HAWAIIAN HOLDINGS INC - FORM 10-Q

Attached files

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EX-32.2 - EXHIBIT 32.2 - HAWAIIAN HOLDINGS INC	ex322q22017.htm
EX-32.1 - EXHIBIT 32.1 - HAWAIIAN HOLDINGS INC	ex321q22017.htm
EX-31.2 - EXHIBIT 31.2 - HAWAIIAN HOLDINGS INC	ex312q22017.htm
EX-31.1 - EXHIBIT 31.1 - HAWAIIAN HOLDINGS INC	ex311q22017.htm
EX-12 - EXHIBIT 12 - HAWAIIAN HOLDINGS INC	exhibit12q22017.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2017

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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer x		Accelerated filer o
Non-accelerated filer o		Smaller reporting company o
(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 July 19, 2017, 53,560,764 shares of the registrant’s common stock were outstanding.

Hawaiian Holdings, Inc.

Form 10-Q

Quarterly Period ended June 30, 2017

Table of Contents



Part I.	Financial Information	3

Item 1.	Consolidated Financial Statements of Hawaiian Holdings, Inc. (Unaudited)	3

	Consolidated Statements of Operations for the three and six months ended June 30, 2017 and 2016	3

	Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2017 and 2016	4

	Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016	5

	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2016	6

	Notes to Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37

Item 4.	Controls and Procedures	38

Part II.	Other Information	39

Item 1.	Legal Proceedings	39

Item 1A.	Risk Factors	39

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39

Item 3.	Defaults Upon Senior Securities	39

Item 4.	Mine Safety Disclosures	39

Item 5.	Other Information	39

Item 6.	Exhibits	40

	Signatures	41

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

Hawaiian Holdings, Inc.

Consolidated Statements of Operations

(in thousands, except per share data)



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
	(unaudited)
Operating Revenue:
Passenger	$	593,210		$	518,572		$	1,130,800		$	1,000,599
Other	82,125			76,018			158,720			145,171
Total	675,335			594,590			1,289,520			1,145,770
Operating Expenses:
Wages and benefits	154,660			130,801			305,713			259,362
Aircraft fuel, including taxes and delivery	102,774			83,798			206,312			153,698
Maintenance, materials and repairs	52,566			54,585			111,970			115,089
Aircraft and passenger servicing	34,751			30,723			68,209			59,274
Aircraft rent	34,553			30,066			67,688			59,454
Commissions and other selling	32,557			31,425			65,738			64,456
Other rentals and landing fees	27,438			24,978			55,774			49,412
Depreciation and amortization	27,872			26,988			55,340			54,134
Purchased services	28,055			24,543			54,692			47,275
Special items	4,771			—			23,450			—
Other	32,789			32,731			64,791			62,714
Total	532,786			470,638			1,079,677			924,868
Operating Income	142,549			123,952			209,843			220,902
Nonoperating Income (Expense):
Interest expense and amortization of debt discounts and issuance costs	(7,711		)	(8,910		)	(15,714		)	(19,914		)
Gains (losses) on fuel derivatives	(4,712		)	21,087			(13,510		)	19,022
Other components of net periodic benefit cost	(4,750		)	(5,082		)	(9,501		)	(10,164		)
Interest income	1,467			1,087			2,619			1,931
Capitalized interest	2,082			463			3,842			688
Loss on extinguishment of debt	—			(6,643		)	—			(9,993		)
Other, net	433			2,686			3,261			9,272
Total	(13,191		)	4,688			(29,003		)	(9,158		)
Income Before Income Taxes	129,358			128,640			180,840			211,744
Income tax expense	48,925			49,070			63,495			80,708
Net Income	$	80,433		$	79,570		$	117,345		$	131,036
Net Income Per Share
Basic	$	1.50		$	1.48		$	2.19		$	2.45
Diluted	$	1.49		$	1.48		$	2.18		$	2.43

See accompanying Notes to Consolidated Financial Statements.

Hawaiian Holdings, Inc.

Consolidated Statements of Comprehensive Income

(in thousands)



	Three Months Ended June 30,
	2017		2016
	(unaudited)
Net Income	$	80,433	$	79,570
Other comprehensive income (loss), net:
Net change related to employee benefit plans, net of tax expense of $897 and $745 for 2017 and 2016, respectively	1,390		1,228
Net change in derivative instruments, net of tax expense of $768 and net of tax benefit of $4,309 for 2017 and 2016, respectively	1,261		(7,080		)
Net change in available-for-sale investments, net of tax expense of $20 and $93 for 2017 and 2016, respectively	32		151
Total other comprehensive income (loss)	2,683		(5,701		)
Total Comprehensive Income	$	83,116	$	73,869



	Six Months Ended June 30,
	2017			2016
	(unaudited)
Net Income	$	117,345		$	131,036
Other comprehensive loss, net:
Net change related to employee benefit plans, net of tax expense of $1,794 and $1,315 for 2017 and 2016, respectively	2,858			2,155
Net change in derivative instruments, net of tax benefit of $3,557 and $9,316 for 2017 and 2016, respectively	(5,836		)	(15,308		)
Net change in available-for-sale investments, net of tax expense of $72 and $416 for 2017 and 2016, respectively	118			683
Total other comprehensive loss	(2,860		)	(12,470		)
Total Comprehensive Income	$	114,485		$	118,566

See accompanying Notes to Consolidated Financial Statements.

Hawaiian Holdings, Inc.

Consolidated Balance Sheets

(in thousands, except shares)



	June 30, 2017			December 31, 2016
	(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	578,694		$	325,991
Restricted cash	1,000			5,000
Short-term investments	265,059			284,075
Accounts receivable, net	86,472			96,067
Spare parts and supplies, net	23,024			20,363
Prepaid expenses and other	46,612			66,740
Total	1,000,861			798,236
Property and equipment, less accumulated depreciation and amortization of $393,388 and $454,231 as of June 30, 2017 and December 31, 2016, respectively	1,662,614			1,654,567
Other Assets:
Long-term prepayments and other	123,583			132,724
Intangible assets, less accumulated amortization of $21,006 and $20,337 as of June 30, 2017 and December 31, 2016, respectively	15,742			16,411
Goodwill	106,663			106,663
Total Assets	$	2,909,463		$	2,708,601
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	118,043		$	116,507
Air traffic liability	619,292			482,496
Other accrued liabilities	159,933			172,214
Current maturities of long-term debt and capital lease obligations	59,102			58,899
Total	956,370			830,116
Long-Term Debt and Capital Lease Obligations	468,409			497,908
Other Liabilities and Deferred Credits:
Accumulated pension and other postretirement benefit obligations	352,521			355,968
Other liabilities and deferred credits	176,625			173,613
Deferred tax liability, net	168,363			170,543
Total	697,509			700,124
Commitments and Contingencies
Shareholders’ Equity:
Special preferred stock, $0.01 par value per share, three shares issued and outstanding as of June 30, 2017 and December 31, 2016	—			—
Common stock, $0.01 par value per share, 53,583,833 and 53,435,234 shares outstanding as of June 30, 2017 and December 31, 2016, respectively	536			534
Capital in excess of par value	119,501			127,266
Accumulated income	773,491			656,146
Accumulated other comprehensive loss, net	(106,353		)	(103,493		)
Total	787,175			680,453
Total Liabilities and Shareholders’ Equity	$	2,909,463		$	2,708,601

See accompanying Notes to Consolidated Financial Statements.

Hawaiian Holdings, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)



	Six Months Ended June 30,
	2017			2016
	(unaudited)
Net cash provided by Operating Activities	$	335,440		$	302,725
Cash flows from Investing Activities:
Additions to property and equipment, including pre-delivery payments	(96,278		)	(70,291		)
Proceeds from purchase assignment and leaseback transactions	—			31,851
Proceeds from disposition of property and equipment	33,511			—
Purchases of investments	(107,533		)	(138,235		)
Sales of investments	125,881			150,651
Net cash used in investing activities	(44,419		)	(26,024		)
Cash flows from Financing Activities:
Repayments of long-term debt and capital lease obligations	(30,484		)	(183,607		)
Repurchases and redemptions of convertible notes	—			(1,426		)
Repurchases of common stock	(4,299		)	(10,075		)
Other	(7,535		)	(7,628		)
Net cash used in financing activities	(42,318		)	(202,736		)
Net increase in cash and cash equivalents	248,703			73,965
Cash, cash equivalents, and restricted cash - Beginning of Period	330,991			286,502
Cash, cash equivalents, and restricted cash - End of Period	$	579,694		$	360,467

See accompanying Notes to Consolidated Financial Statements.

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 and $10.2 million from wages and benefits to other components of net periodic benefit cost on the Company's consolidated statement of operations for the three and six months ended June 30, 2016, respectively.

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 and ending balances of the condensed consolidated statement of cash flows by $5.0 million for the six months ended June 30, 2016.

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 $0.4 million and $5.6 million for the three and six months ended June 30, 2017, respectively. The Company also reclassified $17.3 million of excess tax benefits for share-based payments in the cash flow statement from financing activities to operating activities for the six months ended June 30, 2016.

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. The Company expects to use the full retrospective transition method at the date of 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 reached conclusions on the applicability of the standard on accounting for contracts with customers and has determined that the new standard, once effective, will affect the Company's accounting policies regarding frequent flyer, ticket breakage, credit card fees, booking fees, and upgrade 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. The adoption of the standard will have a significant impact on the Company's financial statements. The Company is currently in the process of quantifying the effects of the new standard on the Company's financial statements.

3. Accumulated Other Comprehensive Income (Loss)

Reclassifications out of accumulated other comprehensive income (loss) by component are as follows:



Details about accumulated other comprehensive (income) loss components	Three months ended June 30,						Six months ended June 30,						Affected line items in the statement where net income is presented
	2017			2016			2017			2016
	(in thousands)
Derivatives designated as hedging instruments under ASC 815
Foreign currency derivative gains, net	$	(480	)	$	(868	)	$	(1,692	)	$	(3,521	)	Passenger revenue
Interest rate derivative losses, net	—			1,235			—			944			Interest expense
Total before tax	(480		)	367			(1,692		)	(2,577		)
Tax expense (benefit)	182			(141		)	641			973
Total, net of tax	$	(298	)	$	226		$	(1,051	)	$	(1,604	)
Amortization of defined benefit plan items
Actuarial loss	$	2,228		$	1,915		$	4,456		$	3,830		Other components of net periodic benefit cost
Prior service cost	60			57			120			114			Other components of net periodic benefit cost
Total before tax	2,288			1,972			4,576			3,944
Tax benefit	(898		)	(747		)	(1,765		)	(1,493		)
Total, net of tax	$	1,390		$	1,225		$	2,811		$	2,451
Short-term investments
Realized gain on sales of investments, net	$	(12	)	$	(58	)	$	(20	)	$	(61	)	Other nonoperating income
Total before tax	(12		)	(58		)	(20		)	(61		)
Tax expense	5			19			8			20
Total, net of tax	(7		)	$	(39	)	$	(12	)	$	(41	)
Total reclassifications for the period	$	1,085		$	1,412		$	1,748		$	806

A rollforward of the amounts included in accumulated other comprehensive income (loss), net of taxes, for the three and six months ended June 30, 2017 and 2016 is as follows:



Three months ended June 30, 2017	Interest Rate Derivatives		Foreign Currency Derivatives			Defined Benefit Plan Items			Short-Term Investments			Total
	(in thousands)
Beginning balance	$	—	$	(26	)	$	(108,734	)	$	(276	)	$	(109,036	)
Other comprehensive income before reclassifications, net of tax	—		1,559			—			39			1,598
Amounts reclassified from accumulated other comprehensive income (loss), net of tax	—		(298		)	1,390			(7		)	1,085
Net current-period other comprehensive income	—		1,261			1,390			32			2,683
Ending balance	$	—	$	1,235		$	(107,344	)	$	(244	)	$	(106,353	)



Three months ended June 30, 2016	Interest Rate Derivatives			Foreign Currency Derivatives			Defined Benefit Plan Items			Short-Term Investments			Total
	(in thousands)
Beginning balance	$	(768	)	$	(2,500	)	$	(102,938	)	$	160		$	(106,046	)
Other comprehensive income (loss) before reclassifications, net of tax	—			(7,306		)	3			190			(7,113		)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax	768			(542		)	1,225			(39		)	1,412
Net current-period other comprehensive income (loss)	768			(7,848		)	1,228			151			(5,701		)
Ending balance	$	—		$	(10,348	)	$	(101,710	)	$	311		$	(111,747	)



Six months ended June 30, 2017	Interest Rate Derivatives		Foreign Currency Derivatives			Defined Benefit Pension Items			Short-Term Investments			Total
	(in thousands)
Beginning balance	$	—	$	7,071		$	(110,202	)	$	(362	)	$	(103,493	)
Other comprehensive income (loss) before reclassifications, net of tax	—		(4,785		)	47			130			(4,608		)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax	—		(1,051		)	2,811			(12		)	1,748
Net current-period other comprehensive income (loss)	—		(5,836		)	2,858			118			(2,860		)
Ending balance	$	—	$	1,235		$	(107,344	)	$	(244	)	$	(106,353	)



Six months ended June 30, 2016	Interest Rate Derivatives			Foreign Currency Derivatives			Defined Benefit Pension 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		)	(13,036		)	(296		)	724			(13,276		)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax	587			(2,191		)	2,451			(41		)	806
Net current-period other comprehensive income (loss)	(81		)	(15,227		)	2,155			683			(12,470		)
Ending balance	$	—		$	(10,348	)	$	(101,710	)	$	311		$	(111,747	)

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 and six months ended June 30, 2017 and 2016, anti-dilutive shares excluded from the calculation of diluted earnings per share were nil.



	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
	(in thousands, except for per share data)
Numerator:
Net Income	$	80,433	$	79,570	$	117,345	$	131,036
Denominator:
Weighted average common stock shares outstanding - Basic	53,626		53,634		53,595		53,574
Assumed exercise of stock options and awards	288		219		353		247
Assumed conversion of convertible note premium	—		—		—		12
Weighted average common stock shares outstanding - Diluted	53,914		53,853		53,948		53,833
Net Income Per Share
Basic	$	1.50	$	1.48	$	2.19	$	2.45
Diluted	$	1.49	$	1.48	$	2.18	$	2.43

Stock Repurchase Program

In April 2017, the Company's Board of Directors approved a modification to the Company's stock repurchase program under which the Company may now repurchase up to $100 million of its outstanding common stock over a two-year period through May 2019 via the open market, established plans or privately negotiated transactions in accordance with all applicable securities laws, rules and regulations. The stock repurchase program is subject to further modification or termination at any time.

The Company spent $4.3 million to repurchase and retire approximately 83 thousand shares of the Company's common stock in open market transactions during the three months ended June 30, 2017. As of June 30, 2017, the Company had $95.7 million remaining to spend under the newly modified stock repurchase program.

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 June 30, 2017 and December 31, 2016:



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
June 30, 2017	(in thousands)
Corporate debt	$	170,591	$	73	$	(237	)	$	170,427
U.S. government and agency debt	47,862		—		(153		)	47,709
Municipal bonds	22,422		16		(48		)	22,390
Other fixed income securities	24,535		—		(2		)	24,533
Total short-term investments	$	265,410	$	89	$	(440	)	$	265,059



	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 June 30, 2017 are shown below.



	Under 1 Year		1 to 5 Years		Total
	(in thousands)
Corporate debt	$	76,363	$	94,064	$	170,427
U.S. government and agency debt	34,068		13,641		47,709
Municipal bonds	7,875		14,515		22,390
Other fixed income securities	15,640		8,893		24,533
Total short-term investments	$	133,946	$	131,113	$	265,059

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

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 June 30, 2017
	Total		Level 1		Level 2		Level 3
	(in thousands)
Cash equivalents	$	369,665	$	332,567	$	37,098	$	—
Restricted cash	1,000		1,000		—		—
Short-term investments	265,059		—		265,059		—
Fuel derivative contracts:
Crude oil call options	3,254		—		3,254		—
Jet fuel swaps	84		—		84		—
Foreign currency derivatives	5,525		—		5,525		—
Total assets measured at fair value	$	644,587	$	333,567	$	311,020	$	—
Fuel derivative contracts:
Jet fuel swaps	$	488	$	—	$	488	$	—
Foreign currency derivatives	3,270		—		3,270		—
Total liabilities measured at fair value	$	3,758	$	—	$	3,758	$	—



	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.

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 crude oil call options and jet fuel swaps which are not traded on a public exchange. The fair value of these instruments are determined based on inputs available or derived from public markets including contractual terms, market prices, yield curves, and measures of volatility among others.

Foreign currency derivatives. The Company’s foreign currency derivatives consist of Japanese Yen and Australian Dollar forward contracts and are valued 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
June 30, 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)
$	457,541	$	467,400	$	—	$	—	$	467,400	$	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 and six months ended June 30, 2017, the Company primarily used crude oil call options and jet fuel swaps to hedge its aircraft fuel expense. These derivative instruments were not designated as hedges under ASC Topic 815, Derivatives and Hedging (ASC 815), for hedge accounting treatment. As a result, any changes in fair value of these derivative instruments are adjusted through other nonoperating income (expense) in the period of change.

The following table reflects the amount of realized and unrealized gains and losses recorded as nonoperating income (expense) in the unaudited Consolidated Statements of Operations.



	Three months ended June 30,						Six months ended June 30,
Fuel derivative contracts	2017			2016			2017			2016
	(in thousands)
Gains (losses) realized at settlement	$	(1,902	)	$	(8,799	)	$	687		$	(27,824	)
Reversal of prior period unrealized amounts	3,441			22,882			(4,506		)	40,692
Unrealized gains (losses) that will settle in future periods	(6,251		)	7,004			(9,691		)	6,154
Gains (losses) on fuel derivatives recorded as Nonoperating income (expense)	$	(4,712	)	$	21,087		$	(13,510	)	$	19,022

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 gain of approximately $0.8 million into earnings over the next 12 months from AOCI based on the values at June 30, 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 June 30, 2017

Balance Sheet
Location

Notional Amount

Final
Maturity
Date

Gross fair
value of
assets

Gross fair
value of
(liabilities)

Net
derivative
position

(in thousands)

Derivatives designated as hedges

Foreign currency derivatives

Prepaid expenses and other

16,282,275 Japanese Yen
44,327 Australian Dollars

June 2018

3,748

(2,969

)

779

Long-term prepayments and other

5,068,850 Japanese Yen
7,386 Australian Dollars

June 2019

1,623

(243

)

1,380

Derivatives not designated as hedges

Foreign currency derivatives

Prepaid expenses and other

1,081,750 Japanese Yen
2,651 Australian Dollars

September 2017

154

(58

)

Fuel derivative contracts

Prepaid expenses and other

91,266 gallons

June 2018

3,338

(488

)

2,850

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)

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 June 30,					Three months ended June 30,						Three months ended June 30,
	2017			2016		2017			2016			2017		2016
	(in thousands)
Foreign currency derivatives	$	(2,505	)	$	10,938	$	(480	)	$	(868	)	$	—	$	—
Interest rate derivatives	—			—		—			1,235			—		—



	(Gain) loss recognized in AOCI on derivatives (effective portion)				(Gain) loss reclassified from AOCI into income (effective portion)						(Gain) loss recognized in nonoperating (income) expense (ineffective portion)
	Six months ended June 30,				Six months ended June 30,						Six months ended June 30,
	2017		2016		2017			2016			2017		2016
	(in thousands)
Foreign currency derivatives	$	7,705	$	20,155	$	(1,692	)	$	(3,521	)	$	—	$	—
Interest rate derivatives	—		923		—			944			—		—

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 June 30, 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.

8. Debt

As of June 30, 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	$	24,469
2018	48,244
2019	72,927
2020	21,413
2021	49,060
Thereafter	241,428
	$	457,541

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 June 30, 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	$	64,008	$	2,926
2018	127,235		7,311
2019	118,070		6,939
2020	97,717		6,690
2021	64,730		6,768
Thereafter	222,227		107,760
	$	693,987	$	138,394

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 June 30,						Six months ended June 30,
Components of Net Period Benefit Cost	2017			2016			2017			2016
	(in thousands)
Service cost	$	3,813		$	3,713		$	7,626		$	7,426
Other cost:
Interest cost	7,259			7,582			14,518			15,164
Expected return on plan assets	(4,796		)	(4,472		)	(9,592		)	(8,944		)
Recognized net actuarial loss	2,287			1,972			4,574			3,944
Total other components of the net periodic benefit cost	4,750			5,082			$	9,500		$	10,164
Net periodic benefit cost	$	8,563		$	8,795		$	17,126		$	17,590

The Company contributed $8.0 million and $14.4 million to its defined benefit and other postretirement plans during the three and six months ended June 30, 2017, respectively. The Company contributed $11.0 million and $11.3 million to its defined benefit and other postretirement plans during the three and six months ended June 30, 2016, respectively.

In 2016, the Hawaiian Airlines, Inc. Pension Plan for Salaried Employees (the Salaried Plan) was consolidated into the Hawaiian Airlines, Inc. Pension Plan for Employees Represented by the International Association of Machinists (IAM), which established the Hawaiian Airlines, Inc. Salaried & IAM Merged Pension Plan (the Merged Plan). At that time, the net liabilities of the Salaried Plan were transferred to the Merged Plan. The benefits under the Merged Plan have remained consistent with the prior plan documents. In June 2017, the Company received a favorable determination letter from the Department of Labor to settle the Merged Plan. The Company will take the necessary action to terminate the Merged Plan and expects to make a one-time cash payment of approximately $17 million to $22 million to settle the plan obligations in the third quarter of 2017.

In March 2017, the Company announced the ratification of a 63-month contract amendment with its pilots as represented by the Air Line Pilots Association (ALPA). As further discussed in Note 12, during the six months ended June 30, 2017, the Company made a one-time payment to reduce the future 401K employer contribution for certain pilot groups, which is not recoverable once paid. In the third quarter of 2017, the Company currently estimates to make a one-time cash payment of approximately $102 million to settle a portion of its outstanding other post-retirement medical plan obligation with its pilots.

11. Commitments and Contingent Liabilities

Commitments

As of June 30, 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 June 30, 2017 are detailed below:



	Capital		Operating		Total Committed Expenditures
	(in thousands)
Remaining in 2017	$	145,666	$	38,885	$	184,551
2018	454,545		64,754		519,299
2019	499,622		59,406		559,028
2020	241,349		58,292		299,641
2021	169,771		56,551		226,322
Thereafter	131,440		400,430		531,870
	$	1,642,393	$	678,318	$	2,320,711

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 reasonably estimate the potential amount of future payments, if any, under the foregoing indemnities and agreements.

Credit Card Holdback

Under the Company’s bank-issued credit card processing agreements, certain proceeds from advance ticket sales may be held back to serve as collateral to cover any possible chargebacks or other disputed charges that may occur. These holdbacks, which are included in restricted cash in the Company’s unaudited Consolidated Balance Sheets, totaled $1.0 million at June 30, 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



	Three months ended June 30,				Six months ended June 30,
	2017		2016		2017		2016
	(in thousands)
Special Items	$	4,771	$	—	$	23,450	$	—

In April 2017, the Company executed a sale leaseback transaction with an independent third party for three Boeing 767-300 aircraft. The lease term for the three aircraft commenced in April 2017 and goes through November 2018, December 2018, and January 2019, respectively. During the three and six months ended June 30, 2017, the Company recorded a loss on sale of aircraft of $4.8 million.

In February 2017, the Company reached a tentative agreement with ALPA, covering the Company's pilots. In March 2017, the Company received notice from ALPA that the agreement was ratified by its members. The agreement was effective April 1, 2017 and has a term of 63 months. The contract includes, among other various benefits, a pay adjustment and ratification bonus computed based on previous service. During the six months ended June 30, 2017, the Company expensed $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 six months ended June 30, 2017 and 2016 were as follows:



	Six months ended June 30,
	2017		2016
	(in thousands)
Investing and Financing Activities Not Affecting Cash:
Property and equipment acquired through a capital lease	$	—	$	6,092

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:

Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)

Three months ended June 30, 2017



	Parent Issuer / Guarantor			Subsidiary Issuer / Guarantor			Non-Guarantor Subsidiaries			Eliminations			Consolidated
	(in thousands)
Operating Revenue	$	—		$	673,606		$	1,837		$	(108	)	$	675,335
Operating Expenses:
Wages and benefits	—			154,660			—			—			154,660
Aircraft fuel, including taxes and delivery	—			102,774			—			—			102,774
Maintenance materials and repairs	—			52,137			429			—			52,566
Aircraft and passenger servicing	—			34,751			—			—			34,751
Commissions and other selling	18			32,546			19			(26		)	32,557
Aircraft rent	—			34,183			370			—			34,553
Other rentals and landing fees	—			27,438			—			—			27,438
Depreciation and amortization	—			26,919			953			—			27,872
Purchased services	177			27,646			247			(15		)	28,055
Special charges	—			4,771			—			—			4,771
Other	1,308			31,001			547			(67		)	32,789
Total	1,503			528,826			2,565			(108		)	532,786
Operating Income (Loss)	(1,503		)	144,780			(728		)	—			142,549
Nonoperating Income (Expense):
Undistributed net income of subsidiaries	81,110			—			—			(81,110		)	—
Interest expense and amortization of debt discounts and issuance costs	—			(7,711		)	—			—			(7,711		)
Other components of net periodic pension cost	—			(4,750		)	—			—			(4,750		)
Interest income	70			1,397			—			—			1,467
Capitalized int

HAWAIIAN HOLDINGS INC - FORM 10-Q - July 26, 2017

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