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Continental Airlines INTRODUCTION In 2008, the senior management team at Continental Airlines, commanded by Lawrence Kellner, the Chairman and Chief Executive Officer, convened a special meeting to discuss the firm's latest quarterly financial results. A bleak situation lay before them. Continental had incurred an operating loss of $71 million dollarsits second consecutive quarterly earnings decline that year. Likewise, passenger volume was significantly down, dropping by nearly 5 percent from the prior year's quarter. Continental's senior management needed to act swiftly to reverse this trend and return to profitability. Being the fourth largest airline in the U.S. and eighth largest in the world, Continental was perceived as one of the most efficiently run companies in the airline industry. Nonetheless, 2008 brought unprecedented challenges for Continental and the entire industry as the United States and much of the world was heading into a severe economic recession. Companies cutting deeply into their budgets for business travel, the highest yielding component of Continental's total revenue, together with a similar downward trend from the leisure and casual sector, combined to sharply reduce total revenue. Concurrent with this revenue decline, the price of jet fuel soared to record levels during 2008.1 Thus, while revenue was decreasing, Continental was paying almost twice as much in fuel costs. Interestingly, fuel costs surpassed the firm's salaries and wages as the highest cost in Continental's cost structure. This obviously had a negative impact on the bottom line, squeezing even further the already strained profit margins. The outlook for a quick recovery in the U.S. economy and, consequently, an upturn in the demand for air travel in the short term did not seem likely. Continental's internal forecasts indicated that a further decline in passenger volume should be anticipated throughout 2009, with a recovery in travel possibly occurring by the middle of 2010. To summarize, adverse economic conditions in the U.S., coupled with the rise in fuel costs, were dragging down Continental's profits and relief was unlikely through the foreseeable future. THE DECISION TO REDUCE FLYING CAPACITY AND THE IMPACT ON OPERATING COSTS Given the situation described above, management needed to act swiftly to restore profitability. Several strategic options were evaluated. Since the U.S. and much of the world was facing a severe recession, the prospect for growing revenues by either raising airfares or passenger volume seemed futile. Contrary to raising revenue, Continental's managers believed that raising fares could potentially erode future revenues beyond the present level. Discounting fares did not seem a plausible solution either, because given the severity of the economic situation a fare cut could fall short in stimulating additional passenger demand and lead to lowering revenues. Thus, because management anticipated that revenues would remain flat for most of the year, the only viable short-term solution to restoring profits was a substantial and swift reduction in operating costs. This could most effectively be accomplished in two ways. First, through a reduction in flying capacity adjusted to match projected passenger demand. With this in mind, Continental's management agreed to reduce flying capacity by 11 percent on domestic and international routes. 2 As a result of this action, Continental would eliminate the least profitable (or unprofitable) flights and, accordingly, would ground several planes in the fleet. Management anticipated that this decision would reduce several of the firm's operating costs. Apart from this, Continental could achieve further reductions in costs by implementing several cost-cutting initiatives and through operational efficiencies. For example, management projected that it could achieve reductions in Passenger Services expenses by consolidating several tasks during passenger check-in and by reducing food and beverage waste served during flights. Additionally, the firm could reduce various miscellaneous expenses through targeted cuts in discretionary spending. In sum, to close the gap in profitability, Continental's strategy was geared toward slashing operating costs by cutting capacity and through aggressive identification and implementation of cost-cutting initiatives. 1 To illustrate, jet fuel is tied to the price of oil and, over the past year, oil prices surged from about $70 to $135 per barrel. Consequently, the price of jet fuel increased markedly, from an average of $1.77 per gallon to $4.20 by the mid-summer of 2008. 2 Specifically, on June 13, 2008, Continental Airlines announced that it planned to reduce its flight capacity by 11 percent. By shrinking capacity, Continental expected to reduce the number of domestic and international flights from its three major hubs in Houston, Cleveland, and Newark (Maynard, M. 2008. Big airlines in a rush go small. The New York Times, June 6.). The next step would be for management to know precisely how their decision to downsize capacity would impact the firm's future operating costs, and also identify specific areas in which the firm could achieve additional cost reductions. Additionally, the cost analysis would help forecast the firm's operating costs and projected profits (or losses) for the upcoming fiscal year. However, before we can proceed with such analysis, an examination of how the various categories of Continental's costs behave is in order. Before we begin, let us prepare with an overview of the airline industry and its competitive landscape, and an understanding of why cost behavior bears particular relevance in this case. Relative to other industries, airlines are a very difficult business to manage. In particular, they are exposed to tremendous risks brought by volatility inherent in their business model, as they deal with high fixed costs, labor unions, instability in fuel prices, weather and natural disasters, passenger safety, and security regulations. These aspects bring a large burden to airlines' cost structures. Moreover, competition within the industry is fierce; the proliferation of discount carriers, such as Southwest Airlines and, most recently, Jet Blue, and the end of fare regulation in 1978, has hindered airlines' pricing power and their ability to spur revenues. For these reasons, cost containment is a critically important aspect of profitability in this industry. In order for Continental to restore profitability in this harsh environment of weak demand for air travel, it must be able to contain its operating costs, especially its massive fixed costs, which are visible in several ways. For example, salaries for pilots, flight attendants, and mechanics, as well as aircraft leasing costs, are typically fixed, varying little with shifts in passenger volume. Because fixed costs typically embody the amount of operating capacity of a firm, they are commonly referred as \"capacity\" costs. Since fixed costs do not self-adjust to fluctuations in passenger volume, the only way in which they can be decreased (or increased) is if management adjusts them in accordance to the level of operating capacity. In contrast, other costs, such as passenger services and reservation and distribution costs, behave as variable and would selfadjust with variations in volume or operating activity. Hence, to assess the impact of this strategic decision to alter Continental's cost structure, and identify the areas that could achieve the greatest reduction in costs, we must resolve how Continental's operating costs behave and what drives them. In what follows, we learn how to apply regression analyses to examine cost behavior and forecast future costs, and then use that knowledge to assess how the reduction in flying capacity would affect Continental's operating costs and profitability in the near term. ESTIMATING COSTS USING REGRESSION ANALYSES The previous discussion highlighted the importance of examining the behavior of Continental's operating costs to pave the way for a cost and profitability analysis using regression analysis. Regression analysis is a powerful statistical tool that is frequently used by firms to examine cost behavior and predict future costs. The idea behind regression analysis is straightforward: historical data for costs, and the various activities that could potentially drive operating costs, are inserted into a mathematical calculation which yields the average amount of change in that particular cost that has occurred over time. Average values provided by regression calculations may then be applied to estimate future change that will occur in that cost given a one-unit change in one or more of the business activities which drive that cost. 3 More precisely, in a regression model, cost is a function of one or more business activities (or factors) underlying a business operation. Simply put, the business activities are the drivers of operating costs. Therefore, since activities drive costs, our first step in the estimation of a cost function is to identify the underlying activities or other potential factors that drive the cost in questionthe cost drivers. This requires extensive knowledge of the business operation. In the case of Continental Airlines, the potential drivers of operating costs vary greatly. For instance, as previously noted, the number of passengers that Continental flies may drive the costs related to Passenger Services. Likewise, Aircraft Maintenance and Repairs costs could be driven by the number of aircraft in the fleet and by the level of flying capacity set by Continental (i.e., available seat miles). In synthesis, to predict how Continental's operating costs would be affected by the decision to reduce capacity, and to identify those areas in which additional room is available for cost cutting, we need to identify which costs in this firm's cost structure behave as variable, fixed, or mixed (in which elements of both variable and fixed are observable). Equally important, we should also identify the specific drivers (if any) of each cost. Your job is to assist management in their quest to restore profitability at Continental Airlines. Specifically, you must conduct regression analyses to examine cost behavior and then use this information to forecast operating costs and profitability for the 3 For ease in exposition, cost functions and regression analyses are discussed briefly here. For further insight on cost functions and on the mechanics of regression analyses, I refer the reader to the Appendix. upcoming year. As part of your cost analysis, you should investigate how the decision to cut flying capacity would impact the firm's future operating costs and, equally important, identify those specific expense categories (or operating areas) in which this firm could attain additional costs saving by implementing cost-cutting initiatives. Your conclusions should be outlined in a memorandum directed to Continental's Executive management team. You are provided next with a description of Continental's operating costs and the potential drivers of costs so you can conduct regression analysis to estimate the corresponding cost functions. To help you in estimating the regressions, a comprehensive set of instructions for performing regression analysis using Microsoft Excel is provided in the Appendix. Immediately following the description of costs, a series of questions is provided that should help guide your analysis. Additionally, to help you estimate your regressions, Exhibit 1 presents past quarterly data for all of the above expenditures for the period of January 2000 through December 2008, while Exhibit 2 provides quarterly operations data for the same period of time. (Exhibits are shown at the end of this document; Exhibit 1 is also available as an Excel spreadsheet.) CONTINENTAL'S OPERATING COSTS AND POTENTIAL COST DRIVERS As shown in Exhibit 1, there are ten categories of operating costs. These include salaries and wages, aircraft fuel and related taxes, aircraft rentals, airport fees, aircraft maintenance and repairs, depreciation and amortization, distribution costs, passenger services, regional capacity purchases, and other expenses. Of these, some represent a single expense item. For example, the cost of aircraft rentals and airport fees together comprise a single cost item. Other costs represent cost pools comprising several cost items. Such is the case of passenger services and other expenses. The following provides a detailed description of each cost, along with the potential cost drivers.4 Salaries and Wages This account represents costs related to salaries and wages, as well as fringe benefits, of Continental's workers. These include salaries for pilots and wages for flight attendants and ground crew, as well as wages for Continental's mechanics. Additionally, a significant portion of this salary pool represents wages of reservation specialists, customer service representatives at airports, and the salaries for administrative and support personnel (e.g., flight schedulers, technology personnel, accountants, and division managers). A possible cost driver of salaries is the available seat miles.5 Aircraft Fuel and Related Taxes This represents the cost of jet fuel and related fuel taxes. Jet fuel cost tends to be driven by the current price of jet fuel and gallons of jet fuel consumed. Aircraft Rentals These are expenses for capital leases of aircraft. The main driver is the number of leased planes in Continental's fleet, including regional jets operated on behalf of Continental by four regional airlines under various capacity purchase agreements. Airport Fees Represents landing fees and passenger security fees paid to the various domestic and international airports where Continental flies. Landing fees are driven by the number of passengers. Aircraft Maintenance and Repairs These are expenses associated with the service and maintenance of planes. These include expenses related to scheduled maintenance, spare parts and materials, and airframe and engine overhauls. The main drivers of these costs are the number of planes in the fleet and the number of miles flown. Depreciation and Amortization This represents depreciation and amortization expenses of aircraft, ground equipment, buildings, and other property. It must be emphasized that the largest portion of depreciation expense relates to the depreciation of aircraft. Although depreciation expenses are driven by the acquisition cost of Continental's capital assets, depreciation is greatly influenced by both company policy and accounting principles, such as the depreciation method, that a firm adopts. 4 A cost driver represents a particular business activity, which usually tends to have a cause-and-effect relationship with a given cost. For example, for airlines, a typical cost driver for landing fees is the number of daily flights carried by the airline, as well as the number of passengers flown. An increase (decrease) in the number of flights or passengers flown would increase (decrease) landing fees. 5 Available seat miles is calculated as the number of seats available for passengers multiplied by the number of scheduled miles those seats are flown. Distribution Costs These expenses represent credit card discount fees, booking fees, and travel agency commissions, all of which are affected by passenger revenue. Therefore, the driver of these costs is total revenue. Passenger Services This is also a cost pool that includes expenses related to processing and servicing passengers prior to take-off, during flight, and after arrival at their destination. A significant portion of these costs is generated by Continental's Field Services Division, the main function of which is to provide service to planes prior to take-off. Some of these expenses relate to checking in passengers, handling luggage on and off planes, cleaning planes, stocking planes with beverage and food, and refueling the aircraft prior to take-off. The potential cost driver of these costs is the number of passengers. Regional Capacity Purchases These are costs related to the purchase of regional routes served by several regional airlines on behalf of Continental (ExpressJet, Chautauqua, CommutAir, and Cogan). These costs are driven by the combined flying capacity of the four airlines: available regional seat miles. Other Expenses This is a cost pool that comprises many ancillary and discretionary expenditures, including technology expenses, security and outside services, general supplies, and advertising and promotional expenses. Further, this cost pool contains various special charges for gains and losses from the sale of retired aircraft and costs of future leases. Given the large variety of miscellaneous items, there is no clear driver of these expenses; however, a large portion of them, such as advertising and promotional expenses, are driven by total revenue. DISCUSSION QUESTIONS 1. Using the quarterly data for operating costs and the various cost drivers of costs provided by Exhibits 1 and 2, estimate regression for cost category of costs. Then, write the appropriate cost function for each category of cost and then interpret your regression results. 2. Based on your regression results, where do you see the largest reductions in costs if flying capacity is lowered by 11 percent? Also, in which areas do you see opportunities to achieve further cost reductions and why? 3. Exhibit 2 provides a quarterly forecast of revenues, jet fuel prices, 6 and the projected operating activity for 2009. Using the information from your regressions and the forecast information provided in Exhibit 2, estimate Continental's operating costs and expected profit for the upcoming fiscal year. 4. Based on the results of your profitability analysis, what can you say about the firm's financial outlook? Would Continental be earning an operating profit in 2009? If not, what should Continental's management do to restore profitability in 2009? 5. Summarize your conclusions in a memorandum addressed to Continental's CEO. In the memo, you must clearly communicate your main findings, emphasizing specific areas in which you see the greatest potential to achieve further reductions in costs and, based on your profitability analysis, sum up the financial outlook for 2009. 6 You should note that Continental has entered into several future contracts to hedge the exposed risks of rising fuel prices. The projected costs for jet fuel on exhibit reflects the value of the various future contracts which guarantee Continental a fixed price for jet fuel at various maturity dates in 2009, as well the estimated gallons of fuel that Continental plans to use during the year. EXHIBIT 1: REVENUESAND OPERATING COSTS DATA & OPERATIONS AND COST DRIVER DATA Obs. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 Period 1Q-2000 2Q-2000 3Q-2000 4Q-2000 1Q-2001 2Q-2001 3Q-2001 4Q-2001 1Q-2002 2Q-2002 3Q-2002 4Q-2002 1Q-2003 2Q-2003 3Q-2003 4Q-2003 1Q-2004 2Q-2004 3Q-2004 4Q-2004 1Q-2005 2Q-2005 3Q-2005 4Q-2005 1Q-2006 2Q-2006 3Q-2006 4Q-2006 1Q-2007 2Q-2007 3Q-2007 4Q-2007 1Q-2008 2Q-2008 3Q-2008 4Q-2008 Revenues 2,277,000,000 2,571,000,000 2,622,000,000 2,429,000,000 2,451,000,000 2,556,000,000 2,223,000,000 1,739,000,000 1,993,000,000 2,192,000,000 2,178,000,000 2,039,000,000 2,042,000,000 2,216,000,000 2,365,000,000 2,247,000,000 2,307,000,000 2,553,000,000 2,602,000,000 2,437,000,000 2,505,000,000 2,857,000,000 3,001,000,000 2,845,000,000 2,947,000,000 3,507,000,000 3,518,000,000 3,156,000,000 3,179,000,000 3,710,000,000 3,820,000,000 3,523,000,000 3,570,000,000 4,044,000,000 4,072,000,000 3,471,000,000 Fuel 334,000,000 313,000,000 354,000,000 392,000,000 345,000,000 349,000,000 322,000,000 213,000,000 208,000,000 254,000,000 276,000,000 285,000,000 347,000,000 302,000,000 316,000,000 290,000,000 333,000,000 387,000,000 414,000,000 453,000,000 470,000,000 575,000,000 684,000,000 714,000,000 672,000,000 744,000,000 858,000,000 760,000,000 684,000,000 842,000,000 895,000,000 933,000,000 1,048,000,000 1,363,000,000 1,501,000,000 993,000,000 Salaries and Wages 672,000,000 719,000,000 748,000,000 736,000,000 758,000,000 800,000,000 779,000,000 684,000,000 732,000,000 746,000,000 743,000,000 738,000,000 778,000,000 762,000,000 778,000,000 738,000,000 688,000,000 711,000,000 703,000,000 717,000,000 715,000,000 649,000,000 646,000,000 639,000,000 661,000,000 791,000,000 743,000,000 680,000,000 726,000,000 821,000,000 836,000,000 744,000,000 729,000,000 704,000,000 765,000,000 760,000,000 Capacity Purchases 158,000,000 317,000,000 328,000,000 347,000,000 359,000,000 353,000,000 382,000,000 406,000,000 431,000,000 415,000,000 454,000,000 475,000,000 447,000,000 430,000,000 444,000,000 446,000,000 473,000,000 506,000,000 589,000,000 553,000,000 425,000,000 Aircraft Rentals 206,000,000 210,000,000 215,000,000 213,000,000 214,000,000 223,000,000 230,000,000 236,000,000 228,000,000 231,000,000 227,000,000 216,000,000 223,000,000 224,000,000 225,000,000 224,000,000 220,000,000 222,000,000 224,000,000 225,000,000 227,000,000 229,000,000 234,000,000 238,000,000 245,000,000 248,000,000 249,000,000 248,000,000 248,000,000 248,000,000 249,000,000 249,000,000 247,000,000 246,000,000 244,000,000 240,000,000 Landing Fees 129,000,000 138,000,000 133,000,000 132,000,000 141,000,000 153,000,000 139,000,000 148,000,000 161,000,000 160,000,000 163,000,000 149,000,000 152,000,000 152,000,000 165,000,000 151,000,000 160,000,000 163,000,000 171,000,000 160,000,000 171,000,000 181,000,000 182,000,000 174,000,000 185,000,000 198,000,000 195,000,000 186,000,000 193,000,000 190,000,000 209,000,000 198,000,000 207,000,000 210,000,000 225,000,000 210,000,000 Distribution Costs 248,000,000 261,000,000 255,000,000 217,000,000 243,000,000 230,000,000 194,000,000 142,000,000 172,000,000 158,000,000 138,000,000 124,000,000 127,000,000 138,000,000 131,000,000 135,000,000 137,000,000 140,000,000 139,000,000 136,000,000 138,000,000 154,000,000 154,000,000 142,000,000 160,000,000 178,000,000 157,000,000 155,000,000 161,000,000 176,000,000 171,000,000 174,000,000 182,000,000 194,000,000 182,000,000 159,000,000 Aircraft Maintenance 159,000,000 171,000,000 167,000,000 149,000,000 160,000,000 162,000,000 142,000,000 104,000,000 114,000,000 119,000,000 119,000,000 124,000,000 133,000,000 126,000,000 135,000,000 115,000,000 112,000,000 102,000,000 107,000,000 93,000,000 112,000,000 106,000,000 116,000,000 121,000,000 127,000,000 140,000,000 140,000,000 140,000,000 144,000,000 169,000,000 166,000,000 142,000,000 159,000,000 167,000,000 152,000,000 135,000,000 Depreciation 95,000,000 98,000,000 102,000,000 107,000,000 105,000,000 111,000,000 120,000,000 131,000,000 106,000,000 112,000,000 112,000,000 114,000,000 116,000,000 110,000,000 110,000,000 108,000,000 104,000,000 105,000,000 104,000,000 102,000,000 99,000,000 98,000,000 97,000,000 95,000,000 96,000,000 97,000,000 99,000,000 99,000,000 99,000,000 101,000,000 106,000,000 107,000,000 106,000,000 108,000,000 112,000,000 111,000,000 Passenger Services 85,000,000 91,000,000 97,000,000 89,000,000 91,000,000 96,000,000 89,000,000 71,000,000 77,000,000 73,000,000 78,000,000 68,000,000 70,000,000 73,000,000 81,000,000 73,000,000 69,000,000 76,000,000 84,000,000 77,000,000 77,000,000 84,000,000 91,000,000 80,000,000 82,000,000 90,000,000 97,000,000 87,000,000 90,000,000 99,000,000 105,000,000 95,000,000 96,000,000 107,000,000 113,000,000 91,000,000 Other Expenses 286,000,000 284,000,000 288,000,000 277,000,000 318,000,000 295,000,000 121,000,000 166,000,000 382,000,000 454,000,000 276,000,000 277,000,000 320,000,000 91,000,000 250,000,000 455,000,000 304,000,000 279,000,000 287,000,000 278,000,000 316,000,000 280,000,000 282,000,000 305,000,000 293,000,000 323,000,000 313,000,000 333,000,000 340,000,000 357,000,000 357,000,000 328,000,000 356,000,000 427,000,000 461,000,000 372,000,000 EXHIBIT 1 (continued): REVENUESAND OPERATING COSTS DATA & OPERATIONS AND COST DRIVER DATA Obs. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 Period 1Q-2000 2Q-2000 3Q-2000 4Q-2000 1Q-2001 2Q-2001 3Q-2001 4Q-2001 1Q-2002 2Q-2002 3Q-2002 4Q-2002 1Q-2003 2Q-2003 3Q-2003 4Q-2003 1Q-2004 2Q-2004 3Q-2004 4Q-2004 1Q-2005 2Q-2005 3Q-2005 4Q-2005 1Q-2006 2Q-2006 3Q-2006 4Q-2006 1Q-2007 2Q-2007 3Q-2007 4Q-2007 1Q-2008 2Q-2008 3Q-2008 4Q-2008 Total Aircraft 514 522 535 522 548 557 501 522 538 570 570 554 562 570 570 579 586 587 592 594 598 604 611 622 630 634 648 648 630 625 631 628 641 630 653 632 Leased Aircraft 403 410 414 398 406 416 377 393 400 404 401 410 419 428 428 434 437 440 445 448 453 459 466 477 483 484 482 480 446 418 415 415 414 390 412 397 Flights 98,820 97,871 97,967 98,378 98,590 99,018 98,564 81,109 81,883 82,815 81,737 78,809 75,178 75,617 76,297 75,650 74,859 75,816 74,211 74,443 71,494 74,651 74,630 75,886 74,962 77,729 77,468 79,030 78,601 82,582 81,118 80,850 76,719 76,096 78,599 76,000 Passengers 11,201,000 12,084,000 12,155,000 11,456,000 11,220,000 12,256,000 11,254,000 9,508,000 12,062,000 13,099,000 13,006,000 12,874,000 11,518,000 13,044,000 13,727,000 13,769,000 12,810,000 14,558,000 14,862,000 14,252,000 14,122,000 15,540,000 15,905,000 15,448,000 15,594,000 17,596,000 17,328,000 16,601,000 16,176,000 18,120,000 17,901,000 16,733,000 16,440,000 17,108,000 17,962,000 15,183,000 Available Seat Miles 20,951,000,000 21,384,000,000 22,356,000,000 21,409,000,000 21,459,000,000 22,813,000,000 21,994,000,000 18,219,000,000 20,375,000,000 22,286,000,000 22,626,000,000 21,054,000,000 20,843,000,000 21,241,000,000 22,819,000,000 21,907,000,000 22,670,000,000 24,150,000,000 24,674,000,000 23,588,000,000 23,585,000,000 25,482,000,000 26,833,000,000 25,720,000,000 26,117,000,000 28,259,000,000 29,262,000,000 27,280,000,000 27,250,000,000 29,592,000,000 30,346,000,000 28,550,000,000 28,376,000,000 30,304,000,000 30,383,000,000 26,448,000,000 Available Seat Miles (Regional) 1,767,000,000 2,073,000,000 1,605,000,000 2,980,000,000 2,400,000,000 2,603,000,000 1,999,000,000 3,408,000,000 2,740,000,000 3,026,000,000 3,112,000,000 3,095,000,000 3,082,000,000 3,374,000,000 3,503,000,000 3,292,000,000 3,126,000,000 3,177,000,000 3,193,000,000 3,104,000,000 3,098,000,000 3,450,000,000 3,390,000,000 3,046,000,000 Passenger Miles Flown 15,005,000,000 16,491,000,000 17,325,000,000 15,340,000,000 15,114,000,000 17,053,000,000 16,206,000,000 12,767,000,000 14,867,000,000 16,489,000,000 16,960,000,000 17,252,000,000 14,352,000,000 16,129,000,000 18,041,000,000 16,412,000,000 16,255,000,000 18,735,000,000 19,922,000,000 18,239,000,000 18,112,000,000 20,292,000,000 21,762,000,000 20,033,000,000 20,336,000,000 23,367,000,000 24,042,000,000 21,772,000,000 21,450,000,000 24,623,000,000 25,422,000,000 22,670,000,000 22,280,000,000 24,836,000,000 24,746,000,000 20,825,000,000 Employees 45,000 45,500 46,000 45,944 38,396 39,000 39,500 39,461 40,229 41,011 41,809 40,244 38,960 39,000 39,500 39,000 38,240 37,496 36,766 38,255 41,831 45,742 50,018 42,200 42,600 43,450 41,500 38,033 41,800 43,300 41,400 39,640 43,000 40,100 43,500 42,490 Fuel Price $0.829 $0.797 $0.865 $0.885 $0.856 $0.815 $0.824 $0.826 $0.644 $0.723 $0.760 $0.740 $1.029 $0.881 $0.857 $0.872 $1.041 $1.787 $1.199 $1.190 $1.453 $1.670 $1.880 $1.776 $1.904 $2.110 $2.215 $2.064 $1.895 $2.079 $2.206 $2.499 $2.797 $3.856 $3.450 $2.925 Fuel Consumed 377,000,000 386,000,000 398,000,000 372,000,000 369,000,000 391,000,000 373,000,000 369,000,000 308,000,000 332,000,000 340,000,000 316,000,000 305,000,000 308,000,000 330,000,000 314,000,000 320,000,000 347,000,000 345,000,000 321,000,000 324,000,000 344,000,000 364,000,000 344,000,000 347,000,000 375,000,000 387,000,000 362,000,000 361,000,000 395,000,000 406,000,000 380,000,000 375,000,000 389,000,000 395,000,000 339,000,000 EXHIBIT 2: PROJECTIONS OF REVENUESAND OPERATINGACTIVITY FORYEAR 2009 Variable Quarter 1 Revenues $2,962,000,000 Available seat miles 26,323,000,000 Available regional seat miles 2,971,000,000 Number of passengers 14,408,000 Number of planes 634 Number leased planes 398 $1.82 Price of fuel (per gallon) Gallons of fuel consumed 403,000,000 _____________________________ Quarter 2 $2,767,000,000 28,007,000,000 3,044,000,000 16,348,000 617 394 $2.07 430,000,000 Quarter 3 $2,947,000,000 28,933,000,000 3,130,000,000 16,795,000 604 380 $1.99 369,000,000 Quarter 4 $2,462,000,000 26,291,000,000 3,002,000,000 15,258,000 601 379 $1.98 479,000,000 All financial and operational data represent quarterly data for the quarter beginning January 2000 (Observation 1) through December 2008. Data have been compiled from Continental's 8-K and10-K reports, submitted to the Securities and Exchange Commission. Definitions of Operations Variables: Available seat miles Available regional seat miles Number of passengers Number of planes Number of leased planes Price of jet fuel Gallons of fuel consumed = the number of seats available multiplied by the number of miles flown; = available seat miles on regional routes; = number of paying passengers flown; = number of planes in the fleet, including regional routes aircraft; = number of leased planes; = average price per gallon of jet fuel in the respective quarter; and = number of gallons of fuel consumed in the respective quarter