HAWAIIAN HOLDINGS INC - Quarter Report: 2012 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, 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).  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 16, 2012, 51,315,558 shares of the registrant’s common stock were outstanding.

 

 

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Hawaiian Holdings, Inc.

Form 10-Q

Quarterly Period ended June 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 six months ended June 30, 2012 and 2011	3
	Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2012 and 2011	4
	Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011	5
	Condensed Consolidated Statements of Cash Flows for the six months ended June 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	21
Item 4.	Controls and Procedures	24
Part II.	Other Information	25
Item 1.	Legal Proceedings	25
Item 1A.	Risk Factors	25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 3.	Defaults Upon Senior Securities	25
Item 5.	Other Information	25
Item 6.	Exhibits	25
	Signatures	26

 

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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,
		2012			2011			2012			2011
		(unaudited)
Operating Revenue:
Passenger		$	438,137		$	353,397		$	829,063		$	678,679
Other		46,414			41,618			90,982			81,946
Total		484,551			395,015			920,045			760,625
Operating Expenses:
Aircraft fuel, including taxes and oil		150,465			135,471			290,783			244,834
Wages and benefits		96,699			79,713			186,823			157,285
Aircraft rent		24,864			31,154			48,086			65,229
Maintenance materials and repairs		49,409			42,724			93,121			86,138
Aircraft and passenger servicing		24,654			19,620			46,000			38,043
Commissions and other selling		28,611			23,292			58,027			49,525
Depreciation and amortization		21,553			15,604			40,704			30,307
Other rentals and landing fees		21,218			17,341			40,966			33,665
Other		37,750			30,263			73,307			60,711
Lease termination charges		—			70,014			—			70,014
Total		455,223			465,196			877,817			835,751
Operating Income (Loss)		29,328			(70,181		)	42,228			(75,126		)
Nonoperating Income (Expense):
Interest expense and amortization of debt discounts and issuance costs		(10,722		)	(4,889		)	(19,770		)	(8,083		)
Interest income		167			338			381			695
Capitalized interest		2,176			1,944			4,749			3,160
Losses on fuel derivatives		(14,823		)	(10,453		)	(9,003		)	(2,074		)
Other, net		183			668			(417		)	341
Total		(23,019		)	(12,392		)	(24,060		)	(5,961		)
Income (Loss) Before Income Taxes		6,309			(82,573		)	18,168			(81,087		)
Income tax (benefit) expense		2,405			(32,531		)	7,006			(31,900		)
Net Income (Loss)		$	3,904		$	(50,042	)	$	11,162		$	(49,187	)
Net Income (Loss) Per Common Stock Share:
Basic		$	0.08		$	(0.99	)	$	0.22		$	(0.97	)
Diluted		$	0.07		$	(0.99	)	$	0.21		$	(0.97	)

 

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, June 30,						Six Months Ended, June 30,
		2012			2011			2012			2011
		(unaudited)
Net Income (Loss)		$	3,904		$	(50,042	)	$	11,162		$	(49,187	)
Other comprehensive income, net:
Net change related to employee benefit plans		1,189			90			2,257			179
		1,189			90			2,257			179
Total comprehensive income (loss), net		$	5,093		$	(49,952	)	$	13,419		$	(49,008	)

 

See accompanying Notes to Consolidated Financial Statements.

 

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Hawaiian Holdings, Inc.

Consolidated Balance Sheets

(in thousands)

 

		June 30,			December 31,
		2012			2011
		(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents		$	446,557		$	304,115
Restricted cash		5,000			30,930
Total cash, cash equivalents and restricted cash		451,557			335,045
Accounts receivable, net of allowance for doubtful accounts of $274 as of June 30, 2012 and $630 as of December 31, 2011		96,709			94,164
Spare parts and supplies, net		21,293			23,595
Deferred tax assets		15,336			15,336
Prepaid expenses and other		36,811			31,391
Total		621,706			499,531
Property and equipment, less accumulated depreciation and amortization of $213,472 as of June 30, 2012 and $181,599 as of December 31, 2011		987,027			729,127
Other Assets:
Long-term prepayments and other		56,601			47,321
Deferred tax assets		53,102			59,519
Intangible assets, net of accumulated amortization of $165,090 as of June 30, 2012 and $154,302 as of December 31, 2011		34,580			45,368
Goodwill		106,663			106,663
Total Assets		$	1,859,679		$	1,487,529
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	84,937		$	80,636
Air traffic liability		420,336			303,382
Other accrued liabilities		71,226			67,267
Current maturities of long-term debt and capital lease obligations		55,576			37,535
Total		632,075			488,820
Long-Term Debt, less discount, and Capital Lease Obligations		631,268			424,436
Other Liabilities and Deferred Credits:
Accumulated pension and other postretirement benefit obligations		327,260			320,742
Other liabilities and deferred credits		30,841			30,655
Total		358,101			351,397
Commitments and Contingent Liabilities
Shareholders’ Equity:
Special preferred stock, $0.01 par value per share, three shares issued and outstanding at June 30, 2012 and December 31, 2011		—			—
Common stock, $0.01 par value per share, 51,315,558 shares issued and outstanding as of June 30, 2012; 50,729,573 shares issued and outstanding as of December 31, 2011		513			507
Capital in excess of par value		262,592			260,658
Accumulated income		75,213			64,051
Accumulated other comprehensive loss, net		(100,083		)	(102,340		)
Total		238,235			222,876
Total Liabilities and Shareholders’ Equity		$	1,859,679		$	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)

 

		Six Months Ended
		June 30,
		2012			2011
		(unaudited)
Net cash provided by Operating Activities		$	209,744		$	93,272
Cash flows from Investing Activities:
Additions to property and equipment, including pre-delivery payments, net		(177,150		)	(147,280		)
Net cash used in investing activities		(177,150		)	(147,280		)
Cash flows from Financing Activities:
Proceeds from exercise of stock options		982			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		(21,731		)	(64,346		)
Debt issuance costs		(2,403		)	(7,042		)
Net cash provided by financing activities		109,848			72,468
Net increase in cash and cash equivalents		142,442			18,460
Cash and cash equivalents - Beginning of Period		304,115			285,037
Cash and cash equivalents - End of Period		$	446,557		$	303,497

 

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 Bureau (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.  These amendments are effective for fiscal years and interim period beginning after December 15, 2011 and should be applied retrospectively.  The Company adopted this guidance for 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 for the quarter ended March 31, 2012.

 

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 June 30,						Six Months ended June 30,
		2012			2011			2012			2011
		(in thousands, except for per share data)
Denominator:
Weighted average common stock shares outstanding - Basic		51,283			50,700			51,145			50,609
Assumed exercise of equity awards		1,174			—			1,235			—
Weighted average common stock shares outstanding - Diluted		52,457			50,700			52,380			50,609
Net income (loss) per common share:
Basic		$	0.08		$	(0.99	)	$	0.22		$	(0.97	)
Diluted		$	0.07		$	(0.99	)	$	0.21		$	(0.97	)

 

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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,
		2012		2011		2012		2011
		(in thousands)
Stock options		93		128		93		97
Restricted stock		609		392		692		280
Convertible notes (1)		10,943		10,943		10,943		5,958
Warrants (1)		10,943		10,943		10,943		5,958

 

(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 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.

 

The tables below present the Company’s financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2012 and December 31, 2011:

 

		Fair Value Measurements as of June 30, 2012
		Total			Level 1			Level 2			Level 3
		(in thousands)
Cash equivalents
Money market securities		$	351,510		$	351,510		$	—		$	—
Fuel derivative contracts:
Crude oil caps/call options		7,429			—			7,429			—
Total assets measured at fair value		$	358,939		$	351,510		$	7,429		$	—
Fuel derivative contracts:
Crude oil collars		$	438		$	—		$	438		$	—
Heating oil collars		598			—			598			—
Total liabilities measured at fair value		$	1,036		$	—		$	1,036		$	—

 

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		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 are 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 $576.4 million and $461.5 million at June 30, 2012 and December 31, 2011, respectively, was approximately $565.0 million ($77.9 million as Level 2 and $487.1 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 its 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 six months ended June 30, 2012, the Company primarily used heating oil and crude oil call options and collars to hedge its aircraft fuel expense. As of June 30, 2012, the Company had outstanding fuel derivative contracts covering 118.9 million gallons of jet fuel that will be settled over the next 18 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.

 

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, 2012 and 2011, and where those gains and losses were recorded in the unaudited Consolidated Statements of Operations.

 

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		Three months ended June 30,						Six months ended June 30,
		2012			2011			2012			2011
		(in thousands)
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		$	(1,874	)	$	3,057		(2,729		)	$	4,616
Reversal of prior period unrealized amounts		(1,235		)	(5,490		)	2,250			(2,701		)
Unrealized losses on contracts that will settle in future periods		(11,714		)	(8,020		)	(8,524		)	(3,989		)
Losses on fuel derivatives recorded as Nonoperating income (expense)		$	(14,823	)	$	(10,453	)	$	(9,003	)	$	(2,074	)

 

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 June 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

Derivatives not designated as hedging

Balance Sheet

Assets as of

Liabilities as of

instruments under ASC 815

Location

June 30, 2012

December 31, 2011

June 30, 2012

December 31, 2011

(in thousands)

Fuel derivative contracts

Prepaid expenses and other

$

7,429

$

2,540

$

1,036

$

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

 

Remaining months in 2012		$	23,657
2013		100,477
2014		37,515
2015		39,435
2016		125,911
Thereafter		264,803

 

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, 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 entered into an operating lease for an Airbus A330-200.  The Company classified this as an operating lease with a term of twelve years with an option to extend an additional two years.

 

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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 June 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		$	6,756		$	51		$	45,022		$	1,999
2013		13,803			102			85,424			4,694
2014		13,803			102			80,051			5,151
2015		13,803			102			79,445			5,159
2016		13,803			102			62,735			5,124
Thereafter		87,150			24			256,758			27,973
		149,118			483			$	609,435		$	50,100
Less amounts representing interest		39,101			83
Present value of minimum capital lease payments		$	110,017		$	400

 

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, 2012 and 2011, included the following:

 

Components of Net Periodic		Three months ended June 30,						Six months ended June 30,
Benefit Cost		2012			2011			2012			2011
		(in thousands)
Service cost		$	3,326		$	2,360		$	6,650		$	4,720
Interest cost		6,857			6,517			13,712			13,034
Expected return on plan assets		(4,013		)	(4,687		)	(8,026		)	(9,375		)
Recognized net actuarial loss		1,738			90			3,475			180
Net periodic benefit cost		$	7,908		$	4,280		$	15,811		$	8,559

 

The Company made contributions of $2.6 million and $5.0 million to its defined benefit and other postretirement plans during the three and six months ended June 30, 2012, respectively, and expects to make additional minimum required contributions of $5.2 million during the remainder of 2012.

 

8. Commitments and Contingent Liabilities

 

Commitments

 

As of June 30, 2012, the Company had capital commitments consisting of 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.

 

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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 and the next four years and thereafter are detailed below as of the date of filing:

 

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

 

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, are approximately nil for the remaining months in 2012, $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.

 

General Guarantees and Indemnifications

 

In the normal course of business, the Company enters into numerous aircraft financing and real estate leasing arrangements that have various guarantees included in the contract.  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 June 30, 2012 and $30.9 million at December 31, 2011.  The agreement with the Company’s largest credit card processor also contains financial triggers for additional holdbacks, which are based upon, among other things, the amount of unrestricted cash, level of debt service coverage and operating income measured quarterly on a trailing 12-month basis.  As of June 30, 2012, there were no amounts subject to this holdback.  As of December 31, 2011, the holdback was 25% of the applicable credit card air traffic liability.  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 triggers.

 

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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 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 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, 2011.  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 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 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, 2012, the latest available data.  At June 30, 2012,

 

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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 4,624 active employees as of June 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.

 

Second Quarter Financial Highlights

 

·                  Operating revenue increased 22.7% to $484.6 million during the second quarter 2012 as compared to the second quarter 2011.

 

·                  Passenger revenue per available seat mile (ASM) increased 6.2% to 12.59 cents from the same period last year.

 

·                  Operating revenue per ASM increased 5.1% to 13.90 cents from the prior year period.

 

·                  Net income of $3.9 million, or $0.07 per diluted share.

 

·                  Unrestricted cash and cash equivalents of $446.6 million at June 30, 2012.

 

Second 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 March, April and May.

 

·                  Took delivery and placed into revenue service three Airbus A330-200 aircraft.

 

·                  Launched daily non-stop service from Honolulu to Fukuoka, Japan and Honolulu to New York City, New York.

 

Results of Operations

 

In the three and six months ended June 30, 2012, we recorded net income of $3.9 million or $0.07 per diluted share and $11.2 million or $0.21 per diluted share, respectively.  In the three and six months ended June 30, 2011, we recorded net losses 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, which includes the impact of a non-recurring and non-cash pre-tax lease termination expense of $70.0 million related the purchase of fifteen Boeing 717-200 previously under lease agreements.  Our improved performance is due to increases in operating revenue, primarily due to increases in passenger revenue, and partially offset by increases in operating expenses due to our continued growth.

 

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