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NOTE: This article is no longer updated. Continental Airlines (CAL) and United Airlines (UAUA) have merged under the ticker symbol and name United Continental Holdings (UAL). Please check that article for updates to the merged company.

Continental Airlines (NYSE: CAL) is the world's fifth largest airline by Revenue Passenger Miles.[1] CAL serves 242 destinations worldwide, offering 2000 daily flights.[1] Continental's Cost per Available Seat Mile (CASM) of 10.75 cents is among the lowest in the airline industry and is the lowest among the legacy carriers, like United Airlines (UAUA) and American Airlines (AMR).[2]

As with all airlines, volatile oil prices hurt the company's financial performance. Its average consolidated jet fuel price per gallon including taxes decreased to $1.97 in 2009 from $3.27 in 2008. Hedge contracts for 2009, which were largely entered into before oil prices fell, resulted in $0.23 per gallon of additional fuel expense during 2009. Moreover, the company posted a $125 million loss because of hedging contracts it had with Lehman Brothers in 2008 after the firm declared bankruptcy on September 15, 2008 .[3] Due to this, Continental Airlines has fuel hedges for only 10% of its expected fuel consumption, but this makes Continental even more vulnerable to fuel prices.[4]

Because of higher fuel costs and declining consumer demand for travel, Continental announced a 6.5% workforce reduction and the early retirement of 67 planes in June 2008, marking a 16% reduction in capacity or Available Seat Miles (ASM).[5] As of 2010, the company has continued to accommodate for declining consumer demand - ASM decreased by 5% between 2009-2010.[2]

Business Overview

Continental Airlines is the world's fifth largest airline by Revenue Passenger Miles.[6] CAL operates through the hub and spoke system, with major hubs in Newark, Houston, and Cleveland.[7] Continental operates a fleet of 632 aircraft[8], offering 2,800 daily departures to over 241 destinations worldwide.[6] Continental provides service to 39 cities in Mexico and Central America, more destinations than any other U.S. airline.[6] In addition to its own flights, CAL also earns revenue through its code-sharing alliances, particularly its SkyTeam Alliance with airlines like Air France-KLM (AFLYY) and Delta Air Lines Inc. (DAL).[9] In 2008, Continental had an average fare of $204.89, down from $236.36 in 2008.[10]

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Financial Analysis

2010 Third Quarter Overview

United Airlines and Continental Airlines (CAL) completed their merger at the end of the third quarter of 2010 on October 1st 2010. All accountable measures of company health for the fourth quarter will be updated to include both Continental and United Airlines under the merged company named United Continental Group.[11] However, the third quarter data released by UAL is exclusive to United Airlines and reports data before the merger.[11]

United Airlines reported third quarter 2010 net income of $473 million excluding special items, which is an increase of $533 million since year ago third quarter.[11] The special item included the merger costs, and along with miscellaneous costs, amounted to $87 million in costs.[11] United passenger revenue increased 21.4 percent in the third quarter 2010 compared to the same period in 2009.[11] For the third quarter of 2010, United's total revenue was $5.4 billion, an increase of 21.7 percent compared to the same period in 2009.[11] United's total consolidated expenses for the third quarter 2010, excluding certain special items, increased $463 million or 10.7 percent compared to the third quarter of 2009, of which $211 million was due to higher fuel costs.[11] The large increase in revenue compared to the smaller increase in costs highlights United's abilities to improve cost efficiency.

Continental reported third quarter 2010 net income of $367 million or $2.24 diluted earnings per share excluding certain special items, an improvement of $365 million year-over-year.[11] Including special items, Continental reported third quarter net income of $354 million.[11] Continental passenger revenue increased 20.6 percent in the third quarter 2010 compared to the same period in 2009.[11] Continental's total revenue for the third quarter of 2010 was $4.0 billion, an increase of 19.2 percent compared to the same period in 2009.[11] Continental's total expenses increased $256 million or 7.9 percent compared to the third quarter of 2009. Expenses for the third quarter 2010, excluding fuel, profit-sharing programs and certain special items, increased $102 million or 4.3 percent.[11]

For both CAL and UAUA, the companies have streamlined and improved their cost efficiency. However, some of that improvement was diminished due to unexpected increases in fuel costs.[11]

2010 Second Quarter Overview

Total revenue for the second quarter of 2010 was $3.7 billion, an increase of 18.6 percent compared to the same period in 2009.[12] Passenger revenue for the second quarter rose 19.7 percent ($544 million) compared to the same period in 2009.[12] The rest of the gains were due to increases in baggage fees and cargo transportation. Cargo revenue in the second quarter of 2010 increased 35.4 percent ($29 million) compared to the same period in 2009, principally due to increased freight volume. Continental Airlines had $233 million in net income this quarter, a $446 million in improvement since year ago second quarter.[12]

On the costs side, Continental's mainline cost per available seat mile (CASM) increased 3.9 percent in the second quarter 2010 compared to the same period last year.[12] Mainline fuel prices for the second quarter increased 8.7 percent compared to the second quarter of 2009, while mainline fuel consumption declined 1.1 percent year-over-year on 0.7 percent less mainline capacity.[12] Holding fuel rate constant and excluding special charges and merger-related costs, second quarter 2010 mainline CASM increased 2.2 percent compared to the second quarter of 2009.[12] Continental's additional revenues since year ago 2nd quarter is far greater than the additional costs.

These dramatic increases in profit illustrate both the public's willingness to travel again and Continental's ability to capture the post-recession airline demand increase. The company plans to begin nonstop Boeing 787 flights to Auckland, New Zealand and Lagos, Nigeria, from its Houston hub, becoming the first airline to introduce the Boeing 787 as part of their plans.[12]

In May, Continental and United announced a merger of equals, citing increasingly competitive global aviation environment.[12] The merger is expected to deliver $1.0 billion to $1.2 billion in net annual synergies by 2013, including between $800 million and $900 million of incremental annual revenues, in large part from expanded customer options resulting from the greater scope and scale of the network, and additional international service enabled by the broader network of the combined carrier.[12] The companies continue to make good progress with merger integration planning and have achieved important milestones on their path toward closing the merger.[12]

2010 First Quarter Overview

For the first quarter, total revenue was $3.2 billion, an increase of 7.0 percent since 1st quarter 2010.[13] This is mainly due to passenger revenue increasing by 7.1% and cargo revenue increasing by 20%, both of which are bouncing to pre-recessionary levels after the [[2009 Financial Crisis|2009 recession].[13] In fact, RPM and mainland load factor increased by 5.9% and 4.3% on a year-over-year basis, providing proof of increased demand for flights.[13]

The company's on-time arrival rate was 78.4%, despite a heavier-than average winter season during the first quarter.[13] Winter storms in the New York and Newark area forced continental to suspend operations and reduced passenger revue by an estimated $25 million.[13] Continental continues to revamp its fleet by adding 757-300 Boeing aircraft to replace 737-300 Boeing aircraft. The company maintains that its young, fuel-efficient fleet provides a natural hedge against the cost of fuel.[13]

The company did not provide specific future guidance, but did expect the increase in demand for their flights and improved efficiencies from Star Alliance would once again make its net income positive. [13]

2009 Overview

Due mainly to decreasing demand, revenue decreased by 17% since 2008 and operating expenses decreased by an equivalent 18%. Despite reduction in revenue, operating expenses also decreased, minimizing net loss.[14] CAL recorded a net loss of $282 million for the year ended December 31, 2009, as compared to a net loss of $586 million for the year ended December 31, 2008.[14] The net loss in 2009 was primarily the result of the global recession. The severe economic recession in the U.S. and global economies has had a significant negative impact on the demand for air carrier services beginning in the fourth quarter of 2008.[14] Passenger revenue in 2009 for U.S. airlines, as reported by the Air Transport Association of America, declined 18% compared to 2008.[14]

Continental benefited from significantly lower fuel costs during 2009. Its average consolidated fuel price per gallon including related taxes decreased to $1.97 in 2009 from $3.27 in 2008.[14] Based on its expected fuel consumption in 2010, a $1 change in the price of a barrel of crude oil would change our annual fuel expense by approximately $41 million. [14]

Passenger revenue decreased significantly in 2009 as compared to 2008 due to reduced traffic, less capacity and lower RASM attributable to the global recession. Cargo revenue decreased as well, due to lower fuel surcharge rates and decreased freight volume. Other revenue increased due to the implementation of new fees for checking bags in 2008. [14]

The company joined Star Alliance and implemented code-sharing and reciprocity of frequent flier programs, elite customer recognition and airport lounge use with United, Lufthansa, Air Canada and other Star Alliance members in late October of 2009. This will improve efficiency and reduce wait-times or problems with customer services.[14]

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Trends and Forces

Airline industries are more sensitive to the economy than other industries

Typically, airline companies and aircraft manufacturers are more prone to swings in revenue and equity market prices due to the release of economic indicators.[15] Consumers tend to reduce travel if personal economic conditions are suboptimal, forcing airlines to cut capacity and production. Indicators such as unemployment indices, personal income, and even home sales affect airline industries in exaggerated fashion.

Since early July, the airline index has gained 13% as carriers reported monthly double-digit unit revenue after last year's slump.[15] But now the industry is facing a slower travel season while economic data seem to indicate a general slowdown in the recovery. For the last two weeks of August 2010, many economic indicators revealed that the U.S economy has erased all of its employment recovery since one year ago. Unemployment increased unexpectedly to November 2009 levels, and existing homesales decreased by more than 27%.[15] Even though such recessionary indications typically reduce fuel futures prices, this does not fully offset the reduction in travel demand that follows a recession, and will affect the bottom line of airline companies.

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Increased Competition on International Routings

Continental has long been one of the most internationally oriented U.S. carriers. In 2008 for example, 50% of the company’s routings were to international destinations[16] These high revenue flights have helped Continental weather decreased domestic demand - in 2008, CAL's revenue from Trans-Atlantic flights grew by 11.6% compared to a 1.2% increase from domestic flights.[17] However, the higher margins on these routes could be pushed downward by increased competition from other U.S. legacy carriers, which have announced expanded international routings as a key component of their post-bankruptcy operational plans-in 2008 for example, DAL added 15 new international routes in the summer of 2009.[18]

Bankruptcy by Legacy Airlines

Numerous U.S. legacy carriers like Delta, US Airways, and United have been forced to declare bankruptcy due to price competition from discount airlines and overall decreased demand for air travel. While Continental’s relatively healthier finances allowed it to avoid bankruptcy, the company is now at a competitive disadvantage to others in the industry. The carriers that declared bankruptcy have cut costs and restructured under Chapter 11 protection. As a result, these airlines have emerged as stronger and more serious competitors, more capable to discount prices because of their lower costs.[19].


Continental's closest competitors are legacy carriers like United Airlines (UAUA), American Airlines (AMR), and Delta Air Lines Inc. (DAL) but also includes low-cost carriers like Southwest Airlines Company (LUV). Because of rising operating expenses and falling consumer demand, CAL has followed other airlines, implementing a $15 fee for the first piece of checked baggage and $25 for a second bag.[20]

AirTran Holdings (AAI): AirTran Holdings (Nasdaq:AAI) is one of America’s largest low-fare passenger airlines. The airline has managed to achieve low operating costs despite relying on a hub-and-spoke system, in which most of its flights originate and terminate at its hub in Atlanta, Georgia. Given AirTran's continued reliance on the hub and spoke system, airline management has cited other operational factors as cause for the airline having a cost structure that is among the lowest in the industry.[21]

American Airlines (AMR): AMR is the parent company of American Airlines, the second largest airline in the world based on available seat miles and revenue passenger miles On an average day, American Airlines flies approximately 3,400 flights between 250 countries. The company recorded a net loss of $1.5 billion in 2009 compared to a net loss of $2.1 billion in 2008. In 2009, AMR experienced very weak demand for air travel driven by the continuing severe downturn in the global economy. [22]

Southwest Airlines Company (LUV): Southwest Airlines is the largest domestic carrier by total passengers, carrying over 101.3 million passengers in 2009 on over 1.18 million flights. Southwest thrives on maintaining low operating expenses, primarily through its extensive fuel hedging, which saved the company an estimated $1.1 billion in fuel costs in 2008. Because of its low costs, Southwest was able to remain profitable for 35 consecutive years, a feat unmatched in commercial aviation history. However, the percentage of fuel costs the company has hedged declines precipitously beyond 2009, and the drop in fuel prices caused by the global economic crisis renders Southwest's key advantage - its low fuel costs in comparison to its competitors - much less valuable.[23]

Delta Air Lines Inc. (DAL): Delta Air Lines is the 2nd largest passenger airline in the world by available seat miles. In recent years, the company has faced financial difficulties due to price competition from discount airlines like JetBlue and Southwest. This has limited Delta's ability to raise prices to their natural supply/demand and cost reflective levels. As a result, Delta was forced into bankruptcy in September of 2005. Since exiting bankruptcy on April 30, 2007, the company has followed a revised operating strategy calling for a network shift towards more profitable international routings. [24]

JetBlue Airways (JBLU): JetBlue Airways is the 8th largest airline in the U.S. by revenue passenger miles. JetBlue differentiates itself from other airline travel companies with its low fares, made possible by low distribution and operating costs - largely due to the fact that it has the youngest fleet in all domestic airlines. JetBlue Airways specializes in cheap point-to-point flights with high levels of customer service to 52 destinations in 19 states, Puerto Rico, Mexico, and the Carribean.[25]

United Airlines (UAUA): With hubs in Los Angeles, San Francisco, Denver, Chicago and Washington D.C., United operates approximately 3,300 flights per day to over 230 destinations domestically and internationally. In 2009, United Airlines was the first in on-time performance for scheduled domestic flights, with 81% of all domestic flights arriving approximately on time. As of December 31, 2009, United Airlines has a 13.7% market share. As a result of high operating expenses and declining consumer demand for travel, United has significantly reduced its capacity or Available Seat Miles (ASM) recently. UAUA announced in April 2010 that it is acquiring Continental Airlines.[26]

US Airways Group (LCC) US Airways is a major domestic air carrier, which as of April 2008 operates 3,800 flights to 230 destinations across the U.S., Canada, the Caribbean, Latin America and Europe. The company’s finances suffered considerably due to reduced air travel following September 11th, forcing the airline to declare bankruptcy in 2002. However, unlike other carriers that improved and emerged stronger following Chapter 11 protection, US Airways never fully recovered. The combination of high fuel costs and tough labor negotiations forced the company into a merger with America West in 2005. While the US Airways name was maintained for brand purposes, the merger actually left America West executives and stockholders with more control over the new company.[27]

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  1. 1.0 1.1 Wikinvest SEC Files: CAL 2009 10-K, Item 1, Business
  2. 2.0 2.1 Wikinvest SEC Files: CAL 2009 10-K, Item 6
  3. CAL 2008 10-K, Item 7, "Aircraft Fuel"
  4. Wikinvest SEC Files: CAL 2009 10 -K, Item 7
  5. Reuters
  6. 6.0 6.1 6.2 CAL 2008 10-K, Item 1, "Overview"
  7. CAL 2007 10-K, Item 1, "Domestic Operations"
  8. CAL 2008 10-K, Item 2, "Flight Equipment"
  9. CAL 2007 10-K, Item 1, "Alliances"
  10. Wikinvest SEC Files: CAL 2009 10-K, Item 6, "Selected Operating Data"
  11. 11.00 11.01 11.02 11.03 11.04 11.05 11.06 11.07 11.08 11.09 11.10 11.11 11.12 UAL Investor Relations: 3rd Quarter 2010 Earnings
  12. 12.0 12.1 12.2 12.3 12.4 12.5 12.6 12.7 12.8 12.9 Continental Airlines Investor Relations: Second Quarter 2010
  13. 13.0 13.1 13.2 13.3 13.4 13.5 13.6 Continental Airlines Investor Relations: First Quarter 2010 Earnings
  14. 14.0 14.1 14.2 14.3 14.4 14.5 14.6 14.7 Wikinvest SEC Files: CAL 2009 10-K, Part 2, Item 7
  15. 15.0 15.1 15.2 MarketWatch: Airline Stocks Hammered by Latest Economic Data, 08-19-2010
  16. CAL 2008 10-K Overview
  17. CAL 2008 10-K Selected Financial Data
  18. "Delta to Offer Customers Service to More Unique International Destinations in 2009" 11/12/2008
  19. Continental 2006 Annual Report, Item 3, pg. 5
  21. Wikinvest Stock Summary: AirTran
  22. Wikinvest Stock Summary: AMR
  23. Wikinvest Stock Summary: LUV
  24. Wikinvest Stock Summary: DAL
  25. Wikinvest Stock Summary: JBLU
  26. Wikinvest Stock Summary: UAUA
  27. Wikinvest Stock Summary: LCC