UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No.  )

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Continental Airlines, Inc.

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

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April 24, 2009

 

To Our Stockholders:

 

On behalf of our Board of Directors, we are pleased to invite you to attend the Continental Airlines, Inc. 2009 Annual Meeting of Stockholders. As indicated in the attached notice, the meeting will be held at The Hyatt Regency, 1200 Louisiana Street, Houston, Texas on Wednesday, June 10, 2009, at 10:00 a.m., local time. At the meeting, our stockholders will act on the matters described in the attached proxy statement and there will be an opportunity to discuss other matters of interest to you as a stockholder.

 

We have elected to take advantage of U.S. Securities and Exchange Commission rules that allow companies to furnish proxy materials to their stockholders on the internet. We believe that these rules allow us to provide our stockholders with the information they need, while lowering the costs of delivery and reducing the environmental impact of our annual meeting.

 

Your vote is important. Even if you plan to attend the meeting in person, please authorize your proxy or direct your vote by following the instructions on each of your voting options described in the attached proxy statement and the notice of internet availability you received in the mail. Alternatively, if you received printed proxy materials, you may vote your shares by internet, telephone or mail pursuant to the instructions included on the proxy card or voting instruction card. We look forward to seeing you in Houston.

 

Cordially,

 

Larry Kellner

Chairman and

Chief Executive Officer

 

Jeff Smisek

President and

Chief Operating Officer

CONTINENTAL AIRLINES, INC.
1600 Smith Street, Dept. HQSEO
Houston, Texas 77002

 

 

NOTICE OF 2009 ANNUAL MEETING OF STOCKHOLDERS

To Be Held June 10, 2009

 

 

The 2009 annual meeting of stockholders of Continental Airlines, Inc. will be held at The Hyatt Regency, 1200 Louisiana Street, Houston, Texas on Wednesday, June 10, 2009, at 10:00 a.m., local time, for the following purposes:

 

1. To elect the nine directors named in the attached proxy statement to serve until the next annual meeting of stockholders;

 

2. To consider and act upon a proposal to amend the company’s 2004 Employee Stock Purchase Plan to (i) authorize the sale of an additional 3.5 million shares of common stock under the plan, under which there are no shares currently available for issuance, and (ii) extend the term of the plan until December 31, 2019;

 

3. To consider and act upon a proposal to ratify the appointment of Ernst & Young LLP as the independent registered public accounting firm of the company and its subsidiaries for the fiscal year ended December 31, 2009;

 

4. To consider and act upon two stockholder proposals, if properly presented at the meeting; and

 

5. To consider and act upon any other matters that may properly come before the meeting or any postponement or adjournment thereof.

 

The holders of record of the company’s common stock at the close of business on April 15, 2009 are entitled to notice of and to vote at the meeting. A list of the stockholders entitled to vote at the meeting will be available for examination, during ordinary business hours, for ten days before the meeting at our principal place of business, 1600 Smith Street, Houston, Texas.

 

Jennifer L. Vogel

Secretary

 

Houston, Texas

April 24, 2009

 

Even if you plan to attend the meeting in person, please authorize your proxy or direct your vote by following the instructions on each of your voting options described in the attached proxy statement and the notice of internet availability you received in the mail. Alternatively, if you received printed proxy materials, you may vote your shares by internet, telephone or mail pursuant to the instructions included on the proxy card or voting instruction card. If you mail the proxy or voting instruction card, no postage is required if mailed in the United States. If you do attend the meeting in person and want to withdraw your proxy, you may do so as described in the attached proxy statement and vote in person on all matters properly brought before the meeting.

 

 

 

 

TABLE OF CONTENTS

 

CONTINENTAL AIRLINES, INC.
1600 Smith Street, Dept. HQSEO
Houston, Texas 77002

 

 

 

 

PROXY STATEMENT

 

2009 ANNUAL MEETING OF STOCKHOLDERS
To Be Held June 10, 2009

 

 

 

 

 

We are providing this proxy statement to you in connection with the solicitation on behalf of Continental’s board of directors, which we refer to as the “board,” of proxies to be voted at the company’s 2009 annual meeting of stockholders or any postponement or adjournment of that meeting. The meeting will be held at The Hyatt Regency, 1200 Louisiana Street, Houston, Texas on Wednesday, June 10, 2009, at 10:00 a.m., local time, for the purposes set forth in the accompanying Notice of 2009 Annual Meeting of Stockholders, which we refer to as the “Meeting Notice.”

 

We have elected to take advantage of the “Notice and Access” rules adopted by the U.S. Securities and Exchange Commission (the “SEC”), which allow public companies to deliver to their stockholders a “Notice of Internet Availability of Proxy Materials” and to provide internet access to the proxy materials and annual reports to security holders.

 

Accordingly, on or about April 29, 2009, we will begin mailing to our stockholders of record a “Notice of Internet Availability of Proxy Materials,” which we refer to as the “Notice of Internet Availability,” except for stockholders who indicated on their proxy cards for our 2007 or 2008 annual meeting of stockholders their preference to receive a full, printed set of materials for future meetings, to whom we will begin mailing the requested printed materials on such date. The Notice of Internet Availability will include instructions on accessing and reviewing our proxy materials and our 2008 annual report to stockholders on the internet, and will provide instructions on submitting a proxy on the internet.

 

At the time we begin mailing our Notice of Internet Availability, we will also first make available on the internet at www.proxyvote.com our Meeting Notice, our proxy statement and our 2008 annual report to stockholders. Any stockholder may also request a printed copy of these materials by any of the following methods:

 

 

Pursuant to the SEC’s rules, our 2008 annual report to stockholders, which includes our audited consolidated financial statements, is not considered a part of, or incorporated by reference in, the proxy solicitation materials.

 

Stockholders with shares registered in their names with Mellon Investor Services LLC, Continental’s transfer agent and registrar, are referred to as “stockholders of record.” Stockholders of record at the close of business on April 15, 2009, the “record date,” are entitled to notice of and to vote at the meeting and at any postponement or adjournment of the meeting. Stockholders with shares held in an account at a broker, bank, trust or other nominee are considered the “beneficial owner” of shares held in “street name,” and are entitled to direct their brokers, banks, trustees or other nominees on how to vote their shares.

At the close of business on the record date, Continental had outstanding 123,551,098 shares of Class B common stock, which we refer to as “common stock.” Subject to certain limitations on voting by non-U.S. citizens as described below, each share of our common stock is entitled to one vote.

 

Under U.S. law, no more than 25% of the voting stock of a U.S. air carrier such as Continental may be owned or controlled, directly or indirectly, by persons who are not U.S. citizens, and Continental itself must be a U.S. citizen. For these purposes, a “U.S. citizen” means:

 

 

The U.S. Department of Transportation determines, on a case-by-case basis, whether an air carrier is effectively owned and controlled by citizens of the United States.

 

In order to comply with these rules, our Amended and Restated Certificate of Incorporation provides that persons who are not U.S. citizens may not vote shares of our capital stock unless the shares are registered on a separate stock record maintained by us. A foreign holder wishing to register on this separate stock record should call us at (713) 324-5152 or send us a written request for registration identifying the full name and address of the holder, the holder’s citizenship, the total number of shares held and the nature of such ownership (i.e., record or beneficial). Such written requests should be addressed to our Secretary at Continental Airlines, Inc., P.O. Box 4607, Houston, Texas 77210-4607. We will not register shares on this record if the amount registered would cause us to violate the foreign ownership rules or adversely affect our operating certificates or authorities. Registration on this record is made in chronological order based on the date we receive a written request for registration. As of the record date, shares registered on this record comprised less than 25% of our voting stock.

 

A quorum of stockholders is necessary for a valid meeting. The required quorum for the transaction of business at the meeting is a majority of the total outstanding shares of stock entitled to vote at the meeting, either present in person or represented by proxy.

 

Abstentions will be included in determining the number of shares present at the meeting for the purpose of determining the presence of a quorum, as will broker non-votes. A “broker non-vote” occurs under the rules of the New York Stock Exchange, or “NYSE,” when a bank, broker, trust or other nominee holding shares of record is not permitted to vote on a non-routine matter without instructions from the beneficial owner of the shares and no instruction is given. Under these NYSE rules, if you do not provide timely voting instructions to a broker, bank, trust or other nominee that holds your shares of record, that institution will be prohibited from voting on the amendment of the 2004 Employee Stock Purchase Plan (Proposal 2), on the stockholder proposal related to discontinuing stock option grants to senior executives (Proposal 4) or on the stockholder proposal related to reincorporating in North Dakota (Proposal 5), but will be permitted to vote in its discretion with respect to the election of directors (Proposal 1) and the proposal to ratify the appointment of the independent registered public accounting firm (Proposal 3).

 

Directors will be elected by a plurality of the votes cast at the meeting for directors by the holders of common stock entitled to vote thereon.

In the vote to elect directors, stockholders may:

 

 

Pursuant to our director resignation policy, if any of our director nominees receives more “withhold” votes than votes “for” his or her re-election, our board (or a committee designated by our board) would be required to consider whether to accept the director’s previously tendered conditional resignation. For further discussion of this policy, please see “Corporate Governance — Corporate Governance Guidelines — Director Resignation Policy” below.

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” EACH OF THE NOMINEES.

 

The proposal to amend the company’s 2004 Employee Stock Purchase Plan will require approval by a majority of the votes cast at the meeting on Proposal 2 by the holders of common stock entitled to vote thereon. In addition, approval of the proposal under applicable NYSE rules requires that the total number of votes cast on the proposal represent a majority of the total outstanding shares entitled to vote on the proposal. For purposes of this proposal, abstentions are treated as votes cast and will have the same effect as votes against the proposal. Broker non-votes, however, are not treated as votes cast and will not be counted in determining whether the total number of votes cast on the proposal represents a majority of the total outstanding shares.

 

In the vote on the proposal to amend the 2004 Employee Stock Purchase Plan, stockholders may:

 

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE PROPOSAL TO AMEND THE COMPANY’S 2004 EMPLOYEE STOCK PURCHASE PLAN.

 

The proposal to ratify the appointment of Ernst & Young LLP as our independent registered public accounting firm will require approval by a majority of the votes cast at the meeting on Proposal 3 by the holders of common stock entitled to vote thereon. Abstentions are not treated as votes cast and thus will not affect the outcome of the proposal.

 

In the vote on the ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm, stockholders may:

 

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” RATIFICATION OF THE APPOINTMENT OF OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.

 

The stockholder proposal related to discontinuing stock option grants to senior executives scheduled to be presented at the meeting will require approval by a majority of the votes cast at the meeting on Proposal 4 by the

holders of common stock entitled to vote thereon. Neither abstentions nor broker non-votes are treated as votes cast and thus neither will affect the outcome of the proposal.

 

In the vote on this stockholder proposal, stockholders may:

 

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “AGAINST” THE STOCKHOLDER PROPOSAL RELATED TO DISCONTINUING STOCK OPTION GRANTS TO SENIOR EXECUTIVES.

 

The stockholder proposal related to reincorporating the company under the laws of North Dakota scheduled to be presented at the meeting will require approval by a majority of the votes cast at the meeting on Proposal 5 by the holders of common stock entitled to vote thereon. Neither abstentions nor broker non-votes are treated as votes cast and thus neither will affect the outcome of the proposal.

 

In the vote on this stockholder proposal, stockholders may:

 

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “AGAINST” THE STOCKHOLDER PROPOSAL RELATED TO REINCORPORATING IN NORTH DAKOTA.

 

Stockholders of record are entitled to vote their shares held “of record” in person at the meeting and at any postponement or adjournment of the meeting. A ballot will be provided to any stockholder of record upon request at the meeting. A stockholder beneficially holding shares in street name may only vote those shares in person at the meeting if the stockholder obtains a legal proxy from the broker, bank, trustee or other nominee that holds the shares of record giving the beneficial stockholder the right to vote the shares. Even if you plan to attend the meeting, we recommend that you also submit your vote in advance of the meeting as described below to ensure that your vote will be counted if you later decide not to attend. Please see “Other Matters — Directions to our Meeting” below for directions to the annual meeting site.

 

Whether you hold shares directly as the stockholder of record or beneficially in street name, you may direct how your shares are voted without attending the meeting. The internet and telephone proxy procedures described below are designed to authenticate stockholders’ identities, to allow stockholders to give their proxy instructions and to confirm that those instructions have been properly recorded. Stockholders authorizing proxies or directing the voting of shares by internet should understand that there may be costs associated with electronic access, such as usage charges from internet access providers and telephone companies, which must be borne by the stockholder.

 

Stockholders of Record.  If you hold shares of record, you may vote by proxy over the internet by following the instructions provided in the Notice of Internet Availability or, if you received printed proxy materials, you may also vote by internet, telephone or mail pursuant to the instructions included on the proxy card. Proxies submitted through Broadridge Financial Solutions, Inc. by internet or telephone must be received by 11:59 p.m. Eastern Time on June 9, 2009, and proxies submitted through Broadridge by mail must be received by 10:00 a.m. on the meeting date. The giving of such proxy will not affect your right to vote in person if you decide to attend the meeting.

Beneficial Holders.  If you hold shares beneficially in street name, you may direct the voting of those shares over the internet by following the instructions provided in the Notice of Internet Availability or, if you received printed proxy materials, you may also vote by internet, telephone or mail pursuant to the instructions included on the voting instruction card provided to you by your broker, bank, trustee or other nominee. Votes directed by internet or telephone must be received by 11:59 p.m. Eastern Time on June 9, 2009. Directing the voting of your shares will not affect your right to vote in person if you decide to attend the meeting; however, you must first obtain a legal proxy as described above under “— Voting in Person at the Annual Meeting.”

 

If you are the record holder of your shares, you may revoke your proxy before it is exercised at the meeting in any of the following ways:

 

 

If you are not the record holder of your shares, you may revoke your proxy before it is exercised at the meeting by either:

 

 

Continental will bear the costs of the solicitation of proxies. In addition to the solicitation of proxies by mail and internet, we may also solicit proxies by telephone, fax or in person. None of our regular employees or directors who engages in solicitation will receive additional compensation for that solicitation. In addition, we have retained Georgeson Inc. to assist in the solicitation of proxies for a fee estimated not to exceed $10,000 plus reasonable out-of-pocket expenses. Arrangements will be made with brokerage houses and with other custodians, nominees and fiduciaries to forward proxy soliciting materials to beneficial owners, and we will reimburse them for their reasonable out-of-pocket expenses incurred in doing so.

 

We are sending only one copy of our Notice of Internet Availability or, as applicable, printed proxy materials to stockholders who share the same last name and address, unless they have notified us that they want to continue receiving multiple copies. This practice, known as “householding,” is designed to reduce duplicate mailings and save significant printing and postage costs.

 

We will deliver promptly to any stockholder who received a householded mailing this year, upon receipt of the stockholder’s written or oral request, additional copies of our Notice of Internet Availability or, as applicable, printed proxy materials. If you received a householded mailing this year and you would like to request additional copies, or if you would like to opt out of this practice for future mailings, please submit your request to our Secretary in writing at Continental Airlines, Inc., P.O. Box 4607, Houston, Texas 77210-4607 or call us at (713) 324-5152. Additionally, if you share the same last name and address with one or more other stockholders and you received multiple copies of the Notice of Internet Availability or, as applicable, printed proxy materials, you may contact us in the manner described above to request a single copy in the future.

 

We have one class of securities outstanding that is entitled to vote on the matters to be considered at the meeting, Class B common stock, which is entitled to one vote per share, subject to the limitations on voting by non-U.S. citizens described above. The following table sets forth, as of the dates indicated below, information with respect to persons owning beneficially (to our knowledge) more than five percent of any class of our voting securities.

 

 

 

 

The following table shows, as of April 17, 2009, the number of shares of common stock beneficially owned by each individual who served as a director in 2008, each current and former executive officer named below in the Summary Compensation Table, and all of our executive officers and directors as a group. This table does not include the restricted stock units held by our executive officers. See “Executive Compensation – Outstanding Equity Awards at Fiscal Year End.”

 

 

 

 

 

We are committed to high standards of corporate governance and to conducting our business ethically and with integrity and professionalism. In furtherance of these commitments, our board has adopted Corporate Governance Guidelines developed and recommended by the Corporate Governance Committee of our board, which we refer to as our “Guidelines,” and monitors our ethics and compliance program through the adoption of Ethics and Compliance Guidelines for our employees and directors. The Guidelines, together with our bylaws, the charters of each of our board committees and the Ethics and Compliance Guidelines, provide the framework for the corporate governance at Continental. A complete copy of each of these documents may be obtained in the “Investor Relations” section of our internet website under the “Corporate Governance” link at www.continental.com, and we will furnish printed copies of these documents to interested security holders without charge, upon request. Written requests for such copies should be addressed to: Continental Airlines, Inc., Attention: Secretary, P.O. Box 4607, Houston, Texas 77210-4607.

 

Our board adopted our initial Guidelines in February 2003 upon the recommendation of the Corporate Governance Committee. Since that time, our board, which monitors developments in the laws, regulations and best practices relating to corporate governance and compliance, has amended the Guidelines on a number of occasions to reflect such developments. The current Guidelines provide for the governance practices described below.

 

Independence.  Our Guidelines require that a majority of our board be “independent” under the criteria for independence established by the NYSE. Our board is responsible for affirmatively determining whether each director nominee satisfies all applicable independence criteria for service on the board or any committee of the board. Please see “— Director Independence” below for a discussion of our board’s independence determinations.

 

Limitation on Board Service.  None of our directors is permitted to serve on the board of directors of more than two other public companies if the director is employed on a full-time basis, or more than four other public companies if the director is employed on less than a full-time basis. For determining the number of boards of directors on which a director serves, our Guidelines exclude service on the board of directors of a charitable, philanthropic or non-profit organization, as well as service on the board of the director’s principal employer. Further, a director’s service on the board of directors of two or more affiliated companies that hold joint or concurrent board meetings will be considered service on only one other board.

 

Minimum Stock Ownership.  Subject to a one-year transition period for newly-elected directors, each of our directors is required to beneficially own at least 1,000 shares of our common stock, our chief executive officer, or “CEO,” and our president are each required to beneficially own at least 5,000 shares, and our executive vice presidents are each required to beneficially own at least 2,000 shares. A director’s or executive officer’s holdings of restricted stock or stock options exercisable within 60 days are included when determining whether the individual beneficially owns a sufficient number of shares.

 

Presiding Director.  Pursuant to our Guidelines, the chair of the Executive Committee of our board, who will at all times be a non-management member of our board, also serves as the presiding director for executive sessions of our non-management directors. Stockholders or other interested parties may communicate with our non-management directors through correspondence directed to the presiding director. Please see “— Communications with the Board of Directors” below for instructions on how to contact the presiding director.

 

Director Resignation Policy.  Under our director resignation policy, each of our incumbent directors must submit a conditional, irrevocable resignation letter in the form approved by our board before our board will nominate the director for re-election. The current form of resignation letter approved by our board provides that the resignation will only be effective if:

 

 

If an incumbent director does not receive the vote for re-election specified in his or her conditional resignation letter in an uncontested election of directors, our board (or a committee designated by our board) shall, no later than 60 days after certification of the election results, consider the attendant circumstances and any other factors it deems relevant and determine whether to accept the director’s resignation.

 

In accordance with our bylaws, Delaware corporate law and the form resignation letter approved by our board, the resignation letter cannot be revoked or withdrawn while this director resignation policy is in effect.

 

Each of the nominated directors has submitted his or her conditional, irrevocable letter of resignation as required by the policy. The revised conditional, irrevocable letter of resignation approved by our board in 2008 for each of Larry Kellner, our Chairman and CEO, and Jeff Smisek, our President and Chief Operating Officer, includes an acknowledgement that our board’s acceptance of either director’s resignation under the circumstances described above would trigger his right under his employment agreement with us to resign for “Good Reason” and receive certain termination benefits. For a discussion of the termination benefits of Mr. Kellner or Mr. Smisek following his resignation for Good Reason, please see “Executive Compensation — Potential Payments Upon Termination or Change in Control” below.

 

Occupational Changes.  If a director experiences either a termination of his or her principal employment or position, or a material decrease in responsibilities with respect to that employment or position, the director is required to submit his or her offer to resign to the chair of the Corporate Governance Committee. The committee will then review the circumstances surrounding the employment change and such other matters as it deems appropriate and make a recommendation to our board concerning acceptance or rejection of the director’s offer to resign. Our board will then make the final determination concerning whether to accept or reject the director’s offer to resign.

 

Director Conflicts of Interest.  Our Guidelines provide procedures for any director believing that he or she may have an actual or perceived conflict of interest, or any senior executive or director who believes another director may have such a conflict, to report the conflict to the chair of the Corporate Governance Committee, who is responsible for reviewing the director’s conflict to determine the appropriate course of action. The committee chair’s determination is subject to ratification by the full Corporate Governance Committee. Any waiver of these procedures may only be made by the Corporate Governance Committee and must be promptly disclosed to our stockholders.

 

Board and Committee Performance Reviews.  The Corporate Governance Committee is required to review the performance of our board and each committee on an annual basis, and the Corporate Governance Committee may consider the results of these reviews when making recommendations to the board concerning the slate of director nominees or the board committee assignments.

 

Right to Amend.  Our board has the authority to amend and/or restate the Guidelines, including any or all of these governance practices, from time to time in its sole discretion without stockholder approval.

 

In addition to those established by our Guidelines, our bylaws, the charters of our board committees and our other company policies provide for the following significant corporate governance practices:

 

 

 

We do not currently have a stockholder rights plan, commonly referred to as a “poison pill.” In November 2008, the stockholder rights plan adopted in November 1998 expired by its terms.

 

In 2007, our board implemented enhancements to our broad-based ethics and compliance program, including the adoption of our Ethics and Compliance Guidelines and the implementation of a worldwide (subject to applicable local privacy laws) Help Line that provides an anonymous method for reporting concerns. These guidelines apply to all of our co-workers, as well as our non-management directors, and serve as the centerpiece for our ethics and compliance program. These guidelines promote ethical conduct, good judgment and compliance with laws and our corporate policies. Another key aspect of the ethics and compliance program is our Ethics and Compliance Committee, led by our General Counsel and Chief Compliance Officer, that promotes awareness and understanding of our program, periodically reviews and evaluates our program and the guidelines, and helps to ensure that our program continues to meet our corporate obligations and standards.

 

We foster a culture of environmental and social responsibility by running an efficient operation, investing in fuel-efficient aircraft and technology to reduce carbon emissions, minimizing noise and waste, playing an active role in the communities we serve, and promoting dignity and respect for all co-workers. For more information, please see our Global Citizenship Report, available in the “Global Citizenship” section of our internet website under “About Continental” at www.continental.com.

 

Our board determines the independence of each director through application of the director independence tests required by Section 303A of the NYSE Listed Company Manual and, for members of the Audit Committee, the additional independence tests required by Rule 10A-3(b)(1) of the Securities Exchange Act of 1934, as amended, which we refer to as the “Exchange Act.” Our board has applied these independence tests to our nine nominees and Dr. George Parker, who is not standing for re-election, and determined that (1) each of the nominees for our board, other than Messrs. Kellner and Smisek (seven of the nine total nominees), and Dr. Parker is “independent” under the applicable standards and (2) each of the nominees for our board and Dr. Parker qualifies for service on each board committee on which such director currently serves. Please see “Proposal 1: Election of Directors — Director Biographical Summaries” below for a list of all nine nominees for our board, together with biographical summaries for the nominees and Dr. Parker, including each individual’s current committee memberships and business experience.

 

In making these independence determinations, the board considered the transactions and relationships between the directors (or members of their immediate families) and the company and its subsidiaries described below:

 

 

 

The purpose of this review was to determine whether any such relationships or transactions were material and, therefore, inconsistent with a determination that the director is independent. As a result of this review, the board affirmatively determined, based on its understanding of such transactions and relationships, that, with the exception of Messrs. Kellner and Smisek, none of the directors nominated for election at the meeting, nor Dr. Parker, has any material relationships with the company or its subsidiaries, and that all such current directors are independent of the company under the applicable standards set forth by the NYSE and SEC. Messrs. Kellner and Smisek are not independent because of their employment as executives of the company.

 

Regular meetings of our board are held four times per year, and special meetings are scheduled when required. The board held nine meetings in 2008. During 2008, each of our current directors attended at least 75% of the sum of the total number of meetings of the board and each committee of which he or she was a member. Last year, eight of our directors attended the annual meeting of stockholders.

 

Under our Corporate Governance Guidelines, directors are expected to fulfill diligently their fiduciary duties to stockholders, which duties include preparing for, attending and participating in meetings of the board and the committees of which the directors are a member. We do not have a formal policy regarding director attendance at

annual meetings. However, when considering a director’s renomination to the board, the Corporate Governance Committee must consider the director’s history of attendance at annual meetings of stockholders and at board and committee meetings as well as the director’s preparation for and participation in such meetings.

 

Our independent directors regularly meet separately in executive session without any members of management present. During 2008, our independent directors met in such executive sessions on four occasions. Our Corporate Governance Guidelines provide that the chair of the Executive Committee, who at all times shall be a non-management director, shall serve as the presiding director for these executive sessions.

 

Our board has established the committees described below, each of which operates under a written charter adopted by the board. Please see the introductory paragraph immediately following “Corporate Governance” above for instructions on obtaining electronic or printed copies of the charters of these board committees.

 

Audit Committee.  The Audit Committee has the authority and power to act on behalf of the board with respect to the appointment of our independent registered public accounting firm, which we also refer to as our “independent auditors,” and with respect to authorizing all audit and other activities performed for us by our internal and independent auditors. The committee, among other matters, reviews with management and the company’s independent auditors the effectiveness of the accounting and financial controls of the company and its subsidiaries, and reviews and discusses the company’s audited financial statements with management and the independent auditors. It is the responsibility of the committee to evaluate the qualifications, performance and independence of the independent auditors and to maintain free and open communication among the committee, the independent auditors, the internal auditors and management of the company. Please see “— Report of the Audit Committee” below. The committee may form and delegate its authority to subcommittees or the chair of the committee when appropriate. Our board has determined that all members of the Audit Committee are independent directors as required by the applicable rules of the NYSE and SEC, and that Mr. McCorkindale, Mr. Munoz and Dr. Parker each qualifies as an audit committee financial expert under the applicable rules promulgated pursuant to the Exchange Act. Our board has also determined that Ms. Williams’ service on the audit committees of three other public companies will not impair her ability to serve on our Audit Committee.

 

Corporate Governance Committee.  The Corporate Governance Committee identifies individuals qualified to become members of the board, consistent with criteria approved by the board, and recommends to the board the slate of directors to be nominated by the board at each annual meeting of stockholders and any director to fill a vacancy on the board. The committee will consider recommendations for nominees for directorships submitted by stockholders. Stockholders desiring the committee to consider their recommendations for nominees should submit their recommendations, together with appropriate biographical information and qualifications, in writing to the committee, c/o Secretary, Continental Airlines, Inc., P.O. Box 4607, Houston, Texas 77210-4607. The committee also recommends directors to be appointed to the committees of the board and the directors to serve as committee chairs, including in the event of vacancies, and oversees the evaluation of the board and management. The committee also developed and recommended to the board the company’s Corporate Governance Guidelines and is responsible for overseeing our board’s compliance with the Guidelines, including determining the appropriate course of action with respect to any potential or actual conflicts of interest involving a director brought to the attention of the chair of the committee. The committee may form and delegate its authority to subcommittees or the chair of the committee when appropriate. All members of the Corporate Governance Committee are independent directors as required by the applicable rules of the NYSE.

 

Executive Committee.  The Executive Committee has the authority to exercise certain powers of the board between board meetings. The chair of the Executive Committee serves as the board’s presiding director for executive sessions of non-management directors. The committee may form and delegate its authority to subcommittees or the chair of the committee when appropriate.

 

Finance Committee.  The Finance Committee reviews our annual financial budget, including the capital expenditure plan, and makes recommendations to the board regarding adoption of the budget as the committee deems appropriate. The committee may form and delegate its authority to subcommittees or the chair of the committee when appropriate.

Human Resources Committee.  The Human Resources Committee reviews and approves corporate goals and objectives relevant to the compensation of our CEO, evaluates our CEO’s performance in light of those goals and objectives, and determines and approves our CEO’s compensation based on its evaluation. The committee also reviews and approves the compensation of our other Section 16 Officers and the incentive compensation plans and programs applicable to them. Our current “Section 16 Officers” are our Chairman and CEO; our President and Chief Operating Officer; each of our Executive Vice Presidents; our Senior Vice President, General Counsel, Secretary and Chief Compliance Officer; and our Vice President and Controller. The committee also administers our equity-based plans and other incentive and employee benefit plans and programs. The committee may form and delegate its authority to subcommittees or the chair of the committee when appropriate. All members of the Human Resources Committee are independent directors as required by the applicable rules of the NYSE.

 

To assist the committee in discharging its responsibilities with respect to executive compensation, the committee relies upon an independent compensation consultant that reports exclusively to the committee. The committee engaged Exequity LLP as its independent compensation consultant effective January 2009. Prior to that time, the committee relied on Mercer Human Resource Consulting, or “Mercer,” another independent compensation consultant, to assist it in developing and structuring the company’s executive compensation programs. To ensure the consultant’s objectivity and to avoid conflicts of interest, we adopted conflict of interest guidelines governing the relationship. These guidelines establish our management’s obligation to report quarterly to the committee the scope and amount of work being performed by the consultant or its affiliates for us, the consultant’s direct access to the committee through its chair, and the requirement that the consultant develop procedures to prevent any employee of the consultant who advises the committee on executive compensation matters from discussing their services with other employees of the consultant.

 

From time to time and in connection with the setting of incentive compensation targets, the compensation consultant makes executive compensation recommendations to the committee based on available marketplace compensation data for U.S. peer airlines and certain non-airline companies with comparable revenue and other characteristics. Management also makes independent recommendations to the committee concerning the form and amount of executive compensation. The committee then reviews and considers the consultant’s and management’s recommendations, marketplace compensation data, individual officer performance and other factors, and makes its determinations concerning the compensation of the CEO and other Section 16 Officers. During 2008, the committee’s compensation decisions and determinations were made during seven meetings, five of which included executive sessions at which management was not present. For further discussion of our processes and procedures for the consideration and determination of executive compensation, please see “Executive Compensation — Compensation Discussion and Analysis” below.

 

In addition to its review and approval of the compensation of our Section 16 Officers, the committee is responsible for reviewing the compensation and benefits of our board’s non-management directors. At the direction of the committee, the committee’s independent compensation consultant compiled available marketplace director compensation data for U.S. peer airlines and certain non-airline companies with comparable revenue and other characteristics. The committee considered this peer company director compensation data, as well as other factors, received input from management, and determined that it would not recommend to our board any changes to our non-management director compensation. For further discussion of our non-management director compensation, please see “— Compensation of Non-Management Directors” below.

Membership on Board Committees.  The following table lists our five board committees, the directors who currently serve on them and the number of committee meetings held in 2008.

 

 

 

 

Stockholders or other interested parties can contact any director (including Mr. Meyer, the current presiding director for executive sessions of our non-management directors), any committee of the board, or our non-management directors as a group, by writing to them c/o Secretary, Continental Airlines, Inc., P.O. Box 4607, Houston, Texas 77210-4607. Comments or complaints relating to the company’s accounting, internal accounting controls or auditing matters will also be referred to members of the Audit Committee. All such communications will be forwarded to the appropriate member(s) of the board, except that the board has instructed the company to direct communications that do not relate to the company’s accounting, internal accounting controls or auditing matters to the chair of the Corporate Governance Committee and not to forward to the board or the chair of the Corporate Governance Committee certain categories of communications.

 

Our Corporate Governance Guidelines provide that the Corporate Governance Committee should consider the following when identifying director nominees:

 

 

 

The Corporate Governance Committee also confirms that nominees are in compliance with stock ownership requirements and board service limitations. In the case of current directors being considered for renomination, the committee also will take into account the director’s:

 

 

Moreover, each incumbent director is required to submit an irrevocable, conditional resignation letter pursuant to our director resignation policy prior to his or her nomination for re-election. Please see “Corporate Governance Guidelines — Director Resignation Policy” above for a discussion of this requirement.

 

Our director nomination process for new board members is as follows:

 

 

The Corporate Governance Committee also considers recommendations for nominees for directorships submitted by stockholders. When considering an individual nominated by a stockholder, the committee follows a substantially similar process, identifying the criteria to be applied and determining, based on information provided by the stockholder submitting the nominee and additional information obtained by the board or senior management, whether the stockholder nominee satisfies those criteria. As discussed above, such criteria shall include the items listed above under “— Qualifications of Directors.”

The Corporate Governance Committee, which is authorized to retain consultants or advisors as it deems necessary or appropriate, may hire a search firm to assist with the process described above. If retained by the committee, the search firm would likely assist with the development of the criteria, the identification of qualified candidates and the gathering of additional information on the final candidates.

 

As provided in our Guidelines, our newly elected directors participate in an orientation program following their election or appointment to the board. This orientation includes presentations by our senior management and independent auditors to familiarize new directors with our strategic plans, financial statements and key policies and practices. We also provide our directors with opportunities to visit our facilities, to participate in training concerning our policies and programs and to review strategic areas of our business in depth. Our directors also participate in director education programs sponsored by various educational institutions, and we reimburse their expenses incurred to attend such programs. In addition, all of our directors are provided flight benefits, including access to our Presidents Club airport lounges, enabling them to monitor the quality of our services and to interact with employees and customers.

 

The table below provides information relating to the compensation of the non-management members of our board in 2008. The compensation elements are described in the narrative following the table.

 

 

 

 

 

Annual Fees.  Each of our non-management directors receives an annual fee of $25,000 paid quarterly in advance, as well as the following additional annual fees based on committee membership and service as a committee chair:

 

 

Meeting Fees.  Our non-management directors also receive the following fees for attendance at meetings of our board and committees:

 

 

Flight Benefits.  As indicated above, our non-management directors receive lifetime flight benefits, comprised of space-available personal and family flight passes, a travel card permitting positive space travel by the director, the director’s family and certain other individuals (which is taxable to the director, subject to our reimbursement of certain of such taxes), frequent flyer cards, access to our Presidents Club facilities for the director and his or her spouse and airport parking where available to us at no incremental cost. As is common in the airline industry, our directors also receive travel privileges on some other airlines through arrangements entered into between us and such airlines.

 

Orientation Fees.  Each of our non-management directors is entitled to receive $2,500 as compensation for time spent on orientation matters when the director is initially elected to the board or to a committee on which he or she has not recently served.

 

Stock Options.  On June 12, 2008, the day following our 2008 annual meeting of stockholders, each of our non-management directors received an annual grant of stock options to purchase 7,500 shares of our common stock at an exercise price equal to the closing price on the date of grant. The granting of these options, which usually occurs on the date of the annual meeting of stockholders, was delayed to allow us time to publicly disclose information concerning the amendment and restatement of our Bankcard Joint Marketing Agreement with Chase Bank USA, N.A. These options were fully vested upon grant and have a 10-year term. If a newly-elected director were first elected to the board other than at an annual meeting of stockholders, the director would receive the annual stock option grant at such time.

 

Reimbursement of Expenses.  We reimburse our directors, including those who are full-time employees who serve as directors, for expenses incurred in attending meetings or in connection with participation in director education programs and director institutes offered by third parties.

Conducting Company Business.  Our non-management directors who, in their capacities as directors, conduct business on our behalf at the request of the board or the Chairman of the Board are paid:

 

 

As required by its charter, the Audit Committee reviews, at least annually, all related person transactions that may be required to be disclosed in the proxy statement for our next annual meeting of stockholders. We obtain information concerning any possible related person transactions from our directors and executive officers through their responses to annual questionnaires. All responses identifying possible related person transactions are then compiled and presented to the Audit Committee. The Audit Committee applies the disclosure standards adopted by the SEC for related person transactions to determine, based on the particular facts and circumstances, whether any “related person” (as defined by the SEC) has a direct or indirect material interest in a transaction involving the company. If such a material interest exists and no exception from disclosure applies, we disclose the transaction in our proxy statement as required by the SEC’s rules.

 

The Audit Committee reviewed all transactions since January 1, 2008 involving a “related person” identified in the annual questionnaire responses or otherwise known to the committee or the company and determined that none of the transactions was required to be disclosed as a related person transaction pursuant to the SEC’s rules.

 

Our executive compensation programs are administered by the Human Resources Committee of the board. The committee is currently composed of four independent, non-management directors, and no member of the committee has ever been an officer or employee of Continental or any of its subsidiaries. None of our executive officers has served as a member of any board of directors or compensation committee of any other company for which any of our directors served as an executive officer at any time since January 1, 2008.

 

The Audit Committee is comprised of four non-employee members of the board of directors (listed below). After reviewing the qualifications of the current members of the committee, and any relationships they may have with the company that might affect their independence from the company, the board has determined that (1) all current committee members are “independent” as that concept is defined in Section 10A of the Exchange Act, (2) all current committee members are “independent” as that concept is defined in the applicable rules of the NYSE, (3) all current committee members are financially literate, and (4) Mr. McCorkindale, Mr. Munoz and Dr. Parker each qualifies as an audit committee financial expert under the applicable rules promulgated pursuant to the Exchange Act.

 

The board of directors appointed the undersigned directors as members of the committee and adopted a written charter setting forth the procedures and responsibilities of the committee. Each year, the committee reviews the charter and reports to the board on its adequacy in light of applicable NYSE rules. In addition, the company will furnish an annual written affirmation to the NYSE relating to, among other things, clauses (2)-(4) of the first paragraph of this report and the adequacy of the committee charter.

 

During the last year, and earlier this year in preparation for the filing with the SEC of the company’s annual report on Form 10-K for the year ended December 31, 2008 (the “10-K”), the committee, among other matters:

 

 

 

Notwithstanding the foregoing actions and the responsibilities set forth in the committee charter, the charter clarifies that it is not the duty of the committee to plan or conduct audits or to determine that the company’s financial statements are complete and accurate and in accordance with generally accepted accounting principles. Management is responsible for the company’s financial reporting process including its system of internal controls, and for the preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States. The independent auditors are responsible for expressing an opinion on those financial statements. Committee members are not employees of the company or accountants or auditors by profession or experts in the fields of accounting or auditing. Therefore, the committee has relied, without independent verification, on management’s representation that the financial statements have been prepared with integrity and objectivity and in conformity with accounting principles generally accepted in the United States and on the representations of the independent auditors included in their report on the company’s financial statements.

 

The committee meets regularly with management and the independent and internal auditors, including private discussions with the independent auditors and the company’s internal auditors and receives the communications described above. The committee has also established procedures for (a) the receipt, retention and treatment of complaints received by the company regarding accounting, internal accounting controls or auditing matters, and (b) the confidential, anonymous submission by the company’s employees of concerns regarding questionable accounting or auditing matters. However, this oversight does not provide us with an independent basis to determine that management has maintained (1) appropriate accounting and financial reporting principles or policies, or (2) appropriate internal controls and procedures designed to assure compliance with accounting standards and applicable laws and regulations. Furthermore, our considerations and discussions with management and the independent auditors do not assure that the company’s financial statements are presented in accordance with generally accepted accounting principles or that the audit of the company’s financial statements has been carried out in accordance with generally accepted auditing standards.

The information contained in this report shall not be deemed to be “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filings with the Securities and Exchange Commission, or subject to the liabilities of Section 18 of the Exchange Act, except to the extent that the company specifically incorporates it by reference into a document filed under the Securities Act of 1933, as amended, or the Exchange Act.

 

Respectfully submitted,

 

Audit Committee

 

Oscar Munoz, Chairman

Douglas H. McCorkindale

George G. C. Parker

Karen Hastie Williams

 

The following table sets forth information with respect to our current executive officers:

 

 

There is no family relationship between any of our executive officers. All officers are appointed by the board to serve until their resignation, death or removal.

 

Introduction

 

We, along with the other U.S. network carriers, again faced significant challenges in 2008. Although we were profitable in 2006 and 2007, the combination of weakening economic conditions, turmoil in the global capital markets, and highly volatile fuel prices has resulted in a difficult financial environment for U.S. network carriers and continues to hinder our ability to achieve and sustain profitability. These significant challenges facing our industry caused several smaller carriers to declare bankruptcy in 2008, most of which ceased passenger operations. We and many of our domestic network competitors reduced domestic capacity, increased fares and fees, reduced costs, and took other measures to address the challenges. As we look to 2009 and the uncertainty in the global capital markets, we may have difficulty obtaining financing on favorable terms for our debt obligations and capital commitments, particularly the acquisition of aircraft and spare engines.

 

In spite of these challenges, in 2008 we remained focused on our financial results, our product and our culture. We had the best EBITDAR (defined below) margin performance among our network peers and our pre-tax margin, length-of-haul adjusted revenue per available seat mile, and year-over-year stage length adjusted cost per available seat mile were among the best of our network peers. In March 2009, we again were rated the top airline on FORTUNE Magazine’s Annual Industry list of World’s Most Admired Companies, our sixth consecutive year to receive this honor. In the same survey, our management team was ranked among the top ten companies for management quality across all industries. We continue to focus on open and honest communications with our co-workers, and the preservation of good relations with our employees is a significant element of our business strategy.

 

A major component of our expense structure is labor and related costs. In 2005 and 2006 we reduced pay and benefit costs and streamlined work rules to save approximately $500 million annually and we provided enhanced incentive-based pay elements for substantially all of our employees. The reductions in base salary (by up to 25%) taken by our officers, the resulting reductions in potential payment amounts with respect to their annual incentive and long-term incentive plan awards, and the voluntary surrender of incentive awards by our officers set the tone for our company-wide wage and benefit reductions. These reductions and work rule changes provided the framework for a business plan that helped the company avoid bankruptcy, return to profitability in 2006 and 2007, grow our network and provide stability to respond to the challenges we are facing.

 

Providing variable incentive-based compensation elements to all of our workgroups allows us to maintain a competitive cost structure and reward all co-workers based on performance. As further described below, variable incentive-based compensation programs resulted in payouts of profit sharing to our broad-based employee groups totaling nearly $270 million in 2007 and 2008 based on 2006 and 2007 financial performance, and on-time incentives for those groups resulted in payouts of approximately $80 million since the beginning of 2005.

 

We were not profitable in 2008 and, accordingly, no profit sharing was paid to employees and no annual performance incentives were paid to the named executive officers. In addition, in recognition of the company’s difficult decision in 2008 to reduce capacity and eliminate positions, Messrs. Kellner and Smisek each voluntarily waived his base salary for the period of June 1, 2008 to December 31, 2008, as described below in “— Detailed Description of Pay Elements — Base Salaries.”

 

Philosophy

 

Against this backdrop, our executive compensation philosophy for 2008 continued to be defined by three main objectives: aligning executive incentives with stockholders’ and co-workers’ interests, retaining our management team, and linking pay to performance. We made difficult decisions to implement a business plan in 2005 that, through shared sacrifice, allowed us to grow, return to profitability in 2006 and 2007, and reward our co-workers through variable incentive-based compensation. These events continue to influence our compensation philosophy. We believe that keeping the interests of our executives aligned with the interests of our stockholders and our co-workers will be an important factor in achieving and sustaining profitability. We also believe that our experienced and well-regarded management team has been and continues to be critical to the company’s successful

implementation of business strategies that led to our return to profitability in 2006 and 2007 and the ultimate preservation and growth of stockholder value. Accordingly, retention of senior executives is a key goal. Finally, we believe that pay for performance is a critical element in our executive compensation structure, and that both absolute and relative performance measures are appropriate. Our incentive programs are designed to drive performance by such measures. As described below, in order to advance these objectives, we have made structural changes in compensation packages over the last several years through significant reductions in the fixed components of executive pay and the implementation of an incentive compensation program focused on multi-year performance incentives that pay out based upon achievement of specified performance targets.

 

Aligned Interests.  We have structured executive and broad-based employee incentives to align the interests of our executives and co-workers with those of our stockholders and customers. The Human Resources Committee believes that such incentives play a significant part in Continental’s successful performance.

 

We align our executive compensation with the interests of our stockholders by linking our incentive compensation performance measures to key indicators of the company’s financial performance: our annual return on base invested capital (“ROBIC”); our long-term earnings before interest, income taxes, depreciation, amortization, aircraft rent, non-operating income (expense) and special items (“EBITDAR”) margin relative to our domestic network competitors; the size of our profit-sharing pool for broad-based workgroups; achieving positive net income; and maintaining specified cash balances. The restricted stock unit (“RSU”) program aligns management’s interests with our stockholders’ interests by placing the executives’ compensation “at risk” for any share price decline that occurs after the achievement of any performance target but before the relevant payment dates, which are spread over multi-year periods for retention purposes. The Profit Based RSUs, discussed below, also align our executives’ interests with the interests of our co-workers by linking executive incentive opportunities to the achievement of cumulative profit sharing pools for our broad base of employees under our Enhanced Profit Sharing Plan.

 

Broad-based employee incentive opportunities also are designed to further our objective of aligning the interests of our co-workers with those of our stockholders and customers. First, stock options granted to our broad co-worker group (excluding officers) in connection with the pay and benefit cost reductions discussed above had realized value upon exercise and unrealized gains of over $97 million based on the closing price of the company’s common stock on December 31, 2008. Pursuant to our Enhanced Profit Sharing Plan, co-workers receive incentives that also are aligned with the interests of our stockholders through payout opportunities based on our annual pre-tax profits. No annual incentives were paid to the named executive officers and no amounts were paid under the Enhanced Profit Sharing Plan for 2008 because the company did not report a profit for the year. Finally, the company maintains its long-standing broad-based on-time arrival incentive program (under which the company paid out $20 million for 2008 to eligible employees) and its perfect attendance program (under which the company gave away nine vehicles in 2008 in a drawing held for employees with six months of perfect attendance). These programs ensure a continued focus on operational performance that aligns co-worker performance with customer satisfaction, enhances our product, and drives financial performance.

 

Retention.  Continental is one of only two major domestic network carriers to avoid bankruptcy since 2001. Our experienced and skilled management team has played a significant role in our stability relative to our peers and our strong results in 2006 and 2007. We seek to retain our management team primarily by setting compensation at competitive levels, by spacing payouts over several years, and by requiring continued employment to receive those payouts.

 

We recognize the opportunities available to our senior executives from other companies within our industry as well as a broader range of general industry companies. Our strategy is to pay our officers competitively relative to companies of similar size and business complexity in general industry, while recognizing that our management team is well-regarded in the airline industry. Accordingly, the Human Resources Committee determined that it is appropriate to design programs that target total compensation for executives at the 50th percentile among the general industry group and at the 75th percentile of the airline industry, based on a benchmarking process discussed further below under “— Process — Compensation Benchmarking.”

 

Our long-term incentive program, discussed below, encourages retention by measuring performance over three-year performance periods and requires the continued employment of the participant through the performance

period, with limited exceptions in the case of death, disability, retirement or certain involuntary termination events. Our Profit Based RSUs also measure performance over a three-year performance period and space payments over a three-year payment period following the achievement of any performance target, subject to achievement of a cash hurdle and the continued employment of the participant through the payment date, also with limited exceptions in the case of death, disability, retirement or certain involuntary termination events.

 

Pay for Performance.  Our incentive compensation programs are designed to measure and reward annual performance based on absolute performance targets and long-term performance based on both absolute and relative performance targets. Absolute performance targets provide the primary links between incentive compensation and the company’s business strategy and operational results. Relative performance targets provide balance to the absolute performance targets by indicating whether the company’s goals are sufficiently aggressive in comparison to the industry. Relative performance targets also provide flexibility to deal with unforeseen events and industry-wide challenges. In such circumstances, the company could fail to achieve its absolute performance targets, but the relative performance measures will reward a management team that is able to outperform its peer group in the face of an industry downturn. Similarly, even if the absolute performance goals are attained, the failure to achieve the relative performance goals can reduce the value of management’s incentive awards.

 

Prior to each new fiscal year, management prepares financial forecasts, an operating and capital expenditure budget, and the company’s Go Forward Plan, our business plan for the new year. Based on this planning process and the operating budget approved by the board of directors, management develops and proposes performance targets under the incentive compensation programs for the new fiscal year. These targets are then evaluated by the Human Resources Committee’s compensation consultant in light of compensation trends and its benchmarking analysis and presented to the Human Resources Committee who reviews and establishes the performance targets for each program. Each of the compensation programs, including the performance goals and financial performance hurdles, is described in further detail under “— Detailed Description of Pay Elements” below as well as in the discussion following the Summary Compensation Table. The absolute and relative pay for performance measures used in our incentive programs are as follows:

 

 

Process

 

Human Resources Committee.  The Human Resources Committee, which is comprised solely of independent directors, makes all decisions concerning the compensation of our named executive officers. In December

2008, the Human Resources Committee engaged Exequity LLP as its independent compensation consultant. Prior to that time, the Human Resources Committee relied on Mercer to assist it in developing and structuring the company’s executive compensation programs in light of the principal objectives of our compensation philosophy described above. The Human Resources Committee also has retained Cleary, Gottlieb, Steen & Hamilton LLP as its legal counsel for executive compensation matters. In designing particular programs, the Human Resources Committee also considers recent trends in executive compensation and the concerns expressed by investors on the topic of executive compensation. For additional information concerning the Human Resources Committee, including its authority and its compensation consultant conflict of interest guidelines, see “Corporate Governance — Standing Committees of the Board of Directors” above.

 

Use of Tally Sheets.  We prepare comprehensive executive compensation tally sheets covering each of the named executive officers and present them to the Human Resources Committee in advance of the meetings at which incentive compensation performance targets are set and incentive awards are considered and made. The Human Resources Committee uses these tally sheets as a valuable source of historical and projected data in its process of considering and granting incentive awards. The tally sheets detail the actual dollar value of compensation received for prior years, the proposed compensation for the current year, including the potential value of any awards being considered by the committee, as well as wealth accumulation analysis in the form of projected compensation values for potential separation scenarios under the employment agreements and upon a change in control of the company.

 

Compensation Benchmarking.  The Human Resources Committee believes that our competition for executive talent includes other airlines as well as a broader range of general industry companies. Consequently, in assessing our compensation levels and designing executive compensation programs, the Human Resources Committee compares Continental’s executive compensation levels to both an airline-only peer group as well as a database of large, non airline-specific U.S.-based companies, which for 2008 continued to be the “Mercer Large 150.” The database represents companies of similar size and scale as Continental so that the analysis compares executive compensation for positions with relatively similar levels of responsibility and complexity. The Mercer Large 150 has median revenue of $16.4 billion and median assets of $18.3 billion versus Continental’s annual revenue of $15.2 billion and assets of $12.7 billion as of December 31, 2008. Additional information concerning the Mercer Large 150 is attached as Appendix A to this proxy statement. Within the airline industry, the peer group for both pay and performance comparison consists of American Airlines, United Airlines, Delta Air Lines, Northwest Airlines (which merged with Delta Air Lines in 2008), US Airways, Alaska Airlines and Southwest Airlines. This peer group offers a broad comparison for determining appropriate pay and financial performance goals relative to the airline industry.

 

The Human Resources Committee annually evaluates the compensation of our CEO and our other named executive officers versus the compensation levels reported for the CEO and officers in equivalent positions for the peer group and the general industry group. The Mercer analysis reviewed by the Human Resources Committee prior to making awards for 2008 showed that total direct compensation for the company’s named executive officers was in line with the general industry group medians, other than the CEO position which fell below the 25th percentile, and was at approximately the 75th percentile of the airline peer group, again other than the CEO position which fell below the median. The Human Resources Committee believes that the current compensation levels are appropriate for retaining our named executive officers. The review of the benchmarking analysis and the core compensation philosophies are balanced with the interest of achieving the desired internal parity of compensation among the named executive officers, as described further below.

 

Evaluation of the CEO.  On an annual basis, the Human Resources Committee reviews and approves corporate goals and objectives relevant to the compensation of our CEO, evaluates our CEO’s performance in light of those goals and objectives, and determines and approves our CEO’s compensation based on its evaluation. In connection with the annual CEO performance review, the Human Resources Committee asks each member of the Board to complete a questionnaire relating to the CEO’s prior year performance and the Human Resources Committee then meets privately with the CEO to discuss the results of the evaluation. The chair of the Human Resources Committee briefs the full Board in executive session, outside the presence of management, on the results of the CEO evaluation.

Timing of Stock Awards.  The company has not granted the named executive officers any stock options since 2003 and has not granted them any restricted stock since 2002. The company has no current plans to grant stock options or restricted stock to its officers. Under the terms of our equity compensation plans, stock option awards are priced based on the closing price of our common stock on the date of grant. The RSU awards generally are granted to the named executive officers at the time the Human Resources Committee establishes performance targets for the awards (at the committee’s regularly scheduled meeting in February of each year) and generally are granted to new officers in connection with their promotion.

 

Detailed Description of Pay Elements

 

Based on the philosophy described above, the Human Resources Committee has developed and implemented the pay elements and programs described below to establish an appropriate balance between fixed and “at risk” or variable compensation elements and between absolute and relative performance, and to develop performance measures that both drive stockholder value and correlate with the long-term success of the company. The Human Resources Committee believes that the “at risk” elements of compensation and the overall compensation provided to the named executives do not encourage the executives to take excessive risks.

 

Internal Parity of Executive Compensation.  Compensation levels are based on competitive considerations, individual performance over time, overall financial results and job duties and responsibilities. Accordingly, Mr. Kellner has the highest compensation among the named executive officers, followed by Mr. Smisek. As executive vice presidents with primary responsibility over one of the three major areas of our business (finance, marketing and operations), Messrs. Rowe, Compton, and Moran have the same compensation opportunities. Mr. Misner also had the same level of compensation prior to his retirement. Our Human Resources Committee has determined that it is appropriate to provide the same base salary and incentive compensation opportunities to each of our executive vice presidents and believes that this uniformity in compensation encourages their collaboration, support and team effort, and is consistent with the company’s Working Together philosophy.

 

The Human Resources Committee believes this philosophy is further promoted by internal pay parity. According to Exequity, Continental’s relationship between CEO pay and the pay of the remaining four named executive officers exhibits significantly more internal pay parity than is the case among airline peers or the general industry. Mr. Kellner’s compensation is 136% of Mr. Smisek’s compensation and is 185% of the average compensation of the four remaining named executive officers (including Mr. Smisek). This compares, for compensation reported in the 2008 proxies of the airline peer group, to 241% for the CEO versus the second named executive officer and 257% for the CEO versus the average of the four remaining named executive officers, and 246% and 317% respectively for the same comparisons in Exequity’s general industry group.

 

Base Salaries.  In recognition of the painful decision to reduce capacity and eliminate positions beginning in September 2008, Messrs. Kellner and Smisek each voluntarily waived his salary for the period June 1, 2008 through December 31, 2008, representing a waiver of $415,625 and $336,000 in compensation, respectively. Each of the named executive officers had earlier voluntarily agreed to base salary reductions of up to 25% beginning in early 2005 as part of the company’s 2005 wage and benefit reductions. The company implemented 2% salary increases for all employee work groups other than flight attendants in each of July 2007 and 2008 as contemplated by the 2005 company-wide reduction plan. In each case, Messrs. Kellner and Smisek voluntarily declined such salary adjustment. The Human Resources Committee approved the application of the 2007 and 2008 2% salary increases to Messrs. Misner, Compton, and Moran. Upon his promotion to executive vice president and chief financial officer, the committee set Mr. Rowe’s annual salary at the same level as the salary paid to each of Messrs. Compton and Moran, consistent with the philosophy discussed above.

 

In December 2008, the Human Resources Committee considered the company’s plans to implement merit pay increases effective January 1, 2009 for our non-collectively bargained work groups. The committee approved a 2.5% merit pay increase for each of the named executive officers effective January 1, 2009, consistent with the target percentage increases provided to our non-collectively bargained workgroups. The current salary levels of the named executive officers generally remain substantially below their salary levels prior to the 2005 base salary reductions. The base salary levels for each of the named executive officers effective as of January 1, 2009 are as follows: $730,313 for Mr. Kellner (23.1% below 2005 salary); $590,400 for Mr. Smisek (18% below 2005 salary);

and $383,908 for Messrs. Rowe, Compton, and Moran (14.7% below 2005 salary for Messrs. Compton and Moran). Mr. Rowe’s salary increased from its 2005 level following his promotion to executive vice president and chief financial officer.

 

Annual Incentive Program.  In recognition of the company’s decision in 2008 to reduce capacity and eliminate positions, Messrs. Kellner and Smisek each also voluntarily waived his right to any annual incentive for 2008 performance. The annual incentive program offers the executives incentive compensation opportunities depending on achievement of an absolute level of Continental’s capital efficiency, cash flow and financial results. The capital efficiency performance measure in the annual program is Continental’s return on base invested capital, or ROBIC. ROBIC is defined as annual EBITDAR divided by the total of property and equipment (less accumulated depreciation and amortization thereon and less purchase deposits on flight equipment) at year-end and 7.5 times annual aircraft rentals. The ROBIC goals are established annually by the Human Resources Committee with reference to the company’s annual budget and financial plan. The program sets the entry incentive opportunity at 50% and permits the Human Resources Committee to establish different levels of target and stretch incentive opportunity on an annual basis. The annual incentive program opportunities for 2008 for the named executive officers, between 50% (entry) and 150% (stretch), with a target of 125% of year-end base salary, were consistent with the opportunity levels provided for the last several years. However, target and stretch levels are reconsidered each year by the Human Resources Committee to confirm that the opportunities remain consistent with the committee’s overall compensation goals discussed above. The program requires the achievement of a minimum cash balance, which also is set annually by the Human Resources Committee. The cash balance was increased for 2008 and is set at a number in excess of the cash balance required under certain of the company’s financial covenants. Finally, the program requires that the company achieve a financial performance hurdle. This target also is set annually by the Human Resources Committee but consistently has been established to require that the company report positive net income for the year as set forth on the company’s regularly prepared and publicly available consolidated statement of operations prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). No incentive payments are made, regardless of ROBIC performance, unless the minimum cash balance and financial performance hurdle are also achieved. The targets for 2008 under the annual incentive program were as follows: ROBIC entry of 11.6%, target of 12.3% and stretch of 16.0%, a financial performance hurdle that required the company to report positive net income for 2008 as described above, and a minimum cash balance of $2.2 billion. For 2008, the company failed to achieve entry level ROBIC performance and the financial performance hurdle and therefore no payments were made under the annual incentive program. The entry, target and stretch incentive opportunities with respect to the 2008 awards under the annual incentive program are set forth in the 2008 Grants of Plan-Based Awards table below.

 

Long-Term Incentive Program.  The company’s long-term incentive compensation program consists of two components — the LTIP based primarily on relative performance and the RSU program based on absolute performance.

 

 

The 2006 LTIP award, the payment of which is included as 2008 compensation in the Summary Compensation Table, had a performance period of January 1, 2006 through December 31, 2008. The performance targets applicable to the 2006 LTIP award were as follows: entry EBITDAR margin equal to the industry group average, target EBITDAR margin equal to entry plus 100 basis points, stretch EBITDAR margin equal to entry EBITDAR margin plus 200 basis points, and a minimum cash balance of $1.125 billion. The company’s EBITDAR margin performance for the 2006 LTIP award performance period exceeded the EBITDAR margin performance of the industry group by 142 basis points, thus achieving performance between the target and stretch levels. The entry, target and stretch incentive opportunities with respect to the 2008 LTIP award are set forth in the 2008 Grants of Plan-Based Awards table based on the named executive officers’ salary and position as of December 31, 2008, except with respect to Mr. Misner whose full award opportunity is shown based on his position and base salary as of his retirement date.

 

 

The Profit Based RSUs awarded for the performance period commencing April 1, 2006 and ending December 31, 2009 (the “2006 Profit Based RSUs”) have achieved the maximum or “stretch” level of performance and the first one-third increment was paid out in cash in March 2008 based on the average closing price of the company’s common stock for the 20 trading days preceding March 1, 2008, or $28.72 per share. The March 2008 payments to the named executive officers are set forth in the Stock Awards column of the Option Exercises and Stock Vested Table. The second one-third increment was paid out in cash in March 2009 based on the average closing price of the company’s common stock for the 20 trading days preceding March 1, 2009, or $12.32 per share. Each of these payments was made following achievement of the required year-end cash hurdle. In 2008, the Human Resources Committee awarded Profit Based RSUs with a performance period commencing January 1, 2008 and ending December 31, 2010 (the “2008 Profit Based RSUs”). Depending on the level of cumulative profit sharing achieved under our Enhanced Profit Sharing Plan, ranging from $100 million to $275 million, the payment percentage for these awards can range from 0% to 200% of the underlying 2008 Profit Based RSUs. Consistent with the 2008 awards under the annual incentive program, the financial performance hurdle applicable to the 2008 Profit

Based RSUs requires the company to achieve positive GAAP net income and the minimum cash balance applicable to such awards is $2.2 billion. The entry, target and stretch award opportunities are outlined in the 2008 Grants of Plan-Based Awards table. The number of RSUs subject to the 2008 Profit Based RSU awards is larger than the 2007 awards in light of the results of the benchmarking analysis, the company’s 2007 performance, concessions made by the officer group in 2007 in connection with employment agreement amendments made to comply with section 409A of the Internal Revenue Code (the “Code”), and the company’s lower stock price. The company did not achieve a profit in 2008 and, therefore, no performance target was achieved in 2008 with respect to the 2008 Profit Based RSUs. In addition, no target was achieved with respect to the Profit Based RSUs awarded for the performance period commencing January 1, 2007 and ending December 31, 2009 (the “2007 Profit Based RSUs”). In 2007, the company did achieve $158 million in profit sharing with respect to the 2007 Profit Based RSUs and this amount will be added to any profit sharing pool achieved for 2009 to determine whether a performance target is achieved with respect to the 2007 Profit Based RSUs.

 

 

Stock Options and Restricted Stock.  No stock options have been granted to the named executive officers since 2003. No restricted stock has been granted to the named executive officers since 2002.

 

Certain Other Programs.  Our named executive officers may participate in company-wide plans and programs, such as group health and welfare plans, the non-pilot 401(k) plan, and the employee stock purchase plan, that are offered to the broader employee group. These programs are consistent with similar plans offered by peer and general industry companies, and are important to the recruitment and retention of executive talent.

 

Incentive Plan 2000.  The company’s annual and long-term incentive compensation programs are adopted pursuant to the company’s stockholder-approved Incentive Plan 2000 (the “2000 Plan”). The 2000 Plan sets forth the general terms applicable to executive incentive compensation, including incentive awards, performance awards, stock options and restricted stock. The 2000 Plan expires in October 2009 and no further awards may be made under the 2000 Plan after this date, including annual incentive awards, LTIP awards, RSU awards, stock options and restricted stock. The company anticipates that the Human Resources Committee will adopt a new incentive plan, including the authorization to issue additional shares of common stock, and submit the plan for approval by the company’s stockholders at the company’s 2010 annual meeting of stockholders.

 

Perquisites.  We provide executives with certain perquisites similar in form and amount to those offered to executives at similar levels at companies within the airline industry and general industry groups. We believe that providing a portion of compensation to our executive officers in the form of perquisites, rather than in cash, enhances retention, results in a cost savings to Continental and strengthens our relationships with our executives. With respect to in-kind tax preparation services, the Human Resources Committee believes this is an important benefit to ensure that executives complete their tax preparation obligations in a timely and accurate manner. Flight benefits provide our executives and non-management directors the advantage of product familiarization and brand identification. The incremental cost to the company of providing flight benefits is minimal, while we believe the value of these benefits to the named executive officers is perceived by them to be high. Executive perquisites are discussed in the footnotes to the Summary Compensation Table.

 

SERP.  The company maintains supplemental executive retirement plans (“SERP”) for the named executive officers that provide an annual retirement benefit expressed as a percentage of the executives’ final average compensation. Since final average compensation is capped in the benefit formula applied under the company’s defined benefit pension plan, the SERP provides an opportunity for the named executive officers to earn supplemental retirement benefits. When combined with the benefit payable from the Continental Retirement Plan (“CARP”), the annual retirement benefit could range up to 75% of final average compensation for Messrs. Kellner and Smisek if they achieve 30 years (the capped amount) of SERP credited service or up to 65% of final average compensation for Messrs. Rowe, Compton, Moran, and Misner if they achieve 26 years (the capped amount) of SERP credited service. The Human Resources Committee believes that the SERP serves as an important and

effective long-term retention incentive. The benefit formulas and the compensation limitations applicable to the SERP and the defined benefit pension plan are described below under “— Pension Benefits.”

 

Other Executive Compensation Matters

 

Outlined below is certain additional information with respect to the company’s compensation policies and practices.

 

Employment Agreements.  We have entered into employment agreements with each of our named executive officers. The Human Resources Committee approved a new employment agreement for Mr. Rowe in connection with his promotion to executive vice president and chief financial officer similar in form to the agreements with the other executive vice presidents. The committee also approved the retirement agreement between the company and Mr. Misner in connection with his retirement. For a discussion of the material terms of these agreements, please see “— Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table — Employment Agreements” below. The committee believes that employment agreements enhance the company’s ability to recruit and retain the best available talent and also define maximum termination-related liabilities.

 

Stock Ownership Guidelines.  The company’s board has adopted minimum stock ownership guidelines. For a discussion of the minimum ownership guidelines for our named executive officers, please see “Corporate Governance — Corporate Governance Guidelines — Minimum Stock Ownership” above. The board believes that continued stock ownership by executives and non-management directors helps tighten the alignment between the interests of board members, executives, and stockholders.

 

Trading Policy.  Our securities trading policy prohibits our officers and directors from trading in options, warrants, puts and calls or similar instruments on our securities and from engaging in short sales of our securities or transactions that are substantially equivalent to short sales.

 

Payments Upon Termination or Change in Control.  Our executives’ employment agreements and our existing compensation programs require us to make certain payments or provide certain benefits to our named executive officers upon termination of employment, including a termination in connection with a change in control of Continental. Rumors of consolidation have been prevalent in the airline industry over the last decade, and some consolidations have occurred, such as the merger of America West and US Airways and the recent merger of Delta and Northwest. Our Human Resources Committee periodically reviews these arrangements and believes that (i) compensation must be structured in a manner that defines risk to the executives related to a change in control and permits them to remain focused on our business before, during and after any such transaction and (ii) our highly regarded management team is a unique corporate asset and that change in control or termination protections (including the excise tax protection described in “— Tax Matters” below) enhance executive stability and, therefore, are in the best interests of the company and its stockholders. Through 2008, such protections continued to represent majority practice among large, publicly traded companies, especially those within consolidating industries. The Human Resources Committee believes that the company’s protections are generally consistent with those maintained by comparable organizations, and that such protections therefore represent part of a competitive overall compensation program for our executives. For a discussion of the potential payments to our named executive officers upon termination or change in control, please see “— Potential Payments Upon Termination or Change in Control” below.

 

Clawback Policy.  The annual incentive program provides that a participant must reimburse the company for the full amount of any annual incentive paid to such participant if the participant’s misconduct (as defined in the program) results in an error in the company’s financial information that has the effect of increasing the amount of such incentive payment.

 

Tax Matters.  In designing and implementing the programs applicable to executives, the Human Resources Committee considers the effects of applicable sections of the Code, including section 162(m), section 4999, and section 409A. Section 162(m) denies publicly held companies a tax deduction for annual compensation in excess of one million dollars paid to their chief executive officer or any of their three other most highly compensated executive officers (excluding the CFO) employed on the last day of a given year, unless their compensation is based on qualified performance criteria or certain other exceptions apply. To qualify for deductibility as performance-

based compensation, the performance criteria must be established within specified periods by a committee of independent directors and approved, as to their material terms, by that company’s stockholders. Continental’s executive compensation plans, including the annual incentive program, the LTIP/RSU Program, and its stock incentive plans, were designed to permit the grant of awards that could qualify as performance-based compensation under section 162(m). Certain awards have been made under the LTIP/RSU Program to address specific retention concerns with respect to certain executives that do not meet the requirements for an exemption as performance-based compensation. However, the Human Resources Committee considered the deductibility of payments related to such awards and concluded that, while not deductible, the awards serve the best interests of the company and its stockholders. Further, the Human Resources Committee may in the future approve compensation or changes to plans, programs or awards that may cause the compensation or awards not to comply with section 162(m) if it determines that such action is appropriate and in the company’s best interests. Although the federal income tax deduction for some amounts recorded as compensation by the company to certain executives may be limited by section 162(m), that limitation does not result in the current payment of increased federal income taxes by the company due to its significant net operating loss carry forwards.

 

Section 4999 of the Code imposes an excise tax on so-called “excess parachute payments” made to an executive in connection with a change in control as described in section 280G of the Code. In light of evolving best practices in executive compensation, the Human Resources Committee adopted a policy that the company will no longer provide reimbursement for such excise taxes to officers who did not, as of the date of the adoption of the policy, have a contractual right to such benefits. All of our named executive officers had a contractual right to such benefits prior to the date of the adoption of the policy. These benefits are discussed below under “— Payments Upon Termination or Change in Control — Change in Control — Reimbursement for Excise Taxes.” Although amounts paid to the named executive officers for this additional tax protection may not be deductible, there would be no impact to the company’s current federal income taxes due to our significant net operating loss carry forwards. The committee’s policy also eliminates tax gross-ups on perquisites provided to officers who did not, as of the date of the adoption of the policy, have a contractual right to such benefits. The committee’s policy retains the flexibility to offer such reimbursements in limited circumstances if the committee determines that providing such reimbursements is in the best interest of the company and its stockholders.

 

Section 409A of the Code changed the tax rules for most forms of nonqualified deferred compensation that were not earned and vested prior to 2005 and imposes additional taxes on non-exempt deferred compensation that does not comply with the requirements of section 409A of the Code. We amended all employment agreements with the named executive officers as well as all compensation programs to avoid the imposition of additional taxes and to comply with the provisions of section 409A. The employment agreements permit the company to postpone all or any portion of any payment that was not “grandfathered” or otherwise exempt from the provisions of section 409A to the extent required to comply with section 409A.

 

The Human Resources Committee has reviewed and discussed with management the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K of the Securities Exchange Act of 1934, as amended. Based on such review and discussions with management, the Human Resources Committee has recommended that the Compensation Discussion and Analysis be included in this proxy statement and the company’s Annual Report on Form 10-K for the year ended December 31, 2008.

 

Respectfully submitted,

 

Human Resources Committee

 

Charles A. Yamarone, Chairman

Kirbyjon H. Caldwell

Henry L. Meyer III

Ronald B. Woodard

 

The following table sets forth information concerning the compensation of our CEO, our chief financial officer, our three other most highly compensated executive officers in 2008, and our former chief financial officer who retired in 2008 (collectively referred to in this proxy statement as the “named executive officers”).

 

 

 

 

 

 

 

The following table sets forth information regarding awards granted in 2008 to our named executive officers under our annual incentive program and the LTIP/RSU Program, each of which has been implemented under our Incentive Plan 2000.