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Continental Airlines (NYSE: CAL) is the world's fifth largest airline by Revenue Passenger Miles.[1] CAL serves over 241 destinations worldwide, offering 2,800 daily flights.[1] Continental's Cost per Available Seat Mile (CASM) of 12.44 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 2008, CAL's average price per gallon of fuel increased by 50% to $3.27 per gallon.[2] Furthermore, its minimal fuel hedges make Continental even more vulnerable to fuel prices as it has only 23% of its expected fuel consumption hedged for 2009.[3] However, CAL is also vulnerable to devalued hedging contracts because of declining oil prices, and 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 .[4] As of January 2009, all open contracts with Lehman Brothers had been settled.[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]
[edit] Business Overview
Continental Airlines is the world's fifth largest airline by Revenue Passenger Miles.[1] 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.[1] Continental provides service to 39 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 2008, Continental had an average fare of $232.26, up from $214.03 in 2007.[10]
CAL's key operating metrics are shown below:
| Year | 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 |
| 2008 | 66,692[11] | 115,511[11] | 80.2%[11] | $232.26[11] | 11.89[11] | 12.44[11] |
[edit] Financial Analysis
CAL earned $15.2 billion in revenue in 2008, an 7.1% increase from 2007.[2] Furthermore, CAL's 2008 revenue marks a 9.01% compounded annual growth rate (CAGR) in revenue since 2004 as the company has increased its capacity or Available Seat Miles (ASM) 21.1% during the same period.[2]
- In 2008, the company's increase in revenue was driven by 6.0% growth in Revenue per Available Seat Mile.[10]
- Despite an overall decline in Continental's capacity of 0.2%, Trans-Atlantic and Latin American flights grew by 8.9% and 2.5%, respectively, in 2008, compared to 4.9% domestic contraction.[13]
- Continental's operating expenses reached $15.555 billion in 2008, a 14.8% increase from 2007.[2]
- The increase in operating expenses was primarily attributed to a 46.2% and 15.6% increase in fuel costs and regional capacity purchase, net, respectively.[13]
- The increase in fuel costs was primarily attibuted to rising fuel costs as CAL's average cost per gallon of fuel jumped by 50% to $3.27 in 2008, up from $2.18 in 2007.[2]
- Because of higher operating expenses, CAL's Cost per Available Seat Mile (CASM) increased by 14.9% in 2008 to 12.44 cents.[2]
Overall, Continental had a net loss of $585 million in 2008 after earning $459 in net income in 2007.[2] However, Continental hedges much less fuel than its competitors, which makes the company vulnerable to volatile oil prices. For example, CAL hedged only 23% of its 2009 fuel needs[3], compared to American Airlines (AMR)'s 34% of fuel needs hedged.[14]
[edit] Business Segments
[edit] Mainline Operations (73% of revenue[15])
Continental Airlines distinguishes between its Mainline and Regional operations based on the number of seats in the plane. For a flight to be considered part of its Mainline operations, it must have more than 50 seats for a jet and more than 78 seats for a turboprop.[15] In 2008, the Mainline operation had 102,527 ASMs, Revenue per Available Seat Mile of 12.51 cents, and Cost per Available Seat Mile of 12.44 cents. Overall, there were 350 aircraft in the fleet and 48,682 passengers. Moreover, 50% of mainline operations consisted of international travel.[15]
[edit] Regional Operations (27% of revenue[15])
As previously mentioned, Continental considers flights with less than or equal to 50 seats for jets and less than or equal to 78 seats for turboprops to be a part of its Regional Operations. The airline does not directly operate this segment, but instead has agreements with ExpressJet, Chautauqua, CommutAir and Colgan to operate and manage these flights.[15] However, Continental still maintains significant control of these operations, and for example, it sets passenger fares and pays revenue-related expenses, such as terminal rent at airports.[15] The Regional Operation consists mostly of domestic flights with 103 destinations in the United States, whereas there are flight to 26 cities in Mexico, eight cities in Canada and one in the Caribbean. This resulted in 18,010 passengers, 12,984 ASM, and revenue of $18 million during 2008.[15]
[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.[16] 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.[17]
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.[18] This decrease in aircraft represents a 16% reduction in capacity.[18]
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.[14] However, Continental's hedges still managed to save the company about $31 million in fuel expenses during 2007.[13] Because of its minimal hedging, Continental expects to pay about $2.28 per gallon of fuel in 2008, a 4.6% increase from 2007.[13]
[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.[13] 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.[19]
[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.[20].
[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.[21] 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.[22]
| Airline | Fleet Size[21] | Annual Departures (2007) (Thousands)[21] | Available Seat Miles (Millions)[21] | Passengers Enplaned (Thousands)[21] | Fuel Cost per Gallon[23] | Cost per Available Seat Mile (CASM)[21] | 2007 Revenue (Millions)[21] | Operating Margin[21] | Net Income (Millions)[21] |
| AirTran Holdings (AAI) | 137 | 262 | 22,680 | 23,741 | $2.23 | $.0957[24] | $2,309 | 5.9% | $52 |
| American Airlines (AMR) | 655 | 769 | 169,856 | 98,165 | $2.12 | $.114[25] | $22,833 | 3.1% | $356 |
| Continental Airlines (CAL) | 365 | 411 | 99,061 | 48.974 | $2.18 | $.108[26] | $14,105 | 4.4% | $460 |
| Delta Air Lines Inc. (DAL) | 446 | 553 | 127,323 | 72,924 | $2.24 | $.119[27] | $19.239 | 5.2% | $579 |
| JetBlue Airways (JBLU) | 134 | 196 | 32,148 | 21,304 | $2.09 | $.0838[28] | $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[29] | $20,049 | 4.8% | $349 |
| US Airways Group (LCC) | 356 | 525 | 75,790 | 57,829 | $2.20 | $.113[30] | $12,055 | 4.3% | $350 |
[edit] Notes
- ↑ 1.0 1.1 1.2 1.3 1.4 1.5 CAL 2008 10-K, Item 1, "Overview"
- ↑ 2.00 2.01 2.02 2.03 2.04 2.05 2.06 2.07 2.08 2.09 2.10 CAL 2008 10-K, Item 6, "Selected Financial Data"
- ↑ 3.0 3.1 CAL 2008 10-K, Item 7, Outlook
- ↑ 4.0 4.1 CAL 2008 10-K, Item 7, "Aircraft Fuel"
- ↑ Reuters
- ↑ "BRIEF-Continental Airlines sees mainline capacity down in 2009" Forbes.com 12/11/2008
- ↑ CAL 2007 10-K, Item 1, "Domestic Operations"
- ↑ CAL 2008 10-K, Item 2, "Flight Equipment"
- ↑ CAL 2007 10-K, Item 1, "Alliances"
- ↑ 10.0 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 CAL 2008 10-K, Item 6, "Selected Operating Data"
- ↑ 11.0 11.1 11.2 11.3 11.4 11.5 CAL January 2009 8-K
- ↑ [http://www.sec.gov/Archives/edgar/data/319687/000031968709000008/f123108form10k.htm#selectedfinancialdata CAL 2008 10-K, Item 6, pg. 33
- ↑ 13.0 13.1 13.2 13.3 13.4 CAL 2008 10-K, Item 7
- ↑ 14.0 14.1 "FACTBOX-U.S. airlines' fuel hedging positions" Reuters.com 12/23/2008
- ↑ 15.0 15.1 15.2 15.3 15.4 15.5 15.6 2008 CAL 10-K, Item 6
- ↑ "OPEC drops crude oil prices again" Phoenix Business Journal 12/19/2008
- ↑ "Continental Airlines posts Q3 loss on fuel costs" USA Today 10/16/2008
- ↑ 18.0 18.1 "Continental becomes latest U.S. airline to cut service" International Herald Tribune 6/5/2008
- ↑ "Delta to Offer Customers Service to More Unique International Destinations in 2009" Delta.com 11/12/2008
- ↑ Continental 2006 Annual Report, Item 3, pg. 5
- ↑ 21.0 21.1 21.2 21.3 21.4 21.5 21.6 21.7 21.8 Air Transport Association 2008 Economic Report Pg. 23
- ↑ Continental.com
- ↑ Wikinvest Fuel Cost per Gallon Page
- ↑ AAI Wikinvest Page
- ↑ AMR Wikinvest Page
- ↑ CAL Wikinvest Page
- ↑ DAL Wikinvest Page
- ↑ JBLU Wikinvest Page
- ↑ UAUA Wikinvest Page
- ↑ LCC Wikinvest Page
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