• Article
• Discussion
• Edit
• History
• Bookmark

Continental Airlines (NYSE: CAL) is the world's fifth largest airline by Revenue Passenger Miles.^[1] CAL serves over 260 destinations worldwide, offering 2,900 daily flights.^[1] Continental's Cost per Available Seat Mile (CASM) of 10.8 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. In 2007, CAL's average price per gallon of fuel increased by 6% to $2.18 per gallon.^[2] Furthermore, its minimal fuel hedges make Continental even more vulnerable to fuel prices as it expects its price per gallon of fuel to increase to $2.28 in 2008.^[3] However, CAL is also vulnerable to devalued hedging contracts because of declining oil prices- the company posted a $63 million loss because of devalued hedging contracts in Q3 2008.^[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] Furthermore, CAL expects its capacity to decrease an additional 4%-6% in 2009 because of slumping consumer demand.^[6]

Contents 1 Business Overview 1.1 Financial Analysis 2 Trends and Forces 2.1 Volatile Oil Prices Hurt Profitability 2.2 Increased Competition on International Routings 2.3 Bankruptcy by Legacy Airlines 3 Competitors 4 Notes

[edit] Business Overview

Continental Airlines is the world's fifth largest airline by Revenue Passenger Miles.^[1] CAL operates throught the hub and spoke system, with major hubs in Newark, Houston, and Cleveland.^[7] Continental operates a fleet of 628 aircraft^[8], offering 2,900 daily departures to over 260 destinations worldwide.^[1] Continental provides service to 41 cities in Mexico and Central America, more destinations than any other U.S. airline.^[1] In addition to its own flights, CAL also earns revenue through it code-sharing alliances, particularly its SkyTeam Alliance with airlines like Air France-KLM (AFLYY) and Delta Air Lines Inc. (DAL).^[9] In 2007, Continental had an average fare of $214.03 in 2007.^[10]

CAL's key operating metrics are shown below:

Year	Revenue Passengers (Thousands)[10]	Available Seat Miles (ASM) (Seat Capacity x Miles Flown) (Millions)[10]	Load Factor (% of aircraft capacity that is utilized)[10]	Average Fare[10]	Revenue per Available Seat Mile (Cents)[10]	Cost per Available Seat Mile (CASM) (Cents)[10]
2005	61,015	101,620	78.9%	$188.67	10.07	10.22
2006	67,119	110.918	80.7%	$201.78	10.83	10.56
2007	68,930	115,738	81.4%	$214.03	11.23	10.83

[edit] Financial Analysis

CAL earned $14.2 billion in revenue in 2007, an 8.4% increase from 2006.^[2] Furthermore, CAL's 2007 revenue marks an approximate 58% growth in revenue since 2003 as the company has increased its capacity or Available Seat Miles (ASM) 33.3% during the same period.^[2]

• In 2007, the company's increase in revenue was driven by a 4.3% increase in ASMs and a 3.8% growth in Revenue per Available Seat Mile.^[10]
• Much of Continental's capacity growth came from its international flights, primarily its Trans-Atlantic service, which grew by 11.9% in 2007, compared to 4.5% domestic growth.^[3]
• Continental's operating expenses reached $13.5 billion in 2007, a 7% increase from 2006.^[2]
  • The increase in operating expenses was primarily attributed to a 10.5% and 13.5% increase in fuel costs and maintenance expenses each respectively.^[3]
  • The increase in fuel costs was primarily attibuted to rising fuel costs as CAL's average cost per gallon of fuel jumped to $2.18 in 2007, up from $2.06 in 2006.^[2]
• Because of higher operating expenses, CAL's Cost per Available Seat Mile (CASM) increased by 2.6% in 2007 to 10.83 cents.^[2]

Overall, Continental operated at a 4.8% operating margin and earned $459 million in net income in 2007, up 34% from 2006.^[2] However, Continental hedges much less fuel than its competitors, which makes the company vulnerable to volatile oil prices. For example, CAL hedged only 22% of its 2009 fuel needs^[11], compared to American Airlines (AMR)'s 34% of fuel needs hedged.^[11] As a result, the company expects its average cost per gallon of fuel to increase to $2.28 during 2008.^[3]

[edit] Trends and Forces

[edit] Volatile Oil Prices Hurt Profitability

Although CAL hedges less of its fuel than competitors, Continental is still vulnerable to devalued hedging contracts as a result of declining oil prices. In 2008 after oil prices had climbed to about $150/barrel in July, Continental and many other airlines entered into hedging contracts at prices well over $100/barrel. However, oil prices have since plummeted, sliding to about $40/barrel in December 2008.^[12] Because of declining oil prices, CAL has been hurt by devalued hedging contracts- for example, in Q3 2008 CAL posted a $63 million fuel-hedging loss because of lower oil prices.^[4]

Because of higher fuel expenses, CAL cut capacity and jobs in 2008. Continental retired 67 aircraft and laid-off 3,000 employees in 2008 to reduce its operating expenses and because of declining consumer demand for travel.^[13] This decrease in aircraft represents a 16% reduction in capacity.^[13]

Fuel expenses represent the largest operating expense for airlines . In 2007 for example, fuel expenses represented 24.8% of CAL's overall operating expenses, a slight increase from 24% of operating expenses a year earlier.^[10] During 2007, CAL's average price per gallon of fuel increased 6%, reaching $2.18.^[2] Furthermore, CAL's 2007 price of fuel marks a 140% increase from $.91 per gallon in 2003.^[2] Because of higher fuel prices, Continental's Cost per Available Seat Mile increased by about 2.6% in 2007, driving a 7% growth in operating expenses.^[10] Unlike many other airlines however, Continental hedges much less of its annual fuel needs, hedging only 22% of its projected fuel needs for 2009.^[11] However, Continental's hedges still managed to save the company about $31 million in fuel expenses during 2007.^[3] Because of its minimal hedging, Continental expects to pay about $2.28 per gallon of fuel in 2008, a 4.6% increase from 2007.^[3]

[edit] Increased Competition on International Routings

Continental has long been one of the most internationally oriented U.S. carriers. In 2007 for example, 48% of the company’s routings were to international destinations^[1] These high revenue flights have helped Continental weather decreased domestic demand- in 2007, CAL's revenue from Trans-Atlantic flights grew by 23.6% compared to a 5.9% increase from domestic flights.^[3] 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 announced plans to add 15 new international routes in the summer of 2009.^[14]

[edit] 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.^[15].

[edit] Competitors

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). CAL's Cost per Available Seat Mile of 10.8 cents is near the lowest in the airline industry, and are the lowest of any legacy carrier.^[16] 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.^[17]

Airline	Fleet Size[16]	Annual Departures (2007) (Thousands)[16]	Available Seat Miles (Millions)[16]	Passengers Enplaned (Thousands)[16]	Fuel Cost per Gallon[18]	Cost per Available Seat Mile (CASM)[16]	2007 Revenue (Millions)[16]	Operating Margin[16]	Net Income (Millions)[16]
AirTran Holdings (AAI)	137	262	22,680	23,741	$2.23	$.0957[19]	$2,309	5.9%	$52
American Airlines (AMR)	655	769	169,856	98,165	$2.12	$.114[20]	$22,833	3.1%	$356
Continental Airlines (CAL)	365	411	99,061	48.974	$2.18	$.108[21]	$14,105	4.4%	$460
Delta Air Lines Inc. (DAL)	446	553	127,323	72,924	$2.24	$.119[22]	$19.239	5.2%	$579
JetBlue Airways (JBLU)	134	196	32,148	21,304	$2.09	$.0838[23]	$2,843	6.0%	$18
Southwest Airlines Company (LUV)	520	1,162	99,636	101,910	$1.70	$.091[2]	$9,861	8%	$645
United Airlines (UAUA)	460	551	141,838	68,362	$2.18	$.135[24]	$20,049	4.8%	$349
US Airways Group (LCC)	356	525	75,790	57,829	$2.20	$.113[25]	$12,055	4.3%	$350

[edit] Notes

1. ↑ ^{1.0 1.1 1.2 1.3 1.4 1.5} CAL 2007 10-K, Item 1, "Overview"
2. ↑ ^{2.00 2.01 2.02 2.03 2.04 2.05 2.06 2.07 2.08 2.09 2.10 2.11} CAL 2007 10-K, Item 6, "Selected Financial Data"
3. ↑ ^{3.0 3.1 3.2 3.3 3.4 3.5 3.6} CAL 2007 10-K, Item 7
4. ↑ ^{4.0 4.1} "Continental Airlines posts Q3 loss on fuel costs" USA Today 10/16/2008
5. ↑ Reuters
6. ↑ "BRIEF-Continental Airlines sees mainline capacity down in 2009" Forbes.com 12/11/2008
7. ↑ CAL 2007 10-K, Item 1, "Domestic Operations"
8. ↑ CAL 2007 10-K, Item 2, "Flight Equipment"
9. ↑ CAL 2007 10-K, Item 1, "Alliances"
10. ↑ ^{10.0 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9} CAL 2007 10-K, Item 6, "Selected Operating Data"
11. ↑ ^{11.0 11.1 11.2} "FACTBOX-U.S. airlines' fuel hedging positions" Reuters.com 12/23/2008
12. ↑ "OPEC drops crude oil prices again" Phoenix Business Journal 12/19/2008
13. ↑ ^{13.0 13.1} "Continental becomes latest U.S. airline to cut service" International Herald Tribune 6/5/2008
14. ↑ "Delta to Offer Customers Service to More Unique International Destinations in 2009" Delta.com 11/12/2008
15. ↑ Continental 2006 Annual Report, Item 3, pg. 5
16. ↑ ^{16.0 16.1 16.2 16.3 16.4 16.5 16.6 16.7 16.8} Air Transport Association 2008 Economic Report Pg. 23
17. ↑ Continental.com
18. ↑ Wikinvest Fuel Cost per Gallon Page
19. ↑ AAI Wikinvest Page
20. ↑ AMR Wikinvest Page
21. ↑ CAL Wikinvest Page
22. ↑ DAL Wikinvest Page
23. ↑ JBLU Wikinvest Page
24. ↑ UAUA Wikinvest Page
25. ↑ LCC Wikinvest Page
26. ↑ ^{26.0 26.1 26.2} AMR 2007 10-K, Item 8, pg na
27. ↑ ^{27.0 27.1 27.2} AMR 2007 10-K, Item 7, pg na
28. ↑ ^{28.0 28.1} CAL 2007 10-K, Item 7, pg _
29. ↑ ^{29.0 29.1 29.2 29.3} CAL 2007 10-K, Item 6, pg _
30. ↑ ^{30.0 30.1} DAL 2007 10-K, Item 8, pg. F-6
31. ↑ ^{31.0 31.1 31.2} DAL 2007 10-K, Item 6, pg. 24
32. ↑ ^{32.0 32.1} JBLU,2007 10-k, Item 8, pg 46
33. ↑ JBLU 2007 10-K, Item 8, pg. 46
34. ↑ ^{34.0 34.1 34.2} JBLU,2007 10-k, Item 6, pg 26
35. ↑ ^{35.0 35.1 35.2} UAUA, 2007 10-K, Item-8, pg-74
36. ↑ ^{36.0 36.1 36.2} UAUA, 2007 10-K, Item-6, pg-30