Exhibit 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF UAL CORPORATION
The present name of the corporation is UAL Corporation. The corporation was incorporated under the name “UAL, Inc.” by the
filing of its original Certificate of Incorporation with the Secretary of State of the State of Delaware on December 30, 1968. This Restated Certificate of Incorporation of the corporation, which restates and integrates and also further amends
the provisions of the corporation’s Restated Certificate of Incorporation, was duly adopted in accordance with the provisions of Sections 242 and 245 of the General Corporation Law of the State of Delaware. The Restated Certificate of
Incorporation of the corporation is hereby amended, integrated and restated to read in its entirety as follows:
ARTICLE
FIRST. The name of the Corporation is UNITED CONTINENTAL HOLDINGS, INC.
ARTICLE SECOND. The registered office of the
Corporation in the State of Delaware is located at 2711 Centerville Road, Suite 400, in the City of Wilmington, County of New Castle, Delaware 19808. The name and address of its registered agent at such address is The Prentice-Hall Corporation
System, Inc., 2711 Centerville Road, Suite 400, in the City of Wilmington, County of Newcastle, Delaware 19808.
ARTICLE
THIRD. The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware (the “GCL”).
ARTICLE FOURTH. The total number of shares of capital stock of all classes of which the Corporation shall have authority to issue is
1,250,000,002, divided into four classes, as follows: 250,000,000 shares of Preferred Stock, without par value (hereinafter referred to as “Serial Preferred Stock”), one (1) share of Class Pilot MEC Junior Preferred Stock, par value
$0.01 per share (the “Class Pilot MEC Preferred Stock”), one (1) share of Class IAM Junior Preferred Stock, par value $0.01 per share (the “Class IAM Preferred Stock” and, together with the Serial Preferred Stock and the
Class Pilot MEC Preferred Stock, the “Preferred Stock”), and 1,000,000,000 shares of Common Stock, par value $0.01 per share (the “Common Stock”).
PART I
Serial Preferred Stock
The board of directors of the Corporation (the “Board of Directors”) is expressly authorized, without any vote or other action
by the stockholders and subject to limitations prescribed by law, to adopt, from time to time, a resolution or resolutions providing for the issue of Serial Preferred Stock in one or more series, to fix the number of shares in each such series and
to fix the designations and the powers, preferences and relative, participating, optional or other special rights, and the qualifications, limitations and restrictions thereof, of each such series. The authority of the Board of Directors with
respect to each such series shall include a determination of the following (which may vary as between the different series of Serial Preferred Stock):
(a) The number of shares constituting the series and the distinctive designation of the series;
(b) The dividend rate on the shares of the series, the conditions and dates upon which
dividends thereon shall be payable, the extent, if any, to which dividends thereon shall be cumulative, and the relative rights of preference, if any, of payment of dividends thereon;
(c) Whether or not the shares of the series are redeemable and, if redeemable, the time or times during which they shall be redeemable
and the amount per share payable on redemption thereof, which amount may, but need not, vary according to the time and circumstances of such redemption;
(d) The amount payable in respect of the shares of the series, in the event of any liquidation, dissolution or winding up of the
Corporation, which amount may, but need not, vary according to the time or circumstances of such action, and the relative rights of preference, if any, of payment of such amount;
(e) Any requirement as to a sinking fund for the shares of the series, or any requirement as to the redemption, purchase or other
retirement by the Corporation of the shares of the series;
(f) The right, if any, to exchange or convert shares of the series
into other securities or property, and the rate or basis, time, manner and condition of exchange or conversion;
(g) The
voting rights, if any, to which the holders of shares of the series shall be entitled in addition to the voting rights provided by law; and
(h) Any other term, condition or provision with respect to the series not inconsistent with the provisions of this Article Fourth, Part I
or any resolution adopted by the Board of Directors pursuant thereto.
PART II
Class Pilot MEC Junior Preferred Stock
Unless otherwise indicated, any reference in this Article Fourth, Part II to “Section,” “subsection,”
“paragraph,” “subparagraph,” or “clause” shall refer to a Section, subsection, paragraph, subparagraph or clause in this Article Fourth, Part II.
Section 1.
Issuance; Restrictions on Transfer
. The share of Class Pilot MEC
Preferred Stock shall be issued only to, and shall be held only by, (i) the United Airlines Pilots Master Executive Council (the “MEC”) of the Air Line Pilots Association, International (“ALPA”) pursuant to ALPA’s
authority as the collective bargaining representative for the crafts or class of pilots employed by United Air Lines, Inc. (“United OpCo”) or (ii) a duly authorized agent acting for the benefit of the MEC. Any purported sale,
transfer, pledge or other disposition (a “transfer”) of the share of Class Pilot MEC Preferred Stock to any person, other than a successor to the MEC by merger or reorganization of ALPA (in any such case, an “ALPA Successor”), or
a duly authorized agent acting for the benefit of ALPA or an ALPA Successor, shall be null and void and of no force and effect. Upon any purported transfer of the share of Class Pilot MEC Preferred Stock by the holder thereof other than as expressly
permitted above, and without any further action by the Corporation, such holder or any other person or entity, such share shall, to the extent of funds legally available therefor and subject to the other provisions of this Restated Certificate, be
automatically redeemed by the Corporation in accordance with Subsection 9.2 hereof, and thereupon such share shall no longer be deemed outstanding, and neither such holder nor any purported transferee thereof shall have in respect thereof any of the
voting powers, preferences or relative, participating, optional or special rights ascribed to the share of Class Pilot MEC Preferred Stock hereunder, but rather such holder thereafter shall only be entitled to receive the amount payable upon
redemption in accordance with Section 9. The certificate representing the share of Class Pilot MEC Preferred Stock shall be legended to reflect the restrictions on transfer and automatic redemption provided for herein.
Section 2.
Definitions
. For purposes of this Article Fourth, Part II, the following terms shall have the meanings
indicated:
2.1 “
Affiliate
” shall have the meaning defined in Rule 12b-2 under the Exchange Act.
2.2 “
Board of Directors
” shall mean the board of directors of the Corporation or any committee thereof authorized by
such board of directors to perform any of its responsibilities with respect to the Class Pilot MEC Preferred Stock.
2.3
“
Business Day
” shall mean any day other than a Saturday, Sunday or a day on which state or federally chartered banking institutions in New York, New York are not required to be open.
2.4 “
Exchange Act
” means the Securities Exchange Act of 1934, as amended, or any successor act thereto.
2.5 “
set apart for payment
” shall be deemed to include, without any action other than the following, the recording by
the Corporation in its accounting ledgers of any accounting or bookkeeping entry which indicates, pursuant to a declaration of dividends or other distribution by the Board of Directors, the allocation of funds to be so paid on any series or class of
capital stock of the Corporation; provided, however, that if any funds for any class or series of stock of the Corporation ranking on a parity with or junior to the Class Pilot MEC Preferred Stock as to distributions upon liquidation, dissolution or
winding up of the Corporation are placed in a separate account of the Corporation or delivered to a disbursing, paying or other similar agent, then “set apart for payment” with respect to the Class Pilot MEC Preferred Stock shall mean,
with respect to such distributions, placing such funds in a separate account or delivering such funds to a disbursing, paying or other similar agent.
2.6 “
Transfer Agent
” means the Corporation or such agent or agents of the Corporation as may be designated from time to
time by the Board of Directors as the transfer agent for the Class Pilot MEC Preferred Stock.
Section 3.
Dividends.
The holder of the share of Class Pilot MEC Preferred Stock
as such shall not be entitled to receive any dividends or other distributions (except as provided in Section 4).
Section 4.
Payments upon Liquidation.
4.1 In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, before any payment or
distribution of the assets of the Corporation (whether capital or surplus) shall be made to or set apart for payment to the holders of any class or series of stock of the Corporation that ranks junior to the Class Pilot MEC Preferred Stock as to
amounts distributable upon liquidation, dissolution or winding up of the Corporation, the holder of the share of Class Pilot MEC Preferred Stock shall be entitled to receive $0.01 for the share of Class Pilot MEC Preferred Stock (the “MEC
Liquidation Preference”), but such holder shall not be entitled to any further payment. If, upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation, or proceeds thereof, distributable to the holder of
the share of Class Pilot MEC Preferred Stock shall be insufficient to pay in full the MEC Liquidation Preference and the liquidation preference on all other shares of any class or series of stock of the Corporation that ranks on a parity with the
Class Pilot MEC Preferred Stock as to amounts distributable upon liquidation, dissolution or winding up of the Corporation, then such assets, or the proceeds thereof, shall be distributed among the holder of the share of Class Pilot MEC Preferred
Stock and any such other parity stock ratably in accordance with the respective amounts that would be payable on such share of Class Pilot MEC Preferred Stock and any such other parity stock if all amounts payable thereon were paid in full. For the
purposes of this Section 4, (i) a consolidation or merger of the Corporation with or into one or more corporations, or (ii) a sale, lease, exchange or transfer of all or substantially all of the Corporation’s assets, shall not be
deemed to be a liquidation, dissolution or winding up, voluntary or involuntary, of the Corporation.
4.2 Subject to the
rights of the holders of shares of any series or class of stock ranking prior to or on a parity with the Class Pilot MEC Preferred Stock as to amounts distributable upon liquidation, dissolution or winding up of the Corporation, after payment shall
have been made to the holder of the share of Class Pilot MEC Preferred Stock, as and to the fullest extent provided in this Section 4, any series or class of stock of the Corporation that ranks junior to the Class Pilot MEC Preferred Stock as
to amounts distributable upon liquidation, dissolution or winding up of the Corporation, shall, subject to the respective terms and provisions (if any) applying thereto, be entitled to receive any and all assets remaining to be paid or distributed,
and the holder of the share of Class Pilot MEC Preferred Stock shall not be entitled to share therein.
Section 5.
Shares to be Retired
. The share of Class Pilot MEC Preferred Stock which shall have been issued and reacquired in any manner (other than redemption pursuant to Section 9.1) by the Corporation shall be retired and restored to the status
of an authorized but unissued share of Class Pilot MEC Preferred Stock and, in the event of the redemption of such share pursuant to Section 9.1 hereof, shall not be reissued.
Section 6.
Ranking.
6.1 Any class or series of stock of the Corporation shall be deemed to rank:
(a) prior to the Class Pilot MEC Preferred Stock as to the distribution of assets upon liquidation, dissolution or winding up, if the
holders of such class or series shall be entitled to the receipt of amounts distributable upon liquidation, dissolution or winding up in preference or priority to the holder of Class Pilot MEC Preferred Stock;
(b) on a parity with the Class Pilot MEC Preferred Stock as to the distribution of assets upon liquidation, dissolution or winding up,
whether or not the liquidation prices per share thereof be different from those of the Class Pilot MEC Preferred Stock, if the holders of such class or series and the Class Pilot MEC Preferred Stock shall be entitled to the receipt of amounts
distributable upon liquidation, dissolution or winding up in proportion to their respective liquidation preferences, without preference or priority one over the other; and
(c) junior to the Class Pilot MEC Preferred Stock, as to the distribution of assets upon liquidation, dissolution or winding up, if the
holder of Class Pilot MEC Preferred Stock shall be entitled to the receipt of amounts distributable upon liquidation, dissolution or winding up in preference or priority to the holders of shares of such class or series.
6.2 The Class IAM Preferred Stock shall be deemed to rank on a parity with the Class Pilot MEC Preferred Stock as to amounts
distributable upon liquidation, dissolution or winding up. The Common Stock shall each be deemed to rank junior to the Class Pilot MEC Preferred Stock as to amounts distributable upon liquidation, dissolution or winding up.
Section 7.
Consolidation, Merger, etc.
7.1 In case the Corporation enters into any consolidation, merger, share exchange or similar transaction, however named, involving the
Corporation or its subsidiary, United OpCo (or any successor to all or substantially all the assets or business of United OpCo), pursuant to which the outstanding shares of Common Stock are to be exchanged for or changed, reclassified or converted
into securities of any successor or resulting or other company (including the Corporation), or cash or other property (each of the foregoing transactions is referred to herein as a “Merger Transaction”), proper provision shall be made so
that, upon consummation of such transaction, the share of Class Pilot MEC Preferred Stock shall be converted, reclassified or changed into or exchanged for preferred stock of such successor or resulting or other company having, in respect of such
company, the same powers, preferences and relative, participating, optional or other special rights (including the rights provided by this Section 7), and the qualifications, limitations or restrictions thereof, that the Class Pilot MEC
Preferred Stock had, in respect of the Corporation, immediately prior to such transaction; specifically including, without limitation, the right, until the ALPA Termination Date (as defined in Section 8.1 below), to elect one member of the
board of directors (or similar governing body) of such company.
7.2 In case the Corporation shall enter into any agreement
providing for any Merger Transaction, then the Corporation shall as soon as practicable thereafter (and in any event at least fifteen (15) Business Days before consummation of such transaction) give notice of such agreement and the material
terms thereof to the holder of the share of Class Pilot MEC Preferred Stock. The Corporation shall not consummate any such Merger Transaction unless all of the terms of this Section 7 and Section 8 have been complied with.
Section 8.
Voting
. The holder of the share of Class Pilot MEC Preferred Stock
shall have the following voting rights:
8.1 Until such time (the “ALPA Termination Date”) as (i) there are no
longer any persons represented by ALPA (or any ALPA Successor) employed by the Corporation or any of its Affiliates or (ii) the collective bargaining agreement between the Corporation or any of its Affiliates and ALPA has been amended by the
parties thereto so that such agreement no longer provides that ALPA has the right to appoint a director of the Corporation, the holder of the share of Class Pilot MEC Preferred Stock shall have the right (a) voting as a separate class, to
(1) elect one director to the Board of Directors at each annual meeting of stockholders for a term of office to expire at the succeeding annual meeting of stockholders, (2) remove such director with or without cause and (3) fill any
vacancies in such directorship resulting from death, resignation, disqualification, removal or other cause, and (b) voting together as a single class with the holders of Common Stock and the holders of such other classes or series of stock that
vote together with the Common Stock as a single class, to vote on all matters submitted to a vote of the holders of Common Stock of the Corporation (other than the election of Directors), except as otherwise required by law.
8.2 The affirmative vote of the holder of the share of Class Pilot MEC Preferred Stock, voting as a separate class, shall be necessary
for authorizing, effecting or validating the amendment, alteration or repeal (including any amendment, alteration or repeal by operation of merger or consolidation) of any of the provisions of this Restated Certificate or of any certificate
amendatory thereof or supplemental thereto (including any Certificate of Designation, Preferences and Rights or any similar document relating to any series of Serial Preferred Stock) which would adversely affect the powers, preferences or special
rights of the Class Pilot MEC Preferred Stock.
8.3 For purposes of the foregoing provisions of Sections 8.1 and 8.2, the
share of Class Pilot MEC Preferred Stock shall have one (1) vote.
Section 9.
Redemption
.
9.1 The share of Class Pilot MEC Preferred Stock shall, to the extent of funds legally available therefor and subject to the other
provisions of this Restated Certificate, be automatically redeemed on the ALPA Termination Date, at a price of $0.01 per share, as provided herein below. As promptly as reasonably possible following the occurrence of the ALPA Termination Date, the
Corporation shall give notice thereof and of the redemption under this Section 9 to the record holder of the Class Pilot MEC Preferred Stock. From and after the redemption provided for in this Section 9.1, all rights of the holder of the
Class Pilot MEC Preferred Stock as such, except the right to receive the redemption price of such share upon the surrender of the certificate formerly representing the same, shall cease and terminate and such share shall not thereafter be deemed to
be outstanding for any purpose whatsoever.
9.2 The share of Class Pilot MEC Preferred Stock shall, to the extent of funds legally
available therefor and subject to the other provisions of this Restated Certificate, be automatically redeemed upon any purported transfer thereof other than as expressly permitted under Section 1.2. The redemption price to be paid in
connection with any redemption shall be $0.01 per share of Class Pilot MEC Preferred Stock. Upon any such redemption, all rights of the holder of Class Pilot MEC Preferred Stock as such, except the right to receive the redemption price of such share
upon the surrender of the certificate formerly representing the same, shall cease and terminate and such share shall not thereafter be deemed to be outstanding for any purpose whatsoever.
9.3 The holder of the share of Class Pilot MEC Preferred Stock so redeemed pursuant to Section 9.1 or 9.2 shall present and
surrender the certificate formerly representing such share to the Corporation and thereupon the redemption price of such share shall be paid to or on the order of the person whose name appears on such certificate as the owner thereof and the
surrendered certificate shall be cancelled.
Section 10.
Record Holders
. The Corporation and the Transfer Agent
(if other than the Corporation) may deem and treat the record holder of the share of Class Pilot MEC Preferred Stock as the true and lawful owner thereof for all purposes, and, except as otherwise provided by law, neither the Corporation nor the
Transfer Agent shall be affected by any notice to the contrary.
PART III
Class IAM Junior Preferred Stock
Unless otherwise indicated, any reference in this Article Fourth, Part III to “Section,” “subsection,”
“paragraph,” “subparagraph,” or “clause” shall refer to a Section, subsection, paragraph, subparagraph or clause in this Article Fourth, Part III.
Section 1.
Issuance; Restrictions on Transfer
. The share of Class IAM Preferred Stock shall be issued only to, and shall be
held only by, (i) the International Association of Machinists and Aerospace Workers (the “IAM”) pursuant to the IAM’s authority as the collective bargaining representative for certain crafts or classes of public contact
employees, ramp and stores employees, food service and security officer employees, Mileage Plus public contact employees, fleet technical instructors and related and maintenance instructor employees employed by United OpCo or (ii) a duly
authorized agent acting for the benefit of the IAM. Any purported sale, transfer, pledge or other disposition (hereinafter a “transfer”) of the share of Class IAM Preferred Stock to any person, other than a successor to the IAM by merger
or reorganization of the IAM (in any such case, an “IAM Successor”), or a duly authorized agent acting for the benefit of the IAM or an IAM Successor, shall be null and void and of no force and effect. Upon any purported transfer of the
share of Class IAM Preferred Stock by the holder thereof other than as expressly permitted above, and without any further action by the Corporation, such holder or any other person or entity, such share shall, to the extent of funds legally
available therefor and subject to the other provisions of this Restated Certificate, be automatically redeemed by the Corporation in accordance with Subsection 9.2 hereof, and thereupon such share shall no longer be deemed outstanding, and neither
such holder nor any purported transferee thereof shall have in respect thereof any of the voting powers, preferences or relative, participating, optional or special rights ascribed to the share of Class IAM Preferred Stock hereunder, but rather such
holder thereafter shall only be entitled to receive the amount payable upon redemption in accordance with Section 9. The certificate representing the share of Class IAM Preferred Stock shall be legended to reflect the restrictions on transfer
and automatic redemption provided for herein.
Section 2.
Definitions
. For purposes of this Article Fourth, Part III, the
following terms shall have the meanings indicated:
2.1 “
Affiliate
” shall have the meaning defined in Rule
12b-2 under the Exchange Act.
2.2 “
Board of Directors
” shall mean the board of directors of the Corporation
or any committee thereof authorized by such board of directors to perform any of its responsibilities with respect to the Class IAM Preferred Stock.
2.3 “
Business Day
” shall mean any day other than a Saturday, Sunday or a day on which state or federally chartered
banking institutions in New York, New York are not required to be open.
2.4 “
Exchange Act
” means the
Securities Exchange Act of 1934, as amended, or any successor act thereto.
2.5 “
set apart for payment
” shall
be deemed to include, without any action other than the following, the recording by the Corporation in its accounting ledgers of any accounting or bookkeeping entry which indicates, pursuant to a declaration of dividends or other distribution by the
Board of Directors, the allocation of funds to be so paid on any series or class of capital stock of the Corporation; provided, however, that if any funds for any class or series of stock of the Corporation ranking on a parity with or junior to the
Class IAM Preferred Stock as to distributions upon liquidation, dissolution or winding up of the Corporation are placed in a separate account of the Corporation or delivered to a disbursing, paying or other similar agent, then “set apart for
payment” with respect to the Class IAM Preferred Stock shall mean, with respect to such distributions, placing such funds in a separate account or delivering such funds to a disbursing, paying or other similar agent.
2.6 “
Transfer Agent
” means the Corporation or such agent or agents of the Corporation as may be designated from time to
time by the Board of Directors as the transfer agent for the Class IAM Preferred Stock.
Section 3.
Dividends
. The
holder of the share of Class IAM Preferred Stock as such shall not be entitled to receive any dividends or other distributions (except as provided in Section 4).
Section 4.
Payments upon Liquidation
.
4.1 In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, before any payment or
distribution of the assets of the Corporation (whether capital or surplus) shall be made to or set apart for payment to the holders of any class or series of stock of the Corporation that ranks junior to the Class IAM Preferred Stock as to amounts
distributable upon liquidation, dissolution or winding up of the Corporation, the holder of the share of Class IAM Preferred Stock shall be entitled to receive $0.01 for the share of Class IAM Preferred Stock (the “IAM Liquidation
Preference”), but such holder shall not be entitled to any further payment. If, upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation, or proceeds thereof, distributable to the holder of the share of
Class IAM Preferred Stock shall be insufficient to pay in full the IAM Liquidation Preference and the liquidation preference on all other shares of any class or series of stock of the Corporation that ranks on a parity with the Class IAM Preferred
Stock as to amounts distributable upon liquidation, dissolution or winding up of the Corporation, then such assets, or the proceeds thereof, shall be distributed among the holder of the share of Class IAM Preferred Stock and any such other parity
stock ratably in accordance with the respective amounts that would be payable on such share of Class IAM Preferred Stock and any such other parity stock if all amounts payable thereon were paid in full. For the purposes of this Section 4,
(i) a consolidation or merger of the Corporation with or into one or more corporations, or (ii) a sale, lease, exchange or transfer of all or substantially all of the Corporation’s assets, shall not be deemed to be a liquidation,
dissolution or winding up, voluntary or involuntary, of the Corporation.
4.2 Subject to the rights of the holders of shares
of any series or class of stock ranking prior to or on a parity with the Class IAM Preferred Stock as to amounts distributable upon liquidation, dissolution or winding up of the Corporation, after payment shall have been made to the holder of the
share of Class IAM Preferred Stock, as and to the fullest extent provided in this Section 4, any series or class of stock of the Corporation that ranks junior to the Class IAM Preferred Stock as to amounts distributable upon liquidation,
dissolution or winding up of the Corporation, shall, subject to the respective terms and provisions (if any) applying thereto, be entitled to receive any and all assets remaining to be paid or distributed, and the holder of the share of Class IAM
Preferred Stock shall not be entitled to share therein.
Section 5.
Shares to be Retired
. The share of Class IAM
Preferred Stock which shall have been issued and reacquired in any manner (other than redemption pursuant to Section 9.1) by the Corporation shall be retired and restored to the status of an authorized but unissued share of Class IAM Preferred
Stock and, in the event of the redemption of such share pursuant to Section 9.1 hereof, shall not be reissued.
Section 6.
Ranking
.
6.1 Any class or series of stock of the Corporation shall be deemed to rank:
(a) prior to the Class IAM Preferred Stock as to the distribution of assets upon liquidation, dissolution or winding up, if the holders
of such class or series shall be entitled to the receipt of amounts distributable upon liquidation, dissolution or winding up in preference or priority to the holder of Class IAM Preferred Stock;
(b) on a parity with the Class IAM Preferred Stock as to the distribution of assets upon liquidation, dissolution or winding up, whether
or not the liquidation prices per share thereof be different from those of the Class IAM Preferred Stock, if the holders of such class or series and the Class IAM Preferred Stock shall be entitled to the receipt of amounts distributable upon
liquidation, dissolution or winding up in proportion to their respective liquidation preferences, without preference or priority one over the other; and
(c) junior to the Class IAM Preferred Stock, as to the distribution of assets upon
liquidation, dissolution or winding up, if the holder of Class IAM Preferred Stock shall be entitled to the receipt of amounts distributable upon liquidation, dissolution or winding up in preference or priority to the holders of shares of such class
or series.
6.2 The Class Pilot MEC Preferred Stock shall be deemed to rank on a parity with the Class IAM Preferred Stock as
to amounts distributable upon liquidation, dissolution or winding up. The Common Stock shall be deemed to rank junior to the Class IAM Preferred Stock as to amounts distributable upon liquidation, dissolution or winding up.
Section 7.
Consolidation, Merger, etc
.
7.1 In case the Corporation enters into any consolidation, merger, share exchange or similar transaction, however named, involving the
Corporation or its subsidiary, United OpCo (or any successor to all or substantially all the assets or business of United OpCo), pursuant to which the outstanding shares of Common Stock are to be exchanged for or changed, reclassified or converted
into securities of any successor or resulting or other company (including the Corporation), or cash or other property (each of the foregoing transactions is referred to herein as a “Merger Transaction”), proper provision shall be made so
that, upon consummation of such transaction, the share of Class IAM Preferred Stock shall be converted, reclassified or changed into or exchanged for preferred stock of such successor or resulting or other company having, in respect of such company,
the same powers, preferences and relative, participating, optional or other special rights (including the rights provided by this Section 7), and the qualifications, limitations or restrictions thereof, that the Class IAM Preferred Stock had,
in respect of the Corporation, immediately prior to such transaction; specifically including, without limitation, the right, until the IAM Termination Date (as defined in Section 8.1 below), to elect one member of the board of directors (or
similar governing body) of such company.
7.2 In case the Corporation shall enter into any agreement providing for any Merger
Transaction, then the Corporation shall as soon as practicable thereafter (and in any event at least fifteen (15) Business Days before consummation of such transaction) give notice of such agreement and the material terms thereof to the holder
of the share of Class IAM Preferred Stock. The Corporation shall not consummate any such Merger Transaction unless all of the terms of this Section 7 and Section 8 have been complied with.
Section 8.
Voting
. The holder of the share of Class IAM Preferred Stock shall have the following voting rights:
8.1 Until such time (the “IAM Termination Date”) as (i) there are no longer any persons represented by the IAM (or any IAM
Successor) employed by the Corporation or any of its Affiliates or (ii) the letter agreement between the Corporation and the IAM, dated as of May 1, 2003, no longer provides that the IAM has the right to appoint a director of the
Corporation, the holder of the share of Class IAM Preferred Stock shall have the right (a) voting as a separate class, to (1) elect one director to the Board of Directors at each annual meeting of stockholders for a term of office to
expire at the succeeding annual meeting of stockholders, (2) remove such director with or without cause and (3) fill any vacancies in such directorship resulting from death, resignation, disqualification, removal or other cause, and
(b) voting together as a single class with the holders of Common Stock and the holders of such other classes or series of stock that vote together with the Common Stock as a single class, to vote on all matters submitted to a vote of the
holders of Common Stock of the Corporation (other than the election of Directors), except as otherwise required by law.
8.2 The affirmative vote of the holder of the share of Class IAM Preferred Stock, voting as
a separate class, shall be necessary for authorizing, effecting or validating the amendment, alteration or repeal (including any amendment, alteration or repeal by operation of merger or consolidation) of any of the provisions of this Restated
Certificate or of any certificate amendatory thereof or supplemental thereto (including any Certificate of Designation, Preferences and Rights or any similar document relating to any series of Serial Preferred Stock) which would adversely affect the
powers, preferences or special rights of the Class IAM Preferred Stock.
8.3 For purposes of the foregoing provisions of
Sections 8.1 and 8.2, the share of Class IAM Preferred Stock shall have one (1) vote.
Section 9.
Redemption
.
9.1 The share of Class IAM Preferred Stock shall, to the extent of funds legally available therefor and subject to the other
provisions of this Restated Certificate, be automatically redeemed on the IAM Termination Date, at a price of $0.01 per share, as provided herein below. As promptly as reasonably possible following the occurrence of the IAM Termination Date, the
Corporation shall give notice thereof and of the redemption under this Section 9 to the record holder of the Class IAM Preferred Stock. From and after the redemption provided for in this Section 9.1, all rights of the holder of the Class
IAM Preferred Stock as such, except the right to receive the redemption price of such share upon the surrender of the certificate formerly representing the same, shall cease and terminate and such share shall not thereafter be deemed to be
outstanding for any purpose whatsoever.
9.2 The share of Class IAM Preferred Stock shall, to the extent of funds legally
available therefor and subject to the other provisions of this Restated Certificate, be automatically redeemed upon any purported transfer thereof other than as expressly permitted under Section 1.2. The redemption price to be paid in
connection with any redemption shall be $0.01 per share of Class IAM Preferred Stock. Upon any such redemption, all rights of the holder of Class IAM Preferred Stock as such, except the right to receive the redemption price of such share upon the
surrender of the certificate formerly representing the same, shall cease and terminate and such share shall not thereafter be deemed to be outstanding for any purpose whatsoever.
9.3 The holder of the share of Class IAM Preferred Stock so redeemed pursuant to Sections 9.1 or 9.2 shall present and surrender the
certificate formerly representing such share to the Corporation and thereupon the redemption price of such share shall be paid to or on the order of the person whose name appears on such certificate as the owner thereof and the surrendered
certificate shall be cancelled.
Section 10.
Record Holders
. The Corporation and the Transfer Agent (if other
than the Corporation) may deem and treat the record holder of the share of Class IAM Preferred Stock as the true and lawful owner thereof for all purposes, and, except as otherwise provided by law, neither the Corporation nor the Transfer Agent
shall be affected by any notice to the contrary.
PART IV
Common Stock
Unless otherwise indicated, any reference in this Article Fourth, Part IV to “Section,” “subsection,”
“paragraph,” “subparagraph,” or “clause” shall refer to a Section, subsection, paragraph, subparagraph or clause in this Article Fourth, Part IV.
Section 1.
Dividends
. Subject to any rights to receive dividends to which the holders of the shares of any other class or
series of stock may be entitled, the holders of shares of Common Stock shall be entitled to receive dividends, if and when declared payable from time to time by the Board of Directors, from any funds legally available therefor.
Section 2.
Liquidation
. In the event of any dissolution, liquidation or winding up of the Corporation, whether voluntary or
involuntary, after there shall have been paid to the holders of shares of any other class or series of stock ranking prior to the Common Stock in respect thereof the full amounts to which they shall be entitled, and subject to any rights of the
holders of any other class or series of stock to participate therein, the holders of the then outstanding shares of Common Stock shall be entitled to receive, pro rata, any remaining assets of the Corporation available for distribution to its
stockholders. Subject to the foregoing, the Board of Directors may distribute in kind to the holders of the shares of Common Stock such remaining assets of the Corporation, or may sell, transfer or otherwise dispose of all or any part of such
remaining assets to any other corporation, trust or other entity and receive payment therefor in cash, stock or obligations of such other corporation, trust or entity or any combination thereof, and may sell all or any part of the consideration so
received, and may distribute the consideration so received or any balance thereof in kind to holders of the shares of Common Stock. The voluntary sale, conveyance, lease, exchange or transfer of all or substantially all the property or assets of the
Corporation (unless in connection therewith the dissolution, liquidation or winding up of the Corporation is specifically approved), or the merger or consolidation of the Corporation into or with any other corporation, or the merger of any other
corporation into it, or any purchase or redemption of shares of stock of the Corporation of any class, shall not be deemed to be a dissolution, liquidation or winding up of the corporation for the purpose of this Section 2.
Section 3.
Voting
. Except as provided by law or this Restated Certificate, each outstanding share of Common Stock of the
Corporation shall entitle the holder thereof to one vote on each matter submitted to a vote at a meeting of stockholders.
PART V
Section 1.
No Preemptive Rights
. Except as otherwise provided herein, no holder of stock of the Corporation of any class
shall have any preemptive, preferential or other right to purchase or subscribe for any shares of stock, whether now or hereafter authorized, of the Corporation of any class, or any obligations convertible into, or any options or warrants to
purchase, any shares of stock, whether now or hereafter authorized, of the Corporation of any class, other than such, if any, as the Board of Directors may from time to time determine, and at such price as the Board of Directors may from time to
time fix; and any shares of stock or any obligations, options or warrants which the Board of Directors may determine to offer for subscription to holders of any shares of stock of the Corporation may, as the Board of Directors shall determine, be
offered to holders of shares of stock of the Corporation of any class or classes or series, and if offered to holders of shares of stock of more than one class or series, in such proportions as between such classes and series as the Board of
Directors may determine.
Section 2.
Non-Citizen Voting Limitation
. All (x) capital stock of, or other equity
interests in, the Corporation, (y) securities convertible into or exchangeable for shares of capital stock, voting securities or other equity interests in the Corporation, and (z) options, warrants or other rights to acquire the securities
described in clauses (x) and (y), whether fixed or contingent, matured or unmatured, contractual, legal, equitable or otherwise (collectively, “Equity Securities”) shall be subject to the following limitations:
(a) Non-Citizen Voting Limitation. In no event shall the total number of shares of Equity Securities held by all persons who fail to
qualify as a “citizen of the United States,” as the term is used in Section 40102(a)(15) of Title 49 of the United States Code, in any similar legislation of the United States enacted in substitution or replacement therefor, and as
interpreted by the Department of Transportation, be entitled to be more than 24.9% (or such other maximum percentage as such Section or substitute or replacement legislation shall hereafter provide) of the aggregate votes of all outstanding Equity
Securities of the Corporation (the “Cap Amount”).
(b) Allocation of Cap Amounts. The restrictions imposed by the
Cap Amount shall be applied pro rata among the holders of Equity Securities who fail to qualify as “citizens of the United States” based on the number of votes the underlying securities are entitled to.
(c) Each certificate or other representative document for Equity Securities (including each such certificate or representative document
for Equity Securities issued upon any permitted transfer of Equity Securities) shall contain a legend in substantially the following form:
“The
[type of Equity Securities]
represented by this
[certificate/representative document]
are subject to voting
restrictions with respect to
[shares/warrants, etc.]
held by persons or entities that fail to qualify as “citizens of the United States” as the term is defined used in Section 40102(a)(15) of Title 49 of the United States Code.
Such voting restrictions are contained in the Restated Certificate of United Continental Holdings, Inc., as the same may be amended or restated from time to time. A complete and correct copy of the Restated Certificate shall be furnished free of
charge to the holder of such shares of
[type of Equity Securities]
upon written request to the Secretary of United Continental Holdings, Inc.”
Section 3.
Restrictions on Issuance of Securities
. (a) The Corporation shall not issue nonvoting equity securities to
the extent prohibited by Section 1123(a)(6) of the United States Bankruptcy Code for so long as such Section is in effect and applicable to the Corporation.
(b) Except as required by law or as approved by the stockholders, the Corporation shall not
issue Serial Preferred Stock pursuant to Article Fourth, Part I with voting rights (unless such Serial Preferred Stock is convertible into Common Stock, in which case such Serial Preferred Stock may vote with the Common Stock on an as-converted
basis).
Section 4.
Stockholder Action
. Any action required or permitted to be taken by the stockholders of the
Corporation must be effected at a duly called annual or special meeting of such stockholders and may not be effected by any consent in writing by such stockholders.
Section 5.
5%
Ownership Limit
.
5.1 For purposes of Sections 5, 6 and 7, the following terms shall have the meanings indicated (and any references to any portions of
Treasury Regulation § 1.382-2T shall include any successor provisions):
“
5% Transaction
”
means any Transfer of Corporation Securities described in clause (y) or (z) of paragraph 5.2, subject to the provision of such paragraph 5.2.
An “
Affiliate
” of any Person means any other Person, that, directly or indirectly through one or more intermediaries,
controls or is controlled by, or is under common control with, such Person; and, for the purposes of this definition only, “control” (including the terms “controlling”, “controlled by” and “under common control
with”) means the possession, direct or indirect, of the power to direct or cause the direction of the management, policies or activities of a Person whether through the ownership of securities, by contract or agency or otherwise.
“
Associate
” has the meaning ascribed to such term in Rule 12b-2 under the Exchange Act.
A Person will be deemed the “
Beneficial Owner
” of, and will be deemed to “
Beneficially Own
,” and will
be deemed to have “
Beneficial Ownership
” of:
(a) any securities that such Person or any of such
Person’s Affiliates or Associates is deemed to “Beneficially Own” within the meaning of Rule 13d-3 under the Exchange Act, and any securities deposited into a trust established by or on behalf of the Person or any of its
Affiliates or Associates, the sole beneficiaries of which are the shareholders of the Person;
(b) any securities (the
“Underlying Securities”) that such Person or any of such Person’s Affiliates or Associates has the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement,
arrangement or understanding (written or oral), or upon the exercise of conversion rights, exchange rights, rights, warrants or options, or otherwise (it being understood that such Person will also be deemed to be the Beneficial Owner of the
securities convertible into or exchangeable for the Underlying Securities); and
(c) any securities Beneficially Owned by
persons that are part of a “group” (within the meaning of Rule 13d-5(b) under the Exchange Act) with such Person. For purposes of calculating the percentage of Voting Securities that are Beneficially Owned by any Person, such
calculation will be made based on the aggregate number of issued and outstanding securities at the time of such calculation, but will not include in the denominator any such securities issuable upon any options, warrants or other securities that are
exercisable for such securities.
“
Code
” means the Internal Revenue Code of 1986, as amended.
“
Corporation Securities
” means (i) shares of Common Stock, (ii) shares of Preferred Stock (other than
preferred stock described in Section 1504(a)(4) of the Code), (iii) warrants, rights, or options (including options within the meaning of Treasury Regulation § 1.382-2T(h)(4)(v)) to purchase stock of the Corporation, and
(iv) any other interest that would be treated as “stock” of the Corporation pursuant to Treasury Regulation § 1.382-2T(f)(18).
“
Effective Date
” means February 1, 2006.
“
Exchange Act
” means the Securities Exchange Act of 1934, as amended, or any successor act thereto.
“
Five-Percent Shareholder
” means a Person or group of Persons that is identified as a “5-percent shareholder”
of the Corporation pursuant to Treasury Regulation § 1.382-2T(g).
“
Percentage Stock
Ownership
” means the percentage Stock Ownership interest as determined in accordance with Treasury Regulation § 1.382-2T(g), (h), (j) and (k).
“
Person
” means any individual, firm, corporation or other legal entity, and includes any successor (by merger or
otherwise) of such entity.
“
Prohibited Transfer
” means any purported Transfer of Corporation Securities to
the extent that such Transfer is prohibited and/or void under this Section 5.
“
Tax Benefit
” means the
net operating loss carryovers, capital loss carryovers, general business credit carryovers, alternative minimum tax credit carryovers and foreign tax credit carryovers, as well as any loss or deduction attributable to a “net unrealized built-in
loss” within the meaning of Section 382, of the Corporation or any direct or indirect subsidiary thereof.
“
Transfer
” means, with respect to any person other than the Corporation, any direct or indirect sale,
transfer, assignment, conveyance, pledge or other disposition, other than a sale, transfer, assignment, conveyance, pledge or other disposition to a wholly owned subsidiary of the transferor, or, if the transferor is wholly owned by a Person, to a
wholly owned subsidiary of such Person. A Transfer also shall include the creation or grant of an option (including an option within the meaning of Treasury Regulation § 1.382-2T(h)(4)(v)).
“
Voting Securities
” means all securities that by their terms are entitled to vote generally in the election of directors
of the Corporation (without giving effect to any contractual limitations on voting).
5.2 Any attempted Transfer of Corporation Securities prior to the earliest of
(A) February 1, 2014, or such later date as may be approved by the Board of Directors, (B) the repeal, amendment or modification of Section 382 of the Code (and any comparable successor provision) (“Section 382”)
in such a way as to render the restrictions imposed by Section 382 no longer applicable to the Corporation, (C) the beginning of a taxable year of the Corporation (or any successor thereof) in which no Tax Benefits are available, and
(D) the date on which the limitation amount imposed by Section 382 in the event of an ownership change of the Corporation, as defined in Section 382, would not be materially less than the net operating loss carryforward or net
unrealized built-in loss of the Corporation (the “Restriction Release Date”), or any attempted Transfer of Corporation Securities pursuant to an agreement entered into prior to the Restriction Release Date, shall be prohibited and void ab
initio so far as it purports to transfer ownership or rights in respect of such stock to the Purported Transferee (y) if the transferor is a Five-Percent Shareholder or (z) to the extent that, as a result of such Transfer (or any series of
Transfers of which such Transfer is a part), either (1) any Person or group of Persons shall become a Five-Percent Shareholder other than by reason of Treasury Regulation Section 1.382-2T(j)(3) or any successor to such regulation or
(2) the Percentage Stock Ownership interest in the Corporation of any Five-Percent Shareholder shall be increased; provided, that this paragraph 5.2 shall not apply to, nor shall any other provision in this Restated Certificate prohibit,
restrict or limit in any way, (i) the issuance of Corporation Securities by the Corporation in accordance with the Second Amended Joint Plan of Reorganization of the Corporation dated January 20, 2006 (the “Chapter 11 Plan”)
or (ii) the issuance of Corporation Securities by the Corporation pursuant to the Agreement and Plan of Merger among UAL Corporation, Continental Airlines, Inc. and JT Merger Sub Inc. dated as of May 2, 2010, but not any subsequent
transfer of such Corporation Securities.
5.3 The restrictions set forth in paragraph 5.2 shall not apply to an attempted
Transfer that is a 5% Transaction if the transferor or the transferee obtains the prior written approval of the Board of Directors or a duly authorized committee thereof.
As a condition to granting its approval pursuant to this paragraph 5.3, the Board of Directors may, in its discretion, require (at
the expense of the transferor and/or transferee) an opinion of counsel selected by the Board of Directors that the Transfer shall not result in the application of any Section 382 limitation on the use of the Tax Benefits. The Board of Directors
may exercise the authority granted by this Section 5 through duly authorized officers or agents of the Corporation.
5.4
Each certificate representing shares of Corporation Securities issued prior to the Restriction Release Date shall contain the legend set forth on
Exhibit A
hereto, evidencing the restrictions set forth in this Section 5 and Sections
6 and 7.
Section 6.
Treatment of Excess Securities
.
6.1 No employee or agent of the Corporation shall record any Prohibited Transfer, and the purported transferee of such a Prohibited
Transfer (the “Purported Transferee”) shall not be recognized as a stockholder of the Corporation for any purpose whatsoever in respect of the Corporation Securities which are the subject of the Prohibited Transfer (the “Excess
Securities”). Until the Excess Securities are acquired by another Person in a Transfer that is not a Prohibited Transfer, the Purported Transferee shall not be entitled with respect to such Excess Securities to any rights of stockholders of the
Corporation, including, without limitation, the right to vote such Excess Securities and to receive dividends or distributions, whether liquidating or otherwise, in respect thereof, if any; provided, however, that the Transferor of such Excess
Securities shall not be required to disgorge, and shall be permitted to retain for its own account, any proceeds of such Transfer, and shall have no further rights, responsibilities, obligations or liabilities with respect to such Excess Securities,
if such Transfer was a Prohibited Transfer pursuant to Section 5.2(z). Once the Excess Securities have been acquired in a Transfer that is not a Prohibited Transfer, the Corporation Securities shall cease to be Excess Securities. For this
purpose, any transfer of Excess Securities not in accordance with the provisions of this Section 6 shall also be a Prohibited Transfer.
6.2 If the Board of Directors determines that a Transfer of Corporation Securities
constitutes a Prohibited Transfer then, upon written demand by the Corporation, the Purported Transferee shall transfer or cause to be transferred any certificate or other evidence of ownership of the Excess Securities within the Purported
Transferee’s possession or control, together with any dividends or other distributions that were received by the Purported Transferee from the Corporation with respect to the Excess Securities (“Prohibited Distributions”), to an agent
designated by the Board of Directors (the “Agent”). The Agent shall thereupon sell to a buyer or buyers, which may include the Corporation, the Excess Securities transferred to it in one or more arm’s-length transactions (over the New
York Stock Exchange or other national securities exchange on which the Corporation Securities may be traded, if possible, or otherwise privately); provided, however, that the Agent shall effect such sale or sales in an orderly fashion and shall not
be required to effect any such sale within any specific time frame if, in the Agent’s discretion, such sale or sales would disrupt the market for the Corporation Securities or otherwise would adversely affect the value of the Corporation
Securities. If the Purported Transferee has resold the Excess Securities before receiving the Corporation’s demand to surrender Excess Securities to the Agent, the Purported Transferee shall be deemed to have sold the Excess Securities for the
Agent, and shall be required to transfer to the Agent any Prohibited Distributions and proceeds of such sale, except to the extent that the Corporation grants written permission to the Purported Transferee to retain a portion of such sales proceeds
not exceeding the amount that the Purported Transferee would have received from the Agent pursuant to Section 6.3 if the Agent rather than the Purported Transferee had resold the Excess Securities.
6.3 The Agent shall apply any proceeds of a sale by it of Excess Securities and, if the Purported Transferee had previously resold the
Excess Securities, any amounts received by it from a Purported Transferee as follows: (x) first, such amounts shall be paid to the Agent to the extent necessary to cover its costs and expenses incurred in connection with its duties hereunder;
(y) second, any remaining amounts shall be paid to the Purported Transferee, up to the amount paid by the Purported Transferee for the Excess Securities (or the fair market value, (1) calculated on the basis of the closing market price for
the Corporation Securities on the day before the Prohibited Transfer, (2) if the Corporation Securities are not listed or admitted to trading on any stock exchange but are traded in the over-the-counter market, calculated based upon the
difference between the highest bid and lowest asked prices, as such prices are reported by the National Association of Securities Dealers through its NASDAQ system or any successor system on the day before the Prohibited Transfer or, if none, on the
last preceding day for which such quotations exist, or (3) if the Corporation Securities are neither listed nor admitted to trading on any stock exchange nor traded in the over-the-counter market, then as determined in good faith by the Board
of Directors, of the Excess Securities at the time of the Prohibited Transfer to the Purported Transferee by gift, inheritance, or similar Transfer), which amount (or fair market value) shall be determined at the discretion of the Board of
Directors; and (z) third, any remaining amounts, subject to the limitations imposed by the following proviso, shall be paid to one or more organizations qualifying under Section 501(c)(3) of the Code (or any comparable successor provision)
(“Section 501(c)(3)”) selected by the Board of Directors; provided, however, that if the Excess Securities (including any Excess Securities arising from a previous Prohibited Transfer not sold by the Agent in a prior sale or sales),
represent a 5% or greater Percentage Stock Ownership in any class of Corporation Securities, then any such remaining amounts to the extent attributable to the disposition of the portion of such Excess Securities exceeding a 4.99% Percentage Stock
Ownership interest in such class shall be paid to two or more organizations qualifying under Section 501(c)(3) selected by the Board of Directors. The recourse of any Purported Transferee in respect of any Prohibited Transfer shall be limited
to the amount payable to the Purported Transferee pursuant to clause (y) of the preceding sentence. In no event shall the proceeds of any sale of Excess Securities pursuant to this Section 6 inure to the benefit of the Corporation.
6.4 If the Purported Transferee fails to surrender the Excess Securities or the proceeds of
a sale thereof to the Agent within thirty days from the date on which the Corporation makes a written demand pursuant to Section 6.2, then the Corporation shall use its best efforts to enforce the provisions hereof, including the institution of
legal proceedings to compel the surrender.
6.5 The Corporation shall make the written demand described in Section 6.2
within thirty days of the date on which the Board of Directors determines that the attempted Transfer would result in Excess Securities; provided, however, that if the Corporation makes such demand at a later date, the provisions of Sections 5 and 6
shall apply nonetheless.
Section 7.
Board Authority.
The Board of Directors shall have the power to determine all matters necessary for assessing compliance with Sections 5 and 6, including,
without limitation, (A) the identification of Five-Percent Shareholders, (B) whether a Transfer is a 5% Transaction or a Prohibited Transfer, (C) the Percentage Stock Ownership in the Corporation of any Five-Percent Shareholder,
(D) whether an instrument constitutes a Corporation Security, (E) the amount (or fair market value) due to a Purported Transferee pursuant to clause (y) of Section 6.3, and (F) any other matters which the Board of Directors
determines to be relevant; and the good faith determination of the Board of Directors on such matters shall be conclusive and binding for all the purposes of Sections 5 and 6.
ARTICLE FIFTH.
Unless otherwise indicated, any reference in this Article Fifth to “Section,” “subsection,” “paragraph,”
“subparagraph,” or “clause” shall refer to a Section, subsection, paragraph, subparagraph or clause in this Article Fifth.
Section 1.
Definitions.
As used in this Restated Certificate, the following terms shall have the following meanings:
1.1 “
Chief Executive Officer
” means the Chief Executive Officer of the Corporation.
1.2 “
Director
” means a director of the Corporation.
1.3 “
Exchange Act
” means the Securities Exchange Act of 1934, as amended, or any successor act thereto.
1.4 “
GCL
” means the General Corporation Law of the State of Delaware, as amended from time to time.
1.5 “
Person
” means any individual, corporation, limited liability company, association, partnership, joint venture,
trust or unincorporated organization, or a governmental entity or any department, agency or political subdivision thereof.
1.6 “
Restated Bylaws
” means the Amended and Restated Bylaws of the Corporation, as amended from time to time.
1.7 “
Stockholders
” means the stockholders of the Corporation.
Section 2.
Directors.
2.1 General Powers. Except as otherwise provided in this Restated Certificate, the business and affairs of the Corporation shall be
managed by or under the direction of the Board of Directors. The Board of Directors may adopt such rules and regulations, not inconsistent with this Restated Certificate, the Restated Bylaws or applicable law, as it may deem proper for the conduct
of its meetings and the management of the Corporation. In addition to the powers conferred expressly by this Restated Certificate and the Restated Bylaws, the Board of Directors may exercise all powers and perform all acts that are not required, by
this Restated Certificate, the Restated Bylaws or applicable law, to be exercised or performed by the Stockholders.
2.2
Number. Except as otherwise provided for or fixed by or pursuant to the provisions of Article Fourth hereof relating to the rights of the holders of any class or series of stock to elect Directors and take certain actions with respect to such
elected Directors, the number of Directors shall be fixed from time to time exclusively pursuant to a resolution of the Board of Directors (but shall not be fewer than five).
2.3 Term of Office. Except as otherwise provided in this Restated Certificate, each Director shall hold office until the next annual
meeting of Stockholders and until his or her successor is elected and qualified, subject to such Director’s earlier death, resignation or removal.
2.4 Resignation of Directors. Any Director may resign at any time upon written notice to the Corporation.
2.5 Voting by Directors. Subject to any greater or additional vote of the Board or of any class of Directors required by law, by this
Restated Certificate or the Restated Bylaws, an act of the Board shall require the affirmative vote of at least a majority of the votes entitled to be cast by the Directors present at a meeting of the Board at which a quorum is present. Each
Director shall have one vote.
Section 3.
Special Voting Provisions.
3.1 Election of Directors. Notwithstanding any other provision of this Restated Certificate, and except as otherwise required by law,
whenever the holders of one or more series of Preferred Stock shall have the right, voting separately as a class, to elect one or more Directors, the term of office, the filling of vacancies, the removal from office and other features of such
directorships shall be governed by the terms of this Restated Certificate or the resolution or resolutions of the Board of Directors establishing such series of Preferred Stock. During any period when the holders of any series of Preferred Stock
(other than the Class Pilot MEC Preferred Stock and the Class IAM Preferred Stock) have the right to elect additional Directors as provided for or fixed by or pursuant to the provisions of Article Fourth hereof, then upon commencement and for the
duration of the period during which such right continues: (i) the then otherwise total authorized number of Directors of the Corporation shall automatically be increased by such specified number of Directors, and the holders of such Preferred
Stock shall be entitled to elect the additional Directors so provided for or fixed by or pursuant to said provisions, and (ii) each such additional Director shall serve until such office terminates pursuant to said provisions, whichever occurs
earlier, subject to his or her earlier death, disqualification, resignation or removal. Except as otherwise provided by the Board of Directors in the resolution or resolutions establishing a series of Preferred Stock, whenever the holders of any
series of Preferred Stock having a right to elect additional Directors are divested of such right pursuant to the provisions of such series of Preferred Stock, the terms of office of all such additional Directors elected by the holders of such
series of Preferred Stock, or selected to fill any vacancies resulting from the death, resignation, disqualification or removal of such additional Directors, shall forthwith terminate and the total authorized number of Directors of the Corporation
shall be reduced accordingly.
3.2 Amendment to the Restated Bylaws. The Board of Directors is expressly authorized to make,
alter, amend or repeal the Restated Bylaws, and to adopt new bylaws; provided, however, that (i) prior to the Chairman Succession Date (as defined in the Restated Bylaws), the Board of Directors shall not be permitted to alter, amend or repeal
Section 5.5(c), Section 5.14, the last sentence of Section 5.6 or the proviso to Section 8.1 and (ii) no bylaws hereafter adopted shall invalidate any prior act of the Board of Directors that would have been valid if such
bylaws had not been adopted.
ARTICLE SIXTH.
(a) A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the director’s duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the GCL, or (iv) for any transaction from which the director derived an improper personal benefit.
(b) Each person who was or is made a party or is threatened to be made a party or is
involved in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a “proceeding”), by reason of the fact that he or she, or a person of whom he or she is the
legal representative, is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director, officer or employee of another corporation or of a partnership, joint venture, trust or other enterprise,
including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as a director or officer or in any other capacity while serving as a director, officer or employee shall be
indemnified and held harmless by the Corporation to the fullest extent authorized by the GCL, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to
provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys’ fees, judgments, fines, ERISA excise taxes or penalties and
amounts paid or to be paid in settlement) actually and reasonably incurred or suffered by such person in connection therewith. Such indemnification shall continue as to a person who has ceased to be a director or officer and shall inure to the
benefit of his or her heirs, executors and administrators; provided, however, that, except as provided in paragraph (c) hereof, the Corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part
thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors. Notwithstanding anything to the contrary herein, the Corporation shall not be obligated to indemnify a director or officer for
costs and expenses relating to proceedings (or any part thereof) instituted against the Corporation by such director or officer (other than proceedings pursuant to which such director or officer is seeking to enforce such director’s or
officer’s indemnification rights hereunder). The right to indemnification conferred in this Article Sixth with respect to directors and officers shall be a contract right and shall include the right to be paid by the Corporation the
expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that, if the GCL requires, the payment of such expense incurred by a director or officer in his or her capacity as a director or officer (and
not in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of a proceeding, shall be made only
upon delivery to the Corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under this
Article Sixth or otherwise. The Corporation may provide indemnification to employees (other than officers) and agents of the Corporation with the same scope and effect as the foregoing indemnification of directors and officers to the extent
(i) permitted by the laws of the State of Delaware as from time to time in effect, and (ii) authorized in the sole discretion any of the Chief Executive Officer, the President, the Chief Financial Officer or the General Counsel of the
Corporation; provided, however, that any such indemnification shall not constitute a contract right for any such employee or agent.
(c) If a claim under paragraph (b) of this Article Sixth is not paid in full by the
Corporation within thirty days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part,
the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final
disposition where the required undertaking, if any is required, has been tendered to the Corporation) that the claimant has not met the standards of conduct which make it permissible under the GCL for the Corporation to indemnify the claimant for
the amount claimed, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to
the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the GCL, nor an actual determination by the Corporation (including its
Board of Directors, independent legal counsel, or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of
conduct.
(d) The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its
final disposition conferred in this Article Sixth shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of this Restated Certificate, by-law, agreement, vote of stockholders or
disinterested directors or otherwise.
(e) The Corporation may maintain insurance, at its expense, to protect itself and any
director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the Corporation would have the power to indemnify such
person against such expense, liability or loss under the GCL.
ARTICLE SEVENTH.
Except as expressly provided in this Restated Certificate, the Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Restated Certificate, in the manner now or hereafter prescribed by the laws of Delaware and this Restated Certificate, and all rights and powers conferred herein upon stockholders and directors are granted subject to this
reservation.
Exhibit A
Form of Stock Legend
The transfer of the shares of
[
—
]
Common Stock represented by this
Certificate is subject to restrictions pursuant to Article Fourth, Part V, Sections 5, 6 and 7 of the Restated Certificate of Incorporation of
[
—
]
.
[
—
]
will furnish a copy of its Restated Certificate of Incorporation to the holder of record of this Certificate without charge upon written request addressed to
[
—
]
at its principal place of business.
WHEREAS, this Restated Certificate of Incorporation shall become effective on
October 1, 2010 at 12:01 a.m.
IN WITNESS WHEREOF, UAL Corporation has caused this Restated Certificate of Incorporation
to be executed by its duly authorized officer on this 30th day of September, 2010.
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UAL Corporation
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By:
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/s/ Thomas J. Sabatino, Jr.
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Name: Thomas J. Sabatino, Jr.
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Office: Senior Vice President,
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General Counsel and
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Corporate Secretary
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Exhibit 3.2
AMENDED AND RESTATED BYLAWS
OF UNITED CONTINENTAL HOLDINGS, INC.
ARTICLE 1
Definitions
As used in
these Restated Bylaws, unless the context otherwise requires, the following terms shall have the following meanings:
1.1
“Assistant Secretary”
means an Assistant Secretary of the Corporation.
1.2
“Assistant Treasurer”
means an Assistant Treasurer of the Corporation.
1.3
“Board”
means the Board of Directors of the
Corporation.
1.4
“Chairman”
means the Chairman of the Board of Directors.
1.5
“Change in Ownership”
means any sale, disposition, transfer or issuance or series of sales, dispositions, transfers
and/or issuances of shares of the capital stock by the Corporation or any holders thereof which results in any person or group of persons (as the term “group” is used under the Securities Exchange Act of 1934, as amended), other than the
holders of Common Stock, owning capital stock of the Corporation possessing the voting power (under ordinary circumstances and without regard to cumulative voting rights) to elect a majority of the Board.
1.6
“Chief Executive Officer”
means the Chief Executive Officer of the Corporation.
1.7
“Common Stock”
means the Common Stock, par value $0.01 per share, of the Corporation.
1.8
“Corporation”
means United Continental Holdings, Inc.
1.9
“DGCL”
means the General Corporation Law of the State of Delaware, as amended from time to time.
1.10
“Director”
means a member of the Board.
1.11
“Effective Time”
means the date and time of the filing with the Secretary of State of the State of Delaware of the
Certificate of Merger (as defined in the Merger Agreement) consummating the Merger (or such later time as may be agreed by the parties to the Merger Agreement and specified in the Certificate of Merger).
1.12
“Entire Board”
means all Directors who would be in office if there were no vacancies.
1.13
“Entire Committee”
means, with respect to any committee, all members
of such committee who would serve on such committee if there were no vacancies.
1.14
“Fundamental Change”
means the occurrence of any of the following: (a) any sale, transfer or disposition of more than 50% of the property or assets of the Corporation and its subsidiaries on a consolidated basis (measured either by book value in accordance with
generally accepted accounting principles consistently applied or by fair market value determined in the reasonable good faith judgment of the Board) in any transaction or series of transactions (other than sales in the ordinary course of business)
and (b) any merger or consolidation to which the Corporation is a party, except for (x) a merger which is effected solely to change the state of incorporation of the Corporation or (y) a merger in which the Corporation is the
surviving person and, after giving effect to such merger, the holders of the capital stock of the Corporation as of the date immediately prior to the merger or consolidation shall continue to own the outstanding capital stock of the Corporation
possessing the voting power (under ordinary circumstances) to elect a majority of the Board.
1.15
“General
Counsel”
means the General Counsel of the Corporation.
1.16
“Merger
” means the merger of JT Merger
Sub Inc., a Delaware corporation and wholly-owned subsidiary of the Corporation, with and into Continental Airlines, Inc., a Delaware corporation, pursuant to the Merger Agreement.
1.17
“Merger Agreement”
means that certain Agreement and Plan of Merger dated as of May 2, 2010, by and among the
Corporation, Continental Airlines, Inc. and JT Merger Sub Inc., as amended from time to time.
1.18
“Preferred
Stock”
means the Preferred Stock, without par value, of the Corporation.
1.19
“President”
means the
President of the Corporation.
1.20
“Restated Certificate”
means the Restated Certificate of Incorporation of
the Corporation, as amended from time to time.
1.21
“Restated Bylaws”
means the Amended and Restated Bylaws
of the Corporation, as amended from time to time.
1.22
“Secretary”
means the Secretary of the Corporation.
1.23
“Stockholders”
means the stockholders of the Corporation.
1.24
“Treasurer”
means the Treasurer of the Corporation.
1.25
“Union Directors”
means those directors of the Corporation elected by the holders of Class Pilot MEC Junior
Preferred Stock and the Class IAM Junior Preferred Stock pursuant to Article Fourth, Parts II and III of the Restated Certificate.
1.26
“Vice President”
means a Vice President of the Corporation.
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ARTICLE 2
Stockholders’ Meetings
2.1
Annual Meeting.
A meeting of Stockholders shall be held annually for the election of Directors and the transaction of other
business at an hour and date as shall be determined by the Board and designated in the notice of meeting.
2.2
Special
Meetings.
Subject to the Restated Certificate, a special meeting of the Stockholders may be called only by (a) both the Chief Executive Officer and the Chairman or (b) the Board, and at an hour and date as shall be determined by them.
At any special meeting of Stockholders, no business other than that set forth in the notice thereof given pursuant to
Section 2.4
may be transacted.
2.3
Place of Meetings.
All meetings of Stockholders shall be held at such places, within or without the State of Delaware, as may
from time to time be fixed by the Board or as specified or fixed in the respective notices. The Board may, in its sole discretion, determine that a meeting of the Stockholders shall not be held at any place, but may instead be held solely by means
of remote communication as authorized by Section 211(a)(2) of the DGCL (or any successor provision thereto). Any previously-scheduled meeting of the Stockholders may be postponed by action of the Board taken prior to the time previously
scheduled for such annual meeting of Stockholders.
2.4
Notices of Stockholders’ Meetings.
Except as otherwise
provided in
Section 2.5
or otherwise required by the Restated Certificate or applicable law, written notice of each meeting of Stockholders, whether annual or special, shall be given to each Stockholder required or permitted to take any
action at, or entitled to notice of, such meeting not less than ten (10) nor more than sixty (60) days before the date on which the meeting is to be held, by delivering such notice to him or her, personally, by mail or by electronic
transmission in the manner provided by law. If mailed, such notice shall be deemed to be given when deposited in the United States mail, with postage prepaid, directed to the Stockholder at his or her address as it appears on the stock ledger of the
Corporation. Every notice of a meeting of Stockholders shall state the place, date and hour of the meeting and the purpose or purposes for which the meeting is called.
2.5
Waivers of Notice.
Notwithstanding any other provision in these Restated Bylaws, notice of any meeting of Stockholders shall
not be required as to any Stockholder who shall attend such meeting in person or be represented by proxy, except when such Stockholder attends such meeting for the express purpose of objecting at the beginning of the meeting to the transaction of
any business at such meeting because the meeting is not lawfully called or convened. If any Stockholder shall, in person or represented by proxy, waive notice of any meeting, whether before or after such meeting, notice thereof shall not be required
as to such Stockholder.
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2.6
Quorum Requirements and Required Vote at Stockholder Meetings.
(a) Except as otherwise required by applicable law, the Restated Certificate or these Restated Bylaws, at all meetings of Stockholders the
presence, in person or represented by proxy, of the holders of outstanding shares representing at least a majority of the total voting power entitled to vote at a meeting of Stockholders shall constitute a quorum for the transaction of business;
provided, however,
that where a separate vote of a class or classes or series of stock is required, the presence in person or represented by proxy of the holders of outstanding shares representing at least a majority of the total voting power
of all outstanding shares of such class or classes or series shall constitute a quorum thereof entitled to take action with respect to such separate vote.
(b) Except as otherwise required by applicable law, the Restated Certificate or these Restated Bylaws, each holder of stock of the
Corporation entitled to vote on any matter at any meeting of the Stockholders shall be entitled to one vote for each share of such stock standing in the name of such holder on the stock ledger of the Corporation on the record date for the
determination of the Stockholders entitled to vote at the meeting. Except as otherwise required by applicable law, the Restated Certificate or these Restated Bylaws, including, without limitation,
Section 3.3
hereof, the affirmative vote
of a majority in voting power of the shares present in person or represented by proxy and entitled to vote on the subject matter at a meeting of Stockholders at which a quorum is present shall be the act of the Stockholders. Except as required by
applicable law, the method of voting and the manner in which votes are counted shall be discretionary with the presiding officer at the meeting.
(c) The holders of a majority in voting power of the shares entitled to vote and present in person or represented by proxy at any meeting
of Stockholders, whether or not a quorum is present, may adjourn such meeting to another time and place. At any such adjourned meeting at which a quorum shall be present, any business may be transacted that might have been transacted at the meeting
as originally called. Unless otherwise required by applicable law, the Restated Certificate or these Restated Bylaws, no notice of an adjourned meeting need be given.
2.7
Proxies.
Each Stockholder entitled to vote at a meeting of Stockholders may authorize another person or persons to act for him
or her by proxy executed in writing by the Stockholder or as otherwise permitted by law, or by his or her duly authorized attorney-in-fact, but such proxy shall no longer be valid eleven months after the date of such proxy. Such proxy must be filed
with the Secretary of the Corporation or his or her representative at or before the time of the meeting.
2.8
Inspectors.
The Board by resolution shall appoint one or more inspectors, which inspector or inspectors may include individuals who serve the Corporation in other capacities, including, without limitation, as officers, employees, agents or representatives
of the Corporation, to act at the meeting and make a written report thereof. One or more persons may be designated as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate has been appointed to act, or if all
inspectors or alternates who have been appointed are unable to act, at the meeting of Stockholders, the chairman of the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before discharging his or her duties, shall
take and sign an oath to execute faithfully the duties of inspector with strict impartiality and according to the best of his or her ability. The inspectors shall have the duties prescribed by the DGCL. The chairman of the meeting shall fix and
announce at the meeting the time of the opening and the closing of the polls for each matter upon which the Stockholders will vote at a meeting.
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2.9
Conduct
of
Stockholders’ Meetings.
The Chief Executive Officer
or the Chairman of the Board, as designated by the Board, or, in their absence or the absence of any such designation, the appointee of the presiding officer of the meeting, shall preside at all meetings of Stockholders and may establish such rules
of procedure for conducting the meetings as he or she deems fair and reasonable. The Secretary, or in his or her absence an Assistant Secretary, or if none be present, the appointee of the presiding officer of the meeting, shall act as secretary of
the meeting.
2.10
Notice of Stockholder Business and Nominations
.
(a)
Annual Meetings of Stockholders
.
(1) Nominations of persons for election to the Board and the proposal of other business to be considered by the
Stockholders may be made at an annual meeting of Stockholders only (A) if brought before the meeting by the Corporation and specified in the Corporation’s notice of meeting delivered pursuant to
Section 2.4
, (B) if brought
before the meeting by or at the direction of the Board or (C) if brought before the meeting by a Stockholder who (i) was a Stockholder of record (and, with respect to any beneficial owner, if different, on whose behalf any nomination or
proposal is made, only if such beneficial owner was the beneficial owner of shares of capital stock of the Corporation) both at the time of giving of notice provided for in this
Section 2.10
, and at the time of the meeting, (ii) is
entitled to vote at the meeting, and (iii) has complied with this
Section 2.10
as to such nominations or other business. Except for proposals properly made in accordance with Rule 14a-8 under the Securities Exchange Act of 1934, as
amended, and the rules and regulations thereunder (as so amended and inclusive of such rules and regulations, the “
Exchange Act
”), and included in the notice of meeting given by or at the direction of the Board, the foregoing clause
(C) shall be the exclusive means for a Stockholder to propose business to be considered or to propose any nominations of persons for election to the Board at an annual meeting of the Stockholders.
(2) Without qualification, for any nominations of persons for election to the Board or other business to be properly
brought before an annual meeting by a Stockholder, in each case, pursuant to clause (C) of paragraph (a)(1) of this
Section 2.10
, the Stockholder must (x) have given timely notice thereof in writing and in proper form to the
Secretary of the Corporation and (y) provide any updates or supplements to such notice at the times and in the forms required by this
Section 2.10
. To be timely, a Stockholder’s notice shall be delivered to, or mailed and
received by, the Secretary at the principal executive offices of the Corporation not more than 120 days and not less than 90 days prior to the one-year anniversary of the preceding year’s annual meeting;
provided, however
, that in the
event that the date of the annual meeting is advanced by more than 30 days, or delayed by more than 60 days, from such anniversary date, notice by the Stockholder to be timely must be so delivered, or mailed and received, not later than the close of
business on the tenth day following the day on which public announcement of the date of such annual meeting is first made by the Corporation. In no event shall any adjournment of an annual meeting or the announcement thereof commence a new time
period (or extend any time period) for the giving of a Stockholder’s notice. For purposes of this
Section 2.10
, the term “Proposing Person” means (i) the Stockholder providing the notice of a proposed nomination or
other business proposed to be brought before a meeting, (ii) the beneficial owner or beneficial owners, if different, on whose behalf the proposed nomination or other business proposed to be brought before a meeting is made, and (iii) any
affiliate or associate (for purposes of these Bylaws, each within the meaning of Rule 12b-2 under the Exchange Act) of such Stockholder or beneficial owner.
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(3) To be in proper form, a Stockholder’s notice (whether given
pursuant to paragraph (a)(2) or paragraph (b) of this
Section 2.10
) shall set forth:
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(A)
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As to each Proposing Person:
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(i)
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the name and address of such Proposing Person (including, if applicable, the name and address that appear on the Corporation’s stock ledger); and
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(ii)
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the class or series and number of shares of capital stock of the Corporation that are, directly or indirectly, owned of record or beneficially (within the meaning of
Rule 13d-3 under the Exchange Act) by such Proposing Person, except that such Proposing Person shall in all events be deemed to beneficially own any shares of any class or series of the capital stock of the Corporation as to which such Proposing
Person has a right to acquire beneficial ownership at any time in the future (the disclosures to be made pursuant to the foregoing clauses (i) and (ii) are referred to as “
Stockholder Information
”);
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(B)
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As to each Proposing Person:
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(i)
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any derivative, swap or other transaction or series of transactions engaged in, directly or indirectly, by such Proposing Person, the purpose or effect of which is to
give such Proposing Person economic risk similar to ownership of shares of any class or series of the capital stock of the Corporation, including due to the fact that the value of such derivative, swap or other transaction is determined by reference
to the price, value or volatility of any shares of any class or series of the capital stock of the Corporation, or which derivative, swap or other transactions provide, directly or indirectly, the opportunity to profit from any increase in the price
or value of shares of any class or series of the capital stock of the Corporation (“
Synthetic Equity Interests
”), which such Synthetic Equity Interests shall be disclosed without regard to whether (x) such derivative, swap or
other transactions convey any voting rights in such shares to such Proposing Person, (y) the derivative, swap or other transactions are required to be, or are capable of being, settled through delivery of such shares or (z) such Proposing
Person may have entered into other transactions that hedge or mitigate the economic effect of such derivative, swap or other transaction;
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(ii)
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any proxy (other than a revocable proxy or consent given in response to a solicitation made pursuant to, and in accordance with, Section 14(a) of the Exchange Act
by way of a solicitation statement filed on Schedule 14A), agreement, arrangement, understanding or relationship pursuant to which such Proposing Person has or shares a right to vote any shares of any class or series of the capital stock of the
Corporation;
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(iii)
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any agreement, arrangement, understanding or relationship, including any repurchase or similar so-called “stock borrowing” agreement or arrangement, engaged
in, directly or indirectly, by such Proposing Person, the purpose or effect of which is to mitigate loss to, reduce the economic risk (of ownership or otherwise) of shares of any class or series of the capital stock of the Corporation by, manage the
risk of share price changes for, or increase or decrease the voting power of, such Proposing Person with respect to the shares of any class or series of the capital stock of the Corporation, or which provides, directly or indirectly, the opportunity
to profit from any decrease in the price or value of the shares of any class or series of the capital stock of the Corporation (“
Short Interests
”);
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(iv)
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any rights to dividends on the shares of any class or series of the capital stock of the Corporation owned beneficially by such Proposing Person that are separated or
separable from the underlying shares of the Corporation;
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(v)
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any performance related fees (other than an asset based fee) that such Proposing Person is entitled to based on any increase or decrease in the price or value of shares
of any class or series of the capital stock of the Corporation, or any Synthetic Equity Interests or Short Interests, if any; and
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(vi)
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any other information relating to such Proposing Person that would be required to be disclosed in a proxy statement or other filing required to be made in connection
with solicitations of proxies or consents by such Proposing Person in support of the nomination for election of Directors or the other business proposed to be brought before the meeting pursuant to Section 14(a) of the Exchange Act (the
disclosures to be made pursuant to the foregoing clauses (i) through (vi) are referred to as “
Disclosable Interests
”); provided, however, that Disclosable Interests shall not include any such disclosures with respect to
the ordinary course business activities of any broker, dealer, commercial bank, trust company or other nominee who is a Proposing Person solely as a result of being the Stockholder of record directed to prepare and submit the information required by
this
Section 2.10
on behalf of a beneficial owner.
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(C)
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As to each person, if any, whom a Proposing Person proposes to nominate for election or reelection as a Director:
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(i)
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all information with respect to such proposed nominee that would be required to be set forth in a Stockholder’s notice pursuant to this
Section 2.10
if
such proposed nominee were a Proposing Person;
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(ii)
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all information relating to such proposed nominee that is required to be disclosed in a proxy statement or other filings required to be made in connection with
solicitations of proxies for election of Directors in a contested election pursuant to Section 14(a) under the Exchange Act (including such proposed nominee’s written consent to being named in the proxy statement as a nominee and to
serving as a Director if elected); and
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(iii)
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a description of all direct and indirect compensation and other material monetary agreements, arrangements and understandings during the past three years, and any other
material relationships, between or among any Proposing Person, on the one hand, and each proposed nominee and his or her respective affiliates and associates, on the other hand, including, without limitation, all information that would be required
to be disclosed pursuant to Item 404 under Regulation S-K if such Proposing Person were the “registrant” for purposes of such rule and the proposed nominee were a Director or executive officer of such registrant; and
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(D)
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As to any business other than nominations for election of Directors that a Proposing Person proposes to bring before an annual meeting:
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(i)
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a reasonably brief description of the business desired to be brought before the annual meeting, the reasons for conducting such business at the annual meeting and any
material interest in such business of any Proposing Person;
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(ii)
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the text of the proposal or business (including the text of any resolutions proposed for consideration); and
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(iii)
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a reasonably detailed description of all agreements, arrangements and understandings (x) between or among any of the Proposing Persons and (y) between or
among any Proposing Person and any other record or beneficial owner of capital stock of the Corporation (including their names) in connection with the proposal of such business by such Stockholder.
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(4) A Stockholder providing notice of a proposed nomination for election to the Board or other business proposed to be
brought before a meeting (whether given pursuant to paragraph (a)(2) or paragraph (b) of this
Section 2.10
) shall further update and supplement such notice, if necessary, so that the information provided or required to be provided
in such notice shall be true and correct as of the record date for the meeting and as of the date that is ten business days prior to the meeting or any adjournment or postponement thereof, and such update and supplement shall be delivered to, or
mailed and received by, the Secretary at the principal executive offices of the Corporation not later than five business days after the record date for the meeting (in the case of the update and supplement required to be made as of the record date),
and not later than eight business days prior to the date for the meeting or, if practicable, any adjournment of postponement thereof (and, if not practicable, on the first practicable date prior to the date to which the meeting has been adjourned or
postponed) (in the case of the update and supplement required to be made as of ten business days prior to the meeting or any adjournment or postponement thereof). The Corporation may also require any proposed nominee for election to the Board to
furnish such other information (i) as may be reasonably required by the Corporation to determine the eligibility of such proposed nominee to serve as an independent Director of the Corporation in accordance with the Corporation’s corporate
governance guidelines as then in effect or (ii) that could be material to a reasonable Stockholder’s understanding of the independence, or lack thereof, of such proposed nominee.
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(5) Notwithstanding anything in paragraph (a)(2) of this
Section 2.10
to the contrary, in the event that the number of Directors to be elected to the Board at the annual meeting is increased and there is no public announcement by the Corporation naming all of the nominees for Director or
specifying the size of the increased Board made by the Corporation at least ten days before the last day a Stockholder could otherwise deliver a notice of nomination in accordance with such paragraph (a)(2) of this
Section 2.10
, a
Stockholder’s notice required by this
Section 2.10
shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to, or mailed and received by, the
Secretary at the principal executive offices of the Corporation not later than the close of business on the tenth day following the day on which such public announcement is first made by the Corporation.
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(b)
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Special Meeting of Stockholders
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Only such business shall be conducted at a special meeting of Stockholders as shall have been properly brought before the meeting in
accordance with
Section 2.2
. Nominations of persons for election to the Board may be made at a special meeting of Stockholders at which Directors are properly to be elected only (1) by or at the direction of the Board or (2) by
any Stockholder who (A) was a Stockholder of record (and, with respect to any beneficial owner, if different, on whose behalf any nomination is made, only if such beneficial owner was the beneficial owner of shares of the Corporation) both at
the time of giving of notice provided for in this
Section 2.10
and at the time of the meeting, (B) is entitled to vote at the meeting and (C) complied with this paragraph (b) and paragraph (a)(3) of this
Section 2.10
as to such nominations. Without qualification, in order for a Stockholder to present any nominations of persons for election to the Board at such a special meeting, pursuant to clause (2) of this paragraph (b), the
Stockholder must (x) have given timely notice thereof in writing and in proper form to the Secretary of the Corporation (which notice shall include disclosure of the information that is required by the applicable provisions of paragraph (a)(3)
of this
Section 2.10
) and (y) provide any updates or supplements to such notice at the times and in the forms required by paragraph (a)(4) of this
Section 2.10
. To be timely, a Stockholder’s notice shall be
delivered to, or mailed and received by, the Secretary at the principal executive offices of the Corporation not earlier than the one hundred twentieth day prior to the date of such special meeting and not later than the close of business on the
later of (x) the ninetieth day prior to the date of such special meeting and (y) the tenth day following the day on which public announcement is first made of the date of such special meeting and of the nominees proposed by the Board to be
elected at such special meeting. In no event shall any adjournment of a special meeting or the announcement thereof commence a new time period (or extend any time period) for the giving of a Stockholder’s notice as described above.
(1) Subject to the rights, if any, of the holders of any series of Preferred Stock to elect additional Directors as may be
provided in a designation of rights relating to such series of Preferred Stock, including the holders of the Class Pilot MEC Junior Preferred Stock and the Class IAM Junior Preferred Stock pursuant to Article Fourth, Parts II and III of the Restated
Certificate, only persons who are nominated in accordance with this
Section 2.10
shall be eligible to serve as Directors and only such business as shall have been brought before the meeting in accordance with this
Section 2.10
shall be conducted at a meeting of Stockholders. Nominations for Union Directors shall be made only by the holders of the Class Pilot MEC Junior Preferred Stock and the Class IAM Junior Preferred Stock, and then only in
accordance with the procedures and qualification requirements of the Restated Certificate and any stockholder agreements applicable to such nomination process. Except as otherwise provided by law, the Restated Certificate or these Restated Bylaws,
the chairman of the meeting shall have the power and duty to determine whether such nomination or business was made in compliance with this
Section 2.10
and, if such proposed nomination or business is deemed not to have been properly
made, to declare that such nomination or proposal has not been properly brought before the meeting and shall be disregarded and declared to be out of order.
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(2) For purposes of this
Section 2.10
, “public
announcement” shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission
pursuant to Section 13, 14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of
this
Section 2.10
, a Stockholder shall also comply with all applicable requirements of the Exchange Act with respect to the matters set forth in this
Section 2.10
. This
Section 2.10
is expressly intended to apply
to any business proposed to be brought before a meeting of Stockholders other than any proposal made pursuant to Rule 14a-8 under the Exchange Act. Nothing in this
Section 2.10
shall be deemed to affect any rights of Stockholders to
request inclusion of proposals in the Corporation’s proxy statement pursuant to Rule 14a-8 under the Exchange Act.
2.11
List of Stockholders.
It shall be the duty of the Secretary or other officer who has charge of the stock ledger to prepare and make, at least ten (10) days before each annual or special meeting of the Stockholders, a complete list of the
Stockholders entitled to vote at such meeting, arranged in alphabetical order, and showing the address of each Stockholder and the number of shares registered in such Stockholder’s name. Such list shall be produced and kept available at the
times and places required by law. The stock ledger shall be the only evidence as to which Stockholders are the Stockholders entitled to examine the stock ledger or the list required by this
Section 2.11
, or to vote in person or by proxy
at such meeting of the Stockholders.
2.12
Remote Communication
. For the purposes of these Restated Bylaws, if
authorized by the Board in its sole discretion, and subject to such guidelines and procedures as the Board may adopt, Stockholders and proxyholders may, by means of remote communication:
(a) participate in a meeting of Stockholders; and
(b) be deemed present in person and vote at a meeting of Stockholders whether such meeting is to be held at a designated place or solely
by means of remote communication, provided that (i) the Corporation shall implement reasonable measures to verify that each person deemed present and permitted to vote at the meeting by means of remote communication is a Stockholder or
proxyholder, (ii) the Corporation shall implement reasonable measures to provide such Stockholders and proxyholders a reasonable opportunity to participate in the meeting and to vote on matters submitted to the Stockholders, including an
opportunity to read or hear the proceedings of the meeting substantially concurrently with such proceedings, and (iii) if any Stockholder or proxyholder votes or takes other action at the meeting by means of remote communication, a record of
such vote or other action shall be maintained by the Corporation.
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ARTICLE 3
Board Of Directors
3.1
Number and Term of Office.
The number and term of office of Directors on the Board shall be determined as provided in the
Restated Certificate.
3.2
Powers.
The Board may, except as otherwise provided in the Restated Certificate or the DGCL,
exercise all such powers and do all such acts and things as may be exercised or done by the Corporation.
3.3
Election.
Except as otherwise required by applicable law or the Restated Certificate, and notwithstanding
Section 2.6(b)
hereof, Directors shall be elected by a plurality of the votes cast at a meeting of Stockholders by the holders of shares
entitled to vote on their election.
3.4
Place of Meetings.
Meetings of the Board may be held either within or without
the State of Delaware at such place as is indicated in the notice or waiver of notice thereof. It is intended that a majority of the in-person Board meetings in each calendar year shall be held in the Greater Chicago Metropolitan Area.
3.5
Organization Meeting.
The Board shall meet as soon as practicable after each annual meeting of Stockholders at the place of
such annual meeting for the purpose of organization and the transaction of other business. No notice of such meeting of the Board shall be required. Such organization meeting may be held at any other time or place specified in a notice given as
hereinafter provided for special meetings of the Board, or in a consent and waiver of notice thereof, signed by all of the Directors.
3.6
Stated Meetings.
The Board shall from time to time, by resolution adopted by the affirmative vote of at least a majority of
the votes entitled to be cast by the Entire Board, appoint the time and place for holding stated meetings of the Board; and such meetings shall thereupon be held at the time and place so appointed, without the giving of any special notice with
regard thereto. Any and all business may be transacted at any stated meeting.
3.7
Special Meetings.
Special meetings
of the Board shall be held whenever called by the Secretary of the Board, at the direction of any three Directors, or by the Chairman, or, in the event that the office of the Chairman is vacant, by the Chief Executive Officer, or in the event that
the office of the Chairman and Chief Executive Officer are vacant, by the President. Notice of a special meeting shall set forth a description of such meeting and be sent to the Directors as provided in
Section 3.8
.
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3.8
Notices of Board Meetings.
Notice of any meeting shall be sent to each Director
at his or her residence or usual place of business either (a) by reputable overnight delivery service in circumstances to which such service guarantees next day delivery, not later than on the day that is the second business day immediately
preceding the day of such meeting, or (b) by facsimile, telex, telegram or electronic mail, not later than twenty-four (24) hours before the time of such meeting. If sent by overnight delivery service, such notice shall be deemed to be
given when delivered to such service; if sent by facsimile, telex, telegram or electronic mail, such notice shall be deemed to be given when transmitted. Notice of any meeting of the Board need not however be given to any Director, if waived by him
or her in writing or if, subject to applicable law, he or she shall be present at the meeting. Any meeting of the Board shall be a legal meeting without any notice thereof having been given if all of the Directors shall be present thereat, except
when a Director attends a meeting for the express purpose of objecting at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened.
3.9
Quorum and Manner of Acting.
Except as otherwise required by applicable law, the Restated Certificate or these Restated
Bylaws, the presence at any organization, stated or special meeting of Directors having at least a majority of the votes entitled to be cast by the Entire Board shall constitute a quorum for the transaction of business; and, except as otherwise
required by applicable law, the Restated Certificate or these Restated Bylaws, the affirmative vote of a majority of the votes entitled to be cast by the Directors present at any meeting at which a quorum is present shall be the act of the Board. In
the absence of a quorum, the affirmative vote of a majority of the votes entitled to be cast by the Directors present may adjourn any meeting, from time to time, until a quorum is present.
3.10
Telephone Meetings.
Directors or members of any committee of the Board may participate in a meeting of the Board or of such
committee by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this
Section 3.10
shall constitute
presence in person at such meeting.
3.11
Chairman of the Board Pro Tempore.
In the absence of both the Chairman and
the Chief Executive Officer at any meeting of the Board, the Board may appoint from among its members a Chairman of the Board pro tempore, who shall preside at such meeting, except where otherwise provided by law.
3.12
Resignation.
Any Director may resign at any time upon notice given in writing or by electronic transmission to the
Corporation. Any such resignation shall take effect at the time received by the Corporation, unless the resignation specifies a later effective date or an effective date determined upon the happening of one or more events.
3.13
Removal of Directors.
Any Director or the entire Board may be removed with or without cause as provided under the DGCL.
3.14
Vacancies and Newly Created Directorships.
Except as otherwise provided in the Restated Certificate, vacancies
and newly created directorships resulting from any increase in the authorized number of Directors may be filled by a majority of the Directors then in office, even if less than a quorum, or by a sole remaining Director, and the Directors so chosen
shall hold office until the next election of Directors and until their successors are duly elected and qualified or until earlier resignation or removal. If there are no Directors in office, then an election of Directors may be held in the manner
provided by statute.
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3.15
Directors’ Fees.
The Board shall have authority to determine, from time to
time, the amount of compensation that shall be paid to its members for attendance at meetings of the Board or of any committee of the Board, which compensation may be payable currently or deferred.
3.16
Action Without Meeting.
Any action required or permitted to be taken at any meeting of the Board or any committee of the
Board may be taken without a meeting if all of the members of the Board or of any such committee, as the case may be, consent thereto in writing, by electronic transmission or transmissions, or as otherwise permitted by law and, if required by law,
the writing or writings or electronic transmission or transmissions are filed with the minutes of proceedings of the Board or of such committee. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in
electronic form if the minutes are maintained in electronic form.
ARTICLE 4
Board Committees
4.1
Designation.
(a) Except as otherwise provided in the Restated Certificate, the Board may, by resolution adopted by the affirmative vote of at least a
majority of the votes entitled to be cast by the Entire Board, designate one or more committees of the Board, each such committee to consist of one or more Directors, and at the Effective Time there shall be the following six committees: an Audit
Committee, an Executive Committee, a Finance Committee, a Compensation Committee, a Nominating/Governance Committee and a Public Responsibility Committee. Except as otherwise provided in the Restated Certificate, unless sooner discharged by the
affirmative vote of a majority of the votes entitled to be cast by the Entire Board, members of each committee of the Board shall hold office until the organization meeting of the Board in the next subsequent year and until their respective
successors are appointed.
(b) So far as practicable, members of each committee of the Board shall be appointed annually at
the organization meeting of the Board. The Board may designate one or more Directors as alternate members of any committee of the Board, who may replace any absent or disqualified member at any meeting of such committee. The Nominating/Governance
Committee of the Board shall have the power to recommend to the Board a chairman of each committee of the Board by the affirmative vote of a majority of the votes entitled to be cast by all of the members of the Nominating/Governance Committee. The
Board shall have the power to appoint one of its members to act as chairman of each committee of the Board.
14
(c) Notwithstanding the foregoing, except as required by law or otherwise provided in these
Restated Bylaws, no committee of the Board will have the authority to (i) issue dividends, distributions or securities, except for issuances of cash or securities pursuant to employee benefit plans; (ii) to approve a Fundamental Change or
Change in Ownership, except as may be required in the exercise of fiduciary duties; (iii) to take any action that would require the approval of the Stockholders pursuant to the DGCL; (iv) elect any officer designated as such in
Section 5.1
or to fill any vacancy in any such office; (v) designate the Chief Executive Officer or the Chairman of the Board; (vi) fill any vacancy in the Board or any newly created Directorship; (vii) amend these
Restated Bylaws; (viii) take any action that under these Restated Bylaws is required to be taken by vote of a specified proportion of the Entire Board or of the Directors at the time in office; or (ix) take any action, the power or
authority for which is reserved for the Entire Board pursuant to Section 141(c)(2) of the DGCL, except as otherwise set forth in such Section 141(c)(2).
4.2
Meetings.
(a) Stated meetings of any committee of the Board shall be held at such times and at such places as shall be fixed, from time to time, by
resolution adopted by the Board or by the affirmative vote of a majority of the votes entitled to be cast by the members of such committee of the Board and upon notification pursuant to
Section 4.3
to all the members of such committee.
Any and all business may be transacted at any stated meeting of any committee of the Board.
(b) Special meetings of any
committee of the Board may be called at any time by the chairman of such committee or by any two members of such committee. Notice of a special meeting of any committee of the Board shall set forth a description of the business to be transacted at
such meeting and be sent to the members of such committee of the Board as provided in
Section 4.3
.
4.3
Notice
of Board Committee Meetings.
Notice of any meeting of any committee of the Board shall be sent to each member of such committee at his or her residence or usual place of business either (a) by reputable overnight delivery service in
circumstances to which such service guarantees next day delivery, not later than on the day that is the second business day immediately preceding the day of such meeting, or (b) by facsimile, telex, telegram or electronic mail, not later than
twenty-four (24) hours before the time of such meeting. If sent by overnight delivery service, such notice shall be deemed to be given when delivered to such service; if sent by facsimile, telex, telegram or electronic mail, such notice shall
be deemed to be given when transmitted. Notice of any meeting of a committee of the Board need not however be given to any member of such committee, if waived by him or her in writing or if, subject to applicable law, he or she shall be present at
the meeting. Any meeting of a committee of the Board shall be a legal meeting without any notice thereof having been given if all of the members shall be present thereat except when a Director attends a meeting for the express purpose of objecting
at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened.
4.4
Place of Meetings.
Meetings of any committee of the Board may be held either within or without the State of Delaware.
4.5
Quorum and Voting Requirements of Board Committees.
(a) The presence of Directors entitled to cast at least a majority of the aggregate number of votes entitled to be cast by all Directors
on a committee of the Board shall constitute a quorum for the transaction of business, and any act of a committee of the Board shall require the affirmative vote of at least a majority of the votes entitled to be cast by the Directors present at a
meeting of such committee at which a quorum is present.
15
(b) The members of any committee of the Board shall act only as a committee of the Board,
and the individual members of the Board shall have no power as such.
4.6
Records.
Each committee of the Board shall
keep a record of its acts and proceedings and shall report the same, from time to time, to the Board. The Secretary, or, in his or her absence, an Assistant Secretary, shall act as secretary to each committee of the Board, or a committee of the
Board may, in its discretion, appoint its own secretary.
4.7
Vacancies.
Except as otherwise provided in the Restated
Certificate, any vacancy in any committee of the Board shall be filled by a majority of the Directors then in office.
4.8
Committee Procedure
. The Board by resolution or resolutions shall establish the rules of procedure to be followed by each committee, which shall include a requirement that such committee keep regular minutes of its proceedings and deliver to
the Secretary the same.
4.9
Executive Committee
.
(a) In addition to any requirements set forth in the Restated Certificate or these Restated Bylaws, an Executive Committee shall be
appointed, to consist of the Chairman, the Chief Executive Officer and three or more other Directors;
provided, however
, that at least a majority of the Executive Committee shall consist of Directors who are neither officers nor employees of
the Corporation or of any of its affiliated corporations.
(b) Subject to the provisions of the DGCL and these Restated
Bylaws, the Executive Committee shall have and may exercise all the powers of the Board in the management of the business and affairs of the Corporation, including, without limitation, the power to authorize the seal of the Corporation to be affixed
to all papers that may require it, but excluding any powers granted by the Board to any other committee of the Board.
(c)
Subject to any provision in the Restated Certificate or the DGCL, any action herein authorized to be taken by the Executive Committee and which is duly taken by it in accordance herewith shall have the same effect as if such action were taken by the
Board.
ARTICLE 5
Officers, Employees and Agents:
Powers And Duties
5.1
Officers.
The officers of the Corporation, who shall be elected by the Board, may be a Chairman of the Board (who shall be a
Director), a Treasurer and one or more Assistant Treasurers, and shall be a Chief Executive Officer, a President, one or more Vice Presidents (who may be further classified by such descriptions as “executive,” “senior,”
“assistant,” “staff” or otherwise, as the Board shall determine), a General Counsel, a Secretary and one or more Assistant Secretaries. The Board may also elect, and may delegate power to appoint, such other officers and select
such other employees or agents as, from time to time, may appear to be necessary or advisable in the conduct of the affairs of the Corporation. Any officer may also be elected to another office or offices.
16
5.2
Term of Office.
Subject to the provisions of the Restated Certificate or these
Restated Bylaws, so far as practicable, each officer shall be elected at the organization meeting of the Board in each year, and shall hold office until the organization meeting of the Board in the next subsequent year and until his or her successor
is chosen or until his or her earlier death, resignation or removal in the manner hereinafter provided.
5.3
Resignation
and Removal of Officers.
Any officer may resign at any time upon written notice to the Corporation. Subject to the provisions of
Section 5.14
, any officer may be removed at any time, either for or without cause, by the affirmative
vote of at least a majority of the votes entitled to be cast by the Entire Board, at any meeting called for that purpose. The Board may delegate such power of removal as to officers, agents and employees not appointed by the Board. Such removal
shall be without prejudice to a person’s contract rights, if any, but the appointment of any person as an officer, agent or employee of the Corporation shall not of itself create contract rights.
5.4
Vacancies.
If any vacancy occurs in any office, the Board may elect a successor to fill such vacancy for the remainder of the
term.
5.5
Chairman of the Board.
(a) The Board may elect a Director as Chairman of the Board.
(b) The Chairman shall preside at all meetings of the Board at which he or she may be present. The Chairman shall have such other powers
and duties as he or she may be called upon by the Board to perform.
(c) Notwithstanding the foregoing, Glenn F. Tilton shall
serve as the Chairman of the Board until the earlier of (i) December 31, 2012, or the date that is two years after the Effective Time, whichever is later, and (ii) that date on which Mr. Tilton resigns, is removed pursuant to
these Restated Bylaws or dies (the earlier of (i) and (ii), the “
Chairman Succession Date
”), at which time the Board shall take all actions necessary to cause Jeffery A. Smisek to become, and Mr. Smisek shall become, the
Chairman of the Board, unless (x) the Nominating/Governance Committee, acting by a vote of a majority of the Entire Committee, recommends to the Board that such actions not be taken by the Board and (y) the Board, acting by a vote of a
majority of the Entire Board, accepts such recommendation.
5.6
Chief Executive Officer.
The Chief Executive Officer
shall have general and active control of the business and affairs of the Corporation and, in the absence of the Chairman (or if there be none), he or she shall preside at all meetings of the Board. He or she shall have general power (a) to
execute bonds, deeds and contracts in the name of the Corporation, (b) to affix the corporate seal, (c) to sign stock certificates, (d) subject to the provisions of the Restated Certificate, these Restated Bylaws and the approval of
the Board, to select all employees and agents of the Corporation whose selection is not otherwise provided for and to fix the compensation thereof, (e) to remove or suspend any employee or agent who shall not have been selected by the Board,
(f) to suspend for cause, pending final action by the Board any employee or agent who shall have been selected by the Board and (g) to exercise all the powers usually and customarily performed by the chief executive officer of a
corporation. Notwithstanding the foregoing, Mr. Smisek shall be the Chief Executive Officer of the Corporation as of the Effective Time.
17
5.7
President.
The President, if not designated as Chief Executive Officer of the
Corporation, shall perform such duties as are delegated by the Board, the Chairman or the Chief Executive Officer. In the event of an absence, disability or vacancy in the office of the Chief Executive Officer, the President shall act in the place
of the Chief Executive Officer with authority to exercise all his or her powers and perform his or her duties.
5.8
Vice
Presidents and Other Officers.
The several Vice Presidents and other elected officers, including, without limitation, the General Counsel, shall perform all such duties and services as shall be assigned to or required of them, from time to time,
by the Board, or the Chief Executive Officer, respectively. In the event of the absence or disability of both the Chairman and the Chief Executive Officer, the President may designate one of the several Vice Presidents to act in his or her place
with authority to exercise all of his or her powers and perform his or her duties, provided that the Board may change such designation, or if the President fails or is unable to make such designation, the Board may make such designation at a regular
or special meeting called for that purpose.
5.9
Secretary.
The Secretary shall attend to the giving of notice of all
meetings of Stockholders and the Board and shall keep and attest true records of all proceedings thereat. He or she shall have charge of the corporate seal and have authority to attest any and all instruments or writings to which the same may be
affixed. He or she shall keep and account for all books, documents, papers and records of the Corporation, except those which are directed to be in charge of the Treasurer, and he or she may delegate responsibility for maintaining the stock ledger
to any transfer agent or registrar appointed by the Board. He or she shall have authority to sign stock certificates and shall generally perform all the duties usually appertaining to the office of secretary of a corporation. In the absence of the
Secretary, an Assistant Secretary or Secretary pro tempore shall perform his or her duties.
5.10
Treasurer.
The
Treasurer, if any, shall be responsible for the collection, receipt, care, custody and disbursement of the funds of the Corporation and shall deposit or cause to be deposited all funds of the Corporation in and with such depositories as the Board
shall, from time to time, direct. He or she shall have the care and custody of all securities owned by the Corporation, and shall deposit such securities with such banks or in such safe deposit vaults, and under such controls, as the Board shall,
from time to time, direct. He or she shall disburse funds of the Corporation on the basis of vouchers properly approved for payment by the controller of the Corporation or his or her duly authorized representative. He or she shall be responsible for
the maintenance of detailed records of cash and security transactions and shall prepare such reports thereof as may be required. He or she shall have the power to sign stock certificates and to endorse for deposit or collection or otherwise all
checks, drafts, notes, bills of exchange or other commercial paper payable to the Corporation and to give proper receipts or discharges therefor. He or she shall have such other duties as are commonly incidental to the office of treasurer of a
corporation. In the absence of the Treasurer, an Assistant Treasurer shall perform his or her duties.
18
5.11
Additional Powers and Duties.
In addition to the foregoing especially enumerated
duties and powers, the officers of the Corporation shall perform such other duties and exercise such further powers as may be provided in these Restated Bylaws or as the Board may, from time to time, determine or as may be assigned to them by any
competent superior officer.
5.12
Compensation.
Except as otherwise provided in the Restated Certificate, the
compensation of all officers of the Corporation shall be fixed, from time to time, by the Board or the Compensation Committee, but this power may be delegated to any officer by the Board or the Compensation Committee in accordance with applicable
law.
5.13
Prohibition on Loans to Directors and Executive Officers.
The Corporation shall not directly or indirectly
extend or maintain credit, arrange for the extension of credit, or renew an extension of credit, in the form of a personal loan to or for any member of the Board or executive officer of the Corporation, as such terms are used in Section 13(k)
of the Exchange Act and the rules and regulations promulgated thereunder.
5.14
Required Board Vote for Removal or
Diminution of Duties of Chairman or Chief Executive Officer.
Notwithstanding any provision in these Restated Bylaws to the contrary, at any time prior to the Chairman Succession Date, the Board may not take any of the following actions, unless
(x) the Nominating/Governance Committee, acting by a vote of a majority of the Entire Committee, recommends to the Board that such actions be taken by the Board and (y) the Board, acting by a vote of a majority of the Entire Board, accepts
such recommendation: (a) the removal of Mr. Tilton from the position of Chairman, (b) the removal of Mr. Smisek from the position of Chief Executive Officer or (c) any material modification of the powers, duties or
responsibilities of the Chairman or the Chief Executive Officer under these Restated Bylaws as of the Effective Time.
5.15
Headquarters.
The Corporation shall maintain its corporate headquarters and related corporate functions in the United Building Chicago, Illinois and maintain its airline operations headquarters in the Willis Tower in Chicago, Illinois. In
addition, the Corporation shall maintain a significant presence in Houston, Texas.
ARTICLE 6
Stock And Transfers Of Stock
6.1
Stock Certificates.
The Common Stock shall be uncertificated. The shares of the Corporation other than the Common Stock shall
be represented by certificates or shall be uncertificated. The Board shall have the power and authority to make such rules and regulations as it may deem expedient concerning the issue, transfer and registration of uncertificated shares or
certificates for shares of stock of the Corporation. Each certificate shall be signed by the Chairman or the President or a Vice President, and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary, certifying the
number of certificated shares owned by such Stockholder in the Corporation. Any or all of the signatures on the certificate may be a facsimile. In case any officer, Transfer Agent or Registrar who has signed or whose facsimile signature has been
placed upon a certificate shall cease to be such officer, Transfer Agent or Registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he or she were such officer, Transfer Agent or Registrar at the
date of issuance.
19
6.2
Transfer Agents and Registrars.
The Board may, in its discretion, appoint
responsible banks or trust companies as the Board may deem advisable, from time to time, to act as Transfer Agents and Registrars of the stock of the Corporation; and, when such appointments shall have been made, no stock certificate shall be valid
until countersigned by one of such Transfer Agents and registered by one of such Registrars.
6.3
Transfers of Stock.
Transfers of shares of stock of the Corporation shall be made on the stock ledger of the Corporation only upon authorization by the record holder thereof or by such holder’s attorney, successor or assignee thereunto authorized by power of
attorney (or other proper evidence of succession, assignment or authority to transfer) duly executed and filed with the Corporation’s Transfer Agent or Registrar. Except as otherwise provided in the Restated Certificate, and subject to any
other transfer restriction applicable thereto, shares of certificated stock may be transferred by delivery of the certificates therefor, accompanied either by an assignment in writing on the back of the certificates or by written power of attorney
to sell, assign and transfer the same with reasonable assurances given that such endorsement is genuine and that all applicable taxes thereon have been paid, signed by the record holder thereof; but no transfer shall affect the right of the
Corporation to pay any dividend upon the stock to the holder of record thereof, or to treat the holder of record as the holder in fact thereof for all purposes, and no transfer shall be valid, except between the parties thereto, until such transfer
shall have been made upon the books of the Corporation. No transfer of stock in violation of the provisions of Article Fourth, Part III, Section 1 or Article Fourth, Part IV, Section 1 of the Restated Certificate shall be valid as against
the Corporation for any purpose.
6.4
Lost Certificates.
In case any certificate of stock shall be lost, stolen or
destroyed, the Board, in its discretion, may authorize the issuance of a substitute certificate in place of the certificate lost, stolen or destroyed and may cause such substitute certificate to be countersigned by the appropriate Transfer Agent (if
any) and registered by the appropriate Registrar (if any),
provided
that, in each such case, the applicant for a substitute certificate shall furnish to the Corporation and to such of its Transfer Agents and Registrars as may require the
same, evidence to their satisfaction, in their discretion, of the loss, theft or destruction of such certificate and of the ownership thereof, and also such security or indemnity as may be required by them.
6.5
Record Date.
(a) In order that the Corporation may determine the Stockholders entitled to notice of or to vote at any meeting of Stockholders or any
adjournment thereof, or, subject to applicable law, to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any
rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board is authorized, from time to time, to fix, in advance, a record date, which shall not be more than sixty (60) nor less than
ten (10) days before the date of such Stockholder meeting, nor more than sixty (60) days prior to any other action.
20
(b) A determination of Stockholders of record entitled to notice of or to vote at a meeting
of Stockholders shall apply to any adjournment of the meeting;
provided, however,
that the Board may fix a new record date for the adjourned meeting.
(c) Only Stockholders that are Stockholders of record on the date so fixed shall be entitled to notice of, and to vote at, a meeting of
Stockholders and any adjournment thereof or to receive payment of any dividend or other distribution or allotment of any rights or to exercise any rights in respect of any change, conversion or exchange of stock or for any other purpose, as
applicable, notwithstanding any transfer of any stock on the stock ledger of the Corporation after any record date so fixed.
ARTICLE 7
Miscellaneous
7.1
Fiscal Year.
The fiscal year of the Corporation shall be the calendar year.
7.2
Surety Bonds.
The Treasurer, each Assistant Treasurer and such other officers or agents of the Corporation as the Board may
direct, from time to time, shall be bonded for the faithful performance of their duties in such amounts and by such surety companies as the Board may determine. The premiums on such bonds shall be paid by the Corporation and the bonds so furnished
shall be in the custody of the Chief Executive Officer or the chief financial officer.
7.3
Signature of Negotiable
Instruments.
All bills, notes, checks or other instruments for the payment of money shall be signed or countersigned by such officer or officers and in such manner as, from time to time, may be prescribed by resolution (whether general or
special) of the Board.
7.4
Subject to Law and Restated Certificate.
All powers, duties and responsibilities provided
for in these Restated Bylaws, whether or not explicitly so qualified, are qualified by the provisions of the Restated Certificate and all applicable laws.
7.5
Voting of Stocks.
Unless otherwise ordered by the Board of Directors, the Chairman of the Board, President and General Counsel
shall each have full power and authority, in the name of and on behalf of the Corporation, to attend, act and vote at any meeting of stockholders of a corporation in which the Corporation may hold stock, and, in connection with any such meeting,
shall possess and may exercise any and all rights and powers incident to the ownership of such stock which, as the owner thereof, the Corporation might possess and exercise. The Board of Directors from time to time may confer like powers upon any
other person or persons.
7.6
Dividends.
Dividends upon the capital stock may be declared by the Board at any regular
or special meeting and may be paid in cash or in property or in shares of the capital stock. Before paying any dividend or making any distribution of profits, the Directors may set apart out of any funds of the Corporation available for dividends a
reserve or reserves for any proper purpose and may later or abolish any such reserve or reserves.
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7.7
Corporate Seal.
The seal of the Corporation shall be circular in form and shall
bear, in addition to any other emblem or device approved by the Board, the name of the Corporation and the words “Corporate Seal” and “Delaware.” The seal may be used by causing it or a facsimile thereof to be impressed or
affixed or in any other manner reproduced.
ARTICLE 8
Amendments
8.1
Amendment of these Restated Bylaws.
Except as herein otherwise expressly provided, these Restated Bylaws may be altered or
repealed and new bylaws, not inconsistent with any provision of the Restated Certificate or applicable law, may be adopted, either (a) by the affirmative vote of at least a majority of the Directors voting at a meeting of the Board at which a
quorum is present or (b) by the affirmative vote of the holders of at least a majority in voting power of the stock entitled to vote thereon, at an annual meeting of Stockholders, or at a special meeting thereof, the notice of which meeting
shall include the form of the proposed amendment or supplement to or modification of these Restated Bylaws or of the proposed new bylaws, or a summary thereof;
provided, however
, that the Board may not take any of the following actions,
unless (x) the Nominating/Governance Committee, acting by a vote of a majority of the Entire Committee, recommends to the Board that such actions be taken by the Board and (y) the Board, acting by a vote of a majority of the Entire Board,
accepts such recommendation: any repeal of, amendment to, or adoption of any provision inconsistent with
Section 5.5(c)
,
Section 5.14
, the last sentence of
Section 5.6
or this proviso.
ARTICLE 9
Restated Certificate to Govern
9.1
Restated Certificate to Govern.
Notwithstanding anything to the contrary herein, if any provision contained herein is
inconsistent with or conflicts with a provision of the Restated Certificate, such provision herein shall be superseded by the inconsistent provision in the Restated Certificate, to the extent necessary to give effect to such provision in the
Restated Certificate.
22
Exhibit 99.2
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
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Year Ended December 31,
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2009
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2008
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2007
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Operating Revenue:
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Passenger (excluding fees and taxes of $1,476, $1,531 and $1,499, respectively)
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$
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11,138
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$
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13,737
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$
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12,995
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Cargo
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366
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497
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453
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Other
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1,082
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1,007
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784
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|
|
|
|
|
|
|
Total Operating Revenue
|
|
|
12,586
|
|
|
|
15,241
|
|
|
|
14,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft fuel and related taxes
|
|
|
3,317
|
|
|
|
5,919
|
|
|
|
4,034
|
|
|
Wages, salaries and related costs
|
|
|
3,137
|
|
|
|
2,957
|
|
|
|
3,127
|
|
|
Aircraft rentals
|
|
|
934
|
|
|
|
976
|
|
|
|
994
|
|
|
Regional capacity purchase, net
|
|
|
848
|
|
|
|
1,059
|
|
|
|
1,113
|
|
|
Landing fees and other rentals
|
|
|
841
|
|
|
|
853
|
|
|
|
790
|
|
|
Distribution costs
|
|
|
624
|
|
|
|
717
|
|
|
|
682
|
|
|
Maintenance, materials and repairs
|
|
|
617
|
|
|
|
612
|
|
|
|
621
|
|
|
Depreciation and amortization
|
|
|
494
|
|
|
|
438
|
|
|
|
413
|
|
|
Passenger services
|
|
|
373
|
|
|
|
406
|
|
|
|
389
|
|
|
Special charges
|
|
|
145
|
|
|
|
181
|
|
|
|
13
|
|
|
Other
|
|
|
1,402
|
|
|
|
1,437
|
|
|
|
1,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
12,732
|
|
|
|
15,555
|
|
|
|
13,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
(146
|
)
|
|
|
(314
|
)
|
|
|
687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonoperating Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(367
|
)
|
|
|
(376
|
)
|
|
|
(393
|
)
|
|
Interest capitalized
|
|
|
33
|
|
|
|
33
|
|
|
|
27
|
|
|
Interest income
|
|
|
12
|
|
|
|
65
|
|
|
|
160
|
|
|
Gains on sale of investments
|
|
|
—
|
|
|
|
78
|
|
|
|
37
|
|
|
Other-than-temporary impairment losses on investments
|
|
|
—
|
|
|
|
(60
|
)
|
|
|
—
|
|
|
Other, net
|
|
|
29
|
|
|
|
(121
|
)
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Nonoperating Income (Expense)
|
|
|
(293
|
)
|
|
|
(381
|
)
|
|
|
(131
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before Income Taxes
|
|
|
(439
|
)
|
|
|
(695
|
)
|
|
|
556
|
|
|
|
|
|
|
|
Income Tax Benefit (Expense)
|
|
|
157
|
|
|
|
109
|
|
|
|
(117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(282
|
)
|
|
$
|
(586
|
)
|
|
$
|
439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(2.18
|
)
|
|
$
|
(5.54
|
)
|
|
$
|
4.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(2.18
|
)
|
|
$
|
(5.54
|
)
|
|
$
|
4.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Used for Computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
129
|
|
|
|
106
|
|
|
|
97
|
|
|
Diluted
|
|
|
129
|
|
|
|
106
|
|
|
|
114
|
|
The accompanying Notes to
Consolidated Financial Statements are an integral part of these statements.
1
CONTINENTAL AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except for share data)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
ASSETS
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,546
|
|
$
|
2,165
|
|
Short-term investments
|
|
|
310
|
|
|
478
|
|
|
|
|
|
|
|
|
|
Total unrestricted cash, cash equivalents and short-term investments
|
|
|
2,856
|
|
|
2,643
|
|
|
|
|
|
Restricted cash, cash equivalents and short-term investments
|
|
|
164
|
|
|
190
|
|
Accounts receivable, net of allowance for doubtful receivables of $7 and $7
|
|
|
494
|
|
|
453
|
|
Spare parts and supplies, net of allowance for obsolescence of $113 and $102
|
|
|
254
|
|
|
235
|
|
Deferred income taxes
|
|
|
203
|
|
|
216
|
|
Prepayments and other
|
|
|
402
|
|
|
610
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
4,373
|
|
|
4,347
|
|
|
|
|
|
|
|
|
|
Property and Equipment:
|
|
|
|
|
|
|
|
Owned property and equipment:
|
|
|
|
|
|
|
|
Flight equipment
|
|
|
8,769
|
|
|
8,446
|
|
Other
|
|
|
1,787
|
|
|
1,694
|
|
|
|
|
|
|
|
|
|
Flight equipment and other
|
|
|
10,556
|
|
|
10,140
|
|
Less: Accumulated depreciation
|
|
|
3,509
|
|
|
3,229
|
|
|
|
|
|
|
|
|
|
Owned property and equipment, net
|
|
|
7,047
|
|
|
6,911
|
|
|
|
|
|
|
|
|
|
Purchase deposits for flight equipment
|
|
|
242
|
|
|
275
|
|
|
|
|
|
|
|
|
|
Capital leases
|
|
|
194
|
|
|
194
|
|
Less: Accumulated amortization
|
|
|
63
|
|
|
53
|
|
|
|
|
|
|
|
|
|
Capital leases, net
|
|
|
131
|
|
|
141
|
|
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
|
7,420
|
|
|
7,327
|
|
|
|
|
|
|
|
|
|
Routes and airport operating rights, net of accumulated amortization of $389 and $375
|
|
|
778
|
|
|
804
|
|
Other assets, net
|
|
|
210
|
|
|
208
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
12,781
|
|
$
|
12,686
|
|
|
|
|
|
|
|
|
(continued on next page)
2
CONTINENTAL AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except for share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt and capital leases
|
|
$
|
975
|
|
|
$
|
519
|
|
|
Accounts payable
|
|
|
924
|
|
|
|
1,021
|
|
|
Air traffic and frequent flyer liability
|
|
|
1,855
|
|
|
|
1,881
|
|
|
Accrued payroll
|
|
|
367
|
|
|
|
345
|
|
|
Accrued other liabilities
|
|
|
268
|
|
|
|
708
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
4,389
|
|
|
|
4,474
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt and Capital Leases
|
|
|
5,291
|
|
|
|
5,353
|
|
|
|
|
|
|
Deferred Income Taxes
|
|
|
203
|
|
|
|
216
|
|
|
|
|
|
|
Accrued Pension Liability
|
|
|
1,248
|
|
|
|
1,417
|
|
|
|
|
|
|
Accrued Retiree Medical Benefits
|
|
|
216
|
|
|
|
234
|
|
|
|
|
|
|
Other Liabilities
|
|
|
844
|
|
|
|
869
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity:
|
|
|
|
|
|
|
|
|
|
Class B common stock - $.01 par, 400,000,000 shares authorized; 138,537,127 and 123,264,534 shares issued and
outstanding
|
|
|
1
|
|
|
|
1
|
|
|
Additional paid-in capital
|
|
|
2,216
|
|
|
|
2,038
|
|
|
Accumulated deficit
|
|
|
(442
|
)
|
|
|
(160
|
)
|
|
Accumulated other comprehensive loss
|
|
|
(1,185
|
)
|
|
|
(1,756
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
|
590
|
|
|
|
123
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
12,781
|
|
|
$
|
12,686
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
3
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(282
|
)
|
|
$
|
(586
|
)
|
|
$
|
439
|
|
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
494
|
|
|
|
438
|
|
|
|
413
|
|
|
Special charges
|
|
|
145
|
|
|
|
181
|
|
|
|
13
|
|
|
Deferred income tax (benefit) expense
|
|
|
(158
|
)
|
|
|
(111
|
)
|
|
|
111
|
|
|
Gains on sale of investments
|
|
|
—
|
|
|
|
(78
|
)
|
|
|
(37
|
)
|
|
Loss on fuel hedge contracts with Lehman Brothers
|
|
|
—
|
|
|
|
125
|
|
|
|
—
|
|
|
Other-than-temporary losses on investments
|
|
|
—
|
|
|
|
60
|
|
|
|
—
|
|
|
Stock-based compensation related to equity awards
|
|
|
9
|
|
|
|
16
|
|
|
|
27
|
|
|
Other adjustments, net
|
|
|
55
|
|
|
|
(14
|
)
|
|
|
50
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in accounts receivable
|
|
|
12
|
|
|
|
147
|
|
|
|
(29
|
)
|
|
(Increase) decrease in spare parts and supplies
|
|
|
(34
|
)
|
|
|
5
|
|
|
|
(66
|
)
|
|
(Increase) decrease in prepayments and other assets
|
|
|
206
|
|
|
|
(167
|
)
|
|
|
16
|
|
|
Increase (decrease) in accounts payable
|
|
|
(104
|
)
|
|
|
(10
|
)
|
|
|
71
|
|
|
Increase (decrease) in air traffic and frequent flyer liability
|
|
|
(26
|
)
|
|
|
(86
|
)
|
|
|
255
|
|
|
Increase (decrease) in accrued payroll, pension liability and other
|
|
|
45
|
|
|
|
(244
|
)
|
|
|
(130
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
362
|
|
|
|
(324
|
)
|
|
|
1,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(381
|
)
|
|
|
(373
|
)
|
|
|
(329
|
)
|
|
Aircraft purchase deposits refunded (paid), net
|
|
|
29
|
|
|
|
102
|
|
|
|
(219
|
)
|
|
(Purchase) sale of short-term investments, net
|
|
|
180
|
|
|
|
115
|
|
|
|
(314
|
)
|
|
Proceeds from sales of investments, net
|
|
|
30
|
|
|
|
171
|
|
|
|
65
|
|
|
Expenditures for airport operating rights
|
|
|
(22
|
)
|
|
|
(131
|
)
|
|
|
(116
|
)
|
|
Proceeds from sales of property and equipment
|
|
|
64
|
|
|
|
113
|
|
|
|
67
|
|
|
Decrease (increase) in restricted cash, cash equivalents and short-term investments
|
|
|
26
|
|
|
|
(13
|
)
|
|
|
86
|
|
|
Other cash flows from investing activities
|
|
|
(4
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(78
|
)
|
|
|
(16
|
)
|
|
|
(760
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments on long-term debt and capital lease obligations
|
|
|
(610
|
)
|
|
|
(641
|
)
|
|
|
(429
|
)
|
|
Proceeds from issuance of long-term debt, net
|
|
|
538
|
|
|
|
642
|
|
|
|
26
|
|
|
Proceeds from public offering of common stock, net
|
|
|
158
|
|
|
|
358
|
|
|
|
—
|
|
|
Proceeds from issuance of common stock pursuant to stock plans
|
|
|
11
|
|
|
|
18
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
97
|
|
|
|
377
|
|
|
|
(368
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase in Cash and Cash Equivalents
|
|
|
381
|
|
|
|
37
|
|
|
|
5
|
|
|
Cash and Cash Equivalents - Beginning of Period
|
|
|
2,165
|
|
|
|
2,128
|
|
|
|
2,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents - End of Period
|
|
$
|
2,546
|
|
|
$
|
2,165
|
|
|
$
|
2,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flows Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
326
|
|
|
$
|
365
|
|
|
$
|
383
|
|
|
Income taxes paid
|
|
$
|
1
|
|
|
$
|
5
|
|
|
$
|
2
|
|
|
Investing and Financing Activities Not Affecting Cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment acquired through the issuance of debt
|
|
$
|
402
|
|
|
$
|
1,014
|
|
|
$
|
190
|
|
|
Reduction of debt in exchange for sale of frequent flyer miles
|
|
$
|
—
|
|
|
$
|
(38
|
)
|
|
$
|
(37
|
)
|
|
Transfer of auction rate securities from available-for-sale to trading
|
|
$
|
—
|
|
|
$
|
97
|
|
|
$
|
—
|
|
|
Common stock issued upon conversion of 4.5% convertible notes
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
170
|
|
The accompanying Notes to
Consolidated Financial Statements are an integral part of these statements.
4
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS’ EQUITY
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B
Common Stock
|
|
Additional
Paid-In
Capital
|
|
Retained
Earnings
(Accumulated
Deficit)
|
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
|
Total
|
|
|
|
Shares
|
|
Amount
|
|
|
|
|
|
Balance at December 31, 2006
|
|
92
|
|
$
|
1
|
|
$
|
1,411
|
|
$
|
(13
|
)
|
|
$
|
(1,013
|
)
|
|
$
|
386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
439
|
|
|
|
—
|
|
|
|
439
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized gain (loss) on derivative instruments
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
45
|
|
|
|
45
|
|
|
Net change related to employee benefit plans
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
463
|
|
|
|
463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
947
|
|
|
|
|
|
|
|
|
|
|
Conversion of 4.5% convertible notes
|
|
4
|
|
|
—
|
|
|
174
|
|
|
—
|
|
|
|
—
|
|
|
|
174
|
|
|
Issuance of common stock pursuant to stock plans
|
|
2
|
|
|
—
|
|
|
35
|
|
|
—
|
|
|
|
—
|
|
|
|
35
|
|
|
Stock-based compensation
|
|
—
|
|
|
—
|
|
|
27
|
|
|
—
|
|
|
|
—
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
98
|
|
|
1
|
|
|
1,647
|
|
|
426
|
|
|
|
(505
|
)
|
|
|
1,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(586
|
)
|
|
|
—
|
|
|
|
(586
|
)
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized gain (loss) on derivative instruments and other
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
(441
|
)
|
|
|
(441
|
)
|
|
Net change related to employee benefit plans
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
(810
|
)
|
|
|
(810
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,837
|
)
|
|
|
|
|
|
|
|
|
|
Issuance of common stock pursuant to stock plans
|
|
1
|
|
|
—
|
|
|
17
|
|
|
—
|
|
|
|
—
|
|
|
|
17
|
|
|
Issuance of common stock pursuant to stock offerings
|
|
24
|
|
|
—
|
|
|
358
|
|
|
—
|
|
|
|
—
|
|
|
|
358
|
|
|
Stock-based compensation
|
|
—
|
|
|
—
|
|
|
16
|
|
|
—
|
|
|
|
—
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
123
|
|
|
1
|
|
|
2,038
|
|
|
(160
|
)
|
|
|
(1,756
|
)
|
|
|
123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(282
|
)
|
|
|
—
|
|
|
|
(282
|
)
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized gain (loss) on derivative instruments and other
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
424
|
|
|
|
424
|
|
|
Net change related to employee benefit plans
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
305
|
|
|
|
305
|
|
|
Tax expense on other comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
(158
|
)
|
|
|
(158
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
289
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock pursuant to stock plans
|
|
2
|
|
|
—
|
|
|
11
|
|
|
—
|
|
|
|
—
|
|
|
|
11
|
|
|
Issuance of common stock pursuant to stock offerings
|
|
14
|
|
|
—
|
|
|
158
|
|
|
—
|
|
|
|
—
|
|
|
|
158
|
|
|
Stock-based compensation
|
|
—
|
|
|
—
|
|
|
9
|
|
|
—
|
|
|
|
—
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
139
|
|
$
|
1
|
|
$
|
2,216
|
|
$
|
(442
|
)
|
|
$
|
(1,185
|
)
|
|
$
|
590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
5
CONTINENTAL AIRLINES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continental Airlines, Inc., a Delaware corporation, is a major United States air carrier engaged in the business of transporting
passengers, cargo and mail. Including our wholly-owned subsidiary, Continental Micronesia, Inc. (“CMI”), and regional flights operated on our behalf under capacity purchase agreements with other carriers, we are the world’s fifth
largest airline as measured by the number of scheduled miles flown by revenue passengers in 2009. Our regional capacity purchase agreements are with ExpressJet Airlines, Inc. (“ExpressJet”), a wholly-owned subsidiary of ExpressJet
Holdings, Inc. (“Holdings”), Chautauqua Airlines, Inc. (“Chautauqua”), a wholly-owned subsidiary of Republic Airways Holdings, Inc., Colgan Air, Inc. (“Colgan”), a wholly-owned subsidiary of Pinnacle Airlines Corp., and
Champlain Enterprises, Inc. (“CommutAir”). Our regional operations using regional jet aircraft are conducted under the name “Continental Express” and those using turboprop aircraft are conducted under the name “Continental
Connection.”
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.
We have evaluated subsequent events through February 17, 2010, which is the date these financial statements were issued.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
(a)
|
Principles of Consolidation
. Our consolidated financial statements include the accounts of Continental and all wholly-owned subsidiaries. All intercompany
accounts and transactions have been eliminated in consolidation.
|
|
(b)
|
Use of Estimates
. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to
make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
|
|
(c)
|
Cash and Cash Equivalents
. We classify short-term, highly liquid investments which are readily convertible into cash and have a maturity of three months or less
when purchased as cash and cash equivalents. Restricted cash, cash equivalents and short-term investments is primarily collateral for estimated future workers’ compensation claims, credit card processing contracts, letters of credit and
performance bonds.
|
|
(d)
|
Short-term Investments
. Short-term investments primarily include certificates of deposit placed through an account registry service (“CDARS”) and
auction rate securities. The CDARS we hold have original maturities of 91 days and are insured by the Federal Deposit Insurance Corporation. Short-term investments are classified as available-for-sale or trading securities and are stated at fair
value. Trading securities consist of student loan-related auction rate securities for which we have received an option to put the securities back to the broker, discussed in Note 6. Realized gains and losses on specific investments are reflected in
non-operating income (expense) in our consolidated statements of operations. Unrealized gains and losses on available-for-sale and trading securities are reflected as a component of accumulated other comprehensive loss and non-operating income
(expense) in our consolidated statements of operations, respectively.
|
|
(e)
|
Spare Parts and Supplies
. Inventories, expendable parts and supplies related to flight equipment are carried at average acquisition cost and are expensed when
consumed in operations. An allowance for obsolescence is provided over the remaining lease term or the estimated useful life of the related aircraft, as well as to reduce the carrying cost of spare parts currently identified as excess to the lower
of amortized cost or net realizable value. We recorded additions to this allowance for expense of $12 million, $26 million and $11 million in the years ended December 31, 2009, 2008 and 2007, respectively. Spare parts and supplies are assumed
to have an estimated residual value of 10% of original cost. These allowances are based on management estimates, which are subject to change.
|
6
|
(f)
|
Property and Equipment
. Property and equipment is recorded at cost and is depreciated to estimated residual value over its estimated useful life using the
straight-line method. Jet aircraft and rotable spare parts are assumed to have residual values of 15% and 10%, respectively, of original cost; other categories of property and equipment are assumed to have no residual value. The estimated useful
lives of our property and equipment are as follows:
|
|
|
|
|
|
|
|
Estimated Useful Life
|
|
Jet aircraft and simulators
|
|
25 to 30 years
|
|
Rotable spare parts
|
|
Average lease term or useful life for related aircraft
|
|
Buildings and improvements
|
|
10 to 30 years
|
|
Vehicles and equipment
|
|
5 to 10 years
|
|
Computer software
|
|
3 to 5 years
|
|
Capital leases
|
|
Shorter of lease term or useful life
|
|
Leasehold improvements
|
|
Shorter of lease term or useful life
|
Amortization of assets recorded under capital leases is included in depreciation expense in our consolidated statement of operations.
The carrying amount of computer software was $85 million and $80 million at December 31, 2009 and 2008, respectively.
Depreciation expense related to computer software was $30 million, $27 million and $28 million in the years ended December 31, 2009, 2008 and 2007, respectively.
|
(g)
|
Routes and Airport Operating Rights
. Routes represent the right to fly between cities in different countries. Airport operating rights represent gate space and
slots (the right to schedule an arrival or departure within designated hours at a particular airport). Routes and international airport operating rights are indefinite-lived intangible assets and are not amortized. Routes and international airport
operating rights totaled $701 million and $713 million at December 31, 2009 and 2008, respectively. We perform a test for impairment of our routes and international slots in the fourth quarter of each year. In 2009, we recorded a $12 million
non-cash charge to write off intangible route assets related to certain Mexican and Central American locations as a result of our annual impairment analysis. We determined that these routes had no fair value since they are subject to “open
skies” agreements and there are no other barriers to flying to these locations. In 2008, we recorded an $18 million non-cash charge to write off an intangible route asset as a result of our decision to move all of our flights between Newark
Liberty International Airport (“New York Liberty”) and London from London Gatwick Airport to London Heathrow Airport. These write-offs are included in special charges in our consolidated statement of operations.
|
Airport operating rights at domestic airports totaled $77 million and $91 million at December 31, 2009 and 2008, respectively. These
assets are amortized over the stated term of the related lease (for gates) or 20 years (for slots). Amortization expense related to domestic airport operating rights was $14 million for each of the years ended December 31, 2009, 2008 and 2007.
We expect annual amortization expense related to domestic airport operating rights to be approximately $14 million in each of the next three years and $8 million and $6 million in 2013 and 2014, respectively.
|
(h)
|
Measurement of Impairment of Long-Lived Assets
. We record impairment losses on long-lived assets, consisting principally of property and equipment and domestic
airport operating rights, when events or changes in circumstances indicate, in management’s judgment, that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount
of those assets. The net carrying value of assets not recoverable is reduced to fair value if lower than the carrying value. In determining the fair market value of the assets, we consider market trends, recent transactions involving sales of
similar assets and, if necessary, estimates of future discounted cash flows. See Note 13 for a discussion of aircraft impairment charges.
|
7
|
(i)
|
Revenue/Air Traffic Liability
. Passenger revenue is recognized either when transportation is provided or when the ticket expires unused, rather than when a
ticket is sold. Revenue is recognized for unused non-refundable tickets on the date of the intended flight if the passenger did not notify us of his or her intention to change the itinerary.
|
We are required to charge certain taxes and fees on our passenger tickets. These taxes and fees include U.S. federal transportation taxes,
federal security charges, airport passenger facility charges and foreign arrival and departure taxes. These taxes and fees are legal assessments on the customer. As we have a legal obligation to act as a collection agent with respect to these taxes
and fees, we do not include such amounts in passenger revenue. We record a liability when the amounts are collected and relieve the liability when payments are made to the applicable government agency.
Under our capacity purchase agreements with regional carriers, we purchase all of the capacity related to aircraft covered by the
contracts and are responsible for selling all of the related seat inventory. We record the related passenger revenue and related expenses, with payments under the capacity purchase agreements reflected as a separate operating expense in our
consolidated statement of operations.
The amount of passenger ticket sales not yet recognized as revenue is included in our
consolidated balance sheets as air traffic and frequent flyer liability. We perform periodic evaluations of the estimated liability for passenger ticket sales and any adjustments, which can be significant, are included in results of operations for
the periods in which the evaluations are completed. These adjustments relate primarily to differences between our statistical estimation of certain revenue transactions and the related sales price, as well as refunds, exchanges, interline
transactions and other items for which final settlement occurs in periods subsequent to the sale of the related tickets at amounts other than the original sales price.
Revenue from the shipment of cargo and mail is recognized when transportation is provided. Other revenue includes revenue from the sale of
frequent flyer miles (see (j) below), ticket change fees, baggage fees, charter services, sublease income on aircraft leased to Holdings but not operated for us and other incidental services. Ticket change fees relate to non-refundable tickets,
but are considered a separate transaction from the air transportation because they represent a charge for our additional service to modify a previous sale. Ticket change fees are recognized as other revenue in our consolidated statement of
operations at the time the fees are assessed.
|
(j)
|
Frequent Flyer Program
. For those OnePass accounts that have sufficient mileage credits to claim the lowest level of free travel, we record a liability for
either the estimated incremental cost of providing travel awards that are expected to be redeemed with us or the contractual rate of expected redemption on alliance carriers. Incremental cost includes the cost of fuel, meals, insurance and
miscellaneous supplies, less any fees charged to the passenger for redeeming the rewards, but does not include any costs for aircraft ownership, maintenance, labor or overhead allocation. We recorded an adjustment of $27 million ($0.24 per basic and
diluted share) to increase passenger revenue and reduce our frequent flyer liability during 2008 for the impact of redemption fees after we increased them during 2008. A change to these cost estimates, the actual redemption activity, the amount of
redemptions on alliance carriers or the minimum award level could have a significant impact on our liability in the period of change as well as future years. The liability is adjusted periodically based on awards earned, awards redeemed, changes in
the incremental costs and changes in the OnePass program, and is included in the accompanying consolidated balance sheets as air traffic and frequent flyer liability. Changes in the liability are recognized as passenger revenue in the period of
change.
|
8
We also sell mileage credits in our frequent flyer program to participating entities, such
as credit/debit card companies, alliance carriers, hotels, car rental agencies, utilities and various shopping and gift merchants. Revenue from the sale of mileage credits is deferred and recognized as passenger revenue over the period when
transportation is expected to be provided, based on estimates of its fair value. Amounts received in excess of the expected transportation’s fair value are recognized in income currently and classified as other revenue. A change to the time
period over which the mileage credits are used (currently six to 26 months), the actual redemption activity or our estimate of the amount or fair value of expected transportation could have a significant impact on our revenue in the year of change
as well as future years.
Prior to joining Star Alliance in October 2009, we based our estimate of the fair value of
transportation related to frequent flyer miles sold on the rates we charged other airlines. In connection with joining Star Alliance, we changed our estimate of the related transportation’s fair value to be based on the rate that is equivalent
to the fare of a round trip ticket with restrictions similar to a frequent flyer reward. We made this change due to the disparate values of rates charged in reciprocal agreements with other Star Alliance members. The resulting fair values are
generally higher than under our former estimates and will result in a larger portion of sales of OnePass miles being deferred and then amortized into passenger revenue and a lower portion being recognized as other revenue.
At December 31, 2009, we estimated that approximately 2.6 million free round-trip travel awards outstanding were expected to be
redeemed for free travel on Continental, Continental Express, Continental Connection, CMI or alliance airlines. Our total liability for future OnePass award redemptions for free travel and unrecognized revenue from sales of OnePass miles to other
companies was approximately $348 million at December 31, 2009. This liability is recognized as a component of air traffic and frequent flyer liability in our consolidated balance sheets.
|
(k)
|
Maintenance and Repair Costs
. Maintenance and repair costs for owned and leased flight equipment, including the overhaul of aircraft components, are charged to
operating expense as incurred. Maintenance and repair costs also include engine overhaul costs covered by cost-per-hour agreements, a majority of which are expensed on the basis of hours flown.
|
|
(l)
|
Advertising Costs
. We expense the costs of advertising as incurred. Advertising expense was $102 million, $93 million and $106 million for the years ended
December 31, 2009, 2008 and 2007, respectively.
|
|
(m)
|
Regional Capacity Purchase, Net
. Payments made to regional carriers under capacity purchase agreements are reported in regional capacity purchase, net, in our
consolidated statement of operations. Regional capacity purchase, net, is net of our rental income on aircraft leased to ExpressJet and flown for us through June 30, 2008. Beginning July 1, 2008, ExpressJet no longer pays us sublease rent
for aircraft operated on our behalf.
|
|
(n)
|
Foreign Currency Gains (Losses)
. Foreign currency gains (losses) are recorded as part of other, net non-operating income (expense) in our consolidated statements
of operations. Foreign currency gains (losses) were $8 million, $(37) million and $2 million for the years ended December 31, 2009, 2008 and 2007, respectively.
|
|
(o)
|
Reclassifications
. Certain reclassifications have been made in the prior years’ consolidated financial statements and related note disclosures to conform to
the current year’s presentation.
|
9
NOTE 2 - 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.
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 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 affected our annual impairment testing for our international routes and airport operating rights,
which we perform as of October 1 of each year. 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. As a result, we recorded a $12 million non-cash special charge in the fourth quarter of 2009 to write off certain of
our international routes. The routes written off are not pledged as collateral under our debt agreements. Our compliance with our debt agreements was not 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 estimating fair value when the volume and level of activity for an asset or liability has significantly decreased in relation to normal market activity for the asset or liability. 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.
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.
Revenue Arrangements with Multiple Deliverables
. In
October 2009, the FASB issued guidance that changes the accounting for revenue arrangements with multiple deliverables. The guidance requires an entity to allocate consideration at the inception of an arrangement to all of its deliverables based on
their relative selling prices and eliminates the use of the residual method of allocation. The guidance establishes a hierarchy for determining the selling price of a deliverable, based on vendor-specific objective evidence, third-party evidence or
estimated selling price. In addition, this guidance expands required disclosures related to a vendor’s multiple-deliverable revenue arrangements. This accounting standard is effective for us on January 1, 2011 and may change our accounting
for the sale of frequent flyer mileage credits discussed in Note 1(j). We may elect to adopt this guidance through either prospective application for revenue arrangements entered into, or materially modified, after the effective date or
retrospective application to all applicable revenue arrangements for all periods presented. 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.
10
NOTE 3 - EARNINGS PER SHARE
The following table sets forth the components of basic and diluted earnings (loss) per share (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic earnings (loss) per share - net income (loss)
|
|
$
|
(282
|
)
|
|
$
|
(586
|
)
|
|
$
|
439
|
|
Effect of dilutive securities - interest expense on:
|
|
|
|
|
|
|
|
|
|
|
|
|
5% convertible notes
|
|
|
—
|
|
|
|
—
|
|
|
|
12
|
|
6% convertible junior subordinated debentures held by subsidiary trust
|
|
|
—
|
|
|
|
—
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for diluted earnings (loss) per share - net income (loss) after assumed conversions
|
|
$
|
(282
|
)
|
|
$
|
(586
|
)
|
|
$
|
463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings (loss) per share - weighted average shares
|
|
|
129
|
|
|
|
106
|
|
|
|
97
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
5% convertible notes
|
|
|
—
|
|
|
|
—
|
|
|
|
9
|
|
6% convertible junior subordinated debentures held by subsidiary trust
|
|
|
—
|
|
|
|
—
|
|
|
|
4
|
|
Employee stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential shares
|
|
|
—
|
|
|
|
—
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings (loss) per share - weighted-average shares after assumed conversions
|
|
|
129
|
|
|
|
106
|
|
|
|
114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The adjustments to net income to determine the
numerator for diluted earnings per share are net of the related effect of profit sharing and income taxes, where applicable.
Approximately 14 million and 13 million potential shares of common stock related to convertible debt securities were
excluded from the computation of diluted earnings (loss) per share in the year ended December 31, 2009 and 2008, respectively, because they were antidilutive. In addition, approximately eight million, eight million and one million weighted
average options to purchase shares of our common stock were excluded from the computation of diluted earnings (loss) per share for the years ended December 31, 2009, 2008 and 2007, respectively, because the effect of including the options would
have been antidilutive.
11
NOTE 4 - LONG-TERM DEBT
Long-term debt at December 31 consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
Secured
|
|
|
|
|
|
|
|
Notes payable, interest rates of 5.375% to 9.0% (weighted average rate of 7.1% as of December 31, 2009),
payable through 2022
|
|
$
|
3,066
|
|
$
|
2,862
|
|
Floating rate notes, with indicated interest rates:
|
|
|
|
|
|
|
|
LIBOR (0.251% on December 31, 2009) plus 0.35% to 1.95%, payable through 2020
|
|
|
1,153
|
|
|
1,345
|
|
LIBOR plus 3.375%, payable in 2011
|
|
|
350
|
|
|
350
|
|
LIBOR plus 3.125% to 3.25%, payable through 2014
|
|
|
188
|
|
|
192
|
|
LIBOR plus 2.5% to 5.0%, payable through 2019
|
|
|
266
|
|
|
157
|
|
Advance purchases of mileage credits, implicit interest rates of 5.5% to 6.18%
|
|
|
186
|
|
|
148
|
|
Other
|
|
|
5
|
|
|
15
|
|
|
|
|
|
Unsecured
|
|
|
|
|
|
|
|
6.0% convertible junior subordinated debentures, payable in 2030
|
|
|
248
|
|
|
248
|
|
4.5% convertible notes, payable in 2015
|
|
|
230
|
|
|
—
|
|
Note payable, interest rate of 8.75%, payable in 2011
|
|
|
200
|
|
|
200
|
|
5% convertible notes, callable beginning in 2010
|
|
|
169
|
|
|
157
|
|
Other
|
|
|
9
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
6,070
|
|
|
5,674
|
|
Less: current maturities
|
|
|
972
|
|
|
516
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,098
|
|
$
|
5,158
|
|
|
|
|
|
|
|
|
Maturities of long-term debt due over the next five
years are as follows (in millions):
|
|
|
|
|
|
Year ending December 31,
|
|
|
|
|
2010
|
|
$
|
972
|
|
2011
|
|
|
1,142
|
|
2012
|
|
|
584
|
|
2013
|
|
|
650
|
|
2014
|
|
|
332
|
Most of our property
and equipment, spare parts inventory, certain routes and the outstanding common stock and substantially all of the other assets of our wholly-owned subsidiaries Air Micronesia, Inc. (“AMI”) and CMI are subject to agreements securing our
indebtedness.
At December 31, 2009, we also had letters of credit and performance bonds relating to various real estate,
customs and aircraft financing obligations in the amount of $109 million with expiration dates through September 2013.
2007 Enhanced Equipment Trust Certificates
. In April 2007, we obtained financing for 12 Boeing 737-800s and 18 Boeing 737-900ERs.
We applied a portion of this financing to 27 Boeing aircraft delivered to us in 2008 and recorded related debt of $1.0 billion. We applied the final portion of this financing to three Boeing 737 aircraft delivered to us in the first half of 2009 and
recorded related debt of $121 million. In connection with this financing, enhanced equipment trusts raised $1.1 billion through the issuance of three classes of enhanced equipment trust certificates. Class A certificates, with an aggregate
principal amount of $757 million, bear interest at 5.983%, Class B certificates, with an aggregate principal amount of $222 million, bear interest at 6.903% and Class C certificates, with an aggregate principal amount of $168 million, bear interest
at 7.339%. Principal payments on the equipment notes and the corresponding distribution of these payments to certificate holders will begin in April 2010 and will end in April 2022 for Class A and B certificates and April 2014 for Class C
certificates.
12
2009-1 Enhanced Equipment Trust Certificates
. On July 1, 2009, we obtained
financing for 12 currently owned Boeing aircraft and five new Boeing 737-900ER aircraft. A pass-through trust raised $390 million through the issuance of a single class of enhanced equipment trust certificates bearing interest at 9%. During 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 five new Boeing 737-900ER aircraft, resulting in proceeds of
$141 million to finance the purchase of the aircraft. Principal payments on the equipment notes and the corresponding distribution of these payments to certificate holders are scheduled from January 2010 through July 2016.
2009-2 Enhanced Equipment Trust Certificates
. In November 2009, we obtained financing for eight currently owned Boeing
aircraft, nine new Boeing 737-800 aircraft and two new Boeing 777 aircraft. These aircraft are expected to be refinanced or delivered by August 31, 2010. In connection with this financing, enhanced equipment trusts raised $644 million through
the issuance of two classes of enhanced equipment trust certificates. Class A certificates, with an aggregate principal amount of $528 million, bear interest at 7.25% and Class B certificates, with an aggregate principal amount of $117 million,
bear interest at 9.25%. The proceeds from the sale of the certificates are initially being held by a depositary in escrow for the benefit of the certificate holders until we issue equipment notes to the trust, which will purchase such notes with a
portion of the escrowed funds. These escrowed funds are not guaranteed by us and are not reported as debt on our consolidated balance sheet because the proceeds held by the depositary are not our assets. Any unused proceeds will be distributed
directly to the certificate holders. Principal payments on the equipment notes and the corresponding distribution of these payments to certificate holders will begin in November 2010 and will end in November 2019 for Class A certificates and in
May 2017 for Class B certificates.
Other Debt Secured by Aircraft
. During 2009, we entered
into loan agreements under which we borrowed $180 million. This indebtedness is secured by five new Boeing 737-900ER aircraft and two Boeing 737-800 aircraft that this debt refinanced. During 2008, we obtained $268 million through three separate
financings secured by two new Boeing 737-900ER aircraft, seven Boeing 757-200 aircraft and five Boeing 737-700 aircraft.
Advance Purchases of Mileage Credits
. On December 30, 2009, we entered into an amendment of our Debit Card Marketing
Agreement with JPMorgan Chase Bank, N.A. (“JP Morgan Chase”) under which JP Morgan Chase purchases frequent flyer mileage credits to be earned by One Pass members for making purchases using a Continental branded debit card issued by JP
Morgan Chase. The agreement provides for a payment to us of $40 million in early 2010 for the advance purchase of frequent flyer mileage credits beginning January 1, 2016, or earlier in certain circumstances. The purchase of mileage credits has
been treated as a loan from JP Morgan Chase with an implicit interest rate of 5.5% and is reported as long-term debt in our consolidated balance sheet.
On June 10, 2008, we entered into an amendment and restatement of our Bankcard Joint Marketing Agreement (the “Bankcard
Agreement”) with Chase Bank USA, N.A. (“Chase”), under which Chase purchases frequent flyer mileage credits to be earned by OnePass members for making purchases using a Continental branded credit card issued by Chase. The Bankcard
Agreement provides for a payment to us of $413 million, of which $235 million relates to the advance purchase of frequent flyer mileage credits for the year 2016. In connection with the advance purchase of mileage credits, we have provided a
security interest to Chase in certain routes and slots, including certain slots at London’s Heathrow Airport. The $235 million purchase of mileage credits has been treated as a loan from Chase with an implicit interest rate of 6.18% and is
reported as long-term debt in our consolidated balance sheet. Our liability will be reduced ratably in 2016 as the mileage credits are issued to Chase.
The remaining $178 million received from Chase is in consideration for certain other commitments with respect to the co-branding
relationship, including the extension of the term of the Bankcard Agreement until December 31, 2016. This amount is reported in other liabilities in our consolidated balance sheet and is being recognized as other revenue on a straight-line
basis over the term of the agreement.
Secured Term Loan Facility
. We and CMI have loans under a $350 million secured
term loan facility. The loans are secured by certain of our U.S.-Asia routes and related assets, all of the outstanding common stock of our wholly-owned subsidiaries AMI and CMI and substantially all of the other assets of AMI and CMI, including
route authorities and related assets. The loans bear interest at a rate equal to the London Interbank Offered Rate (“LIBOR”) plus 3.375% and are due in June 2011. The facility requires us to maintain a minimum balance of unrestricted cash
and short-term investments of $1.0 billion at the end of each month. The loans may become due and payable immediately if we fail to maintain the monthly minimum cash balance and upon the occurrence of other customary events of default under the
loan documents. If we fail to maintain a minimum balance of unrestricted cash and short-term investments of $1.125 billion, we and CMI will be required to make a mandatory aggregate $50 million prepayment of the loans.
13
In addition, the facility provides that if the ratio of the outstanding loan balance to the
value of the collateral securing the loans, as determined by the most recently delivered periodic appraisal, is greater than 52.5%, we and CMI will be required to post additional collateral or prepay the loans to reestablish a loan-to-collateral
value ratio of not greater than 52.5%. We are currently in compliance with the covenants in the facility.
Notes Secured by
Spare Parts Inventory
. We have two series of notes secured by the majority of our spare parts inventory. The senior equipment notes, which total $190 million in principal amount, bear interest at the three-month LIBOR plus 0.35%. The junior
equipment notes, which total $130 million in principal amount, bear interest at the three-month LIBOR plus 3.125%. A portion of the spare parts inventory that serves as collateral for the equipment notes is classified as property and equipment and
the remainder is classified as spare parts and supplies, net.
In connection with these equipment notes, we entered into a
collateral maintenance agreement requiring us, among other things, to maintain a loan-to-collateral value ratio of not greater than 45% with respect to the senior series of equipment notes and a loan-to-collateral value ratio of not greater than 75%
with respect to both series of notes combined. We must also maintain a certain level of rotable components within the spare parts collateral pool. These ratios are calculated semi-annually based on an independent appraisal of the spare parts
collateral pool. If any of the collateral ratio requirements are not met, we must take action to meet all ratio requirements by adding additional eligible spare parts to the collateral pool, redeeming a portion of the outstanding notes, providing
other collateral acceptable to the bond insurance policy provider for the senior series of equipment notes or any combination of the above actions. We are currently in compliance with these covenants.
Convertible Debt Securities
. In December 2009, we issued $230 million in principal amount of 4.5% convertible notes and received
proceeds of $224 million. The notes mature on January 15, 2015 and are convertible into our Class B common stock at an initial conversion price of approximately $19.87 per share. We do not have the option to pay the conversion price in cash;
however, holders of the notes may 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. The conversion price may also be adjusted within a
specified range in certain circumstances if a change in control of Continental occurs.
Our 5% convertible notes with a
principal amount of $175 million and carrying amount of $169 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. Therefore, we
have classified these notes in current maturities of long-term debt and capital leases in our consolidated balance sheet at December 31, 2009. 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.
Because the 5% convertible notes
may be settled in either cash or common stock upon conversion, accounting rules require us to separately account for the debt and equity components of the 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 at December 31 (in millions):
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
Principal amount of convertible notes
|
|
$
|
175
|
|
$
|
175
|
|
Unamortized discount
|
|
|
6
|
|
|
18
|
|
Net carrying amount
|
|
|
169
|
|
|
157
|
|
Additional paid-in capital
|
|
|
64
|
|
|
64
|
14
At December 31, 2009, the unamortized discount had a remaining recognition period of
approximately 6 months.
The amount of interest expense recognized and effective interest rate for the 5% convertible notes
for the year ended December 31 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Contractual coupon interest
|
|
$
|
9
|
|
|
$
|
9
|
|
|
$
|
9
|
|
|
Amortization of discount on 5% convertible notes
|
|
|
12
|
|
|
|
11
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
21
|
|
|
$
|
20
|
|
|
$
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective interest rate
|
|
|
13
|
%
|
|
|
13
|
%
|
|
|
13
|
%
|
In November 2000,
Continental Airlines Finance Trust II, a Delaware statutory business trust (the “Trust”) of which we own all the common trust securities, completed a private placement of five million 6% convertible preferred securities, called Term Income
Deferrable Equity Securities or “TIDES.” The TIDES have a liquidation value of $50 per preferred security and are convertible at any time at the option of the holder into shares of common stock at a conversion rate of $60 per share of
common stock (equivalent to approximately 0.8333 share of common stock for each preferred security). Distributions on the preferred securities are payable by the Trust at an annual rate of 6% of the liquidation value of $50 per preferred security.
The sole assets of the Trust are 6% convertible junior subordinated debentures (“convertible subordinated
debentures”) with an aggregate principal amount of $248 million as of December 31, 2009 issued by us and which mature on November 15, 2030. The convertible subordinated debentures are redeemable by us, in whole or in part, on or after
November 20, 2003 at designated redemption prices. If we redeem the convertible subordinated debentures, the Trust must redeem the TIDES on a pro rata basis having an aggregate liquidation value equal to the aggregate principal amount of the
convertible subordinated debentures redeemed. Otherwise, the TIDES will be redeemed upon maturity of the convertible subordinated debentures, unless previously converted.
Taking into consideration our obligations under (i) the preferred securities guarantee relating to the TIDES, (ii) the
indenture relating to the convertible subordinated debentures to pay all debt and obligations and all costs and expenses of the Trust (other than U.S. withholding taxes) and (iii) the indenture, the declaration relating to the TIDES and the
convertible subordinated debentures, we have fully and unconditionally guaranteed payment of (i) the distributions on the TIDES, (ii) the amount payable upon redemption of the TIDES and (iii) the liquidation amount of the TIDES.
In January 2007, $170 million in principal amount of our 4.5% convertible notes due on February 1, 2007 was converted by
the holders into 4.3 million shares of our Class B common stock at a conversion price of $40 per share. The remaining $30 million in principal amount was paid on February 1, 2007.
NOTE 5 - LEASES
We
lease certain aircraft and other assets under long-term lease arrangements. Other leased assets include real property, airport and terminal facilities, maintenance facilities, training centers and general offices. Most aircraft leases include both
renewal options and purchase options. Because renewals of our existing leases are not considered to be reasonably assured at the inception of each lease, rental payments that would be due during the renewal periods are not included in the
determination of straight-line rent expense. Leasehold improvements are amortized over the shorter of the related lease term or their useful life. Any purchase options are generally effective at the end of the lease term at the then-current fair
market value. Our leases do not include residual value guarantees.
15
At December 31, 2009, the scheduled future minimum lease payments under capital leases
and the scheduled future minimum lease rental payments required under operating leases were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Leases
|
|
Operating Leases
|
|
|
|
Aircraft
|
|
Non-aircraft
|
|
Year ending December 31,
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
$
|
17
|
|
$
|
994
|
|
$
|
462
|
|
2011
|
|
|
16
|
|
|
977
|
|
|
426
|
|
2012
|
|
|
16
|
|
|
948
|
|
|
513
|
|
2013
|
|
|
16
|
|
|
933
|
|
|
376
|
|
2014
|
|
|
16
|
|
|
904
|
|
|
359
|
|
Later years
|
|
|
385
|
|
|
3,389
|
|
|
3,694
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
466
|
|
$
|
8,145
|
|
$
|
5,830
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: amount representing interest
|
|
|
270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of capital leases
|
|
|
196
|
|
|
|
|
|
|
|
Less: current maturities of capital leases
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term capital leases
|
|
$
|
193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009, we had 449 aircraft under operating leases, including 193 mainline
aircraft and 256 regional jets. These operating leases have remaining lease terms ranging up to 15 years. The operating lease amounts for aircraft presented above include a portion of our minimum noncancelable payments under capacity purchase
agreements with our other regional carriers which represents the deemed lease commitments on the related aircraft. See Note 16 for a discussion of our regional capacity purchase agreements.
The table above does not include projected sublease income of $139 million to be received through 2015 from other operators related to
aircraft that are not operated on our behalf. We expect such sublease income to be $29 million, $29 million, $26 million, $22 million and $22 million in each of the next five years, respectively.
Rent expense for non-aircraft operating leases totaled $578 million, $580 million and $535 million for the years ended
December 31, 2009, 2008 and 2007, respectively.
NOTE 6 - 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)
|
16
Assets (liabilities) measured at fair value on a recurring basis during the period include
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Amount as
of
December 31, 2009
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Valuation
Technique
|
|
|
Cash and cash equivalents
|
|
$
|
2,546
|
|
$
|
2,546
|
|
$
|
—
|
|
$
|
—
|
|
(A
|
)
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate securities
|
|
|
201
|
|
|
—
|
|
|
—
|
|
|
201
|
|
(B
|
)
|
|
Other
|
|
|
109
|
|
|
109
|
|
|
—
|
|
|
—
|
|
(A
|
)
|
|
Restricted cash, cash equivalents and short-term investments
|
|
|
164
|
|
|
164
|
|
|
—
|
|
|
—
|
|
(A
|
)
|
|
Auction rate securities put right
|
|
|
20
|
|
|
—
|
|
|
—
|
|
|
20
|
|
(B
|
)
|
|
Fuel derivatives
|
|
|
14
|
|
|
—
|
|
|
—
|
|
|
14
|
|
(A
|
)
|
|
Foreign currency derivatives
|
|
|
5
|
|
|
—
|
|
|
5
|
|
|
—
|
|
(A
|
)
|
Assets
measured at fair value on a nonrecurring basis during 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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We recorded additional losses in the fourth quarter of 2009 associated with these fleet types as discussed
in Note 13. Of the $36 million in fourth quarter aircraft related special charges, $23 million was associated with Boeing 737-300 and 737-500 aircraft and parts that had been sent out for sale on consignment.
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 CDARS. The fair values of these investments are based on observable market data.
Student Loan-Related Auction
Rate Securities
. At December 31, 2009, we held student loan-related auction rate securities with a fair value of $201 million and a par value of $252 million. These securities were classified as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
Par Value
|
|
Amortized Cost
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
$
|
136
|
|
$
|
166
|
|
$
|
136
|
|
Trading
|
|
|
65
|
|
|
86
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
201
|
|
$
|
252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
17
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 totaling $60 million during 2008 to reflect the other-than-temporary
decline in the fair value of these securities. Following this other-than-temporary impairment, a new amortized cost basis was established for available-for-sale securities 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 $201 million at December 31, 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. The initial fair value of the put right was $26 million. 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 other nonoperating income (expense) currently.
During 2009, we sold, at par, auction rate securities having a par value of $40 million. Most of these securities were sold to the
institution that had granted us the put right. We recognized gains on the sales using the specific identification method and recorded losses of the cancellation of the related put rights. The net gains are included in other non-operating income
(expense) in our consolidated statement of operations and 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 that
is 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 option 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 13, 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.
18
Unobservable Inputs
. The reconciliation of our assets measured at fair value on a
recurring basis using unobservable inputs (Level 3) for the year ended December 31, 2009 is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
(40
|
)
|
|
|
—
|
|
|
|
393
|
|
|
Gains and losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported in earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
|
|
|
8
|
|
|
|
(7
|
)
|
|
|
—
|
|
|
Unrealized
|
|
|
1
|
|
|
|
1
|
|
|
|
7
|
|
|
Reported in other comprehensive income (loss)
|
|
|
3
|
|
|
|
—
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
201
|
|
|
$
|
20
|
|
|
$
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $6.1 billion at December 31, 2009 and $5.7 billion at December 31, 2008 was
approximately $5.8 billion and $4.6 billion, respectively. 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 previously held company owned life insurance
policies on certain of our employees. We terminated all of the policies in 2009. As of December 31, 2008, the carrying value of the cash surrender value of the life insurance policies was $26 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 maturity.
|
NOTE 7 - 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 have historically entered into swap agreements or purchased call options to protect us against sudden and significant increases in jet fuel prices. We conduct our fuel hedging activities using a combination of jet fuel, crude oil
and heating oil contracts. We strive to maintain fuel hedging levels and exposure generally comparable to that of our major competitors, so that our fuel cost is not disproportionate to theirs.
19
As of December 31, 2009, our projected fuel requirements for 2010 were hedged as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Price
|
|
Minimum Price
|
|
|
|
%
of
Expected
Consumption
|
|
|
Weighted
Average
Price
(per gallon)
|
|
%
of
Expected
Consumption
|
|
|
Weighted
Average
Price
(per gallon)
|
|
Gulf Coast jet fuel swaps
|
|
1
|
%
|
|
$
|
1.94
|
|
1
|
%
|
|
$
|
1.94
|
|
WTI crude oil swaps
|
|
2
|
|
|
|
1.84
|
|
2
|
|
|
|
1.84
|
|
WTI crude oil call options
|
|
4
|
|
|
|
2.20
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
7
|
%
|
|
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 December 31, 2009. Because our fuel hedges were in a net liability position at December 31, 2008, we were required to
post cash collateral with our counterparties totaling $171 million. These amounts are reported in prepayments and other current assets in our consolidated balance sheet.
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 December 31, 2009, we had forward contracts outstanding to hedge 30% of our projected Japanese yen-denominated cash inflows, primarily from passenger ticket sales, through 2010.
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 are 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 December 31, 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
|
|
$
|
14
|
|
Accrued other
current liabilities
|
|
$
|
—
|
|
|
|
|
|
|
|
Foreign currency derivatives
|
|
Prepayments and other
current assets
|
|
|
5
|
|
Accrued other
current liabilities
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
|
|
$
|
19
|
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
20
The gains and losses related to our derivative instruments reported in our consolidated
balance sheet at December 31, 2009 and our consolidated statement of operations for the year ended December 31, 2009 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
36
|
|
Aircraft fuel and
related taxes
|
|
$
|
(380
|
)
|
|
Other nonoperating
income (expense)
|
|
$
|
7
|
|
|
|
|
|
|
|
|
Foreign currency derivatives
|
|
|
10
|
|
Passenger revenue
|
|
|
(2
|
)
|
|
Other nonoperating
income (expense)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
46
|
|
|
|
$
|
(382
|
)
|
|
|
|
$
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lehman Brothers, one of the counterparties to our fuel
derivative contracts, declared bankruptcy on September 15, 2008. As a result, we determined that our fuel derivative contracts with Lehman Brothers were not highly effective hedges. Therefore, we discontinued hedge accounting for these
contracts as of September 15, 2008 and all subsequent changes in the contracts’ fair values were reported in earnings. In 2008, we recognized losses of $125 million in other non-operating income (expense) related to the changes in the fair
value of these contracts. In January 2009, we settled all open contracts with Lehman Brothers.
NOTE 8 - PREFERRED AND COMMON STOCK
Preferred Stock
. On April 14, 2008, Northwest Airlines, Inc. (“Northwest”) and Delta Air Lines, Inc.
(“Delta”) announced that they had entered into a merger agreement. Northwest previously held the one outstanding share of our Series B preferred stock, which prevented us from engaging in certain business combinations or other activities
without Northwest’s consent. We were entitled to redeem the share of Series B preferred stock for a nominal sum upon the execution of a definitive merger agreement by Northwest with respect to a transaction constituting a change of control of
Northwest, which occurred upon Northwest’s entry into the merger agreement with Delta. As a result, we redeemed and cancelled the Series B preferred stock in the second quarter of 2008, eliminating Northwest’s right to prevent us from
engaging in certain business combinations or other activities.
Common Stock
. We currently have one class of
common stock issued and outstanding, Class B common stock. Each share of common stock is entitled to one vote per share. In August 2009, we completed a public offering of 14.4 million shares of our common stock at a price to the public of
$11.20 per share, raising net proceeds of $158 million. In June 2008, we completed a public offering of 11 million shares of our common stock at a price to the public of $14.80 per share, raising net proceeds of $162 million. Additionally, in
the fourth quarter of 2008, we completed a public offering of 13 million shares of our common stock at an average price to the public of $15.84 per share, raising net proceeds of $196 million. Proceeds from each of these offerings were used for
general corporate purposes. At December 31, 2009, approximately 40 million shares were reserved for future issuance related to the conversion of convertible debt securities and the issuance of stock under our stock incentive plans.
As discussed in Note 4, $170 million in principal amount of our 4.5% convertible notes was converted by the holders into
4.3 million shares of our common stock in January 2007 at a conversion price of $40 per share.
Stockholder Rights
Plan
. On November 20, 2008, our stockholder rights plan expired. As a result, each outstanding share of our common stock is no longer accompanied by a right. The holders of common stock were not entitled to any payment as a result of the
expiration of the rights plan and the rights issued thereunder.
21
NOTE 9 - STOCK PLANS AND AWARDS
Stock Options
. Stock options are awarded with exercise prices equal to the fair market value of our common stock on the date of
grant. Management level employee stock options typically vest over a four year period and generally have five year terms. Expense related to each portion of an option grant is recognized on a straight-line basis over the specific vesting period for
those options. Outside director stock options vest in full on the date of grant and have ten year terms. Under the terms of our management incentive plans, a change in control would result in options outstanding under those plans becoming
exercisable in full.
The table below summarizes stock option transactions pursuant to our plans (share data in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
Options
|
|
|
Weighted-
Average
Exercise Price
|
|
Options
|
|
|
Weighted-
Average
Exercise Price
|
|
Options
|
|
|
Weighted-
Average
Exercise Price
|
|
Outstanding at beginning of year
|
|
7,972
|
|
|
$
|
16.65
|
|
7,817
|
|
|
$
|
17.36
|
|
8,991
|
|
|
$
|
15.12
|
|
Granted
|
|
713
|
|
|
$
|
9.40
|
|
752
|
|
|
$
|
10.84
|
|
728
|
|
|
$
|
35.72
|
|
Exercised
|
|
(383
|
)
|
|
$
|
11.72
|
|
(375
|
)
|
|
$
|
12.49
|
|
(1,699
|
)
|
|
$
|
13.39
|
|
Cancelled
|
|
(188
|
)
|
|
$
|
23.86
|
|
(222
|
)
|
|
$
|
29.14
|
|
(203
|
)
|
|
$
|
17.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
8,114
|
|
|
$
|
16.08
|
|
7,972
|
|
|
$
|
16.65
|
|
7,817
|
|
|
$
|
17.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
|
6,550
|
|
|
$
|
15.98
|
|
6,212
|
|
|
$
|
15.08
|
|
3,393
|
|
|
$
|
15.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, stock options outstanding at the end of the period had a weighted
average contractual life of 2.4 years and an aggregate intrinsic value of $38 million. Options exercisable at December 31, 2009 had a weighted average contractual life of 2.1 years and an aggregate intrinsic value of $28 million.
The fair value of options is determined at the grant date using a Black-Scholes-Merton option-pricing model, which requires us to
make several assumptions. The risk-free interest rate is based on the U.S. Treasury yield curve in effect for the expected term of the option at the time of grant. The dividend yield on our common stock is assumed to be zero since we historically
have not paid dividends and have no current plans to do so in the future. The market price volatility of our common stock is based on the historical volatility of our common stock over a time period equal to the expected term of the option and
ending on the grant date. The expected life of the options is based on our historical experience for various work groups. We recognize expense only for those option awards expected to vest, using an estimated forfeiture rate based on our historical
experience. The forfeiture rate may be revised in future periods if actual forfeitures differ from our assumptions. The weighted-average fair value of options granted during the year ended December 31 was determined based on the following
weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Risk-free interest rate
|
|
|
2.0
|
%
|
|
|
3.1
|
%
|
|
|
4.9
|
%
|
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
Expected market price volatility of our common stock
|
|
|
86
|
%
|
|
|
62
|
%
|
|
|
57
|
%
|
|
Expected life of options (years)
|
|
|
3.9
|
|
|
|
3.9
|
|
|
|
3.9
|
|
|
Fair value of options granted
|
|
$
|
5.75
|
|
|
$
|
5.32
|
|
|
$
|
16.95
|
|
The total intrinsic value
of options exercised during the year ended December 31, 2009, 2008 and 2007 was $2 million, $3 million and $45 million, respectively.
22
The following tables summarize the range of exercise prices and the weighted average
remaining contractual life of the options outstanding and the range of exercise prices for the options exercisable at December 31, 2009 (share data in thousands):
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
Range of
Exercise Prices
|
|
Number
|
|
Weighted
Average Remaining
Contractual Life (Years)
|
|
Weighted Average
Exercise Price
|
|
$9.22-$11.72
|
|
1,286
|
|
4.3
|
|
$
|
9.59
|
|
$11.89
|
|
4,333
|
|
1.9
|
|
$
|
11.89
|
|
$11.96-$20.31
|
|
1,124
|
|
2.4
|
|
$
|
19.21
|
|
$20.97-$49.80
|
|
1,371
|
|
2.3
|
|
$
|
32.83
|
|
|
|
|
|
|
|
|
|
|
$9.22-$49.80
|
|
8,114
|
|
2.4
|
|
$
|
16.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Exercisable
|
|
|
|
|
|
Range of
Exercise Prices
|
|
Number
|
|
Weighted Average
Exercise Price
|
|
$9.22-$11.72
|
|
206
|
|
$
|
9.84
|
|
$11.89
|
|
4,333
|
|
$
|
11.89
|
|
$11.96-$20.31
|
|
1,081
|
|
$
|
19.34
|
|
$20.97-$49.80
|
|
930
|
|
$
|
32.52
|
|
|
|
|
|
|
|
|
$9.22-$49.80
|
|
6,550
|
|
$
|
15.98
|
|
|
|
|
|
|
|
Employee Stock Purchase Plan
. All of our employees (including CMI employees) are eligible
to participate in the 2004 Employee Stock Purchase Plan (the “2004 ESPP”). At the end of each fiscal quarter, participants may purchase shares of our common stock at a discount of 15% off the fair market value of the stock on either the
first day or the last day of the quarter (whichever is lower), subject to a minimum purchase price of $10 per share. This discount is reduced to zero as the fair market value approaches $10 per share. If the fair market value is below the $10 per
share minimum price on the last day of a quarter, then the participants will not be permitted to purchase the common stock for such quarterly purchase period and we will refund to those participants the amount of their unused payroll deductions.
During 2009, 2008 and 2007, approximately 0.5 million, 1.1 million and 0.4 million shares, respectively, of common stock were issued to participants at a weighted-average purchase price of $11.81, $12.76 and $27.84 per share,
respectively. On June 10, 2009, our stockholders approved an amendment to the 2004 ESPP, under which we had sold to participants 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 participants under the 2004 ESPP and extended the term of the plan to December 31, 2019. In January 2010, 0.2 million shares were purchased related to the fourth quarter of 2009 at a price
of $12.82 per share.
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. On
December 1, 2009, our Board of Directors approved our new Incentive Plan 2010, subject to stockholder approval. We expect to submit the new incentive plan to our stockholders for approval in 2010.
23
Profit Based RSU Awards
. We have issued profit based restricted stock unit
(“RSUs”) 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 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 during 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 account for the profit based RSU awards as liability awards. Once it is probable that a profit sharing-based performance target will
be met, we measure the awards at fair value based on the current stock price. The related expense is recognized ratably over the required service period, which ends on each payment date, after adjustment for changes in the then-current market price
of our common stock.
The 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, payments totaling $20 million and $52
million were made in March 2009 and 2008, respectively, with respect to these profit based RSU awards. The third and final payment related to these 1.4 million awards will be made in March 2010.
The 0.5 million RSU awards with a performance period commencing January 1, 2007 and ending December 31, 2009 expired
without vesting on December 31, 2009 because the minimum cumulative profit sharing target was not met. No payments will be made with respect to these awards. We have two other grants of profit based RSU awards outstanding at December 31,
2009. The following table sets forth information about these grants:
|
|
|
|
|
|
|
|
|
2009 Grant
|
|
2008 Grant
|
|
Initial grant date
|
|
February 2009
|
|
February 2008
|
|
Number of RSU awards outstanding
|
|
1.3 million
|
|
0.8 million
|
|
Performance period
|
|
January 1, 2009-
December 31, 2011
|
|
January 1, 2008-
December 31, 2010
|
|
Cumulative profit sharing targets (range)
|
|
$0-$375 million
|
|
$0-$275 million
|
|
Cumulative profit sharing achieved to date for applicable performance period
|
|
$0
|
|
$0
|
|
Payment percentages (range)
|
|
0%-400%
|
|
0%-200%
|
|
Probable payment percentage:
|
|
|
|
|
|
As of December 31, 2009
|
|
0%
|
|
0%
|
|
As of December 31, 2008
|
|
N/A
|
|
100%
|
|
Unrestricted cash, cash equivalents and short-term investments hurdle
|
|
$2.2 billion
|
|
$2.2 billion
|
As of
December 31, 2009, we had recorded no liability associated with the profit based RSU awards for the performance periods commencing January 1, 2008 or 2009 because we had not achieved, and did not reasonably expect to achieve, any of the
cumulative profit sharing-based performance targets for those awards. On December 31, 2009, our enhanced profit sharing plan expired. Pursuant to the terms of the 2008 and 2009 RSU grants, and in order to comply with the provisions of Internal
Revenue Code Section 162(m), achievement of a performance target for such grants will continue to be determined under and based upon the definition of annual award pool in the enhanced profit sharing plan that expired on December 31, 2009.
Stock-Based Compensation Expense
. Total stock-based compensation expense included in wages, salaries and related costs
for the years ended December 31, 2009, 2008 and 2007 was $(3) million, $47 million and $75 million, respectively. As of December 31, 2009, $5 million of compensation cost attributable to future service related to unvested employee stock
options and profit based RSU awards with a performance period commencing April 1, 2006 and ending December 31, 2009 had not yet been recognized. This amount will be recognized in expense over a weighted-average period of 1.2 years.
24
NOTE 10 - ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss (which are all net of applicable income taxes) were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit Pension and
Retiree Medical Benefits Plans
|
|
|
Unrealized
Gain (Loss)
on Derivative
Instruments
and Other
|
|
|
Income Tax
Benefit
(Expense)
|
|
|
Total
|
|
|
|
|
Unrecognized
Prior
Service Cost
|
|
|
Unrecognized
Actuarial
Gains (Losses)
|
|
|
|
|
|
Balance at December 31, 2006
|
|
$
|
(262
|
)
|
|
$
|
(971
|
)
|
|
$
|
(16
|
)
|
|
$
|
236
|
|
|
$
|
(1,013
|
)
|
|
Derivative financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification into earnings
|
|
|
—
|
|
|
|
—
|
|
|
|
(48
|
)
|
|
|
—
|
|
|
|
(48
|
)
|
|
Change in fair value
|
|
|
—
|
|
|
|
—
|
|
|
|
93
|
|
|
|
—
|
|
|
|
93
|
|
|
Employee benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of unrecognized net actuarial loss into earnings
|
|
|
—
|
|
|
|
97
|
|
|
|
—
|
|
|
|
—
|
|
|
|
97
|
|
|
Reclassification of prior service cost into earnings
|
|
|
30
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
30
|
|
|
Current year prior service cost
|
|
|
(18
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(18
|
)
|
|
Current year actuarial gain
|
|
|
—
|
|
|
|
354
|
|
|
|
—
|
|
|
|
—
|
|
|
|
354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
(250
|
)
|
|
|
(520
|
)
|
|
|
29
|
|
|
|
236
|
|
|
|
(505
|
)
|
|
Derivative financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification into earnings
|
|
|
—
|
|
|
|
—
|
|
|
|
170
|
|
|
|
—
|
|
|
|
170
|
|
|
Change in fair value
|
|
|
—
|
|
|
|
—
|
|
|
|
(608
|
)
|
|
|
—
|
|
|
|
(608
|
)
|
|
Unrealized loss on student loan-related auction rate securities
|
|
|
—
|
|
|
|
—
|
|
|
|
(3
|
)
|
|
|
—
|
|
|
|
(3
|
)
|
|
Employee benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of unrecognized net actuarial loss into earnings
|
|
|
—
|
|
|
|
85
|
|
|
|
—
|
|
|
|
—
|
|
|
|
85
|
|
|
Reclassification of prior service cost into earnings
|
|
|
31
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
31
|
|
|
Current year actuarial loss
|
|
|
—
|
|
|
|
(926
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(926
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
(219
|
)
|
|
|
(1,361
|
)
|
|
|
(412
|
)
|
|
|
236
|
|
|
|
(1,756
|
)
|
|
|
|
|
|
|
|
|
Derivative financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification into earnings
|
|
|
—
|
|
|
|
—
|
|
|
|
375
|
|
|
|
—
|
|
|
|
375
|
|
|
Change in fair value
|
|
|
—
|
|
|
|
—
|
|
|
|
46
|
|
|
|
—
|
|
|
|
46
|
|
|
Unrealized gain on student loan-related auction rate securities
|
|
|
—
|
|
|
|
—
|
|
|
|
3
|
|
|
|
—
|
|
|
|
3
|
|
|
Employee benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of unrecognized net actuarial loss into earnings
|
|
|
—
|
|
|
|
138
|
|
|
|
—
|
|
|
|
—
|
|
|
|
138
|
|
|
Reclassification of prior service cost into earnings
|
|
|
31
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
31
|
|
|
Current year actuarial gain
|
|
|
—
|
|
|
|
136
|
|
|
|
—
|
|
|
|
—
|
|
|
|
136
|
|
|
Income tax expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(158
|
)
|
|
|
(158
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
(188
|
)
|
|
$
|
(1,087
|
)
|
|
$
|
12
|
|
|
$
|
78
|
|
|
$
|
(1,185
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
NOTE 11 - EMPLOYEE BENEFIT PLANS
Our employee benefits plans include defined benefit pension plans, defined contribution (including 401(k) savings) plans and a welfare
benefit plan, which includes retiree medical benefits. Substantially all of our domestic employees are covered by one or more of these plans.
Defined Benefit Pension Plans
. Benefits under our defined benefit pension plans are based on a combination of years of benefit
accrual service and an employee’s final average compensation. Under the collective bargaining agreement with our pilots ratified on March 31, 2005, which we refer to as the “pilot agreement,” future defined benefit accruals for
pilots ceased and retirement benefits accruing in the future are provided through two pilot-only defined contribution plans. As required by the pilot agreement, defined benefit pension assets and obligations related to pilots in our primary defined
benefit pension plan (covering substantially all U.S. employees other than Chelsea Food Services division (“Chelsea”) and CMI employees) were spun out into a separate pilot-only defined benefit pension plan, which we refer to as the
“pilot defined benefit pension plan.” On May 31, 2005, future benefit accruals for pilots ceased and the pilot defined benefit pension plan was “frozen.” As of that freeze date, all existing accrued benefits for pilots
(including the right to receive a lump sum payment upon retirement) were preserved in the pilot defined benefit pension plan. Accruals for non-pilot employees under our primary defined benefit pension plan continue.
Retiree Medical Benefits Plans
. Our retiree medical programs are self-insured arrangements that permit retirees who meet certain
age and service requirements to continue medical coverage between retirement and Medicare eligibility. Eligible employees are required to pay a portion of the costs of their retiree medical benefits, which in some cases may be offset by accumulated
unused sick time at the time of their retirement. Plan benefits are subject to co-payments, deductibles and other limits as described in the plans. We account for the retiree medical benefits plan under ASC Topic 715, “Compensation –
Retirement Benefits,” which requires recognition of the expected cost of benefits over the employee’s service period.
Obligation and Funded Status
. Our pension and retiree medical benefits obligations are measured as of December 31 of each
year. The following table sets forth the changes in projected benefit obligation of the defined benefit pension and retiree medical benefits plans at December 31 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined
Benefit Pension
|
|
|
Retiree
Medical
Benefits
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Accumulated benefit obligation
|
|
$
|
2,401
|
|
|
$
|
2,273
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
|
2,482
|
|
|
$
|
2,353
|
|
|
$
|
249
|
|
|
$
|
252
|
|
|
Service cost
|
|
|
65
|
|
|
|
59
|
|
|
|
11
|
|
|
|
12
|
|
|
Interest cost
|
|
|
153
|
|
|
|
149
|
|
|
|
15
|
|
|
|
16
|
|
|
Actuarial (gains) losses
|
|
|
70
|
|
|
|
168
|
|
|
|
(26
|
)
|
|
|
(17
|
)
|
|
Participant contributions
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
|
|
2
|
|
|
Benefits paid
|
|
|
(49
|
)
|
|
|
(118
|
)
|
|
|
(18
|
)
|
|
|
(16
|
)
|
|
Lump sum settlements
|
|
|
(92
|
)
|
|
|
(129
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$
|
2,629
|
|
|
$
|
2,482
|
|
|
$
|
233
|
|
|
$
|
249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
The retiree medical benefits plan and certain supplemental defined benefit pension plans are
unfunded. The following table sets forth the change in the fair value of the defined benefit pension plans’ assets at December 31 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
1,057
|
|
|
$
|
1,817
|
|
|
Actual gains (losses) on plan assets
|
|
|
268
|
|
|
|
(618
|
)
|
|
Employer contributions, including benefits paid under unfunded plans
|
|
|
187
|
|
|
|
105
|
|
|
Benefits paid
|
|
|
(49
|
)
|
|
|
(118
|
)
|
|
Lump sum settlements
|
|
|
(92
|
)
|
|
|
(129
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
$
|
1,371
|
|
|
$
|
1,057
|
|
|
|
|
|
|
|
|
|
|
|
The unfunded portion of the defined benefit pension and retiree medical benefits liabilities were recognized
in the accompanying consolidated balance sheets at December 31 as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined
Benefit Pension
|
|
Retiree
Medical Benefits
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Accrued payroll
|
|
$
|
10
|
|
$
|
8
|
|
$
|
17
|
|
$
|
15
|
|
Accrued pension liability
|
|
|
1,248
|
|
|
1,417
|
|
|
—
|
|
|
—
|
|
Accrued retiree medical benefits
|
|
|
—
|
|
|
—
|
|
|
216
|
|
|
234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status of the plans - net underfunded
|
|
$
|
1,258
|
|
$
|
1,425
|
|
$
|
233
|
|
$
|
249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amounts in accumulated other comprehensive loss
that have not yet been recognized as components of net periodic benefit expense at December 31, 2009 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Defined
Benefit Pension
|
|
Retiree
Medical Benefits
|
|
|
Unrecognized prior service cost
|
|
$
|
22
|
|
$
|
166
|
|
|
Unrecognized actuarial (gains) losses
|
|
$
|
1,174
|
|
$
|
(87
|
)
|
Unrecognized prior service
cost is expensed using a straight-line amortization of the cost over the average future service of employees expected to receive benefits under the plans. The following table sets forth the amounts of unrecognized prior service cost and net
actuarial loss recorded in accumulated other comprehensive loss expected to be recognized as components of net periodic benefit expense during 2010 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Defined
Benefit Pension
|
|
Retiree
Medical Benefits
|
|
|
Prior service cost
|
|
$
|
10
|
|
$
|
21
|
|
|
Actuarial (gains) losses
|
|
$
|
87
|
|
$
|
(4
|
)
|
The following actuarial
assumptions were used to determine our benefit obligations at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined
Benefit Pension
|
|
|
Retiree
Medical Benefits
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Weighted average discount rate
|
|
6.01
|
%
|
|
6.13
|
%
|
|
5.57
|
%
|
|
6.03
|
%
|
|
Weighted average rate of compensation increase
|
|
2.30
|
%
|
|
2.30
|
%
|
|
—
|
|
|
—
|
|
|
Health care cost trend rate
|
|
—
|
|
|
—
|
|
|
7.50
|
%
|
|
7.50
|
%
|
The
December 31, 2009 health care cost trend rate is assumed to decline gradually to 5% by 2015.
27
Net periodic defined benefit pension and retiree medical benefits expense for the year ended
December 31 included the following components (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit Pension
|
|
|
Retiree Medical Benefits
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Service cost
|
|
$
|
65
|
|
|
$
|
59
|
|
|
$
|
61
|
|
|
$
|
11
|
|
|
$
|
12
|
|
|
$
|
11
|
|
|
Interest cost
|
|
|
153
|
|
|
|
149
|
|
|
|
158
|
|
|
|
15
|
|
|
|
15
|
|
|
|
14
|
|
|
Expected return on plan assets
|
|
|
(89
|
)
|
|
|
(157
|
)
|
|
|
(137
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Amortization of unrecognized net actuarial (gain) loss
|
|
|
111
|
|
|
|
34
|
|
|
|
68
|
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
Amortization of prior service cost
|
|
|
10
|
|
|
|
10
|
|
|
|
10
|
|
|
|
21
|
|
|
|
21
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit expense
|
|
|
250
|
|
|
|
95
|
|
|
|
160
|
|
|
|
45
|
|
|
|
47
|
|
|
|
43
|
|
|
Settlement charges (included in special charges)
|
|
|
29
|
|
|
|
52
|
|
|
|
31
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net benefit expense
|
|
$
|
279
|
|
|
$
|
147
|
|
|
$
|
191
|
|
|
$
|
45
|
|
|
$
|
47
|
|
|
$
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2009, 2008 and 2007, we recorded non-cash settlement charges totaling $29 million, $52 million and
$31 million, respectively, related to lump sum distributions from our pilot-only defined benefit pension plan to pilots who retired. Settlement accounting is required 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 a 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.
The following actuarial assumptions were used to determine our net periodic
benefit expense for the year ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit Pension
|
|
|
Retiree Medical Benefits
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Weighted average discount rate
|
|
6.13
|
%
|
|
6.27
|
%
|
|
5.95
|
%
|
|
6.03
|
%
|
|
6.02
|
%
|
|
5.76
|
%
|
|
Expected long-term rate of return on plan assets
|
|
8.25
|
%
|
|
8.50
|
%
|
|
8.26
|
%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Weighted average rate of compensation increase
|
|
2.30
|
%
|
|
2.30
|
%
|
|
2.30
|
%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Health care cost trend rate
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7.50
|
%
|
|
8.00
|
%
|
|
8.00
|
%
|
The 2009
health care cost trend rate is assumed to decline gradually to 5% by 2014.
A one percentage point change in the assumed
health care cost trend rate would have the following effect (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
One Percent
Increase
|
|
One Percent
Decrease
|
|
|
Impact on 2009 retiree medical benefits expense
|
|
$
|
3
|
|
$
|
(2
|
)
|
|
Impact on accrued retiree medical benefits as of December 31, 2009
|
|
$
|
22
|
|
$
|
(20
|
)
|
28
The defined benefit pension plans’ assets consist primarily of equity and
fixed-income securities held through common collective trusts. The fair values of our defined benefit pension plans’ assets as of December 31, 2009 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. companies
|
|
$
|
661
|
|
$
|
—
|
|
$
|
661
|
|
$
|
—
|
|
International companies
|
|
|
292
|
|
|
—
|
|
|
292
|
|
|
|
|
Fixed-income securities
|
|
|
290
|
|
|
—
|
|
|
290
|
|
|
—
|
|
Private equity funds
|
|
|
128
|
|
|
—
|
|
|
—
|
|
|
128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,371
|
|
$
|
—
|
|
$
|
1,243
|
|
$
|
128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Note 6 for a discussion of the levels of inputs to
determine fair value.
Equity securities include investments in large-cap and small-cap companies. Fixed-income securities
include corporate bonds of companies in diversified industries and asset- and mortgage-backed securities. Investments in equity securities and fixed-income securities are commingled funds valued at the unit of participation value of shares held by
the plans’ trust.
The private equity funds invest primarily in common stock of companies in diversified industries and
in buyout, venture capital and special situation funds. Investments in private equity funds are valued at the net asset value of shares held by the plans’ trust at year end.
The reconciliation of our defined benefit plans assets measured at fair value using unobservable inputs (Level 3) for the year ended
December 31, 2009 is as follows (in millions):
|
|
|
|
|
|
|
|
|
Private Equity Funds
|
|
|
Balance at December 31, 2008
|
|
$
|
127
|
|
|
|
|
|
Actual return on plan assets:
|
|
|
|
|
|
Unrealized gains (losses) relating to assets still held at year end
|
|
|
(2
|
)
|
|
Purchases, sales, issuances and settlements (net)
|
|
|
3
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
128
|
|
|
|
|
|
|
|
We develop our expected long-term rate of return assumption based on historical experience and by evaluating
input from the trustee managing the plans’ assets. Our expected long-term rate of return on plan assets is based on a target allocation of assets, which is based on our goal of earning the highest rate of return while maintaining risk at
acceptable levels. The plans strive to have assets sufficiently diversified so that adverse or unexpected results from one security class will not have an unduly detrimental impact on the entire portfolio. We regularly review our actual asset
allocation and the pension plans’ investments are periodically rebalanced to our targeted allocation when considered appropriate. Plan assets are allocated within the following guidelines:
|
|
|
|
|
|
|
|
|
Percent of Total
|
|
Expected Long-Term
Rate of Return
|
|
Equity securities:
|
|
|
|
|
|
U.S. companies
|
|
35-55%
|
|
8%
|
|
International companies
|
|
15-25
|
|
9
|
|
Fixed-income securities
|
|
15-25
|
|
5
|
|
Other
|
|
0-15
|
|
11
|
29
Funding requirements for tax-qualified defined benefit pension plans are determined by
government regulations. During 2009, we contributed $176 million to our tax-qualified defined benefit pension plans, satisfying our minimum funding requirements during calendar year 2009. We contributed an additional $34 million to our tax-qualified
defined benefit pension plans in January 2010. We estimate that our remaining minimum funding requirements during calendar year 2010 are approximately $85 million.
We project that our defined benefit pension and retiree medical plans will make the following benefit payments, which reflect
expected future service and include expected lump sum distributions, during the year ended December 31 (in millions):
|
|
|
|
|
|
|
|
|
|
|
Defined
Benefit
Pension
|
|
Retiree
Medical
Benefits
|
|
2010
|
|
$
|
155
|
|
$
|
17
|
|
2011
|
|
|
165
|
|
|
17
|
|
2012
|
|
|
180
|
|
|
17
|
|
2013
|
|
|
192
|
|
|
17
|
|
2014
|
|
|
208
|
|
|
18
|
|
2015 through 2019
|
|
|
946
|
|
|
105
|
Defined Contribution
Plans for Pilots
. As required by the pilot agreement, two pilot-only defined contribution plans were established in 2005. One of these plans is a money purchase pension plan - a type of defined contribution plan subject to the minimum funding
rules of the Internal Revenue Code. Contributions under this plan are generally expressed as a percentage of applicable pilot compensation, subject to limits under the Internal Revenue Code. The other pilot-only defined contribution plan is a 401(k)
plan that was established by transferring the pilot accounts from our pre-existing primary 401(k) plan (covering substantially all of our U.S. employees other than CMI employees) to a separate pilot-only 401(k) plan. Pilots may make elective pre-tax
and/or post-tax contributions to the pilot-only 401(k) plan. In addition, the pilot agreement provides for variable employer contributions to the pilot-only 401(k) plan based on pre-tax profits during a portion of the term of the pilot agreement. To
the extent the Internal Revenue Code limits preclude employer contributions called for by the pilot agreement, the disallowed amount will be paid directly to the pilots as current wages under a corresponding nonqualified arrangement. Our expense
related to the defined contribution plans for pilots was $77 million, $82 million and $69 million in the years ended December 31, 2009, 2008 and 2007, respectively.
Other 401(k) Plans
. We have two other defined contribution 401(k) employee savings plans in addition to the pilot-only 401(k)
plan, a 401(k) plan covering substantially all domestic employees except for pilots and a 401(k) plan covering substantially all of the employees of CMI. Participants in the non-pilot 401(k) plans may make elective pre-tax and/or post-tax
contributions, and substantially all of those participants who are not and will not become eligible for the Company’s defined benefit pension plans are eligible to receive employer non-elective contributions, expressed as a percentage of
applicable compensation, under the non-pilot 401(k) plans. The non-pilot 401(k) plans were amended effective January 1, 2009 to provide for the reinstatement of service-based employer matching 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. For the years ended December 31, 2009, 2008 and 2007, total expense for these defined
contribution plans was $19 million, $6 million and $5 million, respectively.
Profit Sharing Plan
. Our enhanced profit
sharing plan, which was in place through December 31, 2009, created an award pool for employees of 30% of the first $250 million of annual pre-tax income, 25% of the next $250 million and 20% of amounts over $500 million. Payment of profit
sharing to eligible employees would be made under the plan in the fiscal year following the year in which profit sharing is earned and the related expense is recorded. Substantially all of our employees participated in this program except for
officers and management directors. We recognized $172 million of profit sharing expense and related payroll taxes in 2007. This amount is included in wages, salaries and related costs in our consolidated statements of operations. As we incurred
losses in 2009 and 2008, there was no profit sharing expense in those years.
On December 31, 2009, our enhanced profit
sharing plan expired. Effective January 1, 2010, we adopted a new profit sharing plan with a five year term. Our new profit sharing plan creates an award pool of 15% of annual pre-tax income excluding special, unusual or non-recurring items.
Generally, the profit sharing pool will be distributed among eligible employees based on an employee’s annual base pay relative to the annual base pay of all employees.
30
NOTE 12 - INCOME TAXES
Income tax benefit (expense) for the year ended December 31 consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Federal:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
—
|
|
|
$
|
(2
|
)
|
|
$
|
(3
|
)
|
|
Deferred
|
|
|
143
|
|
|
|
233
|
|
|
|
(194
|
)
|
|
State:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(2
|
)
|
|
Deferred
|
|
|
15
|
|
|
|
20
|
|
|
|
(17
|
)
|
|
Foreign:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
—
|
|
|
|
—
|
|
|
|
(1
|
)
|
|
Tax benefit resulting from intraperiod tax allocation
|
|
|
158
|
|
|
|
—
|
|
|
|
—
|
|
|
Valuation allowance
|
|
|
(158
|
)
|
|
|
(142
|
)
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax benefit (expense)
|
|
$
|
157
|
|
|
$
|
109
|
|
|
$
|
(117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We are required to consider all items (including items recorded in other comprehensive income) in
determining the amount of tax benefit that results from a loss from continuing operations and that should be allocated to continuing operations. As a result, we recorded a $158 million non-cash tax benefit on the loss from continuing operations for
2009, which is exactly offset by income tax expense on other comprehensive income. However, while the income tax benefit from continuing operations is reported in our consolidated statement of operations, the income tax expense on other
comprehensive income is recorded directly to other comprehensive income, which is a component of stockholders’ equity. Because the income tax expense on other comprehensive income is equal to the income tax benefit from continuing operations,
our net deferred tax position at December 31, 2009 is not impacted by this tax allocation.
The reconciliation of income
tax computed at the United States federal statutory tax rate to income tax benefit (expense) for the years ended December 31 is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Percentage
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Income tax benefit (expense) at United States statutory rates
|
|
$
|
154
|
|
|
$
|
243
|
|
|
$
|
(194
|
)
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
|
State income tax benefit (expense), net of federal benefit (expense)
|
|
|
9
|
|
|
|
14
|
|
|
|
(12
|
)
|
|
2.0
|
|
|
2.0
|
|
|
2.1
|
|
|
Meals and entertainment disallowance
|
|
|
(4
|
)
|
|
|
(5
|
)
|
|
|
(6
|
)
|
|
(1.0
|
)
|
|
(0.7
|
)
|
|
1.1
|
|
|
Tax benefit resulting from intraperiod tax allocation
|
|
|
158
|
|
|
|
—
|
|
|
|
—
|
|
|
36.0
|
|
|
—
|
|
|
—
|
|
|
Valuation allowance
|
|
|
(158
|
)
|
|
|
(142
|
)
|
|
|
100
|
|
|
(36.0
|
)
|
|
(20.4
|
)
|
|
(18.0
|
)
|
|
Other
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
(5
|
)
|
|
(0.3
|
)
|
|
(0.1
|
)
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit (expense)
|
|
$
|
157
|
|
|
$
|
109
|
|
|
$
|
(117
|
)
|
|
35.7
|
%
|
|
15.8
|
%
|
|
21.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For financial reporting purposes, income tax benefit recorded on losses results in deferred tax assets. We
have concluded that we are required to provide a valuation allowance for net deferred tax assets due to our continued losses and our determination that it is more likely than not that such deferred tax assets would ultimately not be realized. As a
result, our losses are generally not reduced by any tax benefit. Consequently, we also did not record any provision for income taxes on our pre-tax income in 2007 because we utilized a portion of the net operating loss carryforwards
(“NOLs”) for which we had not previously recognized a benefit. In the fourth quarter of 2007, we recorded income tax expense of $114 million to increase the valuation allowance to be fully reserved for certain NOLs, expiring in 2008
through 2011, which more likely than not would not be realized prior to their expiration. In the second quarter of 2008, we recorded an income tax benefit of $28 million resulting from higher utilization of those NOLs than had been previously
anticipated. We have approximately $3.9 billion of additional NOLs for federal income tax purposes, which expire between the years 2020 and 2029, available for use to offset future cash income taxes.
31
Deferred income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and the related amounts used for income tax purposes. Significant components of our deferred tax assets and (liabilities) as of December 31 were as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Fixed assets, intangibles and spare parts
|
|
$
|
(1,775
|
)
|
|
$
|
(1,767
|
)
|
|
Other, net
|
|
|
(58
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax liabilities
|
|
|
(1,833
|
)
|
|
|
(1,767
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
|
1,412
|
|
|
|
1,355
|
|
|
Pension liability
|
|
|
412
|
|
|
|
481
|
|
|
Accrued liabilities
|
|
|
516
|
|
|
|
558
|
|
|
Other, net
|
|
|
56
|
|
|
|
161
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
2,396
|
|
|
|
2,555
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(563
|
)
|
|
|
(788
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
|
—
|
|
|
|
—
|
|
|
Less: current deferred tax asset
|
|
|
203
|
|
|
|
216
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred tax liability
|
|
$
|
(203
|
)
|
|
$
|
(216
|
)
|
|
|
|
|
|
|
|
|
|
|
Section 382 of the Internal Revenue Code (“Section 382”) imposes limitations on a
corporation’s ability to utilize NOLs if it experiences an “ownership change.” In general terms, an ownership change may result from transactions increasing the ownership of certain stockholders in the stock of a corporation by more
than 50 percentage points over a three-year period. In the event of an ownership change, utilization of our NOLs would be subject to an annual limitation under Section 382 determined by multiplying the value of our stock at the time of the
ownership change by the applicable long-term tax-exempt rate (which is 4.16% for December 2009). Any unused annual limitation may be carried over to later years. 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 December 31, 2009 under current conditions, our annual NOL utilization
could be limited to $103 million per year, before consideration of any built-in gains.
Activity in our deferred tax asset
valuation allowance for the year ended December 31 was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Balance at beginning of year
|
|
$
|
788
|
|
|
$
|
192
|
|
|
$
|
473
|
|
|
|
|
|
|
|
Valuation allowance (utilized) provided for taxes related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
158
|
|
|
|
142
|
|
|
|
(100
|
)
|
|
Items recorded directly to accumulated other comprehensive loss
|
|
|
(269
|
)
|
|
|
462
|
|
|
|
(187
|
)
|
|
Expiration of NOLs
|
|
|
(115
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Other
|
|
|
1
|
|
|
|
(8
|
)
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
563
|
|
|
$
|
788
|
|
|
$
|
192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
Our federal and state income tax returns for years after 2005 remain subject to examination
by the taxing authorities.
NOTE 13 - SPECIAL CHARGES
Special charges for the years ended December 31 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
Aircraft-related charges
|
|
$
|
89
|
|
$
|
40
|
|
$
|
(22
|
)
|
|
Pension settlement charges (see Note 11)
|
|
|
29
|
|
|
52
|
|
|
31
|
|
|
Severance
|
|
|
5
|
|
|
34
|
|
|
—
|
|
|
Route impairment (see Notes 1 and 2)
|
|
|
12
|
|
|
18
|
|
|
—
|
|
|
Other
|
|
|
10
|
|
|
37
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total special charges
|
|
$
|
145
|
|
$
|
181
|
|
$
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The special charges all relate to our mainline segment unless otherwise noted.
Year Ended December 31, 2009
. Aircraft-related charges of $89 million in 2009 include $31 million of non-cash impairments of
owned Boeing 737-300 and 737-500 aircraft and related assets, $39 million of other aircraft-related charges and $19 million of losses related to subleasing regional jets.
We recorded a $31 million impairment charge on the Boeing 737-300 and 737-500 fleets related 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 2010. We recorded an initial impairment charge in 2008 for each of these fleet types. The additional write-down in 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 $39 million of other charges related to our mainline
fleet, primarily related to the grounding and sale of Boeing 737-300 and 737-500 aircraft and the write-off of certain obsolete spare parts. The 737-300 and 737-500 aircraft fleets and spare parts, a portion of which was being sold on consignment,
experienced further declines in fair values during the fourth quarter of 2009 primarily as the result of additional 737 aircraft being grounded by other airlines. During 2009, we sold eight 737-500 aircraft to foreign buyers. Our gains on these
sales were not material.
In December 2009, we agreed with ExpressJet to amend our capacity purchase agreement to permit
ExpressJet to fly eight ERJ-145 aircraft for another carrier under a capacity purchase agreement. These eight aircraft are subleased from us and were previously flown for us under our capacity purchase agreement. We recorded a $13 million charge in
our regional segment based on the difference between the sublease rental and the contracted rental payments on those aircraft during the two and one-half year average initial term of the related sublease agreement.
In July 2009, we entered into agreements to sublease five temporarily grounded ERJ-135 aircraft to Chautauqua 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. We recorded a $6 million 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.
At December 31, 2009, we had four owned and three leased Boeing 737-500 aircraft that were grounded. We had also grounded seven
owned and three leased Boeing 737-300 aircraft. The owned Boeing 737-500 and 737-300 aircraft are being carried at aggregate fair values of $33 million and $22 million, respectively. The three leased Boeing 737-300 aircraft were returned to the
lessor in January 2010 and the leases on the three Boeing 737-500 aircraft will expire during the first half of 2012. We have also temporarily grounded 25 leased 37-seat ERJ-135 aircraft and have subleased five others for terms of five years. The
leases on these 30 ERJ-135 aircraft expire in 2016 through 2018.
33
If economic conditions deteriorate further, we may incur additional special charges in
future periods as we attempt to dispose of our grounded Boeing 737-300 and 737-500 aircraft. Additionally, we may incur further accounting charges as a result of future fleet actions, including costs associated with future lease payments on the 30
ERJ-135 aircraft. We are not able to estimate the amount and timing of these future charges.
During 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.
Other special charges in 2009 related primarily to an adjustment to our reserve for unused facilities due
to reductions in expected sublease income for a maintenance hangar in Denver.
Year Ended December 31, 2008
.
Aircraft-related charges of $40 million in 2008 include non-cash impairments on owned Boeing 737-300 and 737-500 aircraft and related assets. Aircraft-related charges in 2008 also includes charges for future lease costs on permanently grounded
737-300 aircraft and gains on the sale of ten Boeing 737-500 aircraft.
In conjunction with the 2008 capacity reductions, we
incurred $34 million for severance and continuing medical coverage for employees accepting early retirement packages or company-offered leaves of absence during 2008. Approximately 3,000 positions were eliminated as a result of the capacity
reductions, the majority of which were implemented in September 2008.
Other special charges in 2008 related primarily to
contract settlements with regional carriers and adjustments to reserves for unused facilities.
Year Ended
December 31, 2007
. Aircraft related credits of $22 million in 2007 related primarily to the sale of three 737-500 aircraft. Other special charges in 2007 of $4 million related to a change in the mandatory retirement age for our pilots from
age 60 to 65 signed into law on December 31, 2007. Because of the extension of the mandatory retirement age, we recorded an additional $4 million liability for the long-term disability plan for our pilots in 2007.
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 at December 31, 2006
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10
|
|
|
Accrual
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Payments
|
|
|
—
|
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance At December 31, 2007
|
|
|
—
|
|
|
|
—
|
|
|
|
8
|
|
|
Accrual
|
|
|
34
|
|
|
|
14
|
|
|
|
14
|
|
|
Payments
|
|
|
(6
|
)
|
|
|
(4
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
28
|
|
|
|
10
|
|
|
|
20
|
|
|
Accrual
|
|
|
5
|
|
|
|
1
|
|
|
|
10
|
|
|
Payments
|
|
|
(19
|
)
|
|
|
(9
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
14
|
|
|
$
|
2
|
|
|
$
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative accruals January 1, 2007 through December 31, 2009
|
|
$
|
39
|
|
|
$
|
15
|
|
|
$
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
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 14 - GAINS ON SALES OF INVESTMENTS
Copa.
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.
Holdings
. In 2007, we sold all of our shares of the
common stock of Holdings, the parent company of ExpressJet, to third parties for cash proceeds of $35 million. We recognized a gain of $7 million as a result of these sales.
ARINC
. ARINC, Inc. (“ARINC”) develops and operates communications and information processing systems and provides
systems engineering and other services to the aviation industry and other industries. In 2007, we sold all of our ARINC common stock and received cash proceeds of $30 million. Our investment in ARINC had no carrying value, resulting in a gain of $30
million.
NOTE 15 - VARIABLE INTEREST ENTITIES
Certain types of entities in which a company absorbs a majority of another entity’s expected losses, receives a majority of the other
entity’s expected residual returns, or both, as a result of ownership, contractual or other financial interests in the other entity are required to be consolidated. These entities are called “variable interest entities.” The principal
characteristics of variable interest entities are (1) an insufficient amount of equity to absorb the entity’s expected losses, (2) equity owners as a group are not able to make decisions about the entity’s activities, or
(3) equity that does not absorb the entity’s losses or receive the entity’s residual returns. “Variable interests” are contractual, ownership or other monetary interests in an entity that change with fluctuations in the
entity’s net asset value. As a result, variable interest entities can arise from items such as lease agreements, loan arrangements, guarantees or service contracts.
If an entity is determined to be a “variable interest entity,” the entity must be consolidated by the “primary
beneficiary.” The primary beneficiary is the holder of the variable interests that absorbs a majority of the variable interest entity’s expected losses or receives a majority of the entity’s residual returns in the event no holder has
a majority of the expected losses. There is no primary beneficiary in cases where no single holder absorbs the majority of the expected losses or receives a majority of the residual returns. The determination of the primary beneficiary is based on
projected cash flows at the inception of the variable interests.
We have variable interests in the following types of
variable interest entities:
Aircraft Leases
. We are the lessee in a series of operating leases covering the majority
of our leased aircraft. The lessors are trusts established specifically to purchase, finance and lease aircraft to us. These leasing entities meet the criteria for variable interest entities. We are generally not the primary beneficiary of the
leasing entities if the lease terms are consistent with market terms at the inception of the lease and do not include a residual value guarantee, fixed-price purchase option or similar feature that obligates us to absorb decreases in value or
entitles us to participate in increases in the value of the aircraft. This is the case for many of our operating leases; however, leases of approximately 75 mainline jet aircraft contain a fixed-price purchase option that allows us to purchase the
aircraft at predetermined prices on specified dates during the lease term. Additionally, leases of substantially all of our 256 leased regional jet aircraft contain an option to purchase the aircraft at the end of the lease term at prices that,
depending on market conditions, could be below fair value. We have not consolidated the related trusts because, even taking into consideration these purchase options, we are still not the primary beneficiary based on our cash flow analyses. Our
maximum exposure under these leases is the remaining lease payments, which are reflected in future lease commitments in Note 5.
Airport Leases
. We are the lessee of real property under long-term operating leases at a number of airports where we are also the
guarantor of approximately $1.5 billion of underlying debt and interest thereon. These leases are typically with municipalities or other governmental entities, which are excluded from the consolidation requirements concerning variable interest
entities. To the extent our lease and related guarantee are with a separate legal entity other than a governmental entity, we are not the primary beneficiary because the lease terms are consistent with market terms at the inception of the lease and
the lease does not include a residual value guarantee, fixed-price purchase option or similar feature as discussed above.
35
Subsidiary Trust
. We have a subsidiary trust that has mandatorily redeemable
preferred securities outstanding with a liquidation value of $248 million. The trust is a variable interest entity because we have a limited ability to make decisions about its activities. However, we are not the primary beneficiary of the trust.
Therefore, the trust and the mandatorily redeemable preferred securities issued by the trust are not reported on our balance sheets. Instead, we report our 6% convertible junior subordinated debentures held by the trust as long-term debt and
interest on the notes is recorded as interest expense for all periods presented in the accompanying financial statements.
NOTE 16 -
REGIONAL CAPACITY PURCHASE AGREEMENTS
Capacity Purchase Agreement with ExpressJet
General
. In June 2008, we entered into the Second Amended and Restated Capacity Purchase Agreement with ExpressJet and certain of
its affiliates (the “ExpressJet CPA”), which amended and restated our capacity purchase agreement with ExpressJet effective July 1, 2008. Under the ExpressJet CPA, we purchase all of the capacity from the ExpressJet flights covered by
the agreement at a negotiated price.
Capacity and Fleet Matters
. At December 31, 2009, 212 Embraer 50-seat
regional jets were being operated as covered aircraft under the ExpressJet CPA. The minimum number of covered aircraft under the ExpressJet CPA is currently 190 regional jets, and will be reduced as leases on covered aircraft expire. ExpressJet also
subleases 32 Embraer 50-seat regional jets from us outside of the capacity purchase provisions of the ExpressJet CPA at reduced rental rates. During September 2008, we temporarily grounded all 30 of the subleased 37-seat ERJ 135 aircraft being flown
by ExpressJet on our behalf and notified ExpressJet that these aircraft would be withdrawn from the ExpressJet CPA. Five of these aircraft are now subleased to Chautauqua.
Term of Agreement
. The ExpressJet CPA will expire in June 2015, with provisions for an appropriate wind-down period, and has no
renewal or extension options. We may terminate the agreement at any time for “cause” (as defined in the ExpressJet CPA) and either party may terminate for breach of the agreement, subject to certain notice and cure periods. The ExpressJet
CPA also modified our rights under our former capacity purchase agreement by reducing the scope of change-in-control limitations on ExpressJet, reducing restrictions on ExpressJet flying into our hub airports, and removing the most-favored-nation
clause relating to agreements ExpressJet may enter into with other airlines.
Compensation and Operational
Responsibilities
. In exchange for ExpressJet’s operation of the flights and performance of other obligations under the ExpressJet CPA, we have agreed to pay ExpressJet a pre-determined rate, subject to annual inflation adjustments (capped
at 3.5%), for each block hour flown (the hours from gate departure to gate arrival) and to reimburse ExpressJet for various pass-through expenses (with no margin or mark-up) related to the flights, including aviation insurance, property taxes,
international navigation fees, depreciation (primarily aircraft-related), landing fees and certain maintenance expenses. Under the ExpressJet CPA, we are responsible for the cost of providing fuel for all flights and for paying aircraft rent for all
of the aircraft covered by the ExpressJet CPA. The ExpressJet CPA contains incentive bonus and rebate provisions based upon ExpressJet’s operational performance.
Service Agreements
. We provide various services to ExpressJet, including loading fuel into aircraft, certain customer services
such as ground handling, related airport terminal real estate, certain technology services dedicated to flight opening and closeout processes and aviation insurance procurement. Prior to the July 1, 2008 amendment to the ExpressJet CPA, we
charged ExpressJet for these services at rates in accordance with the then-effective capacity purchase agreement. For providing these services, we charged ExpressJet approximately $41 million and $88 million in 2008 and 2007, respectively. Effective
July 1, 2008, we still provide these services but do not charge ExpressJet.
36
Leases
. As of December 31, 2009, ExpressJet leased all 212 of the aircraft flown
for us under long-term operating leases from us. During the base term of the ExpressJet CPA and an appropriate wind-down period, ExpressJet’s lease agreements with us have substantially the same terms as the lease agreements between us and the
lessor, except that ExpressJet does not pay us rent on the aircraft operated under the capacity purchase provisions of the ExpressJet CPA. Aircraft will be removed from the ExpressJet CPA as their lease period ends. Upon expiration of the ExpressJet
CPA, ExpressJet has the option to retain up to 150 aircraft through the remaining lease terms and replacing us as the primary obligor under the leases, releasing us from all obligations related to the leases. ExpressJet also leases or subleases,
under various operating leases, ground equipment and substantially all of its ground facilities, including facilities at public airports, from us or the municipalities or agencies owning and controlling such airports. If ExpressJet defaults on any
of its payment obligations with us, we are entitled to reduce any payments required to be made by us to ExpressJet under the ExpressJet CPA by the amount of the defaulted payment.
As of December 31, 2009, ExpressJet subleased from us and operated 32 aircraft outside of the capacity purchase provisions of
ExpressJet CPA. The lease agreements for these aircraft have substantially the same terms as the lease agreements between us and the lessor, except that ExpressJet pays us reduced rent on these aircraft. Our total rental income related to all leases
with ExpressJet was approximately $23 million, $205 million and $360 million in 2009, 2008 and 2007, respectively, including $22 million, $76 million and $79 million, respectively, related to regional jets operated by ExpressJet outside of the
capacity purchase provisions of the ExpressJet CPA, which is reported as other revenue. Our aircraft rental income on aircraft flown for us through June 30, 2008 is reported as a reduction to regional capacity purchase, net.
Capacity Purchase Agreement with Chautauqua
Chautauqua operates 50-seat regional jets as a Continental Express carrier under a capacity purchase agreement (the “Chautauqua
CPA”). As of December 31, 2009, 22 aircraft were being flown by Chautauqua for us. The Chautauqua CPA requires us to pay Chautauqua a fixed fee, subject to annual inflation adjustments (capped at 3.5%), for each block hour flown for its
operation of the aircraft. Chautauqua supplies the aircraft that it operates under the agreement. Aircraft are scheduled to be removed from service under the Chautauqua CPA each year through 2012, provided that we have the unilateral right to extend
the Chautauqua CPA on the same terms on an aircraft-by-aircraft basis for a period of up to five years in the aggregate for 20 aircraft and for up to three years in the aggregate for seven aircraft, subject to the renewal terms of the related
aircraft lease. Chautauqua also subleases five Embraer 37-seat aircraft from us that are not operated on our behalf.
Capacity Purchase
Agreement with Colgan
Colgan operates fourteen 74-seat Bombardier Q400 twin-turboprop aircraft as a Continental Connection
carrier on short and medium-distance routes from New York Liberty on our behalf. Colgan operates the flights under a capacity purchase agreement with us. In January 2009, we amended the capacity purchase agreement to increase by 15 the number of
Q400 aircraft to be operated by Colgan on our behalf. We expect that Colgan will begin operating these 15 additional aircraft as they are delivered, beginning in the third quarter of 2010 through the second quarter of 2011. Each aircraft is
scheduled to be covered by the agreement for ten years following the date such aircraft is delivered into service thereunder. Colgan supplies all of the aircraft that it operates under the agreement.
Capacity Purchase Agreement with CommutAir
Our capacity purchase agreement with CommutAir (the “CommutAir CPA”), provides for CommutAir to operate sixteen 37-seat
Bombardier Q200 twin-turboprop aircraft as a Continental Connection carrier on short distance routes from Cleveland Hopkins and New York Liberty. CommutAir supplies all of the aircraft that it operates under the agreement.
Indemnification Under Capacity Purchase Agreements
Under each of these capacity purchase agreements, our regional operator is generally required to indemnify us for any claims arising in
connection with its operation of the aircraft under the agreement and to maintain separate insurance to cover its indemnification obligation.
37
Commitments under Capacity Purchase Agreements
Our future commitments under our capacity purchase agreements are dependent on numerous variables, and are therefore difficult to predict.
The most important of these variables is the number of scheduled block hours. Although we are not required to purchase a minimum number of block hours under certain of our capacity purchase agreements, we have set forth below estimates of our future
payments under the agreement based on our stated assumptions. These estimates of our future payments under all of the capacity purchase agreements do not include the portion of the underlying obligation for any aircraft leased to ExpressJet or
deemed to be leased from Chautauqua, CommutAir or Colgan and facility rent that are disclosed as part of aircraft and nonaircraft operating leases. For purposes of calculating these estimates, we have assumed (1) the number of block hours flown
is based on our anticipated level of flight activity or at any contractual minimum utilization levels if applicable, (2) that we will reduce the fleet as rapidly as contractually allowed under each agreement, (3) that aircraft utilization,
stage length and load factors will remain constant, (4) that each carrier’s operational performance will remain at historic levels, and (5) that inflation is projected to be between 0.3% and 2.4% per year. Based on these
assumptions, our future payments through the end of the terms of our capacity purchase agreements at December 31, 2009 were estimated as follows (in millions):
|
|
|
|
|
|
Year ending December 31,
|
|
|
|
|
2010
|
|
$
|
693
|
|
2011
|
|
|
693
|
|
2012
|
|
|
704
|
|
2013
|
|
|
683
|
|
2014
|
|
|
649
|
|
Later years
|
|
|
884
|
|
|
|
|
|
|
Total
|
|
$
|
4,306
|
|
|
|
|
|
It is important to note that the actual amounts we pay
to our regional operators under capacity purchase agreements could differ materially from these estimates. For example, a 10% increase or decrease in scheduled block hours for all of our regional operators (whether as a result of changes in average
daily utilization or otherwise) in 2010 would result in a corresponding increase or decrease in cash obligations under the capacity purchase agreements of approximately 9.2%, or $64 million.
NOTE 17 - RELATED PARTY TRANSACTIONS
Prior to April 2008, Northwest Airlines, Inc. held the sole share of our Series B preferred stock. Until October 2009, we had a global
alliance with Northwest involving extensive codesharing, frequent flyer reciprocity and other cooperative activities. The other cooperative activities are considered normal to the daily operations of both airlines. As a result of these other
cooperative activities, we paid Northwest $9 million and $28 million in 2008 and 2007, respectively, and Northwest paid us $9 million and $13 million in 2008 and 2007, respectively. The payments to and from Northwest were in the ordinary course of
business were based on prevailing market rates. These payments do not include interline billings, which are common among airlines for transportation-related services.
NOTE 18 - 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 with a capacity of 79 or fewer seats. As of December 31, 2009, the regional segment was operated by ExpressJet, Chautauqua, CommutAir and Colgan through capacity purchase agreements. See Note 16 for further
discussion of the 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 revenue from passengers
flying, (2) many operations of the two segments are substantially integrated (for example, airport operations, sales and marketing, scheduling and ticketing) and (3) management decisions are based on their anticipated impact on the overall
network, not on one individual segment.
38
Financial information for the year ended December 31 by business segment is set forth
below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Operating Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainline
|
|
$
|
10,635
|
|
|
$
|
12,827
|
|
|
$
|
12,019
|
|
|
Regional
|
|
|
1,951
|
|
|
|
2,414
|
|
|
|
2,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consolidated
|
|
$
|
12,586
|
|
|
$
|
15,241
|
|
|
$
|
14,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainline
|
|
$
|
481
|
|
|
$
|
427
|
|
|
$
|
400
|
|
|
Regional
|
|
|
13
|
|
|
|
11
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consolidated
|
|
$
|
494
|
|
|
$
|
438
|
|
|
$
|
413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special Charges (Note 13):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainline
|
|
$
|
125
|
|
|
$
|
155
|
|
|
$
|
13
|
|
|
Regional
|
|
|
20
|
|
|
|
26
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consolidated
|
|
$
|
145
|
|
|
$
|
181
|
|
|
$
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainline
|
|
$
|
164
|
|
|
$
|
74
|
|
|
$
|
848
|
|
|
Regional
|
|
|
(310
|
)
|
|
|
(388
|
)
|
|
|
(161
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consolidated
|
|
$
|
(146
|
)
|
|
$
|
(314
|
)
|
|
$
|
687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainline
|
|
$
|
355
|
|
|
$
|
363
|
|
|
$
|
379
|
|
|
Regional
|
|
|
12
|
|
|
|
13
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consolidated
|
|
$
|
367
|
|
|
$
|
376
|
|
|
$
|
393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainline
|
|
$
|
12
|
|
|
$
|
65
|
|
|
$
|
160
|
|
|
Regional
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consolidated
|
|
$
|
12
|
|
|
$
|
65
|
|
|
$
|
160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax Benefit (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainline
|
|
$
|
42
|
|
|
$
|
51
|
|
|
$
|
(150
|
)
|
|
Regional
|
|
|
115
|
|
|
|
58
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consolidated
|
|
$
|
157
|
|
|
$
|
109
|
|
|
$
|
(117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainline
|
|
$
|
(76
|
)
|
|
$
|
(243
|
)
|
|
$
|
581
|
|
|
Regional
|
|
|
(206
|
)
|
|
|
(343
|
)
|
|
|
(142
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consolidated
|
|
$
|
(282
|
)
|
|
$
|
(586
|
)
|
|
$
|
439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amounts presented 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.
39
Information concerning operating revenue by principal geographic area for the year ended
December 31 is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
Domestic
|
|
$
|
6,941
|
|
$
|
8,327
|
|
$
|
8,053
|
|
Trans-Atlantic
|
|
|
2,614
|
|
|
3,448
|
|
|
3,065
|
|
Latin America
|
|
|
1,947
|
|
|
2,283
|
|
|
1,981
|
|
Pacific
|
|
|
1,084
|
|
|
1,183
|
|
|
1,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,586
|
|
$
|
15,241
|
|
$
|
14,232
|
|
|
|
|
|
|
|
|
|
|
|
We attribute revenue among the geographical areas
based upon the origin and destination of each flight segment. Our tangible assets and capital expenditures consist primarily of flight and related ground support equipment, which is mobile across geographic markets and, therefore, has not been
allocated.
NOTE 19 - COMMITMENTS AND CONTINGENCIES
Aircraft Purchase Commitments
. As of December 31, 2009 we had firm commitments to purchase 84 new aircraft (55 Boeing 737
aircraft, four Boeing 777 aircraft and 25 Boeing 787 aircraft) scheduled for delivery from 2010 through 2016, with an estimated aggregate cost of $5.1 billion including related spare engines. We are currently scheduled to take delivery of 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 98 additional Boeing aircraft as of December 31, 2009.
As discussed in Note 4, we have obtained financing for the two Boeing 777 aircraft and nine of the Boeing 737 aircraft to be delivered in
2010. We have backstop financing available for the three other 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 $190 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 $109 million at December 31, 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, customs and aircraft financing obligations at
December 31, 2009 in the amount of $109 million. These letters of credit and performance bonds have expiration dates through September 2013.
40
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 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 December 31, 2009, we had $1.5 billion of floating rate debt and $229 million of fixed rate debt, with remaining terms of up to ten
years, that 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 ten years and an aggregate carrying value of $1.5 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 Agreements
. The covenants contained in our domestic bank-issued credit card processing agreement with 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 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 $65 million if our unrestricted cash, cash equivalents and short-term investments balance falls below $2.0 billion;
|
|
|
•
|
|
a total of $203 million if we fail to maintain the minimum unsecured debt ratings specified above;
|
|
|
•
|
|
a total of $387 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 $846 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.
|
41
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 December 31, 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 $203 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 December 31, 2009, we had approximately 41,300 employees, which, due to the
number of part-time employees, represents 39,640 full-time equivalent employees. Approximately 45% of our full-time equivalent employees are represented by unions.
Approximately 97% of our full-time equivalent employees represented by unions as of December 31, 2009 are covered by
collective bargaining agreements that are currently amendable or become amendable in 2010. In addition, on February 12, 2010, the National Mediation Board informed us that our fleet service employees had voted in favor of representation by the
International Brotherhood of Teamsters. The election covers approximately 7,600 employees, or 6,340 full-time equivalent ramp, operations and cargo agents. The collective bargaining agreements with our pilots, mechanics and certain other work groups
became amendable in December 2008 and those with our flight attendants and CMI mechanics became amendable in December 2009. On July 6, 2009, our flight simulator technicians ratified a new four-year collective bargaining agreement with us. With
respect to our workgroups with amendable contracts, we have been meeting with representatives of the applicable unions to negotiate amended collective bargaining agreements with a goal of reaching agreements that are fair to us and to our employees,
but to date the parties have not reached new agreements. We cannot predict the outcome of our ongoing negotiations with our unionized workgroups, although significant increases in the pay and benefits resulting from new collective bargaining
agreements could have a material adverse effect on us. Furthermore, there can be no assurance that our generally good labor relations and high labor productivity will continue.
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.
42
At December 31, 2009, we had an accrual for estimated costs of environmental
remediation throughout our system of $30 million, based primarily on third-party environmental studies and estimates as to the extent of the contamination and nature of the required remedial actions. We have evaluated and recorded this accrual
for environmental remediation costs separately from any related insurance recovery. We did not have any receivables related to environmental insurance recoveries at December 31, 2009. Based on currently available information, we believe
that our accrual for potential environmental remediation costs is adequate, although our accrual could be adjusted in the future due to new information or changed circumstances. However, we do not expect these items to materially affect our results
of operations, financial condition or liquidity.
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. On December 18, 2009, the plaintiffs’ request for rehearing by the Sixth Circuit
en banc
was denied. The plaintiffs now
have the opportunity to appeal to the U.S. Supreme Court. The plaintiffs in the Swope lawsuit, encompassing 43 travel agencies, have also alleged that certain claims raised in their lawsuit were not, in fact, dismissed. The trial court has not yet
ruled on that issue. In the consolidated lawsuit, we believe the plaintiffs’ claims are without merit, and we intend to defend vigorously any appeal. Nevertheless, a final adverse court decision awarding substantial money damages could have a
material adverse effect on our results of operations, financial condition or liquidity.
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.
43
NOTE 20 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited summarized financial data by quarter for 2009 and 2008 is as follows (in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue
|
|
$
|
2,962
|
|
|
$
|
3,126
|
|
|
$
|
3,317
|
|
|
$
|
3,182
|
|
|
Operating income (loss)
|
|
|
(55
|
)
|
|
|
(154
|
)
|
|
|
61
|
|
|
|
1
|
|
|
Nonoperating income (expense), net
|
|
|
(81
|
)
|
|
|
(59
|
)
|
|
|
(79
|
)
|
|
|
(73
|
)
|
|
Net income (loss)
|
|
|
(136
|
)
|
|
|
(213
|
)
|
|
|
(18
|
)
|
|
|
85
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(1.10
|
)
|
|
$
|
(1.72
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
0.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(1.10
|
)
|
|
$
|
(1.72
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
0.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue
|
|
$
|
3,570
|
|
|
$
|
4,044
|
|
|
$
|
4,156
|
|
|
$
|
3,471
|
|
|
Operating loss
|
|
|
(66
|
)
|
|
|
(71
|
)
|
|
|
(152
|
)
|
|
|
(25
|
)
|
|
Nonoperating income (expense), net
|
|
|
(61
|
)
|
|
|
22
|
|
|
|
(98
|
)
|
|
|
(242
|
)
|
|
Net loss
|
|
|
(82
|
)
|
|
|
(5
|
)
|
|
|
(230
|
)
|
|
|
(269
|
)
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.82
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(2.09
|
)
|
|
$
|
(2.35
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.82
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(2.09
|
)
|
|
$
|
(2.35
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
The quarterly income (loss) amounts were impacted by the following special income (expense)
items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft-related charges
|
|
$
|
(4
|
)
|
|
$
|
(43
|
)
|
|
$
|
(6
|
)
|
|
$
|
(36
|
)
|
|
Pension settlement charges
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(29
|
)
|
|
Severance
|
|
|
—
|
|
|
|
—
|
|
|
|
(5
|
)
|
|
|
—
|
|
|
Route impairment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(12
|
)
|
|
Other
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
(9
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total special charges in operating earnings
|
|
$
|
(4
|
)
|
|
$
|
(44
|
)
|
|
$
|
(20
|
)
|
|
$
|
(77
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional special items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit related to intraperiod tax allocation
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
158
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft-related charges
|
|
$
|
8
|
|
|
$
|
(41
|
)
|
|
$
|
(12
|
)
|
|
$
|
5
|
|
|
Pension settlement charges
|
|
|
—
|
|
|
|
—
|
|
|
|
(8
|
)
|
|
|
(44
|
)
|
|
Severance
|
|
|
—
|
|
|
|
—
|
|
|
|
(33
|
)
|
|
|
(1
|
)
|
|
Route impairment
|
|
|
—
|
|
|
|
—
|
|
|
|
(18
|
)
|
|
|
—
|
|
|
Other
|
|
|
—
|
|
|
|
(17
|
)
|
|
|
(20
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total special charges in operating earnings
|
|
$
|
8
|
|
|
$
|
(58
|
)
|
|
$
|
(91
|
)
|
|
$
|
(40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional special items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains on sales of investments
|
|
$
|
—
|
|
|
$
|
78
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Loss on fuel hedge contracts with Lehman Brothers
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(125
|
)
|
|
Other-than-temporary impairment of auction rate securities
|
|
|
—
|
|
|
|
(29
|
)
|
|
|
—
|
|
|
|
(31
|
)
|
|
Fair value of auction rate securities put right received
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
26
|
|
|
Income tax benefit related to NOL utilization
|
|
|
—
|
|
|
|
28
|
|
|
|
—
|
|
|
|
—
|
|
45
Exhibit 99.4
CONTINENTAL AIRLINES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data) (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Operating Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainline
|
|
$
|
2,713
|
|
|
$
|
2,300
|
|
|
$
|
5,034
|
|
|
$
|
4,498
|
|
|
Regional
|
|
|
598
|
|
|
|
467
|
|
|
|
1,080
|
|
|
|
886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Passenger Revenue
|
|
|
3,311
|
|
|
|
2,767
|
|
|
|
6,114
|
|
|
|
5,384
|
|
|
Cargo
|
|
|
111
|
|
|
|
82
|
|
|
|
213
|
|
|
|
167
|
|
|
Other
|
|
|
286
|
|
|
|
277
|
|
|
|
550
|
|
|
|
536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Revenue
|
|
|
3,708
|
|
|
|
3,126
|
|
|
|
6,877
|
|
|
|
6,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft fuel and related taxes
|
|
|
968
|
|
|
|
891
|
|
|
|
1,822
|
|
|
|
1,626
|
|
|
Wages, salaries and related costs
|
|
|
822
|
|
|
|
799
|
|
|
|
1,618
|
|
|
|
1,564
|
|
|
Aircraft rentals
|
|
|
230
|
|
|
|
235
|
|
|
|
459
|
|
|
|
472
|
|
|
Landing fees and other rentals
|
|
|
215
|
|
|
|
216
|
|
|
|
428
|
|
|
|
425
|
|
|
Regional capacity purchase
|
|
|
211
|
|
|
|
217
|
|
|
|
413
|
|
|
|
431
|
|
|
Distribution costs
|
|
|
190
|
|
|
|
150
|
|
|
|
361
|
|
|
|
307
|
|
|
Maintenance, materials and repairs
|
|
|
136
|
|
|
|
161
|
|
|
|
283
|
|
|
|
314
|
|
|
Depreciation and amortization
|
|
|
122
|
|
|
|
118
|
|
|
|
256
|
|
|
|
229
|
|
|
Passenger services
|
|
|
100
|
|
|
|
96
|
|
|
|
193
|
|
|
|
183
|
|
|
Special charges
|
|
|
6
|
|
|
|
44
|
|
|
|
16
|
|
|
|
48
|
|
|
Merger-related costs
|
|
|
18
|
|
|
|
—
|
|
|
|
18
|
|
|
|
—
|
|
|
Other
|
|
|
362
|
|
|
|
353
|
|
|
|
732
|
|
|
|
696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
3,380
|
|
|
|
3,280
|
|
|
|
6,599
|
|
|
|
6,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
328
|
|
|
|
(154
|
)
|
|
|
278
|
|
|
|
(208
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonoperating Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(92
|
)
|
|
|
(90
|
)
|
|
|
(187
|
)
|
|
|
(183
|
)
|
|
Interest capitalized
|
|
|
6
|
|
|
|
8
|
|
|
|
13
|
|
|
|
17
|
|
|
Interest income
|
|
|
2
|
|
|
|
4
|
|
|
|
4
|
|
|
|
8
|
|
|
Other, net
|
|
|
(11
|
)
|
|
|
19
|
|
|
|
(20
|
)
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Nonoperating Income (Expense)
|
|
|
(95
|
)
|
|
|
(59
|
)
|
|
|
(190
|
)
|
|
|
(141
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before Income Taxes
|
|
|
233
|
|
|
|
(213
|
)
|
|
|
88
|
|
|
|
(349
|
)
|
|
Income Taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
233
|
|
|
$
|
(213
|
)
|
|
$
|
87
|
|
|
$
|
(349
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.67
|
|
|
$
|
(1.72
|
)
|
|
$
|
0.62
|
|
|
$
|
(2.82
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.46
|
|
|
$
|
(1.72
|
)
|
|
$
|
0.60
|
|
|
$
|
(2.82
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Used for Computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
140
|
|
|
|
124
|
|
|
|
139
|
|
|
|
124
|
|
|
Diluted
|
|
|
167
|
|
|
|
124
|
|
|
|
153
|
|
|
|
124
|
|
The accompanying Notes to
Consolidated Financial Statements are an integral part of these statements.
CONTINENTAL AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except for share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2010
|
|
December 31,
2009
|
|
June 30,
2009
|
|
|
|
(Unaudited)
|
|
|
|
(Unaudited)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,047
|
|
$
|
2,546
|
|
$
|
2,521
|
|
Short-term investments
|
|
|
457
|
|
|
310
|
|
|
247
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unrestricted cash, cash equivalents and short-term investments
|
|
|
3,504
|
|
|
2,856
|
|
|
2,768
|
|
|
|
|
|
|
Restricted cash and cash equivalents
|
|
|
167
|
|
|
164
|
|
|
167
|
|
Accounts receivable, net
|
|
|
610
|
|
|
494
|
|
|
488
|
|
Spare parts and supplies, net
|
|
|
275
|
|
|
254
|
|
|
242
|
|
Deferred income taxes
|
|
|
221
|
|
|
203
|
|
|
172
|
|
Prepayments and other
|
|
|
437
|
|
|
402
|
|
|
494
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
5,214
|
|
|
4,373
|
|
|
4,331
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment:
|
|
|
|
|
|
|
|
|
|
|
Owned property and equipment:
|
|
|
|
|
|
|
|
|
|
|
Flight equipment
|
|
|
8,796
|
|
|
8,769
|
|
|
8,614
|
|
Other
|
|
|
1,827
|
|
|
1,787
|
|
|
1,740
|
|
|
|
|
|
|
|
|
|
|
|
|
Flight equipment and other
|
|
|
10,623
|
|
|
10,556
|
|
|
10,354
|
|
Less: Accumulated depreciation
|
|
|
3,708
|
|
|
3,509
|
|
|
3,388
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned property and equipment, net
|
|
|
6,915
|
|
|
7,047
|
|
|
6,966
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase deposits for flight equipment
|
|
|
335
|
|
|
242
|
|
|
257
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital leases
|
|
|
195
|
|
|
194
|
|
|
194
|
|
Less: Accumulated amortization
|
|
|
68
|
|
|
63
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital leases, net
|
|
|
127
|
|
|
131
|
|
|
136
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
|
7,377
|
|
|
7,420
|
|
|
7,359
|
|
|
|
|
|
|
|
|
|
|
|
|
Routes and airport operating rights, net
|
|
|
780
|
|
|
778
|
|
|
797
|
|
Other assets
|
|
|
228
|
|
|
210
|
|
|
175
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
13,599
|
|
$
|
12,781
|
|
$
|
12,662
|
|
|
|
|
|
|
|
|
|
|
|
(continued on next page)
CONTINENTAL AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except for share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2010
|
|
|
December 31,
2009
|
|
|
June 30,
2009
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
(Unaudited)
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt and capital leases
|
|
$
|
1,142
|
|
|
$
|
975
|
|
|
$
|
980
|
|
|
Accounts payable
|
|
|
988
|
|
|
|
924
|
|
|
|
1,062
|
|
|
Air traffic and frequent flyer liability
|
|
|
2,607
|
|
|
|
1,855
|
|
|
|
2,128
|
|
|
Accrued payroll
|
|
|
391
|
|
|
|
367
|
|
|
|
379
|
|
|
Accrued other liabilities
|
|
|
304
|
|
|
|
268
|
|
|
|
307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
5,432
|
|
|
|
4,389
|
|
|
|
4,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt and Capital Leases
|
|
|
4,912
|
|
|
|
5,291
|
|
|
|
4,963
|
|
|
|
|
|
|
|
Deferred Income Taxes
|
|
|
221
|
|
|
|
203
|
|
|
|
172
|
|
|
|
|
|
|
|
Accrued Pension Liability
|
|
|
1,232
|
|
|
|
1,248
|
|
|
|
1,375
|
|
|
|
|
|
|
|
Accrued Retiree Medical Benefits
|
|
|
223
|
|
|
|
216
|
|
|
|
239
|
|
|
|
|
|
|
|
Other Non-Current Liabilities
|
|
|
855
|
|
|
|
844
|
|
|
|
821
|
|
|
|
|
|
|
|
Stockholders’ Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B common stock - $.01 par, 400,000,000 shares authorized; 140,126,934, 138,537,127 and 123,657,537 issued and outstanding
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
Additional paid-in capital
|
|
|
2,240
|
|
|
|
2,216
|
|
|
|
2,047
|
|
|
Accumulated deficit
|
|
|
(355
|
)
|
|
|
(442
|
)
|
|
|
(509
|
)
|
|
Accumulated other comprehensive loss
|
|
|
(1,162
|
)
|
|
|
(1,185
|
)
|
|
|
(1,303
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
|
724
|
|
|
|
590
|
|
|
|
236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
13,599
|
|
|
$
|
12,781
|
|
|
$
|
12,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
CONTINENTAL AIRLINES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions) (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
87
|
|
|
$
|
(349
|
)
|
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
256
|
|
|
|
229
|
|
|
Special charges
|
|
|
16
|
|
|
|
48
|
|
|
Stock-based compensation related to equity awards
|
|
|
4
|
|
|
|
3
|
|
|
Other, net
|
|
|
15
|
|
|
|
27
|
|
|
Changes in operating assets and liabilities
|
|
|
623
|
|
|
|
401
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
1,001
|
|
|
|
359
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(148
|
)
|
|
|
(147
|
)
|
|
Aircraft purchase deposits (paid) refunded, net
|
|
|
(84
|
)
|
|
|
17
|
|
|
Proceeds from sales (purchases) of short-term investments, net
|
|
|
(124
|
)
|
|
|
233
|
|
|
Proceeds from sales of property and equipment
|
|
|
25
|
|
|
|
7
|
|
|
Decrease (increase) in restricted cash and cash equivalents
|
|
|
(3
|
)
|
|
|
23
|
|
|
Other
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(334
|
)
|
|
|
131
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
Payments on long-term debt and capital lease obligations
|
|
|
(411
|
)
|
|
|
(169
|
)
|
|
Proceeds from issuance of long-term debt, net
|
|
|
225
|
|
|
|
30
|
|
|
Proceeds from issuance of common stock pursuant to stock plans
|
|
|
20
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(166
|
)
|
|
|
(134
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase in Cash and Cash Equivalents
|
|
|
501
|
|
|
|
356
|
|
|
|
|
|
|
Cash and Cash Equivalents - Beginning of Period
|
|
|
2,546
|
|
|
|
2,165
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents - End of Period
|
|
$
|
3,047
|
|
|
$
|
2,521
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing and Financing Activities Not Affecting Cash:
|
|
|
|
|
|
|
|
|
|
Property and equipment acquired through the issuance of debt
|
|
|
—
|
|
|
|
197
|
|
The accompanying Notes to
Consolidated Financial Statements are an integral part of these statements.
CONTINENTAL AIRLINES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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. We recorded $11 million of depreciation
expense during the quarter ended March 31, 2010 that relates to prior periods, the impact of which is not material to any individual prior period or our expected annual results for 2010.
The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes
thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2009 (the “2009 Form 10-K”). 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.
NOTE 1 - MERGER WITH
UNITED
On May 2, 2010, Continental, UAL Corporation (“UAL”), and JT Merger Sub Inc., a wholly-owned
subsidiary of UAL (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”), providing for a business combination of Continental and UAL. The Merger Agreement provides that, upon the terms and subject
to the conditions set forth in the Merger Agreement, Merger Sub will be merged with and into Continental, with Continental continuing as the surviving corporation and as a wholly-owned subsidiary of UAL (the “Merger”). Upon completion of
the Merger, UAL will be the parent company of both Continental and United Air Lines, Inc. (“United”) and UAL’s name will be changed to United Continental Holdings, Inc.
Under the terms of the Merger Agreement, our stockholders will receive 1.05 shares of UAL common stock for each share of Continental
common stock they hold at the effective time of the Merger. The exchange ratio is fixed and will not be adjusted for changes in the market value of the common stock of Continental or UAL. The Merger will be accounted for using the acquisition method
of accounting with UAL being considered the acquirer of Continental for accounting purposes. UAL will allocate the purchase price to the fair value of our tangible and intangible assets and liabilities at the acquisition date, with the excess
purchase price being recorded as goodwill. Under the acquisition method of accounting, goodwill is not amortized but is tested for impairment at least annually. The new basis for our assets and liabilities will also be reflected in our
separate-entity financial statements.
The Merger Agreement contains certain termination rights for both UAL and Continental,
including if the Merger is not consummated on or before December 31, 2010 (which is subject to extension under certain circumstances but generally not beyond September 30, 2011) and if the approval of the stockholders of either UAL or
Continental is not obtained. The Merger Agreement further provides that, upon termination of the Merger Agreement by UAL or Continental as a result of an adverse change in the recommendation of the other party’s board of directors, UAL may be
required to pay to Continental, or Continental may be required to pay to UAL, a termination fee of $175 million.
The consummation of the Merger is subject to receipt of various regulatory clearances,
approval by the stockholders of Continental and UAL and the satisfaction or waiver of other conditions as described in the Merger Agreement, and it is possible that factors outside the control of UAL and Continental could result in the Merger being
completed at an earlier time, a later time or not at all. As part of its review of the Merger under the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended, and the rules and regulations promulgated thereunder (the “HSR review
process”), the Department of Justice (“DOJ”) issued Second Requests to Continental and UAL on June 7, 2010. This is a standard part of the HSR review process and was part of our planning from the outset. Continental and UAL are
working to comply with the Second Requests and have agreed to provide the DOJ with additional time to complete the HSR review process. As stated previously, Continental and UAL expect the closing of the Merger to occur in the fourth quarter of 2010.
NOTE 2 - ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Variable Interest Entities
. In June 2009, the Financial Accounting Standards Board (“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 became
effective for us on January 1, 2010. The adoption of this pronouncement did not have any effect on our consolidated financial statements.
Revenue Arrangements with Multiple Deliverables
. In October 2009, the FASB issued guidance that changes the accounting for revenue
arrangements with multiple deliverables. The guidance requires an entity to allocate consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices and eliminates the use of the residual method of
allocation. The guidance establishes a hierarchy for determining the selling price of a deliverable, based on vendor-specific objective evidence, third-party evidence or estimated selling price. In addition, this guidance expands required
disclosures related to a vendor’s multiple-deliverable revenue arrangements. This accounting standard is effective for us on January 1, 2011 and may change our accounting for the sale of frequent flyer mileage credits. We may elect to
adopt this guidance through either prospective application for revenue arrangements entered into, or materially modified, after the effective date or retrospective application to all applicable revenue arrangements for all periods presented. 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.
NOTE 3 - EARNINGS (LOSS) PER SHARE
The following table sets forth the components of basic and diluted earnings (loss) per share (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2010
|
|
2009
|
|
|
2010
|
|
2009
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic earnings (loss) per share - net income (loss)
|
|
$
|
233
|
|
$
|
(213
|
)
|
|
$
|
87
|
|
$
|
(349
|
)
|
|
Effect of dilutive securities - interest expense on:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5% convertible notes
|
|
|
4
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
6% convertible junior subordinated debentures held by subsidiary trust
|
|
|
3
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
4.5% convertible notes
|
|
|
3
|
|
|
—
|
|
|
|
5
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for diluted earnings (loss) per share - net income (loss) after assumed conversions
|
|
$
|
243
|
|
$
|
(213
|
)
|
|
$
|
92
|
|
$
|
(349
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings (loss) per share - weighted average shares
|
|
|
140
|
|
|
124
|
|
|
|
139
|
|
|
124
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5% convertible notes
|
|
|
9
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
6% convertible junior subordinated debentures held by subsidiary trust
|
|
|
4
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
4.5% convertible notes
|
|
|
12
|
|
|
—
|
|
|
|
12
|
|
|
—
|
|
|
Employee stock options
|
|
|
2
|
|
|
—
|
|
|
|
2
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential shares
|
|
|
27
|
|
|
—
|
|
|
|
14
|
|
|
—
|
|
|
Denominator for diluted earnings (loss) per share - weighted average shares after assumed conversions
|
|
|
167
|
|
|
124
|
|
|
|
153
|
|
|
124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The adjustments to net income (loss) to determine the numerator for diluted earnings (loss) per share are
net of the related effect of applicable income taxes and profit sharing.
Approximately 13 million potential shares of
our common stock related to convertible debt securities were excluded from the computation of diluted earnings (loss) per share in the three months ended June 30, 2009 and the six months ended June 30, 2010 and 2009 because they were
antidilutive. In addition, approximately one million weighted average options to purchase shares of our common stock for the three and six months ended June 30, 2010 and approximately eight million weighted average options for the three and six
months ended June 30, 2009 were excluded from the computation of diluted earnings per share because the effect of including the options would have been antidilutive.
NOTE 4 - FLEET INFORMATION
As of June 30, 2010, our operating fleet consisted of 337 mainline jets and 251 regional aircraft. The 337 mainline jets are operated
exclusively by us, while the 251 regional aircraft are operated on our behalf by other operators under capacity purchase agreements.
We own or lease 274 regional jets. Of these, 206 are leased or subleased to ExpressJet
Airlines, Inc. (“ExpressJet”) and operated on our behalf under a capacity purchase agreement with ExpressJet, 43 are subleased to ExpressJet and other operators but are not operated on our behalf and 25 are temporarily grounded.
Additionally, our regional operating fleet includes 45 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 June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft Type
|
|
Total
|
|
Owned
|
|
Leased
|
|
Third-Party
Aircraft
|
|
|
Mainline (a):
|
|
|
|
|
|
|
|
|
|
|
777-200ER
|
|
20
|
|
8
|
|
12
|
|
—
|
|
|
767-400ER
|
|
16
|
|
14
|
|
2
|
|
—
|
|
|
767-200ER
|
|
10
|
|
9
|
|
1
|
|
—
|
|
|
757-300
|
|
21
|
|
9
|
|
12
|
|
—
|
|
|
757-200
|
|
41
|
|
15
|
|
26
|
|
—
|
|
|
737-900ER
|
|
30
|
|
30
|
|
—
|
|
—
|
|
|
737-900
|
|
12
|
|
8
|
|
4
|
|
—
|
|
|
737-800
|
|
117
|
|
44
|
|
73
|
|
—
|
|
|
737-700
|
|
36
|
|
12
|
|
24
|
|
—
|
|
|
737-500
|
|
34
|
|
—
|
|
34
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mainline
|
|
337
|
|
149
|
|
188
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regional (b):
|
|
|
|
|
|
|
|
|
|
|
ERJ-145XR
|
|
89
|
|
—
|
|
89
|
|
—
|
|
|
ERJ-145
|
|
132
|
|
18
|
|
99
|
|
15
|
(c)
|
|
Q400
|
|
14
|
|
—
|
|
—
|
|
14
|
(d)
|
|
Q200
|
|
16
|
|
—
|
|
—
|
|
16
|
(e)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total regional
|
|
251
|
|
18
|
|
188
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
588
|
|
167
|
|
376
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Excludes five grounded Boeing 737-500 aircraft (two owned and three leased) and five grounded owned Boeing 737-300 aircraft.
|
|
(b)
|
Excludes 25 ERJ-135 aircraft that are temporarily grounded and 15 ERJ-145XR aircraft, 23 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 Colgan Air, Inc. (“Colgan”) under a capacity purchase agreement.
|
|
(e)
|
Operated by Champlain Enterprises, Inc. (“CommutAir”) under a capacity purchase agreement.
|
Substantially all of the aircraft and engines we own are subject to mortgages.
Mainline Fleet Activity
. During the first six months of 2010, we placed into service
three leased Boeing 757-300 aircraft and removed three Boeing 737-300 aircraft from service.
Regional Fleet Activity
.
In December 2009, we agreed with ExpressJet to amend our capacity purchase agreement to permit ExpressJet to fly eight ERJ-145 aircraft for United under a capacity purchase agreement. These eight aircraft had been removed from service on our behalf
as of June 30, 2010.
Firm Order and Option Aircraft
. As of June 30, 2010, we had firm commitments to
purchase 86 new aircraft (58 Boeing 737 aircraft, three Boeing 777 aircraft and 25 Boeing 787 aircraft) scheduled for delivery from 2010 through 2016, with an estimated aggregate cost of $5.1 billion including related spare engines. In addition to
our firm order aircraft, we had options to purchase a total of 98 additional Boeing aircraft as of June 30, 2010.
We are
currently scheduled to take delivery of two Boeing 777 aircraft and 12 Boeing 737 aircraft through the end of 2010. Due to issues arising out of the governmental certification process used by the manufacturer of the coach seats on the Boeing 777
aircraft and the coach and first class seats on the Boeing 737 aircraft scheduled for delivery this year, we have incurred delays for most of the aircraft scheduled for delivery in 2010. We expect to take delivery of the two Boeing 777 aircraft and
nine Boeing 737 aircraft by the end of August 2010. While this seat manufacturer also provided the seats installed on most of the Boeing aircraft currently in our fleet, we do not believe these issues will have a material impact on our ability to
continue to operate any of the aircraft in our fleet based on information currently available to us.
NOTE 5 - LONG-TERM DEBT
Maturities
. Maturities of long-term debt due before December 31, 2010 and for the next four years are as
follows (in millions):
|
|
|
|
|
July 1, 2010 through December 31, 2010
|
|
$ 401
|
|
Year ending December 31,
|
|
|
|
2011
|
|
1,151
|
|
2012
|
|
595
|
|
2013
|
|
821
|
|
2014
|
|
345
|
Convertible Debt
Securities
. Our 5% Convertible Notes with a principal amount of $175 million are convertible into 50 shares of 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 at any time for cash at our option
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 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. The holders of the notes also had the
right to require us to repurchase their notes on June 15, 2010; however, none did so. Accordingly, we have classified these notes as long-term debt and capital leases at June 30, 2010. The maturity table above reflects the principal amount
of the notes as due in 2013.
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. The Merger will not result in the holders of the notes having any additional rights to require us to repurchase their notes, nor will it trigger any
repayment obligation on any of our other outstanding debt.
NOTE 6 - 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 it a market-based measurement that should be determined based on assumptions that
market participants would use in pricing an asset or liability. FASB Accounting Standards Codification (“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 the 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 include (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Amount
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
Valuation
Technique
|
|
|
June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,047
|
|
|
$
|
3,047
|
|
$
|
—
|
|
$
|
—
|
|
|
(A
|
)
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate securities
|
|
|
117
|
|
|
|
—
|
|
|
—
|
|
|
117
|
|
|
(B
|
)
|
|
CDARS
|
|
|
21
|
|
|
|
21
|
|
|
—
|
|
|
—
|
|
|
(A
|
)
|
|
Asset-backed securities
|
|
|
121
|
|
|
|
121
|
|
|
—
|
|
|
—
|
|
|
(A
|
)
|
|
Fixed income mutual fund
|
|
|
107
|
|
|
|
—
|
|
|
107
|
|
|
—
|
|
|
(A
|
)
|
|
Corporate debt
|
|
|
42
|
|
|
|
42
|
|
|
—
|
|
|
—
|
|
|
(A
|
)
|
|
U.S. government and agency notes
|
|
|
33
|
|
|
|
33
|
|
|
—
|
|
|
—
|
|
|
(A
|
)
|
|
Notes guaranteed by foreign governments
|
|
|
16
|
|
|
|
16
|
|
|
—
|
|
|
—
|
|
|
(A
|
)
|
|
Restricted cash and cash equivalents
|
|
|
167
|
|
|
|
167
|
|
|
—
|
|
|
—
|
|
|
(A
|
)
|
|
Fuel derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps
|
|
|
(6
|
)
|
|
|
—
|
|
|
—
|
|
|
(6
|
)
|
|
(A
|
)
|
|
Call options
|
|
|
6
|
|
|
|
—
|
|
|
—
|
|
|
6
|
|
|
(A
|
)
|
|
Collars
|
|
|
(3
|
)
|
|
|
—
|
|
|
—
|
|
|
(3
|
)
|
|
(A
|
)
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,546
|
|
|
$
|
2,546
|
|
$
|
—
|
|
$
|
—
|
|
|
(A
|
)
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate securities
|
|
|
201
|
|
|
|
—
|
|
|
—
|
|
|
201
|
|
|
(B
|
)
|
|
CDARS
|
|
|
102
|
|
|
|
102
|
|
|
—
|
|
|
—
|
|
|
(A
|
)
|
|
Asset-backed securities
|
|
|
7
|
|
|
|
7
|
|
|
—
|
|
|
—
|
|
|
(A
|
)
|
|
Restricted cash and cash equivalents
|
|
|
164
|
|
|
|
164
|
|
|
—
|
|
|
—
|
|
|
(A
|
)
|
|
Auction rate securities put right
|
|
|
20
|
|
|
|
—
|
|
|
—
|
|
|
20
|
|
|
(B
|
)
|
|
Fuel derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps
|
|
|
6
|
|
|
|
—
|
|
|
—
|
|
|
6
|
|
|
(A
|
)
|
|
Call options
|
|
|
8
|
|
|
|
—
|
|
|
—
|
|
|
8
|
|
|
(A
|
)
|
|
Foreign currency forward contracts
|
|
|
5
|
|
|
|
—
|
|
|
5
|
|
|
—
|
|
|
(A
|
)
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,521
|
|
|
|
2,521
|
|
$
|
—
|
|
$
|
—
|
|
|
(A
|
)
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate securities
|
|
|
230
|
|
|
|
—
|
|
|
—
|
|
|
230
|
|
|
(B
|
)
|
|
CDARS
|
|
|
14
|
|
|
|
14
|
|
|
—
|
|
|
—
|
|
|
(A
|
)
|
|
Asset-backed securities
|
|
|
3
|
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
(A
|
)
|
|
Restricted cash and cash equivalents
|
|
|
167
|
|
|
|
167
|
|
|
—
|
|
|
—
|
|
|
(A
|
)
|
|
Auction rate securities put right
|
|
|
27
|
|
|
|
—
|
|
|
—
|
|
|
27
|
|
|
(B
|
)
|
|
Fuel derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps
|
|
|
16
|
|
|
|
—
|
|
|
—
|
|
|
16
|
|
|
(A
|
)
|
|
Collars
|
|
|
(33
|
)
|
|
|
—
|
|
|
—
|
|
|
(33
|
)
|
|
(A
|
)
|
|
Foreign currency forward contracts
|
|
|
1
|
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
(A
|
)
|
The determination of fair value of each of these items is discussed below:
Cash and Cash Equivalents and Restricted Cash
. Cash and 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
. The fair values of short-term investments other than auction rate
securities are based on observable market data. “CDARS” are certificates of deposit placed through an account registry service. Asset-backed securities mature through 2012. The fixed income mutual fund invests primarily in money market
instruments and investment grade fixed income securities and is valued at the net asset value of shares held by us. The underlying investments have a weighted average contractual maturity of less than 90 days. Corporate debt securities, government
and agency notes and notes guaranteed by foreign governments have a weighted average maturity of less than two years.
Student Loan-Related Auction Rate Securities
. At June 30, 2010, we held student loan-related auction rate securities with a
fair value of $117 million, a par value of $145 million and amortized cost of $117 million. These securities, which we classify as available-for-sale, are variable-rate debt instruments with contractual maturities generally greater than ten years
who interest rates are reset every seven, 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. We estimated the fair value of these securities taking into consideration the limited sales and
offers to purchase such 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.
During the first six months of 2010, we
sold, at par, auction rate securities having a par value of $106 million. Certain of these auction rate securities were subject to a put right granted to us by an institution permitting us to sell to the institution at their full par value certain
auction rate securities by June 30, 2010. We recognized gains on the sales using the specific identification method. The gains were substantially offset by the cancellation of any related put rights. The net gains are included in other
non-operating income (expense) in our consolidated statement of operations and 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 currently 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 that
is 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 option contracts as Level 3.
Foreign Currency-Forward Contracts
. 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.
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction
Rate
Securities
|
|
|
|
|
|
Fuel Derivatives
|
|
|
|
|
|
Put Right
|
|
|
Swap
|
|
|
Call Options
|
|
|
Collars
|
|
|
Three Months Ended June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
164
|
|
|
$
|
16
|
|
|
$
|
24
|
|
|
$
|
14
|
|
|
$
|
—
|
|
|
Purchases, sales, issuances and settlements (net)
|
|
|
(64
|
)
|
|
|
—
|
|
|
|
5
|
|
|
|
5
|
|
|
|
2
|
|
|
Gains and losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported in earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
|
|
|
17
|
|
|
|
(16
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Unrealized
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
Reported in other comprehensive income (loss)
|
|
|
—
|
|
|
|
—
|
|
|
|
(35
|
)
|
|
|
(13
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2010
|
|
$
|
117
|
|
|
$
|
—
|
|
|
$
|
(6
|
)
|
|
$
|
5
|
|
|
$
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
229
|
|
|
$
|
26
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
(254
|
)
|
|
Purchases, sales, issuances and settlements (net)
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
177
|
|
|
Gains and losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported in earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
—
|
|
|
|
1
|
|
|
|
8
|
|
|
|
—
|
|
|
|
—
|
|
|
Reported in other comprehensive income (loss)
|
|
|
2
|
|
|
|
—
|
|
|
|
6
|
|
|
|
—
|
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2009
|
|
$
|
230
|
|
|
$
|
27
|
|
|
$
|
16
|
|
|
$
|
—
|
|
|
$
|
(33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction
Rate Securities
|
|
|
|
|
|
Fuel Derivatives
|
|
|
|
|
|
Put Right
|
|
|
Swap
|
|
|
Call Options
|
|
|
Collars
|
|
|
Six Months Ended June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
201
|
|
|
$
|
20
|
|
|
$
|
6
|
|
|
$
|
8
|
|
|
$
|
—
|
|
|
Purchases, sales, issuances and settlements (net)
|
|
|
(106
|
)
|
|
|
—
|
|
|
|
1
|
|
|
|
17
|
|
|
|
2
|
|
|
Gains and losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported in earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
|
|
|
23
|
|
|
|
(21
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Unrealized
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
Reported in other comprehensive income (loss)
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(13
|
)
|
|
|
(19
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2010
|
|
$
|
117
|
|
|
$
|
—
|
|
|
$
|
(6
|
)
|
|
$
|
5
|
|
|
$
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
229
|
|
|
$
|
26
|
|
|
$
|
2
|
|
|
$
|
1
|
|
|
$
|
(418
|
)
|
|
Purchases, sales, issuances and settlements (net)
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
5
|
|
|
|
(1
|
)
|
|
|
366
|
|
|
Gains and losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported in earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
—
|
|
|
|
1
|
|
|
|
8
|
|
|
|
—
|
|
|
|
(2
|
)
|
|
Reported in other comprehensive income (loss)
|
|
|
2
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2009
|
|
$
|
230
|
|
|
$
|
27
|
|
|
$
|
16
|
|
|
$
|
—
|
|
|
$
|
(33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 was approximately as follows (in billions):
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Amount
|
|
Fair Value
|
|
June 30, 2010
|
|
$
|
5.9
|
|
$
|
5.8
|
|
December 31, 2009
|
|
|
6.1
|
|
|
5.8
|
|
June 30, 2009
|
|
|
5.7
|
|
|
4.8
|
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.
|
|
•
|
|
Accounts Receivable and Accounts Payable
. The fair values of accounts receivable and accounts payable approximated carrying value due to their
short-term maturity.
|
NOTE 7 - 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 have historically entered into swap agreements, purchased call options or structured costless collar arrangements to protect us against sudden and significant increases in jet fuel prices. We typically conduct our fuel hedging
activities using a combination of crude oil, jet fuel and heating oil contracts. We strive to maintain fuel hedging levels and exposure generally comparable to that of our major competitors, so that our fuel cost is not disproportionate to theirs.
As of June 30, 2010, our projected consolidated fuel requirements for the remainder of 2010 and the first quarter of
2011 were hedged as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Price
|
|
Minimum Price
|
|
|
|
% of
Expected
Consumption
|
|
|
Weighted
Average price
(per gallon)
|
|
% of
Expected
Consumption
|
|
|
Weighted
Average price
(per gallon)
|
|
Remainder of 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WTI crude oil swaps
|
|
19
|
%
|
|
$
|
1.87
|
|
19
|
%
|
|
$
|
1.87
|
|
Jet fuel swaps
|
|
2
|
|
|
|
2.26
|
|
2
|
|
|
|
2.26
|
|
WTI crude oil call options
|
|
22
|
|
|
|
2.25
|
|
N/A
|
|
|
|
N/A
|
|
WTI crude oil collars
|
|
3
|
|
|
|
2.38
|
|
3
|
|
|
|
1.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
46
|
%
|
|
|
|
|
24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter of 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WTI crude oil swaps
|
|
5
|
%
|
|
$
|
1.76
|
|
5
|
%
|
|
$
|
1.76
|
|
WTI crude oil call options
|
|
6
|
|
|
|
2.31
|
|
N/A
|
|
|
|
N/A
|
|
WTI crude oil collars
|
|
3
|
|
|
|
2.38
|
|
3
|
|
|
|
1.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
14
|
%
|
|
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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 June 30, 2010 or December 31, 2009. At June 30, 2009, we had posted cash collateral with our
counterparties totaling $32 million and granted a lien in favor of a counterparty on one Boeing 777-200 aircraft and one Boeing 757-200 aircraft in lieu of posting an additional $25 million in cash. The cash collateral is reported in prepayments and
other current assets in our consolidated balance sheet.
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 June 30, 2010, we had forward contracts outstanding to hedge the following cash inflows, primarily from passenger ticket sales, in foreign currencies:
|
|
•
|
|
21% of our projected Japanese yen-denominated cash inflows through the third quarter of 2011.
|
|
|
•
|
|
5% of our projected Canadian dollar-denominated cash inflows through the fourth quarter of 2010.
|
We account for these instruments as cash flow hedges. They are recorded at fair value in our consolidated balance sheet with the change
in fair value, to the extent effective, being recorded to accumulated OCI, net of applicable income taxes. Gains and losses from settlement of these instruments are recognized as passenger revenue. 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
. 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 (1)
|
|
Liability Derivatives (2)
|
|
|
|
June 30,
2010
|
|
December 31,
2009
|
|
June 30,
2009
|
|
June 30,
2010
|
|
December 31,
2009
|
|
June 30,
2009
|
|
Fuel derivatives
|
|
$
|
9
|
|
$
|
14
|
|
$
|
16
|
|
$
|
12
|
|
$
|
—
|
|
$
|
33
|
|
Foreign currency derivatives
|
|
|
—
|
|
|
5
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
$
|
9
|
|
$
|
19
|
|
$
|
17
|
|
$
|
12
|
|
$
|
—
|
|
$
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Amounts are included in prepayments and other current assets.
|
|
(2)
|
Amounts are included in accrued other current liabilities.
|
The gains (losses) related to the effective portion of our cash flow hedges reported in
accumulated OCI in our consolidated balance sheet and in our consolidated statement of operations were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss)
Recognized in OCI
(Effective Portion)
|
|
|
Gain (Loss) Reclassified
from Accumulated OCI
into
Income
(Effective Portion) (1)
|
|
|
Gain (Loss)
Recognized in Income
(Ineffective Portion) (2)
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Three Months Ended June 30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel derivatives
|
|
$
|
(53
|
)
|
|
$
|
58
|
|
|
$
|
(9
|
)
|
|
$
|
(210
|
)
|
|
$
|
(2
|
)
|
|
$
|
8
|
|
Foreign currency derivatives
|
|
|
(4
|
)
|
|
|
(3
|
)
|
|
|
1
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(57
|
)
|
|
$
|
55
|
|
|
$
|
(8
|
)
|
|
$
|
(209
|
)
|
|
$
|
(2
|
)
|
|
$
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel derivatives
|
|
$
|
(37
|
)
|
|
$
|
29
|
|
|
$
|
(6
|
)
|
|
$
|
(351
|
)
|
|
$
|
(2
|
)
|
|
$
|
6
|
|
Foreign currency derivatives
|
|
|
(4
|
)
|
|
|
9
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(41
|
)
|
|
$
|
38
|
|
|
$
|
(5
|
)
|
|
$
|
(351
|
)
|
|
$
|
(2
|
)
|
|
$
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Amounts related to fuel derivatives are included in aircraft fuel and related taxes and amounts related to foreign currency derivatives are included in passenger
revenue.
|
|
(2)
|
Amounts are included in other nonoperating income (expense).
|
NOTE 8 - COMPREHENSIVE INCOME (LOSS)
Total comprehensive income (loss) included the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Net income (loss)
|
|
$
|
233
|
|
|
$
|
(213
|
)
|
|
$
|
87
|
|
|
$
|
(349
|
)
|
|
|
|
|
|
|
|
Other comprehensive income (loss) adjustments, before tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification into earnings
|
|
|
10
|
|
|
|
201
|
|
|
|
7
|
|
|
|
343
|
|
|
Change in fair value
|
|
|
(57
|
)
|
|
|
55
|
|
|
|
(41
|
)
|
|
|
38
|
|
|
Unrealized gain on student-loan related auction rate securities
|
|
|
—
|
|
|
|
2
|
|
|
|
—
|
|
|
|
2
|
|
|
Employee benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net actuarial losses
|
|
|
21
|
|
|
|
27
|
|
|
|
41
|
|
|
|
54
|
|
|
Amortization of prior service cost
|
|
|
8
|
|
|
|
7
|
|
|
|
16
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) adjustments, before tax
|
|
|
(18
|
)
|
|
|
292
|
|
|
|
23
|
|
|
|
453
|
|
|
Income taxes related to items of other comprehensive income (loss)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
215
|
|
|
$
|
79
|
|
|
$
|
110
|
|
|
$
|
104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 9 – STOCK-BASED COMPENSATION AND EMPLOYEE BENEFIT PLANS
Profit Based RSU Awards
. In February 2010, we issued 1.4 million profit based restricted stock unit (“RSUs”) awards,
which can result in cash payments to our officers upon the achievement of specified profit sharing-based performance targets. The performance period for these awards is January 1, 2010 through December 31, 2012. These awards have
cumulative profit sharing performance targets ranging from $4 million to $120 million and payment percentages ranging from 25% to 200%. The cash hurdle associated with these awards is $2.2 billion. These awards were issued pursuant to our Incentive
Plan 2010, which was approved by our stockholders on June 9, 2010. We currently expect that these awards will achieve a payment percentage of 100%, although the expense related to these awards was not material in the three or six months ended
June 30, 2010. As of June 30, 2010, we have recorded no liability associated with any other profit based RSU awards outstanding because we had not achieved, and we did not believe it was probable that we would achieve, any of the
cumulative profit-sharing based performance targets for those awards.
Stock-Based Compensation Expense
. Total
stock-based compensation expense (credit) included in wages, salaries and related costs was $3 million, $0, $9 million and $(24) million for the three months ended June 30, 2010 and 2009 and the six months ended June 30, 2010 and 2009,
respectively. As of June 30, 2010, $31 million of compensation cost attributable to future service related to unvested employee stock options and profit based RSU awards had not yet been recognized. This amount will be recognized in expense
over a weighted average period of 1.6 years.
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 June 30,
|
|
|
Six Months
Ended June 30,
|
|
|
Three Months
Ended June 30,
|
|
|
Six Months
Ended June 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Service cost
|
|
$
|
16
|
|
|
$
|
16
|
|
|
$
|
33
|
|
|
$
|
32
|
|
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
5
|
|
|
$
|
5
|
|
|
Interest cost
|
|
|
40
|
|
|
|
38
|
|
|
|
79
|
|
|
|
77
|
|
|
|
3
|
|
|
|
4
|
|
|
|
7
|
|
|
|
8
|
|
|
Expected return on plan assets
|
|
|
(28
|
)
|
|
|
(22
|
)
|
|
|
(55
|
)
|
|
|
(44
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Amortization of unrecognized net actuarial loss
|
|
|
22
|
|
|
|
28
|
|
|
|
44
|
|
|
|
55
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(3
|
)
|
|
|
(1
|
)
|
|
Amortization of prior service cost
|
|
|
3
|
|
|
|
2
|
|
|
|
5
|
|
|
|
5
|
|
|
|
5
|
|
|
|
5
|
|
|
|
11
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit expense
|
|
$
|
53
|
|
|
$
|
62
|
|
|
$
|
106
|
|
|
$
|
125
|
|
|
$
|
10
|
|
|
$
|
11
|
|
|
$
|
20
|
|
|
$
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the first six months of 2010, we contributed $74 million to our tax-qualified defined benefit pension
plans and on July 8, 2010 we contributed an additional $38 million to the plans. Our remaining minimum funding requirements during calendar year 2010 are approximately $33 million.
Defined Contribution Plans
. Our defined contribution 401(k) employee savings plans cover substantially all employees. Company
matching contributions are made in cash. Total expense for all defined contribution plans, including two pilot-only plans, was $24 million, $26 million, $50 million and $50 million for the three months ended June 30, 2010 and 2009 and the six
months ended June 30, 2010 and 2009, respectively.
Profit Sharing Plan
. Effective January 1, 2010, we
adopted a new profit sharing plan with a five year term. Our new profit sharing plan creates an award pool of 15% of annual pre-tax income excluding special items. Generally, the profit sharing pool will be distributed among eligible employees based
on an employee’s annual base pay relative to the annual base pay of all employees. We recorded profit sharing expense totaling $18 million in the three and six months ended June 30, 2010.
NOTE 10 – SPECIAL CHARGES AND MERGER-RELATED COSTS
Special charges were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Aircraft-related charges, net
|
|
$
|
—
|
|
$
|
43
|
|
$
|
6
|
|
$
|
47
|
|
Severance and other
|
|
|
6
|
|
|
1
|
|
|
10
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total special charges
|
|
$
|
6
|
|
$
|
44
|
|
$
|
16
|
|
$
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The special charges all relate to our mainline segment
unless otherwise noted.
In the first six months of 2010, we recorded $6 million of aircraft-related charges related to
grounded Boeing 737-300 aircraft, which is net of gains on the sale of two Boeing 737-500 aircraft to a foreign buyer. We also recorded $2 million of severance during the first six months of 2010 related to the elimination of approximately 575
reservation positions.
Severance and other special charges of $6 million in the second quarter of 2010 primarily relate to an
adjustment to our reserve for unused facilities due to a reduction in expected sublease income for a maintenance hangar in Denver.
Aircraft-related charges in the second quarter of 2009 include $31 million of non-cash impairments on owned Boeing 737-300 and 737-500
aircraft and related assets, an $8 million non-cash charge related to the disposition of three 737-300 aircraft and a $4 million non-cash charge to write off certain obsolete spare parts. In the first quarter of 2009, we recorded a $4 million charge
for future lease and other related costs on a permanently grounded Boeing 737-300 aircraft.
Merger-related costs incurred in
the second quarter of 2010 totaling $18 million relate to our pending Merger with a subsidiary of UAL. The costs include financial advisor, legal, accounting and consultant fees and communication costs.
Accrual Activity
. Activity related to the accruals for severance and associated continuing medical coverage costs and future lease
payments on unused facilities is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance/
Medical
Costs
|
|
|
Unused
Facilities
|
|
|
Balance, December 31, 2009
|
|
$
|
14
|
|
|
$
|
26
|
|
|
Accrual
|
|
|
2
|
|
|
|
8
|
|
|
Payments
|
|
|
(10
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2010
|
|
$
|
6
|
|
|
$
|
32
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments related to the accruals for severance and associated continuing medical
coverage costs will be made through the third quarter of 2011. Remaining lease payments on unused facilities will be made through 2018.
NOTE 11 - 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 will ultimately not be realized. As a result, our pre-tax losses for the three and six months ended June 30, 2009 were not reduced by any tax benefit. No federal income tax expense was recognized
related to our pretax income for the three and six months ended June 30, 2010 due to the utilization of book net operating loss carryforwards (“NOLs”) for which no benefit had previously been recognized.
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 currently available information, the pending Merger with a subsidiary of UAL is expected to result in a Section 382 ownership change for Continental. The ultimate determination will be based on facts and
circumstances at the time the transaction closes. 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 4.01% for June 2010). 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 June 30, 2010 under current conditions, our annual NOL utilization could be limited
to $124 million per year, before consideration of any built-in gains.
NOTE 12 - 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 with a capacity of 78 or fewer seats. As of June 30, 2010, flights in our regional segment were 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 revenue from passengers flying, (2) many operations of the two segments are substantially
integrated (for example, airport operations, sales and marketing, scheduling and ticketing) and (3) management decisions are based on their anticipated impact on the overall network, not on one individual segment.
Financial information by business segment is set forth below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2010
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Operating Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainline
|
|
$
|
3,100
|
|
$
|
2,644
|
|
|
$
|
5,777
|
|
|
$
|
5,173
|
|
|
Regional
|
|
|
608
|
|
|
482
|
|
|
|
1,100
|
|
|
|
914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consolidated
|
|
$
|
3,708
|
|
$
|
3,126
|
|
|
$
|
6,877
|
|
|
$
|
6,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainline
|
|
$
|
306
|
|
$
|
(64
|
)
|
|
$
|
329
|
|
|
$
|
—
|
|
|
Regional
|
|
|
22
|
|
|
(90
|
)
|
|
|
(51
|
)
|
|
|
(208
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consolidated
|
|
$
|
328
|
|
$
|
(154
|
)
|
|
$
|
278
|
|
|
$
|
(208
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainline
|
|
$
|
214
|
|
$
|
(120
|
)
|
|
$
|
145
|
|
|
$
|
(135
|
)
|
|
Regional
|
|
|
19
|
|
|
(93
|
)
|
|
|
(58
|
)
|
|
|
(214
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consolidated
|
|
$
|
233
|
|
$
|
(213
|
)
|
|
$
|
87
|
|
|
$
|
(349
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 13 - COMMITMENTS AND CONTINGENCIES
Aircraft Purchase Commitments
. As of June 30, 2010, we had firm commitments to purchase 86 new aircraft (58 Boeing 737
aircraft, three Boeing 777 aircraft and 25 Boeing 787 aircraft) scheduled for delivery from 2010 through 2016, with an estimated aggregate cost of $5.1 billion including related spare engines. We are currently scheduled to take delivery of two
Boeing 777 aircraft and 12 Boeing 737 aircraft through the end of 2010. In addition to our firm order aircraft, we had options to purchase a total of 98 additional Boeing aircraft as of June 30, 2010.
We have obtained financing for the two Boeing 777 aircraft and nine of the Boeing 737 aircraft to be delivered in 2010, provided that
they are delivered by August 31, 2010. We expect the 11 aircraft to be delivered by such date. 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 $190 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 $109 million at June 30, 2010 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, customs, and aircraft financing obligations at
June 30, 2010 in the amount of $85 million. These letters of credit and performance bonds have expiration dates through December 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 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 June 30, 2010, we had $1.4 billion of floating rate debt and $269 million of fixed rate debt, with remaining terms of up to ten years,
that 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 ten years and an aggregate carrying value of $1.5 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 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:
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a total of $90 million if our unrestricted cash, cash equivalents and short-term investments balance falls below $2.0 billion;
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a total of $265 million if we fail to maintain the minimum unsecured debt ratings specified above;
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a total of $499 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
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a total of $1.1 billion 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.
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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 June 30, 2010, our senior
unsecured debt was rated B3 by Moody’s and CCC+ by Standard & Poor’s. These ratings are significantly below investment grade. Due to our current credit ratings, our borrowing costs are higher and our financing options are more
limited than borrowers with investment grade credit ratings. Additional downgrades 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 $265 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 to our respective counterparties under the related derivative
instruments. 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 either of our corporate credit ratings falls below
its current level, which is B2 as rated by Moody’s or B as rated by Standard & Poor’s. Our fuel derivative contracts do not contain any other credit risk-related contingent features, other than those related to a change in
control.
Trans-Atlantic Joint Venture
. On July 10, 2009, the DOT approved our application
to join United and a group of eight other carriers within Star Alliance that already hold antitrust immunity. 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, offering customers more service, scheduling and pricing options. As part of the trans-Atlantic joint venture, we are in negotiations to implement a revenue-sharing structure amongst the joint
venture participants. As currently contemplated, the revenue sharing structure would result in payments between participants based on a formula that compares current period unit revenue performance on trans-Atlantic routes to a historic period or
“baseline,” which is reset annually. The payments would be calculated on a quarterly basis and subject to a cap. Assuming that revenue sharing is implemented and that the revenue sharing formula is applied retroactive to January 1,
2010, as currently contemplated, we estimate that our liability for revenue sharing payments to joint venture carriers that we have relatively outperformed would be approximately $40 million for the six months ended June 30, 2010. This estimate
of our revenue sharing obligation for the first six months of 2010 is not indicative of our expectations for the full year, as we currently expect our net obligation for 2010 to be substantially less than this amount. In addition, the estimated
revenue sharing payment for the year is substantially less than the additional passenger revenue we receive from the joint marketing, scheduling and pricing efforts of the joint venture. Future results will also be impacted by the current year
results, which will serve as the baseline in future years for calculating relative performance in the revenue sharing formula.
Employees
. As of June 30, 2010, we had approximately 40,730 employees. Due to the number of part-time employees and adjusting
for overtime, we had an average of 38,800 full-time equivalent employees for the three months ended June 30, 2010. Including the fleet service employees discussed below, approximately 63% of our full-time equivalent employees are represented by
unions.
On February 12, 2010, the National Mediation Board informed us that our fleet service employees had voted in
favor of representation by the International Brotherhood of Teamsters (Teamsters). The election covers approximately 7,600 employees, or 6,340 full-time equivalent ramp, operations and cargo agents. We are in the process of negotiating a collective
bargaining agreement with the Teamsters covering our fleet service employees.
On March 18, 2010, we announced that we
had reached a tentative agreement on a new four-year labor contract with the Transport Workers Union (“TWU”) that represents our dispatchers, which agreement our dispatchers ratified on April 20, 2010.
Most of our collective bargaining agreements are currently amendable or become amendable in 2010. The collective bargaining agreements
with our pilots, mechanics and certain other work groups became amendable in December 2008 and those with our flight attendants and Continental Micronesia, Inc. (“CMI”) mechanics became amendable in December 2009. With respect to our
workgroups with amendable contracts, prior to the announcement of the Merger Agreement, we had been meeting with representatives of the applicable unions to negotiate amended collective bargaining agreements with a goal of reaching agreements that
are fair to us and fair to our employees, and reached new agreements with our dispatchers and the simulator engineers extending through 2013 and 2012, respectively. In addition to continuing to meet with our flight attendants and mechanics to
negotiate amended collective bargaining agreements for those groups, we are also engaging in discussions with several unions to find the best ways to achieve the future integration of the merged employee groups with the least amount of disruption.
We expect to begin discussions with the Air Line Pilots Association International (“ALPA”) regarding a joint collective bargaining agreement to cover all pilots in the merged entity in early August. The integration of Railway Labor Act
(“RLA”) employee groups is a difficult and sometimes contentious process, and management’s role is limited. The process is governed by federal laws, including the RLA and the McCaskill-Bond Amendment, and must be accomplished in
accordance with all applicable collective bargaining agreements and company policies. We cannot predict the outcome of these processes or of our ongoing negotiations with our unionized workgroups, although significant increases in the pay and
benefits resulting from new collective bargaining agreements could have a material adverse effect on us. Furthermore, there can be no assurance that our generally good labor relations and high labor productivity will continue.
Environmental Matters
. We are continuing environmental remediation of jet fuel
contamination on and near our aircraft maintenance hangar leasehold in Los Angeles, which began in 2005 under a work plan approved by the Los Angeles Regional Water Quality Control Board (LARWQCB) and our landlord, Los Angeles World Airports.
Additionally, we could be responsible for environmental remediation costs primarily related to solvent contamination on and near this site. On June 30, 2010, the LARWQCB required us to perform additional investigation of the site in connection
with our closure plan. If necessary, we plan to appeal the imposition of certain additional requirements to the California State Water Quality Control Board. At June 30, 2010, we had an accrual for estimated costs of environmental remediation
throughout our system of $29 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 June 30, 2010. 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 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. On December 18, 2009, the plaintiffs’ request for rehearing by the Sixth Circuit
en banc
was denied. On March 18, 2010, the
plaintiffs filed a Petition for a Writ of Certiorari with the U.S. Supreme Court, to which the defendants responded on June 16, 2010. The plaintiffs in the Swope lawsuit, encompassing 43 travel agencies, have also alleged that certain claims
raised in their lawsuit were not, in fact, dismissed. The trial court has not yet ruled on that issue. In the consolidated lawsuit, we believe the plaintiffs’ claims are without merit, and we intend to defend vigorously any appeal.
Nevertheless, a final adverse court decision awarding substantial money damages could have a material adverse effect on our results of operations, financial condition or liquidity.
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.
