Forward-Looking Statements
This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect our current views with respect to certain current and future events and financial performance. Such forward-looking statements include, without limitation, statements related to our financial statements and results of operations; any expectations of operating expenses, deferred revenue, interest rates, tax rates, income taxes, deferred tax assets, valuation allowances or other financial items; the severity, magnitude, duration and effects of the COVID-19 pandemic; the extent to which the COVID-19 pandemic and related impacts will materially and adversely affect our business operations, financial performance, results of operations, financial position or achievement of strategic objectives; the duration and scope of government mandates or other limitations of or restrictions on travel; the demand for air travel in the markets in which we operate; changes in our future capital needs; estimations related to our liquidity requirements; future obligations and related impacts of such obligations under the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), the Consolidated Appropriations Act, 2021 (CAA 2021) and American Rescue Plan Act of 2021 (ARP 2021) programs; future obligations and related impact of such obligations related to our agreement with Amazon; the availability of aircraft fuel, aircraft parts and personnel; expectations regarding industry capacity, our operating performance (including bookings, revenue and results of operations), available seat miles, operating revenue, and operating cost per available seat mile for the fourth quarter of 2022; expectations about the recovery of international travel demand; expected salary and related costs; our expected fleet as ofSeptember 30, 2023 ; estimates of annual fuel expenses and measure of the effects of fuel prices on our business; the impact of inflation on our business, our investments and the broader economy; the availability of, and efforts seeking, future financing; changes in our fleet plan and related cash outlays; committed capital expenditures; expected cash payments related to our post-retirement plan obligations and the establishment of a Health Retirement Account; estimated financial charges; expected delivery or deferment of new aircraft and engines; the impact of accounting standards on our financial statements; the effects of any litigation on our operations or business; the effects of our fuel and currency risk hedging policies; the fair value and expected maturity of our debt obligations; our estimated contractual obligations; the restatement of our financial statements for the Non-Reliance Periods and the impact of such restatement on our future financial statements and other financial measures; the material weakness we identified in our internal control over financial reporting and our efforts and timing related to such remediation; and other matters that do not relate strictly to historical facts or statements of assumptions underlying any of the foregoing. Words such as "expects," "anticipates," "projects," "intends," "plans," "believes," "estimates," "could," "would," "will," "might," "may," variations of such words, and similar expressions are also intended to identify such forward-looking statements. These forward-looking statements are and will be, as the case may be, subject to many risks, uncertainties and assumptions relating to our operations and business environment, all of which may cause our actual results to be materially different from any future results, expressed or implied, in these forward-looking statements. Factors that could affect such forward-looking statements include, but are not limited to: the effects of the COVID-19 pandemic on our business operations and financial condition; the duration of government-mandated and other restrictions on travel; fluctuations and the extent of declining demand for air transportation in the markets in which we operate; our dependence on the tourism industry; our ability to generate sufficient cash and manage the cash available to us; our ability to accurately forecast quarterly and annual results; global economic volatility; macroeconomic political and regulatory developments; geopolitical conflict; the price and availability of fuel, aircraft parts and personnel; foreign currency exchange rate fluctuations; competitive pressures, including the impact of increasing industry capacity betweenNorth America and Hawai'i; maintenance of privacy and security of customer-related information and compliance with applicable federal and foreign privacy or data security regulations or standards; our dependence on technology and automated systems; our reliance on third-party contractors; satisfactory labor relations; our ability to attract and retain qualified personnel and key executives; successful implementation of our growth strategy and cost reduction goals; adverse publicity; risks related to the airline industry; our ability to obtain and maintain adequate facilities and infrastructure; seasonal and cyclical volatility; the effect of applicable state, federal and foreign laws and regulations; increases in insurance costs or reductions in coverage; the limited number of suppliers for aircraft, aircraft engines and parts; our existing aircraft purchase agreements; delays in aircraft or engine deliveries or other loss of fleet capacity; changes in our future capital needs; fluctuations in our share price; our financial liquidity; and our ability to implement our growth strategy. The risks, uncertainties, and assumptions referred to above that could cause our results to differ materially from the results expressed or implied by such forward-looking statements also include the risks, uncertainties, and assumptions discussed under the heading "Risk Factors" in Part II, Item 1A in this Quarterly Report on Form 10-Q and discussed from time to time in our public filings and public announcements. All forward-looking statements included in this Quarterly Report on Form 10-Q are based on information available to us as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this quarterly report. The following discussion and analysis should be read in conjunction with our unaudited Consolidated Financial Statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q. Unless the context otherwise 33 --------------------------------------------------------------------------------
requires, the terms the Company, we, us, and our in this Quarterly Report on
Form 10-Q refer to
Our Business
We are engaged in the scheduled air transportation of passengers and cargo amongst the Hawaiian Islands (theNeighbor Island routes), between the Hawaiian Islands and certain cities in theU.S. mainland (theNorth America routes and collectively with theNeighbor Island routes, referred to as our Domestic routes), and between the Hawaiian Islands and theSouth Pacific ,Australia , andAsia (the International routes), collectively referred to as our "Scheduled Operations." In addition, we operate various charter flights. SinceFebruary 2020 , we have temporarily reduced our Scheduled Operations due to the COVID-19 pandemic. We are the largest airline headquartered in the state of Hawai'i and the eleventh largest domestic airline inthe United States based on revenue passenger miles reported by theResearch and Innovative Technology Administration Bureau of Transportation Statistics for the month ofJuly 2022 , the latest available data. As ofSeptember 30, 2022 , we had 7,112 active employees. General information about us is available at https://www.hawaiianairlines.com. Information contained on our website is not incorporated by reference into, or otherwise to be regarded as part of, this Quarterly Report on Form 10-Q unless expressly noted. Our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, as well as any amendments and exhibits to those reports, are available free of charge through our website as soon as reasonably practicable after we file them with, or furnish them to, theSecurities and Exchange Commission (SEC).
Third Quarter 2022 Financial Overview
•Passenger revenue in the third quarter was$663.1 million , up 46.0% and down 4.5% as compared to the same periods in 2021 and 2019, respectively. During the three months endedSeptember 30, 2022 , capacity (as measured in Available Seat Miles or ASMs) was up 18.3%, while Revenue Passenger Miles (RPM) increased 29.3%, as compared to the same period in 2021, driven primarily by increased customer demand within our domestic network and the easing of remaining travel restrictions in certain cities within our international markets. •Our operating loss in the third quarter was$3.4 million , down from operating income of$43.5 million during the same period in 2021, driven primarily by a 107.7% increase in Aircraft fuel, including taxes and delivery expense. Additionally, operating income in the third quarter of 2021 benefited from the recognition of$78.3 million of Payroll Support Programs grant proceeds. •GAAP net loss in the third quarter was$9.3 million , or$0.18 per diluted share on total revenue of$741.2 million , compared to a net income of$14.7 million , or$0.28 per diluted share, on total revenue of$508.8 million during the same period in 2021.
•Unrestricted cash, cash equivalents and short-term investments was
See "Results of Operations" below for further discussion of changes in revenue and operating expense.
Impact of COVID-19 Pandemic The ongoing COVID-19 pandemic, which began in the first quarter of 2020, continues to impact passenger travel demand, with total passenger revenue down approximately 4.5% and 13.6% during the three and nine months endedSeptember 30, 2022 , as compared to the same periods in 2019. The recovery in our domestic network has been robust with passenger revenue up 16.0% and 5.9% during the three and nine months endedSeptember 30, 2022 as compared to the same periods in 2019. International revenue continues to lag the recovery in domestic travel due to ongoing restrictions on international travel, with revenue down 56.8% and 68.8% during the three and nine months endedSeptember 30, 2022 , as compared to the same periods in 2019. During the third quarter of 2022, our domestic network accounted for approximately 87.2% of total passenger revenue. We continue to monitor developments relating to the easing of restrictions on international travel by international governments, including by the government ofJapan , asJapan represented a large percentage of our pre-pandemic international revenue. In lateSeptember 2022 ,Japan announced that passenger arrival caps would be lifted effectiveOctober 11, 2022 ; however, requirements remain in effect for travelers to show proof of COVID-19 vaccination or a pre-travel negative PCR test result. InOctober 2022 , theRepublic of Korea announced that it was eliminating all remaining COVID-related restrictions for all arriving guests, effective immediately, with post-arrival tests and proof of vaccination no longer required. 34 --------------------------------------------------------------------------------
Material Changes to our Consolidated Balance Sheet
As a result of the COVID-19 pandemic, we took actions to increase liquidity and augment our financial position in fiscal years 2020 and 2021. Refer to our Annual Report on Form 10-K for the year endedDecember 31, 2021 filed onFebruary 10, 2022 , for a comprehensive discussion of actions taken in both fiscal years. During the nine months endedSeptember 30, 2022 , material changes to our Consolidated Balance Sheet included the following: •Cash, cash equivalents and short-term investments totaled approximately$1.4 billion as ofSeptember 30, 2022 , compared to$1.7 billion as ofDecember 31, 2021 . Refer to the Cash Flow and Use of Liquidity section below for additional discussion. •As ofSeptember 30, 2022 , our total debt was$1.6 billion , a decrease of$181.5 million , or 10.1%, as compared to$1.8 billion as ofDecember 31, 2021 . During the nine months endedSeptember 30, 2022 , we made the final scheduled principal payment of$45.1 million for our ClassB EETC-13 debt obligation and inJune 2022 , we extinguished the remaining$62.4 million in outstanding Class A EETC-20 and Class B EETC-20 Equipment Notes. •As ofSeptember 30, 2022 , our air traffic liability and current frequent flyer deferred revenue was$699.8 million , an increase of$68.6 million , or 10.9%, as compared to$631.2 million as ofDecember 31, 2021 . The increase in air traffic liability is primarily due to an increase in advanced ticket sales. Refer to the Cash Flow and Use of Liquidity section below for additional discussion. Based on these actions, including anticipated revenue recovery assumptions, we believe we have sufficient liquidity to satisfy our obligations and remain in compliance with existing debt covenants. If we are unable to generate sufficient cash flows to support our future payment obligations, comply with debt covenants, compete successfully with less heavily leveraged competitors, manage potential adverse economic and industry conditions in the future or maintain our credit ratings, the impact to our business and financial condition could be material.
Fleet Summary
Due to the ongoing impacts of the COVID-19 pandemic on our business, we continue to evaluate our existing fleet structure to optimize capacity with demand. The table below summarizes our total fleet as ofSeptember 30, 2021 and 2022, respectively and our expected fleet as ofSeptember 30, 2023 (based on existing executed agreements as ofSeptember 30, 2022 ): September 30, 2021 September 30, 2022 September 30, 2023 (Expected) Aircraft Type Leased (1) Owned (2) Total Leased (1) Owned (2) Total Leased (1) Owned (2) Total A330-200 12 12 24 12 12 24 12 12 24 A321neo 4 14 18 4 14 18 4 14 18 787-9 - - - - - - - 1 1 717-200 5 14 19 5 14 19 5 14 19 ATR 42-500 (3) - 3 3 - 3 3 - - - ATR 72-200 (3) - 4 4 - 1 1 - - - Total 21 47 68 21 44 65 21 41 62
(1) Leased aircraft include aircraft under both finance and operating leases.
(2) Includes unencumbered aircraft as well as those purchased and under various debt financing.
(3) The ATR 42-500 turboprop and ATR 72-200 turboprop aircraft are owned byAirline Contract Maintenance & Equipment, Inc. , our wholly owned subsidiary of the Company. In 2021, we announced the permanent suspension of its 'Ohana by Hawaiian operations, which operated under a capacity purchase agreement with a third-party provider. As ofSeptember 30, 2022 , these aircraft and related asset group were classified as Assets held-for-sale on the Consolidated Balance Sheets. We expect to complete the sale of the remaining ATR 42-500 and ATR 72-200 in the fourth quarter of 2022.
Air Transportation Services Agreement
On
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elect to extend the ATSA for two years and, at the end of such period, the parties may mutually agree to extend the term for three additional years.
The ATSA provides for us to initially operate ten A330-300F aircraft for Transportation Services, with Customer having the right to enter into work orders for additional aircraft. We will supply flight crews, perform maintenance and certain administrative functions, and procure aircraft insurance. Customer will pay us a fixed monthly fee per aircraft, a per flight hour fee, and a per flight cycle fee for each flight cycle operated. Customer will also reimburse us for certain operating expenses, including fuel, certain maintenance, and insurance premiums.
Warrant and Transaction Agreement
Contemporaneously with the ATSA, we and Amazon entered into a Transaction Agreement (the Transaction Agreement), under which, we agreed to issue toAmazon.com NV Investment Holdings LLC , a wholly owned subsidiary of Amazon (Warrantholder), a warrant (the Warrant) to acquire up to 9,442,443 shares (the "Warrant Shares"), of the our common stock. At execution, 1,258,992 Warrant Shares vested upon warrant issuance. Future vesting is based on payments to be made by Amazon or its affiliates either under the ATSA or generally with respect to air cargo or air charters, excluding commercial passenger service (Qualified Payments), up to$1.8 billion in the aggregate. Subject to certain conditions, including vesting, the Warrant may be exercised, in whole or in part and for cash or on a net exercise basis, at any time beforeOctober 20, 2031 . The exercise price with respect to the first 6,294,962 Warrant Shares that vest will be$14.71 per share. The exercise price with respect to the remaining 3,147,481 Warrant Shares will be determined based on the 30-day volume-weighted average price of our common stock as of the earlier of (i)October 20, 2025 , or (ii) the date that the entire First Tranche is vested. The exercise prices and the Warrant Shares issuable are subject to customary antidilution adjustments. Warrantholder may not beneficially own more than 4.999% of the number of shares of our common stock outstanding immediately after giving effect to any exercise of the Warrant unless Warrantholder provides 60 days' prior written notice to us or sooner notice in connection with certain transactions involving the acquisition or all or a material portion of us. Upon consummation of such acquisition transactions and so long as the ATSA has not been terminated (other than for cause by Customer), the Warrant will automatically vest and become exercisable with respect to: (i) if Qualified Payments are equal to or less than$350 million , 25% of the Warrant Shares that are not vested as of such date, (ii) if Qualified Payments are greater than$350 million and equal to or less than$650 million , 50% of the Warrant Shares that are not vested as of such date, (iii) if Qualified Payments are greater than$650 million and equal to or less than$950 million , 75% of the Warrant Shares that are not vested as of such date or (iv) if Qualified Payments are greater than$950 million , all Warrant Shares that are not vested as of such date. The Transaction Agreement sets forth certain governance arrangements and provisions relating to Warrantholder's equity interest in us, including, among other things, customary registration rights relating to the Warrant Shares, restrictions on transferring the Warrant and Warrant Shares, certain standstill provisions, and rights of notice of certain transactions involving the acquisition of us, and includes customary representations, warranties and covenants of us and Amazon. We must use commercially reasonable efforts to obtain shareholder approval of the issuance of Warrant Shares in excess of 19.999% of the number of shares of our common stock issued and outstanding immediately prior to the issuance of the Warrant (such number of shares, the Share Cap), as may be required under the rules of the Nasdaq Global Select Market (Nasdaq), including, but not limited to, Nasdaq Listing Rules 5635(b) and 5635(d) (the Shareholder Approval). Until Shareholder Approval is obtained, Nasdaq rules may restrict issuing shares of our common stock exceeding the Share Cap upon the exercise of the Warrant. We have agreed to file a proxy statement and submit the issuance of shares of our common stock exceeding the Share Cap for a vote at our 2023 annual meeting of shareholders. To the extent the Shareholder Approval is not obtained at such shareholder meeting, at Warrantholder's request, we are required to seek to obtain such approval at each subsequent annual meeting of its shareholders until either the Shareholder Approval is obtained or the term of the Warrant expires. The Warrant and Warrant Shares have not been registered under the Securities Act of 1933, as amended (the Securities Act), in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act and rules and regulations of theU.S. Securities and Exchange Commission promulgated thereunder. 36
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