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HAWAIIAN HOLDINGS INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.(Edgar Glimpses Via Acquire Media NewsEdge) 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: any expectations of operating expenses, deferred revenue, interest rates, income taxes, deferred tax assets, valuation allowance or other financial items; statements regarding areas of strategic focus, statements regarding factors that may affect our ability to fund our working capital, capital expenditures or other general purpose needs; statements related to the impact of our low-cost structure on funding our growth strategy and market opportunities; statements regarding our ability to pay taxes with working capital; estimates of fair value measurements; statements related to aircraft maintenance and repair costs and deposits and timing of maintenance activities; statements related to cash flow from operations and seasonality; estimates of required funding of and contributions to our defined benefit pension and disability plan; estimates of annual fuel expenses and measure of the effects of fuel prices on our business; statements regarding the availability and cost of fuel; statements regarding our wages and benefits and labor costs and agreements; statements regarding the implementation, effective date and costs of compliance with regulations promulgated by the FAA and other regulatory agencies; statements related to airport rent rates and landing fees; statements regarding aircraft rent expense; statements regarding our total capacity and yields on routes; statements related to our hedging program; statements concerning the impact of, and changes to, accounting principles, policies and estimates; statements regarding credit card holdback; statements regarding the availability of financing; statements regarding our capital expenditures; statements regarding potential violations under the Company's debt or lease obligations; statements regarding our ability to comply with covenants under our financing arrangements; statements related to risk management, credit risks and air traffic liability; statements related to future U.S. and global economic conditions or performance; statements related to changes in our fleet plan and related cash outlays; statements related to expected delivery of new aircraft; statements related to potential route expansion; statements related to the increase in frequency on existing routes; statements related to the effects of any litigation on our operations or business; and statements as to 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," 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. 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 from time to time in our public filings and public announcements, including, but not limited to, the risks set out in the "Risk Factors" section of this Quarterly Report on Form 10-Q. All forward-looking statements included in this Report 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 Consolidated Financial Statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q. Overview Hawaiian Holdings, Inc. (the "Company," "Holdings," "we," "us" and "our") 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"). Hawaiian was originally incorporated in January 1929 under the laws of the Territory of Hawai'i and became the Company's indirect wholly-owned subsidiary pursuant to a corporate restructuring that was consummated in August 2002. Hawaiian became a Delaware corporation and the Company's direct wholly-owned subsidiary concurrent with its reorganization in June 2005. Our Business We are engaged in the scheduled air transportation of passengers and cargo amongst the Hawaiian Islands (the Neighbor Island routes), between the Hawaiian Islands and certain cities in the U.S. mainland (the North America routes), and between the Hawaiian Islands and the South Pacific, Australia and Asia (the International routes), collectively referred to as our Scheduled Operations. In addition, we operate various charter flights. We are the largest airline headquartered in the State of Hawai'i and the eleventh largest domestic airline in the United States based on revenue passenger miles reported by the Research and Innovative Technology Administration Bureau of Transportation Statistics as of December 31, 2012, the latest available data. 22 -------------------------------------------------------------------------------- Table of Contents As of March 31, 2013, Hawaiian had 4,962 active employees. General information about us is available at http://www.hawaiianairlines.com/about. 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, the SEC. First Quarter Review First Quarter Financial Highlights † Passenger revenue increased 12.5% to $439.9 million from the prior-year period. † † Operating cost per available seat mile (CASM) decreased 5.7% from the prior-year period, and CASM excluding fuel decreased 7.9% from the prior-year period. † Unrestricted cash and cash equivalents increased 8.0% from December 31, 2012. First Quarter Business Highlights Operational † Ranked #1 nationally for the ninth consecutive year for on-time performance in 2012 and the month of February 2013 by the U.S. Department of Transportation Air Travel Consumer Report. † Unveiled branding and livery for our new Neighbor Island turboprop operations as "'Ohana by Hawaiian" for service to begin in the summer between Honolulu and Moloka'i and Lana'i. Fleet † Added one new Airbus A330-200 aircraft in February for North America and International service. † Executed a purchase agreement with Airbus for 16 new A321neo aircraft for delivery between 2017 and 2020, with purchase rights for an additional nine aircraft. The long-range, single-aisle aircraft will complement Hawaiian's existing fleet of twin-aisle aircraft used for long-haul flying between Hawai'i and the U.S. West Coast. New routes and increased frequencies † Honolulu to Auckland, New Zealand three-times-weekly service launched in March 2013. † Announced Honolulu to Sendai, Japan three-times-weekly service beginning in June 2013. † Announced Honolulu to Taipei, Taiwan three-times-weekly service beginning in July 2013. † Announced the addition of seasonal frequency flights between Honolulu and three Oceania gateways, Sydney, Brisbane and Auckland in September and October 2013. † Announced three-times-weekly-service between Honolulu and Beijing, China beginning in April 2014 pending government approval. See "Results of Operations" below for further discussion of changes in revenues and operating expenses and our reconciliation of non-GAAP measures. In March 2013, we executed a purchase agreement to acquire 16 Airbus A321neo aircraft with scheduled delivery from 2017 to 2020. These fuel efficient, long-range, single-aisle aircraft will complement our existing fleet of wide-body, twin aisle aircraft used for long-haul flying between Hawai'i and the U.S. West Coast. In addition, during April 2013, we executed a purchase agreement 23 -------------------------------------------------------------------------------- Table of Contents for two Pratt and Whitney spare engines (for our Airbus A321neo aircraft) for expected delivery in 2017 and 2018, with the option to purchase an additional two engines. Pratt and Whitney will also provide off-wing engine maintenance for the Airbus A321neo aircraft. During the three months ended March 31, 2013, we continued to focus on our International expansion with the launch of our non-stop flight to Auckland, New Zealand with three-times-weekly service initiated in March 2013. We are currently the only U.S. carrier serving this city. Further, we announced three-times-weekly service from Honolulu to Sendai, Japan to begin in June 2013, reflecting our fifth destination to Japan since 2010, and in April 2013 announced three-times-weekly service from Honolulu to Beijing, China to begin in April 2014 (subject to government approval), reflecting our first destination to China. In February 2013, we announced the branding of our turboprop operations as "'Ohana by Hawaiian" for our new Neighbor Island service between Honolulu and the islands of Moloka'i and Lana'i, expected to begin during the summer season of 2013. The table below summarizes our total fleet as of March 31, 2012 and 2013, and expected fleet as of June 30, 2013 (based on existing agreements): March 31, 2012 March 31, 2013 June 30, 2013 Leased Leased Leased Aircraft Type (5) Owned Total (5) Owned Total (5) Owned Total A330-200(1)(2) 3 3 6 6 4 10 7 6 13 767-300ER (3) 9 7 16 9 7 16 8 7 15 717-200 3 15 18 3 15 18 3 15 18 ATR42 (4) - - - - 2 2 - 2 2 Total 15 25 40 18 28 46 18 30 48 -------------------------------------------------------------------------------- (1) Hawaiian took delivery of a leased A330-200 aircraft in February 2013. (2) Hawaiian took delivery of one leased A330-200 aircraft and one owned A330-200 aircraft in April 2013, and will take delivery of one owned A330-200 in June 2013. (3) The decrease in the number of leased 767-300ER aircraft from the quarter ended March 31, 2013 to the quarter ended June 30, 2013 is due to the planned return of a leased aircraft at the end of its lease term. (4) Hawaiian took delivery of two owned ATR42 turboprop aircraft during the fourth quarter of 2012, with service expected to initiate on our new Neighbor Island routes operated under "'Ohana by Hawaiian" during the summer season of 2013. (5) Leased aircraft include both aircraft under capital and operating leases. See Note 7 for further discussion of our aircraft leases. Results of Operations For the three months ended March 31, 2013, we recorded a net loss of $17.1 million or $0.33 per diluted share, compared to net income of $7.3 million, or $0.14 per diluted share, in the prior-year period. Our current period results reflect the impact of seasonal volatility, where we typically experience lower demand for travel to Hawai'i during the first three months of the calendar year, combined with excess capacity due to increased competition on certain of our North America and International routes. Our positive prior-period results reflected higher unit revenues (passenger revenue per available seat mile) and higher passenger yield, reflecting the impact of expanding our International routes to Japan and Korea, and increasing frequencies on our Australia route. Adjusted (non-GAAP) results and per-share amounts We believe the disclosure of non-GAAP financial measures is useful information to readers of our financial statements because: † We believe it is the basis by which we are evaluated by industry analysts and investors; † Our results excluding these items are often used in management and board of directors decision making analysis; 24 -------------------------------------------------------------------------------- Table of Contents † It is useful to monitor performance without these items as it improves a reader's ability to compare our results to other airlines; and † It is consistent with how we present information in our quarterly earnings press releases. See table below for reconciliation between GAAP consolidated net income to adjusted consolidated net income, including per share amounts for the quarter ended March 31, 2013 and 2012 (in thousands unless otherwise indicated). Three months ended March 31, 2013 2012 Diluted net Diluted net loss income Net loss per share Net income per share As reported - GAAP $ (17,145 ) $ (0.33 ) $ 7,258 $ 0.14 Less: unrealized (losses) gains on fuel derivative contracts, net of tax (2,319 ) (0.04 ) 4,005 0.08 Reflecting economic fuel expense $ (14,826 ) $ (0.29 ) $ 3,253 $ 0.06 Selected Consolidated Statistical Data (unaudited) Three months ended March 31, 2013 2012 (in thousands, except as otherwise indicated) Scheduled Operations: Revenue passengers flown 2,397 2,218 Revenue passenger miles (RPM) 3,205,482 2,630,287 Available seat miles (ASM) 3,960,295 3,139,965 Passenger revenue per RPM (Yield) 13.72 ¢ 14.86 ¢ Passenger load factor (RPM/ASM) 80.9 % 83.8 % Passenger revenue per ASM (PRASM) 11.11 ¢ 12.45 ¢ Total Operations: Revenue passengers flown 2,399 2,219 RPM 3,210,632 2,631,442 ASM 3,965,778 3,141,341 Operating revenue per ASM (RASM) 12.37 ¢ 13.86 ¢ Operating cost per ASM (CASM) 12.68 ¢ 13.45 ¢ CASM excluding aircraft fuel (b) 8.28 ¢ 8.99 ¢ Aircraft fuel expense per ASM (a) 4.40 ¢ 4.46 ¢ Revenue block hours operated (actual) 38,867 33,083 Gallons of jet fuel consumed 53,935 43,125 Average cost per gallon of jet fuel (actual) (a) $ 3.24 $ 3.25 -------------------------------------------------------------------------------- (a) Includes applicable taxes and fees. (b) Represents adjusted unit costs, a non-GAAP measure. We believe this is a useful measure because it better reflects our controllable costs. 25 -------------------------------------------------------------------------------- Table of Contents Operating Revenue Operating revenue was $490.8 million for the three months ended March 31, 2013, a 12.7% increase over operating revenue of $435.5 million for the prior-year period, driven primarily by an increase in passenger revenue, which was primarily due to the expansion of our international services. Passenger Revenue For the three months ended March 31, 2013, passenger revenue increased $49.0 million or 12.5%, as compared to the prior-year period, due to increased capacity that was partially offset by decreased yield and load factor as we faced increased competition on certain of our North America and International routes, which led to a decreased load factor and lower average fares in certain portions of our network. Details of these changes are described in the table below: Change in Change in Change in Change in passenger revenue Yield RPM ASM (millions) North America $ 11.3 (5.8 )% 12.9 % 13.0 % Neighbor Island 2.7 (2.1 ) 4.7 (1.8 ) International 35.0 (9.6 ) 47.0 59.7 Total scheduled $ 49.0 (7.7 )% 21.9 % 26.1 % North America - North America revenue increased by $11.3 million, or 6.3%, for the three months ended March 31, 2013, as compared to the prior-year period, due to increased capacity, partially offset by decreased yield. The increase in capacity was primarily due to the commencement of new routes that initiated subsequent to March 31, 2012, which reflect non-stop daily service from Honolulu to New York City, New York (launched in June 2012), and a third daily year-round flight from Honolulu to Los Angeles, California (launched in June 2012). We experienced a decrease in yield due to an increase in price discounting related to the increase in overall industry capacity on our existing routes and the effect of an increase in average trip length. Neighbor Island - Neighbor Island revenue increased by $2.7 million, or 2.6%, for the three months ended March 31, 2013, as compared to the prior-year period, primarily due to an increased load factor, partially offset by decreased yield. Increased load factor was the result of schedule changes initiated during the fourth quarter of 2012 to decrease capacity on these routes, combined with an increase in overall traffic (RPMs). We experienced a slight decrease in yield primarily due to decreased average fares on these routes, partially offset by the increase in RPMs and load factor. Our prior-period results reflect capacity increases provided by three Boeing 717-200 aircraft which entered the fleet in December 2011 and January 2012. International - International revenue increased by $35.0 million, or 32.8%, for the three months ended March 31, 2013, as compared to the prior-year period, due to increased capacity, partially offset by decreased load factor and yield. The increase in capacity was primarily due to the commencement of new routes that initiated subsequent to March 31, 2012, which reflect non-stop daily routes from Honolulu to Fukuoka, Japan (launched in April 2012), three-times weekly service to Sapporo, Japan, Brisbane, Australia (launched in November 2012), and Auckland, New Zealand (launched in March 2013), and the increase in our Seoul, Korea service to daily from four times per week (launched in August 2012). We experienced a decrease in load factor and yield as we faced increased competition on our Japanese routes combined with the weakening of the Japanese Yen, resulting in a decrease in average fares from the prior-year period. Other Operating Revenue Other operating revenue increased by $6.2 million, or 14.0%, for the three months ended March 31, 2013, as compared to the prior-year period, primarily due to increased cargo revenue due to the additional cargo capacity provided by the Airbus A330-200 aircraft and the expansion of our network, and increased charter and incidental revenue. Operating Expense Operating expenses were $502.7 million and $422.6 million for the three months ended March 31, 2013 and March 31, 2012, respectively. Increases (decreases) in operating expenses for the three months ended March 31, 2013 as compared to the prior-year period is detailed below: 26 -------------------------------------------------------------------------------- Table of Contents Changes in operating expenses for the three months ended March 31, 2013 as compared to the three months ended March 31, 2012 $ % (in thousands) Operating expenses Aircraft fuel, including taxes and oil $ 34,171 24.4 % Wages and benefits 12,611 14.0 Aircraft rent 2,797 12.0 Maintenance materials and repairs 11,547 26.4 Aircraft and passenger servicing 7,713 36.1 Commissions and other selling 4,395 14.9 Depreciation and amortization (38 ) (0.2 ) Other rentals and landing fees (601 ) (3.0 ) Other 7,491 21.1 Total $ 80,086 19.0 % Our operations have expanded by approximately 26.2% (measured in ASMs) during the three months ended March 31, 2013, as compared to the prior-year period, primarily due to the addition of four Airbus A330-200 aircraft since March 31, 2012. Our expansion includes the addition of new North America and International routes since March 31, 2012. As a result of this expansion, we have experienced corresponding increases in our variable expenses such as aircraft fuel, wages and benefits, maintenance materials and repairs, aircraft and passenger servicing, commissions and other selling, and other expenses (which primarily consists of purchased services, personnel expenses and professional and technical fees). We expect operating expenses to increase with the continued expansion of our services and the increase in the number of aircraft in our fleet. Aircraft Fuel Aircraft fuel expense increased in the three months ended March 31, 2013 as compared to the prior-year period, due to an increase in fuel gallons consumed driven primarily by the additional aircraft that entered the fleet subsequent to March 31, 2012 (four additional Airbus A330-200 aircraft), and partially offset by a decrease in fuel price as illustrated in the following table: Three months ended March 31, 2013 2012 Change (in thousands, except per-gallon amounts) Fuel gallons consumed 53,935 43,125 25.1 % Fuel price price per gallon, including taxes and delivery $ 3.24 $ 3.25 (0.3 )% Aircraft fuel expense $ 174,489 $ 140,318 24.4 % During the three months ended March 31, 2013 and March 31, 2012, our fuel derivatives were not designated for hedge accounting under ASC 815 and were marked to fair value through nonoperating income (expense) in the unaudited Consolidated Statements of Operations set forth in the Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q. We recorded a loss on fuel derivatives of $6.6 million for the three months ended March 31, 2013, compared to a gain of $5.8 million for the three months ended March 31, 2012. We believe economic fuel expense is the best measure of the effect of fuel prices on our business as it most closely approximates the net cash outflow associated with the purchase of fuel for our operations in a period and is consistent with how management manages our business and assesses our operating performance. We define economic fuel expense as raw fuel expense plus (gains)/losses realized through actual cash payments to/(receipts from) hedge counterparties for fuel hedge derivatives settled in the period inclusive 27 -------------------------------------------------------------------------------- Table of Contents of costs related to hedging premiums. Economic fuel expense for the three months ended March 31, 2013 and March 31, 2012 is calculated as follows: Three Months Ended March 31, 2013 2012 Change (in thousands, except per- gallon amounts) Aircraft fuel expense, including taxes and oil $ 174,489 $ 140,318 24.4 % Realized (gains) losses on settlement of fuel derivative contracts 2,696 854 215.7 % Economic fuel expense $ 177,185 $ 141,172 25.5 % Gallons of jet fuel consumed 53,935 43,125 25.1 % Economic fuel costs per gallon $ 3.29 $ 3.27 0.6 % See Item 3, Quantitative and Qualitative Disclosures About Market Risk, for additional discussion of our jet fuel costs and related derivative program. Wages and Benefits Wages and benefits expense increased by $12.6 million, or 14.0%, for the three months ended March 31, 2013, as compared to the prior-year period, primarily due to an increase in the number of employees as we continue to expand our operations with additional aircraft and new routes. We expect wages and benefits expense to increase in future periods as we continue to add additional employees for the expansion of our operations. Aircraft Rent Aircraft rent expense increased by $2.8 million, or 12.0%, for the three months ended March 31, 2013, as compared to the prior-year period, primarily due to the addition of two aircraft under operating leases (one A330 aircraft in May 2012 and one A330 aircraft in February 2013). We expect rent expense to increase in future periods as we expand our fleet if we add aircraft under operating leases. Maintenance materials and repairs Maintenance materials and repairs expense increased by $11.5 million, or 26.4%, for the three months ended March 31, 2013, as compared to the prior-year period, primarily due to increased power-by-the-hour (PBH) expenses for the additional Airbus A330-200 aircraft in our fleet and increases in heavy maintenance expense on our Boeing 767-200 and Boeing 717-200 aircraft. We expect maintenance materials and repairs expense to increase in future periods as we continue to integrate additional Airbus aircraft into revenue service, and as a result of price escalations imposed in certain of our PBH contracts. Aircraft and passenger servicing Aircraft and passenger servicing expenses increased by $7.7 million, or 36.1%, for the three months ended March 31, 2013, as compared to the prior-year period, primarily due to volume-related increases as well as increased service costs on our International routes. We expect aircraft and passenger servicing expenses to increase in future periods as we continue to expand our fleet and add additional routes. Commissions and other selling Commissions and other selling expenses increased by $4.4 million, or 14.9%, for the three months ended March 31, 2013, as compared to the prior-year period, primarily due to increases in volume-related selling expenses, which include increased travel agency commissions and increases in the volume of tickets purchased through credit cards and global distribution systems. 28 -------------------------------------------------------------------------------- Table of Contents We expect commissions and other selling expenses to increase in future periods as we continue to expand our fleet and add additional routes. Depreciation and Amortization Depreciation and amortization expense decreased by 0.2% for the three months ended March 31, 2013, as compared to the prior-year period, primarily due to our frequent flyer marketing relationship intangible asset which was fully amortized as of December 31, 2012, which was offset by the increase in the number of owned aircraft (two A330-200 aircraft) and aircraft under a capital lease (one A330-200 aircraft) since March 31, 2012. We expect depreciation and amortization expenses to increase in future periods as we continue to expand our fleet and add additional routes. Other rentals and landing fees Other rentals and landing fees expense decreased by $0.6 million, or 3.0%, for the three months ended March 31, 2013, as compared to the prior-year period, primarily due to decreased rental and landing fee rates at our Honolulu station, partially offset by the addition of new routes since March 31, 2012. We expect expenses for other rentals and landing fees to increase in future periods as we continue to add additional routes and increase frequency on our existing routes. Other expense Other expense increased by $7.5 million, or 21.1%, for the three months ended March 31, 2013, as compared to the prior-year period, primarily due to increased personnel-related expenses, and increased expenses incurred on services outsourced to third-party vendors resulting from our continued expansion. We expect other expenses to increase in future periods as we continue to expand our operations. Operating Costs per Available Seat Mile (CASM) We have listed separately in the table below our fuel costs per ASM and our non-GAAP unit costs, excluding fuel for the three months ended March 31, 2013 and 2012. These amounts are included in CASM, but for internal purposes we consistently use unit cost metrics that exclude fuel and non-recurring items (if applicable) to measure and monitor our costs. CASM and CASM, excluding fuel, for the three months ended March 31, 2013 and 2012 are summarized in the table below: Three months ended March 31, 2013 2012 GAAP operating expenses $ 502,680 $ 422,594 Less: aircraft fuel, including taxes and oil 174,489 140,318 Adjusted operating expenses - excluding aircraft fuel $ 328,191 $ 282,276 Available Seat Miles 3,965,778 3,141,341 CASM - GAAP 12.68 ¢ 13.45 ¢ Less: aircraft fuel 4.40 4.46 CASM - excluding aircraft fuel 8.28 ¢ 8.99 ¢ Nonoperating Expense For the three months ended March 31, 2013, net nonoperating expense increased to $15.5 million, from $1.0 million in the prior-year period. The increase in net nonoperating expense is primarily due to recognized losses on fuel derivatives during the three months ended March 31, 2013 compared to recognized gains on fuel derivatives during the prior-year period. Further increase in net nonoperating expense is due to interest expense and amortization of debt discounts and issuance costs due to the additional financings we entered into subsequent to March 31, 2012. 29 -------------------------------------------------------------------------------- Table of Contents Income Tax Expense (Benefit) We had effective tax rates of 37.4% and 38.8% for the three months ended March 31, 2013 and 2012, respectively. We consider a variety of factors in determining the effective tax rate, including our forecasted full-year pretax results, the U.S. federal statutory rate of 35%, expected nondeductible expenses and estimated state taxes. Liquidity and Capital Resources Our liquidity is dependent on the cash we generate from operating activities and our debt financing arrangements. As of March 31, 2013, we had $438.2 million in cash and cash equivalents, representing an increase of $32.3 million from December 31, 2012. As of March 31, 2013 and December 31, 2012, our restricted cash balance, which consisted of cash held as collateral by entities that process our credit card transactions for advance ticket sales, was $5.0 million. We have been able to generate sufficient funds from our operations to meet our working capital requirements and typically finance our aircraft through secured debt and lease financings. At March 31, 2013, Hawaiian had approximately $648.2 million of debt and capital lease obligations, including approximately $105.5 million that will become due in the next 12 months. Hawaiian has a secured revolving credit facility (the Revolving Credit Facility) in an amount of up to $75.0 million, and as of March 31, 2013, we had no outstanding borrowings under the Revolving Credit Facility and $68.9 million available (net of various outstanding letters of credit). Cash Flows Net cash provided by operating activities was $72.5 million and $119.5 million for the three months ended March 31, 2013 and March 2012, respectively. The decrease in cash provided by operating activities was primarily due to the decrease in net income (loss) from the prior-year period, and the reclassification from restricted cash to unrestricted due to the change in our credit card holdback during the quarter ended March 31, 2012, partially offset by an increase in our air traffic liability balance. Net cash used in investing activities was $25.8 million and $102.8 million for the three months ended March 31, 2013 and March 31, 2012, respectively. The decrease in cash used in investing activities was due to the decrease in purchases of property and equipment and pre-delivery deposits for upcoming aircraft and engine deliveries, which also reflect proceeds of $33.0 million from the refund of pre-delivery deposits in connection with the operating lease for our Airbus A333-200 aircraft delivered in February 2013. Net cash provided by (used in) financing activities was $(14.4) million and $55.3 million for the three months ended March 31, 2013 and March 31, 2012, respectively. The decrease in cash provided by financing activities was primarily due to the decrease in proceeds received from debt issuances and an increase in cash repayments for debt and capital lease obligations as compared to the prior-year period. Capital Commitments As of March 31, 2013, we had capital commitments for aircraft and aircraft related equipment which included firm aircraft orders for 12 wide-body Airbus A330-200 aircraft for delivery between 2013 and 2015, 16 narrow-body Airbus A321neo aircraft for delivery between 2017 and 2020, six Airbus A350XWB-800 aircraft for delivery beginning in 2017, and four Rolls Royce spare engines scheduled for delivery through 2020. In addition, Hawaiian has purchase rights for an additional three A330-200 aircraft, nine A321neo aircraft, and six A350-XWB aircraft. During April 2013, Hawaiian executed a purchase agreement for two Pratt and Whitney spare engines (for its Airbus A321neo aircraft) for delivery in 2017 and 2018, and the option to purchase an additional two spare engines. Committed expenditures for these aircraft, engines and related flight equipment approximates $358 million for the remainder of 2013, $429 million in 2014, $246 million in 2015, $148 million in 2016, $494 million in 2017 and $1.1 billion thereafter. For the remainder of 2013, we expect our other non-aircraft related capital expenditures, which include software, improvements and ramp and maintenance equipment to total approximately $45 million to $55 million. In order to complete the purchase of these aircraft and fund related costs, we must secure acceptable financing. We are currently exploring various financing alternatives, and while we believe that such financing will be available to us, there can be no assurance that financing will be available when required, or on acceptable terms, or at all. The inability to secure such financing could have a material adverse effect on us. We have secured financing commitments of $222 million for a portion of the purchase price of three upcoming aircraft deliveries, with expected delivery dates in the second quarter of 2013 (two Airbus A330s with committed financings totaling $157 million was delivered in April 2013). In addition, we have backstop financing available from aircraft and engine manufacturers, subject to certain customary conditions. See Note 9 for further detail regarding our aircraft facility and lease commitments. 30 -------------------------------------------------------------------------------- Table of Contents Covenants under our Financing Arrangements The terms of certain of our financing agreements restrict our ability to, among other things, incur additional indebtedness, grant liens, merge or consolidate, dispose of assets, prepay indebtedness, make investments, make acquisitions, enter into certain transactions with affiliates, repurchase stock and, in the case of Hawaiian, pay dividends or make distributions to the Company. These agreements also require us to meet certain financial covenants. These financial tests include maintaining a minimum amount of unrestricted cash and achieving certain levels of fixed charge coverage. As of March 31, 2013, we were in compliance with these covenants. If we are not able to comply with these covenants in the future, our outstanding obligations under these facilities could be accelerated and become due and payable immediately. Under our 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 our unaudited Consolidated Balance Sheets set forth in the Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q, totaled $5.0 million at March 31, 2013 and December 31, 2012. In the event of a material adverse change in the business, the holdback could increase to an amount up to 100% of the applicable credit card air traffic liability, which would also cause an increase in the level of restricted cash. If we are unable to obtain a waiver of, or otherwise mitigate the increase in the restriction of cash, it could also cause a covenant violation under other debt or lease obligations and have a material adverse impact on us. Pension and Postemployment Benefit Plan Funding We contributed $2.8 million to our defined benefit and other postretirement plans during the three months ended March 31, 2013, and expect to contribute an additional required minimum of $12.0 million during the remainder of 2013. Future funding requirements for our defined benefit plans are dependent upon many factors such as interest rates, funded status, applicable regulatory requirements and the level and timing of asset returns. Contractual Obligations Our estimated contractual obligations are summarized in the following table: Nine months remaining in 2018 and Contractual Obligations Total 2013 2014 - 2015 2016 - 2017 thereafter (in thousands) Debt and capital lease obligations (1) $ 845,862 $ 122,192 $ 158,959 $ 232,329 $ 332,382 Operating leases-aircraft and related equipment (2) 640,673 69,170 176,190 141,642 253,671 Operating leases-non-aircraft 46,947 3,667 10,135 9,824 23,321 Purchase commitments - Capital (3) 2,780,436 357,770 675,322 641,648 1,105,696 Purchase commitments - Operating (4) 387,255 29,484 61,447 63,894 232,430 Projected employee benefit contributions (5) 40,413 12,000 28,413 - - Total contractual obligations $ 4,741,586 $ 594,283 $ 1,110,466 $ 1,089,337 $ 1,947,500 -------------------------------------------------------------------------------- (1) Amounts represent contractual amounts due, including interest. Interest on variable-rate debt was estimated using rates in effect as of March 31, 2013. Amount reflects capital lease obligations for one Airbus A330-200 aircraft and two Boeing 717 aircraft. (2) Amounts reflect leases for five Airbus A330-200 aircraft, nine Boeing 767 aircraft, one Boeing 717 aircraft and aircraft-related equipment as of March 31, 2013. (3) Amounts include our firm commitments for aircraft and aircraft related equipment including aircraft orders consisting of 12 wide-body Airbus A330-200 aircraft, 16 narrow-body Airbus A321neo aircraft, six Airbus A350XWB-800 aircraft, four Rolls Royce spare engines and two Pratt and Whitney spare engines. We have secured financing commitments of $222 million for a portion of the purchase price of three Airbus A330-200 aircraft deliveries, with expected delivery dates in the second quarter of 2013 (two Airbus A330s with committed financings totaling $157 million were delivered in April 2013). 31 -------------------------------------------------------------------------------- Table of Contents (4) Amounts include commitments for services provided by third-parties for aircraft maintenance for our Airbus fleet, accounting, IT and reservations. Total contractual obligations do not include long-term contracts where the commitment is variable in nature (with no minimum guarantee), such as aircraft maintenance deposits due under operating leases and fees due under certain other agreements such as aircraft maintenance power-by-the-hour, computer reservation systems and credit card processing agreements, or when the agreements contain short-term cancellation provisions. (5) Amount includes our estimated contributions to our pension plans (based on actuarially determined estimates) and our pilots' disability plan. Amounts are subject to change based on numerous factors, including interest rate levels, the amount and timing of asset returns and the impact of future legislation. We are currently unable to estimate the projected contributions beyond 2015. Critical Accounting Policies The discussion and analysis of our financial condition and results of operations are based upon financial statements that have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities as of the date of the financial statements. Actual results may differ from these estimates under different assumptions and/or conditions. Critical accounting policies and estimates are defined as those accounting policies and accounting estimates that are reflective of significant judgments and uncertainties that potentially result in materially different results under different assumptions and conditions. For a detailed discussion of the application of our critical accounting policies, see "Critical Accounting Policies" and Note 2, "Summary of Significant Accounting Policies," to our Consolidated Financial Statements for the year ended December 31, 2012 included in our Annual Report on Form 10-K and current report on Form 8-K filed on March 14, 2013, respectively. |