Airline Industry Crisis

Continental to Reduce Capacity, Fleet and Staffing

Sixty-seven mainline aircraft and 3,000 positions to be eliminated; CEO and President decline their salaries for the remainder of the year.

Short summary:

Network Changes
  • Starts this September
  • By fourth quarter (2008), domestic mainline flights will be down 16% year-over-year
  • 11% reduction in ASMs (Available Seat Miles)

Co-Worker Impact

  • 3,000 job cuts at all levels
  • CEO and President declined their salaries for the remainder of 2008

Fleet Changes

  • Retire sixty-seven 737-300s and 737-500s

    • Thirty-seven in 2008
    • Thirty in 2009
  • Currently operates 375 mainline aircraft
    • Mainline fleet will reduce to 356 by September, 2008
    • Mainline fleet will then reduce to 344 by years end, 2009
  • Will continue to take delivery of the new 737-800s and 737-900ERs

Sixty-seven mainline aircraft and 3,000 positions to be eliminated; CEO and President decline their salaries for the remainder of the year

Continental Airlines released to its more than 45,000 employees the following employee bulletin and message from Larry Kellner, chairman and chief executive officer, and Jeff Smisek, president. Continental does not anticipate any further comment until after it has had the opportunity to meet with employees during the next week.

Dear Co-worker:

We’ve always said that you deserve open, honest and direct communication. This letter and the attached employee bulletin and Q&A are part of that commitment.

The airline industry is in a crisis. Its business model doesn’t work with the current price of fuel and the existing level of capacity in the marketplace. We need to make changes in response.

While there have been several successful fare increases, those increases haven’t been sufficient to cover the rising cost of fuel. As fares increase, fewer customers will fly. As fewer customers fly, we will need to reduce our capacity to match the reduced demand. As we reduce our capacity, we will need fewer employees to operate the airline. Although these changes will be painful, we must adapt to the reality of today’s market to successfully navigate these difficult times.

The attached employee bulletin and Q&A outline some of the steps we are taking to address this industry crisis. The situation for all airlines is serious, and the actions we are announcing today are necessary to secure our future. We regret the loss of jobs caused by this crisis, and we will do our best to minimize furloughs and involuntary terminations.

These actions will help Continental survive this crisis. You have our ongoing commitment to keep you informed as the industry evolves and adapts to these unprecedented challenges. It is important that we all keep our focus on working together during these difficult times.

                 Larry                                 Jeff

                           Employee Bulletin No. 9

Continental today is announcing significant reductions in flying and staffing that are necessary for the company to further adjust to today’s extremely high cost of fuel. These actions are among many steps Continental is taking to respond to record-high fuel prices as the industry faces its worst crisis since 9/11.

The price of Gulf Coast jet fuel closed yesterday at $151.26 — about 75 percent higher than what it was a year ago. At that price and at our current capacity, our fuel expense this year would be $2.3 billion more than it was last year. That increase alone amounts to about $50,000 per employee.

These record fuel costs have fundamentally shifted the economics of our business. At these fuel prices, a large number of our flights are losing money, and Continental needs to react to this changed marketplace.

                               Network Changes

Starting in September, at the conclusion of the peak summer season, Continental will reduce its flights, with fourth quarter domestic mainline departures to be down 16 percent year-over-year. This will result in a reduction of domestic mainline capacity (available seat miles, or ASMs) by 11 percent in the fourth quarter, compared to the same period last year.

By the end of next week, Continental will provide details on specific flights and destinations that are subject to reduction or elimination. For additional information on departures and capacity for 2008 and 2009, see Table A.

                               Co-worker Impact

As a result of the capacity reductions, Continental will need fewer co-workers worldwide to support the reduced flight schedule. About 3,000 positions, including management positions, will be eliminated through voluntary and involuntary separations, with the majority expected to be through voluntary programs.

The company will offer voluntary programs in an effort to reduce the number of co-workers who will be furloughed or involuntarily terminated due to the capacity cuts. Details of these programs will be available next week.

The reductions will take effect after the peak summer season, except for management and clerical reductions, which will begin sooner.

In recognition of the crisis and its effect on their co-workers, Larry and Jeff have declined their salaries for the remainder of the year and have declined any payment under the annual incentive program for 2008.

                                Fleet Changes

Continental will reduce the size of its fleet by removing the least efficient aircraft from its network. To accomplish this, Continental is accelerating the retirement of its Boeing 737-300 and 737-500 fleets. In the first six months of 2008, Continental removed six older aircraft from service. Continental will retire an additional 67 Boeing 737-300 and 737-500 aircraft, with 37 of these additional retirements occurring in 2008 and 30 in 2009. Given the need for prompt capacity reductions in today’s environment, 27 of the 67 aircraft will be removed in September. By the end of 2009, all 737-300 aircraft will be retired from Continental’s fleet.

Continental will continue to take delivery of new, fuel-efficient NextGen Boeing 737-800s and 737-900ERs. Overall fuel efficiency will improve measurably as Continental takes delivery of 16 of these aircraft in the second half of 2008 and 18 in 2009 and accelerates the retirement of the older, less fuel-efficient aircraft as mentioned previously.

By the end of the second quarter of 2008, Continental will operate 375 mainline aircraft. Taking into account both the accelerated retirements and scheduled deliveries, Continental’s fleet count will shrink to 356 aircraft in September 2008 and 344 aircraft at the end of 2009 (see attached Table B).

    TABLE A: Network Changes

                                   Departures
      Estimated Average Daily Departures and Year-over-Year Percent Change
                            3Q '08           4Q '08               FY 2009
                      Daily   % Change   Daily    % Change       % Change
                      Depts.             Depts.
    Mainline
     Domestic           831    (5.7%)      733    (16.0%)    (9.8%) to (11.8%)
    Mainline
     International      298     0.7%       251     (4.1%)    (1.1%) to 0.9%
    Mainline
     System           1,129    (4.1%)      984    (13.2%)    (7.1%) to (9.1%)
    Regional          1,425     3.6%     1,287     (4.1%)    (5.4%) to (7.4%)
    Consolidated      2,554     0.0%     2,271     (8.3%)    (6.1%) to (8.1%)

                           Available Seat Miles (ASMs)
                     Estimated Year-over-Year Percent Change
                                 3Q '08         4Q '08        FY 2009
    Mainline Domestic            (3.0%)        (11.4%)   (3.4%) to (5.4%)
    Mainline International        3.4%          (1.6%)     0.0% to 2.0%
    Mainline System               0.1%          (6.8%)   (0.7%) to (2.7%)
    Regional                      7.5%          (1.5%)   (7.4%) to (9.4%)
    Consolidated                  0.9%          (6.2%)   (1.4%) to (3.4%)

    TABLE B: Continental Airlines Mainline Fleet Plan as of June 5, 2008

                                       Net                    Net
                        Total @      Changes     Total @    Changes    Total @
                       6/30/08E       2H08E     YE 2008E     2009E    YE 2009E
    Mainline Jets
    777-200ER                20         -           20         2          22
    767-400ER                16         -           16         -          16
    767-200ER                10         -           10         -          10
    757-300                  17         -           17         -          17
    757-200                  41         -           41         -          41
    737-900ER *              10        10           20        18          38
    737-900                  12         -           12         -          12
    737-800*                111         6          117         -         117
    737-700                  36         -           36         -          36
    737-300**                47       (24)          23       (23)          -
    737-500**                55       (13)          42        (7)         35
    Total Mainline          375       (21)         354       (10)        344

    *   Final mix of new 737-800/-900ERs are subject to change
    **  Final mix and quantity of 737-300 / 737-500 exits subject to change

June 5, 2008 Posted by | Uncategorized | , | Leave a comment

Continental and ExpressJet Reach New Seven-Year Agreement

ExpressJet Holdings, Inc. announced today that, while it continues to explore all of its strategic options, it has entered into a new seven-year capacity purchase agreement with Continental Airlines, Inc. The new agreement, which becomes effective July 1, 2008, will allow ExpressJet to continue flying the 205 aircraft currently flown for Continental for the foreseeable future while providing Continental the right after one year to withdraw up to 15 aircraft. The new agreement significantly changes Continental’s governance rights under the original agreement, including

  • Easing change-in-control limitations on ExpressJet
  • Reducing restrictions on ExpressJet flying into Continental’s hub airports
  • Removing the most-favored-nation clause, allowing ExpressJet to actively pursue flying for other carriers and to consider other strategic alternatives.
  • Removing Continental’s ability to terminate the agreement without cause.

The new agreement is based on fixed block hour rates that include various pass-through expenses, such as aircraft rent, fuel, airport ground handling and landing fees. The fixed block hour rates are considerably lower than the rates under the current agreement and will be subject to annual adjustment tied to a consumer pricing index. The company intends to return to Continental up to 39 aircraft previously released from the original capacity purchase agreement and to aggressively reduce costs in the coming months in response to the new agreement with Continental and the economic difficulties facing the entire airline industry.

“We recognize the current challenging industry environment being faced by all airlines and we need to react quickly to this deteriorating situation. While this new agreement with Continental reduces uncertainty around the core aspect of our company, it certainly reflects the current operating environment and the evolution of the relationships between mainline and regional airlines. That said, we are pleased to have the opportunity to continue providing uninterrupted, seamless service to Continental and their customers,” stated Jim Ream, ExpressJet’s President and Chief Executive Officer.

In addition, ExpressJet has the right to return to Continental 39 Embraer 50-seat regional jets that ExpressJet currently uses for non-Continental contract flying. Continental plans to add the returned aircraft to the new agreement and withdraw from the agreement up to 30 of its Embraer 37-seat regional jets currently flown by ExpressJet for Continental. Continental will then sublease or ground all of the withdrawn Embraer 37-seat regional jets to better align regional capacity with current market conditions. Additionally, the agreement reduces the rent Continental charges ExpressJet on 30 other regional jets that ExpressJet will retain for seven years to fly at its own revenue risk.

Continental and ExpressJet also entered into a settlement agreement and release of all the parties’ claims relating to payments and rates under the original capacity purchase agreement, including all disputes previously disclosed as possible matters for arbitration.

June 5, 2008 Posted by | Uncategorized | Leave a comment