UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

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)

Registrant's telephone number, including area code: 713-324-2950

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

The aggregate market value of the voting and non-voting common equity stock held by non-affiliates of the registrant was $2.5 billion as of January 22, 2001.

__________________

As of January 22, 2001, 53,401,756 shares of Class B common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Proxy Statement for Annual Meeting of Stockholders to be held on May 15, 2001: PART III

Continental Airlines, Inc. (the "Company" or "Continental") is a major United States air carrier engaged in the business of transporting passengers, cargo and mail. Continental is the fifth largest United States airline (as measured by 2000 revenue passenger miles) and, together with its wholly owned subsidiaries, Continental Express, Inc. ("Express") and Continental Micronesia, Inc. ("CMI"), each a Delaware corporation, served 230 airports worldwide at January 19, 2001. As of January 19, 2001, Continental flew to 136 domestic and 94 international destinations and offered additional connecting service through alliances with domestic and foreign carriers. Continental directly served 16 European cities, seven South American cities, Tel Aviv and Tokyo and is one of the leading airlines providing service to Mexico and Central America, serving more destinations there than any other United States airline. Through its Guam hub, CMI provides extensive service in the western Pacific, including service to more Japanese cities than any other United States carrier.

As used in this Form 10-K, the terms "Continental" and "Company" refer to Continental Airlines, Inc. and its subsidiaries, unless the context indicates otherwise. This Form 10-K may contain forward-looking statements. In connection therewith, please see the cautionary statements contained in Item 1. "Business - Risk Factors Relating to the Company" and "Business - Risk Factors Relating to the Airline Industry" which identify important factors that could cause actual results to differ materially from those in the forward-looking statements.

Continental operates its domestic route system primarily through its hubs at Newark International Airport ("Newark"), George Bush Intercontinental Airport ("Bush Intercontinental") in Houston and Hopkins International Airport ("Hopkins International") in Cleveland. The Company's hub system allows it to transport passengers between a large number of destinations with substantially more frequent service than if each route were served directly. The hub system also allows Continental to add service to a new destination from a large number of cities using only one or a limited number of aircraft. As of January 19, 2001, Continental operated 55% of the average daily jet departures from Newark, 78% of the average daily jet departures from Bush Intercontinental, and 50% of the average daily jet departures from Hopkins International (in each case excluding regional jets). Each of Continental's domestic hubs is located in a large business and population center, contributing to a high volume of "origin and destination" traffic.

Continental Express. Continental Airlines' jet service at each of its domestic hub cities is coordinated with Express, which operates new-generation regional jets and turboprop aircraft under the name "Continental Express".

As of January 19, 2001, Express served 70 cities in the U.S., ten cities in Mexico and five cities in Canada by regional jets. In addition, commuter feed traffic is currently provided to Continental by other code-sharing partners. See "Alliances" below.

Management believes Express's regional jet and turboprop operations complement Continental's jet operations by allowing more frequent service to small cities than could be provided economically with conventional jet aircraft and by carrying traffic that connects onto Continental's jets. Continental believes that Express's new regional jets provide greater comfort and enjoy better customer acceptance than turboprop aircraft. The regional jets also allow Express to serve certain routes that cannot be served by its turboprop aircraft. Continental anticipates that Express's fleet will be entirely comprised of regional jets by 2004.

Continental directly serves destinations throughout Europe, Canada, Mexico, Central and South America, and the Caribbean, as well as Tokyo and Tel Aviv, and has extensive operations in the western Pacific conducted by CMI. As measured by 2000 available seat miles, approximately 38.0% of Continental's jet operations, including CMI, were dedicated to international traffic, compared with 36.2% in 1999. As of January 19, 2001, the Company offered 152 weekly departures to 16 European cities and marketed service to 31 other cities through code-sharing agreements.

The Company's Newark hub is a significant international gateway. From Newark at January 19, 2001, the Company served 16 European cities, five Canadian cities, six Mexican cities, four Central American cities, five South American cities, ten Caribbean destinations, Tel Aviv and Tokyo and marketed numerous other destinations through code-sharing arrangements with foreign carriers. Continental announced that it will inaugurate daily non-stop service between Newark and Hong Kong, effective March 1, 2001, and between Newark and London/Stansted, effective May 1, 2001. In addition, the Company announced that it would begin daily non-stop service between Newark and Buenos Aires, Argentina effective December 1, 2001, subject to government approval.

The Company's Houston hub is the focus of its operations in Mexico and Central America. As of January 19, 2001, Continental flew from Houston to 20 cities in Mexico, every country in Central America, six cities in South America, two Caribbean destinations, three cities in Canada, two cities in Europe and Tokyo. Express also serviced seven additional cities in Mexico by regional jets.

Continental also flies to London, Montreal, Toronto, San Juan and Cancun from its hub in Cleveland.

Continental Micronesia. CMI is a United States-certificated air carrier transporting passengers, cargo and mail in the western Pacific. From its hub operations based on the island of Guam, CMI provides service to eight cities in Japan, more than any other United States carrier, as well as other Pacific rim destinations, including Taiwan, the Philippines, Hong Kong, South Korea, Australia and Indonesia. Service to these Japanese cities and certain other Pacific Rim destinations is subject to a variety of regulatory restrictions limiting the ability of other carriers to serve these markets.

CMI is the principal air carrier in the Micronesian Islands, where it pioneered scheduled air service in 1968. CMI's route system is linked to the United States market through Tokyo and Honolulu, each of which CMI serves non-stop from Guam. CMI and Continental also maintain a code-sharing agreement and coordinate schedules on certain flights from the west coast of the United States to Honolulu, and from Honolulu to Guam, to facilitate travel from the United States into CMI's route system.

Continental has entered into and continues to develop alliances with domestic carriers. In 1998, the Company entered into a long-term global alliance with Northwest Airlines, Inc. ("Northwest Airlines") (the "Northwest Alliance"). Contemporaneously with the commencement of the Northwest Alliance, Northwest Airlines Corporation ("Northwest") purchased from a stockholder of the Company approximately 8.7 million shares of Class A common stock, par value $.01 per share ("Class A common stock") of the Company. On January 22, 2001, the Company repurchased approximately 6.7 million of such shares for $450 million, and reclassified all issued shares of Class A common stock into Class B common stock, par value $.01 per share ("Class B common stock") (see the "Northwest Transaction"). At the same time, Continental and Northwest Airlines extended the term of the Northwest Alliance through 2025, subject to earlier termination by either carrier in the event of certain changes in control of either Northwest Airlines or Continental. The Northwest Alliance provides that each carrier will place its code on a large number of the flights of the other and includes reciprocity of frequent flyer programs and executive lounge access. Significant other joint marketing activities are being undertaken, while preserving the separate identities of the carriers. Northwest Airlines and Continental have also begun to enter into joint contracts with major corporations and travel agents with the objective of creating access to a broader product line encompassing the route systems of both carriers. Continental has also entered into agreements to code share with certain Northwest Airlines regional affiliates.

Continental also has domestic code-sharing agreements with America West Airlines, Inc. ("America West"), Gulfstream International Airlines, Inc. ("Gulfstream"), Mesaba Aviation, Inc., Hawaiian Airlines, Inc., Alaska Airlines, Inc. ("Alaska Air"), Horizon Airlines, Inc., Champlain Enterprises, Inc., dba CommutAir and American Eagle Airlines, Inc. Continental also owns 28% of the common equity of Gulfstream.

In addition to domestic alliances, Continental seeks to develop international alliance relationships that complement the Company's own flying and permit expanded service through its hubs to major international destinations. International alliances assist the Company in the development of its route structure by enabling the Company to offer more frequencies in a market, by providing passengers connecting service from Continental's international flights to other destinations beyond an alliance partner's hub, or by expanding the product line that Continental may offer in a foreign destination.

Continental has implemented international code-sharing agreements with Alitalia Linee Aeree Italiane, S.P.A. ("Alitalia"), Air China, Emirates (the flag carrier of the United Arab Emirates), EVA Airways Corporation, an airline based in Taiwan, Virgin Atlantic Airways ("Virgin"), Societe Air France ("Air France") and Compania Panamena de Aviacion, S.A. ("Copa"). Continental also owns 49% of the common equity of Copa.

Certain of Continental's code-sharing agreements involve block-space arrangements (pursuant to which carriers agree to share capacity and bear economic risk for blocks of seats on certain routes). Continental and Air France purchase blocks of seats on each other's flights between Houston and Newark and Paris. Continental and Virgin exchange blocks of seats on each other's flights between Newark and London, and Continental purchases blocks of seats on eight other routes flown by Virgin between the United Kingdom and the United States. Continental's block-space arrangement with Alitalia will be terminated effective March 25, 2001. The Company and Air France are continuing to discuss terminating certain portions of their alliance.

Most of the Company's larger U.S. competitors are members of global airline groups involving multi-carrier marketing activities. Continental does not currently have an agreement to join such a group, and it is likely that any group formed by Continental in the future would be smaller than some of these groups.

As with other carriers, most tickets for travel on Continental are sold by travel agents. Travel agents generally receive commissions measured by a certain percentage of the price of tickets sold. Airlines often pay additional commissions in connection with special revenue programs.

E-Ticket. In 2000, Continental expanded its electronic ticketing ("E-Ticket") product to approximately 95% of its destinations. E-Tickets result in lower distribution costs to the Company while providing enhanced customer and revenue information. Continental recorded over $5.8 billion in E-Ticket sales in 2000, representing 54% of total sales. During 2000, Continental replaced its airport E-Ticket machines with new state-of-the-art eService Centers, self-service kiosks for customer check-in, in over 50 U.S. airports. Continental and America West were the first U.S. airlines to implement interline E-Ticketing allowing customers to use electronic tickets when their itineraries include travel on both carriers. In 2000, the Company implemented interline E-Ticketing with Northwest Airlines and plans to implement interline E-Ticketing with its alliance partners and some of the other large U.S. carriers. The Company expects these features to contribute to an increase in E-Ticket usage and a further reduction in distribution costs.

Internet. Continental's award winning website, www.continental.com recorded over $320 million in ticket sales in 2000, compared with over $165 million in ticket sales in 1999. The site offers customers direct access to information such as schedules, reservations, flight status, cargo tracking and Continental Online travel specials, a free weekly email containing special offers for weekend travel. New customer service features in 2000 include flight status notification via text messaging tools and a downloadable timetable. Combined with online travel agents, the Company recorded over $665 million in ticket sales through the internet during 2000, compared with over $305 million in 1999.

Other. Continental is using e-commerce to improve distribution for the customer as well as reducing distribution costs. Continental, along with United Air Lines, Inc. ("United"), American Airlines, Inc. ("American"), Delta Air Lines, Inc. ("Delta") and Northwest Airlines, own a majority interest in a comprehensive travel planning website, ORBITZ, which will offer customers unlimited access to a wide variety of unbiased travel options. To date, 29 U.S. and foreign carriers have signed up to join the web-based travel service. ORBITZ will provide customers with convenient online access to airline, hotel, car rental and other travel services in addition to internet offers. The site will feature published fares from virtually all carriers worldwide and will welcome the posting of internet fares from other carriers as well. In addition, Continental has entered into marketing agreements with other web-based travel service companies such as Biz Travel, Hotwire and Site59.com.

Continental has established a frequent flyer program, "OnePass", designed to encourage repeat travel on its system. Continental's OnePass program currently allows passengers to earn mileage credits by flying Continental and certain other carriers including Northwest Airlines, America West, Alaska Air, Alitalia, Air France, Qantas Airways, Copa and Gulfstream. The Company also sells mileage credits to credit card companies, phone companies, hotels, car rental agencies and others participating in the OnePass program.

Due to the structure of the program and the low level of redemptions as a percentage of total travel, Continental believes that displacement of revenue passengers by passengers using flight awards has historically been minimal. The number of awards used on Continental represented 7.6% and 7% of Continental's total revenue passenger miles in 2000 and 1999, respectively.

In 2000, Continental entered into a marketing agreement with MilePoint.com, a new website that allows frequent flyer customers to trade accumulated miles for discounts on online merchandise. To date, the Company, Delta, Northwest Airlines, US Airways, Inc. ("US Airways"), and America West are participants and equity owners.

As of December 31, 2000, the Company had approximately 54,300 employees (48,400 full-time equivalent employees, including approximately 21,150 customer service agents, reservations agents, ramp and other airport personnel, 9,000 flight attendants, 7,600 management and clerical employees, 6,500 pilots, 4,000 mechanics and 150 dispatchers). Labor costs are a significant component of the Company's expenses and can substantially impact airline results. In 2000, labor costs (including employee incentives) constituted 30.9% of the Company's total operating expenses. While there can be no assurance that the Company's generally good labor relations and high labor productivity will continue, management has established as a significant component of its business strategy the preservation of good relations with the Company's employees, approximately 41% of whom are represented by unions.

See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" for a table of the Company's, Express's and CMI's principal collective bargaining agreements, and their respective amendable dates.

Continental and its subsidiaries operate under certificates of public convenience and necessity issued by the Department of Transportation ("DOT"). Such certificates may be altered, amended, modified or suspended by the DOT if public convenience and necessity so require, or may be revoked for intentional failure to comply with the terms and conditions of a certificate.

The airlines are also regulated by the Federal Aviation Administration ("FAA"), primarily in the areas of flight operations, maintenance, ground facilities and other technical matters. Pursuant to these regulations, Continental has established, and the FAA has approved, a maintenance program for each type of aircraft operated by the Company that provides for the ongoing maintenance of such aircraft, ranging from frequent routine inspections to major overhauls.

The DOT allows local airport authorities to implement procedures designed to abate special noise problems, provided such procedures do not unreasonably interfere with interstate or foreign commerce or the national transportation system. Certain airports, including the major airports at Boston, Washington, D.C., Chicago, Los Angeles, San Diego, Orange County (California) and San Francisco, have established airport restrictions to limit noise, including restrictions on aircraft types to be used and limits on the number of hourly or daily operations or the time of such operations. In some instances, these restrictions have caused curtailments in services or increases in operating costs, and such restrictions could limit the ability of Continental to expand its operations at the affected airports. Local authorities at other airports are considering adopting similar noise regulations.

Airports from time to time seek to increase the rates charged to airlines, and the ability of airlines to contest such increases has been restricted by federal legislation, DOT regulations and judicial decisions. In addition, some public airports impose passenger facility charges of up to $4.50 per segment for a maximum of $18 per roundtrip. With certain exceptions, these charges are passed on to customers.

The FAA has designated John F. Kennedy International Airport ("Kennedy") and LaGuardia Airport ("LaGuardia") in New York, O'Hare International Airport in Chicago ("O'Hare") and Ronald Reagan Washington National Airport in Washington, D.C. ("Reagan National") as "high density traffic airports" and has limited the number of departure and arrival slots at those airports. In April 2000, legislation was signed eliminating slot restrictions beginning in 2001 at O'Hare and 2007 at LaGuardia and Kennedy. Elimination of slot restrictions at O'Hare, LaGuardia and Kennedy already began through exemptions for new entrants and small aircraft serving small and non-hub airports. Express has been awarded slot exemptions to provide service at LaGuardia using regional jets. The Borough of Queens, the City of New York and the Mayor of New York have asked the U.S. Court of Appeals for the Second Circuit to review and reverse the DOT's decisions awarding slot exemptions at LaGuardia and Kennedy to Express and other carriers. Subsequent to the award of slot exemptions at LaGuardia, the FAA reduced the number of slot exemptions available there effective January 31, 2001, to ameliorate congestion and delays, and Express will now have only a limited number of slot exemptions available at LaGuardia.

The availability of international routes to U.S. carriers is regulated by treaties and related agreements between the United States and foreign governments. The United States typically follows the practice of encouraging foreign governments to accept multiple carrier designation on foreign routes, although certain countries have sought to limit the number of carriers. Foreign route authorities may become less valuable to the extent that the United States and other countries adopt "open skies" policies liberalizing entry on international routes. Continental cannot predict what laws and regulations will be adopted or their impact, but the impact could be significant.

Many aspects of Continental's operations are subject to increasingly stringent federal, state and local laws protecting the environment. Future regulatory developments could adversely affect operations and increase operating costs in the airline industry.

On November 15, 2000, Continental entered into a number of agreements with Northwest and some of its affiliates under which it would, among other things, repurchase approximately 6.7 million shares of Class A common stock owned by Northwest, reclassify all issued shares of Class A common stock into Class B common stock, make other adjustments to its corporate and alliance relationship with Northwest Airlines and issue to Northwest Airlines one share of preferred stock, designated as Series B preferred stock ("Series B preferred stock") with blocking rights relating to certain change of control transactions involving Continental and certain matters relating to Continental's rights plan. The transactions closed on January 22, 2001. Under the agreements relating to the recapitalization, Continental and Northwest agreed to seek dismissal of the antitrust litigation brought by the U.S. Department of Justice ("DOJ") against Northwest and Continental, which dismissal was granted on January 22, 2001. See Item 3. "Legal Proceedings - Antitrust Litigation".

Repurchase of Shares of Class A Common Stock. On January 22, 2001, Continental repurchased from Northwest and an affiliate 6,685,279 shares of Continental Class A common stock for an aggregate purchase price of $450 million in cash (or approximately $67 per share).

The shares repurchased represented approximately 77% of the total number of shares of Class A common stock owned by Northwest, excluding shares subject to a limited proxy held by Northwest. This limited proxy terminated upon the closing of the recapitalization. After giving effect to the repurchase and the reclassification of the issued shares of Class A common stock into Class B common stock, Northwest's general voting power with respect to Continental, including Northwest's right to vote certain shares under a limited proxy, was reduced from approximately 59.6% to approximately 7.2%. This percentage does not include the share of Series B preferred stock issued to Northwest Airlines in the recapitalization, which does not have general voting rights but instead has a special class vote on certain change of control transactions as described below.

Reclassification of Shares of Class A Common Stock. At the effective time of the recapitalization, the remaining 1,975,945 shares of Class A common stock owned by Northwest that Continental did not purchase, as well as all other issued shares of Class A common stock, were reclassified into Class B common stock at an exchange rate of 1.32 shares of Class B common stock per share of Class A common stock. Unlike the shares of Class A common stock, which were entitled to ten votes per share, the shares of Class B common stock are entitled to one vote per share.

Amendment of Master Alliance Agreement. In connection with the recapitalization, the master alliance agreement between Continental and Northwest Airlines, pursuant to which certain joint marketing activities (such as code sharing, reciprocal frequent flyer programs and executive lounge access) are undertaken, was extended through 2025, with automatic five-year renewals thereafter unless either party gives three years' advance notice of nonrenewal. The master alliance agreement was also amended so that it will be terminable by either Northwest Airlines or, under certain limited circumstances, Continental with six months' prior written notice in the event of a change of control of Continental, and by either Continental or Northwest Airlines with six months prior written notice in the event of a change of control of Northwest Airlines.

Issuance of Series B Preferred Stock. In connection with the transactions described above, including the amendment of the master alliance agreement described above, Continental issued to Northwest Airlines one share of Series B preferred stock for consideration of $100 in cash. The Series B preferred stock gives Northwest Airlines the right to vote, as a separate class, during the term of the master alliance agreement or, if earlier, until the Series B preferred stock becomes redeemable, on:

• any amendment to article seven of Continental's certificate of incorporation which relates, in general, to the requirement to obtain the approval of the holder of the Series B preferred stock to amend Continental's rights agreement;

• certain business combinations and similar change of control transactions involving Continental and a third party major air carrier with respect to which the stockholders of Continental are entitled to vote;

• any dividend or distribution of all or substantially all of Continental's airline assets; and

• certain reorganizations and restructuring transactions involving Continental.

Except for the right to vote on any amendment to Continental's certificate of incorporation that would adversely affect the Series B preferred stock, and on any other matter as may be required by law, the Series B preferred stock does not have any other voting rights. The voting rights of the Series B preferred stock will be eliminated and the Series B preferred stock will, at Continental's option, be redeemable if:

• Northwest Airlines transfers (other than to a successor) or encumbers the Series B preferred stock;

• there is a change of control of Northwest;

• Northwest breaches in certain respects the standstill agreement described below;

• Northwest or certain of its affiliates takes action that results in Northwest or certain of its affiliates becoming an acquiring person under Continental's amended and restated rights agreement;

• the master alliance agreement described above terminates or expires (other than as a result of a breach or wrongful termination by Continental); or

• certain other events.

Purchase of Right of First Offer. In connection with the recapitalization, Continental paid 1992 Air, Inc. $10 million in cash for its sale to Continental of its right of first offer to purchase the shares of Class A common stock that the Company purchased from Northwest (which right terminated immediately after the recapitalization). 1992 Air, Inc. is an affiliate of David Bonderman, one of Continental's directors.

Standstill Agreement. In connection with the recapitalization, Northwest and certain of its affiliates have entered into a standstill agreement with the Company that contains standstill and conduct restrictions that are substantially similar to those previously contained in the corporate governance agreement that had been in place between the parties. However, the percentage of Continental stock that Northwest and its affiliates may own has been adjusted downward to reflect their holdings following the recapitalization and will be adjusted downward to reflect any subsequent dispositions by them of Continental common stock, and upward if their percentage ownership increases as a result of decreases in the number of outstanding shares of Continental common stock. The agreement restricts Northwest and its affiliates from increasing their percentage ownership of shares of Continental stock or otherwise attempting to control or influence the Company. Under the agreement, Northwest agreed to vote neutrally all of Continental's common stock owned by it after the recapitalization, except that Northwest will be free to vote its shares in its discretion with respect to a change of control of the Company, as defined in the Series B preferred stock certificate of designations, and will vote neutrally or as recommended by Continental's board of directors with respect to the election of directors. The standstill agreement provides that Northwest will be released from its obligations if Continental publicly announces that it is seeking, or has entered into an agreement with, a third party to acquire a majority of Continental's voting securities or all or substantially all of Continental's airline assets.

Amendment of the Rights Agreement. Continental has also amended its rights agreement to take into account, among other things, the effects of the recapitalization and to eliminate Northwest's status as an exempt person that would not trigger the provisions of the rights agreement.

Adoption of Amended and Restated Certificate of Incorporation. The Company's certificate of incorporation was amended to:

• reclassify the Company's Class A common stock into 1.32 shares of Class B common stock;

• eliminate all references to Class A and Class D common stock;

• provide that the Company has the authority to issue a total of 210 million shares (as opposed to 310 million shares under the previous certificate of incorporation);

• eliminate the special rights of a Northwest affiliate that owned Class A common stock;

• provide that until the Series B preferred stock becomes redeemable, Continental will not, without the consent of Northwest Airlines, amend its rights agreement or redeem the preferred stock purchase rights under the rights agreement unless the amendment or redemption does not permit a third party major air carrier to enter into certain transactions that would result in its becoming, but for such amendment or redemption, an acquiring person under the rights agreement; and

• provide that until the Series B preferred stock becomes redeemable, the Company will take all necessary action to have in effect a rights agreement with terms and conditions identical in all material respects to the terms and conditions of its amended and restated rights agreement and to issue the rights created under that agreement.

Continental/Northwest Alliance. In November 1998, the Company and Northwest Airlines began implementing a long-term global alliance involving extensive code-sharing, frequent flyer reciprocity, and other cooperative activities. Implementation of the Northwest Alliance continued throughout 2000.

The alliance agreement provides that if by January 25, 2002 the Company has not entered into a code share with KLM Royal Dutch Airlines ("KLM") or is not legally able (but for aeropolitical restrictions) to enter into a new transatlantic joint venture with KLM and Northwest Airlines and place its airline code on certain Northwest Airlines flights, Northwest Airlines can elect to (i) cause good faith negotiations among the Company, KLM and Northwest Airlines as to the impact, if any, on the contribution to the joint venture described below resulting from the absence of the code share, and the Company will reimburse the joint venture for the amount of any loss until it enters into a code-share arrangement with KLM, or (ii) terminate (subject to cure rights of the Company) after one year's notice any or all of such alliance agreement and any or all of the agreements contemplated thereunder. As of January 22, 2001, the Company had not entered into a code share with KLM.

The alliance agreement also provides that subject to the receipt by Northwest Airlines, KLM and the Company of an adequate grant of antitrust immunity and within one year after all contractual and technical impediments have been removed, the Company shall join, as an economic participant, a new transatlantic joint venture with Northwest Airlines and KLM. The Company has not yet applied for such antitrust immunity, and not all such impediments have been removed. The alliance agreement provides that Northwest Airlines and KLM will negotiate in good faith with each other and with the Company the share of the new transatlantic joint venture to which the Company will be entitled. If the three carriers are unable to agree on the profit shares of the new transatlantic joint venture, they will submit the matter to arbitration in accordance with the alliance agreement's dispute resolution procedures. In such a case, the arbitrator(s) will only be permitted to choose one award from those submitted by each of the carriers.

High Leverage and Significant Financing Needs. Continental has a higher proportion of debt compared to its equity capital than some of its principal competitors. In addition, Continental has less cash resources than some of its principal competitors. A majority of Continental's property and equipment is subject to liens securing indebtedness. Accordingly, Continental may be less able than some of its competitors to withstand a prolonged recession in the airline industry or respond as flexibly to changing economic and competitive conditions.

As of December 31, 2000, Continental had approximately $3.7 billion (including current maturities) of long-term debt and capital lease obligations and approximately $1.9 billion of Continental-obligated mandatorily redeemable preferred securities of trust, redeemable common stock and common stockholders' equity. Also at December 31, 2000, Continental had $1.4 billion in cash, cash equivalents and short-term investments.

Continental has substantial commitments for capital expenditures, including for the acquisition of new aircraft. As of December 31, 2000, Continental had agreed to acquire or lease a total of 86 additional Boeing jet aircraft through 2005. The Company anticipates taking delivery of 35 Boeing jet aircraft in 2001. Continental also has options for an additional 105 aircraft (exercisable subject to certain conditions). The estimated aggregate cost of the Company's firm commitments for Boeing aircraft is approximately $4 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 December 31, 2000, Continental had approximately $890 million in financing arranged for such Boeing deliveries. Continental also has commitments or letters of intent for backstop financing for approximately 23% of the anticipated remaining acquisition cost of future Boeing deliveries. In addition, at December 31, 2000, Continental had firm commitments to purchase 26 spare engines related to the new Boeing aircraft for approximately $158 million, which will be deliverable through March 2005.

As of December 31, 2000, Express had firm commitments for 178 Embraer regional jets with options for an additional 100 Embraer regional jets exercisable through 2007. Express anticipates taking delivery of 41 regional jets in 2001. The estimated cost of the Company's firm commitments for Embraer regional jets is approximately $3 billion. Neither Express nor Continental will have any obligation to take any such firm Embraer aircraft that are not financed by a third party and leased to Continental.

For 2000, cash expenditures under operating leases relating to aircraft approximated $864 million, compared to $758 million for 1999, and approximated $353 million relating to facilities and other rentals compared to $328 million in 1999. Continental expects that its operating lease expenses for 2001 will increase over 2000 amounts.

Additional financing will be needed to satisfy the Company's capital commitments. Continental cannot predict whether sufficient financing will be available for capital expenditures not covered by firm financing commitments.

Continental's Historical Operating Results. Continental has recorded positive net income in each of the last six years. However, Continental experienced significant operating losses in the previous eight years. Historically, the financial results of the U.S. airline industry have been cyclical. Continental cannot predict whether current industry conditions will continue.

Significant Cost of Aircraft Fuel. Fuel costs constitute a significant portion of Continental's operating expense. Fuel costs were approximately 15.6% of operating expenses for the year ended December 31, 2000 and 9.7% for the year ended December 31, 1999 (excluding fleet disposition/impairment losses). Fuel prices and supplies are influenced significantly by international political and economic circumstances. Continental enters into petroleum swap contracts, petroleum call option contracts and/or jet fuel purchase commitments to provide some short-term protection (generally three to six months) against a sharp increase in jet fuel prices. The Company's fuel hedging strategy could result in the Company not fully benefiting from certain fuel price declines. If a fuel supply shortage were to arise from OPEC production curtailments, a disruption of oil imports or otherwise, higher fuel prices or reduction of scheduled airline service could result. Significant changes in fuel costs or continuation of high current jet fuel prices would materially affect Continental's operating results.

Labor Costs. Labor costs constitute a significant percentage of the Company's total operating costs, and the Company experiences competitive pressure to increase wages and benefits. In July 2000, the Company completed a three-year program bringing all employees to industry standard wages and also announced and began to implement a phased plan to bring employee benefits to industry standard levels by 2003. The plan provides for increases in vacation, paid holidays, increased 401(k) Company matching contributions and additional past service retirement credit for most senior employees.

Certain Tax Matters. At December 31, 2000, Continental had estimated net operating loss carryforwards ("NOLs") of $1 billion for federal income tax purposes that will expire through 2021 and federal investment tax credit carryforwards of $45 million that will expire through 2001. Due to an ownership change of Continental on April 27, 1993, the ultimate utilization of Continental's NOLs and investment tax credits may be limited, as described below. Reflecting this limitation, Continental had a valuation allowance of $263 million at December 31, 2000.

Continental had, as of December 31, 2000, deferred tax assets aggregating $677 million, including $366 million related to NOLs. The Company has consummated several transactions that resulted in the recognition of NOLs of the Company's predecessor. 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 reduce the value ascribed to routes, gates and slots.

Section 382 of the Internal Revenue Code ("Section 382") imposes limitations on a corporation's ability to utilize NOLs if it experiences an "ownership change." In general terms, an ownership change may result from transactions increasing the ownership of certain stockholders in the stock of a corporation by more than 50 percentage points over a three-year period. In the event that an ownership change occurred, utilization of Continental's NOLs would be subject to an annual limitation under Section 382 determined by multiplying the value of Continental's stock at the time of the ownership change by the applicable long-term tax-exempt rate (which was 5.39% for December 2000). Any unused annual limitation may be carried over to later years, and the amount of the limitation may under certain circumstances be increased by the built-in gains in assets held by Continental at the time of the change that are recognized in the five-year period after the change. Under current conditions, if an ownership change were to occur, Continental's annual NOL utilization would be limited to approximately $174 million per year other than through the recognition of future built-in gain transactions.

In November 1998, Northwest 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 other investors, totaling 8,661,224 shares of the Class A common stock. On January 22, 2001, Continental repurchased 6,685,279 shares of Continental Class A common stock from Northwest and an affiliate. In addition, each issued share of Continental Class A common stock was reclassified into 1.32 shares of Class B common stock in a nontaxable transaction. The Company does not believe that these transactions resulted in an ownership change for purposes of Section 382.

Continental Micronesia's Dependence on the Japanese Economy; Currency Risk. Because the majority of CMI's traffic originates in Japan, its results of operations are substantially affected by the Japanese economy and changes in the value of the yen as compared to the dollar. To reduce the potential negative impact on CMI's earnings, the Company has entered into forward contracts as a hedge against a portion of its expected net yen cash flow position. As of December 31, 2000, the Company had hedged approximately 75% of 2001 projected yen-denominated net cash flows at a rate of 99 yen to $1 US.

Competition and Industry Conditions. The airline industry is highly competitive and susceptible to price discounting. Carriers have used discount fares to stimulate traffic during periods of slack demand, to generate cash flow and to increase market share. Some of Continental's competitors have substantially greater financial resources or lower cost structures than Continental.

Airline profit levels are highly sensitive to changes in fuel costs, fare levels and passenger demand. Passenger demand and fare levels have in the past been influenced by, among other things, the general state of the economy (both internationally and domestically), international events, airline capacity and pricing actions taken by carriers. Domestically, from 1990 to 1993, the weak U.S. economy, turbulent international events and extensive price discounting by carriers contributed to unprecedented losses for U.S. airlines. In the last several years, the U.S. economy has improved and excessive price discounting has abated. Continental cannot predict the extent to which these industry conditions will continue.

In recent years, the major U.S. airlines have sought to form marketing alliances with other U.S. and foreign air carriers. Such alliances generally provide for "code-sharing", frequent flyer reciprocity, coordinated scheduling of flights of each alliance member to permit convenient connections and other joint marketing activities. Such arrangements permit an airline to market flights operated by other alliance members as its own. This increases the destinations, connections and frequencies offered by the airline, which provide an opportunity to increase traffic on its segment of flights connecting with its alliance partners. The Northwest Alliance is an example of such an arrangement, and Continental has existing alliances with numerous other air carriers. Other major U.S. airlines have alliances or planned alliances more extensive than Continental's. Continental cannot predict the extent to which it will benefit from its alliances or be disadvantaged by competing alliances.

In recent years, and particularly since its deregulation in 1978, the U.S. airline industry has also undergone substantial consolidation, and it may in the future undergo additional consolidation. For example, in May 2000, United, the nation's largest commercial airline, announced its agreement to acquire US Airways, the nation's sixth largest commercial airline, subject to regulatory approvals and other conditions. In addition, in January 2001, American announced agreements to acquire the majority of Trans World Airlines, Inc.'s assets and some of US Airways' assets, subject to regulatory approvals and other conditions. Continental routinely monitors changes in the competitive landscape and engages in analysis and discussions regarding its strategic position, including alliances and business combination transactions. Continental has had, and anticipates it will continue to have, discussions with third parties regarding strategic alternatives. The impact on Continental of these pending transactions and any additional consolidation within the U.S. airline industry cannot be predicted at this time.

Regulatory Matters. Airlines are subject to extensive regulatory and legal compliance requirements that engender significant costs. In the last several years, the FAA has issued a number of directives and other regulations relating to the maintenance and operation of aircraft that have required significant expenditures. Some FAA requirements cover, among other things, retirement of older aircraft, security measures, collision avoidance systems, airborne windshear avoidance systems, noise abatement, commuter aircraft safety and increased inspections and maintenance procedures to be conducted on older aircraft. Continental expects to continue incurring expenses in complying with the FAA's regulations.

Additional laws, regulations, taxes and airport rates and charges have been proposed from time to time that could significantly increase the cost of airline operations or reduce revenues. For instance, "passenger bill of rights" legislation has been introduced in Congress that would, among other things, require the payment of compensation to passengers as a result of certain delays, and limit the ability of carriers to prohibit or restrict usage of certain tickets in manners currently prohibited or restricted. The DOT has proposed rules that would significantly limit major carriers' ability to compete with new entrant carriers. If adopted, these measures could have the effect of raising ticket prices, reducing revenue and increasing costs. Restrictions on the ownership and transfer of airline routes and takeoff and landing slots have also been proposed. See "Industry Regulation and Airport Access" above. The ability of U.S. carriers to operate international routes is subject to change because the applicable arrangements between the United States and foreign governments may be amended from time to time, or because appropriate slots or facilities are not made available. Continental cannot provide assurance that laws or regulations enacted in the future will not adversely affect it.

Seasonal Nature of Airline Business; Other. Due to greater demand for air travel during the summer months, revenue in the airline industry in the second and third quarters of the year is generally stronger than revenue in the first and fourth quarters of the year for most U.S. air carriers. Continental's results of operations generally reflect this seasonality, but have also been impacted by numerous other factors that are not necessarily seasonal, including the extent and nature of competition from other airlines, fare wars, excise and similar taxes, changing levels of operations, fuel prices, weather, air traffic control delays, foreign currency exchange rates and general economic conditions.

As shown in the following table, Continental's aircraft fleet consisted of 371 jets, 96 regional jets and 70 turboprop aircraft at December 31, 2000. Continental's purchase commitments as of December 31, 2000 are also shown below.

A majority of the aircraft and engines owned by Continental are subject to mortgages.

During 2000, Continental put into service a total of 28 new Boeing aircraft which consisted of four 767-400ER aircraft, three 767-200ER aircraft, 16 737-800 aircraft, three 757-200 aircraft and two 777-200 aircraft. Express took delivery of 22 ERJ-145 aircraft and 12 ERJ-135 aircraft. The Company retired 11 DC10-30's, five 727-200's and four MD-80's in 2000.

The Company anticipates taking delivery of 35 Boeing jet aircraft in 2001 and the remainder of its firm orders through November 2005. The Company plans to retire 16 jet aircraft in 2001.

Express anticipates taking delivery of 41 Embraer regional jet aircraft in 2001 and the remainder of its firm orders through the first quarter of 2005. The Company plans to retire 20 turboprop aircraft in 2001.

See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Commitments" for a discussion of the Company's order for new firm commitment aircraft and related financing arrangements.

The Company's principal facilities are located at Newark, Bush Intercontinental, Hopkins International and A.B. Won Pat International Airport in Guam. Substantially all of these facilities and Continental's other facilities are leased on a long-term, net-rental basis, and Continental is responsible for maintenance, taxes, insurance and other facility-related expenses and services. At each of its three domestic hub cities and most other locations, Continental's passenger and baggage handling space is leased directly from the airport authority on varying terms dependent on prevailing practice at each airport. Continental also maintains administrative offices, airport and terminal facilities, training facilities and other facilities related to the airline business in the cities it serves.

Continental has entered into agreements with the City of Houston, Texas, the City of Cleveland, Ohio, the New Jersey Economic Development Authority, the Department of Transportation of the State of Hawaii, the Regional Airports Improvement Corporation, and the Harris County (Houston) Industrial Development Corporation to provide funds for constructing, improving and modifying facilities and acquiring equipment which have been or will be leased to Continental. In connection therewith, Continental has unconditionally guaranteed the principal and interest on certain bonds totaling approximately $1.6 billion and has entered into long-term leases with the respective authorities under which rental payments will be sufficient to service the related bonds. The leases generally have terms ranging from 20 to 30 years.

During 2000, construction continued under Continental's Global Gateway Program at Newark International Airport. The program includes construction of a new concourse in Terminal C and other facility improvements. The project is currently ahead of schedule and is expected to be completed in 2002. During 2000, Continental also began plans for the construction of the International Services Expansion Program ("ISEP") with the City of Houston at Bush Intercontinental. Continental's portion of the ISEP includes a new international terminal, a new international ticketing facility, a new cargo facility and various other support facilities and improvements to the Company's existing leased property at Bush Intercontinental. The Company plans to finance its portion of the ISEP with bond financing made available through the City of Houston.

The Company has cargo facilities at Los Angeles International Airport, which it has subleased to another carrier. If such carrier failed to comply with its obligations under the sublease, the Company would be required to perform those obligations.

Continental remains contingently liable until December 1, 2015, on $196 million of long-term lease obligations of US Airways related to the East End Terminal at LaGuardia. If US Airways defaulted on these obligations, Continental could be required to cure the default, at which time it would have the right to occupy the terminal.

United States of America v. Northwest Airlines Corp. & Continental Airlines, Inc., in the United States District Court for the Eastern District of Michigan, Southern Division. In this litigation, the Antitrust Division of the DOJ challenged under Section 7 of the Clayton Act and Section 1 of the Sherman Act the acquisition by Northwest of shares of Continental's Class A common stock bearing, together with certain shares for which Northwest had a limited proxy, more than 50% of the fully diluted voting power of all Continental stock. The government's position was that, notwithstanding various agreements that restricted Northwest's ability to exercise voting control over Continental and were designed to assure Continental's competitive independence, Northwest's control of the Class A common stock would reduce actual and potential competition in various ways and in a variety of markets. The government sought an order requiring Northwest to divest all voting stock in Continental on terms and conditions agreeable to the government and the Court. Under the Northwest Agreements, Continental and Northwest supported an adjournment of the DOJ lawsuit pending closing of the transaction (which adjournment was granted by the U.S. District Court on November 6, 2000) and agreed to seek dismissal of the DOJ litigation upon or promptly after the closing. The U.S. District Court entered an order dismissing this litigation on January 22, 2001.

On July 25, 2000 a Concorde aircraft operated by Air France crashed shortly after takeoff from France's Charles de Gaulle airport, killing 114 people, most of whom were tourists on board the chartered aircraft, which was also destroyed. The interim investigation conducted by French authorities suggests that one of the aircraft's tires burst and that portions of the resulting debris struck the underside of a wing of the aircraft which caused the rupture of a fuel tank, leading to a fire and the crash. In early September 2000, Continental learned that a small piece of metal found on the runway after the Concorde took off is believed by the French authorities to have caused or contributed to the tire failure and is suspected by investigators to have come from a Continental DC10 aircraft that had taken off on the same runway a short time before the Concorde.

The following lawsuits involving the Company have been filed to date in connection with the accident, which remains under investigation: Air France and its Insurers v. Continental Airlines, Inc., USAU, Inc, and USAIG filed on September 15, 2000 before the Commercial Court of Pontoise, France, in which the plaintiffs seek damages for indemnification paid to the passengers' families and other parties, for destruction of the aircraft, and for any other expenses and costs incurred by Air France; and Case No. 00-07707, In re: Petition of Ina Frentzen, Rita Frentzen-Bien, and Ralf Frentzen Requesting Depositions Before Suit filed on September 29, 2000 in the District Court for Dallas County, Texas, D-95th Judicial District (Parties in interest include Continental Airlines, Inc. and The Goodyear Tire & Rubber Company), in which the plaintiffs seek to depose certain parties, including officers and employees of the Company, prior to determining whether to file suit against the Company and certain other parties; and Case No. 01CIV.0149, Dr. Hans-Joachim Schnitter, Dietmar Schnitter, Kerstin Hoffman, Carola Wagner and Annette Friedland v. Air France, S.A., Continental Airlines, Inc., BAE Systems plc, European Aeronautic Defense and Space Company N.V., The Goodyear Tire and Rubber Company, General Electric Company, MRA Systems, Inc., filed on January 9, 2001 in the United States District Court for the Southern District of New York, in which the plaintiffs seek compensatory and punitive damages in connection with the deaths of three passengers on board the Concorde at the time of the loss. The Company anticipates that additional suits will be filed against the Company in the future connected with this accident.

The foregoing litigation is in preliminary stages. The Company is cooperating with French and U.S. authorities in the investigation of the accident. Although the outcome of such suits or any future litigation cannot be known at this time, the Company's costs to defend these matters and, the Company believes, any potential liability exposure are covered by insurance. Consequently, management does not expect the foregoing litigation or any additional suits that may arise from the accident to have a material adverse effect on the financial position or results of operations of the Company.

Under the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (commonly known as "Superfund") and similar state environment cleanup laws, generators of waste disposed of at designated sites may, under certain circumstances, be subject to joint and several liability for investigation and remediation costs. The Company (including its predecessors) has been identified as a potentially responsible party at six federal and two state sites that are undergoing or have undergone investigation or remediation. The Company has entered into a settlement agreement with the Environmental Protection Agency ("EPA") with respect to five of the federal sites. The settlement agreement provides for the EPA to receive an allowed unsecured claim of approximately $1.3 million under the Company's Plan of Reorganization and approximately $230,000 in cash, in full satisfaction of any and all of the Company's liabilities relating to such sites. In addition, the Company has settled one of the state sites for a de minimis amount. With respect to the remaining sites, the Company believes that, although applicable case law is evolving and some cases may be interpreted to the contrary, some or all of any liability claims associated with these sites were discharged by confirmation of the Company's 1993 Plan of Reorganization, principally because the Company's exposure is based on alleged offsite disposal known as of the date of confirmation. Even if any such claims were not discharged, on the basis of currently available information, the Company believes that its potential liability for its allocable share of the cost to remedy each site (to the extent the Company is found to have liability) is not, in the aggregate, material; however, the Company has not been designated a "de minimis" contributor at any of such sites.

The Company is also and may from time to time become involved in other environmental matters, including the investigation and/or remediation of environmental conditions at properties used or previously used by the Company. Although the Company is not currently subject to any environmental cleanup orders imposed by regulatory authorities, it is undertaking voluntary investigation or remediation at certain properties in consultation with such authorities. The full nature and extent of any contamination at these properties and the parties responsible for such contamination have not been determined, but based on currently available information, the Company does not believe that any environmental liability associated with such properties will have a material adverse effect on the Company.

Various other claims and lawsuits against the Company are pending that are of the type generally consistent with the Company's business. The Company cannot at this time reasonably estimate the possible loss or range of loss that could be experienced if any of the claims were successful. Many of such claims and lawsuits are covered in whole or in part by insurance. The Company does not believe that the foregoing matters will have a material adverse effect on the Company.

Not applicable.

Continental's Class B common stock trades on the New York Stock Exchange; its Class A common stock ceased trading on January 22, 2001 upon the closing of the Northwest Transaction. The table below shows the high and low sales prices for the Company's Class B common stock and Class A common stock as reported on the New York Stock Exchange during 1999 and 2000.

On January 22, 2001, each issued share of Class A common stock was reclassified into 1.32 shares of Class B common stock. See Item 1. "Business - Northwest Transaction".

As of January 22, 2001, there were approximately 16,509 holders of record of Continental's Class B common stock.

The Company has paid no cash dividends on its common stock and has no current intention of paying cash dividends on its common stock. Continental began a stock repurchase program in 1998 under which it repurchased a total of 28.1 million shares of Class B common stock for a total of approximately $1.2 billion through December 31, 2000. Of the approximately $287 million available in the program as of December 31, 2000, $200 million was used as part of the purchase price for 6,685,279 shares of Class A common stock held by Northwest. The Company plans to use the remaining balance in the program, along with (i) one-half of future net income (excluding special gains and charges), (ii) all the proceeds from the sale of non-strategic assets and (iii) the amount of cash proceeds received by the Company for the purchase of common stock by employees and other participants under its employee stock purchase and stock option plans to continue to repurchase its common stock in the future. Certain of the Company's credit agreements and indentures restrict the ability of the Company and certain of its subsidiaries to pay cash dividends or repurchase capital stock by imposing minimum unrestricted cash requirements on the Company, limiting the amount of such dividends and repurchases when aggregated with certain other payments or distributions and requiring that the Company comply with other covenants specified in such instruments.

The Company's Certificate of Incorporation provides that no shares of capital stock may be voted by or at the direction of persons who are not United States citizens unless such shares are registered on a separate stock record. The Company's Bylaws further provide that no shares will be registered on such separate stock record if the amount so registered would exceed United States foreign ownership restrictions. United States law currently limits the voting power in the Company (or any other U.S. airline) of persons who are not citizens of the United States to 25%.

The tables below set forth certain consolidated financial data of the Company at December 31, 2000, 1999, 1998, 1997 and 1996 and for each of the five years in the period ended December 31, 2000 (in millions, except per share data).

1. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations" for a discussion of significant transactions in 2000, 1999 and 1998. Results for 2000 include a $6 million gain related to the sale of the Company's remaining investment in, and a right of first refusal relating to, America West Holdings Corporation. Results for 1999 include a $50 million fleet disposition/impairment loss resulting from the Company's decision to accelerate the retirement of certain jet and turboprop aircraft. In addition, 1999 results include a $200 million gain related to the sale of the Company's interest in AMADEUS and other asset sales. Results for 1999 also include the cumulative effect of accounting changes ($33 million, net of taxes) related to the write-off of pilot training costs and a change in the method of accounting for the sale of mileage credits under the Company's frequent flyer program. Results for 1998 include a $77 million fleet disposition/impairment loss resulting from the Company's decision to accelerate the retirement of certain jet and turboprop aircraft. 1996 results include a $77 million fleet disposition loss associated with the Company's decision to accelerate the replacement of its DC-9-30, DC-10-10, 727-200, 737-100 and 737-200 aircraft.
2. No cash dividends were paid on common stock during the periods shown.
3. Continental purchased United Micronesia Development Association, Inc.'s 9% interest in Air Micronesia, Inc. in 1997.
4. The sole assets of the Continental-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust ("Trust") are Convertible Subordinated Debentures. In 1998, approximately $134 million principal amount of such Preferred Securities converted into shares of Class B common stock, and in January 1999, the remainder of such Preferred Securities converted into shares of Class B common stock.
5. Continental redeemed for cash all of the outstanding shares of its Series A 12% Cumulative Preferred Stock in 1997.
6. Represents Class A common stock repurchased from Northwest on January 22, 2001.

The following discussion may contain forward-looking statements. In connection therewith, please see the cautionary statements contained in Item 1. "Business - Risk Factors Relating to the Company" and "Business - Risk Factors Relating to the Airline Industry" which identify important factors that could cause actual results to differ materially from those in the forward-looking statements. Hereinafter, the terms "Continental" and the "Company" refer to Continental Airlines, Inc. and its subsidiaries, unless the context indicates otherwise.

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 and capacity, fuel prices, weather, air traffic control delays, foreign currency exchange rates, changes in regulations and aviation treaties and general economic conditions. Rising jet fuel prices significantly impacted results of operations in 2000. However, management believes the Company is well positioned to respond to market conditions in the event of a sustained economic downturn due to its flexible fleet plan, a strong cash balance and a well developed alliance network.

The following discussion provides an analysis of the Company's results of operations and reasons for material changes therein for the three years ended December 31, 2000.

Comparison of 2000 to 1999. The Company recorded consolidated net income of $342 million and $455 million for the years ended December 31, 2000 and 1999, respectively. Net income in 2000 included a $6 million after-tax gain on the sale of a right of first refusal and the Company's investment in America West Holdings Corporation ("America West Holdings") and a $6 million extraordinary charge from the early repayment of debt. Net income in 1999 was significantly impacted by several non-recurring items, including $200 million of after-tax gains on the sale of the Company's interest in AMADEUS Global Travel Distribution S.A. ("AMADEUS") and other investments, a $50 million after-tax fleet disposition/impairment loss related to the early retirement of several DC-10-30's and other items and the cumulative effect of accounting changes ($33 million, net of taxes) related to the write-off of pilot training costs and a change in the method of accounting for the sale of mileage credits to participating partners in the Company's frequent flyer program.

Passenger revenue increased 14.7%, $1.2 billion, during 2000 as compared to 1999. The increase was principally due to new transatlantic and Latin American destinations served as well as an improvement in yield and load factor.

Cargo and mail revenue increased 18.8%, $57 million, in 2000 as compared to 1999 primarily due to increased international volumes resulting from new markets.

Wages, salaries and related costs increased 13.3%, $335 million, during 2000 as compared to 1999, primarily due to a 5.8% increase in average full-time equivalent employees to support increased flying, increased employee incentives and higher wage rates resulting from the Company's decision to increase employee wages to industry standard by the year 2000.

Aircraft fuel expense increased 86.5%, $667 million, in 2000 as compared to the prior year. The average price per gallon increased 83.2% from 47.31 cents in 1999 to 86.69 cents in 2000. In addition, jet fuel consumption decreased 0.3% even with increased flight operations principally reflecting the fuel efficiency of the Company's younger fleet. During 2000 and 1999, the Company recognized gains of approximately $44 million and $90 million, respectively, related to its fuel hedging program.

Aircraft rentals increased 9.5%, $73 million, during 2000 as compared to 1999, due to the addition of newer aircraft.

Maintenance, materials and repairs increased 7.1%, $43 million, in 2000 as compared to 1999 due to an increase in line maintenance and the volume and timing of engine overhauls as part of the Company's ongoing maintenance program.

Landing fees and other rentals increased 7.0%, $35 million, in 2000 as compared to 1999 primarily due to higher facilities rent and landing fees resulting from increased operations.

Commissions expense decreased 8.7%, $50 million, during 2000 as compared to 1999 due to a lower volume of commissionable sales and lower rates resulting from international commission caps.

Reservations and sales expense increased 9.9%, $41 million, in 2000 as compared to 1999 primarily due to higher credit card fees resulting from increased sales.

Depreciation and amortization expense increased 11.7%, $42 million, in 2000 compared to 1999 primarily due to the addition of new aircraft and related spare parts.

Passenger servicing expense increased 4.0%, $14 million, in 2000 compared to 1999 primarily due to an increase in food costs caused by an increase in passengers.

During 1999, the Company made the decision to accelerate the retirement of six DC-10-30 aircraft and other items in 1999 and the first half of 2000 and to dispose of related excess inventory. In addition, the market value of certain Boeing 747 aircraft no longer operated by the Company had declined. As a result of these items and certain other fleet-related items, the Company recorded a fleet disposition/impairment loss of $81 million in 1999.

Other operating expense increased 5.2%, $57 million, in 2000 as compared to the prior year, primarily as a result of increases in outsourced services, travel and other incidental costs, and other miscellaneous expense.

Interest expense increased 7.7%, $18 million, in 2000 as compared to 1999 due to an increase in long-term debt resulting from the purchase of new aircraft, partially offset by interest savings due to the conversion of the Company's 6-3/4% Convertible Subordinated Notes into Class B common stock, par value $.01 per share ("Class B common stock"), in the second quarter of 1999 and the repurchase of the Company's remaining 9-1/2% senior unsecured notes in 2000.

Interest income increased 22.5%, $16 million, in 2000 as compared to 1999 due to higher average balances of cash, cash equivalents and short-term investments and due to higher interest rates.

The Company's other nonoperating income (expense) in 2000 included a $9 million gain related to the sale of a right of first refusal and the Company's remaining investment in America West Holdings, partially offset by foreign currency losses of $8 million. Other nonoperating income (expense) in 1999 included a $33 million gain on the sale of a portion of the Company's interest in Equant N.V. ("Equant"), partially offset by foreign currency losses of $13 million, losses on equity investments of $7 million and a $4 million loss on the sale of the Company's warrants to purchase common stock of priceline.com, Inc.

In 2000, an extraordinary charge of $6 million (net of income tax benefit) was recorded related to the early extinguishment of debt.

Comparison of 1999 to 1998. The Company recorded consolidated net income of $455 million and $383 million for the years ended December 31, 1999 and 1998, respectively. Net income in 1999 was significantly impacted by several non-recurring items, including $200 million of after-tax gains on the sale of the Company's interest in AMADEUS and other investments, a $50 million after-tax fleet disposition/impairment loss related to the early retirement of several DC-10-30s and other items and the cumulative effect of accounting changes ($33 million, net of taxes) related to the write-off of pilot training costs and a change in the method of accounting for the sale of mileage credits to participating partners in the Company's frequent flyer program. Net income in 1998 was significantly impacted by a $77 million after-tax fleet disposition/impairment loss resulting from the Company's decision to accelerate the retirement of certain jet and turboprop aircraft.

Passenger revenue increased 8.9%, $660 million, during 1999 as compared to 1998. The increase was due to an 11.3% increase in revenue passenger miles, partially offset by a 2.7% decrease in yield. Both yield pressures in the transatlantic markets and a 6.7% increase in average stage length caused the decrease in yield.

Cargo and mail revenue increased 10.2%, $28 million, in 1999 as compared to 1998 due to increased domestic and international volumes and new markets added in 1999.

Other operating revenue increased 12.2%, $24 million, in 1999 compared to the prior year primarily due to an increase in fees charged to customers to change advance purchase tickets and also due to an increase in Presidents Club revenue as a result of a larger number of these airport private clubs.

Wages, salaries and related costs increased 13.2%, $292 million, during 1999 as compared to 1998, primarily due to an 8.3% increase in average full-time equivalent employees to support increased flying and higher wage rates resulting from the Company's decision to increase employee wages to industry standard by the year 2000.

Aircraft fuel expense increased 6.1%, $44 million, in 1999 as compared to the prior year. The average price per gallon increased 1.0% from 46.83 cents in 1998 to 47.31 cents in 1999. This increase is net of gains of approximately $90 million recognized during 1999 related to the Company's fuel hedging program. In addition, the quantity of jet fuel used increased 3.7% principally reflecting increased capacity offset in part by the increased fuel efficiency of the Company's younger fleet.

Aircraft rentals increased 17.0%, $112 million, during 1999 as compared to 1998, due to the delivery of new aircraft.

Landing fees and other rentals increased 20.0%, $83 million, during 1999 as compared to 1998 primarily due to higher facilities rent due to increased rates and volume and higher landing fees resulting from increased operations.

Commissions expense decreased 1.2%, $7 million, during 1999 as compared to 1998 due to lower rates resulting from international commission caps and a lower volume of commissionable sales.

Reservations and sales expense increased 12.8%, $47 million, in 1999 compared to 1998 primarily due to an increase in credit card discount fees and computer reservation system fees as a result of higher sales.

Depreciation and amortization expense increased 22.4%, $66 million, in 1999 compared to 1998 primarily due to the addition of new aircraft and related spare parts.

Passenger servicing expense increased 13.9%, $43 million, in 1999 compared to 1998 primarily due to an increase in food costs caused by an increase in passengers.

Other operating expense increased 16.1%, $153 million, in 1999 as compared to the prior year, primarily as a result of increases in aircraft servicing expense and outsourced services.

Interest expense increased 30.9%, $55 million, in 1999 as compared to 1998 due to an increase in long-term debt resulting from the purchase of new aircraft and $200 million of 8% unsecured senior notes issued in December 1998, partially offset by interest savings of $9 million due to the conversion of the Company's 6-3/4% Convertible Subordinated Notes into Class B common stock.

Interest income increased 20.3%, $12 million, in 1999 as compared to 1998 due to higher average balances of cash, cash equivalents and short-term investments and due to higher interest rates.

An analysis of statistical information for Continental's jet operations, excluding regional jets operated by Continental Express, Inc. ("Express"), a wholly owned subsidiary of the Company, for each of the three years in the period ended December 31, 2000 is as follows:

_____________________

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 does not include the statistics for the capacity that was purchased by another carrier.

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. 1999 and 1998 exclude fleet disposition/impairment losses totaling $81 million and $122 million, respectively.
6. The average revenue received for each mile a revenue passenger is carried.
7. The average number of hours per day that an aircraft flown in revenue service is operated (from gate departure to gate arrival).
8. Excludes four all-cargo 727 aircraft at Continental Micronesia, Inc., a wholly owned subsidiary of the Company, in 1999.

As of December 31, 2000, the Company had $1.4 billion in cash, cash equivalents and short-term investments, compared to $1.6 billion as of December 31, 1999. Net cash provided by operating activities increased $128 million during the year ended December 31, 2000 compared to the same period in the prior year primarily due to an increase in operating income. Net cash used by investing activities for the year ended December 31, 2000 compared to the same period in the prior year decreased $591 million, primarily as a result of the proceeds from the sale of short-term investments in 2000, partially offset by proceeds received from the sale of AMADEUS in 1999. Net cash used by financing activities increased $345 million primarily due to an increase in payments on long-term debt and capital lease obligations.

As of December 31, 2000, Continental had approximately $3.7 billion (including current maturities) of long-term debt and capital lease obligations, and had approximately $1.9 billion of Continental-obligated mandatorily redeemable preferred securities of trust, redeemable common stock and common stockholders' equity, a ratio of 2.0 to 1, at December 31, 2000 and 2.1 to 1 at December 31, 1999.

In March 2000, the Company completed an offering of $743 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 21 Boeing aircraft. All of these aircraft were placed in service in 2000.

In November 2000, the Company completed an offering of $176 million of floating enhanced aircraft trust securities to be used to finance the debt portion of the acquisition cost of four Boeing aircraft. All of these aircraft were placed in service by January 2001.

In November 2000, the Company completed an offering of $841 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 23 new Boeing aircraft scheduled for delivery from February 2001 to December 2001.

Also in November 2000, the Company completed the placement of 5,000,000 6% Convertible Preferred Securities, known as Term Income Deferrable Equity Securities. The net proceeds of the private placement totaled $242 million and were used as part of the purchase price for approximately 6.7 million shares of Class A common stock, par value $.01 per share ("Class A common stock") held by Northwest Airlines Corporation ("Northwest") and an affiliate.

Also in November 2000, the Company completed an offering of $177 million special facilities revenue bonds issued by the New Jersey Economic Development Authority. The bonds will finance the construction of a maintenance facility, cargo facility, ground service equipment maintenance facility, terminal improvements, and other various projects related to the Company's Global Gateway expansion at Newark.

In January 2001, the Company obtained a 3-year $200 million pre-delivery payment facility to be used to finance manufacturer progress payments on 156 new Boeing aircraft.

During 2000, the Company's Board of Directors increased the size of its common stock repurchase program by the amount of cash proceeds received by the Company for the purchase of common stock by employees and other participants under the Company's employee stock purchase and stock option plans after January 1, 2000. The program also permits the expenditure of one half of future net income (excluding special gains and charges), plus all the proceeds from the sale of non-strategic assets, to repurchase common stock. Of the approximately $287 million available in the program as of December 31, 2000, $200 million was used as a part of the purchase price for approximately 6.7 million shares of Class A common stock held by Northwest.

A significant amount of Continental's assets are encumbered.

Deferred Tax Assets. As of December 31, 2000, the Company had deferred tax assets aggregating $677 million, including $366 million related to net operating losses ("NOLs"), and a valuation allowance of $263 million.

Section 382 of the Internal Revenue Code ("Section 382") imposes limitations on a corporation's ability to utilize NOLs if it experiences an "ownership change". In general terms, an ownership change may result from transactions increasing the ownership of certain stockholders in the stock of a corporation by more than 50 percentage points over a three-year period. In the event that an ownership change occurred, utilization of Continental's NOLs would be subject to an annual limitation under Section 382 determined by multiplying the value of the Company's stock at the time of the ownership change by the applicable long-term tax exempt rate (which was 5.39% for December 2000). Any unused annual limitation may be carried over to later years, and the amount of the limitation may under certain circumstances be increased by the built-in gains in assets held by the Company at the time of the change that are recognized in the five-year period after the change. Under current conditions, if an ownership change were to occur, Continental's annual NOL utilization would be limited to approximately $174 million per year other than through the recognition of future built-in gain transactions.

In November 1998, Northwest 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 other investors, totaling 8,661,224 shares of the Class A common stock. On January 22, 2001, Continental repurchased 6,685,279 shares of Continental Class A common stock from Northwest and an affiliate. In addition, each issued share of Continental Class A common stock was reclassified into 1.32 shares of Class B common stock in a nontaxable transaction. The Company does not believe that these transactions 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 December 31, 2000, the estimated aggregate cost of the Company's firm commitments for Boeing aircraft is approximately $4 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 December 31, 2000, Continental had approximately $890 million in financing arranged for such Boeing deliveries. Continental also has commitments or letters of intent for backstop financing for approximately 23% of the anticipated remaining acquisition cost of such Boeing deliveries. In addition, at December 31, 2000, Continental had firm commitments to purchase 26 spare engines related to the new Boeing aircraft for approximately $158 million, which will be deliverable through March 2005. Further 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 increase aircraft rental, depreciation and interest costs while generating cost savings in the areas of maintenance, fuel and pilot training.

As of December 31, 2000, the estimated aggregate cost of Express's firm commitments for Embraer regional jets is approximately $3 billion. Neither Express nor Continental will have any obligation to take any such firm Embraer aircraft that are not financed by a third party and leased to Continental.

Continental expects its cash outlays for 2001 capital expenditures, exclusive of fleet plan requirements, to aggregate approximately $326 million, primarily relating to 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 net capital expenditures during 2000 aggregated $203 million, exclusive of fleet plan requirements.

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.

Bond Financings. Continental has entered into agreements with the City of Houston, Texas, the City of Cleveland, Ohio, the New Jersey Economic Development Authority, the Department of Transportation of the State of Hawaii, the Regional Airports Improvement Corporation, and the Harris County (Houston) Industrial Development Corporation to provide funds for constructing, improving and modifying facilities and acquiring equipment which have been or will be leased to Continental. In connection therewith, Continental has unconditionally guaranteed the principal and interest on certain bonds totaling approximately $1.6 billion and has entered into long-term leases with the respective authorities under which rental payments will be sufficient to service the related bonds. The leases generally have terms ranging from 20 to 30 years.

Employees. In July 2000, the Company completed a three-year program bringing all employees to industry standard wages and also announced and began to implement a phased plan to bring employee benefits to industry standard levels by 2003. The plan provides for increases in vacation, paid holidays, increased 401(k) Company matching contributions and additional past service retirement credit for most senior employees.

The following is a table of the Company's, Express's and CMI's principal collective bargaining agreements, and their respective amendable dates:

In March 2000, CMI and the IAM began collective bargaining negotiations to amend the CMI flight attendants' contract (which became amendable in June 2000). The parties reached a tentative agreement, which was not ratified by the flight attendants. Negotiations will resume in early 2001. The Company continues to believe that mutually acceptable agreements can be reached with such employees, although the ultimate outcome of the negotiations is unknown at this time.

The pilots are in the process of considering whether they wish to merge their independent union, IACP, into the Air Line Pilots Association, which would be subject to ratification by the Continental pilots.

The other employees of Continental, Express and CMI are not covered by collective bargaining agreements.

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, benefits 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 distribution costs and structure, (v) changes in governmental regulations and taxes affecting air transportation and the costs charged for airport access, including new security requirements, (vi) changes in the Company's fleet and related capacity and (vii) 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, E-Ticket and the internet for bookings, and reduced interest expense.

The Company is subject to certain market risks, including commodity price risk (i.e., aircraft fuel prices), interest rate risk, foreign currency risk and price changes related to investments in equity and debt securities. The adverse effects of potential changes in these market risks are discussed below. The sensitivity analyses presented do not consider the effects that such adverse changes may have on overall economic activity nor do they consider additional actions management may take to mitigate the Company's exposure to such changes. Actual results may differ. See the notes to the consolidated financial statements for a description of the Company's accounting policies and other information related to these financial instruments.

Aircraft Fuel. The Company's results of operations are significantly impacted by changes in the price of aircraft fuel. During 2000 and 1999, aircraft fuel accounted for 15.6% and 9.7%, respectively, of the Company's operating expenses (excluding fleet disposition/impairment losses). In order to provide short-term protection (generally three to six months) against a sharp increase in jet fuel prices, the Company from time to time enters into petroleum call options, petroleum swap contracts and jet fuel purchase commitments. The Company's fuel hedging strategy could result in the Company not fully benefiting from certain fuel price declines. As of December 31, 2000, the Company had hedged approximately 23% of its projected 2001 fuel requirements using petroleum call options, which represents 95% of projected first quarter fuel requirements, compared to approximately 24% of its projected 2000 fuel requirements hedged at December 31, 1999. Subsequent to December 31, 2000, the Company entered into jet fuel and heating oil call options, jet fuel swap contracts and jet fuel purchase commitments. The Company estimates that a 10% increase in the price per gallon of aircraft fuel would not have a material impact on the fair value of the petroleum call options existing at December 31, 2000 or 1999.

Foreign Currency. The Company is exposed to the effect of exchange rate fluctuations on the U.S. dollar value of foreign currency denominated operating revenue and expenses. The Company's largest exposure comes from the Japanese yen. However, the Company attempts to mitigate the effect of certain potential foreign currency losses by entering into forward contracts that effectively enable it to sell Japanese yen expected to be received from yen-denominated net cash flows over the next 12 months at specified exchange rates. As of December 31, 2000, the Company had entered into forward contracts to hedge approximately 75% of its 2001 projected yen-denominated net cash flows, as compared to having in place forward contracts to hedge approximately 95% of its 2000 projected yen-denominated net cash flows at December 31, 1999. The Company estimates that at December 31, 2000, a 10% strengthening in the value of the U.S. dollar relative to the yen would have increased the fair value of the existing forward contracts by $15 million as compared to an $18 million increase in the fair value of existing forward contracts at December 31, 1999.

Interest Rates. The Company's results of operations are affected by fluctuations in interest rates (e.g., interest expense on debt and interest income earned on short-term investments).

The Company had approximately $754 million and $690 million of variable-rate debt as of December 31, 2000 and 1999, respectively. The Company has mitigated its exposure on certain variable-rate debt by entering into interest rate cap and swap agreements. The interest rate cap had notional amounts of $84 million and $106 million as of December 31, 2000 and 1999, respectively. Caps outstanding at December 31, 2000 are effective through July 31, 2001. The interest rate cap limits the amount of potential increase in the LIBOR rate component of the floating rate to a maximum of 9% over the term of the contract. The interest rate swap outstanding at December 31, 2000 had a notional amount of $176 million. The interest rate swap effectively locks the Company into paying a fixed rate of interest on a portion of its floating rate debt securities through 2005. If average interest rates increased by 100 basis points during 2001 as compared to 2000, the Company's projected 2001 interest expense would increase by approximately $7 million. At December 31, 1999, an interest rate increase of 100 basis points during 2000 as compared to 1999 was projected to increase 2000 interest expense by approximately $6 million. The interest rate cap does not mitigate this increase in interest expense materially given the current level of such floating rates.

As of December 31, 2000 and 1999, the fair value of $2.2 billion and $2.2 billion (carrying value) of the Company's fixed-rate debt was estimated to be $2.2 billion and $2.2 billion, respectively, based upon discounted future cash flows using current incremental borrowing rates for similar types of instruments or market prices. Market risk, estimated as the potential increase in fair value resulting from a hypothetical 100 basis points decrease in interest rates, was approximately $136 million and $91 million as of December 31, 2000 and 1999, respectively. The fair value of the remaining fixed-rate debt at December 31, 2000 and 1999, (with a carrying value of $453 million and $248 million, respectively), was not practicable to estimate.

If 2001 average short-term interest rates decreased by 100 basis points over 2000 average rates, the Company's projected interest income from cash, cash equivalents and short-term investments would decrease by approximately $12 million during 2001, compared to an estimated $11 million decrease during 2000 measured at December 31, 1999.

Investments in Equity Securities. The Company has a 49% equity investment in Compania Panamena de Aviacion, S.A. ("Copa") and a 28% equity investment in Gulfstream International Airlines, Inc. ("Gulfstream") which are also subject to price risk. However, since a readily determinable market value does not exist for either Copa or Gulfstream (each is privately held), the Company is unable to quantify the amount of price risk sensitivity inherent in these investments. At December 31, 2000 and 1999, the carrying value of the investment in Copa was $48 million and $49 million, respectively. At December 31, 2000 and 1999, the carrying value of the investment in Gulfstream was $8 million and $10 million, respectively.

At December 31, 2000, the Company owned approximately 357,000 depository

certificates convertible, subject to certain restrictions, into an equivalent number of shares of the common stock of Equant, which completed an initial public offering in July 1998. As of December 31, 2000 and 1999, the estimated fair value of these depository certificates was approximately $9 million and $40 million, respectively, based upon the publicly traded market value of Equant common stock. Since the fair value of the Company's investment in the depository certificates is not readily determinable (i.e., the depository certificates are not traded on a securities exchange), the investment is carried at cost, which was not material as of December 31, 2000 or 1999.

Index to Consolidated Financial Statements

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders

Continental Airlines, Inc.

We have audited the accompanying consolidated balance sheets of Continental Airlines, Inc. (the "Company") as of December 31, 2000 and 1999, and the related consolidated statements of operations, common stockholders' equity and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2000 and 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States.

As discussed in Note 1 to the consolidated financial statements, effective January 1, 1999, the Company changed its method of accounting for the sale of mileage credits to participating partners in its frequent flyer program.

ERNST & YOUNG LLP

Houston, Texas

January 16, 2001

  except for Note 16, as to which

  the date is January 22, 2001

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1. See Note 1(i) for the proforma effect of retroactive application of the accounting change.

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

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1. The sole assets of the Trust are convertible subordinated debentures with an aggregate principal amount of $250 million, which bear interest at the rate of 6% per annum and mature on November 15, 2030. Upon repayment, the Continental-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust will be mandatorily redeemed.

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

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

Continental Airlines, Inc. (the "Company" or "Continental") is a major United States air carrier engaged in the business of transporting passengers, cargo and mail. Continental is the fifth largest United States airline (as measured by 2000 revenue passenger miles) and, together with its wholly owned subsidiaries, Continental Express, Inc. ("Express"), and Continental Micronesia, Inc. ("CMI"), each a Delaware corporation, served 230 airports worldwide at January 16, 2001. As of December 31, 2000, Continental flies to 136 domestic and 94 international destinations and offers additional connecting service through alliances with domestic and foreign carriers. Continental directly served 16 European cities, seven South American cities, Tel Aviv and Tokyo and is one of the leading airlines providing service to Mexico and Central America, serving more destinations there than any other United States airline. Through its Guam hub, CMI provides extensive service in the western Pacific, including service to more Japanese cities than any other United States carrier.

As used in these Notes to Consolidated Financial Statements, the terms "Continental" and "Company" refer to Continental Airlines, Inc. and, unless the context indicates otherwise, its subsidiaries.