Attached files
file | filename |
---|---|
EX-10.4 - EXHIBIT 10.4 - UNITED AIRLINES, INC. | fexhibit104.htm |
EX-31.1 - EXHIBIT 31.1 - UNITED AIRLINES, INC. | fexhibit311.htm |
EX-10.1 - EXHIBIT 10.1 - UNITED AIRLINES, INC. | fexhibit101.htm |
EX-31.2 - EXHIBIT 31.2 - UNITED AIRLINES, INC. | fexhibit312.htm |
EX-10.3 - EXHIBIT 10.3 - UNITED AIRLINES, INC. | fexhibit103.htm |
EX-10.5 - EXHIBIT 10.5 - UNITED AIRLINES, INC. | fexhibit105.htm |
EX-32.1 - EXHIBIT 32.1 - UNITED AIRLINES, INC. | fexhibit321.htm |
EX-12.1 - EXHIBIT 12.1 - UNITED AIRLINES, INC. | fexhibit121.htm |
EX-10.2 - EXHIBIT 10.2 - UNITED AIRLINES, INC. | fexhibit102.htm |
UNITED
STATES
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SECURITIES
AND EXCHANGE COMMISSION
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WASHINGTON,
D.C. 20549
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FORM
10-Q
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(Mark
One)
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[X] QUARTERLY
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 QUARTERLY PERIOD ENDED SEPTEMBER 30, 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
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(I.R.S.
Employer
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of
incorporation or organization)
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Identification
No.)
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1600
Smith Street, Dept. HQSEO
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Houston,
Texas 77002
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(Address
of principal executive offices)
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(Zip
Code)
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713-324-2950
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(Registrant's
telephone number, including area code)
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Indicate by check mark whether
registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
_____
Indicate by check mark whether
the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such
files). Yes No
_____
Indicate by check mark whether
the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. Large
accelerated filer X Accelerated
filer
___ Non-accelerated filer ___ Smaller
reporting company ___
(Do not check if a
smaller
reporting
company)
Indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes No
X
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As of October 20, 2009, 138,452,052
shares of Class B common stock of the registrant were
outstanding.
TABLE OF
CONTENTS
PAGE
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PART
I
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FINANCIAL
INFORMATION
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Item
1.
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4
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5
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6
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7
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8
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Item
2.
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33
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Item
3.
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53
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Item
4.
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55
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PART
II
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OTHER
INFORMATION
|
|
Item
1.
|
55
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|
Item
1A.
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56
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Item
2.
|
58
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|
Item
3.
|
58
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|
Item
4.
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58
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Item
5.
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58
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Item
6.
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59
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60
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61
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PART
I - FINANCIAL INFORMATION
CONTINENTAL
AIRLINES, INC.
(In
millions, except per share data) (Unaudited)
(2008
As Adjusted (Note 1))
Three
Months
Ended September
30,
|
Nine
Months
Ended September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Operating
Revenue:
|
||||||||||||||||
Passenger
(excluding fees and taxes of $397, $402, $1,121, and $1,186,
respectively)
|
$ | 2,947 | $ | 3,760 | $ | 8,331 | $ | 10,633 | ||||||||
Cargo
|
92 | 129 | 259 | 383 | ||||||||||||
Other
|
278 | 267 | 814 | 755 | ||||||||||||
Total
Operating Revenue
|
3,317 | 4,156 | 9,404 | 11,771 | ||||||||||||
Operating
Expenses:
|
||||||||||||||||
Aircraft
fuel and related taxes
|
881 | 1,807 | 2,507 | 4,722 | ||||||||||||
Wages,
salaries and related costs
|
794 | 765 | 2,358 | 2,197 | ||||||||||||
Aircraft
rentals
|
233 | 244 | 705 | 736 | ||||||||||||
Landing
fees and other rentals
|
222 | 225 | 647 | 643 | ||||||||||||
Regional
capacity purchase, net
|
211 | 247 | 641 | 838 | ||||||||||||
Distribution
costs
|
160 | 182 | 467 | 558 | ||||||||||||
Maintenance,
materials and repairs
|
159 | 152 | 473 | 478 | ||||||||||||
Depreciation
and amortization
|
124 | 112 | 353 | 327 | ||||||||||||
Passenger
services
|
99 | 113 | 282 | 315 | ||||||||||||
Special
charges
|
20 | 91 | 68 | 141 | ||||||||||||
Other
|
353 | 370 | 1,050 | 1,105 | ||||||||||||
Total
Operating Expenses
|
3,256 | 4,308 | 9,551 | 12,060 | ||||||||||||
Operating
Income (Loss)
|
61 | (152 | ) | (147 | ) | (289 | ) | |||||||||
Nonoperating
Income (Expense):
|
||||||||||||||||
Interest
expense
|
(91 | ) | (95 | ) | (274 | ) | (279 | ) | ||||||||
Interest
capitalized
|
8 | 8 | 25 | 25 | ||||||||||||
Interest
income
|
2 | 16 | 10 | 56 | ||||||||||||
Gain
on sale of investments
|
- | - | - | 78 | ||||||||||||
Other-than-temporary
impairment losses on investments
|
- | - | - | (29 | ) | |||||||||||
Other,
net
|
2 | (27 | ) | 19 | 11 | |||||||||||
Total
Nonoperating Income (Expense)
|
(79 | ) | (98 | ) | (220 | ) | (138 | ) | ||||||||
Loss
before Income Taxes
|
(18 | ) | (250 | ) | (367 | ) | (427 | ) | ||||||||
Income
Tax Benefit
|
- | 20 | - | 110 | ||||||||||||
Net
Loss
|
$ | (18 | ) | $ | (230 | ) | $ | (367 | ) | $ | (317 | ) | ||||
Basic
and Diluted Loss per Share
|
$ | (0.14 | ) | $ | (2.09 | ) | $ | (2.91 | ) | $ | (3.08 | ) | ||||
Shares
Used for Basic and Diluted Computation
|
132 | 110 | 126 | 103 |
The
accompanying Notes to Consolidated Financial Statements are an integral part of
these statements.
CONSOLIDATED
BALANCE SHEETS
(In
millions, except for share data)
(2008
As Adjusted (Note 1))
September
30,
|
December
31,
|
September
30,
|
||||||||||
2009
|
2008
|
2008
|
||||||||||
(Unaudited)
|
(Unaudited)
|
|||||||||||
Current
Assets:
|
||||||||||||
Cash
and cash equivalents
|
$ | 2,313 | $ | 2,165 | $ | 2,411 | ||||||
Short-term
investments
|
229 | 478 | 475 | |||||||||
Total
unrestricted cash, cash equivalents and short-term
investments
|
2,542 | 2,643 | 2,886 | |||||||||
Restricted
cash, cash equivalents and short-term investments
|
164 | 190 | 164 | |||||||||
Accounts
receivable, net
|
549 | 453 | 652 | |||||||||
Spare
parts and supplies, net
|
245 | 235 | 311 | |||||||||
Deferred
income taxes
|
180 | 216 | 217 | |||||||||
Prepayments
and other
|
435 | 610 | 483 | |||||||||
Total
current assets
|
4,115 | 4,347 | 4,713 | |||||||||
Property
and Equipment:
|
||||||||||||
Owned
property and equipment:
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||||||||||||
Flight
equipment
|
8,807 | 8,446 | 8,170 | |||||||||
Other
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1,755 | 1,694 | 1,673 | |||||||||
Flight
equipment and other
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10,562 | 10,140 | 9,843 | |||||||||
Less: Accumulated
depreciation
|
3,444 | 3,229 | 3,061 | |||||||||
Owned
property and equipment, net
|
7,118 | 6,911 | 6,782 | |||||||||
Purchase
deposits for flight equipment
|
226 | 275 | 319 | |||||||||
Capital
leases
|
195 | 194 | 190 | |||||||||
Less: Accumulated
amortization
|
60 | 53 | 51 | |||||||||
Capital
leases, net
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135 | 141 | 139 | |||||||||
Total
property and equipment, net
|
7,479 | 7,327 | 7,240 | |||||||||
Routes
and airport operating rights, net
|
794 | 804 | 785 | |||||||||
Investment
in student loan-related auction rate securities, long-term
|
- | - | 130 | |||||||||
Other
assets, net
|
208 | 208 | 194 | |||||||||
Total
Assets
|
$ | 12,596 | $ | 12,686 | $ | 13,062 |
(continued
on next page)
CONTINENTAL
AIRLINES, INC.
CONSOLIDATED
BALANCE SHEETS
(In
millions, except for share data)
(2008
As Adjusted (Note 1))
September
30,
|
December
31,
|
September
30,
|
||||||||||
STOCKHOLDERS'
EQUITY
|
2009
|
2008
|
2008
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|||||||||
(Unaudited)
|
(Unaudited)
|
|||||||||||
Current
Liabilities:
|
||||||||||||
Current
maturities of long-term debt and capital leases
|
$ | 734 | $ | 519 | $ | 717 | ||||||
Accounts
payable
|
911 | 1,021 | 945 | |||||||||
Air
traffic and frequent flyer liability
|
1,936 | 1,881 | 2,374 | |||||||||
Accrued
payroll
|
405 | 345 | 380 | |||||||||
Accrued
other liabilities
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279 | 708 | 499 | |||||||||
Total
current liabilities
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4,265 | 4,474 | 4,915 | |||||||||
Long-Term
Debt and Capital Leases
|
5,290 | 5,353 | 5,160 | |||||||||
Deferred
Income Taxes
|
180 | 216 | 217 | |||||||||
Accrued
Pension Liability
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1,368 | 1,417 | 564 | |||||||||
Accrued
Retiree Medical Benefits
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241 | 234 | 246 | |||||||||
Other
Liabilities
|
806 | 869 | 849 | |||||||||
Commitments
and Contingencies
|
||||||||||||
Stockholders'
Equity:
|
||||||||||||
Class
B common stock - $.01 par, 400,000,000 shares authorized;138,117,042,
123,264,534 and 110,243,176 issued
|
1 | 1 | 1 | |||||||||
Additional
paid-in capital
|
2,210 | 2,038 | 1,836 | |||||||||
Retained
earnings (accumulated deficit)
|
(527 | ) | (160 | ) | 109 | |||||||
Accumulated
other comprehensive loss
|
(1,238 | ) | (1,756 | ) | (835 | ) | ||||||
Total
stockholders' equity
|
446 | 123 | 1,111 | |||||||||
Total
Liabilities and Stockholders' Equity
|
$ | 12,596 | $ | 12,686 | $ | 13,062 |
The
accompanying Notes to Consolidated Financial Statements are an integral part of
these statements.
CONTINENTAL
AIRLINES, INC.
(In
millions)
(2008
As Adjusted (Note 1))
Nine Months Ended
September 30,
|
||||||||
2009
|
2008
|
|||||||
(Unaudited)
|
||||||||
Cash
Flows from Operating Activities:
|
||||||||
Net
loss
|
$ | (367 | ) | $ | (317 | ) | ||
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
||||||||
Depreciation
and amortization
|
353 | 327 | ||||||
Special
charges
|
68 | 141 | ||||||
Gain
on sale of investments
|
- | (78 | ) | |||||
Other-than-temporary
impairment losses on investments
|
- | 29 | ||||||
Stock-based
compensation related to equity awards
|
7 | 13 | ||||||
Deferred
income tax benefit
|
- | (110 | ) | |||||
Other
adjustments, net
|
35 | 20 | ||||||
Changes
in operating assets and liabilities
|
91 | (22 | ) | |||||
Net
cash provided by operating activities
|
187 | 3 | ||||||
Cash
Flows from Investing Activities:
|
||||||||
Capital
expenditures
|
(301 | ) | (281 | ) | ||||
Aircraft
purchase deposits refunded, net
|
42 | 61 | ||||||
Proceeds
from sales of short-term investments, net
|
256 | 93 | ||||||
Proceeds
from sales of property and equipment
|
46 | 76 | ||||||
Decrease
(increase) in restricted cash, cash equivalents and short-term
investments
|
26 | (62 | ) | |||||
Proceeds
from sale of Copa Holdings, S.A. stock
|
- | 149 | ||||||
Proceeds
from sales of other long-term investments
|
- | 22 | ||||||
Expenditures
for airport operating rights
|
(22 | ) | (109 | ) | ||||
Other
cash flows from investing activities
|
(3 | ) | - | |||||
Net
cash provided by (used in) investing activities
|
44 | (51 | ) | |||||
Cash
Flows from Financing Activities:
|
||||||||
Payments
on long-term debt and capital lease obligations
|
(542 | ) | (341 | ) | ||||
Proceeds
from issuance of long-term debt
|
295 | 497 | ||||||
Proceeds
from public offering of common stock
|
158 | 162 | ||||||
Proceeds
from issuance of common stock pursuant to stock plans
|
6 | 13 | ||||||
Net
cash (used in) provided by financing activities
|
(83 | ) | 331 | |||||
Net
Increase in Cash and Cash Equivalents
|
148 | 283 | ||||||
Cash
and Cash Equivalents - Beginning of Period
|
2,165 | 2,128 | ||||||
Cash
and Cash Equivalents - End of Period
|
$ | 2,313 | $ | 2,411 | ||||
Investing
and Financing Activities Not Affecting Cash:
|
||||||||
Property
and equipment acquired through the issuance of debt
|
$ | 370 | $ | 865 |
The
accompanying Notes to Consolidated Financial Statements are an integral part of
these statements.
CONTINENTAL
AIRLINES, INC.
(Unaudited)
In our opinion, the unaudited
consolidated financial statements included herein contain all adjustments
necessary to present fairly our financial position, results of operations and
cash flows for the periods indicated. Such adjustments, other than
nonrecurring adjustments that have been separately disclosed, are of a normal,
recurring nature.
The accompanying consolidated financial
statements should be read in conjunction with the consolidated financial
statements and the notes thereto for the year ended December 31, 2008 contained
in our Current Report on Form 8-K dated April 24, 2009. Due to
seasonal fluctuations common to the airline industry, our results of operations
for the periods presented are not necessarily indicative of the results of
operations to be expected for the entire year. As used in these Notes
to Consolidated Financial Statements, the terms “Continental,” “we,” “us,” “our”
and similar terms refer to Continental Airlines, Inc. and, unless the context
indicates otherwise, its consolidated subsidiaries.
Reclassifications have been made in the
prior periods’ consolidated statements of operations to conform to our new
presentation for expense related to fuel and related taxes on flights operated
for us by other operators under capacity purchase agreements. This
expense, which is now included in aircraft fuel and related taxes, was
previously reported in regional capacity purchase, net. These
reclassifications do not affect operating income (loss) or net income (loss) for
any period.
We have evaluated subsequent events
through October 21, 2009, which is the date these financial statements were
issued.
NOTE
1 – ADOPTED AND RECENTLY ISSUED ACCOUNTING STANDARDS
Codification. Effective
July 1, 2009, the Financial Accounting Standards Board’s (“FASB”) Accounting
Standards Codification (“ASC”) became the single official source of
authoritative, nongovernmental generally accepted accounting principles (“GAAP”)
in the United States. The historical GAAP hierarchy was eliminated
and the ASC became the only level of authoritative GAAP, other than guidance
issued by the Securities and Exchange Commission. Our accounting
policies were not affected by the conversion to ASC. However,
references to specific accounting standards in the footnotes to our consolidated
financial statements have been changed to refer to the appropriate section of
ASC.
Convertible
Debt. On January 1, 2009, we adopted the Cash Conversion
Subsections of ASC Subtopic 470-20, “Debt with Conversion and Other Options –
Cash Conversion” (“Cash Conversion Subsections”), which clarify the accounting
for convertible debt instruments that may be settled in cash (including partial
cash settlement) upon conversion. The Cash Conversion Subsections
require issuers to account separately for the liability and equity components of
certain convertible debt instruments in a manner that reflects the issuer’s
nonconvertible debt (unsecured debt) borrowing rate when interest cost is
recognized. The Cash Conversion Subsections require bifurcation of a
component of the debt, classification of that component in equity and the
accretion of the resulting discount on the debt to be recognized as part of
interest expense in our consolidated statements of operations.
The Cash Conversion Subsections require
retrospective application to the terms of instruments as they existed for all
periods presented. The adoption of the Cash Conversion Subsections
affects the accounting for our 5% Convertible Notes issued in 2003 and due 2023
(the “5% Convertible Notes”). The retrospective application of this
guidance affects years 2003 through 2008. Income taxes have been
recorded on the foregoing adjustments to the extent tax benefits were
available.
The following table sets forth the
effect of the retrospective application of the Cash Conversion Subsections on
certain previously reported line items (in millions, except per share
data):
Consolidated
Statements of Operations:
Three
Months ended
September 30,
2008
|
Nine
Months ended
September 30,
2008
|
|||||||||||||||
Originally
Reported
|
As
Adjusted
|
Originally
Reported
|
As
Adjusted
|
|||||||||||||
Interest
expense
|
$ | (93 | ) | $ | (95 | ) | $ | (271 | ) | $ | (279 | ) | ||||
Income
tax benefit
|
12 | 20 | 100 | 110 | ||||||||||||
Net
loss
|
(236 | ) | (230 | ) | (319 | ) | (317 | ) | ||||||||
Basic
and Diluted Loss per Share
|
$ | (2.14 | ) | $ | (2.09 | ) | $ | (3.11 | ) | $ | (3.08 | ) |
Consolidated
Balance Sheet:
December 31,
2008
|
September 30,
2008
|
|||||||||||||||
Originally
Reported
|
As
Adjusted
|
Originally
Reported
|
As
Adjusted
|
|||||||||||||
Long-term
debt and capital leases
|
$ | 5,371 | $ | 5,353 | $ | 5,181 | $ | 5,160 | ||||||||
Additional
paid-in capital
|
1,997 | 2,038 | 1,795 | 1,836 | ||||||||||||
Retained
earnings (accumulated deficit)
|
(137 | ) | (160 | ) | 129 | 109 | ||||||||||
Total
stockholders’ equity
|
105 | 123 | 1,090 | 1,111 |
Fair
Value. In September 2006, the FASB issued guidance which
defines fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. This guidance is contained
in ASC Topic 820, “Fair Value Measurements and Disclosures” (“ASC Topic
820”). In February 2008, the FASB deferred the effective date for us
to January 1, 2009 for all nonfinancial assets and liabilities, except for those
that are recognized or disclosed at fair value on a recurring basis (that is, at
least annually). We adopted the deferred provisions of ASC Topic 820
on January 1, 2009. Application of the new
rules will affect our annual impairment testing for our international routes and
airport operating rights, which we perform as of October 1 of each
year. Routes, which are indefinite-lived intangible assets, represent
the right to fly between cities in the United States and foreign
countries. In prior years, we determined the fair value of each route
by modeling the expected future discounted cash flows. If the
calculated fair value was lower than the carrying value of a route, an
impairment loss would have been recognized for the difference between the two
amounts. With the adoption of new accounting rules, fair value is now
determined as an exit price, representing the price that would be received in an
orderly transaction between market participants based on the highest and best
use of the asset, rather than as the result of an internally-generated cash flow
analysis. Certain of our international routes are to countries that
are subject to “open skies” agreements, meaning that all carriers have access to
any destination in that country. In these cases, if there are no
significant barriers to new entrants to serve the international destination,
such as airport slot restrictions or gate availability, there is no market for
the route asset and, therefore, it has no fair value under the new definition of
fair value. We are currently evaluating the requirements of the
pronouncement and anticipate that we will record a non-cash special charge in
the fourth quarter of 2009 to write off certain of our international
routes. However, we do not expect the charge to have a material
effect on our consolidated financial statements. The routes expected
to be written off are not pledged as collateral under our debt
agreements. Therefore, our compliance with our debt agreements will
not be affected by this new guidance.
In April 2009, the FASB issued
additional guidance for estimating fair value in accordance with ASC Topic
820. The additional guidance addresses determining fair value when
the volume and level of activity for an asset or liability have significantly
decreased and identifying transactions that are not orderly. We
adopted the provisions of this guidance for the quarter ended June 30,
2009. The adoption did not have a material effect on our consolidated
financial statements.
Other-Than-Temporary
Impairments. In April 2009, the FASB issued new guidance on
the recognition of other-than-temporary impairments of investments in debt
securities, as well as financial statement presentation and disclosure
requirements for other-than-temporary impairments of investments in debt and
equity securities. We adopted the provisions of this guidance for the
quarter ended June 30, 2009. The adoption did not have a material
effect on our consolidated financial statements.
Transfers of Financial
Assets. In June 2009, the FASB issued guidance that changes
the information a reporting entity provides in its financial statements about
the transfer of financial assets and continuing interests held in transferred
financial assets. The standard amends previous accounting guidance by
removing the concept of qualified special purpose entities. This
accounting standard is effective for us for transfers occurring on or after
January 1, 2010. We are currently evaluating the requirements of this
pronouncement and have not determined the impact, if any, that adoption of this
standard will have on our consolidated financial statements.
Variable Interest
Entities. In June 2009, the FASB issued guidance to change
financial reporting by enterprises involved with variable interest entities
(“VIEs”). The standard replaces the quantitative-based risks and
rewards calculation for determining which enterprise has a controlling financial
interest in a VIE with an approach focused on identifying which enterprise has
the power to direct the activities of a VIE and the obligation to absorb losses
of the entity or the right to receive the entity’s residual
returns. This accounting standard is effective for us on January 1,
2010. We are currently evaluating the requirements of this
pronouncement and have not determined the impact, if any, that adoption of this
standard will have on our consolidated financial statements.
Employee Benefit
Plans. In December 2008, the FASB issued guidance that
requires additional disclosures about assets held in an employer's defined
benefit pension or other postretirement plan, primarily related to categories
and fair value measurements of plan assets. This guidance is
effective for us as of December 31, 2009. Because this guidance
applies only to financial statement disclosures, the adoption is not expected to
have a material effect on our consolidated financial statements.
NOTE
2 - LOSS PER SHARE
Because we incurred a net loss in the
three and nine months ended September 30, 2009 and 2008, basic and diluted loss
per share for each period were calculated as our net loss divided by the
weighted average shares outstanding. Approximately 13 million
potential shares of our common stock related to convertible debt securities were
excluded from the computation of diluted loss per share for each of the periods
presented because they were antidilutive. In addition, approximately
8 million weighted average options to purchase shares of our common stock were
excluded from the computation of diluted loss per share for each of the periods
presented because the effect of including the options would have been
antidilutive.
NOTE
3 - FLEET INFORMATION
As of September 30, 2009, our operating
fleet consisted of 338 mainline jets and 266 regional aircraft. The
338 mainline jets are operated exclusively by us, while the 266 regional
aircraft are operated on our behalf by other operators under capacity purchase
agreements.
We own or lease 274 regional
jets. Of these, 214 are leased or subleased to ExpressJet Airlines,
Inc. (“ExpressJet”) and operated on our behalf under a capacity purchase
agreement with ExpressJet, 35 are subleased to other operators but are not
operated on our behalf and 25 are temporarily grounded. Additionally,
our regional operating fleet includes 52 regional jet and turboprop aircraft
owned or leased by third parties that are operated on our behalf by other
operators under capacity purchase agreements.
The following table summarizes our
operating fleet (aircraft operated by us and by others on our behalf) as of
September 30, 2009:
Third-Party
|
||||||||
Aircraft
Type
|
Total
|
Owned
|
Leased
|
Aircraft
|
||||
Mainline
(a):
|
||||||||
777-200ER
|
20
|
8
|
12
|
-
|
||||
767-400ER
|
16
|
14
|
2
|
-
|
||||
767-200ER
|
10
|
9
|
1
|
-
|
||||
757-300
|
17
|
9
|
8
|
-
|
||||
757-200
|
41
|
15
|
26
|
-
|
||||
737-900ER
|
28
|
28
|
-
|
-
|
||||
737-900
|
12
|
8
|
4
|
-
|
||||
737-800
|
117
|
44
|
73
|
-
|
||||
737-700
|
36
|
12
|
24
|
-
|
||||
737-500
|
34
|
-
|
34
|
-
|
||||
737-300
|
7
|
7
|
-
|
-
|
||||
Total
mainline
|
338
|
154
|
184
|
-
|
||||
Regional
(b):
|
||||||||
ERJ-145XR
|
89
|
-
|
89
|
-
|
||||
ERJ-145
|
140
|
18
|
107
|
15
|
(c)
|
|||
CRJ200LR
|
7
|
-
|
-
|
7
|
(c)
|
|||
Q200
|
16
|
-
|
-
|
16
|
(d)
|
|||
Q400
|
14
|
-
|
-
|
14
|
(e)
|
|||
Total
regional
|
266
|
18
|
196
|
52
|
||||
Total
|
604
|
172
|
380
|
52
|
______________________
(a)
|
Excludes
nine grounded Boeing 737-500 aircraft (five owned and four leased), 12
grounded Boeing 737-300 aircraft (four owned and eight leased) and one
owned Boeing 737-900ER aircraft delivered but not yet placed into
service.
|
(b)
|
Excludes
25 ERJ-135 aircraft that are temporarily grounded and 30 ERJ-145 aircraft
and five ERJ-135 aircraft that are subleased to other operators but are
not operated on our behalf.
|
(c)
|
Operated
by Chautauqua Airlines, Inc. (“Chautauqua”) under a capacity purchase
agreement.
|
(d)
|
Operated
by Champlain Enterprises, Inc. (“CommutAir”) under a capacity purchase
agreement.
|
(e)
|
Operated
by Colgan Air, Inc. (“Colgan”) under a capacity purchase
agreement.
|
Mainline Fleet
Activity. During the first nine months of 2009, we placed into
service 11 new Boeing 737-900ER aircraft and one new Boeing 737-800
aircraft. We removed 16 Boeing 737-300 aircraft and eight Boeing
737-500 aircraft from service during the first nine months of
2009. By early January 2010, we expect to remove from service all of
our remaining Boeing 737-300 aircraft and three additional Boeing 737-500
aircraft.
During the third quarter of 2009, we
sold six 737-500 aircraft to a foreign buyer. We also have an
agreement to sell up to five additional Boeing 737-500 aircraft to a different
foreign buyer. This sale is subject to customary closing conditions,
some of which are outside of our control, and we cannot give any assurances that
the buyer of these aircraft will be able to obtain financing for this
transaction, that there will not be delays in deliveries or that the closing of
this transaction will occur. We hold cash deposits that secure the
buyer’s obligations under the aircraft sale contract and we are entitled to
damages under the aircraft sale contract if the buyer does not take delivery of
the aircraft when required.
Regional Fleet
Activity. In January 2009, we amended our capacity purchase
agreement with Colgan to increase by 15 the number of Q400 aircraft operated by
Colgan on our behalf. We expect that Colgan will begin operating
these 15 additional aircraft as they are delivered to Colgan, beginning in the
third quarter of 2010 through the second quarter of 2011. Each
aircraft is scheduled to be covered by the agreement for approximately ten years
following the date the aircraft is delivered into service. Colgan
supplies all aircraft that it operates under the agreement. One of
Colgan’s Q400 aircraft was involved in an accident on February 12, 2009,
reducing the number of aircraft currently being flown under the agreement to
14.
In July 2009, we entered into
agreements to sublease five temporarily grounded ERJ-135 aircraft beginning in
the third quarter of 2009. These aircraft will not be operated for
us. The subleases have terms of five years, but may be cancelled by
the lessee under certain conditions after an initial term of two
years. The remaining 25 ERJ-135 aircraft continue to be temporarily
grounded. We are evaluating our options regarding these 25 aircraft,
including permanently grounding them.
Firm Order and Option
Aircraft. As of September 30, 2009 we had firm commitments to
purchase 82 new aircraft (52 Boeing 737 aircraft, five Boeing 777 aircraft and
25 Boeing 787 aircraft) scheduled for delivery from 2009 through 2016, with an
estimated aggregate cost of $5.1 billion including related spare
engines. We are currently scheduled to take delivery of one Boeing
737 aircraft in the fourth quarter of 2009 and two Boeing 777 aircraft and 12
Boeing 737 aircraft in 2010. In addition to our firm order aircraft,
we had options to purchase a total of 102 additional Boeing aircraft as of
September 30, 2009.
We have also agreed to lease four
Boeing 757-300 aircraft from Boeing Capital Corporation. We expect
these aircraft to be placed into service by the end of the first quarter of
2010.
NOTE
4 - LONG-TERM DEBT
2007 Enhanced Equipment
Trust Certificates. In April 2007, we obtained financing for
12 Boeing 737-800s and 18 Boeing 737-900ERs. We applied the final
portion of this financing to three Boeing aircraft delivered to us in the first
half of 2009 and recorded related debt of $121 million.
Other Debt Secured by
Aircraft. During the first nine months of 2009, we entered
into loan agreements under which we borrowed $180 million. This
floating rate indebtedness is secured by five new Boeing 737-900ER aircraft and
two Boeing 737-800 aircraft that this debt refinanced.
2009 Enhanced Equipment
Trust Certificates. On July 1, 2009, we obtained financing for
12 currently owned Boeing aircraft and five new Boeing 737-900ERs. A
pass-through trust raised $390 million through the issuance of a single class of
pass-through certificates bearing interest at 9%. The proceeds from
the sale of the certificates were initially held by a depositary in escrow for
the benefit of the certificate holders until we issued equipment notes to the
trust, which purchased such notes with a portion of the escrowed
funds. During the third quarter of 2009, we issued equipment notes
with respect to the 12 currently owned aircraft, resulting in proceeds of $249
million cash for our general corporate purposes, and equipment notes with
respect to four new Boeing 737-900ER aircraft, resulting in proceeds of $113
million to finance the purchase of the aircraft. One remaining new
Boeing 737-900ER aircraft will be financed through the issuance of $28 million
of equipment notes in the fourth quarter of 2009. We have recorded
the principal amount of the equipment notes that we issued as debt on our
consolidated balance sheet. Principal payments on the equipment notes
and the corresponding distribution of these payments to certificate holders are
scheduled from January 2010 through July 2016. Additionally, the
certificates have the benefit of a liquidity facility under which a third party
agrees to make up to three semiannual interest payments on the certificates if a
default in the payment of interest occurs.
Maturities. Maturities
of long-term debt due before December 31, 2009 and for the next four years are
as follows (in millions):
October
1, 2009 through December 31, 2009
|
$ | 62 | ||
Year
ending December 31,
|
||||
2010
|
968 | |||
2011
|
1,143 | |||
2012
|
581 | |||
2013
|
647 |
Convertible Debt
Securities. Our 5% Convertible Notes with a principal amount
of $175 million are convertible into 50 shares of our common stock per $1,000
principal amount at a conversion price of $20 per share. If a holder
of the notes exercises the conversion right, in lieu of delivering shares of our
common stock, we may elect to pay cash or a combination of cash and shares of
our common stock for the notes surrendered. All or a portion of the
notes are also redeemable for cash at our option on or after June 18, 2010 at
par plus accrued and unpaid interest, if any. Holders of the notes
may require us to repurchase all or a portion of their notes at par plus any
accrued and unpaid interest on June 15 of 2010, 2013 or 2018. We may
at our option choose to pay the repurchase price on those dates in cash, shares
of our common stock or any combination thereof. However, if we are
required to repurchase all or a portion of the notes, our policy is to settle
the notes in cash. Holders of the notes may also require us to
repurchase all or a portion of their notes for cash at par plus any accrued and
unpaid interest if certain changes in control of Continental occur.
As a result of the adoption of the Cash
Conversion Subsections of ASC Subtopic 470-20, we are required to account
separately for the debt and equity components of our 5% Convertible Notes in a
manner that reflects our nonconvertible debt (unsecured debt) borrowing rate
when interest expense is recognized. The debt and equity components
recognized for our 5% Convertible Notes were as follows (in
millions):
September
30,
|
December
31,
|
September
30,
|
||||||||||
2009
|
2008
|
2008
|
||||||||||
Principal
amount of Convertible Notes
|
$ | 175 | $ | 175 | $ | 175 | ||||||
Unamortized
discount
|
9 | 18 | 21 | |||||||||
Net
carrying amount
|
166 | 157 | 154 | |||||||||
Additional
paid-in capital
|
64 | 64 | 64 |
At September 30, 2009, the unamortized
discount had a remaining recognition period of nine months.
The amount of interest expense
recognized and effective interest rate for the three and nine months ended
September 30 were as follows (in millions):
Three
Months
Ended September
30,
|
Nine
Months
Ended September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Contractual
coupon interest
|
$ | 2 | $ | 2 | $ | 6 | $ | 6 | ||||||||
Amortization
of discount on 5% Convertible Notes
|
3 | 3 | 9 | 9 | ||||||||||||
Interest
expense
|
$ | 5 | $ | 5 | $ | 15 | $ | 15 | ||||||||
Effective
interest rate
|
13 | % | 13 | % | 13 | % | 13 | % |
NOTE
5 – FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
Accounting rules for fair value clarify
that fair value is an exit price, representing the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction
between market participants based on the highest and best use of the asset or
liability. As such, fair value is a market-based measurement that
should be determined based on assumptions that market participants would use in
pricing an asset or liability. ASC Topic 820 requires us to use
valuation techniques to measure fair value that maximize the use of observable
inputs and minimize the use of unobservable inputs. These inputs are
prioritized as follows:
Level
1:
|
Observable
inputs such as quoted prices for identical assets or liabilities in active
markets
|
|
Level
2:
|
Other
inputs that are observable directly or indirectly, such as quoted prices
for similar assets or liabilities or market-corroborated
inputs
|
|
Level
3:
|
Unobservable
inputs for which there is little or no market data and which require us to
develop our own assumptions about how market participants would price the
assets or liabilities
|
|
The
valuation techniques that may be used to measure fair value are as
follows:
|
(A)
|
Market
approach – Uses prices and other relevant information generated by market
transactions involving identical or comparable assets or
liabilities
|
|
(B)
|
Income
approach – Uses valuation techniques to convert future amounts to a single
present amount based on current market expectations about those future
amounts, including present value techniques, option-pricing models and
excess earnings method
|
|
(C)
|
Cost
approach – Based on the amount that currently would be required to replace
the service capacity of an asset (replacement
cost)
|
Assets (liabilities) measured at fair
value on a recurring basis during the period include (in millions):
Carrying
Amount as of
September 30,
2009
|
Level
1
|
Level
2
|
Level
3
|
Valuation
Technique
|
|||||||||||||
Cash
and cash equivalents
|
$ | 2,313 | $ | 2,313 | - | - |
(A)
|
||||||||||
Short-term
investments:
|
- | ||||||||||||||||
Auction
rate securities
|
205 | - | $ | 205 |
(B)
|
||||||||||||
Other
|
24 | 24 | - | - |
(A)
|
||||||||||||
Restricted
cash, cash equivalents and short-term investments
|
164 | 164 | - | - |
(A)
|
||||||||||||
Auction
rate securities put right
|
23 | - | - | 23 |
(B)
|
||||||||||||
Fuel
derivatives
|
9 | - | - | 9 |
(A)
|
||||||||||||
Foreign
currency derivatives
|
(3 | ) | - | $ | (3 | ) | - |
(A)
|
Assets measured at fair value on a
nonrecurring basis during the nine months ended September 30, 2009 include our
Boeing 737-300 and 737-500 fleets and related assets. We recorded
impairment losses on these assets in the quarter ended June 30,
2009. As a result of the impairments, we measured these assets at
fair value at June 30, 2009, as follows (in millions):
Carrying
Amount as of
June 30,
2009
|
Level
1
|
Level
2
|
Level
3
|
Total
Losses
|
||||||||||||||||
Property
and Equipment:
|
||||||||||||||||||||
Boeing
737-300 fleet
|
$ | 90 | - | - | $ | 90 | $ | (19 | ) | |||||||||||
Boeing
737-500 fleet
|
82 | - | - | 82 | (12 | ) | ||||||||||||||
$ | (31 | ) |
The determination of fair value of each
of these items is discussed below:
Cash, Cash Equivalents and
Restricted Cash. Cash, cash equivalents and restricted cash
consist primarily of U.S. Government and Agency money market funds and other
AAA-rated money market funds with original maturities of three months or
less. The original cost of these assets approximates fair value due
to their short-term maturity.
Short-Term Investments Other
than Auction Rate Securities. Short-term investments other
than auction rate securities primarily consist of certificates of deposit placed
through an account registry service (“CDARS”). The fair values of
these investments are based on observable market data.
Student Loan-Related Auction
Rate Securities and Put Right. At September 30, 2009, we held
student loan-related auction rate securities with a fair value of $205 million
and a par value of $261 million. These securities were classified as
follows (in millions):
Fair
Value
|
Par
Value
|
Amortized
Cost
|
||||||||||
Short-term
investments:
|
||||||||||||
Available-for-sale
|
$ | 135 | $ | 166 | $ | 135 | ||||||
Trading
|
70 | 95 | N/A | |||||||||
Total
|
$ | 205 | $ | 261 |
These securities are variable-rate debt
instruments with contractual maturities generally greater than ten years and
whose interest rates are reset every 7, 28 or 35 days, depending on the terms of
the particular instrument. These securities are secured by pools of
student loans guaranteed by state-designated guaranty agencies and reinsured by
the U.S. government. All of the auction rate securities we hold are
senior obligations under the applicable indentures authorizing the issuance of
the securities. Auctions for these securities began failing in the
first quarter of 2008 and have continued to fail, resulting in our holding such
securities and the issuers of these securities paying interest adjusted to the
maximum contractual rates.
Prior to the first quarter of 2008, the
carrying value of auction rate securities approximated fair value due to the
frequent resetting of the interest rate and the existence of a liquid
market. Although we will earn interest on these investments involved
in failed auctions at the maximum contractual rate, the estimated market value
of these auction rate securities no longer approximates par value due to the
lack of liquidity in the market for these securities at their par
value. We recorded losses of $29 million during the second quarter of
2008 to reflect the other-than-temporary decline in the fair value of these
securities. These losses are included in nonoperating income
(expense) in our consolidated statement of operations. Following this
other-than-temporary impairment, a new amortized cost basis was established
equal to the then fair value. The difference between this amortized
cost and the cash flows expected to be collected is being accreted as interest
income.
We estimated the fair value of these
securities to be $205 million at September 30, 2009, taking into consideration
the limited sales and offers to purchase securities and using
internally-developed models of the expected future cash flows related to the
securities. Our models incorporated our probability-weighted
assumptions about the cash flows of the underlying student loans and discounts
to reflect a lack of liquidity in the market for these securities.
In addition, in 2008, one institution
granted us a put right permitting us in 2010 to sell to the institution at their
full par value auction rate securities with a par value of $125
million. The institution has also committed to loan us 75% of the
market value of these securities at any time until the put right is
exercised. The put right is recorded at fair value in prepayments and
other assets on our consolidated balance sheet. We determined the
fair value based on the difference between the risk-adjusted discounted expected
cash flows from the underlying auction rate securities without the put right and
with the put right being exercised in 2010. We have classified the
underlying auction rate securities as trading securities and elected the fair
value option under the Fair Value Subsections of ASC Topic 825-10, “Financial
Instruments,” for the put right, with changes in the fair value of the put right
and the underlying auction rate securities recognized in earnings
currently.
During the third quarter of 2009, we
sold, at par, auction rate securities having a par value of $30 million to the
institution that had granted us the put right. Our gains on the sales
were recognized using the specific identification method and are included in
other non-operating income (expense) in our consolidated statements of
operations. Such gains were not material.
We continue to monitor the market for
auction rate securities and consider its impact, if any, on the fair value of
our investments. If current market conditions deteriorate further, we
may be required to record additional losses on these securities.
Fuel
Derivatives. We determine the fair value of our fuel
derivatives by obtaining inputs from a broker's pricing model based on inputs
that are either readily available in public markets or can be derived from
information available in publicly quoted markets. We verify the
reasonableness of these inputs by comparing the resulting fair values to similar
quotes from our counterparties as of each date for which financial statements
are prepared. For derivatives not covered by collateral, we also make
an adjustment to incorporate credit risk into the valuation. Due to
the fact that certain of the inputs utilized to determine the fair value of the
fuel derivatives are unobservable (principally volatility of crude oil prices
and the credit risk adjustments), we have categorized these contracts as Level
3.
Foreign Currency
Derivatives. We determine the fair value of our foreign
currency derivatives by comparing our contract rate to a published forward price
of the underlying currency, which is based on market rates for comparable
transactions.
Property and Equipment -
Boeing 737-300 and 737-500 Aircraft Fleets. As discussed in
Note 11, we wrote down our Boeing 737-300 and 737-500 fleets to their respective
fair values in the second quarter of 2009. Fleet assets include owned
aircraft, improvements on leased aircraft, rotable spare parts, spare engines
and simulators. We estimated the fair values based on current market
conditions, the condition of our aircraft and our expected proceeds from the
sale of the assets.
Unobservable
Inputs. The reconciliation of our assets (liabilities)
measured at fair value on a recurring basis using unobservable inputs (Level 3)
is as follows (in millions):
Three Months Ended
September 30, 2009
|
||||||||||||
Student
Loan-Related
Auction Rate
Securities
|
Auction
Rate
Securities Put
Right
|
Fuel
Derivatives
|
||||||||||
Balance
at June 30, 2009
|
$ | 230 | $ | 27 | $ | (17 | ) | |||||
Purchases,
sales, issuances and settlements (net)
|
(30 | ) | - | 36 | ||||||||
Gains
and losses:
|
||||||||||||
Reported
in earnings:
|
||||||||||||
Realized
|
5 | (4 | ) | - | ||||||||
Unrealized
|
- | - | 1 | |||||||||
Reported
in other comprehensive income (loss)
|
- | - | (11 | ) | ||||||||
Balance
at September 30, 2009
|
$ | 205 | $ | 23 | $ | 9 |
Nine Months Ended
September 30, 2009
|
||||||||||||
Student
Loan-Related
Auction Rate
Securities
|
Auction
Rate
Securities Put
Right
|
Fuel
Derivatives
|
||||||||||
Balance
at December 31, 2008
|
$ | 229 | $ | 26 | $ | (415 | ) | |||||
Purchases,
sales, issuances and settlements (net)
|
(31 | ) | - | 458 | ||||||||
Gains
and losses:
|
||||||||||||
Reported
in earnings:
|
||||||||||||
Realized
|
5 | (4 | ) | - | ||||||||
Unrealized
|
- | 1 | 7 | |||||||||
Reported
in other comprehensive income (loss)
|
2 | - | (41 | ) | ||||||||
Balance
at September 30, 2009
|
$ | 205 | $ | 23 | $ | 9 |
Other Financial
Instruments. Other financial instruments that are not subject
to the disclosure requirements of ASC Topic 820 are as follows:
·
|
Debt. The
fair value of our debt with a carrying value of $5.8 billion at September
30, 2009 was approximately $5.1 billion. These estimates were
based on either market prices or the discounted amount of future cash
flows using our current incremental rate of borrowing for similar
liabilities.
|
·
|
Investment in COLI
Products. In connection with certain of our supplemental
retirement plans, we have company owned life insurance policies covering
certain of our employees. As of September 30, 2009, the
carrying value of the cash surrender value of the life insurance policies
was $30 million, which was based on the fair value of the underlying
investments.
|
·
|
Accounts Receivable
and Accounts Payable. The fair values of accounts
receivable and accounts payable approximated carrying value due to their
short-term maturities.
|
NOTE
6 - HEDGING ACTIVITIES
As part of our risk management program,
we use a variety of derivative financial instruments to help manage our risks
associated with changes in fuel prices and foreign currency exchange
rates. We do not hold or issue derivative financial instruments for
trading purposes.
We are exposed to credit losses in the
event of non-performance by issuers of derivative financial
instruments. To manage credit risks, we select issuers based on
credit ratings, limit our exposure to any one issuer under our defined
guidelines and monitor the market position with each counterparty.
Fuel Price Risk
Management. We routinely hedge a portion of our future fuel
requirements, provided the hedges are expected to be cost
effective. We conduct our fuel hedging activities using a combination
of jet fuel, crude oil and heating oil contracts.
We have historically entered into swap
agreements or purchased call options to protect us against sudden and
significant increases in jet fuel prices. To minimize the high cost
to us of call options, we may also enter into collars. Collars are
derivative instruments that involve combining a purchased call option, which on
a stand-alone basis would require us to pay a premium, with a written put
option, which on a stand-alone basis would result in our receiving a
premium. The collars we have entered into consist of both instruments
that result in no net premium to us and instruments that result in our payment
of a net premium to the counterparty. The purchased call option
portion of the collar caps the price of the contract at the agreed upon price,
while the sold option portion of the collar provides for a minimum price of the
related commodity. We had no collars outstanding at September 30,
2009.
As of September 30, 2009, our projected
consolidated fuel requirements were hedged as follows:
Maximum
Price
|
Minimum
Price
|
|||||||||||||||||||
%
of
Expected
Consumption
|
Weighted
Average
Price
(per
gallon)
|
%
of
Expected
Consumption
|
Weighted
Average
Price
(per
gallon)
|
|||||||||||||||||
Fourth Quarter
2009
|
||||||||||||||||||||
Gulf
Coast jet fuel swaps
|
15 | % | $ | 1.83 | 15 | % | $ | 1.83 | ||||||||||||
WTI
crude oil swaps
|
5 | % | 1.36 | 5 | % | 1.36 | ||||||||||||||
Total
|
20 | % | 20 | % | ||||||||||||||||
First Quarter
2010
|
||||||||||||||||||||
Gulf
Coast jet fuel swaps
|
5 | % | $ | 1.94 | 5 | % | $ | 1.94 | ||||||||||||
WTI
crude oil swaps
|
1 | % | 1.62 | 1 | % | 1.62 | ||||||||||||||
WTI
crude oil call options
|
1 | % | 1.88 | N/A | N/A | |||||||||||||||
Total
|
7 | % | 6 | % |
We account for our fuel derivatives as
cash flow hedges and record them at fair value in our consolidated balance sheet
with the change in fair value, to the extent effective, being recorded to
accumulated other comprehensive income (loss) (“accumulated OCI”), net of
applicable income taxes. Fuel hedge gains (losses) are recognized as
a component of fuel expense when the underlying fuel being hedged is
used. The ineffective portion of our fuel hedges is determined based
on the correlation between jet fuel and crude oil or heating oil prices and is
included in nonoperating income (expense) in our consolidated statement of
operations.
When our fuel hedges are in a liability
position, we may be required to post cash collateral with our
counterparties. We were not required to post any such collateral at
September 30, 2009.
Foreign Currency Exchange
Risk Management. We have historically used foreign currency
average rate options and forward contracts to hedge against the currency risk
associated with our forecasted Japanese yen, British pound, Canadian dollar and
euro-denominated cash flows. The average rate options and forward
contracts have only nominal intrinsic value at the date
contracted. At September 30, 2009, we had forward contracts
outstanding to hedge the following cash inflows (primarily from passenger ticket
sales) in foreign currencies:
·
|
24%
of our projected Japanese yen-denominated cash inflows through
2010
|
·
|
9%
of our projected euro-denominated cash inflows through
2009
|
We account for these instruments as
cash flow hedges. They are recorded at fair value in our consolidated
balance sheet with the offset to accumulated OCI, net of applicable income taxes
and hedge ineffectiveness, and recognized as passenger revenue in the month of
sale. We measure hedge effectiveness of average rate options and
forward contracts based on the forward price of the underlying
currency. Hedge ineffectiveness, if any, is included in other
nonoperating income (expense) in our consolidated statement of
operations.
Quantitative
Disclosures. At September 30, 2009, all of our derivative
instruments were designated as cash flow hedges and were reported in our
consolidated balance sheet as follows (in millions):
Asset
Derivatives
|
Liability
Derivatives
|
|||||||||
Balance
Sheet
Location
|
Fair
Value
|
Balance
Sheet
Location
|
Fair
Value
|
|||||||
Fuel
derivatives
|
Prepayments
and other current assets
|
$ | 9 |
Accrued
other current liabilities
|
$ | - | ||||
Foreign
currency derivatives
|
Prepayments
and other current assets
|
- |
Accrued
other current liabilities
|
3 | ||||||
Total
derivatives
|
$ | 9 | $ | 3 |
The gains and losses related to our
derivative instruments reported in our consolidated balance sheet at September
30, 2009 and our consolidated statement of operations were as follows (in
millions):
Three Months Ended
September 30, 2009
|
||||||||||||||
Cash
Flow
Hedges
|
Gain
(Loss)
Recognized
in
OCI
(Effective
Portion)
|
Gain
(Loss) Reclassified from
Accumulated
OCI into Income
(Effective
Portion)
|
Gain
(Loss) Recognized in
Income (Ineffective
Portion)
|
|||||||||||
Income
Statement
Location
|
Amount
|
Income
Statement
Location
|
Amount
|
|||||||||||
Fuel
derivatives
|
$ | (6 | ) |
Aircraft
fuel and
related
taxes
|
$ | (41 | ) |
Other
nonoperating
income
(expense)
|
$ | 1 | ||||
Foreign
currency derivatives
|
(3 | ) |
Passenger
revenue
|
- |
Other
nonoperating
income
(expense)
|
- | ||||||||
Total
|
$ | (9 | ) | $ | (41 | ) | $ | 1 |
Nine Months Ended
September 30, 2009
|
||||||||||||||
Cash
Flow
Hedges
|
Gain
(Loss)
Recognized
in
OCI
(Effective
Portion)
|
Gain
(Loss) Reclassified from
Accumulated
OCI into Income
(Effective
Portion)
|
Gain
(Loss) Recognized in
Income (Ineffective
Portion)
|
|||||||||||
Income
Statement
Location
|
Amount
|
Income
Statement
Location
|
Amount
|
|||||||||||
Fuel
derivatives
|
$ | 23 |
Aircraft
fuel and
related
taxes
|
$ | (392 | ) |
Other
nonoperating
income
(expense)
|
$ | 7 | |||||
Foreign
currency derivatives
|
6 |
Passenger
revenue
|
- |
Other
nonoperating
income
(expense)
|
- | |||||||||
Total
|
$ | 29 | $ | (392 | ) | $ | 7 |
NOTE
7 – COMMON STOCK
Common
Stock. In August 2009, we completed a public offering of 14.4
million shares of Class B common stock at a price to the public of $11.20 per
share, raising net proceeds of $158 million for general corporate
purposes.
In June 2008, we completed a public
offering of 11 million shares of Class B common stock at a price to the public
of $14.80 per share, raising net proceeds of $162 million for general corporate
purposes.
NOTE
8 - STOCK PLANS AND AWARDS
Profit Based RSU
Awards. We have issued profit based restricted stock unit
(“RSU”) awards pursuant to our Long Term Incentive and RSU Program, which can
result in cash payments to our officers upon the achievement of specified profit
sharing-based performance targets. The performance targets require
that we reach target levels of cumulative employee profit sharing under our
enhanced employee profit sharing program during the performance period and that
we have net income calculated in accordance with U.S. generally accepted
accounting principles for the applicable fiscal year in which the cumulative
profit sharing target is met. To serve as a retention feature,
payments related to the achievement of a performance target generally will be
made in annual increments over a three-year period to participants who remain
continuously employed by us through each payment date. Payments also
are conditioned on our having, at the end of the fiscal year preceding the date
any payment is made, a minimum unrestricted cash, cash equivalents and
short-term investments balance as set by the Human Resources Committee of our
Board of Directors. If we do not achieve the minimum cash balance
applicable to a payment date, the payment will be deferred until the next
payment date (March 1 of the next year), subject to a limit on the number of
years payments may be carried forward. Payment amounts are calculated
based on the number of RSUs subject to the award, the average closing price of
our common stock for the 20 trading days preceding the payment date and the
payment percentage set by the Human Resources Committee of our Board of
Directors for achieving the applicable profit sharing-based performance
target.
We have four outstanding awards of
profit based RSUs granted under our Long-Term Incentive and RSU
Program: (1) profit based RSU awards with a performance period
commencing April 1, 2006 and ending December 31, 2009, (2) profit based RSU
awards with a performance period commencing January 1, 2007 and ending December
31, 2009, (3) profit based RSU awards with a performance period commencing
January 1, 2008 and ending December 31, 2010 and (4) profit based RSU awards
with a performance period commencing January 1, 2009 and ending December 31,
2011.
The profit based RSU awards that had a
performance period commencing April 1, 2006 and ending December 31, 2009
achieved the highest level cumulative profit sharing performance target based on
cumulative profit sharing payments to our broad based employees of $262 million
during the performance period. As a result, in March 2009, payments
totaling $20 million were made with respect to these profit based RSU awards
following achievement of the year end cash hurdle of $1.125 billion for those
awards. The third and final payment related to these awards
will be made in March 2010, provided the year end cash hurdle is met at December
31, 2009.
The awards with a performance period
commencing January 1, 2009, most of which were granted in February 2009, cover
1.4 million RSUs with cumulative profit sharing performance targets ranging from
$100 million to $375 million and payment percentages ranging from 100% to
400%. The cash hurdle associated with these awards is $2.2
billion.
As of September 30, 2009, we had
recorded no liability associated with the profit based RSU awards for the
periods commencing January 1, 2007, 2008 or 2009.
Employee Stock Purchase
Plan. On June 10, 2009, our stockholders approved an amendment
to our 2004 Employee Stock Purchase Plan (the “2004 ESPP”), under which we had
sold to our employees all of the remaining previously authorized shares in the
first quarter of 2009. The amendment made 3.5 million shares of
common stock available for purchase by employees under the 2004 ESPP and
extended the term of the plan to December 31, 2019. The 2004 ESPP is
open to all of our employees, including CMI employees.
Stock
Options. During the nine months ended September 30, 2009, we
granted approximately 0.7 million options to purchase shares of our common stock
at a weighted average exercise price of $9.36 per share. The majority
of these options vests in equal installments over four years and has a term of
five years.
Incentive
Plan. Our incentive plan for granting equity and performance
awards to management level employees and equity awards to non-employee directors
expired on October 3, 2009. The plan remains effective solely for
purposes of governing the terms of outstanding awards and no further awards may
be granted under the plan.
Stock-based
Compensation. Total stock-based compensation expense (credit)
included in wages, salaries and related costs was $16 million, $25 million, $(7)
million and $30 million for the three months ended September 30, 2009 and 2008
and the nine months ended September 30, 2009 and 2008,
respectively. As of September 30, 2009, $6 million of compensation
cost attributable to future service related to unvested stock options and profit
based RSU awards with a performance period commencing April 1, 2006 had not yet
been recognized. This amount will be recognized in expense over a
weighted-average period of 1.3 years.
NOTE
9 - COMPREHENSIVE INCOME (LOSS)
Total comprehensive income (loss)
included the following (in millions):
Three
Months
Ended September
30,
|
Nine
Months
Ended September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Net
loss
|
$ | (18 | ) | $ | (230 | ) | $ | (367 | ) | $ | (317 | ) | ||||
Other
comprehensive income (loss):
|
||||||||||||||||
Derivative
financial instruments:
|
||||||||||||||||
Reclassification
into income (net of deferred taxes of $51 and $0 in 2008)
|
40 | 6 | 383 | (201 | ) | |||||||||||
Changes
in fair value (net of deferred taxes of $(77) and $0 in
2008)
|
(9 | ) | (336 | ) | 29 | (82 | ) | |||||||||
Unrealized
gain on student loan-related auction rate securities
|
- | (3 | ) | 2 | (3 | ) | ||||||||||
Items
related to employee benefit plans:
|
||||||||||||||||
(Increase)
decrease in net actuarial losses
|
- | (89 | ) | - | (89 | ) | ||||||||||
Amortization
of net actuarial losses (net of deferred taxes of $(5) and $0 in
2008)
|
27 | 13 | 81 | 22 | ||||||||||||
Amortization
of prior service cost (net of deferred taxes of $(6) and $0 in
2008)
|
7 | 13 | 23 | 23 | ||||||||||||
Comprehensive
income (loss) adjustments
|
65 | (396 | ) | 518 | (330 | ) | ||||||||||
Total
comprehensive income (loss)
|
$ | 47 | $ | (626 | ) | $ | 151 | $ | (647 | ) |
NOTE
10 - EMPLOYEE BENEFIT PLANS
Defined Benefit Pension and
Retiree Medical Plans. Net periodic defined benefit pension
and retiree medical benefits expense included the following components (in
millions):
Defined Benefit
Pension
|
Retiree Medical
Benefits
|
|||||||||||||||||||||||||||||||
Three
Months
Ended September
30,
|
Nine
Months
Ended September
30,
|
Three
Months
Ended September
30,
|
Nine
Months
Ended September
30,
|
|||||||||||||||||||||||||||||
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||||||||||||||
Service
cost
|
$ | 16 | $ | 15 | $ | 48 | $ | 44 | $ | 3 | $ | 3 | $ | 8 | $ | 9 | ||||||||||||||||
Interest
cost
|
38 | 37 | 115 | 112 | 4 | 4 | 12 | 12 | ||||||||||||||||||||||||
Expected
return on plan assets
|
(22 | ) | (39 | ) | (66 | ) | (120 | ) | - | - | - | - | ||||||||||||||||||||
Amortization
of unrecognized net actuarial loss
|
28 | 8 | 83 | 23 | (1 | ) | - | (2 | ) | (1 | ) | |||||||||||||||||||||
Amortization
of prior service cost
|
2 | 2 | 7 | 7 | 5 | 5 | 16 | 16 | ||||||||||||||||||||||||
Net
periodic benefit expense
|
62 | 23 | 187 | 66 | 11 | 12 | 34 | 36 | ||||||||||||||||||||||||
Settlement
charge (included in special charges)
|
- | 8 | - | 8 | - | - | - | - | ||||||||||||||||||||||||
Net
benefit expense
|
$ | 62 | $ | 31 | $ | 187 | $ | 74 | $ | 11 | $ | 12 | $ | 34 | $ | 36 |
During the first nine months of 2009,
we contributed $140 million to our tax-qualified defined benefit pension
plans. On October 9, 2009, we contributed an additional $36 million
to the plans, satisfying our minimum funding requirements during calendar year
2009.
We recorded non-cash settlement charges
totaling $8 million in the three and nine months ended September 30, 2008
related to lump sum distributions from our pilot-only defined benefit pension
plan to retired pilots. Accounting rules for defined benefit pension
plans require the use of settlement accounting if, for a given year, the cost of
all settlements exceeds, or is expected to exceed, the sum of the service cost
and interest cost components of net periodic pension expense for the
plan. Under settlement accounting, unrecognized plan gains or losses
must be recognized immediately in proportion to the percentage reduction of the
plan's projected benefit obligation. We did not record any settlement
charges in the nine months ended September 30, 2009 because it is not probable
that we will meet the threshold for the year 2009. However, we may
record settlement charges in the fourth quarter of 2009 if settlements in the
fourth quarter are higher than currently expected.
Defined Contribution
Plans. The 401(k) plan covering substantially all domestic
employees except for pilots and the 401(k) plan covering substantially all of
the employees of CMI were amended effective January 1, 2009 to provide for the
reinstatement of service-based employer match contributions for certain
workgroups at levels ranging up to 50% of employee contributions of up to 6% of
the employee’s salary, based on seniority. Company matching
contributions are made in cash. Total expense for all defined
contribution plans, including two pilot-only plans, was $22 million, $22
million, $72 million and $67 million for the three months ended September 30,
2009 and 2008 and the nine months ended September 30, 2009 and 2008,
respectively.
NOTE
11 - SPECIAL CHARGES
Special charges were as follows (in
millions):
Three
Months
Ended September
30,
|
Nine
Months
Ended September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Aircraft-related
charges, net of gains on sales of aircraft
|
$ | 6 | $ | 12 | $ | 53 | $ | 45 | ||||||||
Severance
|
5 | 33 | 5 | 33 | ||||||||||||
Route
impairment and other
|
9 | 38 | 10 | 55 | ||||||||||||
Pension
settlement charges (see Note 10)
|
- | 8 | - | 8 | ||||||||||||
Total
special charges
|
$ | 20 | $ | 91 | $ | 68 | $ | 141 |
The special charges all relate to our
mainline segment unless otherwise noted.
In the third quarter of 2009, we
entered into agreements to sublease five temporarily grounded ERJ-135
aircraft. The subleases have terms of five years, but may be
cancelled by the lessee under certain conditions after an initial term of two
years. We recorded a $6 million non-cash charge in our regional
segment for the difference between the sublease rental income and the contracted
rental payments on those aircraft during the initial term of the
agreement. The remaining 25 ERJ-135 aircraft continue to be
temporarily grounded. We are evaluating our options regarding these
aircraft, including permanently grounding them. If we do permanently
ground them, we may incur significant special charges for future rent
expense.
During the first nine months of 2009,
we announced plans to eliminate certain operational, management and clerical
positions across the company. We recorded a charge of $5 million for
severance and other costs during the third quarter of 2009 in connection with
the reductions in force, furloughs and leaves of absence. In the
third quarter of 2009, we also recorded a $9 million adjustment to our reserve
for unused facilities due to reductions in expected sublease income primarily
for a maintenance hangar in Denver.
Aircraft-related charges in 2009 prior
to the third quarter include $31 million of non-cash impairments on owned Boeing
737-300 and 737-500 aircraft and related assets and $16 million of other charges
($12 million of which was non-cash) related to the grounding and disposition of
Boeing 737-300 aircraft and the write-off of certain obsolete spare
parts. The impairment charges on the Boeing 737-300 and 737-500
fleets prior to the third quarters of both 2009 and 2008 relate to our decision
in June 2008 to retire all of our Boeing 737-300 aircraft and a significant
portion of our Boeing 737-500 aircraft by early January 2010. We
recorded an initial impairment charge in the second quarter of 2008 for each of
these fleet types. The additional write-down in the second quarter of
2009 reflects the further reduction in the fair value of these fleet types in
the current economic environment. In both periods, we determined that
indicators of impairment were present for these fleets. Fleet assets
include owned aircraft, improvements on leased aircraft, rotable spare parts,
spare engines and simulators. Based on our evaluations, we determined
that the carrying amounts of these fleets were impaired and wrote them down to
their estimated fair value. We estimated the fair values based on
current market quotes and our expected proceeds from the sale of the
assets.
We recorded $91 million of special
charges in the third quarter of 2008, a portion of which is related to our
capacity reductions implemented beginning in September 2008. The
special charges include $33 million for severance and continuing medical
coverage for employees accepting early retirement packages or company-offered
leaves of absence, $12 million of charges for future lease costs on permanently
grounded Boeing 737-300 aircraft and an $11 million charge related to future
rents for leased space at locations that are no longer expected to be used or
subleased.
The special charges in the third
quarter of 2008 also include an $18 million non-cash charge to write off an
intangible route asset as a result of our decision to move all of our year-round
London flights from London Gatwick Airport to London Heathrow Airport, a $9
million charge pertaining to our reimbursement of certain costs incurred by
ExpressJet for temporarily grounded aircraft and airport slots being returned to
us and a non-cash settlement charge of $8 million related to lump sum
distributions from our pilot-only defined benefit pension plan to retired
pilots.
Aircraft-related charges in 2008 prior
to the third quarter include $37 million of non-cash impairments on owned Boeing
737-300 and 737-500 aircraft and related assets and a non-cash charge of $14
million to write down spare parts and supplies for the Boeing 737-300 and
737-500 fleets to the lower of cost or net realizable value, partially offset by
$18 million of gains on the sale of five owned Boeing 737-500
aircraft. We received proceeds of $68 million on the sale of these
aircraft. Other special charges in the second quarter of 2008 include
$17 million of charges related to contract settlements with regional carriers
and unused facilities ($15 million of which related to our regional
segment).
If economic conditions deteriorate
further, we may incur additional special charges in future quarters as we
attempt to dispose of our grounded Boeing 737-300 and 737-500
aircraft. We are currently unable to estimate the amount or timing of
these future charges, if any. At September 30, 2009, the net carrying
values of our Boeing 737-300 and 737-500 fleets were $76 million and $75
million, respectively.
Accrual
Activity. Activity related to the accruals for severance and
medical costs and future lease payments on permanently grounded aircraft and
unused facilities is as follows (in millions):
Severance/
Medical
Costs
|
Permanently
Grounded
Aircraft
|
Unused
Facilities
|
||||||||||
Balance,
December 31, 2008
|
$ | 28 | $ | 10 | $ | 20 | ||||||
Accrual
|
5 | 1 | 10 | |||||||||
Payments
|
(13 | ) | (8 | ) | (3 | ) | ||||||
Balance,
September 30, 2009
|
$ | 20 | $ | 3 | $ | 27 |
These accruals and payments relate
primarily to our mainline segment. Cash payments related to the
accruals for severance and medical costs will be made through the third quarter
of 2011. Remaining lease payments on permanently grounded aircraft
and unused facilities will be made through 2010 and 2018,
respectively.
NOTE
12 - INCOME TAXES
Our effective tax rates differ from the
federal statutory rate of 35% primarily due to the following: changes
in the valuation allowance, expenses that are not deductible for federal income
tax purposes and state income taxes. We are required to provide a
valuation allowance for our deferred tax assets in excess of deferred tax
liabilities because we have concluded that it is more likely than not that such
deferred tax assets ultimately will not be realized. As a result, our
pre-tax losses for the first nine months of 2009 were not reduced by any tax
benefit.
Section 382 of the Internal Revenue
Code (“Section 382”) imposes limitations on a corporation's ability to utilize
net operating losses (“NOLs”) if it experiences an “ownership
change.” In general terms, an ownership change may result from
transactions increasing the ownership of certain stockholders in the stock of a
corporation by more than 50 percentage points over a three-year
period. In the event of an ownership change, utilization of our NOLs
would be subject to an annual limitation under Section 382 determined by
multiplying the value of our stock at the time of the ownership change by the
applicable long-term tax-exempt rate (which is 4.48% for September
2009). Any unused annual limitation may be carried over to later
years. The amount of the limitation may, under certain circumstances,
be increased by the built-in gains in assets held by us at the time of the
change that are recognized in the five-year period after the
change. If we were to have an ownership change as of September 30,
2009 under current conditions, our annual NOL utilization could be limited to
$101 million per year, before consideration of any built-in gains.
NOTE
13 – GAIN ON SALE OF INVESTMENTS
In May 2008, we sold all of our
remaining shares of Copa Holdings, S.A. (“Copa”) Class A common stock for net
proceeds of $149 million and recognized a gain of $78 million.
NOTE
14 - SEGMENT REPORTING
We have two reportable
segments: mainline and regional. The mainline segment
consists of flights using larger jets while the regional segment currently
consists of flights utilizing aircraft with a capacity of 78 or fewer
seats. As of September 30, 2009, the regional segment was operated by
ExpressJet, Chautauqua, CommutAir and Colgan through capacity purchase
agreements.
We evaluate segment performance based
on several factors, of which the primary financial measure is operating income
(loss). However, we do not manage our business or allocate resources
based on segment operating profit or loss because (1) our flight schedules are
designed to maximize passenger revenue, (2) much of the operations of the two
segments are substantially integrated (for example, airport operations, sales
and marketing, scheduling and ticketing) and (3) management decisions are based
on their anticipated impact on the overall network, not on one individual
segment.
Financial information by business
segment is set forth below (in millions):
Three
Months
Ended September
30,
|
Nine
Months
Ended September
30,
|
||||||||||||||||
2009
|
2008
|
2009
|
2008
|
||||||||||||||
Operating
Revenue:
|
|||||||||||||||||
Mainline
|
$ | 2,797 | $ | 3,519 | $ | 7,970 | $ | 9,899 | |||||||||
Regional
|
520 | 637 | 1,434 | 1,872 | |||||||||||||
Total
Consolidated
|
$ | 3,317 | $ | 4,156 | $ | 9,404 | $ | 11,771 | |||||||||
Operating
Income (Loss):
|
|||||||||||||||||
Mainline
|
$ | 111 | $ | (30 | ) | $ | 111 | $ | 17 | ||||||||
Regional
|
(50 | ) | (122 | ) | (258 | ) | (306 | ) | |||||||||
Total
Consolidated
|
$ | 61 | $ | (152 | ) | $ | (147 | ) | $ | (289 | ) | ||||||
Net
Income (Loss):
|
|||||||||||||||||
Mainline
|
$ | 35 | $ | (112 | ) | $ | (99 | ) | $ | (77 | ) | ||||||
Regional
|
(53 | ) | (118 | ) | (268 | ) | (240 | ) | |||||||||
Total
Consolidated
|
$ | (18 | ) | $ | (230 | ) | $ | (367 | ) | $ | (317 | ) |
The amounts in the table above are
presented on the basis of how our management reviews segment
results. Under this basis, the regional segment's revenue includes a
pro-rated share of our ticket revenue for segments flown by regional carriers
and expenses include all activity related to the regional operations, regardless
of whether the costs were paid directly by us or to the regional
carriers.
NOTE
15 - COMMITMENTS AND CONTINGENCIES
Aircraft Purchase
Commitments. As of September 30, 2009, we had firm commitments
to purchase 82 new aircraft (52 Boeing 737 aircraft,
five Boeing 777 aircraft and 25 Boeing 787 aircraft) scheduled for delivery from
2009 through 2016, with an estimated aggregate cost of $5.1 billion including
related spare engines. In addition to our firm order aircraft, we had
options to purchase a total of 102 additional Boeing aircraft as of September
30, 2009.
We have also agreed to lease four
Boeing 757-300 aircraft from Boeing Capital Corporation. We expect
these aircraft to be placed into service by the end of the first quarter of
2010.
As discussed in Note 4, we have
obtained financing for the one remaining new aircraft scheduled for delivery to
us in 2009. We also have backstop financing available for the two
Boeing 777-200ER aircraft and 12 Boeing 737 aircraft scheduled for delivery in
2010, subject to customary closing conditions. However, we do not
have backstop financing or any other financing currently in place for the
balance of the Boeing aircraft on order. Further financing will be
needed to satisfy our capital commitments for our firm aircraft and other
related capital expenditures. We can provide no assurance that
backstop financing or any other financing not already in place for our aircraft
deliveries will be available to us when needed on acceptable terms or at
all. Since the commitments for firm order aircraft are
non-cancelable, and assuming no breach of the agreement by Boeing, if we are
unable to obtain financing and cannot otherwise satisfy our commitment to
purchase these aircraft, the manufacturer could exercise its rights and remedies
under applicable law, such as seeking to terminate the contract for a material
breach, selling the aircraft to one or more other parties and suing us for
damages to recover any resulting losses incurred by the
manufacturer.
Financings and
Guarantees. We are the guarantor of approximately $1.7 billion
in aggregate principal amount of tax-exempt special facilities revenue bonds and
interest thereon, excluding the US Airways contingent liability described
below. These bonds, issued by various airport municipalities, are
payable solely from our rentals paid under long-term agreements with the
respective governing bodies. The leasing arrangements associated with
approximately $1.5 billion of these obligations are accounted for as operating
leases, and the leasing arrangements associated with approximately $200 million
of these obligations are accounted for as capital leases.
We are contingently liable for US
Airways' obligations under a lease agreement between US Airways and the Port
Authority of New York and New Jersey related to the East End Terminal at
LaGuardia airport. These obligations include the payment of ground
rentals to the Port Authority and the payment of other rentals in respect of the
full amounts owed on special facilities revenue bonds issued by the Port
Authority having an
outstanding par amount of $123 million at September 30, 2009 and a final
scheduled maturity in 2015. If US Airways defaults on these obligations,
we would be obligated to cure the default and we would have the right to occupy
the terminal after
US Airways’ interest in the lease had been terminated.
We also had letters of credit and
performance bonds relating to various real estate and customs obligations at
September 30, 2009 in the amount of $67 million. These letters of
credit and performance bonds have expiration dates through June
2012.
General Guarantees and
Indemnifications. We are the lessee under many real estate
leases. It is common in such commercial lease transactions for us as
the lessee to agree to indemnify the lessor and other related third parties for
tort liabilities that arise out of or relate to our use or occupancy of the
leased premises and the use or occupancy of the leased premises by regional
carriers operating flights on our behalf. In some cases, this
indemnity extends to related liabilities arising from the negligence of the
indemnified parties, but usually excludes any liabilities caused by their gross
negligence or willful misconduct. Additionally, we typically
indemnify such parties for any environmental liability that arises out of or
relates to our use of the leased premises.
In our aircraft financing agreements,
we typically indemnify the financing parties, trustees acting on their behalf
and other related parties against liabilities that arise from the manufacture,
design, ownership, financing, use, operation and maintenance of the aircraft and
for tort liability, whether or not these liabilities arise out of or relate to
the negligence of these indemnified parties, except for, among other things,
their gross negligence or willful misconduct.
We expect that we would be covered by
insurance (subject to deductibles) for most tort liabilities and related
indemnities described above with respect to real estate we lease and aircraft we
operate.
In our financing transactions that
include loans, we typically agree to reimburse lenders for any reduced returns
with respect to the loans due to any change in capital requirements and, in the
case of loans in which the interest rate is based on the London Interbank
Offered Rate (“LIBOR”), for certain other increased costs that the lenders incur
in carrying these loans as a result of any change in law, subject in most cases
to certain mitigation obligations of the lenders. At September 30,
2009, we had $1.5 billion of floating rate debt and $232 million of fixed rate
debt, with remaining terms of up to 11 years, which is subject to these
increased cost provisions. In several financing transactions
involving loans or leases from non-U.S. entities, with remaining terms of up
to 11 years and an
aggregate carrying value of $1.6 billion, we bear the
risk of any change in tax laws that would subject loan or lease payments
thereunder to non-U.S. entities to withholding taxes, subject to customary
exclusions.
We may be required to make future
payments under the foregoing indemnities and agreements due to unknown variables
related to potential government changes in capital adequacy requirements, laws
governing LIBOR-based loans or tax laws, the amounts of which cannot be
estimated at this time.
Credit Card Processing
Agreement. The covenants contained in our domestic bank-issued
credit card processing agreement with Chase Bank USA, N.A. (“Chase”) require
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.
Under the terms of our credit card
processing agreement with American Express, if a covenant trigger under the
Chase processing agreement requires us to post additional collateral under that
agreement, we also would be required to post additional collateral under the
American Express processing agreement. The amount of additional
collateral required under the American Express processing agreement would be
based on a percentage of the value of unused tickets (for travel at a future
date) purchased by customers using the American Express card. The
percentage for purposes of this calculation is the same as the percentage
applied under the Chase processing agreement, after taking into account certain
other risk protection maintained by American Express.
Under these processing agreements and
based on our current air traffic liability exposure (as defined in each
agreement), we would be required to post collateral up to the following amounts
if we failed to comply with the covenants described above:
·
|
a
total of $79 million if our unrestricted cash, cash equivalents and
short-term investments balance falls below $2.0
billion;
|
·
|
a
total of $234 million if we fail to maintain the minimum unsecured debt
ratings specified above;
|
·
|
a
total of $441 million if our unrestricted cash, cash equivalents and
short-term investments balance (plus any collateral posted at Chase) falls
below $1.4 billion or if our ratio of unrestricted cash, cash equivalents
and short-term investments to current liabilities falls below 0.25 to 1.0;
and
|
·
|
a
total of $958 million if our unrestricted cash, cash equivalents and
short-term investments balance (plus any collateral posted at Chase) falls
below $1.0 billion or if our ratio of unrestricted cash, cash equivalents
and short-term investments to current liabilities falls below 0.22 to
1.0.
|
The amounts shown above are incremental
to the current collateral we have posted with these companies. We are
currently in compliance with all of the covenants under these processing
agreements.
Credit
Ratings. At September 30, 2009, our senior unsecured debt was
rated B3 by Moody's and CCC+ by Standard & Poor's. These ratings
are significantly below investment grade. Our current credit ratings
increase the costs we incur when issuing debt, adversely affect the terms of
such debt and limit our financing options. Additional reductions in
our credit ratings could further increase our borrowing costs 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, as discussed above, we would have to post
additional collateral of approximately $234 million under our Chase and American
Express processing agreements if our senior unsecured debt rating were to fall
below Caa3 as rated by Moody's or CCC- as rated by Standard &
Poor's. The insurer under our workers’ compensation program has the
right to require us to post up to $32 million of additional collateral under a
number of conditions, including based on our current senior unsecured debt
rating, which is currently at the minimum of B3 as rated by Moody’s and below
the minimum of B- as rated by Standard & Poor’s. We could also be
required to post a higher amount of collateral with our fuel hedge
counterparties if our credit ratings were to fall, or if our unrestricted cash,
cash equivalents and short-term investments balance fell below certain specified
levels, and our fuel hedges were in a liability position. In such a
case, the total amount of the collateral that we might be required to post at
any time would be up to the amount of our liability under the related derivative
instruments to our respective counterparties. Our fuel hedging
agreement with one counterparty also requires us to post additional collateral
of up to 10% of the notional amount of our hedging contracts with that
counterparty if our senior unsecured debt rating by Moody’s or Standard &
Poor’s is below B3 or B-, respectively. Our fuel derivative contracts
do not contain any other credit risk-related contingent features, other than
those related to a change in control.
Employees. As
of September 30, 2009, we had approximately 41,855 employees, which, due to the
number of part-time employees, represents 38,860 full-time equivalent
employees. Approximately 44% of our full-time equivalent employees
are represented by unions.
The collective bargaining agreements
with our pilots, mechanics and certain other work groups became amendable in
December 2008. On July 6, 2009, our flight simulator technicians
ratified a new four-year collective bargaining agreement with us. We
have been meeting with representatives of the applicable unions representing our
other unionized workgroups, in one case since February 2007, to engage in
bargaining for 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. Although there can be no assurance
that our generally good labor relations and high labor productivity will
continue, the preservation of good relations with our employees is a significant
component of our business strategy.
Environmental
Matters. 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.
At September 30, 2009, we had an
accrual for estimated costs of environmental remediation throughout our system
of $31 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 September 30, 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.
Legal
Proceedings. During the
period between 1997 and 2001, we reduced or capped the base commissions that we
paid to domestic travel agents, and in 2002 we eliminated those base
commissions. These actions were similar to those also taken by other air
carriers. We are a defendant, along with several other air carriers,
in two lawsuits brought by travel agencies that purportedly opted out of a prior
class action entitled Sarah Futch Hall d/b/a/
Travel Specialists v. United Air Lines, et al. (U.S.D.C., Eastern
District of North Carolina), filed on June 21, 2000, in which the defendant
airlines prevailed on summary judgment that was upheld on
appeal. These similar suits against Continental and other major
carriers allege violations of antitrust laws in reducing and ultimately
eliminating the base commissions formerly paid to travel agents 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. The
plaintiffs now have the opportunity to appeal that ruling 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 vigorously defend any
appeal. Nevertheless, a final adverse court decision awarding
substantial money damages could have a material adverse effect on our results of
operations, financial condition or liquidity.
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.
Item
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
This quarterly report on Form 10-Q
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 such risks and
uncertainties, please see the risk factors set forth in Part II, Item
1A. “Risk Factors” and elsewhere in this Form 10-Q, in our Annual
Report on Form 10-K for the year ended December 31, 2008 (the “2008 Form 10-K”)
and in our reports and registration statements filed from time to time with the
Securities and Exchange Commission (“SEC”), which identify important matters
such as the significant volatility in the cost of aircraft fuel, our transition
to a new global alliance, the consequences of our high leverage and other
significant capital commitments, our high labor and pension costs, delays in
scheduled aircraft deliveries, service interruptions at one of our hub airports,
disruptions to the operations of our regional operators, disruptions in our
computer systems, and industry conditions, including the recession in the U.S.
and global economies, the airline pricing environment, terrorist attacks,
regulatory matters, excessive taxation, industry consolidation, the availability
and cost of insurance, public health threats and the seasonal nature of the
airline business. 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 are a major United States air
carrier engaged in the business of transporting passengers, cargo and
mail. We are the world's fifth largest airline as measured by the
number of scheduled miles flown by revenue passengers in
2008. Including our wholly-owned subsidiary, Continental Micronesia,
Inc. (“CMI”), and regional flights operated on our behalf under capacity
purchase agreements with other carriers, we operate more than 2,000 daily
departures. As of September 30, 2009, we served 117 domestic and 117
international destinations and offered additional connecting service through
alliances with domestic and foreign carriers.
General information about us can be
found on our website, continental.com. 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 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 SEC.
Third
Quarter Financial Highlights
·
|
We
recorded a net loss of $18 million in the third quarter of
2009.
|
·
|
Passenger
revenue decreased 21.6% during the third quarter of 2009 as compared to
the third quarter of 2008, primarily due to lower fares and less high
yield business traffic attributable to the global
recession.
|
·
|
We
recorded operating income of $61 million during the third quarter of 2009
as compared to an operating loss of $152 million in the third quarter of
2008, due primarily to lower fuel costs offset in part by reduced
revenue.
|
·
|
Unrestricted
cash, cash equivalents and short-term investments totaled $2.5 billion at
September 30, 2009.
|
Third
Quarter Operational Highlights
·
|
Consolidated
traffic decreased 0.9% and capacity decreased 4.5% during the third
quarter of 2009 as compared to the third quarter of 2008, resulting in a
consolidated load factor of 85.1% for the third quarter of
2009.
|
·
|
We
recorded a U.S. Department of Transportation (“DOT”) on-time arrival rate
of 82.8% and a systemwide mainline segment completion factor of 99.7% for
the third quarter of 2009, compared to a DOT on-time arrival rate of 77.0%
and a mainline segment completion factor of 97.9% for the third quarter of
2008.
|
Outlook
The severe global economic recession
has significantly diminished the demand for air travel and disrupted the global
capital markets, resulting in a difficult financial environment for U.S. network
carriers. In addition, we have significant long-term debt and capital
lease obligations and future commitments for capital expenditures, including the
acquisition of aircraft and related spare engines. To meet these
obligations, we must access the global markets for capital and/or achieve and
sustain profitability. 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 markets for capital in the future
on acceptable terms (or at all). Moreover, our reduced passenger and
cargo revenue resulting from the continued weakened demand for air travel is
hindering our ability to achieve and sustain profitability. Given the
losses we incurred during the first nine months of 2009, under current market
conditions we expect to incur a significant loss for the full year
2009.
Economic
Conditions. 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 current recession in the U.S. and global
economies has had a significant negative impact on the demand for air carrier
services. Seven major U.S. carriers have reported a combined 7.6%
decrease in traffic, as measured by miles flown by revenue passengers during the
first nine months of 2009 as compared to the first nine months of
2008. 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. If global economic
conditions persist 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 is obtainable. 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
the first nine months of 2009. Our average consolidated (mainline and
regional) jet fuel price per gallon including related taxes decreased to $1.97 in the first
nine months of 2009 from $3.38 in the first nine months of 2008. If
fuel prices rise significantly from their current levels, we may be unable to
raise fares or other fees sufficiently in the current financial environment 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 the first nine months of 2009, which
were largely entered into before oil prices fell, resulted in $0.31 per gallon
of additional fuel expense during the first nine months of 2009. We
have significantly fewer hedge contracts outstanding related to the fourth
quarter of 2009 and first quarter of 2010.
Based on our expected fuel consumption
in 2009, a one dollar change in the price of a barrel of crude oil would change
our annual fuel expense by approximately $40 million, before considering
refining margins and the impact of our fuel hedging program. We
believe that our modern, fuel-efficient fleet continues to provide us with a
competitive advantage relative to our peers and a permanent hedge against higher
fuel prices.
New Revenue-Generating and
Cost Saving Measures. In response to the significant decline
in revenue, we are implementing 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 include the
elimination of certain operational, management and clerical positions across the
company. We have offered employees voluntary programs to minimize the
number of involuntary furloughs and reductions in force. We also
increased domestic checked baggage fees by $5 for customers who do not prepay
those fees online, implemented fees for certain international checked baggage
and increased the telephone reservation booking service fee by $5.
Capacity. Because
of the current adverse economic conditions, we have reduced our capacity
significantly and rescheduled aircraft deliveries, and we do not anticipate
returning to significant capacity growth until the level of demand for air
travel and economic conditions improve sufficiently to justify such
growth. By early January 2010, we expect to remove all of our
remaining Boeing 737-300 aircraft and three additional Boeing 737-500 aircraft
from service.
We expect our consolidated capacity to
increase between 1.5% and 2.5% in 2010. We expect our mainline
capacity to increase between 2% and 3%, with mainline domestic capacity
remaining about flat and mainline international capacity increasing between 5%
and 6%. The international capacity increase is primarily due to the
run-rate of international routes added in 2009 and the restoration of our full
schedule to Mexico following our capacity reductions earlier 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. In June 2009, Boeing announced an additional delay to its
787 aircraft program. We currently expect the first of our 25 Boeing
787 aircraft to be delivered in the second half of 2011.
Star
Alliance. In 2008, we entered into framework agreements with
United, Lufthansa and Air Canada, each a member of Star Alliance, pursuant to
which we are developing an extensive code-share relationship and reciprocity of
frequent flier programs, elite customer recognition and airport lounge use with
these other airlines. We plan to implement these relationships and
join United, Lufthansa and Air Canada (and other member airlines) in Star
Alliance on October 27, 2009. We will exit SkyTeam effective with our
last flight on October 24, 2009.
On July 23, 2008, we filed an
application with the DOT to join United and a group of eight other carriers
within Star Alliance that already hold antitrust immunity, which the DOT
approved on July 10, 2009. Final approval by the DOT of this
application 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. In addition, we
are seeking a modification to our existing pilot collective bargaining
agreement, which would permit us to engage in international revenue sharing with
a domestic air carrier.
Labor
Costs. Our ability to achieve and sustain profitability also
depends on continuing our efforts to implement and maintain a more competitive
cost structure. The collective bargaining agreements with our pilots,
mechanics and certain other work groups became amendable in December
2008. On July 6, 2009, our flight simulator technicians ratified a
new four-year collective bargaining agreement with us. We have been
meeting with representatives of the applicable unions representing our other
unionized workgroups, in one case since February 2007, to engage in bargaining
for 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. We cannot predict the outcome of our ongoing
negotiations with our unionized workgroups, although significant increases in
the pay and benefits resulting from new collective bargaining agreements could
have a material adverse effect on us.
RESULTS
OF OPERATIONS
The following discussion provides an
analysis of our results of operations and reasons for material changes therein
for the three and nine months ended September 30, 2009 as compared to the
corresponding periods in 2008. As further discussed in the notes to
our consolidated financial statements, our consolidated financial statements for
the three and nine months ended September 30, 2008 have been adjusted for the
retrospective application of the Cash Conversion Subsections of ASC Subtopic
470-20 and for certain reclassifications related to fuel and related taxes on
flights operated for us by other operators under capital purchase
agreements.
Comparison
of Three Months Ended September 30, 2009 to Three Months Ended September 30,
2008
Consolidated
Results of Operations
Statistical
Information. Certain statistical information for our
consolidated operations for the three months ended September 30 is as
follows:
2009
|
2008
|
Increase
(Decrease)
|
||||||||||
Passengers
(thousands) (1)
|
16,795 | 17,108 | (1.8 | )% | ||||||||
Revenue
passenger miles (millions) (2)
|
24,617 | 24,836 | (0.9 | )% | ||||||||
Available
seat miles (millions) (3)
|
28,933 | 30,304 | (4.5 | )% | ||||||||
Passenger
load factor (4)
|
85.1 | % | 82.0 | % |
3.1 pts.
|
|||||||
Passenger
revenue per available seat mile (cents)
|
10.19 | 12.41 | (17.9 | )% | ||||||||
Average
yield per revenue passenger mile (cents) (5)
|
11.97 | 15.14 | (20.9 | )% | ||||||||
Average
price per gallon of fuel, including fuel taxes
|
$ | 1.99 | $ | 3.85 | (48.3 | )% | ||||||
Fuel
gallons consumed (millions)
|
443 | 470 | (5.7 | )% |
(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.
|
Results of
Operations. We recorded a net loss of $18 million in the third
quarter of 2009 as compared to a net loss of $230 million for the third quarter
of 2008. We consider a key measure of our performance to be operating
income (loss), which was operating income of $61 million for the third quarter
of 2009, as compared to an operating loss of $152 million for the third quarter
of 2008. Significant components of our consolidated operating results
for the three months ended September 30 are as follows (in millions, except
percentage changes):
Increase
|
%
Increase
|
|||||||||||||||
2009
|
2008
|
(Decrease)
|
(Decrease)
|
|||||||||||||
Operating
Revenue
|
$ | 3,317 | $ | 4,156 | $ | (839 | ) | (20.2 | )% | |||||||
Operating
Expenses
|
3,256 | 4,308 | (1,052 | ) | (24.4 | )% | ||||||||||
Operating
Income (Loss)
|
61 | (152 | ) | 213 |
NM
|
|||||||||||
Nonoperating
Income (Expense)
|
(79 | ) | (98 | ) | (19 | ) | (19.4 | )% | ||||||||
Income
Tax Benefit
|
- | 20 | (20 | ) | (100.0 | )% | ||||||||||
Net
Loss
|
$ | (18 | ) | $ | (230 | ) | $ | (212 | ) | (92.2 | )% |
NM – Not
Meaningful
Each of these items is discussed in the
following sections.
Operating
Revenue. The table below shows components of operating revenue
for the quarter ended September 30, 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
|
Percentage
Increase (Decrease) in
Third Quarter 2009 vs
Third Quarter 2008
|
|||||||||||||||
(in
millions)
|
Revenue
|
RASM
|
ASMs
|
|||||||||||||
Passenger
revenue:
|
||||||||||||||||
Domestic
|
$ | 1,177 | (20.5 | )% | (15.6 | )% | (5.8 | )% | ||||||||
Trans-Atlantic
|
649 | (29.2 | )% | (21.0 | )% | (10.5 | )% | |||||||||
Latin
America
|
361 | (22.4 | )% | (24.3 | )% | 2.4 | % | |||||||||
Pacific
|
255 | (9.5 | )% | (22.6 | )% | 16.9 | % | |||||||||
Total
Mainline
|
2,442 | (22.4 | )% | (19.1 | )% | (4.1 | )% | |||||||||
Regional
|
505 | (17.7 | )% | (10.9 | )% | (7.7 | )% | |||||||||
Total
|
2,947 | (21.6 | )% | (17.9 | )% | (4.5 | )% | |||||||||
Cargo
|
92 | (28.7 | )% | |||||||||||||
Other
|
278 | 4.1 | % | |||||||||||||
Operating
Revenue
|
$ | 3,317 | (20.2 | )% |
Passenger revenue decreased
significantly in the third quarter of 2009 as compared to the third quarter of
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 a decreased freight volume. Other revenue
increased due to the implementation of new fees for checking bags in 2008,
offset in part by a reduction in sublease income 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 three
months ended September 30 (in millions, except percentage changes):
2009
|
2008
|
Increase
(Decrease)
|
%
Increase
(Decrease)
|
|||||||||||||
Aircraft
fuel and related taxes
|
$ | 881 | $ | 1,807 | $ | (926 | ) | (51.2 | )% | |||||||
Wages,
salaries and related costs
|
794 | 765 | 29 | 3.8 | % | |||||||||||
Aircraft
rentals
|
233 | 244 | (11 | ) | (4.5 | )% | ||||||||||
Landing
fees and other rentals
|
222 | 225 | (3 | ) | (1.3 | )% | ||||||||||
Regional
capacity purchase, net
|
211 | 247 | (36 | ) | (14.6 | )% | ||||||||||
Distribution
costs
|
160 | 182 | (22 | ) | (12.1 | )% | ||||||||||
Maintenance,
materials and repairs
|
159 | 152 | 7 | 4.6 | % | |||||||||||
Depreciation
and amortization
|
124 | 112 | 12 | 10.7 | % | |||||||||||
Passenger
services
|
99 | 113 | (14 | ) | (12.4 | )% | ||||||||||
Special
charges
|
20 | 91 | (71 | ) |
NM
|
|||||||||||
Other
|
353 | 370 | (17 | ) | (4.6 | )% | ||||||||||
$ | 3,256 | $ | 4,308 | $ | (1,052 | ) | (24.4 | )% |
Operating expenses decreased 24.4%
primarily due to the following:
·
|
Aircraft fuel and
related taxes decreased due to a 48.3% decrease in consolidated jet
fuel prices and decreased flying. Our average jet fuel price
per gallon including related taxes decreased to $1.99 in the third quarter
of 2009 from $3.85 in the third quarter of 2008. Our average
jet fuel price includes losses related to our fuel hedging program of
$0.09 per gallon in the third quarter of 2009 as compared to $0.10 per
gallon in the third quarter of 2008.
|
·
|
Wages, salaries and
related costs increased primarily due to higher wage rates for
certain workgroups offset by a 5% reduction in the number of employees in
connection with capacity reductions. Expenses in the third
quarter of 2009 also include $39 million of higher pension expense
resulting primarily from lower returns on plan assets.
|
·
|
Aircraft
rentals decreased due to the retirement of leased Boeing 737
aircraft in the second half of 2008 and the first nine months of
2009. New aircraft delivered in 2008 and the first nine months
of 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. Capacity purchase expenses decreased due
to the transition of management of certain airports to us from ExpressJet,
with the related expense now being reported in landing fees and other
rentals and other operating expenses, as well as capacity
reductions.
|
·
|
Distribution
costs decreased due to lower credit card discount fees, booking
fees and travel agency commissions, all of which resulted from decreased
passenger revenue.
|
·
|
Passenger
services expenses decreased due to fewer meals and beverages in the
third quarter of 2009 compared to the third quarter of 2008, resulting
from the decreased demand for air travel in the weak economy, and lower
mishandled baggage expenses.
|
·
|
Special
charges. See Note 11 to our consolidated financial
statements contained in Item 1 of this report for a discussion of the
special charges.
|
·
|
Other operating
expenses decreased due to lower ground handling, security and
outside service costs resulting from capacity reductions, more favorable
foreign currency exchange rates and lower OnePass reward expenses,
partially offset by expenses now recorded in other operating expenses as a
result of the transition of management of certain airports to us from
ExpressJet.
|
Nonoperating Income
(Expense). Nonoperating expense decreased $19 million in the
third quarter of 2009 compared to the third quarter of 2008 due to the
following:
·
|
Net interest
expense increased $10 million primarily as a result of lower
interest income.
|
·
|
Other nonoperating
income (expense) included fuel hedge ineffectiveness gains (losses)
of $1 million and $(15) million in the third quarter of 2009 and 2008,
respectively. The ineffectiveness was caused by our non-jet
fuel derivatives experiencing a higher relative change in value than the
jet fuel being hedged and the mark-to-market impact of fuel derivative
contracts with a bankrupt counterparty. Other nonoperating
income (expense) in the third quarter of 2009 also included favorable
foreign exchange gains and an increase in the fair value of the cash
surrender value of company-owned life insurance
policies.
|
Income
Taxes. Our effective tax rates differ from the federal
statutory rate of 35% primarily due to the following: changes in the
valuation allowance, expenses that are not deductible for federal income tax
purposes and state income taxes. We are required to provide a
valuation allowance for our deferred tax assets in excess of deferred tax
liabilities because we have concluded that it is more likely than not that such
deferred tax assets ultimately will not be realized. As a result, our
pre-tax losses for the third quarter of 2009 were not reduced by any tax
benefit.
Segment
Results of Operations
We have two reportable
segments: mainline and regional. The mainline segment
consists of flights using larger jets while the regional segment currently
consists of flights utilizing aircraft with a capacity of 78 or fewer
seats. As of September 30, 2009, the regional segment was operated by
ExpressJet, Chautauqua, CommutAir and Colgan through capacity purchase
agreements. Under these agreements, we purchase all of the capacity
related to aircraft covered by the contracts and are responsible for setting
prices and selling all of the related seat inventory. In exchange for
the regional carriers' operation of the flights, we pay the regional carriers
for each scheduled block hour based on agreed formulas. Under the
agreements, we recognize all passenger, cargo and other revenue associated with
each flight, and are responsible for all revenue-related expenses, including
commissions, reservations, catering and terminal rent at hub
airports.
We evaluate segment performance based
on several factors, of which the primary financial measure is operating income
(loss). However, we do not manage our business or allocate resources
based on segment operating profit or loss because (1) our flight schedules are
designed to maximize passenger revenue, (2) much of the operations of the two
segments are substantially integrated (for example, airport operations, sales
and marketing, scheduling and ticketing), and (3) management decisions are based
on their anticipated impact on the overall network, not on one individual
segment.
Statistical
Information. Certain statistical information for our segments'
operations for the three months ended September 30 is as follows:
Increase
|
||||||||||||
2009
|
2008
|
(Decrease)
|
||||||||||
Mainline
Operations:
|
||||||||||||
Passengers
(thousands)
|
12,181 | 12,518 | (2.7 | )% | ||||||||
Revenue
passenger miles (millions)
|
22,127 | 22,318 | (0.9 | )% | ||||||||
Available
seat miles (millions)
|
25,803 | 26,914 | (4.1 | )% | ||||||||
Cargo
ton miles (millions)
|
245 | 245 | - | |||||||||
Passenger
load factor:
|
||||||||||||
Mainline
|
85.8 | % | 82.9 | % |
2.9 pts.
|
|||||||
Domestic
|
87.9 | % | 83.9 | % |
4.0 pts.
|
|||||||
International
|
83.7 | % | 82.0 | % |
1.7 pts.
|
|||||||
Passenger
revenue per available seat mile (cents)
|
9.46 | 11.69 | (19.1 | )% | ||||||||
Total
revenue per available seat mile (cents)
|
10.84 | 13.07 | (17.1 | )% | ||||||||
Average
yield per revenue passenger mile (cents)
|
11.04 | 14.10 | (21.7 | )% | ||||||||
Average
fare per revenue passenger
|
$ | 202.87 | $ | 254.28 | (20.2 | )% | ||||||
Cost
per available seat mile, including special
charges (cents)
|
10.41 | 13.19 | (21.1 | )% | ||||||||
Special
charges per available seat mile (cents)
|
0.05 | 0.30 |
NM
|
|||||||||
Average
price per gallon of fuel, including fuel taxes
|
$ | 1.99 | $ | 3.86 | (48.4 | )% | ||||||
Fuel
gallons consumed (millions)
|
369 | 389 | (5.1 | )% | ||||||||
Aircraft
in fleet at end of period (1)
|
338 | 351 | (3.7 | )% | ||||||||
Average
length of aircraft flight (miles)
|
1,593 | 1,533 | 3.9 | % | ||||||||
Average
daily utilization of each aircraft (hours)
|
11:06
|
11:21
|
(2.2 | )% | ||||||||
Regional
Operations:
|
||||||||||||
Passengers
(thousands)
|
4,614 | 4,590 | 0.5 | % | ||||||||
Revenue
passenger miles (millions)
|
2,490 | 2,518 | (1.1 | )% | ||||||||
Available
seat miles (millions)
|
3,130 | 3,390 | (7.7 | )% | ||||||||
Passenger
load factor
|
79.6 | % | 74.3 | % |
5.3 pts.
|
|||||||
Passenger
revenue per available seat mile (cents)
|
16.14 | 18.12 | (10.9 | ) % | ||||||||
Average
yield per revenue passenger mile (cents)
|
20.29 | 24.39 | (16.8 | )% | ||||||||
Aircraft
in fleet at end of period (1)
|
266 | 279 | (4.7 | )% |
________________________
(1)
|
Excludes
aircraft that were removed from service. Regional aircraft
include aircraft operated by all carriers under capacity purchase
agreements, but exclude any aircraft subleased to other operators and
operated outside the scope of our capacity purchase
agreements.
|
Mainline Results of
Operations. Significant components of our mainline segment's
operating results for the three months ended September 30 are as follows (in
millions, except percentage changes):
2009
|
2008
|
Increase
(Decrease)
|
%
Increase
(Decrease)
|
|||||||||||||
Operating
Revenue
|
$ | 2,797 | $ | 3,519 | $ | (722 | ) | (20.5 | )% | |||||||
Operating
Expenses:
|
||||||||||||||||
Aircraft
fuel and related taxes
|
735 | 1,501 | (766 | ) | (51.0 | )% | ||||||||||
Wages,
salaries and related costs
|
751 | 727 | 24 | 3.3 | % | |||||||||||
Aircraft
rentals
|
154 | 165 | (11 | ) | (6.7 | )% | ||||||||||
Landing
fees and other rentals
|
197 | 206 | (9 | ) | (4.4 | )% | ||||||||||
Distribution
costs
|
137 | 154 | (17 | ) | (11.0 | )% | ||||||||||
Maintenance,
materials and repairs
|
159 | 152 | 7 | 4.6 | % | |||||||||||
Depreciation
and amortization
|
121 | 109 | 12 | 11.0 | % | |||||||||||
Passenger
services
|
93 | 107 | (14 | ) | (13.1 | )% | ||||||||||
Special
charges
|
13 | 80 | (67 | ) |
NM
|
|||||||||||
Other
|
326 | 348 | (22 | ) | (6.3 | )% | ||||||||||
2,686 | 3,549 | (863 | ) | (24.3 | )% | |||||||||||
Operating
Income (Loss)
|
$ | 111 | $ | (30 | ) | $ | 141 |
NM
|
The variances in specific line items
for the mainline segment are 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 three months ended September 30 are as follows (in
millions, except percentage changes):
Increase
|
%
Increase
|
|||||||||||||||
2009
|
2008
|
(Decrease)
|
(Decrease)
|
|||||||||||||
Operating
Revenue
|
$ | 520 | $ | 637 | $ | (117 | ) | (18.4 | )% | |||||||
Operating
Expenses:
|
||||||||||||||||
Aircraft
fuel and related taxes
|
146 | 306 | (160 | ) | (52.3 | )% | ||||||||||
Wages,
salaries and related costs
|
43 | 38 | 5 | 13.2 | % | |||||||||||
Aircraft
rentals
|
79 | 79 | - | - | ||||||||||||
Landing
fees and other rentals
|
25 | 19 | 6 | 31.6 | % | |||||||||||
Regional
capacity purchase, net
|
211 | 247 | (36 | ) | (14.6 | )% | ||||||||||
Distribution
costs
|
23 | 28 | (5 | ) | (17.9 | )% | ||||||||||
Depreciation
and amortization
|
3 | 3 | - | - | ||||||||||||
Passenger
services
|
6 | 6 | - | - | ||||||||||||
Special
charges
|
7 | 11 | (4 | ) |
NM
|
|||||||||||
Other
|
27 | 22 | 5 | 22.7 | % | |||||||||||
570 | 759 | (189 | ) | (24.9 | )% | |||||||||||
Operating Loss
|
$ | (50 | ) | $ | (122 | ) | $ | (72 | ) | (59.0 | )% |
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 landing fees and other
rentals and other operating expenses. These expenses increased for
the regional segment due to the transition of management of certain airports to
us from ExpressJet.
Comparison
of Nine Months Ended September 30, 2009 to Nine Months Ended September 30,
2008
Consolidated
Results of Operations
Statistical
Information. Certain statistical information for our
consolidated operations for the nine months ended September 30 is as
follows:
2009
|
2008
|
%
Increase
(Decrease)
|
||||||||||
Passengers
(thousands)
|
47,551 | 51,509 | (7.7 | )% | ||||||||
Revenue
passenger miles (millions)
|
67,573 | 71,862 | (6.0 | )% | ||||||||
Available
seat miles (millions)
|
83,264 | 89,062 | (6.5 | )% | ||||||||
Passenger
load factor
|
81.2 | % | 80.7 | % |
0.5
pts.
|
|||||||
Passenger
revenue per available seat mile (cents)
|
10.01 | 11.94 | (16.2 | )% | ||||||||
Average
yield per revenue passenger mile (cents)
|
12.33 | 14.80 | (16.7 | )% | ||||||||
Average
price per gallon of fuel, including fuel taxes
|
$ | 1.97 | $ | 3.38 | (41.7 | )% | ||||||
Fuel
gallons consumed (millions)
|
1,276 | 1,398 | (8.7 | )% |
Results of
Operations. We recorded a net loss of $367 million in the
first nine months of 2009 as compared to a $317 million net loss in the first
nine months of 2008. We consider a key measure of our performance to
be operating loss, which was $147 million for the first nine months of 2009, as
compared to a $289 million operating loss in the first nine months of
2008. Significant components of our consolidated operating results
for the nine months ended September 30 are as follows (in millions, except
percentage changes):
Increase
|
%
Increase
|
|||||||||||||||
2009
|
2008
|
(Decrease)
|
(Decrease)
|
|||||||||||||
Operating
Revenue
|
$ | 9,404 | $ | 11,771 | $ | (2,367 | ) | (20.1 | )% | |||||||
Operating
Expenses
|
9,551 | 12,060 | (2,509 | ) | (20.8 | )% | ||||||||||
Operating
Loss
|
(147 | ) | (289 | ) | (142 | ) | (49.1 | )% | ||||||||
Nonoperating
Income (Expense)
|
(220 | ) | (138 | ) | 82 | 59.4 | % | |||||||||
Income
Tax Benefit
|
- | 110 | (110 | ) | (100.0 | )% | ||||||||||
Net
Loss
|
$ | (367 | ) | $ | (317 | ) | $ | 50 | 15.8 | % |
Each of these items is discussed in the
following sections.
Operating
Revenue. The table below shows components of operating revenue
for the nine months ended September 30, 2009 and period to period comparisons
for operating revenue, RASM and ASMs by geographic region for our mainline and
regional operations:
Revenue
|
Percentage
Increase (Decrease) in
September 30, 2009 YTD
vs September 30, 2008 YTD
|
|||||||||||||||
(in
millions)
|
Revenue
|
RASM
|
ASMs
|
|||||||||||||
Passenger
revenue:
|
||||||||||||||||
Domestic
|
$ | 3,415 | (21.3 | )% | (13.4 | )% | (9.1 | )% | ||||||||
Trans-Atlantic
|
1,700 | (27.0 | )% | (20.3 | )% | (8.4 | )% | |||||||||
Latin
America
|
1,126 | (17.3 | )% | (17.0 | )% | (0.4 | )% | |||||||||
Pacific
|
699 | (10.4 | )% | (15.6 | )% | 6.1 | % | |||||||||
Total
Mainline
|
6,940 | (21.2 | )% | (15.9 | )% | (6.3 | )% | |||||||||
Regional
|
1,391 | (23.7 | )% | (17.1 | )% | (8.0 | )% | |||||||||
Total
|
8,331 | (21.6 | )% | (16.2 | )% | (6.5 | )% | |||||||||
Cargo
|
259 | (32.4 | )% | |||||||||||||
Other
|
814 | 7.8 | % | |||||||||||||
Operating
Revenue
|
$ | 9,404 | (20.1 | )% |
Passenger revenue decreased
significantly in the first nine months of 2009 as compared to the first nine
months of 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 a 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 nine months
ended September 30 (in millions, except percentage changes):
2009
|
2008
|
Increase
(Decrease)
|
%
Increase
(Decrease)
|
|||||||||||||
Aircraft
fuel and related taxes
|
$ | 2,507 | $ | 4,722 | $ | (2,215 | ) | (46.9 | )% | |||||||
Wages,
salaries and related costs
|
2,358 | 2,197 | 161 | 7.3 | % | |||||||||||
Aircraft
rentals
|
705 | 736 | (31 | ) | (4.2 | )% | ||||||||||
Landing
fees and other rentals
|
647 | 643 | 4 | 0.6 | % | |||||||||||
Regional
capacity purchase, net
|
641 | 838 | (197 | ) | (23.5 | )% | ||||||||||
Distribution
costs
|
467 | 558 | (91 | ) | (16.3 | )% | ||||||||||
Maintenance,
materials and repairs
|
473 | 478 | (5 | ) | (1.0 | )% | ||||||||||
Depreciation
and amortization
|
353 | 327 | 26 | 8.0 | % | |||||||||||
Passenger
services
|
282 | 315 | (33 | ) | (10.5 | )% | ||||||||||
Special
charges
|
68 | 141 | (73 | ) |
NM
|
|||||||||||
Other
|
1,050 | 1,105 | (55 | ) | (5.0 | )% | ||||||||||
$ | 9,551 | $ | 12,060 | $ | (2,509 | ) | (20.8 | )% |
Operating
expenses decreased 20.8% primarily due to the following:
·
|
Aircraft fuel and
related taxes decreased due to a 41.7% decrease in consolidated jet
fuel prices and decreased flying. Our average jet fuel price
per gallon including related taxes decreased to $1.97 in the first nine
months of 2009 from $3.38 in the first nine months of 2008. Our
average jet fuel price includes losses related to our fuel hedging program
of $0.31 per gallon in the first nine months of 2009, compared to gains of
$0.04 per gallon in the first nine months of 2008.
|
·
|
Wages, salaries and
related costs increased primarily due to higher wage rates for
certain workgroups offset by a 6% reduction in the number of employees in
connection with capacity reductions. Expenses in the first nine
months of 2009 also include $121 million of higher pension expense
resulting primarily from lower returns on plan assets.
|
·
|
Aircraft
rentals decreased due to the retirement of leased Boeing 737
aircraft in the second half of 2008 and the first nine months of
2009. New aircraft delivered in 2008 and the first nine months
of 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 nine months ended September 30 (in millions, except
percentage changes):
|
Increase
|
%
Increase
|
|||||||||||||||
2009
|
2008
|
(Decrease)
|
(Decrease)
|
|||||||||||||
Capacity
purchase expenses
|
$ | 641 | $ | 960 | $ | (319 | ) | (33.2 | )% | |||||||
Aircraft
sublease income
|
- | (122 | ) | (122 | ) | (100.0 | )% | |||||||||
Regional
capacity purchase, net
|
$ | 641 | $ | 838 | $ | (197 | ) | (23.5 | )% |
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 the nine months ended September 30, 2009 because ExpressJet no longer
pays sublease rent for aircraft operated on our
behalf. Sublease income of $17 million and $72 million on
aircraft operated by ExpressJet outside the scope of our capacity purchase
agreement with ExpressJet for the nine months ended September 30, 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.
|
·
|
Passenger
services expenses decreased due to fewer meals and beverages in the
first nine months of 2009 compared to the first nine months of 2008,
resulting from the decreased demand for air travel in the weak economy,
and lower mishandled baggage expenses.
|
·
|
Special
charges. See Note 11 to our consolidated financial
statements contained in Item 1 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 how certain costs are handled under our
capacity purchase agreement with ExpressJet and foreign currency exchange
losses.
|
Nonoperating Income
(Expense). Nonoperating expense increased $82 million in the
first nine months of 2009 compared to the first nine months of 2008 due to the
following:
·
|
Net interest
expense increased $41 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 were $29 million in the first nine
months of 2008, reflecting the decline in value of student loan-related
auction rate securities.
|
·
|
Other nonoperating
income (expense) included fuel hedge ineffectiveness gains of $7
million and $18 million in the first nine months of 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
the first nine months of 2009 also included favorable foreign exchange
gains and an increase in the fair value of the cash surrender value of
company-owned life insurance policies. In the first nine months
of 2008, we recorded income of $9 million related to our investment in
Copa, which we sold in May 2008.
|
Income
Taxes. Our effective tax rates differ from the federal
statutory rate of 35% primarily due to the following: changes in the
valuation allowance, expenses that are not deductible for federal income tax
purposes and state income taxes. We are required to provide a
valuation allowance for our deferred tax assets in excess of deferred tax
liabilities because we have concluded that it is more likely than not that such
deferred tax assets ultimately will not be realized. As a result, our
pre-tax losses for the first nine months of 2009 were not reduced by any tax
benefit.
Segment
Results of Operations
Statistical
Information. Certain statistical information for our segments'
operations for the nine months ended September 30 is as follows:
Increase
|
||||||||||||
2009
|
2008
|
(Decrease)
|
||||||||||
Mainline
Operations:
|
||||||||||||
Passengers
(thousands)
|
34,619 | 37,714 | (8.2 | )% | ||||||||
Revenue
passenger miles (millions)
|
60,589 | 64,258 | (5.7 | )% | ||||||||
Available
seat miles (millions)
|
74,119 | 79,124 | (6.3 | )% | ||||||||
Cargo
ton miles (millions)
|
664 | 769 | (13.7 | )% | ||||||||
Passenger
load factor:
|
||||||||||||
Mainline
|
81.7 | % | 81.2 | % |
0.5
pts.
|
|||||||
Domestic
|
84.9 | % | 83.5 | % |
1.4 pts.
|
|||||||
International
|
78.8 | % | 78.9 | % |
(0.1) pts.
|
|||||||
Passenger
revenue per available seat mile (cents)
|
9.36 | 11.13 | (15.9 | )% | ||||||||
Total
revenue per available seat mile (cents)
|
10.75 | 12.51 | (14.1 | )% | ||||||||
Average
yield per revenue passenger mile (cents)
|
11.45 | 13.71 | (16.5 | )% | ||||||||
Average
fare per revenue passenger
|
$ | 202.62 | $ | 236.09 | (14.2 | )% | ||||||
Cost
per available seat mile, including special
charges (cents)
|
10.60 | 12.49 | (15.1 | )% | ||||||||
Special
charges per available seat mile (cents)
|
0.08 | 0.15 |
NM
|
|||||||||
Average
price per gallon of fuel, including fuel taxes
|
$ | 1.97 | $ | 3.38 | (41.7 | )% | ||||||
Fuel
gallons consumed (millions)
|
1,061 | 1,159 | (8.5 | )% | ||||||||
Aircraft
in fleet at end of period (1)
|
338 | 351 | (3.7 | )% | ||||||||
Average
length of aircraft flight (miles)
|
1,549 | 1,496 | 3.5 | % | ||||||||
Average
daily utilization of each aircraft (hours)
|
10:45
|
11:22
|
(5.5 | )% | ||||||||
Regional
Operations:
|
||||||||||||
Passengers
(thousands)
|
12,932 | 13,795 | (6.3 | )% | ||||||||
Revenue
passenger miles (millions)
|
6,984 | 7,604 | (8.2 | )% | ||||||||
Available
seat miles (millions)
|
9,145 | 9,938 | (8.0 | )% | ||||||||
Passenger
load factor
|
76.4 | % | 76.5 | % |
(0.1) pts.
|
|||||||
Passenger
revenue per available seat mile (cents)
|
15.22 | 18.35 | (17.1 | )% | ||||||||
Average
yield per revenue passenger mile (cents)
|
19.93 | 23.98 | (16.9 | )% | ||||||||
Aircraft
in fleet at end of period (1)
|
266 | 279 | (4.7 | )% |
________________________
(1)
|
Excludes
aircraft that were removed from service. Regional aircraft
include aircraft operated by all carriers under capacity purchase
agreements, but exclude any aircraft subleased to other operators and
operated outside the scope of our capacity purchase
agreements.
|
Mainline Results of
Operations. Significant components of our mainline segment's
operating results for the nine months ended September 30 are as follows (in
millions, except percentage changes):
2009
|
2008
|
Increase
(Decrease)
|
%
Increase
(Decrease)
|
|||||||||||||
Operating
Revenue
|
$ | 7,970 | $ | 9,899 | $ | (1,929 | ) | (19.5 | )% | |||||||
Operating
Expenses:
|
||||||||||||||||
Aircraft
fuel and related taxes
|
2,088 | 3,912 | (1,824 | ) | (46.6 | )% | ||||||||||
Wages,
salaries and related costs
|
2,233 | 2,129 | 104 | 4.9 | % | |||||||||||
Aircraft
rentals
|
469 | 500 | (31 | ) | (6.2 | )% | ||||||||||
Landing
fees and other rentals
|
570 | 593 | (23 | ) | (3.9 | )% | ||||||||||
Distribution
costs
|
400 | 475 | (75 | ) | (15.8 | )% | ||||||||||
Maintenance,
materials and repairs
|
473 | 478 | (5 | ) | (1.0 | )% | ||||||||||
Depreciation
and amortization
|
343 | 318 | 25 | 7.9 | % | |||||||||||
Passenger
services
|
263 | 300 | (37 | ) | (12.3 | )% | ||||||||||
Special
charges
|
61 | 115 | (54 | ) |
NM
|
|||||||||||
Other
|
959 | 1,062 | (103 | ) | (9.7 | )% | ||||||||||
7,859 | 9,882 | (2,023 | ) | (20.5 | )% | |||||||||||
Operating
Income
|
$ | 111 | $ | 17 | $ | 94 |
NM
|
The variances in specific line items
for the mainline segment are 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 nine months ended September 30 are as follows (in
millions, except percentage changes):
Increase
|
%
Increase
|
|||||||||||||||
2009
|
2008
|
(Decrease)
|
(Decrease)
|
|||||||||||||
Operating
Revenue
|
$ | 1,434 | $ | 1,872 | $ | (438 | ) | (23.4 | )% | |||||||
Operating
Expenses:
|
||||||||||||||||
Aircraft
fuel and related taxes
|
419 | 810 | (391 | ) | (48.3 | )% | ||||||||||
Wages,
salaries and related costs
|
125 | 68 | 57 | 83.8 | % | |||||||||||
Aircraft
rentals
|
236 | 236 | - | - | ||||||||||||
Landing
fees and other rentals
|
77 | 50 | 27 | 54.0 | % | |||||||||||
Regional
capacity purchase, net
|
641 | 838 | (197 | ) | (23.5 | )% | ||||||||||
Distribution
costs
|
67 | 83 | (16 | ) | (19.3 | )% | ||||||||||
Depreciation
and amortization
|
10 | 9 | 1 | 11.1 | % | |||||||||||
Passenger
services
|
19 | 15 | 4 | 26.7 | % | |||||||||||
Special
charges
|
7 | 26 | (19 | ) |
NM
|
|||||||||||
Other
|
91 | 43 | 48 |
NM
|
||||||||||||
1,692 | 2,178 | (486 | ) | (22.3 | )% | |||||||||||
Operating
Loss
|
$ | (258 | ) | $ | (306 | ) | $ | (48 | ) | (15.7 | )% |
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 how certain costs are handled under our capacity purchase agreement
with ExpressJet effective July 1, 2008 and the transition of management of
certain airports to us from ExpressJet.
LIQUIDITY
AND CAPITAL RESOURCES
Current
Liquidity
As of September 30, 2009, we had $2.5
billion in unrestricted cash, cash equivalents and short-term investments, which
is $101 million lower than at December 31, 2008. At September 30,
2009, we also had $164 million of restricted cash, cash equivalents and
short-term investments, which is primarily collateral for estimated future
workers' compensation claims, credit card processing contracts, letters of
credit and performance bonds. Restricted cash, cash equivalents and
short-term investments at December 31, 2008 totaled $190 million. The
decrease in restricted cash is primarily the result of the substitution of cash
collateral for student loan-related auction rate securities previously posted as
collateral under our workers’ compensation program. The use of cash
as collateral lowered the amount required to be posted.
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 September 30, 2009, we
had approximately $6.0 billion of debt and capital lease obligations, including
$2.2 billion that will come due by the end of 2011 (consisting of $0.1 billion
during the three months ending December 31, 2009, $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 markets for capital and/or achieve and sustain
profitability. Historically, we have obtained financing for many of
these debt obligations and capital commitments, particularly the acquisition of
aircraft and spare engines.
We do not currently have any undrawn
lines of credit or revolving credit facilities and most of our otherwise readily
financeable assets are encumbered. The global economic recession has
severely disrupted the global capital markets, resulting in a diminished
availability of financing and higher cost for financing that is
obtainable. Although access to the capital markets has improved over
the past several months, if economic conditions 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. As a result, further worsening or disruption of the
global capital markets could have a material adverse effect on our results of
operations and financial condition.
Sources
and Uses of Cash
Operating
Activities. Net cash provided by operations for the nine
months ended September 30, 2009 were $187 million compared to $3 million in the
same period in 2008. The increase in cash flows is the result of
lower fuel costs partially offset by a drop in revenue in 2009. Our
operating loss was $142 million lower in the first nine months of 2009 than in
the comparable period of 2008.
Investing
Activities. Cash flows provided by (used in) investing
activities for the nine months ended September 30 were as follows (in
millions):
2009
|
2008
|
Change
|
||||||||||
Capital
expenditures
|
$ | (301 | ) | $ | (281 | ) | $ | (20 | ) | |||
Aircraft
purchase deposits refunded, net
|
42 | 61 | (19 | ) | ||||||||
Proceeds
from sales of short-term investments, net
|
256 | 93 | 163 | |||||||||
Proceeds
from sales of property and equipment
|
46 | 76 | (30 | ) | ||||||||
Decrease
(increase) in restricted cash, cash equivalents and short-term
investments
|
26 | (62 | ) | 88 | ||||||||
Proceeds
from sale of Copa stock
|
- | 149 | (149 | ) | ||||||||
Proceeds
from sales of other long-term investments
|
- | 22 | (22 | ) | ||||||||
Expenditures
for airport operating rights
|
(22 | ) | (109 | ) | 87 | |||||||
Other
cash flows from investing activities
|
(3 | ) | - | (3 | ) | |||||||
Net
cash provided by (used in) investing activities
|
$ | 44 | $ | (51 | ) | $ | 95 |
We have substantial commitments for
capital expenditures, including for the acquisition of new
aircraft. As of September 30, 2009, we had firm commitments to
purchase 82 new Boeing aircraft scheduled for delivery from 2009 through 2016,
with an estimated aggregate cost of $5.1 billion including related spare
engines. In addition to our firm order aircraft, we had options to
purchase a total of 102 additional Boeing aircraft as of September 30,
2009.
Projected net capital expenditures for
2009 are as follows (in millions):
Fleet
related (excluding aircraft to be acquired through the issuance of
debt)
|
$ | 260 |
(A)
|
||
Non-fleet
|
120 | ||||
Spare
parts and capitalized interest
|
53 | ||||
Total
|
$ | 433 | |||
Aircraft
purchase deposits refunded
|
(33 | ) | |||
Projected
net capital expenditures
|
$ | 400 |
(A)
|
Includes
lease termination payments on seven 737-500 aircraft we temporarily took
ownership of just prior to completing the sale of these aircraft to a
third party.
|
Projected non-fleet capital
expenditures are primarily for Star Alliance costs, ground service equipment and
technology and terminal enhancements. While some of our projected
capital expenditures are related to projects we have committed to, a significant
number of projects can be deferred. Should economic conditions
warrant, we will reduce our capital expenditures, and expect to be able to do so
without materially impacting our operations.
Net purchase deposits refunded were
lower in the first nine months of 2009 as the result of fewer aircraft
deliveries in the first nine months of 2009 than in the first nine months of
2008.
Proceeds from sales of short-term
investments were higher in the first nine months of 2009 than in the first nine
months of 2008 due to the conversion of short-term investments to cash and cash
equivalents.
We sold six Boeing 737-500 aircraft
during the first nine months of 2009 to a foreign buyer and received cash
proceeds of $38 million, in addition to deposits received in 2008. We
also have an agreement to sell five additional Boeing 737-500 aircraft to a
different foreign buyer. This sale is subject to customary closing
conditions, some of which are outside of our control, and we cannot give any
assurances that the buyer of these aircraft will be able to obtain financing for
this transaction, that there will not be delays in deliveries or that the
closing of this transaction will occur. We hold cash deposits that
secure the buyer’s obligations under the aircraft sale contract, and we are
entitled to damages under the aircraft sale contract if the buyer does not take
delivery of the aircraft when required.
Expenditures for airport operating
rights relate to our acquisition of slots at London’s Heathrow
Airport.
Financing
Activities. Cash flows (used in) provided by financing
activities for the nine months ended September 30 were as follows (in
millions):
2009
|
2008
|
Change
|
||||||||||
Payments
on long-term debt and capital lease obligations
|
$ | (542 | ) | $ | (341 | ) | $ | (201 | ) | |||
Proceeds
from issuance of long-term debt
|
295 | 497 | (202 | ) | ||||||||
Proceeds
from public offering of common stock
|
158 | 162 | (4 | ) | ||||||||
Proceeds
from issuance of common stock pursuant to stock plans
|
6 | 13 | (7 | ) | ||||||||
Net
cash (used in) provided by financing activities
|
$ | (83 | ) | $ | 331 | $ | (414 | ) |
Cash flows related to financing
activities were reduced by lower proceeds from issuances of debt and higher
repayments of debt. Debt issuances in the first nine months of 2008
included a $235 million advance purchase of frequent flyer mileage credits for
the year 2016 and $113 million borrowed under a loan facility to finance a
portion of aircraft pre-delivery payment requirements.
In April 2007, we obtained financing
for 12 Boeing 737-800s and 18 Boeing 737-900ERs. We applied this
financing to 30 Boeing aircraft delivered to us in 2008 and 2009 and recorded
related debt of $1.1 billion, including $121 million recorded in the first nine
months of 2009 and $875 million recorded in the first nine months of
2008.
During the first nine months of 2009,
we entered into loan agreements under which we borrowed $180
million. This floating rate indebtedness is secured by five new
Boeing 737-900ER aircraft and two Boeing 737-800 aircraft that this debt
refinanced.
On July 1, 2009, we obtained financing
for 12 currently owned Boeing aircraft and five new Boeing
737-900ERs. A pass-through trust raised $390 million through the
issuance of a single class of pass-through certificates bearing interest at
9%. The proceeds from the sale of the certificates were initially
held by a depositary in escrow for the benefit of the certificate holders until
we issued equipment notes to the trust, which purchased such notes with a
portion of the escrowed funds. During the third quarter of 2009, we
issued equipment notes with respect to the 12 currently owned aircraft,
resulting in proceeds of $249 million cash for our general corporate purposes,
and equipment notes with respect to four new Boeing 737-900ER aircraft,
resulting in proceeds of $113 million to finance the purchase of the
aircraft. One remaining new Boeing 737-900ER aircraft will be
financed through the issuance of $28 million of equipment notes in the fourth
quarter of 2009. We have recorded the principal amount of the
equipment notes that we issued as debt on our consolidated balance
sheet. Principal payments on the equipment notes and the
corresponding distribution of these payments to certificate holders are
scheduled from January 2010 through July 2016. Additionally, the
certificates have the benefit of a liquidity facility under which a third party
agrees to make up to three semiannual interest payments on the certificates if a
default in the payment of interest occurs.
As discussed above, we have obtained
financing for the one remaining new aircraft scheduled for delivery to us in
2009. We also have backstop financing available for the two Boeing
777-200ER aircraft and 12 Boeing 737 aircraft scheduled for delivery in 2010,
subject to customary closing conditions. However, we do not have
backstop financing or any other financing currently in place for the balance of
the Boeing aircraft on order. Further financing will be needed to
satisfy our capital commitments for our firm order aircraft and other related
capital expenditures. We can provide no assurance that the backstop
financing or any other financing not already in place for our aircraft
deliveries will be available to us when needed on acceptable terms or at
all. Since the commitments for firm order aircraft are
non-cancelable, and assuming no breach of the agreement by Boeing, if we are
unable to obtain financing and cannot otherwise satisfy our commitment to
purchase these aircraft, the manufacturer could exercise its rights and remedies
under applicable law, such as seeking to terminate the contract for a material
breach, selling the aircraft to one or more other parties and suing us for
damages to recover any resulting losses incurred by the
manufacturer.
In August 2009, we completed a public
offering of 14.4 million shares of Class B common stock at a price to the public
of $11.20 per share, raising net proceeds of $158 million for general corporate
purposes.
In June 2008, we completed a public
offering of 11 million shares of Class B common stock at a price to the public
of $14.80 per share, raising net proceeds of $162 million for general corporate
purposes.
Other
Liquidity Matters
See the indicated notes to our
consolidated financial statements contained in Item 1 of this report for the
following other matters affecting our liquidity.
Investment
in student loan-related auction rate securities
|
Note
5
|
Fuel
hedges
|
Note
6
|
Pension
obligations
|
Note
10
|
Credit
card processing agreements
|
Note
15
|
Credit
ratings
|
Note
15
|
Aircraft
Fuel. As of September 30, 2009, our projected consolidated
fuel requirements for the remainder of 2009 were hedged as follows:
Maximum
Price
|
Minimum
Price
|
|||||||||||||||||||
%
of
Expected
Consumption
|
Weighted
Average
Price
(per
gallon)
|
%
of
Expected
Consumption
|
Weighted
Average
Price
(per
gallon)
|
|||||||||||||||||
Fourth Quarter
2009
|
||||||||||||||||||||
Gulf
Coast jet fuel swaps
|
15 | % | $ | 1.83 | 15 | % | $ | 1.83 | ||||||||||||
WTI
crude oil swaps
|
5 | % | 1.36 | 5 | % | 1.36 | ||||||||||||||
Total
|
20 | % | 20 | % | ||||||||||||||||
First Quarter
2010
|
||||||||||||||||||||
Gulf
Coast jet fuel swaps
|
5 | % | $ | 1.94 | 5 | % | $ | 1.94 | ||||||||||||
WTI
crude oil swaps
|
1 | % | 1.62 | 1 | % | 1.62 | ||||||||||||||
WTI
crude oil call options
|
1 | % | 1.88 | N/A | N/A | |||||||||||||||
Total
|
7 | % | 6 | % |
At September 30, 2009, our fuel
derivatives were in a net asset position of $9 million resulting from the recent
increase in crude oil prices. Our fuel derivatives are reported at
fair value in either prepayments and other current assets or accrued other
current liabilities, depending on whether the individual contracts are in an
asset or liability position. We estimate that a 10% increase in the
price of crude oil at September 30, 2009 would increase our net asset related to
the fuel derivatives outstanding at that date by approximately $18
million. We estimate that a 10% decrease in the price of crude oil at
September 30, 2009 would decrease the fair value of our fuel hedges by
approximately $20 million, resulting in a liability balance of $11 million and
the requirement to post cash collateral with our counterparties totaling $4
million. The required collateral amount could vary depending on which
counterparties we have contracts with at any given time. The total
amount of the collateral that we might be required to post at any time would be
up to the amount of our liability under the related derivative instruments to
our respective counterparties, and in certain cases our fuel hedging
counterparties can also require that we post additional collateral of up to 10%
of the notional amounts of the contracts with those counterparties.
When our fuel hedges are in a liability
position, we may be required to post cash collateral with our
counterparties. We were not required to post any such collateral at
September 30, 2009.
Foreign
Currency. At September 30, 2009, we had forward contracts
outstanding to hedge the following cash inflows (primarily from passenger ticket
sales) in foreign currencies:
·
|
24%
of our projected Japanese yen-denominated cash inflows through
2010
|
·
|
9%
of our euro-denominated cash inflows through
2009
|
At September 30, 2009, the fair value
of our foreign currency hedges was $(3) million and is included in accrued other
liabilities in our consolidated balance sheet. We estimate that a
uniform 10% strengthening in the value of the U.S. dollar relative to each
foreign currency would have the following impact on our existing forward
contacts at September 30, 2009 (in millions):
Increase
in
Fair
Value
|
Increase
in
Underlying
Exposure
|
Resulting
Net
Loss
|
||||||||||
Japanese
yen
|
$ | 11 | $ | (43 | ) | $ | (32 | ) | ||||
Euro
|
1 | (8 | ) | (7 | ) |
Item 4. Controls and
Procedures.
Evaluation of Disclosure
Controls and Procedures. As required by Rule 13a-15(b) of the
Securities Exchange Act of 1934, as amended, we have evaluated, under the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, the effectiveness
of the design and operation of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end
of the period covered by this Form 10-Q. Our disclosure controls and
procedures are designed to provide reasonable assurance that the information
required to be disclosed by us in reports that we file under the Exchange Act is
accumulated and communicated to our management, including our principal
executive officer and principal financial officer, as appropriate, to allow
timely decisions regarding required disclosure and is recorded, processed,
summarized and reported within the time periods specified in the rules and forms
of the SEC. Based upon the evaluation, our principal executive
officer and principal financial officer have concluded that our disclosure
controls and procedures were effective as of September 30, 2009 at the
reasonable assurance level.
Changes in Internal
Controls. There was no change in our internal control over
financial reporting during the quarter ended September 30, 2009 that materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
PART
II - OTHER INFORMATION
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. The
plaintiffs now have the opportunity to appeal that ruling 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 vigorously defend any
appeal. Nevertheless, a final adverse court decision awarding
substantial money damages could have a material adverse effect on our results of
operations, financial condition or liquidity.
Part 1, Item 1A, “Risk Factors,” of our
2008 Form 10-K includes a detailed discussion of our risk
factors. The information presented below updates, and should be read
in conjunction with, the risk factors and information disclosed in our 2008 Form
10-K and subsequent quarterly and current reports filed with the
SEC. The risks described in this report and in our 2008 Form 10-K are
not the only risks facing Continental. Additional risks and
uncertainties not currently known to us, or that we currently deem to be
immaterial, also may materially adversely affect our business, financial
condition and future results.
Risk
Factors Relating to the Company
We have
decided to change our global airline alliance, which involves significant
transition and integration risks. During 2008, we
entered into framework agreements with United, Lufthansa and Air Canada, each a
member of Star Alliance, pursuant to which we are winding down and exiting our
participation in our current alliance, SkyTeam, and plan to join United,
Lufthansa and Air Canada (and other member airlines) in Star
Alliance. We plan to exit SkyTeam effective with our last flight on
October 24, 2009 and join Star Alliance on October 27, 2009. This
change from SkyTeam to Star Alliance involves significant transition and
integration risks, both because we are required to end our participation in
SkyTeam and wind down our existing SkyTeam relationships prior to our being able
to participate in Star Alliance and because we may incur costs and/or a loss of
revenue (or a delay in anticipated increased revenue from the new alliance) in
connection with these changes. The significant transition and
integration risks include:
·
|
an
inability to join or a delay in joining Star Alliance due to a lack of
applicable approvals or difficulty in satisfying entrance requirements,
including the requirement that we enter into certain bilateral agreements
with each member of Star Alliance;
|
·
|
significant
revenue dilution as we wind down our participation in SkyTeam and/or
insufficient, or delay in receipt of, revenue from our participation in
Star Alliance, including an inability to maintain our key customer and
business relationships as we transition to Star Alliance;
and
|
·
|
difficulties
integrating our technology processes with Star Alliance
members.
|
In addition, the full implementation of
some of the arrangements contemplated by our framework agreements requires the
approval of domestic and foreign regulatory agencies. These agencies
may deny us necessary approvals, delay certain approvals or, in connection with
granting any such approvals, impose requirements, limitations or costs on us or
on Star Alliance members, or require us or them to divest slots, gates, routes
or other assets. Such actions may impair the value to us of entering
the alliance or make participation in the alliance by us or them unattractive
and, in certain cases, could prevent us from consummating the transactions
contemplated by the framework agreements.
If any of these risks or costs
materialize, they could have a material adverse effect on our business, results
of operations and financial condition.
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 delays in
the deliveries of these new aircraft continue to occur, we will only be able to
accomplish international growth by trying to make alternate arrangements to
acquire the necessary long-range aircraft, possibly on less financially
favorable terms, including higher ownership and operating costs and potentially
involving less efficient aircraft and significant delivery delays as
well.
Risks
Factors Relating to the Airline Industry
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. Some FAA requirements cover, among other things,
retirement of older aircraft, security measures, collision avoidance systems,
airborne windshear avoidance systems, noise abatement and other environmental
concerns, aircraft operation and safety and increased inspections and
maintenance procedures to be conducted on older aircraft.
Many aspects of airlines' operations
also are subject to increasingly stringent federal, state, local and foreign
laws protecting the environment, including the imposition of additional taxes on
airlines or their passengers. Future regulatory developments in the
United States and abroad could adversely affect operations and increase
operating costs in the airline industry. The European Union has
issued a directive to member states to include aviation in its Greenhouse Gas
Emissions Trading Scheme by February 2010, which will require us to have
emissions allowances to operate flights to and from member states of the
European Union in January 2012 and thereafter, including flights between the
United States and the European Union. Non-EU governments are expected
to challenge the application of the EU emissions trading scheme to their
airlines; however, we may be forced to comply with the EU emission trading
scheme requirements during a legal challenge. We may have to purchase
emissions allowances through the EU emissions trading scheme to cover EU flights
that exceed our free allotment, which could result in substantial costs for
us.
Other regulatory actions that may be
taken in the future by the U.S. government, 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 purchase emission credits. It is currently unknown,
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. The impact to us and our industry from such actions is
likely to be adverse and could be significant, particularly if regulators were
to conclude that emissions from commercial aircraft cause significant harm to
the upper atmosphere or have a greater impact on climate change than other
industries. Potential actions may include the imposition of
requirements to purchase emission offsets or credits, which could require
participation in emission trading (such as required in the European Union),
substantial taxes on emissions and growth restrictions on airline operations,
among other potential regulatory actions.
Further, the ability of U.S. carriers
to operate international routes is subject to change because the applicable
arrangements between the United States and foreign governments may be amended
from time to time, or because appropriate slots or facilities are not made
available. We cannot provide assurance that laws or regulations
enacted in the future will not have a significant adverse effect on
us.
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds.
None.
Item
3. Defaults
Upon Senior Securities.
None.
None.
Borrowings under July 2009
EETC. During the third quarter of 2009, Continental borrowed a
total of $362 million through the issuance of (i) $249 million in equipment
notes to finance 12 currently owned Boeing aircraft and (ii) $113 million in
equipment notes to finance the purchase of four new Boeing 737-900ER
aircraft. These equipment notes (“Equipment Notes”) are secured by
such financed aircraft. The funds used to purchase the Equipment
Notes were raised in July 2009 through the sale of $390 million of a single
class of pass-through certificates. The proceeds from this sale of
pass-through certificates are held in escrow pending financing of each
aircraft.
Pursuant to the July 2009 note purchase
agreement (the “Note Purchase Agreement”), the Equipment Notes are issued in a
single series, bearing interest at the rate of 9% per annum. The
interest on the Equipment Notes and the escrowed funds is payable semiannually
on each January 8 and July 8, beginning on January 8, 2010. The
principal payments on the Equipment Notes are scheduled on January 8 and July 8
in certain years, beginning on January 8, 2010. The final payments
will be due on July 8, 2016.
Maturity of the Equipment Notes may be
accelerated upon the occurrence of certain events of default, including failure
by Continental (in some cases after notice or the expiration of a grace period,
or both) to make payments under the applicable indenture when due or to comply
with certain covenants, as well as certain bankruptcy events involving
Continental. The Equipment Notes issued with respect to each aircraft
will be secured by a lien on such aircraft and will also be cross-collateralized
by the other aircraft financed pursuant to the Note Purchase
Agreement. Continental expects to issue an additional $28 million in
Equipment Notes as it applies this financing to purchase a Boeing 737-900ER
aircraft scheduled for delivery in the fourth quarter of 2009.
Item
6. Exhibits.
3.1
|
Amended
and Restated Certificate of Incorporation of Continental, as amended
through June 6, 2006 – incorporated by reference to Exhibit 3.1 to
Continental’s Annual Report on Form 10-K for the year ended December 31,
2006 (File no. 1-10323).
|
|
3.1(a)
|
Certification
of Designation of Series A Junior Participating Preferred Stock, included
as Exhibit A to Exhibit 3.1.
|
|
3.1(a)(i)
|
Certificate
of Amendment of Certificate of Designation of Series A Junior
Participating Preferred Stock – incorporated by reference to Exhibit
3.1(b) to Continental’s Annual Report on Form 10-K for the year ended
December 31, 2001 (File no. 1-10323).
|
|
3.1(a)(ii)
|
Certificate
of Increase – Series A Junior Participating Preferred Stock – incorporated
by reference to Exhibit 3.1(a)(ii) to Continental’s Quarterly Report on
Form 10-Q for the period ended June 30, 2008 (File no.
1-10323).
|
|
3.2
|
Amended
and Restated Bylaws of Continental, effective as of June 10, 2009 –
incorporated by reference to Exhibit 3.2 to Continental’s Current Report
on Form 8-K dated June 10, 2009 (File no. 1-10323).
|
|
10.1*
|
Letter
Agreement dated as of September 30, 2009 between Continental and Jeffery
Smisek (clarifying certain terms of his Employment Agreement in connection
with his promotion to Chairman, President and CEO on January 1,
2010).
|
|
10.2
|
Supplemental
Agreement No. 50, dated as of July 23, 2009, to Purchase Agreement No.
1951 (“P.A. 1951”), dated July 23, 1996, between Continental and The
Boeing Company (“Boeing”) relating to the purchase of Boeing 737
aircraft. (1)
|
|
10.3
|
Supplemental
Agreement No. 51, dated as of August 5, 2009, to P.A. 1951.
(1)
|
|
10.4
|
Supplemental
Agreement No. 52, dated as of August 31, 2009, to P.A.
1951. (1)
|
|
10.5
|
Supplemental
Agreement No. 17, dated as of August 31, 2009, to Purchase Agreement No.
2061, dated October 10, 1997, between Continental and Boeing relating to
the purchase of Boeing 777 aircraft. (1)
|
|
12.1
|
Computation
of Ratio of Earnings to Fixed Charges.
|
|
31.1
|
Rule
13a-14 (a)/15d-14 (a) Certification of Chief Executive
Officer.
|
|
31.2
|
Rule
13a-14 (a)/15d-14 (a) Certification of Chief Financial
Officer.
|
|
32.1
|
Section
1350 Certifications.
|
*This
exhibit relates to management contracts or compensatory plans or
arrangements.
(1)
|
Continental
has applied to the SEC for confidential treatment of a portion of this
exhibit.
|
Pursuant to the requirements of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly
authorized.
CONTINENTAL AIRLINES,
INC.
|
||
Registrant
|
||
Date: October 21,
2009
|
by:
|
/s/ Chris
Kenny
|
Chris
Kenny
|
||
Vice
President and Controller
|
||
(Principal
Accounting Officer)
|
OF
CONTINENTAL
AIRLINES, INC.
3.1
|
Amended
and Restated Certificate of Incorporation of Continental, as amended
through June 6, 2006 – incorporated by reference to Exhibit 3.1 to
Continental’s Annual Report on Form 10-K for the year ended December 31,
2006 (File no. 1-10323).
|
3.1(a)
|
Certification
of Designation of Series A Junior Participating Preferred Stock, included
as Exhibit A to Exhibit 3.1.
|
3.1(a)(i)
|
Certificate
of Amendment of Certificate of Designation of Series A Junior
Participating Preferred Stock – incorporated by reference to Exhibit
3.1(b) to Continental’s Annual Report on Form 10-K for the year ended
December 31, 2001 (File no. 1-10323).
|
3.1(a)(ii)
|
Certificate
of Increase – Series A Junior Participating Preferred Stock – incorporated
by reference to Exhibit 3.1(a)(ii) to Continental’s Quarterly Report on
Form 10-Q for the period ended June 30, 2008 (File no.
1-10323).
|
3.2
|
Amended
and Restated Bylaws of Continental, effective as of June 10, 2009 –
incorporated by reference to Exhibit 3.2 to Continental’s Current Report
on Form 8-K dated June 10, 2009 (File no. 1-10323).
|
10.1*
|
Letter
Agreement dated as of September 30, 2009 between Continental and Jeffery
Smisek (clarifying certain terms of his Employment Agreement in connection
with his promotion to Chairman, President and CEO on January 1,
2010).
|
10.2
|
Supplemental
Agreement No. 50, dated as of July 23, 2009, to Purchase Agreement No.
1951 (“P.A. 1951”), dated July 23, 1996, between Continental and The
Boeing Company (“Boeing”) relating to the purchase of Boeing 737
aircraft. (1)
|
10.3
|
Supplemental
Agreement No. 51, dated as of August 5, 2009, to P.A. 1951.
(1)
|
10.4
|
Supplemental
Agreement No. 52, dated as of August 31, 2009, to P.A.
1951. (1)
|
10.5
|
Supplemental
Agreement No. 17, dated as of August 31, 2009, to Purchase Agreement No.
2061, dated October 10, 1997, between Continental and Boeing relating to
the purchase of Boeing 777 aircraft. (1)
|
12.1
|
Computation
of Ratio of Earnings to Fixed Charges.
|
31.1
|
Rule
13a-14 (a)/15d-14 (a) Certification of Chief Executive
Officer.
|
31.2
|
Rule
13a-14 (a)/15d-14 (a) Certification of Chief Financial
Officer.
|
32.1
|
Section
1350 Certifications.
|
*This
exhibit relates to management contracts or compensatory plans or
arrangements.
(1)
|
Continental
has applied to the SEC for confidential treatment of a portion of this
exhibit.
|