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 March 31, 2014

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 April 18, 2014, 53,203,436 shares of the registrant’s common stock were outstanding.

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Hawaiian Holdings, Inc.

Form 10-Q

Quarterly Period ended March 31, 2014

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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 months ended March 31, 2014 and 2013	3

	Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2014 and 2013	4

	Consolidated Balance Sheets as of March 31, 2014 and December 31, 2013	5

	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and 2013	6

	Notes to Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	37

Item 4.	Controls and Procedures	38

Part II.	Other Information	39

Item 1.	Legal Proceedings	39

Item 1A.	Risk Factors	39

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39

Item 3.	Defaults Upon Senior Securities	39

Item 5.	Other Information	39

Item 6.	Exhibits	40

	Signatures	41

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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
	March 31,
	2014			2013
	(unaudited)
Operating Revenue:
Passenger	$	468,013		$	439,939
Other	56,845			50,815
Total	524,858			490,754

Operating Expenses:
Aircraft fuel, including taxes and delivery	171,139			174,489
Wages and benefits	107,494			102,735
Aircraft rent	26,279			26,019
Maintenance materials and repairs	58,310			55,259
Aircraft and passenger servicing	30,221			29,059
Commissions and other selling	31,335			33,811
Depreciation and amortization	22,811			19,113
Other rentals and landing fees	20,562			19,147
Other	46,670			43,048
Total	514,821			502,680

Operating Income (Loss)	10,037			(11,926		)

Nonoperating Income (Expense):
Interest expense and amortization of debt discounts and issuance costs	(15,010		)	(11,377		)
Interest income	219			127
Capitalized interest	2,776			3,440
Losses on fuel derivatives	(6,899		)	(6,561		)
Other, net	585			(1,082		)
Total	(18,329		)	(15,453		)

Loss Before Income Taxes	(8,292		)	(27,379		)

Income tax benefit	(3,217		)	(10,234		)

Net Loss	$	(5,075	)	$	(17,145	)

Net Loss Per Common Stock Share:
Basic	$	(0.10	)	$	(0.33	)
Diluted	$	(0.10	)	$	(0.33	)

See accompanying Notes to Consolidated Financial Statements.

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Hawaiian Holdings, Inc.
Consolidated Statements of Comprehensive Loss

(in thousands)

	Three Months Ended March 31,
	2014			2013
	(unaudited)
Net Loss	$	(5,075	)	$	(17,145	)

Other comprehensive income (loss), net:
Net change related to employee benefit plans, net of tax expense of $125 and $955 for 2014 and 2013, respectively	205			1,095
Net change in derivative instruments, net of tax benefit of $3,303 for 2014 and tax expense of $618 for 2013	(5,435		)	1,000
Net change in available-for-sale investments	(21		)	—
Total other comprehensive income (loss), net	(5,251		)	2,095
Total Comprehensive Loss, net	$	(10,326	)	$	(15,050	)

See accompanying Notes to Consolidated Financial Statements.

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Hawaiian Holdings, Inc.
Consolidated Balance Sheets
(in thousands, except shares)

	March 31,			December 31,
	2014			2013
	(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	334,991		$	423,384
Restricted cash	20,379			19,434
Short-term investments	143,702			—
Accounts receivable, net	97,715			74,245
Spare parts and supplies, net	17,400			19,767
Deferred tax assets, net	17,325			17,325
Prepaid expenses and other	32,551			51,652
Total	664,063			605,807

Property and equipment, less accumulated depreciation and amortization of $326,013 and $327,102 as of March 31, 2014 and December 31, 2013, respectively	1,484,453			1,334,332

Other Assets:
Long-term prepayments and other	94,117			91,953
Restricted cash	—			1,566
Intangible assets, less accumulated amortization of $32,454 and $175,730 as of March 31, 2014 and December 31, 2013, respectively	23,280			23,940
Goodwill	106,663			106,663
Total Assets	$	2,372,576		$	2,164,261

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	91,687		$	89,787
Air traffic liability	504,731			409,086
Other accrued liabilities	88,331			97,571
Current maturities of long-term debt, less discount, and capital lease obligations	153,346			62,187
Total	838,095			658,631

Long-Term Debt and Capital Lease Obligations	786,501			744,286

Other Liabilities and Deferred Credits:
Accumulated pension and other postretirement benefit obligations	265,815			264,106
Other liabilities and deferred credits	57,045			59,424
Deferred tax liability, net	36,088			40,950
Total	358,948			364,480

Commitments and Contingencies

Shareholders’ Equity:
Special preferred stock, $0.01 par value per share, three shares issued and outstanding as of March 31, 2014 and December 31, 2013	—			—
Common stock, $0.01 par value per share, 53,203,436 and 52,423,085 shares issued and outstanding as of March 31, 2014 and December 31, 2013, respectively	532			524
Capital in excess of par value	272,370			269,884
Accumulated income	164,067			169,142
Accumulated other comprehensive loss, net	(47,937		)	(42,686		)
Total	389,032			396,864
Total Liabilities and Shareholders’ Equity	$	2,372,576		$	2,164,261

See accompanying Notes to Consolidated Financial Statements.

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Hawaiian Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)

	Three Months Ended
	March 31,
	2014			2013
	(unaudited)
Net cash provided by Operating Activities	$	89,455		$	72,541

Cash flows from Investing Activities:
Additions to property and equipment, including pre-delivery payments, net	(170,240		)	(25,800		)
Net proceeds from disposition of equipment	350			—
Purchases of investments	(147,978		)	—
Sales of investments	4,561			—
Net cash used in investing activities	(313,307		)	(25,800		)

Cash flows from Financing Activities:
Proceeds from exercise of stock options	2,449			1,411
Long-term borrowings	147,750			—
Repayments of long-term debt and capital lease obligations	(15,361		)	(13,993		)
Debt issuance costs	—			(1,818		)
Change in restricted cash	621			—
Net cash provided by (used in) financing activities	135,459			(14,400		)

Net increase (decrease) in cash and cash equivalents	(88,393		)	32,341

Cash and cash equivalents - Beginning of Period	423,384			405,880

Cash and cash equivalents - End of Period	$	334,991		$	438,221

See accompanying Notes to Consolidated Financial Statements.

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Hawaiian Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

1. 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 included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

2. Significant Accounting Policies

In October 2013, Hawaiian entered into a co-branded credit card agreement, which provides for the sale of frequent flyer miles to Barclays Bank Delaware (Barclays) beginning in 2014. The agreement is 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 is effective for new and materially modified revenue arrangements entered into by the Company 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 the Company 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. The Company 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 each deliverable based on their relative selling prices. The transportation element will be deferred and recognized as passenger revenue over the period when the transportation is expected to be provided (22 months). The other elements will generally be recognized as other revenue when earned.

In the previous co-branded credit card agreement, the estimated fair value of the transportation element was deferred and recognized as passenger revenue over a period of 22 months. Amounts received in excess of the transportation’s estimated fair value were recognized immediately as other revenue.

The impact of applying the new accounting method for the three months ended March 31, 2014 was immaterial to the Company’s unaudited consolidated financial statements.

3. Short-term investments

Debt securities that are not classified as cash equivalents are classified as available-for-sale investments and are stated at fair value. Realized gains and losses on sales of investments are reflected in nonoperating income (expense) in the unaudited consolidated statements of operations. Unrealized gains and losses on available-for-sale securities are reflected as a component of accumulated other comprehensive loss.

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The following is a summary of short-term investments held at March 31, 2014:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)
U.S. government and agency debt	$	22,461	$	2	$	—		$	22,463
Corporate debt	93,799		101		(49		)	93,851
Other fixed income securities	27,386		6		(4		)	27,388
Total short-term investments	$	143,646	$	109	$	(53	)	$	143,702

Contractual maturities of short-term investments at March 31, 2014 are shown below.

	Under 1 Year		1 to 5 Years		Total
	(in thousands)
U.S. government and agency debt	$	14,998	$	7,465	$	22,463
Corporate debt	29,387		64,464		93,851
Other fixed income securities	26,623		765		27,388
Total short-term investments	$	71,008	$	72,694	$	143,702

The Company classifies investments as current assets as these securities are available for use in its current operations.

4. Accumulated Other Comprehensive Loss

Reclassifications out of accumulated other comprehensive loss by component is as follows:

							Affected line items
							in the statement where
Details about accumulated other comprehensive	Three months ended March 31,						net loss
loss components	2014			2013			is presented
	(in thousands)
Derivatives designated as hedging instruments under ASC 815
Foreign currency derivative gains, net	$	(3,618	)	$	(267	)	Passenger revenue
Interest rate derivative losses, net	211			—			Interest expense
Total before tax	(3,407		)	(267		)
Tax expense	1,285			106
Total, net of tax	$	(2,122	)	$	(161	)
Amortization of defined benefit pension items
Actuarial loss	$	226		$	2,051		Wages and benefits
Prior service credit	(1		)	(1		)	Wages and benefits
Total before tax	225			2,050
Tax benefit	(125		)	(811		)
Total, net of tax	$	100		$	1,239
Short-term investments
Realized gain on sales of investments, net	$	(2	)	$	—		Other nonoperating income
Total before tax	(2		)	—
Tax expense	—			—
Total, net of tax	$	(2	)	$	—
Total reclassifications for the period	$	(2,024	)	$	1,078

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A rollforward of the amounts included in accumulated other comprehensive loss, net of taxes, is as follows:

							Defined
	Interest			Foreign			Benefit
	Rate			Currency			Pension			Short-Term
Three Months ended March 31, 2014	Derivatives			Derivatives			Items			Investments			Total
	(in thousands)
Beginning balance	$	1,096		$	8,277		$	(52,059	)	$	—		$	(42,686	)
Other comprehensive income (loss) before reclassifications, net of tax	(360		)	(2,953		)	105			(19		)	(3,227		)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax	129			(2,251		)	100			(2		)	(2,024		)
Net current-period other comprehensive income (loss)	(231		)	(5,204		)	205			(21		)	(5,251		)
Ending balance	$	865		$	3,073		$	(51,854	)	$	(21	)	$	(47,937	)


							Defined
	Interest			Foreign			Benefit
	Rate			Currency			Pension
Three Months ended March 31, 2013	Derivatives			Derivatives			Items			Total
	(in thousands)
Beginning balance	$	—		$	—		$	(114,054	)	$	(114,054	)
Other comprehensive income (loss) before reclassifications, net of tax	(888		)	2,049			(144		)	1,017
Amounts reclassified from accumulated other comprehensive income (loss), net of tax	—			(161		)	1,239			1,078
Net current-period other comprehensive income (loss)	(888		)	1,888			1,095			2,095
Ending balance	$	(888	)	$	1,888		$	(112,959	)	$	(111,959	)

5. Loss Per Share

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

Diluted 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 March 31,
	2014			2013
	(in thousands, except for per share data)
Numerator:

Net Loss	$	(5,075	)	$	(17,145	)

Denominator:

Weighted average common stock shares outstanding - Basic	52,686			51,665
Weighted average common stock shares outstanding - Diluted	52,686			51,665

Net Loss per common share:
Basic	$	(0.10	)	$	(0.33	)
Diluted	$	(0.10	)	$	(0.33	)

The table below summarizes those common stock equivalents that could potentially dilute basic earnings per share in the future but were excluded from the computation of diluted loss per share because the instruments were antidilutive.

	Three Months ended March 31,
	2014	2013
	(in thousands)
Stock options	805	825
Deferred stock	79	112
Restricted stock	1,482	1,740
Convertible note premium	10,943	10,943
Warrants	10,943	10,943

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In March 2011, the Company entered into a Convertible Note transaction which included the sale of convertible notes, purchase of call options and sale of warrants. The Company’s 5% Convertible Notes due in 2016 with a current principal amount of $86.25 million can be redeemed with either cash or the Company’s common stock, or a combination thereof, at the Company’s option. The 10.9 million shares into which the Convertible Notes could be converted will not impact the dilutive earnings per share calculation in the current and future periods under the if-converted method, as the Company has the intent and ability to redeem the principal amount of these notes with cash. Although the average share price of the Company’s common stock during the quarter ended March 31, 2014 exceeded the conversion price of $7.88 per share, shares related to the conversion premium of the Convertible Note (for which share settlement is assumed for EPS purposes) are not included in the Company’s computation of diluted earnings per share as the Company is in a net loss position for the period and the effect would be antidilutive. However, the shares required to settle the conversion premium of the Convertible Note could be dilutive in future periods.

In connection with the issuance of the Convertible Notes, the Company entered into separate call option transactions and separate warrant transactions with certain financial investors to reduce the potential dilution of the Company’s common stock and to offset potential payments by the Company to holders of the Convertible Notes in excess of the principal of the Convertible Notes upon conversion.

The call options to repurchase the Company’s common stock will always be antidilutive and, therefore, will have no effect on diluted earnings per share and are excluded from the table above.

Although the average share price of the Company’s common stock during the quarter ended March 31, 2014 exceeded the warrant strike price of $10.00 per share, the assumed conversion of the warrants are not included in the Company’s computation of diluted earnings per share as the Company is in a net loss position for the period and the effect would be antidilutive. However, the warrants could be dilutive in future periods.

6. 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.

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The tables below present the Company’s financial assets and liabilities measured at fair value on a recurring basis:

	Fair Value Measurements as of March 31, 2014
	Total		Level 1		Level 2		Level 3
	(in thousands)
Cash equivalents	$	178,982	$	160,149	$	18,833	$	—
Restricted cash	20,379		20,379		—		—
Short-term investments	143,702		—		143,702		—
Fuel derivative contracts:
Crude oil call options	3,048		—		3,048		—
Crude oil put options	53		—		53		—
Heating oil put options	302		—		302		—
Heating oil swaps	350		—		350		—
Foreign currency derivatives	5,255		—		5,255		—
Interest rate derivative	775		—		775		—
Total assets measured at fair value	$	352,846	$	180,528	$	172,318	$	—

Fuel derivative contracts:
Crude oil call options	$	3,048	$	—	$	3,048	$	—
Crude oil put options	53		—		53		—
Heating oil swaps	4,189		—		4,189		—
Foreign currency derivatives	1,829		—		1,829		—
Negative arbitrage derivative	3,668		—		—		3,668
Total liabilities measured at fair value	$	12,787	$	—	$	9,119	$	3,668

	Fair Value Measurements as of December 31, 2013
	Total		Level 1		Level 2		Level 3
	(in thousands)
Cash equivalents	$	269,384	$	269,384	$	—	$	—
Restricted cash	21,000		21,000		—		—
Fuel derivative contracts:
Crude oil call options	7,121		—		7,121		—
Crude oil put options	186		—		186		—
Heating oil put options	417		—		417		—
Heating oil swaps	5,863		—		5,863		—
Foreign currency derivatives	12,494		—		12,494		—
Interest rate derivative	1,121		—		1,121		—
Total assets measured at fair value	$	317,586	$	290,384	$	27,202	$	—

Fuel derivative contracts:
Crude oil call options	$	7,121	$	—	$	7,121	$	—
Crude oil put options	186		—		186		—
Heating oil swaps	187		—		187		—
Foreign currency derivatives	1,188		—		1,188		—
Negative interest arbitrage derivative	12,865		—		—		12,865
Total liabilities measured at fair value	$	21,547	$	—	$	8,682	$	12,865

Cash equivalents. The Company’s cash equivalents consist of money market securities, U.S. agency bonds, foreign and domestic corporate bonds, and commercial paper. The instruments classified as Level 2 are valued using quoted prices for similar assets in active markets.

Restricted cash. The Company’s restricted cash consist of money market securities.

Short-term investments. Short-term investments include U.S. government notes and bonds, U.S. agency bonds, variable rate corporate bonds, asset backed securities, foreign and domestic corporate bonds, municipal bonds, and commercial paper. These instruments are valued using quoted prices for similar assets in active markets or other observable inputs.

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Fuel derivative contracts. The Company’s fuel derivative contracts consist of heating oil puts and swaps, and 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.

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

Negative arbitrage derivative. The Company’s negative arbitrage derivative represents the net interest owed to the trusts that issued the Company’s enhanced equipment trust certificates during the periods prior to the issuance of the related equipment notes, and is valued based primarily on the discounted amount of future cash flows using the appropriate rate of borrowing. Changes to those discount rates would be unlikely to cause material changes in the fair value of the negative arbitrage derivative (refer to Notes 7 and 10 for more information). The table below presents disclosures about the activity for the Company’s “Level 3” financial liability:

	Three Months
	Ended
	March 31, 2014
	(in thousands)
Beginning balance	$	12,865
Reduction of balance in connection with interest payment	(9,197		)
Ending balance	$	3,668

The table below presents the Company’s debt (excluding obligations under capital leases) measured at fair value:

Fair Value of Debt
March 31, 2014										December 31, 2013
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)
$	831,378	$	922,035	$	—	$	143,520	$	778,515	$	695,804	$	738,563	$	—	$	104,656	$	633,907

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.

7. 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 addition, in 2013, the Company recognized in its 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 months ended March 31, 2014, the Company primarily used heating oil puts and swaps to hedge its aircraft fuel expense. These derivative instruments were not designated as hedges under ASC Topic 815, Derivatives and Hedging (ASC 815), for hedge accounting treatment. As a result, any changes in fair value of these derivative instruments are adjusted through other nonoperating income (expense) in the period of change.

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The following table reflects the amount of realized and unrealized gains and losses recorded as nonoperating income (expense) in the unaudited Consolidated Statements of Operations.

	Three months ended March 31,
Fuel derivative contracts	2014			2013
	(in thousands)
Gains (losses) realized at settlement	$	110		$	(2,696	)
Reversal of prior period unrealized amounts	(1,256		)	2,796
Unrealized losses on contracts that will settle in future periods	(5,753		)	(6,661		)
Losses on fuel derivatives recorded as Nonoperating income (expense)	$	(6,899	)	$	(6,561	)

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.

To limit the Company’s exposure to interest rate risk inherent in one of its variable-rate debt, which was used to finance an aircraft delivered in 2013, the Company entered into a forward starting interest rate swap agreement. The interest rate swap agreement is designated as a cash flow hedge under ASC 815.

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 believes that its derivative contracts 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 three months ended March 31, 2014. 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 March 31, 2014.

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 $3.6 million during the three months ended March 31, 2014. The Company expects to reclassify a net gain of approximately $4.7 million into earnings over the next 12 months from AOCI based on the values at March 31, 2014.

Negative Arbitrage Derivative

In 2013, the Company created two pass-through trusts, which issued $444.5 million aggregate principal amount of EETCs. See Note 10 for further information related to the EETCs. 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. During the three months ended March 31, 2014, approximately $9.2 million of the derivative was reduced in connection with the first interest payment made to the trusts.

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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 net derivative positions and location of the asset and liability balances within the unaudited Consolidated Balance Sheets.

Derivative position as of March 31, 2014

	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	$62,200 U.S. dollars	April 2023	$	91	$	—		$	91

	Long-term prepayments and other (1)			684		—			684
Foreign currency derivatives	Prepaid expenses and other	8,178,790 Japanese Yen 4,660,979 Korean Won 48,823 Australian Dollars 2,415 New Zealand Dollars	March 2015	2,769		(996		)	1,773

	Long-term prepayments and other	293,400 Japanese Yen 451 Australian Dollars	August 2015	49		(15		)	34
	Other liabilities and deferred credits	1,694,160 Japanese Yen 9,146 Australian Dollars	August 2015	191		(346		)	(155		)
Derivatives not designated as hedges

Foreign currency derivatives	Prepaid expenses and other	4,169,111 Japanese Yen 26,741 Australian Dollars	March 2015	1,769		(177		)	1,592

	Other accrued liabilities	5,290 Japanese Yen 912 Australian Dollars	March 2015	153		(277		)	(124		)

	Long-term prepayments and other	647,300 Japanese Yen 3,840 Australian Dollars	July 2015	324		—			324
	Other liabilities and deferred credits	648 Australian Dollars	May 2015	—		(18		)	(18		)
Fuel derivative contracts	Other accrued liabilities	94,114 gallons	March 2015	3,753		(7,290		)	(3,537		)
Negative arbitrage derivative	Other accrued liabilities	$444,540 U.S. dollars	January 2015	—		(3,668		)	(3,668		)

(1) Represents the noncurrent portion of the $62.2 million interest rate derivative with final maturity in April 2023.

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Derivative position as of December 31, 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	$63,800 U.S. dollars	April 2023	$	196	$	—		$	196

	Long-term prepayments and other (1)			925		—			925

Foreign currency derivatives	Prepaid expenses and other	10,500,321 Japanese Yen 10,895,370 Korean Won 62,659 Australian Dollars 4,821 New Zealand Dollars	December 2014	9,946		(450		)	9,496

	Long-term prepayments and other	1,980,949 Japanese Yen 16,681 Australian Dollars	May 2015	1,673		—			1,673

Derivatives not designated as hedges

Foreign currency derivatives	Prepaid expenses and other	6,180 Japanese Yen 58 Australian Dollars	December 2014	577		(229		)	348

	Other accrued liabilities			298		(509		)	(211		)

Fuel derivative contracts	Prepaid expenses and other	84,714 gallons	December 2014	13,587		(7,494		)	6,093

Negative arbitrage derivative	Other accrued liabilities	$444,540 U.S. dollars	January 2015	—		(12,250		)	(12,250		)

	Other liabilities and deferred credits (2)			—		(615		)	(615		)

(1) Represents the noncurrent portion of the $64 million interest rate derivative with final maturity in April 2023.

(2) Represents the noncurrent portion of the $445 million negative arbitrage derivative with final maturity in January 2015.

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 Loss.

	(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 March 31,					Three months ended March 31,						Three months ended March 31,
	2014		2013			2014			2013			2014		2013

Foreign currency derivatives	$	4,528	$	(3,053	)	$	(3,618	)	$	(267	)	$	—	$	—
Interest rate derivatives	346		1,435			211			—			—		—

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. Credit risk is deemed to have a minimal impact on the fair value of the derivative instruments as cash collateral would be provided to or by the counterparties based on the current market exposure of the derivative. The Company 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.

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ASC 815 requires a reporting entity to elect a policy of whether to offset rights to reclaim cash collateral or obligations to return cash collateral against derivative assets and liabilities executed with the same counterparty under a master netting agreement, or present such amounts on a gross basis. The Company’s accounting policy is to present its derivative assets and liabilities on a net basis, including any collateral posted with the counterparty. The Company had no collateral posted with its counterparties as of March 31, 2014 or December 31, 2013.

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8. Debt

As of March 31, 2014, the expected maturities of long-term debt over the next five years, and thereafter, were as follows (in thousands):

Remaining months in 2014	$	126,444
2015	76,663
2016	71,259
2017	72,390
2018	79,147
Thereafter	414,190
	$	840,093

During the quarter ended March 31, 2014 a condition for conversion of the Convertible Note was satisfied, which permits holders of the Convertible Notes to put their notes for conversion during the quarter ending June 30, 2014. Since the Company has the intent and ability to redeem the principal amount of these notes with cash, as of March 31, 2014, the carrying value of $77.5 million is reflected as a current liability in the unaudited Consolidated Balance Sheets.

9. Employee Benefit Plans

The components of net periodic benefit cost for the Company’s defined benefit and other postretirement plans included the following:

	Three Months Ended March 31,
Components of Net Period Benefit Cost	2014			2013
	(in thousands)
Service cost	$	2,952		$	3,602
Interest cost	6,986			6,300
Expected return on plan assets	(4,845		)	(4,066		)
Recognized net actuarial loss	225			2,050
Net periodic benefit cost	$	5,318		$	7,886

The Company made contributions of $2.8 million to its defined benefit and other postretirement plans in each of the three months ended March 31, 2014 and 2013, and expects to make additional minimum required contributions of $11.4 million during the remainder of 2014.

10. Commitments and Contingent Liabilities

Commitments

As of March 31, 2014, 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	6	3	Between 2014 and 2015
A350XWB-800 aircraft	6	6	Between 2017 and 2020
A321neo aircraft	16	9	Between 2017 and 2020
Rolls-Royce spare engines:
A330-200 spare engines	2	—	In 2014
A350XWB-800 spare engines	2	—	Between 2017 and 2020
Pratt & Whitney spare engines:
A321neo spare engines	2	—	Between 2017 and 2018

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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 2018.

Committed capital and operating expenditures include escalation and variable amounts based on estimates. The gross committed expenditures and committed financings for those deliveries are detailed below:

							Less: Committed
					Total Committed		Financing for Upcoming		Net Committed
	Capital		Operating		Expenditures		Aircraft Deliveries*		Expenditures
	(in thousands)
Remaining months in 2014	$	254,152	$	46,650	$	300,802	$	220,680	$	80,122
2015	244,370		60,535		304,905		—		304,905
2016	147,824		49,004		196,828		—		196,828
2017	493,824		47,853		541,677		—		541,677
2018	537,785		42,922		580,707		—		580,707
Thereafter	567,911		255,650		823,561		—		823,561

	$	2,245,866	$	502,614	$	2,748,480	$	220,680	$	2,527,800

* 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 2013, Hawaiian consummated an EETC financing, whereby it 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 were to be used to purchase equipment notes to be issued by Hawaiian to finance the purchase of six (6) new Airbus aircraft scheduled for delivery from November 2013 through October 2014. During the three months ended March 31, 2014, the Company received $147.8 million in proceeds from the issuance of the equipment notes, which it used to fund a portion of the purchase price of two Airbus aircraft. The remaining proceeds will be used to purchase equipment notes to be issued by Hawaiian to finance the purchase of three (3) new Airbus aircraft scheduled for delivery through October 2014. The equipment notes are secured by a lien on the aircraft, and the payment obligations of Hawaiian under the equipment notes are fully and unconditionally guaranteed by the Company. The Company issues the equipment notes to the trusts as aircraft are delivered to Hawaiian. Hawaiian records the debt obligation upon issuance of the equipment notes rather than upon the initial issuance of the pass-through certificates. In connection with consummation of the EETC financing transaction, Hawaiian was required to deposit $16.0 million into a collateral account, of which $0.6 million was released during the quarter. 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.

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.

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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 March 31, 2014 and December 31, 2013.

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.

11. Condensed Consolidating Financial Information

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

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

Condensed consolidating financial statements are presented in the following tables:

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Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)

Three Months Ended March 31, 2014

	Parent Issuer / Guarantor			Subsidiary Issuer / Guarantor			Non-Guarantor Subsidiaries		Eliminations			Consolidated
	(in thousands)
Operating Revenue	$	—		$	524,327		$	631	$	(100	)	$	524,858

Operating Expenses:
Aircraft fuel, including taxes and delivery	—			171,139			—		—			171,139
Wages and benefits	—			107,494			—		—			107,494
Aircraft rent	—			26,279			—		—			26,279
Maintenance materials and repairs	—			58,298			12		—			58,310
Aircraft and passenger servicing	—			30,221			—		—			30,221
Commissions and other selling	—			31,347			13		(25		)	31,335
Depreciation and amortization	—			22,712			99		—			22,811
Other rentals and landing fees	—			20,562			—		—			20,562
Other	1,262			45,136			347		(75		)	46,670
Total	1,262			513,188			471		(100		)	514,821
Operating Income (Loss)	(1,262		)	11,139			160		—			10,037

Nonoperating Income (Expense):
Undistributed net loss of subsidiaries	(2,807		)	—			—		2,807			—
Interest expense and amortization of debt discounts and issuance costs	(2,180		)	(12,830		)	—		—			(15,010		)
Interest income	39			180			—		—			219
Capitalized interest	—			2,776			—		—			2,776
Losses on fuel derivatives	—			(6,899		)	—		—			(6,899		)
Other, net	—			585			—		—			585
Total	(4,948		)	(16,188		)	—		2,807			(18,329		)
Income (Loss) Before Income Taxes	(6,210		)	(5,049		)	160		2,807			(8,292		)
Income tax benefit	(1,135		)	(2,082		)	—		—			(3,217		)
Net Income (Loss)	$	(5,075	)	$	(2,967	)	$	160	$	2,807		$	(5,075	)

Comprehensive Income (Loss)	$	(10,326	)	$	(8,218	)	$	160	$	8,058		$	(10,326	)

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Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)

Three Months Ended March 31, 2013

	Parent Issuer / Guarantor			Subsidiary Issuer / Guarantor			Non-Guarantor Subsidiaries		Eliminations			Consolidated
	(in thousands)
Operating Revenue	$	—		$	490,248		$	615	$	(109	)	$	490,754

Operating Expenses:
Aircraft fuel, including taxes and delivery	—			174,489			—		—			174,489
Wages and benefits	—			102,735			—		—			102,735
Aircraft rent	—			26,019			—		—			26,019
Maintenance materials and repairs	—			55,259			—		—			55,259
Aircraft and passenger servicing	—			29,059			—		—			29,059
Commissions and other selling	—			33,827			—		(16		)	33,811
Depreciation and amortization	—			19,113			—		—			19,113
Other rentals and landing fees	—			19,147			—		—			19,147
Other	1,268			41,804			69		(93		)	43,048
Total	1,268			501,452			69		(109		)	502,680
Operating Income (Loss)	(1,268		)	(11,204		)	546		—			(11,926		)

Nonoperating Income (Expense):
Undistributed net loss of subsidiaries	(14,782		)	—			—		14,782			—
Interest expense and amortization of debt discounts and issuance costs	(2,110		)	(9,267		)	—		—			(11,377		)
Interest income	36			91			—		—