Continental Airlines, Inc. Q1 2008 Earnings Call Transcript

Apr.17.08 | About: United Continental (UAL)

Continental Airlines, Inc. (NYSE:CAL)

Q1 2008 Earnings Call

April 16, 2008 10:30 am ET

Executives

Ned Walker – Senior Vice President of Corporate Communications

DeAnne Gabel – Director of Investor Relations

Larry Kellner – Chairman & CEO

Jeffery Smisek – President

Jeff Misner – Executive Vice President & CFO

Jim Compton – Executive Vice President of Marketing

Gerry Laderman - Senior Vice President of Finance and Treasurer.

Analysts

William Greene – Morgan Stanley

Raymond Neidl – Calyon Securities Inc.

Jamie Baker – J.P. Morgan Chase

Mike Linenberg – Merrill Lynch

Daniel McKenzie – Credit Suisse

Justine Fisher – Goldman Sachs

Frank Boroch – Bear Stearns

Bob McAdoo – Avondale Partners LLC

Bill Mastoris – Broadpoint Capital

Media

Mary Schlangenstein – Bloomberg News

Richard Newman – The Record

Bill Hensel – Houston Chronicle

Operator

Welcome to Continental Airlines First Quarter 2008 Financial Results Conference Call. (Operator Instructions) I would like to turn the conference over to Ned Walker, Senior Vice President of Corporate Communications, and DeAnne Gabel, Director of Investor Relations.

Ned Walker

Joining us here in Houston today, we have Larry Kellner, Continental’s Chairman and Chief Executive Officer; Jeff Smisek, our President and member of the Board of Directors; Jeff Misner, our Executive Vice President and Chief Financial Officer; Jim Compton, our Executive Vice President of Marketing; Mark Moran, our Executive Vice President of Operations; and Gerry Laderman, our Senior Vice President of Finance and Treasurer.

We’ll open it up with some overview comments from Larry. Jeff Smisek will follow that with a review of capacity and revenue, and then Jeff Misner will look at our cost structure and balance sheet.

The timeframe that we’ve allocated for today is about 20 minutes for executive comments, followed with a 25-minute window for analysts’ comments, and then about 15 minutes for questions from the media.

With that, I’ll turn it over to DeAnne.

DeAnne Gabel

Earlier today we issued an update for investors with any information relating to our financial and operational outlook for the second quarter, full year 2008, and other information. This investor update was included in a filing with the SEC and can be found on our website under the Investor Relation section.

As a reminder, today we will be discussing some non-GAAP financial measures such as net loss excluding special items. A reconciliation of the GAAP to non-GAAP financial measures can be located on Continental’s website at continental.com under the Investor Relation section.

Our discussion today may contain forward-looking statements that are not limited to historical facts 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 2007 10-K and its other security filings.

With that, here’s Larry.

Larry Kellner

I’d like to start off by saying thanks to each of my over 45,000 coworkers. There have been many distractions in the marketplace, including record-setting fuel prices, speculation about industry consolidation, and general concerns about the economy. My coworkers have done a great job in not letting these concerns distract them from what they do better than anyone else in the business, delivering clean, safe, and reliable air transportation along with award winning customer service.

With that, let me recap our first quarter results. For the first quarter 2008, Continental reported a net loss of $85 million or a loss of $0.86 per diluted share, excluding a $5 million after-tax gain from the sale of aircraft. Including this gain, we reported a net loss of $80 million or a loss of $0.81 per diluted share for the quarter.

On the operational side, our team once again did a great job getting our customers to their destination by delivering a system-wide mainline segment completion factor of 98.9% for the quarter, and my coworkers continue to be recognized for their excellence.

For the fifth consecutive year, Continental was rated the top airline on FORTUNE’s Annual Airline Industry List of World’s Most Admired Companies. We also ranked Number 41 on FORTUNE’s World Most Admired Companies “Top 50” list which ranks companies in a wide variety of industries. Continental was the only U.S. passenger carrier on the “Top 50” list.

On the product side, we’re continuing our efforts to deliver an even better product. During the quarter, we announced an agreement with LiveTV to offer live in-flight satellite-based television throughout the cabin on our next generation 737 fleet and on our 757-300s. We expect to begin to offer this service on domestic flights beginning in January 2009. We also expect to begin to offer Wi-Fi email and texting capabilities on those aircraft through LiveTV.

Looking forward, given the challenges we face during the quarter, my coworkers delivered solid first quarter results. Our international network continues to perform well, but our domestic network continues to face the challenges of excess industry capacity and ticket prices that have not kept pace with the rising price of fuel. Unfortunately, it looks like jet fuel prices may remain at record-high levels for the foreseeable future.

In addition, we are faced with a weakening economy and therefore think that it’s prudent for us to reduce our domestic capacity from previously planned levels beginning this fall. We currently expect that our domestic mainline capacity will decline 5% on an annual run rate basis beginning this fall.

We’re now planning to remove from service an additional 14 older less fuel efficient 737-300 aircraft as leases expire on those aircraft from September 2008 to April 2009. These 14 737-300s are in addition to the 34 737-300 and -500s that we were already planning to remove from service in 2008 and 2009. These aircraft will be replaced with more fuel efficient 737 next generation aircraft. We’re taking deliver of 32 new 737s in 2008 and an additional 18 737s in 2009. We’re also taking delivery of two 777s in 2009.

We also expect to reduce our regional capacity growth rate beginning this fall, although our plans there are fluid as we try to work out better economics for our regional capacity and as the CRJs flown for us by Chautauqua come off lease.

Before I turn it over to Jeff, I want to comment on what the recently announced Delta/Northwest merger may mean for Continental. The proposed Delta/Northwest will change the competitive landscape for Continental and the entire airline industry. As I’ve consistently said, our preference has been to remain independent as long as the competitive landscape didn’t change; however, the landscape is changing.

We’re reviewing our strategic alternatives and we’ll do what we need to do to continue our success and to remain a strong long-term competitor. We are committed to doing what is best for our coworkers, stockholders, customers, and the communities we serve.

As a result of Delta/Northwest having signed a merger agreement, we have redeemed the Golden Share that Northwest held. In light of the Delta/Northwest announcement, we’re also reviewing our continued participation in our alliance with Northwest, Delta, and SkyTeam. We are committed to being an important player in one of the three global alliances so that we can offer a broad global network to our customers.

Despite the speculation about our future cost by this demand, as we evaluate what course of action would be in the best interest of Continental and all its stakeholders, we will not take our off what is the most important thing – running a clean, safe, and reliable airline that delivers excellent customer service and a quality product to our customers.

With that, I’ll turn the call over to Jeff Smisek and Jeff Misner to discuss the quarter’s revenue and top performance details.

Jeffery Smisek

I join Larry in thanking the entire team for delivering better than I would have expected results considering that in the first quarter Gulf Coast jet fuel prices averaged over $118 a barrel, economic concerns continue to grow, the U.S. credit market had a meltdown, and the U.S. dollar continued to weaken. Not only did we have strong consolidated yield increases, up 7.2% year-over-year, we ran a consolidated load factor of 78.5%, down just slightly year-over-year on a capacity increase of 4.1%. Our consolidated RASM was up 7%.

In the first quarter, we grew total revenue by $391 million to a total of a $3.6 billion. That was a 12.3% growth rate. So we had solid revenue results. Unfortunately, our cost grew more than our revenues led of course by the rapid rise in fuel prices. On the good news side, demand in general continued to hold up well; however, we are beginning to see some softness in the Trans-Atlantic sector, which we believe is mainly attributable to the weak dollar. However, things are still good there, just not as good as we’d expected.

In March, we began lapping some fairly strong business first yield increases from the prior year. But thanks to nice year-over-year improvement in leisure yields during the quarter, Trans-Atlantic yields were up 6.6% in the first quarter. However, we are seeing some pressure on our year-over-year Trans-Atlantic RASM going into the second quarter.

During the quarter, we saw some increased competition on our Trans-Pacific routes as both Copa and JAL added several new frequencies, which had a negative impact on Trans-Pacific load factors. But overall Pacific RASM, which includes both our Continental Micronesia Pacific routes and our Trans-Pacific routes was up 8.8% year-over-year due to increased yields which were up 12.4%.

Our Latin region continues to do and mainline Latin RASM was up 6.7% due to both increased yields and higher load factors. The Latin region is seeing some increased competition from low cost carriers which may increase pressure on RASM going forward.

We also continue to see domestic mainline yield increases along with a slight improvement load factor which resulted in a year-over-year RASM improvement of 8.3%. We’ve had better success with fuel surcharges offshore than we have had onshore, and our domestic business continues to lose money. There’ve been numerous attempts to increase domestic fares in recent months; however, the majority of these attempts have failed in low cost carrier markets. We estimate that about 85% of our mainline domestic revenue is exposed to low cost carrier competition, so domestic price increases that stick only in non low cost carrier type fares don’t really do much for us.

We also saw strength in regional yields during the first quarter with about a half point increase in load factor, resulting in an RASM increase of 9.8% compared to the first quarter of last year.

Looking ahead to the second quarter, there are some small pockets of demand weakness in certain time periods in a few markets over the next couple months; but overall, we’re comfortable with the demand outlook. Consolidated domestic book seat factor for the next 6 weeks is running about a point ahead of last year.

Latin bookings are running 4 to 5 points ahead of last year. Trans-Atlantic bookings are running 1 to 2 points behind last year and Pacific bookings are running 3 to 4 points behind last year. But in the Pacific, we’re comfortable with the load factor versus yield tradeoff we’ve been receiving. Net/net for the second quarter, we expect both our consolidated and mainline load factors to be down about a point year-over-year.

We currently expect demand will remain solid throughout the summer. But unless the economic indicators improve dramatically, we think things are likely to get pretty tough after we get passed the peak summer travel season. Therefore, as Larry discussed, we’re reducing our domestic capacity more than we’d earlier estimated starting in the fall.

For the second quarter, we expect mainline capacity to be up 1.5% compared to with the second quarter of 2007 with mainline domestic capacity down 3.4% and international capacity up 6.9%. Our second quarter international growth is mainly driven by the run-rate of new markets we started last year and our Heathrow expansion this year. We expect regional capacity will be up 8.7%.

For full year 2008, we expect our total mainline capacity, including international, will be up about 2% year-over-year. As Larry mentioned, we currently expect that our domestic mainline capacity will decline 5% on an annual run-rate basis with our additional capacity reduction beginning this fall. For 2009, we expect our total mainline capacity, including international capacity, will be about flat year-over-year.

We had good news at the end of the quarter as we were able to enter London Heathrow for the first time. At the end of March, we launched our largest single date international expansion in the company’s history when we inaugurated twice-daily wide-body service from both our Houston and Liberty hubs to Heathrow.

We’re pleased to finally be able to offer our important corporate customers the opportunity to fly up to Heathrow, which is their airport of choice in London, and we look forward to the opportunities this presents. We’re pleased with our progress to date.

During the quarter, we added 6 new modern Q400 turbo props to our regional fleet and plan to end the year with 15 Q400s in service. As with any new aircraft type, we’ve been having some teething pains at the start. But we’re solving the issues, and we think the aircraft will do a terrific job for us and our customers.

The economics of the Q400 versus the regional jet are much more favorable, so we’re pleased to add this to our service option. Plus, given the added bonus of the Q400s performance capability, we’re working closely with the Newark tower to maximize the use of the 1129 cross runway which should help our overall operation in Newark.

Speaking of operational improvement, the DOT has issued a tentative order capping operations in Liberty during peak hours to 83 operations per hour. The caps are scheduled to be effective as of June 1. We’ll be able to grow our capacity at Liberty over time by increasing the size of the aircraft that we operate there. We hope that these caps will benefit our operations at our Liberty hub.

In closing, I want to again thank my coworkers for their great job they do every day. We wouldn’t be earning the business we get without our great coworkers. Our competitors, like us, face the challenges of record-high fuel prices, increased competition, a weak dollar, and a weakening economic environment.

However, we have several advantages, not the least of which is that we have the best team in the business to help us keep our eye on what’s really important, providing clean, safe, and reliable air transportation every day and returning to sustained profitability.

With that, I’ll turn it over to Jeff Misner.

Jeff Misner

As Jeff mentioned, revenue growth was strong; unfortunately, it wasn’t strong enough to cover the rising cost of fuel. Skyrocketing fuel prices continue to consumer the progress we’ve made over the last few years in controlling our costs. Even still, I want to thank our entire team for their continued efforts to reduce costs and increase efficiency throughout the business. It’s those efforts that are keeping us in the game.

As DeAnne mentioned, we filed our investor update this morning, which has our second quarter 2008 guidance. Since the guidance is posted on our website, I won’t take the time to repeat it in my comments.

As mentioned, we’re operating in very difficult times. In addition, to reducing our mainline domestic capacity beginning this fall, we’re implementing another initiative that is expected to deliver approximately $200 million in annual benefits when fully implemented. This includes both cost savings as well as revenue generating initiatives. The following cost guidance reflects what we expect to achieve from the initiative in 2008, as well as the impact from the announced mainline domestic capacity reductions.

For the second quarter 2008, we expect our consolidated CASM, excluding special items, and holding fuel rate constant to be down about 3% year-over-year. Our mainline CASM, again, holding fuel rate constant and excluding special items, to be down 3.5% year-over-year.

For the full year 2008, excluding special items and holding fuel rate constant, we now expect consolidated CASM to be down about a 0.5% to 1%, and mainline CASM will be down 1% to 1.5%. At this point, we have not included in our guidance any cost savings related to our regional operations, but we’re actively looking for ways to achieve better economics with ExpressJet, the cost of which remains significantly over market.

As I said at the beginning, over the last few years, we’ve made remarkable progress towards reducing our cost structure, but we’re not done yet. We’re committed to achieving long-term sustained profitability so we’ll continue to look for ways to increase productivity and decrease efficiencies across all parts of our business as well as work on we’re to increase revenue.

On fuel, jet fuel set new highs during the quarter and currently represents a full one-third of our cost structure. Unfortunately we’ve experienced new highs this month as well. For years we focused on fuel efficiency in our operations, but today’s prices make it even more imperative. We continue to make improvements by continuing our winglet program and working on a variety of fuel savings initiatives.

In addition, we have just signed an agreement to remove eight more of our least fuel-efficient aircraft that is the 737-500, from our fleet in 2009. We continue to hedge a portion of our near-term fuel needs, the details of which you can find in the Investor Update.

On the fleet, as Larry said, we’re now planning to remove from service a total of 48 older less fuel efficient 737-300 and -500 aircraft in 2008 and 2009, including the eight 737-500 I just mentioned, which are being sold to parties who will operate them outside the United States. We expect to end 2008 with 373 mainline aircraft in service and 369 service at the end of 2009.

Cash, we ended the first quarter with $2.5 billion of unrestricted cash and short-term investments, which excludes $237 million in core value student loan related auction rate securities that were reclassified from short-term to long-term investments during the quarter. We expect to end the second quarter 2008 with between $2.9 and $3 billion of unrestricted cash, again excluding the auction rate securities. This range does include some anticipated future financings including a loan facility to fund predelivery deposits for new aircraft, a refinancing of aircraft debt that matured earlier this year and other financing initiatives our corporate financing was focused on. We’ll provide more information about these financings as they’re finalized.

In light of record high fuel prices and other challenges facing the industry, we have pulled down our cap ex plan for the year and now expect cash cap ex will be about $468 million for the year. This is slightly below the low end of our previous estimated range, and more detail on this could be found in the Investor Update.

In concluding here, an environment a weakening economic outlook, a weak dollar, soaring fuel prices is not the backdrop we had originally planned on. But as our track record over the last decade shows we’re pretty nimble and quick to respond to current conditions. When tough decisions need to be made, we won’t hesitate to make them; but we will be thoughtful and thorough to ensure that our response is appropriate.

Finally, given all the things that are going right now in the business, we expect to file our first quarter 2008 Form 10-Q by the end of this month.

With that, let me turn it back to Larry.

Larry Kellner

There are many changes happening in our industry. As we look to the future, we want to emphasize our strengths. We have a great team of professional men and women who deliver award winning service to our customers, a strong well balanced network with an enviable position in New York as well as established hubs in Houston, Cleveland, and Guam. We also have a young fuel efficient fleet and a strong new aircraft order book. That said, the competitive landscape is changing and we’ll do what we need to do to make sure we remain a strong long-term competitor.

In closing, I want to again thank my more than 45,000 coworkers for the great job they do every day.

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

DeAnne Gabel

We are ready to begin the question-and-answer questions for the analysts followed by the question-and-answer session for the media.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from William Greene - Morgan Stanley.

William Greene – Morgan Stanley

Larry, can I ask you just to outline a little bit what options you have with the ExpressJet? I guess the best case would be they give you the economics you want, but I don’t know sort of what outcomes we’ve got here and what it could mean for capacity.

Larry Kellner

Well, Bill, I think there’s two things. One, we’d like to improve our overall cost structure on our regional capacity. Two, we’re pretty flexible about how we do that, so I don’t want to get into a detailed discussion. I’d like to kind of keep that for something Continental’s working on. I will tell you, ExpressJet continues to do an excellent job for us operationally. It’s simple a cost issue. As fuel prices go up, we feel more pressure on that front.

William Greene – Morgan Stanley

Yes, so I guess that’s what I was kind of getting at. It seems to me that the flexibility in the contract that it affords you, gives you an opportunity of reduced regional flying which I would think would be a good thing in this fuel environment. Is that wrong?

Larry Kellner

Well as I said in my remarks, we’ll continue to look at regional capacity clearly at these fuel prices. We probably need a little less of it, not a little more of it.

William Greene – Morgan Stanley

Then when you think about the M&A side, have you had discussions with your labor groups, and what is their reaction to this?

Larry Kellner

Well, Bill, we’re always pretty inclusive in our discussions. Again, I’m not going to get into the details of things we’re not ready to talk about yet. But just know that we’re not going to change our culture here. We’re going to continue to be very coworker focused and make sure that they’re informed once we’ve made a decision of kind of what we’re doing; or as we work through processes, we’ll clearly work with the appropriate (inaudible).

William Greene – Morgan Stanley

All right, maybe just one detailed question last. Just one the international RASM, how much of the growth came form currency and fuel surcharge?

Jim Compton

Bill, this is Jim. On the Trans-Atlantic side, we’ve recorded 2.8% RASM growth, but 2.5 of those points were related to currency, and on the Pacific side about 3.5 points.

Operator

The next question comes from Ray Neidl - Calyon Securities.

Raymond Neidl – Calyon Securities Inc.

Larry, overall regardless of what Continental’s position is going to be in M&A or asset acquisition, what do you see this industry looking like a year from now if oil prices do stay at $115 a barrel or even go higher? Is it going to be significant smaller do you think?

Larry Kellner

Yes, it’ll be smaller.

Raymond Neidl – Calyon Securities Inc.

The other area, back to ExpressJet, as oil prices stay very high and you say they have a high cost structure, would you consider going to other independent contractors to supply you with some of your feed, and would you go to your unions to see if you can get usage of larger RJs?

Larry Kellner

Ray, I want to keep all the flexibility we can. So as soon as we’re ready to announce something, we will. I would tell you, again, I think we’re working primarily to figure out how on the planes ExpressJet flies for us we can do that more efficiently, make sure we find the best results candidly for ExpressJet and ourselves.

Operator

The next question comes from Jamie Baker - J.P. Morgan Chase.

Jamie Baker – J.P. Morgan Chase

Larry, there’s not been too much disclosure as it relates to your SkyTeam participation, particularly as it relates to what happens post Delta/Northwest. Are you a free agent in terms of exiting the alliance? Is there a plenty associated with that? Do you have to give advance notice if you choose to walk?

Larry Kellner

Jamie, again, I want to be helpful as I can be on this call, but all I’m going to say is we’re reviewing our continued participation with Northwest/Delta and SkyTeam and we think it’s important that we’re a major player in one of the three global alliances.

Jamie Baker – J.P. Morgan Chase

But in terms of whatever strings might restrain you, is it something that’s even an important consideration? You’re welcome to say, “Hey, Jamie, it’s kind of a stupid question,” if that’s the case.

Larry Kellner

I just say, “Jamie, we have flexibility.”

Jamie Baker – J.P. Morgan Chase

Second, I guess for Jeff and/or Gerry. Mark Streator and I were both wondering what sort of steps you might you able to take here in order to bolster liquidity in light of what could unfortunately be a fairly substantial cash burn if fuel doesn’t quickly cooperate.

Gerald Laderman

Jamie, we don’t typically comment on financings until they’re completed. Jeff mentioned a couple we’re working on in the commercial bank market. As you know, the corporate finance team always has a list of things they look at, but we prefer not to be that specific until we actually move forward with some of them.

Jamie Baker – J.P. Morgan Chase

But in the absence of a money management business and the absence of a regional subsidiary, in the absence of a Heathrow slot portfolio that you could borrow against, I mean our potential concerns misplaced in this regard or… Well, I’ll just leave it that.

Gerald Laderman

Well, we’ve guidance for the end of the second quarter and beyond that, as you know, we focus almost every day on cash or every day on cash. Yes, it really depends on where we see fuel, where we see revenue, where we see the capital markets, but we stay very focused on both short- and long-term cash.

Larry Kellner

I’d just add to that: if you look back, we financed this year’s aircraft last spring. We are always working ahead of the cash front.

Operator

The next question comes from Mike Linenberg - Merrill Lynch.

Mike Linenberg – Merrill Lynch

In the reclassification of the auction rate securities, was there anything that ran through the P&L, or was that primarily a balance sheet move?

Jeff Misner

It was all balance sheet, nothing in the P&L.

Mike Linenberg – Merrill Lynch

Then just another question here: When I look at the delivery schedule for the 737-800s in ’08, I think it’s 18, is that a new number? Was that previously 30 or was that actually changed sometime ago and I just missed it?

Gerald Laderman

For 2008, we still have the 30, 18 is 2009.

Mike Linenberg – Merrill Lynch

Oh that’s… that’s what I meant, 2009 I think previously I thought was 30. Was that cut back?

Gerald Laderman

Yes, we haven’t talked about our 2009 delivery schedule for quite some time. It may well have been the last time we talked about it that number was out there. We did disclose over the last year or so or two years a number of adjustments to the delivery schedule, so today that number is 18.

Larry Kellner

Mike, we’re taking 50 airplanes between the two years. At one point we were taking 60; however, we’re now taking 24 in 2010. So over the three year period, we’ve clearly moved around (inaudible) with Boeing up to 32 in the current, for instance, but we have 74 positions over the three-year period which is actually an increase from where we were before over the total three years. But we did decrease some in 2009 and moved some of those to 2010.

Mike Linenberg – Merrill Lynch

Then just lastly, historically you have been pretty good when it comes to your various facilities and the covenants. For whatever reason, and I just I probably have to go back and check this, I think your bankcard processing agreement does have a financial covenant maybe related to one of the coverages. Is that something, I think in the past you’ve indicated in your 10-K that you were well above that. But based on kind of where things are moving and fuel prices on current guidance, is that something that is at risk of being tripped or is that something where you’re in talks with the processor and what are potential solutions? Whatever you can say on that would be helpful.

Jeff Misner

That facility does have some covenant (inaudible) ratios and so on. Gerry may want to jump in here, but just like cash, we watch those covenants all the time. So we do have that focus. Gerry, do you want to add anything?

Gerald Laderman

It’s disclosed in the 10-K. We’ve got the fixed charge coverage ratio; we’ve got the cash threshold. We’re well above the cash threshold. On a fixed charge coverage ratio, it’s something that we, it’s sort of rolling 12-month measurements that we just continue to look at.

Mike Linenberg – Merrill Lynch

Gerry, when you say rolling 12 months, is that something where every month it’s measured, or is it every quarter, or is it sort of a one-year look back?

Gerald Laderman

It’s every quarter looking back basically.

Operator

The next question comes from Daniel McKenzie - Credit Suisse.

Daniel McKenzie – Credit Suisse

I’m wondering if you can provide some perspective on the new capacity plan. In particular, I guess what crude price assumption was embedded in the business plan when you decided on the 5% domestic cut in capacity?

Larry Kellner

Danny, it’s tough because we know, and I think history is proving its true on this, that this month’s crude price doesn’t necessarily have a great correlation up or down to the crude price will be in the fall. But as we looked here at a couple of months, if you look at kind of mid February to mid April, with jet fuel prices over $120 a barrel, it doesn’t make sense on our older less fuel efficient 737 and 300s and 500s on the marginal routes, so many of those same routes do much better when they’re on a 737-800 or -900, so part of this is simply a transition.

We’re going to take 50 planes over the two-year period, ’08 and ’09, and we have 48 planes coming out. The planes we’re taking are actually bigger gauged airplanes than the ones we have coming out. Clearly we can use some bigger gauged airplanes also to have more range more effectively into Latin America.

So I wouldn’t tell you the fair environments a piece of it because it’s to the extent you can recover it in fares, higher oil prices are less of a challenge. When you have a soft economy, as we do domestically, you’ve got dollar pressures. So as you look at the whole picture, the less fuel efficient planes make less sense and we’re accelerating getting them out; and we did that kind of the framework of $120-plus a barrel jet fuel.

Daniel McKenzie – Credit Suisse

I guess given the weakening economy, I’m just wondering what percent of your corporate travel customers are telling you they won’t be able to deliver the volumes they promise at this point?

Jim Compton

We constantly are in close talks with our corporate folks with the relationships we’ve built. You mentioned back in January, we talked with some in December and basically we saw growth in international relatively flat domestic corporate travel. We polled them again recently, I would say that it actually hasn’t moved that much, although slightly to the downside that they’re kind of also watching the environment and a little bit softer international and both domestically, but actually better than what my expectations were.

Jeffery Smisek

I would also add, obviously it depends upon the corporate customer, right? Sitting here in Houston with oil and gas customers, they’re booming, so they’re traveling all over the world living large. But if you’re in the financial services business, you have obviously a different outlook on life and travel for right now.

Daniel McKenzie – Credit Suisse

Just one last very quick question: Does the cost guidance include the additional cost from the newly updated bumping rule from the DOT, or is that impact now really material?

Jeff Misner

I think that’s probably immaterial.

Larry Kellner

I’m not sure it’s immaterial. I would tell you, one…

Jeff Misner

Well, the overall cost guidance.

Larry Kellner

Yes, in the overall cost guidance, it’s another cost that we’re putting more pressure on us and it came out yesterday so it’s not rolled into the guidance yet.

Jeffery Smisek

This is Jeff. I would just add that that’s… It’s essentially another cost burden on the industry and effectively a tax on the industry at not a particularly good time. But I understand the reason for it; I understand the need and desire to change, it just comes at an unfortunate time in our business.

Operator

The next question comes from Justin Fisher - Goldman Sachs.

Justine Fisher – Goldman Sachs

The first question is just about the capacity cuts that are currently going on in the industry, and you mentioned that in the markets where you have competition from LCCs it’s tougher to gain pricing power.

So more broadly, how permanent do you think the capacity cuts will be overall from mergers or from what you are doing independently if there are LCCs that have the ability to maybe add flights and try and take some share?

Larry Kellner

Let me just say that LCCs have to buy fuel too and actually have seen a lot of impact in the fuel price increases. If you look, you’re seen several carriers not only go bankrupt but liquidate. You’ve seen Frontier go bankrupt. Sop there’s pressure on the LCCs from fuel as well. I think where we see the most pressure is where we’re flying. Many of the LCCs are flying newer more fuel-efficient aircraft.

In fact, JetBlue’s entire fleet is newer more fuel-efficient aircraft. Where we see the most pressure is where we’re competing domestically with 737 classics versus a low cost competitor competing on a new more fuel efficient aircraft. We do better by far with our 737-800 fleet where we have the more efficient aircraft and so I think that’s a piece of the challenge in getting price increases within the domestic market.

I would say that as you see older aircraft coming out, those are somewhat permanent cuts and the order books with a lack of availability of aircraft at Boeing and Airbus make it more difficult to replace that capacity in the short-term.

Justine Fisher – Goldman Sachs

Then on the international side, what do you think for the London market in particular? I know AMR reported yesterday that they are seeing some weakness in London but strength in other cities. I think that it looks like outlook for yields on Trans-Atlantic might be tough given capacity. But can you tell us, give us a bit more granularity on the particular markets, London and then versus the others?

Jeffery Smisek

I would say obviously we’re new into Heathrow, but we’re actually pretty pleased with the performance so far. I think that our travelers have wanted to be flying on Continental perhaps versus some other carriers into Heathrow, so we’re pretty comfortable with the London market, and we’re pretty comfortable with our performance in Heathrow to date.

Larry Kellner

Yes, our capacity there is up and we expect in some challenges simply the fact that our capacity’s up over 20% there. But I think if you frame what’s happening with our expectations, we feel okay about it.

Justine Fisher – Goldman Sachs

The fixed charge coverage ratio, that is just in the credit card agreement or is that in your bank agreement as well?

Jeff Misner

That’s just in the credit card agreement.

Justine Fisher – Goldman Sachs

Then the only covenant in the bank is just a minimum cash covenant, right?

Gerald Laderman

That’s correct.

Operator

The next question comes from Frank Boroch - Bear Stearns.

Frank Boroch – Bear Stearns

I was wondering if you could maybe just give us a sense, what would, if you have a ballpark figure, domestic fares, how much higher would they have had to been to make money in the first quarter?

Jeff Misner

I’m not sure I have the number off the top of my head here. Jim, can you grab…

Jim Compton

Yes, this is Jim, Frank. It’s obviously real difficult. We’re in an environment that obviously with the rapid rise in fuel, what you’re always doing at the macro level is managing price versus demand at elasticity and so forth. So I think it’s tough to put a number on that because I think the rise in the fuel has been so high and in my economic school analysis would say that elasticity is measured on small price changes. It’s a little bit difficult when you have large price changes and so forth.

So I think we’re going to continue to work at a macro level. We’ve done a number of things in terms of fencing business versus leisure, in terms of picking actually some surcharges even where alpha feeds don’t, but it’s clearly done at a macro level. I think Jeff’s comments earlier in his notes that obviously it’s not enough at this point given kind of the rise in fuel prices.

Larry Kellner

Just to give you a framework, while it’s a hard to be super precise as you look at the whole business and domestic pieces connecting international, etcetera, it’s somewhere between a 5% and 10% increase in domestic fares with exactly the same traffic level would’ve gotten close to breakeven if you look at the size of our domestic network. So it’s not… You don’t need a 20% fare increase, but on the other end, you need to get to about 10 on the domestic fare side to kind of balance what we’ve seen here in the first quarter.

Frank Boroch – Bear Stearns

Given the run-ups since end of the first quarter in jet fuel, if we were to assume you’re paying spot for the, during the peak summer months, do you think you can make money in the summer?

Larry Kellner

Well, I don’t want to comment on future earnings guidance. We try to be careful not to do that, but I’m more worried about the fall is the way I’d answer that question.

Frank Boroch – Bear Stearns

In leaving M&A aside, the DOT’s preliminary approval for the SkyTeam antitrust, expanded antitrust immunity, does that threaten Continental’s European franchise, and is that something Continental needs to react to?

Larry Kellner

Well we need to be an important player in a global alliance. I think two things I would emphasize there: We have flexibility and we’re going to review that situation, but I don’t feel at the moment we don’t feel threatened. We just need to make sure we do the right thing here.

Operator

The next question comes from Bob McAdoo - Avondale Partners.

Bob McAdoo – Avondale Partners LLC

Yes, just a couple quick ones: You made the comment that obviously excess domestic capacity is a problem. With everybody continuing to pull domestic down but continuing to add international, do you get the sense that we’re anywhere near the point where international capacity is going to get to that point where we have to start talking about excess international capacity with what you’re doing and what Delta obviously is doing a bunch of it? Are we anywhere near that point?

Larry Kellner

Well clearly as others add capacity and we add capacity, you get closer to that point. There’s a limit on all fronts. But by the same token, the international business is working at these fuel prices; the domestic business isn’t working at this fuel prices. In the international arena, it’s not just the U.S. carriers, it’s also what impact the dollar has on travel demand, what impact the economy has, and what our foreign competitors do.

Clearly this business is getting more global; and so internally when we look internationally, we don’t look just at our competitors here in the U.S. - a Delta or a Northwest or a United or an American, we also look at what the international guys – the Lufthansa, the BA, the Air France-KLMs are doing. So I think it’s a broader question. But if you look at today, the international business is working much better at these fuel prices than the domestic is working, which is why I think you see the adjustments on the domestic side.

Jeffery Smisek

The only thing I would add to that is obviously foreign point of sale works in our favor with the weak dollar, so that’s a benefit that you don’t have within the domestic business.

Bob McAdoo – Avondale Partners LLC

How much of your business, your Trans-Atlantic or Trans-Pacific business or whatever, in general do you get from overseas?

Larry Kellner

About 30%.

Bob McAdoo – Avondale Partners LLC

About 30%. So you feel comfortable that we’re not anywhere near being to the point where we’re up against a second wall. Where we get the same kind of wall internationally, we do domestic; it’s still kind of working.

Larry Kellner

Well, I think the constraint you’ve got is just aircraft availability. People have been growing internationally in most cases by cycling airplanes out of their fleet that they were using domestically to move them internationally and so you contracted a limit on that.

Clearly while we’re not happy with the 787 delay or what we’ve you seen, we’re not effected by the 380 delays, but both those delays have slowed down the availability of international wide-bodies which put some further constraints on long-term international growth, which probably makes you feel more confident about that arena is simply looking at what assets are available over the long-term.

Bob McAdoo – Avondale Partners LLC

Just a quickie on the Q400, what kind of customer reactions are you getting from that? Are they taking that okay? I know obviously from Portland to Seattle, people use it all the time. I just wonder how they’re doing it out of Newark. Are they doing it okay ? Are they feeling comfortable with the airplane in terms of customers?

Larry Kellner

Well, I think it’s always safe to say that if you’re on a prop, people want to be on RJ. If you’re on RJ or Q400, people want to be on 737. If you’re on a 737, they want to be on a 75. If you’re on a 75, they want to be on a 777. So we’re realistic from the customer side that every market, the larger the airplane in many cases, the better the service we can provide and the product we can provide. But I think overall we’re happy with Q400.

We’ve had some teething pain, more from an operational side as we bring in a new fleet-type. It’s got good noise canceling software on it which makes it perform better than what you think of the typical prop. But it works best in short range destination and it’s had some operational benefits to it in the way we use 11/29, one of the runways in Newark.

Bob McAdoo – Avondale Partners LLC

With the 11/29 runway issue, can you sneak in there without having your flights be counted as part of the overall lid come summer or does that going to still count as part of the lid in terms of departures?

Larry Kellner

It still counts as part of the lid. I wouldn’t say we sneak in, we just the advantages of air traffic control. Clearly because the plane flies at lower attitudes, that makes the ride in many cases a little bumpier, which is not good from a customer side. But it also makes the ATC management a lot easier.

Bob McAdoo – Avondale Partners LLC

So the delays aren’t as much, but you can’t really add any new flights beyond what you had before.

Larry Kellner

No, they’re part of the cap.

Operator

The final question comes from Bill Mastoris - Broadpoint Capital.

Bill Mastoris – Broadpoint Capital

The 14 737-300s that you plan to go ahead and remove, and this is a question obviously for Gerry, Gerry, are those coming out of let’s say one-off deals; or they coming out of EETCs; and if so, are they are concentrated in one or two? I suspect probably some of the older ones would be affected.

Gerald Laderman

The 14 737-300s that we talked about, those are all older aircraft that were financed before the EETC vista, so there all kind of one-off leads.

Larry Kellner

They’re normal leads expirations; we’re just not going to extend the leases further on those planes.

Bill Mastoris – Broadpoint Capital

Then maybe you can give us an update on finance deliveries. I know that you have really quite a few financed in ’08, but maybe if you could just kind of recap that for ’08 and ’09 that would be greatly appreciated.

Gerald Laderman

Sure. The EETC we did last year covered 30 aircraft and we have the flexibility of using that money for 30 of the 35 aircraft that deliver through ’08 and the first quarter of ’09. We’ve also been working among the financing, such as Jeff mentioned, bank financing for a couple of new deliveries as well in that same timeframe.

So it’s fair to say that we’re comfortable that all of our aircraft this year we believe are financed, and we’re beginning to look at next year’s aircraft.

Bill Mastoris – Broadpoint Capital

Gerry, are those going to be all owned or leased or is there a breakout that you’re comfortable giving us color on?

Gerald Laderman

Well, the EETC aircraft will all be owned and so far the incremental aircraft we’ve been looking at financing are also going to be owned.

Ned Walker

That concludes the analyst portion of the call and Christine, if you could go ahead and review the process for the media to ask the Q&A session here. Also like to ask everyone if they could have one question with a quick follow-up, we’ll hopefully accommodate most of the media.

Operator

We will now begin the question-and-answer session for the media. (Operator Instructions) The first question comes from Mary Schlangenstein from Bloomberg News.

Mary Schlangenstein – Bloomberg News

I wanted to ask if you can be any more specific on the additional cost cutting and revenue-generating initiatives that you mention that will result in $200 million in annual benefits. Can you talk a little bit about what that might include and when you first expect to start seeing some benefits?

Jeff Misner

It’s a combination of revenue things as well as some cost cutting ideas as well. On the revenue front, some of the things that we’ve actually just recently announced, (inaudible) fee, would be one of those types of idea. There’s some ideas where we’re going to do a little bit of capacity fencing, for lack of a better term, that is kind of control capacity and allocate a little bit differently that we think will generate some incremental revenue as well. Then there’s other kinds of fees and things as well, some of which are in existence that might just get adjusted and so on.

On the expense side, it’s relatively a long list and many, many items on that list are less than a million dollars. But some of the items, you look at the marketing and advertising and promo budgets and things and pear some of that back, somebody has ideas that we have some kitchens so we’ll look at down streaming meals as opposed to deal with outside catering in some of the other locations, just a whole host of very small things at that nature. As you can imagine, over the last several years, we pretty well clipped off the really big exciting items and so we’re really kind of at that level of (inaudible) at this point.

Larry Kellner

But, Mary, we’ve been pleased. We’ve gotten just a tremendous amount of creativity from our employees on little things we’re doing that we can do a little smarter. Clearly as fuels continue to go up and they work hard to be efficient, there’s an awful lot of creativity out there. So while there aren’t a lot of things on the cost side that really jump out and you say, “Wow, that’s a big number and the rewarding part of that, as Jeff mentioned, is that would’ve hoped we’ve gotten that earlier. There are a lot of smart things that while they’re smaller, and it’s really a huge team effort with everybody working together to make sure that we deliver a quality product to our customer and at the same time be just as efficient as we can. We’re looking at everything we throw away. We’re watching everything we do to say, “How can we be as smart as possible?”

Jeffery Smisek

Just to add that, we’re very focused on making sure that we maintain the integrity of our product. You’re not going to see us get rid of meals at meal time, things like that that are competitors have done. We’re very focused on making sure we’re going to continue to deliver our customers a great product that they’re used to getting from Continental.

Operator

The next question comes from Richard Newman from The Record.

Richard Newman – The Record

I wanted to ask you about at Newark, if you could share anything about which finance, which business sectors, what they’re saying about their travel demands going forward, particularly financial and pharmaceutical companies in the New Jersey/New York City area?

Jim Compton

As we kind of talk to our corporate travel partners that we work with, we talk to them on a continuing basis, I think we’re seeing some of… As I mentioned earlier, as we continually poll them on the trend, we’re seeing some concern with the economy, although less than what we would’ve expected. As Jeff mentioned in his comments, I think the financial service markets we’re watching very closely and seeing some softness there. But really overall, we’re seeing people kind of saying about what they’ve said in December to slightly lower.

Richard Newman – The Record

About what they said in December or slightly lower as far as demand goes?

Jim Compton

Yes, focused on kind of a financial service companies.

Richard Newman – The Record

One other thing, it was mentioned that Continental may benefit from the flight caps in Newark. How are you going to benefit from the flight caps in Newark?

Jeffery Smisek

This is Jeff. I was talking about the operational benefits. Newark has traditionally been a very delayed airport because of the air space and the very crowded space and the operational caps limiting the number of flight operations in Newark should result in fewer delays, which will be a great benefit to our customers and candidly a benefit to us as well because delays inconvenience passengers and candidly delays cost us money as well.

It’s nothing that we do want to be delays. We want to run an on-time airline. We want to make sure that passengers arrive. We want to make sure passengers connect to their connecting opportunity flights, so it’s something we hope will be really beneficial for us in Newark.

Larry Kellner

I would add to that, tough, that from the operational side, which I fully agree with and we worked with FAA on that, it was painful because we had to eliminate as we looked at summer several scheduled flights out of the schedule because of the caps. So there’s always that balance between satisfying demand and kind of keeping the operational integrity.

But clearly if you look at last summer’s experience, I commend the people of the FAA for the work they did on it and the Department of Transportation to try to find a solution to a very difficult issue with regard to what happened to capacity last summer. But I wouldn’t underestimate that it was painful for us in the sense that we had to remove flights from the schedule that we had submitted in the original schedule for next summer, especially in certain peak hours so that we could fit within the caps.

Richard Newman – The Record

Can you mention which flights?

Larry Kellner

Again, what we tried to do is take flights… There’s always better times a days that other times a day to run flights and so you hate having to move a flight that you wanted to run at 6:00 p.m. to 9:00 p.m., but the caps force you to do that.

Operator

The final question from the media comes from Bill Hensel from the Houston Chronicle.

Bill Hensel – Houston Chronicle

I wanted to ask a couple things. One is: You’ve mentioned on the turbo props that you’ve had, two of you mentioned, teething pains. Can you be more specific on what kind of problems you’ve encountered?

Larry Kellner

This is just kind of from the sense, Bill, of any time we start up a new aircraft and we’re going to make we do it right whether you get into delivery delays or procedures, things don’t always work perfectly in a sense of what you write down in the plan on a sheet of paper. So as we go through that process, I think everybody’s working hard, but it’s a new aircraft to our system and this is a business that focuses first and foremost on safety and we’ll always continue to do that. So the result of that is there’s cancellations and delays that you prefer not to have because you’re not going to go until you know you’re ready to go and that’s a common situation with any new aircraft.

Jim Compton

Some of the areas were as simple as we just add a little more block time in the schedule because of the fees and the way the aircraft is being routed into the airport and some things like that just to make sure we keep the same on-time integrity.

Jeffery Smisek

That’s Mark Moran, our Senior or Executive VP of Operations.

Bill Hensel – Houston Chronicle

Also wanted to ask whether in regard to fuel have you been able to find anything that you do differently to save money or to make it more efficient whether it’s just the way it’s managed or the ways it’s delivered, anything like that that you could share?

Larry Kellner

No. Bill, we mentioned we’re going to do a biofuels test flight in coordination with Boeing and GE next year. But in the sense, we have a very solid fuel management group, this is Larry, and we’ll continue to look for every enhancement we can find in that process. But there’s nothing… We pipeline straight to the gate in most cases, for instance, in Air Continental and actually have an underground fueling system. It’s a very efficient process. It’s just a very expensive product.

Jeffery Smisek

Bill, if you could find any of the oil companies here in Houston want to give us a discount, we’d like to talk to them.

Ned Walker

Thank you, everyone for joining us on our first quarter conference call. I’d like to thank Larry, Jeff, Jeff, Jim, Mark, Gerry, and DeAnne. With that, we’ll conclude the earnings call for the first quarter and we’ll talk with everyone in about three months. Thanks so much.

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