UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 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 __________
0-9781
(Commission File Number)
CONTINENTAL AIRLINES, INC.
(Exact name of registrant as specified in its charter)
Delaware 74-2099724
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2929 Allen Parkway, Suite 2010, Houston, Texas 77019
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 713-834-2950
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
Class A Common Stock, New York Stock Exchange, Inc.
par value $.01 per share
Class B Common Stock, New York Stock Exchange, Inc.
par value $.01 per share
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the 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 if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting and non-voting common
equity stock held by non-affiliates of the registrant was $3.2
billion as of March 11, 1998.
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Section 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 March 11, 1998, 8,379,464 shares of Class A Common Stock and
50,951,663 shares of Class B Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for Annual Meeting
of Stockholders to be held on May 21, 1998: PART III
PART I
ITEM 1. BUSINESS.
Continental Airlines, Inc. (the "Company" or "Continental") is a
major United States air carrier engaged in the business of
transporting passengers, cargo and mail. Continental is the fifth
largest United States airline (as measured by 1997 revenue
passenger miles) and, together with its wholly owned subsidiaries,
Continental Express, Inc. ("Express") and Continental Micronesia,
Inc. ("CMI"), each a Delaware corporation, serves 191 airports
worldwide. As of March 1, 1998, Continental flies to 125 domestic
and 66 international destinations and offers additional connecting
service through alliances with domestic and foreign carriers.
Continental directly serves 10 European cities and is one of the
leading airlines providing service to Mexico and Central America,
serving more destinations there than any other United States
airline. Continental currently flies to seven cities in South
America. Through its Guam hub, CMI provides extensive service in
the western Pacific, including service to more Japanese cities than
any other United States carrier.
As used in this Form 10-K, the terms "Continental" and "Company"
refer to Continental Airlines, Inc. and its subsidiaries, unless
the context indicates otherwise. This Form 10-K may contain
forward-looking statements. In connection therewith, please see
the cautionary statements contained in Item 1. "Business - Risk
Factors Relating to the Company" and "Business - Risk Factors
Relating to the Airline Industry" which identify important factors
that could cause actual results to differ materially from those in
the forward-looking statements.
Continental/Northwest Alliance and Related Agreements
On January 26, 1998, the Company announced that, in connection with
an agreement by Air Partners, L.P. ("Air Partners") to dispose of
its interest in the Company to an affiliate of Northwest Airlines,
Inc. ("Northwest"), the Company had entered into a long-term global
alliance with Northwest ("Northwest Alliance") involving schedule
coordination, frequent flyer reciprocity, executive lounge access,
airport facility coordination, code-sharing, the formation of a
joint venture among the two carriers and KLM Royal Dutch Airlines
("KLM") with respect to their trans-Atlantic services, cooperation
regarding other alliance partners of the two carriers and regional
alliance development, certain coordinated sales programs, preferred
reservations displays and other activities.
The Northwest Alliance is expected to be phased in over a multi-
year period. A significant portion of the alliance activities will
commence promptly. Code-sharing will commence, subject to
governmental approvals, with the Company initially placing its
designator code on all of Northwest's international flights (other
than its trans-Atlantic flights) and those Northwest domestic
flights which create international connecting itineraries to and
from Latin America. Thereafter, subject to governmental approval
and approval by Northwest's pilots under their collective
bargaining agreement, (i) Northwest and the Company anticipate
entering into a joint venture among themselves and KLM with respect
to their respective trans-Atlantic flights, (ii) Northwest
anticipates placing its designator code on substantially all of the
Company's other international flights, and (iii) Northwest and the
Company each anticipate placing their respective designator codes
on substantially all of the other carrier's domestic flights.
The Company estimates that the alliance, when fully phased in over
a three-year period, will generate in excess of $500 million in
additional annual pre-tax operating income for the carriers, and
anticipates that approximately 45% of such pre-tax operating income
will accrue to the Company. The Company believes that a
significant portion of the alliance synergies allocable to the
Company can be achieved even without the activities which are
subject to approval of Northwest's pilots.
The Company also announced on January 26, 1998 that Air Partners,
the holder of approximately 14% of the Company's equity and
approximately 51% of its voting power (after giving effect to the
exercise of warrants), had entered into an agreement to dispose of
its interest in the Company to an affiliate of Northwest (the "Air
Partners Transaction"). The Air Partners Transaction is subject
to, among other matters, governmental approval and expiration of
applicable waiting periods under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976. The agreement also extends to an
affiliate of Air Partners a right of first offer to purchase
certain shares of Class A common stock of the Company to be
acquired by Northwest or its affiliates if such entities intend to
dispose of those securities prior to the fifth anniversary of the
closing of the Air Partners Transaction.
In connection with the Air Partners Transaction, the Company
entered into a corporate governance agreement with certain
affiliates of Northwest (the "Northwest Parties") designed to
assure the independence of the Company's board and management
during the six-year term of the governance agreement. Under the
corporate governance agreement, as amended, the Northwest Parties
have agreed not to beneficially own voting securities of the
Company in excess of 50.1% of the fully diluted voting power of the
Company's voting securities, subject to certain exceptions
involving third-party acquisitions or tender offers for 15% or more
of the voting power of the Company's voting securities and a
limited exception permitting a one-time ownership of approximately
50.4% of the fully diluted voting power. The Northwest Parties
have agreed to deposit all voting securities of the Company
beneficially owned by them in a voting trust with an independent
voting trustee requiring that such securities be voted (i) on all
matters other than the election of directors, either as recommended
by the Company's board of directors (a majority of whom must be
independent directors as defined in the agreement) or in the same
proportion as the votes cast by other holders of voting securities,
and (ii) in the election of directors, for the election of
independent directors nominated by the board of directors;
provided, that in the event of a merger or similar business
combination or a recapitalization, liquidation or similar
transaction, a sale of all or substantially all of the Company's
assets, or an issuance of voting securities which would represent
more than 20% of the voting power of the Company prior to issuance,
or any amendment of the Company's charter or by-laws that would
materially and adversely affect Northwest, the shares may be voted
as directed by the Northwest Party owning such shares, and if a
third party is soliciting proxies in connection with an election of
directors, the shares may be voted at the option of such Northwest
Party either as recommended by the Company's board of directors or
in the same proportion as the votes cast by the other holders of
voting securities.
The Northwest Parties have also agreed to certain restrictions on
the transfer of voting securities owned by them, have agreed not to
seek to affect or influence the Company's board of directors or the
control of the management of the Company or the business,
operations, affairs, financial matters or policies of the Company
or to take certain other actions, and have agreed to take all
actions as are necessary to cause independent directors to at all
times constitute at least a majority of the Company's board of
directors. The Company has agreed to cause one designee of a
Northwest Party reasonably acceptable to the board of directors to
be appointed to the Company's board, and has agreed to grant
preemptive rights to a Northwest Party with respect to certain
issuances of Class A common stock and Class B common stock. The
Northwest Parties have agreed that certain specified actions,
together with any material transactions between the Company and
Northwest or its affiliates, including any modifications or waivers
of the corporate governance agreement and the alliance agreement,
may not be taken without the prior approval of a majority of the
board of directors, including the affirmative vote of a majority of
the independent directors. The governance agreement also provides
for the Company to adopt a shareholder rights plan with reasonably
customary terms and conditions, with an acquiring person threshold
of 15% and with appropriate exceptions for the Northwest Parties
for actions permitted by and taken in compliance with the corporate
governance agreement.
The corporate governance agreement provides that, if after three
years Northwest's pilots have not consented to those portions of
the alliance agreement requiring their consent and the Company, at
its election, then chooses to terminate the alliance agreement, the
Northwest Parties can elect either to dispose of their shares in
the Company or negotiate with a committee of independent directors
of the Company regarding a merger. If a merger agreement cannot be
reached within six months of the establishment of the committee,
certain appraisal procedures are specified. If upon completion of
the appraisal procedures, Northwest is unwilling to enter into a
merger agreement at the value for the shares not held by the
Northwest Parties determined by such appraisal procedures, then the
Northwest Parties must sell their voting securities, and if the
Company and the committee are unwilling to approve a merger
agreement at such value, then the corporate governance agreement
(except for certain provisions requiring continuing independent
directors and approval by a majority of such independent directors
of material transactions between the Company and the Northwest
Parties) will expire.
The corporate governance agreement will otherwise expire after the
sixth anniversary of the date of closing of the Air Partners
Transaction, or if earlier, upon the date that the Northwest
Parties cease to beneficially own voting securities representing at
least 10% of the fully diluted voting power of the Company's voting
securities. Upon a termination of the above described terms of the
governance agreement, the Northwest Parties must nonetheless take
such actions as are necessary to cause the Company's board of
directors to at all times include at least five directors who are
independent of and otherwise unaffiliated with Northwest or the
Company and their respective affiliates, and any material
transaction between the Company and Northwest or its affiliates, or
relating to the governance agreement or the alliance agreement, may
not be taken without prior approval thereof by a majority vote of
the independent directors.
The alliance agreement provides that if after four years the
Company has not entered into a code-share with KLM or is not
legally able (but for aeropolitical restrictions) to enter into a
new trans-Atlantic joint venture with KLM and Northwest and place
its airline code on certain Northwest flights, Northwest can elect
to (i) cause good faith negotiations among the Company, KLM and
Northwest as to the impact, if any, on the contribution to the
joint venture resulting from the absence of the code-share, and the
Company will reimburse the joint venture for the amount of any loss
until it enters into a code-share with KLM, or (ii) terminate
(subject to cure rights of the Company) after one year's notice any
or all of such alliance agreement and any or all of the agreements
contemplated thereunder.
Business Strategy
In 1995, Continental implemented a plan, labeled the "Go Forward
Plan", which was a "back to basics" approach focusing on improving
profitability and financial condition, delivering a consistent,
reliable, quality product to customers and improving employee
morale and working conditions. The Company's 1998 strategic plan,
as discussed below, retains the four basic components of the Go
Forward Plan: Fly to Win, Fund the Future, Make Reliability a
Reality and Working Together, with initiatives intended to build
upon Continental's operational and strategic strengths.
Fly to Win
The Company's 1998 Fly to Win initiatives center around three
principal themes: Grow Hub Operations, Improve Business/Leisure
Mix and Strengthen its Alliance Network.
Grow Hub Operations. Continental will continue to add select
flights and refine its flight schedules to maximize the potential
of its hubs. In addition, Continental plans to focus on expanding
international traffic through service to new destinations and
additional code-sharing and other marketing alliances with certain
foreign carriers.
Management believes that by adding domestic and international
flights to the Company's hubs, attracting more international
passengers through alliances with foreign carriers and further
refining the efficiency of the Company's hub operations,
Continental will continue to capture additional flow traffic
through its hubs and attract a larger share of higher-yielding
business travelers.
Improve Business/Leisure Mix. The Company's passenger load factors
increased from 68.1% in 1996 to 70.9% in 1997, facilitating
management of the business/leisure traveler mix on its aircraft.
Since business travelers typically pay a higher fare (on a revenue-
per-seat-mile basis) for the convenience of being able to make and
change last minute travel plans, increases in business traffic
contribute disproportionately to incremental profitability.
Unrestricted business fares accounted for approximately 43.8% of
the Company's domestic passenger revenue in 1997 compared to 42.8%
in 1996 (excluding CMI and Express). Many of the Company's product
and schedule improvements have been made to appeal to business
travelers. The Company has invested in state-of-the-art revenue
management and pricing systems to enhance its ability to manage its
fare mix.
Strengthen its Alliance Network. Management believes that
strengthening the Company's network of alliance partners will allow
it to compete with larger global airline alliances, better leverage
the Company's hub assets and result in improved returns to the
Company. Focusing on strategic global alliances allows the Company
to benefit from the strengths of its alliance partners in their
local markets while reducing the Company's reliance on any
individual alliance partner.
The Company seeks alliance relationships that, together with the
Company's own flying, will permit expanded service through Newark
to major destinations in South America, Europe and Asia, and
expanded service through Houston to South America and Europe as
well as service to Japan. Route authorities that would be required
for the Company's own service to certain of these destinations are
not currently available to the Company. See "Continental/Northwest
Alliance and Related Agreements" above and "Foreign Carrier
Alliances" below for a discussion of new alliances recently entered
into with other carriers.
Fund the Future
Having achieved its 1995 goals of building the Company's overall
liquidity and improving its financial condition, management shifted
its financial focus in 1996 and 1997 to target the Company's
interest and lease expenses. Through refinancing and other
initiatives, Continental has achieved substantial reductions in
interest and lease expenses attributable to financing arrangements
that were entered into when the Company was in a less favorable
financial position.
In 1997 and early 1998, the Company completed a number of
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 aircraft from The
Boeing Company ("Boeing") scheduled to be delivered through April
1998.
- - 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% Cumulative Preferred Stock
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 for $94
million in cash warrants to purchase 3,842,542 shares of Class B
common stock of the Company.
- - 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 $350 million of term loans, $275 million of
which was loaned by Continental to its wholly owned subsidiary
Air Micronesia, Inc. ("AMI"), reloaned by AMI to its wholly owned
subsidiary, CMI, and used by CMI to repay its existing secured
term loan. The facility also includes a $225 million revolving
credit facility.
- - In July 1997, the Company (i) purchased (a) the right of United
Micronesia Development Association, Inc. ("UMDA") 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 Embraer ERJ-145
("ERJ-145") 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 from April 1998 through
November 1998.
- - In February 1998, the Company completed an offering of $773
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 aircraft
scheduled to be delivered from February 1998 through December
1998.
- - In addition, during 1997 and the first quarter of 1998,
Continental completed several offerings totaling approximately
$291 million aggregate principal amount of tax-exempt special
facilities revenue bonds to finance or refinance certain airport
facility projects. These bonds are payable solely from rentals
paid by Continental under long-term lease agreements with the
respective governing bodies.
The focus in 1998 is to maintain stable cash balances while
continuing to pay down debt, secure financing for aircraft
deliveries in 1998 and 1999 and, under appropriate circumstances,
buy back stock. The Company expects to continue, through
refinancings and other initiatives, to eliminate excess interest
and lease expenses.
Make Reliability a Reality
Customer service continues to be the focus in 1998. Management
believes Continental's on-time performance record is crucial to its
other operational objectives and, together with its baggage
handling, customer satisfaction and involuntary denied boarding
initiatives, is an important tool to attract higher-margin business
travelers.
Continental's goal for 1998 is to be ranked monthly by the
Department of Transportation ("DOT") among the top three major air
carriers (excluding those airlines who do not report
electronically) in on-time performance, baggage handling, customer
satisfaction and involuntary denied boarding. For 1997,
Continental ranked fifth in on-time performance, second in baggage
handling, fourth in fewest customer complaints and first in fewest
involuntary denied boardings. In 1997, bonuses of $65 were paid to
substantially all employees for each month that Continental ranked
second or third or achieved 80% or above (for arrivals within 14
minutes) in on-time performance, and bonuses of $100 were paid for
each month that Continental ranked first among the top 10 U.S. air
carriers in on-time performance. For 1997, a total of $21 million
of on-time bonuses was paid. This successful on-time performance
bonus program continues in 1998.
In addition to programs intended to improve Continental's standings
in DOT performance data, the Company has acted in a number of
additional areas to enhance its attractiveness to business
travelers and the travel agent community. Specifically,
Continental implemented various initiatives designed to offer
travelers cleaner and more attractive aircraft interiors,
consistent interior and exterior decor, first class seating on all
jet aircraft, better meals and greater benefits under its award-
winning frequent flyer program. In 1996 and 1997, Continental
continued to make product improvements, such as refurbished
Presidents Clubs with specialty bars, and on-board specialty
coffees and microbrewery beer, among others. In 1997, the Company
switched to a new inflight telephone service provider that offers
reliable air-to-ground telephone service on board its jet aircraft.
The Company expects to complete the installation of inflight
telephones on all its Stage 3 aircraft in 1998. The Company has
also continued to refine its award-winning BusinessFirst service.
In January 1998, Continental launched its TransContinental service
whereby passengers traveling coast-to-coast from Newark
International Airport ("Newark International") will experience new
enhancements on their flights, including new check-in options at
nine New York locations, flexible meal options and door-to-door
pick-up service. The focus in 1998 also includes the integration
of Boeing 777 and 737-700/800 aircraft into the fleet and the
enhancement of the entertainment equipment on board the fleet.
Working Together
Management believes that Continental's employees are its greatest
asset, as well as the cornerstones of improved reliability and
customer service. Management has introduced a variety of programs
to increase employee participation and foster a sense of shared
community. These initiatives include significant efforts to
communicate openly and honestly with all employees through daily
news bulletins, weekly voicemail updates from the Company's Chief
Executive Officer, monthly and quarterly Continental publications,
videotapes mailed to employees, and a Go Forward Plan bulletin
board in over 600 locations system-wide. In addition, regularly
scheduled visits to airports throughout the route system are made
by the senior executives of the Company (each of whom is assigned
an airport for this purpose). Monthly meetings open to all
employees, as well as other periodic on-site visits by management,
are designed to encourage employee participation, knowledge and
cooperation. Continental's goal for 1998 is to be ranked among the
top three major air carriers in employee measures such as turnover,
lost time, productivity and on-the-job injury claims.
In September 1997, Continental announced that it intends to bring
all employees to industry standard wages over a three-year period.
See "Employees" below.
Domestic Operations
Continental operates its domestic route system primarily through
its hubs at Newark International, George Bush Intercontinental
Airport ("Bush Intercontinental") in Houston and Hopkins
International Airport ("Hopkins International") in Cleveland. In
addition, as part of its alliance with Northwest, Continental's
system will connect with Northwest's hubs in Minneapolis, Detroit
and Memphis. See "Continental/Northwest Alliance and Related
Agreements" above. The Company's hub system allows it to transport
passengers between a large number of destinations with
substantially more frequent service than if each route were served
directly. The hub system also allows Continental to add service to
a new destination from a large number of cities using only one or
a limited number of aircraft. Each of Continental's domestic hubs
is located in a large business and population center, contributing
to a high volume of "origin and destination" traffic.
Newark. As of March 1, 1998, Continental operated 58% (244
departures) of the average daily jet departures (excluding regional
jets) and, together with Express, 59% (354 departures) of all
average daily departures (jet, regional jet and turboprop) from
Newark International. Considering the three major airports serving
New York City (Newark International, LaGuardia and John F.
Kennedy), Continental and Express accounted for 24% of all daily
departures, while the next largest carrier, US Airways, Inc. ("US
Airways"), and its commuter affiliate accounted for 15% of all
daily departures.
Houston. As of March 1, 1998, Continental operated 80%
(333 departures) of the average daily jet departures (excluding
regional jets) and, together with Express, 84% (479 departures) of
all average daily departures from Bush Intercontinental. Southwest
Airlines Co. ("Southwest") also has a significant share of the
Houston market through Hobby Airport. Considering both Bush
Intercontinental and Hobby Airport, Continental operated 58% and
Southwest operated 26% of the daily jet departures (excluding
regional jets) from Houston.
Cleveland. As of March 1, 1998, Continental operated 55% (98
departures) of the average daily jet departures (excluding regional
jets) and, together with Express, 67% (247 departures) of all
average daily departures from Hopkins International. The next
largest carrier, Southwest, accounted for 6% of all daily
departures.
Continental Express. Continental's jet service at each of its
domestic hub cities is coordinated with Express, which operates
new-generation turboprop aircraft and regional jets under the name
"Continental Express". The turboprop aircraft average
approximately five years of age and seat 64 passengers or less
while the regional jets average less than one year of age and seat
50 passengers.
In September 1996, Express placed a firm order for 25 ERJ-145
regional jets, with options for an additional 175 aircraft
exercisable through 2008. In June 1997, Express exercised its
option to order 25 of such option aircraft and expects to confirm
its order for an additional 25 of its remaining 150 option aircraft
by August 1998. Express took delivery of 18 of the aircraft
through December 31, 1997 and will take delivery of the remaining
32 aircraft through the third quarter of 1999. The Company expects
to account for all of these aircraft as operating leases. Express
began service with its regional jets in Cleveland in April 1997.
See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations. Liquidity and Capital
Commitments".
As of March 1, 1998, Express served 19 destinations from Newark
International (eight by regional jet), 21 destinations from Bush
Intercontinental (two by regional jet) and 36 destinations from
Hopkins International (seven by regional jet). In addition,
commuter feed traffic is currently provided by other code-sharing
partners. See "Domestic Carrier Alliances" below.
Management believes Express's turboprop and regional jet operations
complement Continental's jet operations by allowing more frequent
service to small cities than could be provided economically with
conventional jet aircraft and by carrying traffic that connects
onto Continental's jets. In many cases, Express (and Continental)
compete for such connecting traffic with commuter airlines owned by
or affiliated with other major airlines operating out of the same
or other cities. Express's new ERJ-145 regional jets provide
greater comfort and enjoy better customer acceptance than turboprop
aircraft. These regional jets also allow Express to serve certain
routes that cannot be served by turboprop aircraft.
Domestic Carrier Alliances. Pursuant to the Company's Fly to Win
initiative under the Go Forward Plan, Continental has entered into
and continues to develop alliances with domestic carriers:
- - On January 26, 1998, the Company announced that it had entered
into a long-term global alliance with Northwest. See
"Continental/Northwest Alliance and Related Agreements" above.
- - Continental has entered into a series of agreements with America
West, Inc. ("America West"), including agreements related to
code-sharing and ground handling, which have created substantial
benefits for both airlines. These code-sharing agreements cover
73 city-pairs and allow Continental to link additional
destinations to its route network. The sharing of facilities and
employees by Continental and America West in their respective key
markets has resulted in significant cost savings.
- - Currently, SkyWest Airlines, Inc., a commuter operator, provides
Continental access to five additional markets in California
through Los Angeles.
- - Continental has entered into a code-sharing agreement with
Gulfstream International Airlines, Inc. ("Gulfstream") which
commenced in April 1997. Gulfstream serves as a connection for
Continental passengers throughout Florida as well as five markets
in the Bahamas.
- - Continental has a code-sharing arrangement with Colgan Air, Inc.
which commenced in July 1997 on flights connecting in four cities
in the eastern United States and offers connections for
Continental passengers to ten cities in the northeastern and mid-
Atlantic regions of the United States.
- - Continental and CMI entered into a cooperative marketing
agreement with Hawaiian Airlines that began October 1, 1997 on
flights connecting in Honolulu.
International Operations
International Operations. Continental serves destinations
throughout Europe, Mexico, the Caribbean and Central and South
America and has extensive operations in the western Pacific
conducted by CMI. Continental's revenue from international
operations has increased each of the last three years and, as
measured by 1997 available seat miles, approximately 31.4% of
Continental's jet operations were dedicated to international
traffic. See Note 15 of Notes to Consolidated Financial
Statements. As of March 1, 1998, the Company offered 112 weekly
departures to 10 European cities and marketed service to six other
cities through code-sharing agreements. Continental is one of the
leading airlines providing service to Mexico and Central America,
serving more destinations there than any other United States
airline. The Company was recently awarded route authority to fly
to Tokyo from both its Newark and Houston hubs receiving a total of
14 frequencies for the two cities. Initially, the Company will use
seven frequencies at its Newark hub with daily non-stop service
scheduled to begin in November 1998. The Company will begin daily
non-stop service to Tokyo from Houston in December 1998.
The Company's Newark hub is a significant international gateway.
From Newark, the Company serves 10 European and two Canadian cities
and markets service to Amsterdam, Prague and certain other
destinations in Canada, the United Kingdom and Europe through code-
sharing arrangements with foreign carriers. Continental recently
announced new non-stop service, subject to government approval,
between Newark and Dublin and Shannon, Ireland (effective June
1998), and Newark and Glasgow, Scotland (effective July 1998). The
Company also has code-sharing agreements and joint marketing
arrangements with other foreign carriers which management believes
are important to Continental's ability to compete effectively as an
international airline. See "Foreign Carrier Alliances" discussed
below.
The Company also has non-stop service to two Mexican cities, six
Caribbean destinations and four South American cities from Newark.
Continental recently received authority from the DOT to begin
service between Newark and Santiago, Chile. The service is
scheduled to begin on May 30, 1998.
The Company's Houston hub is the focus of its operations in Mexico
and Central America. Continental currently flies from Houston to
11 cities in Mexico, every country in Central America and five
cities in South America, including new service to Caracas,
Venezuela which commenced in December 1997. Continental recently
announced four new international routes out of Houston to three
cities in Mexico (Tampico, Veracruz and Merida) and Calgary,
Canada, all of which are scheduled to begin in the second quarter
of 1998. Continental also flies non-stop from Houston to Toronto,
Vancouver, London and Paris.
Continental Micronesia. CMI is a United States-certificated
international air carrier engaged in the business of transporting
passengers, cargo and mail in the western Pacific. From its hub
operations based on the island of Guam, CMI provides service to six
cities in Japan, more than any other United States carrier, as well
as other Pacific rim destinations, including Taiwan, the
Philippines, Hong Kong and Indonesia. Service to these Japanese
cities and certain other Pacific Rim destinations is subject to a
variety of regulatory restrictions, limiting the ability of other
carriers to service these markets.
CMI is the principal air carrier in the Micronesian Islands, where
it pioneered scheduled air service in 1968. CMI's route system is
linked to the United States market through Honolulu, which CMI
serves non-stop from both Tokyo and Guam. CMI and Continental also
maintain a code-sharing agreement and coordinate schedules on
certain flights from the west coast of the United States to
Honolulu, and from Honolulu to Guam and Tokyo, to facilitate travel
from the United States into CMI's route system.
In July 1997, the Company entered into certain agreements with
UMDA. For a discussion of these agreements, see "Business Strategy
- - Fund the Future" above.
Foreign Carrier Alliances. Over the last decade, major United
States airlines have developed and expanded alliances with foreign
air carriers, generally involving adjacent terminal operations,
coordinated flights, code-sharing and other joint marketing
activities. Continental is the sole major United States carrier to
operate a hub in the New York City area. Consequently, management
believes the Company is uniquely situated to attract alliance
partners from Europe, the Far East and South America and intends to
aggressively pursue such alliances. The Company believes that its
recently announced global alliance with Northwest will enhance its
ability to attract foreign alliance partners.
Management believes that developing a network of international
alliance partners will better leverage the Company's hub assets by
attracting high-yield flow traffic and result in improved returns
to the Company. Additionally, Continental can enlarge its scope of
service more rapidly and enter additional markets with lower
capital and start-up costs through formation of alliances with
partners as compared with entering markets independently of other
carriers.
Management has a goal of developing alliance relationships that,
together with the Company's own flying, will permit expanded
service through Newark and Houston to major destinations in South
America, Europe and Asia. Route authorities necessary for the
Company's own service to certain of these destinations are not
currently available to the Company.
Continental has implemented international code-sharing agreements
with Alitalia, Air Canada, Transavia Airlines ("Transavia"), CSA
Czech Airlines, Business Air, China Airlines, EVA Airways
Corporation, an airline based in Taiwan (scheduled to commence
March 30, 1998) and Virgin Atlantic Airways ("Virgin"), which
commenced February 2, 1998.
Alitalia and Continental code-share between points in the United
States and Italy, with Alitalia placing its code on Continental
flights between Newark and Rome and Milan and between Newark and
seven U.S. cities and Mexico City. Continental's agreement with
Alitalia involves a block-space arrangement pursuant to which
carriers agree to share capacity and bear economic risk for blocks
of seats on certain routes.
Continental's agreement with Virgin is a code-share arrangement
containing block-space commitments involving the carriers' Newark-
London routes and eight other routes flown by Virgin between the
United Kingdom and the United States.
Continental and Air Canada (and its subsidiaries) continue to code-
share on six cross-border routes under agreements that expire in
April 1998, where Continental places its code on 18 Air Canada
flights per day and Air Canada places its code on six Continental
flights per day. Continental and Air Canada provide ground
handling and other services for each other at certain locations in
the United States and Canada. Continental does not anticipate
renewing its agreements with Air Canada.
In addition, the Company has also entered into joint marketing
agreements with other airlines, all of which are currently subject
to government approval. Some of these agreements will involve
block-space provisions which management believes are important to
Continental's ability to compete as an international airline. In
October 1996, Continental announced a block-space agreement with
Air France which contemplates a future code-share arrangement on
certain flights between Newark and Charles de Gaulle Airport
("CDG") and Houston and CDG. In August 1997, Continental announced
a code-share agreement with Aerolineas Centrales de Colombia
("ACES").
In connection with the Continental/Northwest alliance, subject to
government approvals, code-sharing will commence with the Company
and Northwest. See "Continental/Northwest Alliance and Related
Agreements" above. Many of the Company's international alliance
agreements provide that a party may terminate the agreement upon a
change of control of the other party. If the Air Partners
Transaction is consummated, certain of the Company's international
alliance partners will have the right to terminate their alliance
relationship with the Company. Based on discussions with such
partners, the Company believes that none of its partners will
exercise such right.
The Company anticipates entering into other code-sharing, joint
marketing and block-space agreements in 1998, which may include the
Company undertaking the financial commitment to purchase seats from
other carriers.
Employees
As of December 31, 1997, the Company had approximately 39,300 full-
time equivalent employees, including approximately 17,100 customer
service agents, reservations agents, ramp and other airport
personnel, 7,000 flight attendants, 6,300 management and clerical
employees, 5,500 pilots, 3,300 mechanics and 100 dispatchers.
Labor costs are a significant component of the Company's expenses
and can substantially impact airline results. In 1997, labor costs
(including employee incentives) constituted 27.9% of the Company's
total operating expenses. While there can be no assurance that the
Company's generally good labor relations and high labor
productivity will continue, management has established as a
significant component of its business strategy the preservation of
good relations with the Company's employees, approximately one-
third of whom are represented by unions. 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 DOT excluding Continental) within 36 months. Such
wage increases will be phased in over the 36-month period as
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.
In April 1997, collective bargaining negotiations began with the
Independent Association of Continental Pilots ("IACP") to amend
both the Continental pilots' contract (which became amendable in
July 1997) and the Express pilots' contract (which became amendable
in October 1997). In February 1998, a five-year collective
bargaining agreement with the Continental Airlines pilots was
announced by the Company and the IACP. In March 1998, Express also
announced a five-year collective bargaining agreement with its
pilots. These agreements are subject to approval by the IACP board
of directors and ratification by the Continental and Express
pilots.
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 addition, the Company's and Express's flight attendants and
dispatchers are represented by unions, as are CMI's flight
attendants, mechanics and related employees and its agent
classification employees. The other employees of Continental,
Express and CMI are not represented by unions and are not covered
by collective bargaining agreements.
Competition and Marketing
The airline industry is highly competitive and susceptible to price
discounting. The Company competes with other air carriers that
have substantially greater resources (and in certain cases, lower
cost structures) as well as smaller air carriers with low cost
structures. Overall industry profit margins have historically been
low. However, during 1995 through 1997, industry profit margins
improved substantially. See Item 1. "Business. Risk Factors
Relating to the Airline Industry" and Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of
Operations".
As with other carriers, most tickets for travel on Continental are
sold by travel agents. Travel agents generally receive commissions
measured by the price of tickets sold. Accordingly, airlines
compete not only with respect to the price of tickets sold, but
also with respect to the amount of commissions paid. Airlines
often pay additional commissions in connection with special revenue
programs.
In 1997, Continental Airlines continued to expand its electronic
ticketing ("E-Ticket") product throughout the United States.
Continental recorded over $1.3 billion in E-Ticket sales in 1997
representing 35% of domestic customers traveling with an E-Ticket
in 1997. Further expansion in 1998 will bring select international
stations online, expand the number of E-Ticket machines in major
airports, and enhance the ability to interline with other carriers
on a bilateral basis. The Company expects these features to
contribute to an increase in E-Ticket usage and a further reduction
in distribution costs.
Frequent Flyer Program
Each major airline has established a frequent flyer program
designed to encourage repeat travel on such carrier. Continental
sponsors a frequent flyer program ("OnePass"), which allows
passengers to earn mileage credits by flying Continental and
certain other carriers, such as America West, Transavia, Alitalia
and Air Canada. The Company also sells mileage credits to hotels,
car rental agencies, credit card companies and others participating
in the OnePass program.
Continental accrues the incremental cost associated with the earned
flight awards based on expected redemptions. The incremental cost
to transport a passenger on a free trip includes the cost of
incremental fuel, meals, insurance and miscellaneous supplies and
does not include any charge for potential displacement of revenue
passengers or costs for aircraft ownership, maintenance, labor or
overhead allocation. Due to the structure of the program and the
low level of redemptions as a percentage of total travel,
Continental believes that displacement of revenue passengers by
passengers using flight awards has historically been minimal. The
number of awards used on Continental represented less than 7% of
Continental's total revenue passenger miles in each of the years
1997 and 1996.
Industry Regulation and Airport Access
Continental and its subsidiaries operate under certificates of
public convenience and necessity issued by the DOT. Such
certificates may be altered, amended, modified or suspended by the
DOT if public convenience and necessity so require, or may be
revoked for intentional failure to comply with the terms and
conditions of a certificate.
The airlines are also regulated by the Federal Aviation
Administration ("FAA"), primarily in the areas of flight
operations, maintenance, ground facilities and other technical
matters. Pursuant to these regulations, Continental has
established, and the FAA has approved, a maintenance program for
each type of aircraft operated by the Company that provides for the
ongoing maintenance of such aircraft, ranging from frequent routine
inspections to major overhauls. Certain regulations require phase-
out of certain aircraft and modifications to aging aircraft. Such
regulations can significantly increase costs and affect a carrier's
ability to compete.
The DOT allows local airport authorities to implement procedures
designed to abate special noise problems, provided such procedures
do not unreasonably interfere with interstate or foreign commerce
or the national transportation system. Certain airports, including
the major airports at Boston, Washington, D.C., Chicago, Los
Angeles, San Diego, Orange County and San Francisco, have
established airport restrictions to limit noise, including
restrictions on aircraft types to be used and limits on the number
of hourly or daily operations or the time of such operations. In
some instances, these restrictions have caused curtailments in
services or increases in operating costs, and such restrictions
could limit the ability of Continental to expand its operations at
the affected airports. Local authorities at other airports are
considering adopting similar noise regulations.
Several airports have recently sought to increase substantially the
rates charged to airlines, and the ability of airlines to contest
such increases has been restricted by federal legislation, DOT
regulations and judicial decisions. In addition, public airports
generally impose passenger facility charges of up to $3 per
departing or connecting passenger. With certain exceptions, these
charges are passed on to the customers.
The FAA has designated John F. Kennedy, LaGuardia, O'Hare and Wash-
ington National airports as "high density traffic airports" and has
limited the number of departure and arrival slots at those
airports. Currently, slots at the high density traffic airports
may be voluntarily sold or transferred between the carriers. The
DOT has in the past reallocated slots to other carriers and
reserves the right to withdraw slots. Various amendments to the
slot system, proposed from time to time by the FAA, members of
Congress and others, could, if adopted, significantly affect
operations at the high density traffic airports or expand slot
controls to other airports. Certain of such proposals could
restrict the number of flights, limit transfer of the ownership of
slots, increase the risk of slot withdrawals or require charges to
the Company's financial statements. Continental cannot predict
whether any of these proposals will be adopted.
The availability of international routes to United States carriers
is regulated by treaties and related agreements between the United
States and foreign governments. The United States has in the past
generally followed the practice of encouraging foreign governments
to accept multiple carrier designation on foreign routes, although
certain countries have sought to limit the number of carriers.
Foreign route authorities may become less valuable to the extent
that the United States and other countries adopt "open skies"
policies liberalizing entry on international routes. Continental
cannot predict what laws and regulations will be adopted or their
impact, but the impact may be significant.
Many aspects of Continental's operations are subject to
increasingly stringent federal, state and local laws protecting the
environment. Future regulatory developments could affect
operations and increase operating costs in the airline industry.
Risk Factors Relating to the Company
Leverage and Liquidity. Continental is more leveraged and has
significantly less liquidity than certain of its competitors,
several of whom have substantial available lines of credit and/or
significant unencumbered assets. Accordingly, Continental may be
less able than certain of its competitors to withstand a prolonged
recession in the airline industry and may not have as much
flexibility to respond to changing economic conditions or to
exploit new business opportunities.
As of December 31, 1997, Continental had approximately $1.9 billion
(including current maturities) of long-term debt and capital lease
obligations and had approximately $1.2 billion of Continental-
obligated mandatorily redeemable preferred securities of subsidiary
trust and common stockholders' equity. Common stockholders' equity
reflects the adjustment of Continental's balance sheet and the
recording of assets and liabilities at fair market value as of
April 27, 1993 in accordance with the American Institute of
Certified Public Accountants' Statement of Position 90-7 -
"Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code". As of December 31, 1997, Continental had $1.0
billion in cash and cash equivalents (excluding restricted cash and
cash equivalents of $15 million). Continental has general lines of
credit and significant encumbered assets.
For 1997, Continental incurred cash expenditures under operating
leases relating to aircraft of approximately $626 million, compared
to $568 million for 1996, and $236 million relating to facilities
and other rentals, compared to $210 million in 1996. Continental
expects that its operating lease expenses for 1998 will increase
over 1997 amounts. In addition, Continental has capital
requirements relating to compliance with regulations that are
discussed below. See "Risk Factors Relating to the Airline
Industry - Regulatory Matters".
In March 1998, Continental announced the conversion of 15 Boeing
737 option aircraft to 15 Boeing 737-900 firm aircraft and the
addition of 25 option aircraft.
As of March 18, 1998, Continental had firm commitments with Boeing
to take delivery of a total of 154 jet aircraft (including the
Boeing 737-900 aircraft discussed above) during the years 1998
through 2005 with options for additional aircraft (exercisable
subject to certain conditions). These 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 $6.7 billion. As of March 18,
1998, Continental had completed or had third party commitments for
a total of approximately $1.6 billion in financing for its future
Boeing deliveries, and had commitments or letters of intent from
various sources for backstop financing for approximately one-third
of the anticipated remaining acquisition cost of such Boeing
deliveries. The Company currently plans on financing the new
Boeing aircraft with a combination of enhanced equipment trust
certificates, lease equity and other third party financing, subject
to availability and market conditions. However, further financing
will be needed to satisfy the Company'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.
Continental's History of Operating Losses. Although Continental
recorded net income of $385 million in 1997, $319 million in 1996
and $224 million in 1995, it had experienced significant operating
losses in the previous eight years. In the long term,
Continental's viability depends on its ability to sustain
profitable results of operations.
Aircraft Fuel. Since fuel costs constitute a significant portion
of Continental's operating costs (approximately 13.6% and 13.3% for
the years ended December 31, 1997 and 1996, respectively),
significant changes in fuel costs would materially affect
Continental's operating results. Fuel prices continue to be
susceptible to international events, and Continental cannot predict
near or longer-term fuel prices. Continental enters into petroleum
option contracts to provide some short-term protection (generally
three to six months) against a sharp increase in jet fuel prices.
In the event of a fuel supply shortage resulting from a disruption
of oil imports or otherwise, higher fuel prices or curtailment of
scheduled service could result.
Labor Matters. In April 1997, collective bargaining agreement
negotiations began with the IACP to amend both the Continental
Airlines pilots' contract (which became amendable in July 1997) and
Express pilots' contract (which became amendable in October 1997).
In February 1998, a five-year collective bargaining agreement with
the Continental Airlines pilots was announced by the Company and
the IACP. In March 1998, Express also announced a five-year
collective bargaining agreement with its pilots. These agreements
are subject to approval by the IACP board of directors and
ratification by the Continental and Express pilots. The Company
began accruing for the increased costs of a tentative agreement
reached in November 1997 in the fourth quarter of 1997. The
Company estimates that such accrual will be approximately $113
million for 1998. Continental's mechanics and related employees
recently voted to be represented by the Teamsters. Continental
does not believe that the Teamsters' union representation will be
material to Continental. In September 1997, Continental announced
that it intends to bring all employees to industry standard wages
(the average of the top ten air carriers as ranked by the DOT,
excluding Continental) within 36 months. The announcement further
stated that wage increases would be phased in over the 36-month
period as revenue, interest rates and rental rates reach industry
standards. Continental estimates that the increased wages will
aggregate approximately $500 million over the 36-month period.
Certain Tax Matters. At December 31, 1997, Continental had
estimated net operating loss carryforwards ("NOLs") of $1.7 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 Continental on April 27, 1993, the ultimate utilization of
Continental's NOLs and investment tax credits could be limited.
Reflecting this possible limitation, Continental has recorded a
valuation allowance of $617 million at December 31, 1997.
Continental had, as of December 31, 1997, deferred tax assets
aggregating $1.1 billion, including $631 million of NOLs.
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
resulting in a $62 million reduction in reorganization value in
excess of amounts allocable to identifiable assets. The Company
may consummate one or more additional built-in gain transactions by
April 27, 1998.
As a result of NOLs, Continental will not pay United States federal
income taxes (other than alternative minimum tax) until it has
recorded approximately an additional $515 million of taxable income
following December 31, 1997. 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
Continental's stock at the time of the ownership change by the
applicable long-term tax-exempt rate (which was 5.23% for February
1998). Any 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
Continental 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 $147 million per year
other than through the recognition of future built-in gain
transactions.
Based on information currently available, the Company does not
believe that the Air Partners Transaction will result in an
ownership change for purposes of Section 382.
Continental Micronesia. Because the majority of CMI's traffic
originates in Japan, its results of operations are substantially
affected by the Japanese economy and changes in the value of the
yen as compared to the dollar. Appreciation of the yen against the
dollar during 1994 and 1995 increased CMI's profitability, while a
decline of the yen against the dollar in 1996 and 1997 has reduced
CMI's profitability. As a result of the continued weakness of the
yen against the dollar, a weak Japanese economy and increased fuel
costs, CMI's operating earnings have declined during 1996 and 1997,
and are not expected to improve materially absent a significant
improvement in these factors.
To reduce the potential negative impact on CMI's dollar earnings,
CMI, from time to time, purchases average rate options as a hedge
against a portion of its expected net yen cash flow position. Such
options historically have not had a material effect on
Continental's results of operations or financial condition. Any
significant and sustained decrease in traffic or yields (including
due to the value of the yen) to and from Japan could materially
adversely affect Continental's consolidated profitability.
Principal Stockholder. As of December 31, 1997, Air Partners held
approximately 9% of the common equity interest and 39% of the
general voting power of the Company. If all the remaining warrants
held by Air Partners had been exercised on December 31, 1997,
approximately 14% of the common equity interest and 51% of the
general voting power of the Company would have been held by Air
Partners. Various provisions in the Company's Certificate of
Incorporation and Bylaws currently provide Air Partners with the
right to elect one-third of the directors in certain circumstances;
these provisions could have the effect of delaying, deferring or
preventing a change in the control of the Company. On January 26,
1998, the Company announced that Air Partners had entered into an
agreement to dispose of its interest in the Company to an affiliate
of Northwest. See Item 1. "Business - Continental/Northwest
Alliance and Related Agreements".
Risks Regarding Continental/Northwest Alliance. On January 26,
1998, the Company and Northwest announced a long-term global
alliance involving schedule coordination, frequent flyer
reciprocity, executive lounge access, airport facility
coordination, code-sharing, the formation of a joint venture among
the two carriers and KLM with respect to their respective trans-
Atlantic services, cooperation regarding other alliance partners of
the two carriers and regional alliance development, certain
coordinated sales programs, preferred reservations displays and
other activities. See Item 1. "Business - Continental/Northwest
Alliance and Related Agreements".
Successful implementation of the alliance and the achievement and
timing of the anticipated synergies by the Company are subject to
certain risks and uncertainties, some of which are beyond the
control of the Company, including (a) competitive pressures,
including developments with respect to existing and potential
future competitive alliances; (b) customer perception of and
acceptance of the alliance, including product differences and
benefits provided; (c) whether the Northwest pilots approve those
aspects of the alliance requiring their approval, and the timing
thereof; (d) potential adverse developments with respect to
regional economic performance; (e) costs or difficulties in
implementing the alliance being greater than expected, including
those caused by the Company's or Northwest's workgroups; (f)
contractual impediments to the implementation by the Company of
certain aspects of the alliance; and (g) non-approval or delay by
regulatory authorities or possible adverse regulatory decisions or
changes. There can be no assurance that the alliance will be fully
and timely implemented or continued, or that the anticipated
synergies will not be delayed or will be achieved.
Corporate Governance Agreement. The Company announced on January
26, 1998 that Air Partners, the holder of approximately 14% of the
Company's equity and approximately 51% of its voting power (after
giving effect to the exercise of warrants), had entered into an
agreement to dispose of its interest in the Company to an affiliate
of Northwest. See Item 1. "Business - Continental/Northwest
Alliance and Related Agreements". In connection with the Air
Partners Transaction, the Company has entered into a corporate
governance agreement with certain affiliates of Northwest, designed
to assure the independence of the Company's board of directors and
management during the six-year period of the governance agreement.
During the term of the governance agreement, the securities of the
Company beneficially owned by Northwest and its affiliates will be
deposited into a voting trust and generally voted as recommended by
the Company's board of directors (a majority of whom must be
independent directors as defined in the agreement) or in the same
proportion as the votes cast by other holders of the Company's
voting securities. However, pursuant to the governance agreement,
those shares may be voted as directed by the Northwest affiliate in
connection with certain matters, including with respect to mergers
and certain other change in control matters and the issuance of
capital stock representing in excess of 20% of the voting power of
the Company prior to issuance requiring a stockholder vote. In
addition, in connection with the election of directors, those
shares shall be voted for the election of the independent
directors; provided that with respect to elections of directors in
respect of which any person other than the Company is soliciting
proxies, the shares may be voted, at the election of Northwest's
affiliate, either as recommended by the Company's board of
directors or in the same proportion as the votes cast by other
holders of the Company's voting securities. As a result of the
provisions of the corporate governance agreement, the ability of
the Company to engage in a change in control transaction other than
with Northwest or an affiliate thereof, or to issue significant
amounts of capital stock under certain circumstances, is limited.
Shareholder Litigation. Following the announcement of the
Northwest Alliance, the Air Partners Transaction and the related
corporate governance agreement between the Company and certain
affiliates of Northwest (collectively, the "Northwest Trans-
action"), to the Company's knowledge as of March 1, 1998, six
separate lawsuits were filed against the Company and its Directors
and certain other parties (the "Shareholder Litigation"). The
complaints in the Shareholder Litigation, which were filed in the
Court of Chancery of the State of Delaware in and for New Castle
County and seek class certification, and which have been
consolidated under the caption In re Continental Airlines, Inc.
Shareholder Litigation, generally allege that the Company's
Directors improperly accepted the Northwest Transaction in
violation of their fiduciary duties owed to the public shareholders
of the Company. They further allege that Delta Air Lines, Inc.
submitted a proposal to purchase the Company which, in the
plaintiffs' opinion, was superior to the Northwest Transaction.
The Shareholder Litigation seeks, inter alia, to enjoin the
Northwest Transaction and the award of unspecified damages to the
plaintiffs.
While there can be no assurance that the Shareholder Litigation
will not result in a delay in the implementation of any aspect of
the Northwest Transaction, or the enjoining of the Northwest
Transaction, the Company believes the Shareholder Litigation to be
without merit and intends to defend it vigorously.
Risks Factors Relating to the Airline Industry
Industry Conditions and Competition. The airline industry is
highly competitive and susceptible to price discounting.
Continental has in the past both responded to discounting actions
taken by other carriers and initiated significant discounting
actions itself. Continental's competitors include carriers with
substantially greater financial resources (and in certain cases,
lower cost structures), as well as smaller carriers with lower cost
structures. Airline profit levels are highly sensitive to, and
during recent years have been severely impacted by, changes in fuel
costs, fare levels (or "average yield") and passenger demand.
Passenger demands and yields have been affected by, among other
things, the general state of the economy, international events and
actions taken by carriers with respect to fares. From 1990 to
1993, these factors contributed to the domestic airline industry's
incurring unprecedented losses. Although fare levels have
increased subsequently, fuel costs have also increased
significantly. In addition, significant industry-wide discounts
could be reimplemented at any time, and the introduction of broadly
available, deeply discounted fares by a major United States airline
would likely result in lower yields for the entire industry and
could have a material adverse effect on Continental's operating
results.
The airline industry has consolidated in past years as a result of
mergers and liquidations and may further consolidate in the future.
Among other effects, such consolidation has allowed certain of
Continental's major competitors to expand (in particular) their
international operations and increase their market strength.
Furthermore, the emergence in recent years of several new carriers,
typically with low cost structures, has further increased the
competitive pressures on the major United States airlines. In many
cases, the new entrants have initiated or triggered price
discounting. Aircraft, skilled labor and gates at most airports
continue to be readily available to start-up carriers. Competition
with new carriers or other low cost competitors on Continental's
routes could negatively impact Continental's operating results.
Regulatory Matters. In the last several years, the FAA has issued
a number of maintenance directives and other regulations relating
to, among other things, retirement of older aircraft, security
measures, collision avoidance systems, airborne windshear avoidance
systems, noise abatement, commuter aircraft safety and increased
inspections and maintenance procedures to be conducted on older
aircraft. Continental expects to continue incurring expenses for
the purpose of complying with the FAA's noise, aging aircraft and
other regulations. In addition, several airports have recently
sought to increase substantially the rates charged to airlines, and
the ability of airlines to contest such increases has been
restricted by federal legislation, DOT regulations and judicial
decisions.
Management believes that Continental benefitted significantly from
the expiration of the aviation trust fund tax (the "ticket tax") on
December 31, 1995. The ticket tax was reinstated on August 27,
1996, expired again on December 31, 1996 and was reinstated again
on March 7, 1997. In July 1997, Congress passed tax legislation
reimposing and significantly modifying the ticket tax. The
legislation includes the imposition of new excise tax and segment
fee tax formulas to be phased in over a multi-year period, an
increase in the international departure tax and the imposition of
a new arrivals tax, and the extension of the ticket tax to cover
items such as the sale of frequent flyer miles. Management
believes that the ticket tax has a negative impact on Continental,
although neither the amount of such negative impact directly
resulting from the reimposition of the ticket tax, nor the benefit
previously realized by its expiration, can be precisely determined.
Additional laws and regulations have been proposed from time to
time that could significantly increase the cost of airline
operations by imposing additional requirements or restrictions on
operations. Laws and regulations have also been considered that
would prohibit or restrict the ownership and/or transfer of airline
routes or takeoff and landing slots. Also, the availability of
international routes to United States carriers is regulated by
treaties and related agreements between the United States and
foreign governments that are amendable. Continental cannot predict
what laws, regulations and amendments may be adopted or their
impact, and there can be no assurance that laws, regulations and
amendments currently proposed or enacted in the future will not
adversely affect Continental.
Seasonal Nature of Airline Business. 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.
Other
While the Company has implemented a Year 2000 project to ensure
that its computer systems will function properly in the year 2000
and thereafter (see Item 7. "Management's Discussion and Analysis
of Financial Condition and Results of Operations"), the Company's
business is dependent upon certain governmental organizations or
entities, such as the FAA, that provide essential aviation industry
infrastructure. There can be no assurance that the systems of such
third parties (including those of the FAA) will be modified to
function properly in the year 2000 on a timely basis. The
Company's business, financial condition or results of operations
could be materially adversely affected by the failure of systems
operated by other parties to operate properly beyond 1999. To the
extent possible, the Company will be developing and executing
contingency plans designed to allow continued operation in the
event of failure of third parties' systems.
ITEM 2. PROPERTIES.
Flight Equipment
As shown in the following table, Continental's (including CMI's)
jet aircraft fleet (excluding regional jets) consisted of 337 jets
and was comprised of 11 different types and series of aircraft at
December 31, 1997.
Seats
Total in Standard Average Age
Type Aircraft Owned Leased Configuration (In Years)
Four Engine
747-200* 4 - 4 426 25.0
Three Engine
DC-10-10 6 - 6 287 25.2
DC-10-30 28 6 22 242 21.7
727-200* 43 4 39 149 21.1
Two Engine
757-200 23 - 23 183 2.4
737-500 50 1 49 104 2.4
737-300 65 14 51 128 10.4
737-200* 16 16 - 100 28.5
737-100* 5 5 - 95 29.5
MD-80 69 15 54 141 13.0
DC-9-30* 28 3 25 103 25.7
337 64 273 14.4
*Stage 2 (noise level) aircraft which are scheduled to be replaced
prior to the year 2000.
The table above excludes six all-cargo 727 CMI aircraft.
A majority of the aircraft and engines owned by Continental are
subject to mortgages.
The FAA has adopted rules pursuant to the Airport Noise and
Capacity Act of 1990 that require a scheduled phase out of Stage 2
aircraft during the 1990's. As a result of Continental's
acquisition of a number of new aircraft and the retirement of older
Stage 2 aircraft in recent years, 71.5% of Continental's current
jet fleet was composed of Stage 3 aircraft at December 31, 1997.
The Company plans to retire the remainder of its Stage 2 jet fleet
(excluding those aircraft operated by CMI) prior to the year 2000
in order to comply with such rules. Scheduled deliveries of the
Company's new Boeing aircraft on order are expected to reduce the
average age of the Company's jet fleet from 14.4 years to 9.8 years
by the end of 1999.
During 1997, Continental took delivery of a total of 20 new Boeing
aircraft which consisted of 14 737-500 aircraft and six 757-200
aircraft. In addition, Continental also purchased three DC-10-30
aircraft and leased seven DC-10-30 aircraft. The Company
anticipates taking delivery of 64 new Boeing aircraft in 1998.
As of December 31, 1997, Express operated a fleet of 116 aircraft,
as follows:
Seats
Total in Standard Average Age
Type Aircraft Owned Leased Configuration (In Years)
Turboprop
ATR-72 3 3 - 64 3.4
ATR-42-320 30 3 27 46 7.9
ATR-42-500 8 - 8 48 1.3
EMB-120 32 22 10 30 8.4
Beech 1900-D 25 25 - 19 1.9
Regional jets
ERJ-145* 18 - 18 50 0.5
116 53 63 5.0
*One regional jet was damaged beyond economic repair in February
1998.
Not included in the table above is one ATR-42 aircraft owned by the
Company and currently leased to a third party.
During 1997, Express took delivery of 16 ERJ-145 aircraft. Express
anticipates taking delivery of 18 new ERJ-145 aircraft in 1998.
See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital
Commitments" for a discussion of the Company's order for new firm
commitment aircraft and related financing arrangements.
Facilities
The Company's principal facilities are located at Newark
International, Bush Intercontinental, Hopkins International and
A.B. Won Pat International Airport in Guam. All these facilities,
as well as substantially all of Continental's other facilities, are
leased on a long-term, net-rental basis, and Continental is
responsible for maintenance, taxes, insurance and other facility-
related expenses and services. In certain locations, Continental
owns hangars and other facilities on land leased on a long-term
basis, which facilities will become the property of the lessor on
termination of the lease. At each of its three domestic hub cities
and most other locations, Continental's passenger and baggage
handling space is leased directly from the airport authority on
varying terms dependent on prevailing practice at each airport.
In July 1996, the Company announced plans to expand its gates and
related facilities into Terminal B at Bush Intercontinental, as
well as planned improvements at Terminal C and the construction of
a new automated people mover system linking Terminal B and Terminal
C. In April 1997, the City of Houston completed the offering of
$190 million aggregate principal amount of tax-exempt special
facilities revenue bonds (the "IAH Bonds"). In connection
therewith, the Company has entered into long-term leases (or
amendments to existing leases) with the City of Houston providing
for the Company to make rental payments sufficient to service the
related tax-exempt bonds, which have a term no longer than 30
years.
The Company is building a wide-body aircraft maintenance hangar in
Honolulu, Hawaii at an estimated cost of $25 million. Construction
of the hangar, anticipated to be completed by the second quarter of
1998, is being financed by tax-exempt special facilities revenue
bonds issued by the State of Hawaii. In connection therewith, the
Company has entered into long-term leases providing for the Company
to make rental payments sufficient to service the related tax-
exempt bonds.
In December 1997, Continental substantially completed construction
of a new hangar and improvements to a cargo facility at Newark
International. Continental expects to complete the financing of
these projects in April 1998 with approximately $25 million of tax-
exempt bonds. Continental is also planning a facility expansion at
Newark which would require, among other matters, agreements to be
reached with the applicable airport authority.
Continental has announced plans to expand its facilities at Hopkins
International, which expansion is expected to be completed in the
third quarter of 1999. The expansion, which will include a new jet
concourse for the regional jet service offered by Express, as well
as other facility improvements, is expected to cost approximately
$156 million and will be funded principally by the issuance of a
combination of tax-exempt special facilities revenue bonds (issued
in March 1998) and general airport revenue bonds (issued in
December 1997) by the City of Cleveland. In connection therewith,
Continental has entered into a long-term lease with the City of
Cleveland under which rental payments will be sufficient to service
the related bonds.
The Company has lease agreements with the City and County of Denver
covering ten gates and several support facilities at Denver
International Airport. The gates and facilities exceed
Continental's needs at the airport and the Company has subleased a
portion of the space.
The Company has cargo facilities at Los Angeles International
Airport. In July 1996, the Company subleased such facilities to
another carrier. If such carrier fails to comply with its
obligations under the sublease, the Company would be required to
perform those obligations.
CMI operates a hub on the island of Guam. In September 1996, the
Guam International Airport Authority completed the first phase of
a $240 million airport terminal expansion and renovation project.
This provided new arrival facilities, inbound baggage carousels and
customs halls and increased the number of gates available to CMI
from six to 12. Upon completion of the second (and final) phase of
the project in August 1998, five new additional gates will be
added, including ticket counters and a new pier-sort outbound
baggage system. The completed project is expected to triple the
size of the terminal complex and increase the cost of CMI's
operations in Guam by approximately $15 million a year.
Continental also maintains administrative offices, airport and
terminal facilities, training facilities and other facilities
related to the airline business in the cities it serves.
Continental remains contingently liable until December 1, 2015, on
$202 million of long-term lease obligations of US Airways related
to the East End Terminal at LaGuardia Airport in New York. If US
Airways defaulted on these obligations, Continental could be
required to cure the default, at which time it would have the
right to reoccupy the terminal.
ITEM 3. LEGAL PROCEEDINGS.
Plan of Reorganization
The Company's Plan of Reorganization, which became effective on
April 27, 1993, upon emergence from bankruptcy (the "Plan of
Reorganization"), provides for the full payment of all allowed
administrative and priority claims. Pursuant to the Plan of
Reorganization, holders of allowed general unsecured claims are
entitled to participate in a distribution of 3,800,000 shares of
the Company's Class A common stock, 10,084,736 shares of the
Company's Class B common stock, and $6,523,952 of cash and have no
further claim against the Company. The Plan of Reorganization
provides for this distribution to be issued initially in trust to
a distribution agent and thereafter for distributions to be made
from the trust from time to time as disputed claims are resolved.
The distribution agent must reserve from each partial distribution
of stock or cash to allow a complete pro rata distribution to be
made to each holder of a disputed claim in the event such claim is
eventually allowed, unless the United States Bankruptcy Court for
the District of Delaware (the "Bankruptcy Court") establishes a
lower reserve or estimates the claim at a lesser amount for
purposes of distribution. As of December 31, 1997, there remained
581,355 shares of Class A common stock, 1,520,827 shares of Class B
common stock, and approximately $972,000 of cash available for
distribution. The stock and cash set aside for distribution to
prepetition unsecured creditors was fixed in the Plan of
Reorganization and will not change as claims are allowed. However,
a limited number of proceedings were brought by prepetition
creditors seeking to impose additional obligations on the Company.
Environmental Proceedings
Under the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended (commonly known
as "Superfund") and similar state environment cleanup laws,
generators of waste disposed of at designated sites may, under
certain circumstances, be subject to joint and several liability
for investigation and remediation costs. The Company (including
its predecessors) has been identified as a potentially responsible
party at four federal and two state sites that are undergoing or
have undergone investigation or remediation. The Company believes
that, although applicable case law is evolving and some cases may
be interpreted to the contrary, some or all of any liability claims
associated with these sites were discharged by confirmation of the
Company's Plan of Reorganization, principally because the Company's
exposure is based on alleged offsite disposal known as of the date
of confirmation. Even if any such claims were not discharged, on
the basis of currently available information, the Company believes
that its potential liability for its allocable share of the cost to
remedy each site (to the extent the Company is found to have
liability) is not, in the aggregate, material; however, the Company
has not been designated a "de minimis" contributor at any of such
sites.
The Company is also involved in other environmental matters,
including the investigation and/or remediation of environmental
conditions at properties used or previously used by the Company.
Although the Company is not currently subject to any environmental
cleanup orders imposed by regulatory authorities, it is undertaking
voluntary investigation or remediation at certain properties in
consultation with such authorities. The full nature and extent of
any contamination at these properties and the parties responsible
for such contamination have not been determined, but based on
currently available information the Company does not believe that
any environmental liability associated with such properties will
have a material adverse effect on the Company.
Shareholder Litigation
Following the announcement of the Northwest Alliance, the Air
Partners Transaction and the related corporate governance agreement
between the Company and certain affiliates of Northwest
(collectively, the "Northwest Transaction"), to the Company's
knowledge as of March 1, 1998, six separate lawsuits were filed
against the Company and its Directors and certain other parties
(the "Shareholder Litigation"). The complaints in the Shareholder
Litigation, which were filed in the Court of Chancery of the State
of Delaware in and for New Castle County and seek class
certification, and which have been consolidated under the caption
In re Continental Airlines, Inc. Shareholder Litigation, generally
allege that the Company's Directors improperly accepted the
Northwest Transaction in violation of their fiduciary duties owed
to the public shareholders of the Company. They further allege
that Delta Air Lines, Inc. submitted a proposal to purchase the
Company which, in the plaintiffs' opinion, was superior to the
Northwest Transaction. The Shareholder Litigation seeks, inter
alia, to enjoin the Northwest Transaction and the award of
unspecified damages to the plaintiffs.
While there can be no assurance that the Shareholder Litigation
will not result in a delay in the implementation of any aspect of
the Northwest Transaction, or the enjoining of the Northwest
Transaction, the Company believes the Shareholder Litigation to be
without merit and intends to defend it vigorously.
General
Various other claims and lawsuits against the Company are pending
that are of the type generally consistent with the Company's
business. The Company cannot at this time reasonably estimate the
possible loss or range of loss that could be experienced if any of
the claims were successful. Typically, such claims and lawsuits
are covered in whole or in part by insurance. The Company does not
believe that the foregoing matters will have a material adverse
effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
Continental's common stock trades on the New York Stock Exchange.
The table below shows the high and low sales prices for the
Company's Class A common stock and Class B common stock as reported
on the New York Stock Exchange during 1996 and 1997.
Class A Class B
Common Stock Common Stock
High Low High Low
1996 First Quarter . . . 27 19-1/8 28-3/16 19-7/16
Second Quarter. . . 31-1/16 25-7/8 31-7/16 26-9/16
Third Quarter . . . 31 21 31-1/8 21-1/8
Fourth Quarter. . . 30-5/8 22 30-3/4 22-5/8
1997 First Quarter . . . 33-3/4 27 33-5/8 27
Second Quarter. . . 36-3/4 30-1/8 35-7/8 29-1/2
Third Quarter . . . 41-7/16 34 41-3/8 34
Fourth Quarter. . . 50-1/2 38-1/2 50-3/16 38-5/8
As of March 11, 1998, there were approximately 3,133 and 17,956
holders of record of Continental's Class A common stock and Class B
common stock, respectively.
The Company has paid no cash dividends on its common stock.
Because management believes it is important to continue
strengthening the Company's balance sheet and liquidity, the
Company has no current intention of paying cash dividends on its
common stock, but may consider repurchase of its common stock under
certain market conditions. Certain of the Company's credit
agreements and indentures restrict the ability of the Company and
certain of its subsidiaries to pay cash dividends by imposing
minimum unrestricted cash requirements on the Company, limiting the
amount of such dividends when aggregated with certain other
payments or distributions and requiring that the Company comply
with other covenants specified in such instruments.
The Company's Certificate of Incorporation provides that no shares
of capital stock may be voted by or at the direction of persons who
are not United States citizens unless such shares are registered on
a separate stock record. The Company's Bylaws further provide that
no shares will be registered on such separate stock record if the
amount so registered would exceed United States foreign ownership
restrictions. United States law currently requires that no more
than 25% of the voting stock of the Company (or any other domestic
airline) may be owned directly or indirectly by persons who are not
citizens of the United States.
ITEM 6. SELECTED FINANCIAL DATA.
The table on the following page sets forth certain consolidated
financial data of (i) the Company at December 31, 1997, 1996, 1995,
1994 and 1993 and for the years ended December 31, 1997, 1996, 1995
and 1994 and the period April 28, 1993 through December 31, 1993
and (ii) the Predecessor Company (see "1993 Reorganization" below),
for the period January 1, 1993 through April 27, 1993 (in millions,
except per share data).
1993 Reorganization
As used on the following page, the term "Reorganized Company"
refers to Continental Airlines, Inc. and its subsidiaries. The
Company reorganized under Chapter 11 of the federal bankruptcy code
in April 1993, after having filed for protection in December 1990.
Pursuant to the Reorganization, Continental Airlines Holdings, Inc.
(together with its subsidiaries, "Holdings" or the "Predecessor
Company"), which had been the Company's parent, merged with and
into the Reorganized Company.
As a result of the adoption of fresh start reporting in accordance
with SOP 90-7, upon consummation of the Company's Plan of
Reorganization (see Item 3. "Legal Proceedings - Plan of
Reorganization"), the consolidated financial statements of the
Predecessor Company and the Reorganized Company have not been
prepared on a consistent basis of accounting and are separated by
a vertical black line. The Reorganized Company includes
Continental CRS Interests, Inc. (formerly System One Information
Management, Inc. prior to April 27, 1995) and other businesses that
had been consolidated with Holdings prior to April 28, 1993 (but
not with pre-reorganized Continental).
ITEM 6. SELECTED FINANCIAL DATA (Continued)
Predecessor
Reorganized Company (1)(2)(3) Company (2)
April 28, January 1,
1993 through 1993 through
Year Ended December 31, December 31, April 27,
1997 1996 1995 1994 1993 1993
Operating revenue. . . . $7,213 $6,360 $5,825 $5,670 $3,910 $1,857
Operating income (loss). 716 525 385 (11) 95 (114)
Income (loss) before
extraordinary gain
(loss) . . . . . . . . 389 325 224 (613) (39) (979)
Net income (loss). . . . 385 319 224 (613) (39) 2,640
Earnings (loss) per
common share:
Income (loss)
before extra-
ordinary loss. . . 6.72 5.87 4.07 (11.88) (1.17) *
Net income (loss). . 6.65 5.75 4.07 (11.88) (1.17) *
Earnings (loss) per
common share
assuming dilution:
Income (loss)
before extra-
ordinary loss. . . 5.03 4.25 3.37 (11.88) (1.17) *
Net income (loss). . 4.99 4.17 3.37 (11.88) (1.17) *
*Not meaningful.
ITEM 6. SELECTED FINANCIAL DATA (Continued)
Reorganized Company (1)
December 31,
1997 1996 1995 1994 1993
Total assets . . . . . . . . . . . $5,830 $5,206 $4,821 $4,601 $5,099
Debt and capital lease obligations
in default (4) . . . . . . . . . - - - 490 -
Long-term debt and capital lease
obligations. . . . . . . . . . . 1,568 1,624 1,658 1,202 1,775
Minority interest (5). . . . . . . - 15 27 26 22
Continental-Obligated Mandatorily
Redeemable Preferred Securities
of Subsidiary Trust holding
solely Convertible Subordinated
Debentures (6) . . . . . . . . . 242 242 242 - -
Redeemable preferred stock (7) . . - 46 41 53 47
(1) See Item 7. "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Results of Operations" for a discussion of significant transactions in
1997, 1996 and 1995. 1996 results include a $128 million fleet disposition charge
associated with the Company's decision to accelerate the replacement of certain aircraft
between August 1997 and December 1999. The fleet disposition charge relates 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. 1995 results include a $108 million gain ($30 million after
taxes) from the System One transactions. 1994 results include a provision of $447
million associated with the planned early retirement of certain aircraft and closed or
underutilized airport and maintenance facilities and other assets.
(2) No cash dividends were paid on common stock during the periods shown.
(3) The earnings per share amounts prior to 1997 have been restated as required to comply
with Statement of Financial Accounting Standards No. 128 - "Earnings Per Share" ("SFAS
128"). For further discussion of earnings per share and the impact of SFAS 128, see the
notes to the consolidated financial statements beginning on page F-14.
(4) The Company's failure to make certain required payments in 1994 to certain lenders and
aircraft lessors constituted events of default under the respective agreements with such
parties. These events of default were cured in 1995.
(5) Continental purchased UMDA's 9% interest in AMI in 1997. See Item 1. "Business -
Business Strategy - Fund the Future".
(6) The sole assets of the Continental-Obligated Mandatorily Redeemable Preferred Securities
of Subsidiary Trust ("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 Trust will be mandatorily redeemed.
(7) Continental redeemed for cash all of the outstanding shares of its Series A 12%
Cumulative Preferred Stock in 1997. See Item 1. "Business - Business Strategy - Fund
the Future".
ITEM 7. 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 cautionary statements
contained in Item 1. "Business - Risk Factors Relating to the
Company" and "Business - Risk Factors Relating to the Airline
Industry" which identify important factors that could cause actual
results to differ materially from those in the forward-looking
statements. Hereinafter, the terms "Continental" and the "Company"
refer to Continental Airlines, Inc. and its subsidiaries, unless
the context indicates otherwise.
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 years ended December 31, 1997.
Comparison of 1997 to 1996. The Company recorded consolidated net
income of $385 million and $319 million for the years ended
December 31, 1997 and 1996, respectively, including a $128 million
fleet disposition charge ($77 million after taxes) in 1996 and
after-tax extraordinary losses relating to the early extinguishment
of debt of $4 million and $6 million in 1997 and 1996,
respectively. Management believes that the Company benefitted in
the first three quarters of 1996 and in the first quarter of 1997
from the expiration of the aviation trust fund tax (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. 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 net operating loss carryforwards ("NOLs").
Passenger revenue increased 13.4%, $789 million, during 1997
compared to 1996. The increase was due to a 14.3% increase in
revenue passenger miles on capacity growth of 9.9% offset by a 1.1%
decrease in yield.
Cargo revenue increased 13.6%, $21 million, during 1997 compared to
1996 due to an increase in cargo capacity, primarily in
international markets.
Mail and other revenue increased 12.8%, $43 million, from 1996 to
1997 primarily as a result of an increase in mail volumes
(principally in international markets) and an increase in other
revenue related to frequent flyer mileage credits sold to
participating partners in the Company's frequent flyer program
("OnePass").
Wages, salaries and related costs increased 16.3%, $236 million,
during 1997 as compared to 1996 due in part to an 9.6% increase in
the average number of full-time equivalent employees from
approximately 34,300 for the year ended December 31, 1996 to 37,600
for the year ended December 31, 1997. Wages and salaries also
increased in 1997 due to a $29 million accrual for the impact of
the tentative collective bargaining agreement with the pilots.
Employee incentives increased 29.9%, $29 million, from 1996 to 1997
as a result of an increase in employee profit sharing of $37
million offset by a decrease in on-time bonuses of $8 million.
Aircraft fuel expense increased 14.3%, $111 million, from 1996 to
1997 primarily due to a 10.5% increase in the quantity of jet fuel
used from 1.228 billion gallons during 1996 to 1.357 billion
gallons during 1997, resulting from increased flying. In addition,
the average price per gallon, net of fuel hedging gains of $65
million in 1996, increased 3.3% from 60.9 cents in 1996 to
62.9 cents in 1997.
Commissions expense increased 11.2%, $57 million, in 1997 compared
to 1996, primarily due to increased passenger revenue.
Aircraft rentals increased 8.3%, $42 million, from 1996 to 1997,
primarily as a result of the delivery of new aircraft throughout
1997, net of retirements.
Maintenance, materials and repairs increased 16.5%, $76 million,
during 1997 as compared to 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 12.9%, $45 million, during
1997 compared to 1996 due to higher facilities rentals and 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 14.9%, $194 million, in 1997 as
compared to 1996, primarily as a result of increases in passenger
services, advertising and publicity, reservations and sales expense
and other miscellaneous expense.
Interest capitalized increased $30 million in 1997 compared to 1996
as a result of higher average purchase deposits for flight
equipment resulting from the pending acquisition of new aircraft.
Interest income increased 30.2%, $13 million, in 1997 compared to
the prior year principally due to an increase in the average
invested balance of cash and cash equivalents.
Other nonoperating income (expense) for the year ended December 31,
1996 included an $18 million gain related to the sale of America
West Airlines, Inc. ("America West") common stock and warrants.
The income tax provision for the year ended December 31, 1997 and
1996 of $237 million and $86 million, respectively, consists of
federal, state and foreign income taxes. During the second quarter
of 1996, the Company had fully utilized previously unbenefitted
post-reorganization NOLs, and began accruing income tax expense.
Comparison of 1996 to 1995. The Company recorded consolidated net
income of $319 million and $224 million for the years ended
December 31, 1996 and 1995, respectively, including a $128 million
fleet disposition charge ($77 million after taxes) and a $6 million
after-tax extraordinary loss relating to the early extinguishment
of debt in 1996. Continental's financial and operating performance
improved significantly in 1996 compared to 1995, reflecting, among
other things, continued implementation of the Company's strategic
program to enhance the fundamentals of its operations, rationalize
capacity, improve customer service and employee relations and
strengthen its balance sheet and liquidity. Management believes
that the Company benefitted significantly from the expiration of
the ticket tax on December 31, 1995, although the amount of any
such benefit directly resulting from the expiration of the ticket
tax cannot precisely be determined. The ticket tax was reinstated
on August 27, 1996, and expired again on December 31, 1996.
Implementation of the Company's route realignment and capacity
rationalization initiatives increased capacity by 0.8% in 1996 as
compared to 1995. This increase in capacity, combined with a 4.7%
increase in traffic, produced a 2.5 percentage point increase in
load factor to 68.1%. This higher load factor, combined with a
4.7% increase in the average yield per revenue passenger mile,
contributed to a 10.7% increase in passenger revenue to $5.9
billion in 1996.
Mail and other revenue decreased 11.4%, $43 million, from 1995 to
1996 primarily as a result of a series of transactions entered into
with a former subsidiary, System One Information Management, Inc.
("System One") (which were effective April 27, 1995). See Note 11
of Notes to Consolidated Financial Statements. Partially
offsetting such decrease was an increase in other revenue resulting
from a wet lease agreement with Alitalia, an agreement with DHL
International to operate a sorting and distribution hub in Manila
and an increase in revenue related to frequent flyer mileage
credits sold to participating partners in the Company's OnePass
program.
Wages, salaries and related costs increased 5.1%, $71 million,
during 1996 as compared to 1995 due in part to an increase in the
average number of full-time equivalent employees from approximately
33,700 for the year ended December 31, 1995 to approximately 34,300
for the year ended December 31, 1996. The increase is also
attributable to pay increases effective July 1, 1996 for
Continental's jet pilots and substantially all of its non-unionized
employees and an increase in base wages and per diem payments for
flight attendants resulting from the Company's collective
bargaining agreement with the International Association of
Machinists and Aerospace Workers ("IAM") representing Continental's
flight attendants.
Employee incentives increased $46 million from 1995 to 1996
primarily due to an increase in employee profit sharing of $37
million and an increase in on-time bonuses of $9 million.
Aircraft fuel expense increased 13.7%, $93 million, from 1995 to
1996. The average price per gallon, net of fuel hedging gains of
$65 million in 1996, increased 10.7% from 55.0 cents in 1995 to
60.9 cents in 1996. In addition, there was a 2.1% increase in the
quantity of jet fuel used from 1.203 billion gallons during 1995 to
1.228 billion gallons during 1996, principally reflecting increased
capacity.
Commissions expense increased 4.3%, $21 million, in 1996 compared
to 1995, primarily due to a 10.7% increase in passenger revenue,
partially offset by a decrease in the percentage of commissionable
revenue.
Aircraft rentals increased 2.4%, $12 million, from 1995 to 1996,
primarily as a result of the delivery of new aircraft throughout
1996. Such increase was partially offset by retirements of certain
leased aircraft and refinancings of certain leased aircraft.
Maintenance, materials and repairs increased 7.5%, $32 million,
during 1996 as compared to 1995, principally due to the volume and
timing of engine overhauls as part of the Company's ongoing
maintenance program.
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 ($77
million after taxes). 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.
Interest expense decreased 22.5%, $48 million, from 1995 to 1996,
primarily due to principal reductions of long-term debt and capital
lease obligations as a result of the Company's refinancing
initiatives.
Interest income increased 38.7%, $12 million, in 1996 compared to
1995, principally due to an increase in the average invested
balance of cash and cash equivalents.
The Company's other nonoperating income (expense) for the year
ended December 31, 1996 includes a $13 million gain related to the
sale of approximately 1.4 million shares of America West common
stock, a $5 million gain related to the sale of the America West
warrants and foreign currency gains and losses (primarily related
to the Japanese yen and the British pound).
Nonoperating income (expense) for the year ended December 31, 1995
primarily consisted of a pre-tax gain of $108 million from the
System One transactions. Additionally in 1995, the bankruptcy
court approved a settlement resolving certain claims filed by the
Company for the return of certain aircraft purchase deposits. As
a result of the settlement, the Company recorded a $12 million gain
in 1995, included in other nonoperating income (expense). These
gains were partially offset by an additional provision of $14
million for underutilized airport facilities and other assets
(primarily associated with Denver International Airport) and a
$5 million pretax charge which represented a waiver fee to a major
creditor of the Company.
The income tax provision for the year ended December 31, 1996 of
$86 million consists of federal, state and foreign income taxes.
During 1996, the Company utilized previously unbenefitted NOLs,
created subsequent to the Company's 1993 emergence from bankruptcy,
and began accruing income tax expense in the second quarter. A
provision for federal income taxes was recorded for the year ended
December 31, 1995 related to the System One transactions. No
additional provision was recorded in 1995 due to the previously
incurred NOLs for which a tax benefit had not previously been
recorded.
Certain Statistical Information
An analysis of statistical information for Continental's jet
operations, excluding regional jets operated by Continental
Express, for each of the three years in the period ended
December 31, 1997 is as follows:
Net Increase/ Net Increase/
(Decrease) (Decrease)
1997 1997-1996 1996 1996-1995 1995
Revenue pas-
senger miles
(millions) (1). . 47,906 14.3 % 41,914 4.7 % 40,023
Available seat
miles
(millions) (2). . 67,576 9.9 % 61,515 0.8 % 61,006
Passenger load
factor (3). . . . 70.9% 2.8 pts. 68.1% 2.5 pts. 65.6%
Breakeven pas-
senger load
factor (4), (11). 60.0% (0.7)pts. 60.7% (0.1)pts. 60.8%
Passenger revenue
per available
seat mile
(cents) (5) . . . 9.19 2.9 % 8.93 8.9 % 8.20
Total revenue per
available seat
miles (cents)
(6) . . . . . . . 10.09 3.0 % 9.80 8.6 % 9.02
Operating cost
per available
seat mile
(cents) (7),
(11). . . . . . . 9.07 3.4 % 8.77 4.9 % 8.36
Average yield
per revenue
passenger
mile (cents) (8). 12.96 (1.1)% 13.10 4.7 % 12.51
Average fare per
revenue
passenger . . . .$150.63 5.1 % $143.27 7.6 % $133.21
Revenue passengers
(thousands) . . . 41,210 7.5 % 38,332 2.0 % 37,575
Average length of
aircraft flight
(miles) . . . . . 967 7.9 % 896 7.2 % 836
Average daily
utilization of
each aircraft
(hours) (9) . . . 10:13 2.3 % 9:59 4.7 % 9:32
Actual aircraft
in fleet at end
of period (10). . 337 6.3 % 317 2.6 % 309
_______________
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
in June 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 738
million available seat miles in 1997, as well as the related
revenue passenger miles and enplanements, which were 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 nonrecurring
charges, nonoperating items and other special items.
(5) Passenger revenue divided by available seat miles.
(6) Total revenue divided by available seat miles.
(7) Operating expenses divided by available seat miles.
(8) The average revenue received for each mile a revenue
passenger is carried.
(9) The average number of hours per day that an aircraft flown in
revenue service is operated (from gate departure to gate
arrival).
(10) Excludes six and four all-cargo 727 CMI aircraft in 1997 and
1996, respectively.
(11) 1996 excludes fleet disposition charge totaling $128 million.
Liquidity and Capital Resources
During 1997 and early 1998, the Company completed a number of
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 aircraft from The
Boeing Company ("Boeing") scheduled to be delivered to
Continental through April 1998.
- - 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% Cumulative Preferred Stock
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, L.P. ("Air
Partners") for $94 million in cash warrants to purchase 3,842,542
shares of Class B common stock of the Company.
- - 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 $350 million of term loans, $275 million of
which was 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. The facility also
includes a $225 million revolving credit facility.
- - In July 1997, the Company (i) purchased (a) the right of United
Micronesia Development Association's ("UMDA") 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 Embraer ERJ-145
("ERJ-145") 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 from April 1998 through
November 1998.
- - In February 1998, the Company completed an offering of $773
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 aircraft
scheduled to be delivered from February 1998 through December
1998.
- - In addition, during 1997 and the first quarter of 1998,
Continental completed several offerings totaling approximately
$291 million aggregate principal amount of tax-exempt special
facilities revenue bonds to finance or refinance certain airport
facility projects. These bonds are payable solely from rentals
paid by Continental under long-term lease agreements with the
respective governing bodies.
The cash proceeds from the pass-through certificate transactions
are deposited with a depositary bank for the benefit of the
certificate holders and enable the Company to finance (through
either leveraged leases or secured debt financings) the debt
portion of the acquisition cost of new aircraft. As of March 18,
1998 approximately $1.6 billion of the proceeds remain on deposit.
If any funds remain as deposits at the end of the specified
delivery periods, such funds will be distributed back to the
certificate holders.
As of December 31, 1997, Continental had approximately $1.9 billion
(including current maturities) of long-term debt and capital lease
obligations, and had approximately $1.2 billion of Continental-
obligated mandatorily redeemable preferred securities of subsidiary
trust and common stockholders' equity, a ratio of 1.6 to 1. As of
December 31, 1996, the ratio of long-term debt and capital lease
obligations (including current maturities) to minority interest,
Continental-obligated mandatorily redeemable preferred securities
of subsidiary trust, redeemable preferred stock and common
stockholders' equity was 2.1 to 1.
As of December 31, 1997 the Company had $1.0 billion in cash and
cash equivalents (excluding restricted cash), compared to $985
million as of December 31, 1996. Net cash provided by operating
activities increased $129 million during the year ended December
31, 1997 compared to the same period in the prior year principally
due to an improvement in operating income. Net cash used by
investing activities for the year ended December 31, 1997 compared
to the same period in the prior year increased $406 million,
primarily as a result of higher capital and fleet-related
expenditures in 1997 and lower purchase deposits refunded in
connection with aircraft delivered in 1996. Net cash used by
financing activities increased $80 million primarily due to (i) a
decrease in payments on long-term debt and capital lease
obligations, (ii) a decrease in proceeds received from the issuance
of long-term debt and (iii) an increase in warrants purchased in
1997.
Continental has general lines of credit and significant encumbered
assets.
Deferred Tax Assets. The Company had, as of December 31, 1997,
deferred tax assets aggregating $1.1 billion, including
$631 million of NOLs. The Company recorded a valuation allowance
of $617 million against such assets as of December 31, 1997.
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. In the fourth quarter of 1997, the Company determined
that it would be able to recognize an additional $155 million of
NOLs attributable to the Company's pre-bankruptcy predecessor.
This benefit, $62 million, was used to reduce reorganization value
in excess of amounts allocable to identifiable assets. To the
extent the Company were to determine in the future that additional
NOLs of the Company's pre-bankruptcy predecessor could be
recognized in the consolidated financial statements, such benefit
would also reduce reorganization value in excess of amounts
allocable to identifiable assets. If such reorganization value is
exhausted, such benefit would decrease other intangibles. The
Company may consummate one or more additional built-in gain
transactions by April 28, 1998.
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 $515 million of taxable income
following December 31, 1997. 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 was 5.23% for February
1998). Any 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 $147 million per year
other than through the recognition of future built-in gain
transactions.
Based on information currently available, the Company does not
believe that the Air Partners agreement to dispose of its interest
in the Company to an affiliate of Northwest Airlines, Inc. will
result in an ownership change for purposes of Section 382. See
Item 7. "Management's Discussion and Analyses - Liquidity and
Capital Resources - Other".
Purchase Commitments. In March 1998, Continental announced the
conversion of 15 Boeing 737 option aircraft to 15 Boeing 737-900
firm aircraft and the addition of 25 option aircraft. As of March
18, 1998, Continental had firm commitments with Boeing to take
delivery of a total of 154 jet aircraft (including the Boeing 737-
900 aircraft described above) during the years 1998 through 2005
with options for an additional 61 aircraft (exercisable subject to
certain conditions). These 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 $6.7 billion. As of March 18,
1998, Continental had completed or had third party commitments for
a total of approximately $1.6 billion in financing for its future
Boeing deliveries, and had commitments or letters of intent from
various sources for backstop financing for approximately one-third
of the anticipated remaining acquisition cost of such Boeing
deliveries. The Company currently plans on financing the new
Boeing aircraft with a combination of enhanced equipment trust
certificates, lease equity and other third party financing, subject
to availability and market conditions. However, further financing
will be needed to satisfy the Company'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, Continental Express, Inc. ("Express") placed an
order for 25 firm ERJ-145 regional jets, with options for an
additional 175 aircraft exercisable through 2008. In June 1997,
Express exercised its option to order 25 of such option aircraft
and expects to confirm its order for an additional 25 of its
remaining 150 option aircraft by August 1998. Neither Express nor
Continental will have any obligation to take such aircraft that are
not financed by a third party and leased to the Company. Express
took delivery of 18 of the aircraft through December 31, 1997 and
will take delivery of the remaining 32 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 1998 capital expenditures,
exclusive of fleet plan requirements, to aggregate $211 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 1997
aggregated $118 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 firm
financing commitments.
Year 2000. The Company uses a significant number of computer
software programs and embedded operating systems that are essential
to its operations. As a result, the Company implemented a Year
2000 project in early 1997 to ensure that the Company's computer
systems will function properly in the year 2000 and thereafter.
The Company anticipates completing its Year 2000 project in early
1999 and believes that, with modifications to its existing software
and systems and/or conversions to new software, the Year 2000 Issue
will not pose significant operational problems for its computer
systems.
The Company has also initiated communications with its significant
suppliers and vendors with which its systems interface and exchange
data or upon which its business depends. The Company is
coordinating efforts with these parties to minimize the extent to
which its business will be vulnerable to their failure to remediate
their own Year 2000 issues. The Company's business is also
dependent upon certain governmental organizations or entities such
as the Federal Aviation Administration ("FAA") that provide
essential aviation industry infrastructure. There can be no
assurance that the systems of such third parties on which the
Company's business relies (including those of the FAA) will be
modified on a timely basis. The Company's business, financial
condition or results of operations could be materially adversely
affected by the failure of its systems or those operated by other
parties to operate properly beyond 1999. To the extent possible,
the Company will be developing and executing contingency plans
designed to allow continued operation in the event of failure of
the Company's or third parties' systems.
The total cost (excluding internal payroll costs) of the Company's
Year 2000 project is currently estimated at $12 million and will be
funded through cash from operations. The cost of the Company's
Year 2000 project is limited by the substantial outsourcing of its
systems and the significant implementation of new systems following
its emergence from bankruptcy in 1993. The costs of the Company's
Year 2000 project and the date on which the Company believes it
will be completed are based on management's best estimates and
include assumptions regarding third-party modification plans.
However, in particular due to the potential impact of third-party
modification plans, there can be no assurance that these estimates
will be achieved and actual results could differ materially from
those anticipated.
Bond Financings. In April 1997, the City of Houston 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 of Houston. The IAH Bonds are unconditionally
guaranteed by Continental. 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, 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 December 1997, Continental substantially completed construction
of a new hangar and improvements to a cargo facility at
Continental's hub at Newark International Airport. Continental
expects to complete the financing of these projects in April 1998
with $25 million of tax-exempt bonds. Continental is also planning
a facility expansion at Newark which would require, among other
matters, agreements to be reached with the applicable airport
authority.
The Company is building a wide-body aircraft maintenance hangar in
Honolulu, Hawaii at an estimated cost of $25 million. Construction
of the hangar, anticipated to be completed by the second quarter of
1998, is being financed by tax-exempt special facilities revenue
bonds issued by the State of Hawaii. In connection therewith, the
Company has entered into long-term leases providing for the Company
to make rental payments sufficient to service the related tax-
exempt bonds.
Continental has announced plans to expand its facilities at its
Hopkins International Airport hub in Cleveland, which expansion is
expected to be completed in the third quarter of 1999. The
expansion, which will include a new jet concourse for the regional
jet service offered by Express, as well as other facility
improvements, is expected to cost approximately $156 million and
will be funded principally by the issuance of a combination of tax-
exempt special facilities revenue bonds (expected to be issued in
March 1998) and general airport revenue bonds (issued in December
1997) by the City of Cleveland. In connection therewith,
Continental has entered into a long-term lease with the City of
Cleveland under which rental payments will be sufficient to service
the related bonds.
Employees. In April 1997, collective bargaining agreement
negotiations began with the Independent Association of Continental
Pilots ("the IACP") to amend both the Continental Airlines pilots'
contract (which became amendable in July 1997) and Express pilots'
contract (which became amendable in October 1997). In February
1998, a five-year collective bargaining agreement with the
Continental Airlines pilots was announced by the Company and the
IACP. In March 1998, Express also announced a five-year collective
bargaining agreement with its pilots. These agreements are subject
to approval by the IACP board of directors and ratification by the
Continental and Express pilots. The Company began accruing for the
increased costs of a tentative agreement reached in November 1997
in the fourth quarter of 1997. The Company estimates that such
accrual will be approximately $113 million for 1998. 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, Continental
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
36 months. The announcement further stated that wage increases
will be phased in over the 36-month period as revenue, interest
rates and rental rates reached industry standards. Continental
estimates that the increased wages will aggregate approximately
$500 million over the 36-month period.
Other. As a result of the continued weakness of the yen against
the dollar, a weak Japanese economy and increased fuel costs, CMI's
operating earnings have declined during 1996 and 1997, and are not
expected to improve materially absent a significant improvement in
these factors.
In addition, the Company has entered into petroleum option
contracts to provide some short-term protection against a sharp
increase in jet fuel prices, and CMI has entered into average rate
option contracts to hedge a portion of its Japanese yen-denominated
ticket sales against a significant depreciation in the value of the
yen versus the United States dollar.
On January 26, 1998, the Company announced that, in connection with
an agreement by Air Partners, L.P. to dispose of its interest in
the Company to an affiliate of Northwest Airlines, Inc.
("Northwest"), the Company had entered into a long-term global
alliance with Northwest.
The Company estimates that the alliance with Northwest, when fully
phased in over a three-year period, will generate in excess of $500
million in additional annual pre-tax operating income for the
carriers, and anticipates that approximately 45% of such pre-tax
operating income will accrue to the Company.
In February 1998, Continental began a block space arrangement
whereby it is committed to purchase capacity on another carrier at
a cost of approximately $147 million per year. This arrangement is
for 10 years. Pursuant to other block space arrangements, other
carriers are committed to purchase capacity on Continental.
On March 3, 1998, the Company announced that its Board of Directors
had authorized the expenditure of up to $100 million to repurchase
the Company's common stock or convertible securities. No time
limit was placed on the duration of the repurchase program.
Subject to applicable securities laws, such purchases will be at
times and in amounts as the Company deems appropriate. As of March
17, 1998, 200,000 shares had been repurchased.
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 compensates 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Market Risk Sensitive Instruments and Positions
The Company is subject to certain market risks, including commodity
price risk (i.e., aircraft fuel prices), interest rate risk,
foreign currency risk and price changes related to investments in
equity securities. Following is a discussion of the adverse
effects of potential changes in these market risks. The
sensitivity analyses presented do not consider the effects that
such adverse changes may have on overall economic activity nor do
they consider additional actions management may take to mitigate
the Company's exposure to such changes. Actual results may differ.
See the notes to the consolidated financial statements for a
description of the Company's accounting policies and other
information related to these financial instruments.
Aircraft Fuel. The Company's results of operations are
significantly impacted by changes in the price of aircraft fuel.
During 1997, aircraft fuel accounted for 14% of the Company's
operating expenses. Based on the Company's 1998 projected fuel
consumption, a one cent change in the average annual price per
gallon of aircraft fuel would impact the Company's annual aircraft
fuel expense by approximately $15 million. In order to provide
short-term protection (generally three to six months) against sharp
increases in aircraft fuel prices, the Company has entered into
petroleum call options. As of December 31, 1997, the Company had
hedged approximately 24% of its projected 1998 fuel requirements,
including 100% related to the first quarter.
Foreign Currency. The Company is exposed to the effect of exchange
rate fluctuations on the U.S. dollar value of foreign currency
denominated operating revenue and expenses. The Company's largest
exposure comes from the Japanese yen. The result of a uniform 10%
strengthening in the value of the U.S. dollar from December 31,
1997 levels relative to the yen is estimated to result in a
decrease in operating income of approximately $25 million for 1998.
However, the Company has mitigated the effect of certain of these
potential foreign currency losses by purchasing foreign currency
average rate option contracts that effectively enable it to sell
Japanese yen expected to be received from yen-denominated ticket
sales over the next nine to twelve months at specified dollar
amounts. As of December 31, 1997, the Company had purchased
average rate options to hedge approximately 100% of its projected
1998 net yen-denominated cash flows.
Interest Rates. The Company's results of operations are affected
by fluctuations in interest rates (e.g., interest expense on debt
and interest income earned on short-term investments).
The Company had approximately $714 million of variable-rate debt as
of December 31, 1997. If average interest rates increased by 0.5%
during 1998 as compared to 1997, the Company's projected 1998
interest expense would increase by approximately $3 million. The
Company has mitigated its exposure on certain variable-rate debt by
entering into an interest rate cap (notional amount of $142 million
as of December 31, 1997) which expires in July 2001. The interest
rate cap limits the amount of potential increase in the Eurodollar
or Prime rate component of the floating rate to a maximum of 9%
over the term of the contract.
As of December 31, 1997, the fair value of $793 million (carrying
value) of the Company's fixed-rate debt was estimated to be $803
million, based upon discounted future cash flows using current
incremental borrowing rates for similar types of instruments or
market prices. Market risk, estimated as the potential increase in
fair value resulting from a hypothetical 0.5% decrease in interest
rates, was approximately $18 million as of December 31, 1997. The
fair value of the remaining fixed-rate debt (with a carrying value
of $162 million and primarily relating to aircraft modification
notes and various loans with immaterial balances) was not
practicable to estimate due to the large number and small dollar
amounts of these notes.
If 1998 average short-term interest rates decreased by 0.5% over
1997 average rates, the Company's projected interest income from
short-term investments would decrease by approximately $4 million
during 1998.
Preferred Securities of Trust. As of December 31, 1997, the fair
value of Continental's 8-1/2% Convertible Trust Originated
Preferred Securities was estimated to be $514 million using market
prices, which exceeded the carrying value of these securities by
$272 million. Market risk is estimated as the potential increase
in fair value resulting from a hypothetical 10% increase in market
prices and was estimated to be $51 million as of December 31, 1997.
Investments in Equity Securities. Continental's investment in
America West Holdings Corporation at December 31, 1997, which was
recorded as its fair value of $9 million and includes unrealized
gains of $4 million, has exposure to price risk. This risk is
estimated as the potential loss in fair value resulting from a
hypothetical 10% adverse change in prices quoted by stock exchanges
and amounts to $1 million.
The Company also has an investment in AMADEUS which is also subject
to price risk. However, since a readily determinable market value
does not exist for AMADEUS (it is privately held), the Company is
unable to quantify the amount of price risk sensitivity inherent in
this investment.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Consolidated Financial Statements
Page No.
Report of Independent Auditors F-2
Consolidated Statements of Operations for each of the
Three Years in the Period Ended December 31, 1997 F-3
Consolidated Balance Sheets as of December 31, 1997
and 1996 F-5
Consolidated Statements of Cash Flows for each of the
Three Years in the Period Ended December 31, 1997 F-7
Consolidated Statements of Redeemable Preferred Stock
and Common Stockholders' Equity for each of the
Three Years in the Period Ended December 31, 1997 F-9
Notes to Consolidated Financial Statements F-13
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Continental Airlines, Inc.
We have audited the accompanying consolidated balance sheets of
Continental Airlines, Inc. (the "Company") as of December 31, 1997
and 1996, and the related consolidated statements of operations,
redeemable preferred stock and common stockholders' equity and cash
flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of the Company at December 31, 1997 and 1996,
the consolidated results of its operations and its cash flows for
each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
February 9, 1998
except for Note 13, as
to which the date is
March 18, 1998
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
Year Ended December 31,
1997 1996 1995
Operating Revenue:
Passenger. . . . . . . . . . . . . . . . $6,660 $5,871 $5,302
Cargo. . . . . . . . . . . . . . . . . . 175 154 145
Mail and other . . . . . . . . . . . . . 378 335 378
7,213 6,360 5,825
Operating Expenses:
Wages, salaries and related costs. . . . 1,688 1,452 1,381
Employee incentives. . . . . . . . . . . 126 97 51
Aircraft fuel. . . . . . . . . . . . . . 885 774 681
Commissions. . . . . . . . . . . . . . . 567 510 489
Aircraft rentals . . . . . . . . . . . . 551 509 497
Maintenance, materials and repairs . . . 537 461 429
Other rentals and landing fees . . . . . 395 350 356
Depreciation and amortization. . . . . . 254 254 253
Fleet disposition charge . . . . . . . . - 128 -
Other. . . . . . . . . . . . . . . . . . 1,494 1,300 1,303
6,497 5,835 5,440
Operating Income 716 525 385
Nonoperating Income (Expense):
Interest expense . . . . . . . . . . . . (166) (165) (213)
Interest capitalized . . . . . . . . . . 35 5 6
Interest income. . . . . . . . . . . . . 56 43 31
Gain on System One transactions. . . . . - - 108
Other, net . . . . . . . . . . . . . . . (1) 20 (7)
(76) (97) (75)
Income before Income Taxes, Minority
Interest and Extraordinary Loss. . . . . 640 428 310
Income Tax Provision. . . . . . . . . . . (237) (86) (78)
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
Year Ended December 31,
1997 1996 1995
Income before Minority Interest
and Extraordinary Loss . . . . . . . . . $ 403 $ 342 $ 232
Minority Interest . . . . . . . . . . . . - (3) (6)
Distributions on Preferred Securities
of Trust, net of applicable income taxes
of $8, $8 and $0, respectively . . . . . (14) (14) (2)
Income before Extraordinary Loss. . . . . 389 325 224
Extraordinary Loss, net of applicable
income taxes of $2 and $4, respectively. (4) (6) -
Net Income. . . . . . . . . . . . . . . . 385 319 224
Preferred Dividend Requirements and
Accretion to Liquidation Value . . . . . (2) (5) (9)
Income Applicable to Common Shares. . . . $ 383 $ 314 $ 215
Earnings per Common Share:
Income before Extraordinary Loss. . . . $ 6.72 $ 5.87 $ 4.07
Extraordinary Loss. . . . . . . . . . . (0.07) (0.12) -
Net Income. . . . . . . . . . . . . . . $ 6.65 $ 5.75 $ 4.07
Earnings per Common Share Assuming
Dilution:
Income before Extraordinary Loss. . . . $ 5.03 $ 4.25 $ 3.37
Extraordinary Loss. . . . . . . . . . . (0.04) (0.08) -
Net Income. . . . . . . . . . . . . . . $ 4.99 $ 4.17 $ 3.37
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)
December 31, December 31,
ASSETS 1997 1996
Current Assets:
Cash and cash equivalents, including
restricted cash and cash equivalents
of $15 and $76, respectively. . . . . . $1,025 $1,061
Accounts receivable, net of allowance
for doubtful receivables of $23 and
$27, respectively . . . . . . . . . . . 361 377
Spare parts and supplies, net of
allowance for obsolescence of $51 and
$47, respectively . . . . . . . . . . . 128 111
Deferred income taxes. . . . . . . . . . 111 -
Prepayments and other assets . . . . . . 103 85
Total current assets . . . . . . . . . 1,728 1,634
Property and Equipment:
Owned property and equipment:
Flight equipment. . . . . . . . . . . . 1,636 1,199
Other . . . . . . . . . . . . . . . . . 456 338
2,092 1,537
Less: Accumulated depreciation . . . . 473 370
1,619 1,167
Purchase deposits for flight equipment . 437 154
Capital leases:
Flight equipment. . . . . . . . . . . . 274 396
Other . . . . . . . . . . . . . . . . . 40 31
314 427
Less: Accumulated amortization . . . . 145 152
169 275
Total property and equipment . . . . . 2,225 1,596
Other Assets:
Routes, gates and slots, net of
accumulated amortization
of $270 and $212, respectively. . . . . 1,425 1,473
Reorganization value in excess of
amounts allocable to identifiable
assets, net of accumulated amortization
of $71 and $60, respectively. . . . . . 164 237
Investments. . . . . . . . . . . . . . . 104 134
Other assets, net. . . . . . . . . . . . 184 132
Total other assets . . . . . . . . . . 1,877 1,976
Total Assets . . . . . . . . . . . . $5,830 $5,206
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except for share data)
December 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
Current Liabilities:
Current maturities of long-term debt . . $ 243 $ 201
Current maturities of capital leases . . 40 60
Accounts payable . . . . . . . . . . . . 781 705
Air traffic liability. . . . . . . . . . 746 661
Accrued payroll and pensions . . . . . . 158 149
Accrued other liabilities. . . . . . . . 317 328
Total current liabilities . . . . . . . 2,285 2,104
Long-Term Debt. . . . . . . . . . . . . . 1,426 1,368
Capital Leases. . . . . . . . . . . . . . 142 256
Deferred Credits and Other Long-Term
Liabilities:
Deferred income taxes. . . . . . . . . . 435 75
Accruals for aircraft retirements and
excess facilities . . . . . . . . . . . 123 188
Other. . . . . . . . . . . . . . . . . . 261 331
Total deferred credits and other
long-term liabilities. . . . . . . . . 819 594
Commitments and Contingencies
Minority Interest . . . . . . . . . . . . - 15
Continental-Obligated Mandatorily
Redeemable Preferred Securities
of Subsidiary Trust Holding Solely
Convertible Subordinated
Debentures (1) . . . . . . . . . . . . . 242 242
Redeemable Preferred Stock. . . . . . . . - 46
Common Stockholders' Equity:
Class A common stock - $.01 par,
50,000,000 shares authorized;
8,379,464 and 9,280,000 shares issued
and outstanding, respectively . . . . . - -
Class B common stock - $.01 par,
200,000,000 shares authorized;
50,512,010 and 47,943,343 shares
issued and outstanding, respectively. . 1 -
Additional paid-in capital . . . . . . . 639 693
Retained earnings (accumulated deficit). 276 (109)
Other. . . . . . . . . . . . . . . . . . - (3)
Total common stockholders' equity . . . 916 581
Total Liabilities and Stockholders'
Equity . . . . . . . . . . . . . . . $5,830 $5,206
(1) The sole assets of the Trust are convertible subordinated debentures
with an aggregate principal amount of $249 million, which bear
interest at the rate of 8-1/2% per annum and mature on December 1,
2020. Upon repayment, the Continental-Obligated Mandatorily
Redeemable Preferred Securities of Subsidiary Trust will be
mandatorily redeemed.
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Year Ended December 31,
1997 1996 1995
Cash Flows From Operating
Activities:
Net income . . . . . . . . . . . . . . . $ 385 $ 319 $224
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization. . . . . 254 254 253
Provision for aircraft and
facilities. . . . . . . . . . . . . . - 128 14
Deferred income taxes. . . . . . . . . 212 72 71
Gain on sale of America West stock
and warrants. . . . . . . . . . . . . - (18) -
Gain on System One transactions. . . . - - (108)
Other, net . . . . . . . . . . . . . . 34 11 27
Changes in operating assets and
liabilities:
Increase in accounts receivable. . . (1) (42) (21)
Increase in spare parts and
supplies. . . . . . . . . . . . . . (38) (43) (8)
Increase in accounts payable . . . . 71 103 48
Increase (decrease) in air traffic
liability . . . . . . . . . . . . . 85 82 (5)
Other. . . . . . . . . . . . . . . . (42) (35) (176)
Net cash provided by operating
activities. . . . . . . . . . . . . . . 960 831 319
Cash Flows from Investing Activities:
Capital expenditures, net of returned
purchase deposits in 1996 and 1995. . . (417) (198) (67)
Purchase deposits paid in connection
with future aircraft deliveries . . . . (409) (116) (15)
Deposits refunded in connection with
aircraft transactions . . . . . . . . . 141 20 97
Other. . . . . . . . . . . . . . . . . . 28 43 60
Net cash provided (used) by
investing activities . . . . . . . . . (657) (251) 75
Cash Flows From Financing Activities:
Net proceeds from issuance of
long-term debt. . . . . . . . . . . . . 517 797 9
Payments on long-term debt and
capital lease obligations . . . . . . . (676) (975) (318)
Net proceeds from issuance of
preferred securities of trust . . . . . - - 242
Purchase of warrants . . . . . . . . . . (94) (50) (14)
Other. . . . . . . . . . . . . . . . . . (25) 30 13
Net cash used by financing activities . (278) (198) (68)
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Year Ended December 31,
1997 1996 1995
Net Increase in Cash and
Cash Equivalents . . . . . . . . . . . . $ 25 $ 382 $326
Cash and Cash Equivalents
Beginning of Period (1). . . . . . . . . 985 603 277
Cash and Cash Equivalents
End of Period (1). . . . . . . . . . . . $1,010 $ 985 $603
Supplemental Cash Flows Information:
Interest paid. . . . . . . . . . . . . . $ 156 $ 161 $179
Income taxes paid, net . . . . . . . . . $ 12 $ 4 $ 11
Financing and Investing Activities
Not Affecting Cash:
Capital lease obligations incurred. . . $ 22 $ 32 $ 10
Property and equipment acquired
through the issuance of debt . . . . . $ 207 $ 119 $ 92
Reduction of capital lease
obligations in connection with
refinanced aircraft. . . . . . . . . . $ 97 $ - $ -
Investment in AMADEUS acquired in con-
nection with System One transactions . $ - $ - $120
Issuance of convertible secured
debentures in connection with the
aircraft settlements . . . . . . . . . $ - $ - $158
(1) Excludes restricted cash of $15 million, $76 million, $144 million
and $119 million at December 31, 1997, 1996, 1995 and 1994,
respectively.
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED
STOCK AND COMMON STOCKHOLDERS' EQUITY
(In millions)
Retained
Redeemable Additional Earnings
Preferred Paid-In (Accumulated
Stock Capital Deficit) Other
Balance, December 31, 1994 . . . . . . . . $ 53 $ 778 $ (652) $(23)
Net Income . . . . . . . . . . . . . . . . - - 224 -
Purchase of Warrants . . . . . . . . . . . - (51) - -
Accumulated Dividends:
8% Cumulative Redeemable Preferred
Stock. . . . . . . . . . . . . . . . . . 2 (2) - -
12% Cumulative Redeemable Preferred
Stock. . . . . . . . . . . . . . . . . . 2 (2) - -
Series A 12% Cumulative Preferred Stock . 2 (2) - -
Issuance of Note in Exchange for
Series A 8% Cumulative Preferred Stock. . (18) (3) - -
Additional Minimum Pension Liability . . . - - - (1)
Unrealized Gain on Marketable Equity
Securities. . . . . . . . . . . . . . . . - - - 20
Other. . . . . . . . . . . . . . . . . . . - 15 - 4
Balance, December 31, 1995 . . . . . . . . 41 733 (428) -
Net Income . . . . . . . . . . . . . . . . - - 319 -
Purchase of Warrants . . . . . . . . . . . - (50) - -
Accumulated Dividends:
Series A 12% Cumulative Preferred Stock . 5 (5) - -
Additional Minimum Pension Liability . . . - - - 6
Unrealized Gain on Marketable Equity
Securities, net . . . . . . . . . . . . . - - - 4
Sale of America West Stock and Warrants. . - - - (18)
Other. . . . . . . . . . . . . . . . . . . - 15 - 5
Balance, December 31, 1996 . . . . . . . . 46 693 (109) (3)
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED
STOCK AND COMMON STOCKHOLDERS' EQUITY
(In millions)
Retained
Redeemable Additional Earnings
Preferred Paid-In (Accumulated
Stock Capital Deficit) Other
Net Income . . . . . . . . . . . . . . . . $ - $ - $ 385 $ -
Purchase of Warrants . . . . . . . . . . . - (94) - -
Accumulated Dividends on Series A 12%
Cumulative Preferred Stock. . . . . . . . 2 (2) - -
Redemption of Series A 12% Cumulative
Preferred Stock . . . . . . . . . . . . . (48) - - -
Additional Minimum Pension Liability . . . - - - (4)
Other. . . . . . . . . . . . . . . . . . . - 42 - 7
Balance, December 31, 1997 . . . . . . . . $ - $ 639 $ 276 $ -
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED
STOCK AND COMMON STOCKHOLDERS' EQUITY
NUMBER OF SHARES
Redeemable Class A Class B
Preferred Common Common Treasury
Stock Stock Stock Stock
Balance, December 31, 1994 . . . . . . . 471,000 12,602,112 40,747,024 60,000
Cancellation of 8% and 12% Cumulative
Redeemable Preferred Stock. . . . . . . (471,000) - - -
Issuance of Series A 8% and 12%
Cumulative Preferred Stock. . . . . . . 589,142 - - -
Issuance of Note in Exchange for
Series A 8% Cumulative Preferred
Stock . . . . . . . . . . . . . . . . . (202,784) - - -
Forfeiture of Restricted Class B
Common Stock. . . . . . . . . . . . . . - - (55,000) 55,000
Reissuance of Treasury Stock . . . . . . - - 115,000 (115,000)
Preferred Stock In-kind Dividend . . . . 11,590 - - -
Issuance of Common Stock pursuant to
Stock Plans and Awards. . . . . . . . . - - 863,978 -
Other. . . . . . . . . . . . . . . . . . - - 1,185,546 -
Balance, December 31, 1995 . . . . . . . 397,948 12,602,112 42,856,548 -
Conversion of Class A to Class B
Common Stock by Air Canada. . . . . . . - (3,322,112) 3,322,112 -
Forfeiture of Restricted Class B
Common Stock. . . . . . . . . . . . . . - - (60,000) 60,000
Purchase of Common Stock . . . . . . . . - - (133,826) 133,826
Reissuance of Treasury Stock . . . . . . - - 193,826 (193,826)
Preferred Stock In-kind Dividend . . . . 49,134 - - -
Issuance of Common Stock pursuant to
Stock Plans and Awards. . . . . . . . . - - 1,764,683 -
Balance, December 31, 1996 . . . . . . . 447,082 9,280,000 47,943,343 -
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED
STOCK AND COMMON STOCKHOLDERS' EQUITY
NUMBER OF SHARES
Redeemable Class A Class B
Preferred Common Common Treasury
Stock Stock Stock Stock
Conversion of Class A to Class B
Common Stock. . . . . . . . . . . . . . - (900,536) 900,536 -
Purchase of Common Stock . . . . . . . . - - (154,882) 154,882
Reissuance of Treasury Stock pursuant
to Stock Plans. . . . . . . . . . . . . - - 154,882 (154,882)
Issuance of Preferred Stock Dividends
on Series A 12% Cumulative Preferred
Stock . . . . . . . . . . . . . . . . . 13,165 - - -
Redemption of Series A 12% Cumulative
Preferred Stock . . . . . . . . . . . . (460,247) - - -
Issuance of Common Stock pursuant to
Stock Plans . . . . . . . . . . . . . . - - 1,646,419 -
Conversion of Trust Originated
Preferred Securities into
Common Stock. . . . . . . . . . . . . . - - 21,712 -
Balance, December 31, 1997 . . . . . . . - 8,379,464 50,512,010 -
CONTINENTAL AIRLINES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continental Airlines, Inc. (the "Company" or "Continental") is a
major United States air carrier engaged in the business of
transporting passengers, cargo and mail. Continental is the fifth
largest United States airline (as measured by 1997 revenue
passenger miles) and, together with its wholly owned subsidiaries,
Continental Express, Inc. ("Express"), and Continental Micronesia,
Inc. ("CMI"), each a Delaware corporation, serves 191 airports
worldwide. Continental flies to 125 domestic and 66 international
destinations and offers additional connecting service through
alliances with domestic and foreign carriers. Continental directly
serves 10 European cities and is one of the leading airlines
providing service to Mexico and Central America, serving more
destinations there than any other United States airline.
Continental currently flies to seven cities in South America.
Through its Guam hub, CMI provides extensive service in the western
Pacific, including service to more Japanese cities than any other
United States carrier.
As used in these Notes to Consolidated Financial Statements, the
terms "Continental" and "Company" refer to Continental Airlines,
Inc. and, unless the context indicates otherwise, its subsidiaries.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation -
The consolidated financial statements of the Company include
the accounts of Continental and its operating subsidiaries,
Express, CMI, and prior to April 27, 1995, System One
Information Management, Inc. ("System One"). See Note 11.
All significant intercompany transactions have been eliminated
in consolidation.
(b) Use of Estimates -
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
(c) Cash and Cash Equivalents -
Cash and cash equivalents consist of cash and short-term,
highly liquid investments which are readily convertible into
cash and have a maturity of three months or less when
purchased. Approximately $15 million and $76 million of cash
and cash equivalents at December 31, 1997 and 1996,
respectively, were held in restricted arrangements relating
primarily to payments for workers' compensation claims and in
accordance with the terms of certain other agreements.
(d) Spare Parts and Supplies -
Flight equipment expendable parts and supplies are valued at
average cost. An allowance for obsolescence for flight
equipment expendable parts and supplies is accrued to allocate
the costs of these assets, less an estimated residual value,
over the estimated useful lives of the related aircraft and
engines.
(e) Property and Equipment -
Property and equipment were recorded at fair market values as
of April 27, 1993; subsequent purchases were recorded at cost
and are depreciated to estimated residual values (10% of cost)
over their estimated useful lives using the straight-line
method. Estimated useful lives for such assets are 25 years
and 18 years from the date of manufacture for all owned jet
and turboprop aircraft, respectively; up to 25 years,
depending on the lease period, for aircraft acquired under
long-term capital leases; and two to 25 years for other
property and equipment, including airport facility
improvements.
(f) Intangible Assets -
Routes, Gates and Slots
Routes are amortized on a straight-line basis over 40 years,
gates over the stated term of the related lease and slots over
20 years. Routes, gates and slots are comprised of the
following (in millions):
Balance at Accumulated Amortization
December 31, 1997 at December 31, 1997
Routes. . . . $ 892 $115
Gates . . . . 407 115
Slots . . . . 126 40
$1,425 $270
Reorganization Value In Excess of Amounts Allocable to
Identifiable Assets
Reorganization value in excess of amounts allocable to
identifiable assets, arising from Continental's emergence from
bankruptcy reorganization in 1993, is amortized on a straight-
line basis over 20 years. The carrying value of this
intangible asset is reviewed if the facts and circumstances
suggest it may be impaired. If this review indicates that
this intangible asset will not be recoverable, as determined
based on the undiscounted cash flows over the remaining
amortization periods, the carrying value is reduced by the
estimated shortfall of cash flows.
(g) Air Traffic Liability -
Passenger revenue is recognized when transportation is
provided rather than when a ticket is sold. The amount of
passenger ticket sales not yet recognized as revenue is
reflected in the accompanying Consolidated Balance Sheets as
air traffic liability. The Company performs periodic
evaluations of this estimated liability, and any adjustments
resulting therefrom, which can be significant, are included in
results of operations for the periods in which the evaluations
are completed.
Continental sponsors a frequent flyer program ("OnePass") and
records an estimated liability for the incremental cost
associated with providing the related free transportation at
the time a free travel award is earned. The liability is
adjusted periodically based on awards earned, awards redeemed
and changes in the OnePass program.
The Company also sells mileage credits to participating
partners in the OnePass program, such as hotels, car rental
agencies and credit card companies. The resulting revenue,
net of the estimated incremental cost of the credits sold, is
recorded as other operating revenue in the accompanying
Consolidated Statements of Operations during the period in
which the credits are sold.
(h) Passenger Traffic Commissions -
Passenger traffic commissions are recognized as expense when
the transportation is provided and the related revenue is
recognized. The amount of passenger traffic commissions not
yet recognized as expense is included in Prepayments and other
assets in the accompanying Consolidated Balance Sheets.
(i) Deferred Income Taxes -
Deferred income taxes are provided under the liability method
and reflect the net tax effects of temporary differences
between the tax basis of assets and liabilities and their
reported amounts in the financial statements.
(j) Maintenance and Repair Costs -
Maintenance and repair costs for owned and leased flight
equipment, including the overhaul of aircraft components, are
charged to operating expense as incurred.
(k) Advertising Costs -
The Company expenses the costs of advertising as incurred.
Advertising expense was $98 million, $76 million and $94
million for the years ended December 31, 1997, 1996 and 1995,
respectively.
(l) Stock Plans and Awards -
Continental has elected to follow Accounting Principles Board
Opinion No. 25 - "Accounting for Stock Issued to Employees"
("APB 25") in accounting for its employee stock options and
its stock purchase plans because the alternative fair value
accounting provided for under Statement of Financial
Accounting Standards No. 123 - "Accounting for Stock-Based
Compensation" ("SFAS 123") requires use of option valuation
models that were not developed for use in valuing employee
stock options or purchase rights. Under APB 25, since the
exercise price of the Company's employee stock options equals
the market price of the underlying stock on the date of grant,
no compensation expense is recognized. Furthermore, under APB
25, since the stock purchase plans are considered
noncompensatory plans, no compensation expense is recognized.
(m) Recently Issued Accounting Standards -
In June 1997, the Financial Accounting Standards Board (the
"FASB") issued Statement of Financial Accounting Standards No.
130 - "Reporting Comprehensive Income" ("SFAS 130") and
Statement of Financial Accounting Standards No. 131 -
"Disclosure About Segments of an Enterprise and Related
Information" ("SFAS 131"). Both SFAS 130 and SFAS 131 are
effective for Continental beginning in the first quarter of
1998.
SFAS 130 establishes standards for the reporting and display
of comprehensive income and its components in a full set of
financial statements. Comprehensive income is defined as the
change in equity during a period from transactions and other
events and circumstances from non-owner sources. Upon
adopting the new standard, Continental will report and display
comprehensive income which includes net income plus non-owner
changes in equity such as the minimum pension liability and
unrealized gains or losses on investments in marketable equity
securities.
SFAS 131 changes the way segment information is presented from
an industry segment approach to a management approach. Under
the management approach, segments are determined based on the
operations regularly reviewed by the chief operating decision
maker to make decisions about resources to be allocated to the
segment and assess its performance. The Company believes that
it will report only one segment and certain additional
geographic disclosures.
In February 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 132 -
"Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("SFAS 132") that revises the
disclosure requirements of Statement of Financial Accounting
Standards No. 87 - "Employers' Accounting for Pensions") and
Statement of Financial Accounting Standards No. 106 -
"Employers' Accounting for Postretirement Benefits Other than
Pensions". The Company will adopt SFAS 132 in 1998. SFAS 132
is not expected to have an impact on the Company's results of
operations or financial position.
(n) Block Space Arrangements -
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. To the
extent the other carrier is financially committed to purchase
such capacity on Continental's flights, such payments to
Continental by the other carrier are recorded as a reduction
in the respective operating expenses in the accompanying
Consolidated Statements of Operations. During 1997,
Continental recorded a reduction of approximately $43 million
of such operating expenses. To the extent that Continental is
financially committed to purchase capacity on other carriers,
such payments to other carriers are recorded as a reduction in
other revenue. No such payments were made in 1997. See Note
13.
(o) Reclassifications -
Certain reclassifications have been made in the prior years'
financial statements to conform to the current year
presentation.
NOTE 2 - EARNINGS PER SHARE
In the fourth quarter of 1997, the Company adopted the FASB's
Statement of Financial Accounting Standards No. 128 - "Earnings per
Share" ("SFAS 128") which specifies the computation, presentation
and disclosure requirements for earnings per common share ("EPS").
SFAS 128 replaces the presentation of primary and fully diluted EPS
pursuant to Accounting Principles Board Opinion No. 15 - "Earnings
per Share" 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. All prior-period EPS data
have been retroactively restated and reflect the application of
SFAS 128.
The following table sets forth the computation of basic and diluted
earnings per share (in millions, except per share data):
1997 1996 1995
Numerator:
Income before extraordinary loss. . $389 $325 $224
Extraordinary loss, net of
applicable income taxes. . . . . . (4) (6) -
Net income. . . . . . . . . . . . . 385 319 224
Preferred stock dividends . . . . . (2) (5) (9)
Numerator for basic earnings per
share - income available to
common stockholders. . . . . . . . 383 314 215
Effect of dilutive securities:
Series A convertible debentures. . - 1 4
Preferred Securities of Trust. . . 14 15 2
6-3/4% convertible subordinated
notes . . . . . . . . . . . . . . 11 8 -
25 24 6
Other . . . . . . . . . . . . . . . (4) (3) (1)
Numerator for diluted earnings
per share - income available to
common stockholders after
assumed conversions . . . . . . . $404 $335 $220
Denominator:
Denominator for basic earnings per
share - weighted-average shares. . 57.6 54.6 52.8
Effect of dilutive securities:
Employee stock options . . . . . . 1.6 2.2 1.3
Warrants . . . . . . . . . . . . . 3.5 5.9 3.6
Restricted Class B common stock. . 0.4 0.8 0.7
Preferred Securities of Trust. . . 10.3 10.3 0.9
6-3/4% convertible subordinated
notes . . . . . . . . . . . . . . 7.6 5.8 -
Series A convertible debentures. . - 0.7 5.9
Dilutive potential common shares. . 23.4 25.7 12.4
Denominator for diluted earnings
per share - adjusted weighted-
average and assumed conversions . 81.0 80.3 65.2
Warrants to purchase 11,120,002 weighted average shares of the
Company's Class B common stock, par value $.01 per share ("Class B
common stock") were not included in the computation of diluted
earnings per share in 1995 because the warrants' exercise price was
greater than the average market price of the common shares and,
therefore, the effect would have been antidilutive.
NOTE 3 - LONG-TERM DEBT
Long-term debt as of December 31 is summarized as follows (in
millions):
1997 1996
Secured
Notes payable, interest rates of 5.84% to
9.97%, payable through 2019 . . . . . . . . $ 325 $ 218
Credit facility, floating interest rate of
LIBOR or Eurodollar plus 1.125%,
payable through 2002. . . . . . . . . . . . 275 -
Floating rate notes, interest rates of
Prime plus .5% to .75%, LIBOR plus
.75% to 3.75% or Eurodollar plus .75%
to 1.0%, payable through 2006 . . . . . . . 204 187
Revolving credit facility, floating interest
rates of LIBOR or Eurodollar plus 1.125%,
payable through 1999. . . . . . . . . . . . 160 -
Notes payable, interest rates of 7.13% to
7.15% payable through 1999 and floating
rates thereafter of LIBOR plus 2%,
payable through 2011. . . . . . . . . . . . 91 97
Floating rate note, interest rate of
LIBOR or Eurodollar plus 1.375%,
payable through 2004. . . . . . . . . . . . 75 -
Notes payable, interest rates of 10.0% to
14.00%, payable through 2005. . . . . . . . 54 178
Floating rate notes, interest rates of
Eurodollar plus 1.75% to 2.0% or Prime
plus 0.75% to 1.0% payable through 2003 . . - 320
Other. . . . . . . . . . . . . . . . . . . . 2 4
Unsecured
Senior notes payable, interest rate of
9.5%, payable through 2001. . . . . . . . . $ 250 $ 250
Convertible subordinated notes, interest
rate of 6.75%, payable through 2006 . . . . 230 230
Notes payable, interest rates of 8.38% to
12%, payable through 2001 . . . . . . . . . 2 78
Other. . . . . . . . . . . . . . . . . . . . 1 7
1,669 1,569
Less: current maturities. . . . . . . . . . 243 201
Total. . . . . . . . . . . . . . . . . . . . $1,426 $1,368
As of December 31, 1997 and 1996, the Prime, LIBOR and Eurodollar
rates associated with Continental's indebtedness approximated 8.5%
and 8.3%, 5.8% and 5.6%, 5.8% and 5.6%, respectively.
A majority of Continental's property and equipment is subject to
agreements securing indebtedness of Continental.
In July 1997, Continental entered into a $575 million credit
facility (the "Credit Facility"), including a $275 million term
loan, the proceeds of which were loaned to CMI to repay its
existing $320 million secured term loan. In connection with this
prepayment, Continental recorded a $4 million after tax
extraordinary loss relating to early extinguishment of debt. The
Credit Facility also includes a $225 million revolving credit
facility with a commitment fee of 0.25% per annum on the unused
portion, and a $75 million term loan commitment with a current
floating interest rate of Libor plus 1.375%. At December 31, 1997,
no borrowings were outstanding under the $225 million revolving
credit facility.
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. 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, Continental entered into a $160 million floating
rate secured revolving credit facility (the "Facility"). The
revolving loans made under the Facility are used to make certain
predelivery payments to The Boeing Company ("Boeing") for new
Boeing aircraft to be delivered through December 1999. As of
December 31, 1997, the Facility had been fully drawn.
At December 31, 1997, under the most restrictive provisions of the
Company's debt and credit facility agreements, the Company had a
minimum cash balance requirement of $600 million, a minimum net
worth requirement of $613 million and was restricted from paying
cash dividends in excess of $350 million.
In March 1996, the Company issued $230 million of 6-3/4%
Convertible Subordinated Notes (the "Notes"). The Notes are
convertible into shares of Class B common stock prior to their
maturity date, April 15, 2006, at a conversion price of $30.20 per
share. The Notes are redeemable at the option of the Company on or
after April 15, 1999, at specified redemption prices.
Maturities of long-term debt due over the next five years are as
follows (in millions):
Year ending December 31,
1998. . . . . . . . . . . . . . . . . . $243
1999. . . . . . . . . . . . . . . . . . 159
2000. . . . . . . . . . . . . . . . . . 152
2001. . . . . . . . . . . . . . . . . . 394
2002. . . . . . . . . . . . . . . . . . 170
NOTE 4 - LEASES
Continental leases certain aircraft and other assets under long-
term lease arrangements. Other leased assets include real
property, airport and terminal facilities, sales offices,
maintenance facilities, training centers and general offices. Most
leases also include renewal options, and some aircraft leases
include purchase options.
At December 31, 1997, the scheduled future minimum lease payments
under capital leases and the scheduled future minimum lease rental
payments required under aircraft and engine operating leases that
have initial or remaining noncancellable lease terms in excess of
one year are as follows (in millions):
Capital Operating
Leases Leases
Year ending December 31,
1998. . . . . . . . . . . . . . . . . . $ 55 $ 658
1999. . . . . . . . . . . . . . . . . . 52 593
2000. . . . . . . . . . . . . . . . . . 41 582
2001. . . . . . . . . . . . . . . . . . 41 564
2002. . . . . . . . . . . . . . . . . . 15 482
Later years . . . . . . . . . . . . . . 26 3,007
Total minimum lease payments . . . . . . . . 230 $5,886
Less: amount representing interest. . . . . 48
Present value of capital leases. . . . . . . 182
Less: current maturities of capital
leases. . . . . . . . . . . . . . . . . . . 40
Long-term capital leases . . . . . . . . . . $142
Not included in the above operating lease table is $236 million in
annual minimum lease payments relating to non-aircraft leases,
principally airport and terminal facilities and related equipment.
Continental is the guarantor of $325 million aggregate principal
amount of tax-exempt special facilities revenue bonds. These
bonds, issued by various airport municipalities, are payable solely
from rentals paid by Continental under long-term agreements with
the respective governing bodies.
The Company's total rental expense for all operating leases, net of
sublease rentals, was $787 million, $719 million and $720 million
in 1997, 1996 and 1995, respectively.
During 1997, the Company acquired 10 aircraft previously leased by
it. 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.
NOTE 5 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
As part of the Company's risk management program, Continental uses
or used a variety of financial instruments, including petroleum
call options, foreign currency average rate options, and interest
rate swap and interest rate cap agreements. The Company does not
hold or issue derivative financial instruments for trading
purposes.
Notional Amounts and Credit Exposure of Derivatives
The notional amounts of derivative financial instruments summarized
below do not represent amounts exchanged between parties and,
therefore, are not a measure of the Company's exposure resulting
from its use of derivatives. The amounts exchanged are calculated
based upon the notional amounts as well as other terms of the
instruments, which relate to interest rates, exchange rates and
other indices.
The Company is exposed to credit losses in the event of non-
performance by counterparties to these financial instruments, but
it does not expect any of the counterparties to fail to meet its
obligations. To manage credit risks, the Company selects
counterparties based on credit ratings, limits its exposure to a
single counterparty under defined guidelines, and monitors the
market position with each counterparty.
Fuel Price Risk Management
The Company has entered into petroleum call option contracts to
provide some short-term protection against a sharp increase in jet
fuel prices. The petroleum call option contracts generally cover
the Company's forecasted jet fuel needs for three to six months.
Gains, if any, on these option contracts are recognized as a
component of fuel expense when the underlying fuel being hedged is
used (deferral method). At December 31, 1997, the Company had
petroleum call option contracts outstanding with an aggregate
notional amount of $200 million. The fair value of the Company's
call option contracts at December 31, 1997, representing the amount
the Company would receive if the option contracts were closed, was
immaterial. During the year ended December 31, 1996, the Company
recognized gains of approximately $65 million under this risk
reduction strategy.
Foreign Currency Exchange Risk Management
CMI purchases foreign currency average rate option contracts that
effectively enable it to sell Japanese yen expected to be received
from yen-denominated ticket sales over the next nine to twelve
months at specified dollar amounts. The option contracts have only
nominal intrinsic value at the time of purchase. These contracts
are designated and effective as hedges of probable monthly yen-
denominated sales transactions, which otherwise would expose the
Company to foreign currency risk. Gains, if any, on these average
rate option contracts are deferred and recognized as a component of
passenger revenue when the related sale is recognized (deferral
method). At December 31, 1997, CMI had average rate option
contracts outstanding with a notional value of $266 million; the
related fair value, representing the amount CMI would receive to
terminate the agreements, was immaterial. During the year ended
December 31, 1997, the Company recognized gains of approximately
$10 million under these option contracts.
Interest Rate Risk Management
The Company entered into an interest rate cap agreement to reduce
the impact of potential increases in interest rates on a floating
rate bank financing. The interest rate cap agreement has a
notional value of $142 million and is effective through July 31,
2001. The interest rate cap limits the amount of potential
increase in the Eurodollar or Prime rate component of the floating
rate to a maximum of 9% over the term of the contract. The fair
value is immaterial. Payments to be received as a result of the
cap agreement are accrued as a reduction in interest expense
(accrual method).
Fair Value of Other Financial Instruments
(a) Cash equivalents -
Cash equivalents consist primarily of commercial paper with
original maturities of three months or less and approximate
fair value due to their short maturity.
(b) Investment in Equity Securities -
Continental's investment in America West Holdings Corporation
("America West") is classified as available-for-sale and
carried at an aggregate market value of $9 million and
$8 million at December 31, 1997 and 1996, respectively.
Included in stockholders' equity at December 31, 1997 and 1996
is a net unrealized gain of $4 million.
Since a readily determinable market value does not exist for
the Company's investment in AMADEUS (see Note 11), the
investment is carried at cost.
(c) Debt -
The fair value of the Company's debt with a carrying value of
$1.49 billion and $1.36 billion as of December 31, 1997 and
1996, respectively, estimated based on the discounted amount
of future cash flows using the current incremental rate of
borrowing for a similar liability or market prices,
approximates $1.47 billion and $1.37 billion, respectively.
The fair value of the remaining debt (with a carrying value of
$179 million and $209 million, respectively, and primarily
relating to aircraft modification notes and various loans with
immaterial balances) was not practicable to estimate due to
the large number and small dollar amounts of these notes.
(d) Preferred Securities of Trust -
As of December 31, 1997, the fair value of Continental's 8-
1/2% Convertible Trust Originated Preferred Securities
("TOPrS") (with a carrying value of $242 million), estimated
based on market prices, approximates $514 million. The
carrying value of the TOPrS was $242 million and the fair
value approximated $332 million as of December 31, 1996. See
Note 6.
NOTE 6 - PREFERRED SECURITIES OF TRUST
Continental Airlines Finance Trust, a Delaware statutory business
trust (the "Trust") with respect to which the Company owns all of
the common trust securities, had 4,986,500 and 4,997,000 8-1/2%
TOPrS outstanding at December 31, 1997 and 1996, respectively. The
TOPrS have a liquidation value of $50 per preferred security and
are convertible at any time at the option of the holder into shares
of Class B common stock at a conversion rate of 2.068 shares of
Class B common stock for each preferred security (equivalent to
$24.18 per share of Class B common stock), subject to adjustment in
certain circumstances. Distributions on the preferred securities
are payable by the Trust at the annual rate of 8-1/2% of the
liquidation value of $50 per preferred security and are included in
Distributions on Preferred Securities of Trust in the accompanying
Consolidated Statements of Operations. The proceeds of the private
placement, which totaled $242 million (net of $8 million of
underwriting commissions and expense) are included in Continental-
Obligated Mandatorily Redeemable Preferred Securities of Subsidiary
Trust Holding Solely Convertible Subordinated Debentures in the
accompanying Consolidated Balance Sheets.
The sole assets of the trust are 8-1/2% Convertible Subordinated
Deferrable Interest Debentures ("Convertible Subordinated
Debentures") with an aggregate principal amount of $249 million
issued by the Company and which mature on December 1, 2020. The
Convertible Subordinated Debentures are redeemable by Continental,
in whole or in part, on or after December 1, 1998 at designated
redemption prices. If Continental redeems the Convertible
Subordinated Debentures, the Trust must redeem the TOPrS on a pro
rata basis having an aggregate liquidation value equal to the
aggregate principal amount of the Convertible Subordinated
Debentures redeemed. Otherwise, the TOPrS will be redeemed upon
maturity of the Convertible Subordinated Debentures, unless
previously converted.
Taking into consideration the Company's obligations under (i) the
Preferred Securities Guarantee relating to the TOPrS, (ii) the
Indenture relating to the Convertible Subordinated Debentures to
pay all debts and obligations and all costs and expenses of the
Trust (other than U.S. withholding taxes) and (iii) the Indenture,
the Declaration relating to the TOPrS and the Convertible
Subordinated Debentures, Continental has fully and unconditionally
guaranteed payment of (i) the distributions on the TOPrS, (ii) the
amount payable upon redemption of the TOPrS, and (iii) the
liquidation amount of the TOPrS.
The Convertible Subordinated Debentures and related income
statement effects are eliminated in the Company's consolidated
financial statements.
NOTE 7 - REDEEMABLE PREFERRED, PREFERRED AND COMMON STOCK
Redeemable Preferred and Preferred Stock
During the years ended December 31, 1997 and 1996, the Company's
board of directors declared and issued 13,165 and 49,134 additional
shares, respectively, of Series A 12% Cumulative Preferred Stock
("Series A 12% Preferred") in lieu of cash dividends. In April
1997, Continental redeemed for cash all of the 460,247 shares of
its Series A 12% Preferred then outstanding for $100 per share plus
accrued dividends thereon. The redemption price, including accrued
dividends, totaled $48 million.
Redeemable preferred stock consisted of 1,000,000 authorized shares
of Series A 12% Preferred with 447,082 shares issued and
outstanding at December 31, 1996.
Continental has 10 million shares of authorized preferred stock,
none of which were outstanding as of December 31, 1997 or 1996.
Common Stock
Continental has two classes of common stock issued and outstanding,
Class A common stock, par value $.01 per share ("Class A common
stock") and Class B common stock. Holders of shares of Class A
common stock and Class B common stock are entitled to receive
dividends when and if declared by the Company's board of directors.
Each share of Class A common stock is entitled to 10 votes per
share and each share of Class B common stock is entitled to one
vote per share. In addition, Continental has authorized 50 million
shares of Class D common stock, par value $.01 per share, none of
which were outstanding.
The Company's Certificate of Incorporation permits shares of the
Company's Class A common stock to be converted into an equal number
of shares of Class B common stock. During 1997 and 1996, 900,536
and 3,322,112 shares of the Company's Class A common stock,
respectively, were so converted.
Warrants
As of December 31, 1997, the Company had outstanding 3,039,468
Class A Warrants and 308,343 Class B Warrants (collectively, the
"Warrants"). As of such date, all of the Class A Warrants were
held by Air Partners, L.P. ("Air Partners"), and all of the Class
B Warrants were held by a limited partner of Air Partners. The
Warrants entitle the holder to purchase one share of Class A common
stock or Class B common stock as follows: (i) 2,298,134 Class A
Warrants and 186,134 Class B Warrants have an exercise price of
$7.50 per share, and (ii) 741,334 Class A Warrants and 122,209
Class B Warrants have an exercise price of $15 per share. The
Warrants expire on April 27, 1998.
On June 2, 1997, the Company purchased for $94 million from 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 represented 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).
On November 21, 1996, Air Partners exercised its right to sell to
the Company, and the Company subsequently purchased, for $50
million, Warrants to purchase 2,614,379 shares of Class B common
stock (representing a portion of the total Warrants held by Air
Partners) pursuant to an agreement entered into earlier in 1996
with the Company.
On September 29, 1995, Continental purchased 2,735,760 Class A
Warrants and 9,699,510 Class B Warrants for an aggregate purchase
price of $56 million (including a waiver fee of $5 million paid to
a major creditor of the Company).
NOTE 8 - STOCK PLANS AND AWARDS
Stock Options
On May 16, 1997, the stockholders of the Company approved the
Continental Airlines, Inc. 1997 Stock Incentive Plan, as amended
(the "97 Incentive Plan") under which the Company may 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 97
Incentive Plan, the aggregate number of shares of Class B common
stock that may be issued under the 97 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 subject to options granted to any one
individual during any calendar year may not exceed 200,000 shares
(subject to adjustment as provided in the 97 Incentive Plan). The
total shares remaining available for grant under the 97 Incentive
Plan at December 31, 1997 was 604,000. Stock options granted under
the 97 Incentive Plan generally vest over a period of three years
and have a term of five years.
Under the Continental Airlines, Inc. 1994 Incentive Equity Plan, as
amended (the "94 Incentive Plan"), key officers and employees of
the Company and its subsidiaries received stock options and/or
restricted stock. The 94 Incentive Plan also provided for each
outside director to receive on the day following the annual
stockholders' meeting options to purchase 5,000 shares of Class B
common stock. The maximum number of shares of Class B common stock
that may be issued under the 94 Incentive Plan will not in the
aggregate exceed 9,000,000. The total remaining shares available
for grant under the 94 Incentive Plan at December 31, 1997 was
141,671. In 1995, the 94 Incentive Plan was amended to provide for
the exchange and repricing of substantially all the outstanding
stock options for new options bearing a shorter exercise term and
generally exercisable at a price lower than that of the cancelled
options, subject to certain conditions. The exercise price for the
repriced options equaled the market value per share on the date of
grant ($8.00). As a result of the repricing, stock options
generally vest over a period of three years and have a term of five
years.
Under the terms of the 97 and 94 Incentive Plans, a change of
control would result in all outstanding options under these plans
becoming exercisable in full and restrictions on restricted shares
being terminated (see Note 17).
The table on the following page summarizes stock option
transactions pursuant to the Company's 94 and 97 Incentive Plans
(share data in thousands):
1997 1996 1995
Weighted- Weighted- Weighted-
Average Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
Outstanding at
Beginning of
Year. . . . . . 5,809 $17.37 4,769 $ 8.41 3,443 $10.19
Granted* . . . . 1,968 $29.34 3,307 $25.07 4,322 $ 8.43
Exercised . . . (1,582) $11.72 (1,747) $ 8.23 (361) $ 9.25
Cancelled. . . . (195) $22.49 (520) $14.83 (2,635) $10.58
Outstanding at
End of Year . . 6,000 $22.62 5,809 $17.37 4,769 $ 8.41
Options
exercisable
at end of
year. . . . . . 1,235 - 656 - 1,079 -
*The option price for all stock options is equal to 100% of the fair market value at the date
of grant.
Options granted during 1995 include the grant of repriced options; options cancelled during
1995 include the cancellation of the higher priced options.
The following tables summarize the range of exercise prices and the
weighted average remaining contractual life of the options
outstanding and the range of exercise prices for the options
exercisable at December 31, 1997 (share data in thousands):
Options Outstanding
Weighted
Average
Remaining
Range of Contractual Weighted Average
Exercise Prices Outstanding Life Exercise Price
$3.88-$8.00 1,178 3.10 $7.54
$8.19-$22.38 389 3.91 $16.59
$22.56-$23.00 1,328 3.12 $22.99
$23.25-$27.88 467 3.82 $25.63
$27.94-$48.88 2,638 4.08 $29.53
$3.88-$48.88 6,000 3.64 $22.62
Options Exercisable
Range of Weighted Average
Exercise Prices Exercisable Exercise Price
$3.88-$8.00 287 $ 7.63
$8.19-$22.38 186 $16.55
$22.56-$23.00 359 $22.99
$23.25-$27.88 77 $25.05
$27.94-$48.88 326 $30.53
$3.88-$48.88 1,235 $20.57
Restricted Stock
The 97 Incentive Plan permits awards of restricted stock to
participants, subject to one or more restrictions, including a
restriction period, and a purchase price, if any, to be paid by the
participant. In connection with the plan, 100,000 shares have been
authorized for issuance as restricted stock (subject to adjustment
as provided in the 97 Incentive Plan). As of December 31, 1997, no
awards of restricted stock had been made.
The 94 Incentive Plan also permitted awards of restricted stock to
participants, subject to one or more restrictions, including a
restriction period, and a purchase price, if any, to be paid by the
participant. In connection with the plan, 600,000 shares were
authorized for issuance as restricted stock. As of December 31,
1997, 35,000 shares were available for grant as restricted stock.
Additionally, on March 4, 1994, the Board approved a one-time grant
of 2,014,000 shares of restricted stock to substantially all
employees at or below the manager level. These shares were issued
at no cost to the employees and vest in 25 percent increments on
each of January 2, 1995, 1996, 1997 and 1998.
Employee Stock Purchase Plans
On May 16, 1997, the stockholders of the Company approved the
Continental Airlines, Inc. 1997 Employee Stock Purchase Plan (the
"97 Stock Purchase Plan"). Under the 97 Stock 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 97 Stock Purchase Plan. During 1997,
148,186 shares of Class B common stock were issued at prices
ranging from $23.38 to $29.33.
Under the Continental Airlines, Inc. 1994 Employee Stock Purchase
Plan, as amended (the "94 Stock Purchase Plan"), which terminated
on December 31, 1996, substantially all employees of the Company
could purchase shares of Class B common stock at 85% of the lower
of the fair market value on the first or last business day of a
calendar quarter. Subject to adjustment, a maximum of
8,000,000 shares of Class B common stock were authorized for
purchase under the 94 Stock Purchase Plan. During 1997, 70,706
shares were issued at a price of $19.55 per share that related to
contributions made in the fourth quarter of 1996. During 1996 and
1995, 191,809 and 518,428 shares, respectively, of Class B common
stock were issued at prices ranging from $15.81 to $23.96 in 1996
and $4.31 to $10.63 in 1995 in connection with the 94 Stock
Purchase Plan.
Pro Forma SFAS 123 Results
Pro forma information regarding net income and earnings per share
has been determined as if the Company had accounted for its
employee stock options and purchase rights under the fair value
method of SFAS 123. The fair value for these options was estimated
at the date of grant using a Black-Scholes option pricing model
with the following weighted-average assumptions for 1997, 1996 and
1995, respectively: risk-free interest rates of 6.1%, 5.8% and
6.2%; dividend yields of 0%; volatility factors of the expected
market price of the Company's common stock of 34% for 1997 and 39%
for 1996 and 1995; and a weighted-average expected life of the
option of 2.5 years, 2.6 years and 2.3 years. The weighted average
fair value of the stock options granted in 1997, 1996 and 1995 was
$7.87, $7.55 and $2.35, respectively. The fair value of the
purchase rights under the Stock Purchase Plans was also estimated
using the Black-Scholes model with the following weighted-average
assumptions for 1997, 1996 and 1995, respectively: risk free
interest rates of 5.2%, 5.2% and 5.8%; dividend yields of 0%;
expected volatility of 34% for 1997 and 39% for 1996 and 1995; and
an expected life of .33 years for 1997 and 0.25 years for 1996 and
1995. The weighted-average fair value of those purchase rights
granted in 1997, 1996 and 1995 was $7.38, $5.75 and $1.89,
respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferrable. In addition, option
valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because the
Company's employee stock options and purchase rights have
characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options and
purchase rights.
Assuming that the Company had accounted for its employee stock
options and purchase rights using the fair value method and
amortized the resulting amount to expense over the options' vesting
period net income would have been reduced by $11 million, $9
million and $5 million for the years ended December 31, 1997, 1996
and 1995, respectively. Basic EPS would have been reduced by 18
cents, 17 cents and 10 cents for the years ended December 31, 1997,
1996 and 1995, respectively, and diluted EPS would have been
reduced by 14 cents, 11 cents and 6 cents for the same periods,
respectively. The pro forma effect on net income is not
representative of the pro forma effects on net income in future
years because it did not take into consideration pro forma
compensation expense related to grants made prior to 1995.
NOTE 9 - EMPLOYEE BENEFIT PLANS
The Company has noncontributory defined benefit pension and defined
contribution (including 401(k) savings) plans. Substantially all
domestic employees of the Company are covered by one or more of
these plans. The benefits under the active defined benefit pension
plan are based on years of service and an employee's final average
compensation. For the years ended December 31, 1997, 1996 and
1995, total pension expense for the defined benefit plans was $41
million, $45 million and $40 million, respectively. Total expense
for the defined contribution plans was $6 million, $7 million and
$6 million, for 1997, 1996 and 1995, respectively.
Net periodic pension cost of the Company's defined benefit plans
for 1997, 1996 and 1995 included the following components (in
millions):
1997 1996 1995
Service cost - benefits earned
during the year . . . . . . . . $38 $38 $30
Interest cost on projected
benefit obligations . . . . . . 51 45 40
Loss (return) on plan assets . . (83) (63) (79)
Net amortization and deferral. . 35 25 49
Net periodic pension costs . . . $41 $45 $40
The following table sets forth the defined benefit plans' funded
status amounts as of December 31, 1997 and 1996 (in millions):
1997 1996
Accumulated Assets Accumulated Assets
Benefits Exceed Benefits Exceed
Exceed Accumulated Exceed Accumulated
Assets Benefits Assets Benefits
Actuarial present
value of benefit
obligations:
Vested . . . . . $603 $ 83 $308 $ 91
Non-vested . . . 17 1 96 3
Accumulated
benefit
obligations . . . 620 84 404 94
Effect of
projected future
salary increases. 141 - 107 -
Projected benefit
obligation. . . . 761 84 511 94
Plan assets at
fair value. . . . 529 103 393 115
Projected benefit
obligation in
excess of (less
than) plan
assets. . . . . . 232 (19) 118 (21)
Unrecognized prior
service costs . . (9) - (9) -
Unrecognized net
gain (loss).. . . (96) 3 42 7
Additional mini-
mum liability . . 9 - 2 -
Accrued (pre-
paid) pension
liability . . . . $136 $(16) $153 $(14)
In accordance with Statement of Financial Accounting Standards
No. 87 - "Employers' Accounting for Pensions", an additional
minimum pension liability for certain plans, representing the
excess of accumulated benefits over plan assets and accrued pension
costs, was recognized at December 31, 1997 and 1996. A
corresponding amount was recognized as a separate reduction to
stockholders' equity.
Plan assets consist primarily of equity securities (including
50,000 and 100,000 shares of Class B common stock) as of December
31, 1997 and 1996, respectively, long-term debt securities and
short-term investments.
The weighted average discount rate used in determining the
actuarial present value of the projected benefit obligation was
7.25%, 7.75% and 7.25% for 1997, 1996 and 1995, respectively. The
expected long-term rate of return on assets (which is used to
calculate the Company's return on pension assets for the current
year) was 9.25% for each of 1997, 1996 and 1995. The weighted
average rate of salary increases was 4.9% for each of 1997, 1996
and 1995. In 1997, Continental changed from the 1984 Unisex
Pensioners Mortality Table to the 1983 Group Annuity Mortality
Table which affects the comparability of benefit obligations. The
unrecognized net gain (loss) is amortized on a straight-line basis
over the average remaining service period of employees expected to
receive a plan benefit.
Continental's policy is to fund the noncontributory defined benefit
pension plans in accordance with Internal Revenue Service ("IRS")
requirements as modified, to the extent applicable, by agreements
with the IRS.
The Company also has a profit sharing program under which an award
pool consisting of 15.0% of the Company's annual pre-tax earnings,
subject to certain adjustments, is distributed each year to
substantially all employees (other than employees whose collective
bargaining agreement provides otherwise or who otherwise receive
profit sharing payments as required by local law) on a pro rata
basis according to base salary. The profit sharing expense
included in the accompanying Consolidated Statements of Operations
for the years ended December 31, 1997, 1996 and 1995 was $105
million, $68 million and $31 million, respectively.
NOTE 10 - INCOME TAXES
The reconciliations of income tax computed at the United States
federal statutory tax rates to income tax provision for the years
ended December 31, 1997, 1996 and 1995 are as follows (in
millions):
Amount Percent
1997 1996 1995 1997 1996 1995
Income tax pro-
vision at
United States
statutory rates . . $224 $150 $109 35.0 % 35.0 % 35.0 %
State income tax
provision . . . . . 9 6 5 1.4 1.4 1.6
Reorganization value
in excess of
amounts allocable
to identifiable
assets. . . . . . . 4 5 20 0.6 1.2 6.5
Meals and
entertainment
disallowance. . . . 9 7 6 1.4 1.6 1.9
Net operating loss
not benefitted. . . (15) (88) (67) (2.3) (20.5) (21.6)
Other. . . . . . . . 6 6 5 1.0 1.4 1.6
Income tax
provision, net. . . $237 $ 86 $ 78 37.1 % 20.1 % 25.0 %
The significant component of the provision for income taxes for the
year ended December 31, 1997, 1996 and 1995 was a deferred tax
provision of $220 million, $80 million and $71 million,
respectively. The provision for income taxes for the period ended
December 31, 1997, 1996 and 1995 also reflects a current tax
provision in the amount of $17 million, $6 million and $7 million,
respectively, as the Company is in an alternative minimum tax
position for federal income tax purposes and pays current state
income tax.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the related amounts used for
income tax purposes. Significant components of the Company's
deferred tax liabilities and assets as of December 31, 1997 and
1996 are as follows (in millions):
1997 1996
Spare parts and supplies, fixed assets
and intangibles . . . . . . . . . . . . . $ 639 $ 635
Deferred gain. . . . . . . . . . . . . . . 63 62
Capital and safe harbor lease activity . . 49 34
Other, net . . . . . . . . . . . . . . . . 39 34
Gross deferred tax liabilities . . . . . . 790 765
Accrued liabilities. . . . . . . . . . . . (370) (370)
Revaluation of leases. . . . . . . . . . . (16) (34)
Net operating loss carryforwards . . . . . (631) (804)
Investment tax credit carryforwards. . . . (45) (45)
Minimum tax credit carryforward. . . . . . (21) (10)
Gross deferred tax assets. . . . . . . . . (1,083) (1,263)
Deferred tax assets valuation allowance. . 617 694
Net deferred tax liability . . . . . . . . 324 196
Less: current deferred tax (asset)
liability . . . . . . . . . . . . . . . . (111) 121
Non-current deferred tax liability . . . . $ 435 $ 75
At December 31, 1997, the Company has estimated net operating loss
carryforwards ("NOLs") of $1.7 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. Reflecting
this possible limitation, the Company has recorded a valuation
allowance of $617 million at December 31, 1997.
In the fourth quarter of 1997, the Company determined that it would
be able to recognize an additional $155 million of NOLs
attributable to the Company's pre-bankruptcy predecessor. This
benefit, $62 million, was used to reduce reorganization value in
excess of amounts allocable to identifiable assets. To the extent
the Company were to determine in the future that additional NOLs of
the Company's pre-bankruptcy predecessor could be recognized in the
accompanying consolidated financial statements, such benefit would
also reduce reorganization value in excess of amounts allocable to
identifiable assets. If such reorganization value is exhausted,
such benefit would reduce other intangibles.
The deferred tax valuation allowance decreased from $694 million at
December 31, 1996 to $617 million at December 31, 1997. This
decrease is related to the realization of deferred tax assets
associated with net operating losses that had not previously been
benefitted.
Approximately $359 million of the Company's net operating losses
can only be used to offset the separate parent company taxable
income of Continental Airlines, Inc. Approximately $13 million of
the Company's investment tax credits can only be used to offset the
separate parent company tax liability of Continental Airlines, Inc.
NOTE 11 - NONOPERATING INCOME (EXPENSE)
In February 1996, Continental sold approximately 1.4 million of the
1.8 million shares it owned in America West, realizing net proceeds
of $25 million and recognizing a gain of $13 million. 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, net in the accompanying
Consolidated Statements of Operations.
Continental and its former System One subsidiary entered into a
series of transactions on April 27, 1995 whereby a substantial
portion of System One's assets (including the travel agent
subscriber base and travel-related information management products
and services software), as well as certain liabilities of System
One, were transferred to a newly formed limited liability company,
System One Information Management, L.L.C. ("LLC"). LLC is owned
equally by Continental CRS Interests, Inc. ("Continental CRS")
(formerly System One, which remains a wholly owned subsidiary of
Continental), Electronic Data Systems Corporation ("EDS") and
AMADEUS, a European computerized reservation system ("CRS").
Substantially all of System One's remaining assets (including the
CRS software) and liabilities were transferred to AMADEUS. In
addition to the one-third interest in LLC, Continental CRS received
cash proceeds of $40 million and an equity interest in AMADEUS
valued at $120 million, and outstanding indebtedness of $42 million
of System One owed to EDS was extinguished. In connection with
these transactions, the Company recorded a pretax gain of $108
million, which amount was included in Nonoperating Income (Expense)
in the accompanying Consolidated Statements of Operations for the
year ended December 31, 1995. The related tax provision totaled
$78 million (which differs from the federal statutory rate due to
certain nondeductible expenses), for a net gain of $30 million.
System One's revenue, included in Cargo, mail and other revenue,
and related net earnings were not material to the consolidated
financial statements of Continental.
NOTE 12 - ACCRUALS FOR AIRCRAFT RETIREMENTS AND EXCESS FACILITIES
During 1996, the Company made the decision to accelerate the
replacement of certain 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 related 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 expenses on these aircraft until they are removed
from service.
During 1994, the Company recorded a $447 million provision
associated with (i) the planned early retirement of certain
aircraft ($278 million) and (ii) closed or underutilized airport
and maintenance facilities and other assets ($169 million).
The following represents the activity within these accruals during
the three years ended December 31, 1997 (in millions):
1997 1996 1995
Total accruals at beginning of year. . $205 $220 $443
Net cash payments:
Aircraft related. . . . . . . . . . . (25) (52) (59)
Underutilized facilities and other. . (13) (17) (20)
Decrease in accrual for grounded
aircraft. . . . . . . . . . . . . . . (16) - -
Fleet disposition charge for cost of
return of leased aircraft . . . . . . - 54 -
Issuance of the Convertible Secured
Debentures. . . . . . . . . . . . . . - - (158)
Increase in accrual for underutilized
facilities. . . . . . . . . . . . . . - - 14
Total accruals at end of year. . . . . 151 205 220
Portion included in accrued other
liabilities . . . . . . . . . . . . . (28) (17) (45)
Accrual for aircraft retirements and
excess facilities . . . . . . . . . . $123 $188 $175
The remaining accruals relate primarily to anticipated cash outlays
associated with (i) underutilized airport facilities (primarily
associated with Denver International Airport), (ii) the return of
leased aircraft and (iii) the remaining liability associated with
the grounded aircraft. The Company has assumed certain sublease
rental income for these closed and underutilized facilities and
grounded aircraft in determining the accrual at December 31, 1997.
However, should actual sublease rental income be different from the
Company's estimates, the actual charge could be different from the
amount estimated. The remaining accrual represents cash outlays to
be incurred over the remaining lease terms (from one to 13 years).
NOTE 13 - COMMITMENTS AND CONTINGENCIES
In March 1998, Continental announced the conversion of 15 Boeing
737 option aircraft to 15 Boeing 737-900 firm aircraft and the
addition of 25 option aircraft.
As of March 18, 1998, Continental had firm commitments with Boeing
to take delivery of a total of 154 jet aircraft (including the
Boeing 737-900 aircraft described above) during the years 1998
through 2005 with options for an additional 61 aircraft
(exercisable subject to certain conditions). These aircraft will
replace older, less efficient Stage 2 aircraft and allow for the
growth of operations. The estimated aggregate cost of the
Company's firm commitments for the Boeing aircraft is approximately
$6.7 billion. As of March 18, 1998, Continental had completed or
had third party commitments for a total of approximately $1.6
billion in financing for its future Boeing deliveries, and had
commitments or letters of intent from various sources for backstop
financing for approximately one-third of the anticipated remaining
acquisition cost of such Boeing deliveries. The Company currently
plans on financing the new Boeing aircraft with a combination of
enhanced equipment trust certificates, lease equity and other third
party financing subject to availability and market conditions.
However, further financing will be needed to satisfy the Company'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 a firm order for 25 Embraer ERJ-
145 regional jets, with options for an additional 175 aircraft
exercisable through 2008. In June 1997, Express exercised its
option to order 25 of such option aircraft and expects to confirm
its order for an additional 25 of its remaining option aircraft by
August 1998. Neither Express nor Continental will have any
obligation to take such aircraft that are not financed by a third
party and leased to Continental. Express took delivery of 18 of
the aircraft through December 31, 1997 and will take delivery of
the remaining 32 aircraft through the third quarter of 1999.
Continental expects to account for all of these aircraft as
operating leases.
Continental expects its cash outlays for 1998 capital expenditures,
exclusive of fleet plan requirements, to aggregate $211 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 remains contingently liable until December 1, 2015, on
$202 million of long-term lease obligations of US Airways, Inc.
("US Airways") related to the East End Terminal at LaGuardia
Airport in New York. If US Airways defaulted on these obligations,
Continental could be required to cure the default, at which time it
would have the right to reoccupy the terminal.
In April 1997, collective bargaining agreement negotiations began
with the Independent Association of Continental Pilots ("IACP") to
amend both the Continental pilots' contract (which became amendable
in July 1997) and Express pilots' contract (which became amendable
in October 1997). In February 1998, a five-year collective
bargaining agreement with the Continental Airlines pilots was
announced by the Company and the IACP. In March 1998, Express also
announced a five-year collective bargaining agreement with its
pilots. These agreements are subject to approval by the IACP board
of directors and ratification by the Continental and Express
pilots. In September 1997, Continental announced that it intends
to bring all employees to industry standard wages (the average of
the top ten air carriers as ranked by the DOT excluding
Continental) within 36 months. The announcement further stated
that wage increases will be phased in over the 36-month period as
revenue, interest rates and rental rates reached industry
standards.
In February 1998, Continental began a block space arrangement
whereby Continental is committed to purchase capacity on another
carrier at a cost of approximately $147 million per year. This
arrangement is for 10 years.
Legal Proceedings
The Company and/or certain of its subsidiaries are defendants in
various lawsuits, including suits relating to certain environmental
claims, the Company's consolidated Plan of Reorganization under
Chapter 11 of the federal bankruptcy code which became effective on
April 27, 1993, the Company's long-term global alliance agreement
with Northwest Airlines, Inc. ("Northwest") entered into in
connection with Air Partners' disposition of its interest in
Continental to an affiliate of Northwest (see Note 16) and
proceedings arising in the normal course of business. While the
outcome of these lawsuits and proceedings cannot be predicted with
certainty and could have a material adverse effect on the Company's
financial position, results of operations and cash flows, it is the
opinion of management, after consulting with counsel, that the
ultimate disposition of such suits will not have a material adverse
effect on the Company's financial position, results of operations
or cash flows.
NOTE 14 - RELATED PARTY TRANSACTIONS
The following is a summary of significant related party
transactions that occurred during 1997, 1996 and 1995, other than
those discussed elsewhere in the Notes to Consolidated Financial
Statements.
In connection with certain synergies agreements, Continental paid
Air Canada $30 million, $16 million and $38 million for the years
ended December 31, 1997, 1996 and 1995, respectively, and Air
Canada paid Continental $16 million, $17 million and $16 million in
1997, 1996 and 1995, respectively, primarily relating to aircraft
maintenance.
The Company and America West, in which David Bonderman holds a
significant interest, entered into a series of agreements during
1994 related to code-sharing and ground handling that have created
substantial benefits for both airlines. Mr. Bonderman is a
director of the Company and holds a significant interest in the
Company. The services provided are considered normal to the daily
operations of both airlines. As a result of these agreements,
Continental paid America West $16 million, $15 million and $11
million in 1997, 1996 and 1995, respectively, and America West paid
Continental $23 million, $22 million and $14 million in 1997, 1996
and 1995, respectively.
On July 27, 1995 and August 10, 1995, Air Partners purchased from
the Company an aggregate of 308,226 and 657,320 shares of Class B
common stock, respectively, at purchase prices of $7.93 per share
(with respect to a total of 710,660 shares) and $6.70 per share
(with respect to a total of 254,886 shares). Of the total, 316,640
shares were purchased pursuant to the exercise of antidilution
rights granted to Air Partners under the Certificate of
Incorporation and the remaining 648,906 shares were purchased
pursuant to the exercise of antidilution rights granted to Air
Canada under the Certificate of Incorporation (which rights were
purchased by Air Partners immediately prior to their exercise on
August 10, 1995).
In May 1996, Air Canada converted all of its 3,322,112 shares of
Class A common stock into Class B common stock (pursuant to certain
rights granted to it under the Company's Certificate of
Incorporation) and sold, on the open market, 4,400,000 shares of
the Company's common stock pursuant to the Secondary Offering.
On November 21, 1996, Air Partners exercised its right to sell to
the Company, and the Company subsequently purchased, for $50
million, Warrants to purchase 2,614,379 shares of Class B common
stock (representing a portion of the total warrants held by Air
Partners) pursuant to an agreement entered into earlier in 1996
with the Company.
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 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 represented 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).
In July 1997, the Company purchased 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 was to pay UMDA approximately 1% of the gross revenues of CMI,
as defined, through January 1, 2012, which payment by CMI to UMDA
totaled $1 million, $6 million and $6 million in 1997, 1996 and
1995, respectively) and UMDA's 9% interest in AMI, terminated the
Company's obligations to UMDA under a settlement agreement entered
into in 1987, and 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 connection with the Company's $320 million secured term loan
financing, entered into in 1996, CMI paid UMDA a dividend of
approximately $13 million in 1996.
NOTE 15 - FOREIGN OPERATIONS
Continental conducts operations in various foreign countries.
Operating revenue from foreign operations are as follows (in
millions):
Year Ended December 31,
1997 1996 1995
Pacific $ 648 $ 699 $ 742
Atlantic 778 494 390
Latin America 532 372 311
$1,958 $1,565 $1,443
NOTE 16 - SUBSEQUENT EVENTS
The Company announced on January 26, 1998 that Air Partners, the
holder of 5,263,188 shares of Continental's Class A common stock
and warrants to purchase 3,039,468 shares of Class A common stock,
which represent, assuming exercise of the warrants, approximately
14% of the Company's common stock equity and approximately 51% of
its outstanding voting power, had entered into an agreement to
dispose of its interest in the Company to an affiliate of Northwest
(the "Air Partners Transaction"). The Air Partners Transaction is
subject to, among other matters, governmental approval and
expiration of applicable waiting periods under the Hart-Scott-
Rodino Antitrust Improvements Act of 1976. The agreement also
extends to an affiliate of Air Partners a right of first offer to
purchase certain shares of Class A common stock to be acquired by
Northwest or its affiliates if such entities intend to dispose of
those securities prior to the fifth anniversary of the closing of
the Air Partners Transaction. Upon completion of the Air Partners
Transaction, a change of control will result under the 97 and 94
Incentive Plans and all outstanding options and restricted stock
under these plans will become fully vested. The Company also
announced on January 26, 1998, that in connection with the Air
Partners Transaction, the Company had entered into a long-term
global alliance with Northwest.
NOTE 17 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited summarized financial data by quarter for 1997 and 1996 is as follows (in millions,
except per share data):
Three Months Ended
March 31 June 30 September 30 December 31
1997
Operating revenue . . . . . . . . . . . . . $1,698 $1,786 $1,890 $1,839
Operating income. . . . . . . . . . . . . . 146 231 207 132
Nonoperating income (expense), net. . . . . (22) (23) (21) (10)
Net income. . . . . . . . . . . . . . . . . 74 128 110 73
Earnings per common share:
Income before extraordinary loss (a). . . $ 1.28 $ 2.22 $ 1.97 $ 1.26
Extraordinary loss, net of tax. . . . . . - - (0.07) -
Net income (a). . . . . . . . . . . . . . $ 1.28 $ 2.22 $ 1.90 $ 1.26
Earnings per common share assuming
dilution:
Income before extraordinary loss (a). . . $ 0.96 $ 1.63 $ 1.48 $ 0.97
Extraordinary loss, net of tax. . . . . . - - (0.04) -
Net income (a). . . . . . . . . . . . . . $ 0.96 $ 1.63 $ 1.44 $ 0.97
(continued on next page)
Three Months Ended
March 31 June 30 September 30 December 31
1996
Operating revenue . . . . . . . . . . . . . $1,489 $1,639 $1,671 $1,561
Operating income. . . . . . . . . . . . . . 120 229 77 99
Nonoperating income (expense), net. . . . . (25) (23) (30) (19)
Net income. . . . . . . . . . . . . . . . . 88 167 17 47
Earnings per common share:
Income before extraordinary loss (a). . . $ 1.60 $ 3.05 $ 0.42 $ 0.82
Extraordinary loss, net of tax. . . . . . - - (0.12) -
Net income (a). . . . . . . . . . . . . . $ 1.60 $ 3.05 $ 0.30 $ 0.82
Earnings per common share assuming
dilution:
Income before extraordinary loss (a). . . $ 1.19 $ 2.09 $ 0.34 $ 0.62
Extraordinary loss, net of tax. . . . . . - - (0.08) -
Net income (a). . . . . . . . . . . . . . $ 1.19 $ 2.09 $ 0.26 $ 0.62
(a) The sum of the four quarterly earnings per share amounts does not agree with the
earnings per share as calculated for the full year due to the fact that the full year
calculation uses a weighted average number of shares based on the sum of the four
quarterly weighted average shares divided by four quarters.
During the third quarter of 1997, in connection with the prepayment
of certain indebtedness, Continental recorded a $4 million after
tax extraordinary loss relating to early extinguishment of debt.
During the first quarter of 1996, the Company recorded a pretax
gain of $12.5 million related to the sale of approximately 1.4
million shares of America West common stock.
During the second quarter of 1996, the Company recorded a $5
million gain related to the sale of the America West warrants.
During the third quarter of 1996, the Company recorded a fleet
disposition charge of $128 million ($77 million after-tax) related
to the Company's decision to accelerate the replacement of certain
aircraft. In addition, in connection with the prepayment of
certain indebtedness, Continental recorded a $6 million after tax
extraordinary loss relating to early extinguishment of debt.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
There were no changes in or disagreements on any matters of
accounting principles or financial statement disclosure between the
Company and its independent public auditors during the registrant's
two most recent fiscal years or any subsequent interim period.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Incorporated herein by reference from the Company's definitive
proxy statement for the annual meeting of stockholders to be held
on May 21, 1998.
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated herein by reference from the Company's definitive
proxy statement for the annual meeting of stockholders to be held
on May 21, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
Incorporated herein by reference from the Company's definitive
proxy statement for the annual meeting of stockholders to be held
on May 21, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated herein by reference from the Company's definitive
proxy statement for the annual meeting of stockholders to be held
on May 21, 1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
(a) The following financial statements are included in Item 8.
"Financial Statements and Supplementary Data":
Report of Independent Auditors
Consolidated Statements of Operations for each of the Three
Years in the Period Ended December 31, 1997
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Cash Flows for each of the Three
Years in the Period Ended December 31, 1997
Consolidated Statements of Redeemable Preferred Stock and
Common Stockholders' Equity for each of the Three Years
in the Period Ended December 31, 1997
Notes to Consolidated Financial Statements
(b) Financial Statement Schedules:
Report of Independent Auditors
Schedule II - Valuation and Qualifying Accounts
All other schedules have been omitted because they are
inapplicable, not required, or the information is included
elsewhere in the consolidated financial statements or notes
thereto.
(c) Reports on Form 8-K.
(i) Report on Form 8-K dated September 25, 1997, with
respect to Item 7. Financial Statements and Exhibits
related to the offering of Continental Airlines, Inc.'s
Pass Through Certificates, Series 1997-3.
(ii) Report on Form 8-K dated October 6, 1997, with respect
to Item 7. Financial Statements and Exhibits related
to the Form of Pass Through Trust Agreement and
Statement of Eligibility of Wilmington Trust Company on
Form T-1.
(iii) Report on Form 8-K dated October 23, 1997, with respect
to Item 7. Financial Statements and Exhibits related
to the offering of Continental Airlines, Inc.'s Pass
Through Certificates, Series 1997-4.
(d) See accompanying Index to Exhibits.
REPORT OF INDEPENDENT AUDITORS
We have audited the consolidated financial statements of
Continental Airlines, Inc. as of December 31, 1997 and 1996, and
for each of the three years in the period ended December 31, 1997,
and have issued our report thereon dated February 9, 1998, except
for Note 13, as to which the date is March 18, 1998 (included
elsewhere in this Form 10-K). Our audits also included the
financial statement schedule for these related periods listed in
Item 14(b) of this Form 10-K. This schedule is the responsibility
of the Company's management. Our responsibility is to express an
opinion based on our audits.
In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
Houston, Texas
March 18, 1998
CONTINENTAL AIRLINES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1997, 1996, and 1995
(In millions)
Allowance
for Doubtful Allowance for
Receivables Obsolescence
Balance, December 31, 1994 . . . $38 $36
Additions charged to expense . 24 12
Deductions from reserve. . . . (15) (12)
Other. . . . . . . . . . . . . (3) -
Balance, December 31, 1995 . . . 44 36
Additions charged to expense . 16 18
Deductions from reserve. . . . (31) (8)
Other. . . . . . . . . . . . . (2) 1
Balance, December 31, 1996 . . . 27 47
Additions charged to expense . 12 12
Deductions from reserve. . . . (21) (4)
Other. . . . . . . . . . . . . 5 (4)
Balance, December 31, 1997 . . . $23 $51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By /s/ LAWRENCE W. KELLNER
Lawrence W. Kellner
Executive Vice President and
Chief Financial Officer
(On behalf of Registrant)
Date: March 19, 1998
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons in the
capacities indicated on March 19, 1998.
Signature Capacity
/s/ GORDON M. BETHUNE Chairman and Chief Executive Officer
Gordon M. Bethune (Principal Executive Officer)
/s/ LAWRENCE W. KELLNER Executive Vice President and
Lawrence W. Kellner Chief Financial Officer
(Principal Financial Officer)
/s/ MICHAEL P. BONDS Vice President and Controller
Michael P. Bonds (Principal Accounting Officer)
THOMAS J. BARRACK, JR.* Director
Thomas J. Barrack, Jr.
LLOYD M. BENTSEN, JR.* Director
Lloyd M. Bentsen, Jr.
DAVID BONDERMAN* Director
David Bonderman
/s/GREGORY D. BRENNEMAN Director
Gregory D. Brenneman
PATRICK FOLEY* Director
Patrick Foley
DOUGLAS McCORKINDALE* Director
Douglas McCorkindale
GEORGE G.C. PARKER* Director
George G.C. Parker
RICHARD W. POGUE* Director
Richard W. Pogue
WILLIAM S. PRICE III* Director
William Price III
DONALD L. STURM* Director
Donald L. Sturm
KAREN HASTIE WILLIAMS* Director
Karen Hastie Williams
CHARLES A. YAMARONE* Director
Charles A. Yamarone
*By /s/ LAWRENCE W. KELLNER
Lawrence W. Kellner
Attorney-in-Fact
March 19, 1998
INDEX TO EXHIBITS
OF
CONTINENTAL AIRLINES, INC.
2.1 Revised Third Amended Disclosure Statement Pursuant to
Section 1125 of the Bankruptcy Code with Respect to
Debtors' Revised Second Amended Joint Plan of
Reorganization Under Chapter 11 of the United States
Bankruptcy Code, as filed with the Bankruptcy Court on
January 13, 1993 -- incorporated by reference from
Exhibit 2.1 to Continental's Annual Report on Form 10-K
for the year ended December 31, 1992 (File no. 0-9781).
2.2 Modification of Debtors' Revised Second Amended Joint
Plan of Reorganization dated March 12, 1993 --
incorporated by reference to Exhibit 2.2 to Continental's
Current Report on Form 8-K, dated April 16, 1993 (the
"April 8-K").
2.3 Second Modification of Debtors' Revised Second Amended
Joint Plan of Reorganization, dated April 8, 1993 --
incorporated by reference to Exhibit 2.3 to the April 8-
K.
2.4 Third Modification of Debtors' Revised Second Amended
Joint Plan of Reorganization, dated April 15, 1993 --
incorporated by reference to Exhibit 2.4 to the April 8-
K.
2.5 Confirmation Order, dated April 16, 1993 -- incorporated
by reference to Exhibit 2.5 to the April 8-K.
3.1 Amended and Restated Certificate of Incorporation of
Continental -- incorporated by reference to
Exhibit 4.1(a) to Continental's Form S-8 registration
statement (No. 333-06993) (the "1996 S-8").
3.2 By-laws of Continental, as amended to date --
incorporated by reference to Exhibit 3.1 to Continental's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996 (the "1996 Third Quarter 10-Q").
4.1 Specimen Class A Common Stock Certificate of the Company
-- incorporated by reference to Exhibit 4.1 to
Continental's Annual Report on Form 10-K for the year
ended December 31, 1995 (File no. 0-9781) (the "1995 10-
K").
4.2 Specimen Class B Common Stock Certificate of the Company
-- incorporated by reference to Exhibit 4.1 to
Continental's Form S-1 Registration Statement (No. 33-
68870) (the "1993 S-1").
4.3 Subscription and Stockholders' Agreement -- incorporated
by reference to Exhibit 4.5 to the April 8-K.
4.3(a) Amendment to Stockholders' Agreement dated April 19, 1996
among the Company, Air Partners and Air Canada --
incorporated by reference to Exhibit 10.1 to
Continental's Form S-3 Registration Statement (No. 333-
02701) (the "1996 S-3").
4.4 Amended and Restated Registration Rights Agreement dated
April 19, 1996 among the Company, Air Partners and Air
Canada -- incorporated by reference to Exhibit 10.2 to
the 1996 S-3.
4.5 Warrant Agreement dated as of April 27, 1993, between
Continental and Continental as warrant agent --
incorporated by reference to Exhibit 4.7 to the April 8-
K.
4.6 Continental hereby agrees to furnish to the Commission,
upon request, copies of certain instruments defining the
rights of holders of long-term debt of the kind described
in Item 601(b)(4)(iii)(A) of Regulation S-K.
10.1 Agreement of Lease dated as of January 11, 1985, between
the Port Authority of New York and New Jersey and People
Express Airlines, Inc., regarding Terminal C (the
"Terminal C Lease") -- incorporated by reference to
Exhibit 10.61 to the Annual Report on Form 10-K (File No.
0-9781) of People Express Airlines, Inc. for the year
ended December 31, 1984.
10.1(a) Supplemental Agreements Nos. 1 through 6 to the Terminal
C Lease -- incorporated by reference to Exhibit 10.3 to
Continental's Annual Report on Form 10-K (File No. 1-
8475) for the year ended December 31, 1987 ("the 1987 10-
K").
10.1(b) Supplemental Agreement No. 7 to the Terminal C Lease --
incorporated by reference to Exhibit 10.4 to
Continental's Annual Report on Form 10-K (File No. 1-
8475) for the year ended December 31, 1988.
10.1(c) Supplemental Agreements No. 8 through 11 to the Terminal
C Lease -- incorporated by reference to Exhibit 10.10 to
the 1993 S-1.
10.1(d) Supplemental Agreements No. 12 through 15 to the Terminal
C Lease -- incorporated by reference to Exhibit 10.2(d)
to the 1995 10-K.
10.1(e) Supplemental Agreement No. 16 to the Terminal C Lease.
(3)
10.2 Assignment of Lease with Assumption and Consent dated as
of August 15, 1987, among the Port Authority of New York
and New Jersey, People Express Airlines, Inc. and
Continental -- incorporated by reference to Exhibit
10.2 to the 1987 10-K.
10.3* Amended and restated employment agreement between the
Company and Gordon M. Bethune -- incorporated by
reference to Exhibit 10.4 to the 1995 10-K.
10.3(a)* Amendment to employment agreement, dated as of April 19,
1996, between the Company and Gordon M. Bethune --
incorporated by reference to Exhibit 10.1 to
Continental's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996 (the "1996 Second Quarter 10-
Q").
10.3(b)* Amendment to employment agreement, dated as of September
30, 1996, between the Company and Gordon M. Bethune --
incorporated by reference to Exhibit 10.1 to the 1996
Third Quarter 10-Q.
10.4* Amended and restated employment agreement between the
Company and Gregory D. Brenneman -- incorporated by ref-
erence to Exhibit 10.5 to the 1995 10-K.
10.4(a)* Amendment to employment agreement, dated as of April 19,
1996, between the Company and Gregory D. Brenneman --
incorporated by reference to Exhibit 10.2 to the 1996
Second Quarter 10-Q.
10.4(b)* Amendment to employment agreement, dated as of September
30, 1996, between the Company and Gregory D. Brenneman --
incorporated by reference to Exhibit 10.2 to the 1996
Third Quarter 10-Q.
10.5* Amended and restated employment agreement between the
Company and Lawrence W. Kellner -- incorporated by ref-
erence to Exhibit 10.3 to the 1996 Second Quarter 10-Q.
10.6* Amended and restated employment agreement between the
Company and C.D. McLean -- incorporated by reference to
Exhibit 10.8 to the 1995 10-K.
10.7* Form of amendment to employment agreements, dated as of
April 19, 1996, between the Company and, respectively,
Lawrence W. Kellner and C.D. McLean -- incorporated by
reference to Exhibit 10.4 to the 1996 Second Quarter 10-
Q.
10.7(a)* Form of amendment to employment agreements, dated as of
September 30, 1996, between the Company and,
respectively, Lawrence W. Kellner and C.D. McLean --
incorporated by reference to Exhibit 10.3 to the 1996
Third Quarter 10-Q.
10.8* Amended and restated employment agreement, as amended,
between the Company and Jeffery A. Smisek -- incorporated
by reference to Exhibit 10.2 to the Continental Quarterly
Report on Form 10-Q for the quarter ended March 31, 1997
(the "1997 First Quarter 10-Q").
10.9* Executive Bonus Program -- incorporated by reference to
Appendix B to the Company's proxy statement relating its
annual meeting of stockholders held on June 26, 1996.
10.10* Continental Airlines, Inc. 1994 Incentive Equity Plan
("1994 Equity Plan") -- incorporated by reference to
Exhibit 4.3 to the Company's Form S-8 Registration
Statement (No. 33-81324).
10.10(a)* First Amendment to 1994 Equity Plan -- incorporated by
reference to Exhibit 10.1 to Continental's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1995.
10.10(b)* Second Amendment to 1994 Equity Plan -- incorporated by
reference to Exhibit 4.3(c) to the 1996 S-8.
10.10(c)* Third Amendment to 1994 Equity Plan -- incorporated by
reference to Exhibit 10.4 to the 1996 Third Quarter 10-Q.
10.10(d)* Fourth Amendment to 1994 Equity Plan. (3)
10.10(e)* Form of Employee Stock Option Grant pursuant to the 1994
Equity Plan. (3)
10.10(f)* Form of Outside Director Stock Option Grant pursuant to
the 1994 Equity Plan. (3)
10.10(g)* Form of Restricted Stock Grant pursuant to the 1994
Equity Plan. (3)
10.11* Continental Airlines, Inc. 1997 Stock Incentive Plan
("1997 Incentive Plan") -- incorporated by reference to
Exhibit 4.3 to Continental's Form S-8 Registration
Statement (No. 333-23165).
10.11(a)* First Amendment to 1997 Incentive Plan. (3)
10.11(b)* Form of Employee Stock Option Grant pursuant to the 1997
Incentive Plan. (3)
10.11(c)*Form of Outside Director Stock Option Grant pursuant to
the 1997 Incentive Plan. (3)
10.12* Form of Letter Agreement relating to certain flight
benefits between the Company and each of its nonemployee
directors -- incorporated by reference to Exhibit 10.19
of the 1995 10-K.
10.13 Purchase Agreement No. 1783, including exhibits and side
letters thereto, between the Company and Boeing,
effective April 27, 1993, relating to the purchase of
Boeing 757 aircraft ("Purchase Agreement No. 1783") --
incorporated by reference to Exhibit 10.2 to
Continental's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1993. (1)
10.13(a) Supplemental Agreement No. 4 to Purchase Agreement No.
1783, dated March 31, 1995 -- incorporated by reference
to Exhibit 10.12(a) to Continental's Annual Report on
Form 10-K for the year ended December 31, 1994 (File no.
0-9781). (1)
10.13(b) Supplemental Agreement No. 6 to Purchase Agreement No.
1783, dated June 13, 1996 -- incorporated by reference to
Exhibit 10.6 to the 1996 Second Quarter 10-Q. (1)
10.13(c) Supplemental Agreement No. 7 to Purchase Agreement No.
1783, dated July 23, 1996 -- incorporated by reference to
Exhibit 10.6(a) to the 1996 Second Quarter 10-Q. (1)
10.13(d) Supplemental Agreement No. 8 to Purchase Agreement No.
1783, dated October 27, 1996 -- incorporated by reference
to Exhibit 10.11(d) to Continental's Annual Report on
Form 10-K for the year ended December 31, 1996 (the "1996
10-K"). (1)
10.13(e) Letter Agreement No. 6-1162-GOC-044 to Purchase Agreement
No. 1783, dated March 21, 1997 -- incorporated by
reference to Exhibit 10.4 to the 1997 First Quarter 10-Q.
(2)
10.13(f) Supplemental Agreement No. 9 to Purchase Agreement No.
1783, dated August 13, 1997 -- incorporated by reference
to Exhibit 10.1 to Continental's Quarterly Report on Form
10-Q for the quarter ended September 30, 1997. (2)
10.13(g) Supplemental Agreement No. 10, including side letters, to
Purchase Agreement No. 1783, dated October 10, 1997.
(2)(3)
10.14 Purchase Agreement No. 1951, including exhibits and side
letters thereto, between the Company and Boeing, dated
July 23, 1996, relating to the purchase of Boeing 737
aircraft ("Purchase Agreement No. 1951") -- incorporated
by reference to Exhibit 10.8 to the 1996 Second Quarter
10-Q. (1)
10.14(a) Supplemental Agreement No. 1 to Purchase Agreement No.
1951, dated October 10, 1996 -- incorporated by reference
to Exhibit 10.14(a) to the 1996 10-K. (1)
10.14(b) Supplemental Agreement No. 2 to Purchase Agreement No.
1951, dated March 5, 1997 -- incorporated by reference to
Exhibit 10.3 to the 1997 First Quarter 10-Q. (2)
10.14(c) Supplemental Agreement No. 3, including exhibit and side
letter, to Purchase Agreement No. 1951, dated July 17,
1997. (2)(3)
10.14(d) Supplemental Agreement No. 4, including exhibits and side
letters, to Purchase Agreement No. 1951, dated October
10, 1997. (2)(3)
10.15 Aircraft General Terms Agreement between the Company and
Boeing, dated October 10, 1997. (2)(3)
10.15(a) Letter Agreement No. 6-1162-GOC-136 between the Company
and Boeing, dated October 10, 1997, relating to certain
long-term aircraft purchase commitments of the Company.
(2)(3)
10.16 Purchase Agreement No. 2060, including exhibits and side
letters, between the Company and Boeing, dated October
10, 1997, relating to the purchase of Boeing 767 aircraft
("Purchase Agreement No. 2060"). (2)(3)
10.16(a) Supplement Agreement No. 1 to Purchase Agreement No.
2060. (2)(3)
10.17 Purchase Agreement No. 2061, including exhibits and side
letters, between the Company and Boeing, dated October
10, 1997, relating to the purchase of Boeing 777 aircraft
("Purchase Agreement No. 2061"). (2)(3)
10.17(a) Supplemental Agreement No. 1 to Purchase Agreement No.
2061. (2)(3)
10.18 Lease Agreement dated as of May 1992 between the City and
County of Denver, Colorado and Continental regarding
Denver International Airport -- incorporated by reference
to Exhibit 10.17 to the 1993 S-1.
10.18(a) Supplemental Lease Agreement, including an exhibit
thereto, dated as of April 3, 1995 between the City and
County of Denver, Colorado and Continental and United Air
Lines, Inc. regarding Denver International Airport --
incorporated by reference to Exhibit 10.15(a) to
Continental's Annual Report on Form 10-K for the year
ended December 31, 1994 (File No. 0-9781).
10.19 Lease Agreement, as amended and supplemented, between the
Company and the City of Houston, Texas regarding Terminal
C of George Bush Intercontinental Airport -- incorporated
by reference to Exhibit 10.5 to Continental's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1993 (the "1993 Third Quarter 10-Q").
10.20 Agreement and Lease dated as of May 1987, as
supplemented, between the City of Cleveland, Ohio and
Continental regarding Cleveland Hopkins International
Airport -- incorporated by reference to Exhibit 10.6 to
the 1993 Third Quarter 10-Q.
10.21 Third Revised Investment Agreement, dated April 21, 1994,
between America West Airlines, Inc. and AmWest Partners,
L.P. -- incorporated by reference to Exhibit 1 to
Continental's Schedule 13D relating to America West
Airlines, Inc. filed on August 25, 1994.
10.22 Governance Agreement, dated January 25, 1998, among
Continental, Newbridge Parent Corporation and Northwest
Airlines Corporation (the "Governance Agreement") --
incorporated by reference to Exhibit 99.1 to
Continental's Current Report on Form 8-K, dated January
25, 1998.
10.22(a) First Amendment to the Governance Agreement, dated March
2, 1998. (3)
10.23 Letter Agreement No. 11 between the Company and General
Electric Company, dated December 22, 1997, relating to
certain long-term engine purchase commitments of the
Company. (2)(3)
21.1 List of Subsidiaries of Continental. (3)
23.1 Consent of Ernst & Young LLP. (3)
24.1 Powers of attorney executed by certain directors and
officers of Continental. (3)
27.1 Financial Data Schedule. (3)
__________
*These exhibits relate to management contracts or compensatory
plans or arrangements.
(1) The Commission has granted confidential treatment for a
portion of this exhibit.
(2) The Company has applied to the Commission for confidential
treatment of a portion of this exhibit.
(3) Filed herewith.