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 September 30, 2018
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  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
 
 
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 October 19, 2018, 49,403,496 shares of the registrant’s common stock were outstanding.




Hawaiian Holdings, Inc.
Form 10-Q
Quarterly Period ended September 30, 2018
 
Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2



PART I. FINANCIAL INFORMATION

ITEM 1.                   FINANCIAL STATEMENTS.
Hawaiian Holdings, Inc.
Consolidated Statements of Operations
(in thousands, except per share data)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017 (a)
 
2018
 
2017 (a)
 
 
(unaudited)
Operating Revenue:
 
 

 
 

 
 
 
 
Passenger
 
$
697,232

 
$
668,643

 
$
1,963,994

 
$
1,856,401

Other
 
61,855

 
47,573

 
175,952

 
136,140

Total
 
759,087

 
716,216

 
2,139,946

 
1,992,541

Operating Expenses:
 
 

 
 

 
 
 
 
Wages and benefits
 
176,642

 
161,059

 
516,906

 
466,772

Aircraft fuel, including taxes and delivery
 
162,932

 
110,111

 
449,404

 
316,423

Maintenance, materials and repairs
 
57,118

 
49,396

 
176,229

 
161,366

Aircraft and passenger servicing
 
42,063

 
37,533

 
117,207

 
107,459

Aircraft rent
 
31,768

 
35,195

 
93,533

 
102,883

Commissions and other selling
 
32,704

 
33,163

 
96,482

 
94,967

Other rentals and landing fees
 
33,227

 
30,989

 
95,226

 
86,763

Depreciation and amortization
 
36,373

 
28,447

 
101,537

 
83,787

Purchased services
 
32,509

 
24,736

 
95,104

 
79,428

Contract terminations expense
 

 

 
35,322

 

Special items
 

 

 

 
23,450

Other
 
37,925

 
36,585

 
117,977

 
101,371

Total
 
643,261

 
547,214

 
1,894,927

 
1,624,669

Operating Income
 
115,826

 
169,002

 
245,019

 
367,872

Nonoperating Income (Expense):
 
 

 
 

 
 
 
 
Other nonoperating special items
 

 
(50,202
)
 

 
(50,202
)
Interest expense and amortization of debt discounts and issuance costs
 
(8,446
)
 
(7,578
)
 
(24,628
)
 
(23,292
)
Gains (losses) on fuel derivatives
 
3,495

 
3,282

 
27,064

 
(10,228
)
Interest income
 
3,124

 
1,861

 
6,529

 
4,480

Capitalized interest
 
1,821

 
2,416

 
6,414

 
6,258

Other, net
 
937

 
(3,892
)
 
(759
)
 
(10,132
)
Total
 
931

 
(54,113
)
 
14,620

 
(83,116
)
Income Before Income Taxes
 
116,757

 
114,889

 
259,639

 
284,756

Income tax expense
 
23,215

 
43,267

 
58,075

 
102,594

Net Income
 
$
93,542

 
$
71,622

 
$
201,564

 
$
182,162

Net Income Per Common Stock Share:
 
 

 
 

 
 
 
 
Basic
 
$
1.85

 
$
1.35

 
$
3.97

 
$
3.41

Diluted
 
$
1.84

 
$
1.34

 
$
3.96

 
$
3.39

Weighted Average Number of Common Stock Shares Outstanding:
 
 
 
 
 
 
 
 
Basic
 
50,594

 
53,185

 
50,807

 
53,456

Diluted
 
50,731

 
53,509

 
50,935

 
53,799

Cash Dividends Declared Per Common Stock Share
 
$
0.12

 
$

 
$
0.36

 
$


(a) Amounts adjusted due to the adoption of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606). See Note 2 to Consolidated Financial Statements contained in Part I, Item 1 of this report for additional information.

See accompanying Notes to Consolidated Financial Statements.

3



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

 
 
Three Months Ended September 30,
 
 
2018
 
2017 (a)
 
 
(unaudited)
Net Income
 
$
93,542

 
$
71,622

Other comprehensive income, net:
 
 

 
 

Net change related to employee benefit plans, net of tax expense of $146 and $15,247 for 2018 and 2017, respectively
 
641

 
25,042

Net change in derivative instruments, net of tax expense of $1,396 and net of tax benefit of $198 for 2018 and 2017, respectively
 
4,292

 
(326
)
Net change in available-for-sale investments, net of tax expense of $53 and $43 for 2018 and 2017, respectively
 
167

 
70

Total other comprehensive income
 
5,100

 
24,786

Total Comprehensive Income
 
$
98,642

 
$
96,408


 
 
Nine Months Ended September 30,
 
 
2018
 
2017 (a)
 
 
(unaudited)
Net Income
 
$
201,564

 
$
182,162

Other comprehensive income, net:
 
 

 
 

Net change related to employee benefit plans, net of tax expense of $478 and $17,040 for 2018 and 2017, respectively
 
1,668

 
27,900

Net change in derivative instruments, net of tax expense of $2,050 and net of tax benefit of $3,756 for 2018 and 2017, respectively
 
6,311

 
(6,162
)
Net change in available-for-sale investments, net of tax benefit of $42 and net of tax expense of $115 for 2018 and 2017, respectively
 
(126
)
 
188

Total other comprehensive income
 
7,853

 
21,926

Total Comprehensive Income
 
$
209,417

 
$
204,088


(a) Amounts adjusted due to the adoption of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606). See Note 2 to Consolidated Financial Statements contained in Part I, Item 1 of this report for additional information.

See accompanying Notes to Consolidated Financial Statements.


4



Hawaiian Holdings, Inc.
Consolidated Balance Sheets
(in thousands, except shares)
 
 
September 30, 2018
 
December 31, 2017 (a)
 
 
(unaudited)
ASSETS
 
 

 
 

Current Assets:
 
 

 
 

Cash and cash equivalents
 
$
346,041

 
$
190,953

Restricted cash
 

 
1,000

Short-term investments
 
245,307

 
269,297

Accounts receivable, net
 
126,534

 
140,279

Spare parts and supplies, net
 
32,646

 
35,361

Prepaid expenses and other
 
95,292

 
79,186

Total
 
845,820

 
716,076

Property and equipment, less accumulated depreciation and amortization of $631,180 and $558,548 as of September 30, 2018 and December 31, 2017, respectively
 
2,116,204

 
1,842,263

Other Assets:
 
 

 
 

Long-term prepayments and other
 
187,860

 
193,632

Intangible assets, less accumulated amortization of $22,340 and $21,561 as of September 30, 2018 and December 31, 2017, respectively
 
14,408

 
15,187

Goodwill
 
106,663

 
106,663

Total Assets
 
$
3,270,955

 
$
2,873,821

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

Current Liabilities:
 
 

 
 

Accounts payable
 
$
141,209

 
$
140,805

Air traffic liability
 
653,113

 
589,093

Other accrued liabilities
 
136,820

 
147,593

Current maturities of long-term debt and capital lease obligations
 
105,451

 
59,470

Total
 
1,036,593

 
936,961

Long-Term Debt and Capital Lease Obligations
 
612,583

 
511,201

Other Liabilities and Deferred Credits:
 
 

 
 

Accumulated pension and other post-retirement benefit obligations
 
169,484

 
220,788

Other liabilities and deferred credits
 
280,199

 
225,605

Deferred tax liability, net
 
188,895

 
134,141

Total
 
638,578

 
580,534

Commitments and Contingencies
 


 


Shareholders’ Equity:
 
 

 
 

Special preferred stock, $0.01 par value per share, three shares issued and outstanding as of September 30, 2018 and December 31, 2017
 

 

Common stock, $0.01 par value per share, 49,961,321 and 51,173,453 shares outstanding as of September 30, 2018 and December 31, 2017, respectively
 
500

 
512

Capital in excess of par value
 
127,621

 
126,743

Accumulated income
 
922,491

 
793,134

Accumulated other comprehensive loss, net
 
(67,411
)
 
(75,264
)
Total
 
983,201

 
845,125

Total Liabilities and Shareholders’ Equity
 
$
3,270,955

 
$
2,873,821


(a) Amounts adjusted due to the adoption of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606). See Note 2 to Consolidated Financial Statements contained in Part I, Item 1 of this report for additional information.

See accompanying Notes to Consolidated Financial Statements.

5



Hawaiian Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
 
 
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
 
(unaudited)
Net cash provided by Operating Activities
 
$
444,080

 
$
295,477

Cash flows from Investing Activities:
 
 

 
 

Additions to property and equipment, including pre-delivery payments
 
(386,098
)
 
(212,535
)
Proceeds from the sale and sale leaseback of aircraft and aircraft related equipment
 
117,143

 
33,511

Purchases of investments
 
(159,648
)
 
(171,485
)
Sales of investments
 
182,816

 
183,930

Net cash used in investing activities
 
(245,787
)
 
(166,579
)
Cash flows from Financing Activities:
 
 

 
 

Long-term borrowings
 
86,500

 

Repayments of long-term debt and capital lease obligations
 
(53,741
)
 
(52,463
)
Dividend payments
 
(18,327
)
 

Debt issuance costs
 
(1,108
)
 
(188
)
Repurchases of common stock
 
(53,894
)
 
(50,486
)
Other
 
(3,635
)
 
(7,703
)
Net cash used in financing activities
 
(44,205
)
 
(110,840
)
Net increase in cash and cash equivalents
 
154,088

 
18,058

Cash, cash equivalents, and restricted cash - Beginning of Period
 
191,953

 
330,991

Cash, cash equivalents, and restricted cash - End of Period
 
$
346,041

 
$
349,049

 
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, 2017.
 
2. Significant Accounting Policies
 
Recently Adopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, and created Accounting Standards Codification (ASC) Topic 606 (ASC 606), 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. ASC 606 replaced most existing revenue recognition guidance in GAAP and is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017.

The Company elected to adopt the full retrospective transition method as of January 1, 2018, resulting in the restatement of the prior periods as of the date of adoption. The overall decrease in equity as of January 1, 2016 was $76.0 million net of tax, with an offsetting change primarily in Other liabilities and deferred credits. Refer to Note 5 for additional revenue recognition discussion.

The most significant impact of the standard relates to the accounting for the Company's frequent flyer travel award program. This change, as well as other less significant changes, are described below:

Frequent flyer - The standard requires the Company to account for miles earned by passengers in the HawaiianMiles program through flight activity as a component of the passenger revenue ticket transaction at the estimated selling price of the miles, effectively eliminating the incremental cost accounting previously applied. ASC 606 resulted in a significant increase to the deferred revenue liability on the Company's balance sheet, as the estimated selling price of the miles significantly exceeds the value previously recorded for incremental cost. The allocated value of miles earned through flights and sold to partners is recognized at the time the free travel or other award is redeemed by the passenger. Previously, the transportation element associated with sold miles was deferred and recognized as passenger revenue over the period when the transportation was expected to be provided (23 months).
Passenger revenue - The standard requires the Company to make certain adjustments to its passenger revenue, most notably related to unused tickets, which represents unexercised passenger rights. The Company uses historical information to estimate the proportion of ticket revenue that will expire unused to be recognized at the scheduled flight date. Prior to the adoption of ASC 606, the Company recorded this revenue as the tickets expired unused. As of the adoption date the adjustment due to passenger ticket expiration had the effect of reducing the air traffic liability but did not have a significant effect on revenue recognized. Ticket change fees were previously recognized at the time the fees were assessed; however, under ASC 606, the Company now defers the recognition of ticket change fees as a component of air traffic liability until the related transportation is provided. Further, the Company reclassified revenue items such as checked baggage, charter, ticket change and cancellation fees, in flight revenue, and other incidental sales to passenger revenue (from other operating revenue), as these items do not represent distinct performance obligations separate from the transportation provided to the passenger.
Selling Costs - Under ASC 606, the Company will capitalize selling costs associated with credit card fees, booking fees, and commissions, and recognize the associated expense at the ticketed flight date. Prior to ASC 606, the Company recognized the costs associated with credit card and booking fees as they were incurred.


7




Restated financial statement information, which reflects the adoption of the ASC 606 is below:

 
Three Months Ended September 30, 2017
 
As Reported
 
Adjustments
 
As Restated
 
(in thousands)
Operating Revenue:
 
 
 
 
 
Passenger
$
634,475

 
$
34,168

 
$
668,643

Other
85,084

 
(37,511
)
 
47,573

Total
$
719,559

 
$
(3,343
)
 
$
716,216

Operating Expenses
545,808

 
1,406

 
547,214

Operating Income
173,751

 
(4,749
)
 
169,002

Nonoperating Income (Expense)
(54,113
)
 

 
(54,113
)
Income tax expense
45,072

 
(1,805
)
 
43,267

Net Income
$
74,566

 
$
(2,944
)
 
$
71,622

Net Income Per Common Stock Share:
 
 
 
 
 
Basic
$
1.40

 
$
(0.05
)
 
$
1.35

Diluted
$
1.39

 
$
(0.05
)
 
$
1.34


 
Nine Months Ended September 30, 2017
 
As Reported
 
Adjustments
 
As Restated
 
(in thousands)
Operating Revenue:
 
 
 
 
 
Passenger
$
1,765,275

 
$
91,126

 
$
1,856,401

Other
243,804

 
(107,664
)
 
136,140

Total
$
2,009,079

 
$
(16,538
)
 
$
1,992,541

Operating Expenses
1,625,485

 
(816
)
 
1,624,669

Operating Income
383,594

 
(15,722
)
 
367,872

Nonoperating Income (Expense)
(83,116
)
 

 
(83,116
)
Income tax expense
108,567

 
(5,973
)
 
102,594

Net Income
$
191,911

 
$
(9,749
)
 
$
182,162

Net Income Per Common Stock Share:
 
 
 
 
 
Basic
$
3.59

 
$
(0.18
)
 
$
3.41

Diluted
$
3.57

 
$
(0.18
)
 
$
3.39




8



Select consolidated balance sheet line items, which reflect the adoption of the new standard are as follows:
 
December 31, 2017
 
Balance Sheet
 
As Reported
 
Adjustments
 
As Restated
 
(in thousands)
ASSETS
 
 
 
 
 
Prepaid expenses and other
$
65,196

 
$
13,990

 
$
79,186

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
Air traffic liability
545,362

 
43,731

 
589,093

Other accrued liabilities
146,283

 
1,310

 
147,593

Noncurrent Liabilities:
 
 
 
 
 
Other liabilities and deferred credits
95,636

 
129,969

 
225,605

Deferred tax liability
174,344

 
(40,203
)
 
134,141

Shareholders' Equity:
 
 
 
 
 
Accumulated income
913,951

 
(120,817
)
 
793,134


There was no impact to the Company's net cash provided by operating activities on the Condensed Consolidated Statements of Cash Flows.

Recently Issued Accounting Pronouncements

In February 2018, the FASB issued 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02). The guidance allows reclassification from accumulated other comprehensive income to retained earnings of stranded taxes resulting from the Tax Cuts and Jobs Act (the Tax Act). In addition, under ASU 2018-02, certain disclosures regarding stranded tax effects are required. ASU 2018-02 is effective for annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company continues to evaluate the impact of ASU 2018-02 and the potential effects on the Company's consolidated financial statements.

In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities (ASU 2017-02), which better aligns a company's risk management activities and financial reporting for hedging relationships and is intended to simplify hedge accounting requirements. ASU 2017-12 is effective for annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company does not expect that the adoption of ASU 2017-12 will have a significant impact on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (ASU 2016-02). ASU 2016-02 requires a lessee to recognize a right-of-use asset and a lease liability in the statement of financial position for all leases (with the exception of short-term leases) at the lease commencement date and recognize expenses similar to the current ASC 840, Leases (Topic 840). ASU 2016-02 is effective for fiscal years, and interim periods beginning after December 15, 2018, and early adoption is permitted. The Company currently plans to utilize the optional transition method for adoption of ASU 2016-02, which allows entities to continue to apply the legacy guidance in Topic 840, including its disclosure requirements, in the comparative periods presented in the year of adoption. The Company plans to adopt ASU 2016-02 on January 1, 2019, as required.

Under ASU 2016-02, the lease liability will be measured at the present value of remaining lease payments and the right-of-use asset will be derived from the calculation of the lease liability, adjusted for any historically recorded amounts under Topic 840 for rent leveling and certain other adjustments (ROU Asset). Lease payments, which are anticipated to be comparable to the minimum lease payments included in the Company's existing lease commitments disclosure, include fixed and in-substance fixed payments, variable payments based on an index or rate, reasonably certain purchase options, termination penalties and probable amounts the lessee will owe under a residual value guarantee. Lease payments exclude variable payments other than those based on an index or rate or any amount allocated to non-lease components. Variable lease payments will continue to be expensed as incurred. See Note 10 below which discusses the Company's undiscounted lease obligations as of September 30, 2018.

9




The Company is currently evaluating and implementing ASU 2016-02 and believes the most significant impact on its financial statements will be the consolidated balance sheet impact of recording the ROU Asset and lease liability for existing aircraft and engine operating leases. As of September 30, 2018, the Company will have 14 aircraft and 5 engines under operating lease in its fleet at the date of adoption, with an estimated net present value of future lease payments ranging between approximately $450.0 million to $500.0 million using current rates. The Company also has operating leases related to terminal operations, office, and hangar space, which are not included in the range provided. The Company is currently evaluating the impact of these leases on its consolidated balance sheet at adoption.

3. Accumulated Other Comprehensive Income (Loss)
 
Reclassifications out of accumulated other comprehensive income (loss) by component are as follows: 
Details about accumulated other comprehensive (income) loss components
 
Three months ended September 30,
 
Nine months ended September 30,
 
Affected line items in the statement where net income is presented
 
2018
 
2017
 
2018
 
2017
 
 
 
(in thousands)
 
 
Derivatives designated as hedging instruments under ASC 815
 
 
 
 
 
 
 
 
 
 
Foreign currency derivative losses (gains)
 
$
(1,080
)
 
$
(449
)
 
$
1,025

 
$
(2,141
)
 
Passenger revenue
Total before tax
 
(1,080
)
 
(449
)
 
1,025

 
(2,141
)
 
 
Tax expense (benefit)
 
265

 
170

 
(250
)
 
811

 
 
Total, net of tax
 
$
(815
)
 
$
(279
)
 
$
775

 
$
(1,330
)
 
 
Amortization of defined benefit plan items
 
 

 
 

 
 

 
 

 
 
Actuarial loss
 
$
730

 
$
2,277

 
$
1,978

 
$
6,733

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

 
65

 
168

 
185

 
Nonoperating Income (Expense), Other, net
Partial settlement and curtailment loss
 

 
15,001

 

 
15,001

 
Other nonoperating special items
Loss on plan termination
 

 
35,201

 

 
35,201

 
Other nonoperating special items
Total before tax
 
786

 
52,544

 
2,146

 
57,120

 
 
Tax benefit
 
(145
)
 
(19,883
)
 
(478
)
 
(21,648
)
 
 
Total, net of tax
 
$
641

 
$
32,661

 
$
1,668

 
$
35,472

 
 
Short-term investments
 
 

 
 

 
 

 
 

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

 
$
(6
)
 
$
52

 
$
(26
)
 
Nonoperating Income (Expense), Other, net
Total before tax
 
21

 
(6
)
 
52

 
(26
)
 
 
Tax expense (benefit)
 
(5
)
 
2

 
(12
)
 
10

 
 
Total, net of tax
 
$
16

 
$
(4
)
 
$
40

 
$
(16
)
 
 
Total reclassifications for the period
 
$
(158
)
 
$
32,378

 
$
2,483

 
$
34,126

 
 

A rollforward of the amounts included in accumulated other comprehensive income (loss), net of taxes, for the three and nine months ended September 30, 2018 and 2017 is as follows:


10



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

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

 

 
151

 
5,258

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

 
16

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

 
641

 
167

 
5,100

Ending balance
 
$
7,560

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

Three months ended September 30, 2017
 
Foreign Currency Derivatives
 
Defined Benefit Plan Items
 
Short-Term Investments
 
Total
 
 
(in thousands)
Beginning balance
 
$
1,235

 
$
(107,344
)
 
$
(244
)
 
$
(106,353
)
Other comprehensive income (loss) before reclassifications, net of tax
 
(47
)
 
(7,619
)
 
74

 
(7,592
)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax
 
(279
)
 
32,661

 
(4
)
 
32,378

Net current-period other comprehensive income (loss)
 
(326
)
 
25,042

 
70

 
24,786

Ending balance
 
$
909

 
$
(82,302
)
 
$
(174
)
 
$
(81,567
)

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

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

 

 
(166
)
 
5,370

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

 
1,668

 
40

 
2,483

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

 
1,668

 
(126
)
 
7,853

Ending balance
 
$
7,560

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

Nine months ended September 30, 2017
 
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
 
(4,832
)
 
(7,572
)
 
204

 
(12,200
)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax
 
(1,330
)
 
35,472

 
(16
)
 
34,126

Net current-period other comprehensive income (loss)
 
(6,162
)
 
27,900

 
188

 
21,926

Ending balance
 
$
909

 
$
(82,302
)
 
$
(174
)
 
$
(81,567
)


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.

11



 
Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For the three and nine months ended September 30, 2018 and 2017, anti-dilutive shares excluded from the calculation of diluted earnings per share were immaterial.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(in thousands, except for per share data)
Numerator:
 
 

 
 

 
 

 
 

Net Income
 
$
93,542

 
$
71,622

 
$
201,564

 
$
182,162

Denominator:
 
 

 
 

 
 

 
 

Weighted average common stock shares outstanding - Basic
 
50,594

 
53,185

 
50,807

 
53,456

Assumed exercise of stock options and awards
 
137

 
324

 
128

 
343

Weighted average common stock shares outstanding - Diluted
 
50,731

 
53,509

 
50,935

 
53,799

Net Income Per Share
 
 

 
 

 
 

 
 

Basic
 
$
1.85

 
$
1.35

 
$
3.97

 
$
3.41

Diluted
 
$
1.84

 
$
1.34

 
$
3.96

 
$
3.39


Stock Repurchase Program

In April 2017, the Company's Board of Directors approved the repurchase of up to $100 million of its outstanding common stock over a two-year period through May 2019 via the open market, established plans or privately negotiated transactions in accordance with all applicable securities laws, rules and regulations, which was completed in December 2017. In November 2017, the Company's Board of Directors approved a new stock repurchase program pursuant to which the Company may repurchase up to an additional $100 million of its outstanding common stock over a two-year period through December 2019. The stock repurchase program is subject to modification or termination at any time. The Company will repurchase shares of it's common stock subject to prevailing market conditions, and may discontinue such repurchases at any time. The Company spent $31.2 million and $53.9 million to repurchase and retire approximately 0.8 million shares and 1.4 million shares of the Company's common stock in open market transactions during the three and nine months ended September 30, 2018, respectively. The Company spent $46.2 million and $50.5 million to repurchase and retire approximately 1.1 million shares and 1.2 million shares of the Company's common stock in open market transactions during the three and nine months ended September 30, 2017, respectively. As of September 30, 2018, the Company had $46.1 million remaining to spend under its stock repurchase program.

Dividends

During the three months ended September 30, 2018, the Company declared a cash dividend of $0.12 per share for stockholders of record as of August 17, 2018, which was paid on August 31, 2018, totaling $6.1 million. During the nine months ended September 30, 2018, the Company paid total quarterly cash dividends of $18.3 million.

5. Revenue Recognition
The majority of our revenue is derived from transporting passengers on our aircraft. The Company accounts for revenue in accordance with ASC 606, which was adopted on January 1, 2018, using the full retrospective method. See Note 2 for further discussion of the adoption, including the impact on our previously issued financial statements.
The Company's primary operations are that of its wholly-owned subsidiary, Hawaiian. Principally all operations of Hawaiian
either originate and/or end in the State of Hawai'i. The management of such operations is based on a system-wide approach due
to the interdependence of Hawaiian's route structure in its various markets. As Hawaiian is engaged in only one significant line of business (i.e., air transportation), management has concluded that it has only one segment. The Company's operating revenues by geographic region (as defined by the Department of Transportation) are summarized below:

12



 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
Geographic Information
 
(in thousands)
Domestic
 
$
535,155

 
$
520,510

 
$
1,555,833

 
$
1,473,031

Pacific
 
223,932

 
195,706

 
584,113

 
519,510

Total operating revenue
 
$
759,087

 
$
716,216

 
$
2,139,946

 
$
1,992,541

Passenger & Other revenue - Generally, the Company’s contracts with customers have two principal performance obligations, which are the promise to provide transportation to the passenger and the frequent flyer miles earned on the flight. In addition, the Company often charges additional fees for items such as baggage and in-flight entertainment. Such items are not capable of being distinct from the transportation provided because the customer can only benefit from the services during the flight. The transportation performance obligation, including the redemption of HawaiianMiles awards for flights, is satisfied, and revenue is recognized, as transportation is provided. In some instances, tickets sold by the Company can include a flight segment on another carrier which is referred to as an interline segment. In this situation, the Company acts as an agent for the other carrier and revenue is recognized net of cost in other revenue. Tickets sold by other airlines where the Company provides the transportation are recognized as passenger revenue at the estimated value to be billed to the other airline when travel is provided. Differences between amounts billed and the actual amounts may be rejected and rebilled or written off if the amount recorded was different from the original estimate.
Other operating revenue consists of cargo revenue, ground handling fees, commissions, and fees earned under certain joint marketing agreements with other companies. These amounts are recognized when the service is provided.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
Passenger Revenue by Type
 
(in thousands)
Passenger revenue, excluding frequent flyer
 
$
658,886

 
$
631,604

 
$
1,855,247

 
$
1,756,185

Frequent flyer revenue, transportation component
 
38,346

 
37,039

 
108,747

 
100,216

Passenger Revenue
 
$
697,232

 
$
668,643

 
$
1,963,994

 
$
1,856,401

 
 
 
 
 
 
 
 
 
Other revenue (e.g. cargo and other miscellaneous)
 
$
43,046

 
$
34,996

 
$
123,275

 
$
101,031

Frequent flyer revenue, marketing and brand component
 
18,809

 
12,577

 
52,677

 
35,109

Other Revenue
 
$
61,855

 
$
47,573

 
$
175,952

 
$
136,140

For the three months ended September 30, 2018 and 2017, the Company's total revenue was $759.1 million and $716.2 million, respectively. For the nine months ended September 30, 2018 and 2017, the Company's total revenue was $2.1 billion and $2.0 billion, respectively. As of September 30, 2018 and December 31, 2017, the Company's Air traffic liability balance as it relates to passenger tickets (excluding frequent flyer) was $477.9 million and $422.6 million, respectively, which represents future revenue that is expected to be realized over the next 12 months. During the three months ended September 30, 2018 and 2017, the amount of revenue recognized that was included in Air traffic liability as of the beginning of the respective period was $323.4 million and $322.7 million, respectively. During the nine months ended September 30, 2018 and 2017, the amount of revenue recognized that was included in Air traffic liability as of the beginning of the respective period was $357.4 million and $322.2 million, respectively.

Passenger revenue associated with unused tickets, which represent unexercised passenger rights, is recognized in proportion
to the pattern of rights exercised by related passengers (e.g. scheduled departure dates). To calculate the portion to be recognized as revenue in the period, the Company utilizes historical information and applies the trend rate to the current air traffic liability balances for that specific period.
Management has elected (via a practical expedient election) to exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected from a customer, e.g., sales, use, value added, and certain excise taxes.
Frequent Flyer Revenue - Hawaiian's frequent flyer travel award program provides a variety of awards to program members based on accumulated mileage. ASC 606 requires the Company to account for miles earned by passengers in the HawaiianMiles program through flight activity as a component of the passenger revenue ticket transaction at the estimated selling price of the miles. Ticket consideration received is allocated between the performance obligations, primarily travel and

13



miles earned by passengers. The allocated value of the miles is deferred until the free travel or other award is used by the passenger, at which time it is included in passenger revenue. The value of the ticket used in the determination of the estimated selling price is based on the historical value of equivalent flights to those provided for loyalty awards and the related miles redeemed to obtain that award adjusted for breakage or fulfillment. The ETV includes a fulfillment discount (breakage) to reflect the value of the award ticket over the number of miles that, based on historical experience, will be needed to obtain the award. On a quarterly basis, the Company calculates the equivalent ticket value (ETV) by analyzing the fares of similar tickets for the prior 12 months, considering cabin class and geographic region.
The Company also sells mileage credits to companies participating in our frequent flyer program These contracts generally include multiple performance obligations, including the transportation that will ultimately be provided when the mileage credits are redeemed and marketing and brand related activities. The marketing and brand performance obligations are effectively provided each time a HawaiianMiles member uses the co-branded credit card and monthly access to customer lists and marketing is provided, which corresponds to the timing of when the Company issues or is obligated to issue the mileage credits to the HawaiianMiles member. Therefore, the Company recognizes revenue for the marketing and brand performance obligations when HawaiianMiles members use their co-brand credit card and the resulting mileage credits are issued to them, which best correlates with the Company’s performance in satisfying the obligation.

During the first quarter of 2018, we amended our partnership with Barclaycard US, Hawaiian's co-branded credit card partner. Management determined that the amendment should be accounted for as a termination of the existing contract and the creation of a new contract under ASC 606 and the relative selling price was determined for each performance obligation of the new agreement. The new agreement continues through 2024 and includes improved economics and enhanced product offerings for our Barclay's co-branded cardholders.

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

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

The Company's frequent flyer liability is recorded in Air traffic liability (short-term) and Other liabilities and deferred credits (long-term) in the Company's consolidated balance sheet based on estimated and expected redemption patterns using historical data and analysis. As of September 30, 2018 and December 31, 2017, the Company's contract liability balance was $372.6 million and $321.9 million, respectively.

Accounts Receivable - Accounts receivable primarily consist of amounts due from credit card companies, non-airline partners, and cargo transportation customers. The Company provides an allowance for uncollectible accounts equal to the estimated losses expected to be incurred based on historical chargebacks, write-offs, bankruptcies and other specific analyses. Bad debt expense was not material in any period presented.
Costs to obtain or fulfill a contract - In order for the Company to provide transportation to our customers we incur fulfillment costs which are generally: booking fees, credit card fees, and commission/selling costs. As of September 30, 2018 and December 31, 2017, the Company's asset balance associated with these costs were $17.9 million and $16.7 million, respectively. During the three months ended September 30, 2018 and 2017, expenses related to these costs totaled to $25.3 million and $25.1 million, respectively. During the nine months ended September 30, 2018 and 2017, expenses related to these costs totaled to $73.0 million and $72.0 million, respectively. To determine the amount to capitalize and expense at the end of each period, the Company uses historical sales data and estimates the amount associated with unflown tickets.


6. Short-Term Investments
 

14



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

The following is a summary of short-term investments held as of September 30, 2018 and December 31, 2017:
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
September 30, 2018
 
(in thousands)
Corporate debt
 
$
145,256

 
$
14

 
$
(793
)
 
$
144,477

U.S. government and agency debt
 
49,850

 

 
(156
)
 
49,694

Municipal bonds
 
13,503

 

 
(61
)
 
13,442

Other fixed income securities
 
37,724

 
1

 
(31
)
 
37,694

Total short-term investments
 
$
246,333

 
$
15

 
$
(1,041
)
 
$
245,307

 
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
December 31, 2017
 
(in thousands)
Corporate debt
 
$
165,610

 
$
8

 
$
(535
)
 
$
165,083

U.S. government and agency debt
 
59,054

 
1

 
(215
)
 
58,840

Municipal bonds
 
21,517

 

 
(104
)
 
21,413

Other fixed income securities
 
23,973

 
1

 
(13
)
 
23,961

Total short-term investments
 
$
270,154

 
$
10

 
$
(867
)
 
$
269,297


Contractual maturities of short-term investments as of September 30, 2018 are shown below. 
 
 
Under 1 Year
 
1 to 5 Years
 
Total
 
 
(in thousands)
Corporate debt
 
$
68,381

 
$
76,096

 
$
144,477

U.S. government and agency debt
 
49,694

 

 
49,694

Municipal bonds
 
9,870

 
3,572

 
13,442

Other fixed income securities
 
29,780

 
7,914

 
37,694

Total short-term investments
 
$
157,725

 
$
87,582

 
$
245,307


 
7.  Fair Value Measurements
 
ASC Topic 820, Fair Value Measurement (ASC 820), defines fair value as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.  As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability.  As a basis for considering such assumptions, ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
 
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.


15



The tables below present the Company’s financial assets and liabilities measured at fair value on a recurring basis:
 
 
Fair Value Measurements as of September 30, 2018
 
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
(in thousands)
Cash equivalents
 
$
202,252

 
$
139,303

 
$
62,949

 
$

Short-term investments
 
245,307

 

 
245,307

 

Fuel derivative contracts:
 
 
 
 

 
 

 
 

Crude oil call options
 
23,637

 

 
23,637

 

Foreign currency derivatives
 
9,187

 

 
9,187

 

Total assets measured at fair value
 
$
480,383

 
$
139,303

 
$
341,080

 
$

Foreign currency derivatives
 
13

 

 
13

 

Total liabilities measured at fair value
 
$
13

 
$

 
$
13

 
$

 
 
 
Fair Value Measurements as of December 31, 2017
 
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
(in thousands)
Cash equivalents
 
$
62,310

 
$
27,807

 
$
34,503

 
$

Restricted cash
 
1,000

 
1,000

 

 

Short-term investments
 
269,297

 

 
269,297

 

Fuel derivative contracts:
 
 
 
 

 
 

 
 

Crude oil call options
 
20,272

 

 
20,272

 

Jet fuel swaps
 
336

 

 
336

 

Foreign currency derivatives
 
4,300

 

 
4,300

 

Total assets measured at fair value
 
$
357,515

 
$
28,807

 
$
328,708

 
$

Foreign currency derivatives
 
1,713

 

 
1,713

 

Total liabilities measured at fair value
 
$
1,713

 
$

 
$
1,713

 
$


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 included collateral held by one of the Company's credit card processors.
 
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 primarily based upon data available or derived from public markets.

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

16



Fair Value of Debt
September 30, 2018
 
December 31, 2017
Carrying
 
Fair Value
 
Carrying
 
Fair Value
Amount
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Amount
 
Total
 
Level 1
 
Level 2
 
Level 3
(in thousands)
$
474,401

 
$
473,282

 
$

 
$

 
$
473,282

 
$
433,072

 
$
444,099

 
$

 
$

 
$
444,099

 
The fair value estimates of the Company’s debt were based on the discounted amount of future cash flows using the Company’s current incremental rate of borrowing for similar instruments.
 
The carrying amounts of cash, other receivables, and accounts payable approximate fair value due to the short-term nature of these financial instruments.
 
8.  Financial Derivative Instruments
 
The Company uses derivatives to manage risks associated with certain assets and liabilities arising from the potential adverse impact of fluctuations in global fuel prices and foreign currencies.
 
Fuel Risk Management

The Company’s operations are inherently dependent upon the price and availability of aircraft fuel. To manage economic risks associated with fluctuations in aircraft fuel prices, the Company periodically enters into derivative financial instruments. During the three and nine months ended September 30, 2018, 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 Company's unaudited Consolidated Statements of Operations.
 
 
Three months ended September 30,
 
Nine months ended September 30,
Fuel derivative contracts
 
2018
 
2017
 
2018
 
2017
 
 
(in thousands)
Gains (losses) realized at settlement
 
$
8,085

 
$
(2,787
)
 
$
24,572

 
$
(2,100
)
Reversal of prior period unrealized amounts
 
(18,873
)
 
6,251

 
(11,791
)
 
(7,946
)
Unrealized gains (losses) that will settle in future periods
 
14,283

 
(182
)
 
14,283

 
(182
)
Gains (losses) on fuel derivatives recorded as nonoperating income (expense)
 
$
3,495

 
$
3,282

 
$
27,064

 
$
(10,228
)

Foreign Currency Exchange Rate Risk Management
 
The Company is subject to foreign currency exchange rate risk due to revenues and expenses that are denominated in foreign currencies, with the primary exposures being 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. As discussed in more detail in Note 9, the Company also entered into two Japanese Yen denominated debt agreements during the nine month period ended September 30, 2018.

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.
 

17



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 $8.2 million into earnings over the next 12 months from AOCI based on the values at September 30, 2018.
 
The following tables present the gross fair value of asset and liability derivatives that are designated as hedging instruments under ASC 815 and derivatives that are not designated as hedging instruments under ASC 815, as well as the net derivative positions and location of the asset and liability balances within the Company's unaudited Consolidated Balance Sheets.

Derivative position as of September 30, 2018 
 
 
Balance Sheet
Location
 
Notional Amount
 
Final
Maturity
Date
 
Gross fair
value of
assets
 
Gross fair
value of
(liabilities)
 
Net
derivative
position
 
 
 
 
(in thousands)
 
 
 
(in thousands)
Derivatives designated as hedges
 
 
 
 
 
 
 
 

 
 

 
 

Foreign currency derivatives
 
Prepaid expenses and other
 
15,557,050 Japanese Yen
51,131 Australian Dollars
 
September 2019
 
7,625

 
(6
)
 
7,619

 
 
Long-term prepayments and other
 
4,537,300 Japanese Yen
8,963 Australian Dollars
 
September 2020
 
1,412

 
(6
)
 
1,406

Derivatives not designated as hedges
 
 
 
 
 
 
 
 

 
 

 
 
Foreign currency derivatives
 
Prepaid expenses and other
 
674,600 Japanese Yen
1,708 Australian Dollars
 
December 2018
 
150

 
(1
)
 
149

Fuel derivative contracts
 
Prepaid expenses and other
 
91,182 gallons
 
September 2019
 
23,637

 

 
23,637

 
Derivative position as of December 31, 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
 
16,732,375 Japanese Yen
47,805 Australian Dollars
 
December 2018
 
3,737

 
(1,441
)
 
2,296

 
 
Long-term prepayments and other
 
4,666,700 Japanese Yen
9,180 Australian Dollars
 
December 2019
 
546

 
(195
)
 
351

Derivatives not designated as hedges
 
 
 
 
 
 
 
 

 
 

 
 
Foreign currency derivatives
 
Other accrued liabilities
 
866,150 Japanese Yen
3,148 Australian Dollars
 
March 2018
 
17

 
(77
)
 
(60
)
Fuel derivative contracts
 
Prepaid expenses and other
 
94,332 gallons
 
December 2018
 
20,608

 

 
20,608

 
The following table reflects the impact of cash flow hedges designated for hedge accounting treatment and their location within the Company's unaudited Consolidated Statements of Comprehensive Income. 
 
 
(Gain) loss recognized in AOCI on derivatives (effective portion)
 
(Gain) loss reclassified from AOCI
into income (effective portion)
 
(Gain) loss recognized in
nonoperating (income) expense
(ineffective portion)
 
 
Three months ended September 30,
 
Three months ended September 30,
 
Three months ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
 
 
(in thousands)
Foreign currency derivatives
 
$
(6,769
)
 
$
75

 
$
(1,080
)
 
$
(449
)
 
$

 
$



18



 
 
(Gain) loss recognized in AOCI on derivatives (effective portion)
 
(Gain) loss reclassified from AOCI
into income (effective portion)
 
(Gain) loss recognized in
nonoperating (income) expense
(ineffective portion)
 
 
Nine months ended September 30,
 
Nine months ended September 30,
 
Nine months ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
 
 
(in thousands)
Foreign currency derivatives
 
$
(7,338
)
 
$
7,780

 
$
1,025

 
$
(2,141
)
 
$

 
$


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 September 30, 2018 and December 31, 2017.

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

9.  Debt
 
As of September 30, 2018, the expected maturities of long-term debt for the remainder of 2018 and the next four years, and thereafter, were as follows (in thousands): 
Remaining months in 2018
$
9,346

2019
80,810

2020
29,330

2021
56,312

2022
63,443

Thereafter
235,160

 
$
474,401


During the nine months ended September 30, 2018, the Company entered into two Japanese Yen denominated debt agreements for a total value of $86.5 million, which is collateralized by aircraft. Each such loan is for a term of 12 years at fixed installment coupon rates of 1.01% and 1.05%. The fluctuation in foreign exchange rates at each balance sheet date is reflected within the nonoperating income (expense) line item. During each of the three and nine months ended September 30, 2018, the Company recorded foreign currency unrealized gains of $2.3 million.
 
10.  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.
In July 2018, the Company entered into a sale leaseback transaction with an independent third party for one A330-200 aircraft under an operating lease for a term of 12 years. Future minimum rental payments for this lease are reflected in the table below.

19



As of September 30, 2018, the scheduled future minimum rental payments under operating and capital leases with non-cancellable basic terms of more than one year were as follows:
 
Capital & Financing Leases
 
Operating Leases
 
Aircraft
 
Other
 
Aircraft
 
Other
 
(in thousands)
Remaining in 2018
$
6,213

 
$
1,840

 
$
28,414

 
$
2,007

2019
24,850

 
6,561

 
106,382

 
7,751

2020
24,850

 
4,641

 
90,417

 
7,340

2021
24,850

 
4,566

 
74,315

 
6,695

2022
24,705

 
4,870

 
68,208

 
6,920

Thereafter
97,261

 
119,931

 
219,196

 
95,580

 
202,729

 
142,409

 
$
586,932

 
$
126,293

Less amounts representing interest
(37,471
)
 
(53,171
)
 
 
 
 
Present value of minimum capital lease payments
$
165,258

 
$
89,238

 
 
 
 

11. Employee Benefit Plans
 
The components of net periodic benefit cost for the Company’s defined benefit and other post-retirement plans included the following: 
 
 
Three months ended September 30,
 
Nine months ended September 30,
Components of Net Period Benefit Cost
 
2018
 
2017
 
2018
 
2017
 
 
(in thousands)
Service cost
 
$
2,275

 
$
3,296

 
$
6,199

 
$
7,626

Other cost:
 
 
 
 
 
 
 
 
Interest cost
 
5,145

 
5,983

 
15,163

 
14,518

Expected return on plan assets
 
(5,594
)
 
(4,533
)
 
(16,770
)
 
(9,592
)
Recognized net actuarial loss
 
786

 
2,342

 
2,146

 
4,574

Total other components of the net periodic benefit cost
 
337

 
3,792

 
539

 
9,500

Partial settlement and curtailment loss
 

 
15,001

 

 
15,001

Loss on plan termination
 

 
35,201

 

 
35,201

Net periodic benefit cost
 
$
2,612

 
$
57,290

 
$
6,738

 
$
67,328

 
Total other components of the net periodic benefit cost are recorded within the nonoperating income (expense), other, net line item.

During each of the three and nine months ended September 30, 2018, the Company made a discretionary contribution of $50.0 million to its defined benefit and other postretirement plans. During the three and nine months ended September 30, 2017, the Company contributed $14.2 million and $28.6 million, respectively, to its defined benefit and other post-retirement plans.

In August 2017, the Company completed the termination of the Hawaiian Airlines, Inc. Salaried & IAM Merged Pension Plan (the Merged Plan) by transferring the assets and liabilities to a third-party insurance company. At that time, the Company contributed a total of $18.5 million in cash to fully fund the plan and recognized a one-time financial loss of $35.2 million as other nonoperating special item in the Consolidated Statement of Operations.

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). In connection with the ratification of the agreement, the parties agreed to eliminate the post-65 post-retirement medical benefit for all active pilots, and replace the benefit with a health retirement account (HRA) managed by ALPA, which represented a curtailment and partial settlement of the pilots' other post-retirement benefit plan. In August 2017, the Company made a one-time cash payment of approximately $101.9 million to fund the HRA and settle the

20



post-65 post-retirement medical plan obligation. The cash contributed was distributed to the trust funding the individual health retirement notional accounts of the participants. The Company recognized a one-time settlement loss of $15.0 million.

12. Commitments and Contingent Liabilities
 
Commitments

As of September 30, 2018, the Company had the following capital commitments consisting of firm aircraft and engine orders and purchase rights:
Aircraft Type
 
Firm Orders
 
Purchase Rights
 
Expected Delivery Dates
A321neo aircraft
 
9

 
9

 
Between 2018 and 2020
B787-9 aircraft
 
10

 
10

 
Between 2021 and 2025
 
 
 
 
 
 
 
Pratt & Whitney spare engines:
 
 

 
 

 
 
A321neo spare engines
 
3

 
2

 
Between 2018 and 2019
General Electric GEnx spare engines:
 
 

 
 

 
 
B787-9 spare engines
 
2

 
2

 
Between 2021 and 2025

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

In July 2018, the Company entered into a purchase agreement for the purchase of 10 Boeing 787-9 "Dreamliner" aircraft with purchase rights for an additional 10 aircraft with scheduled delivery from 2021 to 2024. In October 2018, the Company entered into a definitive agreement for the selection of GEnx engines to power its Boeing 787-9 fleet. The agreement provides for the purchase of 20 GEnx engines, the right to purchase an additional 20 GEnx engines and the purchase of up to four spare engines. The committed expenditures under these agreements are reflected in the table below. The Company also intends to enter into additional related agreements in connection with the Boeing 787-9 purchases, including for the purchase of a flight simulator, spare parts and materials, and related services.

Committed capital and operating expenditures include escalation amounts based on estimates. Capital expenditures represent aircraft and aircraft related equipment commitments, and operating expenditures represent all other non-aircraft commitments the Company has entered into. The gross committed expenditures and committed payments for those deliveries as of September 30, 2018 are detailed below: 
 
 
Capital
 
Operating
 
Total Committed
Expenditures
 
 
(in thousands)
Remaining in 2018
 
$
98,658

 
$
16,517

 
$
115,175

2019
 
331,090

 
61,576

 
392,666

2020
 
162,749

 
56,052

 
218,801

2021
 
303,006

 
51,719

 
354,725

2022
 
417,828

 
51,918

 
469,746

Thereafter
 
710,948

 
216,064

 
927,012

 
 
$
2,024,279

 
$
453,846

 
$
2,478,125

 
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.


21



General Guarantees and Indemnifications
 
In the normal course of business, the Company enters into numerous aircraft financing and real estate leasing arrangements that have various guarantees included in such contracts. It is common in such lease transactions for the lessee to agree to indemnify the lessor and other related third-parties for tort liabilities that arise out of, or relate to, the lessee’s use of the leased aircraft or occupancy of the leased premises. In some cases, this indemnity extends to related liabilities arising from the negligence of the indemnified parties, but usually excludes any liabilities caused by such parties' gross negligence or willful misconduct. Additionally, the lessee typically indemnifies such parties for any environmental liability that arises out of or relates to the lessee's use of the real estate leased premises. The Company believes that it is insured (subject to deductibles) for most of the tort liabilities and related indemnities described above with respect to the aircraft and real estate that it leases. The Company cannot reasonably estimate the potential amount of future payments, if any, under the foregoing indemnities and agreements.
 
Credit Card Holdback
 
Under the Company’s bank-issued credit card processing agreements, certain proceeds from advance ticket sales may be held back to serve as collateral to cover any possible chargebacks or other disputed charges that may occur. These holdbacks, which are included in restricted cash in the Company’s unaudited Consolidated Balance Sheets, totaled $1.0 million as of December 31, 2017. As of September 30, 2018, there were no holdbacks held with the Company's credit card processors.
 
In the event of a material adverse change in the Company's business, the holdback could increase to an amount up to 100% of the outstanding credit card amounts that is unflown (e.g. air traffic liability, excluding frequent flyer deferred revenue), which would also cause an increase in the level of restricted cash. If the Company is unable to obtain a waiver of, or otherwise mitigate the increase in the restriction of cash, it could have a material adverse impact on the Company's operations, business or financial condition.

13. Contract Terminations Expense and Special Items

Contract terminations expense

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

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

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

Special items

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 run through November 2018, December 2018, and January 2019, respectively. During the nine months ended September 30, 2017, the Company recorded a loss on sale of aircraft of $4.8 million. During the three and nine months ended September 30, 2018, the Company delivered two of the aircraft and recorded an additional loss of $1.8 million as a result of final price adjustments. The Company expects to close the sale and deliver the third aircraft in the fourth quarter of 2018.

In March 2017, the Company received notice from ALPA that the tentative agreement covering the Company's pilots was ratified by ALPA's members and became effective on April 1, 2017.  The agreement included, among other various benefits, a pay adjustment and ratification bonus computed based on previous service. During the nine months ended September 30, 2017,

22



the Company expensed $18.7 million principally related to a one-time payment to reduce the Company's future 401K employer contribution for certain pilot groups, which was not recoverable once paid.

Nonoperating special items

In August 2017, the Company terminated the Merged Plan and settled a portion of it's pilots' other post-retirement medical plan liability. In connection with the reduction of these liabilities, the Company recorded one-time Other nonoperating special charges of $35.2 million related to the Merged Plan termination and $15.0 million related to the other post-retirement medical plan partial settlement. Refer to Note 11 for additional information.

14. Income Taxes

The Company’s effective tax rate was 19.9% and 37.7% for the three months ended September 30, 2018 and 2017, respectively and 22.4% and 36.0% for the nine months ended September 30, 2018 and 2017, respectively. The effective tax rate represents a blend of federal and state taxes and includes the impact of certain nondeductible items. The effective tax rate for the three and nine months ended September 30, 2018 reflects the reduced federal corporate income tax rate as a result of the enactment of the Tax Cuts and Jobs Act (the Tax Act) in December 2017. During the three and nine months ended September 30, 2018, the Company recorded a discrete item of $6.7 million to reflect the impact of the Tax Act on discretionary contributions made to its defined benefit and other postretirement plans related to its 2017 tax return. The Company adjusted its estimated liability under Staff Accounting Bulletin 118 (SAB 118) by reducing the prior year liability to reflect the tax benefit at a higher income tax rate for the additional contributions made. Further adjustments of other provisional estimates that were recorded at December 31, 2017 may be necessary as the Company finalizes its tax filings in the fourth quarter.

15. Supplemental Cash Flow Information

Non-cash investing and financing activities for the nine months ended September 30, 2018 and 2017 were as follows:
 
Nine months ended September 30,
 
2018
 
2017
 
(in thousands)
Investing and Financing Activities Not Affecting Cash:
 
 
 
Property and equipment acquired through a capital lease
$
116,359

 
$


16. 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 16 as Subsidiary Issuer / Guarantor) of pass-through certificates, the Company (which is also referred to in this Note 16 as Parent Issuer / Guarantor) is fully and unconditionally guaranteeing the payment obligations of Hawaiian, which is a 100% owned subsidiary of the Company, under equipment notes issued by Hawaiian to purchase new aircraft.

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


23



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

 
$
756,314

 
$
2,870

 
$
(97
)
 
$
759,087

Operating Expenses:
 
 

 
 

 
 

 
 

 
 

Wages and benefits
 

 
176,642

 

 

 
176,642

Aircraft fuel, including taxes and delivery
 

 
162,932

 

 

 
162,932

Maintenance, materials and repairs
 

 
55,818

 
1,300

 

 
57,118

Aircraft and passenger servicing
 

 
42,063

 

 

 
42,063

Commissions and other selling
 

 
32,716

 
16

 
(28
)
 
32,704

Aircraft rent
 

 
31,782

 
(14
)
 

 
31,768

Other rentals and landing fees
 

 
33,146

 
81

 

 
33,227

Depreciation and amortization
 

 
34,849

 
1,524

 

 
36,373

Purchased services
 
43

 
32,298

 
183

 
(15
)
 
32,509

Other
 
1,604

 
35,955

 
420

 
(54
)
 
37,925

Total
 
1,647

 
638,201

 
3,510

 
(97
)
 
643,261

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

 
(640
)
 

 
115,826

Nonoperating Income (Expense):
 
 

 
 

 
 

 
 

 
 

Undistributed net income of subsidiaries
 
94,810

 

 

 
(94,810
)
 

Interest expense and amortization of debt discounts and issuance costs
 

 
(8,400
)
 
(46
)
 

 
(8,446
)
Interest income
 
41

 
3,083

 

 

 
3,124

Capitalized interest
 

 
1,821

 

 

 
1,821

Gains on fuel derivatives
 

 
3,495

 

 

 
3,495

Other, net
 

 
936

 
1

 

 
937

Total
 
94,851

 
935

 
(45
)
 
(94,810
)
 
931

Income (Loss) Before Income Taxes
 
93,204

 
119,048

 
(685
)
 
(94,810
)
 
116,757

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

 
(143
)
 

 
23,215

Net Income (Loss)
 
$
93,542

 
$
95,352

 
$
(542
)
 
$
(94,810
)
 
$
93,542

Comprehensive Income (Loss)
 
$
98,642

 
$
100,452

 
$
(542
)
 
$
(99,910
)
 
$
98,642



24



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

 
$
714,469

 
$
1,853

 
$
(106
)
 
$
716,216

Operating Expenses:
 
 

 
 

 
 

 
 

 
 

Aircraft fuel, including taxes and delivery
 

 
110,111

 

 

 
110,111

Wages and benefits
 

 
161,059

 

 

 
161,059

Aircraft rent
 

 
35,090

 
105

 

 
35,195

Maintenance, materials and repairs
 

 
48,987

 
409

 

 
49,396

Aircraft and passenger servicing
 

 
37,533

 

 

 
37,533

Commissions and other selling
 
17

 
33,158

 
19

 
(31
)
 
33,163

Depreciation and amortization
 

 
27,491

 
956

 

 
28,447

Other rentals and landing fees
 

 
30,989

 

 

 
30,989

Purchased services
 
117

 
24,428

 
206

 
(15
)
 
24,736

Other
 
1,498

 
34,678

 
469

 
(60
)
 
36,585

Total
 
1,632

 
543,524

 
2,164

 
(106
)
 
547,214

Operating Income (Loss)
 
(1,632
)
 
170,945

 
(311
)
 

 
169,002

Nonoperating Income (Expense):
 
 

 
 

 
 

 
 

 
 

Undistributed net income of subsidiaries
 
72,524

 

 

 
(72,524
)
 

Other nonoperating special items
 

 
(50,202
)
 

 

 
(50,202
)
Interest expense and amortization of debt discounts and issuance costs
 

 
(7,578
)
 

 

 
(7,578
)
Interest income
 
76

 
1,785

 

 

 
1,861

Capitalized interest
 

 
2,416

 

 

 
2,416

Gains on fuel derivatives
 

 
3,282

 

 

 
3,282

Other, net
 

 
(3,892
)
 

 

 
(3,892
)
Total
 
72,600

 
(54,189
)
 

 
(72,524
)
 
(54,113
)
Income (Loss) Before Income Taxes
 
70,968

 
116,756

 
(311
)
 
(72,524
)
 
114,889

Income tax expense (benefit)
 
(654
)
 
43,921

 

 

 
43,267

Net Income (Loss)
 
$
71,622

 
$
72,835

 
$
(311
)
 
$
(72,524
)
 
$
71,622

Comprehensive Income (Loss)
 
$
96,408

 
$
97,621

 
$
(311
)
 
$
(97,310
)
 
$
96,408


(a) Amounts adjusted due to the adoption of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606). See Note 2 to Consolidated Financial Statements contained in Part I, Item 1 of this report for additional information.














25



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

 
$
2,132,853

 
$
7,390

 
$
(297
)
 
$
2,139,946

Operating Expenses:
 
 

 
 

 
 

 
 

 
 

Aircraft fuel, including taxes and delivery
 

 
449,404

 

 

 
449,404

Wages and benefits
 

 
516,906

 

 

 
516,906

Aircraft rent
 

 
93,547

 
(14
)
 

 
93,533

Maintenance materials and repairs
 

 
172,780

 
3,449

 

 
176,229

Aircraft and passenger servicing
 

 
117,207

 

 

 
117,207

Commissions and other selling
 
(5
)
 
96,537

 
61

 
(111
)
 
96,482

Depreciation and amortization
 

 
98,026

 
3,511

 

 
101,537

Other rentals and landing fees
 

 
94,913

 
313

 

 
95,226

Purchased services
 
131

 
94,415

 
603

 
(45
)
 
95,104

Contract termination expense
 

 
35,322

 

 

 
35,322

Other
 
5,284

 
110,513

 
2,321

 
(141
)
 
117,977

Total
 
5,410

 
1,879,570

 
10,244

 
(297
)
 
1,894,927

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

 
(2,854
)
 

 
245,019

Nonoperating Income (Expense):
 
 

 
 

 
 

 
 

 
 

Undistributed net income of subsidiaries
 
205,719

 

 

 
(205,719
)
 

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

 
(24,628
)
Interest income
 
157

 
6,372

 

 

 
6,529

Capitalized interest
 

 
6,414

 

 

 
6,414

Gains on fuel derivatives
 

 
27,064

 

 

 
27,064

Other, net
 
(4
)
 
(761
)
 
6

 

 
(759
)
Total
 
205,869

 
14,555

 
(85
)
 
(205,719
)
 
14,620

Income (Loss) Before Income Taxes
 
200,459

 
267,838

 
(2,939
)
 
(205,719
)
 
259,639

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

 
(617
)
 

 
58,075

Net Income (Loss)
 
$
201,564

 
$
208,041

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

Comprehensive Income (Loss)
 
$
209,417

 
$
215,894

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



26



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

 
$
1,987,423

 
$
5,436

 
$
(318
)
 
$
1,992,541

Operating Expenses:
 
 

 
 

 
 

 
 

 
 

Aircraft fuel, including taxes and delivery
 

 
316,423

 

 

 
316,423

Wages and benefits
 

 
466,772

 

 

 
466,772

Aircraft rent
 

 
102,408

 
475

 

 
102,883

Maintenance materials and repairs
 

 
158,417

 
2,949

 

 
161,366

Aircraft and passenger servicing
 

 
107,459

 

 

 
107,459

Commissions and other selling
 
42

 
94,976

 
57

 
(108
)
 
94,967

Depreciation and amortization
 

 
80,927

 
2,860

 

 
83,787

Other rentals and landing fees
 

 
86,763

 

 

 
86,763

Purchased services
 
400

 
78,428

 
645

 
(45
)
 
79,428

Special items
 

 
23,450

 

 

 
23,450

Other
 
3,957

 
96,128

 
1,451

 
(165
)
 
101,371

Total
 
4,399

 
1,612,151

 
8,437

 
(318
)
 
1,624,669

Operating Income (Loss)
 
(4,399
)
 
375,272

 
(3,001
)
 

 
367,872

Nonoperating Income (Expense):
 
 

 
 

 
 

 
 

 
 

Undistributed net income of subsidiaries
 
183,830

 

 

 
(183,830
)
 

Other nonoperating special items
 

 
(50,202
)
 

 

 
(50,202
)
Interest expense and amortization of debt discounts and issuance costs
 

 
(23,292
)
 

 

 
(23,292
)
Interest income
 
216

 
4,264

 

 

 
4,480

Capitalized interest
 

 
6,258

 

 

 
6,258

Losses on fuel derivatives
 

 
(10,228
)
 

 

 
(10,228
)
Other, net
 

 
(10,132
)
 

 

 
(10,132
)
Total
 
184,046

 
(83,332
)
 

 
(183,830
)
 
(83,116
)
Income (Loss) Before Income Taxes
 
179,647

 
291,940

 
(3,001
)
 
(183,830
)
 
284,756

Income tax expense (benefit)
 
(2,514
)
 
105,108

 

 

 
102,594

Net Income (Loss)
 
$
182,161

 
$
186,832

 
$
(3,001
)
 
$
(183,830
)
 
$
182,162

Comprehensive Income (Loss)
 
$
204,088

 
$
208,754

 
$
(3,001
)
 
$
(205,753
)
 
$
204,088


(a) Amounts adjusted due to the adoption of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606). See Note 2 to Consolidated Financial Statements contained in Part I, Item 1 of this report for additional information.


27



Condensed Consolidating Balance Sheets
September 30, 2018
 
 
Parent Issuer /
Guarantor
 
Subsidiary
Issuer /
Guarantor
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
(in thousands)
ASSETS
 
 

 
 

 
 

 
 

 
 

Current assets:
 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
9,706

 
$
328,848

 
$
7,487

 
$

 
$
346,041

Restricted cash
 

 

 

 

 

Short-term investments
 

 
245,307

 

 

 
245,307

Accounts receivable, net
 
25

 
125,602

 
1,065

 
(158
)
 
126,534

Spare parts and supplies, net
 

 
32,646

 

 

 
32,646

Prepaid expenses and other
 
197

 
94,898

 
197

 

 
95,292

Total
 
9,928

 
827,301

 
8,749

 
(158
)
 
845,820

Property and equipment at cost
 

 
2,656,671

 
90,713

 

 
2,747,384

Less accumulated depreciation and amortization
 

 
(616,828
)
 
(14,352
)
 

 
(631,180
)
Property and equipment, net
 

 
2,039,843

 
76,361

 

 
2,116,204

Long-term prepayments and other
 

 
187,484

 
376

 

 
187,860

Deferred tax assets, net
 

 

 

 

 

Goodwill and other intangible assets, net
 

 
120,263

 
808

 

 
121,071

Intercompany receivable
 

 
403,074

 

 
(403,074
)
 

Investment in consolidated subsidiaries
 
1,365,950

 

 

 
(1,365,950
)
 

TOTAL ASSETS
 
$
1,375,878

 
$
3,577,965

 
$
86,294

 
$
(1,769,182
)
 
$
3,270,955

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

 
 

 
 

 
 

Current liabilities:
 
 

 
 

 
 

 
 

 
 

Accounts payable
 
$
911

 
$
138,685

 
$
1,771

 
$
(158
)
 
$
141,209

Air traffic liability
 

 
648,795

 
4,318

 

 
653,113

Other accrued liabilities
 

 
136,529

 
291

 

 
136,820

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

 
105,414

 
37

 

 
105,451

Total
 
911

 
1,029,423

 
6,417

 
(158
)
 
1,036,593

Long-term debt and capital lease obligations
 

 
607,975

 
4,608

 

 
612,583

Intercompany payable
 
391,766

 

 
11,308

 
(403,074
)
 

Other liabilities and deferred credits:
 
 

 
 

 
 

 
 

 
=sum(C32:I32)

Accumulated pension and other post-retirement benefit obligations
 

 
169,484

 

 

 
169,484

Other liabilities and deferred credits
 

 
279,067

 
1,132

 

 
280,199

Deferred tax liabilities, net
 

 
188,895

 

 

 
188,895

Total
 

 
637,446

 
1,132

 

 
638,578

Shareholders’ equity
 
983,201

 
1,303,121

 
62,829

 
(1,365,950
)
 
983,201

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
1,375,878

 
$
3,577,965

 
$
86,294

 
$
(1,769,182
)
 
$
3,270,955





28



Condensed Consolidating Balance Sheets
December 31, 2017 (a) 
 
 
Parent Issuer /
Guarantor
 
Subsidiary
Issuer /
Guarantor
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
(in thousands)
ASSETS
 
 
 
 

 
 

 
 

 
 

Current assets:
 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
57,405

 
$
125,861

 
$
7,687

 
$

 
$
190,953

Restricted cash
 

 
1,000

 

 

 
1,000

Short-term investments
 

 
269,297

 

 

 
269,297

Accounts receivable, net
 
25

 
139,008

 
1,455

 
(209
)
 
140,279

Spare parts and supplies, net
 

 
35,361

 

 

 
35,361

Prepaid expenses and other
 
171

 
78,933

 
82

 

 
79,186

Total
 
57,601

 
649,460

 
9,224

 
(209
)
 
716,076

Property and equipment at cost
 

 
2,326,249

 
74,562

 

 
2,400,811

Less accumulated depreciation and amortization
 

 
(546,831
)
 
(11,717
)
 

 
(558,548
)
Property and equipment, net
 

 
1,779,418

 
62,845

 

 
1,842,263

Long-term prepayments and other
 

 
193,449

 
183

 

 
193,632

Deferred tax assets, net
 
31,845

 

 

 
(31,845
)
 

Goodwill and other intangible assets, net
 

 
120,695

 
1,155

 

 
121,850

Intercompany receivable
 

 
392,791

 

 
(392,791
)
 

Investment in consolidated subsidiaries
 
1,137,941

 

 

 
(1,137,941
)
 

TOTAL ASSETS
 
$
1,227,387

 
$
3,135,813

 
$
73,407

 
$
(1,562,786
)
 
$
2,873,821

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

 
 

 
 

 
 

Current liabilities:
 
 

 
 

 
 

 
 

 
 

Accounts payable
 
$
622

 
$
138,818

 
$
1,574

 
$
(209
)
 
$
140,805

Air traffic liability
 

 
584,366

 
4,727

 

 
589,093

Other accrued liabilities
 
32

 
147,211

 
350

 

 
147,593

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

 
59,470

 

 

 
59,470

Total
 
654

 
929,865

 
6,651

 
(209
)
 
936,961

Long-term debt and capital lease obligations
 

 
511,201

 

 

 
511,201

Intercompany payable
 
381,608

 

 
11,183

 
(392,791
)
 

Other liabilities and deferred credits:
 
 

 
 

 
 

 
 

 
0

Accumulated pension and other post-retirement benefit obligations
 

 
220,788

 

 

 
220,788

Other liabilities and deferred credits
 

 
224,500

 
1,105

 

 
225,605

Deferred tax liabilities, net
 

 
165,986

 

 
(31,845
)
 
134,141

Total
 

 
611,274

 
1,105

 
(31,845
)
 
580,534

Shareholders’ equity
 
845,125

 
1,083,473

 
54,468

 
(1,137,941
)
 
845,125

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
1,227,387

 
$
3,135,813

 
$
73,407

 
$
(1,562,786
)
 
$
2,873,821


(a) Amounts adjusted due to the adoption of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606). See Note 2 to Consolidated Financial Statements contained in Part I, Item 1 of this report for additional information.




29



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

 
$
1,506

 
$

 
$
444,080

Cash Flows From Investing Activities:
 
 

 
 

 
 

 
 

 
 

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

 
51,280

 

Additions to property and equipment, including pre-delivery deposits
 

 
(373,099
)
 
(12,999
)
 

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

 
117,143

 

 

 
117,143

Purchases of investments
 

 
(159,648
)
 

 

 
(159,648
)
Sales of investments
 

 
182,816

 

 

 
182,816

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

 
(245,787
)
Cash Flows From Financing Activities:
 
 

 
 

 
 

 
 

 
 

Long-term borrowings
 

 
86,500

 

 

 
86,500

Repayments of long-term debt and capital lease obligations
 

 
(53,734
)
 
(7
)
 

 
(53,741
)
Debt issuance costs
 

 
(1,108
)
 

 

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

 

 

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

 

 
11,300

 
(51,280
)
 

Repurchases of common stock
 
(53,894
)
 

 

 

 
(53,894
)
Other
 
78

 
(3,713
)
 

 

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

 
11,293

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

 
(200
)
 

 
154,088

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

 
126,861

 
7,687

 

 
191,953

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

 
$
328,848

 
$
7,487

 
$

 
$
346,041




30



Condensed Consolidating Statements of Cash Flows
Nine months ended September 30, 2017
 
 
Parent Issuer /
Guarantor
 
Subsidiary
Issuer /
Guarantor
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
(in thousands)
Net Cash Provided By (Used In) Operating Activities
 
$
(3,491
)
 
$
300,820

 
$
(1,852
)
 
$

 
$
295,477

Cash Flows From Investing Activities:
 
 

 
 

 
 

 
 

 
 

Net payments to affiliates
 
(2,500
)
 
(52,507
)
 

 
55,007

 

Additions to property and equipment, including pre-delivery deposits
 

 
(208,759
)
 
(3,776
)
 

 
(212,535
)
Proceeds from the sale and sale leaseback of aircraft and aircraft related equipment
 

 
33,511

 

 

 
33,511

Purchases of investments
 

 
(171,485
)
 

 

 
(171,485
)
Sales of investments
 

 
183,930

 

 

 
183,930

Net cash used in investing activities
 
(2,500
)
 
(215,310
)
 
(3,776
)
 
55,007

 
(166,579
)
Cash Flows From Financing Activities:
 
 

 
 

 
 

 
 

 
 

Repayments of long-term debt and capital lease obligations
 

 
(52,463
)
 

 

 
(52,463
)
Debt issuance costs
 

 
(188
)
 

 

 
(188
)
Net payments from affiliates
 
52,507

 

 
2,500

 
(55,007
)
 

Repurchases of Common Stock
 
(50,486
)
 

 

 

 
(50,486
)
Other
 
86

 
(7,789
)
 

 

 
(7,703
)
Net cash provided by (used in) financing activities
 
2,107

 
(60,440
)
 
2,500

 
(55,007
)
 
(110,840
)
Net increase (decrease) in cash and cash equivalents
 
(3,884
)
 
25,070

 
(3,128
)
 

 
18,058

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

 
254,985

 
8,377

 

 
330,991

Cash, cash equivalents, & restricted cash - End of Period
 
$
63,745

 
$
280,055

 
$
5,249

 
$

 
$
349,049



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

31



ITEM 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
Forward-Looking Statements
 
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect our current views with respect to certain current and future events and financial performance. Such forward-looking statements include, without limitation, statements related to our financial statements and results of operations; any expectations of operating expenses, deferred revenue, interest rates, tax rates, income taxes, deferred tax assets, valuation allowances or other financial items; expectations regarding industry capacity, our operating performance, available seat miles, operating revenue per available seat mile and operating cost per available seat mile for the fourth quarter of 2018; our expected fleet as of September 30, 2019; estimates of annual fuel expenses and measure of the effects of fuel prices on our business; the availability of financing; statements regarding our intention to pay quarterly dividends and the amounts thereof, if any; statements regarding our ability and intention to repurchase our shares; changes in our fleet plan and related cash outlays; committed capital expenditures; expected cash payments related to our post-retirement plan obligations; estimated financial charges; expected delivery of new aircraft and engines; the impact of accounting standards on our financial statements; the effects of any litigation on our operations or business; the effects of our fuel and currency risk hedging policies; the fair value and expected maturity of our debt obligations; our estimated contractual obligations; and other matters that do not relate strictly to historical facts or statements of assumptions underlying any of the foregoing.  Words such as “expects,” “anticipates,” “projects,” “intends,” “plans,” “believes,” “estimates,” “could,” “may,” variations of such words, and similar expressions are also intended to identify such forward-looking statements.  These forward-looking statements are and will be, as the case may be, subject to many risks, uncertainties and assumptions relating to our operations and business environment, all of which may cause our actual results to be materially different from any future results, expressed or implied, in these forward-looking statements.
 
Factors that could affect such forward-looking statements include, but are not limited to: our ability to accurately forecast quarterly and annual results; global economic volatility; macroeconomic developments; political developments; our dependence on the tourism industry; the price and availability of fuel; foreign currency exchange rate fluctuations; competitive pressures, including the potential impact of increasing industry capacity between North America and Hawai’i; fluctuations in demand for transportation in the markets in which we operate, including due to the occurrence of natural disasters, such as hurricanes, earthquakes and tsunamis; maintenance of privacy and security of customer-related information and compliance with applicable federal and foreign privacy or data security regulations or standards; our dependence on technology and automated systems; our reliance on third-party contractors; satisfactory labor relations; our ability to attract and retain qualified personnel and key executives; successful implementation of growth strategy and cost reduction goals; adverse publicity; risks related to the airline industry; our ability to obtain and maintain adequate facilities and infrastructure; seasonal and cyclical volatility; the effect of applicable state, federal and foreign laws and regulations; increases in insurance costs or reductions in coverage; the limited number of suppliers for aircraft, aircraft engines and parts; our existing aircraft purchase agreements; delays in aircraft or engine deliveries or other loss of fleet capacity; our ability to continue to generate sufficient cash flow to support the payment of a quarterly dividend; changes in our future capital needs; fluctuations in our share price; our financial liquidity; and our ability to implement our growth strategy. The risks, uncertainties, and assumptions referred to above that could cause our results to differ materially from the results expressed or implied by such forward-looking statements also include the risks, uncertainties, and assumptions discussed from time to time in our public filings and public announcements, including, but not limited to, our risk factors set out in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017. 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 June 2018, the latest available data. As of September 30, 2018, we had 7,152 active employees.

32




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

Financial Highlights

GAAP net income in the third quarter of $93.5 million, or $1.84 per diluted share.

Adjusted net income in the third quarter of $96.7 million, or $1.91 per diluted share.

Pre-tax margin for the third quarter of 15.4%.

Unrestricted cash and cash equivalents and short-term investments of $591.3 million.

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

Outlook

Looking ahead, industry capacity increases in North America and certain parts of our International network are expected to continue through the fourth quarter of 2018. We expect our available seat miles during the three months ending December 31, 2018 to increase by 4.5% to 6.5% compared to the prior year period. While demand for travel to Hawaii remains robust, impacts from weather-related disruptions and the current pricing environment result in our expectation of operating revenue per available seat mile to be between down 2.5% to up 0.5%. We expect operating cost per available seat mile during the three months ending December 31, 2018 to be up 2.3% to 5.8% compared to the prior year period.

Partnerships

Together with Japan Airlines, we filed an application with the U.S. Department of Transportation (DOT) and Japan's Ministry of Land, Infrastructure, Transport and Tourism (MLIT) seeking antitrust immunity to create a joint venture that promises significant consumer benefits and the opportunity for service expansion. We further enhanced our comprehensive partnership with Japan Airlines with the announcement of reciprocal frequent flyer benefits for HawaiianMiles and JAL Mileage Bank members, which became effective in October 2018. The joint venture and enhanced program are the first two phases of the comprehensive partnership launched in March 2018 with codeshare flights. The Company has not yet received approval and does not anticipate operations commencing under the joint venture until 2019.

Fleet Summary

In July 2018, we entered into an agreement for the purchase of 10 Boeing 787-9 "Dreamliner" aircraft with purchase rights for an additional 10 aircraft. We expect those aircraft to be delivered starting in 2021 and, thus, they are not reflected in the table below. The table below summarizes our total fleet as of September 30, 2017 and 2018, and expected fleet as of September 30, 2019 (based on existing executed agreements):
 
 
September 30, 2017
 
September 30, 2018
 
September 30, 2019
Aircraft Type
 
Leased (2)
 
Owned
 
Total
 
Leased (2)
 
Owned
 
Total
 
Leased (2)
 
Owned
 
Total
A330-200
 
11

 
13

 
24

 
12

 
12

 
24

 
12

 
12

 
24

A321neo
 

 

 

 
2

 
7

 
9

 
2

 
14

 
16

767-300
 
7

 
1

 
8

 
4

 
2

 
6

 

 

 

717-200
 
5

 
15

 
20

 
5

 
15

 
20

 
5

 
15

 
20

ATR 42-500 (1)
 

 
3

 
3

 

 
4

 
4

 

 
4

 
4

ATR 72-200 (3)
 

 
3

 
3

 

 
3

 
3

 

 
3

 
3

Total
 
23

 
35

 
58

 
23

 
43

 
66

 
19

 
48

 
67

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


33



(1)
The ATR 42-500 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.

(3)
The ATR 72-200 turboprop aircraft are used for our cargo operations.


Results of Operations
 
For the three months ended September 30, 2018, we generated net income of $93.5 million, or $1.84 per diluted share, compared to net income of $71.6 million, or $1.34 per diluted share, for the same period in 2017. For the nine months ended September 30, 2018, we generated net income of $201.6 million, or $3.96 per diluted share, compared to net income of $182.2 million, or $3.39 per diluted share, for the same period in 2017. During the first quarter of 2018, we extended our partnership with Barclaycard US, Hawaiian's co-branded credit card partner. The new agreement continues through 2024 and includes improved economics and enhanced product offerings for our cardholders.

Selected Consolidated Statistical Data (unaudited)
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(in thousands, except as otherwise indicated)
Scheduled Operations (a) :
 
 

 
 

 
 

 
 

Revenue passengers flown
 
3,035

 
3,000

 
8,943

 
8,588

Revenue passenger miles (RPM)
 
4,554,393

 
4,290,499

 
12,918,174

 
12,187,344

Available seat miles (ASM)
 
5,347,156

 
4,946,678

 
15,098,431

 
14,203,112

Passenger revenue per RPM (Yield)
 

15.31
¢
 

15.58
¢
 

15.20
¢
 

15.23
¢
Passenger load factor (RPM/ASM)
 
85.2
%
 
86.7
%
 
85.6
%
 
85.8
%
Passenger revenue per ASM (PRASM)
 

13.04
¢
 

13.52
¢
 

13.01
¢
 

13.07
¢
Total Operations (a) :
 
 

 
 

 
 

 
 

Revenue passengers flown
 
3,039

 
3,001

 
8,949

 
8,592

RPM
 
4,557,706

 
4,293,095

 
12,921,666

 
12,190,846

ASM
 
5,352,976

 
4,950,800

 
15,104,500

 
14,208,624

Operating revenue per ASM (RASM)
 

14.18
¢
 

14.47
¢
 

14.17
¢
 

14.02
¢
Operating cost per ASM (CASM)
 

12.02
¢
 

11.05
¢
 

12.55
¢
 

11.43
¢
CASM excluding aircraft fuel, loss on sale of aircraft, contract terminations expense, and special items (b)
 

8.94
¢
 

8.83
¢
 

9.32
¢
 

9.04
¢
Aircraft fuel expense per ASM (c)
 

3.05
¢
 

2.22
¢
 

2.98
¢
 

2.23
¢
Revenue block hours operated
 
55,147

 
49,384

 
155,369

 
141,955

Gallons of aircraft fuel consumed
 
72,133

 
67,160

 
206,032

 
193,404

Average cost per gallon of aircraft fuel (actual) (c)
 
$
2.26

 
$
1.64

 
$
2.18

 
$
1.64

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

Operating Revenue
 
During the three and nine months ended September 30, 2018, operating revenue increased by $42.9 million, or 6.0%, and $147.4 million, or 7.4%, respectively, as compared to the prior year periods, driven by increased passenger revenue and is discussed further below:


34



Passenger revenue

For the three and nine months ended September 30, 2018, passenger revenue increased by $28.6 million, or 4.3%, and $107.6 million, or 5.8%, respectively, as compared to the prior year periods. Details of these changes are described in the table below: 
 
 
Three months ended September 30, 2018 as compared to three months ended September 30, 2017
 
Nine months ended September 30, 2018 as compared to nine months ended September 30, 2017
 
 
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
 
$
4.9

 
(3.0
)%
 
4.2
%
 
7.4
%
 
$
52.9

 
(1.9
)%
 
5.7
%
 
8.0
%
International
 
23.7

 
3.1

 
10.2

 
9.5

 
54.7

 
5.2

 
6.5

 
3.2

Total scheduled
 
$
28.6

 
(1.7
)%
 
6.2
%
 
8.1
%
 
$
107.6

 
(0.2
)%
 
6.0
%
 
6.3
%

Domestic

For the three and nine months ended September 30, 2018, revenue on our domestic routes increased by $4.9 million, or 1.0%, and $52.9 million, or 3.8%, respectively, as compared to the prior year periods. The increase was due to an increase in overall passengers flown in our North America routes of 5.4% and 6.5% for the three and nine months ended September 30, 2018, respectively, partially offset by a slight decrease in average fare prices. Passengers flown on our Neighbor Island routes were down 3.3% in the three months ended September 30, 2018 driven by reduction in travel associated with the impacts of two hurricanes impacting the State of Hawaii and volcanic activity on the Big Island of Hawaii. During the year we expanded our operations and now have direct routes that go between Maui, Hawaii and Portland, Oregon (January 2018), Kona, Hawaii and Los Angeles, California (March 2018), Lihue, Hawaii and Los Angeles, California (May 2018), Honolulu, Hawaii and Long Beach, California (May 2018), Maui, Hawaii and San Diego, California (June 2018), and Lihue, Hawaii and Oakland, California (July 2018 - expansion to daily service). In September 2018, we announced our new direct route between Honolulu, Hawaii and Boston, Massachusetts, which will commence in April 2019.

International

For the three and nine months ended September 30, 2018, revenue on our international routes increased by $23.7 million, or 13.7%, and $54.7 million, or 12.0%, respectively, as compared to the prior year periods. During the three months ended September 30, 2018, the overall passengers flown increased by 11.0% and average fares increased by 1.9% as compared to the prior year period. During the nine months ended September 30, 2018, the overall passengers flown increased by 6.7% and average fares increased by 5.7% as compared to the prior year period.

Operating Expense
 
Operating expenses were $643.3 million and $547.2 million for the three months ended September 30, 2018 and 2017, respectively, and $1.9 billion and $1.6 billion for the nine months ended September 30, 2018 and 2017, respectively. Increases (decreases) in operating expenses for the three and nine months ended September 30, 2018, as compared to the prior year periods, are detailed below:


35



 
 
Increase / (decrease) for the three months ended September 30, 2018 compared to the three months ended September 30, 2017
 
Increase / (decrease) for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017
 
 
$
 
%
 
$
 
%
Operating expenses
 
(in thousands)
 
 
 
(in thousands)
 
 
Wages and benefits
 
$
15,583

 
9.7
 %
 
$
50,134

 
10.7
 %
Aircraft fuel, including taxes and delivery
 
52,821

 
48.0

 
132,981

 
42.0

Maintenance, materials and repairs
 
7,722

 
15.6

 
14,863

 
9.2

Aircraft and passenger servicing
 
4,530

 
12.1

 
9,748

 
9.1

Commissions and other selling
 
(459
)
 
(1.4
)
 
1,515

 
1.6

Aircraft rent
 
(3,427
)
 
(9.7
)
 
(9,350
)
 
(9.1
)
Other rentals and landing fees
 
2,238

 
7.2

 
8,463

 
9.8

Depreciation and amortization
 
7,926

 
27.9

 
17,750

 
21.2

Purchased services
 
7,773

 
31.4

 
15,676

 
19.7

Contract terminations expense
 

 

 
35,322

 
100.0

Special items
 

 

 
(23,450
)
 
(100.0
)
Other
 
1,340

 
3.7

 
16,606

 
16.4

Total
 
$
96,047

 
17.6
 %
 
$
270,258

 
16.6
 %
 
Wages and benefits

Wages and benefits expense increased by $15.6 million, or 9.7%, and $50.1 million, or 10.7%, for the three and nine months ended September 30, 2018, respectively as compared to the prior year periods. The increases were the result of higher salary expense, driven by increased wage rates and headcount.

Aircraft fuel
 
Aircraft fuel expense increased during the three and nine months ended September 30, 2018, as compared to the prior year period, 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 September 30,
 
Nine months ended September 30,
 
 
2018
 
2017
 
% Change
 
2018
 
2017
 
% Change
 
 
(in thousands, except per-gallon amounts)
 
 
 
(in thousands, except per-gallon amounts)
 
 
Aircraft fuel expense, including taxes and delivery
 
$
162,932

 
$
110,111

 
48.0
%
 
$
449,404

 
$
316,423

 
42.0
%
Fuel gallons consumed
 
72,133

 
67,160

 
7.4
%
 
206,032

 
193,404

 
6.5
%
Average fuel price per gallon, including taxes and delivery
 
$
2.26

 
$
1.64

 
37.8
%
 
$
2.18

 
$
1.64

 
32.9
%
 
We believe economic fuel expense is a good measure of the effect of fuel prices on our business as it most closely approximates the net cash outflow associated with the purchase of fuel for our operations in a period and is consistent with how our management manages our business and assesses our operating performance. We define economic fuel expense as raw fuel expense plus (gains)/losses realized through actual cash payments to/(receipts from) hedge counterparties for fuel derivatives settled in the period, inclusive of costs related to hedging premiums. Economic fuel expense is calculated as follows: 

36



 
 
Three months ended September 30,
 
 Nine months ended September 30,
 
 
2018
 
2017
 
% Change
 
2018
 
2017
 
% Change
 
 
(in thousands, except per-gallon amounts)
 
 
 
(in thousands, except per-gallon amounts)
 
 
Aircraft fuel expense, including taxes and delivery
 
$
162,932

 
$
110,111

 
48.0
%
 
$
449,404

 
$
316,423

 
42.0
%
Realized losses (gains) on settlement of fuel derivative contracts
 
(8,085
)

2,787


NM


(24,572
)

2,100

 
NM

Economic fuel expense
 
$
154,847

 
$
112,898

 
37.2
%
 
$
424,832

 
$
318,523

 
33.4
%
Fuel gallons consumed
 
72,133

 
67,160

 
7.4
%
 
206,032

 
193,404

 
6.5
%
Economic fuel costs per gallon
 
$
2.15

 
$
1.68

 
28.0
%
 
$
2.06

 
$
1.65

 
24.8
%
 
See Item 3, "Quantitative and Qualitative Disclosures About Market Risk" for additional discussion of our aircraft fuel costs and related hedging program.

Maintenance, materials and repairs

Maintenance, materials and repairs expense increased $7.7 million, or 15.6%, and $14.9 million, or 9.2%, for the three and nine months ended September 30, 2018, respectively as compared to the prior year periods. On a per ASM basis, maintenance, materials and repairs expense increased 7.0% and 2.7%, respectively as compared to the prior year periods, primarily driven by higher rates on our aircraft maintenance agreements and the timing of scheduled maintenance events.

Aircraft and passenger servicing

Aircraft and passenger servicing expense increased by $4.5 million, or 12.1%, and $9.7 million, or 9.1%, for the three and nine months ended September 30, 2018, respectively as compared to the prior year periods. The increase was a direct result of our higher number of passengers flown on our long-haul routes, which resulted in an increase in various aircraft and passenger servicing expenses such as our food and beverage and ground handling costs.

Aircraft rent

Aircraft rent expense decreased by $3.4 million, or 9.7% and $9.4 million, or 9.1%, for the three and nine months ended September 30, 2018, respectively as compared to the prior year periods. As described below under Contract terminations expense during the first quarter of 2018, we entered into a transaction with a lessor to early terminate three Boeing 767-300 aircraft leases and concurrently entered into a forward sale agreement for the same three Boeing 767-300 aircraft, including two Pratt & Whitney 4060 engines for each aircraft. As we now own these aircraft, the amount of aircraft rent expense has been reduced.

Depreciation and amortization

Depreciation and amortization expense increased by $7.9 million, or 27.9%, and $17.8 million, or 21.2%, for the three and nine months ended September 30, 2018, respectively, as compared to the prior year periods, due to the increase in the number of owned aircraft, specifically the addition of eight Airbus A321neo aircraft we took delivery of and placed in service, including those under capital lease, since September 30, 2017.

Purchased services

Purchased services expense increased by $7.8 million, or 31.4%, and $15.7 million, or 19.7%, for the three and nine months ended September 30, 2018, respectively, as compared to the prior year periods. The increase was primarily attributed to an increase in third-party vendor IT services and an increase in services associated with our cargo operations.

Contract terminations expense

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


37



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

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

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 goes through November 2018, December 2018, and January 2019, respectively. During the three and nine months ended September 30, 2017, we recorded a loss on sale of aircraft of $4.8 million.

In March 2017, we received notice from ALPA that our negotiated contract agreement was ratified by ALPA's members. The agreement became effective April 1, 2017. The agreement included, among other various benefits, a pay adjustment and ratification bonus computed based on previous service. During the nine months ended September 30, 2017, we expensed $18.7 million principally related to a one-time payment to reduce our future 401K employer contribution for certain pilot groups, which was not recoverable once paid.

Other expenses

Other expenses increased by $16.6 million or 16.4%, for the nine months ended September 30, 2018, as compared to the prior year period. During the period, there was an increase in personnel related expenses for our crew members (e.g. meals, lodging, etc.) due to increased operations. Other components of our Other expense line item include, but are not limited to: communication costs, professional and technical fees, insurance costs, legal fees, and other miscellaneous expenses.

Nonoperating Income (Expense)

Net nonoperating expense decreased by $55.0 million, or 101.7%, and $97.7 million, or 117.6% for the three and nine months ended September 30, 2018, respectively, as compared to the prior year periods. The decrease in expense was primarily attributable to the termination of the Merged Plan and partial settlement of the pilots' other post-retirement medical plan liability in August 2017. In connection with these transactions, we recorded one-time Other nonoperating special charges of $35.2 million related to the Merged Plan termination and $15.0 million related to the other post-retirement medical plan partial settlement. The decrease in expense was also attributed to a $27.1 million gain on fuel derivatives for the nine months ended September 30, 2018 as compared to a $10.2 million loss in the prior year period driven by an increase in average fuel prices. As described in Note 9 to our Consolidated Financial Statements, we entered into two debt agreements denominated in Japanese Yen during the nine months ended September 30, 2018. The fluctuation in foreign exchange rates at each balance sheet date is reflected within the nonoperating income (expense) line item. The foreign currency fluctuation for the three and nine months ended September 30, 2018 was $2.3 million, respectively.

Income Taxes

Our effective tax rate was 19.9% and 37.7% for the three months ended September 30, 2018 and 2017, respectively and 22.4% and 36.0% for the nine months ended September 30, 2018 and 2017, respectively. The effective tax rate represents a blend of federal and state taxes and includes the impact of certain nondeductible items. The effective tax rate for the three and nine months ended September 30, 2018 also reflects the reduced federal corporate income tax rate as a result of the enactment of the Tax Act in December 2017. During the three and nine months ended September 30, 2018, we recorded a discrete item of $6.7 million to reflect the impact of the Tax Act on discretionary contributions made to our defined benefit and other postretirement plans related to our 2017 tax returns. We adjusted our estimated liability under SAB 118 by reducing the prior year liability to reflect the tax benefit at a higher income tax rate for the additional contributions made. Further adjustments of other provisional estimates that were recorded at December 31, 2017 may be necessary as we finalize our tax filings in the fourth quarter.

38




Liquidity and Capital Resources

Our liquidity is dependent on the cash we generate from operating activities and our debt financing arrangements. As of September 30, 2018, we had $346.0 million in cash and cash equivalents and $245.3 million in short-term investments, an increase of $131.1 million from December 31, 2017.

We have been able to generate sufficient funds from our operations to meet our working capital requirements and finance our aircraft acquisitions through secured debt and lease financings. At September 30, 2018, we had approximately $718.0 million of debt and capital lease obligations, including approximately $105.5 million classified as a current liability in our unaudited Consolidated Balance Sheets. See the Contractual Obligations table below for a description of our estimated contractual obligations as of September 30, 2018.

We also have access to a secured revolving credit and letter of credit facility of $225 million, maturing in December 2019. As of September 30, 2018, we had no outstanding borrowings under the revolving credit facility. During the nine months ended September 30, 2018, we executed two foreign-denominated debt agreements with a total principal value of $86.5 million, which are collateralized by aircraft.

Cash Flows

Cash flows from operating activities continue to provide our primary source of liquidity. We generated positive cash flows from operations of $444.1 million and $295.5 million for the nine months ended September 30, 2018 and 2017, respectively. We had higher operating cash flows in 2018 as a result of the terminated Merged Plan and partial settlement of our pilots' other post-retirement medical plan in 2017 as discussed above and in Note 11. Our operating cash flows were also impacted by changes in working capital, including the seasonality of advanced ticket sales.

Net cash used in investing activities was $245.8 million for the nine months ended September 30, 2018 due to purchases of property and equipment, specifically the purchase of five Airbus A321neos along with progress payments for future aircraft commitments and other flight equipment, offset by proceeds of $117.1 million resulting from the disposition of two B767 aircraft and the sale and subsequent leaseback of an A330-200 aircraft accounted for as an operating lease during the period.

Net cash used in financing activities was $44.2 million for the nine months ended September 30, 2018 due to $53.9 million of repurchases of our common stock in the period, $53.7 million in repayments of our long-term debt and lease obligations, and $18.3 million in dividend payments during the year offset by the origination of $86.5 million in debt.

Capital Commitments

As of September 30, 2018, we had the following capital commitments consisting of firm aircraft and engine orders and purchase rights: 
Aircraft Type
 
Firm Orders
 
Purchase Rights
 
Expected Delivery Dates
A321neo aircraft
 
9

 
9

 
Between 2018 and 2020
B787-9 aircraft
 
10

 
10

 
Between 2021 and 2025
 
 
 
 
 
 
 
Pratt & Whitney spare engines:
 
 

 
 

 
 
A321neo spare engines
 
3

 
2

 
Between 2018 and 2019
General Electric GEnx spare engines:
 
 

 
 

 
 
B787-9 spare engines
 
2

 
2

 
Between 2021 and 2025
 
In the first quarter of 2018, we exercised our right to terminate our aircraft purchase agreement with Airbus for six Airbus A330-800neo aircraft and the purchase rights for an additional six Airbus A330-800neo aircraft. In July 2018, we executed a purchase agreement for the purchase of 10 Boeing 787-9 "Dreamliner" aircraft with purchase rights for an additional 10 aircraft. In October 2018, we entered into an agreement for the selection of GEnx engines to power our Boeing 787-9 fleet. The agreements provide for the purchase of 20 GEnx engines, the right to purchase an additional 20 GEnx engines and the purchase of up to four spare engines. The committed expenditures for these agreements are reflected within our Contractual Obligations Table.

39




In order to complete the purchase of these aircraft and fund related costs, we may need to secure additional financing. We have backstop financing available from aircraft and engine manufacturers, subject to certain customary conditions. We are also currently exploring various financing alternatives, and while we believe that such financing will be available to us, there can be no assurance that financing will be available when required, or on acceptable terms, or at all. The inability to secure such financing could have an impact on our ability to fulfill our existing purchase commitments and a material adverse effect on our operations.

Stock Repurchase Program and Dividends

In November 2017, our Board of Directors approved a stock repurchase program pursuant to which we may repurchase up to $100 million of our outstanding common stock over a two-year period through December 2019. The stock repurchase program is subject to further modification or termination at any time. We spent $31.2 million and $53.9 million to repurchase and retire approximately 0.8 million shares and 1.4 million shares of the Company's common stock in open market transactions during the three and nine months ended September 30, 2018, respectively. As of September 30, 2018, we had $46.1 million remaining to spend under our stock repurchase program.

During the three months ended September 30, 2018, we declared and paid cash dividends of $0.12 per share, or $6.1 million, which was paid on August 31, 2018, to stockholders of record as of August 17, 2018. During the nine months ended September 30, 2018, we declared and paid total cash dividends of $18.3 million.

Credit Card Holdbacks

Under our bank-issued credit card processing agreements, certain proceeds from advance ticket sales may be held back to serve as collateral to cover any possible chargebacks or other disputed charges that may occur. These holdbacks, which are included in restricted cash in our unaudited Consolidated Balance Sheets set forth in our unaudited Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q, totaled $1.0 million as of December 31, 2017. As of September 30, 2018, there were no holdbacks held with its credit card processors.

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

Pension and Postemployment Benefit Plan Funding

During the three and nine months ended September 30, 2018, we made a discretionary contribution of $50.0 million to our defined benefit and other postretirement plans. During the three and nine months ended September 30, 2017, we contributed $14.2 million and $28.6 million, respectively, to our defined benefit and other post-retirement plans (excluding the one-time special charge transactions discussed in this Part I. Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the heading "Nonoperating Income (Expense)") to our defined benefit and other post-retirement plans during the three and nine months ended September 30, 2017. 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.

Critical Accounting Policies

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

Critical accounting policies and estimates are defined as those accounting policies and accounting estimates that are reflective of significant judgments and uncertainties that potentially result in materially different results under different assumptions and conditions. For a detailed discussion of the application of our critical accounting policies, see 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, 2017, each

40



included in our Annual Report on Form 10-K, Updates to those policies since the issuance of our 2017 Annual Report are below.

We adopted ASC 606 as of January 1, 2018, utilizing the full retrospective option. The adoption of the standard has had a significant impact on our financial statements and our critical accounting policies. See Note 2 and Note 5 to our Consolidated Financial Statements above for additional information including estimated quantification of the overall effect. A summary of our significant critical accounting policies as it pertains to the adoption is below.

Revenue Recognition
HawaiianMiles, Hawaiian's frequent flyer travel award program, provides a variety of awards to program members based on accumulated mileage. ASC 606 requires us to account for miles earned by passengers in the HawaiianMiles program through flight activity as a component of the passenger revenue ticket transaction at the estimated selling price of the miles. Ticket consideration received is allocated between the performance obligations, primarily travel and miles earned by passengers. The allocated value of the miles is deferred until the free travel or other award is used by the passenger, at which time it is included in passenger revenue. The value of the ticket used in the determination of the estimated selling price is based on the historical value of equivalent flights to those provided for loyalty awards and the related miles redeemed to obtain that award adjusted for breakage or fulfillment. The ETV includes a fulfillment discount (breakage) to reflect the value of the award ticket over the number of miles that, based on historical experience, will be needed to obtain the award. On a quarterly basis, we calculate the equivalent ticket value (ETV) by analyzing the fares of similar tickets for the prior 12 months, considering cabin class and geographic region.

We also sell mileage credits to companies participating in our frequent flyer program. These contracts generally include multiple performance obligations, including the transportation that will ultimately be provided when the mileage credits are redeemed and marketing and brand related activities. The marketing and brand performance obligations are effectively provided each time a HawaiianMiles member uses the co-branded credit card and monthly access to customer lists and marketing is provided, which corresponds to the timing of when we issue or are obligated to issue the mileage credits to the HawaiianMiles member. Therefore, we recognize revenue for the brand performance obligation when HawaiianMiles members use their co-brand credit card and the resulting mileage credits are issued to them, which best correlates with our performance toward satisfying the obligation.

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

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

Passenger revenue

Passenger revenue associated with unused tickets, which represent unexercised passenger rights, is recognized in proportion to
the pattern of rights exercised by related passengers (e.g. scheduled departure dates). To calculate the portion to be recognized
as revenue in the period, we utilize historical information and apply the trend rate to the current air traffic liability balances for that specific period.


41



Contractual Obligations
 
Our estimated contractual obligations as of September 30, 2018 are summarized in the following table: 
Contractual Obligations
 
Total
 
Remaining in 2018
 
2019 - 2020
 
2021 - 2022
 
2023 and
thereafter
 
 
(in thousands)
Debt and capital lease obligations (1)
 
$
895,634

 
$
18,807

 
$
200,895

 
$
200,441

 
$
475,491

Operating leases—aircraft and related equipment (2) 
 
586,932

 
28,414

 
196,799

 
142,523

 
219,196

Operating leases—non-aircraft
 
126,293

 
2,007

 
15,091

 
13,615

 
95,580

Purchase commitments - Capital (3) 
 
2,024,279

 
98,658

 
493,839

 
720,834

 
710,948

Purchase commitments - Operating (4) 
 
453,846

 
16,517

 
117,628

 
103,638

 
216,063

Projected employee benefit contributions (5) 
 
31,900

 

 
12,500

 
10,000

 
9,400

Total contractual obligations
 
$
4,118,884

 
$
164,403

 
$
1,036,752

 
$
1,191,051

 
$
1,726,678


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

(2)
Amounts reflect leases for eleven Airbus A330-200 aircraft, four 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.

Off-Balance Sheet Arrangements

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

Non-GAAP Financial Measures

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

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

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

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

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

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

Changes in fair value of derivative contracts, net of tax, are based on market prices for open contracts as of the end of the reporting period. This line item includes the unrealized amounts of fuel derivatives (not designated as hedges) that will settle in future periods and the reversal of prior period unrealized amounts. We believe that excluding the impact

42



of these derivative adjustments helps investors analyze our operational performance and compare our results to other airlines in the periods presented below.
Unrealized loss (gain) on foreign debt is based on fluctuations in foreign exchanges rates related to foreign-denominated debt agreements we executed during the three months ended June 30, 2018. We believe that excluding the impact of these amounts helps investors analyze our operational performance and compare our results to other airlines in the periods presented below.
Loss (gain) on sale of aircraft is the result of adjustments to the final purchase price of our Boeing 767-300 aircraft included in a forward sale agreement we entered in January 2018. During three and nine months ended September 30, 2018, we recoded a loss on the sale of two Boeing 767-300 aircraft covered under the forward sale agreement of $1.8 million.
On April 1, 2017, our agreement with the Airline Pilots Association covering our pilots for a term of 63 months became effective. The agreement includes, among various other benefits, a pay adjustment and ratification bonus computed based on previous service. During the three months ended March 31, 2017, we expensed $18.7 million principally related to a one-time payment to reduce our future 401K employer contribution for certain pilot groups, which is not recoverable once paid. 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.
During the nine months ended September 30, 2018, we terminated two contracts which incurred a total of $35.3 million in contract terminations expense. In February 2018, we exercised our right to terminate the purchase agreement with Airbus for six Airbus A330-800neo aircraft and the purchase rights for an additional six Airbus A330-800neo aircraft. We recorded a contract terminations expense to reflect a portion of the termination penalty. In January 2018, we entered into a transaction with our lessor to early terminate and purchase three Boeing 767-300 aircraft leases and concurrently entered into a forward sale agreement for the same three Boeing 767-300 aircraft, including two Pratt & Whitney 4060 engines for each aircraft. These aircraft were previously accounted for as operating leases. In order to exit the leases and purchase the aircraft, we agreed to pay a total of $67.1 million (net of all deposits) of which a portion was expensed immediately and recognized as a lease termination fee. The expensed amount represents the total purchase price over fair value of the aircraft purchased as of the date of the transaction.
In August 2017, we terminated the Merged Plan and settled a portion of our pilots' other post-retirement medical plan liability. In connection with the reduction of these liabilities we recorded one-time Other nonoperating special charges of $35.2 million related to the Merged Plan termination and $15.0 million related to the other post-retirement (OPEB) medical plan partial settlement.

43



 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
Total
 
Diluted Per Share
 
Total
 
Diluted Per Share
 
Total
 
Diluted Per Share
 
Total
 
Diluted Per Share
 
 
(in thousands, except for per share data)
GAAP net income, as reported
 
$
93,542

 
$
1.84

 
$
71,622

 
$
1.34

 
$
201,564

 
$
3.96

 
$
182,162

 
$
3.39

Add: changes in fair value of derivative contracts
 
4,590

 
0.09

 
(6,069
)
 
(0.11
)
 
(2,492
)
 
(0.05
)
 
8,128

 
0.15

Add: unrealized loss (gain) on foreign debt
 
(2,267
)
 
(0.04
)
 

 

 
(2,331
)
 
(0.05
)
 

 

Add: loss on sale of aircraft
 
1,844

 
0.04

 

 

 
1,844

 
$
0.04

 

 
$

Add: contract terminations expense
 

 

 

 

 
35,322

 
$
0.69

 

 
$

Add: special items
 

 

 

 

 

 

 
23,450

 
0.44

Add: other nonoperating special items
 

 

 
50,202

 
0.93

 

 

 
50,202

 
0.92

Deduct: tax effect of adjustments
 
(1,042
)
 
(0.02
)
 
(16,091
)
 
(0.30
)
 
(8,086
)
 
(0.16
)
 
(29,817
)
 
(0.55
)
Adjusted net income
 
$
96,667

 
$
1.91

 
$
99,664

 
$
1.86

 
$
225,821

 
$
4.43

 
$
234,125

 
$
4.35


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, (loss) gain on sale of aircraft, contract terminations expense, and special items, are summarized in the table below: 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(in thousands, except as otherwise indicated)
GAAP operating expenses
 
$
643,261

 
$
547,214

 
$
1,894,927

 
$
1,624,669

Less: aircraft fuel, including taxes and delivery
 
(162,932
)
 
(110,111
)
 
(449,404
)
 
(316,423
)
Less: loss on sale of aircraft
 
(1,844
)
 

 
(1,844
)
 

Less: contract terminations expense
 

 

 
(35,322
)
 

Less: special items
 

 

 

 
(23,450
)
Adjusted operating expenses - excluding aircraft fuel, loss on sale of aircraft, contract terminations expense, and special items
 
$
478,485

 
$
437,103

 
$
1,408,357

 
$
1,284,796

Available Seat Miles
 
5,352,976

 
4,950,800

 
15,104,500

 
14,208,624

CASM - GAAP
 

12.02
¢
 

11.05
¢
 

12.55
¢
 

11.43
¢
Less: aircraft fuel
 
(3.05
)
 
(2.22
)
 
(2.98
)
 
(2.23
)
Less: loss on sale of aircraft
 
(0.03
)
 

 
(0.01
)
 

Less: contract terminations expense
 

 

 
(0.24
)
 

Less: special items
 

 

 

 
(0.16
)
CASM - excluding aircraft fuel, loss on sale of aircraft, contract terminations expense, and special items
 

8.94
¢
 

8.83
¢
 

9.32
¢
 

9.04
¢
 

44



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

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

Aircraft Fuel Costs

Aircraft fuel costs constitute a significant portion of our operating expense. Fuel costs represented 25% and 24% of our operating expenses for the three and nine months ended September 30, 2018, respectively, and 20% for each of the three and nine months ended September 30, 2017. Approximately 72% of our fuel was based on Singapore jet fuel prices, 25% was based on U.S. West Coast jet fuel prices, and 3% was based on other jet fuel prices. Based on the amount of fuel expected to be consumed for the remainder of 2018, for every one cent increase in the cost of a gallon of jet fuel, our fuel expense would increase by approximately $0.3 million.

We periodically enter into derivative financial instruments to manage our exposure to changes in the price of jet fuel. During the three and nine months ended September 30, 2018, 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 September 30, 2018, we hedged approximately 50% of our projected fuel requirements for the remainder of 2018 with crude oil call options. As of September 30, 2018, the fair value of these fuel derivative agreements reflected a net asset of $23.6 million, which is recorded as a prepaid expense and other asset in our unaudited Consolidated Balance Sheet.

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 September 30, 2018, a change in interest rates is unlikely to have a material impact on our results of operations.

As of September 30, 2018, we had $724.2 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 is estimated as the potential increase in fair value resulting from a hypothetical 10% decrease in interest rates, and amounted to approximately $6.9 million as of September 30, 2018.

Foreign Currency

We have debt, 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 2018 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 $7.1 million and $4.5 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.


45



As of September 30, 2018, the fair value of our foreign currency forward contracts reflected a net asset of $7.8 million and $1.4 million recorded in Prepaid expenses and other (short-term) and Long-term prepayments and other (long-term), respectively, in our unaudited Consolidated Balance Sheets.

As we have foreign-denominated debt, the amount of debt owed will be impacted by the fluctuations in Japanese Yen. A 10% decrease in the value of the U.S. dollar, relative to the Japanese Yen, would result in an increase of our losses by approximately $7.0 million.

ITEM 4.                                                CONTROLS AND PROCEDURES.
 
Evaluation of Disclosure Controls and Procedures

Our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), performed an evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), which have been designed to permit us to effectively identify and timely disclose important information. Based on that evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures were effective as of September 30, 2018 to provide reasonable assurance that the information required to be disclosed by the Company in reports it files under the Exchange Act, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and is accumulated and communicated to our management, including our CEO and CFO, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2018 which materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

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


46



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

ITEM 2.                                                UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
 
The following table displays information with respect to our repurchases of shares of our common stock during the three months ended September 30, 2018:

Period
 
Total number of shares purchased (i)
 
Average price paid per share (ii)
 
Total number of shares purchased as part of publicly announced plans or programs (i)
 
Approximate dollar value of shares that may yet be purchased under the plans or programs (in millions) (i)
July 1, 2018 - July 31, 2018
 

 
$

 

 
 
August 1, 2018 - August 31, 2018
 
99,031

 
42.41

 
99,031

 
 
September 1, 2018 - September 30, 2018
 
681,207

 
39.56

 
681,207

 
 
Total
 
780,238

 
 
 
780,238

 
$
46.1


(ii)
In November 2017, our Board of Directors approved a stock repurchase program pursuant to which the Company may repurchase up to $100 million of our outstanding common stock over a two-year period through December 2019. The stock repurchase program is subject to further modification or termination at any time.

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

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

ITEM 5.                                                OTHER INFORMATION.
 
None.


47



ITEM 6.                                                EXHIBITS.
 
Exhibit No.
 
Description
 
 
 
10.1‡
 
 
 
 
10.2‡
 
 
 
 
12
 
 
 
 
31.1
 
 
 
 
31.2
 
 
 
 
32.1
 
 
 
 
32.2
 
 
 
 
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

‡ Confidential treatment has been requested for a portion of this exhibit.

48



SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 
 
 
HAWAIIAN HOLDINGS, INC.
 
 
 
 
 
 
 
 
Date:
October 24, 2018
By:
/s/ Shannon L. Okinaka
 
 
 
Shannon L. Okinaka
 
 
 
Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)


49