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UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
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WASHINGTON,
D.C. 20549
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FORM
10-K
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(Mark
One)
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[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
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THE
SECURITIES EXCHANGE ACT OF 1934
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FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2009
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OR
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[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
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THE
SECURITIES EXCHANGE ACT OF 1934
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FOR
THE TRANSITION PERIOD FROM __________ TO __________
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Commission
File Number 1-10323
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CONTINENTAL
AIRLINES, INC.
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(Exact
name of registrant as specified in its charter)
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Delaware
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74-2099724
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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1600
Smith Street, Dept. HQSEO, Houston, Texas
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77002
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant's
telephone number, including area
code: 713-324-2950
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Securities
registered pursuant to Section 12(b) of the Act:
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Title of Each
Class
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Name
of Each Exchange
On Which
Registered
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Class
B Common Stock, par value $.01 per share
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New
York Stock Exchange
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Securities
registered pursuant to Section 12(g) of the
Act: None
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Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes X No
_____
Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Exchange Act. Yes No X
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90
days. Yes X No
_____
Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-5 (Section 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files). Yes No
_____
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form
10-K. [X]
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer or a smaller reporting company. See the definitions of " large
accelerated filer," “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act. Large accelerated filer X
Accelerated
filer ___ Non-accelerated filer ___ Smaller
reporting company ___
(Do not check if a
smaller
reporting company)
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes No X
As of June 30, 2009, the aggregate
market value of the registrant's common stock held by non-affiliates of the
registrant was $1.1 billion based on the closing sale price as reported on the
New York Stock Exchange.
Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practicable date.
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Class
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Outstanding at
February 16, 2010
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Class
B Common Stock, $.01 par value per share
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139,057,281
shares
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__________________
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DOCUMENTS
INCORPORATED BY REFERENCE
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Proxy
Statement for Annual Meeting of Stockholders to be held on June 9,
2010: PART III
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TABLE OF
CONTENTS
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PAGE
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PART
I
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Item
1.
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5
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5
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6
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6
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6
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7
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8
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10
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11
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12
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13
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14
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Item
1A.
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17
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17
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22
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Item
1B.
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26
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Item
2.
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26
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26
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29
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Item
3.
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29
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29
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30
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31
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Item
4.
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31
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PART
II
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Item
5.
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32
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32
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32
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32
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Item
6.
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33
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Item
7.
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39
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39
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43
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55
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62
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62
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70
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70
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Item
7A.
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70
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Item
8.
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73
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73
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74
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76
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76
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77
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78
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80
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82
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Item
9.
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135
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Item
9A.
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135
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Item
9B.
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137
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PART
III
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Item
10.
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138
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Item
11.
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138
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Item
12.
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138
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Item
13.
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138
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Item
14.
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138
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PART
IV
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Item
15.
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139
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140
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142
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PART
I
Continental Airlines, Inc., a Delaware
corporation incorporated in 1980, is a major U.S. air carrier engaged in the
business of transporting passengers, cargo and mail. The terms
"Continental," "we," "us," "our" and similar terms refer to Continental
Airlines, Inc. and, unless the context indicates otherwise, its consolidated
subsidiaries.
We are the world's fifth largest
airline as measured by the number of scheduled miles flown by revenue passengers
in 2009. Including our wholly-owned subsidiary, Continental
Micronesia, Inc. ("CMI"), and regional flights operated on our behalf under
capacity purchase agreements with other carriers, we operate more than 2,000
daily departures. As of December 31, 2009, we flew to 118 domestic
and 124 international
destinations and offered additional connecting service through alliances with
domestic and foreign carriers. We directly served 28 Trans-Atlantic
destinations, 11 Canadian cities, seven South American cities and four
Trans-Pacific destinations from the U.S. mainland as of December 31,
2009. In addition, we provide service to more destinations in Mexico
and Central America than any other U.S. airline, serving 39
cities. Through our Guam hub, CMI provides extensive service in the
western Pacific, including service to more Japanese cities than any other U.S.
carrier.
General information about us, including
our Corporate Governance Guidelines and the charters for the committees of our
Board of Directors, can be found on our website, continental.com. Our
Board has adopted the "Ethics and Compliance Guidelines," which apply to all
directors, officers and employees of Continental and its subsidiaries and serve
as our "Code of Ethics" under Item 406 of Regulation S-K and as our "Code of
Business Conduct and Ethics" as required by Section 303A.10 of the New York
Stock Exchange ("NYSE") Listed Company Manual. The Ethics and
Compliance Guidelines also are available on our website, and future amendments
to or waivers from compliance with these guidelines will be disclosed on our
website in accordance with Item 5.05 of Form 8-K.
Copies of these charters and guidelines
are available in print to any stockholder who requests them. Written
requests for such copies may be directed to our Secretary at Continental
Airlines, Inc., P.O. Box 4607, Houston,
Texas 77210-4607. Electronic copies of our annual reports
on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, as
well as any amendments and exhibits to those reports, are available free of
charge through our website as soon as reasonably practicable after we file them
with, or furnish them to, the U.S. Securities and Exchange Commission
("SEC").
Information on our website is not
incorporated into this Form 10-K or our other securities filings and is not a
part of them.
This Form 10-K contains forward-looking
statements that are not limited to historical facts, but reflect our current
beliefs, expectations or intentions regarding future events. All
forward-looking statements involve risks and uncertainties that could cause
actual results to differ materially from those in the forward-looking
statements. For examples of those risks and uncertainties, see the
cautionary statements contained in Item 1A. "Risk
Factors." See Item 1A. "Risk Factors" and Item
7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Overview" for a discussion of trends and factors
affecting us and our industry. Also see Item 8. "Financial
Statements and Supplementary Data, Note 18 - Segment Reporting" for financial
information about each of our business segments. We undertake no
obligation to publicly update or revise any forward-looking statements to
reflect events or circumstances that may arise after the date of this report,
except as required by applicable law.
We operate our domestic route system
primarily through our hubs in the New York metropolitan area at Newark Liberty
International Airport ("New York Liberty"), in Houston, Texas at George Bush
Intercontinental Airport ("Houston Bush") and in Cleveland, Ohio at Hopkins
International Airport ("Cleveland Hopkins"). Each of our domestic
hubs is located in a large business and population center, contributing to a
large amount of "origin and destination" traffic. Our hub system
allows us to transport passengers between a large number of destinations with
substantially more frequent service than if each route were served
directly. The hub system also allows us to add service to a new
destination from a large number of cities using only one or a limited number of
aircraft. As of December 31, 2009, we operated 75% of the average
daily departures from New York Liberty, 84% of the average daily departures from
Houston Bush and 65% of the average daily departures from Cleveland Hopkins, in
each case based on scheduled passenger departures and including regional flights
flown for us under capacity purchase agreements.
We directly serve destinations
throughout Europe, Asia, Canada, Mexico, Central and South America and the
Caribbean. We also provide service to numerous other destinations
through codesharing arrangements with other carriers and have extensive
operations in the western Pacific conducted by CMI. As measured by
2009 available seat miles, approximately 51% of our mainline operations is
dedicated to international service.
New York Liberty is a significant
international gateway for our operations. From New York Liberty, we
served 28 Trans-Atlantic destinations, four Trans-Pacific destinations, eight
cities in Canada, four cities in Mexico, seven cities in Central America, four
cities in South America and 16 Caribbean destinations at December 31,
2009. We expect to begin daily service between New York Liberty and
Munich, Germany in March 2010.
Houston Bush is the focus of our
flights to destinations in Mexico and Central and South America. As
of December 31, 2009, we flew from Houston Bush to 29 cities in Mexico, ten
cities in Central America, seven cities in South America, six Caribbean
destinations, four cities in Canada, four cities in Europe and
Tokyo.
At December 31, 2009, we flew from
Cleveland Hopkins to two cities in Canada, San Juan, Puerto Rico and Cancun,
Mexico.
From its hub operations based on the
island of Guam, as of December 31, 2009, CMI provided service to nine cities in Japan, more
than any other U.S. carrier, as well as other Pacific rim destinations,
including Manila, Philippines and Cairns, Australia. CMI is the
principal air carrier in the Micronesian Islands, where it pioneered scheduled
air service in 1968. CMI's route system is linked to the U.S.
mainland through Tokyo and Honolulu, each of which CMI serves non-stop from
Guam. CMI began service from Guam and Honolulu to Nadi, Fiji in
December 2009.
See Item 8. "Financial
Statements and Supplementary Data, Note 18 - Segment Reporting," for operating
revenue by geographical area.
We have extensive commercial
relationships with other airlines, which are often referred to generally as
“alliances” and may include (a) codesharing (one carrier placing its name and
flight number, or "code," on flights operated by the other carrier), (b)
reciprocal frequent flyer program participation, reciprocal airport lounge
access and other joint activities (such as seamless check-in at airports) and/or
(c) capacity purchase agreements. Alliances allow airlines to develop
their route structures by enabling them to offer their passengers greater
destination coverage, while providing member airlines with the potential for
both increased revenues and cost savings. We seek in particular to
develop international alliance relationships that complement our own route
system and permit expanded service through our hubs to major international
destinations. International alliances enable us to provide our
passengers better connecting service from our international flights to other
destinations beyond an alliance airline’s hub and expand the product line that
we may offer in a foreign destination.
On October 27, 2009, we joined Star
Alliance. Star Alliance was established in 1997 as the first global
airline alliance to offer customers worldwide reach and a smooth travel
experience. As a member of Star Alliance, we have bilateral
commercial agreements with all 25 other Star Alliance members, including
reciprocal earning and redemption of frequent flyer miles. The
members are Air Canada, Air China, Air New Zealand, All Nippon Airways (“ANA”),
Asiana Airlines, Austrian Airlines, British Midland Airways (“bmi”), Brussels
Airlines, EgyptAir, LOT Polish Airlines, Lufthansa, Scandinavian Airlines
(“SAS”), Shanghai Airlines, Singapore Airlines, South African Airways, Spanair,
Swiss International Air Lines, TAP Portugal, Thai Airways International, Turkish
Airlines, United Airlines (“United”) and US Airways. Regional member
carriers Adria Airways (Slovenia), Blue1 (Finland) and Croatia Airlines enhance
the global network. Aegean Airlines, Air India and TAM Airlines have
also been accepted as future members. Overall, Star Alliance network
offers more than 19,700 daily flights to 1,077 destinations in 175
countries.
As of December 31, 2009, we also had
codesharing agreements with Star Alliance members United, Lufthansa, Air Canada,
bmi and Asiana Airlines. Codesharing with additional airlines in Star
Alliance is being implemented, with codesharing with Air New Zealand, ANA and
SAS expected to begin in March 2010.
On July 10, 2009, the U.S. Department
of Transportation (“DOT”) approved our application to join United and a group of
eight other carriers within Star Alliance that already hold antitrust
immunity. This approval enables us, United and these other immunized
Star Alliance carriers to work closely together to deliver highly competitive
international flight schedules, fares and service and provides competitive
balance to antitrust-immunized carriers in SkyTeam. Additionally, we,
United, Lufthansa and Air Canada are permitted under antitrust immunity to
establish a trans-Atlantic joint venture to create a more efficient and
comprehensive trans-Atlantic network for our respective customers, offering
those customers more service, scheduling and pricing options and establishing a
framework for
similar
joint ventures in other regions of the world. The DOT’s approval of
antitrust immunity is subject to certain conditions and limitations that are not
expected to diminish materially the benefits of our participation in Star
Alliance or the trans-Atlantic joint venture. On December 23, 2009,
we, United and ANA filed an application with the DOT for antitrust immunity to
enable the three carriers to establish a trans-Pacific joint venture, offering
similar benefits to our trans-Pacific customers. We are seeking a
modification to our pilot collective bargaining agreement to permit us to engage
in revenue sharing with a domestic air carrier, which is a component of the
proposed joint ventures.
In
addition to our current participation in Star Alliance, we have a domestic
codesharing agreement with Hawaiian Airlines and international codesharing
agreements with Copa Airlines (an airline based in Panama), Emirates (the flag
carrier of the United Arab Emirates), EVA Airways Corporation (an airline based
in Taiwan), Virgin Atlantic Airways and French rail operator
SNCF. Additionally, we have codeshare agreements with Gulfstream
International Airlines, Hyannis Air Service, Inc. ("Cape Air"), Colgan Air, Inc.
("Colgan") and Hawaii Island Air, Inc. ("Island Air"), who provide us with
commuter feed traffic. We also have a train-to-plane alliance with
Amtrak.
We have regional capacity purchase
agreements with ExpressJet Airlines, Inc. ("ExpressJet"), a wholly-owned
subsidiary of ExpressJet Holdings, Inc. ("Holdings"), Chautauqua Airlines, Inc.,
("Chautauqua"), a wholly-owned subsidiary of Republic Airways Holdings, Inc.,
Colgan Air, Inc. (“Colgan”), a wholly-owned subsidiary of Pinnacle
Airlines Corp., and Champlain Enterprises, Inc. ("CommutAir"). See
Item 8. "Financial Statements and Supplementary Data, Note 16 - Regional
Capacity Purchase Agreements" for further discussion of our capacity purchase
agreements.
Except for the four regional capacity
purchase agreements listed above, all of our codeshare relationships are
currently free-sell codeshares, where the marketing carrier sells seats on the
operating carrier's flights from the operating carrier's inventory, but takes no
inventory risk. In contrast, under our capacity purchase agreements,
we (as the marketing carrier) purchase all seats on covered flights and are
responsible for all scheduling, pricing and seat inventories. Some of
our alliance relationships include other cooperative undertakings such as joint
purchasing, joint corporate sales contracts, airport handling, facilities
sharing or joint technology development.
Regional
Operations
Our regional operations are conducted
by other operators on our behalf, primarily under capacity purchase
agreements. We schedule and market the regional flights provided for
us by other operators under capacity purchase agreements. Our
regional operations using regional jet aircraft are conducted under the name
"Continental Express" by ExpressJet and Chautauqua, and those using turboprop
aircraft are conducted under the name "Continental Connection" by CommutAir and
Colgan. As of December 31, 2009, our regional operators served 102
destinations in the United States, 26 cities in Mexico and eight cities in
Canada. This regional service complements our operations by carrying
traffic that connects onto our mainline jets and allows more frequent flights to
smaller cities than could be provided economically with mainline jet
aircraft. Additional commuter feed traffic currently is provided to
us by other alliance airlines, as discussed above.
Under our capacity purchase agreement
with ExpressJet (the “ExpressJet CPA”), we purchase all of the capacity from the
ExpressJet flights covered by the agreement. In exchange for
ExpressJet's operation of the flights and performance of other obligations under
the ExpressJet CPA, we have agreed to pay ExpressJet a pre-determined rate,
subject to annual inflation adjustments (capped at 3.5%), for each block hour
flown (the hours from gate departure to gate arrival) and to reimburse
ExpressJet for various pass-through expenses (with no margin or mark-up) related
to the flights, including aviation insurance, property taxes, international
navigation fees, depreciation (primarily aircraft-related), landing fees and
certain maintenance expenses. Under the ExpressJet CPA, we are
responsible for the cost of providing fuel for all flights and for paying
aircraft rent for all of the aircraft operated on our behalf. The
ExpressJet CPA also contains incentive bonus and rebate provisions based upon
ExpressJet's operational performance.
The capacity purchase provisions of the
ExpressJet CPA currently cover a minimum of 190 regional jets and, as of
December 31, 2009, ExpressJet operated 212 Embraer 50-seat regional jets under
those provisions of the contract. The minimum number of covered
aircraft will be reduced as leases on covered aircraft expire. The
ExpressJet CPA will expire in June 2015, with provisions for an appropriate
wind-down period, and has no renewal or extension options. ExpressJet
also subleases 32 Embraer 50-seat regional jets from us that are not operated on
our behalf.
Chautauqua operates 50-seat regional
jets as a Continental Express carrier under a capacity purchase agreement (the
"Chautauqua CPA"). As of December 31, 2009, 22 aircraft were being
flown by Chautauqua for us. The Chautauqua CPA requires us to pay
Chautauqua a fixed fee, subject to annual inflation adjustments (capped at
3.5%), for each block hour flown for its operation of the
aircraft. Chautauqua supplies the aircraft that it operates under the
agreement. Aircraft are scheduled to be removed from service under
the Chautauqua CPA each year through 2012, provided that we have the unilateral
right to extend the Chautauqua CPA on the same terms on an aircraft-by-aircraft
basis for a period of up to five years in the aggregate for 20 aircraft and for
up to three years in the aggregate for seven aircraft, subject to the renewal
terms of the related aircraft lease. Chautauqua also subleases five
Embraer 37-seat aircraft from us that are not operated on our
behalf.
Colgan operates fourteen 74-seat
Bombardier Q400 twin-turboprop aircraft as a Continental Connection carrier on
short and medium-distance routes from New York Liberty on our
behalf. Colgan operates the flights under a capacity purchase
agreement with us. In January 2009, we amended the capacity purchase
agreement to increase by 15 the number of Q400 aircraft to be operated by Colgan
on our behalf. We expect that Colgan will begin operating these 15
additional aircraft as they are delivered, beginning in the third quarter of
2010 through the second quarter of 2011. Each aircraft is scheduled
to be covered by the agreement for ten years following the date such aircraft is
delivered into service thereunder. Colgan supplies all of the
aircraft that it operates under the agreement.
Our
capacity purchase agreement with CommutAir (the "CommutAir CPA") provides for
CommutAir to operate sixteen 37-seat Bombardier Q200 twin-turboprop aircraft as
a Continental Connection carrier on short distance routes from Cleveland Hopkins
and New York Liberty. CommutAir supplies all of the aircraft that it
operates under the agreement.
Marketing
As with other major domestic
hub-and-spoke carriers, a majority of our revenue comes from tickets sold by
travel agents. Although we generally do not pay base commissions, we
often negotiate compensation to travel agents based on their performance in
selling our tickets or based on competitive conditions in particular
markets. A significant portion of our revenue, including a
significant portion of our higher yield traffic, is derived from bookings made
through third party global distribution systems ("GDSs") used by many travel
agents and travel purchasers.
We use the internet to provide
travel-related services for our customers and to reduce our overall distribution
costs. We have marketing agreements with internet travel service
companies such as Expedia, Hotwire, Orbitz and Travelocity. Although
customers' use of the internet has helped to reduce our distribution costs, it
also has lowered our yields because it has enhanced the visibility of competing
fares offered by other carriers.
Our website, continental.com, is our
lowest cost distribution channel. We recorded approximately $3.2
billion in ticket sales on continental.com in 2009. The site offers
customers the ability to purchase, change and refund tickets on-line, to
check-in on-line and to have direct access to information such as schedules,
reservations, flight status, frequent flyer account information (including the
ability to redeem and change reward travel) and Continental travel
specials. Tickets purchased through our website accounted for 30% of
our passenger revenue during 2009.
Substantially all of our sales involve
our electronic ticketing, or e-ticket, product. Our e-ticket product
enables us to process customer and revenue information more
efficiently. E-ticketed passengers have the ability to check-in at
continental.com for all domestic and international travel. On-line
check-in allows customers to obtain a printed or electronic boarding pass from
their home, office or hotel up to 24 hours prior to departure and to proceed
directly to security at the airport, bypassing the ticket counter and saving
time. Passengers with baggage who check-in on-line may use special
kiosks at our hub airports to check their bags rapidly. E-ticketed
passengers also can use self-service kiosks to check-in. Our
customers have access to approximately 1,600 Continental self-service kiosks at
173 airports throughout our system, including all domestic airports we
serve. During 2009, 84% of all check-ins were done on-line or at
self-service kiosks.
Our first aircraft equipped with our
new flat-bed BusinessFirst seats began service in the fourth quarter of
2009. These seats, which will be offered on long-haul international
routes, allow customers to lie completely flat and provide 6½ feet of sleeping
space in the fully extended position (six feet four inches on Boeing 757-200
aircraft). The seats include laptop power and feature 15.4-inch video
monitors. We will install the flat-bed seats on our entire
fleet of Boeing 777, 757-200 and 767-200 aircraft and substantially all of our
767-400 aircraft, as well as on our Boeing 787 fleet as those aircraft are
delivered to us.
Our
Boeing 777 and 757-200 aircraft are currently equipped with Audio Video on
Demand entertainment systems in each BusinessFirst/first class and economy
seat. Customers can start, stop, pause, rewind or fast forward movies
and music at any time. The system features a large selection of
movies, television shows, music and interactive video games. The
system will also be provided on other aircraft equipped with flat-bed seats as
those seats are installed.
We are installing DIRECTV® satellite
programming on our entire fleet of narrowbody Next-Generation Boeing 737
aircraft (737-700, 737-800,737-900 and 737-900ER aircraft) and Boeing 757-300
aircraft. DIRECTV® offers customers the choice of more than 100
channels of live television and previously recorded programming. This
service is complimentary in first class and available at each seat in economy
class for a fee. We have completed installation of DIRECTV® on 48
aircraft as of December 31, 2009 and expect to complete installation of DIRECTV®
on our entire fleet of Boeing 737 Next-Generation aircraft by the end of 2010
and our Boeing 757-300 aircraft by mid-2011.
We introduced the cashless cabin in the
fourth quarter of 2009, and expect to have a cashless environment on-board our
entire fleet by early in the second quarter of 2010. In a cashless
cabin, flight crews accept credit and debit cards exclusively for on-board
purchases.
Our
Presidents Club lounges offer a wide range of amenities to make customers’
travel experience productive and enjoyable. Services offered include
complimentary beverages, light snacks and bar service, assistance with
arrangements for travel on us, high-speed wireless Internet access, local
telephone calls and fax machines. Arrival shower facilities are
available at select locations. The lounges are available to
Presidents Club members and to BusinessFirst customers, Star Alliance Gold Elite
members and Star Alliance international first and business class customers on
the day of travel.
During 2008, we began implementation of
our joint project with the Transportation Security Administration ("TSA") to be
the first U.S. carrier to launch a paperless boarding pass pilot program that
allows passengers to receive boarding passes electronically on their cell phones
or PDAs, and use those devices to pass through security and board the
aircraft. The new technology heightens the ability to detect
fraudulent boarding passes while improving customer service and reducing paper
use. This service is currently available at each of our hubs and
other select airports.
We offer a carbon offsetting program
developed in partnership with non-profit Sustainable Travel
International. This program allows customers to view the carbon
footprint of their booked itinerary and choose among a number of options to
reduce the impact of carbon dioxide emissions of their flights. For
customers who elect to participate in this program, their contributions are made
directly to Sustainable Travel International to fund the purchase of offsets,
which are generated from sustainable development projects including
reforestation, renewable energy and energy conservation. We receive
no revenue related to this program.
We maintain our "OnePass" frequent
flyer program to encourage repeat travel. OnePass allows passengers
to earn mileage credits by flying on us and certain other alliance
carriers. We also sell mileage credits to credit/debit card
companies, hotels, car rental agencies, utilities and various shopping and gift
merchants participating in OnePass. Mileage credits can be redeemed
for free, discounted or upgraded travel on Continental, Continental Express,
Continental Connection, CMI or alliance airlines. Most travel awards
are subject to capacity limitations.
During 2009, OnePass participants
claimed approximately 1.3 million round-trip awards. Frequent flyer
awards accounted for an estimated 6.0% of our consolidated revenue passenger
miles. We believe displacement of revenue passengers by passengers
who redeem rewards earned by flying on us is minimal given our ability to manage
frequent flyer inventory and the low ratio of OnePass award usage to revenue
passenger miles. At December 31, 2009, we had an outstanding
liability associated with approximately 2.6 million free round-trip travel
awards that were expected to be redeemed for free travel on Continental,
Continental Express, Continental Connection, CMI or alliance
airlines. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Critical Accounting Policies and
Estimates - Frequent Flier Accounting" for a detailed discussion concerning the
accounting treatment of our OnePass frequent flier program.
Our EliteAccess service is offered to
OnePass members who qualify for Elite status (based on the number of paid flight
miles and the fares purchased in a calendar year), first class and BusinessFirst
ticket holders and travelers with high-yield coach tickets who qualify as Elite
for the Day. EliteAccess passengers receive preferential treatment in
the check-in, boarding and baggage claim areas, are not charged fees for checked
bags and have special security lanes at certain airports. We also
provide a guarantee of no middle seat assignment for those passengers using a
full-fare, unrestricted ticket.
Competition
The U.S. airline industry is
characterized by substantial competition with respect to fares, fees, routes and
services, which is particularly pronounced in domestic
markets. Carriers use discount fares to stimulate traffic during
periods of slack demand, or when they begin service to new cities or have excess
capacity, to generate cash flow and to establish, increase or preserve market
share. Many of our competitors have greater financial resources
and/or lower cost structures than we do, in some cases as the result
of their bankruptcies and/or mergers. In recent years, the domestic
market share held by low-cost carriers has increased significantly and is
expected to continue to increase. The increased market presence of
low-cost carriers, which engage in substantial price discounting, has diminished
the ability of the network carriers to maintain sufficient fare levels in
domestic markets to achieve and sustain profitability. We cannot
predict whether or for how long these trends will continue.
In addition to price competition,
airlines also compete for market share by increasing the size of their route
system and the number of markets they serve. Several of our domestic
competitors are continuing to increase their international capacity, including
service to some destinations that we currently serve. Additionally,
the "open skies" agreement between the United States and the European Union,
which became effective on March 30, 2008, is resulting in increased competition
from European and U.S. airlines in these international markets, and may give
rise to additional consolidation or better integration opportunities among
European carriers. The “open skies” agreement between the United
States and Japan announced in December 2009 is also likely to increase
competition in affected markets if it becomes effective. The
increased competition in these international markets, particularly to the extent
our competitors engage in price discounting, may have a material adverse effect
on our results of operations, financial condition or liquidity.
We also compete with U.S. and foreign
carriers, including major network carriers, low-cost carriers and regional
carriers, throughout our global network on the basis of scheduling, availability
of non-stop and connecting flights, on-time performance, type of equipment,
cabin configuration, amenities provided to passengers, frequent flyer programs,
on-board products, markets served and other services.
We are also facing stronger competition
from carriers that have participated in industry consolidation or expanded
airline alliances and joint ventures. See Item 1A. "Risk Factors -
Risk Factors Relating to the Airline Industry - The airline is highly
competitive and susceptible to price discounting" below for a discussion of the
competitive advantages enjoyed by carriers participating in industry
consolidation and/or airline alliances and joint ventures.
As of December 31, 2009, we had
approximately 41,300 employees, which, due to the number of part-time employees,
represents 39,640 full-time equivalent employees consisting of approximately
16,225 customer service agents, reservations agents, ramp and other airport
personnel, 8,740 flight attendants, 6,195 management and clerical employees,
4,270 pilots, 4,090 mechanics and 120 dispatchers. Approximately 45%
of our full-time equivalent employees are represented by unions as of December
31, 2009. The following table reflects the principal collective
bargaining agreements, and their respective amendable dates, of Continental and
CMI:
|
Employee
Group
|
Approximate
Number
of
Full-time
Equivalent
Employees
|
Representing
Union
|
Contract
Amendable
Date
|
|
|
Continental
Flight
Attendants
|
8,460
|
International
Association of
Machinists
and Aerospace
Workers
("IAM")
|
December
2009
|
|
|
Continental
Pilots
|
4,270
|
Air
Line Pilots Association
International
("ALPA")
|
December
2008
|
|
|
Continental
Mechanics
|
3,965
|
International
Brotherhood of
Teamsters
("Teamsters")
|
December
2008
|
|
|
CMI
Fleet and Passenger
Service
Employees
|
420
|
Teamsters
|
November
2011
|
|
|
CMI
Flight Attendants
|
280
|
IAM
|
December
2010
|
|
|
Continental
Dispatchers
|
120
|
Transport
Workers Union
("TWU")
|
December
2008
|
|
|
CMI
Mechanics
|
125
|
Teamsters
|
December
2009
|
|
|
Continental
Flight
Simulator
Technicians
|
40
|
TWU
|
December
2012
|
|
On February 12, 2010, the National
Mediation Board informed us that our fleet service employees had voted in favor
of representation by the Teamsters. The election covers approximately
7,600 employees, or 6,340 full-time equivalent ramp, operations and cargo
agents.
Approximately 97% of our full-time
equivalent employees represented by unions as of December 31, 2009 are covered
by collective bargaining agreements that are currently amendable or become
amendable in 2010. The collective bargaining agreements with our
pilots, mechanics and certain other work groups became amendable in December
2008 and those with our flight attendants and CMI mechanics became amendable in
December 2009. On July 6, 2009, our flight simulator technicians
ratified a new four-year collective bargaining agreement with
us. With respect to our workgroups with amendable contracts, we have
been meeting with representatives of the applicable unions to negotiate amended
collective bargaining agreements with a goal of reaching agreements that are
fair to us and to our employees, but to date the parties have not reached new
agreements. Negotiations often take considerable time. For
example, we began negotiating with our pilots’ union in February 2007, and we
only received their first economic proposal in December 2009. We
cannot predict the outcome of our ongoing negotiations with our unionized
workgroups, although significant increases in the pay and benefits resulting
from new collective bargaining agreements could have a material adverse effect
on us. Furthermore, there can be no assurance that our generally good
labor relations and high labor productivity will continue.
Federal
Regulations. We provide air transportation under certificates
of public convenience and necessity issued by the DOT. These
certificates may be altered, amended, modified or suspended by the DOT if public
convenience and necessity so require, or may be revoked for intentional failure
by the holder of the certificate to comply with the terms and conditions of a
certificate. Continental and CMI each operate under a separate air
carrier certificate issued by the Federal Aviation Administration ("FAA"), which
may be amended, suspended or revoked by the FAA if the public interest and
safety in air commerce so require.
Airlines are regulated by the FAA,
primarily in the areas of flight operations, maintenance, ground facilities and
other technical matters. Pursuant to these regulations, we have
established, and the FAA has approved, a maintenance program for each type of
aircraft we operate that provides for the ongoing maintenance of our aircraft,
ranging from frequent routine inspections to major overhauls.
Airlines are subject to extensive
regulatory and legal compliance requirements that result in significant costs
and can adversely affect us. Additional laws, regulations, airport
rates and charges and growth constraints have been proposed from time to time
that could significantly increase the cost of airline operations or reduce
revenue. In addition, to address concerns about airport congestion,
the FAA has designated certain airports, including New York Liberty, New York’s
John F. Kennedy International Airport (“Kennedy”) and LaGuardia Airport
(“LaGuardia”) as “high density traffic airports,” and has imposed operating
restrictions at these three airports, which may include capacity
reductions. The FAA has also designated New York Liberty and Kennedy
as Level 3 Coordinated Airports under the International Air Transport
Association Worldwide Scheduling Guidelines, which requires us to participate in
seasonal FAA procedures for capacity allocation and schedule coordination for
New York Liberty and to have slots to operate at that
airport. Additional restrictions on airline routes and takeoff and
landing slots may be proposed that could affect rights of ownership and
transfer. Although we do not believe that these current operating
restrictions will have a material adverse effect on our operations at New York
Liberty, we cannot predict the impact of future capacity constraints or
allocations or other restrictions on our operations that might be imposed by the
FAA, Congress or other regulators, which could have a material adverse effect on
us.
Under the Aviation and Transportation
Security Act (the "Aviation Security Act") and related federal regulations,
substantially all security screeners at airports are federal employees and
significant other elements of airline and airport security are overseen and
performed by federal employees, including federal security managers, federal law
enforcement officers, federal air marshals and federal security
screeners. Among other matters, the law mandates improved flight deck
security, deployment of federal air marshals onboard flights, improved airport
perimeter access security, airline crew security training, enhanced security
screening of passengers, baggage, cargo, mail, employees and vendors, enhanced
training and qualifications of security screening personnel, additional
provision of passenger data to U.S. Customs and Border Protection and enhanced
background checks.
Airports from time to time seek to
increase the rates charged to airlines, and the ability of airlines to contest
such increases has been restricted by federal statutes, DOT and FAA regulations
and judicial decisions. Under the Aviation Security Act, funding for
passenger security is provided in part by a per enplanement ticket tax
(passenger security fee) of $2.50, subject to a $5 per one-way trip
cap. The Aviation Security Act also allows the TSA to assess an
aviation security infrastructure fee on each airline up to the total amount
spent by that airline on passenger and property screening in calendar year 2000
and, starting in fiscal year 2005, to impose a new methodology for calculating
assessments. TSA has continued to assess this fee on
airlines. Furthermore, because of significantly higher security and
other costs incurred by airports since September 11, 2001, many airports have
significantly increased their rates and charges to airlines, including us, and
may do so again in the future. Most airports where we operate
impose passenger facility charges of up to $4.50 per segment, subject to an $18
per roundtrip cap.
In time of war or during a national
emergency or defense-oriented situation, we and other air carriers could be
required to provide airlift services to the Air Mobility Command under the Civil
Reserve Air Fleet program ("CRAF"). If we were required in the future
to provide a substantial number of aircraft and crew to the Air Mobility Command
under CRAF, our operations could be materially adversely affected.
International
Regulations. The availability of international routes to U.S.
carriers is regulated by treaties and related agreements between the United
States and foreign governments. The United States typically follows
the practice of encouraging foreign governments to accept multiple carrier
designation on foreign routes, although certain countries have sought to limit
the number of carriers allowed to fly these routes. Certain foreign governments
impose limitations on the ability of air carriers to serve a particular city
and/or airport within their country from the United States. Bilateral
agreements between the United States and foreign governments often include
restrictions on the number of carriers (designations), operations (frequencies),
or airports (points) that can be served. When designations are
limited, only a certain number of airlines of each country may provide service
between the countries. When frequencies are limited, operations are
restricted to a certain number of weekly flights (as awarded by the United
States to the domestic carrier, based on the bilateral limits). When
points are limited, only certain airports within a country can be
served.
For a U.S. carrier to fly to any
international destination that is not subject to an "open skies" agreement
(meaning all carriers have access to any destination in a particular country),
it must first obtain approval from both the United States and the foreign
country where the destination is located, which is referred to as a "foreign
route authority." Route authorities to some international
destinations can be sold between carriers, and their value can vary because of
limits on accessibility. For those international routes where there
is a limit on the number of carriers or frequency of flights, studies have shown
that these routes have more value than those without restrictions. To
the extent foreign countries adopt open skies policies or otherwise liberalize
or eliminate restrictions on international
routes,
those actions would increase competition and potentially decrease the value of a
route. We cannot predict what laws, treaties and regulations relating
to international routes will be adopted or their resulting impact on us, but the
overall trend in recent years has been an increase in the number of “open skies”
agreements, as evidenced by “open skies” agreements between the United States
and the European Union and between the United States and Japan (if it becomes
effective). The impact of any future changes in governmental
regulation of international routes could be significant.
Environmental
Regulations. Many aspects of airlines' operations are also
subject to increasingly stringent federal, state, local and foreign laws
protecting the environment, including the imposition of additional taxes on
airlines or their passengers. Future regulatory developments in the
United States and abroad could adversely affect operations and increase
operating costs in the airline industry. The European Union has
issued a directive to member states to include aviation in its Greenhouse Gas
Emissions Trading Scheme (“ETS”), which requires us to begin monitoring our
emissions of carbon dioxide effective January 1, 2010 and have emissions
allowances equal to the amount of our carbon dioxide emissions to operate
flights to and from member states of the European Union in January 2012 and
thereafter, including flights between the United States and the European
Union. On December 16, 2009, we joined a lawsuit in the United
Kingdom with the Air Transport Association of America, American Airlines
(“American”) and United to challenge the extension of the European Union’s ETS
to include aviation and the imposition of its requirements on us. In
addition, non-EU governments are expected to challenge the application of the EU
ETS to their airlines; however, we may be forced to comply with the EU ETS
requirements during the pendency of a legal challenge. We may have to
purchase emissions allowances through the EU ETS to cover EU flights that exceed
our free allowances, which could result in substantial costs for
us.
Other regulatory actions that may be
taken in the future by the U.S. government, foreign governments (including the
European Union), or the International Civil Aviation Organization to address
climate change or limit the emission of greenhouse gases by the aviation sector
are unknown at this time. Climate change legislation has been
introduced in the U.S. Congress, including a proposal to require transportation
fuel producers and importers to acquire allowances sufficient to offset the
emissions resulting from combustion of their fuels. We cannot
predict, however, if any such legislation will pass the Congress or, if passed
and enacted into law, how it would specifically apply to the aviation
industry. In addition, effective January 14, 2010, the Administrator
of the U.S. Environmental Protection Agency (“EPA”) found that current and
projected concentrations of greenhouse gases in the atmosphere threaten the
public health and welfare. Although legal challenges and legislative
proposals are expected that may invalidate this endangerment finding and the
EPA’s assertion of authority under the Clean Air Act, the finding could result
in EPA regulation of commercial aircraft emissions if EPA finds, as expected,
that such emissions contribute to greenhouse gas pollution.
The impact to us and our industry from
any additional legislation or regulations addressing climate change is likely to
be adverse and could be significant, particularly if regulators were to conclude
that emissions from commercial aircraft cause significant harm to the upper
atmosphere or have a greater impact on climate change than other
industries. Potential actions may include the imposition of
requirements on airlines or transportation fuel producers and importers to
purchase emission offsets or credits, which could require participation in
emissions allowance trading (such as required in the European Union) and
increase the cost of carbon-based fuels (such as jet fuel), substantial taxes on
emissions and growth restrictions on airline operations, among other potential
regulatory actions.
The DOT allows local airport
authorities to implement procedures designed to abate special noise problems,
provided those procedures do not unreasonably interfere with interstate or
foreign commerce or the national transportation system. Some
airports, including certain major airports serving Boston, Chicago, Los Angeles,
San Diego, Orange County (California), Washington, D.C., Denver and San
Francisco, have established airport restrictions to limit noise, including
restrictions on aircraft types to be used and limits on the number and
scheduling of hourly or daily operations. In some instances, these
restrictions have caused curtailments in services or increased operating costs,
and could limit our ability to expand our operations at the affected
airports. Local authorities at other airports could consider adopting
similar noise regulations. Some foreign airports, including major
airports in countries such as the United Kingdom, France, Spain, Belgium,
Germany and Japan, have adopted similar restrictions to limit noise, and in some
instances our operations and costs have been adversely affected in the same
manner as described above.
Item
1A. Risk Factors.
There
are many factors that continue to threaten our operations, financial condition,
results of operations and liquidity. These factors are discussed
below.
Risk
Factors Relating to the Company
Fuel
prices or disruptions in fuel supplies could have a material adverse effect on
us. Expenditures for
fuel and related taxes represent the largest single cost of operating our
business. These costs include fuel costs on flights flown for us
under capacity purchase agreements. Our operations depend on the
availability of jet fuel supplies, and our results are significantly impacted by
changes in jet fuel prices, especially during periods of high volatility such as
2008. If fuel prices rise significantly in a short period of time, we
may be unable to increase fares or other fees sufficiently to offset fully our
increased fuel costs.
We routinely hedge a portion of our
future fuel requirements to protect against rising fuel
costs. However, there can be no assurance that our hedge contracts
will provide any particular level of protection against increased fuel costs or
that our counterparties will be able to perform under our hedge contracts, such
as in the case of a counterparty's bankruptcy. Because of the large
volume of jet fuel that we consume in our business, entering into hedge
contracts for any substantial portion of our future projected fuel requirements
is costly. Additionally, a deterioration in our financial condition
could negatively affect our ability to enter into new hedge contracts in the
future.
Significant declines in fuel prices
(such as those experienced in the last six months of 2008) may increase the
costs associated with our fuel hedging arrangements to the extent we have
entered into swaps or collars. Swaps and put options sold as part of
a collar obligate us to make payments to the counterparty upon settlement of the
contracts if the price of the commodity hedged falls below the agreed upon
amount. Historically, declining crude oil prices have resulted in our
being required to post significant amounts of collateral to cover potential
amounts owed with respect to swap and collar contracts that have not yet
settled. Additionally, lower fuel prices may result in increased
industry capacity and lower fares, especially to the extent that reduced fuel
costs justify increased utilization by airlines of less fuel efficient aircraft
that are unprofitable during periods of higher fuel prices.
Fuel prices could increase dramatically
and supplies could be disrupted as a result of international political and
economic circumstances, such as increasing international demand resulting from a
global economic recovery, conflicts or instability in the Middle East or other
oil producing regions and diplomatic tensions between the United States and oil
producing nations, as well as OPEC production decisions, disruptions of oil
imports, environmental concerns, weather, refinery outages or maintenance and
other unpredictable events.
Further volatility in jet fuel prices
or disruptions in fuel supplies, whether as a result of natural disasters or
otherwise, could have a material adverse effect on our results of operations,
financial condition and liquidity.
Disruptions
in the global capital markets coupled with our high leverage may affect our
ability to satisfy our significant financing needs or meet our
obligations. As is the case
with many of our principal competitors, we have a high proportion of debt
compared to our capital. We have a significant amount of fixed
obligations, including debt, aircraft leases and financings, leases of airport
property and other facilities and pension funding obligations. At
December 31, 2009, we had approximately $6.3 billion of debt and capital lease
obligations, including $2.1 billion that will come due by the end of 2011
(consisting of $1.0 billion during 2010 and $1.1 billion during
2011).
In addition, we have substantial
non-cancelable commitments for capital expenditures, including the acquisition
of new aircraft and related spare engines. To meet these obligations, we must
access the global capital markets and/or achieve and sustain
profitability. If there are future disruptions in the global capital
markets, as were experienced in late 2008 through mid-2009, we may be unable to
obtain financing or otherwise access the capital markets on favorable
terms. See “Management’s Discussion of Financial Condition and
Results of Operations – Liquidity and Capital Resources” included in Item 7 of
this report for a discussion of our obligations and the status of our efforts to
meet our financing needs.
Credit
rating downgrades could have a material adverse effect on our
liquidity. Reductions in our
credit ratings may increase the cost and reduce the availability of financing to
us in the future. We do not have any debt obligations that would be
accelerated as a result of a credit rating downgrade. However, we
would have to post additional collateral under our credit card processing
agreements with Chase Bank USA, N.A. ("Chase") and American Express and under
our workers' compensation program if our debt rating falls below specified
levels, as described below.
Failure
to meet our financial covenants would adversely affect our liquidity. Our credit card
processing agreement with Chase (the "Chase processing agreement") contains
financial covenants which require, among other things, that we post additional
cash collateral if we fail to maintain (1) a minimum level of unrestricted cash,
cash equivalents and short-term investments, (2) a minimum ratio of unrestricted
cash, cash equivalents and short-term investments to current liabilities of 0.25
to 1.0 or (3) a minimum senior unsecured debt rating of at least Caa3 and CCC-
from Moody's and Standard & Poor's, respectively. If a covenant
trigger under the Chase processing agreement results in our posting additional
collateral under that agreement, we would also be required to post additional
collateral under our credit card processing agreement with American
Express.
The amount of additional cash
collateral that we may be required to post if we fail to comply with the
financial covenants described above, which is based on our then-current air
traffic liability exposure (as defined in each agreement), could be
significant. See “Financial Statements and Supplementary Data, Note
19 – Commitments and Contingencies” included in Item 8 of this report for a
detailed discussion of our collateral posting obligations under these credit
card processing agreements.
Depending on our unrestricted cash,
cash equivalents and short-term investments balance at the time, the posting of
a significant amount of cash collateral could cause our unrestricted cash and
short-term investments balance to fall below the minimum balance of $1.0 billion
required under our $350 million secured term loan facility, resulting in a
default under that facility. The posting of such additional
collateral under these circumstances and/or the acceleration of amounts borrowed
under our secured term loan facility (or other remedies pursued by the lenders
thereunder) would likely have a material adverse effect on our financial
condition.
We are currently in compliance with all
of the covenants under these agreements.
Our
obligations for funding our defined benefit pension plans are affected by
factors beyond our control. We have defined
benefit pension plans covering substantially all of our U.S. employees other
than employees of our Chelsea Food Services division and CMI. The
timing and amount of our funding requirements under these plans depend upon a
number of factors, including labor negotiations and changes to pension plan
benefits as well as factors outside of our control, such as the number of
retiring employees, asset returns, interest rates and changes in pension
laws. Changes to these and other factors, such as liquidity
requirements, that can significantly increase our funding requirements could
have a material adverse effect on our financial condition.
Our
initiatives to increase revenues may not be adequate or successful. As we seek to
achieve and sustain profitability, we must continue to take steps to generate
additional revenues. These measures include charging separately for
services that previously had been included within the price of a ticket,
charging for other goods and services and increasing our existing
fees. We intend to introduce additional ancillary revenue initiatives
in the future. We can offer no assurance that these new measures or
any future initiatives will be successful in increasing our
revenues. Additionally, the implementation of some of these
initiatives could create technical and logistical challenges for
us. Any new and increased fees or charges might also reduce the
demand for travel on our airline or across the airline industry in general,
particularly in light of current weakened global economic
conditions.
Delays in
scheduled aircraft deliveries continue to adversely affect our ability to expand
our international capacity. Because all of
our widebody aircraft are already fully utilized, we will need to acquire
additional widebody aircraft to grow internationally when the level of demand
for international air travel supports such growth. We have
contractual commitments to purchase the long-range widebody aircraft that we
currently believe are necessary for our international growth, but significant
delays in their deliveries have occurred. We have been, and continue
to be, adversely impacted by those delays. If significant additional
delays in the deliveries of these new aircraft occur, we will only be able to
accomplish international growth by making alternate arrangements to acquire the
necessary long-range aircraft, if available and possibly on less financially
favorable terms, including higher ownership and operating costs.
Labor
disruptions could adversely affect our operations. Although we enjoy
generally good relations with our employees, we can provide no assurance that we
will be able to maintain these good relations in the future or avoid labor
disruptions, including a strike. The amendable dates for many of our
collective bargaining agreements have passed, including the agreements with the
unions representing our pilots, flight attendants and mechanics. We
are currently in talks with representatives of the applicable
unions. We cannot predict the outcome of these negotiations, and any
labor disruption, including a strike, that results in a prolonged significant
reduction in flights would have a material adverse effect on our results of
operations and financial condition.
Our labor
costs may not be competitive. Labor costs
constitute a significant percentage of our total operating costs. All
of the major hub-and-spoke carriers with whom we compete have achieved
significant labor cost reductions, whether in or out of
bankruptcy. Our wages, salaries and benefits cost per available seat
mile, measured on a stage length adjusted basis, is higher than that of many of
our competitors. These higher labor costs may adversely affect our
ability to achieve and sustain profitability while competing with other airlines
that have achieved lower relative labor costs. Additionally, we
cannot predict the outcome of our ongoing negotiations with our unionized
workgroups, although significant increases in the pay and benefits resulting
from new collective bargaining agreements could have a material adverse effect
on us.
If we
experience problems with certain of our third party regional operators, our
operations could be materially adversely affected. All of our
regional operations are conducted by third party operators on our behalf,
primarily under capacity purchase agreements. Due to our reliance on
third parties to provide these essential services, we are subject to the risks
of disruptions to their operations, which may result from many of the same risk
factors disclosed in this report. In addition, we may also experience
disruption to our regional operations if we terminate the capacity purchase
agreement with one or more of our current operators and transition the services
to another provider. As our regional segment provides revenue to us
directly and indirectly (by providing flow traffic to our hubs), a significant
disruption to our regional operations could have a material adverse effect on
our results of operations and financial condition.
Interruptions
or disruptions in service at one of our hub airports could have a material
adverse effect on our operations. We operate
principally through our hub operations at New York Liberty, Houston Bush,
Cleveland Hopkins and Guam. Substantially all of our flights either
originate from or fly into one of these locations, contributing to a large
amount of "origin and destination" traffic. A significant
interruption or disruption in service at one of our hubs resulting from air
traffic control delays, weather conditions, growth constraints, relations with
third party service providers, failure of computer systems, labor relations,
fuel supplies, terrorist activities, security breaches or otherwise could result
in the cancellation or delay of a significant portion of our flights and, as a
result, our business could be materially adversely affected.
We could
experience adverse publicity and declining revenues as a result of an accident
involving our aircraft or the aircraft of our regional carriers. Any accident
involving an aircraft that we operate or an aircraft that is operated under our
brand by one of our regional carriers could have a material adverse effect on us
if such accident created a public perception that our operations or those of our
regional carriers are less safe or reliable than other airlines, resulting in
passengers being reluctant to fly on us or our regional carriers. In
addition, any such accident could expose us to significant tort
liability. Although we currently maintain liability insurance in
amounts and of the type we believe to be consistent with industry practice to
cover damages arising from any such accidents, and our regional carriers carry
similar insurance and generally indemnify us for their operations on our behalf,
if our liability exceeds the applicable policy limits or the ability of a
carrier to indemnify us, we could incur substantial losses from an
accident.
A
significant failure or disruption of the computer systems on which we rely could
adversely affect our business. We depend heavily
on computer systems and technology to operate our business, such as flight
operations systems, communications systems, airport systems and reservations
systems (including continental.com and third party global distribution systems).
These systems could suffer substantial or repeated disruptions due to events
beyond our control, including natural disasters, power failures, terrorist
attacks, equipment or software failures, computer viruses or
hackers. Any such disruptions could materially impair our flight and
airport operations and our ability to market our services, and could result in
increased costs, lost revenue and the loss or compromise of important
data. Although we have taken measures in an effort to reduce the
adverse effects of certain potential failures or disruptions, if these steps are
not adequate to prevent or remedy the risks, our business may be materially
adversely affected.
Our net
operating loss carryforwards may be limited. At December 31,
2009, we had estimated net operating loss carryforwards ("NOLs") of $3.9 billion
for federal income tax purposes that expire beginning in 2020 and continuing
through 2029. Section 382 of the Internal Revenue Code ("Section
382") imposes limitations on a corporation's ability to utilize NOLs if it
experiences an "ownership change." In general terms, an ownership
change may result from transactions increasing the ownership of certain
stockholders in the stock of a corporation by more than 50 percentage points
over a three-year period.
In the event of an ownership change,
utilization of our NOLs would be subject to an annual limitation under Section
382 determined by multiplying the value of our stock at the time of the
ownership change by the applicable long-term tax-exempt rate (which is 4.16% for
December 2009). Any unused annual limitation may be carried over to
later years.
For purposes of Section 382, increases
in share holdings by, or that result in a person becoming, a holder of 5% or
more of the outstanding shares of our common stock are aggregated for purposes
of determining whether an "ownership change" has occurred. Because
our common stock has been trading at low market prices, the cost of acquiring a
sufficient number of shares of our common stock to become a holder of 5% or more
of the outstanding shares, and the cost of acquiring additional shares by
existing holders, has decreased significantly from historical levels, increasing
the possibility that we could experience an "ownership
change." Although we cannot currently predict whether or when such an
"ownership change" may occur, an ownership change as of December 31, 2009 would
have resulted in a $103 million limit to our annual NOL utilization, before
consideration of any built-in gains. The imposition of this
limitation on our ability to use our NOLs to offset future taxable income could
cause us to pay U.S. federal income taxes earlier than if such limitation were
not in effect and could cause such NOLs to expire unused, reducing or
eliminating the benefit of such NOLs. In addition, depending on the
market value of our common stock at the time of any such ownership change, a
limitation on our ability to use our NOLs could require us to recognize a
significant non-cash tax charge, the amount of which we cannot estimate at this
time.
The
global recession could continue to result in less demand for air
travel. The airline
industry is highly cyclical, and the level of demand for air travel is
correlated to the strength of the U.S. and global economies. The
severe economic recession in the U.S. and global economies had a substantial
negative impact on the demand for air carrier services beginning in the fourth
quarter of 2008. This decline in demand has disproportionately
reduced the volume of high-yield traffic in the premium cabins on domestic and
international flights, as many business travelers either curtailed their travel
or purchased lower yield economy tickets. The diminished volume of
high-yield traffic has significantly reduced airline revenues since the fourth
quarter of 2008.
We cannot predict how quickly or fully
demand for air travel will recover. Stagnant or worsening global
economic conditions that continue to contribute to the loss of business and
leisure traffic, particularly the loss of high-yield international traffic in
our first class and BusinessFirst cabins, could have a material adverse effect
on our results of operations and financial condition.
The
airline industry is highly competitive and susceptible to price
discounting. The U.S. airline industry is characterized by
substantial price competition, especially in domestic
markets. Carriers use discount fares to stimulate traffic during
periods of slack demand, or when they begin service to new cities or have excess
capacity, to generate cash flow and to establish, increase or preserve market
share. Some of our competitors have greater financial resources
(including a larger percentage or more favorable fuel hedges against price
increases) and/or lower cost structures than we do, in some cases as the result
of bankruptcies and/or mergers. In recent years, the domestic market
share held by low-cost carriers has increased significantly and is expected to
continue to increase. The increased market presence of low-cost
carriers, which engage in substantial price discounting, has diminished the
ability of the network carriers to maintain sufficient fare levels in domestic
markets to achieve sustained profitability. We cannot predict whether
or for how long these trends will continue.
In addition to price competition,
airlines also compete for market share by increasing the size of their route
system and the number of markets they serve. Several of our domestic
competitors have increased their international capacity, including service to
some destinations that we currently serve. Additionally, the "open
skies" agreement between the United States and the European Union, which became
effective on March 30, 2008 is resulting in increased competition from European
and U.S. airlines in these international markets, and may give rise to
additional consolidation or better integration opportunities among European
carriers. The “open skies” agreement between the United States and
Japan announced in December 2009 is also likely to increase competition in
affected markets if it becomes effective. The increased competition
in these international markets, particularly to the extent our competitors
engage in price discounting, may have a material adverse effect on our results
of operations, financial condition or liquidity.
Expanded
government regulation could further increase our operating costs and restrict
our ability to conduct our business. Airlines are
subject to extensive regulatory and legal compliance requirements that result in
significant costs and can adversely affect us. Additional laws,
regulations, airport rates and charges and growth constraints have been proposed
from time to time that could significantly increase the cost of airline
operations or reduce revenue. In addition, to address concerns about
airport congestion, the FAA has designated certain airports, including New York
Liberty, Kennedy and LaGuardia as “high density traffic airports,” and has
imposed operating restrictions at these three airports, which may include
capacity reductions. In addition, the FAA has designated New York
Liberty and Kennedy as Level 3 Coordinated Airports under the International Air
Transport Association Worldwide Scheduling Guidelines, which requires us to
participate in seasonal FAA procedures for capacity allocation and schedule
coordination for New York Liberty and to have slots to operate at that
airport. Additional restrictions on airline routes and takeoff and
landing slots may be proposed that could affect rights of ownership and
transfer. Although we do not believe that these current operating
restrictions will have a material adverse effect on our operations at New York
Liberty, we cannot predict the impact of future capacity constraints or
allocations or other restrictions on our operations that might be imposed by the
FAA, Congress or other regulators, which could have a material adverse effect on
us.
The FAA from time to time issues
directives and other regulations relating to the maintenance and operation of
aircraft that require significant expenditures or operational restrictions, and
which could include the temporary grounding of an entire aircraft type if the
FAA identifies design, manufacturing, maintenance or other issues requiring
immediate corrective action. FAA requirements cover, among other
things, retirement of older aircraft, security measures, collision avoidance
systems, airborne windshear avoidance systems, noise abatement and other
environmental concerns, aircraft operation and safety and increased inspections
and maintenance procedures to be conducted on older aircraft. These
FAA directives or requirements could have a material adverse effect on
us.
Many aspects of airlines' operations
also are subject to increasingly stringent federal, state, local and foreign
laws protecting the environment, including the imposition of additional taxes on
airlines or their passengers. Future regulatory developments in the
United States and abroad could adversely affect operations and increase
operating costs in the airline industry. The European Union has
issued a directive to member states to include aviation in its Greenhouse Gas
ETS, which requires us to begin monitoring our emissions of carbon dioxide
effective January 1, 2010 and have emissions allowances equal to the amount of
our carbon dioxide emissions to operate flights to and from member states of the
European Union in January 2012 and thereafter, including flights between the
United States and the European Union. On December 16, 2009, we joined
a lawsuit in the United Kingdom with the Air Transport Association of America,
American and United to challenge the extension of the European Union’s ETS to
include aviation and the imposition of its requirements on us. In
addition, non-EU governments are expected to challenge the application of the EU
ETS to their airlines; however, we may be forced to comply with the EU ETS
requirements during the pendency of a legal challenge. We may have to
purchase emissions allowances through the EU ETS to cover EU flights that exceed
our free allowances, which could result in substantial costs for
us.
Other regulatory actions that may be
taken in the future by the U.S. government, other foreign governments or the
International Civil Aviation Organization to address concerns about climate
change and air emissions from the aviation sector are unknown at this
time. Climate change legislation has been introduced in the U.S.
Congress, including a proposal to require transportation fuel producers and
importers to acquire allowances sufficient to offset the emissions resulting
from combustion of their fuels. We cannot predict, however, if any
such legislation will pass the Congress or, if passed and enacted into law, how
it would specifically apply to the aviation industry. In addition,
effective January 14, 2010, the Administrator of EPA found that current and
projected concentrations of greenhouse gases in the atmosphere threaten the
public health and welfare. Although legal challenges and legislative
proposals are expected that may invalidate this endangerment finding and the
EPA’s assertion of authority under the Clean Air Act, the finding could result
in EPA regulation of commercial aircraft emissions if EPA finds, as expected,
that such emissions contribute to greenhouse gas pollution.
The impact to
us and our industry from any additional legislation or regulations addressing
climate change is likely to be adverse and could be significant, particularly if
regulators were to conclude that emissions from commercial aircraft cause
significant harm to the upper atmosphere or have a greater impact on climate
change than other industries. Potential actions may include the
imposition of requirements on airlines or transportation fuel producers and
importers to purchase emission offsets or credits, which could require
participation in emissions allowance trading (such as required in the European
Union) and increase the cost of carbon-based fuels (such as jet fuel),
substantial taxes on emissions and growth restrictions on airline operations,
among other potential regulatory actions.
Further, the ability of U.S. carriers
to operate international routes is subject to change because the applicable
arrangements between the United States and foreign governments may be amended
from time to time, or because appropriate slots or facilities are not made
available. We cannot provide assurance that laws or regulations
enacted in the future will not have a significant adverse effect on
us.
Additional
terrorist attacks or international hostilities may further adversely affect our
financial condition, results of operations and liquidity. The
terrorist attacks of September 11, 2001 involving commercial aircraft severely
and adversely affected our financial condition, results of operations and
liquidity and the airline industry generally. Airlines continue to be
a target of terrorist attacks. Additional terrorist attacks, even if
not made directly on the airline industry, or the fear of such attacks
(including elevated national threat warnings or selective cancellation or
redirection of flights due to terror threats such as the August 2006 terrorist
plot targeting multiple airlines, including us), could negatively affect us and
the airline industry. The potential negative effects include
increased security, insurance and other costs for us and lost revenue from
increased ticket refunds and decreased ticket sales. Our financial
resources might not be sufficient to absorb the adverse effects of any further
terrorist attacks or other international hostilities involving the United
States.
Additional
security requirements may increase our costs and decrease our
traffic. Since September
11, 2001, the Department of Homeland Security ("DHS") and TSA have implemented
numerous security measures that affect airline operations and costs, and they
are likely to implement additional measures in the future. Most
recently, DHS has begun to implement the US-VISIT program (a program of
fingerprinting and photographing foreign visa holders), announced that it will
implement greater use of passenger data for evaluating security measures to be
taken with respect to individual passengers, expanded the use of federal air
marshals on our flights (who do not pay for their seats and thus displace
revenue passengers and cause increased customer complaints from displaced
passengers), begun investigating a requirement to install aircraft security
systems (such as devices on commercial aircraft as countermeasures against
portable surface to air missiles) and expanded cargo and baggage
screening. DHS also has required certain flights to be cancelled on
short notice for security reasons, and has required certain airports to remain
at higher security levels than other locations. In addition, foreign
governments also have begun to institute additional security measures at foreign
airports we serve, out of their own security concerns or in response to security
measures imposed by the United States.
Moreover, the TSA has imposed measures
affecting the contents of baggage that may be carried on an
aircraft. The TSA and other security regulators could impose other
measures as necessary to respond to security threats that may arise in the
future.
A large portion of the costs of these
security measures is borne by the airlines and their passengers, and we believe
that these and other security measures have the effect of decreasing the demand
for air travel and the overall attractiveness of air transportation as compared
to other modes of transportation. Additional security measures
required by the U.S. and foreign governments in the future, such as further
expanded cargo screening, might increase our costs or decrease the demand for
air travel, adversely affecting our financial results.
The
airline industry is heavily taxed. The airline
industry is subject to extensive government fees and taxation that negatively
impact our revenue. The U.S. airline industry is one of the most
heavily taxed of all industries. These fees and taxes have grown
significantly in the past decade for domestic flights, and various U.S. fees and
taxes also are assessed on international flights. In addition, the
governments of foreign countries in which we operate impose on U.S. airlines,
including us, various fees and taxes, and these assessments have been increasing
in number and amount in recent years. Certain of these fees and taxes
must be included in the fares we advertise or quote to our
customers. Due to the competitive revenue environment, many increases
in these fees and taxes have been absorbed by the airline industry rather than
being passed on to the passenger. Further increases in fees and taxes
may reduce demand for air travel and thus our revenues.
Airlines
may continue to participate in industry consolidation or alliances, which could
have a material adverse effect on us. We are facing
stronger competition from carriers that have participated in industry
consolidation and from expanded airline alliances and joint
ventures.
Since its deregulation in 1978, the
U.S. airline industry has undergone substantial consolidation and additional
consolidation may occur in light of the recently completed merger of Delta and
Northwest, which changed the competitive environment for us and the entire
airline industry. As a result of the announcement of the
Delta/Northwest merger agreement, we conducted a comprehensive review of our
strategic alternatives and announced in April 2008 that we had determined that
the best course for us was not to merge with another airline at such
time. Through consolidation, carriers have the opportunity to
significantly expand the reach of their networks, which is of primary importance
to business travelers, and to achieve cost reductions by eliminating redundancy
in their networks and their management structures.
Through participation in airline
alliances and/or joint ventures, carriers granted anti-trust immunity by the
appropriate regulatory authorities are able to coordinate their routes, pool
their revenues and costs and enjoy other mutual benefits, such as frequent flier
program reciprocity, achieving many of the benefits of
consolidation. For example, in 2009, Air France-KLM, Delta and
Northwest launched a new trans-Atlantic joint venture among those airlines that
involves coordination of routes, fares, schedules and other matters among those
airlines, Alitalia and CSA Czech Airlines. American, British Airways
and Iberia have received tentative DOT approval of their application for
anti-trust immunity for a similar trans-Atlantic joint venture, which would also
involve many of the same benefits. Delta recently attempted to induce
Japan Airlines to leave its current alliance and join Delta’s alliance, although
it was unsuccessful.
There may be additional consolidation
or changes in airline alliances and/or joint ventures in the future, any of
which could result in one or more airlines or alliances with more extensive
route networks and/or lower costs structures than currently exist, changing the
competitive landscape for the airline industry and having a material adverse
effect on us.
Insurance
costs could increase materially or key coverage could become
unavailable. The September 11,
2001 terrorist attacks led to a significant increase in insurance premiums and a
decrease in the insurance coverage available to commercial
airlines. Furthermore, our ability to continue to obtain certain
types of insurance remains uncertain. Since the terrorist attacks,
the U.S. government has provided war risk (terrorism) insurance to U.S.
commercial airlines to cover losses. War risk insurance in amounts
necessary for our operations, and at premiums that are not excessive, is not
currently available in the commercial insurance market. If the
government discontinues this coverage in whole or in part, we may be able to
obtain comparable coverage in the commercial insurance market only, if it is
available at all, for substantially higher premiums and on more restrictive
terms. If we are unable to obtain adequate war risk insurance, our
business could be materially and adversely affected.
Public
health threats affecting travel behavior could have a material adverse effect on
the industry. Public health threats, such as the H1N1 flu
virus, the bird flu, Severe Acute Respiratory Syndrome (SARs) and other highly
communicable diseases, outbreaks of which have occurred in various parts of the
world in which we operate, could adversely impact our operations and the
worldwide demand for air travel. Travel restrictions or operational
problems, such as quarantining of personnel or inability to access our
facilities or aircraft in any part of the world in which we operate, or any
reduction in the demand for air travel caused by public health threats in the
future, may materially adversely affect our operations and financial
results.
Our
results of operations fluctuate due to seasonality and other factors associated
with the airline industry. Due to greater
demand for air travel during the summer months, revenue in the airline industry
in the second and third quarters of the year is generally stronger than revenue
in the first and fourth quarters of the year for most U.S. air
carriers. Our results of operations generally reflect this
seasonality, but also have been impacted by numerous other factors that are not
necessarily seasonal, including excise and similar taxes, weather and air
traffic control delays, as well as the other factors discussed
above. As a result, our operating results for a quarterly period are
not necessarily indicative of operating results for an entire year, and
historical operating results are not necessarily indicative of future operating
results.
Item
1B. Unresolved Staff Comments.
None.
As of December 31, 2009, our operating
fleet consisted of 337 mainline jets and 264 regional aircraft. The
337 mainline jets are operated exclusively by us, while the 264 regional
aircraft are operated on our behalf by other operators under capacity purchase
agreements.
We own or lease 274 regional
jets. Of these, 212 are leased or subleased to ExpressJet and
operated on our behalf under a capacity purchase agreement with ExpressJet, 37
are subleased to other operators but are not operated on our behalf and 25 are
temporarily grounded. Additionally, our regional operating fleet
includes 52 regional jet and turboprop aircraft owned or leased by third parties
that are operated on our behalf by other operators under capacity purchase
agreements.
The following table summarizes our
operating fleet (aircraft operated by us and by others on our behalf) as of
December 31, 2009:
|
Seats
in
|
Average
|
|||||||||||
|
Third-Party
|
Standard
|
Age
|
||||||||||
|
Aircraft
Type
|
Total
|
Owned
|
Leased
|
Aircraft
|
Configuration
|
(In
Years)
|
||||||
|
Mainline
(a):
|
||||||||||||
|
777-200ER
|
20
|
8
|
12
|
-
|
285
|
9.6
|
||||||
|
767-400ER
|
16
|
14
|
2
|
-
|
235
|
8.3
|
||||||
|
767-200ER
|
10
|
9
|
1
|
-
|
174
|
8.8
|
||||||
|
757-300
|
18
|
9
|
9
|
-
|
216
|
7.3
|
||||||
|
757-200
|
41
|
15
|
26
|
-
|
175
|
12.9
|
||||||
|
737-900ER
|
30
|
30
|
-
|
-
|
173
|
1.2
|
||||||
|
737-900
|
12
|
8
|
4
|
-
|
173
|
8.3
|
||||||
|
737-800
|
117
|
44
|
73
|
-
|
160
|
7.8
|
||||||
|
737-700
|
36
|
12
|
24
|
-
|
124
|
11.0
|
||||||
|
737-500
|
34
|
-
|
34
|
-
|
114
|
13.7
|
||||||
|
737-300
|
3
|
3
|
-
|
-
|
124
|
23.6
|
||||||
|
Total
mainline
|
337
|
152
|
185
|
-
|
9.0
|
|||||||
|
Regional
(b):
|
||||||||||||
|
ERJ-145XR
|
89
|
-
|
89
|
-
|
50
|
|||||||
|
ERJ-145
|
138
|
18
|
105
|
15
|
(c)
|
50
|
||||||
|
CRJ200LR
|
7
|
-
|
-
|
7
|
(c)
|
50
|
||||||
|
Q400
|
14
|
-
|
-
|
14
|
(d)
|
74
|
||||||
|
Q200
|
16
|
-
|
-
|
16
|
(e)
|
37
|
||||||
|
Total
regional
|
264
|
18
|
194
|
52
|
||||||||
|
Total
|
601
|
170
|
379
|
52
|
||||||||
|
(a)
|
Excludes
seven grounded Boeing 737-500 aircraft (four owned and three leased) and
ten grounded Boeing 737-300 aircraft (seven owned and three leased) and
two leased 757-300 aircraft delivered but not yet placed into
service.
|
|
(b)
|
Excludes
25 ERJ-135 aircraft that are temporarily grounded and 15 ERJ145XR
aircraft, 17 ERJ-145 aircraft and five ERJ-135 aircraft that are subleased
to other operators, but are not operated on our behalf.
|
|
(c)
|
Operated
by Chautauqua under a capacity purchase agreement.
|
|
(d)
|
Operated
by Colgan under a capacity purchase agreement.
|
|
(e)
|
Operated
by CommutAir under a capacity purchase
agreement.
|
Most of the aircraft and engines we own
are subject to mortgages.
Mainline Fleet
Activity. During 2009, we placed into service 13 new Boeing
737-900ER aircraft, one new Boeing 737-800 aircraft and one leased Boeing
757-300 aircraft. We removed 20 Boeing 737-300 aircraft and eight
Boeing 737-500 aircraft from service during 2009. We removed three
additional Boeing 737-500 aircraft and one Boeing 737-300 aircraft from service
in January 2010. By March 2010, we expect to remove our two remaining
Boeing 737-300 aircraft from service.
At December 31, 2009, we had four owned
and three leased Boeing 737-500 aircraft that were grounded. We had
also grounded seven owned and three leased Boeing 737-300
aircraft. The three leased Boeing 737-300 aircraft were returned to
the lessor in January 2010 and the leases on the three Boeing 737-500 aircraft
will expire during the first half of 2012.
During 2009, we sold eight 737-500
aircraft to foreign buyers. We sold one grounded Boeing 737-500
aircraft to a foreign buyer in February 2010 and have agreements to sell the
three remaining grounded Boeing 737-500 aircraft to foreign
buyers. These sales are subject to customary closing conditions, some
of which are outside of our control, and we cannot give any assurances that the
buyers of these aircraft will be able to obtain financing for these
transactions, that there will not be delays in deliveries or that the closing of
these transactions will occur. We hold cash deposits that secure the
buyers’ obligations under the aircraft sale contracts and we are entitled to
damages under the aircraft sale contract if the buyers do not take delivery of
the aircraft when required.
We have also agreed to lease four
Boeing 757-300 aircraft from Boeing Capital Corporation. As of
December 31, 2009, three of these aircraft had been delivered, one of which had
been placed into service. We expect all of these aircraft to be
placed into service during 2010.
Regional Fleet
Activity. In January 2009, we amended our capacity purchase
agreement with Colgan to increase by 15 the number of Q400 aircraft to be
operated by Colgan on our behalf. We expect that Colgan will begin
operating these 15 additional aircraft as they are delivered to Colgan,
beginning in the third quarter of 2010 through the second quarter of
2011. Each aircraft is scheduled to be covered by the agreement for
ten years following the date the aircraft is delivered into
service. Colgan supplies all of the aircraft that it operates under
the agreement.
In July 2009, we entered into
agreements to sublease five temporarily grounded ERJ-135 aircraft to
Chautauqua. These aircraft will not be operated for
us. The subleases have terms of five years, but may be cancelled by
the lessee under certain conditions after an initial term of two
years. The remaining 25 ERJ-135 aircraft continue to be temporarily
grounded. The leases on the 30 ERJ-135 aircraft expire in 2016
through 2018. We are evaluating our options regarding these 25
aircraft, including permanently grounding them.
In December 2009, we agreed with
ExpressJet to amend our capacity purchase agreement to permit ExpressJet to fly
eight ERJ-145 aircraft for another carrier under a capacity purchase
agreement. These eight aircraft are subleased from us and were
previously flown for us under our capacity purchase agreement. As of
December 31, 2009, two of these aircraft had been removed from service for
us. The remaining six aircraft will be removed from service for us
during the first half of 2010. The subleases have an average initial
term of two and one-half years.
Firm Order and Option
Aircraft. As of December 31, 2009 we had firm commitments to
purchase 84 new aircraft (55 Boeing 737 aircraft, four Boeing 777 aircraft and
25 Boeing 787 aircraft) scheduled for delivery from 2010 through 2016, with an
estimated aggregate cost of $5.1 billion including related spare
engines. In addition to our firm order aircraft, we had options to
purchase a total of 98 additional Boeing aircraft as of December 31,
2009.
We are currently scheduled to take
delivery of two Boeing 777 aircraft and 12 Boeing 737 aircraft in
2010. Due to issues arising out of the governmental certification
process used by the manufacturer of the coach seats on the Boeing 777 aircraft
and the coach and first class seats on the Boeing 737 aircraft scheduled for
delivery this year, we expect a delay in delivery of between one and six months
for most of the aircraft scheduled for delivery in 2010. This seat
manufacturer also provided the seats installed on most of the Boeing aircraft
currently in our fleet. We do not believe these issues will have a
material impact on our ability to continue to operate any of the aircraft in our
fleet.
Facilities
Our principal facilities are located at
New York Liberty, Houston Bush, Cleveland Hopkins and A.B. Won Pat International
Airport in Guam. Substantially all of these facilities are leased on
a net-rental basis, as we are responsible for maintenance, insurance and other
facility-related expenses and services. At each hub location, we
generally have multiple leases covering different types of facilities, and those
leases have expiration dates ranging from 2010 to 2030.
At each of our three domestic hub
cities and most other locations, our passenger and baggage handling space is
leased directly from the airport authority on varying terms dependent on
prevailing practice at each airport. We also maintain administrative
offices, terminal, catering, cargo and other airport facilities, training
facilities, maintenance facilities and other facilities, in each case as
necessary to support our operations in the cities we serve.
See Item 8. “Financial Statements and
Supplementary Data, Note 19 – Commitments and Contingencies” for a discussion of
certain of our guarantees relating to our principal facilities, as well as our
contingent liability for US Airways’ obligations under a lease agreement
covering the East End Terminal at LaGuardia Airport.
During
the period between 1997 and 2001, we reduced or capped the base commissions that
we paid to domestic travel agents, and in 2002 we eliminated those base
commissions. These actions were similar to those also taken by other air
carriers. We are a defendant, along with several other air carriers,
in two lawsuits brought by travel agencies that purportedly opted out of a prior
class action entitled Sarah Futch Hall d/b/a/
Travel Specialists v. United Air Lines, et al. (U.S.D.C., Eastern
District of North Carolina), filed on June 21, 2000, in which the defendant
airlines prevailed on summary judgment that was upheld on
appeal. These similar suits against Continental and other major
carriers allege violations of antitrust laws in reducing and ultimately
eliminating the base commissions formerly paid to travel agents and seek
unspecified money damages and certain injunctive relief under the Clayton Act
and the Sherman Anti-Trust Act. The pending cases, which currently
involve a total of 90 travel agency plaintiffs, are Tam Travel, Inc. v. Delta
Air Lines, Inc., et al. (U.S.D.C., Northern District of California),
filed on April 9, 2003 and Swope Travel Agency, et al.
v. Orbitz LLC et al. (U.S.D.C., Eastern District
of
Texas), filed on June 5, 2003. By order dated November 10, 2003,
these actions were transferred and consolidated for pretrial purposes by the
Judicial Panel on Multidistrict Litigation to the Northern District of
Ohio. On October 29, 2007, the judge for the consolidated lawsuit
dismissed the case for failure to meet the heightened pleading standards
established earlier in 2007 by the U.S. Supreme Court’s decision in Bell Atlantic Corp. v.
Twombly. On October 2, 2009, the U.S. Court of Appeals for the
Sixth Circuit affirmed the trial court’s dismissal of the case, and on December
18, 2009, the plaintiffs’ request for rehearing by the Sixth Circuit en banc was
denied. The plaintiffs now have the opportunity to appeal to the U.S.
Supreme Court. The plaintiffs in the Swope lawsuit, encompassing 43
travel agencies, have also alleged that certain claims raised in their lawsuit
were not, in fact, dismissed. The trial court has not yet ruled on
that issue. In the consolidated lawsuit, we believe the plaintiffs’
claims are without merit, and we intend to defend vigorously any
appeal. Nevertheless, a final adverse court decision awarding
substantial money damages could have a material adverse effect on our results of
operations, financial condition or liquidity.
Environmental
Proceedings
Under the federal Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
(commonly known as “Superfund”) and similar state environment cleanup laws,
generators of waste disposed of at designated sites may, under certain
circumstances, be subject to joint and several liability for investigation and
remediation costs. We (including our predecessors) have been
identified as a potentially responsible party at one federal site and one state
site that are undergoing or have undergone investigation or
remediation. Although applicable case law is evolving and some cases
may be interpreted to the contrary, we believe that some or all of any liability
claims associated with these sites were discharged by confirmation of our 1993
Plan of Reorganization, principally because our exposure is based on alleged
offsite disposal known as of the date of confirmation. Even if any
such claims were not discharged, on the basis of currently available
information, we believe that our potential liability for our allocable share of
the cost to remedy each site (if and to the extent we are found to be liable) is
not, in the aggregate, material; however, we have not been designated a “de
minimis” contributor at either site.
In 2001, the California Regional Water
Quality Control Board (“CRWQCB”) mandated a field study of the area surrounding
our aircraft maintenance hangar in Los Angeles. The study was
completed in September 2001 and identified jet fuel and solvent contamination on
and adjacent to this site. In April 2005, we began environmental
remediation of jet fuel contamination surrounding our aircraft maintenance
hangar pursuant to a workplan submitted to (and approved by) the CRWQCB and our
landlord, the Los Angeles World Airports. Additionally, we could be
responsible for environmental remediation costs primarily related to solvent
contamination on and near this site.
Although
we are not currently subject to any environmental cleanup orders imposed by
regulatory authorities, we are undertaking voluntary investigation or
remediation at certain properties in consultation with such
authorities. The full nature and extent of any contamination at these
properties and the parties responsible for such contamination have not been
determined, but based on currently available information and our current
reserves, we do not believe that any environmental liability associated with
such properties will have a material adverse effect on us.
At December 31, 2009, we had an accrual
for estimated costs of environmental remediation throughout our system of $30
million, based primarily on third-party environmental studies and estimates as
to the extent of the contamination and nature of the required remedial
actions. We have evaluated and recorded this accrual for environmental
remediation costs separately from any related insurance recovery. We did
not have any receivables related to environmental insurance recoveries at
December 31, 2009. Based on currently available information, we
believe that our accrual for potential environmental remediation costs is
adequate, although our accrual could be adjusted in the future due to new
information or changed circumstances. However, we do not expect these
items to materially affect our results of operations, financial condition or
liquidity.
We and/or certain of our subsidiaries
are defendants in various other pending lawsuits and proceedings and are subject
to various other claims arising in the normal course of our business, many of
which are covered in whole or in part by insurance. Although the
outcome of these lawsuits and proceedings (including the probable loss we might
experience as a result of an adverse outcome) cannot be predicted with certainty
at this time, we believe, after consulting with outside counsel, that the
ultimate disposition of such suits will not have a material adverse effect on
us.
Not
applicable.
PART
II
Item
5.
Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.
Our Class B common stock, which we
refer to as our common stock, trades on the NYSE under the symbol
“CAL.” The table below shows the high and low sales prices for our
common stock as reported in the consolidated transaction reporting system during
2009 and 2008.
|
Class
B
Common
Stock
|
||||||
|
High
|
Low
|
|||||
|
2009
|
Fourth
Quarter
|
$18.75
|
$10.94
|
|||
|
Third
Quarter
|
$17.55
|
$8.76
|
||||
|
Second
Quarter
|
$15.76
|
$7.86
|
||||
|
First
Quarter
|
$21.83
|
$6.37
|
||||
|
2008
|
Fourth
Quarter
|
$20.89
|
$9.49
|
|||
|
Third
Quarter
|
$21.40
|
$5.91
|
||||
|
Second
Quarter
|
$23.42
|
$9.70
|
||||
|
First
Quarter
|
$31.25
|
$17.19
|
||||
As of February 16, 2010, there were
approximately 18,890 holders of record of our common stock. We paid
no cash dividends on our common stock during 2009 or 2008 and have no current
intention of doing so.
Our certificate of incorporation
provides that no shares of capital stock may be voted by or at the direction of
persons who are not U.S. citizens unless the shares are registered on a separate
stock record. Our bylaws further provide that no shares will be
registered on the separate stock record if the amount so registered would exceed
U.S. foreign ownership restrictions. United States law currently limits the
voting power in us (and other U.S. airlines) of persons who are not citizens of
the United States to 25%.
See Item 12. “Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder Matters” for
information regarding our equity compensation plans as of December 31,
2009.
None.
The following financial information for
the five years ended December 31, 2009 has been derived from our consolidated
financial statements. This information should be read in conjunction
with our consolidated financial statements and note thereto included in Item 8.
“Financial Statements and Supplementary Data” of this report.
|
Statement
of Operations Data (in millions except per
share data):
|
|||||
|
Year
Ended December 31,
|
|||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
|
|
Operating
revenue
|
$12,586
|
$15,241
|
$14,232
|
$13,128
|
$11,208
|
|
Operating
expenses
|
12,732
|
15,555
|
13,545
|
12,660
|
11,247
|
|
Operating
income (loss)
|
(146)
|
(314)
|
687
|
468
|
(39)
|
|
Income
(loss) before cumulative effect of change
in
accounting principle
|
(282)
|
(586)
|
439
|
361
|
(75)
|
|
Cumulative
effect of change in accounting principle
|
-
|
-
|
-
|
(26)
|
-
|
|
Net
income (loss)
|
(282)
|
(586)
|
439
|
335
|
(75)
|
|
Net
income (loss) excluding special items (1)
|
(295)
|
(352)
|
529
|
296
|
(212)
|
|
Earnings
(loss) per share:
|
|||||
|
Basic:
|
|||||
|
Income
(loss) before cumulative effect of
change
in accounting principle
|
$(2.18)
|
$(5.54)
|
$ 4.53
|
$ 4.05
|
$(1.06)
|
|
Cumulative
effect of change in accounting principle
|
-
|
-
|
-
|
(0.29)
|
-
|
|
Net
income (loss)
|
$(2.18)
|
$(5.54)
|
$ 4.53
|
$ 3.76
|
$(1.06)
|
|
Diluted:
|
|||||
|
Income
(loss) before cumulative effect of
change
in accounting principle
|
$(2.18)
|
$(5.54)
|
$ 4.05
|
$ 3.51
|
$(1.08)
|
|
Cumulative
effect of change in accounting principle
|
-
|
-
|
-
|
(0.23)
|
-
|
|
Net
income (loss)
|
$(2.18)
|
$(5.54)
|
$ 4.05
|
$ 3.28
|
$(1.08)
|
|
(1)
|
See
“Reconciliation of GAAP to non-GAAP Financial Measures” in this
Item.
|
|
Balance
Sheet Data (in millions):
|
|||||
|
As
of December 31,
|
|||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
|
|
Unrestricted
cash, cash equivalents and
short-term
investments
|
$2,856
|
$2,643
|
$2,803
|
$2,484
|
$ 1,957
|
|
Total
assets
|
12,781
|
12,686
|
12,105
|
11,308
|
10,529
|
|
Long-term
debt and capital lease obligations
|
5,291
|
5,353
|
4,337
|
4,820
|
5,010
|
|
Stockholders’
equity
|
590
|
123
|
1,569
|
386
|
273
|
Selected
Operating Data
We have two reportable
segments: mainline and regional. The mainline segment
consists of flights to cities using larger jets while the regional segment
currently consists of flights with a capacity of 79 or fewer
seats. As of December 31, 2009, the regional segment was operated by
ExpressJet, Chautauqua, CommutAir and Colgan under capacity purchase
agreements.
|
Year
Ended December 31,
|
|||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
|
|
Mainline
Operations:
|
|||||
|
Passengers
(thousands) (1)
|
45,573
|
48,682
|
50,960
|
48,788
|
44,939
|
|
Revenue
passenger miles (millions) (2)
|
79,824
|
82,806
|
84,309
|
79,192
|
71,261
|
|
Available
seat miles (millions) (3)
|
97,407
|
102,527
|
103,139
|
97,667
|
89,647
|
|
Cargo
ton miles (millions)
|
948
|
1,005
|
1,037
|
1,075
|
1,018
|
|
Passenger
load factor (4):
|
|||||
|
Mainline
|
81.9%
|
80.8%
|
81.7%
|
81.1%
|
79.5%
|
|
Domestic
|
84.8%
|
83.3%
|
83.9%
|
83.6%
|
81.2%
|
|
International
|
79.2%
|
78.2%
|
79.4%
|
78.2%
|
77.5%
|
|
Passenger
revenue per available seat mile (cents)
|
9.49
|
11.10
|
10.47
|
9.96
|
9.32
|
|
Total
revenue per available seat mile (cents)
|
10.92
|
12.51
|
11.65
|
11.17
|
10.46
|
|
Average
yield per revenue passenger mile (cents) (5)
|
11.58
|
13.75
|
12.80
|
12.29
|
11.73
|
|
Average
fare per revenue passenger
|
$204.89
|
$236.26
|
$214.06
|
$201.81
|
$188.67
|
|
Cost
per available seat mile (cents)
|
10.75
|
12.44
|
10.83
|
10.56
|
10.22
|
|
Cost
per available seat mile excluding special
charges
and aircraft fuel and related taxes (cents) (6)
|
7.79
|
7.50
|
7.57
|
7.42
|
7.42
|
|
Average
price per gallon of fuel, including fuel taxes
|
$1.98
|
$3.27
|
$2.18
|
$2.06
|
$1.78
|
|
Fuel
gallons consumed (millions)
|
1,395
|
1,498
|
1,542
|
1,471
|
1,376
|
|
Aircraft
in fleet at end of period (7)
|
337
|
350
|
365
|
366
|
356
|
|
Average
length of aircraft flight (miles)
|
1,550
|
1,494
|
1,450
|
1,431
|
1,388
|
|
Average
daily utilization of each aircraft (hours) (8)
|
10:37
|
11:06
|
11:34
|
11:07
|
10:31
|
|
Regional
Operations:
|
|||||
|
Passengers
(thousands) (1)
|
17,236
|
18,010
|
17,970
|
18,331
|
16,076
|
|
Revenue
passenger miles (millions) (2)
|
9,312
|
9,880
|
9,856
|
10,325
|
8,938
|
|
Available
seat miles (millions) (3)
|
12,147
|
12,984
|
12,599
|
13,251
|
11,973
|
|
Passenger
load factor (4)
|
76.7%
|
76.1%
|
78.2%
|
77.9%
|
74.7%
|
|
Passenger
revenue per available seat mile (cents)
|
15.59
|
18.14
|
17.47
|
17.15
|
15.67
|
|
Average
yield per revenue passenger mile (cents) (5)
|
20.34
|
23.83
|
22.33
|
22.01
|
20.99
|
|
Aircraft
in fleet at end of period (7)
|
264
|
282
|
263
|
282
|
266
|
|
Year
Ended December 31,
|
|||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
|
|
Consolidated
Operations:
|
|||||
|
Passengers
(thousands) (1)
|
62,809
|
66,692
|
68,930
|
67,119
|
61,015
|
|
Revenue
passenger miles (millions) (2)
|
89,136
|
92,686
|
94,165
|
89,517
|
80,199
|
|
Available
seat miles (millions) (3)
|
109,554
|
115,511
|
115,738
|
110,918
|
101,620
|
|
Passenger
load factor (4)
|
81.4%
|
80.2%
|
81.4%
|
80.7%
|
78.9%
|
|
Passenger
revenue per available seat mile (cents)
|
10.17
|
11.89
|
11.23
|
10.82
|
10.07
|
|
Average
yield per revenue passenger mile (cents) (5)
|
12.50
|
14.82
|
13.80
|
13.41
|
12.76
|
|
Cost
per available seat mile (cents)
|
11.62
|
13.47
|
11.70
|
11.41
|
11.07
|
|
Cost
per available seat mile excluding special
charges
and aircraft fuel and related taxes (cents) (6)
|
8.46
|
8.19
|
8.21
|
8.06
|
8.08
|
|
Average
price per gallon of fuel, including fuel taxes
|
$1.97
|
$3.27
|
$2.18
|
$2.06
|
$1.78
|
|
Fuel
gallons consumed (millions)
|
1,681
|
1,809
|
1,853
|
1,791
|
1,671
|
|
(1)
|
The
number of revenue passengers measured by each flight segment
flown.
|
|
(2)
|
The
number of scheduled miles flown by revenue passengers.
|
|
(3)
|
The
number of seats available for passengers multiplied by the number of
scheduled miles those seats are flown.
|
|
(4)
|
Revenue
passenger miles divided by available seat miles.
|
|
(5)
|
The
average passenger revenue received for each revenue passenger mile
flown.
|
|
(6)
|
See
“Reconciliation of GAAP to non-GAAP Financial Measures” in this
Item.
|
|
(7)
|
Excludes
aircraft that were removed from service. Regional aircraft
include aircraft operated by all carriers under capacity purchase
agreements, but exclude any aircraft that were subleased to other
operators but not operated on our behalf.
|
|
(8)
|
The
average number of hours per day that an aircraft flown in revenue service
is operated (from gate departure to gate
arrival).
|
Reconciliation
of GAAP to non-GAAP Financial Measures
Non-GAAP financial measures are
presented because they provide management and investors the ability to measure
and monitor our performance on a consistent basis. Special items
relate to activities that are not central to our ongoing operations or are
unusual in nature. A reconciliation of net income (loss) to the
non-GAAP financial measure of net income (loss) excluding special items for the
year ended December 31 is as follows (in millions):
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||
|
Net
income (loss) excluding special items:
|
||||||||||||
|
Net
income (loss) – GAAP
|
$(282)
|
$(586)
|
$439
|
$335
|
$(75)
|
|||||||
|
Special
charges:
|
||||||||||||
|
Operating
(expense) income:
|
||||||||||||
|
Aircraft-related
charges
|
(89)
|
(40)
|
22
|
18
|
16
|
|||||||
|
Pension
settlement/curtailment charges
|
(29)
|
(52)
|
(31)
|
(59)
|
(83)
|
|||||||
|
Severance
|
(5)
|
(34)
|
-
|
-
|
-
|
|||||||
|
Route
impairment
|
(12)
|
(18)
|
-
|
-
|
-
|
|||||||
|
Other
|
(10)
|
(37)
|
(4)
|
14
|
-
|
|||||||
|
Other
special (expense) income items:
|
||||||||||||
|
Gains
on sale of investments
|
-
|
78
|
37
|
92
|
204
|
|||||||
|
Loss
on fuel hedge contracts with Lehman
Brothers
|
-
|
(125)
|
-
|
-
|
-
|
|||||||
|
Other-than-temporary
impairment of auction
rate
securities
|
-
|
(60)
|
-
|
-
|
-
|
|||||||
|
Fair
value of auction rate securities put right
received
|
-
|
26
|
-
|
-
|
-
|
|||||||
|
Income
tax benefit (expense):
|
||||||||||||
|
Intraperiod
tax allocation
|
158
|
-
|
-
|
-
|
-
|
|||||||
|
NOL
utilization
|
-
|
28
|
(114)
|
-
|
-
|
|||||||
|
Cumulative
effect of change in accounting
principal
|
-
|
-
|
-
|
(26)
|
-
|
|||||||
|
Total
special items – income (expense)
|
13
|
(234)
|
(90)
|
39
|
137
|
|||||||
|
Net
income (loss) excluding special items –
non-GAAP
|
$(295)
|
$(352)
|
$529
|
$296
|
$(212)
|
|||||||
Cost per available seat mile (CASM) is
a common metric used in the airline industry to measure an airline’s cost
structure and efficiency. CASM trends can be distorted by items that
are not central to our ongoing operations or are unusual in
nature. Additionally, both the cost and availability of fuel are
subject to many economic and political factors beyond our
control. CASM excluding special charges and aircraft fuel and related
taxes provides management and investors the ability to measure our cost
performance absent special items and fuel price volatility. A
reconciliation
of GAAP
operating expenses used to determine CASM to the non-GAAP operating expenses
used to determine CASM excluding special charges and aircraft fuel and related
taxes for the year ended December 31 is as follows (in millions, except CASM
amounts):
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||
|
Mainline
cost per available seat mile excluding special
charges
and aircraft fuel and related taxes:
|
|||||||
|
Operating
expenses – GAAP
|
$10,471
|
$12,753
|
$11,171
|
$10,314
|
$ 9,162
|
||
|
Special
charges:
|
|||||||
|
Aircraft-related
charges
|
(70)
|
(40)
|
22
|
18
|
16
|
||
|
Pension
settlement/curtailment charges
|
(29)
|
(52)
|
(31)
|
(59)
|
(83)
|
||
|
Severance
|
(5)
|
(34)
|
-
|
-
|
-
|
||
|
Route
impairment
|
(12)
|
(18)
|
-
|
-
|
-
|
||
|
Other
|
(9)
|
(11)
|
(4)
|
14
|
-
|
||
|
Aircraft
fuel and related taxes
|
(2,755)
|
(4,905)
|
(3,354)
|
(3,034)
|
(2,443)
|
||
|
Operating
expenses excluding above items –
non-GAAP
|
$ 7,591
|
$ 7,693
|
$ 7,804
|
$ 7,253
|
$ 6,652
|
||
|
Available
seat miles – mainline
|
97,407
|
102,527
|
103,139
|
97,667
|
89,647
|
||
|
CASM
– GAAP (cents)
|
10.75
|
12.44
|
10.83
|
10.56
|
10.22
|
||
|
CASM
excluding special charges and aircraft
fuel
and related taxes – non-GAAP (cents)
|
7.79
|
7.50
|
7.57
|
7.42
|
7.42
|
||
|
Consolidated
cost per available seat mile excluding
special
charges and aircraft fuel and related taxes:
|
|||||||
|
Operating
expenses – GAAP
|
$12,732
|
$15,555
|
$13,545
|
$12,660
|
$11,247
|
||
|
Special
charges:
|
|||||||
|
Aircraft-related
charges
|
(89)
|
(40)
|
22
|
18
|
16
|
||
|
Pension
settlement/curtailment charges
|
(29)
|
(52)
|
(31)
|
(59)
|
(83)
|
||
|
Severance
|
(5)
|
(34)
|
-
|
-
|
-
|
||
|
Route
impairment
|
(12)
|
(18)
|
-
|
-
|
-
|
||
|
Other
|
(10)
|
(37)
|
(4)
|
14
|
-
|
||
|
Aircraft
fuel and related taxes
|
(3,317)
|
(5,919)
|
(4,034)
|
(3,697)
|
(2,974)
|
||
|
Operating
expenses excluding above items –
non-GAAP
|
$ 9,270
|
$ 9,455
|
$ 9,498
|
$ 8,936
|
$ 8,206
|
||
|
Available
seat miles – consolidated
|
109,554
|
115,511
|
115,738
|
110,918
|
101,620
|
||
|
CASM
– GAAP (cents)
|
11.62
|
13.47
|
11.70
|
11.41
|
11.07
|
||
|
CASM
excluding special charges and aircraft
fuel
and related taxes – non-GAAP (cents)
|
8.46
|
8.19
|
8.21
|
8.06
|
8.08
|
||
The following discussion contains
forward-looking statements that are not limited to historical facts, but reflect
our current beliefs, expectations or intentions regarding future
events. All forward-looking statements involve risks and
uncertainties that could cause actual results to differ materially from those in
the forward-looking statements. For examples of those risks and
uncertainties, see the cautionary statements contained in Item 1A. “ Risk
Factors – Risk Factors Relating to the Company” and “Risk Factors – Risk Factors
Relating to the Airline Industry.” We undertake no obligation to
publicly update or revise any forward-looking statements to reflect events or
circumstances that may arise after the date of this report, except as required
by applicable law.
Overview
We recorded a net loss of $282 million
for the year ended December 31, 2009, as compared to a net loss of $586 million
for the year ended December 31, 2008. Our net loss in 2009 was
primarily the result of the global recession. Excluding special
items, we recorded a net loss of $295 million for the year ended December 31,
2009, compared to a net loss of $352 million for the year ended December 31,
2008. Net loss excluding special items is significant because it
provides management and investors the ability to measure and monitor our
performance on a consistent basis. Special items relate to activities
that are not central to our ongoing operations or are unusual in
nature. A reconciliation of our net loss to the non-GAAP financial
measure of net loss excluding special items is provided in Item
6. “Selected Financial Data.”
2009
Financial Highlights
|
·
|
Passenger
revenue decreased 18.9% during 2009 as compared to 2008, primarily due to
lower fares and less high-yield business traffic attributable to the
global recession.
|
|
·
|
Operating
income (loss), a key measure of our performance, improved to a loss of
$146 million in 2009 compared to a $314 million loss in 2008, primarily
due to lower fuel prices offset by lower revenue.
|
|
·
|
We
raised approximately $1.7 billion through the issuance of common stock,
enhanced equipment trust certificates and convertible debt and through
other new secured borrowings.
|
|
·
|
Unrestricted
cash, cash equivalents and short-term investments totaled $2.9 billion at
December 31, 2009, as compared to $2.6 billion at December 31,
2008.
|
2009
Operational Highlights
|
·
|
We
joined Star Alliance on October 27, 2009.
|
|
·
|
Consolidated
traffic decreased 3.8% and capacity decreased 5.2% during 2009 as compared
to 2008, resulting in a consolidated load factor of 81.4%, 1.2 points
higher than the prior year consolidated load factor.
|
|
·
|
We
recorded a DOT on-time arrival rate of 78.8% for Continental mainline
flights and a mainline segment completion factor of 99.5% for 2009,
compared to a DOT on-time arrival rate of 74.0% and a mainline segment
completion factor of 98.9% for 2008. We also operated 101 days
without a single mainline flight
cancellation.
|
|
·
|
We
placed into service 13 new Boeing 737-900ER, one new Boeing 737-800 and
one leased Boeing 757-300 aircraft and removed 20 Boeing 737-300 and eight
Boeing 737-500 aircraft from our mainline fleet. The average
age of our mainline fleet was nine years at December 31,
2009.
|
Outlook
The severe global economic recession
significantly diminished the demand for air travel beginning in the fourth
quarter of 2008 and disrupted the global capital markets, resulting in a
difficult financial environment for U.S. network carriers. Although
we have seen some indications that the airline industry may be experiencing the
early stages of a recovery, we cannot predict how quickly or fully demand for
air travel will recover, and continued weakness in such demand would hinder our
ability to achieve and sustain profitability. Moreover, although
access to the capital markets has improved over the past several months, as
evidenced by our recent financing transactions, we cannot give any assurances
that we will be able to obtain additional financing or otherwise access the
capital markets in the future on acceptable terms (or at all). We
must achieve and sustain profitability and/or access the capital markets to meet
our significant long-term debt and capital lease obligations and future
commitments for capital expenditures, including the acquisition of aircraft and
related spare engines.
Economic
Conditions. The severe economic recession in the U.S. and
global economies has had a significant negative impact on the demand for air
carrier services beginning in the fourth quarter of 2008. Passenger
revenue in 2009 for U.S. airlines, as reported by the Air Transport Association
of America, declined 18% compared to 2008. The decline in demand for
air travel in 2008 and 2009 disproportionately reduced the volume of high-yield
traffic, as many business travelers either curtailed their travel or purchased
lower yield economy tickets. Although recent improvements in
corporate bookings and revenue trends suggest that the airline industry may be
experiencing the early stages of a recovery, we cannot predict how quickly or
fully demand for air travel will recover. If global economic
conditions fail to improve or worsen, resulting in continuing demand weakness
and reduced revenues, we may be unable to offset the reduced revenues fully
through further cost and capacity reductions or other measures.
In addition to its effect on demand for
our services, the global economic recession severely disrupted the global
capital markets, resulting in a diminished availability of financing and higher
cost for financing that was obtainable. Although access to the
capital markets has improved over the past several months, as evidenced by our
recent financing transactions, if economic conditions again worsen or these
markets experience further disruptions, we may be unable to obtain financing on
acceptable terms (or at all) to refinance certain maturing debt we would
normally expect to refinance and to satisfy future capital
commitments.
Fuel
Costs. We benefited from significantly lower fuel costs during
2009. Our average consolidated (mainline and regional) jet fuel price
per gallon including related taxes decreased to $1.97 in 2009 from
$3.27 in 2008. If fuel prices rise significantly from their current
levels, we may be unable to raise fares or other fees sufficiently to offset
fully our increased costs.
In an effort to address the risk of
rising fuel prices, we enter into fuel hedging arrangements from time to time,
including collars that minimize the up-front costs. However, a
precipitous decline in crude oil prices, as experienced during the second half
of 2008, may result in significant costs to us in cases where our hedging
arrangements obligate us to make payments to the counterparties to the extent
that the price of crude falls below the applicable agreed-upon
amounts. Our hedge contracts for 2009, which were largely entered
into before oil prices fell, resulted in $0.23 per gallon of additional fuel
expense during 2009.
Based on our expected fuel consumption
in 2010, a one dollar change in the price of a barrel of crude oil would change
our annual fuel expense by approximately $41 million, assuming no changes to the
refining margins and our fuel hedging program. We believe that our
modern, fuel-efficient fleet continues to provide us with a competitive
advantage relative to our peers and a long-term hedge against rising fuel
prices.
Revenue-Generating and Cost
Saving Measures. In response to the significant decline in
revenue, we implemented a number of measures to raise revenues and reduce costs
that are designed to achieve approximately $100 million in annual benefits when
fully implemented in 2010. These measures included the elimination of
certain operational, management and clerical positions across the company during
2009. We also increased or implemented fees for certain services we
provide, including checked baggage.
Going forward, we intend to offer
additional goods and services relating to air travel that will permit customers
to select product attributes that they wish to consume, and pay for, and not
select other product attributes that they do not wish to consume or pay
for. A portion of the goods and services will come from “unbundling”
our current product, while another portion will come from goods and services
that we do not currently offer. The revenue that we derive from these
goods and services, which is generally referred to as ancillary revenue,
typically has higher margins than that of our core product and is an important
element of our strategy to return to profitability and sustain that
profitability.
Additionally, we will continue to
invest in technology designed to assist customers with
self-service. We believe that many of our customers desire more
control over their travel experience, and wish to use tools that will permit
them to do so through all phases of travel, from pre-purchase to
post-flight. We will also invest in technology designed to help us
make better operational decisions and more efficiently assist customers at
airports, while lowering our operating costs.
Capacity. Because
of the adverse economic conditions in 2009, we reduced our consolidated capacity
by 5.2% in 2009 and rescheduled aircraft deliveries. We do not
anticipate returning to significant capacity growth unless the level of demand
for air travel, economic conditions and our financial performance improve
sufficiently to justify such growth. We expect only modest capacity
growth for 2010, with our consolidated capacity increasing between 1.0% and
2.0%. We expect our mainline capacity to increase between 1.5% and
2.5%, with mainline domestic capacity remaining about flat and mainline
international capacity increasing between 4.0% and 5.0%. The
international capacity increase is primarily due to the run-rate of
international routes added in 2009 and the restoration of our schedule to Mexico
following our capacity reductions in 2009 related to the H1N1 flu
virus.
Our future ability to grow our capacity
could be adversely impacted by manufacturer delays in aircraft
deliveries. We currently expect the first of our 25 Boeing 787
aircraft to be delivered in the second half of 2011, approximately two and a
half years late.
Star
Alliance. On October 27, 2009, we joined Star Alliance and
implemented code-sharing and reciprocity of frequent flier programs, elite
customer recognition and airport lounge use with United, Lufthansa, Air Canada
and other Star Alliance members.
On July 10, 2009, the DOT approved our
application to join United and a group of eight other carriers within Star
Alliance that already hold antitrust immunity. This approval enables
us, United and these other immunized Star Alliance carriers to work closely
together to deliver highly competitive international flight schedules, fares and
service and provides competitive balance to antitrust-immunized carriers in
SkyTeam. Additionally, we, United, Lufthansa and Air Canada have
received final DOT approval to establish a trans-Atlantic joint venture to
create a more efficient and comprehensive trans-Atlantic network for our
respective customers, offering those customers more service, scheduling and
pricing options and establishing a framework for similar joint ventures in other
regions of the world. The DOT’s approval of antitrust immunity is
subject to certain conditions and limitations that are not expected to diminish
materially the benefits of our participation in Star Alliance or the
trans-Atlantic joint venture. On December 23, 2009, we, United and
ANA filed an application with the DOT for antitrust immunity to enable the three
carriers to establish a trans-Pacific joint venture, offering similar benefits
to our trans-Pacific customers. We are seeking a modification to our
pilot collective bargaining agreement to permit us to engage in revenue sharing
with a domestic air carrier, which is a component of the proposed joint
ventures.
The full implementation of some of the
arrangements relating to Star Alliance requires the approval of domestic and
foreign regulatory agencies. These agencies may deny us necessary
approvals, delay certain approvals or, in connection with granting any such
approvals, impose requirements, limitations or costs on us or on other Star
Alliance members, or require us or them to divest slots, gates, routes or other
assets. In certain cases, such actions could prevent us from
consummating the transactions contemplated by our alliance
agreements.
Labor
Costs. Our ability to achieve and sustain profitability also
depends on continuing our efforts to implement and maintain a more competitive
cost structure. Approximately 97% of our full-time equivalent
employees represented by unions as of December 31, 2009 are covered by
collective bargaining agreements that are currently amendable or become
amendable in 2010. In addition, on February 12, 2010, the National
Mediation Board informed us that our fleet service employees had voted in favor
of representation by the Teamsters. The election covers approximately
7,600 employees, or 6,340 full-time equivalent ramp, operations and cargo
agents. The collective bargaining agreements with our pilots,
mechanics and certain other work groups became amendable in December 2008 and
those with our flight attendants and CMI mechanics became amendable in December
2009. On July 6, 2009, our flight simulator technicians ratified a
new four-year collective bargaining agreement with us. With respect
to our workgroups with amendable contracts, we have been meeting with
representatives of the applicable unions to negotiate amended collective
bargaining agreements with a goal of reaching agreements that are fair to us and
to our employees, but to date the parties have not reached new
agreements. Negotiations often take considerable time. For
example, we began negotiating with our pilots’ union in February 2007, and we
only received their first economic proposal in December 2009. We
cannot predict the outcome of our ongoing negotiations with our unionized
workgroups, although significant increases in the pay and benefits resulting
from new collective bargaining agreements could have a material adverse effect
on us. Furthermore, there can be no assurance that our generally good
labor relations and high labor productivity can continue.
Results
of Operations
Special
Items. The comparability of our financial results between
years is affected by a number of special items. Our results for each
of the last three years include the following special items (in
millions):
|
Income
(Expense)
|
|||
|
2009
|
2008
|
2007
|
|
|
Operating
(expense) income:
|
|||
|
Aircraft-related
charges (1)
|
$ (89)
|
$ (40)
|
$ 22
|
|
Pension
settlement charges (2)
|
(29)
|
(52)
|
(31)
|
|
Severance
(1)
|
(5)
|
(34)
|
-
|
|
Route
impairment (3)
|
(12)
|
(18)
|
-
|
|
Other
(1)
|
(10)
|
(37)
|
(4)
|
|
Total
special charges classified as operating items
|
(145)
|
(181)
|
(13)
|
|
Nonoperating
(expense) income:
|
|||
|
Gains
on sales of investments (4)
|
-
|
78
|
37
|
|
Loss
on fuel hedge contracts with Lehman Brothers (5)
|
-
|
(125)
|
-
|
|
Other-than-temporary
impairment of auction rate securities (6)
|
-
|
(60)
|
-
|
|
Fair
value of auction rate securities put right received (6)
|
-
|
26
|
-
|
|
Total
special non-operating items
|
-
|
(81)
|
37
|
|
Income
tax benefit (expense):
|
|||
|
Intraperiod
tax allocation (7)
|
158
|
-
|
-
|
|
NOL
utilization (7)
|
-
|
28
|
(114)
|
|
Total
special items – income (expense)
|
$ 13
|
$(234)
|
$ (90)
|
|
(1)
|
See
Note 13 to our consolidated financial statements contained in Item 8 of
this report.
|
|
|
(2)
|
See
Note 11 to our consolidated financial statements contained in Item 8 of
this report.
|
|
|
(3)
|
See
Notes 1 and 2 to our consolidated financial statements contained in Item 8
of this report.
|
|
|
(4)
|
See
Note 14 to our consolidated financial statements contained in Item 8 of
this report.
|
|
|
(5)
|
See
Note 7 to our consolidated financial statements contained in Item 8 of
this report.
|
|
|
(6)
|
See
Note 6 to our consolidated financial statements contained in Item 8 of
this report.
|
|
|
(7)
|
See
Note 12 to our consolidated financial statements contained in Item 8 of
this report.
|
|
Comparison
of Year Ended December 31, 2009 to December 31, 2008
Consolidated Results of
Operations
Significant components of our
consolidated operating results for the year ended December 31 were as follows
(in millions, except percentage changes):
|
Increase
|
%
Increase
|
|||||||
|
2009
|
2008
|
(Decrease)
|
(Decrease)
|
|||||
|
Operating
revenue
|
$12,586
|
$15,241
|
$ (2,655)
|
(17.4)%
|
||||
|
Operating
expenses
|
12,732
|
15,555
|
(2,823)
|
(18.1)%
|
||||
|
Operating
loss
|
(146)
|
(314)
|
(168)
|
(53.5)%
|
||||
|
Nonoperating
income (expense)
|
(293)
|
(381)
|
(88)
|
(23.1)%
|
||||
|
Income
tax benefit
|
157
|
109
|
48
|
44.0
%
|
||||
|
Net
loss
|
$ (282)
|
$ (586)
|
$ (304)
|
(51.9)%
|
||||
Each of these items is discussed in the
following sections.
Operating
Revenue. The table below shows components of operating revenue
for the year ended December 31, 2009 and period to period comparisons for
operating revenue, passenger revenue per available seat mile (“RASM”) and
available seat miles (“ASMs”) by geographic region for our mainline and regional
operations:
|
Revenue
|
%
Increase
(Decrease)
in
2009 vs
2008
|
|||||
|
(in
millions)
|
Revenue
|
RASM
|
ASMs
|
|||
|
Passenger
revenue:
|
||||||
|
Domestic
|
$ 4,581
|
(18.7)%
|
(12.6)%
|
(6.9)%
|
||
|
Trans-Atlantic
|
2,249
|
(24.6)%
|
(17.2)%
|
(8.9)%
|
||
|
Latin
America
|
1,483
|
(15.3)%
|
(16.0)%
|
0.9 %
|
||
|
Pacific
|
931
|
(8.4)%
|
(15.4)%
|
8.5 %
|
||
|
Total
Mainline
|
9,244
|
(18.8)%
|
(14.5)%
|
(5.0)%
|
||
|
Regional
|
1,894
|
(19.6)%
|
(14.0)%
|
(6.4)%
|
||
|
Total
|
11,138
|
(18.9)%
|
(14.5)%
|
(5.2)%
|
||
|
Cargo
|
366
|
(26.4)%
|
||||
|
Other
|
1,082
|
7.4 %
|
||||
|
Operating
revenue
|
$12,586
|
(17.4)%
|
||||
Passenger revenue decreased
significantly in 2009 as compared to 2008 due to reduced traffic, less capacity
and lower RASM. The reduced traffic and lower RASM reflects lower
fares and less high-yield business traffic attributable to the global
recession. The decline in demand has disproportionately reduced the
volume of high-yield traffic, as many business travelers are either curtailing
their travel or purchasing lower yield economy tickets.
Cargo revenue decreased due to lower
fuel surcharge rates and decreased freight volume. Other revenue
increased due to the implementation of new fees for checking bags in 2008 and a
change in how certain costs are handled under our capacity purchase agreement
with ExpressJet, offset in part by a reduction in sublease income received from
ExpressJet and decreased revenue associated with sales of mileage credits in our
OnePass frequent flyer program and ticket change fees.
Operating
Expenses. The table below shows period-to-period comparisons
by type of operating expense for our consolidated operations for the year ended
December 31 (in millions, except percentage changes):
|
2009
|
2008
|
Increase
(Decrease)
|
%
Increase
(Decrease)
|
|||
|
Aircraft fuel and related
taxes
|
$3,317
|
$ 5,919
|
$(2,602)
|
(44.0)%
|
||
|
Wages, salaries and related
costs
|
3,137
|
2,957
|
180
|
6.1 %
|
||
|
Aircraft rentals
|
934
|
976
|
(42)
|
(4.3)%
|
||
|
Regional capacity purchase,
net
|
848
|
1,059
|
(211)
|
(19.9)%
|
||
|
Landing fees and other
rentals
|
841
|
853
|
(12)
|
(1.4)%
|
||
|
Distribution costs
|
624
|
717
|
(93)
|
(13.0)%
|
||
|
Maintenance, materials and
repairs
|
617
|
612
|
5
|
0.8
%
|
||
|
Depreciation and
amortization
|
494
|
438
|
56
|
12.8 %
|
||
|
Passenger services
|
373
|
406
|
(33)
|
(8.1)%
|
||
|
Special charges
|
145
|
181
|
(36)
|
NM
|
||
|
Other
|
1,402
|
1,437
|
(35)
|
(2.4)%
|
||
|
$12,732
|
$15,555
|
$(2,823)
|
(18.1)%
|
|||
|
NM
– Not meaningful
|
||||||
Operating expenses decreased 18.1%
primarily due to the following:
|
·
|
Aircraft fuel and
related taxes decreased due to a 39.8% decrease in consolidated jet
fuel prices and decreased flying. Our average jet fuel price
per gallon including related taxes decreased to $1.97 in 2009 from $3.27
in 2008. Our average jet fuel price includes losses related to
our fuel hedging program of $0.23 per gallon in 2009 compared to losses of
$0.10 per gallon in 2008.
|
|
·
|
Wages, salaries and
related costs increased primarily due to $155 million of higher
pension expense resulting primarily from lower returns on plan assets in
2008. Higher wage rates and health insurance costs were offset
by a 5% reduction in the number of full-time equivalent
employees.
|
|
·
|
Aircraft
rentals decreased due to the retirement of leased Boeing 737
aircraft in 2008 and 2009. New aircraft delivered in 2008 and
2009 were purchased, with the related expense being reported in
depreciation and amortization and interest expense.
|
|
·
|
Regional capacity
purchase, net, includes expenses related to our capacity purchase
agreements. Our most significant capacity purchase agreement is
with ExpressJet. We also have agreements with Chautauqua,
Colgan and CommutAir. The net amounts consisted of the
following for the year ended December 31 (in millions, except percentage
changes):
|
|
Increase
|
%
Increase
|
||||||||
|
2009
|
2008
|
(Decrease)
|
(Decrease)
|
||||||
|
Capacity
purchase expenses
|
$848
|
$1,181
|
$(333)
|
(28.2)%
|
|||||
|
Aircraft
sublease income
|
-
|
(122)
|
(122)
|
(100.0)%
|
|||||
|
Regional
capacity purchase, net
|
$848
|
$1,059
|
$(211)
|
(19.9)%
|
|||||
|
Capacity
purchase expenses decreased due to rate reductions in conjunction with our
amended capacity purchase agreement with ExpressJet effective July 1, 2008
and capacity reductions. There was no aircraft sublease income
in 2009 because ExpressJet no longer pays sublease rent for aircraft
operated on our behalf. Sublease income on aircraft that were
subleased to other operators, but not operated on our behalf, of $23
million and $76 million for 2009
and 2008, respectively, is recorded as other revenue.
|
|
|
·
|
Distribution
costs decreased due to lower credit card discount fees, booking
fees and travel agency commissions, all of which resulted from decreased
passenger revenue.
|
|
·
|
Depreciation and
amortization expense increased in 2009 due to higher capitalizable
project costs, acceleration of depreciation on exiting aircraft and
increased depreciation from new aircraft.
|
|
·
|
Passenger
services expenses decreased due to fewer meals and beverages in
2009 compared to 2008, resulting from the decreased demand for air travel
in the weak economy, and lower mishandled baggage
expenses.
|
|
·
|
Special
charges. See Note 13 to our consolidated financial
statements contained in Item 8 of this report for a discussion of the
special charges.
|
|
·
|
Other operating
expenses decreased due to insurance settlements received in 2009
related to Hurricane Ike, reduced technology expenses resulting from new
contracts, lower expense due to station closings, the impact on certain
expenses of more favorable foreign currency exchange rates, lower OnePass
reward expenses and lower ground handling, security and outside services
costs as a result of capacity reductions, partially offset by increases in
expenses resulting from changes in who is contractually responsible for
certain costs under our capacity purchase agreement with
ExpressJet.
|
Nonoperating Income
(Expense). Nonoperating expense decreased $88 million in 2009
compared 2008 due to the following:
|
·
|
Net interest
expense increased $44 million primarily as a result of lower
interest income.
|
|
·
|
Gain on sale of
investments in 2008 consisted of $78 million related to the sale of
our remaining interests in Copa.
|
|
·
|
Other-than-temporary
impairment losses on investments included a loss of $60
million in 2008 to reflect the decline in the value of our student
loan-related auction rate securities.
|
|
·
|
Other nonoperating
income (expense) included fuel hedge ineffectiveness gains of $7
million and $26 million in 2009
and 2008, respectively. The ineffectiveness was caused by our
non-jet fuel derivatives experiencing a higher relative increase in value
than the jet fuel being hedged. Other nonoperating income
(expense) in 2009 also included foreign exchange gains of $8 million,
compared to losses of $37 million in 2008, and an increase in the fair
value of the cash surrender value of company-owned life insurance
policies. Additionally, other nonoperating income (expense) in
2008 included $125 million expense related to changes in the fair value of
fuel derivative contracts with Lehman Brothers that were deemed
ineffective after Lehman Brothers declared bankruptcy and a gain of $26
million related to our receipt of a put right covering certain of the
student loan-related auction rate
securities.
|
Income
Taxes. We are required to consider all items (including items
recorded in other comprehensive income) in determining the amount of tax benefit
that results from a loss from continuing operations and that should be allocated
to continuing operations. As a result, we recorded a $158 million
non-cash tax benefit on the loss from continuing operations for 2009, which is
exactly offset by income tax expense on other comprehensive
income. However, while the income tax benefit from continuing
operations is reported in our consolidated statement of operations, the income
tax expense on other comprehensive income is recorded directly to other
comprehensive income, which is a component of stockholders’
equity. Because the income tax expense on other comprehensive income
is equal to the income tax benefit from continuing operations, our net deferred
tax position at December 31, 2009 is not impacted by this tax
allocation.
Excluding this special item, our
effective tax rates differ from the federal statutory rate of 35% primarily due
to the following: changes in the valuation allowance, expenses that
are not deductible for federal income tax purposes and state income
taxes. We are required to provide a valuation allowance for our
deferred tax assets in excess of deferred tax liabilities because we have
concluded that it is more likely than not that such deferred tax assets
ultimately will not be realized.
Segment
Results of Operations
We have two reportable
segments: mainline and regional. The mainline segment
consists of flights to cities using larger jets while the regional segment
currently consists of flights with a capacity of 79 or fewer
seats. As of December 31, 2009, the regional segment was operated by
ExpressJet, Chautauqua, CommutAir and Colgan through capacity purchase
agreements. Under these agreements, we purchase all of the capacity
related to aircraft covered by the contracts and are responsible for setting
prices and selling all of the related seat inventory. In exchange for
the regional carriers’ operation of the flights, we pay the regional carriers
for each scheduled block hour based on agreed formulas. Under the
agreements, we recognize all passenger, cargo and other revenue associated with
each flight, and are responsible for most revenue-related expenses, including
commissions, reservations and catering.
We evaluate segment performance based
on several factors, of which the primary financial measure is operating income
(loss). However, we do not manage our business or allocate resources
based on segment operating profit or loss because (1) our flight schedules are
designed to maximize revenue from passengers flying, (2) many operations of the
two segments are substantially integrated (for example, airport operations,
sales and marketing, scheduling and ticketing), and (3) management decisions are
based on their anticipated impact on the overall network, not on one individual
segment.
Mainline Results of
Operations. Significant components of our mainline segment’s
operating results for the year ended December 31 were as follows (in millions,
except percentage changes):
|
2009
|
2008
|
Increase
(Decrease)
|
%
Increase
(Decrease)
|
|||||
|
Operating
revenue
|
$10,635
|
$12,827
|
$(2,192)
|
(17.1)%
|
||||
|
Operating
expenses:
|
||||||||
|
Aircraft
fuel and related taxes
|
2,755
|
4,905
|
(2,150)
|
(43.8)%
|
||||
|
Wages,
salaries and related costs
|
2,968
|
2,850
|
118
|
4.1
%
|
||||
|
Aircraft
rentals
|
621
|
662
|
(41)
|
(6.2)%
|
||||
|
Landing
fees and other rentals
|
741
|
782
|
(41)
|
(5.2)%
|
||||
|
Distribution
costs
|
534
|
611
|
(77)
|
(12.6)%
|
||||
|
Maintenance,
materials and repairs
|
617
|
612
|
5
|
0.8 %
|
||||
|
Depreciation
and amortization
|
481
|
427
|
54
|
12.6 %
|
||||
|
Passenger
services
|
349
|
384
|
(35)
|
(9.1)%
|
||||
|
Special
charges
|
125
|
155
|
(30)
|
NM
|
||||
|
Other
|
1,280
|
1,365
|
(85)
|
(6.2)%
|
||||
|
10,471
|
12,753
|
(2,282)
|
(17.9)%
|
|||||
|
Operating
income
|
$ 164
|
$ 74
|
$ 90
|
121.6 %
|
||||
The variances in specific line items
for the mainline segment were due to the same factors discussed under
consolidated results of operations.
Regional Results of
Operations. Significant components of our regional segment’s
operating results for the year ended December 31 were as follows (in millions,
except percentage changes):
|
Increase
|
%
Increase
|
|||||||
|
2009
|
2008
|
(Decrease)
|
(Decrease)
|
|||||
|
Operating
revenue
|
$1,951
|
$2,414
|
$(463)
|
(19.2)%
|
||||
|
Operating
expenses:
|
||||||||
|
Aircraft
fuel and related taxes
|
562
|
1,014
|
(452)
|
(44.6)%
|
||||
|
Wages,
salaries and related costs
|
169
|
107
|
62
|
57.9 %
|
||||
|
Aircraft
rentals
|
313
|
314
|
(1)
|
(0.3)%
|
||||
|
Regional
capacity purchase, net
|
848
|
1,059
|
(211)
|
(19.9)%
|
||||
|
Landing
fees and other rentals
|
100
|
71
|
29
|
40.8 %
|
||||
|
Distribution
costs
|
90
|
106
|
(16)
|
(15.1)%
|
||||
|
Depreciation
and amortization
|
13
|
11
|
2
|
18.2 %
|
||||
|
Passenger
services
|
24
|
22
|
2
|
9.1 %
|
||||
|
Special
charges
|
20
|
26
|
(6)
|
NM
|
||||
|
Other
|
122
|
72
|
50
|
69.4 %
|
||||
|
2,261
|
2,802
|
(541)
|
(19.3)%
|
|||||
|
Operating
loss
|
$ (310)
|
$(388)
|
$ (78)
|
(20.1)%
|
||||
The reported results of our regional
segment do not reflect the total contribution of the regional segment to our
system-wide operations. The regional segment generates revenue for
the mainline segment as it feeds passengers from smaller cities into our
hubs. The variances in specific line items for the regional segment
reflect generally the same factors discussed under consolidated results of
operations, with the exception of wages, salaries and related costs, landing
fees and other rentals, passenger services and other operating
expenses. These expenses increased for the regional segment due to
changes in who is contractually responsible for certain costs under our capacity
purchase agreement with ExpressJet and the transition of management of certain
airports to us from ExpressJet.
Comparison
of Year Ended December 31, 2008 to December 31, 2007
Consolidated Results of
Operations
Significant components of our
consolidated operating results for the year ended December 31 were as follows
(in millions, except percentage changes):
|
Increase
|
%
Increase
|
|||||||
|
2008
|
2007
|
(Decrease)
|
(Decrease)
|
|||||
|
Operating
revenue
|
$15,241
|
$14,232
|
$ 1,009
|
7.1%
|
||||
|
Operating
expenses
|
15,555
|
13,545
|
2,010
|
14.8%
|
||||
|
Operating
income (loss)
|
(314)
|
687
|
(1,001)
|
NM
|
||||
|
Nonoperating
income (expense)
|
(381)
|
(131)
|
250
|
NM
|
||||
|
Income
tax benefit (expense)
|
109
|
(117)
|
226
|
NM
|
||||
|
Net
income (loss)
|
$ (586)
|
$ 439
|
$(1,025)
|
NM
|
||||
Each of these items is discussed in the
following sections.
Operating
Revenue. The table below shows components of operating revenue
for the year ended December 31, 2008 and period to period comparisons for
operating revenue, RASM and ASMs by geographic region for our mainline and
regional operations:
|
Revenue
|
%
Increase
(Decrease)
in
2008 vs
2007
|
|||||
|
(in
millions)
|
Revenue
|
RASM
|
ASMs
|
|||
|
Passenger
revenue:
|
||||||
|
Domestic
|
$ 5,633
|
1.2 %
|
6.4 %
|
(4.9)%
|
||
|
Trans-Atlantic
|
2,983
|
11.6 %
|
2.5 %
|
8.9 %
|
||
|
Latin
America
|
1,750
|
12.1 %
|
9.4 %
|
2.5 %
|
||
|
Pacific
|
1,016
|
2.3 %
|
8.5 %
|
(5.6)%
|
||
|
Total
Mainline
|
11,382
|
5.4 %
|
6.0 %
|
(0.6)%
|
||
|
Regional
|
2,355
|
7.0 %
|
3.8 %
|
3.1 %
|
||
|
Total
|
13,737
|
5.7 %
|
5.9 %
|
(0.2)%
|
||
|
Cargo
|
497
|
9.7 %
|
||||
|
Other
|
1,007
|
28.4 %
|
||||
|
Operating
revenue
|
$15,241
|
7.1 %
|
||||
Passenger revenue increased due to
increased international traffic on increased capacity and increased
fares. The improved RASM reflects our actions taken to increase fares
and implement more restrictions on low fare tickets, as well as our domestic
capacity reductions commenced in September 2008.
Cargo revenue increased due to higher
fuel surcharge rates and increased mail volume. Other revenue
increased due to higher revenue associated with sales of mileage credits on our
OnePass frequent flyer program, higher ticket change fees, the implementation of
new fees for checking bags and changes in how certain costs are handled under
the ExpressJet CPA.
Operating
Expenses. The table below shows period-to-period comparisons
by type of operating expense for our consolidated operations for the year ended
December 31 (in millions, except percentage changes):
|
2008
|
2007
|
Increase
(Decrease)
|
%
Increase
(Decrease)
|
|||
|
Aircraft fuel and related
taxes
|
$ 5,919
|
$ 4,034
|
$1,885
|
46.7 %
|
||
|
Wages, salaries and related
costs
|
2,957
|
3,127
|
(170)
|
(5.4)%
|
||
|
Aircraft rentals
|
976
|
994
|
(18)
|
(1.8)%
|
||
|
Regional capacity purchase,
net
|
1,059
|
1,113
|
(54)
|
(4.9)%
|
||
|
Landing fees and other
rentals
|
853
|
790
|
63
|
8.0 %
|
||
|
Distribution costs
|
717
|
682
|
35
|
5.1 %
|
||
|
Maintenance, materials and
repairs
|
612
|
621
|
(9)
|
(1.4)%
|
||
|
Depreciation and
amortization
|
438
|
413
|
25
|
6.1 %
|
||
|
Passenger services
|
406
|
389
|
17
|
4.4 %
|
||
|
Special charges
|
181
|
13
|
168
|
NM
|
||
|
Other
|
1,437
|
1,369
|
68
|
5.0 %
|
||
|
$15,555
|
$13,545
|
$2,010
|
14.8 %
|
|||
Operating expenses increased 14.8%
primarily due to the following:
|
·
|
Aircraft fuel and
related taxes increased due to a 50.0% increase in jet fuel
prices. Our average jet fuel price per gallon including related
taxes increased to $3.27 in 2008 from $2.18 in 2007. Our
average jet fuel price includes losses related to our fuel hedging program
of $0.10 per gallon in 2008, compared to gains of $0.02 per gallon in
2007.
|
|
·
|
Wages, salaries and
related costs decreased primarily due to a $172 million decrease in
profit sharing expenses. Although the average number of full
time equivalent employees decreased approximately 1% in 2008, the impact
on expenses was offset by wage increases.
|
|
·
|
Aircraft
rentals decreased due to the retirement of several Boeing 737
aircraft. New aircraft delivered in 2008 were all purchased,
with the related expense being reflected in depreciation and
amortization.
|
|
·
|
Regional capacity
purchase, net includes expenses related to our capacity purchase
agreements. Our most significant capacity purchase agreement is
with ExpressJet. Regional capacity purchase, net is net of our
rental income on aircraft leased to ExpressJet and flown for us in 2007
and the first six months of 2008. Under the ExpressJet CPA,
ExpressJet no longer pays sublease rent for aircraft operated on our
behalf. The net amounts consisted of the following for the year
ended December 31 (in millions, except percentage
changes):
|
|
Increase
|
%
Increase
|
||||||||
|
2008
|
2007
|
(Decrease)
|
(Decrease)
|
||||||
|
Capacity
purchase expenses
|
$1,181
|
$1,379
|
$(198)
|
(14.4)%
|
|||||
|
Aircraft
sublease income
|
(122)
|
(266)
|
(144)
|
(54.1)%
|
|||||
|
Regional
capacity purchase, net
|
$1,059
|
$1,113
|
$ (54)
|
(4.9)%
|
|||||
|
Regional
capacity purchase, net did not change significantly compared to
2007. Sublease income on aircraft that were subleased to other
operators, but not operated on our behalf, of $76 million and $79 million
for 2008 and 2007, respectively, is recorded as other
revenue.
|
|||||||||
|
·
|
Landing fees and other
rentals increased primarily due to a higher number of international
flights and rate increases.
| ||||||||