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Continental Airlines Releases Second Quarter

Continental Airlines today reported a second quarter net loss of $17 million ($0.26 loss per share), which included a special charge of $19 million after taxes ($30 million before taxes) due to the retirement of leased MD-80 aircraft.Excluding the aircraft retirement charge, Continental achieved a net profit of
$2 million ($0.03 earnings per share) for the quarter, which compares favorably to the First Call mean estimate of $0.09 loss per share. 
A weak domestic fare environment caused in large part by the growth of low cost competitors and record high fuel prices continue to hurt the company’s financial performance.  The price of West Texas Intermediate crude oil hit an all-time high of $42.33 per barrel on June 1, 2004, and continues at over $40 per barrel.
“These results remain disappointing in a year where we hoped to break even,” said Gordon Bethune, Continental’s chairman and chief executive officer.  “Our efforts to
return to profitability were overwhelmed by the continuing soft domestic yields, a record high cost of fuel, and a $265 million burden of taxes and fees paid to the government over the last three months.”
Second quarter passenger revenue improved 15.1 percent to $2.3 billion versus the same period in 2003.  Mainline revenue passenger miles increased 14.7 percent over the second quarter 2003 on a capacity increase of 12.4 percent, resulting in a mainline load factor of 78.1 percent, up 1.6 points year-over-year.  Mainline capacity has now returned to the levels of the second quarter of 2000.
Due to intense competition with low cost carriers, mainline yields continue to be weak, decreasing 1.6 percent year-over-year.  Industry fare discounting and record high fuel prices drove Continental’s consolidated breakeven load factor up to 78.7 percent.
Revenue passenger miles for regional operations were 30.9 percent higher on a capacity increase of 25.6 percent versus the same period in 2003, driving regional load factor up 3.0 points to 73.2 percent. 
Despite overall weakness in domestic yields, Continental continued to maintain a domestic length-of-haul adjusted yield and revenue per available seat mile (RASM) premium to the industry. 

Beginning this quarter, Continental will supplementally disclose in its financial statements all taxes and fees remitted to various governmental entities that are charged on passenger tickets.  For the first six months of 2004, those taxes and fees totaled $509 million.  In the current competitive environment, substantially all of these taxes and fees are absorbed by Continental.  The Air Transport Association estimates that the total tax and fee burden borne by the U.S. airline industry will exceed $14 billion in 2004, the same period for which they expect industry losses to be approximately $3 billion.
Abnormally severe weather throughout the Northeast, Southeast, Gulf of Mexico and Great Lakes regions posed significant operational challenges for the entire industry during the quarter.  Despite bad weather, Continental had few flight cancellations and maintained a systemwide mainline completion factor of 99.7 percent.  Continental’s on-time performance for the quarter, as reported to the Department of Transportation, was 74.3 percent, a notable accomplishment given the weather and Air Traffic Control delays.
“Despite 52 days of severe thunderstorms affecting at least one of our hub cities of Houston, New York and Cleveland, we cancelled only about one-half of one percent of the almost 100,000 flights we flew this quarter,” said Larry Kellner, Continental’s president and chief operating officer.  “Our co-workers did an outstanding job of serving our customers and capturing revenue in spite of Mother Nature’s obstacles.”
  Continental won top honors in the OAG Airline of the Year Awards 2004.  Continental was the first North American airline to win “Airline of the Year,” in addition to “Best Executive/Business Class” and “Best Airline Based in North America.”
More than 10 million travelers of 92 different nationalities collectively ranked Continental Airlines No. 1 in the Best Airline - North America category and No. 2 in the Best Airline - Transatlantic category in a survey commissioned by Skytrax Research of London, U.K.  The survey was conducted between June 2003 and March 2004. 
Continental began offering free, high-speed wireless Internet in all of its domestic Presidents Clubs, except at Chicago where the company shares a club with Northwest Airlines.  Continental is on target to complete wireless service at its international clubs by the end of the year.
Continental added several new international routes during the second quarter including flights between Newark Liberty International and Edinburgh, Scotland; Oslo, Norway; and Punta Cana, Dominican Republic.  The airline also added flights between Houston and Port of Spain, Trinidad; Roatan, Honduras; and Montego Bay, Jamaica.  The company added domestic service from Newark Liberty to Sacramento and Albuquerque.
Continental’s regional operations, marketed as Continental Express, began service between Houston and Puebla, Oaxaca, and Toluca, Mexico; and Tallahassee, Florida; from Mexico City to McAllen and San Antonio; and from Newark Liberty to St. John’s, Newfoundland.
Continental’s mainline cost per available seat mile (CASM) increased 8.7 percent (CASM decreased 6.5 percent excluding special items and holding fuel rate constant) in the second quarter compared to the same period last year, with the increase largely due to the security fee reimbursement of $176 million in the second quarter 2003 and record high fuel prices. 
“We continue to work on removing costs that our customers don’t value,” said Jeff Misner, Continental senior vice president and chief financial officer.  “While we are making good progress on our initiatives, it is clear that we have much more work to do to become profitable in this weak domestic fare environment.”
The $30 million special charge is for future obligations for rent and return conditions related to six leased MD-80 aircraft that were retired during the quarter.  The company’s 10 remaining MD-80 aircraft will be retired by January 2005.
In June, Continental filed an election with the IRS to preserve the company’s eligibility for deficit reduction contribution relief under the recently enacted Pension Funding Equity Act.  Under that legislation, Continental may reduce pension contributions otherwise due in 2004.  The company continues to evaluate its 2004 contribution options to fund the pension plan and expects to make a decision regarding
the funding by mid-September 2004.
During the second quarter, Continental took delivery of one Boeing 757-300 and three Boeing 737-800s, and expects to take delivery of five additional Boeing 737-800s over the remaining six months of 2004. 
The airline ended the second quarter with a record $1.9 billion in cash and short-term investments, of which $177 million is restricted.