SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
_______________________________________
FORM 10-K
(Mark One) | ||
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended December 31, 2016 | ||
or | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to . | ||
Commission file number 1-31443
HAWAIIAN HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) | 71-0879698 (I.R.S. employer identification no.) | |
3375 Koapaka Street, Suite G-350 Honolulu, Hawai'i (Address of principal executive offices) | 96819 (Zip code) | |
Registrant's telephone number, including area code: (808) 835-3700
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock ($0.01 par value) | NASDAQ Stock Market, LLC (NASDAQ Global Select Market) | |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
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. Yes x No o
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
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 x | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o | |||
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Rule Act 12b-2). Yes o No x
The aggregate market value of the voting and non-voting common equity stock held by non-affiliates of the registrant was approximately $2.0 billion, computed by reference to the closing sale price of the Common Stock on the NASDAQ Global Select Market, on June 30, 2016, the last business day of the registrant's most recently completed second fiscal quarter.
As of February 10, 2017, 53,445,556 shares of Common Stock of the registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on May 10, 2017 will be incorporated by reference into Part III of this Form 10-K.
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TABLE OF CONTENTS
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect our current views with respect to certain current and future events and financial performance. Such forward-looking statements include, without limitation: statements related to our financial statements and results of operations; any expectations of operating expenses, deferred revenue, interest rates, income taxes, deferred tax assets, valuation allowances or other financial items; expectations regarding our operating performance for the first quarter of 2017; statements concerning the tentative agreement with the Air Line Pilots Association, the scheduled ratification vote, and amounts expected to be payable under such agreement; statements regarding factors that may affect our operating results; statements regarding our goals, mission and areas of focus; statements regarding our working capital, and capital expenditures; statements related to funding our growth strategy and market opportunities; statements regarding the effect of fleet changes on our business, operations and cost structure; statements regarding our ability to pay taxes with working capital; estimates of fair value measurements; statements related to aircraft maintenance and repair; statements related to cash flow from operations and seasonality; estimates of required funding of and contributions to our defined benefit pension and disability plans; statements regarding our intention to consolidate and terminate certain pension plans, and the expected cost to settle certain plan obligations; statements and estimates regarding the availability, cost and effects of fuel prices on our business; statements regarding our wages and benefits and labor costs and agreements; statements regarding the status and effects of federal and state legislation and regulations promulgated by the FAA, DOT and other regulatory agencies; statements related to airport rent rates and landing fees; statements related to our lease of the cargo and maintenance hangar at the Honolulu International Airport, including estimated construction costs and service date; statements regarding aircraft rent expense; statements regarding our total capacity and yields on routes; statements regarding potential dilution of our securities; statements related to our frequent flyer program; statements related to our hedging program; statements concerning accounting principles, policies and estimates; statements regarding our net operating loss carryforwards; statements regarding our credit card holdback; statements regarding our debt or lease obligations and financing arrangements; statements regarding our financing needs; statements related to risk management, credit risks, and air traffic liability; statements related to future U.S. and global economic conditions or performance; statements related to changes in our fleet plan and related cash outlays; statements related to expected delivery of new aircraft and associated costs; statements related to the effects of any litigation on our operations or business; statements related to competition on our routes; statements related to continuous investments in technology and systems; and statements as to 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," 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 factors 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: our ability to accurately forecast quarterly and annual results; global economic volatility; macroeconomic developments; political developments; our dependence on the tourism industry; the price and availability of fuel; foreign currency exchange rate fluctuations; our competitive environment; fluctuations in demand for transportation in the markets in which we operate; 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 growth strategy and cost reduction goals; adverse publicity; 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 deliveries or other loss of fleet capacity; fluctuations in our share price; and our financial liquidity. 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 include those discussed under the heading "Risk Factors" in Item 1A in this Annual Report on Form 10-K and the risks, uncertainties and assumptions discussed from time to time in our other public filings and public announcements. All forward-looking statements included in this document 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 hereof.
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PART I
ITEM 1. BUSINESS.
Overview
Hawaiian Holdings, Inc. (the Company, Holdings, we, us, and our) is a holding company incorporated in the State of Delaware. The Company's primary asset is our sole ownership of all issued and outstanding shares of common stock of Hawaiian Airlines, Inc. (Hawaiian). Hawaiian was originally incorporated in January 1929 under the laws of the Territory of Hawai'i and became our indirect wholly-owned subsidiary pursuant to a corporate restructuring that was consummated in August 2002. Hawaiian became a Delaware corporation and the Company's direct wholly-owned subsidiary concurrent with its reorganization and reacquisition by the Company in June 2005.
Our Business
We are engaged in the scheduled air transportation of passengers and cargo amongst the Hawaiian Islands (the Neighbor Island routes), between the Hawaiian Islands and certain cities in the United States (the North America routes), and between the Hawaiian Islands and the South Pacific, Australia, New Zealand and Asia (the International routes), collectively referred to as our Scheduled Operations. We offer non-stop service to Hawai'i from more U.S. gateway cities (11) than any other airline, and also provide approximately 160 daily flights between the Hawaiian Islands. In addition, we operate various charter flights.
We are the longest serving airline as well as the largest airline headquartered in the State of Hawai'i, and the 10th largest domestic airline in the United States based on revenue passenger miles (RPMs) reported by the Research and Innovative Technology Administration Bureau of Transportation Services as of October 2016, the latest data available.
At December 31, 2016, our fleet consisted of 20 Boeing 717-200 aircraft for the Neighbor Island routes, eight Boeing 767-300 aircraft, and 23 Airbus A330-200 aircraft for the North America, International, and charter routes. We also own three ATR42 aircraft for the "Ohana by Hawaiian" Neighbor Island service.
Our goal is to be the number one destination carrier serving Hawai'i. We are devoted to the travel needs of the residents of and visitors to Hawai'i and offer a unique travel experience. We are strongly rooted in the culture and people of Hawai'i and seek to provide quality service to our customers that exemplifies the spirit of Aloha.
Outlook
Our mission every year is to grow a profitable airline with a passion for excellence, our customers, our people and the spirit of Hawai'i. In 2017, we will continue to focus on strengthening our competitive position in the markets that we serve primarily by continuing to mature the routes we launched over the past several years, improving our sales distribution channels, maintaining a disciplined approach in controlling our costs, and growing our offering of value-added products and services.
Flight Operations
Our flight operations are based in Honolulu, Hawai'i. At December 31, 2016, we operated 218 scheduled flights with:
• | Daily service on our North America routes between the State of Hawai'i and Los Angeles, Oakland, Sacramento, San Diego, San Francisco, and San Jose, California; Las Vegas, Nevada; Phoenix, Arizona; Portland, Oregon; and Seattle, Washington; and scheduled service between the State of Hawai'i and New York City, New York. |
• | Daily service on our Neighbor Island routes among the six major islands of the State of Hawai'i. |
• | Daily service on our International routes between the State of Hawai'i and Sydney, Australia; and Tokyo and Osaka, Japan and scheduled service between the State of Hawai'i and Pago Pago, American Samoa; Papeete, Tahiti; Brisbane, Australia; Auckland, New Zealand; Sapporo, Japan; Seoul, South Korea; and Beijing, China. |
• | Various ad hoc charters. |
Fuel
Our operations and financial results are significantly affected by the availability and price of jet fuel. The following table sets forth statistics about our aircraft fuel consumption and cost.
Year | Gallons consumed | Total cost, including taxes | Average cost per gallon | Percent of operating expenses | |||||||||
(in thousands) | |||||||||||||
2016 | 244,118 | $ | 344,322 | $ | 1.41 | 16.8 | % | ||||||
2015 | 234,183 | $ | 417,728 | $ | 1.78 | 22.1 | % | ||||||
2014 | 230,199 | $ | 678,253 | $ | 2.95 | 32.8 | % | ||||||
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As illustrated by the table above, fuel costs constitute a significant portion of our operating expenses. We purchase aircraft fuel at prevailing market prices, and seek to manage economic risks associated with fluctuations in aircraft fuel prices by entering into derivative financial instruments such as heating oil swaps and crude oil call options.
Aircraft Maintenance
Our aircraft maintenance programs consist of a series of phased or continuous checks for each aircraft type. These checks are performed at specified intervals measured by calendar months, time flown, by the number of takeoffs and landings, or cycles operated. In addition, we perform inspections, repairs, and modifications of our aircraft in response to Federal Aviation Administration (FAA) directives. We perform checks ranging from "walk around" inspections before each flight's departure to major overhauls of the airframes which can take several weeks to complete. Aircraft engines are subject to phased maintenance programs designed to detect and remedy potential problems before they occur. The service lives of certain airframe and engine parts and components, which are time or cycle controlled, are replaced or refurbished prior to the expiration of their time or cycle limits. We have contracts with third parties to provide certain maintenance on our aircraft and aircraft engines.
Marketing and Ticket Distribution
We utilize various distribution channels including our website www.hawaiianairlines.com, primarily for our North America and Neighbor Island routes, and travel agencies and wholesale distributors for our International routes.
Our website is available in English, Japanese, Korean, and Chinese and offers our customers information on our flight schedules, information on our HawaiianMiles frequent flyer program, the ability to book reservations on our flights or connecting flights with any of our code-share partners, the status of our flights as well as the ability to purchase hotels, cars and vacation packages. We also distribute our fares through online travel agencies.
Frequent Flyer Program
The HawaiianMiles frequent flyer program was initiated in 1983 to encourage and develop customer loyalty. HawaiianMiles allows passengers to earn mileage credits by flying with us and our partner carriers. In addition, members earn mileage credits for patronage with our other program partners, including credit card issuers, hotels, car rental firms, and general merchants pursuant to our exchange partnership agreements. We also sell mileage credits to other companies participating in the program.
HawaiianMiles members have a choice of various awards based on accumulated mileage credits, with most of the awards being redeemed for free air travel on Hawaiian.
HawaiianMiles accounts with no activity (frequent flyer miles earned or redeemed) for 18 months automatically expire. The number of free travel awards used for travel on Hawaiian was approximately 585,000 in 2016. The amount of free travel awards as a percentage of total revenue passengers was approximately 5% in 2016. We believe displacement of revenue passengers is minimal due to our ability to manage frequent flyer seat inventory, and the relatively low ratio of free award usage to total revenue passengers.
Code-Share and Other Alliances
We have marketing alliances with other airlines that provide reciprocal frequent flyer mileage accrual and redemption privileges and code-shares on certain flights (one carrier placing its name and flight numbers, or code, on flights operated by the other carrier). These programs enhance our revenue opportunities by:
• | increasing value to our customers by providing easier access to more travel destinations and better mileage accrual/redemption opportunities; |
• | gaining access to more connecting traffic from other airlines; and |
• | providing members of our alliance partners' frequent flyer programs an opportunity to travel on our system while earning mileage credit in the alliance partners' programs. |
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Our marketing alliances with other airlines as of December 31, 2016 were as follows:
Hawaiian Miles Frequent Flyer Agreement | Other Airline Frequent Flyer Agreement | Code-share—Hawaiian Flight # on Flights Operated by Other Airline | Code-share—Other Airline Flight # on Flights Operated by Hawaiian | ||||
Air China | No | No | Yes | Yes | |||
All Nippon Airways | Yes | Yes | Yes | Yes | |||
American Airlines | No | Yes | No | Yes | |||
China Airlines | Yes | Yes | Yes | Yes | |||
Delta Air Lines | No | Yes | No | Yes | |||
JetBlue | Yes | Yes | Yes | Yes | |||
Korean Air | Yes | Yes | Yes | Yes | |||
Philippine Airlines | No | No | No | Yes | |||
Turkish Airlines | No | No | No | Yes | |||
United Airlines | No | Yes | No | Yes | |||
Virgin America | Yes | Yes | Yes | No | |||
Virgin Atlantic Airways | Yes | Yes | No | No | |||
Virgin Australia | Yes | Yes | No | Yes | |||
Although these programs and services increase our ability to be more competitive, they also increase our reliance on third parties.
Competition
The airline industry is extremely competitive. We believe that the principal competitive factors in the airline industry are:
• | Price; |
• | Flight frequency and schedule; |
• | On-time performance and reliability; |
• | Name recognition; |
• | Marketing affiliations; |
• | Frequent flyer benefits; |
• | Customer service; |
• | Aircraft type; and |
• | In-flight services. |
Domestic—We face multiple competitors on our North America routes including major network carriers such as Alaska (ALK), American Airlines (AA), United Airlines (UA), and Delta Airlines (DL). Various charter companies also provide non scheduled service to Hawai'i, mostly under public charter arrangements. Our Neighbor Island competitors consist of regional carriers, which include Island Air, Mokulele Airlines, and a number of other "air taxi" companies.
International—Currently, we are the only provider of direct service between Honolulu and each of Sapporo, Japan; Pago Pago, American Samoa; and Papeete, Tahiti. However, we face multiple competitors from both domestic and foreign carriers on our other international routes.
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Employees
As of December 31, 2016, we had 6,199 active employees, and approximately 83% of our employees were covered by labor agreements with the following organized labor groups:
Employee Group | Represented by | Number of Employees | Agreement amendable on(*) | |||||
Flight deck crew members | Air Line Pilots Association (ALPA) | 663 | September 15, 2015 | ** | ||||
Cabin crew members | Association of Flight Attendants (AFA) | 1,810 | January 1, 2017 | *** | ||||
Maintenance and engineering personnel | International Association of Machinists and Aerospace Workers (IAM-M) | 908 | January 1, 2021 | |||||
Clerical | IAM-C | 1,712 | January 1, 2021 | |||||
Flight dispatch personnel | Transport Workers Union (TWU) | 43 | August 1, 2021 | |||||
(*) Our relations with our labor organizations are governed by Title II of the Railway Labor Act of 1926, pursuant to which the collective bargaining agreements between us and these organizations do not expire but instead become amendable as of a certain date if either party wishes to modify the terms of the agreement.
(**) In February 2017, we reached a tentative agreement with the (ALPA). A ratification vote is set to occur in March 2017, however we can provide no assurances that the tentative agreement will be approved at that time. The tentative agreement is for a 63-month contract amendment which includes (amongst other various benefits) a pay adjustment and ratification bonus.
(***) As of January 2017, contract negotiations are ongoing with the AFA.
Seasonality
Hawai'i is a popular vacation destination for travelers. For that reason, our operations and financial results are subject to substantial seasonal and cyclical volatility, primarily due to leisure and holiday travel patterns. Demand levels are typically weaker in the first quarter of the year with stronger demand periods occurring during June, July, August, and December. We may adjust our pricing or the availability of particular fares to obtain an optimal passenger load factor depending on seasonal demand differences.
Customers
Our business is not dependent upon any single customer, or a few customers. The loss of any one customer would not have a material adverse effect on our business.
Regulation
Our business is subject to extensive and evolving international, federal, state and local laws and regulations. Many governmental agencies regularly examine our operations to monitor compliance with applicable laws and regulations. Governmental authorities can enforce compliance with applicable laws and regulations and obtain injunctions or impose civil or criminal penalties or modify, suspend, or revoke our operating certificates in case of violations.
Industry Regulations
We are subject to the regulatory jurisdiction of the U.S. Department of Transportation (DOT) and the Federal Aviation Administration (FAA). The DOT has jurisdiction over international routes and fares for some countries (based upon treaty relations with those countries), consumer protection policies including baggage liability, denied boarding compensation, and unfair competitive practices as set forth in the Airline Deregulation Act of 1978. The FAA has regulatory jurisdiction over flight operations, including equipment, ground facilities, security systems, maintenance, and other safety matters. Pursuant to these regulations, we have established, and the FAA has approved, a maintenance program for each type of aircraft we operate that provides for the ongoing maintenance of our aircraft, ranging from frequent routine inspections to major overhauls.
Maintenance Directives
The FAA approves all airline maintenance programs, including modifications to the programs. In addition, the FAA licenses the repair stations and mechanics that perform inspections, repairs and overhauls, as well as the inspectors who monitor the work.
The FAA frequently issues airworthiness directives in response to specific incidents or reports by operators or manufacturers, requiring operators of specified equipment types to perform prescribed inspections, repairs or modifications within stated time periods or numbers of cycles. In the last several years, the FAA has issued a number of maintenance directives and other regulations relating to, among other things, wiring requirements for aging aircraft, fuel tank flammability, cargo compartment
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fire detection/suppression systems, collision avoidance systems, airborne windshear avoidance systems, noise abatement, and increased inspection requirements.
Airport Security
The Aviation and Transportation Security Act (ATSA) mandates that the Transportation Security Administration (TSA) provide screening of all passengers and property, including mail, cargo, carry-on and checked baggage, and other articles that will be carried aboard a passenger aircraft. Under the ATSA, substantially all security screeners at airports are federal employees and airline and airport security is overseen and performed by federal employees, including security managers, law enforcement officers, and Federal Air Marshals. The ATSA also provides for increased security on flight decks of aircraft and requires Federal Air Marshals to be present on certain flights, improved airport perimeter access security, airline crew security training, enhanced security screening of passengers, baggage, cargo, mail, employees and vendors, enhanced training and qualifications of security screening personnel, provision of passenger data to U.S. Customs and Border Protection and enhanced background checks.
The TSA also has the authority to impose additional fees on the air carriers, if necessary, to cover additional federal aviation security costs.
Environmental and Employee Safety and Health
We are subject to various laws and regulations concerning environmental matters and employee safety and health in the U.S. and other countries in which we do business. 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, and the Comprehensive Environmental Response, Compensation, and Liability Act. Certain of our operations are also subject to the oversight of the Occupational Safety and Health Administration (OSHA) concerning employee safety and health matters. The U.S. Environmental Protection Agency (EPA), OSHA, and other federal agencies have been authorized to promulgate regulations that affect our operations. In addition to these federal activities, states have been delegated certain authority under the aforementioned federal statutes. Many state and local governments have adopted environmental and employee safety and health laws and regulations, some of which are similar to or stricter than federal requirements, such as California.
The EPA is authorized to regulate aircraft emissions and has historically implemented emissions control standards previously adopted by the International Civil Aviation Organization. Our aircraft comply with the existing EPA standards as applicable by engine design date.
We seek to minimize the impact of carbon emissions from our operations through reductions in our fuel consumption and other efforts. We have reduced the fuel needs of our aircraft fleet through the retirement and replacement of certain elements of our fleet with newer, more fuel efficient aircraft. In addition, we have implemented fuel saving procedures in our flight and ground support operations that further reduce carbon emissions. In 2012, we earned the first-ever aviation based carbon credits through the reduction of carbon dioxide emissions with the use of an eco-friendly engine washing technology. We are also supporting initiatives to develop alternative fuels and efforts to modernize the air traffic control system in the U.S. as part of our efforts to reduce our emissions and minimize our impact on the environment.
Noise Abatement
Under the Airport Noise and Capacity Act, the DOT allows local airport authorities to implement procedures designed to abate special noise problems, provided such procedures do not unreasonably interfere with interstate and foreign commerce, or the national transportation system. Certain airports, including the major airports at Los Angeles, San Diego, San Francisco, and San Jose, California, Sydney, Australia, and Tokyo, Japan, have established airport restrictions to limit noise, including restrictions on aircraft types to be used and limits on the number of hourly or daily operations or the time of such operations. Local authorities at other airports could consider adopting similar noise restrictions. In some instances, these restrictions have caused curtailments in services or increases in operating costs, and such restrictions could limit our ability to expand our operations.
Civil Reserve Air Fleet Program
The U.S. Department of Defense regulates the Civil Reserve Air Fleet (CRAF) and government charters. We have elected to participate in the CRAF program by agreeing to make aircraft available to the federal government for use by the U.S. military under certain stages of readiness related to national emergencies. The program is a standby arrangement that allows the U.S. Department of Defense U.S. Transportation Command to call on as many as 12 contractually committed Hawaiian aircraft and crews to supplement military airlift capabilities. None of our aircraft are presently mobilized under this program.
Other Regulations
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The State of Hawai'i is uniquely dependent upon air transportation. The Hawai'i state legislature has enacted legislation that reflects and attempts to address its concerns. For example, House Bill 2250 HD1, Act 1 of the 2008 Special Session, establishes a statutory scheme for the regulation of Hawai'i neighbor island air carriers, provided that federal legislation is enacted to permit its implementation. The U.S. Congress has yet to enact legislation that would allow this proposed legislation to go into effect.
Additionally, several aspects of airline operations are subject to regulation or oversight by federal agencies other than the FAA and the DOT. Federal antitrust laws are enforced by the U.S. Department of Justice. The U.S. Postal Service has jurisdiction over certain aspects of the transportation of mail and related services provided by our cargo services. Labor relations in the air transportation industry are generally regulated under the Railway Labor Act. We and other airlines certificated prior to October 24, 1978 are also subject to preferential hiring rights granted by the Airline Deregulation Act to certain airline employees who have been furloughed or terminated (other than for cause). The Federal Communications Commission issues licenses and regulates the use of all communications frequencies assigned to us and other airlines. There is increased focus on consumer protection both on the federal and state level. We cannot always accurately predict the cost of such requirements on our operations.
Additional laws and regulations are proposed from time to time, which could significantly increase the cost of airline operations by imposing additional requirements or restrictions. U.S. law restricts the ownership of U.S. airlines to corporations where no more than 25% of the voting stock may be held by non-U.S. citizens and the airline must be under the actual control of U.S. citizens. The President and two thirds of the Board of Directors and other managing officers must also be U.S. citizens. Regulations also have been considered from time to time that would prohibit or restrict the ownership and/or transfer of airline routes or takeoff and landing slots and authorizations. Also, the award of international routes to U.S. carriers (and their retention) is regulated by treaties and related agreements between the U.S. and foreign governments, which are amended from time to time. We cannot predict what laws and regulations will be adopted or what changes to international air transportation treaties will be adopted, if any, or how we will be affected by those changes.
Business Segment Data
We operate in a single industry segment. All required financial segment information can be found in our consolidated financial statements.
Information about Geographic Revenue and Foreign Operations
Information concerning revenues by geographic area is set forth in Note 15 to our consolidated financial statements.
Available Information
General information about us, including the charters for the committees of our Board of Directors can be found at https://www.hawaiianairlines.com. 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 that we file with the Securities and Exchange Commission (SEC) are available free of charge through our website. The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, which can be found at http://www.sec.gov.
We also use the investor relations section of our website https://newsroom.hawaiianairlines.com/investor-relations and our website (https://www.hawaiianairlines.com), as a means of disclosing material information and for complying with our disclosure obligations under Regulation FD.
Information on our website is not incorporated into this Annual Report on Form 10-K or our other securities filings and is not a part of such filings.
ITEM 1A. RISK FACTORS.
In addition to the risks identified elsewhere in this report, the following risk factors apply to our business, results of operations, and financial conditions.
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ECONOMIC RISKS
Our business is affected by global economic volatility.
Our business and results of operations are significantly impacted by general world-wide economic conditions. Demand for discretionary purchases including air travel and vacations to Hawai'i remains unpredictable. Deterioration in demand resulting from economic uncertainty or another recession may result in a reduction in our passenger traffic and/or increased competitive pressure on fares in the markets we serve, which would negatively impact our results of operations and financial condition. We cannot assure that we would be able to offset such revenue reductions by reducing our costs.
Our business is highly dependent on tourism to, from, and amongst the Hawaiian Islands and our financial results could suffer if there is a 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. Hawai'i tourism levels are affected by the political and economic climate in Hawai'i's main tourism markets, the availability of hotel accommodations, the popularity of Hawai'i as a tourist destination relative to other vacation destinations, and other global factors, including natural disasters, safety and security. From time to time, various events and industry specific problems such as labor strikes have had a negative impact on tourism in Hawai'i. The occurrence of natural disasters, such as earthquakes and tsunamis, in Hawai'i or other parts of the world could also have a material adverse effect on Hawai'i tourism. In addition, the potential or actual occurrence of terrorist attacks, wars, and the threat of other negative world events have had, and may in the future have, a material adverse effect on Hawai'i tourism. A decline in the level of Hawai'i passenger traffic could have a material adverse effect on our results of operations and financial condition.
Our business is highly dependent on the price and availability of fuel.
Our results and operations are heavily impacted by the price and availability of jet fuel. While we have benefited recently from lower fuel costs, fuel costs began to increase in the latter half of 2016 and we cannot assure that fuel costs will not increase further in the future. The cost and availability of jet fuel remains volatile and is subject to political, economic, and market factors that are generally outside of our control. Prices may be affected by many factors including, without limitation, the impact of political instability, crude oil production and refining capacity, 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, 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.
We 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 our counterparties will be able to perform under these hedge arrangements. Also, if fuel prices fall significantly below the levels in existence at the time we enter into our hedging contracts, we may be required to post a significant amount of cash collateral, which could have an impact on the level of our unrestricted cash and cash equivalents and adversely affect our liquidity.
Also, see Item 7A, Quantitative and Qualitative Disclosures About Market Risk, for further information regarding our exposure to the price of fuel.
Our business is exposed to foreign currency exchange rate fluctuations.
Our business is 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. To manage the effects of fluctuating exchange rates, we periodically enter into foreign currency forward contracts. There is no assurance that such 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.
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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 could negatively impact our operating results. Many of our competitors on our North America and International routes are larger and have greater financial resources and brand recognition than we do. Aggressive marketing tactics or a prolonged fare war initiated by one or more of these competitors could adversely affect our financial resources and our ability to compete in these markets. Since airline markets have few natural barriers to entry, we also face the threat of new entrants in all of our markets.
Furthermore, large network carriers have significantly reduced their costs and adjusted their routes to compete with low-cost carriers (LCC) in their existing markets by diverting resources to long-haul markets such as Hawai'i, where LCC competition has been less severe. Additional capacity to Hawai'i, whether from network carriers or LCCs, 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.
Airline bankruptcy restructuring, strategic combinations or industry consolidation could have an impact on our competitive environment.
Many of our competitors have dramatically reduced operating costs through a combination of bankruptcy restructuring, industry consolidation, and vendor and labor negotiations to increase market strength. Several domestic airlines were able to reduce labor costs, restructure debt and lease agreements, and implement other financial improvements through the bankruptcy process. In addition, certain of our competitors have merged (for example, the Alaska Airlines acquisition of Virgin America in December 2016) to create larger and more financially formidable airlines.
Through consolidation, carriers have the opportunity to achieve cost reductions by eliminating redundancy in their networks and operating structures. With reduced costs, these competitors are more capable of operating profitably in an environment of reduced fares and may, as a result, increase service in our primary markets or reduce fares to attract additional customers. Because airline customers are price sensitive, we cannot ensure that we will be able to attract a sufficient number of customers at sufficiently high fare levels to generate profitability, or that we will be able to reduce our operating costs sufficiently to remain competitive with other airlines.
The concentration of our business in Hawai'i, and between Hawai'i and the U.S. mainland, provides little diversification of our revenue.
During 2016, approximately 74% of our passenger revenue was generated from air transportation between the Hawaiian Islands and the U.S. mainland and amongst the Hawaiian Islands. Many of our competitors, particularly major network carriers with whom we compete on our North America routes, enjoy greater geographical diversification of their revenue. A reduction in the level of demand for travel within Hawai'i, or to Hawai'i from the U.S. mainland, or an increase in the level of industry capacity on these routes, may reduce the revenue we are able to generate and adversely affect our financial results. As these routes account for a significantly higher proportion of our revenue than they do for many of our competitors, such a reduction would have a relatively greater adverse effect on our financial results.
Our business is affected by the competitive advantages held by network carriers in the North America market.
During 2016, approximately 54% of our passenger revenue was generated from our North America routes. The majority of competition on our North America routes is from network carriers such as ALK, AA, DL, and UA, all of whom have a number of competitive advantages. Primarily, network carriers generate passenger traffic from and throughout the U.S. mainland, which enable 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 (with jetBlue (JBLU), AA, etc.) to provide customers access to and from North America 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 frequent 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
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built-in market. Passengers in the North America 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 Neighbor Island routes are affected by increased capacity provided by our competitors.
During 2016, approximately 24% of our passenger revenue was generated from our Neighbor Island routes. Although we enjoy a strong competitive position on our Neighbor Island routes, our competitors have increased capacity to Hawai'i either by introducing new routes or increasing the frequency of existing routes from North America to the Neighbor Islands. This additional capacity provided by our competitors has the effect of decreasing our share of traffic on our Neighbor Island routes, which could 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 2016, approximately 22% 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 have joined 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. We currently do not participate in any world-wide airline alliances or joint ventures, which may negatively impact our market share and operations as capacity provided by our competitors increase. 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 customer-related information or fail to comply with applicable U.S. and foreign privacy or data security regulations 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, and transmit personal information about our customers and we are subject to increasing legislative, regulatory and customer focus on privacy and data security. A number of our commercial partners, including credit card companies, have imposed data security standards that we are obligated to meet and these standards continue to evolve. We will continue our efforts to meet new and increasing privacy and security standards; however, it is possible that such new standards may prove difficult to meet, require us to expend additional resources, and result in the Company being unable to process credit card transactions if determined to be non-compliant. Additionally, any compromise of our technology systems could result in the loss, disclosure, misappropriation of or access to our customers’, employees’ or business partners’ information. Any such loss, disclosure, misappropriation or access could result in legal claims or proceedings, liability or regulatory penalties under laws protecting the privacy of personal information. Any significant data breach or our failure to comply with applicable U.S. and foreign privacy or data security regulations or security standards imposed by our commercial partners may adversely affect our reputation, business, results of operations and financial condition, and may require that we expend significant additional resources related to the security of information systems.
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 systems, all of which must be able to accommodate high traffic volumes, maintain secure information and provide accurate flight information, as well as process critical financial related transactions. Any substantial or repeated failures of these systems could negatively affect our customer service, compromise the
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security of customer information, result in the loss of important data, loss of revenue and increased costs, and generally harm our business. 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 threats, 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. 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 business could be adversely impacted.
We are highly reliant on third-party contractors to provide certain facilities and services for our operations, and termination of our third-party agreements could have a potentially adverse effect on our financial results.
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, 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. As part of our cost-control efforts, our reliance on outside vendors has increased and may continue to do so in the future.
The failure of any of our third-party service providers to adequately perform their service obligations, or other interruptions of services may reduce our revenues, increase expenses, and/or prevent us from operating our flights and providing other services to our customers. Our business and financial performance would be materially harmed if our customers believe that our 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 may make strategic and operational decisions that 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.
In addition, 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 are currently in labor negotiations with our flight attendants union, AFA, whose contract became amendable January 1, 2017. If we are unable to reach an agreement with any unionized work group, we may be subject to future work interruptions and/or stoppages, which may hamper or halt operations. In addition, the threat of future work interruptions and/or stoppages may cause a decline in our passenger traffic, negatively impacting our results of operations and financial condition. In February 2017, we reached a tentative agreement with the Air Line Pilots Association (ALPA), covering our pilots. A ratification vote is set to occur in March 2017, however we can provide no assurances that the tentative agreement will be approved at that time (see Note 11 to the Notes to Consolidated Financial Statements for additional information).
Our operations may be adversely affected if we are unable to attract and retain qualified personnel and key executives, including our Chief Executive Officer.
We are dependent on the knowledge and expertise of our key executives, particularly Mark B. Dunkerley, our Chief Executive Officer. Attracting and retaining such personnel in the airline industry is highly competitive. We cannot be certain that we will be able to retain our Chief Executive Officer or other key executives or attract other qualified personnel in the future. Any inability to retain our key executives, or attract and retain additional qualified executives, could have a negative impact on our operations.
In addition, as we continue to 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.
A higher than normal number of pilot retirements could adversely affect us.
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We currently have a large number of pilots eligible for retirement. Among other things, the extension of pilot careers facilitated by the FAA’s 2007 modification of the mandatory retirement age from age 60 to age 65 has now been fully implemented, resulting in large numbers of pilots in the industry approaching the revised mandatory retirement age. If pilot retirements were to exceed normal levels in the future, and we are not able to replace these pilots in a timely fashion, it may adversely affect our 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 our distribution 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.
Our reputation and financial results could be harmed in the event of adverse publicity, including the event of an aircraft accident or incident.
Our customer base is broad and our business activities have significant prominence, particularly in Hawai'i and other destinations we serve. Consequently, negative publicity resulting from real or perceived shortcomings in our customer service, employee relations, business conduct, or other events 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 and its consequential temporary or permanent loss of revenue, but also significant potential claims of injured passengers and others. We are required by the U.S. Department of Transportation (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.
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.
The airline industry has historically operated on low gross profit margins. 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 would cause a corresponding decrease in revenue (if not offset by higher fares), and it may result in a disproportionately greater decrease in profits. Therefore, any general reduction in airline passenger traffic as a result of any of the following or other factors, which are largely outside of our control, could harm our business, financial condition, and results of operations:
• | decline in general economic conditions; |
• | continued threat of terrorist attacks and conflicts overseas; |
• | actual or threatened war and political instability; |
• | increased security measures or breaches in security; |
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• | adverse weather and natural disasters; |
• | 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; and |
• | congestion at airports and actual or potential disruptions in the air traffic control system. |
Our results of operations may be volatile due to the conditions identified above. We cannot ensure that our financial resources will be sufficient to absorb the effects of any of these unexpected factors should they occur.
Our financial results and operations may be negatively affected by the State of Hawai'i's airport modernization plan.
The State of Hawai'i has begun to implement a modernization plan encompassing the airports we serve within the State. Our landing fees and airport rent rates have increased to fund the modernization program. Additionally, we expect the costs for our Neighbor Island operations to increase more than the costs related to our North America and International operations due to phased adjustments of the airport's funding mechanism. Therefore, costs related to the modernization program will have a greater impact on our operations as compared to our competitors, who do not have significant Neighbor Island operations. We can offer no assurance that we will be successful in offsetting these cost increases through other cost reductions or increases in our revenue and, therefore, can offer no assurance that our future financial results will not be negatively affected by them.
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 at the 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. As Hawai'i is a popular vacation destination, demand from North America, our largest source of visitors, is typically stronger during 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.
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 act 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 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, 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
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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.
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, CBP, TSA, etc.). 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 do so again in the future.
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, a number of our destinations in Asia have been revising their privacy and consumer laws and regulations. Failure to comply with these evolving laws or regulations could result in significant penalties, criminal charges, costs to defend 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. Resolving or defending legal matters 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,
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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.
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.
FLEET AND FLEET-RELATED RISKS
We are dependent on a limited number of suppliers for aircraft, aircraft engines and parts.
We are dependent on a limited number of suppliers (e.g. Airbus, Boeing, Rolls Royce, etc.) for aircraft, aircraft engines, and aircraft-related items. As a result, we are vulnerable to any problems associated with the supply of those aircraft and parts which could result in increased parts and maintenance costs in future years.
Our agreements to purchase Airbus A330-200, Airbus A321neo aircraft, and A330-800neo aircraft represent significant future financial commitments and operating costs.
As of December 31, 2016, we had the following firm order commitments and purchase rights for aircraft:
Aircraft Type | Firm Orders | Purchase Rights | Expected Delivery Dates | ||||
A330-200 aircraft | 1 | — | In 2017 | ||||
A321neo aircraft | 16 | 9 | Between 2017 and 2020 | ||||
A330-800neo aircraft | 6 | 6 | Between 2019 and 2021 | ||||
We have made substantial pre-delivery payments for Airbus 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. These commitments substantially increase our future capital spending requirements and may require us to increase our level of debt in future years. 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 have contractual commitments to purchase and integrate additional Airbus aircraft into our fleet. If for any reason we are unable to secure deliveries of the Airbus aircraft on the contractually scheduled delivery dates and successfully introduce these aircraft into our fleet, then our business, operations, and financial performance could be negatively impacted. For example, we have been notified of anticipated delays of three months for the initial three A321neo deliveries, which were initially scheduled to be delivered in the third quarter of 2017. Delays in scheduled aircraft deliveries or our failure to integrate newly purchased Airbus 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.
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We may never realize the full value of our long-lived assets, resulting in impairment and other related charges that may negatively impact our financial position and results of operations.
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. For example, in the fourth quarter of 2016, based on fleet plan changes, we recorded a $49.4 million non-cash impairment charge relating to the planned early retirement of our owned fleet of Boeing 767-300 aircraft, engines, and related assets. We could be subject to similar impairment charges in the future that could have an adverse effect on our financial position and results of operations in future periods.
COMMON STOCK RISKS
Our share price is subject to fluctuations and stockholders could have difficulty trading shares.
The market price of our stock is influenced by many factors, many of which are outside of our control, and include the following:
• | operating results and financial condition; |
• | 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, may 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 the company's 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.
Certain provisions of our certificate of incorporation and bylaws 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; |
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• | 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. |
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 December 31, 2016, 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 or other employees to us or our stockholders; (iii) any action asserting a claim against us or any of our directors, officers or other employees arising pursuant to any provision of the Delaware General Corporation Law or our certificate of incorporation or bylaws laws (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. Accordingly, stockholders may be limited in your ability to pursue legal actions, in all cases subject to the court’s having personal jurisdiction over the indispensable parties named as defendants. Accordingly, stockholders may be limited in their ability to pursue legal actions.
LIQUIDITY RISKS
See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, for further information regarding our liquidity.
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 Airbus to acquire new aircraft. We may finance these upcoming aircraft deliveries; however, the unpredictability of global credit market conditions may adversely affect the availability of financing or may result in unfavorable terms and conditions. We can offer no assurance that the financing we need will be available when required or that the economic terms on which it is available will not adversely affect our financial condition. If we cannot obtain financing or we cannot obtain financing on commercially reasonable terms, our business and financial condition will 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 December 31, 2016, we had $482 million in outstanding debt. 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 operational purposes; |
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• | 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 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 our 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 is held back to serve as collateral to cover any possible chargebacks or other disputed charges that may occur. These holdbacks totaled $5.0 million as of December 31, 2016. 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.
Our obligations for funding our defined benefit pension plans are significant and are affected by factors beyond our control.
We sponsor two defined benefit pension plans, as well as a separate plan to administer pilots' disability benefits. Currently, our minimum funding obligation for our pension plans is subject to temporary favorable rules that are scheduled to expire at the end of 2017. As of December 31, 2016, the unfunded pension and disability obligation related to these plans was $174 million. The timing and amount of funding requirements depend upon a number of factors, including labor negotiations and changes to pension plan benefits as well as factors outside our control, such as the number and demographic profile of qualified retiring employees, asset returns, interest rates and changes in pension laws. These factors, along with the impact of results that can vary significantly from estimates, may significantly impact our funding requirements and have an adverse effect on our financial condition.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
Aircraft
The table below summarizes our total fleet as of December 31, 2015, 2016 and anticipated in 2017 (based on existing agreements):
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December 31, 2015 | December 31, 2016 | December 31, 2017 | Seating Capacity (Per Aircraft) | Simple Average Age (In Years) | ||||||||||||||||||||||||||
Aircraft Type | Leased (6) | Owned | Total | Leased (6) | Owned | Total | Leased (6) | Owned | Total | |||||||||||||||||||||
A330-200(1) | 10 | 12 | 22 | 11 | 12 | 23 | 11 | 13 | 24 | 278 - 294 | 3.7 | |||||||||||||||||||
767-300(2) | 4 | 4 | 8 | 4 | 4 | 8 | 3 | 4 | 7 | 252 - 264 | 17.8 | |||||||||||||||||||
717-200(3) | 3 | 15 | 18 | 5 | 15 | 20 | 5 | 15 | 20 | 128 | 14.7 | |||||||||||||||||||
ATR turboprop(4) | — | 6 | 6 | — | 6 | 6 | — | 6 | 6 | 48 | 18.0 | |||||||||||||||||||
A321-200(5) | — | — | — | — | — | — | — | 3 | 3 | 189 | N/A | |||||||||||||||||||
Total | 17 | 37 | 54 | 20 | 37 | 57 | 19 | 41 | 60 | |||||||||||||||||||||
(1) | During 2016, we took delivery of and placed into service one Airbus A330-200 aircraft for service on our North America and International routes. The aircraft was financed through a six-year lease agreement. The increase in the number of owned aircraft in 2017 is due to the planned delivery of a Company-financed aircraft. |
(2) | The decrease in the number of leased Boeing 767-300 from 2016 to 2017 is due to the planned retirement of an aircraft at the end of its lease term. |
(3) | During 2016, we took delivery of two Boeing 717-200 aircraft for service on our Neighbor Island routes. The aircraft were financed through six-year lease agreements. |
(4) | The ATR turboprop aircraft are owned by Airline Contract Maintenance & Equipment, Inc., a wholly-owned subsidiary of the Company. |
(5) | In the fourth quarter of 2017, we expect to take delivery of three Airbus A321-200 aircraft. |
(6) | Leased aircraft include both aircraft under capital and operating leases. See Note 9 to the consolidated financial statements for further discussion regarding our aircraft leases. |
At December 31, 2016, we had firm aircraft orders as detailed below:
Delivery Year | A321neo Aircraft(1) | A330-800neo Aircraft(2) | A330-200 Aircraft(3) | Total | |||||||
2017 | 3 | — | 1 | 4 | |||||||
2018 | 6 | — | — | 6 | |||||||
2019 | 6 | 2 | — | 8 | |||||||
2020 | 1 | 2 | — | 3 | |||||||
2021 | — | 2 | — | 2 | |||||||
2022 | — | — | — | — | |||||||
16 | 6 | 1 | 23 | ||||||||
(1) | In 2013, Hawaiian executed a purchase agreement for the purchase of 16 new Airbus A321neo aircraft scheduled for delivery between 2017 and 2020. The Airbus A321neo narrow-body aircraft will be used to complement Hawaiian's existing fleet of wide-body aircraft for travel to and from the West Coast on its North America routes. |
(2) | In 2014, Hawaiian entered into an amendment (the Purchase Agreement Amendment) to the Airbus A330/A350XWB Purchase Agreement to convert its order for six firm A350XWB-800 aircraft with an additional six purchase rights into an order for six firm A330-800neo aircraft with an additional six purchase rights. The Purchase Agreement Amendment provides for delivery, subject to certain flexibility rights, of six Airbus A330-800neo aircraft starting in 2019. These fuel efficient, long-range aircraft will complement our existing fleet of wide-body, twin aisle aircraft used for long-haul flying on our North America and International routes. |
(3) | In 2016, Hawaiian executed a purchase agreement for the purchase of one new Airbus A330-200 aircraft scheduled for delivery in the fourth quarter of 2017. |
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Hawaiian has purchase rights for an additional nine A321neo aircraft and six A330-800neo aircraft and can utilize these rights subject to production availability. See Note 9 to the consolidated financial statements for additional information regarding our aircraft lease agreements.
Ground Facilities
Our principal terminal facilities, cargo facilities and hangar and maintenance facilities are located at the Honolulu International Airport (HNL). The majority of the facilities at HNL are leased on a month-to-month basis. We are also charged for the use of terminal facilities at the four major Neighbor Island airports owned by the State of Hawai'i. Some terminal facilities, including gates and holding rooms, are considered by the State of Hawai'i to be common areas and thus are not exclusively controlled by us. We also utilize other State of Hawai'i facilities, including station managers' offices, Premier Club lounges, and operations support space.
The table below sets forth the airport locations we utilize pursuant to various agreements as of December 31, 2016:
Name of Airport | Location | |||
Phoenix Sky Harbor International Airport | Phoenix | Arizona | ||
Los Angeles International Airport | Los Angeles | California | ||
Oakland International Airport | Oakland | California | ||
Sacramento International Airport | Sacramento | California | ||
San Diego International Airport | San Diego | California | ||
San Francisco International Airport | San Francisco | California | ||
Norman Y. Mineta San Jose International Airport | San Jose | California | ||
Hilo International Airport | Hilo | Hawai'i | ||
Honolulu International Airport | Honolulu | Hawai'i | ||
Kahului Airport | Kahului | Hawai'i | ||
Kapalua Airport | Lahaina | Hawai'i | ||
Kona International Airport | Kona | Hawai'i | ||
Lana'i Airport | Lana'i | Hawai'i | ||
Lihu'e Airport | Lihu'e | Hawai'i | ||
Moloka'i Airport | Moloka'i | Hawai'i | ||
McCarran International Airport | Las Vegas | Nevada | ||
John F. Kennedy International Airport | New York | New York | ||
Portland International Airport | Portland | Oregon | ||
Seattle-Tacoma International Airport | Seattle | Washington | ||
Pago Pago International Airport | Pago Pago | American Samoa | ||
Brisbane International Airport | Brisbane | Australia | ||
Sydney International Airport | Sydney | Australia | ||
Beijing Capital International Airport | Beijing | China | ||
Haneda International Airport | Tokyo | Japan | ||
Kansai International Airport | Osaka | Japan | ||
Narita International Airport | Tokyo | Japan | ||
New Chitose International Airport | Sapporo | Japan | ||
Auckland Airport | Auckland | New Zealand | ||
Incheon International Airport | Seoul | South Korea | ||
Faa'a International Airport | Papeete | Tahiti | ||
Our corporate headquarters are located in leased premises adjacent to the Honolulu International Airport.
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ITEM 3. LEGAL PROCEEDINGS.
We are subject to legal proceedings arising in the normal course of our operations. We do not anticipate that the disposition of any currently pending proceeding will have a material effect on our operations, business or financial condition.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock is traded on the NASDAQ Stock Market, LLC (NASDAQ) under the symbol "HA." The following table sets forth the range of high and low sales prices of our common stock as reported on the NASDAQ for the periods indicated.
High | Low | ||||||
2016 | |||||||
Fourth Quarter | $ | 60.90 | $ | 44.28 | |||
Third Quarter | 49.87 | 37.40 | |||||
Second Quarter | 50.95 | 34.69 | |||||
First Quarter | 48.14 | 28.40 | |||||
2015 | |||||||
Fourth Quarter | $ | 40.13 | $ | 23.77 | |||
Third Quarter | 26.00 | 19.87 | |||||
Second Quarter | 26.10 | 20.75 | |||||
First Quarter | 27.66 | 18.01 | |||||
Holders
There were 844 stockholders of record of our common stock as of February 10, 2017, which does not reflect those shares held beneficially or those shares held in "street" name.
Dividends and Other Restrictions
We paid no dividends in 2016 or 2015. We do not anticipate paying periodic cash dividends on our common stock for the foreseeable future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources."
United States law prohibits non-U.S. citizens from owning more than 25% of the voting interest of a U.S. air carrier or controlling a U.S. air carrier. Our certificate of incorporation prohibits the ownership or control of more than 25% (to be increased or decreased from time to time, as permitted under the laws of the U.S.) of our issued and outstanding voting capital stock by persons who are not "citizens of the U.S." As of December 31, 2016, we believe we are in compliance with the law as it relates to voting stock held by non-U.S. citizens.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
On April 23, 2015, we announced that our Board of Directors approved a stock repurchase program under which we may purchase up to $100 million of our outstanding common stock over a two-year period ending on April 24, 2017 through the open market, established plans or privately negotiated transactions in accordance with applicable securities laws, rules and regulations. The stock repurchase program is subject to modification or termination at any time. We did not repurchase any shares of our common stock during the three months ended December 31, 2016. As of December 31, 2016, the Company has$46.0 million remaining to spend under the stock repurchase program.
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Stockholder Return Performance Graph
The following graph compares cumulative total stockholder return on our common stock, the S&P 500 Index and the AMEX Airline Index from January 1, 2012 to December 31, 2016. The comparison assumes $100 was invested on January 1, 2012 in our common stock and each of the foregoing indices and assumes reinvestment of dividends before consideration of income taxes. We have paid no dividends on our common stock.
The stock performance depicted in the graph above is not to be relied upon as indicative of future performance. The stock performance graph shall not be deemed to be incorporated by reference into any of our filings under the Securities Act or the Exchange Act, except to the extent that we specifically incorporate the same by reference, nor shall it be deemed to be "soliciting material" or to be "filed" with the SEC or subject to Regulations 14A or 14C or to the liabilities of Section 18 of the Exchange Act.
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ITEM 6. SELECTED FINANCIAL DATA.
The Selected Financial Data should be read in conjunction with our accompanying audited consolidated financial statements and the notes related thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" below.
Hawaiian Holdings, Inc.
Selected Financial Data
Year ended December 31, | |||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||
(in thousands, except per share data) | |||||||||||||||||||
Summary of Operations: | |||||||||||||||||||
Operating revenue | $ | 2,450,580 | $ | 2,317,467 | $ | 2,314,879 | $ | 2,155,865 | $ | 1,962,353 | |||||||||
Operating expenses | 2,055,118 | 1,891,364 | 2,069,747 | 2,022,118 | 1,832,955 | ||||||||||||||
Operating income | 395,462 | 426,103 | 245,132 | 133,747 | 129,398 | ||||||||||||||
Net Income | 235,432 | 182,646 | 68,926 | 51,854 | 52,237 | ||||||||||||||
Net Income Per Common Stock Share: | |||||||||||||||||||
Basic | $ | 4.40 | $ | 3.38 | $ | 1.29 | $ | 1.00 | $ | 1.04 | |||||||||
Diluted | 4.36 | 2.98 | 1.10 | 0.98 | 1.01 | ||||||||||||||
Balance Sheet Items as of December 31: | |||||||||||||||||||
Total assets | $ | 2,708,601 | $ | 2,509,710 | $ | 2,602,528 | $ | 2,164,261 | $ | 1,865,824 | |||||||||
Long-term debt, less discount, and capital lease obligations, excluding current maturities (a) | 497,908 | 694,678 | 893,288 | 744,286 | 553,009 | ||||||||||||||
(a) | In 2016, we extinguished $140.5 million of existing debt under three secured financing agreements, which was originally scheduled to mature in 2022 and 2023. In 2015, we extinguished $123.9 million of existing debt under four secured financing agreements, which were originally scheduled to mature in 2018, 2023, and 2024. We also repurchased $70.8 million in principal of our Convertible Notes. In 2014, we received proceeds of $368.4 million in connection with the EETC financing for the purchase of five Airbus A330-200 aircraft. In 2013, we borrowed $132.0 million to finance a portion of the purchase price of two Airbus A330-200 aircraft, and received proceeds of $76.1 million in connection with the EETC financing for the purchase of one Airbus A330-200 aircraft. In 2012, we borrowed $133.0 million to finance a portion of the purchase price of two Airbus A330-200 aircraft and took delivery of three aircraft (two Boeing 717 aircraft and one Airbus A330-200 aircraft) under capital leases. See further discussion at Note 8 to the consolidated financial statements. |
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Overview
The following Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understand the Company and its operations. This discussion and analysis of our financial condition and results of operations contains forward-looking statements that involve risks and uncertainties. We have based these forward-looking statements on our current expectations and projections of future events. However, our actual results could differ materially from those discussed herein as a result of the risks that we face, including but not limited to those risks stated in the "Risk Factors" section of this report. See "Cautionary Note Regarding Forward-Looking Statements," above. In addition, the following discussion should be read in conjunction with the audited consolidated financial statements and the related notes thereto included elsewhere in this report.
Year in Review
2016 Financial Highlights
• | Operating income decreased to $395 million compared to $426 million in the prior-year period. |
• | Pre-tax income grew to $379 million compared to $296 million in the prior-year period. |
• | GAAP net income of $235 million or $4.36 per diluted share compared to $183 million or $2.98 per diluted share in the prior year period. |
• | Adjusted net income of $280 million or $5.19 per diluted share compared to $189 million or $3.09 per share in the prior year period. |
• | Unrestricted cash and cash equivalents and short-term investments of $610 million compared to $560 million in the prior year period. |
• | Extinguished $141 million of debt instruments that were originally scheduled to mature in 2022 and 2023. |
See "Non-GAAP Financial Measures" below for our reconciliation of non-GAAP measures.
Outlook
We expect our financial performance to remain strong in the first quarter of 2017, as compared to the first quarter of 2016. We expect our passenger revenues to increase, coupled with expected increases in our aircraft fuel, wages and benefits, and rent expense which could potentially put pressure on our operating margins (as compared to 2016). We expect available seat miles during the first quarter of 2017 to increase by 2.5% to 4.5% from the same prior year period. Despite the continued strengthening of the U.S. dollar, a decrease in fuel surcharges on our international routes, and an increase in industry capacity on our Neighbor Island routes, operating revenue per available seat mile could increase by up to 4.0% to 7.0% from the same prior year period.
The table below is a reconciliation of GAAP to non-GAAP CASM ex-fuel guidance for the first quarter of 2017.
Estimated three months ending March 31, 2017 | ||||||||
(in thousands, except as otherwise indicated) | ||||||||
GAAP operating expenses | $ | 511,591 | $ | 539,845 | ||||
Less: aircraft fuel, including taxes and delivery | (100,235 | ) | (108,248 | ) | ||||
Adjusted operating expenses - excluding aircraft fuel | $ | 411,356 | $ | 431,597 | ||||
Available Seat Miles | 4,477,298 | 4,564,660 | ||||||
CASM - GAAP | 11.43 | ¢ | 11.83 | ¢ | ||||
Less: aircraft fuel | (2.24 | ) | (2.37 | ) | ||||
CASM - excluding aircraft fuel | 9.19 | ¢ | 9.46 | ¢ | ||||
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Selected Consolidated Statistical Data
Below are the operating statistics we use to measure our operating performance.
Year ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
(in thousands, except as otherwise indicated) | |||||||||||
Scheduled Operations (a) : | |||||||||||
Revenue passengers flown | 11,044 | 10,665 | 10,191 | ||||||||
Revenue passenger miles (RPM) | 15,484,369 | 14,450,564 | 13,910,804 | ||||||||
Available seat miles (ASM) | 18,371,544 | 17,710,309 | 17,062,264 | ||||||||
Passenger revenue per RPM (Yield) | 13.86 | ¢ | 14.02 | ¢ | 14.70 | ¢ | |||||
Passenger load factor (RPM/ASM) | 84.3 | % | 81.6 | % | 81.5 | % | |||||
Passenger revenue per ASM (PRASM) | 11.68 | ¢ | 11.44 | ¢ | 11.99 | ¢ | |||||
Total Operations (a) : | |||||||||||
Revenue passengers flown | 11,051 | 10,673 | 10,195 | ||||||||
RPM | 15,492,509 | 14,462,191 | 13,921,147 | ||||||||
ASM | 18,384,637 | 17,726,322 | 17,073,630 | ||||||||
Operating revenue per ASM (RASM) | 13.33 | ¢ | 13.07 | ¢ | 13.56 | ¢ | |||||
Operating cost per ASM (CASM) | 11.18 | ¢ | 10.67 | ¢ | 12.12 | ¢ | |||||
CASM excluding aircraft fuel and special items (b) | 8.71 | ¢ | 8.31 | ¢ | 8.15 | ¢ | |||||
Aircraft fuel expense per ASM (c) | 1.87 | ¢ | 2.36 | ¢ | 3.97 | ¢ | |||||
Revenue block hours operated | 179,254 | 173,546 | 166,362 | ||||||||
Gallons of jet fuel consumed | 244,118 | 234,183 | 230,199 | ||||||||
Average cost per gallon of jet fuel (actual) (c) | $ | 1.41 | $ | 1.78 | $ | 2.95 | |||||
(a) | Includes the operations of our contract carrier under a capacity purchase agreement. Total Operations includes both scheduled and chartered operations. |
(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 our reconciliation of non-GAAP measures. |
(c) | Includes applicable taxes and fees. |
Operating Revenue
Our revenue is derived primarily from transporting passengers on our aircraft. Revenue is recognized when either the transportation is provided or when the related ticket expires unused. We measure capacity in terms of available seat miles, which represent the number of seats available for passengers multiplied by the number of miles the seats are flown. Yield, or the average amount one passenger pays to fly one mile, is calculated by dividing passenger revenue by RPMs. We strive to increase passenger revenue primarily by increasing our yield per flight or by filling a higher proportion of available seats, which produces higher operating revenue per available seat mile. Other revenue primarily consists of baggage fees, cargo revenue, incidental services revenue, ticket change and cancellation fees, marketing component related to the sale of frequent flyer miles, inflight revenue, contract services and charter services revenue.
Operating revenue was $2.45 billion, $2.32 billion and $2.31 billion for the years ended December 31, 2016, 2015 and 2014. The increase in operating revenue in 2016 from 2015 was driven primarily by an increase in passenger revenue and is discussed below:
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2016 vs. 2015
Passenger Revenue
Passenger revenue was $2.15 billion and $2.03 billion for the years ended December 31, 2016 and 2015, respectively. Details of these changes are described in the table below:
Year Ended December 31, 2016 as compared to December 31, 2015 | ||||||||||||
Change in scheduled passenger revenue | Change in Yield | Change in RPM | Change in ASM | |||||||||
(in millions) | ||||||||||||
Domestic | $ | 104.2 | 0.1 | % | 6.6 | % | 2.9 | % | ||||
International | 15.9 | (4.7 | ) | 8.6 | 5.6 | |||||||
Total scheduled | $ | 120.1 | (1.1 | )% | 7.2 | % | 3.7 | % | ||||
Domestic revenue increased by $104.2 million in 2016, as compared to 2015, primarily due to capacity, yield, and load factor increases on our North America routes; along with increases in capacity on our Neighbor Island routes.
International revenue increased by $15.9 million in 2016, as compared to 2015, due to increased capacity. The strengthening of the U.S. dollar combined with lower fuel surcharges resulted in decreased average fares for our International routes compared to the prior period. Increased capacity was driven by changes we made to our network in 2016, including the introduction of service of our route from Honolulu to Narita, Japan (July 2016) and expansion of service for the Kona to Haneda, Japan (December 2016) route.
Other Operating Revenue
Other operating revenue increased by $13.0 million, or 4.4%, in 2016, as compared to 2015, due to increased sale of miles and other revenue related to our co-branded credit card agreement and cancellation penalty revenue.
Operating Expenses
The largest components of our operating expenses are wages and benefits provided to our employees, aircraft fuel (including taxes and delivery) and aircraft maintenance materials and repairs. Increases (decreases) in operating expenses are detailed below.
Changes for the year ended December 31, 2016 as compared to December 31, 2015 | ||||||
$ | % | |||||
(in thousands) | ||||||
Operating expense: | ||||||
Aircraft fuel, including taxes and delivery | $ | (73,406 | ) | (17.6 | )% | |
Wages and benefits | 56,028 | 11.2 | ||||
Aircraft rent | 8,912 | 7.7 | ||||
Maintenance materials and repairs | 4,322 | 1.9 | ||||
Aircraft and passenger servicing | 9,427 | 8.0 | ||||
Commissions and other selling | 5,985 | 5.0 | ||||
Depreciation and amortization | 2,547 | 2.4 | ||||
Other rentals and landing fees | 13,032 | 13.7 | ||||
Purchased services | 14,436 | 17.6 | ||||
Special charges | 109,142 | 100.0 | ||||
Other | 13,329 | 11.7 | ||||
Total | $ | 163,754 | 8.7 | % | ||
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The price and availability of aircraft fuel is extremely volatile due to global economic and geopolitical factors that we can neither control nor accurately predict. The decreases in aircraft fuel expense are illustrated in the following table:
Year Ended December 31, | ||||||||||
2016 | 2015 | % Change | ||||||||
(in thousands, except per-gallon amounts) | ||||||||||
Aircraft fuel expense, including taxes and delivery | $ | 344,322 | $ | 417,728 | (17.6 | )% | ||||
Fuel gallons consumed | 244,118 | 234,183 | 4.2 | % | ||||||
Average fuel price per gallon, including taxes and delivery | $ | 1.41 | $ | 1.78 | (20.8 | )% | ||||
The decrease in fuel expense from 2016 to 2015 is primarily due to the decrease in average fuel price per gallon, partially offset by increased fuel consumption due to an additional aircraft in the fleet (Airbus 330-200).
We believe economic fuel expense is the best 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 and is consistent with how management manages our business and assesses our operating performance. We define economic fuel expense as GAAP fuel expense plus (gains)/losses realized through actual cash (receipts)/payments received from or paid to hedge counterparties for fuel hedge derivative contracts settled in the period inclusive of costs related to hedging premiums.
Economic fuel expense is calculated as follows:
Year Ended December 31, | ||||||||||
2016 | 2015 | % Change | ||||||||
(in thousands, except per-gallon amounts) | ||||||||||
Aircraft fuel expense, including taxes and delivery | $ | 344,322 | $ | 417,728 | (17.6 | )% | ||||
Realized losses on settlement of fuel derivative contracts | 27,572 | 60,946 | (54.8 | )% | ||||||
Economic fuel expense | $ | 371,894 | $ | 478,674 | (22.3 | )% | ||||
Fuel gallons consumed | 244,118 | 234,183 | 4.2 | % | ||||||
Economic fuel costs per gallon | $ | 1.52 | $ | 2.04 | (25.5 | )% | ||||
See Item 7A, Quantitative and Qualitative Disclosures about Market Risk, for additional discussion of our jet fuel costs and related derivative program.
Wages and benefits expense increased by $56.0 million, or 11.2%, in 2016 as compared to 2015, due to an overall headcount increase of 11.7% due to our growing capacity in 2016, increased pension and postretirement benefit expenses, and increased profit-sharing expenses resulting from our improved financial performance as compared to the prior period.
Other rentals and landing fees expense increased by $13.0 million, or 13.7%, in 2016 as compared to 2015, primarily due to increased rates, passengers, and landing frequencies. Also, we incurred additional cost year over year for our station rent amounts.
Purchased services expense increased by $14.4 million, or 17.6%, in 2016 as compared to 2015, due to an increase in outsourced web and third-party vendor reservation fees because of increased passenger counts.
In 2016, we incurred $109.1 million in special items. The $109.1 million is comprised of three components: (1) $49.4 million in impairment charges in connection with our owned Boeing 767-300 fleet and related assets, (2) $38.8 million related to retroactive bonuses included within a tentative agreement between us and ALPA as of February 2017 and profit sharing for other contract groups, and (3) $21.0 million related to the termination of our Boeing 767-300 maintenance contract.
The impairment analysis and ultimate charge was triggered by the decision in the fourth quarter of 2016 to early exit the Boeing 767-300 fleet in 2018. The early exit of the Boeing 767-300 fleet was made possible by our decision to acquire one Airbus A330 (to be delivered in 2017), lease two additional Airbus A321s (to be delivered in 2018 and in addition to our existing aircraft orders), and our ability to early terminate our long-term power by the hour maintenance contract for the Boeing 767-300 fleet. This fleet change allows us to streamline our fleet, simplify our operations, and potentially reduce our cost structure in the future. In order to assess whether there was an impairment of the Boeing 767-300 asset group, we compared the projected undiscounted cash flows of the fleet to the book value of the assets and determined the book value was in excess of the undiscounted cash flows. We estimated the fair value of the Boeing 767-300 fleet assets using third party pricing information and quotes from potential buyers of our owned aircraft, which resulted in a $49.4 million impairment charge. Our
28
determination of fair value considered attributes specific to our Boeing 767-300 fleet and aircraft condition (e.g. age, maintenance requirements, cycles, etc.). The Boeing 767-300 asset group consists of both owned and leased aircraft. We expect to remove three leased Boeing 767-300 aircraft from service in 2018. At that time, these aircraft will have remaining lease payments of approximately $54.3 million. At the time each aircraft is removed from service, we will accrue for any remaining lease payments not mitigated through an arrangement with the lessor.
In February 2017, we reached a tentative agreement with the Air Line Pilots Association (ALPA), covering our pilots. A ratification vote is set to occur in March 2017, however, we can provide no assurances that the tentative agreement will be approved at that time. The tentative agreement is for a 63-month contract amendment which includes (amongst other various benefits) a pay adjustment and ratification bonus. As of December 31, 2016, we accrued $34.0 million related to past service (prior to January 1, 2017), which is expected to be payable upon ratification. The final amount paid may differ when a final agreement is reached and ratified.
Other expenses increased by $13.3 million, or 11.7%, in 2016 as compared to 2015, primarily due to an increase in hotel expenses for our crew members, professional and technical fees, as well as personnel related expenses.
Nonoperating Expense
Net nonoperating expense decreased by $114.4 million in 2016, as compared to 2015 due to reduced debt levels which resulted in a $19.1 million reduction in interest expense as compared to the prior year period. The decrease in net nonoperating expense was also due to gains on our fuel hedge portfolio of $20.1 million in 2016 compared to losses of $59.9 million in the prior year period.
2015 vs. 2014
Passenger Revenue
Passenger revenue was $2.03 billion and $2.05 billion for the years ended December 31, 2015 and 2014, respectively. Details of these changes are described in the table below:
Year Ended December 31, 2015 as compared to December 31, 2014 | ||||||||||||
Change in scheduled passenger revenue | Change in Yield | Change in RPM | Change in ASM | |||||||||
(in millions) | ||||||||||||
Domestic | $ | 69.1 | (2.7 | )% | 7.5 | % | 8.9 | % | ||||
International | (88.5 | ) | (12.8 | ) | (4.0 | ) | (6.0 | ) | ||||
Total scheduled | $ | (19.4 | ) | (4.6 | )% | 3.9 | % | 3.8 | % | |||
Domestic revenue increased by $69.1 million in 2015, as compared to 2014, primarily due to capacity increases on our North America routes, driven by the annualized impact of service introduced in 2014 and the introduction of a new cabin configuration to our fleet of Boeing 717-200 aircraft for our Neighbor Island routes.
International revenue decreased by $88.5 million in 2015, as compared to 2014, due to decreased yield and capacity. The continued strengthening of the U.S. dollar combined with lower fuel surcharges resulted in decreased average fares for our International routes compared to the prior period. Decreased capacity was driven by changes we made to our network in 2014, including the suspension of our route from Honolulu to Taipei, Taiwan (March 2014) and Honolulu to Fukuoka, Japan (June 2014).
Other Operating Revenue
Other operating revenue increased by $22.0 million, or 8.2%, in 2015, as compared to 2014, due to $11.2 million generated by increased sales of frequent flyer miles under our co-branded credit card agreement, as compared to the prior year period. Additionally, a 9.0% increase in the number of passengers flown on our North America routes resulted in a $7.5 million increase in ancillary revenue compared to the prior year period.
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Operating Expenses
Increases (decreases) in operating expenses are detailed below.
Changes for the year ended December 31, 2015 as compared to December 31, 2014 | ||||||
$ | % | |||||
(in thousands) | ||||||
Operating expense: | ||||||
Aircraft fuel, including taxes and delivery | $ | (260,525 | ) | (38.4 | )% | |
Wages and benefits | 52,060 | 11.6 | ||||
Aircraft rent | 9,231 | 8.7 | ||||
Maintenance materials and repairs | (971 | ) | (0.4 | ) | ||
Aircraft and passenger servicing | (5,331 | ) | (4.3 | ) | ||
Commissions and other selling | (2,772 | ) | (2.3 | ) | ||
Depreciation and amortization | 9,207 | 9.6 | ||||
Other rentals and landing fees | 7,153 | 8.1 | ||||
Purchased services | 8,452 | 11.5 | ||||
Other | 5,113 | 4.7 | ||||
Total | $ | (178,383 | ) | (8.6 | )% | |
Decreases in aircraft fuel expense are illustrated in the following table:
Year Ended December 31, | ||||||||||
2015 | 2014 | % Change | ||||||||
(in thousands, except per-gallon amounts) | ||||||||||
Aircraft fuel expense, including taxes and delivery | $ | 417,728 | $ | 678,253 | (38.4 | )% | ||||
Fuel gallons consumed | 234,183 | 230,199 | 1.7 | % | ||||||
Average fuel price per gallon, including taxes and delivery | $ | 1.78 | $ | 2.95 | (39.7 | )% | ||||
The decrease in fuel expense from 2015 to 2014 is primarily due to a decrease in the average fuel price per gallon, partially offset by increased fuel consumption due to the additional aircraft in the fleet (three additional A330-200 offset by the return of two Boeing 767-300 aircraft at the end of their lease term).
Economic fuel expense is calculated as follows:
Year Ended December 31, | ||||||||||
2015 | 2014 | % Change | ||||||||
(in thousands, except per-gallon amounts) | ||||||||||
Aircraft fuel expense, including taxes and delivery | $ | 417,728 | $ | 678,253 | (38.4 | )% | ||||
Realized losses on settlement of fuel derivative contracts | 60,946 | 20,365 | 199.3 | % | ||||||
Economic fuel expense | $ | 478,674 | $ | 698,618 | (31.5 | )% | ||||
Fuel gallons consumed | 234,183 | 230,199 | 1.7 | % | ||||||
Economic fuel costs per gallon | $ | 2.04 | $ | 3.03 | (32.7 | )% | ||||
Wages and benefits expense increased by $52.1 million, or 11.6%, in 2015, as compared to 2014, due to increased pension and postretirement benefit expenses and increased profit-sharing expenses resulting from our improved financial performance as compared to the prior period.
Aircraft rent expense increased by $9.2 million, or 8.7%, in 2015, as compared to 2014, primarily due to the addition of three A330-200 aircraft under operating leases (one each in February 2015, May 2015, and October 2015), offset by the return of two Boeing 767-300 aircraft (one each in May 2015 and October 2015).
Depreciation and amortization expense increased by $9.2 million, or 9.6%, in 2015, as compared to 2014, primarily due to the annualized effect of owned aircraft added to the fleet in the prior year period.
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Other rentals and landing fees expense increased by $7.2 million, or 8.1%, in 2015 as compared to 2014, primarily due to increased rates and landing frequencies.
Purchased services expense increased by $8.5 million, or 11.5%, in 2015 as compared to 2014, due to costs incurred in connection with our turboprop operations and increased IT infrastructure costs.
Nonoperating Expense
Net nonoperating expense decreased by $1.3 million in 2015, as compared to 2014, primarily due to reduced debt levels which resulted in an $8.6 million reduction in interest expense as compared to the prior year period. Also our fuel hedge portfolio generated losses of $59.9 million in the current period compared to losses of $63.5 million in the prior year period. These reductions in nonoperating expense were partially offset by an $8.2 million increase in losses generated from the early extinguishment of long-term debt.
Income Tax Expense
We recorded income tax expense of $144.0 million, $113.0 million, and $44.5 million during the years ended December 31, 2016, 2015, and 2014, respectively. In 2016, 2015, and 2014, we had an effective tax rate of 38.0%, 38.2%, and 39.2%, respectively.
See Note 10 to the consolidated financial statements for further discussion.
Liquidity and Capital Resources
Our liquidity is dependent on the cash we generate from operating activities, our existing cash resources, and our debt financing arrangements. As of December 31, 2016, we had $326.0 million in cash and cash equivalents and $284.1 million in short-term investments, representing an increase of $50.0 million from December 31, 2015. As of December 31, 2016 and 2015, our restricted cash balance of $5.0 million consisted of cash held as collateral by entities that process our credit card transactions for advanced ticket sales.
We have been able to generate sufficient funds from our operations to meet our working capital requirements and typically finance our aircraft through secured debt and lease financings. At December 31, 2016, we had $556.8 million of debt and capital lease obligations, including $58.9 million classified as a current liability in the Consolidated Balance Sheets. As of December 31, 2016, our current liabilities exceeded our current assets by approximately $31.9 million. However, approximately $482.5 million of our current liabilities are related to our advanced ticket sales and frequent flyer deferred revenue, both of which largely represent revenue to be recognized for travel within the next 12 months and not actual cash outlays. The deficit in working capital does not have an adverse impact to our cash flows, liquidity, or operations.
In December 2016, we amended and restated the existing credit agreement with Citigroup Global Markets Inc. by increasing the secured revolving credit facility (Revolving Credit Facility) from $175 million to $225 million. This Revolving Credit Facility will expire in December 2019. As of December 31, 2016 we had no outstanding borrowings under the Revolving Credit Facility.
Cash Flows
Net cash provided by operating activities was $417.4 million, $476.0 million, and $300.4 million in 2016, 2015, and 2014, respectively. The decrease in 2016 was primarily due to: (1) a $66.1 million decrease in our deferred income tax expense as a result of becoming a cash taxpayer, (2) a $46.7 million net decrease in the change to unrealized gains/losses on our fuel derivative contracts, and (3) a $42.7 million net increase in pension and postretirement benefit contributions, partially offset by (4) an increase of $52.8 million in net income and (5) a $49.4 million increase relating to the impairment of our Boeing 767-300 assets. The increase in 2015 was primarily due to the increased net income before deferred income tax expense, which does not impact our cash flows because our net operating loss carryforwards were used to satisfy this income tax obligation.
Net cash used in investing activities was $154.1 million, $35.3 million, and $686.8 million for 2016, 2015, and 2014, respectively. The increase in net cash used in 2016 was primarily due to a $69.9 million decrease in cash received compared to 2015, for purchase assignment and leaseback transactions, and engine credit payments received from the manufacturer. There was also an increase of $60.0 million in cash payments for property and equipment, including pre-delivery deposits for our Airbus A330-200 and Airbus A321neo fleet. The decrease in 2015 was due to acquisition of fewer aircraft during the year, which resulted in a $323.4 million reduction in capital expenditures. We also received $101.7 million from the purchase assignment and leaseback of three Airbus A330-200 aircraft during the year, and reduced our net purchases of investments by $240.2 million in 2015.
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Net cash used in financing activities was $218.8 million and $423.3 million for 2016 and 2015, respectively, and net cash provided by financing activities was $227.1 million for 2014. The decrease in cash used in 2016 was due to the lack of repurchases and payments for settlements of our convertible notes in 2016. The increase in cash used in financing activities in 2015 was due to the lack of long-term borrowings during the year, the early repayment of long-term debt, and the repurchase of convertible notes and common stock. This was partially offset by the net settlement of the convertible note call options and warrants.
Covenants under our Financing Arrangements
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 Consolidated Balance Sheets totaled $5.0 million as of December 31, 2016 and 2015.
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 activity for all unflown tickets, which would also result in an increase in the required level of restricted cash. If we are 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.
Pension and Other Postretirement Benefit Plan Funding
As of December 31, 2016, the excess of the projected benefit obligations over the fair value of plan assets was approximately $359.3 million. We contributed $57.8 million, $20.4 million, and $8.9 million to our defined benefit pension plans and disability plan during 2016, 2015, and 2014, respectively. 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. In 2017, we expect to contribute approximately $50.0 million to our defined benefit pension plans and disability plan.
In 2016, the Hawaiian Airlines, Inc. Pension Plan for Salaried Employees (Salaried Plan) was consolidated into the Hawaiian Airlines, Inc. Pension Plan for Employees Represented by the International Association of Machinists (IAM), which established the Hawaiian Airlines, Inc. Salaried & IAM Merged Pension Plan (the Merged Plan). At that time, the net liabilities of the Salaried Plan were transferred to the Merged Plan. The benefits under the Merged Plan have remained consistent with the prior plan documents. We, as plan sponsor, have submitted an application to the Department of Labor to settle the Merged Plan and expect to receive a response in 2017, at which time we intend to terminate the Merged Plan (if the application is approved by the Department of Labor). In 2017, we expect to spend approximately $17 million to $22 million to settle the plan obligations. As of December 31, 2016, there was no significant effect to the operation of the plans.
Off-Balance Sheet Arrangements
An off-balance sheet arrangement is any transaction, agreement or other contractual arrangement involving an unconsolidated entity under which a company has (i) made guarantees, (ii) retained a contingent interest in transferred assets, (iii) an obligation under derivative instruments classified as equity or (iv) any obligation arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the company, or that engages in leasing, hedging or research and development arrangements with the company. We have no arrangements of the types described in the first three categories that we believe may have a current or future material effect on our financial condition, liquidity or results of operations. We do have obligations arising out of variable interests in unconsolidated entities related to certain aircraft leases. To the extent our leases and related guarantees are with a separate legal entity other than a governmental entity, we are not the primary beneficiary because the lease terms are consistent with market terms at the inception of the lease, and the lease does not include a residual value guarantee, fixed price purchase option, or similar feature.
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Contractual Obligations
Our estimated contractual obligations as of December 31, 2016 are summarized in the following table:
Contractual Obligations | Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | ||||||||||||||
(in thousands) | |||||||||||||||||||
Debt and capital lease obligations(1) | $ | 703,585 | $ | 89,730 | $ | 192,341 | $ | 119,008 | $ | 302,506 | |||||||||
Operating leases—aircraft and related equipment(2) | 741,329 | 120,766 | 235,889 | 162,447 | 222,227 | ||||||||||||||
Operating leases—non-aircraft | 139,170 | 5,223 | 13,624 | 13,065 | 107,258 | ||||||||||||||
Purchase commitments—capital(3) | 1,565,362 | 240,884 | 888,912 | 386,582 | 48,984 | ||||||||||||||
Other commitments(4) | 703,894 | 79,098 | 121,636 | 112,290 | 390,870 | ||||||||||||||
Projected employee benefit contributions(5) | 75,050 | 50,000 | 25,050 | — | — | ||||||||||||||
Total contractual obligations | $ | 3,928,390 | $ | 585,701 | $ | 1,477,452 | $ | 793,392 | $ | 1,071,845 | |||||||||
(1) | Amounts reflect capital lease obligations for one Airbus A330-200 aircraft, two Boeing 717-200 aircraft, one Airbus A330 flight simulator, and aircraft and IT related equipment. |
(2) | Amounts reflect leases for ten Airbus A330-200 aircraft, four Boeing 767-300 aircraft, three Boeing 717-200 aircraft, three turboprop aircraft and aircraft-related equipment as of December 31, 2016. |
(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, capacity purchases, accounting, IT, reservations, and the estimated rental payments for the cargo and maintenance hangar (described below). 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 contributions to our pension plans (based on actuarially determined estimates) and 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. |
Capital Commitments
As of December 31, 2016, 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 | ||||
A330-200 aircraft | 1 | — | In 2017 | ||||
A321neo aircraft | 16 | 9 | Between 2017 and 2020 | ||||
A330-800neo aircraft | 6 | 6 | Between 2019 and 2021 | ||||
Pratt & Whitney spare engines: | |||||||
A321neo spare engines | 3 | — | Between 2017 and 2019 | ||||
Rolls-Royce spare engines: | |||||||
A330-800neo spare engines | 2 | — | Between 2019 and 2020 | ||||
Committed expenditures for these aircraft, engines, and related flight equipment are approximately $241 million in 2017, $401 million in 2018, $488 million in 2019, $229 million in 2020, $158 million in 2021, and $49 million thereafter.
In order to complete the purchase of these aircraft and fund related costs, we may need to secure acceptable financing. We have backstop financing available from aircraft and engine manufacturers, subject to certain customary conditions. Financing may be necessary to satisfy our capital commitments for firm order aircraft and other related capital expenditures. We can provide no assurance that any financing not already in place for aircraft and spare engine deliveries will be available to us on acceptable terms when necessary or at all.
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In November 2016, we entered into a lease agreement with the Department of Transportation of the State of Hawai'i to lease a cargo and maintenance hangar at the Honolulu International Airport with a lease term of 35 years. The hangar is not fully completed and we have since taken responsibility for the remainder of the construction. We are obligated to fund the remaining construction costs needed to complete the hangar. While there is no minimum funding requirement, we estimate the cost to complete the hangar will be approximately $25.0 million to $35.0 million, which we expect to incur in 2017. In accordance with the applicable accounting guidance, specifically as it relates to our involvement in the construction of the hangar, we are considered the owner of the asset under construction and has recognized a $73.0 million asset, with a corresponding other liability, for the value of the construction previously completed.
We estimate that the hangar will be put into service in late 2017. At that time, we expect the lease to be considered a financing arrangement and a fixed asset of $73.0 million for the value of the construction previously completed plus any remaining amount spent by us and the $73.0 million liability will remain on our balance sheet. When construction is completed we will have on-going committed expenditures under the lease agreement consisting of ground rent (included in Operating leases - non-aircraft in the contractual obligations table above) and building rent and apron rent (included in Other commitments in the contractual obligations table above).
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 industry analysts and investors; |
• | These measures are often used in management and board of directors decision making analysis; |
• | It improves a reader's ability to compare our results to those of other airlines; and |
• | It is consistent with how we present information in our quarterly earnings press releases. |
See table below for reconciliation between GAAP consolidated net income to adjusted consolidated net income, including per share amounts (in thousands unless otherwise indicated). The adjustments are described below:
• | 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. Excluding the impact of these derivative adjustments allows investors to better analyze our core operational performance and more readily compare our results to other airlines in the periods presented below. |
• | Loss on extinguishment of debt, net of tax, is excluded to allow investors to better analyze our core operational performance and more readily compare our results to other airlines in the periods presented below. |
• | The impairment and maintenance contract termination charges related to the early retirement of our fleet of Boeing 767-300 aircraft, engines, and related assets along with the retroactive bonuses and a proposed collective bargaining agreement payment are considered special items and are not expected to represent ongoing expenses to us. Excluding these special items allows investors to better analyze our core operational performance and more readily compare our results to other airlines in the periods presented below. |
Year Ended December 31, | |||||||||||||||||||||||
2016 | 2015 | 2014 | |||||||||||||||||||||
Net Income | Diluted Net Income Per Share | Net Income | Diluted Net Income Per Share | Net Income | Diluted Net Income Per Share | ||||||||||||||||||
As reported—GAAP | $ | 235,432 | $ | 4.36 | $ | 182,646 | $ | 2.98 | $ | 68,926 | $ | 1.10 | |||||||||||
Add: changes in fair value of derivative contracts | (47,678 | ) | (0.88 | ) | (1,015 | ) | (0.02 | ) | 43,106 | 0.67 | |||||||||||||
Add: loss on extinguishment of debt | 10,473 | 0.19 | 12,058 | 0.20 | 2,617 | 0.04 | |||||||||||||||||
Add: special items | |||||||||||||||||||||||
Impairment charge | 49,361 | 0.92 | — | — | — | — | |||||||||||||||||
Termination charge | 21,000 | 0.39 | — | — | — | — | |||||||||||||||||
Retroactive bonuses and a proposed collective bargaining agreement payment | 38,781 | 0.72 | — | — | — | — | |||||||||||||||||
Tax effect of adjustments | (27,307 | ) | (0.51 | ) | (4,417 | ) | (0.07 | ) | (17,528 | ) | (0.29 | ) | |||||||||||
Adjusted net income | $ | 280,062 | $ | 5.19 | $ | 189,272 | $ | 3.09 | $ | 97,121 | $ | 1.52 | |||||||||||
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Operating Costs per Available Seat Mile (CASM)
Listed in the table below is our fuel costs per ASM and non-GAAP unit costs, excluding fuel. These amounts are included in CASM, but for internal purposes we consistently use cost metrics that exclude fuel and non-recurring items (if applicable) to measure and monitor its costs.
CASM and CASM, excluding fuel, are summarized in the table below:
Year Ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
GAAP operating expenses | $ | 2,055,118 | $ | 1,891,364 | $ | 2,069,747 | |||||
Less: aircraft fuel, including taxes and delivery | (344,322 | ) | (417,728 | ) | (678,253 | ) | |||||
Less: special items | |||||||||||
Impairment charge | (49,361 | ) | — | — | |||||||
Termination charge | (21,000 | ) | — | — | |||||||
Bonuses and a proposed collective bargaining agreement payment | (38,781 | ) | — | — | |||||||
Adjusted operating expenses—excluding aircraft fuel and special items | $ | 1,601,654 | $ | 1,473,636 | $ | 1,391,494 | |||||
Available Seat Miles | 18,384,637 | 17,726,322 | 17,073,630 | ||||||||
CASM—GAAP | 11.18 | ¢ | 10.67 | ¢ | 12.12 | ¢ | |||||
Less: aircraft fuel | (1.87 | ) | (2.36 | ) | (3.97 | ) | |||||
Less: special items | |||||||||||
Impairment charge | (0.28 | ) | — | — | |||||||
Termination charge | (0.11 | ) | — | — | |||||||
Bonuses and a proposed collective bargaining agreement payment | (0.21 | ) | — | — | |||||||
CASM—excluding aircraft fuel and special items | 8.71 | ¢ | 8.31 | ¢ | 8.15 | ¢ | |||||
Critical Accounting Policies and Estimates
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. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amount of assets and liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities as of the date of the financial statements. Actual results could differ from those estimates.
Critical accounting policies and estimates are defined as those accounting policies and accounting estimates that are reflective of significant judgments and uncertainties, and that potentially result in materially different results under different assumptions and conditions. Our most critical accounting policies and estimates are described below. See the summary of significant accounting policies included in Note 1 to the consolidated financial statements for additional discussion of the application of these estimates and other accounting policies.
Frequent Flyer Accounting
HawaiianMiles, Hawaiian's frequent flyer travel award program, provides a variety of awards to program members based on accumulated mileage. We utilize the incremental cost method of accounting for free travel awards earned by passengers issued from the HawaiianMiles program through flight activity. This method utilizes a number of estimates including the incremental cost per mile and breakage. We record a liability for the estimated incremental cost of providing travel awards that are expected to be redeemed on Hawaiian or the contractual rate of expected redemption on other airlines. We estimate the incremental cost of travel awards based on periodic studies of actual costs and apply these cost estimates to all issued miles, less an appropriate breakage factor for estimated miles that will not be redeemed. Incremental costs include the cost of fuel, meals and beverages, insurance and certain other passenger traffic-related costs, but does not include any costs for aircraft ownership and maintenance. The breakage factor is estimated based on an analysis of historical expirations.
We also sell mileage credits to companies participating in our frequent flyer program. These sales are accounted for as multiple-element arrangements, with one element representing the transportation that will ultimately be provided when the
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mileage credits are redeemed and the other elements consisting of marketing related activities that we conduct with the participating company.
In 2013, Hawaiian entered into a co-branded credit card agreement, which provides for the sale of frequent flyer miles to Barclays Bank Delaware (Barclays) which began in 2014. The agreement was a new multiple element arrangement subject to Accounting Standards Update 2009-13, Multiple Deliverable Revenue Arrangements — A consensus of the FASB Emerging Issues Task Force (ASU 2009-13), which was effective for new and materially modified revenue arrangements entered into by us after January 1, 2011. ASU 2009-13 requires the allocation of the overall consideration received to each deliverable using the estimated selling price. The objective of using estimated selling price based methodology is to determine the price at which we would transact a sale if the product or service were sold on a stand-alone basis.
The following four deliverables or elements were identified in the agreement: (i) travel miles; (ii) use of the Hawaiian brand and access to member lists; (iii) advertising elements; and (iv) other airline benefits including checked baggage services and travel discounts. We determined the relative fair value of each element by estimating the selling prices of the deliverables by considering discounted cash flows using multiple inputs and assumptions, including: (1) the expected number of miles to be awarded and redeemed; (2) the estimated weighted average equivalent ticket value, adjusted by a fulfillment discount; (3) the estimated total annual cardholder spend; (4) an estimated royalty rate for the Hawaiian portfolio; and (5) the expected use of each of the airline benefits. The overall consideration received is allocated to the deliverables based on their relative selling prices. The transportation element is deferred and recognized as passenger revenue over the period when the transportation is expected to be provided (23 months). The other elements are generally recognized as other revenue when earned.
Under the programs of certain participating companies, credits are accumulated in accounts maintained by the participating company, then transferred into a member's HawaiianMiles account for immediate redemption of free travel awards. For those transactions, revenue is recognized over the period during which the mileage is projected to be used for travel (four months).
On an annual basis, we review the deferral period and deferral rate for mileage credits sold to participating companies (except for miles sold under our co-branded credit card agreement), as well as the breakage rate assumption for free travel awards earned in connection with the purchase of passenger tickets. The cost components of the incremental cost assumption are reviewed on a quarterly basis.
Pension and Other Postretirement and Postemployment Benefits
The calculation of pension and other postretirement and postemployment benefit expenses and its corresponding liabilities require the use of significant assumptions, including the assumed discount rate, the expected long-term rate of return on plan assets, expected mortality rates of the plan participants, and the expected health care cost trend rate. Changes in these assumptions will impact the expense and liability amounts, and future actual experience may differ from these assumptions. The significant assumptions as of December 31, 2016 are as follows:
Pension: | ||||
Discount rate to determine projected benefit obligation | 4.19 | % | ||
Expected return on plan assets | 6.69 | % | + | |
Postretirement: | ||||
Discount rate to determine projected benefit obligation | 4.29 | % | ||
Expected return on plan assets | N/A | |||
Expected health care cost trend rate: | ||||
Initial | 7.75 | % | ||
Ultimate | 4.75 | % | ||
Years to reach ultimate trend rate | 6 | |||
Disability: | ||||
Discount rate to determine projected benefit obligation | 4.24 | % | ||
Expected return on plan assets | 5.37 | % | + | |
N/A Not Applicable
+ | Expected return on plan assets used to determine the net periodic benefit expense for 2017 is 6.34% for the pension plans and 4.60% for the disability plan. |
The expected long-term rate of return assumption is developed by evaluating input from the trustee managing the plans' assets, including the trustee's review of asset class return expectations by several consultants and economists, as well as long-term
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inflation assumptions. Our expected long-term rate of return on plan assets is based on a target allocation of assets, which is based on our goal of earning the highest rate of return while maintaining risk at acceptable levels. The Retirement Plan for Pilots of Hawaiian Airlines, Inc. and the Pilot's Voluntary Employee Beneficiary Association Disability and Survivor's Benefit Plan strive to have assets sufficiently diversified so that adverse or unexpected results from any one security class will not have an unduly detrimental impact on the entire portfolio. The Merged pension plan strives to have its assets align with the potential liability as of the expected settlement date. We believe that our long-term asset allocation on average will approximate the targeted allocation. We periodically review our actual asset allocation and rebalance the pension plan's investments to our targeted allocation when considered appropriate. Pension expense increases as the expected rate of return on plan assets decreases. Lowering the expected long-term rate of return will have the following effects on our estimated 2017 pension and disability benefit expense:
100 Basis Point Decrease | |||
(in millions) | |||
Increase in estimated 2017 pension expense | $ | 3.1 | |
Increase in estimated 2017 disability benefit expense | 0.2 | ||
We determine the appropriate discount rate for each of our plans based on current rates on high quality corporate bonds that would generate the cash flow necessary to pay plan benefits when due. The pension and other postretirement benefit liabilities and future expense both increase as the discount rate is reduced. Lowering the discount rate would have the following effects:
100 Basis Point Decrease | |||
(in millions) | |||
Increase in pension obligation as of December 31, 2016 | $ | 57.9 | |
Increase in other postretirement benefit obligation as of December 31, 2016 | 44.1 | ||
Increase in estimated 2017 pension expense | 2.9 | ||
Increase in estimated 2017 other postretirement benefit expense | 6.2 | ||
The health care cost trend rate is based upon an evaluation of our historical trends and experience taking into account current and expected market conditions. Changes in the assumed health care cost trend rate would have the following annual effects:
100 Basis Point Increase | |||
(in millions) | |||
Increase in other postretirement benefit obligation as of December 31, 2016 | $ | 39.1 | |
Increase in estimated 2017 other postretirement benefit expense | 7.7 | ||
100 Basis Point Decrease | |||
(in millions) | |||
Decrease in other postretirement benefit obligation as of December 31, 2016 | $ | 30.4 | |
Decrease in estimated 2017 other postretirement benefit expense | 4.3 | ||
Aircraft Maintenance and Repair Costs
On a quarterly basis we complete a forecast of maintenance costs for the next scheduled event on applicable leased aircraft and compare these estimates to our forecasted nonrefundable deposits to identify costs not expected to be recoverable. Any costs not expected to be recoverable are considered to be not substantially and contractually related to maintenance of the leased asset. Therefore, we bifurcate and expense the proportionate share that is estimated to not be recoverable from existing and future nonrefundable deposits. In determining whether it is probable that maintenance deposits will be used to fund the cost of the maintenance events, we conduct the following analysis:
• | We evaluate the aircraft's condition, including the airframe, the engines, the auxiliary power unit and the landing gear. |
• | We then project future usage of the aircraft during the term of the lease based on our business and fleet plan. |
• | We estimate the cost of performing the next scheduled maintenance event. These estimates are based on the experience of our maintenance personnel and available industry data, including historical fleet operating statistic reports published by the aircraft and engine manufacturers. |
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• | We compare the forecasted maintenance deposits to be paid at the time of the next scheduled maintenance event to the estimated cost of the next scheduled maintenance event. Those costs not expected to be recoverable are considered to be not substantially and contractually related to maintenance of the leased asset. |
• | We prospectively account for any changes in estimates. |
Our assessment of the recoverability of our maintenance deposits is subject to change in the event that key estimates and assumptions change over time. Those key estimates and assumptions include our fleet plan and the projected total cost and, to a lesser extent, anticipated timing of the major maintenance activities covered by the maintenance reserves.
Based on historical trends and future projections, including those published by the manufacturers of our aircraft and engines, we believe it is unlikely that future maintenance costs for our aircraft will decline to such an extent that the maintenance deposits currently recorded on our Consolidated Balance Sheets would not be used to fund the cost of future maintenance events and, therefore, not be recoverable.
Impairment of Long-Lived Assets and Finite-lived Intangible Assets
Long-lived assets used in operations, consisting principally of property and equipment and finite-lived intangible assets, are tested for impairment when events or changes in circumstances indicate, in management's judgment, that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their carrying amount. When testing for impairment management considers market trends, the expected useful lives of the assets, changes in economic conditions, recent transactions involving sales of similar assets and, if necessary, estimates of future undiscounted cash flows. 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. Any changes in the estimated useful lives of these assets will be accounted for prospectively.
The impairment analysis and ultimate charge was triggered by the decision in the fourth quarter of 2016 to exit the Boeing 767-300 fleet in 2018. The early exit of the Boeing 767-300 fleet was made possible by our decision to acquire one Airbus A330 (to be delivered in 2017), lease two additional Airbus A321s (to be delivered in 2018 and in addition to our existing aircraft orders), and our ability to early terminate our long-term power by the hour maintenance contract for the Boeing 767-300 fleet. This fleet change allows us to streamline our fleet, simplify our operations, and potentially reduce our cost structure in the future. In order to assess whether there was an impairment of the Boeing 767-300 asset group, we compared the projected undiscounted cash flows of the fleet to the book value of the assets and determined the book value was in excess of the undiscounted cash flows. We estimated the fair value of the Boeing 767-300 fleet assets using third party pricing information and quotes from potential buyers of our owned aircraft, which resulted in a $49.4 million impairment charge. Our determination of fair value considered attributes specific to our Boeing 767-300 fleet and aircraft condition (e.g. age, maintenance requirements, cycles, etc.). The Boeing 767-300 asset group consists of both owned and leased aircraft. We expect to remove three leased Boeing 767-300 aircraft from service in 2018. At that time, these aircraft will have remaining lease payments of approximately $54.3 million. At the time each aircraft is removed from service we will accrue for any remaining lease payments not mitigated through an arrangement with the lessor.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are subject to certain market risks, including commodity price risk (i.e. jet fuel prices) and foreign currency risk. We have market-sensitive instruments in the form of financial derivatives used to offset Hawaiian's exposure to jet fuel price increases, and financial hedge instruments used to hedge Hawaiian's exposure to foreign currency exchange risk. The adverse effects of potential changes in these market risks are discussed below.
The sensitivity analyses presented do not consider 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 17% of our operating expenses for the year ended December 31, 2016. Approximately 70% of our fuel is based on Singapore jet fuel prices and 30% is based on U.S. West Coast jet fuel prices. Based on gallons expected to be consumed in 2017, for every one cent increase in the cost of a gallon of jet fuel, our fuel expense would increase by approximately $2.5 million, excluding the results 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 2016, our fuel hedge portfolio primarily consisted of heating oil swaps and crude oil call options. Swaps provide for a settlement 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.
As of December 31, 2016, we hedged approximately 50% of our projected fuel requirements for 2017 with heating oil swaps and crude oil call options. As of December 31, 2016, the fair value of these fuel derivative agreements reflected a net asset of $15.1 million that is recorded in other accrued liabilities in the Consolidated Balance Sheets.
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, puts and other option-based structures.
We do not hold or issue derivative financial instruments for trading purposes.
Interest Rates
Our results of operations are affected by fluctuations in interest rates due to our interest income earned on our cash deposits. Our variable-rate debt agreements include the Revolving Credit Facility and secured loan agreements, the terms of which are discussed in Note 8 to our consolidated financial statements.
Changes in market interest rates have a direct and corresponding effect on our pre-tax earnings and cash flows associated with our interest-bearing cash accounts. Based on the balances of our cash and cash equivalents, restricted cash, and short-term investments as of December 31, 2016, a change in interest rates is unlikely to have a material impact on our results of operations.
At December 31, 2016, we had $570.6 million of fixed-rate debt including aircraft capital lease obligations, facility agreements for aircraft purchases, and the outstanding equipment notes related to the 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 market rates, and amounted to approximately $9.6 million as of December 31, 2016.
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 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 $27.5 million and $17.1 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 currency exchange rates.
As of December 31, 2016, the fair value of our foreign currency forwards reflected a net asset of $8.9 million that is recorded in prepaid expenses and other, and $2.6 million recorded in long-term prepayments and other reflected in the Consolidated Balance Sheets.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS
Page | |
Hawaiian Holdings, Inc. | |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Hawaiian Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Hawaiian Holdings, Inc. as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income (loss), shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2016. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Hawaiian Holdings, Inc. at December 31, 2016 and 2015, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Hawaiian Holdings, Inc.'s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 16, 2017, expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP | ||
Honolulu, Hawai'i
February 16, 2017
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Hawaiian Holdings, Inc.
Consolidated Statements of Operations
For the Years ended December 31, 2016, 2015 and 2014
2016 | 2015 | 2014 | |||||||||
(in thousands, except per share data) | |||||||||||
Operating Revenue: | |||||||||||
Passenger | $ | 2,145,742 | $ | 2,025,610 | $ | 2,045,052 | |||||
Other | 304,838 | 291,857 | 269,827 | ||||||||
Total | 2,450,580 | 2,317,467 | 2,314,879 | ||||||||
Operating Expenses: | |||||||||||
Wages and benefits | 555,534 | 499,506 | 447,446 | ||||||||
Aircraft fuel, including taxes and delivery | 344,322 | 417,728 | 678,253 | ||||||||
Aircraft rent | 124,565 | 115,653 | 106,422 | ||||||||
Maintenance materials and repairs | 228,970 | 224,648 | 225,619 | ||||||||
Aircraft and passenger servicing | 126,876 | 117,449 | 122,780 | ||||||||
Commissions and other selling | 125,731 | 119,746 | 122,518 | ||||||||
Depreciation and amortization | 108,128 | 105,581 | 96,374 | ||||||||
Other rentals and landing fees | 108,087 | 95,055 | 87,902 | ||||||||
Purchased services | 96,274 | 81,838 | 73,386 | ||||||||
Special items | 109,142 | — | — | ||||||||
Other | 127,489 | 114,160 | 109,047 | ||||||||
Total | 2,055,118 | 1,891,364 | 2,069,747 | ||||||||
Operating Income | 395,462 | 426,103 | 245,132 | ||||||||
Nonoperating Income (Expense): | |||||||||||
Interest expense and amortization of debt discounts and issuance costs | (36,612 | ) | (55,678 | ) | (64,240 | ) | |||||
Interest income | 4,007 | 2,811 | 1,684 | ||||||||
Capitalized interest | 2,651 | 3,261 | 8,024 | ||||||||
Gains (losses) on fuel derivatives | 20,106 | (59,931 | ) | (63,471 | ) | ||||||
Loss on extinguishment of debt | (10,473 | ) | (12,058 | ) | (3,885 | ) | |||||
Other, net | 4,323 | (8,820 | ) | (9,797 | ) | ||||||
Total | (15,998 | ) | (130,415 | ) | (131,685 | ) | |||||
Income Before Income Taxes | 379,464 | 295,688 | 113,447 | ||||||||
Income tax expense | 144,032 | 113,042 | 44,521 | ||||||||
Net Income | $ | 235,432 | $ | 182,646 | $ | 68,926 | |||||
Net Income Per Common Stock Share: | |||||||||||
Basic | $ | 4.40 | $ | 3.38 | $ | 1.29 | |||||
Diluted | $ | 4.36 | $ | 2.98 | $ | 1.10 | |||||
Weighted Average Number of Common Stock Shares Outstanding: | |||||||||||
Basic | 53,502 | 54,031 | 53,591 | ||||||||
Diluted | 53,958 | 61,256 | 62,822 | ||||||||
See accompanying Notes to Consolidated Financial Statements.
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Hawaiian Holdings, Inc.
Consolidated Statements of Comprehensive Income (Loss)
For the Years ended December 31, 2016, 2015 and 2014
Year Ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
(in thousands) | |||||||||||
Net Income | $ | 235,432 | $ | 182,646 | $ | 68,926 | |||||
Other comprehensive income (loss), net: | |||||||||||
Net change related to employee benefit plans, net of tax benefit of $3,588 for 2016, tax expense of $18,826 for 2015, and tax benefit of $50,968 for 2014 | (6,337 | ) | 31,655 | (83,461 | ) | ||||||
Net change in derivative instruments, net of tax expense of $1,290 for 2016, tax benefit of $4,866 for 2015, and tax expense of $2,188 for 2014 | 2,111 | (8,002 | ) | 3,589 | |||||||
Net change in available-for-sale investments, net of tax expense of $6 for 2016, and tax benefit of $72 and $154 for 2015 and 2014 | 10 | (118 | ) | (254 | ) | ||||||
Total other comprehensive income (loss) | (4,216 | ) | 23,535 | (80,126 | ) | ||||||
Total Comprehensive Income (Loss) | $ | 231,216 | $ | 206,181 | $ | (11,200 | ) | ||||
See accompanying Notes to Consolidated Financial Statements.
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Hawaiian Holdings, Inc.
Consolidated Balance Sheets
December 31, 2016 and 2015
2016 | 2015 | ||||||
(in thousands, except share data) | |||||||
ASSETS | |||||||
Current Assets: | |||||||
Cash and cash equivalents | $ | 325,991 | $ | 281,502 | |||
Restricted cash | 5,000 | 5,000 | |||||
Short-term investments | 284,075 | 278,545 | |||||
Accounts receivable, net | 96,067 | 81,723 | |||||
Spare parts and supplies, net | 20,363 | 19,164 | |||||
Prepaid expenses and other | 66,740 | 75,050 | |||||
Total | 798,236 | 740,984 | |||||
Property and equipment, net | |||||||
Flight equipment | 1,658,698 | 1,737,435 | |||||
Pre-delivery deposits on flight equipment | 117,762 | 21,467 | |||||
Other property and equipment | 332,338 | 226,350 | |||||
2,108,798 | 1,985,252 | ||||||
Less accumulated depreciation and amortization | (454,231 | ) | (432,510 | ) | |||
Total | 1,654,567 | 1,552,742 | |||||
Other Assets: | |||||||
Long-term prepayments and other | 132,724 | 70,873 | |||||
Intangible assets, net | 16,411 | 18,660 | |||||
Goodwill | 106,663 | 106,663 | |||||
Total Assets | $ | 2,708,601 | $ | 2,489,922 | |||
LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||
Current Liabilities: | |||||||
Accounts payable | $ | 116,507 | |||||