f093009form10q.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
 
FORM 10-Q
 
(Mark One)
 
[X]     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
     THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2009
 
OR
 
[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF     
     THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM __________ TO __________
 
Commission File Number 1-10323
 
CONTINENTAL AIRLINES, INC.
(Exact name of registrant as specified in its charter)
Delaware
74-2099724
 
(State or other jurisdiction
(I.R.S. Employer
 
of incorporation or organization)
Identification No.)
 
 
1600 Smith Street, Dept. HQSEO
Houston, Texas  77002
(Address of principal executive offices)
(Zip Code)
 
713-324-2950
(Registrant's telephone number, including area code)
 
Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes    X     No _____
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes          No _____
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” 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 October 20, 2009, 138,452,052 shares of Class B common stock of the registrant were outstanding.

 
 

 


 
TABLE OF CONTENTS

   
PAGE
     
PART I
FINANCIAL INFORMATION
 
     
Item 1.
 
     
 
4
     
   
 
5
 
6
     
 
7
     
 
8
     
Item 2.
 
33
     
Item 3.
53
     
Item 4.
55
     
PART II
OTHER INFORMATION
 
     
Item 1.
55
     
Item 1A.
56
     
Item 2.
58
     
Item 3.
58
     
Item 4.
58
     
Item 5.
58
     
Item 6.
59
     
 
60
     
 
61


 
 

 

PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements.
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data) (Unaudited)
(2008 As Adjusted (Note 1))

   
Three Months
Ended September 30,
   
Nine Months
Ended September 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Operating Revenue:
           
Passenger (excluding fees and taxes of $397, $402, $1,121, and $1,186, respectively)
  $ 2,947     $ 3,760     $ 8,331     $ 10,633  
Cargo
    92       129       259       383  
Other
    278       267       814       755  
Total Operating Revenue
    3,317       4,156       9,404       11,771  
                                 
Operating Expenses:
                               
Aircraft fuel and related taxes
    881       1,807       2,507       4,722  
Wages, salaries and related costs
    794       765       2,358       2,197  
Aircraft rentals
    233       244       705       736  
Landing fees and other rentals
    222       225       647       643  
Regional capacity purchase, net
    211       247       641       838  
Distribution costs
    160       182       467       558  
Maintenance, materials and repairs
    159       152       473       478  
Depreciation and amortization
    124       112       353       327  
Passenger services
    99       113       282       315  
Special charges
    20       91       68       141  
Other
    353       370       1,050       1,105  
Total Operating Expenses
    3,256       4,308       9,551       12,060  
                                 
Operating Income (Loss)
    61       (152 )     (147 )     (289 )
                                 
Nonoperating Income (Expense):
                               
Interest expense
    (91 )     (95 )     (274 )     (279 )
Interest capitalized
    8       8       25       25  
Interest income
    2       16       10       56  
Gain on sale of investments
    -       -       -       78  
Other-than-temporary impairment losses on investments
    -       -       -       (29 )
Other, net
    2       (27 )     19       11  
Total Nonoperating Income (Expense)
    (79 )     (98 )     (220 )     (138 )
                                 
Loss before Income Taxes
    (18 )     (250 )     (367 )     (427 )
                                 
Income Tax Benefit
    -       20       -       110  
                                 
Net Loss
  $ (18 )   $ (230 )   $ (367 )   $ (317 )
                                 
Basic and Diluted Loss per Share
  $ (0.14 )   $ (2.09 )   $ (2.91 )   $ (3.08 )
                                 
Shares Used for Basic and Diluted Computation
    132       110       126       103  

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

 
 

 

CONTINENTAL AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except for share data)
(2008 As Adjusted (Note 1))

   
September 30,
   
December 31,
   
September 30,
 
 
2009
   
2008
   
2008
 
   
(Unaudited)
         
(Unaudited)
 
                   
Current Assets:
                 
Cash and cash equivalents
  $ 2,313     $ 2,165     $ 2,411  
Short-term investments
    229       478       475  
Total unrestricted cash, cash equivalents and short-term investments
    2,542       2,643       2,886  
                         
Restricted cash, cash equivalents and short-term investments
    164       190       164  
Accounts receivable, net
    549       453       652  
Spare parts and supplies, net
    245       235       311  
Deferred income taxes
    180       216       217  
Prepayments and other
    435       610       483  
Total current assets
    4,115       4,347       4,713  
                         
Property and Equipment:
                       
Owned property and equipment:
                       
Flight equipment
    8,807       8,446       8,170  
Other
    1,755       1,694       1,673  
Flight equipment and other
    10,562       10,140       9,843  
Less:  Accumulated depreciation
    3,444       3,229       3,061  
Owned property and equipment, net
    7,118       6,911       6,782  
                         
Purchase deposits for flight equipment
    226       275       319  
                         
Capital leases
    195       194       190  
Less:  Accumulated amortization
     60        53        51  
Capital leases, net
    135       141       139  
Total property and equipment, net
    7,479       7,327       7,240  
                         
Routes and airport operating rights, net
    794       804       785  
Investment in student loan-related auction rate securities, long-term
    -       -       130  
Other assets, net
    208       208       194  
                         
Total Assets
  $ 12,596     $ 12,686     $ 13,062  

(continued on next page)

 
 

 

CONTINENTAL AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except for share data)
(2008 As Adjusted (Note 1))

 
September 30,
   
December 31,
   
September 30,
 
STOCKHOLDERS' EQUITY
 
2009
   
2008
   
2008
 
   
(Unaudited)
         
(Unaudited)
 
                   
Current Liabilities:
                 
Current maturities of long-term debt and capital leases
  $ 734     $ 519     $ 717  
Accounts payable
    911       1,021       945  
Air traffic and frequent flyer liability
    1,936       1,881       2,374  
Accrued payroll
    405       345       380  
Accrued other liabilities
    279       708       499  
Total current liabilities
    4,265       4,474       4,915  
                         
Long-Term Debt and Capital Leases
    5,290       5,353       5,160  
                         
Deferred Income Taxes
    180       216       217  
                         
Accrued Pension Liability
    1,368       1,417       564  
                         
Accrued Retiree Medical Benefits
    241       234       246  
                         
Other Liabilities
    806       869       849  
                         
Commitments and Contingencies
                       
                         
Stockholders' Equity:
                       
Class B common stock - $.01 par, 400,000,000 shares authorized;138,117,042, 123,264,534 and 110,243,176 issued
    1       1       1  
Additional paid-in capital
    2,210       2,038       1,836  
Retained earnings (accumulated deficit)
    (527 )     (160 )     109  
Accumulated other comprehensive loss
    (1,238 )     (1,756 )     (835 )
Total stockholders' equity
    446       123       1,111  
Total Liabilities and Stockholders' Equity
  $ 12,596     $ 12,686     $ 13,062  


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

 
 

 

CONTINENTAL AIRLINES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(2008 As Adjusted (Note 1))

   
Nine Months Ended September 30,
 
   
2009
   
2008
 
   
(Unaudited)
 
Cash Flows from Operating Activities:
           
Net loss
  $ (367 )   $ (317 )
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Depreciation and amortization
    353       327  
Special charges
    68       141  
Gain on sale of investments
    -       (78 )
Other-than-temporary impairment losses on investments
    -       29  
Stock-based compensation related to equity awards
    7       13  
Deferred income tax benefit
    -       (110 )
Other adjustments, net
    35       20  
Changes in operating assets and liabilities
    91       (22 )
Net cash provided by operating activities
    187       3  
                 
Cash Flows from Investing Activities:
               
Capital expenditures
    (301 )     (281 )
Aircraft purchase deposits refunded, net
    42       61  
Proceeds from sales of short-term investments, net
    256       93  
Proceeds from sales of property and equipment
    46       76  
Decrease (increase) in restricted cash, cash equivalents and short-term investments
    26       (62 )
Proceeds from sale of Copa Holdings, S.A. stock
    -       149  
Proceeds from sales of other long-term investments
    -       22  
Expenditures for airport operating rights
    (22 )     (109 )
Other cash flows from investing activities
    (3 )     -  
Net cash provided by (used in) investing activities
    44       (51 )
                 
Cash Flows from Financing Activities:
               
Payments on long-term debt and capital lease obligations
    (542 )     (341 )
Proceeds from issuance of long-term debt
    295       497  
Proceeds from public offering of common stock
    158       162  
Proceeds from issuance of common stock pursuant to stock plans
    6       13  
Net cash (used in) provided by financing activities
    (83 )     331  
                 
Net Increase in Cash and Cash Equivalents
    148       283  
                 
Cash and Cash Equivalents - Beginning of Period
    2,165       2,128  
                 
Cash and Cash Equivalents - End of Period
  $ 2,313     $ 2,411  
                 
Investing and Financing Activities Not Affecting Cash:
               
Property and equipment acquired through the issuance of debt
  $ 370     $ 865  
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

 
 

 

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


In our opinion, the unaudited consolidated financial statements included herein contain all adjustments necessary to present fairly our financial position, results of operations and cash flows for the periods indicated.  Such adjustments, other than nonrecurring adjustments that have been separately disclosed, are of a normal, recurring nature.

The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto for the year ended December 31, 2008 contained in our Current Report on Form 8-K dated April 24, 2009.  Due to seasonal fluctuations common to the airline industry, our results of operations for the periods presented are not necessarily indicative of the results of operations to be expected for the entire year.  As used in these Notes to Consolidated Financial Statements, the terms “Continental,” “we,” “us,” “our” and similar terms refer to Continental Airlines, Inc. and, unless the context indicates otherwise, its consolidated subsidiaries.

Reclassifications have been made in the prior periods’ consolidated statements of operations to conform to our new presentation for expense related to fuel and related taxes on flights operated for us by other operators under capacity purchase agreements.  This expense, which is now included in aircraft fuel and related taxes, was previously reported in regional capacity purchase, net.  These reclassifications do not affect operating income (loss) or net income (loss) for any period.

We have evaluated subsequent events through October 21, 2009, which is the date these financial statements were issued.

NOTE 1 – ADOPTED AND RECENTLY ISSUED ACCOUNTING STANDARDS

Codification.  Effective July 1, 2009, the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) became the single official source of authoritative, nongovernmental generally accepted accounting principles (“GAAP”) in the United States.  The historical GAAP hierarchy was eliminated and the ASC became the only level of authoritative GAAP, other than guidance issued by the Securities and Exchange Commission.  Our accounting policies were not affected by the conversion to ASC.  However, references to specific accounting standards in the footnotes to our consolidated financial statements have been changed to refer to the appropriate section of ASC.

Convertible Debt.  On January 1, 2009, we adopted the Cash Conversion Subsections of ASC Subtopic 470-20, “Debt with Conversion and Other Options – Cash Conversion” (“Cash Conversion Subsections”), which clarify the accounting for convertible debt instruments that may be settled in cash (including partial cash settlement) upon conversion.  The Cash Conversion Subsections require issuers to account separately for the liability and equity components of certain convertible debt instruments in a manner that reflects the issuer’s nonconvertible debt (unsecured debt) borrowing rate when interest cost is recognized.  The Cash Conversion Subsections require bifurcation of a component of the debt, classification of that component in equity and the accretion of the resulting discount on the debt to be recognized as part of interest expense in our consolidated statements of operations.

The Cash Conversion Subsections require retrospective application to the terms of instruments as they existed for all periods presented.  The adoption of the Cash Conversion Subsections affects the accounting for our 5% Convertible Notes issued in 2003 and due 2023 (the “5% Convertible Notes”).  The retrospective application of this guidance affects years 2003 through 2008.  Income taxes have been recorded on the foregoing adjustments to the extent tax benefits were available.

The following table sets forth the effect of the retrospective application of the Cash Conversion Subsections on certain previously reported line items (in millions, except per share data):

Consolidated Statements of Operations:
   
Three Months ended
September 30, 2008
 
Nine Months ended
September 30, 2008
   
Originally
Reported
 
As
Adjusted
 
Originally
Reported
 
As
Adjusted
                 
Interest expense
  $ (93 )   $ (95 )   $ (271 )   $ (279 )
Income tax benefit
    12       20       100       110  
Net loss
    (236 )     (230 )     (319 )     (317 )
                                 
Basic and Diluted Loss per Share
  $ (2.14 )   $ (2.09 )   $ (3.11 )   $ (3.08 )

Consolidated Balance Sheet:
   
December 31, 2008
 
September 30, 2008
   
Originally
Reported
 
As
Adjusted
 
Originally
Reported
 
As
Adjusted
                 
Long-term debt and capital leases
  $ 5,371     $ 5,353     $ 5,181     $ 5,160  
Additional paid-in capital
    1,997       2,038       1,795       1,836  
Retained earnings (accumulated deficit)
    (137 )     (160 )     129       109  
Total stockholders’ equity
    105       123       1,090       1,111  


Fair Value.  In September 2006, the FASB issued guidance which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.  This guidance is contained in ASC Topic 820, “Fair Value Measurements and Disclosures” (“ASC Topic 820”).  In February 2008, the FASB deferred the effective date for us to January 1, 2009 for all nonfinancial assets and liabilities, except for those that are recognized or disclosed at fair value on a recurring basis (that is, at least annually).  We adopted the deferred provisions of ASC Topic 820 on January 1, 2009. Application of the new rules will affect our annual impairment testing for our international routes and airport operating rights, which we perform as of October 1 of each year.  Routes, which are indefinite-lived intangible assets, represent the right to fly between cities in the United States and foreign countries.  In prior years, we determined the fair value of each route by modeling the expected future discounted cash flows.  If the calculated fair value was lower than the carrying value of a route, an impairment loss would have been recognized for the difference between the two amounts.  With the adoption of new accounting rules, fair value is now determined as an exit price, representing the price that would be received in an orderly transaction between market participants based on the highest and best use of the asset, rather than as the result of an internally-generated cash flow analysis.  Certain of our international routes are to countries that are subject to “open skies” agreements, meaning that all carriers have access to any destination in that country.  In these cases, if there are no significant barriers to new entrants to serve the international destination, such as airport slot restrictions or gate availability, there is no market for the route asset and, therefore, it has no fair value under the new definition of fair value.  We are currently evaluating the requirements of the pronouncement and anticipate that we will record a non-cash special charge in the fourth quarter of 2009 to write off certain of our international routes.  However, we do not expect the charge to have a material effect on our consolidated financial statements.  The routes expected to be written off are not pledged as collateral under our debt agreements.  Therefore, our compliance with our debt agreements will not be affected by this new guidance.

In April 2009, the FASB issued additional guidance for estimating fair value in accordance with ASC Topic 820.  The additional guidance addresses determining fair value when the volume and level of activity for an asset or liability have significantly decreased and identifying transactions that are not orderly.  We adopted the provisions of this guidance for the quarter ended June 30, 2009.  The adoption did not have a material effect on our consolidated financial statements.

Other-Than-Temporary Impairments.  In April 2009, the FASB issued new guidance on the recognition of other-than-temporary impairments of investments in debt securities, as well as financial statement presentation and disclosure requirements for other-than-temporary impairments of investments in debt and equity securities.  We adopted the provisions of this guidance for the quarter ended June 30, 2009.  The adoption did not have a material effect on our consolidated financial statements.

Transfers of Financial Assets.  In June 2009, the FASB issued guidance that changes the information a reporting entity provides in its financial statements about the transfer of financial assets and continuing interests held in transferred financial assets.  The standard amends previous accounting guidance by removing the concept of qualified special purpose entities.  This accounting standard is effective for us for transfers occurring on or after January 1, 2010.  We are currently evaluating the requirements of this pronouncement and have not determined the impact, if any, that adoption of this standard will have on our consolidated financial statements.

Variable Interest Entities.  In June 2009, the FASB issued guidance to change financial reporting by enterprises involved with variable interest entities (“VIEs”).  The standard replaces the quantitative-based risks and rewards calculation for determining which enterprise has a controlling financial interest in a VIE with an approach focused on identifying which enterprise has the power to direct the activities of a VIE and the obligation to absorb losses of the entity or the right to receive the entity’s residual returns.  This accounting standard is effective for us on January 1, 2010.  We are currently evaluating the requirements of this pronouncement and have not determined the impact, if any, that adoption of this standard will have on our consolidated financial statements.

Employee Benefit Plans.  In December 2008, the FASB issued guidance that requires additional disclosures about assets held in an employer's defined benefit pension or other postretirement plan, primarily related to categories and fair value measurements of plan assets.  This guidance is effective for us as of December 31, 2009.  Because this guidance applies only to financial statement disclosures, the adoption is not expected to have a material effect on our consolidated financial statements.

NOTE 2 - LOSS PER SHARE

Because we incurred a net loss in the three and nine months ended September 30, 2009 and 2008, basic and diluted loss per share for each period were calculated as our net loss divided by the weighted average shares outstanding.  Approximately 13 million potential shares of our common stock related to convertible debt securities were excluded from the computation of diluted loss per share for each of the periods presented because they were antidilutive.  In addition, approximately 8 million weighted average options to purchase shares of our common stock were excluded from the computation of diluted loss per share for each of the periods presented because the effect of including the options would have been antidilutive.

NOTE 3 - FLEET INFORMATION

As of September 30, 2009, our operating fleet consisted of 338 mainline jets and 266 regional aircraft.  The 338 mainline jets are operated exclusively by us, while the 266 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 Airlines, Inc. (“ExpressJet”) and operated on our behalf under a capacity purchase agreement with ExpressJet, 35 are subleased to other operators but are not operated on our behalf and 25 are temporarily grounded.  Additionally, our regional operating fleet includes 52 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 September 30, 2009:

         
       
Third-Party
Aircraft Type
Total
Owned
Leased
Aircraft
         
Mainline (a):
       
777-200ER
20 
 
 
12 
 
 
767-400ER
16 
 
14 
 
 
 
767-200ER
10 
 
 
 
 
757-300
17 
 
 
 
 
757-200
41 
 
15 
 
26 
 
 
737-900ER
28 
 
28 
 
 
 
737-900
12 
 
 
 
 
737-800
117 
 
44 
 
73 
 
 
737-700
36 
 
12 
 
24 
 
 
737-500
34 
 
 
34 
 
 
737-300
     7
 
    7
 
     - 
 
   -
 
Total mainline
338
 
154
 
184
 
   -
 
                 
Regional (b):
               
ERJ-145XR
89 
 
 
89 
 
-  
 
ERJ-145
140 
 
18 
 
107 
 
15 
(c)
CRJ200LR
 
 
 
(c)
Q200
16 
 
 
 
16 
(d)
Q400
  14
 
    -
 
     -
 
 14
(e)
Total regional
266
 
  18
 
196
 
 52
 
                 
Total
604
 
172
 
380
 
   52
 
______________________

(a)
Excludes nine grounded Boeing 737-500 aircraft (five owned and four leased), 12 grounded Boeing 737-300 aircraft (four owned and eight leased) and one owned Boeing 737-900ER aircraft delivered but not yet placed into service.
(b)
Excludes 25 ERJ-135 aircraft that are temporarily grounded and 30 ERJ-145 aircraft and five ERJ-135 aircraft that are subleased to other operators but are not operated on our behalf.
(c)
Operated by Chautauqua Airlines, Inc. (“Chautauqua”) under a capacity purchase agreement.
(d)
Operated by Champlain Enterprises, Inc. (“CommutAir”) under a capacity purchase agreement.
(e)
Operated by Colgan Air, Inc. (“Colgan”) under a capacity purchase agreement.

Mainline Fleet Activity.  During the first nine months of 2009, we placed into service 11 new Boeing 737-900ER aircraft and one new Boeing 737-800 aircraft.  We removed 16 Boeing 737-300 aircraft and eight Boeing 737-500 aircraft from service during the first nine months of 2009.  By early January 2010, we expect to remove from service all of our remaining Boeing 737-300 aircraft and three additional Boeing 737-500 aircraft.

During the third quarter of 2009, we sold six 737-500 aircraft to a foreign buyer.  We also have an agreement to sell up to five additional Boeing 737-500 aircraft to a different foreign buyer.  This sale is subject to customary closing conditions, some of which are outside of our control, and we cannot give any assurances that the buyer of these aircraft will be able to obtain financing for this transaction, that there will not be delays in deliveries or that the closing of this transaction will occur.  We hold cash deposits that secure the buyer’s obligations under the aircraft sale contract and we are entitled to damages under the aircraft sale contract if the buyer does not take delivery of the aircraft when required.

Regional Fleet Activity.  In January 2009, we amended our capacity purchase agreement with Colgan 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 to Colgan, 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 the aircraft is delivered into service.  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 under the agreement to 14.

In July 2009, we entered into agreements to sublease five temporarily grounded ERJ-135 aircraft beginning in the third quarter of 2009.  These aircraft will not be operated for us.  The subleases have terms of five years, but may be cancelled by the lessee under certain conditions after an initial term of two years.  The remaining 25 ERJ-135 aircraft continue to be temporarily grounded.  We are evaluating our options regarding these 25 aircraft, including permanently grounding them.
 
Firm Order and Option Aircraft.  As of September 30, 2009 we had firm commitments to purchase 82 new aircraft (52 Boeing 737 aircraft, five Boeing 777 aircraft and 25 Boeing 787 aircraft) scheduled for delivery from 2009 through 2016, with an estimated aggregate cost of $5.1 billion including related spare engines.  We are currently scheduled to take delivery of one Boeing 737 aircraft in the fourth quarter of 2009 and two Boeing 777 aircraft and 12 Boeing 737 aircraft in 2010.  In addition to our firm order aircraft, we had options to purchase a total of 102 additional Boeing aircraft as of September 30, 2009.

We have also agreed to lease four Boeing 757-300 aircraft from Boeing Capital Corporation.  We expect these aircraft to be placed into service by the end of the first quarter of 2010.

NOTE 4 - LONG-TERM DEBT

2007 Enhanced Equipment Trust Certificates.  In April 2007, we obtained financing for 12 Boeing 737-800s and 18 Boeing 737-900ERs.  We applied the final portion of this financing to three Boeing aircraft delivered to us in the first half of 2009 and recorded related debt of $121 million.

Other Debt Secured by Aircraft.  During the first nine months of 2009, we entered into loan agreements under which we borrowed $180 million.  This floating rate indebtedness is secured by five new Boeing 737-900ER aircraft and two Boeing 737-800 aircraft that this debt refinanced.

2009 Enhanced Equipment Trust Certificates.  On July 1, 2009, we obtained financing for 12 currently owned Boeing aircraft and five new Boeing 737-900ERs.  A pass-through trust raised $390 million through the issuance of a single class of pass-through certificates bearing interest at 9%.  The proceeds from the sale of the certificates were initially held by a depositary in escrow for the benefit of the certificate holders until we issued equipment notes to the trust, which purchased such notes with a portion of the escrowed funds.  During the third quarter of 2009, we issued equipment notes with respect to the 12 currently owned aircraft, resulting in proceeds of $249 million cash for our general corporate purposes, and equipment notes with respect to four new Boeing 737-900ER aircraft, resulting in proceeds of $113 million to finance the purchase of the aircraft.  One remaining new Boeing 737-900ER aircraft will be financed through the issuance of $28 million of equipment notes in the fourth quarter of 2009.  We have recorded the principal amount of the equipment notes that we issued as debt on our consolidated balance sheet.  Principal payments on the equipment notes and the corresponding distribution of these payments to certificate holders are scheduled from January 2010 through July 2016.  Additionally, the certificates have the benefit of a liquidity facility under which a third party agrees to make up to three semiannual interest payments on the certificates if a default in the payment of interest occurs.

Maturities.  Maturities of long-term debt due before December 31, 2009 and for the next four years are as follows (in millions):

October 1, 2009 through December 31, 2009
  $ 62  
Year ending December 31,
       
2010
    968  
2011
    1,143  
2012
    581  
2013
    647  

Convertible Debt Securities.  Our 5% Convertible Notes with a principal amount of $175 million are convertible into 50 shares of our common stock per $1,000 principal amount at a conversion price of $20 per share.  If a holder of the notes exercises the conversion right, in lieu of delivering shares of our common stock, we may elect to pay cash or a combination of cash and shares of our common stock for the notes surrendered.  All or a portion of the notes are also redeemable for cash at our option on or after June 18, 2010 at par plus accrued and unpaid interest, if any.  Holders of the notes may require us to repurchase all or a portion of their notes at par plus any accrued and unpaid interest on June 15 of 2010, 2013 or 2018.  We may at our option choose to pay the repurchase price on those dates in cash, shares of our common stock or any combination thereof.  However, if we are required to repurchase all or a portion of the notes, our policy is to settle the notes in cash.  Holders of the notes may also require us to repurchase all or a portion of their notes for cash at par plus any accrued and unpaid interest if certain changes in control of Continental occur.

As a result of the adoption of the Cash Conversion Subsections of ASC Subtopic 470-20, we are required to account separately for the debt and equity components of our 5% Convertible Notes in a manner that reflects our nonconvertible debt (unsecured debt) borrowing rate when interest expense is recognized.  The debt and equity components recognized for our 5% Convertible Notes were as follows (in millions):

   
September 30,
 
December 31,
 
September 30,
   
2009
 
2008
 
2008
             
Principal amount of Convertible Notes
  $ 175     $ 175     $ 175  
Unamortized discount
    9       18       21  
Net carrying amount
    166       157       154  
Additional paid-in capital
    64       64       64  

At September 30, 2009, the unamortized discount had a remaining recognition period of nine months.

The amount of interest expense recognized and effective interest rate for the three and nine months ended September 30 were as follows (in millions):

   
Three Months
Ended September 30,
 
Nine Months
Ended September 30,
   
2009
 
2008
 
2009
 
2008
                 
Contractual coupon interest
  $ 2     $ 2     $ 6     $ 6  
Amortization of discount on 5% Convertible Notes
    3       3       9       9  
Interest expense
  $ 5     $ 5     $ 15     $ 15  
                                 
Effective interest rate
    13 %     13 %     13 %     13 %

NOTE 5 – FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

Accounting rules for fair value clarify that fair value is an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants based on the highest and best use of the asset or liability.  As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability.  ASC Topic 820 requires us to use valuation techniques to measure fair value that maximize the use of observable inputs and minimize the use of unobservable inputs.  These inputs are prioritized as follows:

 
Level 1:
Observable inputs such as quoted prices for identical assets or liabilities in active markets
 
Level 2:
Other inputs that are observable directly or indirectly, such as quoted prices for similar assets or liabilities or market-corroborated inputs
 
Level 3:
Unobservable inputs for which there is little or no market data and which require us to develop our own assumptions about how market participants would price the assets or liabilities

 
The valuation techniques that may be used to measure fair value are as follows:

 
(A)
Market approach – Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities
 
(B)
Income approach – Uses valuation techniques to convert future amounts to a single present amount based on current market expectations about those future amounts, including present value techniques, option-pricing models and excess earnings method
 
(C)
Cost approach – Based on the amount that currently would be required to replace the service capacity of an asset (replacement cost)

Assets (liabilities) measured at fair value on a recurring basis during the period include (in millions):

   
Carrying Amount as of
September 30, 2009
   
Level 1
   
Level 2
   
Level 3
 
Valuation
Technique
                           
Cash and cash equivalents
  $ 2,313     $ 2,313       -       -  
(A)
Short-term investments:
            -                    
Auction rate securities
    205               -     $ 205  
(B)
Other
    24       24       -       -  
(A)
Restricted cash, cash equivalents and short-term investments
    164       164       -       -  
(A)
Auction rate securities put right
    23       -       -       23  
(B)
Fuel derivatives
    9       -       -       9  
(A)
Foreign currency derivatives
    (3 )     -     $ (3 )     -  
(A)

Assets measured at fair value on a nonrecurring basis during the nine months ended September 30, 2009 include our Boeing 737-300 and 737-500 fleets and related assets.  We recorded impairment losses on these assets in the quarter ended June 30, 2009.  As a result of the impairments, we measured these assets at fair value at June 30, 2009, as follows (in millions):

   
Carrying Amount as of
June 30, 2009
 
Level 1
 
Level 2
 
Level 3
 
Total
Losses
                     
Property and Equipment:
                   
Boeing 737-300 fleet
  $ 90       -       -     $ 90     $ (19 )
Boeing 737-500 fleet
    82       -       -       82       (12 )
                                    $ (31 )

The determination of fair value of each of these items is discussed below:

Cash, Cash Equivalents and Restricted Cash.  Cash, cash equivalents and restricted cash consist primarily of U.S. Government and Agency money market funds and other AAA-rated money market funds with original maturities of three months or less.  The original cost of these assets approximates fair value due to their short-term maturity.

Short-Term Investments Other than Auction Rate Securities.  Short-term investments other than auction rate securities primarily consist of certificates of deposit placed through an account registry service (“CDARS”).  The fair values of these investments are based on observable market data.

Student Loan-Related Auction Rate Securities and Put Right.  At September 30, 2009, we held student loan-related auction rate securities with a fair value of $205 million and a par value of $261 million.  These securities were classified as follows (in millions):

   
Fair Value
 
Par Value
 
Amortized Cost
             
Short-term investments:
           
Available-for-sale
  $ 135     $ 166     $ 135  
Trading
    70       95       N/A  
Total
  $ 205     $ 261          

These securities are variable-rate debt instruments with contractual maturities generally greater than ten years and whose interest rates are reset every 7, 28 or 35 days, depending on the terms of the particular instrument.  These securities are secured by pools of student loans guaranteed by state-designated guaranty agencies and reinsured by the U.S. government.  All of the auction rate securities we hold are senior obligations under the applicable indentures authorizing the issuance of the securities.  Auctions for these securities began failing in the first quarter of 2008 and have continued to fail, resulting in our holding such securities and the issuers of these securities paying interest adjusted to the maximum contractual rates.

Prior to the first quarter of 2008, the carrying value of auction rate securities approximated fair value due to the frequent resetting of the interest rate and the existence of a liquid market.  Although we will earn interest on these investments involved in failed auctions at the maximum contractual rate, the estimated market value of these auction rate securities no longer approximates par value due to the lack of liquidity in the market for these securities at their par value.  We recorded losses of $29 million during the second quarter of 2008 to reflect the other-than-temporary decline in the fair value of these securities.  These losses are included in nonoperating income (expense) in our consolidated statement of operations.  Following this other-than-temporary impairment, a new amortized cost basis was established equal to the then fair value.  The difference between this amortized cost and the cash flows expected to be collected is being accreted as interest income.

We estimated the fair value of these securities to be $205 million at September 30, 2009, taking into consideration the limited sales and offers to purchase securities and using internally-developed models of the expected future cash flows related to the securities.  Our models incorporated our probability-weighted assumptions about the cash flows of the underlying student loans and discounts to reflect a lack of liquidity in the market for these securities.

In addition, in 2008, one institution granted us a put right permitting us in 2010 to sell to the institution at their full par value auction rate securities with a par value of $125 million.  The institution has also committed to loan us 75% of the market value of these securities at any time until the put right is exercised.  The put right is recorded at fair value in prepayments and other assets on our consolidated balance sheet.  We determined the fair value based on the difference between the risk-adjusted discounted expected cash flows from the underlying auction rate securities without the put right and with the put right being exercised in 2010.  We have classified the underlying auction rate securities as trading securities and elected the fair value option under the Fair Value Subsections of ASC Topic 825-10, “Financial Instruments,” for the put right, with changes in the fair value of the put right and the underlying auction rate securities recognized in earnings currently.

During the third quarter of 2009, we sold, at par, auction rate securities having a par value of $30 million to the institution that had granted us the put right.  Our gains on the sales were recognized using the specific identification method and are included in other non-operating income (expense) in our consolidated statements of operations.  Such gains were not material.

We continue to monitor the market for auction rate securities and consider its impact, if any, on the fair value of our investments.  If current market conditions deteriorate further, we may be required to record additional losses on these securities.

Fuel Derivatives.  We determine the fair value of our fuel derivatives by obtaining inputs from a broker's pricing model based on inputs that are either readily available in public markets or can be derived from information available in publicly quoted markets.  We verify the reasonableness of these inputs by comparing the resulting fair values to similar quotes from our counterparties as of each date for which financial statements are prepared.  For derivatives not covered by collateral, we also make an adjustment to incorporate credit risk into the valuation.  Due to the fact that certain of the inputs utilized to determine the fair value of the fuel derivatives are unobservable (principally volatility of crude oil prices and the credit risk adjustments), we have categorized these contracts as Level 3.

Foreign Currency Derivatives.  We determine the fair value of our foreign currency derivatives by comparing our contract rate to a published forward price of the underlying currency, which is based on market rates for comparable transactions.

Property and Equipment - Boeing 737-300 and 737-500 Aircraft Fleets.  As discussed in Note 11, we wrote down our Boeing 737-300 and 737-500 fleets to their respective fair values in the second quarter of 2009.  Fleet assets include owned aircraft, improvements on leased aircraft, rotable spare parts, spare engines and simulators.  We estimated the fair values based on current market conditions, the condition of our aircraft and our expected proceeds from the sale of the assets.

Unobservable Inputs.  The reconciliation of our assets (liabilities) measured at fair value on a recurring basis using unobservable inputs (Level 3) is as follows (in millions):
 
   
Three Months Ended September 30, 2009
 
   
Student Loan-Related
Auction Rate Securities
   
Auction Rate
Securities Put Right
   
Fuel
Derivatives
 
                   
Balance at June 30, 2009
  $ 230     $ 27     $ (17 )
Purchases, sales, issuances and settlements (net)
    (30 )     -       36  
Gains and losses:
                       
Reported in earnings:
                       
Realized
    5       (4 )     -  
Unrealized
    -       -       1  
Reported in other comprehensive income (loss)
    -       -       (11 )
Balance at September 30, 2009
  $ 205     $ 23     $ 9  
 
   
Nine Months Ended September 30, 2009
 
   
Student Loan-Related
Auction Rate Securities
   
Auction Rate
Securities Put Right
   
Fuel
Derivatives
 
                   
Balance at December 31, 2008
  $ 229     $ 26     $ (415 )
Purchases, sales, issuances and settlements (net)
    (31 )     -       458  
Gains and losses:
                       
Reported in earnings:
                       
Realized
    5       (4 )     -  
Unrealized
    -       1       7  
Reported in other comprehensive income (loss)
    2       -       (41 )
Balance at September 30, 2009
  $ 205     $ 23     $ 9  

Other Financial Instruments.  Other financial instruments that are not subject to the disclosure requirements of ASC Topic 820 are as follows:

· 
Debt.  The fair value of our debt with a carrying value of $5.8 billion at September 30, 2009 was approximately $5.1 billion.  These estimates were based on either market prices or the discounted amount of future cash flows using our current incremental rate of borrowing for similar liabilities.
   
· 
Investment in COLI Products.  In connection with certain of our supplemental retirement plans, we have company owned life insurance policies covering certain of our employees.  As of September 30, 2009, the carrying value of the cash surrender value of the life insurance policies was $30 million, which was based on the fair value of the underlying investments.
   
· 
Accounts Receivable and Accounts Payable.  The fair values of accounts receivable and accounts payable approximated carrying value due to their short-term maturities.

NOTE 6 - HEDGING ACTIVITIES

As part of our risk management program, we use a variety of derivative financial instruments to help manage our risks associated with changes in fuel prices and foreign currency exchange rates.  We do not hold or issue derivative financial instruments for trading purposes.

We are exposed to credit losses in the event of non-performance by issuers of derivative financial instruments.  To manage credit risks, we select issuers based on credit ratings, limit our exposure to any one issuer under our defined guidelines and monitor the market position with each counterparty.

Fuel Price Risk Management.  We routinely hedge a portion of our future fuel requirements, provided the hedges are expected to be cost effective.  We conduct our fuel hedging activities using a combination of jet fuel, crude oil and heating oil contracts.

We have historically entered into swap agreements or purchased call options to protect us against sudden and significant increases in jet fuel prices.  To minimize the high cost to us of call options, we may also enter into collars.  Collars are derivative instruments that involve combining a purchased call option, which on a stand-alone basis would require us to pay a premium, with a written put option, which on a stand-alone basis would result in our receiving a premium.  The collars we have entered into consist of both instruments that result in no net premium to us and instruments that result in our payment of a net premium to the counterparty.  The purchased call option portion of the collar caps the price of the contract at the agreed upon price, while the sold option portion of the collar provides for a minimum price of the related commodity.  We had no collars outstanding at September 30, 2009.

As of September 30, 2009, our projected consolidated fuel requirements were hedged as follows:
 

 
   
Maximum Price
 
Minimum Price
   
% of
Expected
Consumption
 
Weighted
Average Price
(per gallon)
 
% of
Expected
Consumption
 
Weighted
Average Price
(per gallon)
                 
Fourth Quarter 2009
                               
Gulf Coast jet fuel swaps
    15 %     $ 1.83         15 %     $ 1.83    
WTI crude oil swaps
    5 %       1.36         5 %       1.36    
Total
    20 %                 20 %            
                                         
First Quarter 2010
                                       
Gulf Coast jet fuel swaps
    5 %     $ 1.94         5 %     $ 1.94    
WTI crude oil swaps
    1 %       1.62         1 %       1.62    
WTI crude oil call options
    1 %       1.88         N/A         N/A    
Total
    7 %                 6 %            

We account for our fuel derivatives as cash flow hedges and record them at fair value in our consolidated balance sheet with the change in fair value, to the extent effective, being recorded to accumulated other comprehensive income (loss) (“accumulated OCI”), net of applicable income taxes.  Fuel hedge gains (losses) are recognized as a component of fuel expense when the underlying fuel being hedged is used.  The ineffective portion of our fuel hedges is determined based on the correlation between jet fuel and crude oil or heating oil prices and is included in nonoperating income (expense) in our consolidated statement of operations.

When our fuel hedges are in a liability position, we may be required to post cash collateral with our counterparties.  We were not required to post any such collateral at September 30, 2009.

Foreign Currency Exchange Risk Management.  We have historically used foreign currency average rate options and forward contracts to hedge against the currency risk associated with our forecasted Japanese yen, British pound, Canadian dollar and euro-denominated cash flows.  The average rate options and forward contracts have only nominal intrinsic value at the date contracted.  At September 30, 2009, we had forward contracts outstanding to hedge the following cash inflows (primarily from passenger ticket sales) in foreign currencies:

· 
24% of our projected Japanese yen-denominated cash inflows through 2010
   
· 
9% of our projected euro-denominated cash inflows through 2009

We account for these instruments as cash flow hedges.  They are recorded at fair value in our consolidated balance sheet with the offset to accumulated OCI, net of applicable income taxes and hedge ineffectiveness, and recognized as passenger revenue in the month of sale.  We measure hedge effectiveness of average rate options and forward contracts based on the forward price of the underlying currency.  Hedge ineffectiveness, if any, is included in other nonoperating income (expense) in our consolidated statement of operations.

Quantitative Disclosures.  At September 30, 2009, all of our derivative instruments were designated as cash flow hedges and were reported in our consolidated balance sheet as follows (in millions):

 
Asset Derivatives
Liability Derivatives
 
Balance Sheet
Location
 
Fair
Value
Balance Sheet
Location
 
Fair
Value
             
Fuel derivatives
Prepayments and other current assets
  $ 9  
Accrued other current liabilities
  $ -  
                     
Foreign currency derivatives
Prepayments and other current assets
    -  
Accrued other current liabilities
    3  
Total derivatives
    $ 9       $ 3  

The gains and losses related to our derivative instruments reported in our consolidated balance sheet at September 30, 2009 and our consolidated statement of operations were as follows (in millions):

   
Three Months Ended September 30, 2009
Cash Flow Hedges
 
Gain (Loss)
Recognized in
OCI
(Effective Portion)
Gain (Loss) Reclassified from
Accumulated OCI into Income
(Effective Portion)
Gain (Loss) Recognized in
Income (Ineffective Portion)
Income Statement
Location
 
Amount
Income Statement
Location
 
Amount
                 
Fuel derivatives
 
  $ (6 )
Aircraft fuel and
related taxes
  $ (41 )
Other nonoperating
income (expense)
  $ 1  
                             
Foreign currency derivatives
    (3 )
Passenger revenue
 
    -  
Other nonoperating
income (expense)
    -  
Total
  $ (9 )     $ (41 )     $ 1  

   
Nine Months Ended September 30, 2009
Cash Flow Hedges
 
Gain (Loss)
Recognized in
OCI
(Effective Portion)
Gain (Loss) Reclassified from
Accumulated OCI into Income
(Effective Portion)
Gain (Loss) Recognized in
Income (Ineffective Portion)
Income Statement
Location
 
Amount
Income Statement
Location
 
Amount
                 
Fuel derivatives
 
  $ 23  
Aircraft fuel and
related taxes
  $ (392 )
Other nonoperating
income (expense)
  $ 7  
                             
Foreign currency derivatives
    6  
Passenger revenue
 
    -  
Other nonoperating
income (expense)
    -  
Total
  $ 29       $ (392 )     $ 7  

NOTE 7 – COMMON STOCK

Common Stock.  In August 2009, we completed a public offering of 14.4 million shares of Class B common stock at a price to the public of $11.20 per share, raising net proceeds of $158 million for general corporate purposes.

In June 2008, we completed a public offering of 11 million shares of Class B common stock at a price to the public of $14.80 per share, raising net proceeds of $162 million for general corporate purposes.

NOTE 8 - STOCK PLANS AND AWARDS

Profit Based RSU Awards.  We have issued profit based restricted stock unit (“RSU”) awards pursuant to our Long Term Incentive and RSU Program, which can result in cash payments to our officers upon the achievement of specified profit sharing-based performance targets.  The performance targets require that we reach target levels of cumulative employee profit sharing under our enhanced employee profit sharing program during the performance period and that we have net income calculated in accordance with U.S. generally accepted accounting principles for the applicable fiscal year in which the cumulative profit sharing target is met.  To serve as a retention feature, payments related to the achievement of a performance target generally will be made in annual increments over a three-year period to participants who remain continuously employed by us through each payment date.  Payments also are conditioned on our having, at the end of the fiscal year preceding the date any payment is made, a minimum unrestricted cash, cash equivalents and short-term investments balance as set by the Human Resources Committee of our Board of Directors.  If we do not achieve the minimum cash balance applicable to a payment date, the payment will be deferred until the next payment date (March 1 of the next year), subject to a limit on the number of years payments may be carried forward.  Payment amounts are calculated based on the number of RSUs subject to the award, the average closing price of our common stock for the 20 trading days preceding the payment date and the payment percentage set by the Human Resources Committee of our Board of Directors for achieving the applicable profit sharing-based performance target.

We have four outstanding awards of profit based RSUs granted under our Long-Term Incentive and RSU Program:  (1) profit based RSU awards with a performance period commencing April 1, 2006 and ending December 31, 2009, (2) profit based RSU awards with a performance period commencing January 1, 2007 and ending December 31, 2009, (3) profit based RSU awards with a performance period commencing January 1, 2008 and ending December 31, 2010 and (4) profit based RSU awards with a performance period commencing January 1, 2009 and ending December 31, 2011.

The profit based RSU awards that had a performance period commencing April 1, 2006 and ending December 31, 2009 achieved the highest level cumulative profit sharing performance target based on cumulative profit sharing payments to our broad based employees of $262 million during the performance period.  As a result, in March 2009, payments totaling $20 million were made with respect to these profit based RSU awards following achievement of the year end cash hurdle of $1.125 billion for those awards.   The third and final payment related to these awards will be made in March 2010, provided the year end cash hurdle is met at December 31, 2009.

The awards with a performance period commencing January 1, 2009, most of which were granted in February 2009, cover 1.4 million RSUs with cumulative profit sharing performance targets ranging from $100 million to $375 million and payment percentages ranging from 100% to 400%.  The cash hurdle associated with these awards is $2.2 billion.

As of September 30, 2009, we had recorded no liability associated with the profit based RSU awards for the periods commencing January 1, 2007, 2008 or 2009.

Employee Stock Purchase Plan.  On June 10, 2009, our stockholders approved an amendment to our 2004 Employee Stock Purchase Plan (the “2004 ESPP”), under which we had sold to our employees all of the remaining previously authorized shares in the first quarter of 2009.  The amendment made 3.5 million shares of common stock available for purchase by employees under the 2004 ESPP and extended the term of the plan to December 31, 2019.  The 2004 ESPP is open to all of our employees, including CMI employees.

Stock Options.  During the nine months ended September 30, 2009, we granted approximately 0.7 million options to purchase shares of our common stock at a weighted average exercise price of $9.36 per share.  The majority of these options vests in equal installments over four years and has a term of five years.

Incentive Plan.  Our incentive plan for granting equity and performance awards to management level employees and equity awards to non-employee directors expired on October 3, 2009.  The plan remains effective solely for purposes of governing the terms of outstanding awards and no further awards may be granted under the plan.

Stock-based Compensation.  Total stock-based compensation expense (credit) included in wages, salaries and related costs was $16 million, $25 million, $(7) million and $30 million for the three months ended September 30, 2009 and 2008 and the nine months ended September 30, 2009 and 2008, respectively.  As of September 30, 2009, $6 million of compensation cost attributable to future service related to unvested stock options and profit based RSU awards with a performance period commencing April 1, 2006 had not yet been recognized.  This amount will be recognized in expense over a weighted-average period of 1.3 years.

NOTE 9 - COMPREHENSIVE INCOME (LOSS)

Total comprehensive income (loss) included the following (in millions):

   
Three Months
Ended September 30,
   
Nine Months
Ended September 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Net loss
  $ (18   $ (230   $ (367 )   $ (317 )
                                 
Other comprehensive income (loss):
                               
Derivative financial instruments:
                               
Reclassification into income (net of deferred taxes of $51 and $0 in 2008)
    40       6       383       (201 )
Changes in fair value (net of deferred taxes of $(77) and $0 in 2008)
    (9 )     (336 )     29       (82 )
Unrealized gain on student loan-related auction rate securities
    -       (3 )     2       (3 )
Items related to employee benefit plans:
                               
(Increase) decrease in net actuarial losses
    -       (89 )     -       (89 )
Amortization of net actuarial losses (net of deferred taxes of $(5) and $0 in 2008)
    27       13       81       22  
Amortization of prior service cost (net of deferred taxes of $(6) and $0 in 2008)
    7       13       23       23  
Comprehensive income (loss) adjustments
    65       (396 )     518       (330 )
                                 
Total comprehensive income (loss)
  $ 47     $ (626 )   $ 151     $ (647 )

NOTE 10 - EMPLOYEE BENEFIT PLANS

Defined Benefit Pension and Retiree Medical Plans.  Net periodic defined benefit pension and retiree medical benefits expense included the following components (in millions):

   
Defined Benefit Pension
   
Retiree Medical Benefits
 
   
Three Months
Ended September 30,
   
Nine Months
Ended September 30,
   
Three Months
Ended September 30,
   
Nine Months 
Ended September 30,
 
   
2009
   
2008
   
2009
   
2008
   
2009
   
2008
   
2009
   
2008
 
                                                 
Service cost
  $ 16     $ 15     $ 48     $ 44     $ 3     $ 3     $ 8     $ 9  
Interest cost
    38       37       115       112       4       4       12       12  
Expected return on plan assets
    (22 )     (39 )     (66 )     (120 )     -       -       -       -  
Amortization of unrecognized net actuarial loss
    28       8       83       23       (1 )     -       (2 )     (1 )
Amortization of prior service cost
    2       2       7       7       5       5       16       16  
Net periodic benefit expense
    62       23       187       66       11       12       34       36  
Settlement charge (included in special charges)
    -       8        -       8       -        -       -       -  
Net benefit expense
  $ 62     $ 31     $ 187     $ 74     $ 11     $ 12     $ 34     $ 36  

During the first nine months of 2009, we contributed $140 million to our tax-qualified defined benefit pension plans.  On October 9, 2009, we contributed an additional $36 million to the plans, satisfying our minimum funding requirements during calendar year 2009.

We recorded non-cash settlement charges totaling $8 million in the three and nine months ended September 30, 2008 related to lump sum distributions from our pilot-only defined benefit pension plan to retired pilots.  Accounting rules for defined benefit pension plans require the use of settlement accounting if, for a given year, the cost of all settlements exceeds, or is expected to exceed, the sum of the service cost and interest cost components of net periodic pension expense for the plan.  Under settlement accounting, unrecognized plan gains or losses must be recognized immediately in proportion to the percentage reduction of the plan's projected benefit obligation.  We did not record any settlement charges in the nine months ended September 30, 2009 because it is not probable that we will meet the threshold for the year 2009.  However, we may record settlement charges in the fourth quarter of 2009 if settlements in the fourth quarter are higher than currently expected.

Defined Contribution Plans.  The 401(k) plan covering substantially all domestic employees except for pilots and the 401(k) plan covering substantially all of the employees of CMI were amended effective January 1, 2009 to provide for the reinstatement of service-based employer match contributions for certain workgroups at levels ranging up to 50% of employee contributions of up to 6% of the employee’s salary, based on seniority.  Company matching contributions are made in cash.  Total expense for all defined contribution plans, including two pilot-only plans, was $22 million, $22 million, $72 million and $67 million for the three months ended September 30, 2009 and 2008 and the nine months ended September 30, 2009 and 2008, respectively.

NOTE 11 - SPECIAL CHARGES

Special charges were as follows (in millions):

   
Three Months
Ended September 30,
   
Nine Months
Ended September 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Aircraft-related charges, net of gains on sales of aircraft
  $ 6     $ 12     $ 53     $ 45  
Severance
    5       33       5       33  
Route impairment and other
    9       38       10       55  
Pension settlement charges (see Note 10)
    -       8       -       8  
Total special charges
  $ 20     $ 91     $ 68     $ 141  

The special charges all relate to our mainline segment unless otherwise noted.

In the third quarter of 2009, we entered into agreements to sublease five temporarily grounded ERJ-135 aircraft.  The subleases have terms of five years, but may be cancelled by the lessee under certain conditions after an initial term of two years.  We recorded a $6 million non-cash charge in our regional segment for the difference between the sublease rental income and the contracted rental payments on those aircraft during the initial term of the agreement.  The remaining 25 ERJ-135 aircraft continue to be temporarily grounded.  We are evaluating our options regarding these aircraft, including permanently grounding them.  If we do permanently ground them, we may incur significant special charges for future rent expense.

During the first nine months of 2009, we announced plans to eliminate certain operational, management and clerical positions across the company.  We recorded a charge of $5 million for severance and other costs during the third quarter of 2009 in connection with the reductions in force, furloughs and leaves of absence.  In the third quarter of 2009, we also recorded a $9 million adjustment to our reserve for unused facilities due to reductions in expected sublease income primarily for a maintenance hangar in Denver.

Aircraft-related charges in 2009 prior to the third quarter include $31 million of non-cash impairments on owned Boeing 737-300 and 737-500 aircraft and related assets and $16 million of other charges ($12 million of which was non-cash) related to the grounding and disposition of Boeing 737-300 aircraft and the write-off of certain obsolete spare parts.  The impairment charges on the Boeing 737-300 and 737-500 fleets prior to the third quarters of both 2009 and 2008 relate to our decision in June 2008 to retire all of our Boeing 737-300 aircraft and a significant portion of our Boeing 737-500 aircraft by early January 2010.  We recorded an initial impairment charge in the second quarter of 2008 for each of these fleet types.  The additional write-down in the second quarter of 2009 reflects the further reduction in the fair value of these fleet types in the current economic environment.  In both periods, we determined that indicators of impairment were present for these fleets.  Fleet assets include owned aircraft, improvements on leased aircraft, rotable spare parts, spare engines and simulators.  Based on our evaluations, we determined that the carrying amounts of these fleets were impaired and wrote them down to their estimated fair value.  We estimated the fair values based on current market quotes and our expected proceeds from the sale of the assets.

We recorded $91 million of special charges in the third quarter of 2008, a portion of which is related to our capacity reductions implemented beginning in September 2008.  The special charges include $33 million for severance and continuing medical coverage for employees accepting early retirement packages or company-offered leaves of absence, $12 million of charges for future lease costs on permanently grounded Boeing 737-300 aircraft and an $11 million charge related to future rents for leased space at locations that are no longer expected to be used or subleased.

The special charges in the third quarter of 2008 also include an $18 million non-cash charge to write off an intangible route asset as a result of our decision to move all of our year-round London flights from London Gatwick Airport to London Heathrow Airport, a $9 million charge pertaining to our reimbursement of certain costs incurred by ExpressJet for temporarily grounded aircraft and airport slots being returned to us and a non-cash settlement charge of $8 million related to lump sum distributions from our pilot-only defined benefit pension plan to retired pilots.

Aircraft-related charges in 2008 prior to the third quarter include $37 million of non-cash impairments on owned Boeing 737-300 and 737-500 aircraft and related assets and a non-cash charge of $14 million to write down spare parts and supplies for the Boeing 737-300 and 737-500 fleets to the lower of cost or net realizable value, partially offset by $18 million of gains on the sale of five owned Boeing 737-500 aircraft.  We received proceeds of $68 million on the sale of these aircraft.  Other special charges in the second quarter of 2008 include $17 million of charges related to contract settlements with regional carriers and unused facilities ($15 million of which related to our regional segment).

If economic conditions deteriorate further, we may incur additional special charges in future quarters as we attempt to dispose of our grounded Boeing 737-300 and 737-500 aircraft.  We are currently unable to estimate the amount or timing of these future charges, if any.  At September 30, 2009, the net carrying values of our Boeing 737-300 and 737-500 fleets were $76 million and $75 million, respectively.

Accrual Activity.  Activity related to the accruals for severance and medical costs and future lease payments on permanently grounded aircraft and unused facilities is as follows (in millions):

   
Severance/
Medical Costs
   
Permanently
Grounded Aircraft
   
Unused
Facilities
 
                   
Balance, December 31, 2008
  $ 28     $ 10     $ 20  
Accrual
    5       1       10  
Payments
    (13 )     (8 )     (3 )
Balance, September 30, 2009
  $ 20     $ 3     $ 27  

These accruals and payments relate primarily to our mainline segment.  Cash payments related to the accruals for severance and medical costs will be made through the third quarter of 2011.  Remaining lease payments on permanently grounded aircraft and unused facilities will be made through 2010 and 2018, respectively.

NOTE 12 - INCOME TAXES

Our effective tax rates differ from the federal statutory rate of 35% primarily due to the following:  changes in the valuation allowance, expenses that are not deductible for federal income tax purposes and state income taxes.  We are required to provide a valuation allowance for our deferred tax assets in excess of deferred tax liabilities because we have concluded that it is more likely than not that such deferred tax assets ultimately will not be realized.  As a result, our pre-tax losses for the first nine months of 2009 were not reduced by any tax benefit.

Section 382 of the Internal Revenue Code (“Section 382”) imposes limitations on a corporation's ability to utilize net operating losses (“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 4.48% for September 2009).  Any unused annual limitation may be carried over to later years.  The amount of the limitation may, under certain circumstances, be increased by the built-in gains in assets held by us at the time of the change that are recognized in the five-year period after the change.  If we were to have an ownership change as of September 30, 2009 under current conditions, our annual NOL utilization could be limited to $101 million per year, before consideration of any built-in gains.

NOTE 13 – GAIN ON SALE OF INVESTMENTS

In May 2008, we sold all of our remaining shares of Copa Holdings, S.A. (“Copa”) Class A common stock for net proceeds of $149 million and recognized a gain of $78 million.

NOTE 14 - SEGMENT REPORTING

We have two reportable segments:  mainline and regional.  The mainline segment consists of flights using larger jets while the regional segment currently consists of flights utilizing aircraft with a capacity of 78 or fewer seats.  As of September 30, 2009, the regional segment was operated by ExpressJet, Chautauqua, CommutAir and Colgan through capacity purchase agreements.

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

   
Three Months 
Ended September 30,
 
Nine Months
Ended September 30,
 
   
2009
   
2008
     
2009
   
2008
 
                       
Operating Revenue:
                     
Mainline
  $ 2,797     $ 3,519       $ 7,970     $ 9,899  
Regional
    520       637         1,434       1,872  
Total Consolidated
  $ 3,317     $ 4,156       $ 9,404     $ 11,771  
                                   
Operating Income (Loss):
                                 
Mainline
  $ 111     $ (30 )     $ 111     $ 17  
Regional
     (50 )      (122 )        (258 )      (306 )
Total Consolidated
  $ 61     $ (152 )     $ (147 )   $ (289 )
                                   
Net Income (Loss):
                                 
Mainline
  $ 35     $ (112 )     $ (99 )   $ (77 )
Regional
    (53 )     (118 )       (268 )     (240 )
Total Consolidated
  $ (18 )   $ (230 )     $ (367 )   $ (317 )

The amounts in the table above are presented on the basis of how our management reviews segment results.  Under this basis, the regional segment's revenue includes a pro-rated share of our ticket revenue for segments flown by regional carriers and expenses include all activity related to the regional operations, regardless of whether the costs were paid directly by us or to the regional carriers.

NOTE 15 - COMMITMENTS AND CONTINGENCIES

Aircraft Purchase Commitments.  As of September 30, 2009, we had firm commitments to purchase 82 new aircraft (52 Boeing 737 aircraft, five Boeing 777 aircraft and 25 Boeing 787 aircraft) scheduled for delivery from 2009 through 2016, with an estimated aggregate cost of $5.1 billion including related spare engines.  In addition to our firm order aircraft, we had options to purchase a total of 102 additional Boeing aircraft as of September 30, 2009.

We have also agreed to lease four Boeing 757-300 aircraft from Boeing Capital Corporation.  We expect these aircraft to be placed into service by the end of the first quarter of 2010.

As discussed in Note 4, we have obtained financing for the one remaining new aircraft scheduled for delivery to us in 2009.  We also have backstop financing available for the two Boeing 777-200ER aircraft and 12 Boeing 737 aircraft scheduled for delivery in 2010, subject to customary closing conditions.  However, we do not have backstop financing or any other financing currently in place for the balance of the Boeing aircraft on order.  Further financing will be needed to satisfy our capital commitments for our firm aircraft and other related capital expenditures.  We can provide no assurance that backstop financing or any other financing not already in place for our aircraft deliveries will be available to us when needed on acceptable terms or at all.  Since the commitments for firm order aircraft are non-cancelable, and assuming no breach of the agreement by Boeing, if we are unable to obtain financing and cannot otherwise satisfy our commitment to purchase these aircraft, the manufacturer could exercise its rights and remedies under applicable law, such as seeking to terminate the contract for a material breach, selling the aircraft to one or more other parties and suing us for damages to recover any resulting losses incurred by the manufacturer.

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