Quarterly report with a continuing view of a company's financial position

10-Q
Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 FORM 10-Q
 
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
or

 o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from       to       
 
Commission file number 1-31443
 HAWAIIAN HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
 
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.  ý 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).  ý Yes o No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer x
 
Accelerated filer o
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o Yes ý No
 
As of October 13, 2017, 52,471,736 shares of the registrant’s common stock were outstanding.




Hawaiian Holdings, Inc.
Form 10-Q
Quarterly Period ended September 30, 2017
 
Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2



PART I. FINANCIAL INFORMATION

ITEM 1.                   FINANCIAL STATEMENTS.
Hawaiian Holdings, Inc.
Consolidated Statements of Operations
(in thousands, except per share data)
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(unaudited)
Operating Revenue:
 
 

 
 

 
 
 
 
Passenger
 
$
634,475

 
$
591,496

 
$
1,765,275

 
$
1,592,095

Other
 
85,084

 
80,341

 
243,804

 
225,512

Total
 
719,559

 
671,837

 
2,009,079

 
1,817,607

Operating Expenses:
 
 

 
 

 
 
 
 
Wages and benefits
 
161,059

 
136,356

 
466,772

 
395,718

Aircraft fuel, including taxes and delivery
 
110,111

 
94,818

 
316,423

 
248,516

Maintenance, materials and repairs
 
49,396

 
51,812

 
161,366

 
166,901

Aircraft and passenger servicing
 
36,360

 
33,971

 
104,569

 
93,245

Aircraft rent
 
35,195

 
32,891

 
102,883

 
92,345

Commissions and other selling
 
32,930

 
29,480

 
98,668

 
93,936

Other rentals and landing fees
 
30,989

 
28,926

 
86,763

 
78,338

Depreciation and amortization
 
28,447

 
27,495

 
83,787

 
81,629

Purchased services
 
24,736

 
25,614

 
79,428

 
72,889

Special items
 

 

 
23,450

 

Other
 
36,585

 
31,565

 
101,376

 
94,279

Total
 
545,808

 
492,928

 
1,625,485

 
1,417,796

Operating Income
 
173,751

 
178,909

 
383,594

 
399,811

Nonoperating Income (Expense):
 
 

 
 

 
 
 
 
Other nonoperating special items
 
(50,202
)
 

 
(50,202
)
 

Interest expense and amortization of debt discounts and issuance costs
 
(7,578
)
 
(8,539
)
 
(23,292
)
 
(28,453
)
Gains (losses) on fuel derivatives
 
3,282

 
(3,601
)
 
(10,228
)
 
15,421

Other components of net periodic benefit cost
 
(3,792
)
 
(5,054
)
 
(13,293
)
 
(15,218
)
Interest income
 
1,861

 
1,113

 
4,480

 
3,044

Capitalized interest
 
2,416

 
719

 
6,258

 
1,407

Loss on extinguishment of debt
 

 

 

 
(9,993
)
Other, net
 
(100
)
 
612

 
3,161

 
9,884

Total
 
(54,113
)
 
(14,750
)
 
(83,116
)
 
(23,908
)
Income Before Income Taxes
 
119,638

 
164,159

 
300,478

 
375,903

Income tax expense
 
45,072

 
61,705

 
108,567

 
142,413

Net Income
 
$
74,566

 
$
102,454

 
$
191,911

 
$
233,490

Net Income Per Share
 
 

 
 

 
 
 
 
Basic
 
$
1.40

 
$
1.92

 
$
3.59

 
$
4.37

Diluted
 
$
1.39

 
$
1.91

 
$
3.57

 
$
4.35

 
See accompanying Notes to Consolidated Financial Statements.


3



Hawaiian Holdings, Inc.
Consolidated Statements of Comprehensive Income
(in thousands)

 
 
Three Months Ended September 30,
 
 
2017
 
2016
 
 
(unaudited)
Net Income
 
$
74,566

 
$
102,454

Other comprehensive income (loss), net:
 
 

 
 

Net change related to employee benefit plans, net of tax expense of $15,247 and $714 for 2017 and 2016, respectively
 
25,042

 
1,293

Net change in derivative instruments, net of tax benefit of $198 and $1,141 for 2017 and 2016, respectively
 
(326
)
 
(1,858
)
Net change in available-for-sale investments, net of tax expense of $43 and net of tax benefit of $150 for 2017 and 2016, respectively
 
70

 
(246
)
Total other comprehensive income (loss)
 
24,786

 
(811
)
Total Comprehensive Income
 
$
99,352

 
$
101,643


 
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
 
(unaudited)
Net Income
 
$
191,911

 
$
233,490

Other comprehensive income (loss), net:
 
 
 
 

Net change related to employee benefit plans, net of tax expense of $17,040 and $2,028 for 2017 and 2016, respectively
 
27,900

 
3,448

Net change in derivative instruments, net of tax benefit of $3,756 and $10,457 for 2017 and 2016, respectively
 
(6,162
)
 
(17,166
)
Net change in available-for-sale investments, net of tax expense of $115 and $266 for 2017 and 2016, respectively
 
188

 
437

Total other comprehensive income (loss)
 
21,926

 
(13,281
)
Total Comprehensive Income
 
$
213,837

 
$
220,209



See accompanying Notes to Consolidated Financial Statements.


4



Hawaiian Holdings, Inc.
Consolidated Balance Sheets
(in thousands, except shares)
 
 
 
September 30, 2017
 
December 31, 2016
 
 
(unaudited)
 
 
ASSETS
 
 

 
 

Current Assets:
 
 

 
 

Cash and cash equivalents
 
$
348,049

 
$
325,991

Restricted cash
 
1,000

 
5,000

Short-term investments
 
270,697

 
284,075

Accounts receivable, net
 
118,622

 
96,067

Spare parts and supplies, net
 
26,560

 
20,363

Prepaid expenses and other
 
56,783

 
66,740

Total
 
821,711

 
798,236

Property and equipment, less accumulated depreciation and amortization of $533,964 and $454,231 as of September 30, 2017 and December 31, 2016, respectively
 
1,753,946

 
1,654,567

Other Assets:
 
 

 
 

Long-term prepayments and other
 
124,926

 
132,724

Intangible assets, less accumulated amortization of $21,301 and $20,337 as of September 30, 2017 and December 31, 2016, respectively
 
15,447

 
16,411

Goodwill
 
106,663

 
106,663

Total Assets
 
$
2,822,693

 
$
2,708,601

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

Current Liabilities:
 
 

 
 

Accounts payable
 
$
118,810

 
$
116,507

Air traffic liability
 
573,373

 
482,496

Other accrued liabilities
 
157,760

 
172,214

Current maturities of long-term debt and capital lease obligations
 
58,585

 
58,899

Total
 
908,528

 
830,116

Long-Term Debt and Capital Lease Obligations
 
447,533

 
497,908

Other Liabilities and Deferred Credits:
 
 

 
 

Accumulated pension and other post-retirement benefit obligations
 
234,206

 
355,968

Other liabilities and deferred credits
 
172,792

 
173,613

Deferred tax liability, net
 
218,843

 
170,543

Total
 
625,841

 
700,124

Commitments and Contingencies
 


 


Shareholders’ Equity:
 
 

 
 

Special preferred stock, $0.01 par value per share, three shares issued and outstanding as of September 30, 2017 and December 31, 2016
 

 

Common stock, $0.01 par value per share, 52,471,736 and 53,435,234 shares outstanding as of September 30, 2017 and December 31, 2016, respectively
 
525

 
534

Capital in excess of par value
 
73,776

 
127,266

Accumulated income
 
848,057

 
656,146

Accumulated other comprehensive loss, net
 
(81,567
)
 
(103,493
)
Total
 
840,791

 
680,453

Total Liabilities and Shareholders’ Equity
 
$
2,822,693

 
$
2,708,601

 

See accompanying Notes to Consolidated Financial Statements.

5



Hawaiian Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
 
 
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
 
(unaudited)
Net cash provided by Operating Activities
 
$
295,477

 
$
434,922

Cash flows from Investing Activities:
 
 

 
 

Additions to property and equipment, including pre-delivery payments
 
(212,535
)
 
(104,250
)
Proceeds from purchase assignment and leaseback transactions
 

 
31,851

Proceeds from disposition of property and equipment
 
33,511

 

Purchases of investments
 
(171,485
)
 
(217,964
)
Sales of investments
 
183,930

 
208,075

Net cash used in investing activities
 
(166,579
)
 
(82,288
)
Cash flows from Financing Activities:
 
 

 
 

Repayments of long-term debt and capital lease obligations
 
(52,463
)
 
(205,532
)
Repurchases and redemptions of convertible notes
 

 
(1,426
)
Repurchases of common stock
 
(50,486
)
 
(13,763
)
Other
 
(7,891
)
 
(7,702
)
Net cash used in financing activities
 
(110,840
)
 
(228,423
)
Net increase in cash and cash equivalents
 
18,058

 
124,211

Cash, cash equivalents, and restricted cash - Beginning of Period
 
330,991

 
286,502

Cash, cash equivalents, and restricted cash - End of Period
 
$
349,049

 
$
410,713

 
See accompanying Notes to Consolidated Financial Statements.


6



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, 2016.
 
2. Significant Accounting Policies
 
Recently Adopted Accounting Pronouncements

In March 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, requiring an employer to report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. ASU 2017-07 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption only permitted in the first quarter of 2017. The Company early adopted this standard during the first quarter of 2017. The adoption of ASU 2017-07 resulted in a reclassification of $5.1 million and $15.2 million from wages and benefits to other components of net periodic benefit cost on the Company's consolidated statement of operations for the three and nine months ended September 30, 2016, respectively.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows, Restricted Cash, requiring restricted cash and restricted cash equivalents to be included with cash and cash equivalents on the statement of cash flows when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The guidance is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted. The Company early adopted this standard during the first quarter of 2017. Restricted cash is now included as a component of cash, cash equivalents, and restricted cash on the Company's condensed consolidated statement of cash flows. The inclusion of restricted cash increased the beginning and ending balances of the condensed consolidated statement of cash flows by $5.0 million for the nine months ended September 30, 2016.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, requiring all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. ASU 2016-09 will also allow an employer to withhold more shares for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2016. The Company adopted this standard during the first quarter of 2017. The primary impact of the adoption of the standard on the Company's consolidated financial statements was the recognition of excess tax benefits in the provision for income taxes rather than additional paid-in capital, which reduced income tax expense by $0.3 million and $5.8 million for the three and nine months ended September 30, 2017, respectively. The Company also reclassified $17.6 million of excess tax benefits for share-based payments in the cash flow statement from financing activities to operating activities for the nine months ended September 30, 2016.

Recently Issued Accounting Pronouncements

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging, which better aligns a company's risk management activities and financial reporting for hedging relationships and is intended to simplify hedge accounting requirements. ASU 2017-12 is effective for annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the components and options within ASU 2017-12.

7




In February 2016, the FASB issued ASU 2016-02, Leases, requiring a lessee to recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018. ASU 2016-02 requires entities to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. Full retrospective application is prohibited. The Company is evaluating the impact the adoption of this standard will have on its consolidated financial statements and believes this ASU will have a significant impact on its consolidated balance sheet but does not expect that the ASU will have a material impact on the Company's results of operations or cash flows. The effect of adopting the new standard will be to record right-of-use assets and operating lease obligations for current operating leases on the Company's balance sheet. See Note 9 which discusses our lease obligations as of September 30, 2017.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, and created a new topic (ASC 606), requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASC 606 will replace most existing revenue recognition guidance in GAAP when it becomes effective. ASC 606 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company will elect to adopt the full retrospective transition method as of January 1, 2018, resulting in the restatement of certain prior periods on the date of adoption.

The Company is completing its overall analysis for the provisions of ASC 606 specific to its consolidated financial statements and related disclosures. The Company is also designing and implementing controls and systems in anticipation of the adoption of the standard, effective January 1, 2018 which will have a material impact on its consolidated financial statements. The overall expected decrease in equity as of January 1, 2016 is expected to be up to $125 million net of tax, with an offsetting change primarily in Other liabilities and deferred credits. The corresponding annual income statement effect is expected to be a decrease of approximately 1% of total revenue.

While the Company continues to assess all potential impacts of this new standard, it currently believes the most significant impact relates to the accounting for the Company's frequent flyer travel award program. This change as well as other less significant changes, is briefly described below:

Frequent flyer - The standard will require the Company to account for miles earned by passengers in the HawaiianMiles program through flight activity as a component of the passenger revenue ticket transaction at the estimated selling price of the miles (effectively eliminating the incremental cost accounting currently applied). Under ASC 606, ticket consideration received is allocated between the performance obligations, primarily travel and miles earned by passengers. The allocated value of the miles will be deferred until the free travel or other award is used by the passenger, at which time it will be included in passenger revenues. ASC 606 will result in a significant increase to the deferred revenue liability on the Company's balance sheet, as the estimated selling price of the miles significantly exceeds the value previously recorded for incremental cost.
Passenger revenue - Currently, passenger revenue is recognized either when the transportation is provided or when tickets expire unused. However, after the application of ASC 606, passenger revenue associated with unused tickets, which represent unexercised passenger rights, is expected to be recognized in proportion to the pattern of rights exercised by related passengers (e.g. scheduled departure dates). This will have the effect of accelerating the recognition of revenue and reducing the recorded balance in air traffic liability as compared to the current policy.
Other operating revenue - Other operating revenue includes checked baggage revenue, cargo revenue, ticket change and cancellation fees, charter revenue, ground handling fees, commissions and fees earned under certain joint marketing agreements with other companies, inflight revenue, and other incidental sales. Ticket change and cancellation fees are currently recognized at the time the fees are assessed. The Company expects to defer the recognition of ticket change fees as a component of air traffic liability until the related transportation is provided. Certain amounts currently classified in other revenue (e.g. bag and other ancillary fees) will be reclassified to passenger revenue.
Selling Costs - Certain selling costs to issue passenger tickets (e.g. credit card and booking fees) are currently recognized when incurred.  Consistent with the Company’s current accounting for commissions, under ASC 606 the Company will capitalize selling costs associated with credit card and booking fees and recognize the associated expense at the ticketed flight date.

The adoption of the standard will require the implementation of new accounting processes and systems, which will change the Company's internal control over revenue recognition. Other items could be identified that will impact amounts ultimately recorded.


8



3. Accumulated Other Comprehensive Income (Loss)
 
Reclassifications out of accumulated other comprehensive income (loss) by component are as follows: 
Details about accumulated other comprehensive (income) loss components
 
Three months ended September 30,
 
Nine months ended September 30,
 
Affected line items in the statement where net income is presented
 
2017
 
2016
 
2017
 
2016
 
 
 
(in thousands)
 
 
Derivatives designated as hedging instruments under ASC 815
 
 

 
 

 
 

 
 

 
 
Foreign currency derivative losses (gains)
 
$
(449
)
 
$
1,842

 
$
(2,141
)
 
$
(1,679
)
 
Passenger revenue
Interest rate derivative losses, net
 

 

 

 
944

 
Interest expense
Total before tax
 
(449
)
 
1,842

 
(2,141
)
 
(735
)
 
 
Tax expense (benefit)
 
170

 
(701
)
 
811

 
272

 
 
Total, net of tax
 
$
(279
)
 
$
1,141

 
$
(1,330
)
 
$
(463
)
 
 
Amortization of defined benefit plan items
 
 

 
 

 
 

 
 

 
 
Actuarial loss
 
$
2,277

 
$
1,950

 
$
6,733

 
$
5,780

 
Other components of net periodic benefit cost
Prior service cost
 
65

 
57

 
185

 
171

 
Other components of net periodic benefit cost
Partial settlement and curtailment loss
 
15,001

 

 
15,001

 

 
Other nonoperating special items
Loss on plan termination
 
35,201

 

 
35,201

 

 
Other nonoperating special items
Total before tax
 
52,544

 
2,007

 
57,120

 
5,951

 
 
Tax benefit
 
(19,883
)
 
(714
)
 
(21,648
)
 
(2,207
)
 
 
Total, net of tax
 
$
32,661

 
$
1,293

 
$
35,472

 
$
3,744

 
 
Short-term investments
 
 

 
 

 
 

 
 

 
 
Realized gain on sales of investments, net
 
$
(6
)
 
$
(129
)
 
$
(26
)
 
$
(189
)
 
Other nonoperating income
Total before tax
 
(6
)
 
(129
)
 
(26
)
 
(189
)
 
 
Tax expense
 
2

 
49

 
10

 
69

 
 
Total, net of tax
 
$
(4
)
 
$
(80
)
 
$
(16
)
 
$
(120
)
 
 
Total reclassifications for the period
 
$
32,378

 
$
2,354

 
$
34,126

 
$
3,161

 
 

9




A rollforward of the amounts included in accumulated other comprehensive income (loss), net of taxes, for the three and nine months ended September 30, 2017 and 2016 is as follows:
Three months ended September 30, 2017
 
Interest Rate Derivatives
 
Foreign Currency Derivatives
 
Defined Benefit
Plan Items
 
Short-Term Investments
 
Total
 
 
(in thousands)
Beginning balance
 
$

 
$
1,235

 
$
(107,344
)
 
$
(244
)
 
$
(106,353
)
Other comprehensive income (loss) before reclassifications, net of tax
 

 
(47
)
 
(7,619
)
 
74

 
(7,592
)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax
 

 
(279
)
 
32,661

 
(4
)
 
32,378

Net current-period other comprehensive income (loss)
 

 
(326
)
 
25,042

 
70

 
24,786

Ending balance
 
$

 
$
909

 
$
(82,302
)
 
$
(174
)
 
$
(81,567
)

Three months ended September 30, 2016
 
Interest Rate Derivatives
 
Foreign Currency Derivatives
 
Defined Benefit Plan Items
 
Short-Term Investments
 
Total
 
 
(in thousands)
Beginning balance
 
$

 
$
(10,348
)
 
$
(101,710
)
 
$
311

 
$
(111,747
)
Other comprehensive loss before reclassifications, net of tax
 

 
(2,999
)
 

 
(166
)
 
(3,165
)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax
 

 
1,141

 
1,293

 
(80
)
 
2,354

Net current-period other comprehensive income (loss)
 

 
(1,858
)
 
1,293

 
(246
)
 
(811
)
Ending balance
 
$

 
$
(12,206
)
 
$
(100,417
)
 
$
65

 
$
(112,558
)

Nine months ended September 30, 2017
 
Interest Rate Derivatives
 
Foreign Currency Derivatives
 
Defined Benefit Pension Items
 
Short-Term Investments
 
Total
 
 
(in thousands)
Beginning balance
 
$

 
$
7,071

 
$
(110,202
)
 
$
(362
)
 
$
(103,493
)
Other comprehensive income (loss) before reclassifications, net of tax
 

 
(4,832
)
 
(7,572
)
 
204

 
(12,200
)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax
 

 
(1,330
)
 
35,472

 
(16
)
 
34,126

Net current-period other comprehensive income (loss)
 

 
(6,162
)
 
27,900

 
188

 
21,926

Ending balance
 
$

 
$
909

 
$
(82,302
)
 
$
(174
)
 
$
(81,567
)

Nine months ended September 30, 2016
 
Interest Rate Derivatives
 
Foreign Currency Derivatives
 
Defined Benefit Pension Items
 
Short-Term Investments
 
Total
 
 
(in thousands)
Beginning balance
 
$
81

 
$
4,879

 
$
(103,865
)
 
$
(372
)
 
$
(99,277
)
Other comprehensive income (loss) before reclassifications, net of tax
 
(668
)
 
(16,035
)
 
(296
)
 
557

 
(16,442
)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax
 
587

 
(1,050
)
 
3,744

 
(120
)
 
3,161

Net current-period other comprehensive income (loss)
 
(81
)
 
(17,085
)
 
3,448

 
437

 
(13,281
)
Ending balance
 
$

 
$
(12,206
)
 
$
(100,417
)
 
$
65

 
$
(112,558
)


10



4. Earnings Per Share
 
Basic earnings per share, which excludes dilution, is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period.
 
Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For the three and nine months ended September 30, 2017 and 2016, anti-dilutive shares excluded from the calculation of diluted earnings per share were nil.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(in thousands, except for per share data)
Numerator:
 
 

 
 

 
 

 
 

Net Income
 
$
74,566

 
$
102,454

 
$
191,911

 
$
233,490

Denominator:
 
 

 
 

 
 

 
 

Weighted average common stock shares outstanding - Basic
 
53,185

 
53,427

 
53,456

 
53,488

Assumed exercise of stock options and awards
 
324

 
161

 
343

 
219

Assumed conversion of convertible note premium
 

 

 

 
8

Weighted average common stock shares outstanding - Diluted
 
53,509

 
53,588

 
53,799

 
53,715

Net Income Per Share
 
 

 
 

 
 

 
 

Basic
 
$
1.40

 
$
1.92

 
$
3.59

 
$
4.37

Diluted
 
$
1.39

 
$
1.91

 
$
3.57

 
$
4.35


Stock Repurchase Program and Dividends

In April 2017, the Company's Board of Directors approved the repurchase of up to $100 million of its outstanding common stock over a two-year period through May 2019 via the open market, established plans or privately negotiated transactions in accordance with all applicable securities laws, rules and regulations. The stock repurchase program is subject to further modification or termination at any time.

The Company spent $46.2 million and $50.5 million to repurchase and retire approximately 1.1 million shares and 1.2 million shares of the Company's common stock in open market transactions during the three and nine months ended September 30, 2017, respectively. As of September 30, 2017, the Company had $49.5 million remaining to spend under its stock repurchase program.

In October 2017, the Company announced that its Board of Directors declared a quarterly cash dividend of $0.12 per share payable on November 30, 2017, to stockholders of record as of November 17, 2017.

5. 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 Company's unaudited consolidated statements of operations.  Unrealized gains and losses on available-for-sale securities are reflected as a component of accumulated other comprehensive income.

The following is a summary of short-term investments held as of September 30, 2017 and December 31, 2016:
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
September 30, 2017
 
(in thousands)
Corporate debt
 
$
167,407

 
$
67

 
$
(170
)
 
$
167,304

U.S. government and agency debt
 
50,515

 
1

 
(131
)
 
50,385

Municipal bonds
 
19,839

 
27

 
(30
)
 
19,836

Other fixed income securities
 
33,172

 
1

 
(1
)
 
33,172

Total short-term investments
 
$
270,933

 
$
96

 
$
(332
)
 
$
270,697


11



 
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
December 31, 2016
 
(in thousands)
Corporate debt
 
$
171,139

 
$
84

 
$
(357
)
 
$
170,866

U.S. government and agency debt
 
53,916

 
8

 
(134
)
 
53,790

Municipal bonds
 
22,893

 
1

 
(144
)
 
22,750

Other fixed income securities
 
36,670

 

 
(1
)
 
36,669

Total short-term investments
 
$
284,618

 
$
93

 
$
(636
)
 
$
284,075


Contractual maturities of short-term investments as of September 30, 2017 are shown below. 
 
 
Under 1 Year
 
1 to 5 Years
 
Total
 
 
(in thousands)
Corporate debt
 
$
72,879

 
$
94,425

 
$
167,304

U.S. government and agency debt
 
34,320

 
16,065

 
50,385

Municipal bonds
 
6,942

 
12,894

 
19,836

Other fixed income securities
 
24,535

 
8,637

 
33,172

Total short-term investments
 
$
138,676

 
$
132,021

 
$
270,697

 
The Company classifies investments as current assets as these securities are available for use in its current operations.
 
6.  Fair Value Measurements
 
ASC Topic 820, Fair Value Measurement (ASC 820) defines fair value as 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.


12



The tables below present the Company’s financial assets and liabilities measured at fair value on a recurring basis:
 
 
Fair Value Measurements as of September 30, 2017
 
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
(in thousands)
Cash equivalents
 
$
198,018

 
$
171,936

 
$
26,082

 
$

Restricted cash
 
1,000

 
1,000

 

 

Short-term investments
 
270,697

 

 
270,697

 

Fuel derivative contracts:
 
 
 
 

 
 

 
 

Crude oil call options
 
8,184

 

 
8,184

 

Jet fuel swaps
 
566

 

 
566

 

Foreign currency derivatives
 
4,721

 

 
4,721

 

Total assets measured at fair value
 
$
483,186

 
$
172,936

 
$
310,250

 
$

Fuel derivative contracts:
 
 

 
 

 
 

 
 

Jet fuel swaps
 
$
21

 
$

 
$
21

 
$

Foreign currency derivatives
 
2,612

 

 
2,612

 

Total liabilities measured at fair value
 
$
2,633

 
$

 
$
2,633

 
$

 
 
 
Fair Value Measurements as of December 31, 2016
 
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
(in thousands)
Cash equivalents
 
$
123,120

 
$
104,113

 
$
19,007

 
$

Restricted cash
 
5,000

 
5,000

 

 

Short-term investments
 
284,075

 

 
284,075

 

Fuel derivative contracts:
 
 
 
 

 
 

 
 

Crude oil call options
 
8,489

 

 
8,489

 

Heating oil swaps
 
6,601

 

 
6,601

 

Foreign currency derivatives
 
12,906

 

 
12,906

 

Total assets measured at fair value
 
$
440,191

 
$
109,113

 
$
331,078

 
$

Foreign currency derivatives
 
1,469

 

 
1,469

 

Total liabilities measured at fair value
 
$
1,469

 
$

 
$
1,469

 
$


Cash equivalents.  The Company's level 1 cash equivalents consist of money market securities and the level 2 cash equivalents consist of U.S. agency bonds, mutual funds, 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 consists of cash held as collateral by institutions that process our credit card transactions for advanced ticket sales, which is valued similarly to the money market securities held as cash equivalents.
 
Short-term investments.  Short-term investments include U.S. and foreign 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.

Fuel derivative contracts.  The Company’s fuel derivative contracts consist of crude oil call options and jet fuel swaps, which are not traded on a public exchange. The fair value of these instruments are 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 and Australian Dollar forward contracts and are valued primarily based upon data available or derived from public markets.

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

13



Fair Value of Debt
September 30, 2017
 
December 31, 2016
Carrying
 
Fair Value
 
Carrying
 
Fair Value
Amount
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Amount
 
Total
 
Level 1
 
Level 2
 
Level 3
(in thousands)
$
438,843

 
$
449,761

 
$

 
$

 
$
449,761

 
$
481,874

 
$
484,734

 
$

 
$

 
$
484,734

 
The fair value estimates of the Company’s debt were based on the discounted amount of future cash flows using the Company’s current incremental rate of borrowing for similar instruments.
 
The carrying amounts of cash, other receivables, and accounts payable approximate fair value due to the short-term nature of these financial instruments.
 
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 and foreign currencies.
 
Fuel Risk Management

The Company’s operations are inherently dependent upon the price and availability of aircraft fuel. To manage economic risks associated with fluctuations in aircraft fuel prices, the Company periodically enters into derivative financial instruments. During the three and nine months ended September 30, 2017, the Company primarily used crude oil call options and jet fuel 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.

The following table reflects the amount of realized and unrealized gains and losses recorded as nonoperating income (expense) in the Company's unaudited Consolidated Statements of Operations.
 
 
Three months ended September 30,
 
Nine months ended September 30,
Fuel derivative contracts
 
2017
 
2016
 
2017
 
2016
 
 
(in thousands)
Losses realized at settlement
 
$
(2,787
)
 
$
(2,525
)
 
$
(2,100
)
 
$
(30,349
)
Reversal of prior period unrealized amounts
 
6,251

 
(7,115
)
 
(7,946
)
 
39,731

Unrealized gains (losses) that will settle in future periods
 
(182
)
 
6,039

 
(182
)
 
6,039

Gains (losses) on fuel derivatives recorded as Nonoperating income (expense)
 
$
3,282

 
$
(3,601
)
 
$
(10,228
)
 
$
15,421


Foreign Currency Exchange Rate Risk Management
 
The Company is subject to foreign currency exchange rate risk due to revenues and expenses that are 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 to further manage the effects of fluctuating exchange rates. The effective portion of the gain or loss of designated cash flow hedges is reported as a component of accumulated other comprehensive income (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). Foreign currency forward contracts that are not designated as cash flow hedges are recorded at fair value, and any changes in fair value are recognized as other nonoperating income (expense) in the period of change.
 
The Company believes that its foreign currency forward contracts that are designated as cash flow hedges will continue to be effective in offsetting changes in cash flow attributable to the hedged risk. The Company expects to reclassify a net gain of approximately $0.6 million into earnings over the next 12 months from AOCI based on the values at September 30, 2017.

14



 
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 Company's unaudited Consolidated Balance Sheets.

Derivative position as of September 30, 2017 
 
 
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
 
 
 
 
 
 
 
 

 
 

 
 

Foreign currency derivatives
 
Prepaid expenses and other
 
15,704,725 Japanese Yen
46,792 Australian Dollars
 
September 2018
 
3,594

 
(2,340
)
 
1,254

 
 
Long-term prepayments and other
 
4,812,000 Japanese Yen
8,247 Australian Dollars
 
September 2019
 
952

 
(242
)
 
710

Derivatives not designated as hedges
 
 
 
 
 
 
 
 

 
 

 
 
Foreign currency derivatives
 
Prepaid expenses and other
 
924,350 Japanese Yen
3,776 Australian Dollars
 
December 2017
 
175

 
(30
)
 
145

Fuel derivative contracts
 
Prepaid expenses and other
 
94,332 gallons
 
September 2018
 
8,750

 
(21
)
 
8,729

 
Derivative position as of December 31, 2016
 
 
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
 
 
 
 
 
 
 
 

 
 

 
 

Foreign currency derivatives
 
Prepaid expenses and other
 
16,121,500 Japanese Yen
41,917 Australian Dollars
 
December 2017
 
9,803

 
(1,349
)
 
8,454

 
 
Long-term prepayments and other
 
4,371,900 Japanese Yen
8,434 Australian Dollars
 
December 2018
 
2,632

 
(59
)
 
2,573

Derivatives not designated as hedges
 
 
 
 
 
 
 
 

 
 

 
 
Foreign currency derivatives
 
Prepaid expenses and other
 
879,050 Japanese Yen
5,802 Australian Dollars
 
March 2017
 
471

 
(61
)
 
410

Fuel derivative contracts
 
Prepaid expenses and other
 
17,850 gallons
 
December 2017
 
15,090

 

 
15,090

 
The following table reflects the impact of cash flow hedges designated for hedge accounting treatment and their location within the Company's unaudited Consolidated Statements of Comprehensive Income. 
 
 
(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 September 30,
 
Three months ended September 30,
 
Three months ended September 30,
 
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
 
(in thousands)
Foreign currency derivatives
 
$
75

 
$
4,841

 
$
(449
)
 
$
1,842

 
$

 
$

Interest rate derivatives
 

 

 

 

 

 



15



 
 
(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)
 
 
Nine months ended September 30,
 
Nine months ended September 30,
 
Nine months ended September 30,
 
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
 
(in thousands)
Foreign currency derivatives
 
$
7,780

 
$
24,996

 
$
(2,141
)
 
$
(1,679
)
 
$

 
$

Interest rate derivatives
 

 
923

 

 
944

 

 


Risk and Collateral
 
Financial derivative instruments expose the Company to possible credit loss in the event the counterparties 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) regularly 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 by the counterparties based on the current market exposure of the derivative.

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 counterparties as of September 30, 2017 and December 31, 2016.

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.

8.  Debt
 
As of September 30, 2017, the expected maturities of long-term debt for the remainder of 2017 and the next four years, and thereafter, were as follows (in thousands): 
Remaining months in 2017
$
5,771

2018
48,244

2019
72,927

2020
21,413

2021
49,060

Thereafter
241,428

 
$
438,843


9.  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.

16



As of September 30, 2017, the scheduled future minimum rental payments under operating leases with non-cancellable basic terms of more than one year were as follows:
 
Aircraft
 
Other
 
(in thousands)
Remaining in 2017
$
31,984

 
$
1,643

2018
127,235

 
7,311

2019
118,070

 
6,939

2020
97,717

 
6,690

2021
64,730

 
6,768

Thereafter
222,227

 
107,760

 
$
661,963

 
$
137,111

10. Employee Benefit Plans
 
The components of net periodic benefit cost for the Company’s defined benefit and other post-retirement plans included the following: 
 
 
Three months ended September 30,
 
Nine months ended September 30,
Components of Net Period Benefit Cost
 
2017
 
2016
 
2017
 
2016
 
 
(in thousands)
Service cost
 
$
3,296

 
$
3,438

 
$
10,922

 
$
10,864

Other cost:
 
 
 
 
 
 
 
 
Interest cost
 
5,983

 
7,518

 
20,502

 
22,682

Expected return on plan assets
 
(4,533
)
 
(4,472
)
 
(14,125
)
 
(13,416
)
Recognized net actuarial loss
 
2,342

 
2,008

 
6,916

 
5,952

Total other components of the net periodic benefit cost
 
3,792

 
5,054

 
13,293

 
15,218

Partial settlement and curtailment loss
 
15,001

 

 
15,001

 

Loss on plan termination
 
35,201

 

 
35,201

 

Net periodic benefit cost
 
$
57,290

 
$
8,492

 
$
74,417

 
$
26,082

 
During the three and nine months ended September 30, 2017, the Company contributed $14.2 million and $28.6 million, respectively to its defined benefit and other post-retirement plans. These amounts are exclusive of the one-time contributions to the Hawaiian Airlines, Inc. Salaried & IAM Merged Pension Plan (the Merged Plan) and pilots' other post-retirement benefit plan, as discussed below. During the three and nine months ended September 30, 2016, the Company contributed $15.6 million and $26.9 million, respectively to its defined benefit and other post-retirement plans.

In 2016, the Hawaiian Airlines, Inc. Pension Plan for Salaried Employees (the Salaried Plan) was consolidated into the Hawaiian Airlines, Inc. Pension Plan for Employees Represented by the International Association of Machinists (IAM), which established the Merged Plan. At that time, the net liabilities of the Salaried Plan were transferred to the Merged Plan. In August 2017, the Company completed the termination of the plan by transferring the assets and liabilities to a third-party insurance company. The Company contributed a total of $18.5 million in cash to fully fund the plan and recognized a one-time financial loss of $35.2 million as an other nonoperating special item on the Company's Consolidated Statement of Operations. The Company no longer has any expected contributions to the Merged Plan due to the final settlement.

In March 2017, the Company announced the ratification of a 63-month contract amendment with its pilots as represented by the Air Line Pilots Association (ALPA). In connection with the ratification of the agreement, the parties agreed to eliminate the post-65 post-retirement medical benefit for all active pilots, and replace the benefit with a heath retirement account (HRA) managed by ALPA, which represented a curtailment and partial settlement of the pilots' other post-retirement benefit plan. In August 2017, the Company made a one-time cash payment of approximately $101.9 million to fund the HRA and settle the post-65 post-retirement medical plan obligation. The cash contributed was distributed to the trust funding the individual health retirement notional accounts of the participants. In connection with the settlement of the liability, the discount rate was updated to 3.87%. The Company recognized a one-time settlement loss of $15.0 million. The obligation recorded for the unsettled portion of this plan was $83.4 million as of September 30, 2017. The Company has expected contributions of $0.9 million to the pilots' other post-retirement benefit plan for the remainder of 2017.

17





11. Commitments and Contingent Liabilities
 
Commitments

As of September 30, 2017, 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
A321neo aircraft
 
16

 
9

 
Between 2017 and 2020
A330-800neo aircraft
 
6

 
6

 
Between 2019 and 2021
Pratt & Whitney spare engines:
 
 

 
 

 
 
A321neo spare engines
 
3

 
2

 
Between 2017 and 2019
Rolls-Royce spare engines:
 
 

 
 

 
 
A330-800neo spare engines
 
2

 
2

 
Between 2019 and 2026

Committed capital and operating expenditures include escalation amounts based on estimates. The gross committed expenditures and committed payments for those deliveries as of September 30, 2017 are detailed below: 
 
 
Capital
 
Operating
 
Total Committed
Expenditures
 
 
(in thousands)
Remaining in 2017
 
$
114,916

 
$
23,089

 
$
138,005

2018
 
454,848

 
73,242

 
528,090

2019
 
500,811

 
60,228

 
561,039

2020
 
242,152

 
58,708

 
300,860

2021
 
170,406

 
56,551

 
226,957

Thereafter
 
131,834

 
400,430

 
532,264

 
 
$
1,614,967

 
$
672,248

 
$
2,287,215

 
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 such contracts. 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 such parties' gross negligence or willful misconduct. Additionally, the lessee typically indemnifies such parties for any environmental liability that arises out of or relates to the lessee's use of the real estate leased premises. The Company believes that it is insured (subject to deductibles) for most of the tort liabilities and related indemnities described above with respect to the aircraft and real estate that it leases. The Company cannot reasonably 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 $1.0 million at September 30, 2017 and $5.0 million at December 31, 2016.
 

18



In the event of a material adverse change in the Company's 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 have a material adverse impact on the Company's operations, business or financial condition.

12. Special Items
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(in thousands)
Operating:
 
 
 
 
 
 
 
 
Loss on sale of aircraft
 

 

 
4,771

 

Collective bargaining charge
 

 

 
18,679

 

Special items
 
$

 
$

 
$
23,450

 
$

Nonoperating:
 
 
 
 
 
 
 
 
Partial settlement and curtailment loss
 
15,001

 

 
15,001

 

Loss on plan termination
 
35,201

 

 
35,201

 

Other nonoperating special items
 
$
50,202

 
$

 
$
50,202

 
$


As discussed in Note 10, in August 2017, the Company terminated the Merged Plan and settled a portion of its pilots' other post-retirement medical plan liability. In connection with the reduction of these liabilities the Company recorded one-time Other nonoperating special charges of $35.2 million related to the Merged Plan termination and $15.0 million related to the other post-retirement medical plan partial settlement.

In April 2017, the Company executed a sale leaseback transaction with an independent third party for three Boeing 767-300 aircraft. The lease terms for the three aircraft commenced in April 2017 and continues through November 2018, December 2018, and January 2019, respectively. During the nine months ended September 30, 2017, the Company recorded a loss on sale of aircraft of $4.8 million.

In February 2017, the Company reached a tentative agreement with ALPA, covering the Company's pilots. In March 2017, the Company received notice from ALPA that the agreement was ratified by ALPA's members.  The agreement became effective April 1, 2017 and has a term of 63 months.  The agreement includes, among other various benefits, a pay adjustment and ratification bonus computed based on previous service. During the nine months ended September 30, 2017, the Company expensed $18.7 million related to (1) a one-time payment to reduce the Company's future 401K employer contribution for certain pilot groups, which is not recoverable once paid and (2) a one-time true up of the pilot vacation accrual at the revised rates set forth in the agreement.

13. Supplemental Cash Flow Information
 
Non-cash investing and financing activities for the nine months ended September 30, 2017 and 2016 were as follows:
 
Nine months ended September 30,
 
2017
 
2016
 
(in thousands)
Investing and Financing Activities Not Affecting Cash:
 
 
 
Property and equipment acquired through a capital lease
$

 
$
6,092


14. 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 14 as Subsidiary Issuer / Guarantor) of pass-through certificates, the Company (which is also referred to in this Note 14 as Parent Issuer / Guarantor) is fully and unconditionally guaranteeing the payment obligations of Hawaiian, which is a 100% owned subsidiary of the Company, under equipment notes issued by Hawaiian to purchase new aircraft.


19



The Company's condensed consolidating financial statements are presented in the following tables:

Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
Three months ended September 30, 2017
 
 
Parent Issuer /
Guarantor
 
Subsidiary
Issuer /
Guarantor
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
(in thousands)
Operating Revenue
 
$

 
$
717,812

 
$
1,853

 
$
(106
)
 
$
719,559

Operating Expenses:
 
 

 
 

 
 

 
 

 
 

Wages and benefits
 

 
161,059

 

 

 
161,059

Aircraft fuel, including taxes and delivery
 

 
110,111

 

 

 
110,111

Maintenance materials and repairs
 

 
48,987

 
409

 

 
49,396

Aircraft and passenger servicing
 

 
36,360

 

 

 
36,360

Commissions and other selling
 
18

 
32,924

 
19

 
(31
)
 
32,930

Aircraft rent
 

 
35,090

 
105

 

 
35,195

Other rentals and landing fees
 

 
30,989

 

 

 
30,989

Depreciation and amortization
 

 
27,491

 
956

 

 
28,447

Purchased services
 
117

 
24,428

 
206

 
(15
)
 
24,736

Other
 
1,498

 
34,678

 
469

 
(60
)
 
36,585

Total
 
1,633

 
542,117

 
2,164

 
(106
)
 
545,808

Operating Income (Loss)
 
(1,633
)
 
175,695

 
(311
)
 

 
173,751

Nonoperating Income (Expense):