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HAWAIIAN HOLDINGS INC - Quarter Report: 2020 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, 2020
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 classTrading symbol(s)Name of each exchange on which registered
Common Stock ($0.01 par value)HANASDAQ 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  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  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,” “non-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 21, 2020, 46,003,751 shares of the registrant’s common stock were outstanding.



Hawaiian Holdings, Inc.
Form 10-Q
Quarterly Period ended September 30, 2020
 
Table of Contents
 
   
   
 
   
 
  
 
   
 
   
 
   
   
   
   
   
   
   
   
   
   
   
 
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PART I. FINANCIAL INFORMATION

ITEM 1.                   FINANCIAL STATEMENTS.
Hawaiian Holdings, Inc.
Consolidated Statements of Operations
(in thousands, except per share data)
Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
 (unaudited)
Operating Revenue:  
Passenger$39,777 $694,263 $573,008 $1,948,990 
Other36,205 60,888 122,122 175,101 
Total75,982 755,151 695,130 2,124,091 
Operating Expenses:  
Wages and benefits19,494 182,862 238,077 537,997 
Aircraft fuel, including taxes and delivery14,544 138,586 135,025 405,290 
Maintenance, materials and repairs18,664 61,363 93,067 182,539 
Aircraft and passenger servicing5,140 41,762 46,459 120,303 
Depreciation and amortization36,734 41,596 115,516 119,274 
Aircraft rent26,230 30,534 77,120 91,773 
Commissions and other selling5,201 33,291 34,844 96,598 
Other rentals and landing fees14,156 33,345 57,599 95,777 
Purchased services22,878 33,120 77,006 98,306 
Special items17,489 — 178,407 — 
Other16,525 42,056 80,143 118,041 
Total197,055 638,515 1,133,263 1,865,898 
Operating Income (Loss)(121,073)116,636 (438,133)258,193 
Nonoperating Income (Expense):  
Other nonoperating special items(7,011)— (7,011)— 
Interest expense and amortization of debt discounts and issuance costs(11,596)(6,438)(26,612)(21,268)
Losses on fuel derivatives(297)(4,553)(6,933)(7,203)
Interest income1,942 3,148 7,728 9,205 
Capitalized interest831 1,171 2,583 3,713 
Other, net(6,380)(1,445)(2,915)(5,553)
Total(22,511)(8,117)(33,160)(21,106)
Income (Loss) Before Income Taxes(143,584)108,519 (471,293)237,087 
Income tax expense (benefit)(46,485)28,443 (122,918)62,820 
Net Income (Loss)$(97,099)$80,076 $(348,375)$174,267 
Net Income (Loss) Per Share  
Basic$(2.11)$1.70 $(7.58)$3.65 
Diluted$(2.11)$1.70 $(7.58)$3.64 
Weighted Average Number of Common Stock Shares Outstanding:
Basic46,001 47,119 45,980 47,784 
Diluted46,001 47,236 45,980 47,847 
Cash dividends declared per common stock share$— $0.12 $0.12 $0.36 

See accompanying Notes to Consolidated Financial Statements.
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Hawaiian Holdings, Inc.
Consolidated Statements of Comprehensive Income
(in thousands)
 Three Months Ended September 30,
 20202019
 (unaudited)
Net Income (Loss)$(97,099)$80,076 
Other comprehensive income (loss), net:  
Net change related to employee benefit plans, net of tax benefit of $3,272 and net of tax expense of $38 for 2020 and 2019, respectively
(11,284)786 
Net change in derivative instruments, net of tax benefit of $416 and net of tax expense of $690 for 2020 and 2019, respectively
(1,266)2,096 
Net change in available-for-sale investments, net of tax benefit of $197 and net of tax expense of $32 for 2020 and 2019, respectively
(579)92 
Total other comprehensive income (loss)(13,129)2,974 
Total Comprehensive Income (Loss)$(110,228)$83,050 

 Nine Months Ended September 30,
 20202019
 (unaudited)
Net Income (Loss)$(348,375)$174,267 
Other comprehensive income (loss), net:  
Net change related to employee benefit plans, net of tax benefit of $2,833 and net of tax expense of $390 for 2020 and 2019, respectively
(9,950)2,031 
Net change in derivative instruments, net of tax benefit of $1,098 and $122 for 2020 and 2019, respectively
(3,341)(405)
Net change in available-for-sale investments, net of tax expense of $281 and $457 for 2020 and 2019, respectively
875 1,401 
Total other comprehensive income (loss)(12,416)3,027 
Total Comprehensive Income (Loss)$(360,791)$177,294 


See accompanying Notes to Consolidated Financial Statements.

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Hawaiian Holdings, Inc.
Consolidated Balance Sheets
(in thousands, except shares)
September 30, 2020
(unaudited)
December 31, 2019
ASSETS  
Current Assets:  
Cash and cash equivalents$537,002 $373,056 
Short-term investments442,106 245,599 
Accounts receivable, net30,106 97,380 
Income taxes receivable67,758 64,192 
Spare parts and supplies, net36,621 37,630 
Prepaid expenses and other54,918 56,849 
Total1,168,511 874,706 
Property and equipment, less accumulated depreciation and amortization of $858,926 and $762,544 as of September 30, 2020 and December 31, 2019, respectively
2,121,218 2,316,772 
Other Assets:  
Operating lease right-of-use assets647,288 632,545 
Long-term prepayments and other146,619 182,438 
Intangible assets, net13,500 13,500 
Goodwill— 106,663 
Total Assets$4,097,136 $4,126,624 
LIABILITIES AND SHAREHOLDERS’ EQUITY  
Current Liabilities:  
Accounts payable$96,160 $148,748 
Air traffic liability and current frequent flyer deferred revenue515,424 606,684 
Other accrued liabilities132,734 161,430 
Current maturities of long-term debt, less discount114,810 53,273 
Current maturities of finance lease obligations21,618 21,857 
Current maturities of operating leases81,881 83,224 
Total962,627 1,075,216 
Long-Term Debt1,035,971 547,254 
Other Liabilities and Deferred Credits:  
Noncurrent finance lease obligations126,159 141,861 
Noncurrent operating leases524,172 514,685 
Accumulated pension and other post-retirement benefit obligations223,907 203,596 
Other liabilities and deferred credits78,849 97,434 
Noncurrent frequent flyer deferred revenue186,618 175,218 
Deferred tax liability, net241,618 289,564 
Total1,381,323 1,422,358 
Commitments and Contingencies
Shareholders’ Equity:  
Special preferred stock, $0.01 par value per share, three shares issued and outstanding as of September 30, 2020 and December 31, 2019
— — 
Common stock, $0.01 par value per share, 46,003,751 and 46,121,859 shares outstanding as of September 30, 2020 and December 31, 2019, respectively
460 461 
Capital in excess of par value144,884 135,651 
Accumulated income688,170 1,049,567 
Accumulated other comprehensive loss, net(116,299)(103,883)
Total717,215 1,081,796 
Total Liabilities and Shareholders’ Equity$4,097,136 $4,126,624 
See accompanying Notes to Consolidated Financial Statements.
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Hawaiian Holdings, Inc.
Consolidated Statements of Shareholders' Equity
(in thousands)
Common
Stock(*)
Special
Preferred
Stock(**)
Capital In Excess of Par ValueAccumulated IncomeAccumulated Other Comprehensive Income (Loss)Total
(unaudited)
Balance at December 31, 2019$461 $— $135,651 $1,049,567 $(103,883)$1,081,796 
Net Loss— — — (144,372)— (144,372)
Dividends declared on common stock ($0.12 per share)
— — — (5,514)— (5,514)
Other comprehensive income, net— — — — 1,331 1,331 
Issuance of 88,141 shares of common stock, net of shares withheld for taxes
— (1,231)— — (1,230)
Repurchase and retirement of 259,910 shares common stock
(2)— — (7,508)— (7,510)
Share-based compensation expense— — (135)— — (135)
Balance at March 31, 2020$460 $— $134,285 $892,173 $(102,552)$924,366 
Net Loss— — — (106,904)— (106,904)
Other comprehensive loss, net— — — — (618)(618)
Issuance of 46,447 shares of common stock, net of shares withheld for taxes
— — (83)— — (83)
CARES Act warrant issuance— — 7,403 — — 7,403 
Share-based compensation expense— — 1,769 — — 1,769 
Balance at June 30, 2020$460 $— $143,374 $785,269 $(103,170)$825,933 
Net Loss— — — (97,099)— (97,099)
Other comprehensive loss, net— — — — (13,129)(13,129)
Issuance of 7,214 shares of common stock, net of shares withheld for taxes
— — (45)— — (45)
CARES Act warrant issuance, net of tax— — (7)— — (7)
Share-based compensation expense— — 1,562 — — 1,562 
Balance at September 30, 2020$460 $— $144,884 $688,170 $(116,299)$717,215 

(*)    Common Stock—$0.01 par value; 118,000,000 authorized as of September 30, 2020 and December 31, 2019.
(**)    Special Preferred Stock—$0.01 par value; 2,000,000 shares authorized as of September 30, 2020 and December 31, 2019.

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Hawaiian Holdings, Inc.
Consolidated Statements of Shareholders' Equity
(in thousands)
Common
Stock(*)
Special
Preferred
Stock(**)
Capital In Excess of Par ValueAccumulated IncomeAccumulated 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, net— — — — 2,261 2,261 
Issuance of 65,517 shares of common stock, net of shares withheld for taxes
— (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, net— — — — (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.
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Hawaiian Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
 
Nine Months Ended September 30,
 20202019
(unaudited)
Net cash provided by (used in) Operating Activities$(173,482)$456,895 
Cash flows from Investing Activities:  
Additions to property and equipment, including pre-delivery payments(101,775)(280,288)
Proceeds from the purchase assignment and sale leaseback114,000 — 
Proceeds from the disposition of aircraft related equipment— 9,045 
Purchases of investments(408,955)(265,705)
Sales of investments214,469 267,464 
Other— (6,275)
Net cash used in investing activities(182,261)(275,759)
Cash flows from Financing Activities:  
Long-term borrowings602,264 227,889 
Repayments of long-term debt and finance lease obligations(64,686)(95,356)
Dividend payments(5,514)(17,206)
Debt issuance costs(3,506)(1,162)
Repurchases of common stock(7,510)(50,690)
Other(1,359)(1,026)
Net cash provided by financing activities519,689 62,449 
Net increase in cash and cash equivalents163,946 243,585 
Cash, cash equivalents, and restricted cash - Beginning of Period373,056 268,577 
Cash, cash equivalents, and restricted cash - End of Period$537,002 $512,162 
 
See accompanying Notes to Consolidated Financial Statements.

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Hawaiian Holdings, Inc. 
Notes to Consolidated Financial Statements (Unaudited)
 
1. General
 
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 variations in the demand for air travel, 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 for the entire year. Furthermore, the severe impacts of the global coronavirus (COVID-19) pandemic make any comparison to prior or future periods unreliable. 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, 2019.

2. Impact of the COVID-19 Pandemic

Due to the rapid and unprecedented spread of COVID-19, what began with the Company's suspension of service to South Korea and Japan in late February accelerated in March when governments instituted requirements of self-isolation or quarantine for incoming travelers. This was followed by the announcement in March 2020 of a 14-day mandatory quarantine for all travelers to, from and within the State of Hawai`i. These restrictions, combined with the ongoing spread and impact of the COVID-19 pandemic globally, have continued to suppress customer demand.

Despite the easing of travel restrictions in recent months within the United States, restrictions for travel to and within the State of Hawai`i as well as travel to and from various international locations, including those in the Hawaiian network, remain in effect. In September 2020, the Governor of the State of Hawai`i announced that a program allowing travelers from the U.S. mainland coming to Hawai`i to bypass the quarantine requirement with proof of a negative COVID-19 test from a state-approved testing partner would begin on October 15, 2020. Following this announcement, the Company saw increases in bookings and has slowly begun rebuilding its Neighbor Island and North America flight schedule commensurate with the anticipated increases in demand.

The exact timing and pace of the recovery of passenger demand continues to remain uncertain. Certain markets have reopened, some of which have since experienced a resurgence of COVID-19 cases, while others, particularly international markets, remain closed or are enforcing extended quarantines for most U.S. residents. See Note 6, for a discussion of the recognition of passenger revenue, the Company's air traffic liability and ticket breakage.

In response to the COVID-19 pandemic, the Company implemented various measures to mitigate declining demand through capacity and cost reductions, while managing cash flow and liquidity.

Capacity Reductions. Beginning in the second half of March, the Company experienced a significant decline in demand as COVID-19 spread globally. In response, the Company significantly reduced system capacity to a level that maintained essential services to align capacity with expected demand. During the three and nine months ended September 30, 2020, the Company reduced capacity by 86.5% and 60.2%, respectively, as compared to the same period in 2019. As a result of capacity reductions, the Company temporarily parked approximately 29% of its fleet as of September 30, 2020.

Expense Management. In response to the reduction in revenue, the Company has implemented, and will continue to implement cost savings and liquidity measures, including:

In the first quarter 2020, the Company instituted a temporary hiring freeze, except with respect to operationally critical and essential positions.
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The Company reduced capital expenditures for 2020 and continues to evaluate non-essential, non-aircraft capital expenditures. During the three and nine months ended September 30, 2020, capital expenditures were approximately $7.8 million and $101.8 million, respectively.
The Company’s officers reduced their base salaries between 10% and 50% through September 30, 2020. Members of the Board of Directors also reduced their compensation.
During the third quarter of 2020, the Company announced and completed voluntary separation and temporary leave programs across each of its labor groups. Additionally, the Company completed involuntary terminations, the majority of which were effective October 1, 2020. Combined, separation and temporary leave programs resulted in an approximately 32% reduction of the Company's total workforce.
On October 26, 2020, the Company entered into an amendment (the “Amendment”) to its 787-9 purchase agreement with Boeing, which provides for, among other things, a change in the aircraft delivery schedule from 2021 through 2025 to 2022 through 2026, with the first delivery now scheduled in September 2022. Refer to Note 11 for additional discussion, including the impact of the Amendment on the Company's future financial commitments.

The Company anticipates it may implement further discretionary changes and other cost reduction and liquidity preservation measures as needed to address the volatile and quickly-changing dynamics of passenger demand and changes in revenue, regulatory and public health directives and prevailing government policy and financial market conditions.

Cash Flow and Liquidity Management. The Company's cash, cash equivalents and short-term investments as of September 30, 2020 was $979.1 million. The Company has taken various actions to increase liquidity and strengthen our financial position during the nine months ended September 30, 2020, including, but not limited to:

During the first quarter 2020, the Company fully drew down its previously undrawn $235.0 million revolving credit facility. Refer to Note 9 for additional discussion.
During the first and second quarters of 2020, the Company suspended its stock repurchase program and payment of dividends.
During the second and third quarters of 2020, the Company received $240.6 million in grants and $60.3 million in loans from the U.S. Department of Treasury (the Treasury) pursuant to the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) Payroll Support Program (PSP), as discussed in further detail below.
During the third quarter 2020, the Company entered into a Loan and Guarantee Agreement (Loan Agreement) with Treasury pursuant to the CARES Act Economic Relief Program (ERP) to provide for a secured term loan which permits the Company to borrow up to $420.0 million. As of September 30, 2020, the Company had borrowed $45 million under the program as discussed in further detail below.
During the third quarter 2020, the Company completed $376.0 million in other financings secured by aircraft, including the issuance of enhanced equipment trust certificates and two sale-leaseback transactions. Refer to Note 9 and the sale-leaseback transactions section in this Note 2 for more information on the Company's financing activities during the three and nine months ended September 30, 2020.

The Company continues to explore and pursue options to raise additional financing by leveraging its unencumbered assets, which as of September 30, 2020, included 12 aircraft with an estimated fair value of approximately $242.7 million.

Based on these actions, including revenue recovery assumptions made for the impact of COVID-19, the Company has concluded that it will be able to generate sufficient liquidity to satisfy its obligations and remain in compliance with existing covenants in the Company's financing agreements for more than the next twelve months, prior to giving effect to any additional financing that may occur. The Company's assumptions about future conditions used to estimate liquidity requirements, including the impact of the COVID-19 pandemic and other ongoing impacts to the business, are subject to uncertainty, and actual results could differ from these estimates. The Company will continue to monitor these conditions as new information becomes available and will update its analyses accordingly.

Valuation of Goodwill and Indefinite-Lived Intangibles

Goodwill and intangible assets with indefinite lives are not amortized. The Company applies a fair value-based impairment test to the carrying value of goodwill and indefinite-lived intangible assets on an annual basis and, if certain events or circumstances indicate that an impairment loss may have been incurred, on an interim basis. The Company assesses the value of our goodwill and indefinite-lived assets under either a qualitative or quantitative approach.

During the first quarter of 2020, the adverse economic impact and declining passenger demand attributed to the COVID-19 pandemic drove the Company's stock price to 52-week lows and significantly reduced future cash flow projections. The Company qualitatively assessed that an impairment loss may have been incurred as of March 31, 2020 and performed an
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interim test of the recoverability of its goodwill and indefinite-lived intangible assets. The Company determined that the estimated fair value of the Company's one reporting unit was less than its carrying value and that the deficit between fair value and the carrying value of the reporting unit exceeded the amount of goodwill on the Company's unaudited Consolidated Balance Sheets, leading to the recognition of a goodwill impairment charge of $106.7 million in the first quarter of 2020.

Fair value was determined using a combination of an income approach, which estimates fair value based upon projections of future revenues, expenses, and cash flows discounted to its present value, and a market approach. The valuation methodology and underlying financial information included in the Company's determination of fair value required significant judgments by management. The principal assumptions used in the Company's discounted cash flow analysis consisted of (a) the long-term projections of future financial performance and (b) the weighted-average cost of capital of market participants, adjusted for the risk attributable to the Company and the industry in which it operates. Under the market approach, the principal assumption included an estimate for a control premium.

As of September 30, 2020, the Company had approximately $13.5 million in indefinite-lived intangible assets subject to impairment. The Company determined that the fair value of its indefinite-lived intangible assets exceeded its carrying value and was not impaired.

Valuation of Long-Lived Assets

The Company's long-lived assets, consisting principally of aircraft and other non-aircraft equipment, are classified as property and equipment, net on the Company's unaudited Consolidated Balance Sheets, and have a recorded value of approximately $2.1 billion at September 30, 2020. The Company reviews long-lived assets used in operations for impairment when events and circumstances indicate the assets may be impaired.

As a result of the COVID-19 pandemic, including capacity reductions, the temporary grounding of the majority of its fleet, as well as reduced future cash flow projections, the Company previously identified, and continues to identify, indicators of impairment of its long-lived assets.

In the second quarter of 2020, the Company recorded an impairment charge of $34.0 million related to its ATR-42 and ATR-72 fleets, assets held under its commercial real estate subsidiary, and software-related projects that were discontinued as a result of the COVID-19 pandemic. The Company estimated the fair value of its ATR-42 and ATR-72 fleets using a third-party valuation and estimated the fair value of the assets held in its commercial real-estate subsidiary using a combination of a market and income-based approach, which estimates fair value based upon projections of future revenues, expenses, and cash flows discounted to its present value. The principal assumptions used in the Company's discounted cash flow analysis consisted of (a) the long-term projections of future financial performance and (b) the weighted-average cost of capital of market participants, adjusted for the risk attributable to the Company and the industry in which it operates.

To determine whether impairment exists for aircraft used in operations, assets are grouped by fleet-type (the lowest level for which there are identifiable cash flows) and future cash flows are estimated based on projections of capacity, yield, fuel costs, labor costs and other relevant factors. Given the substantial reduction in the Company's active aircraft and diminished projections of future cash flows in the near term, the Company evaluated the remainder of its fleet and determined that only the fleet types discussed above were impaired as the future cash flows from operation of the fleet through the respective retirement dates exceeded the carrying value. The Company will continue to monitor the duration and extent of the impact of the COVID-19 pandemic on its business and will continue to evaluate its current fleet and other long-lived assets for impairment accordingly.

CARES Act

On March 27, 2020, President Trump signed into law the CARES Act, which provides an estimated $2.2 trillion to fight the COVID-19 pandemic and stimulate the U.S. economy. The assistance includes tax relief and government loans, grants and investments for entities in affected industries. The CARES Act provides for, among other things: (a) financial relief to passenger air carriers for direct payroll support under the PSP, (b) financial relief in the form of loans and loan guarantees available for operations under the ERP, (c) temporary suspension of certain aviation taxes, (d) temporary deferral of certain employer payroll taxes, and (e) additional corporate tax benefits that are further discussed in Note 14.

Payroll Support Program

On April 22, 2020, the Company entered into a Payroll Support Program agreement (the PSP Agreement) with the Treasury under the CARES Act. In connection with the PSP Agreement, the Company entered into a Warrant Agreement
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(the PSP Warrant Agreement) with the Treasury, and the Company issued a promissory note to the Treasury (the Note). Pursuant to the PSP Agreement, the Treasury provided the Company with financial assistance, paid in installments, totaling approximately $300.9 million, to be used exclusively for the purpose of continuing to pay employee salaries, wages and benefits. Under the PSP Agreement, the Company agreed to (i) refrain from conducting involuntary furloughs or reducing employee rates of pay or benefits through September 30, 2020, (ii) limit executive compensation through March 24, 2022 and (iii) suspend payment of dividends and stock repurchases through September 30, 2021. The PSP Agreement also imposes certain Treasury-mandated reporting obligations on the Company. Finally, the Company is required to continue to provide air service to markets served prior to March 1, 2020 until March 1, 2022, to the extent determined reasonable and practicable by the U.S. Department of Transportation (DOT) and subject to exemptions granted by the DOT to the Company given the absence of demand for certain of such services.

The Note issued by Hawaiian to the Treasury was in the total principal amount of approximately $60.3 million. The Note has a ten-year term and bears interest at a rate per annum equal to 1.00% until the fifth anniversary of the PSP Closing Date, and thereafter bears interest at a rate equal to the secured overnight financing rate plus 2.00% until the tenth anniversary of the PSP Closing Date, which interest is payable semi-annually beginning on September 30, 2020. The Note may be prepaid at any time, without penalty and is subject to customary change of control provisions and events of default.

As compensation to the U.S. government for providing financial relief under the PSP Agreement, and pursuant to the PSP Warrant Agreement, the Company issued to the Treasury a total of 509,964 warrants to purchase shares of the Company’s common stock at an exercise price of $11.82 per share (the PSP Warrants). The PSP Warrants are non-voting, freely transferable, may be settled as net shares or in cash at the Company’s option, expire five years from the date of issuance, and contain registration rights and customary anti-dilution provisions. Refer to Note 9 for additional discussion.

Economic Relief Program

On September 25, 2020 (ERP Closing Date), the Company entered into the Loan Agreement. The Loan Agreement provides for a secured term loan facility which permits the Company to borrow up to $420.0 million (the Facility). On the ERP Closing Date, the Company borrowed $45.0 million and may, at its option, borrow additional amounts in up to two subsequent borrowings until March 26, 2021, so long as, after giving effect to any further borrowing, the collateral coverage ratio is no less than 2.0 to 1.0. The proceeds from the Facility will be used for certain general corporate purposes and operating expenses in accordance with the terms and conditions of the Loan Agreement. As a condition to the drawing under the Facility, we are required to comply with all applicable provisions of the CARES Act.

Borrowings under the Facility will initially bear interest at a variable rate per annum equal to (a) the Adjusted LIBO Rate (as defined in the Loan Agreement) plus (b) 2.50% accrued interest on the loans is payable in arrears on the first business day following the 14th day of each March, June, September and December (beginning with September 15, 2021), and on the Maturity Date (as defined below). The applicable interest rate for the $45 million loan drawn on the ERP Closing Date under the Facility is 2.73% per annum for the period from the ERP Closing Date through September 15, 2021 at which time the interest rate will reset in accordance with the foregoing formula. All advances under the Facility will be in the form of term loans, all of which will mature and be due and payable in a single installment on June 30, 2024.

The Facility is secured by (i) the Company's frequent flyer loyalty program, HawaiianMiles, including but not limited to loyalty program partner participation agreements (including rights to receive cash flows thereunder), documents, deposit accounts, securities accounts, books and records and intellectual property primarily used in connection with the loyalty program and (ii) 14 Boeing 717-200 airframes and the related 28 Rolls Royce BR715-A1-30 engines, together with their related accessories, aircraft documents and parts (collectively, the Collateral). The Facility is also subject to various financial covenants, including a minimum collateral coverage ratio of 2.0 to 1.0 and a minimum debt service coverage ratio of 1.75 to 1.00.

In connection with its entry into the Loan Agreement, the Company also entered into a warrant agreement (the ERP Warrant Agreement), with the Treasury under the ERP. Pursuant to the ERP Warrant Agreement, the Company agreed to issue warrants to purchase up to an aggregate of 3,553,299 shares of the Company's common stock (the ERP Warrants) at an exercise price of $11.82 per share (the “Exercise Price”). Pursuant to the ERP Warrant Agreement, (a) on the Closing Date, the Company issued to the Treasury an ERP Warrant to purchase up to 380,711 Warrant Shares of the Company's common stock and (b) on the date of each borrowing under the Loan Agreement, the Company will issue to the Treasury an additional ERP Warrant for a number of shares of the Company's common stock equal to 10% of such borrowing, divided by the Exercise Price. The ERP Warrants are non-voting, are freely transferable, may be settled as net shares or in cash at the Company's option, expire five years from the date of issuance, and contain registration rights and customary anti-dilution provisions.

12


On October 23, 2020, the Company entered into an Amended and Restated Loan Agreement with the U.S. Treasury, providing for an increase to the Loan Agreement from $420 million to $622 million and correspondingly increased the aggregate number of ERP Warrants available to be issued up to 5,262,267.


Sale-Leaseback Transactions

During the three months ended September 30, 2020, the Company entered into sale-leaseback transactions for two A321-200 aircraft. The transactions qualified as a sale, generating an immaterial loss, and the associated assets were removed from property and equipment, net and recorded as operating lease right-of-use assets on the Company's unaudited consolidated Balance Sheets. The liabilities are recorded within current and noncurrent operating lease liabilities on the Company's unaudited Consolidated Balance Sheets.

3. Significant Accounting Policies
 
Recently Adopted Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 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 over the lifetime of the asset. The Company adopted ASU 2016-13 effective January 1, 2020. The adoption of this standard did not have a material impact on its financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (ASU 2017-04), which simplifies the measurement of goodwill, eliminating Step 2 of the goodwill impairment test. ASU 2017-04 replaces the implied fair value of goodwill method with a methodology that compares the fair value of a reporting unit with its carrying amount. The Company adopted ASU 2017-04 effective January 1, 2020. Refer to Note 2 for discussion of the goodwill impairment recorded during the first quarter of 2020.

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4. 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 componentsThree months ended September 30,Nine months ended September 30,Affected line items in the statement where net income is presented
2020201920202019
 (in thousands) 
Derivative instruments under ASC 815     
Foreign currency derivative gains, net$— $(1,095)$(3,075)$(4,431)Passenger revenue
Foreign currency derivative losses (gains)418 — (4,363)— Nonoperating Income (Expense), Other, net
Total before tax418 (1,095)(7,438)(4,431) 
Tax expense (benefit)(103)271 1,840 1,025  
Total, net of tax$315 $(824)$(5,598)$(3,406) 
Amortization of defined benefit plan items     
Actuarial loss$1,046 $768 $2,890 $2,430 Nonoperating Income (Expense), Other, net
Prior service cost414 56 526 168 Nonoperating Income (Expense), Other, net
Special termination benefits5,258 — 5,258 — Other nonoperating special items
Curtailment loss1,753 — 1,753 — Other nonoperating special items
Total before tax8,471 824 10,427 2,598  
Tax benefit(1,904)(38)(2,388)(424) 
Total, net of tax$6,567 $786 $8,039 $2,174  
Short-term investments     
Realized losses (gain) on sales of investments, net$(283)$(97)$(654)$(126)Nonoperating Income (Expense), Other, net
Total before tax(283)(97)(654)(126) 
Tax expense (benefit)67 24 159 31  
Total, net of tax$(216)$(73)$(495)$(95) 
Total reclassifications for the period$6,666 $(111)$1,946 $(1,327) 

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, 2020 and 2019 is as follows:
Three months ended September 30, 2020Foreign Currency DerivativesDefined Benefit
Plan Items
Short-Term InvestmentsTotal
 (in thousands)
Beginning balance$1,266 $(106,694)$2,258 $(103,170)
Other comprehensive loss before reclassifications, net of tax(1,581)(17,851)(363)(19,795)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax315 6,567 (216)6,666 
Net current-period other comprehensive loss(1,266)(11,284)(579)(13,129)
Ending balance$— $(117,978)$1,679 $(116,299)
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Three months ended September 30, 2019Foreign Currency DerivativesDefined Benefit Plan ItemsShort-Term InvestmentsTotal
 (in thousands)
Beginning balance$816 $(94,610)$707 $(93,087)
Other comprehensive income before reclassifications, net of tax2,920 — 165 3,085 
Amounts reclassified from accumulated other comprehensive income (loss), net of tax(824)786 (73)(111)
Net current-period other comprehensive income2,096 786 92 2,974 
Ending balance$2,912 $(93,824)$799 $(90,113)
Nine months ended September 30, 2020Foreign Currency DerivativesDefined Benefit
Plan Items
Short-Term InvestmentsTotal
 (in thousands)
Beginning balance$3,341 $(108,028)$804 $(103,883)
Other comprehensive income (loss) before reclassifications, net of tax2,257 (17,989)1,370 (14,362)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax(5,598)8,039 (495)1,946 
Net current-period other comprehensive income (loss)(3,341)(9,950)875 (12,416)
Ending balance$— $(117,978)$1,679 $(116,299)
Nine months ended September 30, 2019Foreign Currency DerivativesDefined Benefit Plan ItemsShort-Term InvestmentsTotal
 (in thousands)
Beginning balance$3,317 $(95,855)$(602)$(93,140)
Other comprehensive income (loss) before reclassifications, net of tax3,001 (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 (loss)(405)2,031 1,401 3,027 
Ending balance$2,912 $(93,824)$799 $(90,113)

5. Earnings (Loss) Per Share
 
Basic earnings (loss) 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. For the three and nine months ended September 30, 2020, there were 164,253 and 137,051 potentially dilutive shares, respectively, that were excluded from the computation of diluted weighted average common stock shares outstanding because their effect would have been antidilutive given the Company's net loss. The following table shows the computation of basic and diluted earnings (loss) per share:
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 Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
 (in thousands, except for per share data)
Numerator:    
Net Income (Loss)$(97,099)$80,076 $(348,375)$174,267 
Denominator:    
Weighted average common stock shares outstanding - Basic46,001 47,119 45,980 47,784 
Assumed exercise of stock options and awards— 117 — 63 
Weighted average common stock shares outstanding - Diluted46,001 47,236 45,980 47,847 
Net Income (Loss) Per Share    
Basic$(2.11)$1.70 $(7.58)$3.65 
Diluted$(2.11)$1.70 $(7.58)$3.64 

Stock Repurchase Program

In November 2018, 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 2020. On March 18, 2020, the Company announced the suspension of its stock repurchase program and pursuant to its receipt of financial assistance under the CARES Act, it is restricted from making any stock repurchases until one year following repayment of all outstanding loans under the ERP. Accordingly, the Company will not be making any further repurchases under its current stock repurchase program.

During the three months ended September 30, 2019, the Company spent $20.0 million to repurchase and retire approximately 0.8 million shares of the Company's common stock in open market transactions. During the nine months ended September 30, 2020 and 2019, the Company spent $7.5 million and $50.7 million, respectively, to repurchase and retire approximately 260 thousand shares and 1.9 million shares, respectively, of the Company's common stock in open market transactions.

The Company had no stock repurchase activity during the three months ended September 30, 2020.

Dividends

The Company’s receipt of financial assistance under the CARES Act precludes the Company from making any further dividend payments until one year following the Company's repayment of all outstanding loans under the ERP.

6. Revenue Recognition
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. 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.
The majority of the Company's passenger revenue is derived from passenger ticket sales. Other revenue is primarily derived from the Company's cargo operations and loyalty program. 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 DOT) are summarized below:
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Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Geographic Information(in thousands)
Domestic$69,838 $533,235 $526,958 $1,542,480 
Pacific6,144 221,916 168,172 581,611 
Total operating revenue$75,982 $755,151 $695,130 $2,124,091 

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 is mobile across geographic markets, and therefore has not been allocated to specific geographic regions. During the three months ended September 30, 2020 and 2019, North America routes accounted for approximately 49% and 73% of domestic revenue, respectively.
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,
2020201920202019
Passenger Revenue by Type(in thousands)
Passenger revenue, excluding frequent flyer$34,623 $653,424 $534,926 $1,834,853 
Frequent flyer revenue, transportation component5,154 40,839 38,082 114,137 
Passenger Revenue$39,777 $694,263 $573,008 $1,948,990 
Other revenue (e.g., cargo and other miscellaneous)$23,265 $37,725 $74,884 $110,527 
Frequent flyer revenue, marketing and brand component12,940 23,163 47,238 64,574 
Other Revenue$36,205 $60,888 $122,122 $175,101 

For the three months ended September 30, 2020 and 2019, the Company's total revenue was $76.0 million and $755.2 million, respectively. As of September 30, 2020 and December 31, 2019, the Company's Air traffic liability balance, as it relates to passenger tickets (excluding frequent flyer liability), was $305.7 million and $426.9 million, respectively, which generally represents revenue that is expected to be realized over the next 12 months. Prior to the second quarter of 2020, passenger tickets sold and credits issued were generally valid for one year from the date of issuance or flight, as applicable. In April 2020, we announced the waiver of certain change fees and extended ticket validity for up to 24 months. Management assessed the impact of this change and believes that the classification of Air traffic liability as a current liability continues to remain appropriate. Management will continue to monitor customers' travel behavior and may adjust its estimates in the future.

During the three months ended September 30, 2020 and 2019, the amount of passenger ticket revenue recognized that was included in Air traffic liability as of the beginning of the respective period was $6.4 million and $367.5 million, respectively. During the nine months ended September 30, 2020 and 2019, the amount of passenger ticket revenue recognized that was included in Air traffic liability as of the beginning of the respective period was $254.6 million and $422.1 million, respectively.
Passenger revenue associated with unused tickets, which represents 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 to estimate breakage and applies the trend rate to the current Air traffic liability balances for that specific period. Management continues to monitor customers' travel behavior and may adjust its estimates in the future as additional information becomes available.

Frequent Flyer Revenue

The Company's frequent flyer liability is recorded in Air traffic liability, Current frequent flyer deferred revenue and Noncurrent frequent flyer deferred revenue in the Company's unaudited Consolidated Balance Sheets based on estimated and expected redemption patterns using historical data and analysis. As of September 30, 2020, and December 31, 2019, the Company's frequent flyer liability balance was $389.6 million and $349.8 million, respectively.
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September 30, 2020December 31, 2019
(in thousands)
Air traffic liability (current portion of frequent flyer revenue)$202,981 $174,588 
Noncurrent frequent flyer deferred revenue186,618 175,218 
Total frequent flyer liability$389,599 $349,806 

Frequent flyer program deferred revenue classified as a current liability represents the Company's current estimate of revenue expected to be recognized in the next 12 months based on projected redemptions, while the balance classified as a noncurrent liability represents the Company's current estimate of revenue expected to be recognized beyond 12 months. Due to the effects of the COVID-19 pandemic, including changes to the Company's ticket validity and exchange policies, management continues to monitor customers' travel behavior and may adjust its estimates in the future as additional information becomes available.

7.  Fair Value Measurements
 
Accounting Standards Codification (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:
 
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, 2020
 TotalLevel 1Level 2Level 3
 (in thousands)
Cash equivalents$307,500 $300,337 $7,163 $— 
Short-term investments
Corporate debt securities201,198 — 201,198 — 
U.S. government and agency securities190,908 — 190,908 — 
Other fixed income securities50,000 — 50,000 — 
Total short-term investments442,106 — 442,106 — 
Fuel derivative contracts39 — 39 — 
Foreign currency derivatives265 — 265 — 
Total assets measured at fair value$749,910 $300,337 $449,573 $— 
Foreign currency derivatives712 — 712 — 
Total liabilities measured at fair value$712 $— $712 $— 
 
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 Fair Value Measurements as of December 31, 2019
 TotalLevel 1Level 2Level 3
 (in thousands)
Cash equivalents$216,491 $205,943 $10,548 $— 
Short-term investments
Corporate debt securities100,713 — 100,713 — 
U.S. government and agency securities75,481 — 75,481 — 
Other fixed income securities69,405 — 69,405 — 
Total short-term investments245,599 — 245,599 — 
Fuel derivative contracts5,878 — 5,878 — 
Foreign currency derivatives4,424 — 4,424 — 
Total assets measured at fair value$472,392 $205,943 $266,449 $— 
Foreign currency derivatives593 — 593 — 
Total liabilities measured at fair value$593 $— $593 $— 

Cash equivalents. The Company's Level 1 cash equivalents consist of money market securities. The carrying amounts approximate fair value because of the short-term maturity of these assets. The Company's Level 2 cash equivalents consist primarily of debt securities. These instruments are valued using quoted prices for similar assets in active markets.

Short-term investments. Short-term investments are valued based on a market approach using industry standard valuation techniques that incorporate inputs such as quoted prices for similar assets, interest rates, benchmark curves, credit ratings, and other observable inputs. As of September 30, 2020, corporate debt securities have remaining maturities of two years or less, U.S. government and agency securities have maturities of approximately two years or less, and other fixed-income securities of one year or less.

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 measured at fair value: 
Fair Value of Debt
September 30, 2020December 31, 2019
CarryingFair ValueCarryingFair Value
AmountTotalLevel 1Level 2Level 3AmountTotalLevel 1Level 2Level 3
(in thousands)
$1,172,399 $1,022,314 $— $— $1,022,314 $610,397 $605,286 $— $— $605,286 
 
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.

As discussed in Note 2 above, the Company recognized an impairment charge on its long-lived assets of approximately $30.9 million during the nine months ended September 30, 2020. The impairment charges were calculated using Level 3 fair value inputs based primarily upon forecasted future cash flows, recent market transactions, published pricing guides and our assessment of existing market conditions based on industry knowledge.
 
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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, 2020, the Company's portfolio comprised of crude oil call options, which 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 contracts2020201920202019
 (in thousands)
Losses realized at settlement$(2,062)$(3,399)$(7,899)$(9,294)
Reversal of prior period unrealized amounts3,287 4,936 2,488 8,181 
Unrealized losses that will settle in future periods(1,522)(6,090)(1,522)(6,090)
Losses on fuel derivatives recorded as Nonoperating Expense$(297)$(4,553)$(6,933)$(7,203)

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 gain or loss 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. 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.

During the three and nine months ended September 30, 2020, the Company de-designated certain hedged transactions with maturity dates through February 2022 as the Company concluded that the cash flows attributable to the hedged risk were no longer probable of occurring. As a result, the Company reclassified approximately $0.5 million and $3.9 million from AOCI to nonoperating income in the period during the three and nine months ended September 30, 2020, respectively. Future gains and losses related to these instruments will continue to be recorded in nonoperating expense. As of September 30, 2020, the Company did not have any remaining derivative instruments designated for hedge accounting.
 
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.

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Derivative position as of September 30, 2020 
 Balance Sheet
Location
Notional AmountFinal
Maturity
Date
Gross fair
value of
assets
Gross fair
value of
(liabilities)
Net
derivative
position
  (in thousands) (in thousands)
Derivatives not designated as hedges     
Foreign currency derivativesOther accrued liabilities4,068,800 Japanese Yen
7,553 Australian Dollars
August 2021235 (625)(390)
 Other liabilities and deferred credits1,430,750 Japanese Yen
February 202230 (87)(57)
Fuel derivative contractsPrepaid expenses and other27,972 gallonsMarch 202139 — 39 
 
Derivative position as of December 31, 2019
Balance Sheet
Location
Notional AmountFinal
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 derivativesPrepaid expenses and other19,270,650 Japanese Yen
44,468 Australian Dollars
December 20203,787 (358)3,429 
Long-term prepayments and other5,487,250 Japanese Yen
8,429 Australian Dollars
December 2021618 (193)425 
Derivatives not designated as hedges     
Foreign currency derivativesOther accrued liabilities694,050 Japanese Yen
2,438 Australian Dollars
March 202019 (42)(23)
Fuel derivative contractsPrepaid expenses and other97,986 gallonsDecember 20205,878 — 5,878 
 
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,
 2020201920202019
(in thousands)
Foreign currency derivatives$1,262 $(3,881)$418 $(1,095)
 (Gain) loss recognized in AOCI on derivatives(Gain) loss reclassified from AOCI
into income
 Nine months ended September 30,Nine months ended September 30,
 2020201920202019
(in thousands)
Foreign currency derivatives$3,131 $(3,904)$(7,020)$(4,431)

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.

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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, 2020 and December 31, 2019.

The Company is also subject to market risk in the event that 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
 
Long-term debt, net of unamortized discounts and issuance costs, is outlined as follows:

September 30, 2020December 31, 2019
(in thousands)
Class A EETC-13, fixed interest rate of 3.9%, semiannual principal and interest payments, remaining balance due at maturity in January 2026
$214,923 $229,866 
Class B EETC-13, fixed interest rate of 4.95%, semiannual principal and interest payments, remaining balance due at maturity in January 2022
75,565 82,036 
Japanese Yen denominated financing, fixed interest rate of 1.05%, quarterly principal and interest payments, remaining balance due at maturity in May 2030
37,484 39,170 
Japanese Yen denominated financing, fixed interest rate of 1.01%, semiannual principal and interest payments, remaining balance due at maturity in June 2030
35,153 36,616 
Japanese Yen denominated financing, fixed interest rate of 0.65%, quarterly principal and interest payments, remaining balance due at maturity in March 2025
123,184 133,970 
Japanese Yen denominated financing, fixed interest rate of 0.76%, semiannual principal and interest payments, remaining balance due at maturity in September 2031
83,826 88,739 
Revolving credit facility, variable interest rate of LIBOR plus a margin of 2.25%, monthly interest payments, principal balance due at maturity in December 2022
235,000 — 
Class A EETC-20, fixed interest rate of 7.375%, semiannual principal and interest payments, remaining balance due at maturity in September 2027
216,976 — 
Class B EETC-20, fixed interest rate of 11.25%, semiannual principal and interest payments, remaining balance due at maturity in September 2025
45,010 — 
CARES Act Payroll Support Program, fixed interest rate of 1.0% for the first through fifth years and variable interest of SOFR plus a margin of 2.0% for the sixth year through maturity, semiannual interest payments, principal balance due at maturity in April 2030 through September 2030
60,278 — 
CARES Act Economic Relief Program, variable interest rate of LIBOR plus a margin of 2.5%, quarterly interest payments, principal balance due at maturity in June 2024
45,000 — 
Unamortized debt discount and issuance costs(21,618)(9,870)
Total Debt$1,150,781 $600,527 
Less: Current maturities of long-term debt(114,810)(53,273)
Long-Term Debt, less discount$1,035,971 $547,254 

Revolving Credit Facility

In March 2020, the Company drew down $235.0 million in revolving loans pursuant to its Amended and Restated Credit and Guaranty Agreement (the Credit Agreement) dated December 11, 2018. The Credit Agreement terminates, and all outstanding revolving loans thereunder will be due and payable, on December 11, 2022, unless otherwise extended by the parties. The revolving loans bear a variable interest rate equal to the LIBO Rate plus a margin of 2.25% per annum. The revolving loans are secured by certain assets of Hawaiian and the Company. The Credit Agreement requires that the Company maintain $300.0 million in liquidity, as defined under the Credit Agreement. In the event that the requirement is not met, or other customary conditions are not satisfied, the due date of the revolving loans may be accelerated.


22


Payroll Support Program Note

In April 2020, the Company entered into the Note for approximately $60.3 million and agreed to issue to the Treasury a total of 509,964 warrants to purchase shares of the Company's common stock pursuant to the PSP Agreement. The proceeds under the Note and issuance of the PSP Warrants occurred over multiple tranches between April and September 2020. The Company recorded the value of the Note and the PSP Warrants on a relative fair value basis as $53.6 million in noncurrent debt and $6.7 million in additional paid in capital, respectively. See Note 2 above for further discussion of the terms of the Note.

Economic Relief Program

In September 2020, the Company entered into the Loan Agreement with the Treasury which permits the Company to borrow up to $420.0 million. As of September 30, 2020, the Company borrowed $45.0 million under the ERP and may, at its option, borrow additional amounts in up to two subsequent borrowings until March 26, 2021. The Company recorded the value of the loan and the warrants on a relative fair value basis as $41.9 million in noncurrent debt and $3.1 million in additional paid in capital, respectively. Refer to Note 2 above for further discussion of the terms of the Loan Agreement.

On October 23, 2020, the Company amended and restated its CARES Act ERP Loan Agreement with the Treasury which increases the maximum facility available to be borrowed by the Company to $622 million.

Enhanced Equipment Trust Certificates

In August 2020, the Company completed a $262.0 million offering of Class A and B pass-through certificates, Series 2020-1 utilizing a pass through trust (the 2020-1 EETC). The 2020-1 EETC is secured by two A330-200 aircraft and six A321-200neo aircraft. Details of the 2020-1 EETC is shown in the table below:
(in thousands)Total PrincipalFixed Interest RateIssuance DateFinal Maturity Date
2020-1 Class A Certificates$216,976 7.375 %August 2020September 2027
2020-1 Class B Certificates45,010 11.250 %August 2020September 2025
Total$261,986 

Schedule of Maturities of Long-Term Debt

As of September 30, 2020, the expected maturities of long-term debt for the remainder of 2020 and the next four years, and thereafter, were as follows (in thousands): 
Remaining months in 2020$8,150 
2021116,817 
2022359,081 
202372,393 
2024131,971 
Thereafter483,987 
 $1,172,399 

Covenants

The Company's debt agreements contain various affirmative, negative and financial covenants as discussed above within this Note and further in Note 2. We were in compliance with the covenants in these debt agreements as of September 30, 2020.

10. Employee Benefit Plans
 
The components of net periodic benefit cost for the Company’s defined benefit and other post-retirement plans included the following: 
23


 Three months ended September 30,Nine months ended September 30,
Components of Net Period Benefit Cost2020201920202019
 (in thousands)
Service cost$2,695 $2,120 $8,029 $6,311 
Other cost:
Interest cost4,970 5,584 14,910 16,799 
Expected return on plan assets(6,293)(5,487)(18,865)(16,452)
Recognized net actuarial loss1,460 824 3,416 2,599 
Total other components of the net periodic benefit cost137 921 (539)2,946 
Curtailment loss1,753 — 1,753 — 
Special termination benefits5,258 — 5,258 — 
Net periodic benefit cost$9,843 $3,041 $14,501 $9,257 
 
Service costs are recorded within Wages and Benefits in the unaudited Consolidated Statements of Operations. Total other components of the net periodic benefit cost are recorded within the nonoperating income (expense), other, net line item in the unaudited Consolidated Statements of Operations. During the three and nine months ended September 30, 2020 and 2019, the Company was not required to, and did not make cash contributions to its defined benefit and other post-retirement plans. The Company is not required to make a cash contribution to its defined benefit plan for the remainder of 2020.

During the quarter ending September 30, 2020, the Company remeasured its postretirement healthcare obligation to account for retiree healthcare benefits provided to eligible participants under the Company's voluntary separation programs. As a result, the Company recorded $5.3 million in special termination benefits during the three and nine months ended September 30, 2020. The Company also recorded $1.8 million in curtailment loss during the three and nine months ended September 30, 2020.

As a result of its separation programs, the Company remeasured its postretirement plans using discount rates ranging between 2.48% and 2.81% based on the measurement date. The projected benefit obligation of the other postretirement plans increased by approximately $33.7 million and accumulated other comprehensive income gains decreased by approximately $14.3 million as a result of the plans' remeasurement.

11. Commitments and Contingent Liabilities
 
Commitments

As of September 30, 2020, the Company had the following capital commitments consisting of firm aircraft and engine orders and purchase rights for additional aircraft and engines:
Aircraft TypeFirm OrdersPurchase RightsExpected Delivery Dates
A321neo aircraft— N/A
B787-9 aircraft10 10 Between 2021 and 2025
General Electric GEnx spare engines:   
B787-9 spare enginesBetween 2021 and 2023

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.

24


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, 2020 are detailed below: 
Aircraft and aircraft relatedOtherTotal Committed
Expenditures
 (in thousands)
Remaining in 2020$32,280 $13,692 $45,972 
2021325,876 73,649 399,525 
2022445,457 72,926 518,383 
2023250,392 67,409 317,801 
2024364,609 59,267 423,876 
Thereafter115,247 135,926 251,173 
 $1,533,861 $422,869 $1,956,730 

On October 26, 2020, the Company entered into the Amendment related to its Boeing 787-9 purchase agreement referenced above, which, amongst other things, provides for a change in the Company's aircraft delivery schedule to between 2022 and 2026, with the first delivery scheduled in September 2022. The impact of the Amendment on the Company’s future commitments, by year, is reflected in the table below:

Remaining in 20202021202220232024Thereafter
(in thousands)
Change in contractual 787 commitments$(25,610)$(294,898)$(105,430)$(80,603)$125,123 $491,518 

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, 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. As of September 30, 2020 and December 31, 2019, 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 credit card processor could increase holdbacks to up to 100% of the amount of outstanding credit card tickets that are unflown (e.g., Air traffic liability, excluding frequent flyer deferred revenue), which would result in a restriction of cash. If the Company were unable to obtain a waiver of, or otherwise mitigate the increase in the restriction of cash, it could have a material impact on the Company's operations, business or financial condition.

25


12. Special Items

Special items in the unaudited Consolidated Statements of Operations consisted of the following:
Three months ended September 30,Nine months ended September 30,
2020201920202019
(in thousands)
Operating
Collective bargaining agreement payment (1)
$— $— $20,242 $— 
Goodwill impairment (2)
— — 106,662 — 
Long-lived asset impairment (3)
— — 34,014 — 
Severance and benefit costs (4)
17,489 — 17,489 — 
Total operating special items$17,489 $— $178,407 $— 
Nonoperating
Special termination benefits (5)
$5,258 $— $5,258 $— 
Curtailment loss (5)
1,753 — 1,753 — 
Total nonoperating special items$7,011 $— $7,011 $— 

(1)In March 2020, the Company reached an agreement in principle with the flight attendants of Hawaiian, represented by the Association of Flight Attendants (the AFA) on a new five-year contract that runs through April 2025. On April 3, 2020, the Company received notice from the AFA that the collective bargaining agreement (CBA) was ratified by its members. The ratified CBA provides for, among other things, a ratification payment to be paid over a one-year term, increased medical cost sharing, improved pay scales, and a one-time medical savings contribution to eligible flights attendants upon retirement. During the nine months ended September 30, 2020, the Company recorded a $23.5 million ratification bonus, of which $20.2 million was related to service prior to January 1, 2020, and was recorded as a Special item in the unaudited Consolidated Statements of Operations. The remaining $3.3 million was recorded as a component of Wages and benefits in the unaudited Consolidated Statements of Operations.

(2)As discussed in Note 2, the Company recognized a goodwill impairment charge of $106.7 million during the nine months ended September 30, 2020.

(3)As discussed in Note 2, the Company recognized an impairment of long-lived assets of $34.0 million during the nine months ended September 30, 2020.

(4)During the third quarter 2020, the Company announced and completed voluntary separation program offerings across each of its labor groups. In addition to separation payments, the Company offered its employees, based on labor group, age, and years of service, special termination benefits in the form of retiree healthcare benefits as discussed below. The election and revocation windows for these programs closed during the quarter. Additionally, the Company announced involuntary separations and temporary leave programs, the majority of which were effective October 1, 2020. Combined, the separation and temporary leave programs represented a reduction of approximately 32% of the Company's workforce. The Company recorded $17.5 million during the three and nine months ended September 30, 2020 related to the workforce reduction and separation programs.

(5)During the three and nine months ended September 30, 2020, the Company recorded $7.0 million in special termination benefits and curtailment losses related to the Company's pension and other postretirement benefit plans in connection with its voluntary separation programs. See Note 10 for additional information.


26


13. Supplemental Cash Flow Information

Non-cash investing and financing activities for the nine months ended September 30, 2020 and 2019 were as follows:

Nine months ended September 30,
20202019
Investing and Financing Activities Not Affecting Cash:
(in thousands)
Property and equipment acquired through a finance lease$— $6,567 
Right-of-use assets acquired under operating leases75,667 5,435 

14. Income Taxes

The Company's effective tax rate was 32.4% and 26.2% for the three months ended September 30, 2020 and 2019, respectively, and 26.1% and 26.5% for the nine months ended September 30, 2020 and 2019, respectively. The effective tax rates represent a blend of federal and state taxes and includes the impact of certain nondeductible items.

On March 27, 2020, the CARES Act was enacted in response to the COVID-19 pandemic as discussed in Note 2. The CARES Act, among other things, allows for net operating losses (NOLs) incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes and eliminates the 80 percent limitation on carried back NOLs.

The effective tax rate for the three and nine months ended September 30, 2020 includes the impact of the nondeductible goodwill impairment and reflects a tax benefit resulting from the rate differential from NOLs generated in recent periods, which were carried back to prior years. The ultimate impact may differ from these provisional amounts due to, among other things, additional analysis, changes in interpretations and estimates the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the CARES Act. The Company will continue to monitor the updates on guidance issued with respect to the CARES Act.

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 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:

27


Condensed Consolidating Statements of Operations and Comprehensive Loss
Three months ended September 30, 2020
 Parent Issuer /
Guarantor
Subsidiary
Issuer /
Guarantor
Non-Guarantor
Subsidiaries
EliminationsConsolidated
 (in thousands)
Operating Revenue$— $76,090 $3,114 $(3,222)$75,982 
Operating Expenses:     
Wages and benefits— 19,494 — — 19,494 
Aircraft fuel, including taxes and delivery— 14,544 — — 14,544 
Maintenance, materials and repairs— 18,027 1,187 (550)18,664 
Aircraft and passenger servicing— 5,140 — — 5,140 
Commissions and other selling(25)5,221 (1)5,201 
Aircraft rent— 26,182 48 — 26,230 
Other rentals and landing fees— 14,175 (28)14,156 
Depreciation and amortization— 35,726 1,008 — 36,734 
Purchased services39 25,184 296 (2,641)22,878 
Special items— 17,489 — — 17,489 
Other1,439 14,503 585 (2)16,525 
Total1,453 195,685 3,139 (3,222)197,055 
Operating Loss(1,453)(119,595)(25)— (121,073)
Nonoperating Income (Expense):     
Undistributed net loss of subsidiaries(95,952)— — 95,952 — 
Other nonoperating special items— (7,011)— — (7,011)
Interest expense and amortization of debt discounts and issuance costs— (11,596)— — (11,596)
Interest income1,941 — — 1,942 
Capitalized interest— 831 — — 831 
Losses on fuel derivatives— (297)— — (297)
Other, net— (6,380)— — (6,380)
Total(95,951)(22,512)— 95,952 (22,511)
Loss Before Income Taxes(97,404)(142,107)(25)95,952 (143,584)
Income tax benefit(305)(46,175)(5)— (46,485)
Net Income$(97,099)$(95,932)$(20)$95,952 $(97,099)
Comprehensive Loss$(110,228)$(109,061)$(20)$109,081 $(110,228)

28


Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
Three months ended September 30, 2019
 Parent Issuer /
Guarantor
Subsidiary
Issuer /
Guarantor
Non-Guarantor
Subsidiaries
EliminationsConsolidated
 (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 
Depreciation and amortization— 39,853 1,743 — 41,596 
Other rentals and landing fees— 33,345 — — 33,345 
Purchased services70 32,803 263 (16)33,120 
Other1,576 40,099 435 (54)42,056 
Total1,646 631,041 5,934 (106)638,515 
Operating Income (Loss)(1,646)123,567 (5,285)— 116,636 
Nonoperating Income (Expense):     
Undistributed net income of subsidiaries81,379 — — (81,379)— 
Interest expense and amortization of debt discounts and issuance costs— (6,438)— — (6,438)
Interest income3,144 — — 3,148 
Capitalized interest— 1,171 — — 1,171 
Losses on fuel derivatives— (4,553)— — (4,553)
Other, net(8)(1,437)— — (1,445)
Total81,375 (8,113)— (81,379)(8,117)
Income (Loss) Before Income Taxes79,729 115,454 (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 
29


Condensed Consolidating Statements of Operations and Comprehensive Loss
Nine months ended September 30, 2020
 Parent Issuer /
Guarantor
Subsidiary
Issuer /
Guarantor
Non-Guarantor
Subsidiaries
EliminationsConsolidated
 (in thousands)
Operating Revenue$— $694,755 $10,347 $(9,972)$695,130 
Operating Expenses:     
Aircraft fuel, including taxes and delivery— 135,025 — — 135,025 
Wages and benefits— 238,077 — — 238,077 
Aircraft rent— 77,128 (8)— 77,120 
Maintenance materials and repairs— 89,992 4,359 (1,284)93,067 
Aircraft and passenger servicing— 46,459 — — 46,459 
Commissions and other selling(6)34,833 63 (46)34,844 
Depreciation and amortization— 110,558 4,958 — 115,516 
Other rentals and landing fees— 57,672 (82)57,599 
Purchased services189 84,516 849 (8,548)77,006 
Special items— 147,570 30,837 — 178,407 
Other4,306 74,178 1,671 (12)80,143 
Total4,489 1,096,008 42,738 (9,972)1,133,263 
Operating Loss(4,489)(401,253)(32,391)— (438,133)
Nonoperating Income (Expense):     
Undistributed net loss of subsidiaries(344,832)— — 344,832 — 
Other nonoperating special items— (7,011)— — (7,011)
Interest expense and amortization of debt discounts and issuance costs— (26,612)— (26,612)
Interest income7,724 — — 7,728 
Capitalized interest— 2,583 — — 2,583 
Losses on fuel derivatives— (6,933)— — (6,933)
Other, net— (2,910)(5)— (2,915)
Total(344,828)(33,159)(5)344,832 (33,160)
Loss Before Income Taxes(349,317)(434,412)(32,396)344,832 (471,293)
Income tax benefit(942)(115,173)(6,803)— (122,918)
Net Loss$(348,375)$(319,239)$(25,593)$344,832 $(348,375)
Comprehensive Loss$(360,791)$(331,655)$(25,593)$357,248 $(360,791)

30


Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
Nine months ended September 30, 2019
 Parent Issuer /
Guarantor
Subsidiary
Issuer /
Guarantor
Non-Guarantor
Subsidiaries
EliminationsConsolidated
 (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 selling11 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 services194 97,463 696 (47)98,306 
Other4,714 112,159 1,335 (167)118,041 
Total4,919 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 subsidiaries178,139 — — (178,139)— 
Interest expense and amortization of debt discounts and issuance costs— (21,252)(16)— (21,268)
Interest income25 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)
Total178,156 (21,100)(23)(178,139)(21,106)
Income (Loss) Before Income Taxes173,237 253,702 (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 

31


Condensed Consolidating Balance Sheets
September 30, 2020
 Parent Issuer /
Guarantor
Subsidiary
Issuer /
Guarantor
Non-Guarantor
Subsidiaries
EliminationsConsolidated
 (in thousands)
ASSETS     
Current assets:     
Cash and cash equivalents$9,452 $518,402 $9,148 $— $537,002 
Short-term investments— 442,106 — — 442,106 
Accounts receivable, net— 30,533 244 (671)30,106 
Income taxes receivable— 67,758 — — 67,758 
Spare parts and supplies, net— 36,621 — — 36,621 
Prepaid expenses and other124 54,748 46 — 54,918 
Total9,576 1,150,168 9,438 (671)1,168,511 
Property and equipment at cost— 2,912,019 68,125 — 2,980,144 
Less accumulated depreciation and amortization— (831,355)(27,571)— (858,926)
Property and equipment, net— 2,080,664 40,554 — 2,121,218 
Operating lease right-of-use assets— 647,288 — — 647,288 
Long-term prepayments and other50 146,101 468 — 146,619 
Goodwill and other intangible assets, net— 13,000 500 — 13,500 
Intercompany receivable— 569,107 — (569,107)— 
Investment in consolidated subsidiaries1,266,361 — 504 (1,266,865)— 
TOTAL ASSETS$1,275,987 $4,606,328 $51,464 $(1,836,643)$4,097,136 
LIABILITIES AND SHAREHOLDERS’ EQUITY     
Current liabilities:     
Accounts payable$947 $93,885 $1,999 $(671)$96,160 
Air traffic liability and current frequent flyer deferred revenue— 509,326 6,098 — 515,424 
Other accrued liabilities— 132,545 189 — 132,734 
Current maturities of long-term debt, less discount— 114,810 — — 114,810 
Current maturities of finance lease obligations— 21,618 — — 21,618 
Current maturities of operating leases— 81,881 — — 81,881 
Total947 954,065 8,286 (671)962,627 
Long-term debt— 1,035,971 — — 1,035,971 
Intercompany payable557,825 — 11,282 (569,107)— 
Other liabilities and deferred credits:    
Noncurrent finance lease obligations— 126,159 — — 126,159 
Noncurrent operating leases— 524,172 — — 524,172 
Accumulated pension and other post-retirement benefit obligations— 223,907 — — 223,907 
Other liabilities and deferred credits— 77,748 1,101 — 78,849 
Noncurrent frequent flyer deferred revenue— 186,618 — — 186,618 
Deferred tax liabilities, net— 241,618 — — 241,618 
Total— 1,380,222 1,101 — 1,381,323 
Shareholders’ equity717,215 1,236,070 30,795 (1,266,865)717,215 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY$1,275,987 $4,606,328 $51,464 $(1,836,643)$4,097,136 

32


Condensed Consolidating Balance Sheets
December 31, 2019
 Parent Issuer /
Guarantor
Subsidiary
Issuer /
Guarantor
Non-Guarantor
Subsidiaries
EliminationsConsolidated
(in thousands)
ASSETS    
Current assets:     
Cash and cash equivalents$1,228 $362,933 $8,895 $— $373,056 
Short-term investments— 245,599 — — 245,599 
Accounts receivable, net— 95,141 3,188 (949)97,380 
Income taxes receivable, net— 64,192 — — 64,192 
Spare parts and supplies, net— 37,630 — — 37,630 
Prepaid expenses and other90 56,743 16 — 56,849 
Total1,318 862,238 12,099 (949)874,706 
Property and equipment at cost— 2,987,222 92,094 — 3,079,316 
Less accumulated depreciation and amortization— (739,930)(22,614)— (762,544)
Property and equipment, net— 2,247,292 69,480 — 2,316,772 
Operating lease right-of-use assets— 632,545 — — 632,545 
Long-term prepayments and other— 182,051 387 — 182,438 
Goodwill and other intangible assets, net— 119,663 500 — 120,163 
Intercompany receivable— 550,075 — (550,075)— 
Investment in consolidated subsidiaries1,619,949 — 504 (1,620,453)— 
TOTAL ASSETS$1,621,267 $4,593,864 $82,970 $(2,171,477)$4,126,624 
LIABILITIES AND SHAREHOLDERS’ EQUITY     
Current liabilities:     
Accounts payable$529 $139,764 $9,404 $(949)$148,748 
Air traffic liability and current frequent flyer deferred revenue— 600,851 5,833 — 606,684 
Other accrued liabilities— 161,125 305 — 161,430 
Current maturities of long-term debt, less discount— 53,273 — — 53,273 
Current maturities of finance lease obligations— 21,857 — — 21,857 
Current maturities of operating leases— 83,224 — — 83,224 
Total529 1,060,094 15,542 (949)1,075,216 
Long-term debt— 547,254 — — 547,254 
Intercompany payable538,942 — 11,133 (550,075)— 
Other liabilities and deferred credits:    0
Noncurrent finance lease obligations— 141,861 — — 141,861 
Noncurrent operating leases— 514,685 — — 514,685 
Accumulated pension and other post-retirement benefit obligations— 203,596 — — 203,596 
Other liabilities and deferred credits— 96,338 1,096 — 97,434 
Noncurrent frequent flyer deferred revenue— 175,218 — — 175,218 
Deferred tax liabilities, net— 289,564 — — 289,564 
Total— 1,421,262 1,096 — 1,422,358 
Shareholders’ equity1,081,796 1,565,254 55,199 (1,620,453)1,081,796 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY$1,621,267 $4,593,864 $82,970 $(2,171,477)$4,126,624 
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Condensed Consolidating Statements of Cash Flows
Nine months ended September 30, 2020
 Parent Issuer /
Guarantor
Subsidiary
Issuer /
Guarantor
Non-
Guarantor
Subsidiaries
EliminationsConsolidated
 (in thousands)
Net Cash Provided By (Used In) Operating Activities$4,111 $(177,272)$(321)$— $(173,482)
Cash Flows From Investing Activities:     
Net payments to affiliates(7,850)(24,921)(66)32,837 — 
Additions to property and equipment, including pre-delivery deposits— (94,565)(7,210)— (101,775)
Proceeds from the sale and sale leaseback of aircraft and aircraft related equipment— 114,000 — — 114,000 
Purchases of investments— (408,955)— — (408,955)
Sales of investments— 214,469 — — 214,469 
Net cash used in investing activities(7,850)(199,972)(7,276)32,837 (182,261)
Cash Flows From Financing Activities:     
Long-term borrowings— 602,264 — — 602,264 
Repayments of long-term debt and finance lease obligations— (64,686)— — (64,686)
Debt issuance costs— (3,506)— — (3,506)
Dividend payments(5,514)— — — (5,514)
Net payments from affiliates24,987 — 7,850 (32,837)— 
Repurchases of common stock(7,510)— — — (7,510)
Other— (1,359)— — (1,359)
Net cash provided by financing activities11,963 532,713 7,850 (32,837)519,689 
Net increase (decrease) in cash and cash equivalents8,224 155,469 253 — 163,946 
Cash, cash equivalents, & restricted cash - Beginning of Period1,228 362,933 8,895 — 373,056 
Cash, cash equivalents, & restricted cash - End of Period$9,452 $518,402 $9,148 $— $537,002 


34


Condensed Consolidating Statements of Cash Flows
Nine months ended September 30, 2019
 Parent Issuer /
Guarantor
Subsidiary
Issuer /
Guarantor
Non-
Guarantor
Subsidiaries
EliminationsConsolidated
 (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 affiliates75,273 — 10,350 (85,623)— 
Repurchases of Common Stock(50,690)— — — (50,690)
Other— (1,026)— — (1,026)
Net cash provided by financing activities7,377 130,351 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 Period5,154 255,279 8,144 — 268,577 
Cash, cash equivalents, & restricted cash - End of Period$1,594 $502,834 $7,734 $— $512,162 


Income Taxes
 
The income tax expense (benefit) is presented as if each entity that is part of the consolidated group files a separate return.
35


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; the severity, magnitude, duration and effects of the COVID-19 pandemic; the extent to which the COVID-19 pandemic and related impacts will materially and adversely affect our business operations, financial performance, results of operations, financial position or achievement of strategic objectives; the duration and scope of government mandates or other limitations of or restrictions on travel; the demand for air travel in the markets in which we operate; the compounding effect of the COVID-19 pandemic on competitive pressures in the markets in which we operate; our dependence on tourism; the impact of the COVID-19 pandemic on our suppliers; the effect of the economic downturn and the COVID-19 pandemic on our aircraft contracts and commitments; the effect of government, business and individual actions intended to mitigate the effects of the COVID-19 pandemic; the terms and effectiveness of cost reduction and liquidity preservation measures taken by us; our ability to continue to generate sufficient cash to operate; changes in our future capital needs; estimations related to our liquidity requirements; our participation under the CARES Act and the terms of relief thereunder; future borrowings and obligations under CARES Act programs; the impact of Essential Air Service requirements on our flight schedule, the availability of aircraft fuel, aircraft parts and personnel; 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 third quarter of 2020; expected salary and related costs; estimates for daily cash burn; our expected fleet as of September 30, 2021; estimates of annual fuel expenses and measure of the effects of fuel prices on our business; the availability of, and efforts seeking, future financing; 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 or deferment 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: the continuing and developing effects of the spread of COVID-19 on our business operations and financial condition; whether our cost-cutting efforts related to the COVID-19 pandemic will be effective or sufficient; the duration of government-mandated and other restrictions on travel; the full effect that the quarantine, restrictions on travel and other measures to limit the spread of COVID-19 will have on demand for air travel in the markets in which we operate; fluctuations and the extent of declining demand for air transportation in the markets in which we operate; our dependence on the tourist industry; our ability to generate sufficient cash and manage the cash available to us; our ability to accurately forecast quarterly and annual results; global economic volatility; macroeconomic political and regulatory developments; the price and availability of fuel, aircraft parts and personnel; foreign currency exchange rate fluctuations; competitive pressures, including the impact of increasing industry capacity between North America and Hawai`i; 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 our 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; 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 under the heading “Risk Factors” in Part II, Item 1A in this Quarterly Report on Form 10-Q and discussed from time to time in our public filings and public announcements. All forward-looking statements included in this Quarterly Report on Form 10-Q 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
36


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. As described below under "Impact of COVID-19," since February 2020, we have temporarily reduced our Scheduled Operations. 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 Bureau of Transportation Statistics for the month of April 2020, the latest available data. As of September 30, 2020, we had 7,087 active employees before giving effect to voluntary and involuntary separation programs discussed in detail below.

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.

September 2020 Quarterly Financial Overview

GAAP net loss in the third quarter of $97.1 million, or $2.11 per diluted share. Adjusted net loss in the third quarter of $172.7 million, or $3.76 per diluted share

Total revenue in the third quarter was $76.0 million, down 89.9% as compared to the same period in 2019

Unrestricted cash, cash equivalents and short-term investments of $979.1 million as of September 30, 2020

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.

Impact of COVID-19

Due to the rapid and unprecedented spread of COVID-19, what began with our suspension of service to South Korea and Japan in late February accelerated in March when governments instituted requirements of self-isolation or quarantine for incoming travel. This was followed by the announcement in March 2020 of a 14-day mandatory quarantine for all travelers to, from and within the State of Hawai`i. These restrictions, combined with the ongoing spread and impact of the COVID-19 pandemic globally, have continued to suppress customer demand, which continues at historically low levels.

Despite the easing of travel restrictions in recent months in the United States, restrictions for travel to and within the State of Hawai`i as well as travel to and from various international locations, including those in our network, remains in effect. In September 2020, the Governor of the State of Hawai`i announced that a program allowing travelers coming to Hawai`i from the mainland U.S. to bypass the quarantine requirement with the proof of a negative COVID-19 test from a state-approved testing partner would begin on October 15, 2020. Following this announcement, the Company saw increases in bookings and has slowly begun rebuilding its Neighbor Island and North America flight schedule commensurate with anticipated increases in demand.

The exact timing and pace of the recovery of passenger demand continues to remain uncertain. Certain markets have reopened, some of which have since experienced a resurgence of COVID-19 cases, while others, particularly international markets, remain closed or are enforcing extended quarantines for most U.S. residents.

In response to the COVID-19 pandemic, we have implemented enhanced safety protocols focusing on our staff and guests, while at the same time working to mitigate the impact of the pandemic on our financial position and operations.

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Guest and Employee Experience. We have enhanced cleaning procedures and revised guest-facing procedures in an effort to minimize the risk of transmission of COVID-19. These procedures are in line with current recommendations from leading public health authorities and include:

Performing enhanced aircraft cleaning between flight and during overnight, including recurring electrostatic spraying of all aircraft.
Frequent cleaning and disinfecting of counters and self-service check-in kiosks in our airports.
Ensuring hand sanitizers are readily available for guests at airports we serve.
Requiring guests and guest facing employees to wear a face mask or covering, with guests required to keep them on from check-in to deplaning.
Modifying boarding and deplaning processes and limiting the capacity of available seats on all aircraft to approximately 70% of normalized capacity through December 15th.
Modifying in-flight service to reduce close interactions between crew members and guests.
Eliminating change fees on all domestic and international flights in order to provide guests with travel flexibility across our network.
Launching a program to offer guests pre-travel COVID-19 testing through mail-in kits and proprietary drive-through testing labs in select U.S. mainland gateways.

Capacity Impacts. In response to the reduced passenger demand as a result of the COVID-19 pandemic, we significantly reduced system capacity late in the first quarter of 2020 to a level that maintained essential services while aligning capacity with expected passenger demand. For the quarter and year ended September 30, 2020, system capacity was reduced 86.5% and 60.2%, respectively, as compared to the same periods in 2019. In connection with this reduction, we temporarily parked approximately 29% of our fleet as of September 30, 2020.

Expense Management. In response to the reduction in revenue, we have implemented and will continue to implement, cost savings and liquidity measures, including:

In the first quarter 2020, we instituted a temporary hiring freeze, except with respect to operationally critical and essential positions.
We reduced capital expenditures for 2020 and continue to evaluate non-essential, non-aircraft capital expenditures. During the three and nine months ended September 30, 2020, capital expenditures were approximately $7.8 million and $101.8 million, respectively.
Our officers reduced their base salaries between 10% and 50% through September 30, 2020. Members of our Board of Directors also temporarily reduced their compensation.
During the third quarter of 2020, we announced and completed voluntary separation and temporary leave programs across each of our labor groups. Additionally, we completed involuntary separations, the majority of which were effective October 1, 2020. Combined, separation and temporary leave programs resulted in an approximately 32% reduction of our total workforce.
On October 26, 2020, we entered into the Amendment related to our Boeing 787-9 purchase agreement with Boeing, which provides for, among other things, a change in the aircraft delivery schedule from 2021 through 2025 to 2022 through 2026, with the first delivery now scheduled in September 2022. Refer to Note 11 for additional discussion, including the impact of this amendment on our future financial commitments.

We may implement further discretionary changes and other cost reduction and liquidity preservation measures as needed to address the volatile and quickly-changing dynamics of passenger demand and changes in revenue, regulatory and public health directives and prevailing government policy and financial market conditions.

Cash Flow and Liquidity Management. Our cash, cash equivalents and short-term investments as of September 30, 2020 was $979.1 million as a result of various actions taken to increase liquidity and strengthen financial position during the nine months ended September 30, 2020, including, but not limited to:

During the first quarter of 2020, we fully drew down our previously undrawn $235.0 million revolving credit facility. Refer to Note 9 in the Notes to Consolidated Financial Statements for additional discussion.
During the first quarter of 2020, we suspended our stock repurchase program and on April 22, 2020, we suspended dividend payments.
During the second and third quarters of 2020, we received $240.6 million in grants and $60.3 million in loans pursuant to the CARES Act PSP, as discussed in further detail below.
During the third quarter 2020, we entered into the Loan Agreement with the Treasury pursuant to the ERP under the CARES to provide for a secured term loan which permits us to borrow up to $420.0 million. As of September 30,
38


2020, we had borrowed $45.0 million under the program. On October 23, 2020, we amended and restated our Loan Agreement with the Treasury to increase the maximum facility available to be borrowed by the Company to $622 million.
During the third quarter 2020, we completed $376.0 million in financings secured by aircraft, including the issuance of enhanced equipment trust certificates and two sale and lease track transactions. See Note 2 and Note 9 in the Notes to Consolidated Financial Statements for more information on our financing activities during the three and nine months ended September 30, 2020.

We will continue to explore and pursue options to raise additional financing as opportunities arise.

CARES Act

On March 27, 2020, President Trump signed into law the CARES Act, which provides an estimated $2.2 trillion to fight the COVID-19 pandemic and stimulate the U.S. economy. The assistance includes tax relief and government loans, grants and investments for entities in affected industries. The CARES Act provides, among other things: (a) financial relief to passenger air carriers for direct payroll support under the PSP, (b) financial relief in the form of loans and loan guarantees available for operations under the ERP, (c) temporary suspension of certain aviation taxes, (d) temporary deferral of certain employer payroll taxes, and (e) additional Corporate tax benefits that are further discussed in Note 14 in the Notes to Consolidated Financial Statements.

Payroll Support Program (PSP)

On April 22, 2020, Hawaiian entered into a PSP Agreement with the Treasury under the CARES Act. In connection with the PSP Agreement, we entered into a PSP Warrant Agreement with the Treasury and Hawaiian issued the Note to the Treasury. Pursuant to the PSP Agreement, the Treasury provided Hawaiian with financial assistance, paid in installments, totaling approximately $300.9 million, to be used exclusively for the purpose of continuing to pay employee salaries, wages and benefits. Under the PSP Agreement, Hawaiian agreed to (i) refrain from conducting involuntary furloughs or reducing employee rates of pay or benefits through September 30, 2020, (ii) limit executive compensation through March 24, 2022 and (iii) suspend payment of dividends and stock repurchases through September 30, 2021. The PSP Agreement also imposes certain Treasury-mandated reporting obligations on us. Finally, Hawaiian is required to continue to provide air service to markets served prior to March 1, 2020 until March 1, 2022, to the extent determined reasonable and practicable by the DOT and subject to exemptions granted by the DOT to us given the absence of demand for certain of such services.

The Note issued by Hawaiian to the Treasury was in the principal amount of approximately $60.3 million. The Note has a ten-year term and bears interest at a rate per annum equal to 1.00% until the fifth anniversary of the PSP Closing Date, and thereafter bears interest at a rate equal to the secured overnight financing rate plus 2.00% until the tenth anniversary of the PSP Closing Date, which interest is payable semi-annually beginning on September 30, 2020. The Note may be prepaid at any time, without penalty and is subject to customary change of control provisions and events of default.

As compensation to the U.S. government for providing financial relief under the PSP Agreement, and pursuant to the PSP Warrant Agreement, we issued to the Treasury a total of 509,964 PSP Warrants at an exercise price of $11.82 per share. The PSP Warrants are non-voting, freely transferable, may be settled as net shares or in cash at our option, expire five years from the date of issuance, and contain registration rights and customary anti-dilution provisions.

Economic Relief Program (ERP)

On September 25, 2020, we entered into the Loan Agreement, which provides for a secured term loan facility permitting us to borrow up to $420.0 million. On the ERP Closing Date, we borrowed $45.0 million and may, at our option, borrow additional amounts in up to two subsequent borrowings until March 26, 2021, so long as, after giving effect to any further borrowing, the collateral coverage ratio is no less than 2.0 to 1.0. As a condition to the drawing under the Facility, we are required to comply with all applicable provisions of the CARES Act.

Borrowings under the Facility will initially bear interest at a variable rate per annum equal to (a) the Adjusted LIBO Rate (as defined in the Loan Agreement) plus (b) 2.50%. Accrued interest on the loans is payable in arrears on the first business day following the 14th day of each March, June, September and December (beginning with September 15, 2021), and on the Maturity Date. The applicable interest rate for the $45.0 million loan drawn on the ERP Closing Date under the Facility is 2.73% per annum for the period from the ERP Closing Date through September 15, 2021 at which time the interest rate will reset in accordance with the foregoing formula. All advances under the Facility will be in the form of term loans, all of which will mature and be due and payable in a single installment on June 30, 2024.
39



The Facility is secured by our frequent flyer loyalty program, HawaiianMiles, and certain aircraft, including 14 Boeing 717-200 airframes and the related 28 Rolls Royce BR715-A1-30 engines, together with their related accessories, aircraft documents and parts. The Facility is also subject to various financial covenants, including a minimum collateral coverage ratio of 2.0 to 1.0 and a minimum debt service coverage ratio of 1.75 to 1.00. Additionally, the ERP limits executive compensation and suspends payment of dividends and stock repurchases through one year following the repayment of the ERP outstanding loan balance.

In connection with our entry into the Loan Agreement, we entered into an ERP warrant agreement with the Treasury. Pursuant to the ERP Warrant Agreement, we agreed to issue ERP Warrants to purchase up to an aggregate of 3,553,299 shares of our common stock at an exercise price of $11.82 per share. Pursuant to the ERP Warrant Agreement, (a) on the ERP Closing Date, we issued to the Treasury an ERP Warrant to purchase up to 380,711 shares of our common stock and (b) on the date of each borrowing under the Loan Agreement, we will issue to the Treasury an additional ERP Warrant for a number of shares of our common stock equal to 10% of such borrowing, divided by the Exercise Price. The ERP Warrants are non-voting, freely transferable, may be settled as net shares or in cash at our option, expire five years from the date of issuance, and contain registration rights and customary anti-dilution provisions.

On October 23, 2020, we amended and restated our Loan Agreement with the Treasury under the ERP to increase the maximum facility available to be borrowed by the Company to $622 million.

The CARES Act also provides for deferred payment of the employer portion of social security taxes through the end of 2020, with 50% of the deferred amount due December 31, 2021 and the remaining 50% due December 31, 2022. Lastly, the CARES Act provides for the carryback of additional net operating losses to 2016 and 2017, which will result in tax benefits for those years.

Fleet Summary

Due to the ongoing uncertainties of the COVID-19 pandemic on our business, we continue to evaluate our existing fleet structure to optimize capacity with demand, as well as the potential deferment of future aircraft deliveries. As of September 30, 2020, we have temporarily parked 26 aircraft. The table below summarizes our total fleet as of September 30, 2019 and 2020, respectively and our expected fleet as of September 30, 2021 (based on existing executed agreements as of September 30, 2020):
 September 30, 2019September 30, 2020September 30, 2021
Aircraft TypeLeased (1)Owned (2)TotalLeased (1)Owned (2)TotalLeased (1)Owned (2)Total
A330-20012 12 24 12 12 24 12 12 24 
A321neo (3)13 15 14 18 14 18 
787-9 (4)— — — — — — — 
717-20015 20 14 19 14 19 
ATR 42-500 (5)— — — 
ATR 72-200 (5)— — — 
Total19 47 66 21 48 69 21 50 71 

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

(2)    Includes unencumbered aircraft as well as those purchased and under various debt financing.

(3)    We took delivery of the last firm order Airbus A321-200 aircraft in the second quarter of 2020.

(4)    In July 2018, we entered into a purchase agreement for the purchase of 10 Boeing 787-9 "Dreamliner" aircraft with purchase rights for an additional 10 aircraft. On October 26, 2020, the Company entered into an amendment the purchase agreement, which revises our delivery schedule to between 2022 through 2026. Refer to Note 11 for additional discussion.

(5)    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. The ATR 42-500 turboprop aircraft are used for passenger operations under a Capacity Purchase Agreement (CPA) with a third-party provider. The ATR 72-200 turboprop aircraft are used for our cargo operations under the aforementioned CPA.
40



Results of Operations
 
For the three months ended September 30, 2020, we generated a net loss of $97.1 million, or $2.11 per diluted share, compared to net income of $80.1 million, or $1.70 per diluted share, for the same period in 2019. For the nine months ended September 30, 2020, we generated a net loss of $348.4 million, or $7.58 per diluted share, compared to net income of $174.3 million, or $3.64 per diluted share, for the same period in 2019.

Selected Consolidated Statistical Data (unaudited)
 Three months ended September 30, Nine months ended September 30,
 2020 2019 2020 2019
 (in thousands, except as otherwise indicated)
Scheduled Operations (a):       
Revenue passengers flown331  3,066  2,873  8,843 
Revenue passenger miles (RPM)181,878  4,673,734  3,988,435  13,288,823 
Available seat miles (ASM)711,151  5,321,812  6,095,612  15,325,559 
Passenger revenue per RPM (Yield)21.87 ¢14.85 ¢14.37 ¢14.67 ¢
Passenger load factor (RPM/ASM)25.6 %87.8 %65.4 %86.7 %
Passenger revenue per ASM (PRASM)5.59 ¢13.05 ¢9.40 ¢12.72 ¢
Total Operations (a):       
Revenue passengers flown332  3,072  2,877  8,853 
RPM185,788  4,679,632  3,995,644  13,300,090 
ASM718,405  5,331,914  6,107,424  15,341,510 
Operating revenue per ASM (RASM)10.58 ¢14.16 ¢11.38 ¢13.85 ¢
Operating cost per ASM (CASM)27.43 ¢11.98 ¢18.56 ¢12.16 ¢
CASM excluding aircraft fuel, gain on sale of aircraft, and special items (b)40.94 ¢9.38 ¢17.36 ¢9.53 ¢
Aircraft fuel expense per ASM (c)2.02 ¢2.60 ¢2.22 ¢2.64 ¢
Revenue block hours operated12,388  56,088  71,743  162,556 
Gallons of aircraft fuel consumed13,394  69,749  84,975  201,547 
Average cost per gallon of aircraft fuel (c)$1.09  $1.99  $1.59  $2.01 
 
(a)    Includes the operations of our contract carrier under a capacity purchase agreement.
(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, 2020, operating revenue decreased by $679.2 million, or 89.9%, and $1,429.0 million, or 67.3%, respectively, as compared to the same period in 2019, driven by decreased passenger and other revenue primarily related to the ongoing impacts of the COVID-19 pandemic and discussed further below:

Passenger revenue

For the three and nine months ended September 30, 2020, passenger revenue decreased by $654.5 million, or 94.3%, and $1,376.0 million, or 70.6%, respectively, as compared to the same periods in 2019. Details of these changes are reflected in the table below: 
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Increase (Decrease) vs. Three Months Ended September 30, 2020
(in thousands)Three months ended September 30, 2020Passenger RevenueYieldRPMsASMsPRASM
Domestic$38,527 (92.3)%33.9 %(94.2)%(80.1)%(64.3)%
International1,250 (99.4)(100.0)(100.0)(100.0)(100.0)
Total scheduled$39,777 (94.3)%47.3 %(96.1)%(86.6)%(53.8)%

Increase (Decrease) vs. Nine Months Ended September 30, 2020
(in thousands)Nine months ended September 30, 2020Passenger RevenueYieldRPMsASMPRASM
Domestic$431,605 (70.1)%(3.7)%(68.9)%(55.8)%(35.7)%
International141,403 (72.1)1.0 (72.4)(69.6)(10.0)
Total scheduled$573,008 (70.6)%(2.0)%(70.0)%(60.2)%(30.8)%

Domestic passenger revenue during the three months ended September 30, 2020 decreased 92.3% on a capacity reduction of 80.1% as compared to the same period in 2019, while domestic passenger revenue during the nine months ended September 30, 2020 decreased 70.1% on a capacity reduction of 55.8% as compared to the same period in 2019. The decline in both periods was driven by the ongoing impacts of the COVID-19 pandemic.

Despite the easing of travel restrictions in the United States, restrictions for travel to and within the State of Hawai`i as well as travel to and from various international locations, including those in our network, remains in effect. In September 2020, the Governor of the State of Hawai`i announced that a program allowing travelers from the mainland U.S. coming to Hawai`i to bypass the quarantine requirement with proof of a negative COVID-19 test, from a state-approved provider, would begin on October 15, 2020. Following this announcement, we saw increases in bookings and have slowly begun rebuilding our Neighbor Island and North America flight schedule commensurate with the anticipated increases in demand. The exact timing and pace of the recovery remain uncertain. In each of our markets, we continue to monitor travel directives and customer demand and will adjust capacity and flight schedules accordingly.

International passenger revenue during the three months ended September 30, 2020 decreased 99.4% on a capacity reduction of 100.0% as compared to the same period in 2019. International passenger revenue during the nine months ended September 30, 2020 decreased 72.1% on a capacity reduction of 69.6% as compared to the same period in 2019. In late March 2020, we suspended all international flights in response to the COVID-19 pandemic. We expect this significantly lower demand environment to continue through the remainder of 2020 and into at least early 2021, with improvement expected to lag behind the domestic demand recovery, once government travel restrictions begin to lift and customer demand starts to return.

Other Operating Revenue

For the three and nine months ended September 30, 2020, Other operating revenue decreased by $24.7 million and $53.0 million, or 40.5% and 30.3%, respectively, as compared to the same periods in 2019, driven by reductions in cargo and loyalty program revenue as a result of the COVID-19 pandemic. Cargo revenue decreased $6.4 million and $19.5 million during the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019 due to reduced volumes as a result of the impacts of the COVID-19 pandemic. Loyalty revenue, primarily comprised of brand and marketing performance obligations, decreased $13.4 million and $23.0 million, respectively, during the three and nine months ended September 30, 2020, as compared to the same periods in 2019, as a result of reduced credit card spend. Other components in Other operating revenue include, but are not limited to, ground handling and other freight services which, collectively, declined during the three and nine months ended September 30, 2020 by approximately $4.9 million and $10.5 million, respectively, as compared to the same periods in 2019, as a result of our reduced operations.

Operating Expense
 
Operating expenses were $197.1 million and $638.5 million for the three months ended September 30, 2020 and 2019, respectively. Increases (decreases) in operating expenses for the three and nine months ended September 30, 2020, as compared to the same period in 2019, are detailed below:
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Increase / (decrease) for the three months ended September 30, 2020 compared to the three months ended September 30, 2019Increase / (decrease) for the six months ended September 30, 2020 compared to the nine months ended September 30, 2019
$%$%
Operating expenses(in thousands)(in thousands)
Wages and benefits$(163,368)(89.3)%$(299,920)(55.7)%
Aircraft fuel, including taxes and delivery(124,042)(89.5)(270,265)(66.7)
Maintenance, materials and repairs(42,699)(69.6)(89,472)(49.0)
Aircraft and passenger servicing(36,622)(87.7)(73,844)(61.4)
Commissions and other selling(28,090)(84.4)(61,754)(63.9)
Aircraft rent(4,304)(14.1)(14,653)(16.0)
Other rentals and landing fees(19,189)(57.5)(38,178)(39.9)
Depreciation and amortization(4,862)(11.7)(3,758)(3.2)
Purchased services(10,242)(30.9)(21,300)(21.7)
Special items17,489 100.0 178,407 100.0 
Other(25,531)(60.7)(37,898)(32.1)
Total$(441,460)(69.1)%$(732,635)(39.3)%
 
Wages and benefits

Wages and benefits expense decreased by $163.4 million, or 89.3% and $299.9 million, or 55.7%, for the three and nine months ended September 30, 2020 as compared to the prior year period. The decrease was primarily attributed to the recognition of approximately $129.1 million and $240.6 million in contra-expense related to the grant portion of PSP funding during the three and nine months ended September 30, 2020, and is being recorded in proportion to estimated wage and benefits expense over the period it covers. Additionally, in March 2020, we instituted a temporary hiring freeze, reduced officer salaries between 10% and 50% through September 2020, and instituted various voluntary and involuntary leave programs.

During the third quarter, we announced and completed voluntary separation program offerings across all of our labor groups. Additionally, we announced involuntary workforce reductions, the majority of which were effective October 1, 2020. Combined with our voluntary leave programs, this represents approximately 32% of our total workforce as of September 30, 2020. As a result, we expect salaries and related costs to decline in the fourth quarter of 2020 and into 2021 as compared to the respective prior year periods.

Aircraft fuel
 
Aircraft fuel expense decreased during the three and nine months ended September 30, 2020, as compared to the prior year period, primarily due to a decrease in the average fuel price per gallon combined with decreased consumption, as illustrated in the following table: 
Three months ended September 30,Nine months ended September 30,
20202019% Change20202019% Change
(in thousands, except per-gallon amounts)(in thousands, except per-gallon amounts)
Aircraft fuel expense, including taxes and delivery$14,544 $138,586 (89.5)%$135,025 $405,290 (66.7)%
Fuel gallons consumed13,394 69,749 (80.8)%84,975 201,547 (57.8)%
Average fuel price per gallon, including taxes and delivery$1.09 $1.99 (45.2)%$1.59 $2.01 (20.9)%
 
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: 
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Three months ended September 30, Nine months ended September 30,
20202019% Change20202019% Change
(in thousands, except per-gallon amounts)(in thousands, except per-gallon amounts)
Aircraft fuel expense, including taxes and delivery$14,544 $138,586 (89.5)%$135,025 $405,290 (66.7)%
Realized losses on settlement of fuel derivative contracts2,062 3,399 (39.3)%7,899 9,294 (15.0)%
Economic fuel expense$16,606 $141,985 (88.3)%$142,924 $414,584 (65.5)%
Fuel gallons consumed13,394 69,749 (80.8)%84,975 201,547 (57.8)%
Economic fuel costs per gallon$1.24 $2.04 (39.2)%$1.68 $2.06 (18.4)%
 
Maintenance, materials and repairs

Maintenance, materials and repairs expense decreased by $42.7 million, or 69.6%, and $89.5 million, or 49.0%, for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. The decrease is primarily attributed to reductions in variable-related maintenance costs commensurate with capacity reductions during the periods in response to the COVID-19 pandemic. We expect maintenance, materials and repairs expense to decline in the fourth quarter of 2020 versus the comparable prior year period due to the capacity reductions discussed above.

Aircraft and passenger servicing

Aircraft and passenger servicing expense decreased by $36.6 million, or 87.7%, and $73.8 million, or 61.4%, for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. We expect aircraft and passenger servicing expense to decline in the fourth quarter of 2020 versus the comparable prior year period due to the capacity reductions discussed above.

Commissions and other selling expenses

Commissions and other selling expenses decreased by $28.1 million, or 84.4%, and $61.8 million, or 63.9%, for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. The decrease in commissions and other selling expense during the three and nine months ended September 30, 2020 was primarily related to the significant reduction in demand for travel due to the impact of the COVID-19 pandemic. We expect commissions and other selling expenses to decline in the fourth quarter of 2020 versus the comparable prior year period due to the capacity reductions discussed above.

Aircraft rent

Aircraft rent expense decreased by $4.3 million, or 14.1%, and $14.7 million, or 16.0% for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. The decrease in both periods was primarily attributed to lease extensions entered into for certain of our A330-200 and Boeing 717-200 aircraft in the second half of 2019, resulting in more favorable lease rates extended over periods ranging between two to eight years. Refer to Note 10 in the Notes to Consolidated Financial Statements in our 2019 Annual Report on Form 10-K filed on February 12, 2020. Additionally, in July 2020, we completed two sale-leaseback transactions. The transactions qualified as a sale, generating an immaterial loss, and the associated assets were removed from our unaudited Consolidated Balance Sheets within property and equipment, net and recorded as operating lease right-of-use assets.

Other rentals and landing fees

Other rentals and landing fees decreased by $19.2 million, or 57.5%, and $38.2 million, or 39.9% for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. A portion of our other rentals and landing fees are variable in nature and are dependent on factors such as the number of departures and passengers. The decrease in landing fees and other rents is due to the reduction in capacity and number of flights operated during the three and nine months ended September 30, 2020. We expect other rentals and landing fees to decline in the fourth quarter of 2020 versus the comparable prior year period due to the capacity reductions discussed above.

Purchased services
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Purchased services decreased by $10.2 million, or 30.9%, and $21.3 million, or 21.7% for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. The decrease in purchased services expense is primarily related to the significant reduction in demand for travel due to the impact of the COVID-19 pandemic. We expect purchased services expense to decline in the fourth quarter of 2020 versus the comparable prior year period due to the capacity reductions discussed above.

Special items

During the three and nine months ended September 30, 2020, we recognized approximately $24.5 million and $185.4 million of special items, respectively, comprised of the following:

In March 2020, we reached an agreement in principle with our flight attendants, represented by the AFA, on a new five-year contract that runs through April 2025. On April 3, 2020, we received notification from the AFA that the CBA was ratified by its members. The ratified CBA provides for, among other things, a ratification payment to be paid over a one-year term, increased medical cost sharing, improved pay scales, and a one-time medical savings contribution to eligible flight attendants upon retirement. During the first quarter, we recorded a $23.5 million ratification bonus, of which $20.2 million was related to service prior to January 1, 2020, and recognized this as a special item in the unaudited Consolidated Statements of Operations. The remaining $3.3 million was recorded as a component of wages and benefits in the unaudited Consolidated Statements of Operations.

During the first quarter of 2020, the adverse economic impact and declining passenger demand attributed to the COVID-19 pandemic drove our stock price to 52-week lows and significantly reduced future cash flow projections. We qualitatively assessed that an impairment loss may have been incurred as of March 31, 2020 and performed an interim test of the recoverability of goodwill and indefinite-lived intangible assets. We determined that the estimated fair value of our one reporting unit was less than its carrying value and that the deficit between fair value and the carrying value of the reporting unit exceeded the amount of goodwill on the unaudited Consolidated Balance Sheets, leading to the recognition of a goodwill impairment charge of $106.7 million in the first quarter of 2020.

During the second quarter of 2020, we recorded special items of $34.0 million comprised of the following; (a) an impairment charge of $27.5 million to fair value our ATR-42 and ATR-72 fleets, (b) an impairment charge of $3.4 million to fair value our commercial real estate assets; and (c) an approximately $3.1 million write-off for discontinued software-related projects as a result of the COVID-19 pandemic.

During the third quarter 2020, we announced and completed voluntary separation programs across each of our labor groups providing for one-time severance payments, the establishment of health reimbursement accounts and other benefits. Additionally, we announced involuntary separation and temporary leave programs, the majority of which were effective October 1, 2020. We recorded $17.5 million in severance and benefits as an operating special item and $7.0 million related to special termination benefits and curtailment loss as a nonoperating special item in the Consolidated Statements of Operations.

Other expense

The decrease in other expense is primarily driven by lower volume-related costs resulting from the decreased capacity during the three and nine months ended September 30, 2020. We expect other expense to decline in the fourth quarter 2020 versus the comparable prior year period due to the capacity reductions discussed above.

Nonoperating Income (Expense)

Net nonoperating expense increased by $14.4 million, or 177.3%, and $12.1 million, or 57.1% during the three and nine months ended September 30, 2020 as compared to the same periods in 2019. The increase in expense was primarily attributed to the movement of realized and unrealized gains and losses associated with our fuel and foreign currency derivative instruments, which are not designated for hedge accounting under ASC 815 and the movement of unrealized gains and losses on our debt instruments denominated in foreign currency.

Income Taxes

Our effective tax rate was 32.4% and 26.2% for the three months ended September 30, 2020 and 2019, respectively. The effective tax rate represents a blend of federal and state taxes and includes the impact of certain nondeductible items. The
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effective tax rate for the three and nine months ended September 30, 2020 includes the impact of the nondeductible goodwill impairment and reflects a tax benefit resulting from the rate differential from NOLs generated in recent periods which were carried back to prior years.

Liquidity and Capital Resources

Cash, cash equivalents and short-term investments totaled $979.1 million as of September 30, 2020, compared to $618.7 million as of December 31, 2019. As a result of the COVID-19 pandemic, we have taken, and are continuing to take, actions to increase liquidity and augment our financial position, which include:

On March 16, 2020, we drew down fully from our previously undrawn $235.0 million revolving credit facility;
We suspended dividend payments, and our stock repurchase program;
We received $240.6 million in grants and $60.3 million in loans pursuant to the PSP under the CARES Act;
In September 2020, we entered into the Loan Agreement with the Treasury to borrow up to $420.0 million in secured term loans pursuant to the ERP under the CARES Act. As of September 30, 2020, we had borrowed $45.0 million under the program; and
During the third quarter, we completed $376.0 million in financings secured by aircraft, including the issuance of enhanced equipment trust certificates and two sale-leaseback transactions. See Note 2 and Note 9 to the Notes to Consolidated Financial Statements for more information on our financing activities.

On October 23, 2020, we amended and restated our CARES Act ERP Loan Agreement with the Treasury to increase the maximum facility available to be borrowed by the Company to $622 million.

We continue to explore and pursue options to raise additional financing as opportunities may arise.

We cannot assure you that the assumptions used to estimate our liquidity requirements will be correct because we have never previously experienced such an unprecedented event impacting global travel, and as a consequence, our ability to predict the full impact of the COVID-19 pandemic is uncertain. In addition, the magnitude and duration of the COVID-19 pandemic is uncertain. However, based on our assumptions and estimates with respect to the temporary suspension of nearly the entirety of our operations, and our financial condition, we believe that the liquidity described in the preceding paragraphs will be sufficient to fund our liquidity requirements over at least the next twelve months.

As of September 30, 2020, our current liabilities exceeded our current assets by approximately $205.9 million. However, approximately $515.4 million of our current liabilities relate to our advanced ticket sales and frequent flyer deferred revenue, both of which largely represent revenue to be recognized for future travel.

Cash Flows

Net cash provided by operating activities was $173.5 million and $456.9 million during the nine months ended September 30, 2020 and 2019, 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. Our operating cash flows during the nine months ended September 30, 2020 were largely impacted by the adverse impact of the COVID-19 pandemic on our financial results.
Cash used in investing activities was $182.3 million and $275.8 million during the nine months ended September 30, 2020 and 2019, respectively. Investing activities included capital expenditures, primarily related to aircraft and other equipment, the sale and leaseback of two A321-200neo aircraft, and the purchases and sales of short-term investments. During the nine months ended September 30, 2020, capital expenditures were approximately $101.8 million, the majority of which relate to predelivery payments for our Boeing 787-9 aircraft deliveries and the purchase of our last A321neo aircraft in May 2020, as compared with $280.3 million in capital expenditures during the nine months ended September 30, 2019. During the nine months ended September 30, 2020, our purchases and sales of short-term investments resulted in net cash inflow of $194.5 million as compared to net cash inflow of $1.8 million during the same period in 2019. During the nine months ended September 30, 2020, we entered into two sale-leaseback transactions generating total proceeds of $114.0 million.
Net cash provided by financing activities was $519.7 million during the nine months ended September 30, 2020 as compared to net cash used in financing activities of $62.4 million during the nine months ended September 30, 2019. As discussed above, this is largely attributed to the financing initiatives completed by us in response to the COVID-19 pandemic, partially offset by scheduled debt and finance lease obligation repayments. During the nine months ended September 30, 2020, and prior to suspension of our dividend and share repurchase programs, pursuant to provisions under the CARES Act, we returned $13.0
46


million to our shareholders through a combination of share repurchases and dividend payments, as compared to $67.9 million during the same period in 2019.
Covenants
We were in compliance with covenants contained in our financing agreements at September 30, 2020.
Capital Commitments

As of September 30, 2020, we had the following capital commitments consisting of firm aircraft and engine orders and purchase rights: 
Aircraft TypeFirm OrdersPurchase RightsExpected Delivery Dates
A321neo aircraft— N/A
B787-9 aircraft1010Between 2021 and 2025
General Electric GEnx spare engines:   
B787-9 spare enginesBetween 2021 and 2023
 
On October 26, 2020, the Company entered into an amendment to its Boeing 787-9 purchase agreement, which changes the scheduled delivery of each aircraft and related engines to between 2022 and 2026. Refer to Note 11 for additional discussion.

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 were authorized to repurchase up to $100 million of our outstanding common stock over a two-year period through December 2020. The stock repurchase program was subject to further modification or termination at any time. In March 2020, we indefinitely suspended all repurchases under the approved repurchase plan in connection with our receipt of financial assistance under the CARES Act, which restricts us from repurchasing shares and making dividend payments until one year following repayment of outstanding loans under the ERP. We spent $7.5 million and $50.7 million to repurchase and retire approximately 0.3 million shares and 1.9 million shares of our common stock in open market transactions during the nine months ended September 30, 2020 and 2019, respectively.

Credit Card Holdbacks

Under our bank-issued credit card processing agreements, 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. As of September 30, 2020 and December 31, 2019, there were no holdbacks held by our credit card processors. In the event of a material adverse change in our business, the credit card processors could increase holdbacks to an amount up to 100% of the outstanding credit card tickets that are unflown (e.g., Air traffic liability, excluding frequent flyer deferred revenue), which would result in the restriction of cash. If we were unable to obtain a waiver of, or otherwise mitigate the increase in the restriction of cash, it could have a material impact on our operations, business or financial condition.

Pension and Postemployment Benefit Plan Funding

During the three and nine months ended September 30, 2020 and 2019, we were not required to, and did not make contributions to our defined benefit and other postretirement plans. Future funding requirements for our defined benefit and other postretirement plans are dependent upon many factors such as interest rates, funded status, applicable regulatory requirements and the level and timing of asset returns. Given available funding credits in the defined benefit plan and the financial uncertainties of the COVID-19 pandemic on our business, we do not anticipate making any cash contributions to our defined benefit plan during 2020.
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Contractual Obligations
 
Our estimated contractual obligations as of September 30, 2020 are summarized in the following table: 
Contractual ObligationsTotalRemaining in 20202021 - 20222023 - 20242025 and
thereafter
 (in thousands)
Debt obligations, including principal and interest (1)$1,346,640 $8,629 $566,123 $244,687 $527,201 
Finance lease obligations, including principal and interest (2)175,347 6,890 55,112 44,995 68,350 
Operating lease obligations (3) 810,230 28,106 212,725 183,233 386,166 
Aircraft purchase commitments (4)1,533,861 32,280 771,333 615,001 115,247 
Other commitments (5)422,869 13,692 146,575 126,676 135,926 
Projected employee benefit contributions (6)78,600 — 11,000 40,000 27,600 
Total contractual obligations$4,367,547 $89,597 $1,762,868 $1,254,592 $1,260,490 

(1)    Represents scheduled and estimated interest payments under our long-term debt based on interest rates specified in the applicable debt agreements. Principal and interest payments for debt denominated in Japanese Yen is estimated using the spot rate as of September 30, 2020.

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

(3)    Amounts reflect leases for eleven Airbus A330-200 aircraft, four Boeing 717-200 aircraft, and office space.

(4)    Amounts include our firm commitments for aircraft and aircraft related equipment. On October 26, 2020, we entered into an amendment to our 787-9 purchase agreement with Boeing, providing for change in our aircraft delivery schedule to between 2022 through 2026. Refer to Note 11 for additional discussion and impact of the purchase agreement on our commitments and contractual obligations.

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

(6)    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.

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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:

During the three and nine months ended September 30, 2020, the effective tax rate included a tax benefit of $6.1 million and $29.5 million, respectively, resulting from the rate differential between the prevailing tax rate of 21% during the years that generated the net operating losses and the previous tax rate of 35% that was in effect during the years to which net operating losses were carried back as a result of the enactment of the CARES Act. This benefit is attributed to the enactment of the CARES Act and we believe that exclusion of this tax benefit provides investors comparability of results between periods.
During the three and nine months ended September 30, 2020, we recognized $129.1 million and $240.6 million in contra-expense related to grant proceeds from the PSP. The grant proceeds were recognized in proportion to estimated wages and benefits expense over the period the PSP covers. We utilized all proceeds under the PSP as of September 30, 2020.
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.
Changes in fair value of foreign currency 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 foreign currency 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.
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.
Special Items

On April 3, 2020, we received notification from the AFA that the CBA was ratified by its members. The ratified CBA provided for, among other things, a ratification payment, payable over twelve months. During the nine months ended September 30, 2020, we recorded a $23.5 million ratification bonus, of which $20.2 million related to service prior to January 1, 2020, and was recorded as a special item in the unaudited Consolidated Statements of Operations.
During the three months ended March 31, 2020, we recognized a goodwill impairment charge of $106.7 million, recorded as a special item. Refer to Note 2 in the Notes to Consolidated Financial Statements for additional discussion.
During the three months ended June 30, 2020, we recognized a charge of $34.0 million associated with the impairment of certain of our long-lived assets. Refer to Note 2 in the Notes to the Consolidated Financial Statements for additional discussion.
During the three months ended September 30, 2020, we announced and completed voluntary separation programs across each of our labor groups providing for one-time severance payments, the establishment of health reimbursement accounts and other benefits. Additionally, we announced involuntary separation programs, the majority of which were effective October 1, 2020. We recorded $17.5 million in severance and benefits as an operating special item and $7.0 million related to special termination benefits and curtailment loss as a nonoperating special item in the Consolidated Statements of Operations.
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 Three months ended September 30,Nine months ended September 30,
 2020201920202019
 TotalDiluted Net Loss Per ShareTotalDiluted Net Income Per ShareTotalDiluted Net Loss Per ShareTotalDiluted Net Income Per Share
(in thousands, except for per share data)
GAAP Net Income (Loss), as reported$(97,099)$(2.11)$80,076 $1.70 $(348,375)$(7.58)$174,267 $3.64 
Adjusted for:
CARES Act - carryback of additional NOLs(6,143)(0.13)— — (29,537)(0.64)— — 
CARES Act grant recognition(129,088)(2.81)— — (240,648)(5.23)— — 
Changes in fair value of fuel derivative contracts(1,765)(0.04)1,154 0.02 (966)(0.02)(2,091)(0.04)
Gain on sale of aircraft equipment— — — — — — (1,948)(0.04)
Unrealized loss on foreign debt5,119 0.11 717 0.01 7,541 0.16 2,254 0.05 
Unrealized loss on non-designated fx positions623 0.01 — — 423 0.01 — — 
Special items17,489 0.38 — — 178,407 3.88 — — 
Nonoperating special items7,011 0.15 — — 7,011 0.15 — — 
Tax effect of adjustments31,189 0.68 (490)(0.01)48,017 1.04 473 0.01 
Adjusted Net Income (Loss)$(172,664)$(3.76)$81,457 $1.72 $(378,127)$(8.23)$172,955 $3.62 

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.

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CASM and CASM-excluding aircraft fuel, gain on sale of aircraft and equipment, and special items, are summarized in the table below: 
 Three months ended September 30,Nine months ended September 30,
 2020201920202019
 (in thousands, except as otherwise indicated)
GAAP Operating Expenses$197,055 $638,515 $1,133,263 $1,865,898 
Adjusted for:
Aircraft fuel, including taxes and delivery(14,544)(138,586)(135,025)(405,290)
CARES Act PSP grant recognition129,088 — 240,648 — 
Gain on sale of aircraft and equipment— — — 1,948 
Special items(17,489)— (178,407)— 
Adjusted Operating Expenses$294,110 $499,929 $1,060,479 $1,462,556 
Available Seat Miles718,405 5,331,914 6,107,424 15,341,510 
CASM - GAAP27.43 ¢11.98 ¢18.56 ¢12.16 ¢
Adjusted for:
Aircraft fuel, including taxes and delivery(2.02)(2.60)(2.22)(2.64)
CARES Act PSP grant recognition17.97 — 3.94 — 
Gain on sale of aircraft and equipment— — — 0.01 
Special items(2.44)— (2.92)— 
Adjusted CASM40.94 ¢9.38 ¢17.36 ¢9.53 ¢
 
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 GAAP. 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. There have been no material changes to our critical accounting policies during the three months ended September 30, 2020, except as discussed below. For more information on our critical accounting policies, see Part II, 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, 2019.

Goodwill and Indefinite-lived Intangible Assets

Goodwill and intangible assets with indefinite lives are not amortized. We apply a fair value-based impairment test to the carrying value of goodwill and indefinite-lived intangible assets on an annual basis and, if certain events or circumstances indicate that an impairment loss may have been incurred, on an interim basis. We assess the value of our goodwill and indefinite-lived assets under either a qualitative or quantitative approach.

During the first quarter of 2020, the adverse economic impact and declining passenger demand attributed to the COVID-19 pandemic drove our stock price to 52-week lows and significantly reduced future cash flow projections. We qualitatively assessed that an impairment loss may have been incurred as of March 31, 2020 and performed an interim test of the recoverability of our goodwill and indefinite-lived intangible assets. We determined that the estimated fair value of our one reporting unit was less than its carrying value and that the deficit between fair value and the carrying value of the reporting unit exceeded the amount of goodwill on the unaudited Consolidated Balance Sheets, leading to the recognition of a goodwill impairment charge of $106.7 million in the first quarter of 2020.

Fair value was determined using a combination of an income approach, which estimates fair value based upon projections of future revenues, expenses, and cash flows discounted to its present value, and a market approach. The valuation methodology
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and underlying financial information included in our determination of fair value required significant judgments by management. The principal assumptions used in our discounted cash flow analysis consisted of (a) the long-term projections of future financial performance and (b) the weighted-average cost of capital of market participants, adjusted for the risk attributable to the Company and the industry in which we operate.

As of September 30, 2020, we had approximately $13.5 million in indefinite-lived intangible assets subject to impairment. We determined that the fair value of our indefinite-lived intangible assets exceeded their carrying value and was not impaired.

Long-Lived Assets

Our long-lived assets, consisting principally of aircraft and other non-aircraft equipment, are classified as property and equipment, net on the unaudited Consolidated Balance Sheets, and have a recorded value of approximately $2.1 billion at September 30, 2020. We review long-lived assets used in operations for impairment when events and circumstances indicate the assets may be impaired.

Based on our evaluation, including consideration of the continuing impact of the COVID-19 pandemic and revised financial projections, we identified indicators of impairment related to our long-lived assets. To determine whether impairment exists for aircraft used in operations, assets are grouped at the fleet-type level (the lowest level for which there are identifiable cash flows) and future cash flows are estimated based on projections of capacity, passenger mile yield, fuel costs, labor costs and other relevant factors. Based on our evaluation, it was determined that the net carrying values of our ATR-42 and ATR-72 fleets and assets held under our commercial real estate subsidiary were not recoverable through the generation of future undiscounted cash flows as of September 30, 2020.

We estimated the fair value of our ATR-42 and ATR-72 fleets using a third-party valuation, which takes into consideration market pricing information, among other factors, and resulted in a $27.5 million impairment charge. We estimated the fair value of our commercial real-estate entity using a combination of a market and income-based approach, which estimates fair value based upon projections of future revenues, expenses, and cash flows discounted to its present value, and resulted in a $3.4 million impairment charge. The principal assumptions used in our discounted cash flow analysis consisted of (a) the long-term projections of future financial performance and (b) the weighted-average cost of capital of market participants, adjusted for the risk attributable to the Company and the industry in which we operate.

ITEM 3.                QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
There have been no material changes in market risk from the information provided in Part II, Item 7A "Quantitative and Qualitative Disclosures About Market Risk", in our 2019 Annual Report on Form 10-K.

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, 2020 to provide reasonable assurance that the information required to be disclosed by us in reports we file under the Exchange Act, 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

During the three and nine months ended September 30, 2020, 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) that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Inherent Limitations on Effectiveness of Controls

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

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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.
 
BUSINESS RISKS

The global COVID-19 pandemic has had and is expected to continue to have a material adverse impact on our operations and financial performance. We are unable to predict the extent to which the pandemic and related impacts will continue to adversely affect our business operations, liquidity, financial performance, results of operations, financial position or the achievement of our strategic objectives.

Our operations and financial performance have been negatively impacted by the COVID-19 pandemic that has caused, and is expected to continue to cause, the global slowdown of economic activity (including the decrease in demand for goods and services), and significant volatility in and disruption to financial markets. Because the severity, magnitude and duration of the COVID-19 pandemic and its economic consequences are uncertain, rapidly changing and difficult to predict, the pandemic’s impact on our operations and financial performance, as well as its impact on our ability to successfully execute our business strategy and initiatives, remains uncertain. Further, the ultimate impact of the COVID-19 pandemic on our operations and financial performance depends on many factors that are not within our control, including, but not limited, to: governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic (including restrictions on travel, transport and our workforce); the impact of the pandemic and actions taken in response to it on global and regional economies and travel; the availability of federal, state, or local funding programs; general economic uncertainty in global markets and financial market volatility; global economic conditions and levels of economic growth; and the pace of recovery when the COVID-19 pandemic subsides.

The COVID-19 pandemic has subjected our operations, financial performance and financial condition to a number of risks, including, but not limited to those discussed below:

Financial risks: In response to the COVID-19 pandemic, we have experienced a significant decrease in demand for air travel and reduced load capacity on flights currently operated. For the three months ended September 30, 2020, our revenue was $76.0 million, down $679.2 million from the same period in 2019.

Operations- and customer-related risks: Across our business, we are facing increased operational challenges, including low demand for air travel, significant reductions in our flight schedule, decreased passenger traffic on our current routes, high-volume customer service requests for refunds and cancellations, the need to protect employee and customer health and safety, site shutdowns, workplace disruptions, need for contract modifications and cancellations, and other restrictions on business operations and the movement of people, including a 14-day quarantine requirement for all travelers to the state of Hawai`i, which was only lifted effective October 15 so long as travelers are able to present evidence of a negative COVID-19 test administered within 72 hours prior to commencing travel from a State-approved testing partner, a 14-day quarantine requirement for travelers between certain islands within the State of Hawai`i, testing requirements in order to bypass quarantine, airport health screening measures, certain measures being taken on flights to minimize transmission of COVID-19. We expect decreased levels of passenger traffic and revenue, as compared to pre-COVID-19 pandemic levels, and to incur additional costs as we begin to increase the number of flights offered as passenger traffic to the Hawaiian Islands increases in response to the implementation of testing in order to bypass 14-day quarantine requirements. We have implemented enhanced measures to protect the health and safety of our passengers and employees, and may be required or determine to take additional safety measures to minimize the transmission of COVID-19 that may further impact our operations and results of operations. Additionally, our current planning scenario for recovery from the pandemic assumes a 15-25% reduction in our anticipated flight schedule for the summer of 2021 and related reductions in headcount. During the third quarter, we announced and completed certain voluntary separation programs. Additionally, involuntary separation and voluntary leave programs, beginning effective October 1, 2020, resulted in a reduction in total headcount by approximately 32% of our total workforce. These and similar factors related directly and indirectly to the COVID-19 pandemic adversely impact our business. We expect that the longer the period of economic disruption continues, the more material the adverse impact will be on our business operations, financial performance and results of operations.

Liquidity- and funding-related risks: While we have received support under the CARES Act and have fully drawn our committed credit line, a prolonged period of lower cash from operations could adversely affect our financial condition
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and the achievement of our strategic objectives. Additionally, our credit rating was recently downgraded by ratings agencies and there can be no assurance that we will not face additional credit rating downgrades as a result of weaker than anticipated performance of our business or other factors. Future downgrades could further adversely affect our cost of funds and related margins, liquidity, competitive position and access to capital markets. Conditions in the financial and credit markets may also limit the availability of funding or increase the cost of funding, which could adversely affect our business, financial position and results of operations. In light of current market conditions, any such financings are likely to reflect loan-to-value ratios and interest rates and other terms and conditions less favorable than our recent aircraft financings.

Legal and regulatory risks: While we are endeavoring to take all reasonable precautions and instituting numerous health and safety measures to protect our guests and our employees, there can be no assurance that guests will not be exposed to COVID-19 while traveling, or that our employees will not be exposed to COVID-19 while working. Should such exposure be determined to have been caused while traveling or working, notwithstanding the steps we take to protect our guests and employees, we may be subject to civil lawsuits or employee grievances that give rise to legal liability. Furthermore, while the airline industry is committed to the safety of our guests and employees and has taken and will continue to take all necessary precautions, there can be no assurance that federal legislation or federal regulation will not be enacted that increase our costs or increase our exposure to claims of non-compliance.

At this time, we are also not able to predict whether the COVID-19 pandemic will result in permanent changes to our customers’ behavior, with such changes including but not limited to such changes as a lasting or permanent reduction in leisure travel and more broadly a general reluctance to travel by consumers, each of which could have a material impact on our business. Currently, the COVID-19 pandemic has produced the following trends, each possibly having an effect on future operations:

Travelers have indicated they are wary of airports and commercial aircraft, where they may view the risk of contagion as increased; and

Travelers may be dissuaded from flying due to restrictions on movement and possible enhanced COVID-19-related screening measures which have been or may be implemented across multiple markets we serve.

The COVID-19 pandemic may also affect our operating and financial results in a manner that is not presently known to us or that we currently do not expect. The COVID-19 pandemic may also exacerbate other risks described in this “Risk Factors” section, including, but not limited to, our dependence on Hawaiian leisure travel, our competitiveness, demand for air travel generally and our services specifically, shifting consumer preferences and our substantial outstanding indebtedness.

ECONOMIC RISKS

Our business is affected by global economic volatility, including the current economic downturn precipitated by the COVID-19 pandemic.

Our business and results of operations are significantly impacted by general world-wide economic conditions, including the current economic downturn related to the COVID-19 pandemic. Demand for discretionary air travel and vacations to, from and within the Hawaiian Islands has declined and remains unpredictable, which has negatively impacted our results of operations and financial condition. Our business depends on the demand for air travel to, from and within the Hawaiian Islands. Further deterioration or instability in demand resulting from travel restrictions, ongoing economic uncertainty or further recession may result in sustained reduction in our passenger traffic and/or increased competitive pressure on fares in the markets we serve, which could continue to negatively impact our results of operations and financial condition. There can be no assurance that we will be able to offset such revenue reductions by reducing our costs or seeking additional relief through the CARES Act or other potential financing arrangements or other programs or opportunities.

Our business is highly dependent on tourism to, from, and amongst the Hawaiian Islands and our financial results have been impacted and may continue to be impacted by the current and any future downturn in tourism levels.

Our principal base of operations is in Hawai`i and our revenue is linked primarily to the number of travelers (mainly tourists) to, from and amongst the Hawaiian Islands. As a result of the COVID-19 pandemic and government mandates related to travel and business operations, we have experienced a significant decline in the demand for travel to, from and amongst the Hawaiian Islands. In March 2020, the State of Hawai`i implemented a 14-day quarantine applicable to passengers traveling to Hawai`i or between the Hawaiian Islands. While restrictions to travel between the Hawaiian Islands were removed in June 2020, a modified reinstatement of the 14-day quarantine requirement for Neighbor Island travel became effective August 11, 2020,
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restrictions on travel to Hawai`i were extended until at least through the end of November 2020. Effective October 15, 2020, passengers travelling to Hawai`i from the U.S. mainland who can demonstrate that they have obtained a negative test for COVID-19 from a state-approved testing partner, within 72 hours from the final leg of departure are exempt from the State's 14-day quarantine requirement. A county may, however, require passengers to obtain a subsequent test after arrival into the State (with any such tests paid for by the county and administered at a country-designated site). While travel restrictions have eased somewhat with the use of COVID-19 testing, certain restrictions, including with respect to the use of COVID-19 testing, may be reinstated, or altered, as the infection rates of COVID-19 change, which may have a significant impact on our business operations. Additionally, even with the lifting of certain restrictions associated with travel to and between the Hawaiian Islands, we expect to continue to experience decreased levels of passenger traffic and revenue, as compared to pre-COVID 19 pandemic levels. We will need to incur costs as we begin to increase our number of flights as passenger traffic to and within the Hawaiian Islands increases in response to the implementation of pre-travel testing in order to bypass quarantine requirements.

Hawai`i tourism levels are generally affected by the economic and political climate impacting air travel and tourism markets generally, including the availability of hotel accommodations, the popularity of tourist destinations relative to other vacation destinations, and other global factors including health crises, natural disasters, safety, and security. As a result of the COVID-19 pandemic, there has been a significant decline in air travel due to government mandates and general public health concerns. Additionally, tourism has declined as various public events, attractions and venues have been closed or cancelled. While we have seen some increased tourism activity in the State of Hawai`i after implementation of the State of Hawai`i's pre-travel COVID-19 testing program, we cannot predict if and when tourism levels will recover to levels prior to the COVID-19 pandemic. Additionally, from time to time, various events and industry-specific problems such as labor strikes have had a negative impact on tourism generally or in Hawai`i specifically. The occurrence of natural disasters, such as hurricanes, earthquakes, volcanic eruptions, and tsunamis, in Hawai`i or other parts of the world, could also have an adverse effect or compound the existing adverse effect of the COVID-19 pandemic on tourism. In addition, the potential or actual occurrence of terrorist attacks, wars, and/or the threat of other negative world events have had, and may in the future have, a material adverse effect on or compound the current effect of the COVID-19 pandemic on tourism.

Our business is highly dependent on the price and availability of fuel.

Our results and operations are heavily impacted by the price and availability of jet fuel. The cost and availability of jet fuel remains volatile and is subject to political, economic, and market factors that are generally outside of our control. Prices may be affected by many factors including, without limitation, the impact of political instability, crude oil production and refining capacity, unexpected changes in the availability of petroleum products due to disruptions to distribution systems or refineries, unpredicted increases in demand due to weather or the pace of global economic growth, inventory reserve levels of crude oil and other petroleum products, the relative fluctuation between the U.S. dollar and other major currencies, and the actions of speculators in commodity markets. The cost of jet fuel has been especially volatile recently due to the negative impact of the COVID-19 pandemic on the demand for oil. Because of the effects of these factors on the price and availability of jet fuel, the cost and future availability of fuel cannot be predicted with any degree of certainty. Also, due to the competitive nature of the airline industry, there can be no assurance that we will be able to increase our fares or other fees to sufficiently offset any increase in fuel prices.

While we enter into derivative agreements to protect against the volatility of fuel costs, uncertainty related to the demand for air travel makes it difficult to accurately forecast our future fuel consumption, and as a result, we are unable to predict the effectiveness of hedging as a means of managing increases in the cost of fuel in the future.

See Item 7A “Quantitative and Qualitative Disclosures About Market Risk of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 for further information regarding our exposure to foreign currency exchange rates.

Our business is exposed to foreign currency exchange rate fluctuations.

Prior to the COVID-19 pandemic, our business had been expanding internationally with an increasing percentage of our passenger revenue generated from our international routes. The fluctuation of the U.S. dollar relative to foreign currencies can significantly affect our results of operations and financial condition. To manage the effects of fluctuating exchange rates, we periodically enter into foreign currency forward contracts and execute payment of expenditures in those locations in local currency. We entered into Japanese Yen denominated debt agreements totaling $227.9 million and $86.5 million in 2019 and 2018, respectively. If our business is able to expand internationally, there is no assurance that these agreements will protect us against foreign currency exchange rate fluctuations during unfavorable market conditions or that our counterparties will be able to perform under these hedge arrangements.

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See Item 7A “Quantitative and Qualitative Disclosures About Market Risk” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 for further information regarding our exposure to foreign currency exchange rates.

LIQUIDITY RISKS

Our financial liquidity could be adversely affected by credit market conditions.

Our business requires access to capital markets to finance equipment purchases, including aircraft, and to provide liquidity in seasonal or cyclical periods of weaker revenue generation. In particular, we will face specific funding requirements with respect to our obligation under purchase agreements with Boeing to acquire new aircraft. We may finance these upcoming aircraft deliveries; however, the unpredictability of global credit market conditions, including related to the current COVID-19 pandemic, may adversely affect the availability of financing or may result in unfavorable terms and conditions.

Our current unencumbered aircraft can be financed to increase our liquidity, but such financings may be subject to unfavorable terms. In light of current market conditions, any such financings are likely to reflect loan-to-value ratios and interest rates and other terms and conditions less favorable than our recent aircraft financings.

Additionally, our credit rating was recently downgraded by ratings agencies and there can be no assurance that we will not face additional credit rating downgrades as a result of weaker than anticipated performance of our business or other factors. Future downgrades could further adversely affect our cost of funds and related margins, liquidity, competitive position and access to capital markets.

We can offer no assurance that financing we may need in the future will be available when required or that the economic terms on which it is available will not adversely affect our financial condition. If we cannot obtain financing or we cannot obtain financing on commercially reasonable terms, our business and financial condition may be adversely affected.

Our debt could adversely affect our liquidity and financial condition, and include covenants that impose restrictions on our financial and business operations.

As of September 30, 2020, we had approximately $1.0 billion in outstanding commercial debt, excluding funds borrowed under the CARES Act PSP and ERP. Our debt and related covenants could:

require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing the availability of our cash flow for other operational purposes;
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
limit, along with the financial and other restrictive covenants in the agreements governing our debt, our ability to borrow additional funds;
place us at a competitive disadvantage compared to other less leveraged competitors and competitors with debt agreements on more favorable terms than us; and
adversely affect our ability to secure additional financing in the future on acceptable terms or at all, which would impact our ability to fund our working capital, capital expenditures, acquisitions or other general purpose needs.

These agreements require us to meet certain covenants. If we breach any of these covenants we could be in a default under these facilities, which could cause our outstanding obligations under these facilities to accelerate and become due and payable immediately, and could also cause us to default under our other debt or lease obligations and lead to an acceleration of the obligations related to such other debt or lease obligations. The existence of such a default could also preclude us from borrowing funds under other credit facilities.

Our ability to comply with the provisions of financing agreements can be affected by events beyond our control and a default under any such financing agreements if not cured or waived, could have a material adverse effect on us. In the event our debt is accelerated, we may not have sufficient liquidity to repay these obligations or to refinance our debt obligations, resulting in a material adverse effect on our financial condition.

We have entered into loan agreements with the U.S. Treasury pursuant to the CARES Act that have certain operating and other restrictions.

As a condition of receiving grants and loans under the PSP under the CARES Act, we agreed to, among other things: refrain from conducting involuntary furloughs or reducing employee rates of pay or benefits through September 30, 2020; limit executive compensation through March 24, 2022; suspend payment of dividends and stock repurchases through September 30,
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2021; and comply with certain reporting requirements. We are also required to continue to provide air service to markets served prior to March 1, 2020 until March 1, 2022, to the extent determined reasonable and practicable by the DOT and subject to exemptions granted to us by the DOT given the absence of demand for such services.

Under the Loan Agreement with the Treasury pursuant to the ERP, we agreed to, among other things, limit our ability to: pay dividends, repurchase common stock or make certain other payments; make certain investments; incur liens on the Collateral; dispose of the Collateral; enter into certain affiliate transactions; and engage in certain business activities, in each case subject to certain exceptions. We must also maintain a certain minimum aggregate liquidity amount.

Additionally, the Loan Agreement requires us to comply with the relevant provisions of the CARES Act, including, among other things: prohibiting the repurchase of common stock, prohibiting the payment of common stock dividends and restricting the payment of certain executive compensation, in each case, through the date that is 12 months after the date on which all outstanding loans under the Facility have been repaid in full; prohibiting the reduction of employment levels by more than ten percent (10)% until September 30, 2020; and compliance with applicable requirements regarding maintenance of certain scheduled air transportation service until March 1, 2022.

The restrictions placed on us as part of our participation in the PSP and ERP under the CARES Act, including restrictions on use of funds, staffing, pay reduction, stock buy-backs, dividends, certain transactions, and service requirements may negatively affect our financial and business operations.

We are required to maintain reserves under our credit card processing agreements which could adversely affect our financial and business operations.

Under our bank-issued credit card processing agreements, certain proceeds from advance ticket sales may be held back to serve as collateral to cover chargebacks or other disputed charges that may occur. As of September 30, 2020, there were no holdbacks by our credit card processors.

In the event of a material adverse change in our business, the holdback could incrementally increase to an amount up to 100% of the applicable credit card activity for all unflown flights, which would also cause an increase in the level of restricted cash. If we are unable to obtain a waiver, or otherwise mitigate the increase in restricted cash, it could adversely affect our liquidity and also cause a covenant violation under other debt or lease obligations and have a material adverse effect on our financial condition.

COMPETITIVE ENVIRONMENT RISKS

We operate in an extremely competitive environment.

The airline industry is characterized by low profit margins, high fixed costs, and significant price competition. We compete with other airlines on all of our Domestic and International routes. The commencement of, or increase in, service on our routes by existing or new carriers at competitive prices could negatively impact our operating results. Most of our competitors are much larger and have greater financial resources and brand recognition than we do. Aggressive marketing tactics or a prolonged fare competition initiated by one or more of these competitors could adversely affect our financial resources and our ability to compete in these markets. Additionally, our competitors have been and may continue to be more successful in navigating the challenges related to COVID-19, including having easier access to additional capital and more favorable lending terms, which could impact our ability to compete successfully in the future. Since airline markets have few natural barriers to entry, we also face the constant threat of new entrants in all of our markets.

Additional capacity to or within Hawai`i, whether from network carriers or low-cost carriers, could decrease our share of the markets in which we operate, could cause a decline in our yields, or both, including in light of industry-wide reductions in air travel due to the COVID-19 pandemic, which could have a material adverse effect on our results of operations and financial condition.

The concentration of our business within Hawai`i, and between Hawai`i and the U.S. mainland, provides little diversification of our revenue and could be exacerbated by the effects of the COVID-19 pandemic.

During the nine months ended September 30, 2020, approximately 75.3% of our passenger revenue was generated from our Domestic routes. Most of our competitors, particularly major network carriers with whom we compete on North American routes, enjoy greater geographical diversification of their passenger revenue. As Domestic routes account for a significantly higher proportion of our revenue than they do for most of our competitors, a proportionately higher decline in demand for our
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domestic routes generally due to the COVID-19 pandemic is likely to have a relatively greater adverse effect on our financial results than on those of our competitors. Additionally, reductions in the level of demand for travel to, from, and within Hawai`i, such as those caused by government restrictions on travel to and business operations within Hawai`i, including the only recently modified 14-day quarantine in place for travelers within and to Hawai`i, has reduced the revenue we are able to generate from our routes and adversely affected our financial results. Sustained reduction in our Domestic routes and continued industry capacity of major network carriers on routes to, from and within Hawai`i is likely to continue to adversely affect our financial results.

Our business is affected by the competitive advantages held by network carriers in the North America market.

During the nine months ended September 30, 2020, approximately 53.8% of our passenger revenue was generated from our North America routes. The majority of competition on our North America routes is from network carriers such as Alaska Airlines, American Airlines, Delta Air Lines, Southwest Airlines, and United Airlines, all of whom have a number of competitive advantages. Primarily, network carriers generate passenger traffic from and throughout the U.S. mainland, which enables them to attract higher customer traffic levels as compared to us.

In contrast, we lack a comparable direct network to feed passengers to our North America flights and are therefore more reliant on passenger demand in the specific cities we serve. We also rely on our code-share partner agreements (e.g. with JetBlue) to provide customers access to and from North American destinations currently unserved by us. Most network carriers operate from hubs, which can provide a built-in market of passengers depending on the economic strength of the hub city and the size of the customer group that frequents the airline. Our Honolulu and Maui hubs do not originate a large proportion of North American travel, nor do they have the population or potential customer franchise of a larger city to provide us with a significant built-in market. Passengers in the North American market, for the most part, do not originate in Honolulu, but on the U.S. mainland, making Honolulu primarily a destination rather than an origin of passenger traffic.

Our Neighbor Island routes are affected by increased capacity provided by our competitors.

During the nine months ended September 30, 2020, approximately 21.5% of our passenger revenue was generated from our Neighbor Island routes. Prior to the COVID-19 pandemic, certain of our competitors increased capacity to and within Hawai`i by introducing new routes and increasing the frequency of existing routes from North America to Hawai`i and by the introduction of additional flights within the neighbor islands. We are unable to predict competitor capacity related to air travel to Hawai`i or between the neighbor islands, including any impact that the COVID-19 pandemic may have on such capacity. Any increased competitor capacity that decreases our share of traffic to Hawai`i or between the neighbor islands could ultimately have a material adverse effect on our results of operations and financial condition.

Our International routes are affected by competition from domestic and foreign carriers.

During the nine months ended September 30, 2020, approximately 24.7% of our passenger revenue was generated from our International routes. When our operations are not constrained by restrictions related to the COVID-19 pandemic, our competitors on these routes include both domestic and foreign carriers. Both domestic and foreign competitors have a number of competitive advantages that may enable them to attract higher customer traffic levels as compared to us.

Many of our domestic competitors are members of airline alliances, which provide customers access to each participating airline’s international network, allowing for convenience and connectivity to their destinations. These alliances formed by our domestic competitors have increased in recent years. In some instances, our domestic competitors have been granted antitrust exemptions to form joint venture arrangements in certain geographies, further deepening their cooperation on certain routes. To mitigate this risk, we rely on code-share agreements with partner airlines to provide customers access to international destinations currently unserved by us.

Many of our foreign competitors are network carriers that benefit from network feed to support international routes on which we compete. In contrast, we lack a comparable direct network to feed passengers to our international flights, and are therefore more reliant on passenger demand in the specific destinations that we serve. Most network carriers operate from hubs, which can provide a built-in home base market of passengers. Passengers on our International routes, for the most part, do not originate in Hawai`i, but rather internationally, in these foreign carriers’ home bases. We also rely on our code-share agreements and our relationships with travel agencies and wholesale distributors to provide customers access to and from International destinations currently unserved by us.


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INFORMATION TECHNOLOGY AND THIRD-PARTY RISKS

If we do not maintain the privacy and security of personal information or other information relating to our customers or others, or fail to comply with applicable U.S. and foreign privacy, data protection, or data security laws or security standards imposed by our commercial partners, our reputation could be damaged, we could incur substantial additional costs, and we could become subject to litigation or regulatory penalties.

We receive, retain, transmit and otherwise process personal information and other information about our customers and other individuals, including our employees and contractors, and we are subject to increasing legislative, regulatory and customer focus on privacy, data protection, and data security both domestically and internationally. Numerous laws and regulations in the U.S. and in various other jurisdictions in which we operate relate to privacy, data protection, and security, including laws and regulations regarding the collection, processing, storage, sharing, disclosure, use and security of personal information and other data from and about our customers and other individuals. The scope of these laws and regulations is changing, subject to differing interpretations, may be costly to comply with, and may be inconsistent among countries and jurisdictions or conflict with other obligations of ours.

A number of our commercial partners, including credit card companies, have imposed data security standards or other obligations relating to privacy, data protection, or data security upon us. We strive to comply with applicable laws, regulations, policies, and contractual and other legal obligations relating to privacy, data protection, and data security. However, these legal, contractual, and other obligations may be interpreted and applied in new ways and/or in manners that are inconsistent, and may conflict with other rules or practices. Data privacy, data protection, and data security are active areas, with laws and regulations in these areas being frequently proposed, enacted, and amended, and existing laws and regulations subject to differing and evolving interpretations. New laws and regulations in these areas likely will continue to be enacted.

Any failure or perceived failure by us to comply with laws or regulations, our privacy or data protection policies, or other privacy-, data protection-, or information security-related obligations to customers, or other third parties, or any compromise of security that results in the unauthorized disclosure, transfer or use of personal or other information, may result in governmental investigations and enforcement actions, governmental or private litigation, other liability, our loss of the ability to process credit card transactions, or us becoming subject to higher costs for such transactions, or public statements critical of us by consumer advocacy groups, competitors, the media or others that could cause our current or prospective customers to lose trust in us, any of which could have an adverse effect on our business. Additionally, if third-party business partners that we work with, such as vendors, violate applicable laws, applicable policies or other privacy-, data protection-, or security-related obligations, such violations may also put our customers’ or others’ information at risk and could in turn have an adverse effect on our business. Governmental agencies may also request or take customer data for national security or informational purposes, and also can make data requests in connection with criminal or civil investigations or other matters, which could harm our reputation and our business.

We will continue our efforts to comply with new and increasing privacy, data protection, and information security obligations; however, it is possible that such obligations may require us to expend additional resources, and may be difficult or impossible for us to meet. Any failure to comply with applicable U.S. or foreign privacy, data protection, or data security laws or regulations, any privacy or security standards imposed by our commercial partners, or any other obligations we are or may become subject to relating to privacy, data protection, or information security, or any allegation or assertion relating to any of the foregoing may result in claims, regulatory investigations and proceedings, private litigation and proceedings, and other liability, all of which may adversely affect our reputation, business, results of operations and financial condition.

Our actual or perceived failure to protect customer information or other personal information or confidential information could result in harm to our business.

Our business and operations involve the storage, transmission and processing of information about our customers, our employees and contractors, our business partners, and others, as well as our own confidential information. We may become the target of cyber-attacks by third parties seeking unauthorized access to any of these types of information or to disrupt our business or operations. Computer malware, viruses, fraudulent sales of frequent flier miles, and general hacking have become more prevalent in our industry. While we have taken steps to protect customer information and other confidential information that we have access to, there can be no assurance that any security measures that we or our third-party service providers have implemented will be effective against current or future security threats. We and our third-party service providers may be unable to anticipate attempted security breaches and to implement adequate preventative measures, and our security measures or those of our third-party service providers could be breached, we could suffer data loss, unauthorized access to or use of the systems or networks used in our business and operations, and unauthorized, accidental, or unlawful access to, or disclosure, modification, misuse, loss or destruction of, our or our customers’ information. We may also experience security breaches or other incidents
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that may remain undetected for an extended period. Further, third parties may also conduct attacks designed to disrupt or deny access to the systems and networks used in our business and operations.

Actual or perceived security breaches or other security incidents could result in unauthorized use of or access to systems and networks, unauthorized, accidental, or unlawful access to, or disclosure, modification, misuse, loss or destruction of, our or our customers’ information, and may lead to litigation, indemnity obligations, regulatory investigations and other proceedings, severe reputational damage adversely affecting customer or investor confidence and causing damage to our brand, indemnity obligations, disruption to our operations, damages for contract breach, and other liability, and may adversely affect our revenues and operating results. Additionally, our service providers may suffer security breaches or other incidents that may compromise data stored or processed for us that may give rise to any of the foregoing.

Any such actual or perceived security breach or other incident may lead to the expenditure of significant financial and other resources in efforts to investigate or correct a breach, address and eliminate vulnerabilities, and to prevent future security breaches or incidents, as well as significant costs for remediation that may include liability for stolen assets or information and repair of system damage that may have been caused, incentives offered to customers or other business partners in an effort to maintain business relationships after a breach, costs in connection with payment card replacement, and other liabilities. Certain breaches affecting payment card information or the environment in which such information is processed may also result in a loss of our ability to process credit cards or increased costs associated with doing so. We have incurred and expect to incur ongoing expenditures in an effort to prevent information security breaches and other security incidents.

We cannot be certain that our insurance coverage will be adequate for information security liabilities actually incurred or to cover any indemnification claims against us relating to any incident, that insurance will continue to be available to us on economically reasonable terms, or at all, or that any insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, including our financial condition, operating results, and reputation.

We are increasingly dependent on technology and automated systems to operate our business.

We depend heavily on technology and automated systems to effectively operate our business. These systems include flight operations systems, communications systems, airport systems, reservations systems, management and accounting systems, commercial websites, including www.hawaiianairlines.com, and other IT systems, many of which must be able to accommodate high traffic volumes, maintain secure information and provide accurate flight information, as well as process critical financial transactions. Any substantial, extended, or repeated failures of these systems could negatively affect our customer service, compromise the security of customer information or other information stored on, transmitted by, or otherwise processed by these systems, result in the loss of important data, loss of revenue and increased costs, and generally harm our business. Additionally, loss of key talent required to maintain and advance these systems could have a material impact on our operations. Like other companies, our systems may be vulnerable to disruptions due to events beyond our control, including natural disasters, power disruptions, software or equipment failures, terrorist attacks, cybersecurity incursions, computer viruses and hackers. There can be no assurance that the measures we have taken to reduce the adverse effects of certain potential failures or disruptions are adequate to prevent or remedy disruptions of our systems. In addition, we will need to continuously make significant investments in technology to periodically upgrade and replace existing systems. If we are unable to make these investments or fail to successfully implement, upgrade or replace our systems, our business could be adversely impacted. We do not carry business interruption insurance sufficient to compensate us for the potentially significant losses, including the potential harm to our business, results of operations and financial condition that may result from system interruptions or system failures.

We are highly reliant on third-party contractors to provide certain facilities and services for our operations, and termination of our third-party agreements could have a potentially adverse effect on our financial results.

There are a limited number of qualified employees and personnel in the airline and information technology industry, especially within the Hawai`i market. Due to these limitations, we have historically relied on outside vendors for a variety of services and functions critical to our business, including aircraft maintenance and parts, code-sharing, reservations, computer services including hosting and software maintenance, accounting, frequent flyer programs, passenger processing, ground facilities, baggage and cargo handling, personnel training, and the distribution and sale of airline seats. Our reliance on outside vendors may continue to increase in the future.

The failure of any of our third-party service providers to adequately perform their service obligations, or other interruptions of services, including those related the impacts of the COVID-19 pandemic on their businesses, are likely to reduce our revenues,
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increase expenses, and/or prevent us from operating our flights and providing other services to our customers. Additionally, our business and financial performance would be materially harmed if our customers believe that our services are unreliable or unsatisfactory.

LABOR RELATIONS AND RELATED COSTS RISKS

We are dependent on satisfactory labor relations.
Labor costs are a significant component of airline expenses and can substantially impact an airline’s results of operations. A significant portion of our workforce is represented by labor unions. We may make strategic and operational decisions that may require the consent of one or more of these labor unions, and these labor unions could demand additional wages, benefits or other consideration in return for their consent.

In addition, we have entered into collective bargaining agreements with our pilots, mechanical group employees, clerical group employees, flight attendants, and dispatchers. We cannot ensure that future agreements with our employees’ labor unions will be on terms in line with our expectations or comparable to agreements entered into by our competitors, and any future agreements may increase our labor costs or otherwise adversely affect our business. For example, in April 2020, the flight attendants of Hawaiian, represented by the Association of Flight Attendants, ratified an amended collective bargaining agreement, which among other things, includes a ratification payment, increased medical cost sharing, pay scale increases, and a one-time medical savings contribution to eligible flights attendants upon retirement.

Our operations may be adversely affected if we are unable to attract and retain qualified personnel and key executives.

We believe that our future success is dependent on the knowledge and expertise of our key executives and highly qualified management, technical, and other personnel. Attracting and retaining such personnel in the airline industry is highly competitive. We cannot be certain that we will be able to retain our key executives or attract other qualified personnel in the future, including in light of the restrictions on executive compensation imposed on us under the CARES Act. Any inability to retain our key executives, or other senior technical personnel, or attract and retain additional qualified executives, could have a negative impact on our operations.

In addition, as we rebuild our operations as passenger demand recovers, and expand our operations through the acquisition of new aircraft and introduction of service to new markets, it may be challenging to attract a sufficient number of qualified personnel including pilots, mechanics and other skilled labor. As we compete with other carriers for qualified personnel, we also face the challenge of attracting individuals who embrace our team-oriented, friendly and customer-driven corporate culture. Our inability to attract and retain qualified personnel who embrace our corporate culture could have a negative impact on our reputation and overall operations.

STRATEGY AND BRAND RISKS
Our failure to successfully implement our route and network strategy could harm our business.
Our route and network strategy (how we determine to deploy our fleet) includes initiatives to increase revenue, decrease costs, mature our network, and improve distribution of our sales channels. It is critical that we execute upon our planned strategy in order for our business to attain economies of scale and to sustain or improve our results of operations. As a result of the COVID-19 pandemic and related decline in air travel and safety protocols we have taken in response to the COVID-19 pandemic that reduce our maximum load capacity, we are not likely to be able to utilize and fill current capacity or any additional capacity provided by any additional aircraft entering our fleet, hire and retain skilled personnel, or secure the required equipment and facilities in a cost-effective manner at the levels previously anticipated. As a result, we are unlikely to be able to meaningfully develop and grow our new and existing markets in the near term, which may adversely affect our business and operations for an indeterminant time period. In addition, if we are unable to adequately contain our non-fuel unit costs, our financial results may suffer.

Our reputation and financial results could be harmed in the event of adverse publicity, including the event of an aircraft accident or incident.

Our customer base is broad and our business activities have significant prominence, particularly in Hawai`i and other destinations we serve. Consequently, negative publicity resulting from real or perceived shortcomings in our customer service, employee relations, business conduct, third-party aircraft components or other events or circumstances affecting our operations
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could negatively affect the public image of our company and the willingness of customers to purchase services from us, which could affect our financial results.

Additionally, we are exposed to potential losses that may be incurred in the event of an aircraft accident or incident. Any such accident or incident involving our aircraft or an aircraft operated by one of our code-share partners could involve not only the repair or replacement of a damaged aircraft or aircraft parts, and its consequential temporary or permanent loss of revenue, but also significant claims of injured passengers and others. We are required by the DOT to carry liability insurance, and although we currently maintain liability insurance in amounts consistent with the industry, we cannot be assured that our insurance coverage will adequately cover us from all claims and we may be forced to bear substantial losses incurred with an accident. In addition, any aircraft accident or incident could cause a public perception that we are less safe or reliable than other airlines, which would harm our business.

Airline Industry, Regulation and Related Costs Risks

The airline industry has substantial operating leverage and is affected by many conditions that are beyond its control, which could harm our financial condition and results of operations.

Due to the substantial fixed costs associated with operating an airline, there is a disproportionate relationship between the cost of operating each flight and the number of passengers carried. However, the revenue generated from a particular flight is directly related to the number of passengers carried and the respective average fares applied. Accordingly, a decrease in the number of passengers carried, and when applicable, the aggregate effect of decreasing flights scheduled, causes a corresponding decrease in revenue that is likely to result in a disproportionately greater decrease in profits. Therefore, the reduction in airline passenger traffic as a result of the COVID-19 pandemic and any future reductions as a result of the following or other factors, which are largely outside of our control, will likely harm our business, financial condition, and results of operations:

decline in general economic conditions;
the threat of terrorist attacks and conflicts overseas;
actual or threatened war and political instability;
increased security measures or breaches in security;
adverse weather and natural disasters;
changes in consumer preferences, perceptions, or spending patterns;
increased costs related to security and safety measures,
decreased passenger load capacity as a result of the blocking of seats on aircraft as part of our safety protocols undertaken in response to the COVID-19 pandemic;
increased fares as a result of increases in fuel costs;
outbreaks of contagious diseases or fear of contagion; and
congestion or major construction at airports and actual or potential disruptions in the air traffic control system.

Our results of operations are and may continue to be volatile due to the conditions identified above. We cannot ensure that our financial resources will be sufficient to absorb the effects of the COVID-19 pandemic or any unexpected events, including those identified above.

Our financial results and operations may be negatively affected by the State of Hawai`i’s airport modernization plan.

The State of Hawai`i has begun to implement a modernization plan encompassing the airports we serve within the State. Our landing fees and airport rent rates have increased to fund the modernization program. Additionally, we expect the costs for our Neighbor Island operations to increase more than the costs related to our North America and International operations due to phased adjustments of the airports’ funding mechanism. Consequently, costs related to the modernization program will have a greater impact on our operations as compared to our competitors, most of whom do not have significant Neighbor Island operations. We can offer no assurance that we will be successful in offsetting these cost increases through other cost reductions or increases in our revenue and, therefore, can offer no assurance that our future financial results will not be negatively affected by them.

Our operations may be disrupted if we are unable to obtain and maintain adequate facilities and infrastructure at airports within the State of Hawai`i.

We must be able to maintain and/or obtain adequate gates, maintenance capacity, office space, operations areas, and ticketing facilities at the airports within the State of Hawai`i to be able to operate our existing and proposed flight schedules. Failure to maintain such facilities and infrastructure may adversely impact our operations and financial performance.
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Our business is subject to substantial seasonal and cyclical volatility.

Our results of operations reflect the impact of seasonal volatility primarily due to passenger leisure and holiday travel patterns. Moreover, due to the widespread impact of the COVID-19 pandemic on the demand for air travel generally and travel to and within Hawai`i specifically, we have seen a significant decline in demand for air travel in 2020 as compared to prior years. As Hawai`i is a popular vacation destination, demand from North America, our largest source of visitors, is typically stronger during June, July, August and December and considerably weaker at other times of the year. Because of fluctuations in our results from seasonality, operating results for a historical period are not necessarily indicative of operating results for a future period and operating results for an interim period are not necessarily indicative of operating results for an entire year.

Terrorist attacks or international hostilities, or the fear of terrorist attacks or hostilities, even if not made directly on the airline industry, could negatively affect us and the airline industry.

Terrorist attacks, even if not made directly on the airline industry, or the fear of such attacks, hostilities or act of war, could adversely affect the airline industry, including us, and could result in a significant decrease in demand for air travel, increased security costs, increased insurance costs covering war-related risks, and increased flight operational loss due to cancellations and delays. Any future terrorist attacks or the implementation of additional security-related fees could have a material adverse effect on our business, financial condition and results of operations, and on the airline industry in general.

The airline industry is subject to extensive government regulation, new regulations, and taxes which could have an adverse effect on our financial condition and results of operations.

Airlines are subject to extensive regulatory requirements that result in significant costs. New, and modifications to existing, laws, regulations, taxes and airport rates, and charges imposed by domestic and foreign governments have been proposed from time to time that could significantly increase the cost of airline operations, restrict operations or reduce revenue. The Federal Aviation Administration (FAA) from time to time issues directives and other regulations relating to the maintenance and operation of aircraft that require significant expenditures. Some FAA requirements cover, among other things, retirement of older aircraft, security measures, collision avoidance systems, airborne windshear avoidance systems, noise abatement and other environmental concerns, commuter aircraft safety and increased inspections, and maintenance procedures to be conducted on older aircraft. A failure to be in compliance, or a modification, suspension or revocation of any of our DOT/FAA authorizations or certificates, would have a material adverse impact on our operations.

We cannot predict the impact that laws or regulations may have on our operations, nor can we ensure that laws or regulations enacted in the future will not adversely affect our business. Further, we cannot guarantee that we will be able to obtain or maintain necessary governmental approvals. Once obtained, operating permits are subject to modification and revocation by the issuing agencies. Compliance with these and any future regulatory requirements could require us to incur significant capital and operating expenditures.

In addition to extensive government regulations, the airline industry is dependent on certain services provided by government agencies (DOT, FAA, U.S. Customs and Border Protection (CBP) and the Transportation Security Administration (TSA)). Furthermore, because of significantly higher security and other costs incurred by airports since September 11, 2001, many airports have significantly increased their rates and charges to airlines, including us, and may continue to do so in the future.

Federal budget constraints or federally imposed furloughs due to budget negotiation deadlocks may adversely affect our industry, business, results of operations and financial position.

Many of our airline operations are regulated by governmental agencies, including the FAA, the DOT, the CBP, the TSA, and others. If the federal government operations were to experience issues in reaching budgetary consensus in the future resulting in mandatory furloughs and/or other budget constraints, or if a government shutdown were to continue for an extended period of time, our business and results of operations could be materially negatively impacted. The travel behaviors of the flying public could also be affected, which may materially adversely impact our industry and our business.

The airline industry is required to comply with various environmental laws and regulations, which could inhibit our ability to operate and could also have an adverse effect on our results of operations.

Many aspects of airlines’ operations are subject to increasingly stringent federal, state, local, and foreign laws protecting the environment. U.S. federal laws that have a particular impact on us include the Airport Noise and Capacity Act of 1990, the Clean Air Act, the Resource Conservation and Recovery Act, the Clean Water Act, the Safe Drinking Water Act, the
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Comprehensive Environmental Response Act and the Compensation and Liability Act. Compliance with these and other environmental laws and regulations can require significant expenditures, and violations can lead to significant fines and penalties. Governments globally are increasingly focusing on the environmental impact caused by the consumption of fossil fuels and as a result have proposed or enacted legislation which may increase the cost of providing airline service or restrict its provision. We expect the focus on environmental matters to increase.

Concern about climate change and greenhouse gases may result in additional regulation of aircraft emissions in the U.S. and abroad. In addition, other legislative or regulatory action to regulate greenhouse gas emissions is possible. At this time, we cannot predict whether any such legislation or regulation would apportion costs between one or more jurisdictions in which we operate flights. We are monitoring and evaluating the potential impact of such legislative and regulatory developments.

In addition to direct costs, such regulation may have a greater effect on the airline industry through increases in fuel costs. The impact to us and our industry from such actions is likely to be adverse and could be significant, particularly if regulators were to conclude that emissions from commercial aircraft cause significant harm to the atmosphere or have a greater impact on climate change than other industries.

Our operations may be adversely affected by our expansion into non-U.S. jurisdictions and the related laws and regulations to which we are subject.

The expansion of our operations into non-U.S. jurisdictions has expanded the scope of the laws and regulations to which we are subject, both domestically and internationally. Compliance with the laws and regulations of foreign jurisdictions and the restrictions on operations that these laws, regulations or other government actions may impose could significantly increase the cost of airline operations or reduce revenue. For example, various jurisdictions have imposed or are currently imposing restrictions that impede or restrict travel in response to the COVID-19 pandemic and a number of our destinations in Asia have been revising their privacy and consumer laws and regulations. Limitations placed on our business as a result of these or other laws and regulations or failure to comply with evolving laws or regulations could result in significant penalties, criminal charges, costs to defend ourselves in a foreign jurisdiction, restrictions on operations and reputational damage. In addition, we operate flights on international routes regulated by treaties and related agreements between the U.S. and foreign governments, which are subject to change as they may be amended from time to time. Modifications of these arrangements could result in an inability to obtain or retain take-off or landing slots for our routes, route authorization and necessary facilities. Any limitations, additions or modifications to government treaties, agreements, regulations, laws or policies related to our international routes could have a material adverse impact on our financial position and results of operations.

We may be party to litigation or regulatory action in the normal course of business or otherwise, which could have an adverse effect on our operations and financial results.

From time to time, we are a party to or otherwise involved in legal or regulatory proceedings, claims, government inspections, investigations or other legal matters, both domestically and in foreign jurisdictions, including proceedings related to the COVID-19 pandemic. For example, due to cancelled or rescheduled flights in connection with the COVID-19 pandemic, several U.S. airlines, including us, have been subject to class action complaints citing violation of state consumer statutes for allegedly failing or refusing to refund passenger tickets on cancelled flights. We believe we have meritorious defenses and intend to vigorously contest the claims. Resolving or defending legal matters, however, can take months or years. The duration of such matters can be unpredictable with many variables that we do not control including adverse party or government responses. Litigation and regulatory proceedings are subject to significant uncertainty and may be expensive, time-consuming and disruptive to our operations. In addition, an adverse resolution of a lawsuit, regulatory matter, investigation or other proceeding could have a material adverse effect on our financial condition and results of operations. We may be required to change or restrict our operations or be subject to injunctive relief, significant compensatory damages, punitive damages, penalties, fines or disgorgement of profits, none of which may be covered by insurance. We may have to pay out settlements that also may not be covered by insurance. There can be no assurance that any of these payments or actions will not be material. In addition, publicity of ongoing legal and regulatory matters may adversely affect our reputation.

Our insurance costs are susceptible to significant increases, and further increases in insurance costs or reductions in coverage could have an adverse effect on our financial results.

We carry types and amounts of insurance customary in the airline industry, including coverage for general liability, passenger liability, property damage, aircraft loss or damage, baggage and cargo liability, and workers’ compensation. We are required by the DOT to carry liability insurance on each of our aircraft. We currently maintain commercial airline insurance with a major group of independent insurers that regularly participate in world aviation insurance markets, including public liability insurance and coverage for losses resulting from the physical destruction or damage to our aircraft. However, there can be no assurance
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that the amount of such coverage will not change or that we will not bear substantial losses from accidents or damage to, or loss of, aircraft or other property due to other factors such as natural disasters. We could incur substantial claims resulting from an accident or damage to, or loss of, aircraft or other property due to other factors such as natural disasters in excess of related insurance coverage that could have a material adverse effect on our results of operations and financial condition. While we have not yet seen an increase in our insurance premiums on account of the COVID-19 pandemic, we may experience increases as our policies become eligible for renewal.

Extended interruptions or disruptions in service have and could continue to have a material adverse impact on our operations.

Our financial results have been and may continue to be adversely affected by factors outside our control, including, but not limited to, flight cancellations, significant delays in operations, and facility disruptions, such as those caused by the current COVID-19 pandemic. Our principal base of operations is in Hawai`i and a significant interruption or disruption in service has had and may continue to have a serious impact on our business and results of operations. In addition to international health crises, such as the COVID-19 pandemic, natural disasters, such as hurricanes, earthquakes and tsunamis, may impact the demand for transportation in the markets in which we operate.

FLEET AND FLEET-RELATED RISKS
We are dependent on our limited number of suppliers for aircraft, aircraft engines and parts.

We are dependent on a limited number of suppliers (e.g. Airbus, Boeing, Rolls Royce, Pratt & Whitney) for aircraft, aircraft engines, and aircraft-related items. We are vulnerable to malfunction, failure or other problems associated with the supply and performance of these aircraft and parts and/or related operational disruptions, such as those caused by the COVID-19 pandemic. We do not yet know the full impact of operational disruptions of our suppliers and believe that such disruptions could result in reputational harm, increased parts and maintenance costs, and adverse effects on our financial position and results of operations.

Our agreements to purchase Boeing 787-9 aircraft represent significant future financial commitments and operating costs.
As of September 30, 2020, we had the following firm order commitments and purchase rights for additional aircraft:

Aircraft TypeFirm OrdersPurchase RightsExpected Delivery Dates
A321neo aircraft— 9N/A
B787-9 aircraft1010Between 2021 and 2025

We have made substantial pre-delivery payments for aircraft under existing purchase agreements and are required to continue these pre-delivery payments as well as make payments for the balance of the purchase price through delivery of each aircraft. Due to the current impacts of the COVID-19 pandemic, we are reevaluating these contracts. There can be no assurance, however, that we will be able to modify these contracts, reschedule the scheduled delivery dates for these aircraft, or take similar actions to the extent we seek to do so. These commitments substantially increase our future capital spending requirements and may require us to increase our level of debt in future years. We are continuing to evaluate our options to finance these orders. There can be no assurance that we will be able to obtain such financing on favorable terms, or at all.

On October 26, 2020, we entered into an amendment to the Boeing 787-9 purchase agreement, which provides for, amongst other things, a change in the aircraft delivery schedule from 2021 through 2025 to 2022 and 2026, with the first delivery scheduled in September 2022.

Delays in scheduled aircraft deliveries or other loss of fleet capacity may adversely impact our operations and financial results.

The success of our business depends on, among other things, the ability to effectively operate a certain number and type of aircraft. As noted above, we are uncertain about the future of our contractual commitments to purchase additional aircraft for our fleet. Our inability to purchase and introduce new aircraft into our fleet could negatively impact our business, operations and financial performance. Even if we proceed with some or all of our contractual commitments to purchase additional aircraft, delays in scheduled aircraft, due to the COVID-19 pandemic or other circumstances, or our failure to integrate newly purchased aircraft into our fleet as planned may require us to utilize our existing fleet longer than expected. Such extensions may require us to operate existing aircraft beyond the point at which it is economically optimal to retire them, resulting in increased maintenance costs.
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We may never realize the full value of our long-lived assets such as aircraft and non-aircraft equipment, resulting in impairment and other related charges that may negatively impact our financial position and results of operations.

Economic and intrinsic triggers, which include the effects of the COVID-19 pandemic, extreme fuel price volatility, an uncertain economic and credit environment, unfavorable trends in historical or forecasted results of operations and cash flows, as well as other uncertainties, may cause us to record material impairments of our long-lived assets. Additionally, we could be subject to impairment charges in the future that could have an adverse effect on our financial position and results of operations in future periods. The risk of future material impairments has grown significantly as result of the effects of the COVID-19 pandemic on our business.

During the fiscal quarter ended March 31, 2020, the adverse economic impact and declining passenger demand attributed to the COVID-19 pandemic drove down our stock price to 52-week lows and significantly reduced our cash flows. We determined that the estimated fair value of our business was less than its carrying value. The deficit between the fair value and the carrying value of the assets exceeded the amount of goodwill on our financial statements and, therefore, we recognized a goodwill impairment charge of $106.7 million during the three months ended March 31, 2020.

As part of our response to COVID-19, discussed above, including substantial capacity reductions and the temporary grounding of the majority of its fleet, as well as reduced cash flow projections, we identified indicators of impairment of our long-lived assets. To determine whether impairment exists for aircraft used in operations, assets are grouped at the fleet-type level (the lowest level for which there are identifiable cash flows) and future cash flows are estimated based on projections of capacity, passenger mile yield, fuel costs, labor costs and other relevant factors. In the second quarter of 2020, we recorded an impairment charge of $34.0 million related to our ATR-42 and ATR-72 fleets, assets held in our commercial real-estate subsidiary and the termination of software-related projects.

As of September 30, 2020, the Company had approximately $13.5 million in indefinite-lived intangible assets subject to impairment. The fair value of our indefinite-lived intangible asset continues to exceed its carrying value.

Given the ongoing impact of the COVID-19 pandemic, we continue to evaluate our current fleet and other long-lived assets for impairment accordingly. As of September 30, 2020, our remaining long-lived assets continued to generate future cash flows from operation of the fleet through the respective retirement dates in excess of its respective carrying values.

COMMON STOCK RISKS

Our share price is subject to fluctuations.

The market price of our stock is influenced by many factors, many of which are outside of our control, and include the following:

operating results and financial condition;
changes in the competitive environment in which we operate;
fuel price volatility including the availability of fuel;
announcements concerning our competitors including bankruptcy filings, mergers, restructurings or acquisitions by other airlines;
increases or changes in government regulation;
general and industry specific market conditions;
changes in financial estimates or recommendations by securities analysts; and
sales of our common stock or other actions by investors with significant shareholdings.

In recent years the stock market has experienced volatile price and volume fluctuations that often have been unrelated to the operating performance of individual companies. These market fluctuations, as well as general economic conditions, may affect the price of our common stock.

In the past, securities class action litigation has often been instituted against a company following periods of volatility in its stock price. This type of litigation, if filed against us, could result in substantial costs and divert our management's attention and resources. In addition, the future sale of a substantial number of shares of common stock by us or by our existing stockholders may have an adverse impact on the market price of our common stock. There can be no assurance that the trading price of our common stock will remain at or near its current level.

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Certain provisions of our certificate of incorporation and bylaws may delay or prevent a change of control, which could materially adversely affect the price of our common stock.

Our certificate of incorporation and bylaws contain provisions that may make it difficult to remove our Board of Directors and management, and may discourage or delay a change of control, which could materially and adversely affect the price of our common stock. These provisions include, among others:

the ability of our Board of Directors to issue, without further action by the stockholders, series of undesignated preferred stock, or rights to acquire preferred stock, that could dilute the interest of, or impair the voting power of, holders of our common stock or could also be used as a method of discouraging, delaying or preventing a change of control;
advance notice procedures for stockholder proposals to be considered at stockholders’ meetings and for nominations of candidates for election to our Board of Directors;
the ability of our Board of Directors to fill vacancies on the board;
a prohibition against stockholders taking action by written consent;
a prohibition against stockholders calling special meetings of stockholders; and
super-majority voting requirements to modify or amend specified provisions of our certificate of incorporation.

Our certificate of incorporation includes a provision limiting voting and ownership by non-U.S. citizens and our bylaws include a provision specifying an exclusive forum for stockholder disputes.

To comply with restrictions imposed by federal law on foreign ownership of U.S. airlines, our certificate of incorporation restricts voting of shares of our common stock by non-U.S. citizens. Our certificate of incorporation provides that the failure of non-U.S. citizens to register their shares on a separate stock record, which we refer to as the “foreign stock record,” would result in a suspension of their voting rights in the event that the aggregate foreign ownership of the outstanding common stock exceeds the foreign ownership restrictions imposed by federal law.

Our certificate of incorporation further provides that no shares of our common stock will be registered on the foreign stock record if the amount so registered would exceed the foreign ownership restrictions imposed by federal law. If it is determined that the amount registered in the foreign stock record exceeds the foreign ownership restrictions imposed by federal law, shares will be removed from the foreign stock record in reverse chronological order based on the date of registration therein, until the number of shares registered therein does not exceed the foreign ownership restrictions imposed by federal law. As of December 31, 2019, we believe we were in compliance with the foreign ownership rules.

Our by-laws provide that, unless we consent in writing to an alternative forum, the Court of Chancery of the State of Delaware or, if such court lacks jurisdiction, any other state or federal court located in the State of Delaware will be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of us; (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our current or former directors, officers or other employees to us or our stockholders; (iii) any action asserting a claim against us or any of our directors, officers or other employees arising pursuant to any provision of the Delaware General Corporation Law or our certificate of incorporation or bylaws (as each may be amended or restated from time to time); or (iv) any action asserting a claim against us or any of our directors, officers or other employees governed by the internal affairs doctrine. Our amended and restated bylaws further provide that the federal district courts of the United States of America will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act of 1933, as amended (the Securities Act). Accordingly, stockholders may be limited in the forum in which they are able to pursue legal actions against us.

We cannot repurchase our common stock pursuant to our share repurchase program or continue to pay dividends on our common stock for the foreseeable future.

Under the terms of our relief under the CARES Act, we are required to suspend payment of dividends and refrain from engaging in stock repurchases through the date that is 12 months after the date on which all outstanding loans under the Facility have been repaid in full. We announced on March 18, 2020 that we suspended stock repurchases under our previously announced repurchase program, which expires December 31, 2020. As such, we do not anticipate any future repurchases under our currently approved repurchase program and we cannot provide any assurance that we will initiate any repurchase program again in the future. Additionally, although we have historically issued quarterly dividends, we cannot provide any assurance that we will declare dividends in the future, even after the restrictions related to the CARES Act are no longer applicable, based on our operating results, financial condition, capital requirements, and general business conditions.

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

On March 18, 2020, we announced the suspension of our repurchase program and pursuant to our receipt of financial assistance under the CARES Act, we are prevented from executing stock repurchases through the date that is 12 months after the date on which all outstanding loans under the Facility have been repaid in full. We had no stock repurchase activity during the three months ended September 30, 2020.

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

ITEM 5.                                                OTHER INFORMATION.
 
Amended and Restated Loan and Guarantee Agreement

On October 23, 2020, Hawaiian amended and restated its Loan and Guarantee Agreement, dated as of September 25, 2020, among Hawaiian, as the borrower, the Company, the guarantors party thereto from time to time, the United States Department of the Treasury, and the Bank of New York Mellon, as administrative agent and collateral agent (the “Loan Agreement”) to, among certain other things, increase the maximum amount available to be borrowed by Hawaiian to $622 million, and, in connection therewith, entered into an Amended and Restated Loan Agreement, dated as of October 23, 2020 (the “Amended and Restated Loan Agreement”).

The foregoing description of the Amended and Restated Loan Agreement does not purport to be complete, and is qualified in its entirety by reference to the full text of the Amended and Restated Loan Agreement, a copy of which is filed as Exhibit 10.2 to this Quarterly Report on Form 10-Q and is incorporated herein by reference.

Amendment of Agreement with The Boeing Company

On October 26, 2020, Hawaiian entered into an amendment (the “Amendment”) to its purchase agreement dated July 18, 2018, between Hawaiian, The Boeing Company (“Boeing”) and us. Pursuant to the Amendment, the Company's delivery schedule was revised from 2021 through 2025 to 2022 through 2026, with the first delivery scheduled for September 2022.

The foregoing description of the Amendment does not purport to be complete, and is qualified in its entirety by the full text of the Amendment, a copy of which will be filed subsequent to this Form 10-Q.


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ITEM 6.                                                EXHIBITS.
 
Exhibit No. Description
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
10.1
10.2
31.1 
31.2 
   
32.1 
   
32.2 
   
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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
104Cover Page Interactive Data Files (formatted as inline XBRL and contained in Exhibit 101)
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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 
 HAWAIIAN HOLDINGS, INC.
   
   
Date:October 28, 2020By:/s/ Shannon L. Okinaka
  Shannon L. Okinaka
  Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)

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