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, 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 October 21, 1997, 8,406,064 shares of Class A common stock
and 50,289,587 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, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
(Unaudited) (Unaudited)
Operating Revenue:
Passenger . . . . . . . $1,750 $1,546 $4,960 $4,440
Cargo, mail and other . 140 125 414 359
1,890 1,671 5,374 4,799
Operating Expenses:
Wages, salaries and
related costs. . . . . 462 397 1,305 1,139
Aircraft fuel . . . . . 221 201 660 558
Commissions . . . . . . 152 135 437 398
Aircraft rentals. . . . 141 128 400 379
Maintenance, materials
and repairs. . . . . . 147 118 400 349
Other rentals and
landing fees . . . . . 104 89 299 258
Depreciation and
amortization . . . . . 64 63 186 195
Fleet disposition
charge . . . . . . . . - 128 - 128
Other . . . . . . . . . 392 335 1,103 969
1,683 1,594 4,790 4,373
Operating Income . . . . 207 77 584 426
Nonoperating Income
(Expense):
Interest expense. . . . (42) (40) (126) (129)
Interest capitalized. . 9 1 23 2
Interest income . . . . 14 11 41 30
Other, net. . . . . . . (2) (2) (4) 19
(21) (30) (66) (78)
Income before Income
Taxes, Minority
Interest and
Extraordinary Loss. . . 186 47 518 348
Income Tax Provision . . (69) (19) (192) (57)
(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,
1997 1996 1997 1996
(Unaudited) (Unaudited)
Income before Minority
Interest and
Extraordinary Loss. . . $ 117 $ 28 $ 326 $ 291
Minority Interest. . . . - (1) - (3)
Distributions on
Preferred Securities
of Trust, net of
applicable income
taxes of $2, $2,
$6 and $6,
respectively. . . . . . (3) (3) (10) (10)
Income before
Extraordinary Loss. . . 114 24 316 278
Extraordinary Loss,
net of applicable
income taxes of $2,
$4, $2 and $4,
respectively. . . . . . (4) (6) (4) (6)
Net Income . . . . . . . 110 18 312 272
Preferred Dividend
Requirements. . . . . . - (1) (2) (3)
Income Applicable to
Common Shares . . . . . $ 110 $ 17 $ 310 $ 269
(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,
1997 1996 1997 1996
(Unaudited) (Unaudited)
Earnings per Common and
Common Equivalent Share:
Income Before
Extraordinary Loss. . $1.83 $0.35 $4.95 $4.26
Extraordinary Loss,
net of tax. . . . . . (0.06) (0.10) (0.05) (0.10)
Net Income . . . . . . $1.77 $0.25 $4.90 $4.16
Earnings per Common
Share Assuming
Full Dilution:
Income Before
Extraordinary Loss. . $1.50 $0.34 $4.07 $3.58
Extraordinary Loss,
net of tax. . . . . . (0.05) (0.09) (0.05) (0.08)
Net Income . . . . . . $1.45 $0.25 $4.02 $3.50
Shares used for
Computation:
Primary. . . . . . . . 62.3 64.6 63.4 64.7
Fully diluted
excluding extra-
ordinary loss . . . . 80.5 82.5 81.6 81.7
Fully diluted
including extra-
ordinary loss . . . . 80.5 64.6 81.6 81.7
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
CONTINENTAL AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except for share data)
September 30, December 31,
ASSETS 1997 1996
(Unaudited)
Current Assets:
Cash and cash equivalents, including
restricted cash and cash equivalents
of $27 and $76, respectively . . . . . . $ 988 $1,061
Accounts receivable, net. . . . . . . . . 469 377
Spare parts and supplies, net . . . . . . 122 111
Prepayments and other . . . . . . . . . . 131 85
Total current assets . . . . . . . . . . 1,710 1,634
Property and Equipment:
Owned property and equipment:
Flight equipment . . . . . . . . . . . . 1,537 1,199
Other. . . . . . . . . . . . . . . . . . 443 338
1,980 1,537
Less: Accumulated depreciation. . . . . 438 370
1,542 1,167
Purchase deposits for flight equipment 393 154
Capital leases:
Flight equipment. . . . . . . . . . . . . 271 396
Other . . . . . . . . . . . . . . . . . . 35 31
306 427
Less: Accumulated amortization . . . . . 137 152
169 275
Total property and equipment . . . . . . 2,104 1,596
Other Assets:
Routes, gates and slots, net. . . . . . . 1,439 1,473
Reorganization value in excess of
amounts allocable to identifiable
assets, net. . . . . . . . . . . . . . . 226 237
Investments . . . . . . . . . . . . . . . 131 134
Other assets, net . . . . . . . . . . . . 194 132
Total other assets . . . . . . . . . . . 1,990 1,976
Total Assets. . . . . . . . . . . . . . $5,804 $5,206
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except for share data)
September 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
(Unaudited)
Current Liabilities:
Current maturities of long-term debt. . . $ 260 $ 201
Current maturities of capital leases. . . 38 60
Accounts payable. . . . . . . . . . . . . 761 705
Air traffic liability . . . . . . . . . . 835 661
Accrued payroll and pensions. . . . . . . 146 149
Accrued other liabilities . . . . . . . . 416 328
Total current liabilities. . . . . . . . 2,456 2,104
Long-Term Debt . . . . . . . . . . . . . . 1,445 1,368
Capital Leases . . . . . . . . . . . . . . 147 256
Deferred Credits and Other Long-Term
Liabilities:
Deferred income taxes . . . . . . . . . . 253 75
Accruals for aircraft retirements and
excess facilities. . . . . . . . . . . . 147 188
Other . . . . . . . . . . . . . . . . . . 299 331
Total deferred credits and other
long-term liabilities . . . . . . . . . 699 594
Commitments and Contingencies
Minority Interest. . . . . . . . . . . . . - 15
Continental-Obligated Mandatorily
Redeemable Preferred Securities of
Subsidiary Trust Holding Solely
Convertible Subordinated
Debentures (A). . . . . . . . . . . . . . 242 242
Redeemable Preferred Stock . . . . . . . . - 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, except for share data)
September 30, December 31,
1997 1996
(Unaudited)
Common Stockholders' Equity:
Class A common stock - $.01 par,
50,000,000 shares authorized;
8,419,064 and 9,280,000 shares issued
and outstanding, respectively. . . . . . $ - $ -
Class B common stock - $.01 par,
200,000,000 shares authorized;
50,192,171 and 47,943,343 shares
issued and outstanding, respectively . . - -
Additional paid-in capital . . . . . . . 613 693
Retained earnings (accumulated deficit) . 203 (109)
Other . . . . . . . . . . . . . . . . . . (1) (3)
Total common stockholders' equity. . . . 815 581
Total Liabilities and Stockholders'
Equity . . . . . . . . . . . . . . . . $5,804 $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)
Nine Months
Ended September 30,
1997 1996
(Unaudited)
Net Cash Provided by Operating
Activities. . . . . . . . . . . . . . . $740 $685
Cash Flows from Investing Activities:
Capital expenditures. . . . . . . . . . (275) (116)
Purchase deposits paid in connection
with future aircraft deliveries. . . . (242) (79)
Purchase deposits refunded in
connection with aircraft delivered . . 29 12
Proceeds from sale of America West
stock and warrants . . . . . . . . . . - 32
Other . . . . . . . . . . . . . . . . . 4 18
Net cash used by investing
activities. . . . . . . . . . . . . . (484) (133)
Cash Flows from Financing Activities:
Payments on long-term debt and
capital lease obligations. . . . . . . (627) (890)
Proceeds from issuance of long-term
debt, net. . . . . . . . . . . . . . . 505 553
Purchase of warrants to purchase
Class B common stock . . . . . . . . . (94) -
Purchase of 9% minority interest
in AMI . . . . . . . . . . . . . . . . (18) -
Redemption of preferred stock . . . . . (48) -
Proceeds from issuance of common
stock. . . . . . . . . . . . . . . . . 18 7
Dividends paid on preferred securities
of trust . . . . . . . . . . . . . . . (16) (17)
Dividends paid to minority interest
holder in connection with secured
term loan financing. . . . . . . . . . - (13)
Net cash used by financing activities. (280) (360)
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Nine Months
Ended September 30,
1997 1996
(Unaudited)
Net Increase (Decrease) in Cash and
Cash Equivalents. . . . . . . . . . . . $(24) $192
Cash and Cash Equivalents - Beginning
of Period (A) . . . . . . . . . . . . . 985 603
Cash and Cash Equivalents - End of
Period (A). . . . . . . . . . . . . . . $961 $795
Supplemental Cash Flow Information:
Interest paid . . . . . . . . . . . . . $104 $120
Income taxes paid . . . . . . . . . . . $ 7 $ 1
Investing and Financing Activities
Not Affecting Cash:
Property and equipment acquired
through the issuance of debt . . . . . $207 $ 54
Reduction of capital lease
obligations in connection with
refinanced aircraft. . . . . . . . . . $ 97 $ -
Financed purchase deposits for
flight equipment, net. . . . . . . . . $ 52 $ 17
Capital lease obligations incurred. . . $ 15 $ 27
Purchase deposits refunded and used
to reduce debt . . . . . . . . . . . . $ 31 $ -
(A) Excludes restricted cash of $76 million and $144 million at
January 1, 1997 and 1996, respectively, and $27 million and $70
million at September 30, 1997 and 1996, respectively.
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. For fully diluted
purposes, net income has been adjusted for the distributions on the
preferred securities of trust and interest expense (net of tax) on
the convertible debt. Preferred stock dividend requirements
decreased net income in the EPS computations by approximately $2
million for the nine months ended September 30, 1997, and $1
million and $3 million for the three and nine months ended
September 30, 1996, respectively. 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"). See Note 5.
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
obligations 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 and diluted EPS were:
Three Months Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
Basic EPS (1) $1.97 $0.42 $5.47 $5.06
Basic EPS (2) $1.90 $0.30 $5.40 $4.94
Diluted EPS (1) $1.48 $0.34 $4.06 $3.63
Diluted EPS (2) $1.44 $0.26 $4.02 $3.55
(1) Excluding extraordinary loss.
(2) Including extraordinary loss.
NOTE 2 - INCOME TAXES
Income taxes for the three and nine months ended September 30, 1997
were provided at the estimated annual effective tax rate. Such
rate differs from the federal statutory rate of 35%, primarily due
to state and foreign income taxes and the effect of certain
expenses that are not deductible for income tax purposes. Income
taxes for the three and nine months ended September 30, 1996 were
provided at the estimated effective tax rate, which differs from
the federal statutory rate of 35%, primarily due to net operating
loss carryforwards ("NOLs") for which a tax benefit had not
previously been recorded, state and foreign income taxes and the
effect of certain expenses that are not deductible for income tax
purposes.
At December 31, 1996, the Company had estimated 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 NOLs and investment tax credits could
be limited. Reflecting this possible limitation, the Company has
recorded a valuation allowance of $694 million at December 31,
1996.
The Company has consummated several built-in-gain transactions,
which resulted in the realization of tax benefits related to NOLs
attributable to the Company's predecessor. To the extent the
Company consummates additional built-in-gain transactions, such
benefits will reduce the valuation allowance and reorganization
value in excess of amounts allocable to identifiable assets. If
such reorganization value were exhausted, reductions in the
valuation allowance would decrease other intangibles.
NOTE 3 - FLEET DISPOSITION CHARGE
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. As a result of its
decision to accelerate the replacement of these aircraft, the
Company recorded a fleet disposition charge of $128 million. The
fleet disposition 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 and amortization
expense on these aircraft through the respective dates they are
removed from service.
NOTE 4 - OTHER
Aircraft Financing Transactions
In March 1997, Continental completed an offering 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 are being used 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 through
February 1998. In connection therewith, owner participants have
committed equity financing to be used in leveraged leases of all
such aircraft. As of September 30, 1997, 13 of such aircraft have
been delivered. If any funds remain as deposits with the escrow
agent for such pass-through certificates 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 will be
required to pay a material make whole premium is remote.
In April 1997, Continental entered into 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. The Facility contains certain financial covenants,
including maintenance of a minimum fixed charge ratio, a minimum
net worth and a minimum unrestricted cash balance. Continental is
also restricted in its ability to pay cash dividends and make
certain other payments.
In June 1997, the Company acquired 10 aircraft previously leased by
it. The debt financing for the acquisition of the six Boeing 737-
300 aircraft and the four McDonnell Douglas DC-9-82 aircraft was
funded by the private placement of $155 million of pass-through
certificates. The pass-through certificates were issued by
separate pass-through trusts that acquired equipment trust notes
issued on a recourse basis by Continental. Aircraft maintenance
expense in the second quarter of 1997 was reduced by approximately
$16 million due to the reversal of reserves that are no longer
required as a result of the transaction.
In September 1997, the Company, in cooperation with the airframe
and engine manufacturers, completed an offering of $89 million of
pass-through certificates to enable certain owner trustees to
finance the acquisition cost of nine Embraer ("EMB")-145ER regional
jets previously delivered to and leased by Continental. The pass-
through certificates are not direct obligations of, or guaranteed
by, Continental and therefore are not included in the accompanying
consolidated financial statements.
Facility and Other Financing Transactions
In July 1997, Continental entered into a $575 million credit
facility (the "Credit Facility"), including a $275 million term
loan. The proceeds of the term loan were loaned by Continental to
its wholly owned subsidiary Air Micronesia, Inc. ("AMI"), reloaned
by AMI to its wholly owned subsidiary Continental Micronesia, Inc.
("CMI"), and used by CMI to repay its existing secured term loan.
In connection with this prepayment, Continental recorded a $4
million after tax extraordinary charge to consolidated earnings in
the third quarter of 1997. The facility also includes a $225
million revolving credit facility and a $75 million term loan
commitment for general corporate purposes.
The Credit Facility is secured by substantially all of CMI's assets
(other than aircraft subject to other financing arrangements) but
does not contain any financial covenants relating to CMI other than
covenants restricting CMI's incurrence of certain indebtedness and
pledge or sale of assets. AMI's rights with respect to its loan to
CMI and Continental's rights with respect to its loan to AMI (as
well as Continental's stock in AMI and AMI's stock in CMI) are
pledged as collateral for loans to Continental under the Credit
Facility. In addition, the Credit Facility contains certain
financial covenants applicable to Continental and prohibits
Continental from granting a security interest on certain of its
international route authorities and domestic slots.
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 are being 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.
The Company also announced plans to expand its hub facilities at
Hopkins International Airport in Cleveland which is expected to be
completed in the first quarter of 1999. The expansion, which will
include a new jet concourse for the 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
under which rental payments will be sufficient to service the
related bonds.
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 the Company expects to occupy in the
fourth quarter of 1997. The Company expects to finance these
projects, which will cost approximately $21 million, through tax-
exempt bonds to be issued by the New Jersey Economic Development
Authority. In addition, the Company is planning a facility
expansion at Newark which would require, among other things,
agreements to be reached with the applicable airport authority.
The Company has 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.
Commitments
In June 1997, Continental signed a letter of intent with Boeing to
purchase 35 new widebody jet aircraft. The parties entered into a
definitive agreement in October 1997 relating to this order. The
order consists of five firm Boeing 777-200 aircraft and 30 firm
Boeing 767-400ER aircraft, with options for six additional 777
aircraft. This order is in addition to the five firm 777 aircraft
which the airline already had on order with Boeing, the deliveries
of which will be accelerated as part of this order. The new
widebody aircraft will replace six DC-10-10 and 31 DC-10-30
aircraft, which will be retired as the new Boeing aircraft are
delivered, and will also be used to expand the airline's
international and transcontinental service. The ten firm delivery
777 aircraft are scheduled to be delivered from September 1998
through May 1999, and the 30 firm 767 aircraft are scheduled to be
delivered starting in mid-2000 through the end of 2005. In
connection with this new order, Continental has obtained the
flexibility to substitute certain aircraft on order with Boeing and
has obtained other benefits. The Company currently plans to
substitute 777 aircraft for certain of the 767 aircraft.
In June 1997, Express exercised its option to order an additional
25 EMB-145ER regional jets. Express is scheduled to take delivery
of these 50-seat aircraft from June 1998 through September 1999.
Neither Express nor Continental will have any obligation to take
aircraft that are not financed by a third party and leased to the
Company. The Company expects to account for all of these aircraft
as operating leases.
Other
On May 16, 1997, the stockholders of the Company approved the
Continental Airlines, Inc. 1997 Stock Incentive Plan (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 and 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).
Also on May 16, 1997, the stockholders of the Company approved the
Continental Airlines, Inc. 1997 Employee Stock Purchase Plan (the
"Purchase Plan"). Under the Purchase Plan, all employees of the
Company, including CMI and Express, may purchase shares of Class B
common stock of the Company at 85% of the lower of the fair market
value on the first day of the option period or the last day of the
option period. Subject to adjustment, a maximum of 1,750,000
shares of Class B common stock are authorized for issuance under
the Purchase Plan.
In April the Company began collective bargaining agreement
negotiations with its Continental Airlines pilots, whose contract
became amendable in July 1997, and Express pilots, whose contract
became amendable in October 1997. Negotiations are in progress to
amend these contracts. 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. In addition, in May 1996, the Company sold all of
its 802,860 America West warrants, realizing net proceeds of $7
million and recognizing a gain of $5 million. The gains are
included in other nonoperating income in the accompanying
consolidated statement of operations.
Continental has entered into block space arrangements with certain
other carriers whereby one or both of the carriers is obligated to
purchase capacity on the other carrier. One such arrangement began
on June 1, 1997 pursuant to which the other carrier is sharing
Continental's costs of operating certain flights by committing to
purchase capacity on such flights. Under this arrangement, the
Company's statements of operations reflect the reimbursement of $18
million and $24 million for the three and nine months ended
September 30, 1997, respectively, from the other carrier as an
offset to the Company's respective operating expenses.
NOTE 5 - RELATED PARTY TRANSACTIONS
In January 1997, Air Canada divested the remainder of its April
1993 investment in Continental common stock by selling on the open
market 5,600,000 shares of the Company's Class B common stock.
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 $48 million.
On June 2, 1997, the Company purchased for $94 million from Air
Partners, L.P. ("Air Partners") warrants to purchase 3,842,542
shares of Class B common stock (representing a portion of the total
warrants held by Air Partners). The purchase price represents the
intrinsic value of the warrants (the difference between the closing
market price of the Class B common stock on May 28, 1997 ($34.25)
and the applicable exercise price). The warrants sold by Air
Partners consisted of 2,314,687 Class B warrants exercisable for
$7.50 per share and 1,527,855 Class B warrants exercisable for
$15.00 per share.
In July 1997, the Company (i) purchased (a) the rights of United
Micronesia Development Association, Inc. ("UMDA") to receive future
payments under a services agreement between UMDA and CMI (pursuant
to which CMI pays UMDA approximately 1% of the gross revenues of
CMI, as defined, through January 1, 2012, which payment by CMI to
UMDA totaled $6 million in 1996) and (b) UMDA's 9% interest in AMI,
(ii) terminated the Company's obligations to UMDA under a
settlement agreement entered into in 1987, and (iii) terminated
substantially all of the other contractual arrangements between the
Company, AMI and CMI, on the one hand, and UMDA on the other hand,
for an aggregate consideration of $73 million.
NOTE 6 - NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130 - "Reporting
Comprehensive Income" ("SFAS 130") that establishes standards for
the reporting and display of comprehensive income in financial
statements. The Company will adopt SFAS 130 in the first quarter
of 1998. SFAS 130 is not expected to have an impact on the
Company's results of operations or financial position.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131 - "Disclosures
about Segments of an Enterprise and Related Information" ("SFAS
131") which specifies the presentation and disclosure requirements
for operating segments in annual financial statements and also
requires certain segment information in interim reports. The
Company will adopt SFAS 131 in the first quarter of 1998. SFAS 131
is not expected to have an impact on the Company's results of
operations or financial position.
NOTE 7 - SUBSEQUENT EVENTS
In October 1997, the Company completed an offering of $752 million
of pass-through certificates. The pass-through certificates are
not direct obligations of, or guaranteed by, Continental and
therefore are not included in Continental's consolidated financial
statements. The cash proceeds from the transaction were deposited
with an escrow agent and will be used to finance (through either
leveraged leases or secured debt financings) the debt portion of
the acquisition cost of up to 24 new Boeing aircraft scheduled to
be delivered to Continental from April 1998 through November 1998.
If any funds remain as deposits with the escrow agent for such
pass-through certificates at the end of the delivery period (which
may be extended to May 1999), such funds will be distributed back
to the certificate holders.
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 and
the Company's registration statements filed with the Securities and
Exchange Commission under the Securities Act of 1933, as amended,
since December 31, 1996. These risk factors identify important
factors that could cause actual results to differ materially from
those anticipated in the forward-looking statements.
Due to the greater demand for air travel during the summer months,
revenue in the airline industry in the third quarter of the year is
generally significantly greater than revenue in the first quarter
of the year and moderately greater than revenue in the second and
fourth quarters of the year for the majority of air carriers.
Continental's results of operations generally reflect this
seasonality, but have also been impacted by numerous other factors
that are not necessarily seasonal, including the extent and nature
of competition from other airlines, fare wars, excise and similar
taxes, changing levels of operations, fuel prices, foreign currency
exchange rates and general economic conditions.
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, 1997 as compared to
the corresponding periods ended September 30, 1996.
Comparison of Three Months Ended September 30, 1997 to Three Months
Ended September 30, 1996
The Company recorded consolidated net income of $110 million and
$18 million for the three months ended September 30, 1997 and 1996,
respectively, including a $128 million fleet disposition charge
($77 million after taxes) in 1996 and after tax extraordinary
losses of $4 million and $6 million in 1997 and 1996, respectively.
Excluding the fleet disposition charge in 1996, the Company's
income before income taxes, minority interest and extraordinary
loss increased in 1997 by $11 million, or 6.3%. Management
believes that the Company benefitted in the third quarter of 1996
from the expiration of the aviation trust fund tax (the "ticket
tax"). The ticket tax, which expired on December 31, 1995, was
reinstated on August 27, 1996. 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 13.2%, $204 million, during the quarter
ended September 30, 1997 as compared to the same period in 1996,
primarily due to a 15.4% increase in revenue passenger miles,
offset by a 2.5% decrease in yield.
Cargo, mail and other revenue increased 12.0%, $15 million, in the
three months ended September 30, 1997 as compared to the same
period in the prior year, principally as a result of an increase in
freight and mail volumes due to a strike by certain employees of
United Parcel Services ("UPS") and an increase 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 16.4%, $65 million,
during the quarter ended September 30, 1997 as compared to the same
period in 1996, primarily due to an 8.7% increase in average full-
time equivalent employees in the third quarter of 1997 compared to
the third quarter of 1996 and increases in accruals for employee
profit sharing and other incentive programs, including the payment
of bonuses for on-time arrival performance.
Aircraft fuel expense increased 10.0%, $20 million, in the three
months ended September 30, 1997 as compared to the same period in
the prior year. The average price per gallon, net of fuel hedging
gains of $16 million in 1996, increased from 60.1 cents in the
third quarter of 1996 to 60.2 cents in the third quarter of 1997.
In addition, there was a 9.6% increase in the quantity of jet fuel
used from 322 million gallons in the third quarter of 1996 to 353
million gallons in the third quarter of 1997, principally
reflecting increased capacity.
Commissions expense increased 12.6%, $17 million, in the quarter
ended September 30, 1997 as compared to the same period in the
prior year, primarily due to increased passenger revenue.
Aircraft rentals increased 10.2%, $13 million in the three months
ended September 30, 1997 as compared to the same period in 1996.
The increase is a result of new aircraft inducted into operation in
Continental's fleet.
Maintenance, materials and repairs increased 24.6%, $29 million,
during the quarter ended September 30, 1997 as compared to the same
period in 1996, due principally to the volume and timing of engine
overhauls, increase in component costs and routine maintenance as
part of the Company's ongoing maintenance program.
Other rentals and landing fees increased 16.9%, $15 million, for
the three months ended September 30, 1997 compared to the same
period in 1996, due to higher facilities rentals and higher landing
fees resulting from increased operations.
During the third quarter of 1996, the Company recorded a fleet
disposition charge of $128 million ($77 million after taxes),
related primarily to (i) the writedown of Stage 2 aircraft
inventory 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 17.0%, $57 million, in the three
months ended September 30, 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 capitalized increased $8 million in the third quarter of
1997 as compared to the third quarter of 1996 as a result of higher
average purchase deposits for flight equipment.
The income tax provision for the three months ended September 30,
1997 and 1996 of $69 million and $19 million, respectively,
consisted of federal, state and foreign income taxes.
In July 1997 and 1996, extraordinary losses of $4 million (net of
$2 million income tax benefit) and $6 million (net of $4 million
income tax benefit), respectively, were recorded related to the
early extinguishment of debt.
Comparison of Nine Months Ended September 30, 1997 to Nine Months
Ended September 30, 1996
The Company recorded consolidated net income of $312 million and
$272 million for the nine months ended September 30, 1997 and 1996,
respectively, including a $128 million fleet disposition charge
($77 million after taxes) and a gain of $18 million on the sale of
certain shares of America West common stock and warrants in 1996
and after tax extraordinary losses of $4 million and $6 million in
1997 and 1996, respectively. Excluding the fleet disposition
charge in 1996, the Company's income before income taxes, minority
interest and extraordinary loss increased during 1997 by $42
million, or 8.8%. Management believes that the Company benefitted
in the first three quarters of 1996 and the first quarter of 1997
from the expiration of the ticket tax on December 31, 1995 and
December 31, 1996, respectively. The ticket tax was reinstated on
August 27, 1996 and again on March 7, 1997, respectively.
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.
Additionally, the Company benefitted in the first six months of
1996 from the recognition of previously unbenefitted post-
reorganization NOLs.
Passenger revenue increased 11.7%, $520 million, during the nine
months ended September 30, 1997 as compared to the same period in
1996. The increase was due to a 13.5% increase in revenue
passenger miles offset by a 1.9% decrease in yield.
Cargo, mail and other revenue increased 15.3%, $55 million, in the
nine months ended September 30, 1997 as compared to the same period
in the prior year, principally as a result of an increase in
freight and mail volumes primarily due to a strike by certain
employees of UPS, and an increase 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 14.6%, $166 million,
during the nine months ended September 30, 1997 as compared to the
same period in 1996, primarily due to an 8.6% increase in average
full-time equivalent employees in the first nine months of 1997
compared to the first nine months of 1996 and increases in employee
incentives. In addition there was an increase in wage rates
resulting from a longevity pay increase for substantially all
employee groups effective July 1, 1996.
Aircraft fuel expense increased 18.3%, $102 million, in the nine
months ended September 30, 1997 as compared to the same period in
the prior year. The average price per gallon, net of fuel hedging
gains of $37 million in 1996 increased 7.4% from 59.1 cents in the
first nine months of 1996 to 63.5 cents in the first nine months of
1997. In addition, there was a 10.0% increase in the quantity of
jet fuel used from 913 million gallons in the first nine months of
1996 to 1,004 million gallons in the first nine months of 1997,
principally reflecting increased capacity.
Commissions expense increased 9.8%, $39 million, in the nine months
ended September 30, 1997 as compared to the same period in the
prior year, primarily due to increased passenger revenue.
Aircraft rentals increased 5.5%, $21 million during the nine months
ended September 30, 1997 as compared to the same period in 1996.
The increase is a result of new aircraft inducted into operation in
Continental's fleet.
Maintenance, materials and repairs increased 14.6%, $51 million,
during the nine months ended September 30, 1997 as compared to the
same period in 1996, principally due to the volume and timing of
engine overhauls, increase in component costs and routine
maintenance as part of the Company's ongoing maintenance program.
Aircraft maintenance expense was reduced by $16 million in 1997 due
to the reversal of reserves that are no longer required as a result
of the acquisition of 10 aircraft previously leased by the Company.
Other rentals and landing fees increased 15.9%, $41 million, for
the nine months ended September 30, 1997 compared to the same
period in 1996, due to higher facilities rentals and higher landing
fees resulting from increased operations.
During the third quarter of 1996, the Company recorded a fleet
disposition charge of $128 million ($77 million after taxes),
related primarily to (i) the writedown of Stage 2 aircraft
inventory 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 13.8%, $134 million, in the nine
months ended September 30, 1997 as compared to the same period in
the prior year, primarily as a result of increases in passenger
services, advertising and publicity, reservations and sales expense
and other miscellaneous expense.
Interest capitalized increased $21 million in the first nine months
of 1997 compared to the first nine months of 1996 as a result of
higher average purchase deposits for flight equipment resulting
from the acquisition of new aircraft.
Interest income increased 36.7%, $11 million, in the first nine
months of 1997 compared to the same period in the prior year,
principally due to 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, 1997 included foreign currency losses.
Other nonoperating income (expense) in the first nine months of
1996 consisted of an $18 million gain related to the sale of
America West common stock and warrants, a $5 million payment to
settle certain litigation arising out of the Company's decision in
1995 to cap domestic travel agency commissions and foreign currency
gains (primarily related to the Japanese yen).
The income tax provision for the nine months ended September
30,1997 and 1996 of $192 million and $57 million, respectively,
consists of federal, state and foreign income taxes. During the
second quarter of 1996, the Company utilized previously
unbenefitted post-reorganization NOLs, and began accruing income
tax expense.
In July 1997 and 1996, extraordinary losses of $4 million (net of
$2 million income tax benefit) and $6 million (net of $4 million
income tax benefit), respectively, were recorded related to the
early extinguishment of debt.
Certain Statistical Information
An analysis of statistical information for Continental's jet
operations, excluding regional jet operations, for the periods
indicated is as follows:
Three Months Ended Net
September 30, Increase/
1997 1996 (Decrease)
Revenue passenger miles
(millions) (1). . . . . . . . . . 13,038 11,302 15.4 %
Available seat miles
(millions) (2). . . . . . . . . .17,686 16,117 9.7 %
Passenger load factor (3). . . . . 73.7% 70.1% 3.6 pts.
Breakeven passenger load
factor (4). . . . . . . . . . . . 65.6% 61.0% 4.6 pts.
Passenger revenue per available
seat mile (cents). . . . . . . . 9.18 8.95 2.6 %
Total revenue per available
seat mile (cents) . . . . . . . . 10.05 9.81 2.4 %
Operating cost per available
seat mile (cents) (5) . . . . . . 8.98 8.60 4.4 %
Average yield per revenue
passenger mile (cents) (6) . . . 12.45 12.77 (2.5)%
Average fare per revenue
passenger . . . . . . . . . . . .$149.96 $144.70 3.6 %
Revenue passengers (thousands) . .10,822 9,972 8.5 %
Average length of aircraft
flight (miles) . . . . . . . . . 991 914 8.4 %
Average daily utilization of
each aircraft (hours) (7). . . . 10:19 10:17 0.3 %
Actual aircraft in fleet at
end of period (8) . . . . . . . . 334 314 6.4 %
Nine Months Ended Net
September 30, Increase/
1997 1996 (Decrease)
Revenue passenger miles
(millions) (1). . . . . . . . . . 35,851 31,581 13.5 %
Available seat miles
(millions) (2). . . . . . . . . .50,004 45,820 9.1 %
Passenger load factor (3). . . . . 71.7% 68.9% 2.8 pts.
Breakeven passenger load
factor (4). . . . . . . . . . . . 63.5% 60.5% 3.0 pts.
Passenger revenue per available
seat mile (cents). . . . . . . . 9.26 9.07 2.1 %
Total revenue per available
seat mile (cents) . . . . . . . . 10.16 9.94 2.2 %
Operating cost per available
seat mile (cents) (5) . . . . . . 9.05 8.77 3.2 %
Average yield per revenue
passenger mile (cents) (6) . . . 12.91 13.16 (1.9)%
Average fare per revenue
passenger . . . . . . . . . . . .$149.19 $143.97 3.6 %
Revenue passengers (thousands) . .31,022 28,858 7.5 %
Average length of aircraft
flight (miles) . . . . . . . . . 954 893 6.8 %
Average daily utilization of
each aircraft (hours) (7). . . . 10:14 9:58 2.7 %
Actual aircraft in fleet at
end of period (8) . . . . . . . . 334 314 6.4 %
Continental has entered into block space arrangements with certain other
carriers whereby one or both of the carriers is obligated to purchase
capacity on the other carrier. One such arrangement began on June 1,
1997 pursuant to which the other carrier is sharing Continental's costs
of operating certain flights by committing to purchase capacity on such
flights. The tables above exclude the statistics (which were not
material) for the capacity that was purchased and marketed by the other
carrier.
(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) Revenue passenger miles divided by available seat miles.
(4) 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 nonoperating items.
(5) Excludes 1996 fleet disposition charge totaling $128 million.
(6) The average revenue received for each mile a revenue passenger is
carried.
(7) The average block hours flown per day in revenue service per
aircraft.
(8) 1997 excludes four all-cargo 727 aircraft at CMI.
LIQUIDITY AND CAPITAL COMMITMENTS
During 1997, the Company completed several transactions intended to
strengthen its long-term financial position and enhance earnings.
- - In March 1997, Continental completed an offering of $707 million of
pass-through certificates to be used 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 through February 1998.
- - In April 1997, Continental completed an offering of $190 million
aggregate principal amount of tax-exempt special facilities revenue
bonds to finance Continental's expansion of its hub at George Bush
Intercontinental Airport in Houston. These bonds are solely payable
from rentals paid by Continental under long-term lease agreements
with the City of Houston.
- - In April 1997, Continental entered into 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 $48 million.
- - In June 1997, Continental purchased from Air Partners warrants to
purchase 3,842,542 shares of Class B common stock of the Company for
$94 million in cash.
- - In June 1997, Continental completed an offering of $155 million of
pass-through certificates which were used to finance the acquisition
of 10 aircraft previously leased by the Company.
- - In July 1997, Continental entered into a $575 million credit
facility, including a $275 million term loan. The proceeds of the
$275 million term loan were used by CMI to repay its existing secured
term loan. The facility also includes a $225 million revolving
credit facility and a $75 million term loan commitment for general
corporate purposes.
- - In July 1997, the Company (i) purchased (a) UMDA's right to receive
future payments under a services agreement between UMDA and CMI and
(b) UMDA's 9% interest in AMI, (ii) terminated the Company's
obligations to UMDA under a settlement agreement entered into in
1987, and (iii) terminated substantially all of the other contractual
arrangements between the Company, AMI and CMI, on the one hand, and
UMDA on the other hand, for an aggregate consideration of $73
million.
- - In September 1997, Continental completed an offering of $89 million
of pass-through certificates which were used to finance the debt
portion of the acquisition cost of nine EMB-145ER regional jets.
- - In October 1997, the Company completed an offering of $752 million of
pass-through certificates to be used to finance (through either
leveraged leases or secured debt financings) the debt portion of the
acquisition cost of up to 24 new Boeing aircraft scheduled to be
delivered to Continental from April 1998 through November 1998.
As of October 10, 1997, Continental had firm commitments with Boeing to
take delivery of a total of 115 narrowbody and 40 widebody jet aircraft
during the years 1997 through 2005 with options for an additional 91
aircraft (exercisable subject to certain conditions). The narrowbody
aircraft will replace older, less efficient Stage 2 aircraft and allow
for growth of operations. The new widebody aircraft will replace six
DC-10-10 and 31 DC-10-30 aircraft, which will be retired as the new
Boeing aircraft are delivered, and will also be used to expand
Continental's international and transcontinental service. In connection
with this new order, the Company has obtained the flexibility to
substitute certain aircraft on order with Boeing and has obtained other
benefits. The Company currently plans to substitute 777 aircraft for
certain of the 767 aircraft. The Company's agreement with Boeing
provides that the Company will purchase from Boeing the carrier's
requirements for new jet aircraft (other than regional jets) over the
next 20 years, subject to certain conditions. However, Boeing has
agreed with the European Commission not to enforce such provision.
The estimated aggregate cost of the Company's firm commitments for the
155 Boeing aircraft is approximately $7 billion. As of October 10,
1997, the Company has completed or has third party commitments for a
total of approximately $482 million in financing for its future Boeing
deliveries, and has commitments or letters of intent from various
sources for backstop financing for approximately one-third of the
anticipated acquisition cost of its future narrowbody and widebody
Boeing deliveries. The Company currently plans on financing the new
Boeing aircraft with enhanced equipment trust certificates or similar
financing and lease equity, subject to availability and market
conditions. However, further financing will be needed to satisfy
Continental's capital commitments for other aircraft and aircraft-
related expenditures such as engines, 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.
In September 1996, Express placed an order for 25 firm EMB-145ER
regional jets, with options for an additional 175 aircraft. In June
1997, Express exercised its option to order 25 of such option aircraft.
Express now has options for an additional 150 regional jets exercisable
at the election of Express over the next 12 years. Neither Express nor
Continental will have any obligation to take aircraft that are not
financed by a third party and leased to the Company. Express has taken
delivery of 13 of the firm aircraft through October 1, 1997 and will
take delivery of the remaining 37 firm aircraft through the third
quarter of 1999. 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 $155 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, 1997, aggregated $95 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. Continental has significant encumbered assets.
As of September 30, 1997, the Company had $961 million in cash and cash
equivalents (excluding restricted cash of $27 million), compared to $985
million (excluding restricted cash of $76 million) as of December 31,
1996. Net cash provided by operating activities increased $55 million
during the nine months ended September 30, 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 $351 million
for the nine months ended September 30, 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
nine months ended September 30, 1997 compared to the same period in the
prior year decreased $80 million primarily due to a decrease in payments
on long-term debt and capital lease obligations.
See Note 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. The Company has consummated several built-in-gain
transactions, which resulted in the realization of tax benefits related
to NOLs attributable to the Company's predecessor. To the extent the
Company consummates additional built-in-gain transactions, such benefits
will reduce the valuation allowance and reorganization value in excess
of amounts allocable to identifiable assets. If such reorganization
value were exhausted, reductions in the valuation allowance would
decrease other intangibles.
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 5.33% for October 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
$130 million.
Continental has entered into block space arrangements with certain other
carriers whereby one or both of the carriers is obligated to purchase
capacity on the other carrier. One such arrangement began on June 1,
1997 pursuant to which the other carrier is sharing Continental's costs
of operating certain flights by committing to purchase capacity on such
flights. Under this arrangement, the Company's statements of operations
reflect the reimbursement from the other carrier as an offset to the
Company's respective operating expenses.
As a result of the continuing weakness of the yen against the dollar,
CMI's operating earnings have declined during each of 1996 and 1997, and
are not expected to improve materially absent a stronger yen.
The Taxpayer Relief Act was enacted on August 5, 1997 and contains an
extension and modification of the ticket tax, plus new airline industry
taxes. The new law increases the tax on international departures from
$6 to $12, imposes a new tax on international arrivals of $12, imposes
a domestic flight segment fee of $1 (increasing over a five-year phase-
in period to $3) per passenger per segment, reduces the ticket tax from
10% to 9% (decreasing over a three-year phase-in period to 7.5%) and
imposes a 7.5% tax on the sale of frequent flyer miles. The departure
and arrival taxes apply to amounts paid for tickets on or after August
13, 1997, for travel beginning on or after October 1, 1997. The new
domestic segment tax and the reduction in the ticket tax apply to
amounts paid and travel beginning on or after October 1, 1997.
Management believes that this new law will have a negative impact on the
Company, although the amount of such negative impact cannot be precisely
determined.
In April 1997, the Company began collective bargaining agreement
negotiations with its Continental Airlines pilots, whose contract became
amendable in July 1997, and Express pilots, whose contract became
amendable in October 1997. Negotiations are in progress to amend these
contracts. 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. The Company's mechanics and
related employees recently voted to be represented by the International
Brotherhood of Teamsters (the "Teamsters"). The Company does not
believe that the Teamsters' union representation will be material to the
Company. In September 1997, the Company announced that it intends to
bring all employees to industry standard wages (the average of the top
ten air carriers as ranked by the Department of Transportation,
excluding Continental) within the next 36 months. The Company stated
that it would phase in wage increases over the 36-month period as its
revenue, interest rates and rental rates reach industry standards. The
Company estimates that the increased wages will aggregate approximately
$500 million over the 36-month period.
Management believes that the Company's costs are likely to be affected
in the future by, among other matters, (i) higher aircraft rental
expense as new aircraft are delivered, (ii) higher wages, salaries and
related costs as the Company increases its employee compensation 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.
None.
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 Supplemental Agreement No. 9 to Purchase Agreement No.
1783 between the Company and Boeing, dated August 13,
1997, relating to the purchase of Boeing 757 aircraft.
11.1 Statement Regarding Computation of Per Share Earnings
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CONTINENTAL AIRLINES, INC.
(Registrant)
Date: October 29, 1997 by: /s/ Lawrence W. Kellner
Lawrence W. Kellner
Executive Vice President and
Chief Financial Officer
(On behalf of Registrant)
Date: October 29, 1997 by: /s/ Michael P. Bonds
Michael P. Bonds
Vice President and Controller
(Chief Accounting Officer)
INDEX TO EXHIBITS
OF
CONTINENTAL AIRLINES, INC.
10.1 Supplemental Agreement No. 9 to Purchase Agreement No. 1783
between the Company and Boeing, dated August 13, 1997,
relating to the purchase of Boeing 757 aircraft. (1)
11.1 Statement Regarding Computation of Per Share Earnings
27.1 Financial Data Schedule.
_______________
(1) The Company has applied to the Commission for confidential
treatment of a portion of this exhibit.