UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
Commission File Number 0-9781
CONTINENTAL AIRLINES, INC.
(Exact name of registrant as specified in its charter)
Delaware 74-2099724
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2929 Allen Parkway, Suite 2010
Houston, Texas 77019
(Address of principal executive offices)
(Zip Code)
713-834-2950
(Registrant's telephone number, including area code)
Indicate by check mark whether registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No _____
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Sections 12, 13 or
15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes X No _____
_______________
As of April 24, 1998, 11,418,932 shares of Class A common stock and
50,325,443 shares of Class B common stock were outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
<TABLE>
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
<CAPTION>
Three Months
Ended March 31,
1998 1997
(Unaudited)
<S> <C> <C>
Operating Revenue:
Passenger . . . . . . . . . . . . . . . $1,714 $1,564
Cargo . . . . . . . . . . . . . . . . . 48 40
Mail and other. . . . . . . . . . . . . 92 94
1,854 1,698
Operating Expenses:
Wages, salaries and related costs . . . 497 414
Aircraft fuel . . . . . . . . . . . . . 190 229
Aircraft rentals. . . . . . . . . . . . 156 131
Maintenance, materials and repairs. . . 153 125
Commissions . . . . . . . . . . . . . . 141 138
Other rentals and landing fees. . . . . 101 97
Depreciation and amortization . . . . . 68 60
Other . . . . . . . . . . . . . . . . . 398 358
1,704 1,552
Operating Income . . . . . . . . . . . . 150 146
Nonoperating Income (Expense):
Interest expense. . . . . . . . . . . . (40) (42)
Interest capitalized. . . . . . . . . . 13 6
Interest income . . . . . . . . . . . . 12 13
Other, net. . . . . . . . . . . . . . . 2 1
(13) (22)
Income before Income Taxes . . . . . . . 137 124
Income Tax Provision . . . . . . . . . . (52) (46)
Distributions on Preferred Securities
of Trust, net of applicable income
taxes of $2 and $2, respectively. . . . (4) (4)
</TABLE>
<PAGE>
<TABLE>
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
<CAPTION>
Three Months
Ended March 31,
1998 1997
(Unaudited)
<S> <C> <C>
Net Income . . . . . . . . . . . . . . . $ 81 $ 74
Preferred Dividend Requirements. . . . . - (1)
Income Applicable to Common Shares . . . $ 81 $ 73
Earnings per Common Share. . . . . . . . $ 1.38 $ 1.28
Earnings per Common Share
Assuming Dilution . . . . . . . . . . . $ 1.06 $ 0.96
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
<PAGE>
<TABLE>
CONTINENTAL AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except for share data)
<CAPTION>
March 31, December 31,
ASSETS 1998 1997
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents, including
restricted cash and cash equivalents
of $16 and $15, respectively . . . . . . $ 669 $1,025
Short-term investments. . . . . . . . . . 184 -
Accounts receivable, net. . . . . . . . . 454 361
Spare parts and supplies, net . . . . . . 135 128
Deferred income taxes . . . . . . . . . . 111 111
Prepayments and other . . . . . . . . . . 123 103
Total current assets . . . . . . . . . . 1,676 1,728
Property and Equipment:
Owned property and equipment:
Flight equipment . . . . . . . . . . . . 1,917 1,636
Other. . . . . . . . . . . . . . . . . . 482 456
2,399 2,092
Less: Accumulated depreciation. . . . . 508 473
1,891 1,619
Purchase deposits for flight equipment 480 437
Capital leases:
Flight equipment. . . . . . . . . . . . . 317 274
Other . . . . . . . . . . . . . . . . . . 40 40
357 314
Less: Accumulated amortization . . . . . 154 145
203 169
Total property and equipment . . . . . . 2,574 2,225
Other Assets:
Routes, gates and slots, net. . . . . . . 1,410 1,425
Reorganization value in excess of
amounts allocable to identifiable
assets, net. . . . . . . . . . . . . . . - 164
Investments . . . . . . . . . . . . . . . 107 104
Other assets, net . . . . . . . . . . . . 198 184
Total other assets . . . . . . . . . . . 1,715 1,877
Total Assets. . . . . . . . . . . . . . $5,965 $5,830
</TABLE>
(continued on next page)
<PAGE>
<TABLE>
CONTINENTAL AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except for share data)
<CAPTION>
March 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
(Unaudited)
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt. . . $ 228 $ 243
Current maturities of capital leases. . . 45 40
Accounts payable. . . . . . . . . . . . . 666 781
Air traffic liability . . . . . . . . . . 893 746
Accrued payroll and pensions. . . . . . . 173 158
Accrued other liabilities . . . . . . . . 341 317
Total current liabilities. . . . . . . . 2,346 2,285
Long-Term Debt . . . . . . . . . . . . . . 1,541 1,426
Capital Leases . . . . . . . . . . . . . . 180 142
Deferred Credits and Other Long-Term
Liabilities:
Deferred income taxes . . . . . . . . . . 318 435
Accruals for aircraft retirements and
excess facilities. . . . . . . . . . . . 97 123
Other . . . . . . . . . . . . . . . . . . 259 261
Total deferred credits and other
long-term liabilities . . . . . . . . . 674 819
Commitments and Contingencies
Continental-Obligated Mandatorily
Redeemable Preferred Securities of
Subsidiary Trust Holding Solely
Convertible Subordinated
Debentures (A). . . . . . . . . . . . . . 242 242
</TABLE>
(A) The sole assets of the Trust are convertible subordinated
debentures with an aggregate principal amount of $249 million,
which bear interest at the rate of 8-1/2% per annum and mature
on December 1, 2020. Upon repayment, the Continental-
Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trust will be mandatorily redeemed.
(continued on next page)
<PAGE>
<TABLE>
CONTINENTAL AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except for share data)
<CAPTION>
March 31, December 31,
1998 1997
(Unaudited)
<S> <C> <C>
Common Stockholders' Equity:
Class A common stock - $.01 par,
50,000,000 shares authorized;
8,379,464 and 8,379,464 shares issued
and outstanding, respectively. . . . . . $ - $ -
Class B common stock - $.01 par,
200,000,000 shares authorized;
51,066,488 and 50,512,010 shares
issued, respectively . . . . . . . . . . 1 1
Additional paid-in capital . . . . . . . 647 639
Retained earnings . . . . . . . . . . . . 357 276
Treasury stock - 439,000 Class B shares
in 1998. . . . . . . . . . . . . . . . . (26) -
Other . . . . . . . . . . . . . . . . . . 3 -
Total common stockholders' equity. . . . 982 916
Total Liabilities and Stockholders'
Equity . . . . . . . . . . . . . . . . $5,965 $5,830
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
<PAGE>
<TABLE>
CONTINENTAL AIRLINES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
<CAPTION>
Three Months
Ended March 31,
1998 1997
(Unaudited)
<S> <C> <C>
Net Cash Provided by Operating
Activities. . . . . . . . . . . . . . .$ 100 $154
Cash Flows from Investing Activities:
Purchase of short-term investments. . . (184) -
Capital expenditures. . . . . . . . . . (139) (106)
Purchase deposits paid in connection
with future aircraft deliveries, net . (55) (54)
Other . . . . . . . . . . . . . . . . . (8) (8)
Net cash used by
investing activities. . . . . . . . . (386) (168)
Cash Flows from Financing Activities:
Payments on long-term debt and
capital lease obligations. . . . . . . (63) (128)
Proceeds from issuance of long-term
debt, net. . . . . . . . . . . . . . . - 6
Purchase of Class B treasury stock. . . (26) -
Distributions on preferred securities
of trust . . . . . . . . . . . . . . . (6) (6)
Other . . . . . . . . . . . . . . . . . 24 5
Net cash used by financing activities. (71) (123)
Net Decrease in Cash and Cash
Equivalents . . . . . . . . . . . . . . (357) (137)
Cash and Cash Equivalents - Beginning
of Period (A) . . . . . . . . . . . . . 1,010 985
Cash and Cash Equivalents - End of
Period (A). . . . . . . . . . . . . . . $ 653 $848
</TABLE>
(A) Excludes restricted cash of $15 million and $76 million at
January 1, 1998 and 1997, respectively, and $16 million and $79
million at March 31, 1998 and 1997, respectively.
(continued on next page)
<PAGE>
<TABLE>
CONTINENTAL AIRLINES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
<CAPTION>
Three Months
Ended March 31,
1998 1997
(Unaudited)
<S> <C> <C>
Supplemental Cash Flow Information:
Interest paid . . . . . . . . . . . . .$ 25 $ 26
Income taxes paid . . . . . . . . . . .$ 2 $ -
Investing and Financing Activities
Not Affecting Cash:
Property and equipment acquired
through the issuance of debt . . . . .$ 154 $ 28
Capital lease obligations incurred. . .$ 53 $ 9
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.<PAGE>
CONTINENTAL AIRLINES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In the opinion of management, the unaudited consolidated financial
statements included herein contain all adjustments necessary to
present fairly the financial position, results of operations and
cash flows for the periods indicated. Such adjustments 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 contained in the Annual
Report of Continental Airlines, Inc. (the "Company" or "Conti-
nental") on Form 10-K for the year ended December 31, 1997.
NOTE 1 - SHORT-TERM INVESTMENTS
During 1998, the Company began investing in commercial paper with
original maturities in excess of 90 days but less than 270 days.
These investments are classified as short-term investments in the
consolidated balance sheet. Short-term investments are stated at
cost, which approximates market value.
NOTE 2 - REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCABLE TO
IDENTIFIABLE ASSETS
During 1998, the Company determined that it would be able to
recognize additional net operating losses ("NOLs") attributable to
the Company's predecessor as a result of the completion of several
transactions resulting in recognition of built-in gains for federal
income tax purposes. This benefit was used to reduce to zero
reorganization value in excess of amounts allocable to identifiable
assets.
<PAGE>
NOTE 3 - EARNINGS PER SHARE
The following table sets forth the computations of basic and
diluted earnings per share (in millions, except per share data):
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1998 1997
<S> <C> <C>
Net income . . . . . . . . . . . . . . . $ 81 $ 74
Preferred stock dividends. . . . . . . . - (1)
Numerator for basic earnings per
share - income available to
common stockholders . . . . . . . . . . 81 73
Effect of dilutive securities:
Preferred Securities of Trust . . . . . 3 3
6-3/4% convertible subordinated notes . 2 2
5 5
Numerator for diluted earnings
per share - income available to
common stockholders after
assumed conversions. . . . . . . . . . $ 86 $ 78
Denominator:
Denominator for basic earnings per
share - weighted-average shares. . . . 58.9 56.9
Effect of dilutive securities:
Employee stock options . . . . . . . . 2.0 1.4
Warrants . . . . . . . . . . . . . . . 2.7 4.8
Restricted Class B common stock. . . . - 0.4
Preferred Securities of Trust. . . . . 10.3 10.3
6-3/4% convertible subordinated
notes . . . . . . . . . . . . . . . . 7.6 7.6
Dilutive potential common shares . . . 22.6 24.5
Denominator for diluted earnings per
share - adjusted weighted-average
and assumed conversions. . . . . . . . 81.5 81.4
</TABLE>
NOTE 4 - INCOME TAXES
Income taxes for the three months ended March 31, 1998 and 1997
were provided at the estimated annual effective tax rate. Such
rate differs from the federal statutory rate of 35%, primarily due
to state income taxes and the effect of certain expenses that are
not deductible for income tax purposes.
At December 31, 1997, the Company had estimated NOL carryforwards
of $1.7 billion for federal income tax purposes that will expire
through 2009 and federal investment tax credit carryforwards of $45
million that will expire through 2001. As a result of the change
in ownership of the Company on April 27, 1993, the ultimate
utilization of the Company's net operating losses and investment
tax credits will be limited. Reflecting this limitation, the
Company has recorded a valuation allowance of $617 million at
December 31, 1997.
Continental had, as of December 31, 1997, deferred tax assets
aggregating $1.1 billion, including $631 million of NOLs.
Realization of a substantial portion of the Company's remaining
NOLs required the completion by April 27, 1998 of transactions
resulting in recognition of built-in gains for federal income tax
purposes. The Company consummated several such transactions
resulting in the elimination of reorganization value in excess of
amounts allocable to identifiable assets. In addition, the
deferred tax asset related to these net operating losses and the
related valuation allowance (each totaling $164 million) were
eliminated in the first quarter of 1998. To the extent the Company
were to determine in the future that additional NOLs of the
Company's predecessor could be recognized in the accompanying
consolidated financial statements, such benefit would reduce other
intangibles.
NOTE 5 - COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 - "Reporting Comprehensive Income"
("SFAS 130"). SFAS 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the
adoption of SFAS 130 had no impact on the Company's net income or
shareholders' equity. SFAS 130 requires unrealized gains or losses
on the Company's available-for-sale securities and changes in
minimum pension liabilities, which prior to adoption were reported
separately in shareholders' equity, to be included in other
comprehensive income.
During the first quarter of 1998 and 1997, total comprehensive
income amounted to $84 million and $74 million, respectively.
NOTE 6 - OTHER
On January 26, 1998, the Company announced that, in connection with
an agreement by Air Partners, L.P. ("Air Partners") to dispose of
its interest in the Company to an affiliate of Northwest Airlines,
Inc. ("Northwest"), the Company had entered into a long-term global
alliance with Northwest (the "Northwest Alliance") involving
schedule coordination, frequent flyer reciprocity, executive lounge
access, airport facility coordination, code-sharing, the formation
of a joint venture among the two carriers and KLM Royal Dutch
Airlines with respect to their trans-Atlantic services, cooperation
regarding other alliance partners of the two carriers and regional
alliance development, certain coordinated sales programs, preferred
reservations displays and other activities.
<PAGE>
In February 1998, the Company completed an offering of $773 million
of pass-through certificates to be used to finance (through either
leveraged leases or secured debt financings) the debt portion of
the acquisition cost of up to 24 aircraft scheduled to be delivered
through December 1998.
In addition, during the first quarter of 1998, Continental
completed several offerings totaling approximately $98 million
aggregate principal amount of tax-exempt special facilities revenue
bonds to finance certain airport facility projects. These bonds
are guaranteed by Continental and are payable solely from rentals
paid by Continental under long-term lease agreements with the
respective governing bodies.
In February 1998, a five-year collective bargaining agreement with
the Continental Airlines pilots was announced by the Company and
the Independent Association of Continental Pilots ("IACP"). In
March 1998, the Company's wholly owned subsidiary, Continental
Express, Inc. ("Express"), also announced a five-year collective
bargaining agreement with its pilots. These agreements are subject
to ratification by the Continental and Express pilots.
In March 1998, the Company announced that its Board of Directors
had authorized the expenditure of up to $100 million to repurchase
shares of the Company's common stock or convertible securities. No
time limit was placed on the duration of the repurchase program.
Subject to applicable securities laws, such purchases occur at
times and in amounts that the Company deems appropriate. As of
April 24, 1998, 910,000 shares had been repurchased.
NOTE 7 - SEGMENTS DISCLOSURE
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 131 - "Disclosure
About Segments of an Enterprise and Related Information" ("SFAS
131"). Although SFAS 131 is effective beginning the first quarter
of 1998, Continental has elected not to report segment information
in interim financial statements in the first year of application
consistent with the provisions of the statement.
NOTE 8 - SUBSEQUENT EVENTS
In April 1998, the Company completed an offering of $187 million of
pass-through certificates to be used to refinance the debt related
to 14 aircraft currently owned by Continental. In connection with
this refinancing, Continental will record a $3 million after tax
extraordinary charge to consolidated earnings in the second quarter
of 1998.
On April 24, 1998 Air Partners exercised warrants to purchase
2,298,134 shares of Class A common stock with an exercise price of
$7.50 per share and warrants to purchase 741,334 shares of Class A
common stock with an exercise price of $15.00 per share.
In May 1998, Express announced an order for 25 firm Embraer ERJ-135
regional jets, with options for an additional 50 aircraft
exercisable through 2005. The Company currently plans on financing
the new aircraft using lease financing and expects to account for
all of these aircraft as operating leases.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The following discussion may contain forward-looking statements.
In connection therewith, please see the risk factors set forth in
the Company's Form 10-K for the year ended December 31, 1997 which
identify important factors that could cause actual results to
differ materially from those in the forward-looking statements.
Due to the greater demand for air travel during the summer months,
revenue in the airline industry in the third quarter of the year is
generally significantly greater than revenue in the first quarter
of the year and moderately greater than revenue in the second and
fourth quarters of the year for the majority of air carriers.
Continental's results of operations generally reflect this
seasonality, but have also been impacted by numerous other factors
that are not necessarily seasonal, including the extent and nature
of competition from other airlines, fare sale activities, excise
and similar taxes, changing levels of operations, fuel prices,
foreign currency exchange rates and general economic conditions.
RESULTS OF OPERATIONS
The following discussion provides an analysis of the Company's
results of operations and reasons for material changes therein for
the three months ended March 31, 1998 as compared to the
corresponding period ended March 31, 1997.
Comparison of Three Months Ended March 31, 1998 to Three Months
Ended March 31, 1997
The Company recorded consolidated net income of $81 million for the
three months ended March 31, 1998 as compared to consolidated net
income of $74 million for the three months ended March 31, 1997.
Management believes that the Company benefitted in the first
quarter of 1997 from the expiration of the aviation trust fund tax
(the "ticket tax"). The ticket tax was reinstated on March 7,
1997. Management believes that the ticket tax has a negative
impact on the Company, although neither the amount of such negative
impact directly resulting from the reimposition of the ticket tax,
nor the benefit realized by its previous expiration, can be
precisely determined.
CMI's operating results declined during 1996, 1997 and the first
quarter of 1998 as a result of the continued weakness of the yen
against the dollar, a weak Japanese economy and increased fuel
costs in 1996 and 1997. CMI's operating results are not expected
to improve materially absent a significant improvement in the
Japanese economy or a significant strengthening of the yen.
Passenger revenue increased 9.6%, $150 million, during the quarter
ended March 31, 1998 as compared to the same period in 1997, which
was primarily due to a 10.8% increase in revenue passenger miles
driven by a 10.7% increase in capacity. Continental Airlines
passenger yield declined 1.3% from 13.49 cents per revenue
passenger mile to 13.31 cents per revenue passenger mile.
Cargo revenue increased 20.0%, $8 million, in the three months
ended March 31, 1998 as compared to the same period in the prior
year, due to an increase in cargo capacity, primarily in
international markets.
Wages, salaries and related costs increased 20.0%, $83 million,
during the quarter ended March 31, 1998 as compared to the same
period in 1997, due primarily to an 11% increase in average full-
time equivalent employees and an accrual for the impact of the
Company's new collective bargaining agreement with the IACP.
Aircraft fuel expense decreased 17.0%, $39 million, in the three
months ended March 31, 1998 as compared to the same period in the
prior year. The average price per gallon decreased 25.4% from
69.38 cents in the first quarter of 1997 to 51.79 cents in the
first quarter of 1998. Partially offsetting such price decline was
a 10.0% increase in the quantity of jet fuel used from 320 million
gallons in the first quarter of 1997 to 352 million gallons in the
first quarter of 1998, principally reflecting increased capacity.
Aircraft rentals increased 19.1%, $25 million, primarily as a
result of the delivery of new aircraft throughout 1997 and the
first quarter of 1998, net of retirements.
Maintenance, materials and repairs increased 22.4%, $28 million,
during the quarter ended March 31, 1998 as compared to the same
period in 1997, due principally to the volume and timing of engine
overhauls (including an increase in the number of aircraft) and
routine maintenance as part of the Company's ongoing maintenance
program.
Depreciation and amortization expense increased 13.3%, $8 million,
in the three months ended March 31, 1998 as compared to the same
period in 1997, primarily due to increased costs related to new
aircraft offset by a reduction in the amortization of
reorganization value in excess of amounts allocable to identifiable
assets. See Note 2 to consolidated financial statements.
Other operating expense increased 11.2%, $40 million, in the three
months ended March 31, 1998 as compared to the same period in the
prior year, as a result of increases in passenger services,
reservations and sales expense and other miscellaneous expense.
Interest capitalized increased $7 million in the first quarter of
1998 compared to 1997 as a result of higher average purchase
deposits for flight equipment resulting from the pending
acquisition of new aircraft.
<PAGE>
An analysis of statistical information for Continental's jet
operations, excluding regional jets operated by Express, for the
periods indicated is as follows:
<TABLE>
<CAPTION>
Three Months Ended Net
March 31, Increase/
1998 1997 (Decrease)
<S> <C> <C> <C>
Revenue passenger miles
(millions) (1). . . . . . . . . . 12,072 10,891 10.8 %
Available seat miles
(millions) (2). . . . . . . . . . 17,523 15,832 10.7 %
Passenger load factor (3). . . . . 68.9% 68.8% 0.1 pts.
Breakeven passenger load
factor (4). . . . . . . . . . . . 60.6% 59.0% 1.6 pts.
Passenger revenue per available
seat mile (cents) (5). . . . . . 9.12 9.29 (1.8)%
Total revenue per available
seat mile (cents) (6) . . . . . . 10.01 10.22 (2.1)%
Operating cost per available
seat mile (cents) (7) . . . . . . 9.14 9.27 (1.4)%
Average yield per revenue
passenger mile (cents) (8) . . . 13.23 13.51 (2.1)%
Average fare per revenue
passenger . . . . . . . . . . . .$154.88 $151.04 2.5 %
Revenue passengers (thousands) . . 10,072 9,739 3.4 %
Average length of aircraft
flight (miles) . . . . . . . . . 1,015 925 9.7 %
Average daily utilization of
each aircraft (hours) (9). . . . 10:13 10:15 (0.3)%
Actual aircraft in fleet at
end of period (10). . . . . . . . 346 321 7.8 %
</TABLE>
Continental has entered into block space arrangements with certain
other carriers whereby one or both of the carriers is obligated to
purchase capacity on the other carrier. One such arrangement began
in June 1997 and another block-space arrangement began in February
1998. For 1998, the table above excludes 330 million available
seat miles, and related revenue passenger miles and enplanements,
operated by Continental but purchased and marketed by the other
carrier, and includes 22 million available seat miles, and related
revenue passenger miles and enplanements, operated by other
carriers but purchased and marketed by Continental.
(1) The number of scheduled miles flown by revenue passengers.
(2) The number of seats available for passengers multiplied by
the number of scheduled miles those seats are flown.
(3) Revenue passenger miles divided by available seat miles.
(4) The percentage of seats that must be occupied by revenue
passengers in order for the airline to break even on an
income before income taxes basis, excluding nonrecurring
charges, nonoperating items and other special items.
(5) Passenger revenue divided by available seat miles.
(6) Total revenue divided by available seat miles.
(7) Operating expenses divided by available seat miles.
(8) The average revenue received for each mile a revenue
passenger is carried.
(9) The average number of hours per day that an aircraft flown in
revenue service is operated (from gate departure to gate
arrival).
(10) Excludes all-cargo 727 aircraft (six in 1998 and four in
1997) at Continental Micronesia, Inc. ("CMI"), a wholly owned
subsidiary of Continental. During the first quarter of 1998,
the Company took delivery of 12 aircraft and removed three
aircraft from service.
LIQUIDITY AND CAPITAL COMMITMENTS
In the first four months of 1998, the Company completed several
transactions intended to strengthen its long-term financial
position and enhance earnings.
In February 1998, the Company completed an offering of $773 million
of pass-through certificates to be used to finance (through either
leveraged leases or secured debt financings) the debt portion of
the acquisition cost of up to 24 aircraft scheduled to be delivered
through December 1998.
In addition, during the first quarter of 1998 Continental completed
several offerings totaling approximately $98 million aggregate
principal amount of tax-exempt special facilities revenue bonds to
finance certain airport facility projects. These bonds are
guaranteed by Continental and are payable solely from rentals paid
by Continental under long-term lease agreements with the respective
governing bodies.
In April 1998, the Company completed an offering of $187 million of
pass-through certificates to be used to refinance the debt related
to 14 aircraft currently owned by Continental.
As of March 31, 1998, the Company had $653 million in cash and cash
equivalents (excluding restricted cash of $16 million) and $184
million of short-term investments, compared to $1,010 million in
cash and cash equivalents (excluding restricted cash of $15
million) as of December 31, 1997. Net cash provided by operating
activities decreased $54 million during the three months ended
March 31, 1998 compared to the same period in the prior year
primarily due to an increase in credit card receivables. Net cash
used by investing activities increased $218 million for the three
months ending March 31, 1998 compared to the same period in the
prior year, primarily as a result of higher capital and fleet-
related expenditures and the purchase of short-term investments.
Net cash used by financing activities for the three months ended
March 31, 1998 compared to the same period in the prior year
decreased $52 million primarily due to a decrease in payments on
long-term debt and capital lease obligations.
<PAGE>
Deferred Tax Assets. The Company had, as of December 31, 1997,
deferred tax assets aggregating $1.1 billion, including
$631 million of NOLs. Realization of a substantial portion of the
Company's remaining NOLs required the completion by April 27, 1998
of transactions resulting in recognition of built-in gains for
federal income tax purposes. The Company consummated several such
transactions resulting in the elimination of reorganization value
in excess of amounts allocable to identifiable assets. To the
extent the Company were to determine in the future that additional
NOLs of the Company's predecessor could be recognized in the
accompanying consolidated financial statements, such benefit would
reduce other intangibles.
As a result of NOLs, the Company will not pay United States federal
income taxes (other than alternative minimum tax) until it has
recorded approximately an additional $515 million of taxable income
following December 31, 1997. Section 382 of the Internal Revenue
Code ("Section 382") imposes limitations on a corporation's ability
to utilize NOLs if it experiences an "ownership change." In
general terms, an ownership change may result from transactions
increasing the ownership of certain stockholders in the stock of a
corporation by more than 50 percentage points over a three-year
period. Based on information currently available, the Company does
not believe that the Air Partners agreement to dispose of its
interest in the Company to an affiliate of Northwest will result in
an ownership change for purposes of Section 382.
Purchase Commitments. As of April 24, 1998, Continental had firm
commitments with The Boeing Company ("Boeing") to take delivery of
a total of 148 jet aircraft during the years 1998 through 2005 with
options for an additional 61 aircraft (exercisable subject to
certain conditions). These new aircraft will replace older, less
efficient Stage 2 aircraft and allow for growth of operations. The
estimated aggregate cost of the Company's firm commitments for the
Boeing aircraft is approximately $6.4 billion. As of April 24,
1998, Continental had completed or had third-party commitments for
a total of approximately $1.4 billion in financing for its future
Boeing deliveries, and had commitments or letters of intent from
various sources for backstop financing for approximately one-third
of the anticipated remaining acquisition cost of such Boeing
deliveries. The Company currently plans on financing the new
Boeing aircraft with a combination of enhanced equipment trust
certificates, lease equity and other third-party financing, subject
to availability and market conditions. However, further financing
will be needed to satisfy the Company's capital commitments for
other aircraft and aircraft-related expenditures such as engines,
spare parts, simulators and related items. There can be no
assurance that sufficient financing will be available for all
aircraft and other capital expenditures not covered by firm
financing commitments. Deliveries of new Boeing aircraft are
expected to increase aircraft rental, depreciation and interest
costs while generating cost savings in the areas of maintenance,
fuel and pilot training.
<PAGE>
As of March 31, 1998, Express had firm commitments for 29 Embraer
ERJ-145 ("ERJ-145") regional jets, with options for an additional
150 aircraft exercisable through 2008. Neither Express nor
Continental will have any obligation to take any such aircraft that
are not financed by a third party and leased to the Company.
Express took delivery of three of the firm aircraft in the first
quarter of 1998 and will take delivery of the remaining 29 firm
aircraft through the third quarter of 1999. The Company expects to
account for all of these aircraft as operating leases.
Continental expects its cash outlays for 1998 capital expenditures,
exclusive of fleet plan requirements, to aggregate $229 million,
primarily relating to mainframe, software application and
automation infrastructure projects, aircraft modifications and
mandatory maintenance projects, passenger terminal facility
improvements and office, maintenance, telecommunications and ground
equipment. Continental's capital expenditures during the three
months ended March 31, 1998 aggregated $48 million, exclusive of
fleet plan requirements.
The Company expects to fund its future capital commitments through
internally generated funds together with general Company financings
and aircraft financing transactions. However, there can be no
assurance that sufficient financing will be available for all
aircraft and other capital expenditures not covered by firm
financing commitments.
Bond Financings. In December 1997, Continental substantially
completed construction of a new hangar and improvements to a cargo
facility at Continental's hub at Newark International Airport.
Continental completed the financing of these projects in April 1998
with $23 million of tax-exempt bonds. Continental is also planning
a major facility expansion at Newark which would require, among
other matters, agreements to be reached with the applicable airport
authority.
Continental has announced plans to expand its facilities at its
Hopkins International Airport hub in Cleveland, which expansion is
expected to be completed in the third quarter of 1999. The
expansion, which will include a new jet concourse for the regional
jet service offered by Express, as well as other facility
improvements, is expected to cost approximately $156 million and
will be funded principally by a combination of tax-exempt special
facilities revenue bonds (issued in March 1998) and general airport
revenue bonds (issued in December 1997) by the City of Cleveland.
In connection therewith, Continental has guaranteed the bonds and
has entered into a long-term lease with the City of Cleveland under
which rental payments will be sufficient to service the related
bonds.
Employees. In February 1998, a five-year collective bargaining
agreement with the Continental Airlines pilots was announced by the
Company and the IACP. In March 1998, Express also announced a
five-year collective bargaining agreement with its pilots. These
agreements are subject to ratification by the Continental and
Express pilots. The Company began accruing for the increased costs
of a tentative agreement reached in November 1997 in the fourth
quarter of 1997. The Company estimates that the provision for such
increased costs will be approximately $113 million for 1998. The
Company's mechanics and related employees have voted to be
represented by the International Brotherhood of Teamsters (the
"Teamsters"). The Company does not believe that the Teamsters
representation will cause a material financial impact to the
Company. In September 1997, Continental announced that it intends
to bring all employees to industry standard wages (the average of
the top ten U.S. air carriers as ranked by the U.S. Department of
Transportation excluding Continental) within 36 months. The
announcement further stated that wage increases will be phased in
over the 36-month period as revenue, interest rates and rental
rates reached industry standards. Continental estimates that the
increased wages will aggregate approximately $500 million over the
36-month period.
Other. On January 26, 1998, the Company announced that, in
connection with an agreement by Air Partners to dispose of its
interest in the Company to an affiliate of Northwest, the Company
had entered into a long-term global alliance with Northwest. The
Company estimates that the alliance with Northwest, when fully
phased in over a three-year period, will generate in excess of $500
million in additional annual pre-tax operating income for the
carriers, and anticipates that approximately 45% of such pre-tax
operating income will accrue to the Company. Recently, United
Airlines and Delta Air Lines, and American Airlines and US Airways,
respectively, announced plans to form alliances, subject in certain
cases to approval of such companies' respective pilots' unions. If
either or both planned alliances are implemented, the anticipated
benefit from the Company's alliance with Northwest would be
somewhat diminished. The Company cannot currently estimate the
impact of any such alliances on its business or on the anticipated
benefits from the Northwest Alliance.
In February 1998, Continental began a block space arrangement
whereby it is committed to purchase capacity on another carrier at
a cost of approximately $147 million per year. This arrangement is
for 10 years. Pursuant to other block space arrangements, other
carriers are committed to purchase capacity on Continental.
In March 1998, the Company announced that its Board of Directors
had authorized the expenditure of up to $100 million to repurchase
shares of the Company's common stock or convertible securities. No
time limit was placed on the duration of the repurchase program.
Subject to applicable securities laws, such purchases occur at
times and in amounts that the Company deems appropriate. As of
April 24, 1998, 910,000 shares had been repurchased.
Management believes that the Company's costs are likely to be
affected in the future by (i) higher aircraft ownership costs as
new aircraft are delivered, (ii) higher wages, salaries and related
costs as the Company compensates its employees comparable to
industry average, (iii) changes in the costs of materials and
services (in particular, the cost of fuel, which can fluctuate
significantly in response to global market conditions),
(iv) changes in governmental regulations and taxes affecting air
transportation and the costs charged for airport access, including
new security requirements, (v) changes in the Company's fleet and
related capacity and (vi) the Company's continuing efforts to
reduce costs throughout its operations, including reduced
maintenance costs for new aircraft, reduced distribution expense
from using Continental's electronic ticket product ("E-Ticket") and
the Internet for bookings, and reduced interest expense.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
10.1 Letter Agreement No. 6-1162-GOC-131R1 to Purchase
Agreement No. 1951 between the Company and Boeing,
dated March 26, 1998.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
(i) Report dated January 25, 1998 reporting an Item 5.
"Other Event" and an Item 7. "Financial Statements
and Exhibits". No financial statements were filed
with the report, which announced that the Company
had entered into a Governance Agreement with
Northwest Airlines Corporation.
(ii) Report dated February 20, 1998 reporting an Item 7.
"Financial Statements and Exhibits". No financial
statements were filed with the report, which
included an Exhibit Index related to the offering of
Continental Airlines, Inc.'s Pass Through
Certificates, Series 1998-1.
(iii) Report dated March 3, 1998 reporting an Item 5.
"Other Event" and an Item 7. "Financial Statements
and Exhibits". No financial statements were filed
with the report, which announced that the Company's
Board of Directors had authorized a stock repurchase
program.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CONTINENTAL AIRLINES, INC.
(Registrant)
Date: May 7, 1998 by: /s/ Lawrence W. Kellner
Lawrence W. Kellner
Executive Vice President and
Chief Financial Officer
(On behalf of Registrant)
Date: May 7, 1998 /s/ Michael P. Bonds
Michael P. Bonds
Vice President and Controller
(Chief Accounting Officer)
<PAGE>
INDEX TO EXHIBITS
OF
CONTINENTAL AIRLINES, INC.
10.1 Letter Agreement No. 6-1162-GOC-131R1 to Purchase
Agreement No. 1951 between the Company and Boeing, dated
March 26, 1998. (1)
27.1 Financial Data Schedule.
_______________
(1) The Company has applied to the Commission for confidential
treatment of a portion of this exhibit.
EXHIBIT 10.1
March 26, 1998
6-1162-GOC-131R1
Continental Airlines, Inc.
2929 Allen Parkway
Houston, Texas 77019
Subject: Letter Agreement No. 6-1162-GOC-131R1 to Purchase
Agreement No. 1951 - Special Matters
Ladies and Gentlemen:
This Letter Agreement amends Purchase Agreement No. 1951 dated as
of July 23, 1996 (the Agreement) between The Boeing Company
(Boeing) and Continental Airlines, Inc. (Buyer) relating to Model
737 aircraft (the Aircraft). This Letter Agreement supersedes and
replaces in its entirely Letter Agreement 6-1162-GOC-131, dated
October 10, 1997.
All terms used herein and in the Agreement, and not defined herein,
will have the same meaning as in the Agreement.
1. Credit Memorandum.
[CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.]
5. Model Substitution.
5.1 Model 737-724/-824 Aircraft. Buyer may elect to
substitute Model 737-824 for Model 737-724 or Model 737-724 for
Model 737-824 Aircraft for any Aircraft or Option Aircraft
delivering in [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT.] or later. Buyer's model substitution
notice to Boeing must be in writing to Boeing no later than the
first day of the tenth month prior to delivery of each Aircraft.
5.2 Model 737-624 Aircraft. Buyer may elect to substitute
either Model 737-724 or 737-824 Aircraft for Model 737-624 Option
Aircraft delivering in [CONFIDENTIAL MATERIAL OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
A REQUEST FOR CONFIDENTIAL TREATMENT.] or later. Buyer's written
model substitution notice must be received by Boeing no later than
the first day of the tenth month prior to delivery of each
Aircraft.
5.3 Model 737-524 Aircraft. Buyer may elect to substitute
Model 737-324 for Model 737-524 Aircraft. Buyer's substitution
notice must be in writing and received by Boeing no later than the
first day of the tenth month prior to delivery of each Aircraft if
Customer and Boeing have previously agreed on a configuration for
the Model 737-324. If configuration for the Model 737-324 has not
been established, than the notice period shall be the time required
to configure the Model 737-324 plus 10 months.
6. Assignment of Credits.
Buyer may not assign the credit memoranda described in this
Letter Agreement without Boeing's prior written consent other than
in circumstances where Boeing provides or arranges lease equity
financing to Customer in respect of an Aircraft.
7. Confidential Treatment.
Boeing and Buyer understand that certain information contained
in this Letter Agreement, including any attachments hereto, are
considered by both parties to be confidential. Notwithstanding the
provisions of Letter Agreement 6-1162-MMF-308R2, Boeing and Buyer
agree that each party will treat this Letter Agreement and the
information contained herein as confidential and will not, without
the other party's prior written consent, disclose this Letter
Agreement or any information contained herein to any other person
or entity except as may be required by applicable law or
governmental regulations.
Very truly yours,
THE BOEING COMPANY
By /s/ Gunar B. Clem
Its Attorney-In-Fact
ACCEPTED AND AGREED TO this
Date: March 27, 1998
CONTINENTAL AIRLINES, INC.
By /s/ Jeffrey J. Misner
Its Vice President Treasury Operations
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