Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

This quarterly report on Form 10-Q contains forward-looking statements that are not limited to historical facts, but reflect our current beliefs, expectations or intentions regarding future events. All forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. For examples of such risks and uncertainties, please see the risk factors set forth in Part II, Item 1A. "Risk Factors" and elsewhere in this Form 10-Q, in our 2008 Form 10-K and in our reports and registration statements filed from time to time with the SEC, which identify important matters such as the significant volatility in the cost of aircraft fuel, our transition to a new global alliance, the consequences of our high leverage and other significant capital commitments, our high labor and pension costs, delays in scheduled aircraft deliveries, service interruptions at one of our hub airports, disruptions to the operations of our regional operators, disruptions in our computer systems, and industry conditions, including the recession in the U.S. and global economies, the airline pricing environment, terrorist attacks, regulatory matters, excessive taxation, industry consolidation, the availability and cost of insurance, public health threats and the seasonal nature of the airline business. We undertake no obligation to publicly update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this report, except as required by applicable law.

OVERVIEW

We are a major United States air carrier engaged in the business of transporting passengers, cargo and mail. We are the world's fifth largest airline as measured by the number of scheduled miles flown by revenue passengers in 2008. Including our wholly-owned subsidiary, Continental Micronesia, Inc. ("CMI"), and regional flights operated on our behalf under capacity purchase agreements with other carriers, we operate more than 2,300 daily departures. As of March 31, 2009, we served 121 domestic and 121 international destinations and offered additional connecting service through alliances with domestic and foreign carriers.

General information about us can be found on our website, continental.com. Electronic copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, as well as any amendments to those reports, are available free of charge through our website as soon as reasonably practicable after we file them with, or furnish them to, the Securities and Exchange Commission ("SEC").

First Quarter Financial Highlights

· We recorded a net loss of $136 million in the first quarter of 2009, compared to a net loss of $82 million in the first quarter of 2008.

· Passenger revenue and cargo revenue decreased 18.8% and 30.3%, respectively, during the first quarter of 2009 as compared to the first quarter of 2008 primarily due to the weak economy.

· We recorded an operating loss of $55 million during the first quarter of 2009 as compared to an operating loss of $66 million in the first quarter of 2008, due primarily to reduced passenger revenue offset in part by lower fuel expenses.

· Unrestricted cash, cash equivalents and short-term investments totaled $2.6 billion at March 31, 2009.

First Quarter Operational Highlights

· Consolidated traffic decreased 11.2% and capacity decreased 7.2% during the first quarter of 2009 as compared to the first quarter of 2008.

· We recorded a U.S. Department of Transportation ("DOT") on-time arrival rate of 76% and a mainline segment completion factor of 99.2% for the first quarter of 2009, compared to a DOT on-time arrival rate of 71% and a mainline segment completion factor of 98.9% for the first quarter of 2008.

· We placed into service four new Boeing 737-900ER aircraft and one new Boeing 737-800 aircraft.

· We inaugurated service to Shanghai, China.

Outlook

The combination of weakening economic conditions and turmoil in the global capital markets has resulted in a difficult financial environment for U.S. network carriers and threatens our profitability in 2009 and thereafter. In addition, we have significant long-term debt and capital lease obligations and future commitments for capital expenditures, including the acquisition of aircraft and related spare engines. To meet these obligations, we must access the global capital markets and/or achieve and sustain profitability. Historically, we have obtained financing for many of these debt obligations and capital commitments, particularly the acquisition of aircraft and spare engines. Due to the troubled global capital markets, however, we may be unable to obtain financing or otherwise access the capital markets on favorable terms, and continuing declines in our passenger and cargo revenues would hinder our ability to achieve and sustain profitability.

Economic Conditions. The airline industry is highly cyclical, and the level of demand for air travel is correlated to the strength of the U.S. and global economies. The current recession in the U.S. and global economies has had a significant negative impact on the demand for air carrier services. Seven major U.S. carriers have reported a combined 11.3% decrease in traffic, as measured by miles flown by revenue passengers, and an 8.6% decrease in capacity, as measured by available seat miles, during the first quarter of 2009 as compared to the first quarter of 2008. Furthermore, the Air Transport Association has reported that passenger revenue for these seven carriers fell 23% in March 2009 compared to March 2008, representing the fifth consecutive month in which passenger revenue has fallen from the prior year. The decline in demand has disproportionately reduced the volume of high yield traffic in the premium cabins, as many business and leisure travelers are either curtailing their travel or purchasing lower yield economy tickets.

The current economic crisis has severely disrupted the global capital markets, resulting in a diminished availability of financing and higher cost for financing that is obtainable. If the capital markets do not improve, whether through measures implemented by the U.S. and foreign governments or otherwise, we may be unable to obtain financing on acceptable terms (or at all) to refinance certain maturing debt we would normally expect to refinance and to satisfy future capital commitments.

Fuel Costs. We benefited from significantly lower fuel costs during the first quarter of 2009. Our average consolidated (mainline and regional) jet fuel price per gallon including related taxes decreased to $1.82 in the first quarter of 2009 from $2.80 in the first quarter of 2008. However, the continued volatility in jet fuel prices, which were very high by historical standards during much of 2008, continues to impair our ability to achieve and sustain profitability. If fuel prices rise significantly from their current levels, we may be unable to raise fares or other fees sufficiently in the current financial environment to offset fully our increased costs.

In response to high fuel prices during the first half of 2008 and to address the risk of further escalations in fuel prices, most of the major network carriers (including us) continued to enter into fuel hedging arrangements, including collars which minimize the up-front costs. However, the precipitous decline in oil prices during the second half of 2008 resulted in significant costs to us and to those other carriers with hedging arrangements obligating them to make payments to the counterparties to the extent that the price of crude falls below a specified level. As of April 15, 2009, we expect that our hedge contracts, which were largely entered into before oil prices fell, will result in $0.55 per gallon of additional fuel expense during the second quarter of 2009, based on current prices. We have significantly fewer hedge contracts outstanding related to the third and fourth quarters of 2009, and have hedged none of our fuel requirements beyond 2009.

As a result of declining crude oil prices, we have been required to post significant amounts of collateral to cover potential amounts owed with respect to fuel hedging contracts that have not yet settled. At March 31, 2009, our fuel derivatives were in a net liability position of $252 million and we had posted cash collateral with our counterparties totaling $168 million and granted a lien in favor of a counterparty on two aircraft in lieu of posting an additional $63 million in cash.

Based on our expected fuel consumption in 2009, a one dollar change in the price of a barrel of crude oil would change our annual fuel expense by approximately $40 million, before considering refining margins and the impact of our fuel hedging program. We believe that our modern, fuel-efficient fleet continues to provide us with a competitive advantage relative to our peers and a permanent hedge against rising fuel prices.

Capacity. Our long-term target remains to grow our mainline capacity between 5% and 7% annually. However, because of the current adverse economic conditions, we have reduced our capacity significantly and rescheduled aircraft deliveries, and we do not anticipate returning to significant capacity growth until the level of demand for air travel and economic conditions improve sufficiently to justify such growth.

Our future ability to grow our capacity could be adversely impacted by delays in aircraft deliveries. Boeing has announced several delays to its 787 aircraft program. We expect the first of our 25 Boeing 787 aircraft to be delivered in 2011 instead of the first half of 2009 as originally scheduled. However, in order to provide flexibility for our widebody aircraft needs, we announced orders in February 2008 for eight new Boeing 777 aircraft.

We are currently scheduled to take delivery of nine Boeing 737 aircraft in the remaining nine months of 2009. In addition, we have agreed to lease four Boeing 757-300 aircraft from Boeing Capital Corporation. We expect these Boeing 757-300 aircraft to be placed into service in the first half of 2010.

Star Alliance. In 2008, we entered into framework agreements with United, Lufthansa and Air Canada, each a member of Star Alliance, pursuant to which we plan to develop an extensive code-share relationship and reciprocity of frequent flier programs, elite customer recognition and airport lounge use with these other airlines. We plan to implement these relationships and join United, Lufthansa and Air Canada (and other member airlines) in Star Alliance as promptly as practicable following our exit from SkyTeam. We will exit SkyTeam effective with our last flight on October 24, 2009.

On July 23, 2008, we filed an application with the DOT to join United and a group of eight other carriers within Star Alliance that already hold antitrust immunity, which the DOT tentatively approved on April 7, 2009. Final approval by the DOT of this application would enable us, United and these other immunized Star Alliance carriers to work closely together to deliver highly competitive international flight schedules, fares and service and would provide competitive balance to antitrust-immunized carriers in SkyTeam. Additionally, we, United, Lufthansa and Air Canada have requested DOT approval (which the DOT has tentatively granted) to establish a trans-Atlantic joint venture to create a more efficient and comprehensive trans-Atlantic network for our respective customers, offering those customers more service, scheduling and pricing options and establishing a framework for similar joint ventures in other regions of the world. In addition, we are seeking a modification to our existing pilot collective bargaining agreement, which presently prohibits us from engaging in a revenue or profit sharing agreement with a domestic air carrier, to permit us to enter into such joint ventures.

Labor Costs. Our ability to achieve and sustain profitability also depends on continuing our efforts to implement and maintain a more competitive cost structure. The collective bargaining agreements with our pilots, mechanics and certain other work groups became amendable in December 2008. We are meeting with representatives of the applicable unions to engage in bargaining for amended collective bargaining agreements with a goal of reaching agreements that are fair to us and to our employees. We cannot predict the outcome of our ongoing negotiations with our unionized workgroups, although significant increases in the pay and benefits resulting from new collective bargaining agreements could have a material adverse effect on us.

RESULTS OF OPERATIONS

The following discussion provides an analysis of our results of operations and reasons for material changes therein for the three months ended March 31, 2009 as compared to the corresponding period in 2008. As further discussed in the notes to our consolidated financial statements, our consolidated financial statements for the three months ended March 31, 2008 have been adjusted for the retrospective application of FSP APB 14-1, "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)," and for certain reclassifications related to fuel and related taxes on flights operated for us by other operators under capital purchase agreements.