HARBOR DIVERSIFIED, INC. The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited consolidated financial statements and the related condensed notes included in this Quarterly Report, and with the audited consolidated financial statements, accompanying notes, and the other financial information included within our Annual Report on Form 10-K for the year endedDecember 31, 2021 (our "2021 Annual Report"). The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those expressed or implied by the forward-looking statements below. Factors that could cause or contribute to those differences in our actual results include, but are not limited to, those discussed below and elsewhere within this Quarterly Report, particularly in the sections entitled "Cautionary Note Regarding Forward-Looking Statements" and "Risk Factors."
Overview
Harbor Diversified, Inc. ("Harbor") is a non-operating holding company that is the parent of a consolidated group of subsidiaries, includingAWAC Aviation, Inc. ("AWAC"), which is the sole member ofAir Wisconsin Airlines LLC ("AirWisconsin "), a regional air carrier. Harbor is also the direct parent of three other subsidiaries: (1)Lotus Aviation Leasing, LLC , which leases flight equipment toAir Wisconsin , (2)Air Wisconsin Funding LLC , which provides flight equipment financing toAir Wisconsin , and (3)Harbor Therapeutics, Inc. , which is a non-operating entity with no material assets. Because Harbor consolidatesAir Wisconsin for financial statement purposes, disclosures relating to activities ofAir Wisconsin also apply to Harbor unless otherwise noted. When appropriate,Air Wisconsin is named specifically for its individual contractual obligations and related disclosures. Where reference is intended to include Harbor and its consolidated subsidiaries, they may be jointly referred to as the "Company," "we," "us," or "our." Where reference is intended to refer only toHarbor Diversified, Inc. , it is referred to as "Harbor." For the three and nine months endedSeptember 30, 2022 ,Air Wisconsin operated a fleet of 64 CRJ-200 regional jets under a capacity purchase agreement (the "United capacity purchase agreement") with its sole major airline partner,United Airlines, Inc. ("United"), with a presence at both Chicago O'Hare andWashington -Dulles international airports, two of United's key domestic hubs. All ofAir Wisconsin's flights are currently operated as United Express pursuant to the terms of the United capacity purchase agreement. In providing regional flying under the United capacity purchase agreement,Air Wisconsin uses United's logos, service marks, and aircraft paint schemes. United controls route selection, pricing, seat inventories, marketing and scheduling. In addition, United providesAir Wisconsin with ground support services and gate access. More than 99% of our operating revenues for the three and nine months endedSeptember 30, 2022 was derived from operations associated with the United capacity purchase agreement. Subject to certain limited exceptions, the United capacity purchase agreement providesAir Wisconsin fixed daily revenue for each aircraft covered under the agreement. The agreement also provides for a fixed payment for each departure and block hour flown, as well as reimbursement of certain direct operating expenses incurred in connection with providing regional flying service for United. In addition,Air Wisconsin is eligible to receive incentive payments, or may be required to pay penalties, upon the achievement of, or failure to achieve, certain performance criteria primarily based on flight completion, on-time performance, and customer satisfaction ratings. Furthermore, the agreement provides for the payment or accrual of certain amounts by United toAir Wisconsin based on certain scheduling benchmarks. The United capacity purchase agreement protectsAir Wisconsin , to an extent, from many of the elements that typically cause volatility in airline financial performance, including fuel prices, variations in ticket prices, and fluctuations in the number of passengers. InOctober 2020 ,Air Wisconsin entered into an amendment to the United capacity purchase agreement that, among other things, provided relief on certain scheduling requirements and settled certain disputes that had existed between United andAir Wisconsin over amounts owed toAir Wisconsin under the United capacity purchase agreement. InApril 2021 ,Air Wisconsin and United entered into a second amendment to the agreement, which addressed the scheduling of block hours after a certain date. In April, June andSeptember 2022 ,Air Wisconsin and United entered into a third, fourth and fifth amendment, respectively, to the United capacity purchase agreement, which addressed the date by which United was required to provide a wind-down schedule for the period following the expiration of the term of the agreement. The United capacity purchase agreement is scheduled to terminate inFebruary 2023 unless sooner terminated in accordance with its terms, in each case subject to a wind-down period following termination during which aircraft would be removed from service under the agreement in accordance with a schedule.Air Wisconsin and United entered into negotiations to either extend the United capacity purchase agreement or enter into a replacement capacity purchase agreement with United. To protect itself against the possibility that United would not agree to an extension or a new agreement on commercially reasonable terms,Air Wisconsin began negotiating the terms of a capacity purchase agreement withAmerican Airlines, Inc. ("American"). InAugust 2022 ,Air Wisconsin entered into a new five-year capacity purchase agreement with American, pursuant to whichAir Wisconsin has agreed to provide up to 60 CRJ-200 regional jet aircraft for regional airline services for American (the "American capacity purchase agreement").Air Wisconsin expects to commence flying operations for American inMarch 2023 . American will becomeAir Wisconsin's sole airline partner once all aircraft are removed from United's flying operations, which is expected to occur throughout 2023. For additional information, refer to Part II, Item 5, "American Capacity Purchase Agreement" within this Quarterly Report. 24
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A dispute exists under the United capacity purchase agreement with respect to certain recurring amounts owed toAir Wisconsin by United. As ofSeptember 30, 2022 , the aggregate amount in dispute was approximately$33,042 . InOctober 2022 , United initiated arbitration under the agreement and requested a declaration that it does not owe any of the disputed amounts claimed byAir Wisconsin . AsAir Wisconsin and United are in the early stages of arbitration,Air Wisconsin cannot, with any degree of certainty, estimate the likely outcome of the arbitration including any potential award of the disputed amounts.Air Wisconsin , however, maintains that it has a strong position and is entitled to the disputed amounts under the terms of the United capacity purchase agreement. As a result, the Company has recognized all disputed amounts throughSeptember 30, 2022 . The existence of the dispute could significantly delay the transition of aircraft from the provision of services to United to the provision of services to American. For additional information regarding the risks associated with the dispute with United and the transition from the United capacity purchase agreement to the American capacity purchase agreement, refer to the section entitled "Risk Factors" within this Quarterly Report.
Labor Shortages
Historically, the airline industry has experienced periodic shortages of qualified personnel, particularly pilots and mechanics. As a result of the reduced flying caused by the COVID-19 pandemic, the shortage was temporarily abated. However, as flight demand has increased, labor shortages within the airline industry have become acute, particularly for regional airlines such asAir Wisconsin . The shortage is particularly critical at the captain level, since it can take as long as two years to replace a captain, taking into account training time and experience required at the first officer level before a pilot can be elevated to the rank of captain. Pilot shortages within the airline industry are the result of a number of factors, including personnel seeking opportunities with larger airlines where compensation may be substantially higher, the number of pilots at major airlines reaching retirement age, upward pressure on wages and bonuses at other regional carriers and within other industries, and the proliferation of cargo and low-cost carriers that have increased demand for pilots. In the past several months, these and other factors have caused our pilot attrition rates to be higher than our ability to hire and retain replacement pilots, resulting in our inability to consistently achieve block hours in line with pre-pandemic levels. To address the diminished supply of qualified pilot candidates, regional airlines, includingAir Wisconsin , have implemented significant pilot wage and bonus increases, which has substantially increased our labor costs and may continue to negatively impact our results of operations and financial condition. If we are unable to maintain a sufficient number of qualified pilots to operate our scheduled flights, it could lead to reduced flight schedules, which would further impact our financial condition. In addition to pilots,Air Wisconsin's operations rely on the availability of other qualified personnel, including maintenance technicians. As a result of global supply chain constraints and inflationary pressures, as well as increased flying levels,Air Wisconsin has experienced increased costs of certain maintenance activities and delays in obtaining third-party maintenance services, which has been compounded by difficulty recruiting and retaining qualified maintenance technicians. Mechanic shortages within the industry have resulted from several factors, including larger airlines offering higher salaries and more extensive benefit programs, greater demand for mechanics across the airline industry, and upward pressure on wages in other industries. We anticipate these drivers will continue to place upward pressure on our operating costs.
Impact of Competitive Environment
Several regional and larger carriers have ceased operations as a direct or indirect result of the COVID-19 pandemic. As of the date of this filing,ExpressJet Airlines, Inc. ,Miami Air International ,Trans States Airlines , andCompass Airlines , each of which are or were domestic, regional, or charter airlines, have either filed for Chapter 11 or Chapter 7 bankruptcy, or ceased or severely limited operations. The impact of these and other changes to the competitive environment on our business and industry is highly uncertain.
Paycheck Protection Program
InApril 2020 ,Air Wisconsin received a$10.0 million loan (the "SBA Loan") under the small business Paycheck Protection Program ("PPP") established under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") and administered by theSmall Business Administration ("SBA"). The entire$10.1 million principal amount and accrued interest was forgiven inAugust 2021 , which was recorded as gain on extinguishment of debt in the audited consolidated statements of operations included within our 2021 Annual Report. 25
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Payroll Support Program
InApril 2020 ,Air Wisconsin entered into a Payroll Support Program Agreement (the "PSP-1 Agreement") with respect to payroll support ("Treasury Payroll Support") from theU.S. Department of the Treasury ("Treasury") under a program ("Payroll Support Program") provided by the CARES Act, pursuant to whichAir Wisconsin received approximately$42.2 million .The Treasury's Office of the Inspector General ("OIG") commenced a routine audit ofAir Wisconsin's compliance with the terms of the PSP-1 Agreement. As of the date of this filing,Air Wisconsin has not received written confirmation from the OIG regarding the status or results of the audit. InDecember 2020 , the federal Consolidated Appropriations Act of 2021 ("PSP Extension Law") was adopted, which provided additional payroll support to eligible air carriers. InMarch 2021 , pursuant to the PSP Extension Law,Air Wisconsin entered into a Payroll Support Program Extension Agreement with theTreasury (the "PSP-2 Agreement"), pursuant to whichAir Wisconsin received approximately$33.0 million .
In
The PSP Agreements contain various covenants, some of which have expired. The surviving covenants require that (i) the payroll support proceeds must have been used exclusively for the payment of wages, salaries and benefits, and (ii)Air Wisconsin cannot pay total compensation to certain employees in excess of certain total compensation caps. IfAir Wisconsin failed to comply with any of its expired obligations or failed or fails to comply with any of its continuing obligations under these agreements, it may be required to repay some or all of the funds provided to it under the PSP Agreements. Any such default, acceleration, insolvency or failure to comply would likely have a material adverse effect on our business. TheTreasury commenced a routine audit ofAir Wisconsin's compliance with the terms of the PSP-1 Agreement. No such audits have been initiated by theTreasury under the PSP-2 Agreement or PSP-3 Agreement as of the date of this filing.
Employee Retention Credit
Air Wisconsin expects to receive an employee retention credit in the aggregate amount of approximately$1.1 million pursuant to the CARES Act for payroll expenses incurred during the second, third, and fourth quarters of 2020. The amended returns necessary to receive this credit have been filed, but as of the date of this filing,Air Wisconsin has received a credit of$197 for only one of the three eligible quarters.
Economic Conditions, Challenges and Risks Impacting Financial Results
For a discussion of the general and specific factors and trends affecting our business and results of operations, refer to the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" within our 2021 Annual Report. Results of Operations
Comparison of the Three Months Ended
The following table sets forth our major operational statistics and the associated percentage changes for the periods presented:
Three Months Ended
September 30,
2022 2021 Change
Operating Data:
Available Seat Miles ("ASMs") (in
thousands) 305,363 438,990 (133,627 ) (30.4 %)
Actual Block Hours 25,676 37,995 (12,319 ) (32.4 %)
Actual Departures 16,771 26,137 (9,366 ) (35.8 %)
Revenue Passenger Miles ("RPMs") (in
thousands) 263,899 364,533 (100,634 ) (27.6 %)
Average Stage Length (in miles) 372 341 31 9.1 %
Contract Revenue Per Available Seat Mile
(in cents) 22.40 ¢ 16.37 ¢ 6.03 ¢ 36.8 %
Passengers 699,678 1,047,201 (347,523 ) (33.2 %)
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The decrease in ASMs, block hours, departures, RPMs and passengers during the three months endedSeptember 30, 2022 , compared to the three months endedSeptember 30, 2021 , was primarily due to the industry-wide pilot shortage which resulted in a significantly lower number of flights.
Operating Revenues
The following table sets forth our operating revenues and the associated dollar and percentage changes for the periods presented:
Three Months Ended
September 30,
2022 2021 Change
Operating Revenues ($ in thousands): Contract Revenues$ 68,389 $ 71,866 $ (3,477 ) (4.8 %) Contract Services and Other 21 21 - - Total Operating Revenues$ 68,410 $ 71,887 $ (3,477 ) (4.8 %) Total operating revenues decreased$3.5 million , or 4.8%, during the three months endedSeptember 30, 2022 , compared to the three months endedSeptember 30, 2021 , primarily due to a decrease in flying due to the industry-wide pilot shortage. As a result of the reduced flight activity as illustrated in the table above for operating data, variable revenue decreased by$10.3 million , or 31.5%, which was offset by increases in revenue from incentives of$2.5 million and an increase in the stand ready performance obligation of$4.4 million due to a reduction in our flying schedule. Refer to Note 1, Summary of Significant Accounting Policies for additional information regarding the stand ready performance obligation.
Operating Expenses
The following table sets forth our operating expenses and the associated dollar and percentage changes for the periods presented:
Three Months Ended
September 30,
2022 2021 Change
Operating Expenses ($ in thousands):
Payroll and Related Costs $ 26,801 $ 29,056 $ (2,255 ) (7.8 %)
Aircraft Fuel and Oil 49 51 (2 ) (3.9 %)
Aircraft Maintenance, Materials and Repairs 17,494 13,877 3,617 26.1 %
Other Rents 1,617 1,572 45 2.9 %
Depreciation, Amortization and Obsolescence 6,639 6,570 69 1.1 %
Payroll Support Program - (16,146 ) 16,146 (100 %)
Purchased Services and Other 3,310 3,684 (374 ) (10.2 %)
Total Operating Expenses$ 55,910 $ 38,664
Payroll and Related Costs. Payroll and related costs decreased$2.3 million , or 7.8%, to$26.8 million for the three months endedSeptember 30, 2022 , compared to the three months endedSeptember 30, 2021 . The decrease was primarily driven by a decrease in crew wages and training expenses of$1.8 million , a decrease in personnel expenses, including per diem and crew rooms, of$0.9 million , a decrease for employee benefits taxes and other wage expense of$0.5 million , and a decrease in mechanic wages of$0.3 million , offset by an increase in hiring, retention, and captain upgrade bonuses of$0.8 million , and an increase in management wages of$0.4 million . Aircraft Fuel and Oil. Substantially all of the fuel costs incurred as a result of flying pursuant to the United capacity purchase agreement during the three months endedSeptember 30, 2022 andSeptember 30, 2021 were directly paid to suppliers by United. Aircraft fuel and oil expense primarily reflects the costs associated with aircraft oil purchases. These expenses were immaterial for the three months endedSeptember 30, 2022 andSeptember 30, 2021 . 27
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Aircraft Maintenance, Materials and Repairs. Aircraft maintenance, materials and repairs costs increased$3.6 million , or 26.1%, to$17.5 million for the three months endedSeptember 30, 2022 , compared to the three months endedSeptember 30, 2021 , primarily as a result of an increase in airframe and engine repairs of$0.6 million and$2.0 million , respectively, and an increase in materials used of$0.7 million . These increases were largely driven by higher maintenance rates and a greater reliance on third-party maintenance providers due to the ongoing labor shortage. For additional information, refer to Note 1, Summary of Significant Accounting Policies - Reclassification.
Other Rents. Other rents expense was relatively unchanged for the three months
ended
Depreciation, Amortization and Obsolescence. Depreciation, amortization and
obsolescence expense was relatively unchanged for the three months ended
Payroll Support Program. The contra-expense for the Payroll Support Program decreased$16.1 million , or 100%, for the three months endedSeptember 30, 2022 , compared to the three months endedSeptember 30, 2021 . There was no contra-expense recorded in the three months endedSeptember 30, 2022 due to the cessation of the Payroll Support Program in 2021. Purchased Services and Other. Purchased services and other expense decreased$0.4 million , or 10.2%, to$3.3 million for the three months endedSeptember 30, 2022 , compared to the three months endedSeptember 30, 2021 . The decrease was primarily due to a decrease in insurance expense and in corporate and fiscal expense. For additional information, refer to Note 1, Summary of Significant Accounting Policies - Reclassification.
Other (Expense) Income
Interest Income. Interest income increased$0.2 million for the three months endedSeptember 30, 2022 , compared to the three months endedSeptember 30, 2021 . The increase was primarily due to an increase in interest earned on the notes receivable due from United. Interest Expense. Interest expense decreased$0.1 million for the three months endedSeptember 30, 2022 , compared to the three months endedSeptember 30, 2021 , due to debt payments made in 2021. For additional information, refer to the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations - Debt and Credit Facilities" within our 2021 Annual Report.
Loss on
Gain on Extinguishment of Debt. Gains on extinguishment of debt decreased$10.1 million for the three months endedSeptember 30, 2022 , compared to the three months endedSeptember 30, 2021 . The decrease is due to the forgiveness of the SBA Loan inAugust 2021 related toAir Wisconsin's receipt of governmental assistance related to the COVID-19 pandemic.
Other, Net. Other income increased
Net Income
Net income for the three months endedSeptember 30, 2022 was$8.0 million , or$0.17 per basic share and$0.13 per diluted share, compared to net income of$36.3 million , or$0.67 per basic share and$0.51 per diluted share, for the three months endedSeptember 30, 2021 . For additional information, refer to Note 10, Earnings Per Share and Equity. The decrease in net income for the three months endedSeptember 30, 2022 , when compared to the three months endedSeptember 30, 2021 , primarily resulted from an increase in overall operating expenses and specifically no contra-expense related to the Payroll Support Program, under which we ceased receiving support in 2021. The decrease in net income can also be attributed to a decrease in operating revenues, a decrease in gain on extinguishment of debt, and increased losses on investments in marketable securities.
Income Taxes
In the three months endedSeptember 30, 2022 , our effective tax rate was 23.8%, compared to 18.1% for the three months endedSeptember 30, 2021 . Our tax rate can vary depending on changes in tax laws, adoption of accounting standards, the amount of income we earn in each state and the state tax rate applicable to such income, permanent differences between financial statement income and taxable income, as well as any valuation allowance required on our deferred tax assets. 28
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We recorded an income tax expense of
The income tax expense for the three months endedSeptember 30, 2022 resulted in an effective tax rate of 23.8%, which differed from theU.S. federal statutory rate of 21.0%, primarily due to the impact of state income taxes and permanent differences between financial statement and taxable income. The income tax expense for the three months endedSeptember 30, 2021 resulted in an effective tax rate of 18.1%, which differed from theU.S. federal statutory rate of 21.0%, primarily due to the tax exempt status of the SBA Loan forgiveness, the impact of state income taxes, and permanent differences between financial statement and taxable income.
For additional information, refer to Note 5, Income Taxes, in our audited consolidated financial statements included within our 2021 Annual Report.
Comparison of the Nine Months Ended
The following table sets forth our major operational statistics and the associated percentage changes for the periods presented:
Nine Months Ended
September 30,
2022 2021 Change
Operating Data:
Available Seat Miles (in thousands) 964,499 918,676 45,823 5.0 %
Actual Block Hours 82,470 81,989 481 0.6 %
Actual Departures 53,865 57,734 (3,869 ) (6.7 %)
Revenue Passenger Miles (in thousands) 802,218 715,066 87,152 12.2 %
Average Stage Length (in miles) 366 322 44 13.7 %
Contract Revenue Per Available Seat Mile
(in cents) 22.11 ¢ 18.99 ¢ 3.12 ¢ 16.4 %
Passengers 2,172,492 2,147,805 24,687 1.1 %
The increase in ASMs, block hours, RPMs and passengers during the nine months
ended September 30, 2022 , compared to the nine months ended September 30, 2021 ,
was primarily due to an increase in stage length and flying under the United
capacity purchase agreement during the first two quarters of 2022 as a result of
increased demand for air travel related to the recovery from the COVID-19
pandemic, which was partially offset by a decrease in flying activity in the
three months ended September 30, 2022 due to the industry-wide pilot shortage.
Operating Revenues
The following table sets forth our operating revenues and the associated dollar and percentage changes for the periods presented:
Nine Months Ended
September 30,
2022 2021 Change
Operating Revenues ($ in thousands): Contract Revenues$ 213,280 $ 174,467 $ 38,813 22.2 % Contract Services and Other 35 54 (19 ) (35.2 %) Total Operating Revenues$ 213,315 $ 174,521 $ 38,794 22.2 % Total operating revenues increased by$38.8 million , or 22.2%, during the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 30, 2021 , primarily due to the recognition of fixed revenues that were previously deferred as a result of changes in estimated departures over the remaining wind-down period. Such changes are due to a significant decrease in expected flight activity due to the on-going pilot shortage, particularly at the captain level. 29
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Operating Expenses
The following table sets forth our operating expenses and the associated dollar and percentage changes for the periods presented:
Nine Months Ended
September 30,
2022 2021 Change
Operating Expenses ($ in thousands): Payroll and Related Costs$ 81,096 $ 76,819 $ 4,277 5.6 % Aircraft Fuel and Oil 134 108 26 24.1 % Aircraft Maintenance, Materials, and Repairs 48,331 37,489 10,842 28.9 % Aircraft Rent - 67 (67 ) (100 %) Other Rents 4,887 3,757 1,130 30.1 % Depreciation, Amortization, and Obsolescence 19,957 19,569 388 2.0 % Payroll Support Program - (66,316 ) 66,316 (100 %) Purchased Services and Other 10,589 9,944 645 6.5 % Total Operating Expenses$ 164,994 $ 81,437 $ 83,557 102.6 % Payroll and Related Costs. Payroll and related costs increased$4.3 million , or 5.6%, to$81.1 million for the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 30, 2021 . The increase was primarily driven by an increase in hiring, retention, and captain bonuses and training expenses of$2.7 million , an increase in payroll taxes and benefits of$1.7 million , an increase in personnel expenses, including per diems and crew rooms, of$0.4 million , and an increase in management wages of$0.3 million , offset by a decrease in crew wages of$0.8 million . Aircraft Fuel and Oil. Substantially all of the fuel costs incurred as a result of flying pursuant to the United capacity purchase agreement during the nine months endedSeptember 30, 2022 andSeptember 30, 2021 were directly paid to suppliers by United. Aircraft fuel and oil expense primarily reflects the costs associated with aircraft oil purchases. These expenses were immaterial for the nine months endedSeptember 30, 2022 andSeptember 30, 2021 . Aircraft Maintenance, Materials and Repairs. Aircraft maintenance, materials and repairs costs increased$10.8 million , or 28.9%, to$48.3 million for the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 30, 2021 , primarily as a result of an increase in airframe repairs of$5.0 million , materials used of$2.4 million , and engine repairs of$1.7 million . These increases were largely driven by higher maintenance rates and a greater reliance on third-party maintenance providers due to the ongoing labor shortage. For additional information, refer to Note 1, Summary of Significant Accounting Policies - Reclassification.
Aircraft Rent. There was no rent expense for the nine months ended
Other Rents. Other rents expense increased$1.1 million , or 30.1%, to$4.9 million for the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 30, 2021 . The increase was primarily due to an increase of$1.0 million in flight training simulator rental expense.
Depreciation, Amortization and Obsolescence. Depreciation, amortization and
obsolescence expense increased
Payroll Support Program. The contra-expense for the Payroll Support Program decreased$66.3 million , or 100%, for the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 30, 2021 . There was no contra-expense recorded in the nine months endedSeptember 30, 2022 due to the cessation of the Payroll Support Program in 2021. Purchased Services and Other. Purchased services and other expense increased$0.6 million , or 6.5%, to$10.6 million for the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 30, 2021 . This increase was primarily due to an increase in professional and technical services of$0.6 million , and an increase in technology fees of$0.3 million , partially offset by a decrease in legal fees of$0.3 million , and a decrease in property taxes of$0.1 million . For additional information, refer to Note 1, Summary of Significant Accounting Policies - Reclassification. 30
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Other (Expense) Income
Interest Income. Interest income increased by$0.7 million for the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 30, 2021 . The increase was primarily due to an increase in interest earned on the notes receivable due from United. Interest Expense. Interest expense decreased$0.8 million for the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 30, 2021 , primarily due to the prepayment of debt inJune 2021 . For additional information, refer to the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations - Debt and Credit Facilities" within our 2021 Annual Report and Note 6, Debt, in our audited consolidated financial statements included within our 2021 Annual Report.
Loss on
Gain on Extinguishment of Debt. Gains on extinguishment of debt decreased$10.3 million for the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 30, 2021 . The decrease is primarily due to the forgiveness of the SBA Loan in the amount of$10.1 million inAugust 2021 related toAir Wisconsin's receipt of governmental assistance related to the COVID-19 pandemic and certain prepayments of debt inJune 2021 resulting in a gain on extinguishment of debt of$0.2 million . Other, Net. Other income increased by$1.2 million for the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 30, 2021 , due to an increase in dividend income from investments in marketable securities.
Net Income
Net income for the nine months endedSeptember 30, 2022 was$32.4 million , or$0.68 per basic share and$0.50 per diluted share, compared to net income of$82.0 million , or$1.49 per basic and$1.14 per diluted share for the nine months endedSeptember 30, 2021 . For additional information, refer to Note 10, Earnings Per Share and Equity. The decrease in net income for the nine months endedSeptember 30, 2022 , when compared to the nine months endedSeptember 30, 2021 , primarily resulted from a significant increase in overall operating expenses and specifically no contra-expense related to the Payroll Support Program, under which we ceased receiving support in 2021. Further, our operating expenses, including payroll and related costs, as well as aircraft maintenance and repair costs have also increased. The overall increase in operating expenses was partially offset by an increased recognition of deferred fixed revenues. Non-operating income decreased due to gains on extinguishment of debt that were recorded in the nine months endedSeptember 30, 2021 . Income Taxes In the nine months endedSeptember 30, 2022 , our effective tax rate was 23.8%, compared to 21.6% for the nine months endedSeptember 30, 2021 . Our tax rate can vary depending on changes in tax laws, adoption of accounting standards, the amount of income we earn in each state and the state tax rate applicable to such income, permanent differences between financial statement income and taxable income, as well as any valuation allowance required on our deferred tax assets.
We recorded an income tax expense of
The income tax expense for the nine months endedSeptember 30, 2022 resulted in an effective tax rate of 23.8%, which differed from theU.S. federal statutory rate of 21.0%, primarily due to the impact of state income taxes and permanent differences between financial statement and taxable income. The income tax expense for the nine months endedSeptember 30, 2021 resulted in an effective tax rate of 21.6%, which differed from theU.S. federal statutory rate of 21.0%, primarily due to the tax exempt status of the SBA Loan forgiveness, the impact of state taxes, and permanent differences between financial statement income and taxable income. 31
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For additional information, refer to Note 5, Income Taxes, in our audited consolidated financial statements included within our 2021 Annual Report.
Liquidity and Capital Resources
Sources and Uses of Cash
Our principal sources of liquidity are our cash and cash equivalents balance, our marketable securities, andAir Wisconsin's cash flows from operations. As ofSeptember 30, 2022 , our cash and cash equivalents balance was$19.4 million and we held$130.5 million of marketable securities. For the nine months endedSeptember 30, 2022 , cash provided by operations was$0.2 million . OnNovember 4, 2022 United prepaid toAir Wisconsin $50,126 to satisfy all of the outstanding, undisputed notes receivable, including all accrued interest, issued pursuant to the first amendment to the United capacity purchase agreement. In the near term, we expect to fund our liquidity requirements through cash generated from operations and existing cash, cash equivalents, and marketable securities balances. For additional information, refer to Note 1, Contract Revenue.Air Wisconsin requires cash to fund its operating expenses and working capital requirements, which include outlays for capital expenditures, labor, and maintenance costs, and payment of debt service obligations, including principal and interest payments. Our cash needs vary from period to period primarily based on the timing and costs of significant maintenance events and increased labor costs due to shortages of qualified pilots and mechanics. During the ordinary course of business, we evaluate our cash requirements and, if necessary, adjust operating and capital expenditures to reflect current market conditions and our projected demand. Our capital expenditures are typically used to acquire or maintain aircraft and flight equipment forAir Wisconsin . During the nine months endedSeptember 30, 2022 , we had$3.0 million in capital expenditures primarily related to purchases of rotable parts and capitalized engine overhauls. Future capital expenditures may be impacted by events and transactions that are not currently forecasted.Air Wisconsin's ability to service its long-term debt obligations and business development efforts depends, in part, on its ability to generate cash from operating activities, which is subject to, among other things, its future operating performance, as well as other factors, some of which may be beyond our control. IfAir Wisconsin fails to generate sufficient cash from operations, it may need to obtain additional debt financing, or restructure its current debt financing, to achieve its longer-term objectives. As ofSeptember 30, 2022 ,Air Wisconsin had$9.2 million of short-term debt, and$56.1 million of long-term debt, all of which is secured indebtedness incurred in connection with the Aircraft Notes. For additional information, refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations - Debt and Credit Facilities" within our 2021 Annual Report. The United capacity purchase agreement andAir Wisconsin's credit agreements with its lender contain restrictions that limitAir Wisconsin's ability to pay, or prohibit it from paying, dividends or distributions to Harbor. In addition, the PSP Agreements preventAir Wisconsin from paying dividends prior to certain dates. We believe our available working capital and anticipated cash flows from operations will be sufficient to meet our liquidity requirements for at least the next 12 months from the date of this filing. To the extent that results or events differ from our financial projections or business plans, our liquidity may be adversely impacted. Restricted Cash As ofSeptember 30, 2022 , in addition to cash and cash equivalents of$19.0 million , the Company had$0.4 million in restricted cash, which relates to a credit facility used for the issuance of cash collateralized letters of credit supporting our worker's compensation insurance program, landing fees at certain airports and facility leases, as well as cash held for the repurchase of shares under Harbor's stock repurchase program. Restricted cash includes amounts escrowed in an interest-bearing account that secures the credit facility.
Cash Flows
The following table presents information regarding our cash flows for each of the periods presented ($ in thousands):
Nine Months Ended
September 30,
2022 2021 Change
Net cash provided by operating activities
$ (82,663 ) (99.8 %) Net cash used in investing activities (4,874 ) (127,983 ) 123,109 96.2 % Net cash used in financing activities (14,480 ) (41,248 ) 26,768 64.9 % 32
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Cash Flows Provided by Operating Activities
During the nine months endedSeptember 30, 2022 , our cash flows provided by operating activities were$0.2 million . We had net income of$32.4 million . Net income is further adjusted for increases in cash primarily related to depreciation, obsolescence and amortization of$18.7 million , loss on marketable securities of$9.8 million , income taxes payable of$4.6 million , and prepaid and other expenses of$3.7 million , offset by decreases in cash primarily related to deferred revenues of$13.5 million , notes receivable of$12.8 million , accounts receivable of$25.9 million , long-term deferred revenue of$9.0 million , accounts payable of$3.5 million , and contract liabilities of$2.5 million . During the nine months endedSeptember 30, 2021 , our net cash flows provided by operating activities were$82.8 million . We had net income of$82.0 million , which was primarily due to increased revenues as a result of the increase in demand for air travel, and lower overall expenses. Net cash flows are further adjusted for increases in cash primarily related to depreciation, obsolescence and amortization of$18.5 million , contract liabilities of$20.8 million , and accounts payable of$5.1 million , partially offset by decreases in cash primarily related to the gain on extinguishment of debt of$10.4 million , long-term deferred revenues of$11.9 million , notes receivable of$13.7 million , accounts receivable of$2.4 million , accrued payroll and benefits of$1.0 million and prepaid and other expenses of$4.9 million .
Cash Flows Used in Investing Activities
During the nine months ended
During the nine months ended
Cash Flows Used in Financing Activities
During the nine months ended
During the nine months ended
Commitments and Contractual Obligations
For additional information regarding our commitments and contractual
obligations, refer to the section entitled "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Commitments and Contractual
Obligations" within our 2021 Annual Report.
The following table sets forth our cash obligations for the periods presented ($
in thousands)
October
through
December
Total 2022 2023 2024 2025 2026 Thereafter
Aircraft Notes Principal $ 59,100 $ 3,500 $ 7,000 $ 7,000 $ 41,600 $ - $ -
Aircraft Notes Interest 6,213 591 2,154 1,874 1,594 - -
Operating Lease Obligations 14,026 1,452 5,841
3,365 2,664 177 527 Total$ 79,339 $ 5,543 $ 14,995 $ 12,239 $ 45,858 $ 177 $ 527 The principal amount of the Aircraft Notes is payable in semi-annual installments of$3.5 million and certain additional amounts may be due based on excess cash flow. The amounts set forth in the table do not reflect any such additional excess cash flow payments. As a result of certain prepayments made under the Aircraft Notes inJune 2021 , no semi-annual installments are due prior toDecember 31, 2022 . As ofSeptember 30, 2022 , all ofAir Wisconsin's long-term debt was subject to fixed interest rates. For additional information regarding the Aircraft Notes and Other Loans, refer to the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" within our 2021 Annual Report. 33
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Series C Convertible Redeemable Preferred Stock
InJanuary 2020 , Harbor completed an acquisition fromSouthshore Aircraft Holdings, LLC and its affiliated entities ("Southshore") of three CRJ-200 regional jets, each having two General Electric ("GE") engines, plus five additionalGE engines, in exchange for the issuance of 4,000,000 shares of Harbor's Series C Convertible Redeemable Preferred Stock (the "Series C Preferred") with an aggregate value of$13.2 million , or$3.30 per share (the "Series C Issue Price").Air Wisconsin had leased each of these CRJ-200 regional jets andGE engines from Southshore. InJanuary 2020 , Harbor filed a Certificate of Designations, Preferences, and Rights of Series C Convertible Redeemable Preferred Stock ("Certificate of Designations") with the Secretary of State of theState of Delaware , which establishes the rights, preferences, privileges, qualifications, restrictions and limitations relating to the Series C Preferred. Each share of Series C Preferred was initially convertible, at any time after issuance, into that number of shares of common stock determined by dividing the then applicable Series C Liquidation Amount (defined below) by$0.80 , subject to certain adjustments set forth in the Certificate of Designations (the "Conversion Price"). The adjusted Conversion Price as of the date of this filing is$0.15091 . The conversion of Series C Preferred is subject to a limitation on the number of shares of the common stock that may be issued upon conversion of Series C Preferred equal to the sum of (a) 16,500,000, plus (b) the quotient of (i) the aggregate amount of all accrued and unpaid Preferential Dividends divided by (ii)$0.80 (the "Conversion Cap"), plus (c) the quotient of (i) the number of shares of Series C Preferred issued as PIK Dividends multiplied by the Series C Issue Price, divided by (ii)$0.80 . Any outstanding shares of Series C Preferred that may not be converted pursuant to the limitation described herein (the "Conversion Cap Excess Shares"), from and afterDecember 31, 2022 , in addition to the Preferential Dividends, shall accrue cumulative quarterly dividends equal to an amount per share equal to 0.5% of the Series C Liquidation Amount (as defined below) of each outstanding Conversion Cap Excess Share in the first quarter afterDecember 31, 2022 , and increasing an additional 0.5% of the Series C Liquidation Amount in each subsequent quarter (the "Conversion Cap Excess Dividends"). As ofSeptember 30, 2022 , 754,550 shares of the Series C Preferred are immediately convertible into 16,500,000 shares of common stock, and the remaining 3,245,450 shares of the Series C Preferred would be deemed Conversion Cap Excess Shares. For additional information related to the Series C Preferred, refer to the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations - Series C Convertible Redeemable Preferred Stock" within our 2021 Annual Report.
On
Based on the applicable accounting guidance, Harbor is required to apply the "if-converted" method to the Series C Preferred to determine the weighted average number of shares outstanding for purposes of calculating the net income (loss) per share of common stock. However, conversion is not assumed for purposes of computing diluted earnings per share if the effect would be anti-dilutive. Harbor accounts for its Series C Preferred in accordance with the guidance in ASC Topic 480, Distinguishing Liabilities from Equity. Based on the applicable accounting guidance, preferred stock that is conditionally redeemable is classified as temporary or "mezzanine" equity. Accordingly, the Series C Preferred, which is subject to conditional redemption, is presented at redemption value as mezzanine equity outside of the stockholders' equity section of the consolidated balance sheets included within this Quarterly Report.
Debt and Credit Facilities
For additional information regarding our debt and credit facilities, refer to the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations - Debt and Credit Facilities" within our 2021 Annual Report. Paycheck Protection Program InApril 2020 ,Air Wisconsin received the$10.0 million SBA Loan under the PPP established under the CARES Act and administered by the SBA. The loan was forgivable subject to certain limitations, including that the loan proceeds be used to retain workers and for payroll, mortgage payments, lease payments, and utility payments. The entire principal amount and accrued interest was forgiven inAugust 2021 . 34
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Payroll Support Program
InApril 2020 ,Air Wisconsin entered into the PSP-1 Agreement with theTreasury for payroll support under the CARES Act and received approximately$42.2 million , all of which was received in the year endedDecember 31, 2020 . InMarch 2021 ,Air Wisconsin entered into the PSP-2 Agreement with theTreasury for payroll support under the PSP Extension Law and received approximately$33.0 million , all of which was received in the nine months endedSeptember 30, 2021 . InJune 2021 theTreasury entered into the PSP-3 Agreement withAir Wisconsin for payroll support under the American Rescue Plan, andAir Wisconsin received approximately$33.3 million . The PSP Agreements contain various covenants, some of which have expired. The surviving covenants require that (i) the payroll support proceeds must have been used exclusively for the payment of wages, salaries and benefits, and (ii)Air Wisconsin cannot pay total compensation to certain employees in excess of certain total compensation caps. IfAir Wisconsin failed to comply with any of its expired obligations or failed or fails to comply with any of its continuing obligations under these agreements, it may be required to repay some or all of the funds provided to it under the PSP Agreements. Any such default, acceleration, insolvency or failure to comply would likely have a material adverse effect on the Company's business. TheTreasury commenced a routine audit ofAir Wisconsin's compliance with the terms of the PSP-1 Agreement. No such audits have been initiated by theTreasury under the PSP-2 Agreement or PSP-3 Agreement as of the date of this filing. For additional information, refer to Note 8, Commitments and Contingencies.
Maintenance Commitments
For additional information regarding our maintenance commitments, refer to the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations - Maintenance Commitments" within our 2021 Annual Report.
Off-Balance Sheet Arrangements
An off-balance sheet arrangement is any transaction, agreement or other contractual arrangement involving an unconsolidated entity under which a company has (i) made guarantees, (ii) a retained or a contingent interest in transferred assets, (iii) an obligation under derivative instruments classified as equity or (iv) any obligation arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us, or that engages in leasing, hedging or research and development arrangements with us. We have no off-balance sheet arrangements that would have a material current or future effect on the Company's financial condition, results of operations or liquidity.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in accordance with generally accepted accounting principles. Critical accounting policies are those policies that are most important to the preparation of our consolidated financial statements and require management's subjective and complex judgments due to the need to make estimates about the effect of matters that are inherently uncertain. In doing so, we must make estimates and assumptions that affect our reported amounts of assets, liabilities, revenues and expenses, as well as related disclosure of contingent assets and liabilities. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations would be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting policies. Our critical accounting policies relate to revenue recognition, long-lived assets, and income tax. The application of these accounting policies involve the exercise of judgment and the use of assumptions as to the future uncertainties and, as a result, actual results will likely differ, and may differ materially, from such estimates. For additional information regarding our critical accounting policies, refer to the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies" within our 2021 Annual Report.
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