Fitch Ratings: Continental Airlines Off Rtg Watch Neg.

Business Editors

CHICAGO--(BUSINESS WIRE)--Feb. 13, 2002

Fitch Ratings has removed the debt and preferred equity securities of Continental Airlines, Inc. (Continental) from Rating Watch Negative, while affirming the current ratings of 'B-' for Continental's senior unsecured debt, 'B-' for the company's recently issued convertible notes, and 'CCC' for its TIDES preferred equity securities. The current Rating Outlook for Continental is Negative.

Fitch's actions reflect the latest signs of stabilization in Continental's cash flow position that have begun to appear over the last several weeks. After suffering an unprecedented decline in air travel demand following the events of September 11, Continental has reported steady improvements in revenue per available seat mile (RASM), a key indicator of financial performance. RASM levels in December and January came in about 15% lower than prior year levels. This compares favorably with the 25%-30% RASM declines reported by Continental and most of its major airline competitors in the October-November period of industry crisis. Although yields remain very weak as a result of depressed business travel demand and continued discounting, booked load factors in the first quarter appear to be improving and the foundation for a return to positive operating cash flow in the second and third quarters is now stronger than at any point since September 11. Monthly traffic trends and the success of Continental's cost reduction program suggest that the risk of a further weakening in the company's operating cash position is unlikely--particularly as we move out of the seasonally slow traffic period of January and February.

Still, the current debt ratings indicate that a high level of financial risk continues to exist for Continental as it seeks to stabilize its operations. Until business traffic returns to more normal levels and rampant fare discounting abates, RASM levels will remain weak in 2002. Furthermore, Continental's high debt levels ($4.6 billion as of Dec. 31, 2001) and significant off-balance sheet aircraft lease commitments (roughly $9 billion on a present value debt-equivalent basis) will keep fixed financing obligations (interest and rental expenses) high well into the growth phase of the next airline traffic cycle.

It is important to note that Continental has been quite successful in squeezing out costs in connection with its recent schedule reductions. Benefiting from a sharp decline in fuel prices, the company was able to keep cost per available seat mile (CASM) essentially flat in the fourth quarter of 2001. This was achieved in a period when Continental reduced capacity by about 15% and faced significant non-recurring costs related to job reductions, insurance and heightened security measures. These cost control trends bode well for the company in its effort to restore profitability in the second quarter of 2002. Even with these encouraging signs, however, the risk of rising labor costs looms in 2003 and beyond as the company opens contract negotiations this year with its mechanics (contract currently amendable) and pilots (negotiations scheduled to begin this summer). Continental's labor costs are still well below industry-leading levels.

In terms of capital spending commitments, the company has apparently been successful in reaching an agreement with Boeing to stretch out previously scheduled 2002 aircraft deliveries. Deliveries of 20 Boeing aircraft are still slated for the first half of this year, but no additional Boeing aircraft will be delivered until the second half of 2003. Financing for all 2002 Boeing deliveries, as well as all Embraer regional jets for Continental Express, is in place. Thirteen of the 20 Boeing aircraft scheduled for delivery this year have been pre-funded through enhanced equipment trust certificates (EETCs). The remaining seven aircraft are covered by manufacturer financing commitments. Capital spending for Continental in 2002 is expected to total approximately $2 billion, of which about $250 million will represent cash outlays.

Continental's effort to maintain an adequate liquidity position in the months since September has been largely successful. Including the $175 million raised in the convertible note issue, $172 million in net proceeds from a common stock offering completed in November, and $264 million (after tax) in proceeds from the government assistance program, management expects the cash balance at the end of this quarter to lie somewhere in the range of $925 million to $975 million. Given the company's expectation that operating cash flow generation will resume in the second and third quarters as a result of a more robust traffic environment, the liquidity picture appears brighter.