Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 2.94M
2: EX-31.1 Certification -- §302 - SOA'02 HTML 27K
3: EX-31.2 Certification -- §302 - SOA'02 HTML 27K
4: EX-32.1 Certification -- §906 - SOA'02 HTML 23K
5: EX-32.2 Certification -- §906 - SOA'02 HTML 24K
11: R1 Cover Page HTML 76K
12: R2 Consolidated Statements of Operations HTML 134K
13: R3 Consolidated Statements of Comprehensive Income HTML 49K
14: R4 Consolidated Statements of Comprehensive Income HTML 28K
(Parenthetical)
15: R5 Consolidated Balance Sheets HTML 142K
16: R6 Consolidated Balance Sheets (Parenthetical) HTML 41K
17: R7 Consolidated Statements of Shareholders' Equity HTML 78K
18: R8 Consolidated Statements of Shareholders' Equity HTML 36K
(Parenthetical)
19: R9 Condensed Consolidated Statements of Cash Flows HTML 58K
20: R10 General HTML 26K
21: R11 Accumulated Other Comprehensive Income (Loss) HTML 114K
22: R12 Loss Per Share HTML 47K
23: R13 Revenue Recognition HTML 76K
24: R14 Short-Term Investments HTML 170K
25: R15 Fair Value Measurements HTML 172K
26: R16 Financial Derivative Instruments HTML 76K
27: R17 Debt HTML 55K
28: R18 Employee Benefit Plans HTML 47K
29: R19 Amazon Agreement HTML 30K
30: R20 Commitments and Contingent Liabilities HTML 54K
31: R21 Assets Held-For-Sale HTML 56K
32: R22 Condensed Consolidating Financial Information HTML 631K
33: R23 Pay vs Performance Disclosure HTML 35K
34: R24 Insider Trading Arrangements HTML 28K
35: R25 Accumulated Other Comprehensive Income (Loss) HTML 115K
(Tables)
36: R26 Loss Per Share (Tables) HTML 45K
37: R27 Revenue Recognition (Tables) HTML 72K
38: R28 Short-Term Investments (Tables) HTML 166K
39: R29 Fair Value Measurements (Tables) HTML 167K
40: R30 Financial Derivative Instruments (Tables) HTML 73K
41: R31 Debt (Tables) HTML 50K
42: R32 Employee Benefit Plans (Tables) HTML 42K
43: R33 Commitments and Contingent Liabilities (Tables) HTML 48K
44: R34 Assets Held-For-Sale (Tables) HTML 55K
45: R35 Condensed Consolidating Financial Information HTML 634K
(Tables)
46: R36 Accumulated Other Comprehensive Income (Loss) - HTML 67K
Reclassifications Out of Accumulated Other
Comprehensive Income (Loss) (Details)
47: R37 Accumulated Other Comprehensive Income (Loss) - HTML 53K
Roll-Forward of the Amounts Included in
Accumulated Other Comprehensive Income (Loss)
(Details)
48: R38 Loss Per Share - Schedule of Potential Dilution HTML 58K
(Details)
49: R39 Revenue Recognition - Narrative (Details) HTML 48K
50: R40 Revenue Recognition - Disaggregation Of Revenue HTML 49K
(Details)
51: R41 Revenue Recognition - Frequent Flyer Liability HTML 35K
(Details)
52: R42 Revenue Recognition - Rollforward of Frequent HTML 31K
Flyer Deferred Revenue (Details)
53: R43 Short-Term Investments - Schedule of Short-Term HTML 121K
Investments (Details)
54: R44 Short-Term Investments - Narrative (Details) HTML 29K
55: R45 Fair Value Measurements - Financial Assets and HTML 107K
Liabilities Measured at Fair Value on a Recurring
Basis (Details)
56: R46 Fair Value Measurements - Narrative (Details) HTML 24K
57: R47 Fair Value Measurements - Reconciliation of Short HTML 58K
Term Investments and Assets Held For Sale Measured
at Fair Value on a Recurring Basis Unobservable
Input (Details)
58: R48 Fair Value Measurements - Debt Measured at Fair HTML 35K
Value (Excluding Obligations Under Capital Leases
and Financing Obligations) (Details)
59: R49 Financial Derivative Instruments - Realized and HTML 38K
Unrealized Gains and Losses (Details)
60: R50 Financial Derivative Instruments - Narrative HTML 40K
(Details)
61: R51 Financial Derivative Instruments - Derivative HTML 44K
Positions (Details)
62: R52 Debt - Long-term Debt (Details) HTML 74K
63: R53 Debt - Narrative (Details) HTML 53K
64: R54 Debt - Maturity of Long-Term Debt (Details) HTML 39K
65: R55 Employee Benefit Plans (Details) HTML 45K
66: R56 Amazon Agreement (Details) HTML 67K
67: R57 Commitments and Contingent Liabilities - Orders HTML 32K
and Purchase Rights (Details)
68: R58 Commitments and Contingent Liabilities - Narrative HTML 55K
(Details)
69: R59 Commitments and Contingent Liabilities - Committed HTML 42K
Expenditures and Committed Payments (Details)
70: R60 Assets Held-For-Sale - Narrative (Details) HTML 59K
71: R61 Assets Held-For-Sale - Asset Held for Sale HTML 47K
Activity (Details)
72: R62 Condensed Consolidating Financial Information - HTML 192K
Condensed Consolidating Statements of Operations
and Comprehensive Loss (Details)
73: R63 Condensed Consolidating Financial Information - HTML 234K
Condensed Consolidating Balance Sheets (Details)
74: R64 Condensed Consolidating Financial Information - HTML 93K
Condensed Consolidating Statements of Cash Flows
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(Registrant’s Telephone Number, Including Area Code)
Securities
registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol(s)
Name of each exchange on which registered
iCommon Stock ($0.01 par value)
iHA
iNasdaq
Stock Market, LLC
(Nasdaq Global Select Market)
Securities registered pursuant to Section 12(g) of the Act: None
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. ☒iYes☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). ☒iYes☐ 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,”“non-accelerated filer,”“smaller reporting company,” and “emerging growth company”
in Rule 12b-2 of the Exchange Act.
iLarge accelerated filer
☒
Accelerated
filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
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. ☐
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes i☒ No
Property
and equipment, less accumulated depreciation and amortization of $i1,143,934 and $i1,135,262
as of September 30, 2023 and December 31, 2022, respectively
i1,969,556
i1,874,352
Other
Assets:
Assets held-for-sale
i2,813
i14,019
Operating
lease right-of-use assets
i423,706
i459,128
Long-term
prepayments and other
i117,716
i100,317
Intangible
assets, net
i13,500
i13,500
Total
Assets
$
i3,923,260
$
i4,139,623
LIABILITIES
AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable
$
i198,007
$
i196,009
Air
traffic liability and current frequent flyer deferred revenue
i699,085
i590,796
Other
accrued liabilities
i175,992
i182,036
Current
maturities of long-term debt, less discount
i42,364
i47,836
Current
maturities of finance lease obligations
i9,998
i25,789
Current
maturities of operating leases
i85,214
i77,858
Total
i1,210,660
i1,120,324
Long-Term
Debt
i1,534,877
i1,583,889
Other
Liabilities and Deferred Credits:
Noncurrent finance lease obligations
i62,768
i75,221
Noncurrent
operating leases
i311,647
i347,726
Accumulated
pension and other post-retirement benefit obligations
i143,058
i135,775
Other
liabilities and deferred credits
i71,967
i94,654
Noncurrent
frequent flyer deferred revenue
i320,657
i318,369
Deferred
tax liability, net
i88,868
i130,400
Total
i998,965
i1,102,145
Commitments
and Contingencies
i
i
Shareholders’ Equity:
Special
preferred stock, $ii0.01/ par value per share, iiiithree///
shares issued and outstanding as of September 30, 2023 and December 31, 2022
i—
i—
Common
stock, $ii0.01/ par value per share, ii51,633,094/
and ii51,450,904/ shares issued and outstanding as of September 30, 2023 and December 31,
2022, respectively
i516
i514
Capital in excess of par value
i292,335
i287,161
Accumulated
income (loss)
(i18,556)
i140,756
Accumulated
other comprehensive loss, net
(i95,537)
(i95,166)
Total
i178,758
i333,265
Total
Liabilities and Shareholders’ Equity
$
i3,923,260
$
i4,139,623
See
accompanying Notes to Consolidated Financial Statements.
Net cash provided by (used in) Operating Activities
$
i2,072
$
(i24,050)
Cash
flows from Investing Activities:
Additions to property and equipment, including pre-delivery payments
(i213,152)
(i29,717)
Proceeds
from the disposition of aircraft and aircraft related equipment
i19,911
i10,743
Purchases
of investments
(i320,628)
(i751,509)
Proceeds
from sales and maturities of investments
i452,913
i756,561
Net
cash used in investing activities
(i60,956)
(i13,922)
Cash
flows from Financing Activities:
Repayments of long-term debt and finance lease obligations
(i58,681)
(i173,298)
Debt
issuance costs and discounts
i—
(i2,236)
Payment
for taxes withheld for stock compensation
(i1,134)
(i1,842)
Net
cash used in financing activities
(i59,815)
(i177,376)
Net
decrease in cash and cash equivalents
(i118,699)
(i215,348)
Cash,
cash equivalents, and restricted cash - Beginning of Period
i246,620
i507,828
Cash,
cash equivalents, and restricted cash - End of Period
$
i127,921
$
i292,480
Non-Cash
Transactions:
Right-of-use assets acquired under operating leases
$
i26,724
$
i—
See
accompanying Notes to Consolidated Financial Statements.
8
Hawaiian Holdings, Inc.
Notes to Consolidated Financial Statements (Unaudited)
1. iGeneral
Business
and Basis of Presentation
Hawaiian Holdings, Inc. (the Company) and its direct wholly owned subsidiary, Hawaiian Airlines, Inc. (Hawaiian), are incorporated in the State of Delaware. Unless the context otherwise requires, the terms the Company, we, us, and our in this Quarterly Report on Form 10-Q refer to Hawaiian Holdings, Inc. and its consolidated subsidiaries. The Company’s primary asset is its sole ownership of all issued and outstanding shares of common stock of 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 variations in the demand for air travel, 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 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, 2022.
Unless otherwise noted, all amounts disclosed are stated before consideration of income taxes.
2. iAccumulated
Other Comprehensive Income (Loss)
i
Reclassifications out of accumulated other comprehensive income (loss) by component are as follows:
Details about accumulated other
comprehensive income (loss) components
Three months ended September 30,
Nine months ended September 30,
Affected line items in the statement where net income is presented
2023
2022
2023
2022
(in thousands)
Amortization
of defined benefit plan items
Actuarial loss
$
i537
$
i504
$
i1,524
$
i1,559
Nonoperating
Income (Expense), Other, net
Prior service cost
i186
i122
i517
i316
Nonoperating
Income (Expense), Other, net
Total before tax
i723
i626
i2,041
i1,875
Tax
benefit
(i172)
(i151)
(i486)
(i539)
Total,
net of tax
$
i551
$
i475
$
i1,555
$
i1,336
Short-term
investments
Realized gain on sales of investments
$
i—
$
(i102)
$
(i579)
$
(i6,501)
Gains
(losses) on investments, net
Realized loss on sales of investments
i1,492
i1,235
i4,167
i22,823
Gains
(losses) on investments, net
Total before tax
i1,492
i1,133
i3,588
i16,322
Income
tax benefit
(i374)
(i280)
(i903)
(i4,026)
Total,
net of tax
$
i1,118
$
i853
$
i2,685
$
i12,296
Total
reclassifications for the period
$
i1,669
$
i1,328
$
i4,240
$
i13,632
/
iA
roll-forward of the amounts included in accumulated other comprehensive income (loss), net of taxes, for the three and nine months ended September 30, 2023 and 2022 is as follows:
Other
comprehensive income (loss) before reclassifications, net of tax
i398
(i49,852)
(i49,454)
Amounts
reclassified from accumulated other comprehensive income (loss), net of tax
i1,336
i12,296
i13,632
Net
current-period other comprehensive income (loss)
i1,734
(i37,556)
(i35,822)
Ending
balance
$
(i73,291)
$
(i44,369)
$
(i117,660)
3.
iLoss Per Share
Basic loss per share, which excludes dilution, is computed by dividing net loss available to common shareholders by the weighted average number of common shares outstanding for the period.
The potentially dilutive shares that were excluded from the computation of diluted weighted average common stock shares outstanding because their effect would have been antidilutive was i337,699
and i407,625 for the three months ended September 30, 2023 and 2022, respectively, and i159,954
and i429,204 for the nine months ended September 30, 2023 and 2022, respectively. Certain warrant shares held by Amazon have not been included in the computation as their performance condition has not yet been satisfied. As of September 30, 2023 and 2022, the unvested Amazon warrant shares excluded from antidilutive
10
shares
were i8,183,451and izero,
respectively. Refer to Note 10 to the Notes to Consolidated Financial Statements for additional discussion.
i
The following table shows the computation of basic and diluted loss per share:
Weighted
average common stock shares outstanding - Basic
i51,632
i51,388
i51,576
i51,344
Weighted
average common stock shares outstanding - Diluted
i51,632
i51,388
i51,576
i51,344
Net
Loss Per Share
Basic
$
(i0.94)
$
(i0.18)
$
(i3.09)
$
(i3.70)
Diluted
$
(i0.94)
$
(i0.18)
$
(i3.09)
$
(i3.70)
/
4.
iRevenue Recognition
The majority of the Company's passenger revenue is derived from passenger ticket sales. Other revenue is primarily derived from the Company's cargo operations and loyalty program. The Company's primary operations are that of its wholly owned subsidiary, Hawaiian. Principally all operations of Hawaiian either originate
and/or end in the state of Hawai'i. The management of such operations is based on a system-wide approach due to the interdependence of Hawaiian's route structure in its various markets. As Hawaiian is engaged in only ione significant line of business (i.e., air transportation), the Company has concluded that it has only ione
segment. iThe Company's operating revenues by geographic region (as defined by the U.S. Department of Transportation (DOT)) are summarized below:
Hawaiian
attributes operating revenue by geographic region based on the destination of each flight segment. Hawaiian's tangible assets consist primarily of flight equipment, which is mobile across geographic markets, and therefore has not been allocated to specific geographic regions.
Other operating revenue consists of cargo revenue, ground handling fees, commissions, and fees earned under certain joint marketing agreements with other companies. These amounts are recognized when the service is provided.
Other
revenue (e.g., cargo and other miscellaneous)
$
i31,320
$
i47,678
$
i96,321
$
i139,289
Frequent
flyer revenue, marketing and brand component
i31,493
i30,369
i92,505
i86,345
Other
Revenue
$
i62,813
$
i78,047
$
i188,826
$
i225,634
11
As
of September 30, 2023 and December 31, 2022, the Company's air traffic liability balance, as it relates to passenger tickets (excluding frequent flyer liability), was$i508.9 million and $i414.5
million, respectively, which generally irepresents revenue that is expected to be realized in future periods.
During the three months ended September 30, 2023 and 2022, the amount of passenger ticket revenue, excluding frequent flyer revenue, recognized that was included in air traffic liability as of the beginning of the respective period was $i332.1
million and $i330.1 million, respectively. During the nine months ended September 30, 2023 and 2022, the amount of passenger ticket revenue, excluding frequent flyer revenue, recognized that was included in air traffic liability as of the beginning of the respective period was $i338.7 million
and $i282.7 million, respectively.
Non-refundable tickets sold and credits issued generally expire i13 months from the date of issuance or scheduled flight, as applicable. In
April 2020, the Company announced the waiver of certain change fees and extended ticket validity for up to i24 months for (a) tickets issued between March 1, 2020 and December 31, 2020 and (b) tickets issued prior to March 1, 2020 for original travel between March 1, 2020 and February 28, 2021. In December 2021, the
Company announced the further extension of ticket validity to December 31, 2022, which also included all Main Cabin and First Class passenger tickets purchased in 2021. The Company records an estimate of breakage revenue on the scheduled flight date for tickets that will expire unused. These estimates are based on the evaluation of actual historical results, available market information, forecasted trends and the extension of the expiration date for certain tickets impacted by the COVID-19 pandemic. At December 31, 2022, $i151.9 million
of passenger tickets expired unused after receiving extended validity dates throughout the prior two years. The breakage revenue related to these expired tickets had been recorded over the extended ticket validity period.
During the three months ended September 30, 2023 and 2022, the Company recognized advanced breakage of $i16.5 million
and $i49.7 million, respectively. During the nine months ended September 30, 2023 and 2022, the Company recognized advanced breakage of $i46.2 million
and $i105.8 million, respectively. The Company will continue to monitor customers' travel behavior and may adjust its estimates in the future.
Frequent Flyer Accounting
The Company's frequent flyer liability is recorded in air traffic liability and noncurrent frequent flyer deferred revenue on
its unaudited Consolidated Balance Sheets. iThe table below presents the Company's frequent flyer liability balance:
Air traffic liability (current portion of frequent flyer revenue)
$
i183,521
$
i166,211
Noncurrent
frequent flyer deferred revenue
i320,657
i318,369
Total
frequent flyer liability
$
i504,178
$
i484,580
i
The
table below presents the Company's activity of the current and noncurrent frequent flyer deferred revenue for the nine months ended September 30, 2023 and 2022:
2023
2022
(in
thousands)
Total frequent flyer liability - beginning balance
$
i484,580
$
i466,171
Miles
awarded
i158,285
i144,878
Travel
miles redeemed (Passenger Revenue)
(i135,232)
(i124,350)
Non-travel
miles redeemed (Other Revenue)
(i3,455)
(i3,298)
Total
frequent flyer liability - ending balance
$
i504,178
$
i483,401
/
5.
iShort-Term Investments
The Company's short-term investments 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 as well as unrealized gains and losses related to changes in the fair value of equity securities are reflected in Losses on investments, net within Nonoperating
income (expense) on the unaudited Consolidated Statements of Operations.
iThe following is a summary of the amortized cost, gross unrealized gains and losses, and fair value of the Company's short-term investments as of September 30, 2023 and December 31, 2022:
The
following tables present fair values and gross unrealized losses by security type and length of time that individual debt securities and other investments measured at net asset value have been in a continuous unrealized loss position:
As
of September 30, 2023 and December 31, 2022, the Company's unrealized losses from debt securities were generated from i507 positions out of i557
positions and i496 positions out of i547 positions, respectively.
The
Company reviews debt securities quarterly for credit losses and impairment. If the cost of an investment exceeds its fair value, the Company will evaluate, among other factors, general market conditions, credit quality of debt instrument issuers, and the extent to which the fair value is less than cost. This determination requires significant judgment. In making this judgment, the Company employs a systematic methodology that considers available quantitative and qualitative evidence in evaluating potential impairment of its investments. In addition, the Company considers specific adverse conditions related to the financial health of, and business outlook for, the investee. If the
Company has plans to sell the security or it is more likely than not that the Company will be required to sell the security before recovery, then a decline in fair value below cost is recorded as an impairment charge in Other, net, within non-operating expense on the unaudited consolidated statements of operations, and a new cost basis in the investment is established. If market, industry, and/or investee conditions deteriorate, the Company may incur future impairments.
Debt securities in a continuous unrealized loss position for twelve months or greater as of September 30, 2023 and December 31, 2022 were primarily attributable to changes
in interest rates, relative to when the investment securities were purchased. The Company does not intend to sell any of these investments and it is not more likely than not that it will be required to sell any of these investments before recovery of the entire amortized cost basis, which may be at maturity. Accordingly, the Company has determined that the unrealized losses on its debt securities as of September 30, 2023 were temporary in nature. The Company has evaluated these debt securities and did not recognize any significant credit losses as of September 30, 2023 and December 31,
2022.
For the three months ended September 30, 2023 and 2022, the unrealized losses on equity securities, recorded in Losses on Investment, net, in Nonoperating income (expense) were $i2.6 million and $i3.4 million,
respectively. For the nine months ended September 30, 2023 and 2022, the unrealized losses on equity securities were $i3.1 million and $i22.8 million,
respectively.
iContractual maturities of debt securities as of September 30, 2023 are shown below:
Under 1 Year
1 to 5 Years
Over
5 Years
Total
(in thousands)
Debt Securities
Corporate debt
$
i131
$
i180,920
$
i77,486
$
i258,537
U.S.
government and agency debt
i46,759
i374,990
i11,654
i433,403
Other
fixed income securities
i31,995
i13,703
i13,726
i59,424
Asset-backed
securities
i5
i10,111
i15,430
i25,546
Collateralized
loan obligations
i—
i—
i42,437
i42,437
Bank
notes
i222
i4,850
i4,027
i9,099
Total
debt securities
$
i79,112
$
i584,574
$
i164,760
$
i828,446
/
14
The
Company classifies its investments as current assets as these securities are available for use in its current operation.
6. iFair Value Measurements
Accounting Standards Codification (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.
i
The tables below present the Company’s financial assets and liabilities measured at fair value on a recurring basis:
Cash
equivalents and restricted cash. The Company'sLevel 1 cash equivalents consist of money market securities and mutual funds, which are valued based on quoted prices in an active market. The carrying amounts approximate fair value because of the short-term maturity of these assets. Level 2 cash equivalents consist primarily of debt securities with original maturity dates less than 90 days. The fair value of these instruments is based on a market approach using prices generated by market transactions involving similar assets. Restricted cash includes funds held in a controlled account to be used for debt service payments associated with the Company's loyalty and intellectual brand offering. As of September 30,
2023, approximately $i17.3 million was held in the controlled account designated for debt servicing and was classified as restricted cash on the Company's Consolidated Balance Sheets.
Short-term investments. The Company's Level 1 short-term investments consist of equity mutual funds, which are valued based on a market approach using prices generated by market transactions involving
identical assets. Level 2 short-term investments consist of corporate debt securities, U.S. government and agency securities, other fixed income securities, asset-backed securities, collateralized loan obligations, bank notes, and derivative instruments as further discussed in Note 7, which are valued based on a market approach using industry standard valuation techniques that incorporate inputs such as quoted prices for similar assets, interest rates, benchmark curves, credit ratings, and other observable inputs or market data. Certain asset-backed securities, collateralized loan obligations, and private bank notes that are not readily marketable are classified as Level 3 in the fair value hierarchy and valued using certain unobservable inputs including future cash flows and discount rates.
iThe
reconciliation of the Company's short-term investments measured at fair value on a recurring basis using unobservable inputs (Level 3) for the nine months ended September 30, 2023 is as follows:
16
Short-term
Investment Activity for the nine months ended September 30, 2023
Other
investments at net asset value (NAV). In accordance with relevant accounting standards, certain investments that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in the table above are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the statement of financial position. The investments measured using NAV are investments in a partnership for which a secondary market does not exist. Investments in the partnership are carried at estimated NAV as determined by and reported by the general partners of the partnerships and represent the proportionate share of the estimated fair value of the underlying assets of the limited partnerships. The Company can redeem its shares upon approval by the respective
partnerships' managing member.
Fuel derivative contracts. 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. 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. Any changes in fair value of these derivative instruments are
adjusted through other Nonoperating income (expense) in the period of change. The Company’s fuel derivative contracts consist of crude oil call options, which are not traded on a public exchange. The fair value of these instruments is determined based on inputs available or derived from public markets including contractual terms, market prices, yield curves, and measures of volatility among others.
Assets held for sale.The Company's assets held for sale consist of aircraft, engine, rotable and expendable aircraft parts. The assets are measured at the lower of the carrying amount or fair value less cost to sell and a loss
is recognized for any initial adjustment of the assets' carrying amount to fair value less cost to sell. The fair value measurements for the Company's held-for-sale assets were based on Level 3 inputs, which include information obtained from third-party valuation sources and other market sources, including recent offers from potential buyers. Refer to Note 12 to the Notes to Consolidated Financial Statements for additional discussion.
iThe table below presents the
Company’s debt measured at fair value:
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 based on quotes of similar debt for other similarly rated companies.
The carrying amounts of cash, other receivables, and accounts payable approximate fair value due to the short-term nature of these financial instruments.
7. iFinancial
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.
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. The Company uses a combination
of derivative contracts to hedge its aircraft fuel expense.
i
The following table reflects the amount of realized and unrealized gains and losses recorded as Nonoperating income (expense) in the Consolidated Statements of Operations.
Unrealized
losses that will settle in future periods
(i91)
(i1,063)
(i91)
(i1,063)
Gains
(losses) on fuel derivatives recorded as nonoperating income (expense)
$
i3,097
$
(i1,063)
$
(i5,627)
$
(i1,063)
/
Investment
Portfolio Management
The Company's investment managers use a combination of derivative instruments (swaps, futures, options and forward contracts) to manage risk associated with its investment portfolio, including the volatility in interest rates and currency exchange rates on foreign denominated debt securities. As of September 30, 2023 and December 31, 2022, the Company's derivative positions reflected a net asset position of $i1.8 million
and $i1.3 million within the portfolio. During the three months ended September 30, 2023 and 2022, the Company recognized a net realized and unrealized gain of $i1.0 million
and $i3.1 million, respectively, through Nonoperating income (expense). During the nine months ended September 30, 2023 and 2022, the Company recognized a net realized and unrealized loss of $i0.1
million and a net realized and unrealized gain of $i7.8 million, respectively, through Nonoperating income (expense).
iThe following table presents the gross
fair value of asset and liability derivatives, all of which 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 Consolidated Balance Sheets.
The financial derivative instruments expose the Company to possible credit loss in the event the counterparties to the agreements fail to meet their obligations. To manage such credit risks, the Company (1) selects its counterparties based on past experience and credit ratings, (2) limits its exposure to any single counterparty, and (3) periodically monitors the market position and credit rating of each counterparty. Credit risk is deemed to have a minimal impact on the fair value of the derivative instruments as cash collateral would be provided to or by the counterparties based on the current market exposure of the derivative.
The
Company's agreements with its counterparties also require the posting of cash collateral in the event the aggregate value of the Company's positions exceeds certain exposure thresholds. The aggregate fair value of the Company's derivative instruments that contain credit-risk related contingent features was in a net asset position of $i9.2 million and $i6.6 million
as of September 30, 2023 and December 31, 2022, respectively.
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 $i0.7 million
collateral posted with its counterparties as of September 30, 2023. iNo collateral was posted with its counterparties as of December 31, 2022.
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.
19
8. iDebt
i
Long-term
debt, net of unamortized discounts and issuance costs, is outlined as follows:
Class A EETC-13,
fixed interest rate of ii3.9/%, semiannual principal and interest payments, remaining balance due at maturity
in January 2026
$
i162,953
$
i184,572
Japanese
Yen denominated financing, fixed interest rate of ii1.05/%, quarterly principal and interest payments, remaining
balance due at maturity in May 2030
i18,655
i23,524
Japanese
Yen denominated financing, fixed interest rate of ii1.01/%, semiannual principal and interest payments, remaining
balance due at maturity in June 2030
i16,670
i20,350
Japanese
Yen denominated financing, fixed interest rate of ii0.65/%, quarterly principal and interest payments, remaining
balance due at maturity in March 2025
i46,055
i64,276
Japanese
Yen denominated financing, fixed interest rate of ii0.76/%, semiannual principal and interest payments, remaining
balance due at maturity in September 2031
i43,646
i55,731
CARES
Act Payroll Support Program, fixed interest rate of ii1.0/% for the first through fifth years and variable
interest of SOFR plus a margin of ii2.0/% for the sixth year through maturity, semiannual interest payments,
principal balance due at maturity in April 2030 through September 2030
i60,278
i60,278
Payroll
Support Program Extension, fixed interest rate of ii1.0/% for the first through fifth years and variable interest
of SOFR plus a margin of ii2.0/% for the sixth year through maturity, semiannual interest payments, principal
balance due at maturity in March 2031 through April 2031
i27,797
i27,797
Payroll
Support Program 3, fixed interest rate of ii1.0/% for the first through fifth years and variable interest
of SOFR plus a margin of ii2.0/% for the sixth year through maturity, semiannual interest payments, principal
balance due at maturity in April 2031 through June 2031
i23,908
i23,908
Loyalty
Program Financing, fixed interest of ii5.75/%, quarterly interest payments, principal balance due at maturity
in January 2026
i1,200,000
i1,200,000
Unamortized
debt discount and issuance costs
(i22,721)
(i28,711)
Total
Debt
$
i1,577,241
$
i1,631,725
Less:
Current maturities of long-term debt
(i42,364)
(i47,836)
Long-Term
Debt, less discount
$
i1,534,877
$
i1,583,889
/
Revolving
Credit Facility
In August 2022, the Company entered into an Amended and Restated Credit and Guarantee Agreement (the Revolving Credit Facility). The Revolving Credit Facility has an aggregate principal amount not to exceed $i235.0 million and matures in December 2025. The Company may, from time to time, grant liens on certain eligible account
receivables, aircraft, spare engines, ground support equipment and route authorities, as well as cash and certain cash equivalents, in order to secure its outstanding obligations under the Revolving Credit Facility. Indebtedness under the Revolving Credit Facility will bear interest, at a per annum rate based on, at the Company's option: (1) a variable rate equal to the Secured overnight financing rate (as defined in the Revolving Credit Facility) plus a margin of i3.0%; or (2) Alternate base rate (as defined in the Revolving
Credit Facility) plus a margin of i2.0%. The Company is also subject to compliance and liquidity covenants under the Revolving Credit Facility. As of September 30, 2023, the Company had ino
outstanding borrowing under the Revolving Credit Facility.
Debt Extinguishment
In June 2022, the Company repurchased the remaining $i62.4 million of its outstanding Series 2020-1A and Series 2020-1B Equipment Notes. The repurchase resulted in the recognition of a loss on extinguishment of debt of $ii8.6/ million
during the three and six months ended June 30, 2022, which is reflected in the Nonoperating income (expense), other, net line item on the unaudited Consolidated Statements of Operations.
20
Schedule of Debt Maturities
i
As of September 30, 2023, the expected maturities of debt,
excluding debt issuance costs, for the remainder of 2023 and the next four years, and thereafter, were as follows (in thousands):
Remaining months in 2023
$
i5,323
2024
i43,593
2025
i55,245
2026
i1,338,052
2027
i10,590
Thereafter
i147,159
$
i1,599,962
/
Covenants
The
Company's debt agreements contain various affirmative, negative and financial covenants. The Company was in compliance with the covenants in these debt agreements as of September 30, 2023.
9. iEmployee Benefit Plans
i
The
components of net periodic benefit cost for the Company’s defined benefit and other post-retirement plans included the following:
Three months ended September 30,
Nine
months ended September 30,
Components of Net Period Benefit Cost
2023
2022
2023
2022
(in thousands)
Service cost
$
i1,791
$
i2,392
$
i5,211
$
i7,176
Other
cost:
Interest cost
i6,513
i4,572
i19,455
i13,727
Expected
return on plan assets
(i5,529)
(i6,471)
(i16,589)
(i19,413)
Recognized
net actuarial loss
i723
i626
i2,041
i1,875
Total
other components of the net periodic benefit cost
i1,707
(i1,273)
i4,907
(i3,811)
Net
periodic benefit cost
$
i3,498
$
i1,119
$
i10,118
$
i3,365
/
Service
costs are recorded within Wages and benefits on the unaudited Consolidated Statements of Operations. Total other components of the net periodic benefit cost are recorded within the nonoperating income (expense), other, net line item on the unaudited Consolidated Statements of Operations. During the three and nine months ended September 30, 2023 and 2022, the Company was not required to, and did iiiinot///
make cash contributions to its defined benefit and other post-retirement plans. The Company is not required to make a cash contribution to its defined benefit plan for the remainder of 2023.
10. iAmazon Agreement
On October 20, 2022, Hawaiian and Amazon.com
Services LLC (Customer), a wholly owned subsidiary of Amazon.com, Inc. (Amazon), entered into an Air Transportation Services Agreement (the ATSA) under which the Company will provide certain air cargo transportation services to Customer for an initial term of ieight years. Thereafter, the Customer may elect to extend the ATSA for itwo
years and, at the end of such period, the parties may mutually agree to extend the term for three additional years.
The ATSA provides for the Company to initially operate iten A330-300F aircraft for air cargo transportation services, with the Customer having the right to enter into work orders for additional aircraft. The
Company will supply flight crews, perform maintenance and certain administrative functions, and procure aircraft insurance. The Customer will pay the Company a fixed monthly fee per aircraft, a per flight hour fee, and a per flight cycle fee for each flight cycle operated. The Customer will also reimburse the Company for certain operating expenses, including fuel, certain maintenance, and insurance premiums. As part of the ATSA, the Company received $i11.5 million
toward start-up costs which has been recorded in Other liabilities in the Consolidated Balance Sheet. The deferred up-front payment will be amortized into revenue on a pro-rata basis over the term of the contract as revenue is earned. Operations under the ATSA commenced on October 2, 2023.
21
The Company and Amazon also entered into a Transaction Agreement, under which the Company agreed to issue to Amazon.com NV Investment Holdings LLC, a wholly
owned subsidiary of Amazon, a warrant (the Warrant) to acquire up to i9,442,443 shares (the Warrant Shares), of the Company's common stock, par value $i0.01
per share.
The exercise price with respect to the first i6,294,962 Warrant Shares that vest will be $i14.71
per share (the First Tranche). The exercise price with respect to the remaining i3,147,481 Warrant Shares (the Second Tranche) will be determined based on the i30-day
volume-weighted average price of the Company’s common stock as of the earlier of (i) October 20, 2025, or (ii) the date that the entire First Tranche is vested. At execution of the ATSA, i1,258,992 Warrant Shares, valued at $i11.6 million,
vested, and were recorded in Other assets in the Consolidated Balance Sheet. The remaining Warrant Shares will vest based on qualifying payments to be made by Amazon or its affiliates either under the ATSA or generally to the Company with respect to air cargo or air charter services (the Performance Condition), excluding commercial passenger service, up to $i1.8 billion
of qualifying payments in the aggregate.
The Warrant was valued in itwo tranches, both utilizing a Monte Carlo Simulation Model. The First Tranche, which met the grant date criteria under ASC 718 at execution of the ATSA, has a set exercise price and a grant date fair value of approximately $i57.9 million,
or $i9.19 per Warrant Share. The Warrant is classified as an equity award, subject only to the Performance Condition referenced above which impacts the timing of the vesting of the Warrant Shares. For the Second Tranche, which will not have an established exercise price until a future date, as noted above, was valued at approximately $i11.2 million,
or $i3.57 per Warrant Share as of September 30, 2023. As a grant date has not yet been established, the Company will estimate the fair value of these Warrant Shares on a quarterly basis; however, the Company also considered that until the Warrant Shares vest, there is no financial statement impact related to the Second Tranche for unvested shares under ASC
718. At their grant date, the Company will value these Warrant Shares, which will be classified as equity awards, subject to the Performance Condition.
As discussed above, i1,258,992 Warrant Shares (included in the First Tranche), with a value of $i11.6 million,
vested at execution of the ATSA, and were recorded as Other assets on the Consolidated Balance Sheet. The $i11.6 million will be recognized as contra-revenue pro rata with estimated revenue earned over the term of the ATSA. For the remaining Warrant Shares, the value of the Warrant Shares, at grant date, will be recognized as a reduction of the transaction price of the Company’s flight services performance obligation over the term of the ATSA as revenue is earned with an offsetting entry to Capital in excess of par.
11.
iCommitments and Contingent Liabilities
Commitments
i
As of September 30, 2023, the
Company had the following aircraft-related commitments consisting of firm aircraft and engine orders and purchase rights for additional aircraft and engines:
Aircraft Type
Firm Orders
Purchase Rights
Expected Delivery Dates
A321neo
aircraft
i—
i9
N/A
Boeing
787-9 aircraft
i12
i8
Between 2024 and
2027
General Electric GEnx spare engines:
Boeing
787-9 spare engines
i3
i1
Between 2023
and 2027
/
In July 2018, the Company entered into a purchase agreement for the purchase of i10 Boeing 787-9 "Dreamliner" aircraft, including purchase rights for an additional i10
aircraft with scheduled delivery from 2021 to 2025. In October 2018, the Company entered into a definitive agreement for the selection of GEnx engines to power its Boeing 787-9 fleet. The agreement provides for the purchase of i20 GEnx engines, the right to purchase an additional i20
GEnx engines, and the purchase of up to ifour spare engines.
In December 2022, the Company entered into a supplemental agreement to its Boeing 787-9 purchase agreement, pursuant to which (a) the Company agreed with Boeing to defer the delivery of the Boeing 787-9 aircraft and (b) agreed to exercise purchase options for an additional itwo
Boeing 787-9 aircraft. In July 2023, the Company was notified by Boeing that its 2023 and 2024 Boeing 787-9 aircraft deliveries will be delayed by a couple of months. The Company's first Boeing 787-9 aircraft is now expected to be delivered in January 2024. The committed expenditures under the amended purchase agreement and delivery delay are reflected in the table below.
22
In order to complete the purchase of these aircraft and fund related costs, the Company may need to secure acceptable financing. Financing may
be necessary to satisfy the Company's capital commitments for firm order aircraft and other related capital expenditures. The Company can provide no assurance that any financing not already in place for aircraft and spare engine deliveries will be available to us on acceptable terms when necessary or at all.
The Company has commitments with third-parties to provide aircraft maintenance services which include fixed payments based on flight hours for the Company's fleet. The Company also has commitments with third-party
service providers for reservations, information technology, and accounting services through 2033. Committed capital and other expenditures include escalation and variable amounts based on estimated forecasts. iThe gross committed expenditures and committed payments as of September 30, 2023 and for the next five fiscal years and thereafter are detailed below:
Aircraft
and Aircraft Related
Other
Total Committed Expenditures
(in thousands)
Remaining in 2023
$
i48,815
$
i6,381
$
i55,196
2024
i585,331
i27,758
i613,089
2025
i519,228
i16,069
i535,297
2026
i425,730
i9,671
i435,401
2027
i249,569
i7,068
i256,637
Thereafter
i—
i60,906
i60,906
$
i1,828,673
$
i127,853
$
i1,956,526
During
the third quarter of 2023, the Company entered into amendments for itwo A330-200 aircraft leases, originally scheduled to mature in 2024, for an additional itwo years. The commitments associated with these amendments
are reflected in the table above.
In October 2023, the Company entered into amendments for itwo additional A330-200 aircraft leases, originally scheduled to mature in 2024, for an additional itwo
years.
Litigation and Contingencies
The Company is subject to legal proceedings arising in the normal course of its operations. The Company 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 such contracts. 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 such parties' gross negligence or willful misconduct. Additionally, the lessee typically indemnifies such parties for any environmental liability that arises out of or relates to the lessee's use of the real estate leased premises. The Company
believes that it is insured (subject to deductibles) for most of the 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 Holdbacks
Under the Company’s bank-issued credit card processing agreements, 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. As of September 30, 2023 and December 31,
2022, there were iino/ holdbacks held with the
Company's credit card processors.
In the event of a material adverse change in the Company's business, the credit card processor could increase holdbacks to up to i100% of the amount of outstanding credit card tickets that are unflown (e.g., air traffic liability, excluding frequent flyer deferred revenue), which would result in a restriction of cash. If the Company were unable to
obtain a waiver of, or otherwise mitigate the increase in the restriction of cash, it could have a material impact on the Company's operations, business or financial condition.
23
12. iAssets
Held-For-Sale
In 2021, the Company reclassified approximately $i29.5 million in long-lived assets as held for sale as follows:
•The Company announced the termination of its 'Ohana by Hawaiian operations, which utilized its ATR-42 and
ATR-72 fleet, and was operated under a capacity purchase agreement (CPA) with a third-party carrier. Following the termination of the operations, management committed to a plan of sale and wrote-down the related assets by approximately $i6.4 million to fair value, less cost to sell, and classified approximately $i23.2 million
as assets held for sale on the Consolidated Balance Sheets.
•The Company sold certain commercial real-estate assets held by one of the Company's subsidiaries. Management fair valued the assets, less the cost to sell, which did not result in a write-down to the asset group, and reclassified approximately $i6.3 million
as assets held for sale on the Consolidated Balance Sheets.
As of September 30, 2023 and December 31, 2022, assets held for sale were $i2.8 million and $i14.0
million, respectively. iA roll-forward of the Assets held-for-sale activity for the nine months ended September 30, 2023 and 2022 is as follows:
Assets
Held-For-Sale Activity for the nine months ended September 30, 2023
During
the second quarter of 2022, the Company sold ithree ATR-72 aircraft and recognized a $i2.6 million
gain on the transactions, which was recorded in Other operating expense in the consolidated statements of operations. During the third quarter of 2022, the Company estimated the fair value of its remaining ATR-42 and ATR-73 aircraft, using available market information and in consideration of recent transactions, which resulted in the recognition of a $i6.3 million impairment charge, which was recorded as a Special item
in the unaudited consolidated statements of operations. During the second quarter of 2023, the Company sold ione ATR-42 aircraft and recognized a $i0.4 million
loss, which was recorded in Other operating expense in the consolidated statements of operations.
In February 2023, the Company entered into a sale agreement for the sale of its commercial real estate and recognized a gain on sale of $i10.2 million, which was recorded in Other operating expense in the consolidated statements of operations. The sale closed
in March 2023.
24
In October 2023, the Company completed the sale of its remaining ATR 72-200 aircraft, which did not result in a gain or loss on the transaction. The company anticipates completing the sale of remaining aircraft parts by early 2024, and will continue to monitor the asset group for potential impairment.
13. iCondensed
Consolidating Financial Information
The following condensed consolidating financial information is presented in accordance with Rule 3-10 of Regulation S-X because, in connection with the issuance by pass-through trusts formed by Hawaiian (which is also referred to in this Note 13 as Subsidiary Issuer / Guarantor) of pass-through certificates, the Company (which is also referred to in this Note 13 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.
The
Company's condensed consolidating financial statements are presented in the following tables:
i
Condensed Consolidating Statements of Operations and Comprehensive Loss
Net
Cash Provided By (Used In) Operating Activities
$
(i4,270)
$
i6,116
$
(i25,896)
$
i—
$
(i24,050)
Cash
Flows From Investing Activities:
Net payments to affiliates
i—
(i37,188)
i17,474
i19,714
i—
Additions
to property and equipment, including pre-delivery deposits
i—
(i29,717)
i—
i—
(i29,717)
Proceeds
from the disposition of aircraft and aircraft related equipment
i—
i97
i10,646
i—
i10,743
Purchases
of investments
i—
(i751,509)
i—
i—
(i751,509)
Sales
of investments
i—
i756,561
i—
i—
i756,561
Net
cash provided by (used in) investing activities
i—
(i61,756)
i28,120
i19,714
(i13,922)
Cash
Flows From Financing Activities:
Repayments
of long-term debt and finance lease obligations
i—
(i173,298)
i—
i—
(i173,298)
Debt
issuance costs
i—
(i2,236)
i—
i—
(i2,236)
Net
payments from affiliates
i19,714
i—
i—
(i19,714)
i—
Payment
for taxes withheld for stock compensation
i—
(i1,842)
i—
i—
(i1,842)
Net
cash provided by (used in) financing activities
i19,714
(i177,376)
i—
(i19,714)
(i177,376)
Net
increase (decrease) in cash and cash equivalents
i15,444
(i233,016)
i2,224
i—
(i215,348)
Cash,
cash equivalents, & restricted cash - Beginning of Period
i20,803
i434,615
i52,410
i—
i507,828
Cash,
cash equivalents, & restricted cash - End of Period
$
i36,247
$
i201,599
$
i54,634
$
i—
$
i292,480
32
ITEM
2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect our current views with respect to certain current and future events and financial performance. Such forward-looking statements include, without limitation, statements related to our financial statements and results of operations; any expectations of operating expenses, deferred revenue, interest rates, tax rates, income taxes, deferred tax assets, valuation allowances
or other financial items; the severity, magnitude, duration and effects of the COVID-19 pandemic; the extent to which the COVID-19 pandemic and related impacts will materially and adversely affect our business operations, financial performance, results of operations, financial position or achievement of strategic objectives; the demand for air travel in the markets in which we operate; demand for air travel to Maui, Hawai'i; changes in our future capital needs; estimations related to our liquidity requirements; future obligations and related impact of such obligations related to our agreement with Amazon; the availability of aircraft fuel, aircraft parts and personnel; the impact and timing of A321neo engine shortages on our operating performance (including bookings, revenue and results of operations), available seat miles, operating revenue, and operating cost per available seat mile for the fourth quarter of 2023, 2024 and potentially beyond; expectations about the
recovery of international travel demand; expectations related to currency fluctuations; expected salary and related costs; our expected fleet as of September 30, 2024; estimates of annual fuel expenses and measure of the effects of fuel prices on our business; the impact of inflation on our business, our investments and the broader economy; the impact of climate change or natural disasters; the availability of, and efforts seeking, future financing; changes in our fleet plan and related cash outlays; committed capital expenditures; expected cash payments related to our post-retirement plan obligations; estimated financial charges; expected delivery or deferment of new aircraft and engines; the impact of accounting standards on our financial statements; the effects of any litigation on our operations or business; the effects of our fuel and currency risk hedging policies; the fair value and expected maturity of our debt
obligations; our estimated contractual obligations; the restatement of our financial statements for the Non-Reliance Periods and the impact of such restatement on our future financial statements and other financial measures; the material weakness we identified in our internal control over financial reporting and our efforts and timing related to such remediation; and other matters that do not relate strictly to historical facts or statements of assumptions underlying any of the foregoing. Words such as “expects,”“anticipates,”“projects,”“intends,”“plans,”“believes,”“estimates,”“could,”“would,”“will,”“might,”“may,” variations of such words, and similar expressions are also intended to identify such forward-looking statements. These forward-looking statements are and will be, as the case may be, subject to many risks, uncertainties and assumptions relating to our operations and
business environment, all of which may cause our actual results to be materially different from any future results, expressed or implied, in these forward-looking statements.
Factors that could affect such forward-looking statements include, but are not limited to: the impact of our agreement with Amazon and the role of cargo in our business model; fluctuations and the extent of declining demand for air transportation in the markets in which we operate; our dependence on the tourism industry; our ability to generate sufficient cash and manage the cash available to us; our ability to accurately forecast quarterly and annual results; global economic volatility; macroeconomic political and regulatory developments; geopolitical conflict; the impact of climate change the impact of climate change or natural disasters; the price and availability of fuel, aircraft parts and personnel; foreign currency exchange rate
fluctuations; competitive pressures, including the impact of increasing industry capacity on our Domestic routes; maintenance of privacy and security of customer-related information and compliance with applicable federal and foreign privacy or data security regulations or standards; our dependence on technology and automated systems; our reliance on third-party contractors; satisfactory labor relations; our ability to attract and retain qualified personnel and key executives; successful implementation of our growth strategy and cost reduction goals; adverse publicity; negative impacts to our intellectual property rights or brand; risks related to the airline industry; our ability to obtain and maintain adequate facilities and infrastructure; seasonal and cyclical volatility; the effect of applicable state, federal and foreign laws and regulations; increases in insurance costs or reductions in coverage; the limited number of suppliers for aircraft, aircraft engines and
parts; our existing aircraft purchase agreements; delays in aircraft or engine deliveries or other loss of fleet capacity; changes in our future capital needs; fluctuations in our share price; our financial liquidity; and our ability to implement our growth strategy. The risks, uncertainties, and assumptions referred to above that could cause our results to differ materially from the results expressed or implied by such forward-looking statements also include the risks, uncertainties, and assumptions discussed under the heading “Risk Factors” in Part II, Item 1A in this Quarterly Report on Form 10-Q and discussed from time to time in our public filings and public announcements. All forward-looking statements included in this Quarterly Report on Form 10-Q are based on information available to us as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statements to reflect events or circumstances that may arise after the
date of this quarterly report. The following discussion and analysis should be read in conjunction with our unaudited Consolidated Financial Statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q. Unless the context otherwise requires, the terms the Company, we, us, and our in this Quarterly Report on Form 10-Q refer to Hawaiian Holdings, Inc. and its consolidated subsidiaries.
33
Our Business
We are engaged in the scheduled air transportation of passengers and cargo amongst the Hawaiian
Islands (the Neighbor Island routes), between the Hawaiian Islands and certain cities in the U.S. mainland (the North America routes and collectively with the Neighbor Island routes, referred to as our Domestic routes), and between the Hawaiian Islands and the South Pacific, Australia, New Zealand and Asia (the International routes), collectively referred to as our “Scheduled Operations.” We offer non-stop service to Hawai'i from 15 U.S. mainland cities, which is more U.S. gateway cities than any other airline, and also provide approximately 144 daily flights between the Hawaiian Islands. In addition, we operate various charter flights. We are the longest serving airline, as well as the largest airline headquartered in the state of Hawai'i and the eleventh largest domestic airline in the United States based on revenue passenger miles (RPMs) as reported by the Research and Innovative Technology Administration Bureau of Transportation Statistics as of July 2023,
the latest available data. As of September 30, 2023, we had 7,347active employees.
In October 2022, we entered into an Air Transportation Services Agreement (ATSA) with Amazon.com Services LLC (Customer), a wholly-owned subsidiary of Amazon.com Inc. (Amazon), to provide certain air cargo transportation services to the Customer for an initial term of eight years. Thereafter, the Customer may elect to extend the ATSA for two years and, at the end of such period, the parties may mutually agree to extend the term for three additional years. The ATSA provides for us to initially operate ten A330-300F aircraft for the air cargo transportation services with the Customer having the right to enter into work orders for additional aircraft. We will supply flight crews, perform maintenance and certain administrative functions,
and procure aircraft insurance. The Customer will pay us a fixed monthly fee per aircraft, a per flight hour fee, and a per flight cycle fee for each flight cycle operated. The Customer will also reimburse us for certain operating expenses, including fuel, certain maintenance, and insurance premiums. Operations under the ATSA commenced on October 2, 2023.
General information about us is available at https://www.hawaiianairlines.com. Information contained on our website is not incorporated by reference into, or
otherwise to be regarded as part of, this Quarterly Report on Form 10-Q unless expressly noted. Our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, as well as any amendments and exhibits to those reports, are available free of charge through our website as soon as reasonably practicable after we file them with, or furnish them to, the Securities and Exchange Commission (SEC).
Third Quarter 2023 Financial Overview
•Passenger revenue in the third quarter was $664.9 million, up 0.3% as compared to the same period in 2022. During the
three months ended September 30, 2023, capacity (as measured in Available Seat Miles or ASMs) was up 4.2%, while RPM increased 8.2%, as compared to the same period in 2022, driven by improving demand on our International routes.
•Our operating loss in the third quarter was $54.9 million, as compared to an operating loss of $3.4 million during the same period in 2022.
•GAAP net loss in the third quarter was $48.7 million, or $0.94 per diluted share on total revenue of $727.7 million, compared to a net loss of $9.3 million, or $0.18 per diluted share, on total revenue of $741.2 million during the same period in 2022.
•Unrestricted
cash, cash equivalents and short-term investments was $1.1 billion as of September 30, 2023.
See “Results of Operations” below for further discussion of changes in revenue and operating expense.
Material Changes to our Consolidated Balance Sheet
During the nine months ended September 30, 2023, material changes to our Consolidated Balance Sheet consisted of the following:
•Cash, cash equivalents and short-term investments totaled approximately $1.1 billion as of September 30, 2023, compared to $1.4 billion as of December 31,
2022.
•As of September 30, 2023, our total debt was $1.6 billion, a decrease of $54.5 million, or 3.3%, as compared to $1.63 billion as of December 31, 2022.
•As of September 30, 2023, our air traffic liability and current frequent flyer deferred revenue was $699.1 million, an increase of $108.3 million, or 18.3%, as compared to $590.8 million as of December 31, 2022. The increase in air traffic liability is primarily due to an increase in advanced ticket sales and the seasonality of passenger travel, partially offset by an influx of ticket refunds following the wildfires in West Maui in August 2023.
34
Refer
to the Cash Flow and Use of Liquidity section below for additional discussion.
(1) Leased
aircraft include aircraft under both finance and operating leases. Four of our leased A330-200 aircraft have lease maturities in 2024. During the third quarter of 2023, we entered into an amendment to extend two of the A330-200 aircraft for an additional two years. In October 2023, we entered into amendments to extend the two remaining A330-200 aircraft leases for an additional two years.
(2) Includes unencumbered aircraft as well as those purchased and under various debt financing arrangements.
(3) A330-300F aircraft to be utilized under the ATSA with Amazon. Operations under the ATSA commenced on October 2, 2023. As discussed above, the ATSA provides for the operation of 10 aircraft with customer options to expand the fleet.
(4) In
July 2018, we entered into a purchase agreement for the purchase of 10 Boeing 787-9 "Dreamliner" aircraft, including purchase rights for an additional 10 aircraft. In December 2022, we entered into a supplemental agreement to the Boeing 787-9 purchase agreement, pursuant to which (a) we agreed with Boeing to defer the delivery of the Boeing 787-9 aircraft and (b) agreed to exercise purchase options for an additional two Boeing 787-9 aircraft. In July 2023, we were notified by Boeing that our 2023 and 2024 Boeing 787-9 deliveries will be delayed by a couple of months. Our first 787-9 aircraft is now expected to be delivered in January 2024. We are currently exploring financing options for our upcoming Boeing 787-9 deliveries.
(5) The ATR 42-500 turboprop and ATR 72-200 turboprop aircraft are owned by Airline Contract
Maintenance & Equipment, Inc., our wholly owned subsidiary. In 2021, we announced the termination of our 'Ohana by Hawaiian operations, which operated under a capacity purchase agreement with a third-party provider. As of September 30, 2023, there was one remaining aircraft and certain aircraft parts. The asset group was classified as Assets held-for-sale on the Consolidated Balance Sheets. In October 2023, we completed the sale of the remaining ATR 72-200 aircraft, which did not result in a gain or loss on the transaction. We anticipate completing the sale of remaining aircraft parts by early 2024.
Air Transportation Services Agreement
On October 20, 2022, we and Customer, a wholly owned subsidiary of Amazon, entered into an ATSA under which
we will provide certain air cargo transportation services to Customer for an initial term of eight years. Thereafter, the Customer may elect to extend the ATSA for two years and, at the end of such period, the parties may mutually agree to extend the term for three additional years.
The ATSA provides for us to initially operate ten A330-300F aircraft for air cargo transportation services, with Customer having the right to enter into work orders for additional aircraft. We will supply flight crews, perform maintenance and certain administrative functions, and procure aircraft insurance. Customer will pay us a fixed monthly fee per aircraft, a per flight hour
35
fee, and a per flight cycle fee for each flight cycle operated.
Customer will also reimburse us for certain operating expenses, including fuel, certain maintenance, and insurance premiums.
During the third quarter of 2023, we took delivery of our first A330-300F aircraft. Operations under the ATSA commenced on October 2, 2023.
Results of Operations
For the three months ended September 30, 2023, we generated a net loss of $48.7 million, or $0.94 per diluted share, compared to a net loss of $9.3 million, or $0.18 per diluted share, for the same period in 2022. For the nine months ended September
30, 2023, we generated a net loss of $159.3 million, or $3.09 per diluted share, compared to a net loss of $189.9 million, or $3.70 per diluted share, for the same period in 2022.
Selected Consolidated Statistical Data (unaudited)
CASM
excluding aircraft fuel and non-recurring items (a)
11.27
¢
10.32
¢
11.13
¢
10.73
¢
Aircraft fuel expense per ASM (b)
3.87
¢
4.55
¢
3.74
¢
4.40
¢
Revenue
block hours operated
53,183
51,284
158,058
143,646
Gallons of aircraft fuel consumed
68,521
63,834
199,735
174,744
Average
cost per gallon of aircraft fuel (b)
$
2.92
$
3.54
$
2.82
$
3.46
(a) Represents adjusted unit costs, a non-GAAP measure. We believe this is a useful measure because it better reflects our controllable costs. See “Non-GAAP Financial Measures” below for a reconciliation
of non-GAAP measures.
(b) Includes applicable taxes and fees.
Operating Revenue
During the three and nine months ended September 30, 2023, operating revenue decreased by $13.5 million, or 1.8%, and increased by $137.0 million, or 7.2%, respectively, as compared to the same periods in 2022. For the three months ended September 30, 2023, the decrease in operating revenue was primarily driven by a decrease in Other operating revenue of $15.2 million, or 19.5%, which is discussed in more detail below, while passenger was flat, up 0.3%. For the nine months ended September 30, 2023, the increase was primarily driven by the continued recovery of passenger
demand on our International routes, partially offset by reductions in our Domestic network revenue, which was negatively impacted by the wildfires in Maui
and a 16.3% decline in Other operating revenue.
36
Passenger revenue
For the three and nine months ended September 30, 2023, passenger revenue increased by $1.8 million, or 0.3%, and $173.8 million, or 10.3%, respectively, as compared to the same periods in 2022. Details of these changes are reflected in the table below:
Domestic
passenger revenue decreased 13.0% during the three months ended September 30, 2023 as compared to the same period in 2022, on a capacity reduction, as measured in ASM, of 4.6%. Domestic passenger revenue decreased by 3.8% during the nine months ended September 30, 2023 as compared to the same period in 2022, on a capacity reduction, as measured in ASM, of 3.3%.
Demand on our Domestic routes has recovered to pre-COVID-19 pandemic levels, with passenger revenue up 1.0% and 1.9% during the three and nine months ended September 30, 2023, as compared to the same periods in 2019, respectively, which has primarily been driven by the strength of our North America traffic. This recovery has been negatively impacted, however, by engine shortages from Pratt & Whitney
and its affiliates, which announced in July 2023 that a significant portion of the PW110G-JM engine fleet, including several engines utilized by Hawaiian, would require accelerated removals and inspections. This unanticipated time out of service resulted in lower-than-expected capacity growth in the quarter and we anticipate that we will continue to experience operational disruptions from our engine shortages from Pratt & Whitney into 2024 and potentially beyond.
Our Neighbor Island traffic, which accounted for approximately 18.4% and 18.5% of total Domestic passenger revenue during the three and nine months ended September 30, 2023, continued to face increased competitive pressures with additional capacity in the market combined with the low priced Neighbor Island route fares. Furthermore, on August 8 2023, the Island of Maui was devastated by wildfires,
which decimated the historic town of Lahaina, a popular tourist destination. In the immediate aftermath, there was a sharp decline in passenger traffic to the island of Maui and an increase in passenger ticket refunds in the aftermath of the fires. With many areas of the island not impacted by the wildfires and portions of West Maui reopening for tourism on October 8, 2023, demand for travel to Maui is recovering, but is expected to remain below historic levels through at least the remainder of 2023 and into 2024. The impact of these events has led to declines in Neighbor Island route revenue yield of 10.8% and 16.2% during the three and nine months ended September 30, 2023 as compared to the same periods in 2022, and is expected to continue to be a headwind to our Neighbor Island route revenue during at least the remainder of 2023.
37
International
route passenger revenue increased 90.9% and 146.1% during the three and nine months ended September 30, 2023, respectively, as compared to the same periods in 2022, primarily driven by increased capacity, which was up 43.6% and 99.4%, respectively. Despite improvements, our International route network remains depressed in comparison to pre-COVID-19 pandemic levels, with revenue down 17.5% and 23.1% during the three and nine months ended September 30, 2023, respectively, as compared to the same periods in 2019. We expect demand on our International routes to continue to lag behind demand on our Domestic routes as international demand recovers to pre-COVID-19 pandemic levels. In addition, we expect the weakening of the Japanese Yen, which has increased the cost of travel for customers from Japan, to continue to negatively impact international demand until the Japanese Yen
recovers.
We expect our ASM for the fourth quarter of 2023 to be up approximately 1.5% to 4.5% compared to the same period in 2022. We expect RASM will be down between 10.0% and 13.0% for the fourth quarter of 2023 as compared to the same period in 2022.
Other Operating Revenue
For the three and nine months ended September 30, 2023, Other operating revenue decreased by $15.2 million, or 19.5%, and $36.8 million, or 16.3%, respectively, as compared to the same periods in 2022.
During the three and nine months ended September 30, 2023, Cargo revenue decreased $9.1 million and $18.7 million, respectively, as compared to the same periods in 2022, primarily driven by reduced
cargo volumes. Loyalty revenue, primarily comprised of brand and marketing performance obligations, increased $1.4 million and $6.4 million during the three and nine months ended September 30, 2023, respectively, as compared to the same periods in 2022, as a result of increased credit card spend and new cardholder acquisitions. Other components in Other operating revenue include, but are not limited to, ground handling and other freight services, which collectively, decreased during the three and nine months ended September 30, 2023 by approximately $7.5 million and $24.5 million, respectively, as compared to the same periods in 2022.
Operating Expense
Operating
expenses were $782.6 million and $2.2 billion during the three and nine months ended September 30, 2023, respectively. Increases (decreases) in operating expenses for the three and nine months ended September 30, 2023, as compared to the same periods in 2022, are detailed below:
Wages and benefits expense increased $42.6 million, or 20.6%, and $113.4 million, or 18.4%, during the three and nine months ended September 30, 2023, respectively, as compared to the prior year periods. The increase in wages and benefits expense is primarily attributed to increased headcount and training costs as we prepare for the commencement of our ATSA operations with Amazon, as well as the introduction of our Boeing 787 aircraft (anticipated to commence service in April 2024), scheduled contractual wage increases and increased inflationary and hiring costs. In February 2023, the pilots ratified a new four year collective bargaining agreement (CBA), which included, amongst other things, a signing bonus, pay scale increases across all fleet types, improved health benefits and cost sharing, and enhancements to the
Company's postretirement and disability plans.
We expect that wages and benefits will increase during the fourth quarter of 2023, as compared to the same period in 2022, as a result of the amended CBAs we have entered into over the past several years, hiring and training costs associated with the commencement of operations under the ATSA in October 2023 and our Boeing 787 operations beginning in April 2024, and continued inflationary pressures.
Aircraft fuel
Aircraft fuel expense decreased during the three and nine months ended September 30, 2023, as compared to the prior year periods, primarily due to a decrease in the average fuel cost per gallon, offset by increased consumption, as illustrated in the following table:
Aircraft fuel expense, including taxes and delivery
$
200,069
$
225,999
(11.5)
%
$
564,075
$
603,873
(6.6)
%
Fuel
gallons consumed
68,521
63,834
7.3
%
199,735
174,744
14.3
%
Average fuel price per gallon, including taxes and delivery
$
2.92
$
3.54
(17.5)
%
$
2.82
$
3.46
(18.5)
%
Fuel
consumption increased by 7.3% and 14.3% during the three and nine months ended September 30, 2023, respectively, as compared to the prior year periods. The fuel consumption increase was a result of increased operations combined with operational challenges, including runway construction at the Daniel K. Inouye International Airport in Honolulu, Hawai'i, and aircraft up-gauging as a result of supply chain and engine availability issues impacting our A321neo aircraft.
We believe economic fuel expense is a good measure of the effect of fuel prices on our business as it most closely approximates the net cash outflow associated with the purchase of fuel for our operations in a period and is consistent with how our management manages our business and assesses our operating performance. We define economic
fuel expense as raw fuel expense plus (gains)/losses realized through actual cash payments to/(receipts from) hedge counterparties for fuel derivatives settled in the period, inclusive of costs related to hedging premiums.
Aircraft fuel expense, including taxes and delivery
$
200,069
$
225,999
(11.5)
%
$
564,075
$
603,873
(66.7)
%
Realized
losses on settlement of fuel derivative contracts
3,867
—
100.0
%
8,175
—
100.0
%
Economic fuel expense
$
203,936
$
225,999
(9.8)
%
$
572,250
$
603,873
(5.2)
%
Fuel
gallons consumed
68,521
63,834
7.3
%
199,735
174,744
14.3
%
Economic fuel price per gallon
$
2.98
$
3.54
(15.8)
%
$
2.87
$
3.46
(17.1)
%
We
expect that fuel gallons consumed will be up between 5.0% to 8.0% during the fourth quarter of 2023 as compared to the same period in 2022.
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Maintenance, materials and repairs
Maintenance, materials and repairs expense increased $5.7 million, or 9.7%, and decreased $1.9 million, or 1.1%, during the three and nine months ended September 30, 2023, respectively, as compared to the same periods in 2022.
As discussed in the section titled Passenger Revenue, challenges with engine supply for our A321neo fleet has negatively impacted our operations. In response, we have, and continue to
receive credits from Pratt & Whitney offsetting Power-by-the-Hour (PBH) expense, and recognized a reduction in maintenance, materials and repairs expense of $7.6 million and $17.5 million during the three and nine-months ended September 30, 2023. In December 2022, we entered into a Memorandum of Understanding (MOU) with one of our third-party service providers to terminate our Amended and Restated Complete Fleet Services (CFS) Agreement (Amended CFS) covering A330-200 aircraft. The Amended CFS was originally scheduled to run through December 2027, and terminated in April 2023. Upon execution of the MOU, we agreed to pay a total of $12.5 million in termination fees, which was recognized in fiscal year 2022. As of December 31, 2022, we had approximately $24.1 million in deferred liabilities which was amortized into earnings as contra-maintenance materials and repairs
expense during the remainder of the contract period. During the three and nine months ended September 30, 2023, we recognized approximately $0.0 million and $24.1 million, respectively, in amortization. Excluding these reductions, maintenance, materials and repairs expense increased 13.4 million, or 22.5%, and $39.6 million, or 23.2%, during the three and nine months ended September 30, 2023, respectively, as compared to the same periods in 2022, primarily the result of increased rates and utilization associated with our PBH agreements, the timing of scheduled heavy maintenance events and inflationary pressures on costs.
We expect maintenance, materials and repairs expense to increase during the fourth quarter of 2023,
as compared to the same period in 2022 as a result of scheduled heavy maintenance events expected in the period and increased PBH costs.
Aircraft and passenger servicing
Aircraft and passenger servicing expense increased by $5.2 million, or 12.6%, and $21.4 million, or 19.4%, for the three and nine months ended September 30, 2023, respectively, as compared to the same periods in 2022. The increase was primarily due to higher volume-related expenses associated with increased passenger demand and inflationary pressures. We expect aircraft and passenger service expense to increase during the fourth quarter of 2023, as compared to the same period in 2022, as we continue to build international operational capacity.
Other rentals and landing
fees
Other rentals and landing fees increased by $8.0 million, or 20.8%, and $16.6 million, or 15.0% for the three and nine months ended September 30, 2023, respectively, as compared to the same periods in 2022. A portion of our other rentals and landing fees are variable in nature and are dependent on factors such as the number of departures and passengers. The increase in landing fees and other rentals is attributed to an increase in rates and operations as discussed above. We expect other rentals and landing fees expense to increase during the fourth quarter of 2023, as compared to the same period in 2022, as we continue to rebuild international operational capacity.
Purchased services
Purchased services increased by $5.3 million,
or 16.9%, and $13.1 million, or 13.7%, for the three and nine months ended September 30, 2023, respectively, as compared to the same periods in 2022. The increase in purchased services is primarily related to our increased operations during the three and nine months ended September 30, 2023 as compared to the same periods in 2022. We expect other purchased services expense to increase during the fourth quarter of 2023, as compared to the same period in 2022, as we continue to build international operational capacity.
Other expense
Other expense increased $5.3 million, or 12.3%, and $19.5 million, or 17.2%, for the three and nine months ended September 30, 2023, respectively, as compared to the same
periods in 2022. The increase was primarily related to personnel-related expenditures for crew travel, professional and technical expenditures, and other miscellaneous expense. During the first quarter of 2023, we also recognized a $10.2 million gain on the sale of commercial real estate.
We expect other expense to increase during the fourth quarter of 2023 as we continue to build operational capacity.
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Nonoperating Income (Expense)
Net nonoperating expense decreased by $1.8 million, or 24.4%, and $34.8 million,
or 64.8%, during the three and nine months ended September 30, 2023, respectively, as compared to the same periods in 2022. The change in both periods was attributed to (a) increased generation of interest income commensurate with the expansion of our investment portfolio into higher risk, higher yielding investments, (b) reduction in interest expense as a result of debt reduction activities in 2022, and (c) improvements in our investment portfolio positions, which were offset by a reduction in gains associated with our foreign denominated debt.
Income Taxes
Our effective tax rate was 19.5% and 20.7% for the three and nine months ended September 30, 2023 as compared to 14.0% and 17.8% during the same periods in 2022. The effective tax rate represents
a blend of federal and state taxes, the impact of certain nondeductible items, and the valuation allowance on certain state net operating loss carryforwards, realized capital losses, and unrealized capital losses on equity securities during the periods.
We expect our tax rate to be approximately 21.0% for the fourth quarter of 2023.
Liquidity and Capital Resources
Cash, cash equivalents and short-term investments (excluding restricted cash) totaled approximately $1.1 billion as of September 30, 2023, compared to approximately $1.4 billion as of December 31, 2022.
As of September 30,
2023, our current assets exceeded our current liabilities by approximately $185.3 million as compared to $558.0 million as of December 31, 2022. Approximately $699.1 million of our current liabilities relate to our advanced ticket sales and frequent flyer deferred revenue.
Cash Flow and Uses of Liquidity
Operating Activities
Net cash provided by operating activities was $2.1 million during the nine months ended September 30, 2023 compared to net cash used in operating activities of $24.1 million during the prior year period. Our operating cash flows are impacted by the following factors:
Advanced Ticket Sales. We
sell tickets for air travel and record the receipt on advance sales as deferred revenue in air traffic liability. The air traffic liability typically increases during the winter and spring months as advanced ticket sales grow prior to the summer and fall peak travel seasons and decreases upon utilization during these seasons. As discussed above, we noted marked improvements in air travel demand during the three and nine months ended September 30, 2023, as compared to the same periods in 2022; however, overall demand (measured in passengers flown) remains below 2019 levels, down approximately 7.8%, largely due to international travel demand lagging the recovery of domestic travel.
Aircraft Fuel. Fuel expense represented approximately 25.6% and 25.3% of our total operating expense during the three and nine months ended September
30, 2023 compared to 30.4% and 28.9%, respectively during the same periods in 2022. The market price for jet fuel is volatile, which can impact the comparability of our cash flows from operations. During the three and nine months ended September 30, 2023, the average fuel price per gallon decreased 17.5% and 18.5%, respectively, as compared to the same periods in 2022.
Pension and Other Postretirement Benefit Plan Funding. During the three and nine months ended September 30, 2023 and 2022, we were not required to, and did not, make contributions to our defined benefit and other postretirement plans. Future funding requirements for our defined benefit and other postretirement plans are dependent upon many factors such as interest rates,
funded status, applicable regulatory requirements and the level and timing of asset returns. Given available funding credits in the defined benefit plan from past contributions in excess of required minimums, we continue to evaluate whether any cash contributions will be made to our defined benefit plan during 2023.
Operating Lease Obligations. As of September 30, 2023, we had $396.9 million of operating lease obligations, which range between approximately $42.0 million to $102.7 million on an annual basis between 2024 and 2027. We have approximately $27.8 million in operating lease obligations during the remainder of 2023.
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Other
Commitments. We have certain purchase obligations under which we are required to make minimum payments for goods and services, including, but not limited to aircraft maintenance, IT, capacity purchases, and reservations. Total contractual obligations do not include long-term contracts where the commitment is variable in nature (with no minimum guarantee), such as aircraft maintenance deposits due under operating leases and fees under certain other agreements such as aircraft maintenance PBH, computer reservation systems and credit card processing agreements, or when the agreements contain short-term cancellation provisions. As of September 30, 2023, we had approximately $127.9 million of such obligations, which range from approximately $7.1 million to $27.8 million on an annual basis over the next five years.
Investing
Activities
Net cash used in investing activities was $61.0 million during the nine months ended September 30, 2023 compared to net cash used in investing activities of $13.9 million during the prior year period. Investing activities include capital expenditures, primarily related to aircraft and other equipment, and the purchases and sales of short-term investments.
Short-term Investments. During the nine months ended September 30, 2023, our purchases and proceeds from the sale and maturity of short-term investments resulted in net cash inflow of $132.3 million as compared to net cash inflow of $5.1 million during the same period in 2022.
Capital Expenditures. Our capital expenditures are primarily related
to the purchase of aircraft, fleet modifications, and technology enhancements. Our capital expenditures were $213.2 million during the nine months ended September 30, 2023 as compared to $29.7 million in capital expenditures during the same period in 2022, primarily related to predelivery payments toward our Boeing 787-9 aircraft, the first of which is now expected to be delivered in the first quarter of 2024.
As of September 30, 2023, we had the following capital commitments consisting of firm aircraft and engine orders and purchase rights:
Aircraft Type
Firm
Orders
Purchase Rights
Expected Delivery Dates
A321neo aircraft
—
9
N/A
Boeing 787-9 aircraft
12
8
Between 2024 and 2027
General
Electric GEnx spare engines:
Boeing 787-9 spare engines
3
1
Between 2023 and 2027
Committed expenditures for these aircraft, engines, and related flight equipment are approximately $48.8 million for the remainder of 2023, $585.3 million in 2024, $519.2 million
in 2025, $425.7 million in 2026, and $249.6 million in 2027.
In October 2020, we entered into an amendment to our Boeing 787-9 purchase agreement, which changed the scheduled delivery of each aircraft and related engines to between 2022 and 2026. In December 2022, we entered into a supplemental agreement to the purchase agreement, pursuant to which (a) we agreed with Boeing to defer delivery of the Boeing 787-9 aircraft, and (b) agreed to exercise purchase options for an additional two Boeing 787-9 aircraft. In July 2023, we received notification from Boeing of a delivery delay for the first aircraft from the scheduled delivery at November 2023 to be delayed until January 2024. Refer to Note 11 in the Notes to Consolidated Financial Statements for additional discussion.
In order to complete the purchase of these aircraft and fund related costs, we may need to secure
acceptable financing. We have backstop financing available from aircraft and engine manufacturers, subject to certain customary conditions. Financing may be necessary to satisfy our capital commitments for firm order aircraft and other related capital expenditures. We can provide no assurance that any financing not already in place for aircraft and spare engine deliveries will be available to us on acceptable terms when necessary or at all.
Financing Activities
Net cash used in financing activities was $59.8 million during the nine months ended September 30, 2023 compared to net cash used in financing activities of $177.4 million during the prior year period. Our financing cash flows are impacted by the following factors:
Debt and Finance
Lease Obligations.During the nine months ended September 30, 2023 and 2022, we repaid $58.7 million and $173.3 million of long-term debt and finance lease obligations, respectively. In January 2022, we made the final scheduled principal payment of $45.1 million for our Class B EETC-13 debt obligation and in June 2022, we paid $71.6 million to
42
extinguish our remaining outstanding Series 2020-1A and Series 2020-1B Equipment Notes. Refer to Note 8 in the Notes to Consolidated Financial Statements for additional discussion.
Future Debt Obligations. As of
September 30, 2023, scheduled maturities of our debt remaining in 2023 were $5.3 million. The scheduled maturities total $43.6 million in 2024, $55.2 million in 2025, $1.3 billion in 2026, $10.6 million in 2027, and beyond 2027, scheduled maturities aggregate to $147.2 million. In addition, we are obligated to make periodic interest payments at fixed and variable rates, depending on the terms of the applicable debt agreements. Based on applicable interest rates and scheduled debt maturities as of September 30, 2023, these interest obligations total $17.8 million remaining in 2023, $78.3 million in 2024, $77.4 million in 2025, $22.6 million in 2026, $2.7 million in 2027, and $7.6 million thereafter.
Finance Lease Obligations. As of September 30,
2023, we had $85.1 million of finance lease obligations, which range between approximately $11.3 million to $13.2 million on an annual basis between 2024 to 2027. We have approximately $2.9 million in finance lease obligations during the remainder of 2023.
Return to Shareholders. Pursuant to our receipt of financial assistance under federal Payroll Support Programs, we were restricted from making any stock repurchases or dividend payments through September 30, 2022. We did not repurchase stock or make dividend payments during the three and nine months ended September 30, 2023. Pursuant to the Inflation Reduction Act passed by Congress in August 2022, future stock repurchases will be subject to excise tax.
Undrawn Lines
of Credit. As of September 30, 2023, our revolving line of credit remained undrawn and available under our $235.0 million revolving credit facility. In August 2022, we renewed the revolving credit facility for an additional three years, maturing in December 2025.
Credit Card Holdbacks. Under our bank-issued credit card processing agreements, 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. As of September 30, 2023 and December 31, 2022, there were no holdbacks held by our credit card processors. In the event of a material adverse change in our business, the credit card processors could increase holdbacks to an amount
up to 100% of the outstanding credit card tickets that are unflown (e.g., air traffic liability, excluding frequent flyer deferred revenue), which would result in the restriction of cash. If we were unable to obtain a waiver of, or otherwise mitigate the increase in the restriction of cash, it could have a material impact on our operations, business or financial condition.
Covenants. We were in compliance with covenants contained in our financing agreements as of September 30, 2023.
Non-GAAP Financial Measures
We believe the disclosure of non-GAAP financial measures is useful information
to readers of our financial statements because:
•We believe it is the basis by which we are evaluated by many industry analysts and investors;
•These measures are often used in management and Board of Directors decision making analysis;
•It improves a reader’s ability to compare our results to those of other airlines; and
•It is consistent with how we present information in our quarterly financial results press releases.
See
tables below for reconciliation between GAAP consolidated net income (loss) to adjusted consolidated net income (loss), including per share amounts (in thousands unless otherwise indicated), adjusted Operating Costs per Available Seat Mile (CASM), and adjusted EBITDA. The adjustments are described below:
•CBA related expense.
◦In February 2023, pilots represented by the Air Line Pilots Association ratified a new four-year CBA, which included, amongst other things, a signing bonus, pay scale increases across all fleet types, improved health benefits and cost sharing, and enhancements to the Company's postretirement and disability plans. In connection with the ratification, we recorded a signing
bonus and vacation liability true-up of approximately $17.7 million in wages and benefits during the first quarter of 2023.
◦In February 2022, employees represented by the International Association of Machinists and Aerospace Workers and International Association of Machinists and Aerospace Workers - Clerical Division ratified a new CBA, which included a one-time signing bonus of $2.1 million, which was recorded in wages and
43
benefits during the first quarter of 2022. During the second quarter of 2022, the Company and the IAM also completed a separation program under the CBA and recognized an additional $2.6 million
one-time expense, which was recorded in wages and benefits.
•Contract termination amortization. In December 2022, we entered into a Memorandum of Understanding (MOU) with one of our third-party service providers to early terminate our Amended and Restated Complete Fleet Services Agreement (Amended CFS) covering A330-200 aircraft. The Amended CFS was originally scheduled to run through December 2027, and will now terminate in April 2023. Upon execution of the MOU, we agreed to pay a total of $12.5 million in termination fees, which was recognized in fiscal year 2022. As of December 31, 2022, we had approximately $24.1 million in deferred liabilities to be recognized into earnings over the remaining
contract term as contra-maintenance materials and repairs expense. During the three and nine months ended September 30, 2023, we recognized approximately $0.0 million and $24.1 million, respectively, in amortization within Maintenance, materials and repairs in the Consolidated Statements of Operation.
•Special items. During the third quarter of 2022, we estimated the fair value of our remaining ATR-42 and ATR-72 aircraft, which resulted in the recognition of a $6.3 million impairment charge recorded as a Special item in the consolidated statements of operations.
•Loss (gain) on sale of aircraft. During
the three months ended June 30, 2023, the Company completed the sale of one ATR-42 aircraft and recognized a loss of approximately $0.4 million. During the three months ended June 30, 2022, we sold three ATR-72 aircraft and recorded a $2.6 million gain on sale of aircraft in other operating expense.
•Gain on sale of commercial real estate. In February 2023, we entered into an agreement for the sale of our commercial real estate and recognized a gain on the transaction of $10.2 million, which was recorded in Other operating expense in the Consolidated Statements of Operations.
•Interest
income on federal tax refund. In March 2023, we received $4.7 million in interest in connection with a $66.8 million federal tax refund received related to fiscal year 2018. The interest was recorded in Interest income in the Consolidated Statements of Operations.
•Changes in fair value of fuel derivative contracts. Changes in fair value of derivative contracts, net of tax, are based on market prices for open contracts as of the end of the reporting period. This line item includes the unrealized amounts of fuel derivatives (not designated as hedges) that
will settle in future periods and the reversal of prior period unrealized amounts.
•Loss on extinguishment of debt. During the three and six months ended June 30, 2022, we recognized a $8.6 million loss on the extinguishment of our remaining outstanding Series 2020-1A and Series 2020-1B Equipment Notes. Loss on extinguishment of debt is excluded to allow investors to better analyze our core operational performance and more readily compare our results to other airlines in the periods presented below.
•Unrealized gain on foreign debt. Unrealized gain on foreign debt is based on the fluctuation in exchange rates and the measurement of foreign-denominated debt to our functional currency.
•Unrealized
loss on equity securities. Unrealized loss on equity securities is driven by changes in market prices and currency fluctuations, which is recorded in Other nonoperating expense in the Consolidated Statements of Operations.
We believe that adjusting for the impact of the changes in fair value of equity securities and fuel derivative contracts, fluctuations in exchange rates on debt instruments denominated in foreign currency, and non-recurring expenses and income/gains (including CBA-related expense, contract termination amortization, loss (gain) on sale of aircraft, loss on extinguishment of debt, interest income on income tax refund, and gain on sale of commercial real estate), helps investors better analyze our operational
performance and compare our results to other airlines in the periods presented.
Changes in fair value of fuel derivative contracts
(6,964)
(0.13)
1,063
0.02
(2,548)
(0.05)
1,063
0.02
Loss
on extinguishment of debt
—
—
—
—
—
—
8,568
0.17
Unrealized gain on foreign debt
(4,196)
(0.08)
(9,734)
(0.19)
(18,791)
(0.36)
(41,697)
(0.81)
Unrealized
loss on equity securities
2,607
0.05
3,445
0.07
3,149
0.06
22,839
0.44
Tax effect of adjustments
2,344
0.04
497
0.01
7,445
0.15
4,969
0.10
Adjusted
net loss
$
(54,929)
$
(1.06)
$
(7,695)
$
(0.15)
$
(190,874)
$
(3.70)
$
(185,776)
$
(3.62)
Operating
Costs per Available Seat Mile (CASM)
We have listed separately in the table below our fuel costs per ASM and our non-GAAP unit costs, excluding fuel and non-recurring items. These amounts are included in CASM, but for internal purposes we consistently use unit cost metrics that exclude fuel and non-recurring items (if applicable) to measure and monitor our costs.
45
CASM and CASM-excluding aircraft fuel and non-recurring items are summarized in the table below:
CASM
excluding aircraft fuel and non-recurring items
11.27
¢
10.32
¢
11.13
¢
10.73
¢
Adjusted EBITDA
We believe that adjusting earnings for interest, taxes, depreciation and amortization, non-recurring operating expenses (such as changes in unrealized gains and losses on financial instruments) and one-time charges helps investors better
analyze our financial performance by allowing for company-to-company and period-over-period comparisons that are unaffected by company-specific or one-time occurrences.
Changes in fair value of fuel derivative instruments
(6,964)
1,063
(2,548)
1,063
Unrealized
gain on foreign debt
(4,196)
(9,734)
(18,791)
(41,697)
Loss (gain) on sale of aircraft
—
—
392
(2,578)
Special
items
—
6,303
—
6,303
Unrealized loss on equity securities
2,607
3,445
3,149
22,839
Adjusted
EBITDA
$
(11,716)
$
47,851
$
(70,862)
$
(56,560)
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based upon financial
statements that have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities as of the date of the financial statements. Actual results may differ from these estimates under different assumptions and/or conditions.
Critical accounting policies and estimates are defined as those accounting policies and accounting estimates that are reflective of significant judgments and uncertainties that potentially result in materially different results under different assumptions and conditions. There have been no material changes to our critical accounting policies and estimates during the nine months ended September 30, 2023. For more information
on our critical accounting policies, see Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year ended December 31, 2022.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There have been no material changes in market risk from the information provided in Part II, Item 7A "Quantitative and Qualitative Disclosures About Market Risk", in our 2022 Annual Report on Form 10-K.
ITEM
4.CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Our management, including our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act)), which have been designed to permit us to effectively identify and timely disclose important information. Based on that evaluation, our management, including our principal executive officer and principal financial officer, concluded that our disclosure controls and procedures were effective as of September 30, 2023 to provide reasonable
assurance that the information required to be disclosed by us in reports we file under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosures.
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Changes in Internal Control over Financial Reporting
During the three months ended September 30, 2023, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, will be detected. These inherent limitations include the realities that judgments in decision-making can be faulty
and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of effectiveness of controls to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
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PART II.
OTHER INFORMATION
ITEM 1.LEGAL PROCEEDINGS.
We are not a party to any litigation that is expected to have a significant effect on our operations or business.
ITEM 1A.RISK FACTORS.
RISK FACTOR SUMMARY
Our
business operations are subject to numerous risks and uncertainties, including those outside of our control, that could cause our actual results to be harmed, including risks regarding the following:
Business Risks
•future obligations and related impacts of such obligations with respect to our agreements with Amazon
Economic Risks
•global economic and market volatility
•our dependence on tourism to, from, and amongst the Hawaiian Islands
•our dependence on the price and availability of fuel
•our exposure to foreign
currency exchange rate fluctuations
Liquidity Risks
•credit market conditions
•our debt, including covenants that restrict our financial and business operations
•requirements for us to maintain reserves under our credit card processing agreements
Competitive Environment Risks
•the extremely competitive environment in which we operate
•the effect of inflation on our profitability
•the effect of interest rate increases on the fair value of our fixed
income investments
•the concentration of our business
•the competitive advantages held by network carriers in the North America market and our reliance on commercial relationships with other airlines to provide access to Domestic and International routes
•the effect of increased capacity provided by our competitors on our North American and Neighbor Island routes
•the effect of competition from domestic and foreign carriers on our International routes
Information Technology and Third-Party Risks
•compliance with U.S. and foreign laws and regulations relating to privacy, data
protection, and data security and security standards imposed by our commercial partners
•actual or perceived failure to protect customer or other personal or confidential information
•our increasing dependence on technology and automated systems to operate our business
•our reliance on third-party contractors to provide certain facilities and services
Labor Relations and Related Costs Risks
•our dependence on satisfactory labor relations
•our ability to attract and retain qualified personnel and key executives
Strategy
and Brand Risks
•our ability to successfully implement our route and network strategy
•damage to our reputation or brand image
•adverse publicity
•our ability to protect our intellectual property rights
•concentration of our cargo business with Amazon
•our ability to realize the full benefits of our agreements with Amazon
Airline Industry, Regulation and Related Costs Risks
•the substantial operating leverage of the airline industry and other
conditions beyond its control
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•any inability to maintain adequate facilities and infrastructure at airports within the state of Hawai'i
•substantial seasonal and cyclical volatility of our business
•terrorist attacks or international hostilities, or the fear of terrorist attacks or hostilities
•extensive government regulation, new regulations and taxes impacting the airline industry
•climate change, including increased regulation and the impact of severe weather events
•federal
budget constraints
•compliance with various environmental laws and regulations required of the airline industry
•our expansion into non-U.S. jurisdictions and the related laws and regulations to which we are subject
•litigation or regulatory action in the normal course of business or otherwise
•changes in tax laws or regulations and our ability to use our net operating loss carryforwards
•increases in our insurance costs or reductions in coverage
•extended interruptions or disruptions in service
Fleet and
Fleet-Related Risks
•our dependence on a limited number of suppliers for aircraft, aircraft engines and parts
•significant future financial commitments and operating costs related to our agreements to purchase Boeing 787-9 aircraft
•delays in scheduled aircraft deliveries or other loss of fleet capacity
•any impairment and other related charges related to the value of our long-lived assets
Common Stock Risks
•fluctuations in our share price
•we do not expect to repurchase our common stock or pay dividends
on our common stock
•future earnings and earnings per share impacts from fluctuations in the value of the Amazon warrants
•dilution of existing stockholders and market price impacts related to the exercise of our outstanding warrants
•limitations on voting and ownership by non-U.S. citizens in our certificate of incorporation and exclusive forum provisions in our bylaws
•the effect of our indebtedness and liabilities related to our debt offerings on the cash flow available for our operations and to satisfy our obligations related such debt
Restatement of our Consolidated Financial Statements Risks
•challenges to developing and maintaining effective internal control over financial reporting so that we can accurately report our financial results in a timely
manner
•litigation over the restatement of our previously issued financial statements
BUSINESS RISKS
Our agreement with Amazon increases the role of cargo in our business model, which may have negative impacts on our operating results and financial condition.
Our business has historically focused on passenger flights. The ATSA with Amazon is anticipated to increase our cargo operations. Historically, our revenue from non-passenger operations, which includes cargo, accounted for approximately 11.6%, 14.1%, and 21.3% of total revenue during the years ending December 31, 2022, 2021 and 2020,
respectively. During the three and nine months ended September 30, 2023, other revenue accounted for 8.6% and 9.2%, respectively, of our total revenue. Under the ATSA, cargo operations are expected to account for a larger portion of our revenue. Our cargo operations for Amazon may not generate the levels of revenue anticipated. We expect to incur additional costs in order to ramp up and prepare for increased cargo operations, including hiring crew, opening mainland bases and preparing to provide line maintenance for the Amazon fleet. Our pre-service efforts could be costly and be time-consuming and distracting to our management. Additionally, we will incur costs before we generate revenue from our cargo operations for Amazon, which may negatively impact our business and results of operations. Once we begin generating revenue from cargo operations for Amazon, some or all of that revenue will be offset against the value
of Amazon’s vested warrant shares due to our accounting policies.
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ECONOMIC RISKS
Our business is affected by global economic volatility, including any future economic downturns.
Our business and results of operations are significantly impacted by general world-wide economic conditions, including any future economic downturn. For example, the COVID-19 pandemic and associated decline in economic activity and increase in unemployment levels had a severe and prolonged effect on the global economy generally and, in turn, resulted in a prolonged period of depressed demand for air travel in general. As a result of the COVID-19
pandemic, we experienced a significant decrease in demand for air travel and reduced load capacity on flights. For the three months ended September 30, 2023, our passenger revenue was $664.9 million, up approximately $1.8 million compared to 2022, but down $29.4 million, or 4.2% from the pre-pandemic period in 2019. Across our business and as a result of the COVID-19 pandemic, we have faced operational challenges, including continued delay in the recovery of international travel. Our business depends on the demand for travel to, from and within the Hawaiian Islands and such demand for discretionary air travel remains unpredictable. Further deterioration or instability in demand, including resulting from any future pandemic or other public health related travel restrictions, recommendations or other impacts on travel behavior, such as those that occurred during the COVID-19 pandemic, ongoing economic uncertainty or recession
may result in sustained reduction in our passenger traffic and/or increased competitive pressure on fares in the markets we serve, which could continue to negatively impact our results of operations and financial condition. There can be no assurance that we will be able to offset passenger revenue reductions with other revenue, by reducing our costs or by seeking financing arrangements or other programs or opportunities. We also may not have sufficient cash flows to support our debt obligations, on which more detail is provided in Note 8 of the Notes to Consolidated Financial Statements.In addition, a rapid economic expansion following the height of the COVID-19 pandemic resulted in significant inflationary pressures and volatility in certain currencies, which have increased our costs for aircraft fuel, wages and other goods and services we require to operate our business.
Earlier
in 2023, concerns arose with respect to the financial condition of certain banking institutions in the United States, in particular those with exposure to certain types of depositors and large portfolios of investment securities. In March 2023, both Silicon Valley Bank (SVB) and Signature Bank (Signature) entered receivership. While we do not maintain accounts with either SVB or Signature, we maintain our cash at other financial institutions in balances that exceed the current Federal Deposit Insurance Corporation insurance limits.If more banks and financial institutions experience financial hardship, enter receivership or become insolvent in the future due to financial conditions affecting the banking system and financial markets, our ability to access our cash, cash equivalents and investments may be threatened and could have a material adverse effect on our business and financial condition.
Our
business is highly dependent on tourism to, from, and amongst the Hawaiian Islands and our financial results have been impacted and may continue to be impacted by the current and any future downturn in tourism levels.
Our principal base of operations is in Hawai'i and our revenue is linked primarily to the number of travelers (mainly tourists) to, from and amongst the Hawaiian Islands. As a result of the COVID-19 pandemic and government mandates related to travel, we experienced a significant decline in the demand for travel to, from and amongst the Hawaiian Islands. The State of Hawai'i stopped imposing quarantine, testing and vaccination requirements at the end of the first quarter of 2022, but certain foreign government restrictions remained in effect for international travelers during 2022. We have and will continue to incur costs as we further increase our number of flights as passenger traffic to and
within the Hawaiian Islands increases, which we incur before the anticipated additional revenue is earned.
Hawai'i tourism levels are generally affected by the economic and political climate impacting air travel and tourism markets generally, including the availability of hotel accommodations, the popularity of tourist destinations relative to other vacation destinations, and other global factors including health crises, natural disasters, safety, and security. While we have seen some increased tourism activity in the state of Hawai'i since the start of the COVID-19 pandemic, we cannot predict if and when tourism levels will be sustained at levels seen prior to the COVID-19 pandemic, particularly with respect to international markets. Additionally, from time to time, various events and industry-specific problems such as labor strikes have had a negative impact on tourism generally and in Hawai'i specifically.
The occurrence of natural disasters, such as wildfires, hurricanes, earthquakes, volcanic eruptions, and tsunamis, in Hawai'i or other parts of the world, could also have an adverse effect on our business or financial condition. For example, as a result of the recent wildfires in West Maui, we have experienced a decline in tourism in this region that has adversely impacted our business and financial results. We expect demand for travel to Maui to remain depressed and continue to impact our business and financial results while West Maui continues to rebuild from wildfire devastation. In addition, the potential or actual occurrence of terrorist attacks, wars, and/or the threat of other negative world events have had, and may in the future have, a material adverse effect on or impede the recovery of tourism from the COVID-19 pandemic.
Our business is highly dependent on the price and availability of fuel.
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Our
results, operations, and plans for decarbonization are heavily impacted by the price and availability of jet fuel. The cost of jet fuel remains high and the availability of jet fuel remains volatile. The cost and availability of jet fuel are subject to political, economic, and market factors that are generally outside of our control, including those related to the conflict between Russia and Ukraine. Prices may be affected by many factors including, without limitation, the impact of political instability, crude oil production and refining capacity, sustainable aviation fuel (SAF) production, unexpected changes in the availability of petroleum products due to disruptions to distribution systems or refineries, unpredicted increases in demand due to weather or the pace of global economic growth, inventory reserve levels of crude oil and other petroleum products, the relative fluctuation between the U.S. dollar and other major currencies, government taxes, regulations and
subsidies that change the price or availability of jet fuel, and the actions of speculators in commodity markets. Because of the effects of these factors on the price and availability of jet fuel, the cost and future availability of fuel cannot be predicted with any degree of certainty. Also, due to the competitive nature of the airline industry, there can be no assurance that we will be able to increase our fares or other fees to sufficiently offset any increase in fuel prices.
While we may enter into derivative agreements to protect against the volatility of fuel costs, there is no assurance that such agreements will protect us during unfavorable market conditions or that counterparties will be able to perform under these hedge arrangements.
See Item 7A “Quantitative and Qualitative Disclosures About Market Risk”
of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 for further information regarding our exposure to the price of fuel.
Our business is exposed to foreign currency exchange rate fluctuations.
Prior to the COVID-19 pandemic, our business had been expanding internationally with an increasing percentage of our passenger revenue generated from our International routes. The fluctuation of the U.S. dollar relative to foreign currencies can significantly affect our results of operations and financial condition. For example, the value of the Japanese Yen has experienced significant volatility versus the U.S. dollar recently. Any weakening of the Japanese Yen relative to the U.S. dollar causes our flights, and travel in general, from Japan to Hawai'i to become more expensive
to customers in Japan, which could negatively impact our business. To manage the effects of fluctuating exchange rates, we periodically enter into foreign currency forward contracts and execute payment of expenditures in those locations in local currency. As of September 30, 2023, we have Japanese Yen denominated debt totaling $125.0 million. If our business continues to expand internationally, there is no assurance that these agreements will protect us against foreign currency exchange rate fluctuations during unfavorable market conditions or that our counterparties will be able to perform under these hedge arrangements.
See Item 7A “Quantitative and Qualitative Disclosures About Market Risk” of our Annual Report on Form 10-K for the fiscal year ended December
31, 2022 for further information regarding our exposure to foreign currency exchange rates.
LIQUIDITY RISKS
Our financial liquidity could be adversely affected by credit market conditions.
Our business requires access to capital markets to finance equipment purchases, including aircraft, and to provide liquidity in seasonal or cyclical periods of weaker revenue generation. In particular, we will face specific funding requirements with respect to our obligation under purchase agreements with Boeing to acquire new aircraft. We may finance these upcoming aircraft deliveries; however, the unpredictability of global credit market conditions, particularly in light of the U.S. Federal Reserve System (Federal Reserve) raising interest rates, may adversely affect the availability of financing
or may result in unfavorable terms and conditions.
Our current unencumbered aircraft can be financed to increase our liquidity, but such financings may be subject to unfavorable terms. In light of current market conditions, any such financings are likely to reflect loan-to-value ratios and interest rates and other terms and conditions less favorable than our recent aircraft financings.
Additionally, there can be no assurance that we will not face credit rating downgrades as a result of weaker than anticipated performance of our business or other factors, as demonstrated by our credit rating downgrades in 2020. Future downgrades could adversely affect our cost of funds and related margins, liquidity, competitive position and access to capital markets.
We can offer
no assurance that financing we may need in the future will be available when required or that the economic terms on which it is available will not adversely affect our financial condition. If we cannot obtain financing or we cannot obtain financing on commercially reasonable terms, our business and financial condition may be adversely affected.
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Our debt could adversely affect our liquidity and financial condition, and include covenants that impose restrictions on our financial and business operations.
As of September 30, 2023, we had approximately $1.5 billion in outstanding commercial debt, excluding funds borrowed under the federal PSP.
Our debt and related covenants could:
•require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing the availability of our cash flow for other purposes;
•limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
•limit, along with the financial and other restrictive covenants in the agreements governing our debt, our ability to borrow additional funds;
•place us at a competitive disadvantage compared to other less leveraged competitors and competitors with debt agreements on more favorable terms than us; and
•adversely
affect our ability to secure additional financing in the future on acceptable terms or at all, which would impact our ability to fund our working capital, capital expenditures, acquisitions or other general corporate purpose needs.
These agreements require us to meet certain covenants. If we breach any of these covenants we could be in a default under these facilities, which could cause our outstanding obligations under these facilities to accelerate and become due and payable immediately, and could also cause us to default under our other debt or lease obligations and lead to an acceleration of the obligations related to such other debt or lease obligations. The existence of such a default could also preclude us from borrowing funds under other credit facilities.
Our ability to comply with the provisions of financing agreements can be affected
by events beyond our control and a default under any such financing agreements if not cured or waived, could have a material adverse effect on us. In the event our debt is accelerated, we may not have sufficient liquidity to repay these obligations or to refinance our debt obligations, resulting in a material adverse effect on our financial condition.
We are required to maintain reserves under our credit card processing agreements which could adversely affect our financial and business operations.
Under our bank-issued credit card processing agreements, certain proceeds from advance ticket sales may be held back to serve as collateral to cover any possible chargebacks or other disputed charges that may occur. As of September 30, 2023, there were no holdbacks held by our credit card processors.
In
the event of a material adverse change in our business, the holdback could incrementally increase to an amount up to 100% of the applicable credit card activity for all unflown flights, which would also cause an increase in the level of restricted cash. If we are unable to obtain a waiver, or otherwise mitigate the increase in restricted cash, it could adversely affect our liquidity and also cause a covenant violation under other debt or lease obligations and have a material adverse effect on our financial condition.
COMPETITIVE ENVIRONMENT RISKS
We operate in an extremely competitive environment.
The airline industry is characterized by low profit margins, high fixed costs, and significant price competition. We compete with other airlines on all of our Domestic and International
routes. The commencement of, or increase in, service on our routes by existing or new carriers at aggressive prices has and could continue to negatively impact our operating results, including as demand for air travel rebuilds. Most of our competitors are much larger and have greater financial resources and brand recognition than we do. Moreover, competitors or potential competitors may merge or enter alliances that increase their financial resources and other strategic advantages. Aggressive marketing tactics or a prolonged fare competition initiated by one or more of these competitors could adversely affect our financial resources and our ability to compete in these markets. Additionally, our competitors have been and may continue to be more successful in recovering from the impacts of the COVID-19 pandemic, which could impact our ability to compete successfully in the future. Since airline markets have few natural barriers to entry, we also face the constant threat
of new entrants in all of our markets.
Additional capacity to or within Hawai'i, whether from network carriers or low-cost carriers, could decrease our share of the markets in which we operate, could cause a decline in our yields, or both, which could have a material adverse effect on our results of operations and financial condition.
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Inflation may adversely affect us by increasing costs beyond what we can recover through price increases and may contribute to a recession.
In the past year, inflation increased throughout the U.S. economy to levels not seen in decades. Although inflation rates have recently declined, inflation can
adversely affect us by increasing the costs of labor, fuel, and other costs as well as by reducing demand for air travel. In an inflationary environment, depending on airline industry and other economic conditions, we may be unable to raise prices enough to keep up with the rate of inflation, which would reduce our profit margins. We have experienced, and continue to experience, increases in the prices of labor, fuel and other costs of providing service. Continued inflationary pressures could impact our profitability.
In response to inflation, the Federal Reserve has increased interest rates in an effort to reduce inflationary pressures. The Federal Reserve's actions increase the risk of a recession in which demand for air travel is reduced, which could adversely affect our financial condition and results of operations.
Interest rate increases
may adversely affect the fair value of our investments
The Federal Reserve's interest rate increases have reduced and could continue to reduce, the fair value of our investments. Reductions in the fair value of our investments could have a negative impact on our earnings and liquidity.
The concentration of our business within Hawai'i, and between Hawai'i and the U.S. mainland, provides little diversification of our revenue.
During the three months ended September 30, 2023, approximately 75.7% of our passenger revenue was generated from our Domestic routes. Most of our competitors, particularly major network carriers with whom we compete on
North American and Neighbor Island routes, enjoy greater geographical diversification of their passenger revenue. As Domestic routes account for a significantly higher proportion of our revenue than they do for most of our competitors, a proportionately higher decline in demand for our domestic routes is likely to have a relatively greater adverse effect on our financial results than on those of our competitors. Sustained reduction in demand on our Domestic routes and continued industry capacity of major network carriers on routes to, from and within Hawai'i could adversely affect our financial results.
Our business is affected by the competitive advantages held by network carriers in the North America market.
The majority of competition on our North America routes is from network carriers such as Alaska Airlines, American Airlines, Delta Air
Lines, Southwest Airlines, and United Airlines, all of whom have a number of competitive advantages. Primarily, network carriers generate passenger traffic from and throughout the U.S. mainland, which enables them to attract higher customer traffic levels as compared to us.
In contrast, we lack a comparable direct network to feed passengers to our North America flights and are therefore more reliant on passenger demand in the specific cities we serve. We also rely on our code-share partner agreements (e.g. with JetBlue) to provide customers access to and from North American destinations currently unserved by us. Most network carriers operate from hubs, which can provide a built-in market of passengers depending on the economic strength of the hub city and the size of the customer group that frequents the airline. Our Honolulu and Maui hubs do not originate a large proportion of North American travel, nor
do they have the population or potential customer franchise of a larger city to provide us with a significant built-in market. Passengers in the North American market, for the most part, do not originate in Honolulu, but on the U.S. mainland, making Honolulu primarily a destination rather than an origin of passenger traffic.
Our North America and Neighbor Island routes are affected by increased capacity provided by our competitors.
Prior to and during the COVID-19 pandemic, certain of our competitors increased capacity to and within Hawai'i by introducing new routes and increasing the frequency of existing routes from North America to Hawai'i and by the introduction of additional flights within the neighbor islands. We are unable to predict competitor capacity related to air travel to Hawai'i or between the neighbor islands. Any increased competitor
capacity that decreases our share of traffic to Hawai'i or between the neighbor islands could ultimately have a material adverse effect on our results of operations and financial condition.
Our International routes are affected by competition from domestic and foreign carriers.
During the three months ended September 30, 2023, approximately 24.3% of our passenger revenue was generated from our International routes. Our competitors on these routes include both domestic and foreign carriers. Both domestic and foreign
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competitors have a number of competitive advantages that may enable them to attract
higher customer traffic levels as compared to us.
Many of our domestic competitors are members of airline alliances, which provide customers access to each participating airline’s international network, allowing for convenience and connectivity to their destinations. These alliances formed by our domestic competitors have increased in recent years. In some instances, our domestic competitors have been granted antitrust exemptions to form joint venture arrangements in certain geographies, further deepening their cooperation on certain routes. To mitigate this risk, we rely on code-share agreements with partner airlines to provide customers access to international destinations currently unserved by us.
Many of our foreign competitors are network carriers that benefit from network feed to support international routes on which we compete. In contrast,
we lack a comparable direct network to feed passengers to our international flights, and are therefore more reliant on passenger demand in the specific destinations that we serve. Most network carriers operate from hubs, which can provide a built-in home base market of passengers. Passengers on our International routes, for the most part, do not originate in Hawai'i, but rather internationally, in these foreign carriers’ home bases. We also rely on our code-share agreements and our relationships with travel agencies and wholesale distributors to provide customers access to and from International destinations currently unserved by us.
INFORMATION TECHNOLOGY AND THIRD-PARTY RISKS
If we do not maintain the privacy and security of personal information or other information relating to our customers or others, or fail to comply with applicable U.S.
and foreign privacy, data protection, or data security laws or security standards imposed by our commercial partners, our reputation could be damaged, we could incur substantial additional costs, and we could become subject to litigation or regulatory penalties.
We receive, retain, transmit and otherwise process personal information and other information about our customers and other individuals, including our employees and contractors, and we are subject to increasing legislative, regulatory and customer focus on privacy, data protection, and data security both domestically and internationally. Numerous laws and regulations in the U.S. and in various other jurisdictions in which we operate relate to privacy, data protection, and security, including laws and regulations regarding the collection, processing, storage, sharing, disclosure, use and security of personal information and other data from and about
our customers and other individuals. For example, in the European Union, the General Data Protection Regulation (GDPR) became effective in 2018.The United Kingdom has adopted legislation that substantially implements the GDPR.Additionally, California enacted the California Consumer Privacy Act (CCPA), effective as of January 1, 2020, which was modified significantly by the California Privacy Rights Act (CPRA), which became effective in most material respects on January 1, 2023. Other states, including Colorado, Connecticut, Delaware, Florida, Indiana, Iowa, Montana, Oregon, Tennessee, Texas, Utah, and Virginia have enacted similar legislation. The GDPR and CCPA, other new laws and regulations, and changes in laws or regulations relating to privacy, data protection and information
security may require us to modify our practices with respect to the collection, use and disclosure of data. The GDPR provides for significant penalties in the case of non-compliance of up to €20 million or four percent of worldwide annual revenues, whichever is greater. The United Kingdom legislation implementing the GDPR provides for a similar penalty structure. The GDPR, CCPA, CPRA and other existing and proposed laws and regulations can be costly to comply with and can delay or impede our processing of data, result in negative publicity, increase our operating costs and subject us to claims or other remedies. The scope of laws and regulations relating to privacy, data protection, and security is changing, subject to differing interpretations, may be costly to comply with, and may be inconsistent among countries and jurisdictions or conflict with other obligations of ours.
A number of our commercial partners,
including payment card companies, have imposed data security standards or other obligations relating to privacy, data protection, or data security upon us. We strive to comply with applicable laws, regulations, policies, and contractual and other legal obligations relating to privacy, data protection, and data security. However, these legal, contractual, and other actual and asserted obligations may be interpreted and applied in new ways and/or in manners that are inconsistent, and may conflict with other obligations or our practices.
Any failure or perceived failure by us to comply with laws or regulations, our privacy or data protection policies, or other actual or asserted privacy-, data protection-, or information security-related obligations to customers or other third parties, or any actual or perceived compromise of security resulting in the unauthorized disclosure, transfer, loss, unavailability,
use, or other processing of personal or other information, may result in governmental investigations and enforcement actions, governmental or private litigation, other liability, our loss of the ability to process payment card transactions, or us becoming subject to higher costs for such transactions, or public statements critical of us by consumer advocacy groups, competitors, the media or others that could cause our current or prospective customers to lose trust in us, any of which could have an adverse effect on our business. Additionally, if third-party business partners that we work with, such as vendors, violate or are alleged to violate applicable laws, applicable policies or other privacy-, data protection-, or security-related obligations, such violations may also
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put our
customers’ or others’ information at risk and could in turn have an adverse effect on our business. Governmental agencies may also request or take customer data for national security or informational purposes, and also can make data requests in connection with criminal or civil investigations or other matters, which could harm our reputation and our business.
We will continue our efforts to comply with new and increasing privacy, data protection, and information security obligations; however, it is possible that such obligations may require us to expend additional resources, and may be difficult or impossible for us to meet. Any actual or alleged failure to comply with applicable U.S. or foreign privacy, data protection, or data security laws or regulations, any privacy or security standards imposed by our commercial partners, or any other actual or asserted obligations relating to privacy, data protection,
or information security, may result in claims, regulatory investigations and proceedings, private litigation and proceedings, and other liability, all of which may adversely affect our reputation, business, results of operations and financial condition.
Our actual or perceived failure to protect customer information or other personal information or confidential information could result in harm to our business.
Our business and operations involve the storage, transmission and processing of information about our customers, our employees and contractors, our business partners, and others, as well as our own confidential information. We have been and may again become the target of cyber-attacks by third parties seeking unauthorized access to any of these types of information or to disrupt our business or operations. Ransomware and other malware,
business e-mail compromises, fraudulent sales of frequent flier miles, and general hacking have become more prevalent in our industry. While we have taken steps to protect customer information and other confidential information to which we have access, there can be no assurance that any security measures that we or our third-party service providers have implemented will be effective against current or future security threats. We and our third-party service providers may be unable to anticipate attempted security breaches and to implement adequate preventative measures, and our security measures or those of our third-party service providers could be breached or otherwise compromised, we could suffer data loss, corruption, or unavailability, unauthorized access to or use of the systems or networks used in our business and operations, and unauthorized, accidental, or unlawful access to, or disclosure, modification, misuse, loss, unavailability, destruction, or other unauthorized
processing of our or our customers’ information. We may also experience security breaches or other incidents that may remain undetected for an extended period. Further, third parties may also conduct attacks designed to disrupt or deny access to the systems and networks used in our business and operations.
Actual or perceived security breaches or other security incidents could result in unauthorized use of or access to systems and networks, unauthorized, accidental, or unlawful access to, or disclosure, modification, misuse, loss, unavailability or destruction of, our or our customers’ information, and may lead to litigation, claims, indemnity obligations, regulatory investigations and other proceedings, severe reputational damage adversely affecting customer or investor confidence and causing damage to our brand, indemnity obligations, disruption to our operations, damages for contract
breach, and other liability, and may adversely affect our revenues and operating results. Additionally, our service providers may suffer security breaches or other incidents that may result in unauthorized access or otherwise compromise data stored or processed for us that may give rise to any of the foregoing.
Any such actual or perceived security breach or other incident may lead to the expenditure of significant financial and other resources in efforts to investigate or correct a breach or other incident, address and eliminate vulnerabilities, and to prevent future security breaches or incidents, as well as significant costs for remediation that may include liability for stolen assets or information and repair of system damage that may have been caused, incentives offered to customers or other business partners in an effort to maintain business relationships after a breach, costs in connection with payment
card brand fines, and other liabilities. Certain breaches affecting payment card information or the environment in which such information is processed may also result in a loss of our ability to process payment cards or increased costs associated with doing so. We have incurred and expect to incur ongoing expenditures in an effort to prevent information security breaches and other security incidents.
We cannot be certain that our insurance coverage will be adequate for information security liabilities actually incurred or to cover any indemnification claims against us relating to any incident. Furthermore, we cannot be certain that insurance will continue to be available to us on economically reasonable terms, or at all, or that any insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage, or the occurrence
of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, including our financial condition, operating results, and reputation.
We are increasingly dependent on technology and automated systems to operate our business.
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We depend heavily on technology and automated systems to effectively operate our business. These systems include flight operations systems, communications systems, airport systems, reservations systems, management and accounting systems, commercial websites,
including www.hawaiianairlines.com, and other IT systems, many of which must be able to accommodate high traffic volumes, maintain secure information and provide accurate flight information, as well as process critical financial transactions. Any substantial, extended, or repeated failures of these systems could negatively affect our customer service, compromise the security of customer information or other information stored on, transmitted by, or otherwise processed by these systems, result in the loss of or damage to important data, loss of revenue and increased costs, and generally harm our business. Additionally, loss of key talent required to maintain and advance these systems could have a material impact on our operations. Like other companies, our systems may be vulnerable to disruptions due to events beyond our control, including natural
disasters, power disruptions, software or equipment failures, terrorist attacks, cybersecurity incursions, computer viruses and hackers. There can be no assurance that the measures we have taken to reduce the adverse effects of certain potential failures or disruptions are adequate to prevent or remedy disruptions of our systems or prevent or mitigate all attacks. In addition, we will need to continuously make significant investments in technology to periodically upgrade and replace existing systems. If we are unable to make these investments or fail to successfully implement, upgrade or replace our systems, our operations and business could be adversely impacted. For example, in May 2023, a maintenance failure caused a power disruption at our Honolulu internet provider, which interrupted our operations and resulted in significant flight delays and, during our transition to the Amadeus Altea Passenger System in April 2023, we experienced intermittent issues, including
issues related to our website, mobile and kiosk passenger check-in capability and booking through our website, which could have a significant impact on our operations. We do not carry business interruption insurance sufficient to compensate us for the potentially significant losses, including the potential harm to our business, results of operations, financial condition and reputation that may result from system interruptions or system failures.
We are highly reliant on third-party contractors to provide certain facilities and services for our operations, and their failure to provide adequate products and services, or the termination of our third-party agreements could have
a potentially adverse effect on our financial results.
There are a limited number of qualified employees and personnel in the airline and information technology industry, especially within the Hawai'i market. Due to these limitations, we have historically relied on outside vendors for a variety of services and functions critical to our business, including aircraft maintenance and parts, code-sharing, distribution and reservations, computer services including hosting and software maintenance, accounting, frequent flyer programs, passenger processing, ground facilities, baggage and cargo handling, personnel training, and the distribution and sale of airline seats. Our reliance on outside vendors may continue to increase in the future.
The failure of any of our third-party service providers to adequately perform their service obligations, or other
interruptions of services are likely to reduce our revenues, increase expenses, and/or prevent us from operating our flights and providing other services to our customers. Our reliance on third-party distribution channels means we depend, in part, on their willingness and ability to reach customers and sell ancillary products and services that we offer. Such distribution channels may be more expensive or have less functionality than the distribution channels that we operate. Our business and financial performance would be materially harmed if our customers believe that any of our, or our contractors', services are unreliable or unsatisfactory.
LABOR RELATIONS AND RELATED COSTS RISKS
We are dependent on satisfactory labor relations.
Labor costs are a significant component of
airline expenses and can substantially impact an airline’s results of operations. A significant portion of our workforce is represented by labor unions. We have entered into collective bargaining agreements with our pilots, mechanical group employees, clerical group employees, flight attendants, and dispatchers. We cannot ensure that future agreements with our employees’ labor unions will be on terms in line with our expectations or comparable to agreements entered into by our competitors, and any future agreements may increase our labor costs or otherwise adversely affect our business. We may make strategic and operational decisions that may require the consent of one or more of these labor unions, and these labor unions could demand additional wages, benefits or other consideration in return for their consent.
Application of state and local laws to our operations may conflict with federal laws, or with
the laws of other states and local governments, and may subject us to additional requirements and restrictions, which might affect our relationship with our workforce and cause our expenses to increase. Application of conflicting laws may result in operational disruption or have negative effects on our collective bargaining agreements, and any failure or perceived failure by us to comply with federal, state or local labor laws may lead to litigation.
Our operations may be adversely affected if we are unable to attract and retain qualified personnel and key executives.
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We believe that our future success is dependent on the knowledge and expertise of our key executives and highly qualified
management, technical, and other personnel. Attracting and retaining such personnel in the airline industry is highly competitive. We cannot be certain that we will be able to retain our key executives or attract other qualified personnel in the future. Any inability to retain our key executives, or other senior technical personnel, or attract and retain additional qualified executives, could have a negative impact on our operations.
In addition, as we rebuild our operations as passenger demand recovers, and expand our operations through the acquisition of new aircraft and introduction of service to new markets, it may be challenging to attract a sufficient number of qualified personnel including pilots, mechanics and other skilled labor. As we compete with other carriers for qualified personnel, we also face the challenge of attracting individuals who embrace our team-oriented, friendly and customer-driven
corporate culture. Our inability to attract and retain qualified personnel who embrace our corporate culture could have a negative impact on our reputation and overall operations.
STRATEGY AND BRAND RISKS
Our failure to successfully implement our route and network strategy could harm our business.
Our route and network strategy (how we determine to deploy our fleet) includes initiatives to increase revenue, decrease costs, mature our network, and improve distribution of our sales channels. It is critical that we execute upon our planned strategy in order for our business to attain economies of scale and to sustain or improve our results of operations. If we are unable to utilize and fill increased capacity provided by additional aircraft entering our fleet, hire and retain
skilled personnel, or secure the required equipment and facilities in a cost-effective manner, we may be unable to successfully develop and grow our new and existing markets, which may adversely affect our business and operations.
We continue to strive toward aggressive cost-containment goals which are an important part of our business strategy to offer the best value to passengers through competitive fares while maintaining acceptable profit margins and return on capital. We believe a lower cost structure will better position us to fund our strategy and take advantage of market opportunities. If we are unable to adequately contain our non-fuel unit costs, our financial results may suffer.
Any damage to our reputation or brand image could adversely affect our business or financial results.
Maintaining
a good reputation globally is critical to our business. Our reputation or brand image could be adversely impacted by, among other things, any failure to maintain our safety record, our high ethical, social and environmental sustainability practices for all of our operations and activities, our ability to provide on-time operational service to our customers, our impact on the environment, public pressure from investors or policy groups to change our policies, such as initiatives to address climate change, customer perceptions of our advertising campaigns, sponsorship arrangements or marketing programs, or customer perceptions of statements made by us, our employees and executives, agents or other third parties. Damage to our reputation or brand image or loss of customer confidence in our services could adversely affect our business and financial results, as well as require additional resources to rebuild our reputation.
We
also increasingly use social media to communicate news and events. The inappropriate and/or unauthorized use of certain platforms or outlets could damage our brand image and reputation, and could lead to a loss of goodwill with our customers and stakeholders. Inappropriate or unauthorized use of social media could have legal implications if, for example, employees improperly collect or disseminate personally identifiable information of employees, customers or other stakeholders. Further, disclosure of our non-public information by our employees or others, whether intentional or unintentional, through social media could lead to information loss.
Our intellectual property rights, particularly our brand, are valuable, and any inability to protect them may adversely affect our business and financial results.
We consider our intellectual property rights,
particularly our brand and its associated trademarks, to be valuable assets. We protect our intellectual property rights through a combination of trademark, copyright and other forms of legal protection, contractual agreements and policing of third-party misuses of our intellectual property. Our failure to obtain or adequately protect our intellectual property or any change in law that reduces or removes the current legal protections of our intellectual property may diminish our competitiveness and adversely impact our business and financial results. Any litigation or disputes regarding intellectual property may be costly and time-consuming and may divert the attention of our management and key personnel from our business operations, either of which may adversely impact our business and financial results.
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Our
reputation and financial results could be harmed in the event of adverse publicity, such as in the event of an aircraft accident or incident, or if we are unable to achieve certain sustainability goals.
Our customer base is broad and our business activities have significant prominence, particularly in Hawai'i and other destinations we serve. Consequently, negative publicity, including on social media, resulting from real or perceived shortcomings in our customer service, employee relations, business conduct, third-party aircraft components or other events or circumstances affecting our operations could negatively affect the public image of our company and the willingness of customers to purchase services from us, which could affect our financial results.
Additionally,
we are exposed to potential losses that may be incurred in the event of an aircraft accident or incident. Any such accident or incident involving our aircraft or an aircraft operated by one of our code-share partners could involve not only the repair or replacement of a damaged aircraft or aircraft parts, and its consequential temporary or permanent loss of revenue, but also significant claims of injured passengers and others. We are required by the DOT to carry liability insurance, and although we currently maintain liability insurance in amounts consistent with the industry, we cannot be assured that our insurance coverage will adequately cover us from all claims and we may be forced to bear substantial losses incurred with an accident. In addition, any aircraft accident or incident could cause a public perception that we are less safe or reliable than other airlines, which would harm our business.
The
airline industry is also subject to increasing scrutiny for its greenhouse gas emissions and impact on the environment. We are investing and intend to continue to invest towards achieving our environmental goals. While we are working to achieve our environmental goals, our sustainability plans and our ability to execute those sustainability plans are subject to substantial risks and uncertainties, including ongoing support from governments and other third-parties, the need for significant capital investment, and research and development as well as commercialization of new technologies. There can be no guarantee that we can achieve any or all of our environmental goals, and our brand, reputation and financial results may be harmed as a result of our inability to achieve such goals.
Our cargo business will be concentrated with Amazon, and any decrease in volumes or increase in costs, or a termination of our
commercial agreement with Amazon, could have a significant impact on our business, operations, financial condition and brand.
We expect that a significant portion of our cargo revenue will consist of air cargo transportation services provided to Amazon under the ATSA. The ATSA does not require a minimum amount of volume or revenue and Amazon is permitted to decrease volume at any time. Our cargo business would not achieve its expected financial benefits if Amazon’s use of our cargo services does not reach forecasted levels for any reason, including due to general economic conditions or preferences of Amazon and its customers. Such a shortcoming could significantly impact our business and results of operations.
In addition, the profitability of the ATSA is dependent on our ability to manage and accurately predict costs. Our projections of operating
costs, crew productivity and maintenance expenses contain assumptions, including as to flight hours, aircraft reliability, crewmember productivity, compensation and benefits expense, and maintenance costs. If actual costs are higher than projected or aircraft reliability is less than expected, or aircraft become damaged and are out of revenue service for repair, the profitability of the ATSA and future operating results may be negatively impacted. We also rely on flight crews that are unionized. If collective bargaining agreements increase our costs and we cannot recover such increases, our operating results would be negatively impacted.
Performance under the ATSA is subject to a number of challenges and uncertainties, such as: unforeseen maintenance and other costs; our ability to hire pilots and other personnel necessary to support our services; interruptions in the operations under the ATSA as a result
of unexpected or unforeseen events, whether as a result of factors within our control or outside of our control; and the level of operations and results of operations, including margins, under the ATSA being less than our current expectations and projections. The ATSA also contains monthly incentive payments for reaching specific on-time arrival performance thresholds, as well as providing for monetary penalties for on-time arrival performance below certain thresholds. As a result, our operating revenues may vary from period to period depending on the achievement of monthly incentives or the imposition of penalties. Further, we could be found in default if we do not maintain certain minimum reliability thresholds over an extended period of time. If we are placed in default due to the failure to maintain reliability thresholds, Amazon may elect to terminate all or part of the services we provide and pursue rights and remedies available to it at law or in equity. The ATSA
is also subject to two extension options, which Amazon may choose not to exercise. To the extent that our volume of flying for Amazon is less than we anticipate or costs associated with our cargo business are higher than we forecast, or if the ATSA is terminated for any reason, our business, results of operations and financial condition could be significantly and adversely affected.
Our agreements with Amazon confer certain termination rights which, if exercised or triggered, may result in our inability to realize the full benefits of the agreements.
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Our agreements with Amazon give Amazon the option to terminate in certain circumstances and upon the occurrence of certain events of default,
including a change of control of Hawaiian or our failure to meet certain performance requirements. In particular, Amazon will have the right to terminate the agreement without cause after March 31, 2027, upon providing us prior written notice of termination and paying an early termination fee.
Upon termination, Amazon will generally, subject to certain exceptions, retain the warrants that have vested prior to the time of termination and, depending on the circumstances giving rise to the termination, may have the right to accelerated vesting of the remaining warrants upon a change of control of our company. Upon termination, Amazon or we may also have the right to receive a termination fee from the other party depending on the circumstances giving rise to the right of termination.
An
exercise by Amazon of any of these termination rights could have an adverse effect on our business, results of operations and financial condition.
AIRLINE INDUSTRY, REGULATION AND RELATED COSTS RISKS
The airline industry has substantial operating leverage and is affected by many conditions that are beyond its control, which could harm our financial condition and results of operations.
Due to the substantial fixed costs associated with operating an airline, there is a disproportionate relationship between the cost of operating each flight and the number of passengers carried. However, the revenue generated from a particular flight is directly related to the number of passengers carried and the respective average fares applied. Accordingly, a decrease in the number of passengers carried
and, when applicable, the aggregate effect of decreasing flights scheduled, causes a corresponding decrease in revenue that is likely to result in a disproportionately greater decrease in profits. Therefore, any future reductions in airline passenger traffic as a result of the following or other factors, which are largely outside of our control, will likely harm our business, financial condition, and results of operations:
•decline in general economic conditions;
•threat of terrorist attacks and conflicts overseas;
•actual or threatened war and political instability;
•increased security measures or breaches in security;
•adverse
weather and natural disasters, such as the Maui wildfires;
•changes in consumer preferences, perceptions, or spending patterns;
•increased costs related to security and safety measures;
•increased fares as a result of increases in fuel costs;
•outbreaks of contagious diseases or fear of contagion that affect travel behavior, such as occurred during the COVID-19 pandemic; and
•congestion or major construction at airports and actual or potential disruptions in the air traffic control system.
Our results of operations are and may continue to be volatile due to the conditions
identified above. We cannot ensure that our financial resources will be sufficient to absorb the effects of any unexpected events, including those identified above.
Our operations may be disrupted if we are unable to obtain and maintain adequate facilities and infrastructure at airports within the state of Hawai'i.
We must be able to maintain and/or obtain adequate gates, maintenance capacity, office space, operations areas, and ticketing facilities, especially at airports within the state of Hawai'i, to be able to operate our existing and proposed flight schedules. Failure to maintain such facilities and infrastructure may adversely impact our operations and financial performance.
Our business is subject to substantial seasonal and
cyclical volatility.
Our results of operations reflect the impact of seasonal volatility primarily due to passenger leisure and holiday travel patterns. Because of fluctuations in our results from seasonality, operating results for a historical period are not necessarily indicative of operating results for a future period and operating results for an interim period are not necessarily indicative of operating results for an entire year. Moreover, due to the widespread impact of the COVID-19 pandemic on the demand for air travel generally and travel to and within Hawai'i specifically, we have seen significant declines in demand for air travel in 2020, 2021, 2022 and 2023 to-date as compared to the years before the COVID-19 pandemic. As Hawai'i is a popular vacation destination, demand from North America, our largest source of visitors, is typically stronger during the months of June, July, August and December
and considerably weaker at other times of the year. Because of fluctuations in our results from seasonality, operating results for
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a historical period are not necessarily indicative of operating results for a future period and operating results for an interim period are not necessarily indicative of operating results for an entire year.
Our cargo operations are also subject to seasonal volatility. Global trade flows are typically seasonal in nature, with peak activity during the retail holiday season. Demand for air cargo capacity is historically low following the seasonal holiday peak in the fourth quarter of the previous year. While we expect our revenues to fluctuate seasonally, a significant proportion of the costs
associated with our cargo business, such as crew salaries and benefits, facilities and overhead costs, cannot easily be reduced to match the seasonal drop in demand.
Because of fluctuations in our results from seasonality, operating results for a historical period are not necessarily indicative of operating results for a future period and operating results for an interim period are not necessarily indicative of operating results for an entire year.
Terrorist attacks or international hostilities, or the fear of terrorist attacks or hostilities, even if not made directly on the airline industry, could negatively affect us and the airline industry.
Terrorist attacks, even if not made directly on the airline industry, or the fear of such attacks, hostilities or acts of war, could adversely
affect the airline industry, including us, and could result in a significant decrease in demand for air travel, increased security costs, increased insurance costs covering war-related risks, and increased flight operational loss due to cancellations and delays. Any future terrorist attacks or the implementation of additional security-related fees could have a material adverse effect on our business, financial condition and results of operations, and on the airline industry in general.
The airline industry is subject to extensive government regulation, new regulations, and taxes which could have an adverse effect on our financial condition and results of operations.
Airlines are subject to extensive regulatory requirements that result in significant costs. New, and modifications to existing, laws, regulations, taxes and airport rates, and charges
imposed by domestic and foreign governments have been proposed from time to time that could significantly increase the cost of airline operations, restrict operations or reduce revenue. The Federal Aviation Administration (FAA) from time to time issues directives and other regulations relating to the maintenance and operation of aircraft that require significant expenditures. Some FAA requirements cover, among other things, retirement of older aircraft, security measures, aircraft landing safety measures, including with respect to the interaction of aircraft systems with new technologies such as 5G C-band service, collision avoidance systems, airborne windshear avoidance systems, noise abatement and other environmental concerns, commuter aircraft safety and increased inspections, and maintenance procedures to be conducted on older aircraft. A failure to be in compliance, or a modification, suspension or revocation of any of our DOT/FAA authorizations or certificates,
would have a material adverse impact on our operations.
In 2018, Congress passed a five-year funding authorization for the FAA which was scheduled to expire in September 2023, and has been extended through December 31, 2023. The legislative process to renew this authorization (the FAA Reauthorization) could impact us, and the airline industry more generally, in numerous ways. As part of the FAA Reauthorization, Congress could seek to impose new rules or regulations concerning, among other things, customer service and consumer protection, aviation safety, labor requirements, investments in FAA staffing and resources and improvements to the air traffic control system, as well as new or increased fees or taxes intended to fund these policies. Any new or enhanced requirements resulting from the FAA Reauthorization have the potential to increase our costs or impact
our operations.
We cannot predict the impact that laws or regulations may have on our operations, nor can we ensure that laws or regulations enacted in the future will not adversely affect our business. Further, we cannot guarantee that we will be able to obtain or maintain necessary governmental approvals. Once obtained, operating permits are subject to modification and revocation by the issuing agencies. Compliance with these and any future regulatory requirements could require us to incur significant capital and operating expenditures.
In addition to extensive government regulations, the airline industry is dependent on certain services provided by government agencies (DOT, FAA, U.S. Customs and Border Protection (CBP) and the Transportation Security Administration (TSA)). Furthermore, because of significantly higher security and other costs
incurred by airports since September 11, 2001, many airports have significantly increased their rates and charges to airlines, including us, and may continue to do so in the future. In addition to passenger security requirements, the TSA has adopted comprehensive regulations governing air cargo transportation, covering things like cargo screening and security clearances for people with access to cargo. Additional measures have been proposed, which, if adopted, may have an adverse impact on our ability to efficiently process cargo and could increase our costs.
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We are subject to risks associated with climate change, including increased regulation of our CO2 emissions and the potential increased impacts
of severe weather events on our operations and infrastructure.
There is increasing global regulatory focus on climate change and emissions of greenhouse gases, including CO2. In particular, the International Civil Aviation Organization (ICAO) has adopted rules such as the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), which is a market-based emissions offset program. Although the U.S. federal government has not yet enacted legislation to mandate that U.S. airlines participate in CORSIA, we are currently monitoring our international emissions for reporting purposes, and such data will be used in calculations to determine subsequent carbon offsetting requirements under the CORSIA program. At this time, we cannot predict the costs of complying with any future obligations under the CORSIA program. Regardless of the method of regulation or application of CORSIA, further policy changes
with regard to climate change are possible, which could increase operating costs in the airline industry and, as a result, adversely affect our operations.
In the event that CORSIA does not come into force as expected, we and other airlines could become subject to an unpredictable and inconsistent array of national or regional emissions restrictions, creating a patchwork of complex regulatory requirements that may affect global competitors differently. Concerns over climate change may result in the adoption of municipal, state, regional, and federal requirements or in changing business environments that may result in increased costs to the airline industry and us. In addition, several countries and U.S. states have adopted or are considering adopting programs to regulate greenhouse gas emissions. On January 20, 2021, the United States rejoined the Paris Climate
Accord and the current Presidential administration has made climate change mitigation an important policy priority. For example, on September 9, 2021, the current Presidential administration launched the Sustainable Aviation Fuel Grand Challenger to scale up the production of SAF, aiming to reduce greenhouse gas emissions from aviation by 20% by 2030. Additionally, the U.S. Environmental Protection Agency pressed for ambitious new aircraft greenhouse gas emission standards at international negotiations organized by ICAO in 2022. The current Presidential administration may adopt additional regulatory changes that could impact the airline industry and our business. Moreover, certain airports have adopted, and others could in the future adopt, greenhouse gas emission or climate-neutral goals that could impact our operations or require us to make changes or additional investments in our infrastructure.
All
such climate change-related regulatory activity and developments may adversely affect our business and financial results by requiring us to reduce our emissions, make capital investments to modernize aspects of our operations, purchase carbon offset credits, or otherwise pay for our emissions. Such activity may also impact us indirectly by increasing our operating costs, including fuel costs. We may not be able to increase revenue in proportion with such additional costs.
We could incur significant costs to improve the climate resiliency of our infrastructure and otherwise prepare for, respond to, and mitigate such physical effects of climate change. We could also experience significant operational disruption, reduced demand and increased costs as a result of increases in the frequency, severity or duration of natural disasters, such as wildfires, like the August 2023 wildfires in West Maui, and severe weather
events, like hurricanes, exacerbated by climate change. Such severe weather events may increase the incidence of delays and cancellations, increase turbulence-related injuries, impact fuel consumption to avoid weather, require repositioning of aircraft to avoid damage or accommodate changed flights, or reduce demand for travel. We are not able to accurately predict the materiality of any potential losses or costs associated with the physical effects of climate change.
Federal budget constraints may adversely affect our industry, business, results of operations and financial position.
Many of our airline operations are regulated by governmental agencies, including the FAA, the DOT, the CBP, the TSA, and others. If a failure by the federal government to reach budgetary consensus for fiscal year 2024, or future periods, results in mandatory furloughs
and/or other budget constraints, our business and results of operations could be materially negatively impacted, including as a result of actual or potential disruption in the air traffic control system, actual or perceived delays at various airports, and delays in deliveries of new aircraft, which may materially adversely impact our industry, our business, results of operations and financial positions.
The airline industry is required to comply with various environmental laws and regulations, which could inhibit our ability to operate and could also have an adverse effect on our results of operations.
Many aspects of airlines’ operations are subject to increasingly stringent federal, state, local, and foreign laws protecting the environment. U.S. federal laws that have a particular impact on us include the Airport Noise and Capacity Act of 1990,
the Clean Air Act, the Resource Conservation and Recovery Act, the Clean Water Act, the Safe Drinking Water Act, the Comprehensive Environmental Response Act and the Compensation and Liability Act. Compliance with these and other environmental laws and regulations can require significant expenditures, and violations can lead to significant fines and
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penalties. Governments globally are increasingly focusing on the environmental impact caused by the consumption of fossil fuels and as a result have proposed or enacted legislation which may increase the cost of providing airline service or restrict its provision. We expect the focus on environmental matters to increase.
Concern about climate change and greenhouse gases may
result in additional regulation of aircraft emissions in the U.S. and abroad. In addition, other legislative or regulatory action to regulate greenhouse gas emissions is possible. At this time, we cannot predict whether any such legislation or regulation would apportion costs between one or more jurisdictions in which we operate flights. We are monitoring and evaluating the potential impact of such legislative and regulatory developments. In addition to direct costs, such regulation may have a greater effect on the airline industry through increases in fuel costs. The impact to us and our industry from such actions is likely to be adverse and could be significant, particularly if regulators were to conclude that emissions from commercial aircraft cause significant harm to the atmosphere or have a greater impact on climate change than other industries.
Our operations may be adversely affected by our expansion
into non-U.S. jurisdictions and the related laws and regulations to which we are subject.
The expansion of our operations into non-U.S. jurisdictions has expanded the scope of the laws and regulations to which we are subject, both domestically and internationally. Compliance with the laws and regulations of foreign jurisdictions and the restrictions on operations that these laws, regulations or other government actions may impose could significantly increase the cost of airline operations or reduce revenue. For example, various jurisdictions have imposed or are currently imposing restrictions that impede or restrict travel in response to the COVID-19 pandemic and certain of our destinations in Asia have been revising their privacy and consumer laws and regulations. Limitations placed on our business as a result of these or other laws and regulations or failure to comply with evolving laws or regulations
could result in significant penalties, criminal charges, costs to defend ourselves in a foreign jurisdiction, restrictions on operations and reputational damage. In addition, we operate flights on international routes regulated by treaties and related agreements between the U.S. and foreign governments, which are subject to change as they may be amended from time to time. Modifications of these arrangements could result in an inability to obtain or retain take-off or landing slots for our routes, route authorization and necessary facilities. Any limitations, additions or modifications to government treaties, agreements, regulations, laws or policies related to our International routes could have a material adverse impact on our financial position and results of operations.
We may be party to litigation or regulatory action in the normal course of business or otherwise, which could have an adverse effect
on our operations and financial results.
From time to time, we are a party to or otherwise involved in legal or regulatory proceedings, claims, government inspections, investigations or other legal matters, both domestically and in foreign jurisdictions, including proceedings related to the COVID-19 pandemic. For example, despite the removal of the COVID-19 vaccine requirement as a condition of employment, we continue to be subject to civil lawsuits and employee grievances that may give rise to legal liability. We believe we have meritorious defenses and intend to vigorously contest such claims. Resolving or defending legal matters, however, can take months or years. The duration of such matters can be unpredictable with many variables that we do not control including adverse party or government responses. Litigation and regulatory proceedings are subject to significant uncertainty and may be expensive, time-consuming
and disruptive to our operations. In addition, an adverse resolution of a lawsuit, regulatory matter, investigation or other proceeding could have a material adverse effect on our financial condition and results of operations. We may be required to change or restrict our operations or be subject to injunctive relief, significant compensatory damages, punitive damages, penalties, fines or disgorgement of profits, none of which may be covered by insurance. We may have to pay out settlements that also may not be covered by insurance. There can be no assurance that any of these payments or actions will not be material. In addition, publicity of ongoing legal and regulatory matters may adversely affect our reputation.
Changes in tax laws or regulations could have a material adverse effect on our business, results of operations, and financial conditions.
The
rules dealing with U.S. federal, state and local income taxation are constantly under review by persons involved in the legislative process and by the Internal Revenue Service, the U.S. Department of the Treasury (the Treasury) and state and local tax authorities. Changes in U.S. tax laws or their interpretations (which may have retroactive application) could materially increase the amount of taxes we owe, thereby negatively impacting our results of operations as well as our cash flows from operations. For example, the U.S. recently enacted the Inflation Reduction Act, which, among other changes, implements a 1% excise tax on certain stock buybacks and a 15% alternative minimum tax on adjusted financial statement income of certain companies. Furthermore, our implementation of new practices and processes designed to comply with changing tax laws and regulations could require us to make substantial changes to our business practices, allocate additional resources, and increase
our costs, potentially adversely impacting our business, financial position and results of operations.
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As we continue to grow internationally, we may also be subject to taxation in jurisdictions around the world with increasingly complex tax laws, the application of which may be uncertain. The amount of taxes we pay in these jurisdictions could increase substantially as a result of changes in the applicable tax principles, including increased tax rates, new tax laws or revised interpretations of existing tax laws and precedents, potentially adversely affecting our liquidity and results of operations. For example, the Organization for Economic Cooperation and Development proposed a global minimum tax of 15%, which has been adopted by the European Union
effective January 1, 2024. In addition, the authorities in these jurisdictions could review our tax returns and impose additional tax, interest and penalties, and the relevant authorities could claim that various withholding requirements apply to us or assert that benefits of tax treaties are not available to us or our subsidiaries, any of which could adversely impact us and our results of operations.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
As of December 31, 2022, we had NOLs available to reduce future taxable income of approximately $236.0 million for federal income tax purposes that have indefinite
carryover and approximately $708.0 million for state income tax purposes that will expire, if unused, beginning in 2024. The majority of our state NOLs relate to the state of Hawai'i, most of which have indefinite carryover, but are limited to 80% utilization.
Our ability to use our NOLs will depend on the amount of taxable income generated in future periods. If our financial results continue to be adversely impacted by the COVID-19 pandemic, there can be no assurance that an increase in the valuation allowance on our net deferred tax assets will not be required in the future. Such valuation allowance could be material. Additionally, due to our ongoing recovery from the impacts of the COVID-19 pandemic and other economic factors, the NOLs may expire before we can generate sufficient taxable income to use them.
Under Section 382 of the Internal Revenue
Code of 1986, as amended, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change NOLs to offset its post-change income may be limited. In general, an “ownership change” will occur if there is a cumulative change in our ownership by “5-percent shareholders” that exceeds 50 percentage points over a rolling three-year period. Similar rules may apply under state tax laws. Our ability to use NOLs to reduce future taxable income and liabilities may be subject to annual limitations as a result of prior ownership changes and ownership changes that may occur in the future.
Our insurance costs are susceptible to significant increases, and further increases in insurance costs or reductions in coverage could have an adverse effect on our financial results.
We carry types and amounts of insurance
customary in the airline industry, including coverage for general liability, passenger liability, property damage, aircraft loss or damage, baggage and cargo liability, and workers’ compensation. We are required by the DOT to carry liability insurance on each of our aircraft. We currently maintain commercial airline insurance with a major group of independent insurers that regularly participate in world aviation insurance markets, including public liability insurance and coverage for losses resulting from the physical destruction or damage to our aircraft. However, there can be no assurance that the amount of such coverage will not change or that we will not bear substantial losses from accidents or damage to, or loss of, aircraft or other property due to other factors such as natural disasters. We could incur substantial claims resulting from an accident or damage to, or loss of, aircraft or other property due to other factors such as natural disasters in excess of
related insurance coverage that could have a material adverse effect on our results of operations and financial condition. As a result of the COVID-19 pandemic, we have experienced, and may continue to experience, increases in our policy premiums as our policies become eligible for renewal.
Extended interruptions or disruptions in service have and could continue to have a material adverse impact on our operations.
Our financial results have been and may continue to be adversely affected by factors outside our control, including, but not limited to, flight cancellations, significant delays in operations, and facility disruptions. Our principal base of operations is in Hawai'i and a significant interruption or disruption in service has had and may continue to have a serious impact on our business and results of operations. In addition to international
health crises, such as the COVID-19 pandemic, natural disasters, such as hurricanes, earthquakes and tsunamis, have in the past and may again impact the demand for transportation in the markets in which we operate.
FLEET AND FLEET-RELATED RISKS
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We are dependent on our limited number of suppliers for aircraft, aircraft engines and parts.
We are dependent on a limited number of suppliers (e.g. Airbus, Boeing, Pratt & Whitney, Rolls Royce) for aircraft, aircraft engines, and aircraft-related items. We are vulnerable to malfunction, failure, recall or other problems associated with the supply and performance of these aircraft
and parts and/or related operational disruptions, such as those caused by the COVID-19 pandemic and recalls of Pratt & Whitney engines used on our A321neo aircraft due to contamination in the powdered metal used to manufacture certain engine parts. Certain of our suppliers have experienced and continue to experience significant supply chain disruptions. We have experienced delays and part shortages from our suppliers and may experience additional delays and part shortages in the future. These disruptions have and may continue to have a negative impact on our operations, including for example, aircraft out of service due to part unavailability. During 2023, we experienced shortages of Pratt & Whitney engines that resulted in aircraft out of service, and we expect these challenges to continue into 2024 and potentially beyond. We do not yet know the full impact of these operational disruptions resulting from our engine shortages from Pratt & Whitney and its
affiliates. We believe that such disruptions have resulted in, and could result in additional reputational harm, increased parts and maintenance costs, increased aircraft down time, and adverse effects on our financial position and results of operations.
Our agreements to purchase Boeing 787-9 aircraft represent significant future financial commitments and operating costs.
As of September 30, 2023, we had the following firm order commitments and purchase rights for additional aircraft:
Aircraft Type
Firm
Orders
Purchase Rights
Expected Delivery Dates
A321neo aircraft
—
9
N/A
Boeing 787-9 aircraft
12
8
Between 2024 and 2027
We
have made substantial pre-delivery payments for aircraft under existing purchase agreements and are required to continue these pre-delivery payments as well as make payments for the balance of the purchase price through delivery of each aircraft. In December 2022, we entered into a supplemental agreement to our Boeing 787-9 purchase agreement with the Boeing Company, pursuant to which (a) we agreed with the Boeing Company to defer the delivery of our Boeing 787-9 aircraft, the first of which we now expect to receive in the fourth quarter of 2023, with the remaining deliveries scheduled through 2027, and (b) we agreed to exercise purchase options for an additional two Boeing 787-9 aircraft with scheduled delivery dates in 2027. In July 2023, we were notified by Boeing that our 2023 and 2024 Boeing 787-9 deliveries will be delayed by a couple of months. Our first 787-9 aircraft is now expected to be delivered in January 2024.
These
commitments substantially increase our future capital spending requirements and may require us to increase our level of debt in future years. We are continuing to evaluate our options to finance these commitments. There can be no assurance that we will be able to obtain such financing on favorable terms, or at all.
Delays in scheduled aircraft deliveries or other loss of fleet capacity may adversely impact our operations and financial results.
The success of our business depends on, among other things, the ability to effectively operate a certain number and type of aircraft. As noted above, we are uncertain about the future of our contractual commitments to purchase additional aircraft for our fleet and have and may continue to experience supply chain delays that impact the availability of our aircraft. Our inability to purchase and introduce
new aircraft into our fleet could negatively impact our business, operations and financial performance. Even if we proceed with some or all of our contractual commitments to purchase additional aircraft, delays in scheduled aircraft or our failure to integrate newly purchased aircraft into our fleet as planned may require us to utilize our existing fleet longer than expected. Such extensions may require us to operate existing aircraft beyond the point at which it is economically optimal to retire them, resulting in increased maintenance costs.
We may never realize the full value of our long-lived assets such as aircraft and non-aircraft equipment, resulting in impairment and other related charges that may negatively impact our financial position and results of operations.
Long-lived assets used in operations consist principally of property and
equipment and had a carrying value of approximately $2.0 billion as of September 30, 2023. Economic and intrinsic triggers, which include extreme fuel price volatility, an uncertain economic and credit environment, unfavorable trends in historical or forecasted results of operations and cash flows, as well as other uncertainties, may cause us to record material impairments of our long-lived assets. Additionally, we could be subject to impairment charges in the future that could have an adverse effect on our financial position and results of operations in future periods.
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Long-lived assets are tested for impairment when events or changes in circumstances indicate, in management's judgement, that the assets
might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their carrying amount. To determine whether impairment exists for aircraft used in operations, assets are grouped at the fleet-type level (the lowest level for which there are identifiable cash flows) and future cash flows are estimated based on projections of capacity, passenger mile yield, fuel costs, labor costs and other relevant factors. If, at any time, management determines the net carrying value of an asset is not recoverable, the amount is reduced to its fair value during the period in which such determination is made.
We continue to evaluate our current fleet and other long-lived assets for impairment accordingly. As of September 30, 2023, our remaining long-lived assets continued to generate future cash flows from operation of the fleet through
the respective retirement dates in excess of their respective carrying values.
COMMON STOCK RISKS
Our share price is subject to fluctuations.
The market price of our stock is influenced by many factors, many of which are outside of our control, and include other factors discussed in the Risk Factors section, as well as the following:
•our operating results and financial condition
•how our operating results and financial condition compare to securities analyst expectations, particularly with respect to metrics for which we do not give guidance, including whether those results significantly fail to meet or exceed securities
analyst expectations
•changes in the competitive environment in which we operate
•fuel price volatility including the availability of fuel
•announcements concerning our competitors including bankruptcy filings, mergers, restructurings or acquisitions by other airlines
•increases or changes in government regulation
•general and industry specific market conditions
•changes in financial estimates or recommendations by securities analysts
•sales of our common stock or other actions by investors with significant
shareholdings
In recent years the stock market has experienced volatile price and volume fluctuations that often have been unrelated to the operating performance of individual companies. These market fluctuations, as well as general economic conditions, have affected and may continue to affect the price of our common stock.
In the past, securities class action litigation has often been instituted against a company following periods of volatility in its stock price. This type of litigation, if filed against us, could result in substantial costs and divert our management's attention and resources. In addition, the future sale of a substantial number of shares of common stock by us or by our existing stockholders may have an adverse impact on the market price of our common stock. There can be no assurance that the trading price of our common stock
will remain at or near its current level.
We do not expect to repurchase our common stock pursuant to our share repurchase program or pay dividends on our common stock for the foreseeable future.
You should not rely on an investment in our common stock to provide dividend income. Although we have historically issued quarterly dividends and repurchased shares, we do not currently anticipate any future dividends or share repurchases and we cannot provide any assurance that we will initiate any dividend or a share repurchase program again in the future. Accordingly, investors may need to rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any return on their investment. Our decision whether to declare dividends or institute a share repurchase program could be based on, amongst other things,
our operating results, financial condition, capital requirements, and general business conditions.
Our future earnings and earnings per share, as reported under generally accepted accounting principles, will be impacted by the Amazon warrants.
The warrants held by Amazon are subject to fair value measurements during periods that they are outstanding. Accordingly, future fluctuations in the fair value of the warrants are expected to adversely impact our reported earnings measures from time
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to time. See Note 10 in the accompanying consolidated financial statements of this report for further information about the warrants issued to Amazon.
If
Amazon or the Treasury exercise their rights to acquire shares of our common stock pursuant to the outstanding warrants held by them, such exercise will dilute the ownership interests of our then-existing stockholders and could adversely affect the market price of our common stock.
If Amazon or the Treasury exercise their rights to acquire shares of our common stock pursuant to their warrants, it will dilute the ownership interests of our then-existing stockholders and reduce our earnings per share. In addition, any sales in the public market of any common stock issuable upon the exercise of the warrants by Amazon or the Treasury, or the perception that such sales could occur, could adversely affect prevailing market prices of our common stock. Moreover, the warrants include anti-dilution adjustments for certain issuances of common stock or convertible securities by us. If such anti-dilution adjustments are
made, Amazon would receive more shares for the exercise of its warrants than before the anti-dilution adjustment, increasing their dilutive impact.
Our certificate of incorporation includes a provision limiting voting and ownership by non-U.S. citizens and our bylaws include a provision specifying an exclusive forum for stockholder disputes.
To comply with restrictions imposed by federal law on foreign ownership of U.S. airlines, our certificate of incorporation restricts voting of shares of our common stock by non-U.S. citizens. Our certificate
of incorporation provides that the failure of non-U.S. citizens to register their shares on a separate stock record, which we refer to as the “foreign stock record,” would result in a suspension of their voting rights in the event that the aggregate foreign ownership of the outstanding common stock exceeds the foreign ownership restrictions imposed by federal law.
Our certificate of incorporation further provides that no shares of our common stock will be registered on the foreign stock record if the amount so registered would exceed the foreign ownership restrictions imposed by federal law. If it is determined that the amount registered in the foreign stock record exceeds the foreign ownership restrictions imposed by federal law, shares will be removed from the foreign stock record in reverse chronological
order based on the date of registration therein, until the number of shares registered therein does not exceed the foreign ownership restrictions imposed by federal law. As of September 30, 2023, we believe we were in compliance with the foreign ownership rules.
Our bylaws provide that, unless we consent in writing to an alternative forum, the Court of Chancery of the State of Delaware or, if such court lacks jurisdiction, any other state or federal court located in the State of Delaware will be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of us; (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our current or former directors, officers, stockholders or other employees to us or our stockholders;
(iii) any action asserting a claim against us or any of our directors, officers, stockholders or other employees arising pursuant to any provision of the Delaware General Corporation Law or our certificate of incorporation or bylaws (as each may be amended or restated from time to time); or (iv) any action asserting a claim against us or any of our directors, officers or other employees governed by the internal affairs doctrine. Our amended and restated bylaws further provide that the federal district courts of the United States of America will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act of 1933, as amended. Accordingly, stockholders may
be limited in the forum in which they are able to pursue legal actions against us.
Certain provisions of our certificate of incorporation and bylaws, and our issuance of warrants to Amazon, may delay or prevent a change of control, which could materially adversely affect the price of our common stock.
Our certificate of incorporation and bylaws contain provisions that may make it difficult to remove our Board of Directors and management, and may discourage or delay a change of control, which
could materially and adversely affect the price of our common stock. These provisions include, among others:
•the ability of our Board of Directors to issue, without further action by the stockholders, series of undesignated preferred stock, or rights to acquire preferred stock, that could dilute the interest of, or impair the voting power of, holders of our common stock or could also be used as a method of discouraging, delaying or preventing a change of control;
•advance notice procedures for stockholder proposals to be considered at stockholders’ meetings and for nominations of candidates for election to our Board of Directors;
•the ability of our Board of Directors to fill vacancies on the board;
•a
prohibition against stockholders taking action by written consent;
•a prohibition against stockholders calling special meetings of stockholders; and
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•super-majority voting requirements to modify or amend specified provisions of our certificate of incorporation.
In addition, some terms of the agreements between us and Amazon may discourage attempts to acquire our company. Amazon is entitled to notice of certain transactions, including transactions
that might result in a change of control of Hawaiian, ten days before we enter into a definitive agreement related to such transactions, subject to certain exceptions. Also, the vesting of the warrants issued by us to Amazon will generally, subject to certain exceptions, be accelerated upon a change of control of the Company.
If Amazon exercises its right to acquire additional shares of our common stock pursuant to its warrants, Amazon may become a significant stockholder.
The warrants issued by us to Amazon grant Amazon the right to purchase, in the aggregate, up to 15%, as of the date of the agreements, of our common stock on a post-issuance basis. If the warrants issued to Amazon, including pursuant to any anti-dilutive adjustments, are exercised, Amazon may
become a significant stockholder of our company.
If securities analysts do not publish research or reports about us, or if they issue unfavorable commentary about us or our industry or downgrade the outlook of our common stock, the market price of our common stock could decline.
The trading market for our common stock will depend in part on the research and reports that third-party securities analysts publish about us and our industry. One or more analysts could downgrade the outlook for our common stock or issue other negative commentary about us or our industry. Furthermore, if one or more of these analysts cease coverage of us, we could lose visibility in the market. In addition, analysts and other market observers assessing our performance and prospects will
take into account our existing and future amounts of debt, securities offerings, and any offers by us to repurchase our securities. As a result of one or more of these factors, the market price of our common stock could decline and cause you to lose all or a portion of your investment.
SECURITIES OFFERINGS RISKS
In connection with the issuance of Hawaiian’s enhanced equipment trust certificate, our indebtedness and liabilities could limit the cash flow available for our operations, and consequently expose us to risks that could materially adversely affect the resources available to us and Hawaiian to satisfy our obligations under such certificates.
As of September 30, 2023, the outstanding principal balance of our enhanced equipment trust
certificate (EETC) issuances was $163.0 million. Offerings of structured finance securities, such as the EETC issuances may present risks similar to those of the other types of debt obligations in which we or Hawaiian may invest and, in fact, such risks may be of greater significance in the case of such structured finance securities. In addition, the performance of the EETCs will be affected by a variety of factors, including its priority in the capital structure of the issuer thereof, and the availability of any credit enhancement, the level and timing of payments and recoveries on and the characteristics of the underlying receivables, loans or other assets that are being securitized, remoteness of those assets from the originator or transferor, the adequacy of and ability to realize upon any related collateral and the capability of the servicer of the securitized assets. If we or Hawaiian fail to comply with these covenants or to make payments under such indebtedness
when due, then we or Hawaiian would be in default under that indebtedness, which could, in turn, result in ours or Hawaiian’s other indebtedness becoming immediately payable in full.
In connection with the issuance of the senior secured notes due 2026, our indebtedness and liabilities could limit the cash flow available for Hawaiian’s operations, and consequently expose us to risks that could materially adversely affect the resources available to us to satisfy our obligations under the Notes.
In February 2021, we conducted a private offering of 5.75% senior secured notes due 2026 (the Notes) collateralized by certain loyalty and brand assets (Notes Offering). The indebtedness of Hawaiian and its subsidiaries increased significantly as a result of the Notes
Offering. As of September 30, 2023, Hawaiian had approximately $1.6 billion of total indebtedness (excluding finance lease obligations of approximately $72.8 million and operating lease obligations of $396.9 million). We incurred approximately $1.2 billion principal amount of indebtedness as a result of the Notes Offering. We may also incur additional indebtedness to meet future financing needs. The indebtedness of Hawaiian and its subsidiaries could have significant negative consequences for our security holders and the resources available to satisfy our obligations under the Notes, including the following:
•greater difficulty satisfying our obligations with respect to the Notes;
•increasing
Hawaiian’s vulnerability to adverse economic and industry conditions;
•limiting Hawaiian’s ability to obtain additional financing;
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•requiring the dedication of a substantial portion of Hawaiian’s cash flow from operations to service Hawaiian’s indebtedness, which will reduce the amount of cash available for other purposes;
•limiting Hawaiian’s flexibility to plan for, or react to, changes in its business;
•placing Hawaiian at a possible competitive disadvantage with competitors that are less leveraged than us or have better access to capital; and
•potentially
causing Hawaiian’s credit ratings to be reduced and causing our and Hawaiian’s debt and equity securities to significantly decrease in value.
Hawaiian’s business, including the HawaiianMiles Program, may not generate sufficient funds, and we and Hawaiian may otherwise be unable to maintain sufficient cash reserves, to pay amounts due under our and Hawaiian’s indebtedness, including the Notes, and our and Hawaiian’s cash needs may increase in the future. In addition, future indebtedness that we or Hawaiian may incur may contain financial and other restrictive covenants that limit our ability to operate our business, including with respect to the HawaiianMiles Program, raise capital or make payments under our or Hawaiian’s indebtedness. If we or Hawaiian fail to comply with these covenants or to make payments under ours or Hawaiian’s indebtedness when due, then we or Hawaiian would be in default under that
indebtedness, which could, in turn, result in ours and Hawaiian’s other indebtedness becoming immediately payable in full.
RESTATEMENT OF OUR CONSOLIDATED FINANCIAL STATEMENTS RISKS
In the past, we have had to restate our previously issued consolidated financial statements and as part of that process identified a material weakness in our internal control over financial reporting as of March 31, 2022, June 30, 2022, and September 30, 2022. If we are unable to develop and maintain effective internal control over financial reporting, we may not be able to accurately report our financial results in a timely manner, which may adversely affect investor confidence in us and may adversely affect our business,
financial condition and results of operations.
On October 21, 2022, the Audit and Finance Committee of our Board of Directors concluded, after discussion with our management, that our consolidated unaudited financial statements as of and for the quarterly periods ended March 31, 2022 and June 30, 2022 (collectively, the Non-Reliance Periods) included in the Quarterly Reports on Form 10-Q filed with the SEC for the Non-Reliance Periods, (1) should no longer be relied upon due to an error in accounting for net unrealized losses from equity securities, as further described below, and (2) would require restatement. As a result of this restatement, our management re-evaluated the effectiveness of our disclosure controls and procedures and internal control over financial
reporting as of March 31, 2022 and June 30, 2022 and evaluated the effectiveness of our disclosure controls and procedures and internal control over financial reporting as of September 30, 2022. Management concluded that our disclosure controls and procedures were not effective as of March 31, 2022, June 30, 2022, and September 30, 2022, and that our internal control over financial reporting was not effective as of March 31, 2022, June 30, 2022, and September 30, 2022 due to a material weakness. Specifically, there was a lack
of effectively designed control activity over the accounting for unrealized gains and losses on equity securities.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented, or detected on a timely basis. Effective internal control over financial reporting is necessary for us to provide reliable financial reporting and prevent fraud. We concluded that we remediated the material weakness as of December 31, 2022.
Any failure to maintain effective internal control over financial reporting could adversely impact our ability to report our financial condition and results of operations on a timely and accurate
basis. If our financial statements are not accurate, investors may not have a complete understanding of our operations. Likewise, if our financial statements are not filed on a timely basis, we could be subject to sanctions or investigations by the stock exchange on which our common stock is listed, the SEC or other regulatory authorities. In either case, there could be an adverse effect on our business, financial condition and results of operations. Ineffective internal control over financial reporting could also cause investors to lose confidence in our reported financial information which could have a negative effect on the trading price of our stock.
We can give no assurance that the measures we took and plan to take in the future will prevent the occurrence of additional material weaknesses or restatements of financial results in the future due to a failure to implement or maintain adequate internal
control over financial reporting or circumvention of these controls. In addition, even if we are successful in strengthening our controls and procedures, in the future those controls and procedures may not be adequate to prevent or identify irregularities or errors or to facilitate the fair presentation of our consolidated financial statements.
We may face litigation and other risks as a result of the restatement and material weakness in our internal control over financial reporting.
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As part of the restatement, we identified a material weakness in our internal control over financial reporting, which was remediated as of December 31, 2022. As
a result of such material weakness, the restatement, the change in accounting for unrealized gains and losses on equity securities, and other matters raised or that may in the future be raised by the SEC, we face potential for litigation or other disputes which may include, among others, claims invoking the federal and state securities laws, contractual claims or other claims arising from the restatement and the material weakness in our internal control over financial reporting and the preparation of our financial statements. As of the date of this Quarterly Report on Form 10-Q, we have no knowledge of any such litigation or dispute. However, we can provide no assurance that such litigation or dispute will not arise in the future. Any such litigation or dispute, whether successful or not, could adversely affect our business, financial condition and results of operations.
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ITEM
2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
On March 18, 2020, we announced the suspension of our repurchase program and pursuant to our receipt of financial assistance under federal Payroll Support Programs, we were prevented from executing stock repurchases through September 30, 2022. We had no stock repurchase activity during the nine months ended September 30, 2023.
ITEM 3.DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4.MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5.OTHER INFORMATION.
Securities Trading Plans of Directors
and Executive Officers
During our last fiscal quarter, no director or officer, as defined in Rule 16a-1(f), iiadopted/ or iiterminated/
a “Rule 10b5-1 trading arrangement” or a “non-Rule 10b5-1 trading arrangement,” each as defined in Regulation S-K Item 408.
XBRL Instance Document
- The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
Cover Page Interactive Data Files (formatted as inline XBRL and contained in Exhibit 101)
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SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
