Document


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 June 30, 2017
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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer x
 
Accelerated filer o
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
Emerging growth company o

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

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 July 19, 2017, 53,560,764 shares of the registrant’s common stock were outstanding.




Hawaiian Holdings, Inc.
Form 10-Q
Quarterly Period ended June 30, 2017
 
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 June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(unaudited)
Operating Revenue:
 
 

 
 

 
 
 
 
Passenger
 
$
593,210

 
$
518,572

 
$
1,130,800

 
$
1,000,599

Other
 
82,125

 
76,018

 
158,720

 
145,171

Total
 
675,335

 
594,590

 
1,289,520

 
1,145,770

Operating Expenses:
 
 

 
 

 
 
 
 
Wages and benefits
 
154,660

 
130,801

 
305,713

 
259,362

Aircraft fuel, including taxes and delivery
 
102,774

 
83,798

 
206,312

 
153,698

Maintenance, materials and repairs
 
52,566

 
54,585

 
111,970

 
115,089

Aircraft and passenger servicing
 
34,751

 
30,723

 
68,209

 
59,274

Aircraft rent
 
34,553

 
30,066

 
67,688

 
59,454

Commissions and other selling
 
32,557

 
31,425

 
65,738

 
64,456

Other rentals and landing fees
 
27,438

 
24,978

 
55,774

 
49,412

Depreciation and amortization
 
27,872

 
26,988

 
55,340

 
54,134

Purchased services
 
28,055

 
24,543

 
54,692

 
47,275

Special items
 
4,771

 

 
23,450

 

Other
 
32,789

 
32,731

 
64,791

 
62,714

Total
 
532,786

 
470,638

 
1,079,677

 
924,868

Operating Income
 
142,549

 
123,952

 
209,843

 
220,902

Nonoperating Income (Expense):
 
 

 
 

 
 
 
 
Interest expense and amortization of debt discounts and issuance costs
 
(7,711
)
 
(8,910
)
 
(15,714
)
 
(19,914
)
Gains (losses) on fuel derivatives
 
(4,712
)
 
21,087

 
(13,510
)
 
19,022

Other components of net periodic benefit cost
 
(4,750
)
 
(5,082
)
 
(9,501
)
 
(10,164
)
Interest income
 
1,467

 
1,087

 
2,619

 
1,931

Capitalized interest
 
2,082

 
463

 
3,842

 
688

Loss on extinguishment of debt
 

 
(6,643
)
 

 
(9,993
)
Other, net
 
433

 
2,686

 
3,261

 
9,272

Total
 
(13,191
)
 
4,688

 
(29,003
)
 
(9,158
)
Income Before Income Taxes
 
129,358

 
128,640

 
180,840

 
211,744

Income tax expense
 
48,925

 
49,070

 
63,495

 
80,708

Net Income
 
$
80,433

 
$
79,570

 
$
117,345

 
$
131,036

Net Income Per Share
 
 

 
 

 
 
 
 
Basic
 
$
1.50

 
$
1.48

 
$
2.19

 
$
2.45

Diluted
 
$
1.49

 
$
1.48

 
$
2.18

 
$
2.43

 
See accompanying Notes to Consolidated Financial Statements.


3



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

 
 
Three Months Ended June 30,
 
 
2017
 
2016
 
 
(unaudited)
Net Income
 
$
80,433

 
$
79,570

Other comprehensive income (loss), net:
 
 

 
 

Net change related to employee benefit plans, net of tax expense of $897 and $745 for 2017 and 2016, respectively
 
1,390

 
1,228

Net change in derivative instruments, net of tax expense of $768 and net of tax benefit of $4,309 for 2017 and 2016, respectively
 
1,261

 
(7,080
)
Net change in available-for-sale investments, net of tax expense of $20 and $93 for 2017 and 2016, respectively
 
32

 
151

Total other comprehensive income (loss)
 
2,683

 
(5,701
)
Total Comprehensive Income
 
$
83,116

 
$
73,869


 
 
Six Months Ended June 30,
 
 
2017
 
2016
 
 
(unaudited)
Net Income
 
$
117,345

 
$
131,036

Other comprehensive loss, net:
 
 
 
 

Net change related to employee benefit plans, net of tax expense of $1,794 and $1,315 for 2017 and 2016, respectively
 
2,858

 
2,155

Net change in derivative instruments, net of tax benefit of $3,557 and $9,316 for 2017 and 2016, respectively
 
(5,836
)
 
(15,308
)
Net change in available-for-sale investments, net of tax expense of $72 and $416 for 2017 and 2016, respectively
 
118

 
683

Total other comprehensive loss
 
(2,860
)
 
(12,470
)
Total Comprehensive Income
 
$
114,485

 
$
118,566



See accompanying Notes to Consolidated Financial Statements.


4



Hawaiian Holdings, Inc.
Consolidated Balance Sheets
(in thousands, except shares)
 
 
 
June 30, 2017
 
December 31, 2016
 
 
(unaudited)
 
 
ASSETS
 
 

 
 

Current Assets:
 
 

 
 

Cash and cash equivalents
 
$
578,694

 
$
325,991

Restricted cash
 
1,000

 
5,000

Short-term investments
 
265,059

 
284,075

Accounts receivable, net
 
86,472

 
96,067

Spare parts and supplies, net
 
23,024

 
20,363

Prepaid expenses and other
 
46,612

 
66,740

Total
 
1,000,861

 
798,236

Property and equipment, less accumulated depreciation and amortization of $393,388 and $454,231 as of June 30, 2017 and December 31, 2016, respectively
 
1,662,614

 
1,654,567

Other Assets:
 
 

 
 

Long-term prepayments and other
 
123,583

 
132,724

Intangible assets, less accumulated amortization of $21,006 and $20,337 as of June 30, 2017 and December 31, 2016, respectively
 
15,742

 
16,411

Goodwill
 
106,663

 
106,663

Total Assets
 
$
2,909,463

 
$
2,708,601

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

Current Liabilities:
 
 

 
 

Accounts payable
 
$
118,043

 
$
116,507

Air traffic liability
 
619,292

 
482,496

Other accrued liabilities
 
159,933

 
172,214

Current maturities of long-term debt and capital lease obligations
 
59,102

 
58,899

Total
 
956,370

 
830,116

Long-Term Debt and Capital Lease Obligations
 
468,409

 
497,908

Other Liabilities and Deferred Credits:
 
 

 
 

Accumulated pension and other postretirement benefit obligations
 
352,521

 
355,968

Other liabilities and deferred credits
 
176,625

 
173,613

Deferred tax liability, net
 
168,363

 
170,543

Total
 
697,509

 
700,124

Commitments and Contingencies
 


 


Shareholders’ Equity:
 
 

 
 

Special preferred stock, $0.01 par value per share, three shares issued and outstanding as of June 30, 2017 and December 31, 2016
 

 

Common stock, $0.01 par value per share, 53,583,833 and 53,435,234 shares outstanding as of June 30, 2017 and December 31, 2016, respectively
 
536

 
534

Capital in excess of par value
 
119,501

 
127,266

Accumulated income
 
773,491

 
656,146

Accumulated other comprehensive loss, net
 
(106,353
)
 
(103,493
)
Total
 
787,175

 
680,453

Total Liabilities and Shareholders’ Equity
 
$
2,909,463

 
$
2,708,601

 

See accompanying Notes to Consolidated Financial Statements.

5



Hawaiian Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
 
 
 
Six Months Ended June 30,
 
 
2017
 
2016
 
 
(unaudited)
Net cash provided by Operating Activities
 
$
335,440

 
$
302,725

Cash flows from Investing Activities:
 
 

 
 

Additions to property and equipment, including pre-delivery payments
 
(96,278
)
 
(70,291
)
Proceeds from purchase assignment and leaseback transactions
 

 
31,851

Proceeds from disposition of property and equipment
 
33,511

 

Purchases of investments
 
(107,533
)
 
(138,235
)
Sales of investments
 
125,881

 
150,651

Net cash used in investing activities
 
(44,419
)
 
(26,024
)
Cash flows from Financing Activities:
 
 

 
 

Repayments of long-term debt and capital lease obligations
 
(30,484
)
 
(183,607
)
Repurchases and redemptions of convertible notes
 

 
(1,426
)
Repurchases of common stock
 
(4,299
)
 
(10,075
)
Other
 
(7,535
)
 
(7,628
)
Net cash used in financing activities
 
(42,318
)
 
(202,736
)
Net increase in cash and cash equivalents
 
248,703

 
73,965

Cash, cash equivalents, and restricted cash - Beginning of Period
 
330,991

 
286,502

Cash, cash equivalents, and restricted cash - End of Period
 
$
579,694

 
$
360,467

 
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, 2016.
 
2. Significant Accounting Policies
 
Recently Adopted Accounting Pronouncements

In March 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, requiring an employer to report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. ASU 2017-07 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption only permitted in the first quarter of 2017. The Company early adopted this standard during the first quarter of 2017. The adoption of ASU 2017-07 resulted in a reclassification of $5.1 million and $10.2 million from wages and benefits to other components of net periodic benefit cost on the Company's consolidated statement of operations for the three and six months ended June 30, 2016, respectively.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows, Restricted Cash, requiring restricted cash and restricted cash equivalents to be included with cash and cash equivalents on the statement of cash flows when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The guidance is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted. The Company early adopted this standard during the first quarter of 2017. Restricted cash is now included as a component of cash, cash equivalents, and restricted cash on the Company's condensed consolidated statement of cash flows. The inclusion of restricted cash increased the beginning and ending balances of the condensed consolidated statement of cash flows by $5.0 million for the six months ended June 30, 2016.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, requiring all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. ASU 2016-09 will also allow an employer to withhold more shares for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2016. The Company adopted this standard during the first quarter of 2017. The primary impact of the adoption of the standard on the Company's consolidated financial statements was the recognition of excess tax benefits in the provision for income taxes rather than additional paid-in capital, which reduced income tax expense by $0.4 million and $5.6 million for the three and six months ended June 30, 2017, respectively. The Company also reclassified $17.3 million of excess tax benefits for share-based payments in the cash flow statement from financing activities to operating activities for the six months ended June 30, 2016.

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases, requiring a lessee to recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018. ASU 2016-02 requires entities to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative

7



period in the financial statements. Full retrospective application is prohibited. The Company is currently evaluating the effect that the provisions of ASU 2016-02 will have on its consolidated financial statements and related disclosures.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, 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. ASU 2014-09 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company expects to use the full retrospective transition method at the date of adoption.

The Company is currently evaluating the overall effect that the provisions of ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has reached conclusions on the applicability of the standard on accounting for contracts with customers and has determined that the new standard, once effective, will affect the Company's accounting policies regarding frequent flyer, ticket breakage, credit card fees, booking fees, and upgrade fee accounting. The standard will preclude the Company from applying the incremental cost method of accounting for free travel awards earned by passengers issued from the HawaiianMiles program through flight activity. The Company will instead be required to allocate consideration received between the ticket and miles earned by passengers and defer the value of the miles until redemption, resulting in a significant increase to the deferred revenue liability on the balance sheet. Passenger revenue is currently recognized for unflown tickets when tickets expire unused. Under the new standard, the Company expects to estimate tickets that will expire unused and recognize revenue at the ticketed flight date. Fees for changing itineraries are currently recognized when received. The Company expects to defer the recognition of these fees until the related transportation is provided. Amounts currently classified in other revenue (e.g. bag and other ancillary fees) will be reclassified to passenger revenue. The adoption of the standard will have a significant impact on the Company's financial statements. The Company is currently in the process of quantifying the effects of the new standard on the Company's financial statements.

3. Accumulated Other Comprehensive Income (Loss)
 
Reclassifications out of accumulated other comprehensive income (loss) by component are as follows: 
Details about accumulated other comprehensive (income) loss components
 
Three months ended June 30,
 
Six months ended June 30,
 
Affected line items in the statement where net income is presented
 
2017
 
2016
 
2017
 
2016
 
 
 
(in thousands)
 
 
Derivatives designated as hedging instruments under ASC 815
 
 

 
 

 
 

 
 

 
 
Foreign currency derivative gains, net
 
$
(480
)
 
$
(868
)
 
$
(1,692
)
 
$
(3,521
)
 
Passenger revenue
Interest rate derivative losses, net
 

 
1,235

 

 
944

 
Interest expense
Total before tax
 
(480
)
 
367

 
(1,692
)
 
(2,577
)
 
 
Tax expense (benefit)
 
182

 
(141
)
 
641

 
973

 
 
Total, net of tax
 
$
(298
)
 
$
226

 
$
(1,051
)
 
$
(1,604
)
 
 
Amortization of defined benefit plan items
 
 

 
 

 
 

 
 

 
 
Actuarial loss
 
$
2,228

 
$
1,915

 
$
4,456

 
$
3,830

 
Other components of net periodic benefit cost
Prior service cost
 
60

 
57

 
120

 
114

 
Other components of net periodic benefit cost
Total before tax
 
2,288

 
1,972

 
4,576

 
3,944

 
 
Tax benefit
 
(898
)
 
(747
)
 
(1,765
)
 
(1,493
)
 
 
Total, net of tax
 
$
1,390

 
$
1,225

 
$
2,811

 
$
2,451

 
 
Short-term investments
 
 

 
 

 
 

 
 

 
 
Realized gain on sales of investments, net
 
$
(12
)
 
$
(58
)
 
$
(20
)
 
$
(61
)
 
Other nonoperating income
Total before tax
 
(12
)
 
(58
)
 
(20
)
 
(61
)
 
 
Tax expense
 
5

 
19

 
8

 
20

 
 
Total, net of tax
 
(7
)
 
$
(39
)
 
$
(12
)
 
$
(41
)
 
 
Total reclassifications for the period
 
$
1,085

 
$
1,412

 
$
1,748

 
$
806

 
 

8




A rollforward of the amounts included in accumulated other comprehensive income (loss), net of taxes, for the three and six months ended June 30, 2017 and 2016 is as follows:
Three months ended June 30, 2017
 
Interest Rate Derivatives
 
Foreign Currency Derivatives
 
Defined Benefit
Plan Items
 
Short-Term Investments
 
Total
 
 
(in thousands)
Beginning balance
 
$

 
$
(26
)
 
$
(108,734
)
 
$
(276
)
 
$
(109,036
)
Other comprehensive income before reclassifications, net of tax
 

 
1,559

 

 
39

 
1,598

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

 
(298
)
 
1,390

 
(7
)
 
1,085

Net current-period other comprehensive income
 

 
1,261

 
1,390

 
32

 
2,683

Ending balance
 
$

 
$
1,235

 
$
(107,344
)
 
$
(244
)
 
$
(106,353
)

Three months ended June 30, 2016
 
Interest Rate Derivatives
 
Foreign Currency Derivatives
 
Defined Benefit Plan Items
 
Short-Term Investments
 
Total
 
 
(in thousands)
Beginning balance
 
$
(768
)
 
$
(2,500
)
 
$
(102,938
)
 
$
160

 
$
(106,046
)
Other comprehensive income (loss) before reclassifications, net of tax
 

 
(7,306
)
 
3

 
190

 
(7,113
)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax
 
768

 
(542
)
 
1,225

 
(39
)
 
1,412

Net current-period other comprehensive income (loss)
 
768

 
(7,848
)
 
1,228

 
151

 
(5,701
)
Ending balance
 
$

 
$
(10,348
)
 
$
(101,710
)
 
$
311

 
$
(111,747
)

Six months ended June 30, 2017
 
Interest Rate Derivatives
 
Foreign Currency Derivatives
 
Defined Benefit Pension Items
 
Short-Term Investments
 
Total
 
 
(in thousands)
Beginning balance
 
$

 
$
7,071

 
$
(110,202
)
 
$
(362
)
 
$
(103,493
)
Other comprehensive income (loss) before reclassifications, net of tax
 

 
(4,785
)
 
47

 
130

 
(4,608
)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax
 

 
(1,051
)
 
2,811

 
(12
)
 
1,748

Net current-period other comprehensive income (loss)
 

 
(5,836
)
 
2,858

 
118

 
(2,860
)
Ending balance
 
$

 
$
1,235

 
$
(107,344
)
 
$
(244
)
 
$
(106,353
)

Six months ended June 30, 2016
 
Interest Rate Derivatives
 
Foreign Currency Derivatives
 
Defined Benefit Pension Items
 
Short-Term Investments
 
Total
 
 
(in thousands)
Beginning balance
 
$
81

 
$
4,879

 
$
(103,865
)
 
$
(372
)
 
$
(99,277
)
Other comprehensive income (loss) before reclassifications, net of tax
 
(668
)
 
(13,036
)
 
(296
)
 
724

 
(13,276
)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax
 
587

 
(2,191
)
 
2,451

 
(41
)
 
806

Net current-period other comprehensive income (loss)
 
(81
)
 
(15,227
)
 
2,155

 
683

 
(12,470
)
Ending balance
 
$

 
$
(10,348
)
 
$
(101,710
)
 
$
311

 
$
(111,747
)


9



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 six months ended June 30, 2017 and 2016, anti-dilutive shares excluded from the calculation of diluted earnings per share were nil.
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(in thousands, except for per share data)
Numerator:
 
 

 
 

 
 

 
 

Net Income
 
$
80,433

 
$
79,570

 
$
117,345

 
$
131,036

Denominator:
 
 

 
 

 
 

 
 

Weighted average common stock shares outstanding - Basic
 
53,626

 
53,634

 
53,595

 
53,574

Assumed exercise of stock options and awards
 
288

 
219

 
353

 
247

Assumed conversion of convertible note premium
 

 

 

 
12

Weighted average common stock shares outstanding - Diluted
 
53,914

 
53,853

 
53,948

 
53,833

Net Income Per Share
 
 

 
 

 
 

 
 

Basic
 
$
1.50

 
$
1.48

 
$
2.19

 
$
2.45

Diluted
 
$
1.49

 
$
1.48

 
$
2.18

 
$
2.43


Stock Repurchase Program

In April 2017, the Company's Board of Directors approved a modification to the Company's stock repurchase program under which the Company may now repurchase up to $100 million of its outstanding common stock over a two-year period through May 2019 via 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 further modification or termination at any time.

The Company spent $4.3 million to repurchase and retire approximately 83 thousand shares of the Company's common stock in open market transactions during the three months ended June 30, 2017. As of June 30, 2017, the Company had $95.7 million remaining to spend under the newly modified stock repurchase program.

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 June 30, 2017 and December 31, 2016:
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
June 30, 2017
 
(in thousands)
Corporate debt
 
$
170,591

 
$
73

 
$
(237
)
 
$
170,427

U.S. government and agency debt
 
47,862

 

 
(153
)
 
47,709

Municipal bonds
 
22,422

 
16

 
(48
)
 
22,390

Other fixed income securities
 
24,535

 

 
(2
)
 
24,533

Total short-term investments
 
$
265,410

 
$
89

 
$
(440
)
 
$
265,059

 

10



 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
December 31, 2016
 
(in thousands)
Corporate debt
 
$
171,139

 
$
84

 
$
(357
)
 
$
170,866

U.S. government and agency debt
 
53,916

 
8

 
(134
)
 
53,790

Municipal bonds
 
22,893

 
1

 
(144
)
 
22,750

Other fixed income securities
 
36,670

 

 
(1
)
 
36,669

Total short-term investments
 
$
284,618

 
$
93

 
$
(636
)
 
$
284,075


Contractual maturities of short-term investments as of June 30, 2017 are shown below. 
 
 
Under 1 Year
 
1 to 5 Years
 
Total
 
 
(in thousands)
Corporate debt
 
$
76,363

 
$
94,064

 
$
170,427

U.S. government and agency debt
 
34,068

 
13,641

 
47,709

Municipal bonds
 
7,875

 
14,515

 
22,390

Other fixed income securities
 
15,640

 
8,893

 
24,533

Total short-term investments
 
$
133,946

 
$
131,113

 
$
265,059

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


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 June 30, 2017
 
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
(in thousands)
Cash equivalents
 
$
369,665

 
$
332,567

 
$
37,098

 
$

Restricted cash
 
1,000

 
1,000

 

 

Short-term investments
 
265,059

 

 
265,059

 

Fuel derivative contracts:
 
 
 
 

 
 

 
 

Crude oil call options
 
3,254

 

 
3,254

 

Jet fuel swaps
 
84

 

 
84

 

Foreign currency derivatives
 
5,525

 

 
5,525

 

Total assets measured at fair value
 
$
644,587

 
$
333,567

 
$
311,020

 
$

Fuel derivative contracts:
 
 

 
 

 
 

 
 

Jet fuel swaps
 
$
488

 
$

 
$
488

 
$

Foreign currency derivatives
 
3,270

 

 
3,270

 

Total liabilities measured at fair value
 
$
3,758

 
$

 
$
3,758

 
$

 
 
 
Fair Value Measurements as of December 31, 2016
 
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
(in thousands)
Cash equivalents
 
$
123,120

 
$
104,113

 
$
19,007

 
$

Restricted cash
 
5,000

 
5,000

 

 

Short-term investments
 
284,075

 

 
284,075

 

Fuel derivative contracts:
 
 
 
 

 
 

 
 

Crude oil call options
 
8,489

 

 
8,489

 

Heating oil swaps
 
6,601

 

 
6,601

 

Foreign currency derivatives
 
12,906

 

 
12,906

 

Total assets measured at fair value
 
$
440,191

 
$
109,113

 
$
331,078

 
$

Foreign currency derivatives
 
1,469

 

 
1,469

 

Total liabilities measured at fair value
 
$
1,469

 
$

 
$
1,469

 
$


Cash equivalents.  The Company's level 1 cash equivalents consist of money market securities and the level 2 cash equivalents consist of U.S. agency bonds, mutual funds, 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 consists of cash held as collateral by institutions that process our credit card transactions for advanced ticket sales, which is valued similarly to the money market securities held as cash equivalents.
 
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 crude oil call options and jet fuel 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.

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

12



Fair Value of Debt
June 30, 2017
 
December 31, 2016
Carrying
 
Fair Value
 
Carrying
 
Fair Value
Amount
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Amount
 
Total
 
Level 1
 
Level 2
 
Level 3
(in thousands)
$
457,541

 
$
467,400

 
$

 
$

 
$
467,400

 
$
481,874

 
$
484,734

 
$

 
$

 
$
484,734

 
The fair value estimates of the Company’s debt were based on the discounted amount of future cash flows using the Company’s current incremental rate of borrowing for similar instruments.
 
The carrying amounts of cash, other receivables, and accounts payable approximate fair value due to the short-term nature of these financial instruments.
 
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 six months ended June 30, 2017, the Company primarily used crude oil call options and jet fuel 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 June 30,
 
Six months ended June 30,
Fuel derivative contracts
 
2017
 
2016
 
2017
 
2016
 
 
(in thousands)
Gains (losses) realized at settlement
 
$
(1,902
)
 
$
(8,799
)
 
$
687

 
$
(27,824
)
Reversal of prior period unrealized amounts
 
3,441

 
22,882

 
(4,506
)
 
40,692

Unrealized gains (losses) that will settle in future periods
 
(6,251
)
 
7,004

 
(9,691
)
 
6,154

Gains (losses) on fuel derivatives recorded as Nonoperating income (expense)
 
$
(4,712
)
 
$
21,087

 
$
(13,510
)
 
$
19,022


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 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 $0.8 million into earnings over the next 12 months from AOCI based on the values at June 30, 2017.

13



 
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 June 30, 2017 
 
 
Balance Sheet
Location
 
Notional Amount
 
Final
Maturity
Date
 
Gross fair
value of
assets
 
Gross fair
value of
(liabilities)
 
Net
derivative
position
 
 
 
 
(in thousands)
 
 
 
(in thousands)
Derivatives designated as hedges
 
 
 
 
 
 
 
 

 
 

 
 

Foreign currency derivatives
 
Prepaid expenses and other
 
16,282,275 Japanese Yen
44,327 Australian Dollars
 
June 2018
 
3,748

 
(2,969
)
 
779

 
 
Long-term prepayments and other
 
5,068,850 Japanese Yen
7,386 Australian Dollars
 
June 2019
 
1,623

 
(243
)
 
1,380

Derivatives not designated as hedges
 
 
 
 
 
 
 
 

 
 

 
 
Foreign currency derivatives
 
Prepaid expenses and other
 
1,081,750 Japanese Yen
2,651 Australian Dollars
 
September 2017
 
154

 
(58
)
 
96

Fuel derivative contracts
 
Prepaid expenses and other
 
91,266 gallons
 
June 2018
 
3,338

 
(488
)
 
2,850

 
Derivative position as of December 31, 2016
 
 
Balance Sheet
Location
 
Notional Amount
 
Final
Maturity
Date
 
Gross fair
value of
assets
 
Gross fair
value of
(liabilities)
 
Net
derivative
position
 
 
 
 
(in thousands)
 
 
 
(in thousands)
Derivatives designated as hedges
 
 
 
 
 
 
 
 

 
 

 
 

Foreign currency derivatives
 
Prepaid expenses and other
 
16,121,500 Japanese Yen
41,917 Australian Dollars
 
December 2017
 
9,803

 
(1,349
)
 
8,454

 
 
Long-term prepayments and other
 
4,371,900 Japanese Yen
8,434 Australian Dollars
 
December 2018
 
2,632

 
(59
)
 
2,573

Derivatives not designated as hedges
 
 
 
 
 
 
 
 

 
 

 
 
Foreign currency derivatives
 
Prepaid expenses and other
 
879,050 Japanese Yen
5,802 Australian Dollars
 
March 2017
 
471

 
(61
)
 
410

Fuel derivative contracts
 
Prepaid expenses and other
 
17,850 gallons
 
December 2017
 
15,090

 

 
15,090

 
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 June 30,
 
Three months ended June 30,
 
Three months ended June 30,
 
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
 
(in thousands)
Foreign currency derivatives
 
$
(2,505
)
 
$
10,938

 
$
(480
)
 
$
(868
)
 
$

 
$

Interest rate derivatives
 

 

 

 
1,235

 

 



14



 
 
(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)
 
 
Six months ended June 30,
 
Six months ended June 30,
 
Six months ended June 30,
 
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
 
(in thousands)
Foreign currency derivatives
 
$
7,705

 
$
20,155

 
$
(1,692
)
 
$
(3,521
)
 
$

 
$

Interest rate derivatives
 

 
923

 

 
944

 

 


Risk and Collateral
 
Financial derivative instruments expose the Company to possible credit loss in the event the counterparties fail to meet their obligations. To manage such credit risks, the Company (1) selects its counterparties based on past experience and credit ratings, (2) limits its exposure to any single counterparty, and (3) regularly 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 derivative instruments as cash collateral would be provided by the counterparties based on the current market exposure of the derivative.

ASC 815 requires a reporting entity to elect a policy of whether to offset rights to reclaim cash collateral or obligations to return cash collateral against derivative assets and liabilities executed with the same counterparty under a master netting agreement, or present such amounts on a gross basis. The Company’s accounting policy is to present its derivative assets and liabilities on a net basis, including any collateral posted with the counterparty. The Company had no collateral posted with counterparties as of June 30, 2017 and December 31, 2016.

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 June 30, 2017, the expected maturities of long-term debt for the remainder of 2017 and the next four years, and thereafter, were as follows (in thousands): 
Remaining months in 2017
$
24,469

2018
48,244

2019
72,927

2020
21,413

2021
49,060

Thereafter
241,428

 
$
457,541


9.  Leases

The Company leases aircraft, engines, and other assets under long-term lease arrangements. Other leased assets include real property, airport and terminal facilities, maintenance facilities, and general offices. Certain leases include escalation clauses and renewal options. When lease renewals are considered to be reasonably assured, the rental payments that will be due during the renewal periods are included in the determination of rent expense over the life of the lease.

15



As of June 30, 2017, the scheduled future minimum rental payments under operating leases with non-cancellable basic terms of more than one year were as follows:
 
Aircraft
 
Other
 
(in thousands)
Remaining in 2017
$
64,008

 
$
2,926

2018
127,235

 
7,311

2019
118,070

 
6,939

2020
97,717

 
6,690

2021
64,730

 
6,768

Thereafter
222,227

 
107,760

 
$
693,987

 
$
138,394

10. 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 June 30,
 
Six months ended June 30,
Components of Net Period Benefit Cost
 
2017
 
2016
 
2017
 
2016
 
 
(in thousands)
Service cost
 
$
3,813

 
$
3,713

 
$
7,626

 
$
7,426

Other cost:
 
 
 
 
 
 
 
 
Interest cost
 
7,259

 
7,582

 
14,518

 
15,164

Expected return on plan assets
 
(4,796
)
 
(4,472
)
 
(9,592
)
 
(8,944
)
Recognized net actuarial loss
 
2,287

 
1,972

 
4,574

 
3,944

Total other components of the net periodic benefit cost
 
4,750

 
5,082

 
$
9,500

 
$
10,164

Net periodic benefit cost
 
$
8,563

 
$
8,795

 
$
17,126

 
$
17,590

 
The Company contributed $8.0 million and $14.4 million to its defined benefit and other postretirement plans during the three and six months ended June 30, 2017, respectively. The Company contributed $11.0 million and $11.3 million to its defined benefit and other postretirement plans during the three and six months ended June 30, 2016, respectively.

In 2016, the Hawaiian Airlines, Inc. Pension Plan for Salaried Employees (the Salaried Plan) was consolidated into the Hawaiian Airlines, Inc. Pension Plan for Employees Represented by the International Association of Machinists (IAM), which established the Hawaiian Airlines, Inc. Salaried & IAM Merged Pension Plan (the Merged Plan). At that time, the net liabilities of the Salaried Plan were transferred to the Merged Plan. The benefits under the Merged Plan have remained consistent with the prior plan documents. In June 2017, the Company received a favorable determination letter from the Department of Labor to settle the Merged Plan.  The Company will take the necessary action to terminate the Merged Plan and expects to make a one-time cash payment of approximately $17 million to $22 million to settle the plan obligations in the third quarter of 2017. 

In March 2017, the Company announced the ratification of a 63-month contract amendment with its pilots as represented by the Air Line Pilots Association (ALPA). As further discussed in Note 12, during the six months ended June 30, 2017, the Company made a one-time payment to reduce the future 401K employer contribution for certain pilot groups, which is not recoverable once paid. In the third quarter of 2017, the Company currently estimates to make a one-time cash payment of approximately $102 million to settle a portion of its outstanding other post-retirement medical plan obligation with its pilots. 

11. Commitments and Contingent Liabilities
 
Commitments

As of June 30, 2017, the Company had the following capital commitments consisting of firm aircraft and engine orders and purchase rights:

16



Aircraft Type
 
Firm Orders
 
Purchase Rights
 
Expected Delivery Dates
A330-200 aircraft
 
1

 

 
In 2017
A321neo aircraft
 
16

 
9

 
Between 2017 and 2020
A330-800neo aircraft
 
6

 
6

 
Between 2019 and 2021
Pratt & Whitney spare engines:
 
 

 
 

 
 
A321neo spare engines
 
3

 
2

 
Between 2017 and 2019
Rolls-Royce spare engines:
 
 

 
 

 
 
A330-800neo spare engines
 
2

 
2

 
Between 2019 and 2026

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 IT, accounting services, and a capacity purchase agreement through 2024.
 
Committed capital and operating expenditures include escalation amounts based on estimates. The gross committed expenditures and committed payments for those deliveries as of June 30, 2017 are detailed below: 
 
 
Capital
 
Operating
 
Total Committed
Expenditures
 
 
(in thousands)
Remaining in 2017
 
$
145,666

 
$
38,885

 
$
184,551

2018
 
454,545

 
64,754

 
519,299

2019
 
499,622

 
59,406

 
559,028

2020
 
241,349

 
58,292

 
299,641

2021
 
169,771

 
56,551

 
226,322

Thereafter
 
131,440

 
400,430

 
531,870

 
 
$
1,642,393

 
$
678,318

 
$
2,320,711

 
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 reasonably estimate the potential amount of future payments, if any, under the foregoing indemnities and agreements.
 
Credit Card Holdback
 
Under the Company’s bank-issued credit card processing agreements, certain proceeds from advance ticket sales may be held back to serve as collateral to cover any possible chargebacks or other disputed charges that may occur. These holdbacks, which are included in restricted cash in the Company’s unaudited Consolidated Balance Sheets, totaled $1.0 million at June 30, 2017 and $5.0 million at December 31, 2016.
 
In the event of a material adverse change in the Company's business, the holdback could increase to an amount up to 100% of the 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.

17




12. Special Items

 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(in thousands)
Special Items
 
$
4,771

 
$

 
$
23,450

 
$


In April 2017, the Company executed a sale leaseback transaction with an independent third party for three Boeing 767-300 aircraft. The lease term for the three aircraft commenced in April 2017 and goes through November 2018, December 2018, and January 2019, respectively. During the three and six months ended June 30, 2017, the Company recorded a loss on sale of aircraft of $4.8 million.

In February 2017, the Company reached a tentative agreement with ALPA, covering the Company's pilots. In March 2017, the Company received notice from ALPA that the agreement was ratified by its members.  The agreement was effective April 1, 2017 and has a term of 63 months.  The contract includes, among other various benefits, a pay adjustment and ratification bonus computed based on previous service. During the six months ended June 30, 2017, the Company expensed $18.7 million related to (1) a one-time payment to reduce the future 401K employer contribution for certain pilot groups, which is not recoverable once paid, and (2) a one-time true up of the pilot vacation accrual at the new negotiated contract rates.

13. Supplemental Cash Flow Information
 
Non-cash investing and financing activities for the six months ended June 30, 2017 and 2016 were as follows:
 
Six months ended June 30,
 
2017
 
2016
 
(in thousands)
Investing and Financing Activities Not Affecting Cash:
 
 
 
Property and equipment acquired through a capital lease
$

 
$
6,092


14. 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 14 as Subsidiary Issuer / Guarantor) of pass-through certificates, the Company (which is also referred to in this Note 14 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:


18



Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
Three months ended June 30, 2017
 
 
Parent Issuer /
Guarantor
 
Subsidiary
Issuer /
Guarantor
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
(in thousands)
Operating Revenue
 
$

 
$
673,606

 
$
1,837

 
$
(108
)
 
$
675,335

Operating Expenses:
 
 

 
 

 
 

 
 

 
 

Wages and benefits
 

 
154,660

 

 

 
154,660

Aircraft fuel, including taxes and delivery
 

 
102,774

 

 

 
102,774

Maintenance materials and repairs
 

 
52,137

 
429

 

 
52,566

Aircraft and passenger servicing
 

 
34,751

 

 

 
34,751

Commissions and other selling
 
18

 
32,546

 
19

 
(26
)
 
32,557

Aircraft rent
 

 
34,183

 
370

 

 
34,553

Other rentals and landing fees
 

 
27,438

 

 

 
27,438

Depreciation and amortization
 

 
26,919

 
953

 

 
27,872

Purchased services
 
177

 
27,646

 
247

 
(15
)
 
28,055

Special charges
 

 
4,771

 

 

 
4,771

Other
 
1,308

 
31,001

 
547

 
(67
)
 
32,789

Total
 
1,503

 
528,826

 
2,565

 
(108
)
 
532,786

Operating Income (Loss)
 
(1,503
)
 
144,780

 
(728
)
 

 
142,549

Nonoperating Income (Expense):
 
 

 
 

 
 

 
 

 
 

Undistributed net income of subsidiaries
 
81,110

 

 

 
(81,110
)
 

Interest expense and amortization of debt discounts and issuance costs
 

 
(7,711
)
 

 

 
(7,711
)
Other components of net periodic pension cost
 

 
(4,750
)
 

 

 
(4,750
)
Interest income
 
70

 
1,397

 

 

 
1,467

Capitalized interest
 

 
2,082

 

 

 
2,082

Losses on fuel derivatives
 

 
(4,712
)
 

 

 
(4,712
)
Other, net
 

 
433

 

 

 
433

Total
 
81,180

 
(13,261
)
 

 
(81,110
)
 
(13,191
)
Income (Loss) Before Income Taxes
 
79,677

 
131,519

 
(728
)
 
(81,110
)
 
129,358

Income tax expense (benefit)
 
(756
)
 
49,681

 

 

 
48,925

Net Income (Loss)
 
$
80,433

 
$
81,838

 
$
(728
)
 
$
(81,110
)
 
$
80,433

Comprehensive Income (Loss)
 
$
83,116

 
$
84,521

 
$
(728
)
 
$
(83,793
)
 
$
83,116



19



Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
Three months ended June 30, 2016
 
 
Parent Issuer /
Guarantor
 
Subsidiary
Issuer /
Guarantor
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
(in thousands)
Operating Revenue
 
$

 
$
593,161

 
$
1,515

 
$
(86
)
 
$
594,590

Operating Expenses:
 
 

 
 

 
 

 
 

 
 

Aircraft fuel, including taxes and delivery
 

 
83,798

 

 

 
83,798

Wages and benefits
 

 
130,801

 

 

 
130,801

Aircraft rent
 

 
30,066

 

 

 
30,066

Maintenance materials and repairs
 

 
53,941

 
644

 

 
54,585

Aircraft and passenger servicing
 

 
30,723

 

 

 
30,723

Commissions and other selling
 

 
31,437

 
21

 
(33
)
 
31,425

Depreciation and amortization
 

 
26,241

 
747

 

 
26,988

Other rentals and landing fees
 

 
24,978

 

 

 
24,978

Purchased services
 
52

 
24,319

 
187

 
(15
)
 
24,543

Other
 
1,461

 
30,978

 
330

 
(38
)
 
32,731

Total
 
1,513

 
467,282

 
1,929

 
(86
)
 
470,638

Operating Income (Loss)
 
(1,513
)
 
125,879

 
(414
)
 

 
123,952

Nonoperating Income (Expense):
 
 

 
 

 
 

 
 

 
 

Undistributed net income of subsidiaries
 
80,326

 

 

 
(80,326
)
 

Interest expense and amortization of debt discounts and issuance costs
 

 
(8,910
)
 

 

 
(8,910
)
Other components of net periodic pension cost
 

 
(5,082
)
 

 

 
(5,082
)
Interest income
 
65

 
1,022

 

 

 
1,087

Capitalized interest
 

 
463

 

 

 
463

Gains on fuel derivatives
 

 
21,087

 

 

 
21,087

Loss on extinguishment of debt
 

 
(6,643
)
 

 

 
(6,643
)
Other, net
 

 
2,686

 

 

 
2,686

Total
 
80,391

 
4,623

 

 
(80,326
)
 
4,688

Income (Loss) Before Income Taxes
 
78,878

 
130,502

 
(414
)
 
(80,326
)
 
128,640

Income tax expense (benefit)
 
(692
)
 
49,762

 

 

 
49,070

Net Income (Loss)
 
$
79,570

 
$
80,740

 
$
(414
)
 
$
(80,326
)
 
$
79,570

Comprehensive Income (Loss)
 
$
73,869

 
$
75,039

 
$
(414
)
 
$
(74,625
)
 
$
73,869



20



Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
Six months ended June 30, 2017
 
 
Parent Issuer /
Guarantor
 
Subsidiary
Issuer /
Guarantor
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
(in thousands)
Operating Revenue
 
$

 
$
1,286,149

 
$
3,583

 
$
(212
)
 
$
1,289,520

Operating Expenses:
 
 

 
 

 
 

 
 

 
 

Aircraft fuel, including taxes and delivery
 

 
206,312

 

 

 
206,312

Wages and benefits
 

 
305,713

 

 

 
305,713

Aircraft rent
 

 
67,318

 
370

 

 
67,688

Maintenance materials and repairs
 

 
109,430

 
2,540

 

 
111,970

Aircraft and passenger servicing
 

 
68,209

 

 

 
68,209

Commissions and other selling
 
24

 
65,753

 
38

 
(77
)
 
65,738

Depreciation and amortization
 

 
53,436

 
1,904

 

 
55,340

Other rentals and landing fees
 

 
55,774

 

 

 
55,774

Purchased services
 
283

 
54,000

 
439

 
(30
)
 
54,692

Special charges
 

 
23,450

 

 

 
23,450

Other
 
2,460

 
61,454

 
982

 
(105
)
 
64,791

Total
 
2,767

 
1,070,849

 
6,273

 
(212
)
 
1,079,677

Operating Income (Loss)
 
(2,767
)
 
215,300

 
(2,690
)
 

 
209,843

Nonoperating Income (Expense):
 
 

 
 

 
 

 
 

 
 

Undistributed net income of subsidiaries
 
118,112

 

 

 
(118,112
)
 

Interest expense and amortization of debt discounts and issuance costs
 

 
(15,714
)
 

 

 
(15,714
)
Other components of net periodic pension cost
 

 
(9,501
)
 

 

 
(9,501
)
Interest income
 
140

 
2,479

 

 

 
2,619

Capitalized interest
 

 
3,842

 

 

 
3,842

Losses on fuel derivatives
 

 
(13,510
)
 

 

 
(13,510
)
Loss on extinguishment of debt
 

 

 

 

 

Other, net
 

 
3,261

 

 

 
3,261

Total
 
118,252

 
(29,143
)
 

 
(118,112
)
 
(29,003
)
Income (Loss) Before Income Taxes
 
115,485

 
186,157

 
(2,690
)
 
(118,112
)
 
180,840

Income tax expense (benefit)
 
(1,860
)
 
65,355

 

 

 
63,495

Net Income (Loss)
 
$
117,345

 
$
120,802

 
$
(2,690
)
 
$
(118,112
)
 
$
117,345

Comprehensive Income (Loss)
 
$
114,485

 
$
117,942

 
$
(2,690
)
 
$
(115,252
)
 
$
114,485



21



Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
Six months ended June 30, 2016
 
 
Parent Issuer /
Guarantor
 
Subsidiary
Issuer /
Guarantor
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
(in thousands)
Operating Revenue
 
$

 
$
1,143,295

 
$
2,678

 
$
(203
)
 
$
1,145,770

Operating Expenses:
 
 

 
 

 
 

 
 

 
 

Aircraft fuel, including taxes and delivery
 

 
153,698

 

 

 
153,698

Wages and benefits
 

 
259,362

 

 

 
259,362

Aircraft rent
 

 
59,454

 

 

 
59,454

Maintenance materials and repairs
 

 
113,041

 
2,048

 

 
115,089

Aircraft and passenger servicing
 

 
59,274

 

 

 
59,274

Commissions and other selling
 
1

 
64,489

 
37

 
(71
)
 
64,456

Depreciation and amortization
 

 
52,640

 
1,494

 

 
54,134

Other rentals and landing fees
 

 
49,412

 

 

 
49,412

Purchased services
 
87

 
46,959

 
259

 
(30
)
 
47,275

Other
 
2,787

 
59,574

 
455

 
(102
)
 
62,714

Total
 
2,875

 
917,903

 
4,293

 
(203
)
 
924,868

Operating Income (Loss)
 
(2,875
)
 
225,392

 
(1,615
)
 

 
220,902

Nonoperating Income (Expense):
 
 

 
 

 
 

 
 

 
 

Undistributed net income of subsidiaries
 
132,142

 

 

 
(132,142
)
 

Interest expense and amortization of debt discounts and issuance costs
 
117

 
(20,031
)
 

 

 
(19,914
)
Other components of net periodic pension cost
 

 
(10,164
)
 

 

 
(10,164
)
Interest income
 
124

 
1,807

 

 

 
1,931

Capitalized interest
 

 
688

 

 

 
688

Gains on fuel derivatives
 

 
19,022

 

 

 
19,022

Loss on extinguishment of debt
 

 
(9,993
)
 

 

 
(9,993
)
Other, net
 

 
9,272

 

 

 
9,272

Total
 
132,383

 
(9,399
)
 

 
(132,142
)
 
(9,158
)
Income (Loss) Before Income Taxes
 
129,508

 
215,993

 
(1,615
)
 
(132,142
)
 
211,744

Income tax expense (benefit)
 
(1,528
)
 
82,236

 

 

 
80,708

Net Income (Loss)
 
$
131,036

 
$
133,757

 
$
(1,615
)
 
$
(132,142
)
 
$
131,036

Comprehensive Income (Loss)
 
$
118,566

 
$
121,287

 
$
(1,615
)
 
$
(119,672
)
 
$
118,566



22



Condensed Consolidating Balance Sheets
June 30, 2017
 
 
Parent Issuer /
Guarantor
 
Subsidiary
Issuer /
Guarantor
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
(in thousands)
ASSETS
 
 

 
 

 
 

 
 

 
 

Current assets:
 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
68,878

 
$
504,771

 
$
5,045

 
$

 
$
578,694

Restricted cash
 

 
1,000

 

 

 
1,000

Short-term investments
 

 
265,059

 

 

 
265,059

Accounts receivable, net
 
29

 
84,782

 
1,874

 
(213
)
 
86,472

Spare parts and supplies, net
 

 
23,024

 

 

 
23,024

Prepaid expenses and other
 
159

 
46,359

 
94

 

 
46,612

Total
 
69,066

 
924,995

 
7,013

 
(213
)
 
1,000,861

Property and equipment at cost
 

 
1,984,100

 
71,902

 

 
2,056,002

Less accumulated depreciation and amortization
 

 
(383,353
)
 
(10,035
)
 

 
(393,388
)
Property and equipment, net
 

 
1,600,747

 
61,867

 

 
1,662,614

Long-term prepayments and other
 

 
123,528

 
55

 

 
123,583

Deferred tax assets, net
 
30,616

 

 

 
(30,616
)
 

Goodwill and other intangible assets, net
 

 
121,018

 
1,387

 

 
122,405

Intercompany receivable
 

 
296,880

 

 
(296,880
)
 

Investment in consolidated subsidiaries
 
974,070

 

 

 
(974,070
)
 

TOTAL ASSETS
 
$
1,073,752

 
$
3,067,168

 
$
70,322

 
$
(1,301,779
)
 
$
2,909,463

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

 
 

 
 

 
 

Current liabilities:
 
 

 
 

 
 

 
 

 
 

Accounts payable
 
$
418

 
$
116,138

 
$
1,700

 
$
(213
)
 
$
118,043

Air traffic liability
 

 
615,384

 
3,908

 

 
619,292

Other accrued liabilities
 
462

 
159,246

 
225

 

 
159,933

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

 
59,102

 

 

 
59,102

Total
 
880

 
949,870

 
5,833

 
(213
)
 
956,370

Long-term debt and capital lease obligations
 

 
468,409

 

 

 
468,409

Intercompany payable
 
285,697

 

 
11,183

 
(296,880
)
 

Other liabilities and deferred credits:
 
 

 
 

 
 

 
 

 
0

Accumulated pension and other postretirement benefit obligations
 

 
352,521

 

 

 
352,521

Other liabilities and deferred credits
 

 
175,769

 
856

 

 
176,625

Deferred tax liabilities, net
 

 
198,979

 

 
(30,616
)
 
168,363

Total
 

 
727,269

 
856

 
(30,616
)
 
697,509

Shareholders’ equity
 
787,175

 
921,620

 
52,450

 
(974,070
)
 
787,175

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
1,073,752

 
$
3,067,168

 
$
70,322

 
$
(1,301,779
)
 
$
2,909,463





23



Condensed Consolidating Balance Sheets
December 31, 2016
 
 
Parent Issuer /
Guarantor
 
Subsidiary
Issuer /
Guarantor
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
(in thousands)
ASSETS
 
 
 
 

 
 

 
 

 
 

Current assets:
 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
67,629

 
$
249,985

 
$
8,377

 
$

 
$
325,991

Restricted cash
 

 
5,000

 

 

 
5,000

Short-term investments
 

 
284,075

 

 

 
284,075

Accounts receivable, net
 
28

 
94,852

 
1,392

 
(205
)
 
96,067

Spare parts and supplies, net
 

 
20,363

 

 

 
20,363

Prepaid expenses and other
 
29

 
66,665

 
46

 

 
66,740

Total
 
67,686

 
720,940

 
9,815

 
(205
)
 
798,236

Property and equipment at cost
 

 
2,038,931

 
69,867

 

 
2,108,798

Less accumulated depreciation and amortization
 

 
(445,868
)
 
(8,363
)
 

 
(454,231
)
Property and equipment, net
 

 
1,593,063

 
61,504

 

 
1,654,567

Long-term prepayments and other
 

 
132,724

 

 

 
132,724

Deferred tax assets, net
 
28,757

 

 

 
(28,757
)
 

Goodwill and other intangible assets, net
 

 
121,456

 
1,618

 

 
123,074

Intercompany receivable
 

 
277,732

 

 
(277,732
)
 

Investment in consolidated subsidiaries
 
855,289

 

 

 
(855,289
)
 

TOTAL ASSETS
 
$
951,732

 
$
2,845,915

 
$
72,937

 
$
(1,161,983
)
 
$
2,708,601

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

 
 

 
 

 
 

Current liabilities:
 
 

 
 

 
 

 
 

 
 

Accounts payable
 
$
492

 
$
114,935

 
$
1,285

 
$
(205
)
 
$
116,507

Air traffic liability
 

 
478,109

 
4,387

 

 
482,496

Other accrued liabilities
 
4,088

 
167,864

 
262

 

 
172,214

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

 
58,899

 

 

 
58,899

Total
 
4,580

 
819,807

 
5,934

 
(205
)
 
830,116

Long-term debt and capital lease obligations
 

 
497,908

 

 

 
497,908

Intercompany payable
 
266,699

 

 
11,033

 
(277,732
)
 

Other liabilities and deferred credits:
 
 

 
 

 
 

 
 

 
0

Accumulated pension and other postretirement benefit obligations
 

 
355,968

 

 

 
355,968

Other liabilities and deferred credits
 

 
172,783

 
830

 

 
173,613

Deferred tax liabilities, net
 

 
199,300

 

 
(28,757
)
 
170,543

Total
 

 
728,051

 
830

 
(28,757
)
 
700,124

Shareholders’ equity
 
680,453

 
800,149

 
55,140

 
(855,289
)
 
680,453

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
951,732

 
$
2,845,915

 
$
72,937

 
$
(1,161,983
)
 
$
2,708,601









24



Condensed Consolidating Statements of Cash Flows
Six months ended June 30, 2017
 
 
Parent Issuer /
Guarantor
 
Subsidiary
Issuer /
Guarantor
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
(in thousands)
Net Cash Provided By (Used In) Operating Activities
 
$
(2,498
)
 
$
339,242

 
$
(1,304
)
 
$

 
$
335,440

Cash Flows From Investing Activities:
 
 

 
 

 
 

 
 

 
 

Net payments to affiliates
 

 
(7,960
)
 

 
7,960

 

Additions to property and equipment, including pre-delivery deposits
 

 
(94,250
)
 
(2,028
)
 

 
(96,278
)
Proceeds from disposition of property and equipment
 

 
33,511

 

 

 
33,511

Purchases of investments
 

 
(107,533
)
 

 

 
(107,533
)
Sales of investments
 

 
125,881

 

 

 
125,881

Net cash used in investing activities
 

 
(50,351
)
 
(2,028
)
 
7,960

 
(44,419
)
Cash Flows From Financing Activities:
 
 

 
 

 
 

 
 

 
 

Repayments of long-term debt and capital lease obligations
 

 
(30,484
)
 

 

 
(30,484
)
Net payments from affiliates
 
7,960

 

 

 
(7,960
)
 

Repurchases of common stock
 
(4,299
)
 

 

 

 
(4,299
)
Other
 
86

 
(7,621
)
 

 

 
(7,535
)
Net cash provided by (used in) financing activities
 
3,747

 
(38,105
)
 

 
(7,960
)
 
(42,318
)
Net increase (decrease) in cash and cash equivalents
 
1,249

 
250,786

 
(3,332
)
 

 
248,703

Cash, cash equivalents, & restricted cash - Beginning of Period
 
67,629

 
254,985

 
8,377

 

 
330,991

Cash, cash equivalents, & restricted cash - End of Period
 
$
68,878

 
$
505,771

 
$
5,045

 
$

 
$
579,694




25



Condensed Consolidating Statements of Cash Flows
Six months ended June 30, 2016
 
 
Parent Issuer /
Guarantor
 
Subsidiary
Issuer /
Guarantor
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
(in thousands)
Net Cash Provided By (Used In) Operating Activities
 
$
(2,995
)
 
$
306,452

 
$
(732
)
 
$

 
$
302,725

Cash Flows From Investing Activities:
 
 

 
 

 
 

 
 

 
 

Net payments to affiliates
 

 
(26,686
)
 

 
26,686

 

Additions to property and equipment, including pre-delivery deposits
 

 
(58,257
)
 
(12,034
)
 

 
(70,291
)
Proceeds from purchase assignment and leaseback transaction
 

 
31,851

 

 

 
31,851

Purchases of investments
 

 
(138,235
)
 

 

 
(138,235
)
Sales of investments
 

 
150,651

 

 

 
150,651

Net cash used in investing activities
 

 
(40,676
)
 
(12,034
)
 
26,686

 
(26,024
)
Cash Flows From Financing Activities:
 
 

 
 

 
 

 
 

 
 

Repayments of long-term debt and capital lease obligations
 

 
(183,607
)
 

 

 
(183,607
)
Repurchase of convertible notes
 
(1,426
)
 

 

 

 
(1,426
)
Net payments from affiliates
 
15,653

 

 
11,033

 
(26,686
)
 

Repurchases of Common Stock
 
(10,075
)
 

 

 

 
(10,075
)
Other
 
389

 
(8,017
)
 

 

 
(7,628
)
Net cash provided by (used in) financing activities
 
4,541

 
(191,624
)
 
11,033

 
(26,686
)
 
(202,736
)
Net increase (decrease) in cash and cash equivalents
 
1,546

 
74,152

 
(1,733
)
 

 
73,965

Cash, cash equivalents, & restricted cash - Beginning of Period
 
69,420

 
208,406

 
8,676

 

 
286,502

Cash, cash equivalents, & restricted cash - End of Period
 
$
70,966

 
$
282,558

 
$
6,943

 
$

 
$
360,467



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

26



ITEM 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
Forward-Looking Statements
 
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect our current views with respect to certain current and future events and financial performance.  Such forward-looking statements include, without limitation, statements regarding: our expectations regarding our financial performance, available seat miles, operating revenue per available seat mile and operating cost per available seat mile for the third quarter of 2017; our expected fleet as of June 30, 2018; estimates of annual fuel expenses and measure of the effects of fuel prices on our business; the availability of financing; changes in our fleet plan and related cash outlays; committed capital expenditures; expected cash payments related to our post-retirement plan obligations; estimated financial charges; expected delivery of new aircraft; the impact of accounting standards on our financial statements; the effects of any litigation on our operations or business; and other matters that do not relate strictly to historical facts or statements of assumptions underlying any of the foregoing.  Words such as “expects,” “anticipates,” “projects,” “intends,” “plans,” “believes,” “estimates,” “could,” “may,” variations of such words, and similar expressions are also intended to identify such forward-looking statements.  These forward-looking statements are and will be, as the case may be, subject to many risks, uncertainties and assumptions relating to our operations and business environment, all of which may cause our actual results to be materially different from any future results, expressed or implied, in these forward-looking statements.
 
Factors that could affect such forward-looking statements include, but are not limited to: our ability to accurately forecast quarterly and annual results; global economic volatility; macroeconomic developments; political developments; our dependence on the tourism industry; the price and availability of fuel; foreign currency exchange rate fluctuations; our competitive environment; including the potential impact of rising industry capacity between North America and Hawai’i;
fluctuations in demand for transportation in the markets in which we operate; maintenance of privacy and security of customer-related information and compliance with applicable federal and foreign privacy or data security regulations or standards; our dependence on technology and automated systems; our reliance on third-party contractors; satisfactory labor relations; our ability to attract and retain qualified personnel and key executives; successful implementation of growth strategy and cost reduction goals; adverse publicity; risks related to the airline industry; our ability to obtain and maintain adequate facilities and infrastructure; seasonal and cyclical volatility; the effect of applicable state, federal and foreign laws and regulations; increases in insurance costs or reductions in coverage; the limited number of suppliers for aircraft, aircraft engines and parts; our existing aircraft purchase agreements; delays in aircraft deliveries or other loss of fleet capacity; fluctuations in our share price; and our financial liquidity. The risks, uncertainties, and assumptions referred to above that could cause our results to differ materially from the results expressed or implied by such forward-looking statements also include the risks, uncertainties, and assumptions discussed from time to time in our public filings and public announcements, including, but not limited to, our risk factors set out in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.  All forward-looking statements included in this Report are based on information available to us as of the date hereof.  We undertake no obligation to publicly update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this quarterly report.  The following discussion and analysis should be read in conjunction with our unaudited Consolidated Financial Statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q.
 
Our Business

We are engaged in the scheduled air transportation of passengers and cargo amongst the Hawaiian Islands (the “Neighbor Island” routes), between the Hawaiian Islands and certain cities in the U.S. mainland (the “North America” routes and collectively with the Neighbor Island routes, referred to as our “Domestic” routes), and between the Hawaiian Islands and the South Pacific, Australia, and Asia (the “International” routes), collectively referred to as our “Scheduled Operations.” In addition, we operate various charter flights. We are the largest airline headquartered in the State of Hawai‘i and the tenth largest domestic airline in the United States based on revenue passenger miles reported by the Research and Innovative Technology Administration Bureau of Transportation Statistics for the month of March 2017, the latest available data. As of June 30, 2017, we had 6,356 active employees.

General information about us is available at https://www.hawaiianairlines.com. Information contained on our website is not incorporated by reference into, or otherwise to be regarded as part of, this Quarterly Report on Form 10-Q unless expressly noted. Our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, as well as any amendments and exhibits to those reports, are available free of charge through our website as soon as reasonably practicable after we file them with, or furnish them to the Securities and Exchange Commission.

27



Financial Highlights

GAAP net income in the second quarter of $80.4 million or $1.49 per diluted share.

Adjusted net income in the second quarter of $85.3 million or $1.58 per diluted share.

Unrestricted cash and cash equivalents and short-term investments of $843.8 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 revenue performance to improve in the third quarter compared to the prior year period due to improved passenger loads, increased capacity, higher average fares, specifically in our North America and International routes, and increased rates for, and volume of, cargo transported. We expect available seat miles during the quarter ending September 30, 2017 to increase by 0.5% to 2.5% from the prior year period, while we expect operating revenue per available seat mile to increase by 4.5% to 7.5% from the prior year period. 

We expect operating cost per available seat mile (CASM) for the quarter ending September 30, 2017 to increase by 17.6% to 21.1% from the prior year period.  Our expected increase in CASM during the third quarter of 2017 as compared to the prior year period is driven by various components including:
The expected charge related to the termination of our Merged Plan (see Note 10 to the Consolidated Financial Statements for further discussion). We will take the necessary action to terminate the Merged Plan and expect to make a one-time cash payment of approximately $17 million to $22 million to settle the plan obligations in the third quarter of 2017.  We currently estimate to incur a financial charge of up to $40 million related to the settlement when it occurs;
The expected charge related to the settlement of a portion of our Pilots other postretirement medical plan liability (see Note 10 to the Consolidated Financial Statements for further discussion). In the third quarter of 2017, we currently expect to make a one-time cash payment of approximately $102 million to settle a portion of our outstanding other post-retirement medical plan obligation with our Pilots. We currently estimate to incur a financial charge up to $17 million related to the settlement when it occurs;
Expected increases in wages and benefits primarily due to contractual rate increases; and
Expected increases in the amount and cost of fuel.

Fleet Summary

The table below summarizes our total fleet as of June 30, 2016 and 2017, and expected fleet as of June 30, 2018 (based on existing agreements):
 
 
June 30, 2016
 
June 30, 2017
 
June 30, 2018
Aircraft Type
 
Leased (2)
 
Owned
 
Total
 
Leased (2)
 
Owned
 
Total
 
Leased (2)
 
Owned
 
Total
A330-200
 
11

 
12

 
23

 
11

 
12

 
23

 
11

 
13

 
24

767-300
 
4

 
4

 
8

 
7

 
1

 
8

 
7

 

 
7

717-200
 
3

 
15

 
18

 
5

 
15

 
20

 
5

 
15

 
20

ATR turboprop (1)
 

 
6

 
6

 

 
6

 
6

 

 
6

 
6

A321neo
 

 

 

 

 

 

 
2

 
6

 
8

Total
 
18

 
37

 
55

 
23

 
34

 
57

 
25

 
40

 
65

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

(1)
The ATR turboprop aircraft are owned by Airline Contract Maintenance & Equipment, Inc., a wholly-owned subsidiary of the Company.

(2)
Leased aircraft include aircraft under both capital and operating leases.


28



Results of Operations
 
For the three months ended June 30, 2017, we generated net income of $80.4 million, or $1.49 per diluted share, compared to net income of $79.6 million, or $1.48 per diluted share, for the same period in 2016. For the six months ended June 30, 2017, we generated net income of $117.3 million, or $2.18 per diluted share, compared to net income of $131.0 million, or $2.43 per diluted share, for the same period in 2016.

Selected Consolidated Statistical Data (unaudited)
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(in thousands, except as otherwise indicated)
Scheduled Operations (a) :
 
 

 
 

 
 

 
 

Revenue passengers flown
 
2,885

 
2,755

 
5,588

 
5,401

Revenue passenger miles (RPM)
 
4,099,122

 
3,846,966

 
7,896,847

 
7,388,033

Available seat miles (ASM)
 
4,735,335

 
4,550,964

 
9,256,433

 
8,917,956

Passenger revenue per RPM (Yield)
 

14.47
¢
 

13.48
¢
 

14.32
¢
 

13.54
¢
Passenger load factor (RPM/ASM)
 
86.6
%
 
84.5
%
 
85.3
%
 
82.8
%
Passenger revenue per ASM (PRASM)
 

12.53
¢
 

11.39
¢
 

12.22
¢
 

11.22
¢
Total Operations (a) :
 
 

 
 

 
 

 
 

Revenue passengers flown
 
2,886

 
2,756

 
5,590

 
5,403

RPM
 
4,099,261

 
3,847,065

 
7,897,754

 
7,389,122

ASM
 
4,735,491

 
4,551,094

 
9,257,844

 
8,919,188

Operating revenue per ASM (RASM)
 

14.26
¢
 

13.06
¢
 

13.93
¢
 

12.85
¢
Operating cost per ASM (CASM)
 

11.25
¢
 

10.34
¢
 

11.66
¢
 

10.37
¢
CASM excluding aircraft fuel and special items (b)
 

8.98
¢
 

8.50
¢
 

9.18
¢
 

8.65
¢
Aircraft fuel expense per ASM (c)
 

2.17
¢
 

1.84
¢
 

2.23
¢
 

1.72
¢
Revenue block hours operated
 
47,569

 
44,367

 
92,574

 
87,093

Gallons of aircraft fuel consumed
 
64,506

 
59,697

 
126,244

 
117,553

Average cost per gallon of aircraft fuel (actual) (c)
 
$
1.59

 
$
1.40

 
$
1.63

 
$
1.31

 
(a)
Includes the operations of our contract carrier under a capacity purchase agreement.
(b)
Represents adjusted unit costs, a non-GAAP measure. We believe this is a useful measure because it better reflects our controllable costs. See “Non-GAAP Financial Measures” below for a reconciliation of non-GAAP measures.
(c)
Includes applicable taxes and fees.

Operating Revenue
 
During the three and six months ended June 30, 2017, operating revenue increased by $80.7 million, or 13.6%, and $143.8 million or 12.5%, respectively, as compared to the prior year periods, driven by increased passenger revenue.

Passenger revenue

For the three and six months ended June 30, 2017, passenger revenue increased by $74.7 million, or 14.4%, and $130.2 million or 13.0%, respectively, as compared to the prior year periods. Details of these changes are described in the table below: 

29



 
 
Three months ended June 30, 2017 as compared to three months ended June 30, 2016
 
Six months ended June 30, 2017 as compared to six months ended June 30, 2016
 
 
Change in scheduled passenger revenue
 
Change in Yield
 
Change in RPM
 
Change in ASM
 
Change in scheduled passenger revenue
 
Change in Yield
 
Change in RPM
 
Change in ASM
 
 
(in millions)
 
 
 
 
 
 
 
(in millions)
 
 
 
 
 
 
Domestic
 
$
31.9

 
9.6
%
 
(1.9
)%
 
(3.8
)%
 
$
52.6

 
8.3
%
 
(1.6
)%
 
(4.9
)%
International
 
42.8

 
10.7

 
29.3

 
22.3

 
77.6

 
7.4

 
28.7

 
23.8

Total scheduled
 
$
74.7

 
7.3
%
 
6.6
 %
 
4.1
 %
 
$
130.2

 
5.8
%
 
6.9
 %
 
3.8
 %

Domestic

For the three and six months ended June 30, 2017, revenue on our domestic routes increased by $31.9 million, or 7.6%, and $52.6 million, or 6.6%, respectively, as compared to the prior year periods. The increase was due to improved average fares within our North America routes.

International

For the three and six months ended June 30, 2017, revenue on our international routes increased by $42.8 million, or 43.1%, and $77.6 million, or 38.3%, respectively, as compared to the prior year periods. The increase was primarily due to improved passenger load factors, higher average fares, and expansion of our Hawai'i to Tokyo, Japan service, including the introduction of service from Honolulu to Narita, Japan (July 2016), Kona to Tokyo Haneda Airport (December 2016), and expansion of existing Honolulu to Haneda service.

Other operating revenue

For the three and six months ended June 30, 2017, other operating revenue increased by $6.1 million or 8.0%, and $13.5 million or 9.3%, respectively, as compared to the prior year periods. The increase was primarily due to an increase in the volume of cargo transported during the respective periods.

Operating Expense
 
Operating expenses were $532.8 million and $1,079.7 million for the three and six months ended June 30, 2017, respectively, and $470.6 million and $924.9 million for the three and six months ended June 30, 2016, respectively. Increases (decreases) in operating expenses for the three and six months ended June 30, 2017 as compared to the prior year periods are detailed below:


30



 
 
Increase / (decrease) for the three months ended June 30, 2017 compared to the three months ended June 30, 2016
 
Increase / (decrease) for the six months ended June 30, 2017 compared to the six months ended June 30, 2016
 
 
$
 
%
 
$
 
%
Operating expenses
 
(in thousands)
 
 
 
(in thousands)
 
 
Wages and benefits
 
$
23,859

 
18.2
 %
 
$
46,351

 
17.9
 %
Aircraft fuel, including taxes and delivery
 
18,976

 
22.6

 
$
52,614

 
34.2
 %
Maintenance, materials and repairs
 
(2,019
)
 
(3.7
)
 
(3,119
)
 
(2.7
)
Aircraft and passenger servicing
 
4,028

 
13.1

 
8,935

 
15.1

Commissions and other selling
 
1,132

 
3.6

 
1,282

 
2.0

Aircraft rent
 
4,487

 
14.9

 
8,234

 
13.8

Other rentals and landing fees
 
2,460

 
9.8

 
6,362

 
12.9

Depreciation and amortization
 
884

 
3.3

 
1,206

 
2.2

Purchased services
 
3,512

 
14.3

 
7,417

 
15.7

Special items
 
4,771

 

 
23,450

 

Other
 
58

 
0.2

 
2,077

 
3.3

Total
 
$
62,148

 
13.2
 %
 
$
154,809

 
16.7
 %
 
Wages and benefits

Wages and benefits expense increased by $23.9 million or 18.2%, and $46.4 million or 17.9% for the three and six months ended June 30, 2017, respectively, as compared to the prior year period. The increase was due to an increase in the number of employees, increases related to the signing of the contract amendment with the AirLine Pilots Association ("ALPA") effective April 1, 2017, along with overall increases in employee benefit costs.

Aircraft fuel
 
Aircraft fuel expense increased during the three and six months ended June 30, 2017, as compared to the prior year periods, primarily due to the increase in the average fuel price per gallon and an increase in consumption as illustrated in the following table: 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
 
 
(in thousands, except per-gallon amounts)
 
 
 
(in thousands, except per-gallon amounts)
 
 
Aircraft fuel expense, including taxes and delivery
 
$
102,774

 
$
83,798

 
22.6
%
 
$
206,312

 
$
153,698

 
34.2
%
Fuel gallons consumed
 
64,506

 
59,697

 
8.1
%
 
126,244

 
117,553

 
7.4
%
Average fuel price per gallon, including taxes and delivery
 
$
1.59

 
$
1.40

 
13.6
%
 
$
1.63

 
$
1.31

 
24.4
%
 
We believe economic fuel expense is a good measure of the effect of fuel prices on our business as it most closely approximates the net cash outflow associated with the purchase of fuel for our operations in a period and is consistent with how management manages our business and assesses our operating performance. We define economic fuel expense as raw fuel expense plus (gains)/losses realized through actual cash payments to/(receipts from) hedge counterparties for fuel derivatives settled in the period inclusive of costs related to hedging premiums. Economic fuel expense is calculated as follows: 

31



 
 
Three months ended June 30,
 
 Six months ended June 30,
 
 
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
 
 
(in thousands, except per-gallon amounts)
 
 
 
(in thousands, except per-gallon amounts)
 
 
Aircraft fuel expense, including taxes and delivery
 
$
102,774

 
$
83,798

 
22.6
 %
 
$
206,312

 
$
153,698

 
34.2
 %
Realized losses (gains) on settlement of fuel derivative contracts
 
1,902


8,799


(78.4
)%

(687
)

27,824

 
(102.5
)%
Economic fuel expense
 
$
104,676

 
$
92,597

 
13.0
 %
 
$
205,625

 
$
181,522

 
13.3
 %
Fuel gallons consumed
 
64,506

 
59,697

 
8.1
 %
 
126,244

 
117,553

 
7.4
 %
Economic fuel costs per gallon
 
$
1.62

 
$
1.55

 
4.5
 %
 
$
1.63

 
$
1.54

 
5.8
 %
 
See Item 3, "Quantitative and Qualitative Disclosures About Market Risk" for additional discussion of our aircraft fuel costs and related hedging program.

Aircraft and passenger servicing

Aircraft and passenger servicing increased by $4.0 million, or 13.1%, and $8.9 million, or 15.1%, for the three and six months ended June 30, 2017, respectively, as compared to the prior year periods. The increase was primarily due to the increase in number of flights and passengers as compared to the prior year periods which resulted in higher ground handling and food and beverage expenses.

Aircraft rent

Aircraft rent increased by $4.5 million, or 14.9%, and $8.2 million, or 13.8%, for the three and six months ended June 30, 2017, respectively, as compared to the prior year periods. The increase was primarily due to additional aircraft in the fleet as a result of a sale leaseback transaction for three Boeing 767-300 aircraft (April 2017), as well as additional Boeing 717-200 and an Airbus A330-200 aircraft.

Other rentals and landing fees

Other rentals and landing fees increased by $2.5 million, or 9.8%, and $6.4 million, or 12.9%, for the three and six months ended June 30, 2017, respectively, as compared to the prior year periods. The increase was primarily due to increases in landing fee rates, landing frequencies, and airport rental fees.

Purchased services

Purchased services increased by $3.5 million, or 14.3%, and $7.4 million, or 15.7%, for the three and six months ended June 30, 2017, respectively, as compared to the prior year periods. The increase was primarily due to an increase in third-party vendor IT services during the period.

Special items

In April 2017, we executed a sale leaseback transaction with an independent third party for three Boeing 767-300 aircraft. The lease term for the three aircraft commenced in April 2017 and continues through November 2018, December 2018, and January 2019, respectively. During the three and six months ended June 30, 2017, we recorded a loss on sale of aircraft of $4.8 million.

In February 2017, we reached a tentative agreement with ALPA, covering our pilots. In March 2017, we received notice from ALPA that the agreement was ratified by its members.  The agreement was effective April 1, 2017 and has a term of 63-months.  The contract includes, among other various benefits, a pay adjustment and ratification bonus, amongst other various benefits. During the six months ended June 30, 2017, we expensed $18.7 million related to (1) a one-time payment to reduce the future 401K employer contribution for certain pilot groups, which is not recoverable once paid, and (2) a one-time true up of the pilot vacation accrual at the new negotiated contract rates.



32



Nonoperating Income (Expense)

Net nonoperating expense increased by $17.9 million, or 381.4%, for the three months ended June 30, 2017, as compared to the prior year period. The increase was primarily due to a period over period fluctuation in gains/losses of fuel derivatives of $25.8 million partially offset by a $6.6 million fluctuation in losses related to extinguishment of debt.

Net nonoperating expense increased by $19.8 million, or 216.7%, for the six months ended June 30, 2017, as compared to the prior year period. The increase was primarily due to a period over period fluctuation in gains/losses of fuel derivatives of $32.5 million partially offset by a $10.0 million fluctuation in losses related to extinguishment of debt.

Income Taxes

Our effective tax rate was 37.8% and 38.1% for the three months ended June 30, 2017 and 2016, respectively, and 35.1% and 38.1% for the six months ended June 30, 2017 and 2016, respectively. We consider a variety of factors in determining our effective tax rate, including our forecasted full-year pretax results, the U.S. federal statutory rate, expected nondeductible expenses, and estimated state taxes.

Liquidity and Capital Resources

Our liquidity is dependent on the cash we generate from operating activities and our debt financing arrangements. As of June 30, 2017, we had $578.7 million in cash and cash equivalents and $265.1 million in short-term investments, an increase of $233.7 million from December 31, 2016.

We have been able to generate sufficient funds from our operations to meet our working capital requirements and periodically finance our aircraft through secured debt and lease financings. At June 30, 2017, we had approximately $527.5 million of debt and capital lease obligations, including approximately $59.1 million classified as a current liability in the unaudited Consolidated Balance Sheets. See the Contractual Obligations table below for a description of our estimated contractual obligations as of June 30, 2017.

We also have access to a secured revolving credit and letter of credit facility in an amount of up to $225 million, maturing in December 2019. As of June 30, 2017, we had no outstanding borrowings under the revolving credit facility.

In the third quarter of 2017, we currently expect to make a one-time cash payment of approximately $102 million to settle a portion of our outstanding other post-retirement medical plan obligation with our pilots. We currently estimate to incur a financial charge up to $17 million related to the settlement when it occurs.

In 2016, the Hawaiian Airlines, Inc. Pension Plan for Salaried Employees (Salaried Plan) was consolidated into the Hawaiian Airlines, Inc. Pension Plan for Employees Represented by the International Association of Machinists (IAM), which established the Hawaiian Airlines, Inc. Salaried & IAM Merged Pension Plan (the Merged Plan). At that time, the net liabilities of the Salaried Plan were transferred to the Merged Plan. The benefits under the Merged Plan have remained consistent with the prior plan documents. In June 2017 we received a favorable determination letter from the Department of Labor to settle the Merged Plan.  We will take the necessary action to terminate the Merged Plan and expect to make a one-time cash payment of approximately $17 million to $22 million to settle the plan obligations in the third quarter of 2017.  We currently estimate to incur a financial charge up to $40 million related to the settlement when it occurs.

Cash Flows

Net cash provided by operating activities was $335.4 million and $302.7 million for the six months ended June 30, 2017 and 2016, respectively. The increase was primarily due to an increase in our air traffic liability.

Net cash used in investing activities was $44.4 million for the six months ended June 30, 2017 due to purchases of property and equipment, and pre-delivery payments for future aircraft deliveries, partially offset by a net cash inflow related to investment activity.

Net cash used in financing activities was $42.3 million for the six months ended June 30, 2017, primarily due to the repayment of long-term debt and capital lease obligations along with repurchases of our common stock in the period.


33



Capital Commitments

As of June 30, 2017, 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 2017
A321neo aircraft
 
16

 
9

 
Between 2017 and 2020
A330-800neo aircraft
 
6

 
6

 
Between 2019 and 2021
Pratt & Whitney spare engines:
 
 

 
 

 
 
A321neo spare engines
 
3

 
2

 
Between 2017 and 2019
Rolls-Royce spare engines:
 
 

 
 

 
 
A330-800neo spare engines
 
2

 
2

 
Between 2019 and 2026
 
Committed expenditures for these aircraft, engines and related flight equipment approximates $146 million for the remainder of 2017, $455 million in 2018, $500 million in 2019, $241 million in 2020, $170 million in 2021 and $131 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 2017, our Board of Directors approved a modification to our stock repurchase program under which we may repurchase up to $100 million of our outstanding common stock. The stock repurchase program is subject to further modification or termination at any time.

We spent $4.3 million to repurchase and retire approximately 83 thousand shares of our common stock in open market transactions during the three months ended June 30, 2017. As of June 30, 2017, we had $95.7 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.

Credit Card Holdbacks

Under our bank-issued credit card processing agreements, certain proceeds from advance ticket sales may be held back to serve as collateral to cover any possible chargebacks or other disputed charges that may occur. These holdbacks, which are included in restricted cash in our unaudited Consolidated Balance Sheets set forth in the unaudited Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q, totaled $1.0 million and $5.0 million as of June 30, 2017 and December 31, 2016, respectively.

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 $8.0 million and $14.4 million to our defined benefit and other postretirement plans during the three and six months ended June 30, 2017, respectively. 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.


34



Contractual Obligations
 
Our estimated contractual obligations as of June 30, 2017 are summarized in the following table: 
Contractual Obligations
 
Total
 
Remaining in 2017
 
2018 - 2019
 
2020 - 2021
 
2022 and
thereafter
 
 
(in thousands)
Debt and capital lease obligations (1)
 
$
658,434

 
$
44,579

 
$
192,341

 
$
119,008

 
$
302,506

Operating leases—aircraft and related equipment (2) 
 
693,988

 
64,008

 
245,306

 
162,447

 
222,227

Operating leases—non-aircraft
 
138,395

 
2,926

 
14,250

 
13,459

 
107,760

Purchase commitments - Capital (3) 
 
1,642,392

 
145,666

 
954,167

 
411,119

 
131,440

Purchase commitments - Operating (4) 
 
678,318

 
38,885

 
124,160

 
114,843

 
400,430

Projected employee benefit contributions (5) 
 
166,805

 
137,605

 
29,200

 

 

Total contractual obligations
 
$
3,978,332

 
$
433,669

 
$
1,559,424

 
$
820,876

 
$
1,164,363


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

(2)
Amounts reflect leases for ten Airbus A330-200 aircraft, seven Boeing 767-300 aircraft, and three Boeing 717-200 aircraft.

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

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

(5)
Amounts include our estimated minimum contributions to our pension plans (based on actuarially determined estimates) and contributions to our pilots’ disability plan. Amounts are subject to change based on numerous factors, including interest rate levels, the amount and timing of asset returns and the impact of future legislation. We are currently unable to estimate the projected contributions beyond 2019. As discussed in Note 10 to the Consolidated Financial Statements, "Employee Benefits Plans", we currently expect to make a one-time cash payment of approximately $102 million to settle a portion of our outstanding other post-retirement medical plan obligation with our pilots, which amount is included in the table above. We also expect to make a one-time cash payment of approximately $17 million to $22 million to settle obligations under the Merged Plan in the third quarter of 2017.  This amount is not yet finalized, thus not included in the table above.

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

35



designated as hedges) that will settle in future periods and the reversal of prior period unrealized amounts. We believe that excluding the impact of these derivative adjustments helps investors analyze our operational performance and compare our results to other airlines in the periods presented below.
Loss on extinguishment of debt, net of tax, is excluded to help investors analyze our operational performance and compare our results to other airlines in the periods presented below.
The collective bargaining charge of $18.7 million related to (1) a one-time payment to reduce the future 401K employer contribution for certain pilot groups, and (2) a one-time true up of the pilot vacation accrual at the new negotiated contract rates. The loss on sale of aircraft was a result of a sale-leaseback transaction covering three Boeing 767 aircraft as part of the planned exit from our Boeing 767 fleet, which resulted in a non-cash loss of $4.8 million. These one-time charges, we consider special items and are not expected to represent ongoing expenses. We believe that excluding such special items helps investors analyze our operational performance and compare its results to other airlines in the periods presented below.
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
Total
 
Diluted Per Share
 
Total
 
Diluted Per Share
 
Total
 
Diluted Per Share
 
Total
 
Diluted Per Share
GAAP net income, as reported
 
$
80,433

 
$
1.49

 
$
79,570

 
$
1.48

 
$
117,345

 
$
2.18

 
$
131,036

 
$
2.43

Add: changes in fair value of derivative contracts
 
2,810

 
0.05

 
(29,886
)
 
(0.55
)
 
14,197

 
0.26

 
(46,846
)
 
(0.87
)
Add: loss on extinguishment of debt
 

 

 
6,643

 
0.12

 

 

 
9,993

 
0.19

Add: special items
 
4,771

 
0.09

 

 

 
23,450

 
$
0.43

 

 
$

Add: tax effect of adjustments
 
(2,764
)
 
$
(0.05
)
 
8,832

 
$
0.16

 
(13,764
)
 
$
(0.26
)
 
14,004

 
$
0.26

Adjusted net income
 
$
85,250

 
$
1.58

 
$
65,159

 
$
1.21

 
$
141,228

 
$
2.61

 
$
108,187

 
$
2.01


Operating Costs per Available Seat Mile (CASM)

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

CASM and CASM - excluding aircraft fuel and special items, are summarized in the table below: 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(in thousands, except as otherwise indicated)
GAAP operating expenses
 
$
532,786

 
$
470,638

 
$
1,079,677

 
$
924,868

Less: aircraft fuel, including taxes and delivery
 
(102,774
)
 
(83,798
)
 
(206,312
)
 
(153,698
)
Less: special items
 
$
(4,771
)
 
$

 
$
(23,450
)
 
$

Adjusted operating expenses - excluding aircraft fuel and special items
 
$
425,241

 
$
386,840

 
$
849,915

 
$
771,170

Available Seat Miles
 
4,735,491

 
4,551,094

 
9,257,844

 
8,919,188

CASM - GAAP
 

11.25
¢
 

10.34
¢
 

11.66
¢
 

10.37
¢
Less: aircraft fuel
 
(2.17
)
 
(1.84
)
 
(2.23
)
 
(1.72
)
Less: special items
 
(0.10
)
 

 
(0.25
)
 

CASM - excluding aircraft fuel and special items
 

8.98
¢
 

8.50
¢
 

9.18
¢
 

8.65
¢
 
Critical Accounting Policies


36



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 Note 2 herein, "Significant Accounting Policies," and the section titled “Critical Accounting Policies and Estimates” and Note 1, “Summary of Significant Accounting Policies,” to our Consolidated Financial Statements for the year ended December 31, 2016 included in our Annual Report on Form 10-K.

The new revenue standard (ASU 2014-09), once effective, will affect our accounting policies regarding frequent flyer, ticket breakage, credit card fees, booking fees, and upgrade fee accounting.  The adoption of the standard will have a significant impact on our financial statements, and we are currently in the process of quantifying the effects of the new standard on our financial statements.  See Note 2 to the Consolidated Financial Statements for additional information.

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

The sensitivity analyses presented 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 19% of our operating expenses for the three and six months ended June 30, 2017, and 18% and 17% for the three and six months ended June 30, 2016, respectively. Approximately 72% of our fuel was based on Singapore jet fuel prices and 28% was based on U.S. West Coast jet fuel prices. Based on the amount of fuel expected to be consumed for the remainder of 2017, for every one cent increase in the cost of a gallon of jet fuel, our fuel expense would increase by approximately $1.3 million, excluding the impact 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 six months ended June 30, 2017, our fuel hedge program primarily consisted of crude oil call options and jet fuel swaps. 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. With call options, we are hedged against spikes in crude oil prices and during a period of decline in crude oil prices we only forfeit cash previously paid for hedge premiums.

As of June 30, 2017, we hedged approximately 47% of our projected fuel requirements for the remainder of 2017 with crude oil call options and jet fuel swaps. As of June 30, 2017, the fair value of these fuel derivative agreements reflected a net asset of $2.9 million which is recorded as a prepaid expense and other asset in the unaudited Consolidated Balance Sheets.

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
 
Changes in market interest rates have a direct and corresponding effect on our pre-tax earnings and cash flows associated with interest-bearing cash accounts. Based on the balances of our cash and cash equivalents and restricted cash as of June 30, 2017, a change in interest rates is unlikely to have a material impact on our results of operations.

At June 30, 2017, we had $540.1 million of fixed-rate debt including capital lease obligations, facility agreements for aircraft purchases, and the outstanding equipment notes related to our 2013 EETC financing. Market risk for fixed-rate long-term debt

37



is estimated as the potential increase in fair value resulting from a hypothetical 10% decrease in interest rates, and amounted to approximately $8.1 million as of June 30, 2017.

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 2017 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 $15.2 million and $9.4 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 June 30, 2017, the fair value of our foreign currency forwards reflected a net asset of $0.9 million and $1.4 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 Securities Exchange Act of 1934, as amended (the Exchange Act)), which have been designed to permit us to effectively identify and timely disclose important information. Based on that evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures were effective as of June 30, 2017 to provide reasonable assurance that the information required to be disclosed by the Company in reports it files under the Exchange Act, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and is accumulated and communicated to our management, including our CEO and CFO, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2017 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.


38



PART II.  OTHER INFORMATION
 
ITEM 1.                                                LEGAL PROCEEDINGS.
 
We are not a party to any litigation that is expected to have a significant effect on our operations or business.
 
ITEM 1A.                                       RISK FACTORS.
 
See Part I, Item 1A., “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 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 June 30, 2017:

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)
April 1, 2017 - April 30, 2017
 

 
$

 

 
 
May 1, 2017 - May 31, 2017
 
39,694

 
52.89

 
39,694

 
 
June 1, 2017 - June 30, 2017
 
43,715

 
50.33

 
43,715

 
 
Total
 
83,409

 
 
 
83,409

 
$
95.7


In April 2017, our Board of Directors approved a modification to our stock repurchase program under which we may repurchase up to $100 million of our outstanding common stock over a two-year period through May 2019 via 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.

We spent $4.3 million to repurchase and retire approximately 83 thousand shares of our common stock in open market transactions during the three months ended June 30, 2017. As of June 30, 2017, we had $95.7 million remaining to spend under the stock repurchase program.

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

ITEM 5.                                                OTHER INFORMATION.
 
None.


39



ITEM 6.                                                EXHIBITS.
 
Exhibit No.
 
Description
 
 
 
12
 
Computation of ratio of earnings to fixed charges for the six months ended June 30, 2017 and years ended December 31, 2016, 2015, 2014, 2013 and 2012.
 
 
 
31.1
 
Rule 13a-14(a) Certification of Chief Executive Officer.
 
 
 
31.2
 
Rule 13a-14(a) Certification of Chief Financial Officer.
 
 
 
32.1
 
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.2
 
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
101.INS
 
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension Schema Document
101.CAL
 
XBRL Taxonomy Extension Valuation Linkbase Document
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document


40



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:
July 26, 2017
By:
/s/ Shannon L. Okinaka
 
 
 
Shannon L. Okinaka
 
 
 
Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)


41