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 Annual Report on Form 10-K for the year ended December 31, 2008 (the "2008 Form 10-K") and in our reports and registration statements filed from time to time with the Securities and Exchange Commission ("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 2,000 daily departures. As of September 30, 2009, we served 117 domestic and 117 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 SEC.

Third Quarter Financial Highlights

· We recorded a net loss of $18 million in the third quarter of 2009.

· Passenger revenue decreased 21.6% during the third quarter of 2009 as compared to the third quarter of 2008, primarily due to lower fares and less high yield business traffic attributable to the global recession.

· We recorded operating income of $61 million during the third quarter of 2009 as compared to an operating loss of $152 million in the third quarter of 2008, due primarily to lower fuel costs offset in part by reduced revenue.

· Unrestricted cash, cash equivalents and short-term investments totaled $2.5 billion at September 30, 2009.

Third Quarter Operational Highlights

· Consolidated traffic decreased 0.9% and capacity decreased 4.5% during the third quarter of 2009 as compared to the third quarter of 2008, resulting in a consolidated load factor of 85.1% for the third quarter of 2009.

· We recorded a U.S. Department of Transportation ("DOT") on-time arrival rate of 82.8% and a systemwide mainline segment completion factor of 99.7% for the third quarter of 2009, compared to a DOT on-time arrival rate of 77.0% and a mainline segment completion factor of 97.9% for the third quarter of 2008.

Outlook

The severe global economic recession has significantly diminished the demand for air travel and disrupted the global capital markets, resulting in a difficult financial environment for U.S. network carriers. 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 markets for capital and/or achieve and sustain profitability. Although access to the capital markets has improved over the past several months, as evidenced by our recent financing transactions, we cannot give any assurances that we will be able to obtain additional financing or otherwise access the markets for capital in the future on acceptable terms (or at all). Moreover, our reduced passenger and cargo revenue resulting from the continued weakened demand for air travel is hindering our ability to achieve and sustain profitability. Given the losses we incurred during the first nine months of 2009, under current market conditions we expect to incur a significant loss for the full year 2009.

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 7.6% decrease in traffic, as measured by miles flown by revenue passengers during the first nine months of 2009 as compared to the first nine months of 2008. The decline in demand has disproportionately reduced the volume of high yield traffic, as many business travelers are either curtailing their travel or purchasing lower yield economy tickets. If global economic conditions persist or worsen, resulting in continuing demand weakness and reduced revenues, we may be unable to offset the reduced revenues fully through further cost and capacity reductions or other measures.

In addition to its effect on demand for our services, the global economic recession severely disrupted the global capital markets, resulting in a diminished availability of financing and higher cost for financing that is obtainable. If economic conditions again worsen or these markets experience further disruptions, 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 nine months of 2009. Our average consolidated (mainline and regional) jet fuel price per gallon including related taxes decreased to $1.97 in the first nine months of 2009 from $3.38 in the first nine months of 2008. 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 an effort to address the risk of rising fuel prices, we enter into fuel hedging arrangements from time to time, including collars that minimize the up-front costs. However, a precipitous decline in crude oil prices, as experienced during the second half of 2008, may result in significant costs to us in cases where our hedging arrangements obligate us to make payments to the counterparties to the extent that the price of crude falls below the applicable agreed-upon amounts. Our hedge contracts for the first nine months of 2009, which were largely entered into before oil prices fell, resulted in $0.31 per gallon of additional fuel expense during the first nine months of 2009. We have significantly fewer hedge contracts outstanding related to the fourth quarter of 2009 and first quarter of 2010.

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 higher fuel prices.

New Revenue-Generating and Cost Saving Measures. In response to the significant decline in revenue, we are implementing a number of measures to raise revenues and reduce costs that are designed to achieve approximately $100 million in annual benefits when fully implemented in 2010. These measures include the elimination of certain operational, management and clerical positions across the company. We have offered employees voluntary programs to minimize the number of involuntary furloughs and reductions in force. We also increased domestic checked baggage fees by $5 for customers who do not prepay those fees online, implemented fees for certain international checked baggage and increased the telephone reservation booking service fee by $5.

Capacity. 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. By early January 2010, we expect to remove all of our remaining Boeing 737-300 aircraft and three additional Boeing 737-500 aircraft from service.

We expect our consolidated capacity to increase between 1.5% and 2.5% in 2010. We expect our mainline capacity to increase between 2% and 3%, with mainline domestic capacity remaining about flat and mainline international capacity increasing between 5% and 6%. The international capacity increase is primarily due to the run-rate of international routes added in 2009 and the restoration of our full schedule to Mexico following our capacity reductions earlier in 2009 related to the H1N1 flu virus.

Our future ability to grow our capacity could be adversely impacted by manufacturer delays in aircraft deliveries. In June 2009, Boeing announced an additional delay to its 787 aircraft program. We currently expect the first of our 25 Boeing 787 aircraft to be delivered in the second half of 2011.

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 are developing 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 on October 27, 2009. 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 approved on July 10, 2009. Final approval by the DOT of this application enables us, United and these other immunized Star Alliance carriers to work closely together to deliver highly competitive international flight schedules, fares and service and provides competitive balance to antitrust-immunized carriers in SkyTeam. Additionally, we, United, Lufthansa and Air Canada have received final DOT approval 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. The DOT's approval of antitrust immunity is subject to certain conditions and limitations that are not expected to diminish materially the benefits of our participation in Star Alliance or the trans-Atlantic joint venture. In addition, we are seeking a modification to our existing pilot collective bargaining agreement, which would permit us to engage in international revenue sharing with a domestic air carrier.

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. On July 6, 2009, our flight simulator technicians ratified a new four-year collective bargaining agreement with us. We have been meeting with representatives of the applicable unions representing our other unionized workgroups, in one case since February 2007, to engage in bargaining for amended collective bargaining agreements with a goal of reaching agreements that are fair to us and to our employees, but to date the parties have not reached new agreements. 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 and nine months ended September 30, 2009 as compared to the corresponding periods in 2008. As further discussed in the notes to our consolidated financial statements, our consolidated financial statements for the three and nine months ended September 30, 2008 have been adjusted for the retrospective application of the Cash Conversion Subsections of ASC Subtopic 470-20 and for certain reclassifications related to fuel and related taxes on flights operated for us by other operators under capital purchase agreements.