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Executives

Nene Foxhall - Senior Vice President of Communications and Public Affairs

Lawrence W. Kellner - Chairman of the Board, Chief Executive Officer

Jeffery A. Smisek - President, Chief Operating Officer, Director

Zane Rowe - Chief Financial Officer, Executive Vice President

James E. Compton - Executive Vice President - Marketing

Mark J. Moran - Executive Vice President - Operations

Gerald Laderman - Senior Vice President of Finance and Treasurer

DeAnne Gabel- Director of Investor Relations

Analysts

Jamie Baker - JP Morgan

Gary Chase - Barclays Capital

William Greene - Morgan Stanley

Hunter Keay - Stifel Nicolaus

Mike Linenberg - Bank of America

Bob McAdoo - Avondale Partners

Dan McKenzie - Next Generation Equity Research

Media

Ted Reed - thestreet.com

Shannon Buggs - The Houston Chronicle

Allison Grant

Richard Newman - The Record

Jake Hahnville - Promedia Travel.

Colleen O’Neil - WTAM

Continental Airlines, Inc. (CAL) Q2 2009 Earnings Call July 21, 2009 10:30 AM ET

Operator

Good morning ladies and gentlemen and welcome to the Continental Airlines Second Quarter 2009 Financial Results Conference Call. (Operator Instructions) As a reminder this conference call is being Webcast and recorded Tuesday July 21, 2009. I would now like to turn the call over to Nene Foxhall, Senior Vice President of Communications and Public Affairs. Miss Foxhall, you may begin.

Nene Foxhall

Thank you, Anthony. Good morning everyone. Joining us here in Houston are Continental’s Chairman and Chief Executive Officer, Larry Kellner; President and Chief Operating Officer, Jeff Smisek; Executive Vice President and Chief Financial Officer, Zane Rowe; Executive Vice President Marketing, Jim Compton; Executive Vice President Operations, Mark Moran; and Senior Vice President Finance and Treasurer, Jerry Laderman, to discuss Continental’s second quarter 2009 financial results.

Larry will begin with some overview comments, followed by Jeff’s review of our capacity and revenue results. Zane will follow with a discussion of Continental’s cost structure and balance sheet. At that point we will open the call for questions. We plan 20 minutes for the executive comments and then 25 minutes for analysts’ questions. At the conclusion of the analysts’ questions, we will begin a 15-minute question-and-answer session for the media. We would appreciate it if each of you would limit your questions to one with one follow up.

With that, I will turn it over to Deanne.

DeAnne

Thanks, Nene. Earlier today we issued an update for investors presenting information relating to our financial and operational outlook for the third quarter and full year 2009 and other information. This investor update was included in the filing with the SEC.

Today we will be discussing some non-GAAP financial measures such as net loss excluding special items. Please note that reconciliation of the GAAP to non-GAAP financial measures, as well as the Investor Update can be found on our website at continental.com under the Investor Relations section. In addition, our discussions today may contain forward-looking statements that are not limited to historical fact, but reflect the Company’s current beliefs, expectations, or intentions, regarding future events. All forward-looking statements involve risks and uncertainties that could cause actual results to differ materially. For examples of such risks and uncertainties please see the risk factors set forth in the Company’s 2008 10-K and its other securities filings.

With that, I will turn the call over to Larry.

Larry Kellner

Thank you, Nene and DeAnne. Good morning and thanks for joining us.

I want to start by thanking all of my co-workers for the great job they do every day. The summer load factors have been very high and I know this adds to the daily challenge of running a smooth operation. I appreciate the entire team’s efforts to deliver clean, safe, and reliable air transportation while providing excellent customer service and a high quality product.

During the quarter we maintained our excellent completion record by achieving a system wide segment completion factor of 99.6% for the quarter. And, we finished first in the DOT on-time monthly performance among the major network carriers in both May and June, earning my co-workers $9 million in cash incentives during the quarter.

For the second quarter, Continental reported a net loss of $213 million, or a loss of $1.72 per diluted share. Excluding $44 million of special charges, our net loss was $169 million, or a loss per share of $1.36.

As Jeff will share in more detail in a moment, these results were adversely affected by significant declines in the number of high yield passengers, as many business travelers curtailed travel or purchased lower yield economy tickets. And unfortunately, while leisure travel remains strong, it was at very low yields.

While there are indications that our RASM declines have bottomed out, it is at significantly reduced levels. We have benefited from lower fuel prices, but not enough to offset the decline in revenue. We have taken many steps this year to right size the business to better match the demand environment and to maximize revenue and reduce costs. The most difficult of these actions is the elimination of approximately 1,700 positions that we announced today. We will make every effort to minimize the number of involuntary furloughs and reductions in force.

For me, this was a very tough, but necessary decision. Our future depends on us doing the difficult things required to remain competitive in the market place.

In addition to right sizing the business and running an efficient operation, we are focused on maintaining our long-term strategic position. This includes launching service to strategic locations such as Shanghai, and being in a global alliance that is the best fit for us, and we are well on our way to doing just that. We were pleased to receive approval from the DOT of our Star Alliance application earlier this month. This will better position us to continue as an effective global competitor.

Finally, before I turn the call over to Jeff and Zane, as we announced last week, at the end of the year I will be returning to private equity and Jeff will be taking the reigns as Chairman and CEO. Jeff is the right choice to successfully lead Continental into the future. He is a strong and effective leader. He has been my partner during my time as CEO and has been key part of every major decision that has taken place at Continental during his more than 14 years here.

With that, I will turn the call over to Jeff and Zane to discuss this quarter’s operational revenue and cost performance details.

Jeff Smisek

Thanks Larry. I join Larry and the rest of the management team in thanking our co-workers for a job well done. We have been running a very high load factor, which put additional stress on the system and our team has done an impressive job running a good operation and delivering great service. The revenue environment remains challenging. For the second quarter main line RASM was down 16.9% and regional RASM was down 20.5%, coupled with our consolidated capacity decrease during the quarter of 7.8% year-over-year. This resulted in passenger revenue being down 24.2% year-over-year. During the quarter we continue to see industry fare sales designed to stimulate traffic, which they did, resulting in very high load factors. Unfortunately, the high load factors were generated by low fares and thus weak yields.

The year-over-year drop in business revenue in June was slightly better than what we saw in April and May, although it is still significantly down, with business revenue down 35% year-over-year versus down 38% year-over-year in both April and May. The number of business passengers was down 27% year-over-year in June versus down 36% in April and down 34% in May. So, we do think the drop off in business travel has stabilized, although clearly it is stabilizing at a low level. Slides showing monthly changes year-to-date through June are on our website on the Investor Relations section.

We expect to see continued pressure on yields until the industry capacity is appropriately resized to meet the reduced demand, or until demand itself picks up again. Although the economic environment doesn’t appear to be improving yet, it also doesn’t appear to be getting much worse, and there is some good news in that we are seeing international carriers cutting capacity, which didn’t occur at significant levels when the industry was going through its fuel price crisis last year.

Second quarter main line yields decreased 18.3% year-over-year and load factor increased 1 ½ points. Regional yields declines accounted for substantially all of the year-over-year RASM declines of 20.5% year-over-year.

We estimate that the H1N1 flu reduced second quarter consolidated passenger revenue by approximately $50 million. We are closely monitoring the impact of H1N1 in regions currently experiencing their winter season, such as South America, and in particular Argentina, where we have seen recent outbreaks. We will be responsive should we need to take temporary capacity adjustments in Argentina or other regions as the winter flu season sets in.

Now turning to the third quarter outlook, across all regions of the business we expect to see pricing pressure similar to what we saw in the second quarter. That is, we expect to see carriers heavily discounting leisure fares to back fill the lack of business traffic with leisure traffic. There have been a lot of industry fare sales so far this summer and those fare sales have been at a steep discount.

Some carriers have already announced deeply discounted fare sales for targeted periods of weakness in the fall in an attempt to fill seats that have historically been filled with business traffic. Unless we see a rebound in business traffic, we expect that this trend will continue.

We still have a week and a half left in the month and things could change, but based on the data thus far, we are currently estimating consolidated July RASM will be down 16% to 18% and mainline July RASM will be down 17% to 19% year-over-year.

We don’t know when a recovery will come and there is a lot of uncertainty about the economic environment, however from the RASM degradation perspective, we do think we have hit the bottom. But, we don’t know how long we will bounce along the bottom and what the rate of decline that will be. Our success is highly correlated with the return of business travel and we haven’t seen signs of that yet. So, while things appear to have stabilized, they have stabilized at low levels. We are committed to right sizing our business to match the demand environment. Today we announced the very difficult step of reducing our workforce as part of that right sizing. That tough decision is just one of the many steps we are taking to help mitigate the down side of a continued weak revenue environment. This was a particularly painful decision for us to make, given the tough employment environment out there and we deeply regret that it was necessary.

In addition to identifying several new cost savings initiatives, we are rolling out some new revenue generating measures. We expect the aggregate annual run rate of these cost and revenue initiatives, once fully implemented in 2010, will be over $100 million. Some of these initiatives, such as an increase checked bag fee and an increased reservation booking service fee, are being implemented as of today, while others are targeted for implementation this fall. Legally, we can’t give you more details on the future items, but we will announce them as we roll them out. The fact is customer preferences for ala carte choice and thus ala carte pricing are growing. As a result, we are changing to match those preferences while preserving our core brand. We expect to see our ancillary revenues grow over the next year.

We have continued to adjust our capacity plans for 2009. We started out the year planning for mainline capacity to be down between 3.5% and 4.5%, but as the economic environment weakened, we responded by pulling additional capacity and now expect that our mainline capacity for the full year will be down 5.6% year-over-year with mainline domestic capacity down 7.7% and mainline international capacity down 3.5%. We expect our regional capacity will be down 7.2% year-over-year.

Most of our international reduction has been in the Trans-Atlantic region. For the month of June our Trans-Atlantic capacity was down 11.4% year-over-year and in October it will be down nearly 16% year-over-year. While the aggregate Trans-Atlantic capacity of our US network peers was only down about 1.5% year-over-year for the month of June, some US carriers have said they expect to pull additional capacity this fall. In addition, the International carriers are participating in Trans-Atlantic reduction as well, which should help the Trans-Atlantic revenue picture. For the full year 2009, we are expecting our Trans-Atlantic capacities to be down 9.1% year-over-year.

Although as of now we believe we have responded appropriately with our capacity reductions, given the level of demand, we are monitoring the operating environment closely and will make further adjustments as necessary.

We are in the peak summer travel season now and while the revenue environment appears to have stabilized, it has done so at low levels on peak summer traffic. We really don’t have visibility yet as to how business and leisure traffic will hold up in the fall. When business traffic does return, it could return quickly, and we are well positioned to take full advantage of that opportunity.

I am proud to have been chosen to succeed Larry as Chairman and CEO next year. I am committed to maintaining Continental’s working together culture and its award winning product and service, while responding appropriately and timely to changes in the market place. I want all of you to know that I am committed to returning Continental to profitability and sustaining that profitability.

With that, I will turn the call over to Zane Rowe.

Zane Rowe

Thanks, Jeff. I wanted to begin by joining Larry and Jeff in thanking the entire Continental team. It remains a very tough economic environment and our team is doing a good job on staying focused and running and efficient airline.

Controlling costs has been a long-term focus here at Continental and it is extremely important that we continue to do so as we adjust capacity to manage through this weak economic environment. I am pleased at what we have accomplished, but recognized the need to remain vigilant in seeking ways to operate more efficiently and at a lower cost.

Second quarter mainline CASM holding fuel rate constants and excluding special items was up 2.8% year-over-year on a mainline capacity decrease of 7.3%. Much of the year-over-year increase in the second quarter was driven by higher wages, salaries, and benefits, primarily the result of increased pension expense and the higher wage rate. For the full year, excluding special items and holding fuel rate constant, we expect both consolidated and mainline CASM to be up 1.5% to 2% year-over-year.

With regard to fuel, we continue to see volatile fuel prices. Our current projection, it seems we will pay an average cost of $1.92 per gallon of jet fuel for the full year which equates to a year-over-year savings of over $2.7 billion in the fuel line. For the second quarter our average consolidated fuel price per gallon, including hedge impacts and fuel related taxes, was $2.07, nearly $1.40 lower than what we averaged for the same period last year for a savings of $762 million.

We estimate our third quarter consolidated fuel price, including taxes and fuel hedge impacts, will be about $1.91 per gallon. We believe our most efficient hedge is our fuel-efficient fleet and our focus on operational efficiencies. We continue to hedge a portion of our fuel needs to mitigate some of the volatility we have seen in the oil markets. A more comprehensive overview of our hedge position is detailed in the Investor Update.

Regarding our fleet financing activity and liquidity, during the second quarter we took delivery of two new Boeing 737-900ER aircraft. We took delivery of one aircraft last week and have six more scheduled for the remainder of the year. In June we successfully priced a $300 million EETC transaction in the public debt market. We were pleased with the execution of the offering and are happy that the capital markets have begun to show signs of life. The proceeds will be used to finance five new 737-900ER aircraft delivering this year and for general corporate purposes. In addition, last week we closed on a debt facility with a commercial bank to finance two new aircraft delivering this quarter, including the aircraft we took delivery of last week. As a result of this facility and the EETC, we have now completed the financing for all of our new aircraft this year, without the need to use any back-stock financing. While we do have back-stock financing available for all of next year’s aircraft, we will engage in our typical process of looking at various financing options for the 2010 delivery.

With respect to liquidity, we ended the second quarter with $2.77 billion of unrestricted cash and short-term investments. As a percentage of the last 12 months revenue, cash was 20% at the end of the quarter. We expect to end the third quarter with approximately $2.4 billion in unrestricted cash and short-term investments.

Now briefly turning to the balance sheet, our cash CapEx for the second quarter was $71 million and our current estimate for the full year is $336 million. In light of the current economic condition, we continue to closely monitor our capital spending and have scaled back some of our projects and deferred others to a later date. Year-to-date we have contributed $120 million to our defined benefit pension plan. We estimate our remaining minimum funding requirements for this year are approximately $30 million.

In conclusion, an unfortunate consequence of the current economic environment is the need to reduce capacity to match the weak demand. This necessitated making some tough decision so to right size our business as well as identifying further revenue enhancing and cost saving initiatives. We will focus on delivering on these initiatives as we have in the past, in order to help secure our future and remain competitively well positioned.

With that I will turn the call back over to Larry.

Larry Kellner

Thank you, Jeff and Zane.

The operating environment remains challenging, but the good news is that there are indications that the decline in revenue has stabilized. As Jeff and Zane mentioned, we are focused on maximizing revenue, running an efficient operation, and controlling costs.

We have many core strengths: great people, our globally balanced network, our fuel-efficient fleet, and a superb product, as well as great opportunities ahead as we transition to the Star Alliance. We will leverage these strengths to maintain our industry leading position and remain focused on achieving and sustaining profitability.

With that, I will turn the call back over to DeAnne to begin our Q&A.

DeAnne Gabel

Thank you, Larry, Jeff, and Zane. With that we will begin the question-and-answer session for the analysts followed by the question-and-answer session for the media. Anthony, if you could please review the Q&A process, we are ready to begin.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jamie Baker of JP Morgan.

Jamie Baker - JP Morgan

My first question is for either Jeff or Larry. Has Continental thought through any response it might make should any of your competitors ultimately turn to Washington for assistance, in the sense of a liquidity nature?

Jeff Smisek

I don’t know that that will occur, but should it occur we are really big believers in a level playing field and that is what we would focus on in that eventuality.

Jamie Baker - JP Morgan

That is helpful and I have a second follow up relating to One Pass. Do you think there is any more borrowing power within that relationship in the form of any further contract extension or forward mileage sale?

Larry Kellner

I think, as always, we will look across our business to see where we can generate additional cash. We tend to talk about it once we have done it, so we are always looking at other parts. We are very happy with the many relationships we have in One Pass, but I always think there are other opportunities, but we will talk about them as we are at a point where we have them.

Jamie Baker - JP Morgan

Okay, thanks.

Operator

Your next question comes from Gary Chase with Barclays Capital.

Gary Chase - Barclays Capital

Congratulations and good luck to both Larry and Jeff.

We are in a situation now where people are just hyper sensitive to this stuff, so Jeff, if I could, if you could just clarify what you mean by you think the RASM declines are bottoming out. Do you mean based on where you came in for June, is that on a quarterly basis? Are there going to be months where the comps are worse? I just think people are incredibly sensitive to what’s happening at the margin. I want to make sure I understand what you are trying to telegraph.

Jeff Smisek

Sure. I think the best way I would phrase it is right now it is clear we are living on the back of a great deal of leisure demand sparked by extremely low fares. As a result, with the very high load factors we are having, and strong bookings from leisure traffic, we are able to revenue manage the flights.

It is difficult for us to see, however, going into September post Labor Day when the kids are returning to school and leisure traffic traditionally falls off, what the business demand will be. I would characterize the stabilization as more of stabilization with respect to very current trends. That is June RASM versus the quarter, because in the quarter we had the positive event of Easter shifting into April this year which slightly distorted upwards the quarters RASM results.

Larry Kellner

I would just add on that you were seeing RASM drop off pretty quickly early in the year, especially as we went through like shifting Easter between March and April and we kind of adjusted for that. What we have seen is that flatten out. We are not saying the world’s getting better, but I think if you look at our business traffic slide you can also see that has kind of stabilized where it was year-over-year.

I think there are two questions. One is the Fall and where is business traffic, and two is not to get confused by fourth quarter comparisons, because clearly the comps get easier as you start to lap the troubles of a year ago. So, I think what we are seeing right now is some stability in the revenue environment versus what we saw earlier in the year was that it was falling off at a pretty sharp pace. We are not seeing it get worse and I think the other evidence of that is we are not constantly during the month knocking down our forecast to take more revenue out as the month comes on and future months come on. We have seen a little more stability in our ability to predict as well.

Gary Chase - Barclays Capital

Okay and one for Zane. On the $100 million that you are targeting, it feels to me like the headcount is going to explain the vast majority of that. Is that accurate and if not is there a lot more to go on the revenue side? So, you have announced what the cost side is going to be; the revenue initiative you have announced a few of them. Of the few that you have announced, the increased baggage fee and the booking fee, would that explain the bulk of the rest of that $100 million or are there significant new initiatives that we should expect?

Zane Rowe

I would say that there are a number of initiatives and each of the points that you mentioned are part of that. As Jeff mentioned earlier, we can’t talk about the revenue initiatives that we haven’t announced just yet, but it is a fairly balanced assortment of details within the $100. We have pretty much gone across the board once again and challenged every department in the Company with coming up with these savings. I think it is a fairly balanced group of revenue and cost saving initiatives.

Gary Chase - Barclays Capital

But does the $1,700 hedge out? Does that not get you the majority of the way?

Zane Rowe

That is included in the number, but not necessarily the bulk of the number.

Gary Chase - Barclays Capital

Okay, thanks.

Operator

Your next question comes from William Greene of Morgan Stanley.

William Greene - Morgan Stanley

If we look at the Star transition that is coming up, what are the milestones or target dates that we should watch for? Is there some sort of key cut over where there could be a challenge on the IT side and will there be any sort of revenue hiccups associated with this when you think about it?

Larry Kellner

On key dates with our final flight on October 24 we will leave SkyTeam. We will be in Star just as fast as we can be after that and think days, don’t think weeks or months. We will pick up partners as quickly as we can even before we get in Star. We just can’t do anything until we get out of SkyTeam to jointly market with any of the Star partners, or be involved with any of the Star partners. So, it won’t be seamless in the sense that we cut out of Sky Team on the 24th and go to Star on the 25th. It will be a couple of days in the transition.

I think that from an IT side there are always challenges, but a lot of that work is done and I feel confident about where we will be. Clearly sitting here today, we are always worried about revenue hiccups as you have IT issues and other things, but we have been focused on this. We have had a significant amount of lead time and I feel good about where we are to transition from SkyTeam to Star.

You do have the challenge that until after post the 24th we cannot market or book and meanwhile we won’t be marketing any flights in October or November or after the 24th in SkyTeam. So, you do have a period where you are taking bookings for November and December where you are not yet in Star, but yet you are not marketing SkyTeam carriers. Also, our alliance with codeshares with Delta and Northwest, some dropped off already. They all drop off, essentially, here at the end of July and so we do have a little revenue risk. I think we are managing that as effectively as we can.

William Greene - Morgan Stanley

Are any of the corporate contracts at risk when you transition?

Larry Kellner

We have got some joint contracts, but I think, again, we feel from where we are positioned we don’t feel that is a significant risk for us; a very small risk.

William Greene - Morgan Stanley

If we look at your capacity points, you have sort of altered them ask we have gone through the year. Can you just sort of talk a little bit about the triggers? Like what causes you to want to cut a little bit more? Is it simply a profit metric? Is it a cash flow metric? Also, what are going to be the things you will watch for when you start to think about when it is time to even add back?

Larry Kellner

A couple of things, one it’s more in the short term. It is much more of a cash metric than it is a profit metric, especially in markets where we thinned out individual days of week on the service where it is just clear that the revenue on that flight is not going to cover the cash expenses of that flight. That is the same approach we used in Mexico with the Swine flu. On a longer-term basis, clearly we do look at profitability and when we have made significant market changes, like getting out of Cologne, we’ve said look we just don’t think this market is going to be profitable on a long-term basis. And, we will look at adding back capacity. In a lot of cases we have gone from seven to six, or seven to five, we will add that capacity back where we think that capacity will cover cash.

William Greene - Morgan Stanley

Is your guess that airlines will be more likely to sort of jump the gun in hopes that things will get better, or will they wait to see if actually things are getting better before capacity comes back?

Larry Kellner

I would go back to our decision that was very tough for us, where we continue to have to reduce staffing here, or eliminate positions. We had held on for a long time hoping that clearly as we kept nicking away at our capacity plans, we were not making staffing adjustments. I think we have concluded that as you look out to the next year it is going to be pretty tough. You’d have to talk to other carriers for their view, but we had hoped we would see some stability sooner than we have seen it, but we are going to continue to take the appropriate actions to make sure that we are positioned for the future. They are tough, but I don’t see a lot of capacity being added back the next year. I think it will take awhile and I think looking at where the economy is we have just got to plan for that.

William Greene - Morgan Stanley

All right, thanks for the help.

Operator

Your next question comes from Hunter Keay of Stifel Nicolaus.

Hunter Keay - Stifel Nicolaus

My question is for Jim. I was wondering if you could maybe outline specifically how you think this move to Star is going to impact the operation at Newark? Pricing aside, I guess I am really more talking in terms of flow in connecting traffic. Do you expect to maybe pick up more connecting flights from international feed, or do you think this is going to be more reflective on the domestic network? What do you think are the main things from a network perspective to watch for at Newark?

Jim Compton

Obviously we are very excited about the transition to Star and the way we think about it, take specifically the ark that you are talking about, today as Delta is growing their New York presence some of that kind of activity has become redundant within SkyTeam. So for Star they don’t have that New York player. So we are very excited about the connectivity that we are going to be offering our Star partners to New York. As well as, by the way, the larger network that Star provides our customers around the world also.

Take that same logic into Houston, with our gateway into Latin America both Mexico, Central America and in the southern cone, again, Star doesn’t have a US player partner for connecting in from the US out of Europe, for instance, to Houston and the Latin America area. Again in SkyTeam has dealt against networks and Atlanta has grown that has also become somewhat redundant, but once again, that is from a network point of view, from a connectivity point of view it is just a so much more powerful network for us and it is a great win, win both for us and for our Star partners; so for our customers as well as the Star carriers in terms of opportunity that they don’t have today.

Hunter Keay - Stifel Nicolaus

Okay, great thanks, and a question for Jeff and of course Larry feel free to join in too. Jeff, what are the characteristics in a hypothetical airline that you would look for in assessing a potential merger partner and acquisition target? Maybe just more broadly, maybe outside the lines of just say network implications, what are the characteristics that you look for in terms of what would be a good fit for Continental?

Jeff Smisek

That is a pretty hypothetical question there Hunter. I think that the characteristics of any kind of partner for a merger or for an alliance are actually quite similar. You look for something that adds to your network, because we are in a network business. Ideally you look for a carrier that had costs that were similar to yours, so you wouldn’t have disparate cost differences. Ideally you would look for a carrier that had culture that was similar to our own culture, because we have something that is quite special here at Continental that we think brings enormous benefit to our customers and ultimately to our shareholders.

Clearly you look at the financing arrangements and the amount of debt on the balance sheet, all the things you would do in any transaction you would look at. But, network complimentarily would be helpful. There is a theory that you would want maximum overlap so that you are taking out capacity et cetera, but that is a little hard to get through the Department of Justice and this Department of Justice appears to be a tad more aggressive than that of the prior administration. Beyond that hypothetical I am not prepared to speak any more, because it is only a hypothetical.

Hunter Keay - Stifel Nicolaus

Of course, all right, great, thanks guys. I appreciate it.

Operator

Your next question comes from Mike Linenberg of Bank of America.

Mike Linenberg - Bank of America

I know you have answered several questions on Star. With respect to the four-way JV though, how should we look at when that should be up and running? Is that 2010, and I am talking about you with tons of United, Air Canada, is that something that will be up and running in early 2010, or is that going to take some time? Also, when should we anticipate seeing the benefits from that?

Larry Kellner

I think the key is we didn’t get our Justice Department approval until just a week and a half ago. So, last week we were able to have the first discussions about how we’d roll that out. As soon as we are ready to give you more detail we will. Again, I think we are always careful not to get ahead of ourselves here. We are excited about it. It has got a lot of benefit, but it is also a lot of work and so we’ve still got a lot of work to do yet to get that in place, both to agree on exactly how the JV will be structured. We have the framework for it, but we’ve got a lot of details to work out. Then you have all the implementation issues as well. So, I think we aren’t yet ready to project when we will be up and running with the JV, but we are excited to have our approval.

I want to thank everybody who worked so hard on that. All the congressional support we got and also the Department of Transportation for their efforts. We are very pleased with what they issued. But, again, it took awhile and so I think that puts us in a position where right now we are doing the hard work and hopefully by next quarters call we will have a little better handle on that.

Mike Linenberg - Bank of America

Okay fair enough. My second question is when I think about assets that you can ultimately pledge as collateral, if we think about the fact that Newark is now a capped airport. I realize that is on a temporary basis. Is there an opportunity down the road that those caps, whether they are temporary or become permanent, that down the road they may be viewed as slot’s that could be pledged as collateral for financing? Is there an opportunity there or is that just wishful thinking on my part?

Larry Kellner

I think that is hard to answer, because clearly if you look at history, once an airport became fully slot controlled on a long time basis, even some airports in the US those slots were finance able. Since these are temporary camps I really wouldn’t put them in that bucket, but I think what we need to see is, kind of, what is the long-term process. Clearly, we need to fix the air traffic control system in New York so we can get more traffic through there, because right now while our on time performance in May and June among the network majors was first, we still had huge issues in Newark. Newark has been consistently, of the major airports, at the bottom of the list.

So, I think our primary focus is to figure out how to fix the airport so it can handle more capacity. If we end up with slots on a long-term basis that is an issue we will address when we get there. Right now they are temporary and I think our number one goal is to get the ATC system.

Mike Linenberg - Bank of America

Okay, very good. Thank you.

Operator

Your next question comes from Bob McAdoo of Avondale Partners.

Bob McAdoo - Avondale Partners

You talked some about the Trans-Atlantic capacity being down this fall whatever. Are all those changes in the computers now, have they been for the last few weeks, or are there more changes to be announced in terms of to really get you to the numbers that you gave us today?

Jim Compton

All of those capacity reductions would be reflected in the GDSs also.

Bob McAdoo - Avondale Partners

Okay and then the 1,700 people that are coming out, are those tied to capacity changes, or are those kind of overhead changes that you are making?

Jim Compton

It is a mix of both. There are some management and clerical, there is also across very ford groups in addition. We have had some very difficult decisions to make throughout the year. We have seen a reduction in call volumes and we have made reductions already in our reservation staffing. We have also out [culled] some from our flight attendants. So, some of it is flight volume driven, but there is also a piece of it that is overhead driven. In fact a very important piece of it is overhead driven and we have got to continue to work all fronts here.

Bob McAdoo - Avondale Partners

Okay and then educate me a little bit on the anti-trust immunity. We all talk about what it allows you to do internationally. Do you have anti-trust immunity in terms of talking about the domestic issues, domestic schedules, and things like that with United or is this simply limited to international?

Jim Compton

Oh we wish. No, no, the anti-trust approval only applies to our international operations and to the domestic portion of international journeys. But we absolutely do not have anti-trust immunity with respect to domestic operations and we are keenly aware of that, and we will of course be very careful to make sure that we don’t go astray.

Bob McAdoo - Avondale Partners

So in terms of the value of some kind of merger with United or somebody, the fact that you have got anti-trust immunity from the domestic side doesn’t reduce the beauty of being able to do something with the merger is what you are saying.

Jim Compton

Well it doesn’t apply to domestic operation that is correct.

Bob McAdoo - Avondale Partners

I understand. Okay, thanks.

Operator

Your next question comes from Dan McKenzie of Next Generation Equity Research.

Dan McKenzie - Next Generation Equity Research

Jeff, I believe you mentioned in your remarks that you expect to see some pressure on yields until capacity is right sized or demand comes back. I am wondering what you believe happens first. If capacity needs to be right sized, I am just wondering what kind of right sizing you are thinking might need to potentially take place.

Jeff Smisek

Dan, that is hard to know. I will tell you that we are seeing some good signs. Particularly right now the international operations have been pretty adversely affected. Trans-Atlantic, Pacific, and it has bled into Latin America as well. Last year the international carriers didn’t really participate much in the fuel crisis downsizing. The US carriers, I think, reacted more aggressively. Now we are seeing the global aspect of the recession and we are seeing carriers across the globe cut capacity in many of our international markets and that is a very positive thing.

I think people will cut capacity to match the demand and ultimately we all need higher yields than we are getting because of the yields that we are getting, the demand we are getting, most all carriers are losing money and clearly that is not sustainable.

The way I would best characterize it is we will know it when we see it when it comes to the correct amount of capacity coming out, given the level of demand. Demand is moving. There are some positive signs in the economy that I read about every day. I keep waiting for more and more green chutes and I have no doubt that we will ultimately climb out of the recession and demand will increase and that will be beneficial, but I think all carriers are facing very similar pressures and they are reacting in similar ways, as you would expect, to meet those pressures.

Larry Kellner

I would just add in that while we have known for a couple of months that the sale fare environment was very low, we have seen more demand at that level than we expected. I think the positive is we are at a point where we are running very high load factors here at the end of June and in July and I think that is a sign that the demand is clearly there at the sale fare level we are at and it is more demand than we expected at that level. Our revenue management systems have kicked in.

I think the big question is we saw this high correlation to schools getting out and that demand level kicking in and so where is demand going to be in the fall? The real big question for us is when does business traffic come back and at what volume? So while it stabilized and was a little better in June year-over-year, we have still got a long ways to go on business traffic and that is the most important element in kind of stabilizing the revenue situation.

Dan McKenzie - Next Generation Equity Research

I understand. Okay then there has been so much talk about Star that I will follow up with yet even one more question. I believe you guys previously placed the incremental revenue benefit of joining Star over SkyTeam at $100 million, but if I am not mistaken that was before any trust or JV immunity here. Now that you have that I am wondering how you are thinking about quantifying that benefit.

Larry Kellner

The $100 million is right. That is the benefit we reaped merely from moving SkyTeam to Star without anti-trust or without a JV. Now that we have anti-trust and are working on the JV again, we just got that, so let us see how we end up on the JV. I think we have always been willing, once we have a plan in place, to kind of lay out what we think it’s worth. But, I think step one for us here is to get the plan in place with regard to the JV, all of the details in place, before we start talking about what we think it is worth.

Dan McKenzie - Next Generation Equity Research

I understand, of course. Zane, I am just wondering how you are thinking about the opportunity to reschedule debt that is coming due next year?

Zane Rowe

As Larry indicated earlier we don’t like to discuss that prior to actually doing anything, but I think you see our actions today. Obviously we are pleased with our success rating here doing $90 million in the EETC transaction, as we have Terry and his team keyed up to look at 2010, so we will leave it at that.

Larry Kellner

Dan, I think in the EETC we have shown we have been effective at refinancing aircraft where the debt was coming due prior to the debt coming due, so we can stay ahead of that with the market understanding where we are at.

Dan McKenzie - Next Generation Equity Research

I understand. Thanks a lot I appreciate it.

DeAnne Gabel

Anthony, that concludes the session for the analyst’s portion of the question-and answer portion. I will now turn the call over to Nene.

Nene Foxhall

Thanks DeAnne. Anthony, once you have briefly reviewed the process for asking questions we will begin the media session.

Operator

Thank you. (Operator instructions) Our first question comes from Ted Reed of thestreet.com.

Ted Reed - thestreet.com

First of all I would like to ask about your 787 order. When do you expect to get those aircraft and do you see the same level of need for them that you did when you placed the order?

Larry Kellner

Right now we would expect to get the 787 in 2011. Clearly we are waiting for Boeing to update its schedule and we will keep everybody informed as we see that schedule updated as to what your expectations are.

Yes, I think on the international markets, I think as you look fuel prices, while down from last years high, are still significantly higher than they were in 2004 when we ordered the aircraft. It is a very efficient aircraft. We have a lot of international growth opportunities out of Newark. We also have some out of Houston if you look at our network. We think the plane is a great fit for us and we continue to be excited about getting it.

Jeff Smisek

Ted, Larry had told me he is really looking forward to flying on the 787s as well.

Ted Reed - thestreet.com

My second thing is, I read about the ATI application and there was discussion of global extent of the ATI. What does that mean in terms of what you might be able to do beyond the Trans-Atlantic, if anything?

Larry Kellner

It is actually very valuable. What we will be able to do, and obviously this is on a jurisdiction-by-jurisdiction basis, and this is a grant of anti-trust immunity by the US government and doesn’t apply, necessarily, to foreign nations. But, what we believe we will be able to do over time is to enter into arrangements with foreign carriers, for example, in Latin America, also in the Asia Pacific region. Perhaps joint ventures as well, which will permit us to maximize connectivity, maximize flow, coordinate our schedules to provide a very seamless service and frequent service to customers and provide a better product than we alone can provide, and give us, again, competitive heft against the other major alliances; SkyTeam is one of them.

Ted Reed - thestreet.com

Is there any particular market outside of the Trans-Atlantic that that would have great value in?

Larry Kellner

Well we think there is great value in Asia Pacific and great value in Latin America and we are keenly interested in pursing both.

Operator

Your next question comes from Shannon Buggs of the Houston Chronicle.

Shannon Buggs - The Houston Chronicle

I am wondering if you have more details that you can share with us about the 1,700 jobs that you are going to be cutting. How much of that is going to come out of Houston and the headquarters? A very significant piece was related to the management and clerical and I wanted some more details about that.

Jeff Smisek

I think for us the first step will be to make sure we have got all of our team informed here. So we are working through that process now and how we will roll that out.

Two, it is a little difficult to predict exactly how it will roll out by city, because we are going to take every step we can just like we did last year to minimize the number of involuntary furloughs or reductions in force. Much like we were out last month with our flight attendants looking for volunteers for leaves of absences, we will work aggressively to minimize the impact on our people. They do a great job. This is in no way related to them, it is simply an impact of the economy and where we are. These are very touch decision and we are going to work through it internally with our folks and do everything we can to minimize it and we want to make sure they have got the details first.

Shannon Buggs - The Houston Chronicle

Okay, I get that you want to give them the details first, but with this are you also planning on doing a COLA for specific groups like you did with the flight attendants?

Jeff Smisek

We will work with each work group to look for every alternative we can find to minimize against involuntary furloughs or reductions in force. So, there will be some impact on the corporate side, without question, but we are going to do everything we can to minimize the impact of this while making sure we are competitive as we go forward.

Operator

Your next question comes from Allison Grant of (inaudible).

Allison Grant

I was wondering if you could be more specific about what was happening here in Cleveland. Also, could you be more specific about the timing of it, when the employees will know?

Larry Kellner

It depends on the group, again, because we will work with each work group to do everything we can to minimize the impact. On the management/clerical side we will move fairly quickly on the individual where we go to kind of on flights and to our schedule clearly we have a busy summer schedule that pulls down at the end of September. So, this is around the last week in September, I think it is the 23rd of September is where we are targeting on many of the work groups to have it resolved. We will look for as many volunteers as we can get to minimize the impact, again, of involuntary furloughs or reductions in force.

Allison Grant

Can you tell us anything about any capacity cuts that may be coming?

Larry Kellner

We outlined, and Jeff outlined in his comments, our outlook for capacity and we have also got that out in our Investor Update. We would be happy if you have specific questions you want to talk to on capacity. But, the schedules are loaded for the fall and so it is out there in the public system. We are not announcing additional new capacity cuts beyond what we have loaded in today, so it is out there and in the system.

Operator

Your next question comes from Richard Newman of The Record.

Richard Newman -The Record

I wanted to ask about the Newark jobs. It has already been addressed, but I noticed that the Trans-Atlantic traffic was down disproportionately. Should we assume that there will be more of an impact on the Newark jobs picture than in say Houston or Cleveland?

Larry Kellner

Yes, again if you look at our work groups and where they are at, so much of it depends on what we can do to minimize the impact of this and how that shifts among our employees. So, as we have more details we will be happy to fill that in. We just want to be careful not to get ahead. Clearly there is an impact as we are reducing our Trans-Atlantic capacity and so there will be an impact in Newark, but it is difficult to pin down exactly where that will be. With our headquarters here the management/clerical hit will actually be more in Houston and so for different groups it will hit us at different spots in the system.

Our number one goal is A) to make sure our team knows first what is going on and B) to do everything we can to minimize it.

Jeff Smisek

The one thing that I would add to that is, as Larry said, as we seek to minimize the impact through close and other voluntary programs, although it is hard to predict, I will tell you that should some of those not be successful the work force in Newark tends to be less senior than elsewhere because we have had so much growth in Newark. Then we have a lot of historical growth there and as a result the workforce tends to be more junior. So to the extent that we have to do some furloughs, you have to expect some disproportionate impact on Newark because that would be the sight of furloughs because we furlough in reverse seniority order.

Richard Newman -The Record

Could you identify flights that have been cut out of Newark? I heard someone mention Cologne is that one?

Jeff Smisek

Well that was last year when we cut back on the international side. That has been out of the system (interposing) of leaving the market. What we have tried to do here in as many cases as we can is not leave markets, but leave them on certain days, especially during the week or season. We have got some other stuff that is seasonal and so we get out of it for the entire winter, things like Newark to Athens or Cleveland to Heathrow. But, on the stuff that is scheduled for the fall, the bulk of the cuts have been day of week cuts, so we will go from flying daily to flying four, five, or six times a week and we are getting out of the softest days.

Operator

Your next question comes from Jake Hahnville with Promedia Travel.

Jake Hahnville - Promedia Travel

I was hoping for an update on technology. There was some discussion three months ago about migrating to the Star alliance common IT platform. I was just wondering have any decisions been made and what components of the platform would be used if that happened and when?

Larry Kellner

I think what we said and what we continue to be focused on is getting Continental and United on a common platform and so we continue to work on that. Where it is appropriate, when we are ready, we will announce where we are going. But, both United and us share the goal of getting to a common platform. We just think from a customer service side as we move forward one of the challenges we have always had in these alliances is IT. Clearly being on a common platform will solve a lot of customer issues and that is the primary focus. It is flexibility for making changes and things you can do for the customer on the alliance side.

Jake Hahnville - Promedia Travel

So that includes the reservation system?

Larry Kellner

We would try to get to a common hosting system with United, yes.

Operator

Your last question comes from Colleen O’Neil of WTAM

Colleen O’Neil of WTAM

You started to touch upon this, but I am wondering if you can give us an idea as far as how many employees of Hopkins airport in Cleveland may be cut?

Larry Kellner

Again, we just need to work through. Because, as you look at Cleveland, its pilots, its flight attendants, its airport agents, there are lots of work groups in the city and we need to work through with each work group kind of, one, what we can do to mitigate this and two, then when we get the results, as Jeff mentioned earlier, it goes in seniority order so it depends on what programs we are and where we are in place. So, we will be glad to update you as we move forward, but it is difficult at this time to predict, other than to lay out right now. We have a large number of what we need to accomplish and the question is how we go back with each workgroup and accomplish this in the best possible way.

Colleen O’Neil of WTAM

Also, we have heard that besides layoffs, and I didn’t hear you address this, but from people in this area that are employees say that a lot of workers are going to be cut down to part time hours. Is there any truth to that?

Larry Kellner

Again, I think as you look at the schedule and as we talk about the number of positions, some of those are part time, some of those are full time, you may see some full time people end up going to part time because that is a better alternative than leaving in total. Again, it is very difficult for us, but we have to staff the operation on a long-term basis based on the flight schedule and the block hours we have. So, it is clearly a case where some people that are full time may end up going part time and we will just work through that in the way that has the least impact on our people, but allows us to remain competitive going forward.

Colleen O’Neil of WTAM

But the way you will make decisions on who goes is going to be based on seniority?

Larry Kellner

First of all we try to find volunteers, but if it was involuntary it would then be based on seniority for every group other than management and clerical which doesn’t have the same seniority systems.

Nene Foxhall

Larry, Jeff, Zane, DeAnne, thank you and thanks to all of you on the call for joining us. Please call Corporate Communications if you have any further questions. We look forward to talking to you next quarter.

Operator

Thank you ladies and gentlemen. This concludes today’s teleconference. Thank you for participating. (Operator instructions).

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Source: Continental Airlines, Inc. Q2 2009 Earnings Call Transcript
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