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Was Continental Airlines heading towards Chapter 11 for the third time?

September 12, 2010 | About:

Airlines Industry is a highly competitive industry which generally earns low returns because of the high cost of operation. This can bring disaster when times get tough in the economy. Continental Airlines (Ticker CAL) is the fourth largest airline in the US based on revenue passenger miles. It was founded in 1931 and commenced operations in 1934. Continental Airlines had been through Chapter 11 twice. It filed for the bankruptcy for the first time in September 1983 and remained under Chapter 11 from 1983 to 1986. Continental filed for its second bankruptcy in 1990 mainly due the increased jet fuel prices after the Gulf War of 1990. In 1993 Air Canada, Air Partners and Texas Pacific Group, enabled Continental to emerge from bankruptcy by investing $450 million in the airline.

Was Continental Airlines heading towards bankruptcy for the third time before merging with United Airlines (Ticker UAUA)? Altman Z-score analysis, capital structure analysis, and profitability analysis shows that the company was in distress before the merger was announced.

Altman Z score analysis:

Altman Z-Score decreased to 1.2 in year 2009 from 1.7 in year 2008. At the end of June 2010, the company had a Z-Score of 0.49, which means that company was in distress zone and chances of financial embarrassment were very high. (Data Source: Old School Value)

Zones of Discrimination:

Z > 2.99 –“Safe” Zone

1.8< Z< 2.99 –“Grey” Zone

Z< 1.80 –“Distress” Zone

Capital Structure Analysis:

At the end of year 2009, the company’s total debt to equity ratio was 1062%. Debt comprised 91.4% of the total capital and equity comprised only 8.6% of the total capital. Also about 15% of the company’s total debt was due in year 2010 and another 18% was due in year 2011, which would have created problems for the company. The company had approximately $7 billion worth operating lease commitments due in next five years.

Million $ Percent
Debt 6266 91.4%
Equity 590 8.6%
Total 6856 100%

Million $ Percent
LT Debt (Incl. Cap Leases) Due 2010 975 15.6%
LT Debt (Incl. Cap Leases) Due 2011 1148.9 18.3%
LT Debt (Incl. Cap Leases) Due 2012 590.9 9.4%
LT Debt (Incl. Cap Leases) Due 2013 656.9 10.5%
LT Debt (Incl. Cap Leases) Due 2014 338.9 5.4%
Total LT Debt (Incl. Cap Leases) Due in next 5 years 3710.6 59.2%
Total LT Debt (Incl. Cap Leases) Due after 5 years 2555.5 40.8%
Total 6266 100.0%

Million $ Percent
Total Term Long 350 5.6%
Total Senior Bonds and Notes 5272 84.1%
Total Capital Leases 196 3.1%
Total Trust Preferred 248 4.0%
Other Borrowings 200 3.2%
Total 6266 100.0%

Million $ Percent
Operating Lease commitment due 2010 1485 10.5%
Operating Lease commitment due 2011 1432 10.1%
Operating Lease commitment due 2012 1487 10.5%
Operating Lease commitment due 2013 1331 9.4%
Operating Lease commitment due 2014 1285 9.1%
Operating Lease commitment due in next 5 yrs 7020 49.7%
Operating Lease commitment due after 5 yrs 7094 50.3%
Total 14114 100.0%
(Source: Capital IQ)

Profitability Analysis:

Continental Airlines had negative operating earnings in year 2008 and 2009. Company’s ROA and ROE were also negative in the year 2008 and 2009. In year 2009, the company paid around $330 million as interest expense.

Jet Fuel Price Analysis:

The airline industry is extremely sensitive to costs such as fuel, labor and borrowing costs. Jet fuel price in 2010 increased by about 10.7% with compared to 2009.

27 Aug 10 Share in World Index cts/gal $/bbl $/mt Index Value 2000= 100 vs. 1 week ago vs. 1 month ago vs.1

yr ago
Jet Fuel Price 100% 208.2 87.5 689.3 239.1 1.7% 0.8% 10.7%
Asia & Oceania 22% 203.6 85.5 675.5 244.3 -0.6% -1.3% 10.2%
Europe & CIS 28% 208.5 87.6 690.1 236.0 1.9% 0.3% 10.2%
Middle East & Africa 7% 200.4 84.2 664.2 251.4 0.6% 0.0% 9.9%
North America 39% 210.8 88.5 698.6 235.4 2.8% 2.2% 11.4%
Latin & Central America 4% 219.8 92.3 710.8 255.7 2.9% 3.0% 11.5%
(Source: http://www.iata.org)

Disclaimer: The information/data in this article has been obtained or derived from sources generally available to the public and believed by the author to be reliable, but the author does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity.

Disclosure: The author of this article holds no financial interest in the securities of this company. The author of this article knows of no existence of any conflicts of interest that might bias the content or publication of this article. The author is not monetarily or financially compensated in any way for writing this article.

This article is also available at http://sudhanshujain.wordpress.com/

Rating: 1.9/5 (14 votes)


Skyflyin - 8 years ago    Report SPAM
Was Continental headed towards a third BK in 2010? No, and if you think they were you know nothing of the airline business. CO has long been regarded as one of the better run airlines and in better financial shape than most of its competitors.

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