Sara Crider, Drew Siebert, Jason Stone, & Darin Wolding

 Founded in 1934 as Varney Speed lines  Renamed to Continental in 1937  Acquired by Texas Air Corp. in 1981  Merged with Texas International in 1982  Chapter 11 Bankruptcy in 1983  Merged with People Express, Frontier, and New York Air in 1987  Chapter 11 Bankruptcy in 1990  Merged with United Airlines in 2010

 Currently operating independent from United  Headquarters in Chicago, IL  2400 Departures Daily  130 Domestic Destinations  132 International Destinations  Fleet of 348 airplanes

POTENTIAL OPTIONS FOR MANAGEMENT REVIEW NET ADVANTAGE TO LEASING  Many variables must be considered in rent vs. buy decisions:  Tax deductions and tax credits of ownership  Cash flow considerations  Depreciation tax credits (opportunity cost to lessee)  Time Value of Money: Initial Cash Outlay Avoided  Continental must assess their tax position.  Can Continental take advantage of tax credits? If so, buying may be a better option than leasing.  Continental must reconcile the opportunity cost of capital used to purchase new planes.  What does Continental earn on invested money?  Is the Return On Investment higher if Continental buys the aircraft versus investing the initial cash outlay saved in securities?  The Net Advantage to Leasing (NAL) method considers all variables relevant to the rent vs. buy decision.  Continental must consider the residual value of the assets in their decision.  Residual value is an opportunity cost to the lessee  The lessee forgoes the benefit of liquidating the asset at the end of the lease period.  High residual values may negate the Time Value of Money benefit associated with avoiding high initial cash outlay. Continental Airlines must determine the most cost effective way to add two Boeing 757 aircraft to its fleet for the next fifteen (15) years.

ProbabilityValue 0.05 $ 10,000, $ 500, $ 15,000, $ 1,500, $ 20,000, $ 2,000, $ 25,000, $ 3,750, $ 30,000, $ 6,000, $ 35,000, $ 5,250, $ 40,000, $ 4,000, $ 45,000, $ 4,500, $ 50,000, $ 2,500, $ 30,000,000.00Expected Residual Value ProbabilityRate 0.810% % %Total Interest Cost ( r) (1-T)0.6 r0.104 Quarterly r0.026

Quarterly A/P Cost $ 4,000, Tax Rate (T) 0.4 Tax deduction $ 1,600, Airplane Cost (A/P Cost) $ 125,000, Expected Residual Value (ERV) $ 30,000,000 Tax Rate (T) 0.4 Years15 Quarters per year4 Number of Periods60 Depreciation Tax Credits $ 633, Quarterly CFAT $ 3,033, A/P M79ITCNAL NAL = $ 4,073,583.63

Quarterly PeriodCFAT[1 + (1-T)r}^t] 1 $ 3,033, $ 2,986, $ 3,033, $ 2,940, $ 3,033, $ 2,895, $ 3,033, $ 2,851, $ 3,033, $ 2,807, $ 3,033, $ 2,764, $ 3,033, $ 2,721, $ 3,033, $ 2,680, $ 3,033, $ 2,638, $ 3,033, $ 2,598, $ 3,033, $ 2,558, $ 3,033, $ 2,519, $ 3,033, $ 2,480, $ 3,033, $ 2,442, $ 3,033, $ 2,404, $ 3,033, $ 2,367, $ 3,033, $ 2,331, $ 3,033, $ 2,295, $ 3,033, $ 2,260, $ 3,033, $ 2,225, $ 3,033, $ 2,191, $ 3,033, $ 2,157, $ 3,033, $ 2,124, $ 3,033, $ 2,092, $ 3,033, $ 2,059, $ 3,033, $ 2,028, $ 3,033, $ 1,997, $ 3,033, $ 1,966, $ 3,033, $ 1,936, $ 3,033, $ 1,906, $ 3,033, $ 1,877, $ 3,033, $ 1,848, $ 3,033, $ 1,819, $ 3,033, $ 1,792, $ 3,033, $ 1,764, $ 3,033, $ 1,737, $ 3,033, $ 1,710, $ 3,033, $ 1,684, $ 3,033, $ 1,658, $ 3,033, $ 1,633, $ 3,033, $ 1,608, $ 3,033, $ 1,583, $ 3,033, $ 1,558, $ 3,033, $ 1,535, $ 3,033, $ 1,511, $ 3,033, $ 1,488, $ 3,033, $ 1,465, $ 3,033, $ 1,442, $ 3,033, $ 1,420, $ 3,033, $ 1,398, $ 3,033, $ 1,377, $ 3,033, $ 1,356, $ 3,033, $ 1,335, $ 3,033, $ 1,314, $ 3,033, $ 1,294, $ 3,033, $ 1,274, $ 3,033, $ 1,255, $ 3,033, $ 1,235, $ 3,033, $ 1,216, $ 3,033, $ 1,198, $ 117,631,571.80

ProbabilityRate 0.810% % %Total Interest Cost ( r) 2.6% Quarterly r Airplane Cost (A/P Cost) $ 125,000,000.00

Salvage ValueNAL (1 Plane) $30M$839k $50M($1,358k) $10M$3,035k The worst case scenario is for Continental to not be able to use tax benefits for the full 15 year lease. In that situation, leasing is still a positive NPV option at the expected residual value of $30M per plane. For this reason, Continental should lease.

Evaluating the value of an early termination option on the NAL is difficult because the salvage value of the asset will be different at any possible termination point. Because the NAL is positive for the expected salvage value over 15 years, it is still a good idea to lease because “options” cannot have a negative value. The best value of this option is that it gives Continental flexibility which is valuable to any business. With the ability to break the lease without penalty at any time, Continental can adjust to market conditions like fewer people flying or newer more fuel efficient aircraft.