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Rating Action:

MOODY'S DOWNGRADES RATINGS OF CONTINENTAL AIRLINES, INC. SENIOR IMPLIED RATING TO B3 FROM B2

10 Apr 2003
MOODY'S DOWNGRADES RATINGS OF CONTINENTAL AIRLINES, INC. SENIOR IMPLIED RATING TO B3 FROM B2

Approximately $16.1 Billion of Debt Securities Affected.

New York, April 10, 2003 -- Moody's Investor's Service lowered the debt ratings of Continental Airlines, Inc. (Senior Implied B3 from B2); the Senior Unsecured rating was downgraded to Caa2 from B3. The outlook is Negative.

The downgrade reflects the financial risks posed by recent substantial declines in air travel demand and yields, and the probability that these conditions will continue through a substantial portion of the second quarter. This decline in demand and the resulting reduction in revenues and potentially cash flow, comes at a time of the year in which the company typically rebuilds financial strength in anticipation of the seasonally weak fourth and first quarters. Should cash flow not strengthen during the course of the second and third calendar quarters, the company could face the normally cash flow negative fourth and first calendar quarters with more limited liquidity and financial flexibility. Acknowledged in the ratings is the probability of government assistance to the airline industry including Continental and an increase in demand as the most active period of the war in Iraq comes to a close and the currently high level of passenger concern due to SARS is reduced. The ratings action completes a review begun on March 17, 2003.

The rating outlook is Negative reflecting the high level of uncertainty regarding demand and pricing dynamics. Increased passenger traffic is dependent on a quick return of consumer and business confidence which have been adversely affected by a weak economic outlook and concerns related to the war in Iraq. Even with an increase in demand, pricing may remain very competitive with the probability of continued aggressive pricing based on to the need of several carriers to generate cash even at the expense of longer term profits. As a result, there is a high degree of uncertainty regarding near term cash flow and the possibility that Continental may not be able to sustain sufficient liquidity over the next two quarters to warrant maintaining the current ratings as it enters the weaker portion of its seasonal cycle.

Balance sheet liquidity remains adequate (estimated to be in excess of $1.1 billion) but could face erosion if the typical seasonal strength seen in the second and third calendar quarters does not materialize this year. Several factors could lead to this outcome. The war in Iraq did not begin until late in the first quarter and may substantially affect demand through the second quarter or longer. The most significant impact on demand from the war seems to have been in the trans-Atlantic routes. This geography is highly sensitive to summer tourist travel which would be negatively affected by continued geopolitical uncertainty. In the Pacific, the impact of SARS has been sudden and substantial, particularly on demand to affected areas such as Hong Kong. The company has temporarily suspended its Hong Kong service from the US, but the majority of Continental's Pacific capacity is flown by Continental Micronesia where demand has been much more stable.

Continental currently benefits from a diverse route network and relatively low costs partially as a result of labor contracts that are more favorable than its primary hub and spoke competitors. The company has consistently managed better than industry average operating margins, yet in the current environment this still represents an operating loss. Moody's anticipates that despite the recent reduced demand, Continental's first quarter cash balances will be approximately the same level as those seen at the end of 2002. Although the company does not face any large debt payments, a number of small obligations (in total about $350 million) could add pressure to cash balances absent refinancing.

The company's unsecured debt rating was lowered one notch more than the senior implied rating. This ratings differential was based on continued pledging of assets by Continental to support borrowings. Unsecured debt holders face a substantial loss of principal in liquidation due to this effective subordination of their position.

The company's Equipment Trust Certificate and Enhanced Equipment Trust Certificate transactions have been reviewed and the ratings adjusted based on Moody's view of the underlying collateral. Junior tranches have been most negatively affected due to the continued weakening of the secondary market for aircraft. Moody's anticipates that this trend will continue for the intermediate term as there is no indication of a resurgence of demand or a scrapping of capacity that would meaningfully bring supply and demand back into balance.

Ratings affected are as follows:

Continental Airlines, Inc.

Senior Implied Rating: to B3 from B2

Issuer Rating: to Caa2 from B3

Debt Shelf:

- Senior Unsecured: to (P)Caa2 from (P)B3

- Subordinated : to (P)Ca from (P)Caa2

- Equipment Trust Certificates Shelf : to (P)B1 from (P)Ba3

Sr. Unsecured Notes: to Caa2 from B3

Sr. Unsecured IRB: to Caa2 from B3

Sr. Unsecured Rev. Bond: to Caa2 from B3

Sr. Unsecured Conv. Notes: to Caa2 from B2

Sr. Secured Loan Certificates: to Ba3 from Ba2

Sr. Secured Term Loans (Tranche B): to B3 from B1

Preferred Stock: to C from Ca

Enhanced Equipment Trust Certificates 1996-1 Class A: to Baa3 from Baa1

Enhanced Equipment Trust Certificates 1996-1 Class B: to Ba3 from Baa3

Enhanced Equipment Trust Certificates 1996-1 Class C: to B3 from Ba2

Enhanced Equipment Trust Certificates 1996-2 Class A: to Baa3 from Baa1

Enhanced Equipment Trust Certificates 1996-2 Class B: to Ba2 from Baa3

Enhanced Equipment Trust Certificates 1996-2 Class C: to B3 from Ba2

Enhanced Equipment Trust Certificates 1996-2 Class D: to Caa1 from B2

Enhanced Equipment Trust Certificates 1997-1 Class A: to Baa3 from Baa1

Enhanced Equipment Trust Certificates 1997-1 Class B: to Ba3 from Baa3

Enhanced Equipment Trust Certificates 1997-1 Class C: to B2 from Ba2

Enhanced Equipment Trust Certificates 1997-2 Class A: to Ba2 from Baa1

Enhanced Equipment Trust Certificates 1997-2 Class B: to B3 from Baa3

Enhanced Equipment Trust Certificates 1997-2 Class C: to Caa2 from Ba2

Enhanced Equipment Trust Certificates 1997-3 Class A: confirm at Baa3

Enhanced Equipment Trust Certificates 1997-3 Class B: confirm at Ba2

Enhanced Equipment Trust Certificates 1997-3 Class C: confirm at Ba3

Enhanced Equipment Trust Certificates 1997-4 Class A: to Baa3 from Baa1

Enhanced Equipment Trust Certificates 1997-4 Class B: to Ba2 from Baa3

Enhanced Equipment Trust Certificates 1997-4 Class C: to B1 from Ba2

Enhanced Equipment Trust Certificates 1998-1 Class A: to Baa3 from Baa1

Enhanced Equipment Trust Certificates 1998-1 Class B: to Ba2 from Baa3

Enhanced Equipment Trust Certificates 1998-1 Class C: to B2 from Ba2

Enhanced Equipment Trust Certificates 1998-2 Class A: to Ba1 from Baa1

Enhanced Equipment Trust Certificates 1998-2 Class B: to B1 from Baa3

Enhanced Equipment Trust Certificates 1998-2 Class C: to B3 from Ba2

Enhanced Equipment Trust Certificates 1998-3 Class A: to Baa3 from Baa1

Enhanced Equipment Trust Certificates 1998-3 Class B: to Ba2 from Baa3

Enhanced Equipment Trust Certificates 1998-3 Class C: to B3 from Ba2

Enhanced Equipment Trust Certificates 1999-1 Class A: to Baa3 from Baa1

Enhanced Equipment Trust Certificates 1999-1 Class B: to Ba2 from Baa3

Enhanced Equipment Trust Certificates 1999-1 Class C: to B2 from Ba2

Enhanced Equipment Trust Certificates 1999-2 Class A: to Baa3 from Baa1

Enhanced Equipment Trust Certificates 1999-2 Class B: to Ba2 from Baa3

Enhanced Equipment Trust Certificates 1999-2 Class C: to B2 from Ba2

Enhanced Equipment Trust Certificates 2000-1 Class A: to Baa3 from Baa1

Enhanced Equipment Trust Certificates 2000-1 Class B: to Ba3 from Baa3

Enhanced Equipment Trust Certificates 2000-1 Class C: to B2 from Ba2

Enhanced Equipment Trust Certificates 2000-2 Class A: to Baa3 from Baa1

Enhanced Equipment Trust Certificates 2000-2 Class B: to Ba2 from Baa3

Enhanced Equipment Trust Certificates 2000-2 Class C: to B2 from Ba2

Enhanced Equipment Trust Certificates 2001-1 Class A: to Baa3 from Baa1

Enhanced Equipment Trust Certificates 2001-1 Class B: to Ba1 from Baa3

Enhanced Equipment Trust Certificates 2001-1 Class C: to B2 from Ba2

Enhanced Equipment Trust Certificates 2001-1 Class D: to B3 from B1

Enhanced Equipment Trust Certificates 2002-1 Class G*: Aaa

Floating Equipment Trust Certificates*: Aaa

* Enhanced Equipment Trust Certificates supported by monoline insurance policies remain rated Aaa.

Calair L.L.C.

Senior Unsecured Notes: to Caa2 from B3

Continental Airlines, Inc. is headquartered in Houston, TX

New York
Michael J. Mulvaney
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Richard Bittenbender
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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