UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
Commission File Number 0-9781
CONTINENTAL AIRLINES, INC.
(Exact name of registrant as specified in its charter)
Delaware 74-2099724
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1600 Smith Street, Dept. HQSEO
Houston, Texas 77002
(Address of principal executive offices)
(Zip Code)
713-324-2950
(Registrant's telephone number, including area code)
Indicate by check mark whether registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No _____
_______________
As of October 16, 1998, 11,418,632 shares of Class A common stock
and 48,122,769 shares of Class B common stock were outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
(Unaudited) (Unaudited)
Operating Revenue:
Passenger . . . . . . . $1,969 $1,750 $5,571 $4,960
Cargo and mail. . . . . 66 64 202 187
Other . . . . . . . . . 81 76 233 227
2,116 1,890 6,006 5,374
Operating Expenses:
Wages, salaries and
related costs. . . . . 581 462 1,599 1,305
Aircraft fuel . . . . . 181 221 554 660
Aircraft rentals. . . . 164 141 482 400
Commissions . . . . . . 155 152 448 437
Maintenance, materials
and repairs. . . . . . 150 147 455 400
Other rentals and
landing fees . . . . . 110 104 310 299
Depreciation and
amortization . . . . . 75 64 215 186
Fleet dispositions/
impairment losses:
Jet . . . . . . . . . 65 - 65 -
Turboprop . . . . . . 57 - 57 -
Other . . . . . . . . . 435 392 1,248 1,103
1,973 1,683 5,433 4,790
Operating Income . . . . 143 207 573 584
Nonoperating Income
(Expense):
Interest expense. . . . (47) (42) (131) (126)
Interest capitalized. . 14 9 42 23
Interest income . . . . 16 14 42 41
Other, net. . . . . . . (1) (2) 11 (4)
(18) (21) (36) (66)
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions of dollars, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
(Unaudited) (Unaudited)
Income before Income
Taxes and Extraordinary
Charge. . . . . . . . . $ 125 $ 186 $ 537 $ 518
Income Tax Provision . . (49) (69) (206) (192)
Distributions on
Preferred Securities
of Trust, net of
applicable income
taxes of $2, $2,
$6 and $6,
respectively. . . . . . (3) (3) (10) (10)
Income before
Extraordinary Charge. . 73 114 321 316
Extraordinary Charge,
net of applicable
income taxes of $0,
$2, $2 and $2,
respectively. . . . . . - (4) (4) (4)
Net Income . . . . . . . 73 110 317 312
Preferred Dividend
Requirements. . . . . . - - - (2)
Income Applicable to
Common Shares . . . . . $ 73 $ 110 $ 317 $ 310
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions of dollars, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
(Unaudited) (Unaudited)
Earnings per
Common Share:
Income Before
Extraordinary Charge. $1.21 $1.97 $5.33 $5.47
Extraordinary Charge,
net of tax. . . . . . - (0.07) (0.06) (0.07)
Net Income . . . . . . $1.21 $1.90 $5.27 $5.40
Earnings per Common
Share Assuming
Dilution:
Income Before
Extraordinary Charge. $0.97 $1.48 $4.15 $4.06
Extraordinary Charge,
net of tax. . . . . . - (0.04) (0.05) (0.04)
Net Income . . . . . . $0.97 $1.44 $4.10 $4.02
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
CONTINENTAL AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except for share data)
September 30, December 31,
ASSETS 1998 1997
(Unaudited)
Current Assets:
Cash and cash equivalents, including
restricted cash and cash equivalents
of $13 and $15, respectively . . . . . . $1,226 $1,025
Short-term investments. . . . . . . . . . 44 -
Accounts receivable, net. . . . . . . . . 549 361
Spare parts and supplies, net . . . . . . 152 128
Deferred income taxes . . . . . . . . . . 111 111
Prepayments and other . . . . . . . . . . 130 103
Total current assets . . . . . . . . . . 2,212 1,728
Property and Equipment:
Owned property and equipment:
Flight equipment . . . . . . . . . . . . 2,284 1,636
Other. . . . . . . . . . . . . . . . . . 547 456
2,831 2,092
Less: Accumulated depreciation. . . . . 583 473
2,248 1,619
Purchase deposits for flight equipment 425 437
Capital leases:
Flight equipment. . . . . . . . . . . . . 359 274
Other . . . . . . . . . . . . . . . . . . 43 40
402 314
Less: Accumulated amortization . . . . . 169 145
233 169
Total property and equipment . . . . . . 2,906 2,225
Other Assets:
Routes, gates and slots, net. . . . . . . 1,231 1,425
Reorganization value in excess of
amounts allocable to identifiable
assets, net. . . . . . . . . . . . . . . - 164
Investments . . . . . . . . . . . . . . . 151 104
Other assets, net . . . . . . . . . . . . 208 184
Total other assets . . . . . . . . . . . 1,590 1,877
Total Assets. . . . . . . . . . . . . . $6,708 $5,830
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except for share data)
September 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
(Unaudited)
Current Liabilities:
Current maturities of long-term debt. . . $ 197 $ 243
Current maturities of capital leases. . . 48 40
Accounts payable. . . . . . . . . . . . . 906 781
Air traffic liability . . . . . . . . . . 963 746
Accrued payroll and pensions. . . . . . . 168 158
Accrued other liabilities . . . . . . . . 284 317
Total current liabilities. . . . . . . . 2,566 2,285
Long-Term Debt . . . . . . . . . . . . . . 1,937 1,426
Capital Leases . . . . . . . . . . . . . . 211 142
Deferred Credits and Other Long-Term
Liabilities:
Deferred income taxes . . . . . . . . . . 308 435
Accruals for aircraft retirements and
excess facilities. . . . . . . . . . . . 115 123
Other . . . . . . . . . . . . . . . . . . 238 261
Total deferred credits and other
long-term liabilities . . . . . . . . . 661 819
Commitments and Contingencies
Continental-Obligated Mandatorily
Redeemable Preferred Securities of
Subsidiary Trust Holding Solely
Convertible Subordinated
Debentures (A). . . . . . . . . . . . . . 242 242
(A) 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.
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except for share data)
September 30, December 31,
1998 1997
(Unaudited)
Common Stockholders' Equity:
Class A common stock - $.01 par,
50,000,000 shares authorized;
11,418,632 and 8,379,464 shares issued
and outstanding, respectively. . . . . . $ - $ -
Class B common stock - $.01 par,
200,000,000 shares authorized;
51,066,488 shares issued in 1998
and 50,512,010 shares issued and
outstanding in 1997. . . . . . . . . . . 1 1
Additional paid-in capital . . . . . . . 653 639
Retained earnings . . . . . . . . . . . . 593 276
Other . . . . . . . . . . . . . . . . . . (2) -
Treasury stock - 2,894,654 Class B shares
in 1998. . . . . . . . . . . . . . . . . (154) -
Total common stockholders' equity. . . . 1,091 916
Total Liabilities and Stockholders'
Equity . . . . . . . . . . . . . . . . $6,708 $5,830
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
CONTINENTAL AIRLINES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Nine Months
Ended September 30,
1998 1997
(Unaudited)
Net Cash Provided by Operating
Activities. . . . . . . . . . . . . . . $799 $740
Cash Flows from Investing Activities:
Purchase deposits paid in connection
with future aircraft deliveries. . . . (583) (242)
Purchase deposits refunded in
connection with aircraft delivered . . 540 29
Capital expenditures. . . . . . . . . . (492) (275)
Proceeds from disposition of property
and equipment. . . . . . . . . . . . . 67 14
Investment in partner airlines. . . . . (53) -
Purchase of short-term investments. . . (44) -
Other . . . . . . . . . . . . . . . . . (18) (10)
Net cash used by investing
activities. . . . . . . . . . . . . . (583) (484)
Cash Flows from Financing Activities:
Proceeds from issuance of long-term
debt, net. . . . . . . . . . . . . . . 477 505
Payments on long-term debt and
capital lease obligations. . . . . . . (375) (627)
Purchase of Class B treasury stock. . . (191) -
Proceeds from issuance of common
stock. . . . . . . . . . . . . . . . . 51 18
Dividends paid on preferred securities
of trust . . . . . . . . . . . . . . . (16) (16)
Purchase of warrants to purchase
Class B common stock . . . . . . . . . - (94)
Redemption of preferred stock . . . . . - (48)
Purchase of 9% minority interest
in AMI . . . . . . . . . . . . . . . . - (18)
Proceeds from sale-leaseback
transactions . . . . . . . . . . . . . 41 -
Net cash used by financing activities. (13) (280)
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Nine Months
Ended September 30,
1998 1997
(Unaudited)
Net Increase (Decrease) in Cash and
Cash Equivalents. . . . . . . . . . . . $ 203 $(24)
Cash and Cash Equivalents - Beginning
of Period (A) . . . . . . . . . . . . . 1,010 985
Cash and Cash Equivalents - End of
Period (A). . . . . . . . . . . . . . . $1,213 $961
Supplemental Cash Flow Information:
Interest paid . . . . . . . . . . . . . $ 98 $104
Income taxes paid . . . . . . . . . . . $ 13 $ 7
Investing and Financing Activities
Not Affecting Cash:
Property and equipment acquired
through the issuance of debt . . . . . $ 335 $207
Capital lease obligations incurred. . . $ 111 $ 15
Reduction of capital lease
obligations in connection with
refinanced aircraft. . . . . . . . . . $ - $ 97
Financed purchase deposits for
flight equipment, net. . . . . . . . . $ - $ 52
Purchase deposits refunded and used
to reduce debt . . . . . . . . . . . . $ - $ 31
(A) Excludes restricted cash of $15 million and $76 million at
January 1, 1998 and 1997, respectively, and $13 million and $27
million at September 30, 1998 and 1997, respectively.
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
CONTINENTAL AIRLINES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In the opinion of management, the unaudited consolidated financial
statements included herein contain all adjustments necessary to
present fairly the financial position, results of operations and
cash flows for the periods indicated. Such adjustments are of a
normal, recurring nature. The accompanying consolidated financial
statements should be read in conjunction with the consolidated
financial statements and the notes thereto contained in the Annual
Report of Continental Airlines, Inc. (the "Company" or
"Continental") on Form 10-K for the year ended December 31, 1997.
NOTE 1 - SHORT-TERM INVESTMENTS
During 1998, the Company began investing in commercial paper with
original maturities in excess of 90 days but less than 270 days.
These investments are classified as short-term investments in the
consolidated balance sheet. Short-term investments are stated at
cost, which approximates market value.
NOTE 2 - INTANGIBLES
During 1998, the Company determined that it would be able to
recognize additional net operating losses ("NOLs") attributable to
the Company's predecessor as a result of the completion of several
transactions resulting in recognition of built-in gains for federal
income tax purposes. This benefit was used to reduce to zero
reorganization value in excess of amounts allocable to identifiable
assets in the first quarter of 1998. During the third quarter of
1998, the Company determined that additional NOLs of the Company's
predecessor could be benefitted and accordingly reduced both the
valuation allowance and routes, gates and slots by $152 million.
NOTE 3 - FLEET DISPOSITIONS/IMPAIRMENT LOSSES
On August 11, 1998, the Company announced that Continental
Micronesia, Inc. ("CMI"), a wholly owned subsidiary of the Company,
plans to accelerate the retirement of its four Boeing 747 aircraft
by April 1999 and its remaining thirteen Boeing 727 aircraft by
December 2000. The Boeing 747s will be replaced by DC-10-30
aircraft and the Boeing 727 aircraft will be replaced with a
reduced number of Boeing 737 aircraft. In addition, Continental
Express, Inc. ("Express"), a wholly owned subsidiary of the
Company, will accelerate the retirement of certain turboprop
aircraft by 2000, including its fleet of 32 EMB-120 turboprop
aircraft, as regional jets are acquired to replace turboprops.
In connection with its decision to accelerate the replacement of
these aircraft, the Company performed an evaluation to determine,
in accordance with Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" ("SFAS 121"), whether future
cash flows (undiscounted and without interest charges) expected to
result from the use and eventual disposition of these aircraft will
be less than the aggregate carrying amount of these aircraft and
the related assets. As a result of the evaluation, management
determined that the estimated future cash flows expected to be
generated by these aircraft will be less than their carrying
amount, and therefore, these aircraft are impaired as defined by
SFAS 121. Consequently, the original cost basis of these aircraft
and related items was reduced to reflect the fair market value at
the date the decision was made, resulting in a $59 million fleet
disposition/impairment loss. In determining the fair market value
of these assets, the Company considered recent transactions
involving sales of similar aircraft and market trends in aircraft
dispositions. The remaining $63 million of the fleet
disposition/impairment loss includes cash and non-cash costs
related primarily to future commitments on leased aircraft past the
dates they will be removed from service and the write-down of
related inventory to its estimated fair market value. The combined
charge of $122 million ($77 million after tax) was recorded in the
third quarter of 1998.
NOTE 4 - EARNINGS PER SHARE
The following table sets forth the computations of basic and
diluted earnings per share (in millions):
Three Months Nine Months
Ended Ended
September 30, September 30,
1998 1997 1998 1997
Numerator:
Income before extraordinary
charge . . . . . . . . . . . . $ 73 $114 $321 $316
Extraordinary charge, net of
applicable income taxes. . . . - (4) (4) (4)
Net income. . . . . . . . . . . 73 110 317 312
Preferred stock dividends . . . - - - (2)
Numerator for basic earnings per
share - income available to
common stockholders . . . . . . 73 110 317 310
Effect of dilutive securities:
Preferred Securities of Trust . 3 3 9 9
6-3/4% convertible subordinated
notes. . . . . . . . . . . . . 2 2 6 6
5 5 15 15
Numerator for diluted earnings
per share - income available
to common stockholders after
assumed conversions. . . . . . $ 78 $115 $332 $325
Denominator:
Denominator for basic earnings
per share - weighted-average
shares . . . . . . . . . . . . 60.3 58.0 60.0 57.4
Effect of dilutive securities:
Employee stock options . . . . 1.7 1.6 1.9 1.5
Warrants . . . . . . . . . . . - 2.5 1.1 3.8
Restricted Class B common
stock . . . . . . . . . . . . - 0.4 - 0.4
Preferred Securities of Trust. 10.3 10.3 10.3 10.3
6-3/4% convertible subordinated
notes . . . . . . . . . . . . 7.6 7.6 7.6 7.6
Dilutive potential common
shares. . . . . . . . . . . . 19.6 22.4 20.9 23.6
Denominator for diluted
earnings per share - adjusted
weighted-average and assumed
conversions. . . . . . . . . . 79.9 80.4 80.9 81.0
NOTE 5 - INCOME TAXES
Income taxes for the three and nine months ended September 30, 1998
and 1997 were provided at the estimated annual effective tax rate.
Such rate differs from the federal statutory rate of 35%, primarily
due to state income taxes and the effect of certain expenses that
are not deductible for income tax purposes.
At December 31, 1997, the Company had NOL carryforwards of $1.9
billion for federal income tax purposes that will expire through
2009 and federal investment tax credit carryforwards of $45 million
that will expire through 2001. As a result of the change in
ownership of the Company on April 27, 1993, the ultimate
utilization of the Company's NOLs and investment tax credits will
be limited. Reflecting this limitation, the Company recorded a
valuation allowance of $617 million at December 31, 1997.
Realization of a substantial portion of the Company's remaining
NOLs required the completion of transactions resulting in
recognition of built-in gains for federal income tax purposes.
During 1998, the Company has consummated several such transactions,
the benefit of which resulted in the elimination of reorganization
value in excess of amounts allocable to identifiable assets in the
first quarter of 1998. During the third quarter of 1998, the
Company determined that additional NOLs of the Company's
predecessor could be benefitted and accordingly reduced both the
valuation allowance and routes, gates and slots by $152 million.
To the extent the Company were to determine in the future that
additional NOLs of the Company's predecessor could be recognized in
the accompanying consolidated financial statements, such benefit
would further reduce routes, gates and slots.
NOTE 6 - COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130 - "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 establishes new rules for the
reporting and display of comprehensive income and its components;
however, the adoption of SFAS 130 had no impact on the Company's
net income or stockholders' equity. SFAS 130 requires unrealized
gains or losses on the Company's available-for-sale securities and
changes in minimum pension liabilities, which prior to adoption
were reported separately in stockholders' equity, to be included in
other comprehensive income.
During the third quarters of 1998 and 1997, total comprehensive
income amounted to $70 million and $110 million, respectively. For
the nine months ended September 30, 1998 and 1997, total
comprehensive income amounted to $313 million and $311 million,
respectively.
NOTE 7 - OTHER
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 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 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. On October 23, 1998, the Department of
Justice ("DOJ") filed a lawsuit against Northwest and Continental
challenging Northwest's acquisition of an interest in Continental.
The DOJ is not seeking to preliminarily enjoin the transaction, nor
is it challenging the alliance with Northwest at this time,
although it is continuing to investigate certain specific aspects
of the alliance. Continental expects to implement its alliance
with Northwest promptly after the closing of Northwest's
acquisition of an equity interest in Continental. While it is not
possible to predict the ultimate outcome of this litigation, the
Company does not believe that this litigation will have a material
adverse effect on the Company.
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
through December 1998.
In addition, during the first quarter of 1998, Continental
completed several offerings totaling approximately $98 million
aggregate principal amount of tax-exempt special facilities revenue
bonds to finance certain airport facility projects. These bonds
are guaranteed by Continental and are payable solely from rentals
paid by Continental under long-term lease agreements with the
respective governing bodies.
In April 1998, the Company completed an offering of $187 million of
pass-through certificates to be used to refinance the debt related
to 14 aircraft currently owned by Continental. In connection with
this refinancing, Continental recorded a $4 million after tax
extraordinary charge to consolidated earnings in the second quarter
of 1998.
On April 24, 1998 Air Partners exercised warrants to purchase
2,298,134 shares of Class A common stock with an exercise price of
$7.50 per share and warrants to purchase 741,334 shares of Class A
common stock with an exercise price of $15.00 per share. The
Company no longer has any warrants outstanding.
In May 1998, Express signed a memorandum of understanding to
purchase 25 Embraer ERJ-135 ("ERJ-135") 37-seat regional jets,
deliverable through the third quarter of 1999, with options for an
additional 50 aircraft exercisable through 2005. The Company
currently plans to finance the new aircraft using lease financing
and to account for all of these aircraft as operating leases.
On May 21, 1998, the stockholders of the Company approved the
Continental Airlines, Inc. 1998 Stock Incentive Plan (the
"Incentive Plan"). The Incentive Plan provides that the Company
may issue shares of restricted Class B common stock or grant
options to purchase shares of Class B common stock to non-employee
directors and employees of the Company or its subsidiaries.
Subject to adjustment as provided in the Incentive Plan, the
aggregate number of shares of Class B common stock that may be
issued under the Incentive Plan may not exceed 5,500,000 shares,
which may be originally issued or treasury shares or a combination
thereof.
In June 1998, a new five-year collective bargaining agreement,
retroactive to October 1997, was ratified by Continental's pilots,
who are represented by the Independent Association of Continental
Pilots ("IACP"). The agreement becomes amendable in October 2002.
The Company began accruing for the increased costs of the new
agreement in the fourth quarter of 1997. The Company estimates
that the increased costs will be approximately $113 million for
1998. Also in June 1998, the pilots at Express, who are also
represented by the IACP, rejected a new five-year tentative
agreement which had been submitted to them for ratification. The
parties resumed bargaining with respect to a revised Express
contract with the assistance of the National Mediation Board
("NMB") in the third quarter of 1998. While it is not possible to
predict the outcome of those negotiations, the Company does not
believe it will have a material financial impact on the Company.
The Company's dispatchers, represented by the Transport Workers'
Union ("TWU"), ratified a new five-year collective bargaining
agreement in July 1998. The agreement becomes amendable in October
2003. On October 9, 1998, the Company and the International
Brotherhood of Teamsters (the "Teamsters") reached a tentative
agreement for an initial four-year collective bargaining agreement
covering the Company's mechanics and related employees. The
agreement will be submitted for a ratification vote, the results of
which will be known in mid-November 1998. While it is not possible
to predict the outcome of the ratification vote, the Company does
not believe it will have a material financial impact on the
Company.
Also in June 1998, the Company sold its remaining 317,140 shares of
America West Holding Corporation ("America West") Class B common
stock realizing net proceeds of approximately $8.9 million and a
gain of $6 million.
In 1998, the Company's Board of Directors authorized the
expenditure of up to $300 million to repurchase shares of 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 occur at times and in
amounts that the Company deems appropriate. As of October 16,
1998, 3,695,800 shares had been repurchased for a total of $197
million.
In October 1998, the Company entered into an agreement to offer
$524 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 14 aircraft scheduled
to be delivered from December 1998 to April 1999. The transaction
is expected to be completed in early November of 1998.
NOTE 8 - SEGMENTS DISCLOSURE
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 131 - "Disclosure
About Segments of an Enterprise and Related Information" ("SFAS
131"). Although SFAS 131 became effective the first quarter of
1998, Continental has elected not to report segment information in
interim financial statements in the first year of application
consistent with the provisions of the statement.
NOTE 9 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 133 - Accounting for
Derivative Instruments and Hedging Activities ("SFAS 133"), which
is required to be adopted for years beginning after June 15, 1999.
The Company will adopt SFAS 133 in the fourth quarter of 1998.
Management does not anticipate that the adoption of SFAS 133 will
have a significant effect on earnings or the financial position of
the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The following discussion may contain forward-looking statements.
In connection therewith, please see the risk factors set forth in
the Company's Form 10-K for the year ended December 31, 1997 which
identify important factors that could cause actual results to
differ materially from those in the forward-looking statements.
Continental's results of operations are impacted by seasonality
(the second and third quarters are generally stronger than the
first and fourth quarters) as well as numerous other factors that
are not necessarily seasonal, including the extent and nature of
competition from other airlines, fare sale activities, excise and
similar taxes, changing levels of operations, fuel prices, foreign
currency exchange rates and general economic conditions. To date,
the recent turmoil in the world's financial markets has not had a
material impact on the Company's results of operations. Although
CMI's results in Asia have declined in recent years, the Company
successfully redeployed CMI capacity into the stronger domestic
markets and CMI's recent results have improved. In addition, the
Company believes it is well positioned to respond to market
conditions in the event of a sustained economic downturn for the
following reasons: underdeveloped hubs with strong local traffic;
a flexible fleet plan; a strong cash balance, a $225 million unused
revolving credit facility and a well developed alliance network.
RESULTS OF OPERATIONS
The following discussion provides an analysis of the Company's
results of operations and reasons for material changes therein for
the three and nine months ended September 30, 1998 as compared to
the corresponding periods ended September 30, 1997.
Comparison of Three Months Ended September 30, 1998 to Three Months
Ended September 30, 1997
The Company recorded consolidated net income of $73 million for the
three months ended September 30, 1998 as compared to consolidated
net income of $110 million for the three months ended September 30,
1997. Net income was significantly impacted by a $122 million ($77
million after-tax) fleet disposition/impairment loss resulting from
the Company's decision to accelerate the retirement of certain jet
and turboprop aircraft.
Passenger revenue increased 12.5%, $219 million, during the quarter
ended September 30, 1998 as compared to the same period in 1997,
which was principally due to a 14.6% increase in revenue passenger
miles, partially offset by a 2.7% decrease in yield.
Wages, salaries and related costs increased 25.8%, $119 million,
during the quarter ended September 30, 1998 as compared to the same
period in 1997, primarily due to an 11.1% increase in average full-
time equivalent employees and higher wage rates resulting from the
Company's decision to increase employee wages to industry standards
by the year 2000.
Aircraft fuel expense decreased 18.1%, $40 million, in the three
months ended September 30, 1998 as compared to the same period in
the prior year. The average price per gallon decreased 26.0% from
60.23 cents in the third quarter of 1997 to 44.59 cents in the
third quarter of 1998. This reduction was partially offset by a
10.2% increase in the quantity of jet fuel used, principally
reflecting increased capacity.
Aircraft rentals increased $23 million or 16.3% due to the delivery
of new aircraft.
Maintenance, materials and repairs increased 2.0%, $3 million,
during the quarter ended September 30, 1998 as compared to the same
period in 1997 due to the volume and timing of engine overhauls and
routine maintenance as part of the Company's ongoing maintenance
program.
Depreciation and amortization expense increased 17.2%, $11 million,
in the third quarter of 1998 compared to the third quarter of 1997
primarily due to the addition of new aircraft and related spare
parts. These increases were partially offset by a reduction in the
amortization of reorganization value in excess of amounts allocable
to identifiable assets and routes, gates and slots. See Note 2.
As a result of its decision to accelerate the retirement of certain
jet and turboprop aircraft (see Note 3), the Company recorded a
fleet disposition/ impairment loss of $122 million.
Other operating expense increased 11.0%, $43 million, in the three
months ended September 30, 1998 as compared to the same period in
the prior year, as a result of increases in passenger and aircraft
servicing expense, reservations and sales expense and other
miscellaneous expense, primarily due to the 11.1% increase in
available seat miles.
Comparison of Nine Months Ended September 30, 1998 to Nine Months
Ended September 30, 1997
The Company recorded consolidated net income of $317 million and
$312 million for the nine months ended September 30, 1998 and 1997,
respectively. Net income was significantly impacted by a $122
million ($77 million after-tax) fleet disposition/impairment loss
resulting from the Company's decision to accelerate the retirement
of certain jet and turboprop aircraft. Management believes that
the Company benefitted in the first quarter of 1997 from the
expiration of the aviation trust fund tax (the "ticket tax"). The
ticket tax was reinstated on March 7, 1997. Management believes
that the ticket tax has a negative impact on the Company, although
neither the amount of such negative impact directly resulting from
the reimposition of the ticket tax, nor the benefit realized by its
previous expiration, can be precisely determined.
Passenger revenue increased 12.3%, $611 million, during the nine
months ended September 30, 1998 as compared to the same period in
1997. The increase was due to a 13.5% increase in revenue
passenger miles, partially offset by a 1.9% decrease in yield.
Wages, salaries and related costs increased 22.5%, $294 million,
during the nine months ended September 30, 1998 as compared to the
same period in 1997, primarily due to an 11.6% increase in average
full-time equivalent employees and higher wage rates resulting from
the Company's decision to increase employee wages to industry
standards by the year 2000.
Aircraft fuel expense decreased 16.1%, $106 million, in the nine
months ended September 30, 1998 as compared to the same period in
the prior year. The average price per gallon decreased 24.9% from
63.45 cents in the first nine months of 1997 to 47.66 cents in the
first nine months of 1998. This reduction was partially offset by
an 11.1% increase in the quantity of jet fuel used principally
reflecting increased capacity.
Aircraft rentals increased 20.5%, $82 million, during the nine
months ended September 30, 1998 as compared to the same period in
1997, due primarily to the delivery of new aircraft.
Maintenance, materials and repairs increased 13.8%, $55 million,
during the nine months ended September 30, 1998 as compared to the
same period in 1997. Aircraft maintenance expense in the second
quarter of 1997 was reduced by $16 million due to the reversal of
reserves that were no longer required as a result of the
acquisition of 10 aircraft previously leased by the Company. In
addition, maintenance expense increased due to the volume and
timing of engine overhauls as part of the Company's ongoing
maintenance program.
Depreciation and amortization expense increased 15.6%, $29 million,
in the first nine months of 1998 compared to the same period in
1997 primarily due to the addition of new aircraft and related
spare parts. These increases were partially offset by a reduction
in the amortization of reorganization value in excess of amounts
allocable to identifiable assets and routes, gates and slots. See
Note 2.
As a result of its decision to accelerate the retirement of certain
jet and turboprop aircraft (see Note 3), the Company recorded a
fleet disposition/impairment loss of $122 million.
Other operating expense increased 13.1%, $145 million, in the nine
months ended September 30, 1998 as compared to the same period in
the prior year, primarily as a result of increases in passenger and
aircraft servicing expense, reservations and sales expense and
other miscellaneous expense, primarily due to the 11.5% increase in
available seat miles.
The Company's other nonoperating income (expense) in the nine
months ended September 30, 1998 included a $6 million gain on the
sale of America West stock. Other nonoperating expense in the
first nine months of 1997 consisted primarily of foreign currency
losses.
Certain Statistical Information
An analysis of statistical information for Continental's jet
operations, excluding regional jet operations, for the periods
indicated is as follows:
Three Months Ended Net
September 30, Increase/
1998 1997 (Decrease)
Revenue passenger miles
(millions) (1). . . . . . . . . . 14,944 13,038 14.6 %
Available seat miles
(millions) (2). . . . . . . . . . 19,642 17,686 11.1 %
Passenger load factor (3). . . . . 76.1% 73.7% 2.4 pts.
Breakeven passenger load
factor (4). . . . . . . . . . . . 62.8% 61.8% 1.0 pts.
Passenger revenue per available
seat mile (cents). . . . . . . . 9.22 9.18 0.4 %
Total revenue per available
seat mile (cents) . . . . . . . . 10.06 10.05 0.1 %
Operating cost per available
seat mile (cents) (5) . . . . . . 8.82 8.98 (1.8)%
Average yield per revenue
passenger mile (cents) (6) . . . 12.12 12.45 (2.7)%
Average fare per revenue
passenger . . . . . . . . . . . .$155.39 $149.96 3.6 %
Revenue passengers (thousands) . . 11,655 10,822 7.7 %
Average length of aircraft
flight (miles) . . . . . . . . . 1,067 991 7.7 %
Average daily utilization of
each aircraft (hours) (7). . . . 10:20 10:19 0.2 %
Actual aircraft in fleet at
end of period (8) . . . . . . . . 359 334 7.5 %
Nine Months Ended Net
September 30, Increase/
1998 1997 (Decrease)
Revenue passenger miles
(millions) (1). . . . . . . . . . 40,691 35,851 13.5 %
Available seat miles
(millions) (2). . . . . . . . . .55,739 50,004 11.5 %
Passenger load factor (3). . . . . 73.0% 71.7% 1.3 pts.
Breakeven passenger load
factor (4). . . . . . . . . . . . 60.9% 59.6% 1.3 pts.
Passenger revenue per available
seat mile (cents). . . . . . . . 9.24 9.26 (0.2)%
Total revenue per available
seat mile (cents) . . . . . . . . 10.12 10.16 (0.4)%
Operating cost per available
seat mile (cents) (5) . . . . . . 8.93 9.05 (1.3)%
Average yield per revenue
passenger mile (cents) (6) . . . 12.66 12.91 (1.9)%
Average fare per revenue
passenger . . . . . . . . . . . .$156.17 $149.19 4.7 %
Revenue passengers (thousands) . .32,988 31,022 6.3 %
Average length of aircraft
flight (miles) . . . . . . . . . 1,040 954 9.0 %
Average daily utilization of
each aircraft (hours) (7). . . . 10:17 10:14 0.5 %
Actual aircraft in fleet at
end of period (8) . . . . . . . . 359 334 7.5 %
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. For the three months ended
September 30, 1998, the table above excludes 554 million available
seat miles, and related revenue passenger miles and enplanements,
operated by Continental but purchased and marketed by the other
carrier, and includes 99 million available seat miles, and related
revenue passenger miles and enplanements, operated by other
carriers but purchased and marketed by Continental. For the nine
months ended September 30, 1998, the table above excludes 1,230
million available seat miles, and related revenue passenger miles
and enplanements, operated by Continental but purchased and
marketed by the other carrier, and includes 164 million available
seat miles, and related revenue passenger miles and enplanements,
operated by other carriers but purchased and marketed by
Continental.
__________________
(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) 1998 excludes a fleet disposition/ impairment loss totaling
$122 million.
(6) The average revenue received for each mile a revenue
passenger is carried.
(7) The average number of hours per day that an aircraft flown in
revenue service is operated (from gate departure to gate
arrival).
(8) Excludes all-cargo 727 aircraft (six in 1998 and four in
1997) at CMI. During the first nine months of 1998, the
Company took delivery of 47 aircraft and removed 25 aircraft
from service.
LIQUIDITY AND CAPITAL COMMITMENTS
In the first nine months of 1998, the Company completed several
transactions intended to strengthen its long-term financial
position and enhance earnings.
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
through December 1998.
In addition, during the first quarter of 1998 Continental completed
several offerings totaling approximately $98 million aggregate
principal amount of tax-exempt special facilities revenue bonds to
finance certain airport facility projects. These bonds are
guaranteed by Continental and are payable solely from rentals paid
by Continental under long-term lease agreements with the respective
governing bodies.
In April 1998, the Company completed an offering of $187 million of
pass-through certificates used to refinance the debt related to 14
aircraft currently owned by Continental.
As of September 30, 1998, the Company had $1.2 billion in cash and
cash equivalents (excluding restricted cash of $13 million) and $44
million of short-term investments, compared to $1 billion in cash
and cash equivalents (excluding restricted cash of $15 million) as
of December 31, 1997. Net cash provided by operating activities
increased $59 million during the nine months ended September 30,
1998 compared to the same period in the prior year primarily due to
an improvement in operating income (excluding a $122 million fleet
disposition/impairment loss). Net cash used by investing
activities increased $99 million for the nine months ending
September 30, 1998 compared to the same period in the prior year,
primarily as a result of higher capital and fleet-related
expenditures. Net cash used by financing activities for the nine
months ended September 30, 1998 compared to the same period in the
prior year decreased $267 million primarily due to a decrease in
payments on long-term debt and capital lease obligations. This
decrease was partially due to the repayment of a $275 million
secured term loan in 1997.
Deferred Tax Assets. The Company 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 required the completion of transactions
resulting in recognition of built-in gains for federal income tax
purposes. During 1998, the Company has consummated several such
transactions, the benefit of which resulted in the elimination of
reorganization value in excess of amounts allocable to identifiable
assets in the first quarter of 1998. During the third quarter of
1998, the Company determined that additional NOLs of the Company's
predecessor could be benefitted and accordingly reduced both the
valuation allowance and routes, gates and slots by $152 million.
To the extent the Company were to determine in the future that
additional NOLs of the Company's predecessor could be recognized in
the accompanying consolidated financial statements, such benefit
would further reduce routes, gates and slots.
As a result of NOLs, the Company will not pay United States federal
income taxes (other than alternative minimum tax) until it has
recorded approximately an additional $1 billion 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. 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 will result in
an ownership change for purposes of Section 382.
Purchase Commitments. As of October 16, 1998, Continental had firm
commitments with The Boeing Company ("Boeing") to take delivery of
a total of 117 jet aircraft during the years 1998 through 2005 with
options for an additional 115 aircraft (exercisable subject to
certain conditions). These new aircraft will replace older, less
efficient Stage 2 aircraft and allow for growth of operations. The
estimated aggregate cost of the Company's firm commitments for the
Boeing aircraft is approximately $5.5 billion. As of October 16,
1998, Continental had completed or had third-party commitments for
a total of approximately $521 million 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.
During the first nine months of 1998, the Company took delivery of
47 jet aircraft of which 39 were financed through enhanced
equipment trust certificates.
As of October 16, 1998, Express had firm commitments for 41 Embraer
ERJ-145 ("ERJ-145") 50-seat regional jets and a memorandum of
understanding to purchase 25 ERJ-135 37-seat regional jets, with
options for an additional 125 ERJ-145 and 50 ERJ-135 aircraft
exercisable through 2008. Neither Express nor Continental will
have any obligation to take any such firm aircraft that are not
financed by a third party and leased to the Company. Express took
delivery of 15 of the ERJ-145 firm aircraft in the first three
quarters of 1998 and will take delivery of the remaining 66 firm
aircraft through the third quarter of 2001. 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 $231 million,
primarily relating to mainframe, software application and
automation infrastructure projects, aircraft modifications and
mandatory maintenance projects, passenger terminal facility
improvements and office, maintenance, telecommunications and ground
equipment. Continental's capital expenditures during the nine
months ended September 30, 1998 aggregated $144 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 and Euro.
As described in its annual report on Form 10-K for the year ended
December 31, 1997, 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 total cost
for the project (excluding internal payroll costs) is currently
expected to approximate $12-15 million, which is being funded with
cash from operations. As of September 30, 1998, the Company had
incurred and expensed approximately $10 million relating to its
Year 2000 project.
The Company's Year 2000 project involves the review of a number of
internal and third party components. Each component is subjected
to the project's five phases, which consist of inventory of
systems, evaluation and analysis, modification implementation, user
testing and integration compliance. The components are currently
in various stages of completion; however, the Company's entire Year
2000 project is anticipated to be completed by early 1999. This
should allow for the Company sufficient time for any additional
analysis, modification and testing which may be required. 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 third parties on which the Company's
business relies (including those of the Federal Aviation
Administration) to operate properly beyond 1999. There can be no
assurance that such systems will be modified for Year 2000
operational requirements on a timely basis. Although the Company
currently has day to day operational contingency plans, management
is in the process of updating these plans for possible Year 2000
specific operational requirements.
Effective January 1, 1999, eleven of the fifteen countries
comprising the European Union will begin a transition to a single
monetary unit, the "euro", which is scheduled to be completed by
July 1, 2002. The Company has developed a plan designed to allow
it to effectively operate in euros. Management does not anticipate
that the implementation of this single currency plan will have a
material effect on the Company's operations or financial condition.
Bond Financings. 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 completed the financing of these projects in April 1998
with $23 million of tax-exempt bonds. Continental is also planning
a major 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 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 a combination of tax-exempt special
facilities revenue bonds issued in March 1998 and general airport
revenue bonds issued in December 1997 in each case by the City of
Cleveland. In connection therewith, Continental has guaranteed the
special facilities revenue bonds and has entered into a long-term
lease with the City of Cleveland under which rental payments will
be sufficient to service both series of bonds.
Employees. In June 1998, a new five-year collective bargaining
agreement, retroactive to October 1997, was ratified by
Continental's pilots, who are represented by the IACP. The
agreement becomes amendable in October 2002. The Company began
accruing for the increased costs of the new agreement in the fourth
quarter of 1997. The Company estimates that the increased costs
will be approximately $113 million for 1998. Also in June 1998,
the pilots at Express, who are also represented by the IACP,
rejected a new five-year tentative agreement which had been
submitted to them for ratification. The parties resumed bargaining
with respect to a revised Express contract with the assistance of
the NMB in the third quarter of 1998. While it is not possible to
predict the outcome of those negotiations, the Company does not
believe it will have a material financial impact on the Company.
The Company's dispatchers, represented by the TWU, ratified a new
five-year collective bargaining agreement in July 1998. The
agreement becomes amendable in October 2003. On October 9, 1998,
the Company and the Teamsters reached a tentative agreement for an
initial four-year collective bargaining agreement covering the
Company's mechanics and related employees. The agreement will be
submitted for a ratification vote, the results of which will be
known in mid-November 1998. While it is not possible to predict
the outcome of the ratification vote, the Company does not believe
it will have a material financial impact on the Company.
In September 1997, Continental announced that it intends to bring
all employees to industry standard wages (the average of the top
ten U.S. air carriers as ranked by the U.S. 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. On January 26, 1998, the Company announced that, in
connection with an agreement by Air Partners to dispose of its
interest in the Company to an affiliate of Northwest, the Company
had entered into a long-term global alliance with Northwest. The
Company estimated at the time of the announcement that the alliance
with Northwest, when fully phased in over a three-year period,
would generate in excess of $500 million in additional annual pre-
tax operating income for the carriers, and anticipated that
approximately 45% of such pre-tax operating income would accrue to
the Company. On October 23, 1998, the Department of Justice
("DOJ") filed a lawsuit against Northwest and Continental
challenging Northwest's acquisition of an interest in Continental.
The DOJ is not seeking to preliminarily enjoin the transaction, nor
is it challenging the alliance with Northwest at this time,
although it is continuing to investigate certain specific aspects
of the alliance. Continental expects to implement its alliance
with Northwest promptly after the closing of Northwest's
acquisition of an equity interest in Continental. While it is not
possible to predict the ultimate outcome of this litigation, the
Company does not believe that this litigation will have a material
adverse effect on 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.
In 1998, the Company's Board of Directors authorized the
expenditure of up to $300 million to repurchase shares of 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 occur at times and in
amounts that the Company deems appropriate. As of October 16,
1998, 3,695,800 shares had been repurchased for a total of $197
million.
Historically, the Company has entered into petroleum call options
to provide some short-term protection against a sharp increase in
jet fuel prices. In light of declining fuel prices and the high
cost of call options with strike prices at spreads above current
prices, which have typically been purchased by the Company, the
Company's petroleum call option contracts currently provide
protection only against significantly higher fuel prices with
respect to approximately three months of the Company's fuel needs,
in the event of a fuel supply shortage resulting from a disruption
of oil imports or otherwise.
To reduce the potential negative impact on CMI's dollar earnings,
CMI entered into forward contracts in the fourth quarter of 1998 as
a hedge against a portion of its expected net yen cash flow
position. The forward contracts represent 95% of the estimated net
yen cash flows through the first quarter of 1999. See Note 9.
Management believes that the Company's costs are likely to be
affected in the future by (i) higher aircraft ownership costs 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 and the Internet
for bookings, and reduced interest expense.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
For information regarding the Company's exposure to certain market
risks, see Item 7A. Quantitative and Qualitative Disclosures About
Market Risk in Continental's Annual Report on Form 10-K for the
year ended December 31, 1997.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
10.1 Supplemental Agreement No. 6, including exhibits
and side letters, to Purchase Agreement No. 1951
between the Company and The Boeing Company
relating to the purchase of Boeing 737 aircraft,
dated July 30, 1998.
10.2 Supplemental Agreement No. 11, including exhibits
and side letters, to Purchase Agreement No. 1783
between the Company and The Boeing Company
relating to the purchase of Boeing 757 aircraft,
dated July 30, 1998.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
(i) Report dated July 30, 1998 reporting Item 7.
"Financial Statements and Exhibits". No
financial statements were filed with the report,
which included an Exhibit Index related to the
Restated Financial Data Schedules for 1995, 1996
and 1997.
(ii) Report dated September 24, 1998 reporting Item 5.
"Other Events". No financial statements were
filed with the report, which included a Press
Release related to the stock repurchase program.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CONTINENTAL AIRLINES, INC.
(Registrant)
Date: October 23, 1998 by: /s/ Lawrence W. Kellner
Lawrence W. Kellner
Executive Vice President and
Chief Financial Officer
(On behalf of Registrant)
Date: October 23, 1998 /s/ Michael P. Bonds
Michael P. Bonds
Vice President and Controller
(Chief Accounting Officer)
INDEX TO EXHIBITS
OF
CONTINENTAL AIRLINES, INC.
10.1 Supplemental Agreement No. 6, including exhibits and side
letters, to Purchase Agreement No. 1951 between the
Company and The Boeing Company relating to the purchase
of Boeing 737 aircraft, dated July 30, 1998. (1)
10.2 Supplemental Agreement No. 11, including exhibits and
side letters, to Purchase Agreement No. 1783 between the
Company and The Boeing Company relating to the purchase
of Boeing 757 aircraft, dated July 30, 1998. (1)
27.1 Financial Data Schedule.
___________________
(1) The Company has applied to the Commission for
confidential treatment of a portion of this exhibit.