UNITED STATES
 

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 JUNE 30, 2007


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 1-10323


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 _____

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer   X   Accelerated filer _____ Non-accelerated filer _____

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes    No   X  

__________


As of July 13, 2007, 97,833,713 shares of Class B common stock of the registrant were outstanding.

TABLE OF CONTENTS


   

PAGE

     

PART I

FINANCIAL INFORMATION

 
     

Item 1.

Financial Statements -

 
     
 

Consolidated Statements of Operations

3

     
 

Consolidated Balance Sheets -

 
 

Assets

5

 

Liabilities and Stockholders' Equity

6

     
 

Condensed Consolidated Statements of Cash Flows

7

     
 

Notes to Consolidated Financial Statements

8

     

Item 2.

Management's Discussion and Analysis of Financial Condition
and Results of Operations


21

     

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

44

     

Item 4.

Controls and Procedures

44

     

PART II

OTHER INFORMATION

 
     

Item 1.

Legal Proceedings

46

     

Item 1A.

Risk Factors

46

     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

47

     

Item 3.

Defaults Upon Senior Securities

48

     

Item 4.

Submission of Matters to a Vote of Security Holders

48

     

Item 5.

Other Information

48

     

Item 6.

Exhibits

49

     
 

Signatures

50

     
 

Index to Exhibits

51

 

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share data) (Unaudited)

 

Three Months             
Ended June 30,
            

Six Months             
Ended June 30,
          

 

2007  

 

2006  

 

2007  

 

2006  

 
                 

Operating Revenue:

   

   Passenger (excluding fees and taxes of $391,
      $364, $737, and $679, respectively)


$3,396 

 


$3,227 

 


$6,291 

 


$5,911 

 

   Cargo

109 

 

112 

 

216 

 

218 

 

   Other

   205 

 

   168 

 

   382 

 

   324 

 
 

3,710 

 

3,507 

 

6,889 

 

6,453 

 
                 

Operating Expenses:

               

   Wages, salaries and related costs

842 

 

744 

 

1,568 

 

1,416 

 

   Aircraft fuel and related taxes

821 

 

791 

 

1,505 

 

1,452 

 

   Regional capacity purchase, net

444 

 

454 

 

873 

 

869 

 

   Aircraft rentals

248 

 

248 

 

496 

 

493 

 

   Landing fees and other rentals

190 

 

198 

 

384 

 

383 

 

   Distribution costs

176 

 

178 

 

337 

 

338 

 

   Maintenance, materials and repairs

169 

 

140 

 

313 

 

267 

 

   Depreciation and amortization

101 

 

97 

 

200 

 

193 

 

   Passenger services

99 

 

90 

 

189 

 

171 

 

   Special charges

 

10 

 

18 

 

 

   Other

   350 

 

    313 

 

    679 

 

    613 

 
 

3,447 

 

 3,263 

 

 6,562 

 

 6,198 

 
                 

Operating Income

   263 

 

    244 

 

    327 

 

    255 

 
                 

Nonoperating Income (Expense):

               

   Interest expense

(97)

 

(100)

 

(193)

 

(201)

 

   Interest capitalized

 

 

11 

 

 

   Interest income

41 

 

31 

 

77 

 

55 

 

   Income from other companies

 

17 

 

10 

 

34 

 

   Gain on disposition of ExpressJet Holdings shares

 

 

 

 

   Other, net

     14 

 

      1 

 

      15 

 

       6 

 
 

   (31)

 

   (46)

 

    (73)

 

   (97)

 
                 

Income before Income Taxes and Cumulative
   Effect of Change in Accounting Principle


232 

 

   
198 

 

   
254 

 

   
158 

 
                 

Income Taxes

      (4)

 

        - 

 

     (4)

 

        - 

 
                 

Income before Cumulative Effect of Change
  in Accounting Principle


228 

 

   
198 

 

   
250 

 

   
158 

 
                 

Cumulative Effect of Change in Accounting
  Principle


        - 

 


        - 

 


        - 

 


    (26)

 
                 

Net Income

$   228 

 

$   198 

 

$   250 

 

$   132 

 

(continued on next page)

 

CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share data) (Unaudited)

 

 

Three Months             
Ended June 30,
            

Six Months             
Ended June 30,
          

 

2007  

 

2006  

 

2007  

 

2006  

 
                 

Earnings per Share:

   

 

         

  Basic:

               

    Income before Cumulative Effect of Change
      in Accounting Principle


$ 2.35 

 


$ 2.24 

 


$ 2.60 

 


$  1.82 

 

    Cumulative Effect of Change in Accounting
      Principle


       - 

 


       - 

 


       - 

 


 (0.30)

 

    Net Income

$ 2.35 

 

$ 2.24 

 

$ 2.60 

 

$  1.52 

 
                 

  Diluted:

               

    Income before Cumulative Effect of Change
      in Accounting Principle


$ 2.03 

 


$ 1.84 

 


$ 2.26 

 


$  1.55 

 

    Cumulative Effect of Change in Accounting
      Principle


       - 

 


       - 

 


       - 

 


 (0.24)

 

    Net Income

$ 2.03 

 

$ 1.84 

 

$ 2.26 

 

$  1.31 

 
                 

Shares Used for Computation:

               

    Basic

97 

 

89 

 

96 

 

88 

 

    Diluted

115 

 

111 

 

115 

 

110 

 

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)

 

June 30,    

December 31,

June 30,    

ASSETS

  2007      

   2006    

  2006      

 

(Unaudited)   

 

(Unaudited)  

       

Current Assets:

     

   Cash and cash equivalents

$   2,745 

 

$   2,123 

 

$   2,202 

 

   Short-term investments

     431 

 

     361 

 

     270 

 

      Total unrestricted cash, cash equivalents and
       short-term investments

3,176 

 

2,484 

 

2,472 

 
             

   Restricted cash

202 

 

265 

 

248 

 

   Accounts receivable, net

758 

 

582 

 

687 

 

   Spare parts and supplies, net

256 

 

217 

 

208 

 

   Deferred income taxes

187 

 

165 

 

171 

 

   Prepayments and other

     499 

 

     416 

 

     461 

 

      Total current assets

  5,078 

 

  4,129 

 

  4,247 

 
             

Property and Equipment:

           

   Owned property and equipment:

           

      Flight equipment

7,169 

 

6,973 

 

6,786 

 

      Other

  1,489 

 

  1,430 

 

  1,376 

 
 

8,658 

 

8,403 

 

8,162 

 

       Less: Accumulated depreciation

  2,655 

 

  2,539 

 

  2,441 

 
 

  6,003 

 

  5,864 

 

  5,721 

 
             

   Purchase deposits for flight equipment

     246 

 

     183 

 

     234 

 
             

   Capital leases

298 

 

303 

 

335 

 

       Less: Accumulated amortization

       87 

 

       87 

 

     112 

 
 

     211 

 

     216 

 

     223 

 

          Total property and equipment, net

  6,460 

 

  6,263 

 

  6,178 

 
             

Routes

484 

 

484 

 

484 

 

Airport operating rights, net

113 

 

120 

 

127 

 

Investment in other companies

62 

 

81 

 

131 

 

Intangible pension asset

 

 

60 

 

Other assets, net

     246 

 

     231 

 

     219 

 
             

           Total Assets

$12,443 

 

$11,308 

 

$11,446 

 

 

(continued on next page)

CONTINENTAL AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except for share data)

LIABILITIES AND
STOCKHOLDERS' EQUITY

June 30,     

December 31,  

June 30,      

  2007       

   2006      

  2006        

 

(Unaudited)    

 

(Unaudited)    

       

Current Liabilities:

     

   Current maturities of long-term debt and
      capital leases


$   483 

 


$   574 

 


$   766 

 

   Accounts payable

1,204 

 

1,076 

 

1,084 

 

   Air traffic and frequent flyer liability

2,421 

 

1,712 

 

2,104 

 

   Accrued payroll

245 

 

233 

 

225 

 

   Accrued other liabilities

   317 

 

   360 

 

   308 

 

      Total current liabilities

4,670 

 

3,955 

 

4,487 

 
             

Long-Term Debt and Capital Leases

4,767 

 

4,859 

 

4,626 

 
             

Deferred Income Taxes

   187 

 

   165 

 

   171 

 
             

Accrued Pension Liability

   985 

 

 1,149 

 

   927 

 
             

Accrued Retiree Medical Benefits

   221 

 

   203 

 

    41 

 
             

Other

   663 

 

   630 

 

  610 

 
             

Commitments and Contingencies

           
             

Stockholders' Equity:

           

   Preferred Stock - $.01 par, 10,000,000 shares
      authorized; one share of Series B issued and
      outstanding, stated at par value

 

 

 

 

 

 

   Class B common stock - $.01 par, 400,000,000
      shares authorized; 97,683,412, 91,816,121

      and 114,685,100 issued



 



 



 

   Additional paid-in capital

1,580 

 

1,370 

 

1,693 

 

   Retained earnings (accumulated deficit)

239 

 

(11)

 

538 

 

   Accumulated other comprehensive loss

(870)

 

(1,013)

 

(507)

 

   Treasury stock - 0, 0 and 25,489,506 shares, at cost

           - 

 

           - 

 

 (1,141)

 

      Total stockholders' equity

      950 

 

      347 

 

      584 

 

         Total Liabilities and Stockholders' Equity

$ 12,443 

 

$ 11,308 

 

$ 11,446 

 



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) (Unaudited)

 

        Six Months Ended June 30,

 

2007  

    2006    

 
     

Net Cash Provided by Operations

$

$  968 

$  978 

 
         

Cash Flows from Investing Activities:

       

Capital expenditures

 

(155)

(163)

 

Sale (purchase) of short-term investments, net

 

(70)

(36)

 

Purchase deposits paid in connection with future aircraft deliveries, net

 

(62)

(128)

 

Decrease (increase) in restricted cash, net

 

   63 

   (7)

 

Proceeds from sale of ExpressJet Holdings shares, net

 

35 

 

Proceeds from dispositions of property and equipment

 

     7 

   11 

 

Net cash used in investing activities

 

(182)

(323)

 
         

Cash Flows from Financing Activities:

       

Payments on long-term debt and capital lease obligations

 

(213)

(556)

 

Proceeds from issuance of long-term debt

 

25 

336 

 

Proceeds from issuance of common stock pursuant to stock plans

 

    24 

    43 

 

Other

 

      - 

      1 

 

Net cash used in financing activities

 

(164)

(176)

 
         

Net Increase in Cash and Cash Equivalents

 

622 

479 

 
         

Cash and Cash Equivalents - Beginning of Period

 

2,123 

1,723 

 
         

Cash and Cash Equivalents - End of Period

 

$2,745 

$2,202 

 
         

Investing and Financing Activities Not Affecting Cash:

       

Common stock issued upon conversion of 4.5% Convertible Notes

 

$  170 

$       - 

 

Property and equipment acquired through the issuance of debt

 

$  190 

$       - 

 




The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

CONTINENTAL AIRLINES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

In our opinion, the unaudited consolidated financial statements included herein contain all adjustments necessary to present fairly our financial position, results of operations and cash flows for the periods indicated. Such adjustments, other than nonrecurring adjustments that have been separately disclosed, 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 our Annual Report on Form 10-K for the year ended December 31, 2006 (the "2006 Form 10-K"). Due to seasonal fluctuations common to the airline industry, our results of operations for the periods presented are not necessarily indicative of the results of operations to be expected for the entire year. As used in these Notes to Consolidated Financial Statements, the terms "Continental," "we," "us," "our" and similar terms refer to Continental Airlines, Inc. and, unless the context indicates otherwise, its consolidated subsidiaries.

Certain reclassifications have been made in the prior period's financial statements to conform to the current year presentation.

NOTE 1 - RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENT

We adopted the Financial Accounting Standards Board's Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109" ("FIN 48"), effective January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements and requires the impact of a tax position to be recognized in the financial statements if that position is more likely than not of being sustained by the taxing authority.  The adoption of FIN 48 did not have a material effect on our consolidated financial position or results of operations.

NOTE 2 - EARNINGS PER SHARE

The following table sets forth the components of basic and diluted earnings per share (in millions):

 

Three Months      
Ended June 30, 
    

Six Months        
Ended June 30,  
   

 

  2007  

  2006  

  2007  

  2006  

         

Numerator:

       

  Numerator for basic earnings per share - net income

$228 

$198 

$250 

$132 

  Effect of dilutive securities - interest expense on:

       

    5% Convertible Notes

    6% Convertible Junior Subordinated Debentures
      Held by Subsidiary Trust


    3 


    2 


    5 


    5 

    4.5% Convertible Notes

    - 

    2 

    1 

    3 

  Numerator for diluted earnings per share - net income
    after assumed conversions


$ 233 


$ 204 


$ 259 


$ 143 

         

Denominator:

       

  Denominator for basic earnings per share -
    weighted-average shares


   97 


 
   89 


   96 


   88  

  Effect of dilutive securities:

       

    5% Convertible Notes

    6% Convertible Junior Subordinated Debentures
      Held by Subsidiary Trust


  4 


  4 


  4 


  4 

    4.5% Convertible Notes

    Employee stock options

     5 

     4 

     5 

    4 

  Dilutive potential common shares

   18 

   22 

   19 

 22 

  Denominator for diluted earnings per share -
    weighted-average shares after assumed conversions


115 


111 


115 


110 


The adjustments to net income to determine the numerator for diluted earnings per share are net of the related effect of profit sharing and income taxes.

Approximately one million weighted average options to purchase shares of our common stock were excluded from the computation of diluted earnings per share for each of the three months ended June 30, 2007 and 2006 and the six months ended June 30, 2006 because the options' exercise prices were greater than the average market price of the common shares during the relevant period or the effect of including the options would have been antidilutive.

NOTE 3 - FLEET INFORMATION

As of June 30, 2007, we owned or leased 368 mainline jets and 274 regional jets. All mainline jets are operated exclusively by us. Of the 274 regional jets that we own or lease, 208 are leased or subleased to ExpressJet Airlines, Inc. ("ExpressJet") and operated on our behalf under a capacity purchase agreement with ExpressJet (the "ExpressJet CPA"). The remaining 66 regional aircraft are subleased to ExpressJet, but are not operated on our behalf and, accordingly, are not included in the operating fleet table below. Additionally, our regional operating fleet includes 49 regional aircraft owned or leased by third parties that are operated on our behalf by other operators under capacity purchase agreements. See Note 9 for a discussion of our regional capacity purchase agreements.

The following table summarizes our operating fleet (aircraft operated by us and by others on our behalf) as of June 30, 2007:

Third-Party       

Aircraft Type

Total    

Owned   

Leased  

Aircraft          

             
 

Mainline:

         
 

  777-200ER

20 

 

 

12 

       
 

  767-400ER

16 

 

14 

 

       
 

  767-200ER

10 

 

 

       
 

  757-300

17 

 

 

       
 

  757-200

41 

 

13 

 

28 

       
 

  737-900

12 

 

 

       
 

  737-800

105 

 

32 

 

73 

       
 

  737-700

36 

 

12 

 

24 

       
 

  737-500

63 

 

15 

 

48 

       
 

  737-300

  48 

 

   20 

 

   28 

       
 

  Total mainline

368 

 

 140 

 

 228 

       
                     
 

Regional:

                 
 

  ERJ-145XR

63 

 

 

63 

 

-  

   
 

  ERJ-145

131 

 

18 

 

97 

 

16 

   
 

  ERJ-135

  30 

 

    - 

 

   30 

 

-  

   
 

  CRJ200LR

19 

 

 

 

19 

   
 

  Q200

 

 

 

   
 

  Beech1900

  10 

 

    - 

 

     - 

 

 10 

   
 

  Total regional

257 

 

  18 

 

 190 

 

 49 

   
                     
 

Total

625 

 

158 

 

418 

 

   49 

   

Fleet Activity. During the first half of 2007, we took delivery of, and placed into service, two new 777-200ER aircraft. Although we did not take delivery of any new regional aircraft, we began regional service with a third party who is operating 35 of its aircraft on our behalf. We also removed 64 regional aircraft from the ExpressJet CPA and we are now subleasing such aircraft to ExpressJet outside the scope of the ExpressJet CPA.

Firm Order and Option Aircraft. On June 13, 2007, we ordered four additional 737 aircraft from The Boeing Company ("Boeing") and moved six existing Boeing 737 deliveries from 2009 to 2010. As of June 30, 2007, we had firm commitments for 89 new aircraft (64 Boeing 737 aircraft and 25 Boeing 787 aircraft), with an estimated aggregate cost of $5.1 billion including related spare engines. We are scheduled to take delivery of the 89 firm order Boeing aircraft between 2008 and 2013. In addition to our firm order aircraft, we have options to purchase a total of 92 additional Boeing aircraft. On July 18, 2007, we signed an agreement with Boeing to accelerate three of our existing 737-900ER deliveries from the first quarter of 2009 to the second half of 2008.

On July 18, 2007, we entered into an agreement providing for our sale of ten Boeing 737-500 aircraft owned by us to TRANSAERO Airlines of Russia, with delivery dates during the period from October 2007 through November 2008. We will operate each aircraft until shortly before its delivery date. This transaction is subject to customary closing conditions, some of which are outside our control, and we cannot give any assurances that the closing of the transaction will occur. We are also in discussions with another foreign entity regarding the sale of an additional five Boeing 737-500 aircraft for delivery during the period from December 2007 through December 2008. Based on this transaction and these discussions, we do not believe that there is any impairment of these aircraft.

On April 10, 2007, we obtained financing for 12 Boeing 737-800s and 18 Boeing 737-900ERs. We expect to apply the financing to 30 of the 33 Boeing 737 aircraft scheduled to be delivered in 2008, although we may instead choose to substitute certain Boeing 737 aircraft scheduled to be delivered in the first quarter of 2009. Pass-through trusts raised $1.1 billion through the issuance of three classes of pass-through certificates. Class A certificates, with an aggregate principal amount of $757 million, bear interest at 5.983%, Class B certificates, with an aggregate principal amount of $222 million, bear interest at 6.903% and Class C certificates, with an aggregate principal amount of $168 million, bear interest at 7.339%. The proceeds from the sale of the certificates will initially be held in escrow by the trusts and not reported as debt on our consolidated balance sheet because the proceeds held by the trusts are not our assets and interest earned on the proceeds as well as any unused proceeds will be distributed by the trusts directly to the certificate holders. As we take delivery of each aircraft, we will issue equipment notes to the trusts, which will purchase such notes with a portion of the escrowed funds. We will use the proceeds to finance the purchase of the aircraft and will record the principal amount of the equipment notes that we issue as debt on our consolidated balance sheet. Principal payments on the equipment notes and the corresponding distribution of these payments to certificate holders will begin in April 2010 and will end in April 2022 for Class A and B certificates and April 2014 for Class C certificates. Additionally, the Class A and B certificates have the benefit of a liquidity facility under which a third party agrees to make three semiannual interest payments on the certificates if a default in the payment of interest occurs.

We have manufacturer backstop financing for up to 22 (depending on the model selected) of the 24 Boeing 737 aircraft scheduled to be delivered through the end of 2009 and not otherwise covered by the financing described above. However, we do not have backstop financing or any other financing currently in place for the remaining 12 Boeing 737 aircraft on order, nor do we have backstop financing or any other financing for the 25 Boeing 787 aircraft on order. Further financing will be needed to satisfy our capital commitments for our firm aircraft and other related capital expenditures. We can provide no assurance that such further financing will be available.

NOTE 4 - LONG-TERM DEBT

In January 2007, $170 million in principal amount of our 4.5% Convertible Notes due on February 1, 2007 was converted by the holders into 4.3 million shares of our Class B common stock at a conversion price of $40 per share. The remaining $30 million in principal amount was paid on February 1, 2007.

During the first half of 2007, we incurred $190 million of floating rate indebtedness pursuant to existing finance agreements secured by two 777-200ER aircraft that were delivered in March and April 2007. This indebtedness consists of $156 million of senior notes due in 2019 and $34 million of junior notes due in 2014. The loans bear interest at the London Interbank Offered Rate ("LIBOR") plus a blended margin of approximately 1.9% per year. The commitments under these finance agreements are now fully funded.

Maturities. Maturities of long-term debt due before December 31, 2007 and for the next four years are as follows (in millions):

July 1, 2007 through December 31, 2007

$  183

Year ending December 31,

 
 

2008

652

 

2009

496

 

2010

639

 

2011

1,014


NOTE 5 - STOCK PLANS AND AWARDS

Restricted Stock Units. We currently have three outstanding awards of Restricted Stock Units ("RSUs") granted under our Long-Term Incentive and RSU Program: (1) stock price based RSU awards granted in 2004 with a performance period ending December 31, 2007, (2) profit based RSU awards granted in 2006 with a performance period ending December 31, 2009 and (3) profit based RSU awards granted in 2007 with a performance period ending December 31, 2009.

During the first half of 2007, we issued 637,500 profit based RSU awards pursuant to our Long-Term Incentive and RSU Program, which can result in cash payments to our officers upon the achievement of specified profit-sharing based performance targets. The performance targets require that we reach target levels of cumulative employee profit sharing under our enhanced employee profit sharing program during the period from January 1, 2007 through December 31, 2009, and that we have net income calculated in accordance with U.S. generally accepted accounting principles for the applicable fiscal year. To serve as a retention feature, payments related to the achievement of a performance target will generally be made in one-third annual increments to participants who remain continuously employed by us through each payment date. Payments also are conditioned on our having a minimum unrestricted cash, cash equivalents and short-term investments balance of $2.0 billion at the end of the fiscal year preceding the date any payment is made. If we do not achieve the cash target applicable to a payment date, the payment will be deferred until the next payment date (March 31 of the next year), subject to a limit on the number of years payments may be carried forward. Payment amounts will be calculated based on the average price of our common stock during the 20 trading days preceding the payment date and the payment percentage set by the Human Resources Committee of our Board of Directors for achieving the applicable profit-sharing based performance target. Depending on the level of cumulative employee profit sharing achieved, the payment percentage for these awards can range from 0% to 200% of the underlying profit based RSU award.

We account for the profit based RSU awards as liability awards. Once it is probable that a profit-sharing based performance target will be met, we measure the awards at fair value based on the current stock price. The related expense is recognized ratably over the required service period, which ends on each payment date, after adjustment for changes in the then-current market price of our common stock. As of June 30, 2007, we have not concluded that it is probable that we will achieve any of the performance targets set for the profit based RSU awards granted in 2007. Accordingly, we have recognized no expense for those awards through June 30, 2007.

During the three months ended June 30, 2007, we concluded that it is probable that, prior to December 31, 2009, the end of the performance period for the profit based RSU awards granted in 2006, we will achieve the highest performance target set for those awards. As a result, we recorded wages, salaries and related costs of $30 million ($0.31 per basic share and $0.26 per diluted share) in the second quarter of 2007 to recognize the cumulative expense associated with the probable achievement of the higher performance target from the date the awards were issued through June 30, 2007.

Cumulative Effect of Change in Accounting Principle. We adopted Statement of Financial Accounting Standards No. 123R, "Share-Based Payment" ("SFAS 123R") effective January 1, 2006. Upon adoption, we recognized a cumulative effect of change in accounting principle to record our liability related to our outstanding stock price based RSU awards at that date, reducing earnings $26 million ($0.30 per basic share and $0.24 per diluted share).

On February 1, 2006, in light of the sacrifices made by their co-workers in connection with pay and benefit cost reduction initiatives, our officers voluntarily surrendered their stock price based RSU awards for the performance period ending March 31, 2006, which had vested during the first quarter of 2006 and otherwise would have paid out a total of $23 million at the end of March 2006. Of the $26 million total cumulative effect of change in accounting principle recorded on January 1, 2006, $14 million related to the surrendered awards. Accordingly, upon surrender, we reported the reversal of the $14 million as a credit to special charges in our statement of operations during the first quarter of 2006. The remaining $12 million of the cumulative effect of change in accounting principle was related to stock price based RSU awards with a performance period ending December 31, 2007, which were not surrendered.

SFAS 123R Expense. Excluding the cumulative effect of change in accounting principle and the credit to special charges discussed above, total stock-based compensation expense related to SFAS 123R included in wages, salaries and related costs was $41 million, $15 million, $67 million and $32 million for the three months ended June 30, 2007 and 2006 and the six months ended June 30, 2007 and 2006, respectively. As of June 30, 2007, we had $127 million of compensation cost that had not yet been recognized attributable to future service requirements related to profit based RSU awards with performance targets that are probable of being achieved, unvested employee stock options and stock price based RSU awards. This amount will be recognized as expense over a weighted-average period of 1.8 years.

NOTE 6 - COMPREHENSIVE INCOME

Total comprehensive income included the following (in millions):

 

Three Months       
Ended June 30,      

Six Months         
Ended June 30,     

 

  2007  

  2006  

  2007  

  2006  

         

Net income

$228 

$198 

$250 

$132 

         

Other comprehensive income:

       

  Unrealized net gain (loss) on derivative instruments

(20)

(3)

23 

  Items related to employee benefit plans:

       

    Increase in net actuarial gains

111 

70 

    Amortization of net actuarial losses

17 

35 

    Amortization of prior service cost

15 

    Decrease in additional minimum pension liability

      - 

 136 

      - 

 164 

Comprehensive income adjustments

 116 

 133 

 143 

 168 

         

Total comprehensive income

$ 344 

$ 331 

$ 393 

$ 300 


We adopted SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88 and 106 and 132(R)" ("SFAS 158"), on December 31, 2006. Under SFAS 158, unrecognized prior service cost and actuarial (gains) losses related to our defined benefit pension and retiree medical benefits plans are recorded in accumulated other comprehensive loss. Prior to December 31, 2006, these amounts were not recorded on our consolidated balance sheet and an additional minimum pension liability was recorded when necessary.

NOTE 7 - EMPLOYEE BENEFIT PLANS

Net periodic defined benefit pension and retiree medical benefits expense included the following components (in millions):

 

       Defined Benefit Pension        

       Retiree Medical Benefits       

 

Three Months
Ended June 30,

Six Months   
Ended June 30,

Three Months
Ended June 30,

Six Months   
Ended June 30,

 

2007

2006

2007

2006

2007

2006

2007

2006

                 

Service cost

$ 15 

$ 15 

$ 31 

$ 30 

$ 3 

$ 3 

$ 5 

$ 6 

Interest cost

40 

37 

79 

74 

Expected return on plan assets

(34)

(31)

(67)

(62)

Amortization of net actuarial loss

17 

17 

35 

35 

Amortization of prior service cost

   3 

   2 

   5 

   4 

   5 

   4 

 10 

   8 

Net periodic benefit expense

41 

40 

83 

81 

11 

11 

21 

21 

Settlement charge (included in
   special charges)


    7 


  14 


  12 


  29 


   - 


   - 


   - 


   - 

                 

Net benefit expense

$  48 

$  54 

$ 95 

$110 

$11 

$11 

$21 

$21 


During the first half of 2007, we contributed $136 million to our defined benefit pension plans. We contributed an additional $75 million to our defined benefit pension plans in July 2007. We expect to contribute more than $325 million to our defined benefit pension plans during 2007, significantly exceeding our minimum funding requirements of $187 million during the current calendar year.

We recorded non-cash settlement charges totaling $7 million, $14 million, $12 million and $29 million in the three months ended June 30, 2007 and 2006 and the six months ended June 30, 2007 and 2006, respectively, related to lump sum distributions from our pilot-only defined benefit pension plan to pilots who retired during each respective period. SFAS No. 88, "Employer's Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits" ("SFAS 88"), requires the use of settlement accounting if, for a given year, the cost of all settlements exceeds, or is expected to exceed, the sum of the service cost and interest cost components of net periodic pension expense for the plan. Under settlement accounting, unrecognized plan gains or losses must be recognized immediately in proportion to the percentage reduction of the plan's projected benefit obligation. We anticipate that we will have additional non-cash settlement charges in the future in conjunction with lump-sum distributions to retiring pilots.

NOTE 8 - SPECIAL CHARGES

Special charges were as follows (in millions):

 

Three Months       
Ended June 30,      

Six Months         
Ended June 30,     

 

  2007  

  2006  

  2007  

  2006  

         

Pension settlement charges (see Note 7)

$7 

$14 

$12 

$ 29 

Aircraft-related charges (credits)

(4)

(12)

Surrender of stock price based RSU awards (see Note 5)

 - 

  - 

 - 

(14)

         

Special charges

$7 

$10 

$18 

$  3 

NOTE 9 - REGIONAL CAPACITY PURCHASE AGREEMENTS

Presentation in Statements of Operations. Expenses related to our capacity purchase agreements are reported as regional capacity purchase, net, in our consolidated statements of operations. Our most significant capacity purchase agreement is with ExpressJet. Regional capacity purchase, net, includes all fuel expense on flights operated for us under capacity purchase agreements plus, in the case of the ExpressJet CPA, a margin on ExpressJet's fuel expense on flights flown for us up to a cap provided in the ExpressJet CPA and a related fuel purchase agreement (which margin applies only to the first 71.2 cents per gallon, including fuel taxes) and is net of our rental income on aircraft leased to ExpressJet and flown for us.

ExpressJet. In December 2005, we gave notice to ExpressJet that we would withdraw 69 of the 274 regional jet aircraft from the ExpressJet CPA because we believe the rates charged to us by ExpressJet for regional capacity are above the current market. On May 5, 2006, ExpressJet notified us that it would retain all of the 69 regional jets (consisting of 44 ERJ-145XR and 25 ERJ-145 aircraft) covered by our withdrawal notice, as permitted by the ExpressJet CPA. Accordingly, ExpressJet must retain each of those 69 regional jets for the remaining term of the applicable underlying aircraft lease and, as each aircraft is withdrawn from the ExpressJet CPA, the implicit interest rate used to calculate the scheduled lease payments that ExpressJet will make to us under the applicable aircraft sublease is automatically increased by 200 basis points to compensate us for our continued participation in ExpressJet's lease financing arrangements. Once the aircraft are withdrawn from the ExpressJet CPA, we recognize the related rental income we receive from ExpressJet as other revenue in our consolidated statements of operations.

The withdrawal of the 69 aircraft began in December 2006 and is expected to be completed in August 2007. As of June 30, 2007, 66 aircraft have been withdrawn. Under the ExpressJet CPA, ExpressJet has the option to fly any of the withdrawn aircraft it retains either for another airline or under ExpressJet's own flight designator code (in either case subject to its ability to obtain facilities, such as gates, ticket counters, hold rooms and other operations-related facilities, and subject to its agreement with us prohibiting ExpressJet from flying under its or another carrier's code in or out of our hub airports during the term of the ExpressJet CPA). So long as we are ExpressJet's largest customer, if ExpressJet enters into an agreement with another major carrier (as defined in the ExpressJet CPA) to provide regional airline services on a capacity purchase or other similar economic basis for more than ten aircraft, we are entitled to the same or comparable economic terms and conditions.

In accordance with the ExpressJet CPA, ExpressJet has agreed to meet with us each year to review and set the block hour rates to be paid in the following year, in each case based on the methodology used to set the original block hour rates (including an initial 10% targeted operating margin). If we and ExpressJet cannot come to an agreement on these block hour rates, the ExpressJet CPA provides that the disagreement will be submitted to arbitration. We have been unable to reach an agreement on 2007 rates and have entered into binding arbitration. The arbitration hearing was completed on July 7, 2007, and we expect that the arbitration panel will render its decision in the next few weeks. Until the decision is rendered, we will recognize current year expense based on 2006 rates. We do not believe that the outcome of the arbitration will have a material adverse effect on our results of operations, financial condition or liquidity.

Chautauqua. In July 2006, we selected Chautauqua Airlines, Inc. ("Chautauqua"), a wholly-owned subsidiary of Republic Airways Holdings Inc., to provide and operate forty-four 50-seat regional jets as a Continental Express carrier to be phased in during 2007 under a new capacity purchase agreement (the "Chautauqua CPA"). As of June 30, 2007, 35 aircraft are being flown by Chautauqua for us. Under the Chautauqua CPA, we schedule and market all of our Continental Express regional jet service provided by Chautauqua. The Chautauqua CPA requires us to pay a fixed fee to Chautauqua, subject to specified reconciliations and annual escalations, for its operation of the aircraft. Chautauqua supplies the aircraft it operates under the agreement. The Chautauqua CPA has a five-year term with respect to ten aircraft and an average term of 2.5 years for the balance of the aircraft. In addition, we have the unilateral right to extend the Chautauqua CPA on the same terms on an aircraft-by-aircraft basis for a period of up to five years in the aggregate for 20 aircraft and for up to three years in the aggregate for 24 aircraft, subject to the renewal terms of the related aircraft lease.

Colgan. In February 2007, we selected Pinnacle Airlines Corp.'s subsidiary Colgan Air, Inc. ("Colgan") to operate fifteen 74-seat Bombardier Q400 twin-turboprop aircraft on short and medium-distance routes from Newark Liberty International Airport ("New York Liberty") starting in early 2008. Colgan will operate the flights as a Continental Connection carrier under a new capacity purchase agreement. Colgan will supply the aircraft that it will operate under the agreement. The agreement has a ten-year term.

NOTE 10 - INVESTMENT IN OTHER COMPANIES

Copa. At June 30, 2007, we held 4.4 million shares of Copa Holdings, S.A. ("Copa") Class A common stock with a carrying value of $56 million and a market value of $294 million. This investment represents a 10% interest in Copa.

Holdings. In January 2007, we sold substantially all of our shares of ExpressJet Holdings, Inc. ("Holdings"), the parent company of ExpressJet, common stock to third parties for cash proceeds of $35 million. We recognized a gain of $7 million in the first quarter of 2007 as a result of these sales. We sold the remaining shares of Holdings common stock in April 2007 and no longer own any shares of Holdings common stock.

ARINC Incorporated. On July 3, 2007, six major air carriers, including us, collectively holding more than 90% of the common stock of ARINC Incorporated ("ARINC"), entered into a definitive agreement to sell all of such ARINC common stock to an affiliate of The Carlyle Group, a global private equity firm. ARINC develops and operates communications and information processing systems and provides systems engineering and other services to the aviation industry and other industries. Our investment in ARINC has no carrying value.

The transaction is expected to close no later than October 31, 2007, subject to regulatory approval and other customary closing conditions. Many of these conditions are outside of our control, and we cannot give any assurances that the closing of the transaction will occur. Upon closing, we expect to receive cash proceeds of approximately $30 million.

NOTE 11 - SEGMENT REPORTING

We have two reportable segments: mainline and regional. We evaluate segment performance based on several factors, of which the primary financial measure is operating income (loss). However, we do not manage our business or allocate resources based on segment operating profit or loss because (1) our flight schedules are designed to maximize revenue from passengers flying, (2) many operations of the two segments are substantially integrated (for example, airport operations, sales and marketing, scheduling and ticketing) and (3) management

decisions are based on their anticipated impact on the overall network, not on one individual segment.

Financial information by business segment is set forth below (in millions):

 

Three Months       
Ended June 30,      

Six Months         
Ended June 30,      

 

  2007 

  2006 

  2007 

  2006 

         

Operating Revenue:

       
 

Mainline

$3,130 

$2,890 

$5,818 

$5,337 

 

Regional

   580 

   617 

 1,071 

1,116 

 

Total Consolidated

$3,710 

$3,507 

$6,889 

$6,453 

         

Operating Income (Loss):

       
 

Mainline

$    272 

$    223 

$    414 

$    285 

 

Regional

         (9)

         21 

        (87)

       (30)

 

Total Consolidated

$    263 

$    244 

$    327 

$    255 

           

Net Income (Loss):

       
 

Mainline

$    241 

$    179 

$    342 

$    166 

 

Regional

    (13)

     19 

    (92)

    (34)

 

Total Consolidated

$    228 

$    198 

$    250 

$    132 


Net income for the mainline segment for the six months ended June 30, 2006 includes the $26 million cumulative effect of change in accounting principle related to the adoption of SFAS 123R. The amounts presented above are presented on the basis of how our management reviews segment results. Under this basis, the regional segment's revenue includes a pro-rated share of our ticket revenue for segments flown by our regional carriers, and expenses include all activity related to the regional operations, regardless of whether such expenses were incurred by us directly or through our capacity purchase agreements.

NOTE 12 - COMMITMENTS AND CONTINGENCIES

Purchase Commitments. See Note 3 for a discussion of our aircraft purchase commitments.

Financings and Guarantees. We are the guarantor of approximately $1.7 billion aggregate principal amount of tax-exempt special facilities revenue bonds and interest thereon, excluding the US Airways contingent liability described below. These bonds, issued by various airport municipalities, are payable solely from our rentals paid under long-term agreements with the respective governing bodies. The leasing arrangements associated with approximately $1.5 billion of these obligations are accounted for as operating leases, and the leasing arrangements associated with approximately $200 million of these obligations are accounted for as capital leases in our financial statements.

We are contingently liable for US Airways' obligations under a lease agreement between US Airways and the Port Authority of New York and New Jersey related to the East End Terminal at LaGuardia airport. These obligations include the payment of ground rentals to the Port Authority and the payment of other rentals in respect of the full amounts owed on special facilities revenue bonds issued by the Port Authority having an outstanding par amount of $146 million at June 30, 2007 and a final scheduled maturity in 2015. If US Airways defaults on these obligations, we would be obligated to cure the default and we would have the right to occupy the terminal after US Airways' interest in the lease had been terminated.

We also have letters of credit and performance bonds relating to various real estate and customs obligations at June 30, 2007 in the amount of $53 million. These letters of credit and performance bonds have expiration dates through September 2008.

General Guarantees and Indemnifications. We are the lessee under many real estate leases. It is common in such commercial lease transactions for us, as the lessee, to agree to indemnify the lessor and other related third parties for tort liabilities that arise out of or relate to our use or occupancy of the leased premises and the use or occupancy of the leased premises by regional carriers operating flights on our behalf. In some cases, this indemnity extends to related liabilities arising from the negligence of the indemnified parties, but usually excludes any liabilities caused by their gross negligence or willful misconduct. Additionally, we typically indemnify such parties for any environmental liability that arises out of or relates to our use of the leased premises.

In our aircraft financing agreements, we typically indemnify the financing parties, trustees acting on their behalf and other related parties against liabilities that arise from the manufacture, design, ownership, financing, use, operation and maintenance of the aircraft and for tort liability, whether or not these liabilities arise out of or relate to the negligence of these indemnified parties, except for their gross negligence or willful misconduct.

We expect that we would be covered by insurance (subject to deductibles) for most tort liabilities and related indemnities described above with respect to real estate we lease and aircraft we operate.

In our financing transactions that include loans, we typically agree to reimburse lenders for any reduced returns with respect to loans due to any change in capital requirements and, in the case of loans in which the interest rate is based on LIBOR, for certain other increased costs that the lenders incur in carrying these loans as a result of any change in law, subject in most cases to certain mitigation obligations of the lenders. At June 30, 2007, we had $1.3 billion of floating rate debt and $302 million of fixed rate debt, with remaining terms of up to 11 years, that is subject to these increased cost provisions. In several financing transactions involving loans or leases from non-U.S. entities, with remaining terms of up to 11 years and an aggregate carrying value of $1.4 billion, we bear the risk of any change in tax laws that would subject loan or lease payments thereunder to non-U.S. entities to withholding taxes, subject to customary exclusions. In addition, in cross-border aircraft lease agreements for two 757 aircraft, we bear the risk of any change in U.S. tax laws that would subject lease payments made by us to a resident of Japan to withholding taxes, subject to customary exclusions. These capital leases for two 757 aircraft expire in 2008 and have a carrying value of $32 million at June 30, 2007.

We may be required to make future payments under the foregoing indemnities and agreements due to unknown variables related to potential government changes in capital adequacy requirements, laws governing LIBOR based loans or tax laws, the amounts of which cannot be estimated at this time.

Bank Card Processing Agreement. Our U.S. bank card processing agreement contains financial covenants which require, among other things, that we maintain a minimum EBITDAR (generally, earnings before interest, taxes, depreciation, amortization, aircraft rentals and income from other companies, adjusted for special items) to fixed charges (interest and aircraft rentals) ratio for the preceding 12 months of 1.1 to 1.0. The liquidity covenant requires us to maintain a minimum level of $1.0 billion of unrestricted cash and short-term investments and a minimum ratio of unrestricted cash and short-term investments to current liabilities at each month end of 0.29 to 1.0. The agreement also requires us to maintain a minimum senior unsecured debt rating of at least Caa3 as rated by Moody's and CCC- as rated by Standard & Poor's. Although we are currently in compliance with all of the covenants, failure to maintain compliance would result in our being required to post up to an additional $684 million of cash collateral, which would materially adversely affect our liquidity. Depending on our unrestricted cash and short-term investments balance at the time, the posting of a significant amount of cash collateral could cause our unrestricted cash and short-term investments balance to fall below the $1.0 billion minimum balance requirement under our $350 million secured loan facility, resulting in a default under that facility. During the first quarter of 2007, the bank card processor under this agreement returned $67 million of our collateral to us. If we cease to comply with the financial covenants discussed above or if our unrestricted cash and short-term investments balance falls below $2.0 billion, the bank card processor can require us to redeposit the collateral.

Employees. As of June 30, 2007, we had approximately 43,300 full-time equivalent employees. Although there can be no assurance that our generally good labor relations and high labor productivity will continue, the preservation of good relations with our employees is a significant component of our business strategy. Approximately 43% of our employees are represented by unions. None of our collective bargaining agreements becomes amendable before December 2008.

Environmental Matters.  In 2001, the California Regional Water Quality Control Board ("CRWQCB") mandated a field study of the area surrounding our aircraft maintenance hangar in Los Angeles. The study was completed in September 2001 and identified jet fuel and solvent contamination on and adjacent to this site. In April 2005, we began environmental remediation of jet fuel contamination surrounding our aircraft maintenance hangar pursuant to a workplan submitted to (and approved by) the CRWQCB and our landlord, the Los Angeles World Airports. Additionally, we could be responsible for environmental remediation costs primarily related to solvent contamination on and near this site.

In 1999, we purchased property located near our New York Liberty hub in Elizabeth, New Jersey from Honeywell International, Inc. ("Honeywell") with certain environmental indemnification obligations by us to Honeywell. We did not operate the facility located on or make any improvements to the property. In 2005, we sold the property to Catellus Commercial Group, LLC ("Catellus") and in connection with the sale, Catellus assumed certain environmental indemnification obligations in favor of us. On October 9, 2006, Honeywell provided us with a notice seeking indemnification from us in connection with a U.S. Environmental Protection Agency potentially responsible party notice to Honeywell involving the Newark Bay Study Area of the Diamond Alkali Superfund Site alleging hazardous substance releases from the property. In addition, on May 7, 2007, Honeywell provided us with a notice seeking indemnification from us in connection with a possible lawsuit by Tierra Solutions, Inc. relating to alleged discharges from the property into Newark Bay and seeking cleanup of Newark Bay waters and sediments under the Resource Conservation and Recovery Act. We have notified Honeywell that, at this time, we have not agreed that we are required to indemnify Honeywell with respect to this matter. Honeywell's liability with respect to releases from the property into the Newark Bay Study Area, if any, and our potential indemnification obligation, if any, remain under review, but cannot be determined at this time. We have sought indemnification from Catellus to the full extent to which we may be required to indemnify Honeywell and, although we are in discussions with Catellus regarding such indemnification, Catellus has not yet agreed that it is required to indemnify us with respect to this matter.

At June 30, 2007, we have a reserve for estimated costs of environmental remediation throughout our system of $39 million, based primarily on third-party environmental studies and estimates as to the extent of the contamination and nature of the required remedial actions.  We have evaluated and recorded this accrual for environmental remediation costs separately from any related insurance recovery.  We do not have any receivables related to environmental insurance recoveries at June 30, 2007. Based on currently available information, we believe that our reserves for potential environmental remediation costs are adequate, although reserves could be adjusted as further information develops or circumstances change. However, we do not expect these items to materially affect our results of operations, financial condition or liquidity.

Legal Proceedings. During the period between 1997 and 2001, we reduced or capped the base commissions that we paid to domestic travel agents, and in 2002 we eliminated those base commissions.  These actions were similar to those also taken by other air carriers. We are a defendant, along with several other air carriers, in two lawsuits brought by travel agencies that purportedly opted out of a prior class action entitled Sarah Futch Hall d/b/a/ Travel Specialists v. United Air Lines, et al. (U.S.D.C., Eastern District of North Carolina), filed on June 21, 2000, in which the defendant airlines prevailed on summary judgment that was upheld on appeal. These similar suits against Continental and other major carriers allege violations of antitrust laws in reducing and ultimately eliminating the base commissions formerly paid to travel agents. The pending cases are Tam Travel, Inc. v. Delta Air Lines, Inc., et al. (U.S.D.C., Northern District of California), filed on April 9, 2003 and Swope Travel Agency, et al. v. Orbitz LLC et al. (U.S.D.C., Eastern District of Texas), filed on June 5, 2003. By order dated November 10, 2003, these actions were transferred and consolidated for pretrial purposes by the Judicial Panel on Multidistrict Litigation to the Northern District of Ohio. Discovery has commenced. On September 14, 2006, the judge for the consolidated lawsuit issued an order dismissing 28 plaintiffs in the Swope case for their failure to properly opt-out of the Hall case. Consequently, a total of 90 travel agency plaintiffs remain in the two cases. In each of these cases, we believe the plaintiffs' claims are without merit and we are vigorously defending the lawsuits.  Nevertheless, a final adverse court decision awarding substantial money damages could have a material adverse effect on our results of operations, financial condition or liquidity.

On June 7, 2007, Ronald A. Katz Technology Licensing, L.P. filed a lawsuit in the U.S. District Court for the Eastern District of Texas alleging that Continental infringes certain patents relating to automated telephone call processing systems. The plaintiff is seeking unspecified monetary damages, trebling of damages based on alleged willful infringement, attorney's fees and injunctive relief. On June 20, 2007, the case, which includes numerous other defendants, was transferred to the United States District Court for the Central District of California for consolidated or coordinated pretrial proceedings. We believe the plaintiff's claims are without merit and we are vigorously defending this lawsuit. Although this lawsuit is currently in the initial pleading stage and no reasonable estimate of potential losses in the event of a negative outcome can be made, a final adverse court decision awarding substantial money damages or imposing material restrictions on our ability to operate our existing automated telephone call processing systems could have a material adverse effect on our results of operations, financial condition or liquidity.

We and/or certain of our subsidiaries are defendants in various other pending lawsuits and proceedings and are subject to various other claims arising in the normal course of our business, many of which are covered in whole or in part by insurance. Although the outcome of these lawsuits and proceedings (including the probable loss we might experience as a result of an adverse outcome) cannot be predicted with certainty at this time, we believe, after consulting with outside counsel, that the ultimate disposition of such suits will not have a material adverse effect on us.

I tem 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion contains forward-looking statements that are not limited to historical facts, but reflect our current beliefs, expectations or intentions regarding future events. In connection therewith, please see the risk factors set forth in Part I, Item 1A of our 2006 Form 10-K and Part II, Item 1A of this report, which identify important risk factors that could cause actual results to differ materially from those in the forward-looking statements, such as the consequences of our significant prior financial losses and high leverage, the significant cost of aircraft fuel, our high labor and pension costs, service interruptions at one of our hub airports, disruptions in our computer systems, and industry conditions, including the airline pricing environment, industry capacity decisions, industry consolidation, terrorist attacks, regulatory matters, excessive taxation, the availability and cost of insurance, public health threats and the seasonal nature of the airline business.  We undertake no obligation to publicly update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this report, except as required by applicable law.

OVERVIEW

We are a major United States air carrier engaged in the business of transporting passengers, cargo and mail. We are the world's fifth largest airline as measured by the number of scheduled miles flown by revenue passengers in 2006. Including our wholly-owned subsidiary, Continental Micronesia, Inc. ("CMI"), and regional flights operated on our behalf under capacity purchase agreements with other carriers, we operate more than 2,700 daily departures. As of June 30, 2007, we served 131 domestic and 128 international destinations and offered additional connecting service through alliances with domestic and foreign carriers.

General information about us can be found at our website, continental.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, as well as any amendments to those reports, are available free of charge through our website as soon as reasonably practicable after we file them with, or furnish them to, the Securities and Exchange Commission.

Second Quarter Financial Highlights

  • Passenger revenue grew 5.2% during the second quarter of 2007 as compared to the second quarter of 2006 due to more flights, higher load factors and an increase in international fares.
  • Operating income increased $19 million during the second quarter of 2007 as compared to the second quarter of 2006 due to increased operating revenue.
  • Unrestricted cash, cash equivalents and short-term investments totaled $3.2 billion at June 30, 2007.

Second Quarter Operational Highlights

  • Traffic increased 5.4% and capacity increased 4.7% during the second quarter of 2007 as compared to the second quarter of 2006, resulting in a consolidated load factor of 83.2%, 0.5 points above the prior year second quarter consolidated load factor.
  • We posted a mainline completion factor of 99.4% and a U.S. Department of Transportation on-time arrival rate of 72.2%.

  • We took delivery of our 20th Boeing 777 aircraft.
  • We began nonstop flights between New York Liberty and Athens, Greece in June 2007.

Outlook

We currently intend to grow our mainline capacity approximately 5% in 2007 and between 3% and 4% in 2008. We are targeting mainline capacity growth of between 5% and 7% annually thereafter, although actual growth may differ from these targets in any given year. We have reduced our estimated mainline capacity growth for 2008 primarily due to our intention to sell up to 15 Boeing 737-500 aircraft. Our expected capacity growth for 2007 includes our commencement of nonstop flights between New York Liberty and Mumbai, India in October 2007. We also plan to inaugurate service from our Houston hub to London's Heathrow Airport on March 30, 2008, subject to government approval and our obtaining commercially viable operating slots and facilities at Heathrow Airport.

Although we were profitable during 2006 and the first half of 2007, we had previously suffered substantial losses following September 11, 2001. Our ability to sustain our profitability depends on, among other factors, continuing our efforts to implement and maintain a more competitive cost structure, continuing our profitable international growth and responding effectively to the factors that threaten the airline industry as a whole. We have attempted to return to sustained profitability by implementing $1.6 billion of annual cost-cutting and revenue-generating measures since 2002.

Many factors continue to threaten our ability to sustain our profitability. For example, competition in most of our domestic markets from low-cost carriers, as well as new carriers such as Virgin America (which is expected to begin service in August 2007), and our response to such competition continue to result in increased capacity and reduced yields in many of those markets. In addition, several of our domestic competitors have increased their international capacity, resulting in lower yield and/or load factor growth rates in affected markets. The recent "open skies" agreement between the U.S. and the European Union, which becomes effective on March 30, 2008, could also result in increased competition from European and U.S. airlines in these international markets, and may give rise to additional consolidation or better integration opportunities among European carriers. In addition, Air France-KLM, Delta Air Lines and Northwest Airlines have filed for anti-trust immunity for a new trans-Atlantic joint venture and also to coordinate with Alitalia and CSA Czech Airlines. Our ability to compete effectively in this new environment will depend in part on whether we are able to obtain commercially viable operating slots and facilities at London's Heathrow Airport.

We are also facing stronger competition from carriers that have emerged from bankruptcy, including Delta Air Lines, Northwest Airlines, US Airways and United Airlines. Carriers typically emerge from bankruptcy with substantially lower costs than ours achieved by cost reductions through, among other things, reducing or discharging debt, lease and pension obligations and reducing wages and benefits.

High fuel prices continue to increase our costs and diminish our profitability. Although we experienced some success raising ticket prices in response to higher fuel costs, future increases in jet fuel prices or disruptions in fuel supplies could have a material adverse effect on our results of operations, financial condition and liquidity. Conversely, lower fuel prices may result in lower fares and the reduction or elimination of fuel surcharges. Additionally, lower fuel prices may result in increased industry capacity, especially to the extent that reduced fuel costs justify increased utilization by airlines of less fuel efficient aircraft that are unprofitable during periods of higher fuel prices. We believe that our young, fuel-efficient fleet continues to provide us with a competitive advantage relative to our peers. As of June 30, 2007, we had hedged approximately 30% and 10% of our projected fuel requirements for the third and fourth quarters of 2007, respectively, using heating oil option contracts forming zero cost collars with a weighted average call price of $2.04 per gallon and a weighted average put price of $1.87 per gallon.

Additionally, our ability to sustain our profitability could be adversely affected by additional terrorist attacks, or the fear of such attacks, or other international hostilities. The terrorist plot discovered in August 2006 targeting multiple airlines elevated concerns about future terrorist attacks and resulted in the imposition by the Transportation Security Administration and foreign security authorities of additional security measures significantly restricting the contents of carry on baggage. These elevated concerns and baggage restrictions temporarily reduced the number of customer bookings on certain routes, including bookings by high-yield business travelers for whom the ability to carry on baggage is an important service amenity, and the baggage restrictions continue to result in a greater number of checked bags, increasing our costs.

RESULTS OF OPERATIONS

The following discussion provides an analysis of our results of operations and reasons for material changes therein for the three and six months ended June 30, 2007 as compared to the corresponding periods in 2006.

Comparison of Three Months Ended June 30, 2007 to Three Months Ended June 30, 2006

Consolidated Results of Operations

Statistical Information. Certain statistical information for our consolidated operations for the three months ended June 30 is as follows:

 


 2007   


   2006   

Increase  
(Decrease)

       

Passengers (thousands) (1)

18,120

17,596

3.0 %

Revenue passenger miles (millions) (2)

24,623

23,367

5.4 %

Available seat miles (millions) (3)

29,592

28,259

4.7 %

Passenger load factor (4)

83.2%

82.7%

0.5 pts.

Passenger revenue per available seat mile (cents)

11.48

11.42

0.5 %

Average yield (cents) (5)

13.79

13.81

(0.1)%

  1. The number of revenue passengers measured by each flight segment flown.
  2. The number of scheduled miles flown by revenue passengers.
  3. The number of seats available for passengers multiplied by the number of scheduled miles those seats are flown.
  4. Revenue passenger miles divided by available seat miles.
  5. The average passenger revenue received for each revenue passenger mile flown.

Results of Operations. We recorded net income of $228 million in the second quarter of 2007 as compared to net income of $198 million for the second quarter of 2006. We consider a key measure of our performance to be operating income, which was $263 million for the second quarter of 2007, as compared to $244 million for the second quarter of 2006. Significant components of our consolidated operating results for the three months ended June 30 are as follows (in millions, except percentage changes):

   

Increase   

% Increase

 

  2007  

  2006  

(Decrease)

(Decrease)

         

Operating Revenue

$3,710 

$3,507 

$203 

 

5.8 %

 

Operating Expenses

3,447 

3,263 

184 

 

5.6 %

 

Operating Income

    263 

    244 

    19 

 

7.8 %

 

Nonoperating Income (Expense)

   (31)

   (46)

   (15)

 

(32.6)%

 

Income Taxes

    (4)

    - 

   (4)

 

NM    

 
             

Net Income

$ 228 

$ 198 

$  30 

 

15.2 %

 

NM - Not Meaningful

Each of these items is discussed in the following sections.

Operating Revenue. The table below shows components of operating revenue for the quarter ended June 30, 2007 and period to period comparisons for operating revenue, passenger revenue per available seat mile ("RASM") and available seat miles ("ASMs") by geographic region for our mainline and regional operations:

 

            
Revenue         

Percentage Increase (Decrease) in      
Second Quarter 2007 vs Second Quarter 2006

 

      (in millions)      

Revenue    

RASM

ASMs

         

Passenger revenue:

       

  Domestic

$1,517

 

3.5 %

 

(2.5)%

6.1 %

  Trans-Atlantic

689

 

20.9 %

 

8.1 %

11.8 %

  Latin America

377

 

9.1 %

 

8.7 %

0.3 %

  Pacific

   236

 

8.8 %

 

7.8 %

1.0 %

  Total Mainline

2,819

 

8.5 %

 

2.2 %

6.1 %

             

  Regional

   577

 

(8.4)%

 

(2.7)%

(5.8)%

             

    Total

3,396

 

5.2 %

 

0.5 %

4.7 %

             

Cargo

109

 

(2.7)%

     

Other

   205

 

22.0 %

     
             

Operating Revenue

$3,710

 

5.8 %

     

Passenger revenue increased due to increased traffic and several fare increases. Consolidated RASM for the quarter increased year-over-year due to higher load factors and our actions taken to improve the mix of local versus flow traffic and reduce discounting. Consolidated RASM was adversely affected by our reduction in regional flying, which historically has had significantly higher RASM than our mainline flying.

Other revenue increased due to $22 million of rental income on aircraft leased to ExpressJet but not operated for us during the second quarter of 2007 and higher revenue associated with sales of mileage credits in our OnePass frequent flyer program. As of June 30, 2007, 66 aircraft leased to ExpressJet have been withdrawn from the ExpressJet CPA.

Operating Expenses. The table below shows period-to-period comparisons by type of operating expense for our consolidated operations for the three months ended June 30 (in millions, except percentage changes):

 


  2007  


  2006  

Increase    
(Decrease)  

% Increase

(Decrease)

         

Wages, salaries and related costs

$  842

$  744 

$ 98 

 

13.2 %

 

Aircraft fuel and related taxes

821

791 

30 

 

3.8 %

 

Regional capacity purchase, net

444

454 

(10)

 

(2.2)%

 

Aircraft rentals

248

248 

 

-     

 

Landing fees and other rentals

190

198 

(8)

 

(4.0)%

 

Distribution costs

176

178 

(2)

 

(1.1)%

 

Maintenance, materials and repairs

169

140 

29 

 

20.7 %

 

Depreciation and amortization

101

97 

 

4.1 %

 

Passenger services

99

90 

 

10.0 %

 

Special charges

7

10 

(3)

 

NM    

 

Other

   350

   313 

   37 

 

11.8 %

 
 

$3,447

$3,263 

$184 

 

5.6 %

 


Operating expenses increased 5.6% primarily due to the following:

  • Wages, salaries and related costs increased primarily due to the hiring of additional employees necessary to support our growth and an increase of $30 million for profit sharing and on-time performance incentive expenses. Additionally, stock-based compensation expense was $26 million higher in the second quarter of 2007 than in the comparable period of 2006, primarily due to an increase in the accrual for profit based RSU awards granted in 2006 to reflect a higher probable level of expected cumulative profit sharing for the performance period, partially offset by the impact on expense for all RSU awards of a decrease in our common stock price at June 30, 2007 as compared to that at December 31, 2006.
  • Aircraft fuel and related taxes increased due to an increase in flight activity. The average jet fuel price per gallon including related taxes decreased slightly from $2.11 in the second quarter of 2006 to $2.08 in the second quarter of 2007. Fuel expense includes gains related to our fuel hedging program of $14 million in the second quarter of 2007, compared to hedging gains of $9 million in the second quarter of 2006.
  • Regional capacity purchase, net, includes expenses related to our capacity purchase agreements. Our most significant capacity purchase agreement is with ExpressJet. Regional capacity purchase, net includes all fuel expense on flights operated for us under capacity purchase agreements plus, in the case of the ExpressJet CPA, a margin on ExpressJet's fuel expense up to a cap provided in the ExpressJet CPA and a related fuel purchase agreement (which margin applies only to the first 71.2 cents per gallon, including fuel taxes) and is net of our rental income on aircraft leased to ExpressJet and flown for us. The net amounts consist of the following for the three months ended June 30 (in millions, except percentage changes):

     

Increase  

% Increase

 

  2007      

  2006           

(Decrease)

(Decrease)

         

Capacity purchase expenses

$392 

 

$422 

 

$(30)

 

(7.1)%

 

Fuel and fuel taxes in excess of cap
  (71.2 cents per gallon for ExpressJet;
  no cap for other carriers)



118 

 



115 

 



 



2.6 %

 

Aircraft sublease income

 (66)

 

 (83)

 

(17)

 

(20.5)%

 
                 

Regional capacity purchase, net

$444 

 

$454 

 

$(10)

 

(2.2)%

 

The net expense was lower in the second quarter of 2007 than in the corresponding quarter of 2006 due to a 5.8% decrease in regional capacity, which includes new capacity provided by Chautauqua more than offset by reduced flying by ExpressJet. Additionally, aircraft sublease income was lower in the second quarter of 2007 than in the second quarter of 2006, reflecting the withdrawal of aircraft from the ExpressJet CPA. Sublease income on aircraft operated by ExpressJet outside the scope of the ExpressJet CPA is recorded as other revenue.

We have been unable to reach an agreement with ExpressJet on 2007 block hour rates and have entered into binding arbitration. The arbitration hearing was completed on July 7, 2007, and we expect that the arbitration panel will render its decision in the next few weeks. Until the decision is rendered, we will recognize current year expense based on 2006 rates.

  • Maintenance, materials and repairs increased primarily due to the mix of heavy maintenance events, which is driven by aircraft age and timing of the maintenance life cycle. In addition, higher engine maintenance costs were driven by increase in flight activity and by contractual engine repair rates escalated in accordance with their contracts due to the aging of our fleet.
  • Other operating expenses increased primarily due to a greater number of international flights which resulted in increased air navigation fees and ground handling, security and related expenses.
  • Special charges in the second quarter of 2007 consisted of a $7 million non-cash settlement charge related to lump sum distributions from our pilot-only defined benefit pension plan to pilots who retired. Special charges in the second quarter of 2006 consisted of a $14 million non-cash settlement charge related to lump sum distributions from our pilot-only defined benefit pension plan to pilots who retired and a $4 million credit attributable to a reduction of our allowance for future lease payments and return conditions on permanently grounded MD-80 aircraft following negotiated settlements with aircraft lessors.

Nonoperating Income (Expense). Nonoperating income (expense) includes net interest expense (interest expense less interest income and capitalized interest), income from other companies, gains from dispositions of investments and any ineffectiveness of our derivative financial instruments. Total nonoperating income (expense) decreased $15 million in the second quarter of 2007 compared to the second quarter of 2006 due to the following:

  • Net interest expense decreased $14 million primarily as a result of increased interest income on our higher cash balances.
  • Income from other companies, which includes our equity in the earnings of Copa in 2007 and 2006 and equity in the earnings of Holdings and income related to our tax sharing agreement with Holdings in 2006, was $12 million lower in 2007 as compared to 2006 as a result of our reduced ownership interests in Holdings and Copa and a decrease in income recognized from our tax sharing agreement with Holdings.
  • Hedge ineffectiveness gains related to our fuel hedges outstanding at June 30, 2007 totaled $10 million during the second quarter of 2007. This ineffectiveness arises because our heating oil collars have experienced a relatively higher increase in value than the jet fuel being hedged. Hedge ineffectiveness gains in the second quarter of 2006 totaled $4 million.

Income Taxes. Income tax expense in the second quarter of 2007 is attributable to the federal Alternative Minimum Tax and state and foreign income taxes. We did not otherwise record any income tax expense related to our pretax income in the second quarter of 2007 or 2006 due to the utilization of book net operating losses for which we had not previously recognized a benefit.

Segment Results of Operations

We have two reportable segments: mainline and regional. The mainline segment consists of flights to cities using jets with a capacity of greater than 100 seats while the regional segment currently consists of flights with a capacity of 50 or fewer seats. The regional segment is operated primarily by ExpressJet and Chautauqua through capacity purchase agreements. Under these agreements, we purchase all of the capacity related to aircraft covered by the contracts, and are responsible for setting prices and selling all of the related seat inventory. In exchange for the regional carriers' operation of the flights, we pay the regional carriers for each scheduled block hour based on agreed formulas. Under the agreements, we recognize all passenger, cargo and other revenue associated with each flight, and are responsible for all revenue-related expenses, including commissions, reservations, catering and terminal rent at hub airports.

We evaluate segment performance based on several factors, of which the primary financial measure is operating income (loss). However, we do not manage our business or allocate resources based on segment operating profit or loss because (1) our flight schedules are designed to maximize revenue from passengers flying, (2) many operations of the two segments are substantially integrated (for example, airport operations, sales and marketing, scheduling and ticketing), and (3) management decisions are based on their anticipated impact on the overall network, not on one individual segment.

Statistical Information. Certain statistical information for our segments' operations for the three months ended June 30 is as follows:

   

Increase  

 

 2007   

   2006   

(Decrease)

       

Mainline Operations:

     

Passengers (thousands)

13,417

12,746

5.3 %

Revenue passenger miles (millions)

22,065

20,633

6.9 %

Available seat miles (millions)

26,415

24,885

6.1 %

Passenger load factor

83.5%

82.9%

0.6 pts.

Cargo ton miles (millions)

253

263

(3.8)%

       

Passenger revenue per available seat mile (cents)

10.67

10.44

2.2 %

Total revenue per available seat mile (cents)

11.85

11.61

2.1 %

Average yield per revenue passenger mile (cents)

12.78

12.59

1.5 %

Average fare per revenue passenger

$212.56

$206.33

3.0 %

       

Cost per available seat mile, including special charges (cents) (1)

10.82

10.72

0.9 %

Average price per gallon of fuel, including fuel taxes (cents)

207.89

210.95

(1.5)%

Fuel gallons consumed (millions)

395

375

5.3 %

       

Actual aircraft in fleet at end of period

368

360

2.2 %

Average length of aircraft flight (miles)

1,448

1,435

0.9 %

Average daily utilization of each aircraft (hours)

11:55

11:23

4.6 %

       

Regional Operations (2):

     

Passengers (thousands)

4,703

4,850

(3.0)%

Revenue passenger miles (millions)

2,558

2,734

(6.4)%

Available seat miles (millions)

3,177

3,374

(5.8)%

Passenger load factor

80.5%

81.0%

(0.5) pts.

Passenger revenue per available seat mile (cents)

18.15

18.66

(2.7)%

Average yield per revenue passenger mile (cents)

22.54

23.03

(2.1)%

Actual aircraft in fleet at end of period (3)

257

274

(6.2)%

  1. Includes special charges which represented 0.03 and 0.04 cents per available seat mile for the three months ended June 30, 2007 and 2006, respectively.
  2. Consists of flights flown under capacity purchase agreements with our regional carriers ExpressJet, Chautauqua and CommutAir.
  3. Includes aircraft operated by all carriers under capacity purchase agreements but excludes any aircraft operated by ExpressJet outside the scope of the ExpressJet CPA.

 

Mainline Results of Operations. Significant components of our mainline segment's operating results for the three months ended June 30 are as follows (in millions, except percentage changes):

 


  2007  


  2006  

Increase   
(Decrease) 

% Increase
(Decrease)

         

Operating Revenue

$3,130

$2,890 

$240 

 

8.3 %

 
             

Operating Expenses:

           

  Wages, salaries and related costs

828

733 

95 

 

13.0 %

 

  Aircraft fuel and related taxes

821

791 

30 

 

3.8 %

 

  Aircraft rentals

170

170 

 

-     

 

  Landing fees and other rentals

177

187 

(10)

 

(5.3)%

 

  Distribution costs

151

147 

 

2.7 %

 

  Maintenance, materials and repairs

169

140 

29 

 

20.7 %

 

  Depreciation and amortization

97

94 

 

3.2 %

 

  Passenger services

96

86 

10 

 

11.6 %

 

  Special charges

7

10 

(3)

 

NM    

 

  Other

   342

   309 

  33 

 

10.7 %

 
 

2,858

2,667 

191 

 

7.2 %

 
             

Operating Income

$  272

$   223 

$  49 

 

22.0 %

 


The variances in specific line items for the mainline segment are due to the same factors discussed under consolidated results of operations.

Regional Results of Operations. Significant components of our regional segment's operating results for the three months ended June 30 are as follows (in millions, except percentage changes):

 

Increase  

% Increase

 

  2007  

  2006  

(Decrease)

(Decrease) 

         

Operating Revenue

$580 

$617 

$(37)

 

(6.0)%

 
             

Operating Expenses:

           

  Wages, salaries and related costs

14 

11 

 

27.3 %

 

  Regional capacity purchase, net

444 

454 

(10)

 

(2.2)%

 

  Aircraft rentals

78 

78 

 

-     

 

  Landing fees and other rentals

13 

11 

 

18.2 %

 

  Distribution costs

25 

31 

(6)

 

(19.4)%

 

  Depreciation and amortization

 

33.3 %

 

  Passenger services

(1)

 

(25.0)%

 

  Other

    8 

    4 

   4 

 

100.0 %

 
 

589 

596 

  (7)

 

(1.2)%

 
             

Operating Income (Loss)

$  (9)

$ 21 

$(30)

 

(142.9)%

 

The reported results of our regional segment do not reflect the total contribution of the regional segment to our system-wide operations. The regional segment generates revenue for the mainline segment as it feeds passengers from smaller cities into our hubs. The variances in specific line items for the regional segment reflect generally the same factors discussed under consolidated results of operations.

Comparison of Six Months Ended June 30, 2007 to Six Months Ended June 30, 2006

Consolidated Results of Operations

Statistical Information. Certain statistical information for our consolidated operations for the six months ended June 30 is as follows:

 

 2007   

   2006   

Increase

       

Passengers (thousands)

34,296

33,190

3.3%

Revenue passenger miles (millions)

46,073

43,703

5.4%

Available seat miles (millions)

56,841

54,375

4.5%

Passenger load factor

81.1%

80.4%

0.7 pts.

Passenger revenue per available seat mile (cents)

11.07

10.87

1.8%

Average yield (cents)

13.65

13.52

1.0%

Results of Operations. We recorded net income of $250 million in the first six months of 2007 as compared to net income of $132 million for the first six months of 2006. We consider a key measure of our performance to be operating income, which was $327 million for the first six months of 2007, as compared to $255 million for the first six months of 2006. Significant components of our consolidated operating results for the six months ended June 30 are as follows (in millions, except percentage changes):

   

Increase   

% Increase

 

  2007  

  2006  

(Decrease)

(Decrease)

         

Operating Revenue

$6,889 

$6,453 

$436 

 

6.8 %

 

Operating Expenses

6,562 

6,198 

364 

 

5.9 %

 

Operating Income

327 

    255 

72 

 

28.2 %

 

Nonoperating Income (Expense)

(73)

   (97)

(24)

 

(24.7)%

 

Income Taxes

(4)

   - 

(4)

 

NM    

 

Cumulative Effect of Change in Accounting Principle

       - 

  (26)

  26 

 

NM    

 
             

Net Income

$  250 

$  132 

$118 

 

89.4 %

 

Each of these items is discussed in the following sections.

Operating Revenue. The table below shows components of operating revenue for the six months ended June 30, 2007 and period to period comparisons for operating revenue, RASM and ASMs by geographic region for our mainline and regional operations:

 

            
Revenue         

Percentage Increase (Decrease) in      
June 30, 2007 YTD vs June 30,2006 YTD

 

      (in millions)      

Revenue    

RASM

ASMs

         

Passenger revenue:

       

  Domestic

$2,812

 

3.4 %

 

(1.6)%

5.2 %

  Trans-Atlantic

1,176

 

22.5 %

 

10.7 %

10.7 %

  Latin America

765

 

13.9 %

 

11.5 %

2.2 %

  Pacific

   461

 

9.5 %

 

9.1 %

0.4 %

  Total Mainline

5,214

 

9.3 %

 

3.6 %

5.5 %

             

  Regional

1,077

 

(5.5)%

 

(3.2)%

(2.4)%

             

    Total

6,291

 

6.4 %

 

1.8 %

4.5 %

             

Cargo

216

 

(0.9)%

     

Other

   382

 

17.9 %

     
             

Operating Revenue

$6,889

 

6.8 %

     

Passenger revenue increased due to increased traffic and several fare increases. Consolidated RASM increased year-over-year due to higher yields and load factors. The improved RASM reflects our actions taken to improve the mix of local versus flow traffic and reduce discounting. Consolidated RASM was adversely affected by our reduction in regional flying, which historically has had significantly higher RASM than our mainline flying.

Other revenue increased due to higher revenue associated with sales of mileage credits in our OnePass frequent flyer program and $29 million of rental income on aircraft leased to ExpressJet but not operated for us during the first half of 2007. As of June 30, 2007, 66 aircraft leased to ExpressJet have been withdrawn from the ExpressJet CPA.

Operating Expenses. The table below shows period-to-period comparisons by type of operating expense for our consolidated operations for the six months ended June 30 (in millions, except percentage changes):

 

  2007  

  2006  

Increase  
(Decrease)

% Increase
(Decrease)

         

Wages, salaries and related costs

$1,568

$1,416

$152 

 

10.7 %

 

Aircraft fuel and related taxes

1,505

1,452

53 

 

3.7 %

 

Regional capacity purchase, net

873

869

 

0.5 %

 

Aircraft rentals

496

493

 

0.6 %

 

Landing fees and other rentals

384

383

 

0.3 %

 

Distribution costs

337

338

(1)

 

(0.3)%

 

Maintenance, materials and repairs

313

267

46 

 

17.2 %

 

Depreciation and amortization

200

193

 

3.6 %

 

Passenger services

189

171

18 

 

10.5 %

 

Special charges

18

3

15 

 

NM    

 

Other

   679

   613

  66 

 

10.8 %

 
 

$6,562

$6,198

$364 

 

5.9 %

 


Operating expenses increased 5.9% primarily due to the following:

  • Wages, salaries and related costs increased primarily due to the hiring of additional employees necessary to support our growth and an increase of $50 million for profit sharing and on-time performance incentive expenses. Additionally, stock-based compensation expense was $35 million higher in the first six months of 2007 than in the comparable period of 2006, primarily due to an increase in the accrual for profit based RSU awards granted in 2006 to reflect a higher probable level of expected cumulative profit sharing for the performance period, partially offset by the impact on expense for all RSU awards of a decrease in our common stock price at June 30, 2007 as compared to that at December 31, 2006.
  • Aircraft fuel and related taxes increased due to an increase in flight activity. The average jet fuel price per gallon including related taxes decreased from $2.08 in the first half of 2006 to $1.99 in the first half of 2007. Fuel expense includes losses related to our fuel hedging program of $1 million in the six months ended June 30, 2007, compared to hedging gains of $8 million in the comparable period of 2006.
  • Regional capacity purchase, net, includes expenses related to our capacity purchase agreements. Our most significant capacity purchase agreement is with ExpressJet. Regional capacity purchase, net includes all fuel expense on flights operated for us under capacity purchase agreements plus, in the case of the ExpressJet CPA, a margin on ExpressJet's fuel expense up to a cap provided in the ExpressJet CPA and a related fuel purchase agreement (which margin applies only to the first 71.2 cents per gallon, including fuel taxes) and is net of our rental income on aircraft leased to ExpressJet and flown for us. The net amounts consist of the following for the six months ended June 30 (in millions, except percentage changes):

     

Increase  

% Increase

 

  2007      

  2006           

(Decrease)

(Decrease)

         

Capacity purchase expenses

$ 806 

 

$ 829 

 

$(23)

 

(2.8)%

 

Fuel and fuel taxes in excess of cap
  (71.2 cents per gallon for ExpressJet;
  no cap for other carriers)



211 

 



205 

 



 



2.9 %

 

Aircraft sublease income

(144)

 

(165)

 

(21)

 

(12.7)%

 
                 

Regional capacity purchase, net

$ 873 

 

$ 869 

 

$   4 

 

0.5 %

 

The net expense was higher in the first half of 2007 than in the corresponding quarter of 2006 due to lower aircraft sublease income, reflecting the withdrawal of aircraft from the ExpressJet CPA, offset by the impact of a 2.4% decrease in regional capacity, which includes new capacity provided by Chautauqua more than offset by reduced flying by ExpressJet. Sublease income on aircraft operated by ExpressJet outside the scope of the ExpressJet CPA is recorded as other revenue.

We have been unable to reach an agreement with ExpressJet on 2007 block hour rates and have entered into binding arbitration. The arbitration hearing was completed on July 7, 2007, and we expect that the arbitration panel will render its decision in the next few weeks. Until the decision is rendered, we will recognize current year expense based on 2006 rates.

  • Maintenance, materials and repairs increased primarily due to the mix of heavy maintenance events, which is driven by aircraft age and timing of the maintenance life cycle. In addition, higher engine maintenance costs were driven by increase in flight activity and by contractual engine repair rates escalated in accordance with their contracts due to the aging of our fleet.
  • Other operating expenses increased primarily due to a greater number of international flights which resulted in increased air navigation fees and ground handling, security and related expenses.
  • Special charges in the first half of 2007 consisted of a $12 million non-cash settlement charge related to lump sum distributions from our pilot-only defined benefit pension plan to pilots who retired and a $6 million aircraft-related charge. Special charges in the first half of 2006 consisted of $29 million of non-cash settlement charges related to lump sum distributions from our pilot-only defined benefit pension plan to pilots who retired, a $14 million credit related to our officers' voluntary surrender of stock price based RSU awards and a $12 million credit attributable to a reduction of our allowance for future lease payments and return conditions on permanently grounded MD-80 aircraft following negotiated settlements with aircraft lessors.

Nonoperating Income (Expense). Nonoperating income (expense) includes net interest expense (interest expense less interest income and capitalized interest), income from other companies, gains from dispositions of investments and any ineffectiveness of our derivative financial instruments. Total nonoperating income (expense) decreased $24 million in the first six months ended June 30, 2007 compared to the six months ended June 30, 2006 due to the following:

  • Net interest expense decreased $32 million primarily as a result of increased interest income on our higher cash balances.
  • Income from other companies, which includes our equity in the earnings of Copa and Holdings and income related to our tax sharing agreement with Holdings in 2006, was $24 million lower in 2007 as compared to 2006 as a result of our reduced ownership interests in Holdings and Copa and a decrease in income recognized from our tax sharing agreement with Holdings.
  • Hedge ineffectiveness gains related to our fuel hedges totaled $11 million during the first half of 2007. This ineffectiveness arises because our heating oil collars have experienced a relatively higher increase in value than the jet fuel being hedged. Hedge ineffectiveness gains in the first half of 2006 totaled $5 million.

Income Taxes. Income tax expense in the first half of 2007 is attributable to the federal Alternative Minimum Tax and state and foreign income taxes. We did not otherwise record any income tax expense related to our pretax income in the first half of 2007 or 2006 due to the utilization of book net operating losses for which we had not previously recognized a benefit.

Segment Results of Operations

Statistical Information. Certain statistical information for our segments' operations for the six months ended June 30 is as follows:

   

Increase  

 

 2007   

   2006   

(Decrease)

       

Mainline Operations:

     

Passengers (thousands)

25,362

24,232

4.7 %

Revenue passenger miles (millions)

41,155

38,651

6.5 %

Available seat miles (millions)

50,538

47,919

5.5 %

Passenger load factor

81.4%

80.7%

0.7 pts.

Cargo ton miles (millions)

507

525

(3.4)%

       

Passenger revenue per available seat mile (cents)

10.32

9.96

3.6 %

Total revenue per available seat mile (cents)

11.51

11.14

3.3 %

Average yield per revenue passenger mile (cents)

12.67

12.34

2.7 %

Average fare per revenue passenger

$207.72

$199.19

4.3 %

       

Cost per available seat mile, including special charges (cents) (1)

10.69

10.54

1.4 %

Average price per gallon of fuel, including fuel taxes (cents)

199.10

201.09

(1.0)%

Fuel gallons consumed (millions)

756

722

4.7 %

       

Actual aircraft in fleet at end of period

368

360

2.2 %

Average length of aircraft flight (miles)

1,433

1,418

1.1 %

Average daily utilization of each aircraft (hours)

11:32

11:03

4.3 %

       

Regional Operations:

     

Passengers (thousands)

8,934

8,958

(0.3)%

Revenue passenger miles (millions)

4,918

5,052

(2.7)%

Available seat miles (millions)

6,303

6,456

(2.4)%

Passenger load factor

78.0%

78.3%

(0.3) pts.

Passenger revenue per available seat mile (cents)

17.08

17.65

(3.2)%

Average yield per revenue passenger mile (cents)

21.89

22.56

(3.0)%

Actual aircraft in fleet at end of period

257

274

(6.2)%

  1. Includes special charges which represented 0.04 and 0.01 cents per available seat mile for the six months ended June 30, 2007 and 2006, respectively.


Mainline Results of Operations. Significant components of our mainline segment's operating results for the six months ended June 30 are as follows (in millions, except percentage changes):

 

  2007  

  2006  

Increase  
(Decrease)

% Increase
(Decrease)

         

Operating Revenue

$5,818

$5,337 

$481 

 

9.0 %

 
             

Operating Expenses:

           

  Wages, salaries and related costs

1,543

1,394 

149 

 

10.7 %

 

  Aircraft fuel and related taxes

1,505

1,452 

53 

 

3.7 %

 

  Aircraft rentals

339

339 

 

-     

 

  Landing fees and other rentals

359

361 

(2)

 

(0.6)%

 

  Distribution costs

288

281 

 

2.5 %

 

  Maintenance, materials and repairs

313

267 

46 

 

17.2 %

 

  Depreciation and amortization

193

187 

 

3.2 %

 

  Passenger services

182

163 

19 

 

11.7 %

 

  Special charges

18

15 

 

NM    

 

  Other

  664

   605 

  59 

 

9.8 %

 
 

5,404

5,052 

352 

 

7.0 %

 
             

Operating Income

$  414

$   285 

$129 

 

45.3 %

 


The variances in specific line items for the mainline segment are due to the same factors discussed under consolidated results of operations.

Regional Results of Operations. Significant components of our regional segment's operating results for the six months ended June 30 are as follows (in millions, except percentage changes):

   

Increase  

% Increase

 

  2007  

  2006  

(Decrease)

(Decrease) 

         

Operating Revenue

$1,071 

$1,116 

$(45)

 

(4.0)%

 
             

Operating Expenses:

           

  Wages, salaries and related costs

25 

22 

 

13.6 %

 

  Regional capacity purchase, net

873 

869 

 

0.5 %

 

  Aircraft rentals

157 

154 

 

1.9 %

 

  Landing fees and other rentals

25 

22 

 

13.6 %

 

  Distribution costs

49 

57 

(8)

 

(14.0)%

 

  Depreciation and amortization

 

16.7 %

 

  Passenger services

(1)

 

(12.5)%

 

  Other

     15 

       8 

  7 

 

87.5 %

 
 

1,158 

1,146 

 12 

 

1.0 %

 
             

Operating Loss

$  (87)

$  (30)

$ 57 

 

190.0%

 

The reported results of our regional segment do not reflect the total contribution of the regional segment to our system-wide operations. The regional segment generates revenue for the mainline segment as it feeds passengers from smaller cities into our hubs. The variances in specific line items for the regional segment reflect generally the same factors discussed under consolidated results of operations.

 

LIQUIDITY AND CAPITAL RESOURCES

Current Liquidity

As of June 30, 2007, we had $3.2 billion in unrestricted cash, cash equivalents and short-term investments, which is $692 million higher than at December 31, 2006. At June 30, 2007, we also had $202 million of restricted cash, which is primarily collateral for estimated future workers' compensation claims, performance bonds, letters of credit and credit card processing contracts. Restricted cash at December 31, 2006 totaled $265 million.

Sources and Uses of Cash

Operating Activities. Cash flows provided by operations for the six months ended June 30, 2007 were $968 million compared to $978 million in the same period in 2006. The decrease in cash flows provided by operations in 2007 compared to 2006 is primarily the result of $111 million of profit sharing paid to our employees and $39 million of higher contributions to our defined benefit pension plans, both of which occurred in 2007, partially offset by an increase in operating income and advance ticket sales associated with increased capacity.

Investing Activities. Cash flows provided by (used in) investing activities for the six months ended June 30 were as follows (in millions):

   

Cash     

   

Increase  

 

 2007   

   2006   

(Decrease)

       

Capital expenditures

$(155)

$(163)

$  8 

 

Sale (purchase) of short-term investments, net

(70)

(36)

(34)

 

Purchase deposits paid in connection with future
  aircraft deliveries, net


(62)


(128)


66 

 

Decrease (increase) in restricted cash, net

63 

(7)

70 

 

Proceeds from sale of Holdings shares

35 

35 

 

Proceeds from dispositions of property and equipment

    7 

   11  

   (4)

 
 

$(182)

$(323)

$141 

 


We have substantial commitments for capital expenditures, including for the acquisition of new aircraft. Net capital expenditures for the full year 2007 are expected to be $430 million, or $635 million after considering purchase deposits to be paid, net of purchase deposits to be refunded. Projected net capital expenditures for 2007 consist of $160 million of fleet expenditures, $215 million of non-fleet expenditures (primarily for ground service equipment and terminal enhancements) and $55 million for rotable parts and capitalized interest.

During the six months ended June 30, 2007, purchase deposits paid were lower than in the first six months of 2006 as the result of pre-funding $103 million of purchase deposits on Boeing aircraft in the first quarter of 2006.

The decrease in restricted cash is the result of the return of $67 million cash collateral in the first quarter of 2007 from our U.S. bank card processor, discussed in "Other Liquidity Matters" below.


In January 2007, we sold substantially all of our shares of Holdings common stock to third parties for cash proceeds of $35 million. We recognized a gain of $7 million in the first quarter of 2007 as a result of these sales. We contributed substantially all of the $35 million proceeds to our defined benefit pension plans in February 2007. We sold the remaining shares of Holdings common stock to third parties in April 2007 and no longer own any shares of Holdings common stock.

We expect to sell our interest in ARINC no later than October 31, 2007, subject to regulatory approval and other customary closing conditions. Many of these conditions are outside of our control, and we cannot give any assurances that the closing of the transaction will occur. Upon closing, we expect to receive cash proceeds of approximately $30 million.

Financing Activities. Cash flows provided by (used in) financing activities for the six months ended June 30 were as follows (in millions):

   

Cash     

   

Increase  

 

 2007   

   2006   

(Decrease)

       

Payments on long-term debt and capital lease obligations

$ (213)

$ (556)

$ 343 

 

Proceeds from issuance of long-term debt

25 

336 

(311)

 

Proceeds from issuance of common stock pursuant to stock plans
and other


   24 


   44 


 (20)


 

$(164)

$(176)

$  12 

 

Cash flows used in financing activities decreased due to lower repayments in the first half of 2007. In January 2007, $170 million in principal amount of our 4.5% Convertible Notes due on February 1, 2007 was converted by the holders into 4.3 million shares of our Class B common stock at a conversion price of $40 per share. The remaining $30 million in principal amount was paid on February 1, 2007. Other payments on long-term debt during the 2007 include pre-payments totaling $31 million which were due later in 2007 or in 2008. In March 2006, we elected to pre-pay $96 million of debt due in February 2007.

Proceeds from the issuance of long-term debt in the first half of 2007 relate to the refinancing of debt secured by three 737-500 aircraft. Proceeds from the issuance of long-term debt in the first half of 2006 include $320 million related to the refinancing of floating rate debt secured by our spare parts inventory that was originally due to mature in 2007.

During the first half of 2007, we incurred $190 million of floating rate indebtedness pursuant to existing finance agreements secured by two 777-200ER aircraft that were delivered in March and April 2007. This indebtedness consists of $156 million of senior notes due in 2019 and $34 million of junior notes due in 2014. The loans bear interest at LIBOR plus a blended margin of approximately 1.9% per year. The commitments under these finance agreements are now fully funded.

On April 10, 2007, we obtained financing for 12 Boeing 737-800s and 18 Boeing 737-900ERs. We expect to apply the financing to 30 of the 33 Boeing 737 aircraft scheduled to be delivered in 2008, although we may instead choose to substitute certain Boeing 737 aircraft scheduled to be delivered in the first quarter of 2009. Pass-through trusts raised $1.1 billion through the issuance of three classes of pass-through certificates. Class A certificates, with an aggregate principal amount of $757 million, bear interest at 5.983%, Class B certificates, with an aggregate principal amount of $222 million, bear interest at 6.903% and Class C certificates, with an aggregate principal amount of $168 million, bear interest at 7.339%. The proceeds from the sale of the certificates will initially be held in escrow by the trusts and not reported as debt on our consolidated balance sheet because the proceeds held by the trusts are not our assets and interest earned on the proceeds as well as any unused proceeds will be distributed by the trusts directly to the certificate holders. As we take delivery of each aircraft, we will issue equipment notes to the trusts, which will purchase such notes with a portion of the escrowed funds. We will use the proceeds to finance the purchase of the aircraft and will record the principal amount of the equipment notes that we issue as debt on our consolidated balance sheet. Principal payments on the equipment notes and the corresponding distribution of these payments to certificate holders will begin in April 2010 and will end in April 2022 for Class A and B certificates and April 2014 for Class C certificates. Additionally, the Class A and B certificates have the benefit of a liquidity facility under which a third party agrees to make three semiannual interest payments on the certificates if a default in the payment of interest occurs.

In addition, we have manufacturer backstop financing for up to 22 (depending on the model selected) of the 24 Boeing 737 aircraft scheduled to be delivered through the end of 2009 and not otherwise covered by the financing described above. However, we do not have backstop financing or any other financing currently in place for the remaining 12 Boeing 737 aircraft on order, nor do we have backstop financing or any other financing for the 25 Boeing 787 aircraft on order. Further financing will be needed to satisfy our capital commitments for our firm aircraft and other related capital expenditures. We can provide no assurance that such further financing will be available.

Other Liquidity Matters

Financeable Assets. At June 30, 2007, we had approximately $5.3 billion (including current maturities) of long-term debt and capital lease obligations. We do not currently have any undrawn lines of credit or revolving credit facilities and substantially all of our otherwise readily financeable assets are encumbered. However, our remaining interest in Copa, which had a market value of $294 million at June 30, 2007, is not pledged as collateral under any of our debt, although there are contractual limitations on our ability to dispose of this asset. We were in compliance with all debt covenants at June 30, 2007.

Credit Ratings. At June 30, 2007, our senior unsecured debt was rated B3 by Moody's and CCC+ by Standard & Poor's. While Moody's upgraded our senior unsecured debt rating from Caa1 in March 2007, our credit ratings remain significantly below-investment grade. Although we obtained favorable terms in the April 2007 issuance of $1.1 billion in pass through certificates (discussed above under "Sources and Uses of Cash"), our current credit ratings increase the costs we incur when issuing debt, adversely affect the terms of such debt and limit our financing options. Additional reductions in our credit ratings could further increase our borrowing costs and reduce the availability of financing to us in the future. We do not have any debt obligations that would be accelerated as a result of a credit rating downgrade. However, we would have to post additional collateral of approximately $188 million under our U.S. bank card processing agreement if our senior unsecured debt rating falls below Caa3 as rated by Moody's or CCC- as rated by Standard & Poor's. We would also be required to post additional collateral of up to $24 million under our worker's compensation program if our senior unsecured debt rating falls below Caa2 as rated by Moody's or CCC+ as rated by Standard & Poor's.

Bank Card Processing Agreement. Our U.S. bank card processing agreement also contains financial covenants which require, among other things, that we maintain a minimum EBITDAR (generally, earnings before interest, taxes, depreciation, amortization, aircraft rentals and income from other companies, adjusted for special items) to fixed charges (interest and aircraft rentals) ratio for the preceding 12 months of 1.1 to 1.0. The liquidity covenant requires us to maintain a minimum level of $1.0 billion of unrestricted cash and short-term investments and a minimum ratio of unrestricted cash and short-term investments to current liabilities at each month end of 0.29 to 1.0. Although we are currently in compliance with all of the covenants, failure to maintain compliance would result in our being required to post up to an additional $684 million of cash collateral, which would materially adversely affect our liquidity. Depending on our unrestricted cash and short-term investments balance at the time, the posting of a significant amount of cash collateral could cause our unrestricted cash and short-term investments balance to fall below the $1.0 billion minimum balance required under our $350 million secured term loan facility, resulting in a default under that facility. During the first quarter of 2007, the bank card processor under this agreement returned $67 million of our collateral to us. If we cease to comply with the financial covenants discussed above or if our unrestricted cash and short-term investments balance falls below $2.0 billion, the bank card processor can require us to redeposit the collateral.

Pension Plans. We have noncontributory defined benefit pension plans in which substantially all of our U.S. employees participate, other than Chelsea Food Services and CMI employees. Future benefit accruals for our pilots under the pilot-only defined benefit pension plan ceased as of May 31, 2005. Funding requirements for defined benefit pension plans are determined by government regulations. During the first half of 2007, we contributed $136 million to our defined benefit pension plans. We contributed an additional $75 million to our defined benefit pension plans in July 2007. We expect to contribute more than $325 million to our defined benefit pension plans during 2007, significantly exceeding our minimum funding requirements of $187 million during the current calendar year.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

There have been no material changes in market risk from the information provided in Item 7A. "Quantitative and Qualitative Disclosures About Market Risk" in our 2006 Form 10-K except as follows:

Aircraft Fuel. As of June 30, 2007, we had hedged approximately 30% and 10% of our projected fuel requirements for the third and fourth quarters of 2007, respectively, using heating oil option contracts forming zero cost collars with a weighted average call price of $2.04 per gallon and a weighted average put price of $1.87 per gallon. At June 30, 2007, the fair value of our fuel hedges was $16 million and is included in prepayments and other current assets in our consolidated balance sheet. Of this total, $10 million was ineffective and recognized as other nonoperating income in the second quarter of 2007. This ineffectiveness arises because our heating oil collars have experienced a relatively higher increase in value than the jet fuel being hedged. We estimate that a 10% increase in the price of heating oil at June 30, 2007 would increase the fair value related to the fuel hedges outstanding at that date by $22 million.

Foreign Currency. At June 30, 2007, we have forward contracts outstanding to hedge the following cash flows:

  • Approximately 34% of our projected British pound-denominated cash flows through the first quarter of 2008
  • Approximately 54% of our projected euro-denominated cash flows through the fourth quarter of 2007
  • Approximately 42% of our projected Canadian dollar-denominated cash flows through the fourth quarter of 2008

A uniform 10% strengthening in the value of the U.S. dollar relative to each foreign currency would have the following impact on our existing forward contracts at June 30, 2007 (in millions):

 

Increase in
Fair Value

Increase in          
Underlying Exposure

Resulting
Net Loss

       

British pound

$ 8

 

$27

 

$(19)

 

Euro

2

 

4

 

(2)

 

Canadian dollar

7

 

18

 

(11)

 


Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer and Chief Financial Officer performed an evaluation of our disclosure controls and procedures, which have been designed to provide reasonable assurance that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is (i) accumulated and communicated to the Company's management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure and (ii) recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. They concluded that the controls and procedures were effective as of June 30, 2007 to provide reasonable assurance of the achievement of these objectives. While our disclosure controls and procedures provide reasonable assurance that the appropriate information will be available on a timely basis, this assurance is subject to limitations inherent in any control system, no matter how well it may be designed or administered.

Changes in Internal Controls. There was no change in our internal control over financial reporting during the quarter ended June 30, 2007, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

During the period between 1997 and 2001, we reduced or capped the base commissions that we paid to domestic travel agents, and in 2002 we eliminated those base commissions. These actions were similar to those also taken by other air carriers. We are a defendant, along with several other air carriers, in two lawsuits brought by travel agencies that purportedly opted out of a prior class action entitled Sarah Futch Hall d/b/a/ Travel Specialists v. United Air Lines, et al. (U.S.D.C., Eastern District of North Carolina), filed on June 21, 2000, in which the defendant airlines prevailed on summary judgment that was upheld on appeal. These similar suits against Continental and other major carriers allege violations of antitrust laws in reducing and ultimately eliminating the base commissions formerly paid to travel agents. The pending cases are Tam Travel, Inc. v. Delta Air Lines, Inc., et al. (U.S.D.C., Northern District of California), filed on April 9, 2003 and Swope Travel Agency, et al. v. Orbitz LLC et al. (U.S.D.C., Eastern District of Texas), filed on June 5, 2003. By order dated November 10, 2003, these actions were transferred and consolidated for pretrial purposes by the Judicial Panel on Multidistrict Litigation to the Northern District of Ohio. Discovery has commenced. On September 14, 2006, the judge for the consolidated lawsuit issued an order dismissing 28 plaintiffs in the Swope case for their failure to properly opt-out of the Hall case. Consequently, a total of 90 travel agency plaintiffs remain in the two cases. In each of these cases, we believe the plaintiffs' claims are without merit and we are vigorously defending the lawsuits. Nevertheless, a final adverse court decision awarding substantial money damages could have a material adverse effect on our results of operations, financial condition or liquidity.

On June 7, 2007, Ronald A. Katz Technology Licensing, L.P. filed a lawsuit in the U.S. District Court for the Eastern District of Texas alleging that Continental infringes certain patents relating to automated telephone call processing systems. The plaintiff is seeking unspecified monetary damages, trebling of damages based on alleged willful infringement, attorney's fees and injunctive relief. On June 20, 2007, the case, which includes numerous other defendants, was transferred to the United States District Court for the Central District of California for consolidated or coordinated pretrial proceedings. We believe the plaintiff's claims are without merit and we are vigorously defending this lawsuit. Although this lawsuit is currently in the initial pleading stage and no reasonable estimate of potential losses in the event of a negative outcome can be made, a final adverse court decision awarding substantial money damages or imposing material restrictions on our ability to operate our existing automated telephone call processing systems could have a material adverse effect on our results of operations, financial condition or liquidity.

Item 1A. Risk Factors

Part I, Item 1A, "Risk Factors," of our 2006 Form 10-K includes a detailed discussion of our risk factors. The information presented below updates, and should be read in conjunction with, the risk factors and information disclosed in our 2006 Form 10-K.

Our high leverage may affect our ability to satisfy our significant financing needs or meet our obligations. As is the case with our principal competitors, we have a high proportion of debt compared to our capital. We have a significant amount of fixed obligations, including debt, aircraft leases and financings, leases of airport property and other facilities and pension funding obligations. At June 30, 2007, we had approximately $5.3 billion (including current maturities) of long-term debt and capital lease obligations.

In addition, we have substantial commitments for capital expenditures, including the acquisition of new aircraft and related spare engines. Although we have entered into agreements to finance 30 Boeing 737 aircraft scheduled to be delivered in 2008 or the first quarter of 2009 and have manufacturer backstop financing for up to 22 (depending on the model selected) of the remaining 24 Boeing 737 aircraft scheduled to be delivered through the end of 2009, we do not have backstop financing or any other financing currently in place for the remaining aircraft on order. Further financing will be needed to satisfy our capital commitments for our firm aircraft and other related capital expenditures. We can provide no assurance that such further financing will be available.

The Airline Industry is Highly Competitive and Susceptible to Price Discounting. The U.S. airline industry is characterized by substantial price competition, especially in domestic markets. Carriers use discount fares to stimulate traffic during periods of slack demand or when they begin service to new cities or have excess capacity to generate cash flow and to establish or increase market share. Some of our competitors have substantially greater financial resources (including more favorable hedges against fuel price increases) and/or lower cost structures than we do. In recent years, the domestic market share held by low-cost carriers has increased significantly and is expected to continue to increase, which is dramatically changing the airline industry. The increased market presence of low-cost carriers, which engage in substantial price discounting, has diminished the ability of the network carriers to maintain sufficient pricing structures in domestic markets to achieve profitability. This has contributed to the dramatic losses for us and the airline industry generally. For example, a low-cost carrier began to directly compete with us on flights between New York Liberty and destinations in Florida in 2005, and entered the New York to Houston market in 2006. We are responding vigorously to this challenge, but have experienced decreased yields on affected flights. We cannot predict whether or for how long these trends will continue.

In addition to price competition, airlines also compete for market share by increasing the size of their route system and the number of markets they serve. Several of our domestic competitors have announced aggressive plans to expand into international markets, including some destinations that we currently serve. Additionally, the recent "open skies" agreement between the U.S. and the European Union will become effective on March 30, 2008 and could result in increased competition from European and U.S. airlines in these international markets, and may give rise to additional consolidation or better integration opportunities among European carriers. In addition, Air France-KLM, Delta Air Lines and Northwest Airlines have filed for anti-trust immunity for a new trans-Atlantic joint venture and also to coordinate with Alitalia and CSA Czech Airlines. Our ability to compete effectively in this new environment will depend in part on our obtaining commercially viable operating slots and facilities at London's Heathrow Airport. The increased competition in these international markets, particularly to the extent our competitors engage in price discounting, may have a material adverse effect on our results of operations, financial condition or liquidity.

We are also facing stronger competition from carriers that have emerged from bankruptcy, including Delta Air Lines, Northwest Airlines, US Airways and United Airlines. Carriers typically emerge from bankruptcy with substantially lower costs than ours achieved by cost reductions through, among other things, reducing or discharging debt, lease and pension obligations and reducing wages and benefits.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.


Item 3. Defaults Upon Senior Securities.

None.

Item 4. Submission of Matters to a Vote of Security Holders.

Continental's Annual Meeting of Stockholders was held on June 12, 2007. The following individuals were elected to Continental's Board of Directors to hold office until the next annual meeting of stockholders.

NOMINEE

VOTES FOR 

VOTES WITHHELD

     

Thomas J. Barrack,Jr.

81,633,554

1,369,838

 

Kirbyjon H. Caldwell

82,317,232

686,160

 

Lawrence W. Kellner

81,813,251

1,190,141

 

Douglas H. McCorkindale

81,524,302

1,479,090

 

Henry L. Meyer III

82,044,134

959,258

 

Oscar Munoz

82,335,595

667,797

 

George G.C. Parker

81,430,341

1,573,051

 

Jeffrey A. Smisek

81,672,050

1,331,342

 

Karen Hastie Williams

75,588,582

7,414,810

 

Ronald B. Woodard

81,881,757

1,121,635

 

Charles A. Yamarone

81,635,078

1,368,314

 

A proposal to ratify the appointment of Ernst & Young LLP as our independent auditors for the fiscal year ending December 31, 2007 was voted on by the stockholders as follows:


  VOTES FOR  


VOTES AGAINST


VOTES ABSTAINING

 
       

82,835,560

76,232

91,600

     

A stockholder proposal related to our political activities was voted on by the stockholders as follows:


  VOTES FOR  


VOTES AGAINST


VOTES ABSTAINING

 
       

3,785,266

53,157,780

11,648,745

     

A stockholder proposal related to our performance-based equity compensation for senior officers was voted on by the stockholders as follows:


  VOTES FOR  


VOTES AGAINST


VOTES ABSTAINING

 
       

4,719,705

63,436,147

435,940

     

Item 5.  Other Information.

None.

Item 6. Exhibits.

 

3.1

Amended and Restated Certificate of Incorporation of Continental, as amended through June 6, 2006 - incorporated by reference to Exhibit 3.1 to Continental's Annual Report on Form 10-K for the year ended December 31, 2006 (File no. 1-10323).

 

3.1(a)

Certificate of Amendment of Certificate of Designation of Series A Junior Participating Preferred Stock - incorporated by reference to Exhibit 3.1(b) to Continental's Annual Report on Form 10-K for the year ended December 31, 2001 (File no. 1-10323).

 

3.1(a)(i)

Certificate of Amendment of Certificate of Designation of Series A Junior Participating Preferred Stock - incorporated by reference to Exhibit 3.1(b) to Continental's Annual Report on Form 10-K for the year ended December 31, 2001 (File no. 1-10323).

 

3.1(b)

Certificate of Designation of Series B Preferred Stock - incorporated by reference to Exhibit 3.1(b) to Continental's Annual Report on Form l0-K for the year ended December 31, 2000 (File no. 1-10323).

 

3.1(c)

Corrected Certificate of Designations of Series B Preferred Stock - incorporated by reference to the Exhibit 3.1 to Continental's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 (File no. 1-10323).

 

3.2

Bylaws of Continental, as amended through November 30, 2006 - incorporated by reference to Exhibit 3.2 to Continental's Current Report on Form 8-K dated November 29, 2006.

 

10.1

Supplemental Agreement No. 41, dated June 1, 2007, to Purchase Agreement No. 1951, dated July 23, 1996, between Continental and The Boeing Company ("P.A. 1951"). (1)

10.2

Supplemental Agreement No. 42, dated June 12, 2007, to P.A. 1951. (1)

31.1

Rule 13a-14 (a)/15d-14 (a) Certification of Chief Executive Officer.

 

31.2

Rule 13a-14 (a)/15d-14 (a) Certification of Chief Financial Officer.

 

32.1

Section 1350 Certifications.

  1. Continental has applied to the Commission for confidential treatment of a portion of this exhibit.

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: July 19, 2007    

by:

/s/ Jeffrey J. Misner                        

   

Jeffrey J. Misner

   

Executive Vice President and

   

Chief Financial Officer

   

(On behalf of Registrant)

     

Date: July 19, 2007    

by:

/s/ Chris Kenny                               

   

Chris Kenny

   

Vice President and Controller

   

(Principal Accounting Officer)

 

INDEX TO EXHIBITS
OF
CONTINENTAL AIRLINES, INC.

3.1

Amended and Restated Certificate of Incorporation of Continental, as amended through June 6, 2006 - incorporated by reference to Exhibit 3.1 to Continental's Annual Report on Form 10-K for the year ended December 31, 2006 (File no. 1-10323).

3.1(a)

Certificate of Amendment of Certificate of Designation of Series A Junior Participating Preferred Stock - incorporated by reference to Exhibit 3.1(b) to Continental's Annual Report on Form 10-K for the year ended December 31, 2001 (File no. 1-10323).

3.1(a)(i)

Certificate of Amendment of Certificate of Designation of Series A Junior Participating Preferred Stock - incorporated by reference to Exhibit 3.1(b) to Continental's Annual Report on Form 10-K for the year ended December 31, 2001 (File no. 1-10323).

3.1(b)

Certificate of Designation of Series B Preferred Stock - incorporated by reference to Exhibit 3.1(b) to Continental's Annual Report on Form l0-K for the year ended December 31, 2000 (File no. 1-10323).

3.1(c)

Corrected Certificate of Designations of Series B Preferred Stock - incorporated by reference to the Exhibit 3.1 to Continental's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 (File no. 1-10323).

3.2

Bylaws of Continental, as amended through November 30, 2006 - incorporated by reference to Exhibit 3.2 to Continental's Current Report on Form 8-K dated November 29, 2006.

10.1

Supplemental Agreement No. 41, dated June 1, 2007, to Purchase Agreement No. 1951, dated July 23, 1996, between Continental and The Boeing Company ("P.A. 1951"). (1)

10.2

Supplemental Agreement No. 42, dated June 12, 2007, to P.A. 1951. (1)

31.1

Rule 13a-14 (a)/15d-14 (a) Certification of Chief Executive Officer.

31.2

Rule 13a-14 (a)/15d-14 (a) Certification of Chief Financial Officer.

32.1

Section 1350 Certifications.

  1. Continental has applied to the Commission for confidential treatment of a portion of this exhibit.
CERTIFICATION

EXHBIT 10.1

Supplemental Agreement No. 41

to

Purchase Agreement No. 1951

between

The Boeing Company

and

Continental Airlines, Inc.

Relating to Boeing Model 737 Aircraft

 

 

THIS SUPPLEMENTAL AGREEMENT, entered into as of

June 1, 2007, by and between THE BOEING COMPANY (Boeing) and Continental Airlines, Inc. (Buyer);

WHEREAS, the parties hereto entered into Purchase Agreement No. 1951 dated July 23, 1996 (the Agreement), as amended and supplemented, relating to Boeing Model 737-500, 737-600, 737-700, 737-800, 737-900 and 737-900ER aircraft (the Aircraft);

WHEREAS, Buyer wishes to exercise [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

WHEREAS, Buyer wishes to exercise its [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

WHEREAS, Buyer wishes to exercise its [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

WHEREAS, Boeing agrees to [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

WHEREAS, Boeing agrees to [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

NOW THEREFORE, in consideration of the mutual covenants herein contained, the parties agree to amend the Agreement as follows:

1. Table of Contents, Articles, Tables and Exhibits, and Letter Agreements:

    1. Remove and replace, in its entirety, the "Table of Contents", with the Table of Contents attached hereto, to reflect the changes made by this Supplemental Agreement No. 41.
    2. Remove and replace, in its entirety, page T-2-2, T-2-3, and T-2-4 of Table 1 entitled the "Aircraft Deliveries and Descriptions, Model 737-700 Aircraft", with the revised page T-2-2 of Table 1 attached hereto.
    3. Add page T-3-5 to Table 1 entitled the "Aircraft Deliveries and Descriptions, Model 737-800 Aircraft".
    4. Remove, in its entirety, page T-5-2 of Table 1 entitled, "Aircraft Deliveries and Descriptions, Model 737-900 Aircraft".
    5. Remove and replace, in its entirety, page T-6-1 and T-7-1 of Table 1 entitled, "Aircraft Deliveries and Descriptions, Model 737-900ER Aircraft", with the revised page T-6-1 and T-6-2 attached hereto.
    6. Remove and replace, in its entirety, "Exhibit A-6", with the revised Exhibit A-1.1 (737-724 Aircraft [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] attached hereto.
    7. Remove and replace, in its entirety, "Exhibit A-7", with the revised Exhibit A-2.1 (737-824 Aircraft [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] attached hereto.
    8. Add Exhibit A-2.2 (737-824 Aircraft [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] attached hereto.
    9. Remove and replace Exhibit A-9, with the revised Exhibit A-6 (737-900ER Aircraft) attached hereto.
    10. Remove Exhibit A-8, in its entirety (737-924 Aircraft [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]
    11. Remove and replace, in its entirety, "Supplemental Exhibit D-3", with the revised Supplemental Exhibit D-3 attached hereto.
    12. Add "Supplemental Exhibit D-4", to reflect the changes to the Bureau of Labor Statistics related to Aircraft [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]
    13. Remove and replace, in its entirety, Letter Agreement 6-1162-GOC-131R7 "Special Matters", with the revised Letter Agreement 6-1162-GOC-131R8 attached hereto.

The Agreement will be deemed to be supplemented to the extent herein provided as of the date hereof and as so supplemented will continue in full force and effect.

EXECUTED IN DUPLICATE as of the day and year first written above.

 

THE BOEING COMPANY Continental Airlines, Inc.

 

 

 

By: /s/ Anthony J. Hicker By: /s/ Gerald Laderman

Its: Attorney-In-Fact   Its: Senior Vice President -

     Finance and Treasurer

TABLE OF CONTENTS

Page SA

Number Number

ARTICLES

1. Subject Matter of Sale 1-1 SA 39

2. Delivery, Title and Risk
of Loss 2-1

3. Price of Aircraft 3-1 SA 39

4. Taxes 4-1

5. Payment 5-1

6. Excusable Delay 6-1

7. Changes to the Detail
Specification 7-1 SA 39

8. Federal Aviation Requirements and
Certificates and Export License 8-1 SA 39

9. Representatives, Inspection,
Flights and Test Data 9-1

10. Assignment, Resale or Lease 10-1

11. Termination for Certain Events 11-1

12. Product Assurance; Disclaimer and Release: Exclusion

Of Liabilities; Customer Support; Indemnification and

Insurance 12-1

13. Buyer Furnished Equipment and
Spare Parts 13-1

14. Contractual Notices and Requests 14-1 SA 39

15. Miscellaneous 15-1

 

TABLE OF CONTENTS

Page SA

Number Number

TABLES

1. Aircraft Deliveries and
Descriptions - 737-500 T-1 SA 3

Aircraft Deliveries and
Descriptions - 737-700 T-2 SA 41

Aircraft Deliveries and
Descriptions - 737-800 T-3 SA 41

Aircraft Deliveries and

Descriptions - 737-600 T-4 SA 4

Aircraft Deliveries and
Descriptions - 737-900 T-5 SA 39

Aircraft Deliveries and
Descriptions - 737-900ER T-6 SA 41

EXHIBITS

A-1 Aircraft Configuration - Model 737-724

(Aircraft delivering through July 2004) SA 26

A-1.1 Aircraft Configuration - Model 737-724

(Aircraft delivering after July 2004) SA 41

A-2 Aircraft Configuration - Model 737-824

(Aircraft delivering through July 2004) SA 26

A-2.1 Aircraft Configuration - Model 737-824

(Aircraft delivering after July 2004

through December 2007) SA 41

A-2.2 Aircraft Configuration - Model 737-824

(Aircraft delivering after December 2007 SA 41

A-3 Aircraft Configuration - Model 737-624 SA 1

A-4 Aircraft Configuration - Model 737-524 SA 3

A-5 Aircraft Configuration - Model 737-924

SA 26

A-6 Aircraft Configuration - Model 737-92ER SA 41

 

TABLE OF CONTENTS

SA

Number

EXHIBITS (continued)

B Product Assurance Document SA 1

C Customer Support Document - Code Two -
Major Model Differences SA 1

C1 Customer Support Document - Code Three -

Minor Model Differences SA 39

D Aircraft Price Adjustments - Next
Generation Aircraft (1995 Base Price -

Aircraft delivering through July 2004) SA 1

D1 Airframe and Engine Price Adjustments -

Current Generation Aircraft SA 1

D2 Aircraft Price Adjustments - Next
Generation Aircraft (1997 Base Price - Aircraft

delivering through July 2004) SA 5

D3 Aircraft Price Adjustments - Next
Generation Aircraft (July 2003 Base Price -

Aircraft delivering through December 2007) SA 41

D4 Aircraft Price Adjustments - Next

Generation Aircraft (Aircraft delivering in

or after January 2008) SA 41

E Buyer Furnished Equipment
Provisions Document SA 39

F Defined Terms Document SA 5

 

TABLE OF CONTENTS

SA

Number

LETTER AGREEMENTS

1951-1 Not Used

1951-2R4 Seller Purchased Equipment SA 39

1951-3R22 Option Aircraft-Model 737-824 Aircraft SA 38

1951-4R1 Waiver of Aircraft Demonstration SA 1

1951-5R3 Promotional Support - Next Generation

Aircraft SA 39

1951-6 Configuration Matters

1951-7R1 Spares Initial Provisioning SA 1

1951-8R2 Escalation Sharing - Next Generation
Aircraft SA 4

1951-9R18 Option Aircraft-Model 737-724 Aircraft SA 38

1951-11R1 Escalation Sharing-Current Generation
Aircraft SA 4

1951-12R7 Option Aircraft - Model 737-924 Aircraft SA 32

1951-13 Configuration Matters - Model 737-924 SA 5

    1. Installation of Cabin Systems Equipment

737-924 SA 22

1951-15 Configuration Matters - Model 737-924ER SA 39

 

 

 

 

TABLE OF CONTENTS

SA

Number

RESTRICTED LETTER AGREEMENTS

6-1162-MMF-295 Performance Guarantees - Model

737-724 Aircraft

6-1162-MMF-296 Performance Guarantees - Model

737-824 Aircraft

6-1162-MMF-308R4 Disclosure of Confidential

Information SA 39

6-1162-MMF-309R1 [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] SA 1

6-1162-MMF-311R5 [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] SA 39

6-1162-MMF-312R1 Special Purchase Agreement

Provisions SA 1

6-1162-MMF-319 Special Provisions Relating to the

Rescheduled Aircraft

6-1162-MMF-378R1 Performance Guarantees - Model

737-524 Aircraft SA 3

6-1162-GOC-015R1 [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] SA 31

6-1162-GOC-131R7 Special Matters SA 41

6-1162-DMH-365 Performance Guarantees - Model

737-924 Aircraft SA 5

6-1162-DMH-624 [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] SA 8

6-1162-DMH-680 Delivery Delay Resolution Program SA 9

6-1162-DMH-1020 [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] SA 14

6-1162-DMH-1035 [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] SA 15

6-1162-DMH-1054 [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] SA 16

6-1162-CHL-048 Rescheduled Aircraft Agreement SA 26

6-1162-CHL-195 Restructure Agreement for Model

737NG and 757-300 Aircraft SA 30

6-1162-MSA-768 Performance Guarantees - Model

737-924ER Aircraft SA 39

 

TABLE OF CONTENTS

 

SUPPLEMENTAL AGREEMENTS DATED AS OF:

Supplemental Agreement No. 1 October 10, 1996

Supplemental Agreement No. 2 March 5, 1997

Supplemental Agreement No. 3 July 17, 1997

Supplemental Agreement No. 4 October 10, 1997

Supplemental Agreement No. 5 May 21, 1998

Supplemental Agreement No. 6 July 30, 1998

Supplemental Agreement No. 7 November 12, 1998

Supplemental Agreement No. 8 December 7, 1998

Supplemental Agreement No. 9 February 18, 1999

Supplemental Agreement No. 10 March 19, 1999

Supplemental Agreement No. 11 May 14, 1999

Supplemental Agreement No. 12 July 2, 1999

Supplemental Agreement No. 13 October 13, 1999

Supplemental Agreement No. 14 December 13, 1999

Supplemental Agreement No. 15 January 13, 2000

Supplemental Agreement No. 16 March 17, 2000

Supplemental Agreement No. 17 May 16, 2000

Supplemental Agreement No. 18 September 11, 2000

Supplemental Agreement No. 19 October 31, 2000

Supplemental Agreement No. 20 December 31, 2000

Supplemental Agreement No. 21 March 30, 2001

TABLE OF CONTENTS

 

SUPPLEMENTAL AGREEMENTS DATED AS OF:

Supplemental Agreement No. 22 May 23, 2001

Supplemental Agreement No. 23 June 29, 2001

Supplemental Agreement No. 24 August 31, 2001

Supplemental Agreement No. 25 December 31, 2001

Supplemental Agreement No. 26 March 29, 2002

Supplemental Agreement No. 27 November 6, 2002

Supplemental Agreement No. 28 April 1, 2003

Supplemental Agreement No. 29 August 19, 2003

Supplemental Agreement No. 30 November 4, 2003

Supplemental Agreement No. 31 August 20, 2004

Supplemental Agreement No. 32 December 29, 2004

Supplemental Agreement No. 33 December 29, 2004

Supplemental Agreement No. 34 June 22, 2005

Supplemental Agreement No. 35 June 30, 2005

Supplemental Agreement No. 36 July 21, 2005

Supplemental Agreement No. 37 March 30, 2006

Supplemental Agreement No. 38 June 6, 2006

Supplemental Agreement No. 39 August 3, 2006

Supplemental Agreement No. 40 December 5, 2006

Supplemental Agreement No. 41 June 1, 2007

Table 1 to Purchase Agreement 1951

Aircraft Deliveries and Descriptions

Model l737-700 Aircraft

 

[CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

1951PA/CALContinental Airlines, Inc.

 

 

 

 

AIRCRAFT CONFIGURATION

between

THE BOEING COMPANY

and

Continental Airlines, Inc.

 

 

Exhibit A-1.1 to Purchase Agreement Number 1951

(737-724 Aircraft delivering August 2004 through December 2007)


AIRCRAFT CONFIGURATION

Dated                 

relating to

BOEING MODEL 737-724 AIRCRAFT

Exhibit A-1.1

 

The Detail Specification is Customer Detail Specification D6-38808-42 Revision A dated November 1, 1998. Such Detail Specification will be comprised of Boeing Configuration Specification D6-38808 Revision G dated April 29, 1997 as amended to incorporate the applicable specification language to reflect the effect of the changes set forth in the Change Requests and Master Changes listed below, including the effects of such changes on Manufacturer's Empty Weight (MEW) and Operating Empty Weight (OEW). Such Change Requests and Master Changes are set forth in Boeing Document D6-39049. As soon as practicable, Boeing will furnish to Buyer copies of the Detail Specification, which copies will reflect the effect of such changes. The Aircraft Basic Price will reflect and include all effects of such changes of price, except such Aircraft Basic Price will not include the price effects of Change Requests changing Buyer Furnished Equipment to Seller Purchased Equipment.

Exhibit A-1.1 to

Purchase Agreement No. 1951

Page 3

PRICE PER

AIRCRAFT

CHANGE NO. TITLE K [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

 

[CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

1951PA/CALContinental Airlines, Inc.

 

 

 

 

AIRCRAFT CONFIGURATION

between

 

THE BOEING COMPANY

and

Continental Airlines, Inc.

 

 

Exhibit A-2.1 to Purchase Agreement Number 1951

(737-824 Aircraft delivering August 2004 through December 2007)

 

AIRCRAFT CONFIGURATION

Dated

relating to

BOEING MODEL 737-824 AIRCRAFT

Exhibit A-2.1

The Detail Specification is Boeing Detail Specification D6-38808-43 dated October 2, 2001. Such Detail Specification will be comprised of Boeing Configuration Specification D6-38808 Revision G dated April 29, 1997 as amended to incorporate the applicable specification language to reflect the effect of the changes set forth in the Change Requests listed below, including the effects of such changes on Manufacturer's Empty Weight (MEW) and Operating Empty Weight (OEW). Such Change Requests are set forth in Boeing Document D6-39050. As soon as practicable, Boeing will furnish to Buyer copies of the Detail Specification, which copies will reflect the effect of such changes. The Aircraft Basic Price will reflect and include all effects of such changes on price, except such Aircraft Basic Price will not include the price effect of changing Buyer Furnished Equipment to Seller Purchased Equipment.

Exhibit A-2.1 to

Purchase Agreement No. 1951

Page 3

PRICE PER

AIRCRAFT

CHANGE NO. TITLE K [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

 

[CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

AIRCRAFT CONFIGURATION

between

THE BOEING COMPANY

and

Continental Airlines, Inc.

 

Exhibit A-2.2 to Purchase Agreement Number 1951

 

(737-800 Aircraft delivering in or after January 2008)

737-800 BOEING PROPRIETARY

Exhibit A-2.2













CR













TITLE

[CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

First of Model

Per A/C

[CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

Follow on Price

Per A/C

[CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

AIRCRAFT CONFIGURATION

between

THE BOEING COMPANY

and

Continental Airlines, Inc.

 

Exhibit A-6 to Purchase Agreement Number 1951

 

(737-924ER Aircraft)

 

737-900ER BOEING PROPRIETARY

Exhibit A-6













CR













TITLE

[CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

First of Model

Per A/C

[CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

Follow on Price

Per A/C

[CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

1951PA/CALCONTINENTAL AIRLINES, INC.

 

 

 

 

AIRCRAFT PRICE ADJUSTMENT

between

THE BOEING COMPANY

and

Continental Airlines, Inc.

 

 

 

 

Exhibit D-3 to Purchase Agreement Number 1951

 

Next Generation Aircraft

(Aircraft Delivering in August 2004 through December 2007)

PRICE ADJUSTMENT DUE TO

ECONOMIC FLUCTUATIONS

AIRCRAFT PRICE ADJUSTMENT

(July 2003 Base Price)

Aircraft Price Adjustment for New Generation Aircraft

(Aircraft delivering [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

1. Formula

The Aircraft Price Adjustment will be determined at the time of Aircraft delivery in accordance with the following formula:

Pa = (P) (L + M) - P

Where:

Pa = Airframe Price Adjustment.

P = Airframe Price plus Optional Features Price (as set forth in Article 3.2 of this Agreement).

L = [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] x (ECI 

ECIb)

M = [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] x [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

ECI = a value determined using the U.S. Department of Labor, Bureau of Labor Statistics [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] calculated by establishing a three-month arithmetic average value (expressed as a decimal and rounded to the nearest tenth) using the values for the [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] months prior to the month of scheduled delivery of the applicable Aircraft. As the Employment Cost Index values are released only on a quarterly basis, the value released for the month of March will be used for the months of January and February; the value for June used for April and May; the value for September used for July and August; and the value for December used for October and November.

ECIb = the base year index (as set forth in Table 1 for Aircraft [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] of this Purchase Agreement)

[CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] =

a value determined using the U.S. Department of Labor, Bureau of Labor Statistics [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT], calculated as a 3-month arithmetic average of the released monthly values (expressed as a decimal and rounded to the nearest tenth) using the values for the [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] prior to the month of scheduled delivery of the applicable Aircraft.

[CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] =

the base year index (as set forth in Table 1 for Aircraft [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] of this Purchase Agreement)

As an example, for an Aircraft scheduled to be delivered in the month of July, the months [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] will be utilized in determining the value of ECI and CPI.

Note: i. In determining the values of L and M, all calculations and resulting values will be expressed as a decimal rounded to the nearest ten-thousandth.

ii. [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] is the numeric ratio attributed to [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] in the Airframe Price Adjustment formula.

iii. [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] is the numeric ratio attributed to [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] in the Airframe Price Adjustment formula.

iv. The denominators (base year indices) are the actual average values reported by the U.S. Department of Labor, Bureau of Labor Statistics. The actual average values are calculated as a 3-month arithmetic average of the released monthly values (expressed as a decimal and rounded to the nearest tenth) using the values for the [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] months prior to the airframe base year. The applicable base year and corresponding denominator is provided by Boeing in Table 1 of this Purchase Agreement.

v. The final value of Pa will be rounded to the nearest dollar.

vi. [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

2. Values to be Utilized in the Event of [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

2.1 [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

2.2 Notwithstanding Article 2.1 above, if prior to the scheduled delivery month of an Aircraft the Bureau of Labor Statistics changes the base year for determination of the ECI and [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] values as defined above, such re-based values will be incorporated in the Airframe Price Adjustment calculation.

2.3 [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

2.4 If within 12 months of Aircraft delivery, the published index values are revised due to an acknowledged error by the Bureau of Labor Statistics, the Airframe Price Adjustment will be re-calculated using the revised index values (this does not include those values noted as preliminary by the Bureau of Labor Statistics). A credit memorandum or supplemental invoice will be issued for the Airframe Price Adjustment difference. Interest charges will not apply for the period of original invoice to issuance of credit memorandum or supplemental invoice.

Note: i. The values released by the Bureau of Labor Statistics and available to Boeing 30 days prior to the first day of the scheduled delivery month of an Aircraft will be used to determine the ECI and CPI values for the applicable months (including those noted as preliminary by the Bureau of Labor Statistics) to calculate the Airframe Price Adjustment for the Aircraft invoice at the time of delivery. The values will be considered final and no Airframe Price Adjustments will be made after Aircraft delivery for any subsequent changes in published Index values, subject always to paragraph 2.4 above.

ii. The maximum number of digits to the right of the decimal after rounding utilized in any part of the Airframe Price Adjustment equation will be 4, where rounding of the fourth digit will be increased to the next highest digit when the 5th digit is equal to 5 or greater.

 

ESCALATION ADJUSTMENT

 

AIRFRAME AND OPTIONAL FEATURES

 

between

THE BOEING COMPANY

and

CONTINENTAL AIRLINES, INC.

 

Exhibit D-4 to Purchase Agreement Number 1951

 

Next Generation Aircraft

(Aircraft delivering in or after January 2008)

 

1. Formula.

Airframe and Optional Features price adjustments (Airframe Price Adjustment) are used to allow prices to be stated in current year dollars at the signing of this Purchase Agreement and to adjust the amount to be paid by Customer at delivery for the effects of economic fluctuation. The Airframe Price Adjustment will be determined at the time of Aircraft delivery in accordance with the following formula:

Pa = (P) (L + M) - P

Where:

Pa = Airframe Price Adjustment. (Airframe Price includes the Engine Price at its basic thrust level.)

P = Airframe Price plus the price of the Optional Features (as set forth in Table 1 of this Purchase Agreement).

 

L = [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] x [(ECI   x (ECI-R

ECIb) ECI-Rb)]

Where:

ECI = three-month arithmetic average value of [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] for October, November, and December 2005, using [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT];

ECIb = base year airframe escalation index (as set forth in Table 1 of this Purchase Agreement);

ECI-R = a value determined using the U.S. Department of Labor, Bureau of Labor Statistics, [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] calculated by establishing a three-month arithmetic average value (expressed as a decimal and rounded to the nearest tenth) using the values for the [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] months prior to the month of scheduled delivery of the applicable Aircraft. As the Employment Cost Index values are only released on a quarterly basis, the value released for the first quarter will be used for the months of January, February, and March; the value released for the second quarter will be used for the months of April, May, and June; the value released for the third quarter will be used for the months of July, August, and September; the value released for the fourth quarter will be used for the months of [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

ECI-Rb = three-month arithmetic average value of 100.0 for October, November, and December 2005, using the ECI - NAICS Manufacturing [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] and

M = [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] x [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

Where:

 

[CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] = a value determined using the U.S. Department of Labor, Bureau of Labor Statistics, [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

calculated as a 3-month arithmetic average of the released monthly values (expressed as a decimal and rounded to the nearest tenth) using the values for the [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] months prior to the month of scheduled delivery of the applicable Aircraft.

CPIb = the base year airframe escalation index (as set forth in Table 1 of this Purchase Agreement); and

As an example, for an Aircraft scheduled to be delivered in the month of July, the months of [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] of the preceding year will be utilized in determining the value of ECI-R and [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

Note: i. In determining the values of L and M, all calculations and resulting values will be expressed as a decimal rounded to the nearest ten-thousandth.

ii. [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] is the numeric ratio attributed to [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] in the Airframe Price Adjustment formula.

iii. [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] is the numeric ratio attributed to [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] in the Airframe Price Adjustment formula.

iv. The denominators (base year indices) are the actual average values reported by the U.S. Department of Labor, Bureau of Labor Statistics. The actual average values are calculated as a 3-month arithmetic average of the released monthly values (expressed as a decimal and rounded to the nearest tenth) using the values for the [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] months prior to the airframe base year. The applicable base year and corresponding denominator is provided by Boeing in Table 1 of this Purchase Agreement.

v. The final value of Pa will be rounded to the nearest dollar.

vi. [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

2. Values to be Utilized in the Event of [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT].

2.1 [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

2.2 Notwithstanding Article 2.1 above, if prior to the scheduled delivery month of an Aircraft the Bureau of Labor Statistics changes the base year for determination of the ECI-R and [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] values as defined above, such re-based values will be incorporated in the Airframe Price Adjustment calculation.

2.3 [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

2.4 If within 12 months of Aircraft delivery, the published index values are revised due to an acknowledged error by the Bureau of Labor Statistics, the Airframe Price Adjustment will be re-calculated using the revised index values (this does not include those values noted as preliminary by the Bureau of Labor Statistics). A credit memorandum or supplemental invoice will be issued for the Airframe Price Adjustment difference. Interest charges will not apply for the period of original invoice to issuance of credit memorandum or supplemental invoice.

Note: i. The values released by the Bureau of Labor Statistics and available to Boeing 30 days prior to the first day of the scheduled delivery month of an Aircraft will be used to determine the ECI-R and [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] values for the applicable months (including those noted as preliminary by the Bureau of Labor Statistics) to calculate the Airframe Price Adjustment for the Aircraft invoice at the time of delivery. The values will be considered final and no Airframe Price Adjustments will be made after Aircraft delivery for any subsequent changes in published Index values, subject always to paragraph 2.4 above.

ii. The maximum number of digits to the right of the decimal after rounding utilized in any part of the Airframe Price Adjustment equation will be 4, where rounding of the fourth digit will be increased to the next highest digit when the 5th digit is equal to 5 or greater.

June 1, 2007

6-1162-GOC-131R8

 

 

Continental Airlines, Inc.

1600 Smith Street

Houston, Texas 77002

 

Subject: Letter Agreement No. 6-1162-GOC-131R8 to Purchase

Agreement No. 1951 - Special Matters

 

Ladies and Gentlemen:

This Letter Agreement amends Purchase Agreement No. 1951 dated as of July 23, 1996 (the Agreement) between The Boeing Company (Boeing) and Continental Airlines, Inc. (Buyer) relating to Model 737 aircraft (the Aircraft). This Letter Agreement supersedes and replaces in its entirety Letter Agreement 6-1162-GOC-131R7 dated December 5, 2006.

All terms used herein and in the Agreement, and not defined herein, will have the same meaning as in the Agreement.

1. [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

2. [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Advance Payment Schedule.

2.1 Firm Aircraft. [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

 

 

2.2 Option Aircraft and follow-on Firm. [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

3. [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

4. Option Aircraft.

[CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

5. [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

6. Assignment of Credits.

Buyer may not assign the credit memoranda described in this Letter Agreement without Boeing's prior written consent [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

7. Confidential Treatment.

Boeing and Buyer understand that certain information contained in this Letter Agreement, including any attachments hereto, are considered by both parties to be confidential. Notwithstanding the provisions of Letter Agreement 6-1162-MMF-308R4, Boeing and Buyer agree that each party will treat this Letter Agreement and the information contained herein as confidential and will not, without the other party's prior written consent, disclose this Letter Agreement or any information contained herein to any other person or entity except as may be required by applicable law or governmental regulations.

Very truly yours,

THE BOEING COMPANY

 

 

By /s/ Anthony J. Hicker

Its Attorney-In-Fact  

 

ACCEPTED AND AGREED TO this

Date: June 1, 2007

CONTINENTAL AIRLINES, INC.

 

 

By /s/ Gerald Laderman

Its Senior Vice President - Finance and Treasurer

 

 

CERTIFICATION

EXHBIT 10.2

Supplemental Agreement No. 42

to

Purchase Agreement No. 1951

between

The Boeing Company

and

Continental Airlines, Inc.

Relating to Boeing Model 737 Aircraft

 

 

THIS SUPPLEMENTAL AGREEMENT, entered into as of

June 12, 2007, by and between THE BOEING COMPANY (Boeing) and Continental Airlines, Inc. (Buyer);

WHEREAS, the parties hereto entered into Purchase Agreement No. 1951 dated July 23, 1996 (the Agreement), as amended and supplemented, relating to Boeing Model 737-500, 737-600, 737-700, 737-800, 737-900 and 737-900ER aircraft (the Aircraft);

1.0 WHEREAS, Buyer wishes to [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

4.0 WHEREAS, Boeing and Buyer agree to [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

5.0 WHEREAS, Buyer wishes to [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

6.0 WHEREAS, Buyer wishes [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

 

NOW THEREFORE, in consideration of the mutual covenants herein contained, the parties agree to amend the Agreement as follows:

1. Table of Contents, Articles, Tables and Exhibits, and Letter Agreements:

      1. Remove and replace, in its entirety, the "Table of Contents", with the Table of Contents attached hereto, to reflect the changes made by this Supplemental Agreement No. 42.
      2. Remove and replace, in its entirety, page T-2-2, of Table 1 entitled the "Aircraft Deliveries and Descriptions, Model 737-700 Aircraft", with the revised page T-2-2 and new page T-2-3 of Table 1 attached hereto.
      3. Remove and replace, in its entirety, page T-3-5, of Table 1 entitled the "Aircraft Deliveries and Descriptions, Model 737-800 Aircraft", with the revised page T-3-5 of Table 1 attached hereto.
      4. Remove and replace, in its entirety, Letter Agreement 1951-9R18 "Option Aircraft - Model 737-724", with the revised Letter Agreement 1951-9R19 attached hereto
      5. Remove and replace, in its entirety, Letter Agreement 6-1162-GOC-131R8 "Special Matters", with the revised Letter Agreement 6-1162-GOC-131R9 attached hereto.

 

The Agreement will be deemed to be supplemented to the extent herein provided as of the date hereof and as so supplemented will continue in full force and effect.

EXECUTED IN DUPLICATE as of the day and year first written above.

 

THE BOEING COMPANY Continental Airlines, Inc.

 

By: /s/ Anthony J. Hicker By: /s/ Gerald Laderman

Its: Attorney-In-Fact   Its: Senior Vice President -

       Finance and Treasurer

TABLE OF CONTENTS

Page SA

Number Number

ARTICLES

1. Subject Matter of Sale 1-1 SA 39

2. Delivery, Title and Risk
of Loss 2-1

3. Price of Aircraft 3-1 SA 39

4. Taxes 4-1

5. Payment 5-1

6. Excusable Delay 6-1

7. Changes to the Detail
Specification 7-1 SA 39

8. Federal Aviation Requirements and
Certificates and Export License 8-1 SA 39

9. Representatives, Inspection,
Flights and Test Data 9-1

10. Assignment, Resale or Lease 10-1

11. Termination for Certain Events 11-1

12. Product Assurance; Disclaimer and Release; Exclusion

Of Liabilities; Customer Support; Indemnification

And Insurance 12-1

13. Buyer Furnished Equipment and
Spare Parts 13-1

14. Contractual Notices and Requests 14-1 SA 39

15. Miscellaneous 15-1

 

TABLE OF CONTENTS

Page SA

Number Number

TABLES

1. Aircraft Deliveries and
Descriptions - 737-500 T-1 SA 3

Aircraft Deliveries and
Descriptions - 737-700 T-2 SA 42

Aircraft Deliveries and
Descriptions - 737-800 T-3 SA 42

Aircraft Deliveries and

Descriptions - 737-600 T-4 SA 4

Aircraft Deliveries and
Descriptions - 737-900 T-5 SA 39

Aircraft Deliveries and
Descriptions - 737-900ER T-6 SA 41

EXHIBITS

A-1 Aircraft Configuration - Model 737-724

(Aircraft delivering through July 2004) SA 26

A-1.1 Aircraft Configuration - Model 737-724

(Aircraft delivering on or after August 2004) SA 26

A-2 Aircraft Configuration - Model 737-824

(Aircraft delivering through July 2004) SA 26

A-2.1 Aircraft Configuration - Model 737-824

(Aircraft delivering through August 2004

through December 2007) SA 41

A-2.2 Aircraft Configuration - Model 737-824

(Aircraft delivering on or after January 2008 SA 41

A-3 Aircraft Configuration - Model 737-624 SA 1

A-4 Aircraft Configuration - Model 737-524 SA 3

A-5 Aircraft Configuration - Model 737-924

(Aircraft delivering through July 2004) SA 26

A-6 Aircraft Configuration - Model 737-924ER SA 41

 

TABLE OF CONTENTS

SA

Number

EXHIBITS (continued)

B Product Assurance Document SA 1

C Customer Support Document - Code Two -
Major Model Differences SA 1

C1 Customer Support Document - Code Three -

Minor Model Differences SA 39

D Aircraft Price Adjustments - New
Generation Aircraft (1995 Base Price -

[CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY

WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT

TO A REQUEST FOR CONFIDENTIAL TREATMENT] SA 1

D1 Airframe and Engine Price Adjustments -

Current Generation Aircraft SA 1

D2 Aircraft Price Adjustments - New
Generation Aircraft (1997 Base Price - [CONFIDENTIAL MATERIAL

OMITTED AND FILED SEPARATELY WITH THE SECURITIES

AND EXCHANGE COMMISSION PURSUANT TO A REQUEST

FOR CONFIDENTIAL TREATMENT] SA 5

D3 Aircraft Price Adjustments - New
Generation Aircraft (July 2003 Base Price -

[CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY

WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT

TO A REQUEST FOR CONFIDENTIAL TREATMENT] SA 41

D4 Escalation Adjustment - Airframe and

Optional Features [CONFIDENTIAL MATERIAL OMITTED AND

FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE

COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] SA 41

E Buyer Furnished Equipment
Provisions Document SA 39

F Defined Terms Document SA 5

 

TABLE OF CONTENTS

SA

Number

LETTER AGREEMENTS

1951-1 Not Used

1951-2R4 Seller Purchased Equipment SA 39

1951-3R22 Option Aircraft-Model 737-824 Aircraft SA 38

1951-4R1 Waiver of Aircraft Demonstration SA 1

1951-5R3 Promotional Support - New Generation

Aircraft SA 39

1951-6 Configuration Matters

1951-7R1 Spares Initial Provisioning SA 1

1951-8R2 Escalation Sharing - New Generation
Aircraft SA 4

1951-9R19 Option Aircraft-Model 737-724 Aircraft SA 42

1951-11R1 Escalation Sharing-Current Generation
Aircraft SA 4

1951-12R7 Option Aircraft - Model 737-924 Aircraft SA 32

1951-13 Configuration Matters - Model 737-924 SA 5

    1. Installation of Cabin Systems Equipment

737-924 SA 22

1951-15 Configuration Matters - Model 737-924ER SA 39

 

 

 

 

TABLE OF CONTENTS

SA

Number

RESTRICTED LETTER AGREEMENTS

6-1162-MMF-295 Performance Guarantees - Model

737-724 Aircraft

6-1162-MMF-296 Performance Guarantees - Model

737-824 Aircraft

6-1162-MMF-308R4 Disclosure of Confidential

Information SA 39

6-1162-MMF-309R1 [CONFIDENTIAL MATERIAL OMITTED AND

FILED SEPARATELY WITH THE SECURITIES

AND EXCHANGE COMMISSION PURSUANT

TO A REQUEST FOR CONFIDENTIAL

TREATMENT] SA 1

6-1162-MMF-311R5 [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] SA 39

6-1162-MMF-312R1 Special Purchase Agreement

Provisions SA 1

6-1162-MMF-319 Special Provisions Relating to the

Rescheduled Aircraft

6-1162-MMF-378R1 Performance Guarantees - Model

737-524 Aircraft SA 3

6-1162-GOC-015R1 [CONFIDENTIAL MATERIAL OMITTED AND FILED

SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] SA 31

6-1162-GOC-131R9 Special Matters SA 42

6-1162-DMH-365 Performance Guarantees - Model

737-924 Aircraft SA 5

6-1162-DMH-624 [CONFIDENTIAL MATERIAL OMITTED AND FILED

SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] SA 8

6-1162-DMH-680 Delivery Delay Resolution Program SA 9

6-1162-DMH-1020 [CONFIDENTIAL MATERIAL OMITTED AND FILED

SEPARATELY WITH THE SECURITIES AND EXCHANGE

COMMISSION PURSUANT TO A REQUEST FOR

CONFIDENTIAL TREATMENT] SA 14

6-1162-DMH-1035 [CONFIDENTIAL MATERIAL OMITTED AND FILED

SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR

CONFIDENTIAL TREATMENT] SA 15

6-1162-DMH-1054 [CONFIDENTIAL MATERIAL OMITTED AND FILED

SEPARATELY WITH THE SECURITIES AND EXCHANGE

COMMISSION PURSUANT TO A REQUEST FOR

CONFIDENTIAL TREATMENT] SA 16

6-1162-CHL-048 Rescheduled Aircraft Agreement SA 26

6-1162-CHL-195 Restructure Agreement for Model

737NG and 757-300 Aircraft SA 30

6-1162-MSA-768 Performance Guarantees - Model

737-924ER Aircraft SA 39

 

TABLE OF CONTENTS

 

SUPPLEMENTAL AGREEMENTS DATED AS OF:

Supplemental Agreement No. 1 October 10, 1996

Supplemental Agreement No. 2 March 5, 1997

Supplemental Agreement No. 3 July 17, 1997

Supplemental Agreement No. 4 October 10, 1997

Supplemental Agreement No. 5 May 21, 1998

Supplemental Agreement No. 6 July 30, 1998

Supplemental Agreement No. 7 November 12, 1998

Supplemental Agreement No. 8 December 7, 1998

Supplemental Agreement No. 9 February 18, 1999

Supplemental Agreement No. 10 March 19, 1999

Supplemental Agreement No. 11 May 14, 1999

Supplemental Agreement No. 12 July 2, 1999

Supplemental Agreement No. 13 October 13, 1999

Supplemental Agreement No. 14 December 13, 1999

Supplemental Agreement No. 15 January 13, 2000

Supplemental Agreement No. 16 March 17, 2000

Supplemental Agreement No. 17 May 16, 2000

Supplemental Agreement No. 18 September 11, 2000

Supplemental Agreement No. 19 October 31, 2000

Supplemental Agreement No. 20 December 21, 2000

Supplemental Agreement No. 21 March 30, 2001

TABLE OF CONTENTS

SUPPLEMENTAL AGREEMENTS DATED AS OF:

Supplemental Agreement No. 22 May 23, 2001

Supplemental Agreement No. 23 June 29, 2001

Supplemental Agreement No. 24 August 31, 2001

Supplemental Agreement No. 25 December 31, 2001

Supplemental Agreement No. 26 March 29, 2002

Supplemental Agreement No. 27 November 6, 2002

Supplemental Agreement No. 28 April 1, 2003

Supplemental Agreement No. 29 August 19, 2003

Supplemental Agreement No. 30 November 4, 2003

Supplemental Agreement No. 31 August 20, 2004

Supplemental Agreement No. 32 December 29, 2004

Supplemental Agreement No. 33 December 29, 2004

Supplemental Agreement No. 34 June 22, 2005

Supplemental Agreement No. 35 June 30, 2005

Supplemental Agreement No. 36 July 21, 2005

Supplemental Agreement No. 37 March 30, 2006

Supplemental Agreement No. 38 June 6, 2006

Supplemental Agreement No. 39 August 3, 2006

Supplemental Agreement No. 40 December 5, 2006

Supplemental Agreement No. 41 June 1, 2007

Supplemental Agreement No. 42 June 12, 2007

Table 1 to Purchase Agreement 1951

Aircraft Deliveries and Descriptions

Model 737-700 Aircraft

 

 

[CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

1951-9R19

June 12, 2007

 

Continental Airlines, Inc.

1600 Smith Street

Houston, Texas 77002

 

Subject: Letter Agreement No. 1951-9R19 to Purchase Agreement No. 1951 - Option Aircraft - Model 737-724 Aircraft

 

Ladies and Gentlemen:

This Letter Agreement amends Purchase Agreement No. 1951 dated July 23, 1996 (the Agreement) between The Boeing Company (Boeing) and Continental Airlines, Inc. (Buyer) relating to Model 737-724 aircraft (the Aircraft). This Letter Agreement supersedes and replaces in its entirety Letter Agreement 1951-9R18 dated June 6, 2006.

All terms used and not defined herein shall have the same meaning as in the Agreement.

In consideration of Buyer's purchase of the Aircraft, Boeing hereby agrees to manufacture and sell up to fifty-seven (57) additional Model 737-724 Aircraft (the Option Aircraft) to Buyer, on the same terms and conditions set forth in the Agreement, except as otherwise described in Attachment A hereto, and subject to the terms and conditions set forth below.

1. Delivery.

The Option Aircraft will be delivered to Buyer during or before the months set forth in the following schedule:

Month and Year Number of

of Delivery   Option Aircraft

[CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

  1. Price.

The basic price of the Option Aircraft shall [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

3. Option Aircraft Deposit.

In consideration of Boeing's grant to Buyer of options to purchase the Option Aircraft as set forth herein, Buyer has paid a deposit to Boeing of [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] for each Option Aircraft through Supplemental Agreement 37 and (the Option Deposit) prior to June 6, 2006. For Option Aircraft added effective Supplemental Agreement 38 and thereafter, the Option Deposit amount is [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] for each Option Aircraft. If Buyer exercises an option herein for an Option Aircraft, the amount of the Option Deposit for such Option Aircraft will be credited against the first advance payment due for such Option Aircraft pursuant to the advance payment schedule set forth in Article 5 of the Agreement.

If Buyer does not exercise its option to purchase a particular Option Aircraft pursuant to the terms and conditions set forth herein, Boeing shall be entitled to retain the Option Deposit for such Option Aircraft.

4. Option Exercise.

To exercise its option to purchase the Option Aircraft, Buyer shall give written notice thereof to Boeing on or before the first business day of the month in each Option Exercise Date shown below:

Option Aircraft Option Exercise Date

[CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

5. Contract Terms.

Within thirty (30) days after Buyer exercises an option to purchase Option Aircraft pursuant to paragraph 4 above, Boeing and Buyer will use their best reasonable efforts to enter into a supplemental agreement amending the Agreement to add the applicable Option Aircraft to the Agreement as a firm Aircraft (the Option Aircraft Supplemental Agreement).

If the parties have not entered into such an Option Aircraft Supplemental Agreement within the time period contemplated herein, either party shall have the right, exercisable by written or telegraphic notice given to the other within ten (10) days after such period, to cancel the purchase of such Option Aircraft.

6. Cancellation of Option to Purchase.

Either Boeing or Buyer may cancel the option to purchase an Option Aircraft if any of the following events are not accomplished by the respective dates contemplated in this Letter Agreement, or in the Agreement, as the case may be:

(i) purchase of the Aircraft under the Agreement for any reason not attributable to the cancelling party;

(ii) payment by Buyer of the Option Deposit with respect to such Option Aircraft pursuant to paragraph 3 herein; or

(iii) exercise of the option to purchase such Option Aircraft pursuant to the terms hereof.

Any cancellation of an option to purchase by Boeing which is based on the termination of the purchase of an Aircraft under the Agreement shall be on a one-for-one basis, for each Aircraft so terminated.

Cancellation of an option to purchase provided by this letter agreement shall be caused by either party giving written notice to the other within ten (10) days after the respective date in question. Upon receipt of such notice, all rights and obligations of the parties with respect to an Option Aircraft for which the option to purchase has been cancelled shall thereupon terminate.

If an option is cancelled as provided above, Boeing shall promptly refund to Buyer, without interest, any payments received from Buyer with respect to the affected Option Aircraft. Boeing shall be entitled to retain the Option Deposit unless cancellation is attributable to Boeing's fault, in which case the Option Deposit shall also be returned to Buyer without interest.

7. Applicability.

Except as otherwise specifically provided, limited or excluded herein, all Option Aircraft that are added to the Agreement by an Option Aircraft Supplemental Agreement as firm Aircraft shall benefit from all the applicable terms, conditions and provisions of the Agreement.

 

If the foregoing accurately reflects your understanding of the matters treated herein, please so indicate by signature below.

Very truly yours,

THE BOEING COMPANY

 

 

 

By /s/ Anthony J. Hicker  

Its  Attorney-In-Fact     

 

ACCEPTED AND AGREED TO this

Date: _____

CONTINENTAL AIRLINES, INC.,

 

 

 

By  /s/ Gerald Laderman   

Its  Senior Vice President - Finance and Treasurer       

 

 

Attachment

 

Model 737-724 Aircraft

1. Option Aircraft Description and Changes.

1.1 Aircraft Description. The Option Aircraft are described by Boeing Detail Specification D019A001-H Revision H, dated as of November 18, 2005, as amended and revised pursuant to the Agreement.

1.2 Changes. The Option Aircraft Detail Specification shall be revised to include:

(1) Changes applicable to the basic Model 737-700 aircraft which are developed by Boeing between the date of the Detail Specification and the signing of a Supplemental Agreement for the Option Aircraft.

(2) Changes mutually agreed upon.

(3) Changes required to obtain a Standard Certificate of Airworthiness.

1.3 Effect of Changes. Changes to the Detail Specification pursuant to the provisions of the clauses above shall include the effects of such changes upon Option Aircraft weight, balance, design and performance.

2. Price Description.

2.1 Price Adjustments.

2.1.1 Base Price Adjustments. The Base Airplane Price (pursuant to Article 3 of the Agreement) of the Option Aircraft will be adjusted to Boeing's and the engine manufacturer's then-current prices as of the date of execution of the Supplemental Agreement for the Option Aircraft.

2.1.2 Special Features. The price for Special Features incorporated in the Option Aircraft Detail Specification will be adjusted to Boeing's then-current prices for such features as of the date of execution of the Supplemental Agreement for the Option Aircraft [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

 

2.1.3 Escalation Adjustments. The Base Airframe and Special Features price will be escalated according to the applicable airframe and engine manufacturer escalation provisions contained in Exhibit D of the Agreement.

2.1.4 Price Adjustments for Changes. Boeing may adjust the Aircraft Basic Price and the Advance Payment Base Prices for Option Aircraft for any changes mutually agreed upon by Buyer and Boeing subsequent to the date that Buyer and Boeing enter into the Supplemental Agreement for the Option Aircraft.

2.1.5 BFE to SPE. An estimate of the total price for items of Buyer Furnished Equipment (BFE) changed to Seller Purchased Equipment (SPE) pursuant to the Detail Specification is included in the Option Aircraft price build-up. The purchase price of the Option Aircraft will be adjusted by the price charged to Boeing for such items plus 10% of such price.

3. Advance Payments.

3.1 If Buyer exercises its right under this letter agreement to acquire an Option Aircraft, Buyer shall pay to Boeing advance payments for such Option Aircraft pursuant to the schedule for payment of advance payments provided in the Agreement.

 

June 12, 2007

6-1162-GOC-131R9

 

 

Continental Airlines, Inc.

1600 Smith Street

Houston, Texas 77002

 

Subject: Letter Agreement No. 6-1162-GOC-131R9 to Purchase

Agreement No. 1951 - Special Matters

 

Ladies and Gentlemen:

This Letter Agreement amends Purchase Agreement No. 1951 dated as of July 23, 1996 (the Agreement) between The Boeing Company (Boeing) and Continental Airlines, Inc. (Buyer) relating to Model 737 aircraft (the Aircraft). This Letter Agreement supersedes and replaces in its entirety Letter Agreement 6-1162-GOC-131R8 dated June 1, 2007.

All terms used herein and in the Agreement, and not defined herein, will have the same meaning as in the Agreement.

1. [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

2. [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Advance Payment Schedule.

2.1 Firm Aircraft. [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

 

 

2.2 Option Aircraft and follow-on Firm. [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

3. [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

4. Option Aircraft.

[CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

5. [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

6. Assignment of Credits.

Buyer may not assign the credit memoranda described in this Letter Agreement without Boeing's prior written consent [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]

7. Confidential Treatment.

Boeing and Buyer understand that certain information contained in this Letter Agreement, including any attachments hereto, are considered by both parties to be confidential. Notwithstanding the provisions of Letter Agreement 6-1162-MMF-308R4, Boeing and Buyer agree that each party will treat this Letter Agreement and the information contained herein as confidential and will not, without the other party's prior written consent, disclose this Letter Agreement or any information contained herein to any other person or entity except as may be required by applicable law or governmental regulations.

Very truly yours,

THE BOEING COMPANY

 

 

By /s/ Anthony J. Hicker

Its Attorney-In-Fact  

 

ACCEPTED AND AGREED TO this

Date: ______________

CONTINENTAL AIRLINES, INC.

 

 

By /s/ Gerald Laderman

Its Senior Vice President - Finance and Treasurer

 

 

 

 

CERTIFICATION

EXHBIT 31.1

CERTIFICATION

I, Lawrence W. Kellner, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Continental Airlines, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

  1. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
  2. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
  3. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
  4. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
  5. 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

    1. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
    2. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: July 19, 2007

 

/s/ Lawrence W. Kellner      

Lawrence W. Kellner

Chairman of the Board and

Chief Executive Officer

 

 

 

CERTIFICATION

EXHIBIT 31.2

CERTIFICATION

I, Jeffrey J. Misner, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Continental Airlines, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

  1. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
  2. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
  3. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
  4. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
  5. 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

    1. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
    2. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: July 19, 2007

 

/s/ Jeffrey J. Misner               

Jeffrey J. Misner

Executive Vice President and

Chief Financial Officer

 

 

 

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

EXHIBIT 32.1

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)

Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), each of the undersigned officers of Continental Airlines, Inc., a Delaware corporation (the "Company"), does hereby certify, to such officer's knowledge, that:

The Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2007 (the "Form 10-Q") of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

A signed original of this written statement required by Section 906 has been provided to Continental Airlines, Inc. and will be retained by Continental Airlines, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

 

Dated: July 19, 2007

 

/s/ Lawrence W. Kellner

Lawrence W. Kellner

Chairman of the Board and

Chief Executive Officer

 

 

/s/ Jeffrey J. Misner

Jeffrey J. Misner

Executive Vice President and

Chief Financial Officer