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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
|
||||||||