HAWAIIAN HOLDINGS INC - Quarter Report: 2011 June (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2011

 

or

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from       to       

 

Commission file number 1-31443

 

HAWAIIAN HOLDINGS, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

(808) 835-3700

(Registrant’s Telephone Number, Including Area Code)

 

 

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x Yes o No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the past 12 months (or for such shorter period that the registrant was required to submit and post such files).  o Yes o No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o Yes x No

 

As of July 21, 2011, 50,712,907 shares of the registrant’s common stock were outstanding.

 

 

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Hawaiian Holdings, Inc.

Form 10-Q

Quarterly Period ended June 30, 2011

 

Table of Contents

 

Part I.	Financial Information	3
Item 1.	Consolidated Financial Statements of Hawaiian Holdings, Inc. (Unaudited)	3
	Consolidated Statements of Operations for the three and six months ended June 30, 2011 and 2010	3
	Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010	4
	Condensed Consolidated Statements of Cash Flows for the three and six months ended June 30, 2011 and 2010	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	23
Item 4.	Controls and Procedures	26
Part II.	Other Information	27
Item 1.	Legal Proceedings	27
Item 1A.	Risk Factors	27
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 3.	Defaults Upon Senior Securities	36
Item 5.	Other Information	36
Item 6.	Exhibits	37
	Signatures	38

 

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PART I. FINANCIAL INFORMATION

 

ITEM 1.                    FINANCIAL STATEMENTS.

 

Hawaiian Holdings, Inc.

Consolidated Statements of Operations

(in thousands, except per share data)

 

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2011			2010			2011			2010
		(unaudited)
Operating Revenue:
Passenger		$	353,397		$	277,706		$	678,679		$	541,103
Other		41,618			38,183			81,946			73,162
Total		395,015			315,889			760,625			614,265
Operating Expenses:
Aircraft fuel, including taxes and oil		135,471			78,610			244,834			148,916
Wages and benefits		79,713			73,181			157,285			146,080
Aircraft rent		31,154			27,128			65,229			51,242
Maintenance materials and repairs		42,724			29,544			86,138			65,413
Aircraft and passenger servicing		19,620			14,007			38,043			28,193
Commissions and other selling		23,292			17,122			49,525			39,790
Depreciation and amortization		15,604			14,397			30,307			28,384
Other rentals and landing fees		17,341			13,262			33,665			26,382
Other		30,263			24,640			60,711			50,289
Lease termination charges		70,014			—			70,014			—
Total		465,196			291,891			835,751			584,689
Operating Income (Loss)		(70,181		)	23,998			(75,126		)	29,576
Nonoperating Income (Expense):
Interest expense and amortization of debt discounts and issuance costs		(4,889		)	(4,972		)	(8,083		)	(9,975		)
Interest income		338			1,916			695			2,738
Capitalized interest		1,944			466			3,160			523
Losses on fuel derivatives		(10,453		)	(4,845		)	(2,074		)	(5,472		)
Other, net		668			(652		)	341			(1,110		)
Total		(12,392		)	(8,087		)	(5,961		)	(13,296		)
Income (Loss) Before Income Taxes		(82,573		)	15,911			(81,087		)	16,280
Income tax (benefit) expense		(32,531		)	6,918			(31,900		)	7,071
Net Income (Loss)		$	(50,042	)	$	8,993		$	(49,187	)	$	9,209
Net Income (Loss) Per Common Stock Share:
Basic		$	(0.99	)	$	0.17		$	(0.97	)	$	0.18
Diluted		$	(0.99	)	$	0.17		$	(0.97	)	$	0.17

 

See accompanying Notes to Consolidated Financial Statements.

 

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Hawaiian Holdings, Inc.

Consolidated Balance Sheets

(in thousands)

 

		June 30,			December 31,
		2011			2010
		(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents		$	303,497		$	285,037
Restricted cash		5,226			5,224
Total cash, cash equivalents and restricted cash		308,723			290,261
Accounts receivable, net of allowance for doubtful accounts of $956 as of June 30, 2011 and $744 as of December 31, 2010		79,279			59,887
Spare parts and supplies, net		22,639			18,354
Deferred tax assets, net		18,449			40,651
Prepaid expenses and other		59,094			37,367
Total		488,184			446,520
Property and equipment, less accumulated depreciation and amortization of $157,433 as of June 30, 2011 and $147,588 as of December 31, 2010		618,276			418,120
Other Assets:
Long-term prepayments and other		41,888			38,629
Deferred tax assets, net		69,254			38,847
Intangible assets, net of accumulated amortization of $142,659 as of June 30, 2011 and $130,951 as of December 31, 2010		57,012			68,720
Goodwill		106,663			106,663
Total Assets		$	1,381,277		$	1,117,499
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	86,802		$	69,300
Air traffic liability		339,008			250,861
Other accrued liabilities		55,605			63,506
Current maturities of long-term debt and capital lease obligations		31,933			16,888
Total		513,348			400,555
Long-Term Debt, less discount, and Capital Lease Obligations		377,106			171,884
Other Liabilities and Deferred Credits:
Accumulated pension and other postretirement benefit obligations		215,927			213,704
Other liabilities and deferred credits		33,029			53,487
Total		248,956			267,191
Commitments and Contingent Liabilities
Shareholders’ Equity:
Special preferred stock, $0.01 par value per share, three shares issued and outstanding at June 30, 2011 and December 31, 2010		—			—
Common stock, $0.01 par value per share, 52,783,121 shares issued and 50,712,907 shares outstanding as of June 30, 2011; 52,291,091 shares issued and 50,220,877 outstanding as of December 31, 2010		528			522
Capital in excess of par value		258,947			245,947
Treasury stock, 2,070,214 shares at cost, at June 30, 2011 and December 31, 2010		(10,752		)	(10,752		)
Accumulated income		28,244			77,431
Accumulated other comprehensive loss, net		(35,100		)	(35,279		)
Total		241,867			277,869
Total Liabilities and Shareholders’ Equity		$	1,381,277		$	1,117,499

 

See accompanying Notes to Consolidated Financial Statements.

 

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Hawaiian Holdings, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

 

		Six Months Ended
		June 30,
		2011			2010
		(unaudited)
Net cash provided by Operating Activities		$	93,272		$	75,940
Cash flows from Investing Activities:
Additions to property and equipment, including pre-delivery payments		(147,280		)	(53,777		)
Purchases of investments		—			(76,487		)
Sales of investments		—			43,506
Net cash used in investing activities		(147,280		)	(86,758		)
Cash flows from Financing Activities:
Proceeds from exercise of stock options		162			167
Purchase of call options and sale of common stock warrants, net		(7,556		)	—
Issuance of convertible notes		86,250			—
Long-term borrowings		65,000			—
Repayments of long-term debt and capital lease obligations		(64,346		)	(13,852		)
Issuance costs		(7,042		)	—
Net cash provided by (used in) financing activities		72,468			(13,685		)
Net increase (decrease) in cash and cash equivalents		18,460			(24,503		)
Cash and cash equivalents - Beginning of Period		285,037			300,738
Cash and cash equivalents - End of Period		$	303,497		$	276,235

 

See accompanying Notes to Consolidated Financial Statements.

 

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Hawaiian Holdings, Inc.

 

Notes to Consolidated Financial Statements (Unaudited)

 

1. Summary of Significant Accounting Policies

 

Business and Basis of Presentation

 

Hawaiian Holdings, Inc. (the Company or Holdings) is a holding company incorporated in the State of Delaware. The Company’s primary asset is its sole ownership of all issued and outstanding shares of common stock of Hawaiian Airlines, Inc. (Hawaiian). The accompanying unaudited financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X of the U.S. Securities and Exchange Commission (SEC).  Accordingly, these interim financial statements do not include all of the information and footnotes required by GAAP for complete audited financial statements.  In the opinion of management, the accompanying financial statements contain all adjustments, including normal recurring adjustments, necessary for the fair presentation of the Company’s results of operations and financial position for the periods presented.  Due to seasonal fluctuations common to the airline industry, the results of operations for the periods presented are not necessarily indicative of the results of operations to be expected for the entire year.  Certain amounts in prior periods have been reclassified to conform to the current period’s presentation.  The accompanying financial statements should be read in conjunction with the financial statements and the notes of the Company included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

 

New accounting pronouncements

 

In October 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2009-13, Multiple Deliverable Revenue Arrangements — A Consensus of the FASB Emerging Issues Task Force (ASU 2009-13).  This guidance defines whether multiple deliverables should be separated and how the consideration should be allocated to one or more units of accounting.  This guidance establishes a selling price hierarchy for determining the selling price of a deliverable.  The selling price used for each deliverable is based on vendor-specific objective evidence, if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific nor third-party evidence is available.  This accounting standard became effective for new and materially modified revenue arrangements entered into by the Company after January 1, 2011.  During the three and six months ended June 30, 2011, the Company did not have any significant new or materially modified agreements that were subject to this accounting standard, therefore, this accounting standard did not have an impact on its unaudited consolidated financial statements.  The Company anticipates an impact from this standard when significant third party mileage sales agreements are executed or materially modified in future periods.

 

In May 2011, the FASB issued Accounting Standards Update 2011-04, Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs (ASU 2011-04). ASU 2011-04 amended Accounting Standards Codification (ASC) Topic 820, Fair Value Measurements and Disclosures (ASC 820), to converge the fair value measurement guidance in GAAP and International Financial Reporting Standards (IFRSs). Some of the amendments clarify the application of existing fair value measurement requirements, while other amendments change a particular principle in ASC 820. In addition, ASU 2011-04 requires additional fair value disclosures.  The amendments are to be applied prospectively and are effective for annual periods beginning after December 15, 2011. The Company is currently evaluating the effect that the provisions of ASU 2011-04 will have on its financial statements.

 

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2. Earnings (Loss) Per Share

 

Diluted earnings (loss) per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.  Diluted earnings (loss) per share uses the treasury stock method for in-the-money stock options, deferred stock units, restricted stock, convertible notes and warrants.  For further discussion on the convertible notes and warrants see Note 5 — Debt.

 

		Three Months ended June 30,						Six Months ended June 30,
		2011			2010			2011			2010
		(in thousands, except for per share data)
Denominator:
Weighted average common stock shares outstanding - Basic		50,700			51,941			50,609			51,901
Assumed exercise of equity awards		—			1,199			—			1,286
Weighted average common stock shares outstanding - Diluted		50,700			53,140			50,609			53,187
Net income (loss) per common share:
Basic		$	(0.99	)	$	0.17		$	(0.97	)	$	0.18
Diluted		$	(0.99	)	$	0.17		$	(0.97	)	$	0.17

 

The table below summarizes those common stock equivalents excluded from the computation of diluted earnings per share because the awards were antidilutive.

 

		Three Months ended June 30,				Six Months ended June 30,
		2011		2010		2011		2010
		(in thousands)
Stock options		128		67		97		107
Restricted stock		392		284		280		143
Convertible notes (1)		10,943		—		5,958		—
Warrants (1)		10,943		5,974		5,958		2,987

 

(1)           In March 2011, the Company entered into a Convertible Note transaction which included the sale of convertible notes, purchase of convertible note hedges and the sale of warrants as described in Note 5 — Debt.  These weighted common stock equivalents were excluded because their conversion price of $7.8819 per share for the convertible notes and $10.00 for the warrants exceeded the average market price of our common stock during these periods, and the effect of their inclusion would be antidilutive. These securities could be dilutive in future periods.  The convertible note hedges will always be antidilutive and, therefore, will have no effect on diluted net income per share.

 

3.  Fair Value Measurements

 

ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.  As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability.  As a basis for considering such assumptions, ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

 

Level 1 — Observable inputs such as quoted prices in active markets for identical assets or liabilities;

 

Level 2 — Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term for the assets or liabilities; and

 

Level 3 — Unobservable inputs for which there is little or no market data and that are significant to the fair value of the assets or liabilities.

 

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The tables below present the Company’s financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2011 and December 31, 2010:

 

		Fair Value Measurements as of June 30, 2011
		Total			Level 1			Level 2			Level 3
		(in thousands)
Cash equivalents
Money market securities		$	213,182		$	213,182		$	—		$	—
Fuel derivative contracts, net*:
Crude oil caps		4,488			—			4,488			—
Crude oil collars		229			—			229			—
Heating oil caps		182			—			182			—
Heating oil collars		212			—			212			—
Total assets measured at fair value		$	218,293		$	213,182		$	5,111		$	—
		Fair Value Measurements as of December 31, 2010
		Total			Level 1			Level 2			Level 3
		(in thousands)
Cash equivalents
Money market securities		$	94,659		$	94,659		$	—		$	—
U.S. government-sponsored enterprise notes		133,048			—			133,048			—
Fuel derivative contracts, net*:
Crude oil caps		6,609			—			6,609			—
Crude oil collars		2,174			—			2,174			—
Total assets measured at fair value		$	236,490		$	94,659		$	141,831		$	—

 

* The Company had fuel derivative contract assets of $5.1 million and $8.8 million as of June 30, 2011 and December 31, 2010, respectively, in prepaid expenses and other assets in the unaudited Consolidated Balance Sheets.

 

Cash equivalents.  The Company’s cash equivalents consist of money market securities and U.S. government-sponsored enterprise notes.  The money market securities are classified as Level 1 investments and are valued using inputs observable in markets for identical securities.  The U.S. government-sponsored enterprise notes with contractual maturities less than three months are classified as Level 2 investments and valued using inputs observable in active markets for similar securities.

 

Fuel derivative contracts.  The Company’s fuel derivative contracts consist of heating oil and crude oil caps (or call options) and collars (a combination of call options and put options) which are not traded on a public exchange. The fair value of these instruments is determined based on inputs available from public markets; therefore, they are classified as Level 2 in the fair value hierarchy.

 

There were no assets measured at fair value on a recurring basis using unobservable inputs (Level 3) as of June 30, 2011 and December 31, 2010.

 

Nonfinancial Assets Measured at Fair Value on a Nonrecurring Basis

 

See Note 6 - Leases, for information related to fair value measurements of nonfinancial assets on a nonrecurring basis performed as of June 30, 2011.

 

4.  Financial Instruments and Risk Management

 

Financial Instruments

 

The fair value of the Company’s debt (excluding obligations under capital leases) with a carrying value of $408.6 million and $146.4 million at June 30, 2011 and December 31, 2010, respectively, was approximately $397.7 million and $140.0 million. The Company’s estimates were based on quoted market prices for its publicly held convertible senior notes.  For the other debt where comparable market prices were not available, the estimates were based on the discounted amount of future cash flows using the Company’s estimated current incremental rate of borrowing.

 

The carrying amounts of cash and cash equivalents, restricted cash, other receivables and accounts payable approximate their fair value due to their short-term nature.

 

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Fuel Risk Management

 

The Company’s operations are inherently dependent upon the price and availability of aircraft fuel.  To manage economic risks associated with fluctuations in aircraft fuel prices, the Company periodically enters into derivative financial instruments such as heating oil and crude oil caps (or call options) and collars (a combination of call options and put options).  During the three and six months ended June 30, 2011, the Company primarily used heating oil and crude oil caps and collars to hedge its aircraft fuel expense.  As of June 30, 2011, the Company had outstanding fuel derivative contracts covering 54 million gallons of jet fuel that will be settled over the next 12 months.  These derivative instruments were not designated as hedges under ASC Topic 815, Derivatives and Hedging (ASC 815) for hedge accounting treatment.  As a result, changes in the fair value of these derivative instruments are adjusted through other nonoperating income (expense) in the period of change.

 

The following table shows the amount and location of realized and unrealized gains and losses that were recognized during the three and six months ended June 30, 2011 and 2010, and where those gains and losses were recorded in the unaudited Consolidated Statements of Operations.

 

		Three months ended June 30,						Six months ended June 30,
Derivatives Not Designated as Hedging Instruments Under ASC 815		2011			2010			2011			2010
		(in thousands)
Gains (losses) on fuel derivatives recorded in nonoperating income (expense):
Mark-to-fair value gains (losses) on undesignated fuel hedges:
Realized gain (losses):
Gains (losses) realized at settlement		$	3,057		$	(1,224	)	4,616			$	(1,985	)
Reversal of prior period unrealized amounts		(5,490		)	224			(2,701		)	(262		)
Unrealized gains (losses) on contracts that will settle in future periods		(8,020		)	(3,845		)	(3,989		)	(3,225		)
Losses on fuel derivatives recorded as nonoperating expense		$	(10,453	)	$	(4,845	)	$	(2,074	)	$	(5,472	)

 

ASC 815 requires a reporting entity to elect a policy of whether to offset rights to reclaim cash collateral or obligations to return cash collateral against derivative assets and liabilities executed with the same counterparty, or present such amounts on a gross basis.  The Company’s accounting policy is to present its derivative assets and liabilities on a net basis including the collateral posted with the counterparty.  No cash collateral was received from counterparties at June 30, 2011 and December 31, 2010.

 

The following table presents the fair value of the asset and liability derivatives that are not designated as hedging instruments under ASC 815 as well as the location of the asset and liability balances within the unaudited Consolidated Balance Sheets.

 

Derivatives not designated as

Fair Value of Derivatives

hedging instruments under

Balance Sheet

Assets as of

Liabilities as of

ASC 815

Location

June 30, 2011

December 31, 2010

June 30, 2011

December 31, 2010

(in thousands)

Fuel derivative contracts

Prepaid expenses and other

$

5,111

$

8,783

$

—

$

—

 

5.  Debt

 

Convertible Notes

 

On March 23, 2011, the Company issued $86.25 million principal amount of convertible senior notes (the Convertible Notes) due March 15, 2016.  The Convertible Notes were issued at par and bear interest at a rate of 5.00% per annum.  Interest is paid semi-annually, in arrears, on March 15 and September 15 each year, beginning on September 15, 2011.

 

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Each $1,000 of principal of the Convertible Notes is convertible under certain circumstances, at an initial conversion rate of 126.8730 shares of the Company’s common stock (or a total of approximately 10.9 million shares), which is the equivalent of approximately $7.8819 per share, subject to adjustment upon the occurrence of certain specified events as set forth in the indenture governing the terms of the Convertible Notes.  Upon conversion, the Company will have the right, at the Company’s election, to pay or deliver, cash, shares of the Company’s common stock or a combination thereof.  Holders may convert their Convertible Notes at their option at any time prior to November 15, 2015, only if one of the following conditions has been met:

 

·      During any calendar quarter after the calendar quarter ending June 30, 2011, and only during such calendar quarter, if the closing price of the Company’s common stock for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the preceding calendar quarter exceeds 130% of the conversion price per share of common stock in effect on the last day of such preceding calendar quarter;

 

·      During the five consecutive business days immediately after any 10 consecutive trading day period in which the average trading price per $1,000 principal amount of the Convertible Notes during such period was less than 97% of the product of the closing sale price of the common stock and the conversion rate on such trading day;

 

·      The Company makes specified distributions to holders of the Company’s common stock or specified corporate transactions occur.

 

On or after November 15, 2015, and up through and including the second business day immediately preceding March 15, 2016, the Holders may convert their Convertible Notes into common stock.

 

Holders may require the Company to repurchase all or a portion of their Convertible Notes upon a fundamental change, primarily a change in control or termination of trading, at a cash repurchase price equal to 100% of the principal amount of the Convertible Notes plus accrued and unpaid interest, if any.  The Company may not redeem the Convertible Notes prior to their maturity date.

 

When accounting for the Convertible Notes, the Company applied accounting guidance related to the accounting for convertible debt instruments that may be settled in cash upon conversion.  This guidance required the Company to separately account for the liability and equity components of the Convertible Notes in a manner that reflects our nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods.  This guidance required bifurcation of a component of the debt, classification of that component in equity, and then accretion of the resulting discount on the debt as part of interest expense reflected in the unaudited Consolidated Statements of Operations.

 

Accordingly, the Company recorded an adjustment to reduce the carrying value of the Convertible Notes by $19.5 million and recorded this amount in Shareholders’ Equity.  This adjustment was based on the calculated fair value of a similar debt instrument that did not have an associated equity component.  The annual interest rate calculated for a similar debt instrument was 11.00%.

 

The total issuance costs for the Convertible Notes were $3.3 million, of which $2.5 million was allocated to the debt component and $0.8 million was allocated to the equity component.  The issuance costs allocated to debt were capitalized and are being amortized to interest expense over the term of the Convertible Notes.  The issuance costs allocated to equity were recorded as a reduction of additional paid-in-capital.

 

The carrying value of the Convertible Notes is $67.6 million at June 30, 2011.  Interest expense for the three and six months ended June 30, 2011 was $1.2 million and $1.3 million, respectively, and non-cash interest expense for the three and six months ended June 30, 2011 was $0.8 million, for the amortization of the discount on the liability component.

 

Convertible Note Hedges and Warrants

 

In connection with the issuance of the Convertible Notes, the Company entered into separate convertible note hedge transactions (the Convertible Note Hedges) and separate warrant transactions (the Warrants) related to our common stock with certain financial investors to reduce the potential dilution of the Company’s common stock and to offset potential payments by the Company to holders of the Convertible Notes in excess of the principal of the Convertible Notes upon conversion.  The Convertible Note Hedges and Warrants are separate transactions, entered into by the Company with the financial institutions, and are not part of the Convertible Notes described above.

 

The Company paid $19.5 million for the Convertible Note Hedges.  Under the terms of the Convertible Note Hedges, the counterparties to the Convertible Note Hedges will generally deliver to the Company amounts in excess of the principal amount of the Convertible Notes delivered upon conversion by the Company to the holders of the Convertible Notes in the same form of consideration elected to be delivered by the Company to the holders of the Convertible Notes under the indenture for the Convertible Notes.  The Company may elect to settle the conversion feature of the Convertible Notes in cash or shares of common stock or in any combination of cash or shares of common stock as determined in accordance with the provisions of the indenture.   The Convertible Note Hedges are currently exercisable and expire on March 15, 2016.

 

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Concurrent with the issuance of the Convertible Notes, the Company sold Warrants to certain financial institutions that permit such financial institutions to acquire shares of the Company’s common stock.  The Warrants are exercisable by the financial institutions for 10.9 million shares of the Company’s common stock at a current exercise price of $10.00 per share.  The Company received $12.0 million in proceeds for the sale of the Warrants.  The Warrants expire at various dates beginning in June 2016 and ending in September 2016.  The Warrants provide for net share settlement by the Company, subject to the option of the Company to deliver cash in lieu of shares if certain conditions under the Warrants have been met.

 

The Company determined that the Convertible Note Hedges and Warrants meet the requirements of the FASB’s accounting guidance for accounting for derivative financial instruments indexed to, and potentially settled in, a Company’s own stock and other relevant guidance and, therefore, are classified as equity transactions.  As a result, the Company recorded the purchase of the Convertible Note Hedges as a reduction in additional paid-in-capital and the proceeds of the Warrants as an increase to additional paid-in-capital in the unaudited Consolidated Balance Sheets, and the Company will not recognize subsequent changes in the fair value of the agreements in the financial statements.

 

Revolving Credit Facility

 

In December 2010, Hawaiian, as borrower, with the Company as guarantor, entered into an Amended and Restated Credit Agreement with Wells Fargo Capital Finance, Inc., as arranger and administrative agent for the lenders, providing for a secured revolving credit facility (the Revolving Credit Facility) in an amount of up to $75.0 million.  The Company used the proceeds received from the issuance of the Convertible Notes to pay-off the outstanding revolving credit facility balance of $54.7 million.  As of June 30, 2011, the Company had no outstanding borrowings under the Revolving Credit Facility and $65.4 million available (net of various outstanding letters of credit).  At June 30, 2011, the Company is in compliance with its financial covenants under the Revolving Credit Facility.

 

Aircraft Facility Agreements

 

On June 27, 2011, Hawaiian borrowed $192.8 million through fifteen separate secured loan agreements to finance a portion of the purchase price of fifteen Boeing 717-200 aircraft, each such aircraft including two Rolls-Royce BR700-715 engines, that Hawaiian previously leased under four capital and eleven operating leases.  See additional discussion of the purchase agreement at Note 6 — Leases.  The loan agreements bear interest at 8% per annum and are subject to a balloon payment at the maturity date of June 2019.

 

On April 6, 2011, Hawaiian borrowed $65 million through a secured loan agreement to finance a portion of the purchase price of an Airbus A330-200 aircraft that Hawaiian took delivery of on April 12, 2011.  This loan agreement has a fixed interest rate of 6.461% with principal and interest payments due quarterly beginning in July 2011 and a maturity date of April 2023.

 

As of June 30, 2011, the scheduled maturities of long-term debt over the next five years were as follows (in thousands):

 

Remaining months in 2011		$	15,646
2012		33,016
2013		86,443
2014		23,047
2015		24,510

 

6.  Leases

 

On June 27, 2011, Hawaiian terminated lease agreements and concurrently entered into a purchase agreement with the lessor covering fifteen Boeing 717-200 aircraft, each such aircraft including two Rolls-Royce BR700-715 engines.  These aircraft were previously operated by Hawaiian under four capital and eleven operating lease agreements.  The purchase price for the fifteen Boeing 717-200 aircraft was $230 million, comprised of financing of $192.8 million  through secured loan agreements with Boeing Capital, cash payment of $25.0 million, and the non-cash application of maintenance and security deposits held by the previous lessor and current debt financer of $12.2 million.  This purchase price was reduced by certain previously recorded lease valuation adjustments related to these aircraft.  The Company recognized the excess of the purchase price paid over the fair value of the aircraft under operating leases as a cost of terminating the leases under ASC 840 — Leases (formerly FASB Interpretation No. 26, Accounting for Purchase of a Leased Asset by the Lessee during the Term of the Lease) and elected to apply the same accounting policy to the aircraft under capital leases.  As a result, the Company reduced the value of the fifteen Boeing 717-200 to their fair value of $135 million on its unaudited Consolidated Balance Sheets and recorded lease termination charges of $70.0 million on the unaudited Consolidated Statements of Operations.  The Company determined the valuation of the aircraft based on a third-party appraisal that considered multiple inputs, including market transactions for similar aircraft and information specific to the condition of each aircraft.  As a result, this fair value measurement was considered a Level 3 measurement as described in Note 3 – Fair Value Measurements.  See additional information on the loan agreements at Note 5 — Debt.

 

In February 2011, the Company renegotiated its operating lease for its general office space extending the lease through 2026.

 

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As of June 30, 2011, the scheduled future minimum rental payments under capital and operating leases (adjusted for the changes discussed above) with non-cancelable basic terms of more than one year were as follows (in thousands):

 

		Total
Remaining months in 2011		$	44,761
2012		83,822
2013		77,793
2014		74,769
2015		74,299

 

7. Employee Benefit Plans

 

The components of net periodic benefit cost for the Company’s defined benefit and other postretirement plans for the three and six months ended June 30, 2011 and 2010, included the following:

 

Components of Net Periodic		Three months ended June 30,						Six months ended June 30,
Benefit Cost		2011			2010			2011			2010
		(in thousands)
Service cost		$	2,360		$	2,350		$	4,720		$	4,699
Interest cost		6,517			6,326			13,034			12,652
Expected return on plan assets		(4,687		)	(4,156		)	(9,375		)	(8,313		)
Recognized net actuarial loss		90			102			180			205
Net periodic benefit cost		$	4,280		$	4,622		$	8,559		$	9,243

 

The Company made contributions of $3.4 million and $5.3 million to its defined benefit and other postretirement plans during the three and six months ended June 30, 2011, respectively, and expects to make contributions in the amount of $6.7 million during the remainder of 2011.

 

8. Income Taxes

 

The Company recorded an income tax benefit of $32.5 million and $31.9 million for the three and six months ended June 30, 2011, respectively.  The tax benefit as a percentage of pre-tax income differed from the statutory rate due to the impact that forecasted permanent tax differences have on the Company’s full year 2011 financial loss projections.

 

No cash payments for federal and state income taxes were made during the three and six months ended June 30, 2011, as compared to cash payments of $2.5 million for the three and six months ended June 30, 2010, respectively.

 

During the six months ended June 30, 2011, the Company changed tax accounting methods with the IRS.  These tax accounting changes resulted in the recovery of approximately $22.5 million of deferred tax assets.

 

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some or all of the Company’s deferred tax assets will not be realized.  The ultimate realization of the Company’s deferred tax assets is dependent upon its ability to generate future taxable income during the periods in which those temporary differences become deductible.  The Company reversed its tax valuation allowance in 2010 because its projections of future taxable income were sufficient to support recognition of its deferred tax assets.  The Company continues to believe its projections of future taxable income support the realizability of its deferred tax assets even though it recognized a net operating loss for the three and six months ended June 30, 2011.  The net operating loss recognized at the three and six months ended June 30, 2011 was primarily due to non-recurring and non-cash lease termination charges that do not impact our ability to generate future taxable income.

 

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9. Comprehensive Income

 

The components of comprehensive income included the following:

 

 

		Three months ended						Six months ended
		June 30,						June 30,
		2011			2010			2011			2010
		(in thousands)
Net income (loss)		$	(50,042	)	$	8,993		$	(49,187	)	$	9,209
Other comprehensive income (loss):
Change in unrealized net losses on short and long-term investments		—			(617		)	—			(1,749		)
Amortization of net actuarial losses on employee benefit plans		90			90			179			193
Total comprehensive income (loss)		$	(49,952	)	$	8,466		$	(49,008	)	$	7,653

 

10. Commitments and Contingent Liabilities

 

Commitments

 

As of June 30, 2011, Hawaiian had capital commitments consisting of firm aircraft orders for twelve wide-body Airbus A330-200 aircraft, six Airbus A350XWB-800 aircraft and five Rolls Royce spare engines scheduled for delivery through 2020. Hawaiian has purchase rights for an additional four A330-200 aircraft and six A350XWB aircraft and can utilize these rights subject to production availability. Hawaiian also has operating commitments with a third-party to provide aircraft maintenance services which include fixed payments as well as payments that are variable based on flight hours for our Airbus fleet through 2027. The Company also has operating commitments with third-party service providers for reservations, IT and accounting services through 2017. Committed expenditures, including estimated escalation and variable amounts estimated based on forecasted usage, for the next five years are detailed below as of June 30, 2011:

 

		Capital			Operating			Total
					(in thousands)
Remaining months in 2011		$	96,243	*	$	10,746		$	106,989
2012		274,247		*	23,009			297,256
2013		287,389			19,603			306,992
2014		234,489			20,050			254,539
2015		166,231			20,620			186,851

*              Includes the final payment for the A330-200 aircraft with expected delivery dates in the fourth quarter 2011, first quarter 2012 and second quarter 2012 that Hawaiian has entered into loan agreements for as further discussed below at Airbus A330-200 Facility Agreement Commitments.

 

Airbus A330-200 Facility Agreement Commitments

 

On June 29, 2011, Hawaiian entered into a secured loan agreement for $66 million to finance a portion of the purchase price of one Airbus A330-200 aircraft with an upcoming delivery in first quarter 2012.  The loan agreement will bear interest, at Hawaiian’s election, at either a floating rate based on a margin over LIBOR or a fixed rate, with a maturity date of March 2024.

 

On June 29, 2011, Hawaiian also entered into two secured loan agreements each for $67 million to finance a portion of the purchase price of two Airbus A330-200 aircraft with upcoming delivery in fourth quarter 2011 and second quarter 2012.  These loan agreements will bear interest, at Hawaiian’s election, at either a floating rate based on a margin over LIBOR or a fixed rate, and are subject to balloon payments at the maturity dates of October 2023 and April 2022, respectively.

 

The anticipated future payments for these facility agreements for the remaining months in 2011 is approximately $2 million, $13 million in 2012, $14 million in 2013, $15 million in 2014 and $15 million in 2015.

 

Lease Commitments

 

On June 29, 2011, Hawaiian entered into three separate eight-year lease agreements for an additional three Boeing 717-200 aircraft, with one aircraft expected to be delivered in third quarter 2011 and two aircraft in fourth quarter 2011. The Company is still assessing whether these leases will be classified as capital or operating, and will make this determination in the period it takes delivery of the aircraft.

 

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On April 6, 2011, Hawaiian entered into a twelve-year operating lease agreement for an Airbus A330-200 aircraft with an expected delivery date in the second quarter of 2012.

 

The anticipated future payments for these leases for the remaining months in 2011 is approximately $1 million, $11 million in 2012, $15 million in 2013, $15 million in 2014 and $15 million in 2015.

 

Litigation and Contingencies

 

The Company is subject to various legal proceedings arising in the normal course of its operations.  Management does not anticipate that the disposition of such proceedings will have a material effect on the Company’s financial statements.

 

General Guarantees and Indemnifications

 

The Company is the lessee under certain real estate leases. It is common in such commercial lease transactions for the lessee to agree to indemnify the lessor and other related third parties for tort liabilities that arise out of or relate to the lessee’s use or occupancy of the leased premises. In some cases, this indemnity extends to related liabilities arising from the negligence of the indemnified parties, but usually excludes any liabilities caused by their gross negligence or willful misconduct. Additionally, the lessee typically indemnifies such parties for any environmental liability that arises out of or relates to its use of the leased premises. The Company expects that it is covered by insurance (subject to deductible amounts) for most tort liabilities and related indemnities described above with respect to real estate that it leases.  The Company cannot estimate the potential amount of future payments, if any, under the foregoing indemnities and agreements.

 

Credit Card Holdback

 

Under the Company’s bank-issued credit card processing agreements, certain proceeds from advance ticket sales may be held back to serve as collateral to cover any possible chargebacks or other disputed charges that may occur.  These holdbacks, which are included in restricted cash in the Company’s unaudited Consolidated Balance Sheets, totaled $5.2 million at June 30, 2011.   The agreement with the Company’s largest credit card processor also contains financial triggers for additional holdbacks, which are based on, among other things, the amount of unrestricted cash and short-term investments, the level of debt service coverage and operating income measured quarterly on a trailing 12-month basis.  No amounts were subject to this holdback at June 30, 2011 or December 31, 2010.  Under the terms of this credit card agreement, the level of credit card holdback is subject to adjustment based on actual performance relative to these specific financial triggers.  Based on the Company’s performance relative to these financial triggers for the quarter ended June 30, 2011, the Company expects the holdback to increase to 25% of the applicable credit card air traffic liability, increasing the restricted cash balance in third quarter 2011 by approximately $30 to $35 million, that the Company plans to fund through advance ticket sale remittances.  Depending on the Company’s performance relative to these financial triggers in the future, the holdback could incrementally increase to an amount up to 100% of the applicable credit card air traffic liability, which would also cause an increase in the level of restricted cash.  If the Company is unable to obtain a waiver of, or otherwise mitigate the increase in restriction of cash, it could also cause a covenant violation under other debt or lease obligations and have a material adverse impact on the Company.

 

ITEM 2.           MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect our current views with respect to certain current and future events and financial performance.  Such forward-looking statements include, without limitation: any expectations of operating expenses, deferred revenue, interest rates, income taxes, deferred tax assets, valuation allowance or other financial items; statements regarding factors that may affect our operating results; estimates of fair value measurements; statements related to aircraft maintenance and repair costs and deposits and timing of maintenance activities; statements related to cash flow from operations and seasonality; estimates of required funding of and contributions to our defined benefit pension and disability plan; estimates of annual fuel expenses and measure of the effects of fuel prices on our business; statements regarding the availability of fuel; statements regarding our wages and benefits and labor costs and agreements; statements regarding costs of compliance with regulations promulgated by the FAA and other regulatory agencies; statements related to airport rent rates and landing fees; statements regarding aircraft rent expense; statements regarding our total capacity and yields on routes; statements regarding compliance with potential environmental regulations; statements regarding potential dilution of our securities; statements regarding cost liability and deferred revenue estimates related to the frequent flyer program; statements related to our hedging program; statements concerning the impact of, and changes to, accounting principles, policies and estimates; statements regarding our tax valuation allowance; statements regarding credit card holdback; statements regarding the availability of financing; statements regarding our capital expenditures; statements regarding potential violations under the Company’s debt or lease obligations; statements regarding our ability to comply with covenants under our financing arrangements;

 

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statements related to risk management, credit risks and air traffic liability; statements related to future U.S. and global economic conditions or performance; statements related to changes in our fleet plan and related cash outlays; statements related to expected delivery of new aircraft; statements related to potential route expansion; statements related to the effects of any litigation on our operations or business; and statements as to other matters that do not relate strictly to historical facts or statements of assumptions underlying any of the foregoing.  Words such as “expects,” “anticipates,” “projects,” “intends,” “plans,” “believes,” “estimates,” variations of such words, and similar expressions are also intended to identify such forward-looking statements.  These forward-looking statements are and will be, as the case may be, subject to many risks, uncertainties and factors relating to our operations and business environment, all of which may cause our actual results to be materially different from any future results, expressed or implied, in these forward-looking statements.

 

The risks, uncertainties and assumptions referred to above that could cause our results to differ materially from the results expressed or implied by such forward-looking statements also include the risks, uncertainties and assumptions discussed from time to time in our other public filings and public announcements, including our Annual Report on Form 10-K for the year ended December 31, 2010.  All forward-looking statements included in this document are based on information available to us as of the date hereof.  We undertake no obligation to publicly update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this quarterly report.  The following discussion and analysis should be read in conjunction with our consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q.

 

Overview

 

Our Company

 

Hawaiian Holdings, Inc. (the “Company,” “Holdings,” “we,” “us” and “our”) is a holding company incorporated in the State of Delaware. The Company’s primary asset is its sole ownership of all issued and outstanding shares of common stock of Hawaiian Airlines, Inc. (“Hawaiian”).  Hawaiian was originally incorporated in January 1929 under the laws of the Territory of Hawaii and became the Company’s indirect wholly-owned subsidiary pursuant to a corporate restructuring that was consummated in August 2002.  Hawaiian became a Delaware corporation and the Company’s direct wholly-owned subsidiary concurrent with its reorganization and reacquisition by the Company in June 2005.

 

Hawaiian is engaged in the scheduled air transportation of passengers and cargo amongst the Hawaiian Islands (the interisland routes), between the Hawaiian Islands and certain cities in the Western United States (the transpacific routes), and between the Hawaiian Islands and the South Pacific, Australia and Asia (the Pacific routes), collectively referred to as our Scheduled Operations.  In addition, Hawaiian operates various charter flights.  Hawaiian is the largest airline headquartered in Hawaii and the eleventh largest domestic airline in the United States based on revenue passenger miles reported by the Research and Innovative Technology Administration Bureau of Transportation Statistics as of March 31, 2011, the latest available data.  At June 30, 2011 Hawaiian’s operating fleet consisted of Boeing 717-200 aircraft for its interisland routes, Boeing 767-300 aircraft for its transpacific, Pacific and charter routes and Airbus A330-200 aircraft for its transpacific routes as detailed below:

 

Aircraft Type		Leased		Owned		Total
A330-200 (1)		3		1		4
767-300ER/EM (2)		10		7		17
717-200 (3)		—		15		15
Total		13		23		36

 

(1)   The Company took delivery of one owned A330-200 aircraft in April 2011.

(2)   The Company returned one Boeing 767-300ER in May 2011 due to the end of its lease term.

(3)   In June 2011, the Company purchased its existing fleet of fifteen Boeing 717-200 aircraft previously under lease agreements.

 

Based in Honolulu, Hawaiian had 4,146 active employees as of June 30, 2011.

 

General information about us is available at http://www.hawaiianair.com/about.  Information contained on our website is not incorporated by reference into, or otherwise to be regarded as part of, this Quarterly Report on Form 10-Q unless expressly noted.  Our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, as well as any amendments and exhibits to those reports, are available free of charge through our website as soon as reasonably practicable after we file them with, or furnish them to, the SEC.

 

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Second Quarter Highlights

 

·      Took delivery and placed into revenue service a fourth Airbus A330-200 aircraft in April 2011.

 

·      Purchased 15 Boeing 717-200 aircraft previously held under operating and capital lease agreements.

 

·      Added an additional three Boeing 717-200 aircraft through lease agreements with expected delivery dates in September, October and November 2011 to the fleet for service on interisland routes.

 

·      Ranked as the #1 carrier for punctuality and fewest flight cancellations as reported by the U.S. Department of Transportation Air Travel Consumer for the months of March, April  and May 2011 (latest information available).

 

·      Launched daily non-stop service to Kansai International Airport in Osaka, Japan in July 2011; Hawaiian’s third route to Asia in the past eight months.

 

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Results of Operations

 

In the three and six months ended June 30, 2011, we recorded a net loss of $50.0 million, or $0.99 per basic and diluted share and $49.2 million, or $0.97 per basic and diluted share, respectively, that includes the impact of a non-recurring and non-cash pre-tax lease termination expense of $70.0 million related to the purchase of fifteen Boeing 717-200 aircraft previously under lease agreements.

 

Statistical Data (unaudited)

 

		Three Months ended June 30,						Six Months ended June 30,
		2011			2010			2011			2010
		(in thousands, except as otherwise indicated)
Scheduled Operations:
Revenue passengers flown		2,152			2,075			4,240			4,074
Revenue passenger miles (RPM)		2,502,779			2,107,873			4,843,893			4,027,535
Available seat miles (ASM)		2,982,445			2,462,720			5,765,116			4,760,187
Passenger revenue per ASM (PRASM)		11.85		¢	11.28		¢	11.77		¢	11.37		¢
Passenger load factor (RPM/ASM)		83.9		%	85.6		%	84.0		%	84.6		%
Passenger revenue per RPM (Yield)		14.12		¢	13.17		¢	14.01		¢	13.44		¢
Total Operations:
Operating revenue per ASM		13.23		¢	12.83		¢	13.19		¢	12.90		¢
Operating cost per ASM (CASM)(b)		15.59		¢	11.85		¢	14.49		¢	12.28		¢
Lease termination charges per ASM		2.35		¢	—		¢	1.21		¢	—		¢
Aircraft fuel expense per ASM		4.54		¢	3.19		¢	4.24		¢	3.13		¢
Revenue passengers flown		2,152			2,076			4,242			4,075
Revenue block hours operated (actual)		31,284			27,674			60,992			54,118
RPM		2,504,879			2,107,914			4,846,776			4,027,576
ASM		2,984,671			2,462,762			5,768,685			4,760,229
Gallons of jet fuel consumed		40,572			34,296			78,821			66,810
Average cost per gallon of jet fuel (actual) (a)		$	3.34		$	2.29		$	3.11		$	2.23

 

(a)                    Includes applicable taxes and fees.

(b)                   Includes lease termination charges of $70.0 million.

 

Operating Revenue

 

Operating revenue was $395.0 million and $760.6 million for the three and six months ended June 30, 2011, respectively, a 25.0% and 23.8% increase over operating revenue of $315.9 million and $614.3 million for the same three and six month period in 2010, driven primarily by an increase in passenger revenue.

 

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Passenger Revenue

 

Passenger revenue increased $75.7 million or 27.3% and $137.6 million or 25.4% for the three and six months ended June 30, 2011, respectively, as compared to the same three and six month period in 2010.  The detail of these changes are described in the table below:

 

		Three months ended June 30, 2011 as compared									Six months ended June 30, 2011 as compared
		to three months ended June 30, 2010									to six months ended June 30, 2010
		Change in									Change in
		scheduled			Change in		Change in		Change in		scheduled			Change in		Change in		Change in
		passenger revenue			Yield		RPM		ASM		passenger revenue			Yield		RPM		ASM
		(millions)									(millions)
Transpacific		$	31.2		13.0	%	5.8	%	4.2	%	$	48.8		6.8	%	8.4	%	6.7	%
Interisland		4.3			6.1		(1.3	)	2.7		14.9			9.7		(1.4	)	1.3
Pacific		40.2			14.4		121.2		141.1		73.9			15.5		117.4		124.0
Total scheduled		$	75.7		7.2	%	18.7	%	21.1	%	$	137.6		4.4	%	20.3	%	21.1	%

 

Transpacific — Transpacific revenue increased by $31.2 million and $48.8 million for the three and six months ended June 30, 2011, respectively, as compared to the same three and six month period in 2010, due to increased yield, increases in our flown capacity due to the induction of the A330-200 aircraft into our fleet, which provides for increased capacity, and a net increase of one additional aircraft to our fleet in the period ended June 30, 2011 as compared to June 30, 2010.

 

Interisland — Interisland revenue increased by $4.3 million and $14.9 million for the three and six months ended June 30, 2011, respectively, as compared to the same three and six month period in 2010, due to the increased yield on our interisland routes partially offset by a decrease in our load factor.  The increased yield on our interisland routes reflects the continued reduction in availability of discounted fares during 2011.

 

Pacific — Pacific revenue increased by $40.2 million and $73.9 million for the three and six months ended June 30, 2011, respectively, as compared to the same three and six month period in 2010, primarily due to increased yield and the expansion of our services to Tokyo, Japan in November 2010, Seoul, South Korea in January 2011 and seasonal daily flights (from four flights weekly) to Sydney, Australia in April 2011.

 

Other Revenue

 

Other operating revenue increased by $3.4 million or 9.0% and $8.8 million or 12.0% in the three and six months ended June 30, 2011, respectively, as compared to the three and six months ended June 30, 2010, primarily due to increased cargo and bag fee revenue.  These increases are primarily attributable to the induction of the Airbus A330-200 aircraft which provided additional passenger and cargo capacity.

 

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