-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WoY9K8K1gjlTAKSQNw9x2B3ch2uUmjxWBr7CV2M09vAM5xMKv0EngLh/6uO3SBkN vyjntnuNYc6fpFpKjbS8sw== 0001047469-99-032060.txt : 19990817 0001047469-99-032060.hdr.sgml : 19990817 ACCESSION NUMBER: 0001047469-99-032060 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HAWAIIAN AIRLINES INC/HI CENTRAL INDEX KEY: 0000046205 STANDARD INDUSTRIAL CLASSIFICATION: AIR TRANSPORTATION, SCHEDULED [4512] IRS NUMBER: 990042880 STATE OF INCORPORATION: HI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08836 FILM NUMBER: 99690026 BUSINESS ADDRESS: STREET 1: 3375 KOAPAKA ST STREET 2: STE G350 CITY: HONOLULU STATE: HI ZIP: 96819 BUSINESS PHONE: 8088353700 FORMER COMPANY: FORMER CONFORMED NAME: HAL INC /HI/ DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: HAWAIIAN AIRLINES INC DATE OF NAME CHANGE: 19850314 FORMER COMPANY: FORMER CONFORMED NAME: INTER ISLAND AIRWAYS LTD DATE OF NAME CHANGE: 19670920 10-Q 1 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 ( ) 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 1-8836 HAWAIIAN AIRLINES, INC. (Exact Name of Registrant as Specified in Its Charter) Hawaii 99-0042880 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 3375 Koapaka Street, Suite G-350 Honolulu, Hawaii 96819 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (808) 835-3700 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. (X) Yes ( ) No Indicate by check mark whether the Registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. (X) Yes ( ) No As of August 1, 1999, 40,997,335 shares of Common Stock shares were outstanding. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS HAWAIIAN AIRLINES, INC. CONDENSED BALANCE SHEETS (IN THOUSANDS)
(UNAUDITED) JUNE 30, DECEMBER 31, 1999 1998 - -------------------------------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents.......................................................... $ 41,592 $ 31,011 Restricted cash.................................................................... 14,816 6,432 Accounts receivable, net........................................................... 32,370 29,995 Inventories, net................................................................... 10,120 8,546 Prepaid expenses and other......................................................... 6,131 5,923 -------- -------- TOTAL CURRENT ASSETS........................................................... 105,029 81,907 -------- -------- Property and equipment, less accumulated depreciation and amortization of $31,207 and $25,584 in 1999 and 1998, respectively................. 103,354 84,922 Other assets........................................................................... 6,158 8,232 Reorganization value in excess of amounts allocable to identifiable assets, net ("Excess Reorganization Value").............. 43,034 46,850 -------- -------- TOTAL ASSETS................................................................... $257,575 $221,911 -------- -------- -------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt.................................................. $ 4,631 $ 3,532 Current portion of capital lease obligations....................................... 5,235 4,614 Accounts payable................................................................... 34,744 28,883 Accrued liabilities................................................................ 24,658 16,517 Air traffic liability.............................................................. 33,542 22,131 -------- -------- TOTAL CURRENT LIABILITIES...................................................... 102,810 75,677 -------- -------- Long-Term Debt......................................................................... 24,183 14,454 Capital Lease Obligations.............................................................. 3,078 5,966 Other Liabilities and Deferred Credits................................................. 33,941 34,927 SHAREHOLDERS' EQUITY: Common and Special Preferred Stock................................................. 410 410 Capital in excess of par value..................................................... 99,418 99,418 Warrants........................................................................... 3,153 3,153 Notes receivable from Common Stock sales........................................... (1,581) (1,581) Accumulated deficit................................................................ (3,331) (6,007) Accumulated other comprehensive loss............................................... (4,506) (4,506) -------- -------- SHAREHOLDERS' EQUITY........................................................... 93,563 90,887 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY..................................... $257,575 $221,911 -------- -------- -------- --------
See accompanying notes to condensed financial statements 2 HAWAIIAN AIRLINES, INC. CONDENSED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------------------------------------------- 1999 1998 1999 1998 - ----------------------------------------------------------------------------------------------------- OPERATING REVENUES: Passenger ............................ $ 101,581 $ 91,086 $ 192,067 $ 173,294 Charter .............................. 9,663 8,670 19,850 18,103 Cargo ................................ 5,912 5,657 11,047 10,829 Other ................................ 5,163 3,590 9,365 7,023 --------- --------- --------- --------- TOTAL ............................ 122,319 109,003 232,329 209,249 --------- --------- --------- --------- OPERATING EXPENSES: Wages and benefits ................... 34,486 29,379 67,476 58,926 Aircraft fuel, including taxes and oil 17,473 17,047 31,259 35,851 Maintenance materials and repairs .... 24,542 20,997 48,302 42,179 Rentals and landing fees ............. 7,227 7,314 14,647 14,659 Sales commissions .................... 3,625 2,971 7,039 6,138 Depreciation and amortization ........ 4,210 3,394 7,806 6,125 Other ................................ 26,402 21,837 49,969 41,226 --------- --------- --------- --------- TOTAL ............................ 117,965 102,939 226,498 205,104 --------- --------- --------- --------- OPERATING INCOME ......................... 4,354 6,064 5,831 4,145 --------- --------- --------- --------- NONOPERATING EXPENSE: Interest expense, net ................ (429) (39) (658) (361) Loss on disposition of equipment ..... (363) (46) (783) (59) Other, net ........................... (26) (99) 622 (47) --------- --------- --------- --------- TOTAL ............................ (818) (184) (819) (467) --------- --------- --------- --------- INCOME BEFORE INCOME TAXES ............... 3,536 5,880 5,012 3,678 INCOME TAX PROVISION ..................... (1,643) (2,939) (2,336) (1,839) --------- --------- --------- --------- NET INCOME ............................... 1,893 2,941 2,676 1,839 OTHER COMPREHENSIVE INCOME (LOSS) ........ -- -- -- -- --------- --------- --------- --------- COMPREHENSIVE INCOME ..................... $ 1,893 $ 2,941 $ 2,676 $ 1,839 --------- --------- --------- --------- --------- --------- --------- --------- NET INCOME PER COMMON STOCK SHARE: Basic ................................ $ 0.05 $ 0.07 $ 0.07 $ 0.04 --------- --------- --------- --------- --------- --------- --------- --------- Diluted .............................. $ 0.04 $ 0.07 $ 0.06 $ 0.04 --------- --------- --------- --------- --------- --------- --------- --------- WEIGHTED AVERAGE NUMBER OF COMMON STOCK SHARES OUTSTANDING: Basic ................................ 40,997 40,898 40,997 40,885 --------- --------- --------- --------- --------- --------- --------- --------- Diluted .............................. 42,223 42,178 42,218 42,246 --------- --------- --------- --------- --------- --------- --------- ---------
See accompanying notes to condensed financial statements 3 HAWAIIAN AIRLINES, INC. CONDENSED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, --------------------------- 1999 1998 - ------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income ................................................ $ 2,676 $ 1,839 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ......................... 7,806 6,125 Net periodic postretirement benefit cost .............. 694 669 Loss on disposition of equipment ...................... 783 59 Income tax provision recognized as a reduction to Excess Reorganization Value .................... 2,336 1,839 Increase in restricted cash ........................... (8,384) (837) Decrease (increase) in accounts receivable ............ (2,375) 3,919 Increase in inventories ............................... (1,574) (122) Decrease (increase) in prepaid expenses and other ..... (208) 1,332 Increase (decrease) in accounts payable ............... 5,861 (561) Increase in accrued liabilities ....................... 8,141 1,020 Increase in air traffic liability ..................... 11,411 7,218 Other, net ............................................ (223) (894) -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES ......... 26,944 21,606 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Sale of investment securities ............................. -- 3,001 Purchase of property and equipment ........................ (25,229) (6,850) Net proceeds from disposition of equipment ................ 305 742 -------- -------- NET CASH USED IN INVESTING ACTIVITIES ............. (24,924) (3,107) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock .................... -- 64 Issuance of long-term debt ................................ 12,281 425 Repayment of long-term debt ............................... (1,453) (657) Repayment of capital lease obligations .................... (2,267) (2,075) -------- -------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 8,561 (2,243) NET INCREASE IN CASH AND CASH EQUIVALENTS ......... 10,581 16,256 Cash and cash equivalents - Beginning of Period ................ 31,011 15,713 -------- -------- CASH AND CASH EQUIVALENTS - END OF PERIOD ...................... $ 41,592 $ 31,969 -------- -------- -------- --------
See accompanying notes to condensed financial statements 4 HAWAIIAN AIRLINES, INC. STATISTICAL DATA (IN THOUSANDS, EXCEPT AS OTHERWISE INDICATED) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------- ---------------------------- 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------------------- SCHEDULED OPERATIONS: Revenue passengers flown ..................... 1,336 1,268 2,631 2,453 Revenue passenger miles ("RPM") .............. 1,033,123 960,980 1,931,428 1,755,629 Available seat miles ("ASM") ................. 1,371,776 1,227,900 2,627,109 2,431,395 Passenger load factor ........................ 75.3% 78.3% 73.5% 72.2% Passenger revenue per passenger mile ("Yield") 9.8(cent) 9.5(cent) 9.9(cent) 9.9(cent) OVERSEAS CHARTER OPERATIONS: Revenue passengers flown ..................... 63 60 132 127 RPM .......................................... 175,565 165,729 368,022 349,106 ASM .......................................... 186,903 176,470 385,690 371,239 TOTAL OPERATIONS: Revenue passengers flown ..................... 1,399 1,328 2,763 2,580 RPM .......................................... 1,208,688 1,126,709 2,299,450 2,104,735 ASM .......................................... 1,558,679 1,404,370 3,012,799 2,802,634 Revenue per ASM .............................. 7.85(cent) 7.76(cent) 7.71(cent) 7.47(cent) Cost per ASM ................................. 7.57(cent) 7.33(cent) 7.52(cent) 7.32(cent)
5 HAWAIIAN AIRLINES, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION In the opinion of management, the unaudited condensed financial statements included in this report contain all adjustments necessary for a fair presentation of the results of operations and statements of cash flows for the interim periods covered and the financial condition of Hawaiian Airlines, Inc. ("Hawaiian Airlines" or the "Company") as of June 30, 1999 and December 31, 1998. The operating results for the interim period are not necessarily indicative of the results to be expected for the full fiscal year. The accompanying financial statements should be read in conjunction with the financial statements and the notes thereto contained in Hawaiian Airlines' Annual Report on Form 10-K for the year ended December 31, 1998. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICES CASH, CASH EQUIVALENTS AND RESTRICTED CASH The Company considers all investments purchased with an original maturity of three months or less to be cash equivalents. As of June 30, 1999 and December 31, 1998, approximately $14.8 and $6.4 million, respectively, of cash was restricted as to withdrawal. These funds serve as collateral to support a credit card holdback for advance ticket sales and are classified as restricted cash in the accompanying condensed balance sheets. Funds are made available as air travel is provided. INCOME TAXES The Company's reorganization and the associated implementation of fresh start reporting in September 1994 gave rise to significant items of expense for financial reporting purposes that are not deductible for income tax purposes. In large measure, it is these nondeductible expenses that result in an effective tax rate (for financial reporting purposes) significantly different than the current United States ("U.S.") corporate statutory rate of 35.0%. The Company presently expects that its full year 1999 results will require a provision for income taxes. For the three and six month periods ended June 30, 1999, estimated interperiod tax provisions of $1.6 million and $2.3 million, respectively, have been reflected in the accompanying condensed statements of earnings. While generally accepted accounting principles require that a provision for income taxes be recorded, a majority of the amount recorded will not require cash outlay as the provision will be offset by net operating loss carryforwards available to the Company. The estimated income tax benefit from the expected utilization of these net operating loss carryforwards has been applied as a reduction to reorganization value in excess of amounts allocable to identifiable assets. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of air traffic liability, accruals for loss contingencies and the amounts reported for accumulated pension and 6 other postretirement benefit obligations. Management believes that such estimates have been appropriately established in accordance with generally accepted accounting principles. RECLASSIFICATIONS Certain prior year amounts were reclassified to conform to the 1999 presentation. Such reclassifications had no effect on previously reported financial condition and/or results of operations. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS no. 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The provisions of SFAS No. 133, as amended by SFAS No. 137, are effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company will adopt SFAS No. 133 on January 1, 2001 but has not yet determined the impact of its adoption. In March 1998, the American Institute of Certified Public Accountants Accounting Standards Executive Committee (the "AcSEC") issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP") which requires that certain costs related to the development or purchase of internal-use software be capitalized and amortized over the estimated useful life of the software. The SOP also requires that costs related to the preliminary project stage and the post-implementation/operations stage, as defined, in an internal-use computer software development project be expensed as incurred. In April 1998, the AcSEC issued SOP 98-5, "Reporting on the Costs of Start-up Activities," which requires that costs incurred during start-up activities, including organization costs, be expensed as incurred. Adoption of the provisions of SOP 98-1 and SOP 98-5 by the Company as of January 1, 1999 did not have a material impact on the Company's financial position or results of operations. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Certain statements contained in this report that are not related to historical results, including, without limitation, statements regarding the Company's business strategy and objectives, future financial position and estimated cost savings, are forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act and involve risks and uncertainties. Although the Company believes that the assumptions on which any forward-looking statements are based are reasonable, there can be no assurance that such assumptions will prove to be accurate and actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed under Part I, Item I, Business of the Company's Form 10-K Annual Report for the year ended December 31, 1998 and heretofore, as well as those discussed elsewhere in this Form 10-Q. All forward-looking statements contained in this Form 10-Q are qualified in their entirety by this cautionary statement. It is not reasonably possible to itemize all of the many factors and specific events that could affect the outlook of an airline operating in the global economy. Some factors that could significantly impact capacity, load factors, revenues, expenses and cash flows include the airline pricing environment, fuel costs, labor union situations both at the Company and other carriers, low-fare carrier expansion, capacity decisions of other carriers, actions of the U.S. and foreign governments, foreign currency exchange rate fluctuations, inflation, the general economic environment and other factors discussed herein. Developments in any of these areas, as well as other risks and uncertainties detailed from time to time in the Company's Securities and Exchange Commission filings, could cause the Company's results to differ from results that have been or may be projected by or on behalf of the Company. The Company cautions that the foregoing list of important factors is not exclusive. The Company does not undertake to update any forward-looking statements that may be made from time to time by or on behalf of the Company. SEGMENT INFORMATION Due to the centralization of the Company's operations in the State of Hawaii and the interdependence of its routes, management considers its operations to be one operating segment. RESULTS OF OPERATIONS In second quarter 1999, the Company generated operating and net income of $4.4 million and $1.9 million, respectively. Quarter over quarter, operating revenues increased by $13.3 million, primarily due to an $11.5 million increase in scheduled and chartered passenger revenues. Operating expenses increased by $15.0 million principally due to higher labor, maintenance and general administrative expenses. As anticipated, the Company has incurred additional operating expenses, essentially representing buildup costs related to the implementation of its 1999 growth strategies as discussed in ROUTES, AIRCRAFT AND ALLIANCES below. The incurrence of these buildup costs were expected to be non-uniform with a disproportionate increase occurring in the latter part of second quarter 1999. Incremental labor and training costs incurred to support these growth strategies accounted for approximately $1 million in second quarter 1999. For the six months ended June 30, 1999, the Company improved operating and net income by $1.7 million and $837,000, respectively, as compared to the six months ended June 30, 1998. Operating and net income for the six months ended June 30, 1999 totaled $5.8 million and $2.7 million, respectively. Period over period, operating revenues increased by $23.1 million, again primarily due to a $20.5 million increase in scheduled and chartered passenger revenues. Operating expenses increased by $21.4 million 8 with higher labor, maintenance and general administrative costs being partially offset by reduced aircraft fuel expense. Again, the Company has incurred additional operating expenses related to buildup costs associated with its 1999 growth strategies as discussed below. The Hawaii economy posted an inflation-adjusted 2.2% gross state product growth rate in 1998, the highest percentage level since 1990. However, overall tourism in Hawaii remains stagnant. Preliminary statistics from the Hawaii Visitors & Convention Bureau revealed that period over period, visitor arrivals to the State of Hawaii through the first six months of 1999 were relatively unchanged. Through June 1999, overall visitor counts to Hawaii increased by a net 0.6%, with a 7.7% decrease in Eastbound visitor traffic being offset by a 5.4% increase in Westbound visitor traffic. THREE MONTH PERIOD ENDED JUNE 30, 1999 The following table compares second quarter 1999 operating passenger revenues and statistics to those in second quarter 1998, in thousands, except as otherwise indicated:
Three Months Ended June 30, Operating Passenger ------------------------------------ Increase Revenues and Statistics 1999 1998 (Decrease) % - ------------------------------------------------------------------------ ----------------------------- Scheduled: Passenger revenues ......... $ 101,581 $ 91,086 $ 10,495 11.5 Revenue passengers flown ... 1,336 1,268 68 5.4 RPM ........................ 1,033,123 960,980 72,143 7.5 ASM ........................ 1,371,776 1,227,900 143,876 11.7 Passenger load factor ...... 75.3% 78.3% (3.0) (3.8) Yield ...................... 9.8(cent) 9.5(cent) 0.3(cent) 3.2 Overseas Charter: Charter revenues ........... $ 9,663 $ 8,670 $ 993 11.5 Revenue passengers flown ... 63 60 3 5.0 RPM ........................ 175,565 165,729 9,836 5.9 ASM ........................ 186,903 176,470 10,433 5.9 Total Operations: Scheduled passenger and overseas charter revenues $ 111,244 $ 99,756 $ 11,488 11.5 Revenue passengers flown ... 1,399 1,328 71 5.3 RPM ........................ 1,208,688 1,126,709 81,979 7.3 ASM ........................ 1,558,679 1,404,370 154,309 11.0
Significant quarter to quarter variances were as follows: Scheduled passenger revenues totaled $101.6 million in second quarter 1999, an increase of $10.5 million or 11.5%. On a scheduled system-wide basis, the Company experienced an approximate 5.9% increase in its average fares due to improved fare and inventory management, passenger mix and general increases on all pricing tiers. The average fare increase was offset by a greater average passenger stage length of approximately 2.0%, reflecting a larger contribution of passenger revenues from the Company's Transpacific operations. Quarter over quarter, the Company's Transpacific passenger revenues increased by $9.9 million, primarily due to the aforementioned efforts resulting in higher yields and an 8% increase in Transpacific RPMs and passengers carried. 9 Overseas charter revenues increased $993,000 or 11.5%, principally due to additional ad hoc charters flown quarter over quarter. The following table compares operating expenses per ASM for second quarter 1999 with second quarter 1998 by major category:
Three Months Ended June 30, ---------------------------- Increase Operating Expenses Per ASM 1999 1998 (Decrease) % - ----------------------------------------------------------------------- -------------------------- Wages and benefits ................... 2.21(cent) 2.09(cent) 0.12(cent) 5.7 Aircraft fuel, including taxes and oil 1.12 1.21 (0.09) (7.4) Maintenance materials and repairs .... 1.57 1.50 0.07 4.7 Rentals and landing fees ............. 0.46 0.52 (0.06) (11.5) Sales commissions .................... 0.23 0.21 0.02 9.5 Depreciation and amortization ........ 0.27 0.24 0.03 12.5 Other ................................ 1.69 1.55 0.14 9.0 ---- ---- ---- ----- Total ..................... 7.55(cent) 7.32(cent) 0.23(cent) 3.1 ---- ---- ---- ----- ---- ---- ---- -----
All fluctuations in operating expenses were affected by an overall increase in ASM of approximately 11.0% quarter over quarter. Significant quarter to quarter variances were as follows: The dilutive effect of increased ASMs quarter over quarter was offset by increased wages and benefits of $5.1 million or 17.4%. Wages and benefits totaled $34.5 million in second quarter 1999 versus $29.4 million in second quarter 1998. A majority of the increase is attributable to (1) a 3% wage increase effective December 1, 1998 and (2) additional wages and benefits from increased flying and implementation of the Company's 1999 growth strategies. Aircraft fuel cost, including taxes and oil ("Aircraft Fuel Cost") per ASM decreased by 0.09(cent) or 7.4%. Quarter over quarter, the Company incurred approximately $426,000 or 2.5% more Aircraft Fuel Cost. Due to increased flying, gallons consumed increased by 11.6% while the average cost of aircraft fuel per gallon, excluding taxes, decreased by 3.0(cent) or 5.4%. The average cost of aircraft fuel per gallon has steadily increased during 1999. The second quarter decrease of 3.0(cent) and 5.4% compares to a first quarter 1999 decrease in average cost of aircraft fuel per gallon, excluding taxes, of 13.8(cent) and 28.1%. The Company anticipates that the average cost of aircraft fuel per gallon will increase as the remainder of the year progresses. Maintenance materials and repairs per ASM increased by 0.07(cent) or 4.7%. Quarter over quarter the Company incurred approximately $3.5 million or 16.9% in additional maintenance expense principally due to $3.0 million more in DC-10 maintenance expense, the result of increases in the maintenance rates charged by American Airlines, Inc. ("American") and the number of DC-10 aircraft used and hours flown. Other operating expenses increased quarter over quarter by $4.6 million or 20.9%, principally attributable to expenses associated with the Company's increased flying schedule and passengers flown, including but not limited to, ground handling, food and beverage and personnel expenses. 10 SIX MONTH PERIOD ENDED JUNE 30, 1999 The following table compares operating passenger revenues and statistics for the six month periods ended June 30, 1999 and 1998, in thousands, except as otherwise indicated:
Six Months Ended June 30, Operating Passenger ------------------------------------ Increase Revenues and Statistics 1999 1998 (Decrease) % - ------------------------------------------------------------------------ ----------------------------- Scheduled: Passenger revenues ........... $ 192,067 $ 173,294 $ 18,773 10.8 Revenue passengers flown ..... 2,631 2,453 178 7.3 RPM .......................... 1,931,428 1,755,629 175,799 10.0 ASM .......................... 2,627,109 2,431,395 195,714 8.0 Passenger load factor ........ 73.5% 72.2% 1.3 1.8 Yield ........................ 9.9(cent) 9.9(cent) -(cent) - Overseas Charter: Charter revenues ............. $ 19,850 $ 18,103 $ 1,747 9.7 Revenue passengers flown ..... 132 127 5 3.9 RPM .......................... 368,022 349,106 18,916 5.4 ASM .......................... 385,690 371,239 14,451 3.9 Total Operations: Scheduled passenger and overseas charter revenues . $ 211,917 $ 191,397 $ 20,520 10.7 Revenue passengers flown ..... 2,763 2,580 183 7.1 RPM .......................... 2,299,450 2,104,735 194,715 9.3 ASM .......................... 3,012,799 2,802,634 210,165 7.5
Significant period to period variances were as follows: Scheduled passenger revenues totaled $192.1 million during the six month period ended June 30, 1999, an increase of $18.8 million or 10.8% over passenger revenues of $173.3 million for the six month period ended June 30, 1998. The Company experienced period over period increases of $2.1 million and $15.8 million in its Interisland and Transpacific passenger revenues, respectively. As mentioned above, the Company's concentrated efforts to improve fare and passenger mix and initiate and maintain general price increases resulted in, for the six months ended June 30, 1999 (i) higher yields in the Transpacific market and (ii) a 6% and 10% increase in Interisland and Transpacific RPMs and passengers carried, respectively. Overseas charter revenues totaled $19.9 million in the six month period ended June 30, 1999, an increase of $1.7 million or 9.7% from the six month period ended June 30, 1998. The increase is primarily associated with the Company flying additional ad hoc charters period over period. The following table compares operating expenses per ASM by major category for the six month periods ended June 30, 1999 and 1998: 11
Six Months Ended June 30, ----------------------- Increase Operating Expenses Per ASM 1999 1998 (Decrease) % - ------------------------------------------------------------------------------- ---------------------- Wages and benefits ................... 2.24(cent) 2.10(cent) 0.14(cent) 6.7 Aircraft fuel, including taxes and oil 1.04 1.28 (0.24) (18.8) Maintenance materials and repairs .... 1.60 1.50 0.10 6.7 Rentals and landing fees ............. 0.49 0.52 (0.03) (5.8) Sales commissions .................... 0.23 0.22 0.01 4.5 Depreciation and amortization ........ 0.26 0.22 0.04 18.2 Other ................................ 1.66 1.47 0.19 12.9 ---- ---- ---- ----- Total ..................... 7.52(cent) 7.31(cent) 0.21(cent) 2.9 ---- ---- ---- ----- ---- ---- ---- -----
All fluctuations in operating expenses were affected by an overall increase in ASM of approximately 7.5% period over period. Significant period to period variances were as follows: The dilutive effect of increased ASMs was offset by increased wages and benefits of $8.5 million or 14.5%. Wages and benefits totaled $67.4 million versus $58.9 million for the respective six month periods in 1999 and 1998. Similar to above, a majority of the increase is attributable to (1) a 3% wage increase effective December 1, 1998 and (2) additional wages and benefits from increased flying and implementation of the Company's 1999 growth strategies. Aircraft Fuel Cost per ASM decreased by 0.24(cent) or 18.8%. Approximately $4.6 million or 12.7% less Aircraft Fuel Cost was incurred by the Company in the six month period ended June 30, 1999 compared to the six month period ended June 30, 1998. Period over period, average cost of aircraft fuel per gallon, excluding taxes, decreased by 9.8(cent) or 16.9%. Maintenance materials and repairs per ASM increased by 0.10(cent) or 6.7%. For the six months ended June 30, 1999, the Company incurred approximately $6.1 million or 14.5% in additional maintenance expense as compared to the same period in 1998 due to (i) $1.6 million more in DC-9 airframe and engine repairs and (ii) $4.9 million more in DC-10 maintenance expense, the result of increased American maintenance rates and the number of DC-10 aircraft used and flown. Other operating expenses per ASM increased by 0.19(cent) or 12.9% period over period. Similar to that discussed above, the increase is primarily attributable to expenses associated with the Company's increased flying schedule and passengers flown, including but not limited to, ground handling, food and beverage, personnel expenses and reservation fees. LIQUIDITY AND CAPITAL RESOURCES The Company believes that it has various options available to meet its capital, debt and operating commitments, including cash and liquid short-term investment securities on hand on June 30, 1999 of $41.6 million and internally generated funds. The Company also has restricted cash representing a credit card holdback of $14.8 million resulting from advance ticket sales. These funds are made available to the Company for general use as air travel is provided and fluctuate based upon advance booking trends. The Company also maintains a credit facility with a total availability of $9.3 million as of June 30, 1999 with aggregate term loans and letters of credit outstanding in the amounts of $5.1 12 million and $3.2 million, respectively. The Company will continue to consider various borrowing or leasing options to supplement its cash requirements. Cash and cash equivalents for the six month period ended June 30, 1999 increased by $10.6 million. Operating activities for the six month period ended June 30, 1999 provided $26.9 million in cash and cash equivalents, primarily due to the Company generating positive operating and net income and net increases in accounts payable, accrued liabilities and air traffic liability. Through June 30, 1999, the Company incurred $25.2 million in capital expenditures, approximately $15.8 million of which is associated with the acquisition of additional DC-9 and DC-10 aircraft discussed below. Capitalized portions of aircraft improvements and continued investments in improved software, related hardware and ground equipment and other assets represent a majority of the remaining capital expenditures. The Company estimates that its 1999 capital expenditures will approximate $49.8 million. ROUTES, AIRCRAFT AND ALLIANCES In 1999, the Company initiated and continues to implement certain growth strategies. In first quarter 1999 the Company expanded its Transpac operations by adding four weekly nonstop flights between Los Angeles and Maui and three weekly flights from Los Angeles to Maui to Kona on the Big Island of Hawaii. In August 1999, a two-year agreement providing for approximately 20 round-trip charter flights per month between Los Angeles and Tahiti will commence. To service these new routes, the Company took delivery of, in late 1998 and early 1999, two used DC-10-30 aircraft and is seeking to acquire a third DC-10-30 aircraft. Further, in an effort to meet existing and anticipated passenger demand in the Interisland market resulting from the Company's marketing efforts, including its code sharing arrangements with American and Northwest Airlines, Inc. and most recently Continental Airlines, Inc. ("Continental"), as discussed below, the Company took delivery of, in late 1998 and second quarter 1999, two used DC-9-50 aircraft. The full incremental capacity resulting from the two additional DC-9-50 aircraft has been scheduled in third quarter 1999. On August 3, 1999, the Company announced commencement of a formal code share arrangement with Continental which will allow passengers to book connecting travel between points in the domestic U.S. mainland and any of the islands in the State of Hawaii. The code share arrangement enhances the cooperative marketing alliance with Continental established in 1997. LANDING FEES On September 1, 1999, a two-year moratorium placed on landing fees at all airports in the State of Hawaii is scheduled to end. The Governor of the State of Hawaii has reserved the right to reinstate the landing fee charges before the two-year period ends. Prior to the moratorium, the Company had averaged approximately $500,000 per month in landing fees at airports in the State of Hawaii. TICKET TAX In 1997, legislation was enacted to, among other things, gradually reduce the Federal passenger excise tax from 10% to 7.5% and phase-in a $3 "head tax" per domestic flight segment by the year 2002. On October 1, 1999, the passenger excise tax is scheduled to decrease from 8% to 7.5%, with a correspondent increase in the "head tax" from $2 to $2.25 per domestic flight segment. There can be no assurance that the Company will be able to maintain its current fare levels or predict with any certainty the effects on its fares when the scheduled tax change occurs. 13 INFORMATION TECHNOLOGY SYSTEMS AND YEAR 2000 The Company has brought a number of major information technology systems on line for strategic purposes as well as to address issues associated with the year 2000. These information technology projects either replaced or enhanced existing systems, including local and wide area networks, yield management and all or portions of revenue and financial accounting. Essentially all development and implementation efforts related to these projects have been completed. Approximately $8 million of external costs associated with these efforts have been incurred as of June 30, 1999. The Company's efforts have transitioned whereby, as necessary, these projects have been incorporated into or complement those Year 2000 programs described below. The Company's dedicated Year 2000 Director and Year 2000 Project Office continue to oversee the Company's Year 2000 compliance efforts, which operate on four tracks including 1) information and communication systems; 2) hardware; 3) business partnerships; and 4) government and externalities. Each track utilizes the Federal General Accounting Office methodology and available best practices. STATE OF READINESS The Company has and continues to perform constant awareness activities through regular informational briefings and newsletter updates, formal briefs of management and senior management, and the development of "personal Y2K kits" for all employees to address their concerns. The Company has initiated public relations activities, and is working with the Air Transport Association on a coordinated industry effort. The Company has inventoried all of its hardware and software applications and is in the process of formally documenting its inventory assessments. Applications and hardware configurations of computers operating on the Company's networks have been audited using automated tools, and standalone machines have been subjected to the same detailed audits. Remediation of legacy systems is approximately 97% complete with all remediation and testing of mission critical systems expected before September 30, 1999. The Company has contracted with external vendors to assist in its testing efforts and is currently testing its applications inventory. The Company continues an aggressive business partner management program and is conducting a telephone survey of vital and important vendors, supported by site visits as necessary. Hardware assessments have identified a very small amount of equipment which is date aware, with no systems yet identified as requiring remediation. Currently, the Company believes that all mission critical systems will be documented as Year 2000 Ready by either the manufacturer or through testing by the Company, with a target milestone of August 1999. ESTIMATED COSTS TO ADDRESS YEAR 2000 ISSUES Because a substantial portion of the Company's information systems were replaced by new applications that are represented to be Year 2000 compliant, the Company's remaining Year 2000 issues are primarily related to remediation of legacy code and assistance in conducting Year 2000 testing. The Company estimates that it will expend $1 to $2 million for such remediation and testing. This will be in addition to the $8 million expended on those replacement systems described above. 14 CONTINGENCY PLANS FOR HAWAIIAN AIRLINES In addition to those Company contingency plans already on file for a number of operational functions as a part of U.S. Federal Aviation Administration (the "FAA") regulations and its normal operational disaster recovery plans, the Company has undertaken Year 2000-specific contingency activities. To this end, the Company has established a dedicated position for the coordination of contingency plans. While the Company believes that all systems will be Year 2000 ready, the Company has substantively developed appropriate contingency plans to address complete and partial systems failure for all critical, vital, and important systems. Hawaiian will continue to refine and test its contingency plans throughout the remainder of 1999. RISKS OF YEAR 2000 ISSUES Preliminary reviews of flight systems have found little potential impact of Year 2000 issues, and existing contingency plans and training address the loss of most affected operations systems. The primary risks to Hawaiian Airlines are those of business continuity. While indications to date are that its business partners are actively preparing for the Year 2000, the Company will continue to aggressively address both its supply and revenue chains to ensure, to the best of the Company's knowledge, that both products and business operations of its partners are not adversely affected by the Year 2000 problem. Notwithstanding the foregoing, the Company's business, financial condition or results of operations could be materially adversely affected by the failure of its systems or, which the Company believes is the most reasonably likely worst case scenario, failure of those systems operated by third parties on which the Company's business relies (including those of the FAA) to operate properly beyond 1999. There can be no assurance that such systems will be modified for Year 2000 operational requirements on a timely basis. Because of the variables associated with the year 2000 date problem, management cannot give assurance that in-progress system transitions will be sufficient or assure that the Company will not be affected by the year 2000 issue in some form or manner. 15 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. No material developments in matters previously reported or reportable events arising in the three or six months ended June 30, 1999 were noted, other than that described immediately below. During second quarter 1999, the Department of Taxation of the State of Hawaii (the "State DOT") informally advised the Company that it was prepared to issue proposed tax assessment notices to the Company's lessors of DC9 aircraft under operating leases for general excise tax liability on the lease rent paid to such lessors. Pursuant to the leases, the Company would, subject to certain defenses, including but not limited to the Company's prior discharge in bankruptcy of certain obligations, be liable to the lessors for such taxes and possibly interest and penalties thereon. In the opinion of management, an adequate reserve for this contingency has been established in the accompanying balance sheets and, after consultation with legal counsel, management believes that the ultimate disposition of this matter will not have a material adverse effect on the Company's operations or financial condition. ITEM 2. CHANGES IN SECURITIES. None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. At the May 21, 1999 Annual Meeting of Shareholders of Hawaiian Airlines, Inc., the following matter was voted upon:
Election of Board of Directors Votes ------------------------------ ----- John W. Adams 33,139,359 For 776,053 Withheld Paul J. Casey 33,147,789 For 767,623 Withheld Todd G. Cole 33,118,174 For 797,238 Withheld Robert C. Coo 33,142,474 For 772,938 Withheld Joseph P. Hoar 33,140,584 For 774,828 Withheld 16 Reno F. Morella 33,133,777 For 781,635 Withheld Arthur J. Pasmas 33,142,624 For 772,788 Withheld Samson Poomaihealani 33,138,255 For 777,157 Withheld Edward Z. Safady 33,140,074 For 775,338 Withheld Sharon L. Soper 33,138,356 For 777,056 Withheld Thomas J. Trzanowski 33,136,574 For 778,838 Withheld
ITEM 5. OTHER INFORMATION. To be considered for inclusion in the Company's 2000 proxy material, shareholder proposals to be considered for presentation at the 2000 Annual Meeting of Shareholders must be received by the Corporate Secretary of the Company at its principal offices at 3375 Koapaka Street, Suite G-350, Honolulu, Hawaii 96819 on or before December 17, 1999. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. Exhibit 27 Financial Data Schedule. (b) Reports on Form 8-K. None. 17 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 AIRLINES, INC. August 16, 1999 By /s/ John L. Garibaldi ---------------------------------------- John L. Garibaldi Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 18 EX-27 2 EXHIBIT 27
5 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 56,408 0 32,870 500 10,120 105,029 134,561 31,207 257,575 102,810 27,261 0 0 410 93,153 257,575 232,329 232,329 226,498 226,498 161 0 658 5,012 2,336 2,676 0 0 0 2,676 0.07 0.06
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