UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A-1
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
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 0-9781
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 _____
_______________
As of October 16, 1998, 11,418,632 shares of Class A common stock
and 48,122,769 shares of Class B common stock were outstanding.
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS are amended and
restated in their entirety as follows:
The following discussion may contain forward-looking statements.
In connection therewith, please see the risk factors set forth in
the Company's 1998 10-K which identify important factors such as
the Company's leverage and its liquidity, its history of operating
losses, the cost of aircraft fuel, labor matters, certain tax
matters, regional and global economic downturns, the significant
ownership interest of Northwest Airlines in the Company and risks
relating to the Company's strategic alliance with Northwest
Airlines, year 2000 computer risk, competition and industry
conditions, regulatory matters and the seasonal nature of the
airline business, that could cause actual results to differ
materially from those in the forward-looking statements.
Continental's results of operations are impacted by seasonality
(the second and third quarters are generally stronger than the
first and fourth quarters) as well as numerous other factors that
are not necessarily seasonal, including the extent and nature of
competition from other airlines, employee job actions (including at
other airlines), fare sale activities, excise and similar taxes,
changing levels of operations, fuel prices, foreign currency
exchange rates, changes in regulations and aviation treaties and
general economic conditions. Although the results in Asia of
Continental Micronesia, Inc. ("CMI"), a wholly owned subsidiary of
the Company, have declined in recent years, the Company
successfully redeployed CMI capacity into the stronger U.S.
domestic markets and CMI's recent results have improved. In
addition, the Company believes it is well positioned to respond to
market conditions in the event of a sustained economic downturn for
the following reasons: underdeveloped hubs with strong local
traffic; a flexible fleet plan; a strong cash balance, a $225
million unused revolving credit facility and a well developed
alliance network.
RESULTS OF OPERATIONS
The following discussion provides an analysis of the Company's
results of operations and reasons for material changes therein for
the three months ended March 31, 1999 as compared to the
corresponding period in 1998.
The Company recorded consolidated net income of $84 million for the
first quarter of 1999 as compared to consolidated net income of $81
million for the three months ended March 31, 1998. Net income for
the first quarter of 1999 included the cumulative effect of a
change in accounting principle charge ($6 million, net of taxes)
related to the write-off of pilot training costs.
Passenger revenue increased 10.9%, $186 million, during the first
quarter ended March 31, 1999 as compared to the same period in
1998, which was principally due to a 13.8% increase in revenue
passenger miles, partially offset by a 3.4% decrease in yield. The
Company estimates that passenger revenue increased by $19 million
due to a significant number of flight cancellations at one of its
competitors. The decrease in yield was due to lower industry-wide
fare levels and a 6.7% increase in average stage length.
Other operating revenue increased 23.6%, $17 million, primarily due
to an increase in revenue related to the Company's frequent flyer
program, OnePass.
Wages, salaries and related costs increased 23.9%, $119 million,
during the quarter ended March 31, 1999 as compared to the same
period in 1998, primarily due to a 10.0% increase in average full-
time equivalent employees to support increased flying, increased
on-time bonus payments and higher wage rates resulting from the
Company's decision to increase employee wages to industry standards
by the year 2000.
Aircraft rentals increased 18.0%, $28 million, due to the delivery
of new aircraft.
Aircraft fuel expense decreased 21.1%, $40 million, in the three
months ended March 31, 1999 as compared to the same period in the
prior year. The average price per gallon decreased 25.4% from
51.79 cents in the first quarter of 1998 to 38.62 cents in the
first quarter of 1999. This reduction was partially offset by a
5.4% increase in the quantity of jet fuel used, principally
reflecting increased capacity. See "Fuel Hedging" below.
Maintenance, materials and repairs decreased 6.5%, $10 million,
during the quarter ended March 31, 1999 as compared to the same
period in 1998 due to newer aircraft and the volume and timing of
engine overhauls as part of the Company's ongoing maintenance
program.
Other rentals and landing fees increased 12.9%, $13 million,
primarily due to higher facilities rent and landing fees resulting
from increased operations.
Depreciation and amortization expense increased 25.0%, $17 million,
in the first quarter of 1999 compared to the first quarter of 1998
due principally to the addition of new aircraft and related spare
parts. These increases were partially offset by a $2 million
reduction in the amortization of routes, gates and slots resulting
from the recognition of previously unbenefited NOLs during 1998.
Other operating expense increased 15.8%, $63 million, in the three
months ended March 31, 1999 as compared to the same period in the
prior year, as a result of increases in passenger and aircraft
servicing expense, reservations and sales expense and other
miscellaneous expense, resulting primarily from an increase in
enplanements and revenue passenger miles.
Interest expense increased 32.5%, $13 million, due to an increase
in long-term debt resulting from the purchase of new aircraft.
The Company's other nonoperating income (expense) in 1999 includes
a $20 million gain on the sale of a portion of the Company's
indirect interest in Equant, partially offset by foreign currency
losses of $6 million, principally the Brazilian Real.
Certain Statistical Information
An analysis of statistical information for Continental's jet
operations, excluding regional jet operations, for the periods
indicated is as follows:
Three Months Ended Net
March 31, Increase/
1999 1998 (Decrease)
Revenue passenger miles
(millions) (1). . . . . . . . . .13,737 12,072 13.8 %
Available seat miles
(millions) (2). . . . . . . . . .19,225 17,523 9.7 %
Passenger load factor (3). . . . . 71.5% 68.9% 2.6 pts.
Breakeven passenger load
factor (4). . . . . . . . . . . . 63.5% 60.6% 2.9 pts.
Passenger revenue per available
seat mile (cents). . . . . . . . 9.13 9.12 0.1 %
Total revenue per available
seat mile (cents) . . . . . . . . 10.04 10.01 0.3 %
Operating cost per available
seat mile (cents) . . . . . . . . 9.21 9.14 0.8 %
Average yield per revenue
passenger mile (cents) (5) . . . 12.78 13.23 (3.4)%
Average fare per revenue
passenger . . . . . . . . . . . .$162.91 $154.88 5.2 %
Revenue passengers (thousands) . .10,778 10,072 7.0 %
Average length of aircraft
flight (miles) . . . . . . . . . 1,083 1,015 6.7 %
Average daily utilization of
each aircraft (hours) (6). . . . 10:11 10:13 (0.3)%
Actual aircraft in fleet at
end of period (7) . . . . . . . . 365 346 5.5 %
Continental has entered into block-space arrangements with certain
other carriers whereby one or both of the carriers is obligated to
purchase capacity on the other. The table above excludes 699
million and 330 million available seat miles, and related revenue
passenger miles and enplanements, operated by Continental but
purchased and marketed by the other carrier, and includes 232
million and 22 million available seat miles, and related revenue
passenger miles and enplanements, operated by other carriers but
purchased and marketed by Continental for the quarters ended March
31, 1999 and March 31, 1998, respectively.
__________________
(1) The number of scheduled miles flown by revenue passengers.
(2) The number of seats available for passengers multiplied by
the number of scheduled miles those seats are flown.
(3) Revenue passenger miles divided by available seat miles.
(4) The percentage of seats that must be occupied by revenue
passengers in order for the airline to break even on an
income before income taxes basis, excluding nonrecurring
charges, nonoperating items and other special items.
(5) The average revenue received for each mile a revenue
passenger is carried.
(6) The average number of hours per day that an aircraft flown in
revenue service is operated (from gate departure to gate
arrival).
(7) Excludes six all-cargo 727 aircraft at CMI in 1999 and 1998.
During the first three months of 1999, the Company took
delivery of 13 aircraft and removed 11 aircraft from service.
LIQUIDITY AND CAPITAL COMMITMENTS
In February 1999, the Company completed an offering of $806 million
of pass-through certificates to be used to finance (through either
leveraged leases or secured debt financings) the debt portion of
the acquisition cost of 22 aircraft scheduled to be delivered from
March 1999 through September 1999.
In March of 1999, the Company completed a $160 million Credit
Facility, with a maturity date of March 2001, to finance pre-
delivery deposits for certain new Boeing aircraft to be delivered
between March 1999 and March 2002.
On April 15, 1999, the Company announced a $500 million increase in
the size of its stock repurchase program, bringing the total size
of the program to $800 million. As of April 15, 1999, the Company
had repurchased 5,632,100 shares of Class B common stock for $266
million under this program.
Also on April 15, 1999, the Company exercised its right and called
for redemption on May 25, 1999, all $230 million of its 6-3/4%
Convertible Subordinated Notes due 2006. The notes are convertible
into shares of Class B common stock at a conversion price of
$30.195 per share. The $230 million of notes, unless earlier
converted, will be redeemed for 104.725 percent of their principal
amount plus accrued interest to the date of redemption.
As of March 31, 1999 and December 31, 1998, the Company had
$1.4 billion in cash and cash equivalents (excluding restricted
cash of $11 million). Net cash provided by operating activities
increased $26 million during the three months ended March 31, 1999
compared to the same period in the prior year primarily due to an
improvement in operating income. Net cash used by investing
activities decreased $231 million for the three months ended March
31, 1999 compared to the same period in the prior year, primarily
as a result of the purchase of short-term investments in the first
quarter of 1998. Net cash provided by financing activities for the
three months ended March 31, 1999 compared to the same period in
the prior year increased $98 million primarily due to an increase
in proceeds from the issuance of long-term debt partially offset by
an increase in payments on long-term debt and capital lease
obligations.
Deferred Tax Assets. The Company had, as of December 31, 1998,
deferred tax assets aggregating $803 million, including
$372 million of NOLs and a valuation allowance of $263 million. To
the extent the Company were to determine in the future that
additional NOLs of the Company's predecessor could be recognized in
the accompanying consolidated financial statements, such benefit
would further reduce routes, gates and slots.
As a result of NOLs, the Company will not pay United States federal
income taxes (other than alternative minimum tax) until it has
recorded approximately an additional $1.1 billion of taxable income
following December 31, 1998. 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.
On November 20, 1998, an affiliate of Northwest Airlines, Inc.
completed its acquisition of certain equity of the Company
previously held by Air Partners, L.P. and its affiliates, together
with certain Class A common stock of the Company held by certain
other investors, totaling 8,661,224 shares of Class A common stock
(the "Air Partners Transaction"). Based on information currently
available, the Company does not believe that the Air Partners
Transaction resulted in an ownership change for purposes of Section
382.
Purchase Commitments. Continental has substantial commitments for
capital expenditures, including for the acquisition of new
aircraft. As of April 15, 1999, Continental had agreed to acquire
a total of 111 Boeing jet aircraft through 2005. The Company
anticipates taking delivery of 61 Boeing jet aircraft in 1999 (13
of which were delivered during the first quarter of 1999 and
financed through enhanced equipment trust certificates, with the
Company purchasing nine of those aircraft and leasing the other
four). Continental also has options for an additional 105 Boeing
aircraft (exercisable subject to certain conditions). The
estimated aggregate cost of the Company's firm commitments for
Boeing aircraft is approximately $5.2 billion. Continental
currently plans to finance its new Boeing aircraft with a
combination of enhanced pass through trust certificates, lease
equity and other third party financing, subject to availability and
market conditions. As of April 15, 1999, Continental had
approximately $787 million in financing arranged for such future
Boeing deliveries. In addition, Continental has commitments or
letters of intent for backstop financing for approximately one-
third of the anticipated remaining acquisition cost of such Boeing
deliveries. In addition, at April 15, 1999, Continental has firm
commitments to purchase 32 spare engines related to the new Boeing
aircraft for approximately $167 million which will be deliverable
through December 2004.
As of April 15, 1999, Express had firm commitments to acquire 34
Embraer ERJ-145 ("ERJ-145") 50-seat regional jets and 25 Embraer
ERJ-135 ("ERJ-135") 37-seat regional jets, with options for an
additional 125 ERJ-145 and 50 ERJ-135 aircraft exercisable through
2008. Express anticipates taking delivery of 19 ERJ-145 (three of
which were delivered in the first quarter of 1999) and six ERJ-135
regional jets in 1999 and the remainder of its firm orders through
the third quarter of 2001. Neither Express nor Continental will
have any obligation to take any of the firm ERJ-145 aircraft that
are not financed by a third party and leased to Continental.
Additional financing will be needed to satisfy the Company's
capital commitments for other aircraft and aircraft-related
expenditures such as engines, spare parts, simulators and related
items. There can be no assurance that sufficient financing will be
available for all aircraft and other capital expenditures not
covered by firm financing commitments. Deliveries of new Boeing
aircraft are expected to continue to increase aircraft rental,
depreciation and interest costs while generating cost savings in
the areas of maintenance, fuel and pilot training.
Continental expects its cash outlays for 1999 capital expenditures,
exclusive of fleet plan requirements, to aggregate $254 million,
primarily relating to mainframe, software application and
automation infrastructure projects, aircraft modifications and
mandatory maintenance projects, passenger terminal facility
improvements and office, maintenance, telecommunications and ground
equipment. Continental's capital expenditures during the three
months ended March 31, 1999 aggregated $55 million, exclusive of
fleet plan expenditures.
The Company expects to fund its future capital commitments through
internally generated funds together with general Company financings
and aircraft financing transactions. However, there can be no
assurance that sufficient financing will be available for all
aircraft and other capital expenditures not covered by firm
financing commitments.
Year 2000.
The Year 2000 issue arises as a result of computer programs having
been written using two digits (rather than four) to define the
applicable year, among other problems. Any information technology
("IT") systems that have time-sensitive software might recognize a
date using "00" as the year 1900 rather than the year 2000, which
could result in miscalculations and system failures. The problem
also extends to many "non-IT" systems; that is, operating and
control systems that rely on embedded chip systems. In addition,
the Company is at risk from Year 2000 failures on the part of third
party-suppliers and governmental agencies with which the Company
interacts.
The Company uses a significant number of computer software programs
and embedded operating systems that are essential to its
operations. For this reason, the Company implemented a Year 2000
project in late 1996 so that the Company's computer systems would
function properly in the year 2000 and thereafter. The Company's
Year 2000 project involves the review of a number of internal and
third-party systems. Each system is subjected to the project's
five phases which consist of systems inventory, evaluation and
analysis, modification implementation, user testing and integration
compliance. The systems are currently in various stages of
completion. The Company anticipates completing its review or
modification implementation of systems in June 1999 and believes
that, with modifications to its existing software and systems
and/or conversions to new software, the Year 2000 issue will not
pose significant operational problems for its computer systems.
The Company has also initiated communications and on-site visits
with its significant suppliers, vendors and governmental agencies
with which its systems interface and exchange data or upon which
its business depends. The Company is coordinating efforts with
these parties to minimize the extent to which its business may be
vulnerable to their failure to remediate their own Year 2000
problems. The Company's business is dependent upon certain
domestic and foreign governmental organizations or entities such as
the Federal Aviation Administration ("FAA") that provide essential
aviation industry infrastructure. There can be no assurance that
the systems of such third parties on which the Company's business
relies (including those of the FAA) will be modified on a timely
basis. The Company's business, financial condition or results of
operations could be materially adversely affected by the failure of
its equipment or systems or those operated by other parties to
operate properly beyond 1999. Although the Company currently has
day-to-day operational contingency plans, management is in the
process of updating these plans for possible Year 2000-specific
operational requirements. To facilitate the completion of these
plans, the Company has hired an outside consultant. The Company
anticipates completing the revision of current contingency plans
and the creation of additional contingency plans by September 1999.
In addition, the Company will continue to monitor third-party
(including governmental) readiness and will modify its contingency
plans accordingly. While the Company does not currently expect any
significant modification of its operations in response to the Year
2000 issue, in a worst-case scenario the Company could be required
to alter its operations significantly.
The total cost of the Company's Year 2000 project (excluding
internal payroll) is currently estimated at $16-18 million and has
been and will be funded through cash from operations. As of March
31, 1999, the Company had incurred and expensed approximately $16
million relating to its Year 2000 project. The cost of the Year
2000 project is limited by the substantial outsourcing of the
Company's systems and the significant implementation of new systems
following the Company's emergence from bankruptcy. The costs of
the Company's Year 2000 project and the date on which the Company
believes it will be completed are based on management's best
estimates and include assumptions regarding third-party
modification plans. However, in particular due to the potential
impact of third-party modification plans, there can be no assurance
that these estimates will be achieved and actual results could
differ materially from those anticipated.
Bond Financings. In July 1996, the Company announced plans to
expand its gates and related facilities into Terminal B at Bush
Intercontinental Airport, as well as planned improvements at
Terminal C and the construction of a new automated people mover
system linking Terminal B and Terminal C. In April 1997 and
January 1999, the City of Houston completed the offering of $190
million and $46 million, respectively, aggregate principal amount
of tax-exempt special facilities revenue bonds (the "IAH Bonds").
The IAH Bonds are unconditionally guaranteed by Continental. In
connection therewith, the Company has entered into long-term leases
(or amendments to existing leases) with the City of Houston
providing for the Company to make rental payments sufficient to
service the related tax-exempt bonds, which have a term no longer
than 30 years. The majority of the Company's expansion project is
expected to be completed during the summer of 1999.
Employees. In September 1997, the Company announced a plan to
bring all employees to industry standard wages no later than the
end of the year 2000. Wage increases began in 1997, and will
continue to be phased in through 2000 as revenue, interest rates
and rental rates reach industry standards.
On January 5, 1999, the Company's mechanics ratified an initial
three-year collective bargaining agreement between the Company and
the IBT. The contract becomes amendable in January 2002.
In March 1999, a tentative initial agreement was reached between
Express and its mechanics, which are represented by the IBT. The
tentative agreement was not ratified by the represented employees,
and the Company anticipates that Express will resume negotiations
concerning an initial agreement.
The International Association of Machinists is currently seeking to
represent the Company and Express's approximately 8,000 fleet
service employees. The National Mediation Board has determined
that a sufficient showing of interest exists to proceed with an
election. Ballots for the election will be sent to all eligible
employees on April 30, 1999. Returns will be counted on June 4,
1999. The Company does not expect this organizing effort to have
a material adverse impact on the Company or its relations with its
airport service employees.
Fuel Hedging.
The Company uses a combination of petroleum swap contracts,
petroleum call options, and jet fuel purchase commitments to
provide some short-term protection against a sharp increase in jet
fuel prices. At December 31, 1998, the fair value of the Company's
petroleum swap contracts, which hedged anticipated fuel purchases
through March 31, 1999, was approximately $6 million (loss).
During the first quarter, the Company had entered into petroleum
swap contracts to hedge jet fuel prices for approximately 50% of
its anticipated fuel requirements through September 30, 1999, the
fair value of which was approximately $34 million at March 31,
1999. As of April 22, 1999, the fair value of the petroleum swap
contracts was approximately $44 million. The fair value has been
recorded in other assets with the offset to other comprehensive
income, net of applicable income taxes and hedge ineffectiveness.
Other.
Management believes that the Company's costs are likely to be
affected in the future by (i) higher aircraft ownership costs as
new aircraft are delivered, (ii) higher wages, salaries and related
costs as the Company compensates its employees comparable to
industry average, (iii) changes in the costs of materials and
services (in particular, the cost of fuel, which can fluctuate
significantly in response to global market conditions),
(iv) changes in governmental regulations and taxes affecting air
transportation and the costs charged for airport access, including
new security requirements, (v) changes in the Company's fleet and
related capacity and (vi) the Company's continuing efforts to
reduce costs throughout its operations, including reduced
maintenance costs for new aircraft, reduced distribution expense
from using Continental's electronic ticket product and the internet
for bookings, and reduced interest expense.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CONTINENTAL AIRLINES, INC.
(Registrant)
Date: April 30, 1999 by: /s/ Lawrence W. Kellner
Lawrence W. Kellner
Executive Vice President and
Chief Financial Officer
(On behalf of Registrant)
Date: April 30, 1999 /s/ Michael P. Bonds
Michael P. Bonds
Vice President and Controller
(Chief Accounting Officer)