UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2007
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-31443
HAWAIIAN HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware |
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71-0879698 |
(State or Other Jurisdiction of |
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(I.R.S. Employer |
Incorporation or Organization) |
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Identification No.) |
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|
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3375 Koapaka Street, Suite G-350 |
|
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Honolulu, HI |
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96819 |
(Address of Principal Executive Offices) |
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(Zip Code) |
(808) 835-3700
(Registrants Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal
Year, if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and larger accelerated filer in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer x Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No
As of April 20, 2007, 46,583,914 shares of the registrants common stock were outstanding.
Hawaiian
Holdings, Inc.
Form 10-Q
Quarterly Period ended March 31, 2007
Table of Contents
2
Hawaiian Holdings, Inc.
Consolidated Statements of Operations (in thousands, except per share data)
|
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Three Months Ended |
|
||||
|
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March 31, |
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||||
|
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2007 |
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2006 |
|
||
|
|
(unaudited) |
|
||||
Operating Revenue: |
|
|
|
|
|
||
Passenger |
|
$ |
192,557 |
|
$ |
189,590 |
|
Cargo |
|
6,990 |
|
8,088 |
|
||
Charter |
|
2,403 |
|
2,274 |
|
||
Other |
|
13,241 |
|
12,138 |
|
||
Total |
|
215,191 |
|
212,090 |
|
||
|
|
|
|
|
|
||
Operating Expenses: |
|
|
|
|
|
||
Aircraft fuel, including taxes and oil |
|
59,294 |
|
56,962 |
|
||
Wages and benefits |
|
57,997 |
|
58,169 |
|
||
Aircraft rent |
|
24,140 |
|
27,358 |
|
||
Maintenance materials and repairs |
|
25,062 |
|
16,772 |
|
||
Aircraft and passenger servicing |
|
14,090 |
|
11,997 |
|
||
Commissions and other selling |
|
13,384 |
|
12,904 |
|
||
Depreciation and amortization |
|
10,226 |
|
6,764 |
|
||
Other rentals and landing fees |
|
6,985 |
|
5,915 |
|
||
Other |
|
20,143 |
|
19,843 |
|
||
Total |
|
231,321 |
|
216,684 |
|
||
|
|
|
|
|
|
||
Operating Loss |
|
(16,130 |
) |
(4,594 |
) |
||
|
|
|
|
|
|
||
Nonoperating Income (Expense): |
|
|
|
|
|
||
Interest and amortization of debt discounts and issuance costs |
|
(6,542 |
) |
(3,936 |
) |
||
Extinguishment and modification of long-term debt |
|
|
|
(3,072 |
) |
||
Interest income |
|
2,821 |
|
2,429 |
|
||
Capitalized interest |
|
909 |
|
299 |
|
||
Other, net |
|
(848 |
) |
(3,234 |
) |
||
Total |
|
(3,660 |
) |
(7,514 |
) |
||
|
|
|
|
|
|
||
Loss Before Income Taxes |
|
(19,790 |
) |
(12,108 |
) |
||
|
|
|
|
|
|
||
Income tax expense (benefit) |
|
(7,898 |
) |
184 |
|
||
|
|
|
|
|
|
||
Net Loss |
|
$ |
(11,892 |
) |
$ |
(12,292 |
) |
|
|
|
|
|
|
||
Net Loss Per Common Stock Share: |
|
|
|
|
|
||
Basic |
|
$ |
(0.25 |
) |
$ |
(0.26 |
) |
Diluted |
|
$ |
(0.25 |
) |
$ |
(0.26 |
) |
|
|
|
|
|
|
||
Weighted Average Number of
|
|
|
|
|
|
||
Basic |
|
47,153 |
|
46,464 |
|
||
Diluted |
|
47,153 |
|
46,464 |
|
See accompanying Notes to Consolidated Financial Statements.
3
Hawaiian Holdings, Inc.
Consolidated Balance Sheets (in thousands, except per share data)
|
|
March 31, |
|
December 31, |
|
||
|
|
2007 |
|
2006 |
|
||
|
|
(unaudited) |
|
|
|
||
ASSETS |
|
|
|
|
|
||
Current Assets: |
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
117,005 |
|
$ |
66,852 |
|
Restricted cash |
|
39,852 |
|
53,719 |
|
||
Short-term investments |
|
13,660 |
|
47,630 |
|
||
Total cash, restricted cash and short-term investments |
|
170,517 |
|
168,201 |
|
||
Accounts receivable, net of allowance for doubtful
accounts of $498
|
|
50,285 |
|
39,304 |
|
||
Spare parts and supplies, net |
|
13,252 |
|
15,462 |
|
||
Deferred tax assets |
|
18,076 |
|
17,609 |
|
||
Prepaid expenses and other |
|
25,314 |
|
19,120 |
|
||
Total |
|
277,444 |
|
259,696 |
|
||
|
|
|
|
|
|
||
Property
and equipment
,
less
accumulated depreciation and amortization of
|
|
276,953 |
|
272,614 |
|
||
|
|
|
|
|
|
||
Other Assets: |
|
|
|
|
|
||
Long-term prepayments and other |
|
35,179 |
|
31,454 |
|
||
Intangible assets, net of accumulated amortization
of $42,974 and $37,110
|
|
156,697 |
|
162,560 |
|
||
Goodwill |
|
93,629 |
|
93,629 |
|
||
Total Assets |
|
$ |
839,902 |
|
$ |
819,953 |
|
|
|
|
|
|
|
||
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
||
Current Liabilities: |
|
|
|
|
|
||
Accounts payable |
|
$ |
45,995 |
|
$ |
51,918 |
|
Air traffic liability |
|
222,182 |
|
180,539 |
|
||
Other accrued liabilities |
|
37,331 |
|
38,402 |
|
||
Current maturities of long-term debt and capital lease obligations |
|
23,164 |
|
22,992 |
|
||
Total |
|
328,672 |
|
293,851 |
|
||
|
|
|
|
|
|
||
Long-Term Debt and Capital Lease Obligations |
|
232,838 |
|
238,381 |
|
||
|
|
|
|
|
|
||
Other Liabilities and Deferred Credits: |
|
|
|
|
|
||
Accumulated pension and other postretirement benefit obligations |
|
127,004 |
|
127,280 |
|
||
Other liabilities and deferred credits |
|
60,253 |
|
59,195 |
|
||
Deferred income taxes |
|
18,076 |
|
17,609 |
|
||
Total |
|
205,333 |
|
204,084 |
|
||
|
|
|
|
|
|
||
Commitments and Contingent Liabilities |
|
|
|
|
|
||
|
|
|
|
|
|
||
Shareholders Equity: |
|
|
|
|
|
||
Special preferred stock, three shares outstanding as
of March 31, 2007
|
|
|
|
|
|
||
Common stock, 46,583,914 shares outstanding as of
March 31, 2007
|
|
466 |
|
466 |
|
||
Capital in excess of par value |
|
211,599 |
|
210,892 |
|
||
Accumulated deficit |
|
(196,160 |
) |
(184,268 |
) |
||
Accumulated other comprehensive income (loss): |
|
|
|
|
|
||
Funded status of pension and postretirement benefits |
|
56,333 |
|
56,743 |
|
||
Unrealized gain (loss) on hedge instruments and short-term investments |
|
821 |
|
(196 |
) |
||
Total |
|
73,059 |
|
83,637 |
|
||
Total Liabilities and Shareholders Equity |
|
$ |
839,902 |
|
$ |
819,953 |
|
See accompanying Notes to Consolidated Financial Statements.
4
Hawaiian Holdings, Inc.
Consolidated Statements of Cash Flows (in thousands)
|
|
Three Months Ended |
|
||||
|
|
March 31, |
|
||||
|
|
2007 |
|
2006 |
|
||
|
|
(unaudited) |
|
||||
Net cash provided by Operating Activities |
|
$ |
32,396 |
|
$ |
16,711 |
|
|
|
|
|
|
|
||
Cash flows from Investing Activities: |
|
|
|
|
|
||
Additions to property and equipment |
|
(10,281 |
) |
(36,403 |
) |
||
Net sales (purchases) of short-term investments |
|
33,913 |
|
(6,454 |
) |
||
Deposit into noncurrent escrow account |
|
|
|
(64,600 |
) |
||
Net cash provided by (used in) investing activities |
|
23,632 |
|
(107,457 |
) |
||
|
|
|
|
|
|
||
Cash flows from Financing Activities: |
|
|
|
|
|
||
Proceeds from long-term borrowings |
|
|
|
91,250 |
|
||
Proceeds from exercise of stock options |
|
|
|
865 |
|
||
Tax benefit from exercise of stock options |
|
|
|
142 |
|
||
Debt issuance costs |
|
(147 |
) |
(4,463 |
) |
||
Repayments of long-term debt and capital lease obligations |
|
(5,728 |
) |
(3,234 |
) |
||
Net cash provided by (used in) financing activities |
|
(5,875 |
) |
84,560 |
|
||
|
|
|
|
|
|
||
Net increase (decrease) in cash and cash equivalents |
|
50,153 |
|
(6,186 |
) |
||
|
|
|
|
|
|
||
Cash and cash equivalents - Beginning of Period |
|
66,852 |
|
130,155 |
|
||
|
|
|
|
|
|
||
Cash and cash equivalents - End of Period |
|
$ |
117,005 |
|
$ |
123,969 |
|
See accompanying Notes to Consolidated Financial Statements.
5
Hawaiian Holdings, Inc.
Notes to Consolidated Financial Statements (Unaudited)
1. Summary of Significant Accounting Policies
Business and Basis of Presentation
Hawaiian Holdings, Inc. (the Company or Holdings) is a holding company incorporated in the State of Delaware. The Companys 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 Hawaii and, based on the total number of miles flown by passengers in 2006, Hawaiian is the largest airline headquartered in Hawaii and the seventeenth largest domestic airline in the United States. Hawaiian is engaged primarily in the scheduled air transportation of passengers and cargo amongst the Hawaiian Islands and between the Hawaiian Islands and certain cities in the Western United States, the South Pacific and Australia. As of March 31, 2007, Hawaiian operated a fleet of 11 Boeing 717-200 aircraft for its interisland routes and a fleet of 17 Boeing 767-300 aircraft for its transpacific, South Pacific and charter routes.
The accompanying unaudited financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X of the U.S. Securities and Exchange Commission (SEC). Accordingly, these interim financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the accompanying financial statements contain all adjustments, including normal recurring adjustments, necessary for the fair presentation of the Companys results of operations and financial position for the periods presented. Due to seasonal fluctuations common to the airline industry and Hawaiian, the results of operations for the periods presented are not necessarily indicative of the results of operations to be expected for the entire year. The accompanying financial statements should be read in conjunction with the financial statements and the notes thereto of Hawaiian Holdings, Inc. and Hawaiian Airlines, Inc. included in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2006.
Reclassifications
Certain amounts for prior periods have been reclassified to conform to the current year presentation.
2. Loss Per Share
The weighted average number of common shares outstanding used in the calculations of basic and diluted net loss per common share for the three months ended March 31, 2007 includes approximately 617,000 issuable shares related to the Companys stock bonus plan discussed in Note 3.
Options to acquire approximately 2.9 million and 2.5 million weighted average shares of the Companys common stock were not included in the calculation of diluted net loss per common share for the three months ended March 31, 2007 and 2006, respectively, because the options exercise prices were greater than the average market price of the common shares or the effect of including the options would have been antidilutive. In addition, 9.5 million potential common shares related to common stock warrants were excluded from the computation of diluted earnings per share for the three months ended March 31, 2007 and 6.8 million potential common shares related to common stock warrants and 12.0 million potential common shares related to convertible debt securities were excluded from the computation of diluted earnings per share for the three months ended March 31, 2006, because they were antidilutive.
3. Stock Option and Stock Bonus Plans
Under the Hawaiian Airlines, Inc. Stock Bonus Plan, which became effective June 2, 2005, Hawaiians eligible employees were granted 1.5 million shares of the Companys common stock. Approximately 275,000 and 608,000 of these shares were distributed to Hawaiians employees on February 14, 2006 and May 1, 2006, respectively. The final distribution of the remaining 617,000 shares was distributed on May 1, 2007. The May 2006 distribution and the May 2007 distributions were based on each eligible employees pro rata share of the applicable cumulative W-2 wages for the tax year preceding the year of each distribution. For the three months ended March 31, 2007, the Company recognized approximately $0.7 million of expense related to the May 2007 distribution, which expense is included in wages and benefits in the accompanying consolidated statement of operations for that period, with a credit to capital in excess of par.
6
4. Employee Benefit Plans
Net periodic defined pension and other retirement benefit expense for the three months ended March 31, 2007 and 2006 included the following components (in thousands).
|
|
Three months ended March 31, |
|
||||
Components of Net Periodic Benefit Cost |
|
2007 |
|
2006 |
|
||
Service cost |
|
$ |
2,445 |
|
$ |
1,896 |
|
Interest cost |
|
5,615 |
|
5,194 |
|
||
Expected return on plan assets |
|
(4,943 |
) |
(4,279 |
) |
||
Recognized net actuarial gain |
|
(410 |
) |
|
|
||
Net periodic benefit cost |
|
$ |
2,707 |
|
$ |
2,811 |
|
The Company sponsors three tax-qualified defined benefit pension plans covering certain of its contract labor groups and its non-contract salaried employees . The Company made scheduled contributions of $3.0 million during the three months ended March 31, 2007 and expects to make contributions in the amount of $8.4 million during the remainder of 2007, of which $3.3 million was made on April 13, 2007.
5. Income Taxes
The Company recorded an income tax benefit of $7.9 million for the three months ended March 31, 2007 primarily due to the tax benefit from operating losses which will be fully recovered by the availability of carrybacks to tax year 2005. The Company recorded an income tax provision of $0.2 million for the comparable period in 2006. The Company does not expect to record any significant additional tax benefits resulting from net operating losses, if any, realized in the remainder of 2007, as additional carrybacks are not available during the carryback period.
Utilization of the Companys deferred tax assets is generally based on the Companys ability to generate taxable income in future years. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the Companys deferred tax assets will not be realized. The ultimate realization of the Companys deferred tax assets is dependent upon its ability to generate future taxable income during the periods in which those temporary differences become deductible, or the future utilization of resulting net operating loss carryforwards prior to expiration. As of March 31, 2007 and December 31, 2006, the Company recognized a full valuation allowance on its deferred tax assets.
In October 2006, the IRS issued a Revenue Agents Report summarizing the income tax examination changes for tax year 2003. Most issues related to the examination of Hawaiians 2003 federal income tax return have been resolved and agreed upon. Examination issues for 2003 that have not been resolved and agreed upon are currently being reviewed by the Appeals Office of the IRS.
The State of Hawaii Department of Taxation is currently in the process of examining Hawaiians general excise tax returns for 2002 through 2005, in addition to the Hawaii capital goods excise tax credit claimed on the 2002 through 2004 income tax returns. Hawaiian cannot currently determine the impact of any potential assessments resulting from these examinations on its future financial position, results of operations and liquidity. Any additional taxes paid by the Company related to any periods prior to the effective date of Hawaiians plan of reorganization will result in a corresponding increase in goodwill; conversely, a reduction in the Companys income tax liability resulting from the State of Hawaii examination will result in a decrease to goodwill.
The Company adopted the Financial Accounting Standards Boards Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (FIN 48) effective January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements and requires the impact of a tax position to be recognized in the financial statements if that position is more likely than not of being sustained by the taxing authority.
Upon adoption of FIN 48, the Companys tax liability was adequate for purposes of its unrecognized tax benefits of $6.7 million; as such, no incremental entry to retained earnings was necessary. In future periods, the Company may be required to adjust its liability as these matters are finalized, which could increase or decrease our income tax expense and
7
effective income tax rates. Of the Companys total unrecognized tax benefits, approximately $6.7 million would favorably affect its effective income tax rate if recognized in future periods. While the Company expects that the amount of its unrecognized tax benefits will change in the next twelve months, the Company does not expect this change to have a significant impact on its results of operations or financial position.
The Company accrues interest related to the unrecognized tax benefits in nonoperating expense on its income statement. As of January 1, 2007, the Company had liabilities of approximately $0.3 million for interest accrued related to the unrecognized tax benefits. The amount of interest recognized in its income statement was not material for the three months ended March 31, 2007.
Various taxes and fees assessed on the sale of tickets to end customers are collected by the Company as an agent and remitted to taxing authorities. These taxes and fees have been presented on a net basis in the accompanying condensed consolidated statements of operations and recorded as a liability until remitted to the appropriate taxing authority.
6. Comprehensive Loss
Total comprehensive loss for the three months ended March 31 included the following (in thousands):
|
|
Three months ended March 31, |
|
||||
|
|
2007 |
|
2006 |
|
||
Net loss |
|
$ |
(11,892 |
) |
$ |
(12,292 |
) |
Other comprehensive income (loss): |
|
|
|
|
|
||
Unrealized net gains on hedge instruments and short-term investments |
|
1,017 |
|
9,498 |
|
||
Amortization of net actuarial gains on employee benefit plans |
|
(410 |
) |
|
|
||
Total comprehensive loss |
|
$ |
(11,285 |
) |
$ |
(2,794 |
) |
7. Commitments and Contingent Liabilities
Litigation and Contingencies
The Company is subject to legal proceedings arising in the normal course of its operations. Management does not anticipate that the disposition of such proceedings will have a material effect upon the Companys financial statements.
Los Angeles Airport Operating Terminal
In December 1985, Hawaiian entered into an agreement with other airlines, as amended, for the sharing of costs, expenses and certain liabilities related to the acquisition, construction and renovation of certain passenger terminal facilities at the Los Angeles International Airport (Facilities). Current tenants and participating members of LAX Two Corporation (the Corporation), a mutual benefit corporation, are jointly and severally obligated to pay their share of debt service payments related to Facilities Sublease Revenue Bonds issued to finance the acquisition, construction and renovation of the Facilities which totaled $111.9 million at completion. The Corporation leases the Facilities from the Regional Airports Improvement Corporation under an agreement accounted for as an operating lease. In addition, the Corporation is also obligated to make annual payments to the city of Los Angeles for charges related to its terminal ground rental.
General Guarantees and Indemnifications
The Company is the lessee under certain real estate leases. It is common in such commercial lease transactions for the lessee to agree to indemnify the lessor and other related third parties for tort liabilities that arise out of or relate to lessees use or occupancy of the leased premises. In some cases, this indemnity extends to related liabilities arising from the negligence of the indemnified parties, but usually excludes any liabilities caused by their gross negligence or willful misconduct. Additionally, the lessee typically indemnifies such parties for any environmental liability that arises out of or relates to its use of the leased premises. The Company expects that it is covered by insurance (subject to deductibles) for most tort liabilities and related indemnities described above with respect to real estate that it leases. The Company cannot estimate the potential amount of future payments, if any, under the foregoing indemnities and agreements.
8
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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. These forward-looking statements are and will be, as the case may be, subject to many risks, uncertainties and factors relating to our operations and business environment 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 cause actual results to differ materially from these forward-looking statements include, but are not limited to, the following:
· aviation fuel costs;
· Hawaiians dependence on tourist travel;
· competition in the interisland market;
· the effects of seasonality and cyclicality;
· the concentration of our business in Hawaii;
· the competitive advantages held by network carriers in the transpacific markets;
· the effects of new entrants into the transpacific and interisland markets;
· competitive pressures on pricing (particularly from lower-cost competitors);
· demand for transportation in the markets in which Hawaiian operates;
· the impact of our substantial financial and operating leverage;
· our ability to comply with financial covenants;
· the competitiveness of our labor costs;
· our relationship with our employees and possible work stoppages;
· our ability to attract, motivate and retain key executives and other employees;
· increasing dependence on technologies to operate Hawaiians business;
· our reliance on other companies for facilities and services (including, without limitation, aircraft maintenance, code sharing, reservations, computer services, frequent flyer programs, passenger processing, ground facilities, baggage and cargo handling and personnel training);
· Hawaiians fleet concentration in out-of-production Boeing 717-200 aircraft;
· the impact of indebtedness on our financial condition and results of operations;
· the effects of any hostilities or act of war (in the Middle East or elsewhere) or any terrorist attack;
· increases in aircraft maintenance costs due to the aging and increased utilization of our fleet, and the possible unavailability of other aircraft;
· bankruptcies in the airline industry and the possible negative impact such bankruptcies might have on fares and excess capacity;
· government legislation and regulation, including the Aviation and Transportation Security Act and other such regulations stemming from the September 11, 2001 or future terrorist attacks;
9
· changes that may be required by the Federal Aviation Administration or other regulators to Hawaiians aircraft or operations;
· the impact of possible aircraft incidents;
· the impact of possible outbreaks of disease;
· economic conditions generally;
· changes in the level of fares we can charge and remain competitive;
· the cost and availability of insurance, including aircraft insurance;
· security-related costs;
· consumer perceptions of the services of Hawaiian compared to other airlines; and
· other risks and uncertainties set forth from time to time in our reports to the Securities and Exchange Commission, included under Risk Factors in our Annual Reports on Form 10-K.
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.
Overview
Our Company
Hawaiian Holdings, Inc. (the Company or Holdings) is a holding company incorporated in the State of Delaware. The Companys 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 Hawaii and became the Companys indirect wholly-owned subsidiary pursuant to a corporate restructuring that was consummated in August 2002. Hawaiian became a Delaware corporation and the Companys direct wholly-owned subsidiary concurrent with its reorganization and reacquisition by the Company in June 2005 as is described in greater detail in our Annual Report on Form 10-K for the year ended December 31, 2006.
Hawaiian is engaged primarily in the scheduled air transportation of passengers and cargo amongst the Hawaiian Islands (the interisland market) and between the Hawaiian Islands and certain cities in the Western United States (the transpacific market), the South Pacific and Australia (the South Pacific market). Based on the total number of miles flown by revenue passengers in 2006, Hawaiian is the largest airline headquartered in Hawaii and the seventeenth largest domestic airline in the United States. At March 31, 2007, Hawaiians operating fleet consisted of 11 leased Boeing 717-200 aircraft, 11 leased Boeing 767-300 aircraft and six owned Boeing 767-300 aircraft. One remaining Boeing 767-300 aircraft that was purchased in March 2006 is being overhauled and modified and is anticipated to enter into service during the second quarter of 2007. The availability of this aircraft will provide an operating spare aircraft. Based in Honolulu, Hawaiian had approximately 3,600 active employees as of March 31, 2007.
General information about us is available at http://www.hawaiianair.com/about/ . 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 Highlights
· The second and third of the four used Boeing 767-300 aircraft that were purchased in March 2006 were placed into revenue service. The fourth aircraft is expected to be placed into service during the second quarter of 2007. This will increase our operating fleet to 11 leased Boeing 717 aircraft for our interisland flights and 18 Boeing 767-300 aircraft (11 leased and seven owned) for our transpacific and South Pacific routes.
· We increased our capacity by approximately 14%, primarily in the transpacific and interisland markets while maintaining our load factor. However, intense competition on both the interisland and transpacific routes has caused reduced yields and continues to affect our revenue performance.
· Our operating cost per available seat mile (CASM) decreased by 6.4% from the three months ended March 31, 2006 to the three months ended March 31, 2007. Our operating cost per seat mile excluding fuel (ex-fuel CASM) declined by 5.5%.
10
We had a net loss of $11.9 million ($ 0.25 per basic and diluted common share) on an operating loss of $16.1 million for the three months ended March 31, 2007. Our passenger yield has declined by 11.1% from the three months ended March 31, 2006 to the three months ended March 31, 2007. This decline is attributable to competitive pressures in the form of increased capacity and the proliferation of discount fares on many of our routes. We expect the proliferation of low fares to continue to exert downward pressure on revenue per available seat mile and that our revenue per available seat mile will decline in 2007. Passenger yield on our interisland routes continue to be affected by the availability of substantially lower fares than were available during the first quarter of 2006. The availability of these lower fares coincided with the commencement of service by Mesa Airlines (Mesa) which operates under the brand name go! in June 2006.
For the three months ended March 31, 2007 and the year ended December 31, 2006, passenger revenue represented approximately 90% of our operating revenue. Of this amount, approximately 68% came from our transpacific routes. Hawaiians principal competition on its transpacific routes has come from network carriers such as American Airlines, United Airlines, Continental Airlines, Delta Air Lines, Northwest Airlines and US Airways, and from low-cost air carriers such as ATA Airlines. Delta Air Lines and Northwest Airlines have been operating under Chapter 11 of the U.S. bankruptcy code since September 2005. Although Delta Air Lines emerged from bankruptcy on April 30, 2007, both carriers have been able to substantially reduce their costs while operating under bankruptcy, and other airlines continue to pursue a variety of means toward reducing costs and increasing general competitiveness. Many of the network carriers are able to offset the negative impact of competitive pressure on transpacific routes with increasing yields on their international routes. Potential increases in airline capacity to Hawaii, whether from existing or other network carriers or low-cost carriers, could result in a significant decrease in our share of the transpacific market and/or our yields in that market, which could have a material adverse effect on our results of operations and financial condition.
In the South Pacific market, we currently are the only provider of nonstop service between Honolulu and each of Pago Pago, American Samoa, and Papeete, Tahiti. We also operate roundtrip flights between Honolulu and Sydney, Australia, competing directly against Qantas Airways, its low-cost affiliate Jetstar and Air Canada on this route. For the three months ended March 31, 2007 and the year ended December 31, 2006, we derived approximately 6% of our total operating revenue from our South Pacific market.
For the three months ended March 31, 2007, Hawaiians CASM decreased by 6.4% from the same period in 2006. Hawaiians ex-fuel CASM decreased by 5.5% from the same period in 2006. While Hawaiians operations and financial results are affected by a variety of factors, Hawaiian, like most airlines, is particularly affected by the availability and price of jet fuel. Fuel costs are volatile and constituted a significant portion of our operating expenses representing approximately 25.6% and 26.3% of our operating expenses for the three months ended March 31, 2007 and 2006, respectively. Based on gallons expected to be consumed in 2007, every one-cent change in the cost of jet fuel increases or decreases Hawaiians annual fuel expense by approximately $1.3 million. Furthermore, although fuel prices have declined from record highs during 2006, future increases in jet fuel prices or disruptions in fuel supplies could have a material adverse effect on our results of operations.
In order to effectively compete in the markets that we serve, we are committed to managing down our controllable costs. During 2006, we initiated a top-to-bottom review of a variety of third-party spending categories, including the areas of ground handling, catering and insurance. We expect annual future savings of approximately $6.5 million from these areas specifically. We expect to generate additional savings attributable to changes in certain of our third-party maintenance relationships for which we anticipate reaching agreement with in the second quarter of 2007. During the summer of 2006, we signed a Letter of Agreement with the International Association of Machinists and Aerospace Workers (IAM) which allows us to outsource reservations, accounting and certain other back office functions in return for job protection to the employees in those areas. During early 2007, we selected vendors for the
11
areas of reservations and accounting and have offered voluntary separation packages to those employees whose positions will be affected in those areas. Outsourcing of certain reservations activities to third-party contractors in the Philippines began during April 2007 and it is anticipated that certain accounting functions will be transitioned to India during the third quarter of 2007. We expect to generate additional cost savings related to these efforts.
12
Hawaiian
Holdings, Inc.
Statistical
Data (unaudited)
|
|
Three months ended March 31, |
|
||||
|
|
2007 |
|
2006 |
|
||
|
|
(in thousands, except as |
|
||||
|
|
otherwise indicated) |
|
||||
Scheduled Operations: |
|
|
|
|
|
||
Revenue passengers flown |
|
1,663 |
|
1,448 |
|
||
Revenue passenger miles (RPM) |
|
1,856,910 |
|
1,625,831 |
|
||
Available seat miles (ASM) |
|
2,123,441 |
|
1,858,605 |
|
||
Passenger revenue per ASM (PRASM) |
|
9.07 |
¢ |
10.20 |
¢ |
||
Passenger load factor (RPM/ASM) |
|
87.4 |
% |
87.5 |
% |
||
Passenger revenue per RPM (Yield) |
|
10.37 |
¢ |
11.66 |
¢ |
||
|
|
|
|
|
|
||
Charter Operations: |
|
|
|
|
|
||
Revenue block hours operated (actual) |
|
314 |
|
311 |
|
||
Revenue per revenue block hour |
|
$ |
7.7 |
|
$ |
7.3 |
|
|
|
|
|
|
|
||
Cargo Operations: |
|
|
|
|
|
||
Revenue ton miles (RTM) |
|
15,958 |
|
18,666 |
|
||
Revenue per RTM |
|
37.93 |
¢ |
36.86 |
¢ |
||
|
|
|
|
|
|
||
Total Operations: |
|
|
|
|
|
||
Operating revenue per ASM |
|
9.96 |
¢ |
11.19 |
¢ |
||
Operating cost per ASM (CASM) |
|
10.70 |
¢ |
11.43 |
¢ |
||
Operating cost per ASM excluding fuel (ex-fuel CASM) |
|
7.96 |
¢ |
8.42 |
¢ |
||
Revenue passengers flown |
|
1,675 |
|
1,461 |
|
||
Revenue block hours operated (actual) |
|
23,176 |
|
20,323 |
|
||
RPM |
|
1,890,703 |
|
1,660,566 |
|
||
ASM |
|
2,161,130 |
|
1,896,161 |
|
||
Breakeven load factor (a) |
|
91.2 |
% |
91.3 |
% |
||
Gallons of jet fuel consumed |
|
30,532 |
|
27,207 |
|
||
Average cost per gallon of jet fuel (actual) (b) |
|
$ |
1.94 |
|
$ |
2.09 |
|
(a) The scheduled passenger load factor required at the current yield to breakeven on a net income basis.
(b) Includes applicable taxes and fees.
13
Both the cost and availability of jet fuel are subject to many economic and political factors and are therefore beyond our control. Presenting ex-fuel CASM provides the ability to measure and monitor our cost performance on a more consistent basis. The following is a reconciliation between the CASM and ex-fuel CASM for the three months ended March 31, 2007 and 2006:
|
|
Three months ended |
|
||||
|
|
March 31, |
|
||||
|
|
2007 |
|
2006 |
|
||
|
|
(in millions, except as
|
|
||||
GAAP operating expenses |
|
$ |
231.3 |
|
$ |
216.7 |
|
Aircraft fuel, including taxes and oil |
|
59.3 |
|
57.0 |
|
||
Adjusted operating expenses |
|
$ |
172.0 |
|
$ |
159.7 |
|
|
|
|
|
|
|
||
Available Seat Miles |
|
2,161.1 |
|
1,896.2 |
|
||
|
|
|
|
|
|
||
CASM |
|
10.70 |
¢ |
11.43 |
¢ |
||
Less aircraft fuel |
|
2.74 |
|
3.01 |
|
||
CASM - ex-fuel |
|
7.96 |
¢ |
8.42 |
¢ |
Three Months ended March 31, 2007 Compared to Three Months ended March 31, 2006
During the three months ended March 31, 2007, the Company incurred a net loss of $11.9 million and an operating loss of $16.1 million, compared to a net loss of $12.3 million and operating loss of $4.6 million for the same three-month period in 2006. Operating loss increased by $11.5 million in the three months ended March 31, 2007, compared to the operating loss for the same three-month period in 2006 primarily due to increases in operating expenses. Despite the increase in operating loss from 2006, the net loss only decreased by $0.4 million in the three months ended March 31, 2007 compared to the same period in 2006. This was primarily due to a tax benefit of $7.9 million recognized during the three months ended March 31, 2007 as a result of our ability to carryback losses to prior years not available in the prior year due to the existence of taxable temporary differences. The significant differences between income and expense items for the first quarters of 2007 and 2006 are discussed below.
Operating Revenue . Operating revenue was $215.2 million for the three months ended March 31, 2007, a 1.5% increase over operating revenue of $212.1 million for the same three-month period in 2006. Scheduled passenger revenue was $192.6 million for the three months ended March 31, 2007, compared to scheduled passenger revenue of $189.6 million for the same three-month period in 2006. The detail of changes in revenue is described in the table below.
|
|
Change in |
|
|
|
|
|
|
|
|
|
|
scheduled |
|
Change in |
|
Change in |
|
Change in |
|
|
|
|
passenger revenue |
|
Yield |
|
RPM |
|
ASM |
|
|
|
|
(millions) |
|
|
|
|
|
|
|
|
Transpacific |
|
$ |
13.0 |
|
(4.6 |
)% |
16.3 |
% |
18.7 |
% |
Interisland |
|
(9.3 |
) |
(26.6 |
) |
14.4 |
|
11.1 |
|
|
South Pacific |
|
(0.7 |
) |
3.3 |
|
(8.5 |
) |
(18.3 |
) |
|
Total scheduled |
|
$ |
3.0 |
|
(11.1 |
)% |
14.2 |
% |
14.2 |
% |
Other operating revenue remained flat at $22.6 million for the three months ended March 31, 2007 compared to the comparable three-month period in 2006.
Operating Expenses. Operating expenses were $231.3 million for the three months ended March 31, 2007, a $14.6 million increase from operating expenses of $216.7 million for the comparable three-month period in 2006. The increase in operating expenses for the three-month period in 2007 was due primarily to increases in maintenance materials and repairs, depreciation and amortization, aircraft fuel and aircraft and passenger servicing expenses.
14
|
|
|
|
Change from |
|
|
|
||
|
|
Three months |
|
three months |
|
|
|
||
|
|
ended |
|
ended |
|
|
|
||
|
|
March 31, 2007 |
|
March 31, 2006 |
|
Change |
|
||
|
|
(in thousands) |
|
||||||
Operating expenses |
|
|
|
|
|
|
|
||
Aircraft fuel, including taxes and oil |
|
$ |
59,294 |
|
$ |
2,332 |
|
4.1 |
% (a) |
Wages and benefits |
|
57,997 |
|
(172 |
) |
(0.3 |
) |
||
Aircraft rent |
|
24,140 |
|
(3,218 |
) |
(11.8 |
) (b) |
||
Maintenance materials and repairs |
|
25,062 |
|
8,290 |
|
49.4 |
(c) |
||
Aircraft and passenger servicing |
|
14,090 |
|
2,093 |
|
17.4 |
(d) |
||
Commissions and other selling |
|
13,384 |
|
480 |
|
3.7 |
|
||
Depreciation and amortization |
|
10,226 |
|
3,462 |
|
51.2 |
(e) |
||
Other rentals and landing fees |
|
6,985 |
|
1,070 |
|
18.1 |
(f) |
||
Other |
|
20,143 |
|
300 |
|
1.5 |
|
||
Total |
|
$ |
231,321 |
|
$ |
14,637 |
|
6.8 |
% |
(a) The increase in aircraft fuel expense was due to a 12% increase in fuel consumption during the three-month period ended March 31, 2007 related primarily to increased operations on our transpacific and interisland routes (we flew approximately 2,900 or 14% more block hours in the three months ended March 31, 2007 compared to the same period in 2006). Partially offsetting the increased consumption, the cost of fuel (inclusive of taxes, delivery and hedging) decreased by 7.2% to an average of $1.94 per gallon for the three-month period ended March 31, 2007 compared to the same period in 2006, and the implementation of fuel efficiency programs in 2006 resulted in a 1.8% improvement in our burn rate (gallons consumed per block hour). In addition, aircraft fuel expense for the three-month period in 2007 included a loss of $0.1 million resulting from the fuel hedging programs in effect during that quarter, compared to a loss of $3.4 million recognized in the comparable three-month period in 2006.
Hawaiians jet fuel operating expense in a particular period will reflect the spot price for jet fuel during that period, applicable fuel taxes, the cost of delivery to airports and the recognition of hedge gains or losses for the designated period.
As illustrated below, Hawaiians average fuel expense per gallon in the first quarter of 2007 was $1.94, as a result of prevailing spot prices, taxes and the impact of jet fuel hedges designated for the quarter.
15
|
|
Per Gallon
|
|
Aggregate |
|
||
|
|
|
|
(millions) |
|
||
Spot Price (including delivery) |
|
$ |
1.84 |
|
$ |
56.3 |
|
Taxes |
|
0.09 |
|
2.8 |
|
||
Hedge Impact |
|
0.01 |
|
0.1 |
|
||
Fuel Expense |
|
$ |
1.94 |
|
$ |
59.2 |
|
See Item 3, Quantitative and Qualitative Disclosures About Market Risk, for additional discussion of our jet fuel costs and related hedging program.
(b) The decrease in aircraft rent expense was a result of the purchase in late December 2006 of three Boeing 767-300ER aircraft that were previously leased. This decrease was partially offset by $1.1 million of aircraft rent expense recorded during the three months ended March 31, 2007, due primarily to projected cost savings for major maintenance activities for certain leased aircraft with non-refundable maintenance deposits. As a result of the expected cost savings, we expensed $0.8 million of certain major overhaul maintenance deposits that we had previously determined to be recoverable through future maintenance activities with our current third-party maintenance providers, along with $0.3 million of spare engine maintenance deposits that we began expensing as they become due. Consistent with our accounting policies for aircraft maintenance and repair costs, we review the recoverability of our maintenance deposits on an ongoing basis and if it is determined that the deposits are not likely to be fully recovered, we will expense the excess deposits as additional aircraft rent.
(c) The increase in maintenance materials and repairs expense was due primarily to a Boeing 767 engine overhaul that took place during the three months ended March 31, 2007 compared to none in the same period in 2006, as well as increased costs incurred under power-by-the-hour (PBH) maintenance contracts for Boeing 767-300ER and Boeing 717-200 aircraft engines and other Boeing 767 and Boeing 717 aircraft components (e.g., auxiliary power units). The increase in expenses incurred under the PBH maintenance contracts was due in turn to the inclusion of additional Boeing 767 engines, increased hourly charges and increased utilization for our aircraft (approximately 14% more block hours were operated in the three months ended March 31, 2007 compared to the same period in 2006). We expect aircraft maintenance expenses to continue to increase in subsequent years due to a variety of factors, including the aging of our fleet, additional fleet utilization, the growth of our fleet, including the introduction into our fleet of the four used Boeing 767-300 acquired in early 2006, the expiration of manufacturers warranties on certain aircraft and increased costs for related materials and services. As more fully discussed in our Critical Accounting Policies, we have made deposits to our aircraft lessors to cover a portion of our future maintenance costs. However, because these payments are recorded as a deposit, to the extent recoverable through future maintenance, and then recognized as maintenance expense when the underlying maintenance is performed, they do not impact the timing of our recognition of maintenance expense, which is recognized as expense when incurred.
(d) The increase in aircraft passenger servicing expense was due primarily to an increase in passenger inconvenience expenses as a result of issuing transportation credit orders and vouchers for meals and hotels incurred during the first quarter of 2007. In addition, passenger food expense increased by approximately 14% which is consistent with the increase in the number of passengers carried.
(e) The increase in depreciation and amortization expense is attributable primarily to depreciation expense incurred following the acquisition of the three Boeing 767-300ER aircraft that were previously leased in late December 2006, as well as depreciation expense incurred on the three used Boeing 767-300 aircraft that were purchased in March 2006 and placed into service in September 2006, January 2007 and March 2007, respectively.
(f) The increase in other rentals and landing fees expense was due to a change in our third-party agreement for our ground handling services at the Seattle-Tacoma International Airport in Seattle, Washington, for which, effective October 2006, we pay the gate and lobby rental charges separate from our ground handling agreement. This increase is offset by a decrease in ground handling fees related to this change. In addition, there was an increase in landing fees due to a 12% increase in the number of flights, and an increase in rent expense associated with the Los Angeles Airport Terminal.
16
Nonoperating Income and Expense . Nonoperating expense, net was $3.7 million for the three months ended March 31, 2007, as compared to nonoperating expense, net of $7.5 million for the three months ended March 31, 2006. The decrease of $3.8 million from the three months ended March 31, 2006 to the three months ended March 31, 2007 is primarily due to the following:
· $3.1 million of debt extinguishment and modification costs recorded during the three months ended March 31, 2006 related to the credit facilities that were amended on March 13, 2006.
· A decrease of $2.4 million of realized and unrealized losses related to Hawaiians fuel hedging program from the three months ended March 31, 2006 to the three months ended March 31, 2007.
· An increase of $0.6 million of capitalized interest recorded during the three months ended March 31, 2007.
· $2.6 million higher interest expense during the three months ended March 31, 2007 due to the addition of long-term debt in 2006.
Income Taxes. The Company recorded an income tax benefit of $7.9 million for the three months ended March 31, 2007 compared to income tax expense of $0.2 million for the same period in 2006. The difference is primarily due to the tax benefit recognized in the three months ended March 31, 2007 resulting from operating losses which will be fully recovered by the availability of carrybacks to tax year 2005. In addition, the Company had more deductible expenses during the three months ended March 31, 2007 compared to the same period in 2006 triggered primarily by accelerated tax depreciation of aircraft that were acquired during 2006.
Liquidity and Capital Resources
Cash Flows
Our liquidity is dependent on the operating results and cash flows of Hawaiian, along with our significant debt financings, including the loan agreements entered into in December 2006 to finance the purchase of three previously leased Boeing 767-300ER aircraft and two credit facilities entered into in June 2005 in connection with Hawaiians plan of reorganization and subsequently amended in March 2006. These financial arrangements are described in more detail in our Annual Report on Form 10-K for the year ended December 31, 2006. Substantially all of our assets are encumbered under our existing credit facilities.
Hawaiian has been able to maintain positive cash flow from operations principally by increasing scheduled passenger revenue through a combination of yield management and scheduling on its long-haul and interisland routes, and through increases in the sales of miles to companies affiliated with its frequent flyer program, HawaiianMiles . However, the introduction of new and expanded service into our transpacific market by certain major domestic airlines, the depressed fares in our interisland markets associated with overall capacity increases including the entrance of Mesa Airlines in June 2006, and other potential downward pressures on our yields and load factors in the markets we serve have impacted and may continue to adversely impact Hawaiians operating revenue. As discussed above, to counteract in part such potentially adverse effects on our operating revenue, we have initiated programs aimed at significantly reducing our operating expenses in order to help maintain positive cash flow from operations in the future.
Cash, cash equivalents, restricted cash and short-term investments were $170.5 million as of March 31, 2007, which is $2.3 million higher than at December 31, 2006. Cash and cash equivalents as of March 31, 2007 were $117.0 million which was $50.2 million higher than at December 31, 2006. The increase in cash and cash equivalents was due to liquidation of a portion of our short-term investments during the three months ended March 31, 2007 as well as the decrease in the holdback level required by our largest credit card processing contract which was amended effective January 1, 2007. As a result of the amendment to the credit card agreement, our holdback percentage was reduced resulting in a release of approximately $24 million from restricted to unrestricted cash.
Despite our net earnings remaining relatively constant between the three months ended March 31, 2007 and the three months ended March 31, 2006, net cash provided by operating activities increased by $15.7 million between those same periods. The $15.7 million period-over-period increase was primarily due to increases in air traffic liability during the three months ended March 31, 2007 due to advanced ticket sales for summer travel as well as a reduction in the cash collateral required by our credit card processor due to the amendment discussed above. Net cash provided by investing activities was $23.6 million during the three months ended March 31, 2007 compared to net cash used in investing activities of $107.5 million for the comparable period in 2006. During the three months ended March 31, 2007, we had net sales of short-term investments of $33.9 million, which was offset by $10.3 million of capital expenditures primarily related to modifications and overhauls of the remaining used Boeing 767-300 aircraft purchased in March 2006 and improvements to our information technology systems. During the three months ended March 31, 2006, our restricted cash balance increased by $64.6 million and our capital expenditures primarily related to the initial purchase of the four used Boeing 767-300 aircraft was $36.4 million. Financing activities for the three months ended March 31, 2007 used net cash of approximately $5.9 million primarily related to repayments on our long-term debt and capital lease obligations, whereas financing activities for the three months ended March 31, 2006 provided net cash of approximately $84.6 million due primarily to the $91.3 million of additional debt incurred.
17
Financial Covenants
The terms of our Term A and Term B Credit Facilities restrict our ability to, among other things, incur additional indebtedness, pay dividends or make other payments on investments, consummate asset sales or similar transactions, create liens, merge or consolidate with any other person, or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of our assets. The terms of the agreements contain covenants that require us to meet certain financial tests to avoid a default that might lead to early termination of the facilities. These financial tests include maintaining a minimum amount of unrestricted cash and achieving certain levels of debt service coverage. If we were not able to comply with these covenants, our outstanding obligations under these facilities could be accelerated and become due and payable immediately.
Under our bank-issued credit card processing agreement, certain proceeds from advance ticket sales are 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 consolidated balance sheet, totaled $39.9 million at March 31, 2007. Funds are subsequently made available to us as air travel is provided. The agreement also contains financial triggers which require, among other things, that we maintain a minimum amount of unrestricted cash and maintain certain levels of debt service coverage and operating income. Under the terms of our credit card processing agreement the level of credit card holdback is subject to adjustment based on these specific financial triggers. As of March 31, 2007, the holdback was at the minimum contractual level of 40% of the applicable unrecognized credit card air traffic liability, and could increase significantly if the various applicable financial triggers are not met. We cannot guarantee that Hawaiians financial performance in future periods will allow it to maintain the current holdback level and that restricted cash will not be commensurately increased.
Pension Plan Funding
Hawaiian sponsors three tax-qualified defined benefit pension plans covering its Air Line Pilots Association, IAM, Transport Workers Union, Network Engineering Group and certain non-contract employees. In the aggregate, these plans are underfunded. Hawaiian made scheduled contributions of $3.0 million during the three months ended March 31, 2007 and expects to contribute an additional $8.4 million to the defined benefit pension plans during the remainder of 2007. Of the $8.4 million, $3.3 million was contributed by Hawaiian in April 2007. Future funding requirements are dependent upon many factors such as interest rates, funding status, applicable regulatory requirements for funding purposes and the level and timing of asset returns.
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 could result in materially different results under different assumptions and conditions. For a detailed discussion of the application of our critical accounting policies other than the one discussed immediately below, see Critical Accounting Policies and Note 3, Summary of Significant Accounting Policies, to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2006.
Aircraft maintenance and repair costs. Maintenance and repair costs for owned and leased flight equipment, including the overhaul of aircraft components, are charged to operating expenses as incurred. Engine overhaul costs covered by power-by-the-hour arrangements are paid and expensed as incurred, on the basis of hours flown per contract. Under the terms of our power-by-the-hour agreements, we pay a set dollar amount per engine hour flown on a monthly basis and the third-party vendor assumes the obligation to repair the engines at no additional cost to us, subject to certain specified exclusions.
Additionally, although our aircraft lease agreements specifically provide that we, as lessee, are responsible for maintenance of the leased aircraft, we do, under our existing aircraft lease agreements, pay maintenance reserves to aircraft lessors that are to be applied towards the cost of future maintenance events. These reserves are calculated
18
based on a performance measure, such as flight hours, and are available for reimbursement to us upon the completion of the maintenance of the leased aircraft. If there are sufficient funds on deposit to reimburse us for the invoices initially paid by Hawaiian and then submitted to the lessor, they are reimbursed to us. However, reimbursements are limited to the available deposits associated with the specific maintenance activity for which we are requesting reimbursement. Under certain of our existing aircraft lease agreements, if there are excess amounts on deposit at the expiration of the lease, the lessor is entitled to retain any excess amounts; whereas at the expiration of certain other of our existing aircraft lease agreements any such excess amounts are returned to us, provided that we have fulfilled all of our obligations under the lease agreements. The maintenance reserves paid under our lease agreements do not transfer either the obligation to maintain the aircraft or the cost risk associated with the maintenance activities to the aircraft lessor. In addition, we maintain the right to select any third-party maintenance provider. Therefore, we record these amounts as a deposit on our balance sheet and then recognize maintenance expense when the underlying maintenance is performed, in accordance with our maintenance accounting policy. Because we recognize expense when the underlying maintenance is performed, as opposed to expensing the deposits when paid to the lessor, and because the cost of maintaining an aircraft increases as the aircraft gets older, we will recognize significantly less maintenance expense in the earlier years of the leases than in the later years, even though our use of and benefit from the aircraft does not vary correspondingly over the term of the lease, and our current and past results of operations may not be indicative of our future results as a result of our expectation of expensing the deposits in the future. Hawaiians maintenance reserve activity for the past three years and the three months ended March 31, 2007, is as follows (in thousands):
|
|
Beginning
|
|
Payments |
|
Reimbursements |
|
Ending
|
|
||||
Year ended December 31: |
|
|
|
|
|
|
|
|
|
||||
2004 |
|
$ |
15,916 |
|
$ |
11,412 |
|
$ |
(1,990 |
) |
$ |
25,338 |
|
2005 |
|
25,338 |
|
12,593 |
|
(7,542 |
) |
30,389 |
|
||||
2006 |
|
30,389 |
|
14,604 |
|
(8,504 |
) |
36,489 |
|
||||
Three months ended March 31, 2007 |
|
36,489 |
|
3,396 |
|
(125 |
) |
39,760 |
|
||||
Fair value adjustments (1) |
|
|
|
|
|
|
|
(4,128 |
) |
||||
Deposits not considered probable of recovery (2) |
|
|
|
|
|
|
|
(5,115 |
) |
||||
Recorded balance at March 31, 2007. |
|
|
|
|
|
|
|
$ |
30,517 |
|
|||
(1) We recorded Hawaiians maintenance deposits at fair value upon Hawaiians emergence from bankruptcy on June 2, 2005. The individual line items in the table do not reflect our recorded fair value adjustments (which related primarily to recording the deposits at their net present value as of June 2, 2005, based on the anticipated dates the underlying maintenance would be performed).
(2) Non-refundable amounts that are not considered probable of being used to fund future maintenance expense recognized as additional aircraft rental expense. In determining whether it is probable that maintenance deposits will be used to fund the cost of maintenance events, we conduct the following analysis:
· We evaluate the aircrafts condition, including the airframe, the engines and the landing gear.
· We then project future usage of the aircraft during the term of the lease based on our business and fleet plan.
· We also estimate the cost of performing all required maintenance during the lease term. These estimates are based on the experience of our maintenance personnel and industry available data, including historical fleet operating statistic reports published by the aircraft and engine manufacturers.
Our assessment of the recoverability of our maintenance deposits is subject to change in the event that key estimates and assumptions supporting it change over time. Those key estimates and assumptions include our fleet plan and the projected total cost and, to a lesser extent, anticipated timing of the major maintenance activities covered by the maintenance reserves. In the three months ended March 31, 2007, we initiated negotiations with new third-party maintenance providers resulting in projected cost savings for major maintenance activities for certain leased aircraft with non-refundable maintenance deposits. As a result of the expected cost savings, we expensed $0.8 million of certain major overhaul maintenance deposits that we had previously determined to be recoverable through future maintenance activities with our current third-party maintenance providers, along with $0.3 million of spare engine maintenance deposits that we began expensing as they become due. This revision in our assessment was based entirely on the projected total cost of the anticipated major maintenance activities that will be required over the remaining aircraft lease term. Based on current market conditions we believe that further significant changes in our fleet plan
19
are unlikely. Furthermore, based on historical trends and future projections, including those published by the manufacturers of our aircraft and engines, we believe it is unlikely that future maintenance costs for our aircraft will decline further to such an extent that the maintenance deposits currently recorded on our consolidated balance sheet would not be used to fund the cost of future maintenance events and therefore not be recoverable.
20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are subject to certain market risks, including commodity price risk (i.e., jet fuel prices), and interest rate risk. We have market sensitive instruments in the form of variable rate debt instruments and financial derivative instruments used to hedge Hawaiians exposure to jet fuel price increases. The adverse effects of potential changes in these market risks are discussed below. The sensitivity analyses presented do not consider the effects that such adverse changes may have on overall economic activity nor do they consider additional actions we might undertake to mitigate our exposure to such changes. Actual results may differ.
Aircraft Fuel Costs . Aircraft fuel costs constituted a significant portion of Hawaiians operating expense. Fuel costs represented 25.6% and 26.3%, respectively, of Hawaiians operating expenses for the three months ended March 31, 2007 and the year ended December 31, 2006. Based on gallons expected to be consumed in 2007, for every one-cent increase in the cost of jet fuel, Hawaiians annual fuel expense increases by approximately $1.3 million.
As of March 31, 2007, Hawaiian had entered into jet fuel forward contracts with a single counterparty to hedge the cost of approximately 9% of its fuel requirements for the remainder of 2007. Hawaiian does not presently have jet fuel forward contracts to hedge its fuel requirements beyond 2007. Under the terms of these jet fuel forward contracts, Hawaiian pays a fixed price per gallon for jet fuel ranging from $1.78 to $2.04 per gallon and receives or pays a floating price per gallon for jet fuel from the counterparty based on the market price for jet fuel. The fair value of the jet fuel forward contracts was $0.8 million as of March 31, 2007 and was recorded in prepaid expenses and other in the accompanying consolidated balance sheet.
The table below reflects Hawaiians jet fuel forward contract position as of March 30, 2007:
|
|
Average Jet Fuel
|
|
Gallons H edged |
|
Percentage of Quarterly
|
|
|
|
|
|
|
(thousands) |
|
|
|
|
Second Quarter 2007 |
|
$ |
1.918 |
|
7,434 |
|
23 |
% |
Third Quarter 2007 |
|
$ |
1.974 |
|
1,218 |
|
4 |
% |
Fourth Quarter 2007 |
|
$ |
2.000 |
|
252 |
|
1 |
% |
Our jet fuel operating expense in a particular period will reflect the spot price for jet fuel during that period, applicable fuel taxes, the cost of delivery to airports and the recognition of hedge gains or losses for the designated period.
We do not hold or issue derivative financial instruments for trading purposes. We are exposed to credit risks in the event the above counterparty fails to meet its obligations; however, we do not expect this counterparty to fail to meet its obligations.
Interest Rates . Our results of operations are affected by fluctuations in interest rates due to our variable-rate debt and interest income earned on our cash deposits and short-term investments. The Companys debt agreements include the Term A Credit Facility, Term B Credit Facility and the Boeing 767-300ER financing agreements, the terms of which are discussed in Note 6 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2006.
At March 31, 2007, we had $85.3 million of fixed rate debt, including capital leases of $0.9 million, and $176.5 million of variable rate debt indexed to the Wells Fargo Bank Prime Rate and the one-month London Interbank Bank Offered Rate (LIBOR) and six-month LIBOR. Interest rates on the LIBOR indexed loans adjust either monthly or semi-annually. The Wells Fargo Bank Prime Rate was 8.25 and one-month LIBOR and six-month LIBOR were 5.32 and 5.33, respectively, on such date. We do not mitigate our exposure on variable-rate debt by entering into interest rate swaps. Therefore, changes in market interest rates have a direct and corresponding effect on our pre-tax earnings and cash flows associated with our floating rate debt and interest-bearing cash accounts and short-term investments. However, based on the balances of our cash and cash equivalents, restricted cash, short-term investments, and variable-rate debt as of March 31, 2007, a change in interest rates would not have a material impact on our results of operations because the level of our variable-rate interest-bearing cash deposits and investments approximate the level of our variable-rate liabilities. Should that relationship change in the future, our exposure to changes in interest rate fluctuations would likely increase.
Market risk for fixed rate long-term debt and capitalized lease obligations is estimated as the potential increase in fair value resulting from a hypothetical 10 percent decrease in interest rates, and amounted to approximately $2.6 million as of March 31, 2007.
21
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), performed an evaluation of our disclosure controls and procedures, which have been designed to permit us to effectively identify and timely disclose important financial information. Based on that evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures are effective as of March 31, 2007 and provide reasonable assurance that the information required to be disclosed by the Company in reports it files under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and is accumulated and communicated to our management, including our CEO and CFO, to allow timely decisions regarding required disclosure. While our disclosure controls and procedures provide reasonable assurance that the appropriate information will be available on a timely basis, this assurance is subject to limitations inherent in any control system, no matter how well it may be designed or administered.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting during the first quarter ended March 31, 2007 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
22
Mesa Air Group
On February 13, 2006, Hawaiian filed a complaint against Mesa Air Group, Inc. (Mesa) in the Bankruptcy Court for the District of Hawaii, Hawaiian Airlines, Inc. v. Mesa Air Group, Inc., Adversary Proceeding No. 06-90026 (Bankr. D. Haw.). The complaint alleges that Mesa misused confidential and proprietary information that was provided by Hawaiian to Mesa in April and May 2004, pursuant to a process that was established by the Bankruptcy Court to facilitate Hawaiians efforts to solicit potential investment in connection with a Chapter 11 plan of reorganization. On March 16, 2006, Mesa filed its answer to the complaint and a counterclaim alleging violations of the Sherman Anti-Trust Act, intentional interference with prospective economic advantage and unfair trade practices. Hawaiian filed a motion to dismiss the counterclaim in its entirety, and at a hearing held on May 19, 2006, the Bankruptcy Court dismissed the two state law causes of action but not the antitrust action. Hawaiian subsequently filed a motion for summary judgment to dismiss the remaining antitrust action, and at a hearing on December 8, 2006, and by order (as amended) entered on March 5, 2007, the Bankruptcy Court granted the motion for summary judgment and dismissed that remaining counterclaim. On June 28, 2006, we filed a motion for a preliminary injunction, requesting that the Bankruptcy Court enjoin Mesa for a period of one year from selling or issuing tickets in the interisland market. Following a hearing on September 15, 2006, the Bankruptcy Court issued a decision on October 5, 2006, denying the motion for preliminary injunction. On August 14, 2006, we filed a motion to amend our complaint to add as a defendant the former aviation consultant (Consultant) for Hawaiian Holdings that was retained by Mesa in April 2005 to evaluate the Hawaii interisland market. At a hearing held on September 15, 2006, the Bankruptcy Court granted a motion to amend our complaint to add Consultant as a defendant. Mesa and Consultant have since been served with the amended complaint and have filed answers. Trial was scheduled to commence on April 2, 2007. Consultant subsequently filed a motion to postpone the trial date for a period of five months to allow for an opportunity for discovery. That motion was granted by the court and trial has been rescheduled to September 25, 2007. Discovery is on-going with a cut-off date currently scheduled for May 23, 2007 for fact discovery and August 23, 2007 for expert discovery.
American Samoa
On July 26, 2006, the Governor of the United States Territory of American Samoa, Togiola Tulafono, issued Executive Order 005-2006 (the Executive Order) regarding Hawaiians service to American Samoa. The Executive Order stated that within 90 days of its issuance the government of American Samoa would identify a new air carrier to provide essential air service to American Samoa and would ban Hawaiian from clearing into or out of the territory. On August 11, 2006, Hawaiian filed a Request for Declaratory Ruling from the Department of Transportation (DOT), seeking a declaration that the Executive Order is preempted by federal law. The public comment period ended on October 31, 2006, with more than 100 comments filed, including a comment by Governor Tulafono. Hawaiian filed a reply to Governor Tulafonos public comments on November 3, 2006. On April 2, 2007, DOT issued a Declaratory Order concluding that the Governor may not bar Hawaiian from serving American Samoa and that the federal law had preempted the area. The order also urged Hawaiian and Governor Tulafono to meet to discuss the issues, and DOT will review the claims of discrimination raised in the responses to the Governors petition to determine if there is an issue to pursue. No appeal of this final order has been filed as of this date by the Governor any other party.
On October 23, 2006, Governor Tulafono filed a complaint with the DOT alleging that Hawaiian had not complied with a 1984 Essential Air Service (EAS) Order requiring certain levels of service to be provided by Hawaiian to American Samoa. In response to Governor Tulafonos complaint, Hawaiian has provided the DOT with information on its service patterns for the past year. On March 15, 2007, Governor Tulafono petitioned DOT to conduct a review of Pago Pagos EAS determination particularly with respect to its capacity element during the peak summer months.
In an order issued on March 30, 2007, DOT reviewed the capacity requirements for the EAS program for Pago Pago, American Samoa finding that the capacity levels were appropriate as set forth in its prior Order. DOT found that Hawaiian was in compliance with those Orders through the provision of its historic service levels. The
23
Order also reviewed fare levels to comparable destinations and found that Hawaiians fares were not suppressing passenger traffic. No appeal of this final order has been filed as of this date by the Governor or any other party.
Chapter 11 Case
On March 23, 2003, Hawaiian filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of Hawaii (the Bankruptcy Court). On June 2, 2005, Hawaiians plan of reorganization became effective, and Holdings reacquired control of Hawaiian by a transaction accounted for as a business combination. Certain aspects of Hawaiians bankruptcy case and reorganization, and Holdings reacquisition of Hawaiian are summarized under Item 1. BusinessConsummation of Hawaiians Joint Plan of Reorganization of our Annual Report on Form 10-K for the year ended December 31, 2006.
In addition, Hawaiian continues to resolve objections to claims filed by creditors during the bankruptcy case. On or about April 9, 2007, we received correspondence from a creditor that represented that it had not received notice of the prior claim objection. Based upon a subsequent investigation, we became aware of the possibility that approximately one hundred forty of the claimants may not have received copies of the objections applicable to their claims or notice of the associated hearing dates. On April 23, 2007, we filed a motion in Bankruptcy Court to amend the previously entered orders sustaining the objections to these claimants, and to request authority to set a new hearing date to address our objections to each of the claims. On April 25, 2007, the Bankruptcy Court entered an order approving that motion and set a hearing on our objections to those claims for June 18, 2007. We do not expect to incur material charges related to the claims.
We are not a party to any other litigation that is expected to have a significant effect on our operations or business.
There have been no material changes to the risk factors disclosed in Item 1A., Risk Factors, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
None.
Exhibit No. |
|
Description |
|
|
|
10.1 |
|
Employment Agreement, dated as of July 11, 2005, between Hawaiian Airlines, Inc. and Barbara Falvey. |
|
|
|
31.1 |
|
Rule 13a-14(a) Certification of Chief Executive Officer. |
|
|
|
31.2 |
|
Rule 13a-14(a) Certification of Chief Financial Officer. |
|
|
|
32.1 |
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2 |
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
24
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
HAWAIIAN HOLDINGS, INC. |
||
|
|
||
|
|
||
May 7, 2007 |
By |
/s/ PETER R. INGRAM |
|
|
|
Peter R. Ingram |
|
|
|
Chief Financial Officer and Treasurer |
25
Exhibit 10.1
EXECUTIVE EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (Agreement) dated , 2005 and effective as of July 11, 2005 (Effective Date) is entered into by and between Barbara Falvey (Employee) and Hawaiian Airlines, Inc., a Hawaii corporation (Company).
Company and Employee desire to establish Companys right to services of Employee, in the capacity described below, on the terms and conditions and subject to the rights of termination hereinafter set forth, and Employee agrees to engage in such employment on those terms and conditions.
In consideration of the mutual agreements hereinafter set forth, Employee and Company have agreed and do hereby agree as follows:
1. EMPLOYMENT AS SENIOR VICE PRESIDENT - PEOPLE SERVICES GROUP . Company does hereby employ and engage Employee as Senior Vice President - People Services Group, and Employee does hereby accept and agree to such engagement and employment.
a. Basic Duties . Employees duties during the Employment Period shall be to serve as Senior Vice President - People Services Group (PSG), which shall generally include those contained in Attachment A. The precise scope of the duties of Employee may be modified from time to time at the discretion of Companys President and Chief Executive Officer (CEO) or her designee(s) consistent with Employees titles and general duties and responsibilities hereunder.
b. Reporting Relationship . Employee shall at all times report to the President and CEO or her designee(s).
c. Time and Effort Expected of Employ . Employee shall devote full time, attention, energy and skill to the performance of Employees duties for Company and for the benefit of Company. Furthermore, Employee shall exercise due diligence and care in the performance of Employees duties to Company under this Agreement.
2. TERM OF AGREEMENT . Company and Employee expressly agree that they have an at will employment relationship, which means that either party has the right to terminate the employment relationship at any time for any reason, with or without cause. Reasons for termination that result in post termination payments are set forth in Section 8. The period of time commencing on the Effective Date and ending upon the date of termination by either party (Termination Date shall be referred to as the Employment Period.
3. COMPENSATION .
a. BASE SALARY . Company shall pay Employee, and Employee agrees to accept from Company, a base salary at the rate of TWO HUNDRED AND FIFTY THOUSAND DOLLARS AND NO /100ths DOLLARS ($250,000) per year (Base Salary), less applicable withholdings required by law or Employees benefit plans or other deductions authorized in writing by Employee to be withheld or deducted, payable in equal semi-monthly installments in accordance with Companys regular payroll practices. Employees Base Salary shall be reviewed annually by Company and may be increased, but not decreased, by Company in its sole and
absolute discretion. Any adjusted amounts under this Section 3.a. will thereafter become the Base Salary for purposes of this Agreement.
b. PERFORMANCE BONUS . In addition to the Base Salary, Employee shall be eligible to participate during the Employment Period in any performance bonus plan hereafter established for senior officers of Company by the Board of Directors (the BOD). Any award to Employee under that plan shall be payable, less applicable withholdings, in the amount, in the manner, and at the time determined by the BOD, in its sole and absolute discretion. Company will request that the BOD award a target bonus equal to 60% of Employees Base Salary, with actual payment amount established annually as a function of overall corporate performance and Employees performance relative to previously established management objectives.
c. STOCK OPTIONS . In addition to Base Salary, Employee shall be eligible to participate during the Employment Period in any stock option plan hereafter established for the senior officers of Company by the BOD in accordance with plan terms and applicable law. Company will request an incoming grant of 166,000 stock options for you to vest ratably over the first three years of your employment. The strike price for this grant and other terms will be determined by the plan finally approved by the BOD and Shareholders. Additionally, you will be considered for additional stock option grants if and when such grants are awarded or considered for other senior executives at the company. Subject to the foregoing, any award to Employee under such plan shall be made in an amount, in the manner, and at the time determined by the BOD, in its sole and absolute discretion.
d. LONG TERM INCENTIVE PLANS . In addition to Base Salary, Employee shall be eligible to participate during the Employment Period in any long term incentive plans hereafter established for the senior officers of Company by the BOD in accordance with plan terms and applicable law. Any award to Employee under such plan shall be made in an amount, in the manner, and at the time determined by the BOD, on a basis consistent with other senior officers, but otherwise in its sole and absolute discretion.
e. 401(k) PLAN . Employee shall be eligible to participate in a 401(k) or analogous plan (the 401 (k) Plan) according to its terms, which shall be developed by Company, subject to approval of the BOD.
4. FRINGE BENEFITS . During his employment under this Agreement, Employee shall be eligible to participate in, and to be covered by, such employee benefit plans effective generally with respect to Companys senior vice president employees as those plans may be amended, supplemented, replaced or terminated from time to time, to the extent Employee is eligible under the terms of such plans; and Employee shall be eligible to receive such other fringe benefits as may be granted to Employee from time to time by the BOD or as delegated by it in its sole and absolute discretion. In addition to the foregoing benefits, Employee shall also receive the following individual benefits:
a. TRAVEL BENEFITS . During the Employment Period, Employee and Employees spouse and eligible dependents shall be entitled to travel benefits on Company flights (but not charter flights) at a level and under procedures commensurate with the officer level, subject to IRS requirements, and pursuant to Company policy. Employee and
2
Employees spouse and eligible dependents of Employee shall be entitled to travel benefits on other airlines consistent with Companys interline transportation agreements.
b. EXECUTIVE LONG-TERM DISABILITY INSURANCE PLAN . Subject to the applicable waiting periods, Employee will be included, at Companys expense, in Companys Executive Long-Term Disability Insurance Plan, as it may be amended, supplemented, replaced or terminated from time to time.
c. BUSINESS EXPENSES . Company shall reimburse Employee for any and all reasonable out-of-pocket, necessary, customary, and usual expenses, properly receipted in accordance with Company policies, incurred by Employee on behalf of Company, provided Employee properly accounts to Company for such expenses in accordance with the rules and regulations of the Internal Revenue Service under the Code, and in accordance with the standard policies and procedures of Company to reimburse business expenses, which obligation shall survive the termination of this Agreement.
d. VACATIONS . Company will provide reasonable vacations authorized by the President and CEO subject to requirements of operations and as duties may permit, provided that unused vacation will not be accrued and Company will not make payment to Employee for unutilized vacation.
e. SICK LEAVE . Reasonable sick leave for illness or injury will also be provided, provided that unused sick leave will not be accrued and Company will not make payment to Employee for unutilized sick leave.
5. RELOCATION AND HOUSING ALLOWANCE .
a. Company will reimburse Employee for all reasonable costs related to relocation to Hawaii, which will include, but not be limited to, the following items: (i) the reasonable out-of-pocket costs of moving her household goods and belongings from her present home to Hawaii, including packing, unpacking, shipping and insurance; (ii) the shipment of one automobile to Hawaii; (iii) closing costs at actual and reasonable amounts for the sale of her current home, and/or the purchase of a home in Honolulu, Hawaii, and (iv) one (1), one-way airfare (coach) for Employee and her spouse directly related to Employees relocation to Hawaii, (collectively referred to as the `Relocation Expenses). The Relocation Expenses will be reimbursed to a maximum of $40,000, inclusive of tax, with appropriate receipts.
b. If, during the first twelve (12) months following the Effective Date, Company terminates Employees employment without Cause, then Company will reimburse Employee for reasonable costs described above as Relocation Expenses incurred to relocate from Hawaii (collectively referred to as the Termination Expenses). The Termination Expenses will be reimbursed up to a maximum of $40,000, inclusive of tax, with appropriate receipts.
c. If, during the first twelve (12) months following the Effective Date, Employee voluntarily resigns from Company, or your employment is terminated for Cause, Employee agrees to repay Company the full amount Employee received as Relocation Expenses in Section 5.a.
3
d. The Company will also provide to Employee a lump sum payment of $30,000.00 less applicable withholdings, for use in Employees discretion in conjunction with relocation and commencement of employment with the Company.
e. Employee will be provided with a $2,500 monthly housing allowance (gross before taxes) or equivalent, for the first twenty-four (24) months of employment. This allowance may be extended beyond that point in time, subject to President and CEO and BOD review and consideration.
6. CONFIDENTIAL INFORMATION . Employee recognizes that by reason of Employees employment by and service to Company, Employee will occupy a position of trust with respect to business and technical information of a secret or confidential nature which is the property of Company which will be imparted to Employee from time to time in the course of the performance of Employees duties hereunder (the Confidential Information). Employee acknowledges that such information is Companys valuable and unique asset and agrees that Employee shall not, during or after the Term of this Agreement, use or disclose directly or indirectly any of Companys Confidential Information to any person, except that Employee may use and disclose to Companys authorized personnel such Confidential Information as is reasonably appropriate in the course of the performance of Employees duties hereunder. Companys Confidential Information shall include all information and knowledge of any nature and in any form relating to Company including, but not limited to, business plans; development projects; computer software and related documentation and materials; designs, practices, processes, methods, know-how and other facts relating to Companys business; and advertising, promotions, financial matters, sales and profit figures, and customers or customer lists.
7. TERMINATION OF EMPLOYEES EMPLOYMENT .
a. DEATH . If Employee dies while employed by Company, Employees employment shall immediately terminate. Companys obligation to pay Employees Base Salary shall cease as of the date of Employees death. Thereafter, Employees beneficiaries or estate shall receive benefits, if any, in accordance with Companys retirement, insurance, and other applicable benefit plans then in effect.
b. DISABILITY . If Employee (i) becomes Disabled, as defined in Companys Executive Long-Term Disability Plan, (ii) he cannot be reasonably accommodated by Company, and (iii) he commences to receive long-term disability benefits, Employees employment may be terminated by Company or Employee. During any period prior to such termination during which Employee is absent from the full-time performance of Employees duties with Company due to Disability, Company shall continue to pay Employee the Base Salary at the rate in effect at the commencement of such period of Disability. Any such payments made to Employee shall be reduced by amounts received from disability insurance obtained or provided by Company, and by the amounts of any benefits payable to Employee, with respect to such period, under Companys Executive Long-Term Disability Plan. Subsequent to the termination provided for in this Section 7.b., Employees eligibility for any benefits shall be determined under Companys retirement, insurance, and other applicable benefit plans then in effect in accordance with the terms of such plans.
4
c. TERMINATION BY COMPANY FOR CAUSE . Company may terminate Employees at will employment under this Agreement for Cause at any time Cause shall be defined as:
(i) The material breach of this Agreement by Employee, including without limitation, repeated neglect of Employees duties, Employees repeated material lack of diligence and attention in performing services as provided in this Agreement, or Employees repeated failure to implement or adhere to Company policies, in each case after notice to Employee stating the reason for such breach and providing Employee thirty (30) days opportunity to cure, provided however that such notice and opportunity to cure shall not be required to be provided more than three (3) times during the Employment Period prior to termination.
(ii) Commission of a crime (other than a petty offense or traffic violation) that has a material adverse impact on Companys reputation and standing in the community.
(iii) Fraudulent conduct in connection with the business affairs of Company, regardless of whether said conduct is designed to defraud Company or others.
(iv) Conduct in material violation of Companys and/or its parent companys corporate compliance rules, practices, procedures and ethical guidelines.
(v) Material violation(s) of Companys House Rules, a copy of which has been provided to Employee by Company.
In the event of termination for Cause, Companys obligation to pay Employees Base Salary and all benefits shall cease as of the Termination Date. Except as provided above in Section 7.c. (i). if Employees employment is terminated for Cause, Employees employment may be terminated immediately without any advance written notice.
d. TERMINATION BY COMPANY WITHOUT CAUSE . Company shall have the right to terminate Employees at will employment at any time, without Cause. In the event Company shall so elect to terminate Employees employment without Cause, Employee shall be entitled to only such payments as may be required under the terms of Section 8 of this Agreement. Employee agrees that in the event of his termination without Cause, the Term of this Agreement will be deemed to be the period between the Effective Date and the Termination Date.
e. RESIGNATION BY EMPLOYEE . If Employee voluntarily resigns his employment at any time during the term of this Agreement, Companys obligation to pay Employees compensation and fringe benefits shall cease as of the date of resignation. Employee agrees to provide Company with at least thirty (30) days written notice prior to the effective date of resignation. Company may elect, in its sole and absolute discretion, to relieve Employee of his employment duties for all or any part of the thirty (30) day notice period. However, Employee shall continue to receive compensation and benefits under this Agreement through the effective date of his resignation.
5
g. RETURN OF COMPANY PROPERTY . Upon termination, Employee will immediately return all Company issued items, including, but not limited to Company identification badge(s), access card(s), AOA badge(s), travel card, Friendship Travel Passes (FTPs), computer equipment (hardware/software), disks and/or electronic data, fax machine(s), pager(s), company credit card(s), company telephone card(s), access code(s), key(s), company files, work product, manuals, customer lists, company documents, financial information, operational information, plans, memoranda, notes, and correspondence.
h. PAYMENT OF ACCRUED OBLIGATIONS . Notwithstanding anything in this Section 7 to the contrary, upon termination of Employees employment for any reason, Company shall pay Employee: (i) Employees Base Salary earned and unpaid through the Termination Date, if any, and (ii) unreimbursed expenses payable in accordance with Company policy (Accrued Expenses). The payment of Accrued Expenses shall be made within ten (10) days following Termination Date.
8. PAYMENTS UPON TERMINATION WITHOUT CAUSE IN EXCHANGE FOR AGREEMENT TO WAIVE ALL CLAIMS .
a. If Company terminates Employees at will employment without Cause, in addition to Accrued Obligations, Employee shall be entitled to the following payments in exchange for a valid release and waiver of all claims through the Termination Date that Employee may have at that time against Company or related persons or entities (Waiver of All Claims): Company shall pay to Employee an amount equal to Employees Base Salary and medical/dental premiums for one year plus the prorated value of any Performance Bonus to which Employee would have been entitled in the current year (the Settlement Sum). The Settlement Sum shall be paid in a lump sum, less applicable withholdings, on the Termination Date. Company shall provide all information for continuation of fringe benefits to the extent required by law.
b. If Employee fails or refuses to agree to a valid Waiver of All Claims through the Termination Date, Employee will not be paid any amounts under this Section 8.
c. TAX WITHHOLDING OBLIGATIONS . At the time that the Waiver of All Claims is executed, the parties will determine the extent to which any of the payments provided for in this Section 8 may be subject to federal, state, or local tax or other withholdings. Those tax/withholding obligations will be detailed in the Waiver of All Claims.
d. NO OTHER COMPENSATION OR BENEFITS POST TERMINATION . No other payment, compensation or fringe benefit other than as described in this Section 8 and in Section 5.b. shall be provided to, or owed to, Employee after termination with or without Cause.
e. Employee shall not be required in any way to mitigate the amount of any payment provided for in this Section 8, including, but not limited to, by seeking other employment, nor shall the amount of any payment provided for in this Section 8 be reduced by any compensation earned by Employee as the result of employment with another employer after the Termination Date, or otherwise.
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9. NONCOMPETITION PROVISIONS .
a. NONCOMPETITION . During the Term of this Agreement and for a period of twelve (12) months commencing on the Termination Date, Employee agrees and covenants that Employee shall not, directly or indirectly, undertake to become an employee, officer, partner, consultant or otherwise be connected with any entity (i) for which, at such time, in excess of 10% of its revenues are derived from airline operations (including without limitation, passenger, charter, military, cargo, or other airline operations) within Hawaii and/or between Hawaii and the mainland United States, or (ii) in which Employees specific duties and responsibilities are in direct competition with Company either within Hawaii or on routes to and from Hawaii serviced by Company. Employee acknowledges and agrees that any breach of this non-competition provision shall entitle Employer to immediately terminate any payments to him pursuant to Section 8 of this Agreement. In addition, Employee agrees that any breach or threatened breach of this provision 9.a. will entitle Company to an injunction from any court having jurisdiction over Employee, it being agreed that any such breach would irreparably harm Company. In addition, Company will be entitled to such damages as may be proved in court arising from such breach.
b. NONDISPARAGEMENT . During the Term of this Agreement and for a period of twelve (12) months commencing on the Termination Date, Employee agrees that he shall not make any statements that disparage or tend to disparage Company, its products, services, officers, employees, advisers or other business contacts, and Company agrees that its officers and management employees of Companys human resources department shall not make any statements that disparage or tend to disparage Employee. The parties acknowledge and agree that each act of such disparagement shall entitle the other to $5,000 in liquidated damages, which shall be awarded by an arbitrator pursuant to the provisions of Section 11 of this Agreement. In addition, Employee acknowledges that any breach of this non-disparagement provision shall entitle Company to immediately terminate any payments pursuant to Section 8 of this Agreement. Nothing herein shall be construed to apply to limit Company in its exercise of Section 7.c. or permit sanctions for statements made in the exercise of such provision.
c. RIGHT TO COMPANY MATERIALS . Employee agrees that all styles, designs, lists, materials, books, files, reports, correspondence, e-mails and other paper and electronically stored information, records, and other documents (Company Materials) used, prepared, or made available to Employee, shall be and shall remain the property of Company. Upon the termination of employment or the expiration of this Agreement, all Company Materials shall be returned immediately to Company, and Employee shall not make or retain any copies thereof.
d. ANTI-SOLICITATION . Employee promises and agrees that during the term of this Agreement and for a period of twelve (12) months commencing on the Termination Date, Employee will not influence or attempt to influence customers or suppliers of Company or any of its present or future subsidiaries or affiliates, either directly or indirectly, to divert their business to any individual, partnership, firm, corporation or other entity then in competition with the business of Company or any subsidiary or affiliate of Company. Employee acknowledges and agrees that any breach of this anti-solicitation provision shall entitle Company to immediately terminate any payments pursuant to Section 8 of this Agreement. In addition, Employee agrees that each act of such solicitation shall entitle Company to $5,000 in
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liquidated damages, which shall be awarded by an arbitrator pursuant to the provisions of Section 11 of this Agreement.
e. SOLICITING EMPLOYEES . During the term of this Agreement and for a period of twelve (12) months commencing on the Termination Date, Employee promises and agrees that Employee will not directly or indirectly solicit any of Companys employees to work for any business, individual, partnership, firm, corporation, or other entity. Employee acknowledges and agrees that any breach of this Soliciting Employees provision shall entitle Company to immediately terminate any payments pursuant to Section 8 of this Agreement. In addition, Employee agrees that each act of such solicitation shall entitle Company to $5,000 in liquidated damages, which shall be awarded by an arbitrator pursuant to the provisions of Section 11 of this Agreement.
10. NOTICES . All notices, requests, demands and other communications hereunder shall be in writing and shall be effective upon receipt. All notices shall be given or served personally or sent by facsimile or first class mail, postage prepaid, addressed as follows:
If to Company:
Hawaiian Airlines, Inc.
Attn: General Counsel
3375 Koapaka Street, Suite G-350
Honolulu, Hawaii 96819
Phone: 808/835-3610
Fax: 808/835-3690
If to Employee:
Barbara Falvey
343 Hobron Lane #2003
Or to such other address which the party receiving the notice has notified the party giving the notice in the manner aforesaid.
11. ARBITRATION CLAUSE/ATTORNEYS FEES . Any controversy or claim arising out of or relating to this Agreement (other than a breach of Provision 9.a.) shall be settled by expedited arbitration administered by Dispute Prevention and Resolution, Inc. (DPR) in Honolulu, Hawaii under its rules applicable to the arbitration of employment disputes, and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. In the event judicial, quasi judicial or arbitral determination is necessary to resolve any dispute arising as to the parties rights and obligations hereunder, the parties agree that the losing party shall pay the costs and fees of the prevailing party. Should there be a disagreement between the parties as to who is the losing party and who is the prevailing party, the judicial, quasi judicial or arbitral body shall have the jurisdiction to determine that status.
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12. TERMINATION OF PRIOR AGREEMENTS . This Agreement terminates and supersedes any and all prior agreements and understandings between the parties with respect to employment or with respect to the compensation of Employee by Company from, and after the Effective Date.
13. ASSIGNMENT: SUCCESSORS . This Agreement is personal in its nature and neither of the parties hereto shall, without the consent of the other, assign or transfer this Agreement or any rights or obligations hereunder; provided that, in the event of the merger, consolidation, transfer, or sale of all or substantially all of the assets of Company with or to any other individual or entity, this Agreement shall, subject to the provisions hereof, be binding upon, and inure to the benefit of such successor and such successor shall discharge and perform all the promises, covenants, duties, and obligations of Company hereunder.
14. GOVERNING LAW . This Agreement and the legal relations thus created between the parties hereto shall be governed by and construed under and in accordance with the laws of the State of Hawaii.
15. ENTIRE AGREEMENT: HEADINGS . This Agreement embodies the entire agreement of the parties respecting the matters within its scope and may be modified only in writing. Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose.
16. WAIVER; MODIFICATION . Companys failure to insist upon strict compliance with any of the terms, covenants, or conditions hereof shall not be deemed a waiver of such term, covenant, or condition, nor shall any waiver or relinquishment of, or failure to insist upon strict compliance with, any right or power hereunder at any one or more times be deemed a waiver or relinquishment of such right or power at any other time or times. This Agreement shall not be modified in any respect except by a writing executed by each party hereto.
17. SEVERABILITY . In the event that a court of competent jurisdiction determines that any portion of this Agreement is in violation of any statute or public policy, only the portions of this Agreement that violate such statute or public policy shall be stricken. All portions of this Agreement that do not violate any statute or public policy shall continue in full force and effect. Further, any court order striking any portion of this Agreement shall modify the stricken terms as narrowly as possible to give as much effect as possible to the intentions of the parties under this Agreement.
18. INDEMNIFICATION . Company shall indemnify and hold Employee harmless to the maximum extent permitted by Section 415-5 of the Hawaii Business Corporation Act, and the Restated Articles of Incorporation and Amended Bylaws of Hawaiian Airlines, Inc. Company will maintain a directors and officers liability insurance policy during the term of this Agreement, which policy shall name Employee as an insured.
19. COUNTERPARTS . This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument.
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20. FACSIMILE SIGNATURES . The parties may execute this Agreement by facsimile, and facsimile signatures shall be binding.
IN WITNESS WHEREOF, Company has caused this Agreement to be executed by its duly authorized officers, and Employee has hereunto signed this Agreement, as of the date first above written.
HAWAIIAN AIRLINES, INC.: |
EMPLOYEE: |
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/s/ MARK B. DUNKERLEY |
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/s/ BARBARA FALVEY |
Mark B. Dunkerley |
Barbara Falvey |
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President and Chief Executive Officer |
Senior Vice President People Services Group |
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Exhibit 31.1
CERTIFICATION
I, Mark B. Dunkerley, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Hawaiian Holdings, Inc. for the quarter ended March 31, 2007;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: May 7, 2007 |
By: |
/s/ MARK B. DUNKERLEY |
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Mark B. Dunkerley |
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President and Chief Executive Officer |
Exhibit 31.2
CERTIFICATION
I, Peter R. Ingram, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Hawaiian Holdings, Inc. for the quarter ended March 31, 2007;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: May 7, 2007 |
By: |
/s/ PETER R. INGRAM |
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Peter R. Ingram |
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Chief Financial Officer and Treasurer |
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Hawaiian Holdings, Inc. (the Company) for the period ended March 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Mark B. Dunkerley, President and Chief Executive Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: May 7 , 2007 |
By: |
/s/ MARK B. DUNKERLEY |
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Mark B. Dunkerley |
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President and Chief Executive Officer |
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Hawaiian Holdings, Inc. (the Company) for the period ended March 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Peter R. Ingram, Chief Financial Officer and Treasurer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: May 7, 2007 |
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By: |
/s/ PETER R. INGRAM |
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Peter R. Ingram |
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Chief Financial Officer and Treasurer |