AS FILED
WITH THE SEC
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 MARCH 31, 1997
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 April 11, 1997, 8,589,530 shares of Class A common stock and
48,992,814 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 March 31,
1997 1996
(Unaudited)
Operating Revenue:
Passenger . . . . . . . . . . . . . . . $1,564 $1,375
Cargo, mail and other . . . . . . . . . 134 114
1,698 1,489
Operating Expenses:
Wages, salaries and related costs . . . 414 364
Aircraft fuel . . . . . . . . . . . . . 229 177
Aircraft rentals. . . . . . . . . . . . 131 124
Commissions . . . . . . . . . . . . . . 138 126
Maintenance, materials and repairs. . . 125 112
Other rentals and landing fees. . . . . 97 84
Depreciation and amortization . . . . . 60 65
Other . . . . . . . . . . . . . . . . . 358 317
1,552 1,369
Operating Income . . . . . . . . . . . . 146 120
Nonoperating Income (Expense):
Interest expense. . . . . . . . . . . . (42) (47)
Interest capitalized. . . . . . . . . . 6 1
Interest income . . . . . . . . . . . . 13 9
Other, net. . . . . . . . . . . . . . . 1 12
(22) (25)
Income before Income Taxes and
Minority Interest . . . . . . . . . . . 124 95
Income Tax Provision . . . . . . . . . . (46) (2)
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions of dollars, except per share data)
Three Months
Ended March 31,
1997 1996
(Unaudited)
Income before Minority Interest. . . . . $ 78 $ 93
Minority Interest. . . . . . . . . . . . - (1)
Distributions on Preferred
Securities of Trust, net of
applicable income taxes of $2 and $2,
respectively. . . . . . . . . . . . . . (4) (4)
Net Income . . . . . . . . . . . . . . . 74 88
Preferred Dividend Requirements. . . . . (1) (1)
Income Applicable to Common Shares . . . $ 73 $ 87
Earnings per Common and Common
Equivalent Share. . . . . . . . . . . . $ 1.13 $ 1.35
Earnings per Common Share
Assuming Full Dilution. . . . . . . . . $ 0.95 $ 1.18
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)
March 31, December 31,
ASSETS 1997 1996
(Unaudited)
Current Assets:
Cash and cash equivalents, including
restricted cash and cash equivalents
of $79 and $76, respectively . . . . . . $ 927 $1,061
Accounts receivable, net. . . . . . . . . 407 377
Spare parts and supplies, net . . . . . . 118 111
Prepayments and other . . . . . . . . . . 122 85
Total current assets . . . . . . . . . . 1,574 1,634
Property and Equipment:
Owned property and equipment:
Flight equipment . . . . . . . . . . . . 1,271 1,199
Other. . . . . . . . . . . . . . . . . . 363 338
1,634 1,537
Less: Accumulated depreciation. . . . . 389 370
1,245 1,167
Purchase deposits for flight equipment 232 154
Capital leases:
Flight equipment. . . . . . . . . . . . . 400 396
Other . . . . . . . . . . . . . . . . . . 35 31
435 427
Less: Accumulated amortization . . . . . 158 152
277 275
Total property and equipment . . . . . . 1,754 1,596
Other Assets:
Routes, gates and slots, net. . . . . . . 1,469 1,473
Reorganization value in excess of
amounts allocable to identifiable
assets, net. . . . . . . . . . . . . . . 233 237
Investments . . . . . . . . . . . . . . . 132 134
Other assets, net . . . . . . . . . . . . 139 132
Total other assets . . . . . . . . . . . 1,973 1,976
Total Assets. . . . . . . . . . . . . . $5,301 $5,206
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(In millions of dollars, except for share data)
March 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
(Unaudited)
Current Liabilities:
Current maturities of long-term debt. . . $ 169 $ 201
Current maturities of capital leases. . . 68 60
Accounts payable. . . . . . . . . . . . . 608 705
Air traffic liability . . . . . . . . . . 788 661
Accrued payroll and pensions. . . . . . . 175 149
Accrued other liabilities . . . . . . . . 352 328
Total current liabilities. . . . . . . . 2,160 2,104
Long-Term Debt . . . . . . . . . . . . . . 1,318 1,368
Capital Leases . . . . . . . . . . . . . . 239 256
Deferred Credits and Other Long-Term
Liabilities:
Deferred income taxes . . . . . . . . . . 119 75
Accruals for aircraft retirements and
excess facilities. . . . . . . . . . . . 177 188
Other . . . . . . . . . . . . . . . . . . 324 331
Total deferred credits and other
long-term liabilities . . . . . . . . . 620 594
Commitments and Contingencies
Minority Interest. . . . . . . . . . . . . 16 15
Continental-Obligated Mandatorily
Redeemable Preferred Securities of
Subsidiary Trust Holding Solely
Convertible Subordinated
Debentures (A). . . . . . . . . . . . . . 242 242
Redeemable Preferred Stock . . . . . . . . 47 46
(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.
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(In millions of dollars, except for share data)
March 31, December 31,
1997 1996
(Unaudited)
Common Stockholders' Equity:
Class A common stock - $.01 par,
50,000,000 shares authorized;
8,593,030 and 9,280,000 shares issued
and outstanding, respectively. . . . . . $ - $ -
Class B common stock - $.01 par,
200,000,000 shares authorized;
48,983,580 and 47,943,343 shares
issued and outstanding, respectively . . - -
Additional paid-in capital . . . . . . . 697 693
Accumulated deficit . . . . . . . . . . . (35) (109)
Other . . . . . . . . . . . . . . . . . . (3) (3)
Total common stockholders' equity. . . . 659 581
Total Liabilities and Stockholders'
Equity . . . . . . . . . . . . . . . . $5,301 $5,206
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)
Three Months
Ended March 31,
1997 1996
(Unaudited)
Net Cash Provided by Operating
Activities. . . . . . . . . . . . . . . $154 $145
Cash Flows from Investing Activities:
Capital expenditures. . . . . . . . . . (171) (20)
Purchase deposits refunded in
connection with aircraft delivered . . 11 6
Proceeds from sale of America West
stock. . . . . . . . . . . . . . . . . - 25
Proceeds from sale/leaseback
transactions . . . . . . . . . . . . . - 12
Other . . . . . . . . . . . . . . . . . (8) 2
Net cash (used) provided by
investing activities. . . . . . . . . (168) 25
Cash Flows from Financing Activities:
Payments on long-term debt and
capital lease obligations. . . . . . . (128) (458)
Proceeds from issuance of long-term
debt, net. . . . . . . . . . . . . . . 6 223
Proceeds from issuance of common
stock. . . . . . . . . . . . . . . . . 5 1
Dividends paid on preferred securities
of trust . . . . . . . . . . . . . . . (6) (6)
Net cash used by financing activities. (123) (240)
Net Decrease in Cash and Cash
Equivalents . . . . . . . . . . . . . . (137) (70)
Cash and Cash Equivalents - Beginning
of Period (A) . . . . . . . . . . . . . 985 603
Cash and Cash Equivalents - End of
Period (A). . . . . . . . . . . . . . . $848 $533
(A) Excludes restricted cash of $76 million and $144 million at
January 1, 1997 and 1996, respectively, and $79 million and
$124 million at March 31, 1997 and 1996, respectively.
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions of dollars)
Three Months
Ended March 31,
1997 1996
(Unaudited)
Supplemental Cash Flow Information:
Interest paid . . . . . . . . . . . . . $ 26 $ 46
Income taxes paid . . . . . . . . . . . $ - $ -
Investing and Financing Activities
Not Affecting Cash:
Property and equipment acquired
through the issuance of debt . . . . . $ 28 $ 28
Capital lease obligations incurred. . . $ 9 $ 1
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, 1996.
NOTE 1 - EARNINGS PER SHARE
The earnings per common share ("EPS") computations are based upon
earnings applicable to common shares and the average number of
shares of common stock, common stock equivalents (stock options,
warrants and restricted stock) and potentially dilutive securities
(e.g., convertible securities) outstanding. The number of shares
used in the primary EPS computations for the three months ended
March 31, 1997 and 1996 was 64,356,176 and 64,069,152,
respectively. The number of shares used in the fully-diluted EPS
computations for the three months ended March 31, 1997 and 1996 was
82,787,287 and 78,627,072, respectively. Preferred stock dividend
requirements decreased net income for this computation by
approximately $1 million for each of the three-month periods ended
March 31, 1997 and 1996.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 - "Earnings per
Share" ("SFAS 128") which specifies the computation, presentation
and disclosure requirements for EPS. SFAS 128 replaces the
presentation of primary and fully diluted EPS pursuant to
Accounting Principles Board Opinion No. 15 - "Earnings per Share"
("APB 15") with the presentation of basic and diluted EPS. Basic
EPS excludes dilution and is computed by dividing net income
available to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into
common stock or resulted in the issuance of common stock that then
shared in the earnings of the entity. The Company is required to
adopt SFAS 128 with its December 31, 1997 financial statements and
restate all prior-period EPS data. The Company will continue to
account for EPS under APB 15 until that time. Under SFAS 128, the
Company's basic EPS for the three months ended March 31, 1997 and
1996 was $1.28 and $1.60 per share, respectively, and the Company's
diluted EPS for the three months ended March 31, 1997 and 1996 was
$0.96 and $1.19 per share, respectively.
NOTE 2 - INCOME TAXES
Income taxes for the three months ended March 31, 1997 were
provided at the estimated annual effective tax rate. Such rate
differs from the federal statutory rate of 35%, primarily due to
state income taxes and the effect of certain expenses that are not
deductible for income tax purposes. The income tax provision for
the three months ended March 31, 1996 consists of foreign income
taxes. No provision for federal income taxes was recorded for the
three months ended March 31, 1996 since the Company had previously
incurred net operating losses for which a tax benefit had not
previously been recorded.
At December 31, 1996, the Company had net operating loss
carryforwards ("NOLs") of $2.3 billion for federal income tax
purposes that will expire through 2009 and federal 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 net operating
losses and investment tax credits could be limited.
For financial reporting purposes, as of December 31, 1996, a
valuation allowance of $694 million 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. Realization of
a substantial portion of the Company's remaining NOLs will require
the completion by April 27, 1998 of transactions resulting in
recognition of built-in gains for federal income tax purposes. The
Company has consummated several such transactions and currently
intends to consummate one or more additional transactions. If the
Company were to determine in the future that such transactions
would not be completed and if future income were not sufficient to
recognize the benefit of previously completed transactions, an
adjustment to the net deferred tax liability of up to $85 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, Continental Airlines
Holdings, Inc., together with its operating subsidiaries, 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 3 - OTHER
On February 28, 1997, the Board of Directors adopted the
Continental Airlines, Inc. 1997 Stock Incentive Plan (the
"Incentive Plan"), subject to approval by the stockholders of the
Company at the annual stockholders' meeting to be held on May 16,
1997. Also, on February 28, 1997, the Company granted options to
purchase approximately 1.6 million shares of Class B common stock
(of which 390,000 options were granted under the Continental
Airlines, Inc. 1994 Incentive Equity Plan and the balance was
granted under the Incentive Plan). The Incentive Plan provides
that the Company may issue shares of restricted Class B common
stock or grant options to purchase shares of Class B common stock
to non-employee directors of the Company or employees of the
Company or its subsidiaries. Subject to adjustment as provided in
the Incentive Plan, the aggregate number of shares of Class B
common stock that may be issued under the Incentive Plan may not
exceed 2,000,000 shares, which may be originally issued or treasury
shares or a combination thereof. The maximum number of shares of
Class B common stock that may be (i) subject to options granted to
any one individual during any calendar year may not exceed 200,000
shares and (ii) granted as restricted stock may not exceed 100,000
shares (in each case subject to adjustment as provided in the
Incentive Plan).
In March 1997, Continental completed a transaction involving the
issuance of $707 million of pass-through certificates. The pass-
through certificates are not direct obligations of, or guaranteed
by, Continental and are therefore not included in the accompanying
consolidated financial statements. The cash proceeds from the
transaction were deposited with an escrow agent and will enable the
Company to finance (through either leveraged leases or secured debt
financings) the debt portion of the acquisition cost of up to 30
new aircraft from The Boeing Company ("Boeing") scheduled to be
delivered to Continental between March 1997 and February 1998. One
such aircraft was delivered in March 1997 and the financing for
such aircraft utilized approximately $37 million of the proceeds
from the transaction. As of April 25, 1997 approximately $670
million of the proceeds remain on deposit. If any funds remain as
deposits at the end of the delivery period (which may be extended
to June 1998), such funds will be distributed back to the
certificate holders. Such distribution will include a make-whole
premium payable by Continental. Management believes that the
likelihood that the Company would be required to pay a material
make-whole premium is remote.
In February 1997, the Company began construction of a new hangar
and improvements to a cargo facility at the Company's hub at Newark
International Airport which is expected to be completed in the
fourth quarter of 1997. The Company expects to finance these
projects, which will cost approximately $25 million, with tax-
exempt bonds. In addition, the Company is also planning a facility
expansion at Newark which would require, among other matters,
agreements to be reached with the applicable airport authority.
In March 1997, the Company announced plans to expand its facilities
at its Hopkins International Airport hub in Cleveland. The
expansion, which will include a new jet concourse for the new
regional jet service offered by Continental's wholly owned
subsidiary, Continental Express, Inc. ("Express"), as well as other
facility improvements, is expected to cost approximately $120
million, which the Company expects will be funded principally by
the issuance of a combination of tax-exempt special facilities
revenue bonds and general airport revenue bonds by the City of
Cleveland. In connection therewith, the Company expects to enter
into long-term leases with the City of Cleveland providing for the
Company to make rental payments sufficient to service the tax-
exempt bonds.
The Company has recently begun collective bargaining agreement
negotiations with its Continental Airlines and Express pilots whose
contracts become amendable in July 1997 and October 1997,
respectively. The Company believes that mutually acceptable
agreements can be reached with such employees, although the
ultimate outcome of the negotiations is unknown at this time.
In February 1996, the Company sold approximately 1.4 million of its
1.8 million shares of America West Airlines, Inc. ("America West")
common stock for net proceeds of approximately $25 million in an
underwritten public offering. A $13 million gain was realized on
the transaction and included in other nonoperating income for the
three months ended March 31, 1996.
NOTE 4 - SUBSEQUENT EVENTS
In April 1997, Continental consummated a $160 million floating rate
(e.g., LIBOR plus 1.125% or prime) secured revolving credit
facility (the "Facility"). The revolving loans made under the
Facility will be used for the purpose of making certain predelivery
payments to Boeing for new Boeing aircraft to be delivered through
December 1999.
In April 1997, Continental redeemed for cash all of the 460,247
outstanding shares of its Series A 12% Cumulative Preferred Stock
("Series A 12% Preferred") held by an affiliate of Air Canada, a
Canadian corporation ("Air Canada"), for $100 per share plus
accrued dividends thereon. The redemption price, including accrued
dividends, totaled $47.7 million.
In April 1997, the City of Houston (the "City") completed the
offering of $190 million aggregate principal amount of tax-exempt
special facilities revenue bonds (the "IAH Bonds") payable solely
from rentals paid by Continental under long-term lease agreements
with the City. The IAH Bonds are unconditionally guaranteed by the
Company. The proceeds from the IAH Bonds will be used to finance
the acquisition, construction and installation of certain terminal
and other airport facilities located at Continental's hub at George
Bush Intercontinental Airport in Houston, including a new automated
people mover system linking Terminals B and C and 20 aircraft gates
in Terminal B into which Continental intends to expand its
operations. The expansion project is expected to be completed by
the summer of 1999.
In April 1997, the Company announced plans to build a wide-body
aircraft maintenance hangar in Honolulu, Hawaii at an estimated
cost of $24 million. Construction of the hangar, anticipated to be
completed by the second quarter of 1998, is expected to be financed
by tax-exempt special facilities revenue bonds issued by the State
of Hawaii. In connection therewith, the Company expects to enter
into long-term leases under which rental payments will be
sufficient to service the related bonds.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The following discussion may contain forward-looking statements.
In connection therewith, please see the risk factors set forth in
the Company's Form 10-K for the year ended December 31, 1996 which
identify important factors that could cause actual results to
differ materially from those in the forward-looking statements.
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 months ended March 31, 1997 as compared to the
corresponding period ended March 31, 1996.
Comparison of Three Months Ended March 31, 1997 to Three Months
Ended March 31, 1996
The Company recorded consolidated net income of $74 million for the
three months ended March 31, 1997 as compared to consolidated net
income of $88 million for the three months ended March 31, 1996.
The Company's net income in the first quarter of 1996 included a
gain of $13 million on the sale of 1.4 million shares of America
West common stock. Management believes that the Company benefitted
in the first quarters of 1996 and 1997 from the expiration of the
aviation trust fund tax (the "ticket tax"). The ticket tax was
reinstated on March 7, 1997. Management believes that the ticket
tax has a negative impact on the Company, although neither the
amount of such negative impact directly resulting from the
reimposition of the ticket tax, nor the benefit realized by its
expiration, can be precisely determined.
Passenger revenue increased 13.7%, $189 million, during the quarter
ended March 31, 1997 as compared to the same period in 1996, which
was primarily due to an 11.7% increase in revenue passenger miles
driven by an 8.8% increase in capacity.
Cargo, mail and other revenue increased 17.5%, $20 million, in the
three months ended March 31, 1997 as compared to the same period in
the prior year, principally as a result of an increase in freight
and mail volumes and in revenue related to frequent flyer mileage
credits sold to participating partners in the Company's frequent
flyer program.
Wages, salaries and related costs increased 13.7%, $50 million,
during the quarter ended March 31, 1997 as compared to the same
period in 1996, due to an increase in accruals for employee profit
sharing and other incentive programs, including the payment of
bonuses for on-time arrival performance, and an increase in wages
and salaries due to an 8.8% increase in average full-time
equivalent employees in the first quarter of 1997 compared to the
first quarter of 1996. In addition, wage rates were impacted by a
longevity pay increase for substantially all employee groups,
effective July 1, 1996.
Aircraft fuel expense increased 29.4%, $52 million, in the three
months ended March 31, 1997 as compared to the same period in the
prior year. The average price per gallon increased 17.0% from
59.31 cents in the first quarter of 1996 to 69.38 cents in the
first quarter of 1997. In addition, there was a 10.3% increase in
the quantity of jet fuel used from 290 million gallons in the first
quarter of 1996 to 320 million gallons in the first quarter of
1997, principally reflecting increased capacity.
Commission expense increased 9.5%, $12 million, in the quarter
ended March 31, 1997 as compared to the same period in the prior
year, primarily due to increased passenger revenue.
Maintenance, materials and repairs increased 11.6%, $13 million,
during the quarter ended March 31, 1997 as compared to the same
period in 1996, due principally to the volume and timing of engine
overhauls and routine maintenance as part of the Company's ongoing
maintenance program.
Other rentals and landing fees increased 15.5%, $13 million, for
the three months ended March 31, 1997 compared to the same period
in 1996, principally due to higher landing fees resulting from
increased operations.
Other operating expense increased 12.9%, $41 million, in the three
months ended March 31, 1997 as compared to the same period in the
prior year, as a result of increases in passenger services,
advertising and publicity, reservations and sales expense and other
miscellaneous expense.
Interest expense decreased 10.6%, $5 million, during the three
months ended March 31, 1997 as compared to the same period in 1996,
primarily due to the Company's refinancing initiatives, including
principal reductions of long-term debt and capital lease
obligations.
The Company's other nonoperating income (expense) in the quarter
ended March 31, 1997 included foreign exchange gains primarily
related to the Japanese yen. Other nonoperating income (expense)
in the first quarter of 1996 consisted primarily of a $13 million
gain related to the sale of 1.4 million shares of America West
common stock.
The income tax provision for the three months ended March 31, 1997
of $46 million consisted of federal, state and foreign income
taxes. The income tax provision for the three months ended
March 31, 1996 consisted solely of foreign income taxes. No
provision for federal income taxes was recorded for the three
months ended March 31, 1996 due to previously unbenefitted NOLs.
An analysis of statistical information for Continental's jet
operations for the periods indicated is as follows:
Three Months Ended Net
March 31, Increase/
1997 1996 (Decrease)
Revenue passenger miles
(millions) (1). . . . . . . . . . 10,891 9,752 11.7 %
Available seat miles
(millions) (2). . . . . . . . . .15,832 14,551 8.8 %
Block hours (thousands) (3). . . . 292 270 8.1 %
Passenger load factor (4). . . . . 68.8% 67.0% 1.8 pts.
Breakeven passenger load
factor (5). . . . . . . . . . . . 62.2% 61.0% 1.2 pts.
Passenger revenue per available
seat mile (cents) (6). . . . . . 9.29 8.90 4.4 %
Total revenue per available
seat mile (cents) (7) . . . . . . 10.22 9.77 4.6 %
Operating cost per available
seat mile (cents) (8) . . . . . . 9.27 8.92 3.9 %
Operating cost per block
hour. . . . . . . . . . . . . . .$5,017 $4,806 4.4 %
Average yield per revenue
passenger mile (cents) (9) . . . 13.51 13.28 1.7 %
Average fare per revenue
passenger . . . . . . . . . . . .$151.04 $142.54 6.0 %
Revenue passengers (thousands) . . 9,739 9,087 7.2 %
Average length of aircraft
flight (miles) . . . . . . . . . 925 876 5.6 %
Average daily utilization of
each aircraft (hours) (10) . . . 10:15 9:39 6.2 %
Actual aircraft in fleet at
end of period (11). . . . . . . . 321 311 3.2 %
(1) The number of scheduled miles flown by revenue passengers.
(2) The number of seats available for passengers multiplied by
the number of scheduled miles those seats are flown.
(3) The number of hours an aircraft is operated in revenue
service from gate-to-gate.
(4) Revenue passenger miles divided by available seat miles.
(5) 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.
(6) Passenger revenue divided by available seat miles.
(7) Total revenue divided by available seat miles.
(8) Operating expenses divided by available seat miles.
(9) The average revenue received for each mile a revenue
passenger is carried.
(10) The average block hours flown per day in revenue service per
aircraft.
(11) Excludes all-cargo 727 aircraft (four in 1997 and three in
1996) at Continental Micronesia, Inc. ("CMI"), a 91%-owned
subsidiary of Continental and three A300 and one 747
Continental aircraft that were removed from service in 1995.
LIQUIDITY AND CAPITAL COMMITMENTS
In the first four months of 1997, the Company completed several
transactions intended to strengthen its long-term financial
position and enhance earnings.
In March 1997, Continental completed a transaction involving the
issuance of $707 million of pass-through certificates that will
enable the Company to finance (through either leveraged leases or
secured debt financings) the debt portion of the acquisition cost
of up to 30 new Boeing aircraft scheduled to be delivered to
Continental between March 1997 and February 1998. One such
aircraft was delivered in March 1997 and the financing for such
aircraft utilized approximately $37 million of the proceeds from
the transaction.
In April 1997, Continental consummated a $160 million secured
revolving credit facility to be used for the purpose of making
certain predelivery payments to Boeing for new Boeing aircraft to
be delivered through December 1999.
In April 1997, Continental redeemed for cash all of the 460,247
outstanding shares of its Series A 12% Preferred held by an
affiliate of Air Canada for $100 per share plus accrued dividends
thereon. The redemption price, including accrued dividends,
totaled $47.7 million.
As of March 31, 1997, Continental had firm commitments with Boeing
to take delivery of a total of 126 jet aircraft during the years
1997 through 2003 with options for an additional 90 aircraft
(exercisable subject to certain conditions). These new aircraft
will replace older, less efficient Stage 2 aircraft and allow for
growth of operations. The estimated aggregate cost of the
Company's firm commitments for the Boeing aircraft is approximately
$4.3 billion. The pass-through certificate transaction described
above will enable the Company to finance (through either leveraged
leases or secured debt financings) the debt portion of the
acquisition cost of up to 29 new Boeing aircraft. In connection
with the pass-through equipment financing, owner participants have
committed to approximately $160 million of equity financing
underlying 21 of these aircraft together with the one aircraft
delivered in March 1997. Continental has additional firm
commitments for approximately $1.1 billion of backstop financing
for its Boeing aircraft orders. However, further financing will be
needed to satisfy Continental's capital commitment for other
aircraft and aircraft-related expenditures such as spare parts,
simulators and related items. There can be no assurance that
sufficient financing will be available for all aircraft and other
capital expenditures not covered by firm financing commitments.
Deliveries of new Boeing aircraft are expected to increase aircraft
rental, depreciation and interest costs while generating cost
savings in the areas of maintenance, fuel and pilot training.
Continental has also entered into agreements to lease two DC-10-30
aircraft and will take delivery of such aircraft in May 1997.
In September 1996, Express placed an order for 25 firm EMB-145 50-
seat regional jets, with options for an additional 175 aircraft.
Neither Express nor Continental will have any obligation to take
aircraft that are not financed by a third party and leased to the
Company. However, if the Company fails to confirm the first
tranche of 25 options by August 1997, the rent associated with the
25 firm aircraft will increase by an aggregate of $33.6 million
over the 16-year life of the leases. Express has taken delivery of
six of the firm aircraft through April 25, 1997 and will take
delivery of the remaining 19 firm aircraft during the period from
May 1, 1997 through the second quarter of 1998. The Company
expects to account for all of these aircraft as operating leases.
Continental expects its cash outlays for 1997 capital expenditures,
exclusive of fleet plan requirements, to aggregate $125 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 three
months ended March 31, 1997, aggregated $33 million, exclusive of
fleet plan requirements.
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 current
financings or firm financing commitments.
As of March 31, 1997, the Company had $848 million in cash and cash
equivalents (excluding restricted cash of $79 million), compared to
$985 million (excluding restricted cash of $76 million) as of
December 31, 1996. Net cash provided by operating activities
increased $9 million during the three months ended March 31, 1997
compared to the same period in the prior year primarily due to an
improvement in operating income. Net cash used by investing
activities increased $193 million for the three months ending March
31, 1997 compared to the same period in the prior year, principally
due to an increase in fleet-related capital expenditures. Net cash
used by financing activities for the three months ended March 31,
1997 compared to the same period in the prior year decreased $117
million primarily due to a decrease in payments on long-term debt
and capital lease obligations.
Continental does not have general lines of credit and has
significant encumbered assets.
As a result of the recent weakness of the yen against the dollar
and increased fuel costs, CMI's operating earnings declined during
the past three quarters as compared to similar periods a year ago,
and are not expected to improve materially absent a stronger yen or
reduced fuel costs. 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. In
January 1997, CMI elected to prepay $25 million of principal amount
of its bank financing rather than use such cash for other purposes.
CMI may prepay additional amounts of its bank financing to remain
in compliance with certain covenants contained in such financing.
See Notes 3 and 4 in the Notes to the Financial Statements for a
discussion of the Company's plans to expand its airport facilities
and the related financing thereof.
The Company had, as of December 31, 1996, deferred tax assets
aggregating $1.3 billion, including $804 million of NOLs. The
Company recorded a valuation allowance of $694 million against such
assets as of December 31, 1996. Realization of a substantial
portion of the Company's remaining NOLs will require the completion
by April 27, 1998 of transactions resulting in recognition of
built-in gains for federal income tax purposes. The Company has
consummated several such transactions and currently intends to
consummate one or more additional transactions. If the Company
were to determine in the future that such transactions will not be
completed and if future income is not sufficient to recognize the
benefit of previously completed transactions, an adjustment to the
net deferred tax liability of up to $85 million would be charged to
income in the period such determination was made.
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 $1.1 billion of taxable income
following December 31, 1996. Section 382 of the Internal Revenue
Code ("Section 382") imposes limitations on a corporation's ability
to utilize NOLs if it experiences an "ownership change." In
general terms, an ownership change may result from transactions
increasing the ownership of certain stockholders in the stock of a
corporation by more than 50 percentage points over a three-year
period. In the event that an ownership change 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 at the time of the ownership change by the
applicable long-term tax-exempt rate (which is 5.5% for April
1997). Unused annual limitation may be carried over to later
years, and the amount of the limitation may under certain
circumstances be increased by the built-in gains in assets held by
the Company at the time of the change that are recognized in the
five-year period after the change. Under current conditions, if an
ownership change were to occur, Continental's annual NOL
utilization would be limited to approximately $111 million.
The Company has recently begun collective bargaining agreement
negotiations with its Continental Airlines and Express pilots whose
contracts become amendable in July 1997 and October 1997,
respectively. In addition, the Company's collective bargaining
agreements with its CMI flight attendants and CMI mechanics and
mechanic-related employees became amendable in September 1996 and
March 1997, respectively. Negotiations are in progress to amend
these two contracts. The Company believes that mutually acceptable
agreements can be reached with all such employees, although the
ultimate outcome of the negotiations is unknown at this time. The
CMI agent-classification employees' collective bargaining
agreement, which became amendable in March 1997, was ratified and
approved in April 1997. The agreement, which becomes amendable in
March 2001, provides for an 8.7% increase in wages over a four-year
period.
The Company anticipates that it will be able to offset a
significant portion of wage and other cost increases with increased
labor productivity, reduced interest and lease expenses, reduced
distribution costs and other cost savings.
Management believes that the Company's costs are likely to be
affected in the future by (i) higher aircraft rental expense as new
aircraft are delivered, (ii) higher wages, salaries and related
costs as the Company continues to compensate its employees
comparable to industry average, (iii) changes in the costs of
materials and services (in particular, the cost of fuel, which can
fluctuate significantly in response to global market conditions),
(iv) changes in governmental regulations and taxes affecting air
transportation and the costs charged for airport access, including
new security requirements, (v) changes in the Company's fleet and
related capacity and (vi) the Company's continuing efforts to
reduce costs throughout its operations, including reduced
maintenance costs for new aircraft, reduced distribution expense
from using Continental's electronic ticket product ("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 col-
lateral 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. In July
1996, the Third Circuit, acting en banc, also affirmed the
District Court's dismissal. The trustees petitioned for a writ
of certiorari to the U.S. Supreme Court which petition was
denied on January 3, 1997. On January 31, 1997, the trustees
petitioned the U.S. Supreme Court for a rehearing of the
trustees' previous petition, which petition was denied on
February 25, 1997. The U.S. Supreme Court's action terminated
this litigation in favor of Continental.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
10.1* Continental Airlines, Inc. 1997 Stock Incentive Plan
-- incorporated by reference to Exhibit 4.3 to
Continental's Form S-8 Registration Statement (No.
333-23165).
10.2* Amended and restated employment agreement between
the Company and Jeffery A. Smisek, as amended. (1)
10.3 Supplemental Agreement No. 2 to Purchase Agreement
No. 1951 between the Company and Boeing, dated March
5, 1997, relating to the purchase of Boeing 737
aircraft. (1)(2)
10.4 Letter Agreement No. 6-1162-GOC-044 to Purchase
Agreement No. 1783 between the Company and Boeing,
dated March 21, 1997, relating to the purchase of
Boeing 757-224 aircraft. (1)(2)
11.1 Statement Regarding Computation of Per Share Earnings
27.1 Financial Data Schedule.
_______________
*These exhibits relate to management contracts or
compensatory plans or arrangements.
(1) Filed herewith.
(2) The Company has applied to the Commission for
confidential treatment of a portion of this exhibit.
(b) Reports on Form 8-K:
(i) Report dated January 3, 1997 reporting an Item 5.
"Other Event". No financial statements were filed
with the report, which announced that the U.S.
Supreme Court denied a petition for a writ of
certiorari that had been filed in connection with
litigation stemming from the Company's 1993
bankruptcy reorganization.
(ii) Report dated March 21, 1997 reporting an Item 5.
"Other Event". No financial statements were filed
with the report, which announced the completion of a
private placement of $707.3 million of pass through
certificates.
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: April 28, 1997 by: /s/ Lawrence W. Kellner
Lawrence W. Kellner
Executive Vice President and
Chief Financial Officer
(On behalf of Registrant)
Date: April 28, 1997 /s/ Michael P. Bonds
Michael P. Bonds
Vice President and Controller
(Chief Accounting Officer)