Edgar Filing: HAWAIIAN HOLDINGS INC

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2013

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

For the transition period from to

Commission file number 1-31443

HAWAIIAN HOLDINGS, INC.

(Exact Name of Registrant as Specified in Its Charter)

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

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

(808) 835-3700

(Registrant’s Telephone Number, Including Area Code)

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

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

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

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

Large accelerated filer o		Accelerated filer x

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

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

As of July 19, 2013, 52,134,740 shares of the registrant’s common stock were outstanding.

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Hawaiian Holdings, Inc.

Form 10-Q

Quarterly Period ended June 30, 2013

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Part I.	Financial Information	3

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

	Consolidated Statements of Operations for the three and six months ended June 30, 2013 and 2012	3

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

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

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

	Notes to Consolidated Financial Statements	7

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

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	37

Item 4.	Controls and Procedures	39

Part II.	Other Information	40

Item 1.	Legal Proceedings	40

Item 1A.	Risk Factors	40

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

Item 3.	Defaults Upon Senior Securities	40

Item 5.	Other Information	41

Item 6.	Exhibits	41

	Signatures	43

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

Hawaiian Holdings, Inc.

Consolidated Statements of Operations

(in thousands, except per share data)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2013			2012			2013			2012
	(unaudited)
Operating Revenue:
Passenger	$	481,461		$	438,137		$	921,400		$	829,063
Other	52,467			46,414			103,282			90,982
Total	533,928			484,551			1,024,682			920,045

Operating Expenses:
Aircraft fuel, including taxes and delivery	169,223			150,465			343,712			290,783
Wages and benefits	103,384			96,699			206,119			186,823
Aircraft rent	28,285			24,864			54,304			48,086
Maintenance materials and repairs	53,036			49,409			108,295			93,121
Aircraft and passenger servicing	29,228			24,654			58,287			46,000
Commissions and other selling	32,186			28,611			65,997			58,027
Depreciation and amortization	19,788			21,553			38,901			40,704
Other rentals and landing fees	19,630			21,218			38,777			40,966
Other	41,777			37,750			84,825			73,307
Total	496,537			455,223			999,217			877,817

Operating Income	37,391			29,328			25,465			42,228

Nonoperating Income (Expense):
Interest expense and amortization of debt discounts and issuance costs	(12,163		)	(10,722		)	(23,540		)	(19,770		)
Interest income	126			167			253			381
Capitalized interest	2,891			2,176			6,331			4,749
Losses on fuel derivatives	(6,906		)	(14,823		)	(13,467		)	(9,003		)
Other, net	(3,124		)	183			(4,206		)	(417		)
Total	(19,176		)	(23,019		)	(34,629		)	(24,060		)

Income (Loss) Before Income Taxes	18,215			6,309			(9,164		)	18,168

Income tax expense (benefit)	6,899			2,405			(3,335		)	7,006

Net Income (Loss)	$	11,316		$	3,904		$	(5,829	)	$	11,162

Net Income (Loss) Per Common Stock Share:
Basic	$	0.22		$	0.08		$	(0.11	)	$	0.22
Diluted	$	0.21		$	0.07		$	(0.11	)	$	0.21

See accompanying Notes to Consolidated Financial Statements.

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Hawaiian Holdings, Inc.

Consolidated Statements of Comprehensive Income

(in thousands)

	Three Months Ended June 30,
	2013		2012
	(unaudited)
Net Income	$	11,316	$	3,904

Other comprehensive income, net:
Net change related to employee benefit plans, net of tax of $1,323 and $548 for 2013 and 2012, respectively	871		1,189
Net change in derivative instruments, net of tax of $3,935 for 2013	6,456		—
Total other comprehensive income, net	7,327		1,189
Total Comprehensive Income, net	$	18,643	$	5,093

	Six Months Ended June 30,
	2013			2012
	(unaudited)
Net Income (Loss)	$	(5,829	)	$	11,162

Other comprehensive income, net:
Net change related to employee benefit plans, net of tax of $2,135 and $1,217 for 2013 and 2012, respectively	1,966			2,257
Net change in derivative instruments, net of tax of $4,552 for 2013	7,456			—
Total other comprehensive income, net	9,422			2,257
Total Comprehensive Income, net	$	3,593		$	13,419

See accompanying Notes to Consolidated Financial Statements.

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Hawaiian Holdings, Inc.

Consolidated Balance Sheets

(in thousands, except shares)

	June 30,			December 31,
	2013			2012
	(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	477,588		$	405,880
Restricted cash	5,621			5,000
Total cash, cash equivalents and restricted cash	483,209			410,880
Accounts receivable, net of allowance for doubtful accounts of $169 and $371 as of June 30, 2013 and December 31, 2012, respectively	97,577			80,750
Spare parts and supplies, net	18,520			27,552
Deferred tax assets, net	20,277			17,675
Prepaid expenses and other	46,108			35,001
Total	665,691			571,858

Property and equipment, less accumulated depreciation and amortization of $287,229 and $249,495 as of June 30, 2013 and December 31, 2012, respectively	1,206,353			1,068,718

Other Assets:
Long-term prepayments and other	86,007			55,629
Restricted cash	15,379			—
Deferred tax assets, net	30,038			36,376
Intangible assets, net of accumulated amortization of $174,410 and $173,090 as of June 30, 2013 and December 31, 2012, respectively	25,260			26,580
Goodwill	106,663			106,663
Total Assets	$	2,135,391		$	1,865,824

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	85,245		$	82,084
Air traffic liability	522,469			388,646
Other accrued liabilities	87,455			74,828
Current maturities of long-term debt and capital lease obligations	113,303			108,232
Total	808,472			653,790

Long-Term Debt, less discount, and Capital Lease Obligations	653,631			553,009

Other Liabilities and Deferred Credits:
Accumulated pension and other postretirement benefit obligations	356,185			352,460
Other liabilities and deferred credits	42,400			37,963
Total	398,585			390,423

Commitments and Contingencies

Shareholders’ Equity:
Special preferred stock, $0.01 par value per share, three shares issued and outstanding as of June 30, 2013 and December 31, 2012	—			—
Common stock, $0.01 par value per share, 52,134,740 and 51,439,934 shares issued and outstanding as of June 30, 2013 and December 31, 2012, respectively	521			514
Capital in excess of par value	267,355			264,854
Accumulated income	111,459			117,288
Accumulated other comprehensive loss, net	(104,632		)	(114,054		)
Total	274,703			268,602
Total Liabilities and Shareholders’ Equity	$	2,135,391		$	1,865,824

See accompanying Notes to Consolidated Financial Statements.

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Hawaiian Holdings, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

	Six Months Ended
	June 30,
	2013			2012
	(unaudited)
Net cash provided by Operating Activities	$	168,123		$	209,744

Cash flows from Investing Activities:
Additions to property and equipment, including pre-delivery payments, net	(174,987		)	(177,150		)
Net cash used in investing activities	(174,987		)	(177,150		)

Cash flows from Financing Activities:
Proceeds from exercise of stock options	1,442			982
Long-term borrowings	132,000			133,000
Repayments of long-term debt and capital lease obligations	(28,174		)	(21,731		)
Debt issuance costs	(10,696		)	(2,403		)
Change in restricted cash	(16,000		)	—
Net cash provided by financing activities	78,572			109,848

Net increase in cash and cash equivalents	71,708			142,442

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

Cash and cash equivalents - End of Period	$	477,588		$	446,557

See accompanying Notes to Consolidated Financial Statements.

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Hawaiian Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

1. Summary of Significant Accounting Policies

Business and Basis of Presentation

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

Recently Issued Accounting Pronouncements

In July 2013, the Financial Accounting Standards Board issued Accounting Standards Update 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (ASU 2013-11). Current GAAP does not include explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The adoption of ASU 2013-11 will require an unrecognized tax benefit, or a portion of an unrecognized tax benefit to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, unless an exception applies. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2013. The Company is currently evaluating the effect that the provisions of ASU 2013-11 will have on its financial statements.

2. Accumulated Other Comprehensive Loss

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

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	Amounts reclassified from accumulated						Affected line items
	other comprehensive loss for the						in the statement where
Details about accumulated other comprehensive	Three Months ended			Six Months ended			net income (loss)
loss components	June 30, 2013			June 30, 2013			is presented
	(in thousands)
Derivatives designated as hedging instruments under ASC 815

Foreign currency derivative gains, net	$	(3,123	)	$	(3,390	)	Passenger revenue
Interest rate derivative losses, net	223			223			Interest expense
Total before tax	(2,900		)	(3,167		)
Tax expense	1,095			1,201
Total net of tax	$	(1,805	)	$	(1,966	)
Amortization of defined benefit pension items
Actuarial loss	$	2,051		$	4,103		Wages and benefits
Prior service credit	(1		)	(2		)	Wages and benefits
Total before tax	2,050			4,101
Tax benefit	(1,323		)	(2,135		)
Total net of tax	$	727		$	1,966

Total reclassifications for the period	$	(1,078	)	$	—

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

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

Beginning balance	$	(888	)	$	1,888		$	(112,959	)	$	(111,959	)
Other comprehensive income before reclassifications, net of tax	1,517			6,744			144			8,405

Amounts reclassified from accumulated other comprehensive income (loss), net of tax	137			(1,942		)	727			(1,078		)
Net current-period other comprehensive income	1,654			4,802			871			7,327
Ending balance	$	766		$	6,690		$	(112,088	)	$	(104,632	)

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

Beginning balance	$	—	$	—		$	(114,054	)	$	(114,054	)
Other comprehensive income before reclassifications, net of tax	629		8,793			—			9,422

Amounts reclassified from accumulated other comprehensive income (loss), net of tax	137		(2,103		)	1,966			—
Net current-period other comprehensive income	766		6,690			1,966			9,422
Ending balance	$	766	$	6,690		$	(112,088	)	$	(104,632	)

3. Earnings (Loss) Per Share

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

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

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

Net Income (Loss)	$	11,316	$	3,904	$	(5,829	)	$	11,162

Denominator:

Weighted average common stock shares outstanding - Basic	52,008		51,283		51,837			51,145
Assumed exercise of equity awards	1,063		1,174		—			1,235
Weighted average common stock shares outstanding - Diluted	53,071		52,457		51,837			52,380

Net Income (Loss) per common share:
Basic	$	0.22	$	0.08	$	(0.11	)	$	0.22
Diluted	$	0.21	$	0.07	$	(0.11	)	$	0.21

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

	Three Months ended June 30,		Six Months ended June 30,
	2013	2012	2013	2012
	(in thousands)
Stock options	81	93	784	93
Deferred stock	—	—	87	—
Restricted stock	1,371	609	1,726	692
Convertible notes (1)	10,943	10,943	10,943	10,943
Warrants	10,943	10,943	10,943	10,943

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

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4. Fair Value Measurements

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

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

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

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

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

	Fair Value Measurements as of June 30, 2013
	Total		Level 1		Level 2		Level 3
	(in thousands)
Cash equivalents	$	328,848	$	328,848	$	—	$	—
Fuel derivative contracts	6,476		—		6,476		—
Foreign currency derivatives	10,763		—		10,763		—
Interest rate derivative	539		—		539		—
Restricted cash	21,000		21,000		—		—
Total assets measured at fair value	$	367,626	$	349,848	$	17,778	$	—

Fuel derivative contracts	$	1,797	$	—	$	1,797	$	—
Foreign currency derivatives	1,257		—		1,257		—
Negative arbitrage derivative	12,865		—		—		12,865
Total liabilities measured at fair value	$	15,919	$	—	$	3,054	$	12,865

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

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

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

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

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

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

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

	Negative
	Arbitrage
Three Months ended June 30, 2013	Derivative
	(in thousands)
Beginning balance	$	—
Issuance of enhanced equipment trust certificates	12,865
Ending balance	$	12,865

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

Fair Value of Debt
June 30, 2013										December 31, 2012
Carrying		Fair Value								Carrying		Fair Value
Amount		Total		Level 1		Level 2		Level 3		Amount		Total		Level 1		Level 2		Level 3
		(in thousands)										(in thousands)
$	664,039	$	652,993	$	—	$	81,640	$	571,353	$	554,568	$	547,943	$	—	$	81,091	$	466,852

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

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

5. Financial Derivative Instruments

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

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

Fuel Risk Management

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

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

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	Three months ended June 30,						Six months ended June 30,
Fuel derivative contracts	2013			2012			2013			2012
	(in thousands)
Losses on fuel derivatives recorded in nonoperating income (expense):
Realized gain (losses):
Losses realized at settlement	$	(4,740	)	$	(1,874	)	$	(7,436	)	$	(2,729	)
Reversal of prior period unrealized amounts	3,379			(1,235		)	4,422			2,250
Unrealized losses on contracts that will settle in future periods	(5,545		)	(11,714		)	(10,453		)	(8,524		)
Losses on fuel derivatives recorded as Nonoperating income (expense)	$	(6,906	)	$	(14,823	)	$	(13,467	)	$	(9,003	)

Interest Rate Risk Management

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

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

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

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

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

Foreign Currency Exchange Rate Risk Management

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

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

The Company believes that its foreign currency forward contracts will continue to be effective in offsetting changes in cash flow attributable to the hedged risk. The Company reclassified gains from AOCI to passenger revenue of $3.1 million in the quarter ended June 30, 2013. The Company expects to reclassify a net gain of approximately $10.7 million into earnings over the next 12 months from AOCI based on the values at June 30, 2013.

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Negative Arbitrage Derivative

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

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

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

The following tables present the gross fair value of asset and liability derivatives that are designated as hedging instruments under ASC 815 and derivatives that are not designated as hedging instruments under ASC 815, as well as the location of the asset and liability balances within the unaudited Consolidated Balance Sheets. The tables also present the gross and net derivative position recorded in the unaudited Consolidated Balance Sheets.

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Derivative position as of June 30, 2013

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

Derivatives designated as hedges
Interest rate derivative	Prepaid expenses and other	$67,000 U.S. dollars	April 2023	$	94	$	—		$	94
	Long-term prepayments and other (1)			445		—			445
Foreign currency derivatives	Prepaid expenses and other	14,637,688 Japanese Yen 11,470,732 Korean Won 48,743 Australian Dollars 13,011 New Zealand Dollars	June 2014	10,553		(941		)	9,612
	Other liabilities and deferred credits (2)	2,367,465 Japanese Yen 1,831 Australian Dollars	November 2014 July 2014	194		(316		)	(122		)

Derivatives not designated as hedges
Fuel derivative contracts	Prepaid expenses and other	113,106 gallons	June 2014	4,412		(1,141		)	3,271
	Long-term prepayments and other (3)	20,916 gallons	December 2014	2,064		(656		)	1,408
Negative arbitrage derivative	Other accrued liabilities	$444,540 U.S. dollars	October 2014	—		(12,250		)	(12,250		)
	Other liabilities and deferred credits (4)			—		(615		)	(615		)

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

(2) Represents the noncurrent portion of the foreign currency derivatives with final maturities in July and November 2014.

(3) Represents the noncurrent portion of the fuel derivatives with final maturity in December 2014.

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

Derivative position as of December 31, 2012

Balance Sheet
Location

Notional Amount

Final
Maturity
Date

Gross fair
value of
assets

Gross fair
value of
(liabilities)

Net
derivative position

(in thousands)

Derivatives not designated as hedges

Fuel derivative contracts

Prepaid expenses and other

126,924 gallons

June 2014

13,094

(397

)

12,697

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

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

Foreign currency derivatives	$	(11,111	)	$	—	$	(3,123	)	$	—	$	(61	)	$	—
Interest rate derivatives	(2,446		)	—		223			—		—			—

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

Foreign currency derivatives	$	(14,164	)	$	—	$	(3,390	)	$	—	$	(61	)	$	—
Interest rate derivatives	(1,011		)	—		223			—		—			—

Risk and Collateral

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

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

6. Debt

In 2013, the Company borrowed $132.0 million through two separate secured loan agreements to finance a portion of the purchase price of two Airbus A330-200 aircraft that Hawaiian took delivery of in the second quarter of 2013. These loan agreements have a term of 10 years with quarterly principal and interest payments. One of the loan agreements, with a principal borrowing of $67.0 million, bears interest under a variable-rate (3.88% at June 30, 2013) with a $7 million balloon payment due at maturity. The second loan agreement, with a principal borrowing of $65.0 million, bears interest under a fixed-rate (5.74% at June 30, 2013) with a $10 million balloon payment due at maturity.

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

Remaining months in 2013	$	81,350
2014	48,236
2015	50,410
2016	137,153
2017	53,317
Thereafter	305,278
	$	675,744

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7. Leases

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

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

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

	Capital Leases				Operating Leases
	Aircraft		Other		Aircraft		Other
	(in thousands)
Remaining months in 2013	$	6,901	$	51	$	49,722	$	2,658
2014	13,803		102		96,673		5,059
2015	13,803		102		96,067		5,080
2016	13,803		102		79,357		5,140
2017	13,803		24		78,835		4,684
Thereafter	73,347		—		313,667		23,321
	135,460		381		$	714,321	$	45,942
Less amounts representing interest	32,893		52
Present value of minimum capital lease payments	$	102,567	$	329

8. Employee Benefit Plans

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

Components of Net Periodic	Three months ended June 30,						Six months ended June 30,
Benefit Cost	2013			2012			2013			2012
	(in thousands)
Service cost	$	3,601		$	3,326		$	7,203		$	6,650
Interest cost	6,299			6,857			12,599			13,712
Expected return on plan assets	(4,065		)	(4,013		)	(8,131		)	(8,026		)
Recognized net actuarial loss	2,050			1,738			4,100			3,475
Net periodic benefit cost	$	7,885		$	7,908		$	15,771		$	15,811

The Company made contributions of $4.0 million and $6.7 million to its defined benefit and other postretirement plans during the three and six months ended June 30, 2013, respectively, and expects to make additional minimum required contributions of $8.0 million during the remainder of 2013.

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9. Commitments and Contingent Liabilities

Commitments

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

Aircraft Type	Firm Orders	Purchase Rights	Expected Delivery Dates

A330-200 aircraft	9	3	Between 2013 and 2015
A350XWB-800 aircraft	6	6	Between 2017 and 2020
A321neo aircraft	16	9	Between 2017 and 2020
ATR42 aircraft	1	—	In 2013
Rolls-Royce spare engines:
A330-200 spare engines	2	—	In 2014
A350XWB-800 spare engines	2	—	Between 2017 and 2020
Pratt & Whitney spare engines:
A321neo spare engines	2	—	Between 2017 and 2018

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

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

							Less: Committed
					Total Commited		Financing for Upcoming		Net Committed
	Capital		Operating		Expenditures		Aircraft Deliveries*		Expenditures
	(in thousands)
Remaining months in 2013	$	125,599	$	24,958	$	150,557	$	76,110	$	74,447
2014	421,441		47,574		469,015		368,430		100,585
2015	245,589		47,342		292,931		—		292,931
2016	147,824		36,270		184,094		—		184,094
2017	493,824		35,581		529,405		—		529,405
Thereafter	1,105,696		233,263		1,338,959		—		1,338,959

	$	2,539,973	$	424,988	$	2,964,961	$	444,540	$	2,520,421

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

Enhanced Equipment Trust Certificates (EETC)

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

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

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Litigation and Contingencies

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

General Guarantees and Indemnifications

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

Credit Card Holdback

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

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

10. Condensed Consolidating Financial Information

The following condensed consolidating financial information is presented in accordance with Regulation S-X paragraph 210.3-10 because, in connection with the issuance by two pass-through trusts formed by Hawaiian (which is also referred to in this Note 10 as Subsidiary Issuer / Guarantor) of pass-through certificates pursuant to a registration statement on Form S-3 that was declared effective on April 18, 2013, the Company (which is also referred to in this Note 10 as Parent Issuer / Guarantor), will fully and unconditionally guarantee the payment obligations of Hawaiian under equipment notes to be issued by Hawaiian in the future to purchase new aircraft. The equipment notes will be purchased with the proceeds of the issuance of the pass-through certificates. See Note 9.

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

Condensed consolidating financial statements are presented in the following tables:

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Condensed Consolidating Balance Sheets

June 30, 2013

	Parent Issuer / Guarantor		Subsidiary Issuer / Guarantor			Non-Guarantor Subsidiaries		Eliminations			Consolidated
	(in thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	85,200	$	375,383		$	17,005	$	—		$	477,588
Restricted cash	—		5,621			—		—			5,621
Accounts receivable, net	1,999		95,692			19		(133		)	97,577
Spare parts and supplies, net	—		18,520			—		—			18,520
Deferred tax assets, net	705		19,572			—		—			20,277
Prepaid expenses and other	8		46,084			16		—			46,108
Total	87,912		560,872			17,040		(133		)	665,691

Property and equipment at cost	—		1,474,352			19,230		—			1,493,582
Less accumulated depreciation and amortization	—		(287,229		)	—		—			(287,229		)
Property and equipment, net	—		1,187,123			19,230		—			1,206,353

Long-term prepayments and other	1,433		84,574			—		—			86,007
Restricted cash	—		15,379			—		—			15,379
Deferred tax assets, net	11,675		18,363			—		—			30,038
Goodwill and other intangible assets, net	—		131,923			—		—			131,923
Intercompany receivable	27,714		—			—		(27,714		)	—
Investment in consolidated subsidiaries	222,577		—			—		(222,577		)	—

TOTAL ASSETS	$	351,311	$	1,998,234		$	36,270	$	(250,424	)	$	2,135,391

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	775	$	84,488		$	115	$	(133	)	$	85,245
Air traffic liability	—		521,265			1,204		—			522,469
Other accrued liabilities	1,289		86,166			—		—			87,455
Current maturities of long-term debt and capital lease obligations	—		113,303			—		—			113,303
Total	2,064		805,222			1,319		(133		)	808,472

Long-term debt, less discount, and capital lease obligations	74,544		579,087			—		—			653,631
Intercompany payable	—		27,714			—		(27,714		)	—
Other liabilities and deferred credits:
Accumulated pension and other postretirement benefit obligations	—		356,185			—		—			356,185
Other liabilities and deferred credits	—		42,400			—		—			42,400
Total	—		398,585			—		—			398,585

Shareholders’ Equity	274,703		187,626			34,951		(222,577		)	274,703

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	351,311	$	1,998,234		$	36,270	$	(250,424	)	$	2,135,391

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Condensed Consolidating Balance Sheets

December 31, 2012

	Parent Issuer / Guarantor		Subsidiary Issuer / Guarantor		Non-Guarantor Subsidiaries		Eliminations			Consolidated
	(in thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	83,626	$	303,967	$	18,287	$	—		$	405,880
Restricted cash	—		5,000		—		—			5,000
Accounts receivable, net	2,032		78,949		13		(244		)	80,750
Spare parts and supplies, net	—		27,552		—		—			27,552
Deferred tax assets, net	704		16,971		—		—			17,675