Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 FORM 10-Q
 
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
or

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o Yes ý No
 
As of April 14, 2017, 53,636,630 shares of the registrant’s common stock were outstanding.




Hawaiian Holdings, Inc.
Form 10-Q
Quarterly Period ended March 31, 2017
 
Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2



PART I. FINANCIAL INFORMATION

ITEM 1.                   FINANCIAL STATEMENTS.
Hawaiian Holdings, Inc.
Consolidated Statements of Operations
(in thousands, except per share data)
 
 
 
Three Months Ended March 31,
 
 
2017
 
2016
 
 
(unaudited)
Operating Revenue:
 
 

 
 

Passenger
 
$
537,590

 
$
482,027

Other
 
76,595

 
69,153

Total
 
614,185

 
551,180

Operating Expenses:
 
 

 
 

Wages and benefits
 
151,053

 
128,561

Aircraft fuel, including taxes and delivery
 
103,538

 
69,900

Maintenance, materials and repairs
 
59,404

 
60,504

Aircraft and passenger servicing
 
33,458

 
28,551

Commissions and other selling
 
33,186

 
33,031

Aircraft rent
 
33,135

 
29,388

Other rentals and landing fees
 
28,336

 
24,434

Depreciation and amortization
 
27,468

 
27,146

Purchased services
 
26,637

 
22,732

Special items
 
18,679

 

Other
 
31,997

 
29,983

Total
 
546,891

 
454,230

Operating Income
 
67,294

 
96,950

Nonoperating Income (Expense):
 
 

 
 

Interest expense and amortization of debt discounts and issuance costs
 
(8,003
)
 
(11,004
)
Gains (losses) on fuel derivatives
 
(8,798
)
 
(2,065
)
Other components of net periodic benefit cost
 
(4,751
)
 
(5,082
)
Interest income
 
1,152

 
844

Capitalized interest
 
1,760

 
225

Loss on extinguishment of debt
 

 
(3,350
)
Other, net
 
2,828

 
6,586

Total
 
(15,812
)
 
(13,846
)
Income Before Income Taxes
 
51,482

 
83,104

Income tax expense
 
14,570

 
31,638

Net Income
 
$
36,912

 
$
51,466

Net Income Per Share
 
 

 
 

Basic
 
$
0.69

 
$
0.96

Diluted
 
$
0.68

 
$
0.95

 
See accompanying Notes to Consolidated Financial Statements.


3



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

 
 
Three Months Ended March 31,
 
 
2017
 
2016
 
 
(unaudited)
Net Income
 
$
36,912

 
$
51,466

Other comprehensive loss, net:
 
 

 
 

Net change related to employee benefit plans, net of tax expense of $896 and $570 for 2017 and 2016, respectively
 
1,468

 
927

Net change in derivative instruments, net of tax benefit of $4,325 and $5,007 for 2017 and 2016, respectively
 
(7,097
)
 
(8,228
)
Net change in available-for-sale investments, net of tax expense of $52 and $323 for 2017 and 2016, respectively
 
86

 
532

Total other comprehensive loss
 
(5,543
)
 
(6,769
)
Total Comprehensive Income
 
$
31,369

 
$
44,697


See accompanying Notes to Consolidated Financial Statements.


4



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

 
 

Current Assets:
 
 

 
 

Cash and cash equivalents
 
$
466,789

 
$
325,991

Restricted cash
 
1,000

 
5,000

Short-term investments
 
273,700

 
284,075

Accounts receivable, net
 
104,485

 
96,067

Spare parts and supplies, net
 
18,622

 
20,363

Prepaid expenses and other
 
49,443

 
66,740

Total
 
914,039

 
798,236

Property and equipment, less accumulated depreciation and amortization of $480,614 and $454,231 as of March 31, 2017 and December 31, 2016, respectively
 
1,679,150

 
1,654,567

Other Assets:
 
 

 
 

Long-term prepayments and other
 
126,231

 
132,724

Intangible assets, less accumulated amortization of $20,672 and $20,337 as of March 31, 2017 and December 31, 2016, respectively
 
16,076

 
16,411

Goodwill
 
106,663

 
106,663

Total Assets
 
$
2,842,159

 
$
2,708,601

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

Current Liabilities:
 
 

 
 

Accounts payable
 
$
124,260

 
$
116,507

Air traffic liability
 
606,396

 
482,496

Other accrued liabilities
 
176,900

 
172,214

Current maturities of long-term debt and capital lease obligations
 
58,359

 
58,899

Total
 
965,915

 
830,116

Long-Term Debt and Capital Lease Obligations
 
477,169

 
497,908

Other Liabilities and Deferred Credits:
 
 

 
 

Accumulated pension and other postretirement benefit obligations
 
355,074

 
355,968

Other liabilities and deferred credits
 
171,232

 
173,613

Deferred tax liability, net
 
167,056

 
170,543

Total
 
693,362

 
700,124

Commitments and Contingencies
 


 


Shareholders’ Equity:
 
 

 
 

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

 

Common stock, $0.01 par value per share, 53,636,630 and 53,435,234 shares outstanding as of March 31, 2017 and December 31, 2016, respectively
 
536

 
534

Capital in excess of par value
 
121,155

 
127,266

Accumulated income
 
693,058

 
656,146

Accumulated other comprehensive loss, net
 
(109,036
)
 
(103,493
)
Total
 
705,713

 
680,453

Total Liabilities and Shareholders’ Equity
 
$
2,842,159

 
$
2,708,601

 

See accompanying Notes to Consolidated Financial Statements.

5



Hawaiian Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
 
 
 
Three Months Ended March 31,
 
 
2017
 
2016
 
 
(unaudited)
Net cash provided by Operating Activities
 
$
208,949

 
$
198,505

Cash flows from Investing Activities:
 
 

 
 

Additions to property and equipment, including pre-delivery payments
 
(53,130
)
 
(30,017
)
Proceeds from purchase assignment and leaseback transactions
 

 
31,851

Purchases of investments
 
(68,155
)
 
(54,748
)
Sales of investments
 
78,301

 
53,320

Net cash provided by (used in) investing activities
 
(42,984
)
 
406

Cash flows from Financing Activities:
 
 

 
 

Repayments of long-term debt and capital lease obligations
 
(21,872
)
 
(82,303
)
Repurchases and redemptions of convertible notes
 

 
(1,426
)
Repurchases of common stock
 

 
(2,464
)
Other
 
(7,295
)
 
(5,307
)
Net cash used in financing activities
 
(29,167
)
 
(91,500
)
Net increase in cash and cash equivalents
 
136,798

 
107,411

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

 
286,502

Cash, cash equivalents, and restricted cash - End of Period
 
$
467,789

 
$
393,913

 
See accompanying Notes to Consolidated Financial Statements.


6



Hawaiian Holdings, Inc. 
Notes to Consolidated Financial Statements (Unaudited)
 
1. Business and Basis of Presentation
 
Hawaiian Holdings, Inc. (the Company or Holdings) is a holding company incorporated in the State of Delaware. The Company’s primary asset is its sole ownership of all issued and outstanding shares of common stock of Hawaiian Airlines, Inc. (Hawaiian). The accompanying unaudited financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X of the U.S. Securities and Exchange Commission (SEC).  Accordingly, these interim financial statements do not include all of the information and footnotes required by GAAP for complete financial statements.  In the opinion of management, the accompanying financial statements contain all adjustments, including normal recurring adjustments, necessary for the fair presentation of the Company’s results of operations and financial position for the periods presented.  Due to seasonal fluctuations, among other factors common to the airline industry, the results of operations for the periods presented are not necessarily indicative of the results of operations to be expected for the entire year.  The accompanying unaudited Consolidated Financial Statements should be read in conjunction with the financial statements and the notes of the Company included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.
 
2. Significant Accounting Policies
 
Recently Adopted Accounting Pronouncements

In March 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, requiring an employer to report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. ASU 2017-07 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption only permitted in the first quarter of 2017. The Company early adopted this standard during the first quarter of 2017. The adoption of ASU 2017-07 resulted in a reclassification of $5.1 million from wages and benefits to other components of net periodic benefit cost on the Company's consolidated statement of operations for three months ended March 31, 2016.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows, Restricted Cash, requiring restricted cash and restricted cash equivalents to be included with cash and cash equivalents on the statement of cash flows when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The guidance is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted. The Company early adopted this standard during the first quarter of 2017. Restricted cash is now included as a component of cash, cash equivalents, and restricted cash on the Company's condensed consolidated statement of cash flows. The inclusion of restricted cash increased the beginning balances of the condensed consolidated statement of cash flows by $5.0 million and the ending balances by $1.0 million and $5.0 million for the three months ended March 31, 2017 and 2016, respectively.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows, Classification of Certain Cash Receipts and Cash Payments. The new standard clarifies how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The guidance is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted. The Company early adopted this standard during the first quarter of 2017. The adoption of this guidance did not impact the Company's consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, requiring all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. ASU 2016-09 will also allow an employer to withhold more shares for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2016. The Company adopted this standard during the first quarter of 2017. The primary impact of the adoption of the standard on the Company's consolidated financial statements was the recognition of excess tax benefits in the provision for income taxes rather than additional paid-in capital, which reduced income tax expense by $5.2 million for the three months ended March 31, 2017.

7




Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases, requiring a lessee to recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018. ASU 2016-02 requires entities to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. Full retrospective application is prohibited. The Company is currently evaluating the effect that the provisions of ASU 2016-02 will have on its consolidated financial statements and related disclosures.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in GAAP when it becomes effective. ASU 2014-09 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, and allows for either full retrospective or modified retrospective adoption.

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


8



3. Accumulated Other Comprehensive Income (Loss)
 
Reclassifications out of accumulated other comprehensive income (loss) by component is as follows: 
Details about accumulated other comprehensive loss components
 
Three months ended March 31,
 
Affected line items in the statement where net income is presented
 
2017
 
2016
 
 
 
(in thousands)
 
 
Derivatives designated as hedging instruments under ASC 815
 
 

 
 

 
 
Foreign currency derivative gains, net
 
$
(1,212
)
 
$
(2,653
)
 
Passenger revenue
Interest rate derivative gains
 

 
(291
)
 
Interest expense
Total before tax
 
(1,212
)
 
(2,944
)
 
 
Tax expense
 
459

 
1,114

 
 
Total, net of tax
 
$
(753
)
 
$
(1,830
)
 
 
Amortization of defined benefit plan items
 
 

 
 

 
 
Actuarial loss
 
$
2,228

 
$
1,915

 
Other components of net periodic benefit cost
Prior service cost
 
60

 
57

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

 
1,972

 
 
Tax benefit
 
(867
)
 
(746
)
 
 
Total, net of tax
 
$
1,421

 
$
1,226

 
 
Short-term investments
 
 

 
 

 
 
Realized gain on sales of investments, net
 
$
(8
)
 
$
(3
)
 
Other nonoperating income
Total before tax
 
(8
)
 
(3
)
 
 
Tax expense
 
3

 
1

 
 
Total, net of tax
 
(5
)
 
$
(2
)
 
 
Total reclassifications for the period
 
$
663

 
$
(606
)
 
 

9




A rollforward of the amounts included in accumulated other comprehensive income (loss), net of taxes, for the three months ended March 31, 2017 and 2016 is as follows:
Three months ended March 31, 2017
 
Interest Rate Derivatives
 
Foreign Currency Derivatives
 
Defined Benefit
Plan Items
 
Short-Term Investments
 
Total
 
 
(in thousands)
Beginning balance
 
$

 
$
7,071

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

 
(6,344
)
 
47

 
91

 
(6,206
)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax
 

 
(753
)
 
1,421

 
(5
)
 
663

Net current-period other comprehensive income (loss)
 

 
(7,097
)
 
1,468

 
86

 
(5,543
)
Ending balance
 
$

 
$
(26
)
 
$
(108,734
)
 
$
(276
)
 
$
(109,036
)

Three months ended March 31, 2016
 
Interest Rate Derivatives
 
Foreign Currency Derivatives
 
Defined Benefit Plan Items
 
Short-Term Investments
 
Total
 
 
(in thousands)
Beginning balance
 
$
81

 
$
4,879

 
$
(103,865
)
 
$
(372
)
 
$
(99,277
)
Other comprehensive income (loss) before reclassifications, net of tax
 
(668
)
 
(5,730
)
 
(299
)
 
534

 
(6,163
)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax
 
(181
)
 
(1,649
)
 
1,226

 
(2
)
 
(606
)
Net current-period other comprehensive income (loss)
 
(849
)
 
(7,379
)
 
927

 
532

 
(6,769
)
Ending balance
 
$
(768
)
 
$
(2,500
)
 
$
(102,938
)
 
$
160

 
$
(106,046
)

4. Earnings Per Share
 
Basic earnings per share, which excludes dilution, is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period.
 
Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For the three months ended March 31, 2017 and 2016, anti-dilutive shares excluded from the calculation of diluted earnings per share were not material.
 
 
Three Months Ended March 31,
 
 
2017
 
2016
 
 
(in thousands, except for per share data)
Numerator:
 
 

 
 

Net Income
 
$
36,912

 
$
51,466

Denominator:
 
 

 
 

Weighted average common stock shares outstanding - Basic
 
53,562

 
53,656

Assumed exercise of stock options and awards
 
418

 
275

Assumed conversion of convertible note premium
 

 
24

Weighted average common stock shares outstanding - Diluted
 
53,980

 
53,955

Net Income Per Share
 
 

 
 

Basic
 
$
0.69

 
$
0.96

Diluted
 
$
0.68

 
$
0.95



10



Stock Repurchase Program

In April 2015, the Company's Board of Directors approved a stock repurchase program under which the Company may repurchase up to $100 million of its outstanding common stock over a two-year period through the open market, established plans or privately negotiated transactions in accordance with all applicable securities laws, rules and regulations. The stock repurchase program is subject to modification or termination at any time. The Company had no stock repurchase activity during the three months ended March 31, 2017. As of March 31, 2017, the Company had $46.0 million remaining to spend under the stock repurchase program.

In April 2017, the Company's Board of Directors approved a modification to the stock repurchase program. Such modification extends the stock repurchase program through May 2019 and increases the current share authorization to $100 million of the Company's outstanding common stock.
 
5. Short-Term Investments
 
Debt securities that are not classified as cash equivalents are classified as available-for-sale investments and are stated at fair value.  Realized gains and losses on sales of investments are reflected in nonoperating income (expense) in the unaudited consolidated statements of operations.  Unrealized gains and losses on available-for-sale securities are reflected as a component of accumulated other comprehensive loss.

The following is a summary of short-term investments held as of March 31, 2017 and December 31, 2016:
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
March 31, 2017
 
(in thousands)
Corporate debt
 
$
174,885

 
$
54

 
$
(285
)
 
$
174,654

U.S. government and agency debt
 
49,120

 
10

 
(131
)
 
48,999

Municipal bonds
 
23,537

 
9

 
(59
)
 
23,487

Other fixed income securities
 
26,560

 

 

 
26,560

Total short-term investments
 
$
274,102

 
$
73

 
$
(475
)
 
$
273,700

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

 
$
84

 
$
(357
)
 
$
170,866

U.S. government and agency debt
 
53,916

 
8

 
(134
)
 
53,790

Municipal bonds
 
22,893

 
1

 
(144
)
 
22,750

Other fixed income securities
 
36,670

 

 
(1
)
 
36,669

Total short-term investments
 
$
284,618

 
$
93

 
$
(636
)
 
$
284,075


Contractual maturities of short-term investments as of March 31, 2017 are shown below. 
 
 
Under 1 Year
 
1 to 5 Years
 
Total
 
 
(in thousands)
Corporate debt
 
$
73,640

 
$
101,014

 
$
174,654

U.S. government and agency debt
 
17,924

 
31,075

 
48,999

Municipal bonds
 
7,042

 
16,445

 
23,487

Other fixed income securities
 
23,934

 
2,626

 
26,560

Total short-term investments
 
$
122,540

 
$
151,160

 
$
273,700

 
The Company classifies investments as current assets as these securities are available for use in its current operations.
 

11



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

The tables below present the Company’s financial assets and liabilities measured at fair value on a recurring basis:
 
 
Fair Value Measurements as of March 31, 2017
 
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
(in thousands)
Cash equivalents
 
$
259,654

 
$
230,681

 
$
28,973

 
$

Restricted cash
 
1,000

 
1,000

 

 

Short-term investments
 
273,700

 

 
273,700

 

Fuel derivative contracts:
 
 
 
 

 
 

 
 

Crude oil call options
 
4,597

 

 
4,597

 

Heating oil swaps
 
876

 

 
876

 

Foreign currency derivatives
 
5,353

 

 
5,353

 

Total assets measured at fair value
 
$
545,180

 
$
231,681

 
$
313,499

 
$

Fuel derivative contracts:
 
 

 
 

 
 

 
 

Heating oil swaps
 
$
146

 
$

 
$
146

 
$

Foreign currency derivatives
 
5,443

 

 
5,443

 

Total liabilities measured at fair value
 
$
5,589

 
$

 
$
5,589

 
$

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

 
$
104,113

 
$
19,007

 
$

Restricted cash
 
5,000

 
5,000

 

 

Short-term investments
 
284,075

 

 
284,075

 

Fuel derivative contracts:
 
 
 
 

 
 

 
 

Crude oil call options
 
8,489

 

 
8,489

 

Heating oil swaps
 
6,601

 

 
6,601

 

Foreign currency derivatives
 
12,906

 

 
12,906

 

Total assets measured at fair value
 
$
440,191

 
$
109,113

 
$
331,078

 
$

Foreign currency derivatives
 
1,469

 

 
1,469

 

Total liabilities measured at fair value
 
$
1,469

 
$

 
$
1,469

 
$


Cash equivalents.  The Company's level 1 cash equivalents consist of money market securities and the level 2 cash equivalents consist of U.S. agency bonds, mutual funds, and commercial paper. The instruments classified as level 2 are valued using quoted prices for similar assets in active markets.

12




Restricted cash.  The Company’s restricted cash consists of cash held as collateral by institutions that process our credit card transactions for advanced ticket sales, which is valued similarly to the money market securities held as cash equivalents.
 
Short-term investments.  Short-term investments include U.S. and foreign government notes and bonds, U.S. agency bonds, variable-rate corporate bonds, asset backed securities, foreign and domestic corporate bonds, municipal bonds, and commercial paper.  These instruments are valued using quoted prices for similar assets in active markets or other observable inputs.

Fuel derivative contracts.  The Company’s fuel derivative contracts consist of heating oil swaps and crude oil call options which are not traded on a public exchange. The fair value of these instruments are determined based on inputs available or derived from public markets including contractual terms, market prices, yield curves, and measures of volatility among others.
 
Foreign currency derivatives.  The Company’s foreign currency derivatives consist of Japanese Yen and Australian Dollar forward contracts and are valued based primarily on data available or derived from public markets.

The table below presents the Company’s debt (excluding obligations under capital leases) measured at fair value: 
Fair Value of Debt
March 31, 2017
 
December 31, 2016
Carrying
 
Fair Value
 
Carrying
 
Fair Value
Amount
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Amount
 
Total
 
Level 1
 
Level 2
 
Level 3
(in thousands)
$
463,068

 
$
466,147

 
$

 
$

 
$
466,147

 
$
481,874

 
$
484,734

 
$

 
$

 
$
484,734

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

The Company’s operations are inherently dependent upon the price and availability of aircraft fuel. To manage economic risks associated with fluctuations in aircraft fuel prices, the Company periodically enters into derivative financial instruments. During the three months ended March 31, 2017, the Company primarily used heating oil swaps and crude oil call options 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 March 31,
Fuel derivative contracts
 
2017
 
2016
 
 
(in thousands)
Gains (losses) realized at settlement
 
$
2,589

 
$
(19,025
)
Reversal of prior period unrealized amounts
 
(7,947
)
 
17,810

Unrealized losses that will settle in future periods
 
(3,440
)
 
(850
)
Losses on fuel derivatives recorded as Nonoperating Income (expense)
 
$
(8,798
)
 
$
(2,065
)


13



Foreign Currency Exchange Rate Risk Management
 
The Company is subject to foreign currency exchange rate risk due to revenues and expenses denominated in foreign currencies, with the primary exposures being the Japanese Yen and Australian Dollar. To manage exchange rate risk, the Company executes its international revenue and expense transactions in the same foreign currency to the extent practicable.  
The Company enters into foreign currency forward contracts to further manage the effects of fluctuating exchange rates. The effective portion of the gain or loss of designated cash flow hedges is reported as a component of accumulated other comprehensive income (AOCI) and reclassified into earnings in the same period in which the related sales are recognized as passenger revenue. The effective portion of the foreign currency forward contracts represents the change in fair value of the hedge that offsets the change in the fair value of the hedged item. To the extent the change in the fair value of the hedge does not perfectly offset the change in the fair value of the hedged item, the ineffective portion of the hedge is immediately recognized as nonoperating income (expense). Foreign currency forward contracts that are not designated as cash flow hedges are recorded at fair value, and any changes in fair value are recognized as other nonoperating income (expense) in the period of change.
 
The Company believes that its foreign currency forward contracts that are designated as cash flow hedges will continue to be effective in offsetting changes in cash flow attributable to the hedged risk. The Company expects to reclassify a net loss of approximately $0.4 million into earnings over the next 12 months from AOCI based on the values at March 31, 2017.
 
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 March 31, 2017 
 
 
Balance Sheet
Location
 
Notional Amount
 
Final
Maturity
Date
 
Gross fair
value of
assets
 
Gross fair
value of
(liabilities)
 
Net
derivative
position
 
 
 
 
(in thousands)
 
 
 
(in thousands)
Derivatives designated as hedges
 
 
 
 
 
 
 
 

 
 

 
 

Foreign currency derivatives
 
Other accrued liabilities
 
16,327,950 Japanese Yen
43,378 Australian Dollars
 
March 2018
 
4,064

 
(4,820
)
 
(756
)
 
 
Long-term prepayments and other
 
4,752,925 Japanese Yen
7,104 Australian Dollars
 
March 2019
 
1,284

 
(498
)
 
786

Derivatives not designated as hedges
 
 
 
 
 
 
 
 

 
 

 
 
Foreign currency derivatives
 
Other accrued liabilities
 
882,350 Japanese Yen
1,928 Australian Dollars
 
June 2017
 
5

 
(125
)
 
(120
)
Fuel derivative contracts
 
Prepaid expenses and other
 
89,754 gallons
 
March 2018
 
5,473

 
(146
)
 
5,327

 

14



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

 
 

 
 

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

 
(1,349
)
 
8,454

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

 
(59
)
 
2,573

Derivatives not designated as hedges
 
 
 
 
 
 
 
 

 
 

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

 
(61
)
 
410

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

 

 
15,090

 
The following table reflects the impact of cash flow hedges designated for hedge accounting treatment and their location within the unaudited Consolidated Statements of Comprehensive Income. 
 
 
(Gain) loss recognized in AOCI on derivatives (effective portion)
 
(Gain) loss reclassified from AOCI
into income (effective portion)
 
(Gain) loss recognized in
nonoperating (income) expense
(ineffective portion)
 
 
Three months ended March 31,
 
Three months ended March 31,
 
Three months ended March 31,
 
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
 
(in thousands)
Foreign currency derivatives
 
$
10,210

 
$
9,217

 
$
(1,212
)
 
$
(2,653
)
 
$

 
$

Interest rate derivatives
 

 
923

 

 
(291
)
 

 


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

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

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


15



8.  Debt
 
As of March 31, 2017, the expected maturities of long-term debt for the remainder of 2017 and the next four years, and thereafter, were as follows (in thousands): 
Remaining months in 2017
$
29,996

2018
48,244

2019
72,927

2020
21,413

2021
49,060

Thereafter
241,428

 
$
463,068


9.  Leases

The Company leases aircraft, engines, and other assets under long-term lease arrangements. Other leased assets include real property, airport and terminal facilities, maintenance facilities, and general offices. Certain leases include escalation clauses and renewal options. When lease renewals are considered to be reasonably assured, the rental payments that will be due during the renewal periods are included in the determination of rent expense over the life of the lease.
As of March 31, 2017, the scheduled future minimum rental payments under operating leases with non-cancellable basic terms of more than one year were as follows:
 
Aircraft
 
Other
 
(in thousands)
Remaining in 2017
$
89,912

 
$
4,119

2018
118,017

 
7,137

2019
117,872

 
6,849

2020
97,717

 
6,682

2021
64,730

 
6,760

Thereafter
222,227

 
107,751

 
$
710,475

 
$
139,298

10. Employee Benefit Plans
 
The components of net periodic benefit cost for the Company’s defined benefit and other postretirement plans included the following: 
 
 
Three months ended March 31,
Components of Net Period Benefit Cost
 
2017
 
2016
 
 
(in thousands)
Service cost
 
$
3,813

 
$
3,713

Other cost:
 
 
 
 
Interest cost
 
7,259

 
7,582

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

 
1,973

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

 
5,083

Net periodic benefit cost
 
$
8,563

 
$
8,796

 
The Company contributed $6.4 million and $0.3 million to its defined benefit and other postretirement plans during the three months ended March 31, 2017 and 2016, respectively.

On March 24, 2017, the Company announced the ratification of a 63-month contract amendment with its pilots as represented by the Air Line Pilots Association (ALPA). As further discussed in Note 12, during the three months ended March 31, 2017, the Company accrued a one-time payment to reduce the future 401K employer contribution for certain pilot groups, which is not

16



recoverable once paid. In the second half of 2017, the Company currently estimates to make a one-time cash payment between $100 million and $110 million to settle a portion of its outstanding other post-retirement plan obligation with its pilots. The Company currently estimates to also incur a financial charge between $10 million and $15 million related to the settlement when it occurs. 

11. Commitments and Contingent Liabilities
 
Commitments

As of March 31, 2017, the Company had the following capital commitments consisting of firm aircraft and engine orders and purchase rights:
Aircraft Type
 
Firm Orders
 
Purchase Rights
 
Expected Delivery Dates
A330-200 aircraft
 
1

 

 
In 2017
A321neo aircraft
 
16

 
9

 
Between 2017 and 2020
A330-800neo aircraft
 
6

 
6

 
Between 2019 and 2021
Pratt & Whitney spare engines:
 
 

 
 

 
 
A321neo spare engines
 
3

 
2

 
Between 2017 and 2019
Rolls-Royce spare engines:
 
 

 
 

 
 
A330-800neo spare engines
 
2

 
2

 
Between 2019 and 2026

The Company has operating commitments with a third-party to provide aircraft maintenance services which require fixed payments as well as variable payments based on flight hours for its Airbus fleet through 2027. The Company also has operating commitments with third-party service providers for IT, accounting services, and a capacity purchase agreement through 2024.
 
Committed capital and operating expenditures include escalation amounts based on estimates. The gross committed expenditures and committed payments for those deliveries as of March 31, 2017 are detailed below: 
 
 
Capital
 
Operating
 
Total Committed
Expenditures
 
 
(in thousands)
Remaining in 2017
 
$
204,880

 
$
59,351

 
$
264,231

2018
 
409,234

 
64,378

 
473,612

2019
 
489,159

 
58,683

 
547,842

2020
 
236,380

 
57,316

 
293,696

2021
 
165,643

 
54,974

 
220,617

Thereafter
 
129,870

 
390,870

 
520,740

 
 
$
1,635,166

 
$
685,572

 
$
2,320,738

 
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.

17



 
Credit Card Holdback
 
Under the Company’s bank-issued credit card processing agreements, certain proceeds from advance ticket sales may be held back to serve as collateral to cover any possible chargebacks or other disputed charges that may occur. These holdbacks, which are included in restricted cash in the Company’s unaudited Consolidated Balance Sheets, totaled $1.0 million at March 31, 2017 and $5.0 million at December 31, 2016.
 
In the event of a material adverse change in the Company's business, the holdback could increase to an amount up to 100% of the applicable credit card air traffic liability, which would also cause an increase in the level of restricted cash. If the Company is unable to obtain a waiver of, or otherwise mitigate the increase in the restriction of cash, it could have a material adverse impact on the Company.

12. Special Items

In February 2017, the Company reached a tentative agreement with ALPA, covering the Company's pilots. In March 2017, Company received notice from ALPA that the agreement was ratified by its members.  The agreement is effective April 1, 2017 and has a term of 63-months.  The contract includes (amongst other various benefits) a pay adjustment and ratification bonus computed based on previous service. During the three months ended March 31, 2017, the Company accrued $18.7 million related to (1) a one-time payment to reduce the future 401K employer contribution for certain pilot groups, which is not recoverable once paid, and (2) a one-time true up of the pilot vacation accrual at the new negotiated contract rates.

13. Supplemental Cash Flow Information
 
Non-cash investing and financing activities for the three months ended March 31, 2017 and 2016 were as follows:
 
Three months ended March 31,
 
2017
 
2016
 
(in thousands)
Investing and Financing Activities Not Affecting Cash:
 
 
 
Property and equipment acquired through a capital lease
$

 
$
9,104


14. Condensed Consolidating Financial Information

The following condensed consolidating financial information is presented in accordance with Regulation S-X paragraph 210.3-10 because, in connection with the issuance by two pass-through trusts formed by Hawaiian (which is also referred to in this Note 14 as Subsidiary Issuer / Guarantor) of pass-through certificates, the Company (which is also referred to in this Note 14 as Parent Issuer / Guarantor) is fully and unconditionally guaranteeing the payment obligations of Hawaiian, which is a 100% owned subsidiary of the Company, under equipment notes issued by Hawaiian to purchase new aircraft.

Condensed consolidating financial statements are presented in the following tables:


18



Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
Three months ended March 31, 2017
 
 
Parent Issuer /
Guarantor
 
Subsidiary
Issuer /
Guarantor
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
(in thousands)
Operating Revenue
 
$

 
$
612,543

 
$
1,746

 
$
(104
)
 
$
614,185

Operating Expenses:
 
 

 
 

 
 

 
 

 
 

Wages and benefits
 

 
151,053

 

 

 
151,053

Aircraft fuel, including taxes and delivery
 

 
103,538

 

 

 
103,538

Maintenance materials and repairs
 

 
57,293

 
2,111

 

 
59,404

Aircraft and passenger servicing
 

 
33,458

 

 

 
33,458

Commissions and other selling
 
6

 
33,207

 
19

 
(46
)
 
33,186

Aircraft rent
 

 
33,135

 

 

 
33,135

Other rentals and landing fees
 

 
28,336

 

 

 
28,336

Depreciation and amortization
 

 
26,517

 
951

 

 
27,468

Purchased services
 
106

 
26,354

 
192

 
(15
)
 
26,637

Special charges
 

 
18,679

 

 

 
18,679

Other
 
1,152

 
30,453

 
435

 
(43
)
 
31,997

Total
 
1,264

 
542,023

 
3,708

 
(104
)
 
546,891

Operating Income (Loss)
 
(1,264
)
 
70,520

 
(1,962
)
 

 
67,294

Nonoperating Income (Expense):
 
 

 
 

 
 

 
 

 
 

Undistributed net income of subsidiaries
 
37,002

 

 

 
(37,002
)
 

Interest expense and amortization of debt discounts and issuance costs
 

 
(8,003
)
 

 

 
(8,003
)
Other components of net periodic pension cost
 

 
(4,751
)
 

 

 
(4,751
)
Interest income
 
70

 
1,082

 

 

 
1,152

Capitalized interest
 

 
1,760

 

 

 
1,760

Losses on fuel derivatives
 

 
(8,798
)
 

 

 
(8,798
)
Other, net
 

 
2,828

 

 

 
2,828

Total
 
37,072

 
(15,882
)
 

 
(37,002
)
 
(15,812
)
Income (Loss) Before Income Taxes
 
35,808

 
54,638

 
(1,962
)
 
(37,002
)
 
51,482

Income tax expense (benefit)
 
(1,104
)
 
15,674

 

 

 
14,570

Net Income (Loss)
 
$
36,912

 
$
38,964

 
$
(1,962
)
 
$
(37,002
)
 
$
36,912

Comprehensive Income (Loss)
 
$
31,369

 
$
33,421

 
$
(1,962
)
 
$
(31,459
)
 
$
31,369



19



Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
Three months ended March 31, 2016
 
 
Parent Issuer /
Guarantor
 
Subsidiary
Issuer /
Guarantor
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
(in thousands)
Operating Revenue
 
$

 
$
550,134

 
$
1,163

 
$
(117
)
 
$
551,180

Operating Expenses:
 
 

 
 

 
 

 
 

 
 

Aircraft fuel, including taxes and delivery
 

 
69,900

 

 

 
69,900

Wages and benefits
 

 
128,561

 

 

 
128,561

Aircraft rent
 

 
29,388

 

 

 
29,388

Maintenance materials and repairs
 

 
59,100

 
1,404

 

 
60,504

Aircraft and passenger servicing
 

 
28,551

 

 

 
28,551

Commissions and other selling
 
1

 
33,052

 
16

 
(38
)
 
33,031

Depreciation and amortization
 

 
26,399

 
747

 

 
27,146

Other rentals and landing fees
 

 
24,434

 

 

 
24,434

Purchased services
 
35

 
22,640

 
72

 
(15
)
 
22,732

Other
 
1,326

 
28,596

 
125

 
(64
)
 
29,983

Total
 
1,362

 
450,621

 
2,364

 
(117
)
 
454,230

Operating Income (Loss)
 
(1,362
)
 
99,513

 
(1,201
)
 

 
96,950

Nonoperating Income (Expense):
 
 

 
 

 
 

 
 

 
 

Undistributed net income of subsidiaries
 
51,816

 

 

 
(51,816
)
 

Interest expense and amortization of debt discounts and issuance costs
 
117

 
(11,121
)
 

 

 
(11,004
)
Other components of net periodic pension cost
 

 
(5,082
)
 

 

 
(5,082
)
Interest income
 
59

 
785

 

 

 
844

Capitalized interest
 

 
225

 

 

 
225

Losses on fuel derivatives
 

 
(2,065
)
 

 

 
(2,065
)
Loss on extinguishment of debt
 

 
(3,350
)
 

 

 
(3,350
)
Other, net
 

 
6,586

 

 

 
6,586

Total
 
51,992

 
(14,022
)
 

 
(51,816
)
 
(13,846
)
Income (Loss) Before Income Taxes
 
50,630

 
85,491

 
(1,201
)
 
(51,816
)
 
83,104

Income tax expense (benefit)
 
(836
)
 
32,474

 

 

 
31,638

Net Income (Loss)
 
$
51,466

 
$
53,017

 
$
(1,201
)
 
$
(51,816
)
 
$
51,466

Comprehensive Income (Loss)
 
$
44,697

 
$
46,248

 
$
(1,201
)
 
$
(45,047
)
 
$
44,697


20



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

 
 

 
 

 
 

 
 

Current assets:
 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
68,070

 
$
391,405

 
$
7,314

 
$

 
$
466,789

Restricted cash
 

 
1,000

 

 

 
1,000

Short-term investments
 

 
273,700

 

 


 
273,700

Accounts receivable, net
 
28

 
103,073

 
1,693

 
(309
)
 
104,485

Spare parts and supplies, net
 

 
18,622

 

 

 
18,622

Prepaid expenses and other
 
106

 
49,072

 
265

 

 
49,443

Total
 
68,204

 
836,872

 
9,272

 
(309
)
 
914,039

Property and equipment at cost
 

 
2,089,033

 
70,731

 

 
2,159,764

Less accumulated depreciation and amortization
 

 
(471,416
)
 
(9,198
)
 

 
(480,614
)
Property and equipment, net
 

 
1,617,617

 
61,533

 

 
1,679,150

Long-term prepayments and other
 

 
126,231

 

 

 
126,231

Deferred tax assets, net
 
29,861

 

 

 
(29,861
)
 

Goodwill and other intangible assets, net
 

 
121,237

 
1,502

 

 
122,739

Intercompany receivable
 

 
290,111

 

 
(290,111
)
 

Investment in consolidated subsidiaries
 
887,587

 

 

 
(887,587
)
 

TOTAL ASSETS
 
$
985,652

 
$
2,992,068

 
$
72,307

 
$
(1,207,868
)
 
$
2,842,159

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

 
 

 
 

 
 

Current liabilities:
 
 

 
 

 
 

 
 

 
 

Accounts payable
 
$
524

 
$
121,240

 
$
2,805

 
$
(309
)
 
$
124,260

Air traffic liability
 

 
602,352

 
4,044

 

 
606,396

Other accrued liabilities
 
487

 
176,150

 
263

 

 
176,900

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

 
58,359

 

 

 
58,359

Total
 
1,011

 
958,101

 
7,112

 
(309
)
 
965,915

Long-term debt and capital lease obligations
 

 
477,169

 

 

 
477,169

Intercompany payable
 
278,928

 

 
11,183

 
(290,111
)
 

Other liabilities and deferred credits:
 
 

 
 

 
 

 
 

 
0

Accumulated pension and other postretirement benefit obligations
 

 
355,074

 

 

 
355,074

Other liabilities and deferred credits
 

 
170,398

 
834

 


 
171,232

Deferred tax liabilities, net
 

 
196,917

 

 
(29,861
)
 
167,056

Total
 

 
722,389

 
834

 
(29,861
)
 
693,362

Shareholders’ equity
 
705,713

 
834,409

 
53,178

 
(887,587
)
 
705,713

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
985,652

 
$
2,992,068

 
$
72,307

 
$
(1,207,868
)
 
$
2,842,159





21



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

 
 

 
 

 
 

Current assets:
 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
67,629

 
$
249,985

 
$
8,377

 
$

 
$
325,991

Restricted cash
 

 
5,000

 

 

 
5,000

Short-term investments
 

 
284,075

 

 

 
284,075

Accounts receivable, net
 
28

 
94,852

 
1,392

 
(205
)
 
96,067

Spare parts and supplies, net
 

 
20,363

 

 

 
20,363

Prepaid expenses and other
 
29

 
66,665

 
46

 

 
66,740

Total
 
67,686

 
720,940

 
9,815

 
(205
)
 
798,236

Property and equipment at cost
 

 
2,038,931

 
69,867

 

 
2,108,798

Less accumulated depreciation and amortization
 

 
(445,868
)
 
(8,363
)
 

 
(454,231
)
Property and equipment, net
 

 
1,593,063

 
61,504

 

 
1,654,567

Long-term prepayments and other
 

 
132,724

 

 

 
132,724

Deferred tax assets, net
 
28,757

 

 

 
(28,757
)
 

Goodwill and other intangible assets, net
 

 
121,456

 
1,618

 

 
123,074

Intercompany receivable
 

 
277,732

 

 
(277,732
)
 

Investment in consolidated subsidiaries
 
855,289

 

 

 
(855,289
)
 

TOTAL ASSETS
 
$
951,732

 
$
2,845,915

 
$
72,937

 
$
(1,161,983
)
 
$
2,708,601

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

 
 

 
 

 
 

Current liabilities:
 
 

 
 

 
 

 
 

 
 

Accounts payable
 
$
492

 
$
114,935

 
$
1,285

 
$
(205
)
 
$
116,507

Air traffic liability
 

 
478,109

 
4,387

 

 
482,496

Other accrued liabilities
 
4,088

 
167,864

 
262

 

 
172,214

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

 
58,899

 

 

 
58,899

Total
 
4,580

 
819,807

 
5,934

 
(205
)
 
830,116

Long-term debt and capital lease obligations
 

 
497,908

 

 

 
497,908

Intercompany payable
 
266,699

 

 
11,033

 
(277,732
)
 

Other liabilities and deferred credits:
 
 

 
 

 
 

 
 

 
0

Accumulated pension and other postretirement benefit obligations
 

 
355,968

 

 

 
355,968

Other liabilities and deferred credits
 

 
172,783

 
830

 

 
173,613

Deferred tax liabilities, net
 

 
199,300

 

 
(28,757
)
 
170,543

Total
 

 
728,051

 
830

 
(28,757
)
 
700,124

Shareholders’ equity
 
680,453

 
800,149

 
55,140

 
(855,289
)
 
680,453

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
951,732

 
$
2,845,915

 
$
72,937

 
$
(1,161,983
)
 
$
2,708,601









22



Condensed Consolidating Statements of Cash Flows
Three months ended March 31, 2017
 
 
Parent Issuer /
Guarantor
 
Subsidiary
Issuer /
Guarantor
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
(in thousands)
Net Cash Provided By (Used In) Operating Activities
 
$
(1,102
)
 
$
210,250

 
$
(199
)
 


 
$
208,949

Cash Flows From Investing Activities:
 
 

 
 

 
 

 
 

 
 

Net payments to affiliates
 

 
(1,495
)
 

 
1,495

 

Additions to property and equipment, including pre-delivery deposits
 

 
(52,266
)
 
(864
)
 

 
(53,130
)
Purchases of investments
 

 
(68,155
)
 

 

 
(68,155
)
Sales of investments
 

 
78,301

 

 

 
78,301

Net cash used in investing activities
 

 
(43,615
)
 
(864
)
 
1,495

 
(42,984
)
Cash Flows From Financing Activities:
 
 

 
 

 
 

 
 

 
 

Repayments of long-term debt and capital lease obligations
 

 
(21,872
)
 

 

 
(21,872
)
Net payments from affiliates
 
1,495

 

 

 
(1,495
)
 

Other
 
48

 
(7,343
)
 

 

 
(7,295
)
Net cash provided by (used in) financing activities
 
1,543

 
(29,215
)
 

 
(1,495
)
 
(29,167
)
Net increase (decrease) in cash and cash equivalents
 
441

 
137,420

 
(1,063
)
 

 
136,798

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

 
254,985

 
8,377

 

 
330,991

Cash, cash equivalents, & restricted cash - End of Period
 
$
68,070

 
$
392,405

 
$
7,314

 
$

 
$
467,789




23



Condensed Consolidating Statements of Cash Flows
Three months ended March 31, 2016
 
 
Parent Issuer /
Guarantor
 
Subsidiary
Issuer /
Guarantor
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
(in thousands)
Net Cash Provided By (Used In) Operating Activities
 
$
(1,387
)
 
$
200,071

 
$
(179
)
 
$

 
$
198,505

Cash Flows From Investing Activities:
 
 

 
 

 
 

 
 

 
 

Net payments to affiliates
 

 
(3,314
)
 

 
3,314

 

Additions to property and equipment, including pre-delivery deposits
 

 
(29,490
)
 
(527
)
 

 
(30,017
)
Proceeds from purchase assignment and leaseback transaction
 

 
31,851

 

 

 
31,851

Net proceeds from disposition of property and equipment
 

 

 

 

 

Purchases of investments
 

 
(54,748
)
 

 

 
(54,748
)
Sales of investments
 

 
53,320

 

 

 
53,320

Net cash provided by (used in) investing activities
 

 
(2,381
)
 
(527
)
 
3,314

 
406

Cash Flows From Financing Activities:
 
 

 
 

 
 

 
 

 
 

Repayments of long-term debt and capital lease obligations
 

 
(82,303
)
 

 

 
(82,303
)
Repurchase of convertible notes
 
(1,426
)
 

 

 

 
(1,426
)
Net payments from affiliates
 
3,314

 

 

 
(3,314
)
 

Repurchases of Common Stock
 
(2,464
)
 

 

 

 
(2,464
)
Other
 
148

 
(5,455
)
 

 

 
(5,307
)
Net cash used in financing activities
 
(428
)
 
(87,758
)
 

 
(3,314
)
 
(91,500
)
Net increase (decrease) in cash and cash equivalents
 
(1,815
)
 
109,932

 
(706
)
 

 
107,411

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

 
208,406

 
8,676

 

 
286,502

Cash, cash equivalents, & restricted cash - End of Period
 
$
67,605

 
$
318,338

 
$
7,970

 
$

 
$
393,913



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

24



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

We are engaged in the scheduled air transportation of passengers and cargo amongst the Hawaiian Islands (the “Neighbor Island” routes), between the Hawaiian Islands and certain cities in the U.S. mainland (the “North America” routes and collectively with the Neighbor Island routes, referred to as our “Domestic” routes), and between the Hawaiian Islands and the South Pacific, Australia, and Asia (the “International” routes), collectively referred to as our “Scheduled Operations.” In addition, we operate various charter flights. We are the largest airline headquartered in the State of Hawai‘i and the tenth largest domestic airline in the United States based on revenue passenger miles reported by the Research and Innovative Technology Administration Bureau of Transportation Statistics for the month of December 2016, the latest available data. As of March 31, 2017, we had 6,234 active employees.

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

25



Financial Highlights

GAAP net income in the first quarter of $36.9 million or $0.68 per diluted share.

Adjusted net income in the first quarter of $56.0 million or $1.04 per diluted share.

Unrestricted cash and cash equivalents and short-term investments of $740.5 million.

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

Outlook

We expect our financial revenue performance to improve in the second quarter compared to the prior year period due to improved passenger loads, increased capacity, higher average fares specifically in our North America and International routes, and increased rates for, and volume of, cargo transported. We expect available seat miles during the quarter ending June 30, 2017 to increase by 3.0% to 5.0% from the prior year period, while we expect operating revenue per available seat mile to increase by 5.5% to 8.5% from the prior year period.  We expect operating cost per available seat mile (CASM) for the quarter ending June 30, 2017 to increase by 8.0% to 11.0% from the prior year period.  Our expected increase in CASM during the second quarter of 2017 as compared to the prior year period is primarily driven by our expectation of increases to fuel prices, increases in wages and benefits primarily due to contractual rate increases, increases in aircraft rent due to additional aircraft in our fleet, increases in other rental and landing fees due to increases in rates, passengers and landing frequencies, and increases in aircraft and passenger servicing and purchased services due primarily to the growth in our operations.

Fleet Summary

The table below summarizes our total fleet as of March 31, 2016 and 2017, and expected fleet as of March 31, 2018 (based on existing agreements):
 
 
March 31, 2016
 
March 31, 2017
 
March 31, 2018
Aircraft Type
 
Leased (2)
 
Owned
 
Total
 
Leased (2)
 
Owned
 
Total
 
Leased (2)
 
Owned
 
Total
A330-200
 
10

 
12

 
22

 
11

 
12

 
23

 
11

 
13

 
24

767-300
 
4

 
4

 
8

 
4

 
4

 
8

 
4

 
3

 
7

717-200
 
3

 
15

 
18

 
5

 
15

 
20

 
5

 
15

 
20

ATR turboprop (1)
 

 
6

 
6

 

 
6

 
6

 

 
6

 
6

A321neo
 

 

 

 

 

 

 
2

 
5

 
7

Total
 
17

 
37

 
54

 
20

 
37

 
57

 
22

 
42

 
64

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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

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

Results of Operations
 
For the three months ended March 31, 2017, we generated net income of $36.9 million, or $0.68 per diluted share, compared to net income of $51.5 million, or $0.95 per diluted share, for the same period in 2016.


26



Selected Consolidated Statistical Data (unaudited)
 
 
Three months ended March 31,
 
 
2017
 
2016
 
 
(in thousands, except as otherwise indicated)
Scheduled Operations (a) :
 
 

 
 

Revenue passengers flown
 
2,704

 
2,646

Revenue passenger miles (RPM)
 
3,797,725

 
3,541,069

Available seat miles (ASM)
 
4,521,098

 
4,366,995

Passenger revenue per RPM (Yield)
 

14.16
¢
 

13.61
¢
Passenger load factor (RPM/ASM)
 
84.0
%
 
81.1
%
Passenger revenue per ASM (PRASM)
 

11.89
¢
 

11.04
¢
Total Operations (a) :
 
 

 
 

Revenue passengers flown
 
2,704

 
2,647

RPM
 
3,798,493

 
3,542,059

ASM
 
4,522,353

 
4,368,096

Operating revenue per ASM (RASM)
 

13.58
¢
 

12.62
¢
Operating cost per ASM (CASM)
 

12.09
¢
 

10.40
¢
CASM excluding aircraft fuel and special items (b)
 

9.39
¢
 

8.80
¢
Aircraft fuel expense per ASM (c)
 

2.29
¢
 

1.60
¢
Revenue block hours operated
 
45,005

 
42,726

Gallons of aircraft fuel consumed
 
61,738

 
57,855

Average cost per gallon of aircraft fuel (actual) (c)
 
$
1.68

 
$
1.21

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

Operating Revenue
 
During the three months ended March 31, 2017, operating revenue increased $63.0 million, or 11.4%, as compared to the prior year period, driven by increased passenger revenue.

Passenger revenue

For the three months ended March 31, 2017, passenger revenue increased $55.6 million, or 11.5%, as compared to the prior year period. Details of these changes are described in the table below: 
 
 
Three months ended March 31, 2017 as compared to three months ended March 31, 2016
 
 
Change in scheduled passenger revenue
 
Change in Yield
 
Change in RPM
 
Change in ASM
 
 
(in millions)
 
 
 
 
 
 
Domestic
 
$
20.8

 
6.7
%
 
(1.2
)%
 
(6.0
)%
International
 
34.8

 
4.5

 
28.1

 
25.3

Total scheduled
 
$
55.6

 
4.0
%
 
7.2
 %
 
3.5
 %

Domestic

For the three months ended March 31, 2017, revenue on our domestic routes increased by $20.8 million or 6.7% as compared to the prior year period. The increase was due to a combination of higher average fares and improved passenger load factors within our North America routes.

27




International

For the three months ended March 31, 2017, revenue on our international routes increased by $34.8 million or 33.8%, as compared to the prior year period. The increase was primarily due to improved passenger load factors, higher average fares, and expansion of our Hawaii to Tokyo, Japan service, including the introduction of service from Honolulu to Narita, Japan (July 2016), Kona to Tokyo Haneda Airport (December 2016), and expansion of existing Honolulu to Haneda service.

Other operating revenue

For the three months ended March 31, 2017, other operating revenue increased by $7.4 million, or 10.8%, as compared to the prior year period. The increase was primarily due to an increase in the volume of cargo transported during the three months ended March 31, 2017.

Operating Expense
 
Operating expenses were $546.9 million and $454.2 million for the three months ended March 31, 2017 and 2016, respectively. Increases (decreases) in operating expenses for the three months ended March 31, 2017 as compared to the prior year period are detailed below:

 
 
Increase / (decrease) for the three months ended March 31, 2017 compared to the three months ended March 31, 2016
 
 
$
 
%
Operating expenses
 
(in thousands)
 
 
Wages and benefits
 
$
22,492

 
17.5
 %
Aircraft fuel, including taxes and delivery
 
33,638

 
48.1

Maintenance, materials and repairs
 
(1,100
)
 
(1.8
)
Aircraft and passenger servicing
 
4,907

 
17.2

Commissions and other selling
 
155

 
0.5

Aircraft rent
 
3,747

 
12.8

Other rentals and landing fees
 
3,902

 
16.0

Depreciation and amortization
 
322

 
1.2

Purchased services
 
3,905

 
17.2

Special items
 
18,679

 
N/A

Other
 
2,014

 
6.7

Total
 
$
92,661

 
20.4
 %
 
Wages and benefits

Wages and benefits expense increased by $22.5 million, or 17.5%, for the three months ended March 31, 2017, as compared to the prior year period. The increase was due to a 9.0% increase in the number of employees, increased wages which were retroactively applied in connection with the recently approved collective bargaining agreement with our pilot union, the Air Line Pilots Association (ALPA), and increased employee health benefit costs.

Aircraft fuel
 
Aircraft fuel expense increased during the three months ended March 31, 2017, as compared to the prior year period, primarily due to the increase in the average fuel price per gallon and an increase in consumption as illustrated in the following table: 

28



 
 
Three months ended March 31,
 
 
2017
 
2016
 
% Change
 
 
(in thousands, except per-gallon amounts)
 
 
Aircraft fuel expense, including taxes and delivery
 
$
103,538

 
$
69,900

 
48.1
%
Fuel gallons consumed
 
61,738

 
57,855

 
6.7
%
Average fuel price per gallon, including taxes and delivery
 
$
1.68

 
$
1.21

 
38.8
%
 
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 derivatives settled in the period inclusive of costs related to hedging premiums. Economic fuel expense is calculated as follows: 
 
 
Three months ended March 31,
 
 
2017
 
2016
 
% Change
 
 
(in thousands, except per-gallon amounts)
 
 
Aircraft fuel expense, including taxes and delivery
 
$
103,538

 
$
69,900

 
48.1
 %
Realized losses (gains) on settlement of fuel derivative contracts
 
(2,589
)

19,025


(113.6
)%
Economic fuel expense
 
$
100,949

 
$
88,925

 
13.5
 %
Fuel gallons consumed
 
61,738

 
57,855

 
6.7
 %
Economic fuel costs per gallon
 
$
1.64

 
$
1.54

 
6.5
 %
 
See Item 3, "Quantitative and Qualitative Disclosures About Market Risk" for additional discussion of our aircraft fuel costs and related hedging program.

Aircraft and passenger servicing

Aircraft and passenger servicing increased by $4.9 million, or 17.2%, for the three months ended March 31, 2017, as compared to the prior year period. The increase was primarily due to the increase in number of flights as compared to the three months ended March 31, 2016 which resulted in higher ground handling and food and beverage expenses.

Other rentals and landing fees

Other rentals and landing fees increased by $3.9 million, or 16.0%, for the three months ended March 31, 2017, as compared to the prior year period, primarily due to increases in landing fee rates, passengers and landing frequencies. Airport rental fees also increased compared to the prior year period.

Purchased services

Purchased services increased by $3.9 million, or 17.2%, for the three months ended March 31, 2017, as compared to the prior year period. The increase was primarily due to an increase in outsourced web and third-party vendor reservation fees resulting from increased passenger counts.

Special items

In February 2017, we reached a tentative agreement with ALPA, covering our pilots. In March 2017, we received notice from ALPA that the agreement was ratified by its members.  The 63-month agreement is effective April 1, 2017.  The contract includes a pay adjustment and ratification bonus, amongst other various benefits. During the three months ended March 31, 2017, we accrued $18.7 million related to (1) a one-time payment to reduce the future 401K employer contribution for certain pilot groups, which is not recoverable once paid, and (2) a one-time true up of the pilot vacation accrual at the new negotiated contract rates. In the second half of 2017, we currently estimate to make a one-time cash payment between $100 million and $110 million to settle a portion of our outstanding other post-retirement plan obligation with our pilots. We currently estimate to also incur a financial charge between $10 million and $15 million related to the settlement when it occurs.


29



Nonoperating Income (Expense)

Net nonoperating expense increased by $2.0 million, or 14.2%, for the three months ended March 31, 2017, as compared to the prior year period. The increase was primarily due to an increase of fuel derivative losses of $6.7 million partially offset by a $3.0 million decrease in interest expense and amortization of debt discounts and issuance costs due to the early retirement of debt.

In March 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASU 2017-07), requiring an employer to report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. As of March 31, 2017 we recorded $4.8 million in other components of net periodic benefit cost, along with a reclassification of $5.1 million from wages and benefits to other components of net periodic benefit cost in the prior period.

Income Taxes

The effective tax rates for the three months ended March 31, 2017 and 2016 were 28.3% and 38.1%, respectively. We expect our full year 2017 effective tax rate to be higher than our effective tax rate for the three months ended March 31, 2017. The 28.3% rate includes a discrete item for the excess tax benefit from equity awards which is not expected to be as significant throughout the remainder of 2017 due to the timing of our stock compensation vesting. We consider a variety of factors in determining our effective tax rate, including our forecasted full-year pretax results, the U.S. federal statutory rate, expected nondeductible expenses, and estimated state taxes.

Liquidity and Capital Resources

Our liquidity is dependent on the cash we generate from operating activities and our debt financing arrangements. As of March 31, 2017, we had $466.8 million in cash and cash equivalents and $273.7 million in short-term investments, an increase of $130.4 million from December 31, 2016.

We have been able to generate sufficient funds from our operations to meet our working capital requirements and periodically finance our aircraft through secured debt and lease financings. At March 31, 2017, we had approximately $535.5 million of debt and capital lease obligations, including approximately $58.4 million classified as a current liability in the unaudited Consolidated Balance Sheets. See the Contractual Obligations table below for a description of our estimated contractual obligations as of March 31, 2017.

We also have access to a secured revolving credit and letter of credit facility in an amount of up to $225 million, maturing in December 2019. As of March 31, 2017, we had no outstanding borrowings under the revolving credit facility.

Cash Flows

Net cash provided by operating activities was $208.9 million and $198.5 million for the three months ended March 31, 2017 and 2016, respectively. The increase was primarily due to an increase in air traffic liability, partially offset by a decrease in net income.

Net cash used in investing activities was $43.0 million for the three months ended March 31, 2017 due to purchases of property and equipment, and pre-delivery payments for future aircraft deliveries, offset by a net cash inflow related to investment activity.

Net cash used in financing activities was $29.2 million for the three months ended March 31, 2017 primarily due to the repayment of long-term debt and capital lease obligations.


30



Capital Commitments

As of March 31, 2017, we had the following capital commitments consisting of firm aircraft and engine orders and purchase rights: 
Aircraft Type
 
Firm Orders
 
Purchase Rights
 
Expected Delivery Dates
A330-200 aircraft
 
1

 

 
In 2017
A321neo aircraft
 
16

 
9

 
Between 2017 and 2020
A330-800neo aircraft
 
6

 
6

 
Between 2019 and 2021
Pratt & Whitney spare engines:
 
 

 
 

 
 
A321neo spare engines
 
3

 
2

 
Between 2017 and 2019
Rolls-Royce spare engines:
 
 

 
 

 
 
A330-800neo spare engines
 
2

 
2

 
Between 2019 and 2026
 
Committed expenditures for these aircraft, engines and related flight equipment approximates $205 million for the remainder of 2017, $409 million in 2018, $489 million in 2019, $236 million in 2020, $166 million in 2021 and $130 million thereafter.

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

Stock Repurchase Program

In April 2015, our Board of Directors approved a stock repurchase program under which we may purchase up to $100 million of our outstanding common stock over a two-year period ending in April 2017 through the open market, established plans or privately negotiated transactions in accordance with applicable securities laws, rules and regulations. The stock repurchase program is subject to modification or termination at any time. We had no stock repurchase activity during the three months ended March 31, 2017. As of March 31, 2017, we had $46 million remaining to spend under the stock repurchase program. See Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds” of this report for additional information on the stock repurchase program.

In April 2017, our Board of Directors approved a modification to the stock repurchase program. Such modification extends the stock repurchase program through May 2019 and increases the current share authorization to $100 million of our outstanding common stock.

Credit Card Holdbacks

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

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

Pension and Postemployment Benefit Plan Funding

We contributed $6.4 million to our defined benefit and other postretirement plans during the three months ended March 31, 2017. Future funding requirements for our defined benefit plans are dependent upon many factors such as interest rates, funded status, applicable regulatory requirements and the level and timing of asset returns.

On March 24, 2017, we announced the ratification of a 63-month contract amendment with our pilots as represented by the Air

31



Line Pilots Association (ALPA). In the second half of the year, we currently estimate to make a one-time cash payment between $100 million and $110 million to settle a portion of our outstanding other post-retirement plan obligation with our pilots. We currently estimate to also incur a financial charge between $10 million and $15 million related to the settlement when it occurs.

Contractual Obligations
 
Our estimated contractual obligations as of March 31, 2017 are summarized in the following table: 
Contractual Obligations
 
Total
 
Remaining in 2017
 
2018 - 2019
 
2020 - 2021
 
2022 and
thereafter
 
 
(in thousands)
Debt and capital lease obligations (1)
 
$
670,308

 
$
56,453

 
$
192,341

 
$
119,008

 
$
302,506

Operating leases—aircraft and related equipment (2) 
 
710,475

 
89,912

 
235,889

 
162,447

 
222,227

Operating leases—non-aircraft
 
139,298

 
4,119

 
13,986

 
13,442

 
107,751

Purchase commitments - Capital (3) 
 
1,635,166

 
204,880

 
898,393

 
402,023

 
129,870

Purchase commitments - Operating (4) 
 
685,572

 
59,351

 
123,061

 
112,290

 
390,870

Projected employee benefit contributions (5) 
 
72,833

 
43,633

 
29,200

 

 

Total contractual obligations
 
$
3,913,652

 
$
458,348

 
$
1,492,870

 
$
809,210

 
$
1,153,224


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

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

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

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

(5)
Amounts include our estimated minimum contributions to our pension plans (based on actuarially determined estimates) and contributions to our pilots’ disability plan. Amounts are subject to change based on numerous factors, including interest rate levels, the amount and timing of asset returns and the impact of future legislation. We are currently unable to estimate the projected contributions beyond 2019. As discussed in Note 10 herein, "Employee Benefits Plans", we currently estimate to make a one-time cash payment between $100 million and $110 million to settle a portion of our outstanding other post-retirement plan obligation with our pilots. As the amount is not yet finalized, it is not included in the table above.

Non-GAAP Financial Measures

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

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

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

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

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

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


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Changes in fair value of derivative contracts, net of tax, are based on market prices for open contracts as of the end of the reporting period. This line item includes the unrealized amounts of fuel and interest rate derivatives (not designated as hedges) that will settle in future periods and the reversal of prior period unrealized amounts. We believe that excluding the impact of these derivative adjustments allows investors to better analyze our operational performance and compare its results to other airlines in the periods presented below.
Loss on extinguishment of debt, net of tax, is excluded to allow investors to better analyze our operational performance and compare our results to other airlines in the periods presented below.
During the three months ended March 31, 2017, we accrued $18.7 million related to (1) a one-time payment to reduce the future 401K employer contribution for certain pilot groups, which is not recoverable once paid, and (2) a one-time true up of the pilot vacation accrual at the new negotiated contract rates. These one-time charges are considered special items and are not expected to represent ongoing expenses. We believe that excluding such special items allows investors to better analyze our operational performance and compare our results to other airlines in the periods presented below.
 
 
Three months ended March 31,
 
 
2017
 
2016
 
 
Total
 
Diluted Per Share
 
Total
 
Diluted Per Share
GAAP net income, as reported
 
$
36,912

 
$
0.68

 
$
51,466

 
$
0.95

Add: changes in fair value of derivative contracts
 
11,387

 
0.21

 
(16,960
)
 
(0.31
)
Add: loss on extinguishment of debt
 

 

 
3,350

 
0.06

Add: special items
 
18,679

 
0.35

 

 

Tax effect of adjustments
 
(11,001
)
 
$
(0.20
)
 
5,172


$
0.10

Adjusted net income
 
$
55,977

 
$
1.04

 
$
43,028

 
$
0.80


Operating Costs per Available Seat Mile (CASM)

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

CASM and CASM - excluding aircraft fuel and special items, are summarized in the table below: 
 
 
Three months ended March 31,
 
 
2017
 
2016
 
 
(in thousands, except as otherwise indicated)
GAAP operating expenses
 
$
546,891

 
$
454,230

Less: aircraft fuel, including taxes and delivery
 
(103,538
)
 
(69,900
)
Less: special items
 
$
(18,679
)
 
$

Adjusted operating expenses - excluding aircraft fuel and special items
 
$
424,674

 
$
384,330

Available Seat Miles
 
4,522,353

 
4,368,096

CASM - GAAP
 

12.09
¢
 

10.40
¢
Less: aircraft fuel
 
(2.29
)
 
(1.60
)
Less: special items
 
(0.41
)
 

CASM - excluding aircraft fuel and special items
 

9.39
¢
 

8.80
¢
 
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

33



expenses, and related disclosures of contingent assets and liabilities as of the date of the financial statements. Actual results may differ from these estimates under different assumptions and/or conditions.

Critical accounting policies and estimates are defined as those accounting policies and accounting estimates that are reflective of significant judgments and uncertainties that potentially result in materially different results under different assumptions and conditions. For a detailed discussion of the application of our critical accounting policies, see Note 2 herein, "Significant Accounting Policies," and the section titled “Critical Accounting Policies and Estimates” and Note 1, “Summary of Significant Accounting Policies,” to our Consolidated Financial Statements for the year ended December 31, 2016 included in our Annual Report on Form 10-K.

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

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

Aircraft Fuel Costs

Aircraft fuel costs constitute a significant portion of our operating expense. Fuel costs represented 19% and 15% of our operating expenses for the three months ended March 31, 2017 and March 31, 2016, respectively. Approximately 72% of our fuel was based on Singapore jet fuel prices and 28% was based on U.S. West Coast jet fuel prices. Based on the amount of fuel expected to be consumed for the remainder of 2017, for every one cent increase in the cost of a gallon of jet fuel, our fuel expense would increase by approximately $2.0 million, excluding the impact of our fuel hedge program.

We periodically enter into derivative financial instruments to manage our exposure to changes in the price of jet fuel. During the three months ended March 31, 2017, our fuel hedge program primarily consisted of heating oil swaps and crude oil call options. Swaps provide for a settlement in our favor in the event the prices exceed a predetermined contractual level and are unfavorable in the event prices fall below a predetermined contractual level. With call options, we are hedged against spikes in crude oil prices, and during a period of decline in crude oil prices we only forfeit cash previously paid for hedge premiums.

As of March 31, 2017, we hedged approximately 41% of our projected fuel requirements for the remainder of 2017 with heating oil swaps and crude oil call options. As of March 31, 2017, the fair value of these fuel derivative agreements reflected a net asset of $5.3 million recorded in prepaid expenses and other assets in the unaudited Consolidated Balance Sheets.

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

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

Interest Rates
 
Changes in market interest rates have a direct and corresponding effect on our pre-tax earnings and cash flows associated with interest-bearing cash accounts. Based on the balances of our cash and cash equivalents and restricted cash as of March 31, 2017, a change in interest rates is unlikely to have a material impact on our results of operations.

At March 31, 2017, we had $548.7 million of fixed-rate debt including capital lease obligations, facility agreements for aircraft purchases, and the outstanding equipment notes related to our 2013 EETC financing. Market risk for fixed-rate long-term debt is estimated as the potential increase in fair value resulting from a hypothetical 10% decrease in interest rates, and amounted to approximately $11.1 million as of March 31, 2017.


34



Foreign Currency

We generate revenues and incur expenses in foreign currencies. Changes in foreign currency exchange rates impact our results of operations through changes in the dollar value of foreign currency-denominated operating revenues and expenses. Our most significant foreign currency exposures are the Japanese Yen and Australian Dollar. Based on expected remaining 2017 revenues and expenses denominated in Japanese Yen and Australian Dollars, a 10% strengthening in value of the U.S. dollar, relative to the Japanese Yen and Australian Dollar, would result in a decrease in operating income of approximately $22.2 million and $13.0 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 March 31, 2017, the fair value of our foreign currency forwards reflected a net liability of $0.1 million recorded in other accrued liabilities in the unaudited Consolidated Balance Sheets.

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

Our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), performed an evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)), which have been designed to permit us to effectively identify and timely disclose important information. Based on that evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures were effective as of March 31, 2017 to provide reasonable assurance that the information required to be disclosed by the Company in reports it files under the Exchange Act, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and is accumulated and communicated to our management, including our CEO and CFO, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended March 31, 2017 which materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

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


35



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

ITEM 2.                                                UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
 
In April 2015, our Board of Directors approved a stock repurchase program under which we may repurchase up to $100 million of our outstanding common stock over a two-year period through the open market, established plans or privately negotiated transactions in accordance with all applicable securities laws, rules and regulations. The stock repurchase program is subject to modification or termination at any time. We had no stock repurchase activity during the three months ended March 31, 2017. As of March 31, 2017, we had $46.0 million remaining to spend under the stock repurchase program.

In April 2017, our Board of Directors approved a modification to the stock repurchase program. Such modification extends the stock repurchase program through May 2019 and increases the current share authorization to $100 million of our outstanding common stock.

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

ITEM 5.                                                OTHER INFORMATION.
 
None.


36



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


37



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:
April 21, 2017
By:
/s/ Shannon L. Okinaka
 
 
 
Shannon L. Okinaka
 
 
 
Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)


38