HA-09.30.2014-10Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 FORM 10-Q
 
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2014
or
 o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from       to       
 
Commission file number 1-31443
 HAWAIIAN HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
 
71-0879698
(State or Other Jurisdiction of
 
(I.R.S. Employer
Incorporation or Organization)
 
Identification No.)
 
3375 Koapaka Street, Suite G-350
 
 
Honolulu, HI
 
96819
(Address of Principal Executive Offices)
 
(Zip Code)
 
(808) 835-3700
(Registrant’s Telephone Number, Including Area Code)
  
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  ý Yes o No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  ý Yes o No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o
 
Accelerated filer x
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o Yes ý No
 
As of October 17, 2014, 54,023,742 shares of the registrant’s common stock were outstanding.




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

2



PART I. FINANCIAL INFORMATION

ITEM 1.               FINANCIAL STATEMENTS.

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

 
 

 
 
 
 
Passenger
 
$
566,985

 
$
543,315

 
$
1,541,795

 
$
1,464,715

Other
 
72,477

 
55,983

 
198,245

 
159,265

Total
 
639,462

 
599,298

 
1,740,040

 
1,623,980

Operating Expenses:
 
 

 
 

 
 
 
 
Aircraft fuel, including taxes and delivery
 
182,219

 
181,334

 
527,497

 
525,046

Wages and benefits
 
114,469

 
112,150

 
334,441

 
318,269

Aircraft rent
 
26,724

 
27,575

 
79,098

 
81,879

Maintenance materials and repairs
 
51,293

 
51,705

 
168,002

 
160,000

Aircraft and passenger servicing
 
31,848

 
31,080

 
92,929

 
89,367

Commissions and other selling
 
32,015

 
32,288

 
94,123

 
98,285

Depreciation and amortization
 
24,384

 
22,092

 
70,960

 
60,993

Other rentals and landing fees
 
23,637

 
21,996

 
65,855

 
60,773

Other
 
46,704

 
44,644

 
139,335

 
129,469

Total
 
533,293

 
524,864

 
1,572,240

 
1,524,081

Operating Income
 
106,169

 
74,434

 
167,800

 
99,899

Nonoperating Income (Expense):
 
 

 
 

 
 
 
 
Interest expense and amortization of debt discounts and issuance costs
 
(17,104
)
 
(13,479
)
 
(48,111
)
 
(37,019
)
Interest income
 
471

 
173

 
1,088

 
426

Capitalized interest
 
1,834

 
3,005

 
6,584

 
9,336

Gains (losses) on fuel derivatives
 
(27,892
)
 
2,536

 
(28,506
)
 
(10,931
)
Other, net
 
(5,114
)
 
749

 
(3,804
)
 
(3,457
)
Total
 
(47,805
)
 
(7,016
)
 
(72,749
)
 
(41,645
)
Income Before Income Taxes
 
58,364

 
67,418

 
95,051

 
58,254

Income tax expense
 
22,789

 
26,814

 
37,224

 
23,479

Net Income
 
$
35,575

 
$
40,604

 
$
57,827

 
$
34,775

Net Income Per Common Stock
 
 

 
 

 
0

 
 
Basic
 
$
0.66

 
$
0.78

 
$
1.08

 
$
0.67

Diluted
 
$
0.56

 
$
0.76

 
$
0.94

 
$
0.65

 
See accompanying Notes to Consolidated Financial Statements.


3



Hawaiian Holdings, Inc.
Consolidated Statements of Comprehensive Income
(in thousands)
 
 
 
Three Months Ended September 30,
 
 
2014
 
2013
 
 
(unaudited)
Net Income
 
$
35,575

 
$
40,604

Other comprehensive income (loss), net:
 
 

 
 

Net change related to employee benefit plans, net of tax expense of $3 and $899 for 2014 and 2013, respectively
 
44

 
1,381

Net change in derivative instruments, net of tax expense of $4,308 and tax benefit of $2,610 for 2014 and 2013, respectively
 
7,081

 
(4,465
)
Net change in available-for-sale investments, net of tax benefit of $54 for 2014
 
(90
)
 

Total other comprehensive income (loss)
 
7,035

 
(3,084
)
Total Comprehensive Income
 
$
42,610

 
$
37,520

 
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
 
(unaudited)
Net Income
 
$
57,827

 
$
34,775

Other comprehensive income (loss), net:
 
 

 
 

Net change related to employee benefit plans, net of tax expense of $213 and $3,034 for 2014 and 2013, respectively
 
389

 
3,347

Net change in derivative instruments, net of tax benefit of $1,045 for 2014 and tax expense of $1,942 for 2013, respectively
 
(1,726
)
 
2,991

Net change in available-for-sale investments, net of tax benefit of $33 for 2014
 
(55
)
 

Total other comprehensive income (loss)
 
(1,392
)
 
6,338

Total Comprehensive Income
 
$
56,435

 
$
41,113

 
See accompanying Notes to Consolidated Financial Statements.


4



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

 
 

Current Assets:
 
 

 
 

Cash and cash equivalents
 
$
328,255

 
$
423,384

Restricted cash
 
6,566

 
19,434

Short-term investments
 
253,300

 

Accounts receivable, net
 
82,902

 
74,245

Spare parts and supplies, net
 
20,287

 
19,767

Deferred tax assets, net
 
17,325

 
17,325

Prepaid expenses and other
 
47,677

 
51,652

Total
 
756,312

 
605,807

Property and equipment, less accumulated depreciation and amortization of $344,727 and $327,102 as of September 30, 2014 and December 31, 2013, respectively
 
1,630,978

 
1,334,332

Other Assets:
 
 

 
 

Long-term prepayments and other
 
99,323

 
91,953

Restricted cash
 

 
1,566

Intangible assets, less accumulated amortization of $33,774 and $175,730 as of September 30, 2014 and December 31, 2013, respectively
 
21,960

 
23,940

Goodwill
 
106,663

 
106,663

Total Assets
 
$
2,615,236

 
$
2,164,261

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

Current Liabilities:
 
 

 
 

Accounts payable
 
$
78,350

 
$
89,787

Air traffic liability
 
487,525

 
409,086

Other accrued liabilities
 
114,717

 
97,571

Current maturities of long-term debt, less discount, and capital lease obligations
 
171,054

 
62,187

Total
 
851,646

 
658,631

Long-Term Debt, less discount, and Capital Lease Obligations
 
885,486

 
744,286

Other Liabilities and Deferred Credits:
 
 

 
 

Accumulated pension and other postretirement benefit obligations
 
268,703

 
264,106

Other liabilities and deferred credits
 
70,129

 
59,424

Deferred tax liability, net
 
78,513

 
40,950

Total
 
417,345

 
364,480

Commitments and Contingencies
 


 


Shareholders’ Equity:
 
 

 
 

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

 

Common stock, $0.01 par value per share, 54,007,425 and 52,423,085 shares issued and outstanding as of September 30, 2014 and December 31, 2013, respectively
 
540

 
524

Capital in excess of par value
 
277,328

 
269,884

Accumulated income
 
226,969

 
169,142

Accumulated other comprehensive loss, net
 
(44,078
)
 
(42,686
)
Total
 
460,759

 
396,864

Total Liabilities and Shareholders’ Equity
 
$
2,615,236

 
$
2,164,261

 
See accompanying Notes to Consolidated Financial Statements.

5



Hawaiian Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
 
 
 
Nine months ended September 30,
 
 
2014
 
2013
 
 
(unaudited)
Net cash provided by Operating Activities
 
$
252,163

 
$
207,475

Cash flows from Investing Activities:
 
 

 
 

Additions to property and equipment, including pre-delivery payments, net
 
(361,290
)
 
(232,717
)
Net proceeds from disposition of equipment
 
978

 

Purchases of investments
 
(346,010
)
 

Sales of investments
 
92,103

 

Net cash used in investing activities
 
(614,219
)
 
(232,717
)
Cash flows from Financing Activities:
 
 

 
 

Proceeds from exercise of stock options
 
5,487

 
2,376

Long-term borrowings
 
293,430

 
132,000

Repayments of long-term debt and capital lease obligations
 
(46,392
)
 
(45,200
)
Debt issuance costs
 
(32
)
 
(12,416
)
Change in restricted cash
 
14,434

 
(16,000
)
Net cash provided by financing activities
 
266,927

 
60,760

Net increase (decrease) in cash and cash equivalents
 
(95,129
)
 
35,518

Cash and cash equivalents - Beginning of Period
 
423,384

 
405,880

Cash and cash equivalents - End of Period
 
$
328,255

 
$
441,398

 
See accompanying Notes to Consolidated Financial Statements.


6



Hawaiian Holdings, Inc.
 
Notes to Consolidated Financial Statements (Unaudited)
 
1. Business and Basis of Presentation
 
Hawaiian Holdings, Inc. (the Company or Holdings) is a holding company incorporated in the State of Delaware. The Company’s primary asset is its sole ownership of all issued and outstanding shares of common stock of Hawaiian Airlines, Inc. (Hawaiian). The accompanying unaudited financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X of the U.S. Securities and Exchange Commission (SEC).  Accordingly, these interim financial statements do not include all of the information and footnotes required by GAAP for complete financial statements.  In the opinion of management, the accompanying financial statements contain all adjustments, including normal recurring adjustments, necessary for the fair presentation of the Company’s results of operations and financial position for the periods presented.  Due to seasonal fluctuations, among other factors common to the airline industry, the results of operations for the periods presented are not necessarily indicative of the results of operations to be expected for the entire year.  The accompanying unaudited Consolidated Financial Statements should be read in conjunction with the financial statements and the notes of the Company included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013.
 
2. Significant Accounting Policies
 
Sale of Frequent Flyer Miles

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

Recently Issued Accounting Pronouncements

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


7



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

The following is a summary of short-term investments held as of September 30, 2014:
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
 
(in thousands)
Corporate debt
 
$
184,141

 
$
91

 
$
(193
)
 
$
184,039

U.S. government and agency debt
 
23,797

 
11

 
(2
)
 
23,806

Municipal bonds
 
22,924

 
7

 
(4
)
 
22,927

Other fixed income securities
 
22,533

 

 
(5
)
 
22,528

Total short-term investments
 
$
253,395

 
$
109

 
$
(204
)
 
$
253,300

 
Contractual maturities of short-term investments as of September 30, 2014 are shown below. 
 
 
Under 1 Year
 
1 to 5 Years
 
Total
 
 
(in thousands)
Corporate debt
 
$
80,081

 
$
103,958

 
$
184,039

U.S. government and agency debt
 
16,325

 
7,481

 
23,806

Municipal bonds
 
8,244

 
14,683

 
22,927

Other fixed income securities
 
22,528

 

 
22,528

Total short-term investments
 
$
127,178

 
$
126,122

 
$
253,300

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

8



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

 
 

 
 

 
 

 
 
Foreign currency derivative gains, net
 
$
(1,297
)
 
$
(3,005
)
 
$
(6,523
)
 
$
(6,395
)
 
Passenger revenue
Interest rate derivative losses, net
 
201

 
217

 
618

 
440

 
Interest expense
Total before tax
 
(1,096
)
 
(2,788
)
 
(5,905
)
 
(5,955
)
 
 
Tax expense
 
424

 
1,025

 
2,239

 
2,226

 
 
Total, net of tax
 
$
(672
)
 
$
(1,763
)
 
$
(3,666
)
 
$
(3,729
)
 
 
Amortization of defined benefit pension items
 
 

 
 

 
 

 
 

 
 
Actuarial loss (gain)
 
$
(64
)
 
$
2,281

 
$
388

 
$
6,384

 
Wages and benefits
Prior service cost (credit)
 
113

 
(1
)
 
111

 
(3
)
 
Wages and benefits
Total before tax
 
49

 
2,280

 
499

 
6,381

 
 
Tax benefit
 
(5
)
 
(899
)
 
(215
)
 
(3,034
)
 
 
Total, net of tax
 
$
44

 
$
1,381

 
$
284

 
$
3,347

 
 
Short-term investments
 
 

 
 

 
 

 
 

 
 
Realized gain on sales of investments, net
 
$
(10
)
 
$

 
$
(12
)
 
$

 
Other nonoperating income
Total before tax
 
(10
)
 

 
(12
)
 

 
 
Tax expense
 
1

 

 
1

 

 
 
Total, net of tax
 
$
(9
)
 
$

 
$
(11
)
 
$

 
 
Total reclassifications for the period
 
$
(637
)
 
$
(382
)
 
$
(3,393
)
 
$
(382
)
 
 

A rollforward of the amounts included in accumulated other comprehensive loss, net of taxes, for the three and nine months ended September 30, 2014 and 2013 is as follows:
Three months ended September 30, 2014
 
Interest
Rate
Derivatives
 
Foreign
Currency
Derivatives
 
Defined
Benefit
Pension
Items
 
Short-Term Investments
 
Total
 
 
(in thousands)
Beginning balance
 
$
471

 
$
95

 
$
(51,714
)
 
$
35

 
$
(51,113
)
Other comprehensive income (loss) before reclassifications, net of tax
 
39

 
7,714

 

 
(81
)
 
7,672

Amounts reclassified from accumulated other comprehensive income (loss), net of tax
 
121

 
(793
)
 
44

 
(9
)
 
(637
)
Net current-period other comprehensive income (loss)
 
160

 
6,921

 
44

 
(90
)
 
7,035

Ending balance
 
$
631

 
$
7,016

 
$
(51,670
)
 
$
(55
)
 
$
(44,078
)
 

9



Three months ended September 30, 2013
 
Interest
Rate
Derivatives
 
Foreign
Currency
Derivatives
 
Defined
Benefit
Pension
Items
 
Total
 
 
(in thousands)
Beginning balance
 
$
766

 
$
6,690

 
$
(112,088
)
 
$
(104,632
)
Other comprehensive loss before reclassifications, net of tax
 
(220
)
 
(2,482
)
 

 
(2,702
)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax
 
135

 
(1,898
)
 
1,381

 
(382
)
Net current-period other comprehensive income (loss)
 
(85
)
 
(4,380
)
 
1,381

 
(3,084
)
Ending balance
 
$
681

 
$
2,310

 
$
(110,707
)
 
$
(107,716
)
Nine months ended September 30, 2014
 
Interest
Rate
Derivatives
 
Foreign
Currency
Derivatives
 
Defined
Benefit
Pension
Items
 
Short-Term Investments
 
Total
 
 
(in thousands)
Beginning balance
 
$
1,096

 
$
8,277

 
$
(52,059
)
 
$

 
$
(42,686
)
Other comprehensive income (loss) before reclassifications, net of tax
 
(844
)
 
2,784

 
105

 
(44
)
 
2,001

Amounts reclassified from accumulated other comprehensive income (loss), net of tax
 
379

 
(4,045
)
 
284

 
(11
)
 
(3,393
)
Net current-period other comprehensive income (loss)
 
(465
)
 
(1,261
)
 
389

 
(55
)
 
(1,392
)
Ending balance
 
$
631

 
$
7,016

 
$
(51,670
)
 
$
(55
)
 
$
(44,078
)
Nine months ended September 30, 2013
 
Interest
Rate
Derivatives
 
Foreign
Currency
Derivatives
 
Defined
Benefit
Pension
Items
 
Total
 
 
(in thousands)
Beginning balance
 
$

 
$

 
$
(114,054
)
 
$
(114,054
)
Other comprehensive income before reclassifications, net of tax
 
409

 
6,311

 

 
6,720

Amounts reclassified from accumulated other comprehensive income (loss), net of tax
 
272

 
(4,001
)
 
3,347

 
(382
)
Net current-period other comprehensive income
 
681

 
2,310

 
3,347

 
6,338

Ending balance
 
$
681

 
$
2,310

 
$
(110,707
)
 
$
(107,716
)

5. 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. 

10



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

 
 

 
 

 
 

Net Income
 
$
35,575

 
$
40,604

 
$
57,827

 
$
34,775

Denominator:
 
 

 
 

 
 

 
 

Weighted average common stock shares outstanding - Basic
 
53,878

 
52,303

 
53,359

 
51,994

Assumed exercise of stock options and awards
 
848

 
1,209

 
1,061

 
1,166

Assumed conversion of convertible note premium
 
4,965

 

 
4,498

 

Assumed conversion of warrants
 
3,359

 

 
2,767

 

Weighted average common stock shares outstanding - Diluted
 
63,050

 
53,512

 
61,685

 
53,160

Net Income per common share
 
 

 
 

 
 

 
 

Basic
 
$
0.66

 
$
0.78

 
$
1.08

 
$
0.67

Diluted
 
$
0.56

 
$
0.76

 
$
0.94

 
$
0.65

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

 

 

 
522

Deferred stock
 

 

 

 
58

Restricted stock
 
7

 
1,031

 
2

 
1,494

Convertible note premium
 

 
10,943

 

 
10,943

Warrants
 

 
10,943

 

 
10,943


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

11



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

The tables below present the Company’s financial assets and liabilities measured at fair value on a recurring basis:
 
 
 
Fair Value Measurements as of September 30, 2014
 
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
(in thousands)
Cash equivalents
 
$
155,967

 
$
152,967

 
$
3,000

 
$

Restricted cash
 
6,566

 
6,566

 

 

Short-term investments
 
253,300

 

 
253,300

 

Fuel derivative contracts:
 
0

 
 

 
 

 
 

Crude oil call options
 
50

 

 
50

 

Crude oil put options
 
4

 

 
4

 

Heating oil put options
 
845

 

 
845

 

Foreign currency derivatives
 
11,851

 

 
11,851

 

Interest rate derivative
 
452

 

 
452

 

Total assets measured at fair value
 
$
429,035

 
$
159,533

 
$
269,502

 
$

Fuel derivative contracts:
 
 

 
 

 
 

 
 

Crude oil call options
 
$
50

 
$

 
$
50

 
$

Crude oil put options
 
4

 

 
4

 

Heating oil swaps
 
19,515

 

 
19,515

 

Foreign currency derivatives
 
118

 

 
118

 

Negative arbitrage derivative
 
500

 

 

 
500

Total liabilities measured at fair value
 
$
20,187

 
$

 
$
19,687

 
$
500

 

12



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

 
$
269,384

 
$

 
$

Restricted cash
 
21,000

 
21,000

 

 

Fuel derivative contracts:
 
0

 
 

 
 

 
 

Crude oil call options
 
7,121

 

 
7,121

 

Crude oil put options
 
186

 

 
186

 

Heating oil put options
 
417

 

 
417

 

Heating oil swaps
 
5,863

 

 
5,863

 

Foreign currency derivatives
 
12,494

 

 
12,494

 

Interest rate derivative
 
1,121

 

 
1,121

 

Total assets measured at fair value
 
$
317,586

 
$
290,384

 
$
27,202

 
$

Fuel derivative contracts:
 
 

 
 

 
 

 
 

Crude oil call options
 
$
7,121

 
$

 
$
7,121

 
$

Crude oil put options
 
186

 

 
186

 

Heating oil swaps
 
187

 

 
187

 

Foreign currency derivatives
 
1,188

 

 
1,188

 

Negative arbitrage derivative
 
12,865

 

 

 
12,865

Total liabilities measured at fair value
 
$
21,547

 
$

 
$
8,682

 
$
12,865

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

Fuel derivative contracts.  The Company’s fuel derivative contracts consist of heating oil puts and swaps, and Brent crude oil call options and collars (a combination of purchased call options and sold put options of crude oil) which are not traded on a public exchange. The fair value of these instruments are determined based on inputs available or derived from public markets including contractual terms, market prices, yield curves and measures of volatility among others.
 
Foreign currency derivatives.  The Company’s foreign currency derivatives consist of Japanese Yen and Australian Dollar forward contracts and are valued based primarily on data available or derived from public markets.
 
Interest rate derivative.  The Company’s interest rate derivative consists of an interest rate swap and is valued based primarily on data available or derived from public markets.
 
Negative arbitrage derivative.  The Company’s negative arbitrage derivative represents the net interest owed to the trusts that issued the Company’s enhanced equipment trust certificates during the periods prior to the issuance of the related equipment notes, and is valued based primarily on the discounted amount of future cash flows using the appropriate rate of borrowing. Changes to those discount rates would be unlikely to cause material changes in the fair value of the negative arbitrage derivative (refer to Notes 7 and 10 for more information).


13



The table below presents disclosures about the activity for the Company’s “Level 3” financial liability during the three and nine months ended September 30, 2014 and 2013
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
Beginning balance
$
3,668

 
$
12,865

 
$
12,865

 
$

Issuance of enhanced equipment trust certificates

 

 

 
12,865

Reduction of balance in connection with interest payment
(3,168
)
 

 
(12,365
)
 

Ending balance
$
500

 
$
12,865

 
$
500

 
$
12,865


The table below presents the Company’s debt (excluding obligations under capital leases) measured at fair value: 
Fair Value of Debt
September 30, 2014
 
December 31, 2013
Carrying
 
Fair Value
 
Carrying
 
Fair Value
Amount
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Amount
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
(in thousands)
 
 
 
(in thousands)
$
952,467

 
$
1,030,224

 
$

 
$
142,071

 
$
888,153

 
$
695,804

 
$
738,563

 
$

 
$
104,656

 
$
633,907

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

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

The following table reflects the amount of realized and unrealized gains and losses recorded as nonoperating income (expense) in the unaudited Consolidated Statements of Operations.
 
 
Three months ended September 30,
 
Nine months ended September 30,
Fuel derivative contracts
 
2014
 
2013
 
2014
 
2013
 
 
(in thousands)
Losses realized at settlement
 
$
(4,632
)
 
$
(3,790
)
 
$
(6,530
)
 
$
(11,226
)
Reversal of prior period unrealized amounts
 
56

 
4,278

 
(1,816
)
 
5,472

Unrealized gains (losses) that will settle in future periods
 
(23,316
)
 
2,048

 
(20,160
)
 
(5,177
)
Gains (losses) on fuel derivatives recorded as Nonoperating income (expense)
 
$
(27,892
)
 
$
2,536

 
$
(28,506
)
 
$
(10,931
)

14




Interest Rate Risk Management
 
The Company is exposed to market risk from adverse changes in interest rates associated with its long-term debt obligations. Market risk associated with fixed-rate and variable-rate long-term debt relates to the potential reduction in fair value and negative impact to future earnings, respectively, from an increase in interest rates.
 
To limit the Company’s exposure to interest rate risk inherent in one of its variable-rate debt instruments, which was used to finance an aircraft delivered in 2013, the Company entered into a forward starting interest rate swap agreement.  The interest rate swap agreement is designated as a cash flow hedge under ASC 815.
  
The Company believes that its interest rate derivative contract will continue to be effective in offsetting changes in cash flow attributable to the hedged risk. The Company reclassified $0.2 million and $0.6 million in net losses from AOCI to interest expense during the three and nine months ended September 30, 2014, respectively. The Company expects to reclassify a net loss of approximately $0.7 million into earnings over the next 12 months from AOCI based on the values at September 30, 2014.
 
Foreign Currency Exchange Rate Risk Management
 
The Company is subject to foreign currency exchange rate risk due to revenues and expenses denominated in foreign currencies, with the primary exposures being the Japanese Yen and Australian Dollar. To manage exchange rate risk, the Company executes its international revenue and expense transactions in the same foreign currency to the extent practicable.
 
The Company enters into foreign currency forward contracts, certain of which are designated as cash flow hedges under ASC 815, to further manage the effects of fluctuating exchange rates. The effective portion of the gain or loss of designated cash flow hedges is reported as a component of AOCI and reclassified into earnings in the same period in which the related sales are recognized as passenger revenue. The effective portion of the foreign currency forward contracts represents the change in fair value of the hedge that offsets the change in the fair value of the hedged item. To the extent the change in the fair value of the hedge does not perfectly offset the change in the fair value of the hedged item, the ineffective portion of the hedge is immediately recognized as nonoperating income (expense). Foreign currency forward contracts that are not designated as cash flow hedges are recorded at fair value, and any changes in fair value are recognized as other nonoperating income (expense) in the period of change.
 
The Company believes that its foreign currency forward contracts that are designated as cash flow hedges will continue to be effective in offsetting changes in cash flow attributable to the hedged risk. The Company reclassified $1.3 million and $6.5 million in gains from AOCI to passenger revenue during the three and nine months ended September 30, 2014, respectively. The Company expects to reclassify a net gain of approximately $8.1 million into earnings over the next 12 months from AOCI based on the values at September 30, 2014.
 
Negative Arbitrage Derivative
 
In 2013, the Company created two pass-through trusts, which issued $444.5 million aggregate principal amount of EETCs. See Note 10 for further information related to the EETCs. In accordance with the related agreements, the Company is obligated to pay the interest that accrues on the proceeds and is also entitled to the benefits of the income generated from the same proceeds. The difference between the interest owed to the pass-through trusts and the interest generated from the proceeds introduces an element of variability that could cause the associated cash flows to fluctuate. This variability requires the Company’s obligation to the trusts to be recognized as a derivative in the Company’s unaudited consolidated financial statements.  During the three and nine months ended September 30, 2014, approximately $3.2 million and $12.4 million of the derivative was reduced in connection with the interest payments made to the trusts, respectively.

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 September 30, 2014 

15



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

 
 

 
 

Interest rate derivative
 
Prepaid expenses and other
 
$59,000 U.S. dollars
 
April 2023
 
$
73

 
$

 
$
73

 
 
Long-term prepayments and other (1)
 
 
 
 
 
379

 

 
379

Foreign currency derivatives
 
Prepaid expenses and other
 
7,218,469 Japanese Yen
52,209 Australian Dollars
 
September 2015
 
7,448

 
(14
)
 
7,434

 
 
Long-term prepayments and other
 
3,384,130 Japanese Yen
9,707 Australian Dollars
 
August 2016
 
2,514

 

 
2,514

Derivatives not designated as hedges
 
 
 
 
 
 
 
 

 
 

 
0

Foreign currency derivatives
 
Prepaid expenses and other
 
9,415,313 Japanese Yen
48,981 Australian Dollars
 
September 2015
 
1,529

 
(104
)
 
1,425

 
 
Long-term prepayments and other
 
3,910,000 Japanese Yen
9,700 Australian Dollars
 
August 2016
 
360

 

 
360

Fuel derivative contracts
 
Other accrued liabilities
 
93,211 gallons
 
September 2015
 
899

 
(19,569
)
 
(18,670
)
Negative arbitrage derivative
 
Other accrued liabilities
 
$444,540 U.S. dollars
 
January 2015
 

 
(500
)
 
(500
)
 
(1)
Represents the noncurrent portion of the $59.0 million interest rate derivative with final maturity in April 2023.


16



Derivative position as of December 31, 2013

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

 
 

 
 

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

 
$

 
$
196

 
 
Long-term prepayments and other (1)
 
 
 
 
 
925

 

 
925

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

 
(450
)
 
9,496

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

 

 
1,673

Derivatives not designated as hedges
 
 
 
 
 
 
 
 

 
 

 
 

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

 
(229
)
 
348

 
 
Other accrued liabilities
 
 
 
 
 
298

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

 
(7,494
)
 
6,093

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

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

 
(615
)
 
(615
)

(1) Represents the noncurrent portion of the $64 million interest rate derivative with final maturity in April 2023.
(2) Represents the noncurrent portion of the $445 million negative arbitrage derivative with final maturity in January 2015.
 
The following table reflects the impact of cash flow hedges designated for hedge accounting treatment and their location within the unaudited Consolidated Statements of Comprehensive Income. 
 
 
(Gain) loss recognized in AOCI on derivatives (effective portion)
 
(Gain) loss reclassified from AOCI
into income (effective portion)
 
(Gain) loss recognized in
nonoperating (income) expense
(ineffective portion)
 
 
Three months ended September 30,
 
Three months ended September 30,
 
Three months ended September 30,
 
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
 
 
(in thousands)
Foreign currency derivatives
 
$
(12,428
)
 
$
3,960

 
$
(1,297
)
 
$
(3,005
)
 
$

 
$

Interest rate derivatives
 
(283
)
 
82

 
201

 
217

 

 

 
 
(Gain) loss recognized in AOCI on derivatives (effective portion)
 
(Gain) loss reclassified from AOCI
into income (effective portion)
 
(Gain) loss recognized in
nonoperating (income) expense
(ineffective portion)
 
 
Nine months ended September 30,
 
Nine months ended September 30,
 
Nine months ended September 30,
 
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
 
 
(in thousands)
Foreign currency derivatives
 
$
(4,720
)
 
$
(10,204
)
 
$
(6,523
)
 
$
(6,395
)
 
$

 
$
(61
)
Interest rate derivatives
 
668

 
(929
)
 
618

 
440

 

 


17




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

The Company's agreements with its counterparties also requires the posting of cash collateral in the event the aggregate value of the Company's positions exceeds certain exposure thresholds that are based upon certain liquidity metrics of the Company. The aggregate fair value of the Company's derivative instruments that contain credit-risk related contingent features that are in a net liability position as of September 30, 2014 was $18.7 million.

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 $7.0 million of collateral posted with one of its counterparties as of September 30, 2014, and no collateral posted with counterparties as of December 31, 2013.

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

8.  Debt
 
As of September 30, 2014, the expected maturities of long-term debt for the remainder of 2014 and the next four years, and thereafter, were as follows (in thousands): 
Remaining months in 2014
$
99,810

2015
82,965

2016
81,267

2017
81,266

2018
87,212

Thereafter
526,618

 
$
959,138

 
Revolving Credit Facilities

In September 2014, the Company terminated its secured revolving credit facility with Wells Fargo Capital Finance LLC, which provided for a secured revolving credit facility of up to $75 million.

Convertible Notes

During the three months ended September 30, 2014 a condition for conversion of the Convertible Note was satisfied, which permits holders of the Convertible Notes to surrender their notes for conversion during the quarter ending December 31, 2014.  Therefore, the principal balance could be settled in as early as 2014 and is classified accordingly in the table above. As of September 30, 2014, the carrying value of $79.6 million is reflected as a current liability in the unaudited Consolidated Balance Sheets.

Debt Extinguishment

In October 2014, Hawaiian extinguished $54.2 million of existing debt under a secured financing agreement, which was originally scheduled to mature in October 2023.

 
9. Employee Benefit Plans

18



 
The components of net periodic benefit cost for the Company’s defined benefit and other postretirement plans included the following: 
 
 
Three months ended September 30,
 
Nine months ended September 30,
Components of Net Period Benefit Cost
 
2014
 
2013
 
2014
 
2013
 
 
(in thousands)
Service cost
 
$
3,162

 
$
4,473

 
$
9,066

 
$
11,676

Interest cost
 
6,839

 
6,340

 
20,811

 
18,939

Expected return on plan assets
 
(4,842
)
 
(4,065
)
 
(14,532
)
 
(12,196
)
Recognized net actuarial loss
 
49

 
2,280

 
499

 
6,381

Net periodic benefit cost
 
$
5,208

 
$
9,028

 
$
15,844

 
$
24,800

 
The Company made contributions of $2.3 million and $8.9 million to its defined benefit and other postretirement plans during the three and nine months ended September 30, 2014, respectively. The Company made contributions of $11.9 million and $18.6 million to its defined benefit and other postretirement plans during the three and nine months ended September 30, 2013, respectively.
 
10. Commitments and Contingent Liabilities
 
Commitments

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

 
3

 
Between 2014 and 2015
A350XWB-800 aircraft
 
6

 
6

 
Between 2017 and 2020
A321neo aircraft
 
16

 
9

 
Between 2017 and 2020
Rolls-Royce spare engines:
 
 

 
 

 
 
A330-200 spare engine
 
1

 

 
In 2014
A350XWB-800 spare engines
 
2

 

 
Between 2017 and 2020
Pratt & Whitney spare engines:
 
 

 
 

 
 
A321neo spare engines
 
2

 

 
Between 2017 and 2018

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

The Company has operating commitments with a third-party to provide aircraft maintenance services which require fixed payments as well as variable payments based on flight hours for its Airbus fleet through 2027. The Company also has operating commitments with third-party service providers for reservations, IT, and accounting services through 2018.
 
Committed capital and operating expenditures include escalation and variable amounts based on estimates. The gross committed expenditures and committed financings for those deliveries as of September 30, 2014 are detailed below: 

19



 
 
Capital
 
Operating
 
Total Committed
Expenditures
 
Less: Committed
Financing for Upcoming
Aircraft Deliveries*
 
Net Committed
Expenditures
 
 
(in thousands)
Remaining months in 2014
 
$
84,346

 
$
15,550

 
$
99,896

 
$
75,000

 
$
24,896

2015
 
253,246

 
60,535

 
313,781

 

 
313,781

2016
 
147,824

 
49,004

 
196,828

 

 
196,828

2017
 
493,824

 
47,853

 
541,677

 

 
541,677

2018
 
547,118

 
42,922

 
590,040

 

 
590,040

Thereafter
 
558,578

 
255,650

 
814,228

 

 
814,228

 
 
$
2,084,936

 
$
471,514

 
$
2,556,450

 
$
75,000

 
$
2,481,450

 
*See below for a detailed discussion of the committed financings Hawaiian has received for its upcoming capital commitments for aircraft deliveries.
 
Enhanced Equipment Trust Certificates (EETC)
 
In 2013, Hawaiian consummated an EETC financing, whereby it created two pass-through trusts, one of which issued $328.2 million aggregate principal amount of Class A pass-through certificates with a stated interest rate of 3.9% and the second of which issued $116.3 million aggregate principal amount of Class B pass-through certificates with a stated interest rate of 4.95%. The proceeds of the issuance of the Class A and Class B pass-through certificates were used to purchase equipment notes that were issued by Hawaiian to finance the purchase of six (6) new Airbus aircraft.  During the nine months ended September 30, 2014, the Company received $293.4 million in proceeds from the issuance of the equipment notes, which it used to fund a portion of the purchase price of four Airbus aircraft. The remaining proceeds were used to purchase equipment notes that were issued by Hawaiian to finance the purchase of an Airbus aircraft delivered in October 2014. The equipment notes are secured by a lien on the aircraft, and the payment obligations of Hawaiian under the equipment notes are fully and unconditionally guaranteed by the Company. The Company issued the equipment notes to the trusts as aircraft were delivered to Hawaiian. Hawaiian recorded the debt obligation upon issuance of the equipment notes rather than upon the initial issuance of the pass-through certificates. In connection with the consummation of the EETC financing transaction, Hawaiian was required to deposit $16.0 million into a collateral account, of which $14.4 million was released during the nine months ended September 30, 2014. The funds held in this account are under the control of a third party. Accordingly, these funds are classified as restricted cash in the Company’s unaudited Consolidated Balance Sheets.
 
The Company evaluated whether the pass-through trusts formed are variable interest entities (“VIEs”) required to be consolidated by the Company under applicable accounting guidance, and determined that the pass-through trusts are VIEs. The Company determined that it does not have a variable interest in the pass-through trusts. Neither the Company nor Hawaiian invested in or obtained a financial interest in the pass-through trusts. Rather, Hawaiian has an obligation to make interest and principal payments on its equipment notes held by the pass-through trusts, which are fully and unconditionally guaranteed by the Company. Neither the Company nor Hawaiian intends to have any voting or non-voting equity interest in the pass-through trusts or to absorb variability from the pass-through trusts. Based on this analysis, the Company determined that it is not required to consolidate the pass-through trusts.
 
Litigation and Contingencies
 
The Company is subject to legal proceedings arising in the normal course of its operations. Management does not anticipate that the disposition of any currently pending proceeding will have a material effect on the Company’s operations, business or financial condition.

General Guarantees and Indemnifications
 
In the normal course of business, the Company enters into numerous aircraft financing and real estate leasing arrangements that have various guarantees included in the contract. It is common in such lease transactions for the lessee to agree to indemnify the lessor and other related third-parties for tort liabilities that arise out of or relate to the lessee’s use of the leased aircraft or occupancy of the leased premises. In some cases, this indemnity extends to related liabilities arising from the negligence of the indemnified parties, but usually excludes any liabilities caused by their gross negligence or willful misconduct. Additionally, the lessee typically indemnifies such parties for any environmental liability that arises out of or relates to its use of the real estate leased premises. The Company believes that it is insured (subject to deductibles) for most tort liabilities and related

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indemnities described above with respect to the aircraft and real estate that it leases. The Company cannot estimate the potential amount of future payments, if any, under the foregoing indemnities and agreements.
 
Credit Card Holdback
 
Under the Company’s bank-issued credit card processing agreements, certain proceeds from advance ticket sales may be held back to serve as collateral to cover any possible chargebacks or other disputed charges that may occur. These holdbacks, which are included in restricted cash in the Company’s unaudited Consolidated Balance Sheets, totaled $5.0 million at September 30, 2014 and December 31, 2013.
 
In the event of a material adverse change in the business, the holdback could increase to an amount up to 100% of the applicable credit card air traffic liability, which would also cause an increase in the level of restricted cash. If the Company is unable to obtain a waiver of, or otherwise mitigate the increase in the restriction of cash, it could have a material adverse impact on the Company.
 
11. Supplemental Cash flow Information
 
Non-cash investing and financing activities for the nine months ended September 30, 2014 and 2013 were as follows:
 
Nine months ended September 30,
 
2014
 
2013
 
(in thousands)
Investing and Financing Activities Not Affecting Cash:
 
 
 
Property and equipment acquired through a capital lease
$

 
$
11,840


12. 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 12 as Subsidiary Issuer / Guarantor) of pass-through certificates, as discussed in Note 10, the Company (which is also referred to in this Note 12 as Parent Issuer / Guarantor), is fully and unconditionally guaranteeing the payment obligations of Hawaiian, which is a 100% owned subsidiary of the Company, under equipment notes issued by Hawaiian to purchase new aircraft, and will fully and unconditionally guarantee those obligations in connection with the future issuance of equipment notes by Hawaiian.

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Condensed consolidating financial statements are presented in the following tables:

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

 
$
638,414

 
$
1,145

 
$
(97
)
 
$
639,462

Operating Expenses:
 
 

 
 

 
 

 
 

 
 

Aircraft fuel, including taxes and delivery
 

 
182,219

 

 

 
182,219

Wages and benefits
 

 
114,469

 

 

 
114,469

Aircraft rent
 

 
26,724

 

 

 
26,724

Maintenance materials and repairs
 

 
51,029

 
264

 

 
51,293

Aircraft and passenger servicing
 

 
31,848

 

 

 
31,848

Commissions and other selling
 

 
32,024

 
11

 
(20
)
 
32,015

Depreciation and amortization
 

 
23,654

 
730

 

 
24,384

Other rentals and landing fees
 
5

 
23,632

 

 

 
23,637

Other
 
1,246

 
45,291

 
244

 
(77
)
 
46,704

Total
 
1,251

 
530,890

 
1,249

 
(97
)
 
533,293

Operating Income (Loss)
 
(1,251
)<