HAWAIIAN HOLDINGS INC - Quarter Report: 2012 September (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 September 30, 2012

 

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).  x 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 October 17, 2012, 51,388,041 shares of the registrant’s common stock were outstanding.

 

 

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Hawaiian Holdings, Inc.

Form 10-Q

Quarterly Period ended September 30, 2012

 

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 nine months ended September 30, 2012 and 2011	3
	Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2012 and 2011	4
	Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011	5
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	23
Item 4.	Controls and Procedures	25
Part II.	Other Information	26
Item 1.	Legal Proceedings	26
Item 1A.	Risk Factors	26
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 3.	Defaults Upon Senior Securities	26
Item 5.	Other Information	26
Item 6.	Exhibits	27
	Signatures	28

 

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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 September 30,						Nine Months Ended September 30,
		2012			2011			2012			2011
		(unaudited)
Operating Revenue:
Passenger		$	497,243		$	412,771		$	1,326,306		$	1,091,450
Other		52,079			43,088			143,061			125,034
Total		549,322			455,859			1,469,367			1,216,484
Operating Expenses:
Aircraft fuel, including taxes and oil		165,762			135,956			456,545			380,790
Wages and benefits		93,438			82,417			280,261			239,702
Aircraft rent		25,626			25,317			73,712			90,546
Maintenance materials and repairs		44,150			36,273			137,271			122,411
Aircraft and passenger servicing		28,859			22,283			74,859			60,326
Commissions and other selling		31,028			23,359			89,055			72,884
Depreciation and amortization		22,983			17,496			63,687			47,803
Other rentals and landing fees		22,520			19,830			63,486			53,495
Other		40,023			31,981			113,330			92,692
Lease termination charges		—			—			—			70,014
Total		474,389			394,912			1,352,206			1,230,663
Operating Income (Loss)		74,933			60,947			117,161			(14,179		)
Nonoperating Income (Expense):
Interest expense and amortization of debt discounts and issuance costs		(11,975		)	(7,737		)	(31,745		)	(15,820		)
Interest income		96			638			477			1,333
Capitalized interest		2,579			2,647			7,328			5,807
Gains (losses) on fuel derivatives		6,508			(9,707		)	(2,495		)	(11,781		)
Other, net		1,662			538			1,245			879
Total		(1,130		)	(13,621		)	(25,190		)	(19,582		)
Income (Loss) Before Income Taxes		73,803			47,326			91,971			(33,761		)
Income tax (benefit) expense		28,320			21,709			35,326			(10,191		)
Net Income (Loss)		$	45,483		$	25,617		$	56,645		$	(23,570	)
Net Income (Loss) Per Common Stock Share:
Basic		$	0.88		$	0.50		$	1.11		$	(0.46	)
Diluted		$	0.86		$	0.50		$	1.08		$	(0.46	)

 

See accompanying Notes to Consolidated Financial Statements.

 

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Hawaiian Holdings, Inc.

Consolidated Statement of Comprehensive Income (Loss)

(in thousands)

 

		Three Months Ended, September 30,						Nine Months Ended, September 30,
		2012			2011			2012			2011
		(unaudited)
Net Income (Loss)		$	45,483		$	25,617		$	56,645		$	(23,570	)
Other comprehensive income, net:
Net change related to employee benefit plans		1,863			129			4,120			308
		1,863			129			4,120			308
Total comprehensive income (loss), net		$	47,346		$	25,746		$	60,765		$	(23,262	)

 

See accompanying Notes to Consolidated Financial Statements.

 

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Hawaiian Holdings, Inc.

Consolidated Balance Sheets

(in thousands)

 

		September 30,			December 31,
		2012			2011
		(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents		$	433,485		$	304,115
Restricted cash		5,000			30,930
Total cash, cash equivalents and restricted cash		438,485			335,045
Accounts receivable, net of allowance for doubtful accounts of $212 as of September 30, 2012 and $630 as of December 31, 2011		107,704			94,164
Spare parts and supplies, net		21,840			23,595
Deferred tax assets		17,506			15,336
Prepaid expenses and other		40,669			31,391
Total		626,204			499,531
Property and equipment, less accumulated depreciation and amortization of $230,675 as of September 30, 2012 and $181,599 as of December 31, 2011		1,009,712			729,127
Other Assets:
Long-term prepayments and other		57,300			47,321
Deferred tax assets		23,197			59,519
Intangible assets, net of accumulated amortization of $169,746 as of September 30, 2012 and $154,302 as of December 31, 2011		29,924			45,368
Goodwill		106,663			106,663
Total Assets		$	1,853,000		$	1,487,529
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	81,008		$	80,636
Air traffic liability		385,811			303,382
Other accrued liabilities		71,124			67,267
Current maturities of long-term debt and capital lease obligations		56,478			37,535
Total		594,421			488,820
Long-Term Debt, less discount, and Capital Lease Obligations		617,761			424,436
Other Liabilities and Deferred Credits:
Accumulated pension and other postretirement benefit obligations		318,633			320,742
Other liabilities and deferred credits		35,424			30,655
Total		354,057			351,397
Commitments and Contingent Liabilities
Shareholders’ Equity:
Special preferred stock, $0.01 par value per share, three shares issued and outstanding at September 30, 2012 and December 31, 2011		—			—
Common stock, $0.01 par value per share, 51,383,905 shares issued and outstanding as of September 30, 2012; 50,729,573 shares issued and outstanding as of December 31, 2011		513			507
Capital in excess of par value		263,772			260,658
Accumulated income		120,696			64,051
Accumulated other comprehensive loss, net		(98,220		)	(102,340		)
Total		286,761			222,876
Total Liabilities and Shareholders’ Equity		$	1,853,000		$	1,487,529

 

See accompanying Notes to Consolidated Financial Statements.

 

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Hawaiian Holdings, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

 

		Nine Months Ended September 30,
		2012			2011
		(unaudited)
Net cash provided by Operating Activities		$	249,394		$	112,618
Cash flows from Investing Activities:
Additions to property and equipment, including pre-delivery payments, net		(215,950		)	(175,464		)
Net cash used in investing activities		(215,950		)	(175,464		)
Cash flows from Financing Activities:
Proceeds from exercise of stock options		1,263			162
Purchase of call options and sale of common stock warrants, net		—			(7,556		)
Issuance of convertible notes		—			86,250
Long-term borrowings		133,000			65,000
Repayments of long-term debt and capital lease obligations		(35,219		)	(72,087		)
Debt issuance costs		(3,118		)	(7,114		)
Net cash provided by financing activities		95,926			64,655
Net increase in cash and cash equivalents		129,370			1,809
Cash and cash equivalents - Beginning of Period		304,115			285,037
Cash and cash equivalents - End of Period		$	433,485		$	286,846

 

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 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, among other factors, 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.  The accompanying unaudited consolidated 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, 2011.

 

Recently Adopted Accounting Pronouncements

 

In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2011-05, Comprehensive Income — Presentation of Comprehensive Income (ASU 2011-05).  This update changes the requirements for the presentation of other comprehensive income, eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity, amongst other things.  ASU 2011-05 requires that all nonowner changes in stockholders’ equity be presented in a single continuous statement of comprehensive income or in two separate but consecutive statements.  The Company adopted this guidance during the quarter ended March 31, 2012 and the two-statement approach is presented within this report.

 

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 the 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 adopted ASU 2011-04 during the quarter ended March 31, 2012.

 

Recently Issued Accounting Pronouncements

 

In July 2012, the FASB issued Accounting Standards Update 2012-02, Intangibles—Goodwill and Other: Testing Indefinite — Lived Intangible Assets for Impairment (ASU 2012-02).  ASU 2012-02 amended ASC Topic 350, Intangibles—Goodwill and Other, to allow an entity the option to first assess qualitative factors, to determine whether or not it is necessary to perform the quantitative test for testing indefinite-lived intangible assets for impairment outlined in ASC 350. This amendment is effective for fiscal years and interim periods beginning after September 15, 2012, but can be early adopted. The Company will adopt the provisions of ASU 2012-02 for its annual intangible asset impairment test as of October 1, 2012.

 

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2. Earnings (Loss) Per Share

 

Basic earnings (loss) per share, which excludes dilution, is computed by dividing net income or loss available to common shareholders by the weighted average number of common shares outstanding for the period.

 

Diluted earnings (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.

 

		Three Months ended September 30,						Nine Months ended September 30,
		2012			2011			2012			2011
		(in thousands, except for per share data)
Numerator:
Net income (loss)		$	45,483		$	25,617		$	56,645		$	(23,570	)
Denominator:
Weighted average common stock shares outstanding - Basic		51,444			50,858			51,246			50,690
Assumed exercise of equity awards		1,179			572			1,217			—
Weighted average common stock shares outstanding - Diluted		52,623			51,430			52,463			50,690
Net income (loss) per common share:
Basic		$	0.88		$	0.50		$	1.11		$	(0.46	)
Diluted		$	0.86		$	0.50		$	1.08		$	(0.46	)

 

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 September 30,				Nine Months ended September 30,
		2012		2011		2012		2011
		(in thousands)
Stock options		83		1,783		90		659
Deferred stock		—		—		—		1
Restricted stock		607		402		664		320
Convertible notes (1)		10,943		10,943		10,943		7,619
Warrants (1)		10,943		10,943		10,943		7,619

 

(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.  These weighted common stock equivalents were excluded from the computation of diluted earnings per share because their conversion price of $7.88 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 earnings 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 September 30, 2012 and December 31, 2011:

 

		Fair Value Measurements as of September 30, 2012
		Total			Level 1			Level 2			Level 3
		(in thousands)
Cash equivalents
Money market securities		$	341,398		$	341,398		$	—		$	—
Fuel derivative contracts:
Crude oil caps/call options		16,820			—			16,820			—
Crude oil collars		158			—			158			—
Heating oil collars		406			—			406			—
Total assets measured at fair value		$	358,782		$	341,398		$	17,384		$	—

 

		Fair Value Measurements as of December 31, 2011
		Total			Level 1			Level 2			Level 3
		(in thousands)
Cash equivalents
Money market securities		$	208,594		$	208,594		$	—		$	—
Fuel derivative contracts:
Crude oil caps/call options		1,511			—			1,511			—
Crude oil collars		231			—			231			—
Heating oil caps/call options		170			—			170			—
Heating oil collars		628			—			628			—
Total assets measured at fair value		$	211,134		$	208,594		$	2,540		$	—
Fuel derivative contracts:
Crude oil collars		$	90		$	—		$	90		$	—
Heating oil collars		427			—			427			—
Total liabilities measured at fair value		$	517		$	—		$	517		$	—

 

Cash equivalents.  The Company’s cash equivalents consist of money market securities and are classified as Level 1 investments and valued using inputs observable in markets for identical securities.

 

Fuel derivative contracts.  The Company’s fuel derivative contracts consist of heating oil, West Texas Intermediate (WTI) crude oil and Brent crude oil call options and collars (a combination of purchased call options and sold put options) which are not traded on a public exchange. The fair value of these instruments is determined based on inputs available or derived from public markets including contractual terms, market prices, yield curve and measures of volatility among others.

 

The fair value of the Company’s debt (excluding obligations under capital leases) with a carrying value of $565.6 million and $461.5 million at September 30, 2012 and December 31, 2011, respectively, was approximately $550.7 million ($74.4 million as Level 2 and $476.3 million as Level 3 in the fair value hierarchy) and $445.2 million ($66.4 million as Level 2 and $378.8 million as Level 3 in the fair value hierarchy).  The Company’s fair value estimates were based on either market prices or the discounted amount of future cash flows using the Company’s current incremental rate of borrowing for similar liabilities.

 

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.

 

4.  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 WTI crude oil and Brent crude oil call options and collars. During the three and nine months ended September 30, 2012, the Company primarily used heating oil and crude oil call options and collars to hedge its aircraft fuel expense. As of September 30, 2012, the Company had outstanding fuel derivative contracts covering 127.0 million gallons of jet fuel that will be settled over the next 24 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, any changes in fair value of these derivative instruments are adjusted through other nonoperating income (expense) in the period of change.

 

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The following table reflects the amount and location of realized and unrealized gains and losses that were recognized during the three and nine months ended September 30, 2012 and 2011, and where those gains and losses were recorded in the unaudited Consolidated Statements of Operations.

 

		Three months ended September 30,						Nine months ended September 30,
		2012			2011			2012			2011
Gains (losses) on fuel derivative recorded in nonoperating income (expense):
Mark-to-fair value gains (losses) on undesignated fuel hedges:
Realized gain (losses):
Gains (losses) realized at settlement		$	(1,589	)	$	(2,323	)	$	(4,318	)	$	2,292
Reversal of prior period unrealized amounts		3,050			977			2,324			(3,841		)
Unrealized gains (losses) on contracts that will settle in future periods		5,047			(8,361		)	(501		)	(10,232		)
Gains (losses) on fuel derivatives recorded in nonoperating income (expense)		$	6,508		$	(9,707	)	$	(2,495	)	$	(11,781	)

 

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.  Based on the fair value of our fuel derivative contracts, our counterparties may require us to post collateral when the price of the underlying commodity decreases.  The Company’s accounting policy is to present its derivative assets and liabilities on a net basis including the collateral posted with the counterparty.  The Company had no collateral posted with counterparties as of September 30, 2012 and December 31, 2011.

 

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.

 

				Fair Value of Derivatives
				Assets as of						Liabilities as of
Derivatives not designated as hedging instruments under ASC 815		Balance Sheet Location		September 30, 2012			December 31, 2011			September 30, 2012			December 31, 2011
				(in thousands)
Fuel derivative contracts		Prepaid expenses and other		$	17,384		$	2,540		$	—		$	517

 

5.  Debt

 

In 2012, the Company borrowed $133.0 million through two separate secured loan agreements to finance a portion of the purchase price of two Airbus A330-200 aircraft that Hawaiian took delivery of in the first and second quarters of 2012.  These loan agreements have fixed interest rates ranging from 5.43% to 5.45%, with principal and interest payments due quarterly, and maturity dates in 2022 and 2024.  One of the facility agreements has a balloon payment of approximately $25 million due at maturity in 2022.

 

As of September 30, 2012, the scheduled maturities of long-term debt over the next five years and thereafter were as follows (in thousands):

 

Remaining months in 2012		$	11,942
2013		100,477
2014		37,515
2015		39,435
2016		125,911
Thereafter		264,803

 

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6.  Leases

 

The Company leases aircraft, engines and other assets under long-term lease arrangements. Other leased assets include real property, airport and terminal facilities, maintenance facilities, training centers and general offices. Certain leases include escalation clauses and renewal options. When lease renewals are considered to be reasonably assured at the inception of the lease, the rental payments that will be due during the renewal periods are included in the determination of rent expense over the life of the lease.

 

In the second quarter of 2012, the Company took delivery of an Airbus A330-200 aircraft under an operating lease with a lease term of twelve years and an option to extend an additional two years.

 

Also, in the second quarter of 2012, the Company took delivery of an additional Airbus A330-200 aircraft under a capital lease with a lease term of twelve years.

 

During the first quarter of 2012, the Company took delivery of two Boeing 717-200 aircraft under capital leases with lease terms of eight years.

 

As of September 30, 2012, the scheduled future minimum rental payments under capital leases and operating leases with noncancelable basic terms of more than one year were as follows:

 

		Capital Leases						Operating Leases
		Aircraft			Other			Aircraft			Other
		(in thousands)
Remaining months in 2012		$	3,450		$	25		$	22,436		$	958
2013		13,803			102			84,842			4,784
2014		13,803			102			80,051			5,239
2015		13,803			102			79,445			5,204
2016		13,803			102			62,735			5,124
Thereafter		87,150			24			256,758			27,973
		145,812			457			$	586,267		$	49,282
Less amounts representing interest		37,555			74
Present value of minimum capital lease payments		$	108,257		$	383

 

7. Employee Benefit Plans

 

The components of net periodic benefit cost for the Company’s defined benefit and other post-retirement plans for the three and nine months ended September 30, 2012 and 2011, included the following:

 

		Three months ended September 30,						Nine months ended September 30,
Components of Net Periodic Benefit Cost		2012			2011			2012			2011
		(in thousands)
Service cost		$	3,363		$	2,254		$	10,013		$	6,974
Interest cost		6,876			6,523			20,588			19,557
Expected return on plan assets		(4,022		)	(4,703		)	(12,048		)	(14,078		)
Recognized net actuarial loss		1,863			129			5,338			309
Net periodic benefit cost		$	8,080		$	4,203		$	23,891		$	12,762

 

The Company made contributions of $14.4 million and $19.4 million to its defined benefit and other postretirement plans during the three and nine months ended September 30, 2012, respectively, satisfying the Company’s required 2012 plan year contributions.

 

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8. Commitments and Contingent Liabilities

 

Commitments

 

As of September 30, 2012, the Company had capital commitments for aircraft and aircraft related equipment including firm aircraft orders for thirteen wide-body Airbus A330-200 aircraft, six Airbus A350XWB-800 aircraft and five Rolls Royce spare engines scheduled for delivery through 2020. The Company has purchase rights for an additional three A330-200 aircraft and six A350XWB-800 aircraft and can utilize these rights subject to production availability. The Company has operating commitments with a third-party to provide aircraft maintenance services which include fixed payments as well as variable payments 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 capital and operating expenditures include escalation and variable amounts based on estimated forecasts.  The gross committed expenditures for upcoming aircraft deliveries and committed financings for those deliveries for the remaining months in 2012, the next four years and thereafter are detailed below as of the date of this Report:

 

											Less: Committed
								Total Commited			Financing for Upcoming			Net Committed
		Capital			Operating			Expenditures			Aircraft Deliveries*			Expenditures
		(in thousands)
Remaining months in 2012		$	58,218		$	8,197		$	66,415		$	—		$	66,415
2013		450,232		*	36,462			486,694			247,000			239,694
2014		431,166			28,447			459,613			—			459,613
2015		243,025			28,582			271,607			—			271,607
2016		80,451			29,325			109,776			—			109,776
Thereafter		722,413			257,698			980,111			—			980,111

*                                         See below for a detailed discussion of the committed financings Hawaiian has received for its upcoming capital commitments for aircraft deliveries.

 

Airbus A330-200 Facility Agreement Commitments

 

In October 2012, Hawaiian entered into a secured loan agreement totaling $67 million to finance a portion of the capital commitment for an Airbus A330-200 aircraft with an expected delivery date in the first quarter of 2013.  Both the gross capital commitment for the cost of the aircraft and the committed financing are shown in the table above.  This loan agreement has a term of ten years and quarterly principal and interest payments under a variable interest rate with a $7 million balloon payment due at maturity.

 

The anticipated future principal payments and commitment fees for this facility agreement, not included in the table above, is approximately $0.8 million for the remaining months in 2012, $5.6 million in 2013, $6.4 million in 2014, $6.4 million in 2015, $6.4 million in 2016 and $43.0 million thereafter.

 

Purchase Aircraft Lease Financing Agreement

 

Hawaiian has a commitment to assign its purchase of two Airbus A330-200 aircraft at delivery and simultaneously enter into lease agreements for the respective aircraft with scheduled delivery dates during the first half of 2013 with total committed lease financing of $180 million.  Both the gross capital commitment for the cost of the aircraft and the committed financing are shown in the table above.  The lease agreements have initial lease terms of twelve years with the option to extend an additional two years. Rent under each lease is payable monthly at a fixed rate to be determined at delivery of each aircraft.  The Company will determine whether these leases will be classified as capital or operating leases in the period it takes delivery of each aircraft.

 

The anticipated future payments for these leases, not included in the table above, is zero for the remaining months in 2012 and approximately $15.3 million in 2013, $18.4 million in 2014, $18.4 million in 2015, $18.4 million in 2016 and $150.0 million thereafter.

 

Litigation and Contingencies

 

The Company is subject to legal proceedings arising in the normal course of its operations.  Management does not anticipate that the disposition of any currently pending proceeding will have a material effect on the Company’s operations, business or financial condition.

 

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General Guarantees and Indemnifications

 

In the normal course of business, the Company enters into numerous aircraft financing and real estate leasing arrangements that include various guarantees.  It is common in such 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 of the leased aircraft 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 real estate leased premises.  The Company believes that it is covered by insurance (subject to deductibles) for most tort liabilities and related indemnities described above with respect to the aircraft and real estate that it leases.  Hawaiian 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 $5.0 million at September 30, 2012 and $30.9 million at December 31, 2011.  As of September 30, 2012, per the agreement with the Company’s largest credit card processor, the level of credit card holdback was subject to an adjustment based on actual performance relative to certain financial triggers including the amount of unrestricted cash, level of debt service coverage and operating income measured quarterly on a trailing 12-month basis.   There were no amounts subject to this holdback at September 30, 2012.  As of December 31, 2011, the holdback was 25% of the applicable credit card air traffic liability.

 

In October 2012, the Company entered into an amendment with its largest credit card processor that eliminates the financial triggers for additional holdbacks.  In the event of a material adverse change in the business, the holdback could 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 the 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 the expected effects of the purchase of aircraft; statements related to our hedging program; statements concerning the impact of, and changes to, accounting principles, policies and estimates; 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; 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 increase in frequency on existing routes; 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.

 

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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, but not limited to, the risks set out in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2011.  All forward-looking statements included in this Report 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 in June 2005.

 

Hawaiian is engaged in the scheduled air transportation of passengers and cargo amongst the Hawaiian Islands (the Neighbor Island routes), between the Hawaiian Islands and certain cities in the Continental United States (the North America routes), and between the Hawaiian Islands and the South Pacific, Australia and Asia (the International 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 tenth 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 June 30, 2012, the latest available data.  At September 30, 2012, Hawaiian’s operating fleet consisted of Boeing 717-200 aircraft for its Neighbor Island routes and Boeing 767-300 aircraft and Airbus A330-200 aircraft for its North America, International and charter routes as detailed below:

 

Aircraft Type		Leased		Owned		Total
A330-200 (1)		5		4		9
767-300ER		9		7		16
717-200 (2)		3		15		18
Total		17		26		43

 

(1)	The Company took delivery of two owned A330-200 aircraft in March and April 2012 and two leased aircraft in May and June 2012.
(2)	The Company took delivery of two leased Boeing 717-200 aircraft during the quarter ended March 31, 2012.

 

Based in Honolulu, Hawaiian had 4,756 active employees as of September 30, 2012.

 

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.

 

Third Quarter Financial Highlights

 

·                  Operating revenue increased 20.5% to $549.3 million during the third quarter 2012 as compared to the third quarter 2011.

 

·                  Net income of $45.5 million, or $0.86 per diluted share for the third quarter 2012 as compared to net income of $25.6 million or $0.50 per diluted share for the third quarter of 2011.

 

·                  Unrestricted cash and cash equivalents of $433.5 million at September 30, 2012 as compared to $304.1 million at December 31, 2011.

 

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Third Quarter Operational Highlights

 

·                  Ranked as the #1 carrier for on-time performance as reported by the U.S. Department of Transportation Air Travel Consumer for the months of June, July, and August.

 

Results of Operations

 

In the three and nine months ended September 30, 2012, we recorded net income of $45.5 million or $0.86 per diluted share and $56.6 million or $1.08 per diluted share, respectively.  In the three and nine months ended September 30, 2011, we recorded net income of $25.6 million or $0.50 per diluted share and a net loss of $23.6 million or $0.46 per basic and diluted share, respectively.  The nine months ended September 30, 2011 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 recorded during the second quarter 2011.

 

Statistical Data (unaudited)

 

		Three Months ended September 30,						Nine Months ended September 30,
		2012			2011			2012			2011
		(in thousands, except as otherwise indicated)
Scheduled Operations:
Revenue passengers flown		2,519			2,267			7,066			6,507
Revenue passenger miles (RPM)		3,367,603			2,694,577			8,923,088			7,538,470
Available seat miles (ASM)		4,041,920			3,162,394			10,662,494			8,927,509
Passenger revenue per ASM (PRASM)		12.30		¢	13.05		¢	12.44		¢	12.23		¢
Passenger load factor (RPM/ASM)		83.3		%	85.2		%	83.7		%	84.4		%
Passenger revenue per RPM (Yield)		14.77		¢	15.32		¢	14.86		¢	14.48		¢
Total Operations:
Operating revenue per ASM		13.56		¢	14.40		¢	13.76		¢	13.61		¢
Operating cost per ASM (CASM)(b)		11.71		¢	12.47		¢	12.66		¢	13.77		¢
Lease termination charges per ASM		—		¢	—		¢	—		¢	0.78		¢
Aircraft fuel expense per ASM		4.09		¢	4.29		¢	4.27		¢	4.26		¢
Revenue passengers flown		2,522			2,269			7,071			6,511
Revenue block hours operated (actual)		39,774			32,511			108,431			93,503
RPM		3,376,257			2,696,892			8,938,530			7,543,668
ASM		4,052,248			3,166,417			10,680,632			8,935,101
Gallons of jet fuel consumed		54,535			42,895			145,006			121,717
Average cost per gallon of jet fuel (actual) (a)		$	3.04		$	3.17		$	3.15		$	3.13

 

(a)                   Includes applicable taxes and fees.

(b)                   Includes lease termination charges of $70.0 million incurred during the quarter ended June 30, 2011.

 

Operating Revenue

 

Operating revenue was $549.3 million and $1.5 billion for the three and nine months ended September 30, 2012, respectively, a 20.5% and 20.8% increase over operating revenue of $455.9 million and $1.2 billion, respectively, for the same three and nine month periods in 2011, driven primarily by an increase in passenger revenue.

 

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