UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No.  )

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Continental Airlines, Inc.

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

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April 23, 2010

 

To Our Stockholders:

 

On behalf of our Board of Directors, I am pleased to invite you to attend the Continental Airlines, Inc. 2010 Annual Meeting of Stockholders. As indicated in the attached notice, the meeting will be held at The Hyatt Regency, 1200 Louisiana Street, Houston, Texas on Wednesday, June 9, 2010, at 10:00 a.m., local time. At the meeting, our stockholders will act on the matters described in the attached proxy statement and there will be an opportunity to discuss other matters of interest to you as a stockholder.

 

We have elected to take advantage of U.S. Securities and Exchange Commission rules that allow companies to furnish proxy materials to their stockholders on the internet. We believe that these rules allow us to provide our stockholders with the information they need, while lowering the costs of delivery and reducing the environmental impact of our annual meeting.

 

Your vote is important. Even if you plan to attend the meeting in person, please authorize your proxy or direct your vote by following the instructions on each of your voting options described in the attached proxy statement and the notice of internet availability you received in the mail. Alternatively, if you received printed proxy materials, you may vote your shares by internet, telephone or mail pursuant to the instructions included on the proxy card or voting instruction card. I look forward to seeing you in Houston.

 

Cordially,

 

Jeff Smisek
Chairman, President and
Chief Executive Officer

CONTINENTAL AIRLINES, INC.
1600 Smith Street, Dept. HQSEO
Houston, Texas 77002

 

 

NOTICE OF 2010 ANNUAL MEETING OF STOCKHOLDERS

To Be Held June 9, 2010

 

 

The 2010 annual meeting of stockholders of Continental Airlines, Inc. will be held at The Hyatt Regency, 1200 Louisiana Street, Houston, Texas on Wednesday, June 9, 2010, at 10:00 a.m., local time, for the following purposes:

 

1. To elect the nine directors named in the attached proxy statement to serve until the next annual meeting of stockholders;

 

2. To consider and act upon a proposal to approve the Continental Airlines, Inc. Incentive Plan 2010;

 

3. To consider and act upon a proposal to ratify the appointment of Ernst & Young LLP as the independent registered public accounting firm of the company and its subsidiaries for the fiscal year ending December 31, 2010;

 

4. To consider and act upon a stockholder proposal, if properly presented at the meeting; and

 

5. To consider and act upon any other matters that may properly come before the meeting or any postponement or adjournment thereof.

 

The holders of record of the company’s common stock at the close of business on April 15, 2010 are entitled to notice of and to vote at the meeting. A list of the stockholders entitled to vote at the meeting will be available for examination, during ordinary business hours, for ten days before the meeting at our principal place of business, 1600 Smith Street, Houston, Texas.

 

Jennifer L. Vogel
Secretary

 

Houston, Texas

April 23, 2010

 

Even if you plan to attend the meeting in person, please authorize your proxy or direct your vote by following the instructions on each of your voting options described in the attached proxy statement and the notice of internet availability you received in the mail. Alternatively, if you received printed proxy materials, you may vote your shares by internet, telephone or mail pursuant to the instructions included on the proxy card or voting instruction card. If you mail the proxy or voting instruction card, no postage is required if mailed in the United States. If you do attend the meeting in person and want to withdraw your proxy, you may do so as described in the attached proxy statement and vote in person on all matters properly brought before the meeting.

 

 

 

 

TABLE OF CONTENTS

 

CONTINENTAL AIRLINES, INC.
1600 Smith Street, Dept. HQSEO
Houston, Texas 77002

 

 

 

 

PROXY STATEMENT

 

2010 ANNUAL MEETING OF STOCKHOLDERS

To Be Held June 9, 2010

 

 

 

 

 

We are providing this proxy statement to you in connection with the solicitation on behalf of Continental’s board of directors, which we refer to as the “board,” of proxies to be voted at the company’s 2010 annual meeting of stockholders or any postponement or adjournment of that meeting. The meeting will be held at The Hyatt Regency, 1200 Louisiana Street, Houston, Texas on Wednesday, June 9, 2010, at 10:00 a.m., local time, for the purposes set forth in the accompanying Notice of 2010 Annual Meeting of Stockholders, which we refer to as the “Meeting Notice.”

 

We have elected to take advantage of the “Notice and Access” rules adopted by the U.S. Securities and Exchange Commission (the “SEC”), which allow public companies to deliver to their stockholders a “Notice of Internet Availability of Proxy Materials” and to provide internet access to the proxy materials and annual reports to security holders. Accordingly, most of our stockholders will receive a “Notice of Internet Availability of Proxy Materials,” which we refer to as the “Notice of Internet Availability.” The Notice of Internet Availability will include instructions on accessing and reviewing our proxy materials and our annual report to stockholders on the internet, and will provide instructions on submitting a proxy on the internet.

 

We expect to begin furnishing our proxy materials to stockholders on April 28, 2010, at which time we will also first make available on the internet at www.proxyvote.com our Meeting Notice, our proxy statement and our annual report to stockholders. Any stockholder receiving a Notice of Internet Availability may also request a printed copy of these materials by any of the following methods:

 

 

Pursuant to the SEC’s rules, our annual report to stockholders, which includes our audited consolidated financial statements for 2009, is not considered a part of, or incorporated by reference in, the proxy solicitation materials.

 

Stockholders with shares registered in their names with Mellon Investor Services LLC, Continental’s transfer agent and registrar, are referred to as “stockholders of record.” Stockholders of record at the close of business on April 15, 2010, the “record date,” are entitled to notice of and to vote at the meeting and at any postponement or adjournment of the meeting. Stockholders with shares held in an account at a broker, bank, trust or other nominee are considered the “beneficial owner” of shares held in “street name,” and are entitled to direct their brokers, banks, trustees or other nominees on how to vote their shares.

 

At the close of business on the record date, Continental had outstanding 139,412,110 shares of Class B common stock, which we refer to as “common stock.” Subject to certain limitations on voting by non-U.S. citizens as described below, each share of our common stock is entitled to one vote.

 

Under U.S. law, no more than 25% of the voting stock of a U.S. air carrier such as Continental may be owned or controlled, directly or indirectly, by persons who are not U.S. citizens, and Continental itself must be a U.S. citizen. For these purposes, a “U.S. citizen” means:

 

 

The U.S. Department of Transportation determines, on a case-by-case basis, whether an air carrier is effectively owned and controlled by citizens of the United States.

 

In order to comply with these rules, our Amended and Restated Certificate of Incorporation provides that persons who are not U.S. citizens may not vote shares of our capital stock unless the shares are registered on a separate stock record maintained by us. A foreign holder wishing to register on this separate stock record should call us at (713) 324-5152 or send us a written request for registration identifying the full name and address of the holder, the holder’s citizenship, the total number of shares held and the nature of such ownership (i.e., record or beneficial). Such written requests should be addressed to our Secretary at Continental Airlines, Inc., P.O. Box 4607, Houston, Texas 77210-4607. We will not register shares on this record if the amount registered would cause us to violate the foreign ownership rules or adversely affect our operating certificates or authorities. Registration on this record is made in chronological order based on the date we receive a written request for registration. As of the record date, shares registered on this record comprised less than 25% of our voting stock.

 

A quorum of stockholders is necessary for a valid meeting. The required quorum for the transaction of business at the meeting is a majority of the total outstanding shares of stock entitled to vote at the meeting, either present in person or represented by proxy.

 

Abstentions will be included in determining the number of shares present at the meeting for the purpose of determining the presence of a quorum, as will shares voted by a bank, broker, trust or other nominee on a “discretionary basis.”

 

Under the rules of the New York Stock Exchange, or “NYSE,” banks, brokers, trusts or other nominees holding shares of record may vote those shares in their discretion on certain routine proposals when they do not receive timely voting instructions from the beneficial holders. A “broker non-vote” occurs under these NYSE rules when a bank, broker, trust or other nominee holding shares of record is not permitted to vote on a non-routine matter without instructions from the beneficial owner of the shares and no instruction is given.

 

Accordingly, if you do not provide timely voting instructions to a broker, bank, trust or other nominee that holds your shares of record, that institution will be prohibited from voting on the election of directors (Proposal 1), on the approval of the Continental Airlines, Inc. Incentive Plan 2010 (Proposal 2) or on the stockholder proposal related to discontinuing stock option grants to senior executives (Proposal 4), but will be permitted to vote in its discretion with respect to the proposal to ratify the appointment of the independent registered public accounting firm (Proposal 3).

 

Please note that, as indicated above, these record holders will not be permitted to vote shares you beneficially hold in the election of directors unless you provide timely voting instructions. We urge you to submit your voting instructions to your bank, broker, trust or other nominee in advance of the meeting.

Please see “— Voting in Person at the Annual Meeting — Beneficial Holders” below for a discussion of the procedures and deadline for submitting your voting instructions.

 

Directors will be elected by a plurality of the votes cast at the meeting for directors by the holders of common stock entitled to vote thereon.

 

In the vote to elect directors, stockholders may:

 

 

Under the NYSE rules, banks, brokers, trustees or other nominees holding shares of record will not be permitted to vote those shares in the election of directors without timely instructions from the beneficial owners of the shares, resulting in broker non-votes. These broker non-votes are not treated as votes cast and will not affect the outcome of the proposal.

 

Pursuant to our director resignation policy, if any of our director nominees receives more “withhold” votes than votes “for” his or her re-election, our board (or a committee designated by our board) would be required to consider whether to accept the director’s previously tendered conditional resignation. For further discussion of this policy, please see “Corporate Governance — Corporate Governance Guidelines — Director Resignation Policy” below.

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” EACH OF THE NOMINEES.

 

The proposal to approve the Continental Airlines, Inc. Incentive Plan 2010, which we refer to as “Incentive Plan 2010,” will require approval by a majority of the votes cast at the meeting on Proposal 2 by the holders of common stock entitled to vote thereon. In addition, approval of the proposal under applicable NYSE rules requires that the total number of votes cast on the proposal represent a majority of the total outstanding shares entitled to vote on the proposal. For purposes of this proposal, abstentions are treated as votes cast and will have the same effect as votes against the proposal. Further, under the NYSE rules, banks, brokers, trustees or other nominees holding shares of record will not be permitted to vote those shares on Proposal 2 without timely instructions from the beneficial owners of the shares, resulting in broker non-votes. These broker non-votes are not treated as votes cast and will not be counted in determining whether the total number of votes cast on the proposal represents a majority of the total outstanding shares.

 

In the vote on the proposal to approve Incentive Plan 2010, stockholders may:

 

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE PROPOSAL TO APPROVE THE COMPANY’S INCENTIVE PLAN 2010.

 

The proposal to ratify the appointment of Ernst & Young LLP as our independent registered public accounting firm will require approval by a majority of the votes cast at the meeting on Proposal 3 by the holders of common stock entitled to vote thereon. Abstentions are not treated as votes cast and will not affect the outcome of the proposal.

In the vote on the ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm, stockholders may:

 

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” RATIFICATION OF THE APPOINTMENT OF OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.

 

The stockholder proposal related to discontinuing stock option grants to senior executives scheduled to be presented at the meeting will require approval by a majority of the votes cast at the meeting on Proposal 4 by the holders of common stock entitled to vote thereon. Under the NYSE rules, banks, brokers, trustees or other nominees holding shares of record will not be permitted to vote those shares on Proposal 4 without timely instructions from the beneficial owners of the shares, resulting in broker non-votes. Neither abstentions nor broker non-votes are treated as votes cast, and neither will affect the outcome of the proposal.

 

In the vote on this stockholder proposal, stockholders may:

 

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “AGAINST” THE STOCKHOLDER PROPOSAL RELATED TO DISCONTINUING STOCK OPTION GRANTS TO SENIOR EXECUTIVES.

 

Stockholders of record are entitled to vote their shares held “of record” in person at the meeting and at any postponement or adjournment of the meeting. A ballot will be provided to any stockholder of record upon request at the meeting. A stockholder beneficially holding shares in street name may only vote those shares in person at the meeting if the stockholder obtains a legal proxy from the broker, bank, trustee or other nominee that holds the shares of record giving the beneficial stockholder the right to vote the shares. Even if you plan to attend the meeting, we recommend that you also submit your vote in advance of the meeting as described below to ensure that your vote will be counted if you later decide not to attend. Please see “Other Matters — Directions to our Meeting” below for directions to the annual meeting site.

 

Whether you hold shares directly as the stockholder of record or beneficially in street name, you may direct how your shares are voted without attending the meeting. The internet and telephone proxy procedures described below are designed to authenticate stockholders’ identities, to allow stockholders to give their proxy instructions and to confirm that those instructions have been properly recorded. Stockholders authorizing proxies or directing the voting of shares by internet should understand that there may be costs associated with electronic access, such as usage charges from internet access providers and telephone companies, which must be borne by the stockholder.

 

Stockholders of Record.  If you hold shares of record, you may vote by proxy over the internet by following the instructions provided in the Notice of Internet Availability or, if you received printed proxy materials, you may also vote by internet, telephone or mail pursuant to the instructions included on the proxy card. Proxies submitted through Broadridge Financial Solutions, Inc. by internet or telephone must be received by 11:59 p.m. Eastern Time on June 8, 2010, and proxies submitted through Broadridge by mail must be received by 10:00 a.m. on the meeting date. The giving of such proxy will not affect your right to vote in person if you decide to attend the meeting.

Beneficial Holders.  If you hold shares beneficially in street name, you may direct the voting of those shares over the internet by following the instructions provided in the Notice of Internet Availability or, if you received printed proxy materials, you may also vote by internet, telephone or mail pursuant to the instructions included on the voting instruction card provided to you by your broker, bank, trustee or other nominee. Votes directed by internet or telephone must be received by 11:59 p.m. Eastern Time on June 8, 2010. Directing the voting of your shares will not affect your right to vote in person if you decide to attend the meeting; however, you must first obtain a legal proxy as described above under “— Voting in Person at the Annual Meeting.”

 

If you are the record holder of your shares, you may revoke your proxy before it is exercised at the meeting in any of the following ways:

 

 

If you are not the record holder of your shares, you may revoke your proxy before it is exercised at the meeting by either:

 

 

Continental will bear the costs of the solicitation of proxies. In addition to the solicitation of proxies by mail and internet, we may also solicit proxies by telephone, fax or in person. None of our regular employees or directors who engages in solicitation will receive additional compensation for that solicitation. In addition, we have retained Georgeson Inc. to assist in the solicitation of proxies for a fee estimated not to exceed $10,000 plus reasonable out-of-pocket expenses. Arrangements will be made with brokerage houses and with other custodians, nominees and fiduciaries to forward proxy soliciting materials to beneficial owners, and we will reimburse them for their reasonable out-of-pocket expenses incurred in doing so.

 

We are sending only one copy of our Notice of Internet Availability or, as applicable, printed proxy materials to stockholders who share the same last name and address, unless they have notified us that they want to continue receiving multiple copies. This practice, known as “householding,” is designed to reduce duplicate mailings and save printing and postage costs.

 

We will deliver promptly to any stockholder who received a householded mailing this year, upon receipt of the stockholder’s written or oral request, additional copies of our Notice of Internet Availability or, as applicable, printed proxy materials. If you received a householded mailing this year and you would like to request additional copies, or if you would like to opt out of this practice for future mailings, please submit your request to our Secretary in writing at Continental Airlines, Inc., P.O. Box 4607, Houston, Texas 77210-4607 or call us at (713) 324-5152. Additionally, if you share the same last name and address with one or more other stockholders and you received multiple copies of the Notice of Internet Availability or, as applicable, printed proxy materials, you may contact us in the manner described above to request a single copy in the future.

 

Our Class B common stock is our only class of securities outstanding that is entitled to vote on the matters to be considered at the meeting. Each holder of record of Class B common stock as of the record date is entitled to cast one vote per share on each matter, subject to the limitations on voting by non-U.S. citizens described above. The following table sets forth, as of the dates indicated below, information with respect to persons owning beneficially (to our knowledge) more than five percent of any class of our voting securities.

 

 

 

 

The following table shows, as of April 15, 2010, the number of shares of common stock beneficially owned by our current directors, each current and former executive officer named in the Summary Compensation Table, and all of our current executive officers and directors as a group. This table does not include the restricted stock units held by our executive officers. See “Executive Compensation — Outstanding Equity Awards at Fiscal Year End.”

 

 

 

 

 

We are committed to high standards of corporate governance and to conducting our business ethically and with integrity and professionalism. In furtherance of these commitments, our board has adopted Corporate Governance Guidelines developed and recommended by the Corporate Governance and Social Responsibility Committee of our board, which we refer to as our “Guidelines,” and monitors our ethics and compliance program through the adoption of Ethics and Compliance Guidelines for our employees and directors. The Guidelines, together with our bylaws, the charters of each of our board committees and the Ethics and Compliance Guidelines, provide the framework for the corporate governance at Continental. A complete copy of each of these documents may be obtained in the “Investor Relations” section of our internet website under the “Corporate Governance” link at www.continental.com, and we will furnish printed copies of these documents to interested security holders without charge, upon request. Written requests for such copies should be addressed to: Continental Airlines, Inc., Attention: Secretary, P.O. Box 4607, Houston, Texas 77210-4607.

 

The Corporate Governance and Social Responsibility Committee monitors developments in the laws, regulations and best practices relating to corporate governance and periodically recommends to our board the adoption of amendments to the Guidelines to reflect those developments. The current Guidelines provide for the governance practices described below.

 

Independence.  Our Guidelines require that a majority of our board be “independent” under the criteria for independence established by the NYSE. Our board is responsible for affirmatively determining whether each director nominee satisfies all applicable independence criteria for service on the board or any committee of the board. Please see “— Director Independence” below for a discussion of our board’s independence determinations.

 

Limitation on Board Service.  None of our directors is permitted to serve on the board of directors of more than two other public companies if the director is employed on a full-time basis, or more than four other public companies if the director is employed on less than a full-time basis. For determining the number of boards of directors on which a director serves, our Guidelines exclude service on the board of directors of a charitable, philanthropic or non-profit organization, as well as service on the board of the director’s principal employer. Further, a director’s service on the board of directors of two or more affiliated companies that hold joint or concurrent board meetings will be considered service on only one other board.

 

Minimum Stock Ownership.  In February 2010, our board implemented enhancements to our Guidelines to increase the minimum stock ownership requirements for our chief executive officer, or “CEO,” our directors and our executive vice presidents. Our Guidelines now require that each of our directors beneficially own at least 5,000 shares of our commons stock, subject to a one-year transition period for newly-elected directors, that our CEO beneficially own at least 10,000 shares, that our president beneficially own at least 5,000 shares, and that each of our executive vice presidents beneficially own at least 2,000 shares during the period ending February 16, 2011, and at least 5,000 shares thereafter. A director’s or executive officer’s holdings of restricted stock or stock options exercisable within 60 days are included when determining whether the individual beneficially owns a sufficient number of shares.

 

Additional Holding Period for Restricted Stock.  In February 2010, our board determined, upon the recommendation of the Human Resources Committee, that future annual equity awards to our non-management directors would be made in shares of restricted stock. The forfeiture and transfer restrictions on these shares of restricted stock lapse on the one year anniversary of the grant date, subject to earlier vesting in certain circumstances. For a discussion of the restricted stock to be granted to our non-management directors under our current compensation practices, please see “— Narrative Disclosure to Director Compensation Table — Equity Awards” below.

 

At the time our board determined to make these future equity awards to non-management directors in shares of restricted stock, it also implemented enhancements to our Guidelines to provide that each non-management director who receives a grant of shares of restricted stock of the company is required to hold at least 50% of those shares for an additional period of one year following the expiration of the applicable forfeiture and transfer restrictions set

forth in the agreement governing the grant. If a director discontinues service on our board, whether as a result of his or her resignation, removal, retirement, death or otherwise, this additional holding period requirement shall no longer apply to that director.

 

Lead Independent Director.  In February 2010, our board implemented enhancements to our Guidelines to establish a lead independent director with the following responsibilities:

 

 

The chair of the Corporate Governance and Social Responsibility Committee, currently Mr. Meyer, has been appointed by our board to serve as the lead independent director. Stockholders or other interested parties may communicate with our non-management directors through correspondence directed to the lead independent director. Please see “— Communications with the Board of Directors” below for instructions on how to contact the lead independent director.

 

Director Resignation Policy.  Under our director resignation policy, each of our incumbent directors must submit a conditional, irrevocable resignation letter in the form approved by our board before our board will nominate the director for re-election. The current form of resignation letter approved by our board provides that the resignation will only be effective if:

 

 

If an incumbent director does not receive the vote for re-election specified in his or her conditional resignation letter in an uncontested election of directors, our board (or a committee designated by our board) shall, no later than 60 days after certification of the election results, consider the attendant circumstances and any other factors it deems relevant and determine whether to accept the director’s resignation. In accordance with our bylaws, Delaware corporate law and the form resignation letter approved by our board, the resignation letter cannot be revoked or withdrawn while this director resignation policy is in effect.

 

Each of the nominated directors has submitted his or her conditional, irrevocable letter of resignation as required by the policy. The revised conditional, irrevocable letter of resignation approved by our board for Jeff Smisek, our Chairman, President and CEO, includes an acknowledgement that our board’s acceptance of his resignation under the circumstances described above would trigger his right under his employment agreement with us to resign for “Good Reason” and receive certain termination benefits. For a discussion of the termination benefits of Mr. Smisek following his resignation for Good Reason, please see “Executive Compensation — Potential Payments Upon Termination or Change in Control” below.

 

Occupational Changes.  If a director experiences either a termination of his or her principal employment or position, or a material decrease in responsibilities with respect to that employment or position, the director is required to submit his or her offer to resign to the chair of the Corporate Governance and Social Responsibility Committee. The committee will then review the circumstances surrounding the employment change and such other matters as it deems appropriate and make a recommendation to our board concerning acceptance or rejection of the director’s offer to resign. Our board will then make the final determination concerning whether to accept or reject the director’s offer to resign.

Director Conflicts of Interest.  Our Guidelines provide procedures for any director believing that he or she may have an actual or perceived conflict of interest, or any senior executive or director who believes another director may have such a conflict, to report the conflict to the chair of the Corporate Governance and Social Responsibility Committee, who is responsible for reviewing the director’s conflict to determine the appropriate course of action. The committee chair’s determination is subject to ratification by the full Corporate Governance and Social Responsibility Committee. Any waiver of these procedures may only be made by the Corporate Governance and Social Responsibility Committee and must be promptly disclosed to our stockholders.

 

Board and Committee Performance Reviews.  The Corporate Governance and Social Responsibility Committee is required to review the performance of our board and each committee on an annual basis, and the Corporate Governance and Social Responsibility Committee may consider the results of these reviews when making recommendations to the board concerning the slate of director nominees or the board committee assignments.

 

Right to Amend.  Our board has the authority to amend and/or restate the Guidelines, including any or all of these governance practices, from time to time in its sole discretion without stockholder approval.

 

In addition to those established by our Guidelines, our bylaws, the charters of our board committees and our other company policies provide for the following significant corporate governance practices:

 

 

We do not currently have a stockholder rights plan, commonly referred to as a “poison pill.” In November 2008, the stockholder rights plan adopted in November 1998 expired by its terms.

 

Continental’s Ethics and Compliance program includes the Ethics and Compliance Guidelines and the implementation of a worldwide (subject to applicable local privacy laws) Help Line that provides an anonymous method for reporting concerns. The Ethics and Compliance Guidelines apply to all of our co-workers, as well as our non-management directors, and serve as the centerpiece for our ethics and compliance program. These guidelines promote ethical conduct, good judgment and compliance with laws and our corporate policies. Another key aspect of our ethics and compliance program is our Ethics and Compliance Committee, chaired by our General Counsel and Chief Compliance Officer, that promotes awareness and understanding of our program, periodically reviews and evaluates our program and the guidelines, and helps to ensure that our program continues to meet our corporate obligations and standards.

 

We foster a culture of environmental and social responsibility by running an efficient operation, investing in fuel-efficient aircraft and technology to reduce carbon emissions, minimizing noise and waste, playing an active role in the communities we serve, and promoting dignity and respect for all co-workers. For more information, please see our Global Citizenship Report, available in the “Global Citizenship” section of our internet website under “About Continental” at www.continental.com.

 

Our board determines the independence of each director through application of the director independence tests required by Section 303A of the NYSE Listed Company Manual and, for members of the Audit Committee, the additional independence tests required by Rule 10A-3(b)(1) of the Securities Exchange Act of 1934, as amended, which we refer to as the “Exchange Act.” Our board has applied these independence tests to our nine nominees, Mr. Larry Kellner, who resigned from our board in December 2009, Dr. George Parker, who retired from our board in June 2009, and Mr. Douglas McCorkindale, who is not standing for re-election, and determined that (1) each of the nominees for our board (other than Mr. Smisek (eight of the nine total nominees)), Dr. Parker and Mr. McCorkindale is “independent” under the applicable standards and (2) each of the nominees for our board and Mr. McCorkindale qualifies for service on each board committee on which such director currently serves. Please see “Proposal 1: Election of Directors — Director Biographical Summaries” below for a list of all nine nominees for our board, together with biographical summaries for the nominees, including each individual’s current committee memberships, business experience, directorships and qualifications.

 

In making these independence determinations, the board considered the transactions and relationships between the directors (or members of their immediate families) and the company and its subsidiaries described below:

 

 

 

The purpose of this review was to determine whether any such relationships or transactions were material and, therefore, inconsistent with a determination that the director is independent. As a result of this review, the board affirmatively determined, based on its understanding of such transactions and relationships, that none of (i) the non-management directors nominated for election at the meeting, (ii) Dr. Parker or (iii) Mr. McCorkindale, has any material relationships with the company or its subsidiaries, and that all such directors are independent of the company under the applicable standards set forth by the NYSE and SEC. Mr. Smisek is not independent because of his current employment as an executive officer of the company, and Mr. Kellner was not independent because of his prior employment as an executive officer of the company.

 

Regular meetings of our board are held four times per year, and special meetings are scheduled when required. The board held six meetings in 2009. During 2009, each of our current directors attended at least 75% of the sum of the total number of meetings of the board and each committee of which he or she was a member. Last year, all nine of our directors attended the annual meeting of stockholders.

 

Under our Corporate Governance Guidelines, directors are expected to fulfill diligently their fiduciary duties to stockholders, which duties include preparing for, attending and participating in meetings of the board and the committees of which the directors are a member. We do not have a formal policy regarding director attendance at annual meetings. However, when considering a director’s renomination to the board, the Corporate Governance and Social Responsibility Committee must consider the director’s history of attendance at annual meetings of stockholders and at board and committee meetings as well as the director’s preparation for and participation in such meetings.

 

Our non-management directors regularly meet separately in executive session without any members of management present. During 2009, our non-management directors met in such executive sessions on five occasions. Our Corporate Governance Guidelines currently provide that the lead independent director shall preside over non-management director executive sessions. If any of our non-management directors is determined by our board not to be independent, the lead independent director is required by our Corporate Governance Guidelines to call at least one executive session of our independent directors annually.

 

Our board has established the committees described below, each of which operates under a written charter adopted by the board. Each of these committees may form and delegate its authority to subcommittees or the chair of the committee when appropriate. Please see the introductory paragraph immediately following “Corporate Governance” above for instructions on obtaining electronic or printed copies of the charters of these board committees.

 

Audit Committee.  The Audit Committee has the authority and power to act on behalf of the board with respect to the appointment of our independent registered public accounting firm, which we also refer to as our “independent auditors,” and with respect to authorizing all audit and other activities performed for us by our internal and independent auditors. The committee, among other matters, reviews with management and the company’s independent auditors the effectiveness of the accounting and financial controls of the company and its subsidiaries, and reviews and discusses the company’s audited financial statements with management and the independent auditors. It is the responsibility of the committee to evaluate the qualifications, performance and independence of the independent auditors and to maintain free and open communication among the committee, the independent auditors, the internal auditors and management of the company. Please see “— Report of the Audit Committee” below. The committee is also responsible for overseeing our risk assessment and risk management policies, including our enterprise risk management process, our legal and ethical compliance programs and our fuel and currency hedging strategies. Our board has determined that all members of the Audit Committee are independent directors as required by the applicable rules of the NYSE and SEC, and that Mr. McCorkindale and Mr. Munoz each qualifies as an audit committee financial expert under the applicable rules promulgated pursuant to the Exchange Act.

 

Corporate Governance and Social Responsibility Committee.  The Corporate Governance and Social Responsibility Committee identifies individuals qualified to become members of the board, consistent with criteria approved by the board, and recommends to the board the slate of directors to be nominated by the board at each annual meeting of stockholders and any director to fill a vacancy on the board. The committee will consider recommendations for nominees for directorships submitted by stockholders. Stockholders desiring the committee to consider their recommendations for nominees should submit their recommendations, together with appropriate biographical information and qualifications, in writing to the committee, c/o Secretary, Continental Airlines, Inc., P.O. Box 4607, Houston, Texas 77210-4607. The committee also recommends directors to be appointed to the committees of the board and the directors to serve as committee chairs, including in the event of vacancies, and oversees the evaluation of the board and management. The committee also developed and recommended to the board the company’s Corporate Governance Guidelines and is responsible for overseeing our board’s compliance with the Guidelines, including determining the appropriate course of action with respect to any potential or actual conflicts of interest involving a director brought to the attention of the chair of the committee. In addition, beginning in September 2009, the committee’s responsibilities were expanded to include oversight of our policies and practices on significant issues of corporate social responsibility, including protection of the environment, workplace diversity, community relations and charitable contributions, and government relations and political contributions. For a discussion of our corporate social responsibility efforts, please see “— Global Citizenship” above. All members of the Corporate Governance and Social Responsibility Committee are independent directors as required by the applicable rules of the NYSE.

 

Executive Committee.  The Executive Committee has the authority to exercise certain powers of the board between board meetings.

 

Finance Committee.  The Finance Committee reviews our annual financial budget, including the capital expenditure plan, and makes recommendations to the board regarding adoption of the budget as the committee deems appropriate.

 

Human Resources Committee.  The Human Resources Committee reviews and approves corporate goals and objectives relevant to the compensation of our CEO, evaluates our CEO’s performance in light of those goals and objectives, and determines and approves our CEO’s compensation based on its evaluation. The committee also reviews and approves the compensation of our other Section 16 Officers and the incentive compensation plans and programs applicable to them. Our current “Section 16 Officers” are our Chairman, President and CEO; each of our

Executive Vice Presidents; our Senior Vice President, Human Resources and Labor Relations; our Senior Vice President, Communications and Government Affairs; our Senior Vice President, General Counsel, Secretary and Chief Compliance Officer; and our Vice President and Controller. The committee also administers our equity-based plans and other incentive and employee benefit plans and programs. All members of the Human Resources Committee are independent directors as required by the applicable rules of the NYSE.

 

To assist the committee in discharging its responsibilities with respect to executive compensation, the committee relies upon an independent compensation consultant that reports exclusively to the committee. The committee engaged Exequity LLP as its independent compensation consultant effective January 2009. Prior to that time, the committee relied on Mercer Human Resource Consulting, another independent compensation consultant, to assist it in developing and structuring the company’s executive compensation programs. To ensure the consultant’s objectivity and to avoid conflicts of interest, we adopted conflict of interest guidelines governing the relationship. These guidelines establish our management’s obligation to report quarterly to the committee the scope and amount of work being performed by the consultant or its affiliates for us, the consultant’s direct access to the committee through its chair, and the requirement that the consultant develop procedures to prevent any employee of the consultant who advises the committee on executive compensation matters from discussing their services with other employees of the consultant.

 

From time to time and in connection with the setting of incentive compensation targets, the compensation consultant makes executive compensation recommendations to the committee based on available marketplace compensation data for U.S. peer airlines and certain non-airline companies with comparable revenue and other characteristics. Management also makes independent recommendations to the committee concerning the form and amount of executive compensation. The committee then reviews and considers the consultant’s and management’s recommendations, marketplace compensation data, individual officer performance and other factors, and makes its determinations concerning the compensation of the CEO and other Section 16 Officers. During 2009, the committee’s compensation decisions and determinations were made during eight meetings, seven of which included executive sessions at which management was not present. For further discussion of our processes and procedures for the consideration and determination of executive compensation, please see “Executive Compensation — Compensation Discussion and Analysis” below.

 

In addition to its review and approval of the compensation of our Section 16 Officers, the committee is responsible for reviewing the compensation and benefits of our board’s non-management directors. At the direction of the committee, the committee’s independent compensation consultant compiled available marketplace director compensation data for U.S. peer airlines and certain non-airline companies with comparable revenue and other characteristics. The committee considered this peer company director compensation data, as well as other factors, received input from management, and determined that it would be appropriate to recommend that our board change the non-management director compensation to provide for (1) an annual grant to non-management directors of shares of restricted stock, which are generally considered to reflect a preferable compensation risk profile, replacing an annual grant of 7,500 stock options and (2) an annual fee to be paid to the newly-designated lead independent director to acknowledge the additional time and effort necessary to fulfill the responsibilities of the position. Based on this recommendation, in February 2010 the board approved the changes to our non-management director compensation described above. For further discussion of our non-management director compensation, please see “— Compensation of Non-Management Directors” below.

Membership on Board Committees.  The following table lists our five board committees, the directors who currently serve on them and the number of committee meetings held in 2009.

 

 

 

 

Our board has the responsibility for selecting the appropriate leadership structure for the company. In making leadership structure determinations, the board considers many factors, including the specific needs of the business and what is in the best interests of the company’s stockholders. Our current leadership structure is comprised of a combined Chairman of the Board and Chief Executive Officer, an independent director serving as our lead independent director and board committees led by independent directors. The board believes that this leadership structure is the most effective for the company at this time. Combining the Chairman of the Board and CEO roles promotes decisive leadership, fosters clear accountability and enhances the company’s ability to communicate its message and strategy clearly and consistently to our stockholders, employees and customers, particularly during periods of turbulent economic and industry conditions. The board also believes there is a very well-functioning and effective balance between strong company leadership and appropriate safeguards and oversight by independent directors. For a discussion of the responsibilities of the lead independent director, please see “Corporate Governance Guidelines — Lead Independent Director” above.

 

Effective risk oversight is an important priority of the board. Because risks are considered in virtually every business decision, the board discusses risk throughout the year generally or in connection with specific proposed actions. The board’s approach to risk oversight includes understanding the critical risks in the company’s business and strategy, evaluating the company’s risk management processes, allocating responsibilities for risk oversight among the full board and its committees, and fostering an appropriate culture of integrity and compliance with legal responsibilities.

 

Our board exercises its oversight of our risk management policies and practices primarily through its committees, which regularly report back to the board regarding their risk oversight activities. The Audit Committee oversees risks related to the company’s financial statements, the financial reporting process, accounting and certain legal matters. The Audit Committee also oversees the internal audit function and the company’s ethics and compliance program.

 

The Human Resources Committee periodically reviews the risks arising from our compensation policies, practices and programs, as well as the mitigating controls, to determine whether any such risks are material to us.

Based on its most recent review, the Human Resources Committee determined that the structure of our compensation policies, practices and programs appropriately utilize a mix of fixed and at-risk pay elements, annual and long-term incentives, and absolute and relative measures of performance, which mitigate and balance any risks to us.

 

The Finance Committee considers risks in connection with their review of the company’s annual budget and capital spending plans, and the Corporate Governance and Social Responsibility Committee oversees issues that could pose significant reputational risk to the company.

 

While the board oversees risk management, company management is charged with managing risk. The Company has robust internal processes and a strong internal control environment to identify and manage risks and to communicate with the board. These include an enterprise risk management program, a risk management committee, a strong ethics and compliance program, and a comprehensive internal and external audit process. Our board receives periodic reports on each of these aspects of the company’s risk management process. In addition, the board participates in our enterprise risk management process by providing feedback on managements identification and assessment of the key risks facing the company.

 

Stockholders or other interested parties can contact any director (including Mr. Meyer, the board’s lead independent director), any committee of the board, or our non-management directors as a group, by writing to them c/o Secretary, Continental Airlines, Inc., P.O. Box 4607, Houston, Texas 77210-4607. Comments or complaints relating to the company’s accounting, internal accounting controls or auditing matters will also be referred to members of the Audit Committee. All such communications will be forwarded to the appropriate member(s) of the board, except that the board has instructed the company to direct communications that do not relate to the company’s accounting, internal accounting controls or auditing matters to the chair of the Corporate Governance and Social Responsibility Committee and not to forward to the board or the chair of the Corporate Governance and Social Responsibility Committee certain categories of communications.

 

Our Corporate Governance Guidelines provide that the Corporate Governance and Social Responsibility Committee should consider the following when identifying director nominees:

 

 

While our board does not have a specific diversity policy, due to the global and complex nature of our business, the board believes it is important to consider diversity of race, ethnicity, gender, age, education, cultural background and professional experiences in evaluating board candidates.

 

The Corporate Governance and Social Responsibility Committee also confirms that nominees are in compliance with stock ownership requirements and board service limitations. In the case of current directors being considered for renomination, the committee also will take into account the director’s:

 

 

Moreover, each incumbent director is required to submit an irrevocable, conditional resignation letter pursuant to our director resignation policy prior to his or her nomination for re-election. Please see “Corporate Governance Guidelines — Director Resignation Policy” above for a discussion of this requirement.

 

Our director nomination process for new board members is as follows:

 

 

The Corporate Governance and Social Responsibility Committee also considers recommendations for nominees for directorships submitted by stockholders. When considering an individual nominated by a stockholder, the committee follows a substantially similar process, identifying the criteria to be applied and determining, based on information provided by the stockholder submitting the nominee and additional information obtained by the

board or senior management, whether the stockholder nominee satisfies those criteria. As discussed above, such criteria shall include the items listed above under “— Qualifications of Directors.”

 

The Corporate Governance and Social Responsibility Committee, which is authorized to retain consultants or advisors as it deems necessary or appropriate, may hire a search firm to assist with the process described above. If retained by the committee, the search firm would likely assist with the development of the criteria, the identification of qualified candidates and the gathering of additional information on the final candidates.

 

As provided in our Guidelines, our newly-elected directors participate in an orientation program following their election or appointment to the board. This orientation includes presentations by our senior management and independent auditors to familiarize new directors with our strategic plans, financial statements and key policies and practices. We also provide our directors with opportunities to visit our facilities, to participate in training concerning our policies and programs and to review strategic areas of our business in depth. Our directors also participate in director education programs sponsored by various educational institutions, and we reimburse their expenses incurred to attend such programs. In addition, all of our directors are provided flight benefits, including access to our Presidents Club airport lounges, enabling them to monitor the quality of our services and to interact with employees and customers.

 

The table below provides information relating to the compensation of the non-management members of our board in 2009. The compensation elements are described in the narrative following the table.

 

 

 

 

Annual Fees.  Each of our non-management directors receives an annual fee of $25,000, paid quarterly in advance, as well as the following additional annual fees, paid quarterly in advance, which are based on committee membership, service as a committee chair or service as the lead independent director:

 

 

Meeting Fees.  Our non-management directors also receive the following fees for attendance at meetings of our board and committees:

 

 

Flight Benefits.  As indicated above, our non-management directors receive lifetime flight benefits, comprised of space-available personal and family flight passes, a travel card permitting positive space travel by the director, the director’s family and certain other individuals, frequent flyer cards, access to our Presidents Club facilities for the director and his or her spouse and airport parking where available to us at no incremental cost. As is common in the airline industry, our directors also receive travel privileges on some other airlines through arrangements entered into between us and such airlines. These benefits are taxable to the director, subject to reimbursement of certain of such taxes by the company. In May 2009, our board adopted amendments to our Guidelines to provide that the company will not provide tax reimbursements on post-separation perquisites to non-management directors newly-elected after such date. Only those non-management directors with an existing contractual right at the time of such amendments will receive the tax reimbursements on post-separation perquisites.

 

Orientation Fees.  Each of our non-management directors is entitled to receive $2,500 as compensation for time spent on orientation matters when the director is initially elected to the board or to a committee on which he or she has not recently served.

Equity Awards.  On June 10, 2009, the date of our 2009 annual meeting of stockholders, each individual then serving as one of our non-management directors received an annual grant of stock options to purchase 7,500 shares of our common stock at an exercise price equal to the closing price on the date of grant. These options were fully vested upon grant and have a 10-year term. In accordance with our standard compensation arrangements for non-management directors in effect during 2009, newly-elected directors who were first elected to the board other than at an annual meeting of stockholders would receive the annual stock option grant at the time of such election. However, Mr. Simmons did not receive a grant of stock options at the time of his election in November 2009 because our incentive compensation plan pursuant to which equity awards were granted to non-management directors had expired in October 2009. On December 1, 2009, our board adopted Incentive Plan 2010 and approved a grant to Mr. Simmons under this plan of stock options to purchase 7,500 shares of our common stock. This grant to Mr. Simmons, as well as the grant under this plan of 7,500 stock options to Ms. Corvi upon her election to our board in December 2009, are subject to the approval of Incentive Plan 2010 by our stockholders at the meeting.

 

In February 2010, our board determined, upon the recommendation of the Human Resources Committee, that future annual equity awards to our non-management directors would be made in shares of restricted stock with an aggregate value of $50,000, subject to the approval of Incentive Plan 2010 by our stockholders at the meeting. The closing price per share of our common stock on the trading date preceding the date of grant will be used to calculate the number of shares of restricted stock granted to each non-management director, and these grants will be made on the date of each of our annual stockholders meetings, or upon the date that a new director is first elected to the board if other than at an annual stockholders meeting. The forfeiture and transfer restrictions on these shares lapse on the one year anniversary of the grant date (subject to earlier vesting upon the death or disability of the director or on the last day of service as a member of the board with respect to any director (i) who is ineligible for nomination to the board pursuant to the terms of the company’s Corporate Governance Guidelines related to age or (ii) whose service on the board is terminated upon or following a change in control of the company). Upon the lapse of these restrictions, our non-management directors are required to hold 50% of the shares of previously restricted stock for an additional one-year period pursuant to our Guidelines. For a discussion of this additional holding period requirement, please see “— Corporate Governance Guidelines — Holding Period for Restricted Stock” above.

 

Reimbursement of Expenses.  We reimburse our directors, including those who are full-time employees who serve as directors, for expenses incurred in attending meetings or in connection with participation in director education programs and director institutes offered by third parties.

 

Conducting Company Business.  Our non-management directors who, in their capacities as directors, conduct business on our behalf at the request of the board or the Chairman of the Board are paid:

 

 

As required by its charter, the Audit Committee reviews, at least annually, all related person transactions that are required to be disclosed in the proxy statement for our next annual meeting of stockholders. We obtain information concerning any possible related person transactions from our directors and executive officers through their responses to annual questionnaires. All responses identifying possible related person transactions are then compiled and reviewed by management. We apply the disclosure standards adopted by the SEC for related person transactions to determine, based on the particular facts and circumstances, whether any “related person” (as defined by the SEC) has a direct or indirect material interest in a transaction involving the company. Management reviews with the Audit Committee a summary of each transaction considered, together with its conclusions concerning whether any related person has a material interest in such transaction. If, based on this review, a “related person” is determined to have a material interest in a transaction with the company and no exception from disclosure applies, we will disclose the transaction in our proxy statement as required by the SEC’s rules.

 

Management reviewed with the Audit Committee all transactions since January 1, 2009 involving a “related person” identified in the annual questionnaire responses or otherwise known to the committee or the company. None of these transactions was required to be disclosed as a related person transaction pursuant to the SEC’s rules.

 

Our executive compensation programs are administered by the Human Resources Committee of the board. The committee is currently composed of four independent, non-management directors, and no member of the committee has ever been an officer or employee of Continental or any of its subsidiaries. None of our executive officers has served as a member of any board of directors or compensation committee of any other company for which any of our directors served as an executive officer at any time since January 1, 2009.

 

The Audit Committee is comprised of four non-employee members of the board of directors (listed below). After reviewing the qualifications of the current members of the committee, and any relationships they may have with the company that might affect their independence from the company, the board has determined that (1) all current committee members are “independent” as that concept is defined in Section 10A of the Exchange Act, (2) all current committee members are “independent” as that concept is defined in the applicable rules of the NYSE, (3) all current committee members are financially literate, and (4) each of Mr. McCorkindale and Mr. Munoz qualifies as an audit committee financial expert under the applicable rules promulgated pursuant to the Exchange Act.

 

The board of directors appointed the undersigned directors as members of the committee and adopted a written charter setting forth the procedures and responsibilities of the committee. Each year, the committee reviews the charter and reports to the board on its adequacy in light of applicable NYSE rules. In addition, the company will furnish an annual written affirmation to the NYSE relating to, among other things, clauses (2)-(4) of the first paragraph of this report and the adequacy of the committee charter.

 

During the last year, and earlier this year in preparation for the filing with the SEC of the company’s annual report on Form 10-K for the year ended December 31, 2009 (the “10-K”), the committee, among other matters:

 

 

 

Notwithstanding the foregoing actions and the responsibilities set forth in the committee charter, the charter clarifies that it is not the duty of the committee to plan or conduct audits or to determine that the company’s financial statements are complete and accurate and in accordance with generally accepted accounting principles. Management is responsible for the company’s financial reporting process including its system of internal controls, and for the preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States. The independent auditors are responsible for expressing an opinion on those financial statements. Committee members are not employees of the company or accountants or auditors by profession or experts in the fields of accounting or auditing. Therefore, the committee has relied, without independent verification, on management’s representation that the financial statements have been prepared with integrity and objectivity and in conformity with accounting principles generally accepted in the United States and on the representations of the independent auditors included in their report on the company’s financial statements.

 

The committee meets regularly with management and the independent and internal auditors, including private discussions with the independent auditors and the company’s internal auditors and receives the communications described above. The committee has also established procedures for (a) the receipt, retention and treatment of complaints received by the company regarding accounting, internal accounting controls or auditing matters, and (b) the confidential, anonymous submission by the company’s employees of concerns regarding questionable accounting or auditing matters. However, this oversight does not provide us with an independent basis to determine that management has maintained (1) appropriate accounting and financial reporting principles or policies, or (2) appropriate internal controls and procedures designed to assure compliance with accounting standards and applicable laws and regulations. Furthermore, our considerations and discussions with management and the independent auditors do not assure that the company’s financial statements are presented in accordance with generally accepted accounting principles or that the audit of the company’s financial statements has been carried out in accordance with generally accepted auditing standards.

 

The information contained in this report shall not be deemed to be “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filings with the Securities and Exchange Commission, or subject to the liabilities of Section 18 of the Exchange Act, except to the extent that the company specifically incorporates it by reference into a document filed under the Securities Act of 1933, as amended, or the Exchange Act.

 

Respectfully submitted,

 

Audit Committee

 

Oscar Munoz, Chairman
Carolyn Corvi
Douglas H. McCorkindale
Laurence E. Simmons

 

The following table sets forth information with respect to our current executive officers:

 

 

There is no family relationship between any of our executive officers. All officers are appointed by the board to serve until their resignation, death or removal.

 

Introduction

 

The severe economic recession in the U.S. and global economies had a significant adverse impact on the demand for air travel, especially high-yield business traffic, resulting in our loss of $282 million for the year ended 2009. The poor economy, disrupted global capital markets, and volatile fuel prices contributed to another challenging year for U.S. network carriers and hindered our ability to achieve and sustain profitability. Despite these challenges, we continued efforts in 2009 to position our company to take advantage of an improving economic environment. For example, during the year we focused significant effort on successfully transitioning into Star Alliance, which we joined on October 27, 2009. We also received approval from the Department of Transportation to join United Airlines and eight other carriers that already hold antitrust immunity to work together to deliver highly competitive international air transportation services. As we look to 2010, we see some indications that the industry may be experiencing the early stages of a recovery and we remain focused on achieving the full benefits of our participation in Star Alliance and returning to profitability.

 

In the challenging economic environment, we remained focused on our financial results, our product and our culture. For 2009, we again achieved the best EBITDAR margin performance among our network peers, and our length-of-haul adjusted revenue per available seat mile was among the best of our network peers. We continued to invest in our award-winning product as we began the installation of flat-bed BusinessFirst seats on aircraft that service our long-haul international flights, continued the installation of DIRECTV^® on our narrowbody Next-Generation Boeing 737 aircraft, and introduced the convenience of a cashless cabin for on-board purchases. In March 2010, we were again rated the most admired U.S. airline on FORTUNE Magazine’s annual airline industry list of World’s Most Admired Companies, our ninth consecutive year to receive this honor. In the same survey, of the 14 global carriers ranked, Continental ranked first for people management. We continue to focus on open and honest communication with our co-workers.

 

Five years ago, adverse economic conditions required us to reduce pay and benefit costs company-wide and streamline work rules in order to save approximately $500 million annually, and in connection with those actions we provided enhanced incentive-based pay elements for substantially all of our employees. These reductions and work rule changes provided the framework for a business plan that helped the company avoid filing for bankruptcy protection like so many of our competitors were forced to do, return to profitability in 2006 and 2007, grow our network and provide a competitive platform to respond to the many challenges we have faced. Providing variable incentive-based compensation elements to all of our workgroups allows us to reward all co-workers based on performance. These incentive-based compensation programs resulted in payouts of profit sharing to our broad-based employee groups totaling nearly $270 million in 2007 and 2008 (based on 2006 and 2007 financial performance). We were not profitable in 2008 or 2009 and, accordingly, no profit sharing was paid to employees and no annual performance incentives were paid to the named executive officers for either year. However, other performance-based on-time incentives benefiting most broad-based employee groups have rewarded superior operational performance and resulted in payouts of approximately $105 million since the beginning of 2005.

 

We also successfully implemented our succession plan after Larry Kellner, our Chairman and Chief Executive Officer throughout 2009, voluntarily resigned at year-end. Jeff Smisek was promoted to the position of Chairman, President and Chief Executive Officer effective January 1, 2010. In connection with his promotion, Mr. Smisek has entered into an agreement with the company pursuant to which he has agreed to forego his annual salary and any annual bonus that would otherwise be earned for each calendar year beginning on or after January 1, 2010, unless the company makes a profit for that calendar year.

 

Philosophy

 

Our executive compensation philosophy for 2009 continued to be defined by three main objectives: aligning executive incentives with stockholders’ and co-workers’ interests, retaining our management team, and linking pay to performance. We made difficult decisions in 2005 that allowed us to implement a business plan that has permitted us to grow, return to profitability in 2006 and 2007, and reward our co-workers through variable incentive-based

compensation, and has prepared us to remain viable in the global economic crisis. We believe that keeping the interests of our executives aligned with the interests of our stockholders and our co-workers will be an important factor in achieving and sustaining profitability. We also believe that our experienced and well-regarded management team has been, and continues to be, critical to the successful implementation of our business strategies and the ultimate preservation and growth of stockholder value. Accordingly, retention of senior executives is a key goal. Finally, we believe that pay for performance is a critical element in our executive compensation structure, and that both absolute and relative performance measures are appropriate. Our incentive programs are designed to drive performance by such measures. The performance measures used in our incentive compensation programs are defined in “— Detailed Description of Pay Elements — Performance Measures” below.

 

Aligned Interests.  We have structured executive and broad-based employee incentives to align the interests of our executives and co-workers with those of our stockholders and customers. The Human Resources Committee believes that such incentives are an important contributor to Continental’s potential for successful performance.

 

For each of the years included in the Summary Compensation Table below, our executive compensation elements were aligned with the interests of our stockholders by linking our incentive compensation performance measures to the following key indicators of the company’s financial performance: our annual return on base invested capital (“ROBIC”); EBITDAR margin relative to our domestic network competitors; the size of our profit-sharing pool for broad-based workgroups; achieving positive net income; and maintaining specified cash balances. The restricted stock unit (“RSU”) program aligns management’s interests with our stockholders’ interests by placing the executives’ compensation “at risk” for any share price decline that occurs after the achievement of any performance target but before the relevant payment dates, which are spread over multi-year periods for retention purposes. The Profit Based RSUs, discussed below, also align our executives’ interests with the interests of our co-workers by linking executive incentive opportunities to the achievement of cumulative profit sharing pools for our broad base of employees.

 

Our broad-based employee incentive opportunities are designed to further our objective of aligning the interests of our co-workers with those of our stockholders and customers. First, stock options granted to our broad co-worker group (excluding officers) in connection with the pay and benefit cost reductions discussed above had realized value upon exercise and unrealized gains of over $96 million based on the closing price of the company’s common stock on December 31, 2009. Pursuant to our profit sharing plan, eligible co-workers receive incentives that also are aligned with the interests of our stockholders through payout opportunities based on our annual pre-tax profits. No annual incentives were paid to the named executive officers and no amounts were paid under the Enhanced Profit Sharing Plan for 2009 because the company did not report a profit for the year. Finally, the company maintains its long-standing broad-based on-time arrival incentive program and its perfect attendance program. These programs ensure a continued focus on operational performance that aligns co-worker performance with customer satisfaction, enhances our product, and drives financial performance.

 

Retention.  Continental is one of only two major domestic network carriers to avoid bankruptcy since the terrorist attacks of September 11, 2001. Our experienced and skilled management team has played a significant role in our stability relative to our peers and our ability to successfully implement innovative business strategies, such as being the first major carrier to transition from one global alliance to another. We seek to retain our management team primarily by setting compensation at competitive levels, by spacing long-term incentive payouts over several years, and by requiring continued employment to receive those payouts.

 

We recognize the opportunities available to our senior executives from other companies within our industry and outside our industry. Mr. Kellner’s departure effective December 31, 2009 to pursue other business opportunities is an example of the retention challenges facing the company and the Human Resources Committee as it sets compensation for our executives. We seek to pay our officers competitively relative to companies of similar size and business complexity in general industry, while recognizing that our management team is well-regarded in the airline industry. Accordingly, the Human Resources Committee determined that it is appropriate to design programs that target total compensation for executives at the 50th percentile among the general industry group and at the 75th percentile of the airline industry, based on a benchmarking process discussed further below under “— Process and Oversight — Compensation Benchmarking.”

Pay for Performance.  Our incentive compensation programs are designed to measure and reward annual performance based on absolute performance targets and long-term performance based on both absolute and relative performance targets. Absolute performance targets provide the primary links between incentive compensation and the company’s business strategy and operational results. Relative performance targets provide balance to the absolute performance targets by measuring the company’s performance in comparison to an industry peer group. Relative performance targets also provide flexibility to deal with unforeseen events and industry-wide challenges. In such circumstances, the company could fail to achieve its absolute performance targets, but the relative performance measures will reward a management team that is able to outperform its peer group in the face of adverse industry conditions. Similarly, even if the absolute performance goals are attained, the failure to achieve the relative performance goals can reduce the value of management’s incentive awards. Each of the company’s compensation programs, including the performance goals and financial performance hurdles, is described in further detail under “—  Detailed Description of Pay Elements” below as well as in the discussion following the Summary Compensation Table.

 

Process and Oversight

 

Human Resources Committee.  The Human Resources Committee, which is comprised solely of independent directors, makes all decisions concerning the compensation of our named executive officers. The Human Resources Committee has retained Exequity LLP as its independent compensation consultant to assist it in developing and structuring the company’s executive compensation programs in light of the principal objectives of our compensation philosophy described above, and also has retained Cleary, Gottlieb, Steen & Hamilton LLP as its legal counsel for executive compensation matters. In designing particular programs, the Human Resources Committee also considers recent trends in executive compensation and the concerns expressed by investors on the topic of executive compensation. For additional information concerning the Human Resources Committee, including its authority and its compensation consultant conflict of interest guidelines, see “Corporate Governance — Standing Committees of the Board of Directors” above.

 

Target Setting.  Prior to each new fiscal year, management prepares financial forecasts, an operating and capital expenditure budget, and the company’s Go Forward Plan, our business plan for the new year. Based on this planning process and the operating budget approved by our board, management develops and proposes performance targets under the incentive compensation programs for the new fiscal year. These proposals then are evaluated by Exequity, the Human Resources Committee’s independent compensation consultant, in light of compensation trends, benchmarking and internal parity analysis. The Human Resources Committee, with reference to information provided in the tally sheets and the analysis prepared by Exequity, each as discussed below, reviews the proposed targets and establishes the final performance targets for each program.

 

Tally Sheets.  We prepare comprehensive executive compensation tally sheets covering each of the named executive officers and present them to the Human Resources Committee in advance of the meetings at which incentive compensation performance targets are set and incentive awards are considered and made. The Human Resources Committee uses these tally sheets as a valuable source of historical and projected data in its process of considering and granting incentive awards and in making annual pay decisions. The tally sheets include detail of the actual dollar value of compensation received for prior years (including amounts reported to the named executives on Form W-2), the estimated compensation for the current year, and the potential value of any awards being considered by the committee, as well as wealth accumulation analysis in the form of projected compensation values for potential separation scenarios under the employment agreements and upon a change in control of the company. When making decisions on new compensation awards, the committee takes into consideration past awards as well as the potential value of outstanding awards.

 

Compensation Benchmarking.  The Human Resources Committee believes that our competition for executive talent includes other airlines as well as a broader range of general industry companies. Consequently, in assessing our compensation levels and designing executive compensation programs, the Human Resources Committee compares Continental’s executive compensation levels to both an airline-only peer group as well as selected large, non airline-specific U.S.-based companies. In 2009, the non airline-specific companies used as a compensation benchmarking reference point consisted of companies of similar size and scale as Continental so that the analysis compares executive compensation for positions with relatively similar levels of responsibility and

complexity. For this purpose, Exequity identified the 100 U.S.-based publicly traded companies that had annual revenues closest in amount to Continental’s annual revenues, with 50 of these companies having greater revenues than Continental and 50 having revenues less than Continental’s. The median annual revenues for the non airline-specific benchmark group was $14.4 billion versus Continental’s annual revenues of $14.2 billion (based on 2007 annual revenues). Additional information concerning the group of companies used for the 2009 benchmarking analysis is attached as Appendix A to this proxy statement. Within the airline industry, the peer group for both pay and performance comparison in 2009 consisted of American Airlines, United Airlines, Delta Air Lines, Northwest Airlines and US Airways as well as low cost carriers Alaska Airlines and Southwest Airlines. Northwest Airlines was dropped from the peer group following the completion of its merger with Delta Air Lines. The Human Resources Committee believes that this peer group offers an appropriate comparison for determining pay and financial performance goals relative to the most comparable companies within the airline industry.

 

The Human Resources Committee annually evaluates the compensation of our CEO and our other named executive officers versus the compensation levels reported for the CEO and officers in equivalent positions for the general industry group and the airline peer group. As discussed above under “— Philosophy — Retention,” the Human Resources Committee targets total compensation for executives at the 50th percentile among the general industry group and at the 75^th percentile of the airline peer group. The Human Resources Committee reviews the alignment of each named executive officer’s pay with the benchmark pay levels among the two comparator groups, as well as the total pay provided to the group of named executive officers in comparison to total pay delivered by the two comparator groups to their named executive officers as a group. The Exequity analysis reviewed by the Human Resources Committee prior to making pay decisions for 2009 showed that total direct compensation for the company’s named executive officers as a group fell below both the general industry group medians and the targeted benchmark 75th percentile among the airline peer group. Similarly, the pay of Continental’s CEO fell well below the benchmark levels of median compensation among the general industry group and the 75^th percentile among the airline peers. The pay comparisons for each named executive officer generally showed that Continental’s executive pay falls below the benchmark levels, with some limited exceptions. Although compensation falls below the overall targeted benchmarks, the committee also recognizes the constraints on compensation in light of the current adverse economic and industry climate.

 

Internal Parity of Executive Compensation.  The review of the benchmarking analysis and the core compensation philosophies discussed above are balanced with the interest of achieving the desired internal parity of compensation among the named executive officers. Compensation levels are also based on competitive considerations, individual performance over time, overall financial results and job duties and responsibilities. Accordingly, for 2009, Mr. Kellner continued to have the highest compensation among the named executive officers, followed by Mr. Smisek. Since being elected president effective in December 2004, Mr. Smisek’s compensation levels have been set closer to those of Mr. Kellner in recognition of his strong supporting role and for retention and succession planning purposes. As executive vice presidents with primary responsibility over one of the three major areas of our business (finance, marketing and operations), Messrs. Rowe, Compton, and Moran have the same compensation opportunities. Our Human Resources Committee has determined that it is appropriate to provide the same base salary and incentive compensation opportunities to each of our executive vice presidents and believes that this uniformity in compensation encourages their collaboration, support and team effort, and is consistent with the company’s Working Together philosophy.

 

The Human Resources Committee believes this philosophy is further promoted by internal compensation parity. According to Exequity, Continental’s relationship between CEO compensation and the pay of the remaining four named executive officers exhibits significantly more internal pay parity than is the case among the airline peers and the companies within the general industry benchmark group. Some external observers raise concerns when CEO compensation exceeds three times either the second most highly paid executive or the average of the remaining five named executive officers. The 2009 study revealed that Mr. Kellner’s compensation was 136% of Mr. Smisek’s compensation and was 185% of the average compensation of the four remaining named executive officers (including Mr. Smisek). This compares, for compensation reported in the 2008 proxies of the airline peer group, to an average of 241% for the CEO versus the second named executive officer and an average of 257% for the CEO versus the average of the four remaining named executive officers, and to averages of 246% and 317%, respectively, for the same comparisons in the general industry group.

Succession Planning.  The Human Resources Committee and the board of directors periodically reviews succession planning at the executive level and in key senior management-level positions. As discussed in “— Compensation Benchmarking” and “— Internal Parity of Executive Compensation” above, Mr. Smisek served in a strong supporting role to Mr. Kellner since his promotion to President effective in December 2004. Following Mr. Kellner’s announcement to the board that he intended to resign from the company, the Human Resources Committee and the board held a series of meetings to review the succession plan and alternatives for Mr. Kellner’s successor. The committee recommended and the board concluded that Mr. Smisek’s leadership role and experience overseeing nearly every aspect of the business since joining the company in 1995 made him the best candidate and clear successor for the position. The committee and Mr. Smisek remain focused on the continued development of the next generation of the company’s leadership.

 

Compensation Risk Analysis.  The role of the Human Resources Committee in risk oversight includes review of risks arising from our compensation policies, practices and programs as well as the mitigating controls, to determine whether any such risks are material to us. The committee reviewed compensation-related risk in light of the company’s comprehensive risk management practices, compensation program design, the committee’s process for setting performance targets and its use of certification procedures before payments are made. The company’s compensation programs are designed to balance and mitigate any potential risk, including limits on payouts, cash hurdles, multi-year payouts, and clawback provisions. For further discussion of the board’s role in risk oversight, please see “Corporate Governance — Board Oversight of Risk Management” above.

 

Evaluation of the CEO.  On an annual basis, the Human Resources Committee reviews and approves corporate goals and objectives relevant to the compensation of our CEO, evaluates our CEO’s performance in light of those goals and objectives, and determines and approves our CEO’s compensation based on its evaluation. In connection with the annual CEO performance review, the Human Resources Committee asks each member of the board to complete a questionnaire relating to the CEO’s prior year performance and the Human Resources Committee then meets privately with the CEO to discuss the results of the evaluation. The chair of the Human Resources Committee briefs the full board in executive session, outside the presence of management, on the results of the CEO evaluation.

 

Timing of Stock Awards.  The company has not granted the named executive officers any stock options since 2003 and has not granted them any restricted stock since 2002. The company has no current plans to grant stock options or restricted stock to its officers. Under the terms of our equity compensation plans, stock option awards are priced based on the closing price of our common stock on the date of grant. The RSU awards generally are granted at the time the Human Resources Committee establishes performance targets for the awards at the Human Resources Committee’s regularly scheduled meeting in February of each year, and generally are granted to new officers in connection with their promotion. Awards to non-management board members are granted in connection with election to the board at our annual stockholder meeting and upon first election to the board for new members.

 

Detailed Description of Pay Elements

 

Based on the philosophy described above, the Human Resources Committee has developed and implemented the pay elements and programs described below to establish an appropriate balance between fixed and “at risk” or variable compensation elements and between absolute and relative performance, and to drive performance that both enhances stockholder value and focuses on the long-term success of the company. The company’s compensation programs applicable to the years included in the Summary Compensation Table and disclosed elsewhere under “Executive Compensation” were adopted pursuant to the company’s Incentive Plan 2000 (“Incentive Plan 2000”), which expired in October 2009 except for purposes of governing the terms of outstanding awards. See “— Incentive Plan 2000” below.

Performance Measures.  The performance measures used in our incentive compensation programs include financial measures reported in our financial statements and measures that are calculated based on items included in the financials. Further information regarding our performance measures and how they are utilized in our programs is described below:

 

 

Base Salaries.  The base salary levels of the named executive officers are set at a level that is designed to provide sufficient fixed compensation to satisfy the company’s retention objectives while allowing the company to provide a greater potential level of compensation through variable incentive performance awards. After pay and benefit reductions were implemented in 2005, the Human Resources Committee has approved base salary adjustments for the named executive officers as increases have been implemented for other company workgroups. Messrs. Kellner and Smisek each refused the 2007 and 2008 salary increases and each voluntarily waived his salary for the period of June 1, 2008 through December 31, 2008. The Human Resources Committee approved a 2.5% merit pay increase for each of the named executive officers effective January 1, 2009, consistent with the target percentage increases provided to our non-collectively bargained workgroups. Upon his promotion to Chairman, President and Chief Executive Officer effective January 1, 2010, Mr. Smisek’s base salary (which he has waived unless the company is profitable for the full calendar year) was set at $730,000.

 

Annual Incentive Program.  Since 2004 and continuing through 2009, the company’s ROBIC performance has been the measure used in our Annual Executive Bonus Program adopted pursuant to Incentive Plan 2000 (referred to herein as the annual incentive program). This absolute performance measure recognizes the capital-intensive nature of the airline industry and ensures that Continental achieves a sufficient return on its capital. The ROBIC goals are established annually by the Human Resources Committee with reference to the company’s annual budget and financial plan. The program sets the entry incentive opportunity at 50% and permits the Human Resources Committee to establish different levels of target and stretch incentive opportunity on an annual basis. The annual incentive program opportunities for 2009 for the named executive officers, between 50% (entry) and 150% (stretch), with a target of 125% of year-end base salary, were consistent with the opportunity levels provided for the last several years. However, target and stretch levels are reconsidered each year by the Human Resources Committee to confirm that the opportunities remain consistent with the committee’s overall compensation goals discussed above. Before any payment is made for a fiscal year, even if a ROBIC performance goal is met, the annual incentive program also required the achievement of a minimum specified year-end cash balance as well as a financial performance hurdle, each of which the Human Resources Committee sets annually, recognizing that such hurdles are additional important absolute measures of the company’s financial performance and liquidity. The financial performance hurdle required that the company report positive net income for the year as set forth on the

company’s regularly prepared and publicly available consolidated statement of operations prepared in accordance with accounting principles generally accepted in the United States (“GAAP”).

 

The targets for 2009 under the annual incentive program were as follows: ROBIC entry of 12.5%, target of 13.5% and stretch of 16.0%, a financial performance hurdle that required the company to report positive net income for 2009, and a minimum cash balance of $2.2 billion. For 2009, the company failed to achieve entry level ROBIC performance and the financial performance hurdle and therefore no payments were made under the annual incentive program. The entry, target and stretch incentive opportunities with respect to the 2009 awards under the annual incentive program are set forth in the 2009 Grants of Plan-Based Awards table below.

 

Long-Term Incentive Program.  The company’s Long-Term Incentive and RSU Program adopted pursuant to Incentive Plan 2000 (the “LTIP/RSU Program”) consists of two long-term incentive components — the long-term incentive program (“LTIP”) and the RSU program.

 

 

The 2007 LTIP award, the payment of which is included as 2009 compensation in the Summary Compensation Table below, had a performance period of January 1, 2007 through December 31, 2009. The performance targets applicable to the 2007 LTIP award were as follows: entry EBITDAR margin equal to the industry group average, target EBITDAR margin equal to entry plus 50 basis points, stretch EBITDAR margin equal to entry EBITDAR margin plus 100 basis points, and a minimum cash balance of $2.0 billion. The company’s EBITDAR margin performance for the 2007 LTIP award performance period exceeded the EBITDAR margin performance of the industry group by 311 basis points, thus achieving performance in excess of the stretch level. The entry, target and stretch incentive payment opportunities with respect to the 2009 LTIP award are set forth in the 2009 Grants of Plan-Based Awards table below based on the named executive officers’ salary and position as of December 31, 2009. In establishing performance targets for the 2009 LTIP award, the Human Resources Committee considered company and peer group performance information, determined that industry fundamentals remained largely unchanged and established 2009 LTIP award performance targets that are consistent with performance targets applicable to the 2007 and 2008 LTIP awards.

 

 

The Profit Based RSUs awarded for the performance period commencing April 1, 2006 and ending December 31, 2009 (the “2006 Profit Based RSUs”) achieved the maximum or “stretch” level of performance and the first and second one-third increments were paid out in cash in March 2008 and March 2009. The March 2009 payments to the named executive officers are set forth in the Stock Awards column of the 2009 Option Exercises and Stock Vested Table below and were based on the average closing price of the company’s common stock for the 20 trading days preceding March 1, 2009, or $12.32 per share. Each of these payments was made following achievement of the required year-end cash hurdle. In 2009, the Human Resources Committee awarded Profit Based RSUs with a performance period commencing January 1, 2009 and ending December 31, 2011 (the “2009 Profit Based RSUs”). Depending on the level of cumulative profit sharing achieved (or, as described below, calculated) under our Enhanced Profit Sharing Plan, ranging from $100 million to $375 million, the payment percentage for these awards can range from 0% to 400% of the underlying 2009 Profit Based RSUs. The Enhanced Profit Sharing Plan expired at the end of 2009, but, as provided by the Human Resources Committee at the time of grant and in compliance with section 162(m) of the Code, performance under the 2008 and 2009 Profit Based RSU awards will be calculated based on the terms of such plan rather than the company’s new profit sharing plan adopted effective beginning with calendar year 2010. Consistent with the 2009 awards under the annual incentive program, the financial performance hurdle applicable to the 2009 Profit Based RSUs requires the company to achieve positive GAAP net income and the minimum cash balance applicable to such awards is $2.2 billion. The entry, target and stretch award opportunities are outlined in the 2009 Grants of Plan-Based Awards table. The company did not achieve a profit in 2008 or 2009 and, therefore, no performance target was achieved in 2008 or 2009 with respect to the 2009 Profit Based RSUs or the Profit Based RSUs for the performance period commencing January 1, 2008 and ending December 31, 2010 (the “2008 Profit Based RSUs”). In addition, no target was achieved with respect to the Profit Based RSUs awarded for the performance period commencing January 1, 2007 and ending December 31, 2009 (the “2007 Profit Based RSUs”). In 2007, the company did achieve $158 million in profit sharing with respect to the 2007 Profit Based RSUs; however this was below the entry performance level for the awards and so the 2007 Profit Based RSUs expired without vesting.

 

Certain Other Programs.  Our named executive officers may participate in company-wide plans and programs, such as group health and welfare plans, the non-pilot 401(k) plan, and the employee stock purchase plan, that are offered to the broader employee group. These programs are consistent with similar plans offered by peer and general industry companies, and are important to the recruitment and retention of executive talent.

 

Incentive Plan 2000.  The company’s annual and long-term incentive compensation programs for compensation awarded in 2009 and included in the Summary Compensation Table are adopted pursuant to the company’s stockholder-approved Incentive Plan 2000, which sets forth the general terms applicable to executive incentive compensation. Incentive Plan 2000 expired in October 2009 and no further awards may be made under Incentive Plan 2000, including annual incentive awards, LTIP awards, RSU awards, stock options and restricted stock.

Incentive Plan 2010.  Following the expiration of Incentive Plan 2000, the Human Resources Committee considered and recommended, and the board has adopted, Incentive Plan 2010. Incentive Plan 2010 is a new incentive plan and is being submitted for approval by the company’s stockholders at the meeting. See “Proposal 2: Approval of Incentive Plan 2010” below.

 

Perquisites.  We provide executives with certain perquisites similar in form and amount to those offered to executives at similar levels at companies within the airline industry and general industry groups. We believe that providing a portion of compensation to our executive officers in the form of perquisites, rather than in cash, enhances retention, results in a cost savings to Continental and strengthens our relationships with our executives. For example, flight benefits provide our executives and non-management directors the advantage of product familiarization and brand identification. The incremental cost to the company of providing flight benefits is minimal, while we believe the value of these benefits to the named executive officers is perceived by them to be high. With respect to in-kind tax preparation services, the Human Resources Committee believes this is an important benefit to ensure that executives complete their tax preparation obligations in a timely and accurate manner. Executive perquisites are discussed in the footnotes to the Summary Compensation Table.

 

SERP.  The company maintains supplemental executive retirement plans (“SERP”) for the named executive officers that provide an annual retirement benefit expressed as a percentage of the executives’ final average compensation. Since final average compensation is capped in the benefit formula applied under the company’s defined benefit pension plan, the SERP provides an opportunity for the named executive officers to earn supplemental retirement benefits. When combined with the benefit payable from the Continental Retirement Plan (“CARP”), the annual retirement benefit could range up to 75% of final average compensation for Mr. Smisek if he achieves 30 years (the capped amount) of SERP credited service or up to 65% of final average compensation for Messrs. Rowe, Compton, and Moran if they achieve 26 years (the capped amount) of SERP credited service. Mr. Kellner resigned effective December 31, 2009 with 25 years of SERP credited service and a benefit of 62.5% of his final average compensation. Because the benefits provided under the CARP are not subject to Medicare tax, the company previously has agreed to reimburse the named executives for the Medicare tax obligations related to the SERP so that the SERP benefits are treated on a similar basis to the CARP benefits. The Human Resources Committee believes that the SERP serves as an important and effective long-term retention incentive. The benefit formulas and the compensation limitations applicable to the SERP and the defined benefit pension plan are described below under ‘‘— Pension Benefits.”

 

Other Executive Compensation Matters

 

Outlined below is certain additional information with respect to the company’s compensation policies and practices.

 

Employment Agreements.  We have entered into employment agreements with each of our named executive officers. For a discussion of the material terms of these agreements, please see “— Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table — Employment Agreements” below. The committee believes that employment agreements enhance the company’s ability to recruit and retain the best available talent and also define maximum termination-related liabilities.

 

Confidentiality and Non-Competition Agreements.  Following the departure of several members of our management team to our competitors and the company’s strategic decision to join Star Alliance, the Human Resources Committee considered expanding the confidentiality and non-competition obligations of certain members of senior management. Mr. Kellner’s employment agreement included a non-compete obligation for a period of two years following termination of his employment. In April 2009, we entered into Confidentiality and Non-Competition Agreements with Messrs. Smisek, Rowe, Compton, and Moran that include an 18-month non-compete obligation following termination of the executive’s employment, except if such termination is by the company for a reason other than Cause (including a non-renewal of the employment agreement) or by the executive for Good Reason. The non-compete provisions prohibit the named executive officers from serving in an executive, advisory or consulting capacity for any passenger air carrier in the U.S. or in any foreign country in which the company has an office, station or branch as of the date of termination of employment with the company. To induce

the officers to enter into the Confidentiality and Non-Competition Agreements, the company paid $1,125,000 to Mr. Smisek and $750,000 to each of Messrs. Rowe, Compton, and Moran.

 

Stock Ownership Guidelines.  The company’s board has adopted minimum stock ownership guidelines. For a discussion of the minimum ownership guidelines for our named executive officers, please see “Corporate Governance — Corporate Governance Guidelines — Minimum Stock Ownership” above. The board believes that continued stock ownership by executives and non-management directors helps tighten the alignment among the interests of board members, executives, and stockholders.

 

Trading Policy.  Our securities trading policy prohibits our officers and directors from trading in options, warrants, puts and calls or similar instruments on our securities and from engaging in short sales of our securities or transactions that are substantially equivalent to short sales.

 

Payments Upon Termination or Change in Control.  Our executives’ employment agreements and our existing compensation programs require us to make certain payments or provide certain benefits to our named executive officers upon termination of employment, including a termination in connection with a change in control of Continental. Talk of consolidation has been prevalent in the airline industry over the last decade, and some consolidations have occurred, such as the mergers of America West with US Airways and Delta with Northwest. Our Human Resources Committee periodically reviews our change in control arrangements and believes that (i) compensation must be structured in a manner that quantifies the risk to the executives related to a change in control and permits them to remain focused on our business before, during and after any such transaction and (ii) our highly regarded management team is a unique corporate asset and change in control or termination protections (including the excise tax protection described in “— Tax Matters” below) enhance executive stability and therefore are in the best interests of the company and its stockholders. Through 2009, such protections continued to represent majority practice among large, publicly traded companies, especially those within consolidating industries. The Human Resources Committee believes that the company’s protections are generally consistent with those maintained by comparable organizations, and that such protections represent part of a competitive overall compensation program for our executives. For a discussion of the potential payments to our named executive officers upon termination or change in control, please see “— Potential Payments Upon Termination or Change in Control” below.

 

Clawback Policy.  The annual incentive program provides that a participant must reimburse the company for the full amount of any annual incentive paid to such participant if the participant’s misconduct (as defined in the program) results in an error in the company’s financial information that has the effect of increasing the amount of such incentive payment. Incentive Plan 2010 includes the same provisions which will be applicable to all awards granted pursuant to Incentive Plan 2010, if adopted by stockholders. In addition, Incentive Plan 2010 also provides that the Human Resources Committee may adjust compensation as necessary, in its sole discretion, if there is a material restatement of the company’s financial statements that affects financial information used in determining compensation paid to a participant.

 

Tax Matters.  In designing and implementing the programs applicable to executives, the Human Resources Committee considers the effects of applicable sections of the Code, including section 162(m), section 4999, and section 409A. Section 162(m) denies publicly held companies a tax deduction for annual compensation in excess of one million dollars paid to their chief executive officer or any of their three other most highly compensated executive officers (excluding the CFO) employed on the last day of a given year, unless their compensation is based on qualified performance criteria or certain other exceptions apply. To qualify for deductibility as performance-based compensation, the performance criteria must be established within specified periods by a committee of independent directors and approved, as to their material terms, by that company’s stockholders. Continental’s executive compensation plans, including the annual incentive program, the LTIP/RSU Program, and its stock incentive plans, were designed to permit the grant of awards that could qualify as performance-based compensation under section 162(m). Certain awards have been made under the LTIP/RSU Program to address specific retention concerns with respect to certain executives that do not meet the requirements for an exemption as performance-based compensation. However, the Human Resources Committee considered the deductibility of payments related to such awards and concluded that, while not deductible, the awards serve the best interests of the company and its stockholders. Further, the Human Resources Committee may in the future approve compensation or changes to

plans, programs or awards that may cause the compensation or awards not to comply with section 162(m) if it determines that such action is appropriate and in the company’s best interests. Although the federal income tax deduction for some amounts recorded as compensation by the company to certain executives may be limited by section 162(m), that limitation does not result in the current payment of increased federal income taxes by the company due to its significant net operating loss carry forwards.

 

Section 4999 of the Code imposes an excise tax on so-called “excess parachute payments” made to an executive in connection with a change in control as described in section 280G of the Code. In light of evolving best practices in executive compensation, the Human Resources Committee adopted a policy in April 2009 that the company will no longer provide reimbursement for such excise taxes to officers who did not, as of the date of the adoption of the policy, have a contractual right to such benefits. All of our named executive officers had a contractual right to such benefits prior to the date of the adoption of the policy. These benefits are discussed below under “— Potential Payments Upon Termination or Change in Control — Change in Control — Reimbursement for Excise Taxes.” Although amounts paid to the named executive officers for this additional tax protection may not be deductible, there would be no impact to the company’s current federal income taxes due to our significant net operating loss carry forwards. The committee’s policy also eliminates tax gross-ups on post-separation perquisites provided to officers who did not, as of the date of the adoption of the policy, have a contractual right to such benefits. The committee’s policy retains the flexibility to offer such reimbursements in limited circumstances if the committee determines that providing such reimbursements is in the best interest of the company and its stockholders. In May 2009, the board adopted amendments to the company’s Corporate Governance Guidelines to provide that the company will not provide tax reimbursements on post-separation perquisites to any newly-elected non-management director after such date.

 

Section 409A of the Code imposes significant additional taxes on non-exempt deferred compensation that does not comply with the requirements of section 409A of the Code. Our employment agreements and compensation programs are structured to avoid the imposition of such additional taxes and to comply with the provisions of section 409A.

 

The Human Resources Committee has reviewed and discussed with management the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K of the Securities Exchange Act of 1934, as amended. Based on such review and discussions with management, the Human Resources Committee has recommended that the Compensation Discussion and Analysis be included in this proxy statement and the company’s Annual Report on Form 10-K for the year ended December 31, 2009.

 

Respectfully submitted,

 

Human Resources Committee

 

Charles A. Yamarone, Chairman

Kirbyjon H. Caldwell

Henry L. Meyer III

Ronald B. Woodard

 

The following table sets forth information concerning the compensation of our chief executive officer, our chief financial officer, and our three other most highly compensated executive officers in 2009 (collectively referred to in this proxy statement as the “named executive officers”). Mr. Kellner served as Chairman and Chief Executive Officer throughout 2009. Mr. Smisek served as President and Chief Operating Officer throughout 2009. Mr. Kellner resigned from the company on December 31, 2009. Mr. Smisek was promoted to the position of Chairman, President and Chief Executive Officer effective January 1, 2010.

 

 

 

 

 

 

 

 

 

 

The following table sets forth information regarding awards granted in 2009 to our named executive officers under our annual incentive program and the LTIP/RSU Program, each of which was implemented under our Incentive Plan 2000.