"Do you sleep good at night knowing your operation is falling apart at the seams?"

Of course he feels good, he saved CAL from having to go into bankruptcy for a third time by merging it with UAL.

Was Continental Headed for Bankruptcy Before Merging With United? - Seeking Alpha

"Was Continental Headed for Bankruptcy Before Merging With United?

The airline 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 (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 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 to 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 (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 the 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 the years 2008 and 2009. The company’s ROA and ROE were also negative in the years 2008 and 2009. In year 2009, the company paid around $330 million in interest expenses.

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% 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: IATA.org)"