1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
February 5, 2001
CONTINENTAL AIRLINES, INC.
(Exact name of registrant as specified in its charter)
Delaware 0-09781 74-2099724
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) 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)
2
Item 7. Financial Statements and Exhibits.
(c) Exhibits
99.1 Presentation Data
99.2 Risk Factors
Item 9. Regulation FD Disclosure.
The Company is furnishing herewith certain data being presented by certain of
its executive officers at a conference on February 5, 2001.
Beginning Monday, February 5, 2001 an audio webcast of their remarks and
accompanying graphic presentation will be made available under our Investor
Relations - Investor Presentation section at Continental's corporate website
at http://www.continental.com/corporate.
The information presented may contain forward looking statements, and certain
assumptions upon which such forward looking statements are in part based.
Numerous important factors, including those factors identified as Risk Factors
and presented herewith in Exhibit 99.2, and the fact that the assumptions set
forth below could prove incorrect, could cause actual results to differ
materially from those contained in such forward looking statements.
3
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, Continental
Airlines, Inc. has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CONTINENTAL AIRLINES, INC.
By /s/ Jeffery A. Smisek
--------------------------------
Jeffery A. Smisek
Executive Vice President
and General Counsel
February 2, 2001
4
EXHIBIT INDEX
99.1 Presentation Data
99.2 Risk Factors
1
Goldman Sachs
Transportation Conference
February 5, 2001
CONTINENTAL AIRLINES
[GRAPHIC]
POISED FOR A GREAT YEAR
2
PLEASE NOTE THAT THE DISCUSSION TODAY MAY CONTAIN FORWARD LOOKING STATEMENTS.
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DESCRIBED IN THE FORWARD
LOOKING STATEMENTS. ADDITIONAL INFORMATION CONCERNING FACTORS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN THE FORWARD LOOKING STATEMENTS
IS CONTAINED IN THE COMPANY'S FORM 10-K AND OTHER SECURITIES FILINGS WITH THE
SECURITIES AND EXCHANGE COMMISSION.
3
CONSISTENTLY PROFITABLE
23 CONSECUTIVE PROFITABLE QUARTERS
CUMULATIVE PRE-TAX NET INCOME ($MILLIONS)
[GRAPH]
Excludes non-recurring gains and charges (net gain of $130M)
4
CONTINENTAL OUTPACES INDUSTRY PROFITABILITY
FOURTH QUARTER 2000 EPS
WN CO NW AA DL US UA HP
% CHANGE YEAR OVER YEAR 61% 45% 10% (40)% (51)% (96)% (226)% (279)%
Excludes non-recurring gains and charges
Source: First Call
5
STRONG ON-TIME PERFORMANCE
YEAR 2000
1Q 2Q 3Q 4Q Full Year
----- ---- ---- ---- ---------
D.O.T. RANKING 3rd 3rd 2nd 1st 1st
COMPLETION
FACTOR 98.0% 98.0% 98.5% 98.6% 98.3%
*Rank based on Top 10 US Major Carriers
6
GAP BETWEEN THE BEST & INDUSTRY WIDENS
1998 - 2000 JD POWER RANKING
(LONG-HAUL)
JD POWER SCORE
-----------------------------------------------------------------
FLIGHT ATTENDANTS AIRPORT CHECK-IN OVERALL SATISFACTION
----------------- ---------------- --------------------
1998 109 116 110
1999 116 116 118
2000 121 122 123
JD Power & Associates Airline Satisfaction Studies (1998 through 2000)
7
EMPLOYEES ENJOY COMING TO WORK
FORTUNE
100 BEST COMPANIES TO WORK FOR
- - - - - RANKING - - - - -
[GRAPHIC]
AIRLINE 1998 1999 2000
- ------- ---- ---- ----
CO 40 23 18
WN 4 2 4
AA N/A N/A N/A
DL N/A N/A N/A
HP N/A N/A N/A
NW N/A N/A N/A
UA N/A N/A N/A
US N/A N/A N/A
8
LARGE LOCAL TRAFFIC BASE PROVIDES STABILITY
CO 64%
UA 56%
AA 56%
US 51%
DL 47%
NW 47%
Source: LTM Q499 O&D Pax DB1A Data; US Domestic only
9
NEW YORK DOMESTIC MARKET SHARE LEADER
NEW YORK CITY REVENUE %
FIRST SIX MONTHS 2000
CO 24.3
AA 18.5
DL 15.0
UA 14.1
US 8.0
NW 4.6
Source: O&D Plus database, Top 6 Major U.S. Carriers Shown
10
DIRECT RAIL SERVICE TO NEWARK
[FLOWCHART]
MODE OF TRANSPORT EST. TRAVEL TIME* EST. COST
- ----------------- ----------------- ---------
PRIVATE CAR SERVICE 1 HR 15 MIN. $50-$75
DIRECT RAIL SERVICE 30 MIN. $9
*BETWEEN 5-6:30P
11
NORTHWEST ALLIANCE EXPANDS NETWORK
[MAP]
12
BEST . . .
ACCORDING TO CUSTOMERS . . .
JD Power Award for Long Haul - 1996
JD Power Award for Long Haul - 1997
JD Power Award for Long Haul - 1999
JD Power Award for Long Haul - 2000
JD Power Award for Short Haul - 2000
13
BEST . . .
ACCORDING TO EMPLOYEES . . .
Fortune 100 Best Companies To Work For - 1999
Fortune 100 Best Companies To Work For - 2000
Fortune 100 Best Companies To Work For - 2001
14
BEST . . .
ACCORDING TO PEERS
Air Transport World Airline of the Year - 1996
Air Transport World Airline of the Year - 2001
15
FINANCIAL PERFORMANCE
[GRAPHIC]
CONTINENTAL AIRLINES
16
PROFITS CONTINUE
2000 VS 1999
($MILLIONS) 2000 1999 BETTER/(WORSE)
- ----------- ---- ---- -------------
OPERATING REVENUE $ 9,899 $ 8,639 $ 1,260
Operating Expense 9,215 7,958 (1,257)
------- ------- --------
Operating Earnings 684 681 3
Net Interest Exp./Non-Op 122 129 7
------- ------- --------
Net Income Before Taxes 562 552 10
Taxes/Other 220 214 (6)
------- ------- --------
Net Income $ 342 $ 338 $ 4
======= ======= ========
ASMs (millions) 86,100 81,946 5.1%
Load Factor 74.5% 73.2% 1.3pts
Total Revenue per ASM 10.67(cent) 9.86(cent) 8.2%
Cost per ASM 9.76(cent) 8.99(cent) (8.6)%
Fuel Cost / Gallon 86.7(cent) 47.3(cent) (83.2)%
Excludes Special Gains and Charges
17
MODERATE GROWTH PLAN FOR 2001
EXCLUDING PACIFIC ONLY 3.5%
[BAR GRAPH]
SYSTEM LATIN
EX-PACIFIC DOMESTIC AMERICA TRANSATLANTIC
---------- -------- ------- -------------
% INCREASE/(DECREASE) 3.5% 5.0% 2.0% (2.0)%
% OF SYSTEM 90% 62% 12% 16%
Pacific region will grow 24% primarily from the addition of New York to
Hong Kong.
18
STRONG DOMESTIC RASM
RASM VS. INDUSTRY
1994 80%
1996 101%
1998 105%
2000 112%
Length of Haul Adjusted
19
RASM GAINS IN ALL REGIONS
2000
RASM % GROWTH
Domestic 8.7%
Atlantic 4.8%
Latin 6.1%
Pacific 16.9%
20
COSTS ARE BEING MANAGED
CASM HOLDING FUEL RATE CONSTANT
YEAR-OVER-YEAR % INCREASE
1998 1.4%
1999 1.4%
2000 1.5%
2001E 1.3%
21
DISTRIBUTION COSTS DECLINE
DISTRIBUTION COSTS AS A % OF SALES
1996 20.7%
1998 16.4%
2000 13.9%
2004E 7-10%
22
MARKET DRIVEN FLEET PLAN
[BAR GRAPH]
TOTAL JET AIRCRAFT
2000 2001 2002 2003 2004 2005
---- ---- ---- ---- ---- ----
MINIMUM 371 389 402 385 372 365
MAXIMUM 371 390 428 475 512 530
FLEET TYPES: 5 5 5 4 4 3
MINIMUM = COMMITTED FLEET LESS LEASE EXPIRATIONS
MAXIMUM = COMMITTED FLEET AND ALL OPTIONS ARE EXERCISED
23
YOUNG FLEET IS FUEL EFFICIENT
[BAR GRAPH]
YEAR-OVER-YEAR % INCREASE
1998 1999 2000
---- ---- ----
ASMS 10.6% 9.7% 5.1%
GALLONS CONSUMED 9.6% 3.7% (0.3)%
24
2001 FLEET FINANCING
o 24 BOEING AIRCRAFT
o AMOUNT FINANCED: $889 MILLION
o AVERAGE INTEREST RATE: 7.81%
o NEW AIRCRAFT: 17 BOEING 737
7 BOEING 767
----------------------
o COMPLETES AIRCRAFT FINANCING THROUGH SEPTEMBER 2001
25
OPPORTUNITIES
[GRAPHIC]
CONTINENTAL AIRLINES
26
2001 - CO POISED FOR A GREAT YEAR
o EXCELLENT EMPLOYEE RELATIONS - NO OPEN LABOR CONTRACTS
o INDUSTRY LEADING PRODUCT
o RASM PREMIUM TO INDUSTRY
o INDUSTRY GROWTH IN LINE WITH GDP
o STRONG LOCAL MARKET PROVIDES STABILITY
o FUEL PRICE EXPECTATIONS BETTER 2001 VS 2000
o STRONG ALLIANCE RELATIONSHIPS
o YOUNG, FUEL-EFFICIENT FLEET
o STRONG MANAGEMENT TEAM
27
CONTINENTAL'S HIGH RETURN
LOW RISK OPPORTUNITIES
GOAL
---------------------------
ANNUAL
TODAY 2005 PRETAX BENEFITS
----- ---- ---------------
o DIST. COST % OF REVENUE 13.9% 7-10% $275 MILLION
o LOW RISK GROWTH 2,455 3,400 $175 MILLION
(DAILY DEPARTURES)
o FLEET TYPES 5 3 $125 MILLION
o ALLIANCE PARTNERS 19 20 $100 MILLION
o BUSINESS MIX 47.2% 50-55% $100 MILLION
-------------
$775 MILLION
28
[PICTURE OF AIRPLANE]
1
EXHIBIT 99.2
RISK FACTORS RELATING TO THE COMPANY
High Leverage and Significant Financing Needs. Continental has a higher
proportion of debt compared to its equity capital than some of its principal
competitors. In addition, Continental has less cash resources than some of its
principal competitors. A majority of Continental's property and equipment is
subject to liens securing indebtedness. Accordingly, Continental may be less
able than some of its competitors to withstand a prolonged recession in the
airline industry or respond as flexibly to changing economic and competitive
conditions.
As of December 31, 2000, Continental had approximately $3.7 billion
(including current maturities) of long-term debt and capital lease obligations
and approximately $1.9 billion of Continental-obligated mandatorily redeemable
preferred securities of trust, redeemable common stock and common stockholders'
equity. Also at December 31, 2000, Continental had $1.4 billion in cash and cash
equivalents and short-term investments.
Continental has substantial commitments for capital expenditures,
including for the acquisition of new aircraft. As of December 31, 2000,
Continental had agreed to acquire or lease a total of 86 additional Boeing jet
aircraft through 2005. The Company anticipates taking delivery of 35 Boeing jet
aircraft in 2001. Continental also has options for an additional 105 aircraft
(exercisable subject to certain conditions). The estimated aggregate cost of the
Company's firm commitments for Boeing aircraft is approximately $4 billion.
Continental currently plans to finance its new Boeing aircraft with a
combination of enhanced pass through trust certificates, lease equity and other
third-party financing, subject to availability and market conditions. As of
December 31, 2000, Continental had approximately $890 million in financing
arranged for such Boeing deliveries. Continental also has commitments or letters
of intent for backstop financing for approximately 23% of the anticipated
remaining acquisition cost of future Boeing deliveries. In addition, at December
31, 2000, Continental had firm commitments to purchase 26 spare engines related
to the new Boeing aircraft for approximately $158 million, which will be
deliverable through March 2005.
As of December 31, 2000, Continental Express, Inc. ("Express"), a
wholly owned subsidiary of the Company, had firm commitments for 178 Embraer
regional jets with options for an additional 100 Embraer regional jets
exercisable through 2007. Express anticipates taking delivery of 41 regional
jets in 2001. The estimated cost of the Company's firm commitments for Embraer
regional jets is approximately $3 billion. Neither Express nor Continental will
have any obligation to take any such firm Embraer aircraft that are not financed
by a third party and leased to Continental.
For 2000, cash expenditures under operating leases relating to aircraft
approximated $864 million, compared to $758 million for 1999, and approximated
$353 million relating to facilities and other rentals compared to $328 million
in 1999. Continental expects that its operating lease expenses for 2001 will
increase over 2000 amounts.
2
Additional financing will be needed to satisfy the Company's capital
commitments. Continental cannot predict whether sufficient financing will be
available for capital expenditures not covered by firm financing commitments.
Continental's Historical Operating Results. Continental has recorded
positive net income in each of the last six years. However, Continental
experienced significant operating losses in the previous eight years.
Historically, the financial results of the U.S. airline industry have been
cyclical. Continental cannot predict whether current industry conditions will
continue.
Significant Cost of Aircraft Fuel. Fuel costs constitute a significant
portion of Continental's operating expense. Fuel costs were approximately 15.6%
of operating expenses for the year ended December 31, 2000 and 9.7% for the year
ended December 31, 1999 (excluding fleet disposition/impairment losses). Fuel
prices and supplies are influenced significantly by international political and
economic circumstances. Continental enters into petroleum swap contracts,
petroleum call option contracts and/or jet fuel purchase commitments to provide
some short-term protection (generally three to six months) against a sharp
increase in jet fuel prices. The Company's fuel hedging strategy could result in
the Company not fully benefiting from certain fuel price declines. If a fuel
supply shortage were to arise from OPEC production curtailments, a disruption of
oil imports or otherwise, higher fuel prices or reduction of scheduled airline
service could result. Significant changes in fuel costs or continuation of high
current jet fuel prices would materially affect Continental's operating results.
Labor Costs. Labor costs constitute a significant percentage of the
Company's total operating costs, and the Company experiences competitive
pressure to increase wages and benefits. In July 2000, the Company completed a
three-year program bringing all employees to industry standard wages and also
announced and began to implement a phased plan to bring employee benefits to
industry standard levels by 2003. The plan provides for increases in vacation,
paid holidays, increased 401(k) Company matching contributions and additional
past service retirement credit for most senior employees.
Certain Tax Matters. At December 31, 2000, Continental had estimated
net operating loss carryforwards ("NOLs") of $1 billion for federal income tax
purposes that will expire through 2021 and federal investment tax credit
carryforwards of $45 million that will expire through 2001. Due to an ownership
change of Continental on April 27, 1993, the ultimate utilization of
Continental's NOLs and investment tax credits may be limited, as described
below. Reflecting this limitation, Continental had a valuation allowance of $263
million at December 31, 2000.
Continental had, as of December 31, 2000, deferred tax assets
aggregating $677 million, including $366 million related to NOLs. The Company
has consummated several transactions that resulted in the recognition of NOLs of
the Company's predecessor. To the extent the Company were to determine in the
future that additional NOLs of the Company's predecessor could be recognized in
the accompanying consolidated financial statements, such benefit would reduce
the value ascribed to routes, gates and slots.
Section 382 of the Internal Revenue Code ("Section 382") imposes
limitations on a corporation's ability to utilize NOLs if it experiences an
"ownership change." In general terms, an
3
ownership change may result from transactions increasing the ownership of
certain stockholders in the stock of a corporation by more than 50 percentage
points over a three-year period. In the event that an ownership change occurred,
utilization of Continental's NOLs would be subject to an annual limitation under
Section 382 determined by multiplying the value of Continental's stock at the
time of the ownership change by the applicable long-term tax-exempt rate (which
was 5.39% for December 2000). Any unused annual limitation may be carried over
to later years, and the amount of the limitation may under certain circumstances
be increased by the built-in gains in assets held by Continental at the time of
the change that are recognized in the five-year period after the change. Under
current conditions, if an ownership change were to occur, Continental's annual
NOL utilization would be limited to approximately $174 million per year other
than through the recognition of future built-in gain transactions.
In November 1998, Northwest Airlines, Inc. completed its acquisition of
certain equity of the Company previously held by Air Partners, L.P. and its
affiliates, together with certain Class A common stock of the Company held by
other investors, totaling 8,661,224 shares of the Class A common stock (the "Air
Partners Transaction"). The Company does not believe that the Air Partners
Transaction resulted in an ownership change for purposes of Section 382.
On January 22, 2001, Continental repurchased 6,685,279 shares of
Continental Class A common stock from Northwest Airlines Corporation and an
affiliate. In addition, each issued share of Continental Class A common stock
was reclassified into 1.32 shares of Class B common stock in a nontaxable
transaction. The Company does not believe that these transactions resulted in an
ownership change for purposes of Section 382.
Continental Micronesia's Dependence on the Japanese Economy; Currency
Risk. Because the majority of the traffic of Continental Micronesia, Inc.
("CMI"), a wholly owned subsidiary of the Company, originates in Japan, its
results of operations are substantially affected by the Japanese economy and
changes in the value of the yen as compared to the dollar. To reduce the
potential negative impact on CMI's earnings, the Company has entered into
forward contracts as a hedge against a portion of its expected net yen cash flow
position. As of December 31, 2000, the Company had hedged approximately 75% of
2001 projected yen-denominated net cash flows at a rate of 99 yen to $1 US.
RISKS FACTORS RELATING TO THE AIRLINE INDUSTRY
Competition and Industry Conditions. The airline industry is highly
competitive and susceptible to price discounting. Carriers have used discount
fares to stimulate traffic during periods of slack demand, to generate cash flow
and to increase market share. Some of Continental's competitors have
substantially greater financial resources or lower cost structures than
Continental.
Airline profit levels are highly sensitive to changes in fuel costs,
fare levels and passenger demand. Passenger demand and fare levels have in the
past been influenced by, among other things, the general state of the economy
(both internationally and domestically), international events, airline capacity
and pricing actions taken by carriers. Domestically, from 1990 to 1993, the weak
U.S. economy, turbulent international events and extensive price discounting by
carriers contributed to unprecedented losses for U.S. airlines. In the last
several years, the U.S. economy
4
has improved and excessive price discounting has abated. Continental cannot
predict the extent to which these industry conditions will continue.
In recent years, the major U.S. airlines have sought to form marketing
alliances with other U.S. and foreign air carriers. Such alliances generally
provide for "code-sharing", frequent flyer reciprocity, coordinated scheduling
of flights of each alliance member to permit convenient connections and other
joint marketing activities. Such arrangements permit an airline to market
flights operated by other alliance members as its own. This increases the
destinations, connections and frequencies offered by the airline, which provide
an opportunity to increase traffic on its segment of flights connecting with its
alliance partners. Continental's alliance with Northwest Airlines, Inc. is an
example of such an arrangement, and Continental has existing alliances with
numerous other air carriers. Other major U.S. airlines have alliances or planned
alliances more extensive than Continental's. Continental cannot predict the
extent to which it will benefit from its alliances or be disadvantaged by
competing alliances.
In recent years, and particularly since its deregulation in 1978, the
U.S. airline industry has also undergone substantial consolidation, and it may
in the future undergo additional consolidation. For example, in May 2000, United
Air Lines, Inc., the nation's largest commercial airline, announced its
agreement to acquire US Airways, Inc. ("US Airways"), the nation's sixth largest
commercial airline, subject to regulatory approvals and other conditions. In
addition, in January 2001, American Airlines, Inc. announced agreements to
acquire the majority of Trans World Airlines, Inc.'s assets and some of US
Airways' assets, subject to regulatory approvals and other conditions.
Continental routinely monitors changes in the competitive landscape and engages
in analysis and discussions regarding its strategic position, including
alliances and business combination transactions. Continental has had, and
anticipates it will continue to have, discussions with third parties regarding
strategic alternatives. The impact on Continental of the pending transactions
and any additional consolidation within the U.S. airline industry cannot be
predicted at this time.
Regulatory Matters. Airlines are subject to extensive regulatory and
legal compliance requirements that engender significant costs. In the last
several years, the FAA has issued a number of directives and other regulations
relating to the maintenance and operation of aircraft that have required
significant expenditures. Some FAA requirements cover, among other things,
retirement of older aircraft, security measures, collision avoidance systems,
airborne windshear avoidance systems, noise abatement, commuter aircraft safety
and increased inspections and maintenance procedures to be conducted on older
aircraft. Continental expects to continue incurring expenses in complying with
the FAA's regulations.
Additional laws, regulations, taxes and airport rates and charges have
been proposed from time to time that could significantly increase the cost of
airline operations or reduce revenues. For instance, "passenger bill of rights"
legislation has been introduced in Congress that would, among other things,
require the payment of compensation to passengers as a result of certain delays,
and limit the ability of carriers to prohibit or restrict usage of certain
tickets in manners currently prohibited or restricted. The DOT has proposed
rules that would significantly limit major carriers' ability to compete with new
entrant carriers. If adopted, these measures could have the effect of raising
ticket prices, reducing revenue and increasing costs. Restrictions on the
ownership and
5
transfer of airline routes and takeoff and landing slots have also been
proposed. See "Industry Regulation and Airport Access" above. The ability of
U.S. carriers to operate international routes is subject to change because the
applicable arrangements between the United States and foreign governments may be
amended from time to time, or because appropriate slots or facilities are not
made available. Continental cannot provide assurance that laws or regulations
enacted in the future will not adversely affect it.
Seasonal Nature of Airline Business; Other. Due to greater demand for
air travel during the summer months, revenue in the airline industry in the
second and third quarters of the year is generally stronger than revenue in the
first and fourth quarters of the year for most U.S. air carriers. Continental's
results of operations generally reflect this seasonality, but have also been
impacted by numerous other factors that are not necessarily seasonal, including
the extent and nature of competition from other airlines, fare wars, excise and
similar taxes, changing levels of operations, fuel prices, weather, air traffic
control delays, foreign currency exchange rates and general economic conditions.
