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HAWAIIAN HOLDINGS INC - Quarter Report: 2019 September (Form 10-Q)



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 FORM 10-Q
 
      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
or
          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)
Securities registered pursuant to Section 12(b) of the Act:
 
 
Title of each class
 
Trading symbol(s)
 
Name of each exchange on which registered
Common Stock ($0.01 par value)
 
HA
 
NASDAQ Stock Market, LLC
 
 
 
 
(NASDAQ Global Select Market)
Securities registered pursuant to Section 12(g) of the Act: None
 
 
 
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.   Yes o No
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).   Yes o No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
 
Large accelerated filer
 
Accelerated filer 
 
 
Non-accelerated filer 
 
Smaller reporting company 
 
 
 
 
 
Emerging growth company 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes  No
 
As of October 18, 2019, 46,591,737 shares of the registrant’s common stock were outstanding.




Hawaiian Holdings, Inc.
Form 10-Q
Quarterly Period ended September 30, 2019
 
Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2



PART I. FINANCIAL INFORMATION

ITEM 1.                   FINANCIAL STATEMENTS.
Hawaiian Holdings, Inc.
Consolidated Statements of Operations
(in thousands, except per share data)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
(unaudited)
Operating Revenue:
 
 

 
 

 
 
 
 
Passenger
 
$
694,263

 
$
697,232

 
$
1,948,990

 
$
1,963,994

Other
 
60,888

 
61,855

 
175,101

 
175,952

Total
 
755,151

 
759,087

 
2,124,091

 
2,139,946

Operating Expenses:
 
 

 
 

 
 
 
 
Wages and benefits
 
182,862

 
176,642

 
537,997

 
516,906

Aircraft fuel, including taxes and delivery
 
138,586

 
162,932

 
405,290

 
449,404

Maintenance, materials and repairs
 
61,363

 
57,118

 
182,539

 
176,229

Aircraft and passenger servicing
 
41,762

 
42,063

 
120,303

 
117,207

Depreciation and amortization
 
41,596

 
36,373

 
119,274

 
101,537

Aircraft rent
 
30,534

 
31,768

 
91,773

 
93,533

Commissions and other selling
 
33,291

 
32,704

 
96,598

 
96,482

Other rentals and landing fees
 
33,345

 
33,227

 
95,777

 
95,226

Purchased services
 
33,120

 
32,509

 
98,306

 
95,104

Contract terminations expense
 

 

 

 
35,322

Other
 
42,056

 
37,925

 
118,041

 
117,977

Total
 
638,515

 
643,261

 
1,865,898

 
1,894,927

Operating Income
 
116,636

 
115,826

 
258,193

 
245,019

Nonoperating Income (Expense):
 
 

 
 

 
 
 
 
Interest expense and amortization of debt discounts and issuance costs
 
(6,438
)
 
(8,446
)
 
(21,268
)
 
(24,628
)
Gains (losses) on fuel derivatives
 
(4,553
)
 
3,495

 
(7,203
)
 
27,064

Interest income
 
3,148

 
3,124

 
9,205

 
6,529

Capitalized interest
 
1,171

 
1,821

 
3,713

 
6,414

Other, net
 
(1,445
)
 
937

 
(5,553
)
 
(759
)
Total
 
(8,117
)
 
931

 
(21,106
)
 
14,620

Income Before Income Taxes
 
108,519

 
116,757

 
237,087

 
259,639

Income tax expense
 
28,443

 
23,215

 
62,820

 
58,075

Net Income
 
$
80,076

 
$
93,542

 
$
174,267

 
$
201,564

Net Income Per Common Stock Share:
 
 

 
 

 
 
 
 
Basic
 
$
1.70

 
$
1.85

 
$
3.65

 
$
3.97

Diluted
 
$
1.70

 
$
1.84

 
$
3.64

 
$
3.96

Weighted Average Number of Common Stock Shares Outstanding:
 
 
 
 
 
 
 
 
Basic
 
47,119

 
50,594

 
47,784

 
50,807

Diluted
 
47,236

 
50,731

 
47,847

 
50,935



See accompanying Notes to Consolidated Financial Statements.

3



Hawaiian Holdings, Inc.
Consolidated Statements of Comprehensive Income
(in thousands)

 
 
Three Months Ended September 30,
 
 
2019
 
2018
 
 
(unaudited)
Net Income
 
$
80,076

 
$
93,542

Other comprehensive income, net:
 
 

 
 

Net change related to employee benefit plans, net of tax expense of $38 and $146 for 2019 and 2018, respectively
 
786

 
641

Net change in derivative instruments, net of tax expense of $690 and $1,396 for 2019 and 2018, respectively
 
2,096

 
4,292

Net change in available-for-sale investments, net of tax expense of $32 and $53 for 2019 and 2018, respectively
 
92

 
167

Total other comprehensive income
 
2,974

 
5,100

Total Comprehensive Income
 
$
83,050

 
$
98,642


 
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
 
(unaudited)
Net Income
 
$
174,267

 
$
201,564

Other comprehensive income, net:
 
 

 
 

Net change related to employee benefit plans, net of tax expense of $390 and $478 for 2019 and 2018, respectively
 
2,031

 
1,668

Net change in derivative instruments, net of tax benefit of $122 and net of tax expense of $2,050 for 2019 and 2018, respectively
 
(405
)
 
6,311

Net change in available-for-sale investments, net of tax expense of $457 and net of tax benefit of $42 for 2019 and 2018, respectively
 
1,401

 
(126
)
Total other comprehensive income
 
3,027

 
7,853

Total Comprehensive Income
 
$
177,294

 
$
209,417



See accompanying Notes to Consolidated Financial Statements.


4



Hawaiian Holdings, Inc.
Consolidated Balance Sheets
(in thousands, except shares)
 
 
September 30, 2019
(unaudited)
 
December 31, 2018
ASSETS
 
 

 
 

Current Assets:
 
 

 
 

Cash and cash equivalents
 
$
512,162

 
$
268,577

Short-term investments
 
232,444

 
232,241

Accounts receivable, net
 
145,466

 
111,834

Spare parts and supplies, net
 
37,536

 
33,942

Prepaid expenses and other
 
54,095

 
58,573

Total
 
981,703

 
705,167

Property and equipment, less accumulated depreciation and amortization of $738,574 and $663,461 as of September 30, 2019 and December 31, 2018, respectively
 
2,240,442

 
2,185,111

Other Assets:
 
 

 
 

Operating lease right-of-use assets
 
583,542

 

Long-term prepayments and other
 
138,817

 
185,556

Intangible assets, less accumulated amortization of $18,176 and $18,939 as of September 30, 2019 and December 31, 2018, respectively
 
13,524

 
14,149

Goodwill
 
106,663

 
106,663

Total Assets
 
$
4,064,691

 
$
3,196,646

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

Current Liabilities:
 
 

 
 

Accounts payable
 
$
155,362

 
$
143,146

Air traffic liability and current frequent flyer deferred revenue
 
651,571

 
603,736

Other accrued liabilities
 
151,566

 
158,154

Current maturities of long-term debt and finance lease obligations
 
77,014

 
101,097

Current maturities of operating leases
 
86,632

 

Total
 
1,122,145

 
1,006,133

Long-Term Debt and Finance Lease Obligations
 
704,527

 
608,684

Other Liabilities and Deferred Credits:
 
 

 
 

Noncurrent operating leases
 
455,765

 

Accumulated pension and other post-retirement benefit obligations
 
182,962

 
182,620

Other liabilities and deferred credits
 
99,231

 
119,826

Noncurrent frequent flyer deferred revenue
 
174,474

 
163,619

Deferred tax liability, net
 
258,740

 
167,770

Total
 
1,171,172

 
633,835

Commitments and Contingencies
 


 


Shareholders’ Equity:
 
 

 
 

Special preferred stock, $0.01 par value per share, three shares issued and outstanding as of September 30, 2019 and December 31, 2018
 

 

Common stock, $0.01 par value per share, 46,744,658 and 48,540,280 shares outstanding as of September 30, 2019 and December 31, 2018, respectively
 
467

 
485

Capital in excess of par value
 
133,003

 
128,448

Accumulated income
 
1,023,490

 
912,201

Accumulated other comprehensive loss, net
 
(90,113
)
 
(93,140
)
Total
 
1,066,847

 
947,994

Total Liabilities and Shareholders’ Equity
 
$
4,064,691

 
$
3,196,646


See accompanying Notes to Consolidated Financial Statements.

5



Hawaiian Holdings, Inc.
Consolidated Statements of Shareholders' Equity
(in thousands)
 
 
Common
Stock(*)
 
Special
Preferred
Stock(**)
 
Capital In Excess of Par Value
 
Accumulated Income
 
Accumulated Other Comprehensive Income (Loss)
 
Total
 
 
(unaudited)
Balance at December 31, 2018
 
$
485

 
$

 
$
128,448

 
$
912,201

 
$
(93,140
)
 
$
947,994

Net Income
 

 

 

 
36,358

 

 
36,358

Dividends declared on common stock ($0.12 per share)
 

 

 

 
(5,811
)
 

 
(5,811
)
Other comprehensive income
 

 

 

 

 
2,261

 
2,261

Issuance of 65,517 shares of common stock, net of shares withheld for taxes
 
1

 

 
(983
)
 

 

 
(982
)
Repurchase and retirement of 403,598 shares common stock
 
(4
)
 

 

 
(11,082
)
 

 
(11,086
)
Share-based compensation expense
 

 

 
1,426

 

 

 
1,426

Cumulative effect of accounting change (ASU 2016-02), net of tax
 

 

 

 
4,900

 

 
4,900

Balance at March 31, 2019
 
$
482

 
$

 
$
128,891

 
$
936,566

 
$
(90,879
)
 
$
975,060

Net Income
 

 

 

 
57,833

 

 
57,833

Dividends declared on common stock ($0.12 per share)
 

 

 

 
(5,743
)
 

 
(5,743
)
Other comprehensive loss
 

 

 

 

 
(2,208
)
 
(2,208
)
Issuance of 28,927 shares of common stock, net of shares withheld for taxes
 

 

 
(32
)
 

 

 
(32
)
Repurchase and retirement of 725,105 shares common stock
 
(7
)
 

 

 
(19,597
)
 

 
(19,604
)
Share-based compensation expense
 

 

 
1,384

 

 

 
1,384

Balance at June 30, 2019
 
$
475

 
$

 
$
130,243

 
$
969,059

 
$
(93,087
)
 
$
1,006,690

Net Income
 

 

 

 
80,076

 

 
80,076

Dividends declared on common stock ($0.12 per share)
 

 

 

 
(5,652
)
 

 
(5,652
)
Other comprehensive income
 

 

 

 

 
2,974

 
2,974

Issuance of 1,180 shares of common stock, net of shares withheld for taxes
 

 

 
(13
)
 

 

 
(13
)
Repurchase and retirement of 762,543 shares common stock
 
(8
)
 

 

 
(19,993
)
 

 
(20,001
)
Share-based compensation expense
 

 

 
2,773

 

 

 
2,773

Balance at September 30, 2019
 
$
467

 
$

 
$
133,003

 
$
1,023,490

 
$
(90,113
)
 
$
1,066,847

(*)    Common Stock—$0.01 par value; 118,000,000 authorized as of September 30, 2019 and December 31, 2018.
(**)    Special Preferred Stock—$0.01 par value; 2,000,000 shares authorized as of September 30, 2019 and December 31, 2018.

See accompanying Notes to Consolidated Financial Statements.

6



Hawaiian Holdings, Inc.
Consolidated Statements of Shareholders' Equity
(in thousands)
 
 
Common
Stock(*)
 
Special
Preferred
Stock(**)
 
Capital In Excess of Par Value
 
Accumulated Income
 
Accumulated Other Comprehensive Income (Loss)
 
Total
 
 
(unaudited)
Balance at December 31, 2017
 
$
512

 
$

 
$
126,743

 
$
793,134

 
$
(75,264
)
 
$
845,125

Net Income
 

 

 

 
28,542

 

 
28,542

Dividends declared on common stock ($0.12 per share)
 

 

 

 
(6,145
)
 

 
(6,145
)
Other comprehensive loss
 

 

 

 

 
(7,191
)
 
(7,191
)
Issuance of 146,923 shares of common stock, net of shares withheld for taxes
 
1

 

 
(3,230
)
 

 

 
(3,229
)
Repurchase and retirement of 548,861 shares common stock
 
(5
)
 

 

 
(20,238
)
 

 
(20,243
)
Share-based compensation expense
 

 

 
1,355

 

 

 
1,355

Balance at March 31, 2018
 
$
508

 
$

 
$
124,868

 
$
795,293

 
$
(82,455
)
 
$
838,214

Net Income
 

 

 

 
79,480

 

 
79,480

Dividends declared on common stock ($0.12 per share)
 

 

 

 
(6,093
)
 

 
(6,093
)
Other comprehensive income
 

 

 

 

 
9,944

 
9,944

Issuance of 29,006 shares of common stock, net of shares withheld for taxes
 

 

 
(296
)
 

 

 
(296
)
Repurchase and retirement of 65,389 shares common stock
 
(1
)
 

 

 
(2,500
)
 

 
(2,501
)
Share-based compensation expense
 

 

 
1,299

 

 

 
1,299

Balance at June 30, 2018
 
$
507

 
$

 
$
125,871

 
$
866,180

 
$
(72,511
)
 
$
920,047

Net Income
 

 

 

 
93,542

 

 
93,542

Dividends declared on common stock ($0.12 per share)
 

 

 

 
(6,089
)
 

 
(6,089
)
Other comprehensive income
 

 

 

 

 
5,100

 
5,100

Issuance of 6,427 shares of common stock, net of shares withheld for taxes
 

 

 
(112
)
 

 

 
(112
)
Repurchase and retirement of 780,238 shares common stock
 
(7
)
 

 

 
(31,142
)
 

 
(31,149
)
Share-based compensation expense
 

 

 
1,862

 

 

 
1,862

Balance at September 30, 2018
 
$
500

 
$

 
$
127,621

 
$
922,491

 
$
(67,411
)
 
$
983,201

(*)    Common Stock—$0.01 par value; 118,000,000 authorized as of September 30, 2018 and December 31, 2017.
(**)    Special Preferred Stock—$0.01 par value; 2,000,000 shares authorized as of September 30, 2018 and December 31, 2017.

See accompanying Notes to Consolidated Financial Statements.

7



Hawaiian Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
 
 
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
 
(unaudited)
Net cash provided by Operating Activities
 
$
456,895

 
$
444,080

Cash flows from Investing Activities:
 
 

 
 

Additions to property and equipment, including pre-delivery payments
 
(280,288
)
 
(386,098
)
Proceeds from the disposition of aircraft related equipment
 
9,045

 
117,143

Purchases of investments
 
(265,705
)
 
(159,648
)
Sales of investments
 
267,464

 
182,816

Other
 
(6,275
)
 

Net cash used in investing activities
 
(275,759
)
 
(245,787
)
Cash flows from Financing Activities:
 
 

 
 

Long-term borrowings
 
227,889

 
86,500

Repayments of long-term debt and finance lease obligations
 
(95,356
)
 
(53,741
)
Dividend payments
 
(17,206
)
 
(18,327
)
Debt issuance costs
 
(1,162
)
 
(1,108
)
Repurchases of common stock
 
(50,690
)
 
(53,894
)
Other
 
(1,026
)
 
(3,635
)
Net cash provided by (used in) financing activities
 
62,449

 
(44,205
)
Net increase in cash and cash equivalents
 
243,585

 
154,088

Cash, cash equivalents, and restricted cash - Beginning of Period
 
268,577

 
191,953

Cash, cash equivalents, and restricted cash - End of Period
 
$
512,162

 
$
346,041

 
See accompanying Notes to Consolidated Financial Statements.


8



Hawaiian Holdings, Inc. 
Notes to Consolidated Financial Statements (Unaudited)
 
1. Business and Basis of Presentation
 
Hawaiian Holdings, Inc. (the Company, Holdings, we, us and our) and its direct wholly-owned subsidiary, Hawaiian Airlines, Inc. (Hawaiian), are 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. The accompanying unaudited financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X of the U.S. Securities and Exchange Commission (SEC).  Accordingly, these interim financial statements do not include all of the information and footnotes required by GAAP for complete financial statements.  In the opinion of management, the accompanying financial statements contain all adjustments, including normal recurring adjustments, necessary for the fair presentation of the Company’s results of operations and financial position for the periods presented. Due to seasonal fluctuations, among other factors common to the airline industry, the results of operations for the periods presented are not necessarily indicative of the results of operations to be expected for the entire year.  The accompanying unaudited Consolidated Financial Statements should be read in conjunction with the financial statements and the notes of the Company included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
 
2. Significant Accounting Policies
 
Recently Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, Leases (ASU 2016-02), which was subsequently codified within Accounting Standards Codification (ASC) 842, Leases (ASC 842). ASC 842 requires a lessee to recognize a right-of-use asset and a lease liability in the statement of financial position for all leases (with the exception of short-term leases) at the lease commencement date and recognize expenses similar to the current ASC 840, Leases. ASC 842 is effective for fiscal years, and interim periods beginning after December 15, 2018.

The Company adopted ASC 842 as of January 1, 2019 using the transition method that provides for a cumulative-effect adjustment to retained earnings upon adoption. The Company elected the package of transition provisions available for expired or existing contracts, which allows the Company to carry-forward our historical assessments of (a) whether contracts are, or contain, leases, (b) lease classification, and (c) initial direct costs.

The adoption of the ASC 842 had a significant impact on the Company's consolidated balance sheet due to the recognition of approximately $603.9 million of operating lease liabilities and right-of-use (ROU) assets for operating leases of $649.3 million. Additionally, the Company recognized a $4.9 million (net of tax of $1.6 million) cumulative effect adjustment credit to retained earnings.

The adjustment to retained earnings was driven principally by ASC 842's elimination of the previous build-to-suit lease accounting guidance under ASC 840, Leases, and resulted in the derecognition of build-to-suit assets and liabilities that remained on the balance sheet after the end of the construction period. ASC 842 then required the application of lease accounting to the agreement, which resulted in an operating lease. This resulted in the recognition of a ROU asset, inclusive of building costs incurred by the Company to place the asset into service, of $124.7 million, and a lease liability of $90.8 million.

The unaudited Consolidated Financial Statements as of and for the three and nine months ended September 30, 2019 are presented under the new standard, while comparative periods presented are not adjusted and continue to be reported in accordance with our historical accounting policy. See Note 10, Leases, for additional information.

In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities (ASU 2017-12), which better aligns a company's risk management activities and financial reporting for hedging relationships and is intended to simplify hedge accounting requirements. ASU 2017-12 was effective for annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company adopted this standard during the first quarter of 2019. The adoption of this standard did not have an impact on the Company's Consolidated Financial Statements.

Recently Issued Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (ASU 2016-13), which requires the use of an "expected loss" model on financial instruments and other commitments to extend credit held by a reporting entity at each

9



reporting date. ASU 2016-13 replaces the incurred loss methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to calculate credit loss estimates. ASU 2016-13 is effective for annual reporting periods beginning after December 15, 2019, with early adoption permitted. The Company will adopt ASU 2016-13 effective January 1, 2020. The Company does not expect that the adoption of the standard will have a significant impact on its consolidated financial statements.

3. Accumulated Other Comprehensive Income (Loss)
 
Reclassifications out of accumulated other comprehensive income (loss) by component are as follows: 
Details about accumulated other comprehensive (income) loss components
 
Three months ended September 30,
 
Nine months ended September 30,
 
Affected line items in the statement where net income is presented
 
2019
 
2018
 
2019
 
2018
 
 
 
(in thousands)
 
 
Derivatives designated as hedging instruments under ASC 815
 
 
 
 
 
 
 
 
 
 
Foreign currency derivative losses (gains)
 
$
(1,095
)
 
$
(1,080
)
 
$
(4,431
)
 
$
1,025

 
Passenger revenue
Total before tax
 
(1,095
)
 
(1,080
)
 
(4,431
)
 
1,025

 
 
Tax expense (benefit)
 
271

 
265

 
1,025

 
(250
)
 
 
Total, net of tax
 
$
(824
)
 
$
(815
)
 
$
(3,406
)
 
$
775

 
 
Amortization of defined benefit plan items
 
 

 
 

 
 

 
 

 
 
Actuarial loss
 
$
768

 
$
730

 
$
2,430

 
$
1,978

 
Nonoperating Income (Expense), Other, net
Prior service cost
 
56

 
56

 
168

 
168

 
Nonoperating Income (Expense), Other, net
Total before tax
 
824

 
786

 
2,598

 
2,146

 
 
Tax benefit
 
(38
)
 
(145
)
 
(424
)
 
(478
)
 
 
Total, net of tax
 
$
786

 
$
641

 
$
2,174

 
$
1,668

 
 
Short-term investments
 
 

 
 

 
 

 
 

 
 
Realized losses (gain) on sales of investments, net
 
$
(97
)
 
$
21

 
$
(126
)
 
$
52

 
Nonoperating Income (Expense), Other, net
Total before tax
 
(97
)
 
21

 
(126
)
 
52

 
 
Tax expense (benefit)
 
24

 
(5
)
 
31

 
(12
)
 
 
Total, net of tax
 
$
(73
)
 
$
16

 
$
(95
)
 
$
40

 
 
Total reclassifications for the period
 
$
(111
)
 
$
(158
)
 
$
(1,327
)
 
$
2,483

 
 


A roll-forward of the amounts included in accumulated other comprehensive income (loss), net of taxes, for the three and nine months ended September 30, 2019 and 2018 is as follows:

Three months ended September 30, 2019
 
Foreign Currency Derivatives
 
Defined Benefit
Plan Items
 
Short-Term Investments
 
Total
 
 
(in thousands)
Beginning balance
 
$
816

 
$
(94,610
)
 
$
707

 
$
(93,087
)
Other comprehensive income before reclassifications, net of tax
 
2,920

 

 
165

 
3,085

Amounts reclassified from accumulated other comprehensive income (loss), net of tax
 
(824
)
 
786

 
(73
)
 
(111
)
Net current-period other comprehensive income
 
2,096

 
786

 
92

 
2,974

Ending balance
 
$
2,912

 
$
(93,824
)
 
$
799

 
$
(90,113
)

10




Three months ended September 30, 2018
 
Foreign Currency Derivatives
 
Defined Benefit Plan Items
 
Short-Term Investments
 
Total
 
 
(in thousands)
Beginning balance
 
$
3,268

 
$
(74,926
)
 
$
(853
)
 
$
(72,511
)
Other comprehensive income before reclassifications, net of tax
 
5,107

 

 
151

 
5,258

Amounts reclassified from accumulated other comprehensive income (loss), net of tax
 
(815
)
 
641

 
16

 
(158
)
Net current-period other comprehensive income
 
4,292

 
641

 
167

 
5,100

Ending balance
 
$
7,560

 
$
(74,285
)
 
$
(686
)
 
$
(67,411
)


Nine months ended September 30, 2019
 
Foreign Currency Derivatives
 
Defined Benefit Pension Items
 
Short-Term Investments
 
Total
 
 
(in thousands)
Beginning balance
 
3,317

 
(95,855
)
 
(602
)
 
(93,140
)
Other comprehensive income (loss) before reclassifications, net of tax
 
3,001

 
(143
)
 
1,496

 
4,354

Amounts reclassified from accumulated other comprehensive income (loss), net of tax
 
(3,406
)
 
2,174

 
(95
)
 
(1,327
)
Net current-period other comprehensive income
 
(405
)
 
2,031

 
1,401

 
3,027

Ending balance
 
2,912

 
(93,824
)
 
799

 
(90,113
)

Nine months ended September 30, 2018
 
Foreign Currency Derivatives
 
Defined Benefit Plan Items
 
Short-Term Investments
 
Total
 
 
(in thousands)
Beginning balance
 
1,249

 
(75,953
)
 
(560
)
 
(75,264
)
Other comprehensive income (loss) before reclassifications, net of tax
 
5,536

 

 
(166
)
 
5,370

Amounts reclassified from accumulated other comprehensive income, net of tax
 
775

 
1,668

 
40

 
2,483

Net current-period other comprehensive income (loss)
 
6,311

 
1,668

 
(126
)
 
7,853

Ending balance
 
7,560

 
(74,285
)
 
(686
)
 
(67,411
)


4. 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. Antidilutive shares excluded from the diluted earnings per share calculation are not material. The following table shows the computation of basic and diluted earnings per share:

11



 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
(in thousands, except for per share data)
Numerator:
 
 

 
 

 
 

 
 

Net Income
 
$
80,076

 
$
93,542

 
$
174,267

 
$
201,564

Denominator:
 
 

 
 

 
 

 
 

Weighted average common stock shares outstanding - Basic
 
47,119

 
50,594

 
47,784

 
50,807

Assumed exercise of stock options and awards
 
117

 
137

 
63

 
128

Weighted average common stock shares outstanding - Diluted
 
47,236

 
50,731

 
47,847

 
50,935

Net Income Per Share
 
 

 
 

 
 

 
 

Basic
 
$
1.70

 
$
1.85

 
$
3.65

 
$
3.97

Diluted
 
$
1.70

 
$
1.84

 
$
3.64

 
$
3.96



Stock Repurchase Program

In November 2017, the Company's Board of Directors approved the repurchase of up to $100 million of its outstanding common stock over a two-year period through December 2019 via the open market, established plans or privately negotiated transactions in accordance with all applicable securities laws, rules and regulations, which was completed in December 2018. In November 2018, the Company's Board of Directors approved a new stock repurchase program pursuant to which the Company may repurchase up to an additional $100 million of its outstanding common stock over a two-year period through December 2020. The stock repurchase program is subject to modification or termination at any time. The Company will repurchase shares of its common stock subject to prevailing market conditions and may discontinue such repurchases at any time.

The Company spent $20.0 million and $50.7 million to repurchase and retire approximately 0.8 million shares and 1.9 million shares of the Company's common stock in open market transactions during the three and nine months ended September 30, 2019, respectively. The Company spent $31.1 million and $53.9 million to repurchase and retire approximately 0.8 million shares and 1.4 million shares of the Company's common stock in open market transactions during the three and nine months ended September 30, 2018, respectively. As of September 30, 2019, the Company had $46.8 million remaining to spend under its existing stock repurchase program.

Dividends

During the three months ended September 30, 2019, the Company declared a cash dividend of $0.12 per share for stockholders of record as of August 16, 2019, which was paid on August 30, 2019, totaling $5.7 million. During the nine months ended September 30, 2019, the Company declared and paid cash dividends of $0.12 per share for each of the three quarters, totaling $17.2 million.

5. Revenue Recognition
The majority of the Company's revenue is derived from transporting passengers on our aircraft. The Company accounts for revenue in accordance with ASC 606, which was adopted on January 1, 2018, using the full retrospective method.
The Company's primary operations are that of its wholly-owned subsidiary, Hawaiian. Principally all operations of Hawaiian either originate and/or end in the State of Hawai'i. The management of such operations is based on a system-wide approach due to the interdependence of Hawaiian's route structure in its various markets. As Hawaiian is engaged in only one significant line of business (i.e., air transportation), management has concluded that it has only one segment. The Company's operating revenues by geographic region (as defined by the U.S. Department of Transportation) are summarized below:

12



 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Geographic Information
 
(in thousands)
Domestic
 
$
533,235

 
$
535,155

 
$
1,542,480

 
$
1,555,833

Pacific
 
221,916

 
223,932

 
581,611

 
584,113

Total operating revenue
 
$
755,151

 
$
759,087

 
$
2,124,091

 
$
2,139,946


Hawaiian attributes operating revenue by geographic region based on the destination of each flight segment. Hawaiian's tangible assets consist primarily of flight equipment, which are mobile across geographic markets, and therefore, have not been allocated to specific geographic regions.
Passenger & Other revenue - Generally, the Company’s contracts with customers have two principal performance obligations, which are the promise to provide transportation to the passenger and the frequent flyer miles earned on the flight. In addition, the Company typically charges additional fees for items such as baggage and in-flight entertainment. Such items are not capable of being distinct from the transportation provided because the customer can only benefit from the services during the flight. The transportation performance obligation, including the redemption of HawaiianMiles awards for flights is satisfied, and revenue is recognized, as transportation is provided. In some instances, tickets sold by the Company can include a flight segment on another carrier which is referred to as an interline segment. In this situation, the Company acts as an agent for the other carrier and revenue is recognized net of cost in other revenue. Tickets sold by other airlines where the Company provides the transportation are recognized as passenger revenue at the estimated value to be billed to the other airline when travel is provided. Differences between amounts billed and the actual amounts may be rejected and rebilled or written off if the amount recorded was different from the original estimate.
Other operating revenue consists of cargo revenue, ground handling fees, commissions, and fees earned under certain joint marketing agreements with other companies. These amounts are recognized when the service is provided.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Passenger Revenue by Type
 
(in thousands)
Passenger revenue, excluding frequent flyer
 
$
653,424

 
$
658,886

 
$
1,834,853

 
$
1,855,247

Frequent flyer revenue, transportation component
 
40,839

 
38,346

 
114,137

 
108,747

Passenger Revenue
 
$
694,263

 
$
697,232

 
$
1,948,990

 
$
1,963,994

 
 
 
 
 
 
 
 
 
Other revenue (e.g., cargo and other miscellaneous)
 
$
37,725

 
$
43,046

 
$
110,527

 
$
123,275

Frequent flyer revenue, marketing and brand component
 
23,163

 
18,809

 
64,574

 
52,677

Other Revenue
 
$
60,888

 
$
61,855

 
$
175,101

 
$
175,952


For the three months ended September 30, 2019 and 2018, the Company's total revenue was $755.2 million and $759.1 million, respectively. As of September 30, 2019 and December 31, 2018, the Company's Air traffic liability balance, as it relates to passenger tickets (excluding frequent flyer), was $472.3 million and $427.8 million, respectively, which represents future revenue that is expected to be realized over the next 12 months. During the three months ended September 30, 2019 and 2018, the amount of passenger ticket revenue recognized that was included in Air traffic liability as of the beginning of the respective period was $367.5 million and $323.4 million. During the nine months ended September 30, 2019 and 2018, the amount of passenger ticket revenue recognized that was included in Air traffic liability as of the beginning of the respective period was $422.1 million and $357.4 million.
Passenger revenue associated with unused tickets, which represent unexercised passenger rights, is recognized in proportion to the pattern of rights exercised by related passengers (e.g., scheduled departure dates). To calculate the portion to be recognized as revenue in the period, the Company utilizes historical information and applies the trend rate to the current Air traffic liability balances for that specific period.
Certain governmental taxes are imposed on the Company's ticket sales through a fee included in ticket prices. The Company collects these fees and remits them to the appropriate government agency. Management has elected (via a practical expedient election) to exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected from a customer (e.g., sales, use, value

13



added, and certain excise taxes). These fees have been presented on a net basis in the accompanying Consolidated Statements of Operations and recorded as a liability until remitted.
Frequent Flyer Revenue - Hawaiian's frequent flyer travel award program provides a variety of awards to program members based on accumulated mileage. ASC 606 requires the Company to account for miles earned by passengers in the HawaiianMiles program through flight activity as a component of the passenger revenue ticket transaction at the estimated selling price of the miles. Ticket consideration received is allocated between the performance obligations, primarily travel and miles earned by passengers. The allocated value of the miles is deferred until the free travel or other award is used by the passenger, at which time it is included in passenger revenue. The value of the ticket used in the determination of the estimated selling price is based on the historical value of equivalent flights to those provided for loyalty awards and the related miles redeemed to obtain that award adjusted for breakage or fulfillment. The equivalent ticket value (ETV) includes a fulfillment discount (breakage) to reflect the value of the award ticket over the number of miles that, based on historical experience, will be needed to obtain the award. On a quarterly basis, the Company calculates the ETV by analyzing the fares of similar tickets for the prior 12 months, considering cabin class and geographic region.
The Company also sells mileage credits to companies participating in our frequent flyer program. These contracts generally include multiple performance obligations, including the transportation that will ultimately be provided when the mileage credits are redeemed and marketing and brand related activities. The marketing and brand performance obligations are effectively provided each time a HawaiianMiles member uses the co-branded credit card and monthly access to customer lists and marketing is provided, which corresponds to the timing of when the Company issues or is obligated to issue the mileage credits to the HawaiianMiles member. Therefore, the Company recognizes revenue for the marketing and brand performance obligations when HawaiianMiles members use their co-brand credit card and the resulting mileage credits are issued to them, which best correlates with the Company’s performance in satisfying the obligation.

During the first quarter of 2018, the Company amended its partnership with Barclaycard US, Hawaiian's co-branded credit card partner. Management determined that the amendment should be accounted for as a termination of the existing contract and the creation of a new contract under ASC 606 and the relative selling price was determined for each performance obligation of the new agreement. The new agreement continues through 2024 and includes improved economics and enhanced product offerings for the Company's Barclay's co-branded cardholders. The amended agreement includes the following performance obligations: (i) transportation that will ultimately be provided when mileage credits are redeemed (transportation); (ii) the Hawaiian Airlines brand and access to its members lists (collectively, brand performance); (iii) marketing; and (iv) airline benefits to cardholders, including discounts and anniversary travel benefits, baggage waivers and inflight purchase credits. The Company determined the relative fair value of each performance obligation by estimating the selling prices of the deliverables by considering discounted cash flows using multiple inputs and assumptions, including: (1) the expected number of miles to be awarded and redeemed; (2) the estimated weighted average equivalent ticket value, adjusted by a fulfillment discount; (3) the estimated total annual cardholder spend; (4) an estimated royalty rate for the Hawaiian portfolio; and (5) the expected use of each of the airline benefits. The overall consideration received is allocated to the performance obligations based on their relative selling prices.

The transportation performance obligation is deferred and recognized as passenger revenue when the transportation is expected to be provided.

Accounting for mileage sales to co-branded partners involves the use of various techniques to estimate revenue. To determine the total estimated transaction price, the Company forecasts future credit card activity using historical information. The relative selling price is determined using management’s standalone estimated selling price of each performance obligation. The objective of using the estimated selling price-based methodology is to determine the price at which the Company would transact a sale if the product or service were sold on a stand-alone basis. Accordingly, the Company determines the best estimate of selling price by considering multiple inputs and methods including, but not limited to, discounted cash flows, brand value, published selling prices, number of miles awarded and number of miles redeemed. The Company estimates the selling price of miles using an ETV adjusted for a fulfillment discount as described above.

Miles expire after 18 months of member account inactivity. The Company reviews its breakage estimates annually based upon the latest available information regarding redemption and expiration patterns (e.g., credit card and non-credit card holders). The Company’s estimate of the expected expiration of miles requires significant management judgment. Current and future changes to expiration assumptions or to the expiration policy, or to program rules and program could affect the estimated value of a mile.

The Company's frequent flyer liability is recorded in Air traffic liability and current frequent flyer deferred revenue and Noncurrent frequent flyer deferred revenue in the Company's consolidated balance sheet based on estimated and expected

14



redemption patterns using historical data and analysis. As of September 30, 2019 and December 31, 2018, the Company's contract liability balance was $348.3 million and $332.2 million, respectively.

Accounts Receivable - Accounts receivable primarily consist of amounts due from credit card companies, non-airline partners, and cargo transportation customers. The Company provides an allowance for uncollectible accounts equal to the estimated losses expected to be incurred based on historical chargebacks, write-offs, bankruptcies and other specific analyses. Bad debt expense was not material in any period presented.

6. Short-Term Investments
 
Debt securities that are not classified as cash equivalents are classified as available-for-sale investments and are stated as current assets at fair value as these securities are available for use in current operations. Realized gains and losses on sales of investments are reflected in nonoperating income (expense) in the Company's unaudited Consolidated Statements of Operations. Unrealized gains and losses on available for sale securities are reflected as a component of Accumulated other comprehensive loss, net.

The following is a summary of short-term investments held as of September 30, 2019 and December 31, 2018:
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
September 30, 2019
 
(in thousands)
Corporate debt
 
$
104,849

 
$
890

 
$
(8
)
 
$
105,731

U.S. government and agency debt
 
70,740

 
270

 
(51
)
 
70,959

Certificates of Deposit
 
45,456

 

 

 
45,456

Other fixed income securities
 
10,298

 

 

 
10,298

Total short-term investments
 
$
231,343

 
$
1,160

 
$
(59
)
 
$
232,444


 
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
December 31, 2018
 
(in thousands)
Corporate debt
 
$
142,748

 
$
49

 
$
(695
)
 
$
142,102

U.S. government and agency debt
 
37,163

 
3

 
(59
)
 
37,107

Municipal bonds
 
9,903

 

 
(32
)
 
9,871

Other fixed income securities
 
43,183

 
2

 
(24
)
 
43,161

Total short-term investments
 
$
232,997

 
$
54

 
$
(810
)
 
$
232,241


Contractual maturities of short-term investments as of September 30, 2019 are shown below. 
 
 
Under 1 Year
 
1 to 5 Years
 
Total
 
 
(in thousands)
Corporate debt
 
$
25,503

 
$
80,228

 
$
105,731

U.S. government and agency debt
 
31,894

 
39,065

 
70,959

Certificates of Deposit
 
45,456

 

 
45,456

Other fixed income securities
 
10,298

 

 
10,298

Total short-term investments
 
$
113,151

 
$
119,293

 
$
232,444



 
7.  Fair Value Measurements
 
ASC Topic 820, Fair Value Measurement (ASC 820), defines fair value as 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:
 

15



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:
 
 
Fair Value Measurements as of September 30, 2019
 
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
(in thousands)
Cash equivalents
 
$
105,802

 
$
85,078

 
$
20,724

 
$

Short-term investments
 
232,444

 

 
232,444

 

Fuel derivative contracts
 
3,438

 

 
3,438

 

Foreign currency derivatives
 
4,120

 

 
4,120

 

Total assets measured at fair value
 
$
345,804

 
$
85,078

 
$
260,726

 
$

Foreign currency derivatives
 
919

 

 
919

 

Total liabilities measured at fair value
 
$
919

 
$

 
$
919

 
$

 
 
 
Fair Value Measurements as of December 31, 2018
 
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
(in thousands)
Cash equivalents
 
$
121,154

 
$
42,175

 
$
78,979

 
$

Short-term investments
 
232,241

 

 
232,241

 

Fuel derivative contracts
 
1,572

 

 
1,572

 

Foreign currency derivatives
 
4,579

 

 
4,579

 

Total assets measured at fair value
 
$
359,546

 
$
42,175

 
$
317,371

 
$

Foreign currency derivatives
 
1,347

 

 
1,347

 

Total liabilities measured at fair value
 
$
1,347

 
$

 
$
1,347

 
$



Cash equivalents.  The Company's Level 1 cash equivalents consist of money market securities and certificates of deposit. The carrying amounts approximate fair value because of the short-term maturity of these assets. The Company's Level 2 cash equivalents consist of U.S. agency bonds, mutual funds, and commercial paper. These instruments are valued using quoted prices for similar assets in active markets.

Short-term investments.  Short-term investments shown in the table above are classified as available-for-sale. Instruments are valued using quoted prices for similar assets in active markets or other observable inputs.

Fuel derivative contracts.  The Company’s fuel derivative contracts consist of crude oil call options, which are not traded on a public exchange. The fair value of these instruments is determined based on inputs available or derived from public markets including contractual terms, market prices, yield curves, and measures of volatility among others.
 
Foreign currency derivatives.  The Company’s foreign currency derivatives consist of Japanese Yen and Australian Dollar forward contracts and are valued primarily based upon data readily observable in public markets.

The table below presents the Company’s debt (excluding obligations under finance leases) measured at fair value: 

16



Fair Value of Debt
September 30, 2019
 
December 31, 2018
Carrying
 
Fair Value
 
Carrying
 
Fair Value
Amount
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Amount
 
Total
 
Level 1
 
Level 2
 
Level 3
(in thousands)
$
619,798

 
$
622,125

 
$

 
$

 
$
622,125

 
$
467,760

 
$
461,805

 
$

 
$

 
$
461,805


 
The fair value estimates of the Company’s debt were based on the discounted amount of future cash flows using the Company’s current incremental rate of borrowing for similar instruments.
 
The carrying amounts of cash, other receivables, and accounts payable approximate fair value due to the short-term nature of these financial instruments.
 
8.  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 and foreign currencies.
 
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, 2019, the Company primarily used crude oil call options to hedge its aircraft fuel expense. These derivative instruments were not designated as hedges under ASC Topic 815, Derivatives and Hedging (ASC 815), for hedge accounting treatment. As a result, any changes in fair value of these derivative instruments are adjusted through other nonoperating income (expense) in the period of change.

The following table reflects the amount of realized and unrealized gains and losses recorded as nonoperating income (expense) in the Company's unaudited Consolidated Statements of Operations.
 
 
Three months ended September 30,
 
Nine months ended September 30,
Fuel derivative contracts
 
2019
 
2018
 
2019
 
2018
 
 
(in thousands)
Gains (losses) realized at settlement
 
$
(3,399
)
 
$
8,085

 
$
(9,294
)
 
$
24,572

Reversal of prior period unrealized amounts
 
4,936

 
(18,873
)
 
8,181

 
(11,791
)
Unrealized gains (losses) that will settle in future periods
 
(6,090
)
 
14,283

 
(6,090
)
 
14,283

Gains (losses) on fuel derivatives recorded as nonoperating income (expense)
 
$
(4,553
)
 
$
3,495

 
$
(7,203
)
 
$
27,064



Foreign Currency Exchange Rate Risk Management
 
The Company is subject to foreign currency exchange rate risk due to revenues and expenses that are denominated in foreign currencies, with the primary exposures being to the Japanese Yen and the 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 to further manage the effects of fluctuating exchange rates. The effective portion of the gain or loss of designated cash flow hedges is reported as a component of accumulated other comprehensive income (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). Foreign currency forward contracts that are not designated as cash flow hedges are recorded at fair value, and therefore any changes in fair value are recognized as other nonoperating income (expense) in the period of change.
 
The Company believes that its foreign currency forward contracts that are designated as cash flow hedges will continue to be effective in offsetting changes in cash flow attributable to the hedged risk. The Company expects to reclassify a net gain of

17



approximately $3.1 million into earnings over the next 12 months from AOCI based on the values of its foreign currency forward contracts at September 30, 2019.
 
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 net derivative positions and location of the asset and liability balances within the Company's unaudited Consolidated Balance Sheets.

Derivative position as of September 30, 2019 
 
 
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
 
 
 
 
 
 
 
 

 
 

 
 

Foreign currency derivatives
 
Prepaid expenses and other
 
18,172,950 Japanese Yen
45,848 Australian Dollars
 
September 2020
 
3,391

 
(539
)
 
2,852

 
 
Long-term prepayments and other
 
5,359,550 Japanese Yen
7,952 Australian Dollars
 
September 2021
 
507

 
(60
)
 
447

Derivatives not designated as hedges
 
 
 
 
 
 
 
 

 
 

 
 
Foreign currency derivatives
 
Other accrued liabilities
 
987,100 Japanese Yen
2,095 Australian Dollars
 
December 2019
 
222

 
(320
)
 
(98
)
Fuel derivative contracts
 
Prepaid expenses and other
 
97,860 gallons
 
September 2020
 
3,438

 

 
3,438

 
Derivative position as of December 31, 2018
 
 
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
 
 
 
 
 
 
 
 

 
 

 
 

Foreign currency derivatives
 
Prepaid expenses and other
 
15,933,550 Japanese Yen
48,709 Australian Dollars
 
December 2019
 
3,922

 
(915
)
 
3,007

 
 
Long-term prepayments and other
 
4,491,350 Japanese Yen
9,419 Australian Dollars
 
December 2020
 
633

 
(292
)
 
341

Derivatives not designated as hedges
 
 
 
 
 
 
 
 

 
 

 
 
Foreign currency derivatives
 
Other accrued liabilities
 
832,900 Japanese Yen
2,785 Australian Dollars
 
March 2019
 
24

 
(140
)
 
(116
)
Fuel derivative contracts
 
Prepaid expenses and other
 
95,256 gallons
 
December 2019
 
1,572

 

 
1,572


 
The following table reflects the impact of cash flow hedges designated for hedge accounting treatment and their location within the Company's unaudited Consolidated Statements of Comprehensive Income. 
 
 
(Gain) loss recognized in AOCI on derivatives
 
(Gain) loss reclassified from AOCI
into income
 
 
Three months ended September 30,
 
Three months ended September 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
(in thousands)
Foreign currency derivatives
 
$
(3,881
)
 
$
(6,769
)
 
$
(1,095
)
 
$
(1,080
)

18



 
 
(Gain) loss recognized in AOCI on derivatives
 
(Gain) loss reclassified from AOCI
into income
 
 
Nine months ended September 30,
 
Nine months ended September 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
(in thousands)
Foreign currency derivatives
 
(3,904
)
 
(7,338
)
 
(4,431
)
 
1,025


Risk and Collateral
 
Financial derivative instruments expose the Company to possible credit loss in the event the counterparties 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) regularly assesses the market position and credit rating of each counterparty. Credit risk is deemed to have a minimal impact on the fair value of the derivative instruments, as cash collateral would be provided by the counterparties based on the current market exposure of the derivative.

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 under a master netting agreement or present such amounts on a gross basis. The Company’s accounting policy is to present its derivative assets and liabilities on a net basis, including any collateral posted with the counterparty. The Company had no collateral posted with counterparties as of September 30, 2019 and December 31, 2018.

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.

9.  Debt
 
As of September 30, 2019, the expected maturities of long-term debt for the remainder of 2019 and the next four years, and thereafter, were as follows (in thousands): 
Remaining months in 2019
$
7,938

2020
55,611

2021
82,740

2022
90,016

2023
54,998

Thereafter
328,495

 
$
619,798



During the nine months ended September 30, 2019, the Company entered into two Japanese Yen denominated debt agreements totaling $227.9 million (¥24.7 billion), which were collateralized through a combination of two A321neo and four A330-200 aircraft with a NBV of approximately $382.7 million. The terms of the loans are 12 years and 5.5 years, at fixed installment coupon rates of 0.76% and 0.65%, respectively, and initially measured and recorded for $89.1 million and $138.7 million, respectively. At each balance sheet date, the Company remeasures the outstanding principal balance at the spot rate for the respective period and records any gain or loss at the current rate within the other nonoperating income (expense) line item. During the three and nine months ended September 30, 2019, the Company recorded foreign currency unrealized losses of $0.7 million and $2.3 million, respectively. During each of the three and nine months ended September 30, 2018, the Company recorded foreign currency unrealized gains of $2.3 million. These amounts include the above referenced debt agreements and the foreign denominated debt agreements entered in 2018.

10.  Leases
As discussed in Note 2, the Company adopted ASC 842 as of January 1, 2019, using the modified retrospective approach. Prior year financial statements were not recast under the new standard and, therefore, those amounts are not presented below.
The Company leases aircraft, engines, airport terminal facilities, maintenance hangars, commercial real estate, and other property and equipment, among other items. The Company combines lease and nonlease components in calculating the ROU asset and lease liabilities for the aforementioned asset groups. Certain leases include escalation clauses, renewal options, and/or

19



termination options. When lease renewals or termination options are considered to be reasonably certain, such periods are included in the lease term and fixed payments are included in the calculation of the lease liability and ROU asset.
The Company's leases do not provide a readily determinable implicit rate; therefore, the Company utilizes an incremental borrowing rate to discount lease payments based on information available at lease commencement. The Company gives consideration to its recent debt issuances as well as publicly available data for instruments with similar characteristics when calculating our incremental borrowing rates.
Aircraft and Engines
As of September 30, 2019, the Company leased 19 aircraft, of which 5 are under finance leases and 14 are under operating leases. These leases have remaining lease terms ranging from approximately 1 year to 11 years. The Company also had 5 engines under operating leases with remaining lease terms ranging from less than 1 year to 7 years. Aircraft and engine finance leases continue to be reported on our consolidated balance sheet, while operating leases were added to the balance sheet with the adoption of the new standard.
Airport Terminal Facilities
The Company's facility leases are primarily for space at airports that it serves, most notably, its operations in the State of Hawai'i. These leases are classified as operating leases and reflect the Company's use of airport terminals, office space, cargo and maintenance facilities (excluding the maintenance hangar discussed below). The Company leases space from government agencies that control the use of the airport. The remaining lease terms vary from 1 month to 30 years. At the majority of U.S. airports, the lease rates depend on airport operating costs or the use of the facilities and are reset at least annually. Because of the variable nature of the rates, these leases are not recorded on our balance sheet as a ROU asset and lease liability.
Other Commercial Real Estate
The Company leases non-airport facility office space supporting its operations, including its headquarters in Honolulu, Hawai'i. These leases are classified as operating and have remaining lease terms ranging between 1 to 7 years.
Maintenance Hangar
In November 2016, the Company entered into a lease agreement with the Department of Transportation of the State of Hawai'i (the "Hawai'i Lease") to lease a cargo and maintenance hangar at the Daniel K. Inouye International Airport with a remaining lease term of 32 years. As the hangar was not fully constructed, the Company took responsibility of the construction and was responsible for the remainder of the construction costs of $37.3 million. In accordance with the applicable accounting guidance, specifically as it relates to the Company's involvement in the construction of the hangar, the Company was considered the owner of the asset under construction and previously recognized an additional $73.0 million asset, with a corresponding finance liability, for the amount previously spent by the lessor.

As discussed in Note 2, ASC 842 eliminated the previous build-to-suit lease accounting guidance and resulted in the derecognition of build-to-suit assets and liabilities that remained on the balance sheet after the end of the construction period. ASC 842 then required the application of lease accounting to the agreement. The agreement is accounted for as an operating lease under ASC 842.

In July 2019, the Company entered into an amendment to the Hawai'i Lease with the State of Hawai'i. The amendment resulted in the adjustment of lease rates and was accounted for as a modification under ASC 842. The modification did not result in a change in lease classification. The impact to both the ROU asset and lease liability is reflected in the Lease Position Table below.

Other Property and Equipment
The Company leases certain IT assets (including data center access, equipment, etc.) and various other non-aircraft equipment. The remaining lease terms range from 1 to 3 years. Certain lease IT assets are embedded within service agreements. The combined lease and nonlease components of those agreements are included in the ROU asset and lease liability.
Lease Position as of September 30, 2019
The table below presents the lease-related assets and liabilities recorded on the consolidated balance sheet.

20



 
 
Classification on the Balance Sheet
 
September 30, 2019
 
 
 
 
(in thousands)
Assets:
 
 
 
 
Operating lease assets
 
Operating lease right-of use assets
 
$
583,542

Finance lease assets
 
Property and equipment, net
 
160,905

Total lease assets
 
 
 
$
744,447

 
 
 
 
 
Liabilities:
 
 
 
 
Current
 
 
 
 
Operating
 
Current maturities of operating leases
 
$
86,632

Finance
 
Current maturities of long-term debt and finance lease obligations
 
23,583

Noncurrent
 
 
 
 
Operating
 
Noncurrent operating leases
 
455,765

Finance
 
Long-Term Debt and Finance Lease Obligations
 
148,140

Total lease liabilities
 
 
 
$
714,120

 
 
 
 
 
Weighted-average remaining lease term
 
 
 
 
Operating leases
 
 
 
10.5 years

Finance leases
 
 
 
8.5 years

Weighted-average discount rate
 
 
 
 
Operating leases (1)
 
 
 
4.81
%
Finance leases
 
 
 
4.68
%
(1) Upon adoption of the new lease standard, discount rates used for existing leases were established at January 1, 2019.
Lease Costs
During the three and nine months ended September 30, 2019, the total lease costs for finance and operating leases were as follows:
 
 
Three Months Ended September 30,
 
Nine months ended September 30,
 
 
2019
 
 
(in thousands)
Finance lease cost:
 
 
 
 
Amortization of right-of-use assets
 
$
6,361

 
$
18,923

Interest of lease liabilities
 
2,052

 
6,265

Operating lease cost (1)
 
30,035

 
89,787

Short-term lease cost (1)
 
865

 
4,181

Variable lease cost (1)
 
32,979

 
93,582

Total lease cost
 
$
72,292

 
$
212,738

(1) Expenses are classified within aircraft rent and other rentals and landing fees in the consolidated statements of operations.
During the three and nine months ended September 30, 2019, the cash paid for amounts included in the measurement of lease liabilities were as follows:

21



 
 
Three Months Ended September 30,
 
Nine months ended September 30,
 
 
2019
 
 
(in thousands)
Operating cash flows from operating leases
 
28,479

 
87,362

Operating cash flows from finance leases
 
2,052

 
6,265

Financing cash flows from finance lease
 
5,886

 
17,407


Undiscounted Cash Flows
As of September 30, 2019, the scheduled future minimum rental payments under operating and finance leases with non-cancellable basic terms of more than one year were as follows:
 
Finance Leases
 
Operating Leases
 
Aircraft
 
Other
 
Aircraft
 
Other
 
(in thousands)
Remaining in 2019
$
6,355

 
$
1,466

 
$
27,531

 
$
1,716

2020
25,433

 
5,327

 
96,072

 
7,570

2021
25,447

 
3,912

 
81,750

 
7,781

2022
25,027

 
3,578

 
71,690

 
8,185

2023
21,997

 
5,019

 
61,750

 
8,398

Thereafter
76,237

 
7,108

 
158,493

 
180,972

Total minimum lease payments
180,496

 
26,410

 
497,286

 
214,622

Less: amounts representing interest
(29,941
)
 
(5,242
)
 
(68,913
)
 
(100,598
)
Present value of future minimum lease payments
$
150,555

 
$
21,168

 
$
428,373

 
$
114,024

Less: current maturities of lease obligations
(18,749
)
 
(4,834
)
 
(84,071
)
 
(2,561
)
Long-term lease obligations
$
131,806

 
$
16,334

 
$
344,302

 
$
111,463


11. Employee Benefit Plans
 
The components of net periodic benefit cost for the Company’s defined benefit and other post-retirement plans included the following: 
 
 
Three months ended September 30,
 
Nine months ended September 30,
Components of Net Period Benefit Cost
 
2019
 
2018
 
2019
 
2018
 
 
(in thousands)
Service cost
 
$
2,120

 
$
2,275

 
$
6,311

 
$
6,199

Other cost:
 
 
 
 
 
 
 
 
Interest cost
 
5,584

 
5,145

 
16,799

 
15,163

Expected return on plan assets
 
(5,487
)
 
(5,594
)
 
(16,452
)
 
(16,770
)
Recognized net actuarial loss
 
824

 
786

 
2,599

 
2,146

Total other components of the net periodic benefit cost
 
921

 
337

 
2,946

 
539

Net periodic benefit cost
 
$
3,041

 
$
2,612

 
$
9,257

 
$
6,738


 
Total other components of the net periodic benefit cost are recorded within the nonoperating income (expense), other, net line item in the consolidated statements of operations. During the three and nine months ended September 30, 2019, the Company was not required to, and did not make contributions to its defined benefit and other post-retirement plans. During the three and nine months ended September 30, 2018, the Company made a discretionary contribution of $50.0 million to its defined benefit and other postretirement plans.


22



12. Commitments and Contingent Liabilities
 
Commitments

As of September 30, 2019, the Company had the following capital commitments consisting of firm aircraft and engine orders and purchase rights for additional aircraft and engines:
Aircraft Type
 
Firm Orders
 
Purchase Rights
 
Expected Delivery Dates
A321neo aircraft
 
3

 
3

 
Between 2019 and 2020
B787-9 aircraft
 
10

 
10

 
Between 2021 and 2025
 
 
 
 
 
 
 
Pratt & Whitney spare engines:
 
 

 
 

 
 
A321neo spare engines (1)
 

 
2

 
N/A
General Electric GEnx spare engines:
 
 

 
 

 
 
B787-9 spare engines
 
2

 
2

 
Between 2021 and 2025


(1)
During the second quarter of 2019, the Company took delivery of its remaining A321neo spare engine and maintain purchase rights for an additional two engines, which expire on December 31, 2019.

In February 2018, the Company exercised its right to terminate its aircraft purchase agreement between the Company and Airbus for six Airbus A330-800neo aircraft and the purchase rights for an additional six Airbus A330-800neo aircraft. Refer to Note 13 below for discussion on the contract termination charge.

In July 2018, the Company entered into a purchase agreement for the purchase of 10 Boeing 787-9 "Dreamliner" aircraft with purchase rights for an additional 10 aircraft with scheduled delivery from 2021 to 2025. In October 2018, the Company entered into a definitive agreement for the selection of GEnx engines to power its Boeing 787-9 fleet. The agreement provides for the purchase of 20 GEnx engines, the right to purchase an additional 20 GEnx engines, and the purchase of up to four spare engines. The committed expenditures under these agreements are reflected in the table below. In December 2018, the Company entered into an amendment to the purchase agreement with Boeing, which includes an option for the Company to accelerate delivery of Boeing 787-9 aircraft from 2024 and 2025 to 2023; however, the Company does not currently expect to execute the option to accelerate its planned delivery schedule. The Company also intends to enter into additional related agreements in connection with the Boeing 787-9 purchases, including for the purchase of spare parts and materials and related services.

Committed capital and operating expenditures include escalation amounts based on estimates. Capital expenditures represent aircraft and aircraft related equipment commitments, and operating expenditures represent all other non-aircraft commitments the Company has entered into. The gross committed expenditures and committed payments for those deliveries as of September 30, 2019 are detailed below: 
 
 
Aircraft and aircraft related
 
Other
 
Total Committed
Expenditures
 
 
(in thousands)
Remaining in 2019
 
$
113,604

 
$
20,356

 
$
133,960

2020
 
177,700

 
76,588

 
254,288

2021
 
313,570

 
72,782

 
386,352

2022
 
437,636

 
64,917

 
502,553

2023
 
245,612

 
59,469

 
305,081

Thereafter
 
469,397

 
167,120

 
636,517

 
 
$
1,757,519

 
$
461,232

 
$
2,218,751

 
During the second quarter of 2019, the Company made scheduled payments of $44.8 million to pay off its debt facility entered into for the financing of its Boeing 717-200 aircraft. As of September 30, 2019, all owned Boeing 717-200 aircraft were unencumbered.


23



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 such contracts. 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 such parties' gross negligence or willful misconduct. Additionally, the lessee typically indemnifies such parties for any environmental liability that arises out of or relates to the lessee's use of the real estate leased premises. The Company believes that it is insured (subject to deductibles) for most of the tort liabilities and related indemnities described above with respect to the aircraft and real estate that it leases. The Company cannot reasonably 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 are included in restricted cash in the Company’s unaudited Consolidated Balance Sheets. As of September 30, 2019 and December 31, 2018, there were no holdbacks held with the Company's credit card processors.
 
In the event of a material adverse change in the Company's business, the holdback could increase to an amount up to 100% of the outstanding credit card amounts that is unflown (e.g., air traffic liability, excluding frequent flyer deferred revenue), 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 have a material adverse impact on the Company's operations, business or financial condition.

13. Contract Terminations Expense

Contract terminations expense

For the nine months ended September 30, 2018, the Company terminated two contracts which incurred a total of $35.3 million in contract terminations expense. The transactions are described below:

In February 2018, the Company exercised its right to terminate the aircraft purchase agreement between the Company and Airbus for six Airbus A330-800neo aircraft and the purchase rights for an additional six Airbus A330-800neo aircraft. To terminate the purchase agreement, the Company was obligated to repay Airbus for concessions received relating to a prior firm order, training credits, as well as forfeit the pre-delivery progress payments made towards the flight equipment. The Company recorded a contract terminations expense to reflect a portion of the termination penalty within the Consolidated Statements of Operations.

In January 2018, the Company entered into a transaction with its lessor to early terminate and purchase three Boeing 767-300 aircraft leases and concurrently entered into a forward sale agreement for the same three Boeing 767-300 aircraft, including two Pratt & Whitney 4060 engines for each aircraft. These aircraft were previously accounted for as operating leases. In order to exit the lease and purchase the aircraft, the Company agreed to pay a total of $67.1 million (net of all deposits) of which a portion was expensed immediately and recognized as a contract termination fee. The expensed amount represents the total purchase price amount over fair value of the aircraft purchased as of the date of the transaction.


24



14. Supplemental Cash Flow Information

Non-cash investing and financing activities for the nine months ended September 30, 2019 and 2018 were as follows:

 
 
Nine months ended September 30,
 
 
2019
 
2018
Investing and Financing Activities Not Affecting Cash:
 
(in thousands)
Property and equipment acquired through a finance lease
 
$
6,567

 
$
116,359

Right-of-use assets acquired under operating leases
 
5,435

 



15. 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 15 as Subsidiary Issuer / Guarantor) of pass-through certificates, the Company (which is also referred to in this Note 15 as Parent Issuer / Guarantor) is fully and unconditionally guaranteeing the payment obligations of Hawaiian, which is a 100% owned subsidiary of the Company, under equipment notes issued by Hawaiian to purchase new aircraft.

The Company's condensed consolidating financial statements are presented in the following tables:


25



Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
Three months ended September 30, 2019
 
 
Parent Issuer /
Guarantor
 
Subsidiary
Issuer /
Guarantor
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
(in thousands)
Operating Revenue
 
$

 
$
754,608

 
$
649

 
$
(106
)
 
$
755,151

Operating Expenses:
 
 

 
 

 
 

 
 

 
 

Wages and benefits
 

 
182,862

 

 

 
182,862

Aircraft fuel, including taxes and delivery
 

 
138,586

 

 

 
138,586

Maintenance, materials and repairs
 

 
58,056

 
3,307

 

 
61,363

Aircraft and passenger servicing
 

 
41,762

 

 

 
41,762

Commissions and other selling
 

 
33,310

 
17

 
(36
)
 
33,291

Aircraft rent
 

 
30,365

 
169

 

 
30,534

Other rentals and landing fees
 

 
33,345

 

 

 
33,345

Depreciation and amortization
 

 
39,853

 
1,743

 

 
41,596

Purchased services
 
70

 
32,803

 
263

 
(16
)
 
33,120

Other
 
1,576

 
40,099

 
435

 
(54
)
 
42,056

Total
 
1,646

 
631,041

 
5,934

 
(106
)
 
638,515

Operating Income (Loss)
 
(1,646
)
 
123,567

 
(5,285
)
 

 
116,636

Nonoperating Income (Expense):
 
 

 
 

 
 

 
 

 
 

Undistributed net income of subsidiaries
 
81,379

 

 

 
(81,379
)
 

Interest expense and amortization of debt discounts and issuance costs
 

 
(6,438
)
 

 

 
(6,438
)
Interest income
 
4

 
3,144

 

 

 
3,148

Capitalized interest
 

 
1,171

 

 

 
1,171

Losses on fuel derivatives
 

 
(4,553
)
 

 

 
(4,553
)
Other, net
 
(8
)
 
(1,437
)
 

 

 
(1,445
)
Total
 
81,375

 
(8,113
)
 

 
(81,379
)
 
(8,117
)
Income (Loss) Before Income Taxes
 
79,729

 
115,454

 
(5,285
)
 
(81,379
)
 
108,519

Income tax expense (benefit)
 
(347
)
 
29,899

 
(1,109
)
 

 
28,443

Net Income (Loss)
 
$
80,076

 
$
85,555

 
$
(4,176
)
 
$
(81,379
)
 
$
80,076

Comprehensive Income (Loss)
 
$
83,050

 
$
88,529

 
$
(4,176
)
 
$
(84,353
)
 
$
83,050



26



Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
Three months ended September 30, 2018
 
 
Parent Issuer /
Guarantor
 
Subsidiary
Issuer /
Guarantor
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
(in thousands)
Operating Revenue
 
$

 
$
756,314

 
$
2,870

 
$
(97
)
 
$
759,087

Operating Expenses:
 
 

 
 

 
 

 
 

 
 

Wages and benefits
 

 
176,642

 

 

 
176,642

Aircraft fuel, including taxes and delivery
 

 
162,932

 

 

 
162,932

Maintenance, materials and repairs
 

 
55,818

 
1,300

 

 
57,118

Aircraft and passenger servicing
 

 
42,063

 

 

 
42,063

Commissions and other selling
 

 
32,716

 
16

 
(28
)
 
32,704

Aircraft rent
 

 
31,782

 
(14
)
 

 
31,768

Depreciation and amortization
 

 
34,849

 
1,524

 

 
36,373

Other rentals and landing fees
 

 
33,146

 
81

 

 
33,227

Purchased services
 
43

 
32,298

 
183

 
(15
)
 
32,509

Other
 
1,604

 
35,955

 
420

 
(54
)
 
37,925

Total
 
1,647

 
638,201

 
3,510

 
(97
)
 
643,261

Operating Income (Loss)
 
(1,647
)
 
118,113

 
(640
)
 

 
115,826

Nonoperating Income (Expense):
 
 

 
 

 
 

 
 

 
 

Undistributed net income of subsidiaries
 
94,810

 

 

 
(94,810
)
 

Interest expense and amortization of debt discounts and issuance costs
 

 
(8,400
)
 
(46
)
 

 
(8,446
)
Interest income
 
41

 
3,083

 

 

 
3,124

Capitalized interest
 

 
1,821

 

 

 
1,821

Gains on fuel derivatives
 

 
3,495

 

 

 
3,495

Other, net
 

 
936

 
1

 

 
937

Total
 
94,851

 
935

 
(45
)
 
(94,810
)
 
931

Income (Loss) Before Income Taxes
 
93,204

 
119,048

 
(685
)
 
(94,810
)
 
116,757

Income tax expense (benefit)
 
(338
)
 
23,696

 
(143
)
 

 
23,215

Net Income (Loss)
 
$
93,542

 
$
95,352

 
$
(542
)
 
$
(94,810
)
 
$
93,542

Comprehensive Income (Loss)
 
$
98,642

 
$
100,452

 
$
(542
)
 
$
(99,910
)
 
$
98,642



27



Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
Nine months ended September 30, 2019
 
 
Parent Issuer /
Guarantor
 
Subsidiary
Issuer /
Guarantor
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
(in thousands)
Operating Revenue
 
$

 
$
2,122,368

 
$
2,063

 
$
(340
)
 
$
2,124,091

Operating Expenses:
 
 

 
 

 
 

 
 

 
 

Aircraft fuel, including taxes and delivery
 

 
405,290

 

 

 
405,290

Wages and benefits
 

 
537,997

 

 

 
537,997

Aircraft rent
 

 
91,564

 
209

 

 
91,773

Maintenance materials and repairs
 

 
176,131

 
6,408

 

 
182,539

Aircraft and passenger servicing
 

 
120,303

 

 

 
120,303

Commissions and other selling
 
11

 
96,655

 
58

 
(126
)
 
96,598

Depreciation and amortization
 

 
114,254

 
5,020

 

 
119,274

Other rentals and landing fees
 

 
95,750

 
27

 

 
95,777

Purchased services
 
194

 
97,463

 
696

 
(47
)
 
98,306

Other
 
4,714

 
112,159

 
1,335

 
(167
)
 
118,041

Total
 
4,919

 
1,847,566

 
13,753

 
(340
)
 
1,865,898

Operating Income (Loss)
 
(4,919
)
 
274,802

 
(11,690
)
 

 
258,193

Nonoperating Income (Expense):
 
 

 
 

 
 

 
 

 
 

Undistributed net income of subsidiaries
 
178,139

 

 

 
(178,139
)
 

Interest expense and amortization of debt discounts and issuance costs
 

 
(21,252
)
 
(16
)
 

 
(21,268
)
Interest income
 
25

 
9,180

 

 

 
9,205

Capitalized interest
 

 
3,713

 

 

 
3,713

Losses on fuel derivatives
 

 
(7,203
)
 

 

 
(7,203
)
Other, net
 
(8
)
 
(5,538
)
 
(7
)
 

 
(5,553
)
Total
 
178,156

 
(21,100
)
 
(23
)
 
(178,139
)
 
(21,106
)
Income (Loss) Before Income Taxes
 
173,237

 
253,702

 
(11,713
)
 
(178,139
)
 
237,087

Income tax expense (benefit)
 
(1,030
)
 
66,309

 
(2,459
)
 

 
62,820

Net Income (Loss)
 
$
174,267

 
$
187,393

 
$
(9,254
)
 
$
(178,139
)
 
$
174,267

Comprehensive Income (Loss)
 
$
177,294

 
$
190,420

 
$
(9,254
)
 
$
(181,166
)
 
$
177,294


28



Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
Nine months ended September 30, 2018
 
 
Parent Issuer /
Guarantor
 
Subsidiary
Issuer /
Guarantor
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
(in thousands)
Operating Revenue
 
$

 
$
2,132,853

 
$
7,390

 
$
(297
)
 
$
2,139,946

Operating Expenses:
 
 

 
 

 
 

 
 

 
 

Aircraft fuel, including taxes and delivery
 

 
449,404

 

 

 
449,404

Wages and benefits
 

 
516,906

 

 

 
516,906

Aircraft rent
 

 
93,547

 
(14
)
 

 
93,533

Maintenance materials and repairs
 

 
172,780

 
3,449

 

 
176,229

Aircraft and passenger servicing
 

 
117,207

 

 

 
117,207

Commissions and other selling
 
(5
)
 
96,537

 
61

 
(111
)
 
96,482

Depreciation and amortization
 

 
98,026

 
3,511

 

 
101,537

Other rentals and landing fees
 

 
94,913

 
313

 

 
95,226

Purchased services
 
131

 
94,415

 
603

 
(45
)
 
95,104

Contract termination expense
 

 
35,322

 

 

 
35,322

Other
 
5,284

 
110,513

 
2,321

 
(141
)
 
117,977

Total
 
5,410

 
1,879,570

 
10,244

 
(297
)
 
1,894,927

Operating Income (Loss)
 
(5,410
)
 
253,283

 
(2,854
)
 

 
245,019

Nonoperating Income (Expense):
 
 

 
 

 
 

 
 

 
 

Undistributed net income of subsidiaries
 
205,719

 

 

 
(205,719
)
 

Interest expense and amortization of debt discounts and issuance costs
 
(3
)
 
(24,534
)
 
(91
)
 

 
(24,628
)
Interest income
 
157

 
6,372

 

 

 
6,529

Capitalized interest
 

 
6,414

 

 

 
6,414

Gains on fuel derivatives
 

 
27,064

 

 

 
27,064

Other, net
 
(4
)
 
(761
)
 
6

 

 
(759
)
Total
 
205,869

 
14,555

 
(85
)
 
(205,719
)
 
14,620

Income (Loss) Before Income Taxes
 
200,459

 
267,838

 
(2,939
)
 
(205,719
)
 
259,639

Income tax expense (benefit)
 
(1,105
)
 
59,797

 
(617
)
 

 
58,075

Net Income (Loss)
 
$
201,564

 
$
208,041

 
$
(2,322
)
 
$
(205,719
)
 
$
201,564

Comprehensive Income (Loss)
 
$
209,417

 
$
215,894

 
$
(2,322
)
 
$
(213,572
)
 
$
209,417




29



Condensed Consolidating Balance Sheets
September 30, 2019
 
 
Parent Issuer /
Guarantor
 
Subsidiary
Issuer /
Guarantor
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
(in thousands)
ASSETS
 
 

 
 

 
 

 
 

 
 

Current assets:
 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
1,594

 
$
502,834

 
$
7,734

 
$

 
$
512,162

Short-term investments
 

 
232,444

 

 

 
232,444

Accounts receivable, net
 

 
143,850

 
1,848

 
(232
)
 
145,466

Spare parts and supplies, net
 

 
37,536

 

 

 
37,536

Prepaid expenses and other
 
168

 
53,802

 
125

 

 
54,095

Total
 
1,762

 
970,466

 
9,707

 
(232
)
 
981,703

Property and equipment at cost
 

 
2,886,141

 
92,875

 

 
2,979,016

Less accumulated depreciation and amortization
 

 
(718,508
)
 
(20,066
)
 

 
(738,574
)
Property and equipment, net
 

 
2,167,633

 
72,809

 

 
2,240,442

Operating lease right-of-use assets
 

 
583,542

 

 

 
583,542

Long-term prepayments and other
 

 
138,520

 
297

 

 
138,817

Goodwill and other intangible assets, net
 

 
119,687

 
500

 

 
120,187

Intercompany receivable
 

 
532,762

 

 
(532,762
)
 

Investment in consolidated subsidiaries
 
1,587,146

 

 
504

 
(1,587,650
)
 

TOTAL ASSETS
 
$
1,588,908

 
$
4,512,610

 
$
83,817

 
$
(2,120,644
)
 
$
4,064,691

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

 
 

 
 

 
 

Current liabilities:
 
 

 
 

 
 

 
 

 
 

Accounts payable
 
$
732

 
$
150,177

 
$
4,685

 
$
(232
)
 
$
155,362

Air traffic liability
 

 
647,078

 
4,493

 

 
651,571

Other accrued liabilities
 

 
151,270

 
296

 

 
151,566

Current maturities of long-term debt, less discount, and finance lease obligations
 

 
77,014

 

 

 
77,014

Current maturities of operating leases
 

 
86,632

 

 

 
86,632

Total
 
732

 
1,112,171

 
9,474

 
(232
)
 
1,122,145

Long-term debt and finance lease obligations
 

 
704,527

 

 

 
704,527

Intercompany payable
 
521,329

 

 
11,433

 
(532,762
)
 

Other liabilities and deferred credits:
 
 

 
 

 
 

 
 

 
 
Noncurrent operating leases
 

 
455,765

 

 

 
455,765

Accumulated pension and other post-retirement benefit obligations
 

 
182,962

 

 

 
182,962

Other liabilities and deferred credits
 

 
98,130

 
1,101

 

 
99,231

Noncurrent frequent flyer deferred revenue
 

 
174,474

 

 

 
174,474

Deferred tax liabilities, net
 

 
258,740

 

 

 
258,740

Total
 

 
1,170,071

 
1,101

 

 
1,171,172

Shareholders’ equity
 
1,066,847

 
1,525,841

 
61,809

 
(1,587,650
)
 
1,066,847

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
1,588,908

 
$
4,512,610

 
$
83,817

 
$
(2,120,644
)
 
$
4,064,691





30



Condensed Consolidating Balance Sheets
December 31, 2018
 
 
Parent Issuer /
Guarantor
 
Subsidiary
Issuer /
Guarantor
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
(in thousands)
ASSETS
 
 
 
 

 
 

 
 

 
 

Current assets:
 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
5,154

 
$
255,279

 
$
8,144

 
$

 
$
268,577

Short-term investments
 

 
232,241

 

 

 
232,241

Accounts receivable, net
 

 
109,499

 
2,569

 
(234
)
 
111,834

Spare parts and supplies, net
 

 
33,942

 

 

 
33,942

Prepaid expenses and other
 
165

 
58,296

 
112

 

 
58,573

Total
 
5,319

 
689,257

 
10,825

 
(234
)
 
705,167

Property and equipment at cost
 

 
2,756,551

 
92,021

 

 
2,848,572

Less accumulated depreciation and amortization
 

 
(648,111
)
 
(15,350
)
 

 
(663,461
)
Property and equipment, net
 

 
2,108,440

 
76,671

 

 
2,185,111

Long-term prepayments and other
 
62,990

 
185,161

 
899

 
(63,494
)
 
185,556

Goodwill and other intangible assets, net
 

 
120,119

 
693

 

 
120,812

Intercompany receivable
 

 
456,338

 

 
(456,338
)
 

Investment in consolidated subsidiaries
 
1,325,380

 

 

 
(1,325,380
)
 

TOTAL ASSETS
 
$
1,393,689

 
$
3,559,315

 
$
89,088

 
$
(1,845,446
)
 
$
3,196,646

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

 
 

 
 

 
 

Current liabilities:
 
 

 
 

 
 

 
 

 
 

Accounts payable
 
$
665

 
$
139,552

 
$
3,163

 
$
(234
)
 
$
143,146

Air traffic liability
 

 
598,387

 
5,349

 

 
603,736

Other accrued liabilities
 

 
157,842

 
312

 

 
158,154

Current maturities of long-term debt, less discount, and finance lease obligations
 

 
101,052

 
45

 

 
101,097

Total
 
665

 
996,833

 
8,869

 
(234
)
 
1,006,133

Long-term debt and finance lease obligations
 

 
604,089

 
4,595

 

 
608,684

Intercompany payable
 
445,030

 

 
11,308

 
(456,338
)
 

Other liabilities and deferred credits:
 
 

 
 

 
 

 
 

 
0

Accumulated pension and other post-retirement benefit obligations
 

 
182,620

 

 

 
182,620

Other liabilities and deferred credits
 

 
118,682

 
1,144

 

 
119,826

Noncurrent frequent flyer deferred revenue
 

 
163,619

 

 

 
163,619

Deferred tax liabilities, net
 

 
167,770

 

 

 
167,770

Total
 

 
632,691

 
1,144

 

 
633,835

Shareholders’ equity
 
947,994

 
1,325,702

 
63,172

 
(1,388,874
)
 
947,994

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
1,393,689

 
$
3,559,315

 
$
89,088

 
$
(1,845,446
)
 
$
3,196,646






31



Condensed Consolidating Statements of Cash Flows
Nine months ended September 30, 2019
 
 
Parent Issuer /
Guarantor
 
Subsidiary
Issuer /
Guarantor
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
(in thousands)
Net Cash Provided By (Used In) Operating Activities
 
$
(587
)
 
$
462,734

 
$
(5,252
)
 
$

 
$
456,895

Cash Flows From Investing Activities:
 
 

 
 

 
 

 
 

 
 

Net payments to affiliates
 
(10,350
)
 
(75,273
)
 

 
85,623

 

Additions to property and equipment, including pre-delivery deposits
 

 
(274,786
)
 
(5,502
)
 

 
(280,288
)
Proceeds from the sale and sale leaseback of aircraft and aircraft related equipment
 

 
9,045

 

 

 
9,045

Purchases of investments
 

 
(265,705
)
 

 

 
(265,705
)
Sales of investments
 

 
267,464

 

 

 
267,464

Other
 

 
(6,275
)
 

 

 
(6,275
)
Net cash used in investing activities
 
(10,350
)
 
(345,530
)
 
(5,502
)
 
85,623

 
(275,759
)
Cash Flows From Financing Activities:
 
 

 
 

 
 

 
 

 
 

Long-term borrowings
 

 
227,889

 

 

 
227,889

Repayments of long-term debt and finance lease obligations
 

 
(95,350
)
 
(6
)
 

 
(95,356
)
Debt issuance costs
 

 
(1,162
)
 

 

 
(1,162
)
Dividend payments
 
(17,206
)
 

 

 

 
(17,206
)
Net payments from affiliates
 
75,273

 

 
10,350

 
(85,623
)
 

Repurchases of common stock
 
(50,690
)
 

 

 

 
(50,690
)
Other
 

 
(1,026
)
 

 

 
(1,026
)
Net cash provided by financing activities
 
7,377

 
130,351

 
10,344

 
(85,623
)
 
62,449

Net increase (decrease) in cash and cash equivalents
 
(3,560
)
 
247,555

 
(410
)
 

 
243,585

Cash, cash equivalents, & restricted cash - Beginning of Period
 
5,154

 
255,279

 
8,144

 

 
268,577

Cash, cash equivalents, & restricted cash - End of Period
 
$
1,594

 
$
502,834

 
$
7,734

 
$

 
$
512,162




32



Condensed Consolidating Statements of Cash Flows
Nine months ended September 30, 2018
 
 
Parent Issuer /
Guarantor
 
Subsidiary
Issuer /
Guarantor
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
(in thousands)
Net Cash Provided By (Used In) Operating Activities
 
$
(4,236
)
 
$
446,810

 
$
1,506

 
$

 
$
444,080

Cash Flows From Investing Activities:
 
 

 
 

 
 

 
 

 
 

Net payments to affiliates
 
(11,300
)
 
(39,980
)
 

 
51,280

 

Additions to property and equipment, including pre-delivery deposits
 

 
(373,099
)
 
(12,999
)
 

 
(386,098
)
Proceeds from the sale of aircraft and aircraft related equipment
 

 
117,143

 

 

 
117,143

Purchases of investments
 

 
(159,648
)
 

 

 
(159,648
)
Sales of investments
 

 
182,816

 

 

 
182,816

Net cash used in investing activities
 
(11,300
)
 
(272,768
)
 
(12,999
)
 
51,280

 
(245,787
)
Cash Flows From Financing Activities:
 
 

 
 

 
 

 
 

 
 

Long-term borrowings
 

 
86,500

 

 

 
86,500

Repayments of long-term debt and finance lease obligations
 

 
(53,734
)
 
(7
)
 

 
(53,741
)
Debt issuance costs
 

 
(1,108
)
 

 

 
(1,108
)
Dividend payments
 
(18,327
)
 

 

 

 
(18,327
)
Net payments from affiliates
 
39,980

 

 
11,300

 
(51,280
)
 

Repurchases of Common Stock
 
(53,894
)
 

 

 

 
(53,894
)
Other
 
78

 
(3,713
)
 

 

 
(3,635
)
Net cash provided by (used in) financing activities
 
(32,163
)
 
27,945

 
11,293

 
(51,280
)
 
(44,205
)
Net increase (decrease) in cash and cash equivalents
 
(47,699
)
 
201,987

 
(200
)
 

 
154,088

Cash, cash equivalents, & restricted cash - Beginning of Period
 
57,405

 
126,861

 
7,687

 

 
191,953

Cash, cash equivalents, & restricted cash - End of Period
 
$
9,706

 
$
328,848

 
$
7,487

 
$

 
$
346,041




Income Taxes
 
The income tax expense (benefit) is presented as if each entity that is part of the consolidated group files a separate return.

33



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, statements related to our financial statements and results of operations; any expectations of operating expenses, deferred revenue, interest rates, tax rates, income taxes, deferred tax assets, valuation allowances or other financial items; expectations regarding industry capacity, our operating performance, available seat miles, operating revenue per available seat mile and operating cost per available seat mile for the fourth quarter of 2019; our expected fleet as of September 30, 2020; service expansion in the fourth quarter of 2019; operations under a joint venture commencing in 2020; estimates of annual fuel expenses and measure of the effects of fuel prices on our business; the availability of financing; statements regarding our intention to pay quarterly dividends and the amounts thereof, if any; statements regarding our ability and intention to repurchase our shares; changes in our fleet plan and related cash outlays; committed capital expenditures; expected cash payments related to our post-retirement plan obligations; estimated financial charges; expected delivery of new aircraft and engines; the impact of accounting standards on our financial statements; the effects of any litigation on our operations or business; the effects of our fuel and currency risk hedging policies; the fair value and expected maturity of our debt obligations; our estimated contractual obligations; and 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,” “could,” “would,” “will,” “might,” “may,” 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.
 
Factors that could affect such forward-looking statements include, but are not limited to: our ability to accurately forecast quarterly and annual results; global economic volatility; macroeconomic developments; political developments; our dependence on the tourism industry; the price and availability of fuel; foreign currency exchange rate fluctuations; competitive pressures, including the impact of increasing industry capacity between North America and Hawai’i; fluctuations in demand for transportation in the markets in which we operate, including due to the occurrence of natural disasters, such as hurricanes, earthquakes and tsunamis; maintenance of privacy and security of customer-related information and compliance with applicable federal and foreign privacy or data security regulations or standards; our dependence on technology and automated systems; our reliance on third-party contractors; satisfactory labor relations; our ability to attract and retain qualified personnel and key executives; successful implementation of growth strategy and cost reduction goals; adverse publicity; risks related to the airline industry; our ability to obtain and maintain adequate facilities and infrastructure; seasonal and cyclical volatility; the effect of applicable state, federal and foreign laws and regulations; increases in insurance costs or reductions in coverage; the limited number of suppliers for aircraft, aircraft engines and parts; our existing aircraft purchase agreements; delays in aircraft or engine deliveries or other loss of fleet capacity; our ability to continue to generate sufficient cash flow to support the payment of a quarterly dividend; changes in our future capital needs; fluctuations in our share price; our financial liquidity; and our ability to implement our growth strategy. 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” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. 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.
 
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 collectively with the Neighbor Island routes, referred to as our Domestic 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 Hawai‘i and the tenth largest domestic airline in the United States based on revenue passenger miles reported by the Research and Innovative Technology Administration

34



Bureau of Transportation Statistics for the month of July 2019, the latest available data. As of September 30, 2019, we had 7,389 active employees.

General information about us is available at https://www.hawaiianairlines.com. 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 Securities and Exchange Commission.

Financial Highlights

GAAP net income in the third quarter of $80.1 million, or $1.70 per diluted share.

GAAP pre-tax margin for the third quarter of 14.4%.

Adjusted net income in the third quarter of $81.5 million, or $1.72 per diluted share.

Unrestricted cash and cash equivalents and short-term investments of $744.6 million.

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

Outlook

Looking ahead, industry capacity in our Domestic network is expected to remain at historically high levels in 2019. We expect our available seat miles during the three months ending December 31, 2019 to range between an increase of 3.0% to 4.5%, compared to the prior year period. While demand for travel to Hawai'i remains robust, the competitive environment results in our expectation of operating revenue per available seat mile to decline 0.5% to 3.5% as compared to the same period in 2018. We expect operating cost per available seat mile during the three months ending December 31, 2019 to range between a decrease of 0.1% to 2.5% compared to the prior year period. For the twelve-month period ending December 31, 2019, we expect operating cost per available seat mile to range between a decrease of 2.3% and 2.9%.

Partnerships

Together with Japan Airlines (JAL), we filed an application in 2018 with the U.S. Department of Transportation (DOT) and Japan's Ministry of Land, Infrastructure, Transport and Tourism (MLIT) seeking antitrust immunity (ATI) to create a joint venture that promises significant consumer benefits and the opportunity for service expansion. The partnership was launched in March 2018 with codeshare flights between Japan and Hawai'i. We further enhanced our comprehensive partnership with JAL with the announcement of reciprocal frequent flyer benefits for HawaiianMiles and JAL Mileage Bank members, which became effective in October 2018. In September 2019, we received a tentative ruling from the DOT to approve our joint venture without ATI. We are preparing a substantive response to the tentative DOT ruling addressing their areas of concern and seeking reconsideration of their preliminary determination regarding ATI. Such filing is due on November 12, 2019. If our revised application results in approval of ATI by the DOT, we anticipate that operations under the joint venture, including all of the expected benefits thereunder, will commence in 2020.

Fleet Summary

The table below summarizes our total fleet as of September 30, 2018 and 2019, and expected fleet as of September 30, 2020 (based on existing executed agreements):

35



 
 
September 30, 2018
 
September 30, 2019
 
September 30, 2020
Aircraft Type
 
Leased (1)
 
Owned
 
Total
 
Leased (1)
 
Owned
 
Total
 
Leased (1)
 
Owned
 
Total
A330-200
 
12

 
12

 
24

 
12

 
12

 
24

 
12

 
12

 
24

A321neo
 
2

 
7

 
9

 
2

 
13

 
15

 
2

 
16

 
18

767-300 (4)
 
4

 
2

 
6

 

 

 

 

 

 

717-200
 
5

 
15

 
20

 
5

 
15

 
20

 
5

 
15

 
20

ATR 42-500 (2)
 

 
4

 
4

 

 
4

 
4

 

 
4

 
4

ATR 72-200 (2)(3)
 

 
3

 
3

 

 
3

 
3

 

 
3

 
3

Total
 
23

 
43

 
66

 
19

 
47

 
66

 
19

 
50

 
69

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

(1)
Leased aircraft include aircraft under both finance and operating leases.

(2)
The ATR 42-500 turboprop and ATR 72-200 turboprop aircraft are owned by Airline Contract Maintenance & Equipment, Inc., a wholly-owned subsidiary of the Company.

(3)
Aircraft are utilized for our cargo operations.

(4)
We completed the exit from our Boeing 767-300 aircraft fleet in January 2019.

Results of Operations
 
For the three months ended September 30, 2019, we generated net income of $80.1 million, or $1.70 per diluted share, compared to net income of $93.5 million, or $1.84 per diluted share, for the same period in 2018. For the nine months ended September 30, 2019, we generated net income of $174.3 million, or $3.64 per diluted share, compared to net income of $201.6 million, or $3.96 per diluted share, for the same period in 2018.

Selected Consolidated Statistical Data (unaudited)
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
(in thousands, except as otherwise indicated)
Scheduled Operations (a):
 
 

 
 

 
 

 
 

Revenue passengers flown
 
3,066

 
3,035

 
8,843

 
8,943

Revenue passenger miles (RPM)
 
4,673,734

 
4,554,393

 
13,288,823

 
12,918,174

Available seat miles (ASM)
 
5,321,812

 
5,347,156

 
15,325,559

 
15,098,431

Passenger revenue per RPM (Yield)
 

14.85
¢
 

15.31
¢
 

14.67
¢
 

15.20
¢
Passenger load factor (RPM/ASM)
 
87.8
%
 
85.2
%
 
86.7
%
 
85.6
%
Passenger revenue per ASM (PRASM)
 

13.05
¢
 

13.04
¢
 

12.72
¢
 

13.01
¢
Total Operations (a):
 
 

 
 

 
 

 
 

Revenue passengers flown
 
3,072

 
3,039

 
8,853

 
8,949

RPM
 
4,679,632

 
4,557,706

 
13,300,090

 
12,921,666

ASM
 
5,331,914

 
5,352,976

 
15,341,510

 
15,104,500

Operating revenue per ASM (RASM)
 

14.16
¢
 

14.18
¢
 

13.85
¢
 

14.17
¢
Operating cost per ASM (CASM)
 

11.98
¢
 

12.02
¢
 

12.16
¢
 

12.55
¢
CASM excluding aircraft fuel, loss on sale of aircraft, and contract terminations expense (b)
 

9.38
¢
 

8.94
¢
 

9.53
¢
 

9.32
¢
Aircraft fuel expense per ASM (c)
 

2.60
¢
 

3.05
¢
 

2.64
¢
 

2.98
¢
Revenue block hours operated
 
56,088

 
55,147

 
162,556

 
155,369

Gallons of aircraft fuel consumed
 
69,749

 
72,133

 
201,547

 
206,032

Average cost per gallon of aircraft fuel (c)
 
$
1.99

 
$
2.26

 
$
2.01

 
$
2.18

 
(a)
Includes the operations of our contract carrier under a capacity purchase agreement.

36



(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 a reconciliation of non-GAAP measures.
(c)
Includes applicable taxes and fees.

Operating Revenue
 
During the three and nine months ended September 30, 2019, operating revenue decreased by $3.9 million, or 0.5%, and $15.9 million, or 0.7%, respectively, as compared to the same periods in 2018, driven primarily by decreased passenger revenue and is discussed further below:

Passenger revenue

For the three and nine months ended September 30, 2019, passenger revenue decreased by $3.0 million, or 0.4%, and $15.0 million, or 0.8%, respectively, as compared to the prior year periods. Details of these changes are reflected in the table below: 
 
 
Three months ended September 30, 2019 as compared to three months ended September 30, 2018
 
Nine months ended September 30, 2019 as compared to nine months ended September 30, 2018
 
 
Change in scheduled passenger revenue
 
Change in Yield
 
Change in RPM
 
Change in ASM
 
Change in scheduled passenger revenue
 
Change in Yield
 
Change in RPM
 
Change in ASM
 
 
(in millions)
 
 
 
 
 
 
 
(in millions)
 
 
 
 
 
 
Domestic
 
$
(2.3
)
 
(5.2
)%
 
5.0
 %
 
2.0
 %
 
$
(11.2
)
 
(6.6
)%
 
6.3
 %
 
5.0
 %
International
 
(0.7
)
 
1.7

 
(1.9
)
 
(5.2
)
 
(3.8
)
 
3.2

 
(3.9
)
 
(5.1
)
Total scheduled
 
$
(3.0
)
 
(3.0
)%
 
2.6
 %
 
(0.5
)%
 
$
(15.0
)
 
(3.5
)%
 
2.9
 %
 
1.5
 %

Domestic revenue decreased by $2.3 million during the three months ended September 30, 2019 as compared to the same period in 2018. The decrease was primarily driven by a 4.4% decline in average fares, partially offset by a 1.3% increase in total passengers. Domestic revenue decreased by $11.2 million during the nine months ended September 30, 2019, as compared to the same period in 2018, as capacity reductions on short-haul routes outpaced capacity and passenger growth on longer haul routes combined with a 2.9% decline in average fares. As a result, RPM increased 6.3%, while yield declined 6.6% during the nine months ended September 30, 2019.

International revenue decreased by $0.7 million and $3.8 million during the three and nine months ended September 30, 2019, respectively, as compared to same periods in 2018 on reduced capacity, namely the suspension of our service to Beijing, China in October 2018.

During the fourth quarter of 2019, we will expand service between Honolulu, Hawai'i and San Francisco, California (October 2019) with an additional daily flight and commence service between Honolulu, Hawai'i and Fukuoka, Japan (November 2019) and Kahului, Hawai'i and Las Vegas, Nevada (December 2019). We also received approval from the U.S. Department of Transportation to provide for an additional slot for service to Haneda Airport in Tokyo, Japan, which will commence in 2020.

In January 2019, we completed the retirement of our Boeing 767-300 fleet, and during the nine months ended September 30, 2019, we took delivery of four A321neo aircraft, bringing our total A321 fleet to fifteen aircraft as of September 30, 2019. We expect to take delivery of an additional two A321neo aircraft during the remainder of 2019 and our eighteenth and final A321neo aircraft in early 2020.

Other Operating Revenue

For the three and nine months ended September 30, 2019, Other operating revenue decreased by $1.0 million, or 1.6%, and $0.9 million, or 0.5%, respectively, as compared to the prior year periods. The decrease was primarily driven by a decline in cargo revenue.

Operating Expense
 
Operating expenses were $638.5 million and $643.3 million for the three months ended September 30, 2019 and 2018, respectively, and $1.9 billion and $1.9 billion for the nine months ended September 30, 2019 and 2018, respectively. Increases (decreases) in operating expenses for the three and nine months ended September 30, 2019, as compared to the same period in 2018, are detailed below:

37




 
 
Increase / (decrease) for the three months ended September 30, 2019 compared to the three months ended September 30, 2018
 
Increase / (decrease) for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018
 
 
$
 
%
 
$
 
%
Operating expenses
 
(in thousands)
 
 
 
(in thousands)
 
 
Wages and benefits
 
$
6,220

 
3.5
 %
 
$
21,091

 
4.1
 %
Aircraft fuel, including taxes and delivery
 
(24,346
)
 
(14.9
)
 
(44,114
)
 
(9.8
)
Maintenance, materials and repairs
 
4,245

 
7.4

 
6,310

 
3.6

Aircraft and passenger servicing
 
(301
)
 
(0.7
)
 
3,096

 
2.6

Commissions and other selling
 
587

 
1.8

 
116

 
0.1

Aircraft rent
 
(1,234
)
 
(3.9
)
 
(1,760
)
 
(1.9
)
Other rentals and landing fees
 
118

 
0.4

 
551

 
0.6

Depreciation and amortization
 
5,223

 
14.4

 
17,737

 
17.5

Purchased services
 
611

 
1.9

 
3,202

 
3.4

Contract terminations expense
 

 

 
(35,322
)
 
(100.0
)
Other
 
4,131

 
10.9

 
64

 
0.1

Total
 
$
(4,746
)
 
(0.7
)%
 
$
(29,029
)
 
(1.5
)%
 
Wages and benefits

Wages and benefits expense increased by $6.2 million, or 3.5%, and $21.1 million, or 4.1%, for the three and nine months ended September 30, 2019, respectively, as compared to the same periods in 2018. The increase was a result of higher salary expense, driven by increased headcount and annual rate increases for certain of our collective bargaining groups in early 2019.

Aircraft fuel
 
Aircraft fuel expense decreased during the three and nine months ended September 30, 2019, as compared to the prior year periods, primarily due to a decrease in the average fuel price per gallon combined with a decrease in consumption, as illustrated in the following table: 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2019
 
2018
 
% Change
 
2019
 
2018
 
% Change
 
 
(in thousands, except per-gallon amounts)
 
 
 
(in thousands, except per-gallon amounts)
 
 
Aircraft fuel expense, including taxes and delivery
 
$
138,586

 
$
162,932

 
(14.9
)%
 
$
405,290

 
$
449,404

 
(9.8
)%
Fuel gallons consumed
 
69,749

 
72,133

 
(3.3
)%
 
201,547

 
206,032

 
(2.2
)%
Average fuel price per gallon, including taxes and delivery
 
$
1.99

 
$
2.26

 
(11.9
)%
 
$
2.01

 
$
2.18

 
(7.8
)%
 
We believe economic fuel expense is a good 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 our 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 derivatives settled in the period, inclusive of costs related to hedging premiums. Economic fuel expense is calculated as follows: 

38



 
 
Three months ended September 30,
 
 Nine months ended September 30,
 
 
2019
 
2018
 
% Change
 
2019
 
2018
 
% Change
 
 
(in thousands, except per-gallon amounts)
 
 
 
(in thousands, except per-gallon amounts)
 
 
Aircraft fuel expense, including taxes and delivery
 
$
138,586

 
$
162,932

 
(14.9
)%
 
$
405,290

 
$
449,404

 
(9.8
)%
Realized losses (gains) on settlement of fuel derivative contracts
 
3,399


(8,085
)

NM


9,294


(24,572
)
 
NM

Economic fuel expense
 
$
141,985

 
$
154,847

 
(8.3
)%
 
$
414,584

 
$
424,832

 
(2.4
)%
Fuel gallons consumed
 
69,749

 
72,133

 
(3.3
)%
 
201,547

 
206,032

 
(2.2
)%
Economic fuel costs per gallon
 
$
2.04

 
$
2.15

 
(5.1
)%
 
$
2.06

 
$
2.06

 
 %
 
See Item 3, "Quantitative and Qualitative Disclosures About Market Risk" for additional discussion of our aircraft fuel costs and related hedging program.

Depreciation and amortization

Depreciation and amortization expense increased by $5.2 million, or 14.4%, and $17.7 million, or 17.5%, for the three and nine months ended September 30, 2019, respectively, as compared to the same periods in 2018, due to the increase in the number of owned aircraft, specifically the addition of six Airbus A321neo aircraft that were placed into service since September 30, 2018.

Contract terminations expense

During the nine months ended September 30, 2018, we terminated two contracts which incurred a total of $35.3 million in expense. The transactions are described below:

In January 2018, we entered into a transaction with a lessor to early terminate three Boeing 767-300 aircraft leases and concurrently entered into a forward sale agreement for the same three Boeing 767-300 aircraft, including two Pratt & Whitney 4060 engines for each aircraft. These aircraft were previously accounted for as operating leases. In order to exit the leases and purchase the aircraft, we agreed to pay a total of $67.1 million (net of all deposits), of which a portion was expensed immediately and recognized as a contract termination fee. The expensed amount represents the total purchase price amount over fair value of the aircraft purchased as of the date of the transaction.

In February 2018, we exercised our right to terminate the aircraft purchase agreement with Airbus for six Airbus A330-800neo aircraft and the purchase rights for an additional six Airbus A330-800neo aircraft. To terminate the purchase agreement, we were obligated to repay Airbus for concessions received relating to a prior firm order, training credits, as well as forfeit the pre-delivery progress payments made towards the flight equipment. We recorded a contract terminations expense to reflect a portion of the termination penalty within our Consolidated Statements of Operations.

Nonoperating Income (Expense)

Net nonoperating expense increased by $9.0 million, or 971.9%, and $35.7 million, or 244.4%, for the three and nine months ended September 30, 2019, respectively, as compared to the prior year periods. The increase in expense in both periods was primarily attributed to the movement of realized and unrealized gains and losses associated with our fuel derivative program. For the three and nine months ended September 30, 2019, we recorded a net loss of $4.6 million and $7.2 million, respectively, as compared to a net gain of $3.5 million and $27.1 million, respectively, during the same periods in 2018.

Income Taxes

Our effective tax rate was 26.2% and 19.9% for the three months ended September 30, 2019 and 2018, respectively, and 26.5% and 22.4%, respectively, for the nine months ended September 30, 2019 and 2018. The effective tax rate represents a blend of federal and state taxes and includes the impact of certain nondeductible items. In certain interim periods, we may have adjustments to our net deferred tax assets as a result of changes in prior year estimates and tax laws enacted during the period, which will impact the effective tax rate for that interim period.

Liquidity and Capital Resources
Our primary sources of liquidity are:

39



Our existing cash and cash equivalents and short-term investments of $744.6 million, and our expected cash from operations;
Our 30 unencumbered aircraft as of September 30, 2019 that could be financed, if necessary; and
Our $235.0 million revolving credit facility with no outstanding borrowing. Information about this facility can be found in our Annual Report on Form 10-K for the year ended December 31, 2018.
At September 30, 2019, we had $781.5 million of debt and finance lease obligations, including $77.0 million classified as a current liability in the Consolidated Balance Sheets. As of December 31, 2018, our current liabilities exceeded our current assets by approximately $140.4 million. However, approximately $651.6 million of our current liabilities are related to our advanced ticket sales and frequent flyer deferred revenue, both of which largely represent revenue to be recognized for travel within the next 12 months and not actual cash outlays. The deficit in working capital does not have an adverse impact to our cash flows, liquidity, or operations.

Cash Flows
Net cash provided by operating activities was $456.9 million and $444.1 million during the nine months ended September 30, 2019 and 2018, respectively. Operating cash flows are primarily derived from providing air transportation to customers. The vast majority of tickets are purchased in advance of when travel is provided, and in some cases, several months before the anticipated travel date. The operating cash flows during each of the nine months ended September 30, 2019 and 2018 were impacted by changes in Air traffic liability and current frequent flyer deferred revenue, Accounts receivables and Other asset and liabilities, net.
Cash used in investing activities was $275.8 million and $245.8 million during the nine months ended September 30, 2019 and 2018, respectively. Investing activities included Capital expenditures, primarily related to aircraft and other equipment, and the purchases and sales of short-term investments. During the nine months ended September 30, 2019, capital expenditures were $280.3 million, the majority of which relate to aircraft deliveries in the period combined with predelivery payments for future aircraft deliveries, including our Boeing 787-9 aircraft, as compared with $386.1 million in capital expenditures during the nine months ended September 30, 2018. This was offset by proceeds of $9.0 million and $117.1 million resulting from the disposition of aircraft and aircraft related equipment during the nine months ended September 30, 2019 and 2018, respectively. During the nine months ended September 30, 2019, our purchases and sales of short-term investments resulted in net cash inflow of $1.8 million as compared to net cash inflow of $23.2 million during the same period in 2018.
Net cash provided by financing activities was $62.4 million during the nine months ended September 30, 2019 as compared to net cash used in financing activities of $44.2 million during the nine months ended September 30, 2018. During the nine months ended September 30, 2019, we entered into two Japanese Yen denominated debt financings, as further discussed in Note 9 to our Consolidated Financial Statements, and received proceeds from long-term borrowings of $227.9 million. Additionally, we repaid $95.4 million in scheduled debt and finance lease obligations, including a final payment of $39.7 million towards our debt facility originally entered into for the financing of our Boeing 717-200 aircraft, compared with $53.7 million during the prior year period. We repurchased $50.7 million of our outstanding common stock through authorized share repurchases during the nine months ended September 30, 2019, compared with repurchases of $53.9 million during the same period in 2018. We also paid $17.2 million in dividends to shareholders during the nine months ended September 30, 2019, compared with $18.3 million in dividends during the nine months ended September 30, 2018. Although we currently intend to continue paying dividends on a quarterly basis for the foreseeable future, our Board of Directors may change the timing, amount, and payment of dividends on the basis of the results of operations, financial condition, cash requirements, future prospects, and other factors deemed relevant by our Board of Directors.

40



Capital Commitments

As of September 30, 2019, 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
A321neo aircraft
 
3

 
3

 
Between 2019 and 2020
B787-9 aircraft
 
10

 
10

 
Between 2021 and 2025
 
 
 
 
 
 
 
Pratt & Whitney spare engines:
 
 

 
 

 
 
A321neo spare engines (1)
 

 
2

 
N/A
General Electric GEnx spare engines:
 
 

 
 

 
 
B787-9 spare engines
 
2

 
2

 
Between 2021 and 2025
 

(1)
During the second quarter of 2019, we took delivery of our remaining A321neo spare engine and maintain purchase rights for an additional two engines, which expire on December 31, 2019.

In July 2018, we executed a purchase agreement for the purchase of 10 Boeing 787-9 "Dreamliner" aircraft with purchase rights for an additional 10 aircraft. In October 2018, we entered into an agreement for the selection of GEnx engines to power our Boeing 787-9 fleet. The agreements provide for the purchase of 20 GEnx engines, the right to purchase an additional 20 GEnx engines and the purchase of up to four spare engines. The committed expenditures for these agreements are reflected within our Contractual Obligations Table.

In order to complete the purchase of these aircraft and fund related costs, we may need to secure additional financing. We have backstop financing available from aircraft and engine manufacturers, subject to certain customary conditions. We are also 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 an impact on our ability to fulfill our existing purchase commitments and a material adverse effect on our operations.

Stock Repurchase Program and Dividends

In November 2018, our Board of Directors approved a stock repurchase program pursuant to which we may repurchase up to $100 million of our outstanding common stock over a two-year period through December 2020. The stock repurchase program is subject to further modification or termination at any time. We spent $20.0 million and $50.7 million to repurchase and retire approximately 0.8 million shares and 1.9 million shares of our common stock in open market transactions during the three and nine months ended September 30, 2019, respectively. We spent $31.1 million and $53.9 million to repurchase and retire approximately 0.8 million shares and 1.4 million shares of our common stock in open market transactions during the three and nine months ended September 30, 2018, respectively. As of September 30, 2019, we had $46.8 million remaining to spend under our stock repurchase program.

During the three months ended September 30, 2019, we declared and paid cash dividends of $0.12 per share, totaling $5.7 million, which was paid on August 30, 2019, to stockholders of record as of August 16, 2019. During the nine months ended September 30, 2019, we declared and paid cash dividends of $0.12 per share for each of the three quarters, totaling $17.2 million.

Credit Card Holdbacks

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 our unaudited Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q. As of September 30, 2019 and December 31, 2018, there were no holdbacks held with our credit card processors.

In the event of a material adverse change in our business, the holdbacks could increase to an amount up to 100% of the outstanding credit card amounts that is unflown (e.g. air traffic liability), which would also result in an increase in our required

41



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 have a material adverse impact on our operations.

Pension and Postemployment Benefit Plan Funding

During the three and nine months ended September 30, 2019 and 2018, we had no required contributions to our defined benefit plans and made no such contributions. 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, 2019 are summarized in the following table: 
Contractual Obligations
 
Total
 
Remaining in 2019
 
2020 - 2021
 
2022 - 2023
 
2024 and
thereafter
 
 
(in thousands)
Debt and finance lease obligations (1)
 
$
893,256

 
$
16,376

 
$
227,293

 
$
219,616

 
$
429,971

Operating leases—aircraft and related equipment (2) 
 
497,286

 
27,531

 
177,822

 
133,440

 
158,493

Operating leases—non-aircraft
 
214,622

 
1,717

 
15,351

 
16,583

 
180,971

Purchase commitments - aircraft and aircraft related (3) 
 
1,757,519

 
113,604

 
491,269

 
683,248

 
469,398

Purchase commitments - non-aircraft (4) 
 
461,232

 
20,356

 
149,370

 
124,386

 
167,120

Projected employee benefit contributions (5) 
 
40,600

 

 
10,800

 
17,800

 
12,000

Total contractual obligations
 
$
3,864,515

 
$
179,584

 
$
1,071,905

 
$
1,195,073

 
$
1,417,953


(1)
Amounts reflect finance lease obligations for one Airbus A330-200 aircraft, two Boeing 717-200 aircraft, two Airbus A321neo aircraft, one Airbus A330 flight simulator, and aircraft and IT related equipment.

(2)
Amounts reflect leases for eleven Airbus A330-200 aircraft and three Boeing 717-200 aircraft.

(3)
Amounts include our firm commitments for aircraft and aircraft related equipment.

(4)
Amounts include commitments for services provided by third-parties for aircraft maintenance for our Airbus fleet, accounting, IT, capacity purchases, and the estimated rental payments for a cargo and maintenance hangar. 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)
Amounts include our estimated minimum contributions to our pension plans (based on actuarially determined estimates) and contributions to 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.

Off-Balance Sheet Arrangements

During the periods presented we did not have, nor do we currently have, any off-balance sheet arrangements as defined under the applicable rules of the SEC.

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 many 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

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

42




See table below for reconciliation between GAAP consolidated net income to adjusted consolidated net income, including per share amounts (in thousands unless otherwise indicated). The adjustments are described below:

Changes in fair value of derivative contracts, net of tax, are based on market prices for open contracts as of the end of the reporting period. This line item includes the unrealized amounts of fuel derivatives (not designated as hedges) that will settle in future periods and the reversal of prior period unrealized amounts. We believe that excluding the impact of these derivative adjustments helps investors analyze our operational performance and compare our results to other airlines in the periods presented below.
During the nine months ended September 30, 2019, we recorded a gain on disposal for Boeing 767-300 aircraft equipment of $1.9 million, in conjunction with the retirement of our Boeing 767-300 fleet. During each of the three and nine months ended September 30, 2018, we also recorded a loss on the sale of two Boeing 767-300 aircraft covered under a forward sale agreement of $1.8 million.
Unrealized loss (gain) on foreign debt is based on the fluctuation in exchanges rates and the measurement of foreign-denominated debt to our functional currency. We believe that excluding the impact of these amounts helps investors analyze our operational performance and compare our results to other airlines in the periods presented below.
During the nine months ended September 30, 2018, we terminated two contracts which incurred a total of $35.3 million in contract terminations expense. In February 2018, we exercised our right to terminate the purchase agreement with Airbus for six Airbus A330-800neo aircraft and the purchase rights for an additional six Airbus A330-800neo aircraft. We recorded a contract terminations expense to reflect a portion of the termination penalty. In January 2018, we entered into a transaction with our lessor to early terminate and purchase three Boeing 767-300 aircraft leases and concurrently entered into a forward sale agreement for the same three Boeing 767-300 aircraft, including two Pratt & Whitney 4060 engines for each aircraft. These aircraft were previously accounted for as operating leases. In order to exit the leases and purchase the aircraft, we agreed to pay a total of $67.1 million (net of all deposits) of which a portion was expensed immediately and recognized as a lease termination fee. The expensed amount represents the total purchase price over fair value of the aircraft purchased as of the date of the transaction.
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
Total
 
Diluted Per Share
 
Total
 
Diluted Per Share
 
Total
 
Diluted Per Share
 
Total
 
Diluted Per Share
 
 
(in thousands, except for per share data)
GAAP Net Income, as reported
 
$
80,076

 
$
1.70

 
$
93,542

 
$
1.84

 
$
174,267

 
$
3.64

 
$
201,564

 
$
3.96

Adjusted for:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Changes in fair value of derivative contracts
 
1,154

 
0.02

 
4,590

 
0.09

 
(2,091
)
 
(0.04
)
 
(2,492
)
 
(0.05
)
Loss (gain) on sale of aircraft equipment
 

 

 
1,844

 
0.04

 
(1,948
)
 
(0.04
)
 
1,844

 
0.04

Unrealized loss (gain) on foreign debt
 
717

 
0.01

 
(2,267
)
 
(0.04
)
 
2,254

 
0.05

 
(2,331
)
 
(0.05
)
Contract terminations expense
 

 

 

 

 

 

 
35,322

 
0.69

Tax effect of adjustments
 
(490
)
 
(0.01
)
 
(1,042
)
 
(0.02
)
 
473

 
0.01

 
(8,086
)
 
(0.16
)
Adjusted Net Income
 
$
81,457

 
$
1.72

 
$
96,667

 
$
1.91

 
$
172,955

 
$
3.62

 
$
225,821

 
$
4.43


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 and special items. These amounts are included in CASM, but for internal purposes we consistently use unit cost metrics that exclude fuel and special items (if applicable) to measure and monitor our costs.


43



CASM and CASM-excluding aircraft fuel, gain on sale of aircraft and equipment, and contract terminations expense are summarized in the table below: 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
(in thousands, except as otherwise indicated)
GAAP Operating Expenses
 
$
638,515

 
$
643,261

 
$
1,865,898

 
$
1,894,927

Adjusted for:
 
 
 
 
 
 
 
 
Aircraft fuel, including taxes and delivery
 
(138,586
)
 
(162,932
)
 
(405,290
)
 
(449,404
)
Gain (loss) on sale of aircraft and equipment
 

 
(1,844
)
 
1,948

 
(1,844
)
Contract terminations expense
 

 

 

 
(35,322
)
Adjusted Operating Expenses
 
$
499,929

 
$
478,485

 
$
1,462,556

 
$
1,408,357

Available Seat Miles
 
5,331,914

 
5,352,976

 
15,341,510

 
15,104,500

CASM - GAAP
 

11.98
¢
 

12.02
¢
 

12.16
¢
 

12.55
¢
Adjusted for:
 
 
 
 
 
 
 
 
Aircraft fuel, including taxes and delivery
 
(2.60
)
 
(3.05
)
 
(2.64
)
 
(2.98
)
Gain (loss) on sale of aircraft and equipment
 

 
(0.03
)
 
0.01

 
(0.01
)
Contract terminations expense
 

 

 

 
(0.24
)
Adjusted CASM
 

9.38
¢
 

8.94
¢
 

9.53
¢
 

9.32
¢
 
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. With the exception of the items noted below, there have been no material changes to our critical accounting policies during the three months ended September 30, 2019. For more information on our critical accounting policies, see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year ended December 31, 2018.

Leases

In 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)." This ASU and subsequently issued amendments require leases with durations greater than twelve months to be recognized on the consolidated balance sheet. We adopted ASC 842 as of January 1, 2019 using the modified retrospective approach. Prior year financial statements were not recast under the new standard. We elected the package of transition provisions available for expired or existing contracts, which allowed us to carry-forward our historical assessments of (a) whether contracts are, or contain leases, (b) lease classification, and (c) initial direct costs. We lease property and equipment under finance and operating lease, including aircraft and related engines, real property, airport and terminal facilities, maintenance facilities, and general offices. We do not separate lease and nonlease components of contracts. Certain leases include escalation clauses, renewal options, and/or termination options. When lease renewals or termination options are considered to be reasonably assured, such periods are included in the lease term and fixed payments are included in the calculation of the lease liability and ROU asset.

When available, we utilize the rate implicit in the lease to discount lease payments to present value; however, all of our leases do not provide a readily determinable implicit rate. Therefore, we estimate our incremental borrowing rate to discount lease payments based on information available at lease commencement. We give consideration to our recent debt issuances as well as publicly available data for instruments with similar characteristics when calculating our incremental borrowing rates.


44



ITEM 3.                QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
We are subject to certain market risks, including commodity price risk (e.g., aircraft fuel prices), interest rate risk and foreign currency risk. We have market-sensitive instruments in the form of financial derivatives used to offset our exposure to aircraft fuel price increases and financial hedge instruments used to hedge our exposure to foreign currency exchange risk. The adverse effects of potential changes in these market risks are discussed below.

The sensitivity analyses presented below 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 22% of our operating expenses for each of the three and nine months ended September 30, 2019, respectively, and 25% and 24% of our operating expenses for the three and nine months ended September 30, 2018, respectively. Approximately 71% of our fuel was based on Singapore jet fuel prices, approximately 25% was based on U.S. West Coast jet fuel prices, and approximately 4% was based on other jet fuel prices. We periodically enter into derivative financial instruments to manage our exposure to changes in the price of jet fuel. As of September 30, 2019, we hedged approximately 50% of our projected fuel requirements for the remainder of 2019 with crude oil call options. As of September 30, 2019, the fair value of these fuel derivative agreements reflected a net asset of $3.4 million, which is recorded as a prepaid expense and other asset in our unaudited Consolidated Balance Sheet. Based on the amount of fuel expected to be consumed for the remainder of 2019, for every one cent increase in the cost of a gallon of jet fuel, our fuel expense would increase by approximately $0.7 million.

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 fixed forward pricing contracts, swaps, calls, collars and other option-based structures. We do not hold or issue derivative financial instruments for trading purposes.

We continue to believe that our fuel derivative program is an important part of our strategy to reduce our exposure to volatile fuel prices. We expect to continue to enter into these types of contracts prospectively, although significant changes in market conditions could affect our decisions. For more discussion, see Note 8 to our Consolidated Financial Statements.

Interest Rates
We have exposure to market risk associated with changes in interest rates related to our pre-tax earnings and cash flows associated with our interest-bearing cash equivalent accounts and short-term investments. Based on the balances of our cash and cash equivalents, and short-term investments as of September 30, 2019, a change in interest rates is unlikely to have a material impact on our results of operations.
Our variable-rate debt agreements include the revolving credit facility and secured loan agreements, the terms of which are discussed in Note 9 to our Consolidated Financial Statements. At September 30, 2019, we had $781.5 million of fixed-rate debt including finance lease obligations, facility agreements for aircraft purchases, and the outstanding notes related to the aircraft purchase financing. As of September 30, 2019, we had no variable-rate debt. A 10% increase in average annual interest rates would have decreased the estimated fair value of our fixed-rate long-term debt by $5.3 million as of September 30, 2019.

Foreign Currency
We have exposure to market risk associated with changes in foreign currency exchange rates because we generate sales, incur expenses, and have debt denominated and paid in foreign currencies, predominantly in Japanese Yen and to a lesser extent, the Australian Dollar.
To mitigate the exchange rate risk, we transact our international sales and expenditures in the same foreign currency, to the extent practical. Additionally, our Japanese Yen denominated debt serves as a natural hedge against the volatility of exchange rates against cash inflows. We also have an established foreign currency derivative program, where we periodically enter into foreign currency forward contracts. At September 30, 2019, the fair value of our foreign currency forwards reflected a net asset of $3.2 million in the consolidated balance sheet.
Based on forecasted transactions in foreign currency, a 10% depreciation in the U.S. dollar, relative to the Japanese Yen and Australian Dollar, would result in a decrease in annual net income, net of the impact of foreign currency hedges, of approximately $25.3 million.

45




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 (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), 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, 2019 to provide reasonable assurance that the information required to be disclosed by the Company in reports it files under the Exchange Act, 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 were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2019 which materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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.


46



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 Annual Report on Form 10-K for the fiscal year ended December 31, 2018 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.
 
The following table displays information with respect to our repurchases of shares of our common stock during the three months ended September 30, 2019:

Period
 
Total number of shares purchased (i)
 
Average price paid per share (ii)
 
Total number of shares purchased as part of publicly announced plans or programs (i)
 
Approximate dollar value of shares that may yet be purchased under the plans or programs (in millions) (i)
July 1, 2019 - July 31, 2019
 
251,433

 
$
27.56

 
251,433

 
 
August 1, 2019 - August 31, 2019
 
276,574

 
25.06

 
276,574

 
 
September 1, 2019 - September 30, 2019
 
234,536

 
26.18

 
234,536

 
 
Total
 
762,543

 
 
 
762,543

 
$
46.8


(i)
In November 2018, our Board of Directors approved the repurchase of up to an additional $100 million of our outstanding common stock through December 2020. The stock repurchase program is subject to further modification or termination at any time.

(ii)
Weighted average price paid per share is calculated on a settlement basis and excludes commission.

ITEM 3.                                                DEFAULTS UPON SENIOR SECURITIES.
 
None.
 
ITEM 4.                                                MINE SAFETY DISCLOSURES.
 
Not applicable.

ITEM 5.                                                OTHER INFORMATION.
 
None.


47



ITEM 6.                                                EXHIBITS.
 
Exhibit No.
 
Description
 
 
 
31.1
 
 
 
 
31.2
 
 
 
 
32.1
 
 
 
 
32.2
 
 
 
 
101.INS
 
XBRL Instance Document - The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL 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

48



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.
 
 
 
 
 
 
 
 
Date:
October 22, 2019
By:
/s/ Shannon L. Okinaka
 
 
 
Shannon L. Okinaka
 
 
 
Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)


49