10-Q 1 ha-06302014x10q.htm 10-Q HA-06.30.2014-10Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 FORM 10-Q
 
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2014
or
 o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from       to       
 
Commission file number 1-31443
 HAWAIIAN HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
 
71-0879698
(State or Other Jurisdiction of
 
(I.R.S. Employer
Incorporation or Organization)
 
Identification No.)
 
3375 Koapaka Street, Suite G-350
 
 
Honolulu, HI
 
96819
(Address of Principal Executive Offices)
 
(Zip Code)
 
(808) 835-3700
(Registrant’s Telephone Number, Including Area Code)
  
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  ý Yes o No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  ý Yes o No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o
 
Accelerated filer x
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o Yes ý No
 
As of July 18, 2014, 53,747,583 shares of the registrant’s common stock were outstanding.




Hawaiian Holdings, Inc.
Form 10-Q
Quarterly Period ended June 30, 2014
 
Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2



PART I. FINANCIAL INFORMATION

ITEM 1.               FINANCIAL STATEMENTS.

Hawaiian Holdings, Inc.
Consolidated Statements of Operations
(in thousands, except per share data)
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(unaudited)
Operating Revenue:
 
 

 
 

 
 
 
 
Passenger
 
$
506,797

 
$
481,461

 
$
974,810

 
$
921,400

Other
 
68,923

 
52,467

 
125,768

 
103,282

Total
 
575,720

 
533,928

 
1,100,578

 
1,024,682

Operating Expenses:
 
 

 
 

 
 
 
 
Aircraft fuel, including taxes and delivery
 
174,139

 
169,223

 
345,278

 
343,712

Wages and benefits
 
112,478

 
103,384

 
219,972

 
206,119

Aircraft rent
 
26,095

 
28,285

 
52,374

 
54,304

Maintenance materials and repairs
 
58,399

 
53,036

 
116,709

 
108,295

Aircraft and passenger servicing
 
30,860

 
29,228

 
61,081

 
58,287

Commissions and other selling
 
30,773

 
32,186

 
62,108

 
65,997

Depreciation and amortization
 
23,765

 
19,788

 
46,576

 
38,901

Other rentals and landing fees
 
21,656

 
19,630

 
42,218

 
38,777

Other
 
45,961

 
41,777

 
92,631

 
84,825

Total
 
524,126

 
496,537

 
1,038,947

 
999,217

Operating Income
 
51,594

 
37,391

 
61,631

 
25,465

Nonoperating Income (Expense):
 
 

 
 

 
 
 
 
Interest expense and amortization of debt discounts and issuance costs
 
(15,997
)
 
(12,163
)
 
(31,007
)
 
(23,540
)
Interest income
 
398

 
126

 
617

 
253

Capitalized interest
 
1,974

 
2,891

 
4,750

 
6,331

Gains (losses) on fuel derivatives
 
6,285

 
(6,906
)
 
(614
)
 
(13,467
)
Other, net
 
725

 
(3,124
)
 
1,310

 
(4,206
)
Total
 
(6,615
)
 
(19,176
)
 
(24,944
)
 
(34,629
)
Income (Loss) Before Income Taxes
 
44,979

 
18,215

 
36,687

 
(9,164
)
Income tax expense (benefit)
 
17,652

 
6,899

 
14,435

 
(3,335
)
Net Income (Loss)
 
$
27,327

 
$
11,316

 
$
22,252

 
$
(5,829
)
Net Income (Loss) Per Common Stock
 
 

 
 

 
0

 
 
Basic
 
$
0.51

 
$
0.22

 
$
0.42

 
$
(0.11
)
Diluted
 
$
0.43

 
$
0.21

 
$
0.39

 
$
(0.11
)
 
See accompanying Notes to Consolidated Financial Statements.


3



Hawaiian Holdings, Inc.
Consolidated Statements of Comprehensive Income
(in thousands)
 
 
 
Three Months Ended June 30,
 
 
2014
 
2013
 
 
(unaudited)
Net Income
 
$
27,327

 
$
11,316

Other comprehensive income (loss), net:
 
 

 
 

Net change related to employee benefit plans, net of tax expense of $85 and $1,323 for 2014 and 2013, respectively
 
140

 
871

Net change in derivative instruments, net of tax benefit of $2,049 for 2014 and tax expense of $3,935 for 2013
 
(3,372
)
 
6,456

Net change in available-for-sale investments, net of tax expense of $21 for 2014
 
56

 

Total other comprehensive income (loss)
 
(3,176
)
 
7,327

Total Comprehensive Income
 
$
24,151

 
$
18,643

 
 
Six Months Ended June 30,
 
 
2014
 
2013
 
 
(unaudited)
Net Income (Loss)
 
$
22,252

 
$
(5,829
)
Other comprehensive income (loss), net:
 
 

 
 

Net change related to employee benefit plans, net of tax expense of $209 and $2,135 for 2014 and 2013, respectively
 
345

 
1,966

Net change in derivative instruments, net of tax benefit of $5,352 for 2014 and tax expense of $4,552 for 2013
 
(8,807
)
 
7,456

Net change in available-for-sale investments, net of tax expense of $21 for 2014
 
35

 

Total other comprehensive income (loss)
 
(8,427
)
 
9,422

Total Comprehensive Income
 
$
13,825

 
$
3,593

 
See accompanying Notes to Consolidated Financial Statements.


4



Hawaiian Holdings, Inc.
Consolidated Balance Sheets
(in thousands, except shares)
 
 
 
June 30, 2014
 
December 31, 2013
 
 
(unaudited)
ASSETS
 
 

 
 

Current Assets:
 
 

 
 

Cash and cash equivalents
 
$
360,281

 
$
423,384

Restricted cash
 
20,379

 
19,434

Short-term investments
 
203,333

 

Accounts receivable, net
 
94,833

 
74,245

Spare parts and supplies, net
 
17,071

 
19,767

Deferred tax assets, net
 
17,325

 
17,325

Prepaid expenses and other
 
32,893

 
51,652

Total
 
746,115

 
605,807

Property and equipment, less accumulated depreciation and amortization of $346,750 and $327,102 as of June 30, 2014 and December 31, 2013, respectively
 
1,624,155

 
1,334,332

Other Assets:
 
 

 
 

Long-term prepayments and other
 
85,545

 
91,953

Restricted cash
 

 
1,566

Intangible assets, less accumulated amortization of $33,114 and $175,730 as of June 30, 2014 and December 31, 2013, respectively
 
22,620

 
23,940

Goodwill
 
106,663

 
106,663

Total Assets
 
$
2,585,098

 
$
2,164,261

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

Current Liabilities:
 
 

 
 

Accounts payable
 
$
87,886

 
$
89,787

Air traffic liability
 
537,088

 
409,086

Other accrued liabilities
 
94,650

 
97,571

Current maturities of long-term debt, less discount, and capital lease obligations
 
156,025

 
62,187

Total
 
875,649

 
658,631

Long-Term Debt and Capital Lease Obligations
 
915,110

 
744,286

Other Liabilities and Deferred Credits:
 
 

 
 

Accumulated pension and other postretirement benefit obligations
 
266,489

 
264,106

Other liabilities and deferred credits
 
60,375

 
59,424

Deferred tax liability, net
 
51,529

 
40,950

Total
 
378,393

 
364,480

Commitments and Contingencies
 


 


Shareholders’ Equity:
 
 

 
 

Special preferred stock, $0.01 par value per share, three shares issued and outstanding as of June 30, 2014 and December 31, 2013
 

 

Common stock, $0.01 par value per share, 53,747,583 and 52,423,085 shares issued and outstanding as of June 30, 2014 and December 31, 2013, respectively
 
537

 
524

Capital in excess of par value
 
275,128

 
269,884

Accumulated income
 
191,394

 
169,142

Accumulated other comprehensive loss, net
 
(51,113
)
 
(42,686
)
Total
 
415,946

 
396,864

Total Liabilities and Shareholders’ Equity
 
$
2,585,098

 
$
2,164,261

 
See accompanying Notes to Consolidated Financial Statements.

5



Hawaiian Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
 
 
 
Six months ended June 30,
 
 
2014
 
2013
 
 
(unaudited)
Net cash provided by Operating Activities
 
$
203,969

 
$
168,123

Cash flows from Investing Activities:
 
 

 
 

Additions to property and equipment, including pre-delivery payments, net
 
(331,766
)
 
(174,987
)
Net proceeds from disposition of equipment
 
350

 

Purchases of investments
 
(234,143
)
 

Sales of investments
 
30,859

 

Net cash used in investing activities
 
(534,700
)
 
(174,987
)
Cash flows from Financing Activities:
 
 

 
 

Proceeds from exercise of stock options
 
4,333

 
1,442

Long-term borrowings
 
293,430

 
132,000

Repayments of long-term debt and capital lease obligations
 
(30,756
)
 
(28,174
)
Debt issuance costs
 

 
(10,696
)
Change in restricted cash
 
621

 
(16,000
)
Net cash provided by financing activities
 
267,628

 
78,572

Net increase (decrease) in cash and cash equivalents
 
(63,103
)
 
71,708

Cash and cash equivalents - Beginning of Period
 
423,384

 
405,880

Cash and cash equivalents - End of Period
 
$
360,281

 
$
477,588

 
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, 2013.
 
2. Significant Accounting Policies
 
Sale of Frequent Flyer Miles

In October 2013, Hawaiian entered into a co-branded credit card agreement, which provides for the sale of frequent flyer miles to Barclays Bank Delaware (Barclays) beginning in 2014. The agreement is a new multiple element arrangement subject to Accounting Standards Update 2009-13, Multiple Deliverable Revenue Arrangements — A consensus of the FASB Emerging Issues Task Force (ASU 2009-13), which is effective for new and materially modified revenue arrangements entered into by the Company after January 1, 2011.  ASU 2009-13 requires the allocation of the overall consideration received to each deliverable using the estimated selling price.  The objective of using 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.
 
The following four deliverables or elements were identified in the agreement: (i) travel miles; (ii) use of the Hawaiian brand and access to member lists; (iii) advertising elements; and (iv) other airline benefits including checked baggage services and travel discounts.  The Company determined the relative fair value of each element by estimating the selling prices of the deliverables by considering discounted cash flows using multiple inputs and assumptions, including: (1) the expected number of miles to be awarded and redeemed; (2) the estimated weighted average equivalent ticket value, adjusted by a fulfillment discount; (3) the estimated total annual cardholder spend; (4) an estimated royalty rate for the Hawaiian portfolio; and (5) the expected use of each of the airline benefits. The overall consideration received is allocated to the deliverables based on their relative selling prices.  The transportation element will be deferred and recognized as passenger revenue over the period when the transportation is expected to be provided (22 months).  The other elements will generally be recognized as other revenue when earned.
 
In the previous co-branded credit card agreement, the estimated fair value of the transportation element was deferred and recognized as passenger revenue over a period of 22 months.  Amounts received in excess of the transportation’s estimated fair value were recognized immediately as other revenue.
 
The impact of applying the new accounting method for the three and six months ended June 30, 2014 was immaterial to the Company’s unaudited consolidated financial statements.

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (ASU 2014-09), requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in GAAP when it becomes effective. Early adoption is not permitted. The amendments in ASU 2014-09 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The Company is currently evaluating the effect that the provisions of ASU 2014-09 will have on its consolidated financial statements and related disclosures.


7



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

The following is a summary of short-term investments held as of June 30, 2014:
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
 
(in thousands)
Corporate debt
 
$
126,003

 
$
84

 
$
(55
)
 
$
126,032

U.S. government and agency debt
 
32,570

 
9

 
(3
)
 
32,576

Other fixed income securities
 
23,096

 

 
(7
)
 
23,089

Municipal bonds
 
21,625

 
11

 

 
21,636

Total short-term investments
 
$
203,294

 
$
104

 
$
(65
)
 
$
203,333

 
Contractual maturities of short-term investments as of June 30, 2014 are shown below. 
 
 
Under 1 Year
 
1 to 5 Years
 
Total
 
 
(in thousands)
Corporate debt
 
$
49,698

 
$
76,334

 
$
126,032

U.S. government and agency debt
 
24,515

 
8,061

 
32,576

Other fixed income securities
 
21,986

 
1,103

 
23,089

Municipal bonds
 
11,485

 
10,151

 
21,636

Total short-term investments
 
$
107,684

 
$
95,649

 
$
203,333

 
The Company classifies investments as current assets as these securities are available for use in its current operations.
 
4. Accumulated Other Comprehensive Loss
 
Reclassifications out of accumulated other comprehensive loss by component is as follows:
 

8



Details about accumulated other 
comprehensive loss components
 
Three months ended June 30,
 
Six months ended June 30,
 
Affected line items
in the statement where
net income (loss) is presented
 
2014
 
2013
 
2014
 
2013
 
 
 
(in thousands)
 
 
Derivatives designated as hedging instruments under ASC 815
 
 

 
 

 
 

 
 

 
 
Foreign currency derivative gains, net
 
$
(1,608
)
 
$
(3,123
)
 
$
(5,226
)
 
$
(3,390
)
 
Passenger revenue
Interest rate derivative losses, net
 
206

 
223

 
417

 
223

 
Interest expense
Total before tax
 
(1,402
)
 
(2,900
)
 
(4,809
)
 
(3,167
)
 
 
Tax expense
 
527

 
1,095

 
1,815

 
1,201

 
 
Total, net of tax
 
$
(875
)
 
$
(1,805
)
 
$
(2,994
)
 
$
(1,966
)
 
 
Amortization of defined benefit pension items
 
 

 
 

 
 

 
 

 
 
Actuarial loss
 
$
226

 
$
2,051

 
$
452

 
$
4,103

 
Wages and benefits
Prior service credit
 
(1
)
 
(1
)
 
(2
)
 
(2
)
 
Wages and benefits
Total before tax
 
225

 
2,050

 
450

 
4,101

 
 
Tax benefit
 
(85
)
 
(1,323
)
 
(210
)
 
(2,135
)
 
 
Total, net of tax
 
$
140

 
$
727

 
$
240

 
$
1,966

 
 
Short-term investments
 
 

 
 

 
 

 
 

 
 
Realized gain on sales of investments, net
 
$
(1
)
 
$

 
$
(2
)
 
$

 
Other nonoperating income
Total before tax
 
(1
)
 

 
(2
)
 

 
 
Tax expense
 

 

 

 

 
 
Total, net of tax
 
$
(1
)
 
$

 
$
(2
)
 
$

 
 
Total reclassifications for the period
 
$
(736
)
 
$
(1,078
)
 
$
(2,756
)
 
$

 
 

A rollforward of the amounts included in accumulated other comprehensive loss, net of taxes, for the three and six months ended June 30, 2014 and 2013 is as follows:
Three months ended June 30, 2014
 
Interest
Rate
Derivatives
 
Foreign
Currency
Derivatives
 
Defined
Benefit
Pension
Items
 
Short-Term Investments
 
Total
 
 
(in thousands)
Beginning balance
 
$
865

 
$
3,073

 
$
(51,854
)
 
$
(21
)
 
$
(47,937
)
Other comprehensive income (loss) before reclassifications, net of tax
 
(520
)
 
(1,977
)
 

 
57

 
(2,440
)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax
 
126

 
(1,001
)
 
140

 
(1
)
 
(736
)
Net current-period other comprehensive income (loss)
 
(394
)
 
(2,978
)
 
140

 
56

 
(3,176
)
Ending balance
 
$
471

 
$
95

 
$
(51,714
)
 
$
35

 
$
(51,113
)
 

9



Three months ended June 30, 2013
 
Interest
Rate
Derivatives
 
Foreign
Currency
Derivatives
 
Defined
Benefit
Pension
Items
 
Total
 
 
(in thousands)
Beginning balance
 
$
(888
)
 
$
1,888

 
$
(112,959
)
 
$
(111,959
)
Other comprehensive income before reclassifications, net of tax
 
1,517

 
6,744

 
144

 
8,405

Amounts reclassified from accumulated other comprehensive income (loss), net of tax
 
137

 
(1,942
)
 
727

 
(1,078
)
Net current-period other comprehensive income
 
1,654

 
4,802

 
871

 
7,327

Ending balance
 
$
766

 
$
6,690

 
$
(112,088
)
 
$
(104,632
)

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

 
$
8,277

 
$
(52,059
)
 
$

 
$
(42,686
)
Other comprehensive income (loss) before reclassifications, net of tax
 
(883
)
 
(4,930
)
 
105

 
37

 
(5,671
)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax
 
258

 
(3,252
)
 
240

 
(2
)
 
(2,756
)
Net current-period other comprehensive income (loss)
 
(625
)
 
(8,182
)
 
345

 
35

 
(8,427
)
Ending balance
 
$
471

 
$
95

 
$
(51,714
)
 
$
35

 
$
(51,113
)
 
Six months ended June 30, 2013
 
Interest
Rate
Derivatives
 
Foreign
Currency
Derivatives
 
Defined
Benefit
Pension
Items
 
Total
 
 
(in thousands)
Beginning balance
 
$

 
$

 
$
(114,054
)
 
$
(114,054
)
Other comprehensive income before reclassifications, net of tax
 
629

 
8,793

 

 
9,422

Amounts reclassified from accumulated other comprehensive income (loss), net of tax
 
137

 
(2,103
)
 
1,966

 

Net current-period other comprehensive income
 
766

 
6,690

 
1,966

 
9,422

Ending balance
 
$
766

 
$
6,690

 
$
(112,088
)
 
$
(104,632
)

5. Earnings (Loss) Per Share
 
Basic earnings (loss) per share, which excludes dilution, is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding for the period.
 
Diluted earnings (loss) 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. 

10



 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(in thousands, except for per share data)
Numerator:
 
 

 
 

 
 

 
 

Net Income (Loss)
 
$
27,327

 
$
11,316

 
$
22,252

 
$
(5,829
)
Denominator:
 
 

 
 

 
 

 
 

Weighted average common stock shares outstanding - Basic
 
53,499

 
52,008

 
53,095

 
51,837

Assumed exercise of stock options and awards
 
1,009

 
1,063

 
583

 

Assumed conversion of convertible note premium
 
4,972

 

 
2,133

 

Assumed conversion of warrants
 
3,367

 

 
1,235

 

Weighted average common stock shares outstanding - Diluted
 
62,847

 
53,071

 
57,046

 
51,837

Net Income (Loss) per common share
 
 

 
 

 
 

 
 

Basic
 
$
0.51

 
$
0.22

 
$
0.42

 
$
(0.11
)
Diluted
 
$
0.43

 
$
0.21

 
$
0.39

 
$
(0.11
)
 
The table below summarizes those common stock equivalents that could potentially dilute basic earnings (loss) per share in the future but were excluded from the computation of diluted earnings (loss) per share because the instruments were antidilutive. 
 
 
Three Months Ended June 30,
 
Six months ended June 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(in thousands)
Stock options
 

 
81

 

 
784

Deferred stock
 

 

 

 
87

Restricted stock
 

 
1,371

 

 
1,726

Convertible note premium
 

 
10,943

 

 
10,943

Warrants
 

 
10,943

 

 
10,943


In March 2011, the Company entered into a Convertible Note transaction which included the sale of convertible notes, purchase of call options and sale of warrants. The Company’s 5% Convertible Notes due in 2016 with a current principal amount of $86.25 million can be redeemed with either cash or the Company’s common stock, or a combination thereof, at the Company’s option.  The 10.9 million shares into which the Convertible Notes could be converted will not impact the dilutive earnings per share calculation in the current and future periods under the if-converted method, as the Company has the intent and ability to redeem the principal amount of these notes with cash. During the three and six months ended June 30, 2014 the average share price of the Company’s common stock exceeded the conversion price of $7.88 per share, therefore shares related to the conversion premium of the Convertible Note (for which share settlement is assumed for EPS purposes) are included in the Company's computation of diluted earnings per share.
 
In connection with the issuance of the Convertible Notes, the Company entered into separate call option transactions and separate warrant transactions with certain financial investors to reduce the potential dilution of the Company’s common stock and to offset potential payments by the Company to holders of the Convertible Notes in excess of the principal of the Convertible Notes upon conversion.
 
The call options to repurchase the Company’s common stock will always be antidilutive and, therefore, will have no effect on diluted earnings (loss) per share and are excluded from the table above.
 
During the three and six months ended June 30, 2014 the average share price of the Company's common stock exceeded the warrant strike price of $10.00 per share, therefore the assumed conversion of the warrants are included in the Company's computation of diluted earnings per share.
 
6.  Fair Value Measurements
 

11



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

The tables below present the Company’s financial assets and liabilities measured at fair value on a recurring basis:
 
 
 
Fair Value Measurements as of June 30, 2014
 
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
(in thousands)
Cash equivalents
 
$
179,481

 
$
168,482

 
$
10,999

 
$

Restricted cash
 
20,379

 
20,379

 

 

Short-term investments
 
203,333

 

 
203,333

 

Fuel derivative contracts:
 
0

 
 

 
 

 
 

Crude oil call options
 
3,022

 

 
3,022

 

Crude oil put options
 
2

 

 
2

 

Heating oil put options
 
56

 

 
56

 

Heating oil swaps
 
4,779

 

 
4,779

 

Foreign currency derivatives
 
2,160

 

 
2,160

 

Interest rate derivative
 
169

 

 
169

 

Total assets measured at fair value
 
$
413,381

 
$
188,861

 
$
224,520

 
$

Fuel derivative contracts:
 
 

 
 

 
 

 
 

Crude oil call options
 
$
3,022

 
$

 
$
3,022

 
$

Crude oil put options
 
2

 

 
2

 

Heating oil swaps
 
588

 

 
588

 

Foreign currency derivatives
 
3,113

 

 
3,113

 

Negative arbitrage derivative
 
3,668

 

 

 
3,668

Total liabilities measured at fair value
 
$
10,393

 
$

 
$
6,725

 
$
3,668

 

12



 
 
Fair Value Measurements as of December 31, 2013
 
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
(in thousands)
Cash equivalents
 
$
269,384

 
$
269,384

 
$

 
$

Restricted cash
 
21,000

 
21,000

 

 

Fuel derivative contracts:
 
0

 
 

 
 

 
 

Crude oil call options
 
7,121

 

 
7,121

 

Crude oil put options
 
186

 

 
186

 

Heating oil put options
 
417

 

 
417

 

Heating oil swaps
 
5,863

 

 
5,863

 

Foreign currency derivatives
 
12,494

 

 
12,494

 

Interest rate derivative
 
1,121

 

 
1,121

 

Total assets measured at fair value
 
$
317,586

 
$
290,384

 
$
27,202

 
$

Fuel derivative contracts:
 
 

 
 

 
 

 
 

Crude oil call options
 
$
7,121

 
$

 
$
7,121

 
$

Crude oil put options
 
186

 

 
186

 

Heating oil swaps
 
187

 

 
187

 

Foreign currency derivatives
 
1,188

 

 
1,188

 

Negative interest arbitrage derivative
 
12,865

 

 

 
12,865

Total liabilities measured at fair value
 
$
21,547

 
$

 
$
8,682

 
$
12,865

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

Fuel derivative contracts.  The Company’s fuel derivative contracts consist of heating oil puts and swaps, and Brent crude oil call options and collars (a combination of purchased call options and sold put options of crude oil) 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, Korean Won, Australian Dollar and New Zealand Dollar forward contracts and are valued based primarily on data available or derived from public markets.
 
Interest rate derivative.  The Company’s interest rate derivative consists of an interest rate swap and is valued based primarily on data available or derived from public markets.
 
Negative arbitrage derivative.  The Company’s negative arbitrage derivative represents the net interest owed to the trusts that issued the Company’s enhanced equipment trust certificates during the periods prior to the issuance of the related equipment notes, and is valued based primarily on the discounted amount of future cash flows using the appropriate rate of borrowing. Changes to those discount rates would be unlikely to cause material changes in the fair value of the negative arbitrage derivative (refer to Notes 7 and 10 for more information). The table below presents disclosures about the activity for the Company’s “Level 3” financial liability during the three and six months ended June 30, 2014 and 2013

13



 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
Beginning balance
$
3,668

 
$

 
$
12,865

 
$

Issuance of enhanced equipment trust certificates

 
12,865

 

 
12,865

Reduction of balance in connection with interest payment

 

 
(9,197
)
 

Ending balance
$
3,668

 
$
12,865

 
$
3,668

 
$
12,865


The table below presents the Company’s debt (excluding obligations under capital leases) measured at fair value: 
Fair Value of Debt
June 30, 2014
 
December 31, 2013
Carrying
 
Fair Value
 
Carrying
 
Fair Value
Amount
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Amount
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
(in thousands)
 
 
 
(in thousands)
$
964,827

 
$
1,059,642

 
$

 
$
140,650

 
$
918,992

 
$
695,804

 
$
738,563

 
$

 
$
104,656

 
$
633,907

 
The fair value estimates of the Company’s debt were based on either market prices or the discounted amount of future cash flows using the Company’s current incremental rate of borrowing for similar liabilities.
 
The carrying amounts of cash, other receivables and accounts payable approximate fair value due to the short-term nature of these financial instruments.
 
7.  Financial Derivative Instruments
 
The Company uses derivatives to manage risks associated with certain assets and liabilities arising from the potential adverse impact of fluctuations in global fuel prices, interest rates and foreign currencies.
 
In addition, in 2013, the Company recognized in its Consolidated Balance Sheets the financial effect of the net interest owed to the trusts that issued the Company’s enhanced equipment trust certificates. The characteristics of the net interest obligation resulted in the obligation meeting the definition of a derivative instrument under ASC Topic 815, Derivatives and Hedging (ASC 815).
 
Fuel Risk Management

The Company’s operations are inherently dependent upon the price and availability of aircraft fuel. To manage economic risks associated with fluctuations in aircraft fuel prices, the Company periodically enters into derivative financial instruments. During the three and six months ended June 30, 2014, the Company primarily used heating oil puts and swaps to hedge its aircraft fuel expense.  These derivative instruments were not designated as hedges under ASC Topic 815, Derivatives and Hedging (ASC 815), for hedge accounting treatment. As a result, any changes in fair value of these derivative instruments are adjusted through other nonoperating income (expense) in the period of change.

The following table reflects the amount of realized and unrealized gains and losses recorded as nonoperating income (expense) in the unaudited Consolidated Statements of Operations.
 
 
Three months ended June 30,
 
Six months ended June 30,
Fuel derivative contracts
 
2014
 
2013
 
2014
 
2013
 
 
(in thousands)
Losses realized at settlement
 
$
(2,009
)
 
$
(4,740
)
 
$
(1,899
)
 
$
(7,436
)
Reversal of prior period unrealized amounts
 
2,625

 
3,379

 
(1,613
)
 
4,422

Unrealized gains (losses) that will settle in future periods
 
5,669

 
(5,545
)
 
2,898

 
(10,453
)
Gains (losses) on fuel derivatives recorded as Nonoperating income (expense)
 
$
6,285

 
$
(6,906
)
 
$
(614
)
 
$
(13,467
)

 

14



Interest Rate Risk Management
 
The Company is exposed to market risk from adverse changes in interest rates associated with its long-term debt obligations. Market risk associated with fixed-rate and variable-rate long-term debt relates to the potential reduction in fair value and negative impact to future earnings, respectively, from an increase in interest rates.
 
To limit the Company’s exposure to interest rate risk inherent in one of its variable-rate debt instruments, which was used to finance an aircraft delivered in 2013, the Company entered into a forward starting interest rate swap agreement.  The interest rate swap agreement is designated as a cash flow hedge under ASC 815.
  
The Company believes that its interest rate derivative contract will continue to be effective in offsetting changes in cash flow attributable to the hedged risk. The Company reclassified net losses from AOCI to interest expense of $0.2 million and $0.4 million during the three and six months ended June 30, 2014, respectively. The Company expects to reclassify a net loss of approximately $0.8 million into earnings over the next 12 months from AOCI based on the values at June 30, 2014.
 
Foreign Currency Exchange Rate Risk Management
 
The Company is subject to foreign currency exchange rate risk due to revenues and expenses denominated in foreign currencies, with the primary exposures being the Japanese Yen and Australian Dollar. To manage exchange rate risk, the Company executes its international revenue and expense transactions in the same foreign currency to the extent practicable.
 
The Company enters into foreign currency forward contracts, certain of which are designated as cash flow hedges under ASC 815, 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 AOCI and reclassified into earnings in the same period in which the related sales are recognized as passenger revenue. The effective portion of the foreign currency forward contracts represents the change in fair value of the hedge that offsets the change in the fair value of the hedged item. To the extent the change in the fair value of the hedge does not perfectly offset the change in the fair value of the hedged item, the ineffective portion of the hedge is immediately recognized as nonoperating income (expense). Foreign currency forward contracts that are not designated as cash flow hedges are recorded at fair value, and any changes in fair value are recognized as other nonoperating income (expense) in the period of change.
 
The Company believes that its foreign currency forward contracts that are designated as cash flow hedges will continue to be effective in offsetting changes in cash flow attributable to the hedged risk. The Company reclassified gains from AOCI to passenger revenue of $1.6 million and $5.2 million during the three and six months ended June 30, 2014, respectively. The Company expects to reclassify a net gain of approximately $1.1 million into earnings over the next 12 months from AOCI based on the values at June 30, 2014.
 
Negative Arbitrage Derivative
 
In 2013, the Company created two pass-through trusts, which issued $444.5 million aggregate principal amount of EETCs. See Note 10 for further information related to the EETCs. In accordance with the related agreements, the Company is obligated to pay the interest that accrues on the proceeds and is also entitled to the benefits of the income generated from the same proceeds. The difference between the interest owed to the pass-through trusts and the interest generated from the proceeds introduces an element of variability that could cause the associated cash flows to fluctuate. This variability requires the Company’s obligation to the trusts to be recognized as a derivative in the Company’s unaudited consolidated financial statements.  During the six months ended June 30, 2014, approximately $9.2 million of the derivative was reduced in connection with the first interest payment made to the trusts.

The following tables present the gross fair value of asset and liability derivatives that are designated as hedging instruments under ASC 815 and derivatives that are not designated as hedging instruments under ASC 815, as well as the net derivative positions and location of the asset and liability balances within the unaudited Consolidated Balance Sheets.
 
Derivative position as of June 30, 2014 

15



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

 
 

 
 

Interest rate derivative
 
Prepaid expenses and other
 
$60,600 U.S. dollars
 
April 2023
 
$
28

 
$

 
$
28

 
 
Long-term prepayments and other (1)
 
 
 
 
 
141

 

 
141

Foreign currency derivatives
 
Other accrued liabilities
 
7,899,945 Japanese Yen
889,577 Korean Won
48,743 Australian Dollars
462 New Zealand Dollars
 
June 2015
 
1,279

 
(2,155
)
 
(876
)
 
 
Other liabilities and deferred credits
 
3,058,330 Japanese Yen
11,354 Australian Dollars
 
May 2016
 
13

 
(521
)
 
(508
)
Derivatives not designated as hedges
 
 
 
 
 
 
 
 

 
 

 
0

Foreign currency derivatives
 
Prepaid expenses and other
 
4,061,169 Japanese Yen
26,490 Australian Dollars
 
June 2015
 
595

 
(38
)
 
557

 
 
Other accrued liabilities
 
1,209,060 Japanese Yen
9,676 Australian Dollars
 
June 2015
 
233

 
(399
)
 
(166
)
 
 
Long-term prepayments and other
 
307,000 Japanese Yen
1,540 Australian Dollars
 
July 2015
 
40

 

 
40

Fuel derivative contracts
 
Prepaid expenses and other
 
88,450 gallons
 
June 2015
 
7,859

 
(3,612
)
 
4,247

Negative arbitrage derivative
 
Other accrued liabilities
 
$444,540 U.S. dollars
 
January 2015
 

 
(3,668
)
 
(3,668
)
 
(1)
Represents the noncurrent portion of the $60.6 million interest rate derivative with final maturity in April 2023.

Derivative position as of December 31, 2013


16



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

 
 

 
 

Interest rate derivative
 
Prepaid expenses and other
 
$63,800 U.S. dollars
 
April 2023
 
$
196

 
$

 
$
196

 
 
Long-term prepayments and other (1)
 
 
 
 
 
925

 

 
925

Foreign currency derivatives
 
Prepaid expenses and other
 
10,500,321 Japanese Yen
10,895,370 Korean Won
62,659 Australian Dollars
4,821 New Zealand Dollars
 
December 
2014
 
9,946

 
(450
)
 
9,496

 
 
Long-term prepayments and other
 
1,980,949 Japanese Yen
16,681 Australian Dollars
 
May 2015
 
1,673

 

 
1,673

Derivatives not designated as hedges
 
 
 
 
 
 
 
 

 
 

 
 

Foreign currency derivatives
 
Prepaid expenses and other
 
6,180 Japanese Yen
58 Australian Dollars
 
December 
2014
 
577

 
(229
)
 
348

 
 
Other accrued liabilities
 
 
 
 
 
298

 
(509
)
 
(211
)
Fuel derivative contracts
 
Prepaid expenses and other
 
84,714 gallons
 
December 
2014
 
13,587

 
(7,494
)
 
6,093

Negative arbitrage derivative
 
Other accrued liabilities
 
$444,540 U.S. dollars
 
January 
2015
 

 
(12,250
)
 
(12,250
)
 
 
Other liabilities and deferred credits (2)
 
 
 
 
 

 
(615
)
 
(615
)

(1) Represents the noncurrent portion of the $64 million interest rate derivative with final maturity in April 2023.
(2) Represents the noncurrent portion of the $445 million negative arbitrage derivative with final maturity in January 2015.
 
The following table reflects the impact of cash flow hedges designated for hedge accounting treatment and their location within the unaudited Consolidated Statements of Comprehensive Income. 
 
 
(Gain) loss recognized in AOCI on derivatives (effective portion)
 
(Gain) loss reclassified from AOCI
into income (effective portion)
 
(Gain) loss recognized in
nonoperating (income) expense
(ineffective portion)
 
 
Three months ended June 30,
 
Three months ended June 30,
 
Three months ended June 30,
 
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
 
 
(in thousands)
Foreign currency derivatives
 
$
3,180

 
$
(11,111
)
 
$
(1,608
)
 
$
(3,123
)
 
$

 
$
(61
)
Interest rate derivatives
 
605

 
(2,446
)
 
206

 
223

 

 

 
 
(Gain) loss recognized in AOCI on derivatives (effective portion)
 
(Gain) loss reclassified from AOCI
into income (effective portion)
 
(Gain) loss recognized in
nonoperating (income) expense
(ineffective portion)
 
 
Six months ended June 30,
 
Six months ended June 30,
 
Six months ended June 30,
 
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
 
 
(in thousands)
Foreign currency derivatives
 
$
7,708

 
$
(14,146
)
 
$
(5,226
)
 
$
(3,390
)
 
$

 
$
(61
)
Interest rate derivatives
 
951

 
(1,011
)
 
417

 
223

 

 


Risk and Collateral
 

17



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

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 its counterparties as of June 30, 2014 or December 31, 2013.

8.  Debt
 
As of June 30, 2014, the expected maturities of long-term debt for the remainder of 2014 and the next four years, and thereafter, were as follows (in thousands): 
Remaining months in 2014
$
113,211

2015
82,965

2016
81,267

2017
81,266

2018
87,212

Thereafter
526,618

 
$
972,539

 
During the three months ended June 30, 2014 a condition for conversion of the Convertible Note was satisfied, which permits holders of the Convertible Notes to put their notes for conversion.  Since the Company has the intent and ability to redeem the principal amount of these notes with cash, as of June 30, 2014, the carrying value of $78.5 million is reflected as a current liability in the unaudited Consolidated Balance Sheets.
 
9. Employee Benefit Plans
 
The components of net periodic benefit cost for the Company’s defined benefit and other postretirement plans included the following: 
 
 
Three months ended June 30,
 
Six months ended June 30,
Components of Net Period Benefit Cost
 
2014
 
2013
 
2014
 
2013
 
 
(in thousands)
Service cost
 
$
2,952

 
$
3,601

 
$
5,904

 
$
7,203

Interest cost
 
6,986

 
6,299

 
13,972

 
12,599

Expected return on plan assets
 
(4,845
)
 
(4,065
)
 
(9,690
)
 
(8,131
)
Recognized net actuarial loss
 
225

 
2,050

 
450

 
4,100

Net periodic benefit cost
 
$
5,318

 
$
7,885

 
$
10,636

 
$
15,771

 
The Company made contributions of $3.8 million and $6.6 million to its defined benefit and other postretirement plans during the three and six months ended June 30, 2014, respectively. The Company made contributions of $4.0 million and $6.7 million to its defined benefit and other postretirement plans during the three and six months ended June 30, 2013, respectively. The Company expects to make additional minimum required contributions of $7.6 million during the remainder of 2014.
 

18



10. Commitments and Contingent Liabilities
 
Commitments

In July 2014, the Company signed a memorandum of understanding (MOU) with Airbus for the conversion of the existing order for six new A350XWB-800 aircraft for delivery between 2017 and 2020 into the purchase of six new Airbus A330neo aircraft for delivery between 2019 and 2021, with rights to purchase an additional six new Airbus A330neo aircraft. This change in the dates of delivery and in the model of the aircraft being delivered are not included in the tables below as definitive agreements relating to these commitments have yet to be finalized.

As of June 30, 2014, the Company had the following capital commitments consisting of firm aircraft and engine orders and purchase rights:
Aircraft Type
 
Firm
Orders
 
Purchase
Rights
 
Expected Delivery Dates
A330-200 aircraft
 
4

 
3

 
Between 2014 and 2015
A350XWB-800 aircraft
 
6

 
6

 
Between 2017 and 2020
A321neo aircraft
 
16

 
9

 
Between 2017 and 2020
Rolls-Royce spare engines:
 
 

 
 

 
 
A330-200 spare engine
 
1

 

 
In 2014
A350XWB-800 spare engines
 
2

 

 
Between 2017 and 2020
Pratt & Whitney spare engines:
 
 

 
 

 
 
A321neo spare engines
 
2

 

 
Between 2017 and 2018

The Company has operating commitments with a third-party to provide aircraft maintenance services which require fixed payments as well as variable payments based on flight hours for its Airbus fleet through 2027. The Company also has operating commitments with third-party service providers for reservations, IT, and accounting services through 2018.
 
Committed capital and operating expenditures include escalation and variable amounts based on estimates. The gross committed expenditures and committed financings for those deliveries are detailed below: 
 
 
Capital
 
Operating
 
Total Committed
Expenditures
 
Less: Committed
Financing for Upcoming
Aircraft Deliveries*
 
Net Committed
Expenditures
 
 
(in thousands)
Remaining months in 2014
 
$
95,155

 
$
31,100

 
$
126,255

 
$
75,000

 
$
51,255

2015
 
245,702

 
60,535

 
306,237

 

 
306,237

2016
 
147,824

 
49,004

 
196,828

 

 
196,828

2017
 
493,824

 
47,853

 
541,677

 

 
541,677

2018
 
547,118

 
42,922

 
590,040

 

 
590,040

Thereafter
 
558,578

 
255,650

 
814,228

 

 
814,228

 
 
$
2,088,201

 
$
487,064

 
$
2,575,265

 
$
75,000

 
$
2,500,265

 
*See below for a detailed discussion of the committed financings Hawaiian has received for its upcoming capital commitments for aircraft deliveries.
 
Enhanced Equipment Trust Certificates (EETC)
 
In 2013, Hawaiian consummated an EETC financing, whereby it created two pass-through trusts, one of which issued $328.2 million aggregate principal amount of Class A pass-through certificates with a stated interest rate of 3.9% and the second of which issued $116.3 million aggregate principal amount of Class B pass-through certificates with a stated interest rate of 4.95%. The proceeds of the issuance of the Class A and Class B pass-through certificates were to be used to purchase equipment notes to be issued by Hawaiian to finance the purchase of six (6) new Airbus aircraft scheduled for delivery from November 2013 through October 2014.  During the six months ended June 30, 2014, the Company received $293.4 million in proceeds from the issuance of the equipment notes, which it used to fund a portion of the purchase price of four Airbus aircraft. The remaining proceeds will be used to purchase equipment notes to be issued by Hawaiian to finance the purchase of an Airbus aircraft scheduled for delivery in October 2014. The equipment notes are secured by a lien on the aircraft, and the

19



payment obligations of Hawaiian under the equipment notes are fully and unconditionally guaranteed by the Company. The Company issues the equipment notes to the trusts as aircraft are delivered to Hawaiian. Hawaiian records the debt obligation upon issuance of the equipment notes rather than upon the initial issuance of the pass-through certificates. In connection with consummation of the EETC financing transaction, Hawaiian was required to deposit $16.0 million into a collateral account, of which $0.6 million was released during the six months ended June 30, 2014. The funds held in this account are under the control of a third party. Accordingly, these funds are classified as restricted cash in the Company’s unaudited Consolidated Balance Sheets.
 
The Company evaluated whether the pass-through trusts formed are variable interest entities (“VIEs”) required to be consolidated by the Company under applicable accounting guidance, and determined that the pass-through trusts are VIEs. The Company determined that it does not have a variable interest in the pass-through trusts. Neither the Company nor Hawaiian invested in or obtained a financial interest in the pass-through trusts. Rather, Hawaiian has an obligation to make interest and principal payments on its equipment notes held by the pass-through trusts, which will be fully and unconditionally guaranteed by the Company. Neither the Company nor Hawaiian intends to have any voting or non-voting equity interest in the pass-through trusts or to absorb variability from the pass-through trusts. Based on this analysis, the Company determined that it is not required to consolidate the pass-through trusts.
 
Litigation and Contingencies
 
The Company is subject to legal proceedings arising in the normal course of its operations. Management does not anticipate that the disposition of any currently pending proceeding will have a material effect on the Company’s operations, business or financial condition.

General Guarantees and Indemnifications
 
In the normal course of business, the Company enters into numerous aircraft financing and real estate leasing arrangements that have various guarantees included in the contract. It is common in such lease transactions for the lessee to agree to indemnify the lessor and other related third-parties for tort liabilities that arise out of or relate to the lessee’s use of the leased aircraft or occupancy of the leased premises. In some cases, this indemnity extends to related liabilities arising from the negligence of the indemnified parties, but usually excludes any liabilities caused by their gross negligence or willful misconduct. Additionally, the lessee typically indemnifies such parties for any environmental liability that arises out of or relates to its use of the real estate leased premises. The Company believes that it is insured (subject to deductibles) for most tort liabilities and related indemnities described above with respect to the aircraft and real estate that it leases. The Company cannot estimate the potential amount of future payments, if any, under the foregoing indemnities and agreements.
 
Credit Card Holdback
 
Under the Company’s bank-issued credit card processing agreements, certain proceeds from advance ticket sales may be held back to serve as collateral to cover any possible chargebacks or other disputed charges that may occur. These holdbacks, which are included in restricted cash in the Company’s unaudited Consolidated Balance Sheets, totaled $5.0 million at June 30, 2014 and December 31, 2013.
 
In the event of a material adverse change in the business, the holdback could increase to an amount up to 100% of the applicable credit card air traffic liability, which would also cause an increase in the level of restricted cash. If the Company is unable to obtain a waiver of, or otherwise mitigate the increase in the restriction of cash, it could also cause a covenant violation under other debt or lease obligations and have a material adverse impact on the Company.
 
11. 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 11 as Subsidiary Issuer / Guarantor) of pass-through certificates, as discussed in Note 10, the Company (which is also referred to in this Note 11 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, and will fully and unconditionally guarantee those obligations in connection with the future issuance of equipment notes by Hawaiian.
 

20



Also, in accordance with Regulation S-X paragraph 210.5-04 (c), the Company is required to report condensed financial information as a result of limitations on the ability of Hawaiian to pay dividends or advances to the Company included in Hawaiian’s debt agreements.  The Company’s condensed consolidating financial information satisfies this requirement.
Condensed consolidating financial statements are presented in the following tables:

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

 
$
574,779

 
$
1,025

 
$
(84
)
 
$
575,720

Operating Expenses:
 
 

 
 

 
 

 
 

 
 

Aircraft fuel, including taxes and delivery
 

 
174,139

 

 

 
174,139

Wages and benefits
 

 
112,478

 

 

 
112,478

Aircraft rent
 

 
26,095

 

 

 
26,095

Maintenance materials and repairs
 

 
58,172

 
227

 

 
58,399

Aircraft and passenger servicing
 

 
30,860

 

 

 
30,860

Commissions and other selling
 

 
30,778

 
19

 
(24
)
 
30,773

Depreciation and amortization
 

 
23,130

 
635

 

 
23,765

Other rentals and landing fees
 

 
21,656

 

 

 
21,656

Other
 
1,507

 
44,302

 
212

 
(60
)
 
45,961

Total
 
1,507

 
521,610

 
1,093

 
(84
)
 
524,126

Operating Income (Loss)
 
(1,507
)
 
53,169

 
(68
)
 

 
51,594

Nonoperating Income (Expense):
 
 

 
 

 
 

 
 

 
 

Undistributed net income of subsidiaries
 
29,694

 

 

 
(29,694
)
 

Interest expense and amortization of debt discounts and issuance costs
 
(2,210
)
 
(13,787
)
 

 

 
(15,997
)
Interest income
 
40

 
358

 

 

 
398

Capitalized interest
 

 
1,974

 

 

 
1,974

Gains on fuel derivatives
 

 
6,285

 

 

 
6,285

Other, net
 

 
725

 

 

 
725

Total
 
27,524

 
(4,445
)
 

 
(29,694
)
 
(6,615
)
Income (Loss) Before Income Taxes
 
26,017

 
48,724

 
(68
)
 
(29,694
)
 
44,979

Income tax expense (benefit)
 
(1,310
)
 
18,962

 

 

 
17,652

Net Income (Loss)
 
$
27,327

 
$
29,762

 
$
(68
)
 
$
(29,694
)
 
$
27,327

Comprehensive Income (Loss)
 
$
24,151

 
$
26,586

 
$
(68
)
 
$
(26,518
)
 
$
24,151



21



Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
Three months ended June 30, 2013
 
 
Parent Issuer /
Guarantor
 
Subsidiary
Issuer /
Guarantor
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
(in thousands)
Operating Revenue
 
$

 
$
533,993

 
$
22

 
$
(87
)
 
$
533,928

Operating Expenses:
 
 

 
 

 
 

 
 

 
 

Aircraft fuel, including taxes and delivery
 

 
169,223

 

 

 
169,223

Wages and benefits
 

 
103,384

 

 

 
103,384

Aircraft rent
 

 
28,285

 

 

 
28,285

Maintenance materials and repairs
 

 
53,036

 

 

 
53,036

Aircraft and passenger servicing
 

 
29,228

 

 

 
29,228

Commissions and other selling
 

 
32,204

 

 
(18
)
 
32,186

Depreciation and amortization
 

 
19,788

 

 

 
19,788

Other rentals and landing fees
 

 
19,630

 

 

 
19,630

Other
 
4,217

 
37,503

 
126

 
(69
)
 
41,777

Total
 
4,217

 
492,281

 
126

 
(87
)
 
496,537

Operating Income (Loss)
 
(4,217
)
 
41,712

 
(104
)
 

 
37,391

Nonoperating Income (Expense):
 
 

 
 

 
 

 
 

 
 

Undistributed net income of subsidiaries
 
15,406

 

 

 
(15,406
)
 

Interest expense and amortization of debt discounts and issuance costs
 
(2,158
)
 
(10,005
)
 

 

 
(12,163
)
Interest income
 
28

 
98

 

 

 
126

Capitalized interest
 

 
2,891

 

 

 
2,891

Losses on fuel derivatives
 

 
(6,906
)
 

 

 
(6,906
)
Other, net
 

 
(3,124
)
 

 

 
(3,124
)
Total
 
13,276

 
(17,046
)
 

 
(15,406
)
 
(19,176
)
Income (Loss) Before Income Taxes
 
9,059

 
24,666

 
(104
)
 
(15,406
)
 
18,215

Income tax expense (benefit)
 
(2,257
)
 
9,156

 

 

 
6,899

Net Income (Loss)
 
$
11,316

 
$
15,510

 
$
(104
)
 
$
(15,406
)
 
$
11,316

Comprehensive Income (Loss)
 
$
18,643

 
$
22,837

 
$
(104
)
 
$
(22,733
)
 
$
18,643



22



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

 
$
1,099,106

 
$
1,656

 
$
(184
)
 
$
1,100,578

Operating Expenses:
 
 

 
 

 
 

 
 

 
 

Aircraft fuel, including taxes and delivery
 

 
345,278

 

 

 
345,278

Wages and benefits
 

 
219,972

 

 

 
219,972

Aircraft rent
 

 
52,374

 

 

 
52,374

Maintenance materials and repairs
 

 
116,470

 
239

 

 
116,709

Aircraft and passenger servicing
 

 
61,081

 

 

 
61,081

Commissions and other selling
 

 
62,125

 
32

 
(49
)
 
62,108

Depreciation and amortization
 

 
45,842

 
734

 

 
46,576

Other rentals and landing fees
 

 
42,218

 

 

 
42,218

Other
 
2,769

 
89,438

 
559

 
(135
)
 
92,631

Total
 
2,769

 
1,034,798

 
1,564

 
(184
)
 
1,038,947

Operating Income (Loss)
 
(2,769
)
 
64,308

 
92

 

 
61,631

Nonoperating Income (Expense):
 
 

 
 

 
 

 
 

 
 

Undistributed net income of subsidiaries
 
26,887

 

 

 
(26,887
)
 

Interest expense and amortization of debt discounts and issuance costs
 
(4,390
)
 
(26,617
)
 

 

 
(31,007
)
Interest income
 
79

 
538

 

 

 
617

Capitalized interest
 

 
4,750

 

 

 
4,750

Losses on fuel derivatives
 

 
(614
)
 

 

 
(614
)
Other, net
 

 
1,310

 

 

 
1,310

Total
 
22,576

 
(20,633
)
 

 
(26,887
)
 
(24,944
)
Income Before Income Taxes
 
19,807

 
43,675

 
92

 
(26,887
)
 
36,687

Income tax expense (benefit)
 
(2,445
)
 
16,880

 

 

 
14,435

Net Income
 
$
22,252

 
$
26,795

 
$
92

 
$
(26,887
)
 
$
22,252

Comprehensive Income
 
$
13,825

 
$
18,368

 
$
92

 
$
(18,460
)
 
$
13,825



23



Condensed Consolidating Statements of Operations and Comprehensive Income
Six months ended June 30, 2013
 
 
Parent Issuer /
Guarantor
 
Subsidiary
Issuer /
Guarantor
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
(in thousands)
Operating Revenue
 
$

 
$
1,024,241

 
$
637

 
$
(196
)
 
$
1,024,682

Operating Expenses:
 
 

 
 

 
 

 
 

 
 

Aircraft fuel, including taxes and delivery
 

 
343,712

 

 

 
343,712

Wages and benefits
 

 
206,119

 

 

 
206,119

Aircraft rent
 

 
54,304

 

 

 
54,304

Maintenance materials and repairs
 

 
108,295

 

 

 
108,295

Aircraft and passenger servicing
 

 
58,287

 

 

 
58,287

Commissions and other selling
 

 
66,031

 

 
(34
)
 
65,997

Depreciation and amortization
 

 
38,901

 

 

 
38,901

Other rentals and landing fees
 

 
38,777

 

 

 
38,777

Other
 
5,485

 
79,307

 
195

 
(162
)
 
84,825

Total
 
5,485

 
993,733

 
195

 
(196
)
 
999,217

Operating Income (Loss)
 
(5,485
)
 
30,508

 
442

 

 
25,465

Nonoperating Income (Expense):
 
 

 
 

 
 

 
 

 
 

Undistributed net income of subsidiaries
 
624

 

 

 
(624
)
 

Interest expense and amortization of debt discounts and issuance costs
 
(4,268
)
 
(19,272
)
 

 

 
(23,540
)
Interest income
 
64

 
189

 

 

 
253

Capitalized interest
 

 
6,331

 

 

 
6,331

Losses on fuel derivatives
 

 
(13,467
)
 

 

 
(13,467
)
Other, net
 

 
(4,206
)
 

 

 
(4,206
)
Total
 
(3,580
)
 
(30,425
)
 

 
(624
)
 
(34,629
)
Income (Loss) Before Income Taxes
 
(9,065
)
 
83

 
442

 
(624
)
 
(9,164
)
Income tax benefit
 
(3,236
)
 
(99
)
 

 

 
(3,335
)
Net Income (Loss)
 
$
(5,829
)
 
$
182

 
$
442

 
$
(624
)
 
$
(5,829
)
Comprehensive Income
 
$
3,593

 
$
9,604

 
$
442

 
$
(10,046
)
 
$
3,593



24



Condensed Consolidating Balance Sheets
June 30, 2014
 
 
Parent Issuer /
Guarantor
 
Subsidiary
Issuer /
Guarantor
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
(in thousands)
ASSETS
 
 

 
 

 
 

 
 

 
 

Current assets:
 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
45,764

 
$
310,762

 
$
3,755

 
$

 
$
360,281

Restricted cash
 

 
20,379

 

 

 
20,379

Short-term investments
 

 
203,333

 

 

 
203,333

Accounts receivable, net
 
1,096

 
93,787

 
128

 
(178
)
 
94,833

Spare parts and supplies, net
 

 
16,143

 
928

 

 
17,071

Deferred tax assets, net
 

 
17,325

 

 

 
17,325

Prepaid expenses and other
 
8

 
32,696

 
189

 

 
32,893

Total
 
46,868

 
694,425

 
5,000

 
(178
)
 
746,115

Property and equipment at cost
 

 
1,937,148

 
33,757

 

 
1,970,905

Less accumulated depreciation and amortization
 

 
(346,016
)
 
(734
)
 

 
(346,750
)
Property and equipment, net
 

 
1,591,132

 
33,023

 

 
1,624,155

Long-term prepayments and other
 
908

 
84,637

 

 

 
85,545

Deferred tax assets, net
 
17,213

 

 

 
(17,213
)
 

Goodwill and other intangible assets, net
 

 
129,283

 

 

 
129,283

Intercompany receivable
 
62,785

 

 

 
(62,785
)
 

Investment in consolidated subsidiaries
 
368,818

 

 

 
(368,818
)
 

TOTAL ASSETS
 
$
496,592

 
$
2,499,477

 
$
38,023

 
$
(448,994
)
 
$
2,585,098

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

 
 

 
 

 
 

Current liabilities:
 
 

 
 

 
 

 
 

 
 

Accounts payable
 
$
492

 
$
87,223

 
$
349

 
$
(178
)
 
$
87,886

Air traffic liability
 

 
535,101

 
1,987

 

 
537,088

Other accrued liabilities
 
1,413

 
93,092

 
145

 

 
94,650

Current maturities of long-term debt, less discount, and capital lease obligations
 
78,538

 
77,487

 

 

 
156,025

Total
 
80,443

 
792,903

 
2,481

 
(178
)
 
875,649

Long-term debt and capital lease obligations
 

 
915,110

 

 

 
915,110

Intercompany payable
 

 
62,785

 

 
(62,785
)
 

Other liabilities and deferred credits:
 
 

 
 

 
 

 
 

 
0

Accumulated pension and other postretirement benefit obligations
 

 
266,489

 

 

 
266,489

Other liabilities and deferred credits
 
203

 
59,422

 
750

 

 
60,375

Deferred tax liabilities, net
 

 
68,742

 

 
(17,213
)
 
51,529

Total
 
203

 
394,653

 
750

 
(17,213
)
 
378,393

Shareholders’ equity
 
415,946

 
334,026

 
34,792

 
(368,818
)
 
415,946

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
496,592

 
$
2,499,477

 
$
38,023

 
$
(448,994
)
 
$
2,585,098








25



Condensed Consolidating Balance Sheets
December 31, 2013
 
 
Parent Issuer /
Guarantor
 
Subsidiary
Issuer /
Guarantor
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
(in thousands)
ASSETS
 
 
 
 

 
 

 
 

 
 

Current assets:
 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
84,797

 
$
333,663

 
$
4,924

 
$

 
$
423,384

Restricted cash
 

 
19,434

 

 

 
19,434

Accounts receivable, net
 
1,192

 
73,241

 
31

 
(219
)
 
74,245

Spare parts and supplies, net
 

 
19,767

 

 

 
19,767

Deferred tax assets, net
 

 
17,325

 

 

 
17,325

Prepaid expenses and other
 

 
51,613

 
39

 

 
51,652

Total
 
85,989

 
515,043

 
4,994

 
(219
)
 
605,807

Property and equipment at cost
 

 
1,629,517

 
31,917

 

 
1,661,434

Less accumulated depreciation and amortization
 

 
(327,102
)
 

 

 
(327,102
)
Property and equipment, net
 

 
1,302,415

 
31,917

 

 
1,334,332

Long-term prepayments and other
 
1,171

 
90,782

 

 

 
91,953

Restricted cash
 

 
1,566

 

 

 
1,566

Deferred tax assets, net
 
14,767

 

 

 
(14,767
)
 

Goodwill and other intangible assets, net
 

 
130,603

 

 

 
130,603

Intercompany receivable
 
25,286

 

 

 
(25,286
)
 

Investment in consolidated subsidiaries
 
348,040

 

 

 
(348,040
)
 

TOTAL ASSETS
 
$
475,253

 
$
2,040,409

 
$
36,911

 
$
(388,312
)
 
$
2,164,261

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

 
 

 
 

 
 

Current liabilities:
 
 

 
 

 
 

 
 

 
 

Accounts payable
 
$
532

 
$
88,990

 
$
484

 
$
(219
)
 
$
89,787

Air traffic liability
 

 
407,359

 
1,727

 

 
409,086

Other accrued liabilities
 
1,307

 
96,264

 

 

 
97,571

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

 
62,187

 

 

 
62,187

Total
 
1,839

 
654,800

 
2,211

 
(219
)
 
658,631

Long-term debt and capital lease obligations
 
76,550

 
667,736

 

 

 
744,286

Intercompany payable
 

 
25,286

 

 
(25,286
)
 

Other liabilities and deferred credits:
 
 

 
 

 
 

 
 

 
0

Accumulated pension and other postretirement benefit obligations
 

 
264,106

 

 

 
264,106

Other liabilities and deferred credits
 

 
59,424

 

 

 
59,424

Deferred tax liabilities, net
 

 
55,717

 

 
(14,767
)
 
40,950

Total
 

 
379,247

 

 
(14,767
)
 
364,480

Shareholders’ equity
 
396,864

 
313,340

 
34,700

 
(348,040
)
 
396,864

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
475,253

 
$
2,040,409

 
$
36,911

 
$
(388,312
)
 
$
2,164,261








26



Condensed Consolidating Statements of Cash Flows
Six months ended June 30, 2014
 
 
Parent Issuer /
Guarantor
 
Subsidiary
Issuer /
Guarantor
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
(in thousands)
Net Cash Provided By (Used In) Operating Activities
 
$
(4,537
)
 
$
207,836

 
$
670

 
$

 
$
203,969

Cash Flows From Investing Activities:
 
 

 
 

 
 

 
 

 
 

Net payments to subsidiaries
 
(38,829
)
 

 

 
38,829

 

Additions to property and equipment, including pre-delivery deposits
 

 
(329,927
)
 
(1,839
)
 

 
(331,766
)
Net proceeds from disposition of property and equipment
 

 
350

 

 

 
350

Purchases of investments
 

 
(234,143
)
 

 

 
(234,143
)
Sales of investments
 

 
30,859

 

 

 
30,859

Net cash used in investing activities
 
(38,829
)
 
(532,861
)
 
(1,839
)
 
38,829

 
(534,700
)
Cash Flows From Financing Activities:
 
 

 
 

 
 

 
 

 
 

Proceeds from exercise of stock options
 
4,333

 

 

 

 
4,333

Long-term borrowings
 

 
293,430

 

 

 
293,430

Repayments of long-term debt and capital lease obligations
 

 
(30,756
)
 

 

 
(30,756
)
Net payments from parent company
 

 
38,829

 

 
(38,829
)
 

Change in restricted cash
 

 
621

 

 

 
621

Net cash provided by financing activities
 
4,333

 
302,124

 

 
(38,829
)
 
267,628

Net decrease in cash and cash equivalents
 
(39,033
)
 
(22,901
)
 
(1,169
)
 

 
(63,103
)
Cash and cash equivalents - Beginning of Period
 
84,797

 
333,663

 
4,924

 

 
423,384

Cash and cash equivalents - End of Period
 
$
45,764

 
$
310,762

 
$
3,755

 
$

 
$
360,281


27



Condensed Consolidating Statements of Cash Flows
Six months ended June 30, 2013
 
 
Parent Issuer /
Guarantor
 
Subsidiary
Issuer /
Guarantor
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
(in thousands)
Net Cash Provided By (Used In) Operating Activities
 
$
(4,229
)
 
$
172,860

 
$
(508
)
 
$

 
$
168,123

Cash Flows From Investing Activities:
 
 

 
 

 
 

 
 

 
 

Net payments from subsidiaries
 
4,361

 

 

 
(4,361
)
 

Additions to property and equipment, including pre-delivery deposits
 

 
(174,213
)
 
(774
)
 

 
(174,987
)
Net cash provided by (used in) investing activities
 
4,361

 
(174,213
)
 
(774
)
 
(4,361
)
 
(174,987
)
Cash Flows From Financing Activities:
 
 

 
 

 
 

 
 

 
 

Proceeds from exercise of stock options
 
1,442

 

 

 

 
1,442

Long-term borrowings
 

 
132,000

 

 

 
132,000

Repayments of long-term debt and capital lease obligations
 

 
(28,174
)
 

 

 
(28,174
)
Debt issuance costs
 

 
(10,696
)
 

 

 
(10,696
)
Net payments to parent company
 

 
(4,361
)
 

 
4,361

 

Change in restricted cash
 

 
(16,000
)
 

 

 
(16,000
)
Net cash provided by financing activities
 
1,442

 
72,769

 

 
4,361

 
78,572

Net increase (decrease) in cash and cash equivalents
 
1,574

 
71,416

 
(1,282
)
 

 
71,708

Cash and cash equivalents - Beginning of Period
 
83,626

 
303,967

 
18,287

 

 
405,880

Cash and cash equivalents - End of Period
 
$
85,200

 
$
375,383

 
$
17,005

 
$

 
$
477,588


28



Certain Restrictions on Subsidiary Distributions, Dividends and Repurchases
 
The Company and Hawaiian are party to an Amended and Restated Credit Agreement (Credit Agreement), dated as of December 10, 2010, that provides for a Revolving Credit Facility. See further discussion of the Revolving Credit Facility at Note 7 to the Consolidated Financial Statements included in the Company’s Annual Report on form 10-K for the year ended December 31, 2013. The Credit Agreement provides that, subject to certain exceptions, neither Hawaiian nor any other subsidiary of the Company will make any distribution or other payment on account of, or declare or pay any dividend on, or purchase, acquire, redeem or retire any stock issued by Hawaiian or any other subsidiary of the Company. The exceptions include (i) distributions by Hawaiian to the Company for the purpose of allowing the Company to pay federal and state income and franchise taxes, (ii) distributions by Hawaiian to the Company to pay customary costs and expenses of operating a publicly-traded company in an aggregate amount in any year not to exceed $10.0 million, and (iii) so long as no event of default has occurred and is continuing or would result therefrom, distributions by Hawaiian to the Company for the purpose of making regularly scheduled interest payments on specified indebtedness of the Company. In addition, the Credit Agreement restricts the ability of Hawaiian and the other subsidiaries of the Company from making loans or advances to the Company. The net assets of Hawaiian restricted under the Credit Agreement, defined as shareholders’ equity, totaled $334.0 million and $313.3 million as of June 30, 2014 and December 31, 2013, respectively.
 
Long-Term Debt
 
The long-term debt included in the Parent Issuer / Guarantor column represents the Convertible Debt described in Note 7 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
 
Income Taxes
 
The income tax expense (benefit) is presented as if each entity that is part of the consolidated group files a separate return.

29



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: any expectations of operating expenses, deferred revenue, interest rates, income taxes, deferred tax assets, valuation allowance or other financial items or financial performance; statements regarding areas of strategic focus, statements regarding factors that may affect our ability to fund our working capital, capital expenditures or other general purpose needs; estimates of fair value measurements; statements related to aircraft maintenance and repair costs and deposits and timing of maintenance activities; statements related to cash flow from operations and seasonality; estimates of required funding of and contributions to our defined benefit pension and disability plan; estimates of annual fuel expenses and measure of the effects of fuel prices on our business; statements regarding the availability and cost of fuel; statements regarding our wages and benefits and labor costs and agreements; statements related to airport rent rates and landing fees; statements regarding aircraft rent expense; statements regarding our total capacity and yields on routes; statements related to our hedging program; statements concerning the impact of, and changes to, accounting principles, policies and estimates; statements regarding credit card holdback; statements regarding the availability of financing; statements regarding our capital expenditures; statements regarding potential violations under the Company’s debt or lease obligations; statements regarding our ability to comply with covenants under our financing arrangements; statements related to risk management, credit risks and air traffic liability; statements related to future U.S. and global economic conditions or performance; statements related to changes in our fleet plan and related cash outlays; statements related to expected delivery of new aircraft; statements related to potential route expansion; statements related to the increase in frequency on existing routes; statements related to expected maturation of existing networks; statements regarding the use of proceeds of the EETC financing and the issuance dates of equipment notes; statements related to the effects of any litigation on our operations or business; and statements as to other matters that do not relate strictly to historical facts or statements of assumptions underlying any of the foregoing.  Words such as “expects,” “anticipates,” “projects,” “intends,” “plans,” “believes,” “estimates,” variations of such words, and similar expressions are also intended to identify such forward-looking statements.  These forward-looking statements are and will be, as the case may be, subject to many risks, uncertainties and assumptions relating to our operations and business environment, all of which may cause our actual results to be materially different from any future results, expressed or implied, in these forward-looking statements.
 
The risks, uncertainties and assumptions referred to above that could cause our results to differ materially from the results expressed or implied by such forward-looking statements also include the risks, uncertainties and assumptions discussed from time to time in our public filings and public announcements, including, but not limited to, our risk factors set out in the “Risk Factors” sections of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.  All forward-looking statements included in this Report are based on information available to us as of the date hereof.  We undertake no obligation to publicly update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this quarterly report.  The following discussion and analysis should be read in conjunction with our unaudited Consolidated Financial Statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q.
 
OVERVIEW

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

Our Business

We are engaged in the scheduled air transportation of passengers and cargo amongst the Hawaiian Islands (the Neighbor Island routes), between the Hawaiian Islands and certain cities in the U.S. mainland (the North America routes), and between the Hawaiian Islands and the South Pacific, Australia and Asia (the International routes), collectively referred to as our Scheduled Operations. In addition, we operate various charter flights. We are the largest airline headquartered in the State of Hawai‘i and the eleventh largest domestic airline in the United States based on revenue passenger miles reported by the Research and Innovative Technology Administration Bureau of Transportation Statistics for the month of March 2014, the latest available data.

30




As of June 30, 2014, Hawaiian had 5,362 active employees.

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

SECOND QUARTER REVIEW

Financial Highlights

GAAP net income in the second quarter of $27.3 million or $0.43 per diluted share compared to $11.3 million in the prior year period or $0.21 per diluted share.

Adjusted net income, reflecting economic fuel expense, in the second quarter of $22.4 million or $0.35 per diluted share compared to $12.6 million in the prior year period of $0.24 per diluted share.

Passenger revenue per available seat mile (PRASM) increase of 4.1% and operating revenue per available seat mile (RASM) increase of 6.7% from the prior year period.

Unrestricted cash and cash equivalents and short-term investments of $564 million compared to $478 million in the prior year period.

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

Outlook

We expect our financial performance to improve through the third quarter as a result of continued improvement in our yields on our North America and Neighbor Island routes, the maturation of our international network, and our cost control efforts. We expect available seat miles during the quarter ending September 30, 2014 to increase by 1% to 3% from the same prior year period, while operating revenue per available seat mile is expected to increase by 3% to 6% from the same prior year period. We expect operating cost per available seat mile, excluding fuel, for the quarter ending September 30, 2014 to increase by 1% to 4% from the same prior year period.

Fleet Summary

The table below summarizes our total fleet as of June 30, 2013 and 2014, and expected fleet as of June 30, 2015 (based on existing agreements):
 
 
June 30, 2013
 
June 30, 2014
 
June 30,2015
Aircraft Type
 
Leased 
(3)
 
Owned
 
Total
 
Leased
(3)
 
Owned
 
Total
 
Leased
(3)
 
Owned
 
Total
A330-200 (1)
 
7

 
6

 
13

 
7

 
11

 
18

 
7

 
14

 
21

767-300 (2)
 
8

 
7

 
15

 
6

 
5

 
11

 
6

 
4

 
10

717-200
 
3

 
15

 
18

 
3

 
15

 
18

 
3

 
15

 
18

ATR42 (4)
 

 
2

 
2

 

 
3

 
3

 

 
3

 
3

Total
 
18

 
30

 
48

 
16

 
34

 
50

 
16

 
36

 
52


(1)
During the three months ended June 30, 2014, we took delivery of and placed into revenue service two Airbus A330-200 aircraft for service on our North America and International routes. Both of these aircraft were financed in part through proceeds from our EETC financing transaction. The increase in the number of owned Airbus A330-200 aircraft from June 30, 2014 to 2015 is due to the planned delivery of three aircraft, one of which will be financed in part through proceeds from our EETC financing transaction. See Note 10 for further discussion regarding the EETC financing transaction.


31



(2)
The decrease in the number of owned Boeing 767-300 aircraft from 2014 to 2015 is due to the planned retirement of an aircraft at the end of its estimated useful life.

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

(4)
The ATR42 aircraft are owned by Airline Contract Maintenance & Equipment, Inc., a wholly-owned subsidiary of the Company.

Results of Operations
 
For the three months ended June 30, 2014, we generated net income of $27.3 million, or $0.43 per diluted share, compared to net income of $11.3 million, or $0.21 per diluted share, for the same period in 2013. For the six months ended June 30, 2014, we generated net income of $22.3 million, or $0.39 per diluted share, compared to a net loss of $5.8 million, or $0.11 per diluted share, for the same period in 2013.

Selected Consolidated Statistical Data (unaudited)
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(in thousands, except as otherwise indicated)
Scheduled Operations (c) :
 
 

 
 

 
 

 
 

Revenue passengers flown
 
2,526

 
2,481

 
4,930

 
4,879

Revenue passenger miles (RPM)
 
3,393,173

 
3,405,654

 
6,621,779

 
6,611,138

Available seat miles (ASM)
 
4,260,565

 
4,211,545

 
8,296,235

 
8,171,840

Passenger revenue per RPM (Yield)
 

14.94
¢
 

14.14
¢
 

14.72
¢
 

13.94
¢
Passenger load factor (RPM/ASM)
 
79.6
%
 
80.9
%
 
79.8
%
 
80.9
%
Passenger revenue per ASM (PRASM)
 

11.90
¢
 

11.43
¢
 

11.75
¢
 

11.28
¢
Total Operations (c) :
 
 

 
 

 
 

 
 

Revenue passengers flown
 
2,526

 
2,482

 
4,932

 
4,881

RPM
 
3,395,161

 
3,408,963

 
6,626,880

 
6,619,596

ASM
 
4,262,774

 
4,215,893

 
8,301,743

 
8,181,671

Operating revenue per ASM (RASM)
 

13.51
¢
 

12.66
¢
 

13.26
¢
 

12.52
¢
Operating cost per ASM (CASM)
 

12.30
¢
 

11.78
¢
 

12.51
¢
 

12.21
¢
CASM excluding aircraft fuel (b)
 

8.21
¢
 

7.76
¢
 

8.36
¢
 

8.01
¢
Aircraft fuel expense per ASM (a)
 

4.09
¢
 

4.02
¢
 

4.15
¢
 

4.20
¢
Revenue block hours operated
 
41,112

 
40,703

 
80,324

 
79,573

Gallons of jet fuel consumed
 
56,937

 
56,625

 
112,101

 
110,560

Average cost per gallon of jet fuel (actual) (a)
 
$
3.06

 
$
2.99

 
$
3.08

 
$
3.11

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

 
Operating Revenue
 
Operating revenue increased $41.8 million, or 7.8%, and $75.9 million, or 7.4%, for the three and six months ended June 30, 2014, respectively, as compared to the prior year periods, driven primarily by an increase in passenger revenue.

Passenger Revenue

For the three and six months ended June 30, 2014, passenger revenue increased $25.3 million, or 5.3%, and $53.4 million, or 5.8%, respectively, as compared to the prior year periods. Details of these changes are described in the table below:


32



 
 
 
Three months ended June 30, 2014 as compared
 
Six months ended June 30, 2014 as compared
 
 
to three months ended June 30, 2013
 
to six months ended June 30, 2013
 
 
Change in
 
 
 
 
 
 
 
Change in
 
 
 
 
 
 
 
 
scheduled
 
 
 
 
 
 
 
scheduled
 
 
 
 
 
 
 
 
passenger
 
Change in
 
Change in
 
Change in
 
passenger
 
Change in
 
Change in
 
Change in
 
 
revenue
 
Yield
 
RPM
 
ASM
 
revenue
 
Yield
 
RPM
 
ASM
 
 
(in millions)
 
 
 
 
 
 
 
(in millions)
 
 
 
 
 
 
North America
 
$
26.5

 
8.8
 %
 
2.7
 %
 
7.5
 %
 
$
53.9

 
10.9
 %
 
1.8
 %
 
5.1
 %
Neighbor Island
 
11.4

 
7.8

 
2.2

 
1.7

 
20.8

 
8.6

 
0.8

 
1.0

International
 
(12.6
)
 
(2.9
)
 
(6.2
)
 
(7.4
)
 
(21.3
)
 
(4.8
)
 
(2.8
)
 
(3.4
)
Total scheduled
 
$
25.3

 
5.7
 %
 
(0.4
)%
 
1.2
 %
 
$
53.4

 
5.6
 %
 
0.2
 %
 
1.5
 %
 
North America

For the three and six months ended June 30, 2014, North America revenue increased by $26.5 million and $53.9 million, respectively, as compared to the prior year periods. The increase was due to strong demand trends, which resulted in an increase in average fares on these routes. Also, changes made to our network during the quarter allowed us to increase our capacity on these routes, which resulted in an increase in the number of revenue passengers flown.

Neighbor Island

For the three and six months ended June 30, 2014, Neighbor Island revenue increased by $11.4 million and $20.8 million, respectively, as compared to the prior year periods, primarily due to higher average fares.

International

For the three and six months ended June 30, 2014, International revenue decreased by $12.6 million and $21.3 million, respectively, as compared to the prior year periods. The decrease was primarily due to a decrease in the average fares on these routes which was driven by unfavorable changes in the Japanese Yen and Australian Dollar exchange rates. A decrease in our international capacity during the three and six months ended June 30, 2014, the result of changes to our network during the quarter, also contributed to the decrease in revenue generated on our International routes.

Other Operating Revenue

Other operating revenue increased by $16.5 million, or 31.4%, and $22.5 million, or 21.8%, for the three and six months ended June 30, 2014, respectively, as compared to the prior year periods. Our new co-branded credit card agreement increased other operating revenue by $7.4 million and $9.7 million for the three and six months ended June 30, 2014, respectively. Also, an increase in the volume of cargo transported increased other operating revenue by $3.7 million and $6.5 million during the three and six months ended June 30, 2014, respectively, as compared to the prior year periods. The increase in volume was the result of additional cargo capacity, the expansion of our network, and improved revenue generation on our existing routes.

Operating Expense
 
Operating expenses were $524.1 million and $1,038.9 million for the three and six months ended June 30, 2014, respectively, and $496.5 million and $999.2 million for the three and six months ended June 30, 2013, respectively. Increases (decreases) in operating expenses for the three and six months ended June 30, 2014 as compared to the prior year periods are detailed below:

 

33



 
 
Increase / (decrease) in operating
 
Increase / (decrease) in operating
 
 
expenses for the three months ended
 
expenses for the six months ended
 
 
June 30, 2014 compared to the three
 
June 30, 2014 compared to the six
 
 
months ended June 30, 2013
 
months ended June 30, 2013
 
 
$
 
%
 
$
 
%
 
 
(in thousands)
 
 
 
(in thousands)
 
 
Operating expenses
 
 
 
 
 
 
 
 
Aircraft fuel, including taxes and delivery
 
$
4,916

 
2.9
 %
 
$
1,566

 
0.5
 %
Wages and benefits
 
9,094

 
8.8

 
13,853

 
6.7

Aircraft rent
 
(2,190
)
 
(7.7
)
 
(1,930
)
 
(3.6
)
Maintenance materials and repairs
 
5,363

 
10.1

 
8,414

 
7.8

Aircraft and passenger servicing
 
1,632

 
5.6

 
2,794

 
4.8

Commissions and other selling
 
(1,413
)
 
(4.4
)
 
(3,889
)
 
(5.9
)
Depreciation and amortization
 
3,977

 
20.1

 
7,675

 
19.7

Other rentals and landing fees
 
2,026

 
10.3

 
3,441

 
8.9

Other
 
4,184

 
10.0

 
7,806

 
9.2

Total
 
$
27,589

 
5.6
 %
 
$
39,730

 
4.0
 %
 
Aircraft Fuel
 
Aircraft fuel expense increased during the three months ended June 30, 2014, as compared to the prior year period, due to an increase in the average fuel price per gallon. Aircraft fuel expense during the six months ended June 30, 2014 did not change significantly from the prior year period, due to the offsetting effects of an increase in consumption and decrease in the average fuel price per gallon as illustrated in the following table: 
 
 
Three months ended June 30, 2014
 
Six months ended June 30, 2014
 
 
2014
 
2013
 
Change
 
2014
 
2013
 
Change
 
 
(in thousands, except per-gallon amounts)
 
 
 
(in thousands, except per-gallon amounts)
 
 
Aircraft fuel expense, including taxes and delivery
 
$
174,139

 
$
169,223

 
2.9
%
 
$
345,278

 
$
343,712

 
0.5
 %
Fuel gallons consumed
 
56,937

 
56,625

 
0.6
%
 
112,101

 
110,560

 
1.4
 %
Average fuel price per gallon, including taxes and delivery
 
$
3.06

 
$
2.99

 
2.3
%
 
$
3.08

 
$
3.11

 
(1.0
)%
 
We believe economic fuel expense is the best measure of the effect of fuel prices on our business as it most closely approximates the net cash outflow associated with the purchase of fuel for our operations in a period and is consistent with how management manages our business and assesses our operating performance. We define economic fuel expense as raw fuel expense plus (gains)/losses realized through actual cash payments to/(receipts from) hedge counterparties for fuel hedge derivatives settled in the period inclusive of costs related to hedging premiums. Economic fuel expense is calculated as follows: 
 
 
Three months ended June 30, 2014
 
Six months ended June 30, 2014
 
 
2014
 
2013
 
Change
 
2014
 
2013
 
Change
 
 
(in thousands, except per-gallon amounts)
 
 
 
(in thousands, except per-gallon amounts)
 
 
Aircraft fuel expense, including taxes and delivery
 
$
174,139

 
$
169,223

 
2.9
 %
 
$
345,278

 
$
343,712

 
0.5
 %
Realized losses on settlement of fuel derivative contracts
 
2,009

 
4,740

 
(57.6
)%
 
1,899

 
7,436

 
(74.5
)%
Economic fuel expense
 
$
176,148

 
$
173,963

 
1.3
 %
 
$
347,177

 
$
351,148

 
(1.1
)%
Fuel gallons consumed
 
56,937

 
56,625

 
0.6
 %
 
112,101

 
110,560

 
1.4
 %
Economic fuel costs per gallon
 
$
3.09

 
$
3.07

 
0.7
 %
 
$
3.10

 
$
3.18

 
(2.5
)%
 
See Item 3, Quantitative and Qualitative Disclosures About Market Risk, for additional discussion of our jet fuel costs and related derivative program.

Wages and Benefits

34




Wages and benefits expense increased by $9.1 million, or 8.8%, and $13.9 million, or 6.7%, for the three and six months ended June 30, 2014, respectively, as compared to the prior year periods, primarily due to a 4% increase in the number of employees from June 30, 2013, as we continued to expand our operations with additional aircraft.

Maintenance materials and repairs

Maintenance materials and repairs expense increased by $5.4 million, or 10.1%, and $8.4 million, or 7.8% for the three and six months ended June 30, 2014, respectively, as compared to the prior year periods, due to the increase in the number and utilization of Airbus A330-200 aircraft in our fleet and was partially offset by a decrease in the number and utilization of Boeing 767-300 aircraft in our fleet.

Depreciation and amortization

Depreciation and amortization expense increased by $4.0 million, or 20.1%, and $7.7 million, or 19.7% for the three and six months ended June 30, 2014, respectively, as compared to the prior year periods, primarily due to the increase in the number of owned aircraft.

Other rentals and landing fees

Other rentals and landing fees expense increased by $2.0 million, or 10.3%, and $3.4 million, or 8.9% for the three and six months ended June 30, 2014, respectively, as compared to the prior year periods, due to increased rates on existing routes.

Other expense

Other expense increased by $4.2 million, or 10.0%, and $7.8 million, or 9.2%, for the three and six months ended June 30, 2014, respectively, as compared to the prior year periods, primarily due to costs incurred in connection with our new turboprop operations that began in March 2014.
 
Nonoperating Expense

Net nonoperating expense decreased by $12.6 million, or 65.5%, for the three months ended June 30, 2014, as compared to the prior year period, primarily due to decreased losses on fuel hedging derivatives of $13.2 million.

In 2013, Hawaiian consummated an EETC financing, whereby it created two pass-through trusts, one of which issued $328.2 million aggregate principal amount of Class A pass-through certificates with a stated interest rate of 3.9% and the second of which issued $116.3 million aggregate principal amount of Class B pass-through certificates with a stated interest rate of 4.95%. The issuance of these equipment notes resulted in a $5.5 million increase in our interest expense in 2014.

Income Taxes

We had effective tax rates of 39.2% and 37.9% for the three months ended June 30, 2014 and 2013, respectively, and 39.3% and 36.4% for the six months ended June 30, 2014 and 2013, respectively. We consider a variety of factors in determining the effective tax rate, including our forecasted full-year pretax results, the U.S. federal statutory rate, expected nondeductible expenses and estimated state taxes.

Liquidity and Capital Resources

Our liquidity is dependent on the cash we generate from operating activities and our debt financing arrangements. As of June 30, 2014, we had $360.3 million in cash and cash equivalents and $203.3 million in short-term investments, an increase of $140.2 million from December 31, 2013. Our restricted cash balance of $20.4 million and $19.4 million as of June 30, 2014 and December 31, 2013, respectively, consisted of cash held as collateral by entities that process our credit card transactions for advanced ticket sales and cash held as collateral for future interest payments owed in connection with the EETC financing which closed in 2013.

We have been able to generate sufficient funds from our operations to meet our working capital requirements and typically finance our aircraft through secured debt and lease financings. At June 30, 2014, Hawaiian had approximately $1,071.1 million of debt and capital lease obligations, including approximately $156.0 million classified as a current liability in the unaudited Consolidated Balance Sheets. During the three months ended June 30, 2014 a condition for conversion of the Convertible

35



Notes was satisfied, which permits holders of the Convertible Notes to put their notes for conversion during the quarter ending September 30, 2014. Since we have the intent and ability to redeem the principal amount of these notes with cash, as of June 30, 2014, the carrying value of $78.5 million is reflected as a current liability in the unaudited Consolidated Balance Sheets.

Hawaiian has a secured revolving credit facility (the Revolving Credit Facility) in an amount of up to $75.0 million, and as of June 30, 2014, we had no outstanding borrowings under the Revolving Credit Facility and $69.4 million available (net of various outstanding letters of credit).

See Note 10 for additional information on the EETC financing which closed in 2013. In addition, we have backstop financing available from aircraft and engine manufacturers, subject to certain customary conditions. Financing will be necessary to satisfy the Company’s capital commitments for its firm order aircraft and other related capital expenditures. The Company can provide no assurance that any financing not already in place for aircraft and spare engine deliveries will be available to the Company on acceptable terms when necessary or at all.

Cash Flows

Net cash provided by operating activities was $204.0 million and $168.1 million for the six months ended June 30, 2014 and 2013, respectively. The increase in cash provided by operating activities was primarily due to our improved financial performance from the prior year period, as we recorded net income of $22.3 million for the six months ended June 30, 2014 compared to a net loss of $5.8 million for the six months ended June 30, 2013.

Net cash used in investing activities was $534.7 million and $175.0 million for the six months ended June 30, 2014 and 2013, respectively. The increase was due to purchases of investments of $234.1 million and the acquisition of four Airbus A330-200 aircraft.

Net cash provided by financing activities was $267.6 million and $78.6 million for the six months ended June 30, 2014 and 2013, respectively. The increase was primarily due to the issuance of equipment notes to finance the acquisition of four Airbus A330-200 aircraft.

In 2013, Hawaiian consummated an EETC financing, whereby it created two pass-through trusts, one of which issued $328.2 million aggregate principal amount of Class A pass-through certificates with a stated interest rate of 3.9% and the second of which issued $116.3 million aggregate principal amount of Class B pass-through certificates with a stated interest rate of 4.95%. During the six months ended June 30, 2014, $293.4 million of the proceeds from the EETC financing was used to finance a portion of the purchase price of four new Airbus aircraft. The remaining proceeds of the issuance of the Class A and Class B pass-through certificates will be used to purchase equipment notes to be issued by Hawaiian to finance the purchase a new Airbus aircraft scheduled for delivery in October 2014. Hawaiian issues the equipment notes to the trusts as aircraft are delivered to Hawaiian. Hawaiian records the debt obligation upon issuance of the equipment notes rather than upon the initial issuance of the pass-through certificates.

Capital Commitments

As of June 30, 2014, we had the following capital commitments consisting of firm aircraft and engine orders and purchase rights: 
Aircraft Type
 
Firm
Orders
 
Purchase
Rights
 
Expected Delivery Dates
A330-200 aircraft
 
4

 
3

 
Between 2014 and 2015
A350XWB-800 aircraft
 
6

 
6

 
Between 2017 and 2020
A321neo aircraft
 
16

 
9

 
Between 2017 and 2020
Rolls-Royce spare engines:
 
 

 
 

 
 
A330-200 spare engine
 
1

 

 
In 2014
A350XWB-800 spare engines
 
2

 

 
Between 2017 and 2020
Pratt & Whitney spare engines:
 
 

 
 

 
 
A321neo spare engines
 
2

 

 
Between 2017 and 2018
 
Committed expenditures for these aircraft, engines and related flight equipment approximates $95 million for the remainder of 2014, $246 million in 2015, $148 million in 2016, $494 million in 2017, $547 million in 2018 and $559 million thereafter.


36



For the remainder of 2014, we expect our other non-aircraft related capital expenditures, which include software, improvements and ramp and maintenance equipment to total approximately $30 million to $40 million.

In July 2014, we signed a memorandum of understanding (MOU) with Airbus for the conversion of an existing order for six new A350XWB-800 aircraft for delivery between 2017 and 2020 into the purchase of six new Airbus A330neo aircraft for delivery between 2019 and 2021, with rights to purchase an additional six new Airbus A330neo aircraft. This change in the dates of delivery and in the model of the aircraft being delivered are not included in the table above as definitive agreements relating to these commitments have yet to be finalized.

In order to complete the purchase of these aircraft and fund related costs, we must secure acceptable financing. We are 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.

We secured financing for a portion of the purchase price of one upcoming Airbus A330-200 aircraft delivery in October 2014 through the EETC financing which closed in 2013. In addition, we have backstop financing available from aircraft and engine manufacturers, subject to certain customary conditions. See Note 10 for further detail regarding the EETC financing.

Covenants under our Financing Arrangements

The terms of certain of our financing agreements restrict our ability to, among other things, incur additional indebtedness, grant liens, merge or consolidate, dispose of assets, prepay indebtedness, make investments, make acquisitions, enter into certain transactions with affiliates, repurchase stock and, in the case of Hawaiian, pay dividends or make distributions to the Company. These agreements also require us to meet certain financial covenants. These financial tests include maintaining a minimum amount of unrestricted cash and achieving certain levels of fixed charge coverage. As of June 30, 2014, we were in compliance with these covenants. If we are not able to comply with these covenants in the future, our outstanding obligations under these facilities could be accelerated and become due and payable immediately.

Under our bank-issued credit card processing agreements, certain proceeds from advance ticket sales may be held back to serve as collateral to cover any possible chargebacks or other disputed charges that may occur. These holdbacks, which are included in restricted cash in our unaudited Consolidated Balance Sheets set forth in the unaudited Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q, totaled $5.0 million as of June 30, 2014 and December 31, 2013.

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

Pension and Postemployment Benefit Plan Funding

We contributed $3.8 million and $6.6 million to our defined benefit and other postretirement plans during the three and six months ended June 30, 2014, respectively, and expect to contribute an additional required minimum of $7.6 million during the remainder of 2014. Future funding requirements for our defined benefit plans are dependent upon many factors such as interest rates, funded status, applicable regulatory requirements and the level and timing of asset returns.

 
Contractual Obligations
 
Our estimated contractual obligations as of June 30, 2014 are summarized in the following table: 

37



Contractual Obligations
 
Total
 
Remaining
months in
2014
 
2015 - 2016
 
2017 - 2018
 
2019 and
thereafter
 
 
(in thousands)
Debt and capital lease obligations (1) (2)
 
$
1,371,464

 
$
143,984

 
$
276,929

 
$
262,765

 
$
687,786

Operating leases—aircraft and related equipment (3) 
 
640,956

 
51,139

 
186,637

 
160,635

 
242,545

Operating leases—non-aircraft
 
41,034

 
2,270

 
8,798

 
7,147

 
22,819

Purchase commitments - Capital (4) 
 
2,088,201

 
95,155

 
393,526

 
1,040,942

 
558,578

Purchase commitments - Operating (5) 
 
487,064

 
31,100

 
109,539

 
90,775

 
255,650

Projected employee benefit contributions (6) 
 
22,561

 
7,092

 
15,469

 

 

Total contractual obligations
 
$
4,651,280

 
$
330,740

 
$
990,898

 
$
1,562,264

 
$
1,767,378


(1)
Amounts represent contractual amounts due, including interest. Interest on variable-rate debt was estimated using rates in effect as of June 30, 2014. Amount reflects capital lease obligations for one Airbus A330-200 aircraft, two Boeing 717 aircraft and one A330 flight simulator.

(2)
During the period ended June 30, 2014 a condition for conversion of the Convertible Note was satisfied, which permits holders of the Convertible Notes to surrender their notes for conversion during the quarter ending September 30, 2014. Therefore, the principal balance could be settled in as early as 2014 and is classified accordingly in the above table. However, the 5% interest-only, semiannual payments are excluded from the table.

(3)
Amounts reflect leases for six Airbus A330-200 aircraft, six Boeing 767 aircraft, one Boeing 717 aircraft, three turbo-prop aircraft and aircraft-related equipment as of June 30, 2014.

(4)
Amounts include our firm commitments for aircraft and aircraft related equipment including aircraft orders consisting of four wide-body Airbus A330-200 aircraft,16 narrow-body Airbus A321neo aircraft, six Airbus A350XWB-800 aircraft, three Rolls Royce spare engines and two Pratt and Whitney spare engines. We have secured financing in the amount of $75.0 million from the EETC financing for a portion of the purchase price of an Airbus A330-200 aircraft delivery in October 2014. The amounts in the table above exclude the effects of the transactions contemplated by the MOU we have entered into with Airbus as of July 22, 2014 relating to the conversion of our existing order for the purchase of six Airbus A350XWB-800 aircraft into an order for the purchase of six Airbus A330neo aircraft, pending the finalization of definitive agreements relating thereto.

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

(6)
Amount includes our estimated contributions to our pension plans (based on actuarially determined estimates) and our pilots’ disability plan. Amounts are subject to change based on numerous factors, including interest rate levels, the amount and timing of asset returns and the impact of future legislation. We are currently unable to estimate the projected contributions beyond 2016.

Non-GAAP Financial Measures

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

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

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

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

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


38




Economic Fuel Expense

See table below for reconciliation between GAAP consolidated net income (loss) to adjusted consolidated net income (loss), including per share amounts (in thousands unless otherwise indicated). 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
Net Income
 
Diluted Net Income Per Share
 
Net Income
 
Diluted Net Income Per Share
 
Net Income
 
Diluted Net Income Per Share
 
Net Loss
 
Diluted Net Loss Per Share
As reported - GAAP
 
$
27,327

 
$
0.43

 
$
11,316

 
$
0.21

 
$
22,252

 
$
0.39

 
$
(5,829
)
 
$
(0.11
)
Add: unrealized losses (gains) on fuel derivatives
 
(4,976
)
 
(0.08
)
 
1,300

 
0.03

 
(771
)
 
(0.01
)
 
3,619

 
0.07

Reflecting economic fuel expense
 
$
22,351

 
$
0.35

 
$
12,616

 
$
0.24

 
$
21,481

 
$
0.38

 
$
(2,210
)
 
$
(0.04
)

Operating Costs per Available Seat Mile (CASM)

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

CASM and CASM, excluding fuel, are summarized in the table below: 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(in thousands, except as otherwise indicated)
GAAP operating expenses
 
$
524,126

 
$
496,537

 
$
1,038,947

 
$
999,217

Less: aircraft fuel, including taxes and delivery
 
(174,139
)
 
(169,223
)
 
(345,278
)
 
(343,712
)
Adjusted operating expenses - excluding aircraft fuel
 
$
349,987

 
$
327,314

 
$
693,669

 
$
655,505

Available Seat Miles
 
4,262,774

 
4,215,893

 
8,301,743

 
8,181,671

CASM - GAAP
 

12.30
¢
 

11.78
¢
 

12.51
¢
 

12.21
¢
Less: aircraft fuel
 
(4.09
)
 
(4.02
)
 
(4.15
)
 
(4.20
)
CASM - excluding aircraft fuel
 

8.21
¢
 

7.76
¢
 

8.36
¢
 

8.01
¢
 
Critical Accounting Policies

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

Critical accounting policies and estimates are defined as those accounting policies and accounting estimates that are reflective of significant judgments and uncertainties that potentially result in materially different results under different assumptions and conditions. For a detailed discussion of the application of our critical accounting policies, see “Critical Accounting Policies” and Note 2, “Summary of Significant Accounting Policies,” to our Consolidated Financial Statements for the year ended December 31, 2013 included in our Annual Report on Form 10-K.

Frequent Flyer Accounting

In October 2013, we entered into a co-branded credit card agreement, which provides for the sale of frequent flyer miles to Barclays Bank Delaware beginning in 2014. The agreement is a new multiple element arrangement subject to Accounting Standards Update 2009-13, Multiple Deliverable Revenue Arrangements - A consensus of the FASB Emerging Issues Task Force (ASU 2009-13), which is effective for new and materially modified revenue arrangements entered into after January 1,

39



2011. ASU 2009-13 requires the allocation of the overall consideration received to each deliverable using the estimated selling price. The following four deliverables or elements were identified in the agreement: (i) travel miles; (ii) use of our brand and access to member lists; (iii) advertising elements; and (iv) other airline benefits including checked baggage services and travel discounts. The objective of using 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 stand-alone basis.

We are required to allocate the total arrangement consideration to each of the elements based on the relative fair values. We determined the relative fair value of each element by estimating the selling prices of the deliverables by considering discounted cash flows using multiple inputs and assumptions, including: (1) the expected number of miles to be awarded and redeemed; (2) the estimated weighted average equivalent ticket value that is adjusted by a fulfillment discount; (3) the estimated total annual cardholder spend; (4) an estimated royalty rate for our portfolio; and (5) the expected use of each of the airline benefits.

The assumptions used to determine the estimated selling prices of the deliverables are considered critical accounting estimates due to the level of subjectivity and judgment surrounding these assumptions, and the impact that these assumptions will have on the comparability of our financial results.

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

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

Aircraft Fuel Costs

Aircraft fuel costs constitute a significant portion of our operating expense. Fuel costs represented 33.2% of our operating expense for the three and six months ended June 30, 2014, and 34.1% and 34.4% of our operating expenses for the three and six months ended June 30, 2013, respectively. Approximately 72% of our fuel is based on Singapore jet fuel prices, 27% is based on U.S. West Coast jet fuel prices and 1% on other jet fuel prices. Based on gallons expected to be consumed for the remainder of 2014, for every one cent increase in the cost of a gallon of jet fuel, our fuel expense would increase by approximately $1.2 million, excluding the results of our fuel hedge program.

We periodically enter into derivative financial instruments to manage our exposure to changes in the price of jet fuel. During the three and six months ended June 30, 2014, our fuel hedge program primarily consisted of heating oil puts and swaps. Put option contracts provide for a settlement in favor of the holder in the event the prices fall below a predetermined contractual level during a particular time period. Swaps provide for a settlement in our favor in the event the prices exceed a predetermined contractual level and are unfavorable in the event prices fall below a predetermined contractual level.

As of June 30, 2014, we hedged approximately 52% of our projected fuel requirements for the remainder of 2014 with heating oil puts and swaps. As of June 30, 2014, the fair value of these fuel derivative agreements reflected a net liability of $4.2 million that is recorded in other accrued liabilities in the unaudited Consolidated Balance Sheets.

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

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

Interest Rates

Our results of operations are affected by fluctuations in interest rates due to our variable-rate debt and interest income earned on our cash deposits. Our variable-rate debt agreements include the Revolving Credit Facility and secured loan agreements, the terms of which are discussed in Note 7 to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2013.

At June 30, 2014, we had $93.1 million of variable-rate debt indexed to the following interest rate: 

40



Index
Rate
One-month LIBOR
0.15
%
 
Changes in market interest rates have a direct and corresponding effect on our pre-tax earnings and cash flows associated with our variable-rate debt and interest-bearing cash accounts. Based on the balances of our cash and cash equivalents, restricted cash, and variable-rate debt as of June 30, 2014, a change in interest rates is unlikely to have a material impact on our results of operations.

At June 30, 2014, we had $987.4 million of fixed-rate debt including aircraft capital lease obligations, a convertible note, facility agreements for aircraft purchases, and the outstanding equipment notes related to the 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 $19.3 million as of June 30, 2014.

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

Foreign Currency

We generate revenues and incur expenses in foreign currencies. Changes in foreign currency exchange rates impact our results of operations through changes in the dollar value of foreign currency-denominated operating revenues and expenses. Our most significant foreign currency exposures are the Japanese Yen and Australian Dollar. Based on expected remaining 2014 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 $9.7 million and $7.1 million, respectively, which excludes the offset of the hedges discussed below. This potential impact to the results of our operation is driven by the inherent nature of our international operations, which requires us to accept a large volume of sales transactions denominated in foreign currencies while few expense transactions are settled in foreign currencies. This disparity is the primary factor in our exposure to foreign currencies.

As of June 30, 2014, the fair value of our foreign currency forwards reflected a net asset of $0.6 million that is recorded in prepaid expenses and other, and a net liability of $1.0 million recorded in other accrued liabilities and $0.5 million recorded in other liabilities and deferred credits reflected in the unaudited Consolidated Balance

 
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, which have been designed to permit us to effectively identify and timely disclose important information. Based on that evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures were effective as of June 30, 2014 to provide reasonable assurance that the information required to be disclosed by the Company in reports it files under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and 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 during the quarter ended June 30, 2014 which materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


41



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.

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, 2013 for a detailed discussion of the risk factors affecting our business, results of operations and financial condition. The disclosure below includes updates to certain risk factor disclosures included in the 2013 Annual Report, which are in addition to, and not in lieu of, those contained in those documents.

Our agreements to purchase Airbus A330-200 and A321neo aircraft, and our memorandum of understanding to convert our existing order to acquire six A350XWB-800 aircraft into an order to purchase six Airbus A330neo aircraft represent significant future financial commitments and operating costs, and creates implementation risk associated with the transition from our existing Boeing 767-300 fleet.

As of June 30, 2014, we had the following firm order commitments and purchase rights for aircraft:
Aircraft Type
 
Firm
Orders
 
Purchase
Rights
 
Expected Delivery Dates
A330-200 aircraft
 
4

 
3

 
Between 2014 and 2015
A350XWB-800 aircraft
 
6

 
6

 
Between 2017 and 2020
A321neo aircraft
 
16

 
9

 
Between 2017 and 2020

In July 2014, we entered into a memorandum of understanding with Airbus for the conversion of our existing order for six A350XWB-800 aircraft scheduled for delivery between 2017 and 2020 into an order for the purchase of six Airbus A330neo aircraft scheduled for delivery between 2019 and 2021, along with purchase rights for an additional six Airbus A330neo aircraft. If we execute a definitive purchase agreement with Airbus relating to this order, we anticipate that we will be required to make substantial pre-delivery payments prior to the delivery date of each aircraft.

We have made substantial pre-delivery payments for Airbus aircraft under existing purchase agreements and are required to continue these pre-delivery payments as well as payments for the balance of the purchase price through delivery of each aircraft. These commitments substantially increase our future capital spending requirements and will require us to significantly increase our level of debt in future years. There can be no assurance that we will be able to raise capital to finance these requirements or that such financing can be obtained on favorable terms, or at all.

The Airbus aircraft will replace expiring leased and retiring Boeing 767-300 aircraft in future years. We cannot be assured that the associated return and retirement costs will not exceed our expectations and adversely impact our results of operations and liquidity.

The addition of the Airbus aircraft to our fleet will require us to incur additional costs related to the acquisition of spare engines and replacement parts, maintenance of the aircraft, training of crews and ground employees, the addition of these aircraft types

42



to our operating certificate and other implementation activities. There can be no assurance that we will be able to recover these costs through the future operation of these aircraft in our fleet or that we will not experience delays in the implementation process which could adversely affect our operations or financial performance.
 
ITEM 2.                                                UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
 
None.
 
ITEM 3.                                                DEFAULTS UPON SENIOR SECURITIES.
 
None.
 
ITEM 5.                                                OTHER INFORMATION.
 
None.

ITEM 6.                                                EXHIBITS.
 
Exhibit No.
 
Description
 
 
 
12

 
Computation of ratio of earning to fixed charges for the three and six months ended June 30, 2014 and 2013.
 
 
 
31.1

 
Rule 13a-14(a) Certification of Chief Executive Officer.
 
 
 
31.2

 
Rule 13a-14(a) Certification of Chief Financial Officer.
 
 
 
32.1

 
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.2

 
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
101.INS
 
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension Schema Document
101.CAL
 
XBRL Taxonomy Extension Valuation Linkbase Document
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document


43



SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
HAWAIIAN HOLDINGS, INC.
 
 
 
 
 
 
 
 
Date:
July 24, 2014
By:
/s/ Scott E. Topping
 
 
 
Scott E. Topping
 
 
 
Executive Vice President, Chief Financial Officer and Treasurer


44