14. Condensed Consolidating Financial Information
The following condensed consolidating financial information is presented in accordance with Rule 3-10 of Regulation S-X paragraph 210.3-10 because, in connection with the issuance by two pass-through trusts formed by Hawaiian (which is also referred to in this Note 14 as Subsidiary Issuer / Guarantor) of pass-through certificates, the CompanyHoldings (which is also referred to in this Note 14 as Parent Issuer / Guarantor) is fully and unconditionally guaranteeing the payment obligations of Hawaiian, which is a 100% owned subsidiary of the Company,Holdings, under equipment notes issued by Hawaiian to purchase new aircraft.
The Company's condensed consolidating financial statements are presented in the following tables:
|
| | | | | | | | | | | | | | | | | | | | |
| | Parent Issuer / Guarantor | | Subsidiary Issuer / Guarantor | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| | (in thousands) |
ASSETS | | |
| | |
| | |
| | |
| | |
|
Current assets: | | |
| | |
| | |
| | |
| | |
|
Cash and cash equivalents | | $ | 63,745 |
| | $ | 279,055 |
| | $ | 5,249 |
| | $ | — |
| | $ | 348,049 |
|
Restricted cash | | — |
| | 1,000 |
| | — |
| | — |
| | 1,000 |
|
Short-term investments | | — |
| | 270,697 |
| | — |
| | — |
| | 270,697 |
|
Accounts receivable, net | | 29 |
| | 117,103 |
| | 1,687 |
| | (197 | ) | | 118,622 |
|
Spare parts and supplies, net | | — |
| | 26,560 |
| | — |
| | — |
| | 26,560 |
|
Prepaid expenses and other | | 145 |
| | 56,409 |
| | 229 |
| | — |
| | 56,783 |
|
Total | | 63,919 |
| | 750,824 |
| | 7,165 |
| | (197 | ) | | 821,711 |
|
Property and equipment at cost | | — |
| | 2,214,015 |
| | 73,895 |
| | — |
| | 2,287,910 |
|
Less accumulated depreciation and amortization | | — |
| | (523,089 | ) | | (10,875 | ) | | — |
| | (533,964 | ) |
Property and equipment, net | | — |
| | 1,690,926 |
| | 63,020 |
| | — |
| | 1,753,946 |
|
Long-term prepayments and other | | — |
| | 124,874 |
| | 52 |
| | — |
| | 124,926 |
|
Deferred tax assets, net | | 31,271 |
| | — |
| | — |
| | (31,271 | ) | | — |
|
Goodwill and other intangible assets, net | | — |
| | 120,839 |
| | 1,271 |
| | — |
| | 122,110 |
|
Intercompany receivable | | — |
| | 342,113 |
| | — |
| | (342,113 | ) | | — |
|
Investment in consolidated subsidiaries | | 1,077,365 |
| | — |
| | — |
| | (1,077,365 | ) | | — |
|
TOTAL ASSETS | | $ | 1,172,555 |
| | $ | 3,029,576 |
| | $ | 71,508 |
| | $ | (1,450,946 | ) | | $ | 2,822,693 |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY | | |
| | |
| | |
| | |
| | |
|
Current liabilities: | | |
| | |
| | |
| | |
| | |
|
Accounts payable | | $ | 703 |
| | $ | 117,454 |
| | $ | 850 |
| | $ | (197 | ) | | $ | 118,810 |
|
Air traffic liability | | — |
| | 569,638 |
| | 3,735 |
| | — |
| | 573,373 |
|
Other accrued liabilities | | 131 |
| | 157,383 |
| | 246 |
| | — |
| | 157,760 |
|
Current maturities of long-term debt, less discount, and capital lease obligations | | — |
| | 58,585 |
| | — |
| | — |
| | 58,585 |
|
Total | | 834 |
| | 903,060 |
| | 4,831 |
| | (197 | ) | | 908,528 |
|
Long-term debt and capital lease obligations | | — |
| | 447,533 |
| | — |
| | — |
| | 447,533 |
|
Intercompany payable | | 330,930 |
| | — |
| | 11,183 |
| | (342,113 | ) | | — |
|
Other liabilities and deferred credits: | | |
| | |
| | |
| | |
| | =sum(C32:I32) |
|
Accumulated pension and other post-retirement benefit obligations | | — |
| | 234,206 |
| | — |
| | — |
| | 234,206 |
|
Other liabilities and deferred credits | | — |
| | 171,937 |
| | 855 |
| | — |
| | 172,792 |
|
Deferred tax liabilities, net | | — |
| | 250,114 |
| | — |
| | (31,271 | ) | | 218,843 |
|
Total | | — |
| | 656,257 |
| | 855 |
| | (31,271 | ) | | 625,841 |
|
Shareholders’ equity | | 840,791 |
| | 1,022,726 |
| | 54,639 |
| | (1,077,365 | ) | | 840,791 |
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | | $ | 1,172,555 |
| | $ | 3,029,576 |
| | $ | 71,508 |
| | $ | (1,450,946 | ) | | $ | 2,822,693 |
|
Condensed Consolidating Balance Sheets
December 31, 20162023
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Parent Issuer / Guarantor | | Subsidiary Issuer / Guarantor | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| | (in thousands) |
ASSETS | | | | | | | | | | |
Current assets: | | | | | | | | | | |
Cash and cash equivalents | | $ | 8,707 | | | $ | 113,026 | | | $ | 31,540 | | | $ | — | | | $ | 153,273 | |
Restricted cash | | — | | | — | | | 17,250 | | | — | | | 17,250 | |
Short-term investments | | — | | | 755,224 | | | — | | | — | | | 755,224 | |
Accounts receivable, net | | 1,269 | | | 101,655 | | | 26,261 | | | (23,327) | | | 105,858 | |
Income taxes receivable, net | | — | | | 669 | | | — | | | — | | | 669 | |
Spare parts and supplies, net | | — | | | 60,115 | | | — | | | — | | | 60,115 | |
Prepaid expenses and other | | — | | | 78,551 | | | — | | | — | | | 78,551 | |
Total | | 9,976 | | | 1,109,240 | | | 75,051 | | | (23,327) | | | 1,170,940 | |
Property and equipment at cost | | — | | | 3,164,145 | | | — | | | — | | | 3,164,145 | |
Less accumulated depreciation and amortization | | — | | | (1,150,529) | | | — | | | — | | | (1,150,529) | |
Property and equipment, net | | — | | | 2,013,616 | | | — | | | — | | | 2,013,616 | |
Assets held-for-sale | | — | | | 262 | | | 873 | | | — | | | 1,135 | |
Operating lease right-of-use assets | | — | | | 413,237 | | | — | | | — | | | 413,237 | |
Long-term prepayments and other | | — | | | 121,097 | | | 1,200,000 | | | (1,200,000) | | | 121,097 | |
| | | | | | | | | | |
Goodwill and other intangible assets, net | | — | | | — | | | 13,500 | | | — | | | 13,500 | |
Intercompany receivable | | (577,961) | | | (57,591) | | | — | | | 635,552 | | | — | |
Investment in consolidated subsidiaries | | 807,451 | | | (17,309) | | | 502 | | | (790,644) | | | — | |
Total Assets | | $ | 239,466 | | | $ | 3,582,552 | | | $ | 1,289,926 | | | $ | (1,378,419) | | | $ | 3,733,525 | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | |
Current liabilities: | | | | | | | | | | |
Accounts payable | | $ | 784 | | | $ | 212,464 | | | $ | 590 | | | $ | (14,615) | | | $ | 199,223 | |
Air traffic liability and current frequent flyer deferred revenue | | — | | | 623,324 | | | 10,021 | | | — | | | 633,345 | |
Other accrued liabilities | | — | | | 170,651 | | | 13,652 | | | (8,712) | | | 175,591 | |
Current maturities of long-term debt, less discount | | — | | | 43,857 | | | — | | | — | | | 43,857 | |
Current maturities of finance lease obligations | | — | | | 10,053 | | | — | | | — | | | 10,053 | |
Current maturities of operating leases | | — | | | 83,332 | | | — | | | — | | | 83,332 | |
Total | | 784 | | | 1,143,681 | | | 24,263 | | | (23,327) | | | 1,145,401 | |
Long-Term Debt | | — | | | 1,547,626 | | | 1,189,526 | | | (1,200,000) | | | 1,537,152 | |
Intercompany payable | | 143,257 | | | (573,873) | | | 121,673 | | | 308,943 | | | — | |
Other Liabilities and Deferred Credits: | | | | | | | | | | |
Noncurrent finance lease obligations | | — | | | 60,116 | | | — | | | — | | | 60,116 | |
Noncurrent operating leases | | — | | | 303,119 | | | — | | | — | | | 303,119 | |
Accumulated pension and other post-retirement benefit obligations | | — | | | 140,742 | | | — | | | — | | | 140,742 | |
Other liabilities and deferred credits | | — | | | 77,154 | | | — | | | — | | | 77,154 | |
Noncurrent frequent flyer deferred revenue | | — | | | 308,502 | | | — | | | — | | | 308,502 | |
Deferred tax liabilities, net | | — | | | 65,914 | | | — | | | — | | | 65,914 | |
Total | | — | | | 955,547 | | | — | | | — | | | 955,547 | |
Shareholders’ equity | | 95,425 | | | 509,571 | | | (45,536) | | | (464,035) | | | 95,425 | |
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | | $ | 239,466 | | | $ | 3,582,552 | | | $ | 1,289,926 | | | $ | (1,378,419) | | | $ | 3,733,525 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | Parent Issuer / Guarantor | | Subsidiary Issuer / Guarantor | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| | (in thousands) |
ASSETS | | | | |
| | |
| | |
| | |
|
Current assets: | | |
| | |
| | |
| | |
| | |
|
Cash and cash equivalents | | $ | 67,629 |
| | $ | 249,985 |
| | $ | 8,377 |
| | $ | — |
| | $ | 325,991 |
|
Restricted cash | | — |
| | 5,000 |
| | — |
| | — |
| | 5,000 |
|
Short-term investments | | — |
| | 284,075 |
| | — |
| | — |
| | 284,075 |
|
Accounts receivable, net | | 28 |
| | 94,852 |
| | 1,392 |
| | (205 | ) | | 96,067 |
|
Spare parts and supplies, net | | — |
| | 20,363 |
| | — |
| | — |
| | 20,363 |
|
Prepaid expenses and other | | 29 |
| | 66,665 |
| | 46 |
| | — |
| | 66,740 |
|
Total | | 67,686 |
| | 720,940 |
| | 9,815 |
| | (205 | ) | | 798,236 |
|
Property and equipment at cost | | — |
| | 2,038,931 |
| | 69,867 |
| | — |
| | 2,108,798 |
|
Less accumulated depreciation and amortization | | — |
| | (445,868 | ) | | (8,363 | ) | | — |
| | (454,231 | ) |
Property and equipment, net | | — |
| | 1,593,063 |
| | 61,504 |
| | — |
| | 1,654,567 |
|
Long-term prepayments and other | | — |
| | 132,724 |
| | — |
| | — |
| | 132,724 |
|
Deferred tax assets, net | | 28,757 |
| | — |
| | — |
| | (28,757 | ) | | — |
|
Goodwill and other intangible assets, net | | — |
| | 121,456 |
| | 1,618 |
| | — |
| | 123,074 |
|
Intercompany receivable | | — |
| | 277,732 |
| | — |
| | (277,732 | ) | | — |
|
Investment in consolidated subsidiaries | | 855,289 |
| | — |
| | — |
| | (855,289 | ) | | — |
|
TOTAL ASSETS | | $ | 951,732 |
| | $ | 2,845,915 |
| | $ | 72,937 |
| | $ | (1,161,983 | ) | | $ | 2,708,601 |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY | | |
| | |
| | |
| | |
| | |
|
Current liabilities: | | |
| | |
| | |
| | |
| | |
|
Accounts payable | | $ | 492 |
| | $ | 114,935 |
| | $ | 1,285 |
| | $ | (205 | ) | | $ | 116,507 |
|
Air traffic liability | | — |
| | 478,109 |
| | 4,387 |
| | — |
| | 482,496 |
|
Other accrued liabilities | | 4,088 |
| | 167,864 |
| | 262 |
| | — |
| | 172,214 |
|
Current maturities of long-term debt, less discount, and capital lease obligations | | — |
| | 58,899 |
| | — |
| | — |
| | 58,899 |
|
Total | | 4,580 |
| | 819,807 |
| | 5,934 |
| | (205 | ) | | 830,116 |
|
Long-term debt and capital lease obligations | | — |
| | 497,908 |
| | — |
| | — |
| | 497,908 |
|
Intercompany payable | | 266,699 |
| | — |
| | 11,033 |
| | (277,732 | ) | | — |
|
Other liabilities and deferred credits: | | |
| | |
| | |
| | |
| | 0 |
|
Accumulated pension and other post-retirement benefit obligations | | — |
| | 355,968 |
| | — |
| | — |
| | 355,968 |
|
Other liabilities and deferred credits | | — |
| | 172,783 |
| | 830 |
| | — |
| | 173,613 |
|
Deferred tax liabilities, net | | — |
| | 199,300 |
| | — |
| | (28,757 | ) | | 170,543 |
|
Total | | — |
| | 728,051 |
| | 830 |
| | (28,757 | ) | | 700,124 |
|
Shareholders’ equity | | 680,453 |
| | 800,149 |
| | 55,140 |
| | (855,289 | ) | | 680,453 |
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | | $ | 951,732 |
| | $ | 2,845,915 |
| | $ | 72,937 |
| | $ | (1,161,983 | ) | | $ | 2,708,601 |
|
Condensed Consolidating Statements of Cash Flows
NineThree months ended September 30, 2017March 31, 2024
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Parent Issuer / Guarantor | | Subsidiary Issuer / Guarantor | | Non- Guarantor Subsidiaries | | Eliminations | | Consolidated |
| | (in thousands) |
Net Cash Provided By (Used In) Operating Activities | | $ | (797) | | | $ | 6,887 | | | $ | (5,836) | | | $ | — | | | $ | 254 | |
Cash Flows From Investing Activities: | | | | | | | | | | |
Net payments to affiliates | | — | | | (7,179) | | | 6,272 | | | 907 | | | — | |
Additions to property and equipment, including pre-delivery deposits | | — | | | (127,018) | | | — | | | — | | | (127,018) | |
Proceeds from the disposition of aircraft and aircraft related equipment | | — | | | 83 | | | 22 | | | — | | | 105 | |
| | | | | | | | | | |
Purchases of investments | | — | | | (15,824) | | | — | | | — | | | (15,824) | |
Sales of investments | | — | | | 109,485 | | | — | | | — | | | 109,485 | |
| | | | | | | | | | |
Net cash provided by (used in) investing activities | | — | | | (40,453) | | | 6,294 | | | 907 | | | (33,252) | |
Cash Flows From Financing Activities: | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Long-term borrowings | | — | | | 131,400 | | | — | | | — | | | 131,400 | |
Repayments of long-term debt and finance lease obligations | | — | | | (18,760) | | | — | | | — | | | (18,760) | |
| | | | | | | | | | |
| | | | | | | | | | |
Debt issuance costs and discount | | — | | | (1,849) | | | — | | | — | | | (1,849) | |
| | | | | | | | | | |
Net payments from affiliates | | 907 | | | — | | | — | | | (907) | | | — | |
Payment for taxes withheld for stock compensation | | — | | | (201) | | | — | | | — | | | (201) | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Net cash provided by financing activities | | 907 | | | 110,590 | | | — | | | (907) | | | 110,590 | |
Net increase in cash and cash equivalents | | 110 | | | 77,024 | | | 458 | | | — | | | 77,592 | |
Cash, cash equivalents, & restricted cash - Beginning of Period | | 8,707 | | | 113,026 | | | 48,790 | | | — | | | 170,523 | |
Cash, cash equivalents, & restricted cash - End of Period | | $ | 8,817 | | | $ | 190,050 | | | $ | 49,248 | | | $ | — | | | $ | 248,115 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | Parent Issuer / Guarantor | | Subsidiary Issuer / Guarantor | | Non- Guarantor Subsidiaries | | Eliminations | | Consolidated |
| | (in thousands) |
Net Cash Provided By (Used In) Operating Activities | | $ | (3,491 | ) | | $ | 300,820 |
| | $ | (1,852 | ) | | $ | — |
| | $ | 295,477 |
|
Cash Flows From Investing Activities: | | |
| | |
| | |
| | |
| | |
|
Net payments to affiliates | | (2,500 | ) | | (52,507 | ) | | — |
| | 55,007 |
| | — |
|
Additions to property and equipment, including pre-delivery deposits | | — |
| | (208,759 | ) | | (3,776 | ) | | — |
| | (212,535 | ) |
Proceeds from disposition of property and equipment | | — |
| | 33,511 |
| | — |
| | — |
| | 33,511 |
|
Purchases of investments | | — |
| | (171,485 | ) | | — |
| | — |
| | (171,485 | ) |
Sales of investments | | — |
| | 183,930 |
| | — |
| | — |
| | 183,930 |
|
Net cash used in investing activities | | (2,500 | ) | | (215,310 | ) | | (3,776 | ) | | 55,007 |
| | (166,579 | ) |
Cash Flows From Financing Activities: | | |
| | |
| | |
| | |
| | |
|
Repayments of long-term debt and capital lease obligations | | — |
| | (52,463 | ) | | — |
| | — |
| | (52,463 | ) |
Net payments from affiliates | | 52,507 |
| | — |
| | 2,500 |
| | (55,007 | ) | | — |
|
Repurchases of common stock | | (50,486 | ) | | — |
| | — |
| | — |
| | (50,486 | ) |
Other | | 86 |
| | (7,977 | ) | | — |
| | — |
| | (7,891 | ) |
Net cash provided by (used in) financing activities | | 2,107 |
| | (60,440 | ) | | 2,500 |
| | (55,007 | ) | | (110,840 | ) |
Net increase (decrease) in cash and cash equivalents | | (3,884 | ) | | 25,070 |
| | (3,128 | ) | | — |
| | 18,058 |
|
Cash, cash equivalents, & restricted cash - Beginning of Period | | 67,629 |
| | 254,985 |
| | 8,377 |
| | — |
| | 330,991 |
|
Cash, cash equivalents, & restricted cash - End of Period | | $ | 63,745 |
| | $ | 280,055 |
| | $ | 5,249 |
| | $ | — |
| | $ | 349,049 |
|
Condensed Consolidating Statements of Cash Flows
NineThree months ended September 30, 2016March 31, 2023
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Parent Issuer / Guarantor | | Subsidiary Issuer / Guarantor | | Non- Guarantor Subsidiaries | | Eliminations | | Consolidated |
| | (in thousands) |
Net Cash Provided By (Used In) Operating Activities | | $ | (613) | | | $ | 122,379 | | | $ | (3,475) | | | $ | — | | | $ | 118,291 | |
Cash Flows From Investing Activities: | | | | | | | | | | |
Net payments to affiliates | | — | | | 24,435 | | | (17,206) | | | (7,229) | | | — | |
Additions to property and equipment, including pre-delivery deposits | | — | | | (106,215) | | | — | | | — | | | (106,215) | |
| | | | | | | | | | |
Proceeds from the disposition of aircraft and aircraft related equipment | | 6,793 | | | 20 | | | 2,750 | | | — | | | 9,563 | |
Purchases of investments | | — | | | (96,806) | | | — | | | — | | | (96,806) | |
Sales of investments | | — | | | 144,069 | | | — | | | — | | | 144,069 | |
| | | | | | | | | | |
Net cash provided by (used in) investing activities | | 6,793 | | | (34,497) | | | (14,456) | | | (7,229) | | | (49,389) | |
Cash Flows From Financing Activities: | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Repayments of long-term debt and finance lease obligations | | — | | | (24,953) | | | — | | | — | | | (24,953) | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Net payments from affiliates | | (7,229) | | | — | | | — | | | 7,229 | | | — | |
| | | | | | | | | | |
Payment for taxes withheld for stock compensation | | — | | | (1,066) | | | — | | | — | | | (1,066) | |
| | | | | | | | | | |
Net cash used in financing activities | | (7,229) | | | (26,019) | | | — | | | 7,229 | | | (26,019) | |
Net increase (decrease) in cash and cash equivalents | | (1,049) | | | 61,863 | | | (17,931) | | | — | | | 42,883 | |
Cash, cash equivalents, & restricted cash - Beginning of Period | | 28,620 | | | 151,357 | | | 66,643 | | | — | | | 246,620 | |
Cash, cash equivalents, & restricted cash - End of Period | | $ | 27,571 | | | $ | 213,220 | | | $ | 48,712 | | | $ | — | | | $ | 289,503 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | Parent Issuer / Guarantor | | Subsidiary Issuer / Guarantor | | Non- Guarantor Subsidiaries | | Eliminations | | Consolidated |
| | (in thousands) |
Net Cash Provided By (Used In) Operating Activities | | $ | (4,036 | ) | | $ | 438,596 |
| | $ | 362 |
| | $ | — |
| | $ | 434,922 |
|
Cash Flows From Investing Activities: | | |
| | |
| | |
| | |
| | |
|
Net payments to affiliates | | — |
| | (27,796 | ) | | — |
| | 27,796 |
| | — |
|
Additions to property and equipment, including pre-delivery deposits | | — |
| | (92,185 | ) | | (12,065 | ) | | — |
| | (104,250 | ) |
Proceeds from purchase assignment and leaseback transaction | | — |
| | 31,851 |
| | — |
| | — |
| | 31,851 |
|
Purchases of investments | | — |
| | (217,964 | ) | | — |
| | — |
| | (217,964 | ) |
Sales of investments | | — |
| | 208,075 |
| | — |
| | — |
| | 208,075 |
|
Net cash used in investing activities | | — |
| | (98,019 | ) | | (12,065 | ) | | 27,796 |
| | (82,288 | ) |
Cash Flows From Financing Activities: | | |
| | |
| | |
| | |
| | |
|
Repayments of long-term debt and capital lease obligations | | — |
| | (205,532 | ) | | — |
| | — |
| | (205,532 | ) |
Repurchase of convertible notes | | (1,426 | ) | | — |
| | — |
| | — |
| | (1,426 | ) |
Net payments from affiliates | | 16,763 |
| | — |
| | 11,033 |
| | (27,796 | ) | | — |
|
Repurchases of Common Stock | | (13,763 | ) | | — |
| | — |
| | — |
| | (13,763 | ) |
Other | | 423 |
| | (8,125 | ) | | — |
| | — |
| | (7,702 | ) |
Net cash provided by (used in) financing activities | | 1,997 |
| | (213,657 | ) | | 11,033 |
| | (27,796 | ) | | (228,423 | ) |
Net increase (decrease) in cash and cash equivalents | | (2,039 | ) | | 126,920 |
| | (670 | ) | | — |
| | 124,211 |
|
Cash, cash equivalents, & restricted cash - Beginning of Period | | 69,420 |
| | 208,406 |
| | 8,676 |
| | — |
| | 286,502 |
|
Cash, cash equivalents, & restricted cash - End of Period | | $ | 67,381 |
| | $ | 335,326 |
| | $ | 8,006 |
| | $ | — |
| | $ | 410,713 |
|
Income Taxes
The income tax expense (benefit) is presented as if each entity that is part of the consolidated group files a separate return.
ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect our current views with respect to certain current and future events and financial performance. Such forward-looking statements include, without limitation, statements regarding:related to the Merger (defined below), including statements related to the timing of completion of the Merger, or the receipt of necessary approvals to complete the Merger; the significance and timing of costs related to the Merger; the impact on us of litigation or other stockholder action related to the Merger; the effects on us and our stockholders if the Merger is not completed; 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 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 and our expectations regardingrelated to our financialagreement with Amazon; the number of aircraft that we will be operating under the ATSA by the end of 2024; 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, per available seat mile and operating cost per available seat mile for the fourthsecond quarter of 2017;2024, 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, 2018;March 31, 2025; 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 purchases of aircraft; expected delivery or deferment of new aircraft;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; 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; political developments; our dependence ongeopolitical conflict; the tourism industry;impact of climate change the impact of climate change or natural disasters; the price and availability of fuel;fuel, aircraft parts and personnel; foreign currency exchange rate fluctuations; our competitive environment;pressures, including the potential impact of risingincreasing industry capacity between North America and Hawai’i;
fluctuations in demand for transportation in the markets in which we operate;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; timing for entry into service of aircraft; changes in our future capital needs; fluctuations in our share price; our financial liquidity; and our financial liquidity.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, including, but not limited to, our risk factors set out in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.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 direct wholly owned subsidiary, Hawaiian Airlines, Inc. (Hawaiian).
Our Business
We are engaged in the scheduled air transportation of passengers and cargo amongst the Hawaiian Islands (the “Neighbor Island”Neighbor Island routes), between the Hawaiian Islands and certain cities in the U.S. mainland (the “North America”North America routes and collectively with the Neighbor Island routes, referred to as our “Domestic”Domestic routes), and between the Hawaiian Islands and the South Pacific, Australia, New Zealand and Asia (the “International”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 Statestate of Hawai‘iHawai'i and the tenth 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 for the monthas of July 2017,January 2024, the latest available data. As of September 30, 2017,March 31, 2024, we had 6,491 7,386active employees.
On October 20, 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 and as of March 31, 2024, we were operating one aircraft with two additional aircraft scheduled to commence operation in the second quarter of 2024. We anticipate that we will be operating six aircraft under the ATSA by the end of 2024.
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.
Commission (SEC).
First Quarter 2024 Financial HighlightsOverview
•Passenger revenue in the first quarter was $583.4 million, up 6.4% as compared to the same period in 2023. During the three months ended March 31, 2024, capacity (as measured in Available Seat Miles or ASMs) was up 2.7%, while RPM increased 5.9%, as compared to the same period in 2023, driven by improving demand across our network.
•Operating loss in the first quarter was $148.6 million, as compared to an operating loss of $117.4 million during the same period in 2023.
•GAAP net incomeloss in the thirdfirst quarter of $74.6was $137.6 million, or $1.39$2.65 per diluted share.
Adjustedshare on total revenue of $645.6 million, compared to a net income in the third quarterloss of $102.6$98.3 million, or $1.92$1.91 per diluted share.share, on total revenue of $612.6 million during the same period in 2023.
•Unrestricted cash, and cash equivalents and short-term investments was $897.3 million as of $618.7 million.March 31, 2024, compared to $908.5 million as of December 31, 2023.
•As of March 31, 2024, the Company had federal and state net operating losses (NOLs) of approximately $451.4 million and $968.8 million, respectively, which are available to reduce future pre-tax income. Analysis under GAAP required us to increase the valuation allowance related to the NOLs which resulted in a lower effective tax rate for the period.
See “Results of Operations” below for further discussion of changes in revenue and operating expense. See “Non-GAAP Financial Measures” below
Merger with Alaska Air Group
On December 2, 2023, we entered into an Agreement and Plan of Merger (the Merger Agreement) with Alaska Air Group, Inc., a Delaware corporation (Alaska), and Marlin Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of Alaska (Merger Sub), pursuant to which, subject to satisfaction or waiver of conditions therein, Merger Sub will merge with and into the Company (the Merger), with the Company surviving as a wholly owned subsidiary of Alaska.
At the effective time of the Merger (the Effective Time), each share of our common stock, Series B Special Preferred Stock, Series C Special Preferred Stock, and Series D Special Preferred Stock issued and outstanding immediately prior to the Effective Time, subject to certain customary exceptions specified in the Merger Agreement, will be converted into the right to receive $18.00 per share, payable to the holder in cash, without interest.
Completion of the Merger is subject to customary closing conditions, including approval by the Company's stockholders, which was obtained on February 16, 2024; performance by the parties in all material respects of their obligations under the Merger Agreement; the receipt of required regulatory approvals; and the absence of an order or law preventing, materially restraining, or materially impairing the consummation of the Merger.
On February 7, 2024, the Company and Alaska each received a request for additional information and documentary material (together, the Second Request) from the Department of Justice (DOJ) in connection with the DOJ’s review of the Merger. On March 27, 2024, Hawaiian and Alaska entered into a timing agreement with the DOJ pursuant to which we agreed, among other things, not to consummate the Merger before 90 days following the date on which both parties have certified substantial compliance with the Second Request unless we have received written notice from the DOJ prior to the end of such 90-day period that the DOJ has closed its investigation of the Merger.
The Merger Agreement includes customary termination rights in favor of each party. In certain circumstances, we may be required to pay Alaska a termination fee of $39.6 million in connection with the termination of the Merger Agreement.
The Merger is expected to close within 12 to 18 months of the date of the Merger Agreement.
Material Changes to our Consolidated Balance Sheet
During the three months ended March 31, 2024, material changes to our Consolidated Balance Sheet consisted of the following:
•As of March 31, 2024, our total debt was $1.7 billion, an increase of $106.4 million, or 6.7%, as compared to $1.6 billion as of December 31, 2023. The increase is attributed to $131.4 million in financing obtained for our reconciliation of non-GAAP measures.
Outlook
We expect our revenue performance to remain consistentfirst Boeing 787-9 aircraft delivery in the fourthfirst quarter of 20172024, partially offset by scheduled debt repayments.
•As of March 31, 2024, our air traffic liability and current frequent flyer deferred revenue was $757.9 million, an increase of $124.5 million, or 19.7%, as compared to the prior year period. We expect available seat miles during the quarter ending$633.3 million as of December 31, 2017 to2023. The increase by 4.0% to 6.0% from the prior year period, while we expect operating revenue per available seat mile to range from down 1.0% to up 2.0% from the prior year period. We expect operating cost per available seat mile, during the quarter ending December 31, 2017 to decrease by 10.3% to 13.5% from the prior year period,in air traffic liability is primarily due to an expected decreaseincrease in special charges foradvanced ticket sales and the quarter ending December 31, 2017, comparedseasonality of passenger travel.
Refer to the prior year period.Cash Flow and Use of Liquidity section below for additional discussion.
Fleet Summary
The table below summarizes our total fleet as of September 30, 2016March 31, 2023 and 2017,2024, respectively and our expected fleet as of September 30, 2018March 31, 2025 (based on existing agreements)executed agreements as of March 31, 2024):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 | | March 31, 2024 | | March 31, 2025 (Expected) |
Aircraft Type | | Leased (1) | | Owned (2) | | Total | | Leased (1) | | Owned (2) | | Total | | Leased (1) | | Owned (2) | | Total |
A330-200 | | 12 | | | 12 | | | 24 | | | 12 | | | 12 | | | 24 | | | 11 | | | 12 | | | 23 | |
A330-300F (3) | | — | | | — | | | — | | | 2 | | | — | | | 2 | | | 7 | | | — | | | 7 | |
A321neo | | 4 | | | 14 | | | 18 | | | 4 | | | 14 | | | 18 | | | 4 | | | 14 | | | 18 | |
787-9 (4) | | — | | | — | | | — | | | — | | | 1 | | | 1 | | | — | | | 4 | | | 4 | |
717-200 (5) | | 5 | | | 14 | | | 19 | | | 1 | | | 18 | | | 19 | | | — | | | 19 | | | 19 | |
ATR 42-500 (6) | | — | | | 1 | | | 1 | | | — | | | — | | | — | | | — | | | — | | | — | |
ATR 72-200 (6) | | — | | | 1 | | | 1 | | | — | | | — | | | — | | | — | | | — | | | — | |
Total | | 21 | | | 42 | | | 63 | | | 19 | | | 45 | | | 64 | | | 22 | | | 49 | | | 71 | |
| | | | | | | | | | | | | | | | | | |
(1) Leased aircraft include aircraft under both finance and operating leases.
(2) Includes unencumbered aircraft as well as those purchased and under various debt financing arrangements.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2016 | | September 30, 2017 | | September 30, 2018 |
Aircraft Type | | Leased (2) | | Owned | | Total | | Leased (2) | | Owned | | Total | | Leased (2) | | Owned | | Total |
A330-200 | | 11 |
| | 12 |
| | 23 |
| | 11 |
| | 13 |
| | 24 |
| | 11 |
| | 13 |
| | 24 |
|
767-300 | | 4 |
| | 4 |
| | 8 |
| | 7 |
| | 1 |
| | 8 |
| | 7 |
| | — |
| | 7 |
|
717-200 | | 3 |
| | 15 |
| | 18 |
| | 5 |
| | 15 |
| | 20 |
| | 5 |
| | 15 |
| | 20 |
|
ATR turboprop (1) | | — |
| | 6 |
| | 6 |
| | — |
| | 6 |
| | 6 |
| | — |
| | 7 |
| | 7 |
|
A321neo | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2 |
| | 8 |
| | 10 |
|
Total | | 18 |
| | 37 |
| | 55 |
| | 23 |
| | 35 |
| | 58 |
| | 25 |
| | 43 |
| | 68 |
|
| | | | | | | | | | | | | | | | | | |
(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.
| |
(1) | The ATR turboprop aircraft are owned by Airline Contract Maintenance & Equipment, Inc., a wholly-owned subsidiary of the Company. |
| |
(2) | Leased aircraft include aircraft under both capital and operating leases. |
(4) In February 2024, we took delivery of our first Boeing 787-9 aircraft under a financing lease, which did not meet the criteria for a sale under the applicable accounting framework and is therefore recognized as a debt financing, and will be placed into revenue service in April 2024. We took delivery of our second aircraft in April 2024 under a financing arrangement, which we anticipate placing into service in May 2024, with a third aircraft scheduled for delivery in late 2024.
(5) In December 2023, we entered into an agreement to purchase one 717-200 aircraft that was under a lease agreement. During the first quarter of 2024, we entered into an agreement to purchase three additional 717-200 aircraft previously under lease. We expect to purchase the remaining 717-200 aircraft under lease in the second quarter of 2024.
(6) 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 March 31, 2024, 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 in the second quarter of 2024.
Results of Operations
For the three months ended September 30, 2017,March 31, 2024, we generated a net incomeloss of $74.6$137.6 million, or $1.39$2.65 per diluted share, compared to a net incomeloss of $102.5$98.3 million, or $1.91 per diluted share, for the same period in 2016. For the nine months ended September 30, 2017, we generated net income of $191.9 million, or $3.57 per diluted share, compared to net income of $233.5 million, or $4.35 per diluted share, for the same period in 2016.2023.
Selected Consolidated Statistical Data (unaudited)
| | | | Three months ended September 30, | | Nine months ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (in thousands, except as otherwise indicated) |
Scheduled Operations (a) : | | |
| | |
| | |
| | |
|
| |
| |
| |
| |
| | | (in thousands, except as otherwise indicated) |
Scheduled Operations: | |
Revenue passengers flown | |
Revenue passengers flown | |
Revenue passengers flown | | 3,000 |
| | 2,916 |
| | 8,588 |
| | 8,317 |
|
Revenue passenger miles (RPM) | | 4,290,499 |
| | 4,166,487 |
| | 12,187,344 |
| | 11,554,522 |
|
Revenue passenger miles (RPM) | |
Revenue passenger miles (RPM) | |
Available seat miles (ASM) | |
Available seat miles (ASM) | |
Available seat miles (ASM) | | 4,946,678 |
| | 4,887,608 |
| | 14,203,112 |
| | 13,805,563 |
|
Passenger revenue per RPM (Yield) | |
| 14.79 | ¢ | |
| 14.20 | ¢ | |
| 14.48 | ¢ | |
| 13.78 | ¢ |
Passenger revenue per RPM (Yield) | |
Passenger revenue per RPM (Yield) | |
Passenger load factor (RPM/ASM) | |
Passenger load factor (RPM/ASM) | |
Passenger load factor (RPM/ASM) | | 86.7 | % | | 85.2 | % | | 85.8 | % | | 83.7 | % |
Passenger revenue per ASM (PRASM) | |
| 12.83 | ¢ | |
| 12.10 | ¢ | |
| 12.43 | ¢ | |
| 11.53 | ¢ |
Total Operations (a) : | | |
| | |
| | |
| | |
|
Passenger revenue per ASM (PRASM) | |
Passenger revenue per ASM (PRASM) | |
Total Operations: | |
Total Operations: | |
Total Operations: | |
Revenue passengers flown | |
Revenue passengers flown | |
Revenue passengers flown | | 3,001 |
| | 2,918 |
| | 8,592 |
| | 8,321 |
|
RPM | | 4,293,095 |
| | 4,170,671 |
| | 12,190,846 |
| | 11,559,795 |
|
RPM | |
RPM | |
ASM | |
ASM | |
ASM | | 4,950,800 |
| | 4,894,768 |
| | 14,208,642 |
| | 13,813,955 |
|
Operating revenue per ASM (RASM) | |
| 14.53 | ¢ | |
| 13.73 | ¢ | |
| 14.14 | ¢ | |
| 13.16 | ¢ |
Operating revenue per ASM (RASM) | |
Operating revenue per ASM (RASM) | |
Operating cost per ASM (CASM) | |
| 11.02 | ¢ | |
| 10.07 | ¢ | |
| 11.44 | ¢ | |
| 10.26 | ¢ |
CASM excluding aircraft fuel and special items (b) | |
| 8.80 | ¢ | |
| 8.13 | ¢ | |
| 9.04 | ¢ | |
| 8.46 | ¢ |
Aircraft fuel expense per ASM (c) | |
| 2.22 | ¢ | |
| 1.94 | ¢ | |
| 2.23 | ¢ | |
| 1.80 | ¢ |
Operating cost per ASM (CASM) | |
Operating cost per ASM (CASM) | |
CASM excluding aircraft fuel and non-recurring items (a) | |
CASM excluding aircraft fuel and non-recurring items (a) | |
CASM excluding aircraft fuel and non-recurring items (a) | |
Aircraft fuel expense per ASM (b) | |
Aircraft fuel expense per ASM (b) | |
Aircraft fuel expense per ASM (b) | |
Revenue block hours operated | | 49,384 |
| | 47,534 |
| | 141,955 |
| | 134,627 |
|
Gallons of aircraft fuel consumed | | 67,160 |
| | 64,918 |
| | 193,404 |
| | 182,471 |
|
Average cost per gallon of aircraft fuel (actual) (c) | | $ | 1.64 |
| | $ | 1.46 |
| | $ | 1.64 |
| | $ | 1.36 |
|
Revenue block hours operated | |
Revenue block hours operated | |
Gallons of aircraft fuel consumed (c) | |
Gallons of aircraft fuel consumed (c) | |
Gallons of aircraft fuel consumed (c) | |
Average cost per gallon of aircraft fuel (b) | |
Average cost per gallon of aircraft fuel (b) | |
Average cost per gallon of aircraft fuel (b) | |
| |
(a) | Includes the operations of our contract carrier under a capacity purchase agreement. |
| |
(b) | Represents adjusted unit costs, a non-GAAP measure. We believe this is a useful measure because it better reflects our controllable costs. See “Non-GAAP Financial Measures” below for a reconciliation of non-GAAP measures. |
| |
(c) | Includes applicable taxes and fees. |
(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.
(c) Excludes operations under the ATSA with Amazon.
Operating Revenue
During the three and nine months ended September 30, 2017,March 31, 2024, operating revenue increased by $47.7$33.0 million, or 7.1%5.4%, and $191.5 million or 10.5%, respectively, as compared to the prior year periods, driven by increased passenger revenue.same period in 2023 and is further discussed below.
Passenger revenue
For the three and nine months ended September 30, 2017,March 31, 2024, passenger revenue increased by $42.9$34.9 million, or 7.3%6.4%, and $173.2 million or 10.9%, respectively, as compared to the prior year periods.same period in 2023. Details of these changesthis change are described in the table below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Increase (Decrease) vs. Three Months Ended March 31, 2024 | | |
(in thousands) | | Three months ended March 31, 2024 | | Passenger Revenue | | Yield | | RPMs | | ASMs | | PRASM | | | | | | | | |
Domestic | | $ | 451,598 | | | 2.1 | % | | 4.1 | % | | (2.0) | % | | (4.5) | % | | 6.9 | % | | | | | | | | |
International | | 131,850 | | | 24.3 | | | (11.0) | | | 39.8 | | | 27.9 | | | (2.8) | | | | | | | | | |
Total | | $ | 583,448 | | | 6.4 | % | | 0.4 | % | | 5.9 | % | | 2.7 | % | | 3.5 | % | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, 2017 as compared to three months ended September 30, 2016 | | Nine months ended September 30, 2017 as compared to nine months ended September 30, 2016 |
| | Change in scheduled passenger revenue | | Change in Yield | | Change in RPM | | Change in ASM | | Change in scheduled passenger revenue | | Change in Yield | | Change in RPM | | Change in ASM |
| | (in millions) | | | | | | | | (in millions) | | | | | | |
Domestic | | $ | 11.1 |
| | 4.3 | % | | (1.7 | )% | | (2.7 | )% | | $ | 63.8 |
| | 6.9 | % | | (1.6 | )% | | (4.1 | )% |
International | | 31.8 |
| | 7.8 |
| | 14.2 |
| | 9.7 |
| | 109.4 |
| | 7.2 |
| | 23.3 |
| | 18.7 |
|
Total scheduled | | $ | 42.9 |
| | 4.2 | % | | 3.0 | % | | 1.2 | % | | $ | 173.2 |
| | 5.1 | % | | 5.5 | % | | 2.9 | % |
Domestic passenger revenue increased $9.2 million, or 2.1%, during the three months ended March 31, 2024 as compared to the same period in 2023, on a capacity reduction, as measured in ASM, of 4.5%. Demand on our domestic network has been supported by improved yields; however, these improvements have been, and continue to be, negatively impacted 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 may continue to experience operational disruptions from our engine shortages from Pratt & Whitney during the remainder of 2024 and potentially beyond.
Our Neighbor Island traffic, which accounted for approximately 22.2% of total Domestic passenger revenue during the three months ended March 31, 2024, increased by 17.8% as compared to the same period in 2023. Despite year-over-year improvement in the Neighbor Island market, revenue during the first quarter was down 25.1% as compared to the same period in 2019 as we continue to face increased competitive pressures with additional capacity in the market combined with the lower priced Neighbor Island route fares.
International route passenger revenue increased by $25.8 million, or 24.3%, during the three months ended March 31, 2024, as compared to the same period in 2023, primarily driven by increased capacity, which was up 27.9%. Despite improvements, our International route network remains depressed in comparison to pre-COVID-19 pandemic levels, with revenue down 15.4% during the three months ended March 31, 2024, as compared to the same period in 2019. We expect demand on our International routes to continue to lag behind demand on our Domestic routes as 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 ASMs for the second quarter of 2024 to be up approximately 3.5% to 6.5% compared to the same period in 2023. We expect RASM will range between down 1.5% and up 1.5% for the second quarter of 2024 as compared to the same period in 2023.
Other Operating Revenue
For the three and nine months period ended September 30, 2017,March 31, 2024, Other operating revenue on our domestic routes increaseddecreased by $11.1$2.0 million, or 2.5%3.1%, and $63.8 million, or 5.1%, respectively, as compared to the prior year periods. The increase wassame period in 2023, primarily driven by a reduction in cargo revenue of $1.4 million due to improved yields within our North America routes of approximately 4.3%lower cargo volumes during the period. Other components in Other operating revenue include, but are not limited to, commissions, and 6.9% forfees earned under certain marketing agreements, which collectively decreased during the three and nine month periodsmonths ended September 30, 2017, respectivelyMarch 31, 2024 by approximately $0.6 million, as compared to the prior year periods.same period in 2023.
For the three and nine months period ended September 30, 2017, revenue on our international routes increased by $31.8 million, or 23.1%, and $109.4 million, or 32.2%, respectively, as compared to the prior year periods. The increase was due to improved yields within our international routes of approximately 7.8% and 7.2% for the three and nine month periods ended September 30, 2017, respectively as compared to the prior year periods. Another contributing factor for the increased revenue (period over period) was our expanded Hawai'i to Tokyo, Japan service. This included the introduction of service from Honolulu to Narita, Japan (July 2016), Kona to Tokyo Haneda Airport (December 2016), and expansion of existing Honolulu to Haneda service (December 2016).
Other operating revenue
For the three and nine months ended September 30, 2017, other operating revenue increased by $4.7 million or 5.9%, and $18.3 million, or 8.1%, respectively, as compared to the prior year periods. The increase was primarily due to an increase in cargo revenue during the respective periods of approximately 26.4% and 27.7% offset by a reduction in baggage revenue of approximately 3.7% and 3.2% for the three and nine months ended September 30, 2017, respectively.
The new revenue standard ASC 606, once effective, will affect our accounting policies and processes (including systems) regarding frequent flyer revenue, passenger revenue, other operating revenue, and selling costs. The adoption of the standard will have a significant impact on our financial statements. See Note 2 to the Consolidated Financial Statements for additional information.
Operating Expense
Operating expenses were $545.8$794.2 million and $1,625.5 million forduring the three and nine months ended September 30, 2017, respectively, and $492.9 million and $1,417.8 million for the three and nine months ended September 30, 2016, respectively.March 31, 2024. Increases (decreases) in operating expenses for the three and nine months ended September 30, 2017March 31, 2024, as compared to the same period in 2023, are detailed below:
| | | | | | | | | | | | | | | | | | |
| | Increase / (decrease) for the three months ended March 31, 2024 compared to the three months ended March 31, 2023 | | |
| | $ | | % | | | | |
Operating expenses | | (in thousands) | | | | | | |
Wages and benefits | | $ | 20,002 | | | 8.3 | % | | | | |
Aircraft fuel, including taxes and delivery | | (8,847) | | | (4.5) | | | | | |
Maintenance, materials and repairs | | 20,684 | | | 41.1 | | | | | |
Aircraft and passenger servicing | | 2,892 | | | 6.8 | | | | | |
Commissions and other selling | | 205 | | | 0.7 | | | | | |
Aircraft rent | | 1,535 | | | 5.4 | | | | | |
Other rentals and landing fees | | 4,407 | | | 11.4 | | | | | |
Depreciation and amortization | | 300 | | | 0.9 | | | | | |
Purchased services | | 3,403 | | | 9.7 | | | | | |
| | | | | | | | |
Special items | | 8,482 | | | 100.0 | | | | | |
| | | | | | | | |
| | | | | | | | |
Other | | 11,120 | | | 32.0 | | | | | |
Total | | $ | 64,183 | | | 8.8 | % | | | | |
Wages and benefits
Wages and benefits expense increased $20.0 million, or 8.3%, during the three months ended March 31, 2024, as compared to the prior year periods are detailed below:
|
| | | | | | | | | | | | | | |
| | Increase / (decrease) for the three months ended September 30, 2017 compared to the three months ended September 30, 2016 | | Increase / (decrease) for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 |
| | $ | | % | | $ | | % |
Operating expenses | | (in thousands) | | | | (in thousands) | | |
Wages and benefits | | $ | 24,703 |
| | 18.1 | % | | $ | 71,054 |
| | 18.0 | % |
Aircraft fuel, including taxes and delivery | | 15,293 |
| | 16.1 |
| | 67,907 |
| | 27.3 |
|
Maintenance, materials and repairs | | (2,416 | ) | | (4.7 | ) | | (5,535 | ) | | (3.3 | ) |
Aircraft and passenger servicing | | 2,389 |
| | 7.0 |
| | 11,324 |
| | 12.1 |
|
Commissions and other selling | | 3,450 |
| | 11.7 |
| | 4,732 |
| | 5.0 |
|
Aircraft rent | | 2,304 |
| | 7.0 |
| | 10,538 |
| | 11.4 |
|
Other rentals and landing fees | | 2,063 |
| | 7.1 |
| | 8,425 |
| | 10.8 |
|
Depreciation and amortization | | 952 |
| | 3.5 |
| | 2,158 |
| | 2.6 |
|
Purchased services | | (878 | ) | | (3.4 | ) | | 6,539 |
| | 9.0 |
|
Special items | | — |
| | — |
| | 23,450 |
| | 100.0 |
|
Other | | 5,020 |
| | 15.9 |
| | 7,097 |
| | 7.5 |
|
Total | | $ | 52,880 |
| | 10.7 | % | | $ | 207,689 |
| | 14.6 | % |
Wages and benefits
Wages and benefits expense for the third quarter increased by $24.7 million or 18.1%, and $71.1 million or 18.0% for the three and nine months ended September 30, 2017, respectively.period. The increase was primarily due to the recent signing of the Air Line Pilots Association (ALPA) contract amendment effective April 1, 2017 as well as an increase in employee benefits (such as health insurance) expenses. We have also increased the number of flight crew personnel and training to prepare for the induction of our A321neo fleet, resulting in higher wages and benefits expense is primarily attributed to increased headcount and training costs as we prepared for the ramp up of our ATSA operations with Amazon, as well as the introduction of our first Boeing 787 aircraft, which was placed into service in additionApril 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 an overallthe Company's postretirement and disability plans.
We expect that wages and benefits will increase in employee headcount by approximately 6.8%during the second quarter of 2024, as compared to September 30, 2016 which includes flight attendants, machinist,the same period in 2023, as a result of scheduled contractual wage increases, hiring and non-contract employees.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 increaseddecreased during the three and nine months ended September 30, 2017,March 31, 2024, as compared to the prior year periods,period, primarily due to the increasea decrease in the average fuel pricecost per gallon, and an increase inoffset by increased consumption, as illustrated in the following table:
| | | | Three months ended September 30, | | Nine months ended September 30, |
| | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change |
| | (in thousands, except per-gallon amounts) | | | | (in thousands, except per-gallon amounts) | | |
| | Three months ended March 31, | |
| | Three months ended March 31, | |
| | Three months ended March 31, | |
| | 2024 | |
| | 2024 | |
| | 2024 | |
| | (in thousands, except per-gallon amounts) | |
| | (in thousands, except per-gallon amounts) | |
| | (in thousands, except per-gallon amounts) | |
Aircraft fuel expense, including taxes and delivery | |
Aircraft fuel expense, including taxes and delivery | |
Aircraft fuel expense, including taxes and delivery | | $ | 110,111 |
| | $ | 94,818 |
| | 16.1 | % | | $ | 316,423 |
| | $ | 248,516 |
| | 27.3 | % |
Fuel gallons consumed | | 67,160 |
| | 64,918 |
| | 3.5 | % | | 193,404 |
| | 182,471 |
| | 6.0 | % |
Fuel gallons consumed | |
Fuel gallons consumed | |
Average fuel price per gallon, including taxes and delivery | | $ | 1.64 |
| | $ | 1.46 |
| | 12.3 | % | | $ | 1.64 |
| | $ | 1.36 |
| | 20.6 | % |
Average fuel price per gallon, including taxes and delivery | |
Average fuel price per gallon, including taxes and delivery | |
Fuel consumption increased by 4.3% during the three months ended March 31, 2024, as compared to the prior year period. The fuel consumption increase was a result of increased operations and aircraft up-gauging as a result of supply chain and engine availability issues impacting certain of 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 rawGAAP fuel expense, including taxes and delivery, plus (gains)/losses realized through actual cash payments to/(receipts from) hedge counterparties foron settlement of fuel derivatives settledcontracts in the period, inclusive of costs related to hedging premiums.
Economic fuel expense is calculated as follows:
| | | | Three months ended September 30, | | Nine months ended September 30, |
| | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change |
| | (in thousands, except per-gallon amounts) | | | | (in thousands, except per-gallon amounts) | | |
| | Three months ended March 31, | |
| | Three months ended March 31, | |
| | Three months ended March 31, | |
| | 2024 | |
| | 2024 | |
| | 2024 | |
| | (in thousands, except per-gallon amounts) | |
| | (in thousands, except per-gallon amounts) | |
| | (in thousands, except per-gallon amounts) | |
Aircraft fuel expense, including taxes and delivery | |
Aircraft fuel expense, including taxes and delivery | |
Aircraft fuel expense, including taxes and delivery | | $ | 110,111 |
| | $ | 94,818 |
| | 16.1 | % | | $ | 316,423 |
| | $ | 248,516 |
| | 27.3 | % |
Realized losses on settlement of fuel derivative contracts | | 2,787 |
|
| 2,525 |
|
| 10.4 | % |
| 2,100 |
|
| 30,349 |
| | (93.1 | )% |
Realized losses on settlement of fuel derivative contracts | |
Realized losses on settlement of fuel derivative contracts | |
Economic fuel expense | |
Economic fuel expense | |
Economic fuel expense | | $ | 112,898 |
| | $ | 97,343 |
| | 16.0 | % | | $ | 318,523 |
| | $ | 278,865 |
| | 14.2 | % |
Fuel gallons consumed | | 67,160 |
| | 64,918 |
| | 3.5 | % | | 193,404 |
| | 182,471 |
| | 6.0 | % |
Economic fuel costs per gallon | | $ | 1.68 |
| | $ | 1.50 |
| | 12.0 | % | | $ | 1.65 |
| | $ | 1.53 |
| | 7.8 | % |
Fuel gallons consumed | |
Fuel gallons consumed | |
Economic fuel price per gallon | |
Economic fuel price per gallon | |
Economic fuel price per gallon | |
See Item 3, "QuantitativeWe expect that fuel gallons consumed will be up between 2.5% to 5.0% during the second quarter of 2024 as compared to the same period in 2023.
Maintenance, materials and Qualitative Disclosures About Market Risk" for additional discussionrepairs
Maintenance, materials and repairs expense increased $20.7 million, or 41.1%, during the three months ended March 31, 2024, as compared to the same period in 2023.In December 2022, we entered into a Memorandum of Understanding (MOU) with one of our aircraft fuel coststhird-party service providers to terminate our Amended and related hedging program.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 months ended March 31, 2023, we recognized approximately $18.1 million in amortization. Excluding this reduction in 2023, maintenance, materials and repairs expense increased $2.6 million, or 3.8%, during the three months ended March 31, 2024, as compared to the same period in 2023.
We expect maintenance, materials and repairs expense to increase during the second quarter of 2024, as compared to the same period in 2023 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 $2.4 million, or 7.0%, and $11.3$2.9 million, or 12.1%6.8%, for the three and nine months ended September 30, 2017, respectively,March 31, 2024, as compared to the prior year periods. The increase was a direct result of our higher passenger counts, which resultedsame period in an increase in various aircraft and passenger servicing expenses such as our food and beverage and ground handling costs.
Commissions and other selling
Commission and other selling increased by $3.5 million, or 11.7%, and $4.7 million, or 5.0%, for the three and nine months ended September 30, 2017, respectively, as compared to the prior year periods.2023. The increase was primarily due to increases in credit card feeshigher volume-related expenses associated with increased passenger demand and advertisinginflationary pressures. We expect aircraft and promotion expenses.
Aircraft rent
Aircraft rent increased by $2.3 million, or 7.0%, and $10.5 million, or 11.4%, forpassenger service expense to increase during the three and nine months ended September 30, 2017, respectively,second quarter of 2024, as compared to the prior year periods. The increase was primarily due to a sale leaseback transaction for three Boeing 767-300 aircraftsame period in April 2017, the addition of two leased Boeing 717-200 aircraft, and an Airbus A330-200 aircraft.2023.
Other rentals and landing fees
Other rentals and landing fees increased by $2.1$4.4 million, or 7.1%, and $8.4 million, or 10.8%11.4%, for the three and nine months ended September 30, 2017, respectively,March 31, 2024, as compared to the prior year periods.same period in 2023. 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 second quarter of 2024, as compared to the same period in 2023 due primarily to increased airport costs.
Purchased services
Purchased services increased by $3.4 million, or 9.7%, for the three months ended March 31, 2024, as compared to the same period in 2023. The increase in purchased services is primarily related to our increased operations during the three months ended March 31, 2024 as compared to the same period in 2023. We expect other purchased services expense to increase during the second quarter of 2024, as compared to the same period in 2023.
Special Items
During the three months ended March 31, 2024, we recorded $8.5 million in Special items as a result of expenses related to our merger with Alaska, primarily consisting of legal, advisory, and other fees. Refer to the Merger with Alaska Air Group subsection above for additional information on the Merger.
Other expense
Other expense increased $11.1 million, or 32.0%, for the three months ended March 31, 2024, as compared to the same period in 2023. The increase was primarily duerelated to increases in landing fee rates, landing frequencies,personnel-related expenditures for crew travel, professional and airport rental fees.
Purchased services
Purchased services decreased by $0.9 million, or 3.4%,technical expenditures, and increased by $6.5 million, or 9.0%, for the three and nine months ended September 30, 2017, respectively, as compared to the prior year periods. The increase was primarily due to an increase in third-party vendor IT services during the nine month period ended September 30, 2017.
Special items
Below is a summary of our special item charges for the three and nine months ended September 30, 2017:
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (in thousands) |
Loss on sale of aircraft | $ | — |
| | $ | — |
| | $ | 4,771 |
| | $ | — |
|
Collective bargaining charge | — |
| | — |
| | 18,679 |
| | — |
|
Total Special items | $ | — |
| | $ | — |
| | $ | 23,450 |
| | $ | — |
|
In March 2017, we announced the ratification of a 63-month contract amendment with our pilots as represented by the ALPA. The agreement became effective April 1, 2017 and has a term of 63 months. The agreement includes, among other various benefits, a pay adjustment and ratification bonus computed based on previous service.miscellaneous expense. During the first two quartersquarter of 2017,2023, we expensed $18.7also recognized a $10.2 million related to (1) a one-time payment to reducegain on the future 401K employer contribution for certain pilot groups, which is not recoverable once paid and (2) a one-time true-up of the pilot vacation accrual at the revised rates set forth in the agreement.
In April 2017, we executed a sale leaseback transaction with an independent third-party for three Boeing 767-300 aircraft. The lease terms for the three aircraft commenced in April 2017 and continue through November 2018, December 2018, and January 2019, respectively. During the nine months ended September 30, 2017, we recorded a loss on sale of aircraft of $4.8 million.commercial real estate.
Nonoperating Income (Expense)
Net nonoperating expense increaseddecreased by $39.4$4.2 million, or 266.9% and $59.2 million, or 247.6%50.0%, forduring the three and nine months ended September 30, 2017,March 31, 2024, as compared to the prior year periods.same period in 2023. The increasechange was primarily dueattributed to a partial settlementfavorable movements in unrealized gains (losses) associated with our foreign denominated debt and curtailment loss as well as a loss on plan termination, recorded in Other nonoperating special items infuel derivatives portfolio, offset by decreased generation of interest income commensurate with the period.
In 2016, the Hawaiian Airlines, Inc. Pension Plan for Salaried Employees (the Salaried Plan) was consolidated into the Hawaiian Airlines, Inc. Pension Plan for Employees Represented by the International Association of Machinists (IAM), which established the Hawaiian Airlines, Inc. Salaried & IAM Merged Pension Plan (the Merged Plan). At that time, the net liabilities of the Salaried Plan were transferred to the Merged Plan. In August 2017, we completed the termination of the Merged Plan by
transferring the assets and liabilities to a third-party insurance company. We contributed a total of $18.5 million in cash to fully fund the plan and recognized a one-time financial loss of $35.2 million as an other nonoperating special item on our Consolidated Statement of Operations.
During the three-months ended September 30, 2017, we recognized a one-time settlement loss of $15.0 million related to the settlement of a portionreduction of our pilots' other post-retirement medical plan liability, pursuant to which the parties agreed to eliminate the post-65 post-retirement medical benefit for all active pilots and to replace the benefit with a health retirement account (HRA) managed by ALPA. This transaction represented a curtailment and partial settlement of the pilots' other post-retirement benefit plan. In August 2017, we made a one-time cash payment of approximately $101.9 million to fund the HRA and settle the post-65 post-retirement medical plan obligation. The cash contributed was distributed to the trust funding the individual health retirement notional accounts of the participants.investment portfolio.
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (in thousands) |
Partial settlement and curtailment loss | $ | 15,001 |
| | $ | — |
| | $ | 15,001 |
| | $ | — |
|
Loss on plan termination | 35,201 |
| | — |
| | 35,201 |
| | — |
|
Total special items | $ | 50,202 |
| | $ | — |
| | $ | 50,202 |
| | $ | — |
|
Also, during the three-months ended September 30, 2017, there was a fluctuation in gains/losses of fuel derivatives of $6.9 million and an increase in capitalized interest of $1.7 million.
During the nine-months ended September 30, 2017, net nonoperating expense increased by $59.2 million, or 247.6%, as compared to the prior year period. The increase was primarily due to the nonoperating special items as described above as well as a period over period fluctuation in gains/losses of fuel derivatives of $25.6 million partially offset by a $10.0 million fluctuation in losses related to extinguishment of debt.
Income Taxes
Our effective tax rate was 37.7% and 37.6%approximately 10.0% for the three months ended September 30, 2017 and 2016, respectively, and 36.1% and 37.9% forMarch 31, 2024 as compared to 21.9% during the nine months ended September 30, 2017 and 2016, respectively. We consider a variety of factorssame period in determining our2023. The effective tax rate includingrepresents a blend of federal and state taxes, the impact of certain nondeductible items, and the valuation allowance on certain federal and state net operating loss carryforwards, realized capital losses, and unrealized capital losses on equity securities during the periods.
As of March 31, 2024, we generated federal and state NOLs of approximately $451.4 million and $968.8 million, respectively, which are available to reduce future taxable income. Our ability to use NOL carryforwards depend on the amount of taxable income generated in future periods. During the first quarter of 2024, we increased our forecasted full-year pretax results,valuation allowance on our net deferred tax assets. The incremental valuation allowance recorded by the U.S.Company during the first quarter of 2024 was primarily due to uncertainties in the future utilization of deferred tax assets related to our NOL carryforwards for federal statutoryincome tax purposes. As a result of the incremental increase in the valuation allowance, our annual effective tax rate expected nondeductible expenses, and estimated state taxes.decreased to approximately 10.0%.
Liquidity and Capital Resources
Our liquidity is dependent on the cash we generate from operating activities and our debt financing arrangements. As of September 30, 2017, we had $348.0 million in cash andCash, cash equivalents and $270.7 million in short-term investments an increase(excluding restricted cash) totaled approximately $897.3 million as of $8.7March 31, 2024, compared to approximately $908.5 million fromas of December 31, 2016.2023.
We have been ableAs of March 31, 2024, our current assets exceeded our current liabilities by approximately $141.3 million as compared to generate sufficient funds from our operations to meet our working capital requirements and periodically finance our aircraft through secured debt and lease financings. At September 30, 2017, we had approximately $506.1$25.5 million as of December 31, 2023. Approximately $757.9 million of debtour current liabilities relate to our advanced ticket sales and capital lease obligations, including approximately $58.6 million classified as a current liability in our unaudited Consolidated Balance Sheets. See the Contractual Obligations table below for a description of our estimated contractual obligations as of September 30, 2017.frequent flyer deferred revenue.
We also have access to a secured revolving credit and letter of credit facility in an amount of up to $225 million, maturing in December 2019. As of September 30, 2017, we had no outstanding borrowings under the revolving credit facility.
Cash FlowsFlow and Uses of Liquidity
Operating Activities
Net cash provided by operating activities was $295.5$0.3 million and $434.9 million forduring the ninethree months ended September 30, 2017March 31, 2024 compared to net cash provided by operating activities of $118.3 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 2016, respectively.record the receipt on advance sales as deferred revenue in air traffic liability. The decrease was primarilyair 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 months ended March 31, 2024, as compared to the same period in 2023; however, overall demand (measured in passengers flown) remains below 2019 levels, down approximately 7.1%, largely due to a reduction in net income as well as cash expendituresinternational travel demand lagging the recovery of domestic travel.
Aircraft Fuel. Fuel expense represented approximately 23.8% of our total operating expense during the three months ended March 31, 2024 compared to 27.1% during the same period relatingin 2023. The market price for jet fuel is volatile, which can impact the comparability of our cash flows from operations. During the three months ended March 31, 2024, the average fuel price per gallon decreased 8.5%, as compared to the terminated Mergedsame period in 2023.
Pension and Other Postretirement Benefit Plan Funding. During the three months ended March 31, 2024 and partial settlement2023, 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 pilots'defined benefit plan during 2024.
Operating Lease Obligations. As of March 31, 2024, we had $363.1 million of operating lease obligations, which range between approximately $29.7 million to $84.6 million on an annual basis between 2024 and 2027. We have approximately $75.8 million in operating lease obligations during the remainder of 2023.
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 post-retirement medical plan (as discussed in Note 10).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 March 31, 2024, we had approximately $120.5 million of such obligations, which range from approximately $3.3 million to $18.3 million on an annual basis over the next five years.
Investing Activities
Net cash used in investing activities was $166.6$33.3 million forduring the ninethree months ended September 30, 2017 dueMarch 31, 2024 compared to purchasesnet cash used in investing activities of property$49.4 million during the prior year period. Investing activities include capital expenditures, primarily related to aircraft and other equipment, and pre-delivery payments for future aircraft deliveries, partially offset by athe purchases and sales of short-term investments.
Short-term Investments. During the three months ended March 31, 2024, our purchases and proceeds from the sale and maturity of short-term investments resulted in net cash inflow of $93.7 million as compared to net cash inflow of $47.3 million during the same period in 2023.
Capital Expenditures. Our capital expenditures are primarily related to investment activity.
Net cash used in financing activities was $110.8the purchase of aircraft, fleet modifications, and technology enhancements. Our capital expenditures were $127.0 million forduring the ninethree months ended September 30, 2017,March 31, 2024 as compared to $106.2 million in capital expenditures during the same period in 2023, primarily duerelated to the repurchasesdelivery of our common stock in the period along with repayments of the Company's long-term debtfirst Boeing 787-9 aircraft and lease obligations.scheduled predelivery payments for scheduled future deliveries.
Capital Commitments
As of September 30, 2017,March 31, 2024, 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 | | 16 |
| | 9 |
| | Between 2017 and 2020 |
A330-800neo aircraft | | 6 |
| | 6 |
| | Between 2019 and 2021 |
Pratt & Whitney spare engines: | | |
| | |
| | |
A321neo spare engines | | 3 |
| | 2 |
| | Between 2017 and 2019 |
Rolls-Royce spare engines: | | |
| | |
| | |
A330-800neo spare engines | | 2 |
| | 2 |
| | Between 2019 and 2026 |
| | | | | | | | | | | | | | | | | | | | |
Aircraft Type | | Firm Orders | | Purchase Rights | | Expected Delivery Dates |
A321neo aircraft | | — | | | 9 | | | N/A |
Boeing 787-9 aircraft | | 11 | | 8 | | Between 2024 and 2027 |
| | | | | | |
| | | | | | |
| | | | | | |
General Electric GEnx spare engines: | | | | | | |
Boeing 787-9 spare engines | | 3 | | | 1 | | | Between 2024 and 2027 |
Committed expenditures for these aircraft, engines, and related flight equipment approximates $115are approximately $225.9 million for the remainder of 2017, $4552024, $419.6 million in 2018, $5012025, $665.5 million in 2019, $2422026, and $252.9 million in 2027.
In October 2020, $170 millionwe 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 February 2024, we took delivery of our first Boeing 787-9 aircraft. This aircraft was placed into service in 2021 and $132 million thereafter.April 2024. We took delivery of our second
aircraft in April 2024 with a third aircraft scheduled for delivery in late 2024. Refer to Note 12 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 are also currently exploring variouscan provide no assurance that any financing alternatives,not already in place for aircraft and while we believe that such financingspare engine deliveries will be available to us there can be no assurance that financing will be available when required, or on acceptable terms when necessary or at all. The inability to secure such
Financing Activities
Net cash provided by financing could have an impact on our ability to fulfill our existing purchase commitments and a material adverse effect on our operations.
Stock Repurchase Program and Dividends
In April 2017, our Board of Directors approved a modification to our stock repurchase program under which we may repurchase up to $100activities was $110.6 million of our outstanding common stock. The stock repurchase program is subject to further modification or termination at any time.
We spent $46.2 million and $50.5 million to repurchase and retire approximately 1.1 million shares and 1.2 million shares of our common stock in open market transactions during the three and nine months ended September 30, 2017,March 31, 2024 compared to net cash used in financing activities of $26.0 million during the prior year period. Our financing cash flows are impacted by the following factors:
Debt and Finance Lease Obligations.During the three months ended March 31, 2024 and 2023, we repaid $18.8 million and $25.0 million of long-term debt and finance lease obligations, respectively. In February 2024, we took delivery of our first Boeing 787-9 aircraft, which was financed. The transaction did not qualify as a sale under the applicable accounting framework and we recorded $131.4 million as debt in the Consolidated balance sheet.
As of September 30, 2017,March 31, 2024, scheduled maturities of our debt remaining in 2024 were $33.5 million. The scheduled maturities total $64.4 million in 2025, $1.3 billion in 2026, $21.7 million in 2027, $22.7 million in 2028, and beyond 2028, scheduled maturities aggregate to $178.6 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 March 31, 2024, these interest obligations total $65.3 million remaining in 2024, $88.4 million in 2025, $32.7 million in 2026, $11.8 million in 2027, $10.7 million in 2028, and $26.7 million thereafter.
As of March 31, 2024, we had $49.5$75.9 million remaining to spendof finance lease obligations. We have approximately $8.5 million in finance lease obligations during the remainder of 2024, approximately $11.3 million for each year between 2025 and 2028, and approximately $22.3 million in the aggregate thereafter.
Undrawn Lines of Credit. As of March 31, 2024, our revolving line of credit, which matures in December 2025, remained undrawn and available under the stock repurchase program. See Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds” of this report for additional information on the stock repurchase program.our $235.0 million revolving credit facility.
In October 2017, we announced that our Board of Directors declared a quarterly cash dividend of $0.12 per share payable on November 30, 2017, to stockholders of record as of November 17, 2017.
Credit Card Holdbacks
Holdbacks. Under our bank-issued credit card processing agreements, certain proceeds from advance ticket sales may be held back to serve as collateral to cover any possible chargebacks or other disputed charges that may occur. These holdbacks, which are included in restricted cash in our unaudited Consolidated Balance Sheets set forth in our unaudited Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q, totaled $1.0 million and $5.0 million asAs of September 30, 2017March 31, 2024 and December 31, 2016, respectively.
2023, there were no holdbacks held by our credit card processors. In the event of a material adverse change in our business, the holdbackscredit card processors could increase holdbacks to an amount up to 100% of the applicableoutstanding credit card tickets that are unflown (e.g., air traffic liability, excluding frequent flyer deferred revenue), which would also result in an increase in the required levelrestriction of restricted cash. If we arewere unable to obtain a waiver of, or otherwise mitigate the increase in the restriction of cash, it could have a material adverse impact on our operations.operations, business or financial condition.
Pension and Postemployment Benefit Plan Funding
Covenants. We contributed $14.2 millionand$28.6 million (excluding the one-time special charge transactions discussedwere in this Part I. Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the heading "Nonoperating Income (Expense)") tocompliance with covenants contained in our defined benefit and other post-retirement plans during the three and nine months ended September 30, 2017, respectively. Future funding requirements for our defined benefit plans are dependent upon many factors such as interest rates, funded status, applicable regulatory requirements and the level and timing of asset returns. See the discussion in this Part I. Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the heading "Nonoperating Income (Expense)" concerning special charges for a description of one-time cash payments made into the Merged Plan and our pilots' other post-retirement medical plan which are not included in the amounts above.
Contractual Obligations
Our estimated contractual obligationsfinancing agreements as of September 30, 2017 are summarized in the following table: March 31, 2024.
|
| | | | | | | | | | | | | | | | | | | | |
Contractual Obligations | | Total | | Remaining in 2017 | | 2018 - 2019 | | 2020 - 2021 | | 2022 and thereafter |
| | (in thousands) |
Debt and capital lease obligations (1) | | $ | 625,737 |
| | $ | 11,882 |
| | $ | 192,341 |
| | $ | 119,008 |
| | $ | 302,506 |
|
Operating leases—aircraft and related equipment (2) | | 661,964 |
| | 31,984 |
| | 245,306 |
| | 162,447 |
| | 222,227 |
|
Operating leases—non-aircraft | | 137,112 |
| | 1,643 |
| | 14,250 |
| | 13,459 |
| | 107,760 |
|
Purchase commitments - Capital (3) | | 1,614,967 |
| | 114,916 |
| | 955,659 |
| | 412,558 |
| | 131,834 |
|
Purchase commitments - Operating (4) | | 672,248 |
| | 23,089 |
| | 133,470 |
| | 115,259 |
| | 400,430 |
|
Projected employee benefit contributions (5) | | 30,710 |
| | 1,510 |
| | 29,200 |
| | — |
| | — |
|
Total contractual obligations | | $ | 3,742,738 |
| | $ | 185,024 |
| | $ | 1,570,226 |
| | $ | 822,731 |
| | $ | 1,164,757 |
|
| |
(1) | Amounts reflect capital lease obligations for one Airbus A330-200 aircraft, two Boeing 717-200 aircraft, one A330 flight simulator, and aircraft and IT related equipment. |
| |
(2) | Amounts reflect leases for ten Airbus A330-200 aircraft, seven Boeing 767-300 aircraft, and three Boeing 717-200 aircraft. |
| |
(3) | Amounts include our firm commitments for aircraft and aircraft related equipment. |
| |
(4) | Amounts include commitments for services provided by third-parties for aircraft maintenance for our Airbus fleet, accounting, IT, capacity purchases, and the estimated rental payments for a cargo and maintenance hangar. Total contractual obligations do not include long-term contracts where the commitment is variable in nature (with no minimum guarantee), such as aircraft maintenance deposits due under operating leases and fees due under certain other agreements such as aircraft maintenance power-by-the-hour, computer reservation systems and credit card processing agreements, or when the agreements contain short-term cancellation provisions. |
| |
(5) | Amounts include our estimated minimum contributions to our pension plans (based on actuarially determined estimates) and contributions to our pilots’ disability plan. Amounts are subject to change based on numerous factors, including interest rate levels, the amount and timing of asset returns and the impact of future legislation. We are currently unable to estimate the projected contributions beyond 2019. |
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 boardBoard of directorsDirectors 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 earningsfinancial results press releases.
See tabletables 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.
•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, but was terminated in April 2023. During the three months ended March 31, 2023, we recognized approximately $18.1 million in amortization within Maintenance, materials and repairs in the Consolidated Statements of Operation.
•Special items. During the three months ended March 31, 2024, we recorded $8.5 million in Special items as a result of expenses related to our merger with Alaska, primarily consisting of legal, advisory, and other fees.
•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 and interest rate derivatives (not designated as hedges) that will settle in future periods and the reversal of prior period unrealized amounts.
•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 gain on equity securities. Unrealized gain 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 excludingadjusting for the impact of thesethe changes in fair value of equity securities and fuel derivative adjustmentscontracts, 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, Special items, interest income on federal tax refunds, 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 below.
Loss on extinguishment of debt, net of tax, is excluded to help investors analyze our operational performance and compare our results to other airlines in the periods presented below.
The collective bargaining charge related to (1) a one-time payment to reduce the future 401K employer contribution for certain pilot groups, and (2) a one-time true up of the pilot vacation accrual at the revised rates set forth in an agreement with our pilots represented by ALPA. The loss on sale of aircraft was a result of a sale-leaseback transaction covering three Boeing 767 aircraft as part of the planned exit from our 767 fleet. In August 2017, we terminated the Merged Plan and settled a portion of the pilots other post-retirement medical plan liability. In connection with the reduction of these liabilities we recorded one-time special charges of $35.2 million related to the Merged Plan termination and $15.0 million related to the settlement of a portion of our outstanding other post-retirement medical plan obligation with our pilots. These one-time charges are considered special items by us and are not expected to represent ongoing expenses. We believe that excluding such special items helps investors analyze our operational performance and compare our results to other airlines in the periods presented below.presented.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | Total | | Diluted Per Share | | Total | | Diluted Per Share | | Total | | Diluted Per Share | | Total | | Diluted Per Share |
GAAP net income, as reported | | $ | 74,566 |
| | $ | 1.39 |
| | $ | 102,454 |
| | $ | 1.91 |
| | $ | 191,911 |
| | $ | 3.57 |
| | $ | 233,490 |
| | $ | 4.35 |
|
Add (deduct): changes in fair value of derivative contracts | | (6,069 | ) | | (0.11 | ) | | 1,076 |
| | 0.02 |
| | 8,128 |
| | 0.15 |
| | (45,770 | ) | | (0.85 | ) |
Add: loss on extinguishment of debt | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 9,993 |
| | 0.19 |
|
Add: special items | | — |
| | — |
| | — |
| | — |
| | 23,450 |
| | $ | 0.44 |
| | — |
| | $ | — |
|
Add: other nonoperating special items | | 50,202 |
| | 0.94 |
| | — |
| | — |
| | 50,202 |
| | 0.93 |
| | — |
| | — |
|
Add (deduct): tax effect of adjustments | | (16,091 | ) | | (0.30 | ) | | (409 | ) | | (0.01 | ) | | (29,817 | ) | | (0.55 | ) | | 13,595 |
| | 0.25 |
|
Adjusted net income | | $ | 102,608 |
| | $ | 1.92 |
| | $ | 103,121 |
| | $ | 1.92 |
| | $ | 243,874 |
| | $ | 4.54 |
| | $ | 211,308 |
| | $ | 3.94 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended March 31, | | |
| | 2024 | | 2023 | | | | |
| | Total | | Diluted Net Loss Per Share | | Total | | Diluted Net Loss Per Share | | | | | | | | |
| | (in thousands, except for per share data) |
Net Loss, as reported | | $ | (137,565) | | | $ | (2.65) | | | $ | (98,257) | | | $ | (1.91) | | | | | | | | | |
Adjusted for: | | | | | | | | | | | | | | | | |
CBA related expense | | — | | | — | | | 17,727 | | | 0.35 | | | | | | | | | |
Contract termination amortization | | — | | | — | | | (18,114) | | | (0.35) | | | | | | | | | |
Special items | | 8,482 | | | 0.16 | | | — | | | — | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Gain on sale of commercial real estate | | — | | | — | | | (10,179) | | | (0.20) | | | | | | | | | |
Interest income on federal tax refund | | — | | | — | | | (4,672) | | | (0.09) | | | | | | | | | |
Changes in fair value of fuel derivative contracts | | (1,816) | | | (0.04) | | | 3,552 | | | 0.07 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Unrealized gain on foreign debt | | (8,555) | | | (0.17) | | | (2,488) | | | (0.05) | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Unrealized gain on equity securities | | (5,115) | | | (0.10) | | | (944) | | | (0.02) | | | | | | | | | |
Tax effect of adjustments | | 1,037 | | | 0.03 | | | 1,568 | | | 0.03 | | | | | | | | | |
Adjusted net loss | | $ | (143,532) | | | $ | (2.77) | | | $ | (111,807) | | | $ | (2.17) | | | | | | | | | |
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 specialnon-recurring items. These amounts are included in CASM, but for internal purposes we consistently use unit cost metrics that exclude fuel and specialnon-recurring items (if applicable) to measure and monitor our costs.
CASM and CASM - excludingCASM-excluding aircraft fuel and specialnon-recurring items are summarized in the table below:
|
| | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (in thousands, except as otherwise indicated) |
GAAP operating expenses | | $ | 545,808 |
| | $ | 492,928 |
| | $ | 1,625,485 |
| | $ | 1,417,796 |
|
Less: aircraft fuel, including taxes and delivery | | (110,111 | ) | | (94,818 | ) | | (316,423 | ) | | (248,516 | ) |
Less: special items | | $ | — |
| | $ | — |
| | $ | (23,450 | ) | | $ | — |
|
Adjusted operating expenses - excluding aircraft fuel and special items | | $ | 435,697 |
| | $ | 398,110 |
| | $ | 1,285,612 |
| | $ | 1,169,280 |
|
Available Seat Miles | | 4,950,800 |
| | 4,894,768 |
| | 14,208,642 |
| | 13,813,955 |
|
CASM - GAAP | |
| 11.02 | ¢ | |
| 10.07 | ¢ | |
| 11.44 | ¢ | |
| 10.26 | ¢ |
Less: aircraft fuel | | (2.22 | ) | | (1.94 | ) | | (2.23 | ) | | (1.80 | ) |
Less: special items | | — |
| | — |
| | (0.17 | ) | | — |
|
CASM - excluding aircraft fuel and special items | |
| 8.80 | ¢ | |
| 8.13 | ¢ | |
| 9.04 | ¢ | |
| 8.46 | ¢ |
| | | | | | | | | | | | | | | | | | |
| | Three months ended March 31, | | |
| | 2024 | | 2023 | | | | |
| | (in thousands, except as otherwise indicated) |
GAAP Operating Expenses | | $ | 794,213 | | | $ | 730,030 | | | | | |
Adjusted for: | | | | | | | | |
CBA related expense | | — | | | (17,727) | | | | | |
Special items | | (8,482) | | | — | | | | | |
Contract termination amortization | | — | | | 18,114 | | | | | |
| | | | | | | | |
Gain on sale of commercial real estate | | — | | | 10,179 | | | | | |
Operating expenses excluding non-recurring items | | $ | 785,731 | | | $ | 740,596 | | | | | |
Aircraft fuel, including taxes and delivery | | (188,778) | | | (197,625) | | | | | |
Operating expenses excluding aircraft fuel and non-recurring items | | $ | 596,953 | | | $ | 542,971 | | | | | |
Available Seat Miles | | 5,050,841 | | | 4,917,517 | | | | | |
CASM - GAAP | | 15.72 | ¢ | | 14.85 | ¢ | | | | |
Adjusted for: | | | | | | | | |
CBA related expense | | — | | | (0.36) | | | | | |
Special items | | (0.16) | | | — | | | | | |
Contract termination amortization | | — | | | 0.37 | | | | | |
| | | | | | | | |
Gain on sale of commercial real estate | | — | | | 0.20 | | | | | |
Aircraft fuel, including taxes and delivery | | (3.74) | | | (4.02) | | | | | |
CASM excluding aircraft fuel and non-recurring items | | 11.82 | ¢ | | 11.04 | ¢ | | | | |
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.
We reclassified prior period EBITDA and Adjusted EBITDA to conform to the current period presentation.
| | | | | | | | | | | | | | | | | | |
| | Three months ended March 31, | | |
| | 2024 | | 2023 | | | | |
| | (in thousands) |
Net Loss | | $ | (137,565) | | | $ | (98,257) | | | | | |
Income tax benefit | | (15,285) | | | (27,574) | | | | | |
Depreciation and amortization | | 32,967 | | | 32,667 | | | | | |
Interest expense and amortization of debt discounts and issuance costs | | 24,069 | | | 22,880 | | | | | |
Interest income | | (10,021) | | | (16,465) | | | | | |
Capitalized interest | | (3,134) | | | (1,458) | | | | | |
EBITDA, as reported | | (108,969) | | | (88,207) | | | | | |
Adjusted for: | | | | | | | | |
CBA related expense | | — | | | 17,727 | | | | | |
Contract termination amortization | | — | | | (18,114) | | | | | |
Gain on sale of commercial real estate | | — | | | (10,179) | | | | | |
Interest income on tax refund | | — | | | (4,672) | | | | | |
| | | | | | | | |
Changes in fair value of fuel derivative instruments | | (1,816) | | | 3,552 | | | | | |
Unrealized gain on foreign debt | | (8,555) | | | (2,488) | | | | | |
| | | | | | | | |
| | | | | | | | |
Special items | | 8,482 | | | — | | | | | |
Unrealized gain on equity securities | | (5,115) | | | (944) | | | | | |
Adjusted EBITDA | | $ | (115,973) | | | $ | (103,325) | | | | | |
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based upon financial statements that have been prepared in accordance with U.S. generally accepted accounting principles.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 three months ended March 31, 2024. For a detailed discussion of the application ofmore information on our critical accounting policies, see Note 2 herein, "Significant Accounting Policies," Note 10 herein, "Employee Benefits Plans,"Part II, Item 7 "Management's Discussion and the section, titled “Critical Accounting PoliciesAnalysis of Financial Condition and Estimates,” and Note 1, “SummaryResults of Significant Accounting Policies,” toOperations" of our Consolidated Financial StatementsAnnual Report on Form 10-K for the year ended December 31, 2016 each included in our Annual Report on Form 10-K.2023.
The new revenue standard (ASU 2014-09), once effective, will affect our accounting policies and processes (including systems) regarding frequent flyer, ticket breakage, credit card fees, booking fees, and upgrade fee accounting. The adoption of the standard will have a significant impact on our financial statements, and we are currently in the process of quantifying the effects of the new standard on our financial statements. See Note 2 to our Consolidated Financial Statements for additional information.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are subject to certain market risks, including commodity price risk (e.g. aircraft fuel prices), interest rate risk and foreign currency risk. WeThere have market-sensitive instruments in the form of financial derivatives used to offset our exposure to aircraft fuel price increases and financial hedge instruments used to hedge our exposure to foreign currency exchange risk. The adverse effects of potentialbeen no material changes in these market risks are discussed below.
The sensitivity analyses presented do not considerrisk from the effects that such adverse changes may have on overall economic activity nor do they consider additional actions we might undertake to mitigate our exposure to such changes. Actual results may differ.
Aircraft Fuel Costs
Aircraft fuel costs constitute a significant portion of our operating expense. Fuel costs represented 20%information provided in Part II, Item 7A "Quantitative and 19% of our operating expenses for the three and nine months ended September 30, 2017, respectively, and 19% and 18% for the three and nine months ended September 30, 2016, respectively. Approximately 72% of our fuel was based on Singapore jet fuel prices, 27% was based on U.S. West Coast jet fuel prices, and 1% on other jet fuel prices. Based on the amount of fuel expected to be consumed for the remainder of 2017, for every one cent increase in the cost of a gallon of jet fuel, our fuel expense would increase by approximately $0.7 million, excluding the impact of our fuel hedge program.
We periodically enter into derivative financial instruments to manage our exposure to changes in the price of jet fuel. During the three and nine months ended September 30, 2017, our fuel hedge program primarily consisted of crude oil call options and jet fuel swaps. Swaps provide for a settlementQualitative Disclosures About Market Risk", in our favor in the event the prices exceed a predetermined contractual level and are unfavorable in the event prices fall below a predetermined contractual level. With call options, we are hedged against spikes in crude oil prices and during a period of decline in crude oil prices we only forfeit cash previously paid for hedge premiums.2023 Annual Report on Form 10-K.
As of September 30, 2017, we hedged approximately 51% of our projected fuel requirements for the remainder of 2017 with crude oil call options and jet fuel swaps. As of September 30, 2017, the fair value of these fuel derivative agreements reflected a net asset of $8.7 million which is recorded as a prepaid expense and other asset in our unaudited Consolidated Balance Sheet.
We expect to continue our program of offsetting some of our exposure to future changes in the price of jet fuel with a combination of fixed forward pricing contracts, swaps, calls, collars and other option-based structures. We do not hold or issue derivative financial instruments for trading purposes.
Interest Rates
Changes in market interest rates have a direct and corresponding effect on our pre-tax earnings and cash flows associated with interest-bearing cash accounts. Based on the balances of our cash and cash equivalents and restricted cash as of September 30, 2017, a change in interest rates is unlikely to have a material impact on our results of operations.
At September 30, 2017, we had $518.1 million of fixed-rate debt including capital lease obligations, facility agreements for aircraft purchases, and the outstanding equipment notes related to our 2013 EETC financing. Market risk for fixed-rate long-term debt is estimated as the potential increase in fair value resulting from a hypothetical 10% decrease in interest rates, and amounted to approximately $7.2 million as of September 30, 2017.
Foreign Currency
We generate revenues and incur expenses in foreign currencies. Changes in foreign currency exchange rates impact our results of operations through changes in the dollar value of foreign currency-denominated operating revenues and expenses. Our most significant foreign currency exposures are the Japanese Yen and Australian Dollar. Based on expected remaining 2017 revenues and expenses denominated in Japanese Yen and Australian Dollars, a 10% strengthening in value of the U.S. dollar, relative to the Japanese Yen and Australian Dollar, would result in a decrease in operating income of approximately $6.8 million and $4.4 million, respectively, which excludes the offset of the hedges discussed below. This potential impact to the results of our operation is driven by the inherent nature of our international operations, which requires us to accept a large volume of sales transactions denominated in foreign currencies while few expense transactions are settled in foreign currencies. This disparity is the primary factor in our exposure to foreign currencies.
As of September 30, 2017, the fair value of our foreign currency forwards reflected a net asset of $1.4 million and $0.7 million recorded in prepaid expenses and other, and long-term prepayments and other, respectively, in our unaudited Consolidated Balance Sheets.
ITEM 4.CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Our management, including our Chief Executive Officer (CEO)principal executive officer and Chief Financial Officer (CFO), performed an evaluationprincipal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) underof the Securities Exchange Act of 1934, as amended (the "Exchange Act")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 CEOprincipal executive officer and CFO,principal financial officer, concluded that our disclosure controls and procedures were effective as of September 30, 2017March 31, 2024 to provide reasonable assurance that
the information required to be disclosed by the Companyus in reports it fileswe file under the Exchange Act, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and is accumulated and communicated to our management, including our CEOprincipal executive officer and CFO,principal financial officer, to allow timely decisions regarding required disclosure.disclosures.
Changes in Internal Control over Financial Reporting
ThereDuring the three months ended March 31, 2024, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2017 whichthat 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.
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:
Alaska Air Group Merger Risks
•the pendency of the Merger may cause disruption in our business
•failure to complete the Merger in a timely manner or at all could negatively impact the market price of our common stock, as well as our future business and our results of operations and financial condition
•to complete the Merger, certain government approvals must be obtained
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 within Hawai'i
•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 our control
•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
•provisions of our certificate of incorporation and bylaws and our agreements with Amazon may delay or prevent a change of control
•Amazon may become a significant stockholder
•the publication of research about us by analysts
Securities Offerings Risks
•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
ALASKA AIR GROUP MERGER
The pendency of the Merger may cause disruption in our business.
The Merger Agreement restricts us from taking specified actions without Alaska's consent until the Merger is completed or the Merger Agreement is terminated. These restrictions are more fully described in the Merger Agreement. These restrictions may affect our ability to execute our business strategies and attain our financial and other goals and may impact our business, results of operations and financial condition.
The pendency of the Merger could cause disruptions to our business or business relationships, which could have an adverse impact on our results of operations. Parties with which we have business relationships, including guests, employees and labor groups, suppliers, third-party service providers and third-party distribution channels, may be uncertain as to the future of such relationships and may delay or defer certain business decisions, seek alternative relationships with third parties or seek to alter their present business relationships with us. Parties with whom we otherwise may have sought to establish business relationships may seek alternative relationships with third parties.
The pursuit of the Merger is expected to place a significant burden on our management and internal resources. The diversion of management’s attention away from day-to-day business concerns and any difficulties encountered in the transition and integration process could adversely affect our business, results of operations and financial condition.
In addition, we have incurred and will continue to incur significant costs, expenses and fees in connection with the Merger. The substantial majority of these costs will be non-recurring expenses relating to the Merger, and many of these costs are payable regardless of whether or not the Merger is consummated. Litigation has been filed in connection with the Merger, and further litigation may arise prior to closing. Defending the litigation could prove costly and time consuming.
Failure to complete the Merger in a timely manner or at all could negatively impact the market price of our common stock, as well as our future business and our results of operations and financial condition.
The Merger cannot be completed until the conditions to closing are satisfied or (if permissible under applicable law) waived. The failure to satisfy the required conditions could delay the completion of the Merger for a significant period of time or prevent it from occurring. Further, there can be no assurance that the conditions to the closing of the Merger will be satisfied or waived or that the Merger will be completed.
If the Merger is not completed in a timely manner or at all, our ongoing business may be adversely affected, including as follows:
•we may experience negative reactions from the financial markets, and our stock price could decline to the extent that the current market price reflects an assumption that the Merger will be completed;
•we may experience negative reactions from employees, guests, suppliers, communities or other third parties;
•we may be subject to further litigation, which could result in significant costs and expenses;
•management’s focus may be diverted from our day-to-day business operations and from pursuing other opportunities that could have been beneficial to the Company;
•our costs of pursuing the Merger may be higher than anticipated;
•we may have difficulties in attracting and/or retaining key employees; and
•our access to capital markets may be limited and we may experience increased borrowing costs.
If the Merger is not consummated, there can be no assurance that these risks will not materialize and will not materially adversely affect our stock price, business, results of operations and financial condition.
The Merger Agreement includes customary termination rights in favor of each party. In certain circumstances, we may be required to pay Alaska a termination fee of $39.6 million in connection with the termination of the Merger Agreement. In certain circumstances, Alaska may be required to pay us a termination fee of $100.0 million. Any requirement to pay a termination fee to Alaska may have an adverse effect on our liquidity and results of operations. The receipt of any termination fee from Alaska may not be sufficient to compensate us for all of the expenses incurred, and opportunities forgone, as a result of our pursuit of the Merger.
In order to complete the Merger, the Company and Alaska must obtain certain regulatory approvals, and if such approvals are not granted or are granted with conditions, completion of the Merger may be jeopardized or the anticipated benefits of the Merger could be reduced.
Although the Company and Alaska have agreed to use reasonable best efforts, subject to certain limitations, to make certain governmental filings and obtain the required regulatory approvals, there can be no assurance that the relevant approvals will be obtained (including through the expiration of applicable waiting periods). Governmental authorities may also commence litigation against us, Alaska or both to prevent the Merger from occurring. Defending any such lawsuit will be time-consuming and expensive and there can be no assurance that we and Alaska would ultimately be successful.
Additionally, if the Merger is not consummated, our stockholders and holders of RSUs, options, and warrants will not receive the merger consideration that would have been paid at the closing of the Merger.
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 9.4%, 11.6%, and 14.1% of total revenue during the years ending December 31, 2023, 2022, and 2021, respectively. During the three months ended March 31, 2024, our revenue from non-passenger operations accounted for 9.6% 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.
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 downturns. 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 March 31, 2024, our passenger revenue was $583.4 million, up approximately $34.9 million compared to 2023, but down $17.9 million, or 3.0% 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 9 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.
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 short-term 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 August 2023 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.
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 and the widening conflict in the Middle East. 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 volume, 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 reduce the 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 Part I, Item 1A., “Risk Factors”7A “Quantitative and Qualitative Disclosures About Market Risk” of our Annual Report on Form 10-K for the fiscal year ended December 31, 20162023 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 has and could continue to 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 March 31, 2024, we have Japanese Yen denominated debt totaling $111.4 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, 2023 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. In addition, our ability to refinance our existing or future indebtedness as we may need or desire will depend on the capital markets, including prevailing interest rates, and our financial condition and performance, which, among other things, is subject to economic, financial, competitive and other factors beyond our control. If we cannot obtain financing, we are unable to refinance our existing or future indebtedness, or we cannot obtain financing or refinance our existing or future indebtedness on commercially reasonable or desirable terms, we may default on our existing or future indebtedness and our business and financial condition may be adversely affected.
Our debt could adversely affect our liquidity and financial condition, and include covenants that impose restrictions on our financial and business operations.
As of March 31, 2024, we had approximately $1.6 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 March 31, 2024, 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.
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 further 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 March 31, 2024, approximately 77.4% of our passenger revenue was generated from our Domestic routes. Most of our competitors, particularly major network carriers with whom we compete on North America and Neighbor Island routes, enjoy greater geographical diversification of their passenger revenue. As Domestic routes account for a detailed discussionsignificantly 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 March 31, 2024, approximately 22.6% 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 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, New Jersey, Oregon, Tennessee, Texas, Utah, and Virginia have enacted similar legislation. The U.S. federal government also is contemplating federal privacy 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 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 not experienced a material cybersecurity incident, but we have experienced cybersecurity incidents in the past and we may experience cybersecurity incidents in the future, including incidents through 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. The security risks that we and our third-party service providers face have been heightened by an increase in employees and service providers working remotely. Additionally, these risks may be elevated in connection with geopolitical events such as the conflict between Russia and Ukraine and the widening conflict in the Middle East. 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.
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 Altéa Passenger Service 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.
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.
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 affectingwithin 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.
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 fiscal years 2020 through 2023, 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 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 May 10, 2024. 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.
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 Challenge 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 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 COVID-19 vaccine requirements as a condition of employment, we continue to be subject to related 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. 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.
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 March 31, 2024, we had NOLs available to reduce future taxable income of approximately $451.4 million for federal income tax purposes that have indefinite carryover, but are limited to 80% utilization, and approximately $968.8 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, 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 financial recovery, the NOLs may expire before we can generate sufficient taxable income to use them.
During the first quarter of 2024, we determined that it is no longer more-likely-than-not that our deferred tax assets will be fully realized based on expected sources of future taxable income. As a result, we increased our valuation allowance resulting in the reduction of our annual effective tax rate to approximately 10.0%.
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
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 could result in 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 March 31, 2024, we had the following firm order commitments and purchase rights for additional aircraft:
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Aircraft Type | | Firm Orders | | Purchase Rights | | Expected Delivery Dates |
A321neo aircraft | | — | | | 9 | | N/A |
Boeing 787-9 aircraft | | 11 | | 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 initially expected 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. In February 2024, we took delivery of our first Boeing 787-9 aircraft, which was placed into service in April 2024. In April 2024, we received delivery of our second Boeing 787-9 aircraft and anticipate delivery of our third aircraft in late 2024. We have, and may continue to experience delays in the delivery of our future Boeing 787-9 aircraft deliveries.
These future 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 $2.1 billion as of March 31, 2024. 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.
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 March 31, 2024, 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; and
•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 to time. See Note 11 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 March 31, 2024, 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
•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 March 31, 2024, the outstanding principal balance of our enhanced equipment trust certificate (EETC) issuances was $153.1 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 March 31, 2024, Hawaiian had approximately $1.7 billion of total indebtedness (excluding finance lease obligations of approximately $65.1 million and operating lease obligations of $363.1 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;
•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.
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
The following table displays information with respect to our repurchases of shares of our common stock during the three months ended September 30, 2017:None.
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Period | | Total number of shares purchased (i) | | Average price paid per share (ii) | | Total number of shares purchased as part of publicly announced plans or programs (i) | | Approximate dollar value of shares that may yet be purchased under the plans or programs (in millions) (i) |
July 1, 2017 - July 31, 2017 | | 89,092 |
| | $ | 43.48 |
| | 89,092 |
| | |
August 1, 2017 - August 31, 2017 | | 417,878 |
| | 41.54 |
| | 417,878 |
| | |
September 1, 2017 - September 30, 2017 | | 620,559 |
| | 40.21 |
| | 620,559 |
| | |
Total | | 1,127,529 |
| | | | 1,127,529 |
| | $ | 49.5 |
|
In April 2017, our Board of Directors approved the repurchase of up to $100 million of our outstanding common stock over a two-year period through May 2019 via the open market, established plans or privately negotiated transactions in accordance with all applicable securities laws, rules and regulations. The stock repurchase program is subject to modification or termination at any time.
We spent $46.2 million and $50.5 million to repurchase and retire approximately 1.1 million shares and 1.2 million shares of our common stock in open market transactions during the three and nine months ended September 30, 2017, respectively. As of September 30, 2017, we had $49.5 million remaining to spend under the stock repurchase program.
ITEM 3.DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4.MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5.OTHER INFORMATION.
None.Securities Trading Plans of Directors and Executive Officers
During our last fiscal quarter, no director or officer, as defined in Rule 16a-1(f), adopted or terminated a “Rule 10b5-1 trading arrangement” or a “non-Rule 10b5-1 trading arrangement,” each as defined in Regulation S-K Item 408.
ITEM 6.EXHIBITS.
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Exhibit No. | | Description |
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| 12 | |
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31.1 | | |
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31.1 | | |
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31.2 | | |
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32.1 | | |
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32.2 | | |
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101.INS | | 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. |
101.SCH | | XBRL Taxonomy Extension Schema Document |
101.CAL | | XBRL Taxonomy Extension Valuation Linkbase Document |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
104 | | 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.
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| | HAWAIIAN HOLDINGS, INC. |
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Date: | October 20, 2017April 24, 2024 | By: | /s/ Shannon L. Okinaka |
| | | | Shannon L. Okinaka |
| | | | Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) |