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HAWAIIAN HOLDINGS INC - Quarter Report: 2013 September (Form 10-Q)

Table of Contents

 

 

 

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, 2013

 

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)

 

Delaware

 

71-0879698

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification No.)

 

3375 Koapaka Street, Suite G-350

 

 

Honolulu, HI

 

96819

(Address of Principal Executive Offices)

 

(Zip Code)

 

(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 preceding 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 definitions of “large accelerated filer,” accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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 18, 2013, 52,387,065 shares of the registrant’s common stock were outstanding.

 

 

 



Table of Contents

 

Hawaiian Holdings, Inc.

Form 10-Q

Quarterly Period ended September 30, 2013

 

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, 2013 and 2012

3

 

 

 

 

Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2013 and 2012

4

 

 

 

 

Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012

6

 

 

 

 

Notes to Consolidated Financial Statements

7

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

26

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

38

 

 

 

Item 4.

Controls and Procedures

39

 

 

 

Part II.

Other Information

40

 

 

 

Item 1.

Legal Proceedings

40

 

 

 

Item 1A.

Risk Factors

40

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

40

 

 

 

Item 3.

Defaults Upon Senior Securities

40

 

 

 

Item 5.

Other Information

40

 

 

 

Item 6.

Exhibits

41

 

 

 

 

Signatures

42

 

2



Table of Contents

 

PART I. FINANCIAL INFORMATION

 

ITEM 1.               FINANCIAL STATEMENTS.

 

Hawaiian Holdings, Inc.

Consolidated Statements of Operations

(in thousands, except per share data)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

(unaudited)

 

Operating Revenue:

 

 

 

 

 

 

 

 

 

Passenger

 

$

543,315

 

$

497,243

 

$

1,464,715

 

$

1,326,306

 

Other

 

55,983

 

52,079

 

159,265

 

143,061

 

Total

 

599,298

 

549,322

 

1,623,980

 

1,469,367

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

Aircraft fuel, including taxes and delivery

 

181,334

 

165,762

 

525,046

 

456,545

 

Wages and benefits

 

112,150

 

93,438

 

318,269

 

280,261

 

Aircraft rent

 

27,575

 

25,626

 

81,879

 

73,712

 

Maintenance materials and repairs

 

51,705

 

44,150

 

160,000

 

137,271

 

Aircraft and passenger servicing

 

31,080

 

28,859

 

89,367

 

74,859

 

Commissions and other selling

 

32,288

 

31,028

 

98,285

 

89,055

 

Depreciation and amortization

 

22,092

 

22,983

 

60,993

 

63,687

 

Other rentals and landing fees

 

21,996

 

22,520

 

60,773

 

63,486

 

Other

 

44,644

 

40,023

 

129,469

 

113,330

 

Total

 

524,864

 

474,389

 

1,524,081

 

1,352,206

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

74,434

 

74,933

 

99,899

 

117,161

 

 

 

 

 

 

 

 

 

 

 

Nonoperating Income (Expense):

 

 

 

 

 

 

 

 

 

Interest expense and amortization of debt discounts and issuance costs

 

(13,479

)

(11,975

)

(37,019

)

(31,745

)

Interest income

 

173

 

96

 

426

 

477

 

Capitalized interest

 

3,005

 

2,579

 

9,336

 

7,328

 

Gains (losses) on fuel derivatives

 

2,536

 

6,508

 

(10,931

)

(2,495

)

Other, net

 

749

 

1,662

 

(3,457

)

1,245

 

Total

 

(7,016

)

(1,130

)

(41,645

)

(25,190

)

 

 

 

 

 

 

 

 

 

 

Income Before Income Taxes.

 

67,418

 

73,803

 

58,254

 

91,971

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

26,814

 

28,320

 

23,479

 

35,326

 

 

 

 

 

 

 

 

 

 

 

Net Income .

 

$

40,604

 

$

45,483

 

$

34,775

 

$

56,645

 

 

 

 

 

 

 

 

 

 

 

Net Income Per Common Stock Share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.78

 

$

0.88

 

$

0.67

 

$

1.11

 

Diluted

 

$

0.76

 

$

0.86

 

$

0.65

 

$

1.08

 

 

See accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents

 

Hawaiian Holdings, Inc.

Consolidated Statements of Comprehensive Income

(in thousands)

 

 

 

Three Months Ended September 30,

 

 

 

2013

 

2012

 

 

 

(unaudited)

 

Net Income

 

$

40,604

 

$

45,483

 

 

 

 

 

 

 

Other comprehensive income, net:

 

 

 

 

 

Net change related to employee benefit plans, net of tax of $ 899 for 2013

 

1,381

 

1,863

 

Net change in derivative instruments, net of tax of $2,610 for 2013

 

(4,465

)

 

Total other comprehensive income, net

 

(3,084

)

1,863

 

Total Comprehensive Income, net

 

$

37,520

 

$

47,346

 

 

 

 

Nine Months Ended September 30,

 

 

 

2013

 

2012

 

 

 

(unaudited)

 

Net Income

 

$

34,775

 

$

56,645

 

 

 

 

 

 

 

Other comprehensive income, net:

 

 

 

 

 

Net change related to employee benefit plans, net of tax of $3,034 and $1,217 for 2013 and 2012, respectively

 

3,347

 

4,120

 

Net change in derivative instruments, net of tax of $1,942 for 2013

 

2,991

 

 

Total other comprehensive income, net

 

6,338

 

4,120

 

Total Comprehensive Income, net

 

$

41,113

 

$

60,765

 

 

See accompanying Notes to Consolidated Financial Statements.

 

4



Table of Contents

 

Hawaiian Holdings, Inc.

Consolidated Balance Sheets

(in thousands, except shares)

 

 

 

September 30,

 

December 31,

 

 

 

2013

 

2012

 

 

 

(unaudited)

 

ASSETS

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

441,398

 

$

405,880

 

Restricted cash

 

19,434

 

5,000

 

Total cash, cash equivalents and restricted cash

 

460,832

 

410,880

 

Accounts receivable, net of allowance for doubtful accounts of $187 and $371 as of September 30, 2013 and December 31, 2012, respectively

 

79,258

 

80,750

 

Spare parts and supplies, net

 

20,857

 

27,552

 

Deferred tax assets, net

 

19,983

 

17,675

 

Prepaid expenses and other

 

35,347

 

35,001

 

Total

 

616,277

 

571,858

 

 

 

 

 

 

 

Property and equipment, less accumulated depreciation and amortization of $307,556 and $249,495 as of September 30, 2013 and December 31, 2012, respectively

 

1,256,466

 

1,068,718

 

 

 

 

 

 

 

Other Assets:

 

 

 

 

 

Long-term prepayments and other

 

88,323

 

55,629

 

Restricted cash

 

1,566

 

 

Deferred tax assets, net

 

5,357

 

36,376

 

Intangible assets, net of accumulated amortization of $175,070 and $173,090 as of September 30, 2013 and December 31, 2012, respectively

 

24,600

 

26,580

 

Goodwill

 

106,663

 

106,663

 

Total Assets

 

$

2,099,252

 

$

1,865,824

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Accounts payable

 

$

88,145

 

$

82,084

 

Air traffic liability

 

452,599

 

388,646

 

Other accrued liabilities

 

90,431

 

74,828

 

Current maturities of long-term debt and capital lease obligations

 

110,960

 

108,232

 

Total

 

742,135

 

653,790

 

 

 

 

 

 

 

Long-Term Debt, less discount, and Capital Lease Obligations.

 

651,778

 

553,009

 

 

 

 

 

 

 

Other Liabilities and Deferred Credits:

 

 

 

 

 

Accumulated pension and other postretirement benefit obligations

 

350,407

 

352,460

 

Other liabilities and deferred credits

 

40,438

 

37,963

 

Total

 

390,845

 

390,423

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity:

 

 

 

 

 

Special preferred stock, $0.01 par value per share, three shares issued and outstanding as of September 30, 2013 and December 31, 2012

 

 

 

Common stock, $0.01 par value per share, 52,382,986 and 51,439,934 shares issued and outstanding as of September 30, 2013 and December 31, 2012, respectively

 

524

 

514

 

Capital in excess of par value

 

269,623

 

264,854

 

Accumulated income

 

152,063

 

117,288

 

Accumulated other comprehensive loss, net

 

(107,716

)

(114,054

)

Total

 

314,494

 

268,602

 

Total Liabilities and Shareholders’ Equity

 

$

2,099,252

 

$

1,865,824

 

 

See accompanying Notes to Consolidated Financial Statements.

 

5



Table of Contents

 

Hawaiian Holdings, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2013

 

2012

 

 

 

(unaudited)

 

Net cash provided by Operating Activities

 

$

207,475

 

$

249,394

 

 

 

 

 

 

 

Cash flows from Investing Activities:

 

 

 

 

 

Additions to property and equipment, including pre-delivery payments, net

 

(232,717

)

(215,950

)

Net cash used in investing activities

 

(232,717

)

(215,950

)

 

 

 

 

 

 

Cash flows from Financing Activities:

 

 

 

 

 

Proceeds from exercise of stock options

 

2,376

 

1,263

 

Long-term borrowings

 

132,000

 

133,000

 

Repayments of long-term debt and capital lease obligations

 

(45,200

)

(35,219

)

Debt issuance costs

 

(12,416

)

(3,118

)

Change in restricted cash

 

(16,000

)

 

Net cash provided by financing activities

 

60,760

 

95,926

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

35,518

 

129,370

 

 

 

 

 

 

 

Cash and cash equivalents - Beginning of Period

 

405,880

 

304,115

 

 

 

 

 

 

 

Cash and cash equivalents - End of Period

 

$

441,398

 

$

433,485

 

 

See accompanying Notes to Consolidated Financial Statements.

 

6



Table of Contents

 

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 for the fiscal year ended December 31, 2012, which is included in the Company’s current Report on Form 8-K filed on March 14, 2013.

 

In October 2013, Hawaiian entered into a co-branded credit card agreement, which will allow the sale of frequent flyer miles to a third party financial institution beginning in 2014.  The agreement will be a multiple-element arrangement subject to Accounting Standards Update 2009-13, Multiple Deliverable Revenue Arrangements — A consensus of the FASB Emerging Issues Task Force (ASU 2009-13), which became effective for new and materially modified revenue arrangements entered into by the Company after January 1, 2011.  The Company does not apply the provisions of ASU 2009-13 to its existing co-branded credit card agreements.  The Company is currently evaluating the financial statement impact of applying ASU 2009-13 to this new agreement.

 

2. Accumulated Other Comprehensive Loss

 

Reclassifications out of accumulated other comprehensive loss by component for the three and nine months ended September 30, 2013 were as follows:

 

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Table of Contents

 

 

 

Amounts reclassified from accumulated

 

Affected line items

 

 

 

other comprehensive loss for the

 

in the statement where

 

Details about accumulated other comprehensive

 

Three Months ended

 

Nine Months ended

 

net income

 

loss components

 

September 30, 2013

 

September 30, 2013

 

is presented

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging instruments under ASC 815

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency derivative gains, net

 

$

(3,005

)

$

(6,395

)

Passenger revenue

 

Interest rate derivative losses, net

 

217

 

440

 

Interest expense

 

Total before tax

 

(2,788

)

(5,955

)

 

 

Tax expense

 

1,025

 

2,226

 

 

 

Total, net of tax

 

$

(1,763

)

$

(3,729

)

 

 

Amortization of defined benefit pension items

 

 

 

 

 

 

 

Actuarial loss

 

$

2,281

 

$

6,384

 

Wages and benefits

 

Prior service credit

 

(1

)

(3

)

Wages and benefits

 

Total before tax

 

2,280

 

6,381

 

 

 

Tax benefit

 

(899

)

(3,034

)

 

 

Total, net of tax

 

$

1,381

 

$

3,347

 

 

 

 

 

 

 

 

 

 

 

Total reclassifications for the period

 

$

(382

)

$

(382

)

 

 

 

A rollforward of the amounts included in accumulated other comprehensive loss, net of taxes, for the three and nine months ended September 30, 2013 were as follows:

 

 

 

 

 

 

 

Defined

 

 

 

 

 

Interest

 

Foreign

 

Benefit

 

 

 

 

 

Rate

 

Currency

 

Pension

 

 

 

Three Months ended September 30, 2013

 

Derivatives

 

Derivatives

 

Items

 

Total

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

766

 

$

6,690

 

$

(112,088

)

$

(104,632

)

Other comprehensive loss before reclassifications, net of tax

 

(220

)

(2,482

)

 

(2,702

)

 

 

 

 

 

 

 

 

 

 

Amounts reclassified from accumulated other comprehensive income (loss), net of tax

 

135

 

(1,898

)

1,381

 

(382

)

Net current-period other comprehensive income (loss)

 

(85

)

(4,380

)

1,381

 

(3,084

)

Ending balance

 

$

681

 

$

2,310

 

$

(110,707

)

$

(107,716

)

 

8



Table of Contents

 

 

 

 

 

 

 

Defined

 

 

 

 

 

Interest

 

Foreign

 

Benefit

 

 

 

 

 

Rate

 

Currency

 

Pension

 

 

 

Nine Months ended September 30, 2013

 

Derivatives

 

Derivatives

 

Items

 

Total

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

 

$

 

$

(114,054

)

$

(114,054

)

Other comprehensive income before reclassifications, net of tax

 

409

 

6,311

 

 

6,720

 

 

 

 

 

 

 

 

 

 

 

Amounts reclassified from accumulated other comprehensive income (loss), net of tax

 

272

 

(4,001

)

3,347

 

(382

)

Net current-period other comprehensive income

 

681

 

2,310

 

3,347

 

6,338

 

Ending balance

 

$

681

 

$

2,310

 

$

(110,707

)

$

(107,716

)

 

3. Earnings Per Share

 

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

 

Diluted earnings 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,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

(in thousands, except for per share data)

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

40,604

 

$

45,483

 

$

34,775

 

$

56,645

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common stock shares outstanding - Basic

 

52,303

 

51,444

 

51,994

 

51,246

 

Assumed exercise of equity awards

 

1,209

 

1,179

 

1,166

 

1,217

 

Weighted average common stock shares outstanding - Diluted

 

53,512

 

52,623

 

53,160

 

52,463

 

 

 

 

 

 

 

 

 

 

 

Net Income per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.78

 

$

0.88

 

$

0.67

 

$

1.11

 

Diluted

 

$

0.76

 

$

0.86

 

$

0.65

 

$

1.08

 

 

 

 

 

 

 

 

 

 

 

 

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,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

(in thousands)

 

Stock options

 

 

83

 

522

 

90

 

Deferred stock

 

 

 

58

 

 

Restricted stock

 

1,031

 

607

 

1,494

 

664

 

Convertible notes (1)

 

10,943

 

10,943

 

10,943

 

10,943

 

Warrants

 

10,943

 

10,943

 

10,943

 

10,943

 

 


(1)         In March 2011, the Company entered into a financing 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 the common stock during these periods, and the effect of their inclusion would be antidilutive. However, 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.

 

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Table of Contents

 

4.  Fair Value Measurements

 

ASC Topic 820, Fair Value Measurement (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 September 30, 2013 and December 31, 2012:

 

 

 

Fair Value Measurements as of September 30, 2013

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

(in thousands)

 

Cash equivalents

 

$

303,816

 

$

303,816

 

$

 

$

 

Restricted cash

 

21,000

 

21,000

 

 

 

Fuel derivative contracts

 

6,717

 

 

6,717

 

 

Foreign currency derivatives

 

4,856

 

 

4,856

 

 

Interest rate derivative

 

457

 

 

457

 

 

Total assets measured at fair value

 

$

336,846

 

$

324,816

 

$

12,030

 

$

 

 

 

 

 

 

 

 

 

 

 

Fuel derivative contracts

 

$

736

 

$

 

$

736

 

$

 

Foreign currency derivatives

 

2,675

 

 

2,675

 

 

Negative arbitrage derivative

 

12,865

 

 

 

12,865

 

Total liabilities measured at fair value

 

$

16,276

 

$

 

$

3,411

 

$

12,865

 

 

 

 

Fair Value Measurements as of December 31, 2012

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

(in thousands)

 

Cash equivalents

 

$

304,159

 

$

304,159

 

$

 

$

 

Fuel derivative contracts

 

13,094

 

 

13,094

 

 

Total assets measured at fair value

 

$

317,253

 

$

304,159

 

$

13,094

 

$

 

 

 

 

 

 

 

 

 

 

 

Fuel derivative contracts

 

$

397

 

$

 

$

397

 

$

 

Total liabilities measured at fair value

 

$

397

 

$

 

$

397

 

$

 

 

Cash equivalents and restricted cash.  The Company’s cash equivalents and restricted cash consist of money market securities, which 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 Brent crude oil call options and collars (a combination of purchased call options and sold put options of crude oil) 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 curves and measures of volatility among others.

 

Foreign currency derivatives. The Company’s foreign currency derivatives consist of Japanese Yen, Korean Won, Australian Dollar and New Zealand Dollar forward contracts and are valued based primarily on data available or derived from public markets.

 

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Interest rate derivative.  The Company’s interest rate derivative consists of an interest rate swap and is valued based primarily on data available or derived from public markets.

 

Negative arbitrage derivative.  The Company’s negative arbitrage derivative represents the net interest owed to the trusts that issued the Company’s enhanced equipment trust certificates during the periods prior to the issuance of the related equipment notes, and is valued based primarily on the discounted amount of future cash flows using the appropriate rate of borrowing.  Changes to those discount rates would be unlikely to cause material changes in the fair value of the negative interest arbitrage derivative (refer to Notes 5 and 9 for more information).  The table below presents disclosures about the activity for the Company’s “Level 3” financial liability:

 

 

 

Three Months

 

Nine Months

 

 

 

Ended

 

Ended

 

 

 

September 30, 2013

 

September 30, 2013

 

 

 

(in thousands)

 

Beginning balance

 

$

12,865

 

$

 

Enhanced equipment trust certificates activity

 

 

12,865

 

Ending balance

 

$

12,865

 

$

12,865

 

 

The table below presents the Company’s debt (excluding obligations under capital leases) measured at fair value as of September 30, 2013 and December 31, 2012:

 

Fair Value of Debt

 

September 30, 2013

 

December 31, 2012

 

Carrying

 

Fair Value

 

Carrying

 

Fair Value

 

Amount

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Amount

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

(in thousands)

 

 

 

(in thousands)

 

$

 649,976

 

$

655,093

 

$

 

$

88,517

 

$

566,576

 

$

554,568

 

$

547,943

 

$

 

$

81,091

 

$

466,852

 

 

The fair value estimates of the Company’s debt 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, other receivables and accounts payable approximate their fair value due to its short-term nature.

 

5.  Financial Derivative Instruments

 

The Company uses derivatives to manage risks associated with certain assets and liabilities arising from the potential adverse impact of fluctuations in global fuel prices, interest rates and foreign currencies.

 

In May 2013, the Company recognized in its unaudited Consolidated Balance Sheets the financial effect of the net interest owed to the trusts that issued the Company’s enhanced equipment trust certificates.  The characteristics of the net interest obligation resulted in the obligation meeting the definition of a derivative instrument under ASC Topic 815, Derivatives and Hedging (ASC 815).

 

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.  During the three and nine months ended September 30, 2013, the Company primarily used Brent crude oil call options and collars (combinations of purchased call options and sold put options of crude oil).  These derivative instruments were not designated as hedges under ASC 815 for hedge accounting treatment.  As a result, 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, 2013 and 2012, 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,

 

 

 

2013

 

2012

 

2013

 

2012

 

Fuel derivative contracts

 

(in thousands)

 

Losses realized at settlement

 

$

(3,790

)

$

(1,589

)

$

(11,226

)

$

(4,318

)

Reversal of prior period unrealized amounts

 

4,278

 

3,050

 

5,472

 

2,324

 

Unrealized gains (losses) on conracts that will settle in future periods

 

2,048

 

5,047

 

(5,177

)

(501

)

Gains (losses) on fuel derivatives recorded as Nonoperating income (expense)

 

$

2,536

 

$

6,508

 

$

(10,931

)

$

(2,495

)

 

Interest Rate Risk Management

 

The Company is exposed to market risk from adverse changes in interest rates associated with its long-term debt obligations.  Market risk associated with fixed-rate and variable-rate long-term debt relates to the potential reduction in fair value and negative impact to future earnings, respectively, from an increase in interest rates.

 

During the quarter ended March 31, 2013, the Company entered into interest rate swap agreements to hedge interest rate risk inherent in debt agreements used to finance aircraft delivered in the quarter ended June 30, 2013.  The interest rate swap agreements were designated as cash flow hedges under ASC 815.  One of these interest rate swap agreements matured in June 2013, resulting in a gain of $0.7 million recognized in Accumulated Other Comprehensive Income (Loss) (AOCI).

 

The effective portion of the gain or loss is reported as a component of AOCI and reclassified into earnings in the same period in which interest is accrued.  The effective portion of the interest rate swap represents the change in fair value of the hedge that offsets the change in the fair value of the hedged item.  To the extent the change in the fair value of the hedge does not perfectly offset the change in the fair value of the hedged item, the ineffective portion of the hedge is immediately recognized in nonoperating income (expense).

 

The Company did not record any ineffectiveness during the quarter ended September 30, 2013.  The Company believes that its derivative contract will continue to be effective in offsetting changes in cash flow attributable to the hedged risk.  The Company reclassified net losses from AOCI to interest expense of $0.2 million during the quarter ended September 30, 2013.  The Company expects to reclassify a net loss of approximately $0.8 million into earnings over the next 12 months from AOCI based on the values at September 30, 2013.

 

If the Company terminates a derivative prior to its contractual settlement date, then the cumulative gain or loss recognized in AOCI at the termination date remains in AOCI until the forecasted transaction occurs.  In a situation where it becomes probable that a hedged forecasted transaction will not occur, any gains and/or losses that have been recorded to AOCI would be required to be immediately reclassified into earnings.  All cash flows associated with purchasing and settling derivatives are classified as operating cash flows in the unaudited Condensed Consolidated Statements of Cash Flows.

 

Foreign Currency Exchange Rate Risk Management

 

The Company is subject to foreign currency exchange rate risk due to revenues and expenses denominated in foreign currencies, with the primary exposures being the Japanese Yen and Australian Dollar.  To manage exchange rate risk, the Company executes its international revenue and expense transactions in the same foreign currency to the extent practicable.

 

The Company enters into foreign currency forward contracts, designated as cash flow hedges under ASC 815, to further manage the effects of fluctuating exchange rates.  The effective portion of the gain or loss is reported as a component of AOCI and reclassified into earnings in the same period in which the related sales are recognized as passenger revenue.  The effective portion of the foreign currency forward contracts represents the change in fair value of the hedge that offsets the change in the fair value of the hedged item.  To the extent the change in the fair value of the hedge does not perfectly offset the change in the fair value of the hedged item, the ineffective portion of the hedge is immediately recognized as nonoperating income (expense).

 

The Company believes that its foreign currency forward contracts will continue to be effective in offsetting changes in cash flow attributable to the hedged risk.  The Company reclassified gains from AOCI to passenger revenue of $3.0 million in the quarter ended September 30, 2013. The Company expects to reclassify a net gain of approximately $4.0 million into earnings over the next 12 months from AOCI based on the values at September 30, 2013.

 

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If the Company terminates a derivative prior to its contractual settlement date, then the cumulative gain or loss recognized in AOCI at the termination date remains in AOCI until the forecasted transaction occurs.  In a situation where it becomes probable that a hedged forecasted transaction will not occur, any gains and/or losses that have been recorded to AOCI would be required to be immediately reclassified into earnings.  All cash flows associated with purchasing and settling derivatives are classified as operating cash flows in the unaudited Condensed Consolidated Statements of Cash Flows.

 

Negative Arbitrage Derivative

 

In May 2013, the Company created two pass-through trusts, which issued $444.5 million aggregate principal amount of enhanced equipment trust certificates.  As of September 30, 2013, the Company has not yet received any of the proceeds raised by the pass-through trusts.  However, in accordance with the related agreements, the Company is obligated to pay the interest that accrues on the proceeds and is also entitled to the benefits of the income generated from the same proceeds.  The difference between the interest owed to the pass-through trusts and the interest generated from the proceeds introduces an element of variability that could cause the associated cash flows to fluctuate.  This variability requires the Company’s obligation to the trusts to be recognized as a derivative in the Company’s unaudited Consolidated Financial Statements.  See Note 9 for additional information related to the Company’s enhanced equipment trust certificates.

 

The following table summarizes the accounting treatment of the Company’s derivative contracts:

 

 

 

 

 

 

 

Classification of Unrealized Gains (Losses)

Derivative Type

 

Accounting Designation

 

Classification of Gains and Losses

 

Effective Portion

 

Ineffective Portion

Interest rate contracts

 

Designated as cash flow hedges

 

Interest expense and amortization of debt discounts and issuance costs

 

AOCI

 

Nonoperating income (expense)

Foreign currency exchange contracts

 

Designated as cash flow hedges

 

Passenger revenue

 

AOCI

 

Nonoperating income (expense)

Fuel hedge contracts

 

Not designated as hedges

 

Gains (losses) on fuel derivatives

 

Change in fair value of hedge is recorded in nonoperating income (expense)

Foreign currency exchange contracts

 

Not designated as hedges

 

Nonoperating income (expense), Other

 

Change in fair value of hedge is recorded in nonoperating income (expense)

Negative arbitrage

 

Not designated as hedges

 

Nonoperating income (expense), Other

 

Change in fair value of derivative is recorded in nonoperating income (expense)

 

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The following tables present the gross fair value of asset and liability derivatives that are designated as hedging instruments under ASC 815 and 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.  The tables also present the gross and net derivative positions as of September 30, 2013 and December 31, 2012.

 

Derivative position as of September 30, 2013

 

 

 

Balance Sheet
Location

 

Notional Amount

 

Final
Maturity
Date

 

Gross fair
value of
assets

 

Gross fair
value of
(liabilities)

 

Net
derivative
position

 

 

 

 

 

(in thousands)

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives designated as hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate derivative

 

Prepaid expenses and other

 

$67,000 U.S. dollars

 

April 2023

 

$

82

 

$

 

$

82

 

 

 

Long-term prepayments and other (1)

 

 

 

 

 

375

 

 

375

 

Foreign currency derivatives

 

Prepaid expenses and other

 

12,036,740 Japanese Yen
9,144,358 Korean Won
71,051 Australian Dollars
8,689 New Zealand Dollars

 

September 2014

 

4,372

 

(2,204

)

2,168

 

 

 

Other liabilities and deferred credits (2)

 

1,713,861 Japanese Yen
13,204 Australian Dollars

 

February 2015

 

58

 

(197

)

(139

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency derivatives

 

Prepaid expenses and other

 

6,180 Japanese Yen
58 Australian Dollars

 

September 2014

 

426

 

(274

)

152

 

Fuel derivative contracts

 

Prepaid expenses and other

 

91,350 gallons

 

September 2014

 

5,573

 

(589

)

4,984

 

 

 

Long-term prepayments and other (3)

 

9,240 gallons

 

January 2015

 

1,144

 

(147

)

997

 

Negative arbitrage derivative

 

Other accrued liabilities

 

$444,540 U.S. dollars

 

October 2014

 

 

(12,250

)

(12,250

)

 

 

Other liabilities and deferred credits (4)

 

 

 

 

 

 

(615

)

(615

)

 


(1)         Represents the noncurrent portion of the $67 million interest rate derivative with final maturity in April 2023.

(2)         Represents the noncurrent portion of the foreign currency derivatives with final maturities in February 2015.

(3)         Represents the noncurrent portion of the fuel derivatives with final maturity in January 2015.

(4)         Represents the noncurrent portion of the $445 million negative arbitrage derivative with final maturity in October 2014.

 

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Derivative position as of December 31, 2012

 

 

 

Balance Sheet
Location

 

Notional Amount

 

Final
Maturity
Date

 

Gross fair
value of
assets

 

Gross fair
value of
(liabilities)

 

Net
derivative
position

 

 

 

 

 

(in thousands)

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

Fuel derivative contracts

 

Prepaid expenses and other

 

126,924 gallons

 

June 2014

 

$

13,094

 

$

(397

)

$

12,697

 

 

The following table reflects the impact of cash flow hedges designated for hedge accounting treatment and their location within the unaudited Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2013 and 2012.

 

 

 

Loss recognized in AOCI on
derivatives (effective portion)

 

(Gain) loss reclassified from AOCI
into income (effective portion)

 

(Gain) loss recognized in
nonoperating (income) expense
(ineffective portion)

 

 

 

Three months ended September 30,

 

Three months ended September 30,

 

Three months ended September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency derivatives

 

$

3,960

 

$

 

$

(3,005

)

$

 

$

 

$

 

Interest rate derivatives

 

82

 

 

217

 

 

 

 

 

 

 

Gain recognized in AOCI on
derivatives (effective portion)

 

(Gain) loss reclassified from AOCI
into income (effective portion)

 

Gain recognized in nonoperating
(income) expense (ineffective
portion)

 

 

 

Nine months ended September 30,

 

Nine months ended September 30,

 

Nine months ended September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency derivatives

 

$

(10,204

)

$

 

$

(6,395

)

$

 

$

(61

)

$

 

Interest rate derivatives

 

(929

)

 

440

 

 

 

 

 

Risk and Collateral

 

The financial derivative instruments expose the Company to possible credit loss in the event the counterparties to the agreements fail to meet their obligations.  To manage such credit risks, the Company (1) selects its counterparties based on past experience and credit ratings, (2) limits its exposure to any single counterparty, and (3) periodically monitors the market position and credit rating of each counterparty.  The Company is also subject to market risk in the event these financial instruments become less valuable in the market.  However, changes in the fair value of the derivative instruments will generally offset the change in the fair value of the hedged item, limiting the Company’s overall exposure.

 

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.  In the event the price of the underlying financial derivative decreases, counterparties may require the Company to post collateral.  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 its counterparties as of September 30, 2013 or December 31, 2012.

 

6.  Debt

 

In 2013, the Company borrowed $132.0 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 during the second quarter of 2013.  These loan agreements have a term of 10 years with quarterly principal and interest payments.  One of the loan agreements, with a principal borrowing of $67.0 million, bears interest under a variable-rate (3.87% at September 30, 2013) and requires a $7 million balloon payment due at maturity.  The second loan agreement, with a principal borrowing of $65.0 million, bears interest under a fixed-rate (5.74%) and requires a $10 million balloon payment due at maturity.

 

As of September 30, 2013, the scheduled maturities of long-term debt over the next five years, and thereafter, were as follows (in thousands):

 

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Remaining months in 2013

 

$

66,299

 

2014

 

48,236

 

2015

 

50,410

 

2016

 

137,153

 

2017

 

53,317

 

Thereafter

 

305,278

 

 

 

$

660,693

 

 

7.  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, 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.

 

During 2013, the Company took delivery of two Airbus A330-200 aircraft under operating leases with lease terms of 12 years with an option to extend for an additional two years.

 

As of September 30, 2013, the scheduled future minimum rental payments under capital leases and operating leases with non-cancellable basic terms of more than one year were as follows:

 

 

 

Capital Leases

 

Operating Leases

 

 

 

Aircraft

 

Other

 

Aircraft

 

Other

 

 

 

(in thousands)

 

Remaining months in 2013

 

$

3,450

 

$

496

 

$

24,469

 

$

1,098

 

2014

 

13,803

 

1,159

 

96,673

 

4,194

 

2015

 

13,803

 

1,190

 

96,067

 

3,920

 

2016

 

13,803

 

1,223

 

79,357

 

3,725

 

2017

 

13,803

 

1,179

 

78,835

 

3,088

 

Thereafter

 

73,347

 

11,972

 

313,667

 

24,970

 

 

 

132,009

 

17,219

 

$

689,068

 

$

40,995

 

Less amounts representing interest

 

(31,397

)

(5,069

)

 

 

 

 

Present value of minimum capital lease payments

 

$

100,612

 

$

12,150

 

 

 

 

 

 

8. Employee Benefit Plans

 

The components of net periodic benefit cost for the Company’s defined benefit and other postretirement plans for the three and nine months ended September 30, 2013 and 2012, included the following:

 

Components of Net Periodic

 

Three months ended September 30,

 

Nine months ended September 30,

 

Benefit Cost

 

2013

 

2012

 

2013

 

2012

 

 

 

(in thousands)

 

Service cost

 

$

4,473

 

$

3,363

 

$

11,676

 

$

10,013

 

Interest cost

 

6,340

 

6,876

 

18,939

 

20,588

 

Expected return on plan assets

 

(4,065

)

(4,022

)

(12,196

)

(12,048

)

Recognized net actuarial loss

 

2,280

 

1,863

 

6,381

 

5,338

 

Net periodic benefit cost

 

$

9,028

 

$

8,080

 

$

24,800

 

$

23,891

 

 

The Company made contributions of $11.9 million and $18.6 million to its defined benefit and other postretirement plans during the three and nine months ended September 30, 2013, respectively, satisfying the Company’s required contributions for 2013.

 

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9. Commitments and Contingent Liabilities

 

Commitments

 

As of September 30, 2013, the Company had the following capital commitments consisting of firm aircraft and engine orders and purchase rights:

 

Aircraft Type

 

Firm
Orders

 

Purchase
Rights

 

Expected Delivery Dates

 

 

 

 

 

 

 

 

 

A330-200 aircraft

 

9

 

3

 

Between 2013 and 2015

 

A350XWB-800 aircraft

 

6

 

6

 

Between 2017 and 2020

 

A321neo aircraft

 

16

 

9

 

Between 2017 and 2020

 

Rolls-Royce spare engines:

 

 

 

 

 

 

 

A330-200 spare engines

 

2

 

 

In 2014

 

A350XWB-800 spare engines

 

2

 

 

Between 2017 and 2020

 

Pratt & Whitney spare engines:

 

 

 

 

 

 

 

A321neo spare engines

 

2

 

 

Between 2017 and 2018

 

 

The Company has operating commitments with a third-party to provide aircraft maintenance services which require fixed payments as well as variable payments based on flight hours for its 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 estimates.  The gross committed expenditures and committed financings for those deliveries during the remainder of 2013 and the next four years, and thereafter, are detailed below:

 

 

 

 

 

 

 

 

 

Less: Committed

 

 

 

 

 

 

 

 

 

Total Commited

 

Financing for Upcoming

 

Net Committed

 

 

 

Capital

 

Operating

 

Expenditures

 

Aircraft Deliveries*

 

Expenditures

 

 

 

(in thousands)

 

Remaining months in 2013

 

$

90,486

 

$

12,081

 

$

102,567

 

$

76,110

 

$

26,457

 

2014

 

421,472

 

49,865

 

471,337

 

368,430

 

102,907

 

2015

 

245,589

 

47,445

 

293,034

 

 

293,034

 

2016

 

147,824

 

36,270

 

184,094

 

 

184,094

 

2017

 

493,824

 

35,581

 

529,405

 

 

529,405

 

Thereafter

 

1,105,696

 

233,263

 

1,338,959

 

 

1,338,959

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

2,504,891

 

$

414,505

 

$

2,919,396

 

$

444,540

 

$

2,474,856

 

 


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

 

Enhanced Equipment Trust Certificates (EETC)

 

In May 2013, Hawaiian created two pass-through trusts, one of which issued $328.2 million aggregate principal amount of Class A pass-through certificates with a stated interest rate of 3.9% and the second of which issued $116.3 million aggregate principal amount of Class B pass-through certificates with a stated interest rate of 4.95%. The proceeds of the issuance of the Class A and Class B pass-through certificates, which amounted to $444.5 million, will be used to purchase equipment notes to be issued by Hawaiian in the future to finance the purchase of six (6) new Airbus aircraft scheduled for delivery from November 2013 through October 2014.  The equipment notes will be secured by a lien on the aircraft, and the payment obligations of Hawaiian under the equipment notes will be fully and unconditionally guaranteed by the Company. Hawaiian has not yet received any of the proceeds raised by the pass-through trusts. The Company expects to issue the equipment notes to the trusts as aircraft are delivered to Hawaiian. Hawaiian will record the debt obligation upon issuance of the equipment notes rather than upon the initial issuance of the pass-through certificates. The proceeds are expected to be used to fund the acquisition of new aircraft. In connection with this transaction, Hawaiian was required to deposit $16.0 million into a collateral account.  The funds held in this account are under the control of a third party.  Accordingly, these funds are classified as restricted cash in the Company’s unaudited Consolidated Balance Sheets.

 

17



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The Company evaluated whether the pass-through trusts formed are variable interest entities (“VIEs”) required to be consolidated by the Company under applicable accounting guidance, and determined that the pass-through trusts are VIEs. The Company determined that it does not have a variable interest in the pass-through trusts. Neither the Company nor Hawaiian invested in or obtained a financial interest in the pass-through trusts. Rather, Hawaiian has an obligation to make interest and principal payments on its equipment notes held by the pass-through trusts, which will be fully and unconditionally guaranteed by the Company. Neither the Company nor Hawaiian intends to have any voting or non-voting equity interest in the pass-through trusts or to absorb variability from the pass-through trusts. Based on this analysis, the Company determined that it is not required to consolidate the pass-through trusts.

 

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 insured (subject to deductibles) for most tort liabilities and related indemnities described above with respect to the aircraft and 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 $5.0 million at September 30, 2013 and December 31, 2012.

 

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.

 

10. Supplemental Cash Flow Information

 

Non-cash investing and financing activities for the nine months ended September 30, 2013 and 2012 were as follows:

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2013

 

2012

 

 

 

(in thousands)

 

Investing and Financing Activities Not Affecting Cash:

 

 

 

 

 

Property and equipment acquired through a capital lease

 

$

11,840

 

$

111,921

 

 

11. Condensed Consolidating Financial Information

 

The following condensed consolidating financial information is presented in accordance with Regulation S-X paragraph 210.3-10 because, in connection with the issuance by two pass-through trusts formed by Hawaiian (which is also referred to in this Note 11 as Subsidiary Issuer / Guarantor) of pass-through certificates, as discussed in Note 9, the Company (which is also referred to in this Note 11 as Parent Issuer / Guarantor), will fully and unconditionally guarantee the payment obligations of Hawaiian, which is a 100% owned subsidiary

 

18



Table of Contents

 

of the Company, under equipment notes to be issued by Hawaiian in the future to purchase new aircraft.

 

Also, in accordance with Regulation S-X paragraph 210.5-04 (c), the Company is required to report condensed financial information as a result of limitations on the ability of Hawaiian to pay dividends or advances to the Company included in Hawaiian’s debt agreements.  The Company’s condensed consolidating financial information satisfies this requirement.

 

Condensed consolidating financial statements are presented in the following tables:

 

Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)

Three Months Ended September 30, 2013

 

 

 

Parent Issuer /
Guarantor

 

Subsidiary Issuer
/ Guarantor

 

Non-Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

Operating Revenue

 

$

 

$

599,361

 

$

(3

)

$

(60

)

$

599,298

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

Aircraft fuel, including taxes and delivery

 

 

181,334

 

 

 

181,334

 

Wages and benefits

 

 

112,150

 

 

 

112,150

 

Aircraft rent

 

 

27,575

 

 

 

27,575

 

Maintenance materials and repairs

 

 

51,705

 

 

 

51,705

 

Aircraft and passenger servicing

 

 

31,080

 

 

 

31,080

 

Commissions and other selling

 

 

32,302

 

 

(14

)

32,288

 

Depreciation and amortization

 

 

22,092

 

 

 

22,092

 

Other rentals and landing fees

 

 

21,996

 

 

 

21,996

 

Other

 

1,072

 

43,530

 

88

 

(46

)

44,644

 

Total

 

1,072

 

523,764

 

88

 

(60

)

524,864

 

Operating Income (Loss)

 

(1,072

)

75,597

 

(91

)

 

74,434

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonoperating Income (Expense):

 

 

 

 

 

 

 

 

 

 

 

Undistributed net income of subsidiaries

 

42,686

 

 

 

(42,686

)

 

Interest expense and amortization of debt discounts and issuance costs

 

(2,207

)

(11,272

)

 

 

(13,479

)

Interest income

 

27

 

146

 

 

 

173

 

Capitalized interest

 

 

3,005

 

 

 

3,005

 

Gains on fuel derivatives

 

 

2,536

 

 

 

2,536

 

Other, net

 

 

749

 

 

 

749

 

Total

 

40,506

 

(4,836

)

 

(42,686

)

(7,016

)

Income (Loss) Before Income Taxes

 

39,434

 

70,761

 

(91

)

(42,686

)

67,418

 

Income tax expense (benefit)

 

(1,170

)

27,984

 

 

 

26,814

 

Net Income (Loss)

 

$

40,604

 

$

42,777

 

$

(91

)

$

(42,686

)

$

40,604

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income (Loss)

 

$

37,520

 

$

39,693

 

$

(91

)

$

(39,602

)

$

37,520

 

 

19



Table of Contents

 

Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)

Three Months Ended September 30, 2012

 

 

 

Parent Issuer /
Guarantor

 

Subsidiary Issuer
/ Guarantor

 

Non-Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

(in thousands)

 

Operating Revenue

 

$

 

$

549,365

 

$

9

 

$

(52

)

$

549,322

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

Aircraft fuel, including taxes and delivery

 

 

165,762

 

 

 

165,762

 

Wages and benefits

 

 

93,438

 

 

 

93,438

 

Aircraft rent

 

 

25,626

 

 

 

25,626

 

Maintenance materials and repairs

 

 

44,150

 

 

 

44,150

 

Aircraft and passenger servicing

 

 

28,859

 

 

 

28,859

 

Commissions and other selling

 

 

31,037

 

 

(9

)

31,028

 

Depreciation and amortization

 

 

22,983

 

 

 

22,983

 

Other rentals and landing fees

 

 

22,520

 

 

 

22,520

 

Other

 

1,484

 

38,560

 

22

 

(43

)

40,023

 

Total

 

1,484

 

472,935

 

22

 

(52

)

474,389

 

Operating Income (Loss)

 

(1,484

)

76,430

 

(13

)

 

74,933

 

Nonoperating Income (Expense):

 

 

 

 

 

 

 

 

 

 

 

Undistributed net income of subsidiaries

 

47,791

 

 

 

(47,791

)

 

Interest expense and amortization of debt discounts and issuance costs

 

(2,105

)

(9,870

)

 

 

(11,975

)

Interest income

 

30

 

66

 

 

 

96

 

Capitalized interest

 

 

2,579

 

 

 

2,579

 

Gains on fuel derivatives

 

 

6,508

 

 

 

6,508

 

Other, net

 

 

1,662

 

 

 

1,662

 

Total

 

45,716

 

945

 

 

(47,791

)

(1,130

)

Income (Loss) Before Income Taxes

 

44,232

 

77,375

 

(13

)

(47,791

)

73,803

 

Income tax expense (benefit)

 

(1,251

)

29,571

 

 

 

28,320

 

Net Income (Loss)

 

$

45,483

 

$

47,804

 

$

(13

)

$

(47,791

)

$

45,483

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income (Loss)

 

$

47,346

 

$

49,667

 

$

(13

)

$

(49,654

)

$

47,346

 

 

20



Table of Contents

 

Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)

Nine Months Ended September 30, 2013

 

 

 

Parent Issuer /
Guarantor

 

Subsidiary Issuer
/ Guarantor

 

Non-Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

(in thousands)

 

Operating Revenue

 

$

 

$

1,623,602

 

$

634

 

$

(256

)

$

1,623,980

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

Aircraft fuel, including taxes and delivery

 

 

525,046

 

 

 

525,046

 

Wages and benefits

 

 

318,269

 

 

 

318,269

 

Aircraft rent

 

 

81,879

 

 

 

81,879

 

Maintenance materials and repairs

 

 

160,000

 

 

 

160,000

 

Aircraft and passenger servicing

 

 

89,367

 

 

 

89,367

 

Commissions and other selling

 

 

98,333

 

 

(48

)

98,285

 

Depreciation and amortization

 

 

60,993

 

 

 

60,993

 

Other rentals and landing fees

 

 

60,773

 

 

 

60,773

 

Other

 

6,557

 

122,837

 

283

 

(208

)

129,469

 

Total

 

6,557

 

1,517,497

 

283

 

(256

)

1,524,081

 

Operating Income (Loss)

 

(6,557

)

106,105

 

351

 

 

99,899

 

Nonoperating Income (Expense):

 

 

 

 

 

 

 

 

 

 

 

Undistributed net income of subsidiaries

 

43,310

 

 

 

(43,310

)

 

Interest expense and amortization of debt discounts and issuance costs

 

(6,475

)

(30,544

)

 

 

(37,019

)

Interest income

 

91

 

335

 

 

 

426

 

Capitalized interest

 

 

9,336

 

 

 

9,336

 

Losses on fuel derivatives

 

 

(10,931

)

 

 

(10,931

)

Other, net

 

 

(3,457

)

 

 

(3,457

)

Total

 

36,926

 

(35,261

)

 

(43,310

)

(41,645

)

Income Before Income Taxes

 

30,369

 

70,844

 

351

 

(43,310

)

58,254

 

Income tax expense (benefit)

 

(4,406

)

27,885

 

 

 

23,479

 

Net Income

 

$

34,775

 

$

42,959

 

$

351

 

$

(43,310

)

$

34,775

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income

 

$

41,113

 

$

49,297

 

$

351

 

$

(49,648

)

$

41,113

 

 

21



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Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)

Nine Months Ended September 30, 2012

 

 

 

Parent Issuer /
Guarantor

 

Subsidiary Issuer
/ Guarantor

 

Non-Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

(in thousands)

 

Operating Revenue

 

$

 

$

1,469,539

 

$

32

 

$

(204

)

$

1,469,367

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

Aircraft fuel, including taxes and delivery

 

 

456,545

 

 

 

456,545

 

Wages and benefits

 

 

280,261

 

 

 

280,261

 

Aircraft rent

 

 

73,712

 

 

 

73,712

 

Maintenance materials and repairs

 

 

137,271

 

 

 

137,271

 

Aircraft and passenger servicing

 

 

74,859

 

 

 

74,859

 

Commissions and other selling

 

 

89,088

 

 

(33

)

89,055

 

Depreciation and amortization

 

 

63,687

 

 

 

63,687

 

Other rentals and landing fees

 

 

63,486

 

 

 

63,486

 

Other

 

3,882

 

109,526

 

93

 

(171

)

113,330

 

Total

 

3,882

 

1,348,435

 

93

 

(204

)

1,352,206

 

Operating Income (Loss)

 

(3,882

)

121,104

 

(61

)

 

117,161

 

Nonoperating Income (Expense):

 

 

 

 

 

 

 

 

 

 

 

Undistributed net income of subsidiaries

 

63,120

 

 

 

(63,120

)

 

Interest expense and amortization of debt discounts and issuance costs

 

(6,201

)

(25,544

)

 

 

(31,745

)

Interest income

 

88

 

389

 

 

 

477

 

Capitalized interest

 

 

7,328

 

 

 

7,328

 

Losses on fuel derivatives

 

 

(2,495

)

 

 

(2,495

)

Other, net

 

 

1,245

 

 

 

1,245

 

Total

 

57,007

 

(19,077

)

 

(63,120

)

(25,190

)

Income (Loss) Before Income Taxes

 

53,125

 

102,027

 

(61

)

(63,120

)

91,971

 

Income tax expense (benefit)

 

(3,520

)

38,846

 

 

 

35,326

 

Net Income (Loss)

 

$

56,645

 

$

63,181

 

$

(61

)

$

(63,120

)

$

56,645

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income (Loss)

 

$

60,765

 

$

67,301

 

$

(61

)

$

(67,240

)

$

60,765

 

 

22



Table of Contents

 

Condensed Consolidating Balance Sheets

September 30, 2013

 

 

 

Parent Issuer /
Guarantor

 

Subsidiary Issuer
/ Guarantor

 

Non-Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

(in thousands)

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

84,311

 

$

352,115

 

$

4,972

 

$

 

$

441,398

 

Restricted cash

 

 

19,434

 

 

 

19,434

 

Accounts receivable, net

 

2,032

 

77,046

 

278

 

(98

)

79,258

 

Spare parts and supplies, net

 

 

20,857

 

 

 

20,857

 

Deferred tax assets, net

 

411

 

19,572

 

 

 

19,983

 

Prepaid expenses and other

 

3

 

35,344

 

 

 

35,347

 

Total

 

86,757

 

524,368

 

5,250

 

(98

)

616,277

 

Property and equipment at cost

 

 

1,533,121

 

30,901

 

 

1,564,022

 

Less accumulated depreciation and amortization

 

 

(307,556

)

 

 

(307,556

)

Property and equipment, net

 

 

1,225,565

 

30,901

 

 

1,256,466

 

Long-term prepayments and other

 

1,302

 

87,021

 

 

 

88,323

 

Restricted cash

 

 

1,566

 

 

 

1,566

 

Deferred tax assets, net

 

13,106

 

 

 

(7,749

)

5,357

 

Goodwill and other intangible assets, net

 

 

131,263

 

 

 

131,263

 

Intercompany receivable

 

26,506

 

 

 

(26,506

)

 

Investment in consolidated subsidiaries

 

263,378

 

 

 

(263,378

)

 

TOTAL ASSETS

 

$

391,049

 

$

1,969,783

 

$

36,151

 

$

(297,731

)

$

2,099,252

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

802

 

$

87,327

 

$

114

 

$

(98

)

$

88,145

 

Air traffic liability

 

 

451,422

 

1,177

 

 

452,599

 

Other accrued liabilities

 

220

 

90,211

 

 

 

90,431

 

Current maturities of long-term debt and capital lease obligations

 

 

110,960

 

 

 

110,960

 

Total

 

1,022

 

739,920

 

1,291

 

(98

)

742,135

 

Long-term debt, less discount, and capital lease obligations

 

75,533

 

576,245

 

 

 

651,778

 

Intercompany payable

 

 

26,506

 

 

(26,506

)

 

Other liabilities and deferred credits:

 

 

 

 

 

 

 

 

 

 

 

Accumulated pension and other postretirement benefit obligations.

 

 

350,407

 

 

 

350,407

 

Other liabilities and deferred credits

 

 

40,438

 

 

 

40,438

 

Deferred tax liabilities, net

 

 

7,749

 

 

(7,749

)

 

Total

 

 

398,594

 

 

(7,749

)

390,845

 

Shareholders’ Equity

 

314,494

 

228,518

 

34,860

 

(263,378

)

314,494

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

391,049

 

$

1,969,783

 

$

36,151

 

$

(297,731

)

$

2,099,252

 

 

23



Table of Contents

 

Condensed Consolidating Balance Sheets

December 31, 2012

 

 

 

Parent Issuer /
Guarantor

 

Subsidiary Issuer
/ Guarantor

 

Non-Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

(in thousands)

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

83,626

 

$

303,967

 

$

18,287

 

$

 

$

405,880

 

Restricted cash

 

 

5,000

 

 

 

5,000

 

Accounts receivable, net

 

2,032

 

78,949

 

13

 

(244

)

80,750

 

Spare parts and supplies, net

 

 

27,552

 

 

 

27,552

 

Deferred tax assets, net

 

704

 

16,971

 

 

 

17,675

 

Prepaid expenses and other

 

 

35,001

 

 

 

35,001

 

Total

 

86,362

 

467,440

 

18,300

 

(244

)

571,858

 

Property and equipment at cost

 

 

1,299,757

 

18,456

 

 

1,318,213

 

Less accumulated depreciation and amortization

 

 

(249,495

)

 

 

(249,495

)

Property and equipment, net

 

 

1,050,262

 

18,456

 

 

1,068,718

 

Long-term prepayments and other

 

1,695

 

53,934

 

 

 

55,629

 

Deferred tax assets, net

 

8,439

 

27,937

 

 

 

36,376

 

Goodwill and other intangible assets, net

 

 

133,243

 

 

 

133,243

 

Intercompany receivable

 

33,110

 

 

 

(33,110

)

 

Investment in consolidated subsidiaries

 

213,275

 

 

 

(213,275

)

 

TOTAL ASSETS

 

$

342,881

 

$

1,732,816

 

$

36,756

 

$

(246,629

)

$

1,865,824

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

292

 

$

81,758

 

$

278

 

$

(244

)

$

82,084

 

Air traffic liability

 

 

386,677

 

1,969

 

 

388,646

 

Other accrued liabilities

 

1,310

 

73,518

 

 

 

74,828

 

Current maturities of long-term debt and capital lease obligations

 

 

108,232

 

 

 

108,232

 

Total

 

1,602

 

650,185

 

2,247

 

(244

)

653,790

 

Long-term debt, less discount, and capital lease obligations

 

72,677

 

480,332

 

 

 

553,009

 

Intercompany payable

 

 

33,110

 

 

(33,110

)

 

Other liabilities and deferred credits:

 

 

 

 

 

 

 

 

 

 

 

Accumulated pension and other postretirement benefit obligations

 

 

352,460

 

 

 

352,460

 

Other liabilities and deferred credits

 

 

37,963

 

 

 

37,963

 

Total

 

 

390,423

 

 

 

390,423

 

Shareholders’ equity

 

268,602

 

178,766

 

34,509

 

(213,275

)

268,602

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

342,881

 

$

1,732,816

 

$

36,756

 

$

(246,629

)

$

1,865,824

 

 

The Company reduced the Parent Issuer / Guarantor’s Investment in consolidated subsidiaries and Shareholders’ equity by $29,015 (in thousands) as of December 31, 2012 to correctly classify the Parent Issuer / Guarantor’s Investment in consolidated subsidiaries.

 

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Table of Contents

 

Condensed Consolidating Statements of Cash Flows

Nine Months Ended September 30, 2013

 

 

 

Parent Issuer /
Guarantor

 

Subsidiary
Issuer /
Guarantor

 

Non-Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

(in thousands)

 

Net Cash Provided By (Used In) Operating Activities:

 

$

(7,244

)

$

215,589

 

$

(870

)

$

 

$

207,475

 

Cash Flows From Investing Activities:

 

 

 

 

 

 

 

 

 

 

 

Net payments from subsidiaries

 

5,553

 

 

 

(5,553

)

 

Additions to property and equipment, including pre-delivery deposits

 

 

(220,272

)

(12,445

)

 

(232,717

)

Net cash provided by (used in) investing activities

 

5,553

 

(220,272

)

(12,445

)

(5,553

)

(232,717

)

Cash Flows From Financing Activities:

 

 

 

 

 

 

 

 

 

 

 

Proceeds from exercise of stock options

 

2,376

 

 

 

 

2,376

 

Long-term borrowings

 

 

132,000

 

 

 

132,000

 

Repayments of long-term debt and capital lease obligations

 

 

(45,200

)

 

 

(45,200

)

Debt issuance costs

 

 

(12,416

)

 

 

(12,416

)

Net payments to parent company

 

 

(5,553

)

 

5,553

 

 

Change in restricted cash

 

 

(16,000

)

 

 

(16,000

)

Net cash provided by financing activities

 

2,376

 

52,831

 

 

5,553

 

60,760

 

Net increase (decrease) in cash and cash equivalents

 

685

 

48,148

 

(13,315

)

 

35,518

 

Cash and cash equivalents - Beginning of Period

 

83,626

 

303,967

 

18,287

 

 

405,880

 

Cash and cash equivalents - End of Period

 

$

84,311

 

$

352,115

 

$

4,972

 

$

 

$

441,398

 

 

Condensed Consolidating Statements of Cash Flows

Nine Months Ended September 30, 2012

 

 

 

Parent Issuer /
Guarantor

 

Subsidiary
Issuer /
Guarantor

 

Non-Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

(in thousands)

 

Net Cash Provided By (Used In) Operating Activities:

 

$

(7,824

)

$

257,509

 

$

(291

)

$

 

$

249,394

 

Cash Flows From Investing Activities:

 

 

 

 

 

 

 

 

 

 

 

Net payments from subsidiaries

 

9,735

 

 

 

(9,735

)

 

Additions to property and equipment, including pre-delivery deposits

 

 

(215,950

)

 

 

(215,950

)

Net cash provided by (used in) investing activities

 

9,735

 

(215,950

)

 

(9,735

)

(215,950

)

Cash Flows From Financing Activities:

 

 

 

 

 

 

 

 

 

 

 

Proceeds from exercise of stock options

 

1,263

 

 

 

 

1,263

 

Long-term borrowings

 

 

133,000

 

 

 

133,000

 

Repayments of long-term debt and capital lease obligations

 

 

(35,219

)

 

 

(35,219

)

Debt issuance costs

 

 

(3,118

)

 

 

(3,118

)

Net payments to parent company

 

 

(9,735

)

 

9,735

 

 

Net cash provided by financing activities

 

1,263

 

84,928

 

 

9,735

 

95,926

 

Net increase (decrease) in cash and cash equivalents

 

3,174

 

126,487

 

(291

)

 

129,370

 

Cash and cash equivalents - Beginning of Period

 

97,219

 

205,656

 

1,240

 

 

304,115

 

Cash and cash equivalents - End of Period

 

$

100,393

 

$

332,143

 

$

949

 

$

 

$

433,485

 

 

Certain Restrictions on Subsidiary Distributions, Dividends and Repurchases

 

The Company and Hawaiian are party to an Amended and Restated Credit Agreement (Credit Agreement), dated as of December 10, 2010, that provides for a Revolving Credit Facility.  See further discussion of the Revolving Credit Facility at Note 6 to the Consolidated Financial Statements included in a current report on Form 8-K filed on March 14, 2013.  The Credit Agreement provides that, subject to certain exceptions, neither Hawaiian nor any other subsidiary of the Company will make any distribution or other payment on account of, or declare or pay any dividend on, or purchase, acquire, redeem or retire any stock issued by Hawaiian or any other subsidiary of the Company. The exceptions include (i) distributions by Hawaiian to the Company for the purpose of allowing the Company to pay federal and state income and franchise taxes, (ii) distributions by Hawaiian to the Company to pay customary costs and expenses of operating a publicly-traded company in an aggregate amount in any year not to exceed $10.0 million, and (iii) so long as no event of default has occurred and is continuing or would result therefrom, distributions by Hawaiian to the Company for the purpose of making regularly scheduled interest payments on specified indebtedness of the Company.  In addition, the Credit Agreement restricts the ability of Hawaiian and the other subsidiaries of the Company from making loans or advances to the Company.  The net assets of Hawaiian restricted under the Credit Agreement, defined as shareholders’ equity, totaled $228.5 million and $178.8 million as of September 30, 2013 and December 31, 2012, respectively.

 

Long-Term Debt

 

The long-term debt included in the Parent Issuer / Guarantor column represents the Convertible Debt described in Note 6 to our Consolidated Financial Statements included in our current report on Form 8-K filed on March 14, 2013.

 

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Table of Contents

 

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 areas of strategic focus, statements regarding factors that may affect our ability to fund our working capital, capital expenditures or other general purpose needs; 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 and cost of fuel; statements regarding our wages and benefits and labor costs and agreements; statements related to airport rent rates and landing fees; statements regarding aircraft rent expense; statements regarding our total capacity and yields on routes; 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 regarding the use of proceeds of the EETC financing and the issuance dates of equipment notes; 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 assumptions 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 public filings and public announcements, including, but not limited to, our risk factors set out in the “Risk Factors” sections of our December 31, 2012 Annual Report on Form 10-K and our March 31, 2013 and June 30, 2013 Quarterly Reports on Form 10-Q.  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 unaudited Consolidated Financial Statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q.

 

OVERVIEW

 

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 100% 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.

 

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Table of Contents

 

Our Business

 

We are 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 U.S. mainland (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, we operate various charter flights.  We are the largest airline headquartered in the State of 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 June 30, 2013, the latest available data.

 

As of September 30, 2013, Hawaiian had 5,233 active employees.

 

General information about us is available at http://www.hawaiianairlines.com/aboutus.  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 REVIEW

 

Financial Highlights

 

·                  GAAP net income of $40.6 million or $0.76 cents per diluted share.

 

·                  Adjusted net income, reflecting economic fuel expense, of $36.8 million or $0.69 per diluted share.

 

·                  Available seat miles (ASMs) increase of 9.0% year-over-year.

 

·                 Passenger revenue per available seat mile (PRASM) increase of 0.2% and operating revenue per available seat per mile (RASM) increase of 0.1%.

 

·                 Cost per available seat mile (CASM), excluding fuel, increase of 2.1% year-over-year.

 

·                 CASM increase of 1.5% year-over-year.

 

Business Highlights

 

Operational

 

·                  Ranked #1 nationally for on-time performance for the months of June and July 2013 by the U.S. Department of Transportation Air Travel Consumer Report.

 

Fleet and Financing

 

·                  Returned one Boeing 767-300 aircraft at the end of its lease term.

 

·                  Took delivery of one ATR42-500 twin-turboprop aircraft to inaugurate new service to Molokai and Lanai.

 

New routes and increased frequencies

 

·                  Honolulu to Taipei, Taiwan three-times-weekly service launched July 9, 2013.

 

·                  Announced the reintroduction of daily non-stop service from Honolulu to Oakland beginning in January 2014, an increase in service from four times weekly.  Also, announced seasonal service, during the summer of 2014, between Oakland and Kona, four times weekly and Oakland and Lihue, three times weekly.

 

·                  Announced seasonal service, during the summer of 2014 between Los Angeles and Kona, three times weekly and Los Angeles and Lihue, four times weekly.

 

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Table of Contents

 

See “Results of Operations” below for further discussion of changes in revenues and operating expenses.  See “Non-GAAP Financial Measures” below for our reconciliation of non-GAAP measures.

 

During the quarter, we continued to focus on our International expansion with the launch of our three-times-weekly service to Taipei, Taiwan in July 2013, reflecting our first destination to Taiwan, and entered into new code share and interline agreements with China Airlines for connecting travel through Taipei to provide customers access to international destinations currently unserved by us.

 

To address the growing demand for travel between the San Francisco Bay Area and the Hawaiian Islands, we reintroduced non-stop daily service between Honolulu and Oakland effective January 2014, increasing service from four times per week, and also announced new annual summer service between Oakland and Kona, four times per week and between Oakland and Kauai, three times per week.

 

In October 2013, we entered into a co-branded credit card agreement, which will allow us to sell frequent flyer miles to a third party financial institution beginning in 2014.

 

Fleet Summary

 

The table below summarizes our total fleet as of September 30, 2012 and 2013, and expected fleet as of September 30, 2014 (based on existing agreements):

 

 

 

September 30, 2012

 

September 30, 2013

 

September 30, 2014

 

Aircraft Type

 

Leased
(3)

 

Owned

 

Total

 

Leased
(3)

 

Owned

 

Total

 

Leased
(3)

 

Owned

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

A330-200

 

5

 

4

 

9

 

7

 

6

 

13

 

7

 

10

 

17

 

767-300 (1)

 

9

 

7

 

16

 

7

 

7

 

14

 

6

 

5

 

11

 

717-200

 

3

 

15

 

18

 

3

 

15

 

18

 

3

 

15

 

18

 

ATR42 (2)

 

 

 

 

 

3

 

3

 

 

3

 

3

 

Total

 

17

 

26

 

43

 

17

 

31

 

48

 

16

 

33

 

49

 

 


(1)                   During the quarter ended September 2013, we returned one leased 767-300 aircraft at the end of its lease term.  The decrease in the total number of 767-300 aircraft from September 30, 2013 to September 30, 2014 is due to the planned return of one leased aircraft at the end of its lease term, and the planned retirement of two owned aircraft.

 

(2)                   Airline Contract Maintenance & Equipment, Inc., a wholly-owned subsidiary of the Company, took delivery of one owned ATR42 turboprop aircraft during the quarter ended September 30, 2013.

 

(3)                   Leased aircraft include both aircraft under capital and operating leases.  See Note 7 for further discussion of our aircraft leases.

 

Results of Operations

 

Our third quarter results reflect the impact of seasonal demand as we typically experience increased air travel to Hawaii as a vacation destination during the third quarter.  For the three months ended September 30, 2013, we recorded net income of $40.6 million, or $0.76 per diluted share, as compared to net income of $45.5 million, or $0.86 per diluted share, for the same period in 2012.  For the nine months ended September 30, 2013, we recorded net income of $34.8 million or $0.65 per diluted share, as compared to net income of $56.6 million or $1.08 per diluted share, for the same period in 2012.

 

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Table of Contents

 

Selected Consolidated Statistical Data (unaudited)

 

 

 

Three Months ended September 30,

 

Nine Months ended September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

(in thousands, except as otherwise indicated)

 

Scheduled Operations:

 

 

 

 

 

 

 

 

 

Revenue passengers flown

 

2,644

 

2,519

 

7,523

 

7,066

 

Revenue passenger miles (RPM)

 

3,668,535

 

3,367,603

 

10,279,673

 

8,923,088

 

Available seat miles (ASM)

 

4,406,504

 

4,041,920

 

12,578,342

 

10,662,494

 

Passenger revenue per RPM (Yield)

 

14.81

¢

14.77

¢

14.25

¢

14.86

¢

Passenger load factor (RPM/ASM)

 

83.3

%

83.3

%

81.7

%

83.7

%

Passenger revenue per ASM (PRASM)

 

12.33

¢

12.30

¢

11.64

¢

12.44

¢

 

 

 

 

 

 

 

 

 

 

Total Operations:

 

 

 

 

 

 

 

 

 

Revenue passengers flown

 

2,647

 

2,522

 

7,528

 

7,071

 

RPM

 

3,675,222

 

3,376,257

 

10,294,818

 

8,938,530

 

ASM

 

4,415,096

 

4,052,248

 

12,596,765

 

10,680,632

 

Operating revenue per ASM (RASM)

 

13.57

¢

13.56

¢

12.89

¢

13.76

¢

Operating cost per ASM (CASM)

 

11.89

¢

11.71

¢

12.10

¢

12.66

¢

CASM excluding aircraft fuel (b)

 

7.78

¢

7.62

¢

7.93

¢

8.39

¢

Aircraft fuel expense per ASM (a)

 

4.11

¢

4.09

¢

4.17

¢

4.27

¢

Revenue block hours operated

 

42,205

 

39,774

 

121,777

 

108,431

 

Gallons of jet fuel consumed

 

59,265

 

54,535

 

169,824

 

145,006

 

Average cost per gallon of jet fuel (actual) (a)

 

$

3.06

 

$

3.04

 

$

3.09

 

$

3.15

 

 


(a)                   Includes applicable taxes and fees.

(b)                   Represents adjusted unit costs, a non-GAAP measure. We believe this is a useful measure because it better reflects our controllable costs.  See “Non-GAAP Financial Measures” below for our reconciliation of non-GAAP measures.

 

Operating Revenue

 

Operating revenue increased $50.0 million, or 9.1%, for the three months ended September 30, 2013, and $154.6 million, or 10.5% for the nine months ended September 30, 2013, as compared to the prior-year periods, driven primarily by an increase in the number of revenue passengers flown.

 

Passenger Revenue

 

For the three and nine months ended September 30, 2013, passenger revenue increased $46.1 million, or 9.3%, and $138.4 million, or 10.4%, respectively, as compared to the prior-year periods.  Details of these changes are described in the table below:

 

 

 

Three months ended September 30, 2013 as compared

 

Nine months ended September 30, 2013 as compared

 

 

 

to three months ended September 30, 2012

 

to nine months ended September 30, 2012

 

 

 

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)

 

 

 

 

 

 

 

North America

 

$

25.0

 

7.6

%

3.0

%

0.7

%

$

55.9

 

0.0

%

9.0

%

8.0

%

Neighbor Island

 

14.7

 

10.2

 

2.7

 

(2.4

)

24.2

 

4.0

 

3.3

 

(2.6

)

International

 

6.4

 

(15.0

)

22.5

 

26.6

 

58.3

 

(12.0

)

30.8

 

41.0

 

Total scheduled

 

$

46.1

 

0.3

%

8.9

%

9.0

%

$

138.4

 

(4.1

)%

15.2

%

18.0

%

 

North America

 

For the three months ended September 30, 2013, North America revenue increased by $25.0 million, as compared to the prior-year period, due to an increase in yield and an increase in load factor.  As industry capacity growth began to stabilize during the quarter we experienced increased demand, which resulted in an increase in average fares on these routes.

 

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Table of Contents

 

For the nine months ended September 30, 2013, North America revenue increased by $55.9 million, as compared to the prior-year period, primarily due to an increase in RPMs which reflect year-to-date non-stop service from Honolulu to New York, New York (launched June 2012), and a third daily year round flight from Honolulu to Los Angeles, California (launched June 2012).

 

Neighbor Island

 

For the three and nine months ended September 30, 2013, Neighbor Island revenue increased by $14.7 million and $24.2 million, respectively, as compared to the prior-year period, due to schedule changes implemented during the fourth quarter 2012 which decreased capacity on these routes.

 

International

 

For the three and nine months ended September 30, 2013, International revenue increased by $6.4 million and $98.3 million, respectively, as compared to the prior-year period, due to increased capacity, offset by decreased yield.

 

The increase in capacity was primarily due to the commencement of new routes that initiated subsequent to September 30, 2012, which includes three times a week service to Sapporo (launched in November 2012), Brisbane (launched in November 2012), Auckland (launched in March 2013), Sendai (launched in June 2013) and Taipei (launched in July 2013).  We experienced a decrease in load factor and yield as a result of increased competition on our Japanese, Australia and New Zealand routes, and the continued strengthening of the US Dollar in most currencies, primarily the Japanese Yen and Australian Dollar, has resulted in decreased average fares from the prior-year period.

 

Other Operating Revenue

 

Other operating revenue increased by $3.9 million, or 7.5%, and $16.2 million, or 11.3%, for the three and nine months ended September 30, 2013, respectively, as compared to the prior-year periods, primarily due to increased cargo revenue which was generated from the additional cargo capacity provided by the Airbus A330-200 aircraft.

 

Operating Expense

 

Operating expenses were $524.9 million and $1.5 billion for the three and nine months ended September 30, 2013, respectively, and $474.4 million and $1.4 billion for the three and nine months ended September 30, 2012, respectively.  Increases (decreases) in operating expenses for the three and nine months ended September 30, 2013 as compared to the prior-year periods are detailed below:

 

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Table of Contents

 

 

 

Increase / (decrease) in operating

 

Increase / (decrease) in operating

 

 

 

expenses for the three months ended

 

expenses for the nine months ended

 

 

 

September 30, 2013 compared to the three

 

September 30, 2013 compared to the nine

 

 

 

months ended September 30, 2012

 

months ended September 30, 2012

 

 

 

$

 

%

 

$

 

%

 

 

 

(in thousands)

 

 

 

(in thousands)

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

Aircraft fuel, including taxes and delivery

 

$

15,572

 

9.4

%

$

68,501

 

15.0

%

Wages and benefits

 

18,712

 

20.0

 

38,008

 

13.6

 

Aircraft rent

 

1,949

 

7.6

 

8,167

 

11.1

 

Maintenance materials and repairs

 

7,555

 

17.1

 

22,729

 

16.6

 

Aircraft and passenger servicing

 

2,221

 

7.7

 

14,508

 

19.4

 

Commissions and other selling

 

1,260

 

4.1

 

9,230

 

10.4

 

Depreciation and amortization

 

(891

)

(3.9

)

(2,694

)

(4.2

)

Other rentals and landing fees

 

(524

)

(2.3

)

(2,713

)

(4.3

)

Other

 

4,621

 

11.5

 

16,139

 

14.2

 

Total

 

$

50,475

 

10.6

%

$

171,875

 

12.7

%

 

Our operations have expanded by approximately 9.0% and 17.9% (measured in ASMs) during the three and nine months ended September 30, 2013, respectively, as compared to the prior-year periods, primarily due to the addition of four Airbus A330-200 aircraft, offset by the return of two leased Boeing 767-300 aircraft.  Our expansion includes the addition of new North America and International routes since September 30, 2012.  As a result of this expansion, we have experienced corresponding increases in our variable expenses such as aircraft fuel, wages and benefits, maintenance materials and repairs, aircraft and passenger servicing, commissions and other selling, and other expenses (which primarily consists of purchased services).

 

We expect operating expenses to increase with the continued expansion of our services and the increase in the number of aircraft in our fleet.

 

Aircraft Fuel

 

Aircraft fuel expense increased during the three and nine months ended September 30, 2013 as compared to the prior-year periods, primarily due to an increase in fuel consumption due to the additional aircraft that entered the fleet subsequent to September 30, 2012 (four additional Airbus A330-200 aircraft, partially offset by two Boeing 767-300 aircraft returned at the end of its lease term), as illustrated in the following table:

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2013

 

2012

 

Change

 

2013

 

2012

 

Change

 

 

 

(in thousands, except per-
gallon amounts)

 

 

 

(in thousands, except per-
gallon amounts)

 

 

 

Aircraft fuel expense, including taxes and delivery

 

$

181,334

 

$

165,762

 

9.4

%

$

525,046

 

$

456,545

 

15.0

%

Fuel gallons consumed

 

59,265

 

54,535

 

8.7

%

169,824

 

145,006

 

17.1

%

Avearge fuel price per gallon, including taxes and delivery

 

$

3.06

 

$

3.04

 

0.7

%

$

3.09

 

$

3.15

 

(1.9

)%

 

During the three and nine months ended September 30, 2013 and 2012, our fuel derivatives were not designated for hedge accounting under ASC 815 and were marked to fair value through nonoperating income (expense) in the unaudited Consolidated Statements of Operations set forth in the Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.  We recorded gains on fuel derivatives of $2.5 million for the three months ended September 30, 2013 and losses of $10.9 million for the nine months ended September 30, 2013, compared to gains of $6.5 million and losses of $2.5 million for the same three and nine month period in 2012, respectively.

 

We believe economic fuel expense is the best measure of the effect of fuel prices on our business as it most closely approximates the net cash outflow associated with the purchase of fuel for our operations in a period and is consistent with how management manages our business and assesses our operating performance.  We define economic fuel expense as raw fuel expense plus (gains)/losses realized through actual cash payments to/(receipts from) hedge counterparties for fuel hedge derivatives settled in the period inclusive of costs related to hedging premiums.  Economic fuel expense for the three and nine months ended September 30, 2013 and 2012 is calculated as follows:

 

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Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2013

 

2012

 

Change

 

2013

 

2012

 

Change

 

 

 

(in thousands, except per-
gallon amounts)

 

 

 

(in thousands, except per-
gallon amounts)

 

 

 

Aircraft fuel expense, including taxes and delivery

 

$

181,334

 

$

165,762

 

9.4

%

$

525,046

 

$

456,545

 

15.0

%

Realized losses on settlement of fuel derivative contracts

 

3,790

 

1,589

 

138.5

%

11,226

 

4,318

 

160.0

%

Economic fuel expense

 

$

185,124

 

$

167,351

 

10.6

%

$

536,272

 

$

460,863

 

16.4

%

Fuel gallons consumed

 

59,265

 

54,535

 

8.7

%

169,824

 

145,006

 

17.1

%

Economic fuel costs per gallon

 

$

3.12

 

$

3.07

 

1.6

%

$

3.16

 

$

3.18

 

(0.6

)%

 

See Item 3, Quantitative and Qualitative Disclosures About Market Risk, for additional discussion of our jet fuel costs and related derivative program.

 

Wages and Benefits

 

Wages and benefits expense increased by $18.7 million, or 20.0%, and $38.0 million, or 13.6%, for the three and nine months ended September 30, 2013, respectively, as compared to the prior-year periods, due to a 10% increase in the number of employees (5,233 and 4,756 active employees as of September 30, 2013 and 2012, respectively) as we continue to expand our operations with additional aircraft and new routes, as well as an increase in our pension and other post-retirement expenses of $2.0 million and $4.0 million for the three and nine months ended September 30, 2013, as compared to the prior-year periods.

 

We expect wages and benefits expense to increase in future periods as we continue to hire employees for the expansion of our operations.

 

Aircraft Rent

 

Aircraft rent expense increased by $1.9 million, or 7.6%, and $8.2 million, or 11.1%, for the three and nine months ended September 30, 2013, respectively, as compared to the prior-year periods, primarily due to the addition of two Airbus A330-200 aircraft under operating leases (one in February 2013 and one in April 2013), partially offset by the return of two Boeing 767-300 aircraft at the end of their lease terms in April and August 2013.

 

We expect aircraft rent expense to increase in 2014 as we operate for a full year with our current fleet of A330 aircraft.  However, in future periods we expect aircraft rent expense to decrease with the planned return of operating leased aircraft.

 

Maintenance materials and repairs

 

Maintenance materials and repairs expense increased by $7.6 million, or 17.1%, and $22.7 million, or 16.6%, for the three and nine months ended September 30, 2013, respectively, primarily due to the increase in the number of Airbus A330-200 aircraft in our fleet, as compared to the prior-year periods.

 

We expect maintenance materials and repairs expense to increase in future periods as we continue to integrate additional Airbus aircraft into revenue service.

 

Aircraft and passenger servicing

 

Aircraft and passenger servicing expenses increased by $2.2 million, or 7.7%, for the three months ended September 30, 2013, as compared to the prior-year period, primarily due to increased ground handling expenses of $1.1 million, as we expanded to new international destinations.

 

Aircraft and passenger servicing expenses increased by $14.5 million, or 19.4%, for the nine months ended September 30, 2013, as compared to the prior-year period, due to increased food and beverage expenses of $7.8 million and ground handling expenses of $4.4 million, as we expanded to new international destinations.

 

We expect aircraft and passenger servicing expenses to increase in future periods as we continue to expand our fleet and add additional routes.

 

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Commissions and other selling

 

Commissions and other selling expenses increased by $1.3 million, or 4.1%, for the three months ended September 30, 2013, as compared to the prior-year period, primarily due to increased advertising and promotional expenses.

 

Commissions and other selling expenses increased by $9.2 million, or 10.4%, for the nine months ended September 30, 2013, as compared to the prior-year period, due to increases in volume-related selling expenses, which include increased travel agency commissions of $4.1 million, and increased advertising and promotional expenses of $3.1 million.

 

We expect commissions and other selling expenses to increase in future periods as we continue to expand our fleet and add additional routes.

 

Depreciation and Amortization

 

Depreciation and amortization expense decreased by $0.9 million, or 3.9%, and $2.7 million, or 4.3%, for the three and nine months ended September, 30, 2013, respectively, as compared to the prior-year periods, primarily due to our frequent flyer marketing relationship intangible asset which was fully amortized as of December 31, 2012, which was partially offset by the increase in the number of owned aircraft (two A330-200 aircraft in April and June 2013).

 

We expect depreciation and amortization expenses to increase in future periods as we continue to expand our fleet.

 

Other rentals and landing fees

 

Other rentals and landing fees expense decreased by $0.5 million, or 2.3%, and $2.7 million, or 4.3%, for the three and nine months ended September 30, 2013, respectively, as compared to the prior-year period, primarily due to decreased rental and landing fee rates at our Honolulu operational facility.

 

We expect expenses for other rentals and landing fees to increase in future periods as we continue to add additional routes and increase frequency on our existing routes.

 

Other expense

 

Other expense increased by $4.6 million, or 11.5%, and $16.1 million, or 14.2%, for the three and nine months ended September 30, 2013, respectively, as compared to the prior-year period, primarily due to increased expense incurred on services outsourced to third-party vendors resulting from our continued expansion.

 

We expect other expenses to increase in future periods as we continue to expand our operations.

 

Nonoperating Expense

 

For the three months ended September 30, 2013, net nonoperating expense increased by $5.9 million from the same three month period in 2012, due to decreased gains on fuel derivatives of $4.0 million and increased interest and amortization of debt discounts and issuance costs of $1.5 million due to the additional financings we entered into subsequent to September 30, 2012.

 

For the nine months ended September 30, 2013, net nonoperating expense increased by $16.5 million from the same nine month period in 2012, due to increased losses on fuel derivatives of $8.4 million, and increased interest and amortization of debt discounts and issuance costs of $5.3 million due to the additional financings we entered into subsequent to September 30, 2012.

 

In May 2013, Hawaiian closed an EETC financing, the proceeds of which will fund a portion of the purchase price of six (6) new Airbus aircraft scheduled for delivery from November 2013 through October 2014.  The proceeds of the EETC financing will be used to purchase equipment notes to be issued by Hawaiian from November 2013 through October 2014.  We expect that the issuance of these equipment notes will significantly increase our interest expense starting in 2014, which is when all equipment notes are expected to be issued and outstanding.

 

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Income Tax Expense (Benefit)

 

We had effective tax rates of 39.8% and 38.4% for the three months ended September 30, 2013 and 2012, respectively, and 40.3% and 38.4% for the nine months ended September 30, 2013 and 2012, respectively.  We consider a variety of factors in determining the effective tax rate, including our forecasted full-year pretax results, the U.S. federal statutory rate of 35%, expected nondeductible expenses and estimated state taxes.

 

As of December 31, 2012, we had net operating loss carryforwards (NOLs) of approximately $232.0 million, which expire in various years beginning in 2031, if not utilized.  In general, under Section 382 of the Internal Revenue Code of 1986, as amended (the Code), a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change NOLs to offset future taxable income.  In general, an “ownership change” occurs if there is a cumulative change in our ownership by “5% shareholders” that exceeds 50 percentage points over a rolling three-year period.  Our existing NOLs may be subject to limitations arising from previous ownership changes, and if we undergo one or more ownership changes in connection with new or existing stockholders initiating or increasing their positions in our stock, our ability to utilize NOLs could be further limited by Section 382 of the Code.  As a result of these limitations, we may not be able to utilize a material portion of the NOLs reflected on our balance sheet, which would require us to establish a valuation allowance over our deferred tax assets.  The establishment of a tax valuation allowance could have a significant, adverse impact on the Company’s future financial performance by increasing the amount of income tax expense recognized during the affected period.

 

Liquidity and Capital Resources

 

Our liquidity is dependent on the cash we generate from operating activities and our debt financing arrangements.  As of September 30, 2013, we had $441.4 million in cash and cash equivalents, representing an increase of $35.5 million from December 31, 2012.  As of September 30, 2013, our restricted cash balance of $21.0 million consisted of cash held as collateral by entities that process our credit card transactions for advanced ticket sales and cash held as collateral for future interest payments owed in connection with the EETC financing which closed in May 2013.  Our December 31, 2012 balance of $5.0 million reflects cash held as collateral by entities that process our credit card transactions for advanced ticket sales.

 

We have been able to generate sufficient funds from our operations to meet our working capital requirements and typically finance our aircraft through secured debt and lease financings.  At September 30, 2013, Hawaiian had approximately $762.7 million of debt and capital lease obligations, including approximately $111.0 million that will become due in the next 12 months.  Hawaiian has a secured revolving credit facility (the Revolving Credit Facility) in an amount of up to $75.0 million, and as of September 30, 2013, we had no outstanding borrowings under the Revolving Credit Facility and $69.8 million available (net of various outstanding letters of credit).

 

See Note 9 to the financial statements included in Part I, Item 1 of this report for additional information on the EETC financing which closed in May 2013.  In addition, we have backstop financing available from aircraft and engine manufacturers, subject to certain customary conditions.  Financing will be necessary to satisfy the Company’s capital commitments for its firm order aircraft and other related capital expenditures. The Company can provide no assurance that any financing not already in place for aircraft and spare engine deliveries will be available to the Company on acceptable terms when necessary or at all.

 

Cash Flows

 

Net cash provided by operating activities was $207.5 million and $249.4 million for the nine months ended September 30, 2013 and 2012, respectively.  The decrease in cash provided by operating activities was due to the decline in our financial performance from the prior-year period, as we generated net income of $34.8 million for the nine months ended September 30, 2013 compared to net income of $56.6 million for the nine months ended September 30, 2012.  Also, during the nine months ended September 30, 2012, approximately $25.9 million was reclassified from restricted to unrestricted cash due to a reduction in the amount of proceeds that were required to be held by our credit card processor as collateral.

 

Net cash used in investing activities was $232.7 million and $216.0 million for the nine months ended September 30, 2013 and 2012, respectively.  During the nine months ended September 30, 2013, the cash used in investing activities consisted of payments of $302.8 million for purchases of property and equipment and pre-delivery deposits for aircraft and engines, partially offset by proceeds of $70.1 million from the refund of pre-delivery deposits in connection with the purchase assignments of two of our Airbus A330-200 aircraft.  During the nine months ended September 30, 2012, the cash used in investing activities consisted of payments of $250.5 million for purchases of property and equipment and pre-delivery deposits for aircraft and engines, partially offset by proceeds of $34.5 million from the refund of pre-delivery deposits in connection with the purchase assignment of an Airbus A330-200 aircraft.

 

Net cash provided by financing activities was $60.8 million and $95.9 million for the nine months ended September 30, 2013 and 2012, respectively.  During the nine months ended September 30, 2013, we received $132.0 million from two term loans that was used to finance a portion of the purchase price of two Airbus A330-200 aircraft that we acquired in 2013, which was offset by $45.2 million in repayments of long-term debt and capital lease obligations, debt issuance payments of $12.4 million, and a $16.0 million collateral payment that was made in connection with the issuance of the EETCs.  During the nine months ended September 30, 2012, we received $133.0 million from two term loans that was used to finance a portion of the purchase price of two Airbus A330-200 aircraft that we acquired in March and April 2012, partially offset by $35.2 million in repayments of long-term debt and capital lease obligations and debt issuance costs of $3.1 million.

 

In May 2013, Hawaiian created two pass-through trusts, one of which issued $328.2 million aggregate principal amount of Class A pass-through certificates with a stated interest rate of 3.9% and the second of which issued $116.3 million aggregate principal amount of Class B pass-through certificates with a stated interest rate of 4.95%. The proceeds of the issuance of the Class A and Class B pass-through certificates, which amounted to $444.5 million, will be used to purchase equipment notes to be issued by Hawaiian in the future to finance the purchase of six (6) new Airbus aircraft scheduled for delivery from November 2013 through October 2014. Hawaiian has not yet issued any of the equipment notes or received any of the proceeds raised by the pass-through trusts. Hawaiian expects to issue the equipment notes to the trusts as aircraft are

 

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delivered to Hawaiian. Hawaiian expects to record the debt obligation upon issuance of the equipment notes rather than upon the initial issuance of the pass-through certificates. The proceeds are expected to be used to fund the acquisition of new aircraft.

 

Capital Commitments

 

As of September 30, 2013, we had the following capital commitments consisting of firm aircraft and engine orders and purchase rights:

 

Aircraft Type

 

Firm
Orders

 

Purchase
Rights

 

Expected Delivery Dates

 

 

 

 

 

 

 

 

 

A330-200 aircraft

 

9

 

3

 

Between 2013 and 2015

 

A350XWB-800 aircraft

 

6

 

6

 

Between 2017 and 2020

 

A321neo aircraft

 

16

 

9

 

Between 2017 and 2020

 

Rolls-Royce spare engines:

 

 

 

 

 

 

 

A330-200 spare engines

 

2

 

 

In 2014

 

A350XWB-800 spare engines

 

2

 

 

Between 2017 and 2020

 

Pratt & Whitney spare engines:

 

 

 

 

 

 

 

A321neo spare engines

 

2

 

 

Between 2017 and 2018

 

 

Committed expenditures for these aircraft, engines and related flight equipment approximates $90 million for the remainder of 2013, $421 million in 2014, $246 million in 2015, $148 million in 2016, $494 million in 2017 and $1.1 billion thereafter.

 

For the remainder of 2013, we expect our other non-aircraft related capital expenditures, which include software, improvements and ramp and maintenance equipment to total approximately $10 million to $20 million.

 

In order to complete the purchase of these aircraft and fund related costs, we must secure acceptable financing. We are currently exploring various financing alternatives, and while we believe that such financing will be available to us, there can be no assurance that financing will be available when required, or on acceptable terms, or at all. The inability to secure such financing could have a material adverse effect on our operations.

 

We secured financing of $444.5 million through the EETC financing in May 2013, the proceeds of which will provide financial support for the purchase price of six Airbus A330-200 aircraft deliveries, commencing in November 2013 through October 2014.  In addition, we have backstop financing available from aircraft and engine manufacturers, subject to certain customary conditions.  See Note 9 for further detail regarding the EETC financing, our aircraft facilities and lease commitments.

 

Covenants under our Financing Arrangements

 

The terms of certain of our financing agreements restrict our ability to, among other things, incur additional indebtedness, grant liens, merge or consolidate, dispose of assets, prepay indebtedness, make investments, make acquisitions, enter into certain transactions with affiliates, repurchase stock and, in the case of Hawaiian, pay dividends or make distributions to the Company.  These agreements also require us to meet certain financial covenants.  These financial tests include maintaining a minimum amount of unrestricted cash and achieving certain levels of fixed charge coverage.  As of September 30, 2013, we were in compliance with these covenants.  If we are not able to comply with these covenants in the future, our outstanding obligations under these facilities could be accelerated and become due and payable immediately.

 

Under our 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 our unaudited Consolidated Balance Sheets set forth in the Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q, totaled $5.0 million at both September 30, 2013 and December 31, 2012.

 

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 result in an increase in the required level of restricted cash.  If we are unable to obtain a waiver of, or otherwise mitigate the increase in the restriction of cash, it could also result in a covenant violation under other debt or lease requirements and have a material adverse impact on our operations.

 

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Pension and Postemployment Benefit Plan Funding

 

We contributed $11.9 million and $18.6 million to our defined benefit and other postretirement plans during the three and nine months ended September 30, 2013, respectively, satisfying our required contribution for 2013.  Future funding requirements for our defined benefit plans are dependent upon many factors such as interest rates, funded status, applicable regulatory requirements and the level and timing of asset returns.

 

Contractual Obligations

 

Our estimated contractual obligations as of September 30, 2013 are summarized in the following table:

 

Contractual Obligations

 

Total

 

Remaining
months in
2013

 

2014 - 2015

 

2016 - 2017

 

2018 and 
thereafter

 

 

 

(in thousands)

 

Debt and capital lease obligations (1) 

 

$

985,349

 

$

78,925

 

$

195,829

 

$

267,956

 

$

442,639

 

Operating leases—aircraft and related equipment (2) 

 

689,068

 

24,469

 

192,740

 

158,192

 

313,667

 

Operating leases—non-aircraft

 

40,995

 

1,098

 

8,114

 

6,813

 

24,970

 

Purchase commitments - Capital (3) 

 

2,504,891

 

90,486

 

667,061

 

641,648

 

1,105,696

 

Purchase commitments - Operating (4) 

 

414,505

 

12,081

 

97,310

 

71,851

 

233,263

 

Projected employee benefit contributions (5) 

 

28,413

 

 

28,413

 

 

 

Total contractual obligations

 

$

4,663,221

 

$

207,059

 

$

1,189,467

 

$

1,146,460

 

$

2,120,235

 

 


(1)                                 Amounts represent contractual amounts due, including interest. Interest on variable-rate debt was estimated using rates in effect as of September 30, 2013. Amount reflects capital lease obligations for one Airbus A330-200 aircraft, two Boeing 717 aircraft and one A330 flight simulator.

 

(2)                                 Amounts reflect leases for six Airbus A330-200 aircraft, seven Boeing 767 aircraft, one Boeing 717 aircraft and aircraft-related equipment as of September 30, 2013.

 

(3)                                 Amounts include our firm commitments for aircraft and aircraft related equipment including aircraft orders consisting of 9 wide-body Airbus A330-200 aircraft, 16 narrow-body Airbus A321neo aircraft, six Airbus A350XWB-800 aircraft, four Rolls Royce spare engines and two Pratt and Whitney spare engines. We have secured financing in the amount of $444.5 million from the EETC financing for a portion of the purchase price of six Airbus A330-200 aircraft deliveries, commencing in November 2013 through October 2014.

 

(4)                                 Amounts include commitments for services provided by third-parties for aircraft maintenance for our Airbus fleet, accounting, IT and reservations. Total contractual obligations do not include long-term contracts where the commitment is variable in nature (with no minimum guarantee), such as aircraft maintenance deposits due under operating leases and fees due under certain other agreements such as aircraft maintenance power-by-the-hour, computer reservation systems and credit card processing agreements, or when the agreements contain short-term cancellation provisions.

 

(5)                                 Amount includes our estimated contributions to our pension plans (based on actuarially determined estimates) and our pilots’ disability plan. Amounts are subject to change based on numerous factors, including interest rate levels, the amount and timing of asset returns and the impact of future legislation. We are currently unable to estimate the projected contributions beyond 2015.

 

Non-GAAP Financial Measures

 

We believe the disclosure of non-GAAP financial measures is useful information to readers of our financial statements because:

 

·                  We believe it is the basis by which we are evaluated by industry analysts and investors;

 

·                  These measures are often used in management and board of directors decision making analysis;

 

·                  It improves a reader’s ability to compare our results to those of other airlines; and

 

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·                  It is consistent with how we present information in our quarterly earnings press releases.

 

Economic Fuel Expense

 

See table below for reconciliation between GAAP consolidated net income to adjusted consolidated net income, including per share amounts for the three and nine months ended September 30, 2013 and 2012 (in thousands unless otherwise indicated).

 

 

 

Three Months ended September 30,

 

Nine Months ended September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

Net Income

 

Diluted net
income
per share

 

Net Income

 

Diluted net
income
per share

 

Net Income

 

Diluted net
income
per share

 

Net Income

 

Diluted net
income
per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As reported - GAAP

 

$

40,604

 

$

0.76

 

$

45,483

 

$

0.86

 

$

34,775

 

$

0.65

 

$

56,645

 

$

1.08

 

Add: unrealized gains on fuel derivative contracts, net of tax

 

(3,796

)

(0.07

)

(4,858

)

(0.09

)

(177

)

 

(1,094

)

(0.02

)

Reflecting economic fuel expense

 

$

36,808

 

$

0.69

 

$

40,625

 

$

0.77

 

$

34,598

 

$

0.65

 

$

55,551

 

$

1.06

 

 

Operating Costs per Available Seat Mile (CASM)

 

We have listed separately in the table below our fuel costs per ASM and our non-GAAP unit costs, excluding fuel for the three and nine months ended September 30, 2013 and 2012. These amounts are included in CASM, but for internal purposes we consistently use unit cost metrics that exclude fuel and non-recurring items (if applicable) to measure and monitor our costs.

 

CASM and CASM, excluding fuel, for the three and nine months ended September 30, 2013 and 2012 are summarized in the table below:

 

 

 

Three Months ended September 30,

 

Nine Months ended September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

GAAP operating expenses

 

$

524,864

 

$

474,389

 

$

1,524,081

 

$

1,352,206

 

Less: aircraft fuel, including taxes and delivery

 

(181,334

)

(165,762

)

(525,046

)

(456,545

)

Adjusted operating expenses - excluding aircraft fuel

 

$

343,530

 

$

308,627

 

$

999,035

 

$

895,661

 

 

 

 

 

 

 

 

 

 

 

Available Seat Miles

 

4,415,096

 

4,052,248

 

12,596,765

 

10,680,632

 

 

 

 

 

 

 

 

 

 

 

CASM - GAAP

 

11.89

¢

11.71

¢

12.10

¢

12.66

¢

Less: aircraft fuel

 

(4.11

)

(4.09

)

(4.17

)

(4.27

)

CASM - excluding aircraft fuel

 

7.78

¢

7.62

¢

7.93

¢

8.39

¢

 

Critical Accounting Policies

 

The discussion and analysis of our financial condition and results of operations are based upon financial statements that have been prepared in accordance with U.S. generally accepted accounting principles.  The preparation of these financial statements requires management to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities as of the date of the financial statements.  Actual results may differ from these estimates under different assumptions and/or conditions.

 

Critical accounting policies and estimates are defined as those accounting policies and accounting estimates that are reflective of significant judgments and uncertainties that potentially result in materially different results under different assumptions and conditions.  For a detailed discussion of the application of our critical accounting policies, see “Critical Accounting Policies” and Note 2, “Summary of Significant Accounting Policies,” to our Consolidated Financial Statements for the year ended December 31, 2012 included in our Annual Report on Form 10-K and current report on Form 8-K filed on March 14, 2013, respectively.

 

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ITEM 3.                                                QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

We are subject to certain market risks, including commodity price risk (i.e. jet fuel prices), interest rate risk and foreign currency risk.  We have market-sensitive instruments in the form of variable-rate debt and financial derivatives used to offset Hawaiian’s exposure to jet fuel price increases, and financial hedge instruments used to hedge Hawaiian’s exposure to variable interest rate risk and foreign currency exchange risk.  The adverse effects of potential changes in these market risks are discussed below.

 

The sensitivity analyses presented do not consider the effects that such adverse changes may have on overall economic activity nor do they consider additional actions we might undertake to mitigate our exposure to such changes.  Actual results may differ.

 

Aircraft Fuel Costs

 

Aircraft fuel costs constitute a significant portion of our operating expense.  Fuel costs represented 34.5% of our operating expenses for the three and nine months ended September 30, 2013, and 34.9% and 33.8% of our operating expenses for the three and nine months ended September 30, 2012, respectively.  Based on gallons expected to be consumed for the remainder of 2013, for every one cent increase in the cost of a gallon of jet fuel, our fuel expense would increase by approximately $0.6 million.

 

We periodically enter into derivative financial instruments to manage our exposure to changes in the price of jet fuel.  During 2013, we expect our fuel hedge program to primarily consist of Brent crude oil call options and collars (combinations of purchased call options and sold put options of crude oil), heating oil put options, and fixed forward price contracts.  Call option contracts provide for a settlement in favor of the holder in the event the prices exceed a predetermined contractual level during a particular time period.  Collars provide for a settlement in our favor in the event prices for the underlying commodity exceed a predetermined contractual level (the call option strike price) during a particular time period.  Put option contracts provide for a settlement in favor of the holder in the event the prices fall below a predetermined contractual level during a particular time period.  Fixed forward price contracts would allow us to fix our fuel price for a predetermined quantity over a particular period of time.

 

The aforementioned fuel derivative agreements were not designated as hedges under ASC 815.  As of September 30, 2013, the fair value of these fuel derivative agreements reflected a net asset of $5.0 million that is recorded in prepaid expenses and other and a net asset of $1.0 million that is recorded in long-term prepayments and other in the unaudited Consolidated Balance Sheets set forth in the Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.

 

We expect to continue our program of offsetting some of our exposure to future changes in the price of jet fuel with a combination of futures contracts, swaps, calls, collars and other option-based structures.

 

We do not hold or issue derivative financial instruments for trading purposes.  We are exposed to credit risks in the event our crude oil counterparties fail to meet their obligations; however, we do not expect these counterparties to fail to meet their obligations.

 

Interest Rates

 

Our results of operations are affected by fluctuations in interest rates due to our variable-rate debt and interest income earned on our cash deposits.  Our variable-rate debt agreements include the Revolving Credit Facility and a secured loan agreement, the terms of which are discussed in Note 6 to our Consolidated Financial Statements included in our current report on Form 8-K filed on March 14, 2013 and Note 6 of this Quarterly Report on Form 10-Q.

 

At September 30, 2013, we had $120.0 million of variable-rate debt indexed to the following interest rate:

 

Index

 

Rate

 

One-month LIBOR

 

0.1806

%

 

Changes in market interest rates have a direct and corresponding effect on our pre-tax earnings and cash flows associated with our variable-rate debt and interest-bearing cash accounts.  Based on the balances of our cash and cash equivalents, restricted cash, and variable-rate debt as of September 30, 2013, a change in interest rates is unlikely to have a material impact on our results of operations.

 

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At September 30, 2013, we had $642.8 million of fixed-rate debt including aircraft capital lease obligations, a convertible note and facility agreements for aircraft purchases.  Market risk for fixed-rate long-term debt is estimated as the potential increase in fair value resulting from a hypothetical 10% decrease in interest rates, and amounted to approximately $3.7 million as of September 30, 2013.

 

In December 2012, we entered into an agreement to issue fixed-rate debt to finance a portion of the purchase price of an Airbus A330-200 aircraft.  The interest rate associated with this debt agreement was fixed in June 2013 and was based on a market index rate.  Between the time the agreement was executed and the interest rate was fixed — a period of six months — we were exposed to interest rate risk in the event the applicable market index rate significantly increased.

 

In April 2013, we issued variable-rate debt to finance a portion of the purchase price of another Airbus A330-200 aircraft.  The interest rate associated with this debt is based on a market index rate that resets every three months.

 

To limit our exposure to significant increases in the applicable market index rates for both the fixed-rate and variable-rate debt, we entered into forward starting interest swap agreements.  These instruments are designated as cash flow hedges under ASC 815.  See Note 5 for further discussion over our interest rate swap hedges.

 

In June 2013, we terminated the interest rate swap used to hedge the variability of the fixed-rate debt, which resulted in a realized gain of $0.7 million.  This gain will reduce the future interest expense over the life of this the debt.

 

A hypothetical 10 percent decrease in the swap rate as of September 30, 2013 will not have a material impact on interest expense related to the variable-rate debt for the remainder of 2013.  As of December 31, 2012, we did not have any interest rate hedges.

 

Foreign Currency

 

We generate revenues and incur expenses in foreign currencies.  Changes in foreign currency exchange rates impact our results of operations through changes in the dollar value of foreign currency-denominated operating revenues and expenses.  Our most significant foreign currency exposures are the Japanese Yen and Australian Dollar.  Based on expected 2013 revenues and expenses dominated in Japanese Yen and Australian Dollars, a 10% strengthening in value of the U.S. dollar, relative to the Japanese Yen and Australian Dollar, would result in a decrease in operating income of approximately $2.1 million and $2.7 million, respectively, which includes the offset of the hedges discussed below.  This potential impact to the results of our operation is driven by the inherent nature of our international operations, which requires us to accept a large volume of sales transactions denominated in foreign currencies while few expense transactions are settled in foreign currencies.  This disparity is the primary factor in our exposure to foreign currencies.

 

The aforementioned foreign currency forwards were designated as cash flow hedges under ASC 815.  As of September 30, 2013, the fair value of our foreign currency forwards reflected a net asset of $2.3 million that is recorded in prepaid expenses and other, and a net liability of $0.1 million recorded in other liabilities and deferred credits in the unaudited Consolidated Balance Sheets set forth in the Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.

 

ITEM 4.                                                CONTROLS AND PROCEDURES.

 

Evaluation of Disclosure Controls and Procedures

 

Our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), performed an evaluation of our disclosure controls and procedures, which have been designed to permit us to effectively identify and timely disclose important information.  Based on that evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures were effective as of September 30, 2013 to provide reasonable assurance that the information required to be disclosed by the Company in reports it files under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and is accumulated and communicated to our management, including our CEO and CFO, to allow timely decisions regarding required disclosure.

 

Changes in Internal Control over Financial Reporting

 

There was no change in our internal control over financial reporting during the quarter ended September 30, 2013 which materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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Inherent Limitations on Effectiveness of Controls

 

A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, will be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of effectiveness of controls to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

 

PART II.  OTHER INFORMATION

 

ITEM 1.                                                LEGAL PROCEEDINGS.

 

We are not a party to any litigation that is expected to have a significant effect on our operations or business.

 

ITEM 1A.                                       RISK FACTORS.

 

See Part I, Item 1A., “Risk Factors,” of our 2012 Annual Report and Part II, Item 1A., “Risk Factors,” of our Form 10-Q for the quarters ended March 31, 2013 and June 30, 2013 for a detailed discussion of the risk factors affecting our business, results of operations and financial condition.

 

ITEM 2.                                                UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

None.

 

ITEM 3.                                                DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 5.                                                OTHER INFORMATION.

 

None.

 

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ITEM 6.                                                EXHIBITS.

 

Exhibit No.

 

Description

 

 

 

12

 

Computation of ratio of earning to fixed charges for the three and nine months ended September 30, 2013 and 2012.

 

 

 

31.1

 

Rule 13a-14(a) Certification of Chief Executive Officer.

 

 

 

31.2

 

Rule 13a-14(a) Certification of Chief Financial Officer.

 

 

 

32.1

 

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.2

 

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101.INS

 

XBRL Instance Document

101.SCH

 

XBRL Taxonomy Extension Schema Document

101.CAL

 

XBRL Taxonomy Extension Valuation Linkbase Document

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

HAWAIIAN HOLDINGS, INC.

 

 

 

 

October 24, 2013

By

/s/ Scott E. Topping

 

 

Scott E. Topping

 

 

Executive Vice President, Chief Financial Officer and Treasurer

 

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