Continental Airlines is primarily involved in transporting passengers, cargo and mail. Continental Airlines operates through two major divisions namely domestic operations and international operations. Its domestic route system is operated through its hubs at Newark International Airport, George Bush Intercontinental Airport in Houston and Hopkins International Airport in Cleveland. Continental is the leading US airline servicing Central America, including Mexico.

Continental Airlines in conjunction with Express Jet operates regional jets and turboprop aircraft under the name Continental Express.
CMI is a US-certified air carrier transporting passengers, cargo and mail in the western Pacific. Through its hub operations on the island of Guam, it serves Pacific Rim destinations including Japanese cities, Australia and Indonesia.
Continental has entered into, and continues to develop, alliances with domestic carriers. The company has a long-term global alliance with Northwest Airlines wherein each carrier has to place its code on a large number of the flights of the other. The agreement also includes joint marketing activities such as reciprocity of frequent flyer programs and lounge access. Continental has also entered into agreements to code-share with certain Northwest Airlines regional affiliates.
Continental's other domestic code-sharing alliance partners include Gulf stream International Airlines, Hawaiian Airlines, Alaska Airlines, Horizon Airlines Sky West Airlines and CommutAir. Other companies with which Continental has international code-sharing agreements include Mexico co, Maersk Air, Air Europa, British European flybe, KLM Royal Dutch Airlines, Emirates, Gulf stream International Airlines, EVA Air, Virgin Atlantic Airways. Continental also has an alliance with SNCF and owns 49% of the common equity of Copa Airlines. With their shark noses and sleek aerodynamics, the 50-seat Embraer jets thatContinental Express has been flying into Newark International Airport for the last three years cut a smart silhouette. Passengers love the insides, too. Wide seats and quiet cabins make the Embraers a far cry from the turboprop regional planes that have earned the nickname "weed-beaters."

They're also a gold mine for the airlines. The regional carrier Continental Express will contribute $840 million in revenue to parent Continental Airlines Inc., up 68 percent from $500 million in 1997.

"They're an important asset for us to handle a very aggressive business plan," said Jim Ream, president of Continental Express. The planes also have become a menace in the delayed-filled skies over Newark, Kennedy and LaGuardia airports, according to airport executives and air traffic controllers, who are at odds with carriers pushing regional jets as a way to develop new markets.

Critics say the proliferation of regional jets such as the Embraer and Delta's Bombardier is turning the nation's busiest airspace into an airborne parking lot. The situation is made worse because regional jets fly at a higher altitude than turboprops, which means they vie for the same airways with 747s and 737s streaming into the airports.

In response, Continental Airlines, as well as units of American, Delta and US Airways, have announced plans to fill the void with their most proven and profitable tool: the regional jet.

At LaGuardia, alone, the carriers plan to bring in as many as 608 additional daily flights. The Flushing, N.Y., airport already averages 981 flights. Even so, DeCota acknowledged the regional jet has transformed air travel as dramatically as federal de-regulation of the airline industry did after 1978. What began in 1993 as a way for smaller airlines to open markets with aircraft having 50 seats or less is now a key growth component at the nation's largest carriers.

"In a lot of ways, it's like the automobile; it opens up places that you couldn't travel before."

The beauty of the regional jet is it can fly profitably to cities that don't yet have the passenger counts to justify deploying bigger jets outfitted with 120 seats or more. On those aircraft, about 65 percent or more of the seats need to be filled for an airline to break even, compared to 45 or less on a regional jet.

But, at Newark, JFK and LaGuardia, which already handle 1.2 million flights a year, the solution to congestion is not more planes with fewer seats, DeCota said. The problem is particularly acute at Newark. Not only are the regional jets crowding the same airspace as the bigger jets, but they are also landing and taking off on the same runways. As a result, the number of flights using the east-west reliever runway has plummeted as pilots on the smaller jets request to use the longer, north-south strips used by the largest aircraft.

That adds to Newark's notorious crowding. With the 9,980- and 11,000-foot runways paralleling the New Jersey Turnpike inundated with bigger jets, one solution for the last several years has been to confine the turboprops and smaller jets to east-west Runway 11-29. But the regional jet pilots have been balking. Pilots often feel more comfortable with longer runways, even if they don't necessarily need them.

According to FAA records, operations on the runway have declined as regional jet flights have climbed to 7 percent of all airport operations since 1997, when they accounted for just 2 percent of all flights. During that time, use of the 6,800-foot runway fell 65 percent to 21,841 flights, or 5 percent of all airport landings and take-offs. Somebody's got to force them back, DeCota said.

There could be some help when the FAA implements a new map of the area's air space in 2004. The new flight patterns will make provisions for the regional jets now crowding the mix, Hatfield said. Even Delta Air Lines is skeptical, although it ordered 94 regional jets from Bombardier Inc. for $2 billion and announced plans to serve 22 additional cities from LaGuardia through its Delta Connection Inc. partners, Atlantic Southeast Airlines and Comair.

"They can't let the operational integrity of the most important airspace in the country fall to pieces," said Doug Blissit, vice president of network analysis for the nation's third-largest airline. "At some point there will have to be some mechanism to limit what more can go in because obviously there's a limit to what the airspace can do," he said.

Continental, which also announced plans to fly regional jets to 22 East Coast cities from LaGuardia, said there's no reason to fear more congestion. The flights it adds in Flushing will be carved from Newark, where Continental's 720 daily flights make it the airport's busiest carrier, said Greg Brenneman, president of chief operating officer.

The 200 daily trips now being made in and out of Newark by Continental Express will drop to 150 in five years as the additional flights are added at LaGuardia, he said. Ultimately, it will be a wash, and it doesn't want to increase the number of departures at Newark.

The nation's No. 5 airline has long said it only makes sense to exploit Newark's limited resources with aircraft that can carry the fullest loads. Regional jets, though, can be used to develop certain markets to the point where they can be taken over by larger jets, especially since the range of an Embraer is 800 miles, more than double that of a turboprop.

Since the first Embraers were introduced in 1997, Continental Express has seen its passenger counts increase 37 percent to almost 6.7 million last year "It brings communities an attractive service to a major hub that previously had been unavailable," said Jim Ream, president of Continental Express. "There are an awful lot of small counties out there clamoring for it. "LaGuardia is an opportunity to grow our presence in New York and we're going to use the RJ as leverage."

Continental is making an expensive bet on the future of regional jets. The airline expects to fly 230 Embraers by 2003, more than triple the 73 it has now. In May, as he helped open a $25 million center to train regional jet pilots and flight crews, Gordon Bethune, Continental's chairman and chief executive officer, called the 32,000 square-foot-facility the envy of competitors. "Continental Express deserves that because they are responsible for so much of our profitability," he said. Yet, Ream acknowledged the transition has not been without its growing pains.

Capt. Tom Tremblay, the Continental Express liaison for the Independent Association of Continental Pilots, said the training center was long overdue and showed how late management came to understand ways in which the regional jets could help the airline grow.

"Originally, their intention was just to replace the turbos," he said. "It took a while for them to realize how effective they could be supplementing the main line's weaker routes. Now, the amount of flying we do even surpasses the work load of the major airlines."

As for compounding Newark's congestion, Continental said it is already taking preventive steps. For one thing, the airline is urging pilots to use the shorter runway.
Embraers typically need just 6,000 feet, so they could safely use Runway 11-29 at Newark.

The results of the push by Continental Express are starting to pay off. Embraers used the runway for 2.5 percent of take-offs during the first quarter, compared with 2 percent of all of last year, it said. Use on arrivals is even better, up to 6 percent from 2.4 percent.

Daniel D'Agostino, president of the Newark local of the National Air Traffic Controllers Association, said the tower has noticed more regional jets using the reliever runway. However, he said the lengthening of a parallel runway nearby has introduced new complications because it now intersects with Runway 11-29. To prevent accidents, controllers and pilots need to observe rules that can result in delays.

As that gets worked out, Continental Express is using technology to address potential congestion. Its newest Embraers will also come with more powerful engines that can get the plane airborne more quickly.
New jets also will be equipped with flight management systems permitting pilots to chart routes outside those used by bigger jets.

Factors that May Affect Future Results
The actual results of the Company’s operations will vary, and may vary materially, from those currently anticipated, estimated, projected or expected by the Company. Among the key factors that may have a direct bearing on the Company’s operating results and financial condition are those set forth in the following paragraphs:
The Company will be materially affected by the uncertainty of the airline industry:
The airline industry has experienced tremendous challenges in recent years and will likely remain volatile for the foreseeable future. Among other factors, the events associated with September 11, 2001, the slowing U.S. economy throughout 2002 and 2003 and increased hostilities in Iraq, the Middle East or other regions could significantly affect the U.S. airline industry. These events have resulted in changed government regulation, declines and shifts in passenger demand, increased insurance costs and tightened credit markets, all of which have affected, and will continue to affect, the operations and financial condition of participants in the industry including the Company, major carriers (including the Company’s major partners), competitors and aircraft manufacturers. These industry developments raise substantial risks and uncertainties which will affect the Company, major carriers (including the Company’s major partners), competitors and aircraft manufacturers in ways that the Company is not currently able to predict. The Company has been, and will continue to be, significantly impacted by the troubled financial condition of its major partners:

In December 2002, United filed for reorganization under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”). During September 2003, the Company entered into the United Express Agreement, which had been previously approved on August 29, 2003 by the U.S. Bankruptcy Court. The United Express Agreement received all necessary approvals from the creditors’ committee operating on behalf of United under bankruptcy protection and United’s pilot union. Notwithstanding the execution of the United Express Agreement, United’s bankruptcy filing could still lead to many other unforeseen expenses, risks and uncertainties. Although United has reported that it intends to emerge from its ongoing Chapter 11 bankruptcy on or before June 30, 2005, it could still file for liquidation under Chapter 7 of the Bankruptcy Code, or liquidate some or all of its assets through one or more transactions with third parties. Such events, individually or singly, could jeopardize the Company’s United Express operations, leave the Company unable to efficiently utilize the additional aircraft which the Company is currently obligated to purchase, or result in other outcomes which could have a material adverse effect on the operations, activities or financial condition of the Company.

In recent months, Delta has indicated the possibility of seeking protection under the Bankruptcy Code unless they achieve a more competitive cost structure, regain profitability and obtain further access to capital markets on acceptable terms. If Delta were to file for protection under the Bankruptcy Code, the Company’s Delta Connection operations could be jeopardized. Such an event could leave the Company unable to utilize existing aircraft or result in other outcomes which could have a material adverse effect on the operations, activities or financial condition of the Company.

The Company’s operations and financial condition are dependent upon the terms of its relationships with its major partners:

Substantially all of the Company’s revenues are derived from flight operations conducted under its agreements with Delta, United and Continental. Any material change in the Company’s contractual relationships with its major partners would impact the Company’s operations and financial condition. The Company’s major partners currently face significant economic, operational, financial and competitive challenges. United’s bankruptcy filing and associated reorganization effort represents only a portion of those challenges. As the Company’s major partners struggle to address such challenges, they have required, and will likely continue to require, the Company’s participation in efforts to reduce costs and improve the financial position of the Company’s partners. In particular, these challenges could translate into lower departure rates on the contract flying portion of the Company’s business. Management believes these developments will impact many aspects of the Company’s operations and financial performance. In particular, the Company anticipates that its financial performance, including its margins, will be less predictable than in prior periods and will be negatively impacted as the industry experiences significant restructuring. In addition, the Company’s contract flying arrangements with Delta and United contain termination provisions that could adversely impact the Company’s revenues. The Company’s rights under the United Express Agreement expire incrementally between 2012 and 2016; however, United can terminate the agreement without notice if the Company does not perform at certain levels. The Company’s current Delta Connection agreement expires in 2008; however, Delta can terminate the agreement without cause upon 180 days notice. The agreement with Continental can be terminated by either party upon 90 days notice. Maintenance costs will likely increase as the age of the Company’s regional jet fleet increases: Because the average age of Sky West’s CRJ200s is approximately 2.6 years, Sky West’s aircraft require less maintenance now than they will in the future. The Company has incurred relatively low maintenance expenses on its regional jet fleet because most of the parts on Sky West’s regional jet aircraft are under multi-year warranties and a limited number of heavy airframe checks and engine overhauls have occurred. The Company’s maintenance costs will increase significantly, both on an absolute basis and as a percentage of its operating expenses, as Sky West’s fleet ages and these warranties expire.

The Company has a significant amount of contractual obligations:
As of September 30, 2004, the Company had $507.7 million in total long-term debt obligations. Substantially all of this long-term debt was incurred in connection with the acquisition of EMB120 and CRJ200 aircraft. The Company also has significant long-term lease obligations primarily relating to its aircraft fleet. These leases are classified as operating leases and therefore are not reflected as liabilities in the Company’s condensed consolidated balance sheets. At September 30, 2004, the Company had 151 aircraft under lease with remaining terms ranging from one to 16 years. Future minimum lease payments due under all long-term operating leases were approximately $1.99 billion at September 30, 2004. At a 7% discount factor, the present value of these lease obligations was equal to approximately $1.26 billion at September 30, 2004.

As of September 30, 2004, the Company had commitments of approximately $800 million to purchase 25 CRJ700 aircraft and related flight equipment. The Company currently anticipates that it will take delivery of these aircraft from October 2004 through May 2005. Additionally, during the quarter ended March 31, 2004, Delta awarded to the Company seven additional CRJ200s that are scheduled for delivery during the first half of 2005. The Company anticipates subleasing these seven aircraft from Delta. The Company’s high level of fixed obligations could impact its ability to obtain additional financing to support additional expansion plans or divert cash flows from operations and expansion plans to service the fixed obligations.
The Company’s reliance on only three aircraft types exposes the Company to a number of potentially significant risks:

As of September 30, 2004 the Company had a fleet of 74 EMB120s, 121 CRJ200s and seven CRJ700s. During the quarter ended September 30, 2004, 78.9% of the Company’s ASMs were flown using CRJ200s, 14.1% of the Company’s ASMs were flown using EMB120s and 7.0% of the Company’s ASMs were flown using CRJ700s. Additionally, as of September 30, 2004, the Company had agreements to acquire 25 CRJ700s and had obtained options to acquire another 80 CRJ700s that can be delivered in either 70 or 90 seat configurations. The Company presently anticipates that delivery dates for the 80 options on either 70 or 90 seat CRJ700s could start in June 2005 and continue through September 2008; however, actual delivery dates remain subject to final determination as agreed upon by the Company and its major partners. The Company is subject to numerous risks related to its current fleet and the ability to operate the additional aircraft that could materially or adversely affect its operations and financial condition, including:

• The Company’s ability to obtain necessary financing to fulfill the Company’s contractual obligations related to the acquisition of aircraft;
• The breach by Bombardier, Inc. of the Company’s firm order contracts for the delivery of CRJ700s and CRJ200s or any change in the delivery schedule of such CRJ700s;
• The interruption of fleet service as a result of unscheduled or unanticipated maintenance requirements for such aircraft;
• The issuance of FAA directives restricting or prohibiting the use of EMB120s, CRJ200s or CRJ700s; or,
• The adverse public perception of an aircraft type as a result of an accident or other adverse publicity.
Unionization of the Company’s employees could impact the Company’s business:
The employees of the Company are not currently represented by any union. Management is aware that collective bargaining group organization efforts among its employees occur from time to time and expects that such efforts will continue in the future. If unionizing efforts are successful, the Company may be subjected to risks of work interruption or stoppage and/or incur additional administrative expenses associated with union representation. Management recognizes that such efforts will likely continue in the future and may ultimately result in some or all of the Company’s employees being represented by a union.
The Company is subject to significant governmental regulation:
All interstate air carriers, including Sky West, are subject to regulation by the DOT, the FAA and other governmental agencies. Regulations promulgated by the DOT primarily relate to economic aspects of air service. The FAA requires operating, air worthiness and other certificates; approval of personnel who may engage in flight, maintenance or operation activities; record keeping procedures in accordance with FAA requirements; and FAA approval of flight training and retraining programs. The Company cannot predict whether it will be able to comply with all present and future laws, rules, regulations and certification requirements or that the cost of continued compliance will not have a material adverse effect on operations