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UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
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WASHINGTON,
D.C. 20549
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FORM
10-K
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(Mark
One)
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[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
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THE
SECURITIES EXCHANGE ACT OF 1934
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FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2008
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OR
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[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
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THE
SECURITIES EXCHANGE ACT OF 1934
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FOR
THE TRANSITION PERIOD FROM __________ TO __________
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Commission
File Number 1-10323
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CONTINENTAL
AIRLINES, INC.
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(Exact
name of registrant as specified in its charter)
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Delaware
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74-2099724
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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1600
Smith Street, Dept. HQSEO, Houston, Texas
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77002
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant's
telephone number, including area
code: 713-324-2950
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Securities
registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name
of Each Exchange
On Which Registered
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Class
B Common Stock, par value $.01 per share
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New
York Stock Exchange
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Securities
registered pursuant to Section 12(g) of the
Act: None
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Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes X No
_____
Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Exchange Act. Yes No X
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90
days. Yes X No
_____
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form
10-K. [X]
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer or a
non-accelerated filer. See definition of "accelerated filer and large
accelerated filer" in Rule 12b-2 of the Exchange Act. Large
accelerated filer X Accelerated
filer ___ Non-accelerated filer ___ Smaller
reporting company ___
(Do not check if a
smaller
reporting company)
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes No X
As of June 30, 2008, the aggregate
market value of the registrant's common stock held by non-affiliates of the
registrant was $1.1 billion based on the closing sale price as reported on the
New York Stock Exchange.
Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practicable date.
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Class
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Outstanding at February 13,
2009
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Class
B Common Stock, $.01 par value per share
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123,531,252
shares
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__________________
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DOCUMENTS
INCORPORATED BY REFERENCE
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Proxy
Statement for Annual Meeting of Stockholders to be held on June 10,
2009: PART III
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TABLE OF
CONTENTS
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PAGE
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PART
I
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Item
1.
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5
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5
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5
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6
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6
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7
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9
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10
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11
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12
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13
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14
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Item
1A.
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17
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17
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22
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Item
1B.
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26
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Item
2.
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27
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27
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29
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Item
3.
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29
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29
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30
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31
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Item
4.
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31
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PART
II
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Item
5.
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32
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32
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32
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32
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Item
6.
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33
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Item
7.
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37
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37
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41
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54
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67
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67
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74
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Item
7A.
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75
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Item
8.
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79
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80
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81
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83
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83
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84
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85
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87
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89
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Item
9.
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140
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Item
9A.
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140
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Item
9B.
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144
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PART
III
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Item
10.
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145
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Item
11.
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145
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Item
12.
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145
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Item
13.
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145
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Item
14.
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145
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PART
IV
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146
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Item
15.
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146
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147
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149
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PART
I
Item
1. Business.
Continental Airlines, Inc., a Delaware
corporation incorporated in 1980, is a major U.S. air carrier engaged in the
business of transporting passengers, cargo and mail. The terms
"Continental," "we," "us," "our" and similar terms refer to Continental
Airlines, Inc. and, unless the context indicates otherwise, its consolidated
subsidiaries.
We are the world's fifth largest
airline as measured by the number of scheduled miles flown by revenue passengers
in 2008. Including our wholly-owned subsidiary, Continental
Micronesia, Inc. ("CMI"), and regional flights operated on our behalf under
capacity purchase agreements with other carriers, we operate more than 2,800
daily departures. As of December 31, 2008, we flew to 120 domestic
and 121 international
destinations and offered additional connecting service through alliances with
domestic and foreign carriers. We directly served ten Canadian cities, 25
European cities, seven South American cities and six Asian cities from the U.S.
mainland as of December 31, 2008. In addition, we provide service to
more destinations in Mexico and Central America than any other U.S. airline,
serving 39 cities. Through our Guam hub, CMI provides extensive
service in the western Pacific, including service to more Japanese cities than
any other U.S. carrier.
General information about us, including
our Corporate Governance Guidelines and the charters for the committees of our
Board of Directors, can be found on our website, continental.com. Our
Board has adopted the "Ethics and Compliance Guidelines," which apply to all
directors, officers and employees of Continental and its subsidiaries and serve
as our "Code of Ethics" under Item 406 of Regulation S-K and as our "Code of
Business Conduct and Ethics" as required by Section 303A.10 of the New York
Stock Exchange ("NYSE") Listed Company Manual. These Ethics and
Compliance Guidelines also are available on our website, and future amendments
to or waivers from compliance with these guidelines will be disclosed on our
website in accordance with Item 5.05 of Form 8-K.
Copies of these charters and guidelines
are available in print to any stockholder who requests them. Written
requests for such copies may be directed to our Secretary at Continental
Airlines, Inc., P.O. Box 4607, Houston,
Texas 77210-4607. Electronic copies of our annual reports
on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, as
well as any amendments and exhibits to those reports, are available free of
charge through our website as soon as reasonably practicable after we file them
with, or furnish them to, the U.S. Securities and Exchange Commission
("SEC").
Information on our website is not
incorporated into this Form 10-K or our other securities filings and is not a
part of them.
This Form 10-K contains forward-looking
statements that are not limited to historical facts, but reflect our current
beliefs, expectations or intentions regarding future events. All
forward-looking statements involve risks and uncertainties that could cause
actual results to differ materially from those in the forward-looking
statements. For examples of those risks and uncertainties, see the
cautionary statements contained in Item 1A. "Risk
Factors." See Item 1A. "Risk Factors" and Item
7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Overview" for a discussion of trends and factors
affecting us and our industry. Also see Item 8. "Financial
Statements and Supplementary Data, Note 18 - Segment Reporting" for financial
information about each of our business segments. We undertake no
obligation to publicly update or revise any forward-looking statements to
reflect events or circumstances that may arise after the date of this report,
except as required by applicable law.
We operate our domestic route system
primarily through our hubs in the New York metropolitan area at Newark Liberty
International Airport ("New York Liberty"), in Houston, Texas at George Bush
Intercontinental Airport ("Houston Bush") and in Cleveland, Ohio at Hopkins
International Airport ("Cleveland Hopkins"). Each of our domestic
hubs is located in a large business and population center, contributing to a
large amount of "origin and destination" traffic. Our hub system
allows us to transport passengers between a large number of destinations with
substantially more frequent service than if each route were served
directly. The hub system also allows us to add service to a new
destination from a large number of cities using only one or a limited number of
aircraft. As of December 31, 2008, we operated 74% of the average
daily departures from New York Liberty, 84% of the average daily departures from
Houston Bush and 65% of the average daily departures from Cleveland Hopkins, in
each case based on scheduled commercial passenger departures and including
regional flights flown for us under capacity purchase agreements.
We directly serve destinations
throughout Europe, Asia, Canada, Mexico, Central and South America and the
Caribbean. We also provide service to numerous other destinations
through codesharing arrangements with other carriers and have extensive
operations in the western Pacific conducted by CMI. As measured by
2008 available seat miles, approximately 50% of our mainline operations is
dedicated to international traffic.
The "open skies" agreement between the
United States and the European Union, which became effective on March 30, 2008,
is resulting in increased competition from European and U.S. airlines in these
international markets, and may give rise to additional integration opportunities
between or among European and U.S. carriers. In addition, the "open
skies" agreement has enhanced our ability to compete with European and U.S.
airlines that historically have provided service between London's Heathrow
Airport and destinations in the United States. We have acquired slots
at Heathrow, and during 2008 we moved all of our London flights from London
Gatwick to London Heathrow.
New York Liberty is a significant
international gateway for our operations. From New York Liberty, we
served 25 cities in Europe, six cities in Asia, eight cities in Canada, five
cities in Mexico, seven cities in Central America, three cities in South America
and 16 Caribbean destinations at December 31, 2008. We expect to
begin daily service between New York Liberty and Shanghai, China in March
2009.
Houston Bush is the focus of our
flights to destinations in Mexico and Central and South America. As
of December 31, 2008, we flew from Houston Bush to 29 cities in Mexico, all
seven countries in Central America, seven cities in South America, six Caribbean
destinations, three cities in Canada, three cities in Europe and
Tokyo. We expect to begin daily service between Houston Bush and
Frankfurt, Germany in late 2009.
At December 31, 2008, we flew from
Cleveland Hopkins to two cities in Canada, San Juan, Puerto Rico and Cancun,
Mexico. We also provide seasonal service between Cleveland Hopkins
and London.
From its hub operations based on the
island of Guam, as of December 31, 2008, CMI provided service to eight cities in
Japan, more than any other U.S. carrier, as well as other Pacific rim
destinations, including Manila in the Philippines and Cairns,
Australia. CMI is the principal air carrier in the Micronesian
Islands, where it pioneered scheduled air service in 1968. CMI's
route system is linked to the U.S. market through Tokyo and Honolulu, each of
which CMI serves non-stop from Guam.
See Item 8. "Financial
Statements and Supplementary Data, Note 18 - Segment Reporting," for operating
revenue by geographical area.
We have alliance agreements, which are
also referred to as codeshare agreements or cooperative marketing agreements,
with other carriers. Alliances allow airlines to develop their route
structures by enabling them to offer their passengers greater destination
coverage, while providing those airlines with the potential for both increased
revenue and cost savings. We seek in particular to develop
international alliance relationships that complement our own route system and
permit expanded service through our hubs to major international
destinations. International alliances enable us to provide our
passengers better connecting service from our international flights to other
destinations beyond an alliance airline's hub and expand the product line that
we may offer in a foreign destination.
These relationships may
include (a) codesharing (one carrier placing its name and flight
number, or "code," on flights operated by the other carrier), (b) reciprocal
frequent flyer program participation, reciprocal airport lounge access and other
joint activities (such as seamless check-in at airports) and/or (c) capacity
purchase agreements.
We are currently a member of SkyTeam, a
global alliance of airlines that includes Aeroflot, Aeromexico, Air France,
Alitalia, China Southern, CSA Czech, Delta Air Lines, Inc. ("Delta"), KLM,
Korean Air and Northwest Airlines, Inc. ("Northwest"), as well as associate
members Copa Airlines of Panama ("Copa Airlines"), Kenya Airways and
AirEuropa. As a member of SkyTeam, we have bilateral codeshare,
frequent flyer program participation and airport lounge access agreements with
each of the SkyTeam members.
Following the announcement by Delta and
Northwest of their definitive agreement to merge, we evaluated which of the
three major global airline alliances would be the best fit for our business over
the long term and decided that Star Alliance was the best alliance for
us. During 2008, we entered into framework agreements with United Air
Lines, Inc. ("United"), Deutsche Lufthansa AG ("Lufthansa") and Air Canada, each
a member of Star Alliance, pursuant to which we plan to develop an extensive
code-share relationship and reciprocity of frequent flier programs, elite
customer recognition and airport lounge use with these other
airlines. We plan to implement these relationships and join United,
Lufthansa and Air Canada (and other member airlines) in Star Alliance as
promptly as practicable following our exit from SkyTeam. We will exit
SkyTeam effective with our last flight on October 24, 2009.
Star Alliance was established in 1997
as the first truly global airline alliance to offer customers worldwide reach
and a smooth travel experience. Star Alliance received the Air
Transport World Market Leadership Award in 2008 and was voted Best Airline
Alliance by Business Traveller Magazine in 2003, 2006, 2007 and 2008 and by
Skytrax in 2003, 2005 and 2007. The members are Air Canada, Air
China, Air New Zealand, All Nippon Airways, Asiana Airlines, Austrian Airlines,
British Midland Airways, EgyptAir, LOT Polish Airlines, Lufthansa, Scandinavian
Airlines, Shanghai Airlines, Singapore Airlines, South African Airways, Spanair,
Swiss International Air Lines, TAP Portugal, Thai Airways International, Turkish
Airlines, United and US Airways. Regional member carriers Adria
Airways (Slovenia), Blue1 (Finland) and Croatia Airlines enhance the global
network. Air India, Brussels Airlines and TAM Airlines have also been
accepted as future members. Overall, the Star Alliance network offers
more than 16,500 daily flights to 912 destinations in 159
countries.
On July 23, 2008, we filed an
application with the U.S. Department of Transportation ("DOT") to join United
and a group of eight other carriers within Star Alliance that already hold
antitrust immunity. Approval by the DOT of this application would
enable us, United and these other immunized Star Alliance carriers to work
closely together to deliver highly competitive international flight schedules,
fares and service and would provide competitive balance to antitrust-immunized
carriers in SkyTeam.
Additionally, we, United, Lufthansa and
Air Canada have requested DOT approval to establish a trans-Atlantic joint
venture to create a more efficient and comprehensive trans-Atlantic network for
our respective customers, offering those customers more service, scheduling and
pricing options and establishing a framework for similar joint ventures in other
regions of the world. We are seeking a modification to our existing
pilot collective bargaining agreement, which presently prohibits us from
engaging in a revenue or profit sharing agreement with a domestic air carrier,
to permit us to enter into such joint ventures.
Prior to joining Star Alliance, we must
exit our existing bilateral alliance agreements with SkyTeam members and enter
into new alliance agreements with our new alliance partners. The
length of this transition period will depend upon a number of factors outside of
our control and the timing of our withdrawal from our existing bilateral
agreements with various SkyTeam members.
In the U.S. domestic market, where
antitrust immunity would not apply, we and United plan to begin broad
code-sharing, which facilitates the seamless creation of customer travel
itineraries using both carriers, as well as frequent flier programs, elite
customer recognition and airport lounge reciprocity. These
cooperative activities are subject to DOT code-sharing regulation and to our
exiting certain of our current alliance relationships.
Subject to these matters, we currently
anticipate that we will join Star Alliance and begin broad code-sharing and
other commercial cooperation with United, Lufthansa and Air Canada (and the
other members of Star Alliance) in the fourth quarter of 2009.
Except for the regional capacity
purchase agreements listed below, all of our codeshare relationships are
currently free-sell codeshares, where the marketing carrier sells seats on the
operating carrier's flights from the operating carrier's inventory, but takes no
inventory risk. In contrast, in capacity purchase agreements, the
marketing carrier purchases all seats on covered flights and is responsible for
all scheduling, pricing and seat inventories. Some of our alliance
relationships include other cooperative undertakings such as joint purchasing,
joint corporate sales contracts, airport handling, facilities sharing or joint
technology development.
Our regional capacity purchase
agreements are with ExpressJet Airlines, Inc. ("ExpressJet"), a wholly-owned
subsidiary of ExpressJet Holdings, Inc. ("Holdings"), Chautauqua Airlines, Inc.,
("Chautauqua"), a wholly-owned subsidiary of Republic Airways Holdings, Inc.,
Champlain Enterprises, Inc. ("CommutAir") and Pinnacle Airlines Corp.'s
subsidiary, Colgan. See Item 8. "Financial Statements and
Supplementary Data, Note 16 - Regional Capacity Purchase Agreements" for further
discussion of our capacity purchase agreements.
Regional
Operations
Our regional operations are conducted
by other operators on our behalf, primarily under capacity purchase
agreements. We schedule and market the regional flights provided for
us by other operators under capacity purchase agreements. Our
regional operations using regional jet aircraft are conducted under the name
"Continental Express" by ExpressJet and Chautauqua and those using turboprop
aircraft are conducted under the name "Continental Connection" by CommutAir and
Colgan. As of December 31, 2008, our regional operators served 103
destinations in the United States, 26 cities in Mexico, eight cities in Canada
and one Caribbean destination on our behalf. We believe this regional
service complements our operations by carrying traffic that connects onto our
mainline jets and by allowing more frequent flights to smaller cities than could
be provided economically with larger jet aircraft. Additional
commuter feed traffic currently is provided to us by other alliance airlines, as
discussed above.
In June 2008, we entered into the
Second Amended and Restated Capacity Purchase Agreement with ExpressJet and
certain of its affiliates (the "Amended ExpressJet CPA"), which amended and
restated the previous capacity purchase agreement effective July 1,
2008. Under the Amended ExpressJet CPA, we will continue to purchase
all of the capacity from the ExpressJet flights covered by the
agreement. In exchange for ExpressJet's operation of the flights and
performance of other obligations under the Amended ExpressJet CPA, we have
agreed to pay ExpressJet a pre-determined rate, subject to annual escalations
(capped at 3.5%), for each block hour flown (the hours from gate departure to
gate arrival) and to reimburse ExpressJet for various pass-through expenses
(with no margin or mark-up) related to the flights, including insurance,
property taxes, international navigation fees, depreciation (primarily
aircraft-related), landing fees and certain maintenance
expenses. Under the Amended ExpressJet CPA, we are responsible for
the cost of providing fuel for all flights and for paying aircraft rent for all
aircraft covered by the Amended ExpressJet CPA. The Amended
ExpressJet CPA contains incentive bonus and rebate provisions based upon
ExpressJet's operational performance, but no longer includes any payment
adjustments in respect of ExpressJet's operating margin. The
pre-determined rate under the Amended ExpressJet CPA is lower than the rate
under the previous capacity purchase agreement and more competitive with rates
offered by other regional service providers.
The Amended ExpressJet CPA covers a
minimum of 205 regional jets in the first year and ExpressJet currently operates
214 regional jets under that contract. After the first year, the
minimum number of covered aircraft adjusts to 190 regional jets, or fewer as
leases on covered aircraft expire. The Amended ExpressJet CPA will
expire after a term of seven years and has no renewal or extension
options. ExpressJet also leases 30 Embraer 50-seat regional jets from
us outside the Amended ExpressJet CPA.
During 2007, Chautauqua began providing
and operating forty-four 50-seat regional jets as a Continental Express carrier
under a capacity purchase agreement (the "Chautauqua CPA"). As of
December 31, 2008, 37 aircraft were being flown by Chautauqua for
us. The Chautauqua CPA requires us to pay Chautauqua a fixed fee,
subject to annual escalations (capped at 3.5%), for each block hour flown for
its operation of the aircraft. Chautauqua supplies the aircraft that
it operates under the agreement. Aircraft are scheduled to be removed
from service under the Chautauqua CPA each year through 2012, provided that we
have the unilateral right to extend the Chautauqua CPA on the same terms on an
aircraft-by-aircraft basis for a period of up to five years in the aggregate for
20 aircraft and for up to three years in the aggregate for seven aircraft,
subject to the renewal terms of the related aircraft lease.
Our capacity purchase agreement with
CommutAir (the "CommutAir CPA") provides for CommutAir to operate sixteen
37-seat Bombardier Q200 twin-turboprop aircraft as a Continental Connection
carrier on short distance routes from Cleveland Hopkins and New York
Liberty. The CommutAir CPA became effective in 2006 and has a term of
approximately six years. CommutAir supplies all of the aircraft that
it operates under the agreement.
In 2008, Colgan began operating fifteen
74-seat Bombardier Q400 twin-turboprop aircraft on short and medium-distance
routes from New York Liberty on our behalf. Colgan operates the
flights as a Continental Connection carrier under a capacity purchase agreement
with us. In January 2009, we amended the capacity purchase agreement
to increase by 15 the number of Q400 aircraft operated by Colgan on our
behalf. We expect that Colgan will begin operating these 15
additional aircraft as they are delivered, beginning in the third quarter of
2010 through the second quarter of 2011. Each aircraft is scheduled
to be covered by the agreement for approximately ten years following the date
such aircraft is delivered into service thereunder. Colgan supplies
all aircraft that it operates under the agreement. One of
Colgan's Q400 aircraft was involved in an accident on February 12, 2009,
reducing the number of aircraft currently being flown for us to 14.
As with other major domestic
hub-and-spoke carriers, a majority of our revenue comes from tickets sold by
travel agents. Although we generally do not pay base commissions, we
often negotiate compensation to travel agents based on their performance in
selling our tickets. A significant portion of our revenue, including
a significant portion of our higher yield traffic, is derived from bookings made
through third party global distribution systems ("GDSs") used by many travel
agents and travel purchasers.
We use the internet to provide
travel-related services for our customers and to reduce our overall distribution
costs. We have marketing agreements with internet travel service
companies such as Orbitz, Hotwire, Travelocity and Expedia. Although
customers' use of the internet has helped to reduce our distribution costs, it
also has lowered our yields because it has enhanced the visibility of competing
fares offered by low-cost carriers.
Our website, continental.com, is our
lowest cost distribution channel and recorded approximately $3.9 billion in
ticket sales in 2008, an 11% increase over 2007. The site offers
customers the ability to purchase and change tickets on-line, to check-in
on-line and to have direct access to information such as schedules,
reservations, flight status, frequent flyer account information (including the
ability to redeem and change reward travel) and Continental travel
specials. Tickets purchased through our website accounted for 26% of
our passenger revenue during 2008, compared with 25% in 2007 and 22% in
2006.
Substantially all of our sales involve
our electronic ticketing, or e-ticket, product. Our e-ticket product
enables us to process customer and revenue information more
efficiently. E-ticketed passengers have the ability to check-in at
continental.com for all domestic and international travel. On-line
check-in allows customers to obtain a boarding pass from their home, office or
hotel up to 24 hours prior to departure and to proceed directly to security at
the airport, bypassing the ticket counter and saving time. Passengers
with baggage who check-in on-line may use special kiosks at our hub airports to
check their bags rapidly. E-ticket passengers also can use
self-service kiosks to check-in. Our customers have access to
approximately 1,400 Continental self-service kiosks at 171 airports throughout
our system, including all domestic airports we serve. During 2008,
76% of all check-ins were done on-line or at self-service kiosks.
We were one of the first U.S. airlines
to implement interline e-ticketing, allowing customers to use electronic tickets
when their itineraries include travel on multiple carriers. At
December 31, 2008, we had interline e-ticketing arrangements with 119 air
carriers.
During 2008, we began implementation of
our joint project with the Transportation Security Administration ("TSA") to be
the first U.S. carrier to launch a paperless boarding pass pilot program that
allows passengers to receive boarding passes electronically on their cell phones
or PDAs, and use those devices to pass through security and board the
aircraft. The new technology heightens the ability to detect
fraudulent boarding passes while improving customer service and reducing paper
use. This service is currently available at each of our hubs and
other select airports.
We offer a carbon offsetting program
developed in partnership with non-profit Sustainable Travel
International. This program allows customers to view the carbon
footprint of their booked itinerary and choose among a number of options to
reduce the impact of carbon dioxide emissions of their flights. For
customers who elect to participate in this program, their contributions are made
directly to Sustainable Travel International to fund the purchase of offsets,
which are generated from sustainable development projects including
reforestation, renewable energy and energy conservation. We receive
no revenue related to this program.
The U.S. airline industry is
characterized by substantial competition with respect to fares, routes and
services, especially in domestic markets. Carriers use discount fares
to stimulate traffic during periods of slack demand, or when they begin service
to new cities or have excess capacity, to generate cash flow and to establish,
increase or preserve market share. Some of our competitors have
greater financial resources and/or lower cost structures than we do, some of
which is the result of bankruptcies and/or mergers. In recent years,
the domestic market share held by low-cost carriers has increased significantly
and is expected to continue to increase. The increased market
presence of low-cost carriers, which engage in substantial price discounting,
has diminished the ability of the network carriers to maintain sufficient fare
levels in domestic markets to achieve sustained profitability. We
cannot predict whether or for how long these trends will continue.
In addition to price competition,
airlines also compete for market share by increasing the size of their route
system and the number of markets they serve. Several of our domestic
competitors are continuing to increase their international capacity, including
service to some destinations that we currently serve. Additionally,
the "open skies" agreement between the United States and the European Union,
which became effective on March 30, 2008, is resulting in increased competition
from European and U.S. airlines in these international markets, and may give
rise to additional consolidation or better integration opportunities among
European carriers. The increased competition in these international
markets, particularly to the extent our competitors engage in price discounting,
may have a material adverse effect on our results of operations, financial
condition or liquidity.
We also compete with U.S. and foreign
carriers, including major network carriers, low-cost carriers and regional
carriers, throughout our global network on the basis of scheduling, availability
of non-stop flights, on-time performance, type of equipment, cabin
configuration, amenities provided to passengers, frequent flyer programs,
on-board products, markets served and other services.
We are also facing stronger competition
from carriers that have participated in industry consolidation or expanded
airline alliances and joint ventures. See Item 1A. "Risk Factors -
Risk Factors Relating to the Airline Industry - The airline is highly
competitive and susceptible to price discounting" below for a discussion of the
competitive advantages enjoyed by carriers participating in industry
consolidation and/or airline alliances and joint ventures.
We maintain our "OnePass" frequent
flyer program to encourage repeat travel. OnePass allows passengers
to earn mileage credits by flying us and certain other alliance
carriers. We also sell mileage credits to credit/debit card
companies, hotels, car rental agencies, utilities and various shopping and gift
merchants participating in OnePass. Mileage credits can be redeemed
for free, discounted or upgraded travel on Continental, Continental Express,
Continental Connection, CMI or alliance airlines. Most travel awards
are subject to capacity limitations.
During 2008, OnePass participants
claimed approximately 1.6 million awards. Frequent flyer awards
accounted for an estimated 8.5% of our consolidated revenue passenger
miles. We believe displacement of revenue passengers by passengers
who redeem rewards earned by flying on us is minimal given our ability to manage
frequent flyer inventory and the low ratio of OnePass award usage to revenue
passenger miles. At December 31, 2008, we had an outstanding
liability associated with approximately 2.4 million free travel awards that were
expected to be redeemed for free travel on Continental, Continental Express,
Continental Connection, CMI or alliance airlines. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Critical Accounting Policies and Estimates - Frequent Flier
Accounting" for a detailed discussion concerning the accounting treatment of our
OnePass frequent flier program.
Our "EliteAccess" service is offered to
OnePass members who qualify for "Elite" status (based on the number of paid
flight miles and the fares purchased), first class and BusinessFirst ticket
holders and travelers with high yield coach tickets who qualify as "Elite for
the Day." EliteAccess passengers receive preferential treatment in
the check-in, boarding and baggage claim areas and have special security lanes
at certain airports. We also provide a guarantee of no middle seat
assignment for those passengers using a full-fare, unrestricted
ticket.
As of December 31, 2008, we had
approximately 42,490 employees, which, due to the number of part-time employees,
represents 40,460 full-time equivalent employees consisting of approximately
16,940 customer service agents, reservations agents, ramp and other airport
personnel, 8,685 flight attendants, 6,235 management and clerical employees,
4,385 pilots, 4,095 mechanics and 120 dispatchers. Approximately 44%
of our full-time equivalent employees are represented by unions. The
following table reflects the principal collective bargaining agreements, and
their respective amendable dates, of Continental and CMI:
|
Employee Group
|
Approximate
Number
of
Full-time
Equivalent Employees
|
Representing Union
|
Contract
Amendable Date
|
|
|
Continental
Flight
Attendants
|
8,395
|
International
Association of
Machinists
and Aerospace
Workers
("IAM")
|
December
2009
|
|
|
Continental
Pilots
|
4,385
|
Air
Line Pilots Association
International
("ALPA")
|
December
2008
|
|
|
Continental
Mechanics
|
3,975
|
International
Brotherhood of
Teamsters
("Teamsters")
|
December
2008
|
|
|
CMI
Fleet and Passenger
Service
Employees
|
430
|
Teamsters
|
November
2011
|
|
|
CMI
Flight Attendants
|
290
|
IAM
|
December
2010
|
|
|
Continental
Dispatchers
|
120
|
Transport
Workers Union
("TWU")
|
December
2008
|
|
|
CMI
Mechanics
|
120
|
Teamsters
|
December
2009
|
|
|
Continental
Flight
Simulator
Technicians
|
40
|
TWU
|
December
2008
|
|
The collective bargaining agreements
with our pilots, mechanics and certain other work groups became amendable in
December 2008. During 2008, we met with representatives of the
applicable unions to engage in bargaining for amended collective bargaining
agreements. These talks will continue in 2009 with a goal of reaching
agreements that are fair to us and to our employees. Although there
can be no assurance that our generally good labor relations and high labor
productivity will continue, the preservation of good relations with our
employees is a significant component of our business
strategy. Additional information about our employee initiatives and
corporate social responsibility efforts can be found in our Global Citizenship
Report on our website, continental.com.
Industry
Regulation and Airport Access
Federal
Regulations. We provide air transportation under certificates
of public convenience and necessity issued by the U.S. Department of
Transportation ("DOT"). These certificates may be altered, amended,
modified or suspended by the DOT if public convenience and necessity so require,
or may be revoked for intentional failure by the holder of the certificate to
comply with the terms and conditions of a certificate. Continental
and CMI each operate under a separate air carrier certificate issued by the
Federal Aviation Administration ("FAA"), which may be amended, suspended or
revoked by the FAA if the public interest and safety in air commerce so
require.
Airlines are regulated by the FAA,
primarily in the areas of flight operations, maintenance, ground facilities and
other technical matters. Pursuant to these regulations, we have
established, and the FAA has approved, a maintenance program for each type of
aircraft we operate that provides for the ongoing maintenance of our aircraft,
ranging from frequent routine inspections to major overhauls.
Our future ability to maintain and/or
grow capacity could be adversely affected by additional laws, regulations and
growth constraints. The FAA has designated certain airports,
including New York Liberty and New York's John F. Kennedy International Airport
("Kennedy") and LaGuardia Airport ("LaGuardia") as "high density traffic
airports" and has limited the number of departure and arrival slots at those
airports. To address concerns about airport congestion, the FAA has
imposed operating restrictions at these airports including recent additional
capacity reductions at LaGuardia. The FAA has designated New York
Liberty and Kennedy as Level 3 Coordinated Airports under the International Air
Transport Association Worldwide Scheduling Guidelines, which requires us to
participate in seasonal FAA procedures for capacity allocation and schedule
coordination for New York Liberty and to have slots to operate at that
airport. Although we do not believe that these current operating
restrictions will have a material effect on our operations at New York Liberty,
we cannot predict the impact of future capacity constraints or allocations or
other restrictions on our operations that might be imposed by the FAA, Congress
or other regulators, which might have a material adverse effect on
us.
Although currently not effective
because of a court order, the FAA has issued rules that continue the FAA
requirement through 2019 that carriers conducting commercial flights at New York
Liberty, Kennedy and LaGuardia have a slot for arrival or departure at these
airports. Under these rules, the FAA will maintain current slot
holdings of airlines at New York Liberty, Kennedy and LaGuardia, except for the
annual withdrawal through 2013 and auction to the highest bidder of (i) 2% of
each airline's slots at New York Liberty and Kennedy that exceed 20 and (ii) 2%
of each airline's slots at LaGuardia. In addition, these rules
provide that the FAA will withdraw and retire 5% of each airline's slots at
LaGuardia. The withdrawal and auctioning to the highest bidder of our
slots could have a material adverse effect on us by causing us to incur
substantial costs to successfully bid for them or by reducing our slot
portfolio, requiring us to terminate flights associated with these slots and
increasing our costs to operate at these airports. Joined by our
airline trade association, the Air Transport Association, and the Port Authority
of New York and New Jersey, which operates New York Liberty, Kennedy and
LaGuardia, we have challenged the legality of the FAA withdrawal of slots from
airlines for non-operational reasons and the slot auction in the U.S. Court of
Appeals for the D.C. Circuit. The court has ordered the FAA not to
implement the rules while our challenge is pending, so the rules have not become
effective and no slot withdrawals or auctions have occurred under such
rules.
Under the Aviation and Transportation
Security Act (the "Aviation Security Act") and related federal regulations,
substantially all security screeners at airports are federal employees and
significant other elements of airline and airport security are overseen and
performed by federal employees, including federal security managers, federal law
enforcement officers, federal air marshals and federal security
screeners. Among other matters, the law mandates improved flight deck
security, deployment of federal air marshals onboard flights, improved airport
perimeter access security, airline crew security training, enhanced security
screening of passengers, baggage, cargo, mail, employees and vendors, enhanced
training and qualifications of security screening personnel, additional
provision of passenger data to U.S. Customs and Border Protection and enhanced
background checks.
Airports from time to time seek to
increase the rates charged to airlines, and the ability of airlines to contest
such increases has been restricted by federal statutes, DOT and FAA regulations
and judicial decisions. Under the Aviation Security Act, funding for
passenger security is provided in part by a per enplanement ticket tax
(passenger security fee) of $2.50, subject to a $5 per one-way trip
cap. The Aviation Security Act also allows the TSA to assess an
aviation security infrastructure fee on each airline up to the total amount
spent by that airline on passenger and property screening in calendar year 2000
and, starting in fiscal year 2005, to impose a new methodology for calculating
assessments. TSA has continued to assess this fee on
airlines. Furthermore, because of significantly higher security and
other costs incurred by airports since September 11, 2001, many airports have
significantly increased their rates and charges to airlines, including us, and
may do so again in the future. Most airports where we operate
impose passenger facility charges of up to $4.50 per segment, subject to an $18
per roundtrip cap.
In time of war or during a national
emergency or defense-oriented situation, we and other air carriers could be
required to provide airlift services to the Air Mobility Command under the Civil
Reserve Air Fleet program ("CRAF"). If we were required in the future
to provide a substantial number of aircraft and crew to the Air Mobility Command
under CRAF, our operations could be materially adversely affected.
International
Regulations. The availability of international routes to U.S.
carriers is regulated by treaties and related agreements between the United
States and foreign governments. The United States typically follows
the practice of encouraging foreign governments to accept multiple carrier
designation on foreign routes, although certain countries have sought to limit
the number of carriers allowed to fly these routes. Certain foreign governments
impose limitations on the ability of air carriers to serve a particular city
and/or airport within their country from the United States. Bilateral
agreements between the United States and foreign governments often include
restrictions on the number of carriers (designations), operations (frequencies),
or airports (points) that can be served. When designations are
limited, only a certain number of airlines of each country may provide service
between the countries. When frequencies are limited, operations are
restricted to a certain number of weekly flights (as awarded by the United
States to the domestic carrier, based on the bilateral limits). When
points are limited, only certain airports within a country can be
served.
For a U.S. carrier to fly to any
international destination that is not subject to an "open skies" agreement
(meaning all carriers have access to any destination in a particular country),
it must first obtain approval from both the United States and the foreign
country where the destination is located, which is referred to as a "foreign
route authority." Route authorities to some international
destinations can be sold between carriers, and their value can vary because of
limits on accessibility. For those international routes where there
is a limit on the number of carriers or frequency of flights, studies have shown
that these routes have more value than those without restrictions. To
the extent foreign countries adopt open skies policies or otherwise liberalize
or eliminate restrictions on international routes, those actions would increase
competition and potentially decrease the value of a route. We cannot
predict what laws, treaties and regulations relating to international routes
will be adopted or their resulting impact on us, but the overall trend in recent
years has been an increase in the number of open skies agreements and the impact
of any future changes in governmental regulation of international routes could
be significant.
Environmental
Regulations. Many aspects of airlines' operations are also
subject to increasingly stringent federal, state, local and foreign laws
protecting the environment, including the imposition of additional taxes on
airlines or their passengers. Future regulatory developments in the
United States and abroad could adversely affect operations and increase
operating costs in the airline industry. The European Union has
issued a directive to member states to include aviation in its Greenhouse Gas
Emissions Trading Scheme by February 2010, which will require us to have
emissions allowances to operate flights to and from member states of the
European Union in January 2012 and thereafter, including flights between the
United States and the European Union. The U.S. government and other
non-EU governments are expected to challenge the application of the EU emissions
trading scheme to their airlines; however, we may be forced to comply with the
EU emission trading scheme requirements during a legal challenge. We
may have to purchase emissions allowances through the EU emissions trading
scheme to cover EU flights that exceed our free allotment, which could result in
substantial costs for us.
Other regulatory actions that may be
taken in the future by the U.S. government, foreign governments (including the
European Union), or the International Civil Aviation Organization to address
climate change or limit the emission of greenhouse gases by the aviation sector
are unknown at this time. Climate change legislation is anticipated
in the United States, but it is currently unknown how the potential legislation
will be applied to the aviation industry. The impact to us and our
industry from such actions is likely to be adverse and could be significant,
particularly if regulators were to conclude that emissions from commercial
aircraft cause significant harm to the upper atmosphere or have a greater impact
on climate change than other industries. Potential actions may
include the imposition of requirements to purchase emission offsets or credits,
which could require participation in emission trading (such as required in the
European Union), substantial taxes on emissions and growth restrictions on
airline operations, among other potential regulatory actions.
The DOT allows local airport
authorities to implement procedures designed to abate special noise problems,
provided those procedures do not unreasonably interfere with interstate or
foreign commerce or the national transportation system. Some
airports, including the major airports at Boston, Chicago, Los Angeles, San
Diego, Orange County (California), Washington National, Denver and San
Francisco, have established airport restrictions to limit noise, including
restrictions on aircraft types to be used and limits on the number and
scheduling of hourly or daily operations. In some instances, these
restrictions have caused curtailments in services or increased operating costs,
and could limit our ability to expand our operations at the affected
airports. Local authorities at other airports could consider adopting
similar noise regulations. Some foreign airports, including major
airports in countries such as the United Kingdom, France, Spain, Belgium,
Germany and Japan, have adopted similar restrictions to limit noise, and in some
instances our operations and costs have been adversely affected in the same
manner as described above.
Item
1A. Risk Factors.
There
are many factors that continue to threaten our operations, financial condition,
results of operations and liquidity. These factors are discussed
below.
Risk
Factors Relating to the Company
Fuel
prices or disruptions in fuel supplies could have a material adverse effect on
us. Expenditures for
fuel and related taxes represent the largest single cost of operating our
business. These costs include fuel costs on flights flown for us
under capacity purchase agreements. Our operations depend on the
availability of jet fuel supplies, and our results are significantly impacted by
changes in jet fuel prices, which have been extremely volatile in recent
months. Jet fuel prices have recently decreased precipitously after
increasing significantly in 2007 and achieving record levels in
2008.
Although we experienced some success in
raising ticket prices and adding or increasing other fees during part of 2008,
we were unable to increase our revenue sufficiently to keep pace with the
escalating fuel prices and suffered a substantial loss in 2008. If
fuel prices return to these historically high levels in the future, we may again
be unable to increase fares or other fees sufficiently to offset fully our
increased fuel costs.
We routinely hedge a portion of our
future fuel requirements. However, there can be no assurance that, at
any given point in time, our hedge contracts will provide any particular level
of protection against increased fuel costs or that our counterparties will be
able to perform under our hedge contracts, such as in the case of a
counterparty's bankruptcy. Additionally, a deterioration in our
financial condition could negatively affect our ability to enter into new hedge
contracts in the future.
Significant declines in fuel prices
(such as those experienced over the past several months) may increase the costs
associated with our fuel hedging arrangements to the extent we have entered into
swaps or collars. Swaps and the put option sold as part of a collar
obligate us to make payments to the counterparty upon settlement of the
contracts if the price of the commodity hedged falls below the agreed upon
amount. Declining crude oil prices have resulted in us being required
to post significant amounts of collateral to cover potential amounts owed with
respect to contracts that have not yet settled. Additionally, lower
fuel prices may result in increased industry capacity and lower fares,
especially to the extent that reduced fuel costs justify increased utilization
by airlines of less fuel efficient aircraft that are unprofitable during periods
of higher fuel prices.
Fuel prices could increase dramatically
and supplies could be disrupted as a result of international political and
economic circumstances, such as decreasing international demand resulting from
the prevailing global recession, conflicts or instability in the Middle East or
other oil producing regions and diplomatic tensions between the United States
and oil producing nations, as well as OPEC production decisions, disruptions of
oil imports, environmental concerns, weather, refinery outages or maintenance
and other unpredictable events.
Further volatility in jet fuel prices
or disruptions in fuel supplies, whether as a result of natural disasters or
otherwise, could have a material adverse effect on our results of operations,
financial condition and liquidity.
We have
decided to change our global airline alliance, which could involve significant
transition and integration risks. During 2008, we
entered into framework agreements with United, Lufthansa and Air Canada, each a
member of Star Alliance, pursuant to which we are winding down and exiting our
participation in our current alliance, SkyTeam, and plan to join United,
Lufthansa and Air Canada (and other member airlines) in Star
Alliance. This change from SkyTeam to Star Alliance could involve
significant transition and integration risks, both because we are required to
end our participation in SkyTeam and wind down our existing SkyTeam
relationships prior to our being able to participate in Star Alliance and
because we may incur costs and/or a loss of revenue (or a delay in anticipated
increased revenue from the new alliance) in connection with these
changes. The significant transition and integration risks
include:
|
·
|
our
inability to terminate our existing agreements with individual SkyTeam
members and to commence participation in Star Alliance in the transition
period we have anticipated;
|
|
·
|
significant
revenue dilution as we wind down our participation in SkyTeam and/or
insufficient or delay in receipt of revenue from our participation in Star
Alliance, including an inability to maintain our key customer and business
relationships as we transition to Star Alliance;
|
|
·
|
our
incurrence, as a result of the wind down of our SkyTeam relationships, of
costs in excess of our expectations and/or costs of an unanticipated
nature, the amount and timing of which cannot be estimated at this time,
but which could be material individually or in the
aggregate;
|
|
·
|
an
inability to join or a delay in joining Star Alliance due to lack of
applicable approvals or difficulty in satisfying entrance requirements,
including the requirement that we enter into certain bilateral agreements
with each member of Star Alliance; and
|
|
·
|
difficulties
integrating our technology processes with Star Alliance
members.
|
In addition, the full implementation of
some of the arrangements contemplated by our framework agreements requires the
approval of domestic and foreign regulatory agencies. These agencies
may deny us necessary approvals, delay certain approvals or, in connection with
granting any such approvals, impose requirements, limitations or costs on us or
on Star Alliance members, or require us or them to divest slots, gates, routes
or other assets. Such actions may impair the value to us of entering
the alliance or make participation in the alliance by us or them unattractive
and, in certain cases, could prevent us from consummating the transactions
contemplated by the framework agreements.
If any of these risks or costs
materialize, they could have a material adverse effect on our business, results
of operations and financial condition.
The
troubled global capital markets coupled with our high leverage may affect our
ability to satisfy our significant financing needs or meet our
obligations. As is the case
with many of our principal competitors, we have a high proportion of debt
compared to our capital. We have a significant amount of fixed
obligations, including debt, aircraft leases and financings, leases of airport
property and other facilities and pension funding obligations. At
December 31, 2008, we had approximately $5.9 billion of long-term debt and
capital lease obligations, including $2.4 billion that will come due by the end
of 2011.
In addition, we have substantial
non-cancelable commitments for capital expenditures, including the acquisition
of new aircraft and related spare engines. We have financing in place
for three of the Boeing 737 aircraft scheduled for delivery in 2009 and have
reached an agreement in principle with a bank for it to provide financing for
three other Boeing 737 aircraft scheduled for delivery in
2009. Boeing has agreed to provide backstop financing for all of the
additional 11 Boeing 737 aircraft scheduled for delivery through February 2010
(or 14 such additional aircraft if we fail to reach a definitive agreement for
the financing described in the previous sentence), subject to customary
conditions. However, we do not have backstop financing or any other
financing currently in place for our other aircraft on order.
The current economic crisis has
severely disrupted the global capital markets, resulting in a diminished
availability of financing and higher cost for financing that is
obtainable. If the capital markets do not improve, whether through
measures implemented by the U.S. and foreign governments, such as the Emergency
Economic Stabilization Act of 2008, or otherwise, we may be unable to obtain
financing on acceptable terms (or at all) to refinance certain maturing debt we
would normally expect to refinance and to satisfy future capital
commitments. As a result, the continued lack of liquidity in the
capital markets could have a material adverse effect on our ability to honor our
contractual commitments and our results of operations and financial
condition.
Credit
rating downgrades could have a material adverse effect on our
liquidity. Reductions in our
credit ratings may increase the cost and reduce the availability of financing to
us in the future. We do not have any debt obligations that would be
accelerated as a result of a credit rating downgrade. However, we
would have to post additional collateral under our credit card processing
agreements with Chase Bank USA, N.A. ("Chase") and American Express and under
our workers' compensation program if our debt rating falls below specified
levels.
Failure
to meet our financial covenants would adversely affect our liquidity. Our credit card
processing agreement with Chase (the "Chase processing agreement") contains
financial covenants which require, among other things, that we post additional
cash collateral if we fail to maintain (1) a minimum level of unrestricted cash,
cash equivalents and short-term investments, (2) a minimum ratio of unrestricted
cash, cash equivalents and short-term investments to current liabilities of 0.25
to 1.0 or (3) a minimum senior unsecured debt rating of at least Caa3 and CCC-
from Moody's and Standard & Poor's, respectively. If a covenant
trigger under the Chase processing agreement results in our posting additional
collateral under that agreement, we would also be required to post additional
collateral under our credit card processing agreement with American
Express.
The amount of additional cash
collateral that we may be required to post in the event of our failure to comply
with the financial covenants described above, which is based on our then-current
air traffic liability exposure (as defined in each agreement), could be
significant. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources
- - Other Liquidity Matters - Bank Card Processing Agreements" for a detailed
discussion of our collateral posting obligations under these credit card
processing agreements.
Depending on our unrestricted cash,
cash equivalents and short-term investments balance at the time, the posting of
a significant amount of cash collateral could cause our unrestricted cash and
short-term investments balance to fall below the minimum balance of $1.0 billion
required under our $350 million secured term loan facility, resulting in a
default under that facility. The posting of such additional
collateral under these circumstances and/or the acceleration of amounts borrowed
under our secured term loan facility (or other remedies pursued by the lenders
thereunder) would likely have a material adverse effect on our financial
condition.
We are currently in compliance with all
of the covenants under these agreements.
Our
obligations for funding our defined benefit pension plans are affected by
factors beyond our control. We have defined
benefit pension plans covering substantially all of our U.S. employees other
than employees of Chelsea Food Services and CMI. The timing and
amount of our funding requirements under these plans depend upon a number of
factors, including labor negotiations and changes to pension plan benefits as
well as factors outside of our control, such as the number of retiring
employees, asset returns, interest rates and changes in pension
laws. Changes to these and other factors, such as liquidity
requirements, that can significantly increase our funding requirements could
have a material adverse effect on our financial condition.
Delays in
scheduled aircraft deliveries may adversely affect our international
growth. Our future success depends, in part, on continuing our
profitable international growth. Because all of our long-range
aircraft are already fully utilized, we will need to acquire additional
long-range aircraft to continue our projected international
growth. Although we have contractual commitments to purchase the
long-range aircraft that we currently believe will be necessary for our
international growth, significant delays in their deliveries have occurred,
adversely affecting our planned international growth. If significant
delays in the deliveries of these new aircraft continue to occur, we would need
to either further curtail our international growth or try to make alternate
arrangements to acquire aircraft, possibly on less financially favorable terms,
including higher ownership and operating costs.
Labor
disruptions could adversely affect our operations. Although we enjoy
generally good relations with our employees, we can provide no assurance that we
will be able to maintain these good relations in the future or avoid labor
disruptions, including a strike. Many of our collective bargaining
agreements have amendable dates that began in December 2008, including those
with the unions representing our pilots and mechanics. We are
currently in talks with representatives of the applicable unions. We
cannot predict the outcome of these negotiations, and any labor disruption,
including a strike, that results in a prolonged significant reduction in flights
would have a material adverse effect on our results of operations and financial
condition.
Our labor
costs may not be competitive. Labor costs
constitute a significant percentage of our total operating costs. All
of the major hub-and-spoke carriers with whom we compete have achieved
significant labor cost reductions, whether in or out of
bankruptcy. We believe that our wages, salaries and benefits cost per
available seat mile, measured on a stage length adjusted basis, is higher than
that of many of our competitors. These higher labor costs may
adversely affect our ability to achieve and sustain profitability while
competing with other airlines that have achieved lower relative labor
costs. Additionally, we cannot predict the outcome of our ongoing
negotiations with our unionized workgroups, although significant increases in
the pay and benefits resulting from new collective bargaining agreements could
have a material adverse effect on us.
If we
experience problems with certain of our third party regional operators, our
operations could be materially adversely affected. All of our
regional operations are conducted by third party operators on our behalf,
primarily under capacity purchase agreements. Due to our reliance on
third parties to provide these essential services, we are subject to the risks
of disruptions to their operations, which may result from many of the same risk
factors disclosed in this report. In addition, we may also experience
disruption to our regional operations if we terminate the capacity purchase
agreement with one or more of our current operators and transition the services
to another provider. As our regional segment provides revenue to us
directly and indirectly (by providing flow traffic to our hubs), a significant
disruption to our regional operations could have a material adverse effect on
our results of operations and financial condition.
Interruptions
or disruptions in service at one of our hub airports could have a material
adverse effect on our operations. We operate
principally through our hub operations at New York Liberty, Houston Bush,
Cleveland Hopkins and Guam. Substantially all of our flights either
originate from or fly into one of these locations, contributing to a large
amount of "origin and destination" traffic. A significant
interruption or disruption in service at one of our hubs resulting from air
traffic control delays, weather conditions or events, growth constraints,
relations with third party service providers, failure of computer systems, labor
relations, fuel supplies, terrorist activities or otherwise could result in the
cancellation or delay of a significant portion of our flights and, as a result,
our business could be materially adversely affected.
We could
experience adverse publicity and declining revenues as a result of an accident
involving our aircraft or the aircraft of our regional carriers. Any accident
involving an aircraft that we operate or an aircraft that is operated under our
brand by one of our regional carriers could have a material adverse effect on us
if such accident created a public perception that our operations or those of our
regional carriers are less safe or reliable than other airlines, resulting in
passengers being reluctant to fly on us or our regional carriers. In
addition, any such accident could expose us to significant tort
liability. Although we currently maintain liability insurance in
amounts and of the type we believe to be consistent with industry practice to
cover damages arising from any such accidents, and our regional carriers carry
similar insurance and generally indemnify us for their operations on our behalf,
if our liability exceeds the applicable policy limits or the ability of a
carrier to indemnify us, we could incur substantial losses from an
accident.
A
significant failure or disruption of the computer systems on which we rely could
adversely affect our business. We depend heavily
on computer systems and technology to operate our business, such as flight
operations systems, communications systems, airport systems and reservations
systems (including continental.com and third party global distribution systems).
These systems could suffer substantial or repeated disruptions due to events
beyond our control, including natural disasters, power failures, terrorist
attacks, equipment or software failures, computer viruses or
hackers. Any such disruptions could materially impair our flight and
airport operations and our ability to market our services, and could result in
increased costs, lost revenue and the loss or compromise of important
data. Although we have taken measures in an effort to reduce the
adverse effects of certain potential failures or disruptions, if these steps are
not adequate to prevent or remedy the risks, our business may be materially
adversely affected.
Our net
operating loss carryforwards may be limited. At December 31,
2008, we had estimated net operating loss carryforwards ("NOLs") of $3.8 billion
for federal income tax purposes that expire beginning in 2009 and continuing
through 2028. Section 382 of the Internal Revenue Code ("Section
382") imposes limitations on a corporation's ability to utilize NOLs if it
experiences an "ownership change." In general terms, an ownership
change may result from transactions increasing the ownership of certain
stockholders in the stock of a corporation by more than 50 percentage points
over a three-year period.
In the event of an ownership change,
utilization of our NOLs would be subject to an annual limitation under Section
382 determined by multiplying the value of our stock at the time of the
ownership change by the applicable long-term tax-exempt rate (which is 5.40% for
December 2008). Any unused annual limitation may be carried over to
later years.
For purposes of Section 382, increases
in share holdings by, or that result in a person becoming, a holder of 5% or
more of the outstanding shares of our common stock are aggregated for purposes
of determining whether an "ownership change" has occurred. Because
our common stock has been trading at low market prices, the cost of acquiring a
sufficient number of shares of our common stock to become a holder of 5% or more
of the outstanding shares, and the cost of acquiring additional shares by
existing holders, has decreased significantly from historical levels, increasing
the possibility that we could experience an "ownership
change." Although we cannot currently predict whether or when such an
"ownership change" may occur, an ownership change as of December 31, 2008 would
have resulted in a $119 million limit to our annual NOL utilization, before
consideration of any built-in gains. The imposition of this
limitation on our ability to use our NOLs to offset future taxable income could
cause us to pay U.S. federal income taxes earlier than if such limitation were
not in effect and could cause such NOLs to expire unused, reducing or
eliminating the benefit of such NOLs. In addition, depending on the
market value of our common stock at the time of any such ownership change, we
may be required to recognize a significant non-cash tax charge, the amount of
which we cannot estimate at this time.
The
global recession could continue to result in less demand for air
travel. The U.S. and
global economies are currently in a recession. The airline industry
is highly cyclical, and the level of demand for air travel is correlated to the
strength of the U.S. and global economies. For 2008, a year in which
the U.S. gross domestic product experienced its largest contraction in 25 years,
traffic for the seven largest U.S. carriers, measured in miles flown by revenue
passengers, fell approximately 2% as compared to 2007, the first such annual
decline in five years. This decline in demand has disproportionately
reduced the volume of high yield traffic in the premium cabins on international
flights, as many business and leisure travelers are either curtailing their
international travel or purchasing lower yield economy tickets. A
prolonged recession in the U.S. or global economies that continues to contribute
to the loss of business and leisure traffic, particularly the loss of high yield
international traffic in our first class and BusinessFirst cabins, could have a
material adverse effect on our results of operations and financial
condition.
The
airline industry is highly competitive and susceptible to price
discounting. The U.S. airline industry is characterized by
substantial price competition, especially in domestic
markets. Carriers use discount fares to stimulate traffic during
periods of slack demand, or when they begin service to new cities or have excess
capacity, to generate cash flow and to establish, increase or preserve market
share. Some of our competitors have greater financial resources
(including a larger percentage or more favorable fuel hedges against price
increases) and/or lower cost structures than we do, some of which is the result
of bankruptcies and/or mergers. In recent years, the domestic market
share held by low-cost carriers has increased significantly and is expected to
continue to increase. The increased market presence of low-cost
carriers, which engage in substantial price discounting, has diminished the
ability of the network carriers to maintain sufficient fare levels in domestic
markets to achieve sustained profitability. We cannot predict whether
or for how long these trends will continue.
In addition to price competition,
airlines also compete for market share by increasing the size of their route
system and the number of markets they serve. Several of our domestic
competitors have increased their international capacity, including service to
some destinations that we currently serve. Additionally, the "open
skies" agreement between the United States and the European Union, which became
effective on March 30, 2008 is resulting in increased competition from European
and U.S. airlines in these international markets, and may give rise to
additional consolidation or better integration opportunities among European
carriers. The increased competition in these international markets,
particularly to the extent our competitors engage in price discounting, may have
a material adverse effect on our results of operations, financial condition or
liquidity.
Expanded
government regulation could further increase our operating costs and restrict
our ability to conduct our business. Airlines are
subject to extensive regulatory and legal compliance requirements that result in
significant costs and can adversely affect us. Additional laws,
regulations, airport rates and charges and growth constraints have been proposed
from time to time that could significantly increase the cost of airline
operations or reduce revenue. In addition, to address concerns about
airport congestion, the FAA has designated certain airports, including New York
Liberty, Kennedy and LaGuardia as "high density traffic airports," and has
imposed operating restrictions at these three airports, including recent
additional capacity reductions at LaGuardia. In addition, the FAA has
designated New York Liberty and Kennedy as Level 3 Coordinated Airports under
the International Air Transport Association Worldwide Scheduling Guidelines,
which requires us to participate in seasonal FAA procedures for capacity
allocation and schedule coordination for New York Liberty and to have slots to
operate at that airport. Although we do not believe that these
current operating restrictions will have a material adverse effect on our
operations at New York Liberty, we cannot predict the impact of future capacity
constraints or allocations or other restrictions on our operations that might be
imposed by the FAA, Congress or other regulators, which might have a material
adverse effect on us.
Additional restrictions on airline
routes and takeoff and landing slots have been or may be proposed that could
affect rights of ownership and transfer. For example, although
currently not effective because of a court order, the FAA has issued rules that
continue the FAA requirement to have a slot for arrival or departure at New York
Liberty, Kennedy and LaGuardia through 2019. These rules provide that
the FAA would withdraw and auction to the highest bidder annually through 2013 a
portion of each airline's slots at New York Liberty, Kennedy and
LaGuardia. Joined by our airline trade association, the Air Transport
Association, and the Port Authority of New York and New Jersey, which operates
New York Liberty, Kennedy and LaGuardia, we have challenged the legality of the
FAA withdrawal of slots from airlines for non-operational reasons and the slot
auction in the U.S. Court of Appeals for the D.C. Circuit. The court
has ordered the FAA not to implement the rules while our challenge is pending,
so the rules have not become effective and no slot withdrawals or auctions have
occurred under such rules. We cannot provide any assurances that we
will prevail in this challenge, and the withdrawal and auctioning to the highest
bidder of our slots could have a material adverse effect on us by causing us to
incur substantial costs to successfully bid for them or by reducing our slot
portfolio, requiring us to terminate flights associated with these slots and
increasing our costs to operate at these airports.
The FAA from time to time issues
directives and other regulations relating to the maintenance and operation of
aircraft that require significant expenditures or operational
restrictions. Some FAA requirements cover, among other things,
retirement of older aircraft, security measures, collision avoidance systems,
airborne windshear avoidance systems, noise abatement and other environmental
concerns, aircraft operation and safety and increased inspections and
maintenance procedures to be conducted on older aircraft.
Many aspects of airlines' operations
also are subject to increasingly stringent federal, state, local and foreign
laws protecting the environment, including the imposition of additional taxes on
airlines or their passengers. Future regulatory developments in the
United States and abroad could adversely affect operations and increase
operating costs in the airline industry. The European Union has
issued a directive to member states to include aviation in its Greenhouse Gas
Emissions Trading Scheme by February 2010, which will require us to have
emissions allowances to operate flights to and from member states of the
European Union in January 2012 and thereafter, including flights between the
United States and the European Union. The U.S. government and other
non-EU governments are expected to challenge the application of the EU emissions
trading scheme to their airlines; however, we may be forced to comply with the
EU emission trading scheme requirements during a legal challenge. We
may have to purchase emissions allowances through the EU emissions trading
scheme to cover EU flights that exceed our free allotment, which could result in
substantial costs for us.
Other regulatory actions that may be
taken in the future by the U.S. government, foreign governments (including the
European Union), or the International Civil Aviation Organization to address
concerns about climate change and air emissions from the aviation sector are
unknown at this time. Climate change legislation is anticipated in
the United States, but it is currently unknown how the potential legislation
will be applied to the aviation industry. The impact to us and our
industry from such actions is likely to be adverse and could be significant,
particularly if regulators were to conclude that emissions from commercial
aircraft cause significant harm to the upper atmosphere or have a greater impact
on climate change than other industries. Potential actions may
include the imposition of requirements to purchase emission offsets or credits,
which could require participation in emission trading (such as required in the
European Union), substantial taxes on emissions and growth restrictions on
airline operations, among other potential regulatory actions.
Further, the ability of U.S. carriers
to operate international routes is subject to change because the applicable
arrangements between the United States and foreign governments may be amended
from time to time, or because appropriate slots or facilities are not made
available. We cannot provide assurance that current laws and
regulations, or laws or regulations enacted in the future, will not adversely
affect us.
Additional
terrorist attacks or international hostilities may further adversely affect our
financial condition, results of operations and liquidity. The
terrorist attacks of September 11, 2001 involving commercial aircraft severely
and adversely affected our financial condition, results of operations and
liquidity and the airline industry generally. Additional terrorist
attacks, even if not made directly on the airline industry, or the fear of such
attacks (including elevated national threat warnings or selective cancellation
or redirection of flights due to terror threats such as the August 2006
terrorist plot targeting multiple airlines, including us), could negatively
affect us and the airline industry. The potential negative effects
include increased security, insurance and other costs for us and lost revenue
from increased ticket refunds and decreased ticket sales. Our
financial resources might not be sufficient to absorb the adverse effects of any
further terrorist attacks or other international hostilities involving the
United States.
Additional
security requirements may increase our costs and decrease our
traffic. Since September
11, 2001, the Department of Homeland Security ("DHS") and TSA have implemented
numerous security measures that affect airline operations and costs, and they
are likely to implement additional measures in the future. Most
recently, DHS has begun to implement the US-VISIT program (a program of
fingerprinting and photographing foreign visa holders), announced that it will
implement greater use of passenger data for evaluating security measures to be
taken with respect to individual passengers, expanded the use of federal air
marshals on our flights (who do not pay for their seats and thus displace
revenue passengers and cause increased customer complaints from displaced
passengers), begun investigating a requirement to install aircraft security
systems (such as devices on commercial aircraft as countermeasures against
portable surface to air missiles) and expanded cargo and baggage
screening. DHS also has required certain flights to be cancelled on
short notice for security reasons, and has required certain airports to remain
at higher security levels than other locations. In addition, foreign
governments also have begun to institute additional security measures at foreign
airports we serve, out of their own security concerns or in response to security
measures imposed by the United States.
Moreover, the TSA has imposed measures
affecting the contents of baggage that may be carried on an
aircraft. The TSA and other security regulators could impose other
measures as necessary to respond to security threats that may arise in the
future.
A large portion of the costs of these
security measures is borne by the airlines and their passengers, and we believe
that these and other security measures have the effect of decreasing the demand
for air travel and the overall attractiveness of air transportation as compared
to other modes of transportation. Additional security measures
required by the U.S. and foreign governments in the future, such as further
expanded cargo screening, might increase our costs or decrease the demand for
air travel, adversely affecting our financial results.
The
airline industry is heavily taxed. The airline
industry is subject to extensive government fees and taxation that negatively
impact our revenue. The U.S. airline industry is one of the most
heavily taxed of all industries. These fees and taxes have grown
significantly in the past decade for domestic flights, and various U.S. fees and
taxes also are assessed on international flights. In addition, the
governments of foreign countries in which we operate impose on U.S. airlines,
including us, various fees and taxes, and these assessments have been increasing
in number and amount in recent years. Certain of these fees and taxes
must be included in the fares we advertise or quote to our
customers. Due to the competitive revenue environment, many increases
in these fees and taxes have been absorbed by the airline industry rather than
being passed on to the passenger. Further increases in fees and taxes
may reduce demand for air travel and thus our revenues.
Airlines
may continue to participate in industry consolidation or alliances, which could
have a material adverse effect on us. We are facing
stronger competition from carriers that have participated in industry
consolidation and from expanded airline alliances and joint
ventures.
Since its deregulation in 1978, the
U.S. airline industry has undergone substantial consolidation and additional
consolidation may occur in light of the recently completed merger of Delta and
Northwest, which changed the competitive environment for us and the entire
airline industry. As a result of the announcement of the
Delta/Northwest merger agreement, we conducted a comprehensive review of our
strategic alternatives and announced in April 2008 that we had determined that
the best course for us was not to merge with another airline at such
time. Through consolidation, carriers have the opportunity to
significantly expand the reach of their networks, which is of primary importance
to business travelers, and to achieve cost reductions by eliminating redundancy
in their networks and their management structures.
Through participation in airline
alliances and/or joint ventures, carriers granted anti-trust immunity by the
appropriate regulatory authorities are able to coordinate their routes, pool
their revenues and costs and enjoy other mutual benefits, such as frequent flier
program reciprocity, achieving many of the benefits of
consolidation. For example, Air France-KLM, Delta and Northwest have
received anti-trust immunity to form a new trans-Atlantic joint venture among
those airlines and to coordinate routes, fares, schedules and other matters
among those airlines, Alitalia and CSA Czech Airlines. American
Airlines, British Airways and Iberia have requested anti-trust immunity for a
similar trans-Atlantic joint venture, which would also involve many of the same
benefits.
There may be additional consolidation
or changes in airline alliances and/or joint ventures in the future, any of
which could change the competitive landscape for the airline industry and have a
material adverse effect on us.
Insurance
costs could increase materially or key coverage could become
unavailable. The September 11,
2001 terrorist attacks led to a significant increase in insurance premiums and a
decrease in the insurance coverage available to commercial
airlines. Furthermore, our ability to continue to obtain certain
types of insurance remains uncertain. Since the terrorist attacks,
the U.S. government has provided war risk (terrorism) insurance to U.S.
commercial airlines to cover losses. War risk insurance in amounts
necessary for our operations, and at premiums that are not excessive, is not
currently available in the commercial insurance market. If the
government discontinues this coverage in whole or in part, we may be able to
obtain comparable coverage in the commercial insurance market only, if it is
available at all, for substantially higher premiums and on more restrictive
terms. If we are unable to obtain adequate war risk insurance, our
business could be materially and adversely affected.
Public
health threats affecting travel behavior could have a material adverse effect on
the industry. Public health threats, such as the bird flu,
Severe Acute Respiratory Syndrome (SARs) and other highly communicable diseases,
outbreaks of which have occurred in various parts of the world in which we
operate, could adversely impact our operations and the worldwide demand for air
travel. Any quarantine of personnel or inability to access our
facilities or aircraft could adversely affect our operations. Travel
restrictions or operational problems in any part of the world in which we
operate, or any reduction in the demand for air travel caused by public health
threats in the future, may materially adversely affect our operations and
financial results.
Our
results of operations fluctuate due to seasonality and other factors associated
with the airline industry. Due to greater
demand for air travel during the summer months, revenue in the airline industry
in the second and third quarters of the year is generally stronger than revenue
in the first and fourth quarters of the year for most U.S. air
carriers. Our results of operations generally reflect this
seasonality, but also have been impacted by numerous other factors that are not
necessarily seasonal, including excise and similar taxes, weather and air
traffic control delays, as well as the other factors discussed
above. As a result, our operating results for a quarterly period are
not necessarily indicative of operating results for an entire year, and
historical operating results are not necessarily indicative of future operating
results.
Item
1B. Unresolved Staff Comments.
None.
Item
2. Properties.
As of December 31, 2008, our operating
fleet consisted of 350 mainline jets and 282 regional aircraft. The
350 mainline jets are operated exclusively by us, while the 282 regional
aircraft are operated on our behalf by other operators under capacity purchase
agreements.
We own or lease 274 regional
jets. Of these, 214 are leased or subleased to ExpressJet and
operated on our behalf under a capacity purchase agreement with ExpressJet, 30
regional jet aircraft are subleased to ExpressJet but are not operated on our
behalf and 30 ERJ-135 regional jet aircraft are temporarily
grounded. Additionally, our regional operating fleet includes 68
regional jet and turboprop aircraft owned or leased by third parties that are
operated on our behalf by other operators under capacity purchase
agreements.
The following table summarizes our
operating fleet (aircraft operated by us and by others on our behalf) as of
December 31, 2008:
|
Seats
in
|
Average
|
|||||||||||
|
Third-Party
|
Standard
|
Age
|
||||||||||
|
Aircraft Type
|
Total
|
Owned
|
Leased
|
Aircraft
|
Configuration
|
(In Years)
|
||||||
|
Mainline
(a):
|
||||||||||||
|
777-200ER
|
20
|
8
|
12
|
-
|
285
|
8.6
|
||||||
|
767-400ER
|
16
|
14
|
2
|
-
|
235
|
7.3
|
||||||
|
767-200ER
|
10
|
9
|
1
|
-
|
174
|
7.8
|
||||||
|
757-300
|
17
|
9
|
8
|
-
|
216
|
6.3
|
||||||
|
757-200
|
41
|
15
|
26
|
-
|
175
|
11.9
|
||||||
|
737-900ER
|
17
|
17
|
-
|
-
|
173
|
0.6
|
||||||
|
737-900
|
12
|
8
|
4
|
-
|
169
|
7.3
|
||||||
|
737-800
|
116
|
43
|
73
|
-
|
157
|
6.8
|
||||||
|
737-700
|
36
|
12
|
24
|
-
|
124
|
10.0
|
||||||
|
737-500
|
42
|
-
|
42
|
-
|
114
|
13.1
|
||||||
|
737-300
|
23
|
14
|
9
|
-
|
124
|
22.6
|
||||||
|
Total
mainline
|
350
|
149
|
201
|
-
|
9.4
|
|||||||
|
Regional
(b):
|
||||||||||||
|
ERJ-145XR
|
89
|
-
|
89
|
-
|
50
|
|||||||
|
ERJ-145
|
145
|
18
|
107
|
20
|
(c)
|
50
|
||||||
|
CRJ200LR
|
17
|
-
|
-
|
17
|
(c)
|
50
|
||||||
|
Q200
|
16
|
-
|
-
|
16
|
(d)
|
37
|
||||||
|
Q400
|
15
|
-
|
-
|
15
|
(e)
|
74
|
||||||
|
Total
regional
|
282
|
18
|
196
|
68
|
||||||||
|
Total
|
632
|
167
|
397
|
68
|
||||||||
|
(a)
|
Excludes
seven grounded Boeing 737-500 aircraft, 12 grounded Boeing 737-300
aircraft and one Boeing 737-800 aircraft delivered but not yet placed into
service at December 31, 2008.
|
|
(b)
|
Excludes
30 temporarily grounded ERJ-135 aircraft and 30 ERJ-145 aircraft that are
subleased to ExpressJet.
|
|
(c)
|
Operated
by Chautauqua under a capacity purchase agreement.
|
|
(d)
|
Operated
by CommutAir under a capacity purchase agreement.
|
|
(e)
|
Operated
by Colgan under a capacity purchase
agreement.
|
Most of the aircraft and engines we own
are subject to mortgages.
Mainline Fleet
Activity. During 2008, we placed into service 17 new Boeing
737-900ER and 11 new Boeing 737-800 aircraft. We also announced that
we would accelerate the retirement of less fuel efficient Boeing 737-300 and
737-500 aircraft from our mainline fleet. We removed 18 Boeing
737-500 and 25 Boeing 737-300 aircraft
from service during 2008. The Boeing 737-500 aircraft removed from
service include ten aircraft that were sold and one aircraft that was declared a
loss following a runway accident. The Boeing 737-300 aircraft removed
from service include six aircraft that were returned to the lessors and seven
owned aircraft that were consigned for sale. The remaining Boeing
737-500 and 737-300 aircraft removed from service are grounded until future sale
or return to the lessors. By the end of 2009, we expect to remove 31
additional Boeing
737-500 and 737-300 aircraft from service. However, some of these
planned exits could be postponed due to delays in new aircraft deliveries and
the closing of pending aircraft sales.
At December 31, 2008, we had five owned
Boeing 737-500 aircraft and five owned Boeing 737-300 aircraft that were
grounded. At December 31, 2008, we also had two temporarily grounded
Boeing 737-500 leased aircraft and seven permanently grounded Boeing 737-300
leased aircraft. These leased aircraft have terms that range from one
month to 43 months. The two leased Boeing 737-500 aircraft that were
grounded at December 31, 2008 re-entered our active fleet in January
2009.
We have aircraft sale contracts with
two different foreign buyers to sell 15 Boeing 737-500 aircraft. The
buyers of these aircraft have requested, and in some cases we have agreed to, a
delay in the delivery dates for the aircraft. We hold cash deposits
that secure the buyers' obligations under the aircraft sale contracts, and we
are entitled to damages under the aircraft sale contracts if the buyers do not
take delivery of the aircraft when required. These pending
transactions are subject to customary closing conditions, some of which are
outside of our control, and we cannot give any assurances that the buyers of
these aircraft will be able to obtain financing for these transactions, that
there will not be further delays in deliveries or that the closing of these
transactions will occur.
Regional Fleet
Activity. During 2008, we temporarily grounded all thirty
37-seat ERJ 135 aircraft being flown by ExpressJet on our behalf and notified
ExpressJet that these aircraft would be withdrawn from the capacity purchase
agreement. We are evaluating our options regarding these 30 aircraft,
including sublease opportunities or permanently grounding them.
In the fourth quarter of 2008,
Chautauqua returned seven CRJ200LR aircraft operated for us to the lessors at
the lease expiration dates.
In 2008, Colgan began operating fifteen
74-seat Bombardier Q400 twin-turboprop aircraft on short and medium-distance
routes from New York Liberty on our behalf. Colgan operates the
flights as a Continental Connection carrier under a capacity purchase agreement
with us. In January 2009, we amended the capacity purchase agreement
to increase by 15 the number of Q400 aircraft operated by Colgan on our
behalf. We expect that Colgan will begin operating these 15
additional aircraft as they are delivered, beginning in the third quarter of
2010 through the second quarter of 2011. Each aircraft is scheduled
to be covered by the agreement for approximately ten years following the date
such aircraft is delivered into service thereunder. Colgan supplies
all aircraft that it operates under the agreement. One of Colgan's
Q400 aircraft was involved in an accident on February 12, 2009, reducing the
number of aircraft currently being flown for us to 14.
Firm Order and Option
Aircraft. As of December 31, 2008, we had firm commitments for
87 new aircraft (54 Boeing 737 aircraft, eight Boeing 777 aircraft and 25 Boeing
787 aircraft) scheduled for delivery from 2009 through 2016, with an estimated
aggregate cost of $5.6 billion including related spare engines. We
are currently scheduled to take delivery of 13 Boeing 737 aircraft in 2009 and
11 Boeing 737 aircraft and two Boeing 777 aircraft in 2010. In
addition to our firm order aircraft, we had options to purchase a total of 102
additional Boeing aircraft as of December 31, 2008.
We have also agreed to lease four
Boeing 757-300 aircraft from Boeing Capital Corporation. We expect
that these aircraft will be placed into service in the first half of
2010.
Our principal facilities are located at
New York Liberty, Houston Bush, Cleveland Hopkins and A.B. Won Pat International
Airport in Guam. Substantially all of these facilities are leased on
a net-rental basis, as we are responsible for maintenance, insurance and other
facility-related expenses and services. At each location, we
generally have multiple leases covering different types of facilities, and those
leases have expiration dates ranging from 2009 to 2030.
At each of our three domestic hub
cities and most other locations, our passenger and baggage handling space is
leased directly from the airport authority on varying terms dependent on
prevailing practice at each airport. We also maintain administrative
offices, terminal, catering, cargo and other airport facilities, training
facilities, maintenance facilities and other facilities, in each case as
necessary to support our operations in the cities we serve.
See Item 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" for a discussion of certain of our guarantees relating to our
principal facilities, as well as our contingent liability for US Airways'
obligations under a lease agreement covering the East End Terminal at LaGuardia
Airport.
Item
3. Legal Proceedings.
During the period between 1997 and
2001, we reduced or capped the base commissions that we paid to domestic travel
agents, and in 2002 we eliminated those base commissions. These
actions were similar to those also taken by other air carriers. We
are a defendant, along with several other air carriers, in two lawsuits brought
by travel agencies that purportedly opted out of a prior class action entitled
Sarah Futch Hall
d/b/a/ Travel Specialists v. United Air Lines, et al. (U.S.D.C., Eastern
District of North Carolina), filed on June 21, 2000, in which the defendant
airlines prevailed on summary judgment that was upheld on
appeal. These similar suits against Continental and other major
carriers allege violations of antitrust laws in reducing and ultimately
eliminating the base commissions formerly paid to travel agents. The
pending cases are Tam
Travel, Inc. v. Delta Air Lines, Inc., et al. (U.S.D.C., Northern
District of California), filed on April 9, 2003 and Swope Travel Agency, et al.
v. Orbitz LLC et al. (U.S.D.C., Eastern District of Texas), filed on June
5, 2003. By order dated November 10, 2003, these actions were
transferred and consolidated for pretrial purposes by the Judicial Panel on
Multidistrict Litigation to the Northern District of Ohio. On
September 14, 2006, the judge for the consolidated lawsuit issued an order
dismissing 28 plaintiffs in the Swope case for their
failure to properly opt-out of the Hall
case. Consequently, a total of 90 travel agency plaintiffs remained
in the two cases. On October 29, 2007, the judge for the consolidated
lawsuit dismissed the case for failure to meet the heightened pleading standards
established earlier in 2007 by the U.S. Supreme Court's decision in Bell Atlantic Corp. v.
Twombly. The plaintiffs have appealed to the Sixth Circuit
Court of Appeals. In each of these cases, we believe the plaintiffs'
claims are without merit, and we intend to vigorously defend any
appeal. Nevertheless, a final adverse court decision awarding
substantial money damages could have a material adverse effect on our results of
operations, financial condition or liquidity.
Under the federal Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
(commonly known as "Superfund") and similar state environment cleanup laws,
generators of waste disposed of at designated sites may, under certain
circumstances, be subject to joint and several liability for investigation and
remediation costs. We (including our predecessors) have been
identified as a potentially responsible party at one federal site and one state
site that are undergoing or have undergone investigation or
remediation. Although applicable case law is evolving and some cases
may be interpreted to the contrary, we believe that some or all of any liability
claims associated with these sites were discharged by confirmation of our 1993
Plan of Reorganization, principally because our exposure is based on alleged
offsite disposal known as of the date of confirmation. Even if any
such claims were not discharged, on the basis of currently available
information, we believe that our potential liability for our allocable share of
the cost to remedy each site (if and to the extent we are found to be liable) is
not, in the aggregate, material; however, we have not been designated a "de
minimis" contributor at either site.
In 2001, the California Regional Water
Quality Control Board ("CRWQCB") mandated a field study of the area surrounding
our aircraft maintenance hangar in Los Angeles. The study was
completed in September 2001 and identified jet fuel and solvent contamination on
and adjacent to this site. In April 2005, we began environmental
remediation of jet fuel contamination surrounding our aircraft maintenance
hangar pursuant to a workplan submitted to (and approved by) the CRWQCB and our
landlord, the Los Angeles World Airports. Additionally, we could be
responsible for environmental remediation costs primarily related to solvent
contamination on and near this site.
Although we are not currently subject
to any environmental cleanup orders imposed by regulatory authorities, we are
undertaking voluntary investigation or remediation at certain properties in
consultation with such authorities. The full nature and extent of any
contamination at these properties and the parties responsible for such
contamination have not been determined, but based on currently available
information and our current reserves, we do not believe that any environmental
liability associated with such properties will have a material adverse effect on
us.
At December 31, 2008, we had an accrual
for estimated costs of environmental remediation throughout our system of $33
million, based primarily on third-party environmental studies and estimates as
to the extent of the contamination and nature of the required remedial
actions. We have evaluated and recorded this accrual for environmental
remediation costs separately from any related insurance recovery. We did
not have any receivables related to environmental insurance recoveries at
December 31, 2008. Based on currently available information, we
believe that our accrual for potential environmental remediation costs is
adequate, although our accrual could be adjusted in the future due to new
information or changed circumstances. However, we do not expect these
items to materially affect our results of operations, financial condition or
liquidity.
We and/or certain of our subsidiaries
are defendants in various other pending lawsuits and proceedings and are subject
to various other claims arising in the normal course of our business, many of
which are covered in whole or in part by insurance. Although the
outcome of these lawsuits and proceedings (including the probable loss we might
experience as a result of an adverse outcome) cannot be predicted with certainty
at this time, we believe, after consulting with outside counsel, that the
ultimate disposition of such suits will not have a material adverse effect on
us.
Not
applicable.
PART
II
Our Class B common stock, which we
refer to as our common stock, trades on the NYSE under the symbol
"CAL." The table below shows the high and low sales prices for our
common stock as reported in the consolidated transaction reporting system during
2008 and 2007.
|
Class
B
Common Stock
|
||||||
|
High
|
Low
|
|||||
|
2008
|
Fourth
Quarter
|
$20.89
|
$9.49
|
|||
|
Third
Quarter
|
$21.40
|
$5.91
|
||||
|
Second
Quarter
|
$23.42
|
$9.70
|
||||
|
First
Quarter
|
$31.25
|
$17.19
|
||||
|
2007
|
Fourth
Quarter
|
$37.79
|
$21.59
|
|||
|
Third
Quarter
|
$38.79
|
$26.21
|
||||
|
Second
Quarter
|
$44.10
|
$32.00
|
||||
|
First
Quarter
|
$52.40
|
$35.22
|
||||
As of February 13, 2009, there were
approximately 19,273 holders of record of our common stock. We have
paid no cash dividends on our common stock and have no current intention of
doing so. Our agreement with the union representing our pilots
provides that we will not declare a cash dividend or repurchase our outstanding
common stock for cash until we have contributed at least $500 million to the
pilots' defined benefit pension plan, measured from March 31,
2005. Through February 18, 2009, we have made $470 million of
contributions to this plan.
Our certificate of incorporation
provides that no shares of capital stock may be voted by or at the direction of
persons who are not U.S. citizens unless the shares are registered on a separate
stock record. Our bylaws further provide that no shares will be
registered on the separate stock record if the amount so registered would exceed
U.S. foreign ownership restrictions. United States law currently limits the
voting power in us (and other U.S. airlines) of persons who are not citizens of
the United States to 25%.
See Item 12. "Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder Matters" for
information regarding our equity compensation plans as of December 31,
2008.
None.
Item
6. Selected Financial
Data.
The following table sets forth the
selected financial data of the Company derived from our consolidated financial
statements. The selected financial data should be read in conjunction
with Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's consolidated financial
statements and notes thereto contained in Item 8. "Financial
Statements and Supplementary Data."
|
Statement
of Operations Data (in millions except per
share data) (1):
|
|||||
|
Year
Ended December 31,
|
|||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
|
|
Operating
revenue
|
$15,241
|
$14,232
|
$13,128
|
$11,208
|
$9,899
|
|
Operating
expenses
|
15,555
|
13,545
|
12,660
|
11,247
|
10,137
|
|
Operating
income
(loss)
|
(314)
|
687
|
468
|
(39)
|
(238)
|
|
Income
(loss) before cumulative effect of change
in
accounting
principle
|
(585)
|
459
|
369
|
(68)
|
(409)
|
|
Cumulative
effect of change in accounting principle
|
-
|
-
|
(26)
|
-
|
-
|
|
Net
income
(loss)
|
(585)
|
459
|
343
|
(68)
|
(409)
|
|
Earnings
(loss) per share:
|
|||||
|
Basic:
|
|||||
|
Income
(loss) before cumulative effect of change
in
accounting
principle
|
$(5.54)
|
$ 4.73
|
$ 4.15
|
$(0.96)
|
$(6.19)
|
|
Cumulative
effect of change in accounting principle
|
-
|
-
|
(0.29)
|
-
|
-
|
|
Net
income
(loss)
|
$(5.54)
|
$ 4.73
|
$ 3.86
|
$(0.96)
|
$(6.19)
|
|
Diluted:
|
|||||
|
Income
(loss) before cumulative effect of change
in
accounting
principle
|
$(5.54)
|
$ 4.18
|
$ 3.53
|
$(0.97)
|
$(6.25)
|
|
Cumulative
effect of change in accounting principle
|
-
|
-
|
(0.23)
|
-
|
-
|
|
Net
income
(loss)
|
$(5.54)
|
$ 4.18
|
$ 3.30
|
$(0.97)
|
$(6.25)
|
|
(1)
|
Includes
the following special income (expense) items for year ended December 31
(in millions):
|
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||
|
Operating
(expense) income:
|
||||||||||||
|
Pension
settlement/curtailment charges
|
$(52)
|
$(31)
|
$(59)
|
$(83)
|
$ -
|
|||||||
|
Aircraft-related
charges, net of gains on sales
of
aircraft
|
(40)
|
22
|
18
|
16
|
(87)
|
|||||||
|
Severance
|
(34)
|
-
|
-
|
-
|
-
|
|||||||
|
Route
impairment and other
|
(55)
|
(4)
|
14
|
-
|
(52)
|
|||||||
|
Nonoperating
(expense) income:
|
||||||||||||
|
Gains
on sale of investments
|
78
|
37
|
92
|
204
|
-
|
|||||||
|
Loss
on fuel hedge contracts with Lehman
Brothers
|
(125)
|
-
|
-
|
-
|
-
|
|||||||
|
Write-down
of auction rate securities, net of
put
right received
|
(34)
|
-
|
-
|
-
|
-
|
|||||||
|
Income
tax credit (expense) related to NOL
utilization
|
28
|
(104)
|
-
|
-
|
-
|
|||||||
|
Cumulative
effect of change in accounting
principal
|
-
|
-
|
(26)
|
-
|
-
|
|||||||
|
Balance
Sheet Data (in millions):
|
|||||
|
As
of December 31,
|
|||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
|
|
Unrestricted
cash, cash equivalents and short-term
investments
|
$2,643
|
$2,803
|
$2,484
|
$ 1,957
|
$ 1,458
|
|
Total
assets
|
12,686
|
12,105
|
11,308
|
10,529
|
10,511
|
|
Long-term
debt and capital lease obligations
|
5,371
|
4,366
|
4,859
|
5,057
|
5,167
|
|
Stockholders'
equity
|
105
|
1,550
|
347
|
226
|
155
|
Selected
Operating Data
We have two reportable
segments: mainline and regional. The mainline segment
consists of flights to cities using larger jets while the regional segment
currently consists of flights with a capacity of 50 or fewer seats (for jets) or
78 or fewer seats (for turboprops). As of December 31, 2008, the
regional segment was operated by ExpressJet, Chautauqua, CommutAir and Colgan
under capacity purchase agreements.
|
Year
Ended December 31,
|
|||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
|
|
Mainline
Operations:
|
|||||
|
Passengers
(thousands)
(1)
|
48,682
|
50,960
|
48,788
|
44,939
|
42,743
|
|
Revenue
passenger miles (millions)
(2)
|
82,806
|
84,309
|
79,192
|
71,261
|
65,734
|
|
Available
seat miles (millions) (3)
|
102,527
|
103,139
|
97,667
|
89,647
|
84,672
|
|
Cargo
ton miles
(millions)
|
1,005
|
1,037
|
1,075
|
1,018
|
1,026
|
|
Passenger
load factor (4):
|
|||||
|
Mainline
|
80.8%
|
81.7%
|
81.1%
|
79.5%
|
77.6%
|
|
Domestic
|
83.3%
|
83.9%
|
83.6%
|
81.2%
|
77.4%
|
|
International
|
78.2%
|
79.4%
|
78.2%
|
77.5%
|
77.9%
|
|
Passenger
revenue per available seat mile (cents)
|
11.10
|
10.47
|
9.96
|
9.32
|
8.82
|
|
Total
revenue per available seat mile (cents)
|
12.51
|
11.65
|
11.17
|
10.46
|
9.83
|
|
Average
yield per revenue passenger mile (cents) (5)
|
13.75
|
12.80
|
12.29
|
11.73
|
11.37
|
|
Average
fare
|
$232.26
|
$214.06
|
$201.81
|
$188.67
|
$177.90
|
|
Cost
per available seat mile, including special
charges
(cents)
|
12.44
|
10.83
|
10.56
|
10.22
|
9.84
|
|
Special
charges per available seat miles (cents)
|
0.15
|
0.01
|
0.03
|
0.07
|
0.16
|
|
Average
price per gallon of fuel, including fuel taxes
|
$3.27
|
$2.18
|
$2.06
|
$1.78
|
$1.19
|
|
Fuel
gallons consumed
(millions)
|
1,498
|
1,542
|
1,471
|
1,376
|
1,333
|
|
Aircraft
in fleet at end of period (6)
|
350
|
365
|
366
|
356
|
349
|
|
Average
length of aircraft flight (miles)
|
1,494
|
1,450
|
1,431
|
1,388
|
1,325
|
|
Average
daily utilization of each aircraft (hours) (7)
|
11:06
|
11:34
|
11:07
|
10:31
|
9:55
|
|
Regional
Operations:
|
|||||
|
Passengers
(thousands)
(1)
|
18,010
|
17,970
|
18,331
|
16,076
|
13,739
|
|
Revenue
passenger miles (millions) (2)
|
9,880
|
9,856
|
10,325
|
8,938
|
7,417
|
|
Available
seat miles (millions) (3)
|
12,984
|
12,599
|
13,251
|
11,973
|
10,410
|
|
Passenger
load factor
(4)
|
76.1%
|
78.2%
|
77.9%
|
74.7%
|
71.3%
|
|
Passenger
revenue per available seat mile (cents)
|
18.14
|
17.47
|
17.15
|
15.67
|
15.09
|
|
Average
yield per revenue passenger mile (cents) (5)
|
23.83
|
22.33
|
22.01
|
20.99
|
21.18
|
|
Aircraft
in fleet at end of period (6)
|
282
|
263
|
282
|
266
|
245
|
|
Consolidated
Operations:
|
|||||
|
Passengers
(thousands)
(1)
|
66,692
|
68,930
|
67,119
|
61,015
|
56,482
|
|
Revenue
passenger miles (millions) (2)
|
92,686
|
94,165
|
89,517
|
80,199
|
73,151
|
|
Available
seat miles (millions) (3)
|
115,511
|
115,738
|
110,918
|
101,620
|
95,082
|
|
Passenger
load factor
(4)
|
80.2%
|
81.4%
|
80.7%
|
78.9%
|
76.9%
|
|
Passenger
revenue per available seat mile (cents)
|
11.89
|
11.23
|
10.82
|
10.07
|
9.51
|
|
Average
yield per revenue passenger mile (cents) (5)
|
14.82
|
13.80
|
13.41
|
12.76
|
12.36
|
|
(1)
|
The
number of revenue passengers measured by each flight segment
flown.
|
|
(2)
|
The
number of scheduled miles flown by revenue passengers.
|
|
(3)
|
The
number of seats available for passengers multiplied by the number of
scheduled miles those seats are flown.
|
|
(4)
|
Revenue
passenger miles divided by available seat miles.
|
|
(5)
|
The
average passenger revenue received for each revenue passenger mile
flown.
|
|
(6)
|
Excludes
aircraft that were removed from service. Regional aircraft
include aircraft operated by all carriers under capacity purchase
agreements, but exclude any aircraft operated by ExpressJet outside the
scope of the ExpressJet CPA.
|
|
(7)
|
The
average number of hours per day that an aircraft flown in revenue service
is operated (from gate departure to gate
arrival).
|
The following information should be
read in conjunction with the information contained in Item 1A. "Risk
Factors" and the audited consolidated financial statements and the notes thereto
included under Item 8. "Financial Statements and Supplementary Data" of this
annual report.
Overview
We recorded a net loss of $585 million
for the year ended December 31, 2008, as compared to net income of $459 million
for the year ended December 31, 2007. Our net loss in 2008 was
primarily the result of significantly higher fuel prices. Our results
for both 2008 and 2007 were also affected by a number of special items, detailed
below under "Results of Operations."
2008
Financial Highlights and Challenges
|
·
|
Total
revenue grew 7.1% during 2008 as compared to 2007 due to increased fares,
international growth and new ancillary fees.
|
|
·
|
Operating
income (loss), a key measure of our performance, decreased $1.0 billion to
a $314 million loss during 2008 as compared to 2007, due primarily to
higher fuel prices.
|
|
·
|
We
raised approximately $1.2 billion in cash through new financings, the
issuance of common stock and the sale of our remaining equity interest in
Copa.
|
|
·
|
Unrestricted
cash, cash equivalents and short-term investments totaled $2.6 billion at
December 31, 2008.
|
2008
Operational Highlights
|
·
|
Consolidated
traffic decreased 1.6% and capacity decreased 0.2% during 2008 as compared
to 2007, resulting in a consolidated load factor of 80.2%, 1.2 points
below the prior year consolidated load factor.
|
|
·
|
We
inaugurated service between New York Liberty and Houston Bush to London's
Heathrow airport.
|
|
·
|
We
recorded a DOT on-time arrival rate of 74.0% for Continental mainline
flights and a mainline segment completion factor of 98.9% for 2008,
compared to a DOT on-time arrival rate of 74.3% and a mainline segment
completion factor of 99.2% for 2007.
|
|
·
|
We
took delivery of 17 Boeing 737-900ER and 12 Boeing 737-800 aircraft and
removed 18 Boeing 737-500 and 25 Boeing 737-300 aircraft from our mainline
fleet.
|
|
·
|
Sales
on continental.com, our lowest cost distribution channel, totaled $3.9
billion, an increase of 11% over
2007.
|
Outlook
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. We also raised
approximately $1.2 billion in cash during 2008 through a number of financings to
strengthen our unrestricted cash and short-term investments balance, which was
$2.6 billion at December 31, 2008. However, we have significant
long-term debt and capital lease obligations and future commitments for capital
expenditures, including the acquisition of aircraft and related spare
engines. To meet these obligations, we must access the global capital
markets and/or return to sustained profitability. Historically, we
have obtained financing for many of these debt obligations and capital
commitments, particularly the acquisition of aircraft and spare
engines. Due to the troubled global capital markets, however, we may
be unable to obtain financing or otherwise access the capital markets on
favorable terms.
Economic
Conditions. The U.S. and global economies are currently in a
recession. The airline industry is highly cyclical, and the level of
demand for air travel is correlated to the strength of the U.S. and global
economies. For 2008, a year in which the U.S. gross domestic product
experienced its largest contraction in 25 years, traffic for the seven largest
U.S. carriers, measured in miles flown by revenue passengers, fell approximately
2% as compared to 2007, the first such annual decline in five
years. This decline in demand has disproportionately reduced the
volume of high yield traffic in the premium cabins on international flights, as
many business and leisure travelers are either curtailing their international
travel or purchasing lower yield economy tickets.
The current economic crisis has
severely disrupted the global capital markets, resulting in a diminished
availability of financing and higher cost for financing that is
obtainable. If the capital markets do not improve, whether through
measures implemented by the U.S. and foreign governments, such as the Emergency
Economic Stabilization Act of 2008, or otherwise, we may be unable to obtain
financing on acceptable terms (or at all) to refinance certain maturing debt we
would normally expect to refinance and to satisfy future capital
commitments.
Fuel
Costs. The extreme volatility in jet fuel prices, which were
very high by historical standards during much of 2008, continues to impair our
ability to achieve and sustain profitability. During the twelve
months ended December 31, 2008, the spot price per gallon of Gulf Coast jet fuel
averaged $2.96 compared to $2.17 for the same period in 2007, with Gulf Coast
jet fuel closing prices peaking at $4.21 per gallon during the
year. In response to high fuel prices and to address the risk of
further escalations in fuel prices, most of the major network carriers
(including us) continued to enter into fuel hedging arrangements, including
collars which minimize the up-front costs. However, in the second
half of the year, the price of crude oil fell from a peak of $147.27 per barrel
on July 11, 2008 to a low of $32.40 per barrel on December 19, 2008, the first
time in almost five years that the price fell below $35 per
barrel. The precipitous decline in oil prices has resulted in
significant costs to us and to those other carriers with hedging arrangements
obligating them to make payments to the counterparties to the extent that the
price of crude falls below a specified level. Declining crude oil
prices have resulted in us being required to post significant amounts of
collateral to cover potential amounts owed with respect to contracts that have
not yet settled. At December 31, 2008, our fuel derivatives were in a
net liability position of $415 million and we had posted cash collateral with
our counterparties totaling $171 million.
Although we experienced some success
raising ticket prices and adding or increasing fees during part of 2008, we were
unable to increase our revenue sufficiently to keep pace with the escalating
fuel prices and suffered a substantial loss in 2008. If fuel prices
return to these historically high levels, we may again be unable to raise fares
or other fees sufficiently to offset our increased costs
fully. Consequently, further increases in jet fuel prices, as well as
disruptions in fuel supplies, could have a material adverse effect on our
results of operations, financial condition and liquidity.
Based on our expected fuel consumption
in 2009, a one dollar change in the price of a barrel of crude oil would change
our annual fuel expense by approximately $41 million, before considering
refining margins and the impact of our fuel hedging program. We
believe that our modern, fuel-efficient fleet continues to provide us with a
competitive advantage relative to our peers and a permanent hedge against rising
fuel prices.
As of December 31, 2008, we have hedged
approximately 23% of our projected consolidated fuel requirements for 2009 with
crude oil collars, options and swaps, excluding contracts with Lehman Brothers
which we terminated in January 2009. See "Item 7A. Quantitative and
Qualitative Disclosures about Market Risk" for details of our hedge position at
December 31, 2008.
Capacity. Our
long-term target remains to grow our mainline capacity between 5% and 7%
annually. However, because of adverse economic conditions, we have
reduced our capacity significantly and rescheduled aircraft deliveries, and we
do not anticipate returning to significant capacity growth until the level of
demand for air travel and economic conditions improve sufficiently to justify
such growth.
In September 2008, at the conclusion of
the peak summer season, we implemented significant reductions in flying and
staffing necessary for us to adjust further to the then high cost of fuel, a
weakening economy and a weak dollar. In conjunction with the
reductions in flying, we announced that we would accelerate the retirement of
all of our Boeing 737-300 aircraft and a significant number of our 737-500
aircraft to remove a majority of the least fuel-efficient aircraft from our
mainline fleet by the end of 2009. The retirement of as many as 15 of
the 737-500 aircraft may be delayed, however, if the parties that agreed to
purchase those aircraft continue to be unable to obtain financing in the
troubled global capital markets. As a result of the capacity
reductions, we eliminated approximately 3,000 employee positions.
Our future ability to grow our capacity
could be adversely impacted by delays in aircraft deliveries. Boeing
has announced several delays to its 787 aircraft program. We expect
the first of our 25 Boeing 787 aircraft to deliver in 2011 instead of the first
half of 2009 as originally scheduled. As a result, our anticipated
mainline capacity in 2010 and thereafter may be reduced, particularly if we are
unable to make alternative arrangements to acquire long-range aircraft on
commercially acceptable terms. However, in order to provide
flexibility for our widebody aircraft needs, we announced orders in February
2008 for eight new Boeing 777 aircraft, the first two of which are now scheduled
to deliver in 2010.
We are currently scheduled to take
delivery of 13 Boeing 737 aircraft in 2009 and 11 Boeing 737 aircraft and two
Boeing 777 aircraft in 2010. In addition, we have agreed to lease
four Boeing 757-300 aircraft from Boeing Capital Corporation. We
expect that these Boeing 757-300 aircraft will be placed into service in the
first half of 2010.
Competition. Competition
in most of our domestic markets from other carriers, as well as our response to
this competition, continues to result in increased capacity and lower yields in
many of those markets. In addition, several of our domestic
competitors have increased their international capacity, including service to
some destinations that we currently serve, resulting in lower yields and/or load
factors in affected markets. The "open skies" agreement between the
United States and the European Union, which became effective in March 2008, is
resulting in increased competition from European and U.S. airlines in these
international markets, and may give rise to additional integration opportunities
between or among U.S. and European carriers. For example, Air
France-KLM, Delta and Northwest have received anti-trust immunity to form a new
trans-Atlantic joint venture among those airlines and to coordinate routes,
fares, schedules and other matters among those airlines, Alitalia and CSA Czech
Airlines. American Airlines, British Airways and Iberia have
requested anti-trust immunity for a similar trans-Atlantic joint venture, which
would also involve many of the same benefits. However, we also expect
that our ability to compete in the trans-Atlantic markets will be enhanced by
our previously announced alliance-related activities.
Star
Alliance. In 2008, we entered into framework agreements with
United, Lufthansa and Air Canada, each a member of Star Alliance, pursuant to
which we plan to develop an extensive code-share relationship and reciprocity of
frequent flier programs, elite customer recognition and airport lounge use with
these other airlines. We plan to implement these relationships and
join United, Lufthansa and Air Canada (and other member airlines) in Star
Alliance as promptly as practicable following our exit from
SkyTeam. We will exit SkyTeam effective with our last flight on
October 24, 2009.
On July 23, 2008, we filed an
application with the DOT to join United and a group of eight other carriers
within Star Alliance that already hold antitrust immunity. Approval
by the DOT of this application would enable us, United and these other immunized
Star Alliance carriers to work closely together to deliver highly competitive
international flight schedules, fares and service and would provide competitive
balance to antitrust-immunized carriers in SkyTeam. Additionally, we,
United, Lufthansa and Air Canada have requested DOT approval to establish a
trans-Atlantic joint venture to create a more efficient and comprehensive
trans-Atlantic network for our respective customers, offering those customers
more service, scheduling and pricing options and establishing a framework for
similar joint ventures in other regions of the world. In addition, we
are seeking a modification to our existing pilot collective bargaining
agreement, which presently prohibits us from engaging in a revenue or profit
sharing agreement with a domestic air carrier, to permit us to enter into such
joint ventures.
Please see Part I, Item 1. "Business -
Alliances" and Part I, Item 1A. "Risk Factors - Risk Factors Relating to the
Company" for future discussion of our transition to Star Alliance.
Labor
Costs. Our ability to achieve and sustain profitability also
depends on continuing our efforts to implement and maintain a more competitive
cost structure. The collective bargaining agreements with our pilots,
mechanics and certain other work groups became amendable in December
2008. During 2008, we met with representatives of the applicable
unions to engage in bargaining for amended collective bargaining
agreements. These talks will continue in 2009 with a goal of reaching
agreements that are fair to us and to our employees. We cannot
predict the outcome of our ongoing negotiations with our unionized workgroups,
although significant increases in the pay and benefits resulting from new
collective bargaining agreements could have a material adverse effect on
us.
Results
of Operations
Special
Items. The comparability of our financial results between
years is affected by a number of special items. Our results for each
of the last three years included the following special items (in
millions):
|
Income (Expense)
|
|||
|
2008
|
2007
|
2006
|
|
|
Pension
settlement charges
(1)
|
$ (52)
|
$(31)
|
$(59)
|
|
Aircraft-related
charges, net of gains on sales of aircraft (2)
|
(40)
|
22
|
18
|
|
Severance
(2)
|
(34)
|
-
|
-
|
|
Route
impairment and other
(2)
|
(55)
|
(4)
|
14
|
|
Total
special operating
items
|
(181)
|
(13)
|
(27)
|
|
Gains
on sales of investments
(3)
|
78
|
37
|
92
|
|
Loss
on fuel hedge contracts with Lehman Brothers (4)
|
(125)
|
-
|
-
|
|
Write-down
of auction rate securities, net of put right received (5)
|
(34)
|
-
|
-
|
|
Total
special non-operating
items
|
(81)
|
37
|
92
|
|
Income
tax credit (expense) related to NOL utilization (6)
|
28
|
(104)
|
-
|
|
Cumulative
effect of change in accounting principle (SFAS 123R) (7)
|
-
|
-
|
(26)
|
|
(1)
|
See
Note 11 to our consolidated financial statements included in Item
8.
|
|
|
(2)
|
See
Note 13 to our consolidated financial statements included in Item
8.
|
|
|
(3)
|
See
Note 14 to our consolidated financial statements included in Item
8.
|
|
|
(4)
|
See
Note 7 to our consolidated financial statements included in Item
8.
|
|
|
(5)
|
See
Note 6 to our consolidated financial statements included in Item
8.
|
|
|
(6)
|
See
Note 12 to our consolidated financial statements included in Item
8.
|
|
|
(7)
|
See
Note 9 to our consolidated financial statements included in Item
8.
|
|
Comparison
of Year Ended December 31, 2008 to December 31, 2007
Consolidated Results of
Operations
Significant components of our
consolidated operating results for the year ended December 31 were as follows
(in millions, except percentage changes):
|
Increase
|
%
Increase
|
|||||||
|
2008
|
2007
|
(Decrease)
|
(Decrease)
|
|||||
|
Operating
revenue
|
$15,241
|
$14,232
|
$ 1,009
|
7.1%
|
||||
|
Operating
expenses
|
15,555
|
13,545
|
2,010
|
14.8%
|
||||
|
Operating
income
(loss)
|
(314)
|
687
|
(1,001)
|
NM
|
||||
|
Nonoperating
income (expense)
|
(370)
|
(121)
|
249
|
NM
|
||||
|
Income
tax benefit (expense)
|
99
|
(107)
|
206
|
NM
|
||||
|
Net
income
(loss)
|
$ (585)
|
$ 459
|
$(1,044)
|
NM
|
||||
|
NM
- Not meaningful
|
||||||||
Each of these items is discussed in the
following sections.
Operating
Revenue. The table below shows components of operating revenue
for the year ended December 31, 2008 and period to period comparisons for
operating revenue, passenger revenue per available seat mile ("RASM") and
available seat miles ("ASMs") by geographic region for our mainline and regional
operations:
|
Revenue
|
%
Increase
(Decrease)
in 2008 vs
2007
|
|||||
|
(in
millions)
|
Revenue
|
RASM
|
ASMs
|
|||
|
Passenger
revenue:
|
||||||
|
Domestic
|
$ 5,633
|
1.2 %
|
6.4 %
|
(4.9)%
|
||
|
Trans-Atlantic
|
2,983
|
11.6 %
|
2.5 %
|
8.9 %
|
||
|
Latin
America
|
1,750
|
12.1 %
|
9.4 %
|
2.5 %
|
||
|
Pacific
|
1,016
|
2.3 %
|
8.5 %
|
(5.6)%
|
||
|
Total
Mainline
|
11,382
|
5.4 %
|
6.0 %
|
(0.6)%
|
||
|
Regional
|
2,355
|
7.0 %
|
3.8 %
|
3.1 %
|
||
|
Total
|
13,737
|
5.7 %
|
5.9 %
|
(0.2)%
|
||
|
Cargo
|
497
|
9.7 %
|
||||
|
Other
|
1,007
|
28.4 %
|
||||
|
Operating
revenue
|
$15,241
|
7.1 %
|
||||
Passenger revenue increased due to
increased international traffic on increased capacity and increased
fares. The improved RASM reflects our actions taken to increase fares
and implement more restrictions on low fare tickets, as well as our domestic
capacity reductions commenced in September 2008.
Cargo revenue increased due to higher
fuel surcharge rates and increased mail volume. Other revenue
increased due to higher revenue associated with sales of mileage credits on our
OnePass frequent flyer program, higher ticket change fees, the implementation of
new fees for checking bags and changes in how certain costs are handled under
the Amended ExpressJet CPA.
Operating
Expenses. The table below shows period-to-period comparisons
by type of operating expense for our consolidated operations for the year ended
December 31 (in millions, except percentage changes):
|
2008
|
2007
|
Increase
(Decrease)
|
%
Increase
(Decrease)
|
|||
|
Aircraft fuel and related
taxes
|
$ 4,905
|
$ 3,354
|
$1,551
|
46.2 %
|
||
|
Wages, salaries and related
costs
|
2,957
|
3,127
|
(170)
|
(5.4)%
|
||
|
Regional capacity purchase,
net
|
2,073
|
1,793
|
280
|
15.6 %
|
||
|
Aircraft
rentals
|
976
|
994
|
(18)
|
(1.8)%
|
||
|
Landing fees and other
rentals
|
853
|
790
|
63
|
8.0 %
|
||
|
Distribution
costs
|
717
|
682
|
35
|
5.1 %
|
||
|
Maintenance, materials and
repairs
|
612
|
621
|
(9)
|
(1.4)%
|
||
|
Depreciation and
amortization
|
438
|
413
|
25
|
6.1 %
|
||
|
Passenger
services
|
406
|
389
|
17
|
4.4 %
|
||
|
Special
charges
|
181
|
13
|
168
|
NM
|
||
|
Other
|
1,437
|
1,369
|
68
|
5.0 %
|
||
|
$15,555
|
$13,545
|
$2,010
|
14.8 %
|
|||
Operating expenses increased 14.8%
primarily due to the following:
|
·
|
Aircraft fuel and related taxes increased
due to a 50.5% increase in jet fuel prices. Our average jet
fuel price per gallon including related taxes increased to $3.27 in 2008
from $2.18 in 2007. Our average jet fuel price includes losses
related to our fuel hedging program of $0.10 per gallon in 2008, compared
to gains of $0.02 per gallon in 2007.
|
|
·
|
Wages, salaries and related costs decreased
primarily due to a $172 million decrease in profit sharing
expenses. Although the average number of full time equivalent
employees decreased approximately 1% in 2008, the impact on expenses was
offset by wage increases.
|
|
·
|
Regional capacity purchase, net includes
expenses related to our capacity purchase agreements. Our most
significant capacity purchase agreement is with
ExpressJet. Regional capacity purchase, net includes all fuel
expense on flights operated for us under capacity purchase agreements and
is net of our rental income on aircraft leased to ExpressJet and flown for
us in 2007 and the first six months of 2008. Under the Amended
ExpressJet CPA, ExpressJet no longer pays sublease rent for aircraft
operated on our behalf. The net amounts consisted of the
following for the year ended December 31 (in millions, except percentage
changes):
|
|
Increase
|
%
Increase
|
||||||||
|
2008
|
2007
|
(Decrease)
|
(Decrease)
|
||||||
|
Capacity
purchase expenses
|
$1,181
|
$1,379
|
$(198)
|
(14.4)%
|
|||||
|
Fuel
and fuel taxes
|
1,014
|
680
|
334
|
49.1
%
|
|||||
|
Aircraft
sublease income
|
(122)
|
(266)
|
(144)
|
(54.1)%
|
|||||
|
Regional
capacity purchase, net
|
$2,073
|
$1,793
|
$ 280
|
15.6 %
|
|||||
|
The
net expense was higher in 2008 than in 2007 primarily due to higher fuel
expense. Fuel expense increased 49.1% over the 2007 expense as
a result of higher fuel prices. Fuel expense includes a
proportionate share of gains and losses related to our fuel hedging
program. Netting together capacity purchase expenses and
aircraft sublease income in 2008 for comparison to 2007, the net expense
did not change significantly. Sublease income of $76 million
and $79 million on aircraft operated by ExpressJet outside the scope of
our capacity purchase agreement for 2008 and 2007, respectively, is
recorded as other revenue.
|
||
|
·
|
Aircraft rentals decreased due to the
retirement of several Boeing 737 aircraft. New aircraft
delivered in 2008 were all purchased, with the related expense being
reflected in depreciation and amortization.
|
|
|
·
|
Landing fees and other rentals increased
primarily due to a higher number of international flights and rate
increases.
|
|
|
·
|
Distribution costs, which consist primarily
of reservation booking fees, credit card fees and commissions, increased
due to a 5.7% increase in passenger revenue.
|
|
|
·
|
Other operating expenses increased
primarily due to a greater number of international flights, which resulted
in increased air navigation fees and ground handling, security and related
expenses, changes in how certain costs are handled under the new Amended
ExpressJet CPA and higher OnePass reward expenses.
|
|
|
·
|
Special charges in 2008 included $52
million of non-cash settlement charges related to lump sum distributions
from our pilot-only defined benefit pension plan to pilots who retired,
$40 million of aircraft-related charges, net of gains on sales of
aircraft, $34 million in severance and $55 million of route impairment and
other charges.
Aircraft-related
charges, net of gains on sales of aircraft, of $40 million include
non-cash impairments on owned Boeing 737-300 and 737-500 aircraft and
related assets. Following the decision in June 2008 to retire
all of our Boeing 737-300 aircraft and a significant portion of our Boeing
737-500 fleet by the end of 2009, we evaluated the ongoing value of the
assets associated with these fleets. Fleet assets include owned
aircraft, improvements on leased aircraft, spare parts, spare engines and
simulators. Based on our evaluation, we determined that the
carrying amounts of these fleets were impaired and wrote them down to
their estimated fair value. We estimated the fair values based
on current market quotes and our expected proceeds from the sale of the
assets. Aircraft-related charges, net of gains on sales of
aircraft in 2008 also includes charges for future lease costs on
permanently grounded 737-300 aircraft and gains on the sale of ten Boeing
737-500 aircraft.
In
conjunction with the capacity reductions, we incurred $34 million for
severance and continuing medical coverage for employees accepting early
retirement packages or company-offered leaves of absence during
2008. Approximately 3,000 positions were eliminated as a result
of the capacity reductions, the majority of which were implemented in
September 2008.
Route
impairment and other special charges in 2008 of $55 million includes an
$18 million non-cash charge to write off an intangible route asset as a
result of our decision to move all of our flights between New York Liberty
and London from London Gatwick Airport to London Heathrow Airport and $37
million of charges related to contract settlements with regional carriers
and unused facilities.
Special
charges in 2007 consisted of a $31 million non-cash settlement charge
related to lump sum distributions from our pilot-only defined benefit
pension plan to pilots who retired and $22 million of gains on the sale of
three Boeing 737-500 aircraft. Additionally, we recorded a $4
million increase to the liability for the long-term disability plan for
our pilots related to a change in the mandatory retirement age for our
pilots from age 60 to 65. This change was signed into law on
December 13,
2007.
|
|
Nonoperating Income
(Expense). Nonoperating income (expense) includes net interest
expense (interest expense less interest income and capitalized interest), gains
from dispositions of investments and any ineffectiveness of our derivative
financial instruments. Total nonoperating expense increased $249
million in 2008 compared to 2007 due primarily to the following:
|
·
|
Net interest expense increased $71 million
primarily due to lower interest income resulting from lower interest rates
on investments and lower cash, cash equivalents and short-term investments
balances.
|
|
·
|
Gain on sale of investments of $78 million
in 2008 related to the sale of our remaining interests in Copa. Gain on
sale of investments in 2007 consisted of $30 million related to the sale
of our interest in ARINC, Inc. ("ARINC") and $7 million related to the
sale of our remaining interest in Holdings.
|
|
·
|
Other nonoperating income (expense)
included $125 million expense related to changes in the fair value of fuel
derivative contracts with Lehman Brothers that were deemed ineffective
after Lehman Brothers declared bankruptcy in
2008. Additionally, we recorded a loss of $34 million in 2008
to reflect the decline in the value of our student loan-related auction
rate securities, net of the value of a put right we received permitting us
to sell certain of the auction rate securities. This account
also includes other fuel hedge ineffectiveness gains of $26 million and
$14 million in 2008 and 2007, respectively, caused by our non-jet fuel
derivatives experiencing a higher relative change in value than the jet
fuel being hedged.
Other
variances in other nonoperating income (expense) include $37 million of
foreign currency exchange losses in 2008 compared to gains of $2 million
in 2007, a $16 million mark-to-market loss on investments supporting
company owned life insurance policies in 2008 compared to a $3 million
gain in 2007 and $6 million less equity in earnings of other companies in
2008 compared to 2007 resulting from our decreased ownership of Copa and
Holdings.
|
Income
Taxes. In the fourth quarter of 2007, we recorded income tax
expense of $104 million to increase the valuation allowance to be fully reserved
for certain NOLs, expiring in 2008 through 2011, which more likely than not
would not be realized prior to their expiration. In the second
quarter of 2008, we recorded an income tax credit of $28 million resulting from
higher utilization of those NOLs than had been previously
anticipated.
Segment
Results of Operations
We have two reportable
segments: mainline and regional. The mainline segment
consists of flights to cities using larger jets while the regional segment
currently consists of flights with a capacity of 50 or fewer seats (for jets) or
78 or fewer seats (for turboprops). As of December 31, 2008, the
regional segment was operated by ExpressJet, Chautauqua, CommutAir and Colgan
through capacity purchase agreements. Under these agreements, we
purchase all of the capacity related to aircraft covered by the contracts and
are responsible for setting prices and selling all of the related seat
inventory. In exchange for the regional carriers' operation of the
flights, we pay the regional carriers for each scheduled block hour based on
agreed formulas. Under the agreements, we recognize all passenger,
cargo and other revenue associated with each flight, and are responsible for all
revenue-related expenses, including commissions, reservations, catering and
terminal rent at hub airports.
We evaluate segment performance based
on several factors, of which the primary financial measure is operating income
(loss). However, we do not manage our business or allocate resources
based on segment operating profit or loss because (1) our flight schedules are
designed to maximize revenue from passengers flying, (2) many operations of the
two segments are substantially integrated (for example, airport operations,
sales and marketing, scheduling and ticketing), and (3) management decisions are
based on their anticipated impact on the overall network, not on one individual
segment.
Mainline Results of
Operations. Significant components of our mainline segment's
operating results for the year ended December 31 were as follows (in millions,
except percentage changes):
|
2008
|
2007
|
Increase
(Decrease)
|
%
Increase
(Decrease)
|
|||||
|
Operating
revenue
|
$12,827
|
$12,019
|
$ 808
|
6.7 %
|
||||
|
Operating
expenses:
|
||||||||
|
Aircraft
fuel and related
taxes
|
4,905
|
3,354
|
1,551
|
46.2 %
|
||||
|
Wages,
salaries and related
costs
|
2,850
|
3,073
|
(223)
|
(7.3)%
|
||||
|
Aircraft
rentals
|
662
|
680
|
(18)
|
(2.6)%
|
||||
|
Landing
fees and other
rentals
|
782
|
738
|
44
|
6.0 %
|
||||
|
Distribution
costs
|
611
|
583
|
28
|
4.8 %
|
||||
|
Maintenance,
materials and repairs
|
612
|
621
|
(9)
|
(1.4)%
|
||||
|
Depreciation
and
amortization
|
427
|
400
|
27
|
6.8 %
|
||||
|
Passenger
services
|
384
|
374
|
10
|
2.7 %
|
||||
|
Special
charges
|
155
|
13
|
142
|
NM
|
||||
|
Other
|
1,365
|
1,335
|
30
|
2.2 %
|
||||
|
12,753
|
11,171
|
1,582
|
14.2 %
|
|||||
|
Operating
income
|
$ 74
|
$ 848
|
$(774)
|
(91.3)%
|
||||
The variances in specific line items
for the mainline segment were due to the same factors discussed under
consolidated results of operations.
Regional Results of
Operations. Significant components of our regional segment's
operating results for the year ended December 31 were as follows (in millions,
except percentage changes):
|
Increase
|
%
Increase
|
|||||||
|
2008
|
2007
|
(Decrease)
|
(Decrease)
|
|||||
|
Operating
revenue
|
$2,414
|
$2,213
|
$ 201
|
9.1 %
|
||||
|
Operating
expenses:
|
||||||||
|
Wages,
salaries and related costs
|
107
|
54
|
53
|
98.1 %
|
||||
|
Regional
capacity purchase, net
|
2,073
|
1,793
|
280
|
15.6 %
|
||||
|
Aircraft
rentals
|
314
|
314
|
-
|
-
|
||||
|
Landing
fees and other rentals
|
71
|
52
|
19
|
36.5
%
|
||||
|
Distribution
costs
|
106
|
99
|
7
|
7.1 %
|
||||
|
Depreciation
and amortization
|
11
|
13
|
(2)
|
(15.4)%
|
||||
|
Passenger
services
|
22
|
15
|
7
|
46.7 %
|
||||
|
Special
charges
|
26
|
-
|
26
|
NM
|
||||
|
Other
|
72
|
34
|
38
|
NM
|
||||
|
2,802
|
2,374
|
428
|
18.0 %
|
|||||
|
Operating
loss
|
$(388)
|
$(161)
|
$(227)
|
NM
|
||||
The reported results of our regional
segment do not reflect the total contribution of the regional segment to our
system-wide operations. The regional segment generates revenue for
the mainline segment as it provides flow traffic to our hubs. The
variances in material line items for the regional segment reflect generally the
same factors discussed under consolidated results of operations and a change in
2008 in how certain costs are handled under the new Amended ExpressJet
CPA.
Comparison
of Year Ended December 31, 2007 to December 31, 2006
Consolidated Results of
Operations
Significant components of our
consolidated operating results for the year ended December 31 were as follows
(in millions, except percentage changes):
|
Increase
|
%
Increase
|
|||||||
|
2007
|
2006
|
(Decrease)
|
(Decrease)
|
|||||
|
Operating
revenue
|
$14,232
|
$13,128
|
$1,104
|
8.4%
|
||||
|
Operating
expenses
|
13,545
|
12,660
|
885
|
7.0%
|
||||
|
Operating
income
|
687
|
468
|
219
|
46.8%
|
||||
|
Nonoperating
income (expense)
|
(121)
|
(99)
|
22
|
22.2%
|
||||
|
Income
taxes
|
(107)
|
-
|
(107)
|
NM
|
||||
|
Cumulative
effect of change in accounting principle
|
-
|
(26)
|
26
|
NM
|
||||
|
Net
income
|
$ 459
|
$ 343
|
$ 116
|
33.8%
|
||||
Each of these items is discussed in the
following sections.
Operating
Revenue. The table below shows components of operating revenue
for the year ended December 31, 2007 and period to period comparisons for
operating revenue, RASM and ASMs by geographic region for our mainline and
regional operations:
|
Revenue
|
%
Increase (Decrease)
in
2007 vs
2006
|
|||||
|
(in millions)
|
Revenue
|
RASM
|
ASMs
|
|||
|
Passenger
revenue:
|
||||||
|
Domestic
|
$ 5,567
|
5.9 %
|
1.3 %
|
4.5 %
|
||
|
Trans-Atlantic
|
2,673
|
23.1 %
|
10.0 %
|
11.9 %
|
||
|
Latin
America
|
1,561
|
12.0 %
|
9.4 %
|
2.4 %
|
||
|
Pacific
|
992
|
9.4 %
|
8.2 %
|
1.1 %
|
||
|
Total
Mainline
|
10,793
|
10.9 %
|
5.0 %
|
5.6 %
|
||
|
Regional
|
2,202
|
(3.2)%
|
1.9 %
|
(4.9)%
|
||
|
Total
|
12,995
|
8.3%
|
3.8 %
|
4.3 %
|
||
|
Cargo
|
453
|
(0.9)%
|
||||
|
Other
|
784
|
17.4
%
|
||||
|
Operating
revenue
|
$14,232
|
8.4 %
|
||||
Passenger revenue increased due to
increased traffic and fares. Along with other domestic airlines, we
raised fares in an effort to offset fuel price increases. The fare
increases were successful in part due to less capacity in domestic markets from
reduced flying by competitors. Consolidated RASM increased
year-over-year due to higher yields and load factors. The improved
RASM reflects our actions taken to improve the mix of local versus flow traffic
and reduce discounting. Consolidated RASM was adversely affected by
our reduction in regional flying, which historically has had significantly
higher RASM than our mainline flying due to the shorter stage length of regional
flights.
Cargo revenue decreased due to a
reduction in the volume of mail carried for the U.S. Postal
Service. Other revenue increased as a result of higher revenue
associated with sales of mileage credits in our OnePass frequent flyer program
and $79 million of rental income on aircraft leased to ExpressJet but not
operated for us during 2007.
Operating
Expenses. The table below shows period-to-period comparisons
by type of operating expense for our consolidated operations for the year ended
December 31 (in millions, except percentage changes):
|
2007
|
2006
|
Increase
(Decrease)
|
%
Increase
(Decrease)
|
|||
|
Aircraft fuel and related
taxes
|
$3,354
|
$3,034
|
$ 320
|
10.5%
|
||
|
Wages, salaries and related
costs
|
3,127
|
2,875
|
252
|
8.8%
|
||
|
Regional capacity purchase,
net
|
1,793
|
1,791
|
2
|
0.1%
|
||
|
Aircraft
rentals
|
994
|
990
|
4
|
0.4%
|
||
|
Landing fees and other
rentals
|
790
|
764
|
26
|
3.4%
|
||
|
Distribution
costs
|
682
|
650
|
32
|
4.9%
|
||
|
Maintenance, materials and
repairs
|
621
|
547
|
74
|
13.5%
|
||
|
Depreciation and
amortization
|
413
|
391
|
22
|
5.6%
|
||
|
Passenger
services
|
389
|
356
|
33
|
9.3%
|
||
|
Special
charges
|
13
|
27
|
(14)
|
NM
|
||
|
Other
|
1,369
|
1,235
|
134
|
10.9%
|
||
|
$13,545
|
$12,660
|
$ 885
|
7.0%
|
|||
Operating expenses increased 7.0%
primarily due to the following:
|
·
|
Aircraft and related taxes increased due to
higher fuel prices and a 5.6% increase in mainline
capacity. Our average jet fuel price per gallon including
related taxes increased to $2.18 in 2007 from $2.06 in
2006. Our average jet fuel price includes gains related to our
fuel hedging program of $0.02 per gallon in 2007, compared to losses
of $0.03 per gallon in 2006.
|
|
·
|
Wages, salaries and related costs increased
primarily due to a 3.7% increase in the average number of full time
equivalent employees necessary to support our growth and an increase of
$72 million for profit sharing and on-time performance incentive
expenses.
|
|
·
|
Regional capacity purchase, net includes
expenses related to our capacity purchase agreements. Our most
significant capacity purchase agreement is with
ExpressJet. Regional capacity purchase, net includes all fuel
expense on flights operated for us under capacity purchase agreements and
is net of our rental income on aircraft leased to ExpressJet and flown for
us. The net amounts consisted of the following for the year
ended December 31 (in millions, except percentage
changes):
|
|
Increase
|
%
Increase
|
||||||||
|
2007
|
2006
|
(Decrease)
|
(Decrease)
|
||||||
|
Capacity
purchase expenses
|
$1,379
|
$1,461
|
$(82)
|
(5.6)%
|
|||||
|
Fuel
and fuel taxes
|
680
|
663
|
17
|
2.6 %
|
|||||
|
Aircraft
sublease income
|
(266)
|
(333)
|
(67)
|
(20.1)%
|
|||||
|
Regional
capacity purchase, net
|
$1,793
|
$1,791
|
$ 2
|
0.1 %
|
|||||
|
The
net expense was higher in 2007 than in 2006 due to higher fuel
expense. Fuel expense increased 2.6% over the 2006 expense as a
result of higher fuel prices. Sublease income was lower in 2007
as 67 aircraft were removed from our service. Sublease income
of $79 million on aircraft operated by ExpressJet outside the scope of the
ExpressJet CPA is recorded as other revenue. These factors were
offset by a decrease in regional capacity, which was attributable to
reduced flying by ExpressJet, partially offset by new capacity provided by
Chautauqua.
|
|
|
·
|
Maintenance, materials and repairs
increased primarily due to higher engine maintenance costs, driven by
increased flight activity and the timing of engine
overhauls. In addition, contractual engine repair rates
escalated in accordance with their contracts due to the aging of our
fleet. The costs of component repairs and expendable materials
increased primarily due to the aging of our fleet and the timing of
overhauls for more costly components, including landing
gears.
|
|
·
|
Other operating expenses increased
primarily due to a greater number of international flights, which resulted
in increased air navigation fees and ground handling, security and related
expenses.
|
|
·
|
Special charges in 2007 consisted of a $31
million non-cash settlement charge related to lump sum distributions from
our pilot-only defined benefit pension plan to pilots who retired and $22
million of gains on the sale of three Boeing 737-500
aircraft. Additionally, we recorded a $4 million increase to
the liability for the long-term disability plan for our pilots related to
a change in the mandatory retirement age for our pilots from age 60 to
65. This change was signed into law on December 13,
2007. Special charges in 2006 consisted of $59 million of
similar non-cash pension settlement charges, an $18 million credit
attributable to a reduction of our accruals for future lease payments and
return conditions related to permanently grounded MD-80
aircraft following negotiated settlements with aircraft lessors and a $14
million credit related to our officers' voluntary surrender of stock price
based restricted stock unit ("RSU")
awards.
|
Nonoperating Income
(Expense). Nonoperating income (expense) includes net interest
expense (interest expense less interest income and capitalized interest), gains
from dispositions of investments and any ineffectiveness of our derivative
financial instruments. Total nonoperating expense increased $22
million in 2007 compared to 2006 due primarily to the following:
|
·
|
Net interest expense decreased $18 million
primarily as a result of increased interest income on our higher cash
balances.
|
|
·
|
Other nonoperating income (expense)
includes hedge ineffectiveness gains related to our fuel hedges that
totaled $14 million during
2007. This ineffectiveness arose because our heating oil
collars experienced a higher increase in value than the jet fuel being
hedged. Hedge ineffectiveness was not material in
2006. Other nonoperating income (expense) also includes our
equity in the earnings of Copa and Holdings and income related to our tax
sharing agreement with Holdings in 2006. These amounts
were $23
million lower in 2007 as compared to 2006 as a result of our reduced
ownership interests in Holdings and Copa and a decrease in income
recognized from our tax sharing agreement with
Holdings.
|
|
·
|
Gain on sale of investments in 2007
consisted of $30 million related to the sale of our interest in ARINC,
Inc. and $7 million related to the sale of all of our remaining interest
in Holdings. In 2006, we recognized a gain of $92 million
related to the sale of 7.5 million shares of Copa's Class A common
stock.
|
Income
Taxes. In the fourth quarter of 2007, we recorded a non-cash
tax charge of $104 million to increase the deferred tax asset valuation
allowance to be fully reserved for certain NOLs expiring in 2008 through
2011. Additional income tax expense of $3 million during 2007 is
attributable to state and foreign income taxes.
Cumulative Effect of Change
in Accounting Principle. Stock price based RSU awards made pursuant to
our Long-Term Incentive and RSU Program can result in cash payments to award
holders if there are specified increases in our stock price over multi-year
performance periods. Prior to our adoption of Statement of Financial
Accounting Standards No. 123 (revised 2004), "Share Based Payment," ("SFAS
123R") on January 1, 2006, we had recognized no liability or expense related to
our stock price based RSU awards because the targets set forth in the program
had not been met. However, SFAS 123R requires these awards to be
measured at fair value at each reporting date with the related expense being
recognized over the required service periods, regardless of whether the
specified stock price targets have been met. On January 1, 2006, we
recognized a cumulative effect of change in accounting principle to record our
liability related to our outstanding stock price based RSU awards at that date,
which reduced 2006 earnings by $26 million. The final stock price
based RSU awards were paid out in January 2008. Following this
payout, there are no stock price based RSU awards outstanding.
Segment
Results of Operations
Mainline Results of
Operations. Significant components of our mainline segment's
operating results for the year ended December 31 were as follows (in millions,
except percentage changes):
|
2007
|
2006
|
Increase
(Decrease)
|
%
Increase
(Decrease)
|
|||||
|
Operating
revenue
|
$12,019
|
$10,907
|
$1,112
|
10.2 %
|
||||
|
Operating
expenses:
|
||||||||
|
Aircraft
fuel and related taxes
|
3,354
|
3,034
|
320
|
10.5 %
|
||||
|
Wages,
salaries and related costs
|
3,073
|
2,830
|
243
|
8.6 %
|
||||
|
Aircraft
rentals
|
680
|
678
|
2
|
0.3 %
|
||||
|
Landing
fees and other rentals
|
738
|
720
|
18
|
2.5 %
|
||||
|
Distribution
costs
|
583
|
541
|
42
|
7.8 %
|
||||
|
Maintenance,
materials and repairs
|
621
|
547
|
74
|
13.5 %
|
||||
|
Depreciation
and amortization
|
400
|
378
|
22
|
5.8 %
|
||||
|
Passenger
services
|
374
|
341
|
33
|
9.7 %
|
||||
|
Special
charges
|
13
|
27
|
(14)
|
NM
|
||||
|
Other
|
1,335
|
1,218
|
117
|
9.6 %
|
||||
|
11,171
|
10,314
|
857
|
8.3 %
|
|||||
|
Operating
income
|
$ 848
|
$ 593
|
$ 255
|
43.0 %
|
||||
The variances in specific line items
for the mainline segment were due to the same factors discussed under
consolidated results of operations.
Regional Results of
Operations. Significant components of our regional segment's
operating results for the year ended December 31 were as follows (in millions,
except percentage changes):
|
Increase
|
%
Increase
|
|||||||
|
2007
|
2006
|
(Decrease)
|
(Decrease)
|
|||||
|
Operating
revenue
|
$2,213
|
$2,221
|
$ (8)
|
(0.4)%
|
||||
|
Operating
expenses:
|
||||||||
|
Wages,
salaries and related costs
|
54
|
45
|
9
|
20.0 %
|
||||
|
Regional
capacity purchase, net
|
1,793
|
1,791
|
2
|
0.1 %
|
||||
|
Aircraft
rentals
|
314
|
312
|
2
|
0.6 %
|
||||
|
Landing
fees and other rentals
|
52
|
44
|
8
|
18.2 %
|
||||
|
Distribution
costs
|
99
|
109
|
(10)
|
(9.2)%
|
||||
|
Depreciation
and amortization
|
13
|
13
|
-
|
-
|
||||
|
Passenger
services
|
15
|
15
|
-
|
-
|
||||
|
Other
|
34
|
17
|
17
|
100.0 %
|
||||
|
2,374
|
2,346
|
28
|
1.2 %
|
|||||
|
Operating
loss
|
$ (161)
|
$ (125)
|
$ 36
|
28.8 %
|
||||
The reported results of our regional
segment do not reflect the total contribution of the regional segment to our
system-wide operations. The regional segment generates revenue for
the mainline segment as it provides flow traffic to our hubs. The
variances in specific line items for the regional segment reflect generally the
same factors discussed under consolidated results of operations.
Liquidity
and Capital Resources
As of December 31, 2008, we had $2.6
billion in unrestricted cash, cash equivalents and short-term investments, which
is $160 million lower than at December 31, 2007. At December 31,
2008, we also had $190 million of restricted cash, cash equivalents and
short-term investments, which was primarily collateral for estimated future
workers' compensation claims, credit card processing contracts, letters of
credit and performance bonds. Restricted cash, cash equivalents and
short-term investments at December 31, 2007 totaled $179 million.
We do not currently have any undrawn
lines of credit or revolving credit facilities and most of our otherwise readily
financeable assets are encumbered. The current economic crisis has
severely disrupted the global capital markets, resulting in a diminished
availability of financing and higher cost for financing that is
obtainable. If the capital markets do not improve, whether through
measures implemented by the U.S. and foreign governments, such as the Emergency
Economic Stabilization Act of 2008, or otherwise, we may be unable to obtain
financing on acceptable terms (or at all) to refinance certain maturing debt we
would normally expect to refinance and to satisfy future capital
commitments. As a result, the continued lack of liquidity in the
capital markets could have a material adverse effect on our results of
operations and financial condition.
We expect to fund our future capital
and purchase commitments through internally generated funds, general company
financings and aircraft financing transactions. However, particularly
in light of the troubled capital markets, there can be no assurance that
sufficient financing will be available for all aircraft and other capital
expenditures or that, if necessary, we will be able to defer or otherwise
renegotiate our capital commitments.
Operating
Activities. Net cash flows used by operations for the year
ended December 31, 2008 were $324 million, a decrease of $1.5 billion from the
$1.1 billion in net cash provided by operating activities in
2007. The decrease in cash flows provided by operations in 2008
compared to 2007 is primarily the result of our 2008 loss caused by higher fuel
expenses. In addition, operating cash flows in 2008 were negatively
impacted by our posting $171 million of cash collateral related to our fuel
hedges, which were in a net liability position at December 31,
2008.
Investing
Activities. Cash flows used in investing activities for the
year ended December 31 were as follows (in millions):
|
Cash
|
||||||
|
Increase
|
||||||
|
2008
|
2007
|
(Decrease)
|
||||
|
Capital
expenditures
|
$(504)
|
$(445)
|
$ (59)
|
|||
|
Purchase
deposits refunded (paid) in connection with
future
aircraft deliveries,
net
|
102
|
(219)
|
321
|
|||
|
Proceeds
(purchase) of short-term and long-term
investments,
net
|
137
|
(314)
|
451
|
|||
|
Proceeds
from sales of investments, net
|
149
|
65
|
84
|
|||
|
Proceeds
from sales of property and equipment
|
113
|
67
|
46
|
|||
|
Decrease
(increase) in restricted cash, net
|
(13)
|
86
|
(99)
|
|||
|
$ (16)
|
$(760)
|
$744
|
||||
Capital expenditures for 2008 consisted
of $177 million of fleet expenditures, $273 million of non-fleet expenditures
and $54 million for rotable parts and capitalized interest. Fleet
expenditures in 2008 included the installation of Audio/Video on Demand
entertainment systems for Boeing 777 and 757 aircraft and the installation of
winglets to improve fuel efficiency. The 2008 non-fleet expenditures
are primarily slots at London's Heathrow Airport, ground service equipment and
technology and terminal enhancements.
We have substantial commitments for
capital expenditures, including for the acquisition of new
aircraft. As of December 31, 2008, we had firm commitments for 87 new
Boeing aircraft scheduled for delivery from 2009 through 2016, with an estimated
aggregate cost of $5.6 billion including related spare engines. In
addition to our firm order aircraft, we had options to purchase a total of 102
additional Boeing aircraft as of December 31, 2008. Projected net
capital expenditures for 2009 are as follows (in millions):
|
Fleet
related (excluding aircraft to be acquired through
the
issuance of
debt)
|
$190
|
|
Non-fleet
|
210
|
|
Spare
parts and capitalized
interest
|
55
|
|
Total
|
$455
|
|
Aircraft
purchase
deposits
|
40
|
|
Projected
net capital
expenditures
|
$495
|
While some of our projected capital
expenditures are related to projects to which we have committed, a significant
number of projects can be deferred. Should economic conditions
warrant, we will reduce our capital expenditures, and will be able to do so
without materially affecting our operations in the near term.
We sold ten Boeing 737-500 aircraft in
2008 and received cash proceeds of $90 million. We have aircraft sale
contracts with two different foreign buyers to sell 15 Boeing 737-500
aircraft. The buyers of these aircraft have requested, and in some
cases we have agreed to, a delay in the delivery dates for the
aircraft. We hold cash deposits that secure the buyers' obligations
under the aircraft sale contracts, and we are entitled to damages under the
aircraft sale contracts if the buyers do not take delivery of the aircraft when
required. We expect to operate each aircraft scheduled for delivery
in 2009 until shortly before its delivery date. These pending
transactions are subject to customary closing conditions, some of which are
outside of our control, and we cannot give any assurances that the buyers of
these aircraft will be able to obtain financing for these transactions, that
there will not be further delays in deliveries or that the closing of these
transactions will occur.
Net purchase deposits paid were lower
in 2008 than in 2007 as the result of higher refunds in 2008 due to aircraft
deliveries.
In May 2008, we sold all of our
remaining shares of Copa Class A common stock for net proceeds of $149 million
and recognized a gain of $78 million.
In 2007, we sold all of our shares of
Holdings common stock to third parties for cash proceeds of $35
million. We also sold our interest in ARINC in the fourth quarter of
2007 for cash proceeds of $30 million.
Sales of property and equipment in 2007
included the sale of three 737-500 aircraft for $44 million in
cash.
Financing
Activities. Cash flows provided by (used in) financing
activities for the year ended December 31 were as follows (in
millions):
|
Cash
|
||||||
|
Increase
|
||||||
|
2008
|
2007
|
(Decrease)
|
||||
|
Payments
on long-term debt and capital lease obligations
|
$(641)
|
$ (429)
|
$(212)
|
|||
|
Proceeds
from issuance of long-term
debt
|
642
|
26
|
616
|
|||
|
Proceeds
from public offering of common stock, net
|
358
|
-
|
358
|
|||
|
Proceeds
from issuance of common stock pursuant to stock plans
|
18
|
35
|
(17)
|
|||
|
$ 377
|
$(368)
|
$ 745
|
||||
Cash flows provided by financing
activities increased in 2008 due to new borrowings and proceeds from public
offerings totaling 24 million shares of Class B common stock. In
addition to the amounts presented in the table above, we acquired $1.0 billion
of property and equipment through the issuance of debt in 2008, compared to $190
million in 2007.
On June 30, 2008, we entered into a
loan facility to finance a portion of the pre-delivery payment requirements
under the aircraft purchase agreements for 66 new Boeing aircraft originally
scheduled for delivery between July 1, 2008 and the end of 2011. We
borrowed $113 million under this facility on June 30, 2008. Our
obligations under the facility are secured by our rights under our purchase
agreements for 737 and 777 aircraft on order with Boeing.
On June 10, 2008, we entered into an
amendment and restatement of our Bankcard Agreement with Chase, under which
Chase purchases frequent flyer mileage credits to be earned by OnePass members
for making purchases using a Continental branded credit card issued by
Chase. The Bankcard Agreement provides for a payment to us of $413
million, of which $235 million relates to the advance purchase of frequent flyer
mileage credits for the year 2016 and the balance of which is in consideration
for certain other commitments with respect to the co-branding relationship,
including the extension of the term of the Bankcard Agreement until December 31,
2016. In connection with the advance purchase of mileage credits, we
have provided a security interest to Chase in certain routes and slots,
including certain slots at London's Heathrow Airport. The $235
million purchase of mileage credits has been treated as a loan from Chase with
an implicit interest rate of 6.18% and is reported as long-term debt in our
consolidated balance sheet. Our liability will be reduced ratably in
2016 as the mileage credits are issued to Chase.
In April 2007, we obtained financing
for 12 Boeing 737-800s and 18 Boeing 737-900ERs. We applied a portion
of this financing to 27 Boeing aircraft delivered to us in 2008 and recorded
related debt of $1.0 billion. We will apply the remainder of this
financing to three of the Boeing 737 aircraft scheduled for delivery in
2009. In connection with this financing, pass-through trusts raised
$1.1 billion through the issuance of three classes of pass-through
certificates. Class A certificates, with an aggregate principal
amount of $757 million, bear interest at 5.983%, Class B certificates, with an
aggregate principal amount of $222 million, bear interest at 6.903% and Class C
certificates, with an aggregate principal amount of $168 million, bear interest
at 7.339%. The proceeds from the sale of the certificates are
initially held by a depositary in escrow for the benefit of the certificate
holders until we use such funds to purchase the aircraft. The funds
in escrow are not guaranteed by us and are not reported as debt on our
consolidated balance sheet at December 31, 2008 because the proceeds held by the
depositary are not our assets and interest earned on the proceeds, as well as
any unused proceeds, will be distributed directly to the certificate
holders.
As we take delivery of each of the
three remaining aircraft that will be financed under this facility, we will
issue equipment notes to the trusts, which will purchase such notes with a
portion of the escrowed funds. We will use the proceeds to finance
the purchase of the aircraft and will record the principal amount of the
equipment notes that we issue as debt on our consolidated balance
sheet. Principal payments on the equipment notes and the
corresponding distribution of these payments to certificate holders will begin
in April 2010 and will end in April 2022 for Class A and B certificates and
April 2014 for Class C certificates. Additionally, the Class A and B
certificates have the benefit of a liquidity facility under which a third party
agrees to make up to three semiannual interest payments on the certificates if a
default in the payment of interest occurs.
We have reached an agreement in
principle with a bank for it to provide financing for three Boeing 737-900ER
aircraft scheduled for delivery in the first half of 2009. Boeing has
agreed to provide backstop financing for all of the additional 11 Boeing 737
aircraft scheduled for delivery through February 2010 (or 14 such additional
aircraft if we fail to reach a definitive agreement for the financing described
in the previous sentence), subject to customary closing
conditions. However, we do not have backstop financing or any other
financing currently in place for the balance of the Boeing aircraft on
order. Further financing will be needed to satisfy our capital
commitments for our firm order aircraft and other related capital
expenditures. We can provide no assurance that the backstop financing
or any other financing not already in place for our aircraft deliveries will be
available to us when needed on acceptable terms or at all. Since the
commitments for firm order aircraft are non-cancelable and assuming no breach of
the agreement by Boeing, if we are unable to obtain financing and cannot
otherwise satisfy our commitment to purchase these aircraft, the manufacturer
could exercise its rights and remedies under applicable law, such as seeking to
terminate the contract for a material breach, selling the aircraft to one or
more other parties and suing us for damages to recover for any resulting losses
incurred by the manufacturer.
During 2008, we obtained $268 million
through three separate financings secured by two new Boeing 737-900ER aircraft,
seven Boeing 757-200 aircraft and five Boeing 737-700 aircraft.
In June 2008, we completed a public
offering of 11 million shares of Class B common stock at a price to the public
of $14.80 per share, raising net proceeds of $162
million. Additionally, in the fourth quarter of 2008, we completed a
public offering of 13 million shares of Class B common stock at an average price
to the public of $15.84 per share, raising net proceeds of $196
million. Proceeds from both offerings were used for general corporate
purposes.
In January 2007, $170 million in
principal amount of our 4.5% Convertible Notes due on February 1, 2007 was
converted by the holders into 4.3 million shares of our Class B common stock at
a conversion price of $40 per share. The remaining $30 million in
principal amount was paid on February 1, 2007.
Proceeds from the issuance of long-term
debt in 2007 relate to the refinancing of debt secured by three Boeing 737-500
aircraft.
During 2007, we incurred $190 million
of floating rate indebtedness pursuant to existing finance agreements secured by
two Boeing 777-200ER aircraft that were delivered in March and April
2007. This indebtedness consists of $156 million of senior notes due
in 2019 and $34 million of junior notes due in 2014. The loans bear
interest at LIBOR plus a blended margin of approximately 1.9% per
year. The commitments under these finance agreements are fully
funded.
Other
Liquidity Matters
Student Loan-Related Auction
Rate Securities. At December 31, 2008, we held student
loan-related auction rate securities with a par value of $291 million and a fair
value of $229 million. This
total includes $258 million par value ($201 million fair value) classified as
short-term investments and $33 million par value ($28 million fair value) that
is collateral for estimated future workers' compensation claims and is
classified as restricted cash, cash equivalents and short-term
investments. These securities are variable-rate debt instruments with
contractual maturities generally greater than ten years and whose interest rates
are reset every 7, 28 or 35 days, depending on the terms of the particular
instrument. These securities are secured by pools of student loans
guaranteed by state-designated guaranty agencies and reinsured by the U.S.
government. All of the auction rate securities we hold are senior
obligations under the applicable indentures authorizing the issuance of the
securities. Auctions for these securities began failing in the first
quarter of 2008 and have continued to fail through mid-February 2009, resulting
in our continuing to hold such securities and the issuers of these securities
paying interest adjusted to the maximum contractual rates. At
December 31, 2008, the carrying value of our auction rate securities was
approximately 80% of par value in the aggregate. Based upon our cash
requirements and other existing liquid assets, the failure of these auctions and
our continuing to hold these securities did not have a material impact on our
liquidity during the year.
In addition, during the fourth quarter
of 2008, one institution granted us a put right permitting us to sell to the
institution auction rate securities with a par value of $125 million in 2010 at
their full par value. The institution has also committed to loan us
75% of the market value of these securities at any time until the put is
exercised.
Pension
Obligations. We have defined benefit pension plans covering
substantially all of our U.S. employees other than Chelsea Food Services and CMI
employees. As of December 31, 2008, our projected benefit obligation
of those plans was a combined liability of $2.5 billion and plan assets related
to those obligations totaled $1.1 billion, leaving an unfunded obligation of
$1.4 billion. We expect to contribute approximately $125 million to
our tax-qualified defined benefit pension plans during 2009.
Credit
Ratings. At December 31, 2008, our senior unsecured debt was
rated B3 by Moody's and B- by Standard & Poor's. These ratings
are significantly below-investment grade. Our current credit ratings
increase the costs we incur when issuing debt, adversely affect the terms of
such debt and limit our financing options. Additional reductions in
our credit ratings could further increase our borrowing costs and reduce the
availability of financing to us in the future. We do not have any
debt obligations that would be accelerated as a result of a credit rating
downgrade. However, we would have to post additional collateral of
approximately $229 million under our domestic bank-issued credit card and
American Express processing agreements if our senior unsecured debt rating were
to fall below Caa3 as rated by Moody's or CCC- as rated by Standard &
Poor's. If requested, we would also be required to post additional
collateral of up to $39 million under our worker's compensation program if our
senior unsecured debt rating were to fall below B3 as rated by Moody's or CCC+
as rated by Standard & Poor's.
Fuel
Hedges. Because our fuel derivatives were in a net liability
position of $415 million at December 31, 2008 resulting from the recent
significant decline in crude oil prices, we posted cash collateral with our
counterparties totaling $171 million. These amounts are reported in
prepayments and other current assets in our consolidated balance
sheet.
Bank Card Processing
Agreements. In connection with the amendment of the Bankcard
Agreement with Chase, we also amended our domestic bank-issued credit card
processing agreement to extend the term of the agreement until December 31, 2016
and modify certain provisions in the agreement. As a result of the
amendment of that processing agreement, the requirement that we maintain a
minimum EBITDAR (generally, earnings before interest, income taxes,
depreciation, amortization, aircraft rentals, certain nonoperating income
(expense) and special items) to fixed charges (interest and aircraft rentals)
ratio for the preceding 12 months was eliminated as a trigger requiring the
posting of additional collateral.
The covenants contained in the Chase
processing agreement require that we post additional cash collateral if we fail
to maintain (1) a minimum level of unrestricted cash, cash equivalents and
short-term investments, (2) a minimum ratio of unrestricted cash, cash
equivalents and short-term investments to current liabilities of 0.25 to 1.0 (or
(3) a minimum senior unsecured debt rating of at least Caa3 and CCC- from
Moody's and Standard & Poor's, respectively.
We also entered into a new credit card
processing agreement with American Express in 2008. Under the terms
of that agreement, if a covenant trigger under the Chase processing agreement
results in our posting additional collateral under that agreement, we would be
required to post additional collateral under the American Express processing
agreement. The amount of additional collateral required under the
American Express processing agreement would be based on a percentage of the
value of unused tickets (for travel at a future date) purchased by customers
using the American Express card. The percentage for purposes of this
calculation is the same as the percentage applied under the Chase processing
agreement, after taking into account certain other risk protection maintained by
American Express.
Under these processing agreements and
based on our current air traffic liability exposure (as defined in each
agreement), we would be required to post collateral up to the following amounts
if we failed to comply with the covenants described above:
|
·
|
a
total of $72 million if our
unrestricted cash, cash equivalents and short-term investments balance
falls below $2.0 billion;
|
|
·
|
a
total of $229 million if we fail to maintain the minimum unsecured debt
ratings specified above;
|
|
·
|
a
total of $437 million if our unrestricted cash, cash equivalents and
short-term investments balance (plus any collateral posted at Chase) falls
below $1.4 billion or if our ratio of unrestricted cash, cash equivalents
and short-term investments to current liabilities falls below 0.25 to 1.0;
and
|
|
·
|
a
total of $958 million if our unrestricted cash, cash equivalents and
short-term investments balance (plus any collateral posted at Chase) falls
below $1.0 billion or if our ratio of unrestricted cash, cash equivalents
and short-term investments to current liabilities falls below 0.22 to
1.0.
|
The amounts shown above are incremental
to the current collateral we have posted with these
companies.
Depending on our unrestricted cash,
cash equivalents and short-term investments balance at the time, posting of
significant amount of cash collateral could cause our unrestricted cash, cash
equivalents and short-term investments balance to fall below the minimum of $1.0
billion required under our $350 million secured term loan facility, resulting in
a default under the facility. The posting of such additional
collateral under these circumstances and/or the acceleration of amounts borrowed
under our secured term loan facility (or other remedies pursued by the lenders
thereunder) would likely have a material adverse effect on our financial
condition. We are currently in compliance with all of the covenants
under these agreements.
Debt
Covenants. We and CMI have loans under a $350 million secured
term loan facility. The loans are secured by certain of our U.S.-Asia
routes and related assets, all of the outstanding common stock of our
wholly-owned subsidiaries Air Micronesia, Inc. ("AMI") and CMI and substantially
all of the other assets of AMI and CMI, including route authorities and related
assets. The loans bear interest at a rate equal to the London
Interbank Offered Rate ("LIBOR") plus 3.375% and are due in June
2011. The facility requires us to maintain a minimum balance of
unrestricted cash and short-term investments of $1.0 billion at the end of
each month. The loans may become due and payable immediately if we fail to
maintain the monthly minimum cash balance and upon the occurrence of other
customary events of default under the loan documents. If we fail to
maintain a minimum balance of unrestricted cash, cash equivalents and short-term
investments of $1.125 billion, we and CMI will be required to make a
mandatory aggregate $50 million prepayment of the loans.
In addition, the facility provides that
if the ratio of the outstanding loan balance to the value of the collateral
securing the loans, as determined by the most recently delivered periodic
appraisal, is greater than 52.5%, we and CMI will be required to post additional
collateral or prepay the loans to reestablish a loan-to-collateral value ratio
of not greater than 52.5%. We are currently in compliance with the
covenants in the facility.
In connection with our $320 million in
notes secured by spare parts inventory, we entered into a collateral maintenance
agreement requiring us, among other things, to maintain a loan-to-collateral
value ratio of not greater than 45% with respect to the $190 million senior
series of equipment notes and a loan-to-collateral value ratio of not greater
than 75% with respect to both series of notes combined. We must also
maintain a certain level of rotable components within the spare parts collateral
pool. These ratios are calculated semi-annually based on an
independent appraisal of the spare parts collateral pool. If any of
the collateral ratio requirements are not met, we must take action to meet all
ratio requirements by adding additional eligible spare parts to the collateral
pool, redeeming a portion of the outstanding notes, providing other collateral
acceptable to the bond insurance policy provider for the senior series of
equipment notes or any combination of the above actions. We are
currently in compliance with these covenants.
Liquidity and Credit Support
Providers. We have utilized proceeds from the issuance of
pass-through certificates to finance the acquisition of 237 leased and owned
mainline jet aircraft, certain spare engines and certain spare
parts. Typically, these pass-through certificates contain liquidity
facilities whereby a third party agrees to make payments sufficient to pay at
least 18 months of interest on the applicable certificates if a payment default
occurs. The liquidity providers for these certificates include the
following: CALYON New York Branch, Landesbank Hessen-Thuringen
Girozentrale, Morgan Stanley Capital Services, Morgan Stanley Bank, Westdeutsche
Landesbank Girozentrale, AIG Matched Funding Corp., ABN AMRO Bank N.V., Credit
Suisse First Boston, Caisse des Depots et Consignations, Bayerische Landesbank
Girozentrale, ING Bank N.V., De Nationale Investeringsbank N.V. and RZB Finance
LLC.
We are also the issuer of pass-through
certificates secured by 135 leased regional jet aircraft currently operated by
ExpressJet. The liquidity providers for these certificates include
the following: ABN AMRO Bank N.V., Chicago Branch, Citibank N.A., Citicorp North
America, Inc., Landesbank Baden-Wurttemberg, RZB Finance LLC and WestLB AG, New
York Branch.
We currently utilize policy providers
to provide credit support on three separate financings with an outstanding
principal balance of $469 million at December 31, 2008. The policy
providers have unconditionally guaranteed the payment of interest on the notes
when due and the payment of principal on the notes no later than 24 months after
the final scheduled payment date. Policy providers on these notes are
Ambac Assurance Corporation (a subsidiary of Ambac Financial Group, Inc.) and
Financial Guaranty Insurance Company (a subsidiary of
FGIC). Financial information for the parent company of Ambac
Assurance Corporation is available over the internet at the SEC's website at
www.sec.gov or at the SEC's public reference room in Washington, D.C. and
financial information for FGIC is available over the internet at
www.fgic.com. A policy provider is also used as credit support for
the financing of certain facilities at Houston Bush, currently subject to a
sublease by us to the City of Houston, with an outstanding balance of $46
million at December 31, 2008.
Contractual
Obligations. The following table summarizes the effect that
minimum debt, lease and other material noncancelable commitments listed below
are expected to have on our future cash flows (in millions):
|
Contractual Obligations
|
Payments Due
|
Later
Years
|
||||||
|
Total
|
2009
|
2010
|
2011
|
2012
|
2013
|
|||
|
Debt
and leases:
|
||||||||
|
Long-term
debt (1)
|
$
7,372
|
$ 832
|
$ 1,045
|
$ 1,344
|
$ 690
|
$ 732
|
$2,729
|
|
|
Capital
lease obligations (1)
|
482
|
17
|
17
|
16
|
16
|
16
|
400
|
|
|
Aircraft
operating leases (2)
|
8,722
|
1,019
|
998
|
939
|
894
|
871
|
4,001
|
|
|
Nonaircraft
operating leases (3)
|
6,147
|
456
|
418
|
402
|
494
|
355
|
4,022
|
|
|
Other:
|
||||||||
|
Capacity
purchase agreements (4)
|
4,703
|
767
|
674
|
660
|
675
|
671
|
1,256
|
|
|
Aircraft
and other purchase
commitments
(5)
|
5,902
|
551
|
809
|
955
|
696
|
1,092
|
1,799
|
|
|
Projected
pension contributions (6)
|
1,657
|
125
|
148
|
155
|
183
|
174
|
872
|
|
|
Total
(7)
|
$34,985
|
$3,767
|
$4,109
|
$4,471
|
$3,648
|
$3,911
|
$15,079
|
|
|
(1)
|
Represents
contractual amounts due, including interest. Interest on
floating rate debt was estimated using rates in effect at December 31,
2008.
|
|
(2)
|
Represents
contractual amounts due and excludes $248 million of projected sublease
income to be received from ExpressJet.
|
|
(3)
|
Represents
minimum contractual amounts.
|
|
(4)
|
Represents
our estimates of future minimum noncancelable commitments under our
capacity purchase agreements and does not include the portion of the
underlying obligations for aircraft leased to ExpressJet or deemed to be
leased from Chautauqua, CommutAir or Colgan and facility rent that is
disclosed as part of aircraft and nonaircraft operating
leases. See Note 16 to our consolidated financial statements
included in Item 8 of this report for the significant assumptions used to
estimate the payments.
|
|
(5)
|
Represents
contractual commitments for firm order aircraft only, net of previously
paid purchase deposits, and noncancelable commitments to purchase goods
and services, primarily information technology support. See
Note 19 to our consolidated financial statements included in Item 8 of
this report for a discussion of our purchase
commitments.
|
|
(6)
|
Represents
our estimate of the minimum funding requirements as determined by
government regulations. Amounts are subject to change based on
numerous assumptions, including the performance of the assets in the plan
and bond rates. See "Critical Accounting Policies and
Estimates" in this Item for a discussion of our assumptions regarding our
pension plans.
|
|
(7)
|
Total
contractual obligations do not include long-term contracts where the
commitment is variable in nature, such as credit card processing
agreements and cost-per-hour engine maintenance
agreements, or where short-term cancellation provisions
exist.
|
In addition to the above contractual
obligations, we also have fuel and foreign currency hedge contracts outstanding
at December 31, 2008 that will settle in 2009. These contracts were
in net liability positions of $415 million and $8 million, respectively, at
December 31, 2008. The actual settlement amounts could be
significantly different due to changes in prices of the underlying commodities
or in currency exchange rates. We had posted cash collateral with our
fuel hedge counterparties of $171 million at December 31, 2008.
We expect to fund our future capital
and purchase commitments through internally generated funds, general company
financings and aircraft financing transactions. However, particularly
in light of the troubled capital markets, there can be no assurance that
sufficient financing will be available for all aircraft and other capital
expenditures or that, if necessary, we will be able to defer or otherwise
renegotiate our capital commitments.
Operating
Leases. At December 31, 2008, we had 466 aircraft under
operating leases, including 210 mainline aircraft and 256 regional
jets. These leases have remaining lease terms ranging up to 16
years. In addition, we have non-aircraft operating leases,
principally related to airport and terminal facilities and related
equipment. The obligations for these operating leases are not
included in our consolidated balance sheets. Our total rental expense for
aircraft and non-aircraft operating leases was $976 million and $580 million,
respectively, in 2008.
Regional Capacity Purchase
Agreements. In June 2008, we entered into the Amended
ExpressJet CPA, which amends and restates our previous capacity purchase
agreement effective July 1, 2008. Under the Amended ExpressJet CPA,
we will continue to purchase all of the capacity from the ExpressJet flights
covered by the agreement at a negotiated price and be responsible for the cost
of providing fuel for all flights and paying aircraft rent for all aircraft
covered by the Amended ExpressJet CPA. See Note 16 to our
consolidated financial statements included in Item 8 of this report for details
of changes to our capacity purchase agreement with ExpressJet.
During 2007, Chautauqua began providing
and operating forty-four 50-seat regional jets as a Continental Express carrier
under the Chautauqua CPA. As of December 31, 2008, 37 aircraft are
being flown by Chautauqua for us. The Chautauqua CPA requires us to
pay Chautauqua a fixed fee, subject to annual escalations (capped at 3.5%), for
each block hour flown for its operation of the aircraft. Chautauqua
supplies the aircraft that it operates under the agreement. Aircraft
are scheduled to be removed from service under the Chautauqua CPA each year
through 2012, provided that we have the unilateral right to extend the
Chautauqua CPA on the same terms on an aircraft-by-aircraft basis for a period
of up to five years in the aggregate for 20 aircraft and for up to three years
in the aggregate for seven aircraft, subject to the renewal terms of the related
aircraft lease.
Our capacity purchase agreement with
CommutAir provides for CommutAir to operate sixteen 37-seat Bombardier Q200
twin-turboprop aircraft as a Continental Connection carrier on short distance
routes from Cleveland Hopkins and New York Liberty. The CommutAir CPA
became effective in 2006 and has a term of approximately six
years. CommutAir supplies all of the aircraft that it operates under
the agreement.
In 2008, Colgan began operating fifteen
74-seat Bombardier Q400 twin-turboprop aircraft on short and medium-distance
routes from New York Liberty on our behalf. Colgan operates the
flights as a Continental Connection carrier under a capacity purchase agreement
with us. In January 2009, we amended the capacity purchase agreement
to increase by 15 the number of Q400 aircraft operated by Colgan on our
behalf. We expect that Colgan will begin operating these 15
additional aircraft as they are delivered, beginning in the third quarter of
2010 through the second quarter of 2011. Each aircraft is scheduled
to be covered by the agreement for approximately ten years following the date
such aircraft is delivered into service thereunder. Colgan supplies
all aircraft that it operates under the agreement. One of Colgan's
Q400 aircraft was involved in an accident on February 12, 2009, reducing the
number of aircraft currently being flown for us to 14.
Under each of these capacity purchase
agreements, our regional operator is generally required to indemnify us for any
claims arising in connection with its operation of the aircraft under the
agreement and to maintain separate insurance to cover its indemnification
obligation.
Guarantees and
Indemnifications. We are the guarantor of approximately $1.7
billion in aggregate principal amount of tax-exempt special facilities revenue
bonds and interest thereon, excluding the US Airways contingent liability
discussed below. These bonds, issued by various municipalities and
other governmental entities, are payable solely from our rentals paid under
long-term agreements with the respective governing bodies. The
leasing arrangements associated with approximately $1.5 billion of these
obligations are accounted for as operating leases, and the leasing arrangements
associated with approximately $200 million of these obligations are accounted
for as capital leases.
We are contingently liable for US
Airways' obligations under a lease agreement between US Airways and the Port
Authority of New York and New Jersey related to the East End Terminal at
LaGuardia airport. These obligations include the payment of ground
rentals to the Port Authority and the payment of other rentals in respect of the
full amounts owed on special facilities revenue bonds issued by the Port
Authority having an outstanding par amount of $123 million at December 31, 2008
and having a final scheduled maturity in 2015. If US Airways defaults
on these obligations, we would be obligated to cure the default and we would
have the right to occupy the terminal after US Airways' interest in the lease
had been terminated.
We also had letters of credit and
performance bonds relating to various real estate and customs obligations at
December 31, 2008 in the amount of $69 million. These letters of
credit and performance bonds have expiration dates through October
2010.
We are the lessee under many real
estate leases. It is common in such commercial lease transactions for
us as the lessee to agree to indemnify the lessor and other related third
parties for tort liabilities that arise out of or relate to our use or occupancy
of the leased premises and the use or occupancy of the leased premises by
regional carriers operating flights on our behalf. In some cases,
this indemnity extends to related liabilities arising from the negligence of the
indemnified parties, but usually excludes any liabilities caused by their gross
negligence or willful misconduct. Additionally, we typically
indemnify such parties for any environmental liability that arises out of or
relates to our use of the leased premises.
In our aircraft financing agreements,
we typically indemnify the financing parties, trustees acting on their behalf
and other related parties against liabilities that arise from the manufacture,
design, ownership, financing, use, operation and maintenance of the aircraft and
for tort liability, whether or not these liabilities arise out of or relate to
the negligence of these indemnified parties, except for their gross negligence
or willful misconduct.
We expect that we would be covered by
insurance (subject to deductibles) for most tort liabilities and related
indemnities described above with respect to real estate we lease and aircraft we
operate.
In our financing transactions that
include loans, we typically agree to reimburse lenders for any reduced returns
with respect to the loans due to any change in capital requirements and, in the
case of loans in which the interest rate is based on LIBOR, for certain other
increased costs that the lenders incur in carrying these loans as a result of
any change in law, subject in most cases to certain mitigation obligations of
the lenders. At December 31, 2008, we had $1.5 billion of floating
rate debt and $260 million of fixed rate debt, with remaining terms of up to 12
years, that is subject to these increased cost provisions. In several
financing transactions involving loans or leases from non-U.S. entities, with
remaining terms of up to 12 years and an aggregate carrying value of $1.6 billion, we bear the
risk of any change in tax laws that would subject loan or lease payments
thereunder to non-U.S. entities to withholding taxes, subject to customary
exclusions.
We may be required to make future
payments under the foregoing indemnities and agreements due to unknown variables
related to potential government changes in capital adequacy requirements, laws
governing LIBOR based loans or tax laws, the amounts of which cannot be
estimated at this time.
Environmental
Matters. In 2001, the CRWQCB mandated a field study of the
area surrounding our aircraft maintenance hangar in Los Angeles. The
study was completed in September 2001 and identified jet fuel and solvent
contamination on and adjacent to this site. In April 2005, we began
environmental remediation of jet fuel contamination surrounding our aircraft
maintenance hangar pursuant to a workplan submitted to (and approved by) the
CRWQCB and our landlord, the Los Angeles World
Airports. Additionally, we could be responsible for environmental
remediation costs primarily related to solvent contamination on and near this
site.
In 1999, we purchased property located
near our New York Liberty hub in Elizabeth, New Jersey from Honeywell with
certain environmental indemnification obligations by us to
Honeywell. We did not operate the facility located on or make any
improvements to the property. In 2005, we sold the property to
Catellus and, in connection with the sale, Catellus assumed certain
environmental indemnification obligations in favor of us. On October
9, 2006, Honeywell provided us with a notice seeking indemnification from us in
connection with the EPA potentially responsible party notice to Honeywell
involving the Newark Bay Study Area of the Diamond Alkali Superfund Site
alleging hazardous substance releases from the property and seeking study
costs. In addition, on May 7, 2007, Honeywell provided us with a
notice seeking indemnification from us in connection with a possible lawsuit by
Tierra Solutions against Honeywell relating to alleged discharges from the
property into Newark Bay and seeking cleanup of Newark Bay waters and sediments
under the Resource Conservation and Recovery Act. We have notified
Honeywell that, at this time, we have not agreed that we are required to
indemnify Honeywell with respect to the EPA and Tierra Solutions claims and
Honeywell has invoked arbitration procedures under its sale and purchase
agreement with us. Catellus has agreed to indemnify and defend us in
connection with the EPA and Tierra Solutions claims, including any arbitration
with Honeywell.
At December 31, 2008, we had an accrual
for estimated costs of environmental remediation throughout our system of $33
million, based primarily on third-party environmental studies and estimates as
to the extent of the contamination and nature of the required remedial
actions. We have evaluated and recorded this accrual for environmental
remediation costs separately from any related insurance recovery. We did
not have any receivables related to environmental insurance recoveries at
December 31, 2008. Based on currently available information, we
believe that our accrual for potential environmental remediation costs is
adequate, although our accrual could be adjusted in the future due to new
information or changed circumstances. However, we do not expect these
items to materially affect our results of operations, financial condition or
liquidity.
Fuel
Hedges. Because our fuel derivatives were in a net liability
position of $415 million at December 31, 2008 resulting from the recent
significant decline in crude oil prices, we posted cash collateral with our
counterparties totaling $171 million. These amounts are reported in
prepayments and other current assets in our consolidated balance
sheet.
An off-balance sheet arrangement is any
transaction, agreement or other contractual arrangement involving an
unconsolidated entity under which a company has (1) made guarantees, (2) a
retained or a contingent interest in transferred assets, (3) an obligation under
derivative instruments classified as equity or (4) any obligation arising out of
a material variable interest in an unconsolidated entity that provides
financing, liquidity, market risk or credit risk support to the company, or that
engages in leasing, hedging or research and development arrangements with the
company.
We have no arrangements of the types
described in the first three categories that we believe may have a material
current or future effect on our results of operations. Certain
guarantees that we do not expect to have a material current or future effect on
our results of operations, financial condition or liquidity are disclosed in
Note 19 to our consolidated financial statements included in Item 8 of this
report.
We do have obligations arising out of
variable interests in unconsolidated entities. See Note 15 to our
consolidated financial statements included in Item 8 of this report for a
discussion of our off-balance sheet aircraft leases, airport leases (which
include the US Airways contingent liability), subsidiary trust and our capacity
purchase agreement with ExpressJet.
Our consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of our consolidated financial
statements requires us to make estimates and judgments that affect the reported
amount of assets and liabilities, revenues and expenses and related disclosure
of contingent assets and liabilities at the date of our financial
statements. Actual results may differ from these estimates under
different assumptions or conditions.
Critical accounting policies are
defined as those that are reflective of significant judgments and uncertainties,
and potentially result in materially different results under different
assumptions and conditions. We believe that our critical accounting
policies are limited to those described below. For a detailed
discussion on the application of these and other accounting policies, see Note 1
to our consolidated financial statements included in Item 8 of this
report.
Pension
Plans. We account for our defined benefit pension plans in
accordance with Statement of Financial Accounting Standards No. 87, "Employer's
Accounting for Pensions" ("SFAS 87") and SFAS No. 158, "Employers' Accounting
for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106 and 132(R)." Under SFAS 87, pension
expense is recognized on an accrual basis over employees' approximate service
periods. Pension expense calculated under SFAS 87 is generally
independent of funding decisions or requirements. We recognized expense for our
defined benefit pension plans totaling $147 million, $191 million and $219
million in 2008, 2007 and 2006, respectively, including settlement
charges. We currently expect our expense related to our defined
benefit pension plans to be approximately $250 million in 2009. This
amount is higher than our expense in each of the past three years due to an
increase in the plans' under-funded status and lower investment returns on lower
plan asset balances.
Our plans' under-funded status was $1.4
billion at December 31, 2008 and $536 million at December 31,
2007. This increase was primarily the result of lower investment
returns as a result of the current global financial crisis and decreases in the
discount rate and the lump sum conversion interest rate used to determine our
pension liability. Funding requirements for tax-qualified defined
benefit pension plans are determined by government
regulations. During 2008, we contributed $102 million to our
tax-qualified defined benefit pension plans, satisfying our minimum funding
requirements during calendar year 2008. We contributed an additional
$50 million to our tax-qualified defined benefit pension plans in January
2009. We expect to contribute approximately $125 million to our
tax-qualified defined benefit pension plans during 2009.
The fair value of our plans' assets
decreased from $1.8 billion at December 31, 2007 to $1.1 billion at December 31,
2008. When calculating pension expense for 2008, we assumed that our
plans' assets would generate a long-term rate of return of 8.5%. We
assumed a long-term rate of return for calculating pension expense in 2007 and
2006 of 8.26% and 8.5%, respectively. We develop our expected
long-term rate of return assumption based on historical experience and by
evaluating input from the trustee managing the plans' assets. Our expected long-term
rate of return on plan assets is based on a target allocation of assets, which
is based on our goal of earning the highest rate of return while maintaining
risk at acceptable levels. Our projected long-term rate of return is
slightly higher than some market indices due to the active management of our
plans' assets, and is supported by the historical returns on our plans'
assets. The plans strive to have assets sufficiently diversified so
that adverse or unexpected results from one security class will not have an
unduly detrimental impact on the entire portfolio. We regularly
review our actual asset allocation and the pension plans' investments are
periodically rebalanced to our targeted allocation when considered
appropriate. Our allocation of assets was as follows at December 31,
2008:
|
Percent of Total
|
Expected
Long-Term
Rate of
Return
|
||||
|
U.S.
equities
|
47%
|
9%
|
|||
|
International
equities
|
21
|
9
|
|||
|
Fixed
income
|
20
|
5
|
|||
|
Other
|
12
|
12
|
|||
Pension expense increases as the
expected rate of return on plan assets decreases. When calculating
pension expense for 2009, we will assume that our plans' assets will generate a
weighted-average long-term rate of return of 8.25%. The decrease of
25 basis points over the rate used to determine 2008 expense reflects additional
expenses of the plan as a result of its current funded
status. Lowering the expected long-term rate of return on our plan
assets by an additional 50 basis points (from 8.25% to 7.75%) would increase our
estimated 2009 pension expense by approximately $5 million.
We discounted our future pension
obligations using a weighted average rate of 6.13% at December 31, 2008,
compared to 6.31% at December 31, 2007. We determine the appropriate
discount rate for each of our plans based on current rates on high quality
corporate bonds that would generate the cash flow necessary to pay plan benefits
when due. This approach can result in different discount rates for
different plans, depending on each plan's projected benefit
payments. The pension liability and future pension expense both
increase as the discount rate is reduced. Lowering the discount rate
by 50 basis points (from 6.13% to 5.63%) would increase our pension liability at
December 31, 2008 by approximately $232 million and increase our
estimated 2009 pension expense by approximately $29 million.
At December 31, 2008, we have
unrecognized net actuarial losses of $1.4 billion related to our defined benefit
pension plans. Our estimated 2009 expense related to our defined
benefit pension plans of $250 million includes the recognition of approximately
$111 million of these losses.
Future changes in plan asset returns,
plan provisions, assumed discount rates, pension funding law and various other
factors related to the participants in our pension plans will impact our future
pension expense and liabilities. We cannot predict with certainty
what these factors will be in the future.
Revenue
Recognition. We recognize passenger revenue when
transportation is provided or when the ticket expires unused, rather than when a
ticket is sold. Revenue is recognized for unused non-refundable
tickets on the date of the intended flight if the passenger did not notify us of
his or her intention to change the itinerary.
The amount of passenger ticket sales
not yet recognized as revenue is included in our consolidated balance sheets as
air traffic and frequent flyer liability. We perform periodic
evaluations of the estimated liability for passenger ticket sales and any
adjustments, which can be significant, are included in results of operations for
the periods in which the evaluations are completed. These adjustments
relate primarily to differences between our statistical estimation of certain
revenue transactions and the related sales price, as well as refunds, exchanges,
interline transactions and other items for which final settlement occurs in
periods subsequent to the sale of the related tickets at amounts other than the
original sales price.
Ticket change fees relate to
non-refundable tickets, but are considered a separate transaction from the air
transportation because they represent a charge for our additional service to
modify a previous order. Ticket change fees are recognized as other
revenue in our consolidated statement of operations at the time the fees are
assessed.
Frequent Flyer
Accounting. For those OnePass accounts that have sufficient
mileage credits to claim the lowest level of free travel, we record a liability
for either the estimated incremental cost of providing travel awards that are
expected to be redeemed with us or the contractual rate of expected redemption
on alliance carriers. Incremental cost includes the cost of fuel,
meals, insurance and miscellaneous supplies, but does not include any costs for
aircraft ownership, maintenance, labor or overhead
allocation. Beginning in 2008, we also include in our determination
of incremental cost the impact of fees charged to certain passengers redeeming
frequent flyer rewards for travel, which partially offsets the incremental cost
associated with providing flights for frequent flyer travel
rewards. We recorded an adjustment of $27 million to increase
passenger revenue and reduce our frequent flyer liability during 2008 for the
impact of these fees, which had not been significant in prior periods, after we
increased them during 2008. A change to these cost estimates, the
actual redemption activity, the amount of redemptions on alliance carriers or
the minimum award level could have a significant impact on our liability in the
period of change as well as future years. The liability is adjusted
periodically based on awards earned, awards redeemed, changes in the incremental
costs and changes in the OnePass program, and is included in the accompanying
consolidated balance sheets as air traffic and frequent flyer
liability. Changes in the liability are recognized as passenger
revenue in the period of change.
We also sell mileage credits in our
frequent flyer program to participating entities, such as credit/debit card
companies, alliance carriers, hotels, car rental agencies, utilities and various
shopping and gift merchants. Revenue from the sale of mileage credits
is deferred and recognized as passenger revenue over the period when
transportation is expected to be provided, based on estimates of its fair
value. Amounts received in excess of the expected transportation's
fair value are recognized in income currently and classified as other
revenue. A change to the time period over which the mileage credits
are used (currently six to 28 months), the actual redemption activity or our
estimate of the amount or fair value of expected transportation could have a
significant impact on our revenue in the year of change as well as future
years.
During the year ended December 31,
2008, OnePass participants claimed approximately 1.6 million
awards. Frequent flyer awards accounted for an estimated 8.5% of our
consolidated revenue passenger miles. We believe displacement of
revenue passengers is minimal given our ability to manage frequent flyer
inventory and the low ratio of OnePass award usage to revenue passenger
miles.
At December 31, 2008, we estimated that
approximately 2.4 million free travel awards outstanding were expected to be
redeemed for free travel on Continental, Continental Express, Continental
Connection, CMI or alliance airlines. Our total liability for future
OnePass award redemptions for free travel and unrecognized revenue from sales of
OnePass miles to other companies was approximately $324 million at December 31,
2008. This liability is recognized as a component of air traffic and
frequent flyer liability in our consolidated balance sheets.
Stock-Based
Compensation. We have stock option and RSU awards outstanding
that require management to make assumptions about the value of the awards in
order to recognize the expense and, in the case of the RSU awards, the
liabilities associated with those awards.
The fair value of options is determined
at the grant date using a Black-Scholes-Merton option-pricing model, which
requires us to make several assumptions. The risk-free interest rate
is based on the U.S. Treasury yield curve in effect for the expected term of the
option at the time of grant. The dividend yield on our common stock
is assumed to be zero since we historically have not paid dividends and have no
current plans to do so in the future. The market price volatility of
our common stock is based on the historical volatility of our common stock over
a time period equal to the expected term of the option and ending on the grant
date. The expected life of the options is based on our historical
experience for various work groups. We recognize expense only for
those option awards expected to vest, using an estimated forfeiture rate based
on our historical experience. The forfeiture rate may be revised in
future periods if actual forfeitures differ from our assumptions. A
one percent decrease in the estimated forfeiture rate at December 31, 2008 would
not have resulted in a material increase to wages, salaries and related
costs.
The weighted-average fair value of
options granted during 2008 was determined to be $5.32 per share, based on the
following weighted-average assumptions:
|
Risk-free
interest
rate
|
3.1%
|
|
|
Dividend
yield
|
0%
|
|
|
Expected
market price volatility of our common stock
|
62%
|
|
|
Expected
life of options (years)
|
3.9
|
At December 31, 2008, we had three
outstanding awards of RSUs granted under our Long-Term Incentive and RSU
Program: (1) profit based RSU awards with a performance period
commencing April 1, 2006 and ending December 31, 2009, (2) profit based RSU
awards with a performance period commencing January 1, 2007 and ending December
31, 2009 and (3) profit based RSU awards with a performance period commencing
January 1, 2008 and ending December 31, 2010.
Profit based RSU awards can result in
cash payments to our officers upon the achievement of specified profit
sharing-based performance targets. The performance targets require
that we reach target levels of cumulative employee profit sharing under our
enhanced employee profit sharing program during the performance period and that
we have net income calculated in accordance with U.S. generally accepted
accounting principles for the applicable fiscal year. To serve as a
retention feature, payments related to the achievement of a performance target
generally will be made in one-third annual increments to participants who remain
continuously employed by us through each payment date. Payments also
are conditioned on our having, at the end of the fiscal year preceding the date
any payment is made, a minimum unrestricted cash, cash equivalents and
short-term investments balance as set by the Human Resources Committee of our
Board of Directors. If we do not achieve the minimum cash balance
applicable to a payment date, the payment will be deferred until the next
payment date (March 1 of the next year), subject to a limit on the number of
years payments may be carried forward. Payment amounts are calculated
based on the average closing price of our common stock during the 20 trading
days preceding the payment date and the payment percentage set by the Human
Resources Committee of our Board of Directors for achieving the applicable
profit sharing-based performance target.
We account for the profit based RSU
awards as liability awards. Once it is probable that a profit
sharing-based performance target will be met, we measure the awards at fair
value based on the current stock price. The related expense is
recognized ratably over the required service period, which ends on each payment
date, after adjustment for changes in the then-current market price of our
common stock. Our determination of the probable cumulative profit
sharing pool is highly subjective and subject to change, due in large part to
the risks and uncertainties inherent in our business. Moreover,
because of the subjective nature of the assessment and those risks and
uncertainties, projected operating results are heavily discounted in our
probability analysis. As of December 31, 2007, we had achieved the
highest cumulative profit sharing-based performance target for the profit based
RSU awards with a performance period commencing April 1, 2006 and were,
therefore, accruing expense based on a payment percentage of
337.5%. We had not achieved any of the cumulative profit
sharing-based performance targets as of December 31, 2008 for the profit based
RSU awards with performance periods commencing January 1, 2007 and 2008,
respectively, but we have concluded that it is probable that we will achieve the
entry level target for those awards during the performance periods, resulting in
an estimated payment percentage under each award of 100%. If we had
concluded that it was probable at December 31, 2008 that we would not achieve
the entry level cumulative profit sharing-based performance targets for those
awards, wages, salaries and related costs would have decreased by $10 million in
2008. Conversely, if we had concluded that it was probable that we
would achieve the next higher cumulative profit sharing-based performance
targets, wages, salaries and related costs attributable to those awards would
have increased by $5 million in 2008. Holding the cumulative profit
sharing pool target levels constant, a one dollar increase or decrease in the
price of our common
stock at December
31, 2008 would have resulted in a $3 million increase or decrease, respectively,
in wages, salaries and related costs in 2008 attributable to all then
outstanding profit based RSU awards.
As of December 31, 2008, $32 million of
compensation cost attributable to future service related to unvested employee
stock options and profit based RSU awards that are probable of being achieved
had not yet been recognized. This amount will be recognized in
expense over a weighted-average period of 1.7 years.
Fair Value
Measurements. We have certain assets and liabilities that are
measured at fair value on a recurring basis. SFAS 157, "Fair Value
Measurements," clarifies that fair value is an exit price, representing the
price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants based on the highest and best
use of the asset or liability. As such, fair value is a market-based
measurement that should be determined based on assumptions that market
participants would use in pricing an asset or liability. SFAS 157
requires us to use valuation techniques to measure fair value that maximize the
use of observable inputs and minimize the use of unobservable
inputs. These inputs are prioritized as follows:
|
Level
1:
|
Observable
inputs such as quoted prices for identical assets or liabilities in active
markets
|
|
|
Level
2:
|
Other
inputs that are observable directly or indirectly, such as quoted prices
for similar assets or liabilities or market-corroborated
inputs
|
|
|
Level
3:
|
Unobservable
inputs for which there is little or no market data and which require us to
develop our own assumptions about how market participants would price the
assets or liabilities
|
We have three items that are classified
as Level 3 - auction rate securities, a put right on certain auction rate
securities and fuel hedging derivatives. The determination of the
fair value of these items requires us to make critical assumptions.
Historically, the carrying value of
auction rate securities approximated fair value due to the frequent resetting of
the interest rate and the existence of a liquid market. However, the
estimated market value of these auction rate securities no longer approximates
par value due to the lack of liquidity in the market for these securities at
their par value. We estimated the fair value of these securities to
be $229 million at December 31, 2008, taking into consideration the limited
sales and offers to purchase securities and using internally-developed models of
the expected future cash flows related to the securities. Our models
incorporated our probability-weighted assumptions about the cash flows of the
underlying student loans and discounts to reflect a lack of liquidity in the
market for these securities. The resulting fair value was
approximately 80% of the par value in the aggregate. Each one percent
decrease in the discounted cash flows indicated by our model would decrease the
fair value of our auction rate securities by approximately $3
million.
During 2008, we received a put right
permitting us to sell certain auction rate securities at par in
2010. We recorded the put right at fair value and recognized a gain
of $26 million upon receipt. We determined the fair value based on
the difference between the risk-adjusted discounted expected cash flows from the
underlying auction rate securities without the put right and with the put right
being exercised in 2010. Therefore, the fair value of the put right
is dependent on our calculation of the fair value of the underlying auction rate
securities. We have reclassified the underlying auction rate
securities to trading securities and elected the fair value option under SFAS
159, "The Fair Value Option for Financial Assets and Financial Liabilities," for
the put right, with changes in the fair value of the put right and the
underlying auction rate securities recognized in earnings
currently. The fair value adjustments to the auction rate securities
and the put right will largely offset and result in minimal net impact to
earnings in future periods.
We determine the fair value of our fuel
derivatives by obtaining inputs from a broker's pricing model based on inputs
that are either readily available in public markets or can be derived from
information available in publicly quoted markets. We verify the
reasonableness of these inputs by comparing the resulting fair values to similar
quotes from our counterparties as of each date for which financial statements
are prepared. For derivatives not covered by collateral, we also make
an adjustment to incorporate credit risk into the valuation. This
adjustment was determined by discounting the expected cash flows under the
contracts using a discount rate equal to the spread between our unsecured
borrowing rate and a risk-free rate for the applicable time
period. At December 31, 2008, this adjustment reduced our liability
position from $434 million (the calculated fair value before the adjustment) to
$415 million. Due to the fact that certain of the inputs utilized to
determine the fair value of the fuel derivatives are unobservable (principally
volatility of crude oil prices and the credit risk adjustments), we have
categorized these option contracts as Level 3.
Property and
Equipment. As of December 31, 2008, the net carrying amount of
our property and equipment was $7.3 billion, which represents 58% of our total
assets. In addition to the original cost of these assets, the net
carrying amount of our property and equipment is impacted by a number of
accounting policy elections, including estimates, assumptions and judgments
relative to capitalized costs, the estimation of useful lives and residual
values and, when necessary, the recognition of asset impairment
charges. Our property and equipment accounting policies are designed
to depreciate our assets over their estimated useful lives and residual values
of our aircraft, reflecting both historical experience and expectations
regarding future operations, utilization and performance of our
assets.
In addition, our policies are designed
to appropriately and consistently capitalize costs incurred to enhance, improve
and extend the useful lives of our assets and expense those costs incurred to
repair and maintain the existing condition of our
aircraft. Capitalized costs increase the carrying values and
depreciation expense of the related assets, which also impact our results of
operations.
Useful lives of aircraft are difficult
to estimate due to a variety of factors, including technological advances that
impact the efficiency of aircraft, changes in market or economic conditions and
changes in laws or regulations affecting the airline industry. We
evaluate the remaining useful lives of our aircraft when certain events occur
that directly impact our assessment of the remaining useful lives of the
aircraft and include changes in operating condition, functional capability and
market and economic factors. Both depreciable lives and residual
values are regularly reviewed for our aircraft and spare parts to recognize
changes in our fleet plan and other relevant information. Jet
aircraft and rotable spare parts are assumed to have estimated residual values
of 15% and 10%, respectively, of original cost; other categories of property and
equipment are assumed to have no residual value. A one year increase
in the useful lives of our owned aircraft would reduce annual depreciation
expense by approximately $18 million while a one year decrease would increase
annual depreciation expense by approximately $17 million. A one
percent decrease in residual value of our owned aircraft would increase annual
depreciation expense by approximately $2 million.
Impairments of Long-Lived
Assets. We record impairment losses on long-lived assets,
consisting principally of property and equipment and domestic airport operating
rights, when events or changes in circumstances indicate, in management's
judgment, that the assets might be impaired and the undiscounted cash flows
estimated to be generated by those assets are less than the carrying amount of
those assets. Our cash flow estimates are based on historical results
adjusted to reflect our best estimate of future market and operating
conditions. The net carrying value of assets not recoverable is
reduced to fair value if lower than the carrying value. In
determining the fair market value of the assets, we consider market trends,
recent transactions involving sales of similar assets and, if necessary,
estimates of future discounted cash flows.
Following the decision in June 2008 to
retire all of our Boeing 737-300 aircraft and a significant portion of our
Boeing 737-500 fleet by the end of 2009, we evaluated the ongoing value of the
assets associated with these fleets. Fleet assets include owned
aircraft, improvements on leased aircraft, rotable spare parts, spare engines
and simulators. Based on our evaluation, we determined that the
carrying amounts of these fleets were impaired and wrote them down to their
estimated fair value. We estimated the fair values based on current
market quotes and our expected proceeds from the sale of the
assets. We also evaluated the ongoing value of the assets associated
with our other fleets and determined that the carrying amounts of those fleets
were not impaired. Accordingly, we recorded $37 million of non-cash
impairments on owned Boeing 737-300 and 737-500 aircraft and related assets and
a non-cash charge of $14 million to write down spare parts and supplies for the
Boeing 737-300 and 737-500 fleets to the lower of cost or net realizable value
during 2008.
We provide an allowance for spare parts
inventory obsolescence over the remaining useful life of the related aircraft,
plus allowances for spare parts currently identified as excess. These
allowances are based on our estimates and industry trends, which are subject to
change and, where available, reference to market rates and
transactions. The estimates are more likely to change when we near
the end of a fleet life or when we remove entire fleets from service sooner than
originally planned.
We also perform annual impairment tests
on our routes and international airport landing slots, which are indefinite life
intangible assets. These tests are based on estimates of discounted
future cash flows, using assumptions consistent with those used for aircraft and
airport operating rights impairment tests. We determined that we did
not have any impairment of our routes at December 31, 2008. However,
we recorded an $18 million non-cash charge in 2008 to write off an intangible
route asset as a result of our decision to move all of our flights between New
York Liberty and London from London Gatwick Airport to London Heathrow
Airport.
Recently
Issued Accounting Pronouncements
See Note 2 to our consolidated
financial statements included in Item 8 of this report for a discussion of
recently issued accounting pronouncements.
Related
Party Transactions
See Note 17 to our consolidated
financial statements included in Item 8 of this report for a discussion of
related party transactions.
Market
Risk Sensitive Instruments and Positions
We are subject to certain market risks,
including commodity price risk (i.e., aircraft fuel prices), interest rate risk,
foreign currency risk and price changes related to certain investments in debt
and equity securities. The adverse effects of potential changes in
these market risks are discussed below. The sensitivity analyses
presented do not consider the effects that such adverse changes may have on
overall economic activity nor do they consider additional actions we may take to
mitigate our exposure to such changes. Actual results may
differ. See the notes to our consolidated financial statements
included in Item 8 of this report for a description of our accounting policies
and other information related to these financial instruments. We do
not hold or issue derivative financial instruments for trading
purposes.
Aircraft
Fuel. Our results of operations are significantly impacted by
changes in the price of aircraft fuel. During 2008 and 2007, mainline
aircraft fuel and related taxes accounted for 38.5% and 30.0%, respectively, of
our mainline operating expenses. Based on our expected fuel
consumption in 2009, a one dollar increase in the price of crude oil will
increase our annual fuel expense by approximately $41 million, before
considering the impact of refining margins and our fuel hedging
program.
We routinely hedge a portion of our
future fuel requirements, provided the hedges are expected to be cost
effective. One component of our hedging strategy is to construct a
hedge position that is designed to better hedge fuel price with respect to
tickets already sold, for which we can no longer adjust our
pricing. Implicit in this strategy is our belief that, as to tickets
not yet sold, the market will be efficient such that fare levels will adjust to
keep pace with fuel costs. We strive to maintain fuel hedging levels
and exposure generally comparable to that of our major competitors, so that our
fuel cost is not disproportionate to theirs.
Another component of our hedging
strategy is to purchase call options or enter into swap agreements to protect us
against sudden and significant increases in jet fuel prices. To
minimize the high cost to us of call options during 2008, we frequently entered
into collars. Collars are derivative instruments that involve
combining a purchased call option, which on a stand-alone basis would require us
to pay a premium, with a written put option, which on a stand-alone basis would
result in our receiving a premium. The collars we have entered into
consist of both instruments that result in no net premium to us (known as a
"costless" or zero-cost collar) and instruments that result in us paying a net
premium to the counterparty. The purchased call option portion of the
collar caps the price of the contract at the agreed upon price while the sold
option portion of the collar provides for a minimum price of the related
commodity. Our general practice is to enter into either crude oil or
heating oil contracts since there is a limited market for jet fuel
derivatives.
As of December 31, 2008, our projected
fuel requirements were hedged as follows, excluding contracts with Lehman
Brothers which we settled in January 2009:
|
Maximum Price
|
Minimum Price
|
|||||||
|
%
of
Expected
Consumption
|
Weighted
Average
Price
(per gallon)
|
%
of
Expected
Consumption
|
Weighted
Average
Price
(per gallon)
|
|||||
|
2009
|
||||||||
|
WTI
crude oil
collars
|
14%
|
$3.40
|
14%
|
$2.53
|
||||
|
WTI
crude oil call options
|
6
|
2.54
|
N/A
|
N/A
|
||||
|
WTI
crude oil
swaps
|
3
|
1.33
|
3
|
1.33
|
||||
|
Total
|
23%
|
17%
|
||||||
Lehman Brothers, one of the
counterparties to our fuel derivative contracts, declared bankruptcy on
September 15, 2008. As a result, we determined that our fuel
derivative contracts with Lehman Brothers were not highly effective
hedges. Therefore, we discontinued hedge accounting for these
contracts as of September 15, 2008 and all subsequent changes in the contracts'
fair values were reported in earnings. In 2008, we recognized losses
of $125 million in other non-operating income (expense) related to the changes
in the fair value of these contracts. In January 2009, we settled all
open contracts with Lehman Brothers.
At December 31, 2008, our fuel
derivatives, including contracts with Lehman Brothers, were in a net loss
position of $415 million resulting from the recent substantial decline in crude
oil prices. This fair value is reported in accrued other current
liabilities in our consolidated balance sheet. We estimate that a 10%
decrease in the price of crude oil and heating oil at December 31, 2008 would
increase our obligation related to the fuel derivatives outstanding at that date
by approximately $118 million.
Because our fuel hedges were in a net
liability position at December 31, 2008, we were required to post cash
collateral with our counterparties totaling $171 million. These
amounts are reported in prepayments and other current assets in our consolidated
balance sheet.
As of December 31, 2007, we had hedged
approximately 20% and 5% of our projected fuel requirements for the first and
second quarters of 2008, respectively, using heating oil option contracts
forming zero cost collars with a weighted average call price of $2.44 per gallon
and a weighted average put price of $2.28 per gallon. At December 31,
2007, the fair value of our fuel hedges was a $24 million net asset and is
included in prepayments and other current assets in our consolidated balance
sheet.
Foreign
Currency. We are exposed to the effect of exchange rate
fluctuations on the U.S. dollar value of foreign currency denominated operating
revenue and expenses. We attempt to mitigate the effect of certain
potential foreign currency losses by entering into forward and option contracts
that effectively enable us to sell Canadian dollars, British pounds, Japanese
yen and euros expected to be received from the respective denominated cash
inflows over the next 12 months at specified exchange rates.
At December 31, 2008, we had forward
contracts outstanding to hedge the following cash inflows (primarily from
passenger ticket sales) in foreign currencies:
|
·
|
36%
of our projected Japanese yen-denominated cash inflows in
2009
|
|
·
|
6%
of our projected euro-denominated cash inflows in
2009
|
At December 31, 2008, the fair value of
our foreign currency hedges was $(8) million and is included in accrued other
liabilities in our consolidated balance sheet. We estimate that a
uniform 10% strengthening in the value of the U.S. dollar relative to each
foreign currency would have the following impact on our existing forward
contacts at December 31, 2008 (in millions):
|
Increase
in
Fair Value
|
Increase
in
Underlying Exposure
|
Resulting
Net Loss
|
||||
|
Japanese
yen
|
$14
|
$(40)
|
$(26)
|
|||
|
Euro
|
3
|
(49)
|
(46)
|
|||
At December 31, 2007, we had forward
contracts outstanding to hedge the following cash inflows from passenger ticket
sales in foreign currencies:
|
·
|
Approximately
25% of our projected British pound-denominated cash flows in
2008
|
|
·
|
Approximately
39% of our projected Canadian dollar-denominated cash flows in
2008
|
|
·
|
Approximately
43% of our projected Japanese yen-denominated cash flows in
2008
|
The fair
value of these hedges was not material at December 31, 2007.
Interest
Rates. Our results of operations are affected by fluctuations
in interest rates (e.g., interest expense on variable-rate debt and interest
income earned on short-term investments). We had approximately $2.0
billion of variable-rate debt as of December 31, 2008 and December 31,
2007. If average interest rates increased by 100 basis points during
2009 as compared to 2008, our projected 2009 interest expense would increase by
approximately $20 million after taking into account scheduled
maturities.
As of December 31, 2008 and 2007, we
estimated the fair value of $3.0 billion and $2.0 billion (carrying value) of
our fixed-rate debt to be $2.2 billion and $2.0 billion, respectively, based
upon discounted future cash flows using our current incremental borrowing rates
for similar types of instruments or market prices. If market interest
rates increased 100 basis points at December 31, 2008, the fair value of our
fixed-rate debt would increase by approximately $59
million. Estimating the fair value of the remaining fixed-rate debt
at December 31, 2008 and 2007, with a carrying value of $683 million and $929
million, respectively, was not practicable due to the large number of remaining
debt instruments with relatively small carrying amounts.
A change in market interest rates would
also impact interest income earned on our cash, cash equivalents and short-term
investments. Assuming our cash, cash equivalents and short-term
investments remain at their average 2008 levels, a 100 basis point increase or
decrease in interest rates would result in a corresponding increase or decrease
in interest income of approximately $26 million during 2009.
Investment
Risk. Our short-term investments primarily include
certificates of deposit placed through an account registry service ("CDARS"),
auction rate securities and automobile loan-related asset backed
securities. While the CDARS are insured by the Federal Deposit
Insurance Corporation and the auction rate securities are secured by pools of
student loans guaranteed by state-designated guaranty agencies and reinsured by
the U.S. government, we are subject to investment risk for the fair value of the
investments. Our short-term investments had a fair value of $506
million at December 31, 2008, including amounts that were classified as
restricted cash, cash equivalents and short-term investments.
Our defined benefit plans had assets
with a fair value of $1.0 billion at December 31, 2008, compared to a fair value
of $1.8 billion at December 31, 2007. This decrease was primarily the
result of lower investment returns as a result of the current global financial
crisis. A significant portion of the plans' assets consists of U.S.
and international equities. Lower asset values can result in higher
required contributions and pension expense in future years and a decrease in our
stockholders' equity.
Index to
Consolidated Financial Statements
|
PAGE
|
|
|
Report
of Independent Registered Public Accounting Firm
|
80
|
|
Consolidated
Statements of Operations for each of the Three Years in the
Period Ended December 31,
2008
|
81
|
|
Consolidated
Balance Sheets as of December 31, 2008 and 2007
|
83
|
|
Consolidated
Statements of Cash Flows for each of the Three Years in the
Period Ended December 31,
2008
|
85
|
|
Consolidated
Statements of Common Stockholders' Equity for each of the
Three Years in the Period Ended
December 31, 2008
|
87
|
|
Notes
to Consolidated Financial Statements
|
89
|
The Board
of Directors and Stockholders
Continental
Airlines, Inc.
We have audited the accompanying
consolidated balance sheets of Continental Airlines, Inc. (the "Company") as of
December 31, 2008 and 2007, and the related consolidated statements of
operations, common stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 2008. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of the Company at December 31, 2008 and
2007, and the consolidated results of its operations and its cash flows for each
of the three years in the period ended December 31, 2008, in conformity
with U.S. generally accepted accounting principles.
As discussed in Notes 9 and 11 to the
consolidated financial statements, the Company adopted, effective January 1,
2006, Statement of Financial Accounting Standards No. 123 (revised 2004), "Share
Based Payment", and, effective December 31, 2006, Statement of Financial
Accounting Standards No. 158, "Employers' Accounting for Defined Benefit Pension
and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106
and 132(R)", respectively.
We also have audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United
States), the Company's internal control over financial reporting as of December
31, 2008, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission, and our report dated February 18, 2009 expressed an unqualified
opinion thereon.
ERNST &
YOUNG LLP
Houston,
Texas
February
18, 2009
CONTINENTAL
AIRLINES, INC.
(In
millions, except per share data)
|
Year
Ended December 31,
|
|||
|
2008
|
2007
|
2006
|
|
|
Operating
Revenue:
|
|||
|
Passenger (excluding fees and
taxes of $1,531, $1,499 and $1,369,
respectively)
|
$13,737
|
$12,995
|
$12,003
|
|
Cargo
|
497
|
453
|
457
|
|
Other
|
1,007
|
784
|
668
|
|
15,241
|
14,232
|
13,128
|
|
|
Operating
Expenses:
|
|||
|
Aircraft fuel and related
taxes
|
4,905
|
3,354
|
3,034
|
|
Wages, salaries and related
costs
|
2,957
|
3,127
|
2,875
|
|
Regional capacity purchase,
net
|
2,073
|
1,793
|
1,791
|
|
Aircraft
rentals
|
976
|
994
|
990
|
|
Landing fees and other
rentals
|
853
|
790
|
764
|
|
Distribution
costs
|
717
|
682
|
650
|
|
Maintenance, materials and
repairs
|
612
|
621
|
547
|
|
Depreciation and
amortization
|
438
|
413
|
391
|
|
Passenger
services
|
406
|
389
|
356
|
|
Special
charges
|
181
|
13
|
27
|
|
Other
|
1,437
|
1,369
|
1,235
|
|
15,555
|
13,545
|
12,660
|
|
|
Operating
Income
(Loss)
|
(314)
|
687
|
468
|
|
Nonoperating
Income (Expense):
|
|||
|
Interest
expense
|
(365)
|
(383)
|
(401)
|
|
Interest
capitalized
|
33
|
27
|
18
|
|
Interest
income
|
65
|
160
|
131
|
|
Gains on sale of
investments
|
78
|
37
|
92
|
|
Other,
net
|
(181)
|
38
|
61
|
|
(370)
|
(121)
|
(99)
|
|
|
Income
(Loss) before Income Taxes and Cumulative Effect of Change in
Accounting
Principle
|
(684)
|
566
|
369
|
|
Income
Tax Benefit
(Expense)
|
99
|
(107)
|
-
|
|
Income
(Loss) before Cumulative Effect of Change in Accounting
Principle
|
(585)
|
459
|
369
|
|
Cumulative
Effect of Change in Accounting Principle
|
-
|
-
|
(26)
|
|
Net
Income
(Loss)
|
$ (585)
|
$ 459
|
$ 343
|
(continued
on next page)
CONTINENTAL
AIRLINES, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
millions, except per share data)
|
Year
Ended December 31,
|
|||
|
2008
|
2007
|
2006
|
|
|
Earnings
(Loss) per Share:
|
|||
|
Basic:
|
|||
|
Income
(Loss) before Cumulative Effect of Change in Accounting
Principle
|
$(5.54)
|
$4.73
|
$ 4.15
|
|
Cumulative
Effect of Change in Accounting Principle
|
-
|
-
|
(0.29)
|
|
Net
Income
(Loss)
|
$(5.54)
|
$4.73
|
$ 3.86
|
|
Diluted:
|
|||
|
Income
(Loss) before Cumulative Effect of Change in Accounting
Principle
|
$(5.54)
|
$4.18
|
$ 3.53
|
|
Cumulative
Effect of Change in Accounting Principle
|
-
|
-
|
(0.23)
|
|
Net
Income
(Loss)
|
$(5.54)
|
$4.18
|
$ 3.30
|
|
Shares
Used for Computation:
|
|||
|
Basic
|
106
|
97
|
89
|
|
Diluted
|
106
|
114
|
111
|
The
accompanying Notes to Consolidated Financial Statements are an integral part of
these statements.
CONTINENTAL
AIRLINES, INC.
(In
millions, except for share data)
|
December
31,
|
||||
|
ASSETS
|
2008
|
2007
|
||
|
Current
Assets:
|
||||
|
Cash and cash
equivalents
|
$ 2,165
|
$ 2,128
|
||
|
Short-term
investments
|
478
|
675
|
||
|
Total unrestricted cash, cash
equivalents and short-term investments
|
2,643
|
2,803
|
||
|
Restricted cash, cash equivalents
and short-term investments
|
190
|
179
|
||
|
Accounts receivable, net of
allowance for doubtful receivables of $7 and $7
|
453
|
606
|
||
|
Spare parts and supplies, net of
allowance for obsolescence of $102 and $80
|
235
|
271
|
||
|
Deferred income
taxes
|
216
|
259
|
||
|
Prepayments and
other
|
610
|
443
|
||
|
Total current
assets
|
4,347
|
4,561
|
||
|
Property
and Equipment:
|
||||
|
Owned property and
equipment:
|
||||
|
Flight
equipment
|
8,446
|
7,182
|
||
|
Other
|
1,694
|
1,548
|
||
|
10,140
|
8,730
|
|||
|
Less: Accumulated
depreciation
|
3,229
|
2,790
|
||
|
6,911
|
5,940
|
|||
|
Purchase deposits for flight
equipment
|
275
|
414
|
||
|
Capital
leases
|
194
|
297
|
||
|
Less: Accumulated
amortization
|
53
|
93
|
||
|
141
|
204
|
|||
|
Total property and
equipment,
net
|
7,327
|
6,558
|
||
|
Routes
and airport operating rights, net of accumulated amortization of
$375
and
$362
|
804
|
706
|
||
|
Investment
in other
companies
|
-
|
63
|
||
|
Other
assets,
net
|
208
|
217
|
||
|
Total
Assets
|
$12,686
|
$12,105
|
||
(continued
on next page)
CONTINENTAL
AIRLINES, INC.
(In
millions, except for share data)
|
December
31,
|
||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
2008
|
2007
|
||
|
Current
Liabilities:
|
||||
|
Current maturities of long-term
debt and capital leases
|
$ 519
|
$ 652
|
||
|
Accounts
payable
|
1,021
|
1,013
|
||
|
Air traffic and frequent flyer
liability
|
1,881
|
1,967
|
||
|
Accrued
payroll
|
345
|
545
|
||
|
Accrued other
liabilities
|
708
|
272
|
||
|
Total current
liabilities
|
4,474
|
4,449
|
||
|
Long-Term
Debt and Capital
Leases
|
5,371
|
4,366
|
||
|
Deferred
Income
Taxes
|
216
|
359
|
||
|
Accrued
Pension
Liability
|
1,417
|
534
|
||
|
Accrued
Retiree Medical
Benefits
|
234
|
235
|
||
|
Other
|
869
|
612
|
||
|
Commitments
and Contingencies
|
||||
|
Stockholders'
Equity:
|
||||
|
Preferred stock - $.01 par,
10,000,000 shares authorized; zero and
one share of Series B issued and
outstanding, stated at par value
|
-
|
-
|
||
|
Class B common stock - $.01 par,
400,000,000 shares authorized;
123,264,534 and 98,208,888 shares
issued and outstanding
|
1
|
1
|
||
|
Additional paid-in
capital
|
1,997
|
1,606
|
||
|
Retained earnings (accumulated
deficit)
|
(137)
|
448
|
||
|
Accumulated other comprehensive
loss
|
(1,756)
|
(505)
|
||
|
Total stockholders'
equity
|
105
|
1,550
|
||
|
Total
Liabilities and Stockholders' Equity
|
$12,686
|
$12,105
|
||
The
accompanying Notes to Consolidated Financial Statements are an integral part of
these statements.
CONTINENTAL
AIRLINES, INC.
(In
millions)
|
Year
Ended December 31,
|
|||
|
2008
|
2007
|
2006
|
|
|
Cash
Flows from Operating Activities:
|
|||
|
Net income
(loss)
|
$ (585)
|
$ 459
|
$ 343
|
|
Adjustments to reconcile net
income (loss) to net cash provided by
operating
activities:
|
|||
|
Depreciation and
amortization
|
438
|
413
|
391
|
|
Special
charges
|
181
|
13
|
27
|
|
Deferred income tax (benefit)
expense
|
(101)
|
101
|
-
|
|
Gains on sale of
investments
|
(78)
|
(37)
|
(92)
|
|
Loss on fuel hedge contracts
with Lehman Brothers
|
125
|
-
|
-
|
|
Write-down in value of auction
rate securities, net of put right received
|
34
|
-
|
-
|
|
Undistributed equity in income
of other companies
|
(9)
|
(18)
|
(36)
|
|
Cumulative effect of change in
accounting principle
|
-
|
-
|
26
|
|
Stock-based compensation
related to equity awards
|
16
|
27
|
34
|
|
Other,
net
|
20
|
48
|
26
|
|
Changes in operating assets and
liabilities:
|
|||
|
(Increase) decrease in accounts
receivable
|
147
|
(29)
|
(70)
|
|
(Increase) decrease in spare
parts and supplies
|
5
|
(66)
|
(26)
|
|
(Increase) decrease in
prepayments and other assets
|
(167)
|
16
|
(56)
|
|
Increase (decrease) in accounts
payable
|
(10)
|
71
|
104
|
|
Increase (decrease) in air
traffic and frequent flyer liability
|
(86)
|
255
|
237
|
|
Increase (decrease) in accrued
payroll, pension liability and other
|
(254)
|
(120)
|
150
|
|
Net cash (used in) provided by
operating
activities
|
(324)
|
1,133
|
1,058
|
|
Cash
Flows from Investing Activities:
|
|||
|
Capital
expenditures
|
(504)
|
(445)
|
(300)
|
|
Aircraft purchase deposits
refunded (paid), net
|
102
|
(219)
|
(81)
|
|
(Purchase) sale of short-term
investments, net
|
137
|
(314)
|
(127)
|
|
Proceeds from sales of
investments, net
|
149
|
65
|
156
|
|
Proceeds from sales of property
and equipment
|
113
|
67
|
10
|
|
Decrease (increase) in
restricted cash, cash equivalents and short-term
investments
|
(13)
|
86
|
(24)
|
|
Net cash used in investing
activities
|
(16)
|
(760)
|
(366)
|
|
Cash
Flows from Financing Activities:
|
|||
|
Payments on long-term debt and
capital lease obligations
|
(641)
|
(429)
|
(948)
|
|
Proceeds from issuance of
long-term
debt
|
642
|
26
|
574
|
|
Proceeds from public offering
of common stock, net
|
358
|
-
|
-
|
|
Proceeds from issuance of
common stock pursuant to stock plans
|
18
|
35
|
82
|
|
Net cash provided by (used in)
financing
activities
|
377
|
(368)
|
(292)
|
|
Net
Increase in Cash and Cash
Equivalents
|
37
|
5
|
400
|
|
Cash
and Cash Equivalents - Beginning of Period
|
2,128
|
2,123
|
1,723
|
|
Cash
and Cash Equivalents - End of Period
|
$2,165
|
$2,128
|
$2,123
|
(continued
on next page)
CONTINENTAL
AIRLINES, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
millions)
|
Year
Ended December 31,
|
|||
|
2008
|
2007
|
2006
|
|
|
Supplemental
Cash Flows Information:
|
|||
|
Interest
paid
|
$ 365
|
$ 383
|
$ 382
|
|
Income taxes paid
(refunded)
|
$ 5
|
$ 2
|
$ (1)
|
|
Investing and Financing
Activities Not Affecting Cash:
|
|||
|
Property and equipment acquired
through the issuance of debt
|
$1,014
|
$ 190
|
$ 192
|
|
Capital lease obligations
incurred
|
$ 4
|
$ -
|
$ -
|
|
Reduction of debt in exchange
for sale of frequent flyer miles
|
$ (38)
|
$ (37)
|
$ -
|
|
Transfer of auction rate
securities from available-for-sale to trading
|
$ 97
|
$ -
|
$ -
|
|
Common stock issued upon
conversion of 4.5% Convertible Notes
|
$ -
|
$ 170
|
$ -
|
The
accompanying Notes to Consolidated Financial Statements are an integral part of
these statements.
CONTINENTAL
AIRLINES, INC.
(In
millions)
|
Retained
|
Accumulated
|
||||||||||
|
Class
B
|
Additional
|
Earnings
|
Other
|
Treasury
|
|||||||
|
Common
Stock
|
Paid-In
|
(Accumulated
|
Comprehensive
|
Stock,
|
|||||||
|
Shares
|
Amount
|
Capital
|
Deficit)
|
Loss
|
At Cost
|
Total
|
|||||
|
December
31, 2005
|
86
|
$ 1
|
$1,635
|
$ 406
|
$(675)
|
$(1,141)
|
$226
|
||||
|
Net
Income
|
-
|
-
|
-
|
343
|
-
|
-
|
343
|
||||
|
Other
Comprehensive Income:
|
|||||||||||
|
Decrease
in additional
minimum
pension liability
|
-
|
-
|
-
|
-
|
68
|
-
|
68
|
||||
|
Net
change in unrealized gain
(loss)
on derivative instruments
|
-
|
-
|
-
|
-
|
(21)
|
-
|
(21)
|
||||
|
Total
Comprehensive Income
|
390
|
||||||||||
|
Issuance
of common stock
pursuant
to stock plans
|
6
|
-
|
82
|
-
|
-
|
-
|
82
|
||||
|
Stock-based
compensation
|
-
|
-
|
34
|
-
|
-
|
-
|
34
|
||||
|
Retirement
of treasury stock
|
-
|
-
|
(381)
|
(760)
|
-
|
1,141
|
-
|
||||
|
Impact
of adoption of SFAS 158
|
-
|
-
|
-
|
-
|
(385)
|
-
|
(385)
|
||||
|
December
31, 2006
|
92
|
1
|
1,370
|
(11)
|
(1,013)
|
-
|
347
|
||||
|
Net
income
|
-
|
-
|
-
|
459
|
-
|
-
|
459
|
||||
|
Other
comprehensive income:
|
|||||||||||
|
Net
change in unrealized gain
(loss)
on derivative instruments
|
-
|
-
|
-
|
-
|
45
|
-
|
45
|
||||
|
Net
change related to employee
benefit
plans
|
-
|
-
|
-
|
-
|
463
|
-
|
463
|
||||
|
Total
Comprehensive Income
|
967
|
||||||||||
|
Conversion
of 4.5%
convertible
notes
|
4
|
-
|
174
|
-
|
-
|
-
|
174
|
||||
|
Issuance
of common stock
pursuant
to stock plans
|
2
|
-
|
35
|
-
|
-
|
-
|
35
|
||||
|
Stock-based
compensation
|
-
|
-
|
27
|
-
|
-
|
-
|
27
|
||||
|
December
31, 2007
|
98
|
1
|
1,606
|
448
|
(505)
|
-
|
1,550
|
||||
(continued
on next page)
CONTINENTAL
AIRLINES, INC.
CONSOLIDATED
STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
(In
millions)
|
Retained
|
Accumulated
|
||||||||||
|
Class
B
|
Additional
|
Earnings
|
Other
|
Treasury
|
|||||||
|
Common
Stock
|
Paid-In
|
(Accumulated
|
Comprehensive
|
Stock,
|
|||||||
|
Shares
|
Amount
|
Capital
|
Deficit)
|
Loss
|
At Cost
|
Total
|
|||||
|
Net
loss
|
-
|
-
|
-
|
(585)
|
-
|
-
|
(585)
|
||||
|
Other
comprehensive income:
|
|||||||||||
|
Net
change in unrealized gain
(loss)
on derivative instruments
and
other
|
-
|
-
|
-
|
-
|
(441)
|
-
|
(441)
|
||||
|
Net
change related to employee
benefit
plans
|
-
|
-
|
-
|
-
|
(810)
|
-
|
(810)
|
||||
|
Total
Comprehensive Loss
|
(1,836)
|
||||||||||
|
Issuance
of common stock
pursuant
to stock plans
|
1
|
-
|
19
|
-
|
-
|
-
|
19
|
||||
|
Issuance
of common stock
pursuant
to stock offerings
|
24
|
-
|
358
|
-
|
-
|
-
|
358
|
||||
|
Stock-based
compensation
|
-
|
-
|
14
|
-
|
-
|
-
|
14
|
||||
|
December
31, 2008
|
123
|
$ 1
|
$1,997
|
$(137)
|
$(1,756)
|
$ -
|
$ 105
|
||||
The
accompanying Notes to Consolidated Financial Statements are an integral part of
these statements.
CONTINENTAL
AIRLINES, INC.
Continental Airlines, Inc., a Delaware
corporation, is a major United States air carrier engaged in the business of
transporting passengers, cargo and mail. Including our wholly-owned
subsidiary, Continental Micronesia, Inc. ("CMI"), and regional flights operated
on our behalf under capacity purchase agreements with other carriers, we are the
world's fifth largest airline as measured by the number of scheduled miles flown
by revenue passengers in 2008. Our regional capacity purchase
agreements are with ExpressJet Airlines, Inc. ("ExpressJet"), a wholly-owned
subsidiary of ExpressJet Holdings, Inc. ("Holdings"), Chautauqua Airlines, Inc.
("Chautauqua"), a wholly-owned subsidiary of Republic Airways Holdings, Inc.,
Champlain Enterprises, Inc. ("CommutAir") and Pinnacle Airlines Corp.'s
subsidiary, Colgan Air, Inc. ("Colgan"). Our regional operations
using regional jet aircraft are conducted under the name "Continental Express"
and those using turboprop aircraft are conducted under the name "Continental
Connection."
As used in these Notes to Consolidated
Financial Statements, the terms "Continental," "we," "us," "our" and similar
terms refer to Continental Airlines, Inc. and, unless the context indicates
otherwise, its consolidated subsidiaries.
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
(a)
|
Principles of Consolidation. Our
consolidated financial statements include the accounts of Continental and
all wholly-owned subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation.
|
|
(b)
|
Use of Estimates. The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results
could differ from those estimates.
|
|
(c)
|
Cash and Cash Equivalents. We
classify short-term, highly liquid investments which are readily
convertible into cash and have a maturity of three months or less when
purchased as cash and cash equivalents. Restricted cash, cash
equivalents and short-term investments is primarily collateral for
estimated future workers' compensation claims, credit card processing
contracts, letters of credit and performance bonds.
|
|
(d)
|
Short-term
Investments. Short-term investments primarily include
certificates of deposit placed through an account registry service
("CDARS"), auction rate securities and automobile loan-related asset
backed securities. The CDARS we hold have original maturities
of 91 days and are insured by the Federal Deposit Insurance
Corporation. Short-term investments are classified as
available-for-sale or trading securities and are stated at fair
value. Trading securities consist of student loan-related
auction rate securities for which we have received an option to put the
securities back to the broker, discussed in Note 6. Realized
gains and losses on specific investments are reflected in non-operating
income (expense) in our consolidated statements of
operations. Unrealized gains and losses on available-for-sale
and trading securities are reflected as a component of accumulated other
comprehensive loss and non-operating income (expense) in our consolidated
statements of operations, respectively.
|
|
(e)
|
Spare Parts and
Supplies. Inventories, expendable parts and supplies
related to flight equipment are carried at average acquisition cost and
are expensed when consumed in operations. An allowance for
obsolescence is provided over the remaining lease term or the estimated
useful life of the related aircraft, as well as to reduce the carrying
cost of spare parts currently identified as excess to the lower of
amortized cost or net realizable value. We recorded additions
to this allowance for expense of $26 million, $11 million and $7 million
in the years ended December 31, 2008, 2007 and 2006,
respectively. The allowance was reduced by $1 million and $32
million in the years ended December 31, 2007 and 2006, respectively,
related primarily to the consignment of surplus spare parts and
supplies. Spare parts and supplies are assumed to have an
estimated residual value of 10% of original cost. These
allowances are based on management estimates, which are subject to
change.
|
|
(f)
|
Property and Equipment. Property
and equipment are recorded at cost and are depreciated to estimated
residual values over their estimated useful lives using the straight-line
method. Jet aircraft and rotable spare parts are assumed to
have residual values of 15% and 10%, respectively, of original cost; other
categories of property and equipment are assumed to have no residual
value. The estimated useful lives of our property and equipment
are as
follows:
|
|
Estimated Useful Life
|
||
|
Jet
aircraft and
simulators
|
25
to 30 years
|
|
|
Rotable
spare
parts
|
Average
lease term or
useful
life for related aircraft
|
|
|
Buildings
and
improvements
|
10
to 30 years
|
|
|
Vehicles
and
equipment
|
5
to 10 years
|
|
|
Computer
software
|
3
to 5 years
|
|
|
Capital
leases
|
Shorter
of lease
term
or useful life
|
|
|
Leasehold
improvements
|
Shorter
of lease
term
or useful life
|
|
Amortization
of assets recorded under capital leases is included in depreciation
expense in our consolidated statement of operations.
|
|
|
The
carrying amount of computer software was $80 million and $77 million at
December 31, 2008 and 2007, respectively. Depreciation expense
related to computer software was $27 million, $28 million and $28 million
in the years ended December 31, 2008, 2007 and 2006,
respectively.
|
|
|
(g)
|
Routes and Airport Operating
Rights. Routes represent the right to fly between cities
in different countries. Routes are indefinite-lived intangible
assets and are not amortized. Routes totaled $466 million and
$484 million at December 31, 2008 and 2007, respectively. We
perform a test for impairment of our routes in the fourth quarter of each
year. In 2008, we recorded an $18 million non-cash charge to
write off an intangible route asset as a result of our decision to move
all of our flights between Newark Liberty International Airport ("New York
Liberty") and London from London Gatwick Airport to London Heathrow
Airport.
|
|
Airport
operating rights represent gate space and slots (the right to schedule an
arrival or departure within designated hours at a particular
airport). Airport operating rights at domestic airports totaled
$91 million and $106 million at December 31, 2008 and 2007,
respectively. These assets are amortized over the stated term
of the related lease (for gates) or 20 years (for
slots). Amortization expense related to domestic airport
operating rights was $14 million for each of the years ended December 31,
2008, 2007 and 2006. We expect annual amortization expense
related to domestic airport operating rights to be approximately $14
million in each of the next four years and $9 million in
2013.
|
|
|
Our
international slots are indefinite-lived intangible assets and are not
amortized. International slots totaled $247 million and $116
million at December 31, 2008 and 2007, respectively.
|
|
|
(h)
|
Measurement of Impairment of Long-Lived
Assets. We record impairment losses on long-lived
assets, consisting principally of property and equipment and domestic
airport operating rights, when events or changes in circumstances
indicate, in management's judgment, that the assets might be impaired and
the undiscounted cash flows estimated to be generated by those assets are
less than the carrying amount of those assets. The net carrying
value of assets not recoverable is reduced to fair value if lower than the
carrying value. In determining the fair market value of the
assets, we consider market trends, recent transactions involving sales of
similar assets and, if necessary, estimates of future discounted cash
flows. See Note 13 for a discussion of aircraft impairment
charges during 2008.
|
|
(i)
|
Revenue/Air Traffic
Liability. Passenger revenue is recognized either when
transportation is provided or when the ticket expires unused, rather than
when a ticket is sold. Revenue is recognized for unused
non-refundable tickets on the date of the intended flight if the passenger
did not notify us of his or her intention to change the
itinerary.
|
|
We
are required to charge certain taxes and fees on our passenger
tickets. These taxes and fees include U.S. federal
transportation taxes, federal security charges, airport passenger facility
charges and foreign arrival and departure taxes. These taxes
and fees are legal assessments on the customer. As we have a
legal obligation to act as a collection agent with respect to these taxes
and fees, we do not include such amounts in passenger
revenue. We record a liability when the amounts are
collected and relieve the liability when payments are made to the
applicable government agency.
|
|
|
Under
our capacity purchase agreements with regional carriers, we purchase all
of the capacity related to aircraft covered by the contracts and are
responsible for selling all of the related seat inventory. We
record the related passenger revenue and related expenses, with payments
under the capacity purchase agreements reflected as a separate operating
expense in our consolidated statement of operations.
|
|
|
The
amount of passenger ticket sales not yet recognized as revenue is included
in our consolidated balance sheets as air traffic and frequent flyer
liability. We perform periodic evaluations of the estimated
liability for passenger ticket sales and any adjustments, which can be
significant, are included in results of operations for the periods in
which the evaluations are completed. These adjustments relate primarily to
differences between our statistical estimation of certain revenue
transactions and the related sales price, as well as refunds, exchanges,
interline transactions and other items for which final settlement occurs
in periods subsequent to the sale of the related tickets at amounts other
than the original sales price.
|
|
|
Revenue
from the shipment of cargo and mail is recognized when transportation is
provided. Other revenue includes revenue from the sale of
frequent flyer miles (see (k) below), ticket change fees, baggage fees,
charter services, sublease income on aircraft leased to Holdings but not
operated for us and other incidental services. Ticket change
fees relate to non-refundable tickets, but are considered a separate
transaction from the air transportation because they represent a charge
for our additional service to modify a previous order. Ticket
change fees are recognized as other revenue in our consolidated statement
of operations at the time the fees are assessed.
|
|
|
(j)
|
Frequent Flyer Program. For
those OnePass accounts that have sufficient mileage credits to claim the
lowest level of free travel, we record a liability for either the
estimated incremental cost of providing travel awards that are expected to
be redeemed with us or the contractual rate of expected redemption on
alliance carriers. Incremental cost includes the cost of fuel,
meals, insurance and miscellaneous supplies, but does not include any
costs for aircraft ownership, maintenance, labor or overhead
allocation. Beginning in 2008, we also include in our
determination of incremental cost the impact of fees charged to certain
passengers redeeming frequent flyer rewards for travel, which partially
offsets the incremental cost associated with providing flights for
frequent flyer travel rewards. We recorded an adjustment of $27
million ($0.24 per basic and diluted share) to increase passenger revenue
and reduce our frequent flyer liability during 2008 for the impact of
these fees, which had not been significant in prior periods, after we
increased them during 2008. A change to these cost estimates,
the actual redemption activity, the amount of redemptions on alliance
carriers or the minimum award level could have a significant impact on our
liability in the period of change as well as future years. The
liability is adjusted periodically based on awards earned, awards
redeemed, changes in the incremental costs and changes in the OnePass
program, and is included in the accompanying consolidated balance sheets
as air traffic and frequent flyer liability. Changes in the
liability are recognized as passenger revenue in the period of
change.
|
|
We
also sell mileage credits in our frequent flyer program to participating
entities, such as credit/debit card companies, alliance carriers, hotels,
car rental agencies, utilities and various shopping and gift
merchants. Revenue from the sale of mileage credits is deferred
and recognized as passenger revenue over the period when transportation is
expected to be provided, based on estimates of its fair
value. Amounts received in excess of the expected
transportation's fair value are recognized in income currently and
classified as other revenue. A change to the time period over
which the mileage credits are used (currently six to 28 months), the
actual redemption activity or our estimate of the amount or fair value of
expected transportation could have a significant impact on our revenue in
the year of change as well as future years.
|
|
|
At
December 31, 2008, we estimated that approximately 2.4 million free travel
awards outstanding were expected to be redeemed for free travel on
Continental, Continental Express, Continental Connection, CMI or alliance
airlines. Our total liability for future OnePass award
redemptions for free travel and unrecognized revenue from sales of OnePass
miles to other companies was approximately $324 million at December 31,
2008. This liability is recognized as a component of air
traffic and frequent flyer liability in our consolidated balance
sheets.
|
|
|
(k)
|
Maintenance and Repair
Costs. Maintenance and repair costs for owned and leased
flight equipment, including the overhaul of aircraft components, are
charged to operating expense as incurred. Maintenance and
repair costs also include engine overhaul costs covered by cost-per-hour
agreements, a majority of which are expensed on the basis of hours
flown.
|
|
(l)
|
Advertising Costs. We expense
the costs of advertising as incurred. Advertising expense was
$93 million, $106 million and $95 million for the years ended December 31,
2008, 2007 and 2006, respectively.
|
|
(m)
|
Regional Capacity Purchase,
Net. Payments made to regional carriers under capacity
purchase agreements are reported in regional capacity purchase, net, in
our consolidated statement of operations. Regional capacity
purchase, net, includes all fuel expense on flights operated for us under
capacity purchase agreements and is net of our rental income on aircraft
leased to ExpressJet and flown for us through June 30,
2008. Beginning July 1, 2008, ExpressJet no longer pays us
sublease rent for aircraft operated on our behalf.
|
|
(n)
|
Foreign Currency Gains
(Losses). Foreign currency gains (losses) are recorded
as part of other, net non-operating income (expense) in our consolidated
statements of operations. Foreign currency gains (losses) were
$(37) million, $2 million and $3 million for the years ended December 31,
2008, 2007 and 2006, respectively.
|
|
(o)
|
Reclassifications. Certain
reclassifications have been made in the prior years' consolidated
financial statements and related note disclosures to conform to the
current year's
presentation.
|
NOTE
2 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
SFAS
157. In September 2006, the Financial Accounting Standards
Board ("FASB") issued Statement No. 157, "Fair Value Measurements" ("SFAS 157"),
which defines fair value, establishes a framework for measuring fair value and
expands disclosures about fair value measurements. In February 2008,
the FASB issued FASB Staff Position No. FAS 157-2, "Effective Date of FASB
Statement No. 157," which deferred the effective date for us to January 1, 2009
for all nonfinancial assets and liabilities, except those that are recognized or
disclosed at fair value on a recurring basis (that is, at least
annually). As discussed in Note 6, we adopted the provisions of SFAS
157 relating to assets and liabilities recognized or disclosed in the financial
statements at fair value on a recurring basis on January 1, 2008. The
adoption of the deferred provisions of SFAS 157 on January 1, 2009 is not
expected to have a material effect on our consolidated financial
statements.
SFAS
159. In February 2007, the FASB issued Statement No. 159, "The
Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS
159"). SFAS 159 permits entities to elect to measure at fair value
eligible financial instruments that are not currently measured at fair
value. This election, which may be applied on an instrument by
instrument basis, is typically irrevocable once made. SFAS 159 was
effective for us as of January 1, 2008. The only financial instrument
we have elected to measure at fair value under this statement is the put right
we received in 2008 to sell certain student loan-related auction rate
securities, discussed in Note 6.
SFAS
141R. In December 2007, the FASB issued Statement No. 141(R),
"Business Combinations" ("SFAS 141R"). SFAS 141R improves consistency
and comparability of information about the nature and effect of a business
combination by establishing principles and requirements for how an acquirer (a)
recognizes and measures in its financial statements the identifiable assets
acquired, liabilities assumed and any noncontrolling interest in the acquiree;
(b) recognizes and measures the goodwill acquired in the business combination or
a gain from a bargain purchase; and (c) determines what information to disclose
to enable users of the financial statements to evaluate the nature and financial
effects of the business combination. SFAS 141R applies prospectively
to all business combination transactions for which the acquisition date is on or
after January 1, 2009. The impact of our adoption of SFAS 141R will
depend upon the nature and terms of business combinations, if any, that we
consummate on or after January 1, 2009.
SFAS
161. In March 2008, the FASB issued Statement No. 161,
"Disclosures about Derivative Instruments and Hedging Activities" ("SFAS
161"). SFAS 161 requires enhanced disclosures about an entity's
derivative and hedging activities and is effective for us as of January 1,
2009. We do not expect the adoption of SFAS 161 to have a material
effect on our consolidated financial statements.
FSP APB
14-1. In May 2008, the FASB affirmed Staff Position No. APB
14-1, "Accounting for Convertible Debt Instruments That May Be Settled in Cash
upon Conversion (Including Partial Cash Settlement)" ("FSP APB 14-1"), which
clarifies the accounting for convertible debt instruments that may be settled in
cash (including partial cash settlement) upon conversion. FSP APB
14-1 requires issuers to account separately for the liability and equity
components of certain convertible debt instruments in a manner that reflects the
issuer's nonconvertible debt (unsecured debt) borrowing rate when interest cost
is recognized. FSP APB 14-1 requires bifurcation of a component of
the debt, classification of that component in equity and the accretion of the
resulting discount on the debt to be recognized as part of interest expense in
our consolidated statement of operations. FSP APB 14-1 requires
retrospective application to the terms of instruments as they existed for all
periods presented. FSP APB 14-1 is effective for us as of January 1,
2009 and early adoption is not permitted. The adoption of FSP APB
14-1 will affect the accounting for our 5% Convertible Notes due 2023 and will
result in increased interest expense of approximately $12 million in 2009 and $6
million in 2010, assuming the 5% Convertible Notes will be settled in
2010. The retrospective application of this FSP to years 2003 through
2008 will result in increased annual interest expense of approximately $4
million in 2003, gradually increasing to approximately $11 million in
2008.
FSP FAS
132(R)-1. In December 2008, the FASB affirmed Staff Position
No. FAS 132(R)-1, "Employers’ Disclosures about Postretirement Benefit Plan
Assets" ("FSP FAS 132(R)-1"). FSP FAS 132(R)-1 requires additional
disclosures about assets held in an employer’s defined benefit pension or other
postretirement plan, primarily related to categories and fair value measurements
of plan assets. FSP FAS 132(R)-1 is effective for us as of
December 31, 2009 and we do not expect the adoption to have a material effect on
our consolidated financial statements.
NOTE
3 - EARNINGS PER SHARE
The following table sets forth the
components of basic and diluted earnings (loss) per share (in
millions):
|
2008
|
2007
|
2006
|
||||
|
Numerator:
|
||||||
|
Numerator
for basic earnings (loss) per share - net income (loss)
|
$(585)
|
$459
|
$343
|
|||
|
Effect
of dilutive securities - interest expense on:
|
||||||
|
5%
Convertible
Notes
|
-
|
7
|
7
|
|||
|
6%
Convertible Junior Subordinated Debentures
held
by subsidiary
trust
|
-
|
12
|
11
|
|||
|
4.5%
Convertible
Notes
|
-
|
-
|
7
|
|||
|
Other
|
-
|
-
|
(1)
|
|||
|
Numerator
for diluted earnings (loss) per share - net
income
(loss) after assumed conversions and effect
of
dilutive securities of equity
investee
|
$(585)
|
$478
|
$367
|
|||
|
Denominator:
|
||||||
|
Denominator
for basic earnings (loss) per share -
weighted
average
shares
|
106
|
97
|
89
|
|||
|
Effect
of dilutive securities:
|
||||||
|
5%
Convertible
Notes
|
-
|
9
|
9
|
|||
|
6%
Convertible Junior Subordinated Debentures
held
by subsidiary
trust
|
-
|
4
|
4
|
|||
|
4.5%
Convertible
Notes
|
-
|
-
|
5
|
|||
|
Employee
stock
options
|
-
|
4
|
4
|
|||
|
Dilutive
potential common
shares
|
-
|
17
|
22
|
|||
|
Denominator
for diluted earnings (loss) per share -
weighted-average
shares after assumed conversions
|
106
|
114
|
111
|
|||
The adjustments to net income to
determine the numerator for diluted earnings per share for the years ended
December 31, 2007 and 2006 are net of the related effect of profit
sharing.
Approximately 13 million potential
shares of common stock related to convertible debt securities were excluded from
the computation of diluted earnings (loss) per share in the year ended December
31, 2008 because the impact would have been antidilutive. In
addition, approximately eight million, one million and one million weighted
average options to purchase shares of our common stock were excluded from the
computation of diluted earnings per share for the years ended December 31, 2008,
2007 and 2006, respectively, because the options' exercise prices were greater
than the average market price of the common shares during the relevant period or
the effect of including the options would have been antidilutive.
NOTE
4 - LONG-TERM DEBT
Long-term debt at December 31 consisted
of the following (in millions):
|
2008
|
2007
|
|||
|
Secured
|
||||
|
Notes
payable, interest rates of 5.4% to 8.4% (weighted average rate
of
6.9%
as of December 31, 2008), payable through
2022
|
$2,862
|
$2,226
|
||
|
Floating
rate notes, with indicated interest rates:
|
||||
|
LIBOR
(1.425% on December 31, 2008) plus 0.35% to 1.95%, payable
through
2020
|
1,345
|
1,095
|
||
|
LIBOR
plus 3.375%, payable in
2011
|
350
|
350
|
||
|
LIBOR
plus 3.125% to 3.25%, payable through 2014
|
192
|
196
|
||
|
LIBOR
plus 2.5% to 4.5%, payable through 2016
|
157
|
174
|
||
|
Advance
purchase of mileage credits, implicit interest rate of
6.18%
|
148
|
-
|
||
|
Other
|
15
|
38
|
||
|
Unsecured
|
||||
|
Convertible
junior subordinated debentures, interest rate of 6.0%,
payable
in
2030
|
248
|
248
|
||
|
Note
payable, interest rate of 8.75%, payable in 2011
|
200
|
200
|
||
|
Convertible
notes, interest rate of 5.0%, callable beginning in 2010
|
175
|
175
|
||
|
Note
payable, interest rate of 8.125%, payable in 2008
|
-
|
89
|
||
|
5,692
|
4,791
|
|||
|
Less: current
maturities
|
516
|
620
|
||
|
Total
|
$5,176
|
$4,171
|
||
Maturities of long-term debt due over
the next five years are as follows (in millions):
|
Year
ending December 31,
|
||
|
2009
|
$ 516
|
|
|
2010
|
770
|
|
|
2011
|
1,128
|
|
|
2012
|
533
|
|
|
2013
|
600
|
|
Most of our property and equipment,
spare parts inventory, certain routes, and the outstanding common stock and
substantially all of the other assets of our wholly-owned subsidiaries Air
Micronesia, Inc. ("AMI") and CMI are subject to agreements securing our
indebtedness.
At December 31, 2008, we also had
letters of credit and performance bonds relating to various real estate and
customs obligations in the amount of $69 million with expiration dates through
October 2010.
Debt Secured by
Aircraft. In April 2007, we obtained financing for 12 Boeing
737-800s and 18 Boeing 737-900ERs. We applied a portion of this
financing to 27 Boeing aircraft delivered to us in 2008 and recorded related
debt of $1.0 billion. We will apply the remainder of this financing
to three of the Boeing 737 aircraft scheduled for delivery in
2009. In connection with this financing, pass-through trusts raised
$1.1 billion through the issuance of three classes of pass-through
certificates. Class A certificates, with an aggregate principal
amount of $757 million, bear interest at 5.983%, Class B certificates, with an
aggregate principal amount of $222 million, bear interest at 6.903% and Class C
certificates, with an aggregate principal amount of $168 million, bear interest
at 7.339%. The proceeds from the sale of the certificates are
initially held by a depositary in escrow for the benefit of the certificate
holders until we use such funds to purchase the aircraft. The funds
in escrow are not guaranteed by us and are not reported as debt on our
consolidated balance sheet at December 31, 2008 because the proceeds held by the
depositary are not our assets and interest earned on the proceeds, as well as
any unused proceeds, will be distributed directly to the certificate
holders.
As we take delivery of each of the
three remaining aircraft that will be financed under this facility, we will
issue equipment notes to the trusts, which will purchase such notes with a
portion of the escrowed funds. We will use the proceeds to finance
the purchase of the aircraft and will record the principal amount of the
equipment notes that we issue as debt on our consolidated balance
sheet. Principal payments on the equipment notes and the
corresponding distribution of these payments to certificate holders will begin
in April 2010 and will end in April 2022 for Class A and B certificates and
April 2014 for Class C certificates. Additionally, the Class A and B
certificates have the benefit of a liquidity facility under which a third party
agrees to make up to three semiannual interest payments on the certificates if a
default in the payment of interest occurs.
During 2008, we obtained $268 million
through three separate financings secured by two new Boeing 737-900ER aircraft,
seven Boeing 757-200 aircraft and five Boeing 737-700 aircraft.
Pre-delivery Payment
Facility. On June 30, 2008, we entered into a loan facility to
finance a portion of the pre-delivery payment requirements under the aircraft
purchase agreements for 66 new Boeing aircraft originally scheduled for delivery
between July 1, 2008 and the end of 2011. We borrowed $113 million
under this facility on June 30, 2008. Our obligations under the
facility are secured by our rights under our purchase agreements for 737 and 777
aircraft on order with Boeing.
Advance Purchase of Mileage
Credits. On June 10, 2008, we entered into an amendment and
restatement of our Bankcard Joint Marketing Agreement (the "Bankcard Agreement")
with Chase Bank USA, N.A. ("Chase"), under which Chase purchases frequent flyer
mileage credits to be earned by OnePass members for making purchases using a
Continental branded credit card issued by Chase. The Bankcard
Agreement provides for a payment to us of $413 million, of which $235 million
relates to the advance purchase of frequent flyer mileage credits for the year
2016. In connection with the advance purchase of mileage credits, we
have provided a security interest to Chase in certain routes and slots,
including certain slots at London's Heathrow Airport. The $235
million purchase of mileage credits has been treated as a loan from Chase with
an implicit interest rate of 6.18% and is reported as long-term debt in our
consolidated balance sheet. Our liability will be reduced ratably in
2016 as the mileage credits are issued to Chase.
The remaining $178 million received
from Chase is in consideration for certain other commitments with respect to the
co-branding relationship, including the extension of the term of the Bankcard
Agreement until December 31, 2016. This amount is reported in other
liabilities in our consolidated balance sheet and will be recognized as other
revenue on a straight-line basis over the term of the agreement.
Secured Term Loan
Facility. We and CMI have loans under a $350 million secured
term loan facility. The loans are secured by certain of our U.S.-Asia
routes and related assets, all of the outstanding common stock of our
wholly-owned subsidiaries AMI and CMI and substantially all of the other assets
of AMI and CMI, including route authorities and related assets. The
loans bear interest at a rate equal to the London Interbank Offered Rate
("LIBOR") plus 3.375% and are due in June 2011. The facility requires
us to maintain a minimum balance of unrestricted cash and short-term investments
of $1.0 billion at the end of each month. The loans may become due and
payable immediately if we fail to maintain the monthly minimum cash balance and
upon the occurrence of other customary events of default under the loan
documents. If we fail to maintain a minimum balance of unrestricted
cash and short-term investments of $1.125 billion, we and CMI will be
required to make a mandatory aggregate $50 million prepayment of the
loans.
In addition, the facility provides that
if the ratio of the outstanding loan balance to the value of the collateral
securing the loans, as determined by the most recently delivered periodic
appraisal, is greater than 52.5%, we and CMI will be required to post additional
collateral or prepay the loans to reestablish a loan-to-collateral value ratio
of not greater than 52.5%. We are currently in compliance with the
covenants in the facility.
Notes Secured by Spare Parts
Inventory. We have two series of notes secured by the majority
of our spare parts inventory. The senior equipment notes, which total
$190 million in principal amount, bear interest at the three-month LIBOR plus
0.35%. The junior equipment notes, which total $130 million in
principal amount, bear interest at the three-month LIBOR plus
3.125%. A portion of the spare parts inventory that serves as
collateral for the equipment notes is classified as property and equipment and
the remainder is classified as spare parts and supplies, net.
In connection with these equipment
notes, we entered into a collateral maintenance agreement requiring us, among
other things, to maintain a loan-to-collateral value ratio of not greater than
45% with respect to the senior series of equipment notes and a
loan-to-collateral value ratio of not greater than 75% with respect to both
series of notes combined. We must also maintain a certain level of
rotable components within the spare parts collateral pool. These
ratios are calculated semi-annually based on an independent appraisal of the
spare parts collateral pool. If any of the collateral ratio
requirements are not met, we must take action to meet all ratio requirements by
adding additional eligible spare parts to the collateral pool, redeeming a
portion of the outstanding notes, providing other collateral acceptable to the
bond insurance policy provider for the senior series of equipment notes or any
combination of the above actions. We are currently in compliance with
these covenants.
Convertible Debt
Securities. On July 1, 2006, our 5% Convertible Notes due 2023
with a principal amount of $175 million became convertible into shares of our
common stock at a conversion price of $20 per share. If a holder of
the notes exercises the conversion right, in lieu of delivering shares of our
common stock, we may elect to pay cash or a combination of cash and shares of
our common stock for the notes surrendered. All or a portion of the
notes are also redeemable for cash at our option on or after June 18, 2010 at
par plus accrued and unpaid interest, if any. Holders of the notes
may require us to repurchase all or a portion of their notes at par plus any
accrued and unpaid interest on June 15 of 2010, 2013 or 2018. We may
at our option choose to pay the repurchase price on those dates in cash, shares
of our common stock or any combination thereof. However, if we are
required to repurchase all or a portion of the notes, our policy is to settle
the notes in cash. Holders of the notes may
also require us to repurchase all or a portion of their notes for cash at par
plus any accrued and unpaid interest if certain changes in control of
Continental occur.
In November 2000, Continental Airlines
Finance Trust II, a Delaware statutory business trust (the "Trust") of which we
own all the common trust securities, completed a private placement of five
million 6% Convertible Preferred Securities, called Term Income Deferrable
Equity Securities or "TIDES." The TIDES have a liquidation value of
$50 per preferred security and are convertible at any time at the option of the
holder into shares of common stock at a conversion rate of $60 per share of
common stock (equivalent to approximately 0.8333 share of common stock for each
preferred security). Distributions on the preferred securities are
payable by the Trust at an annual rate of 6% of the liquidation value of $50 per
preferred security.
The sole assets of the Trust are 6%
Convertible Junior Subordinated Debentures ("Convertible Subordinated
Debentures") with an aggregate principal amount of $248 million as of December
31, 2008 issued by us and which mature on November 15, 2030. The
Convertible Subordinated Debentures are redeemable by us, in whole or in part,
on or after November 20, 2003 at designated redemption prices. If we
redeem the Convertible Subordinated Debentures, the Trust must redeem the TIDES
on a pro rata basis having an aggregate liquidation value equal to the aggregate
principal amount of the Convertible Subordinated Debentures
redeemed. Otherwise, the TIDES will be redeemed upon maturity of the
Convertible Subordinated Debentures, unless previously converted.
Taking into consideration our
obligations under (i) the Preferred Securities Guarantee relating to the TIDES,
(ii) the Indenture relating to the Convertible Subordinated Debentures to pay
all debt and obligations and all costs and expenses of the Trust (other than
U.S. withholding taxes) and (iii) the Indenture, the Declaration relating to the
TIDES and the Convertible Subordinated Debentures, we have fully and
unconditionally guaranteed payment of (i) the distributions on the TIDES, (ii)
the amount payable upon redemption of the TIDES and (iii) the liquidation amount
of the TIDES.
In January 2007, $170 million in
principal amount of our 4.5% convertible notes due on February 1, 2007 was
converted by the holders into 4.3 million shares of our Class B common stock at
a conversion price of $40 per share. The remaining $30 million in
principal amount was paid on February 1, 2007.
NOTE
5 - LEASES
We lease certain aircraft and other
assets under long-term lease arrangements. Other leased assets
include real property, airport and terminal facilities, maintenance facilities,
training centers and general offices. Most aircraft leases include
both renewal options and purchase options. Because renewals of our
existing leases were not considered to be reasonably assured at the inception of
the each lease, rental payments that would be due during the renewal periods
were not included in the determination of straight-line rent
expense. Leasehold improvements are amortized over the shorter of the
related lease term or their useful life. The purchase options are
generally effective at the end of the lease term at the then-current fair market
value. Our leases do not include residual value
guarantees.
At December 31, 2008, the scheduled
future minimum lease payments under capital leases and the scheduled future
minimum lease rental payments required under operating leases were as follows
(in millions):
|
Capital
Leases
|
Operating Leases
|
||||||
|
Aircraft
|
Non-aircraft
|
||||||
|
Year
ending December 31,
|
|||||||
|
2009
|
$ 17
|
$ 1,019
|
$ 456
|
||||
|
2010
|
17
|
998
|
418
|
||||
|
2011
|
16
|
939
|
402
|
||||
|
2012
|
16
|
894
|
494
|
||||
|
2013
|
16
|
871
|
355
|
||||
|
Later
years
|
400
|
4,001
|
4,022
|
||||
|
Total
minimum lease payments
|
482
|
$8,722
|
$6,147
|
||||
|
Less: amount
representing interest
|
284
|
||||||
|
Present
value of capital leases
|
198
|
||||||
|
Less: current
maturities of capital leases
|
3
|
||||||
|
Long-term
capital
leases
|
$195
|
||||||
At December 31, 2008, we had 466
aircraft under operating leases, including 210 mainline aircraft and 256
regional jets. These operating leases have remaining lease terms
ranging up to 16 years. Projected sublease income to be received from
ExpressJet through 2022, not included in the above table, is approximately $248
million. The operating lease amounts for aircraft presented above
include a portion of our minimum noncancelable payments under capacity purchase
agreements with our other regional carriers which represents the deemed lease
commitments on the related aircraft. See Note 16 for a discussion of
our regional capacity purchase agreements. Rent expense for
non-aircraft operating leases totaled $580 million, $535 million and $501
million for the years ended December 31, 2008, 2007 and 2006,
respectively.
NOTE
6 - FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
SFAS 157, "Fair Value Measurements,"
requires expanded disclosures about fair value measurements. SFAS 157
applies to other accounting pronouncements that require or permit fair value
measurements, but does not require any new fair value
measurements. SFAS 157 clarifies that fair value is an exit price,
representing the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants based
on the highest and best use of the asset or liability. As such, fair
value is a market-based measurement that should be determined based on
assumptions that market participants would use in pricing an asset or
liability. SFAS 157 requires us to use valuation techniques to
measure fair value that maximize the use of observable inputs and minimize the
use of unobservable inputs. These inputs are prioritized as
follows:
|
Level
1:
|
Observable
inputs such as quoted prices for identical assets or liabilities in active
markets
|
|
|
Level
2:
|
Other
inputs that are observable directly or indirectly, such as quoted prices
for similar assets or liabilities or market-corroborated
inputs
|
|
|
Level
3:
|
Unobservable
inputs for which there is little or no market data and which require us to
develop our own assumptions about how market participants would price the
assets or liabilities
|
|
|
The
valuation techniques that may be used to measure fair value are as
follows:
|
|
(A)
|
Market
approach - Uses prices and other relevant information generated by market
transactions involving identical or comparable assets or
liabilities
|
|
|
(B)
|
Income
approach - Uses valuation techniques to convert future amounts to a single
present amount based on current market expectations about those future
amounts, including present value techniques, option-pricing models and
excess earnings method
|
|
|
(C)
|
Cost
approach - Based on the amount that currently would be required to replace
the service capacity of an asset (replacement
cost)
|
Assets (liabilities) measured at fair
value on a recurring basis during the period include (in millions):
|
Carrying
Amount as of
December 31, 2008
|
Level 1
|
Level 2
|
Level 3
|
Valuation
Technique
|
||
|
Cash
and cash equivalents
|
$2,165
|
$2,165
|
(A)
|
|||
|
Short-term
investments:
|
||||||
|
Auction
rate securities
|
201
|
$201
|
(B)
|
|||
|
Other
|
277
|
277
|
(A)
|
|||
|
Restricted
cash, cash equivalents and
short-term
investments:
|
||||||
|
Auction
rate securities
|
28
|
28
|
(B)
|
|||
|
Other
|
162
|
162
|
(A)
|
|||
|
Auction
rate securities put right
|
26
|
26
|
(B)
|
|||
|
Fuel
derivatives
|
(415)
|
(415)
|
(A)
|
|||
|
Foreign
currency
derivatives
|
(8)
|
$(8)
|
(A)
|
|||
The determination of fair value of each
of these items is discussed below:
Cash, Cash Equivalents and
Restricted Cash. Cash, cash equivalents and restricted cash
consist primarily of U.S. Government and Agency money market funds and other
AAA-rated money market funds with original maturities of three months or
less. The original cost of these assets approximates fair value due
to their short-term maturity.
Short-Term Investments Other
than Auction Rate Securities. Short-term investments other
than auction rate securities primarily consist of CDARS and automobile
loan-related asset backed securities. The fair values of these
investments are based on observable market data.
Student Loan-Related Auction
Rate Securities. At December 31, 2008, we held student
loan-related auction rate securities with a fair value of $229 million and a par
value of $291 million. These securities were classified as follows
(in millions):
|
Fair Value
|
Par Value
|
|||
|
Short-term
investments:
|
||||
|
Available-for-sale
|
$105
|
$133
|
||
|
Trading
|
96
|
125
|
||
|
Total
|
201
|
258
|
||
|
Restricted
cash, cash equivalents and
short-term
investments
|
28
|
33
|
||
|
Total
|
$229
|
$291
|
||
The restricted portion is collateral
for estimated future workers' compensation claims.
These securities are variable-rate debt
instruments with contractual maturities generally greater than ten years and
whose interest rates are reset every 7, 28 or 35 days, depending on the terms of
the particular instrument. These securities are secured by pools of
student loans guaranteed by state-designated guaranty agencies and reinsured by
the U.S. government. All of the auction rate securities we hold are
senior obligations under the applicable indentures authorizing the issuance of
the securities. Auctions for these securities began failing in the
first quarter of 2008 and have continued to fail through mid-February 2009,
resulting in our continuing to hold such securities and the issuers of these
securities paying interest adjusted to the maximum contractual
rates. We recorded losses of $60 million during 2008 to reflect
other-than-temporary declines in the fair value of these
securities. These losses are included in nonoperating income
(expense) in our consolidated statement of operations.
Historically, the carrying value of
auction rate securities approximated fair value due to the frequent resetting of
the interest rate and the existence of a liquid market. Although we
will earn interest on these investments involved in failed auctions at the
maximum contractual rate, the estimated market value of these auction rate
securities no longer approximates par value due to the lack of liquidity in the
market for these securities at their par value. We estimated the fair
value of these securities to be $229 million at December 31, 2008, taking into
consideration the limited sales and offers to purchase securities and using
internally-developed models of the expected future cash flows related to the
securities. Our models incorporated our probability-weighted
assumptions about the cash flows of the underlying student loans and discounts
to reflect a lack of liquidity in the market for these securities. At
December 31, 2008, the carrying value of our auction rate securities was
approximately 80% of par value in the aggregate.
In addition, during the fourth quarter
of 2008, one institution granted us a put right permitting us to sell to the
institution auction rate securities with a par value of $125 million in 2010 at
their full par value. The institution has also committed to loan us
75% of the market value of these securities at any time until the put right is
exercised. We recorded the put right at fair value in other assets on
our consolidated balance sheet and recognized a gain of $26 million upon
receipt. This gain is included in nonoperating income (expense) in
our consolidated statement of operations. We determined the fair
value based on the difference between the risk-adjusted discounted expected cash
flows from the underlying auction rate securities without the put right and with
the put right being exercised in 2010. We have reclassified the
underlying auction rate securities to trading securities and elected the fair
value option under SFAS 159 for the put right, with changes in the fair value of
the put right and the underlying auction rate securities recognized in earnings
currently. The fair value adjustments to the auction rate securities
and the put right will largely offset and result in minimal net impact to
earnings in future periods. The underlying auction rate securities
had a fair value of $97 million at the date they were transferred into the
trading category. Since these securities had previously been written
down to fair value to reflect an other-than-temporary decline in fair value,
there were no unrealized gains or losses to be recognized in earnings at the
date of transfer into the trading category. The remainder of the
auction rate securities are classified as available-for-sale and changes in fair
value (other than other-than-temporary declines) are recognized in accumulated
other comprehensive income (loss).
We continue to monitor the market for
auction rate securities and consider its impact, if any, on the fair value of
our investments. If current market conditions deteriorate further, we
may be required to record additional losses on these securities.
Fuel
Derivatives. We determine the fair value of our fuel
derivatives by obtaining inputs from a broker's pricing model based on inputs
that are either readily available in public markets or can be derived from
information available in publicly quoted markets. We verify the
reasonableness of these inputs by comparing the resulting fair values to similar
quotes from our counterparties as of each date for which financial statements
are prepared. For derivatives not covered by collateral, we also make
an adjustment to incorporate credit risk into the valuation. Due to
the fact that certain of the inputs utilized to determine the fair value of the
fuel derivatives are unobservable (principally volatility of crude oil prices
and the credit risk adjustments), we have categorized these option contracts as
Level 3.
Foreign Currency
Derivatives. We determine the fair value of our foreign
currency derivatives by comparing our contract rate to a published forward price
of the underlying currency, which is based on market rates for comparable
transactions.
Unobservable
Inputs. The reconciliation of our assets measured at fair
value on a recurring basis using unobservable inputs (Level 3) for the year
ended December 31, 2008 is as follows (in millions):
|
Student
Loan-Related
Auction Rate Securities
|
Auction
Rate
Securities Put Right
|
Fuel
Derivatives
|
||||
|
Balance
at beginning of period
|
$ -
|
$ -
|
$ 24
|
|||
|
Transfers
to Level
3
|
314
|
-
|
-
|
|||
|
Additions
|
-
|
-
|
74
|
|||
|
Dispositions
|
(23)
|
-
|
-
|
|||
|
Gains
and losses:
|
||||||
|
Settlement (gains) losses
reported in earnings
|
-
|
-
|
172
|
|||
|
Unrealized gains (losses)
reported in earnings
|
(60)
|
26
|
(99)
|
|||
|
Unrealized gains (losses)
reported in other
comprehensive
income
|
(2)
|
-
|
(586)
|
|||
|
Balance
at end of
year
|
$229
|
$26
|
$(415)
|
|||
Other Financial
Instruments. Other financial instruments that are not subject
to the disclosure requirements of SFAS 157 are as follows:
|
·
|
Debt. The fair value of our debt
with a carrying value of $5.0 billion at December 31, 2008 and $3.8
billion at December 31, 2007 was approximately $4.2 billion and $3.8
billion, respectively. These estimates were based on either the
discounted amount of future cash flows using our current incremental rate
of borrowing for similar liabilities or market
prices. Estimating the fair value of the remaining debt at
December 31, 2008 and 2007, with a carrying value of $683 million and $929
million, respectively, was not practicable due to the large number of
remaining debt instruments with relatively small carrying
amounts.
|
|
·
|
Investment in COLI Products. In
connection with certain of our supplemental retirement plans, we have
company owned life insurance policies on certain of our
employees. As of December 31, 2008 and 2007, the carrying value
of the underlying investments was $26 million and $45 million,
respectively, which approximated fair value.
|
|
·
|
Accounts Receivable and Accounts
Payable. The fair values of accounts receivable and
accounts payable approximated carrying value due to their short-term
maturity.
|
NOTE
7 - HEDGING ACTIVITIES
As part of our risk management program,
we use a variety of derivative financial instruments to help manage our risks
associated with changes in fuel prices and foreign currency exchange
rates. We do not hold or issue derivative financial instruments for
trading purposes.
We are exposed to credit losses in the
event of non-performance by issuers of derivative financial
instruments. To manage credit risks, we select issuers based on
credit ratings, limit our exposure to any one issuer under our defined
guidelines and monitor the market position with each counterparty.
Fuel Price Risk
Management. We routinely hedge a portion of our future fuel
requirements, provided the hedges are expected to be cost
effective. One component of our hedging strategy is to construct a
hedge position that is designed to better hedge fuel price with respect to
tickets already sold, for which we can no longer adjust our
pricing. Implicit in this strategy is our belief that, as to tickets
not yet sold, the market will be efficient such that fare levels will adjust to
keep pace with fuel costs. We strive to maintain fuel hedging levels
and exposure generally comparable to that of our major competitors, so that our
fuel cost is not disproportionate to theirs.
Another component of our hedging
strategy is to purchase call options or enter into swap agreements to protect us
against sudden and significant increases in jet fuel prices. To
minimize the high cost to us of call options during 2008, we frequently entered
into collars. Collars are derivative instruments that involve
combining a purchased call option, which on a stand-alone basis would require us
to pay a premium, with a written put option, which on a stand-alone basis would
result in our receiving a premium. The collars we have entered into
consist of both instruments that result in no net premium to us (known as a
"costless" or zero-cost collar) and instruments that result in us paying a net
premium to the counterparty. The purchased call option portion of the
collar caps the price of the contract at the agreed upon price while the sold
option portion of the collar provides for a minimum price of the related
commodity. Our generally practice is to enter into either crude oil
or heating oil contracts since there is a limited market for jet fuel
derivatives.
As of December 31, 2008, our projected
fuel requirements for 2009 were hedged as follows, excluding contracts with
Lehman Brothers which we settled in January 2009:
|
Maximum Price
|
Minimum Price
|
|||||||
|
%
of
Expected
Consumption
|
Weighted
Average
Price
(per gallon)
|
%
of
Expected
Consumption
|
Weighted
Average
Price
(per gallon)
|
|||||
|
2009
|
||||||||
|
WTI
crude oil
collars
|
14%
|
$3.40
|
14%
|
$2.53
|
||||
|
WTI
crude oil call options
|
6
|
2.54
|
N/A
|
N/A
|
||||
|
WTI
crude oil
swaps
|
3
|
1.33
|
3
|
1.33
|
||||
|
Total
|
23%
|
17%
|
||||||
Lehman Brothers, one of the
counterparties to our fuel derivative contracts, declared bankruptcy on
September 15, 2008. As a result, we determined that our fuel
derivative contracts with Lehman Brothers were not highly effective
hedges. Therefore, we discontinued hedge accounting for these
contracts as of September 15, 2008 and all subsequent changes in the contracts'
fair values were reported in earnings. In 2008, we recognized losses
of $125 million in other non-operating income (expense) related to the changes
in the fair value of these contracts. In January 2009, we settled all
open contracts with Lehman Brothers.
At December 31, 2008, our fuel
derivatives, including contracts with Lehman Brothers, were in a net liability
position of $415 million resulting from the recent substantial decline in crude
oil prices. This fair value is reported in accrued other current
liabilities in our consolidated balance sheet. At December 31, 2007,
the fair value of our fuel hedges was a $24 million net asset and is included in
prepayments and other current assets in our consolidated balance
sheet. We have not hedged any of our fuel requirements beyond
2009.
Because our fuel hedges were in a net
liability position at December 31, 2008, we posted cash collateral with our
counterparties totaling $171 million. These amounts are reported in
prepayments and other current assets in our consolidated balance
sheet.
Except as discussed above, we account
for our fuel derivatives as cash flow hedges and record them at fair value in
prepayments and other current assets (if we are in an asset position) or accrued
other current liabilities (if we are in a liability position) in our
consolidated balance sheet with the change in fair value, to the extent
effective, being recorded to accumulated other comprehensive income (loss), net
of applicable income taxes.
Fuel hedge gains (losses) are
recognized as a component of fuel expense or regional capacity purchase, net
when the underlying fuel being hedged is used. The ineffective
portion of our fuel hedges is determined based on the correlation between crude
oil or heating oil prices and jet fuel prices and is included in nonoperating
income (expense). This ineffectiveness was caused by our non-jet fuel
derivatives experiencing a higher relative change in value than the jet fuel
being hedged and the mark-to-market adjustment on the fuel derivative contracts
with Lehman Brothers. Realized and unrealized gains (losses) related
to fuel derivative instruments included in our consolidated statement of
operations for the year ended December 31 are as follows (in
millions):
|
2008
|
2007
|
2006
|
||||
|
Aircraft
fuel and related
taxes
|
$(144)
|
$31
|
$(40)
|
|||
|
Regional
capacity purchase,
net
|
(28)
|
6
|
(8)
|
|||
|
Nonoperating
income
(expense)
|
(99)
|
14
|
-
|
|||
|
Total
|
$(271)
|
$51
|
$(48)
|
|||
Foreign Currency Exchange
Risk Management. We use foreign currency average rate options
and forward contracts to hedge against the currency risk associated with our
forecasted Japanese yen, British pound, Canadian dollar and euro-denominated
cash flows. The average rate options and forward contracts have only
nominal intrinsic value at the date contracted.
We account for these instruments as
cash flow hedges. They are recorded at fair value in prepayments and
other current assets or other accrued other liabilities in the accompanying
consolidated balance sheets with the offset to accumulated other comprehensive
income (loss), net of applicable income taxes and hedge ineffectiveness, and
recognized as passenger revenue when the underlying service is
provided. We measure hedge effectiveness of average rate options and
forward contracts based on the forward price of the underlying
currency. Hedge ineffectiveness, if any, is included in other
nonoperating income (expense) in the accompanying consolidated statement of
operations. We had no ineffectiveness related to foreign currency
hedges for the years ended December 31, 2008, 2007 and 2006. Our net
gain (loss) on our foreign currency average rate option and forward contracts
was $5 million, $(2) million and $2 million for the years ended December 31,
2008, 2007 and 2006, respectively. These gains (losses) are included
in passenger revenue in the accompanying consolidated statement of
operations.
NOTE
8 - PREFERRED AND COMMON STOCK
Preferred
Stock. On April 14, 2008, Northwest Airlines, Inc.
("Northwest") and Delta Air Lines, Inc. ("Delta") announced that they had
entered into a merger agreement. Northwest previously held the one
outstanding share of our Series B preferred stock, which prevented us from
engaging in certain business combinations or other activities without
Northwest's consent. We were entitled to redeem the share of Series B
preferred stock for a nominal sum upon the execution of a definitive merger
agreement by Northwest with respect to a transaction constituting a change of
control of Northwest, which occurred upon Northwest's entry into the merger
agreement with Delta. As a result, we redeemed and cancelled the
Series B preferred stock in the second quarter of 2008, eliminating Northwest's
right to prevent us from engaging in certain business combinations or other
activities.
Common
Stock. We currently have one class of common stock issued and
outstanding, Class B common stock. Each share of common stock is entitled to one
vote per share. In June 2008, we completed a public offering of 11
million shares of Class B common stock at a price to the public of $14.80 per
share, raising net proceeds of $162 million. Additionally, in the
fourth quarter of 2008, we completed a public offering of 13 million shares of
Class B common stock at an average price to the public of $15.84 per share,
raising net proceeds of $196 million. Proceeds from both offerings
were used for general corporate purposes. At December 31, 2008,
approximately 26 million shares were reserved for future issuance related to the
conversion of convertible debt securities and the issuance of stock under our
stock incentive plans.
As discussed in Note 4, $170 million in
principal amount of our 4.5% convertible notes was converted by the holders into
4.3 million shares of our Class B common stock in January 2007 at a conversion
price of $40 per share.
Stockholder Rights
Plan. On November 20, 2008, our stockholder rights plan
expired. As a result, each outstanding share of our Class B common
stock is no longer accompanied by a right. The holders of common
stock were not entitled to any payment as a result of the expiration of the
rights plan and the rights issued thereunder.
Restrictions on Dividends
and Share Repurchases. Our agreement with the union
representing our pilots provides that we will not declare a cash dividend or
repurchase our outstanding common stock for cash until we have contributed at
least $500 million to the pilot defined benefit pension plan, measured from
March 30, 2005. Through February 18, 2009, we have made $470 million
of contributions to this plan.
NOTE
9 - STOCK PLANS AND AWARDS
We have an equity incentive plan for
management level employees and non-employee directors that permits the issuance
of shares of our common stock. Approximately 1.0 million shares
remain available for award under this incentive plan as of December 31,
2008. No further awards may be granted under the plan after October
3, 2009.
Stock
Options. Stock options are awarded with exercise prices equal
to the fair market value of our common stock on the date of
grant. Management level employee stock options typically vest over a
four year period and generally have five year terms. Expense related
to each portion of an option grant is recognized on a straight-line basis over
the specific vesting period for those options. Outside director stock
options vest in full on the date of grant and have ten year
terms. Under the terms of our management incentive plans, a change in
control would result in options outstanding under those plans becoming
exercisable in full.
The table below summarizes stock option
transactions pursuant to our plans (share data in thousands):
|
2008
|
2007
|
2006
|
|||||||
|
Options
|
Weighted-
Average
Exercise Price
|
Options
|
Weighted-
Average
Exercise Price
|
Options
|
Weighted-
Average
Exercise Price
|
||||
|
Outstanding
at
beginning
of
year
|
7,817
|
$17.36
|
8,991
|
$15.12
|
12,710
|
$13.57
|
|||
|
Granted
|
752
|
$10.84
|
728
|
$35.72
|
1,853
|
$24.11
|
|||
|
Exercised
|
(375)
|
$12.49
|
(1,699)
|
$13.39
|
(5,118)
|
$14.33
|
|||
|
Cancelled
|
(222)
|
$29.14
|
(203)
|
$17.29
|
(454)
|
$17.15
|
|||
|
Outstanding
at
end
of year
|
7,972
|
$16.65
|
7,817
|
$17.36
|
8,991
|
$15.12
|
|||
|
Exercisable
at
end
of year
|
6,212
|
$15.08
|
3,393
|
$15.45
|
1,764
|
$15.95
|
|||
As of December 31, 2008, stock options
outstanding at the end of the period had a weighted average contractual life of
3.1 years and an
aggregate intrinsic value of $35 million. Options exercisable at
December 31, 2008 had a weighted average contractual life of 2.9 years and an
aggregate intrinsic value of $30 million.
The fair value of options is determined
at the grant date using a Black-Scholes-Merton option-pricing model, which
requires us to make several assumptions. The risk-free interest rate
is based on the U.S. Treasury yield curve in effect for the expected term of the
option at the time of grant. The dividend yield on our common stock
is assumed to be zero since we historically have not paid dividends and have no
current plans to do so in the future. The market price volatility of
our common stock is based on the historical volatility of our common stock over
a time period equal to the expected term of the option and ending on the grant
date. The expected life of the options is based on our historical
experience for various work groups. We recognize expense only for
those option awards expected to vest, using an estimated forfeiture rate based
on our historical experience. The forfeiture rate may be revised in
future periods if actual forfeitures differ from our assumptions. The
weighted-average fair value of options granted during the year ended December 31
was determined based on the following weighted-average assumptions:
|
2008
|
2007
|
2006
|
||
|
Risk-free
interest
rate
|
3.1%
|
4.9%
|
4.7%
|
|
|
Dividend
yield
|
0%
|
0%
|
0%
|
|
|
Expected
market price volatility of our common stock
|
62%
|
57%
|
63%
|
|
|
Expected
life of options
(years)
|
3.9
|
3.9
|
3.4
|
|
|
Fair
value of options
granted
|
$5.32
|
$16.95
|
$11.52
|
The total intrinsic value of options
exercised during the year ended December 31, 2008, 2007 and 2006 was $3 million,
$45 million and $81 million, respectively.
The following tables summarize the
range of exercise prices and the weighted average remaining contractual life of
the options outstanding and the range of exercise prices for the options
exercisable at December 31, 2008 (share data in thousands):
|
Options Outstanding
|
|||||||
|
Range
of
Exercise Prices
|
Number
|
Weighted
Average
Remaining
Contractual Life (Years)
|
Weighted
Average
Exercise
Price
|
||||
|
$8.85-$11.87
|
857
|
3.4
|
$10.45
|
||||
|
$11.89
|
4,519
|
2.9
|
$11.89
|
||||
|
$11.96-$20.31
|
1,132
|
3.4
|
$19.13
|
||||
|
$20.97-$49.80
|
1,464
|
3.2
|
$33.05
|
||||
|
$8.85-$49.80
|
7,972
|
3.1
|
$16.65
|
||||
|
Options Exercisable
|
||||||||
|
Range
of
Exercise Prices
|
Number
|
Weighted
Average
Exercise
Price
|
||||||
|
$8.85-$11.87
|
241
|
$11.70
|
||||||
|
$11.89
|
4,519
|
$11.89
|
||||||
|
$11.96-$20.31
|
763
|
$18.85
|
||||||
|
$20.97-$49.80
|
689
|
$33.00
|
||||||
|
$8.85-$49.80
|
6,212
|
$15.08
|
||||||
Employee Stock Purchase
Plan. All of our employees (including CMI employees) are
eligible to participate in the 2004 Employee Stock Purchase Plan (the "2004
ESPP"). At the end of each fiscal quarter, participants may purchase
shares of our common stock at a discount of 15% off the fair market value of the
stock on either the first day or the last day of the quarter (whichever is
lower), subject to a minimum purchase price of $10 per share. This
discount is reduced to zero as the fair market value approaches $10 per
share. If the fair market value is below the $10 per share minimum
price on the last day of a quarter, then the participants will not be permitted
to purchase the common stock for such quarterly purchase period and we will
refund to those participants the amount of their unused payroll
deductions. During 2008, 2007 and 2006, approximately 1.1 million,
0.4 million and 0.5 million shares, respectively, of common stock were issued to
participants at a weighted-average purchase price of $12.76, $27.84 and $17.77
per share, respectively. In January 2009, 0.2 million shares
were purchased at a price of $14.96 per share for the fourth quarter of
2008. In the aggregate, 3.0 million shares may be purchased under the
plan; however, no shares remained available for purchase following the purchase
made related to the quarter ended December 31, 2008.
Restricted Stock
Units. At December 31, 2008, we had three outstanding awards
of restricted stock units ("RSUs") granted under our Long-Term Incentive and RSU
Program: (1) profit based RSU awards with a performance period
commencing April 1, 2006 and ending December 31, 2009, (2) profit based RSU
awards with a performance period commencing January 1, 2007 and ending December
31, 2009 and (3) profit based RSU awards with a performance period commencing
January 1, 2008 and ending December 31, 2010.
Profit Based RSU
Awards. We have issued profit based RSU awards pursuant to our
Long-Term Incentive and RSU Program, which can result in cash payments to our
officers upon the achievement of specified profit-sharing based performance
targets. The performance targets require that we reach target levels
of cumulative employee profit sharing under our enhanced employee profit sharing
program during the performance period and that we have net income calculated in
accordance with U.S. generally accepted accounting principles for the applicable
fiscal year. To serve as a retention feature, payments related to the
achievement of a performance target generally will be made in annual increments
over a three-year period to participants who remain continuously employed by us
through each payment date. Payments also are conditioned on our
having, at the end of the fiscal year preceding the date any payment is made, a
minimum unrestricted cash, cash equivalents and short-term investments balance
as set by the Human Resources Committee of our Board of Directors. If
we do not achieve the minimum cash balance applicable to a payment date, the
payment will be deferred until the next payment date (March 1 of the next year),
subject to a limit on the number of years payments may be carried
forward. Payment amounts are calculated based on the average closing
price of our common stock during the 20 trading days preceding the payment date
and the payment percentage set by the Human Resources Committee of our Board of
Directors for achieving the applicable profit-sharing based performance
target.
The following table sets forth
information about the profit based RSU awards outstanding at December 31,
2008:
|
2008 Grant
|
2007 Grant
|
2006 Grant
|
|
|
Initial
grant
date
|
February
2008
|
February
2007
|
June
2006
|
|
Number
of awards outstanding
|
0.9
million
|
0.5
million
|
1.5
million
|
|
Performance
period
|
January
1, 2008-
December
31, 2010
|
January
1, 2007-
December
31, 2009
|
April
1, 2006-
December
31, 2009
|
|
Cumulative
profit sharing targets (range)
|
$0-$275
million
|
$0-$350
million
|
$0-$225
million
|
|
Cumulative
profit sharing achieved for
applicable
performance period
|
$0
|
$158
million
|
$262
million
|
|
Payment
percentages (range)
|
0%-200%
|
0%-200%
|
0%-337.5%
|
|
Probable
payment percentage:
|
|||
|
As
of December 31,
2008
|
100%
|
100%
|
337.5%
|
|
As
of December 31,
2007
|
N/A
|
100%
|
337.5%
|
|
As
of December 31,
2006
|
N/A
|
N/A
|
150.0%
|
|
Unrestricted
cash, cash equivalents and
short-term
investments hurdle
|
$2.2
billion
|
$2.0
billion
|
$1.125
billion
|
We account for the profit based RSU
awards as liability awards. Once it is probable that a profit-sharing
based performance target will be met, we measure the awards at fair value based
on the current stock price. The related expense is recognized ratably
over the required service period, which ends on each payment date, after
adjustment for changes in the then-current market price of our common
stock. As of December 31, 2007, we had achieved the highest
cumulative profit sharing-based performance target for the profit based RSU
awards with a performance period commencing April 1, 2006 and were, therefore,
accruing expense based on a payment percentage of 337.5%. We had not
achieved any of the cumulative profit sharing-based performance targets as of
December 31, 2008 for the profit based RSU awards with performance periods
commencing January 1, 2007 and 2008, respectively, but we have concluded that it
is probable that we will achieve the entry level target for those awards during
the performance periods, resulting in an estimated payment percentage under each
award of 100%.
The awards that had a performance
period commencing April 1, 2006 and ending December 31, 2009 achieved the
highest level cumulative profit sharing performance target based on cumulative
profit sharing payments to our broad based employees of $262 million as of
December 31, 2007. As a result, in March 2008, payments totaling $52
million were made with respect to these profit based RSU awards following
achievement of the year end cash hurdle applicable to those awards.
Stock Price Based RSU
Awards. Stock price based RSU awards made pursuant to our
Long-Term Incentive and RSU Program can result in cash payments to award holders
if there are specified increases in our stock price over multi-year performance
periods. There are currently no stock price based RSU awards
outstanding. Prior to our adoption of FASB Statement No. 123R,
"Share-Based Payment" ("SFAS 123R"), on January 1, 2006, we had recognized no
liability or expense related to our stock price based RSU awards because the
targets set forth in the program had not been met. However, SFAS 123R
required these awards to be measured at fair value at each reporting date with
the related expense being recognized over the required service periods,
regardless of whether the specified stock price targets had been
met. The fair value was determined using a pricing model until the
specified stock price target had been met, and was determined based on the
current stock price thereafter. On January 1, 2006, we recognized a
cumulative effect of change in accounting principle to record our liability
related to the stock price based RSU awards at that date, which reduced 2006
earnings by $26 million ($0.29 per basic share and $0.23 per diluted
share).
In February 2006, in light of the
sacrifices made by their co-workers in connection with pay and benefit cost
reduction initiatives, our officers voluntarily surrendered their stock price
based RSU awards for the performance period ending March 31, 2006, which had
vested during the first quarter of 2006 and would have otherwise paid out $23
million at the end of March 2006. Of the $26 million total cumulative
effect of change in accounting principle recorded on January 1, 2006, $14
million related to the surrendered awards. Accordingly, upon the
surrender of these awards, we reported the reversal of the $14 million as a
reduction of special charges in our statement of operations. The
remaining $12 million of the cumulative effect of change in accounting principle
was related to the stock price based RSU awards with a performance period ending
December 31, 2007, discussed below, which were not surrendered.
During the first quarter of 2006, our
stock price achieved the performance target price per share for 1.2 million
stock price based RSU awards with a performance period ending December 31,
2007. At December 31, 2007, our outstanding stock price based RSUs
with a performance period commencing on April 1, 2004 and ending on December 31,
2007 had a vested liability of $29 million and were paid out in cash in January
2008 based on the average closing price of our common stock during the 20
trading days preceding December 31, 2007.
Stock-Based Compensation
Expense. Total stock-based compensation expense included in
wages, salaries and related costs for the years ended December 31, 2008, 2007
and 2006 was $47 million, $75 million and $83 million,
respectively. As of December 31, 2008, $32 million of compensation
cost attributable to future service related to unvested employee stock options
and profit based RSU awards that are probable of being achieved had not yet been
recognized. This amount will be recognized in expense over a
weighted-average period of 1.7 years. The expense related to RSUs
does not impact payments to our broad based employee group under our enhanced
profit sharing plan because profit sharing payments are based on pre-tax net
income calculated prior to any costs associated with incentive compensation for
executives.
NOTE
10 - ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other
comprehensive loss (which are all net of applicable income taxes) were as
follows (in millions):
|
Defined
Benefit Pension and
Retiree Medical Benefits
Plans
|
Unrealized
Gain
(Loss)
on
Derivative
Instruments
and
Other
|
||||||
|
Minimum
Pension
Liability
|
Unrecognized
Prior Service
Cost
|
Unrecognized
Actuarial
Gains
(Losses)
|
Total
|
||||
|
Balance
at December 31, 2005
|
$(680)
|
$ -
|
$ -
|
$ 5
|
$ (675)
|
||
|
Net
change in accumulated other comprehensive
loss
|
68
|
-
|
-
|
(21)
|
47
|
||
|
Impact
of adoption of SFAS 158
|
612
|
(237)
|
(760)
|
-
|
(385)
|
||
|
Balance
at December 31, 2006
|
-
|
(237)
|
(760)
|
(16)
|
(1,013)
|
||
|
Derivative
financial instruments:
|
|||||||
|
Reclassification
into earnings
|
-
|
-
|
-
|
18
|
18
|
||
|
Change
in fair
value
|
-
|
-
|
-
|
27
|
27
|
||
|
Employee
benefit plans:
|
|||||||
|
Reclassification
of unrecognized
net
actuarial loss into
earnings
|
-
|
-
|
97
|
-
|
97
|
||
|
Reclassification
of prior service
cost
into earnings
|
-
|
30
|
-
|
-
|
30
|
||
|
Current
year prior service cost
|
-
|
(18)
|
-
|
-
|
(18)
|
||
|
Current
year actuarial gain
|
-
|
-
|
354
|
-
|
354
|
||
|
Balance
at December 31, 2007
|
-
|
(225)
|
(309)
|
29
|
(505)
|
||
|
Derivative
financial instruments:
|
|||||||
|
Reclassification
into earnings
|
-
|
-
|
-
|
(26)
|
(26)
|
||
|
Change
in fair value
|
-
|
-
|
-
|
(415)
|
(415)
|
||
|
Employee
benefit plans:
|
|||||||
|
Reclassification
of unrecognized
net
actuarial loss into
earnings
|
-
|
-
|
85
|
-
|
85
|
||
|
Reclassification
of prior service
cost
into earnings
|
-
|
31
|
-
|
-
|
31
|
||
|
Current
year actuarial loss
|
-
|
-
|
(926)
|
-
|
(926)
|
||
|
Balance
at December 31, 2008
|
$ -
|
$(194)
|
$(1,150)
|
$(412)
|
$(1,756)
|
||
We adopted SFAS No. 158, "Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans, an
amendment of FASB Statements No. 87, 88, 106 and 132(R)" ("SFAS 158"), on
December 31, 2006. Under SFAS 158, unrecognized prior service cost
and actuarial gains (losses) related to our defined benefit pension and retiree
medical benefits plans are recorded in accumulated other comprehensive
loss.
The prior service cost and unrecognized
actuarial losses recorded in accumulated other comprehensive loss before
applicable income taxes were $219 million and $1.4 billion, respectively, at
December 31, 2008, $250 million and $520 million, respectively, at December 31,
2007 and $262 million and $971 million, respectively, at December 31,
2006. The unrealized gain (loss) on derivative instruments recorded
in accumulated other comprehensive loss before applicable income taxes was the
same as the after-tax amount presented in the table above at each of December
31, 2008, 2007 and 2006.
NOTE
11 - EMPLOYEE BENEFIT PLANS
Our employee benefits plans include
defined benefit pension plans, defined contribution (including 401(k) savings)
plans and a consolidated welfare benefit plan, which includes retiree medical
benefits. Substantially all of our domestic employees are covered by
one or more of these plans.
Defined Benefit Pension
Plans. Benefits under our defined benefit pension plans are
based on a combination of years of benefit accrual service and an employee's
final average compensation. Under the collective bargaining agreement
with our pilots ratified on March 30, 2005, which we refer to as the "pilot
agreement," future defined benefit accruals for pilots ceased and retirement
benefits accruing in the future are provided through two pilot-only defined
contribution plans. As required by the pilot agreement, defined
benefit pension assets and obligations related to pilots in our primary defined
benefit pension plan (covering substantially all U.S. employees other than
Chelsea Food Services ("Chelsea") and CMI employees) were spun out into a
separate pilot-only defined benefit pension plan, which we refer to as the
"pilot defined benefit pension plan." On May 31, 2005, future benefit
accruals for pilots ceased and the pilot defined benefit pension plan was
"frozen." As of that freeze date, all existing accrued benefits for
pilots (including the right to receive a lump sum payment upon retirement) were
preserved in the pilot defined benefit pension plan. Accruals for
non-pilot employees under our primary defined benefit pension plan
continue.
Retiree Medical Benefits
Plans. Our retiree medical programs are self-insured
arrangements that permit retirees who meet certain age and service requirements
to continue medical coverage between retirement and Medicare
eligibility. Eligible employees are required to pay a portion of the
costs of their retiree medical benefits, which in some cases may be offset by
accumulated unused sick time at the time of their retirement. Plan
benefits are subject to co-payments, deductibles and other limits as described
in the plans. We account for the retiree medical benefits plan under
SFAS No. 106, "Employers' Accounting for Postretirement Benefits other than
Pensions," which requires recognition of the expected cost of benefits over the
employee's service period.
Obligation and Funded
Status. Our pension and retiree medical benefits obligations
are measured as of December 31 of each year. The following table sets
forth the changes in projected benefit obligation of the defined benefit pension
and retiree medical benefits plans at December 31 (in millions):
|
Defined
Benefit Pension
|
Retiree
Medical Benefits
|
|||||||
|
2008
|
2007
|
2008
|
2007
|
|||||
|
Accumulated
benefit obligation
|
$2,273
|
$2,180
|
N/A
|
N/A
|
||||
|
Benefit
obligation at beginning of year
|
$2,353
|
$2,697
|
$252
|
$216
|
||||
|
Service
cost
|
59
|
61
|
12
|
11
|
||||
|
Interest
cost
|
149
|
158
|
16
|
14
|
||||
|
Plan
amendments
|
-
|
-
|
-
|
18
|
||||
|
Actuarial
(gains)
losses
|
168
|
(347)
|
(17)
|
8
|
||||
|
Participant
contributions
|
-
|
-
|
2
|
1
|
||||
|
Benefits
paid
|
(118)
|
(59)
|
(16)
|
(16)
|
||||
|
Settlements
|
(129)
|
(157)
|
-
|
-
|
||||
|
Benefit
obligation at end of year
|
$2,482
|
$2,353
|
$249
|
$252
|
||||
Congress enacted, and the president
signed into law on December 13, 2007, a change in the mandatory retirement age
for our pilots from age 60 to 65. We have, for actuarial purposes,
made the assumption that the majority of our pilots will work beyond age 60 and
will not begin receiving their pension payments (or lump-sum distribution) at
the previously assumed age 60.
The retiree medical benefits plan and
certain supplemental defined benefit pension plans are unfunded, although we
have investments in COLI products that support our obligations under certain of
the supplemental plans (see note 6). The following table sets forth
the change in the fair value of the defined benefit pension plans' assets at
December 31 (in millions):
|
2008
|
2007
|
|||
|
Fair
value of plan assets at beginning of year
|
$1,817
|
$1,545
|
||
|
Actual
gains (losses) on plan
assets
|
(618)
|
150
|
||
|
Employer
contributions, including benefits
paid
under unfunded
plans
|
105
|
338
|
||
|
Benefits
paid
|
(118)
|
(59)
|
||
|
Lump
sum
settlements
|
(129)
|
(157)
|
||
|
Fair
value of plan assets at end of
year
|
$1,057
|
$1,817
|
||
The unfunded portion of the defined
benefit pension and retiree medical benefits liabilities were recognized in the
accompanying consolidated balance sheets at December 31 as follows (in
millions):
|
Defined
Benefit Pension
|
Retiree
Medical Benefits
|
|||||||
|
2008
|
2007
|
2008
|
2007
|
|||||
|
Accrued
payroll
|
$ 8
|
$ 2
|
$ 15
|
$ 17
|
||||
|
Accrued
pension
liability
|
1,417
|
534
|
-
|
-
|
||||
|
Accrued
retiree medical benefits
|
-
|
-
|
234
|
235
|
||||
|
Funded
status of the plans - net underfunded
|
$1,425
|
$536
|
$249
|
$252
|
||||
Our plans' under-funded status was $1.4
billion at December 31, 2008 and $536 million at December 31,
2007. The increase in our plans' underfunded status was primarily the
result of lower investment returns as a result of the current global financial
crisis and decreases in the discount rate and the lump sum conversion interest
rate used to determine our pension liability.
The amounts in accumulated other
comprehensive loss that have not yet been recognized as components of net
periodic benefit expense at December 31, 2008 were as follows (in
millions):
|
Defined
Benefit Pension
|
Retiree
Medical Benefits
|
|||
|
Unrecognized
prior service
cost
|
$ 32
|
$187
|
||
|
Unrecognized
actuarial (gains) losses
|
$1,423
|
$(62)
|
||
Unrecognized prior service cost is
expensed using a straight-line amortization of the cost over the average future
service of employees expected to receive benefits under the
plans. The following table sets forth the amounts of unrecognized
prior service cost and net actuarial loss recorded in accumulated other
comprehensive loss expected to be recognized as components of net periodic
benefit expense during 2009 (in millions):
|
Defined
Benefit Pension
|
Retiree
Medical Benefits
|
|||
|
Prior
service
cost
|
$ 10
|
$21
|
||
|
Actuarial
(gains)
losses
|
$111
|
$(3)
|
||
The following actuarial assumptions
were used to determine our benefit obligations at December 31:
|
Defined
Benefit Pension
|
Retiree
Medical Benefits
|
||||||||
|
2008
|
2007
|
2008
|
2007
|
||||||
|
Weighted
average assumed
discount
rate
|
6.13%
|
6.31%
|
6.03%
|
6.02%
|
|||||
|
Weighted
average rate of
compensation
increase
|
2.30%
|
2.30%
|
-
|
-
|
|||||
|
Health
care cost trend
rate
|
-
|
-
|
7.50%
|
8.00%
|
|||||
The December 31, 2008 health care cost
trend rate is assumed to decline gradually to 5% by 2014.
Net periodic defined benefit pension
and retiree medical benefits expense for the year ended December 31 included the
following components (in millions):
|
Defined Benefit Pension
|
Retiree Medical Benefits
|
|||||
|
2008
|
2007
|
2006
|
2008
|
2007
|
2006
|
|
|
Service
cost
|
$ 59
|
$ 61
|
$ 59
|
$12
|
$11
|
$12
|
|
Interest
cost
|
149
|
158
|
146
|
15
|
14
|
14
|
|
Expected
return on plan assets
|
(157)
|
(137)
|
(122)
|
-
|
-
|
-
|
|
Amortization
of unrecognized
net
actuarial (gain) loss
|
34
|
68
|
68
|
(1)
|
(2)
|
-
|
|
Amortization
of prior service cost
|
10
|
10
|
9
|
21
|
20
|
20
|
|
Net
periodic benefit expense
|
95
|
160
|
160
|
47
|
43
|
46
|
|
Settlement
charges (included in
special
charges)
|
52
|
31
|
59
|
-
|
-
|
-
|
|
Net
benefit
expense
|
$ 147
|
$ 191
|
$ 219
|
$47
|
$43
|
$46
|
During 2008, 2007 and 2006, we recorded
non-cash settlement charges totaling $52 million, $31 million and $59 million,
respectively, related to lump sum distributions from our pilot-only defined
benefit pension plan to pilots who retired. SFAS No. 88 , "Employer's
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and
for Termination Benefits" ("SFAS 88"), requires the use of settlement accounting
if, for a given year, the cost of all settlements exceeds, or is expected to
exceed, the sum of the service cost and interest cost components of net periodic
pension expense for a plan. Under settlement accounting, unrecognized
plan gains or losses must be recognized immediately in proportion to the
percentage reduction of the plan's projected benefit obligation.
The following actuarial assumptions
were used to determine our net periodic benefit expense for the year ended
December 31:
|
Defined Benefit Pension
|
Retiree Medical Benefits
|
|||||
|
2008
|
2007
|
2006
|
2008
|
2007
|
2006
|
|
|
Weighted
average assumed
discount
rate
|
6.27%
|
5.95%
|
5.78%
|
6.02%
|
5.76%
|
5.57%
|
|
Expected
long-term rate of return
on
plan assets
|
8.50%
|
8.26%
|
8.50%
|
-
|
-
|
-
|
|
Weighted
average rate of
compensation increase
|
2.30%
|
2.30%
|
2.25%
|
-
|
-
|
-
|
|
Health
care cost trend rate
|
-
|
-
|
-
|
8.00%
|
8.00%
|
9.00%
|
The 2008 health care cost trend rate is
assumed to decline gradually to 5% by 2014.
A one percentage point change in the
assumed health care cost trend rate would have the following effect (in
millions):
|
One
Percent
Increase
|
One
Percent
Decrease
|
|||
|
Impact
on 2008 retiree medical benefits expense
|
$ 3
|
$ (2)
|
||
|
Impact
on accrued retiree medical benefits as of
December
31,
2008
|
$24
|
$(21)
|
||
The defined benefit pension plans'
assets consist primarily of equity and fixed-income securities. As of
December 31, the asset allocations by category were as follows:
|
2008
|
2007
|
|||
|
U.S.
equities
|
47%
|
49%
|
||
|
International
equities
|
21
|
22
|
||
|
Fixed
income
|
20
|
22
|
||
|
Other
|
12
|
7
|
||
|
Total
|
100%
|
100%
|
||
We develop our expected long-term rate
of return assumption based on historical experience and by evaluating input from
the trustee managing the plans' assets. Our expected long-term
rate of return on plan assets is based on a target allocation of assets, which
is based on our goal of earning the highest rate of return while maintaining
risk at acceptable levels. The plans strive to have assets
sufficiently diversified so that adverse or unexpected results from one security
class will not have an unduly detrimental impact on the entire
portfolio. We regularly review our actual asset allocation and the
pension plans' investments are periodically rebalanced to our targeted
allocation when considered appropriate. Plan assets are allocated
within the following guidelines:
|
Percent of Total
|
Expected
Long-Term
Rate of Return
|
|||
|
U.S.
equities
|
35-55%
|
9%
|
||
|
International
equities
|
15-25
|
9
|
||
|
Fixed
income
|
15-25
|
5
|
||
|
Other
|
0-15
|
12
|
||
Funding requirements for tax-qualified
defined benefit pension plans are determined by government
regulations. During 2008, we contributed $102 million to our
tax-qualified defined benefit pension plans, satisfying our minimum funding
requirements during calendar year 2008. We contributed an additional
$50 million to our tax-qualified defined benefit pension plans in January
2009. We expect to contribute approximately $125 million to our
tax-qualified defined benefit pension plans during 2009.
We project that our defined benefit
pension and retiree medical plans will make the following benefit payments,
which reflect expected future service and include expected lump sum
distributions, during the year ended December 31 (in millions):
|
Defined
Benefit Pension
|
Retiree
Medical Benefits
|
||||
|
2009
|
$ 108
|
$ 15
|
|||
|
2010
|
130
|
16
|
|||
|
2011
|
151
|
17
|
|||
|
2012
|
165
|
18
|
|||
|
2013
|
195
|
19
|
|||
|
2014
through
2018
|
992
|
117
|
|||
Defined Contribution Plans
for Pilots. As required by the pilot agreement, two pilot-only
defined contribution plans were established in 2005. One of these
plans is a money purchase pension plan -- a type of defined contribution plan
subject to the minimum funding rules of the Internal Revenue
Code. Contributions under this plan are generally expressed as a
percentage of applicable pilot compensation, subject to limits under the
Internal Revenue Code. The other pilot-only defined contribution plan
is a 401(k) plan that was established by transferring the pilot accounts from
our pre-existing primary 401(k) plan (covering substantially all of our U.S.
employees other than CMI employees) to a separate pilot-only 401(k)
plan. Pilots may make elective pre-tax and/or post-tax contributions
to the pilot-only 401(k) plan. In addition, the pilot agreement calls
for employer contributions to the pilot-only 401(k) plan based on pre-tax
profits during a portion of the term of the pilot agreement. To the
extent the Internal Revenue Code limits preclude employer contributions called
for by the pilot agreement, the disallowed amount will be paid directly to the
pilots as current wages under a corresponding nonqualified
arrangement. Our expense related to the defined contribution plans
for pilots was $82 million, $69 million and $49 million in the years ended
December 31, 2008, 2007 and 2006, respectively.
Other 401(k)
Plans. We have two other defined contribution 401(k) employee
savings plans in addition to the pilot-only 401(k) plan, a 401(k) plan covering
substantially all domestic employees except for pilots and a 401(k) plan
covering substantially all of the employees of CMI. Participants in
the non-pilot 401(k) plans may make elective pre-tax and/or post-tax
contributions, and substantially all of those participants who are not and will
not become eligible for the Company's defined benefit pension plans are eligible
to receive employer contributions, expressed as a percentage of applicable
compensation, under the non-pilot 401(k) plans. In addition, the
non-pilot 401(k) plans will be amended effective as of January 1, 2009 to
provide for the reinstatement of service-based employer match contributions for
certain workgroups at levels ranging up to 50% of employee contributions of up
to 6% of the employee's salary, based on seniority. Company matching
contributions are made in cash. For the years ended December 31,
2008, 2007 and 2006, total expense for these defined contribution plans was $6
million, $5 million and $4 million, respectively.
Profit Sharing
Program. Our enhanced profit sharing program, which will be in
place through December 31, 2009, creates an award pool for employees of 30% of
the first $250 million of annual pre-tax income, 25% of the next $250 million
and 20% of amounts over $500 million. For purposes of the program,
pre-tax net income excludes unusual or non-recurring items and is calculated
prior to any costs associated with incentive compensation for executives with
performance targets determined by the Human Resources Committee of our Board of
Directors. Payment of profit sharing to participating employees
occurs in the fiscal year following the year in which profit sharing is earned
and the related expense is recorded. Substantially all of our
employees participate in this program except for officers and management
directors. We recognized $172 million and $115 million of profit
sharing expense and related payroll taxes in 2007 and 2006,
respectively. This amount is included in wages, salaries and related
costs in our consolidated statements of operations. As we incurred a
loss in 2008, there was no profit sharing expense in 2008.
NOTE
12 - INCOME TAXES
Income tax benefit (expense) for the
year ended December 31 consisted of the following (in millions):
|
2008
|
2007
|
2006
|
||||
|
Federal:
|
||||||
|
Current
|
$ (2)
|
$ (3)
|
$ (1)
|
|||
|
Deferred
|
229
|
(198)
|
(132)
|
|||
|
State:
|
||||||
|
Current
|
-
|
(2)
|
2
|
|||
|
Deferred
|
20
|
(17)
|
(10)
|
|||
|
Foreign:
|
||||||
|
Current
|
-
|
(1)
|
(1)
|
|||
|
Valuation
allowance
|
(148)
|
114
|
142
|
|||
|
Total
income tax benefit (expense)
|
$ 99
|
$(107)
|
$ -
|
|||
The reconciliation of income tax
computed at the United States federal statutory tax rate to income tax benefit
(expense) for the years ended December 31 is as follows (in
millions):
|
Amount
|
Percentage
|
|||||
|
2008
|
2007
|
2006
|
2008
|
2007
|
2006
|
|
|
Income
tax benefit (expense)
at
United States statutory rates
|
$239
|
$(198)
|
$(129)
|
35.0%
|
35.0%
|
35.0%
|
|
State
income tax benefit (expense),
net
of federal benefit
|
14
|
(12)
|
(4)
|
2.0
|
2.1
|
1.1
|
|
Meals
and entertainment disallowance
|
(5)
|
(6)
|
(6)
|
(0.7)
|
1.1
|
1.6
|
|
Valuation
allowance
|
(148)
|
114
|
142
|
(21.7)
|
(20.1)
|
(38.4)
|
|
Other
|
(1)
|
(5)
|
(3)
|
(0.2)
|
0.7
|
0.7
|
|
Income
tax benefit (expense)
|
$ 99
|
$(107)
|
$ -
|
14.4%
|
18.8%
|
0.0%
|
For financial reporting purposes,
income tax benefit recorded on losses results in deferred tax
assets. Beginning in the first quarter of 2004, we concluded that we
were required to provide a valuation allowance for net deferred tax assets due
to our continued losses and our determination that it was more likely than not
that such deferred tax assets would ultimately not be realized. As a
result, our losses subsequent to that point were not reduced by any tax
benefit. Consequently, we also did not record any provision for
income taxes on our pre-tax income in 2006 or 2007 because we utilized a portion
of the net operating loss carryforwards ("NOLs") for which we had not previously
recognized a benefit. In the fourth quarter of 2007, we recorded
income tax expense of $104 million to increase the valuation allowance to be
fully reserved for certain NOLs, expiring in 2008 through 2011, which more
likely than not would not be realized prior to their expiration. In
the second quarter of 2008, we recorded an income tax credit of $28 million
resulting from higher utilization of those NOLs than had been previously
anticipated. We have approximately $3.4 billion of additional NOLs,
which expire between the years 2020 and 2028, available for use to offset future
cash income taxes.
Deferred income taxes reflect the net
tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the related amounts used for
income tax purposes. Significant components of our deferred tax
liabilities and assets as of December 31 were as follows (in
millions):
|
2008
|
2007
|
|||
|
Fixed
assets, intangibles and spare parts
|
$1,767
|
$1,789
|
||
|
Other,
net
|
-
|
3
|
||
|
Gross
deferred tax
liabilities
|
1,767
|
1,792
|
||
|
Net
operating loss
carryforwards
|
(1,355)
|
(1,384)
|
||
|
Pension
liability
|
(481)
|
(151)
|
||
|
Accrued
liabilities
|
(558)
|
(349)
|
||
|
Other,
net
|
(167)
|
-
|
||
|
Gross
deferred tax
assets
|
(2,561)
|
(1,884)
|
||
|
Valuation
allowance
|
794
|
192
|
||
|
Net
deferred tax
liability
|
-
|
100
|
||
|
Less: current
deferred tax
asset
|
(216)
|
(259)
|
||
|
Non-current
deferred tax
liability
|
$ 216
|
$ 359
|
||
Section 382 of the Internal Revenue
Code ("Section 382") imposes limitations on a corporation's ability to utilize
NOLs if it experiences an "ownership change." In general terms, an
ownership change may result from transactions increasing the ownership of
certain stockholders in the stock of a corporation by more than 50 percentage
points over a three-year period. In the event of an ownership change,
utilization of our NOLs would be subject to an annual limitation under Section
382 determined by multiplying the value of our stock at the time of the
ownership change by the applicable long-term tax-exempt rate (which is 5.40% for
December 2008). Any unused annual limitation may be carried over to
later years. The amount of the limitation may, under certain
circumstances, be increased by the built-in gains in assets held by us at the
time of the change that are recognized in the five-year period after the
change. If we were to have an ownership change as of December 31,
2008 under current conditions, our annual NOL utilization could be limited to
$119 million per year, before consideration of any built-in gains.
Activity in our deferred tax asset
valuation allowance for the year ended December 31 was as follows (in
millions):
|
2008
|
2007
|
2006
|
|
|
Balance
at beginning of
year
|
$ 192
|
$ 487
|
$ 496
|
|
Valuation
allowance (utilized) provided for taxes related to:
|
|||
|
Income
(loss) before cumulative effect of change in
accounting
principle
|
148
|
(114)
|
(142)
|
|
Cumulative
effect of change in accounting principle
|
-
|
-
|
10
|
|
Items
recorded directly to accumulated other
comprehensive
loss
|
462
|
(187)
|
(18)
|
|
Adoption
of SFAS
158
|
-
|
-
|
142
|
|
Other
|
(8)
|
6
|
(1)
|
|
Balance
at end of
year
|
$ 794
|
$ 192
|
$ 487
|
Our federal and state income tax
returns for years after 2004 remain subject to examination by the taxing
authorities.
NOTE
13 - SPECIAL CHARGES
Special charges for the years ended
December 31 were as follows (in millions):
|
2008
|
2007
|
2006
|
|
|
Pension
settlement charges (see Note 11)
|
$ 52
|
$ 31
|
$ 59
|
|
Aircraft-related
charges, net of gains on sales of aircraft
|
40
|
(22)
|
(18)
|
|
Severance
|
34
|
-
|
-
|
|
Route
impairment and
other
|
55
|
4
|
(14)
|
|
Total
special
charges
|
$ 181
|
$ 13
|
$ 27
|
Year Ended December 31,
2008. Aircraft-related charges, net of gains on sales of
aircraft, of $40 million include non-cash impairments on owned Boeing 737-300
and 737-500 aircraft and related assets. Following the decision in
June 2008 to retire all of our Boeing 737-300 aircraft and a significant portion
of our Boeing 737-500 fleet by the end of 2009, we evaluated the ongoing value
of the assets associated with these fleets. Fleet assets include
owned aircraft, improvements on leased aircraft, spare parts, spare engines and
simulators. Based on our evaluation, we determined that the carrying
amounts of these fleets were impaired and wrote them down to their estimated
fair value. We estimated the fair values based on current market
quotes and our expected proceeds from the sale of the
assets. Aircraft-related charges, net of gains on sales of aircraft
in 2008 also includes charges for future lease costs on permanently grounded
737-300 aircraft and gains on the sale of ten Boeing 737-500
aircraft.
At December 31, 2008, we had five owned
Boeing 737-500 aircraft and five owned Boeing 737-300 aircraft that were
grounded. These aircraft are being carried at an aggregate fair
market value of $84 million. At December 31, 2008, we also had two
temporarily grounded Boeing 737-500 leased aircraft and seven permanently
grounded Boeing 737-300 leased aircraft. These aircraft have lease
terms that range from one month to 43 months. We also have
temporarily grounded all thirty 37-seat ERJ 135 aircraft. The two
leased Boeing 737-500 aircraft that were grounded at December 31, 2008
re-entered our active fleet in January 2009.
We have aircraft sale contracts with
two different foreign buyers to sell 15 Boeing 737-500 aircraft. The
buyers of these aircraft have requested, and in some cases we have agreed to, a
delay in the delivery dates for the aircraft. We hold cash deposits
that secure the buyers' obligations under the aircraft sale contracts, and we
are entitled to damages under the aircraft sale contracts if the buyers do not
take delivery of the aircraft when required. These pending
transactions are subject to customary closing conditions, some of which are
outside of our control, and we cannot give any assurances that the buyers of
these aircraft will be able to obtain financing for these transactions, that
there will not be further delays in deliveries or that the closing of these
transactions will occur.
We expect to incur additional special
charges in future quarters associated with the planned permanent grounding of 23
additional Boeing 737-300 aircraft during 2009. Additionally, we may incur
further accounting charges as a result of future fleet actions, including costs
associated with future lease payments and return conditions on 30 ERJ-135
aircraft that are currently temporarily grounded. We are not able at this
time to estimate the amount and timing of these future charges.
In conjunction with the capacity
reductions, we incurred $34 million for severance and continuing medical
coverage for employees accepting early retirement packages or company-offered
leaves of absence during 2008. Approximately 3,000 positions were
eliminated as a result of the capacity reductions, the majority of which were
implemented in September 2008.
Route impairment and other special
charges in 2008 of $55 million includes an $18 million non-cash charge to write
off an intangible route asset as a result of our decision to move all of our
flights between New York Liberty and London from London Gatwick Airport to
London Heathrow Airport and $37 million of charges related to contract
settlements with regional carriers and unused facilities.
Year Ended December 31,
2007. Aircraft related credits of $22 million in 2007 related
primarily to the sale of three 737-500 aircraft. Other special
charges in 2007 of $4 million related to a change in the mandatory retirement
age for our pilots from age 60 to 65 signed into law on December 31,
2007. Because of the extension of the mandatory retirement age, we
recorded an additional $4 million liability for the long-term disability plan
for our pilots in 2007.
Year Ended December 31,
2006. Aircraft related special credits of $18 million in 2006
related primarily to a reduction of accruals for future lease payments and
return conditions related to permanently grounded MD-80 aircraft following
negotiated settlements with the aircraft lessors. Other special
credits in 2006 of $14 million related to the surrender of stock price based RSU
awards discussed in Note 9.
Accrual
Activity. Activity related to the accruals for severance and
medical costs and future lease payments on permanently grounded aircraft and
unused facilities is as follows (in millions):
|
Balance,
December 31, 2007
|
Accrual
|
Payments
|
Balance,
December 31, 2008
|
|||||
|
Severance/medical
costs
|
$ -
|
$ 34
|
$(6)
|
$28
|
||||
|
Permanently
grounded aircraft
|
-
|
14
|
(4)
|
10
|
||||
|
Unused
facilities
|
8
|
14
|
(2)
|
20
|
||||
These accruals and payments relate
primarily to our mainline segment. Cash payments related to the
accruals for severance and medical costs will be made through the end of
2009. Remaining lease payments on permanently grounded aircraft and
unused facilities will be made through 2009 and 2018, respectively.
NOTE
14 - INVESTMENT IN OTHER COMPANIES
Copa. In
May 2008 and July 2006, we sold 4.4 million and 7.5 million shares,
respectively, of the Class A common stock of Copa for net proceeds of $149
million and $156 million, respectively. We recognized gains of $78
million and $92 million, respectively, on these transactions. We no
longer own any shares of Copa.
Prior to our disposition of Copa shares
in May 2008, we accounted for our interest in Copa using the equity method of
accounting because of our ability to significantly influence Copa's operations
through our alliance agreements with Copa and our representation on Copa's Board
of Directors.
Holdings. In
2007, we sold all of our shares of the common stock of Holdings, the parent
company of ExpressJet, to third parties for cash proceeds of $35
million. We recognized a gain of $7 million as a result of these
sales.
During 2006, we held an 8.6% interest
in Holdings. We accounted for our interest in Holdings using the
equity method of accounting because of our continued ability to significantly
influence Holdings' operations through our capacity purchase agreement with
ExpressJet.
ARINC. ARINC
develops and operates communications and information processing systems and
provides systems engineering and other services to the aviation industry and
other industries. In 2007, we sold all of our ARINC common stock
and received cash proceeds of $30 million. Our investment
in ARINC had no carrying value, resulting in a gain of $30 million.
Equity in Earnings of Other
Companies. We recorded equity in earnings of other companies
of $12 million, $18 million and $61 million in the years ended December 31,
2008, 2007 and 2006, respectively. The declining amounts reflect our
decreased ownership of Copa and Holdings. These amounts are included
in other nonoperating income (expense) in our consolidated statements of
operations.
NOTE
15 - VARIABLE INTEREST ENTITIES
Certain types of entities in which a
company absorbs a majority of another entity's expected losses, receives a
majority of the other entity's expected residual returns, or both, as a result
of ownership, contractual or other financial interests in the other entity are
required to be consolidated. These entities are called "variable
interest entities." The principal characteristics of variable
interest entities are (1) an insufficient amount of equity to absorb the
entity's expected losses, (2) equity owners as a group are not able to make
decisions about the entity's activities, or (3) equity that does not absorb the
entity's losses or receive the entity's residual returns. "Variable
interests" are contractual, ownership or other monetary interests in an entity
that change with fluctuations in the entity's net asset value. As a
result, variable interest entities can arise from items such as lease
agreements, loan arrangements, guarantees or service contracts.
If an entity is determined to be a
"variable interest entity," the entity must be consolidated by the "primary
beneficiary." The primary beneficiary is the holder of the variable
interests that absorbs a majority of the variable interest entity's expected
losses or receives a majority of the entity's residual returns in the event no
holder has a majority of the expected losses. There is no primary
beneficiary in cases where no single holder absorbs the majority of the expected
losses or receives a majority of the residual returns. The
determination of the primary beneficiary is based on projected cash flows at the
inception of the variable interests.
We have variable interests in the
following types of variable interest entities:
Aircraft
Leases. We are the lessee in a series of operating leases
covering the majority of our leased aircraft. The lessors are trusts
established specifically to purchase, finance and lease aircraft to
us. These leasing entities meet the criteria for variable interest
entities. We are generally not the primary beneficiary of the leasing
entities if the lease terms are consistent with market terms at the inception of
the lease and do not include a residual value guarantee, fixed-price purchase
option or similar feature that obligates us to absorb decreases in value or
entitles us to participate in increases in the value of the
aircraft. This is the case for many of our operating leases; however,
leases of approximately 75 mainline jet aircraft contain a fixed-price purchase
option that allows us to purchase the aircraft at predetermined prices on
specified dates during the lease term. Additionally, leases of
substantially all of our 256 leased regional jet aircraft contain an option to
purchase the aircraft at the end of the lease term at prices that, depending on
market conditions, could be below fair value. We have not
consolidated the related trusts because, even taking into consideration these
purchase options, we are still not the primary beneficiary based on our cash
flow analyses. Our maximum exposure under these leases is the
remaining lease payments, which are reflected in future lease commitments in
Note 5.
Airport
Leases. We are the lessee of real property under long-term
operating leases at a number of airports where we are also the guarantor of
approximately $1.5 billion of underlying debt and interest
thereon. These leases are typically with municipalities or other
governmental entities, which are excluded from the consolidation requirements
concerning variable interest entities. To the extent our lease and
related guarantee are with a separate legal entity other than a governmental
entity, we are not the primary beneficiary because the lease terms are
consistent with market terms at the inception of the lease and the lease does
not include a residual value guarantee, fixed-price purchase option or similar
feature as discussed above.
Subsidiary
Trust. We have a subsidiary trust that has Mandatorily
Redeemable Preferred Securities outstanding with a liquidation value of $248
million. The trust is a variable interest entity because we have a
limited ability to make decisions about its activities. However, we
are not the primary beneficiary of the trust. Therefore, the trust
and the Mandatorily Redeemable Preferred Securities issued by the trust are not
reported on our balance sheets. Instead, we report our 6% Convertible
Junior Subordinated Debentures held by the trust as long-term debt and interest
on the notes is recorded as interest expense for all periods presented in the
accompanying financial statements.
NOTE
16 - REGIONAL CAPACITY PURCHASE AGREEMENTS
Capacity Purchase Agreement
with ExpressJet
General. In
June 2008, we entered into the Second Amended and Restated Capacity Purchase
Agreement with ExpressJet and certain of its affiliates (the "Amended ExpressJet
CPA"), which amends and restates our capacity purchase agreement with
ExpressJet. Under the Amended ExpressJet CPA, we will continue to
purchase all of the capacity from the ExpressJet flights covered by the
agreement at a negotiated price. The Amended ExpressJet CPA was
effective as of July 1, 2008.
Capacity and Fleet
Matters. The Amended ExpressJet CPA covers a minimum of 205
regional jets in the first year. At December 31, 2008, 214 regional
jets were being operated under the Amended ExpressJet CPA. After the
first year, the minimum number of covered aircraft adjusts to 190 regional jets,
or fewer as leases on covered aircraft expire. Of the 69 aircraft
ExpressJet previously subleased from us for non-Continental flying, ExpressJet
continues to sublease 30 Embraer 50-seat regional jets from us outside the
Amended ExpressJet CPA at reduced rental rates. During the third
quarter of 2008, ExpressJet notified us of its intent to return to us 39 ERJ-145
aircraft that it subleased from us and operated on its own
behalf. ExpressJet had returned all 39 of these subleased aircraft to
us by early October 2008. We have elected to add these returned
aircraft to the Amended ExpressJet CPA. During September 2008, we
temporarily grounded all 30 of the subleased 37-seat ERJ 135 aircraft being
flown by ExpressJet on our behalf and notified ExpressJet that these aircraft
would be withdrawn from the Amended ExpressJet CPA. We are evaluating
our options regarding these 30 aircraft, including sublease opportunities or
permanently grounding them.
Term of
Agreement. The Amended ExpressJet CPA will expire after a term
of seven years and has no renewal or extension options. The Amended
ExpressJet CPA eliminated our right to terminate the agreement at any time upon
12 months' notice, although we may terminate the agreement at any time for
"cause" (as defined in the Amended ExpressJet CPA) and either party may
terminate for breach of the agreement, subject to certain notice and cure
periods. The Amended ExpressJet CPA also modified our rights under
our former capacity purchase agreement by reducing the scope of
change-in-control limitations on ExpressJet, reducing restrictions on ExpressJet
flying into our hub airports, and removing the most-favored-nation clause
relating to agreements ExpressJet may enter into with other
airlines.
In connection with entering into the
Amended ExpressJet CPA, certain existing agreements relating to aircraft
subleases, facilities, ground handling, fuel purchasing and administrative
services were amended. In addition, we entered into a settlement
agreement with ExpressJet related to block hour rates for the first six months
of 2008 and settled all outstanding disputed claims and other payment
disagreements under our former capacity purchase agreement, the impact of which
was not material to our consolidated results of operations.
Compensation and Operational
Responsibilities. In exchange for ExpressJet's operation of
the flights and performance of other obligations under the Amended ExpressJet
CPA, we have agreed to pay ExpressJet a pre-determined rate, subject to annual
escalations (capped at 3.5%), for each block hour flown (the hours from gate
departure to gate arrival) and to reimburse ExpressJet for various pass-through
expenses (with no margin or mark-up) related to the flights, including
insurance, property taxes, international navigation fees, depreciation
(primarily aircraft-related), landing fees and certain maintenance
expenses. Under the Amended ExpressJet CPA, we continue to be
responsible for the cost of providing fuel for all flights and for paying
aircraft rent for all aircraft covered by the Amended ExpressJet
CPA. The Amended ExpressJet CPA contains incentive bonus and rebate
provisions based upon ExpressJet's operational performance, but no longer
includes any payment adjustments in respect of ExpressJet's operating
margin.
Service
Agreements. We provide various services to ExpressJet and
charge them at rates in accordance with our capacity purchase
agreement. The services provided to ExpressJet by us include loading
fuel into aircraft, certain customer services such as ground handling and
infrastructure services, including insurance, technology, real estate and
environmental affairs. Prior to 2007, we also provided treasury,
human resources, internal corporate accounting, tax, payroll, accounts payable
and certain risk management services to ExpressJet. For providing
these services, we charged ExpressJet approximately $41 million, $88 million and
$105 million in 2008, 2007 and 2006, respectively.
Leases. As
of December 31, 2008, ExpressJet leased all 244 of its aircraft under long-term
operating leases from us. ExpressJet's lease agreements with us have
substantially the same terms as the lease agreements between us and the lessors
and expire between 2013 and 2022, except that ExpressJet's rent rates on 30
ERJ-145 aircraft not operated under the Amended ExpressJet CPA were reduced by
one-half effective July 1, 2008. ExpressJet leases or
subleases, under various operating leases, ground equipment and substantially
all of its ground facilities, including facilities at public airports, from us
or the municipalities or agencies owning and controlling such
airports. If ExpressJet defaults on any of its payment obligations
with us, we are entitled to reduce any payments required to be made by us to
ExpressJet under the Amended ExpressJet CPA by the amount of the defaulted
payment. Our total rental income related to all leases with
ExpressJet was approximately $205 million, $360 million and $349 million in
2008, 2007 and 2006, respectively. The 2008 and 2007 totals include
$76 million and $79 million, respectively, related to regional jets operated by
ExpressJet outside of our capacity purchase agreement, which is reported as
other revenue. Our aircraft rental income on aircraft flown for us
through June 30, 2008 is reported as a reduction to regional capacity purchase,
net.
Income Taxes. In
conjunction with Holdings' IPO, our tax basis in the stock of Holdings and the
tax basis of ExpressJet's tangible and intangible assets were increased to fair
value. The increased tax basis should result in additional tax
deductions available to ExpressJet over a period of 15 years. To the
extent ExpressJet generates taxable income sufficient to realize the additional
tax deductions, our tax sharing agreement with ExpressJet provides that it will
be required to pay us a percentage of the amount of tax savings actually
realized, excluding the effect of any loss carrybacks. ExpressJet is
required to pay us 100% of the first third of the anticipated tax benefit, 90%
of the second third and 80% of the last third. However, if the
anticipated benefits are not realized by the end of 2018, ExpressJet will be
obligated to pay us 100% of any benefits realized after that date. We
recognize the benefit of the tax savings associated with ExpressJet's asset
step-up for financial reporting purposes in the year paid to us by ExpressJet
due to the uncertainty of realization. We recognized no income from
the tax sharing agreement in 2008 or 2007. Income from the tax
sharing agreement totaled $26 million in 2006 and is included in other
nonoperating income (expense) in the accompanying statement of
operations.
Capacity Purchase Agreement
with Chautauqua
During 2007, Chautauqua Airlines, Inc.
("Chautauqua"), a wholly-owned subsidiary of Republic Airways Holdings Inc.,
began providing and operating forty-four 50-seat regional jets as a Continental
Express carrier under a capacity purchase agreement ("the Chautauqua
CPA"). As of December 31, 2008, 37 aircraft were being flown by
Chautauqua for us. The Chautauqua CPA requires us to pay Chautauqua a
fixed fee, subject to annual escalations (capped at 3.5%), for each block hour
flown for its operation of the aircraft. Chautauqua supplies the
aircraft that it operates under the agreement. Aircraft are scheduled
to be removed from service under the Chautauqua CPA each year through 2012,
provided that we have the unilateral right to extend the Chautauqua CPA on the
same terms on an aircraft-by-aircraft basis for a period of up to five years in
the aggregate for 20 aircraft and for up to three years in the aggregate for
seven aircraft, subject to the renewal terms of the related aircraft
lease.
Capacity Purchase Agreement
with CommutAir
Our capacity purchase agreement with
Champlain Enterprises, Inc., doing business as CommutAir (the "CommutAir CPA"),
provides for CommutAir to operate sixteen 37-seat Bombardier Q200 twin-turboprop
aircraft as a Continental Connection carrier on short distance routes from
Cleveland Hopkins and New York Liberty. The CommutAir CPA became
effective in 2006 and has a term of approximately six
years. CommutAir supplies all of the aircraft that it operates under
the agreement.
Capacity Purchase Agreement
with Colgan
In 2008, Pinnacle Airlines Corp.'s
subsidiary, Colgan Air, Inc. ("Colgan"), began operating fifteen 74-seat
Bombardier Q400 twin-turboprop aircraft on short and medium-distance routes from
New York Liberty on our behalf. Colgan operates the flights as a
Continental Connection carrier under a capacity purchase agreement with
us. In January 2009, we amended the capacity purchase agreement to
increase by 15 the number of Q400 aircraft operated by Colgan on our
behalf. We expect that Colgan will begin operating these 15
additional aircraft as they are delivered, beginning in the third quarter of
2010 through the second quarter of 2011. Each aircraft is scheduled
to be covered by the agreement for approximately ten years following the date
such aircraft is delivered into service thereunder. Colgan supplies
all aircraft that it operates under the agreement. One of Colgan's
Q400 aircraft was involved in an accident on February 12, 2009, reducing the
number of aircraft currently being flown for us to 14.
Indemnification Under
Capacity Purchase Agreements
Under each of these capacity purchase
agreements, our regional operator is generally required to indemnify us for any
claims arising in connection with its operation of the aircraft under the
agreement and to maintain separate insurance to cover its indemnification
obligation.
Commitments under Capacity
Purchase Agreements
Our future commitments under our
capacity purchase agreements are dependent on numerous variables, and are
therefore difficult to predict. The most important of these variables
is the number of scheduled block hours. Although we are not required
to purchase a minimum number of block hours under certain of our capacity
purchase agreements, we have set forth below estimates of our future payments
under the agreement based on our stated assumptions. These estimates
of our future payments under all of the capacity purchase agreements do not
include the portion of the underlying obligation for any aircraft leased to
ExpressJet or deemed to be leased from Chautauqua, CommutAir or Colgan and
facility rent that are disclosed as part of aircraft and nonaircraft operating
leases. For purposes of calculating these estimates, we have assumed
(1) the number of block hours flown is based on our anticipated level of flight
activity or at any contractual minimum utilization levels if applicable, (2)
that we will reduce the fleet as rapidly as contractually allowed under each
agreement, (3) that aircraft utilization, stage length and load factors will
remain constant, (4) that each carrier's operational performance will remain at
historic levels, and (5) that inflation is 1.6% to 3.5% per
year. Additionally, the impact of the 15 additional Q400 aircraft
expected to begin service beginning in 2010 has not been included since this
commitment was entered into subsequent to December 31, 2008. Based on
these assumptions, our future payments through the end of the terms of our
capacity purchase agreements at December 31, 2008 were estimated as follows (in
millions):
|
Year
ending December 31,
|
|||
|
2009
|
$ 767
|
||
|
2010
|
674
|
||
|
2011
|
660
|
||
|
2012
|
675
|
||
|
2013
|
671
|
||
|
Later
years
|
1,256
|
||
|
Total
|
$4,703
|
||
It is important to note that the actual
amounts we pay to our regional operators under capacity purchase agreements
could differ materially from these estimates. For example, a 10%
increase or decrease in scheduled block hours for all of our regional operators
(whether as a result of changes in average daily utilization or otherwise) in
2009 would result in a corresponding increase or decrease in cash obligations
under the capacity purchase agreements of approximately 8.7%, or $67
million.
NOTE
17 - RELATED PARTY TRANSACTIONS
The following is a summary of
significant related party transactions that occurred during 2008, 2007 and 2006,
other than those discussed elsewhere in the Notes to Consolidated Financial
Statements. The payments to and from related parties in the ordinary
course of business were based on prevailing market rates and do not include
interline billings, which are common among airlines for transportation-related
services. In each case, the payments in 2008 relate only to the
period that the respective entity was considered a related party.
Northwest
Airlines. Prior to April 2008, Northwest Airlines, Inc. held
the sole share of our Series B Preferred Stock. We currently have a
global alliance with Northwest involving extensive codesharing, frequent flyer
reciprocity and other cooperative activities. The other cooperative
activities are considered normal to the daily operations of both
airlines. As a result of these other cooperative activities, we paid
Northwest $9 million, $28 million and $27 million in 2008, 2007 and 2006,
respectively, and Northwest paid us $9 million, $13 million and $20 million in
2008, 2007 and 2006, respectively.
Copa
Airlines. Prior to May 2008, we held a 10% interest in
Copa. We have a long-term alliance with Copa Airlines involving
extensive codesharing, frequent flyer reciprocity and other cooperative
activities. The other cooperative activities are considered normal to
the daily operations of both airlines. As a result of these other
cooperative activities, Copa paid us $7 million, $10 million and $8 million in
2008, 2007 and 2006, respectively.
NOTE
18 - SEGMENT REPORTING
We have two reportable
segments: mainline and regional. The mainline segment consists of
flights to cities using larger jets while the regional segment currently
consists of flights with a capacity of 50 or fewer seats (for jets) or 78 or
fewer seats (for turboprops). As of December 31, 2008, the regional
segment was operated by ExpressJet, Chautauqua, CommutAir and Colgan through
capacity purchase agreements. See Note 15 for further discussion of
the capacity purchase agreements.
We evaluate segment performance based
on several factors, of which the primary financial measure is operating income
(loss). However, we do not manage our business or allocate resources
based on segment operating profit or loss because (1) our flight schedules are
designed to maximize revenue from passengers flying, (2) many operations of the
two segments are substantially integrated (for example, airport operations,
sales and marketing, scheduling and ticketing) and (3) management decisions are
based on their anticipated impact on the overall network, not on one individual
segment.
Financial information for the year
ended December 31 by business segment is set forth below (in
millions):
|
2008
|
2007
|
2006
|
|||||
|
Operating
Revenue:
|
|||||||
|
Mainline
|
$12,827
|
$12,019
|
$10,907
|
||||
|
Regional
|
2,414
|
2,213
|
2,221
|
||||
|
Total
Consolidated
|
$15,241
|
$14,232
|
$13,128
|
||||
|
Depreciation
and amortization expense:
|
|||||||
|
Mainline
|
$ 427
|
$ 400
|
$ 378
|
||||
|
Regional
|
11
|
13
|
13
|
||||
|
Total
Consolidated
|
$ 438
|
$ 413
|
$ 391
|
||||
|
Special
Charges (Note 13):
|
|||||||
|
Mainline
|
$ 155
|
$ 13
|
$ 27
|
||||
|
Regional
|
26
|
-
|
-
|
||||
|
Total
Consolidated
|
$ 181
|
$ 13
|
$ 27
|
||||
|
Operating
Income (Loss):
|
|||||||
|
Mainline
|
$ 74
|
$ 848
|
$ 593
|
||||
|
Regional
|
(388)
|
(161)
|
(125)
|
||||
|
Total
Consolidated
|
$ (314)
|
$ 687
|
$ 468
|
||||
|
Interest
Expense:
|
|||||||
|
Mainline
|
$ 352
|
$ 369
|
$ 385
|
||||
|
Regional
|
13
|
14
|
16
|
||||
|
Total
Consolidated
|
$ 365
|
$ 383
|
$ 401
|
||||
|
Interest
Income:
|
|||||||
|
Mainline
|
$ 65
|
$ 160
|
$ 131
|
||||
|
Regional
|
-
|
-
|
-
|
||||
|
Total
Consolidated
|
$ 65
|
$ 160
|
$ 131
|
||||
|
Income
Tax Expense:
|
|||||||
|
Mainline
|
$ 41
|
$(140)
|
$ -
|
||||
|
Regional
|
58
|
33
|
-
|
||||
|
Total
Consolidated
|
$ 99
|
$(107)
|
$ -
|
||||
|
Net
Income (Loss):
|
|||||||
|
Mainline
|
$ (242)
|
$ 601
|
$ 476
|
||||
|
Regional
|
(343)
|
(142)
|
(133)
|
||||
|
Total
Consolidated
|
$(585)
|
$ 459
|
$ 343
|
||||
The
amounts presented above are presented on the basis of how our management reviews
segment results. Under this basis, the regional segment's revenue
includes a pro-rated share of our ticket revenue for segments flown by regional
carriers and expenses include all activity related to the regional operations,
regardless of whether the costs were paid directly by us or to the regional
carriers. Net income (loss) for the mainline segment includes our
equity in Copa's earnings and gains on the sale of Copa shares and disposition
of Holdings shares. Net loss for the regional segment includes our
equity in Holdings' earnings.
Information concerning operating
revenue by principal geographic area for the year ended December 31 is as
follows (in millions):
|
2008
|
2007
|
2006
|
||||
|
Domestic
|
$8,327
|
$8,053
|
$ 7,742
|
|||
|
Trans-Atlantic
|
3,448
|
3,065
|
2,531
|
|||
|
Latin
America
|
2,283
|
1,981
|
1,806
|
|||
|
Pacific
|
1,183
|
1,133
|
1,049
|
|||
|
$15,241
|
$14,232
|
$13,128
|
||||
We attribute revenue among the
geographical areas based upon the origin and destination of each flight
segment. Our tangible assets and capital expenditures consist
primarily of flight and related ground support equipment, which is mobile across
geographic markets and, therefore, has not been allocated.
NOTE
19 - COMMITMENTS AND CONTINGENCIES
Aircraft Purchase
Commitments. As of December 31, 2008, we had firm commitments
for 87 new aircraft (54 Boeing 737 aircraft,
eight Boeing 777 aircraft and 25 Boeing 787 aircraft) scheduled for delivery
from 2009 through 2016, with an estimated aggregate cost of $5.6 billion
including related spare engines. In addition to our firm order
aircraft, we had options to purchase a total of 102 additional Boeing aircraft
as of December 31, 2008.
We have also agreed to lease four
Boeing 757-300 aircraft from Boeing Capital Corporation. We expect
that these aircraft will be placed into service in the first half of
2010.
As discussed in Note 4, we obtained
financing for 12 Boeing 737-800s and 18 Boeing 737-900ERs. We applied
a portion of this financing to 27 Boeing aircraft delivered to us in 2008 and
recorded related debt of $1.0 billion. We will apply the remainder of
this financing to three of the Boeing 737 aircraft scheduled for delivery in
2009. We have reached an agreement in principle with a bank for it to
provide financing for three Boeing 737-900ER aircraft scheduled for delivery in
the first half of 2009. Boeing has agreed to provide backstop
financing for all of the additional 11 Boeing 737 aircraft scheduled for
delivery through February 2010 (or 14 such additional aircraft if we fail to
reach a definitive agreement for the financing described in the previous
sentence), subject to customary closing conditions. However, we do
not have backstop financing or any other financing currently in place for the
balance of the Boeing aircraft on order. Since the commitments for
firm order aircraft are non-cancelable and assuming no breach of the agreement
by Boeing, if we are unable to obtain financing and cannot otherwise satisfy our
commitment to purchase these aircraft, the manufacturer could exercise its
rights and remedies under applicable law, such as seeking to terminate the
contract for a material breach, selling the aircraft to one or more other
parties and suing us for damages to recover for any resulting losses incurred by
the manufacturer. Further financing will be needed to satisfy our
capital commitments for our firm aircraft and other related capital
expenditures. We can provide no assurance that such further financing
will be available.
Financings and
Guarantees. We are the guarantor of approximately $1.7 billion
in aggregate principal amount of tax-exempt special facilities revenue bonds and
interest thereon, excluding the US Airways contingent liability described
below. These bonds, issued by various airport municipalities, are
payable solely from our rentals paid under long-term agreements with the
respective governing bodies. The leasing arrangements associated with
approximately $1.5 billion of these obligations are accounted for as operating
leases, and the leasing arrangements associated with approximately $200 million
of these obligations are accounted for as capital leases.
We are contingently liable for US
Airways' obligations under a lease agreement between US Airways and the Port
Authority of New York and New Jersey related to the East End Terminal at
LaGuardia airport. These obligations include the payment of ground
rentals to the Port Authority and the payment of other rentals in respect of the
full amounts owed on special facilities revenue bonds issued by the Port
Authority having an outstanding par amount of $123 million at December 31, 2008
and a final scheduled maturity in 2015. If US Airways defaults on
these obligations, we would be obligated to cure the default and we would have
the right to occupy the terminal after US Airways' interest in the lease had
been terminated.
We also had letters of credit and
performance bonds relating to various real estate and customs obligations at
December 31, 2008 in the amount of $69 million. These letters of
credit and performance bonds have expiration dates through October
2010.
General Guarantees and
Indemnifications. We are the lessee under many real estate
leases. It is common in such commercial lease transactions for us as
the lessee to agree to indemnify the lessor and other related third parties for
tort liabilities that arise out of or relate to our use or occupancy of the
leased premises and the use or occupancy of the leased premises by regional
carriers operating flights on our behalf. In some cases, this
indemnity extends to related liabilities arising from the negligence of the
indemnified parties, but usually excludes any liabilities caused by their gross
negligence or willful misconduct. Additionally, we typically
indemnify such parties for any environmental liability that arises out of or
relates to our use of the leased premises.
In our aircraft financing agreements,
we typically indemnify the financing parties, trustees acting on their behalf
and other related parties against liabilities that arise from the manufacture,
design, ownership, financing, use, operation and maintenance of the aircraft and
for tort liability, whether or not these liabilities arise out of or relate to
the negligence of these indemnified parties, except for their gross negligence
or willful misconduct.
We expect that we would be covered by
insurance (subject to deductibles) for most tort liabilities and related
indemnities described above with respect to real estate we lease and aircraft we
operate.
In our financing transactions that
include loans, we typically agree to reimburse lenders for any reduced returns
with respect to the loans due to any change in capital requirements and, in the
case of loans in which the interest rate is based on the London Interbank
Offered Rate ("LIBOR"), for certain other increased costs that the lenders incur
in carrying these loans as a result of any change in law, subject in most cases
to certain mitigation obligations of the lenders. At December 31,
2008, we had $1.5 billion of floating rate debt and $260 million of fixed rate
debt, with remaining terms of up to 12 years, that is subject to these increased
cost provisions. In several financing transactions involving loans or
leases from non-U.S. entities, with remaining terms of up to 12 years and an
aggregate carrying value of $1.6 billion, we bear the
risk of any change in tax laws that would subject loan or lease payments
thereunder to non-U.S. entities to withholding taxes, subject to customary
exclusions.
We may be required to make future
payments under the foregoing indemnities and agreements due to unknown variables
related to potential government changes in capital adequacy requirements, laws
governing LIBOR based loans or tax laws, the amounts of which cannot be
estimated at this time.
Credit Card Processing
Agreements. On June 10, 2008, we entered into an amendment and
restatement of our Bankcard Agreement with Chase. In connection
with the amendment of the Bankcard Agreement, we also amended our domestic
bank-issued credit card processing agreement to extend the term of the agreement
until December 31, 2016 and modify certain provisions in the
agreement. As a result of the amendment of that processing agreement,
the requirement that we maintain a minimum EBITDAR (generally, earnings before
interest, income taxes, depreciation, amortization, aircraft rentals, certain
nonoperating income (expense) and special items) to fixed charges (interest and
aircraft rentals) ratio for the preceding 12 months was eliminated as a trigger
requiring the posting of additional collateral.
The covenants contained in the Chase
processing agreement require that we post additional cash collateral if we fail
to maintain (1) a minimum level of unrestricted cash, cash equivalents and
short-term investments, (2) a minimum ratio of unrestricted cash, cash
equivalents and short-term investments to current liabilities of 0.25 to 1.0 or
(3) a minimum senior unsecured debt rating of at least Caa3 and CCC- from
Moody's and Standard & Poor's, respectively.
We have also recently entered into a
new credit card processing agreement with American Express. Under the
terms of that agreement, if a covenant trigger under the Chase processing
agreement results in our posting additional collateral under that agreement, we
would be required to post additional collateral under the American Express
processing agreement. The amount of additional collateral required
under the American Express processing agreement would be based on a percentage
of the value of unused tickets (for travel at a future date) purchased by
customers using the American Express card. The percentage for
purposes of this calculation is the same as the percentage applied under the
Chase processing agreement, after taking into account certain other risk
protection maintained by American Express.
Under these processing agreements and
based on our current air traffic liability exposure (as defined in each
agreement), we would be required to post collateral up to the following amounts
if we failed to comply with the covenants described above:
|
·
|
a
total of $72 million if our unrestricted cash, cash equivalents and
short-term investments balance falls below $2.0
billion;
|
|
·
|
a total
of $229 million if we fail to maintain the minimum unsecured debt ratings
specified above;
|
|
·
|
a
total of $437 million if our unrestricted cash, cash equivalents and
short-term investments balance (plus any collateral posted at Chase) falls
below $1.4 billion or if our ratio of unrestricted cash, cash equivalents
and short-term investments to current liabilities falls below 0.25 to 1.0;
and
|
|
·
|
a
total of $958 million if our unrestricted cash, cash equivalents and
short-term investments balance (plus any collateral posted at Chase) falls
below $1.0 billion or if our ratio of unrestricted cash, cash equivalents
and short-term investments to current liabilities falls below 0.22 to
1.0.
|
The amounts shown above are incremental
to the current collateral we have posted with these companies. We are
currently in compliance with all of the covenants under these processing
agreements.
Employees. As
of December 31, 2008, we had approximately 42,490 employees, which, due to the
number of part-time employees, represents 40,460 full-time equivalent
employees. In conjunction with the capacity reductions we announced
in June 2008, we have reduced our total workforce by approximately 3,000
positions, with the majority of the reductions being accomplished through
voluntary programs. These included an enhanced retirement window,
company offered leaves of absence and other voluntary reduction
programs.
Approximately 44% of our full-time
equivalent employees are represented by unions. The collective
bargaining agreements with our pilots, mechanics and certain other work groups
became amendable in December 2008. During 2008, we met with
representatives of the applicable unions to engage in bargaining for amended
collective bargaining agreements. These talks will continue in 2009
with a goal of reaching agreements that are fair to us and to our
employees. Although there can be no assurance that our generally good
labor relations and high labor productivity will continue, the preservation of
good relations with our employees is a significant component of our business
strategy.
Environmental
Matters. In 2001, the California Regional Water Quality Control
Board ("CRWQCB") mandated a field study of the area surrounding our aircraft
maintenance hangar in Los Angeles. The study was completed in
September 2001 and identified jet fuel and solvent contamination on and adjacent
to this site. In April 2005, we began environmental remediation of
jet fuel contamination surrounding our aircraft maintenance hangar pursuant to a
workplan submitted to (and approved by) the CRWQCB and our landlord, the Los
Angeles World Airports. Additionally, we could be responsible for
environmental remediation costs primarily related to solvent contamination on
and near this site.
In 1999, we purchased property located
near our New York Liberty hub in Elizabeth, New Jersey from Honeywell
International, Inc. ("Honeywell") with certain environmental indemnification
obligations by us to Honeywell. We did not operate the facility
located on or make any improvements to the property. In 2005, we sold
the property to Catellus Commercial Group, LLC ("Catellus") and, in connection
with the sale, Catellus assumed certain environmental indemnification
obligations in favor of us. On October 9, 2006, Honeywell provided us
with a notice seeking indemnification from us in connection with a U.S.
Environmental Protection Agency ("EPA") potentially responsible party notice to
Honeywell involving the Newark Bay Study Area of the Diamond Alkali Superfund
Site alleging hazardous substance releases from the property and seeking study
costs. In addition, on May 7, 2007, Honeywell provided us with a
notice seeking indemnification from us in connection with a possible lawsuit by
Tierra Solutions, Inc. ("Tierra Solutions") against Honeywell relating to
alleged discharges from the property into Newark Bay and seeking cleanup of
Newark Bay waters and sediments under the Resource Conservation and Recovery
Act. We have notified Honeywell that, at this time, we have not
agreed that we are required to indemnify Honeywell with respect to the EPA and
Tierra Solutions claims and Honeywell has invoked arbitration procedures under
its sale and purchase agreement with us. Catellus has agreed to
indemnify and defend us in connection with the EPA and Tierra Solutions claims,
including any arbitration with Honeywell.
At December 31, 2008, we had an accrual
for estimated costs of environmental remediation throughout our system of $33
million, based primarily on third-party environmental studies and estimates as
to the extent of the contamination and nature of the required remedial
actions. We have evaluated and recorded this accrual for environmental
remediation costs separately from any related insurance recovery. We did
not have any receivables related to environmental insurance recoveries at
December 31, 2008. Based on currently available information, we
believe that our accrual for potential environmental remediation costs is
adequate, although our accrual could be adjusted in the future due to new
information or changed circumstances. However, we do not expect these
items to materially affect our results of operations, financial condition or
liquidity.
Legal
Proceedings. During the period between 1997 and 2001, we reduced or
capped the base commissions that we paid to domestic travel agents, and in 2002
we eliminated those base commissions. These actions were similar to those
also taken by other air carriers. We are a defendant, along with
several other air carriers, in two lawsuits brought by travel agencies that
purportedly opted out of a prior class action entitled Sarah Futch Hall d/b/a/
Travel Specialists v. United Air Lines, et al. (U.S.D.C., Eastern
District of North Carolina), filed on June 21, 2000, in which the defendant
airlines prevailed on summary judgment that was upheld on
appeal. These similar suits against Continental and other major
carriers allege violations of antitrust laws in reducing and ultimately
eliminating the base commissions formerly paid to travel agents. The
pending cases are Tam
Travel, Inc. v. Delta Air Lines, Inc., et al. (U.S.D.C., Northern
District of California), filed on April 9, 2003 and Swope Travel Agency, et al.
v. Orbitz LLC et al. (U.S.D.C., Eastern District of Texas), filed on June
5, 2003. By order dated November 10, 2003, these actions were
transferred and consolidated for pretrial purposes by the Judicial Panel on
Multidistrict Litigation to the Northern District of Ohio. On
September 14, 2006, the judge for the consolidated lawsuit issued an order
dismissing 28 plaintiffs in the Swope case for their
failure to properly opt-out of the Hall
case. Consequently, a total of 90 travel agency plaintiffs remained
in the two cases. On October 29, 2007, the judge for the consolidated
lawsuit dismissed the case for failure to meet the heightened pleading standards
established earlier in 2007 by the U.S. Supreme Court's decision in Bell Atlantic Corp. v.
Twombly. The plaintiffs have appealed to the Sixth Circuit
Court of Appeals. In each of these cases, we believe the plaintiffs'
claims are without merit, and we intend to vigorously defend any
appeal. Nevertheless, a final adverse court decision awarding
substantial money damages could have a material adverse effect on our results of
operations, financial condition or liquidity.
We and/or certain of our subsidiaries
are defendants in various other pending lawsuits and proceedings and are subject
to various other claims arising in the normal course of our business, many of
which are covered in whole or in part by insurance. Although the
outcome of these lawsuits and proceedings (including the probable loss we might
experience as a result of an adverse outcome) cannot be predicted with certainty
at this time, we believe, after consulting with outside counsel, that the
ultimate disposition of such suits will not have a material adverse effect on
us.
NOTE
20 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited summarized financial data by
quarter for 2008 and 2007 is as follows (in millions, except per share
data):
|
Three
Months Ended
|
||||||||
|
March 31
|
June 30
|
September 30
|
December 31
|
|||||
|
2008
|
||||||||
|
Operating
revenue
|
$3,570
|
$4,044
|
$4,156
|
$3,471
|
||||
|
Operating
loss
|
(66)
|
(71)
|
(152)
|
(25)
|
||||
|
Nonoperating
income (expense), net
|
(58)
|
25
|
(96)
|
(239)
|
||||
|
Net
loss
|
(80)
|
(3)
|
(236)
|
(266)
|
||||
|
Loss
per share:
|
||||||||
|
Basic
|
$(0.81)
|
$(0.03)
|
$(2.14)
|
$(2.33)
|
||||
|
Diluted
|
$(0.81)
|
$(0.03)
|
$(2.14)
|
$(2.33)
|
||||
|
2007
|
||||||||
|
Operating
revenue
|
$3,179
|
$3,710
|
$3,820
|
$3,523
|
||||
|
Operating
income
|
64
|
263
|
280
|
80
|
||||
|
Nonoperating
expense, net
|
(42)
|
(31)
|
(39)
|
(9)
|
||||
|
Net
income
(loss)
|
22
|
228
|
241
|
(32)
|
||||
|
Earnings
(loss) per share:
|
||||||||
|
Basic
|
$ 0.23
|
$2.35
|
$2.47
|
$(0.33)
|
||||
|
Diluted
|
$ 0.21
|
$2.03
|
$2.15
|
$(0.33)
|
||||
The quarterly income (loss) amounts
were impacted by the following special income (expense) items:
|
Three
Months Ended
|
|||||||||
|
March 31
|
June 30
|
September 30
|
December 31
|
||||||
|
2008
|
|||||||||
|
Operating
earnings:
|
|||||||||
|
Pension
settlement charges
|
$ -
|
$ -
|
$ (8)
|
$ (44)
|
|||||
|
Aircraft-related
charges, net of gains on sales
of
aircraft
|
8
|
(41)
|
(12)
|
5
|
|||||
|
Severance
|
-
|
-
|
(33)
|
(1)
|
|||||
|
Route
impairment and other
|
-
|
(17)
|
(38)
|
-
|
|||||
|
Total
special charges in operating earnings
|
$ 8
|
$(58)
|
$(91)
|
$ (40)
|
|||||
|
Additional
special items:
|
|||||||||
|
Gains
on sales of investments
|
$ -
|
$ 78
|
$ -
|
$ -
|
|||||
|
Loss
on fuel hedge contracts with
Lehman
Brothers
|
-
|
-
|
-
|
(125)
|
|||||
|
Write-down
of auction rate securities, net
of
put right
received
|
-
|
(29)
|
-
|
(5)
|
|||||
|
Income
tax credit related to NOL utilization
|
-
|
28
|
-
|
-
|
|||||
|
2007
|
|||||||||
|
Operating
earnings:
|
|||||||||
|
Pension
settlement charges
|
$ (5)
|
$ (7)
|
$(12)
|
$ (7)
|
|||||
|
Aircraft-related
charges, net of gains on sales
of
aircraft
|
(6)
|
-
|
-
|
28
|
|||||
|
Pilot
long-term disability charge
|
-
|
-
|
-
|
(4)
|
|||||
|
Total
special charges in operating earnings
|
$(11)
|
$ (7)
|
$(12)
|
$ 17
|
|||||
|
Additional
special items:
|
|||||||||
|
Gains
on sales of investments
|
$ 7
|
$ -
|
$ -
|
$ 30
|
|||||
|
Income
tax expense related to NOL
utilization
|
-
|
-
|
-
|
(104)
|
|||||
There were no changes in or
disagreements on any matters of accounting principles or financial statement
disclosure between us and our independent registered public accountants during
our two most recent fiscal years or any subsequent interim period.
Management's Conclusion on
the Effectiveness of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief
Financial Officer performed an evaluation of our disclosure controls and
procedures, which have been designed to permit us to effectively identify and
timely disclose important information. They concluded that the
controls and procedures were effective as of December 31, 2008 to provide
reasonable assurance that the information required to be disclosed by the
Company in reports it files under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the SEC. While our disclosure controls and
procedures provide reasonable assurance that the appropriate information will be
available on a timely basis, this assurance is subject to limitations inherent
in any control system, no matter how well it may be designed or
administered.
Management's Report on
Internal Control over Financial Reporting
Management of the Company is
responsible for establishing and maintaining effective internal control over
financial reporting, as such term is defined in Rule 13a-15(f) under the
Securities Exchange Act of 1934. The Company's internal control over
financial reporting is a process designed to provide reasonable assurance to the
Company's management and Board of Directors regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in the
United States.
Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial
reporting and financial statement preparation and presentation.
Under the supervision and with the
participation of the Company's management, including our Chief Executive Officer
and Chief Financial Officer, an assessment of the effectiveness of the Company's
internal control over financial reporting as of December 31, 2008 was
conducted. In making this assessment, management used the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal
Control - Integrated Framework. Based on their assessment,
management concluded that, as of December 31, 2008, the Company's internal
control over financial reporting was effective based on those
criteria.
The effectiveness of our internal
control over financial reporting as of December 31, 2008, has been audited by
Ernst & Young LLP, the independent registered public accounting firm who
also has audited the Company's consolidated financial statements included in
this Annual Report on Form 10-K. Ernst & Young's report on the
Company's internal control over financial reporting appears below.
Changes in Internal
Controls
There was no change in our internal
control over financial reporting during the quarter ended December 31, 2008,
that materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
Report of Independent
Registered Public Accounting Firm
The Board
of Directors and Stockholders
Continental
Airlines, Inc.
We have audited the internal control
over financial reporting of Continental Airlines, Inc. (the "Company") as of
December 31, 2008, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the "COSO criteria"). The Company's management
is responsible for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over
financial reporting included in the accompanying Management's Report on Internal
Control over Financial Reporting. Our responsibility is to express an
opinion on the Company's internal control over financial reporting based on our
audit.
We conducted our audit in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our
audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company's internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles. A company's internal control over financial
reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as
of December 31, 2008, based on the COSO criteria.
We also have audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated balance sheets of the Company as of December 31, 2008
and 2007, and the related consolidated statements of operations, common
stockholders' equity, and cash flows of the Company for each of the three years
in the period ended December 31, 2008, and our report dated February 18, 2009
expressed an unqualified opinion thereon.
ERNST
& YOUNG
LLP
Houston,
Texas
February
18, 2009
Item
9B. Other Information.
None.
PART
III
Incorporated herein by reference from
our definitive proxy statement for the annual meeting of stockholders to be held
on June 10, 2009.
Item
11. Executive
Compensation.
Incorporated herein by reference from
our definitive proxy statement for the annual meeting of stockholders to be held
on June 10, 2009.
Stockholder Matters.
Incorporated herein by reference from
our definitive proxy statement for the annual meeting of stockholders to be held
on June 10, 2009 and from Item 5. "Market for Registrant's Common
Equity and Related Stockholder Matters" of this Form 10-K.
Incorporated herein by reference from
our definitive proxy statement for the annual meeting of stockholders to be held
on June 10, 2009.
Incorporated herein by reference from
our definitive proxy statement for the annual meeting of stockholders to be held
on June 10, 2009.
PART
IV
|
(a)
|
The
following financial statements are included in Item
8. "Financial Statements and Supplementary
Data":
|
Report of
Independent Registered Public Accounting Firm
Consolidated
Statements of Operations for each of the Three Years in the Period
Ended
December 31, 2008
Consolidated
Balance Sheets as of December 31, 2008 and 2007
Consolidated
Statements of Cash Flows for each of the Three Years in the Period
Ended
December 31, 2008
Consolidated
Statements of Common Stockholders' Equity for each of the Three
Years
in the Period Ended December 31,
2008
Notes to
Consolidated Financial Statements
|
(b)
|
Financial
Statement Schedules:
|
All
schedules have been omitted because they are inapplicable, not required, or the
information is included elsewhere in the consolidated financial statements or
notes thereto.
|
(c)
|
See
accompanying Index to Exhibits.
|
Pursuant to the requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
CONTINENTAL
AIRLINES, INC.
|
|
|
By
/s/ ZANE C.
ROWE
|
|
|
Zane C. Rowe
|
|
|
Executive Vice President
and
|
|
|
Chief Financial
Officer
|
|
|
(On behalf of
Registrant)
|
Date:
February 18,
2009
Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed by the following
persons in the capacities indicated on February 18, 2009.
|
Signature
|
Capacity
|
|
/s/ LAWRENCE W.
KELLNER
|
Chairman
and Chief Executive Officer
|
|
Lawrence
W. Kellner
|
(Principal
Executive Officer)
|
|
/s/ ZANE C.
ROWE
|
Executive
Vice President and
|
|
Zane
C. Rowe
|
Chief
Financial Officer
|
|
(Principal
Financial Officer)
|
|
|
/s/ CHRIS
KENNY
|
Vice
President and Controller
|
|
Chris
Kenny
|
(Principal
Accounting Officer)
|
|
KIRBYJON H.
CALDWELL*
|
Director
|
|
Kirbyjon
H. Caldwell
|
|
|
DOUGLAS H.
McCORKINDALE*
|
Director
|
|
Douglas
H. McCorkindale
|
|
|
HENRY L. MEYER
III*
|
Director
|
|
Henry
L. Meyer III
|
|
OSCAR
MUNOZ*
|
Director
|
|
Oscar
Munoz
|
|
|
GEORGE G. C.
PARKER*
|
Director
|
|
George
G. C. Parker
|
|
|
/s/ JEFFERY A.
SMISEK
|
Director
|
|
Jeffery
A. Smisek
|
|
|
KAREN HASTIE
WILLIAMS*
|
Director
|
|
Karen
Hastie Williams
|
|
|
RONALD B.
WOODARD*
|
Director
|
|
Ronald
B. Woodard
|
|
|
CHARLES A.
YAMARONE*
|
Director
|
|
Charles
A. Yamarone
|
|
*By
|
/s/ Jennifer L.
Vogel
|
|
Jennifer
L. Vogel
|
|
|
Attorney-in-fact
|
|
|
February
18, 2009
|
CONTINENTAL
AIRLINES, INC.
|
3.1
|
Amended
and Restated Certificate of Incorporation of Continental, as amended
through June 6, 2006 - incorporated by reference to Exhibit 3.1 to
Continental's Annual Report on Form 10-K for the year ended December 31,
2006 (File no. 1-10323) (the "2006 10-K").
|
|
3.1(a)
|
Certificate
of Designation of Series A Junior Participating Preferred Stock, included
as Exhibit A to Exhibit 3.1.
|
|
3.1(a)(i)
|
Certificate
of Amendment of Certificate of Designation of Series A Junior
Participating Preferred Stock - incorporated by reference to Exhibit
3.1(b) to Continental's Annual Report on Form 10-K for the year ended
December 31, 2001 (File no. 1-10323) (the "2001 10-K").
|
|
3.2
|
Amended
and Restated Bylaws of Continental, effective as of November 20, 2008 -
incorporated by reference to Exhibit 3.2 to Continental's Current Report
on Form 8-K dated November 20, 2008 (File no. 1-10323).
|
|
4.1
|
Specimen
Class B Common Stock Certificate of Continental - incorporated by
reference to Exhibit 4.1 to Continental's Registration Statement on Form
8-A/A filed November 21, 2008.
|
|
4.2
|
Warrant
Agreement dated as of April 27, 1993, between Continental and Continental
as warrant agent - incorporated by reference to Exhibit 4.7 to
Continental's Current Report on Form 8-K, dated April 16, 1993 (File no.
1-10323). (No warrants remain outstanding under the agreement,
but some of its terms are incorporated into Continental's stock option
agreements.)
|
|
4.3
|
Continental
hereby agrees to furnish to the Commission, upon request, copies of
certain instruments defining the rights of holders of long-term debt of
the kind described in Item 601(b)(4)(iii)(A) of Regulation
S-K.
|
|
10.1
|
Agreement
of Lease dated as of January 11, 1985, between the Port Authority of New
York and New Jersey and People Express, Inc., regarding Terminal C (the
"Terminal C Lease") - incorporated by reference to Exhibit 10.61 to the
Annual Report on Form 10-K (File no. 0-9781) of People Express, Inc. for
the year ended December 31, 1984.
|
|
10.1(a)
|
Assignment
of Lease with Assumption and Consent dated as of August 15, 1987, among
the Port Authority of New York and New Jersey, People Express Airlines,
Inc. and Continental - incorporated by reference to Exhibit 10.2 to
Continental's Annual Report on Form 10-K (File no. 1-8475) for the year
ended December 31, 1987 (the "1987 10-K").
|
|
10.1(b)
|
Supplemental
Agreement Nos. 1 through 6 to the Terminal C Lease - incorporated by
reference to Exhibit 10.3 to the 1987 10-K.
|
|
10.1(c)
|
Supplemental
Agreement No. 7 to the Terminal C Lease - incorporated by reference to
Exhibit 10.4 to Continental's Annual Report on Form 10-K (File no.
1-10323) for the year ended December 31, 1988 (the "1988
10-K").
|
|
10.1(d)
|
Supplemental
Agreements No. 8 through 11 to the Terminal C Lease - incorporated by
reference to Exhibit 10.10 to Continental's Form S-1 Registration
Statement (No. 33-68870).
|
|
10.1(e)
|
Supplemental
Agreements No. 12 through 15 to the Terminal C Lease - incorporated by
reference to Exhibit 10.2(d) to Continental's Annual Report on Form 10-K
(File no. 1-10323) for the year ended December 31,
1995.
|
|
10.1(f)
|
Supplemental
Agreement No. 16 to the Terminal C Lease - incorporated by reference to
Exhibit 10.1(e) to Continental's Annual Report on Form 10-K for the year
ended December 31, 1997 (File no. 1-10323) (the "1997
10-K").
|
|
10.1(g)
|
Supplemental
Agreement No. 17 to the Terminal C Lease - incorporated by reference to
Exhibit 10.1(f) to Continental's Annual Report on Form 10-K for the year
ended December 31, 1999 (File no. 1-10323) (the "1999
10-K").
|
|
10.1(h)
|
Supplemental
Agreement No. 18 to the Terminal C Lease - as incorporated by reference to
Exhibit 10.5 to the 2003 Q-1 10-Q.
|
|
10.1(i)
|
Supplemental
Agreement No. 19 to the Terminal C Lease - incorporated by reference to
Exhibit 10.4 to Continental's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2003 (File no. 1-10323).
|
|
10.1(j)
|
Supplemental
Agreement No. 20 - to the Terminal C Lease - incorporated by reference to
Exhibit 10.1 to Continental's Quarterly Report on Form 10-Q for quarter
ended September 30, 2003 (File no. 1-10323) (the "2003 Q-3
10-Q").
|
|
10.1(k)
|
Supplemental
Agreement No. 21 dated as of June 1, 2003 to Agreement of Lease between
the Company and the Port Authority of New York and New Jersey regarding
Terminal C at Newark Liberty International Airport - incorporated by
reference to Exhibit 10.1 to Continental's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2005 (File no. 1-10323) (the "2005 Q-2
10-Q").
|
|
10.1(l)
|
Supplemental
Agreement No. 22 - to the Terminal C Lease - incorporated by reference to
Exhibit 10.1 to Continental's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2004 (File no. 1-10323) (the "2004 Q-1
10-Q").
|
|
10.1(m)
|
Supplemental
Agreement No. 23 - to the Terminal C Lease - incorporated by reference to
Exhibit 10.1(m) to Continental's Annual Report on Form 10-K for the year
ended December 31, 2005 (File no. 1-10323) (the "2005
10-K").
|
|
10.1(n)
|
Supplemental
Agreement No. 24 - to the Terminal C Lease - incorporated by reference to
Exhibit 10.1(n) to the 2005 10-K.
|
|
10.2
|
Airport
Use and Lease Agreement dated as of January 1, 1998 between Continental
and the City of Houston, Texas ("Houston") regarding George Bush
Intercontinental Airport - incorporated by reference to Exhibit 10.30 to
Continental's Annual Report on Form 10-K for the year ended December 31,
1998 (File no. 1-10323) (the "1998 10-K").
|
|
10.2(a)
|
Special
Facilities Lease Agreement dated as of March 1, 1997 between Continental
and Houston regarding an automated people mover project at Bush
Intercontinental - incorporated by reference to Exhibit 10.30(a) to the
1998 10-K.
|
|
10.2(b)
|
Amended
and Restated Special Facilities Lease Agreement dated as of December 1,
1998 by and between Continental and Houston regarding certain terminal
improvements projects at Bush Intercontinental - incorporated by reference
to Exhibit 10.30(b) to the 1998 10-K.
|
|
10.2(c)
|
Amended
and Restated Special Facilities Lease Agreement dated December 1, 1998 by
and between Continental and Houston regarding certain airport improvement
projects at Bush Intercontinental - incorporated by reference to Exhibit
10.30(c) to the 1998 10-K.
|
|
10.2(d)
|
Terminal
E Lease and Special Facilities Lease Agreement dated as of August 1, 2001
between Continental and Houston regarding Bush Intercontinental -
incorporated by reference to Exhibit 10.8 to Continental's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2001 (File no.
1-10323) (the "2001 Q-3 10-Q").
|
|
10.2(e)
|
Supplement
to Terminal E Lease and Special Facilities Lease Agreement dated as of
August 1, 2001 - incorporated by reference to Exhibit 10.2(e) to
Continental's Annual Report on Form 10-K for the year ended December 31,
2002 (File no. 1-10323) (the "2002 10-K").
|
|
10.3
|
Agreement
and Lease dated as of May 1987, as supplemented, between Continental and
the City of Cleveland, Ohio ("Cleveland") regarding Hopkins International
Airport - incorporated by reference to Exhibit 10.6 to Continental's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1993
(File no. 1-10323).
|
|
10.3(a)
|
Special
Facilities Lease Agreement dated as of October 24, 1997 by and between
Continental and Cleveland regarding certain concourse expansion projects
at Hopkins International (the "1997 SFLA") - incorporated by reference to
Exhibit 10.31(a) to the 1998 10-K.
|
|
10.3(b)
|
First
Supplemental Special Facilities Lease Agreement dated as of March 1, 1998,
and relating to the 1997 SFLA - incorporated by reference to Exhibit 10.1
to Continental's Quarterly Report on Form 10-Q for the quarter ended March
31, 1999 (File no. 1-10323) (the "1999 Q-1 10-Q").
|
|
10.3(c)
|
Special
Facilities Lease Agreement dated as of December 1, 1989 by and between
Continental and Cleveland regarding Hopkins International (the "1989
SFLA") - incorporated by reference to Exhibit 10.1 to Continental's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1999
(File no. 1-10323) (the "1999 Q-3 10-Q").
|
|
10.3(d)
|
First
Supplemental Special Facilities Lease Agreement dated as of March 1, 1998,
and relating to the 1989 SFLA - incorporated by reference to Exhibit
10.1(a) to the 1999 Q-3 10-Q.
|
|
10.3(e)
|
Second
Supplemental Special Facilities Lease Agreement dated as of March 1, 1998,
and relating to the 1989 SFLA - incorporated by reference to Exhibit
10.1(b) to the 1999 Q-3 10-Q.
|
|
10.3(f)
|
Amendment
No. 1, dated January 1, 2006, to Agreement and Lease dated as of May 1987,
as supplemented, between Continental and Cleveland regarding Hopkins
International Airport - incorporated by reference to Exhibit 10.3(f) to
the 2005 10-K.
|
|
10.4*
|
Employment
Agreement dated as of October 15, 2007 between Continental and Lawrence W.
Kellner - incorporated by reference to Exhibit 10.2 to Continental's Form
10-Q for the quarter ended September 30, 2007 (File no. 1-10323) (the
"2007 Q-3 10-Q").
|
|
10.4(a)*
|
Compensation
Reduction Agreement for Lawrence W. Kellner dated December 22, 2004 -
incorporated by reference to Exhibit 99.1 to Continental's Current Report
on Form 8-K dated December 22, 2004 (File no. 1-10323) (the "12/04
8-K").
|
|
10.4(b)*
|
Amendment
to Compensation Reduction Agreement for Lawrence W. Kellner dated February
15, 2005 - incorporated by reference to Exhibit 10.1 to Continental's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2005 (File
no. 1-10323) (the "2005 Q-1 10-Q").
|
|
10.4(c)*
|
Letter
Agreement dated as of May 30, 2008 between Continental and Larry Kellner -
incorporated by reference to Exhibit 99.2 to Continental's Current Report
on Form 8-K dated June 5, 2008 (the "06/08 8-K").
|
|
10.5*
|
Employment
Agreement dated as of October 15, 2007 between Continental and Jeffery A.
Smisek - incorporated by reference to Exhibit 10.3 to the 2007 Q-3
10-Q.
|
|
10.5(a)*
|
Compensation
Reduction Agreement for Jeffery A. Smisek dated December 22, 2004 -
incorporated by reference to Exhibit 99.2 to the 12/04
8-K.
|
|
10.5(b)*
|
Amendment
to Compensation Reduction Agreement for Jeffery A. Smisek dated February
15, 2005 - incorporated by reference to Exhibit 10.2 to the 2005 Q-1
10-Q.
|
|
10.5(c)*
|
Letter
Agreement dated as of May 30, 2008 between Continental and Jeffery Smisek
- incorporated by reference to Exhibit 99.3 to the 06/08
8-K.
|
|
10.6*
|
Employment
Agreement dated as of August 31, 2008 between Continental and Zane Rowe -
incorporated by reference to Exhibit 10.2 to Continental's Form 10-Q for
the quarter ended September 30, 2008 (File no. 1-10323) (the "2008 Q-3
10-Q").
|
|
10.7*
|
Employment
Agreement dated as of October 15, 2007 between Continental and Mark J.
Moran - incorporated by reference to Exhibit 10.6 to the 2007 Q-3
10-Q.
|
|
10.7(a)*
|
Compensation
Reduction Agreement for Mark J. Moran dated December 22, 2004 -
incorporated by reference to Exhibit 10.7(a) to the 2005
10-K.
|
|
10.7(b)*
|
Amendment
to Compensation Reduction Agreement for Mark J. Moran dated February 15,
2005 - incorporated by reference to Exhibit 10.7(b) to the 2005
10-K.
|
|
10.8*
|
Employment
Agreement dated as of October 15, 2007 between Continental and James E.
Compton - incorporated by reference to Exhibit 10.4 to the 2007 Q-3
10-Q.
|
|
10.8(a)*
|
Compensation
Reduction Agreement for James E. Compton dated December 22, 2004 - incorporated by
reference to Exhibit 10.8(a) to Continental's Annual Report on Form 10-K
for the year ended December 31, 2004 (File no. 1-10323) (the "2004
10-K").
|
|
10.8(b)*
|
Amendment
to Compensation Reduction Agreement for James E. Compton dated February
15, 2005 - incorporated by reference to Exhibit 10.4 to the 2005 Q-1
10-Q.
|
|
10.9*
|
Continental
Airlines, Inc. 1997 Stock Incentive Plan ("1997 Incentive Plan") -
incorporated by reference to Exhibit 4.3 to Continental's Form S-8
Registration Statement (No. 333-23165).
|
|
10.9(a)*
|
Form
of Outside Director Stock Option Grant pursuant to the 1997 Incentive Plan
- incorporated by reference to Exhibit 10.11(c) to the 1997
10-K.
|
|
10.10*
|
Amendment
and Restatement of the 1994 Incentive Plan and the 1997 Incentive Plan -
incorporated by reference to Exhibit 10.19 to the 1998
10-K.
|
|
10.11*
|
Continental
Airlines, Inc. 1998 Stock Incentive Plan ("1998 Incentive Plan") -
incorporated by reference to Exhibit 4.3 to Continental's Form S-8
Registration Statement (No. 333-57297).
|
|
10.11(a)*
|
Amendment
No. 1 to 1998 Incentive Plan, 1997 Incentive Plan and 1994 Incentive Plan
- incorporated by reference to Exhibit 10.2 to
Continental's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2001 (File no. 1-10323) (the "2001 Q-2
10-Q").
|
|
10.11(b)*
|
Form
of Outside Director Stock Option Grant pursuant to the 1998 Incentive Plan
- incorporated by reference to Exhibit 10.12(c) to the 2006
10-K.
|
|
10.11(c)*
|
Amendment
to 1998 Incentive Plan, 1997 Incentive Plan and 1994 Incentive Plan -
incorporated by reference to Exhibit 10.5 to the 2004 Q-1
10-Q.
|
|
10.12*
|
Continental
Airlines, Inc. Incentive Plan 2000, as amended and restated ("Incentive
Plan 2000") - incorporated by reference to Exhibit 10.1 to
Continental's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2002 (File no. 1-10323) (the "2002 Q-1
10-Q").
|
|
10.12(a)*
|
Form
of Employee Stock Option Agreement pursuant to the Incentive Plan 2000 -
incorporated by reference to Exhibit 10.3 to the 2001 Q-3
10-Q.
|
|
10.12(b)*
|
Form
of Outside Director Stock Option Agreement pursuant to the Incentive Plan
2000 - incorporated by reference to Exhibit 10.14(b) to the 2000
10-K.
|
|
10.12(c)*
|
Form
of Outside Director Stock Option Grant pursuant to the Incentive Plan 2000
(updated form to facilitate electronic delivery) - incorporated by
reference to Exhibit 10.1 to Continental's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2008 (File no. 1-10323) (the "2008 Q-1
10-Q").
|
|
10.12(d)*
|
Form
of Restricted Stock Agreement pursuant to the Incentive Plan 2000 -
incorporated by reference to Exhibit 10.4 to the 2001 Q-3
10-Q.
|
|
10.12(e)*
|
Amendment
to the Incentive Plan 2000, dated March 12, 2004 - incorporated by
reference to Exhibit 10.6 to the 2004 Q-1 10-Q.
|
|
10.12(f)*
|
Second
Amendment to Incentive Plan 2000, dated June 6, 2006 - incorporated by
reference to Exhibit 10.1 to Continental's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2006 (File no. 1-10323) (the "2006
Q-2 10-Q").
|
|
10.12(g)*
|
Third
Amendment to Incentive Plan 2000, dated September 14, 2006 - incorporated
by reference to Exhibit 10.1 to Continental's Quarterly Report on Form
10-Q for the quarter ended September 30, 2006 (File no. 1-10323)
(the "2006 Q-3 10-Q").
|
|
10.13*
|
Amended
and Restated Annual Executive Bonus Program - incorporated by reference to
Exhibit 10.15 to the 2005 10-K.
|
|
10.13(a)*
|
Form
of Award Notice pursuant to Continental Airlines, Inc. Amended and
Restated Annual Executive Bonus Program - incorporated by reference to
Exhibit 10.15(a) to the 2005 10-K.
|
|
10.13(b)*
|
First
Amendment, dated as of October 15, 2007, to the Amended and Restated
Annual Executive Bonus Program - incorporated by reference to Exhibit 10.7
to the 2007 Q-3 10-Q.
|
|
10.14*
|
Continental
Airlines, Inc. Long-Term Incentive and RSU Program (as amended and
restated through February 18, 2009). (3)
|
|
10.14(a)*
|
Form
of Award Notice pursuant to Continental Airlines, Inc. Long-Term Incentive
and RSU Program (Profit Based RSU
Awards). (3)
|
|
10.14(b)*
|
Form
of Award Notice pursuant to Continental Airlines, Inc. Long-Term Incentive
and RSU Program (NLTIP Award) - incorporated by reference to Exhibit
10.16(b) to the 2005 10-K.
|
|
10.15*
|
Continental
Airlines, Inc. 2005 Broad Based Employee Stock Option Plan - incorporated
by reference to Exhibit 10.8 to the 2005 Q-1 10-Q.
|
|
10.16*
|
Continental
Airlines, Inc. 2005 Pilot Supplemental Option Plan - incorporated by
reference to Exhibit 10.9 to the 2005 Q-1 10-Q.
|
|
10.17*
|
Continental
Airlines, Inc. Enhanced Profit Sharing Plan, (as amended through February
23, 2007) - incorporated by reference to Exhibit 10.19 to the
2006 10-K.
|
|
10.18*
|
Summary
of Non-Employee Director compensation. (3)
|
|
10.19*
|
Form
of Letter Agreement relating to certain flight benefits between
Continental and each of its non-employee directors.
|
|
10.20
|
Amended
and Restated Credit and Guaranty Agreement, dated as of August 3, 2006,
among Continental and Continental Micronesia, Inc., as borrowers and
guarantors, Air Micronesia, Inc., as a guarantor, Merrill Lynch Mortgage
Capital, Inc., as administrative agent, and the lenders party thereto -
incorporated by reference to Exhibit 10.3 to the 2006 Q-3 10-Q.
(1)
|
|
10.21
|
Purchase
Agreement No. 1951, including exhibits and side letters thereto, between
the Company and Boeing, dated July 23, 1996, relating to the purchase of
Boeing 737 aircraft ("P.A. 1951") - incorporated by reference to Exhibit
10.8 to Continental's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996 (File no. 1-10323). (1)
|
|
10.21(a)
|
Supplemental
Agreement No. 1 to P.A. 1951, dated October 10, 1996 - incorporated by
reference to Exhibit 10.14(a) to Continental's Annual Report on Form 10-K
for the year ended December 31, 1996 (File no.
1-1-323). (1)
|
|
10.21(b)
|
Supplemental
Agreement No. 2 to P.A. 1951, dated March 5, 1997 - incorporated by
reference to Exhibit 10.3 to Continental's Quarterly Report on Form 10-Q
for the quarter ending March 31, 1997 (File no.
1-10323). (1)
|
|
10.21(c)
|
Supplemental
Agreement No. 3, including exhibit and side letter, to P.A. 1951, dated
July 17, 1997 - incorporated by reference to Exhibit 10.14(c) to the 1997
10-K. (1)
|
|
10.21(d)
|
Supplemental
Agreement No. 4, including exhibits and side letters, to P.A. 1951, dated
October 10, 1997 - incorporated by reference to Exhibit 10.14(d) to the
1997 10-K. (1)
|
|
10.21(e)
|
Supplemental
Agreement No. 5, including exhibits and side letters, to P.A. 1951, dated
October 10, 1997 - incorporated by reference to Exhibit 10.1 to
Continental's Quarterly Report on Form 10-Q for the quarter ended June 30,
1998 (File no. 1-10323). (1)
|
|
10.21(f)
|
Supplemental
Agreement No. 6, including exhibits and side letters, to P.A. 1951, dated
July 30, 1998 - incorporated by reference to Exhibit 10.1 to Continental's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1998
(File no. 1-10323). (1)
|
|
10.21(g)
|
Supplemental
Agreement No. 7, including side letters, to P.A. 1951, dated November 12,
1998 - incorporated by reference to Exhibit 10.24(g) to the 1998
10-K. (1)
|
|
10.21(h)
|
Supplemental
Agreement No. 8, including side letters, to P.A. 1951, dated December 7,
1998 - incorporated by reference to Exhibit 10.24(h) to the 1998
10-K. (1)
|
|
10.21(i)
|
Letter
Agreement No. 6-1162-GOC-131R1 to P.A. 1951, dated March 26, 1998 -
incorporated by reference to Exhibit 10.1 to Continental's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998 (File no.
1-10323). (1)
|
|
10.21(j)
|
Supplemental
Agreement No. 9, including side letters, to P.A. 1951, dated February 18,
1999 - incorporated by reference to Exhibit 10.4 to the 1999 Q-1
10-Q. (1)
|
|
10.21(k)
|
Supplemental
Agreement No. 10, including side letters, to P.A. 1951, dated March 19,
1999 - incorporated by reference to Exhibit 10.4(a) to the 1999 Q-1
10-Q. (1)
|
|
10.21(l)
|
Supplemental
Agreement No. 11, including side letters, to P.A. 1951, dated March 14,
1999 - incorporated by reference to Exhibit 10.4(a) to Continental's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 (File
no. 1-10323). (1)
|
|
10.21(m)
|
Supplemental
Agreement No. 12, including side letters, to P.A. 1951, dated July 2, 1999
- incorporated by reference to Exhibit 10.8 to the 1999 Q-3
10-Q. (1)
|
|
10.21(n)
|
Supplemental
Agreement No. 13 to P.A. 1951, dated October 13, 1999 - incorporated by
reference to Exhibit 10.25(n) to the 1999
10-K. (1)
|
|
10.21(o)
|
Supplemental
Agreement No. 14 to P.A. 1951, dated December 13, 1999 - incorporated by
reference to Exhibit 10.25(o) to the 1999
10-K. (1)
|
|
10.21(p)
|
Supplemental
Agreement No. 15, including side letters, to P.A. 1951, dated January 13,
2000 - incorporated by reference to Exhibit 10.1 to Continental's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 (File
no. 1-10323) (the "2000 Q-1 10-Q"). (1)
|
|
10.21(q)
|
Supplemental
Agreement No. 16, including side letters, to P.A. 1951, dated March 17,
2000 - incorporated by reference to the 2000 Q-1
10-Q. (1)
|
|
10.21(r)
|
Supplemental
Agreement No. 17, including side letters, to P.A. 1951, dated May 16, 2000
- incorporated by reference to Exhibit 10.2 to Continental's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2000 (File no.
1-10323). (1)
|
|
10.21(s)
|
Supplemental
Agreement No. 18, including side letters, to P.A. 1951, dated September
11, 2000 - incorporated by reference to Exhibit 10.6 to Continental's
Quarterly Report on Form 10-Q for the quarter ended September 30, 2000
(File no. 1-10323). (1)
|
|
10.21(t)
|
Supplemental
Agreement No. 19, including side letters, to P.A. 1951, dated October 31,
2000 - incorporated by reference to Exhibit 10.20(t) to the 2000
10-K. (1)
|
|
10.21(u)
|
Supplemental
Agreement No. 20, including side letters, to P.A. 1951, dated December 21,
2000 - incorporated by reference to Exhibit 10.20(u) to the 2000
10-K. (1)
|
|
10.21(v)
|
Supplemental
Agreement No. 21, including side letters, to P.A. 1951, dated March 30,
2001 - incorporated by reference to Exhibit 10.1 to Continental's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 (File
no. 1-10323). (1)
|
|
10.21(w)
|
Supplemental
Agreement No. 22, including side letters, to P.A. 1951, dated May 23,
2001 - incorporated by reference to Exhibit 10.3 to
the 2001 Q-2 10-Q. (1)
|
|
10.21(x)
|
Supplemental
Agreement No. 23, including side letters, to P.A. 1951, dated June 29,
2001 - incorporated by reference to Exhibit 10.4 to
the 2001 Q-2 10-Q. (1)
|
|
10.21(y)
|
Supplemental
Agreement No. 24, including side letters, to P.A. 1951, dated August 31,
2001 - incorporated by reference to Exhibit 10.11 to the 2001 Q-3
10-Q. (1)
|
|
10.21(z)
|
Supplemental
Agreement No. 25, including side letters, to P.A. 1951, dated December 31,
2001 - incorporated by reference to Exhibit 10.22(z) to the 2001
10-K. (1)
|
|
10.21(aa)
|
Supplemental
Agreement No. 26, including side letters, to P.A. 1951, dated March 29,
2002 - incorporated by reference to Exhibit 10.4 to the 2002 Q-1
10-Q. (1)
|
|
10.21(ab)
|
Supplemental
Agreement No. 27, including side letters, to P.A. 1951, dated November 6,
2002 - incorporated by reference to Exhibit 10.4 to the 2002 Q-1
10-Q. (1)
|
|
10.21(ac)
|
Supplemental
Agreement No. 28, including side letters, to P.A. 1951, dated April 1,
2003 - incorporated by reference to Exhibit 10.2 to the 2003 Q-1
10-Q. (1)
|
|
10.21(ad)
|
Supplemental
Agreement No. 29, including side letters, to P.A. 1951, dated August 19,
2003 - incorporated by reference to Exhibit 10.2 to the 2003 Q-3 10-Q.
(1)
|
|
10.21(ae)
|
Supplemental
Agreement No. 30 to P.A. 1951, dated as of November 4, 2003 - incorporated
by reference to Exhibit 10.23(ae) to Continental's Annual Report on Form
10-K for the year ended December 31, 2003 (File no. 1-10323) (the "2003
10-K"). (1)
|
|
10.21(af)
|
Supplemental
Agreement No. 31 to P.A. 1951, dated as of August 20, 2004 - incorporated
by reference to Exhibit 10.4 to Continental's Quarterly Report on Form
10-Q for the quarter ended September 30, 2004 (File no. 1-10323) (the
"2004 Q-3 10-Q"). (1)
|
|
10.21(ag)
|
Supplemental
Agreement No. 32 to P.A. 1951, including side letters, dated as of
December 29, 2004 - incorporated by reference to Exhibit 10.21(ag) to the
2004 10-K. (1)
|
|
10.21(ah)
|
Supplemental
Agreement No. 33 to P.A. 1951, including side letters, dated as of
December 29, 2004 - incorporated by reference to Exhibit 10.21(ah) to the
2004 10-K. (1)
|
|
10.21(ai)
|
Supplemental
Agreement No. 34 dated June 22, 2005 to P.A. 1951 - incorporated by
reference to Exhibit 10.3 to the 2005 Q-2 10-Q. (1)
|
|
10.21(aj)
|
Supplemental
Agreement No. 35 dated June 30, 2005 to P.A. 1951 - incorporated by
reference to Exhibit 10.4 to the 2005 Q-2 10-Q. (1)
|
|
10.21(ak)
|
Supplemental
Agreement No. 36 dated July 28, 2005 to P.A. 1951 - incorporated by
reference to Exhibit 10.1 to Continental's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2005 (File no. 1-10323) (the "2005 Q-3
10-Q"). (1)
|
|
10.21(al)
|
Supplemental
Agreement No. 37 dated March 30, 2006, to P.A. 1951 - incorporated by
reference to Exhibit 10.2 to Continental's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2006 (File no. 1-10323) (the "2006 Q-1
10-Q"). (1)
|
|
10.21(am)
|
Supplemental
Agreement No. 38, dated June 6, 2006, to P.A. 1951 - incorporated by
reference to Exhibit 10.3 to the 2006 Q-2
10-Q. (1)
|
|
10.21(an)
|
Supplemental
Agreement No. 39, dated August 3, 2006, to P.A. 1951 - incorporated by
reference to Exhibit 10.4 to the 2006 Q-3 10-Q. (1)
|
|
10.21(ao)
|
Supplemental
Agreement No. 40, dated December 5, 2006, to P.A. 1951 -
incorporated by reference to Exhibit 10.23(ao) to the 2006
10-K. (1)
|
|
10.21(ap)
|
Supplemental
Agreement No. 41, dated June 1, 2007, to P.A. 1951 - incorporated by
reference to Exhibit 10.1 to Continental's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2007 (File no. 1-10323) (the "2007 Q-2
10-Q"). (1)
|
|
10.21(aq)
|
Supplemental
Agreement No. 42, dated June 12, 2007, to P.A. 1951 - incorporated by
reference to Exhibit 10.2 to the 2007 Q-2 10-Q. (1)
|
|
10.21(ar)
|
Supplemental
Agreement No. 43, dated July 18, 2007 to P.A. 1951 - incorporated by
reference to Exhibit 10.1 to the 2007 Q-3
10-Q. (1)
|
|
10.21(as)
|
Supplemental
Agreement No. 44, dated December 7, 2007, to P.A. 1951 - incorporated by
reference to Exhibit 10.21(as) to Continental's Annual Report on Form 10-K
for the year ended December 31, 2007 (File no. 1-10323) (the "2007
10-K"). (1)
|
|
10.21(at)
|
Supplemental
Agreement No. 45, dated February 20, 2008, to P.A. 1951 - incorporated by
reference to Exhibit 10.2 to the 2008 Q-1
10-Q. (1)
|
|
10.21(au)
|
Supplemental
Agreement No. 46, dated June 25, 2008, to P.A. 1951 - incorporated by
reference to Exhibit 10.5 to the 2008 Q-2
10-Q. (1)
|
|
10.21(av)
|
Supplemental
Agreement No. 47, dated October 30, 2008, to P.A.
1951. (2)(3)
|
|
10.22
|
Aircraft
General Terms Agreement between the Company and Boeing, dated October 10,
1997 - incorporated by reference to Exhibit 10.15 to the 1997
10-K. (1)
|
|
10.22(a)
|
Letter
Agreement No. 6-1162-GOC-136 between the Company and Boeing, dated October
10, 1997, relating to certain long-term aircraft purchase commitments of
the Company - incorporated by reference to Exhibit 10.15(a) to the 1997
10-K. (1)
|
|
10.23
|
Purchase
Agreement No. 2061, including exhibits and side letters, between the
Company and Boeing, dated October 10, 1997, relating to the purchase of
Boeing 777 aircraft ("P.A. 2061") - incorporated by reference to Exhibit
10.17 to the 1997 10-K. (1)
|
|
10.23(a)
|
Supplemental
Agreement No. 1 to P.A. 2061 dated December 18, 1997 - incorporated by
reference to Exhibit 10.17(a) as to the 1997
10-K. (1)
|
|
10.23(b)
|
Supplemental
Agreement No. 2, including side letter, to P.A. 2061, dated July 30, 1998
- incorporated by reference to Exhibit 10.27(b) to the 1998
10-K. (1)
|
|
10.23(c)
|
Supplemental
Agreement No. 3, including side letter, to P.A. 2061, dated September 25,
1998 - incorporated by reference to Exhibit 10.27(c) to the 1998
10-K. (1)
|
|
10.23(d)
|
Supplemental
Agreement No. 4, including side letter, to P.A. 2061, dated February 3,
1999 - incorporated by reference to Exhibit 10.5 to the 1999 Q-1
10-Q. (1)
|
|
10.23(e)
|
Supplemental
Agreement No. 5, including side letter, to P.A. 2061, dated March 26, 1999
- incorporated by reference to Exhibit 10.5(a) to the 1999 Q-1
10-Q. (1)
|
|
10.23(f)
|
Supplemental
Agreement No. 6 to P.A. 2061, dated June 25, 2002 - incorporated by
reference to Exhibit 10.12 to Continental's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2002 (File no. 1-10323) (the "2002 Q-2
10-Q"). (1)
|
|
10.23(g)
|
Supplemental
Agreement No. 7, including side letter, to P.A. 2061, dated October 31,
2000 - incorporated by reference to Exhibit 10.23(g) to the 2000
10-K. (1)
|
|
10.23(h)
|
Supplemental
Agreement No. 8, including a side letter, to P.A. 2061, dated June 29,
2001 - incorporated by reference to Exhibit 10.5 to the 2001 Q-2
10-Q. (1)
|
|
10.23(i)
|
Supplemental
Agreement No. 9 to P.A. 2061, dated June 25, 2002 - incorporated by
reference to Exhibit 10.12 to the 2002 Q-2
10-Q. (1)
|
|
10.23(j)
|
Supplemental
Agreement No. 10 to P.A. 2061, dated November 4, 2003 - incorporated by
reference to Exhibit 10.26(j) to the 2003 10-K. (1)
|
|
10.23(k)
|
Supplemental
Agreement No. 11 to P.A. 2061, dated July 28, 2005 - incorporated by
reference to Exhibit 10.2 to the 2005 Q-3 10-Q. (1)
|
|
10.23(l)
|
Supplemental
Agreement No. 12 to P.A. 2061, dated March 17, 2006 - incorporated by
reference to Exhibit 10.3 to the 2006 Q-1
10-Q. (1)
|
|
10.23(m)
|
Supplemental
Agreement No. 13, dated December 3, 2007, to P.A. 2061 - incorporated by
reference to Exhibit 10.23(m) to the 2007
10-K. (1)
|
|
10.23(n)
|
Supplemental
Agreement No. 14 to P.A. 2061, dated February 20, 2008 - incorporated by
reference to Exhibit 10.3 to the 2008 Q-1
10-Q. (1)
|
|
10.24
|
Letter
Agreement 6-1162-CHL-048 between the Company and Boeing, dated February 8,
2002, amending P.A. 1951, 2333, 2211, 2060 and 2061 - incorporated by
reference to Exhibit 10.44 to the 2001
10-K. (1)
|
|
10.25
|
Purchase
Agreement No. 2484, including exhibits and side letters, between the
Company and Boeing, dated December 29, 2004, relating to the purchase of
Boeing 7E7 aircraft (now known as 787 aircraft) ("P.A. 2484") - incorporated by
reference to Exhibit 10.27 to the 2004 10-K. (1)
|
|
10.25(a)
|
Supplemental
Agreement No. 1 to P.A. 2484, dated June 30, 2005 - incorporated by
reference to Exhibit 10.5 to the 2005 Q-2 10-Q. (1)
|
|
10.25(b)
|
Supplemental
Agreement No. 2, including exhibits and side letters, to P.A. 2484, dated
January 20, 2006 - incorporated by reference to Exhibit 10.27(b) to the
2005 10-K. (1)
|
|
10.25(c)
|
Supplemental
Agreement No. 3, dated May 3, 2006, to P.A. 2484 - incorporated by
reference to Exhibit 10.4 to the 2006 Q-2 10-Q. (1)
|
|
10.25(d)
|
Supplemental
Agreement No. 4, dated July 14, 2006, to P.A. 2484 - incorporated by
reference to Exhibit 10.5 to the 2006 Q-3
10-Q. (1)
|
|
10.25(e)
|
Supplemental
Agreement No. 5, dated March 12, 2007, to P.A. 2484 - incorporated by
reference to Exhibit 10.1 to Continental's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2007 (File no.
1-10323). (1)
|
|
10.25(f)
|
Supplemental
Agreement No. 6, dated October 22, 2008, to P.A.
2484. (2)(3)
|
|
10.26
|
Amended
and Restated Letter Agreement No. 11 between Continental and General
Electric Company, dated August 8, 2005, relating to certain long-term
engine purchase commitments of Continental - incorporated by reference to
Exhibit 10.3 to the 2005 Q-3 10-Q. (1)
|
|
10.27
|
Standstill
Agreement dated as of November 15, 2000 among the Company, Northwest
Airlines Holdings Corporation, Northwest Airlines Corporation and
Northwest Airlines, Inc. - incorporated by reference to Exhibit 99.8 to
the 11/00 8-K.
|
|
10.28
|
Second
Amended and Restated Capacity Purchase Agreement ("XJT Capacity Purchase
Agreement") among Continental, ExpressJet Holdings, Inc., XJT Holdings,
Inc. and ExpressJet Airlines, Inc. dated June 5, 2008 - incorporated by
reference to Exhibit 10.4 to the 2008 Q-2 10-Q. (1)
|
|
10.28(a)
|
First
Amendment to the XJT Capacity Purchase Agreement, dated as of August 29,
2008 - incorporated by reference to Exhibit 10.1 to the 2008 Q-3
10-Q.
|
|
10.28(b)
|
Second
Amendment to the XJT Capacity Purchase Agreement, dated as of December 23,
2008. (2)(3)
|
|
10.29
|
Agreement
between the Company and the United States of America, acting through the
Transportation Security Administration, dated May 7, 2003 - incorporated
by reference to Exhibit 10.1 to Continental's Quarterly Report on Form
10-Q for the quarter ended June 30, 2003 (File no.
1-10323).
|
|
21.1
|
List
of Subsidiaries of Continental. (3)
|
|
23.1
|
Consent
of Ernst & Young LLP. (3)
|
|
24.1
|
Powers
of attorney executed by certain directors and officers of
Continental. (3)
|
|
31.1
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Executive
Officer. (3)
|
|
31.2
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Financial
Officer. (3)
|
|
32.1
|
Section
1350 Certifications. (4)
|
______________
*These
exhibits relate to management contracts or compensatory plans or
arrangements.
|
(1)
|
The
Commission has granted confidential treatment for a portion of this
exhibit.
|
|
(2)
|
Continental
has applied to the Commission for confidential treatment of a portion of
this exhibit.
|
|
(3)
|
Filed
herewith.
|
|
(4)
|
Furnished
herewith.
|
EXHIBIT
10.14
CONTINENTAL
AIRLINES, INC.
LONG
TERM INCENTIVE AND RSU PROGRAM
(As
Amended and Restated Through February 18, 2009)
I. PURPOSE OF
PROGRAM
This
Continental Airlines, Inc. Long Term Incentive and RSU Program (the “Program”)
has been adopted by the Human Resources Committee of the Board of Directors of
Continental Airlines, Inc., a Delaware corporation (the “Company”), to implement
in part the Performance Award provisions of the Continental Airlines, Inc.
Incentive Plan 2000 (as amended from time to time, the “Incentive Plan 2000”)
adopted by the Board of Directors of the Company, and is intended to provide a
method for attracting, motivating, and retaining key employees to assist in the
development and growth of the Company and its Subsidiaries. The
Program and Awards hereunder shall be subject to the terms of the Incentive Plan
2000, including (a) with respect to Profit Based RSU Awards and Stock Price
Based RSU Awards, the limitations on the maximum number of shares of stock that
may be subject to awards granted under the Incentive Plan 2000 to any one
individual during any calendar year, and (b) with respect to NLTIP Awards, the
limitations on the maximum value of Awards contained in Section 5(a)(iii) of the
Incentive Plan 2000.
The
Program as set forth herein constitutes an amendment and restatement of the
Program as previously adopted and amended by the Company and as in effect on
December 31, 2008 (the “Prior Program”), and shall supersede and replace in its
entirety such previously adopted Prior Program. This amendment and
restatement of the Prior Program into the Program was adopted by the Human
Resources Committee of the Company’s Board of Directors on February 18, 2009,
and shall be effective as of January 1, 2009. The terms and
conditions of this amendment and restatement of the Program shall apply to all
Awards granted under the Program, including, without limitation, Awards granted
under the Prior Program.
II. DEFINITIONS AND
CONSTRUCTION
2.1 Definitions. Where the
following words and phrases are used in the Program, they shall have the
respective meanings set forth below, unless the context clearly indicates to the
contrary:
(a) “Administrator”
means (i) in the context of Awards made to, or the administration (or
interpretation of any provision) of the Program as it relates to, any person who
is subject to Section 16 of the Securities Exchange Act of 1934, as amended
(including any successor section to the same or similar effect, “Section 16”),
the Committee, or (ii) in the context of Awards made to, or the administration
(or interpretation of any provision) of the Program as it relates to, any person
who is not subject to Section 16, the Chief Executive Officer of the Company
(or, if the Chief Executive Officer is not a director of the Company, the
Committee), unless the Program specifies that the Committee shall take specific
action (in which case such action may only be taken by the Committee) or the
Committee (as to any Award described in this clause (ii) or the administration
or interpretation of any specific provision of the Program) specifies that it
shall serve as Administrator.
(b) “Annual
Executive Bonus Program” means the Continental Airlines, Inc. Annual Executive
Bonus Program, or any successor to such program.
(c) “Award”
means, with respect to each Participant for a Performance Period, such
Participant’s opportunity to earn a Payment Amount for such Performance Period,
upon the satisfaction of the terms and conditions of the
Program. Awards shall relate to an NLTIP Performance Target (“NLTIP
Awards”), a Stock Price Based RSU Performance Target (“Stock Price Based RSU
Awards”), or a Profit Based RSU Performance Target (“Profit Based RSU
Awards”). Awards hereunder constitute Performance Awards (as such
term is defined in the Incentive Plan 2000) under the Incentive Plan
2000.
(d) “Award
Notice” means a written notice issued by the Company to a Participant evidencing
such Participant’s receipt of an Award with respect to a Performance
Period.
(e) “Base
Amount” means the sum of (i) the annual base rate of pay paid or payable in cash
by the Company and the Subsidiaries to or for the benefit of a Participant for
services rendered or labor performed, plus (ii) an additional amount equal to
(1) for all Participants other than those described in Section 2.1(dd)(vi),
2.1(dd)(vii) or 2.1(dd)(viii) below, 125% of the amount described in clause (i),
and (2) for all Participants described in Section 2.1(dd)(vi), 2.1(dd)(vii) or
2.1(dd)(viii) below, 37.5% of the amount described in clause
(i). Base Amount shall be determined without reduction for amounts a
Participant could have received in cash in lieu of (A) elective deferrals under
any deferred compensation plan of the Company or (B) elective contributions made
on such Participant’s behalf by the Company or a Subsidiary pursuant to a
qualified cash or deferred arrangement (as defined in section 401(k) of the
Code) or pursuant to a plan maintained under section 125 of the
Code.
(f) “Basis
Point” means one one-hundredth of one percent (0.01%).
(g) “Board”
means the Board of Directors of the Company
(h) “Cash
Hurdle” means, with respect to an NLTIP Performance Period or a Profit Based RSU
Performance Period, the dollar amount specified by the Committee as the Cash
Hurdle with respect to such Performance Period as provided in Section 3.1, and
achievement of the Cash Hurdle means (i) in the case of an NLTIP Performance
Period, that the Company’s cash flow over such Performance Period is such that
the Company’s cash, cash equivalents and short term investments (excluding
restricted cash, cash equivalents and short term investments) at the end of such
Performance Period, as reflected on the regularly prepared and publicly
available balance sheet of the Company and its consolidated subsidiaries
prepared in accordance with GAAP, is equal to or greater than that dollar amount
so specified by the Committee as the Cash Hurdle for such Performance Period,
and (ii) in the case of a Profit Based RSU Performance Period, that the
Company’s cash flow over the period beginning on the first day of such
Performance Period and ending on the last day of the Fiscal Year prior to the
applicable Specified Payment Date (the “Cash Hurdle Measurement Period”) is such
that the Company’s cash, cash equivalents and short term investments (excluding
restricted cash, cash equivalents and short term investments) at the end of such
Cash Hurdle Measurement Period, as reflected on the regularly prepared and
publicly available balance sheet of the Company and its consolidated
subsidiaries prepared in accordance with GAAP, is equal to or greater than that
dollar amount so specified by the Committee as the Cash Hurdle for such
Performance Period.
(i) “Change
in Control” shall have the same meaning as is assigned to such term under the
Incentive Plan 2000, as in effect on March 12, 2004, taking into account
amendments effected on that date.
(j) “Code”
means the Internal Revenue Code of 1986, as amended.
(k) “Committee”
means a committee of the Board comprised solely of two or more outside directors
(within the meaning of the term “outside directors” as used in section 162(m) of
the Code). Such committee shall be the Human Resources Committee of
the Board unless and until the Board designates another committee of the Board
to serve as the Committee.
(l) “Company”
means Continental Airlines, Inc., a Delaware corporation.
(m) “Company
Stock” means the Class B common stock, par value $0.01 per share, of the
Company.
(n) “Cumulative
Profit Sharing Pool” means, with respect to the last day of a Fiscal Year in a
Profit Based RSU Performance Period, the aggregate amount of the Profit Sharing
Pools, if any, for such Fiscal Year and for all prior Fiscal Years in such
Profit Based RSU Performance Period.
(o) “Cumulative
Profit Sharing Pool Target” means, with respect to a Profit Based RSU
Performance Period, the dollar amount specified by the Committee as the
Cumulative Profit Sharing Pool Target with respect to such Performance Period as
provided in Section 3.1. The Committee may set multiple levels for
the Cumulative Profit Sharing Pool Target that may apply to a single Profit
Based RSU Performance Period (and each such level is referred to herein as a
“Cumulative Profit Sharing Pool Target Level”), and the Payout Structure
relating to the Profit Based RSU Award for such Performance Period may specify
different Profit Based RSU Payment Percentages depending on the Cumulative
Profit Sharing Pool Target Level achieved. Achievement of a
Cumulative Profit Sharing Pool Target means that, as of the last day of a Fiscal
Year in the Profit Based RSU Performance Period, the Cumulative Profit Sharing
Pool equals or exceeds a Cumulative Profit Sharing Pool Target Level that has
not been so achieved as of the last day of any prior Fiscal Year in such Profit
Based RSU Performance Period (and the Cumulative Profit Sharing Pool Target
shall be deemed achieved for such Fiscal Year only with respect to the highest
such Cumulative Profit Sharing Pool Target Level so achieved for such Fiscal
Year).
(p) “Disability”
or “Disabled” means, with respect to a Participant, that such Participant is, by
reason of any medically determinable physical or mental impairment that can be
expected to result in death or can be expected to last for a continuous period
of not less than 12 months, receiving income replacement benefits for a period
of not less than three months under an accident and health plan covering
employees of such Participant’s employer.
(q) “EBITDAR”
means, with respect to the Company and each company in the Industry Group and
each NLTIP Performance Period, the aggregate earnings of the Company or such
company and its consolidated subsidiaries during the Performance Period,
determined prior to the charges, costs, and expenses associated with interest,
income taxes, depreciation, amortization, and aircraft rent. EBITDAR
shall be determined based on the regularly prepared and publicly available
statements of operations of the Company and each company in the Industry Group
prepared in accordance with GAAP (and if necessary to determine certain items,
based on Form 41 data filed by the Company or such company with the Department
of Transportation); provided, however, that EBITDAR shall be adjusted to exclude
(i) non-operating income or expense, (ii) write-offs of assets (including
aircraft and associated parts), (iii) one-time gains or losses from the disposal
of assets, and (iv) any other item of gain, loss, or expense determined to be
extraordinary or unusual in nature or infrequent in occurrence, in each case
under clauses (i), (ii), (iii) and (iv) as determined by the Committee in
accordance with GAAP. If the fiscal year of a company in the Industry
Group is not the calendar year, then such company’s EBITDAR for an NLTIP
Performance Period shall be determined based upon the fiscal quarters of such
company that coincide with the fiscal quarters contained in such Performance
Period. Further, if a company in the Industry Group provides publicly available
statements of operations with respect to its airline business that are separate
from the statements of operations provided with respect to its other businesses,
then such company’s EBITDAR shall be determined based solely upon the separately
provided statements of operations pertaining to its airline
business.
(r) “EBITDAR
Margin” means, with respect to the Company and each company in the Industry
Group and each NLTIP Performance Period, the cumulative EBITDAR for the Company
or such company for such Performance Period divided by the Company’s or such
company’s cumulative revenues (determined on a consolidated basis based on the
regularly prepared and publicly available statements of operations of the
Company or such company prepared in accordance with GAAP) over such Performance
Period; provided, however, that, with respect to NLTIP Performance Periods
beginning on or after January 1, 2007, such cumulative revenues shall be
adjusted to exclude any item determined to be extraordinary or unusual in nature
or infrequent in occurrence as determined by the Committee in accordance with
GAAP. If the fiscal year of a company in the Industry Group is not
the calendar year, then such company’s EBITDAR Margin for an NLTIP Performance
Period shall be determined based upon the fiscal quarters of such company that
coincide with the fiscal quarters contained in such Performance
Period. Further, if a company in the Industry Group provides publicly
available statements of operations with respect to its airline business that are
separate from the statements of operations provided with respect to its other
businesses, then such company’s EBITDAR Margin shall be determined based solely
upon the separately provided statements of operations pertaining to its airline
business.
(s) “Eligible
Employee” means any individual who is a staff vice president or more senior
officer of the Company or a Subsidiary.
(t) “Entry
EBITDAR Margin” means, with respect to each NLTIP Performance Period, the
percentage determined by calculating the simple average of the EBITDAR Margins
of the companies in the Industry Group with respect to such Performance
Period. Notwithstanding the foregoing, with respect to each NLTIP
Performance Period beginning on or after January 1, 2007, the term “Entry
EBITDAR Margin” means the percentage determined by dividing (i) the cumulative
EBITDAR of all companies in the Industry Group for such Performance Period by
(ii) all such companies’ cumulative revenues (determined as provided in Section
2.1(r)) over such Performance Period.
(u) “Financial
Performance Hurdle” means, with respect to a particular Fiscal Year, that the
Company’s net income for such Fiscal Year, as set forth on its regularly
prepared and publicly available consolidated statements of operations prepared
in accordance with GAAP, is greater than $0 (or, with respect to the first
Fiscal Year under the Program, greater than $66 million).
(v) “Fiscal
Year” means each 12-consecutive month period commencing on January 1;
provided, however, that the first Fiscal Year under the Program shall be the
nine-consecutive month period commencing on April 1, 2006.
(w) “GAAP”
means United States generally accepted accounting principles, consistently
applied.
(x) “Incentive
Plan 2000” means the Continental Airlines, Inc. Incentive Plan 2000, as amended
from time to time.
(y) “Industry
Group” means, with respect to each NLTIP Performance Period, the companies
determined in accordance with the provisions of Article V for such Performance
Period.
(z) “Market
Value per Share” means, as of any specified date, the simple average of the
closing sales prices of Company Stock in the principal securities market in
which the Company Stock is then traded over the 20 most recent consecutive
Trading Days ending on the last Trading Day preceding the specified date,
adjusted appropriately by the Committee for any stock splits, stock dividends,
reverse stock splits, special dividends or other similar matters occurring
during or with respect to any relevant measurement period.
(z1) “Maximum
Aggregate Payment Amount” means, with respect to each RSU subject to a Profit
Based RSU Award for which the Profit Based RSU Performance Period begins on or
after January 1, 2009, an amount equal to the product of (i) the Profit Based
RSU Payment Percentage applicable to the highest Cumulative Profit Sharing Pool
Target Level specified by the Committee with respect to such Award multiplied by (ii) a
dollar amount determined by the Committee in its sole discretion; provided,
however, that the Committee may, in its sole discretion, determine whether or
not to establish a Maximum Aggregate Payment Amount with respect to any
particular RSU. The Maximum Aggregate Payment Amount, if any, with respect
to an RSU subject to an outstanding Profit Based RSU Award shall be subject to
appropriate adjustment by the Committee for any stock splits, stock dividends,
reverse stock splits, special dividends or other similar matters relating to
Company Stock occurring after the date of grant of such Award.
(aa) “NLTIP
Performance Period” means each three-year period commencing on the first day of
a calendar year that begins on or after January 1,
2005. Notwithstanding the foregoing, no new NLTIP Performance Period
shall commence on or after the date upon which a Change in Control occurs,
unless otherwise determined by the Committee.
(bb) “Participant”
means an Eligible Employee who has received an Award under the Program with
respect to a Performance Period pursuant to Section 4.1.
(cc) “Payment
Amount” (A) with respect to Stock Price Based RSU Awards means, with respect to
each Participant and each Stock Price Based RSU Performance Period with respect
to which the Stock Price Based RSU Performance Target is satisfied, an amount
equal to 100% of the RSU Value, determined as of the last day of the relevant
Stock Price Based RSU Performance Period (or, in the event of a Change in
Control, as of the date of the Change in Control, or in the event of death,
Disability or Retirement of a Participant, as of the date of such death,
Disability or Retirement), (B) with respect to NLTIP Awards means, with respect
to each Participant and each NLTIP Performance Period for which the NLTIP
Performance Target is satisfied, an amount equal to (i) such Participant’s Base
Amount in effect as of the earlier of (1) the last day of such NLTIP Performance
Period, (2) the date of such Participant’s death, Disability or Retirement, or
(3) the day immediately preceding the date upon which such Participant suffers a
Qualifying Event in connection with, after, or in contemplation of a Change in
Control, multiplied by (ii) the Payout Percentage applicable to such Participant
for such NLTIP Performance Period, and (C) with respect to each Profit Based RSU
Award and related Profit Based RSU Performance Period, means each amount payable
pursuant to Section 6.2(b), 6.3(b) and 6.4(b). Notwithstanding the
foregoing, a Payment Amount may be pro-rated as provided in the
Program.
(dd) “Payout
Percentage” means, with respect to each NLTIP Performance Period for which the
NLTIP Performance Target is satisfied:
(i) In
the case of a Participant who is the Company’s Chief Executive Officer as of the
earlier of (1) the last day of such Performance Period, (2) the date of such
Participant’s death, Disability or Retirement, or (3) the day immediately
preceding the date upon which such Participant suffers a Qualifying Event in
connection with, after, or in contemplation of a Change in Control, 75% plus (A)
if the Company’s EBITDAR Margin with respect to such Performance Period exceeds
the Entry EBITDAR Margin with respect to such Performance Period, an additional
percentage equal to (x) 25 divided by (y) the difference between the Target
EBITDAR Margin with respect to such Performance Period and the Entry EBITDAR
Margin with respect to such Performance Period (expressed in Basis Points), for
each Basis Point that the Company’s EBITDAR Margin with respect to such
Performance Period exceeds the Entry EBITDAR Margin with respect to such
Performance Period, up to and including the Target EBITDAR Margin with respect
to such Performance Period, and (B) if the Company’s EBITDAR Margin with respect
to such Performance Period exceeds the Target EBITDAR Margin with respect to
such Performance Period, an additional percentage equal to (x) 50 divided by (y)
the difference between the Stretch EBITDAR Margin with respect to such
Performance Period and the Target EBITDAR Margin with respect to such
Performance Period (expressed in Basis Points), for each Basis Point that the
Company’s EBITDAR Margin with respect to such Performance Period exceeds the
Target EBITDAR Margin with respect to such Performance Period, up to and
including the Stretch EBITDAR Margin with respect to such Performance
Period;
(ii) In
the case of a Participant who is the Company’s President as of the earlier of
(1) the last day of such Performance Period, (2) the date of such Participant’s
death, Disability or Retirement, or (3) the day immediately preceding the date
upon which such Participant suffers a Qualifying Event in connection with,
after, or in contemplation of a Change in Control, 70% plus (A) if the Company’s
EBITDAR Margin with respect to such Performance Period exceeds the Entry EBITDAR
Margin with respect to such Performance Period, an additional percentage equal
to (x) 20 divided by (y) the difference between the Target EBITDAR Margin with
respect to such Performance Period and the Entry EBITDAR Margin with respect to
such Performance Period (expressed in Basis Points), for each Basis Point that
the Company’s EBITDAR Margin with respect to such Performance Period exceeds the
Entry EBITDAR Margin with respect to such Performance Period, up to and
including the Target EBITDAR Margin with respect to such Performance Period, and
(B) if the Company’s EBITDAR Margin with respect to such Performance Period
exceeds the Target EBITDAR Margin with respect to such Performance Period, an
additional percentage equal to (x) 45 divided by (y) the difference between the
Stretch EBITDAR Margin with respect to such Performance Period and the Target
EBITDAR Margin with respect to such Performance Period (expressed in Basis
Points), for each Basis Point that the Company’s EBITDAR Margin with respect to
such Performance Period exceeds the Target EBITDAR Margin with respect to such
Performance Period, up to and including the Stretch EBITDAR Margin with respect
to such Performance Period;
(iii) In
the case of a Participant who is an Executive Vice President of the Company as
of the earlier of (1) the last day of such Performance Period, (2) the date of
such Participant’s death, Disability or Retirement, or (3) the day immediately
preceding the date upon which such Participant suffers a Qualifying Event in
connection with, after, or in contemplation of a Change in Control, 50% plus (A)
if the Company’s EBITDAR Margin with respect to such Performance Period exceeds
the Entry EBITDAR Margin with respect to such Performance Period, an additional
percentage equal to (x) 25 divided by (y) the difference between the Target
EBITDAR Margin with respect to such Performance Period and the Entry EBITDAR
Margin with respect to such Performance Period (expressed in Basis Points), for
each Basis Point that the Company’s EBITDAR Margin with respect to such
Performance Period exceeds the Entry EBITDAR Margin with respect to such
Performance Period, up to and including the Target EBITDAR Margin with respect
to such Performance Period, and (B) if the Company’s EBITDAR Margin with respect
to such Performance Period exceeds the Target EBITDAR Margin with respect to
such Performance Period, an additional percentage equal to (x) 25 divided by (y)
the difference between the Stretch EBITDAR Margin with respect to such
Performance Period and the Target EBITDAR Margin with respect to such
Performance Period (expressed in Basis Points), for each Basis Point that the
Company’s EBITDAR Margin with respect to such Performance Period exceeds the
Target EBITDAR Margin with respect to such Performance Period, up to and
including the Stretch EBITDAR Margin with respect to such Performance
Period;
(iv) In
the case of a Participant who is a Senior Vice President of the Company (or the
President of a Subsidiary) as of the earlier of (1) the last day of such
Performance Period, (2) the date of such Participant’s death, Disability or
Retirement, or (3) the day immediately preceding the date upon which such
Participant suffers a Qualifying Event in connection with, after, or in
contemplation of a Change in Control, 30% plus (A) if the Company’s EBITDAR
Margin with respect to such Performance Period exceeds the Entry EBITDAR Margin
with respect to such Performance Period, an additional percentage equal to (x)
20 divided by (y) the difference between the Target EBITDAR Margin with respect
to such Performance Period and the Entry EBITDAR Margin with respect to such
Performance Period (expressed in Basis Points), for each Basis Point that the
Company’s EBITDAR Margin with respect to such Performance Period exceeds the
Entry EBITDAR Margin with respect to such Performance Period, up to and
including the Target EBITDAR Margin with respect to such Performance Period, and
(B) if the Company’s EBITDAR Margin with respect to such Performance Period
exceeds the Target EBITDAR Margin with respect to such Performance Period, an
additional percentage equal to (x) 20 divided by (y) the difference between the
Stretch EBITDAR Margin with respect to such Performance Period and the Target
EBITDAR Margin with respect to such Performance Period (expressed in Basis
Points), for each Basis Point that the Company’s EBITDAR Margin with respect to
such Performance Period exceeds the Target EBITDAR Margin with respect to such
Performance Period, up to and including the Stretch EBITDAR Margin with respect
to such Performance Period;
(v) In
the case of a Participant (other than a Participant described in any of clauses
(i), (ii), (iii) or (iv) above) who is a participant in the Annual Executive
Bonus Program as of the earlier of (1) the last day of such Performance Period,
(2) the date of such Participant’s death, Disability or Retirement, or (3) the
day immediately preceding the date upon which such Participant suffers a
Qualifying Event in connection with, after, or in contemplation of a Change in
Control, 25% plus (A) if the Company’s EBITDAR Margin with respect to such
Performance Period exceeds the Entry EBITDAR Margin with respect to such
Performance Period, an additional percentage equal to (x) 15 divided by (y) the
difference between the Target EBITDAR Margin with respect to such Performance
Period and the Entry EBITDAR Margin with respect to such Performance Period
(expressed in Basis Points), for each Basis Point that the Company’s EBITDAR
Margin with respect to such Performance Period exceeds the Entry EBITDAR Margin
with respect to such Performance Period, up to and including the Target EBITDAR
Margin with respect to such Performance Period, and (B) if the Company’s EBITDAR
Margin with respect to such Performance Period exceeds the Target EBITDAR Margin
with respect to such Performance Period, an additional percentage equal to (x)
15 divided by (y) the difference between the Stretch EBITDAR Margin with respect
to such Performance Period and the Target EBITDAR Margin with respect to such
Performance Period (expressed in Basis Points), for each Basis Point that the
Company’s EBITDAR Margin with respect to such Performance Period exceeds the
Target EBITDAR Margin with respect to such Performance Period, up to and
including the Stretch EBITDAR Margin with respect to such Performance
Period;
(vi) In
the case of a Participant who is designated as a Category 1 officer by the
Administrator and is not described in any of clauses (i), (ii), (iii), (iv) or
(v) above as of the earlier of (1) the last day of such Performance Period, (2)
the date of such Participant’s death, Disability or Retirement, or (3) the day
immediately preceding the date upon which such Participant suffers a Qualifying
Event in connection with, after, or in contemplation of a Change in Control, 40%
plus (A) if the Company’s EBITDAR Margin with respect to such Performance Period
exceeds the Entry EBITDAR Margin with respect to such Performance Period, an
additional percentage equal to (x) 15 divided by (y) the difference between the
Target EBITDAR Margin with respect to such Performance Period and the Entry
EBITDAR Margin with respect to such Performance Period (expressed in Basis
Points), for each Basis Point that the Company’s EBITDAR Margin with respect to
such Performance Period exceeds the Entry EBITDAR Margin with respect to such
Performance Period, up to and including the Target EBITDAR Margin with respect
to such Performance Period, and (B) if the Company’s EBITDAR Margin with respect
to such Performance Period exceeds the Target EBITDAR Margin with respect to
such Performance Period, an additional percentage equal to (x) 30 divided by (y)
the difference between the Stretch EBITDAR Margin with respect to such
Performance Period and the Target EBITDAR Margin with respect to such
Performance Period (expressed in Basis Points), for each Basis Point that the
Company’s EBITDAR Margin with respect to such Performance Period exceeds the
Target EBITDAR Margin with respect to such Performance Period, up to and
including the Stretch EBITDAR Margin with respect to such Performance
Period;
(vii) In
the case of a Participant who is designated as a Category 2 officer by the
Administrator and is not described in any of clauses (i), (ii), (iii), (iv), (v)
or (vi) above as of the earlier of (1) the last day of such Performance Period,
(2) the date of such Participant’s death, Disability or Retirement, or (3) the
day immediately preceding the date upon which such Participant suffers a
Qualifying Event in connection with, after, or in contemplation of a Change in
Control, 30% plus (A) if the Company’s EBITDAR Margin with respect to such
Performance Period exceeds the Entry EBITDAR Margin with respect to such
Performance Period, an additional percentage equal to (x) 10 divided by (y) the
difference between the Target EBITDAR Margin with respect to such Performance
Period and the Entry EBITDAR Margin with respect to such Performance Period
(expressed in Basis Points), for each Basis Point that the Company’s EBITDAR
Margin with respect to such Performance Period exceeds the Entry EBITDAR Margin
with respect to such Performance Period, up to and including the Target EBITDAR
Margin with respect to such Performance Period, and (B) if the Company’s EBITDAR
Margin with respect to such Performance Period exceeds the Target EBITDAR Margin
with respect to such Performance Period, an additional percentage equal to (x)
25 divided by (y) the difference between the Stretch EBITDAR Margin with respect
to such Performance Period and the Target EBITDAR Margin with respect to such
Performance Period (expressed in Basis Points), for each Basis Point that the
Company’s EBITDAR Margin with respect to such Performance Period exceeds the
Target EBITDAR Margin with respect to such Performance Period, up to and
including the Stretch EBITDAR Margin with respect to such Performance Period;
and
(viii) In
the case of a Participant who is designated as a Category 3 officer by the
Administrator and is not described in any of clauses (i), (ii), (iii), (iv),
(v), (vi) or (vii) above as of the earlier of (1) the last day of such
Performance Period, (2) the date of such Participant’s death, Disability or
Retirement, or (3) the day immediately preceding the date upon which such
Participant suffers a Qualifying Event in connection with, after, or in
contemplation of a Change in Control, 15% plus (A) if the Company’s EBITDAR
Margin with respect to such Performance Period exceeds the Entry EBITDAR Margin
with respect to such Performance Period, an additional percentage equal to (x) 5
divided by (y) the difference between the Target EBITDAR Margin with respect to
such Performance Period and the Entry EBITDAR Margin with respect to such
Performance Period (expressed in Basis Points), for each Basis Point that the
Company’s EBITDAR Margin with respect to such Performance Period exceeds the
Entry EBITDAR Margin with respect to such Performance Period, up to and
including the Target EBITDAR Margin with respect to such Performance Period, and
(B) if the Company’s EBITDAR Margin with respect to such Performance Period
exceeds the Target EBITDAR Margin with respect to such Performance Period, an
additional percentage equal to (x) 10 divided by (y) the difference between the
Stretch EBITDAR Margin with respect to such Performance Period and the Target
EBITDAR Margin with respect to such Performance Period (expressed in Basis
Points), for each Basis Point that the Company’s EBITDAR Margin with respect to
such Performance Period exceeds the Target EBITDAR Margin with respect to such
Performance Period, up to and including the Stretch EBITDAR Margin with respect
to such Performance Period.
(ee) “Payout
Structure” means, with respect to each Profit Based RSU Performance Period, a
Profit Based RSU Payment Percentage determined by the Committee to apply to each
Cumulative Profit Sharing Pool Target Level relating to such Performance
Period. The Payout Structure for each Profit Based RSU Performance
Period shall be determined by the Committee as provided in Section
3.1.
(ff) “Performance
Period” means an NLTIP Performance Period, a Stock Price Based RSU Performance
Period or a Profit Based RSU Performance Period, as applicable or as the context
requires.
(gg) “Performance
Target” means (A) with respect to an NLTIP Performance Period, that (1) the Cash
Hurdle with respect to such Performance Period has been achieved, and (2) the
Company’s EBITDAR Margin with respect to such Performance Period equals or
exceeds the Entry EBITDAR Margin with respect to such Performance Period
(clauses (A)(1) and (2) together, the “NLTIP Performance Target”), (B) with
respect to a Stock Price Based RSU Performance Period, that the Market Value per
Share at any date during the Performance Period has been equal to or greater
than the Target Price with respect to such Performance Period (clause (B), the
“Stock Price Based RSU Performance Target”), or (C) with respect to a Profit
Based RSU Performance Period, that, as of the last day of a Fiscal Year in such
Performance Period, (1) the Financial Performance Hurdle for such Fiscal Year
has been achieved, and (2) the Cumulative Profit Sharing Pool Target for such
Performance Period has been achieved (clauses (C)(1) and (2) together, the
“Profit Based RSU Performance Target”).
(hh) “Pre-tax
Net Income” means, with respect to each Fiscal Year, the consolidated income
before taxes but after minority interest (as computed using net income (loss)
before taxes) of the Company for such Fiscal Year in accordance with GAAP, as
shown on the Company’s consolidated statements of operations for such Fiscal
Year, but calculated (i) excluding any unusual or non-recurring items in
accordance with GAAP and (ii) prior to any costs associated with executive
incentive compensation (defined as incentive compensation for executives of the
Company with performance targets determined by the Committee), in each case as
determined by the Committee; provided, however, Pre-tax Net Income with respect
to the first Fiscal Year under the Program shall be calculated using the
Company’s consolidated statements of operations for the three quarters ended
December 31, 2006 and adjusted by reducing Pre-tax Net Income for the first
Fiscal Year by $31 million. Notwithstanding the foregoing, in no
event shall the Pre-tax Net Income for a Fiscal Year be less than $0 for
purposes of the Program.
(ii) “Profit
Based RSU Payment Percentage” means, with respect to each Profit Based RSU
Performance Period, the percentage of the RSUs subject to the related Profit
Based RSU Award for which payments may be made under the Program upon
achievement of a particular Cumulative Profit Sharing Pool Target Level relating
to such Performance Period. The Profit Based RSU Payment Percentages
for a Profit Based RSU Performance Period shall be determined by the Committee
in connection with the Committee’s determination of the Payout Structure for
such Performance Period.
(jj) “Profit
Based RSU Performance Period” means: (i) as to the first Profit Based RSU
Performance Period under the Program, the period commencing on April 1, 2006 and
ending on December 31, 2009, and (ii) each other period specified by the
Committee as provided in Section 3.1 that consists of one or more consecutive
Fiscal Years that begin on or after January 1, 2007.
(kk) “Profit
Sharing Pool” means, with respect to each Fiscal Year, the “Annual Award Pool”
for such Fiscal Year determined under (and based on the definition of such term
set forth in) the Company’s Enhanced Profit Sharing Plan as in effect on
February 23, 2007, taking into account amendments effected on that date (the
“EPSP”); provided, however, that (A) any Minor Pool (as defined in the EPSP)
with respect to a Fiscal Year that ended prior to the beginning of any Profit
Based RSU Performance Period shall not be included in the Profit Sharing Pool
with respect to a Fiscal Year in such Performance Period and (B) for the Fiscal
Year beginning on April 1, 2006, the Profit Sharing Pool for such Fiscal Year
shall be the same as the Annual Award Pool under the EPSP for the 12-month
period ending on December 31, 2006 (disregarding any Minor Pool to the extent
provided in clause (A) of this paragraph), except that such Annual Award Pool
shall be determined under the EPSP based on Pre-tax Net Income for such Fiscal
Year determined under the Program reduced by an additional $1 million (in lieu
of “Pre-tax Net Income” (as defined under the EPSP) for the 12-month period
ending on December 31, 2006).
(ll) “Program”
means this Continental Airlines, Inc. Long Term Incentive and RSU Program, as
amended from time to time.
(mm) “Qualifying
Event” means, with respect to a Participant, the termination of such
Participant’s employment with the Company under circumstances which would permit
such Participant to receive a Termination Payment or Monthly Severance Amount
(as such terms are defined in such Participant’s employment agreement), or
similar payment, pursuant to any contract of employment between such Participant
and the Company or any Subsidiary.
(nn) “Retirement,”
“Retires” or “Retired” means retirement of a Participant from employment with
the Company pursuant to the provisions of the Continental Retirement Plan, as
amended from time to time.
(oo) “RSUs”
means the method of denominating Profit Based RSU Awards and Stock Price Based
RSU Awards, which shall be granted in whole numbers and which are denominated in
Company Stock for purposes of Incentive Plan 2000. The number of RSUs
subject to an outstanding Profit Based RSU Award or Stock Price Based RSU Award
shall be subject to appropriate adjustment by the Committee for any stock
splits, stock dividends, reverse stock splits, special dividends or other
similar matters relating to Company Stock occurring after the date of grant of
such Award and during or with respect to the applicable Performance
Period.
(pp) “RSU
Value” of a Stock Price Based RSU Award, as of a specified date, means the
dollar amount calculated by multiplying the number of RSUs subject to the Stock
Price Based RSU Award as of the specified date times the Market Value per Share
as of the specified date.
(qq) “Specified
Payment Date” means:
(i) If
a Profit Based RSU Performance Target is achieved for the first Profit Based RSU
Performance Period as of the last day of the Fiscal Year that ends on December
31, 2006, then (A) with respect to a payment under Section 6.2(b)(i) for such
Fiscal Year, the first day of the 15th month following the end of such Fiscal
Year, (B) with respect to a payment under Section 6.2(b)(ii) for such Fiscal
Year, the first day of the 27th month following the end of such Fiscal Year, and
(C) with respect to a payment under Section 6.2(b)(iii) for such Fiscal Year,
the first day of the 39th month following the end of such Fiscal Year;
and
(ii) If
a Profit Based RSU Performance Target is achieved for any Profit Based RSU
Performance Period as of the last day of a Fiscal Year that ends after December
31, 2006, then (A) with respect to a payment under Section 6.2(b)(i) for such
Fiscal Year, the first day of the 3rd month following the end of such Fiscal
Year, (B) with respect to a payment under Section 6.2(b)(ii) for such Fiscal
Year, the first day of the 15th month following the end of such Fiscal Year, and
(C) with respect to a payment under Section 6.2(b)(iii) for such Fiscal Year,
the first day of the 27th month following the end of such Fiscal
Year.
With
respect to each Fiscal Year during a Profit Based RSU Performance Period for
which a Profit Based RSU Performance Target is achieved, the Specified Payment
Date referred to in clause (i)(A) and (ii)(A) above, as applicable, is referred
to herein as the “First Specified Payment Date,” the Specified Payment Date
referred to in clause (i)(B) and (ii)(B) above, as applicable, is referred to
herein as the “Second Specified Payment Date,” and the Specified Payment Date
referred to in clause (i)(C) and (ii)(C) above, as applicable, is referred to
herein as the “Third Specified Payment Date.” Notwithstanding the
foregoing, a Specified Payment Date may be deferred as provided in Section
6.2(b).
(rr) “Stock
Price Based RSU Performance Period” means the period commencing on April 1, 2004
and ending on December 31, 2007.
(ss) “Stretch
EBITDAR Margin” means, with respect to an NLTIP Performance Period, the
percentage determined by the Committee to be the Stretch EBITDAR Margin with
respect to such Performance Period as provided in Section 3.1 hereof, which
shall be expressed as the Target EBITDAR Margin plus that number of Basis Points
determined by the Committee as provided in Section 3.1.
(tt) “Subsidiary”
for purposes of participation in the Program means any entity (other than the
Company) with respect to which the Company, directly or indirectly through one
or more other entities, owns equity interests possessing 50 percent or more of
the total combined voting power of all equity interests of such entity
(excluding voting power that arises only upon the occurrence of one or more
specified events).
(uu) “Target
EBITDAR Margin” means, with respect to an NLTIP Performance Period, the
percentage determined by the Committee to be the Target EBITDAR Margin with
respect to such Performance Period as provided in Section 3.1 hereof, which
shall be expressed as the Entry EBITDAR Margin plus that number of Basis Points
determined by the Committee as provided in Section 3.1.
(vv) “Target
Price” with respect to a Stock Price Based RSU Performance Period means the
dollar value per share of Company Stock specified by the Committee as the Target
Price for such Stock Price Based RSU Performance Period as provided in Section
3.1, which Target Price shall be appropriately adjusted by the Committee for any
stock splits, stock dividends, reverse splits, special dividends or other
similar events occurring during or with respect to the Stock Price Based RSU
Performance Period.
(ww) “Trading
Day” means a day during which trading in securities generally occurs in the
principal securities market in which Company Stock is traded.
2.2 Number,
Gender, Headings, and Periods of Time. Wherever
appropriate herein, words used in the singular shall be considered to include
the plural, and words used in the plural shall be considered to include the
singular. The masculine gender, where appearing in the Program, shall
be deemed to include the feminine gender. The headings of Articles,
Sections, and Paragraphs herein are included solely for
convenience. If there is any conflict between such headings and the
text of the Program, the text shall control. All references to
Articles, Sections, and Paragraphs are to the Program unless otherwise
indicated. Any reference in the Program to a period or number of
days, weeks, months, or years shall mean, respectively, calendar days, calendar
weeks, calendar months, or calendar years unless expressly provided
otherwise.
III. ADMINISTRATION
3.1 Administration
by the Administrator. The Program shall
be administered by the Administrator, so that (i) Awards made to, and the
administration (or interpretation of any provision) of the Program as it relates
to, any person who is subject to Section 16, shall be made or effected by the
Committee, and (ii) Awards made to, and the administration (or interpretation of
any provision) of the Program as it relates to, any person who is not subject to
Section 16, shall be made or effected by the Chief Executive Officer of the
Company (or, if the Chief Executive Officer is not a director of the Company,
the Committee), unless the Program specifies that the Committee shall take
specific action (in which case such action may only be taken by the Committee)
or the Committee (as to any Award described in this clause (ii) or the
administration or interpretation of any specific provision of the Program)
specifies that it shall serve as Administrator. The action of a
majority of the members of the Committee will be the act of the
Committee.
The
Committee may from time to time in its discretion establish in writing for
purposes of the Program a Profit Based RSU Performance Period that consists of
one or more consecutive Fiscal Years. The Committee shall, promptly
upon adoption of the Program in the case of all Performance Periods commencing
on April 1, 2004, and within 90 days after the first day of each Performance
Period commencing on or after January 1, 2005 (but in no event after the date
required for a performance goal to be considered preestablished under Section
162(m) of the Code), establish in writing for purposes of the Program: (i) for
NLTIP Awards, the applicable Target EBITDAR Margin and Stretch EBITDAR Margin
(such that at all times the Stretch EBITDAR Margin shall be higher than the
Target EBITDAR Margin, which in turn shall be higher than the Entry EBITDAR
Margin) and the Cash Hurdle for each such Performance Period, (ii) for Stock
Price Based RSU Awards, the applicable Target Price for each such Performance
Period, and (iii) for Profit Based RSU Awards, the Cash Hurdle, the Cumulative
Profit Sharing Pool Target Levels (including the Cumulative Profit Sharing Pool
Target Level that shall apply for purposes of Section 6.4(b)), the related
Payout Structure for such Performance Period and the Maximum Aggregate Payment
Amount, if any, applicable to the RSUs subject to such Award.
3.2 Powers of
the Administrator. The Administrator
shall supervise the administration and enforcement of the Program according to
the terms and provisions hereof and shall have the sole discretionary authority
and all of the powers necessary to accomplish these purposes. The
Administrator (which shall be limited solely to the Committee with respect to
clauses (e), (f), (g), (h), (i) and (j) below and as described in clause (c)
below) shall have all of the powers specified for it under the Program,
including, without limitation, the power, right, or authority: (a) to designate
an Eligible Employee as a Participant with respect to a Performance Period at
any time prior to the last day of such period, (b) from time to time to
establish rules and procedures for the administration of the Program, which are
not inconsistent with the provisions of the Program or the Incentive Plan 2000,
and any such rules and procedures shall be effective as if included in the
Program, (c) to construe in its discretion all terms, provisions, conditions and
limitations of the Program and any Award, and to determine the number of RSUs
subject to a Profit Based RSU Award or a Stock Price Based RSU Award to a
Participant (which determination with respect to any person who is subject to
Section 16 shall be made only by the Committee), (d) to correct any defect or to
supply any omission or to reconcile any inconsistency that may appear in the
Program in such manner and to such extent as the Administrator shall deem
appropriate, (e) to determine the Target Price, the Target EBITDAR Margin, the
Stretch EBITDAR Margin, and the Cumulative Profit Sharing Pool Target Levels
with respect to each relevant Performance Period, (f) to determine the Cash
Hurdle for each relevant Performance Period, (g) to determine the Payout
Structure and the Maximum Aggregate Payment Amount, if any, for each Profit
Based RSU Award, (h) to make determinations as to whether the Performance
Targets for the various Performance Periods were satisfied, (i) to make
determinations as to whether the Cash Hurdles for the various Profit Based RSU
Performance Periods were satisfied, (j) to certify in writing, prior to the
payment of any amount under the Program with respect to a Performance Period,
whether the Performance Targets relating to such Performance Period and any
other material terms of the Program have in fact been satisfied, and (k) to make
all other determinations necessary or advisable for the administration of the
Program. The Administrator may correct any defect or supply any omission or
reconcile any inconsistency in the Program or in any Award or Award Notice in
the manner and to the extent it shall deem expedient to carry it into
effect.
3.3 Administrator
Decisions Conclusive; Standard of Care. The Administrator
shall, in its sole discretion exercised in good faith (which, for purposes of
this Section 3.3, shall mean the application of reasonable business judgment),
make all decisions and determinations and take all actions necessary in
connection with the administration of the Program. All such
decisions, determinations, and actions by the Administrator shall be final,
binding, and conclusive upon all persons. However, in the event of
any conflict in any such determination as between the Committee and the Chief
Executive Officer of the Company, each acting in its or his capacity as
Administrator of the Plan, the determination of the Committee shall be
conclusive. The Administrator shall not be liable for any action or
determination taken or made in good faith or upon reliance in good faith on the
records of the Company or information presented to the Administrator by the
Company’s officers, employees, or other persons (including the Company’s outside
auditors) as to matters the Administrator reasonably believes are within such
other person’s professional or expert competence. If a Participant
disagrees with any decision, determination, or action made or taken by the
Administrator, then the dispute will be limited to whether the Administrator has
satisfied its duty to make such decision or determination or take such action in
good faith. No liability whatsoever shall attach to or be incurred by
any past, present or future stockholders, officers or directors, as such, of the
Company or any of its Subsidiaries, under or by reason of the Program or the
administration thereof, and each Participant, in consideration of receiving
benefits and participating hereunder, expressly waives and releases any and all
claims relating to any such liability.
IV. PARTICIPATION AND AWARD
NOTICES
4.1 Participation. Each individual
who is an Eligible Employee on the first day of a Performance Period shall
automatically be a Participant and receive an Award with respect to such
Performance Period, unless otherwise determined by the Administrator prior to
the first day of the relevant Performance Period. NLTIP Awards shall
be made with respect to NLTIP Performance Periods, Profit Based RSU Awards shall
be made with respect to Profit Based RSU Performance Periods, and Stock Price
Based RSU Awards shall be made with respect to Stock Price Based RSU Performance
Periods. Each individual who becomes an Eligible Employee after the
first day of a Performance Period shall become a Participant and receive an
Award with respect to such Performance Period only if such individual is
selected prior to the last day of such Performance Period by the Administrator
in its sole discretion for participation in the Program with respect to such
Performance Period. Unless otherwise determined by the Administrator,
Payment Amounts with respect to a Stock Price Based RSU Award or an NLTIP Award
for an individual who becomes a Participant with respect to such Award after the
first day of the related Performance Period shall be pro-rated based on a
fraction, the numerator of which is (except as otherwise provided in Section 6.3
or Section 6.4) the number of days during the period beginning on the date of
such Participant’s commencement of participation in the Program for such
Performance Period and ending on the last day of such Performance Period, and
the denominator of which is the total number of days in such Performance
Period. In addition, unless otherwise determined by the
Administrator, Payment Amounts under Section 6.2(b) with respect to an
individual who becomes a Participant with respect to a Profit Based RSU
Performance Period after the first day of such Performance Period shall be
pro-rated based on a fraction, the numerator of which is (except as otherwise
provided in Section 6.3) the number of days during the period beginning on the
date of such Participant’s commencement of participation in the Program for such
Performance Period and ending on the date of the applicable payment under
Section 6.2(b), and the denominator of which is (except as otherwise provided in
Section 6.3) the number of days in the period beginning on the first day of the
relevant Profit Based RSU Performance Period and ending on the date of the
applicable payment under Section 6.2(b).
4.2 Award
Notices. The Company shall
provide an Award Notice to each Eligible Employee who becomes a Participant with
respect to a Performance Period within 90 days after such Eligible Employee
becomes such a Participant. With respect to Profit Based RSU Awards
and Stock Price Based RSU Awards to a Participant, the Administrator shall
determine in each case the number of RSUs subject to the Award as of the date of
grant of the Award. Each Award Notice with respect to a Profit Based
RSU Award shall specify (a) the Performance Period to which the Award relates,
(b) the applicable Cumulative Profit Sharing Pool Target Levels and Cash Hurdle,
(c) the number of RSUs subject to the Award as of the date of grant of the
Award, and (d) the Payout Structure and the Maximum Aggregate Payment Amount, if
any, applicable to the Award. Each Award Notice with respect to a
Stock Price Based RSU Award shall specify (i) the Performance Period to which
the Award relates, (ii) the applicable Target Price, and (iii) the number of
RSUs subject to the Award as of the date of grant of the Award. Each
Award Notice with respect to an NLTIP Award shall specify (A) the Performance
Period to which the Award relates, (B) the applicable Cash Hurdle, Target
EBITDAR Margin and Stretch EBITDAR Margin, and (C) the applicable Payout
Percentages set forth in Section 2.1(dd) hereof with respect to the Participant
applicable upon the date of grant of the Award.
V. INDUSTRY
GROUP
5.1 Initial
Designation. The Industry
Group shall consist of Alaska Air Group, Inc., AMR Corporation, Delta Air Lines,
Inc., Northwest Airlines Corporation, Southwest Airlines Co., UAL Corporation,
and US Airways Group, Inc.; provided, however, that (a) within 90 days after the
first day of each NLTIP Performance Period, the Committee may in its discretion
add any United States certificated scheduled mainline air carrier to, or remove
any such company from, the Industry Group for such Performance Period and (b)
the Industry Group for each NLTIP Performance Period shall be subject to
adjustment as provided in Section 5.2.
5.2 Adjustments
to the Industry Group During an NLTIP Performance Period. Except as
provided in clause (a) of the proviso to Section 5.1, no company shall be added
to, or removed from, the Industry Group for an NLTIP Performance Period during
such period; provided, however, that a company shall be removed from the
Industry Group for an NLTIP Performance Period if (a) during such period, (i)
such company ceases to maintain publicly available statements of operations
prepared in accordance with GAAP, (ii) such company is not the surviving entity
in any merger, consolidation, or other non-bankruptcy reorganization (or
survives only as a subsidiary of an entity other than a previously wholly owned
subsidiary of such company), (iii) such company sells, leases, or exchanges all
or substantially all of its assets to any other person or entity (other than a
previously wholly owned subsidiary of such company), or (iv) such company is
dissolved and liquidated, or (b) more than 20% of such company’s revenues
(determined on a consolidated basis based on the regularly prepared and publicly
available statements of operations of such company prepared in accordance with
GAAP) for any fiscal year of such company that ends during such Performance
Period are attributable to the operation of businesses other than such company’s
airline business and such company does not provide publicly available statements
of operations with respect to its airline business that are separate from the
statements of operations provided with respect to its other
businesses.
VI. AWARD
PAYMENTS
6.1 Determinations
and Certification by the Committee. As soon as
administratively feasible after the end of each NLTIP Performance Period and
Stock Price Based RSU Performance Period, and as soon as administratively
feasible after the end of each Fiscal Year in a Profit Based RSU Performance
Period, as the case may be, the Committee shall determine whether the applicable
Performance Target for such Performance Period has been met (including, with
respect to a Profit Based RSU Performance Period, the Cumulative Profit Sharing
Pool Target Level, if any, that has been achieved) and whether any other
material terms relating to the payment of the related Awards have been
satisfied. As soon as administratively feasible on or before each
Specified Payment Date under Section 6.2(b), the Committee shall determine
whether the Cash Hurdle for any Cash Hurdle Measurement Period related to such
date has been met. The Committee’s determination as to whether the
applicable Performance Target for a Performance Period, the Cash Hurdle for a
Cash Hurdle Measurement Period and any other material terms relating to the
payment of the related Awards have been satisfied shall be certified by the
Committee in writing and delivered to the Secretary of the
Company. For purposes of the preceding sentence, approved minutes of
the Committee meeting in which the certification is made shall be treated as a
written certification. Notwithstanding the foregoing, each written
certification by the Committee under this Section 6.1 shall be made by a date
which will permit the Company to comply with the time of payment requirements of
Sections 6.2 and 6.3 (after giving effect to the provisions of Section
6.7).
6.2 Eligibility
for Payment of Awards. Subject to the
delayed payment restrictions of Section 6.6, payments with respect to Awards
shall be made as follows:
(a) NLTIP Awards and Stock Price
Based RSU Awards. Upon the Committee’s written certification
in accordance with Section 6.1 that the applicable NLTIP Performance Target for
an NLTIP Performance Period or the applicable Stock Price Based RSU Performance
Target for a Stock Price Based RSU Performance Period and any other material
terms relating to the payment of the related Awards have been satisfied, each
Participant who has received an Award with respect to the relevant Performance
Period for which the related Performance Target and other material terms have
been satisfied, who has remained continuously employed by the Company from the
date he or she received such Award until the last day of such Performance Period
and who has not surrendered such Award to the Company shall be entitled to the
Payment Amount applicable to such Participant’s Award for such Performance
Period. Except as provided in Section 6.3(a) and Section 6.4(a), if a
Participant’s employment with the Company terminates for any reason whatsoever
prior to the last day of an NLTIP Performance Period or Stock Price Based RSU
Performance Period, then such Participant shall not be entitled to receive any
payment under the Program with respect to his or her Award for such Performance
Period, unless otherwise determined by the Administrator or otherwise provided
in the Participant’s employment agreement with the Company. Payment
of the amount to which a Participant becomes entitled pursuant to this Section
6.2(a) shall be made by the Company on or before (i) in the case of an NLTIP
Award, the 15th day of the third calendar month following the end of the
applicable Performance Period, and (ii) in the case of a Stock Price Based RSU
Award, the last day of the first calendar month following the end of the
applicable Performance Period.
(b) Profit Based RSU
Awards. If the Committee certifies in writing in accordance
with Section 6.1 that a Profit Based RSU Performance Target has been achieved as
of the last day of a Fiscal Year in a Profit Based RSU Performance Period, then
each Participant who has received an Award with respect to such Performance
Period for which the related Performance Target and other material terms
(including the relevant Cash Hurdle for the Cash Hurdle Measurement Period) have
been satisfied shall receive the following payments with respect to the
achievement of such Performance Target as of the last day of such Fiscal Year,
provided that such Participant remains continuously employed by the Company from
the date he or she received such Award until the date of payment specified
below:
(i) on
the First Specified Payment Date for such Fiscal Year, a payment in an amount
equal to (A) one third of the number of RSUs subject to such Award as of such
Specified Payment Date multiplied by (B) the
Profit Based RSU Payment Percentage applicable to the Cumulative Profit Sharing
Pool Target Level achieved at the end of such Fiscal Year multiplied by (C) the
Market Value per Share as of such First Specified Payment Date;
(ii) on
the Second Specified Payment Date for such Fiscal Year, a payment in an amount
equal to (A) one third of the number of RSUs subject to such Award as of such
Specified Payment Date multiplied by (B) the
Profit Based RSU Payment Percentage applicable to the Cumulative Profit Sharing
Pool Target Level achieved at the end of such Fiscal Year multiplied by (C) the
Market Value per Share as of such Second Specified Payment Date;
and
(iii) on
the Third Specified Payment Date for such Fiscal Year, a payment in an amount
equal to (A) one third of the number of RSUs subject to such Award as of such
Specified Payment Date multiplied by (B) the
Profit Based RSU Payment Percentage applicable to the Cumulative Profit Sharing
Pool Target Level achieved at the end of such Fiscal Year multiplied by (C) the
Market Value per Share as of such Third Specified Payment Date.
Notwithstanding
the foregoing, if the Cash Hurdle for the relevant Profit Based RSU Performance
Period has not been achieved as of an applicable Specified Payment Date set
forth above and been certified by the Committee in writing in accordance with
Section 6.1, then such Specified Payment Date shall be deferred and shall be
deemed to occur on the next annual anniversary date of the original Specified
Payment Date for which the Committee certifies in writing in accordance with
Section 6.1 that such Cash Hurdle was achieved; provided, however, that if such
Cash Hurdle is not so achieved on or before the first day of the 87th month
following the end of the Fiscal Year to which such Specified Payment Date
relates (or if such Cash Hurdle is not so achieved on or before the first day of
the 99th month following the end of the Fiscal Year if such Specified Payment
Date relates to the Fiscal Year ending on December 31, 2006), then no payment
shall be made under this Section 6.2(b) for such Specified Payment Date with
respect to the related Profit Based RSU Award. Except as provided in
Section 6.3(b) and Section 6.4(b), if a Participant’s employment with the
Company terminates for any reason whatsoever prior to a payment date specified
in this Section 6.2(b), then such Participant shall not be entitled to receive
any payment with respect to his or her Profit Based RSU Award for such payment
date or for any subsequent payment date, unless otherwise determined by the
Administrator or otherwise provided in the Participant’s employment agreement
with the Company.
Notwithstanding
the preceding provisions of this Section 6.2(b) or the provisions of Sections
6.3(b) and 6.4(b), in no event shall the aggregate payments under the Program to
a Participant with respect to an RSU subject to a Profit Based RSU Award for
which the Profit Based RSU Performance Period begins on or after January 1,
2009, exceed an amount equal to the Maximum Aggregate Payment Amount, if any,
applicable to such RSU. To the extent that any payment provided under
the Program with respect to an RSU (determined without regard to the limitation
described in the preceding sentence) would, together with all prior payments
made with respect to such RSU, exceed the limitation described in the preceding
sentence, then such excess shall not be paid under the Program and the holder of
such RSU shall have no rights or entitlements to any such excess
amount.
6.3 Death, Disability or
Retirement.
(a) NLTIP Awards and Stock Price
Based RSU Awards. Except as provided in Section 6.4(a) and
except as specifically provided in a Participant’s employment agreement or
retirement agreement with the Company, if during an NLTIP Performance Period or
a Stock Price Based RSU Performance Period with respect to which a Participant
has received an Award, such Participant dies or becomes Disabled or Retires,
then as to such Participant only (i) the Administrator, with respect to each
Stock Price Based RSU Performance Period that began prior to the date of such
Participant’s death, Disability or Retirement and which has not ended as of such
date, shall as promptly as practicable determine whether the Market Value per
Share at any date during such Performance Period that is on or before the date
of such death, Disability or Retirement has been equal to or greater than the
Target Price with respect to such Performance Period (in which case the Stock
Price Based RSU Performance Target shall be deemed to have been met, as to such
Participant only), (ii) the Administrator, with respect to each NLTIP
Performance Period that began prior to the date of such Participant’s death,
Disability or Retirement and which has not ended as of such date, shall as
promptly as practicable determine (based on publicly available data with respect
to each NLTIP Performance Period that began prior to the date of such
Participant’s death, Disability or Retirement and which has not ended as of such
date) the Company’s EBITDAR Margin and the Entry EBITDAR Margin through the most
recent practicable date and the Company’s cash flow through the most recent
practicable date, and the Company’s resulting cash, cash equivalents and short
term investments, excluding restricted cash, cash equivalents and short term
investments at the most recent practicable date, and shall determine, based on
such data and publicly available data with respect to the companies contained in
the Industry Group (and, if deemed appropriate by the Administrator, annualizing
or otherwise making assumptions with respect to any relevant data), whether the
Company has achieved the relevant NLTIP Performance Target through such most
recent practicable date (and if so, the NLTIP Performance Target shall be deemed
to have been met, as to such Participant only), and (iii) the provisions of
Sections 6.1 and 6.2(a) shall cease to apply with respect to each such
Performance Period. Except as provided in Section 6.4(a) and except
as specifically provided in a Participant’s employment agreement or retirement
agreement with the Company, with respect to each such Stock Price Based RSU
Performance Period that began prior to the date of such Participant’s death,
Disability or Retirement and which has not ended as of such date that the Market
Value per Share has been equal to or greater than the Target Price with respect
to such Performance Period as described in clause (i) of the preceding sentence,
such Participant (or, in the case of death, such Participant’s estate) shall (A)
receive a payment from the Company, within five business days after the
determination by the Administrator referred to in clause (i) of the foregoing
sentence (but in no event later than March 15 of the calendar year following the
calendar year in which occurred the Participant’s death, Disability or
Retirement), equal to the relevant Payment Amount applicable to such
Participant’s Stock Price Based RSU Award for such Stock Price Based RSU
Performance Period, and (B) not be entitled to any additional payment under the
program with respect to such Stock Price Based RSU Performance Period, and with
respect to each NLTIP Performance Period that began prior to the date of such
Participant’s death, Disability or Retirement and which has not ended as of such
date with respect to which the NLTIP Performance Target has been satisfied in
the manner described in clause (ii) of the preceding sentence, such Participant
(or, in the case of death, such Participant’s estate) shall (A) receive a
payment from the Company, within five business days after the determination by
the Administrator referred to in clause (ii) of the foregoing sentence (but in
no event later than March 15 of the calendar year following the calendar year in
which occurred the Participant’s death, Disability or Retirement), equal to the
relevant Payment Amount applicable to such Participant’s NLTIP Award for such
NLTIP Performance Period multiplied by a fraction, the numerator of which is the
number of days during the period beginning on the date of such Participant’s
commencement of participation in the Program for such NLTIP Performance Period
and ending on the date such Participant died, became Disabled or Retired, and
the denominator of which is the number of days in the entire NLTIP Performance
Period, and (B) not be entitled to any additional payment under the Program with
respect to such NLTIP Performance Period.
(b) Profit Based RSU
Awards.
(i) Awards with a Profit Based
RSU Performance Period that began prior to January 1,
2008. The provisions of this Section 6.3(b)(i) shall apply
only to Profit Based RSU Awards with respect to which the Profit Based RSU
Performance Period began prior to January 1, 2008. Except as provided
in Section 6.4(b) and except as specifically provided in a Participant’s
employment agreement or retirement agreement with the Company, if during a
Profit Based RSU Performance Period with respect to which a Participant has
received an Award (or after such Performance Period has ended but prior to the
date such Participant has received all payments to which such Participant may
have otherwise been entitled to under Section 6.2(b) if such Participant had
continued to be employed by the Company), such Participant dies or becomes
Disabled or Retires, then, as to such Participant only, such Participant shall
receive payments in the amounts and at the times specified in Section 6.2(b)
determined as if such Participant had remained continuously employed by the
Company until the applicable payment date, except that:
(A) each
such payment shall be multiplied by a fraction, the numerator of which is the
number of days during the period beginning on the date of such Participant’s
commencement of participation in the Program for the relevant Profit Based RSU
Performance Period and ending on the date such Participant died, became Disabled
or Retired, and the denominator of which is the number of days in the period
beginning on the first day of the relevant Profit Based RSU Performance Period
and ending on the date of the applicable payment under Section 6.2(b);
and
(B) no
payments shall be made to or for the benefit of such Participant with respect to
any Profit Based RSU Performance Target that is achieved with respect to a
Fiscal Year that begins after the date of such Participant’s death, Disability
or Retirement.
Notwithstanding
the foregoing, except as specifically provided in a Participant’s employment
agreement or retirement agreement with the Company, (1) if a Change in Control
occurs after the date of such Participant’s death, Disability or Retirement,
then each payment to which such Participant may still be entitled to pursuant to
the preceding provisions of this Section 6.3(b)(i) as of the date of such Change
in Control that has not previously been paid to such Participant shall be paid
to such Participant within five business days after the date of such Change in
Control, and (2) each such payment shall be determined in the manner described
in such provisions, except that (x) the denominator of the fraction described in
clause (A) above shall be determined based upon the earliest date after such
Change in Control on which such payment could have otherwise been paid under
Section 6.2(b) and (y) the amount of such payment shall be based on the Market
Value per Share as of the date of such Change in Control (rather than as of the
date specified in Section 6.2(b)).
(ii) Awards with a Profit Based
RSU Performance Period that began on or after January 1,
2008. The provisions of this Section 6.3(b)(ii) shall apply
only to Profit Based RSU Awards with respect to which the Profit Based RSU
Performance Period began on or after January 1, 2008. Except as
provided in Section 6.4(b) and except as specifically provided in a
Participant’s employment agreement or retirement agreement with the Company, if
during a Profit Based RSU Performance Period with respect to which a Participant
has received an Award (or after such Performance Period has ended but prior to
the date such Participant has received all payments to which such Participant
may have otherwise been entitled to under Section 6.2(b) if such Participant had
continued to be employed by the Company), such Participant dies or becomes
Disabled or Retires, then, as to such Participant only, such Participant shall
receive a payment on the Applicable Specified Payment Date (as defined below) in
an amount equal to the aggregate remaining individual payments (each, an
“Individual Payment”) that such Participant would have otherwise received with
respect to such Award pursuant to the provisions of Section 6.2(b) determined as
if such Participant had remained continuously employed by the Company until the
applicable payment date and assuming that the Cash Hurdle applicable to each
such Individual Payment was achieved at the earliest relevant time, except
that:
(A) each
such Individual Payment shall be multiplied by a fraction, the numerator of
which is the number of days during the period beginning on the date of such
Participant’s commencement of participation in the Program for the relevant
Profit Based RSU Performance Period and ending on the date such Participant
died, became Disabled or Retired, and the denominator of which is the number of
days in the period beginning on the first day of the relevant Profit Based RSU
Performance Period and ending on the earliest date after the date such
Participant died, became Disabled or Retired as of which payment of such
Individual Payment could have been made under Section 6.2(b) (determined based
upon the assumption that the Cash Hurdle applicable to such payment was
satisfied); and
(B) no
payments shall be made to or for the benefit of such Participant with respect to
any Profit Based RSU Performance Target that is achieved with respect to a
Fiscal Year that begins after the date of such Participant’s death, Disability
or Retirement.
For
purposes of the preceding sentence, the “Applicable Specified Payment Date”
means, with respect to each relevant Profit Based RSU Performance Period, the
Specified Payment Date next occurring (and for which the Cash Hurdle was
actually achieved) with respect to such Performance Period after the Fiscal Year
in which the Participant died, became Disabled or Retired.
Notwithstanding
the foregoing, except as specifically provided in a Participant’s employment
agreement or retirement agreement with the Company, (1) if a Change in Control
occurs after the date of such Participant’s death, Disability or Retirement,
then each payment to which such Participant may still be entitled to pursuant to
the preceding provisions of this Section 6.3(b)(ii) as of the date of such
Change in Control that has not previously been paid to such Participant shall be
paid to such Participant within five business days after the date of such Change
in Control, and (2) each such payment shall be determined in the manner
described in such provisions, except that the amount of such payment shall be
based on the Market Value per Share as of the date of such Change in Control
(rather than as of the date specified in Section 6.2(b)).
6.4 Change in
Control.
(a) NLTIP Awards and Stock Price
Based RSU Awards. Upon the occurrence of a Change in Control,
with respect to each Participant who is employed by the Company on the day
immediately preceding the date of such Change in Control (or whose employment is
terminated in connection therewith or in contemplation thereof), (i) the NLTIP
Performance Targets and the Stock Price Based RSU Performance Targets, including
achievement of the Stretch EBITDAR Margin, for each relevant Performance Period
that began prior to the date of such Change in Control and which has not ended
as of such date shall be deemed to have been satisfied, and (ii) the provisions
of Sections 6.1, 6.2(a) and 6.3(a) shall cease to apply with respect to each
such Performance Period.
If a
Change in Control occurs and thereafter (or in connection therewith or in
contemplation thereof) during a Stock Price Based RSU Performance Period
described in the first paragraph of this Section 6.4(a) a Participant who has
received a Stock Price Based RSU Award with respect to such Stock Price Based
RSU Performance Period suffers a Qualifying Event or subsequent to the Change in
Control dies, becomes Disabled, or Retires, then, with respect to each such
Stock Price Based RSU Performance Period, such Participant (or, in the case of
death, such Participant’s estate) shall (i) within five business days after the
occurrence of the Qualifying Event, death, Disability or Retirement, receive a
payment from the Company equal to the Payment Amount applicable to such
Participant’s Stock Price Based RSU Award for such Stock Price Based RSU
Performance Period, and (ii) not be entitled to any additional payment under the
Program with respect to such Stock Price Based RSU Performance
Period.
If a
Change in Control occurs during an NLTIP Performance Period, then, on or before
the Applicable Payment Date (as defined below) following the end of each
calendar year in such NLTIP Performance Period ending on or after the date of
such Change in Control, each Retirement Eligible Participant (as defined below)
with respect to such calendar year who has received an NLTIP Award with respect
to such NLTIP Performance Period shall receive a payment from the Company equal
to (i) the Payment Amount applicable to such Participant’s NLTIP Award for such
NLTIP Performance Period (determined as if such Participant had Retired on the
last day of such calendar year) multiplied by a fraction, the numerator of which
is the number of days during the period beginning on the date of such
Participant’s commencement of participation in the Program for such NLTIP
Performance Period and ending on the last day of such calendar year, and the
denominator of which is the number of days in the entire NLTIP Performance
Period, minus (ii) the aggregate payments, if any, made to such Participant
pursuant to this paragraph with respect to prior calendar years. For
purposes of the preceding sentence, (A) the “Applicable Payment Date” with
respect to a calendar year shall mean the fifteenth day of the third calendar
month following the end of such year (or, in the case of the last calendar year
in an NLTIP Performance Period, such term shall mean the fifth business day
after the end of such year), and (B) a Participant shall be considered a
“Retirement Eligible Participant” with respect to a calendar year if such
Participant was eligible to Retire during such year and did not suffer a
Qualifying Event, die, become Disabled or Retire during such year.
If a
Change in Control occurs and thereafter (or in connection therewith or in
contemplation thereof) during an NLTIP Performance Period described in the first
paragraph of this Section 6.4(a) a Participant who has received an NLTIP Award
with respect to such NLTIP Performance Period suffers a Qualifying Event or
subsequent to the Change in Control dies, becomes Disabled, or Retires, then,
with respect to each such NLTIP Performance Period, such Participant (or, in the
case of death, such Participant’s estate) shall (i) within five business days
after the occurrence of the Qualifying Event, death, Disability or Retirement,
receive a payment from the Company equal to (A) the Payment Amount applicable to
such Participant’s NLTIP Award for such NLTIP Performance Period multiplied by a
fraction, the numerator of which is the number of days during the period
beginning on the date of such Participant’s commencement of participation in the
Program for such NLTIP Performance Period and ending on the date such
Participant died, became Disabled, Retired or suffered the Qualifying Event, and
the denominator of which is the number of days in the entire NLTIP Performance
Period, minus (B) the aggregate payments, if any, made or payable to such
Participant pursuant to the third paragraph of this Section 6.4(a) with respect
to calendar years that ended prior to the date of such Participant’s Qualifying
Event, death, Disability or Retirement, and (ii) not be entitled to any
additional payment under the Program with respect to such NLTIP Performance
Period (other than any unpaid amount owed to such Participant pursuant to the
third paragraph of this Section 6.4(a) with respect to a calendar year that
ended prior to the date of such Participant’s Qualifying Event, death,
Disability or Retirement).
If a
Change in Control occurs and a Participant who has received an Award with
respect to an NLTIP Performance Period or a Stock Price Based RSU Performance
Period described in the first paragraph of this Section 6.4(a) did not die,
become Disabled, Retire or suffer a Qualifying Event during such Performance
Period and such Participant remained continuously employed by the Company from
the date he or she received such Award until the last day of such Performance
Period, then, with respect to each such Performance Period, such Participant
shall receive a payment from the Company within five business days after the
last day of such Performance Period in an amount equal to (i) the Payment Amount
applicable to such Participant’s Award for such Performance Period, minus (ii)
in the case of an Award with respect to an NLTIP Performance Period, the
aggregate payments, if any, made or payable to such Participant pursuant to the
third paragraph of this Section 6.4(a) with respect to such Award.
(b) Profit Based RSU
Awards. Upon the occurrence of a Change in Control, (i) the
Cash Hurdle for each Profit Based RSU Performance Period that began prior to the
date of such Change in Control and for which a potential for payment under
Sections 6.2(b) or 6.3(b) exists as of the date of such Change in Control shall
be deemed to have been satisfied, and (ii) the Profit Based RSU Performance
Targets for each Profit Based RSU Performance Period that began prior to the
date of such Change in Control and which has not ended as of such date shall be
deemed to have been satisfied for the Fiscal Year in which the Change in Control
occurs at the Cumulative Profit Sharing Pool Target Level specified by the
Committee for purposes of this Section 6.4(b) at the time of grant of the
related Award (provided that this clause (ii) shall not be applicable with
respect to any such Profit Based RSU Performance Period if such Profit Based RSU
Performance Target was satisfied in a Fiscal Year that ended prior to the Fiscal
Year in which such Change in Control occurs at such Cumulative Profit Sharing
Pool Target Level or a higher level). Notwithstanding any provision
in the Program to the contrary, upon the occurrence of a Change in Control, no
Profit Based RSU Performance Target may be achieved with respect to a Fiscal
Year that begins after the date of such Change in Control, and no payments shall
be made to or for the benefit of any Participant with respect to any Profit
Based RSU Performance Target that would have otherwise been achieved for any
such Fiscal Year.
If a
Change in Control occurs, then the provisions of Sections 6.2(b) and 6.3(b)
shall continue to apply to the Profit Based RSU Performance Periods described in
the preceding paragraph with the following modifications:
(i) certification
by the Committee under Section 6.1 of the achievement of the relevant Profit
Based RSU Performance Target and Cash Hurdle shall not be required;
(ii) the
Payment Amount described in Section 6.2(b) as of each applicable Specified
Payment Date that occurs after the date of such Change in Control shall be based
on the Market Value per Share as of the date of such Change in Control (rather
than the Market Value per Share as of such Specified Payment Date);
and
(iii) if
after such Change in Control (or in connection therewith or in contemplation
thereof) and prior to receiving all payments pursuant to Section 6.2(b) with
respect to such Profit Based RSU Performance Periods a Participant who has
received a Profit Based RSU Award with respect to such Profit Based RSU
Performance Periods suffers a Qualifying Event or subsequent to the Change in
Control dies, becomes Disabled, or Retires, then such Participant (or, in the
case of death, such Participant’s estate) shall (A) within five business days
after the occurrence of the Qualifying Event, death, Disability or Retirement,
receive a payment from the Company equal to the aggregate of such remaining
Payment Amounts, and (B) not be entitled to any additional payment under the
Program with respect to such Payment Amounts; provided, however, that if a
Participant who has received a Profit Based RSU Award with respect to such
Profit Based RSU Performance Periods is eligible to Retire as of the date of
such Change in Control or continues in employment with the Company after such
Change in Control until the date such Participant first becomes eligible to
Retire, and if such Participant does not suffer a Qualifying Event, die, become
Disabled or Retire prior to such Participant’s Applicable Retirement Date (as
defined below), then the payments described in the preceding provisions of this
clause (iii) shall not be made following such Participant’s Retirement as
provided above, but, rather, shall be made on or before the March 15 that next
follows such Participant’s Applicable Retirement Date.
For
purposes of clause (iii) of the preceding sentence, a Participant’s “Applicable
Retirement Date” is the date that is five business days before March 15 of the
calendar year next following the later of (x) the calendar year in which such
Change in Control occurs or (y) the calendar year in which such Participant
first became eligible to Retire.
6.5 Form of
Payment of Awards. All payments to
be made under the Program to a Participant with respect to an Award shall be
paid in a single lump sum payment in cash; provided, however, that, to the
extent permitted and subject to any limitations under the Incentive Plan 2000
and applicable laws and securities exchange rules, the Committee may, in its
sole discretion, direct that payment of Profit Based RSU Awards and/or Stock
Price Based RSU Awards be made either (a) in shares of Company Stock, but if and
only if at the time of payment the Company has an effective registration
statement under the Securities Act of 1933, as amended, covering the issuance of
Company Stock under the Program, or (b) in a combination of cash and/or shares
of Company Stock. If the Committee elects to direct the Company to
pay all or a portion of a payment due for Profit Based RSU Awards or Stock Price
Based RSU Awards in shares of Company Stock, then:
(i) in
the case of RSUs granted prior to January 1, 2007, the number of shares of
Company Stock shall be determined by dividing the amount of such payment to be
paid in shares of Company Stock by the Market Value per Share as of the date of
the particular payment with respect to such Award (or, in the case of Stock
Price Based RSU Awards, as of the date used to determine the Payment Amount with
respect to such payment), and rounding such number down to the nearest whole
share;
(ii) in
the case of Stock Price Based RSU Awards granted on or after January 1,
2007, the number of shares of Company Stock shall be equal to the number of RSUs
subject to the Award that are to be so paid in Company Stock; and
(iii) in
the case of Profit Based RSU Awards granted on or after January 1, 2007, the
number of shares of Company Stock shall be determined by multiplying (A) one
third of the number of RSUs subject to such Award that are to be so paid in
Company Stock by (B) the Profit Based RSU Payment Percentage applicable to the
Cumulative Profit Sharing Pool Target Level achieved with respect to the payment
to be made in shares on the Specified Payment Date, rounding such number of
shares down to the nearest whole share.
Notwithstanding
the preceding provisions of this Section 6.5, if a payment to be made under the
Program to a Participant with respect to a Profit Based RSU Award is limited due
to the application of the Program limitations relating to the Maximum Aggregate
Payment Amount, then such payment may not be made in shares of Company
Stock.
6.6 Delayed
Payment Restriction. With respect to a
Participant who is identified as a specified employee (within the meaning of
Section 409A(a)(2)(B)(i) of the Code and as determined by the Company in
accordance with any of the methods permitted under the regulations issued under
Section 409A of the Code) and who is to receive a payment hereunder (which
payment is not a “short-term deferral” for purposes of Section 409A of the Code)
on account of such Participant’s separation from service (within the meaning of
Section 409A(a)(2)(A)(i) of the Code and applicable administrative guidance
thereunder, but excluding a separation from service by reason of death or
Disability), the payment to such Participant shall not be made prior to the
earlier of (a) the date that is six months after the Participant’s termination
of employment or (b) the date of death of the Participant. In such
event, any payment to which the Participant would have otherwise been entitled
during the first six months following the Participant’s termination of
employment (or, if earlier, prior to the Participant’s date of death) shall be
accumulated and paid in the form of a single lump sum payment to the Participant
on the date that is six months after the Participant’s termination of employment
or to the Participant’s estate on the date of the Participant’s death, as
applicable.
6.7 Time of
Payment Obligations. Any obligation
hereunder to make a payment on a specified date shall be deemed to have been
satisfied in the event that such payment is made within five business days after
such specified date; provided, however, that, with respect to a payment that is
intended to qualify as a “short-term deferral” under Section 409A of the Code,
in no event shall such payment be made later than the date required in order for
such payment to so qualify.
VII. TERMINATION AND AMENDMENT OF
PROGRAM
7.1 Termination
and Amendment. Subject to the
terms of this Section 7.1, the Committee may amend the Program at any time and
from time to time, and the Committee may at any time terminate the Program (in
its entirety or as it applies to one or more specified Subsidiaries) with
respect to Performance Periods that have not commenced as of the date of such
Committee action; provided, however, that, (a) except as provided in the
following sentence, the Program may not be amended in a manner that would impair
the rights of any Participant with respect to any outstanding Award without the
consent of such Participant, and (b) to the extent required by Section 409A of
the Code, the Program may not be amended or terminated in a manner that would
give rise to an impermissible acceleration of the time or form of a payment of a
benefit under the Program pursuant to Section 409A(a)(3) of the Code and any
regulations or guidance issued thereunder. Notwithstanding anything
in the Program or an Award Notice to the contrary, if the Committee determines
that the terms of the Program and/or any Award Notice do not, in whole or in
part, satisfy the requirements of Section 409A of the Code (or the requirements
for an exemption to the application of Section 409A of the Code), then the
Committee, in its sole discretion, may unilaterally modify the Program and any
such Award Notice in such manner as it deems appropriate to comply with such
section and any regulations or guidance issued thereunder (or to qualify for an
exemption to the application of such section). No Participant’s
participation herein may be terminated in contemplation of or in connection with
a Change in Control. The Program may not be amended or terminated in
contemplation of or in connection with a Change in Control unless adequate and
effective provision for the making of all payments otherwise payable pursuant to
Section 6.4 of the Program (as in effect on the date of the adoption of this
amendment and restatement of the Program by the Committee) with respect to such
Change in Control shall be made in connection with any such amendment or
termination. The Committee shall remain in existence after the
termination of the Program for the period determined necessary by the Committee
to facilitate the termination of the Program and the payment of any outstanding
Awards hereunder, and all provisions of the Program that are necessary, in the
opinion of the Committee, for equitable operation of the Program during such
period shall remain in force.
VIII. MISCELLANEOUS
PROVISIONS
8.1 No Effect
on Employment Relationship. Except as
expressly provided otherwise herein, for all purposes of the Program, a
Participant shall be considered to be in the employment of the Company as long
as he or she has not incurred a separation from service with the Company and its
affiliates within the meaning of Section 409A(a)(2)(A)(i) of the Code and
applicable administrative guidance issued thereunder; provided, however, that
whether such a separation from service has occurred shall be determined based
upon a reasonably anticipated permanent reduction in the level of bona fide
services to be performed to no more than 20% (or 49% if the Participant will no
longer serve as an officer of the Company) of the average level of bona fide
services provided in the immediately preceding 36 months. Nothing in
the adoption of the Program, the grant of Awards, or the payment of amounts
under the Program shall confer on any person the right to continued employment
by the Company or any Subsidiary or affect in any way the right of the Company
(or a Subsidiary, if applicable) to terminate such employment at any
time. Unless otherwise provided in a written employment agreement,
the employment of each Participant shall be on an at-will basis, and the
employment relationship may be terminated at any time by either the Participant
or the Participant’s employer for any reason whatsoever, with or without
cause. Any question as to whether and when there has been a
termination of a Participant’s employment for purposes of the Program, and the
reason for such termination, shall be determined solely by and in the discretion
of the Administrator, and its determination shall be final, binding, and
conclusive on all parties.
8.2 Prohibition
Against Assignment or Encumbrance. No Award or other
right, title, interest, or benefit hereunder shall ever be assignable or
transferable, or liable for, or charged with any of the torts or obligations of
a Participant or any person claiming under a Participant, or be subject to
seizure by any creditor of a Participant or any person claiming under a
Participant. No Participant or any person claiming under a
Participant shall have the power to anticipate or dispose of any Award or other
right, title, interest, or benefit hereunder in any manner until the same shall
have actually been distributed free and clear of the terms of the
Program. Payments with respect to an Award shall be payable only to
the Participant (or (a) in the event of a Disability that renders such
Participant incapable of conducting his or her own affairs, any payment due
under the Program to such Participant shall be made to his or her duly appointed
legal representative and (b) in the event of the death of a Participant, any
payment due under the Program to such Participant shall be made to his or her
estate). Notwithstanding the preceding provisions of this paragraph, the
Administrator shall comply with the terms of any qualified domestic relations
order (as defined in the Incentive Plan 2000) providing for the transfer or
assignment of all or any portion of a Participant’s interest under the
Program. The provisions of the Program shall be binding on all
successors and permitted assigns of a Participant, including without limitation
the estate of such Participant and the executor, administrator or trustee of
such estate, or any receiver or trustee in bankruptcy or representative of the
Participant’s creditors.
8.3 Unfunded,
Unsecured Program. The Program shall
constitute an unfunded, unsecured obligation of the Company to make payments of
incentive compensation to certain individuals from its general assets in
accordance with the Program. Each Award granted under the Program
merely constitutes a mechanism for measuring such incentive compensation and
does not constitute a property right or interest in the Company, any Subsidiary,
or any of their assets. Neither the establishment of the Program, the
granting of Awards, nor any other action taken in connection with the Program
shall be deemed to create an escrow or trust fund of any kind.
8.4 No Rights
of Participant. No Participant
shall have any security or other interest in any assets of the Company or any
Subsidiary or in Company Stock as a result of participation in the Program
(except after payment thereof to the Participant). Participants and
all persons claiming under Participants shall rely solely on the unsecured
promise of the Company set forth herein, and nothing in the Program, an Award or
an Award Notice shall be construed to give a Participant or anyone claiming
under a Participant any right, title, interest, or claim in or to any specific
asset, fund, entity, reserve, account, or property of any kind whatsoever owned
by the Company or any Subsidiary or in which the Company or any Subsidiary may
have an interest now or in the future; but each Participant shall have the right
to enforce any claim hereunder in the same manner as a general
creditor. Neither the establishment of the Program nor participation
hereunder shall create any right in any Participant to make any decision, or
provide input with respect to any decision, relating to the business of the
Company or any Subsidiary.
8.5 Tax
Withholding. The Company and
the Subsidiaries shall deduct and withhold, or cause to be withheld, from a
Participant’s payment, including the delivery of Company Stock, made under the
Program, or from any other payment to such Participant, an amount necessary to
satisfy any and all tax withholding obligations arising under applicable local,
state, federal, or foreign laws associated with such payment. The
Company and the Subsidiaries may take any other action as may in their opinion
be necessary to satisfy all obligations for the payment and withholding of such
taxes.
8.6 No Effect
on Other Compensation Arrangements. Nothing contained
in the Program or any Participant’s Award or Award Notice shall prevent the
Company or any Subsidiary from adopting or continuing in effect other or
additional compensation arrangements affecting any
Participant. Nothing in the Program shall be construed to affect the
provisions of any other compensation plan or program maintained by the Company
or any Subsidiary.
8.7 Subsidiaries. The Company may
require any Subsidiary employing a Participant to assume and guarantee the
Company’s obligations hereunder to such Participant, either at all times or
solely in the event that such Subsidiary ceases to be a Subsidiary.
8.8 Governing
Law. The Program shall
be construed in accordance with the laws of the State of Texas.
*******
IN WITNESS WHEREOF, the
undersigned officer of the Company acting pursuant to authority granted to him
by the Committee has executed this instrument on February 18, 2009, to be
effective as of January 1, 2009.
CONTINENTAL AIRLINES,
INC.
By: /s/ Jeffery A.
Smisek
Jeffery A. Smisek
President and Chief Operating
Officer
Exhibit
10.14(a)
PROFIT
BASED RSU AWARD NOTICE
to
[Name]
Pursuant
to the Continental Airlines, Inc.
Long
Term Incentive and RSU Program
Performance
Period __________ to ____________
This
document constitutes your Award Notice with respect to a Profit Based RSU Award
as a Participant under the Continental Airlines, Inc. Long Term Incentive and
RSU Program (as amended from time to time, the “Program”) adopted under the
Continental Airlines, Inc. Incentive Plan 2000 (as amended from time to time,
the “Incentive Plan 2000”). This Award Notice evidences your receipt
of a Profit Based RSU Award under the Program, as follows:
(a) Number of RSUs. The
number of RSUs subject to this Profit Based RSU Award is _______________.
(b) Performance
Period. This Profit Based RSU Award is with respect to the
Profit Based RSU Performance Period commencing on __________ and ending on
_____________.
(c) Performance Target and Cash
Hurdle. The Performance Target applicable to this Profit Based
RSU Award is satisfied when (1) a Cumulative Profit Sharing Pool Target is
achieved for a particular Fiscal Year and (2) the Financial Performance Hurdle
is achieved for such Fiscal Year. The Cumulative Profit Sharing Pool
Target Level(s) applicable to this Profit Based RSU Award are as
follows:
[Level
One: $__________
(*)]
[*The
Committee shall establish the Cumulative Profit Sharing Pool Target Levels in
accordance with the terms of the Program at the time of the Award.]
The Cash
Hurdle applicable to this Profit Based RSU Award is $_____________.
The
Cumulative Profit Sharing Pool Target Level that shall be deemed to have been
achieved upon a Change in Control for purposes of Section 6.4(b) of the Program
is Level ____ for this Profit Based RSU Award.
(d) Payout
Structure. The Payout Structure applicable to this Profit
Based RSU Award is as follows:
|
Cumulative
Profit Sharing Pool
Target Level Achieved
|
Profit
Based RSU Payment Percentage (which is the percentage of RSUs for
which
payments may be made)
|
|
[Level
One]
|
[X
% (**)]
|
[**The
Committee shall determine the Profit Based RSU Payment Percentage applicable to
each Cumulative Profit Sharing Pool Target Level achieved in accordance with the
terms of the Program at the time of the Award.]
The
Cumulative Profit Sharing Pool Target Level achieved, if any, is determined at
the end of each Fiscal Year during the Profit Based RSU Performance
Period. The Cumulative Profit Sharing Pool Target Level achieved
determines the applicable Profit Based RSU Payment Percentage. If
more than one Cumulative Profit Sharing Pool Target Level has been established
for this Profit Based RSU Award, the Profit Based RSU Payment Percentage for
achieving a target level will be reduced by the Profit Based RSU Payment
Percentage applicable to the highest Cumulative Profit Sharing Pool Target
Level, if any, achieved for any prior Fiscal Year in the Performance
Period. [For example _________________ (***)] [***An example of the
calculation of the applicable Profit Based RSU Payment Percentage will be
included if more than one Cumulative Profit Sharing Pool Target Level is
established by the Committee.]
(e) Award
Payments. Prior to any payment under the Program, the Human
Resources Committee (the “Committee”) must (with limited exceptions) certify in
writing that the Performance Target for a Fiscal Year within the Performance
Period has been achieved, and that the Cash Hurdle for the Cash Hurdle
Measurement Period and any other material terms relating to payment have been
satisfied. If the Committee determines that the Performance Target or
Cash Hurdle for a Fiscal Year was not achieved, there will be no payment for
such Fiscal Year with respect to this Award.
Payments
with respect to achieving a Performance Target will be made in three
installments - ___ months, ___months and ___months following the end of the
Fiscal Year in which the Performance Target was achieved
(****). [****The payment dates will be established in accordance with
the terms of the Program at the time of the Award.] The Payment
Amount payable on such dates with respect to the achievement of a Performance
Target will be equal to one third of the number of Profit Based RSUs subject to
this Profit Based RSU Award multiplied by the applicable Profit Based RSU
Payment Percentage (determined based on the Cumulative Profit Sharing Pool
Target Level achieved) multiplied by the Market Value per Share on the payment
date (the average closing sales price of a share of Company Stock over the
20-consecutive Trading Days immediately preceding such payment date or, in the
event of a Change in Control, immediately preceding the date of the Change in
Control). [Notwithstanding the foregoing, in no event will the
aggregate payments under the Program with respect to an RSU subject to this
Profit Based RSU Award exceed an amount equal to $_____ (the “Maximum Aggregate
Payment Amount,” which amount is subject to adjustment as provided in the
Program). (*****)] [*****The Maximum Aggregate Payment Amount will be included
if established by the Committee in accordance with the terms of the Program at
the time of the Award.]
If the
Company does not achieve the Cash Hurdle applicable to a payment date, the
payment will be deferred to the next payment date (March 1st of the following
year, subject to a limit on the number of years payments may be carried
forward). If the Cash Hurdle is not satisfied for such subsequent
payment date, there will be no payment with respect to this Award. If
the Cash Hurdle is satisfied, [then, subject to the Maximum Aggregate Payment
Amount limitation (*****),] the Payment Amount will be paid on such date based
on the Market Value per Share at the time of payment.
Receipt
of a Payment Amount is also conditioned on your continuous employment with the
Company through the applicable payment date (with limited exceptions for certain
terminations of employment, such as death, Disability, Retirement and a
Qualifying Event suffered in connection with a Change in Control). A
Payment Amount may be pro-rated as provided in the Program under certain
circumstances.
(f) General. Capitalized
terms used in this Award Notice are defined in the Program, and your
participation is subject to the terms of the Program and the Incentive Plan
2000. The Program and the Incentive Plan 2000 are hereby incorporated
into this Award Notice by reference. The Company shall have the right
to make deductions from Payment Amounts to satisfy withholding of any taxes
required by law and may take any other action as may be necessary or appropriate
to satisfy any such tax withholding obligations.
If you
have any questions, or wish to obtain a copy of the Program or the Incentive
Plan 2000, please contact [____].
CONTINENTAL
AIRLINES, INC.
By:
[Officer
/ Title]
Exhibit
10.18
CONTINENTAL
AIRLINES, INC.
Non-Employee
Director Compensation Summary
Effective
February 18, 2009, members of our board of directors who are not full-time
employees of Continental Airlines, Inc. receive the following
compensation:
|
·
|
$25,000
per year, plus an additional annual fee
of:
|
|
§
|
$40,000
for the chairperson of the Audit
Committee;
|
|
§
|
$20,000
for the chairperson of the Corporate Governance Committee and Human
Resources Committee;
|
|
§
|
$25,000
for members of the Audit Committee (other than the
chairperson);
|
|
§
|
$15,000
for members of the Human Resources Committee (other than members who
receive an additional fee for service as the chairperson of a
committee);
|
|
·
|
$1,400
($2,100 for the chairperson) for each board and committee meeting
physically attended (other than an Audit Committee
meeting);
|
|
·
|
$2,000
($3,000 for the chairperson) for each Audit Committee meeting physically
attended;
|
|
·
|
$700
for each board meeting attended by
telephone;
|
|
·
|
$350
for each committee meeting attended by telephone ($500 for each Audit
Committee meeting attended by
telephone);
|
|
·
|
stock
options to purchase 7,500 shares of common stock at the grant date fair
market value following each annual stockholders meeting and upon election
to the board if they are first elected to the board other than at an
annual stockholders meeting;
|
|
·
|
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 the reimbursement of certain of such taxes by the
company), frequent flyer cards, airport lounge cards and airport parking
where available to Continental at no incremental
cost;
|
|
·
|
limited
flight benefits for the surviving spouse for a period of ten years
following a director’s death; and
|
|
·
|
$2,500
as compensation for time spent on orientation matters in connection with a
director’s first election to the Board of Directors or the director’s
appointment to a committee of the Board on which he or she has not
recently served.
|
In
addition, non-employee directors who conduct Continental business in their
capacities as directors on Continental's behalf at the request of the board or
the Chairman of the Board are paid (i) for telephone participation in board
and committee meetings as if they were physically present, if their conducting
that business makes it impractical for them to attend the meeting in person, and
(ii) $3,000 per day spent outside the United States while conducting that
business.
All
directors, including those who are full-time employees who serve as directors,
receive reimbursement of expenses incurred in attending meetings. Directors also
receive travel privileges on some other airlines through arrangements entered
into between Continental and such airlines.
EXHBIT
10.21(av)
Supplemental
Agreement No. 47
to
Purchase
Agreement No. 1951
Between
The
Boeing Company
and
Continental
Airlines, Inc.
Relating
to Boeing Model 737 Aircraft
THIS
SUPPLEMENTAL AGREEMENT, entered into as of October
30, 2008 by and
between THE BOEING COMPANY (Boeing) and CONTINENTAL AIRLINES, INC.
(Buyer);
WHEREAS, the parties
agree to [CONFIDENTIAL
MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]
WHEREAS, in order to
accommodate the [CONFIDENTIAL MATERIAL OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT]
NOW
THEREFORE, in consideration of the mutual covenants herein contained, the
parties agree to amend the Agreement as follows:
1. Table of Contents, Articles,
Tables and Exhibits:
1.1 Remove
and replace, in its entirety, the “Table of Contents”, with the Table of
Contents attached hereto, to reflect the changes made by this Supplemental
Agreement No. 47.
1.2 Remove
and replace, in their entirety, pages T-2-2 and T-2-3 of Table 1 entitled the
“Aircraft Deliveries and Descriptions, Model 737-700 Aircraft”, with the revised
pages T-2-2 and T-2-3 of Table 1 attached hereto.
2. Letter
Agreements:
2.1
Remove and replace, in its entirety, Attachment B to Letter Agreement No.
1951-9R20, “Option Aircraft – Model 737-724 Aircraft”, with the revised
Attachment B attached hereto.
3. [CONFIDENTIAL MATERIAL OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT]
Customer
agrees that [CONFIDENTIAL MATERIAL OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT]
4. Reschedule Rights to Account
for the IAM Strike
Boeing’s labor contract renewal date
with its principal employee union (the IAM) expired at midnight on September 3,
2008. After a 48 hour mediation effort, the IAM initiated a strike on September
6, 2008. Customer acknowledges that the Revised Delivery Dates
discussed in the first and second paragraphs above and also reflected in the
revised pages T-2-2 and T-2-3 to Table 1 and Attachment B to Letter Agreement
No. 1951-9R20, are based on Boeing’s manufacturing capabilities prior to the IAM
strike.
When the IAM strike ends, Boeing will
determine the effect of the strike on the Revised Delivery Dates herein and
Boeing will provide to Customer a new set of Revised Delivery Dates which will
reflect the effect of such strike (Post Strike Revised Delivery
Dates). Customer hereby agrees to incorporate into the Purchase
Agreement such Post Strike Revised Delivery Dates. Customer also
acknowledges that [CONFIDENTIAL
MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]
The
Agreement will be deemed to be supplemented to the extent herein provided as of
the date hereof and as so supplemented will continue in full force and
effect.
EXECUTED
IN DUPLICATE as of the day and year first written above.
THE
BOEING
COMPANY CONTINENTAL
AIRLINES, INC.
By:
/s/ R.C.
Nelson By: /s/Gerald
Laderman
Its:
Attorney-In-Fact Its: Senior Vice President
- -
Finance and
Treasurer
TABLE OF
CONTENTS
|
Page
Number
|
SA
Number
|
||
|
ARTICLES
|
|||
|
1.
|
Subject
Matter of
Sale
|
1-1
|
SA
39
|
|
2.
|
Delivery,
Title and Risk of
Loss
|
2-1
|
|
|
3.
|
Price
of
Aircraft
|
3-1
|
SA
39
|
|
4.
|
Taxes 40
|
4-1
|
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5.
|
Payment
|
5-1
|
|
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6.
|
Excusable
Delay
|
6-1
|
|
|
7.
|
Changes
to the Detail
Specification
|
7-1
|
SA
39
|
|
8.
|
Federal
Aviation Requirements and Certificates and
Export
License
|
8-1
|
SA
39
|
|
9.
|
Representatives,
Inspection, Flights and Test Data
|
9-1
|
|
|
10.
|
Assignment,
Resale or Lease
|
10-1
|
|
|
11.
|
Termination
for Certain
Events
|
11-1
|
|
|
12.
|
Product
Assurance; Disclaimer and Release: Exclusion of
Liabilities;
Customer Support; Indemnification and Insurance
|
12-1
|
|
|
13.
|
Buyer
Furnished Equipment and Spare Parts
|
13-1
|
|
|
14.
|
Contractual
Notices and
Requests
|
14-1
|
SA
39
|
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15.
|
Miscellaneous
|
15-1
|
|
|
|
TABLE
OF CONTENTS
|
|
Page
Number
|
SA
Number
|
|||
|
TABLES
|
||||
|
1.
|
Aircraft
Deliveries and Descriptions - 737-500
|
T-1
|
SA
3
|
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|
Aircraft
Deliveries and Descriptions - 737-700
|
T-2
|
SA
47
|
||
|
Aircraft
Deliveries and Descriptions - 737-800
|
T-3
|
SA
45
|
||
|
Aircraft
Deliveries and Descriptions - 737-600
|
T-4
|
SA
4
|
||
|
Aircraft
Deliveries and Descriptions - 737-900
|
T-5
|
SA
39
|
||
|
Aircraft
Deliveries and Descriptions - 737-900ER
|
T-6
|
SA
47
|
||
|
EXHIBITS
|
||||
|
A-1
|
Aircraft
Configuration - Model 737-724
(Aircraft
delivering through July
2004)
|
SA
26
|
||
|
A-1.1
|
Aircraft
Configuration - Model 737-724
(Aircraft
delivering on or after August 2004)
|
SA
46
|
||
|
A-2
|
Aircraft
Configuration - Model 737-724
(Aircraft
delivering July
2004)
|
SA
26
|
||
|
A-2.1
|
Aircraft
Configuration - Model 737-824
(Aircraft
delivering August 2004 through December 2007)
|
SA
41
|
||
|
A-2.2
|
Aircraft
Configuration - Model 737-824
(Aircraft
delivering January 2008 through July 2008)
|
SA
45
|
||
|
A-2.3
|
Aircraft
Configuration - Model 737-824
(Aircraft
delivering after July
2008)
|
SA
45
|
||
|
A-3
|
Aircraft
Configuration - Model
737-624
|
SA
1
|
||
|
A-4
|
Aircraft
Configuration - Model
737-524
|
SA
3
|
||
|
A-5
|
Aircraft
Configuration - Model 737-924
[CONFIDENTIAL
MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT]
|
SA
26
|
||
|
A-6
|
Aircraft
Configuration - Model 737-92ER
[CONFIDENTIAL
MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT]
|
SA
45
|
||
|
A-6.1
|
Aircraft
Configuration - Model 737-924ER[CONFIDENTIAL MATERIAL OMITTED
AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT
TO A REQUEST FOR CONFIDENTIAL TREATMENT]
|
SA
45
|
||
|
B
|
Product
Assurance
Document
|
SA
1
|
||
|
C
|
Customer
Support Document - Code Two -
Major
Model
Differences
|
SA
1
|
||
|
C1
|
Customer
Support Document - Code Three -
Minor
Model
Differences
|
SA
39
|
||
|
D
|
Aircraft
Price Adjustments - New Generation
Aircraft (1995 Base
Price - [CONFIDENTIAL MATERIAL OMITTED
AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT
TO A REQUEST FOR CONFIDENTIAL TREATMENT]
|
SA
1
|
||
|
D1
|
Aircraft
and Engine Price Adjustments -
Current
Generation
Aircraft
|
SA
5
|
||
|
D2
|
Aircraft
Price Adjustments - New Generation Aircraft
(1997 Base Price
[CONFIDENTIAL
MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT]
|
SA
5
|
||
|
D3
|
Aircraft
Price Adjustments - New Generation Aircraft
(July 2003 Base
Price - [CONFIDENTIAL MATERIAL OMITTED
AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT
TO A REQUEST FOR CONFIDENTIAL TREATMENT]
|
SA
41
|
||
|
D4
|
Escalation
Adjustment - Airframe and Optional Features
[CONFIDENTIAL
MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT]
|
SA
41
|
||
|
E
|
Buyer
Furnished Equipment Provisions Document
|
SA
39
|
||
|
F
|
Defined
Terms
Document
|
SA
5
|
||
|
|
TABLE
OF CONTENTS
|
|
LETTER AGREEMENTS
|
SA
Number
|
|
|
1951-1
|
Not
Used
|
|
|
1951-2R4
|
Seller
Purchased
Equipment
|
SA
39
|
|
1951-3R22
|
Option
Aircraft-Model 737-824
Aircraft
|
SA
38
|
|
1951-4R1
|
Waiver
of Aircraft
Demonstration
|
SA
1
|
|
1951-5R3
|
Promotional
Support - New Generation Aircraft
|
SA
39
|
|
1951-6
|
Configuration
Matters
|
|
|
1951-7R1
|
Spares
Initial
Provisioning
|
SA
1
|
|
1951-8R2
|
Escalation
Sharing - New Generation
Aircraft
|
SA
4
|
|
1951-9R20
|
Option
Aircraft-Model 737-724 Aircraft SA 45
|
SA
45
|
|
1951-11R1
|
Escalation
Sharing-Current Generation Aircraft
|
SA
4
|
|
1951-12R7
|
Option
Aircraft - Model 737-924
Aircraft
|
SA
32
|
|
1951-13
|
Configuration
Matters - Model
737-924
|
SA
5
|
|
1951-14
|
Installation
of Cabin Systems Equipment 737-924
|
SA
22
|
|
1951-15
|
Configuration
Matters - Model
737-924ER
|
SA
39
|
TABLE OF
CONTENTS
|
RESTRICTED LETTER
AGREEMENTS
|
SA
Number
|
|
|
6-1162-MMF-295
|
Performance
Guarantees - Model 737-724 Aircraft
|
|
|
6-1162-MMF-296
|
Performance
Guarantees - Model 737-824 Aircraft
|
|
|
6-1162-MMF-308R4
|
Disclosure
of Confidential Information
|
SA
39
|
|
6-1162-MMF-309R1
|
[CONFIDENTIAL
MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT]
|
SA
1
|
|
6-1162-MMF-311R6
|
[CONFIDENTIAL
MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT]
|
SA
46
|
|
6-1162-MMF-312R1
|
Special
Purchase Agreement Provisions
|
SA
1
|
|
6-1162-MMF-319
|
Special
Provisions Relating to the Rescheduled Aircraft
|
|
|
6-1162-MMF-378R1
|
Performance
Guarantees - Model 737-524 Aircraft
|
SA
3
|
|
6-1162-GOC-015R1
|
[CONFIDENTIAL
MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT]
|
SA
31
|
|
6-1162-GOC-131R10
|
Special
Matters
|
SA
46
|
|
6-1162-DMH-365
|
Performance
Guarantees - Model 737-924 Aircraft
|
SA
5
|
|
6-1162-DMH-624
|
[CONFIDENTIAL
MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT]
|
SA
8
|
|
6-1162-DMH-680
|
Delivery
Delay Resolution Program
|
SA
9
|
|
6-1162-DMH-1020
|
[CONFIDENTIAL
MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT]
|
SA
14
|
|
6-1162-DMH-1035
|
[CONFIDENTIAL
MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT]
|
SA
15
|
|
6-1162-DMH-1054
|
[CONFIDENTIAL
MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT]
|
SA
16
|
|
6-1162-CHL-048
|
Rescheduled
Aircraft Agreement
|
SA
26
|
|
6-1162-CHLl-195
|
Restructure
Agreement for Model 737NG and 757-300
Aircraft
|
SA
30
|
|
6-1162-MSA-768
|
Performance
Guarantees - Model 737-924ER Aircraft
|
SA
39
|
|
6-1162-SEE-133
|
[CONFIDENTIAL
MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT]
|
SA
46
|
TABLE OF
CONTENTS
|
SUPPLEMENTAL AGREEMENTS
|
DATED AS OF:
|
|
Supplemental
Agreement No.
1
|
October
10, 1996
|
|
Supplemental
Agreement No.
2
|
March
5, 1997
|
|
Supplemental
Agreement No.
3
|
July
17, 1997
|
|
Supplemental
Agreement No.
4
|
October
10, 1997
|
|
Supplemental
Agreement No.
5
|
May
21, 1998
|
|
Supplemental
Agreement No.
6
|
July
30, 1998
|
|
Supplemental
Agreement No.
7
|
November
12, 1998
|
|
Supplemental
Agreement No.
8
|
December
7, 1998
|
|
Supplemental
Agreement No.
9
|
February
18, 1999
|
|
Supplemental
Agreement No.
10
|
March
19, 1999
|
|
Supplemental
Agreement No.
11
|
May
14, 1999
|
|
Supplemental
Agreement No.
12
|
July
2, 1999
|
|
Supplemental
Agreement No.
13
|
October
13, 1999
|
|
Supplemental
Agreement No.
14
|
December
13, 1999
|
|
Supplemental
Agreement No.
15
|
January
13, 2000
|
|
Supplemental
Agreement No.
16
|
March
17, 2000
|
|
Supplemental
Agreement No.
17
|
May
16, 2000
|
|
Supplemental
Agreement No.
18
|
September
11, 2000
|
|
Supplemental
Agreement No.
19
|
October
31, 2000
|
|
Supplemental
Agreement No.
20
|
December
21, 2000
|
|
Supplemental
Agreement No.
21
|
March
30, 2001
|
|
Supplemental
Agreement No.
22
|
May
23, 2001
|
|
Supplemental
Agreement No.
23
|
June
29, 2001
|
|
Supplemental
Agreement No.
24
|
August
31, 2001
|
|
Supplemental
Agreement No.
25
|
December
31, 2001
|
|
Supplemental
Agreement No.
26
|
March
29, 2002
|
|
Supplemental
Agreement No.
27
|
November
6, 2002
|
|
Supplemental
Agreement No.
28
|
April
1, 2003
|
|
Supplemental
Agreement No.
29
|
August
19, 2003
|
|
Supplemental
Agreement No.
30
|
November
4, 2003
|
|
Supplemental
Agreement No.
31
|
August
20, 2004
|
|
Supplemental
Agreement No.
32
|
December
29, 2004
|
|
Supplemental
Agreement No.
33
|
December
29, 2004
|
|
Supplemental
Agreement No.
34
|
June
22, 2005
|
|
Supplemental
Agreement No.
35
|
June
30, 2005
|
|
Supplemental
Agreement No.
36
|
July
21, 2005
|
|
Supplemental
Agreement No.
37
|
March
30, 2006
|
|
Supplemental
Agreement No.
38
|
June
6, 2006
|
|
Supplemental
Agreement No.
39
|
August
3, 2006
|
|
Supplemental
Agreement No.
40
|
December
5, 2006
|
|
Supplemental
Agreement No.
41
|
June
1, 2007
|
|
Supplemental
Agreement No.
42
|
June
13, 2007
|
|
Supplemental
Agreement No.
43
|
July
18, 2007
|
|
Supplemental
Agreement No.
44
|
December
7, 2007
|
|
Supplemental
Agreement No.
45
|
February
20, 2008
|
|
Supplemental
Agreement No.
46
|
June
25, 2008
|
|
Supplemental
Agreement No.
47
|
October
30, 2008
|
Table 1
to Purchase Agreement 1951
Aircraft
Deliveries and Descriptions
Model
737-700 Aircraft
[CONFIDENTIAL
MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]
Attachment
B to
Letter
Agreement 1951-9R20
Option
Aircraft Delivery, Description, Price and Advance Payments
[CONFIDENTIAL
MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]
EXHIBIT
10.25(f)
Supplemental
Agreement No. 6
to
Purchase
Agreement No. 2484
between
The
Boeing Company
and
Continental
Airlines, Inc.
Relating
to Boeing Model 787 Aircraft
THIS
SUPPLEMENTAL AGREEMENT, entered into as of October 22, 2008, by and between THE
BOEING COMPANY (Boeing) and CONTINENTAL AIRLINES, INC. (Customer);
WHEREAS,
the parties hereto entered into Purchase Agreement No. 2484 dated December 29,
2004 (the Purchase Agreement), as amended and supplemented, relating to Boeing
Model 787 aircraft (the Aircraft);
WHEREAS,
Boeing and Customer have agreed to define the configuration of the Model 787-8
for incorporation into Exhibit A.
WHEREAS,
Boeing addresses additional provisions relating to software products along with
the required license terms.
WHEREAS,
Boeing addresses additional provisions relating to post delivery obligations
with respect to catalog seats and In Flight Entertainment.
WHEREAS, Boeing and
Customer have mutually agreed to modify Attachment B to Option Aircraft Letter
6-1162-MSA-547 to [CONFIDENTIAL MATERIAL OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT].
NOW
THEREFORE, in consideration of the mutual covenants herein contained, the
parties agree to amend the Purchase Agreement as follows:
1. Table of Contents, Articles,
Tables and Exhibits:
1.1 Remove
and replace, in its entirety, the “Table of Contents,”
with the Table of Contents attached hereto, to reflect the changes made by this
Supplemental Agreement No. 6.
1.2 Remove
and replace, in its entirety, the “Table 1,” for Model
787-8 with the Table 1 attached hereto, to reflect the changes made by this
Supplemental Agreement No. 6, and to reflect the 787-8
configuration. Customer acknowledges receipt of Letter No.
6-1162-RCN-1857, notifying Customer that the delivery of the Aircraft in such
Table 1 have been delayed.
1.3 Remove
and replace, in its entirety, the “Exhibit A-1,”
attached hereto, to reflect the changes made by this Supplemental Agreement No.
6.
1.4 Remove
and replace, in its entirety, the “Exhibit A-2,”
attached hereto, to reflect the changes made by this Supplemental Agreement No.
6.
2. Letter
Agreements:
2.1 Remove
and replace, in its entirety, Letter Agreement 6-1162-MSA-546R3, “Open Configuration
Matters,” with the revised Letter Agreement 6-1162-MSA-546R4 attached
hereto.
2.2 Remove
and replace, in its entirety Attachment B to Letter Agreement 6-1162-MSA-547R4,
“Option
Aircraft,” with the revised Attachment B attached hereto.
2.3 Add
Letter Agreement 6-1162-AJH-921, “787 e-Enabling,”
attached hereto.
2.4 Add
Letter Agreement 6-1162-AJH-922, “Special Matters Relating to COTS Software and
End User License Agreements”, attached hereto.
2.5 Add
Letter Agreement 6-1162-AJH-923, “Special Terms – Seats and In-flight
Entertainment”, attached hereto
2.6 Remove
and replace, in its entirety, Letter Agreement 6-1162-MSA-552R5, “Special Matters,”
with the revised Letter Agreement 6-1162-MSA-552R6 attached hereto to reflect
the changes made by this Supplemental Agreement No. 6.
The
Agreement will be deemed to be supplemented to the extent herein provided as of
the date hereof and as so supplemented will continue in full force and
effect.
EXECUTED
IN DUPLICATE as of the day and year first written above.
THE
BOEING
COMPANY CONTINENTAL
AIRLINES, INC.
By: /s/ R.C.
Nelson By: /s/ Gerald
Laderman
Its:
Attorney-In-Fact Its: Senior Vice President
- -
Finance and
Treasurer
P.A.
2484
CAL
SA 6-
TABLE OF
CONTENTS
|
ARTICLES
|
SA
NUMBER
|
|||||
|
1.
|
Quantity,
Model and Description
|
2
|
||||
|
2.
|
Delivery
Schedule
|
2
|
||||
|
3.
|
Price
|
2
|
||||
|
4.
|
Payment
|
2
|
||||
|
5.
|
Additional
Terms
|
2
|
||||
|
TABLE
|
||||||
|
1.
|
Aircraft
Information Table
|
6
|
||||
|
EXHIBIT
|
||||||
|
A1.
|
787-8
Aircraft Configuration
|
6
|
||||
|
B.
|
Aircraft
Delivery Requirements and Responsibilities
|
1
|
||||
|
SUPPLEMENTAL EXHIBITS
|
||||||
|
AE1.
|
Escalation
Adjustment/Airframe and Optional Features
|
1
|
||||
|
BFE1.
|
Buyer
Furnished Equipment Variables
|
1
|
||||
|
CS1.
|
Customer
Support Document
|
5
|
||||
|
EE1.
|
Engine
Escalation/Engine Warranty and Patent Indemnity
|
2
|
||||
|
SLP1.
|
Service
Life Policy Components
|
1
|
||||
P.A. No.
2484
SA6
BOEING
PROPRIETARY
TABLE OF
CONTENTS
|
LETTER AGREEMENTS
|
SA
NUMBER
|
|
|
6-1162-MSA-546R4
|
Open
Configuration Matters
|
6
|
|
6-1162-MSA-547R4
|
Option
Aircraft
|
6
|
|
6-1162-MSA-549
|
Spares
Initial Provisioning
|
1
|
|
6-1162-AJH-921
|
787
e-Enabling
|
6
|
|
6-1162-AJH-922
|
Special
Matters Relating to COTS Software and End User License
Agreements
|
6
|
|
6-1162-AJH-923
|
Special
Terms – Seats and In-flight Entertainment
|
6
|
P.A. No.
2484
SA6
BOEING
PROPRIETARY
TABLE OF
CONTENTS
|
CONFIDENTIAL LETTER
AGREEMENTS
|
SA
NUMBER
|
|
|
6-1162-MSA-550
|
Spare
Parts Commitment
|
1
|
|
6-1162-MSA-551R2
|
[CONFIDENTIAL
MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT
|
5
|
|
6-1162-MSA-552R6
|
Special
Matters
|
6
|
|
6-1162-MSA-553R1
|
Open
Matters
|
1
|
|
6-1162-MSA-554R3
|
[CONFIDENTIAL
MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT]
|
5
|
|
6-1162-MSA-555
|
Promotional
Support
|
1
|
P.A. No.
2484
SA6
BOEING
PROPRIETARY
TABLE OF
CONTENTS
|
SUPPLEMENTAL AGREEMENTS
|
DATED AS OF:
|
|
Supplemental
Agreement No.
1
|
June
30, 2005
|
|
Supplemental
Agreement No.
2
|
January
20, 2006
|
|
Supplemental
Agreement No.
3
|
May
3, 2006
|
|
Supplemental
Agreement No.
4
|
July
14, 2006
|
|
Supplemental
Agreement No.
5
|
March
12, 2007
|
|
Supplemental
Agreement No.
6
|
October
22, 2008
|
P.A. No.
2484
SA6
BOEING
PROPRIETARY
Table
1
Purchase
Agreement 2484
Aircraft
Delivery, Description, Price and Advance Payments
(787-8
[CONFIDENTIAL MATERIAL
OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] 2006$ [CONFIDENTIAL MATERIAL OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT]
[CONFIDENTIAL
MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]
CAL
47094-1F.TXT
Boeing Proprietary SA6 Page 1
Table
1
Purchase
Agreement 2484
Aircraft
Delivery, Description, Price and Advance Payments
(787-9
[CONFIDENTIAL MATERIAL
OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] 2006$s [CONFIDENTIAL MATERIAL OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT]
[CONFIDENTIAL
MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]
CAL
47094-1F.TXT
Boeing Proprietary Page 1
Exhibit
A1 to
Purchase
Agreement No. 2484
Page
1
AIRCRAFT
CONFIGURATION
between
THE
BOEING COMPANY
and
CONTINENTAL
AIRLINES, INC.
Exhibit
A1 to Purchase Agreement Number 2484
P.A. No.
2484
A1 SA6
BOEING
PROPRIETARY
AIRCRAFT
CONFIGURATION
relating
to
BOEING
MODEL 787 AIRCRAFT
The
Detail Specification is Boeing document entitled Detail
Specification D019E001CAL88P-1 revision New, dated February,
2009. Such
Detail Specification will be comprised of those provisions of 787 Configuration
Specification 787B1-4102 Revision B, dated July
9, 2007, as amended by addendum 787B1-4102-B001, dated September 12, 2007, which
are applicable to model 787-8 aircraft and
as amended to incorporate the optional features listed below, including the
effects on Manufacturer's Empty Weight (MEW) and Operating Empty Weight
(OEW). Such Options are set forth in Boeing Customer Specified
Option Selection Log and Option Data Pages, configuration file (CAL88P0001),
dated 11/1/07. As soon as practicable, Boeing will make available to
Customer the Detail Specification, which will reflect such optional
features. The Aircraft Basic Price reflects and includes all effects of
such optional features, except such Aircraft Basic Price does not include the
price effects of any Buyer Furnished Equipment.
There is no
additional processing fee added to the master change price for addition or
deletion of catalog options within appropriate lead times.
P.A. No.
2484
A1 SA6
BOEING
PROPRIETARY
EXHIBIT
A1
to BOEING
PROPRIETARY
Purchase
Agreement No. 2484
|
Optional
Features
Item
No.
|
Title
|
Price
Per
Aircaft
[CONFIDENTIAL MATERIAL
OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]
|
[CONFIDENTIAL
MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]
P.A. No.
2484 SA
6
PA_Exhibit_A
BOEING PROPRIETARY
Page 1
AIRCRAFT
CONFIGURATION
between
THE
BOEING COMPANY
and
CONTINENTAL
AIRLINES, INC.
Exhibit
A2 to Purchase Agreement Number 2484
P.A. No.
2484
A2 SA 6
BOEING
PROPRIETARY
AIRCRAFT
CONFIGURATION
relating
to
BOEING
MODEL 787-9 AIRCRAFT
The
Airframe Price in Table 1 was established utilizing the 787 Airplane Description
and Selections 787B1-0227 Revision J dated December 15, 2006. The
content of this Exhibit A2 will be defined pursuant to the provisions of Letter
Agreement 6-1162-MSA-546R4, Open Configuration Matters, to the Purchase
Agreement.
The Boeing Company
P.O. Box 3707
Seattle,
WA 98124-2207
October
22, 2008
6-1162-MSA-546R4
Continental
Airlines, Inc.
1600
Smith Street
Houston,
Texas 77002
Subject: Open
Configuration Matters
Reference: Purchase
Agreement No. 2484 (the Purchase Agreement)
between
The Boeing Company (Boeing) and Continental
Airlines,
Inc. (Customer) relating to Model 787 aircraft (the Aircraft)
Ladies
and Gentlemen:
This
Letter Agreement amends and supplements the Purchase Agreement. All
terms used and not defined in this Letter Agreement have the same meaning as in
the Purchase Agreement. This Letter Agreement supersedes and replaces
in its entirety Letter Agreement 6-1162-MSA-546R3 dated, March 12,
2007.
1. Aircraft
Configuration.
Due to the developing design of the 787
Aircraft and the long period of time between the Purchase Agreement signing and
delivery of Customer’s first Aircraft, the configuration of Customer's Aircraft
has not yet been defined. The parties agree to complete defining the
configuration of the 787-8 Aircraft no later than [CONFIDENTIAL
MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] using the
configuration elements defined in 787 Airplane Description and Selections
Document Number 787B1-0227, which includes available Optional Features for
selection (Configuration). This has been
completed pursuant to Supplement Agreement No. 6 to the Purchase
Agreement.
Boeing and Customer agree to complete
the configuration of the model 787-9 Aircraft no later than the first day of the
month [CONFIDENTIAL
MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] months prior
to delivery of the first model 787-9 Aircraft.
2. Effect on Purchase
Agreement.
By [CONFIDENTIAL
MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Boeing will
provide Customer a written amendment to the Purchase Agreement reflecting the
configuration, including, without limitation, the effects of the Configuration
on those portions of the Purchase Agreement described in Articles 2.1 through
2.4, below. With respect to and in advance of the final 787-8
configuration by CONFIDENTIAL
MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] the parties
agree to the following advanced configuration releases:
|
·
|
Preliminary
Configuration - LOPA YS5509 dated 10/4/04, used to define a
preliminary Performance Guarantees release (reference Article 2.3
below). This has been completed per Supplemental Agreement No.
1 to the Purchase Agreement.
|
|
·
|
Interim Configuration –
to be released by September 2006, used to define the final Performance
Guarantees release (reference Article 2.3 below) and update the pricing
(reference Article 2.4 below).
|
|
·
|
Final Configuration – to
be released after September 2007, used to reflect Customer’s actual
configuration and reflect final build of the Aircraft. LOPA
used to define a preliminary Performance Guarantee will also be used to
define the final Performance Guarantee – per Supplemental Agreement No.
5.
|
2.1 Exhibit
A. The Configuration will be incorporated into Exhibit A of
the Purchase Agreement. This has been completed pursuant to Supplemental
Agreement No. 6 to the Purchase Agreement with respect to model 787-8
aircraft.
2.2 Basic
Specification. Changes applicable to the basic Model 787
aircraft which are developed by Boeing between the date of signing of the
Purchase Agreement and completion of the Configuration will be incorporated into
Exhibit A of the Purchase Agreement.
2.3 [CONFIDENTIAL MATERIAL OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT]. Boeing will provide to
Customer revisions to Letter Agreement 6-1162-MSA-551, [CONFIDENTIAL MATERIAL OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT] to reflect the effects of
the Configuration, if any, on [CONFIDENTIAL MATERIAL OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT].
2.4 Price
Adjustments. The Aircraft Basic Price and Advance Payment Base
Price of each Aircraft set forth on Table 1 to the Purchase Agreement is based
in part on an estimate of the value of the Optional Features and any related
Seller Purchased Equipment. The Aircraft Basic Price and the Advance
Payment Base Price of each Aircraft will be adjusted as required and agreed by
the parties in a supplemental agreement to the Purchase Agreement to reflect the
difference between such estimate and the actual price of such elements of the
Configuration. This has been completed pursuant to Supplemental
Agreement No. 6 to the Purchase Agreement with respect to model 787-8
aircraft.
|
3.
|
Other Letter
Agreements.
|
Boeing and Customer acknowledge that as
the definition of the Aircraft progresses, there will be a need to execute
letter agreements addressing one or more of the following subjects:
3.1 Customer
Software. Additional provisions relating to the loading of
software owned by or licensed to Customer on the Aircraft at
delivery. This has been completed pursuant to Supplement Agreement
No. 6 to the Purchase Agreement.
3.2 Installation of Cabin
Systems Equipment. Additional provisions relating to the terms
on which Boeing will offer and install in-flight entertainment systems and cabin
communications systems in the Aircraft. This has been completed pursuant to
Supplement Agreement No. 6 to the Purchase Agreement.
3.3 Buyer Furnished Equipment
(BFE) and Seller Purchased Equipment (SPE). Provisions
relating to the terms on which Boeing may offer or install BFE and SPE in the
Aircraft. This has been completed pursuant to Supplement Agreement
No. 6 to the Purchase Agreement.
3.4 Onboard Broadband
Offering. Provisions relating to the terms under which Boeing
may offer or install an Onboard Broadband Aircraft Health and Information System
in the Aircraft (originally envisioned as a Connexion by Boeing
product).
Very
truly yours,
THE
BOEING COMPANY
By /s/ R.C.
Nelson
Its Attorney-In-Fact
ACCEPTED
AND AGREED TO
Date: October
22, 2008
CONTINENTAL
AIRLINES, INC.
By /s/ Gerald
Laderman
Its__ Senior Vice President -
Finance and Treasurer
P.A. No.
2484 SA 6
Open
Configuration Matters
BOEING
PROPRIETARY
Attachment
B to
Option
Aircraft Letter 6-1162-MSA-547R4
Option
Aircraft Delivery, Description, Price and Advance Payments
(787-9), [CONFIDENTIAL MATERIAL OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT] 2006$s / [CONFIDENTIAL MATERIAL OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT]
[CONFIDENTIAL
MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]
CAL
43197-10.TXT
0;
Page 1
October
22, 2008
6-1162-AJH-921
Continental
Airlines, Inc.
1600
Smith Street
Houston,
Texas 77002
|
Subject:
|
“787
e-Enabling”
|
|
|
Provision
and Loading of Boeing Owned Software in the Electronic Flight Bag (EFB)
System or Other Onboard Loadable Hardware
System.
|
|
Reference:
|
Purchase
Agreement No. 2484 (the Purchase Agreement) between The Boeing Company
(Boeing) and (Customer)
|
Customer
Services General Terms Agreement No. 24-1 (the CSGTA) between Boeing and
Customer, including Supplemental Agreement for Electronic Access (the
“SA-EA”)
This
letter agreement (Letter Agreement) amends and supplements the Purchase
Agreement. All terms used but not defined in this Letter Agreement
have the same meaning as in the Purchase Agreement.
1. Customer’s
Aircraft is equipped with onboard loadable hardware, specifically the Class 3
EFB System and the Core Network Server (CNS). Boeing will install
certain Boeing owned software, also referred to in the AGTA and the Purchase
Agreement as “Materials” (and not “Aircraft Software”), on the EFBs and on the
File Server Module (FSM) within the Core Network before fly
away. These Materials to be installed on the EFBs include, but are
not limited to, electronic documents (e-Docs), onboard performance tool (OPT),
and the electronic logbook (E-Logbook). The Cabin Logbook will be
installed on an FSM within the Core Network.
2. Boeing
will license and install these Materials on the following
conditions:
(i) Notwithstanding
any provision to the contrary, these Materials are provided and licensed to
Customer in accordance with the terms and conditions of the CSGTA, as
supplemented by the SA-EA, Supplemental Agreement No. SA-eE (“the SA-eE”) to the
CSGTA, and applicable Software License Orders.
(ii) The
DISCLAIMER AND RELEASE and EXCLUSION OF CONSEQUENTIAL AND OTHER DAMAGES
provisions in Article 11 of Part 2 of Exhibit C of the AGTA and the insurance
provisions of Article 8.2 of the AGTA will apply to Boeing’s installation of the
Materials.
3. The
technical data and maintenance information specified in Article 3 of Part 3 of
Supplemental Exhibit CS1 to the Purchase Agreement will be considered
“Materials” as defined therein and not “Aircraft Software” even when such
technical data and maintenance information is provided in software media and is
used onboard the Aircraft or loaded into an onboard Aircraft
system.
4. Notwithstanding
anything to the contrary, (i) the provision, license and access to the Materials
specified in Article 3 of this Letter Agreement through the Maintenance
Performance Toolbox, (ii) the provision and license of the Software Developer
Kits (SDKs) for the EFB and the Core Network, and (iii) the provision and
license of other software which may be identified by Boeing from time to time
shall be pursuant to the terms of the CSGTA, as supplemented by the SA-EA and
the SA-eE, including applicable Software License Orders. The SDK
Contractor Confidentiality Agreement of the SA-eE shall apply to any provision
of the SDKs to Customer’s contractor.
5. The
CSGTA and all referenced Supplemental Agreements thereto, including the Software
License Orders, must be executed between Boeing and Customer no later than
ninety (90) days prior to delivery of Customer’s first 787
Aircraft. All software applications and SDKs referenced in Articles
1, 3 and 4 of this Letter Agreement will be further described in the Software
Licensed Order for that software application and SDK.
Very
truly yours,
THE
BOEING COMPANY
By /s/
R.C.
Nelson
Its Attorney-In-Fact
ACCEPTED
AND AGREED TO this
Date: October
22 , 2008
CONTINENTAL
AIRLINES, INC.
By /s/ Gerald
Laderman
Its Senior Vice President –
Finance and Treasurer
P.A. No.
2484 SA6
787
e-Enabling Letter Agreement
BOEING
PROPRIETARY
October
22, 2008
6-1162-AJH-922
Continental
Airlines, Inc.
1600
Smith Street
Houston,
Texas 77002
|
Subject:
|
Special
Matters relating to COTS Software and End User License
Agreements
|
|
Reference:
|
Purchase
Agreement No. 2484 (the Purchase Agreement) between The Boeing Company
(Boeing) and Continental Airlines, Inc. (Customer) relating to
Model 787 aircraft (Aircraft)
|
This
letter agreement (Letter Agreement) amends and supplements the Purchase
Agreement. All terms used but not defined in this Letter Agreement
have the same meaning as in the Purchase Agreement.
Recitals
A. Certain
third party, commercial off-the-shelf software products are available to perform
various functions required in the Aircraft (COTS Software).
B. The
industry practice with respect to COTS Software is to permit manufacturers to
install the software in products for sale to customers. The
manufacturer is required to pass to the customer an End User License Agreement
(EULA), which covers the right to use the COTS Software. The EULA’s
also require each user of the product to further license the software and pass
the EULA to any user to whom he transfers the product.
C. Because
of the described industry practice with respect to COTS Software, Boeing does
not acquire title to COTS Software and cannot pass title to COTS Software at the
time of delivery of the Aircraft.
D. Therefore,
the parties desire to amend certain provisions of the Purchase Agreement to
properly reflect the respective rights and obligations of the parties with
respect to the COTS Software included in the Aircraft.
Agreement
1. At
delivery of the Aircraft, Boeing will furnish to Customer copies of all EULA’s
applicable to the Aircraft, and Customer agrees to comply with all provisions of
the applicable EULA’s.
2. Notwithstanding
the provisions of Article 6.3 of the AGTA, at delivery of each Aircraft, Boeing
will provide Customer a bill of sale conveying good title, free of encumbrances
except as provided in applicable EULA’s.
3. In
connection with any sale or other transfer of the Aircraft, Customer agrees to
comply with all provisions of the applicable EULA’s, including without
limitation the re-licensing of the software to Customer’s transferee and the
flow down within such license of the further requirement that Customer’s
transferee comply with and flow to other transferees the obligations of the
EULA.
Very
truly yours,
THE
BOEING COMPANY
By /s/
R.C.
Nelson
Its Attorney-In-Fact
ACCEPTED
AND AGREED TO this
Date: October
22, 2008
CONTINENTAL
AIRLINES, INC.
By /s/
Gerald
Laderman
Its Senior Vice President –
Finance and Treasurer
October
22, 2008
6-1162-AJH-923
Continental
Airlines, Inc.
1600
Smith Street
Houston,
Texas 77002
|
Subject:
|
Special
Terms - Seats and In-flight
Entertainment
|
|
Reference:
|
Purchase
Agreement No. 2484 (the Purchase Agreement) between The Boeing Company
(Boeing) and Continental Airlines, Inc. (Customer) relating to
Model 787 aircraft (the
Aircraft)
|
This
letter agreement (Letter
Agreement) amends and supplements the Purchase Agreement. All
capitalized terms used but not defined in this Letter Agreement shall have the
same meaning as defined in the Purchase Agreement.
1.0 Definitions.
1.1 "Covered Seats" shall mean
those seats which are not otherwise identified in Exhibit A to the Purchase
Agreement as Buyer Furnished Equipment.
1.2 "In-flight Entertainment (IFE)
System" shall mean the IFE identified in the Detail Specification of the
Aircraft, inclusive of the IFE software which is required to test and certify
the IFE system on the Aircraft, but exclusive of IFE Customer
Software.
1.3 “IFE Customer Software” shall
mean any software which is obtained by the Customer from a source other than
Boeing for installation in the IFE System.
|
2.0
|
Applicability of
Supplemental Exhibit CS1 to the Purchase
Agreement.
|
2.1 Boeing
did not enter into product support agreements with the suppliers of the Covered
Seats and the IFE System. Customer is responsible to enter into such
product support agreements directly with the suppliers of such Covered Seats and
IFE System and such provisions will apply in lieu of the provisions of
Supplemental Exhibit CS1 to the Purchase Agreement.
2.2 Boeing
will incorporate the Covered Seats and IFE System line maintenance information,
received from the suppliers of such Covered Seats and IFE System, into
Customer’s customized Materials prior to delivery of each Aircraft.
3.0 Applicability of the
Provisions of Exhibit C to the AGTA.
In lieu of the provisions of Part 4 of
Exhibit C to the AGTA, the following warranty and patent and copyright
indemnities will apply to Covered Seats and the IFE System:
“Boeing
will obtain warranties and indemnities against patent and copyright infringement
enforceable by Customer from the suppliers of the Covered Seats and IFE System
installed on the Aircraft at the time of delivery. If requested by
Customer, Boeing will provide copies of such warranties and indemnities to
Customer upon request.”
4.0 IFE Customer
Software.
Customer is responsible for and assumes
all liability with respect to IFE Customer Software.
Very
truly yours,
THE
BOEING COMPANY
By /s/ R.C.
Nelson
Its Attorney-In-Fact
ACCEPTED
AND AGREED TO this
Date:
October 22, 2008
CONTINENTAL
AIRLINES, INC.
By /s/
Gerald
Laderman
Its Senior Vice President –
Finance and Treasurer
October
22, 2008
6-1162-MSA-552R6
Continental
Airlines, Inc.
1600
Smith Street
Houston,
Texas 77002
Subject: Special
Matters
Reference: Purchase
Agreement No. 2484 (the Purchase Agreement)
between
The Boeing Company (Boeing) and Continental
Airlines,
Inc. (Customer) relating to Model 787 aircraft (the Aircraft)
Ladies
and Gentlemen:
This
Letter Agreement amends and supplements the Purchase Agreement. This
Letter Agreement supersedes and replaces in its entirety Letter Agreement
6-1162-MSA-552R5 dated March 12, 2007. All terms used and not defined in this
Letter Agreement have the same meaning as in the Purchase
Agreement.
1. [CONFIDENTIAL MATERIAL OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT]
14. Confidential
Treatment.
Boeing
and Customer understand that certain information contained in this Letter
Agreement, including any attachments hereto, is considered by both parties to be
confidential. Boeing and Customer agree that each party will treat
this Letter Agreement and the information contained herein as confidential and
will not, without
the other
party's prior written consent, disclose this Letter Agreement or any information
contained herein to any other person or entity except as may be required by
applicable law or governmental regulations.
Very
truly yours,
THE
BOEING COMPANY
By /s/ R.C.
Nelson
Its Attorney-In-Fact
ACCEPTED
AND AGREED TO
Date: October 22,
2008
CONTINENTAL
AIRLINES, INC.
By /s/ Gerald
Laderman
Its__
Senior Vice President - Finance and Treasurer
P.A. No.
2484 SA 6
Special
Matters
BOEING
PROPRIETARY
Exhibit
10.28(b)
December
23, 2008
Mr. Mark
Erwin
Senior
Vice President Corporate Development & Alliances
Continental
Airlines, Inc.
1600
Smith Street
Houston,
Texas 77002
Second Amendment
(this “Second Amendment”) to that certain Second Amended and Restated
Capacity Purchase Agreement among Continental Airlines, Inc. (“Continental”),
ExpressJet Holdings, Inc. (“Holdings”), XJT Holdings, Inc. (“XJT”) and
ExpressJet Airlines, Inc. (“ExpressJet” and, collectively with Holdings and XJT,
“Contractor”) dated as of June 5, 2008 (the “Original Second Amended and
Restated CPA”), as amended by that certain First Amendment to the Second Amended
and Restated CPA dated August 29, 2008 (the “Second Amended and Restated
CPA”)
As you
are aware, Continental and Contractor are parties to the Second Amended and
Restated CPA. Continental and Contractor each desires to amend the Second
Amended and Restated CPA as specifically provided below in this Second
Amendment, with such amendments to be effective as of August 29,
2008:
Section
1. The
revised Appendix 1 to Schedule 3 attached to this Second Amendment hereby
replaces in its entirety the Appendix 1 to Schedule 3 attached to the Second
Amended and Restated CPA. Continental and Contractor agree that
nothing in this Section 3 or in Appendix 1 to Schedule 3 attached hereto shall
in any way (i) amend or modify the provisions of Section 2.01(b) of the Second
Amended and Restated CPA, or (ii) create or disclaim (or be deemed, construed or
implied to create or disclaim) any obligation other than as is expressly and
specifically provided for in this Section 3 (and in Appendix 1 to Schedule 3
attached hereto).
Section
2. Contractor
agrees that following sentence shall be added to the end of Section 2.b. of
Appendix 4 to Schedule 3 attached to the Second Amended and Restated
CPA:
“Any
expenses borne by Contractor to develop Contractor’s Fuel Efficiency program for
which Contractor intends to seek reimbursement from Continental as herein
provided must be pre-approved by Continental and any such expenses reimbursed by
Continental to Contractor shall be deducted from any dollar amount of fuel
savings (as determined by performing the calculations described in clauses (a)
through (d) above) prior to determining the amount of any fuel bonus
payments payable to Contractor hereunder (it being acknowledged that any such
expenses not applied to savings shall be carried forward to future years as
necessary until the balance of such expenses is zero); provided, however, that
in no event shall the reimbursement of such expenses be conditioned upon, or
delayed pending, the achievement of any savings or other objectives under
Contractor’s Fuel Efficiency program.”
Section
3.
Contractor and Continental agree that, notwithstanding anything to the contrary
in Section 2 of the First Amendment to the Second Amended and Restated CPA, for
purposes of calculating the amount that Continental is required to pay to
Contractor pursuant to the Second Amended and Restated CPA in respect of any
depreciation expenses associated with either Covered Aircraft or Excess
Inventory, the scheduled depreciation period for such depreciation expenses
chargeable to Continental pursuant to Subsection B.4.a.xi of Schedule 3 to the
Second Amended and Restated CPA shall not be shortened from that period
currently used by Contractor (as indicated by the invoices related thereto that
have been presented to Continental and paid by Continental), notwithstanding any
change in accounting treatment that Contractor may implement relating to the
period over which any such depreciation will be taken for accounting purposes.
The foregoing shall also apply to any future depreciation expense associated
with Covered Aircraft or Excess Inventory that may become chargeable to
Continental pursuant to Subsection B.4.a.xi of Schedule 3 to the Second Amended
and Restated CPA, it being agreed that Contractor shall, for purposes of
calculating the amount that Continental is required to pay to Contractor
pursuant to the Second Amended and Restated CPA, utilize either the scheduled
depreciation period that Contractor would have utilized prior to its entry into
of the Second Amended and Restated CPA (and consistent with the invoices for
depreciation expenses related to Covered Aircraft and Excess Inventory presented
to Continental and paid by Continental under the Existing CPA) or any longer
period that Contractor may utilize in respect of such expenditures in accordance
with generally accepted accounting principles. Further to the foregoing,
Contractor and Continental agree that with respect to any capital expenditures
specifically approved by Continental in writing related to Covered Aircraft or
Excess Inventory, in determining the amount of any payment required to be made
by Continental to Contractor pursuant to Section 8.03(g) of
the Second Amended and Restated CPA, the “net book value” of such assets
referenced therein shall be deemed to mean and refer to the net book value of
such assets that would have been shown on Contractor’s most recent financial
statements if Contractor had accounted for such assets in the same manner as
Contractor had charged Continental for the related depreciation expense. For the
avoidance of doubt, it is acknowledged that if Contractor retains a Covered
Aircraft in accordance with Contractor’s rights to do so pursuant to the Second
Amended and Restated CPA, at the time as such Covered Aircraft ceases to be a
Covered Aircraft, Continental would no longer be required to pay any
depreciation expenses associated with such Covered Aircraft.
Section
4. Capitalized
terms not defined herein shall be defined as provided in the Second Amended and
Restated CPA. From and after the date of this Second Amendment,
references in the Second Amended and Restated CPA to “this Agreement” shall mean
and refer to the Second Amended and Restated CPA as amended by this Second
Amendment. Except as specifically amended or modified hereby, the
Second Amended and Restated CPA shall remain in effect as
written. The Second Amended and Restated CPA, as amended or modified
by this Second Amendment, is hereby ratified and confirmed in all respects, and
shall be deemed to constitute the entire understanding of the parties relating
to its subject matter (and further that any prior or contemporaneous oral
commitments shall have no force or effect), and such agreement, as so amended
hereby, may not be further amended, modified or changed except by further
agreement in writing signed by the parties hereto. This Second
Amendment may be executed by the parties hereto in any number of separate
counterparts, all of which shall constitute one agreement. All
signatures need not be on one counterpart.
If
Continental is in agreement with the above, please indicate its agreement by
having an authorized representative sign below in the spaces provided and return
a signed copy of this Second Amendment to the undersigned at the address
above.
Very
truly yours,
EXPRESSJET
HOLDINGS, INC.
By: /s/
James B. Ream
Name: James
B. Ream
Title: President
and Chief Executive Officer
XJT
HOLDINGS, INC.
By: /s/
James B. Ream
Name: James
B. Ream
Title: President
and Chief Executive Officer
EXPRESSJET
AIRLINES, INC.
By: /s/
James B. Ream
Name: James
B. Ream
Title: President
and Chief Executive Officer
Agreed:
CONTINENTAL
AIRLINES, INC.
By: /s/
Mark Erwin
Name: Mark
Erwin
Title: Senior
Vice President Corporate Development & Alliances
cc: Continental
Airlines, Inc.
1600 Smith Street, HQSLG, Houston,
Texas 77002
Attention: General Counsel
Telecopy
No.: (713) 324-5161
ExpressJet Holdings, Inc.
700 North Sam Houston Parkway West,
Suite 200, Houston, Texas 77067
Attention: Vice President
& General Counsel
Telecopy
No.: (832) 353-1141
Execution
Version
Appendix 1 to Schedule
3
$ [CONFIDENTIAL MATERIAL OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT]*for each actual block hour (which
shall be the “block hour” rate referred to in Schedule 3.A.1.a of this
Agreement).
* This
Base Compensation Rate shall be adjusted to the extent provided pursuant to the
terms of Section
3.02 of this Agreement.
In addition, for each calendar month
beginning with the month of September 2008 and extending through (and including)
June 2009 (such period from September 1, 2008 through June 30, 2009, being
herein referred to as the “Review Period”), Continental and Contractor, as part
of the monthly flight reconciliation process pursuant to Section 3.06(b) of this
Agreement, shall compare the number of Actual Monthly Block Hours for such
calendar month with the number of Baseline Monthly Block Hours for such calendar
month, and Continental shall pay Contractor $[CONFIDENTIAL MATERIAL OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT] for each Extra Monthly Payment Hour,
if any, for such month, provided that, in no event shall Continental be required
(a) to pay an amount greater than $[CONFIDENTIAL MATERIAL OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT] for any one month or $[CONFIDENTIAL MATERIAL OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT] in the aggregate in respect of Extra
Monthly Payment Hours during the Review Period or (b) to make any payment under
this paragraph in respect of any calendar month after the Review
Period. After the Review Period, Contractor shall pay Continental an
amount equal to $[CONFIDENTIAL
MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] for each
Aggregate Accrued Block Hour, if any, existing as of June 30, 2009, subject to
the proviso at the end of the next paragraph (such payment to be made in July
2009 as part of the monthly flight reconciliation process pursuant to Section
3.06(b) of this Agreement).
During each calendar month beginning
with the month of July 2009 and extending through (and including) the end of the
Base Term or, if earlier, the date on which Contractor has provided a discount
to Continental in an aggregate amount equal to $[CONFIDENTIAL MATERIAL OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT] (such period being herein referred to
as the “Discount Period”), Continental and Contractor, as part of the monthly
flight reconciliation process pursuant to Section 3.06(b) of this Agreement,
shall compare the number of Actual Monthly Block Hours for such calendar month
with the number of Baseline Monthly Block Hours for such calendar month, and
Contractor shall provide to Continental and Continental shall receive (and
Continental shall be entitled to apply and take) a discount on any amounts owed
to Contractor under the CPA equal to $[CONFIDENTIAL MATERIAL OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT] per Discount Payment Hour, if any,
for such month, provided that, if for any reason any such discount cannot be
applied and taken such month, the unapplied portion thereof shall be applied and
taken in succeeding months until such discount has been fully applied and taken,
and provided further, that, in no event shall all such monthly payments in the
aggregate made by Contractor pursuant to this paragraph exceed $[CONFIDENTIAL MATERIAL OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT].
Solely for the purposes of calculating
amounts payable under the two preceding paragraphs of this Appendix 1 to
Schedule 3, the following terms shall have the definitions set forth
below:
“Accrued Block Hours” means,
for each calendar month in the Review Period for which Actual Monthly Block
Hours exceeds Baseline Monthly Block Hours, the number of hours by which Actual
Monthly Block Hours for such month exceeds Baseline Monthly Block Hours for such
month.
“Actual Monthly Block Hours”
means, for each calendar month, (a) the total actual block hours flown by
Contractor pursuant to this Agreement during such calendar month, plus (b) the
total block hours that are scheduled by Continental to be flown pursuant to a
Final Monthly Schedule in accordance with this Agreement but which are not
actually flown because the flight is not operated during such calendar month by
Contractor as a result of a Controllable Cancellation.
“Aggregate Accrued Block
Hours” means the aggregate of all Accrued Block Hours from prior months
in the Review Period, less the number of Accrued Block Hours previously applied
to reduce the number of Extra Monthly Payment Hours pursuant to the last clause
in the definition thereof.
“Baseline Monthly Block
Hours” means the
following number of block hours for each calendar month set forth
below:
For
September
2008: [XXX];
For
October
2008: [XXX];
For
November
2008: [XXX];
For
December
2008: [XXX];
For
January
2009: [XXX];
For
February
2009: [XXX];
For March
2009: [XXX];
For April
2009: [XXX];
For May
2009: [XXX]; and
For June
2009: [XXX].
Following
June 2009,
For each
July: [XXX];
For each
August: [XXX];
For each
September: [XXX];
For each
October: [XXX];
For each
November: [XXX];
For each
December: [XXX];
For each
January: [XXX];
For each
February: [XXX];
For each
March: [XXX];
For each
April: [XXX];
For each
May: [XXX]; and
For each
June: [XXX].
“Discount Payment Hours”
means, for each calendar month in the Discount Period for which Actual Monthly
Block Hours exceeds Baseline Monthly Block Hours, the number of hours by which
Actual Monthly Block Hours for such month exceeds the Baseline Monthly Block
Hours for such month.
“Extra Monthly Payment Hours”
means, at the end of each calendar month in the Review Period in which Baseline
Monthly Block Hours exceeds Actual Monthly Block Hours, the number of hours by
which Baseline Monthly Block Hours exceeds Actual Monthly Block Hours, reduced
by the number of Aggregate Accrued Block Hours, if any, existing at the
beginning of such calendar month.
The
foregoing definitions shall be equally applicable to both the singular and
plural forms of the defined terms.
[“XXX”
REPRESENTS CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT.]
EXHIBIT
21.1
SUBSIDIARIES
OF CONTINENTAL AIRLINES
As
of February 18, 2009
|
Name of Subsidiary
|
Jurisdiction
of
Incorporation or
Organization
|
|
|
Air
Micronesia, Inc.
|
Delaware
|
|
|
CAL
CARGO, S.A. de C.V.
|
Mexico
|
|
|
CALFINCO
Inc.
|
Delaware
|
|
|
Century
Casualty Company
|
Vermont
|
|
|
Continental
Airlines de Mexico, S.A.
|
Mexico
|
|
|
Continental
Airlines Domain Name Limited
|
England
|
|
|
Continental
Airlines Finance Trust II
|
Delaware
|
|
|
Continental
Airlines Fuel Purchasing Group, LLC
|
Delaware
|
|
|
Continental
Airlines Purchasing Holdings LLC
|
Delaware
|
|
|
Continental
Airlines Purchasing Services LLC
|
Delaware
|
|
|
Continental
Express, Inc.
|
Delaware
|
|
|
Continental
Micronesia, Inc.
|
Delaware
|
|
|
Presidents
Club of Guam, Inc.
|
Delaware
|
|
Exhibit
23.1
CONSENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We
consent to the incorporation by reference in the following Registration
Statements of Continental Airlines, Inc. and each related Prospectus of our
reports dated February 18, 2009, with respect to the consolidated financial
statements of Continental Airlines, Inc. and the effectiveness of internal
control over financial reporting of Continental Airlines, Inc., included in the
Annual Report (Form 10-K) of Continental Airlines, Inc. for the year ended
December 31, 2008.
|
Form
|
Description
|
|
S-8
|
1997
Stock Incentive Plan (No.
333-23165)
|
|
S-8
|
1998
Stock Incentive Plan (No.
333-57297)
|
|
S-8
|
2000
Incentive Plan (No. 333-39762)
|
|
S-8
|
2004
Employee Stock Purchase Plan (No.
333-113444)
|
|
S-8
|
Supplemental
Saving Plan for Management Pilots (No.
333-50938)
|
| S-8 | 2005 Broad Based Employee Stock Option Plan and 2005 Pilot Supplemental Option Plan (No. 333-126891) |
|
S-8
|
Incentive
Plan 2000 - additional 1.5 million shares of Class B Common Stock (No.
333-134904)
|
|
S-3
|
Registration
Statement relating to Warrants, Class A Common Stock and Class B Common
Stock and sales by certain Selling Security holders and the related
Prospectus (No. 333-09739)
|
|
S-3
|
Registration
Statement relating to $500,000,000 of the Company's Debt Securities, Class
B Common Stock, Preferred Stock, Stock Purchase Contracts, Stock Purchase
Units, Depositary Shares, Warrants, Junior Subordinated Trust Debentures
and Guarantee of Trust Preferred Securities and Trust Preferred Securities
of Continental Airlines Finance Trust III (Universal Shelf) and the
related Prospectus (No. 333-71906)
|
|
S-3
|
Registration
Statement relating to $250,000,000 of Term Income Deferrable Equity
Securities (TIDES) of Continental Airlines Finance Trust II, and
Convertible Junior Subordinated Debentures, a Preferred Securities
Guarantee of the TIDES and Class B Common Stock of the Company (No.
333-55144)
|
|
S-3
|
Registration
Statement relating to $175,000,000 of the Company's 5% Convertible Notes
due 2023 (No. 333-108576)
|
|
S-3
|
Registration
Statement relating to $1 billion of the Company's Debt Securities, Class B
Common Stock, Preferred Stock, Stock Purchase Contracts, Stock Purchase
Units, Depositary Shares, Warrants, Subscription Rights and Pass Through
Certificates, and the related Prospectus (No.
333-128289)
|
|
S-3ASR
|
Automatic
Shelf Registration Statement relating to the Company's Debt Securities,
Class B Common Stock, Preferred Stock, Stock Purchase Contracts, Stock
Purchase Units, Depositary Shares, Warrants, Subscription Rights and Pass
Through Certificates, and the related Prospectuses (No.
333-133187)
|
ERNST & YOUNG LLP
Houston,
Texas
February
18, 2009
EXHIBIT
24.1
POWER
OF ATTORNEY
KNOW ALL
MEN BY THESE PRESENTS, that the undersigned, a director and/or officer of
Continental Airlines, Inc. (the “Company”), does hereby constitute and appoint
Jennifer L. Vogel, Lori A. Gobillot and Gerald W. Clanton, or any of them, as
the undersigned’s true and lawful attorneys in fact and agents to execute in the
name, place and stead of the undersigned the Company’s Annual Report on Form
10-K for the year ended December 31, 2008 (and any amendments thereto), to be
filed by the Company under the Securities Exchange Act of 1934, as amended, as
fully and effectively in all respects as the undersigned could do if personally
present.
IN WITNESS WHEREOF, the undersigned has
signed this Power of Attorney on and as of the date set forth
below.
/s/ Kirbyjon H.
Caldwell
(Signature)
Printed Name: Kirbyjon
H. Caldwell
Dated and
effective as of February 18, 2009
POWER
OF ATTORNEY
KNOW ALL
MEN BY THESE PRESENTS, that the undersigned, a director and/or officer of
Continental Airlines, Inc. (the “Company”), does hereby constitute and appoint
Jennifer L. Vogel, Lori A. Gobillot and Gerald W. Clanton, or any of them, as
the undersigned’s true and lawful attorneys in fact and agents to execute in the
name, place and stead of the undersigned the Company’s Annual Report on Form
10-K for the year ended December 31, 2008 (and any amendments thereto), to be
filed by the Company under the Securities Exchange Act of 1934, as amended, as
fully and effectively in all respects as the undersigned could do if personally
present.
IN WITNESS WHEREOF, the undersigned has
signed this Power of Attorney on and as of the date set forth
below.
/s/ Lawrence W.
Kellner
(Signature)
Printed Name: Lawrence
W. Kellner
Dated and
effective as of February 18, 2009
POWER
OF ATTORNEY
KNOW ALL
MEN BY THESE PRESENTS, that the undersigned, a director and/or officer of
Continental Airlines, Inc. (the “Company”), does hereby constitute and appoint
Jennifer L. Vogel, Lori A. Gobillot and Gerald W. Clanton, or any of them, as
the undersigned’s true and lawful attorneys in fact and agents to execute in the
name, place and stead of the undersigned the Company’s Annual Report on Form
10-K for the year ended December 31, 2008 (and any amendments thereto), to be
filed by the Company under the Securities Exchange Act of 1934, as amended, as
fully and effectively in all respects as the undersigned could do if personally
present.
IN WITNESS WHEREOF, the undersigned has
signed this Power of Attorney on and as of the date set forth
below.
/s/ Douglas H.
McCorkindale
(Signature)
Printed Name: Douglas
H. McCorkindale
Dated and
effective as of February 18, 2009
POWER
OF ATTORNEY
KNOW ALL
MEN BY THESE PRESENTS, that the undersigned, a director and/or officer of
Continental Airlines, Inc. (the “Company”), does hereby constitute and appoint
Jennifer L. Vogel, Lori A. Gobillot and Gerald W. Clanton, or any of them, as
the undersigned’s true and lawful attorneys in fact and agents to execute in the
name, place and stead of the undersigned the Company’s Annual Report on Form
10-K for the year ended December 31, 2008 (and any amendments thereto), to be
filed by the Company under the Securities Exchange Act of 1934, as amended, as
fully and effectively in all respects as the undersigned could do if personally
present.
IN WITNESS WHEREOF, the undersigned has
signed this Power of Attorney on and as of the date set forth
below.
/s/ Henry L. Meyer
III
(Signature)
Printed Name: Henry
L. Meyer III
Dated and
effective as of February 18, 2009
POWER
OF ATTORNEY
KNOW ALL
MEN BY THESE PRESENTS, that the undersigned, a director and/or officer of
Continental Airlines, Inc. (the “Company”), does hereby constitute and appoint
Jennifer L. Vogel, Lori A. Gobillot and Gerald W. Clanton, or any of them, as
the undersigned’s true and lawful attorneys in fact and agents to execute in the
name, place and stead of the undersigned the Company’s Annual Report on Form
10-K for the year ended December 31, 2008 (and any amendments thereto), to be
filed by the Company under the Securities Exchange Act of 1934, as amended, as
fully and effectively in all respects as the undersigned could do if personally
present.
IN WITNESS WHEREOF, the undersigned has
signed this Power of Attorney on and as of the date set forth
below.
/s/ Oscar
Munoz
(Signature)
Printed Name: Oscar
Munoz
Dated and
effective as of February 18, 2009
POWER
OF ATTORNEY
KNOW ALL
MEN BY THESE PRESENTS, that the undersigned, a director and/or officer of
Continental Airlines, Inc. (the “Company”), does hereby constitute and appoint
Jennifer L. Vogel, Lori A. Gobillot and Gerald W. Clanton, or any of them, as
the undersigned’s true and lawful attorneys in fact and agents to execute in the
name, place and stead of the undersigned the Company’s Annual Report on Form
10-K for the year ended December 31, 2008 (and any amendments thereto), to be
filed by the Company under the Securities Exchange Act of 1934, as amended, as
fully and effectively in all respects as the undersigned could do if personally
present.
IN WITNESS WHEREOF, the undersigned has
signed this Power of Attorney on and as of the date set forth
below.
/s/ George G. C.
Parker
(Signature)
Printed Name: George
G. C. Parker
Dated and
effective as of February 18, 2009
POWER
OF ATTORNEY
KNOW ALL
MEN BY THESE PRESENTS, that the undersigned, a director and/or officer of
Continental Airlines, Inc. (the “Company”), does hereby constitute and appoint
Jennifer L. Vogel, Lori A. Gobillot and Gerald W. Clanton, or any of them, as
the undersigned’s true and lawful attorneys in fact and agents to execute in the
name, place and stead of the undersigned the Company’s Annual Report on Form
10-K for the year ended December 31, 2008 (and any amendments thereto), to be
filed by the Company under the Securities Exchange Act of 1934, as amended, as
fully and effectively in all respects as the undersigned could do if personally
present.
IN WITNESS WHEREOF, the undersigned has
signed this Power of Attorney on and as of the date set forth
below.
/s/ Jeffery A.
Smisek
(Signature)
Printed Name: Jeffery
A. Smisek
Dated and
effective as of February 18, 2009
POWER
OF ATTORNEY
KNOW ALL
MEN BY THESE PRESENTS, that the undersigned, a director and/or officer of
Continental Airlines, Inc. (the “Company”), does hereby constitute and appoint
Jennifer L. Vogel, Lori A. Gobillot and Gerald W. Clanton, or any of them, as
the undersigned’s true and lawful attorneys in fact and agents to execute in the
name, place and stead of the undersigned the Company’s Annual Report on Form
10-K for the year ended December 31, 2008 (and any amendments thereto), to be
filed by the Company under the Securities Exchange Act of 1934, as amended, as
fully and effectively in all respects as the undersigned could do if personally
present.
IN WITNESS WHEREOF, the undersigned has
signed this Power of Attorney on and as of the date set forth
below.
/s/ Karen Hastie
Williams
(Signature)
Printed Name: Karen
Hastie Williams
Dated and
effective as of February 18, 2009
POWER
OF ATTORNEY
KNOW ALL
MEN BY THESE PRESENTS, that the undersigned, a director and/or officer of
Continental Airlines, Inc. (the “Company”), does hereby constitute and appoint
Jennifer L. Vogel, Lori A. Gobillot and Gerald W. Clanton, or any of them, as
the undersigned’s true and lawful attorneys in fact and agents to execute in the
name, place and stead of the undersigned the Company’s Annual Report on Form
10-K for the year ended December 31, 2008 (and any amendments thereto), to be
filed by the Company under the Securities Exchange Act of 1934, as amended, as
fully and effectively in all respects as the undersigned could do if personally
present.
IN WITNESS WHEREOF, the undersigned has
signed this Power of Attorney on and as of the date set forth
below.
/s/ Ronald B.
Woodard
(Signature)
Printed Name: Ronald
B. Woodard
Dated and
effective as of February 18, 2009
POWER
OF ATTORNEY
KNOW ALL
MEN BY THESE PRESENTS, that the undersigned, a director and/or officer of
Continental Airlines, Inc. (the “Company”), does hereby constitute and appoint
Jennifer L. Vogel, Lori A. Gobillot and Gerald W. Clanton, or any of them, as
the undersigned’s true and lawful attorneys in fact and agents to execute in the
name, place and stead of the undersigned the Company’s Annual Report on Form
10-K for the year ended December 31, 2008 (and any amendments thereto), to be
filed by the Company under the Securities Exchange Act of 1934, as amended, as
fully and effectively in all respects as the undersigned could do if personally
present.
IN WITNESS WHEREOF, the undersigned has
signed this Power of Attorney on and as of the date set forth
below.
/s/ Charles A.
Yamarone
(Signature)
Printed Name: Charles
A. Yamarone
Dated and
effective as of February 18, 2009
EXHBIT
31.1
CERTIFICATION
I,
Lawrence W. Kellner, certify that:
1. I
have reviewed this annual report on Form 10-K of Continental Airlines,
Inc.;
2. Based
on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The
registrant's other certifying officer(s) and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
|
(a)
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
|
|
(b)
|
Designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
|
|
(c)
|
Evaluated
the effectiveness of the registrant's disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation;
and
|
|
(d)
|
Disclosed
in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting; and
|
5. The
registrant's other certifying officer(s) and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
|
(a)
|
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information;
and
|
|
(b)
|
Any
fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial
reporting.
|
Date:
February 18, 2009
/s/ Lawrence W.
Kellner
Lawrence
W. Kellner
Chairman and
Chief
Executive Officer
EXHIBIT
31.2
CERTIFICATION
I, Zane
C. Rowe, certify that:
1. I
have reviewed this annual report on Form 10-K of Continental Airlines,
Inc.;
2. Based
on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The
registrant's other certifying officer(s) and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
|
(a)
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
|
|
(b)
|
Designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
|
|
(c)
|
Evaluated
the effectiveness of the registrant's disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation;
and
|
|
(d)
|
Disclosed
in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting; and
|
5. The
registrant's other certifying officer(s) and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
|
(a)
|
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information;
and
|
|
(b)
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
|
Date:
February 18, 2009
/s/ Zane C.
Rowe
Zane C.
Rowe
Executive
Vice President and
Chief
Financial Officer
EXHIBIT
32.1
Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections
(a) and (b) of Section 1350, Chapter 63 of Title 18, United States
Code)
Pursuant
to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of
section 1350, chapter 63 of title 18, United States Code), each of the
undersigned officers of Continental Airlines, Inc., a Delaware corporation (the
“Company”), does hereby certify, to such officer's knowledge, that:
The
Annual Report on Form 10-K for the fiscal year ended December 31, 2008 (the
“Form 10-K”) of the Company fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained
in the Form 10-K fairly presents, in all material respects, the financial
condition and results of operations of the Company.
A signed
original of this written statement required by Section 906 has been provided to
Continental Airlines, Inc. and will be retained by Continental Airlines, Inc.
and furnished to the Securities and Exchange Commission or its staff upon
request.
Dated:
February 18, 2009
/s/ Lawrence W.
Kellner
Lawrence
W. Kellner
Chairman and
Chief
Executive Officer
/s/ Zane C.
Rowe
Zane C.
Rowe
Executive
Vice President and
Chief
Financial Officer