result from transactions increasing the ownership of certain
stockholders in the stock of a corporation by more than 50
percentage points over a three-year period. The sale of the
Company's common stock in April 1996 pursuant to an underwritten
public offering arranged by the Company (the "Secondary Offering")
gave rise to an increase in percentage ownership by certain
stockholders for this purpose. The Company believes that such
percentage increase did not give rise to an ownership change under
Section 382 as a result of the Secondary Offering. However, no
assurance can be given that future transactions, whether within or
outside the control of the Company, will not cause a change in
ownership, thereby substantially limiting the potential utilization
of the NOLs in a given future year. In the event that an ownership
change should occur, utilization of Continental's NOLs would be
subject to an annual limitation under Section 382 determined by
multiplying the value of the Company's stock (including both common
and preferred stock) at the time of the ownership change by the
applicable long-term tax exempt rate (which was 5.63% for September
1996). Unused annual limitation may be carried over to later
years, and the amount of the limitation may under certain
circumstances be increased by the built-in gains in assets held by
the Company at the time of the change that are recognized in the
five-year period after the change. Under current conditions, if an
ownership change were to occur, Continental's NOL utilization would
be limited to approximately $100 million per year.
Continental had firm commitments with Boeing to take delivery of 43
new jet aircraft during the years 1997 through 2002. During the
third quarter of 1996, Continental amended the terms of its
commitments with Boeing to take delivery of a total of 61 jet
aircraft during the years 1997 through 2003 with options for an
additional 23 aircraft. These amendments changed the aircraft mix
and timing of delivery of aircraft, in order to more closely match
Continental's anticipated future aircraft needs. In addition, in
October 1996, Continental placed an order for 60 firm 737-500 and
737-600 aircraft that will replace older, less efficient Stage 2
aircraft between August 1997 and December 1999. The estimated
aggregate cost of the Company's firm commitment Boeing aircraft is
in excess of $4 billion. The Company has commitments of
approximately $1.4 billion of backstop financing for its Boeing
aircraft orders. Continental currently plans to finance the
indebtedness on its new aircraft using enhanced equipment trust
certificates or similar financing, subject to availability and
market conditions. However, further financing will be needed to
satisfy the Company's capital commitments for new Boeing aircraft.
There can be no assurance that sufficient financing will be
available for all aircraft and other capital expenditures not
covered by firm financing commitments. The Company has also
entered into agreements with several outside parties to lease four
DC-10-30 aircraft and to purchase three DC-10-30 aircraft and two
MD-82 aircraft. These nine aircraft are expected to be delivered
during the period from October 1996 through mid-year 1997, and the
Company expects to finance the aircraft to be purchased from
available cash or from third party sources.
In addition, in March 1996, Express entered into an agreement to
acquire eight new ATR aircraft. As of September 1996, five of
these aircraft had been delivered. The aircraft are being
accounted for as operating leases. In conjunction with the
acquisition, the Company is returning eight older ATR aircraft
accounted for as capital leases. As of September 1996, four of
these aircraft had been returned. Also, in September 1996, Express
announced an order for 25 firm EMB-145 50-seat regional jets with
options for an additional 175 aircraft. Express plans to account
for these aircraft as operating leases. Neither Express nor
Continental will have any obligation to take aircraft which are not
financed by a third party and leased to Express. Continental will
guarantee Express' obligations under the operating leases. Express
will take delivery of the 25 firm aircraft during the period from
December 1996 through the third quarter of 1998.
Continental expects its cash outlays for 1996 capital expenditures,
exclusive of aircraft acquisitions, to aggregate $120 million,
primarily relating to mainframe, software application and
automation infrastructure projects, aircraft modifications and
mandatory maintenance projects, passenger terminal facility
improvements and office, maintenance, telecommunications and ground
equipment. Continental's capital expenditures during the nine
months ended September 30, 1996 aggregated $93 million, exclusive
of aircraft acquisitions.
The Company expects to fund its future capital commitments through
internally generated funds, together with general Company
financings and aircraft financing transactions. However, there can
be no assurance that sufficient financing will be available for all
aircraft and other capital expenditures not covered by firm
financing commitments.
In July 1996, the Company announced its plan to expand its gates
and related facilities in Terminal B, as well as planned
improvements at Terminal C, at Continental's Houston
Intercontinental Airport hub. The expansion is expected to cost
approximately $115 million, which the Company expects will be
funded principally by the issuance of tax-exempt debt by the
applicable municipal authority. In connection therewith, the
Company expects to enter into long-term leases (or amendments to
existing leases) with the applicable municipal authority containing
rental payments sufficient to service the related tax-exempt debt.
As of September 30, 1996, the Company had $865 million in cash and
cash equivalents, compared to $747 million as of December 31, 1995.
Net cash provided by operating activities increased $330 million
during the nine months ended September 30, 1996 compared to the
same period in the prior year principally due to earnings
improvement. Net cash used by investing activities for the nine
months ended September 30, 1996 compared to the same period in the
prior year increased $220 million, primarily as a result of higher
capital expenditures in 1996, lower purchase deposits refunded in
connection with aircraft delivered in 1996 and proceeds received in
1995 in connection with the System One transactions. This increase
was offset in part by proceeds received from the sale in 1996 of
approximately 1.4 million shares of Continental's America West
stock and all of Continental's America West warrants. Net cash
used by financing activities increased $199 million primarily due
to the repayment of long-term debt, using in part the proceeds
received from the issuance of the 6-3/4% convertible subordinated
notes, dividends paid on preferred securities of trust and a
dividend paid to UMDA in connection with the $320 million secured
term loan financing.
Continental does not have general lines of credit and has
significant encumbered assets.
Approximately $70 million and $144 million of cash and cash
equivalents at September 30, 1996 and December 31, 1995,
respectively, were held in restricted arrangements relating
primarily to workers' compensation claims and in accordance with
the terms of certain other agreements. The $320 million financing
consummated by CMI in July 1996 contains significant financial
covenants relating to CMI, including maintenance of a minimum fixed
charge coverage ratio, a minimum consolidated net worth and minimum
liquidity, and covenants restricting CMI's leverage, its incurrence
of certain indebtedness and its pledge of assets. The financial
covenants also limit the ability of CMI to pay dividends to
Continental.
CMI entered into an interest rate swap agreement and an interest
rate cap agreement to reduce the impact of potential increases in
interest rates on its bank financing that was completed in July
1996. The interest rate swap agreement effectively converts the
floating rate on the bank financing to a fixed rate of 5.875%. The
notional value on the interest rate swap agreement is $320 million
and is effective from August 30, 1996 through January 30, 1997.
The interest rate cap agreement has a notional value of $153
million and is effective from January 31, 1997 through July 31,
2001.
The Company has entered into petroleum option contracts to provide
some short-term protection against a sharp increase in jet fuel
prices, and CMI has entered into average rate option contracts to
hedge a portion of its Japanese yen-denominated ticket sales
against a significant depreciation in the value of the yen versus
the United States dollar. The petroleum option contracts generally
cover the Company's forecasted jet fuel needs for approximately
three to six months, and the average rate option contracts cover a
portion of CMI's yen-denominated ticket sales for the next six to
nine months. At September 30, 1996, the Company had petroleum
option contracts outstanding with an aggregate notional value of
$226 million and CMI had average rate option contracts outstanding
with a contract value of $114 million. At September 30, 1996, the
carrying value of the option contracts was immaterial. The Company
and CMI are exposed to credit loss in the event of nonperformance
by the counterparties on the option contracts; however, management
does not anticipate nonperformance by these counterparties. The
amount of such exposure is generally the unrealized gains, if any,
on such option contracts.
In August 1996, the IAM representing the Company's Continental
Airlines unit flight attendants ratified a three and one-half year
collective bargaining agreement which will remain in effect for 42
months beginning June 24, 1996. The agreement provides for base
wage increases in each year of the contract, a one-time adjustment
to certain base wage scales as an equitable adjustment, an increase
in per diem payments and other matters, including productivity
improvements. In addition, effective July 1, 1996, Continental
implemented pay increases for substantially all of its non-
unionized employees as part of a three-year plan to increase base
wages to be more comparable to industry wages. The Company
anticipates that the pay increases for Continental's flight
attendants and its non-unionized employees will result in a
cumulative increase in wages, salaries and related costs (assuming
no change in the Company's operations) of $137 million through 1999
(approximately $15 million through the remainder of 1996, $67
million through 1997, $107 million through 1998 and $137 million
through 1999). In addition, under the Company's existing
collective bargaining agreement with the union representing its jet
pilots, those pilots received a 13.5% wage increase on July 1, 1996
and will receive a 5% wage increase on June 30, 1997. The Company
anticipates that it will be able to offset a significant portion of
these wage and other cost increases with increased labor
productivity, reduced interest and lease expenses, reduced
distribution costs and other cost savings.
Continental's decision to order 60 new Boeing 737-500 and 737-600
aircraft to replace older, less efficient aircraft is expected to
increase ownership costs while generating cost savings in the areas
of maintenance, fuel and pilot training. The Company estimates net
pre-tax savings from the order to approximate $28 million, $31
million, $66 million, $115 million and $116 million in the years
1997 through 2001, respectively. See the assumptions filed
herewith as Exhibit 99.2.
Management also believes that the Company's costs are likely to be
affected for the remainder of 1996 by (i) higher aircraft rental
expense as new aircraft are delivered, (ii) changes in the costs of
materials and services (in particular, the cost of fuel, which can
fluctuate significantly in response to global market conditions),
(iii) changes in governmental regulations and taxes affecting air
transportation and the costs charged for airport access, including
new security requirements, (iv) changes in the Company's fleet and
related capacity and (v) the Company's continuing efforts to reduce
costs throughout its operations, including reduced maintenance
costs for new aircraft, reduced distribution expense from using E-
Ticket and the Internet for bookings and reduced interest expense.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On December 3, 1990, the Company owned 77 aircraft and 81 spare
engines (in four collateral pools) securing debt evidenced by
equipment trust certificates. The trustees for the four
collateral pools moved in the United States Bankruptcy Court for
the District of Delaware (the "Bankruptcy Court") for "adequate
protection" payments under Sections 361 and 363 of the federal
bankruptcy code for the Company's retention and use of the
aircraft and engines after December 3, 1990, including
postpetition claims for the alleged decline in market value of
the aircraft and engines after December 3, 1990 and claims for
deterioration in the condition of the aircraft and engines in
the same period. The Bankruptcy Court rejected the adequate
protection claims that alleged market value decline. Prior to
April 16, 1993, the Company settled all of the adequate
protection claims of the trustees, except for a claim of
approximately $117 million for alleged market value decline of
29 aircraft and 81 spare engines in the fourth collateral pool.
On April 16, 1993, the Bankruptcy Court rejected the market
value decline claims of the trustees for the fourth collateral
pool in their entirety and incorporated those findings into its
order confirming the Plan of Reorganization. The trustees for
the fourth collateral pool appealed from these orders, but
failed to obtain a stay pending appeal. The Company opposed
these appeals on the merits and sought dismissal of the appeals
on the grounds they were made moot by the substantial
consummation of the Plan of Reorganization. The United States
District Court for the District of Delaware (the "District
Court") dismissed the appeals as moot, and the trustees appealed
to the Third Circuit Court of Appeals (the "Third Circuit")
seeking review of the District Court's mootness determination
and the Bankruptcy Court's finding on the merits. The Third
Circuit affirmed the District Court's dismissal in February
1996, but subsequently granted a rehearing en banc on May 14,
1996. On July 31, 1996, the Third Circuit, acting en banc, also
affirmed the District Court's dismissal. The trustees may apply
for a writ of certiorari to the U.S. Supreme Court. The Company
does not believe that the foregoing matter will have a material
adverse effect on the Company.
In September 1996, the Company signed a settlement agreement
providing for the settlement of all claims against it in
consolidated antitrust litigation in the U.S. District Court for
the District of Minnesota. Continental, along with various
other airlines, has been a defendant in that litigation since
February 1995. Plaintiffs in that litigation claim that
Continental and the other airline defendants conspired to fix
and maintain the commissions paid to U.S. travel agents for
domestic travel. Plaintiffs claim substantial damages, which
would be trebled under applicable antitrust law. While denying
all claims, Continental determined to settle the litigation to
avoid the risks and expenses of further litigation. The
settlement, which is subject to Court approval, includes the
payment by Continental of approximately $5 million and provides
for the complete release of all claims and dismissal of the case
against the Company.
ITEM 2. CHANGES IN SECURITIES.
On June 26, 1996, the Board of Directors of the Company declared
a two-for-one stock split for its Class A and Class B common
stock. See Item 1. "Financial Statements. Note 1 - Stock
Split" for information with respect to the stock split.
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 filed herewith:
3.1 Amended By-Laws of the Company.
10.1* Amendment to employment agreement, dated as of
September 30, 1996, between the Company and
Gordon M. Bethune.
10.2* Amendment to employment agreement, dated as of
September 30, 1996, between the Company and
Gregory D. Brenneman.
10.3* Form of amendment to employment agreement, dated
as of September 30, 1996, for each of Lawrence W.
Kellner, C. D. McLean and Barry P. Simon.
10.4* Third Amendment to Continental Airlines, Inc.
1994 Incentive Equity Plan.
11.1 Statement Regarding Computation of Per Share
Earnings.
27.1 Financial Data Schedule.
99.1 Risk Factors.
99.2 Assumptions relating to pre-tax savings from new
Boeing order.
(b) Reports on Form 8-K:
(i) Report dated July 22, 1996, reporting an Item 5.
"Other Event". No financial statements were filed
with the report which announced the prepayment of
approximately $324 million in principal amount of
indebtedness to affiliates of General Electric
Company.
(ii) Report dated September 16, 1996 reporting an Item
5. "Other Event". No financial statements were
filed with the report which announced that Lloyd M.
Bentsen had been elected to the Company's Board of
Directors.
(iii) Report dated September 30, 1996 reporting an Item
5. "Other Event". No financial statements were
filed with the report which announced that Gordon
M. Bethune had been elected as Chairman of the
Board and Chief Executive Officer of the Company,
that Gregory D. Brenneman had been elected as
President and Chief Operating Officer of the
Company, and that David Bonderman had resigned as
Chairman of the Board of the Company.
__________
*These exhibits relate to management contracts or compensatory
plans or arrangements.
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: October 21, 1996 by: /s/ Lawrence W. Kellner
Lawrence W. Kellner
Senior Vice President and
Chief Financial Officer
(On behalf of Registrant)
Date: October 21, 1996 /s/ Michael P. Bonds
Michael P. Bonds
Vice President and Controller
(Chief Accounting Officer)