Edgar Filing: HAWAIIAN HOLDINGS INC

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2013

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

For the transition period from to

Commission file number 1-31443

HAWAIIAN HOLDINGS, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware		71-0879698
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)

3375 Koapaka Street, Suite G-350
Honolulu, HI		96819
(Address of Principal Executive Offices)		(Zip Code)

(808) 835-3700

(Registrant’s Telephone Number, Including Area Code)

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer x

Non-accelerated filer o		Smaller reporting company o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No

As of October 18, 2013, 52,387,065 shares of the registrant’s common stock were outstanding.

Table of Contents

Hawaiian Holdings, Inc.

Form 10-Q

Quarterly Period ended September 30, 2013

Table of Contents

Part I.	Financial Information	3

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

	Consolidated Statements of Operations for the three and nine months ended September 30, 2013 and 2012	3

	Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2013 and 2012	4

	Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012	5

	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012	6

	Notes to Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	38

Item 4.	Controls and Procedures	39

Part II.	Other Information	40

Item 1.	Legal Proceedings	40

Item 1A.	Risk Factors	40

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40

Item 3.	Defaults Upon Senior Securities	40

Item 5.	Other Information	40

Item 6.	Exhibits	41

	Signatures	42

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

Hawaiian Holdings, Inc.

Consolidated Statements of Operations

(in thousands, except per share data)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
	(unaudited)
Operating Revenue:
Passenger	$	543,315		$	497,243		$	1,464,715		$	1,326,306
Other	55,983			52,079			159,265			143,061
Total	599,298			549,322			1,623,980			1,469,367

Operating Expenses:
Aircraft fuel, including taxes and delivery	181,334			165,762			525,046			456,545
Wages and benefits	112,150			93,438			318,269			280,261
Aircraft rent	27,575			25,626			81,879			73,712
Maintenance materials and repairs	51,705			44,150			160,000			137,271
Aircraft and passenger servicing	31,080			28,859			89,367			74,859
Commissions and other selling	32,288			31,028			98,285			89,055
Depreciation and amortization	22,092			22,983			60,993			63,687
Other rentals and landing fees	21,996			22,520			60,773			63,486
Other	44,644			40,023			129,469			113,330
Total	524,864			474,389			1,524,081			1,352,206

Operating Income	74,434			74,933			99,899			117,161

Nonoperating Income (Expense):
Interest expense and amortization of debt discounts and issuance costs	(13,479		)	(11,975		)	(37,019		)	(31,745		)
Interest income	173			96			426			477
Capitalized interest	3,005			2,579			9,336			7,328
Gains (losses) on fuel derivatives	2,536			6,508			(10,931		)	(2,495		)
Other, net	749			1,662			(3,457		)	1,245
Total	(7,016		)	(1,130		)	(41,645		)	(25,190		)

Income Before Income Taxes.	67,418			73,803			58,254			91,971

Income tax expense	26,814			28,320			23,479			35,326

Net Income .	$	40,604		$	45,483		$	34,775		$	56,645

Net Income Per Common Stock Share:
Basic	$	0.78		$	0.88		$	0.67		$	1.11
Diluted	$	0.76		$	0.86		$	0.65		$	1.08

See accompanying Notes to Consolidated Financial Statements.

Table of Contents

Hawaiian Holdings, Inc.

Consolidated Statements of Comprehensive Income

(in thousands)

	Three Months Ended September 30,
	2013			2012
	(unaudited)
Net Income	$	40,604		$	45,483

Other comprehensive income, net:
Net change related to employee benefit plans, net of tax of $ 899 for 2013	1,381			1,863
Net change in derivative instruments, net of tax of $2,610 for 2013	(4,465		)	—
Total other comprehensive income, net	(3,084		)	1,863
Total Comprehensive Income, net	$	37,520		$	47,346

	Nine Months Ended September 30,
	2013		2012
	(unaudited)
Net Income	$	34,775	$	56,645

Other comprehensive income, net:
Net change related to employee benefit plans, net of tax of $3,034 and $1,217 for 2013 and 2012, respectively	3,347		4,120
Net change in derivative instruments, net of tax of $1,942 for 2013	2,991		—
Total other comprehensive income, net	6,338		4,120
Total Comprehensive Income, net	$	41,113	$	60,765

See accompanying Notes to Consolidated Financial Statements.

Table of Contents

Hawaiian Holdings, Inc.

Consolidated Balance Sheets

(in thousands, except shares)

	September 30,			December 31,
	2013			2012
	(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	441,398		$	405,880
Restricted cash	19,434			5,000
Total cash, cash equivalents and restricted cash	460,832			410,880
Accounts receivable, net of allowance for doubtful accounts of $187 and $371 as of September 30, 2013 and December 31, 2012, respectively	79,258			80,750
Spare parts and supplies, net	20,857			27,552
Deferred tax assets, net	19,983			17,675
Prepaid expenses and other	35,347			35,001
Total	616,277			571,858

Property and equipment, less accumulated depreciation and amortization of $307,556 and $249,495 as of September 30, 2013 and December 31, 2012, respectively	1,256,466			1,068,718

Other Assets:
Long-term prepayments and other	88,323			55,629
Restricted cash	1,566			—
Deferred tax assets, net	5,357			36,376
Intangible assets, net of accumulated amortization of $175,070 and $173,090 as of September 30, 2013 and December 31, 2012, respectively	24,600			26,580
Goodwill	106,663			106,663
Total Assets	$	2,099,252		$	1,865,824

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	88,145		$	82,084
Air traffic liability	452,599			388,646
Other accrued liabilities	90,431			74,828
Current maturities of long-term debt and capital lease obligations	110,960			108,232
Total	742,135			653,790

Long-Term Debt, less discount, and Capital Lease Obligations.	651,778			553,009

Other Liabilities and Deferred Credits:
Accumulated pension and other postretirement benefit obligations	350,407			352,460
Other liabilities and deferred credits	40,438			37,963
Total	390,845			390,423

Commitments and Contingencies

Shareholders’ Equity:
Special preferred stock, $0.01 par value per share, three shares issued and outstanding as of September 30, 2013 and December 31, 2012	—			—
Common stock, $0.01 par value per share, 52,382,986 and 51,439,934 shares issued and outstanding as of September 30, 2013 and December 31, 2012, respectively	524			514
Capital in excess of par value	269,623			264,854
Accumulated income	152,063			117,288
Accumulated other comprehensive loss, net	(107,716		)	(114,054		)
Total	314,494			268,602
Total Liabilities and Shareholders’ Equity	$	2,099,252		$	1,865,824

See accompanying Notes to Consolidated Financial Statements.

Table of Contents

Hawaiian Holdings, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

	Nine Months Ended
	September 30,
	2013			2012
	(unaudited)
Net cash provided by Operating Activities	$	207,475		$	249,394

Cash flows from Investing Activities:
Additions to property and equipment, including pre-delivery payments, net	(232,717		)	(215,950		)
Net cash used in investing activities	(232,717		)	(215,950		)

Cash flows from Financing Activities:
Proceeds from exercise of stock options	2,376			1,263
Long-term borrowings	132,000			133,000
Repayments of long-term debt and capital lease obligations	(45,200		)	(35,219		)
Debt issuance costs	(12,416		)	(3,118		)
Change in restricted cash	(16,000		)	—
Net cash provided by financing activities	60,760			95,926

Net increase in cash and cash equivalents	35,518			129,370

Cash and cash equivalents - Beginning of Period	405,880			304,115

Cash and cash equivalents - End of Period	$	441,398		$	433,485

See accompanying Notes to Consolidated Financial Statements.

Table of Contents

Hawaiian Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

1. Summary of Significant Accounting Policies

Business and Basis of Presentation

Hawaiian Holdings, Inc. (the Company or Holdings) is a holding company incorporated in the State of Delaware. The Company’s primary asset is its sole ownership of all issued and outstanding shares of common stock of Hawaiian Airlines, Inc. (Hawaiian). The accompanying unaudited financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X of the U.S. Securities and Exchange Commission (SEC). Accordingly, these interim financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the accompanying financial statements contain all adjustments, including normal recurring adjustments, necessary for the fair presentation of the Company’s results of operations and financial position for the periods presented. Due to seasonal fluctuations, among other factors common to the airline industry, the results of operations for the periods presented are not necessarily indicative of the results of operations to be expected for the entire year. The accompanying unaudited Consolidated Financial Statements should be read in conjunction with the financial statements and the notes of the Company for the fiscal year ended December 31, 2012, which is included in the Company’s current Report on Form 8-K filed on March 14, 2013.

In October 2013, Hawaiian entered into a co-branded credit card agreement, which will allow the sale of frequent flyer miles to a third party financial institution beginning in 2014. The agreement will be a multiple-element arrangement subject to Accounting Standards Update 2009-13, Multiple Deliverable Revenue Arrangements — A consensus of the FASB Emerging Issues Task Force (ASU 2009-13), which became effective for new and materially modified revenue arrangements entered into by the Company after January 1, 2011. The Company does not apply the provisions of ASU 2009-13 to its existing co-branded credit card agreements. The Company is currently evaluating the financial statement impact of applying ASU 2009-13 to this new agreement.

2. Accumulated Other Comprehensive Loss

Reclassifications out of accumulated other comprehensive loss by component for the three and nine months ended September 30, 2013 were as follows:

Table of Contents

	Amounts reclassified from accumulated						Affected line items
	other comprehensive loss for the						in the statement where
Details about accumulated other comprehensive	Three Months ended			Nine Months ended			net income
loss components	September 30, 2013			September 30, 2013			is presented
	(in thousands)

Derivatives designated as hedging instruments under ASC 815

Foreign currency derivative gains, net	$	(3,005	)	$	(6,395	)	Passenger revenue
Interest rate derivative losses, net	217			440			Interest expense
Total before tax	(2,788		)	(5,955		)
Tax expense	1,025			2,226
Total, net of tax	$	(1,763	)	$	(3,729	)
Amortization of defined benefit pension items
Actuarial loss	$	2,281		$	6,384		Wages and benefits
Prior service credit	(1		)	(3		)	Wages and benefits
Total before tax	2,280			6,381
Tax benefit	(899		)	(3,034		)
Total, net of tax	$	1,381		$	3,347

Total reclassifications for the period	$	(382	)	$	(382	)

A rollforward of the amounts included in accumulated other comprehensive loss, net of taxes, for the three and nine months ended September 30, 2013 were as follows:

							Defined
	Interest			Foreign			Benefit
	Rate			Currency			Pension
Three Months ended September 30, 2013	Derivatives			Derivatives			Items			Total
	(in thousands)

Beginning balance	$	766		$	6,690		$	(112,088	)	$	(104,632	)
Other comprehensive loss before reclassifications, net of tax	(220		)	(2,482		)	—			(2,702		)

Amounts reclassified from accumulated other comprehensive income (loss), net of tax	135			(1,898		)	1,381			(382		)
Net current-period other comprehensive income (loss)	(85		)	(4,380		)	1,381			(3,084		)
Ending balance	$	681		$	2,310		$	(110,707	)	$	(107,716	)

Table of Contents

						Defined
	Interest		Foreign			Benefit
	Rate		Currency			Pension
Nine Months ended September 30, 2013	Derivatives		Derivatives			Items			Total
	(in thousands)

Beginning balance	$	—	$	—		$	(114,054	)	$	(114,054	)
Other comprehensive income before reclassifications, net of tax	409		6,311			—			6,720

Amounts reclassified from accumulated other comprehensive income (loss), net of tax	272		(4,001		)	3,347			(382		)
Net current-period other comprehensive income	681		2,310			3,347			6,338
Ending balance	$	681	$	2,310		$	(110,707	)	$	(107,716	)

3. Earnings Per Share

Basic earnings per share, which excludes dilution, is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period.

Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.

	Three Months ended September 30,				Nine Months ended September 30,
	2013		2012		2013		2012
	(in thousands, except for per share data)
Numerator:

Net Income	$	40,604	$	45,483	$	34,775	$	56,645

Denominator:

Weighted average common stock shares outstanding - Basic	52,303		51,444		51,994		51,246
Assumed exercise of equity awards	1,209		1,179		1,166		1,217
Weighted average common stock shares outstanding - Diluted	53,512		52,623		53,160		52,463

Net Income per common share:
Basic	$	0.78	$	0.88	$	0.67	$	1.11
Diluted	$	0.76	$	0.86	$	0.65	$	1.08

The table below summarizes those common stock equivalents excluded from the computation of diluted earnings per share because the awards were antidilutive.

	Three Months ended September 30,		Nine Months ended September 30,
	2013	2012	2013	2012
	(in thousands)
Stock options	—	83	522	90
Deferred stock	—	—	58	—
Restricted stock	1,031	607	1,494	664
Convertible notes (1)	10,943	10,943	10,943	10,943
Warrants	10,943	10,943	10,943	10,943

(1) In March 2011, the Company entered into a financing transaction which included the sale of convertible notes, purchase of convertible note hedges, and the sale of warrants. These weighted common stock equivalents were excluded from the computation of diluted earnings per share because their conversion price of $7.88 per share for the convertible notes and $10.00 for the warrants exceeded the average market price of the common stock during these periods, and the effect of their inclusion would be antidilutive. However, these securities could be dilutive in future periods. The convertible note hedges will always be antidilutive and, therefore, will have no effect on diluted earnings per share.

Table of Contents

4. Fair Value Measurements

ASC Topic 820, Fair Value Measurement (ASC 820) clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1 — Observable inputs such as quoted prices in active markets for identical assets or liabilities;

Level 2 — Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term for the assets or liabilities; and

Level 3 — Unobservable inputs for which there is little or no market data and that are significant to the fair value of the assets or liabilities.

The tables below present the Company’s financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2013 and December 31, 2012:

	Fair Value Measurements as of September 30, 2013
	Total		Level 1		Level 2		Level 3
	(in thousands)
Cash equivalents	$	303,816	$	303,816	$	—	$	—
Restricted cash	21,000		21,000		—		—
Fuel derivative contracts	6,717		—		6,717		—
Foreign currency derivatives	4,856		—		4,856		—
Interest rate derivative	457		—		457		—
Total assets measured at fair value	$	336,846	$	324,816	$	12,030	$	—

Fuel derivative contracts	$	736	$	—	$	736	$	—
Foreign currency derivatives	2,675		—		2,675		—
Negative arbitrage derivative	12,865		—		—		12,865
Total liabilities measured at fair value	$	16,276	$	—	$	3,411	$	12,865

	Fair Value Measurements as of December 31, 2012
	Total		Level 1		Level 2		Level 3
	(in thousands)
Cash equivalents	$	304,159	$	304,159	$	—	$	—
Fuel derivative contracts	13,094		—		13,094		—
Total assets measured at fair value	$	317,253	$	304,159	$	13,094	$	—

Fuel derivative contracts	$	397	$	—	$	397	$	—
Total liabilities measured at fair value	$	397	$	—	$	397	$	—

Cash equivalents and restricted cash. The Company’s cash equivalents and restricted cash consist of money market securities, which are classified as Level 1 investments and are valued using inputs observable in markets for identical securities.

Fuel derivative contracts. The Company’s fuel derivative contracts consist of Brent crude oil call options and collars (a combination of purchased call options and sold put options of crude oil) which are not traded on a public exchange. The fair value of these instruments is determined based on inputs available or derived from public markets including contractual terms, market prices, yield curves and measures of volatility among others.

Foreign currency derivatives. The Company’s foreign currency derivatives consist of Japanese Yen, Korean Won, Australian Dollar and New Zealand Dollar forward contracts and are valued based primarily on data available or derived from public markets.

Table of Contents

Interest rate derivative. The Company’s interest rate derivative consists of an interest rate swap and is valued based primarily on data available or derived from public markets.

Negative arbitrage derivative. The Company’s negative arbitrage derivative represents the net interest owed to the trusts that issued the Company’s enhanced equipment trust certificates during the periods prior to the issuance of the related equipment notes, and is valued based primarily on the discounted amount of future cash flows using the appropriate rate of borrowing. Changes to those discount rates would be unlikely to cause material changes in the fair value of the negative interest arbitrage derivative (refer to Notes 5 and 9 for more information). The table below presents disclosures about the activity for the Company’s “Level 3” financial liability:

	Three Months		Nine Months
	Ended		Ended
	September 30, 2013		September 30, 2013
	(in thousands)
Beginning balance	$	12,865	$	—
Enhanced equipment trust certificates activity	—		12,865
Ending balance	$	12,865	$	12,865

The table below presents the Company’s debt (excluding obligations under capital leases) measured at fair value as of September 30, 2013 and December 31, 2012:

Fair Value of Debt
September 30, 2013										December 31, 2012
Carrying		Fair Value								Carrying		Fair Value
Amount		Total		Level 1		Level 2		Level 3		Amount		Total		Level 1		Level 2		Level 3
		(in thousands)										(in thousands)
$	649,976	$	655,093	$	—	$	88,517	$	566,576	$	554,568	$	547,943	$	—	$	81,091	$	466,852

The fair value estimates of the Company’s debt were based on either market prices or the discounted amount of future cash flows using the Company’s current incremental rate of borrowing for similar liabilities.

The carrying amounts of cash, other receivables and accounts payable approximate their fair value due to its short-term nature.

5. Financial Derivative Instruments

The Company uses derivatives to manage risks associated with certain assets and liabilities arising from the potential adverse impact of fluctuations in global fuel prices, interest rates and foreign currencies.

In May 2013, the Company recognized in its unaudited Consolidated Balance Sheets the financial effect of the net interest owed to the trusts that issued the Company’s enhanced equipment trust certificates. The characteristics of the net interest obligation resulted in the obligation meeting the definition of a derivative instrument under ASC Topic 815, Derivatives and Hedging (ASC 815).

Fuel Risk Management

The Company’s operations are inherently dependent upon the price and availability of aircraft fuel. To manage economic risks associated with fluctuations in aircraft fuel prices, the Company periodically enters into derivative financial instruments. During the three and nine months ended September 30, 2013, the Company primarily used Brent crude oil call options and collars (combinations of purchased call options and sold put options of crude oil). These derivative instruments were not designated as hedges under ASC 815 for hedge accounting treatment. As a result, changes in fair value of these derivative instruments are adjusted through other nonoperating income (expense) in the period of change.

Table of Contents

The following table reflects the amount and location of realized and unrealized gains and losses that were recognized during the three and nine months ended September 30, 2013 and 2012, and where those gains and losses were recorded in the unaudited Consolidated Statements of Operations.

	Three months ended September 30,						Nine months ended September 30,
	2013			2012			2013			2012
Fuel derivative contracts	(in thousands)
Losses realized at settlement	$	(3,790	)	$	(1,589	)	$	(11,226	)	$	(4,318	)
Reversal of prior period unrealized amounts	4,278			3,050			5,472			2,324
Unrealized gains (losses) on conracts that will settle in future periods	2,048			5,047			(5,177		)	(501		)
Gains (losses) on fuel derivatives recorded as Nonoperating income (expense)	$	2,536		$	6,508		$	(10,931	)	$	(2,495	)

Interest Rate Risk Management

The Company is exposed to market risk from adverse changes in interest rates associated with its long-term debt obligations. Market risk associated with fixed-rate and variable-rate long-term debt relates to the potential reduction in fair value and negative impact to future earnings, respectively, from an increase in interest rates.

During the quarter ended March 31, 2013, the Company entered into interest rate swap agreements to hedge interest rate risk inherent in debt agreements used to finance aircraft delivered in the quarter ended June 30, 2013. The interest rate swap agreements were designated as cash flow hedges under ASC 815. One of these interest rate swap agreements matured in June 2013, resulting in a gain of $0.7 million recognized in Accumulated Other Comprehensive Income (Loss) (AOCI).

The effective portion of the gain or loss is reported as a component of AOCI and reclassified into earnings in the same period in which interest is accrued. The effective portion of the interest rate swap represents the change in fair value of the hedge that offsets the change in the fair value of the hedged item. To the extent the change in the fair value of the hedge does not perfectly offset the change in the fair value of the hedged item, the ineffective portion of the hedge is immediately recognized in nonoperating income (expense).

The Company did not record any ineffectiveness during the quarter ended September 30, 2013. The Company believes that its derivative contract will continue to be effective in offsetting changes in cash flow attributable to the hedged risk. The Company reclassified net losses from AOCI to interest expense of $0.2 million during the quarter ended September 30, 2013. The Company expects to reclassify a net loss of approximately $0.8 million into earnings over the next 12 months from AOCI based on the values at September 30, 2013.

If the Company terminates a derivative prior to its contractual settlement date, then the cumulative gain or loss recognized in AOCI at the termination date remains in AOCI until the forecasted transaction occurs. In a situation where it becomes probable that a hedged forecasted transaction will not occur, any gains and/or losses that have been recorded to AOCI would be required to be immediately reclassified into earnings. All cash flows associated with purchasing and settling derivatives are classified as operating cash flows in the unaudited Condensed Consolidated Statements of Cash Flows.

Foreign Currency Exchange Rate Risk Management

The Company is subject to foreign currency exchange rate risk due to revenues and expenses denominated in foreign currencies, with the primary exposures being the Japanese Yen and Australian Dollar. To manage exchange rate risk, the Company executes its international revenue and expense transactions in the same foreign currency to the extent practicable.

The Company enters into foreign currency forward contracts, designated as cash flow hedges under ASC 815, to further manage the effects of fluctuating exchange rates. The effective portion of the gain or loss is reported as a component of AOCI and reclassified into earnings in the same period in which the related sales are recognized as passenger revenue. The effective portion of the foreign currency forward contracts represents the change in fair value of the hedge that offsets the change in the fair value of the hedged item. To the extent the change in the fair value of the hedge does not perfectly offset the change in the fair value of the hedged item, the ineffective portion of the hedge is immediately recognized as nonoperating income (expense).

The Company believes that its foreign currency forward contracts will continue to be effective in offsetting changes in cash flow attributable to the hedged risk. The Company reclassified gains from AOCI to passenger revenue of $3.0 million in the quarter ended September 30, 2013. The Company expects to reclassify a net gain of approximately $4.0 million into earnings over the next 12 months from AOCI based on the values at September 30, 2013.

Table of Contents

Negative Arbitrage Derivative

In May 2013, the Company created two pass-through trusts, which issued $444.5 million aggregate principal amount of enhanced equipment trust certificates. As of September 30, 2013, the Company has not yet received any of the proceeds raised by the pass-through trusts. However, in accordance with the related agreements, the Company is obligated to pay the interest that accrues on the proceeds and is also entitled to the benefits of the income generated from the same proceeds. The difference between the interest owed to the pass-through trusts and the interest generated from the proceeds introduces an element of variability that could cause the associated cash flows to fluctuate. This variability requires the Company’s obligation to the trusts to be recognized as a derivative in the Company’s unaudited Consolidated Financial Statements. See Note 9 for additional information related to the Company’s enhanced equipment trust certificates.

The following table summarizes the accounting treatment of the Company’s derivative contracts:

			Classification of Unrealized Gains (Losses)
Derivative Type	Accounting Designation	Classification of Gains and Losses	Effective Portion	Ineffective Portion
Interest rate contracts	Designated as cash flow hedges	Interest expense and amortization of debt discounts and issuance costs	AOCI	Nonoperating income (expense)
Foreign currency exchange contracts	Designated as cash flow hedges	Passenger revenue	AOCI	Nonoperating income (expense)
Fuel hedge contracts	Not designated as hedges	Gains (losses) on fuel derivatives	Change in fair value of hedge is recorded in nonoperating income (expense)
Foreign currency exchange contracts	Not designated as hedges	Nonoperating income (expense), Other	Change in fair value of hedge is recorded in nonoperating income (expense)
Negative arbitrage	Not designated as hedges	Nonoperating income (expense), Other	Change in fair value of derivative is recorded in nonoperating income (expense)

Table of Contents

The following tables present the gross fair value of asset and liability derivatives that are designated as hedging instruments under ASC 815 and derivatives that are not designated as hedging instruments under ASC 815, as well as the location of the asset and liability balances within the unaudited Consolidated Balance Sheets. The tables also present the gross and net derivative positions as of September 30, 2013 and December 31, 2012.

Derivative position as of September 30, 2013

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

Derivatives designated as hedges
Interest rate derivative	Prepaid expenses and other	$67,000 U.S. dollars	April 2023	$	82	$	—		$	82
	Long-term prepayments and other (1)			375		—			375
Foreign currency derivatives	Prepaid expenses and other	12,036,740 Japanese Yen 9,144,358 Korean Won 71,051 Australian Dollars 8,689 New Zealand Dollars	September 2014	4,372		(2,204		)	2,168
	Other liabilities and deferred credits (2)	1,713,861 Japanese Yen 13,204 Australian Dollars	February 2015	58		(197		)	(139		)

Derivatives not designated as hedges
Foreign currency derivatives	Prepaid expenses and other	6,180 Japanese Yen 58 Australian Dollars	September 2014	426		(274		)	152
Fuel derivative contracts	Prepaid expenses and other	91,350 gallons	September 2014	5,573		(589		)	4,984
	Long-term prepayments and other (3)	9,240 gallons	January 2015	1,144		(147		)	997
Negative arbitrage derivative	Other accrued liabilities	$444,540 U.S. dollars	October 2014	—		(12,250		)	(12,250		)
	Other liabilities and deferred credits (4)			—		(615		)	(615		)

(1) Represents the noncurrent portion of the $67 million interest rate derivative with final maturity in April 2023.

(2) Represents the noncurrent portion of the foreign currency derivatives with final maturities in February 2015.

(3) Represents the noncurrent portion of the fuel derivatives with final maturity in January 2015.

(4) Represents the noncurrent portion of the $445 million negative arbitrage derivative with final maturity in October 2014.

Table of Contents

Derivative position as of December 31, 2012

Balance Sheet
Location

Notional Amount

Final
Maturity
Date

Gross fair
value of
assets

Gross fair
value of
(liabilities)

Net
derivative
position

(in thousands)

Derivatives not designated as hedges

Fuel derivative contracts

Prepaid expenses and other

126,924 gallons

June 2014

13,094

(397

)

12,697

The following table reflects the impact of cash flow hedges designated for hedge accounting treatment and their location within the unaudited Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2013 and 2012.

	Loss recognized in AOCI on derivatives (effective portion)				(Gain) loss reclassified from AOCI into income (effective portion)					(Gain) loss recognized in nonoperating (income) expense (ineffective portion)
	Three months ended September 30,				Three months ended September 30,					Three months ended September 30,
	2013		2012		2013			2012		2013		2012

Foreign currency derivatives	$	3,960	$	—	$	(3,005	)	$	—	$	—	$	—
Interest rate derivatives	82		—		217			—		—		—

	Gain recognized in AOCI on derivatives (effective portion)					(Gain) loss reclassified from AOCI into income (effective portion)					Gain recognized in nonoperating (income) expense (ineffective portion)
	Nine months ended September 30,					Nine months ended September 30,					Nine months ended September 30,
	2013			2012		2013			2012		2013			2012

Foreign currency derivatives	$	(10,204	)	$	—	$	(6,395	)	$	—	$	(61	)	$	—
Interest rate derivatives	(929		)	—		440			—		—			—

Risk and Collateral

The financial derivative instruments expose the Company to possible credit loss in the event the counterparties to the agreements fail to meet their obligations. To manage such credit risks, the Company (1) selects its counterparties based on past experience and credit ratings, (2) limits its exposure to any single counterparty, and (3) periodically monitors the market position and credit rating of each counterparty. The Company is also subject to market risk in the event these financial instruments become less valuable in the market. However, changes in the fair value of the derivative instruments will generally offset the change in the fair value of the hedged item, limiting the Company’s overall exposure.

ASC 815 requires a reporting entity to elect a policy of whether to offset rights to reclaim cash collateral or obligations to return cash collateral against derivative assets and liabilities executed with the same counterparty, or present such amounts on a gross basis. In the event the price of the underlying financial derivative decreases, counterparties may require the Company to post collateral. The Company’s accounting policy is to present its derivative assets and liabilities on a net basis, including the collateral posted with the counterparty. The Company had no collateral posted with its counterparties as of September 30, 2013 or December 31, 2012.

6. Debt

In 2013, the Company borrowed $132.0 million through two separate secured loan agreements to finance a portion of the purchase price of two Airbus A330-200 aircraft that Hawaiian took delivery of during the second quarter of 2013. These loan agreements have a term of 10 years with quarterly principal and interest payments. One of the loan agreements, with a principal borrowing of $67.0 million, bears interest under a variable-rate (3.87% at September 30, 2013) and requires a $7 million balloon payment due at maturity. The second loan agreement, with a principal borrowing of $65.0 million, bears interest under a fixed-rate (5.74%) and requires a $10 million balloon payment due at maturity.

As of September 30, 2013, the scheduled maturities of long-term debt over the next five years, and thereafter, were as follows (in thousands):

Table of Contents

Remaining months in 2013	$	66,299
2014	48,236
2015	50,410
2016	137,153
2017	53,317
Thereafter	305,278
	$	660,693

7. Leases

The Company leases aircraft, engines and other assets under long-term lease arrangements. Other leased assets include real property, airport and terminal facilities, maintenance facilities, and general offices. Certain leases include escalation clauses and renewal options. When lease renewals are considered to be reasonably assured, the rental payments that will be due during the renewal periods are included in the determination of rent expense over the life of the lease.

During 2013, the Company took delivery of two Airbus A330-200 aircraft under operating leases with lease terms of 12 years with an option to extend for an additional two years.

As of September 30, 2013, the scheduled future minimum rental payments under capital leases and operating leases with non-cancellable basic terms of more than one year were as follows:

	Capital Leases						Operating Leases
	Aircraft			Other			Aircraft		Other
	(in thousands)
Remaining months in 2013	$	3,450		$	496		$	24,469	$	1,098
2014	13,803			1,159			96,673		4,194
2015	13,803			1,190			96,067		3,920
2016	13,803			1,223			79,357		3,725
2017	13,803			1,179			78,835		3,088
Thereafter	73,347			11,972			313,667		24,970
	132,009			17,219			$	689,068	$	40,995
Less amounts representing interest	(31,397		)	(5,069		)
Present value of minimum capital lease payments	$	100,612		$	12,150

8. Employee Benefit Plans

The components of net periodic benefit cost for the Company’s defined benefit and other postretirement plans for the three and nine months ended September 30, 2013 and 2012, included the following:

Components of Net Periodic	Three months ended September 30,						Nine months ended September 30,
Benefit Cost	2013			2012			2013			2012
	(in thousands)
Service cost	$	4,473		$	3,363		$	11,676		$	10,013
Interest cost	6,340			6,876			18,939			20,588
Expected return on plan assets	(4,065		)	(4,022		)	(12,196		)	(12,048		)
Recognized net actuarial loss	2,280			1,863			6,381			5,338
Net periodic benefit cost	$	9,028		$	8,080		$	24,800		$	23,891

The Company made contributions of $11.9 million and $18.6 million to its defined benefit and other postretirement plans during the three and nine months ended September 30, 2013, respectively, satisfying the Company’s required contributions for 2013.

Table of Contents

9. Commitments and Contingent Liabilities

Commitments

As of September 30, 2013, the Company had the following capital commitments consisting of firm aircraft and engine orders and purchase rights:

Aircraft Type	Firm Orders	Purchase Rights	Expected Delivery Dates

A330-200 aircraft	9	3	Between 2013 and 2015
A350XWB-800 aircraft	6	6	Between 2017 and 2020
A321neo aircraft	16	9	Between 2017 and 2020
Rolls-Royce spare engines:
A330-200 spare engines	2	—	In 2014
A350XWB-800 spare engines	2	—	Between 2017 and 2020
Pratt & Whitney spare engines:
A321neo spare engines	2	—	Between 2017 and 2018

The Company has operating commitments with a third-party to provide aircraft maintenance services which require fixed payments as well as variable payments based on flight hours for its Airbus fleet through 2027. The Company also has operating commitments with third-party service providers for reservations, IT, and accounting services through 2017.

Committed capital and operating expenditures include escalation and variable amounts based on estimates. The gross committed expenditures and committed financings for those deliveries during the remainder of 2013 and the next four years, and thereafter, are detailed below:

							Less: Committed
					Total Commited		Financing for Upcoming		Net Committed
	Capital		Operating		Expenditures		Aircraft Deliveries*		Expenditures
	(in thousands)
Remaining months in 2013	$	90,486	$	12,081	$	102,567	$	76,110	$	26,457
2014	421,472		49,865		471,337		368,430		102,907
2015	245,589		47,445		293,034		—		293,034
2016	147,824		36,270		184,094		—		184,094
2017	493,824		35,581		529,405		—		529,405
Thereafter	1,105,696		233,263		1,338,959		—		1,338,959

	$	2,504,891	$	414,505	$	2,919,396	$	444,540	$	2,474,856

* See below for a detailed discussion of the committed financings Hawaiian has received for its upcoming capital commitments for aircraft deliveries.

Enhanced Equipment Trust Certificates (EETC)

In May 2013, Hawaiian created two pass-through trusts, one of which issued $328.2 million aggregate principal amount of Class A pass-through certificates with a stated interest rate of 3.9% and the second of which issued $116.3 million aggregate principal amount of Class B pass-through certificates with a stated interest rate of 4.95%. The proceeds of the issuance of the Class A and Class B pass-through certificates, which amounted to $444.5 million, will be used to purchase equipment notes to be issued by Hawaiian in the future to finance the purchase of six (6) new Airbus aircraft scheduled for delivery from November 2013 through October 2014. The equipment notes will be secured by a lien on the aircraft, and the payment obligations of Hawaiian under the equipment notes will be fully and unconditionally guaranteed by the Company. Hawaiian has not yet received any of the proceeds raised by the pass-through trusts. The Company expects to issue the equipment notes to the trusts as aircraft are delivered to Hawaiian. Hawaiian will record the debt obligation upon issuance of the equipment notes rather than upon the initial issuance of the pass-through certificates. The proceeds are expected to be used to fund the acquisition of new aircraft. In connection with this transaction, Hawaiian was required to deposit $16.0 million into a collateral account. The funds held in this account are under the control of a third party. Accordingly, these funds are classified as restricted cash in the Company’s unaudited Consolidated Balance Sheets.

Table of Contents

The Company evaluated whether the pass-through trusts formed are variable interest entities (“VIEs”) required to be consolidated by the Company under applicable accounting guidance, and determined that the pass-through trusts are VIEs. The Company determined that it does not have a variable interest in the pass-through trusts. Neither the Company nor Hawaiian invested in or obtained a financial interest in the pass-through trusts. Rather, Hawaiian has an obligation to make interest and principal payments on its equipment notes held by the pass-through trusts, which will be fully and unconditionally guaranteed by the Company. Neither the Company nor Hawaiian intends to have any voting or non-voting equity interest in the pass-through trusts or to absorb variability from the pass-through trusts. Based on this analysis, the Company determined that it is not required to consolidate the pass-through trusts.

Litigation and Contingencies

The Company is subject to legal proceedings arising in the normal course of its operations. Management does not anticipate that the disposition of any currently pending proceeding will have a material effect on the Company’s operations, business or financial condition.

General Guarantees and Indemnifications

In the normal course of business, the Company enters into numerous aircraft financing and real estate leasing arrangements that have various guarantees included in the contract. It is common in such lease transactions for the lessee to agree to indemnify the lessor and other related third-parties for tort liabilities that arise out of or relate to the lessee’s use of the leased aircraft or occupancy of the leased premises. In some cases, this indemnity extends to related liabilities arising from the negligence of the indemnified parties, but usually excludes any liabilities caused by their gross negligence or willful misconduct. Additionally, the lessee typically indemnifies such parties for any environmental liability that arises out of or relates to its use of the real estate leased premises. The Company believes that it is insured (subject to deductibles) for most tort liabilities and related indemnities described above with respect to the aircraft and real estate that it leases. The Company cannot estimate the potential amount of future payments, if any, under the foregoing indemnities and agreements.

Credit Card Holdback

Under the Company’s bank-issued credit card processing agreements, certain proceeds from advance ticket sales may be held back to serve as collateral to cover any possible chargebacks or other disputed charges that may occur. These holdbacks, which are included in restricted cash in the Company’s unaudited Consolidated Balance Sheets, totaled $5.0 million at September 30, 2013 and December 31, 2012.

In the event of a material adverse change in the business, the holdback could increase to an amount up to 100% of the applicable credit card air traffic liability, which would also cause an increase in the level of restricted cash. If the Company is unable to obtain a waiver of, or otherwise mitigate the increase in the restriction of cash, it could also cause a covenant violation under other debt or lease obligations and have a material adverse impact on the Company.

10. Supplemental Cash Flow Information

Non-cash investing and financing activities for the nine months ended September 30, 2013 and 2012 were as follows:

	Nine Months Ended
	September 30,
	2013		2012
	(in thousands)
Investing and Financing Activities Not Affecting Cash:
Property and equipment acquired through a capital lease	$	11,840	$	111,921

11. Condensed Consolidating Financial Information

The following condensed consolidating financial information is presented in accordance with Regulation S-X paragraph 210.3-10 because, in connection with the issuance by two pass-through trusts formed by Hawaiian (which is also referred to in this Note 11 as Subsidiary Issuer / Guarantor) of pass-through certificates, as discussed in Note 9, the Company (which is also referred to in this Note 11 as Parent Issuer / Guarantor), will fully and unconditionally guarantee the payment obligations of Hawaiian, which is a 100% owned subsidiary

Table of Contents

of the Company, under equipment notes to be issued by Hawaiian in the future to purchase new aircraft.

Also, in accordance with Regulation S-X paragraph 210.5-04 (c), the Company is required to report condensed financial information as a result of limitations on the ability of Hawaiian to pay dividends or advances to the Company included in Hawaiian’s debt agreements. The Company’s condensed consolidating financial information satisfies this requirement.

Condensed consolidating financial statements are presented in the following tables:

Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)

Three Months Ended September 30, 2013

	Parent Issuer / Guarantor			Subsidiary Issuer / Guarantor			Non-Guarantor Subsidiaries			Eliminations			Consolidated
							(in thousands)
Operating Revenue	$	—		$	599,361		$	(3	)	$	(60	)	$	599,298

Operating Expenses:
Aircraft fuel, including taxes and delivery	—			181,334			—			—			181,334
Wages and benefits	—			112,150			—			—			112,150
Aircraft rent	—			27,575			—			—			27,575
Maintenance materials and repairs	—			51,705			—			—			51,705
Aircraft and passenger servicing	—			31,080			—			—			31,080
Commissions and other selling	—			32,302			—			(14		)	32,288
Depreciation and amortization	—			22,092			—			—			22,092
Other rentals and landing fees	—			21,996			—			—			21,996
Other	1,072			43,530			88			(46		)	44,644
Total	1,072			523,764			88			(60		)	524,864
Operating Income (Loss)	(1,072		)	75,597			(91		)	—			74,434

Nonoperating Income (Expense):
Undistributed net income of subsidiaries	42,686			—			—			(42,686		)	—
Interest expense and amortization of debt discounts and issuance costs	(2,207		)	(11,272		)	—			—			(13,479		)
Interest income	27			146			—			—			173
Capitalized interest	—			3,005			—			—			3,005
Gains on fuel derivatives	—			2,536			—			—			2,536
Other, net	—			749			—			—			749
Total	40,506			(4,836		)	—			(42,686		)	(7,016		)
Income (Loss) Before Income Taxes	39,434			70,761			(91		)	(42,686		)	67,418
Income tax expense (benefit)	(1,170		)	27,984			—			—			26,814
Net Income (Loss)	$	40,604		$	42,777		$	(91	)	$	(42,686	)	$	40,604

Comprehensive Income (Loss)	$	37,520		$	39,693		$	(91	)	$	(39,602	)	$	37,520

Table of Contents

Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)

Three Months Ended September 30, 2012

	Parent Issuer / Guarantor			Subsidiary Issuer / Guarantor		Non-Guarantor Subsidiaries			Eliminations			Consolidated
	(in thousands)
Operating Revenue	$	—		$	549,365	$	9		$	(52	)	$	549,322
Operating Expenses:
Aircraft fuel, including taxes and delivery	—			165,762		—			—			165,762
Wages and benefits	—			93,438		—			—			93,438
Aircraft rent	—			25,626		—			—			25,626
Maintenance materials and repairs	—			44,150		—			—			44,150
Aircraft and passenger servicing	—			28,859		—			—			28,859
Commissions and other selling	—			31,037		—			(9		)	31,028
Depreciation and amortization	—			22,983		—			—			22,983
Other rentals and landing fees	—			22,520		—			—			22,520
Other	1,484			38,560		22			(43		)	40,023
Total	1,484			472,935		22			(52		)	474,389
Operating Income (Loss)	(1,484		)	76,430		(13		)	—			74,933
Nonoperating Income (Expense):