10-Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 FORM 10-Q

 
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2015
or
 o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from       to       
 
Commission file number 1-31443
 HAWAIIAN HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
 
71-0879698
(State or Other Jurisdiction of
 
(I.R.S. Employer
Incorporation or Organization)
 
Identification No.)
 
3375 Koapaka Street, Suite G-350
 
 
Honolulu, HI
 
96819
(Address of Principal Executive Offices)
 
(Zip Code)
 
(808) 835-3700
(Registrant’s Telephone Number, Including Area Code)
  
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  ý Yes o No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  ý Yes o No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o
 
Accelerated filer x
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 

 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o Yes ý No
 
As of October 16, 2015, 53,214,218 shares of the registrant’s common stock were outstanding.




Hawaiian Holdings, Inc.
Form 10-Q
Quarterly Period ended September 30, 2015
 
Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2



PART I. FINANCIAL INFORMATION

ITEM 1.               FINANCIAL STATEMENTS.

Hawaiian Holdings, Inc.
Consolidated Statements of Operations
(in thousands, except per share data)
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(unaudited)
Operating Revenue:
 
 

 
 

 
 
 
 
Passenger
 
$
556,929

 
$
566,985

 
$
1,525,461

 
$
1,541,795

Other
 
74,809

 
72,477

 
217,852

 
198,245

Total
 
631,738

 
639,462

 
1,743,313

 
1,740,040

Operating Expenses:
 
 

 
 

 
 
 
 
Aircraft fuel, including taxes and delivery
 
105,483

 
182,219

 
329,329

 
527,497

Wages and benefits
 
125,884

 
114,469

 
369,875

 
334,441

Aircraft rent
 
29,544

 
26,724

 
86,732

 
79,098

Maintenance, materials and repairs
 
56,196

 
51,293

 
168,512

 
168,002

Aircraft and passenger servicing
 
30,284

 
31,848

 
87,948

 
92,929

Commissions and other selling
 
30,305

 
32,015

 
91,217

 
94,123

Depreciation and amortization
 
26,061

 
24,384

 
78,777

 
70,960

Other rentals and landing fees
 
24,728

 
23,637

 
70,807

 
65,855

Other
 
48,576

 
46,704

 
142,859

 
139,335

Total
 
477,061

 
533,293

 
1,426,056

 
1,572,240

Operating Income
 
154,677

 
106,169

 
317,257

 
167,800

Nonoperating Income (Expense):
 
 

 
 

 
 
 
 
Interest expense and amortization of debt discounts and issuance costs
 
(13,506
)
 
(17,104
)
 
(42,742
)
 
(48,111
)
Interest income
 
691

 
471

 
2,052

 
1,088

Capitalized interest
 
698

 
1,834

 
2,966

 
6,584

Losses on fuel derivatives
 
(25,009
)
 
(27,892
)
 
(28,670
)
 
(28,506
)
Loss on extinguishment of debt
 
(54
)
 

 
(7,296
)
 

Other, net
 
(4,515
)
 
(5,114
)
 
(9,325
)
 
(3,804
)
Total
 
(41,695
)
 
(47,805
)
 
(83,015
)
 
(72,749
)
Income Before Income Taxes
 
112,982

 
58,364

 
234,242

 
95,051

Income tax expense
 
42,953

 
22,789

 
89,496

 
37,224

Net Income
 
$
70,029

 
$
35,575

 
$
144,746

 
$
57,827

Net Income Per Share
 
 

 
 

 
 
 
 
Basic
 
$
1.30

 
$
0.66

 
$
2.67

 
$
1.08

Diluted
 
$
1.15

 
$
0.56

 
$
2.32

 
$
0.94

 
See accompanying Notes to Consolidated Financial Statements.


3



Hawaiian Holdings, Inc.
Consolidated Statements of Comprehensive Income
(in thousands)
 
 
 
Three Months Ended September 30,
 
 
2015
 
2014
 
 
(unaudited)
Net Income
 
$
70,029

 
$
35,575

Other comprehensive income (loss), net:
 
 

 
 

Net change related to employee benefit plans, net of tax expense of $1,117 and $3 for 2015 and 2014, respectively
 
1,894

 
44

Net change in derivative instruments, net of tax benefit $1,628 for 2015 and tax expense of $4,308 for 2014
 
(2,681
)
 
7,081

Net change in available-for-sale investments, net of tax expense of $35 for 2015 and tax benefit of $54 for 2014
 
59

 
(90
)
Total other comprehensive income (loss)
 
(728
)
 
7,035

Total Comprehensive Income
 
$
69,301

 
$
42,610


 
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
 
(unaudited)
Net Income
 
$
144,746

 
$
57,827

Other comprehensive income (loss), net:
 
 
 
 

Net change related to employee benefit plans, net of tax expense of $3,163 and $213 for 2015 and 2014, respectively
 
5,251

 
389

Net change in derivative instruments, net of tax benefit of $3,014 and $1,045 for 2015 and 2014, respectively
 
(4,958
)
 
(1,726
)
Net change in available-for-sale investments, net of tax expense of $145 for 2015 and tax benefit of $33 for 2014
 
239

 
(55
)
Total other comprehensive income (loss)
 
532

 
(1,392
)
Total Comprehensive Income
 
$
145,278

 
$
56,435


 
See accompanying Notes to Consolidated Financial Statements.


4



Hawaiian Holdings, Inc.
Consolidated Balance Sheets
(in thousands, except shares)
 
 
 
September 30, 2015
 
December 31, 2014
 
 
(unaudited)
 
 
ASSETS
 
 

 
 

Current Assets:
 
 

 
 

Cash and cash equivalents
 
$
345,174

 
$
264,087

Restricted cash
 
5,000

 
6,566

Short-term investments
 
265,437

 
260,121

Accounts receivable, net
 
80,682

 
80,737

Spare parts and supplies, net
 
20,359

 
18,011

Deferred tax assets, net
 
22,102

 
21,943

Prepaid expenses and other
 
53,013

 
53,382

Total
 
791,767

 
704,847

Property and equipment, less accumulated depreciation and amortization of $415,194 and $367,507 as of September 30, 2015 and December 31, 2014, respectively
 
1,617,933

 
1,673,493

Other Assets:
 
 

 
 

Long-term prepayments and other
 
90,108

 
96,225

Intangible assets, less accumulated amortization of $36,414 and $34,434 as of September 30, 2015 and December 31, 2014, respectively
 
19,320

 
21,300

Goodwill
 
106,663

 
106,663

Total Assets
 
$
2,625,791

 
$
2,602,528

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

Current Liabilities:
 
 

 
 

Accounts payable
 
$
101,863

 
$
97,260

Air traffic liability
 
481,830

 
424,336

Other accrued liabilities
 
139,827

 
141,919

Current maturities of long-term debt, less discount, and capital lease obligations
 
95,805

 
156,349

Total
 
819,325

 
819,864

Long-Term Debt and Capital Lease Obligations
 
818,608

 
893,288

Other Liabilities and Deferred Credits:
 
 

 
 

Accumulated pension and other postretirement benefit obligations
 
409,047

 
407,864

Other liabilities and deferred credits
 
84,285

 
72,650

Deferred tax liability, net
 
117,376

 
41,629

Total
 
610,708

 
522,143

Commitments and Contingencies
 


 


Shareholders’ Equity:
 
 

 
 

Special preferred stock, $0.01 par value per share, three shares issued and outstanding as of September 30, 2015 and December 31, 2014
 

 

Common stock, $0.01 par value per share, 53,317,662 and 54,455,568 shares outstanding as of September 30, 2015 and December 31, 2014, respectively
 
533

 
545

Capital in excess of par value
 
116,083

 
251,432

Accumulated income
 
382,814

 
238,068

Accumulated other comprehensive loss, net
 
(122,280
)
 
(122,812
)
Total
 
377,150

 
367,233

Total Liabilities and Shareholders’ Equity
 
$
2,625,791

 
$
2,602,528

 
See accompanying Notes to Consolidated Financial Statements.

5



Hawaiian Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
 
 
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
 
(unaudited)
Net cash provided by Operating Activities
 
$
389,472

 
$
252,163

Cash flows from Investing Activities:
 
 

 
 

Additions to property and equipment, including pre-delivery payments
 
(105,329
)
 
(361,290
)
Proceeds from purchase assignment and leaseback transactions
 
86,033

 

Proceeds from disposition of equipment
 
3,606

 
978

Purchases of investments
 
(178,177
)
 
(346,010
)
Sales of investments
 
170,904

 
92,103

Net cash used in investing activities
 
(22,963
)
 
(614,219
)
Cash flows from Financing Activities:
 
 

 
 

Long-term borrowings
 

 
293,430

Repayments of long-term debt and capital lease obligations
 
(74,719
)
 
(46,392
)
Repurchases of convertible notes
 
(171,598
)
 

Repurchases of common stock
 
(37,622
)
 

Other
 
(1,483
)
 
19,889

Net cash provided by (used in) financing activities
 
(285,422
)
 
266,927

Net increase (decrease) in cash and cash equivalents
 
81,087

 
(95,129
)
Cash and cash equivalents - Beginning of Period
 
264,087

 
423,384

Cash and cash equivalents - End of Period
 
$
345,174

 
$
328,255

 
See accompanying Notes to Consolidated Financial Statements.


6



Hawaiian Holdings, Inc. 
Notes to Consolidated Financial Statements (Unaudited)
 
1. Business and Basis of Presentation
 
Hawaiian Holdings, Inc. (the Company or Holdings) is a holding company incorporated in the State of Delaware. The Company’s primary asset is its sole ownership of all issued and outstanding shares of common stock of Hawaiian Airlines, Inc. (Hawaiian). The accompanying unaudited financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X of the U.S. Securities and Exchange Commission (SEC).  Accordingly, these interim financial statements do not include all of the information and footnotes required by GAAP for complete financial statements.  In the opinion of management, the accompanying financial statements contain all adjustments, including normal recurring adjustments, necessary for the fair presentation of the Company’s results of operations and financial position for the periods presented.  Due to seasonal fluctuations, among other factors common to the airline industry, the results of operations for the periods presented are not necessarily indicative of the results of operations to be expected for the entire year.  The accompanying unaudited Consolidated Financial Statements should be read in conjunction with the financial statements and the notes of the Company included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014.
 
2. Significant Accounting Policies
 
Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (ASU 2014-09), requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in GAAP when it becomes effective. In July 2015, the FASB voted to defer the amendments in ASU 2014-09 by one year to December 15, 2017. The terms of ASU 2014-09 are effective for fiscal years, and interim periods within those fiscal years, beginning after the revised effective date, and allow for either full retrospective or modified retrospective adoption. Organizations are permitted to adopt the new revenue standard early, but not before December 15, 2016.
The Company is currently evaluating the effect that the provisions of ASU 2014-09 will have on its consolidated financial statements and related disclosures. We have determined that the new standard, once effective, will preclude the Company from accounting for miles earned under its HawaiianMiles customer loyalty program using the incremental cost method, and will require use of the deferred revenue method. This change could have a significant impact on the Company's financial statements.
In April 2015, the FASB issued Accounting Standards Update 2015-03, Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03), requiring an entity to present its debt issuance costs on the balance sheet as a deduction from the carrying amount of the related debt liability instead of a deferred charge. It is effective for annual reporting periods beginning after December 15, 2015, but early adoption is permitted. We are currently evaluating the impact the adoption of this standard will have on the Company's financial statements.

7



3. Accumulated Other Comprehensive Loss
 
Reclassifications out of accumulated other comprehensive loss by component is as follows: 
Details about accumulated other comprehensive loss components
 
Three months ended September 30,
 
Nine months ended September 30,
 
Affected line items in the statement where net income is presented
 
2015
 
2014
 
2015
 
2014
 
 
 
(in thousands)
 
 
Derivatives designated as hedging instruments under ASC 815
 
 

 
 

 
 

 
 

 
 
Foreign currency derivative gains, net
 
$
(5,003
)
 
$
(1,297
)
 
$
(13,415
)
 
$
(6,523
)
 
Passenger revenue
Interest rate derivative losses, net
 
170

 
201

 
536

 
618

 
Interest expense
Total before tax
 
(4,833
)
 
(1,096
)
 
(12,879
)
 
(5,905
)
 
 
Tax expense
 
1,826

 
424

 
4,866

 
2,239

 
 
Total, net of tax
 
$
(3,007
)
 
$
(672
)
 
$
(8,013
)
 
$
(3,666
)
 
 
Amortization of defined benefit pension items
 
 

 
 

 
 

 
 

 
 
Actuarial loss (gains)
 
$
2,955

 
$
(64
)
 
$
8,315

 
$
388

 
Wages and benefits
Prior service cost
 
57

 
113

 
171

 
111

 
Wages and benefits
Total before tax
 
3,012

 
49

 
8,486

 
499

 
 
Tax benefit
 
(1,118
)
 
(5
)
 
(3,194
)
 
(215
)
 
 
Total, net of tax
 
$
1,894

 
$
44

 
$
5,292

 
$
284

 
 
Short-term investments
 
 

 
 

 
 

 
 

 
 
Realized gain on sales of investments, net
 
$
(1
)
 
$
(10
)
 
$
(36
)
 
$
(12
)
 
Other nonoperating income
Total before tax
 
(1
)
 
(10
)
 
(36
)
 
(12
)
 
 
Tax expense
 

 
1

 
7

 
1

 
 
Total, net of tax
 
$
(1
)
 
$
(9
)
 
$
(29
)
 
$
(11
)
 
 
Total reclassifications for the period
 
$
(1,114
)
 
$
(637
)
 
$
(2,750
)
 
$
(3,393
)
 
 

A rollforward of the amounts included in accumulated other comprehensive loss, net of taxes, for the three and nine months ended September 30, 2015 and 2014 is as follows:
Three months ended September 30, 2015
 
Interest
Rate
Derivatives
 
Foreign
Currency
Derivatives
 
Defined
Benefit
Pension
Items
 
Short-Term Investments
 
Total
 
 
(in thousands)
Beginning balance
 
$
262

 
$
10,423

 
$
(132,163
)
 
$
(74
)
 
$
(121,552
)
Other comprehensive income (loss) before reclassifications, net of tax
 
(641
)
 
967

 

 
60

 
386

Amounts reclassified from accumulated other comprehensive income (loss), net of tax
 
104

 
(3,111
)
 
1,894

 
(1
)
 
(1,114
)
Net current-period other comprehensive income (loss)
 
(537
)
 
(2,144
)
 
1,894

 
59

 
(728
)
Ending balance
 
$
(275
)
 
$
8,279

 
$
(130,269
)
 
$
(15
)
 
$
(122,280
)
 

8



Three months ended September 30, 2014
 
Interest
Rate
Derivatives
 
Foreign
Currency
Derivatives
 
Defined
Benefit
Pension
Items
 
Short-Term Investments
 
Total
 
 
(in thousands)
Beginning balance
 
$
471

 
$
95

 
$
(51,714
)
 
$
35

 
$
(51,113
)
Other comprehensive income (loss) before reclassifications, net of tax
 
39

 
7,714

 

 
(81
)
 
7,672

Amounts reclassified from accumulated other comprehensive income (loss), net of tax
 
121

 
(793
)
 
44

 
(9
)
 
(637
)
Net current-period other comprehensive income (loss)
 
160

 
6,921

 
44

 
(90
)
 
7,035

Ending balance
 
$
631

 
$
7,016

 
$
(51,670
)
 
$
(55
)
 
$
(44,078
)

Nine months ended September 30, 2015
 
Interest
Rate
Derivatives
 
Foreign
Currency
Derivatives
 
Defined
Benefit
Pension
Items
 
Short-Term Investments
 
Total
 
 
(in thousands)
Beginning balance
 
$
254

 
$
12,708

 
$
(135,520
)
 
$
(254
)
 
$
(122,812
)
Other comprehensive income (loss) before reclassifications, net of tax
 
(857
)
 
3,912

 
(41
)
 
268

 
3,282

Amounts reclassified from accumulated other comprehensive income (loss), net of tax
 
328

 
(8,341
)
 
5,292

 
(29
)
 
(2,750
)
Net current-period other comprehensive income (loss)
 
(529
)
 
(4,429
)
 
5,251

 
239

 
532

Ending balance
 
$
(275
)
 
$
8,279

 
$
(130,269
)
 
$
(15
)
 
$
(122,280
)

Nine months ended September 30, 2014
 
Interest
Rate
Derivatives
 
Foreign
Currency
Derivatives
 
Defined
Benefit
Pension
Items
 
Short-Term Investments
 
Total
 
 
(in thousands)
Beginning balance
 
$
1,096

 
$
8,277

 
$
(52,059
)
 
$

 
$
(42,686
)
Other comprehensive income (loss) before reclassifications, net of tax
 
(844
)
 
2,784

 
105

 
(44
)
 
2,001

Amounts reclassified from accumulated other comprehensive income (loss), net of tax
 
379

 
(4,045
)
 
284

 
(11
)
 
(3,393
)
Net current-period other comprehensive income (loss)
 
(465
)
 
(1,261
)
 
389

 
(55
)
 
(1,392
)
Ending balance
 
$
631

 
$
7,016

 
$
(51,670
)
 
$
(55
)
 
$
(44,078
)


4. Earnings Per Share
 
Basic earnings per share, which excludes dilution, is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period.
 
Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For the three and nine months ended September 30, 2015 and 2014, anti-dilutive shares excluded from the calculation of diluted earnings per share were not material.


9



 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(in thousands, except for per share data)
Numerator:
 
 

 
 

 
 

 
 

Net Income
 
$
70,029

 
$
35,575

 
$
144,746

 
$
57,827

Denominator:
 
 

 
 

 
 

 
 

Weighted average common stock shares outstanding - Basic
 
53,731

 
53,878

 
54,266

 
53,359

Assumed exercise of stock options and awards
 
396

 
848

 
458

 
1,061

Assumed conversion of convertible note premium
 
350

 
4,965

 
1,618

 
4,498

Assumed conversion of warrants
 
6,351

 
3,359

 
6,139

 
2,767

Weighted average common stock shares outstanding - Diluted
 
60,828

 
63,050

 
62,481

 
61,685

Net Income Per Share
 
 

 
 

 
 

 
 

Basic
 
$
1.30

 
$
0.66

 
$
2.67

 
$
1.08

Diluted
 
$
1.15

 
$
0.56

 
$
2.32

 
$
0.94

 
Convertible Note Transaction

In March 2011, the Company entered into a convertible note transaction which included the sale of convertible notes, purchase of call options and sale of warrants. As of September 30, 2015, the Company’s 5% Convertible Notes due in 2016 ("Convertible Notes") had an outstanding principal balance of $3.3 million and can be redeemed with either cash or the Company’s common stock, or a combination thereof, at the Company’s option.  During the three and nine months ended September 30, 2015, the Company repurchased $1.0 million and $67.8 million in principal of the Convertible Notes, respectively. The 0.4 million shares into which the currently outstanding Convertible Notes can be converted will not impact the dilutive earnings per share calculation in the current and future periods under the if-converted method, as the Company has the intent and ability to redeem the principal amount of the Convertible Notes with cash.

During the three and nine months ended September 30, 2015 and 2014 the average share price of the Company’s common stock exceeded the conversion price of $7.88 per share. Therefore, shares related to the conversion premium of the Convertible Notes (for which share settlement is assumed for earnings per share purposes) are included in the Company's computation of diluted earnings per share.
 
In connection with the issuance of the Convertible Notes, the Company entered into separate call option transactions and separate warrant transactions with certain financial investors to reduce the potential dilution of the Company’s common stock and to offset potential payments by the Company to holders of the Convertible Notes in excess of the principal of the Convertible Notes upon conversion.

The call options to repurchase the Company’s common stock will always be antidilutive and, therefore, will have no effect on diluted earnings per share and are excluded from the table above.
 
During the three and nine months ended September 30, 2015 and 2014 the average share price of the Company's common stock exceeded the warrant strike price of $10.00 per share. Therefore, the assumed conversion of the warrants is included in the Company's computation of diluted earnings per share.

Stock Repurchase Program

In April 2015, the Company's Board of Directors approved a stock repurchase program under which the Company may repurchase up to $100 million of its outstanding common stock over a two-year period through the open market, established plans or privately negotiated transactions in accordance with all applicable securities laws, rules and regulations. The stock repurchase program is subject to modification or termination at any time. The Company spent $20.0 million and $37.7 million to repurchase approximately 0.9 million and 1.6 million shares of the Company's common stock in open market transactions during the three and nine months ended September 30, 2015, respectively. As of September 30, 2015, the Company has $62.3 million remaining to spend under the stock repurchase program. See Part II, Item 2., “Unregistered Sales of Equity Securities and Use of Proceeds” of this report for additional information on the stock repurchase program.
 

10



5. Short-Term Investments
 
Debt securities that are not classified as cash equivalents are classified as available-for-sale investments and are stated at fair value.  Realized gains and losses on sales of investments are reflected in nonoperating income (expense) in the unaudited consolidated statements of operations.  Unrealized gains and losses on available-for-sale securities are reflected as a component of accumulated other comprehensive loss.

The following is a summary of short-term investments held as of September 30, 2015 and December 31, 2014:
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
September 30, 2015
 
(in thousands)
Corporate debt
 
$
169,615

 
$
84

 
$
(205
)
 
$
169,494

U.S. government and agency debt
 
47,990

 
84

 
(2
)
 
48,072

Municipal bonds
 
23,982

 
18

 
(1
)
 
23,999

Other fixed income securities
 
23,875

 

 
(3
)
 
23,872

Total short-term investments
 
$
265,462

 
$
186

 
$
(211
)
 
$
265,437

 
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
December 31, 2014
 
(in thousands)
Corporate debt
 
$
180,794

 
$
43

 
$
(394
)
 
$
180,443

U.S. government and agency debt
 
38,268

 

 
(40
)
 
38,228

Municipal bonds
 
23,849

 
4

 
(16
)
 
23,837

Other fixed income securities
 
17,618

 

 
(5
)
 
17,613

Total short-term investments
 
$
260,529

 
$
47

 
$
(455
)
 
$
260,121


Contractual maturities of short-term investments as of September 30, 2015 are shown below. 
 
 
Under 1 Year
 
1 to 5 Years
 
Total
 
 
(in thousands)
Corporate debt
 
$
72,807

 
$
96,687

 
$
169,494

U.S. government and agency debt
 
12,441

 
35,631

 
48,072

Municipal bonds
 
16,961

 
7,038

 
23,999

Other fixed income securities
 
22,371

 
1,501

 
23,872

Total short-term investments
 
$
124,580

 
$
140,857

 
$
265,437

 
The Company classifies investments as current assets as these securities are available for use in its current operations.
 
6.  Fair Value Measurements
 
ASC Topic 820, Fair Value Measurement (ASC 820) clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.  As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability.  As a basis for considering such assumptions, ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
 
Level 1 — Observable inputs such as quoted prices in active markets for identical assets or liabilities;
 
Level 2 — Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term for the assets or liabilities; and
 
Level 3 — Unobservable inputs for which there is little or no market data and that are significant to the fair value of the assets or liabilities.

11




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, 2015
 
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
(in thousands)
Cash equivalents
 
$
150,388

 
$
133,602

 
$
16,786

 
$

Restricted cash
 
5,000

 
5,000

 

 

Short-term investments
 
265,437

 

 
265,437

 

Fuel derivative contracts:
 
0

 
 

 
 

 
 

Heating oil put options
 
3,480

 

 
3,480

 

Heating oil swaps
 
12

 

 
12

 

Foreign currency derivatives
 
10,620

 

 
10,620

 

Total assets measured at fair value
 
$
434,937

 
$
138,602

 
$
296,335

 
$

Fuel derivative contracts:
 
 

 
 

 
 

 
 

Heating oil swaps
 
$
27,165

 
$

 
$
27,165

 
$

Foreign currency derivatives
 
368

 

 
368

 

Interest rate derivatives
 
3,175

 

 
3,175

 

Total liabilities measured at fair value
 
$
30,708

 
$

 
$
30,708

 
$

 
 
 
Fair Value Measurements as of December 31, 2014
 
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
(in thousands)
Cash equivalents
 
$
55,072

 
$
35,913

 
$
19,159

 
$

Restricted cash
 
6,566

 
6,566

 

 

Short-term investments
 
260,121

 

 
260,121

 

Fuel derivative contracts:
 
0

 
 

 
 

 
 

Heating oil put options
 
32,637

 

 
32,637

 

Foreign currency derivatives
 
19,746

 

 
19,746

 

Total assets measured at fair value
 
$
374,142

 
$
42,479

 
$
331,663

 
$

 
 
 
 
 
 
 
 
 
Fuel derivative contracts:
 
 

 
 

 
 

 
 

Heating oil swaps
 
$
71,447

 
$

 
$
71,447

 
$

Interest rate derivative
 
129

 

 
129

 

Negative arbitrage derivative
 
500

 

 

 
500

Total liabilities measured at fair value
 
$
72,076

 
$

 
$
71,576

 
$
500

 
Cash equivalents.  The Company’s cash equivalents consist of money market securities, U.S. agency bonds, foreign and domestic corporate bonds, and commercial paper.  The instruments classified as Level 2 are valued using quoted prices for similar assets in active markets.
 
Restricted cash.  The Company’s restricted cash consist of money market securities.
 
Short-term investments.  Short-term investments include U.S. and foreign government notes and bonds, U.S. agency bonds, variable rate corporate bonds, asset backed securities, foreign and domestic corporate bonds, municipal bonds, and commercial paper.  These instruments are valued using quoted prices for similar assets in active markets or other observable inputs.

Fuel derivative contracts.  The Company’s fuel derivative contracts consist of heating oil puts and swaps which are not traded on a public exchange. The fair value of these instruments are 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 based primarily on data available or derived from public markets.

12



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

The table below presents the Company’s debt (excluding obligations under capital leases) measured at fair value: 
Fair Value of Debt
September 30, 2015
 
December 31, 2014
Carrying
 
Fair Value
 
Carrying
 
Fair Value
Amount
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Amount
 
Total
 
Level 1
 
Level 2
 
Level 3
(in thousands)
 
(in thousands)
$
816,897

 
$
815,578

 
$

 
$
3,224

 
$
812,354

 
$
947,897

 
$
956,811

 
$

 
$
69,766

 
$
887,045

 
The fair value estimates of the Company’s debt were based on either market prices or the discounted amount of future cash flows using the Company’s current incremental rate of borrowing for similar liabilities.
 
The carrying amounts of cash, other receivables and accounts payable approximate fair value due to the short-term nature of these financial instruments.
 
7.  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, 2015, the Company primarily used heating oil puts and swaps to hedge its aircraft fuel expense.  These derivative instruments were not designated as hedges under ASC Topic 815, Derivatives and Hedging (ASC 815), for hedge accounting treatment. As a result, any changes in fair value of these derivative instruments are adjusted through other nonoperating income (expense) in the period of change.

The following table reflects the amount of realized and unrealized gains and losses recorded as nonoperating income (expense) in the unaudited Consolidated Statements of Operations.
 
 
Three months ended September 30,
 
Nine months ended September 30,
Fuel derivative contracts
 
2015
 
2014
 
2015
 
2014
 
 
(in thousands)
Losses realized at settlement
 
$
(13,777
)
 
$
(4,632
)
 
$
(44,921
)
 
$
(6,530
)
Reversal of prior period unrealized amounts
 
9,953

 
56

 
38,293

 
(1,816
)
Unrealized losses on contracts that will settle in future periods
 
(21,185
)
 
(23,316
)
 
(22,042
)
 
(20,160
)
Losses on fuel derivatives recorded as Nonoperating income (expense)
 
$
(25,009
)
 
$
(27,892
)
 
$
(28,670
)
 
$
(28,506
)

Foreign Currency Exchange Rate Risk Management
 
The Company is subject to foreign currency exchange rate risk due to revenues and expenses denominated in foreign currencies, with the primary exposures being the Japanese Yen and Australian Dollar. To manage exchange rate risk, the Company executes its international revenue and expense transactions in the same foreign currency to the extent practicable.  
The Company enters into foreign currency forward contracts to further manage the effects of fluctuating exchange rates. The effective portion of the gain or loss of designated cash flow hedges is reported as a component of accumulated other comprehensive income (AOCI) and reclassified into earnings in the same period in which the related sales are recognized as passenger revenue. The effective portion of the foreign currency forward contracts represents the change in fair value of the hedge that offsets the change in the fair value of the hedged item. To the extent the change in the fair value of the hedge does not perfectly offset the change in the fair value of the hedged item, the ineffective portion of the hedge is immediately recognized as nonoperating income (expense). Foreign currency forward contracts that are not designated as cash flow hedges

13



are recorded at fair value, and any changes in fair value are recognized as other nonoperating income (expense) in the period of change.
 
The Company believes that its foreign currency forward contracts that are designated as cash flow hedges will continue to be effective in offsetting changes in cash flow attributable to the hedged risk. The Company expects to reclassify a net gain of approximately $12.0 million into earnings over the next 12 months from AOCI based on the values at September 30, 2015.
 
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 unaudited Consolidated Balance Sheets.

Derivative position as of September 30, 2015 
 
 
Balance Sheet
Location
 
Notional Amount
 
Final
Maturity
Date
 
Gross fair
value of
assets
 
Gross fair
value of
(liabilities)
 
Net
derivative
position
 
 
 
 
(in thousands)
 
 
 
(in thousands)
Derivatives designated as hedges
 
 
 
 
 
 
 
 

 
 

 
 

Interest rate derivative
 
Other accrued liabilities
 
$52,600 U.S. dollars
 
April 2023
 
$

 
$
(197
)
 
$
(197
)
 
 
Other liabilities and deferred credits (1)
 
 
 
 
 

 
(711
)
 
(711
)
Foreign currency derivatives
 
Prepaid expenses and other
 
6,723,830 Japanese Yen
38,257 Australian Dollars
 
September 2016
 
10,088

 
(196
)
 
9,892

 
 
Long-term prepayments and other
 
3,728,050 Japanese Yen
7,349 Australian Dollars
 
August 2017
 
509

 
(160
)
 
349

Derivatives not designated as hedges
 
 
 
 
 
 
 
 

 
 

 
0

Interest rate derivative
 
Other accrued liabilities
 
$87,400 U.S. dollars
 
November 2015
 

 
(2,267
)
 
(2,267
)
Foreign currency derivatives
 
Prepaid expenses and other
 
3,849,000 Japanese Yen
9,443 Australian Dollars
 
August 2016
 
23

 
(12
)
 
11

Fuel derivative contracts
 
Other accrued liabilities
 
81,832 gallons
 
September 2016
 
3,492

 
(27,165
)
 
(23,673
)
 
(1)
Represents the noncurrent portion of the $52.6 million interest rate derivative with final maturity in April 2023.


14



Derivative position as of December 31, 2014
 
 
Balance Sheet
Location
 
Notional Amount
 
Final
Maturity
Date
 
Gross fair
value of
assets
 
Gross fair
value of
(liabilities)
 
Net
derivative
position
 
 
 
 
(in thousands)
 
 
 
(in thousands)
Derivatives designated as hedges
 
 
 
 
 
 
 
 

 
 

 
 

Interest rate derivative
 
Other accrued liabilities
 
$57,400 U.S. dollars
 
April 2023
 
$

 
$
(26
)
 
$
(26
)
 
 
Other liabilities and deferred credits(1)
 
 
 
 
 

 
(103
)
 
(103
)
Foreign currency derivatives
 
Prepaid expenses and other
 
6,909,050 Japanese Yen
51,380 Australian Dollars
 
December 2015
 
13,921

 

 
13,921

 
 
Long-term prepayments and other
 
3,758,500 Japanese Yen
13,080 Australian Dollars
 
November 2016
 
4,565

 

 
4,565

Derivatives not designated as hedges
 
 
 
 
 
 
 
 

 
 

 
 
Foreign currency derivatives
 
Prepaid expenses and other
 
7,714,291 Japanese Yen
43,546 Australian Dollars
 
December 2015
 
1,191

 

 
1,191

 
 
Long-term prepayments and other
 
2,762,000 Japanese Yen
3,500 Australian Dollars
 
August 2016
 
69

 

 
69

Fuel derivative contracts
 
Other accrued liabilities
 
90,994 gallons
 
December 2015
 
32,637

 
(71,447
)
 
(38,810
)
Negative arbitrage derivative
 
Other accrued liabilities
 
$444,540 U.S. dollars
 
January 2015
 

 
(500
)
 
(500
)

(1) Represents the noncurrent portion of the $57.4 million interest rate derivative with final maturity in April 2023.
 
The following table reflects the impact of cash flow hedges designated for hedge accounting treatment and their location within the unaudited Consolidated Statements of Comprehensive Income. 
 
 
(Gain) loss recognized in AOCI on derivatives (effective portion)
 
(Gain) loss reclassified from AOCI
into income (effective portion)
 
(Gain) loss recognized in
nonoperating (income) expense
(ineffective portion)
 
 
Three months ended September 30,
 
Three months ended September 30,
 
Three months ended September 30,
 
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
 
 
(in thousands)
Foreign currency derivatives
 
$
(1,558
)
 
$
(12,428
)
 
$
(5,003
)
 
$
(1,297
)
 
$

 
$

Interest rate derivatives
 
840

 
(283
)
 
170

 
201

 

 

 
 
(Gain) loss recognized in AOCI on derivatives (effective portion)
 
(Gain) loss reclassified from AOCI
into income (effective portion)
 
(Gain) loss recognized in
nonoperating (income) expense
(ineffective portion)
 
 
Nine months ended September 30,
 
Nine months ended September 30,
 
Nine months ended September 30,
 
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
 
 
(in thousands)
Foreign currency derivatives
 
$
(6,295
)
 
$
(4,720
)
 
$
(13,415
)
 
$
(6,523
)
 
$

 
$

Interest rate derivatives
 
778

 
668

 
536

 
618

 

 


Risk and Collateral
 
The financial derivative instruments expose the Company to possible credit loss in the event the counterparties to the agreements fail to meet their obligations. To manage such credit risks, the Company (1) selects its counterparties based on past experience and credit ratings, (2) limits its exposure to any single counterparty, and (3) periodically monitors the market position and credit rating of each counterparty. Credit risk is deemed to have a minimal impact on the fair value of the

15



derivative instruments as cash collateral would be provided by the counterparties based on the current market exposure of the derivative.

The Company's agreements with its counterparties also requires the posting of cash collateral in the event the aggregate value of the Company's positions exceeds certain exposure thresholds that are based upon certain liquidity metrics of the Company. The aggregate fair value of the Company's derivative instruments that contain credit-risk related contingent features that are in a net liability position as of September 30, 2015 was $26.8 million.

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, 2015 and $0.6 million in collateral posted with counterparties as of December 31, 2014.

The Company is also subject to market risk in the event these financial instruments become less valuable in the market. However, changes in the fair value of the derivative instruments will generally offset the change in the fair value of the hedged item, limiting the Company’s overall exposure.

8.  Debt
 
As of September 30, 2015, the expected maturities of long-term debt for the remainder of 2015 and the next four years, and thereafter, were as follows (in thousands): 
Remaining months in 2015
$
16,186

2016
82,861

2017
82,092

2018
87,425

2019
99,070

Thereafter
449,317

 
$
816,951

 
Convertible Notes

During the three and nine months ended September 30, 2015 a condition for conversion of the Convertible Notes was satisfied, which permits holders of the Convertible Notes to surrender their notes for conversion during the quarter ending December 31, 2015.  Therefore, the principal balance is classified accordingly in the table above.

During the three and nine months ended September 30, 2015, the Company repurchased $1.0 million and $67.8 million, respectively, in principal of its Convertible Notes for an aggregate repurchase price of $3.2 million and $171.6 million, respectively. The cash consideration was allocated to the fair value of the liability component immediately before extinguishment and the remaining consideration was allocated to the equity component and recognized as a reduction of shareholders' equity.
The repurchase of the Convertible Notes resulted in a loss on extinguishment of $0.1 million and $7.3 million for the three and nine months ended September 30, 2015, respectively, which is reflected in nonoperating income (expense) in the unaudited Consolidated Statement of Operations.  
Convertible Note Hedges and Warrants
The convertible note hedges and warrants described in Note 8 of the Company's Form 10-K for the year ended December 31, 2014 were outstanding as of September 30, 2015.  Under the terms of the convertible note hedges, the counterparties will deliver to the Company an amount equal to the excess of the Company's stock price on the settlement date and the exercise price of $7.88 per share multiplied by 10.9 million shares.  The convertible note hedges are currently exercisable and expire in March 2016.

Under the terms of the warrants, if the Company elects to deliver cash in lieu of shares, the Company will deliver to the counterparties an amount equal to the excess of the Company's stock price on the settlement date and the exercise price of

16



$10.00 per share multiplied by 10.9 million shares.  The convertible note hedge transaction and the warrant transactions may settle on different dates. The warrants expire at various dates beginning in June 2016.

9. Employee Benefit Plans
 
The components of net periodic benefit cost for the Company’s defined benefit and other postretirement plans included the following: 
 
 
Three months ended September 30,
 
Nine months ended September 30,
Components of Net Period Benefit Cost
 
2015
 
2014
 
2015
 
2014
 
 
(in thousands)
Service cost
 
$
4,006

 
$
3,162

 
$
12,456

 
$
9,066

Interest cost
 
7,454

 
6,839

 
22,232

 
20,811

Expected return on plan assets
 
(4,702
)
 
(4,842
)
 
(14,134
)
 
(14,532
)
Recognized net actuarial loss
 
3,012

 
49

 
8,486

 
499

Net periodic benefit cost
 
$
9,770

 
$
5,208

 
$
29,040

 
$
15,844

 
The Company contributed $3.2 million and $16.7 million to its defined benefit and other postretirement plans during the three and nine months ended September 30, 2015, respectively, including $7.3 million above the minimum funding requirements. The Company contributed $2.3 million and $8.9 million to its defined benefit and other postretirement plans during the three and nine months ended September 30, 2014, respectively.
 
10. Commitments and Contingent Liabilities
 
Commitments

As of September 30, 2015, the Company had the following capital commitments consisting of firm aircraft and engine orders and purchase rights:
Aircraft Type
 
Firm Orders
 
Purchase Rights
 
Expected Delivery Dates
A330-200 aircraft
 
1

 

 
In 2015
A330-800neo aircraft
 
6

 
6

 
Between 2019 and 2021
A321neo aircraft
 
16

 
9

 
Between 2017 and 2020
Rolls-Royce spare engines:
 
 

 
 

 
 
A330-800neo spare engines
 
2

 

 
Between 2019 and 2020
Pratt & Whitney spare engines:
 
 

 
 

 
 
A321neo spare engines
 
2

 

 
Between 2017 and 2018

The Company has operating commitments with a third-party to provide aircraft maintenance services which require fixed payments as well as variable payments based on flight hours for its Airbus fleet through 2027. The Company also has operating commitments with third-party service providers for reservations, IT, and accounting services through 2025.
 
Committed capital and operating expenditures include escalation and variable amounts based on estimates. The gross committed expenditures and committed financings for those deliveries as of September 30, 2015 are detailed below: 
 
 
Capital
 
Operating
 
Total Committed
Expenditures
 
Less: Committed
Financing for Upcoming
Aircraft Deliveries*
 
Net Committed
Expenditures
 
 
(in thousands)
Remaining months in 2015
 
$
54,051

 
$
17,878

 
$
71,929

 
$
48,138

 
$
23,791

2016
 
78,018

 
59,901

 
137,919

 

 
137,919

2017
 
220,806

 
58,637

 
279,443

 

 
279,443

2018
 
399,953

 
51,942

 
451,895

 

 
451,895

2019
 
488,553

 
47,362

 
535,915

 

 
535,915

Thereafter
 
442,888

 
264,181

 
707,069

 

 
707,069

 
 
$
1,684,269

 
$
499,901

 
$
2,184,170

 
$
48,138

 
$
2,136,032


17



 
*See below for a detailed discussion of the committed financings Hawaiian has received for its upcoming capital commitments for aircraft deliveries.
 
Purchase Assignment and Lease Financing Agreement

Hawaiian has a commitment to assign its purchase of an Airbus A330-200 aircraft at delivery and simultaneously enter into a lease agreement for the aircraft with scheduled delivery in October 2015 with total committed lease financing of $48 million. Both the gross capital commitment for the cost of the aircraft and the committed financing are reflected in the table above. The agreement has an initial lease term of 12 years and fixed monthly rental payments that will be determined upon delivery of the aircraft.

The anticipated future minimum payments for this lease are $2.2 million for the remainder of 2015, $8.4 million in each of the years 2016 through 2019, and $65.4 million thereafter.

Aircraft Lease Commitment

Hawaiian entered into a six-year lease agreement for an Airbus A330-200 aircraft with an expected delivery date in the second quarter of 2016, which is not included in the table above. The Company will determine whether this lease will be classified as a capital or operating lease in the period it takes delivery of the aircraft.

The anticipated future minimum payments for this lease are $5.1 million in 2016, $8.9 million in each of the years 2017 through 2019, and $21.5 million thereafter.

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

General Guarantees and Indemnifications
 
In the normal course of business, the Company enters into numerous aircraft financing and real estate leasing arrangements that have various guarantees included in the contract. It is common in such lease transactions for the lessee to agree to indemnify the lessor and other related third-parties for tort liabilities that arise out of or relate to the lessee’s use of the leased aircraft or occupancy of the leased premises. In some cases, this indemnity extends to related liabilities arising from the negligence of the indemnified parties, but usually excludes any liabilities caused by their gross negligence or willful misconduct. Additionally, the lessee typically indemnifies such parties for any environmental liability that arises out of or relates to its use of the real estate leased premises. The Company believes that it is insured (subject to deductibles) for most tort liabilities and related indemnities described above with respect to the aircraft and real estate that it leases. The Company cannot estimate the potential amount of future payments, if any, under the foregoing indemnities and agreements.
 
Credit Card Holdback
 
Under the Company’s bank-issued credit card processing agreements, certain proceeds from advance ticket sales may be held back to serve as collateral to cover any possible chargebacks or other disputed charges that may occur. These holdbacks, which are included in restricted cash in the Company’s unaudited Consolidated Balance Sheets, totaled $5.0 million at September 30, 2015 and December 31, 2014.
 
In the event of a material adverse change in the business, the holdback could increase to an amount up to 100% of the applicable credit card air traffic liability, which would also cause an increase in the level of restricted cash. If the Company is unable to obtain a waiver of, or otherwise mitigate the increase in the restriction of cash, it could have a material adverse impact on the Company.
 

18



11. Supplemental Cash Flow Information
 
Non-cash investing and financing activities for the nine months ended September 30, 2015 and 2014 were as follows:
 
Nine months ended September 30,
 
2015
 
2014
 
(in thousands)
Investing and Financing Activities Not Affecting Cash:
 
 
 
Property and equipment acquired through a capital lease
$
2,791

 
$


12. Condensed Consolidating Financial Information

The following condensed consolidating financial information is presented in accordance with Regulation S-X paragraph 210.3-10 because, in connection with the issuance by two pass-through trusts formed by Hawaiian (which is also referred to in this Note 12 as Subsidiary Issuer / Guarantor) of pass-through certificates, the Company (which is also referred to in this Note 12 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.

Condensed consolidating financial statements are presented in the following tables:

Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
Three months ended September 30, 2015
 
 
Parent Issuer /
Guarantor
 
Subsidiary
Issuer /
Guarantor
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
(in thousands)
Operating Revenue
 
$

 
$
630,657

 
$
1,162

 
$
(81
)
 
$
631,738

Operating Expenses:
 
 

 
 

 
 

 
 

 
 

Aircraft fuel, including taxes and delivery
 

 
105,483

 

 

 
105,483

Wages and benefits
 

 
125,884

 

 

 
125,884

Aircraft rent
 

 
29,544

 

 

 
29,544

Maintenance materials and repairs
 

 
56,021

 
175

 

 
56,196

Aircraft and passenger servicing
 

 
30,284

 

 

 
30,284

Commissions and other selling
 
1

 
30,314

 
15

 
(25
)
 
30,305

Depreciation and amortization
 

 
25,307

 
754

 

 
26,061

Other rentals and landing fees
 

 
24,728

 

 

 
24,728

Other
 
1,510

 
46,874

 
248

 
(56
)
 
48,576

Total
 
1,511

 
474,439

 
1,192

 
(81
)
 
477,061

Operating Income (Loss)
 
(1,511
)
 
156,218

 
(30
)
 

 
154,677

Nonoperating Income (Expense):
 
 

 
 

 
 

 
 

 
 

Undistributed net income of subsidiaries
 
71,067

 

 

 
(71,067
)
 

Interest expense and amortization of debt discounts and issuance costs
 
(100
)
 
(13,406
)
 

 

 
(13,506
)
Interest income
 
53

 
638

 

 

 
691

Capitalized interest
 

 
698

 

 

 
698

Losses on fuel derivatives
 

 
(25,009
)
 

 

 
(25,009
)
Loss on extinguishment of debt
 
(54
)
 

 

 

 
(54
)
Other, net
 

 
(4,515
)
 

 

 
(4,515
)
Total
 
70,966

 
(41,594
)
 

 
(71,067
)
 
(41,695
)
Income (Loss) Before Income Taxes
 
69,455

 
114,624

 
(30
)
 
(71,067
)
 
112,982

Income tax expense (benefit)
 
(574
)
 
43,527

 

 

 
42,953

Net Income (Loss)
 
$
70,029

 
$
71,097

 
$
(30
)
 
$
(71,067
)
 
$
70,029

Comprehensive Income (Loss)
 
$
69,301

 
$
70,369

 
$
(30
)
 
$
(70,339
)
 
$
69,301


19




Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
Three months ended September 30, 2014
 
 
Parent Issuer /
Guarantor
 
Subsidiary
Issuer /
Guarantor
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
(in thousands)
Operating Revenue
 
$

 
$
638,414

 
$
1,145

 
$
(97
)
 
$
639,462

Operating Expenses:
 
 

 
 

 
 

 
 

 
 

Aircraft fuel, including taxes and delivery
 

 
182,219

 

 

 
182,219

Wages and benefits
 

 
114,469

 

 

 
114,469

Aircraft rent
 

 
26,724

 

 

 
26,724

Maintenance materials and repairs
 

 
51,029

 
264

 

 
51,293

Aircraft and passenger servicing
 

 
31,848

 

 

 
31,848

Commissions and other selling
 

 
32,024

 
11

 
(20
)
 
32,015

Depreciation and amortization
 

 
23,654

 
730

 

 
24,384

Other rentals and landing fees
 
5

 
23,632

 

 

 
23,637

Other
 
1,246

 
45,291

 
244

 
(77
)
 
46,704

Total
 
1,251

 
530,890

 
1,249

 
(97
)
 
533,293

Operating Income (Loss)
 
(1,251
)
 
107,524

 
(104
)
 

 
106,169

Nonoperating Income (Expense):
 
 

 
 

 
 

 
 

 
 

Undistributed net income of subsidiaries
 
37,900

 

 

 
(37,900
)
 

Interest expense and amortization of debt discounts and issuance costs
 
(2,260
)
 
(14,844
)
 

 

 
(17,104
)
Interest income
 
47

 
424

 

 

 
471

Capitalized interest
 

 
1,834

 

 

 
1,834

Losses on fuel derivatives
 

 
(27,892
)
 

 

 
(27,892
)
Other, net
 

 
(5,114
)
 

 

 
(5,114
)
Total
 
35,687

 
(45,592
)
 

 
(37,900
)
 
(47,805
)
Income (Loss) Before Income Taxes
 
34,436

 
61,932

 
(104
)
 
(37,900
)
 
58,364

Income tax expense (benefit)
 
(1,139
)
 
23,928

 

 

 
22,789

Net Income (Loss)
 
$
35,575

 
$
38,004

 
$
(104
)
 
$
(37,900
)
 
$
35,575

Comprehensive Income (Loss)
 
$
42,610

 
$
45,039

 
$
(104
)
 
$
(44,935
)
 
$
42,610



20



Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
Nine months ended September 30, 2015
 
 
Parent Issuer /
Guarantor
 
Subsidiary
Issuer /
Guarantor
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
(in thousands)
Operating Revenue
 
$

 
$
1,740,118

 
$
3,503

 
$
(308
)
 
$
1,743,313

Operating Expenses:
 
 

 
 

 
 

 
 

 
 

Aircraft fuel, including taxes and delivery
 

 
329,329

 

 

 
329,329

Wages and benefits
 

 
369,875

 

 

 
369,875

Aircraft rent
 

 
86,732

 

 

 
86,732

Maintenance materials and repairs
 

 
167,489

 
1,023

 

 
168,512

Aircraft and passenger servicing
 

 
87,948

 

 

 
87,948

Commissions and other selling
 
5

 
91,260

 
46

 
(94
)
 
91,217

Depreciation and amortization
 

 
76,529

 
2,248

 

 
78,777

Other rentals and landing fees
 

 
70,807

 

 

 
70,807

Other
 
4,747

 
137,617

 
709

 
(214
)
 
142,859

Total
 
4,752

 
1,417,586

 
4,026

 
(308
)
 
1,426,056

Operating Income (Loss)
 
(4,752
)
 
322,532

 
(523
)
 

 
317,257

Nonoperating Income (Expense):
 
 

 
 

 
 

 
 

 
 

Undistributed net income of subsidiaries
 
153,389

 

 

 
(153,389
)
 

Interest expense and amortization of debt discounts and issuance costs
 
(1,692
)
 
(41,050
)
 

 

 
(42,742
)
Interest income
 
162

 
1,890

 

 

 
2,052

Capitalized interest
 

 
2,966

 

 

 
2,966

Losses on fuel derivatives
 

 
(28,670
)
 

 

 
(28,670
)
Loss on extinguishment of debt
 
(7,296
)
 

 

 

 
(7,296
)
Other, net
 

 
(9,325
)
 

 

 
(9,325
)
Total
 
144,563

 
(74,189
)
 

 
(153,389
)
 
(83,015
)
Income (Loss) Before Income Taxes
 
139,811

 
248,343

 
(523
)
 
(153,389
)
 
234,242

Income tax expense (benefit)
 
(4,935
)
 
94,431

 

 

 
89,496

Net Income (Loss)
 
$
144,746

 
$
153,912

 
$
(523
)
 
$
(153,389
)
 
$
144,746

Comprehensive Income (Loss)
 
$
145,278

 
$
154,444

 
$
(523
)
 
$
(153,921
)
 
$
145,278



21



Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
Nine months ended September 30, 2014
 
 
Parent Issuer /
Guarantor
 
Subsidiary
Issuer /
Guarantor
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
(in thousands)
Operating Revenue
 
$

 
$
1,737,520

 
$
2,801

 
$
(281
)
 
$
1,740,040

Operating Expenses:
 
 

 
 

 
 

 
 

 
 

Aircraft fuel, including taxes and delivery
 

 
527,497

 

 

 
527,497

Wages and benefits
 

 
334,441

 

 

 
334,441

Aircraft rent
 

 
79,098

 

 

 
79,098

Maintenance materials and repairs
 

 
167,499

 
503

 

 
168,002

Aircraft and passenger servicing
 

 
92,929

 

 

 
92,929

Commissions and other selling
 

 
94,149

 
43

 
(69
)
 
94,123

Depreciation and amortization
 

 
69,496

 
1,464

 

 
70,960

Other rentals and landing fees
 
5

 
65,850

 

 

 
65,855

Other
 
4,015

 
134,729

 
803

 
(212
)
 
139,335

Total
 
4,020

 
1,565,688

 
2,813

 
(281
)
 
1,572,240

Operating Income (Loss)
 
(4,020
)
 
171,832

 
(12
)
 

 
167,800

Nonoperating Income (Expense):
 
 

 
 

 
 

 
 

 
 

Undistributed net income of subsidiaries
 
64,787

 

 

 
(64,787
)
 

Interest expense and amortization of debt discounts and issuance costs
 
(6,650
)
 
(41,461
)
 

 

 
(48,111
)
Interest income
 
126

 
962

 

 

 
1,088

Capitalized interest
 

 
6,584

 

 

 
6,584

Losses on fuel derivatives
 

 
(28,506
)
 

 

 
(28,506
)
Other, net
 

 
(3,804
)
 

 

 
(3,804
)
Total
 
58,263

 
(66,225
)
 

 
(64,787
)
 
(72,749
)
Income (Loss) Before Income Taxes
 
54,243

 
105,607

 
(12
)
 
(64,787
)
 
95,051

Income tax expense (benefit)
 
(3,584
)
 
40,808

 

 

 
37,224

Net Income (Loss)
 
$
57,827

 
$
64,799

 
$
(12
)
 
$
(64,787
)
 
$
57,827

Comprehensive Income (Loss)
 
$
56,435

 
$
63,407

 
$
(12
)
 
$
(63,395
)
 
$
56,435




22



Condensed Consolidating Balance Sheets
September 30, 2015
 
 
Parent Issuer /
Guarantor
 
Subsidiary
Issuer /
Guarantor
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
(in thousands)
ASSETS
 
 

 
 

 
 

 
 

 
 

Current assets:
 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
65,949

 
$
271,376

 
$
7,849

 
$

 
$
345,174

Restricted cash
 

 
5,000

 

 

 
5,000

Short-term investments
 

 
265,437

 

 

 
265,437

Accounts receivable, net
 
63

 
80,487

 
289

 
(157
)
 
80,682

Spare parts and supplies, net
 

 
20,359

 

 

 
20,359

Deferred tax assets, net
 

 
22,102

 

 

 
22,102

Prepaid expenses and other
 
50

 
52,852

 
111

 

 
53,013

Total
 
66,062

 
717,613

 
8,249

 
(157
)
 
791,767

Property and equipment at cost
 

 
1,974,943

 
58,184

 

 
2,033,127

Less accumulated depreciation and amortization
 

 
(410,746
)
 
(4,448
)
 

 
(415,194
)
Property and equipment, net
 

 
1,564,197

 
53,736

 

 
1,617,933

Long-term prepayments and other
 
11

 
90,097

 

 

 
90,108

Deferred tax assets, net
 
25,490

 

 

 
(25,490
)
 

Goodwill and other intangible assets, net
 

 
125,983

 

 

 
125,983

Intercompany receivable
 

 
242,726

 

 
(242,726
)
 

Investment in consolidated subsidiaries
 
533,839

 

 

 
(533,839
)
 

TOTAL ASSETS
 
$
625,402

 
$
2,740,616

 
$
61,985

 
$
(802,212
)
 
$
2,625,791

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

 
 

 
 

 
 

Current liabilities:
 
 

 
 

 
 

 
 

 
 

Accounts payable
 
$
557

 
$
101,024

 
$
439

 
$
(157
)
 
$
101,863

Air traffic liability
 

 
479,398

 
2,432

 

 
481,830

Other accrued liabilities
 
343

 
139,214

 
270

 

 
139,827

Current maturities of long-term debt, less discount, and capital lease obligations
 
3,234

 
92,571

 

 

 
95,805

Total
 
4,134

 
812,207

 
3,141

 
(157
)
 
819,325

Long-term debt and capital lease obligations
 

 
818,608

 

 

 
818,608

Intercompany payable
 
242,726

 

 

 
(242,726
)
 

Other liabilities and deferred credits:
 
 

 
 

 
 

 
 

 
0

Accumulated pension and other postretirement benefit obligations
 

 
409,047

 

 

 
409,047

Other liabilities and deferred credits
 
1,392

 
82,143

 
750

 

 
84,285

Deferred tax liabilities, net
 

 
142,866

 

 
(25,490
)
 
117,376

Total
 
1,392

 
634,056

 
750

 
(25,490
)
 
610,708

Shareholders’ equity
 
377,150

 
475,745

 
58,094

 
(533,839
)
 
377,150

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
625,402

 
$
2,740,616

 
$
61,985

 
$
(802,212
)
 
$
2,625,791





23



Condensed Consolidating Balance Sheets
December 31, 2014
 
 
Parent Issuer /
Guarantor
 
Subsidiary
Issuer /
Guarantor
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
(in thousands)
ASSETS
 
 
 
 

 
 

 
 

 
 

Current assets:
 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
79,532

 
$
179,676

 
$
4,879

 
$

 
$
264,087

Restricted cash
 

 
6,566

 

 

 
6,566

Short-term investments
 

 
260,121

 

 

 
260,121

Accounts receivable, net
 
63

 
80,289

 
531

 
(146
)
 
80,737

Spare parts and supplies, net
 

 
18,011

 

 

 
18,011

Deferred tax assets, net
 

 
21,943

 

 

 
21,943

Prepaid expenses and other
 
12

 
53,281

 
89

 

 
53,382

Total
 
79,607

 
619,887

 
5,499

 
(146
)
 
704,847

Property and equipment at cost
 

 
2,006,274

 
34,726

 

 
2,041,000

Less accumulated depreciation and amortization
 

 
(365,279
)
 
(2,228
)
 

 
(367,507
)
Property and equipment, net
 

 
1,640,995

 
32,498

 

 
1,673,493

Long-term prepayments and other
 
537

 
95,688

 

 

 
96,225

Deferred tax assets, net
 
20,556

 

 

 
(20,556
)
 

Goodwill and other intangible assets, net
 

 
127,963

 

 

 
127,963

Intercompany receivable
 

 
15,081

 

 
(15,081
)
 

Investment in consolidated subsidiaries
 
351,391

 

 

 
(351,391
)
 

TOTAL ASSETS
 
$
452,091

 
$
2,499,614

 
$
37,997

 
$
(387,174
)
 
$
2,602,528

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

 
 

 
 

 
 

Current liabilities:
 
 

 
 

 
 

 
 

 
 

Accounts payable
 
$
514

 
$
96,196

 
$
696

 
$
(146
)
 
$
97,260

Air traffic liability
 

 
421,547

 
2,789

 

 
424,336

Other accrued liabilities
 
1,686

 
140,088

 
145

 

 
141,919

Current maturities of long-term debt, less discount, and capital lease obligations
 
66,530

 
89,819

 

 

 
156,349

Total
 
68,730

 
747,650

 
3,630

 
(146
)
 
819,864

Long-term debt and capital lease obligations
 

 
893,288

 

 

 
893,288

Intercompany payable
 
15,081

 

 

 
(15,081
)
 

Other liabilities and deferred credits:
 
 

 
 

 
 

 
 

 
0

Accumulated pension and other postretirement benefit obligations
 

 
407,864

 

 

 
407,864

Other liabilities and deferred credits
 
1,047

 
70,853

 
750

 

 
72,650

Deferred tax liabilities, net
 

 
62,185

 

 
(20,556
)
 
41,629

Total
 
1,047

 
540,902

 
750

 
(20,556
)
 
522,143

Shareholders’ equity
 
367,233

 
317,774

 
33,617

 
(351,391
)
 
367,233

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
452,091

 
$
2,499,614

 
$
37,997

 
$
(387,174
)
 
$
2,602,528









24



Condensed Consolidating Statements of Cash Flows
Nine months ended September 30, 2015
 
 
Parent Issuer /
Guarantor
 
Subsidiary
Issuer /
Guarantor
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
(in thousands)
Net Cash Provided By (Used In) Operating Activities
 
$
(3,461
)
 
$
391,577

 
$
1,356

 
$

 
$
389,472

Cash Flows From Investing Activities:
 
 

 
 

 
 

 
 

 
 

Net payments to affiliates
 
(25,000
)
 
(223,411
)
 

 
248,411

 

Additions to property and equipment, including pre-delivery deposits
 

 
(81,888
)
 
(23,441
)
 

 
(105,329
)
Proceeds from purchase assignment and leaseback transaction
 

 
86,033

 

 

 
86,033

Proceeds from disposition of property and equipment
 

 
3,551

 
55

 

 
3,606

Purchases of investments
 

 
(178,177
)
 

 

 
(178,177
)
Sales of investments
 

 
170,904

 

 

 
170,904

Net cash used in investing activities
 
(25,000
)
 
(222,988
)
 
(23,386
)
 
248,411

 
(22,963
)
Cash Flows From Financing Activities:
 
 

 
 

 
 

 
 

 
 

Repayments of long-term debt and capital lease obligations
 

 
(74,719
)
 

 

 
(74,719
)
Repurchases of convertible notes
 
(171,598
)
 

 

 

 
(171,598
)
Net payments from affiliates
 
223,411

 

 
25,000

 
(248,411
)
 

Repurchases of common stock
 
(37,622
)
 

 

 

 
(37,622
)
Other
 
687

 
(2,170
)
 

 

 
(1,483
)
Net cash provided by (used in) financing activities
 
14,878

 
(76,889
)
 
25,000

 
(248,411
)
 
(285,422
)
Net increase (decrease) in cash and cash equivalents
 
(13,583
)
 
91,700

 
2,970

 

 
81,087

Cash and cash equivalents - Beginning of Period
 
79,532

 
179,676

 
4,879

 

 
264,087

Cash and cash equivalents - End of Period
 
$
65,949

 
$
271,376

 
$
7,849

 
$

 
$
345,174




25



Condensed Consolidating Statements of Cash Flows
Nine months ended September 30, 2014
 
 
Parent Issuer /
Guarantor
 
Subsidiary
Issuer /
Guarantor
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
(in thousands)
Net Cash Provided By (Used In) Operating Activities
 
$
(6,859
)
 
$
257,694

 
$
1,328

 
$

 
$
252,163

Cash Flows From Investing Activities:
 
 

 
 

 
 

 
 

 
 

Net payments to subsidiaries
 
(34,443
)
 

 

 
34,443

 

Additions to property and equipment, including pre-delivery deposits
 

 
(358,538
)
 
(2,752
)
 

 
(361,290
)
Proceeds from disposition of property and equipment
 

 
978

 

 

 
978

Purchases of investments
 

 
(346,010
)
 

 

 
(346,010
)
Sales of investments
 

 
92,103

 

 

 
92,103

Net cash used in investing activities
 
(34,443
)
 
(611,467
)
 
(2,752
)
 
34,443

 
(614,219
)
Cash Flows From Financing Activities:
 
 

 
 

 
 

 
 

 
 

Long-term borrowings
 

 
293,430

 

 

 
293,430

Repayments of long-term debt and capital lease obligations
 

 
(46,392
)
 

 

 
(46,392
)
Net payments from parent company
 

 
34,443

 

 
(34,443
)
 

Other
 
5,487

 
14,402

 

 

 
19,889

Net cash provided by financing activities
 
5,487

 
295,883

 

 
(34,443
)
 
266,927

Net decrease in cash and cash equivalents
 
(35,815
)
 
(57,890
)
 
(1,424
)
 

 
(95,129
)
Cash and cash equivalents - Beginning of Period
 
84,797

 
333,663

 
4,924

 

 
423,384

Cash and cash equivalents - End of Period
 
$
48,982

 
$
275,773

 
$
3,500

 
$

 
$
328,255




26



Certain Restrictions on Subsidiary Distributions, Dividends and Repurchases

The Company and Hawaiian are party to a Credit and Guaranty Agreement (Credit Agreement), dated as of November 7, 2014,
that provides for a Revolving Credit Facility. See further discussion of the Revolving Credit Facility at Note 8 to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2014. Pursuant to the terms of the Credit Agreement, neither Hawaiian nor any other subsidiary of the Company will directly or indirectly declare or pay any dividend, or purchase, redeem or otherwise acquire or retire for value any equity interests of the Company unless certain conditions are met.

Long-Term Debt
 
The long-term debt included in the Parent Issuer / Guarantor column represents the Convertible Notes described in Note 8 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.
 
Income Taxes
 
The income tax expense (benefit) is presented as if each entity that is part of the consolidated group files a separate return.

27



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: our expectations regarding our financial performance; our expectations regarding available seat miles; our expectations regarding operating revenue per available seat mile; our expectations regarding operating cost per available seat mile; our expectations regarding our fleet; any expectations of operating expenses, deferred revenue, interest rates, income taxes, deferred tax assets, valuation allowance or other financial items or financial performance; statements regarding areas of strategic focus, statements regarding factors that may affect our ability to fund our working capital, capital expenditures or other general purpose needs; estimates of fair value measurements; statements related to aircraft maintenance and repair costs and deposits and timing of maintenance activities; statements related to cash flow from operations and seasonality; estimates of required funding of and contributions to our defined benefit pension and disability plan; estimates of annual fuel expenses and measure of the effects of fuel prices on our business; statements regarding the availability and cost of fuel; statements regarding our total capacity and yields on routes; statements related to our hedging program; statements concerning the impact of, and changes to, accounting principles, policies and estimates; statements regarding credit card holdback; statements regarding the availability of financing; statements regarding our capital expenditures; statements regarding potential violations under the Company’s debt or lease obligations; statements regarding our ability to comply with covenants under our financing arrangements; statements related to risk management, credit risks and air traffic liability; statements related to future U.S. and global economic conditions or performance; statements related to changes in our fleet plan and related cash outlays; statements related to expected delivery of new aircraft; statements related to potential route expansion; statements related to the increase in frequency on existing routes; statements related to expected maturation of existing networks; statements related to the effects of any litigation on our operations or business; and statements as to other matters that do not relate strictly to historical facts or statements of assumptions underlying any of the foregoing.  Words such as “expects,” “anticipates,” “projects,” “intends,” “plans,” “believes,” “estimates,” "could", "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.
 
The risks, uncertainties and assumptions referred to above that could cause our results to differ materially from the results expressed or implied by such forward-looking statements also include the risks, uncertainties and assumptions discussed from time to time in our public filings and public announcements, including, but not limited to, our risk factors set out in the “Risk Factors” sections of our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 .  All forward-looking statements included in this Report are based on information available to us as of the date hereof.  We undertake no obligation to publicly update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this quarterly report.  The following discussion and analysis should be read in conjunction with our unaudited Consolidated Financial Statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q.
 
OVERVIEW

Hawaiian Holdings, Inc. (the “Company,” “Holdings,” “we,” “us” and “our”) is a holding company incorporated in the State of Delaware. The Company’s primary asset is its sole ownership of all issued and outstanding shares of common stock of Hawaiian Airlines, Inc. (“Hawaiian”). Hawaiian was originally incorporated in January 1929 under the laws of the Territory of Hawai‘i and became the Company’s indirect 100% owned subsidiary pursuant to a corporate restructuring that was consummated in August 2002. Hawaiian became a Delaware corporation and the Company’s direct wholly-owned subsidiary concurrent with its reorganization in June 2005.

Our Business

We are engaged in the scheduled air transportation of passengers and cargo amongst the Hawaiian Islands (the "Neighbor Island" routes), between the Hawaiian Islands and certain cities in the U.S. mainland (the "North America" routes), and between the Hawaiian Islands and the South Pacific, Australia and Asia (the "International" routes), collectively referred to as our "Scheduled Operations". In addition, we operate various charter flights. We are the largest airline headquartered in the State of 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 June 2015, the latest available data.

28




As of September 30, 2015, Hawaiian had 5,475 active employees.

General information about us is available at http://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 SEC.

Financial Highlights

GAAP net income in the third quarter of $70.0 million or $1.15 per diluted share.

Adjusted net income in the third quarter of $78.4 million or $1.29 per diluted share.

Unrestricted cash and cash equivalents and short-term investments of $611 million.

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

Outlook

We expect our financial performance to improve through the fourth quarter as a result of favorable fuel prices. We expect available seat miles during the quarter ending December 31, 2015 to increase by 2% to 4% from the same prior year period, while operating revenue per available seat mile is expected to decrease by 2.5% to 5.5% from the same prior year period. We expect operating cost per available seat mile, excluding fuel, for the quarter ending December 31, 2015 to increase by 3% to 6% from the same prior year period, due to increased pension costs, commissions and other selling expenses, and aircraft rent.

Fleet Summary

The table below summarizes our total fleet as of September 30, 2014 and 2015, and expected fleet as of September 30, 2016 (based on existing agreements):
 
 
September 30, 2014
 
September 30, 2015
 
September 30, 2016
Aircraft Type
 
Leased (3)
 
Owned
 
Total
 
Leased (3)
 
Owned
 
Total
 
Leased (3)
 
Owned
 
Total
A330-200 (1)
 
7

 
11

 
18

 
9

 
12

 
21

 
11

 
12

 
23

767-300 (2)
 
6

 
5

 
11

 
5

 
4

 
9

 
4

 
4

 
8

717-200
 
3

 
15

 
18

 
3

 
15

 
18

 
3

 
15

 
18

ATR turboprop (4)
 

 
3

 
3

 

 
6

 
6

 

 
6

 
6

Total
 
16

 
34

 
50

 
17

 
37

 
54

 
18

 
37

 
55

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

(1)
The increase in the number of leased Airbus A330-200 aircraft from September 30, 2015 to 2016 is due to the planned delivery of an aircraft to be financed through a purchase assignment and lease transaction, and another Airbus A330-200 aircraft through a six-year lease agreement.

(2)
The decrease in the number of leased Boeing 767-300 aircraft from September 30, 2015 to 2016 is due to the planned return of an aircraft at the end of its lease term.

(3)
Leased aircraft include both aircraft under capital and operating leases.

(4)
The ATR turboprop aircraft are owned by Airline Contract Maintenance & Equipment, Inc., a wholly-owned subsidiary of the Company.


29



Results of Operations
 
For the three months ended September 30, 2015, we generated net income of $70.0 million, or $1.15 per diluted share, compared to net income of $35.6 million, or $0.56 per diluted share, for the same period in 2014. For the nine months ended September 30, 2015, we generated net income of $144.7 million, or $2.32 per diluted share, compared to net income of $57.8 million, or $0.94 per diluted share, for the same period in 2014.

Selected Consolidated Statistical Data (unaudited)
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(in thousands, except as otherwise indicated)
Scheduled Operations (a) :
 
 

 
 

 
 

 
 

Revenue passengers flown
 
2,830

 
2,707

 
8,010

 
7,638

Revenue passenger miles (RPM)
 
3,882,903

 
3,780,301

 
10,816,530

 
10,402,081

Available seat miles (ASM)
 
4,660,211

 
4,499,108

 
13,326,602

 
12,795,342

Passenger revenue per RPM (Yield)
 

14.34
¢
 

15.00
¢
 

14.10
¢
 

14.82
¢
Passenger load factor (RPM/ASM)
 
83.3
%
 
84.0
%
 
81.2
%
 
81.3
%
Passenger revenue per ASM (PRASM)
 

11.95
¢
 

12.60
¢
 

11.45
¢
 

12.05
¢
Total Operations (a) :
 
 

 
 

 
 

 
 

Revenue passengers flown
 
2,833

 
2,709

 
8,014

 
7,641

RPM
 
3,884,851

 
3,783,584

 
10,822,970

 
10,410,466

ASM
 
4,663,198

 
4,502,856

 
13,334,528

 
12,804,599

Operating revenue per ASM (RASM)
 

13.55
¢
 

14.20
¢
 

13.07
¢
 

13.59
¢
Operating cost per ASM (CASM)
 

10.23
¢
 

11.84
¢
 

10.69
¢
 

12.28
¢
CASM excluding aircraft fuel (b)
 

7.97
¢
 

7.80
¢
 

8.22
¢
 

8.16
¢
Aircraft fuel expense per ASM (c)
 

2.26
¢
 

4.04
¢
 

2.47
¢
 

4.12
¢
Revenue block hours operated
 
45,404

 
43,688

 
131,057

 
124,012

Gallons of jet fuel consumed
 
61,179

 
60,232

 
176,175

 
172,333

Average cost per gallon of jet fuel (actual) (c)
 
$
1.72

 
$
3.03

 
$
1.87

 
$
3.06

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

Operating Revenue
 
During the three months ended September 30, 2015, operating revenue decreased $7.7 million, or 1.2%, as compared to the prior year period, driven by decreased passenger revenue. During the nine months ended September 30, 2015, operating revenue increased by $3.3 million, or 0.2%, as compared to the prior year period, driven primarily by an increase in other operating revenue.

Passenger revenue

For the three and nine months ended September 30, 2015, passenger revenue decreased $10.1 million, or 1.8%, and $16.3 million, or 1.1%, respectively, as compared to the prior year periods. Details of these changes are described in the table below: 

30




 
 
Three months ended September 30, 2015 as compared to three months ended September 30, 2014
 
Nine months ended September 30, 2015 as compared to nine months ended September 30, 2014
 
 
Change in scheduled passenger revenue
 
Change in Yield
 
Change in RPM
 
Change in ASM
 
Change in scheduled passenger revenue
 
Change in Yield
 
Change in RPM
 
Change in ASM
 
 
(in millions)
 
 
 
 
 
 
 
(in millions)
 
 
 
 
 
 
North America
 
$
8.3

 
(1.4
)%
 
4.3
 %
 
4.6
%
 
$
36.3

 
(3.9
)%
 
9.1
 %
 
11.4
 %
Neighbor Island
 
4.5

 
(0.2
)
 
3.6

 
5.2

 
12.5

 
1.1

 
2.2

 
5.8

International
 
(22.9
)
 
(14.8
)
 
(1.0
)
 
1.2

 
(65.1
)
 
(10.9
)
 
(5.7
)
 
(8.3
)
Total scheduled
 
$
(10.1
)
 
(4.4
)%
 
2.7
 %
 
3.6
%
 
$
(16.3
)
 
(4.9
)%
 
4.0
 %
 
4.2
 %

North America

For the three and nine months ended September 30, 2015, North America revenue increased by $8.3 million and $36.3 million, respectively, as compared to the prior year periods. The increase was primarily due to capacity increases on our North America routes, much of which was added in the second half of 2014. This was slightly offset by a decrease in the yield generated from these routes, which was a result of the increase in industry capacity compared to the prior period.

Neighbor Island

For the three months ended September 30, 2015, Neighbor Island revenue increased by $4.5 million as compared to the prior year period, due to the introduction of a new cabin configuration to our fleet of 717-200 aircraft and the launch of our turboprop operations in March 2014.

For the nine months ended September 30, 2015, Neighbor Island revenue increased by $12.5 million as compared to the prior year period, due to the introduction of a new cabin configuration to our fleet of 717-200 aircraft, the launch of our turboprop operations in March 2014, and an increased level of 717-200 flight activity particularly in the first and second quarter of 2015.

International

For the three months ended September 30, 2015, International revenue decreased by $22.9 million as compared to the prior year period. The continued strengthening of the U.S. dollar combined with lower fuel surcharges resulted in decreased average fares for our International routes compared to the prior periods.

For the nine months ended September 30, 2015, International revenue decreased by $65.1 million as compared to the prior year period, due to decreased capacity and yield. Decrease in capacity was driven by changes we made to our network in 2014, including the suspension of our route from Honolulu to Fukuoka, Japan (June 2014). Also, the continued strengthening of the U.S. dollar combined with lower fuel surcharges resulted in decreased average fares for our International routes compared to the prior periods.

Other operating revenue

For the three months ended September 30, 2015, other operating revenue increased by $2.3 million, or 3.2%, as compared to the prior year period. Our co-branded credit card agreement and an increase in ancillary revenue increased other operating revenue by $1.1 million and $1.0 million, respectively. The increase in ancillary revenue was primarily driven by a 5% increase in the number of passengers flown on our North America routes.

For the nine months ended September 30, 2015, other operating revenue increased by $19.6 million, or 9.9%, as compared to the prior year period. Our co-branded credit card agreement increased other operating revenue by $9.6 million for the nine months ended September 30, 2015. Additionally, a 10% increase in the number of passengers flown on our North America routes resulted in a $4.4 million increase in ancillary revenue for the nine months ended September 30, 2015.


31



Operating Expense
 
Operating expenses were $477.1 million and $1,426.1 million for the three and nine months ended September 30, 2015, respectively, and $533.3 million and $1,572.2 million for the three and nine months ended September 30, 2014, respectively. Increases (decreases) in operating expenses for the three and nine months ended September 30, 2015 as compared to the prior year periods are detailed below:
 
 
Increase / (decrease) for the three months ended September 30, 2015 compared to the three months ended September 30, 2014
 
Increase / (decrease) for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014
 
 
$
 
%
 
$
 
%
Operating expenses
 
(in thousands)
 
 
 
(in thousands)
 
 
Aircraft fuel, including taxes and delivery
 
$
(76,736
)
 
(42.1
)%
 
$
(198,168
)
 
(37.6
)%
Wages and benefits
 
11,415

 
10.0

 
35,434

 
10.6

Aircraft rent
 
2,820

 
10.6

 
7,634

 
9.7

Maintenance, materials and repairs
 
4,903

 
9.6

 
510

 
0.3

Aircraft and passenger servicing
 
(1,564
)
 
(4.9
)
 
(4,981
)
 
(5.4
)
Commissions and other selling
 
(1,710
)
 
(5.3
)
 
(2,906
)
 
(3.1
)
Depreciation and amortization
 
1,677

 
6.9

 
7,817

 
11.0

Other rentals and landing fees
 
1,091

 
4.6

 
4,952

 
7.5

Other
 
1,872

 
4.0

 
3,524

 
2.5

Total
 
$
(56,232
)
 
(10.5
)%
 
$
(146,184
)
 
(9.3
)%
 
Aircraft fuel
 
Aircraft fuel expense decreased during the three and nine months ended September 30, 2015, as compared to the prior year periods, primarily due to the decrease in the average fuel price per gallon partially offset by an increase in consumption as illustrated in the following table: 
 
 
Three months ended September 30,
 
 
 
Nine months ended September 30,
 
 
 
 
2015
 
2014
 
% Change
 
2015
 
2014
 
% Change
 
 
(in thousands, except per-gallon amounts)
 
 
 
(in thousands, except per-gallon amounts)
 
 
Aircraft fuel expense, including taxes and delivery
 
$
105,483

 
$
182,219

 
(42.1
)%
 
$
329,329

 
$
527,497

 
(37.6
)%
Fuel gallons consumed
 
61,179

 
60,232

 
1.6
 %
 
176,175

 
172,333

 
2.2
 %
Average fuel price per gallon, including taxes and delivery
 
$
1.72

 
$
3.03

 
(43.2
)%
 
$
1.87

 
$
3.06

 
(38.9
)%
 
We believe economic fuel expense is the best measure of the effect of fuel prices on our business as it most closely approximates the net cash outflow associated with the purchase of fuel for our operations in a period and is consistent with how management manages our business and assesses our operating performance. We define economic fuel expense as raw fuel expense plus (gains)/losses realized through actual cash payments to/(receipts from) hedge counterparties for fuel hedge derivatives settled in the period inclusive of costs related to hedging premiums. Economic fuel expense is calculated as follows: 
 
 
Three months ended September 30,
 
 
 
 Nine months ended September 30,
 
 
 
 
2015
 
2014
 
% Change
 
2015
 
2014
 
% Change
 
 
(in thousands, except per-gallon amounts)
 
 
 
(in thousands, except per-gallon amounts)
 
 
Aircraft fuel expense, including taxes and delivery
 
$
105,483

 
$
182,219

 
(42.1
)%
 
$
329,329

 
$
527,497

 
(37.6
)%
Realized losses on settlement of fuel derivative contracts
 
13,777

 
4,632

 
197.4
 %
 
44,921

 
6,530

 
587.9
 %
Economic fuel expense
 
$
119,260

 
$
186,851

 
(36.2
)%
 
$
374,250

 
$
534,027

 
(29.9
)%
Fuel gallons consumed
 
61,179

 
60,232

 
1.6
 %
 
176,175

 
172,333

 
2.2
 %
Economic fuel costs per gallon
 
$
1.95

 
$
3.10

 
(37.1
)%
 
$
2.12

 
$
3.10

 
(31.6
)%

32



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

Wages and benefits

Wages and benefits expense increased by $11.4 million, or 10.0%, and $35.4 million, or 10.6%, for the three and nine months ended September 30, 2015, respectively, as compared to the prior year periods, due to increased pension and postretirement benefit expenses and increased profit-sharing expense resulting from our improved financial performance as compared to the prior year periods.

Aircraft rent

Aircraft rent expense increased by $2.8 million, or 10.6%, and $7.6 million, or 9.7%, for the three and nine months ended September 30, 2015, respectively, as compared to the prior year periods, primarily due to the addition of two aircraft under operating leases (one A330 aircraft each in February 2015 and May 2015), offset by the return of one Boeing 767-300 aircraft in May 2015.

Maintenance, materials and repairs

Maintenance, materials and repairs expense increased by $4.9 million, or 9.6%, for the three months ended September 30, 2015, due to an increase in the number and cost of heavy checks for the Boeing 717-200 aircraft, and an increase in the number and utilization of Airbus A330-200 aircraft in our fleet, as compared to the prior year period.

Maintenance, materials and repairs expense increased by $0.5 million, or 0.3%, for the nine months ended September 30, 2015, due to the increase in the number of Airbus A330-200 aircraft in our fleet. This increase was almost entirely offset by the decrease in the number of Boeing 767-300 aircraft in our fleet as compared to the prior year period.

Aircraft and passenger servicing

Aircraft and passenger servicing expense decreased by $1.6 million, or 4.9%, and $5.0 million, or 5.4%, for the three and nine months ended September 30, 2015, as compared to the prior year periods. These decreases were primarily due to the repeal of the Aviation Security Infrastructure Fee, which took effect in October 2014.

Depreciation and amortization

Depreciation and amortization expense increased by $1.7 million, or 6.9%, and $7.8 million, or 11.0% for the three and nine months ended September 30, 2015, respectively, as compared to the prior year periods, primarily due to the increase in the number of owned aircraft (A330-200 aircraft financed under our 2013 EETC agreement) in our fleet.

Nonoperating Expense

Net nonoperating expense decreased by $6.1 million, or 12.8%, for the three months ended September 30, 2015, as compared to the prior year period, due to $2.9 million reduction in losses on our fuel derivatives. Also, our reduced debt levels resulted in a $3.6 million decrease in our interest expense.

Net nonoperating expense increased by $10.3 million, or 14.1%, for the nine months ended September 30, 2015, as compared to the prior year period, due to losses of $7.3 million incurred in connection with the convertible note repurchases made during the period and foreign currency losses.

Income Taxes

We had effective tax rates of 38.0% and 39.0% for the three months ended September 30, 2015 and 2014, respectively, and 38.2% and 39.2% for the nine months ended September 30, 2015 and 2014, respectively. We consider a variety of factors in determining the effective tax rate, including our forecasted full-year pretax results, the U.S. federal statutory rate, expected nondeductible expenses and estimated state taxes.


33



Liquidity and Capital Resources

Our liquidity is dependent on the cash we generate from operating activities and our debt financing arrangements. As of September 30, 2015, we had $345.2 million in cash and cash equivalents and $265.4 million in short-term investments, an increase of $86.4 million from December 31, 2014.

We have been able to generate sufficient funds from our operations to meet our working capital requirements and typically finance our aircraft through secured debt and lease financings. At September 30, 2015, Hawaiian had approximately $914.4 million of debt and capital lease obligations, including approximately $95.8 million classified as a current liability in the unaudited Consolidated Balance Sheets.

Hawaiian has a secured revolving credit facility in an amount of up to $175.0 million. As of September 30, 2015, we had no outstanding borrowings under the revolving credit facility.

Cash Flows

Net cash provided by operating activities was $389.5 million and $252.2 million for the nine months ended September 30, 2015 and 2014, respectively. The increase was primarily due to our improved financial performance from the prior year period.

Net cash provided by investing activities was $23.0 million for the nine months ended September 30, 2015 due to the refund of pre-delivery deposits we received in connection with the purchase assignment and leaseback of two Airbus A330-200 aircraft that were delivered in February and May 2015, offset by pre-delivery deposits we made for future aircraft deliveries.

Net cash used in financing activities was $285.4 million for the nine months ended September 30, 2015 primarily due to the repurchase of convertible notes, repayment of long-term debt and repurchase of common stock.

Capital Commitments

As of September 30, 2015, we had the following capital commitments consisting of firm aircraft and engine orders and purchase rights: 
Aircraft Type
 
Firm Orders
 
Purchase Rights
 
Expected Delivery Dates
A330-200 aircraft
 
1

 

 
In 2015
A330-800neo aircraft
 
6

 
6

 
Between 2019 and 2021
A321neo aircraft
 
16

 
9

 
Between 2017 and 2020
Rolls-Royce spare engines:
 
 

 
 

 
 
A330-800neo spare engines
 
2

 

 
Between 2019 and 2020
Pratt & Whitney spare engines:
 
 

 
 

 
 
A321neo spare engines
 
2

 

 
Between 2017 and 2018
 
Committed expenditures for these aircraft, engines and related flight equipment approximates $54 million for the remainder of 2015, $78 million in 2016, $221 million in 2017, $400 million in 2018, $489 million in 2019 and $443 million thereafter.

In order to complete the purchase of these aircraft and fund related costs, we may need to secure acceptable 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

In April 2015, our Board of Directors approved a stock repurchase program under which we may purchase up to $100 million of our outstanding common stock over a two-year period ending on April 24, 2017 through the open market, established plans or privately negotiated transactions in accordance with applicable securities laws, rules and regulations. The stock repurchase program is subject to modification or termination at any time. We spent $20.0 million and $37.7 million to repurchase approximately 0.9 million and 1.6 million shares of our common stock in open market transactions during the three and nine months ended September 30, 2015. As of September 30, 2015, the Company has $62.3 million remaining to spend under the

34



stock repurchase program. See Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds” of this report for additional information on the stock repurchase program.

Covenants under our Financing Arrangements

Under our bank-issued credit card processing agreements, certain proceeds from advance ticket sales may be held back to serve as collateral to cover any possible chargebacks or other disputed charges that may occur. These holdbacks, which are included in restricted cash in our unaudited Consolidated Balance Sheets set forth in the unaudited Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q, totaled $5.0 million as of September 30, 2015 and December 31, 2014.

In the event of a material adverse change in the business, the holdback could increase to an amount up to 100% of the applicable credit card air traffic liability, which would also result in an increase in the required level of restricted cash. If we are unable to obtain a waiver of, or otherwise mitigate the increase in the restriction of cash, it could have a material adverse impact on our operations.

Pension and Postemployment Benefit Plan Funding

We contributed $3.2 million and $16.7 million to our defined benefit and other postretirement plans during the three and nine months ended September 30, 2015, including $7.3 million above the minimum funding requirements. Future funding requirements for our defined benefit plans are dependent upon many factors such as interest rates, funded status, applicable regulatory requirements and the level and timing of asset returns.

Contractual Obligations
 
Our estimated contractual obligations as of September 30, 2015 are summarized in the following table: 
Contractual Obligations
 
Total
 
Remaining
months in
2015
 
2016 - 2017
 
2018 - 2019
 
2020 and
thereafter
 
 
(in thousands)
Debt and capital lease obligations (1) (2)
 
$
1,146,577

 
$
26,278

 
$
271,565

 
$
272,466

 
$
576,268

Operating leases—aircraft and related equipment (3) 
 
718,527

 
27,575

 
205,069

 
195,126

 
290,757

Operating leases—non-aircraft
 
47,387

 
1,382

 
10,206

 
9,088

 
26,711

Purchase commitments - Capital (4) 
 
1,684,269

 
54,051

 
298,824

 
888,506

 
442,888

Purchase commitments - Operating (5) 
 
499,901

 
17,878

 
118,538

 
99,304

 
264,181

Projected employee benefit contributions (6) 
 
26,544

 

 
26,544

 

 

Total contractual obligations
 
$
4,123,205

 
$
127,164

 
$
930,746

 
$
1,464,490

 
$
1,600,805


(1)
Amounts represent contractual amounts due, including interest. Interest on variable-rate debt was estimated using rates in effect as of September 30, 2015. Amounts reflect capital lease obligations for one Airbus A330-200 aircraft, two Boeing 717 aircraft, one A330 flight simulator and aircraft related equipment.

(2)
During the period ended September 30, 2015 a condition for conversion of the Convertible Notes was satisfied, which permits holders of the Convertible Notes to surrender their notes for conversion during the quarter ending December 31, 2015. Therefore, the principal balance is classified accordingly in the above table. However, the 5% interest-only, semiannual payments are excluded from the table.

(3)
Amounts reflect leases for eight Airbus A330-200 aircraft, five Boeing 767 aircraft, one Boeing 717 aircraft, and three turbo-prop aircraft.

(4)
Amounts include our firm commitments for aircraft and aircraft related equipment. See Note 10 to the unaudited consolidated financial statements for further discussion of the purchase assignment and leaseback transaction for our remaining A330-200 aircraft delivery in 2015.

(5)
Amounts include commitments for services provided by third-parties for aircraft maintenance for our Airbus fleet, accounting, IT and reservations. Total contractual obligations do not include long-term contracts where the commitment is variable in nature (with no minimum guarantee), such as aircraft maintenance deposits due under

35



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)
Amount includes our estimated contributions to our pension plans (based on actuarially determined estimates) and our pilots’ disability plan. Amounts are subject to change based on numerous factors, including interest rate levels, the amount and timing of asset returns and the impact of future legislation. We are currently unable to estimate the projected contributions beyond 2017.

Non-GAAP Financial Measures

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

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

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

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

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

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

Changes in fair value of derivative contracts, net of tax, are based on market prices for open contracts as of the end of the reporting period. This line item includes the unrealized amounts of fuel and interest rate derivatives (not designated as hedges) that will settle in future periods and the reversal of prior period unrealized amounts. Excluding the impact of these derivative adjustments allows investors to better analyze our operational performance and compare our results to other airlines in the periods presented below.
Loss on extinguishment of debt, net of tax, is excluded to allow investors to better analyze our core operational performance and more readily compare our results to other airlines in the periods presented below.
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
Net Income
 
Diluted Net Income Per Share
 
Net Income
 
Diluted Net Income Per Share
 
Net Income
 
Diluted Net Income Per Share
 
Net Income
 
Diluted Net Income Per Share
As reported - GAAP
 
$
70,029

 
$
1.15

 
$
35,575

 
$
0.56

 
$
144,746

 
$
2.32

 
$
57,827

 
$
0.94

Add: changes in fair value of derivative contracts, net of tax
 
8,370

 
0.14

 
13,956

 
0.23

 
(8,492
)
 
(0.14
)
 
13,185

 
0.21

Add: loss on extinguishment of debt, net of tax
 
34

 

 

 

 
4,385

 
0.07

 

 

Adjusted net income
 
$
78,433

 
$
1.29

 
$
49,531

 
$
0.79

 
$
140,639

 
$
2.25

 
$
71,012

 
$
1.15


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


36



CASM and CASM, excluding fuel, are summarized in the table below: 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(in thousands, except as otherwise indicated)
GAAP operating expenses
 
$
477,061

 
$
533,293

 
$
1,426,056

 
$
1,572,240

Less: aircraft fuel, including taxes and delivery
 
(105,483
)
 
(182,219
)
 
(329,329
)
 
(527,497
)
Adjusted operating expenses - excluding aircraft fuel
 
$
371,578

 
$
351,074

 
$
1,096,727

 
$
1,044,743

Available Seat Miles
 
4,663,198

 
4,502,856

 
13,334,528

 
12,804,599

CASM - GAAP
 

10.23
¢
 

11.84
¢
 

10.69
¢
 

12.28
¢
Less: aircraft fuel
 
(2.26
)
 
(4.04
)
 
(2.47
)
 
(4.12
)
CASM - excluding aircraft fuel
 

7.97
¢
 

7.80
¢
 

8.22
¢
 

8.16
¢
 
Critical Accounting Policies

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

Critical accounting policies and estimates are defined as those accounting policies and accounting estimates that are reflective of significant judgments and uncertainties that potentially result in materially different results under different assumptions and conditions. For a detailed discussion of the application of our critical accounting policies, see “Critical Accounting Policies” and Note 1, “Summary of Significant Accounting Policies,” to our Consolidated Financial Statements for the year ended December 31, 2014 included in our Annual Report on Form 10-K.

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

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

Aircraft Fuel Costs

Aircraft fuel costs constitute a significant portion of our operating expense. Fuel costs represented 22% and 23% of our operating expenses for the three and nine months ended September 30, 2015, respectively, and 34% of our operating expenses for the three and nine months ended September 30, 2014. Approximately 70% of our fuel is based on Singapore jet fuel prices and 30% is based on U.S. West Coast jet fuel prices. Based on gallons expected to be consumed for the remainder of 2015, a $0.10 increase in the cost of a gallon of jet fuel would increase our fuel expense by approximately $5.8 million, excluding the results of our fuel hedge program.

We periodically enter into derivative financial instruments to manage our exposure to changes in the price of jet fuel. During the three and nine months ended September 30, 2015, our fuel hedge program primarily consisted of heating oil puts and swaps. Put option contracts provide for a settlement in favor of the holder in the event the prices fall below a predetermined contractual level during a particular time period. Swaps provide for a settlement in our favor in the event the prices exceed a predetermined contractual level and are unfavorable in the event prices fall below a predetermined contractual level.

As of September 30, 2015, we hedged approximately 50% of our projected fuel requirements for the remainder of 2015 with heating oil puts and swaps. As of September 30, 2015, the fair value of these fuel derivative agreements reflected a net liability of $23.7 million recorded in other accrued liabilities in the unaudited Consolidated Balance Sheets.


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

We do not hold or issue derivative financial instruments for trading purposes.

Interest Rates

Our results of operations are affected by fluctuations in interest rates due to our variable-rate debt and interest income earned on our cash deposits. Our variable-rate debt agreements are discussed in Note 8 to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2014.

At September 30, 2015, we had $78.4 million of variable-rate debt indexed to the following interest rates: 
Index
 
Rate
One-month LIBOR
 
0.20
%
Three-month LIBOR
 
0.33
%
 
Changes in market interest rates have a direct and corresponding effect on our pre-tax earnings and cash flows associated with our variable-rate debt and interest-bearing cash accounts. Based on the balances of our cash and cash equivalents, restricted cash, and variable-rate debt as of September 30, 2015, a change in interest rates is unlikely to have a material impact on our results of operations.

At September 30, 2015, we had $836.0 million of fixed-rate debt including aircraft capital lease obligations, convertible notes, facility agreements for aircraft purchases, and the outstanding equipment notes related to our 2013 EETC financing. Market risk for fixed-rate long-term debt is estimated as the potential increase in fair value resulting from a hypothetical 10% decrease in interest rates, and amounted to approximately $16.6 million as of September 30, 2015.

In 2013, we issued variable-rate debt to finance a portion of the purchase price of another Airbus A330-200 aircraft. The interest rate associated with this debt is based on a market index rate that resets every three months. To limit our exposure to significant increases in the applicable market index rates for this debt, we entered into a forward starting interest swap agreement.

Foreign Currency

We generate revenues and incur expenses in foreign currencies. Changes in foreign currency exchange rates impact our results of operations through changes in the dollar value of foreign currency-denominated operating revenues and expenses. Our most significant foreign currency exposures are the Japanese Yen and Australian Dollar. Based on expected remaining 2015 revenues and expenses denominated in Japanese Yen and Australian Dollars, a 10% strengthening in value of the U.S. dollar, relative to the Japanese Yen and Australian Dollar, would result in a decrease in operating income of approximately $3.5 million and $2.2 million, respectively, which excludes the offset of the hedges discussed below. This potential impact to the results of our operation is driven by the inherent nature of our international operations, which requires us to accept a large volume of sales transactions denominated in foreign currencies while few expense transactions are settled in foreign currencies. This disparity is the primary factor in our exposure to foreign currencies.

As of September 30, 2015, the fair value of our foreign currency forwards reflected a net asset of $9.9 million and $0.3 million recorded in prepaid expenses and other and long-term prepayments and other, respectively, in the unaudited Consolidated Balance Sheets.
 
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 Exchange Act of 1934, as amended), 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, 2015 to provide reasonable assurance that the information required to be disclosed by the Company in reports it files under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and

38



reported within the time periods specified in the rules and forms of the SEC, and is accumulated and communicated to our management, including our CEO and CFO, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act of 1934, as amended) during the quarter ended September 30, 2015 which materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

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


39



PART II.  OTHER INFORMATION
 
ITEM 1.                                                LEGAL PROCEEDINGS.
 
We are not a party to any litigation that is expected to have a significant effect on our operations or business.
 
ITEM 1A.                                       RISK FACTORS.
 
See Part I, Item 1A., “Risk Factors,” of our 2014 Annual Report for a detailed discussion of the risk factors affecting our business, results of operations and financial condition.

ITEM 2.                                                UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
 
The following table displays information with respect to our repurchases of shares of our common stock during the three months ended September 30, 2015:

Period
 
Total number of shares purchased (i)
 
Average price paid per share (ii)
 
Total number of shares purchased as part of publicly announced plans or programs (i)
 
Approximate dollar value of shares that may yet be purchased under the plans or programs (in millions) (i)
July 1, 2015 - July 31, 2015
 
99,599

 
$
23.88

 
99,599

 
$
80

August 1, 2015 - August 31, 2015
 
479,486

 
22.85

 
479,486

 
69

September 1, 2015 - September 30, 2015
 
281,486

 
23.68

 
281,486

 
62

Total
 
860,571

 
 
 
860,571

 
 

(i)
On April 23, 2015, we announced that our Board of Directors approved a stock repurchase program under which we may purchase up to $100 million of our outstanding common stock over a two-year period ending on April 24, 2017 through the open market, established plans or privately negotiated transactions in accordance with applicable securities laws, rules and regulations. The stock repurchase program is subject to modification or termination at any time.
(ii)
Weighted average price paid per share is calculated on a settlement basis and excludes commission.
 
ITEM 3.                                                DEFAULTS UPON SENIOR SECURITIES.
 
None.
 
ITEM 4.                                                MINE SAFETY DISCLOSURES.
 
Not applicable.

ITEM 5.                                                OTHER INFORMATION.
 
None.


40



ITEM 6.                                                EXHIBITS.
 
Exhibit No.
 
Description
 
 
 
12
 
Computation of ratio of earnings to fixed charges for the nine months ended September 30, 2015 and years ended December 31, 2014, 2013, 2012, 2011 and 2010.
 
 
 
31.1
 
Rule 13a-14(a) Certification of Chief Executive Officer.
 
 
 
31.2
 
Rule 13a-14(a) Certification of Chief Financial Officer.
 
 
 
32.1
 
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.2
 
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
101.INS
 
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension Schema Document
101.CAL
 
XBRL Taxonomy Extension Valuation Linkbase Document
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 


41



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 21, 2015
By:
/s/ Shannon L. Okinaka
 
 
 
Shannon L. Okinaka
 
 
 
Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)


42